2002 Annual Report - 131th Year · – The parent company - Pirelli & C. » 67 Shareholders’...

2002 Annual Report - 131th Year

Annual Report 2002-131th Year

Pirelli & C. - Accomandita per AzioniRegistered office in Milan - Via G. Negri 10

Share capital - Euros 339,422,773.56 fully paid-inMilan Companies Registry

and Tax Code No. 00860340157

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PIRELLI & C. Accomandita per Azioni

Leopoldo Pirelli Honorary Chairman

BOARD OF MANAGING PARTNERS

Marco Tronchetti Provera ChairmanAlberto Pirelli Deputy ChairmanCarlo BuoraLuigi OrlandoCarlo Alessandro Puri Negri

Sergio Lamacchia Secretary to the Board

BOARD OF STATUTORY AUDITORS

Roberto Bracchetti ChairmanPaolo Lazzati Standing memberSalvatore Spiniello Standing memberPaolo Colombo AlternateMarco Reboa Alternate

GENERAL MANAGER

Carlo Alessandro Puri Negri

INDEPENDENT AUDITORS

PricewaterhouseCoopers S.p.A.

Note: The nature of the powers delegated to the Chairman and Deputy Chairman are described onpage 45 under Corporate Governance.

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NOTICE OF ANNUAL GENERAL SHAREHOLDERS’MEETING

Notice is hereby given that the Annual General Meeting of the shareolders of Pirelli& C. - Accomandita per Azioni, in ordinary session, will be held in Milan, at theAssociazione Industriale Lombarda in Via Pantano 9 at 10:30 A.M.• Friday, May 7, 2003 in first call• Monday, May 8, 2003 in second callto discuss the following

AGENDA

Ordinary Meeting1) Directors’ Report on operations; report by the Board of Auditors; balance sheet as

of 31 December 2002; allocation of profits.2) Proposal for the purchase and procedures for the disposal of own shares, subject

to the prior revocation of the resolution adopted by the Board on 13 May 2002,insofar as it has not been employed.Inherent and consequent resolutions. Appointment of powers.

Extraordinary Meeting1) Change the limited share partnership company into a joint stock company and

alter its business purpose; subsequent amendment of existing articles 1 (companyname), 2 (business purpose), 7 (calling the meeting), 8 (setting up the meeting),9 (chairmanship of the general meetings), 10 (corporate management), 11(calling the administrative body and majorities), 12 (representing the company),13 (directors’ remuneration), 14 (termination of directors) and 17 (allocation ofprofits) of the articles of association. Inclusion of a new article on the powers ofthe Board of Directors between articles 10 and 11 to be identified as article 11and the new numbering of subsequent articles.Inherent and consequent resolutions. Appointment of powers.

2) Increase of the share capital which can be split for sale by issuing 1,950,355,809ordinary shares at the most, flanked by an equal number of free warrants eachequipped with independent circulation properties which will be offered as anoption for ordinary and savings shareholders for a total of three new ordinaryshares and a warrant for each owned share, whatever its nature, for a unit priceof 0.52 Euros per share, corresponding to its face value.Subsequent increase of the share capital which can be split for sale by issuing487,588,952 ordinary shares at the most, even in several batches, exclusively

and irrevocably linked to the use of the warrants (linked to a maximum numberof 1,950,355,809 ordinary shares obtained by increasing the capital as describedabove) at a unit price of 0.52 Euros per share, corresponding to its face value.Subsequent amendment of article 5 (share capital) of the articles of association.Approval of the Regulation “Warrant for ordinary Pirelli & C. shares 2003-2006”.Inherent and consequent resolutions. Appointment of powers.

3) Endorsement of the merger plan by incorporation into Pirelli & C. A.p.A. (Pirelli& C. S.p.A. once it has become a joint stock company) of Pirelli & C.Luxembourg S.p.A. (fully owned company) and Pirelli S.p.A. amongst others,which will entail:(i) assigning a maximum number of 1,398,203,116 new ordinary shares and

113,580,020 new savings shares of Pirelli & C. - due as of 1 January of theyear in which the merger comes into force in reference to third parties - toordinary and savings shareholders of Pirelli S.p.A. in a ratio of 4 new Pirelli& C. ordinary shares every 3 Pirelli S.p.A. ordinary shares and 10 new Pirelli& C. savings shares every 7 Pirelli S.p.A. savings shares respectively;

(ii) increasing the share capital of Pirelli & C. by issuing a maximum number of1,398,203,116 ordinary shares and 113,580,020 savings shares of Pirelli &C. to serve the merger and the consequent amendment of article 5 (sharecapital) of the articles of association.

(iii) assigning the Directors, as per article 2443 of the Italian Civil Code, thefaculty to increase the share capital once or in several occasions and for amaximum amount of 52,000,000.00 Euros face value, by issuing ordinaryshares to be assigned to managers and to the middle-management of Pirelli& C. A.p.A. (after becoming a joint stock company Pirelli & C. S.p.A.) andof the subsidiary companies, including the subsidiaries of the latter, both inItaly and abroad, as per articles 2441 and/or 2349 of the Italian Civil Code,also to successfully uphold the shareholding incentive plan of theincorporation company Pirelli S.p.A.. Subsequent further amendment ofarticle 5 (share capital) of the articles of association;

(iv) further amendment of article 17 (allocation of profits) – which has becomearticle 18 under the new numbering - of the articles of association.

Inherent and consequent resolutions. Appointment of powers.

Again in the ordinary meeting3) Appointment of the Directors, as the mandate of the unlimited partners has

ended due to the company becoming a joint stock company, after having definedtheir number; definition of the remuneration due to the Directors.

4) Appointment of the Board of Auditors and its Chairman; determination thehonorarium for the Statutory auditors.

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TABLE OF CONTENTS

Notice of Annual General Shareholders’ Meeting Page 4

Agenda » 4

Summary of selected consolidated financial data » 8

Report of the Managing Partners » 9

– The Group » 11– Significant subsequent events » 22– Outlook for the current year » 22– Related party disclosures » 22– Performance of the major group companies » 24– Equity investments held by the Managing Partners » 38– Proforma data » 39– Stock option plans » 44– Corporate Governance » 45– The parent company - Pirelli & C. » 67

Shareholders’ resolutions » 71

Consolidated financial statements at December 31, 2002

– Consolidated balance sheets » 76– Consolidated statements of income » 80– Notes to consolidated financial statements » 82– Supplementary information » 115– Indipendent Auditor’s Report » 135

Extraordinary Session » 137

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FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATEDFINANCIAL DATA(in millions of euros)

2002 2001 2000 1999 1998

Net sales 6,718 7,762 7,697 6,654 5,655Gross operating profit 523 704 850 699 733Operating profit 118 297 432 322 397Net income (loss) (405) 194 3,759 293 282Net income (loss) attributable to Pirelli & C. (58) 125 1,405 86 74Earnings (loss) per share (in euros) (0.09) 0.20 2.28 0.14 0.12

Fixed assets 6,596 7,092 3,728 3,312 2,916Net working capital 991 1,314 667 1,401 1,256Net invested capital 7,587 8,406 4,395 4,713 4,172Shareholders’ equity 4,626 5,407 5,844 2,313 2,245Provisions 911 970 1,186 803 731Net financial (liquidity)/debt position 2,050 2,029 (2,635) 1,597 1,196Net equity attributable to Pirelli & C. 1,933 2,119 2,171 809 748Equity per share (in euros) 2.96 3.39 3.52 1.35 1.20

Free cash flows 476 26 176 96 122Net cash flows (168) (4,691) 4,118 (388) (1,235)R&D expenditures 219 237 213 200 196Capital expenditures 337 646 570 476 390

Gross operating profit/Net sales 7.79% 9.07% 11.04% 10.50% 12.96%

Operating profit/Net sales 1.76% 3.83% 5.61% 4.84% 7.02%

Net icome/Net equity (8.75%) 3.59% 64.32% 12.67% 12.56%

Operating profit/Net invested capital 1.56% 3.53% 9.83% 6.83% 9.52%

Net financial position/Net equity 0,44 0,38 (0,45) 0,69 0,53

Pirelli & C. ordinary share (No. in millions) 618.2 591.4 582.8 563.6 563.6Pirelli & C. savings share (No. in millions) 34.4 34.4 34.4 34.4 34.4Total Pirelli & C. shares (No. in millions) 652.6 625.8 617.2 598.0 598.0Treasury shares (No. in millions) 2.6 2.6 2.6 2.6 2.6

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REPORT OF THE MANAGING PARTNERS

Dear Shareholders,the consolidated financial statements of the Pirelli & C. Group for the year endedDecember 31, 2002 show a consolidated net loss of Euros 405 million compared toa consolidated net income of Euros 194 million in the prior year.The result includes Euros 275 million of restructuring charges, Euros 13 million ofextraordinary income, Euros 138 million of writedowns and Euros 150 million forthe effect of valuing the investment in Olimpia S.p.A. using the equity method.Offsetting the above expenses were the gain realized on the offering of Pirelli & C.Real Estate S.p.A. shares on the stock market (Euros 149 million before incometaxes) and the gain realized by Pirelli & C. Real Estate S.p.A. on the sale of the lasttranche of ex-Unim securities in the portfolio (Euros 51 million).

The net loss, after minority interest, is equal to Euros 58 million compared to a netincome of Euros 125 million in the prior year.

Net sales amount to Euros 6,718 million, with a decrease of 8.2 percent compared to 2001, net of the negative currency exchange effect due to the conversion into Euros(-5.2 percent).

Realization by Pirelli & C. Real Estate: the company’s new headquarters under construction in theBicocca area, Milan.

The change is principally due to lower volumes (-7.1 percent) and the negativeprice/mix effect (-1.1 percent).It should be emphasized that the fall in the reference market of the Telecom Cablesand Systems Sector alone (-70 percent) led to a 9 percent reduction in net salesoverall, again net of the currency exchange effect.

Gross operating profit is Euros 523 million (7.8 percent of net sales) compared toEuros 704 million in 2001 (9.1 percent).The reduction is entirely due to the contraction of the Telecom Cables and SystemsSector (Euros 156 million), owing to the intensification of the crisis in the TLCmarket, and the end of the supply contract with Cisco Systems (Euros 59 million),only partly offset by growth in the Energy Cables and Systems Sector, the TyresSector and the real estate sector.

Operating profit decreased from Euros 297 million (3.8 percent of net sales) toEuros 118 million (1.8 percent of net sales).Constant and continuing attention to the efficiency of production factors, inaddition to the efforts taken by management to reduce costs through therestructuring plan, led to a gross reduction in costs of Euros 215 million in 2002.However, these savings were not sufficient to contain the negative effects of theeconomic scenario, particularly with regard to the Telecommunications Cables andSystems Sector.In any event, the Energy Cables and Systems Sector bettered its performance andthe Tyres Sector reported a strong gain in results, especially compared to thecompetitive panorama of the reference industries.

The net financial position went from a debt position of Euros 2,029 million (Euros1,954 million excluding a liability for project financing contracted by Pirelli & C.Real Estate S.p.A. with Deutsche Bank following the finalization of a preliminarycontract for the sale of a building under construction, which in substance representsan advance payment against the work in progress) to Euros 2,050 million.The change is principally due to the change in the net financial position of thePirelli S.p.A. group of Euros 380 million (mainly for disbursements regardingexpenses for restructuring programs set aside in previous years, the final payment ofincome taxes on the sale of Optical Technologies to Corning, the payment ofdividends, offset by the sale of tax receivables to Unicreditfactoring S.p.A. andMediofactoring S.p.A. in the first half) and the payment of dividends for Euros 52million, partly counterbalanced by the positive effect of the offering of Pirelli & C.Real Estate S.p.A. shares on the market (equal to Euros 284 million, of which Euros105 million refer to the Pirelli & C. Real Estate S.p.A. capital increase and Euros179 million to the sale of shares in the portfolio of Pirelli & C.).

The financial statements at December 31, 2002 of Pirelli & C., the parent company,show a net income of Euros 60 million compared to Euros 148 million in the prioryear.

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THE GROUP

The performance of the Group in 2002 was sharply affected by the unprecedentedcrisis in the telecommunications infrastructures market, which had seriousrepercussions on the performance of companies in the sector in all the majorcountries of the Western world. This market has been the focus of a worldwidecontraction in demand of more than 70 percent in terms of value.In addition, in defiance of the negative trend of the international economy,combined with uncertainties in the economic scenario, the Energy Cables andSystems Sector, reported a slight improvement in profitability, although investmentshave so far failed to regain momentum.Conversely, it should be emphasized that the Tyres Sector continued to delivergrowth.This being the case, management of the Group showed a high capacity for reactingto the drastic changes of the market, on the one hand, by implementing measures tolimit costs, leading to considerable savings in operating expenses and a reduction ofthe breakeven point, and, on the other, by focusing even greater attention on themanagement of cash flows, which was confirmed by a significant growth in freecash flows and better control over net indebtedness.Against the market background described above, in November, the Group decidedto step up and intensify action already in progress in the various operating sectors toimprove efficiency, in order to create the optimum conditions for acting upon anysigns of a recovery as soon as they are perceived. The restructuring plan, whichconcentrated on the Energy and Telecom Cables and Systems Sectors and focusedon rationalizing resources and industrial facilities, impacted 2002 results for a totalof Euros 275 million.

Widely tunable laser for optical networks, produced in the Pirelli Labs, Milan.

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As for the real estate sector, 2002 was a particularly important year for Pirelli & CReal Estate S.p.A. and can be summed up as follows:– important transactions were carried out for the acquisition of highly prestigious

real estate properties for their relative management and leveraging;– the company entered new lines of business with interesting prospects for

development, the main field being non-performing loans;– steps were taken to begin the strategic reorganization of the tertiary portfolio by

creating the first line of long-term investments which will lead to the start of realestate funds;

– the listing of the Company on the stock exchange raised capital resources tofinance investments and reinforce the Company’s visibility in the Italian andinternational panorama.

Having reached these strategic objectives, the year 2002 closed with sharply higherresults that confirmed the development plan announced by the company at the timeof its listing and laid the groundwork for a future that will deliver even highergrowth.

The following is a description of the major events in 2002, in chronological order: In February, Pirelli Finance (Luxembourg) S.A. signed a derivative equity swapagreement with J.P. Morgan on 100,000,000 Olivetti S.p.A. shares, expiringDecember 2006.Settlement can either be made through the physical delivery of the shares orthrough the payment of the differentials compared to the market prices.The initial price is equal to Euros 1.4213 per share plus quarterly interest at the 3-month Euribor plus a spread of 143 bps.

In March, the placement was completed for bonds of Euros 500,000,000 issued byPirelli Finance (Luxembourg) S.A., maturing April 4, 2007, with a fixed interestrate of 6.5 percent.The bond issue serves to satisfy the objective of refinancing short-term debt byoptimizing the financial structure of the Group from the standpoint of both interestrates and maturity dates. The proceeds from the issue were received at thebeginning of April.

On April 22, 2002, an agreement was signed for the sale of the 25.3 percent interestin EPIClink S.p.A., a company specialized in providing outsourcing services in thearea of Information and Communication Technology, to Telecom Italia S.p.A..The sale took place on August 1, 2002, once authorization was received from theantitrust authorities.

On April 2, 2002, the shareholders’ meeting of Pirelli & C. Real Estate S.p.A.passed a resolution to request the listing of Pirelli & C. Real Estate S.p.A.’s ordinaryshares on the Mercato Telematico Azionario (automated screen market) of the stockexchange.On May 9, the Board of Managing Partners of Pirelli & C examined the structure ofthe Global Offer for the listing of the shares of the subsidiary, Pirelli & C. RealEstate S.p.A.. The transaction consisted of an offer of a maximum of 14,150,000ordinary shares that partly (4,050,000 shares) came from a share capital increase

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excluding option rights and partly (10,100,000 shares) from ordinary shares put onsale by Pirelli & C.. The Board of Managing Partners also passed a resolution togrant a greenshoe option for a maximum of 2,100,000 shares. Furthermore, havingtaken note of the decision made by the Pirelli & C. Real Estate Board of Directors toadopt a program that constantly involves the employees and management in thecreation of economic value through a stock option plan for the three-years 2002 –2004, the Board of Managing Partners of Pirelli & C. decided to close and settle theexisting stock option plan for directors, executives and employees of Pirelli & C.Real Estate and its subsidiaries and associated companies.Borsa Italiana S.p.A., under measure No. 2358 dated May 29, arranged for tradingof the shares, after verifying that there would be a sufficiently broad distribution ofPirelli & C. Real Estate S.p.A. ordinary shares floated under the Global Offer.On June 5, Consob authorized the publication of the Offering Memorandum for thePublic Offer of Subscription and Sale and the official listing of Pirelli & C. RealEstate S.p.A. ordinary shares.

The P Zero Corsa tyre, fitted as original equipment to the Ferrari Challenge Stradale.

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On June 20, the offer price was set at Euros 26 per share. On June 24, when the offer period had ended, 10,100,000 shares had been sold byPirelli & C. (with realization of a pre-tax gain of Euros 143 million) and the entireshare capital increase of 4,050,000 shares by Pirelli & C. Real Estate S.p.A. hadbeen subscribed.Subsequently, on July 25, the greenshoe option was partly exercised for 265,442Pirelli & C. Real Estate S.p.A. shares; Pirelli & C. realized a pre-tax gain on thistransaction of Euros 6.7 million.After the greenshoe option was exercised, 14,415,442 Pirelli & C. Real Estate S.p.A.ordinary shares had been floated on the market, equal to 35.50 percent of theoutstanding share capital of the company.

During 2002, Pirelli & C. purchased 16,329,356 Pirelli S.p.A. ordinary shares onthe market at an average price per share of Euros 1.05.After these transactions and taking into account the writedown taken by Pirelli & Cfor tax purposes, at December 31, 2002, Pirelli & C. holds, directly or indirectlythrough Pirelli & C. Luxembourg S.A., 39.20 percent of voting capital (37.90percent of the entire share capital) of Pirelli S.p.A.. The average carrying value isequal to Euros 2.10 per share.At the end of October, the first line of long-term investments was set up through twovehicle companies (commonly called Tiglio I and Tiglio II) to which tertiaryproperties were contributed worth Euros 3.15 billion. Pirelli & C. Real Estate –which holds about a 13 percent stake in the vehicles – performs asset managementactivities and acts as the service provider on an exclusive basis.

On December 19, 2002, a transaction was approved to expand the shareholder baseof Olimpia S.p.A., with the consequent strengthening of the shareholders’ equityand financial structure of the company. The transaction provides for the early redemption of bonds issued by Olimpiadenominated “Olimpia S.p.A. 1.5 percent 2001-2007” (about Euros 262.5 millionof which are owned by Hopa S.p.A. (hereinafter “Hopa”) and about Euros 0.7million by a third party in no way linked by any agreement with Hopa) and asubsequent merger by incorporation in Olimpia by a wholly-owned subsidiary ofHopa (Holy S.r.l., hereinafter “Holy”), with a shareholders’ equity of not less thanEuros 961 million and with no debt. Hopa, after the merger by incorporation of itssubsidiary Holy, will obtain an approx. 16 percent investment in Olimpia.

Subsequent to the merger, Olimpia S.p.A.’s share capital will be held by thefollowing:

Pirelli: 50.4%Edizione Finance International: 16.8%Hopa: 16%Banca Intesa 8.4%Unicredito 8.4%

This transaction will permit Olimpia S.p.A. to reach the following importantobjectives:

– a stronger balance sheet structure due to the reduction in debt of some Euros476 million (following the early redemption of the bonds); an increase inshareholders’ equity of Euros 961 million owing to the merger with Holy and animprovement in the net financial position due to the injection of liquidity of

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approx. Euros 99 million which will occur as a result of the merger with Holy,with a better gearing ratio which decreases from 0.7 to 0.5.

– the greater flexibility that will be reached with the cessation of the restrictionsand financial expenses connected with the bond issue which is expected to bealmost totally extinguished.

The redemption of the bonds and the merger of Olimpia S.p.A. and Holy will takeplace as described below.Olimpia will offer early redemption to the bondholders with the delivery of not onlyOlivetti shares, as planned, but with a combination of about 99 million Olivettishares and some 164 million Olivetti convertible bonds.Holy, at the time of the merger, will have liquidity of about Euros 99 million, some100 million Olivetti shares, around 164 million Olivetti bonds, in addition to a19.99 percent interest in Holinvest. Holy’s shareholders’ equity will be equal toEuros 961 million.Holinvest – 80.001 percent held directly and 19.999 percent held indirectly byHopa, through Holy – will have assets consisting of some 135 million Olivetti 1.5%2001-2010 convertible bonds, the right to obtain, by June 30, 2003, about 164million Olivetti 1.5% 2001-2010 convertible bonds acquired from the repayment ofthe same number of Olimpia S.p.A. bonds and about 486 million CDC indexedbonds and the same number of Olivetti ordinary shares and 2,431 Olivetti shares.As a result of the new agreement that Hopa signed with Olimpia S.p.A.’s

shareholders, Hopa will have the right to nominate a director in Olimpia S.p.A. andin the main listed companies of the Olivetti-Telecom Group. Hopa, which will holdno veto rights in Olivetti, in the event of dissent concerning important extraordinarytransactions or if certain ratios are not met by Olimpia (1:1 debt to equity ratio),can obtain the spin-off of Olimpia S.p.A., whereas Olimpia S.p.A. can obtain thespin-off of Holinvest. Accordingly, Hopa would receive the proportional share ofOlimpia S.p.A.’s assets and liabilities and Olimpia S.p.A. would receive theproportional share of Holinvest’s assets and liabilities. Regardless, the spin-off cannot take place until 36 months have passed since the agreements came into force,unless extraordinary events occur of unusual severity.Moreover, Holinvest will keep at least the majority of the financial instruments and theOlivetti convertible bonds for a period of 20 months from the date of the signing of theagreements. Subsequently, a pre-emptive right on said instruments and bonds will begranted to Olimpia, at the same conditions. At the end of the agreement, a further pre-emptive right for a period of two years will be granted to Olimpia S.p.A..

On December 23, 2002, Pirelli S.p.A., through the subsidiary Pirelli Cavi e SistemiEnergia S.p.A., and the private equity fund Investitori Associati III (AlfieriAssociated Investors), reached an agreement for the purchase, on the part ofInvestitori Associati, of the manufacturing and marketing business carried out byPirelli in the enameled wires and transposed conductors sector in Europe and Chinathrough the affiliates Invex and Icew Insulated Conductors, as well as the option topurchase the business in Brazil at net equity value by September 2004.The deal falls under a broader plan for the rationalization of Pirelli’s Energy Cables

and Systems Sector, announced in November, which focuses on business segmentswith higher value-added.

According to the understanding reached, Pirelli sold Investitori Associati the Invexplant facilities in Quattordio (Alessandria, Italy) and in Baoying (China), withabout 350 employees and 2001 sales of some Euros 110 million, specialized in themanufacturing of copper and aluminum wires used as conductors in the productionof engines and transformers, in particular, enameled wires, transposed conductors,enameled and belted straps with special belts and fiberglass.The transaction had a negative impact on the 2002 statement of income of about

Euros 6 million and will have a positive impact on the net financial position ofabout Euros 28 million.

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View of the laboratories for high voltage studies.

Key figures of the consolidated financial statements can be summarized as follows:

(in millions of euros)

12/31/2002 12/31/2002 12/31/2001excluding Olimpia

• Net sales 6,718 6,718 7,762• Gross operating profit 523 523 704

% of net sales 7.8% 7.8% 9.1%• Operating profit 118 118 297

% of net sales 1.8% 1.8% 3.8%• Share of earnings (losses) of equity investments (25) (175) (32)• Operating profit (loss) including share of earnings (losses)

of equity investments 93 (57) 265• Financial income (expenses) (178) (178) (38)• Extraordinary items (83) (83) 156• Icome (loss) before income taxes (168) (318) 383

% of net sales (2.5%) (4.7%) 4.9%• Icome taxes (87) (87) (189)• Net icome (loss) (255) (405) 194

% of net sales n.s. n.s. 2,5%• Net icome (loss) attributable to Pirelli & C. (58) 125• Earnings (loss) per share (in euros) (0.09) 0.20• Shareholders’ equity 4.626 5.407• Net equity attributable to Pirelli & C. 1,933 2,119• Equity per share (in euros) 2.96 3.39• Net financial (liquidity)/debt position 2,050 2,029• Capital expenditures 337 646• R&D expenditures 219 237• Employees (at year-end) 37,350 39,771• Pirelli & C. ordinary shares (No. in millions) 618.3 591.4• Pirelli & C. savings shares (No. in millions) 34.4 34.4• Total Pirelli & C. shares (No. in millions) 652.7 625.8• Treasury shares (No. in millions) 2.6 2.6

NET SALES

Total Euros 6,718 million compared to Euros 7,762 million in the prior year.The reduction is due to:

• Foreign exchange effect (5.2%)• Volume (7.1%)• Prince/Mix (1.1%)

(13.4%)

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The distribution of net sales by sector is as follows:

Sector 2002 2001• Pirelli S.p.A. Group

– Cables and Systems Energy 45.0% 40.4%– Cables and System Telecom 7.0% 19.8%– Tyres 42.5% 36.7%– Intereliminations (0.5%) (0.2%)

• Total Pirelli S.p.A. Group 94.0% 96.7%• Real Estate (Pirelli & C. Real Estate S.p.A. group) 6.3% 3.4%• Other and intereliminations (0.3%) (0.1%)

100.0% 100.0%

As far as the real estate sector is concerned, it should be borne in mind that net salesare not a significant indicator of the group’s operations since its activities areprimarily developed through the acquisition of qualified minority stakes incompanies which own real estate properties that are managed by the sector.A better expression of the real estate sector’s business volume, therefore, is aggregateproduction value (the sum of revenues and the change in inventories), which alsoincludes the component generated by the minority-owned investments. Suchaggregate production value, net of acquisitions, in 2002 is Euros 1,298 million(compared to Euros 608 million in 2001).

OPERATING PROFIT

Is equal to Euros 118 million compared to Euros 297 million in the prior year,representing 1.8 percent (3.8 percent in 2001).Contributing to the operating profit of Euros 118 million are the industrial sector(Pirelli S.p.A. group) with Euros 117 million (Euros 295 million in 2001) and thereal estate sector (Pirelli & C. Real Estate S.p.A. group) with Euros 42 million(Euros 44 million in 2001).

SHARE OF EARNINGS (LOSSES) OF EQUITY INVESTMENTS

Is a loss of Euros 175 million compared to Euros 32 million in 2001. It includes theshare of the result of companies accounted for using the equity method andwritedowns in subsidiaries and associated companies.The caption particularly includes Pirelli S.p.A.’s share of the result of OlimpiaS.p.A. (loss of Euros 150 million) and the writedowns of the investments in F.C.Internazionale Milano S.p.A. (Euros 18 million), e-Biscom S.p.A. (Euros 35 million)and Caltagirone Editore S.p.A. (Euros 24 million), whereas the share of theearnings of the companies in the real estate sector (Pirelli & C. Real Estate S.p.A.group) is Euros 60 million (compared to Euros 3 million in 2001).

OPERATING PROFIT (LOSS) INCLUDING SHARE OF EARNINGS(LOSSES) OF EQUITY INVESTMENTS

The operating loss, including the share of earnings (losses) of equity investments totalsEuros 57 million compared to an operating profit of Euros 265 million in 2001.

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Contributing to this result are the Pirelli S.p.A. group with a loss of Euros 113million (profit of Euros 262 million in 2001) and the real estate sector (Pirelli & C.Real Estate S.p.A. group) with earnings of Euros 102 million (Euros 47 million in2001).Bearing in mind the business model adopted by the company, this is the mostsignificant indicator of the real estate sector’s operating performance.

FINANCIAL INCOME (EXPENSES)

Is an expense balance of Euros 178 million compared to Euros 38 million in theprior year. The balance includes Euros 38 million to adjust the value of securities inportfolio to market prices while the remaining amount of Euros 140 millionrepresents the balance of financial income and expenses (including exchange gainsand losses and accessory charges) relating to net indebtedness.

EXTRAORDINARY ITEMS

Show an expense balance of Euros 83 million compared to an income balance ofEuros 156 million in 2001. The current year mainly includes restructuring costsconnected with the new rationalization measures focused on the Energy andTelecom Cables and Systems Sectors (Euros 275 million), the previouslydescribed gain on the offering of Pirelli & C. Real Estate S.p.A. shares on themarket (Euros 149 million) and the gain realized by Pirelli & C. Real EstateS.p.A. on the sale of the last tranche of ex-Unim securities in portfolio (Euros 51million).

In 2001, extraordinary items included the gain on real estate transactions by theCables and Systems Sector (Euros 61 million), an earn-out at the end of theagreements with Cisco Systems (Euros 70 million) and gains realized by Pirelli & C.Real Estate S.p.A. (Euros 164 million) offset by industrial restructuring costs(Euros 151 million).

NET INCOME (LOSS)

for the year 2002 is a net loss of Euros 405 million compared to a net income ofEuros 194 million in 2001.

Contributing to the net result of Euros 405 million are the industrial sector (PirelliS.p.A. group) with a loss of Euros 610 million and the real estate sector (Pirelli & C.Real Estate S.p.A. group) with a net income of Euros 125 million Before consolidating Olimpia S.p.A. using the equity method, the net loss is Euros255 million.

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20

SHAREHOLDERS’ EQUITY

went from Euros 5,407 million to Euros 4,626 million, with a decrease of Euros 781million, which can be analyzed as follows:

• Tanslation adjustments (336)

• Net loss for the year (405)

• Dividends to third parties paid by (141)

– Pirelli & C. (52)

– Pirelli S.p.A. (88)

– Other Group companies (1)

• Purchase of Pirelli S.p.A. shares (Pirelli & C.) (17)

• Purchase of Pirelli & C. Real Estate S.p.A. treasury shares (50)

• Conversion of Pirelli & C. 1998/2003 bonds 63

• Pirelli & C. Real Estate capital increase reserved for third parties 105

(781)

The shareholders’ equity attributable to Pirelli & C. is Euros 1,933 million (Euros2.96 per share) compared to Euros 2,119 million (Euros 3.39 per share) at the endof last year.

NET FINANCIAL POSITION

Went from a debt position of Euros 2,029 million (Euros 1,954 million excluding aliability for project financing contracted by Pirelli & C. Real Estate S.p.A. withDeutsche Bank following the finalization of a preliminary contract for the sale of abuilding under construction, which in substance represents an advance paymentagainst the work in progress) to Euros 2,050 million.

The change of Euros 21 million can be analyzed as follows:

• Exchange differences (21)

• Operating profit 118

• Depreciation and amortization 406

• Net investments

– Pirelli S.p.A. group (375)

– Other (67) (442)

• Change in working capital 446

• Change in provisions and other (52)

• Free cash flow 476

• Reclassification of derivatives referring

to Olivetti securities (77)

• Financial income (expenses) (178)

• Extraordinary items (83)

• Icome taxes (87)

• Dividends paid (141)

• Other changes (78)

Net cash flows (168)

Other changes in shareholders’ equity 168

Changes in net financial position (21)

“Reclassification of derivatives referring to Olivetti securities” refers to thereclassification, to financial assets in fixed assets, of Convertible Bond Asset Swapson Olivetti S.p.A. 2010 convertible bonds and Share Swap Transactions on OlivettiS.p.A. shares / Olivetti S.p.A. 2010 convertible bonds held by the subsidiary PirelliFinance Luxembourg S.A. (Pirelli S.p.A. group) that were previously classified incurrent financial assets.

“Other changes” mainly include the final payment of income taxes on the sale ofOptical Technologies to Corning (Euros 263 million), the impact of therestructuring expenses accrued in prior years on cash (Euros 130 million), partlycounterbalanced by the sale of tax receivables to Unicreditfactoring S.p.A. andMediofactoring S.p.A. (Euros 113 million) and the reversal of the non-cash effectsof the new accrued restructuring expenses and the reversal of the non-cash effectsrelating to new accrued restructuring charges (Euros 190 million).

DEBT TO EQUITY RATIO

Is equal to 0.44 compared to 0.38 at December 31, 2001.

CAPITAL EXPENDITURES

Amount to Euros 329 million compared to Euros 646 million in 2001.The ratio of capital expenditures to depreciation is 1.05.

R&D EXPENDITURES

Are entirely charged to the statement of income and amount to Euros 219 millioncompared to Euros 237 million in 2001; they represent 3.3 percent of net sales (3.1percent of net sales in 2001).

EMPLOYEES

Number 37,350 at December 31, 2002 compared to 39,771 at December 31, 2001,with a reduction of 2,421.Taking into account the number of employees who left at the end of the year thetotal number of employees is 36,882.

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SIGNIFICANT SUBSEQUENT EVENTS

On March 10, 2003, in accordance with the agreements reached by the twogroups in March 1998, BZ Group exercised the second sales option relating to2.5 percent of Pirelli S.p.A. ordinary shares with voting rights, at a pricecalculated - in compliance with the agreements - at the average price listed forthe shares in the 90 trading sessions prior to the date the option is exercised, fora total amount of some Euros 43 million (equal to a price per share of Euros0.90).Following the above, Pirelli & C. A.p.A. holds, directly and indirectly, a total of800,191,375 Pirelli S.p.A. ordinary shares, equal to 41.7 percent of share capitalwith voting rights, at an average carrying value of Euros 2.03.

OUTLOOK FOR THE CURRENT YEAR

In the industrial sector (Pirelli S.p.A. group), the uncertainty surrounding the currenteconomic and political situation does not allow for assumptions about an impressiveupswing in the markets of the group.More particularly, in the Telecom Sector, no signs of improvement are expected untilthe end of the year, whereas, in the Energy Sector, selective investments in utilitiesare expected to continue and a slow recovery in demand is forecast for the otherapplication sectors. The Tyres Sector will continue its policy of focusing on the highperformance segment, which is expected to grow.

In this scenario, the Pirelli & C. Group expects to improve its operating result as awhole. In particular, the industrial sector (Pirelli S.p.A. group) will capitalize on thebenefits arising from restructuring measures, whereas the real estate sector (Pirelli &C. Real Estate S.p.A. group), based on available information, can reasonably expectto achieve a higher operating profit in 2003, including the share of the results of itsholdings, compared to the prior year.

RELATED PARTY DISCLOSURES

With reference to the disclosure required by Consob Communication No. 97001574of February 20, 1997 and No. 98015375 of February 27, 1998 which refer totransactions by Group companies with related parties, a statement is made to theeffect that all the transactions, including those between Pirelli & C. and itssubsidiaries, and those among subsidiaries, fall under the ordinary operations of theGroup, are governed by market terms, and there are no transactions of an unusualand exceptional nature or in potential conflict of interest.

The effects deriving from the transactions between Pirelli & C. and its subsidiariesare disclosed in the financial statements of the parent company and in the notes, justas transactions among subsidiaries are eliminated upon the preparation of theconsolidated financial statements.

Furthermore, in order to provide more complete information, the transactions in2002 between the Pirelli S.p.A. Group and the Olivetti Telecom group are describedbelow. These transactions fall within the ordinary operations of the Group, arecarried out at arm’s length and there are no transactions of an unusual andexceptional nature, or constituting a potential conflict of interests:revenues for goods and services, relating mainly to the supply oftelecommunications cables (Euros 53 million);costs for goods and services, mainly relating to telephone services received (Euros10 million);trade receivables, relating to the supply of the goods and services described above(Euros 8 million);trade payables, relating to the telephone services described above (Euros 1.6million);other income, relating to the gain of Euros 6.8 million on the sale of the 25.3percent stake held by Pirelli S.p.A. in EPIClink (sales price of Euros 17.7 million)and to the gain of Euros 0.8 million realized by Pirelli Informatica on the sale of abusiness segment to EPIClink (sales price of Euros 3 million).

23

The Scorpion STR tyre, latest addition to the Sport Utility Vehicle segment.

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PERFORMANCE OF THE MAJOR GROUP COMPANIES

PIRELLI S.p.A. GROUP

The key consolidated figures for the year ended December 31, 2002 are presentedbelow:

Net sales amount to Euros 6,311 million and show a reduction of 10.6 percentcompared to 2001, net of the foreign exchange effect (decrease of -5.4 percent). Thechange is principally due to lower volumes (-9.3 percent) and the negativeprice/mix effect (-1.3 percent). The fall in the net sales of the Telecom Cables andSystems Sector led to a 9.3 percent reduction in sales overall, again net of theexchange effect.Net sales by sector are 48 percent for the Energy Cables and Systems Sector, 7percent for the Telecom Cables and Systems Sector and 45 percent for the TyresSector.

Gross operating profit is Euros 480 million, with a decrease of 27.9 percentcompared to Euros 666 million in 2001.The reduction is entirely due to the contraction in the Telecom Cables and SystemsSector (Euros 156 million), owing to the intensification of the crisis in the TLCmarket, and the end of the supply contract with Cisco Systems (Euros 59 million),partly offset by growth in the Energy Cables and Systems Sector and the TyresSector.

Operating profit is Euros 117 million, equal to 1.9 percent of net sales, compared toEuros 295 million in 2001 (3.9 percent of net sales). Constant and continuingattention to the efficiency of production factors, in addition to the efforts taken bymanagement to reduce costs through the restructuring plan were not sufficient tocontain the negative effects of the economic scenario, particularly with regard to theTelecommunications Cables and Systems Sector.In any event, the Energy Cables and Systems Sector improved its performance andthe Tyres Sector reported a strong gain in results especially compared to thecompetitive environment of the refered markets.The Group’s priority commitment to research and technological innovation is againconfirmed by R&D expenditures which stand at roughly 3.5 percent of net salescompared to 3.2 percent in 2001.

The balance of financial income (expenses) is an expense of Euros 173 millioncompared to Euros 22 million in the prior year. The balance includes Euros 38million to adjust the value of securities in the portfolio to market prices.

The share of the earnings (losses) of equity investments is a loss of Euros 230million and refers to the share of the result of Olimpia S.p.A., accounted for usingthe equity method (Euros 150 million), the writedown of the investment in F.C.Internazionale Milano S.p.A. (Euros 18 million), the writedown of the investment ine-Biscom S.p.A. (Euros 35 million) and the writedown of the investment inCaltagirone Editore S.p.A. (Euros 24 million).

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Extraordinary items show an expense of Euros 262 million compared to an expenseof Euros 16 million in 2001. The current year mainly includes restructuring costsconnected with the new rationalization measures focused on the Energy andTelecom Cables and Systems Sectors (Euros 275 million), offset by gains realized byPirelli S.p.A. (Euros 17 million) on the sale of the building used as therepresentative offices in Rome and the historical Bicocca degli Arcimboldi to Pirelli& C. A.p.A., as part of the broader process for the reallocation of properties.

In 2001, extraordinary items included the gain on real estate transactions by the Cablesand Systems Sector (Euros 61 million), an earn-out at the end of the agreements withCisco Systems (Euros 70 million) and restructuring costs (Euros 151 million).

The net result for 2002 is a net loss of Euros 610 million compared to a net incomeof Euros 86 million in 2001. Before consolidating Olimpia S.p.A. using the equitymethod, the net loss is Euros 460 million.The net loss attributable to Pirelli S.p.A. is Euros 614 million (compared to a netincome of Euros 82 million in 2001), corresponding to a loss per share of Euros0.31 (earnings per share of Euros 0.04 in 2001).

Shareholders’ equity is Euros 4,576 million (Euros 5,660 million at December 31,2001).The shareholders’ equity attributable to Pirelli S.p.A. is Euros 4,394 million (Euros5,462 million at December 31, 2001) which corresponds to Euros 2.19 per share(Euros 2.72 at December 31, 2001).

Free cash flows from operations, in spite of the trend of the Group’s operatingprofit, were positive Euros 419 million thanks to a careful management of workingcapital and a selective investment policy.Net cash flows were negative Euros 376 million (negative Euros 4,617 million in2001, including Euros 3,170 million for the investment in Olimpia S.p.A.). Theyreflect disbursements for the reorganization programs in the current and previousyears of Euros 155 million, the final payment of income taxes on the sale of OpticalTechnologies to Corning of Euros 263 million, the payment of dividends of Euros149 million and are offset by the sale of tax receivables to Unicreditfactoring S.p.A.and Mediofactoring S.p.A. of Euros 113 million in the first six months of the year.The net financial position was also negatively affected by the reclassification ofOlivetti derivatives to financial assets in fixed assets.Consequently, the net financial debt position went from Euros 1,089 million at theend of 2001 to Euros 1,469 million at December 31, 2002.Capital expenditures total Euros 325 million in 2002 compared to Euros 643million in 2001.

R&D expenditures are entirely charged to the statement of income and amount toEuros 219 million compared to Euros 237 million in 2001 and represent 3.5percent of net sales (3.2 percent in 2001).

The number of employees was 36,079 at December 31, 2002, compared to 39,127at December 31, 2001.The uncertainty surrounding the current economic and political situation does notallow for assumptions about an impressive upswing in the markets of the Group.

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More particularly, in the Telecom Sector, no signs of improvement are expected untilthe end of the year, whereas, in the Energy Sector, selective investments in utilitiesare expected to continue and a slow recovery in demand is forecast for the otherapplication sectors. The Tyres Sector will continue its policy of focusing on the highperformance segment, which is expected to grow.In this scenario, the Group, in capitalizing on the benefits from restructuringmeasures, will aim to increase the operating profit of the Energy Cables andSystems Sector, partly through a major focus of its products portfolio on highervalue-added segments. In the Telecom Cables and Systems Sector, the previouslymentioned restructuring actions should lead to a breakeven in the operating resultin the fourth quarter, while the Tyres Sector is expected to report a further increasein operating profit compared to 2002.

Energy Cables and Systems SectorNet sales amount to Euros 3,021 million and show a decrease of 14.5 percent fromthe prior year, due to the currency exchange effect (-3.9 percent), volume (-7.7percent) and prices (-2.9 percent).

Operating profit is Euros 55 million (1.8 percent of net sales), compared to Euros52 million in the prior year (1.5 percent of net sales).

Extraordinary items show an expense balance of Euros 121 million and mainlyinclude restructuring expenses of Euros 120 million.

The net result is a loss of Euros 120 million after financial expenses of Euros 44million, extraordinary expenses of Euros 121 million and income tax expenses ofEuros 10 million.

A section of an Air-Bag™ cable.

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The net financial position is a debt position of Euros 373 million. This is asignificant improvement over Euros 526 million at the end of the prior year and isattributable to a selective policy of investments and actions taken to optimizeworking capital.

New capital expenditures amount to Euros 75 million. The ratio of capitalexpenditures to depreciation is 0.8 percent.

In 2002, 410 people were engaged in research activities for expenditures of Euros44 million, representing 1.5 percent of total sales.

At December 31, 2002, total employees in the Energy Sector were 12,479(including 683 employees with temporary contracts).Compared to December 31, 2001, there was a reduction of 2,044 (including 450employees with temporary contracts).It should be emphasized that, as a result of the acceleration of the rightsizing programprior to the end of 2002, which led to a significant reduction in the headcount as atDecember 31, 2002, on January 1, 2003 the workforce in the Energy Sector totaled12,187, with a decrease of a further 292 compared to December 31, 2002.

The forecast for the current year is for stable macro-economic conditions withoutsigns of a recovery in the market.Actions taken to improve efficiency will continue for all of 2003 with the principalaim of mitigating the negative effects arising from the current market situation andmaking it possible to reach the forecast results.

Telecommunications Cables and Systems SectorNet sales amount to Euros 468 million and show a decrease of 62 percent from theprior year due to the currency exchange effect (-3.5 percent), volume (-47.9 percent)

The cable factory at Mudanya, Turkey.

28

and prices (-19.5 percent calculated on the basis of the prior year adjusted by thevolume variance).

The operating loss is Euros 84 million compared to an operating profit of Euros 76million in the prior year. The efficiencies achieved in respect of the structures andprocesses were not sufficient to offset the negative impact from the fall in volumesand the deterioration in the mix associated with the market trend.

Extraordinary items show an expense balance of Euros 121 million and mainlyinclude restructuring expenses of Euros 118 million to implement the new measuresaimed at rendering the restructuring actions more incisive.

The net result is a loss of Euros 263 million after financial expenses of Euros 54million (of which Euros 35 million are for the writedown of the investment ine-Biscom), extraordinary expenses of Euros 121 million and income tax expenses ofEuros 4 million.

The net financial position is a debt position of Euros 431 million compared to Euros367 million at December 31, 2001. The steps taken to reduce working capital werenot sufficient to compensate the negative impact of the economic result.

Capital expenditures amount to a total of Euros 78 million.

R&D is conducted by an integrated structure of research centers and developmentand engineering units in various countries.A total of 184 persons were engaged in R&D and expenditures totaled Euros 45million, equal to 9.6 percent of net sales.

At December 31, 2002, total employees in the Telecommunications Sector were2,546 (including 52 employees with temporary contracts).Compared to December 31, 2001, there was a reduction of 1,143 (including 190employees with temporary contracts).It should also be emphasized that, as a result of the acceleration of the rightsizingprogram prior to the end of 2002, which led to significant reduction in theheadcount as at December 31, 2002, on January 1, 2003 the workforce in theTelecommunications Sector totaled 2,408, with a decrease of a further 138compared to December 31, 2002.

No significant changes in the economic scenario are forecast for the current year.The restructuring program begun in 2002 will make it possible to capitalize onefficiencies in costs which will allow an improvement in the operating result.

Tyres SectorNet sales amount to Euros 2,857 million and are moderately higher than in 2001.The significant growth in volume (+5.9 percent) and the price/mix (+3.6 percent) )more than offset the negative currency exchange effect (-8.6 percent).

Operating profit is Euros 191 million, representing 6.7 percent of net sales,compared to Euros 172 million in the prior year, equal to 6.1 percent of net sales.

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The positive contribution by volumes, prices and mix along with actions to reducecosts, have more than offset the negative currency exchange effects and the increasein both raw material costs and labor costs.

Extraordinary items show an expense balance of Euros 11 million (includingrestructuring costs of Euros 9 million) compared to Euros 27 million in 2001(including Euros 26 million for layoff expenses).

Net income is Euros 78 million (after financial expenses of Euros 55 million,extraordinary expenses of Euros 11 million and income tax expenses of Euros 47million) compared to Euros 34 million in the prior year (after financial expenses ofEuros 75 million, extraordinary expenses of Euros 27 million and income taxexpenses of Euros 36 million).

The net financial position is a debt position of Euros 492 million, a reduction ofEuros 192 million from the end of 2001.The positive change is due to the capital increase with a share premium subscribedto by the parent company Pirelli S.p.A., equal to Euros 80 million, partly offset bythe payment of dividends to the same parent company (Euros 30 million), actionstaken in the management of working capital and investments focused andcorrelated to cash flows produced by depreciation.

A phase in the production of a new MIRS™ Moto, which is operative at Bicocca, Milan.

Capital expenditures amount to Euros 182 million in 2002 for a ratio of 1.1 todepreciation and representing 6.4 percent of net sales.In 2002, R&D expenditures totaled Euros 122 million, equal to 4.3 percent of netsales, and were focused on revitalizing the product range and pursuing thedevelopment of products and MIRS technology.

At December 31, 2002, employees in the Tyres Sector were 20,222, including 1,515employees with temporary contracts.Compared to December 31, 2001, there was a reduction of 252 management andstaff, of which 24 are employed under temporary contracts, owing to thecontinuation of programs and measures which have the aim of rationalizing thestructures.

The Tyres Sector will continue to pursue its strategy of concentrating on the highperformance tyre segment, supported by the Business Unit organization and thus bya focus on the product. The Tyres Sector will give priority to all operational andworkable measures which will enable it to achieve an improvement in its operatingprofit compared to 2002.

PIRELLI S.p.A.

The financial statements at December 31, 2002 of Pirelli S.p.A., the parentcompany, show a net income of Euros 112 million compared to Euros 1,489 millionin 2001.

The shareholders’ equity is equal to Euros 4,936 million and reflects the net incomefor the year and the payment of dividends relating to the prior year.

The Board of Directors of Pirelli S.p.A. will put forth a proposal at theshareholders’ meeting for the payment of dividends of Euros 0.0364 for eachsavings share.

PIRELLI & C. LUXEMBOURG S.A. – LUXEMBOURG

The company ended the year with a net loss of Swiss francs 34.7 million comparedto a net income of Swiss francs 12.3 million in the prior year.The result for the year includes financial expenses of Swiss francs 32.3 million(Swiss francs 50.3 million in 2001), writedowns of investments for Swiss francs 7.1million and gains from the sale of investments for Swiss francs 4.6 million.

Last year, the result included dividends from Pirelli S.p.A. of Swiss francs 62.6million.

The company holds 527,813,101 Pirelli S.p.A. ordinary shares equal to 27.52percent of voting capital and 26.30 percent of the entire share capital.Debt went from Swiss francs 1,532 million to Swiss francs 1,493 million.

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PIRELLI & C. REAL ESTATE S.p.A.

Pirelli & C. Real Estate is a management company which invests in real estateprimarily by participating with minority stakes in qualified initiatives and takingover their management (Asset Management activities) and also providing them andthird-party clients with a wide range of property services (Service Provideractivities).

2002 was a particularly important year for the company:

– important transactions were carried out for the acquisition of highly prestigiousreal estate properties for their related management and leveraging;

– the company entered new lines of business with interesting prospects fordevelopment, the main field being non-performing loans;

– steps were taken to begin the strategic reorganization of the tertiary portfolio bycreating the first line of long-term investments which will lead to the start of realestate funds;

– the listing of the company on the stock exchange raised capital resources tofinance investments and reinforce the company’s visibility in the Italian andinternational panorama.

Having reached these strategic objectives, the year 2002 was able to close withsharply higher results that confirm the development plan announced by thecompany at the time of its listing and laid the groundwork for a future that willdeliver even higher growth.

The financial statements at December 31, 2002 show an attributable consolidatednet income from real estate operations of Euros 82.6 million, compared to Euros33.5 million in 2001, with a growth of 147 percent. The consolidated net income,including other components, in both years is largely due to the sale of the ex-Unimportfolio and is equal to Euros 125.3 million, compared to Euros 161.4 million in2001.

Realization by Pirelli & C. Real Estate: the residential area of Progetto Bicocca.

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Major events in 2002Pirelli & C. Real Estate S.p.A. group conducted a series of important transactionsduring the year which are listed below.

– In January 2002, the Company purchased, from the parent company Pirelli & C.A.p.A. (for Euros 5.3 million), the entire share capital of Pirelli & C. CreditServicing S.p.A., a company that manages non-performing loan portfolios, thusentering into a new sector of business and completing the range of services it offers.

– Again in January, the Company finalized the agreement signed in November2001 for the acquisition, from the Edilnord 2000 group, of the share capital ofthree service companies (Edilnord Progetti S.p.A., Edilnord Gestioni S.p.A. andServizi Immobiliari Edilnord S.p.A.) and, in keeping with the Company’s usualbusiness model, the acquisition of qualified minority interests in vehiclecompanies owning property zoned for building in the Milan area, which havebeen given to Pirelli & C. Real Estate S.p.A. to manage. The transaction wasvalued at about Euros 220 million.

– In March, in order to focus more completely on its core business, the minoritystake in Eurostazioni S.p.A. was sold to the parent company Pirelli & C. A.p.A.,realizing a gross gain of Euros 1.4 million.

– At the end of March, the group, together with the Morgan Stanley funds,purchased, from Investimenti e Gestioni S.p.A. (Fiat group), the companyImmobiliare San Babila S.p.A., which holds prestigious residential propertymainly located in Milan and Rome. The transaction was valued at about Euros240 million.

– In April, Pirelli & C. Real Estate S.p.A. finalized two acquisitions in the sector ofFacility Management services: the first, for the company Cam Energia e ServiziS.r.l. – now Pirelli & C. Real Estate Facility Management S.p.A. – purchasedfrom Cam Finanziaria S.p.A., and the second, for the entire share capital ofAltair Facilities Management S.p.A., purchased from companies owned by agroup of private entrepreneurs, with the aim of strengthening the group’spresence in this sector of services.

– In April, the group purchased a qualified minority interest in CFT FinanziariaS.p.A., a vehicle company which owns a portfolio of non-performing mortgageloans worth Euros 137 million. CFT Finanziaria S.p.A. later purchasedmoderate-size portfolios from some Tuscan banks for a total of Euros 28 million.

– In May, together with the Morgan Stanley funds, the acquisition was concludedfor the purchase of real estate property valued at Euros 553 million from Bancadi Roma (now Capitalia), which kept a minority stake.

– Again in May, Pirelli & C. Real Estate S.p.A. concluded, together with theMorgan Stanley funds and other partners, the purchase of residential real estateproperties of the RAS Group, consisting of 107 mostly prestigious buildings andover 50 percent of them located in the center of Milan for a value of over Euros1,720 million. Pirelli & C. Real Estate S.p.A. also acquired the Property andFacility Management Service Division. As provided in the original purchaseagreements, 25 percent of the property purchased was sold at the end of Octoberto the SAI Group through the transfer of the company IS;

– In July, Pirelli & C. Real Estate and Soros Real Estate Investors set up a jointventure for investments in light industries and logistics; in keeping with the

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Company’s usual business model, Pirelli & C. Real Estate participates with aqualified minority stake of 25 percent and full management of the initiatives.The joint venture, which expects to invest more than Euros 300 million inexisting portfolios and development initiatives over a three-year period, isalready committed for Euros 58 million.

– At the end of October, the first line of long-term investments was set up throughtwo vehicles (commonly called Tiglio I and Tiglio II) to which tertiary propertywas contributed for a total value of Euros 3.15 billion. Pirelli & C. Real Estate –which owns about 13 percent of the vehicles – carries out asset managementactivities and acts as the service provider on an exclusive basis.

– At the end of December, the Pirelli & C. Real Estate S.p.A. group purchased a 20percent interest in the newly established company to which the Marzotto grouphad contributed areas zoned for building. At the same time, a frameworkagreement was also signed for concentrating in this company, by the end of June2003, areas zoned for building coming from the portfolios of the Pirelli & C. RealEstate, Olivetti and Telecom Italia groups (that will bring total surface space toabout 3 million m2, of which about 1 million m2 is zoned for building) and toentrust Pirelli & C. Real Estate with asset management and specialist servicesrelated to this portfolio.

– At the end of the last quarter, the company CFT Finanziaria, in which Pirelli &C. Real Estate holds a 47 percent stake, the same percentage as Cassa diRisparmio di Firenze, sold the non-performing mortgage loans in portfolio to asecuritization vehicle company, whose services have been entrusted to Pirelli & C.Real Estate.

– In the fourth quarter 2002, the group continued to purchase mainly residentialproperty portfolios, finalizing deeds of purchase for a total of more than Euros110 million.

Economic review


2002 2001 delta

• Aggregate production value, net of acquisitions 1,297,3 607,6 689,7

• Production value 491,5 326,2 165,3

• Operating profit including share of earnings (losses)

of equity investments 102,2 47,2 55,0

• Income before exstraordinary items 99,9 43,9 56,0

• Net income from real estate operations-attributable 82,6 33,5 49,1

• Other components (*) 42,7 127,9 (85,2)

• Net income - attributable 125,3 161,4 (36,1)

(*) Mainly arising in both periods from the sale of securities from the ex-Unim portfolio.

In the description of the economic and financial highlights that follows, it isimportant to note that Pirelli & C. Real Estate is a management company whichinvests in real estate primarily by participating with minority stakes in qualifiedinitiatives and completely taking over their management. Therefore, Aggregate

production value net of acquisitions and the Operating profit (loss) including shareof earnings (losses) of equity investments are the most significant indicators to givea better expression of the business volumes managed and the trend in results at theoperating level.

Aggregate production value, net of acquisitions, amounts to Euros 1,297.1 million,a growth of 113 percent compared to Euros 607.6 million in 2001. Such amount,including acquisitions, is equal to Euros 6,018.6 million compared to Euros 792.7million in 2001. Consolidated production value alone for 2002 is Euros 491.5 millioncompared to Euros 326.2 million in 2001.

The operating profit (loss) including the share of earnings (losses) of equityinvestments is a profit of Euros 102.2 million, compared to Euros 47.2 millionin 2001 (+117 percent). This amount includes the share of the earnings, net ofincome taxes, of companies accounted for using the equity method, for Euros60.1 million.

The income before extraordinary items amounts to Euros 99.9 million comparedto Euros 43.9 million in 2001, an increase of 128 percent.

The attributable consolidated net income from real estate operations is Euros 82.6million, compared to Euros 33.5 million in 2001. Taking into account the Othercomponents of a extraordinary and nonrecurring nature that mainly relate to the saleof the securities portfolio that came from Unim, the consolidated net income is Euros125.3 million compared to Euros 161.4 million in 2001.

Balance sheet review


12.31.2002 12.31.2001• Fixed assets 218,8 74,2

– including investments accounted for using the equity method 109,1 55,2• Net working capital 190,5 249,4

– including inventories 383,7 350,3• Net invested capital 409,3 323,6• Shareholderds’ equity 368,8 132,1

– including minority interest 0,9 1,1• Provisions and contributions 52,8 49,9• Net financial position (12,3) 141,6

– including cash/short-term financial assets (74,2) (41,4)– including financing from shareholders (179,0) (239,1)– including other medium/long-term assets (0,2) (0,2)– including short-term financial payables 31,2 401,9– including medium/long-term financial payables 209,9 20,4

• Total net invested capital financed 409,3 323,6

Shareholders’ equity attributable to the parent company is Euros 367.9million, compared to Euros 131.0 million at December 31, 2001. The increase of

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Euros 236.9 million is due to the result for the year and the effect of the capitalincrease connected with the listing of the company’s shares on the stock exchange(Euros 105 million).

The net financial position shows a liquidity position of Euros 12.3 million comparedto a debt position of Euros 141.6 million at the end of 2001. The improvement fromDecember 31, 2001 is due to the capital increase connected with the listing of thecompany’s shares on the stock exchange and cash flows provided by operations. Thegearing ratio is practically nil compared to 1.1 at December 31, 2001.

The net financial position expressed before financing made to minority-ownedcompanies also improved and shows a debt position of Euros 166.7 million comparedto Euros 380.7 million at the end of 2001. The gearing ratio in this case is 0.5compared to 2.9 at the end of December 2001.

Fixed assets total Euros 218.8 million, compared to Euros 74.2 million carried at theend of 2001, with an increase of Euros 144.6 million.The increase is due to investments in qualified minority-owned companies,investments in treasury shares and higher property, plant and equipment andintangible assets due to the consolidation of service companies purchased during theyear and expenses connected with the shares listing.

Pirelli & C. Real Estate portfolios: building in Via del Tritone, Rome.

Net working capital is Euros 190.5 million, compared to Euros 249.4 million atDecember 31, 2001. The reduction in working capital reflects the operatingimprovement in the receivables/payables balance which compensated the increase ininventories connected with both new acquisitions and the stage of completion of theconstruction work on some important buildings.

Subsequent events

– In January and February 2003, the group continued to purchase real estateportfolios of mainly residential properties, signing preliminary contracts andfinal deeds of purchase for nine buildings situated in Milan and Naples for atotal value of Euros 77 million (of which Euros 27 million refer to the group’sportion) in addition to another Euros 110 million of buildings purchased inthe last quarter of 2002 (of which Euros 38 million refer to the group’sportion).

– In February, an agreement was reached with Deka Immobilien InvestmentGmbH (Deka Group), a leading company in the management of open realestate funds in Europe for portfolio management, for the sale, at about Euros130 million realizing a gross gain of about Euros 20 million, of fourprestigious buildings located in the center of Milan owned by the jointventure with The Morgan Stanley Real Estate Funds, for a surface area ofmore than 30,000 m2, originating from the ex-RAS real estate assets recentlyacquired.

– In February, the group filed an application, with other partners, in order to beadmitted to the bidding arranged by the state properties agency for taking anadministrative and technical consensus of state property.

– Again in February, Pirelli & C. Real Estate won, with other partners, the bid forthe management and revision of computer services for Public Education. Thecontract will be valid for five years and renewable for another two and is worthabout Euros 200 million. Pirelli & C. Real Estate’s facility management businesswill manage the center.

– On March 3, the group, jointly with the Goldman Sachs and Morgan StanleyFunds, presented a non-binding offer in the ENEL group’s bid to sell Enel RealEstate S.p.A., which comprises a portfolio of over 1,300 buildings mainly foroffice and industrial use located throughout the national territory and thededicated staff for the management of the same buildings.

Outlook for the current yearOn the basis of available information, the operating profit including earnings(losses) of equity investments accounted for using the equity method for the year2003 is expected to show a further growth over the prior year. Such growth, asoccurred in 2002, will predictably be higher in the second half of the year when theleveraging of the real estate assets recently acquired will show its full effects.

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37

PIRELLI & C. AMBIENTE S.P.A.

In 2002, the company continued its activities in the field of renewable energysources through the production of a quality fuel derived from waste (CDR-P) for thestart of the recovery of energy through the replacement of primary fossil fuels.

Action taken during the year encompassed three areas:

– the start of investments for building the first plant for the production of CDR-P,which ended with the testing of the plant;

– commercial action aimed at the start of several talks throughout Italy withpotential CDR-P users both for direct co-combustion and with priorgasification;

– protection of the legal process both in terms of the environment and energy tosupport the creation of a quality CDR market as a source of renewable energy.

As for direct co-combustion, the first industrial application in the project isrepresented by IDEA Granda S.Cons.R.L., set up in 2001 with a 49 percentstake held by Pirelli & C. Ambiente, and managed by the same company. At theend of last year the company completed the construction of a plant for theproduction of CDR-P and the CDR-P production stage began at start of this year.The CDR-P produced is destined to partially replace (initially on the basis of theauthorized 10 percent limit against a 35/40 percent technological limit) thetraditional fossil fuels used in the main burner of a cement factory owned by theBuzzi Unicem group. 2003 planning calls for the use of about 10,500 tons of drycompound from solid urban waste of the Province of Cuneo’s basin, to whichadditional ground plastic and tires will be added to obtain about 13,600 tons ofCDR-P.

The result of the company for the year 2002, which is still in the start-up phase,was a loss of Euros 1.7 million compared to a loss of Euros 0.1 million in the prioryear.

The logo of IDEA GRANDA, the new consortium 49% owned by Pirelli & C. Ambiente.

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EQUITY INVESTMENTS HELD BY THE MANAGING PARTNERS

Pursuant to article 79 of Consob Regulation approved by resolution No. 11971 ofMay 14, 1999, the following information is provided as regards the equityinvestments held in the company Pirelli & C. and its subsidiaries by the ManagingPartners, as well as spouses, not legally separated, and minor children, eitherdirectly or through subsidiaries, trustee companies or individual persons, resultingfrom the shareholders’ register at December 31, 2002, from notices received orother information acquired from the same Managing Partners.

Name Company in which equity No. of shares No. of No. of No. of sharesinvestment held held at prior shares shares held at

year-end purchased sold currentyear-end

Tronchetti Provera Marco Pirelli & C. 1,870 200* 2,070Pirelli & C. 176,916,778 7,935,436 184,852,214(indirect ownership)Pirelli S.p.A. 30,513,000 6,848,855 37,361,855(indirect ownership)

Pirelli Alberto Pirelli & C. 4,000 500* 4,500

Buora Carlo Pirelli & C. 3,000 3,000Pirelli S.p.A. 42,517 42,517

Puri Negri Carlo Alessandro Pirelli & C. 10,000 10,000Pirelli & C.Real Estate S.p.A. 2,279,888** 1,185,121 2,279,888 1,185,121

Orlando Luigi Pirelli & C. 3,933 421* 4,354

* Conversion of Pirelli & C. 2.5% 1998-2003 bonds.** The extraordinary shareholders’ meeting of Pirelli & C. Real Estate S.p.A. held April 2, 2002 voted

to change the par value of the shares from € 52 to € 0.50 under a stock split, assigning 104 newshares for every one old share held.

(1) There is no statutory auditor holding equity investments in Pirelli & C. and subsidiaries.(2) No stock options were granted (as regards the stock option plans of the subsidiary Pirelli & C. Real

Estate S.p.A., reference should be made to the following note in this report, whereas for the stockoption plans of Pirelli S.p.A., reference should be made to its 2002 Annual Report.

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PROFORMA CONSOLIDATED FINANCIAL DATA ASSUMING THE LINE-BY-LINECONSOLIDATION OF OLIMPIA S.p.A. AND THE USE OF THE EQUITY METHOD TO VALUEITS INVESTMENT IN OLIVETTI S.p.A.

Proforma consolidated financial data at December 31, 2002 of Pirelli & C. A.p.A. is presented below,assuming the consolidation line-by-line of Olimpia S.p.A. and the use of the equity method to value OlimpiaS.p.A.’s investment in Olivetti S.p.A..

Proforma data of Pirelli & C. A.p.A. - December 2001 (in millions of euros)

Proforma adjustments

Consolidated Elimination of Olimpia S.p.A. Consolidation Total proforma Proformafinancial Olimpia S.p.A. line-by-line adjustments and adjustments consolidated

statements net result consolidation valuation of financial data2002 Pirelli & attributable to investment in 2002 PirelliC. A.pA. (1) Pirelli & C. Olivetti S.p.A. & C. A.p.A.

A.p.A. using the equity (2)method

Condensed Statement of IncomeNet sales 6,718 – - - – 6,718Operating profit 118 – (1) - (1) 117Financial income (expenses)/Valuation adjustments to financial assets (353) 150 (241) (440) (531) (884)Exstraordinary items (83) – (4) (4) (87)Income taxes (87) – – (87)Net income (loss) (405) 150 (246) (440) (536) (941)Net income (loss) - Pirelli & C. (58) 62 (61) (108) (107) (165)

Goodwill amortization effect 3 - - 589 589 592Net income (loss) (excluding godwill amortization) (402) 150 (246) 149 53 (349)Net income (loss) - Pirelli & C.(excluding goodwill amortization) (55) 62 (61) 36 37 (18)

Reclassified Balance SheetFixed assets 6,596 169 8,541 (3,597) 5,113 11,709Net working capital 991 – 58 – 58 1,049Total net invested capital 7,587 169 8,599 (3,597) 5,171 12,758

Financial by:Shareholders’ equity 4,626 169 4,923 (3,597) 1,495 6,121– of which shareolders’ equity -

Pirelli & C. 1,933 69 1,211 (1,396) (116) 1,817Provisions 911 – – – – 911Net financial (liquidity)/debt position 2,050 – 3,676 – 3,676 5,726

(1) Pirelli & C. A.p.A. consolidated financial statements (investment in Olimpia S.p.A. accounted for using the equity method)(2) Proforma data (line-by-line consolidation of Olimpia S.p.A. and equity method valuation of Olivetti S.p.A.)

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The proforma consolidated financial data has been prepared using the statutoryfinancial statements of Olimpia S.p.A. at December 31, 2002 and the consolidatedfinancial statements of the Olivetti S.p.A. Group at the same date approved by theBoards of Directors.The net loss for the year of Olimpia S.p.A. (Euros 246 million) was mainly due tofinancial expenses of Euros 173 million and the loss of Euros 68 million given theOlivetti 2001-2002 warrants were not exercised.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. A.p.A.”: elimination of the statement of income and balance sheet effects ofvaluing Olimpia S.p.A. with the equity method in the Pirelli & C. A.p.A.consolidated financial statements at December 31, 2002.

– in the column “Olimpia S.p.A. line-by-line consolidation”: inclusion of the assets,liabilities, revenues and costs resulting from the financial statements atDecember 31, 2002 of Olimpia S.p.A., attributing the share of net equity andresults of operations to the minority interest.

– in the column “Consolidation adjustments and valuation of investment inOlivetti S.p.A. using the equity method”: inclusion of the effect of accountingfor Olivetti S.p.A. using the equity method, giving rise to a negative valuationadjustment of Euros 440 million, of which Euros 220 million relate to theamortization of implicit goodwill for 12 months out of a total twenty-yearperiod, and Euros 220 million to Olimpia S.p.A.’s share of the year 2002results of the Olivetti Group.

The “goodwill amortization effect” on the net result is detailed as follows:– in the column “Consolidated financial statements at December 31, 2002

Pirelli & C. A.p.A.”, the amount of Euros 3 million refers to the amortizationcharge for the year on the goodwill booked by Pirelli S.p.A. in respect ofOlimpia S.p.A.;

– in the column “Consolidation adjustments and valuation of investment in OlivettiS.p.A. using the equity method”, the amount of Euros 589 million includesEuros 220 million for the goodwill booked by Olimpia S.p.A. in respect ofOlivetti S.p.A. and Euros 369 million for the goodwill booked by Olivetti S.p.A.in respect of Telecom Italia S.p.A..

A comparison of shareholders’ equity and net debt between the consolidatedfinancial data of Pirelli & C. A.p.A. and the proforma consolidated financial data ofPirelli & C. A.p.A. at December 31, 2002 and December 31, 2001 is presentedbelow, assuming:

– the line-by-line consolidation of Olimpia S.p.A. and the valuation of theinvestment in Olivetti S.p.A. using the equity method;

– the line-by-line consolidation of both Olimpia S.p.A. and the Olivetti S.p.A.group.

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Proforma Pirelli & C. A.p.A. equity and financial summary data - December 2002 (in millions of euros)

Shareolders’ Net debt Net/debt/Shareholders’ Shareholders’ equityequity equity Pirelli & C.

31/12/02 31/12/01 31/12/02 31/12/01 31/12/02 31/12/01 31/12/02 31/12/01

Pirelli & C. Group: consolidatedfinancial statements at 12/31 4,626 5,407 2,050 2,029 0.44 0.38 1,933 2,119

Pirelli & C. Group: proforma consolidateddata with Olimpia S.p.A. consolidated lineby-line and Olivetti S.p.A. valued using the equity method 6,121 7,486 5,726 5,538 0.94 0.74 1,817 2,123

Pirelli & C. Group: proforma consolidateddata with Olimpia S.p.A. and Olivetti Groupconsolidated line-by-line 23,428 30,182 39,125 43,900 1.67 1.45 1,817 2,123

The Mini Cooper fitted with Pirelli Eufori@ tyres, manufactured by the MIRS™ process.

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Realization by Pirelli & C. Real Estate: the project of the new entertainment centre in construction in the Bicocca area, Milan.

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STOCK OPTIONS PLANS

The Company has no stock option plans for its employees.

In 2001, Pirelli & C. granted the Managing Director-General Manager of thesubsidiary Pirelli & C. Ambiente S.p.A., Nicolò Dubini, an option for the purchaseof 183,600 shares of this company (equal to 6 percent of share capital) at a price ofEuros 1.15 per share, based on an appraisal carried out for this purpose.In 2002, a new plan was started for the same company with options granted to fouremployees for the purchase of a total of 91,800 Pirelli & C. Ambiente S.p.A. shares,equal to 3 percent of share capital, at the same price per share of Euros 1.15, againbased on an appraisal carried out for this purpose The above options can be exercised beginning from the time the financialstatements at December 31, 2003 of Pirelli & C. Ambiente S.p.A. are approved andthe shares from the options can be sold by the beneficiaries to Pirelli & C. withintwo years of the date the options are exercised at a price that will take into accountthe revaluation of the net assets of the company during the intervening period.

As regards the autonomous stock option plans put into place by Pirelli S.p.A. andPirelli & C. Real Estate S.p.A., listed subsidiaries of Pirelli & C., reference can bemade to the specific reports prepared by these companies.

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CORPORATE GOVERNANCE

INTRODUCTION

On November 16, 1999, the Company informed the market about the adoption ofthe “Code of Self-discipline of listed companies” (hereinafter “Code”),recommended by Borsa Italiana S.p.A..In conformity with the Instructions for the Regulations of the markets organizedand managed by Borsa Italiana, here below, the Company wishes to represent itscorporate governance system which has gradually been formed over time.This year, too, an exact application of all the recommendations contained in theCode is difficult because of the particular type of Company (which has always beena limited partnership with share capital) and the salient feature which distinguishesthe figure of the managing partner.

1. Board of Managing Partners1.1 The role of the Board of Managing Partners

Pursuant to the by-laws (art. 10), the Board is empowered with themanagement of the Company and, for this purpose, is invested with the fullestpowers for finance and administration, except those, which according to the by-laws or by law, are reserved for the shareholders’ meetings.The Board, in fact, exercises its powers in conformity with point 1.2 of theCode, that is:– examines the corporate, industrial and financial plans of the Company and

the corporate structure of the Group which the Company heads;– assigns and revokes the delegation of powers to the managing partners,

establishing the limits and manner of exercising such powers;– establishes, after examining the proposals of the specific compensation

committee and after having consulted the Board of Statutory Auditors, thefee to be paid to the managing partners and those who hold specific posts;

– monitors the general performance of operations, with special attention beingpaid to the conflicts of interest, taking into account, in particular, theinformation received from the executive managing partners and the auditcommittee for internal control and corporate governance, as well ascomparing the results with the budgets on a regular basis;

– examines and approves transactions that have a significant economic, financialor equity impact, with particular reference to related party transactions;

– generally, at the board meetings, held at least quarterly, the Board ofStatutory Auditors is kept posted about the activities conducted and themost important transactions entered into, also by the subsidiaries;

– verifies the adequacy of the general organizational and administrativestructure of the Company and group;

– keeps the shareholders informed at the shareholders’ meetings.

1.2 The appointment of managing partnersIn conformity with point 7 of the Code, and although not included in the by-laws, from now on, as a normal rule, the proposals for the post of managingpartner will be accompanied by exhaustive disclosure concerning the personneland professional characteristics of the candidates and will be deposited at the

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corporate offices, if possible, at least ten days prior to the expected date of theshareholders’ meeting.The Board of Managing Partners did not deem it necessary to form an internalcommittee to nominate candidates for the post of managing partner, since, atpresent, the assumptions for doing so as contemplated by the Code do not applyto the Company and, particularly because no special difficulties are envisagedin proposing candidates, in view of the actual shareholder base.Lastly, the by-laws do not contemplate the system of voting by lists for thenomination of the managing partners.

1.3 The composition of the Board of Managing PartnersThe Board of Managing Partners is composed of the following:Dott. Marco Tronchetti ProveraDott. Alberto PirelliDott. Carlo BuoraDott. Luigi OrlandoCarlo Alessandro Puri NegriCurrently, therefore, the Board is composed of five managing partners, of whomfour are executive, with the executive managing directors being, according topoint 2.1 of the Code, - the Chairman Dott. Marco Tronchetti Provera,entrusted with delegated powers, the Deputy Chairman Dott. Alberto Pirelli(who carries out management functions in the Tyre Sector), Dott. Carlo Buorathe Managing Director and General Manager of the subsidiary Pirelli S.p.A. andCarlo Alessandro Puri Negri, the General Manager of the Company and DeputyChairman-Managing Director of the subsidiary Pirelli & C. Real Estate S.p.A.and Deputy Chairman, entrusted with delegated powers, in Pirelli & C.Ambiente S.p.A..The Code, at point 3, provides a definition of “independent directors”, which,in view of, but especially on account of the particular features which distinguishthe managing partners, none of them can be qualified as such.Given the type of Company, an expiration date for the term of office for themanaging partners has not been established.A list of the posts held as director or statutory auditor by each of the managingpartners in other listed companies in regulated markets, also abroad, infinancial, banking, insurance or other companies of significant size arepresented at the end of this section of the report.

1.4 Meeting of the BoardA Chairman, and if necessary, one or more Deputy Chairmen shall be appointedfrom amongst the members of the Board.In the event of the Chairman being absent, the chair shall be taken by thesenior in age of the Deputy Chairmen present.The Board shall appoint a Secretary who is not necessarily a member of the Board.The Board shall meet at the invitation of the Chairman or, if appointed, by aDeputy Chairman or a Managing Director, at the registered office of theCompany or in any other place just so long as it is in Italy, or whenever ameeting has been requested by two managing partners or by at least twostanding statutory auditors.

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To this end, the by-laws do not establish a minimum number of meetings; it isnevertheless the practice to hold at least six meetings a year (to examine thepreliminary data at June 30 and at December 31, the draft financial statementsand the quarterly and semiannual reports).Meetings of the Board may be held by teleconference or videoconference.In this case the following must be guaranteed:a) identification of all the participants at each point in the teleconference or

videoconference connection;b) the possibility for each participant to intervene, to orally put forward same’s

own opinion, to view, receive and transmit all documentation, as well as thecontextuality of considerations and resolutions;

c) meetings of the Board of Managing Partners are considered to be held inthe place in which the Chairman and the Secretary must besimultaneously.

Board meetings shall be convened by means of a letter, telegram, telex or faxsent to the address of each managing partner and each statutory auditor, atleast five days before (or in urgent cases at least six hours before) the day set forthe meeting.The presence of at least half the members plus one is necessary for theresolutions of the Board to be deemed valid, and the favorable vote of themajority of those attending is required. Nevertheless, for the appointment ofthe Chairman and one or more Deputy Chairmen, in addition to theappointment of the managing director and the granting of powers by the Boardof Managing Partners to one or more of its members, a favorable vote cast by allthe members is required.The resolutions of the Board, even when passed by meetings held throughvideoconference, are recorded in a special book signed by the Chairman and theSecretary.Except in exceptional circumstances, the managing partners are provided withthe necessary documentation and information reasonably in advance of themeetings in order to allow the board to express its opinion knowledgeably onthe matters under examination.In 2002, nine Board meetings were held; total attendance by the managingpartners was more than 90 percent.Two meetings have already been held in 2003 and at least another four areplanned.

1.5 The compensation to the managing partnersThe compensation to the Board of Managing Partners, besides thereimbursement for expenses incurred during the course their duties, consistsof an annual fee established by the shareholders’ meeting (set at Euros51,500 for the three years 2001/2003 by the shareholders’ meeting held onMay 10, 2001).The compensation to the managing partners invested with specificresponsibilities are established by the provisions of art. 2389, paragraph 2 ofthe Italian Civil Code.The Board has internally set up the “Compensation Committee”, establishingthat:

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a) regarding its functions:– proposals are presented to the Board for the compensation of the

managing partners having specific responsibilities and the remunerationof the top management of the Company;

– preliminary examinations are made of the proposals for stock optionplans;

b) regarding its composition:– in general, it is composed of at least three managing partners who shall

appoint the Chairman and a Secretary, who is not necessarily a memberof the Board;

– the Board of Statutory Auditors and the Chairman of the Board ofManaging Partners shall also attend the Board meetings;

– the managing partners invested with specific responsibilities shall absentthemselves from the meeting when their compensation is being discussedand also in the event of discussions which interest them personally;

c) as to its working format:– meetings are held at any time the Chairman deems it necessary or when a

request has been made by another member;– for convening meetings and for the validity of its constitution and the

resolutions, the same rules apply as those stated in the by-laws for themeetings of the Board of Managing Partners.

The “Compensation Committee” is currently composed of the managingpartners Dott. Luigi Orlando, who is Chairman, Dott. Alberto Pirelli and Dott.Carlo Buora; three meetings were held in 2002.

2. Granting of power. Information provided to the Board of Managing PartnersThe Board of Managing Partners granted the Chairman Dott. Marco TronchettiProvera and the Deputy Chairman Dott. Alberto Pirelli the necessary powersnecessary to carry out all the acts pertaining to corporate activity, to beexercised with single signature powers, with the exception of the power to issueguarantees for obligations of the Company and the subsidiaries in excess ofsingle amounts of Euros 25 million or guarantees in the interest of third partiesfor obligations in excess of single amounts of Euros 10 million.Specific and more limited powers were conferred to the managers to be used tocarry out their specific responsibilities.Also during 2002, as in the past, the above managing partners (as well as thoseto whom specific powers were granted) only used the powers conferred to themto carry out the normal operations of the Company - of which the othermanaging partners of the Company were periodically informed -, waiving suchpowers in the case of significant transactions in terms of quality or value froman economic and financial standpoint, and submitting them to the same Boardof Managing Partners. In accordance with art. 10 of the by-laws (which is incompliance with that set forth by art. 150, paragraph 1 of Legislative DecreeNo. 59 of 1998), furthermore, the Board of Managing Partners has kept theBoard of Statutory Auditors posted – on a quarterly basis – about the activitiesand any important economic, financial or equity transactions carried out by theCompany or the subsidiaries as well as transactions involving any potentialconflicts of interest, providing the necessary elements to comprehend the

transactions themselves. To this end, it should be pointed out that in July 2002,the Company adopted a specific procedure (the text of which is presented at theend of this section of the report) which defines, in precise terms, the rules to befollowed to comply with the above-mentioned disclosure obligations. On this occasion, the principles of conduct were also established (the text ofwhich is presented at the end of this section of the report) for carrying outtransactions with related parties.Finally, the Chairman of the Board, also using information provided by theresponsible internal functions, informs the managing partners and, if necessary,discuss any major new legislation and regulations that regard the Company andthe corporate boards.Lastly, it should be pointed out that, starting from December 1, 2002, inaccordance with the regulations of Borsa Italiana, a Code of Conduct on InsiderDealing was adopted (the text of which is presented at the end of this section of thereport) which states the rules according to which transactions effected by relevantpersons on the listed securities of the Group should be disclosed to the market.

3. Internal controlReporting directly to the Chairman of Pirelli & C. A.p.A., also with regard tothe activities carried out in the subsidiaries, is the Internal Audit Function (notinvolved in financial operating activities and in the preparation of the financialstatements and period statements) which has the main responsibility forverifying that the system of internal control of the Pirelli Group is working andis adequate in terms of effectiveness and efficiency. To this end, it should bepointed out that in 2002, activities continued in order to spread and develop themethodology for managing operating risk within all the major units of theGroup. The Internal Audit Function has given support to the Sectors in definingan action plan to update and monitor the “risk portfolio” of the operating units.In relation to Legislative Decree No. 231/2001, based upon the guidelinespublished by Confindustria, the Internal Audit Function has assisted the Groupin implementing a specific methodology aimed at ensuring a compliance withthe Decree itself, which will be aimed at the construction of a model fororganization, management and control in 2003.In line with the audit program for payments (Italy and abroad) begun in 2001,periodical tests were carried out during the year on selected types of financialpayments.The Board of Managing Partners has internally set up an “Audit Committee”for internal control and corporate governance, establishing that:a) regarding its functions:

– carries out advisory and proposal functions for the Board of ManagingPartners and, in particular:– assists the Board in determining the guidelines of the internal control

system and in the periodical testing of its adequacy and its effectivefunctioning, in order to be sure that corporate risks are suitablymanaged;

– evaluates the adequacy of the accounting principles used together withthe persons in charge of the financial functions of the Company andthe auditors;

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50

– evaluates the work plan prepared by those in charge of internal controland receives their reports periodically;

– evaluates the proposals formulated by the independent audit firms inorder to be appointed as auditors as well as the audit work plan andthe results expressed in the report and letter of recommendations;

– informs the Board about the work carried out and the adequacy of thesystem of internal control at least every six months, at the time of theapproval of the annual financial statements and six-month financialstatements;

– performs the additional tasks assigned by the Board of ManagingPartners, particularly in relation to the reports of the independentaudit firm;

– monitors the continuous update of the rules of corporate governanceand ascertains that the principles of conduct eventually adopted by theCompany and its subsidiaries are followed;

b) regarding its composition:– it is composed of at least three managing partners who shall appoint the

Chairman and a Secretary, who is not necessarily a member of the Board;– the Board of Statutory Auditors and the Chairman of the Board of

Managing Partners shall also attend the Board meetings, as well as, byinvitation, the person in charge of the Internal Audit function;

c) regarding its working format:– meetings are held at least twice a year, before the Board meetings for the

approval of the annual financial statements and the six-month financialstatements, or at any time the Chairman deems it necessary or a requesthas been made by another member or a managing director;

– for convening meetings and for the validity of its constitution and theresolutions, the same rules apply as those stated in the by-laws for themeetings of the Board of Managing Partners.

The “Audit Committee” for internal control and corporate governance iscurrently composed of the managing partners Dott. Luigi Orlando, who isChairman, Dott. Carlo Buora and Mr. Carlo Alessandro Puri Negri.Three meetings were held in 2002.Again in 2002, the Internal Audit function reported on its work to theChairman at least monthly and to the Audit Committee three times.The Audit Committee for internal control and corporate governance and theBoard of Managing Partners, also on the basis of indications received from theBoard of Statutory Auditors, have deemed the system of internal control to beadequate.

4. The Board of Statutory AuditorsIt is felt that the entire article 15 of the by-laws should be reported herein, asfollows:“The Board of Statutory Auditors is composed of three standing statutoryauditors and two alternate statutory auditors who must hold the requisitesrequired by the existing laws and also by regulations; to this end, account willbe taken that the matters and sectors of business strictly inherent to those of theCompany are those indicated in the corporate business purpose with particular

reference to companies or entities operating in the financial, industrial,banking, insurance, real estate and services sectors in general.The ordinary General Meeting shall appoint the Board of Statutory Auditorsand determine its compensation. The minority shareholders shall appoint onestanding statutory auditor and one alternate statutory auditor.With the exception of the provisions of the second last paragraph of the presentarticle, the appointment of the Board of Statutory Auditors is made on thegrounds of lists put forward by the shareholders in which candidates are listedunder progressive numbers.Each list contains a number of candidates which does not exceed the number ofmembers to be appointed. All shareholders who, alone or together with othershareholders, represent at least 2 percent of the shares with voting rights in theordinary general meeting, have the right to put forward a list.The lists of candidates, undersigned by the parties presenting them, must befiled at the Company’s registered office at least ten days before the day fixed forthe meeting in first call. A description of the professional résumé of theindividuals standing for election must be enclosed with the lists together withstatements whereby the single candidates accept the nomination and attest,under their own personal responsibility, that no circumstances exist forineligibility or incompatibility, and that they comply with requirementsprescribed by law or by the articles for the position.Any lists put forward which do not comply with the aforesaid provisions shallbe considered not to have been put forward.Each candidate may be included on only one list, under penalty of ineligibility.Likewise, any individuals who are not in possession of the requisites establishedby the applicable rules and regulations or who already hold the position ofstatutory auditor in more than five companies with stocks listed on officialItalian markets, with the exception of the subsidiaries of Pirelli e C..Each individual with voting rights may vote for only one list.The election of the members of the Board of Statutory Auditors is performed asfollows: two standing statutory members and one alternate member are takenfrom the list which has obtained the highest number of votes, in the progressiveorder in which they are listed thereon; the remaining standing statutorymember and the other alternate member are taken from the list which hasobtained the highest number of votes from the meeting after the first list, againin the progressive order in which same are listed thereon; in the event of severallists obtaining the same number of votes, a new run-off vote between the saidlists will be cast by all the shareholders present at the meeting, and thecandidates on the list which obtains the simple majority of the votes will beappointed.The Chairman of the Board of Statutory Auditors shall be the statutory memberindicated as the first candidate on the list which obtained the highest number ofvotes.In case of death, waiver or resignation of a Statutory Auditor, the alternatebelonging to the same list as the resigned statutory auditor shall replace him. Inthe event of replacement of the Chairman of the Board of Statutory Auditors,the chair shall be taken by the other statutory member on the list to which theresigning chairman belonged; if it is not possible to perform substitutions and

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replacements as set out hereinabove, then a meeting shall be convened tointegrate and complete the Board of Statutory Auditors and which shall passresolutions with a relative majority.When the meeting has to make provisions, pursuant to the terms of theaforegoing paragraph or to the terms of law, for the appointment of statutoryauditors and/or alternates needed to complete the Board of Statutory Auditors,it shall proceed as follows: if statutory auditors appointed from the majority listhave to be replaced, then the appointment is made with a relative majority votewithout being tied to any list; if on the other hand statutory auditors appointedby the minority shareholders have to be replaced, the meeting shall replacethem with a relative majority vote choosing names where possible from amongstthe candidates indicated on the list on which the statutory auditor to bereplaced appeared.If only one single list has been put forward, then the meeting shall cast its votein relation to that list; if the list obtains a relative majority, then the first threecandidates on the list in progressive order shall be appointed as the standingstatutory auditors, and the fourth and fifth candidate shall be appointed asalternate statutory auditors; Chairman of the Board of Statutory Auditors shallbe the person indicated at the top of the list put forward; in case of death,waiver or resignation of a statutory auditor, and in the event of substitution ofthe Chairman of the Board of Statutory Auditors, they shall be replacedrespectively by an alternate statutory auditor and a standing statutory auditorin the order arising from the progressive numbering of the said list.Failing any lists, the Board of Statutory Auditors and its Chairman shall beappointed by the general meeting with the majorities prescribed by law.Resigning statutory auditors may be re-appointed”.The shareholders’ meeting of May 13, 2002 appointed as standing statutoryauditors: Dott. Roberto Bracchetti (Chairman), Dott. Paolo Francesco Lazzatiand Dott. Salvatore Spiniello.Dott. Paolo Andrea Colombo and Dott. Marco Reboa were appointed asalternate statutory auditors.The current Board of Statutory Auditors will remain in office until May 13,2005.

5. The shareholders’ meetingsIt is the Company’s consistent policy to use the shareholders’ meetings toprovide the shareholders with information about the Company and itsprospects; this obviously is complied with, in accordance with the rulesgoverning price sensitive issues and, therefore, where necessary, by providingthe market with such information.It is also the Company’s policy to call attention to the location, date and time ofthe meeting in order to facilitate the participation of the shareholders at themeetings; furthermore, where possible, all the managing partners and statutoryauditors try to attend the shareholders’ meetings, in particular the managingpartners who, because of the posts they hold, can make a useful contribution tothe discussion.Lastly, the Board of Managing Partners makes known that it does not feel – atthe present time – that the Company has a need to establish rules for

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conducting shareholders’ meetings, deeming that what is envisaged in the by-laws on this matter is sufficient for the orderly and proper execution of theshareholders’ meetings.

6. Relations with investors and the other shareholdersThe Company has always actively tried to establish a dialogue with itsshareholders and institutional investors based on an understanding of thereciprocal roles, and also by planning periodical meetings with members of theItalian and international financial community.Moreover, as early as March 1999, an Investor Relations office has been set upin the Group, now entrusted to Dott. Roberto Rivellino.

7. Treatment of confidential informationThe management of confidential information, with special reference to pricesensitive information, is under the direct responsibility of the Chairman of theBoard of Managing Partners.Outside communications regarding documents and information about theCompany and its subsidiaries are conducted – always in agreement with theChairman – by the Secretary to the Board and the Corporate Secretary forcommunications to the authorities and the shareholders, by the ExternalRelations function for communications to the press and the Investor Relationsfunction for communications directed to institutional investors.The Chairman and those in charge of the aforementioned functions areinvariably able to join together to issue any urgent external communications.

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POSTS HELD AS DIRECTOR OR STATUTORY AUDITORBY THE MEMBERS OF THE BOARD OF MANAGINGPARTNERS IN OTHER LISTED COMPANIES AND INFINANCIAL, BANKING, INSURANCE OR OTHER LARGE COMPANIES

Marco Tronchetti Provera Pirelli S.p.A. Chairman and Managing DirectorCamfin S.p.A. ChairmanG.P.I. - Gruppo Partecipazioni Industriali S.p.A. ChairmanMarco Tronchetti Provera & C. S.a.p.a. ChairmanOlimpia S.p.A. ChairmanPirelli & C. Ambiente S.p.A. ChairmanPirelli & C. Real Estate S.p.A. ChairmanTelecom Italia S.p.A. ChairmanOlivetti S.p.A. Deputy Chairman and Managing Director

Alberto Pirelli G.P.I. - Gruppo Partecipazioni Industriali S.p.A. Deputy ManagingPirelli S.p.A. Deputy ManagingCamfin S.p.A. DirectorG.I.M. - Generale Industrie Metallurgiche S.p.A. DirectorOlimpia S.p.A. DirectorOlivetti S.p.A. DirectorSMI - Società Metallurgica Italiana S.p.A. Director

Carlo Buora Tim S.p.A. ChairmanOlivetti S.p.A. Managing DirectorPirelli S.p.A. Managing Director and General ManagerTelecom Italia S.p.A. Managing DirectorHDP Holding di PartecipazioniIndustriali S.p.A. DirectorMediobanca S.p.A. DirectorOlimpia S.p.A. DirectorPirelli & C. Ambiente S.p.A. DirectorPirelli & C. Real Estate S.p.A. DirectorRas S.p.A. Director

Luigi Orlando Europa Metalli S.p.A. Honorary ChairmanOrlando & C. - Gestioni Finanziarie S.p.A. ChairmanG.I.M. - Generale Industrie Metallurgiche S.p.A. ChairmanSMI - Società Metallurgica Italiana S.p.A. ChairmanPirelli S.p.A. DirectorRAS - Riunione Adriatica di Sicurtà S.p.A. Director

Carlo Alessandro Puri Negri Partecipazioni Real Estate S.p.A. ChairmanPirelli & C. Real Estate S.p.A. Deputy Chairman and Managing DirectorCamfin S.p.A. Deputy ChairmanPirelli & C. Ambiente S.p.A. Deputy ChairmanGPI - Gruppo Partecipazioni Industriali S.p.A. Managing DirectorAon Italia S.p.A. DirectorOlimpia S.p.A. DirectorOlivetti S.p.A. DirectorPermasteelisa S.p.A. DirectorPirelli S.p.A. DirectorTelecom Italia S.p.A. Director

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PROCEDURE FOR COMPLIANCE WITH THEREQUIREMENTS OF ART. 150, PARAGRAPH 1, OFLEGISLATIVE DECREE NO. 58 OF 1998

INTRODUCTION

In accordance with article 150, paragraph 1, of Legislative Decree No. 58 of 1998(hereinafter, the “Italian Income Tax Code”) “the directors shall report to the Boardof Statutory Auditors, on a timely basis, in accordance with the procedures set out inthe by-laws and at least quarterly, on the activities performed and on transactionscarried out by the Company or its subsidiaries that have a significant economic,financial or equity impact; in particular, they shall report on transactions involving apotential conflict of interest”1.The present procedure, pursuant to the above-cited provision and in light of thecommunications by Consob relating to corporate controls2, defines the individualsand transactions involved in the information flows of which the statutory auditors ofPirelli & C. (hereinafter “Pirelli” or “the Company”) are the recipients, and thephases and timing characterizing those flows. In particular, the procedure sets out:1. the method, frequency and content of the information; 2. the collection of the information.Attached to this procedure is an illustrative report that considers the issues underlyingthe definition of the information flows in question and the decisions made. Consequently, the main objective of this procedure is to provide the Board of StatutoryAuditors with the information that is necessary for the performance of its monitoringand oversight activities as required by the Italian Income Tax Code (article 149).Secondly, this procedure implements the corporate governance tools, allowing forthe tangible realization of the recommendations contained in the Code of Self-discipline prepared by the Committee for Corporate Governance of ListedCompanies which Pirelli has complied with since its release. In particular, byincreasing the transparency of the Company’s management, this procedure allowseach director to participate in that management in a more knowledgeable andinformed manner. Furthermore, this procedure sets in motion the information flowsbetween the directors with delegated powers and the board of directors,recommended by the Code of Self-discip line and aimed, on the one hand, atendorsing the “centrality” of the Company’s management body in its entirety and,on the other hand, at strengthening the internal control functions.

1 This provision was incorporated in Pirelli & C.’s by-laws; article 10, paragraph 2 of the by-lawsstates that “The Board of Managing Partners, also through its delegated bodies, shall report on atimely basis to the Board of Statutory Auditors on the activities performed and the most significanteconomic, financial and equity transactions carried out by the Company and its subsidiaries; inparticular, it reports on the transactions involving a potential conflict of interest. The informationis delivered, at least quarterly, during the Board meetings or through written communication to theBoard of Statutory Auditors”.

2 See, currently, Consob Communication No. 97001574 dated February 20, 1997 and ConsobCommunication No. 1025564 dated April 6, 2001. See also, Consob Communication No. 2064231dated September 30, 2002 which defines the concept of related parties.

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METHOD, FREQUENCY AND CONTENT OF THE INFORMATION

The Board of Managing Partners, also through its delegated bodies, shall send aspecific written report to the Board of Statutory Auditors on a quarterly basis: a) on the activities performed;b) on transactions that have a significant economic, financial or equity impact;c) on transactions involving a potential conflict of interest, i.e.:

c1) on intra-group transactions;c2) on transactions with related parties, other than intra-group transactions;

d) on atypical or unusual transactions and on every other activity or transactionthat it considers appropriate to communicate to the Board of Statutory Auditors.

The information provided shall refer to the activities performed and transactionscarried out during the period subsequent to the previous report.The report shall be sent simultaneously to all directors and standing statutoryauditors.

1. Activities performedThe information shall regard executive activities and the status of transactions alreadyapproved by the Board of Managing Partners, as well as the activities of Committees(Audit Committee, Compensation Committee and other internal committees); inparticular, executive directors report on the activities performed by them – also throughthe Company’s and its subsidiaries’ structures – in exercising the powers delegated tothem, including the initiatives adopted and the projects introduced.

2. Transactions having a significant economic, financial or equity impactThe information shall focus on transactions that have a significant economic, financialor equity impact, highlighting, in particular, the strategic aims, consistent with thebudget and the industrial plan, manner of execution (including terms and conditions,both economic and otherwise, of their realization) and developments, as well as anyconditions and implications that they carry for the Pirelli Group’s activities.For the purposes of this procedure, the following transactions carried out byPirelli or its subsidiaries - in addition to the transactions reserved for the Boardof Managing Partners in accordance with article 2381 of the Italian Civil Codeand the by-laws - are considered to have a significant economic, financial orequity impact:1) the issue of financial instruments for a total equivalent value in excess of Euros

100 million;2) the granting of real or personal guarantees in the interest of subsidiaries (and, in

the interest of Pirelli in the case of real guarantees) against obligations in excessof single amounts of Euros 25 million;

3) the granting of financing or guarantees to the benefit of or in the interest of thirdparties in excess of Euros 10 million;

4) the granting of financing to subsidiaries, investment and divestiture transactions,also including real estate transactions, and transactions involving the acquisitionand disposal of equity investments, of companies or business segments ofcompanies, of property, plant and equipment and of other assets, in excess ofEuros 100 million;

5) merger and demerger transactions, involving subsidiaries, if at least one of thefollowing parameters, where applicable, is equal to or in excess of 15 percent:

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a. total assets of the incorporated (merged) company or the activities subject todemerger/total assets of the Company (data taken from the consolidatedfinancial statements);

b. result before tax and extraordinary items of the incorporated (merged)company or the activities to be demerged/result before tax and extraordinaryitems of the Company (data taken from the consolidated financialstatements);

c. total shareholders’ equity of the incorporated (merged) company or thebusiness segment subject to demerger/total shareholders’ equity of theCompany (data taken from the consolidated financial statements).However, transactions involving the merger (by incorporation or by pooling ofinterests) of listed companies as well as the merger by pooling of interests of alisted company with an unlisted company or by incorporation of a listedcompany into an unlisted company are considered, for the purposes of thisprocedure, transactions that have a significant economic, financial or equityimpact.

The information shall also include transactions that, while individually below thethresholds specified above or those that determine the exclusive responsibility of theBoard of Managing Partners, are interconnected within the same strategic orexecutive structure and therefore, when considered in the aggregate, exceed therelevant thresholds.

3. Transactions involving a potential conflict of interest3a) Intergroup transactionsThe information concerning intra-group transactions shall illustrate the underlyinginterests and the significance from the Group perspective, as well as how thetransactions are executed (including the terms and conditions, both economic andotherwise, of their realization) with particular regard to the valuation methodsfollowed.Specific emphasis shall be placed on transactions with a value exceeding Euros50 million, or less if those transactions are not finalized at arm’s lengthconditions3. Emphasis should also be placed on transactions that, while individuallybelow the specified threshold, are interconnected within the same strategic orexecutive structure and therefore, when considered in aggregate, exceed thatthreshold.For the purposes of this procedure, intra-group transactions4 shall be thosetransactions carried out by Pirelli or its subsidiaries with:a) companies that, directly or indirectly (i.e. also through fiduciary companies or

nominees), control Pirelli pursuant to article 2359, paragraphs 1 and 2, of theItalian Civil Code and article 93 of the Italian Income Tax Code;

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3 For the purposes of this procedure, transactions finalized at standard conditions are thosetransactions entered into at the same conditions as the Company applies to all arm’s lengthtransactions with whatsoever party.

4 For the purposes of this procedure, intra-group transactions cover the disposal, with or withoutconsideration, of personal or real property and of transferable economic rights, transactionsinvolving the performance of works and services, the granting or securing of financing andguarantees, and cooperation agreements for conducting and developing the Company’s business.

b) companies that, directly or indirectly (i.e. also through fiduciary companies ornominees), are controlled by Pirelli pursuant to article 2359, paragraphs 1 and2, of the Italian Civil Code and article 93 of the Italian Income Tax Code;

c) companies that, directly or indirectly (i.e. also through fiduciary companies ornominees), are controlled by the same companies that control Pirelli pursuant toarticle 2359, paragraphs 1 and 2, of the Italian Civil Code and article 93 of theItalian Income Tax Code;

d) associated companies of Pirelli pursuant to article 2359, paragraph 3, of theItalian Civil Code and those that exercise significant influence on Pirelli; anassociated company relationship does not exist with the associated company ofan associated company.

3b) Transactions with related parties, other than intra-group transactionsThe information concerning transactions with related parties, other than intra-group transactions shall highlight the underlying interests and illustrate how thetransactions are executed (including the terms and conditions, both economic andotherwise, of their realization) with particular regard to the valuation methodsfollowed.For the purposes of this procedure, transactions with related parties5 shall be thosetransactions carried out by Pirelli or its subsidiaries with parties directly orindirectly related to Pirelli.Parties directly related to Pirelli are:1 individuals who hold (directly or indirectly, i.e. also through fiduciary companies

or nominees) an investment equal to or exceeding 10 percent of the share capitalrepresented by ordinary shares of Pirelli;

2 individuals who, even though holding (directly or indirectly, i.e. also throughfiduciary companies or nominees) an investment below the percentage indicatedin a), may, by virtue of shareholders’ agreements, nominate, alone or jointly withthe other parties adhering to the agreements, a majority of the members ofPirelli’s Board of Managing Partners;

3 individuals who, even though holding (directly or indirectly, i.e. also throughfiduciary companies or nominees) an investment below the percentage indicatedin a), command, by virtue of shareholders’ agreements, alone or jointly with theother parties adhering to the agreements, a majority of the exercisable votes inPirelli’s ordinary shareholders’ meetings;

4 Pirelli’s members of the Board of Managing Partners and standing statutoryauditors;

5 Pirelli’s General Manager, Secretary to the Board of Managing Partners andManagers of Pirelli who report directly to the Chairman and the GeneralManager (so-called first reports).

Parties indirectly related to Pirelli are:1 spouses, not separated, of the parties referred to in a) to e) above; 2 relatives by blood or affinity, up to the second degree, of the parties referred to in

a) to e) above;3 companies in which the parties referred to in a) to g) above hold, directly or

indirectly (i.e. also through fiduciary companies or nominees) an investment

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5 See note 4.

equal to or exceeding 10 percent (if a listed company) or 20 percent (if anunlisted company) of the share capital represented by shares having voting rightsin the ordinary shareholders’ meetings;

4 companies in which the parties referred to in a) to g) above, although holdinginvestments below the percentage indicated in h), may, by virtue of shareholders’agreements, nominate, alone or jointly with the other parties adhering to theagreements, a majority of the members of that company’s Board of Directors;

5 companies in which the parties referred to in a) to g) above, although holdinginvestments below the percentage indicated in h), command, by virtue ofshareholders’ agreements, alone or jointly with the other parties adhering to theagreements, a majority of the exercisable votes in that company’s ordinaryshareholders’ meetings;

6 companies in which the parties referred to in a) to g) above have a strategicmanagement role, and their subsidiaries;

7 companies that have a majority of their directors in common with Pirelli.The following are also related parties:those adhering, even indirectly, to shareholders’ agreements referred to in article122, paragraph 1, of Legislative Decree No. 58/98, the objective of which is theexercise of voting rights, if the interests covered by such agreements constitute thecontrolling interest.

Information should be given of transactions exceeding Euros 500 thousand, or lessif not finalized at arm’s length conditions, carried out (also through nominees) withparties directly or indirectly related to Pirelli. Further, evidence should be providedof transactions that, while individually below the specified threshold, areinterconnected within the same strategic or executive structure and therefore, whenconsidered in the aggregate, exceed that threshold.

4. Atypical or unusual transactions and other transactionsThe information on atypical or unusual transactions, including those carried out bysubsidiaries, and on every other activity or transaction on which it is consideredappropriate to provide information, shall highlight the underlying interests andillustrate the manner in which the transactions are executed (including the termsand conditions, both economic and otherwise, of their realization) with particularregard to the valuation methods followed.For the purposes of this procedure, atypical or unusual transactions shall be thosetransactions, which, by object or nature, are outside the normal course of theCompany’s business and those that show particular critical elements due to theircharacteristics and to the inherent risks, the nature of the counterpart, or the timeof their completion6.

PROCEDURE FOR THE COLLECTION OF INFORMATION

The Board of Managing Partners shall report to the Board of Statutory Auditorsthrough the delegated bodies. For the purposes of preparing the specific report, theinformation should be transmitted to the Chairman and the General Manager, inaccordance with the following procedure.

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6 Transactions carried out in proximity to the end or beginning of the year.

1. Information on the activities performed, on transactions that have a significanteconomic, financial or equity impact, on intra-group transactions and on atypicalor unusual transactionsPirelli’s General Manager and Managers who report directly to the Chairman andGeneral Manager (so-called first reports) through the General Administration andControl function, shall report monthly to the Chairman and the General Manager,by specific communication, on the activities performed by their structure in theperiod, giving details on transactions that have a significant economic, financial orequity impact, intra-group transactions exceeding Euros 50 million, or less if notfinalized at arm’s length conditions, atypical or unusual transactions, executiveactivities and the status of transactions already approved by the Board of ManagingPartners, as well as the principal activities performed by directors in exercising thepowers delegated to them, comprising the most important projects introduced andthe most significant initiatives adopted.They should also communicate transactions that, while individually below thepreviously specified thresholds or those that determine the exclusive responsibility ofthe Board of Managing Partners, are interconnected within the same strategic orexecutive structure and therefore, when considered in the aggregate, exceed therelevant thresholds7.Information on the activities of the Audit Committee, Compensation Committee andother internal committees are provided by the respective Chairmen.Each quarter, the General Administration and Control function shall prepare andsend to the Chairman and General Manager summary reports containing theaggregate data of the above transactions that were carried out during the periodsubsequent to the previous report.Further, details should also be provided of transactions that, while individuallybelow the previously specified threshold, are interconnected within the samestrategic or executive structure and therefore, when considered in the aggregate,exceed the cited threshold8.

2. Information on transactions with related parties, other than intra-grouptransactions2.1 Pirelli’s General Manager and Managers who directly to the Chairman and

General Manager (so-called first reports) shall send to the GeneralAdministration and Control function, by specific communication, a list oftransactions with related parties, other than intra-group transactions, carriedout by Pirelli or its subsidiaries exceeding Euros 500 thousand or less if notfinalized at arm’s length conditions, using the same methods and with the samefrequency as in point 1) above.Pirelli’s Directors and Standing Statutory Auditors, Secretary to the Board ofManaging Partners, General Manager and Managers who report directly to theChairman and General Manager (so-called first reports) communicate to theGeneral Management Administration and Control – in accordance with the

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7 In such case, the transactions are relevant also if carried out over a period of time exceeding thethree months covered by the report.

8 See note 7.

format laid down in Appendix A – any transactions carried out with Pirelli orwith its subsidiaries by each of them or by parties indirectly related to Pirellithrough them9 that exceed Euros 500 thousand, or less if not finalized at arm’slength conditions, within fifteen days of the transaction’s conclusion.

2.2 In providing the information on transactions with related parties, other thanintra-group transactions, set forth in point 2.1, above, emphasis should also begiven to transactions that, while individually below the previously specifiedthreshold, are interconnected within the same relationship and therefore, whenconsidered in the aggregate, exceed the mentioned threshold10.

2.3 Each quarter, on the basis of the information received in accordance with points2.1 and 2.2 above, the General Administration and Control function shall senda summary to the Chairman and General Manager containing all of theelements necessary to comply with the disclosure requirements related to theabove transactions.

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9 This declaration is requested mainly in view of the difficulty, if not impossibility, for Pirelli to knowor to identify with certainty parties indirectly related to it through the aforementioned individuals;nor would it appear appropriate, first and foremost for reasons of privacy, to request from each ofthose individuals a list of said possible parties.

10 See note 7.

RULES OF CONDUCT FOR CARRYING OUTTRANSACTIONS WITH RELATED PARTIES

1. Transactions with related parties, including intra-group transactions, with theexception of transactions that are typical or usual or to be finalized atstandard conditions shall be approved in advance by the Board of ManagingPartners.

2. Typical or usual transactions are those transactions, which, by subject or nature,are not outside the normal course of the Company’s business and that do notpresent particular critical elements due to their characteristics or to the risksinherent to the nature of the counterpart or to the time of their completion.Transactions finalized at standard conditions are those transactions entered intoat the same conditions as the Company applies to all arm’s length transactionswith whatsoever party.

3. The Board of Managing Partners shall receive adequate information on thenature of the relationship, the manner in which the transaction is to be executed,the conditions, both economic and otherwise, for its realization, the valuationmethod followed, the underlying interests and motivations and any risks to theCompany. In the event that the relationship is with a director or with a partyrelated through a director, the director concerned shall limit his involvement toproviding clarification and shall leave the Board meeting at the time thedecisions are taken.

4. In relation to the nature, value or other characteristics of the transaction, theBoard of Managing Partners, in order to avoid that the transaction is entered intoat unsuitable conditions, is assisted by one or more experts who, depending onthe circumstances, express an opinion on the economic conditions, and/or thelegitimacy, and/or the technical aspects of the transaction.

5. With respect to transactions with related parties, including intra-grouptransactions, that are not submitted to the Board of Managing Partners in thatthey are typical or usual and/or at standard conditions, the directors withdelegated powers or managers responsible for the realization of the transaction,except for the observance of the specific procedure as per article 150, paragraph1, of the Italian Income Tax Code, shall collect and conserve, including bytransaction type or group, adequate information on the nature of therelationship, the manner in which the transaction is to be executed, theconditions, both economic and otherwise, for its realization, the valuationmethod followed, the underlying interests and motivations and any risks to theCompany. One or more experts may be appointed also for these transactions asprovided above.

6. The choice of experts shall be from among individuals with recognizedprofessional credentials and expertise on the subject matter, who shall becarefully evaluated in terms of their independence and the absence of conflicts ofinterest.

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PIRELLI & C. ACCOMANDITA PER AZIONI’S CODEOF CONDUCT ON INSIDER DEALING

1. IntroductionFurther to the provisions set by article 180 and subsequent articles of LegislativeDecree No. 58/1998 on the topic of misuse of privileged information, this Code ofConduct of Pirelli & C. Accomandita per Azioni (the “Code”) aims to regulate thebinding obligations referring to the declaration requirements and conduct inherentto Transactions carried out by Relevant Persons and the related disclosure to themarket.

2. DefinitionsFor the purposes of this Code, it is intended by:

A. Relevant Persons: the members of the Board of Managing Partners (executiveand non-executive), the Standing Statutory Auditors, the General Managers,the Secretary to the Board of Managing Partners, the Heads of Departments.Furthermore, Relevant Persons are considered to be the heads of the functionswhich form the General Affairs Department, Legal and Corporate AffairsDepartment and the External Communications Department.The heads of the following Departments of Pirelli S.p.A. are also consideredRelevant Persons: General Administration and Control, General Finance,Legal Affairs and Investor Relations. The heads of the following functions ofPirelli & C. Real Estate S.p.A. are also considered Relevant Persons:Corporate Administration, Finance and Control, Legal and Corporate Affairs,as well as the heads of the functions of Pirelli S.p.A. and Pirelli & C. RealEstate S.p.A. which form such Departments.

Each of the above identified Relevant Persons may indicate other RelevantPersons, in relation to the activity they carry out or their assigned job, for aindefinite or limited period of time; immediate communication of suchidentification – and of the respective time limits, if set – should be made to theperson concerned and to the Referee.B. Financial Instruments: (i) negotiable financial instruments listed on Italian

and foreign regulated stock markets issued by Pirelli & C., its subsidiaries andits parent companies, excluding non-convertible bonds; (ii) listed or unlistedfinancial instruments that attribute a right to subscribe to, acquire or sell theinstruments referred to in (i), above, and the certificates representative of theinstruments referred to in (i), above; (iii) derivative financial instruments, andcovered warrants, having as their underlyings the financial instrumentsreferred to in (i), above, even when their exercise occurs through the paymentof a cash differential.

C. Transaction(s): any type of act creating, modifying or extinguishing rights onFinancial Instruments, even if carried out within an individual investmentportfolio management relationship. Included in such category are also acts forexercising any stock options or options rights on Financial Instruments.

D. Significant Transaction: every Transaction that, alone or in aggregate withother Transactions carried out in the previous three months and not yetdeclared to the Company, exceeds Euros 80,000. The notional equivalentvalue of derivative financial instruments or covered warrants is calculated as

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the product of the number of shares on which the instrument is based and theofficial price of the underlyings recorded on the day of conclusion of thetransactions.

E. Referee: the Secretary to the Board of Managing Partners of Pirelli & C.,responsible for the receipt of declarations and administration of theinformation relating to Transactions carried out by Relevant Persons, whoshall provide for the subsequent disclosure to the market in accordance withthe procedures provided by the Code.

3. Declaration Requirements of Relevant PersonsWithin the seventh calendar day after the end of each calendar quarter, RelevantPersons shall send the Referee the list of Transactions carried out in the quarter onFinancial Instruments, that in total amount to or exceed Euros 35,000. In the event that a Significant Transaction was carried out, the Relevant Personshould declare this without delay to the Referee, together with the list ofTransactions carried out in the preceding three months and not yet declared to theCompany. Transactions carried out by the Relevant Person’s spouse, if not legally separated, orminor children, or delegated to be carried out by nominees, trustees or subsidiariesare also subject to the declaration requirements.The declaration to the Referee should be made on the form corresponding to the onerequired by Borsa Italiana S.p.A. in the Instructions for the Regulation of MarketsOrganized and Managed by Borsa Italiana S.p.A. for information purposes.

4. Exemption from Transaction declaration requirements The Transactions carried out – even through nominees or trustees – between theRelevant Person and his or her spouse, if not legally separated, or minor children,are excluded from the declaration requirements to the Referee. Also excluded are transactions involving the loan of securities, in the case where theRelevant Person, directly or indirectly, his or her spouse, if not legally separated, orminor children, acts as the lender, and Transactions creating liens or beneficialinterests.

5. Limitations on carrying out TransactionsTransactions carried out – directly or through nominees – by Relevant Persons,excluding non-executive members of the Board of Managing Partners and statutoryauditors, is permitted only from the day after the first release of final or preliminaryeconomic-financial data regarding each quarter1 until the closing of next quarter.The non-executive members of the Board of Managing Partners and statutoryauditors shall abstain from carrying out Transactions from the day of convocation ofthe Board meeting called to examine the above-cited economic-financial data, orfrom the time that they became acquainted with that data, if earlier, until the dayafter its release. Relevant Persons may carry out Transactions outside the allowed period only in theevent of exceptional situations of personal necessity that are adequately justified by

64

1 Or, the six months or full year, in the case of exemption from the publication of the second andfourth quarter reports, respectively.

the person concerned. The assessment of the existence of a situation of personalnecessity is referred to the Chairman of the Board of Managing Partners. The limitations referred to in the first paragraph of this article shall not apply in theevent of exercising the stock options or option rights on Financial Instruments andthe consequent Transactions, provided that they are carried out at the same time theoptions or rights are exercised. The Board of Managing Partners can identify additional periods or circumstances inwhich Transactions are subject to limits and conditions, providing the Referee andthe Relevant Persons with immediate communication.

6. Disclosure of transactions to the MarketThe Referee discloses the information received from the Relevant Persons to themarket within the tenth trading day of the stock market after each calendar quarterby means of the transmission of a specific communication to Borsa Italiana, inaccordance with the procedures provided in the Regulation of Markets Organized andManaged by Borsa Italiana and in the related Instructions.Significant Transactions shall be disclosed to the market without delay, by means ofthe procedures stated in the previous paragraph.

7. SanctionsApart from the possibility of Pirelli & C. seeking compensation for any damagesand/or liability that may result from conduct in violation of the Code, the breach ofthe declaration requirements or of the limitations on carrying out Transactions shalllead to: (i) for employees, the imposition of disciplinary sanctions as provided by thelaws in force and the applicable collective national labor contract; (ii) for any othercollaborators, the termination – with or without notice – of the relationship; (iii) forthe members of the Board of Managing Partners and statutory auditors, the Boardmay propose the revocation of their appointments to the next shareholders’ meeting.

8. AcceptanceAcceptance of this Code by each Relevant Person shall be by signing the formattached as an Appendix.

9. Updating of the Code and treatment of personal dataThe Referee is responsible for monitoring the application and effectiveness of theCode in respect of its intended purpose, and the submission of any modifications orintegrations to the Board of Managing Partners. The Referee shall conserve the written declarations by which the Relevant Personsconfirm their full knowledge and acceptance of the Code and grant their consent, inaccordance with Law No. 675/1996, for the treatment of the requested data.

10. Transitory regulationsThe regulations of the Code shall become effective as from December 1, 2002.Transactions carried out during the month of December 2002 shall be accumulated,for the purposes of the declaration requirements referred to in article 3, with those ofthe first quarter of 2003.

65

THE PARENT COMPANY: PIRELLI & C.

The financial statements at December 31, 2002 of Pirelli & C. show a net income ofEuros 60.2 million compared to a net income of Euros 148.4 million in the prior year.The condensed statement of income is as follows:

(in thousands of euros)

STATEMENT OF INCOME 12/31/2002 12/31/2001 VariazioniFinancial income and expenses 13,167 11,427 1,740Dividends and tax credits 83,449 228,389 (144,940)Gains on sales of securities – 163 (163)Value adjustments to financial assets (134,377) (998) (133,379)Depreciation and amortization (2,067) (1,711) (356)Other operating income and expenses (6,908) (7,319) 411

Income from ordinary operations beforeincome taxes (46,736) 229,951 (276,687)

Extraordinary items 139,612 (3,455) 143,067Income taxes (32,679) (78,110) 45,431Net income 60,197 148,386 (88,189)

An analysis of the main components of the statement of income shows that financialincome, net is generally in line with that in the prior year.

Dividends, including tax credits of Euros 30 million, are equal to Euros 83.4 millioncompared to Euros 228.4 million in the prior year.

Dividends (including tax credits) are mainly from the subsidiaries Pirelli & C. RealEstate S.p.A. (Euros 78.3 million) and Pirelli S.p.A. (Euros 0.4 million for savingsshares in portfolio only).

Value adjustments to financial assets mainly consist of the writedown made for taxpurposes by Pirelli S.p.A. (Euros 134 million).

Other operating expenses, net of income from the recovery of expenses for servicesrendered to Group companies and other income, decreased from Euros 7.3 millionto Euros 6.9 million.

Extraordinary items, net mainly include the pre-tax gain on the offering of Pirelli &C. Real Estate S.p.A. shares on the stock market (Euros 139.5 million).

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68

The condensed balance sheet is as follows:


BALANCE SHEET 12/31/2002 12/31/2001 Change

Property, plant and equipment

and intangible assets 24,458 2,095 22,363

Financial assets

Investments 752,188 859,263 (107,075)

Other securities 2,582 2,582 –

Treasury shares 4,678 4,678 –

Financial receivables 894,345 988,025 (93,680)

Current financial assets 8,447 8,335 112

Other assets 60,563 62,611 (2,048)

1,747,261 1,927,589 (180,328)

Shareholders’ equity 1,264,980 1,194,513 70,467

Provisions 17,410 13,334 4,076

Financial payables 457,024 696,248 (239,224)

Other liabilities 7,847 23,494 (15,647)

1,747,261 1,927,589 (180,328)

Property, plant and equipment increased following Pirelli S.p.A.’s purchase of therepresentative offices in Rome (Euros 17,300 thousand) and Bicocca degliArcimboldi (Euros 7,000 thousand) on June 28, 2002.

Investments decreased by Euros 107.1 million mainly as a result of the writedowntaken for tax purposes by Pirelli S.p.A. (Euros 134 million), the sales of Pirelli & C.Real Estate S.p.A. shares in the offering on the stock market (Euros 11 million), thestake in Superga S.p.A. to third parties (Euros 4 million) and Pirelli & C. CreditServicing S.p.A. to Pirelli & C. Real Estate S.p.A. (Euros 5 million), offset bypurchases of Pirelli S.p.A. shares (16,329,356 ordinary shares for Euros 17million), Pirelli & C. Real Estate S.p.A. shares (600,000 for Euros 11 million) andthe 31.67 percent stake in Eurostazioni by Pirelli & C. Real Estate S.p.A. (Euros 19million).At December 31, 2002, the average carrying value per share of Pirelli S.p.A.ordinary shares is equal to Euros 1.75.A complete analysis is provided in the notes.

Shareholders’ equity at December 31, 2002 is equal to Euros 1,265 millioncompared to Euros 1,194.5 million at December 31, 2001.The increase is the result of the net income for the year (Euros 60.2 million), net ofdividends paid (Euros 52.4 million) and the partial conversion of 2.5% 1998-2003bonds (Euros 62.6 million).

The net financial position shows a liquidity balance of Euros 445.8 million atDecember 31, 2002 compared to Euros 300.1 million at the end of the prioryear.


12/31/2002 12/31/2001 ChangeFinancial receivables 894,344 988,025 (93,681)Current financial assets 8,447 8,335 112Financial payables (457,024) (696,248) 239,224

445,767 300,112 145,655

The change in the net financial position is due to the following:


12/31/2002Increase in share capital and reserves 62,635Funds provided by operations 23,541Net financial investments 111,844Dividends paid to shareholders (52,365)

145,655

Other assets mainly consist of tax receivables (Euros 21.9 million) and dividendsreceivable (Euros 31.4 million).

Other liabilities chiefly comprise payables for the payment of the unified VAT returnfiled for the entire Group, with a contra-entry to other assets (Euros 3 million).

69

71

SHAREHOLDERS’ RESOLUTIONS

APPROPRIATION OF NET INCOME

The year ended December 31, 2002 shows a net income of Euros 60,197,784.

The Board proposes the distribution of dividends, gross of any withholding taxes, of:

– Euros 0.08 for each ordinary shareand– Euros 0.0904 for each savings share.

Dividends proposed for distribution are entitled to an ordinary tax credit withrefund rights equal to 56.25 percent (art. 105, paragraph 1, letter a) of D.P.R.917/86).

Therefore, dividends on:– ordinary shares

are entitled to a tax credit with refund rights of Euros 0.04500;– savings shares

are entitled to a tax credit with refund rights of Euros 0.05085.

If in agreement with our proposal, we ask you to pass the following

Resolution

The shareholders’ meeting:– having examined the Report of the Managing Partners;– having examined the Report of the Board of Statutory Auditors;– having examined the financial statements at December 31, 2002, which show a

net income of Euros 60,197,784

Votes

a) to approve:• the Report of the Managing Partners;• the balance sheet, statement of income, the notes to financial statements for the

year ended December 31, 2002 as presented by the Board of Managing Partnersin their entirety, in their individual items, with the accruals proposed;

b) to appropriate the net income of Euros 60,197,784 as follows:• to the legal reserve (until it reaches one-fifth

of share capital) Euro 4,628• to the shareholders:

Euros 0.08 to 615,700,346 (*) ordinary shares,for a total of Euro 49,256,028Euros 0.0904 to 34,418,257 savings shares,for a total of Euro 3,111,410with the assignment of the tax credit as proposedby the Board of Managing Partners

• to retained earnings Euro 7,825,718(*) net of 2,617,500 treasury shares currently held by the Company.

c) to authorize the managing partners, in the event treasury shares are purchasedbefore the dividend coupon is presented in the preceding point b), to appropriatethe dividends to which such shares are entitled to retained earnings, as well asappropriate the balance of the amounts rounded off, which could arise at thetime of payment of the dividends, to retained earnings.

Proposal for the purchase and procedures for the disposal of own shares,subject to the prior revocation of the resolution adopted on 13 May 2002,insofar as it has not been employed.

Shareholders,

the resolution adopted on 13 May 2002 authorised the purchase of own shares(both ordinary and savings shares) not exceeding the ceiling of 100 million Eurosfor a period of 18 months starting from the date of the same resolution.

The above authorisation will expire on 12 November.

In reference to the purchase of own shares, especially after the merger that will besubmitted to you for approval during the extraordinary meeting, the opportunitiesarisen are similar to those which led the Directors to suggest the resolution of 13May 2002, namely that it is convenient to act (within the legal framework andensuring the equal treatment of shareholders) upon existing market trends toprovide a stabilising initiative which can improve market liquidity, promote theregular performance of transactions and facilitate the overall consistency betweenthe quotation and the intrinsic value of shares.

We therefore believe it appropriate, in order to avoid calling a dedicated meeting inview of the aforementioned expiry date, to suggest the issuance of a newauthorisation on this matter during today’s assembly proceedings, repealing theexisting authorisation insofar as it has not been employed. The draft resolutiondescribed hereunder includes the buying and selling procedures and also theprocedures for selling the own shares already in the portfolio.

As to the ceilings set to buying, we would suggest that the previously statedmaximum amount (100 million Euros) be replaced by the limit set by the ItalianCivil Code, thereby stating that the face value of the total purchased shares may notexceed 10% of the pro-tempore share capital. This amendment appoints yourDirectors greater freedom of action as to the procedures and methods stated by thelaws in force.

As regards the procedures for assigning own shares, we suggest an amendment tothe previous resolution which authorised the assignment of own shares at no lessthan the purchase price. Due to the unfavourable market trend and the market rate

72

of our shares, the average cost price of own shares presently in the portfolio(approximately 1.79 Euros) is remarkably higher than the share’s existing marketprices making it unfeasible to place presently owned own shares in compliance withthese procedures.

The amendment we are putting forward enables the Board to assign own shares at avalue which is no less than the lower between: (a) the average of the official stockexchange prices recorded by the shares over the 15 days prior to the individual actof assignment, and (b) the value achieved by discounting by no more than 5% theminimum price recorded by the Pirelli & C. share (ordinary or savings share) on theday of each act of assignment or, in any case, the latest available price.

We would also suggest the extension of the authorisation to buy own shares toinclude those made available through the right to withdrawal due to shareholders asper art. 2437 of the Italian Civil Code, subject to the implementation of theresolutions stated under item 1 of the agenda of the extraordinary meeting.

Should this proposal meet with your approval, we would invite you to endorse this

RESOLUTION

“The Shareholders’ Meeting:

– having viewed the Directors’ proposal;– bearing in mind the provisions of articles 2357 and 2357-ter of the Italian Civil

Code;– aware that, in this date, the company holds 2,617,500 ordinary shares, equal to

approximately 0.4% of the share capital corresponding to 339,422,773.56Euros;

HAS RESOLVED

a) to revoke the resolution approved by the ordinary assembly on 13 May 2002authorising the purchase and other procedures for the assignment of own actions,insofar as it has not been employed;

b) to authorise the purchase of own shares (ordinary or savings) having a face valueper unit of 0.52 Euros within the maximum ceiling of 10% of the pro-temporeshare capital set by art. 2357 Italian Civil Code, providing that:– the purchase may occur once or several times within 18 months from the date

of this resolution;– the purchase shall take place based on the procedures agreed with the market

management company in order to ensure equal treatment amongstShareholders, as per art. 132 of Legislative Decree no. 58 of 24 February1998, or even when the right to withdrawal is exercised as per art. 2437 ofthe Italian Civil Code;

– in both cases, the buying price for each share shall neither exceed nor cut theaverage official stock exchange prices recorded in the three sessions prior to

73

each individual operation by more than 15%, except when buying subsequentto a withdrawal, in which case reference will be made to the price set by law;

– the purchase must occur using distributable profits and available reservesfrom the previous and regularly approved balance sheet, establishing a reserveof own shares within the terms and conditions of law ;

c) to authorise the Board and on its behalf the Chairman, Vice-Chairman and, ifany are appointed, the Managing Directors, to individually make use, withoutrestrictions of time, of the own shares in the portfolio or purchased based on itemb) of the resolution even before having completed the purchase; the assignmentmay occur once or several times; the shares may be assigned by sale or exchange(even by offering to the public, to shareholders and to the employees and/ordirectors and/or collaborators, also within possible shareholding incentive plans(“stock options”)); when selling, the price shall not cut the lower between: (a)the average official stock exchange prices recorded by the share over the 15 daysprior to the individual act of assignment, and (b) the value achieved bydiscounting by no more than 5% the minimum price recorded by the ordinary orsavings Pirelli & C. share on the day of each act of assignment or, in any case,the latest available price; this price restriction shall not apply if the shares areassigned to employees and/or directors and/or collaborators of the company orits subsidiaries, in the framework of possible stock option plans; the shares maybe assigned also coupled to bonds or to warrants on the same;

d) to appoint the Board, and on its behalf the Chairman, Vice-Chairman and, if anyare appointed, the Managing Directors, all the individual powers needed for thebuying and assigning procedures and, moreover, to implement theaforementioned resolutions also by means of their representatives, in compliancewith the possible requirements of the authorities in charge”.

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CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2002

CONSOLIDATED BALANCE SHEETS

ASSETS (in thousands of euros)

12/31/2002 12/31/2001

A) CAPITAL SUBSCRIPTION RIGHTS

Portion uncalled - -

B) FIXED ASSETS

I) Intangible assets

Formation costs 10,616 6,042

Patents and desing patent rights 4,048 4,101

Concessions, licenses, trademarks and similar rights 12,362 8,076

Goodwill 39,912 15,416

Difference on consolidation 508,269 544,938

Intangible assets in progress and payments on account 4,656 12,781

Other intangible assets 82,139 83,393

TOTAL INTANGIBLE ASSETS 662,002 674,747

II) Property, plant and equipment

Land and buildings 667,363 721,589

Plant and machinery 1,229,889 1,329,564

Industrial and commercial equipment 134,647 147,790

Other property, plant and equipment 173,332 192,035

Assents under construction and payments on account 201,175 434,922

TOTAL PROPERTY, PLANT AND EQUIPMENT 2,406,406 2,825,900

III) Financial assents

Investments in:

a) Subsidiaries 646 1,136

b) Jointly controlled subsidiariers 3,000,888 3,150,840

c) Associated companies 157,868 115,559

d) Other companies 282,677 315,570

Financial receivables:

a.1) Subsidiaries due within 1 year 9,092 -

a.2) Subsidiaries due beyond 1 year 14,662 14,662

b.1) Associated companies due within 1 year 165,911 215,858

b.2) Associated companies due beyond 1 year 5 22

c.1) Other companies due within 1 year 2,466 21,280

c.2) Other companies due beyond 1 year 69,901 74,893

Other securities 85,803 14,247

Treasury shares 4.678 4.678

TOTAL FINANCIAL ASSETS 3,794,597 3,928,745

TOTAL FIXED ASSENTS 6,863,005 7,429,392

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ASSETS (continued) (in thousands of euros)

12/31/2002 12/31/2001

C) CURRENT ASSETS

I) Inventories

Raw materials, auxiliaries and consumables 257,246 295,545

Work in process and semifinished products 302,979 325,373

Contract work in progress 161,465 153,482

Finisced products and goods for resale 539,325 580,295

Advances 22.199 8.758

TOTAL INVENTORIES 1,283,214 1,363,453

II) Receivables

Trade 1,355,815 1,784,613

Subsidiaries 3,930 292

Associated companies 100.192 23,889

Other receivables 622,467 920,769

TOTAL RECEIVABLES 2,082,404 2,729,563

III) Current financial assets

Other investments - 20,700

Other securities 198,652 562,110

TOTAL CURRENT

FINANCIAL ASSETS 198,652 582,810

IV)Cash and banks

Bank and postal deposits 380,370 454,784

Checks 2,027 8,751

Cash on hand 2,722 7,851

TOTAL CASH AND BANKS 385,119 471,386

TOTAL CURRENT ASSENT 3,949,389 5,147,212

D) ACCRUED INCOME AND PREPAID EXPENSES

Accrued income 42,337 37,652

Prepaid expenses 42,594 37,790

TOTAL ACCRUED INCOME AND PREPAID EXPENSES 84,931 75,442

TOTAL ASSETS 10,897,325 12,652,046

77


LIABILITIES AND SHAREHOLDERS’ EQUITY (in thousands of euros)

12/31/2002 12/31/2001

A) SHAREHOLDERS’ EQUITY

- Parent company interest 1,932,938 2,118,705

I) Share capital 339,423 325,408

II) Share premium reserve 549,673 501,054

III) Revaluation reserve 707 707

IV)Legal reserve 67,880 65,014

V) Reserve for treasury shares in portfolio 4,678 4,678

VII) Other reserves 786,538 947,624

VIII)Retained earnings 242,422 149,265

IX)Net income (loss) (58.383) 124.955

- Minority interest 2,693,450 3,288,687

a) Capitale e riserve 3,040,227 3,219,430

b) Net income (346,777) 69,257

TOTAL SHAREHOLDERS’ EQUITY 4,626,388 5,407,392

B) PROVISIONS FOR LIABILITIES AND EXPENSES

Pensions and similar obligations 205,232 237,806

Income taxes 214,464 225,560

Other provision 331,906 401,264

TOTAL PROVISIONS FOR LIABILITIES AND EXPENSES 751,602 864,630

C) PROVISION FOR EMPLOYEES’ LEAVING INDEMNITY 158,951 105,271

D) PAYABLES

Bonds 1,164,796 661,407

Convertible bonds 21,977 86,177

Bank borrowings 1,637,782 2,513,307

Other financial companies 99,726 155,308

Advances from customers 179,693 188,249

Trade 1,259,407 1,328,243

Subsidiaries 126 -

Associated companies 34,592 4,529

Taxes 193,214 531,591

Social security agencies 56,789 49,817

Other payables 433,825 473,856

TOTAL PAYABLES 5,081,927 5,992,484

E) ACCRUED LIABILITIES AND DEFERRED INCOME

Accrued liabilities 242.535 238.314

Deferred income 35.922 43.955

TOTAL ACCRUED LIABILITIES AND DEFERRED INCOME 278.457 282.269

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 10.897.325 12.652.046

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MEMORANDUM ACCOUNTS (in thousands of euros)

12/31/2002 12/31/2001

PERSONAL GUARANTEES

- Sureties on behalf of other companies 224,605 159,722

- Credit guarantees on behalf of other companies 10,656 34,969

235,261 194,691

THIRD PARTY ASSETS HELD IN DEPOSIT

- Securities held in deposit 1,107,883 167,072

- Third-party goods held in deposit 7,625 2,799

1,115,508 169,871

ASSETS HELD BY THIRD PARTIES

- Securities held guarantees and sureties 52,670 68,081

- Share held in deposit 552,528 245,150

- Goods held by third parties 9,103 10,757

614,301 323,988

COMMITMENTS

- Capital expenditures 600,914 57,635

- Nominal value of put options given to third parties 2,151,517 2,165,102

- Sale of tax receivables 102,052 -

- Purchase of equity investments - 38,786

- Securities to be delivered - 75,946

2,854,483 2,337,469

OTHER MEMORANDUM ACCOUNTS

- Potential losses for risk of default on discounted bills 31,500 67,188

- Forward securities purchase 200,000 200,000

231,500 267,188

TOTAL MEMORANDUM ACCOUNTS 5,051,053 3,293,207

79

CONSOLIDATED STATEMENTS OF INCOME


12/31/2002 12/31/2001

A) PRODUCTION VALUE

Revenues from sales and services 6,717,915 7,761,985

Changes in inventories of work in process, semifinisced and finisced products (14,840) (93,782)

Changes in contract work in progress 15,312 (4,876)

Increase in property, plant and equipment 11,218 16,512

Other revenues and income:

a) Miscellaneous 126,653 210,815

b) Government grants 5,188 7,516

TOTAL PRODUCTION VALUE 6,861,446 7,898,170

B) PRODUCTION COSTS

Raw materials, auxiliaries, consumables and goods for resale (3,223,030) (3,888,402)

Service expenses (1,289,691) (1,314,288)

Lease and rent expenses (76,777) (85,581)

Personnel costs (1,426,439) (1,549,744)

Amortization, depreciation and writedowns:

a) amortization of intangible assets (90,844) (82,098)

b) depreciation of property, plant and equipment (314,738) (325,566)

c) writedowns of receivables included in current assets and cash and banks (40,871) (79,945)

Changers in inventories of raw materials, auxiliaries, consumables and goods for resale (485) (6,511)

Accruals for liabilities (8,207) (3,765)

Other accruals (19,598) (3,521)

Other operating expenses (253,264) (235,224)

TOTAL PRODUCTION COSTS (6,743,944) (7,601,645)

DIFFERENCE BETWEEN PRODUCTION VALUE AND PRODUCTION COSTS 117,502 296,525

C) FINANCIAL INCOME AND EXPENSES

Investment income 20.121 12.176

Other financial income:

a) From receivables included in fixed assents

- from subsidiaries 163 -

- associated companies 12.906 -

- other companies 250 319

b) from securities included in fixed assets 90 518

c) from securities included in current assets 13.237 3.550

d) Income other than the above 498.910 461.018

Interest and other financial expenses (723.099) (515.383)

TOTAL FINANCIAL INCOME AND EXPENSES (177.422) (37.802)

80

CONSOLIDATED STATEMENTS OF INCOME

(continued) (in thousands of euros)

12/31/2002 12/31/2001

D) VALUATION ADJUSTMENTS TO FINANCIAL ASSENTS

Revaluation 67,440 9,951

Writedowns (242,536) (41,517)

TOTAL VALUATION ADJUSTMENTS (175,096) (31,566)

E) EXTRAORDINARY ITEMS

Extraordinari income 259,108 425,670

Extraordinari expenses (341,840) (270,075)

TOTAL EXTRAORDINARY ITEMS (82,732) 155,595

INCOME (LOSS) BEFORE INCOME TAXES (317,748) 382,752

Income taxes (87,412) (188,540)

NET INCOME (LOSS) (405,160) 194,212

PARENT COMPANY INTEREST (58,383) 124,955

MINORITY INTEREST (346,777) 69,257

81

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FORM AND CONTENT

The consolidated financial statements for the year ended December 31, 2002 havebeen drawn up in accordance with the provisions introduced by Legislative DecreeNo. 127 of April 9, 1991 which incorporate those of the VII directive of the EC.

The consolidated financial statements include the financial statements of Pirelli &C., the parent company, and the companies in which Pirelli & C. holds, directly orindirectly, control as defined by Legislative Decree 127/91, art. 26.Also included in the consolidation are some companies in which Pirelli & C. ownsless than 50 percent of the share capital in joint venture with other operators tocarry out specific real estate projects.These companies, in which no one shareholder has direct control, are consolidatedproportionally.The subsidiaries which fall under the cases indicated in Legislative Decree 127/91,art. 28 are excluded from the scope of consolidation.

The list of companies in consolidation, the statement of cash flows and thestatement of changes in shareholders’ equity are presented in the supplementaryinformation.

All amounts are expressed in thousands of Euros, unless otherwise indicated.The audit report on the consolidated financial statements has been issued byPricewaterhouseCoopers S.p.A. pursuant to art. 159 of Legislative Decree No. 58 ofFebruary 24, 1998 and takes into account CONSOB recommendation of February20, 1997, in execution of the resolution passed by the shareholders’ meeting of May13, 2002 which appointed the audit firm for the three-year period 2002-2004. Theagreed fee is Euros 12 thousand per year.

The fees for the audit of the individual Group companies have been borne directlyby the companies concerned; the equivalent Euro amount of fees for the year 2002has amounted to approximately Euros 3,340 thousand, including the fees for thelimited review of the six-month financial statements.

PRINCIPLES OF CONSOLIDATION

The financial statements used in consolidation are those at December 31, 2002prepared for approval by the shareholders of the individual companies adjusted,where necessary, to agree with the “Common Accounting Principles” of the Group,which comply with those established by Legislative Decree 127/91 and the principlesset forth by the National Boards of Dottori Commercialisti and Ragionieri.

The financial statements of subsidiaries operating in high-inflation countries havebeen adjusted to take into account the changed purchasing power of the localcurrency, in accordance with the principles for inflation accounting.

82

The financial statements expressed in foreign currency have been translated intoEuros at rates prevailing at year-end for the balance sheet and at average exchangerates for the statement of income, with the exception of the financial statements ofcompanies operating in high-inflation countries, whose statements of income havebeen translated at year-end rates.The differences arising from the translation of beginning shareholders’ equity atyear-end exchange rates have been recorded in translation adjustments inshareholders’ equity.

The exchange rates which have been applied are presented under “Otherinformation” in the notes.

The principles of consolidation are as follows:

– For companies consolidated using the full and proportional consolidationmethods, the accounting value of each investment is eliminated against theunderlying net equity. For companies accounted for using the equity method, thecost of acquisition is adjusted to the underlying share of net equity at December31, 2002, as shown by the related financial statements.For investments in consolidated companies and for those valued using the equitymethod, the differences, at acquisition, between the carrying value of theinvestments and the corresponding share of net equity have been accounted foras follows:

– negative differences are shown as a deduction from fixed assets, except thoseof definite amount; any additional negative difference is recorded in theconsolidation reserve;

– positive differences, where not attributable to the assets or liabilities of theinvestee companies, have been recorded as a reduction of the consolidationreserve up to the amount of same and the remaining amount has beenrecorded as an asset in “difference on consolidation”.

– The assets, liabilities, revenues and costs related to transactions amongconsolidated companies, including dividends paid within the Group, have beeneliminated.

– The gains and losses arising from transactions among consolidated companies,if not yet realized through transactions with third parties, have beeneliminated.

– The minority interest in the share of the net equity and the results of operationsare shown separately, respectively, under shareholders’ equity in the balancesheet and in the statement of income.

The reconciliation between the net results and shareholders’ equity of Pirelli & C. atDecember 31, 2002 and the corresponding consolidated figures is presented in thesupplementary information.

83

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies adopted are those set forth by the provisions of art. 2426 ofthe Italian Civil Code, referred to and supplemented by the provisions of Consoband by the accounting principles issued by the National Boards of DottoriCommercialisti and Ragionieri.

The accounting principles have been applied on a basis consistent with the prioryear. Unless otherwise indicated, the accounting principles applied in the valuationof the components of the consolidated financial statements are in compliance withthose adopted in the financial statements of the parent company.

INTANGIBLE ASSETS

“Formation costs” relate to the capital increase costs of consolidated companies andare amortized over a period of five years.

“Patents and design patent rights” and “concessions, licenses, trademarks andsimilar rights” are amortized over their expected economic lives, estimated in aperiod of five years.

“Goodwill” includes the amount paid for this purpose by the Group companiesfor the acquisition of companies or other corporate transactions. Goodwill isamortized over a period of ten years, which identifies the possible period ofutilization.

“Difference on consolidation”, relative to the acquisition of investments, isamortized over a period of between ten and twenty years; this period identifies thepossible period of utilization.

The caption “other intangible assets” includes sundry costs benefiting futureperiods, and in particular refers to:– applied software acquisition costs, amortized over a period of five years;– leasehold improvements, amortized over the duration of the lease and, in any

case, not exceeding five years;– loan acquisition costs, amortized over a period not exceeding the duration of the

loan and, in any case, not exceeding five years;– image awareness costs benefiting future periods, amortized over the duration of

the contract and, in any case, not exceeding five years.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at purchase or production cost includingdirectly attributable incidental expenses and eventually increased by revaluationseffected in accordance with specific laws.

Depreciation is calculated starting from the month when the asset is available andready for use or potentially able to provide economic benefits.

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Depreciation is calculated on the straight-line method on a monthly basis at ratesdesigned to completely write-off the assets over their estimated useful lives or, fordisposals, up to the last month of utilization, as follows:

Buildings 3% - 10%Plant 7% - 10%Machinery 5% - 10%Equipment 10% - 33%Furniture 10% - 33%Motor vehicles 10% - 25%

In addition, property, plant and equipment are written down when the netrecoverable amount is permanently impaired and lower than the net book value, inaccordance with article 2426, point 3 of the Italian Civil Code.

Ordinary maintenance and repair costs are expensed in the year incurred.

Government investment grants relating to property, plant and equipment arerecorded in a special provision under liabilities and are released to income inproportion to the future depreciation of the assets to which they refer.

Assets acquired under financial leasing contracts are accounted for as property,plant and equipment with a contra-entry to financial payables and are thereforecapitalized and depreciated over their estimated useful lives. The lease installment isdivided between interest expense, recorded in the statement of income, and therepayment of principal, recorded as a deduction of the financial liability.

FINANCIAL ASSETS

- Investments

Equity investments in associated companies are valued using the equity method, inaccordance with article 2359 of the Italian Civil Code.Equity investments in unconsolidated subsidiaries and other companies are valuedat cost and reduced, if necessary, to account for any permanent impairment invalue.The original amount is reinstated whenever the reasons for the adjustment no longerapply.

- Other securities

Other securities are stated at cost, reduced for any permanent impairment in value.

- Treasury shares

Treasury shares are valued at purchase cost.In accordance with article 2357-ter of the Italian Civil Code, an undistributablereserve has been recorded in shareholders’ equity for an amount corresponding tothe carrying value.

85

RECEIVABLES AND PAYABLES

Receivables (under both fixed assets and current assets) are stated at estimatedrealizable value. Payables are stated at nominal value.Receivables and payables in foreign currencies other than the functional currency ofthe individual companies are adjusted to the year-end exchange rates or the agreedexchange rates under hedging contracts; the effects of the hedging contracts arerecorded in accrued income and accrued liabilities; related exchange gains or lossesare recorded in the statement of income in accordance with the accrual basis ofaccounting.

INVENTORIES

Inventories are stated at the lower of cost, determined on the FIFO basis, andestimated realizable value.Work in process on long-term contracts is stated in proportion to the stage ofcompletion of the work on the basis of agreed prices and taking into accountestimated losses.

Inventories of real estate property consist of areas for building, property underrenovation, property under construction, property completed and intended forsale, real estate trading property for sale and construction in progress againstorders.Areas for building are stated at the lower of purchase cost, plus incrementalexpense and interest expense capitalized in the pre-construction phase, and thecorresponding realizable value.Property under construction and/or in the process of renovation also take intoaccount the income earned on the construction order. This income is calculatedon the basis of the total agreed sales price in proportion to the stage of completionof the work determined as a percentage of total cumulative costs incurred up tothe balance sheet date in relation to estimated costs to completion.Property under construction and/or in the process of renovation, for which apreliminary lease agreement has been signed, is valued at the lower of cost plusincremental expenses and interest expense, and the corresponding realizablevalue.Real estate trading property for sale is valued at the lower of cost and marketvalue. Incremental expenses incurred up to the time of sale are added to thepurchase cost.Construction in progress is valued according to the agreed sales price in relationto the stage of completion of the project.Any losses to complete the project are charged entirely in the year in which theybecome known.Inventories also include requests for higher expenditures incurred in constructinguniversity buildings, according to a conservative estimate of their recognition.Requests for additional prices over the contract price are recorded in the financialstatements if the amounts are reasonably certain.Penalties for late delivery of the property are accrued whenever such delays arechargeable to the contractor and not the principal.

86

OTHER INVESTMENTS AND OTHER SECURITIES

Investments and other securities recorded in current assets designated for tradingpurposes and/or to meet treasury requirements, are stated at the lower of cost andfair value.

CASH AND BANKS

Cash and banks are stated at nominal value.

PROVISIONS FOR LIABILITIES AND EXPENSES

- Provisions for pensions and similar obligations

These provisions refer to pensions, health care and other benefits in favor ofemployees, not included in specific laws but covered by local labor agreements, andbenefit plans operating at some Group companies.The accounting method is based on the allocation of the entire cost at maturity overthe service lives of the employees based on entitlement earned, using actuarialmethods.

- Provision for income taxes

The provision for income taxes includes deferred tax liabilities and tax losses thatare certain or likely to be incurred but uncertain as to the amount or as to the dateon which they will arise; definite and certain income taxes payable are recorded in aspecific account in the balance sheet.The provision also includes deferred tax liabilities.

- Other provisions

Other provisions include liabilities that are certain or likely to be incurred butuncertain as to the amount or as to the date on which they will arise.

PROVISION FOR EMPLOYEES’ LEAVING INDEMNITY

The provision for employees’ leaving indemnity includes amounts payable to employeesaccrued on their behalf in accordance with specific laws or national labor contracts.

ACCRUALS AND DEFERRALS

Accruals and deferrals are accounted for on the accrual basis.

GUARANTEES AND COMMITMENTSGuarantees given to third parties are recorded at the contract value of thecommitment assumed on behalf of the beneficiary.Options granted to third parties and third party securities held in deposit arerecorded at nominal value.

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FINANCIAL INSTRUMENTS

Forward contracts and derivative financial instruments used for hedging purposesare recorded under commitments at the time the contract is stipulated, for thenotional amount.Income and expenses, as well as any effects, corresponding to the difference betweenthe original contract amount and the fair value at the end of the year, are accountedfor on the accrual basis.

RECOGNITION OF REVENUES

Revenues from the sale of products are recognized at the time of transfer of titleof ownership which generally coincides with the delivery or shipment of thegoods.Revenues from sales are shown net of discounts and allowances.

RESEARCH, DEVELOPMENT AND ADVERTISING COSTS

“Research & development and advertising costs” are charged to the statement ofincome in the year incurred.

DIVIDENDS

Dividends are recorded on a cash basis, gross of tax credits.

INCOME TAXES

Current income tax liabilities are determined on the basis of a realistic estimate ofthe tax expenses payable under current tax laws; the related liability is shown intaxes payable net of advance payments, withholdings and tax credits.

Deferred taxes are calculated on the temporary difference existing between the valueof assets and liabilities in the balance sheet and their tax basis (liability method).Any deferred tax liabilities are recorded in the provision for income taxes. Deferredtax assets are accounted for only where is a reasonable certainty of recovery andthese are recorded in “Other receivables”.

88


ASSETS

B) FIXED ASSETS

I) Intangible assets

Intangible assets can be analyzed as follows:


12/31/2001 Translation Increase Decrease Amortization 12/31/2002adjustment

• Formation costs 6,042 43 9,579 (241) (4,807) 10,616

• Patents and desing

patent rights 4,110 9 2,545 - (2,616) 4,048

• Concessions, licenses,

trademarks

and similar rights 11,383 (266) 8,337 (666) (6,426) 12,362

• Goodwill 15,416 (606) 29,420 (720) (3,598) 39,912

• Difference

on consolidation 544,938 - - (3,414) (33,255) 508,269

• Other 92,858 (5,545) 43,552 (3,928) (40,142) 86,795

674,747 (6,365) 93,433 (8,969) (90,844) 662,002

The increase in “formation costs” is due to the registration tax capitalized by PirelliTyre Holding N.V. – Amsterdam – as a consequence of the increase in share capitalsubscribed to by Pirelli S.p.A. and the costs incurred for listing Pirelli & C. RealEstate S.p.A..

The increase in “patents and design patent rights” is mainly due to costs incurredby Pirelli Cavi e Sistemi S.p.A. (a company merged in Pirelli S.p.A.) to fileindustrial patents.

“Concessions, licenses, trademarks and similar rights” mainly include the costsincurred to extend the number of software user rights for Pirelli S.p.A.’s newintegrated information system (SAP/Oracle).

The increase in “goodwill” principally relates to the purchases made during the yearby Pirelli & C. Real Estate S.p.A. (Agied S.r.l., Edilnord Progetti S.p.A., ServiziImmobiliari Edilnord S.p.A. and project, property and agency business segmentsreceived from Telecom Italia S.p.A. and Olivetti Multiservices S.p.A. for theexecution of Progetto Tiglio).

The major items included in “other” relate to software applications costs, expenses forthe development of a new commercial and financial reporting system, expenses for theCCM project, corporate reorganization expenses, expenses for the implementation of e-business solutions, loan acquisition costs and leasehold improvements.“Difference on consolidation” at December 31, 2002 includes Euros 448,444thousand representing the difference between the price paid and the underlying net

89

90

equity of the consolidated company Pirelli S.p.A. which arose following thepurchases of shares by Pirelli & C. and by Pirelli & C. Luxembourg S.A. net ofamortization (calculated over a period of 20 years).

II) PROPERTY, PLANT AND EQUIPMENT

The movements in property, plant and equipment during the year are as follows:


12/31/2002 12/31/2001

Gross value

Opening balances 6,405,699 6,263,534

Translation adjustment (714,050) (269,905)

Change in scope of consolidation 1,551 (14,405)

Additions 328,964 646,218

Disposals (265,134) (219,743)

5,757,030 6,405,699

Accumulated depreciation

Opening balances 3,579,799 3,645,534

Translation adjustment (390,047) (224,702)

Change in scope of consolidation 714 (4,244)

Depreciation charge 314,738 325,566

Disposals (154,580) (162,355)

3,350,624 3,579,799

Net book value 2,406,406 2,825,900

The net increase from the prior year is due to the combination of the following:

– translation adjustments, in reference to property, plant and equipment includedin the financial statements of foreign companies;

– additions, which are lower than the prior year, equal to 1.05 times depreciation;– disposals, mainly in reference to plants as a consequence of production

rationalization.

Gross values include about Euros 21,147 thousand of assets which are no longer inuse and are being held for transfer to other Group companies or disposal to thirdparties.

III) Financial assets

Financial assets went from Euros 3,583,105 thousand to Euros 3,442,079thousand. Details are as follows:

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12/31/2001 Change in Increase Decrease 12/31/2002scope of

consolidation

Investmentsin subsidiaries 1,136 (192) 210 (508) 646

Investments in jointedcontrolled subsidiaries 3,150,840 - - (149,952) 3,000,888

Investments in associatedcompanies 115,559 2.382 117,660 (77,733) 157,868

Investments in othercompanies 315,570 (2,039) 74,283 (105,137) 282,677

3,583,105 151 192,153 (333,330) 3,442,079

“Investments in subsidiaries” amount to Euros 646 thousand and consist ofcompanies recently formed and/or insignificant to the consolidated financialstatements in terms of net equity or results of operations and/or in which the rightsof the parent company are subject to restrictions. Details are as follows:


Description Country % holding Amount

AFCAB Holding (Proprietary) Ltd. Sud Africa 50,00% 197

Pirelli & C. Real Estate Ltd. Great Britain 100,00% 100

LSF Italian Finance Company S.p.A. Italy 100,00% 100

Parcheggi Bicocca S.r.l. Italy 75,00% 64

Tintoretto S.r.l. Italy 100,00% 55

Verdi S.r.l. Italy 100,00% 130

646

“Investments in jointly controlled subsidiaries” amount to Euros 3,000,888thousand and refer to the investment in Olimpia S.p.A. (60 percent) which has beenaccounted for using the equity method. This amount includes goodwill that will beamortized over 20 years ( Euros 47,030 thousand).

“Investments in associated companies” amount to Euros 157,868 thousandcompared to Euros 115,559 thousand at December 31, 2001. Details are as follows:

(in migliaia di euro)

Real estate group

Auriga Immobiliare S.r.l. 23,818

CFT Finanziaria S.p.A. 15,915

M.S.M.C. Holding B.V. 23,089

Trixia S.r.l. 7,172

Dixia S.r.l. 6,780

Massetto 1 B.V. 5,092

Immobiliare Prixia S.r.l. 4,230

Iniziative Immobiliari S.r.l. 4,929

Popoy B.V. 2,757

Sci Roev Partners L.P. 2,572

IN Holding Italy S.a.r.l. 2,352

Induxia S.r.l. 2,576

Inim Due S.a.r.l. 2,040

Ortensia S.r.l. 1,272

Progetto Bicocca La Piazza S.r.l. (Italia) 616

Other minor companies 3,300

108,510

Industrial group

Power Cables Malaysia Sdn Bhd (Malesia) 9,243

Drathcord Saar & Co. K.G. (Germania) 5,403

Rodco Ltd. (U.K.) 4,131

Kabeltrommel Gmbh & Co. K.G. (Germania) 2,810

STIP Tunisi (Tunisia) 2,410

SMP Melfi S.r.l. (Italia) 1,807

Auto Cable Tunisie 1,796

K.M.P. Cabos Especiais e Sistemas Ltda (Brasile) 1,353

Industriekraftwerk (Germania) 521

Euro Drive Car S.L. (Spagna) 129

Other minor companies 787

30,390

Other

Eurostazioni S.p.A. 18,335

I.D.E.A. Grande Società consortile 633

18,968

Total 157,868

The increase is mainly due to investments made in CFT Finanziaria S.p.A., Masseto1 BV, Dixia S.r.l. and Trixia S.r.l..

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“Investments in other companies” can be summarized as follows:


12/31/2002 12/31/2001

Investments in Italian listed companies 163,228 204,238

Investments in Italian unlisted companies 89,043 78,981

Investments in unlisted companies 30,406 32,351

282,677 315,570

The decrease in “Investments in Italian listed companies” is mainly due towritedowns in e-Biscom S.p.A. (Euros 34,666 thousand) and Caltagirone EditoreS.p.A. (Euros 24,079 thousand).“Investments in Italian unlisted companies” relate to the subscription to the share

capital increase of F.C. Internazionale Milano S.p.A. (Euros 40,890 thousand)which was offset by the writedown of the same investment (Euros 18,437thousand).

“Financial receivables from other companies due beyond one year” amount toEuros 68,825 thousand and include:

– Euros 4,502 thousand of interest-bearing fixed rate loans; the carrying valueapproximates fair value at the end of the year;

– Euros 26,639 thousand of interest-bearing fixed rate obligatory deposits;– Euro 22,171 thousand of interest-bearing variable rate loans;– Euro 2,307 thousand of non-interest bearing security deposits;– Euro 13,206 thousand of non-interest bearing loans.

Receivables due beyond five years total Euros 26,859 thousand.

“Other securities” total Euros 85,803 thousand compared to Euros 14,247thousand at December 31, 2001. They include Fenera Holding S.p.A. bonds andinvestment securities of Pirelli Financial N.V. (Pirelli S.p.A. group).The change is mainly due to the reclassification from current financial assets ofConvertible Bond Asset Swaps on Olivetti S.p.A. 2010 convertible bonds and ShareSwap Transactions on Olivetti S.p.A. shares / Olivetti S.p.A. 2010 convertible bondsheld by the subsidiary Pirelli Finance (Luxembourg) S.A.. The strategic value of theOlivetti S.p.A. securities was taken into consideration in making thisreclassification. The effect of adjusting these securities to market value, had theyremained in current financial assets, would have been a writedown of about Euros69 million.

“Treasury shares” relate to 2,617,500 ordinary shares, equal to 0.42 percent ofshare capital (0.44 percent of ordinary share capital).As provided by art. 2357-ter of the Italian Civil Code, a “Reserve for treasuryshares in portfolio” has been established for the same amount.A comparison of the treasury shares with the average market prices shows a lowervalue of Euros 0.5 million. The valuation at cost, which approximates the net equityper share, has been maintained in the financial statements as there is no permanentimpairment in value.

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C) CURRENT ASSETS

I) Inventories

Inventories amount to Euros 1,283,214 thousand, compared to Euros 1,363,453thousand in the prior year, and may be analyzed as follows:


12/31/2002 12/31/2001

Pirelli S.p.A. group

• Energy Cables and Systems Sector 385,211 441,529

• Telecommunications Cables and Systems Sector 91,144 128,240

• Tyres Sector 429,983 455,756

• Other - 1

Total Pirelli S.p.A. group 906,338 1,025,526

Pirelli & C. Real Estate S.p.A. group 383,702 346,029

• Other and intereliminations (6,826) (8,102)

1,283,214 1,363,453

II) Receivables

Receivables total Euros 2,082,404 thousand compared to Euros 2,729,563thousand in the prior year, and can be analyzed as follows:


12/31/2002 12/31/2001

Financial Trade Financial Trade

and other and other

• Trade – 1,355,815 – 1,784,613

• Subsidiaries 190 3,740 – 292

• Associated companies 34,382 65,810 1,336 22,553

• Other receivables 25,382 597,085 21,284 899,485

59,954 2,022,450 22,620 2,706,943

– trade receivables from customers by due date are detailed as follows:


12/31/2002 12/31/2001

due within 1 year 1,507,816 1,925,196

due beyond 1 year 540 19,382

allowance for doubtful receivables (152,541) (159,965)

1,355,815 1,784,613

No receivables are due beyond five years.The carrying value of receivables, adjusted for probable future losses, approximatesestimated fair value at year-end.

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– receivables from associated companies include financial receivables and referto a loan made to Eurostazioni S.p.A. (Euros 32,717 thousand) subsequent totransactions with Pirelli & C. A.p.A..The most significant trade receivables refer to direct and indirect associatedcompanies of Pirelli & C. Real Estate S.p.A. - Euros 64,597 thousand (Euros22,158 thousand at December 31, 2001).All amounts are receivable within one year.

– other receivables – “Trade and other”, which amount to Euros 597,085thousand, include the balance of deferred tax assets (Euros 119,156 thousand);amounts due from the tax authorities of Euros 224,539 thousand; receivablesfrom sales of fixed assets of Euros 1,542 thousand; receivables from employees ofEuros 9,223 thousand and receivables from social security agencies, exportrefunds and other minor amounts of Euros 242,625 thousand. Part of thereduction from December 31, 2001 is due to the sale of tax receivables toUnicreditfactoring S.p.A. and Mediofactoring S.p.A.. for Euros 112,815thousand.The amount due beyond one year and within five years is Euros 86,875thousand, while receivables due beyond five years amount to Euros 85,475thousand.

III) Current financial assets

– other securities amount to Euros 198,652 thousand and include the following:Euros 62,359 thousand of fixed rate bonds issued and guaranteed by

banking institutions;Euros 66,953 thousand of variable rate bonds issued and guaranteed by

banking institutions;Euros 5,505 thousand of fixed rate bonds issued and guaranteed by

governments of various countries;Euro 10,109 thousand of variable rate bonds issued and guaranteed by

governments of various countries;Euro 5,189 thousand of bonds issued and guaranteed by primary issuers;Euro 33,589 thousand of equity securities intended for sale;Euro 14,648 thousand of premiums paid on call options on Olivetti S.p.A.

ordinary shares or Olivetti S.p.A. 2001-2010 convertiblebonds;

Euro 280 thousand of investments in mutual funds convertible intocash on demand.

The securities are held in safe-keeping at leading banking institutions.

IV) Cash and banks– bank and postal deposits are concentrated in the financial companies, holding

companies and subholding companies of the Group. Available liquidity is mainlyinvested in the short-term deposit market at leading banking counterpartsprimarily at interest rates in line with market rates.

95

D) Accrued income and prepaid expenses

– accrued income amounts to Euros 42,337 thousand compared to Euros 37,652thousand. The amount is determined on the accrual basis and mainly relates tohedging revenues, interest income, insurance, and other minor items.

– prepaid expenses increased from Euros 37,790 thousand to Euros 42,594thousand and mainly refer to prepaid insurance, property rent and other minoritems.

96

LIABILITIES AND SHAREHOLDERS’ EQUITYA) Shareholders’ equity

Of Pirelli & C.

At December 31, 2002, share capital amounts to Euros 339,422,773.56 andconsists of 618,317,846 ordinary shares and 34,418,257 savings shares, all with apar value of Euros 0.52 per share and normal dividend rights.

During 2002, 26,950,148 ordinary shares were issued against the conversion of thesame number of 2.5% 1998-2003 bonds.Such bonds matured on January 1, 2003 and the bonds that were not converted (fora total of 9,225,571) were reimbursed.

The share premium reserve increased from Euros 501,054 thousand to Euros 549,674thousand following the aforementioned conversion of 2.5% 1998-2003 bonds.

The revaluation reserve ex Law No. 413/1991 and the reserve for treasury shares inthe portfolio have remained unchanged compared to December 31, 2001.

The legal reserve increased from Euros 65,014 thousand to Euros 67,880 thousandsubsequent to resolutions passed by the shareholders’ meeting of May 13, 2002.

The statement of changes in shareholders’ equity is presented in the supplementaryinformation.

Minority interest

The minority interest in shareholders’ equity amounts to Euros 2,693,450 thousandcompared to Euros 3,288,687 thousand at December 31, 2001.

The change principally derives from the balance of the results for the year 2002, thepayment of dividends and the translation adjustment from the conversion of foreigncurrency financial statements to Euros.

The main percentage of investments held by the minority interest is as follows:

12/31/2002 12/31/2001

Pirelli S.p.A. 59,01% 59,87%

Pirelli & C. Real Estate S.p.A. 35,56% 7,73%

B) Provision for liabilities and expenses

Provisions for pensions and similar obligations

These provisions include accruals for pensions, health care and other benefits infavor of employees, not governed by specific laws but covered by local laboragreements and benefit plans operating at some Group companies.

97

In those companies operating in the U.S.A. and the United Kingdom where thedefined benefit pension schemes are in place, the comparison between theliability for future obligations towards those entitled to benefits and the value ofassets invested by the plans shows, at December 31, 2002, a deficit valued atabout Euros 150 million, which will be amortized over the remaining serviceperiod of the participants in the plan in accordance with suitable actuarialmethods. The deficit arose in the last part of the year as a result of thecontinuous deterioration of the financial markets with the consequent reductionin the value of plan assets.

Provisions for income taxes

The provisions for income taxes include accruals relating to income taxes likely tobe incurred but uncertain as to the amount or as to the date on which they willarise, as well as deferred taxation, as follows:


12/31/2002 12/31/2001

Provision for current taxes 57,138 41,731

Provision for deferred taxes 157,326 183,829

214,464 225,560

The tax charge for the year is composed of the following:


12/31/2002 12/31/2001

Current taxes 96,129 184,383

Deferred taxes (8,717) 4,157

87,412 188,540

The tax rates in the principal countries in which the Group operates are as follows:

Europe: United States 40.00%

Italy 40.25% Canada 33.00%

France 35.43% Australia 30.00%

Spain 35.00% South America:

Germany 38.00% Argentina 35.00%

United Kingdom 30.00% Brasil 34.00%

Turchey 33.00% Venezuela 34.00%

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Other provisions

The movements during the year in other provisions are as follows:


Restructuring costs Other Total

Balance at Decembre 31, 2001 200.225 201,039 401,264

Translation adjustment (4,621) (6,692) (11,313)

Utilization (294,642) (107,722) (402,364)

Increase 275,189 69,130 344,319

Balance at Decembre 31, 2002 176,151 155,755 331,906

Utilizations of the provision for restructuring costs were in respect of the EnergyCables and Systems Sector for Euros 133,392 thousand, the TelecommunicationsCables and Systems Sector for Euros 98,201 thousand and the Tyres Sector forEuros 31,523 thousand of the Pirelli S.p.A. Group.The balance of the provision relates to the Energy Cables and Systems Sector forEuros 104,557 thousand, the Telecommunications Cables and Systems Sector forEuros 42,048 thousand and the Tyres Sector for Euros 7,571 thousand.The increase in the provision for restructuring costs mainly relates to thereorganization plan for the industrial structures.

The total of other provisions of Euros 155,755 thousand includes accruals forl it igation, industrial r isks and claims, product warranties, and othercontingencies.

D) Payables

Payables decreased from Euros 5,992,484 thousand to Euros 5,081,927 thousandand may be analyzed as follows:


12/31/2002 12/31/2001

Financial Trade Financial Trade

and other and other

Bonds 1,164,796 - 661,407 -

Convertible bonds 21,977 - 86,177 -

Bank borrowings 1,637,782 - 2,513,307 -

Other financial companies 99,726 - 155,308 -

Advances from customers - 179,693 - 188,249

Trade - 1,259,407 - 1,328,243

Subsidiaries 1 125 - -

Associated companies 752 33,840 79 4,450

Taxes - 193,214 - 531,591

Social security agencies - 56,789 - 49,817

Other payables 7,759 426,066 3,369 470,487

2,932,793 2,149,134 3,419,647 2,572,837

99

The analysis of payables by due date is as follows:

Financial payables


12/31/2002 12/31/2001

within 1 year beyond 1 year within 1 year beyond 1 year

Bonds 4 1,164,792 4 661,403

Convertible bonds 21,977 - 2,102 84,075

Bank borrowings 970,317 667,465 1,456,202 1,057,105

Other financial companies 41,071 58,655 96,200 59,108

Subsidiaries 1 - - -

Associated companies 752 - 79 -

Other payables 7,759 - 3,369 -

1,041,881 1,890,912 1,557,956 1,861,691

Financial payables are secured by liens and mortgages for Euros 40,098thousand.Financial payables due beyond five years amount to Euros 1,092,663 thousand.

Additional disclosure is provided as follows:

Bonds


Non convertible Convertible


Pirelli & C. (Italy)

Lire 287,9 billion 1998-2003 2,5%

convertible in Pirelli & C. share - - 21.977 -

Pirelli S.p.A. (Italy)

Euros 500 million 1998-2008 4,875% - 500.000 - -

Unredeemed bonds 4 - - -

Pirelli Finance Luxembourg S.A.

Euros 500 milion 2002-2007 6,5% - 500.000 - -

Pirelli & C. Luxembourg S.A.

Euros 150 milion 1999-2009 5,125% - 164.792 - -

Total 4 1.164.792 21.977 -

Convertible bonds total Euros 22 million and refer to the residual amount of the2.5% 1998-2003 bonds originally issued for Lire 287.9 billion (Euros 148.7million), authorized by a resolution passed at the extraordinary shareholders’meeting of Pirelli & C. on May 22, 1998. These bonds were reimbursed on January2, 2003.

100

Bank borrowings

Bank borrowings due within one year amount to Euros 970,317 thousand andinclude the current portion of long-term debt for Euros 40,896 thousand.Bank borrowings due beyond one year amount to Euros 667,465 thousand andinclude floating rate loans for Euros 660,734 thousand and fixed rate loans forEuros 156,731 thousand.

Pavables to other financial companies

The amount due beyond one year includes an amount of Euros 31,901 thousandpayable beyond five years.

Trade and other payables


12/31/2002 12/31/2001


Advances from customers 177,702 1,991 188,249 -

Trade 1,259,390 17 1,310,725 17,518

Subsidiaries 125 - - -

Associated companies 33,840 - 4,450 -

Taxes 151,825 41,389 451,452 80,139

Social security agencies 56,789 - 49,817 -

Other payables 383,524 42,542 436,485 34,002

2,063,195 85,939 2,441,178 131,659

Payables to associated companies

As for trade payables, the most significant amounts refer to Société Tunisienne desIndustries De Pnéumatiques S.A. (Euros 16,023 thousand), Drahtcord Saar GmbH& Co. K.G. (Euros 2,399 thousand), Progetto Bicocca la Piazza S.r.l. (Euros 7,862thousand) and Progetto Bicocca Università S.r.l. (Euros 3,074 thousand).

Taxes payable

The decrease in taxes payable is principally due to the payment of taxes on theextraordinary sales transactions regarding the Terrestrial Optical Systems and theOptical Components businesses.

Other payables

These amount to Euros 426,066 thousand and include payables to employees forEuros 90,456 thousand, security deposits from customers for packaging for Euros10,380 thousand, legal and consulting fees for Euros 7,180 thousand, purchases offixed assets and urbanization fees for Euros 64,267 thousand, notes payable forEuros 54,047 thousand, building management by third parties for Euros 18,886thousand and other minor items for the difference.

101

E) Accrued liabilities and deferred income

– Accrued liabilities

Accrued liabilities increased from Euros 238,314 thousand to Euros 242,535thousand and include the portion of exchange differences on hedging transactions,interest expense, property leases payable, hedging costs and other minor items.

– Deferred income

Deferred income decreased from Euros 43,955 thousand to Euros 35,922 thousandand includes installment payments received in advance and insurance premiums.

102

MEMORANDUM ACCOUNTS

Memorandum accounts amount to Euros 5,051,053 thousand compared to Euros3,293,207 thousand in the prior year.

Personal guarantees

Sureties on behalf of other companies Sureties on behalf of other companies are mainly to guarantee loans received andjob orders in the process of being delivered or tested.

Third party assets held in deposit

Securities held in deposit Securities held in deposit include securities entrusted for administration.

Assets held by third parties

Securities held as guarantees and sureties Securities held as guarantees and sureties include owned securities held by thirdparties in deposit as guarantees (mainly in reference to the quotas pledged of thecompanies Auriga Immobiliare S.r.l., Trixia S.r.l. and Dixia S.r.l.), owned securitiesheld in deposit for safe-keeping and sureties given by Pirelli S.p.A. againstcommitments and contractual obligations.

Commitments and contingencies

Capital expenditures include Euros 235,333 thousand for the commitmentundertaken by Pirelli & C. Real Estate S.p.A. and Pirelli & C. Agenzia ResidenzialeS.p.A. to purchase the buildings that are not sold by certain associated companiesstarting December 31, 2004. The caption also includes Euros 320,000 thousand forthe commitment to purchase a part of the buildings owned by Imser 60 S.r.l..

Nominal value of put options given to third partiesThe amount represents the nominal value of the options given to IntesaBci S.p.A.(Euros 520,000 thousand) and Unicredito Italiano S.p.A. (Euros 520,000thousand) (hereinafter, the “Banks”) and to Edizione Holding S.p.A. (Euros1,040,000 thousand) in respect of their investments in Olimpia S.p.A., under theOlimpia S.p.A. shareholder agreements.The put options granted to the Banks can be exercised from September 2006 or,before that date, in the case of a deadlock among the shareholders or in the case ofthe withdrawal of Pirelli S.p.A. from the shareholders agreements, at a price equal tothe value of the economic capital of Olimpia S.p.A., plus a premium (the “Price”).This Price shall be determined by the parties and shall not be less than the outlaysmade 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 put options granted to Edizione Holding S.p.A. can be exercised in the case of a(I) deadlock situation among the shareholders, (II) withdrawal on the part of PirelliS.p.A. from the shareholder agreements and (III) the occurrence of a substantialchange in the controlling structure of Pirelli S.p.A. (including for these purposesPirelli & C. Accomandita per Azioni), by which is meant the exercise by parties

103

other than those currently holding the determining power to nominate the majorityof the components of the management board, with a consequent potentialmodification of the strategic guidelines.The exercise price of the put options granted to Edizione Holding S.p.A. is equal to,respectively, (I) the Price indicated above, (II) the Price increased by an additional50 percent and (III) the Price increased by an amount equal to 200 percent of thePrice. In this case, however, there is no expectation of a Floor or Cap as in theaforementioned agreements with the Banks.This item also includes the nominal value of the option given to Cisco Systems onthe Pirelli Submarine Telecom Systems Holding B.V. shares which it holds. Thisamount (U.S. $75 million) is already shown in the financial statements under theminority interest in shareholders’ equity.

Other memorandum accounts

Forward securities purchaseThis refers to the forward securities purchase (expiration date of November 23,2006) of 200,000,000 Olivetti 2001-2010 convertible bonds effected with CreditAgricole Lazard Financial Products Bank as described in the report on operations.

Financial instruments

It is the Group’s policy to reduce financial risks deriving from international activitiesconducted in research, manufacturing and distribution through operating andfinancial management decisions.

To this end, the Group uses forward exchange contracts and derivative financialinstruments to protect its operating results from unfavorable fluctuations ofexchange and interest rates and the prices of raw materials. With an overall viewtowards reducing exposure to risk, the Group deals exclusively with leading bankcounterparts and in highly liquid instruments.

104

The following table gives a description of the financial derivative contracts in themajor currencies:


Gross Fair value Maturing Maturing

notional within beyond

amounts one year one year

(at year-end

exchange rates)

Exchange rate risk

- Forward contracts 2,430 2,388 2,380 8

- Swaps contracts 576 694 - 694

- Futures contracts 225 - - -

Interest rate risk

- Forward rate agreement - 1 1 -

- Interest rate swaps - 43 43 -

Raw materials prince risk

- Futures contracts 1 1 1 -

The fair value of the derivative financial instruments used to hedge exchange,interest rate and materials price risks approximates the fair value of the positionsbeing hedged.

105

CONSOLIDATED STATEMENTS OF INCOMEA) Production value

Revenues from sales and services

The distribution of sales by geographical area of destination and industry sector arereported in the following table.


2002 2001

Geographical area

Italy 1,538,711 22,90% 1,422,719 18,33%

Other European countries 2,759,848 41,08% 3,377,174 43,51%

North America 73,366 10,89% 1,017,876 13,11%

Central and South America 778,441 11,59% 904,938 11,66%

Oceania, Africa and Asia 909,549 13,54% 1,039,278 13,39%

Total 6,717,915 100,00% 7,761,985 100,00%

Sector

Pirelli S.p.A.

- Energy Cables and System 3,021,391 44.98% 3,457,938 44,55%

- Telecommunications Cables and System 468,151 6,97% 1,230,000 15,85%

- Tyres 2,857,000 42.53% 2,831,171 36,47%

- Other and intereliminations (35,066) (0,52%) (9,889) (0,13%)

Total Pirelli S.p.A. group 6,311,476 93,96% 7,509,220 96,74%

Pirelli & C. Real Estate S.p.A. group 424,050 6,31% 267,156 3,44%

Other and intereliminations (17,611) (0,27%) (14,391) (0,18%)

Totale 6,717,915 100,00% 7,761,985 100,00%

Other revenues and income

The caption “miscellaneous” includes rent income, commissions, insuranceindemnities and refunds, gains from the ordinary disposal of property, plant andequipment and other minor items. Last year, the caption also included the supplyagreement with Cisco Systems (Euros 59 million).

B) Production costs

Service expenses

Service expenses total Euros 1,289,691 thousand and include selling expenses(Euros 345,868 thousand), electrical power (Euros 167,892 thousand), advertising(Euros 126,610 thousand), ordinary maintenance (Euros 75,697 thousand), costsrelating to the construction of buildings (Euros 98,926 thousand), consulting fees(Euros 86,732 thousand), EDP expenses (Euros 45,724 thousand), insurance(Euros 45,600 thousand), outside processing costs (Euros 35,132 thousand),building management expenses (Euros 45,441 thousand) and other minor expenses.

Lease and rent expenses

Lease and rent expenses consist of rent expenses of Euros 48,499 thousand,operating lease installments of Euros 17,219 thousand and patent utilization rightsof Euros 5,329 thousand.

106

Personnel costs

Personnel costs consist of the following:(in thousands of euros)

2002 2001

Salaries and wages 1,091,439 1,203,565

Social security costs 243,318 259,197

Leaving indemnity 45,121 41,464

Pension and similar costs 27,356 21,898

Other costs 19,205 23,620

1,426,439 1,549,744

Amortization, depreciation and writedowns

The depreciation charge for property, plant and equipment may be analyzed as follows:


2002 2001

Buildings 31,503 32,668

Plant and machinery 201,814 212,439

Commercial and industrial equipment 45,300 41,482

Other assets 36,121 38,977

314,738 325,566

Other operating expenses

Other operating expenses went from Euros 235,224 thousand to Euros 253,264thousand and include administrative expenses (Euros 13,718 thousand), travelexpenses (Euros 58,026 thousand), revenue stamps and local taxes (Euros 34,036thousand), losses on the elimination of property, plant and equipment (Euros 6,940thousand), legal fees (Euros 8,139 thousand), association dues (Euros 8,388thousand), entertainment, audit and other minor items.

C) Financial income and expenses

Investment income

Investments income includes:


2002 2001

Dividends from subsidiaries 1,389 1,117

Dividends from associated companies 27 -

Dividends from other companies 18,705 10,315

Other income - 744

20,121 12,176

Other investment income refers to gains on the sale of securities.

107

Other financial income

“Income other than the above” consists of the following:


2002 2001

Interest from subsidiaries 11 2

Interest from jointly controlled subsidiaries - 75

Interest from associated companies 1,868 13,623

Bank interest 52,746 190,339

Other interest 3,071 3,154

Other financial income 55,853 36,174

Gains on exchange 385,361 217,651

498,910 461,018

“Miscellaneous” financial income includes revenues from forward contracts, gainson the sale of fixed rate securities, interest on receivables to be collected from thetax authorities and other minor items.

Interest and other financial expenses

These expenses include:


2002 2001

Interest to associated companies 390 102

Bond interest 56,836 34,262

Bank interest 152,810 152,560

Other financial expenses 113,177 101,717

Losses on exchange 399,886 226,742

723,099 515,383

“Miscellaneous” financial expenses include costs for forward contracts, losses onthe sale of fixed rate securities, bank commissions, etc..

Financial expenses, net, excluding amounts not directly associated with receivablesand payables, amount to Euros 209,664 thousand.

108

D) Valuation adjustments to financial assets

Revaluations (Euros 67,440 thousand) mainly comprise the share of the results ofthe associated companies of Pirelli & C. Real Estate S.p.A. accounted for using theequity method (Euros 67,232 thousand).

Writedowns refers to:


2002 2001

Losses of companies accounted for using the equity method 7,165 7,057

Losses of jointly controlled subsidiaries 149,953 19,312

Writedowns of investments 85,418 15,148

242,536 41,517

The share of the losses of companies accounted for using the equity method refer toassociated companies of Pirelli & C. Real Estate S.p.A..The share of the losses of jointly controlled subsidiaries refers to Olimpia S.p.A.,which is accounted for using the equity method. The writedowns of investments mainly relate to F.C. Internazionale Milano S.p.A. ofEuros 18,437 thousand, e-Biscom S.p.A. of Euros 34,666 thousand, CaltagironeEditore S.p.A. of Euros 24,079 thousand and Euroqube S.A. of Euros 3,143thousand.

E) Extraordinary items

Extraordinary income

Extraordinary income totals Euros 259,108 thousand compared to Euros 425,670thousand in the prior year, and may be analyzed as follows:


2002 2001

Gains on disposals 240,755 294,596

Miscellaneous 18,353 131,074

259,108 425,670

“Gains on disposals” mainly comprise Euros 173,744 thousand from the listing onthe stock exchange (at Euros 26 per share) of 10,365,442 shares of the subsidiaryPirelli & C. Real Estate S.p.A., the gain on the sale of securities from the partialdisposal of the securities underlying the equity swaps in Pirelli & C. Real EstateS.p.A.’s portfolio of Euros 53,611 thousand.Last year, the caption included gains on the sale of Pirelli S.p.A. treasury shareson the market of Euros 30,285 thousand, gains on the disposal of real estateproperties by the Cables and Systems Sector of Euros 72,102 thousand and gainson the sale of securities from the partial disposal of the securities underlying theequity swaps in Pirelli & C. Real Estate S.p.A.’s portfolio of Euros 178,589thousand.

109

“Miscellaneous” principally includes the adjustment for the higher tax credit ofEuros 5,108 thousand on dividends received by the parent company, other prioryears’ taxes of Euros 2,465 thousand relating to the company Pirelli Labs and theremaining amount relates to insurance compensation, sundry refunds and otherminor items.Last year, this caption primarily included an earn-out of Euros 70,497 thousand onthe closing of agreements with Cisco Systems for the sale of the Terrestrial OpticalSystems business.

Extraordinary expenses

Extraordinary expenses amount to Euros 341,840 thousand compared to Euros270,075 thousand in the prior year, and may be analyzed as follows:


2002 2001

Losses on disposals 2,529 1,127

Miscellaneous 339,311 268,948

341,840 270,075

“Miscellaneous” mainly includes restructuring costs relating to the industrialstructure of Euros 275,000 thousand and costs for the shares offering on the stockmarket of the subsidiary Pirelli & C. Real Estate S.p.A. of Euros 24,029 thousand.

110

OTHER INFORMATION

Directors’ and statutory auditors’ fees

Fees to the directors and statutory auditors of Pirelli & C., who also carry out thesefunctions in other companies included in consolidation, are as follows:


directors 13.043statutory auditors 342

13.385

Employees

At December 31, 2002, the average number of employees, by category, incompanies included in consolidation is as follows:

- Senior executives 663- Staff 10.338- Blue-collar 24.997- Temporary employment 2.650

38.648

111

Exchange rates

The main exchange rates used for the translation of the foreign currency financial statements in theconsolidated financial statements are as follows:

(local currency against euros)

Year-end Change in Averange Change in

12/31/2002 12/31/2001 % 2002 2001 %

Europe

British pound 0,6505 0,6085 6,90% 0,62879 0,62172 1,14%

Swiss franc 1,4524 1,4829 (2,06%) 1,4670 1,5102 (2,86%)

Hungarian forint 236,2900 245,1800 (3,63%) 242,9587 256,5446 (5,30%)

Slovakian koruna 41,5030 42,2610 (1,79%) 42,6933 43,2811 (1,36%)

North America

America dollar 1,0487 0,8813 18,99% 0,9454 0,8954 5,58%

Canadian dollar 1,6550 1,4077 17,57% 1,4835 1,3865 7,00%

South America

Brazilian real 3,7054 2,0450 81,19% 2,7709 2,1062 31,56%

Venezuelan bolivar 1.471,3261 667,1441 120,54% 1.112,7547 647,6493 71,81%

Argentine peso 3,5341 1,4100 150,65% 3,0120 0,8954 236,39%

Oceania

Australian dollar 1,8556 1,7280 7,38% 1,7374 1,7320 0,31%

Asia

Chinese yuan RMB 8,6832 7,2942 19,04% 7,8250 7,3827 5,99%

Singapore dollar 1,8199 1,6269 11,86% 1,6909 1,6048 5,37%

Indonesian rupiah 9.121,0000 9.121,0000 0,00% 8.794,7906 9.165,0000 (4,04%)

Africa

Egyptian pound 4,840 4,019 20,43% 4,3581 3,6236 20,27%

Ivory Coast franc 655,957 655,957 0,00% 655,9570 655,9570 0,00%

112

Net financial position

The composition of the net financial position presented below, and the changecompared to December 31, 2001, are commented in the introduction to the report:


12/31/2002 12/31/2001

Short-term financial payables 1,041,881 1,557,956

Accrued and prepaid interest expenses 50,320 12,549

Cash and banks (385,119) (471,386)

Other securities and investments in current assets (198,652) (562,110)

Short-term financial receivables (228,331) (258,333)

Accrued interest income (22,263) (9,577)

Net short-term liquidity 257,836 269,099

Medium/long-term financial payables 1,890,912 1,861,691

Medium/long-term financial receivables (92,584) (89,564)

Other securities (5,779) (11,665)

Net medium/long-term debt 1,792,549 1,760,462

Net financial debt position 2,050,385 2,029,561

R&D expenditures

In 2002, the Group incurred research and development expenditures and technicalmanagement costs for a total of Euros 219 million, entirely charged to operatingexpenses, compared to Euros 237 million in the prior year. Expendituresrepresented 3.5 percent of consolidated net sales compared to 3.2 percent in theprior year.

The geographical breakdown of these expenditures is as follows:

Europe 92%Oceania 1%North America 1%South America 4%

A number of research programs are subsidized by the governments of variouscountries. In particular, in Italy, where the research activities are mainlyconcentrated, the projects financed under the various laws are numerous and apply,in differing proportions, to all sectors of activity.

113

SUPPLEMENTARY INFORMATIONCONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2002

115

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousand of euros)

12/31/2002 12/31/2001

Net cash flows

Operating profit 117,502 296,525

Depreciation and amortization 405,582 407,735

Investments in intangible assets (89,489) (97,179)

Investments in property, plant and equipment (328,964) (646,218)

Investments in financial assets (304,693) (3,648,052)

Disposal of intangible assets 5,123 2,786

Disposal of property, plant and equipment 28,017 33,682

Disposal of financial assets 248,017 125,446

Changes in inventories 80,239 159,232

Changes in trade and other accounts receivable/payable 366,024 (167,773)

Changes in provisions (59,348) (35,218)

Other changes 8,049 21,556

Free cash flows 476,059 (3,547,478)

Financial income/expenses, net (177,422) (69,368)

Income taxes, net (87,412) (188,540)

Extraordinary items, net (82,732) 155,595

Other changes (155,096) (712,817)

Cash flows before dividends (26,603) (4,362,608)

Dividends paid (141,218) (328,906)

Net cash flows (167,821) (4,691,514)

Share capital increase Pirelli & C. 62,635 19,886

Share capital increase Pirelli & C. Real Estate S.p.A. 105,299 -

Share capital increase Pirelli S.p.A. - 29,158

Share capital increase minority interest - 6,080

Changes in share capital 167,934 55,124

Translation adjustments (20,937) (28,103)

Net decrease in cash (20,824) (4,664,493)

Net liquidity (debt) at beginning of the year (2,029,561) 2,634,932

Net debt at end of the year (2,050,385) (2,029,561)

117

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’EQUITY FOR THE YEARS ENDED DECEMBER 31 DECEMBER 2002


Share Share Legal Cumulative Other reserves* Total

capital premium reserve translation retained earnings

reserve adjustments net income

(loss)

BALANCE AT DECEMBER 31, 2000 320,959 485,617 62,212 (640) 1,303,113 2,171,261

Appropriation of net income (shareholders’

resolution of May 11, 2000)

- Payment of dividends - - - - (128,907) (128,907)

- Legal reserve - - 2,802 - (2,802) -

Conversion of bonds 1998/2003 4,449 15,437 - - - 19,886

Adjustment to net equities of subsidiaries

and associated companies - - - - (13,154) (13,154)

Translation adjustment and other changes - - - (55,336) - (55,336)

Net loss for the year - - - - 124,955 124,955

BALANCE AT DECEMBER 31, 2001 325,408 501,054 65,014 (55,976) 1,283,205 2,118,705

Appropriation of net income (shareholders’

resolution of May 11, 2001)

- Payment of dividends - - - - (52,365) (52,365)

- Legal reserve - - 2,866 - (2,866) -

Conversion of bonds 1998/2003 14,015 48,620 - - - 62,635

Adjustment to net equities of subsidiaries

and associated companies - - - - 3,912 3,912

Translation adjustment and other changes - - - (141,566) - (141,566)

Net loss for the year - - - - (58,383) (58,383)

BALANCE AT DECEMBER 31, 2002 339,423 549,674 67,880 (197,542) 1,173,503 1,932,938

* Other reserves include the Revaluation reserve, the Reserve for treasury shares in portfolio and the amortized Difference onconsolidation.

118

RECONCILIATION OF NET RESULTS AND SHAREHOLDERS’ EQUITY OF PIRELLI& C. A.P.A. AND THE CORRESPODING CONSOLIDATED FIGURESOF THE GROUP AT DECEMBER 31, 2002


Net income Shareholders’

equity

Pirelli & C. A.p.A. financial statements 60,198 1,264,981

Share of earnings of:

- consolidated subsidiaries (152,879) (152,879)

- companies valued using the equity method (17,983) (17,983)

Elimination of dividends received from subsidiaries (50,440) (50,440)

Elimination of gains on the sale of intergroup fixed assets (4,855) (4,855)

Elimination of gains on intergroup sales (4,105) (4,105)

Gain on the offering of shares of consolidated companies on the stock exchan 6,490 6,490

Amortization of goodwill (28,809) (28,809)

Elimination of writedowns of consolidated companies 134,000 134,000

Difference between share of net equity of

consolidated companies and their carrying value:

- consolidated subsidiaries 796,700

- associated companies accounted

for using the equity method (10,162)

Group consolidated financial statements (58,383) 1,932,938

119

COMPANIES CONSOLIDATED USING THE FULL CONSOLIDATION METHOD

Company Business Headquarters Share Capital % ownership % of vote Held by

EUROPE

AUSTRIA

Pirelli Gesellschaft mbH Tyre Vienna Euro 726,728 100.00% Lunares S.A.

Pirelli-Oekw GmbH Energy Cables and Systems Vienna Euro 2,071,176 100.00% Pirelli Cable Holding N.V.

BELGIUM

Pirelli Tyres Belux S.A. Tyre Bruxelles Euro 700,000 100.00% Lunares S.A.

FINLAND

Pirelli Cables and Systems OY Energy Cables and Systems Helsinki Euro 10,000,000 100.00% Pirelli Cable Holding N.V.

FRANCE

Eurelectric S.A. Energy Cables and Systems La Bresse Euro 4,036,500 100.00% Pirelli Energie Câbles et Systèmes France S.A.

Pirelli Moto France S.A.S. - PMF S.A.S. Tyre Gonesse Euro 77,000 100.00% Metzeler Reifen GMBH

Pirelli Energie Câbles et Systèmes France S.A. Energy Cables and Systems Paron de Sens Euro 136,800,000 100.00% Pirelli Cable Holding N.V.

Pirelli Telecom Câbles et Systèmes France S.A. Telecom Cables and Systems Bagnolet Cedex Euro 16,295,000 100.00% Pirelli Cavi e Sistemi Telecom S.p.A.

Pneus Pirelli S.A. Tyre Puteaux Euro 3,062,400 100.00% Lunares S.A.

Project Saint Maurice S.A. Real estate Paris Euro 38,200 100.00% Pirelli & C. Real Estate S.p.A.

Superent Bis France S.A. Energy Cables and Systems Bagnolet Cedex Euro 40,000 100.00% Pirelli Energie Câbles et Systèmes France S.A.

GERMANY

Bergmann Kabel und Leitungen GmbH Energy Cables and Systems Schwerin Euro 1,022,600 100.00% Pirelli Kabel und Systeme Holding GmbH

Deutsche Pirelli Reifen Holding GmbH Financial Breuberg/Odenwald Euro 7,694,943 100.00% Pirelli Tyre Holding N.V.

ISO Industrie Spedition Odenwald GmbH Tyre Breuberg/Odenwald Euro 25,565 100.00% Pirelli Reifenwerke GmbH & Co. K.G.

Materialverwertungsgesellschaft Breuberg GmbH Tyre Breuberg/Odenwald Euro 25,565 100.00% Deutsche Pirelli Reifen Holding GmbH

Metzeler Reifen GmbH Tyre Breuberg/Odenwald Euro 16,361,340 100.00% Pirelli Deutschland A.G.

Pirelli Deutschland A.G. Tyre Breuberg/Odenwald Euro 26,075,886 100.00% Deutsche Pirelli Reifen Holding GmbH

Pirelli Kabel Grundstücksverwaltungs GmbH Energy Cables and Systems Berlin Euro 25,600 100.00% Pirelli Kabel und Systeme Holding GmbH

Pirelli Kabel und Systeme Beteiligungs GmbH Energy Cables and Systems Berlin Euro 25,600 100.00% Pirelli Kabel und Systeme Holding GmbH

Pirelli Kabel und Systeme Holding GmbH Energy Cables and Systems Berlin Euro 26,000 99.00% Pirelli Cable Holding NV

1.00% Pirelli Cavi e Sistemi Energia S.p.A.

Pirelli Kabel und Systeme GmbH Energy Cables and Systems Berlin Euro 50,000 100.00% Pirelli Kabel und Systeme (gà Pirelli Kabel und Systeme Verwaltungs GmbH) Beteiligungs GmbH

Pirelli Reifenwerke Geschaeftsfuehrungs GmbH Services Breuberg/Odenwald Euro 25,565 100.00% Deutsche Pirelli Reifen Holding GmbH

Pirelli Reifenwerke GmbH & Co. K.G. Tyre Breuberg/Odenwald Euro 35,790,943 100.00% Pirelli Deutschland A.G.

Pirelli Telekom Kabel und Systeme Deutschland GmbH Telecom Cables and Systems Berlin Euro 25,000 100.00% Pirelli Cavi e Sistemi Telecom S.p.A.

Pneumobil GmbH Tyre Breuberg/Odenwald Euro 259,225 99.62% Pirelli Reifenwerke GmbH & Co. K.G.

Veith Wohnungsbau GmbH Real estate Breuberg/Odenwald Euro 127,823 100.00% Pirelli Deutschland A.G.

120


UNITED KINGDOM

Aberdare Cables Ltd Energy Cables and Systems London British Pound 609,654 100.00% Pirelli General plc

Cable Makers Properties and Services Ltd Energy Cables and Systems East Molesey British Pound 33 63.531% Pirelli General plc

Central Tyre Ltd Tyre London British Pound 100,000 100.00% Pirelli UK Tyres Ltd

Comergy Ltd Energy Cables and Systems London British Pound 1,000,000 100.00% Pirelli Cable Holding N.V.

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 Limited Tyre London British Pound 984 100.00% Centrale Tyre Ltd

Pirelli Cables (2000) Limited Energy Cables and Systems London British Pound 118,653,473 100.00% Pirelli General plc

Pirelli Cables (Industrial) Limited Energy Cables and Systems London British Pound 9,010,935 100.00% Pirelli General plc

Pirelli Cables (Supertention) Ltd. Energy Cables and Systems London British Pound 5,000,000 100.00% Pirelli General plc

Pirelli Cables and Systems International Ltd Energy Cables and Systems London Euro 100,000 100.00% Pirelli Cable Holding N.V.

Pirelli Cables Ltd Energy Cables and Systems London British Pound 100,000 100.00% Pirelli General plc

Pirelli Construction Company Ltd Energy Cables and Systems London British Pound 8,000,000 100.00% Pirelli General plc

Pirelli Focom Limited Energy Cables and Systems London British Pound 6,447,000 100.00% Pirelli General plc

Pirelli General plc Cables and Systems London British Pound 144,139,360 100.00% Pirelli UK plc “B1”/“B2”

Pirelli International Limited Financial London Euro 250,000,000 100.00% Pirelli Finance (Luxembourg) S.A.

Pirelli Metals Ltd Energy Cables and Systems London British Pound 100,000 100.00% Pirelli General plc

Pirelli Telecom Cables and Systems UK Limited Telecom Cables and Systems London British Pound 100,000 100.00% Pirelli General plc

Pirelli Tyres Ltd Tyre London British Pound 16,000,000 100.00% Pirelli UK Tyres Ltd

Pirelli UK Employee Share Trustee Limited Financial London British Pound 2 100.00% Pirelli UK plc “C”

Pirelli UK Finance Ltd Financial London British Pound 6,969,280 100.00% Pirelli UK plc “C”

Pirelli UK plc “A” Tyre holding company London British Pound 68,535,300 100.00% Pirelli Tyre Holding N.V.Energy Cables and System

Pirelli UK plc “B1” Holding company London British Pound 69,188,889 100.00% Pirelli Cable Holding N.V.Telecom Cables and System

Pirelli UK plc “B2” Holding company London British Pound 27,149,529 100.00% Pirelli Cavi e Sistemi Telecom S.p.A.

Pirelli UK plc “C” Financial holding company London British Pound 11,625,978 100.00% Pirelli S.p.A.

Pirelli UK Tyres Ltd Tyre London British Pound 68,000,000 100.00% Pirelli UK plc “A”

GREECE

Elastika Pirelli S.A. Tyre Athens Euro 1,632,010 99.90% Lunares S.A.0.10% Pirelli Pneumatici Holding S.p.A.

Pirelli Hellas S.A. (in liquidazione) Tyre Athens $ USA 22,050,000 79.86% Pirelli Tyre Holding N.V.

HUNGARY

Kabel Keszletertekesito BT. Energy Cables and System Budapest Hun. Forint/000 1,239,841 100.00% MKM Magyar Kabel Muvek Rt.

MKM Magyar Kabel Muvek RT. Energy Cables and System Budapest Hun. Forint/000 6,981,070 100.00% Pirelli Cable Holding N.V.

Pirelli Construction Hungary Limited Energy Cables and System Budapest Hun. Forint/000 3,000 100.00% Pirelli Cable Holding N.V.

Pirelli Hungary Tyre Trading and Services Limited Tyre Budapest Hun. Forint/000 3,000 100.00% Lunares S.A.

IRELAND

Pirelli Reinsurance Company Ltd Reinsurance Dublino $ USA 7,150,000 100.00% Pirelli Finance (Luxembourg) S.A.

121


ITALY

Acquario S.r.l. (in liquidazione) Real estate Genoa Euro 255,000 100.00% Pirelli & C. Real Estate S.p.A.

Agied S.r.l. Real estate Milan Euro 100,000 100.00% Pirelli & C. Real Estate Property Management S,p.A.

Alfa S.r.l. Real estate Milan Euro 2,600,000 100.00% Pirelli & C. Real Estate S.p.A.

Alfa Due S.r.l. Real estate Milan Euro 1,300,000 100.00% Pirelli & C. Real Estate S.p.A.

Altair Building Services S.r.l. Real estate Genoa Euro 500,000 80.00% Pirelli & C. Real Estate Facility Management S.p.A.

Altofim S.r.l. Real estate Milan Euro 78,000 100.00% Pirelli & C. A.p.A.

Cagisa S.p.A. Real estate Milan Euro 624,000 100.00% Pirelli & C. Real Estate Property Management S.p.A.

Casaclick S.p.A. Real estate Milan Euro 5,413,000 99.08% Pirelli & C. Real Estate Agenzia Residenziale S.p.A.

0.27% Pirelli & C. Luxembourg S.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. Service Milan Euro 51,000 100.00% Pirelli S.p.A.

Driver Italia S.p.A. Commercial Milan Euro 200,000 80.935% 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.

Edilnord Progetti S.p.A. Real estate Milan Euro 250,000 100.00% Pirelli & C. Real Estate S.p.A.

Elle Dieci Società Consortile a.r.l. Real estate Milan Euro 100,000 50.00% Agied S.r.l.40.00% Pirelli & C. Real Estate Property

Management S.p.A.

Elle Tre Società Consortile a.r.l. Real estate Milan Euro 100,000 50.00% Agied S.r.l.40.00% Pirelli & C. Real Estate Property

Management S.p.A.

Elle Uno Società Consortile a.r.l. Real estate Milan Euro 100,000 60.00% Edilnord Gestioni S.p.A.

Fibre Ottiche Sud - F.O.S. S.p.A. Optical Battipaglia (SA) Euro 5,200,000 100.00% Pirelli Cavi e Sistemi Telecom S.p.A.

Holdim S.r.l. Real estate Milan Euro 14,404 100.00% Pirelli & C. Real Estate S.p.A.

Invex S.r.l. Energy Cables and System Quattordio (AL) Euro 10,000 100.00% Pirelli Cavi e Sistemi Energia Italia S.p.A.

Iota S.r.l. Real estate Milan Euro 93,600 100.00% Pirelli & C. Real Estate S.p.A.

Kappa S.r.l. Real estate Milan Euro 10,400 100.00% Pirelli & C. Real Estate S.p.A.

Lambda S.r.l. Real estate Milan Euro 578,760 100.00% Pirelli & C. Real Estate S.p.A.

Localto S.p.A. Financial Milan Euro 5,200,000 100.00% Pirelli & C. A.p.A.

Maristel S.p.A. Telecom Cables and System Milan Euro 1,020,000 100.00% Pirelli Cavi e Sistemi Telecom 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.

Pirelli & C. Ambiente S.p.A. Environment Milan Euro 3,060,000 100.00% Pirelli & C. A.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 S.p.A. Real estate Milan Euro 20,302,491 61.20% Pirelli & C. A.p.A.5.31% Pirelli & C. Real Estate S.p.A.

Pirelli & C. Real Estate Agenzia Residenziale S.p.A.(formely Pirelli & C. Casa S.p.A.) Real estate Milan Euro 520,000 100.00% Pirelli & C. Real Estate S.p.A.

Pirelli & C. Real Estate Commercial Agency S.p.A. (formely Pirelli & C. Commercial Agency S.p.A.) Real estate Milan Euro 832,000 100.00% Pirelli & C. Real Estate S.p.A.

122


Pirelli & C. Real Estate Credit Servicing S.p.A. (formely Pirelli & C. Credit Servicing S.p.A.) Financial Milan Euro 5,200,000 100.00% Pirelli & C. Real Estate S.p.A.

Pirelli & C. Real Estate Facility Management S.p.A. (formely Pirelli & C. Facility Management S.p.A.) Real estate Milan Euro 561,000 100.00% Pirelli & C. Real Estate S.p.A.

Pirelli & C. Real Estate Project Management S.p.A. (formely Pirelli & C. Project Management S.p.A.) Real estate Milan Euro 520,000 100.00% Pirelli & C. Real Estate S.p.A.

Pirelli & C. Real Estate Property Managament S.p.A.(formely Pirelli & C. Property Management S.p.A.) Real estate Milan Euro 114,400 100.00% Pirelli & C. Real Estate S.p.A.

Pirelli & C. Real Estate Servizi di Rete S.p.A. (formely Servizi Immobiliari Edilnord S.p.A.) Real estate Milan Euro 500,000 100.00% Pirelli & C. Real Estate S.p.A.

Pirelli S.p.A. Holding Milan Euro 1,043,604,420 11.18% 11.69% Pirelli & C. A.p.A.26.30% 27.51% Pirelli & C. Luxembourg S.A.8.13% 0.00% Pirelli S.p.A.

Pirelli Cavi e Sistemi Energia S.p.A. Holding Cables and Systems Milan Euro 100,000,000 98.749% Pirelli S.p.A.1.251% Pirelli Finance (Luxembourg) S.A.

Pirelli Cavi e Sistemi Energia Italia S.p.A. Energy Cables and Systems Milan Euro 110,000,000 100.00% Pirelli Cavi e Sistemi Energia S.p.A.

Pirelli Cavi e Sistemi Telecom S.p.A. Holding Cables and Systems Telecomunicazioni Milan Euro 70,000,000 98.749% Pirelli S.p.A.

1.251% Pirelli Finance (Luxembourg) S.A.

Pirelli Cavi e Sistemi Telecom Italia S.p.A. Telecom Cables and System Milan Euro 41,000,000 100.00% Pirelli Cavi e Sistemi Telecom S.p.A.

Pirelli Cultura S.p.A. Sundry Milan Euro 1,000,000 100.00% Pirelli S.p.A.

Pirelli Informatica S.p.A. Information System Milan Euro 520,000 100.00% Pirelli S.p.A.

Pirelli Labs S.p.A. Research and Development Milan Euro 10,000,000 100.00% Pirelli S.p.A.

Pirelli Nastri Tecnici S.p.A. (in liquidazione) Sundry Milan Euro 384,642 100.00% Pirelli S.p.A.

Pirelli Pneumatici Holding S.p.A. Financial Milan Euro 121,800,000 100.00% Pirelli Tyre Holding N.V.

Pirelli Pneumatici S.p.A. Tyre Milan Euro 252,320,000 100.00% Pirelli Pneumatici Holding S.p.A.

Pirelli Servizi Finanziari S.p.A. Financial Milan Euro 1,976,000 100.00% Pirelli S.p.A.

Pirelli Submarine Telecom Systems Italia S.p.A. Telecom Cables and System Milan Euro 50,000,000 100.00% Pirelli Submarine Telecom SystemsHolding B.V.

Polo Viaggi S.r.l. Travel Agency Milan Euro 46,800 100.00% Pirelli S.p.A.

Progetti Creativi S.r.l. Real estate Milan Euro 51,000 100.00% Pirelli & C. Real Estate Commercial Agency S.p.A.

Progetto Ambiente Alfa S.r.l. Environment Milan Euro 25,500 100.00% Pirelli & C. Ambiente S.p.A.

Progetto Ambiente Beta S.r.l. Environment Milan Euro 25,500 100.00% Pirelli & C. Ambiente S.p.A.

Progetto Ambiente Gamma S.r.l. Environment Milan Euro 25,500 100.00% Pirelli & C. Ambiente S.p.A.

Progetto Bicocca Centro Tecnologico S.r.l. Real estate Milan Euro 93,600 100.00% Pirelli & C. Real Estate S.p.A.

Progetto Bicocca Esplanade S.p.A. Real estate Milan Euro 2,500,000 100.00% Pirelli & C. Real Estate S.p.A.

Progetto Bicocca Il Centro S.r.l. Real estate Milan Euro 93,000 100.00% Pirelli & C. Real Estate S.p.A.

Progetto Grande Bicocca S.r.l. Real estate Milan Euro 93,600 100.00% Pirelli & C. Real Estate S.p.A.

Progetto Moncalieri S.r.l. Real estate Milan Euro 90,000 100.00% 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.

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.

123


Servizi Aziendali Pirelli S.C.p.A. Service Milan Euro 104,000 93.00% Pirelli S.p.A.0.50% Pirelli Cavi e Sistemi Energia S.p.A.0.50% Pirelli Cavi e Sistemi Telecom S.p.A.1.00% Pirelli Pneumatici S.p.A.1.00% Polo Viaggi S.r.l.1.00% Pirelli Pneumatici Holding S.p.A.1.00% Alfa Due S.r.l.1.00% Pirelli & C. A.p.A.1,00% Pirelli & C. Real Estate S.p.A.

Sistema Puntogomme S.p.A. Tyre Milan Euro 3,060,000 100.00% Pirelli Pneumatici Holding S.p.A.

Somogi S.r.l. Travel Agency Vimodrone (MI) Euro 90,000 88.00% Pirelli & C. Real Estate Facility Management S.p.A.

Stella Polare S.r.l. (in liquidazione) Real estate Napoli Euro 289,215 100.00% Pirelli & C. Real Estate S.p.A.

Tau S.r.l. Real estate Milan Euro 93,600 100.00% Pirelli & C. Real Estate S.p.A.

Trefin S.r.l. Financial Milan Euro 4,242,476 100.00% Pirelli S.p.A.

LUXEMBOURG

Gamirco S.A. Financial Luxembourg Swiss Franc. 2,100,000 100.00% Pirelli Finance (Luxembourg) S.A.

Pirelli & C. Luxembourg S.A. Financial Luxembourg Swiss Franc./000 270,000 100.00% Pirelli & C. A.p.A.

Pirelli Finance (Luxembourg) S.A. Financial Luxembourg Euro 270,228,168 100.00% Pirelli S.p.A.

Pirelli Financial Services Company S.A. Financial Luxembourg Euro 35,000 100.00% Pirelli Finance (Luxembourg) S.A.

Pirelli International Finance S.A. (formerly Pirelli Finance (N.A.) N.V.) Insurance Luxembourg Euro 35,000 100.00% Pirelli Finance (Luxembourg) S.A.

NORWAY

Pirelli Kabler og Systemer AS Energy Cables and System Ski Nor. Krone 100,000 100.00% Pirelli Cables and Systems OY

POLAND

Pirelli Polska Sp.z.o.o. Tyre Varsaw Pol. Zloty/mil. 6,258 100.00% Lunares S.A.

PORTUGAL

Desco Fabrica Portuguesa de Material Electrico e Electronico S.A. Energy Cables and System Arcozelo Vngaia Euro 1,545,000 70.93% Pirelli Energie Câbles et Systèmes

France S.A.29.07% Eurelectric S.A.

ROMANIA

S.C. Pirelli Romania Cabluri si Sisteme S.A. Energy Cable and System Slatina Rom. Leu/000 208,927,700 100.00% Pirelli Cable Holding N.V.

RUSSIA

OOO Pirelli Tyre Russia Commercial Moscow Rus. Rouble 950,000 95.00% Lunares S.A.5.00% Pirelli Tyre Holding N.V.

SPAIN

Fercable S.A. Energy Cables and System Barcelona Euro 3,606,073 100.00% Pirelli Cables y Sistemas S.A.

Omnia Motor S.A. Tyre Barcelona Euro 1,502,530 100.00% Pirelli Neumaticos S.A.

Pirelli Cables y Sistemas S.A. Energy Cables and System Barcelona Euro 24,000,000 100.00% Pirelli Cable Holding N.V.

Pirelli Esmar S.A. Energy Cables and System Torredembarra Euro 8,714,675 100.00% Pirelli Cables y Sistemas S.A.

Pirelli Neumaticos S.A. Tyre Barcelona Euro 45,075,908 100.00% Pirelli Tyre Holding N.V.

Pirelli Telecom Cables y Sistemas Espana S.L. Telecom Cables and System Barcelona Euro 12,000,000 100.00% Pirelli Cavi e Sistemi Telecom S.p.A.

124


SLOVAKIA

Kablo Bratislava Spol. S.R.O. Energy Cable and System Bratislava Slov. Korona 523,334,000 100.00% Pirelli Cable Holding N.V.

Pirelli Slovakia S.R.O. Tyre Bratislava Slov. Korona 200,000 100.00% Lunares

SWEDEN

Pirelli Kablar och System AB Energy Cables and System Hoganas Swed. Korona 100,000 100.00% Pirelli Cables and Systems OY

Pirelli Tyre Nordic AB Tyre Bromma Swed. Korona 950,000 100.00% Lunares S.A.

SWITZERLAND

Agom S.A. Tyre Conthey Swiss Franc. 50,000 75.00% Lunares S.A.

Agom S.A. Bioggio Tyre Bioggio Swiss Franc. 590,000 75.00% Lunares S.A.

Lunares S.A. Tyre holding company Basel Swiss Franc. 10,000,000 100.00% Pirelli Tyre Holding N.V.

Pirelli Cables and Systems S.A. Energy Cables and System Basel Swiss Franc. 500,000 100.00% Pirelli Cable Holding N.V.

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 S.p.A.

Pirelli Submarine Telecom Systems S.A. (in liquidation) Telecom Cables and System Basel Swiss Franc. 1,230,000 100.00% Pirelli Submarine Telecom Systems Holding B.V.

Pirelli Tyre (Europe) S.A. Tyre Basel Swiss Franc. 1,000,000 100.00% Lunares S.A.

THE NETHERLANDS

ICEW (Insulated Conductors and Enameled Wires) N.V. (già Pirelli Telecom Cables and Systems The Netherlands N.V.) Energy Cables and System Delft Euro 250,000 100.00% Pirelli Cable Holding N.V.

Pirelli Cables and Systems N.V. Energy Cables and System Delft Euro 5,000,000 100.00% Pirelli Cable Holding N.V.

Pirelli Cable Holding N.V. Energy Cables and System Delft Euro 272,515,065 100.00% Pirelli Cavi e Sistemi Energia S.p.A.

Holding company

Pirelli Cable Overseas N.V. Telecom Cables and System Delft Euro 10,000,000 100.00% Pirelli Cavi e Sistemi Telecom S.p.A.

Pirelli Submarine Telecom Systems Holding B.V. Telecom Cables and System Delft Euro 4,500,000 90.00% Pirelli Cavi e Sistemi Telecom S.p.A.

Pirelli Tyre Holding N.V. Type holding company Breukelen Euro 250,000,000 100.00% Pirelli S.p.A.

Pirelli Tyres Nederland B.V. Tyre Breukelen Euro 18,152 100.00% Lunares S.A.

Sipir Finance N.V. Financyal Rotterdam Euro 13,021,222 100.00% Pirelli S.p.A

TURKEY

Celikord A.S. Tyre Istanbul Turk Lire/mil. 17,100,000 50.466% Pirelli Tyre Holding N.V.0.267% Pirelli Pneumatici Holding S.p.A.0.267% Pirelli Deutschland A.G.

Turk-Pirelli Lastikleri A.S. Tyre Istanbul Turk Lire/mil. 88,000,000 62.449% Pirelli Tyre Holding N.V.0.076% Pirelli Deutschland A.G.0.076% Pirelli UK Tyres Ltd0.076% Pirelli Pneumatici S.p.A.0.076% Lunares S.A.0.076% Pirelli Pneumatici Holding S.p.A.0.076% Metzeler Reifen GmbH0.076% Pirelli Reifenwerke GmbH & Co. K.G.0.076% Pirelli Neumaticos S.A.

Türk Pirelli Kablo ve Sistemleri A.S. Energy Cables and System Mudania / Bursa Turk Lire/mil. 9,828,000 83.746% Pirelli Cable Holding N.V.

Zalsan Zirai Arac Lastikleri A.S. Tyre Istanbul Turk Lire/mil. 1,400,000 70.00% Turk-Pirelli Lastikleri A.S.

125


NORTH AMERICA

CANADA

Pirelli Power Cables and Systems Canada Ltd Energy Cables and System Saint John (New Brunswich) $ Can. 40,000,000 100.00% Pirelli Cable Holding N.V.

Pirelli Tire Inc. Tyre Ottawa (Ontario) $ Can. 6,000,000 100.00% Lunares S.A.

U.S.A.

Metzeler Motorcycle Tire North America Corp. Tyre Seattle (Washington) $ Usa 150,000 100.00% Metzeler Reifen GmbH

Pirelli Communications Cables and Systems USA LLC Telecom Cables and System Wilmington (Delaware) $ Usa 10 100.00% Pirelli North America Inc. "B1"

Pirelli Communications Cables Corporation Commercyal Wilmington (Delaware) $ Usa 1 100.00% Pirelli Communications Cables and Systems USA LLC

Pirelli Construction Services Inc. Energy Cables and System Dover (Delaware) $ Usa 1,000 100.00% Pirelli Power Cables and Systems USA LLC

Pirelli North America Inc. "A" Tyre Wilmington (Delaware) $ Usa 3,15 100.00% Pirelli Tyre Holding N.V.

Pirelli North America Inc. "B1" Telecom Cables and System Wilmington (Delaware) $ Usa 5,75 100.00% Pirelli Cavi e Sistemi Telecom S.p.A.

Pirelli North America Inc. "B2" Energy Cables and System Wilmington (Delaware) $ Usa 1,10 100.00% Pirelli Cavi e Sistemi Energia S.p.A.

Pirelli Power Cables and Systems USA LLC Energy Cables and System Wilmington (Delaware) $ Usa 10 100.00% Pirelli North America Inc. "B2"

Pirelli RNC Inc. Commercial Wilmington (Delaware) $ Usa 1 100.00% Pirelli Tyre Holding N.V.

Pirelli Tire LLC Tyre Wilmington (Delaware) $ Usa 1 100.00% Pirelli North America Inc. "A"

CENTRAL/SOUTH AMERICA

ARGENTINA

Fipla S.A. Energy Cables and Systems Buenos Aires Arg. Peso 1 66.97% Pirelli Consultora Conductores e Instalaciones S.A.I.C.

Pirelli Argentina de Mandatos S.A. Services Buenos Aires Arg. Peso 500,000 100.00% Pirelli Société Générale S.A.

Pirelli Consultora Conductores e Instalaciones S.A.I.C. Energy Cables and Systems Buenos Aires Arg. Peso 2,227 99.996% Pirelli Cable Holding N.V.0.004% Pirelli Energie Câbles et Systèmes

France S.A.

Pirelli Energia Cables y Sistemas de Argentina S.A. Energy Cables and Systems Buenos Aires Arg. Peso 44,509,458 74.91% Pirelli Consultora Conductores e Instalaciones S.A.I.C.

24.69% Pirelli Cable Holding N.V.

Pirelli Neumaticos S.A.I.C. Tyre Buenos Aires Arg. Peso 19,016,500 99.02% Pirelli Tyre Holding N.V.0.98% Pirelli Pneumatici Holding S.p.A.

Pirelli Telecomunicaciones Cables y Sistemas de Argentina S.A. Telecom Cables and System Buenos Aires Arg. Peso 12,000 100.00% Pirelli Telecomunicações Cabos e Sistemas do Brasil S.A.

Tel 3 S.A. Energy Cables and Systems Buenos Aires Arg. Peso 11,075,000 51.00% Pirelli Energia Cables y Sistemas de Argentina S.A.

BRAZIL

Cordas Metalicas do Brasil Ltda Tyre Sumarè Bra. Real 1,000 99.90% Pirelli Pneus S.A.0.10% Muriaè Ltda

Muriaé Ltda Financial Santo Andrè Bra. Real 80,000,000 99.999% Pirelli Pneus S.A.0.001% Pirelli S.A.

Novacorp Consultora e Serviços Corporativos Ltda Holding Santo Andrè Bra. Real 6,000 99.983% Pirelli S.A.

Pirelli & C. Real Estate Ltda Real Estate Santo Andrè Bra. Real 2,000,000 60.00% Pirelli & C. Real Estate S.p.A. 30.00% Pirelli S.A.

Pirelli Energia Cabos e Sistemas do Brasil S.A. Energy Cables and Systems Santo Andrè Bra. Real 106,824,993 87.202% 88.783% Pirelli Cavi e Sistemi Energia S.p.A.12.211% 10.342% Pirelli S.A.

126


Pirelli Pneus Nordeste Ltda Tyre Feira de Santana Bra. Real 29,991,402 100.00% Pirelli Pneus S.A.

Pirelli Pneus S.A. Tyre Santo Andrè Bra. Real 300,617,484 54.826% 19.031% Pirelli Pneumatici S.p.A.41.200% 79.719% Pirelli Tyre Holding N.V.3.667% 0.776% Pirelli S.A.

Pirelli Produtos Especiais Ltda Energy Cables and System Cerquilho Bra. Real 43,143,421 100.00% Pirelli Energia Cabos e Sistemas do Brasil S.A.

Pirelli S.A. Financial Santo Andrè Bra. Real 45,848,684 100.00% Pirelli S.p.A.

Pirelli Telecomunicações Cabos e Sistemas do Brasil S.A. Telecom Cables and System Sorocaba Bra. Real 65,236,771 87.202% 88.782% Pirelli Cavi e Sistemi Telecom S.p.A.12.211% 10.343% Pirelli S.A.

Pneuac Comercial e Importadora Ltda Tyre San Paolo Bra. Real 12,913,526 100.00% Pirelli Pneus S.A.

Solac-Laminadora de Cobre Ltda Energy Cables and System Jacarei Bra. Real 8,971,950 89.000% Pirelli Energia Cabos e Sistemas do Brasil S.A.

CHILE

Pirelli E y T S.A. Energy Cables and System Santiago Chile Peso/000 3,072,471 99.82% Pirelli Instalaciones Chile S.A.

Pirelli Instalaciones Chile S.A. Energy Cables and System Santiago Chile Peso/000 918,707 90.00% Pirelli Consultora Conductores e Instalaciones S.A.I.C.

10.00% Cite S.A.

Pirelli Neumaticos Chile Limitada Tyre Santiago $ Usa 1,918,451 99.98% Pirelli Pneus S.A.0.02% Pneuac Comercial e Importadora Ltda

COLOMBIA

Pirelli de Colombia S.A. Tyre Santa Fe De Bogota Col. Peso/000 10,977,466 94.95% Pirelli Pneus S.A.1.63% Pirelli de Venezuela C.A.1.14% Muriaè Ltda1.14% Pirelli Pneus Nordeste Ltda 1.14% Pneuac Comercial e Importadora Ltda

MEXICO

Pirelli Neumaticos de Mexico S.A. de C.V. Tyre Mexico City Mex. Peso 35,098,600 99.98% Pirelli Pneus S.A.0.02% Pneuac Comercial e Importadora Ltda

URUGUAY

Cite S.A. Energy Cables and System Montevideo Urug. Peso 4,900,000 100.00% Pirelli Energia Cabos e Sistemas do Brasil S.A.

VENEZUELA

Pirelli de Venezuela C.A. Tyre Valencia Ven. Bolivar/000 13,062,679 96.22% Pirelli Tyre Holding N.V.

AFRICA

COSTA D'AVORIO

SICABLE - Société Ivoirienne de Cables S.A. Energy Cables and System Abidjan Cfa Franc. 740,000,000 51.00% Pirelli Energie Câbles et Systèmes France S.A.

EGYPT

Alexandria Tire Company S.A.E. Tyre Alexandria Egy. Pound 393,000,000 80.563% Pirelli Pneumatici Holding S.p.A.

6.251% Pirelli Pneumatici S.p.A.

International Tire Company Ltd Tyre Alexandria Egy. Pound 50,000 96.00% Alexandria Tire Company S.A.E.

SUD AFRICA

Pirelli Cables & Syistems (Proprietary) Limited Commercial Woodmead, S.A. S.A. Rand 100 100.00% Pirelli Cavi e Sistemi Energia S.p.A.

Pirelli Tyre (Pty) Ltd (già Italian Tyre Pty Ltd) Tyre Sandton S.A. Rand 1 100.00% Lunares S.A.

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OCEANIA

AUSTRALIA

Pirelli Power Cables & Systems Australia PTY Limited Energy Cables and System Liverpool - N.S.W. Austr. $ 15,000,000 100.00% Pirelli Cavi e Sistemi Energia S.p.A.

Pirelli Telecom Cables & Systems Australia PTY Limited Telecom Cables and System Liverpool - N.S.W. Austr. $ 38,500,000 100.00% Pirelli Cavi e Sistemi Telecom S.p.A.

Pirelli Tyres Australia Pty Ltd Tyre Pymble - N.S.W. Austr. $ 150,000 100.00% Lunares S.A.

NEW ZELAND

Pirelli Power Cables & Systems New Zealand Limited Energy Cables and System Auckland Nz. $ 10,000 100.00% Pirelli Power Cables & SystemsAustralia PTY Limited

Pirelli Telecom Cables & Systems New Zealand Limited Telecom Cables and System Auckland Nz. $ 10,000 100.00% Pirelli Telecom Cables & Systems Australia PTY Limited

Pirelli Tyres (NZ) Ltd Tyre Wellington Nz. $ 100 100.00% Pirelli Tyres Australia Pty Ltd

ASIA

CHINA

BICCGeneral Baosheng Cable Co. Ltd Energy Cables and System Jiangsu $ Usa 19,500,000 67.00% Pirelli Cables Asia-Pacific Pte Ltd

Invex Insulated Conductors (Baoying) Co. Ltd. Energy Cables and System Yangzhou Euro 6,000,000 100.00% ICEW (Insulated Conductors and Enameled Wires) N.V.

Pirelli Cables (Shanghai) Trading Co. Ltd Energy Cables and System Shanghai $ Usa 200,000 100,00% Pirelli Cables Asia-Pacific Pte Ltd

Pirelli Telecom Cables Co. Ltd Wuxi Telecom Cables and System Xuelang Town $ Usa 29,941,250 71.843% Pirelli Cable Overseas N.V.

Tianjin Top Power Cables Co. Ltd Energy Cables and System Tianjin Municipality $ Usa 13,100,000 67.00% Pirelli Cable Holding N.V.

JAPAN

P & A K.K. Tyre Tokyo Jap. Yen 2,700,000,000 69.148% Pirelli Tyre Holding N.V.

Pirelli K.K. Tyre Tokyo Jap. Yen 40,000,000 100.00% Lunares S.A.

INDIA

Pirelli Cables (India) Private Limited Energy Cables and System Nuova Delhi India Rupee 10,000,000 99.998% Pirelli Cable Holding N.V.0.002% Pirelli Cavi e Sistemi Energia S.p.A.

INDONESIA

P.T. Pirelli Cables Indonesia Energy Cables and System Jakarta $ Usa 67,300,000 99.48% Pirelli Cable Holding N.V.0.52% Pirelli Cavi e Sistemi Energia S.p.A.

MALAYSIA

BICC (Malaysia) Sdn Bhd Energy Cables and System Kuala Lumpur Mal. Ringgit 100,000 100.00% Pirelli Cables Asia-Pacific Pte Ltd

Submarine Cable Installation Sdn Bhd Energy Cables and System Kuala Lumpur Mal. Ringgit 10,000 100.00% Pirelli Cavi e Sistemi Energia S.p.A.

MAURITIUS

BICCGeneral Asia Pacific Holdings Energy Cables and System Port Louis $ Usa 2 100.00% Pirelli Cables Asia-Pacific Pte Ltd

SINGAPORE

Comergy Ltd Energy Cables and System Singapore British Pound 1,000,000 100.00% Pirelli Cable Holding N.V.

Pirelli Asia Pte Ltd Tyre Singapore Sing. $ 2 100.00% Lunares S.A.

Pirelli Cable Systems Pte Ltd Energy Cables and System Singapore Sing. $ 25,000 50.00% Pirelli General plc

50.00% Pirelli Cable Holding N.V.

Pirelli Cables Asia-Pacific Pte Ltd Energy Cables and System Singapore Sing. $ 213,324,290 100.00% Pirelli Cable Holding N.V.

Trans-Power Cables Pte Ltd Energy Cables and System Singapore Sing. $ 1,500,000 100.00% Pirelli Cable Holding N.V.

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COMPANIES CONSOLIDATED USING THE PROPORTIONAL METHOD


EUROPE

ITALY

G6 Advisor Immobiliare Milan Euro 50,000 42.30% Pirelli & C. Real Estate Comercial Agency S.p.A.

Progetto Bicocca Università S.r.l. Immobiliare Milan Euro 873,600 34.00% Pirelli & C. Real Estate S.p.A.

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INVESTMENT ACCOUNTED FOR USING THE EQUITY METHOD


Jointly Controlled Company

EUROPE

ITALY

Olimpia S.p.A. Industrial holding comapny Milan Euro 1,562,596,150 60.00% Pirelli S.p.A.

Subsidiary company

EUROPE

GERMANY

Drahtcord Saar Geschaeftsfuehrungs GmbH Tyre Merzig Marchi T. 60,000 50.00% Pirelli Deutschland A.G.

Drahtcord Saar GmbH & Co. K.G. Tyre Merzig Marchi T. 30,000,000 50.00% Pirelli Deutschland A.G.

Kabeltrommel Gesellshaft mbH & Co K.G. Energy Cables and Systems Cologne Marchi T. 20,000,000 27.48% Pirelli Kabel und Systeme GmbH

ITALY

Altair Zander Italia S.r.l. Real Estate Milan Euro 10,330 50.00% Pirelli & C. Real Estate Facility Management S.p.A.

Auriga Immobiliare S.r.l. Real Estate Milan Euro 25,602,000 36.02% Pirelli & C. Real Estate S.p.A.

Bernini Immobiliare S.r.l. Real Estate Milan Euro 500,000 14.00% Pirelli & C. Real Estate S.p.A.

Beta S.r.l. Real Estate Milan Euro 26,000 49.00% Partecipazioni Real Estate S.p.A.

CFT Finanziaria S.p.A. Real Estate Florence Euro 23,660,000 46.98% Partecipazioni Real Estate S.p.A.

Delta S.p.A. Real Estate Milan Euro 153,000 47.50% 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.

Domogest S.r.l. Real Estate Florence Euro 1,050,000 50.00% Centrale Immobiliare S.p.A.

Elle Nove Società Consortile a.r.l. Real Estate Milan Euro 100,000 34.90% Edilnord Gestioni S.p.A.

Eurostazioni S.p.A. Real Estate Rome Euro 60,000,000 31.67% Pirelli & C. A.p.A.

Idea Granda S. Consortile r.l. Environment 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 Milan Euro 4,312,591 38.45% Pirelli & C. Real Estate S.p.A.

Orione Immobiliare Prima S.p.A. Real Estate Milan Euro 104,000 29.00% Pirelli & C. Real Estate S.p.A.

Ortensia S.r.l. Real Estate Valdagno Euro 100,000 20.00% Pirelli & C. Real Estate 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 Grande Bicocca Multisala S.r.l. Real Estate Milan Euro 1,530,000 33.00% 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.

Regus Business Centres Italia S.p.A. Real Estate Milan Euro 2,500,000 35.00% Pirelli & C. Real Estate S.p.A.

SMP Melfi S.r.l. Tyre Melito (NA) Euro 3,511,906 50.00% Pirelli Pneumatici Holding S.p.A.

Trixia S.r.l. Real Estate Milan Euro 1,209,700 36.00% Pirelli & C. Real Estate S.p.A.

130


Tintoretto S.r.l. Real Estate Milan Euro 10,000 100.00% Partecipazioni Real Estate S.p.A.

Verdi S.r.l. Real Estate Milan Euro 20,000 100.00% Pirelli & C. Real Estate S.p.A.

LUXEMBOURG

Inimm Due S.a.r.l. Real Estate Luxembourg Euro 240,950 25.00% Pirelli & C. Real Estate S.p.A.

IN Holdings I S.a.r.l. Real Estate Luxembourg Euro 3,768,500 25.00% Pirelli & C. Real Estate S.p.A.

M.S.M.C. Solferino S.a.r.l. Real Estate Luxembourg Euro 136,700 31.25% Pirelli & C. Real Estate S.p.A.

SPAIN

Optiwire S.L. Energy Cables and System Barcelona Euro 6,010 50.00% Pirelli Cables y Sistemas S.A.

THE NETHERLANDS

M.S.M.C. Italy Holding B.V. Real Estate Amsterdam Euro 18,151 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.

Popoy Holding B.V. Financial Rotterdam 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.

UNITED KINGDOM

Rodco Ltd Energy Cables and Systems Gravesend Lira Sterl. 5,000,000 40.00% Pirelli General plc

CENTRAL/SOUTH AMERICA

ARGENTINA

Lineas de Transmision de Buenos Aires S.A. (in liquidazione) Energy Cables and System Buenos Aires Arg. Peso/000 12 20.00% Pirelli Argentina de Mandatos S.A.

BRAZIL

K.M.P. Cabos Especiais e Sistemas Ltda Energy Cables and System San Paolo Real 6,600,916 40.00% Pirelli Energia Cabos e Sistemas do Brasil S.A.

ASIA

SAUDI ARABIA

Sicew-Saudi Italian Co. for Electrical Works Ltd Energy Cables and System Jeddah Saudi Rials/000 1,000,000 34.00% Pirelli Cable Holding N.V.

131

OTHER INVESTMENTS IN SUBSIDIARIES AND ASSOCIATED COMPANIES


EUROPE

AUSTRIA

Pirelli Kabelwerke und Systeme GmbH (*) Energy Cables and Systems Vienna Euro 36,336 100.00% Pirelli Cavi e Sistemi Energia S.p.A.

GERMANY

Industriekraftwerk Breuberg GmbH Congeneration Breuberg/Odenwald Euro 1,533,876 26.00% Pirelli Deutschland AG

HUNGARY

Ipoly Kabeldob KFT. Energy Cables and System Szecseny Ung. Fiorino/000 36,350 25.172% MKM Magyar Kabel Muvek Rt.

ITALY

LSF Italian Finance Company S.p.A. (*) Financial Milan Euro 100,000 100.00% Partecipazioni Real Estate S.p.A.

Parcheggi Bicocca S.r.l. (*) Real Estate Milan Euro 25,500 75.00% Pirelli & C. Real Estate S.p.A.

SPAIN

Euro Driver Car S.L. Tyre Barcelona Euro 492,000 25.00% Pirelli Neumaticos S.A.26.22% Proneus S.L.

Proneus S.L. (*) Tyre Barcelona Euro 3,005,06 51.00% Pirelli Neumaticos S.A.

UNITED KINGDOM

Pirelli & C. Real Estate Ltd. (*) Real Estate London Euro 100,000 100.00% Pirelli & C. Real Estate S.p.A.

AFRICA

SOUTH AFRICA

AFCAB Holdings (Proprietary) Ltd (*) Energy Cables and System Sandton Rand Sudafr. 4,000 50.00% Pirelli Cable Holding N.V.

African Cables Ltd (*) Energy Cables and System Vereeniging Rand Sudafr. 9,886,098 100.00% AFCAB Holdings (Proprietary) Limited

ATC (Proprietary) Ltd Energy Cables and System Brits Rand Sudafr. 632,912 21.00% African Cables Limited

TUNISIA

Auto Cables Tunisie S.A. (*) Energy Cables and System Tunis Tun Dinar 4,450,000 51.00% Pirelli Energie Câbles et Systèmes France S.A.

Société Tunisienne des Industries de Pnéumatiques S.A. Tyre Tunis Tun Dinar 38,252,940 15.83% Pirelli Pneumatici S.p.A.

ZIMBABWE

BICC CAFCA Limited (*) Energy Cables and System Harare Zimbabwe $ 15,706,000 73.463% African Cables Limited

BICC (CENTRAL AFRICA) (Private) Limited (*) Energy Cables and System Harare Zimbabwe $ 200,000 100.00% BICC CAFCA Limited

Zimbabwe Cables (Pte) Limited (*) Energy Cables and System Harare Zimbabwe $ 2 100.00% BICC CAFCA Limited

ASIA

Malaysia

Power Cables Malaysia Sdn Bhd Energy Cables and System Selangor Darul Ehsan Ringgit Mal. 8,000,000 40.00% Pirelli Cables Asia - Pacific Pte Ltd

(*) These investments have not been consolidated in that they are not material or the right of the parent company are subject to restriction or the holding were recently acquired.

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OTHER INVESTMENTS CONSIDERED SIGNIFICANT AS PER CONSOB RESOLUTION N. 11971 OF MAY 14, 1999


AUSTRALIAOptix Australia Ltd Telecom Cables and System Tottenham (Victoria) $ Austr. 4,000,000 15.00% Pirelli Telecom Cables & Systems

Australia PTY Ltd

BELGIUM

Euroqube S.A. Services Bruxelles Euro 94,961,250 17.79% Pirelli & C. Luxembourg S.A.

FRANCE

Aliapur S.A. Tyre Vitry sur Seine Euro 262,500 14.286% Pirelli Pneumatici S.p.A.

ITALY

Eurofly Service S.p.A. Service Caselle Torinese Euro 4,275,000 16.33% Pirelli S.p.A.

Fin. Priv. S.r.l. Financial Milan Euro 20,000 7.14% Pirelli & C. A.p.A.7.14% Pirelli S.p.A.

F.C. Internazionale Milano S.p.A. Sport Milan Euro 53,465,000 19.485% Pirelli S.p.A.

Servizio Titoli S.r.l. Services Turin Euro 105,000 12.381% Pirelli S.p.A.

POLAND

Centrum Utylizacji Opon Organizacja Odzysku S.A. Tyre Varsaw Pol. Zloty 1,008,000 14.00% Pirelli Polska Sp. Z.O.O

SWITZERLAND

Voltimum S.A. Energy Cables and System Meyrin Swiss Franc. 2,850,120 14.286% Pirelli Cavi e Sistemi Energia S.p.A.

TURKEY

Türk Sondel Enerji A.S. Congeneration Istanbul Turk. lira/mil. 900,000 13.98% Türk-Pirelli Lastikleri A.S.4.99% Celikord A.S.

THE NETHERLANDS

MB Venture Capital Fund I Participating Company G N.V. Financial Amsterdam Euro 50,000 14.00% Pirelli Finance (Luxembourg) S.A.

U.S.A.

Alloptic Inc. Telecom Cables and Systems Pleasanton (CA) $ Usa 120,675,987 15.441% Pirelli Cavi e Sistemi Telecom S.p.A.

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EXTRAORDINARY SESSION

137

139

INTRODUCTION

Dear Shareholders,

You have been called to the shareholders’ meeting today to vote on resolutions which will confer to Pirelli &C. A.p.A. (hereinafter “Pirelli & C.”, also after its transformation to a corporation), and to the group whichit heads, a new, modern, rational and efficient structure, and, therefore, one that reflects the new tendenciesin matters of corporate governance and market expectations.

The hope has been expressed on several occasions and by various parties to simplify the corporate structureof the group and the Directors – as soon as market conditions allowed it – which decided to submit acomposite and detailed project for your evaluation in this regard. This project takes a series of importantsteps, all of which are related, in the desired direction.

A project is specifically being presented for your approval which is subdivided as follows: (i) thetransformation of the group holding company from a limited partnership company, A.p.A., to a corporation,S.p.A., (the features of which will allow both greater participation in the decision-making process, especiallywith regard to the appointment of directors, and a potentially better contendability of control), as well asthe adoption of a corporate business purpose which better defines the role of coordination assumed by Pirelli& C., (ii) a share capital increase offered in option to strengthen the balance sheet and financial structure ofyour company, and (iii) the merger by incorporation in Pirelli & C. of Pirelli & C. Luxembourg S.p.A. (aftertransfer of the registered office from Luxembourg to Italy, hereinafter “Pirelli & C. Luxembourg”) and ofPirelli S.p.A., after which your company will find itself in the position of directly controlling a series ofoperating companies and holding investments in others that are related to the Olivetti S.p.A. group.

The reports which follow describe the entire project as well as the individual resolutions and the reasonsunderlying each of them.

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Transformation of the company from a limited partnership company (A.p.A.) to a corporation(S.p.A.) and modification of the corporate business purpose; consequent amendments to the presentarticles 1 (name of the company), 2 (corporate business purpose), 7 (convocation of shareholders’meetings), 8 (constitution of shareholders’ meetings), 9 (chairmanship of shareholders’ meetings),10 (management of the company), 11 (convocation of the Board of Directors and majorities), 12(representation of the company), 13 (compensation to the directors), 14 (resignation of thedirectors) and 17 (distribution of profits) of the by-laws of Pirelli & C..A new article will also be inserted between articles 10 and 11 relating to the powers of the Board ofDirectors and will be numbered article 11, with the consequent re-numbering of the subsequentarticles.

* * *

Report drawn up by the Directors of Pirelli & C., pursuant to art. 72, paragraph 1, ConsobRegulation No. 11971 dated May 14, 1999, as later amended.

Dear Shareholders,

The Directors, and, therefore, the managing partners, of Pirelli & C., are presenting a motion for thetransformation of the company from a limited partnership company (A.p.A.) to a corporation (S.p.A.) withthe contextual adoption of a new corporate business purpose.

1. Reason for the proposal

1.A Transformation of the company

The first step of the project described in the introduction consists in the transformation of the company from alimited partnership company (A.p.A.) to a corporation (S.p.A.). The motion is directed towards allowing Pirelli& C. to assume a legal entity that is more easily recognizable by the market – and, in particular, by internationalinvestors – which provides, by eliminating the subdivision of general partners and limited partners, for a moresignificant participation by all the shareholders in the decision-making process. As known, in fact, the change toa new form of company would mean that the specific rule established by our civil code as regards the position ofthe general partners in the management of the company would no longer apply. This would include thecircumstance by which the general partners, by right, are also directors of the company for an unlimited periodof time, the rule which attributes a substantial right of veto to the directors in office as regards the appointmentof new directors, as well as the necessity to obtain the unanimous consensus of the general partners in the eventof amendments to the deed of incorporation. These prerogatives are not contemplated by the regulationsgoverning the functioning of a corporation, wherein the above-mentioned decisions are taken by the majority ofthe shareholders in the shareholders’ meeting and the appointment of the Directors cannot be made for a periodof more than three years (although the directors can be re-elected).

It is also important to mention that the eventual transformation of Pirelli & C. to a corporation will have noeffect on the joint and several liability of your Directors for company obligations which arose prior to thedate this resolution – if approved – will be inscribed in the Companies Registry, save for the consensus of thecreditors according to the terms and procedures set forth in art. 2499 of the Italian Civil Code.As for the effects of the proposed amendments on the individual articles of the by-laws, the transformationof the type of legal corporate entity will particularly affect art. 1 (name of the company). However, sincethere will no longer be general partners (not contemplated for corporations), this will require amendmentsto articles 8 (constitution of shareholders’ meetings), 9 (chairmanship of shareholders’ meetings), 10(management of the company), 11 (convocation of the Board of Directors and majorities), 12(representation of the company), 13 (compensation to the directors), 14 (resignation of the directors) and

141

17 (distribution of profits). Additionally, art 7 (convocation of shareholders’ meetings) will also be amendedand a new art. 11 (relating to the powers of the Board of Directors) will be introduced, with the consequentre-numbering of the subsequent articles.

1.B Change in the corporate business purpose

The current definition of the corporate business purpose, as specified in art. 2 of the by-laws, presents, onone hand, elements that do not appear to correctly reflect the nature and the role currently assumed byPirelli & C., which is that of an investment holding company with non-operating functions but withresponsibility for coordination of the holdings, and, on the other hand, certain definitions which have beensuperceded by the evolution of the law.

With reference to the first element, the item stated under letter e) should be eliminated (the trading andleasing of real estate properties as well as the management of own properties, and the building worksconsequent thereto), insofar as, within the framework of the group, such business activities are now carriedout by the subsidiary Pirelli & C. Real Estate S.p.A.. Although your company can continue to conduct suchbusiness activities, though not as its main business and on condition that the such business is functional toachieving the corporate business purpose, it would appear appropriate to eliminate an element of potentialuncertainty concerning the specific mission of each of the companies in the Pirelli Group. Similarconsiderations also apply to the item stated under letter d) (leasing of real and movable property and thegranting of loans to third parties).

As far as the second element is concerned, Law 1/1991 was entirely rescinded by Legislative Decree No. 58dated February 24, 1998.

The paragraphs which follow indicate the effect of the changes described in paragraph 1.A and 1.B on theindividual articles of the by-laws.

Art. 1 Name of the companyThe proposed amendment regards the cancellation of the names of the general partners and the re-namingof the company in Pirelli & C. Società per Azioni.

Art. 2 Corporate business purposeThe proposed amendments are directed to giving a better definition of the role of coordination that will beconducted by your company as the group holding company and to eliminate any references to laws whichhave been superceded.

Art. 7 Convocation of shareholders’ meetingsThe proposed amendment consists in a reformulation, in terms that better respond to the nature of thecompany’s business as a holding company, of the right pursuant to art. 2364, paragraph 2, of the ItalianCivil Code, to convene shareholders’ meetings called to approve the financial statements within six monthsof the end of the fiscal year.

Art. 8 Constitution of shareholders’ meetingsThe proposed amendment arises as a result of the fact that there will no longer be the figure of general partnersand, therefore, their approval is needed to amend the deed of incorporation. Furthermore, for the appointmentof the Directors, the relative majority of votes cast in favor by the shares represented at the shareholders’meeting will be sufficient.

Art. 9 Chairmanship of shareholders’ meetingsThe proposed amendment arises as a result of the fact that there will no longer be the figure of generalpartners and the replacement of the Board of Managing Partners by the Board of Directors.

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Art. 10 Management of the companyThe proposed amendment arises as a result of the fact that there will no longer be the figure of generalpartners, as well as the need to establish the number of members of the Board of Directors (indicating amaximum and minimum number), their period of office and the possibility of being re-elected. In order tofollow a logical framework, the paragraphs relating to relations with the Board of Statutory Auditors andthe delegation of powers were moved to art. 11.

A new article 11 was added relating to the powers of the Board of Directors.It was decided to add a separate article relating to the powers of the Board of Directors, relations with theBoard of Statutory Auditors when there are significant transactions or a potential conflict of interest, thepossibility of forming an Executive Committee and the appointing of Directors and Deputy Chairmen.

Art. 11 renumbered art. 12 – Convocation of the Board of Directors and majorities The proposed amendments are of two distinct types. The first, formal, regards the manner of convening the Board of Directors and the Executive Committee andfollows from the replacement of the figure of general partner with that of the director.The second, substantial and consistent with the desire to give the Company a more open and dynamiccorporate governance structure, regards the abolition of the need for votes to be cast in favor by all membersof the Board for the appointment of the Chairman of the same Board, of the Deputy Chairmen, of theManaging Directors and, generally, the delegation of specific powers to one or more of its members. In orderto avoid potential deadlock situations, in the case of a tie vote, a proposal is presented wherein the castingvote shall be that of the Chairman.

Art. 12 renumbered art. 13 – Representation of the companyThe proposed amendment arises as a result of the fact that there will no longer be the figure of generalpartners and, in particular, regards the attribution of the right to represent the Company before legalauthorities by the Chairman of the Board of Directors and, if appointed, by the Deputy Chairmen and theManaging Directors, within the limits of the powers assigned to them by the Board. There is also thepossibility of conferring the representation of the Company before third parties and in legal proceedings toDirectors and, in general, to employees and eventually to third parties.

Art. 13 renumbered art. 14 – Compensation of the directorsThe proposed amendment arises as a result of the fact that there will no longer be the figure of general partners.

Art. 14 renumbered art. 15 – Resignation of the directorsThe proposed amendment, which consists in the replacement of the article as it now stands with a so-calledsimul stabunt simul cadent, arises as a result of the fact that there will no longer be the figure of generalpartners and the special prerogatives attributed to them by the civil code.

Art. 17 renumbered art. 18 – Distribution of profitsThe proposed amendment consists in the simple replacement of the words “Board of General Partners” withthose of “Board of Directors”.

Since the proposed amendments alter the text of the deed of incorporation, their adoption must be approvednot only by the prescribed majority at the extraordinary shareholders’ meeting but also by all the generalpartners, who have already manifested their consensus.

2. Presentation of the comparison of the articles of the by-laws where amendments are requested

A comparison is presented of the current wording of the text of the articles of the by-laws with the proposednew wording which is submitted for your approval.

Current wording

Article 1A company is formed in “accomandita perazioni”, in which the managing partners areCarlo Buora, Carlo Alessandro Puri Negri, LuigiOrlando, Alberto Pirelli and Marco TronchettiProvera, in the name of “PIRELLI & C. –ACCOMANDITA PER AZIONI”.

Article 2The purpose of the Company is the following:a) the acquisition of participating interests in other

companies or corporations, both in Italy andabroad;

b) the financing, the technical and financial co-ordination of the companies or corporations inwhich it has interests;

c) the sale, ownership, management ofgovernment and private securities;

d) leasing of real and movable property and thegranting of loans to third parties;

e) the trading and leasing of real estate properties aswell as the management of own properties, andthe building works consequent thereto.

All financial and deposit-taking activitiesconnected with the public and those set forth inLaw 1/1991 are however excluded.In order to achieve the corporate business purpose,the company can carry out all other relatedtransactions, including the issue of real guaranteesand personal guarantees, including endorsementsto cover the obligations of third parties.

Article 7The convocation of the shareholders’ meeting,which may take place anywhere in Italy includingin a place other than the registered office, the rightto attend meetings and representation at same areall governed by law.Whenever part icular needs require i t , theordinary shareholders’ meeting may be convenedwithin six months of the end of the financialperiod.

Article 8The due convocation of the meeting and thevalidity of its resolutions are governed by law.

Proposed wording

Article 1A Corporation is hereby incorporated under thename Pirelli & C. Società per Azioni.




c) the sale, ownership, management orplacement of both government and privatesecurities;

The Company may carry out all transactions ofany type whatsoever - excluding the collectionof savings deposits from the public - connectedto its corporate business purpose.

Article 7The convocation of the shareholders’ meeting, whichmay take place anywhere in Italy including in aplace other than the registered office, the right toattend meetings and representation at same are allgoverned by law.In view of the nature of the Company’s businessand the special requirements arising therefrom,the ordinary shareholders’ meeting may beconvened within six months of the end of thefinancial period.

Articolo 8The due convocation of the meeting and thevalidity of its resolutions are governed by law.

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For modification of the deed of incorporation, theapproval of all the general partners is alwaysnecessary.

Articolo 9The meeting shall be presided over by theChairman of the Board of Managing Partners, by aDeputy Chairman or by a Managing Director, inthat order; whenever there are two or more DeputyChairmen or Managing Directors, the chair shallbe taken respectively by the senior in age. In theevent of the absence of all the managing partners,the chair shall be taken by another person chosenby the shareholders’ meeting among theshareholders present.The Chairman is assisted by a Secretary appointedby the meeting; there is no need to appoint aSecretary when the minutes of the meeting aredrawn up by a notary public.It is the duty of the Chairman of the meeting toverify the right to attend the meeting, including bymeans of proxy; to ascertain whether or not themeeting has been duly constituted and hasachieved the quorum required in order to passresolutions; to conduct and moderate thediscussion; to establish the order and manner ofvoting as well as announce the results thereof.The resolutions of the meeting shall be recorded inthe minutes, which shall be signed by theChairman and the Secretary of the meeting or thenotary public.The minutes of the extraordinary shareholders’meeting must be drawn up by a notary publicappointed by the Chairman.Any copies and extracts thereof, that have not beendrawn up by a notary public, shall be certified astrue copies by the Chairman of the Board ofManaging Partners.

Article 10The Company is managed by a Board of ManagingPartners invested with the fullest powers exceptthose expressly reserved for the shareholders’meeting by law.The Board of Managing Partners, also throughdelegated bodies, informs the Board of Statutory

The voting quorum for the appointment ofDirectors is established as a relative majorityof the votes.

Articolo 9The meeting shall be presided over by theChairman of the Board of Directors, by a DeputyChairman or by a Managing Director, in thatorder; whenever there are two or more DeputyChairmen or Managing Directors, the chair shallbe taken respectively by the senior in age. In theevent of the absence of the above-indicatedindividuals, the chair shall be taken by anotherperson chosen by the shareholders’ meeting amongthe shareholders present.The Chairman of the shareholders’ meeting isassisted by a Secretary appointed by the meeting;there is no need to appoint a Secretary when theminutes of the meeting are drawn up by a notarypublic.It is the duty of the Chairman of the meeting toverify the right to attend the meeting, including bymeans of proxy; to ascertain whether or not themeeting has been duly constituted and hasachieved the quorum required in order to passresolutions; to conduct and moderate thediscussion; to establish the order and manner ofvoting as well as announce the results thereof.The resolutions of the meeting shall be recorded inthe minutes, which shall be signed by theChairman of the shareholders’ meeting and theSecretary of the meeting or the notary public.The minutes of the extraordinary shareholders’meeting must be drawn up by a notary publicappointed by the Chairman of the shareholders’meeting.Any copies and extracts thereof, that have not beendrawn up by a notary public, shall be certified astrue copies by the Chairman of the Board ofDirectors.

Article 10The Company is managed by a Board ofDirectors composed of between seven andtwenty-three members who shall remain inoffice for three years (unless the meeting fixesa shorter term of office at the time of theappointment) and may be re-elected.

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Auditors on a timely basis about the activitiesconducted and the most important economic,financial and equity transactions carried out by theCompany and its subsidiaries; it specifically makesreference to transactions with potential conflicts ofinterest. The information is provided, at leastquarterly, at the board meetings or ExecutiveCommittee meetings or by written communicationto the Board of Statutory Auditors.The Board of General Partners appoints aChairman and, eventually, one or more DeputyChairmen and is authorized to delegate thosepowers it wishes to confer on one or more of itsmembers, eventually through the position ofManaging Director.It may also appoint General Managers, DeputyGeneral Managers and persons with power ofattorney for single acts or categories of acts,establishing powers and competence. Theseappointments, with the exception of those forGeneral Managers and Deputy General Managers,can also be referred by the Board to the ManagingDirectors and the General Managers.The Board of Managing Partners shall appoint aSecretary, who is not necessarily a member of theBoard.Unless otherwise decided by the shareholders’meeting, the Directors are not bound over by theprohibition mentioned under art. 2390 of theItalian Civil Code.

A Chairman, and if necessary, one or more DeputyChairmen shall be appointed from amongst themembers of the Board of Directors.In the event of the Chairman being absent, thechair shall be taken by a Deputy Chairman ora Managing Director, in that order; if thereshould happen to be two or more DeputyChairmen or Managing Directors, the chairshall be taken respectively by the senior inage.The Board shall appoint a Secretary, who isnot necessarily a member of the Board.Unless otherwise decided by the shareholders’meeting, the Directors are not bound over by theprohibition mentioned under art. 2390 of theItalian Civil Code.

New articleArticle 11The Board of Directors is empowered with themanagement of the Company and, for thispurpose, is invested with the fullest powers foradministration, except those, which accordingto the by-laws or by law, are reserved for theshareholders’ meetings.The Board of Directors, also through delegatedbodies, informs the Board of StatutoryAuditors on a timely basis about the activitiesconducted and the most important economic,financial and equity transactions carried outby the Company and its subsidiaries; itspecifically makes reference to transactions

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Article 11The Board of Managing Partners shall meet atthe invitation of the Chairman or, if appointed, aDeputy Chairman or a Managing Director, at theregistered office of the Company or in any otherplace just as long as it is in Italy, or whenever ameeting has been requested by two ManagingPartners or by at least two standing statutoryauditors.Board meetings shall be convened by means of aletter, telegram, telex or fax sent to the address ofeach Managing Partner and each StandingStatutory Auditor, at least five days before (or inurgent cases at least six hours before) the day setfor the meeting.

with potential conflicts of interest. Theinformation is provided, at least quarterly, atthe board meetings or Executive Committeemeetings or by written communication to theBoard of Statutory Auditors.The Board is authorized to delegate thosepowers it wishes to confer on one or more ofits members, eventually through the positionsof Managing Directors, attributing single orcollective signature powers as it deems toestablish for the administration of theCompany.It may also delegate its competence to anExecutive Committee composed of some of itsmembers, whose compensation shall beestablished by the shareholders’ meeting.It may also nominate one or more committeeswith consulting functions, also for purposes ofupdating the corporate governance structure tothe recommendations issued from time to timeby the competent authorities.Lastly, the Board may appoint GeneralManagers, Deputy General Managers, Managersand Deputy Managers and persons with powerof attorney for single acts or categories of acts,establishing powers and competence. Theappointment of Managers, Deputy Managers andpersons with power of attorney for individualacts or categories of acts, can also be referred bythe Board to the Managing Directors and theGeneral Managers.

Article 12 (renumbered)The Board of Directors shall meet at theinvitation of the Chairman or whomsoever isacting on his behalf, at the registered office ofthe Company or in any other place stated inthe letter of convocation, every time heconsiders it in the best interests of theCompany, or whenever a meeting has beenrequested by one of the Managing Directors orby at least two standing statutory auditors.However, the Board of Directors may validlypass resolutions, even failing any formalconvocation, if all the board members and allthe standing statutory auditors in office arepresent.

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Meetings of the Board of Managing Partners maybe held by teleconference or videoconference.In this case the following must be guaranteed:a) identification of all the participants at each

point in the connection;b) the possibility for each participant to intervene,

to orally put forward same’s own opinion, toview, receive and transmit all documentation, aswell as the contextuality of considerations andresolutions.

The Meeting of the Board of Managing Partnersshall be considered to be held in the place in whichthe Chairman and the Secretary must besimultaneously.The meetings of the Board are chaired by theChairman and, in his absence, the chair shall betaken by the senior in age of the Deputy Chairmen.The presence of at least half the members plus oneis necessary for the resolutions of the Board to bedeemed valid, and the favorable vote of themajority of those present is required. However, forthe appointment of the Chairman and one or moreDeputy Chairmen as well as the attribution of theposition of Managing Director and for thedelegation of specific powers by the Board ofManaging Partners to one or more of its members,a favorable vote must be cast by all members inoffice.The resolutions of the Board, even when passed bymeetings held by teleconference or byvideoconference, are recorded in a special booksigned by the Chairman and the Secretary.

Article 12Legal representation of the Company vis-à-visthird parties and in court proceedings shall be theduty, with separate and several signatory powers,of the Chairman of the Board of ManagingPartners and, if appointed, of the DeputyChairmen and Managing Directors, within thelimits of the powers granted.Each one of the aforesaid shall in any case havefull powers to take legal action and file appealsbefore any judicial authority and any court of anydegree, including in revocation or cassation

Board meetings shall be convened by means of aletter, telegram, telex or fax sent to the address ofeach Director and each Standing StatutoryAuditor, at least five days before (or in urgentcases at least six hours before) the day set for themeeting.Meetings of the Board and of the ExecutiveCommittee may be held by teleconference orvideoconference. In this case the following must beguaranteed:a) identification of all the participants at each



Meetings of the Board of Directors and of theExecutive Committee are considered to be held inthe place in which the Chairman and the Secretarymust be simultaneously.The presence of at least half the members plus oneis necessary for the resolutions of the Board to bedeemed valid, and the favorable vote of themajority of those present is required. In the eventof a tie in votes, the casting vote shall be thatof the Chairman.The resolutions of the Board, even when passed bymeetings held by teleconference or byvideoconference, are recorded in a special booksigned by the Chairman and the Secretary. Anycopies and extracts thereof, that have not beendrawn up by a notary public, shall be certifiedas true copies by the Chairman.

Article 13 (renumbered)Legal representation of the Company vis-à-visthird parties and in court proceedings shall be theduty, with separate and several signatory powers,of the Chairman of the Board of Directors and, ifappointed, of the Deputy Chairmen and ManagingDirectors, within the limits of the powers grantedto them by the Board of Directors.Each one of the aforesaid shall in any case havefull powers to take legal action and file appealsbefore any judicial authority and any court of anydegree, including in revocation or cassation

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(supreme court) proceedings, to file statementsand prosecute in criminal cases, to sue on behalf ofthe Company in criminal proceedings, to beginlegal proceedings and file petitions before alladministrative jurisdictions, to intervene andprotect the Company's interests in case ofproceedings and claims against the Company,granting for this purpose all necessary mandatesand powers of attorney ad litem.

Article 13The managing partners are entitled to annualcompensation established by the shareholders’meeting and shall be reimbursed for all expensesincurred during the course of their duties.The compensation to managing partners investedwith special duties is established by art. 2389,paragraph 2, of the Italian Civil Code.

Article 14In the case of the resignation from office of all thegeneral partners, the company is dissolved unless thepartners are replaced and if the replacements havenot accepted the posts within a six-month period.For this period, the Board of Statutory Auditorsappoints a temporary director to fulfil all the acts ofordinary administration.The temporary director does not assume the positionof the general partner.

Article 17The annual profits shall be distributed, less theappropriations to the reserves prescribed by law, asfollows:a) savings shares shall be attributed an amount of

up to seven percent of their par value; if, in anyfinancial period, a dividend of less than sevenpercent of the par value has been distributed tothe savings shares, the said difference iscalculated as an increase to be added to the

(supreme court) proceedings, to file statementsand prosecute in criminal cases, to sue on behalf ofthe Company in criminal proceedings, to beginlegal proceedings and file petitions before alladministrative jurisdictions, to intervene andprotect the Company's interests in case ofproceedings and claims against the Company,granting for this purpose all necessary mandatesand powers of attorney ad litem.The Board of Directors and, within the limits ofthe powers granted to them by said Board, theChairman of the Board and, if appointed, theDeputy Chairmen and the Managing Directors,are authorized to grant Managers and staff ingeneral, and when necessary third parties, thepower to represent the Company vis-à-vis thirdparties and in court proceedings.

Article 14 (renumbered)The members of the Board of Directors areentitled to annual compensation established by theshareholders’ meeting and shall be reimbursed for allexpenses incurred during the course of their duties.The compensation to Directors invested withspecial duties is established by art. 2389,paragraph 2, of the Italian Civil Code.

Article 15 (renumbered)If, due to resignation or any other cause, morethan half the Directors should leave office,then the entire Board of Directors isconsidered to have resigned with effect as fromthe time of its re-constitution.

Article 18 (renumbered)The annual profits shall be distributed, less theappropriations to the reserves prescribed by law, asfollows:a) savings shares shall be attributed an amount of

up to seven percent of their par value; if, in anyfinancial period, a dividend of less than sevenpercent of the par value has been distributed tothe savings shares, the said difference iscalculated as an increase to be added to the

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3. Evaluation of the Board of Managing Partners on the eventual recourse to the right of withdrawalThe transformation of the type of company and the change in the corporate business purpose give the Pirelli &C. ordinary and savings shareholders the right to withdrawal pursuant to art. 2437 of the Italian Civil Code.

4. Indication of the subjects that may exercise the right of withdrawal, the manner and the termsestablished for exercising the withdrawal and the payment of the relative consideration and the criteriaused in determining this consideration

The holders of Pirelli & C. ordinary shares absent or dissenting from the resolution on the transformation ofthe company and the change in the corporate business purpose (the “Resolution”) and the holders of Pirelli& C. savings shares will be entitled to withdraw, in both cases on condition that the withdrawingshareholder is the holder of the Pirelli & C. shares on which the right of withdrawal is exercised at a datebefore that on which the Resolution is passed and maintains ownership continuously up to obtaining theCertification (as defined in the following paragraph).

The withdrawal statement must be communicated to Pirelli & C., by registered letter, or through a official ofthe court or telegram, by the Pirelli & C. ordinary shareholders that attended the shareholders’ meeting anddissented from the resolution not more than three days from the date of the meeting and by both theordinary and savings absent from the shareholders’ meeting not more than fifteen days from the date of

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preference dividend during the following twofinancial periods; any profits remaining afterthe aforesaid appropriations and provisions andwhich the meeting resolves to distribute, shallbe distributed amongst all the shares in such amanner that the savings shares shall receive atotal dividend which is increased, compared tothe dividend received by the ordinary shares, byan amount equivalent to two percent of theirpar value;

b) aside from what has been established above inrespect of the total higher dividends attributedto the savings shares, the ordinary shares shallbe attributed an amount up to five percent oftheir par value.

The profits remaining shall be distributed amongall the shares, in addition to the attributionreferred to in the preceding letters a) and b),unless the shareholders’ meeting, based upon theproposal of the managing partners, votes specialappropriations to the extraordinary reserves, orother destination or decides to appropriate a partof such profits to retained earnings.In the event of distribution of reserves, savingsshares shall have the same rights as the othershares.Interim dividends can be paid, in observance of thelaw.

preference dividend during the following twofinancial periods; any profits remaining afterthe aforesaid appropriations and provisions andwhich the meeting resolves to distribute, shallbe distributed amongst all the shares in such amanner that the savings shares shall receive atotal dividend which is increased, compared tothe dividend received by the ordinary shares, byan amount equivalent to two percent of theirpar value;


The profits remaining shall be distributed amongall the shares, in addition to the attributionreferred to in the preceding letters a) and b),unless the shareholders’ meeting, based upon theproposal of the Board of Directors, votes specialappropriations to the extraordinary reserves, orother destination or decides to appropriate a partof such profits to retained earnings.In the event of distribution of reserves, savingsshares shall have the same rights as the othershares.Interim dividends can be paid, in observance of thelaw.

registration of the Resolution on the Companies Registry. By this last date (that is, fifteen days from the dateof registration of the Resolution on the Companies Registry), the withdrawal statement must not simply besent by the withdrawing shareholder but must reach the attention of Pirelli & C. The withdrawingshareholders must also attach to the communication – or, if this is not possible, arrive within the termsstated in the notice published in the press as stated in the following paragraph 5, on penalty of theinadmissibility of the statement of withdrawal – the specific certification issued by an agent authorized bythe centralized management system of Monte Titoli S.p.A., attesting that: (i) the ownership of the shares,and therefore the quality of the shareholder, is recorded continuously from a date prior to the date on whichthe Resolution was passed, and (ii) the above stocks were transferred to a specific restricted account inanticipation of the payment of the withdrawal price on the part of Pirelli & C. (the “Certification”).

The payment of the withdrawal price will be made by the term that will be indicated in the notice publishedin the press as stated in the following paragraph 5.

The determination of the price to which the withdrawing shareholders are entitled will follow the procedureindicated below:(i) the price of the right of withdrawal for the ordinary shareholders will correspond to the simple

arithmetic average of the official market prices of Pirelli & C. ordinary shares in the six calendarmonths prior to the date the Resolution was passed;

(ii) the price of the right of withdrawal for the savings shareholders will correspond to the simple arithmeticaverage of the official market prices of Pirelli & C. savings shares in the six calendar months prior to thedate the Resolution was passed;

The amounts to which the withdrawing shareholders are entitled constitute taxable income for the amountwhich exceeds the price paid for the subscription or purchase of the shares cancelled by the company.

The amount distributed to individual holders of a non-qualified investment is subject to a withholdingequalization tax of 12.5%, within the limits of the reserves, other than capital reserves, attributed to them.For non-residents, other than savings shareholders, the equalization tax is equal to 27%, subject to areduction in the rate under international double taxation avoidance agreements.In the event the resident shareholder individual is the holder of a qualified investment, or, although holdinga non-qualified investment, renounces the equalization tax system mentioned above, the taxable incomefrom withdrawal must be entered on the tax return, in the amount equal to the difference between thewithdrawal price and the cost of subscription or purchase of the cancelled shares. Within the limits of thepart of taxable income thus determined proportionally corresponding to the reserves, other than capitalreserves, attributable to the same shareholder in relation to the shares cancelled, a dividend tax credit isrecognized up to the limit of the taxes pursuant to art. 105, paragraph 1, letters a) and b) of D.P.R. No. 917dated December 22, 1986.

The shareholders that have validly exercised the right of withdrawal are entitled to obtain the relativepayment starting from the date the Resolution is passed, with the consequent right to interest established bylaw (currently equal to 3% on an annual basis) beginning from the above date up to the date thewithdrawal price is paid.

The valid exercise of the right of withdrawal involves the contextual loss of status as a shareholderof the Company and therefore those that exercised the right will not have the right to: (i) take part in thecapital increase in option as referred to in point 2 of the agenda of the extraordinary session of theshareholders’ meeting nor, consequently, have the right to transfer the relative option rights, and (ii) to

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receive dividends relating to the year ended December 31, 2002, as referred to in point 1 of the agenda ofthe ordinary session of the shareholders’ meeting.

5. Procedure for communicating information not determinable prior to the shareholders’ meeting to thosehaving the right to withdraw

The information relating to the manner and the terms of exercising the right to withdrawal not determinableprior to the date of the shareholders’ meeting, including the effective date of the registration of theResolution in the Companies Registry, will be rendered public by the Company through publication of anotice on a timely basis in at least one daily national newspaper subsequent to the registration of theResolution in the Companies Registry.

* * *

In you are in agreement, we ask you to approve the following

RESOLUTION

“The extraordinary shareholders’ meeting:• having taken note of the Report of the Directors relating to the proposal to transform Pirelli & C. from a

limited partnership company (A.p.A.) to a corporation (S.p.A.) and modify the corporate businesspurpose;

• having taken note of the amendments to the by-laws proposed and described;• having taken note of the provisions of art. 2437 of the Italian Civil Code;

VOTES

with immediate effect

a) to transform Pirelli & C. from a limited partnership company (A.p.A.) to a corporation (S.p.A.),amending art. 1 of the by-laws as follows:

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Proposed wording

Article 1A Corporation is hereby incorporated under thename Pirelli & C. Società per Azioni.

b) to amend the corporate business purpose, changing art. 2 of the by-laws as follows:

Current wording




c) the sale, ownership, management ofgovernment and private securities;

d) leasing of real and movable property and thegranting of loans to third parties;

e) the trading and leasing of real estateproperties as well as the management of ownproperties, and the building works consequentthereto

All financial and deposit-taking activitiesconnected with the public and those set forth inlaw 1/1991 are however excluded.In order to achieve the corporate business purpose,the company can carry out all other relatedtransactions, including the issue of real guaranteesand personal guarantees, including endorsementsto cover the obligations of third parties.

Proposed wording




c) the sale, ownership, management or placementof both government and private securities;

The Company may carry out all transactions ofany type whatsoever – excluding the collectionof savings deposits from the public –connected to its corporate business purpose.

c) to amend art. 7 of the by-laws (convocation of the shareholders’ meetings) as follows:

Current wording

Article 7The convocation of the shareholders’ meeting,which may take place anywhere in Italy includingin a place other than the registered office, the rightto attend meetings and representation at same areall governed by law.Whenever particular needs require it, the ordinary

Proposed wording

Article 7The convocation of the shareholders’ meeting,which may take place anywhere in Italy includingin a place other than the registered office, the rightto attend meetings and representation at same areall governed by law.In view of the nature of the Company’s

Current wording

Article 1A company is formed in “accomandita perazioni”, in which the managing partners areCarlo Buora, Carlo Alessandro Puri Negri, LuigiOrlando, Alberto Pirelli and Marco TronchettiProvera, in the name of “PIRELLI & C. –ACCOMANDITA PER AZIONI”.

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d) to amend art. 8 of the by-laws (constitution of shareholders’ meetings) as follows:

Current wording

Article 8The due convocation of the meeting and the validityof its resolutions are governed by law.For modification of the deed of incorporation, theapproval of all the general partners is alwaysnecessary.

Proposed wording

Article 8The due convocation of the meeting and thevalidity of its resolutions are governed by law.The voting quorum for the appointment ofDirectors is established as a relative majorityof the votes.

e) to amend art. 9 of the by-laws (chairmanship of shareholders’ meetings) as follows:

Current wording

Article 9The meeting shall be presided over by theChairman of the Board of Managing Partners, by aDeputy Chairman or by a Managing Director, inthat order; whenever there are two or more DeputyChairmen or Managing Directors, the chair shallbe taken respectively by the senior in age. In theevent of the absence of all the managing partners,the chair shall be taken by another person chosenby the shareholders’ meeting among theshareholders present.The Chairman is assisted by a Secretary appointedby the meeting; there is no need to appoint aSecretary when the minutes of the meeting aredrawn up by a notary public.It is the duty of the Chairman of the meeting toverify the right to attend the meeting, including bymeans of proxy; to ascertain whether or not themeeting has been duly constituted and hasachieved the quorum required in order to passresolutions; to conduct and moderate thediscussion; to establish the order and manner ofvoting as well as announce the results thereof.The resolutions of the meeting shall be recorded inthe minutes, which shall be signed by theChairman and the Secretary of the meeting or thenotary public.The minutes of the extraordinary shareholders’meeting must be drawn up by a notary publicappointed by the Chairman.

Proposed wording

Article 9The meeting shall be presided over by theChairman of the Board of Directors, by a DeputyChairman or by a Managing Director, in thatorder; whenever there are two or more DeputyChairmen or Managing Directors, the chair shallbe taken respectively by the senior in age. In theevent of the absence of the above-indicatedindividuals, the chair shall be taken by anotherperson chosen by the shareholders’ meeting amongthe shareholders present.The Chairman of the shareholders’ meeting isassisted by a Secretary appointed by the meeting;there is no need to appoint a Secretary when theminutes of the meeting are drawn up by a notarypublic.It is the duty of the Chairman of the meeting toverify the right to attend the meeting, including bymeans of proxy; to ascertain whether or not themeeting has been duly constituted and hasachieved the quorum required in order to passresolutions; to conduct and moderate thediscussion; to establish the order and manner ofvoting as well as announce the results thereof.The resolutions of the meeting shall be recorded inthe minutes, which shall be signed by theChairman of the shareholders’ meeting and theSecretary of the meeting or the notary public.The minutes of the extraordinary shareholders’meeting must be drawn up by a notary public

shareholders’ meeting may be convened within sixmonths of the end of the financial period.

business and the special requirements arisingtherefrom, the ordinary shareholders’ meetingmay be convened within six months of the endof the financial period.

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f) to amend art. 10 of the by-laws (management of the company) as follows:

Current wording

Article 10The Company is managed by a Board of ManagingPartners invested with the fullest powers exceptthose expressly reserved for the shareholders’meeting by law. The Board of Managing Partners, also throughdelegated bodies, informs the Board of StatutoryAuditors on a timely basis about the activitiesconducted and the most important economic,financial and equity transactions carried out by theCompany and its subsidiaries; it specifically makesreference to transactions with potential conflicts ofinterest. The information is provided, at leastquarterly, at the board meetings or ExecutiveCommittee meetings or by written communicationto the Board of Statutory Auditors.The Board of General Partners appoints aChairman and, eventually, one or more DeputyChairmen and is authorized to delegate thosepowers it wishes to confer on one or more of itsmembers, eventually through the position ofManaging Director.It may also appoint General Managers, DeputyGeneral Managers and persons with power ofattorney for single acts or categories of acts,establishing powers and competence. Theseappointments, with the exception of those forGeneral Managers and Deputy General Managers,can also be referred by the Board to the ManagingDirectors and the General Managers.The Board of Managing Partners shall appoint aSecretary, who is not necessarily a member of theBoard.Unless otherwise decided by the shareholders’meeting, the Directors are not bound over by theprohibition mentioned under art. 2390 of theItalian Civil Code.

Proposed wording

Article 10The Company is managed by a Board ofDirectors composed of between seven andtwenty-three members who shall remain inoffice for three years (unless the meeting fixesa shorter term of office at the time of makingthe appointment) and may be re-elected.A Chairman, and if necessary, one or more DeputyChairmen shall be appointed from amongst themembers of the Board of Directors.In the event of the Chairman being absent, thechair shall be taken by a Deputy Chairman ora Managing Director, in that order; if thereshould happen to be two or more DeputyChairmen or Managing Directors, the chairshall be taken respectively by the senior in age.The Board shall appoint a Secretary, who isnot necessarily a member of the Board.Unless otherwise decided by the shareholders’meeting, the Directors are not bound over by theprohibition mentioned under art. 2390 of theItalian Civil Code.

Any copies and extracts thereof, that have not beendrawn up by a notary public, shall be certified astrue copies by the Chairman of the Board ofManaging Partners.

appointed by the Chairman of the shareholders’meeting.Any copies and extracts thereof, that have not beendrawn up by a notary public, shall be certified astrue copies by the Chairman of the Board ofDirectors.

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g) to introduce, after art. 10, a new art. 11 (Powers of the Board of Directors) – with the consequentrenumbering of the subsequent articles – with the following text: “Article 11The Board of Directors is empowered with the management of the Company and, for this purpose, isinvested with the fullest powers for administration, except those, which according to the by-laws or bylaw, are reserved for the shareholders’ meetings.The Board of Directors, also through delegated bodies, informs the Board of Statutory Auditors on a timelybasis about the activities conducted and the most important economic, financial and equity transactionscarried out by the Company and its subsidiaries; it specifically makes reference to transactions with potentialconflicts of interest. The information is provided, at least quarterly, at the board meetings or ExecutiveCommittee meetings or by written communication to the Board of Statutory Auditors.The Board is authorized to delegate those powers it wishes to confer on one or more of its members,eventually through the positions of Managing Directors, attributing single or collective signature powersas it deems to establish for the administration of the Company.It may also delegate its competence to an Executive Committee composed of some of its members, whosecompensation shall be established by the shareholders’ meeting.It may also nominate one or more committees with consulting functions, also for purposes of updatingthe corporate governance structure to the recommendations issued from time to time by the competentauthorities.Lastly, the Board may appoint General Managers, Deputy General Managers, Managers and DeputyManagers and persons with power of attorney for single acts or categories of acts, establishing powersand competence. The appointment of Managers, Deputy Managers and persons with power of attorneyfor individual acts or categories of acts, can also be referred by the Board to the Managing Directors andthe General Managers”;

h) to amend art. 11 of the by-laws (convocation of the Board of directors and majorities) as follows,assigning the number 12:

Current wording

Article 11The Board of Managing Partners shall meet at theinvitation of the Chairman or, if appointed, a DeputyChairman or a Managing Director, at the registeredoffice of the Company or in any other place just aslong as it is in Italy, or whenever a meeting has beenrequested by two Managing Partners or by at leasttwo standing statutory auditors.Board meetings shall be convened by means of aletter, telegram, telex or fax sent to the address ofeach Managing Partner and each StandingStatutory Auditor, at least five days before (or inurgent cases at least six hours before) the day setfor the meeting.Meetings of the Board of Managing Partners maybe held by teleconference or videoconference.In this case the following must be guaranteed:a) identification of all the participants at each

point in the connection;

Proposed wording

Article 12 (renumbered)The Board of Directors shall meet at theinvitation of the Chairman or whomsoever isacting on his behalf, at the registered office ofthe Company or in any other place stated inthe letter of convocation, every time heconsiders it in the best interests of theCompany, or whenever a meeting has beenrequested by one of the Managing Directors orby at least two standing statutory auditors.However, the Board of Directors may validlypass resolutions, even failing any formalconvocation, if all the board members and allthe standing statutory auditors in office arepresent.Board meetings shall be convened by means of aletter, telegram, telex or fax sent to the address ofeach Director and each Standing StatutoryAuditor, at least five days before (or in urgent

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b) the possibility for each participant to intervene,to orally put forward same’s own opinion, toview, receive and transmit all documentation, aswell as the contextuality of considerations andresolutions.

The Meeting of the Board of Managing Partnersshall be considered to be held in the place in whichthe Chairman and the Secretary must besimultaneously.The meetings of the Board are chaired by theChairman and, in his absence, the chair shall betaken by the senior in age of the Deputy Chairmen.The presence of at least half the members plus oneis necessary for the resolutions of the Board to bedeemed valid, and the favorable vote of themajority of those present is required. However, forthe appointment of the Chairman and one or moreDeputy Chairmen as well as the attribution of theposition of Managing Director and for thedelegation of specific powers by the Board ofManaging Partners to one or more of its members,a favorable vote must be cast by all members inoffice.The resolutions of the Board, even when passed bymeetings held by teleconference or byvideoconference, are recorded in a special booksigned by the Chairman and the Secretary.

cases at least six hours before) the day set for themeeting.Meetings of the Board and of the ExecutiveCommittee may be held by teleconference orvideoconference. In this case the following must beguaranteed:a) identification of all the participants at each



Meetings of the Board of Directors and of theExecutive Committee are considered to be held inthe place in which the Chairman and the Secretarymust be simultaneously.The presence of at least half the members plus oneis necessary for the resolutions of the Board to bedeemed valid, and the favorable vote of themajority of those present is required. In the eventof a tie in votes, the casting vote shall be thatof the Chairman.The resolutions of the Board, even when passed bymeetings held by teleconference or byvideoconference, are recorded in a special booksigned by the Chairman and the Secretary. Anycopies and extracts thereof, that have not beendrawn up by a notary public, shall be certifiedas true copies by the Chairman.

i) to amend art. 12 of the by-laws (representation of the company) as follows, assigning the number 13:

Current wording

Article 12Legal representation of the Company vis-à-visthird parties and in court proceedings shall be theduty, with separate and several signatory powers,of the Chairman of the Board of ManagingPartners and, if appointed, of the DeputyChairmen and Managing Directors, within thelimits of the powers granted.Each one of the aforesaid shall in any case havefull powers to take legal action and file appealsbefore any judicial authority and any court of anydegree, including in revocation or cassation(supreme court) proceedings, to file statementsand prosecute in criminal cases, to sue on behalf of

Proposed wording

Article 13 (renumbered)Legal representation of the Company vis-à-vis thirdparties and in court proceedings shall be the duty,with separate and several signatory powers, of theChairman of the Board of Directors and, ifappointed, of the Deputy Chairmen and ManagingDirectors, within the limits of the powers grantedto them by the Board of Directors.Each one of the aforesaid shall in any case have fullpowers to take legal action and file appeals beforeany judicial authority and any court of any degree,including in revocation or cassation (supreme court)proceedings, to file statements and prosecute incriminal cases, to sue on behalf of the Company in

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Current wording

Article 13The managing partners are entitled to annualcompensation established by the shareholders’meeting and shall be reimbursed for all expensesincurred during the course of their duties.The compensation to managing partners investedwith special duties is established by art. 2389,paragraph 2, of the Italian Civil Code

Proposed wording

Article 14 (renumbered)The members of the Board of Directors areentitled to annual compensation established by theshareholders’ meeting and shall be reimbursed for allexpenses incurred during the course of their duties.The compensation to Directors invested withspecial duties is established by art. 2389,paragraph 2, of the Italian Civil Code.

k) to amend art. 14 of the by-laws (resignation of the directors) as follows, assigning the number 15:

Current wording

Article 14In the case of the resignation from office of all thegeneral partners, the company is dissolved unless thepartners are replaced and if the replacements havenot accepted the posts within a six-month period.For this period, the Board of Statutory Auditorsappoints a temporary director to fulfil all the actsof ordinary administration.The temporary director does not assume theposition of the general partner.

Proposed wording

Article 15 (renumbered)If, due to resignation or any other cause, morethan half the Directors should leave office,then the entire Board of Directors isconsidered to have resigned with effect as fromthe time of its re-constitution.

j) to amend art. 13 of the by-laws (compensation to the directors) as follows, assigning the number 14:

criminal proceedings, to begin legal proceedings andfile petitions before all administrative jurisdictions,to intervene and protect the Company’s interests incase of proceedings and claims against theCompany, granting for this purpose all necessarymandates and powers of attorney ad litem.The Board of Directors and, within the limits ofthe powers granted to them by said Board, theChairman of the Board and, if appointed, theDeputy Chairmen and the Managing Directors,are authorized to grant Managers and staff ingeneral, and when necessary third parties, thepower to represent the Company vis-à-vis thirdparties and in court proceedings.

the Company in criminal proceedings, to beginlegal proceedings and file petitions before alladministrative jurisdictions, to intervene andprotect the Company’s interests in case ofproceedings and claims against the Company,granting for this purpose all necessary mandatesand powers of attorney ad litem.

l) to amend art. 17 of the by-laws (distribution of profits) as follows, assigning the number 18:

Current wording

Article 17The annual profits shall be distributed, less theappropriations to the reserves prescribed by law, asfollows:

Proposed wording

Article 18 (renumbered)The annual profits shall be distributed, less theappropriations to the reserves prescribed by law, asfollows:

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a) savings shares shall be attributed an amount ofup to seven percent of their par value; if, in anyfinancial period, a dividend of less than sevenpercent of the par value has been distributed tothe savings shares, the said difference iscalculated as an increase to be added to thepreference dividend during the following twofinancial periods; any profits remaining afterthe aforesaid appropriations and provisions andwhich the meeting resolves to distribute, shallbe distributed amongst all the shares in such amanner that the savings shares shall receive atotal dividend which is increased, compared tothe dividend received by the ordinary shares, byan amount equivalent to two percent of theirpar value;


The profits remaining shall be distributed amongall the shares, in addition to the attributionreferred to in the preceding letters a) and b),unless the shareholders’ meeting, based upon theproposal of the managing partners, votes specialappropriations to the extraordinary reserves, orother destination or decides to appropriate a partof such profits to retained earnings.In the event of distribution of reserves, savingsshares shall have the same rights as the other shares.Interim dividends can be paid, in observance of thelaw.

a) savings shares shall be attributed an amount ofup to seven percent of their par value; if, in anyfinancial period, a dividend of less than sevenpercent of the par value has been distributed tothe savings shares, the said difference iscalculated as an increase to be added to thepreference dividend during the following twofinancial periods; any profits remaining afterthe aforesaid appropriations and provisions andwhich the meeting resolves to distribute, shallbe distributed amongst all the shares in such amanner that the savings shares shall receive atotal dividend which is increased, compared tothe dividend received by the ordinary shares, byan amount equivalent to two percent of theirpar value;

b) aside from what has been established above, inrespect of the total higher dividends attributedto the savings shares, the ordinary shares shallbe attributed an amount up to five percent oftheir par value.

The profits remaining shall be distributed amongall the shares, in addition to the attributionreferred to in the preceding letters a) and b),unless the shareholders’ meeting, based upon theproposal of the Board of Directors, votes specialappropriations to the extraordinary reserves, orother destination or decides to appropriate a partof such profits to retained earnings.In the event of distribution of reserves, savingsshares shall have the same rights as the other shares.Interim dividends can be paid, in observance of thelaw.

m)to confer to the Board – and on its behalf to the Chairman, the Deputy Chairman and, if appointed, theManaging Directors, all separately, every power necessary to fulfil each formality required so that theresolutions passed can be registered in the Companies Registry, accepting and introducing in theresolutions, the modifications, additions or eliminations, formal and not substantial, eventually requiredby the pertinent authorities;

n) to confer to the Board – and on its behalf to the Chairman, the Deputy Chairman and, if appointed, theManaging Directors, all separately, every power necessary to fulfil each and every formality connectedwith the eventual exercise of the right of withdrawal pursuant to art. 2437 of the Italian Civil Code.

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A share capital increase by Pirelli & C., separable, against payment for a maximum of1,950,355,809 ordinary shares, with free warrants attached, that can be traded separately one fromthe other, to be granted on option to the Pirelli & C. ordinary and savings shareholders, at the unitprice equal to par value Euros 0.52 per share, in a ratio of 3 new ordinary shares cum warrants forevery 1 share of any class of stock held.A consequent share capital increase, separable, against payment through the issue, at one or moretimes, of a maximum of 487,588,952 ordinary shares to be reserved exclusively and irrevocably forthe exercise of the warrants (attached to the shares that will be issued for a maximum of1,950,355,809 ordinary shares coming from the share capital increase in the preceding paragraph),at the unit price equal to par value Euros 0.52 per share. Consequent amendment to article 5 (share capital) of the by-laws.Approval of the “Warrants on Pirelli & C. ordinary shares 2003 - 2006” Regulations.

* * *

Report drawn up by the Directors of Pirelli & C. pursuant to art. 72, paragraph 1, ConsobRegulation No. 11971 dated May 14, 1999, as subsequently amended.

Dear Shareholders,

The Directors of Pirelli & C. ask you to vote on the share capital increase that provides for:

(i) a share capital increase for a maximum of Euros 1,014,185,020.68 through the issue of a maximum of1,950,355,809 ordinary shares, with free warrants attached, that can be traded separately one from theother, to be granted on option to the Pirelli & C. ordinary and savings shareholders, at the unit priceequal to par value Euros 0.52 per share, in a ratio of 3 new shares cum warrants for every 1 share of anyclass of stock held, and

(ii)a consequent share capital increase for a maximum of Euros 253,546,255.04 through the issue, at one ormore times, of a maximum of 487,588,952 ordinary shares to be reserved exclusively for the exercise ofthe aforementioned warrants, at the unit price equal to par value Euros 0.52 per share.

1. Reasons and destination of the share capital increase

Within the framework of the operation to simplify the controlling structure which links your Company toPirelli S.p.A., the Board believes that the balance sheet and financial structure of Pirelli & C. should bestrengthened through a capital increase, which, at this time, is the subject of the motion for a resolution, fora maximum of about Euros 1,014 million, destined to be increased to maximum of Euros 1,268 million inthe event all the warrants are exercised. This increase will strengthen the balance sheet and financialstructure of the industrial and financial activities of the group headed by Pirelli & C..

The following table illustrates the potential effects of the part of the present capital increase on theconsolidated net financial position of Pirelli & C. calculated:

– assuming that the present capital increase is entirely subscribed to, equal to about Euros 1,014 million.The possible increase due to the future exercise of the warrants is not considered;

– taking into account the purchase of 47,973,139 Pirelli S.p.A. ordinary shares from BZ Group HoldingLimited for some Euros 43 million.

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Effects on the net financial position


12/31/2002 Proforma Effect 12/31/2002 Proforma

Short-term financial payables 1,042 (870) 172

Accrued interest expenses 50 (50) -

Cash and banks (385) (385)

Other short-term securities and investments (199) (199)

Short-term financial receivables (228) (228)

Accrued interest income (22) (22)

Short-term net financial position 258 (920) (662)

Medium/long-term financial payables 1,891 (51) 1,840

Medium/long-term financial receivables (93) (93)

Other securities (6) (6)

Medium/long-term net financial position 1,792 (51) 1,741

Total net financial position 2,050 (971) 1,079

Taking into account the above, the following resolutions are proposed:

a) a share capital increase, separable, against payment for a maximum of Euros 1,014,185,020.68 through theissue of a maximum of 1,950,355,809 ordinary shares, all with a par value of Euros 0.52, with dividendrights from January 1, 2003, to be offered in option in a ratio of 3 new ordinary shares for every 1 share ofany class of stock held, at a price equal to par value, for a total equivalent amount immediately of amaximum of Euros 1,014,185,020.68. Each 1 new share issued will also have 1 free warrant attached, thatcan be traded separately, valid for the subscription, at any time (except during the suspension period statedin the Regulations for the “Warrants on Pirelli & C. ordinary shares 2003 – 2006”, attached, - hereinafter“Warrant Regulations” from January 1, 2004 to June 30, 2006, presenting the request by June 20, 2006,of Pirelli & C. ordinary shares in a ratio of 1 new share for every 4 warrants held, at a price equal to the parvalue, in the manner and according to the terms indicated in the “Warrant Regulations”. The request for thelisting of the warrants on the stock exchange will be made after the warrants are offered in option;

b) a consequent share capital increase, separable, against payment for a maximum of Euros253,546,255.04 through the issue, at one or more times, of a maximum of 487,588,952 ordinary shares,all of par value Euros 0.52, with normal dividend rights, to be reserved exclusively and irrevocably forthe exercise of the warrants attached to the shares that will be issued as stated in the previous point a),for a further equivalent future amount of a maximum of Euros 253,546,255.04.

It should be remembered that – owing to the resolution passed to transform the legal status of the companyand to change the corporate business purpose referred to in point 1 of the extraordinary session of theshareholders’ meeting – the absenting or dissenting shareholders have the right of withdrawal under art.2437 of the Italian Civil Code, which can be exercised before the start of the option offer, taking intoaccount what is specified in paragraphs 3, 4 and 5 of the Report on operations relating to thetransformation of Pirelli & C. to a corporation and the change in the corporate business purpose. To thisend, the following is stated:

(a) the valid exercise of the right of withdrawal involves the contextual loss of status as a shareholderof the Company and therefore those that exercise the right will not have the right to: (i) take part in

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the capital increase in option nor, consequently, have the right to transfer the relative option rights,and (ii) to receive dividends relating to the year ended December 31, 2002;

(b) since, at the date of this report, it is not possible to know the number of Pirelli & C. shares on which theright of withdrawal will be exercised, consequently, it is not possible to exactly determine the amount of theshare capital increase. This amount will be communicated by the Company by means of a specific noticepublished in at lease one national newspaper before the start of the exercise period of the option rights.

Lastly, as a result of passing the resolution relating to the capital increase, art. 5 (share capital) of the by-lawswill have to be amended to formally acknowledge the resolution described in this report. The same art. 5 will befurther amended to take into account: (i) the updating of the amount of share capital and its composition at thedate of this report, and (ii) the cancellation of the second, third and last paragraph, relating to the “Pirelli & C.2.5% 1998 – 2003” convertible bonds, redeemed, with regard to the bonds still outstanding at that date, onJanuary 1, 2003 (a comparison of the wording is presented in the resolutions reported below).

2. Potential existence of an underwriting syndicate

Mediobanca – Banca di Credito Finanziario S.p.A. (hereinafter “Mediobanca”) stated its availability topromote the formation of an underwriting syndicate to guarantee the successful outcome of the transaction.

3. Criteria followed in arriving at the issue price and the anticipated option ratio

The issue price of the new shares, as well as the price of the warrants, was determined by taking intoaccount, among other things, the performance of the stock market price over the last three months, thestructure and size of the transaction itself and the high degree of volatility and uncertainty that currentlycharacterizes the financial markets.

4. Shareholders manifesting receptiveness in subscribing to the capital increase

Cam Finanziaria S.p.A. has undertaken the commitment to exercise the option rights on the Pirelli & C.shares it owns, which, at the date of this transaction, are equal to 184,852,214 ordinary shares; theremaining participants in the Pirelli & C. voting trust have indicated their general receptiveness tosubscribing prorata to the capital increase described in this report.

5. Period established for exercising the transaction

As regards timing, the start of the share capital increase is expected to take place – subject to obtaining thenecessary authorization and whenever the market conditions allow – in the first half of 2003, however,before perfecting the merger referred to in point 3 of the agenda of the extraordinary session of theshareholders’ meeting.

6. Date the dividend rights accrue to the new issue of shares

The new issue of shares will have dividend rights from January 1, 2003.

7. Proforma income statement and balance sheet effects

The condensed proforma income statement and proforma reclassified balance sheet for the year endedDecember 31, 2002 is presented below and has been prepared on the basis of the consolidated financialstatements of Pirelli & C. at December 31, 2002.The objective of presenting proforma data is to show the income statement and the balance sheet data ofthe group as if the capital increase and the purchase of Pirelli S.p.A. shares from the BZ Group Holding

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Limited had already taken place, for purposes of the income statement, at the start of the period ofpresentation and, for purposes of the balance sheet, at the balance sheet date.

The proforma data include:– the entire immediate subscription of the share capital increase, equal to a maximum of Euros 1,014

million. The eventual future exercise of the warrants is not taken into account;– the purchase of 47,973,139 Pirelli S.p.A. shares from BZ Group Holding Limited for a total of approx.

Euros 43 million

Proforma adjustments

Consolidated Share capital Purchase Total Proforma

financial increase of shares adjustments consolidated

Pirelli & C. from BZ pro-forma Pirelli & C.

12/31/2002 12/31/2002

pro-forma

Condensed income statement

Net sales 6.718 - 6.718

Operating profit 118 - 118

Share of earnings (losses) of equity investments (175) - - (175)

Operating profit including share of

earnings (losses) of equity investments (57) - (57)

Financial income (expenses) (178) 33 (1) 32 (146)

Extraordinary income (expenses) (83) - (83)

Tax expenses (87) (12) (12) (99)

Net income (loss) (405) 21 (1) 20 (385)

Net income (loss) attributable to Pirelli & C. (58) 21 (1) 20 (38)

Reclassified balance sheet

Fixed assets 6.596 - 6.596

Working capital 991 - 991

Total net invested capital 7.587 - 7.587

Shareholders’ equity 4.626 1.014 (43) 971 5.597

Provisions 911 - 911

Net financial (liquidity) debt position 2.050 (1.014) 43 (971) 1.079

Proforma income statement

The “Share capital increase” column includes interest income (or lower interest expenses) as a result ofutilizing the capital raised by the capital increase calculated at a rate of 3.3% and the corresponding taxeffect.The “Purchase of shares from BZ” column includes interest expenses deriving from the purchase of PirelliS.p.A. shares from BZ Group Holding Limited calculated at a rate of 3.3%.

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Pro-forma balance sheet

The “Share capital increase” column represents the effect of the share capital increase: increase inshareholders’ equity with a corresponding improvement in the net financial position.

8. Eventual share dilution

The transaction for the share capital increase cum warrants described above provides the shareholder with apre-emptive right, which, beginning from the starting date of the offer, can be traded separately from theshares ex-rights.

Since this is a capital increase in option, there are no diluting effects in terms of the percentage ownership ofcapital by the Pirelli & C. shareholders which decide to exercise the option.

* * *


RESOLUTION

“The extraordinary shareholders’ meeting:

– having taken note of the report of the Directors on the proposal to increase share capital againstpayment;

– having taken note of the statement by the Board of Statutory Auditors that the current share capital ofEuros 339,422,773.56 represented by 618,317,846 ordinary shares and 34,418,257 savings shares, allwith a par value of Euros 0.52, is entirely subscribed to and paid in;

– that the Company holds 2,617,500 ordinary treasury shares not entitled to option rights, having takeninto account, in determining the option ratio, the relative increment.

VOTES

1) a share capital increase, separable, against payment for a maximum of Euros 1,014,185,020.68 throughthe issue of a maximum of 1,950,355,809 ordinary shares, of par value Euros 0.52, with dividend rightsfrom January 1, 2003, to be offered in option to the shareholders in a ratio of 3 new ordinary shares forevery 1 share of any class of stock held;

2) to attach 1 warrant to every share referred to in the preceding point 1, that can be traded separately,valid for the subscription, at any time from January 1, 2004 to June 30, 2006, presenting the request byJune 20, 2006, – on the conditions and according to the terms indicated in the Warrant Regulations – 1new Pirelli & C. ordinary share, with normal dividend rights and a par value of Euros 0.52, every 4warrants held, at a unit price equal to par value.

3) to consequently increase share capital, separable, against payment of a maximum par value of Euros253,546,255.04, through the issue, at one or more times, of a maximum of 487,588,952 ordinary shares,of par value Euros 0.52 per share each, with normal dividend rights, to be reserved exclusively andirrevocably for the exercise of a maximum of 1,950,355,809 warrants in the preceding point 2;

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4) to approve the text of the Regulations for the “Warrants on Pirelli & C. ordinary shares 2003 - 2006”,attached to the minutes of this shareholders’ meeting, taking it to be an integral part of this resolution;

5) to establish that the resolutions in the preceding points 2) and 3) are irrevocable up to the last date fixed, asset forth in the Warrant Regulations at the preceding point 4), for exercising the same warrants;

6) to amend to article 5 of the by-laws as follows:

Current wording

Article 5The share capital is Euros 339,399,636.16 dividedinto 652,691,608 shares with a par value of Euros0.52 each consisting of 618,273,351 ordinaryshares and 34,418,257 savings shares.The shareholders’ meeting of May 22, 1998 votedto increase share capital for a maximum amount ofEuros 33,270,858.40, represented by a maximumof 63,982,420 ordinary shares to be issuedexclusively for exercising the conversion rightsreserved for the holders of Pirelli & C. 2.5% 1998-2003 bonds.At the date of April 15, 2002, against theconversion of the bonds in the precedingparagraph, 54,712,354 ordinary shares weresubscribed to for a total par value of Euros28,450,424.08. The value of share capital in thepreceding first paragraph takes account of thisfact.By resolution passed by the extraordinaryshareholders’ meeting held on December 22, 1998,the Directors were granted the power to increasethe share capital, at one or more times, by amaximum amount of Euros 103,291,379.81 andfor a maximum time period of five years from thedate of said resolution.The share capital increase may be carried out byissuing, also with a premium, both ordinary andsavings shares, and must be reserved forshareholders and/or holders of convertible bonds.By resolution passed by the extraordinaryshareholders’ meeting held on December 22, 1998,the Directors were granted the power to issuebonds, at one or more times, including bonds thatare convertible both into ordinary shares or intosavings shares, or bonds with warrants valid for

Proposed wording

Article 5The share capital is Euros 339,422,773.56 dividedinto 652,736,103 shares with a par value of Euros0.52 each consisting of 618,317,846 ordinaryshares and 34,418,257 savings shares.By resolution passed by the extraordinaryshareholders’ meeting held on December 22, 1998,the Directors were granted the power to increasethe share capital, at one or more times, by amaximum amount of Euros 103,291,379.81 andfor a maximum time period of five years from thedate of said resolution. The share capital increase may be carried out byissuing, also with a premium, both ordinary andsavings shares, and must be reserved forshareholders and/or holders of convertible bonds.By resolution passed by the extraordinaryshareholders’ meeting held on December 22, 1998,the Directors were granted the power to issuebonds, at one or more times, including bonds thatare convertible both into ordinary shares or intosavings shares, or bonds with warrants valid forthe subscription of said shares, for a maximum parvalue amount of Euros 206,582,759.63 and for amaximum time period of five years from the dateof said resolution, with the consequent possibleincrease of the share capital to serve the bondconversion.The extraordinary shareholders’ meeting ofMay 6, 2003, voted the following:a) to increase share capital, against payment,

separable, by and no later than December31, 2003, of a maximum of Euros1,014,185,020.68, through the issue of amaximum of 1,950,355,809 ordinary sharesof par value Euros 0.52 each, with dividend

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the subscription of said shares, for a maximum parvalue amount of Euros 206,582,759.63 and for amaximum time period of five years from the dateof said resolution, with the consequent possibleincrease of the share capital to serve the bondconversion.The amount of share capital represented byordinary shares will be determined in relation tothe exercise of the right of conversion on bondsconvertible to ordinary shares to which the holdersof convertible bonds are entitled.

rights from January 1, 2003, to be offered onoption to the shareholders, at a unit priceequal to par value, in a ratio of 3 newordinary shares for every 1 share ofwhatsoever class of stock owned;

b) to attach to each share referred to in pointa) a free warrant, that can be tradedseparately, valid to subscribe, at any timefrom January 1, 2004 to June 30, 2006, in aratio of 1 Pirelli & C. ordinary share, withregular dividend rights and a par value ofEuros 0.52 for every 4 warrants held, at aunit price equal to par value;

c) to consequently increase share capitalagainst payment, separable, by and notlater than June 30, 2006, of a maximum parvalue of Euros 253,546,255.04 through theissue, at one or more times, of a maximumof 487,588,952 ordinary shares, of par valueEuros 0.52 each, with regular dividendrights, to be reserved exclusively andirrevocably for the exercise of a maximumof 1,950,355,809 warrants attached to theshares referred to in the preceding point b).

7) to request Borsa Italiana S.p.A. to list the warrants officially on the Mercato Telematico Azionario,authorizing the Board of Directors – and, on its behalf, the Chairman, Deputy Chairman and, whereappointed, the Managing Directors, all separately – to take every act useful or necessary for obtaining thelisting;

8) to grant the Board of Directors – and, on its behalf, the Chairman, Deputy Chairman and, whereappointed, the Managing Directors, all separately – every and all powers to execute the resolutions toincrease share capital, to be subscribed to according to art. 2439, paragraph 2, of the Italian Civil Code,by and not after December 31, 2003 with regard to the increase referred in point 1), and by and not afterJune 30, 2006 with regard to the increase referred to in point 3), with all the powers necessary to fulfilevery act necessary and pertinent to the execution of the resolutions and in particular to:– determine the number of shares to be issued and therefore the amount of the capital increase,

respecting the maximum limit voted by today’s shareholders’ meeting;– to establish the term for exercising the option rights and the offer of the unexercised rights on the

stock exchange as set forth in art. 2441, paragraph 3 of the Italian Civil Code, as well as place, alsowith third parties, the Pirelli & C. ordinary shares with warrants that are not subscribed on the stockexchange as referred to above;

– to approve every single change or addition to the Warrant Regulations referred to in the precedingpoint 4) which would be necessary and/or pertinent, including the determination of the number ofwarrants to be issued, before the same warrants are issued;

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– to draw up and present every document required to execute the transaction voted, including theprospectus for the option offer and the prospectus for the listing of the warrants;

9) to establish that, if the capital increases have been fully subscribed to by the dates indicated in theprevious point, the share capital shall be considered as increased by an amount equal to the subscriptionsreceived;

10) to authorize the Chairman, Deputy Chairman of the Board of Directors and, where appointed, theManaging Directors, also separately, to file and publish, in accordance with the law, occasionally, thetext of art. 5 of the by-laws updated with the changes relating to the issue of the shares referred to inpoints 1) and 3) and/or at the expiration of the dates referred in point 8);

11) to authorize the Chairman, Deputy Chairman of the Board of Directors and, where appointed, theManaging Directors, also separately, to carry out everything that is necessary or pertinent so that theseresolutions can be registered in the Companies’ Registry, accepting and introducing in the resolutions,any modifications and/or additions, formal and not substantial, necessary at the time of registration andeventually required by the pertinent authorities.

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Approval of the plan for the merger by incorporation in Pirelli & C. of Pirelli & C. LuxembourgS.p.A. (a wholly-owned subsidiary) and Pirelli S.p.A., involving among other things:(i) assignment of a maximum of 1,398,203,116 new ordinary shares and a maximum of

113,580,020 new savings shares of Pirelli & C. – with dividend rights from January 1 of the yearin which the merger becomes effective with third parties – respectively to Pirelli & S.p.A.ordinary and savings shareholders in a ratio of 4 new Pirelli & C. ordinary shares for every 3Pirelli S.p.A. ordinary shares and 10 new Pirelli & C. savings shares for every 7 Pirelli S.p.A.savings shares;

(ii) Pirelli & C. share capital increase through the issue of a maximum of 1,398,203,116 ordinaryshares and a maximum of 113,580,020 Pirelli & C. savings shares to service the merger with theconsequent amendment to article 5 (share capital) of the by-laws;

(iii)delegation to the Directors, according to article 2443 of the Italian Civil Code, of the right toincrease, at one or more times, for a maximum amount of par value Euros 52,000,000.00, theshare capital through the issue of ordinary shares to be granted to the managers and cadres ofPirelli & C. and its subsidiaries and the subsidiaries of the latter, in Italy and abroad, pursuantto articles 2441 and/or 2349 of the Italian Civil Code, also for purposes of maintaining the stockincentive plans of the company being merged, Pirelli S.p.A.. Consequent further amendment toart. 5 (share capital) of the by-laws;

(iv) further amendment of art. 17 (distribution of profits) renumbered article 18 – of the by-laws.

* * *

Report drawn up by the Directors of Pirelli & C. pursuant to art. 2501 quater of the Italian CivilCode and art. 70, paragraph 2, Consob Regulation No. 11971 dated May 14, 1999, as subsequentlyamended.

Dear Shareholders,

The Directors of Pirelli & C. propose to pass a resolution on the merger by incorporation in Pirelli & C. ofPirelli & C. Luxembourg (a wholly-owned subsidiary of Pirelli & C.) and Pirelli S.p.A. (the “Merger”) onthe basis of the plan of merger which you are called to approve.

You are also asked to invest the Directors with the right to increase share capital through the issue ofordinary shares to service the incentive plans approved by the Board of Directors of Pirelli S.p.A. onNovember 5, 2001 – in execution of which 46,829,692 options were assigned to the managers and cadres ofsaid company and its subsidiaries and/or parent companies – and eventual new plans destined for themanagers and cadres of your company and/or its subsidiaries and/or subsidiaries of the latter.

1. Description and reasons for the Merger

The Merger

The Merger is being proposed in order to simplify the corporate structure of the group headed by yourcompany, by concentrating the role of holding company in the latter. In fact, Pirelli & C., after the mergerof Pirelli & C. Luxembourg and Pirelli S.p.A., will find itself directly holding all the controlling investmentsin the various companies which form the Sectors in which the Group operates (Pirelli Cavi e Sistemi EnergiaS.p.A. for the Energy Cables Sector, Pirelli Cavi e Sistemi Telecom S.p.A. for the TelecommunicationsCables Sector, Pirelli Tyre Holding N.V. for the Tyres Sector, in addition to Pirelli & C. Real Estate S.p.A. in

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the real estate area) and other important investments which at the moment link Pirelli S.p.A. to OlivettiS.p.A. and therefore to the telecommunications sector.

The charts that follow depict the structure of the group headed by Pirelli & C. as of the date of this reportand the structure as it will be after the Merger. The charts also indicate the percentage of ownership ofordinary share capital.

* The investment holding will be reduced to 50.4% after the merger of Holy S.r.l. in Olimpia S.p.A., which will in all likelihoodtake place in May 2003.

POST-MERGER

PIRELLI & C.REAL ESTATE S.P.A.

OLIMPIA S.P.A.*

PIRELLI CAVI E SISTEMIENERGIA S.P.A.

PIRELLI CAVI E SISTEMITELECOM S.P.A.

PIRELLI TYREHOLDING N.V.

PIRELLI & C. A.P.A.

PIRELLI & C.LUXEMBOURG S.A.

100%

27,5%

61,2%14,2%

100%60%

PIRELLI S.P.A.

PIRELLI & C.REAL ESTATE S.P.A.

OLIMPIA S.P.A.*

PIRELLI CAVI E SISTEMIENERGIA S.P.A.

PIRELLI TYREHOLDING N.V.

PIRELLI & C. S.P.A.

PIRELLI CAVI E SISTEMITELECOM S.P.A.

100%

61,2%

50,4%

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The objectives which are meant to be pursued by the merger described above are as follows:– to maximize the market capitalization of the Group, on the one hand, eliminating investors’ uncertainty

about the stock in which to invest (with positive consequences on volatility/arbitrage) and, on the otherhand, offering you the possibility of exchanging your shares for shares in a larger-size company, with abroader asset portfolio, a much larger shareholder base and better features of liquidity andcontendability of the underlying security;

- to help focus management on the creation of value for a single shareholder group instead of two differentones;

- to increase the unitariness of strategic and operational guidelines, reinforcing the internal controlfunction across the board;

- to speed up the times in the decision-making process, raising the group’s capacity to interact with themarket, with strategic partners and with institutions;

- to create the basis for a more flexible development and management of the assets in portfolio; - to optimize economic and financial flows within the group and with shareholders;- to simplify administrative activities, eliminating those connected with the management of a listed

subholding company with its own consolidated financial statements and shareholders.

From a legal standpoint, the Merger will mean that Pirelli & C. will universally take the place of Pirelli & C.Luxembourg and Pirelli S.p.A., as a result of which your company will take over all the assets, and rights andobligations of the companies to be merged, and therefore, as an example only, all the relative property, plantand equipment and intangible assets, accounts receivable and payables accrued or due, the contract positionsof the companies to be merged and, in general, the entire equity of the same companies without exclusion orlimitations whatsoever.

Moreover, Pirelli & C. will replace: (i) Pirelli & C. Luxembourg as the issuer of the “Pirelli & C.Luxembourg S.A. – 5.125% Guaranteed Notes due 2009” of Euros 150,000,000 (ii) Pirelli S.p.A. as theissuer of “Pirelli S.p.A.– 4.875% Notes due 2008” of Euros 500,000,000 and (iii) Pirelli S.p.A. as theguarantor of the “Pirelli Finance (Luxembourg) S.A.– 6.50% Guaranteed Notes due 2007” of Euros500,000,000.

Delegation of powers ex art. 2443

By virtue of the above, Pirelli & C. will universally replace, among other things, all the workingrelations currently existing between Pirelli S.p.A. and its employees, some of whom are beneficiaries ofstock incentive plans approved by the Board of Directors of the same company on November 5, 2001.Your Directors, on one hand, wish to allow such beneficiaries to retain the rights granted and, on theother hand – also in view of the role that will be undertaken by Pirelli & C. after the Merger – to havethe opportunity to study new plans for sharing in the risk capital of Pirelli & C., the features of whichtake into account the applicable tax legislation and tend to favor the loyalty of the employees by furtherdeveloping the sense of belonging to the Pirelli Group also after the extraordinary transactions that aredescribed in this report.

With the approval of the Merger, you are asked to invest the Directors with the right to increase, at oneor more times, for a maximum par value of Euros 52,000,000.00, the share capital through the issue ofa maximum of 100,000,000 ordinary shares. The authorization, if approved, will be valid up to April30, 2008.

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The issue price of Pirelli & C. ordinary shares to be issued under the above-mentioned authorization will beset by the Directors at the time the authorization is eventually used; in the case of shares issued againstpayment, the issue price will be set between the par value of the shares (equal to Euros 0.52) and the priceestablished when the options to subscribe to the shares are granted.

Should the authorization be used completely, the shares thus issued would represent about 2.5 percent ofPirelli & C. ordinary share capital, calculated assuming the entire subscription at the present date of thecapital increase referred to in point 2 of the agenda of the extraordinary session of the shareholders’ meetingand the capital increase to service the Merger.

2. Values attributed to Pirelli & C. and Pirelli S.p.A. for purposes of determining the exchange ratio

Since Pirelli S.p.A., unlike Pirelli & C. Luxembourg, has other shareholders besides Pirelli & C., the Mergerrequires the determination of the exchange ratio of Pirelli S.p.A. shares, which will be cancelled as a resultof the Merger, with Pirelli & C. shares to be assigned in substitution.

Pirelli & C. appointed Mediobanca to prepare a valuation document identifying the possible exchangeratio of Pirelli & C. shares with those of Pirelli S.p.A.. In order to ensure full transparency of thevaluation activity, Pirelli & C. also availed itself of the services of Prof. Marco Reboa who verified thework performed by Mediobanca, examining the criteria and the methodologies used by Mediobanca inassigning the values.

From an economic standpoint, the relative values of Pirelli & C. and Pirelli S.p.A. were arrived at on thebasis of the balance sheet data of the companies at December 31, 2002, which coincides with theirrespective year-ends, taking into account the following significant events subsequent to that date:

(i) the purchase by Pirelli & C. of 47,973,139 Pirelli S.p.A. ordinary shares (equal to 2.5 percent ofordinary share capital) from BZ Group Holding Limited for a total price of about Euros 43.1million;

(ii) the merger of Holy S.r.l. in Olimpia S.p.A. on the basis of the agreements signed between theshareholders of Olimpia S.p.A., Olimpia S.p.A. and Hopa S.p.A. and announced to the market onDecember 19, 2002 (published in accordance with the law), after which Pirelli S.p.A.’s investment inOlimpia S.p.A. will be reduced from 60 percent to 50.4 percent;

(iii) the proposed pay out of dividends from 2002 profits by both Pirelli & C. (Euros 0.08 per ordinary shareand Euros 0.0904 per savings share, for a total of about Euros 52 million) and Pirelli S.p.A. (Euros0.0364 per savings share for a total of about Euros 3 million), submitted to the approval of therespective shareholders’ meetings;

(iv) the capital increase cum warrants offered on option to the shareholders of Pirelli & C. referred to inpoint 2 of the agenda for the extraordinary session of the shareholders’ meeting.

The valuation methods adopted

In a merger between companies, the objective of the valuation is to determine the exchange ratio, that is, theproportion between the number of shares of the companies to be merged, destined to be withdrawn fromcirculation, and the number of shares that the merging company will assign to the shareholders of thecompany to be merged. The principal purpose of the valuations of the companies involved in the merger,therefore, is not so much the estimate of the absolute values of economic capital of the companiesconcerned, but rather the availability of significantly relative comparable values for purposes of determiningthe merger ratio.

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The objective of the comparability of the values can also be pursued by choosing a plurality of valuationmethods which make it possible to effectively express the value of the companies involved in the merger,while keeping well in mind the fact that diverse situations can be characterized by different valuecomponents according to the origin and that they therefore require a proper interpretation.

The essential features of the methods used in the valuation and the results which were obtained arepresented in the following paragraph.

The Market Valuation MethodThe Market Valuation Method falls in the category of the so-called “direct” valuation methods, that is,methods which refer, in identifying the value of listed companies, to the effective prices expressed by themarket in transactions where the subject is a portion of the capital of the company being valued. Suchmethods, although not unconditionally adoptable for the calculation of the absolute value of economiccapitals, nevertheless constitute basic values of reference for expressing the relationship existingbetween the economic capitals of two listed companies. The results of the market valuation methodemerge from a logical process that is different from those arrived at by analytical type valuation methodbased upon the explicit assumptions of the one doing the valuation. As known, if the markets wereperfect, the indications of market price would eliminate the valuation processes. Therefore, in the casesuch as the one under examination in which the stocks of the companies in the valuation are traded onsufficiently mature markets, the prices in terms of the size of the capital outstanding and the effectivevolume of exchanges are significant, as well as being comparable for a sufficiently long enough period oftime, then the market prices represent an essential indication in the valuation process. For thedetermination of the relative values of the Companies, the weighted average exchange ratios expressedby the stock market prices over one, three and six months prior to March 7, 2003 were assumed forreference. March 7, 2003 was the date after which the stocks of the Companies were temporarilysuspended from trading.

The Sum of the Parts Method or Net Asset ValueFor purposes of the valuation of holding companies, doctrine and professional practice identify mainly twoalternative procedures:– the estimate of the value of the group as a whole on a consolidated basis;– the separate valuation of the parent company and its investment holdings.

The first involves the use of the consolidated financial statements of the group and the second, instead,through the use of the so-called cascading method, involves the separate analysis of the value of the parentcompany and the individual holdings on the basis of their respective financial statements.The procedure based upon the consolidated financial statements makes it possible to eliminate duplicationsin the income statement and balance sheet values as a result of intercompany transactions and to disregardthe corporate structure of the group.

Nevertheless, in the case of holding companies which hold dissimilar activities, with profiles and dynamicsthat are differentiated and scarcely integrated, the use of consolidated financial statements does not make itpossible to appreciate the diversities existing between the various business sectors through the application ofdifferent valuation methods and parameters. Therefore, where holding companies carry out diversifiedoperating activities, the application of valuations methods on a consolidated basis could lead to incorrectresults. To obviate such inconvenience, the most frequently adopted solutions consist of the utilization ofsub-consolidated financial statements for similar activities, using valuation criteria appropriate for each ofthe activities carried out.

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In this particular case, taking into account the different features of the companies, such method was appliedwith different approaches, using the breakdown by business segment taken from the consolidated financialstatements of Pirelli S.p.A. (industrial holding company) and the statutory financial statements for Pirelli &C. (investment holding company).

In particular, for Pirelli S.p.A., which because of the ample number of direct and indirect investments itrepresents a holding company active in various industrial sectors, the sum of the parts method was appliedon the basis of sub-consolidated financial statements by similar segment of business (energy cables, telecomcables, tyres and the “holding area”). Under this procedure, suitably differentiated valuation methods andparameters were applied to the various sectors/companies in order to grasp the operating features. Inparticular, the three industrial sectors were valued on the basis of the respective market multiples ofsimilarly listed companies. For the tyres business, which benefits from distinctive technologies and selectivemarket shares, the value thus obtained was adjusted to take into account a 20% bonus. For the activities inthe energy and telecom cables sectors, taking into account the negative economic conditions in the respectivemarkets, it was decided that the results expressed by the methodology of market multiples was consistentwith the market value of these activities by Pirelli S.p.A. and therefore did not require the application of abonus.

The “holding area” was valued on the basis of the contribution made to overall consolidated shareholders’equity, adjusted to take into account the costs which structurally accompany the operating activity of thearea as well as the current value of the unconsolidated investments. As for the latter, Olimpia S.p.A. wasvalued on the basis of the estimate of the economic value attributed to Olivetti S.p.A. shares and convertiblebonds in portfolio, increased by a 20% bonus to take into account the strategic value of the stock held byOlimpia S.p.A. in Olivetti S.p.A.. The value of the economic capital of Olivetti S.p.A. was estimated on thebasis of a valuation at Net Asset Value, valuing Telecom Italia S.p.A., which constitutes the main activity ofthe company, using the sum of the parts method. In particular, the Wireline Telephone Division (manageddirectly) and TIM S.p.A. (a 56.3%-owned subsidiary), were valued on the basis of the market multiples ofsimilarly listed companies, Telecom Italia S.p.A.’s holding in Seat Pagine Gialle S.p.A. (56.2%) was valuedon the basis of the average market price for the three months preceding March 7, 2003. This valuation usingthe sum of the parts method resulted to be in line with the target price reported in the research reportspublished by the numerous financial analysts who follow the Telecom Italia S.p.A. stock. In addition to theoverall value attributed to the telecommunications sector, account was also taken of the Pirelli S.p.A.’spotential liability relating to a put exercisable by shareholder financial institutions equal to 16.8 percent ofOlimpia S.p.A.’s capital. This effect was quantified on the basis of the differential value between the exerciseprice of the put relating to the Olimpia S.p.A.’s shares and their current value, determined on the basis of theestimate just described.

The minority holdings of the Pirelli S.p.A. group in listed companies were valued at market value on thebasis of the average market prices for the three months preceding March 7, 2003, the other investments inunconsolidated holdings that were not consolidated line-by-line were valued using the equity method andminor investments were valued at the balance sheet value.

For Pirelli & C., which represents an investment holding company, the assets of which consist of theholdings held in Pirelli S.p.A. (41.7 percent of ordinary share capital and 9.7 percent of savings sharecapital), Pirelli & C. Luxembourg (100%) and Pirelli & C. Real Estate S.p.A. (61.2%), the Net Asset Valuewas applied on the basis of the statutory proforma financial statements of Pirelli & C. + Pirelli & C.Luxembourg.

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In particular, the value of the economic capital of Pirelli & C. was calculated by valuing the investment inPirelli S.p.A. on the basis of the relative Net Asset Value, according to the methodology just described.Pirelli & C. Real Estate S.p.A., in turn, was valued, also taking into account market prices, on the basis ofthe relative Net Asset Value, valuing the real estate assets on the basis of an appraisal drawn up by theappraiser CB Richard Ellis, with reference to the situation at December 31, 2002, and the service activities(Service Providing and Asset Management) on the basis of the market multiples of similarly listedcompanies.

The minority holdings in listed companies were valued at market value on the basis of the average marketprices for the three months preceding March 7, 2003, the other investments were valued using the equitymethod or the balance sheet value. The overall value obtained was adjusted to take into account theoperating costs which structurally accompany investment holding operations.

With reference to the manner of applying the sum of the parts method, both for Pirelli & C. and PirelliS.p.A., it should be noted that, in consideration of the strategic nature of the principal investment holdings,and therefore, under the assumption that these same investments will continue to be held, no tax effect hasbeen applied to the unrealized gains arising from the economic valuation of the subsidiaries and the listedcompanies in which Pirelli & C. and its subsidiaries participate in voting trusts.

The valuation methods applied to the various sectors/companies of Pirelli & C. and Pirelli S.p.A. aretherefore summarized in the following table.

Company/principal assets Valuation method

Pirelli & C.

40.3% Pirelli S.p.A. NAV (compare infra)

61.2% Pirelli & C. Real Estate S.p.A. NAVReal estate properties CB Richard Ellis appraisalServices market multiples

Minority holdings in listed companies average market prices

Unlisted holdings equity method /cost

Pirelli S.p.A.

100% Pirelli Tyre Holding N.V. market multiples + bonus

100% Pirelli Cavi e Sistemi Energia S.p.A. market multiples

100% Pirelli Cavi e Sistemi Telecom S.p.A. market multiples

50.4% Olimpia S.p.A. NAV28.5% Olivetti S.p.A. NAV + bonus54.9% Telecom Italia S.p.A. NAV- Wireline telephone market multiples- TIM S.p.A. market multiples- Seat Pagine Gialle S.p.A. average market prices

Holding area Pirelli S.p.A. group Adjusted shareholders’ equityMinority holdings in listed companies average market pricesOther unconsolidated investments equity method/cost

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As for the assets valued using the market multiples method, the analysis consists of applying, to thecompany assets being valued, a series of ratios – “multiples” – between the market value of similarly listedcompanies (active in the same business segment) and certain income statement and balance sheetparameters related to them. In this way, a rough approximation is obtained of the value that the stockmarket would attribute to the company being valued, if the company were listed. The analysis of themultiples are divided into the following stages:– determination of the sample of listed companies;– determination of the timing interval of reference for the market prices (average over an interval or price

at a certain date);– identification of the multiples considered most significant in the case under examination;– normalization, as far as possible, of the income statement and balance sheet data of the company being

valued and the companies selected for the sample.

In this particular case, the multiples considered the most appropriate were used for the individual assetssubject to valuation and in line with the most prevalently used valuation practices employed by the financialanalysts of the sector.

Results

The following table summarizes the values per share for Pirelli & C. and Pirelli S.p.A. obtained by applyingthe described methods and the relative exchange ratios, taking into account the Pirelli & C. capital increaseon option and the dividends paid out of 2002 profits by Pirelli & C. and Pirelli S.p.A., expressed in terms ofthe number of Pirelli & C. shares for every Pirelli S.p.A. share:

Net Asset Market Valuation MethodValue 1-month average 3-month average 6-month average

Values per ordinary share

Pirelli & C. (Euros) 0,68 0,63 0,65 0,66

Pirelli S.p.A. (Euros) 0,90 0,82 0,87 0,92

Exchange 1,32 1,30 1,34 1,38

Value per n.c. savings share

Pirelli & C. (Euros) 0,62 0,58 0,59 0,55

Pirelli S.p.A. (Euros) 0,88 0,83 0,85 0,94

Exchange 1,43 1,43 1,44 1,71

3. Exchange ratio established and criteria followed in arriving at such determination

For purposes of determining the exchange ratios between the Pirelli & C. and Pirelli S.p.A. stocks, yourDirectors have thoroughly examined the work carried out by Mediobanca and Prof. Macro Reboa and agreewith the methodological approach, the criteria adopted and the conclusions. In particular, your Directors havetaken into account, also as established by art. 2501 quater of the Italian Civil Code, the peculiarities anddifficulties in valuing group holding companies that have industrial holdings in diverse areas and theconsequent opportunity to use valuations that, although respecting the principles of uniformity andcomparability of valuation criteria, made it possible to grasp the distinctive traits of each asset being valued.In light of the limited intervals identified and the basic homogeneity of the results obtained in applying the twomethods under consideration, your Directors have decided to adopt the exchange ratios proposed, namely:

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• 4 Pirelli & C. newly issued ordinary shares for every 3 Pirelli S.p.A. ordinary shares;

• 10 Pirelli & C. newly issued savings shares for every 7 Pirelli S.p.A. savings shares.

No cash differential is anticipated. These exchange ratios have received the consent of the directors of Pirelli S.p.A.

The newly issued Pirelli & C. shares to be used in the exchange do not carry the right to receive dividendsrelating to the year ended December 31, 2002 nor participate in the Pirelli & C. capital increase describedat point 2 on the agenda of the extraordinary session of the shareholders’ meeting.

Fairness opinion

The report on the fairness of the exchange ratio was drawn up, in the case of Pirelli & C., byPricewaterhouseCoopers S.p.A., the firm charged with the audit of the financial statements of both Pirelli &C. and Pirelli S.p.A..

Inasmuch as, pursuant to art. 158, fourth paragraph of Legislative Decree No. 58 dated February 24, 1998,the company charged with the audit of more than one of the companies in the merger can draw up thereport on the fairness of the exchange ratio for only one of the merging companies, Pirelli S.p.A. will petitionthe President of the Milan Courts to appoint an expert as set forth in art. 2501 quinquies of the Italian CivilCode.

4. Manner of assigning Pirelli & C. shares and the date the dividend rights accrue to these shares

Pirelli & C. will execute the Merger by:

– cancellation, without exchange, of the shares representing the entire share capital of Pirelli & C.Luxembourg;

– cancellation, without exchange, of the Pirelli S.p.A. ordinary and savings shares that, at the date theMerger becomes effective, are owned by Pirelli & C. or Pirelli & C. Luxembourg;

– cancellation, without exchange, of the shares of the company to be merged, Pirelli S.p.A., which, at thedate the Merger becomes effective, are owned by the same company to be merged;

– increase of its share capital for a maximum par value of Euros 786,127,230.72 through the issue of amaximum number of 1,398,203,116 ordinary shares and a maximum number of 113,580,020 non-convertible savings shares of par value Euros 0.52 each with dividend rights from January 1 of the yearin which the Merger comes into effect with third parties, to be reserved for the shareholders of PirelliS.p.A. (other than Pirelli & C. and Pirelli & C. Luxembourg) on the basis of the exchange ratiosindicated in the preceding paragraph 3.

As a result, art. 5 (share capital) of the by-laws of the merging company will be amended.

The amount of the capital increase to service the exchange represents the maximum theoretical amountbased upon the structure of the shareholder base as of the date of this report, assuming: (i) full exercise ofthe 46,154,000 “Mediocredito Lombardo Warrants – Pirelli S.p.A. ordinary shares 1998-2003”, held by asingle party, valid for the subscription, in the period July 1 – July 31, 2003, of 1 Pirelli S.p.A. ordinary sharefor each 1 warrant held at the price of approx. Euros 3.24 per share, and (ii) full exercise of the optionsgranted by Pirelli S.p.A. under the existing incentive plans giving the beneficiaries the right to subscribe to46,829,692 Pirelli S.p.A. ordinary shares.

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In order for the Pirelli S.p.A. shares, that are to be exchanged for the exchange ratio to be exactly divisible, up toa maximum of 2 ordinary shares and up to a maximum of 6 savings shares of Pirelli S.p.A. will be cancelled andmade available to a shareholder. The exact amount of the shares to be cancelled will be determined at the timeof signing the deed of merger, taking into account the number of Pirelli S.p.A. ordinary and savings shares heldby Pirelli & C., Pirelli & C. Luxembourg and the same Pirelli S.p.A. at that date, as well as the eventual exerciseof “Mediocredito Lombardo Warrants – Pirelli S.p.A. ordinary shares 1998-2003” and the eventual exercise ofthe options granted by Pirelli S.p.A. to the beneficiaries of the existing incentive plans.

The Pirelli & C. shares issued under the exchange ratios referred to in the preceding point 3 will be madeavailable to those entitled, under conditions of dematerialization, through the respective authorizeddepositary agents registered with Monte Titoli S.p.A. beginning from the date the Merger becomes effective,if the stock market is open for trading or from the first trading day thereafter.

Where necessary, Pirelli S.p.A. will ensure, through a broker charged especially for the purpose, thatshareholders can purchase or sell the minimum number of Pirelli S.p.A. shares in order to have a whole numberof Pirelli & C. shares without any additional expenses, revenues stamps and commissions. This information willbe announced on a timely basis through a specific notice published in at least one national newspaper.

Pirelli & C. and Pirelli S.p.A. will advise those concerned of the necessary procedures to be followed toexchange the shares after the Merger has been executed through publication of a specific notice in at leastone national newspaper.

As from the date the Merger becomes effective, if the stock market is open for trading, or from the firsttrading day thereafter, the Pirelli S.p.A. shares of all classes of stock will be delisted from the MercatoTelematico Azionario organized and operated by Borsa Italiana S.p.A..

Pirelli & C. shares, including the new shares issued to service the exchange ratio, will continue to be listedon the Mercato Telematico Azionario organized and operated by Borsa Italiana S.p.A..

Proposal to modify the features of the Pirelli & C. savings shares

The approval of the Merger on the part of the shareholders of the companies participating in the merger willentail a modification of the privileges offered by the Pirelli & C. savings shares as regards the distribution ofprofits. In fact, the by-laws of Pirelli & C. and Pirelli S.p.A. (and, in particular, art. 17 – which will berenumbered art. 18 following the resolutions described at point 1 of the agenda of the extraordinary sessionof the shareholders’ meeting – of Pirelli & C. and art. 23 of Pirelli S.p.A.) establishes a preference dividendequal to, respectively, 5 percent and 7 percent of the par value of the savings shares (Euros 0.52 for bothcompanies) to be paid from the annual earnings calculated net of the portion to appropriate to the legalreserve. In view of the fact that the Directors believe it more advisable to choose, between the twoalternatives, the one that is more advantageous to the holders of savings shares, with the approval of theMerger the shareholders are asked to amend art. 17 (renumbered art. 18) of the by-laws of your companyas indicated above and as better described in paragraph 10. Therefore, beginning from the date the Mergercomes into effect with third parties, the Pirelli & C. non-convertible savings shares and, therefore, also thosethat will be issued to service the exchange ratio, will have the same rights and the same features as thePirelli S.p.A. non-convertible savings shares outstanding prior to the date that the Merger takes effect.

Date dividend rights accrue to shares servicing the exchange ratio

The Pirelli & C. ordinary and non-convertible savings shares granted in the exchange will have dividendrights from January 1 of the year in which the Merger comes into effect with third parties.

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5. Effective date of the Merger

The deed of merger will establish the date from which the Merger will be in effect ex art. 2504 bis of theItalian Civil Code. The date could also be subsequent to the date in which the final registrations required byart. 2504 of the Italian Civil Code have been completed.

In accordance with the combined provision of articles 2504 bis, paragraph 3, and 2501 bis, paragraph 6 ofthe Italian Civil Code, the transactions of Pirelli & C. Luxembourg and Pirelli S.p.A. will be taken up byPirelli & C. in its financial statements beginning from January 1 of the year in which the Merger comes intoeffect with third parties, and this is also the date on which the merger becomes effective for tax purposes,pursuant to art. 123, paragraph 7, of D.P.R. No. 917 of December 22, 1986 (the “Tuir”).

6. Tax impact of the Merger on the companies concerned

The merger transactions are governed, from a tax standpoint, by art. 123 Tuir and Legislative Decree358/97.

In general terms, the provisions provide for a neutral tax effect on the transaction since it does not give riseto the assumption of either the realization or the distribution of gains of the merged company.

As a result, it follows that the values fiscally recognized for the assets of the companies that are to be mergedwill be maintained by the merging company.

Differences upon mergerThe merger, since it involves the unification of the net assets of the companies participating in thetransaction, can give rise to the need to make specific entries to maintain the accounting equilibriumbetween the values of the assets and liabilities: the surplus or deficit on merger.

From a fiscal standpoint, the merger surplus (represented by the exchange ratio and/or cancellation ofthe investment in the companies that were merged) is not taxable for the merging company. The mergersurplus will become part of shareholders’ equity of the merging company, maintaining proportionallythe same tax nature (of profits or capital) of the shareholders’ equity of the companies being mergedprior to the merger.

As regards, instead, the merger deficit, under civil law, it can be used to the increase the value of the assetsof the companies being merged. To this end, Legislative Decree 358/97 states that this higher value can berecognized fiscally if subjected to an equalization tax of 19 percent.

Furthermore, fiscal recognition of the merger deficit alone from the cancellation of the investment isallowed, even without paying the equalization tax, if and to the extent that the cancelled investments hadgiven rise to gains subjected to taxes by the previous owners.

If the merger deficit is recorded in the income statement, it does not form part of the taxable income of themerging company and, therefore, should be considered non-deductible for Irpeg purposes.

Reserves in abeyance of taxationThe reserves in abeyance of taxes recorded in the last financial statements of the merged companies willform part of the income of the merging company if and to the extent in which they have not been re-established in its financial statements.

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This does not apply to reserves which are taxable only in the event of distribution (for example, themonetary revaluation reserves), which must be re-established in the equity of the merging company only ifthere is a merger surplus or a capital increase for a amount that is higher than the total capital of thecompanies participating in the merger, net of the portion of share capital of each of them already owned bythe same or by the others. In this case, the reserves form part of the income of the company resulting fromthe merger or of the merging company in the case of the successive distribution of the surplus or thereduction of capital due to an excess.

The reserves already allocated to the capital of the merged companies shall be intended as transferred to thecapital of the merging company and form part of the income in the case of the reduction of capital due to anexcess.

Loss carryforwardsThe tax losses of the companies participating in the merger, including the merging company, can be carriedforward by the merging company for the portion of their amount which does not exceed the amount of therespective shareholders’ equity, as shown in the most recent financial statements or, if lower, as shown in thebalance sheet data pursuant to art. 2502 of the Italian Civil Code without taking into account thecontributions and payments against capital increases made in the last twenty-four months prior to the dateof the same balance sheet data.

The tax losses can, however, be carried forward on further condition that in the income statement of thecompany to which the losses refer, relating to the year prior to the one in which the merger was decided, theamount of revenues and the amount of expenses for personnel costs and related social security costs are 40percent higher than those resulting from the average of the two previous years.

The losses can not, in any case, be carried forward up to the total amount of the writedowns of the shares ofthe merged companies deducted by the merging company or by the company which sold the shares to themerging company after the year to which the losses refer and before the deed of merger.

Effective date for tax purposesThe law allows a merger to be effective for tax and accounting purposes on a date prior to that establishedby civil law.

Such date can not, however, be prior to the closing date of the last year of the merged companies or, ifcloser, the merging company.

Registration taxA fixed registration tax is applied to mergers.

Effects on the shareholders of the merged companiesThe exchange of the investments held by the shareholders of the merged companies with shares of themerging company is irrelevant for tax purposes since there is neither the realization or distribution of gainsnor the attainment of revenues.

As regards the Merger transaction in question, the following can be said:– in view of the year-end closing date of the merged companies, the Merger will be effective for tax

purposes from January 1 of the year in which the Merger itself comes into effect with third parties;– the difference on merger arising from the cancellation of the Pirelli S.p.A. shares held by the merging

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company and the exchange of Pirelli S.p.A. shares held by third parties will be recorded for statutorypurposes in the balance sheet of the merging company;

– the reserves in abeyance of taxes recorded by the merged companies, which amount to Euros45,824,199, will be recorded by the merging company by booking the merger surplus, whereas thereserve in abeyance of taxes already recorded in the capital of the merged companies, for a total of Euros27,076,810, will be transferred to the capital of the merging company (in any case, taking into accountthe effects represented by the eventual withdrawal of the shareholders that has already taken place);

– a fixed registration tax of Euros 129.11 will be applied to the merger, to be paid at the time of registeringthe deed of merger.

7. Forecast of the relevant shareholder composition and the controlling structure of Pirelli & C. after the Merger

The shareholder base of Pirelli & C. as of the date of this report is as follows (information is provided oninvestments higher than two percent of subscribed share capital, represented by shares with voting rights, asshown in the shareholders’ register, in official information received or in other available information); alsopresented are the investments held by the participants of the Pirelli & C. Accomandita per Azioni VotingTrust and the Pirelli & C. treasury shares, even if less than the 2 percent threshold):

Shareholder / Declaring Party No. of Pirelli % of ordinary % of share& C. shares share capital capital

Camfin S.p.A.* 184.854.284 (1) 29,90 28,32

Serfis S.p.A. 59.269.815 (2) 9,59 9,08

Assicurazioni Generali S.p.A.* 38.423.166 ( 6,21 5,89

Holding di Partecipazioni Industriali S.p.A.* 36.731.056 ( 5,94 5,63

Fondiaria – Sai S.p.A.* 34.735.046 (3) 5,62 5,32

Edizione Holding S.p.A.* 32.673.670 (4) 5,28 5,01

Mediobanca S.p.A.* 31.378.375 ( 5,07 4,81

R.A.S. S.p.A.* 31.377.170 (5) 5,07 4,81

E.Biscom S.p.A. 29.645.680 (6) 4,79 4,54

S.M.I. S.p.A.* 12.228.540 ( 1,98 1,87

Massimo Moratti* 8.120.616 (7) 1,31 1,24

Sinpar Holding S.A.* 6.115.487 ( 0,99 0,94

Pirelli & C. – treasury shares 2.617.500 ( 0,42 0,40

Other 110.147.441 ( 17,83 16,87

Total 618.317.846 ( 100,00 94,73

Savings shareholders 34.418.257 ( – 5,27

Grand Total 652.736.103 ( 100,00 100,00

Note:1. Sum of the investment held by Camfin S.p.A. (184,852,214 shares) and by the controlling party Marco Tronchetti Provera (

2,070 shares).2. Of which 29,528,225 held through Serfig S.r.l..3. Controlling party: Premafin HP S.p.A..4. Controlling party: Ragione di G. Benetton & C. S.a.p.a..5. Controlling party: Allianz Aktiengellschaft.6. Controlling party: Silvio Scaglia.7. Of which 6,792,046 shares held through CMC S.p.A..* Participants of the Pirelli & C. Accomandita per Azioni Voting Trust. The percentage of ordinary shares covered by the Voting

Trust is currently equal to 56.48 percent.

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The shareholder base of Pirelli S.p.A. as of the date of this report is as follows (information is provided oninvestments higher than two percent of subscribed share capital, represented by shares with voting rights, asshown in the shareholders’ register, in official information received or in other available information):

Shareholder / Declaring party No. of Pirelli S.p.A. % of ordinary % of shareshares share capital capital

Pirelli & C 800.191.375 (1) 41,70 39,87

Landesbank Baden Wuerttemberg 106.576.882 ( 5,55 5,31

Pirelli S.p.A. – treasury shares 163.263.699 (2) 8,51 8,13

Other (*) 849.091.765 ( 44,24 42,31

Total 1.919.123.721 ( 100,00 95,62

Savings shareholders (**) 88.006.016 ( – 4,38

Grand total 2.007.129.737 ( 100,00 100,00

Note:1. Sum of the investment held directly (272,378,274 shares) and indirectly through Pirelli & C. Luxembourg (527,813,101 shares).2. Of which 46,154,000 treasury shares available for eventual exercise of the “Mediocredito Lombardo Warrants – Pirelli S.p.A.

ordinary shares 1998-2003”.* Camfin S.p.A. holds 37,361,855 ordinary shares (1.95 percent of ordinary share capital).** Pirelli & C. holds 8,500,000 savings shares.

– The following table shows the anticipated composition of the Pirelli & C. shareholder base after theeffective date of the Merger, calculated by assuming that:

– the current shareholders of Pirelli & C. will not exercise the right of withdrawal to which they are entitledas a result of the resolutions referred to in point 1 of the agenda of the extraordinary session of theshareholders’ meeting;

– the current shareholders of Pirelli & C. will participate proportionally in Pirelli & C.’s capital increasecum warrants, more fully referred to in the preceding paragraph 1 (therefore subscribing to their share ofthe stock and exercising the free warrants attached to the shares);

– the “Mediocredito Lombardo Warrants – Pirelli S.p.A. ordinary shares 1998-2003” will not be exercised;– the options granted by Pirelli S.p.A. under the existing incentive plans which give the beneficiaries the

right to subscribe to 46,829,692 Pirelli S.p.A. ordinary shares will not be exercised.

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Shareholder / Declaring party % of ordinary % of ordinary shares shares post-capital increase post-capital

and post-Merger increase / post-exerciseof warrants

and post-MergerCamfin S.p.A.* 20,54 21,43 (1)

Serfis S.p.A. 6,17 6,50 (2)

Assicurazioni Generali S.p.A.* 4,00 4,21

Holding di Partecipazioni Industriali S.p.A.* 3,82 4,03

Fondiaria – Sai S.p.A.* 3,62 3,81 (3)

Edizione Holding S.p.A.* 3,40 3,58 (4)

Mediobanca S.p.A.* 3,27 3,44

R.A.S. S.p.A.* 3,27 3,44 (5)

Landesbank Baden Wuerttemberg 3,70 3,28

E.Biscom S.p.A. 3,09 3,25 (6)

S.M.I. S.p.A.* 1,27 1,34

Massimo Moratti* 0,85 0,89 (7)

Sinpar Holding S.A.* 0,64 0,67

Pirelli & C. – treasury shares 0,07 0,06

Other 42,29 40,07

Total 100,00 100,00

Note:1. Controlling party: Marco Tronchetti Provera.2. Also through the subsidiary Serfig S.r.l..3. Controlling party: Premafin HP S.p.A..4. Controlling party: Ragione di G. Benetton & C. S.a.p.a.5. Controlling party: Allianz Aktiengellschaft.6. Controlling party: Silvio Scaglia.7. Also through CMC S.p.A..* Participants in the Azioni Pirelli & C. Accomandita per Azioni Voting Trust.

Pirelli & C. is not aware of the existence of individuals and/or legal entities which, after the Merger, couldexercise control over same.

After the Merger, and assuming the full subscription to the Pirelli & C. capital increase on option prior tothe Merger (as well as the full exercise of the warrants), with no change in what was assumed above, thepercentage of the total investment contributed to the Pirelli & C. Accomandita per Azioni Voting Trust(calculated on the ordinary share capital) will decrease from the current 56.48 percent to about 38.32percent.

8. Effects of the Merger on relevant Shareholder Agreements pursuant to art. 122 of Legislative Decree No.58 of February 24, 1998

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Pirelli & C.

Pirelli & C. Accomandita per Azioni Voting Trust

As a result of the capital increase earmarked to service the exchange ratio, and also taking into accountthe diluting effect of the Pirelli & C. capital increase cum warrants as referred to in point 2 of theagenda of the extraordinary session of the shareholders’ meeting, consequent to the offer of ordinaryshares made also to savings shareholders, the percentage of the total investment contributed to theVoting Trust (calculated on ordinary share capital) will decrease from the current 56.48 percent toabout 38.32 percent.

No other significant effects on the aforementioned voting trust are anticipated.

Pirelli S.p.A.

Agreement between Pirelli S.p.A. and Intesa Mediocredito S.p.A. and between Pirelli S.p.A. and FondazioneCariplo Iniziative Patrimoniali S.p.A.

No significant effects are expected on the above agreements, whose date of expiry (August 1, 2003) ispresumably before the date that the Merger becomes effective.

Agreements between: (i) Pirelli S.p.A. and Edizione Holding S.p.A. – Edizione Finance InternationalS.A., (ii) Pirelli S.p.A., UniCredito Italiano S.p.A. and Intesa S.p.A., and (iii) Pirelli S.p.A. EdizioneHolding S.p.A. – Edizione Finance International S.A., UniCredito Italiano S.p.A., Intesa S.p.A., OlimpiaS.p.A. and Hopa S.p.A.The above agreements are finalized to regulate the control and governing of the common quality ofshareholders in Olimpia S.p.A., the company which holds an investment in Olivetti S.p.A..In executing the agreement signed between Pirelli S.p.A., Edizione Holding S.p.A. - Edizione FinanceInternational S.A., UniCredito Italiano S.p.A., Intesa S.p.A., Olimpia S.p.A. and Hopa S.p.A., the OlimpiaS.p.A. shareholders’ meeting passed a resolution, on March 3, 2003, for the merger of Holy S.r.l., thewholly-owned subsidiary of Hopa S.p.A., in Olimpia S.p.A..After this merger, 50.4 percent of Olimpia S.p.A.’s share capital will be held by Pirelli S.p.A., 16.8 percentby Edizione Finance International S.A., 16 percent by Hopa S.p.A. and 8.4 percent by UniCredito ItalianoS.p.A. and Intesa S.p.A..

The Merger is not expected have any significant effects on the above agreements, except that Pirelli & C.will consequently take over the rights and obligations of Pirelli S.p.A..

Pirelli & C. Luxembourg

There are no shareholder agreements covering Pirelli & C. Luxembourg shares.

Extracts of the agreements cited in this paragraph 8, published in accordance with the law, are presented asan attachment to this report.

9. Evaluation of the Board of Directors on the eventual recourse to the right of withdrawal pursuant to art.2437 of the Italian Civil Code

The Directors of Pirelli & C. do not believe that the Merger gives rise to the right of withdrawal for theshareholders of Pirelli & C. and Pirelli S.p.A. pursuant to art. 2437 of the Italian Civil Code.

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10. Amendments to by-laws

Due to the effect of the Merger, art. 5 of the by-laws of Pirelli & C. will be amended to include the newamount of share capital and the relative number of ordinary and savings shares consequent to theassignment of the shares to service the exchange.

Art. 5 of the by-laws will be further amended to reflect the powers attributed, pursuant to ex art. 2443 ofthe Italian Civil Code, to the Directors, referred to the preceding paragraph 1.

A comparison of the text of art. 5 of the by-laws (as it will amended – after your approval – by theresolutions referred to in point 2 of the agenda of the extraordinary session of the shareholders’ meeting)with the text reflecting the proposal contained in this report is presented below.

Text after the eventual approval of the resolutionsreferred in point 2 of the agenda of theextraordinary session of the shareholders’ meeting

The share capital is Euros 339,422,773.56 dividedinto 652,736,103 shares with a par value of Euros0.52 each consisting of 618,317,846 ordinaryshares and 34,418,257 savings shares.By resolution passed by the extraordinaryshareholders’ meeting held on December 22, 1998,the Directors were granted the power to increasethe share capital, at one or more times, by amaximum amount of Euros 103,291,379.81 andfor a maximum time period of five years from thedate of said resolution. The share capital increasemay be carried out by issuing, also with apremium, both ordinary and savings shares, andmust be reserved for shareholders and/or holdersof convertible bonds.By resolution passed by the extraordinaryshareholders’ meeting held on December 22, 1998,the Directors were granted the power to issuebonds, at one or more times, including bonds thatare convertible both into ordinary shares or intosavings shares, or bonds with warrants valid forthe subscription of said shares, for a maximum parvalue amount of Euros 206,582,759.63 and for amaximum time period of five years from the dateof said resolution, with the consequent possibleincrease of the share capital to serve the bondconversion.The extraordinary shareholders’ meeting of >May7, 2003, voted the following:a) to increase share capital, against payment,

separable, by and no later than December 31,2003, of a maximum of Euros 1,014,185,020.68,

Text with the amendments proposed in thisreport

The share capital is Euros 339,422,773.56 dividedinto 652,736,103 shares with a par value of Euros0.52 each consisting of 618,317,846 ordinaryshares and 34,418,257 savings shares.By resolution passed by the extraordinaryshareholders’ meeting held on December 22, 1998,the Directors were granted the power to increasethe share capital, at one or more times, by amaximum amount of Euros 103,291,379.81 andfor a maximum time period of five years from thedate of said resolution. The share capital increasemay be carried out by issuing, also with apremium, both ordinary and savings shares, andmust be reserved for shareholders and/or holdersof convertible bonds.By resolution passed by the extraordinaryshareholders’ meeting held on December 22, 1998,the Directors were granted the power to issuebonds, at one or more times, including bonds thatare convertible both into ordinary shares or intosavings shares, or bonds with warrants valid forthe subscription of said shares, for a maximum parvalue amount of Euros 206,582,759.63 and for amaximum time period of five years from the dateof said resolution, with the consequent possibleincrease of the share capital to serve the bondconversion.The extraordinary shareholders’ meeting of May 7,2003, voted the following:a) to increase share capital, against payment,

separable, by and no later than December 31,2003, of a maximum of Euros 1,014,185,020.68,

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through the issue of a maximum of1,950,355,809 ordinary shares of par valueEuros 0.52 each, with dividend rights fromJanuary 1, 2003, to be offered on option to theshareholders, at a unit price equal to par value, ina ratio of 3 new ordinary shares for every 1 shareof whatsoever class of stock owned;

b) to attach to each share referred to in point a) afree warrant, that can be traded separately, validto subscribe, at any time from January 1, 2004to June 30, 2006, in a ratio of 1 Pirelli & C.ordinary share, with regular dividend rights anda par value of Euros 0.52 for every 4 warrantsheld, at a unit price equal to par value;

c) to consequently increase share capital againstpayment, separable, by and not later thanJune 30, 2006, of a maximum par value ofEuros 253,546,255.04 through the issue, atone or more t imes, of a maximum of487,588,952 ordinary shares, of par valueEuros 0.52 each, with regular dividend rights,to be reserved exclusively and irrevocably forthe exercise of a maximum of 1,950,355,809warrants attached to the shares referred to inthe preceding point b).

through the issue of a maximum of1,950,355,809 ordinary shares of par valueEuros 0.52 each, with dividend rights fromJanuary 1, 2003, to be offered on option to theshareholders, at a unit price equal to par value, ina ratio of 3 new ordinary shares for every 1 shareof whatsoever class of stock owned;

b) to attach to each share referred to in point a)a free warrant, that can be traded separately,valid to subscribe, at any time from January1, 2004 to June 30, 2006, in a ratio of 1Pirelli & C. ordinary share, with regulardividend rights and a par value of Euros 0.52for every 4 warrants held, at a unit priceequal to par value;

c) to consequently increase share capital againstpayment, separable, by and not later thanJune 30, 2006, of a maximum par value ofEuros 253,546,255.04 through the issue, atone or more t imes, of a maximum of487,588,952 ordinary shares, of par valueEuros 0.52 each, with regular dividend rights,to be reserved exclusively and irrevocably forthe exercise of a maximum of 1,950,355,809warrants attached to the shares referred to inthe preceding point b).

The extraordinary shareholders’ meeting ofwhich approved the merger by incorporationin Pirelli & C. S.p.A. of Pirelli & C.Luxembourg S.p.A. and Pirelli S.p.A. voted toincrease share capital to service the exchangeratio by a maximum par value of Euros786,127,230.72 through the issue of amaximum of 1,398,203,116 ordinary sharesand a maximum of 113,580,020 savings sharesof par value Euros 0.52 each with dividendrights from January 1 of the year in which themerger comes into effect with third parties, tobe reserved for the shareholders of PirelliS.p.A., other than Pirelli & C. S.p.A. andPirelli & C. Luxembourg S.p.A., on the basis ofthe exchange ratio of: (i) 4 new Pirelli & C.ordinary shares for every 3 Pirelli S.p.A.ordinary shares and (ii) 10 new Pirelli & C.non-convertible savings shares for every 7Pirelli S.p.A. non-convertible savings shares. By resolution voted by the extraordinaryshareholders’ meeting of May 7, 2003, the

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Directors were granted the power to issue, atone or more times, up to a maximum of100,000,000 ordinary shares, by April 30,2008, to be granted to the managers andcadres of the Company and its subsidiariesand the subsidiaries of the latter, in Italy andabroad, pursuant to articles 2441 and/or 2349of the Italian Civil Code.

Furthermore, art. 17 (renumbered art. 18) of the by-laws of Pirelli & C. will be amended in accordancewith the previous sub paragraph 4 Proposal to modify the features of the Pirelli & C. savings shares toincrease the preference dividend from the current 5 percent to 7 percent of the par value of the savings to bepaid from the annual earnings calculated net of the portion to appropriate to the legal reserve.

A comparison of the text of art. 18 of the by-laws (as it will amended – after your approval – by theresolutions referred to in point 1 of the agenda of the extraordinary session of the shareholders’ meeting)with the text reflecting the considerations contained in previous paragraph is presented below.

Text after the eventual approval of the resolutionsreferred in point 1 of the agenda of theextraordinary session of the shareholders’ meeting

Article 18The annual profits shall be distributed, less theappropriations to the reserves prescribed by law, asfollows:a) savings shares shall be attributed an amount of

up to five percent of their par value; when, inany financial period, a dividend of less than fivepercent of the par value has been distributed tothe savings shares, the said difference iscalculated as an increase to be added to thepreference dividend during the following twofinancial periods; any profits remaining afterthe aforesaid appropriations and provisions andwhich the meeting resolves to distribute, shallbe distributed amongst all the shares in such amanner that the savings shares shall receive atotal dividend which is increased, compared tothe dividend received by the ordinary shares, byan amount equivalent to two percent of the parvalue;


The profits remaining shall be distributed among

Text with the amendments proposed in thisreport

Article 18After all the appropriations to the reservesprescribed by law have been carried out, theannual profits shall be distributed as follows:a) savings shares shall be attributed an amount of

up to seven percent of their par value; if, in anyfinancial period, a dividend of less than sevenpercent of the par value has been distributed tothe savings shares, the said difference iscalculated as an increase to be added to thepreference dividend during the following twofinancial periods; any profits remaining afterthe aforesaid appropriations and provisions andwhich the meeting resolves to distribute, shallbe distributed amongst all the shares in such amanner that the savings shares shall receive atotal dividend which is increased, compared tothe dividend received by the ordinary shares, byan amount equivalent to two percent of theirpar value;


The profits remaining shall be distributed among

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all the shares, in addition to the attributionreferred to in the preceding letters a) and b),unless the shareholders’ meeting, based upon theproposal of the Board of Directors, votes specialappropriations to the extraordinary reserves, orother destination or decides to appropriate a partof such profits to retained earnings.In the event of distribution of reserves, savings sharesshall have the same rights as the other shares.Interim dividends can be paid, in observance of thelaw.

all the shares, in addition to the attributionreferred to in the preceding letters a) and b),unless the shareholders’ meeting, based upon theproposal of the Board of Directors, votes specialappropriations to the extraordinary reserves, orother destination or decides to appropriate a partof such profits to retained earnings.In the event of distribution of reserves, savings sharesshall have the same rights as the other shares.Interim dividends can be paid, in observance of thelaw.

The above changes will become effective on the date the Merger comes into force, pursuant to art. 2504 bisof the Italian Civil Code and in accordance with that established in the plan of merger.

Attached are the plan of merger and the text of the by-laws of Pirelli & C. to be submitted to the approval ofthe shareholders’ meeting.

* * *


RESOLUTION

“The extraordinary shareholders’ meeting:• having examined the plan of merger drawn up in accordance with article 2501 bis of the Italian Civil

Code and the relative report of the Directors;• having taken note of the balance sheet data of the company at December 31, 2002;• having taken note of the balance sheet data of Pirelli & C. Luxembourg at December 31, 2002;• having taken note of the balance sheet data of Pirelli & C. at December 31, 2002;• having taken note of the registration of the plan of merger on the Milan Companies Registry, in

accordance with art. 2501 bis of the Italian Civil Code, under date of April 3, 2003 for Pirelli & C.,Pirelli & C. Luxembourg and Pirelli S.p.A., and the documentation filed as required by the provisions ofart. 2501 sexies and art. 2504 quinquies of the Italian Civil Code within the terms of the law;

• having taken note of the statement by the Board of Statutory Auditors which attests that the currentshare capital of Pirelli & C. of Euros 339,422,773.56, represented by 618,317,846 ordinary shares and34,418,257 savings shares, all with a par value of Euros 0.52, is entirely subscribed and paid-in;

• having taken note that Pirelli & C. owns 270,000 Pirelli & C. Luxembourg shares of par value Euros680.00 each, representing the entire share capital of said company;

• having taken note of the opinion of the experts, ex art. 158, paragraph 4, Legislative Decree No. 58/98,on the fairness of the exchange ratio of the shares relating to the merger by incorporation of Pirelli & C.Luxembourg and Pirelli S.p.A. in Pirelli & C. issued, pursuant to art. 2501 quinquies of the Italian CivilCode, for Pirelli & C. by PricewaterhouseCoopers S.p.A. and for Pirelli S.p.A. by Mediolanum SocietàLombarda di Revisioni S.R.L. following the decree for nomination by the President of the Milan Courts;

• having taken note that it would be opportune to maintain the incentive plan on behalf of the managersand cadres of the group, also after the merger and that, in the meantime, it would be opportune to conferto the Directors the possibility of studying new plans for sharing in the risk capital;

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votesto approve the plan of merger by incorporation in Pirelli & C. of Pirelli & C. Luxembourg and Pirelli S.p.A.(attached to these minutes) as registered in the Milan Companies Registry, according to the provisions of art.2501 bis of the Italian Civil Code, and thus, for the purpose, with no changes to any other provisions of thesame plan:a) to merge by incorporation in Pirelli & C., with registered office in Milan, Via G. Negri 10, now with share

capital of Euros 339,422,773.56, Pirelli & C. Luxembourg with registered office in Milan, Via G. Negri10, with share capital of Euros 183,600,000 (a wholly-owned subsidiary of Pirelli & C.) and PirelliS.p.A. with registered office in Milan, Viale Sarca 222, now with share capital of Euros1,043,707,463.24, on the basis of the respective balance sheet data at December 31, 2002, with (i)cancellation without substitution of all the Pirelli & C. Luxembourg shares and without a capital increaseon the part of Pirelli & C., since the latter owns the entire share capital of the merged company, (ii)cancellation without substitution of the Pirelli S.p.A. ordinary and savings shares that will be owned, atthe date the merger becomes effective, by the merging company, by Pirelli & C. Luxembourg and byPirelli S.p.A., and (iii) the increase of the capital of Pirelli & C. for a maximum par value of Euros786,127,230.72 through the issue of a maximum of 1,398,203,116 ordinary shares and a maximum of113,580,020 savings shares, all of par value Euros 0.52 each, with dividend rights from January 1 of theyear in which the merger comes into effect with third parties, to be assigned to the third-party holders ofPirelli S.p.A. ordinary and savings shares in a ratio of 4 new Pirelli & C. ordinary shares for every 3Pirelli S.p.A. ordinary shares and 10 new Pirelli & C. non-convertible savings shares for every 7 PirelliS.p.A. non-convertible savings shares;

b) to amend, with immediate effect, art. 5 of the by-laws, adding a new paragraph of the following nature:“the extraordinary shareholders’ meeting of May 7, 2003 which approved the merger by incorporation inPirelli & C. of Pirelli & C. Luxembourg S.p.A. and Pirelli S.p.A. voted to increase share capital to servicethe exchange ratio by a maximum par value of Euros 786,127,230.72 through the issue of a maximumof 1,398,203,116 ordinary shares and a maximum of 113,580,020 savings shares of par value Euros0.52 each with dividend rights from January 1 of the year in which the merger comes into effect withthird parties, to be reserved for the shareholders of Pirelli S.p.A., other than Pirelli & C., Pirelli & C.Luxembourg and Pirelli S.p.A., on the basis of the exchange ratio of: (i) 4 new Pirelli & C. ordinaryshares for every 3 Pirelli S.p.A. ordinary shares and (ii) 10 new Pirelli & C. non-convertible savingsshares for every 7 Pirelli S.p.A. non-convertible savings shares”;

c) to authorize, as from the date the merger becomes effective, the Directors, according to art. 2443 of theItalian Civil Code, to issue, at one or more times, up to a maximum of 100,000,000 ordinary shares, byApril 30, 2008, to be granted to the managers and cadres of the Company and its subsidiaries and thesubsidiaries of the latter, in Italy and abroad, pursuant to articles 2441 and/or 2349 of the Italian CivilCode, in observance of the laws existing in the countries of the beneficiaries; in the case of the bonusissue of shares, their equivalent amount should be drawn from the profits, eventually including retainedearnings, resulting in the latest financial statements approved by the company; in the case of theassignment of shares against payment, their unit price shall be between the par value of the shares andthe price established at the time of granting the employee the options for the subscription of the shares ofthe company.Consequently, art. 5 of the by-laws should further be amended by adding the following last paragraph:“By resolution voted by the extraordinary shareholders’ meeting of May 7, 2003, the Directors were grantedthe power to issue, at one or more times, up to a maximum of 100,000,000 ordinary shares, by April 30,2008, to be granted to the managers and cadres of the Company and its subsidiaries and the subsidiaries ofthe latter, in Italy and abroad, pursuant to articles 2441 and/or 2349 of the Italian Civil Code”

d) to amend, as from the date the merger becomes effective, referred to at letter a) above, art. 18 of the by-laws as follows:

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“After all the appropriations to the reserves prescribed by law have been carried out, the annual profitsshall be distributed as follows:(a) savings shares shall be attributed an amount of up to seven percent of their par value; if, in any

financial period, a dividend of less than seven percent of the par value has been distributed to thesavings shares, the said difference is calculated as an increase to be added to the preference dividendduring the following two financial periods; any profits remaining after the aforesaid appropriationsand provisions and which the meeting resolves to distribute, shall be distributed amongst all theshares in such a manner that the savings shares shall receive a total dividend which is increased,compared to the dividend received by the ordinary shares, by an amount equivalent to two percent oftheir par value;

(b) aside from what has been established above in respect of the total higher dividends attributed to thesavings shares, the ordinary shares shall be attributed an amount up to five percent of their parvalue.

The profits remaining shall be distributed among all the shares, in addition to the attribution referred toin the preceding letters a) and b), unless the shareholders’ meeting, based upon the proposal of the Boardof Directors, votes special appropriations to the extraordinary reserves, or other destination or decides toappropriate a part of such profits to retained earnings.In the event of distribution of reserves, savings shares shall have the same rights as the other shares.Interim dividends can be paid, in observance of the law.”

e) to delegate to the Chairman, Deputy Chairman and, where appointed, the Managing Directors protempore in office, any and all powers, so that each of them, separately, and also through those holdingspecial power of attorney, can execute the preceding resolutions, with the right to make changes in formand not substance, that might be required for purposes of registration in the Companies Registry,determining every single formality for the individual transactions according to the dictates of the plan ofmerger, reaching an agreement for the stipulation of the deed of merger (once the capital increasereferred to in point 2 of the agenda of the extraordinary session of today’s shareholders’ meeting iscarried out) and any other act inherent to and consequent thereof, agreeing, in accordance with theindications contained in the plan of merger, the terms and manner, proceeding – always in accordancewith the above terms – to the issue of the new shares to execute the share capital increase to service theexchange as well as the substitution and the cancellation of the shares of the merged companies, allowingtransfers, transcriptions and notes in the public registers and exonerating the Land and PropertyRegistrar and any other Public Office from whatsoever responsibility and fulfilling all that is essential forthe complete execution of the aforementioned resolutions, with all the necessary and appropriate powerfor this purpose, none excluded or excepted.”

The Board of Managing Partners

Milan March 11, 2003

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Appointment of the Directors – as a result of the fact that there will no longer be the figure ofgeneral partners consequent to the transformation of the legal entity to a corporation – afterestablishing their number; determination of the compensation due to the directors.

As a result of the transformation of the company from a limited partnership company to a corporation, aBoard of Directors will have to be appointed after determining the number of its members. To this end, theby-laws submitted for the approval of the extraordinary shareholders’ meeting established the numberbetween seven and twenty-three members who shall remain in office for three years (unless theshareholders’ meeting fixes a shorter term of office at the time of making the appointment) and may be re-elected.

The shareholders’ meeting will also establish the compensation due to the directors.

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Appointment of the Board of Statutory Auditors and its Chairman, establishing the compensationfor the standing statutory auditors.The by-laws (article 15, renumbered 16, reported below) call for the appointment of a Board of StatutoryAuditors using the mechanism of the voting list, so that the so-called minority shareholders can elect astanding statutory auditor and an alternate statutory auditor. The same provision is provided in the contentsof art. 21 of the by-laws of the company being merged, Pirelli S.p.A..The rights entailed by this provision were availed of by certain investment funds, shareholders of thecompany being merged, Pirelli S.p.A., representing more than 2 percent of the voting rights, which at thetime of the ordinary shareholders’ meeting of May 9, 2002 presented its own list and, consequently,nominated – among the standing statutory auditors – a so-called “minority interest” statutory auditor.Conversely, no shareholder of Pirelli & C. took advantage of this right when a new Board of StatutoryAuditors was elected on May 13, 2002.In view of the resolutions passed by the Board of Managing Partners on March 11, 2003 as regards themerger by incorporation of Pirelli S.p.A. and Pirelli & C. Luxembourg S.p.A. in Pirelli & C., and taking intoaccount the above, for the sole purpose of allowing that the shareholders’ meeting of the merging companyproceed to appoint a new Board of Statutory Auditors, with the consequent opportunity for the minorityshareholders to present its lists, the entire Board of Statutory Auditors of Pirelli & C. decided to resign fromoffice as from the date the merger becomes effective with third parties. Accordingly, the shareholders’ meeting is asked to proceed to appoint a new Board of Statutory Auditors.

Article 15 of the by-laws (renumbered art. 16) – Board of Statutory AuditorsThe Board of Statutory Auditors is composed of three standing statutory auditors and two alternatestatutory auditors who must hold the requisites required by existing laws and regulations; to this end,account will be taken that the matters and sectors of business strictly inherent to those of the Company arethose indicated in the corporate business purpose* with particular reference to companies or entitiesoperating in the industrial, banking, insurance, real estate and services sectors in general.The ordinary shareholders’ meeting shall elect the Board of Statutory Auditors and determine its compensation.The minority shareholders shall appoint one standing statutory auditor and one alternate statutory auditor.With the exception of the provisions of the second last paragraph of the present article, the appointment ofthe Board of Statutory Auditors shall be made on the grounds of lists put forward by the shareholders inwhich candidates are listed under progressive numbers.Each list shall contain a number of candidates which does not exceed the number of members to beappointed. All shareholders who, alone or together with other shareholders, represent at least 2 percent ofthe shares with voting rights in the ordinary shareholders’ meeting, have the right to put forward a list.The lists of candidates, undersigned by the parties presenting them, must be filed at the Company’sregistered office at least ten days before the day fixed for the meeting in first call. A description of theprofessional résumé of the individuals standing for election must be enclosed with the lists together withstatements whereby the single candidates accept the nomination and attest, under their own personalresponsibility, that no circumstances exist for ineligibility or incompatibility, and that they comply withrequirements prescribed by law or by the articles for the position Any lists put forward which do not comply with the aforesaid provisions shall be considered not to havebeen put forward.Each candidate may be included on only one list, under penalty of ineligibility.Likewise, any individuals who are not in possession of the requisites established by the applicable rules andregulations or who already hold the position of statutory auditor in more than five companies with stockslisted on regulated Italian markets, with the exception of the subsidiaries of Pirelli & C. may not beappointed as statutory auditors.Each individual with voting rights may vote for only one list.

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The election of the members of the Board of Statutory Auditors is performed as follows: two standingstatutory members and one alternate member are taken from the list which has obtained the highest numberof votes, in the progressive order in which they are listed thereon; the remaining standing statutory memberand the other alternate member are taken from the list which has obtained the highest number of votes fromthe meeting after the first list, again in the progressive order in which same are listed thereon; in the event ofseveral lists obtaining the same number of votes, a new run-off vote between the said lists will be cast by allthe shareholders present at the meeting, and the candidates on the list which obtains the simple majority ofthe votes will be appointed.The Chairman of the Board of Statutory Auditors shall be the statutory member indicated as the firstcandidate on the list which obtained the highest number of votes.In case of death, waiver or resignation of a Statutory Auditor, the alternate belonging to the same list as theresigned statutory auditor shall replace him. In the event of replacement of the Chairman the Board ofStatutory Auditors, the chair shall be taken by the other statutory member on the list to which the resigningchairman belonged; if it is not possible to perform substitutions and replacements as set out hereinabove,then a meeting shall be convened to integrate and complete the Board of Statutory Auditors and which shallpass resolutions with a relative majority.When the meeting has to make provisions, pursuant to the terms of the aforegoing paragraph or to the termsof law, for the appointment of statutory auditors and/or alternates needed to complete the Board ofStatutory Auditors, it shall proceed as follows: if statutory auditors appointed from the majority list have tobe replaced, then the appointment is made with a relative majority vote without being tied to any list; if, onthe other hand, statutory auditors appointed by the minority shareholders have to be replaced, the meetingshall replace them with a relative majority vote choosing names where possible from amongst the candidatesindicated on the list on which the statutory auditor to be replaced appeared.If only one single list has been put forward, then the meeting shall cast its vote in relation to that list; if thelist obtains a relative majority, then the first three candidates on the list in progressive order shall beappointed as the standing statutory auditors, and the fourth and fifth candidate shall be appointed asalternate statutory auditors; Chairman of the Board of Statutory Auditors shall be the person indicated atthe top of the list put forward; in case of death, waiver or resignation of a statutory auditor, and in the eventof substitution of the Chairman of the Board of Statutory Auditors, they shall be replaced respectively by analternate statutory auditor and a standing statutory auditor in the order arising from the progressivenumbering of the said list.Failing any lists, the Board of Statutory Auditors and its Chairman shall be appointed by the shareholders’meeting with the majorities prescribed by law.Resigning statutory auditors may be re-elected.

* Article 2 of the by-laws, after the amendments referred to in point 1 of the agenda of theextraordinary session of the shareholders’ meeting, states that the company will have the followingcorporate business purpose:a) the acquisition of participating interests in other companies or corporations, both in Italy and abroad;b) the financing, the technical and financial co-ordination of the companies or corporations in which it has

interests;c) the sale, ownership, management or placement of both government and private securities.

REGULATIONS OF THE “WARRANTS ON PIRELLI & C. ORDINARY SHARES 2003 - 2006”

Art. 1 – Warrants on Pirelli & C. ordinary shares 2003 - 2006The extraordinary shareholders’ meeting of Pirelli & C. S.p.A. (formerly “Pirelli & C.” accomandita perazioni), which met [o], voted, among other things, to increase the share capital against payment, separable,by a maximum par value of Euros 253,546,255.041 through the issue, at one or more times, of a maximumof 487,588,9521 ordinary shares of par value Euros 0.52 each, to be reserved exclusively and irrevocablyfor the exercise of the right of subscription by the holders of a maximum of 1,950,355,8091 “Warrants onPirelli & C. ordinary shares 2003 - 2006” (the “Warrants”) attached free to a maximum of 1,950,355,809Pirelli & C. shares, which issue was voted by the same extraordinary shareholders’ meeting.

On the basis of such resolution, the holders of Warrants will have the right to subscribe – in the manner andaccording to the terms indicated in these regulations – 1 Pirelli & C. ordinary share, with normal dividendrights, every 4 Warrants held, at a price equal to the par value of Euros 0.52 per share, except as providedin the following art. 3.

The Warrants are admitted to the centralized administration system of Monte Titoli S.p.A., under conditionsof dematerialization, pursuant to Legislative Decree No. 213 dated June 24, 1998.The Warrants can be traded separately from the shares to which they are attached beginning from the dateof issue and are freely transferable.

Art. 2 – Procedures for exercising WarrantsI) the holders of Warrants can ask to subscribe at any time, except as stated in the following point V -

beginning from January 1, 2004 to June 20, 2006 – Pirelli & C. ordinary shares, in a ratio of 1 newordinary share of par value Euros 0.52 for every 4 warrants presented to be exercised, at a price equalto the par value of Euros 0.52, except as stated in the following art. 3;

II) the subscription requests should be presented to the agent registered with Monte Titoli S.p.A., wherethe Warrants are deposited. The exercise of the Warrants will also have effect for the purposes indicatedin the following point III), the tenth trading day of the stock market in the month following thepresentation of the request, except for those presented between June 1 and June 20, 2006 which willhave effect from June 30, 2006. On the date the exercise of the Warrants becomes effective, Pirelli & C.will proceed to issue the subscribed shares, placing the shares at the disposition of those entitled tothem through Monte Titoli S.p.A.;

III) the shares subscribed to by exercising the Warrants will have normal dividend rights equal to those on thePirelli & C. ordinary shares traded on the stock market at the date the exercise of the Warrants is effective;

IV) the subscription price of the shares should be entirely paid when the request to exercise the Warrants ispresented, without any addition of commissions and expenses to be borne by the one making the request;

V) the exercise of the Warrants will be suspended from the date the Board of Directors of Pirelli & C. callsthe meeting of the Pirelli & C. ordinary shareholders up to the day (inclusive) on which the shareholders’meeting takes place – also when convened after the first call – and, however, up to the day (inclusive) ofpaying the dividends eventually voted by the same shareholders’ meetings;

1 The exact amount of the capital increase and, consequently, the warrants attached to the newly issued Pirelli & C. ordinaryshares, will be established once the number of Pirelli & C. shares on which the right of withdrawal was exercised is known,deriving from point 1 of the agenda of the extraordinary session of the shareholders’ meeting of May 7, 2003. The text of thepresent regulations will be changed accordingly.

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VI) the Warrants which are not presented to be exercised by June 20, 2006 will be forfeit of every right andlose validity for all effects;

VII) when the subscription request is presented, in addition to providing the necessary and customaryinformation, the holder of the Warrants: (i) must take note that the shares subscribed to by exercisingthe Warrants are not registered under the Securities Act of 1933 and later amendments, existing in theUnited States of America; (ii) must declare that he/she is not a U.S. person as defined by “RegulationsS”. No share subscribed by exercising the Warrants will be granted to the holders of the Warrantsunless they meet the above-described conditions.

Art. 3 – Rights of holders of Warrants in the event of transactions involving the share capital ofPirelli & C.

If, by June 30, 2006, Pirelli & C. executes:

I) share capital increases against payment, through the issue of new shares in option, also to service thewarrants valid for their subscription, or convertible bonds – direct or indirect – or with warrants, thenumber of shares subscribable for each warrant and the subscription price of the shares will not bechanged. The holder of the Warrants, in that case, will have the right to exercise the relativesubscription right before the date of convening the shareholders’ meeting called to pass the relativeresolutions or before the date the right is exercised, under the assumption that the transactions will bevoted by the Board of Directors;

II) bonus capital increases by assigning new shares, the number of shares subscribable for each Warrantand the subscription price of each of them will not be changed. When the Warrants are exercised, asmany bonus shares will be assigned as would have been assigned to the shares subscribed to byexercising the Warrants before the bonus capital increase;

III) increases in the par value of the shares or decreases in the par value of the shares due to losses, neitherthe number of shares subscribable for each Warrant nor the subscription price of the shares indicatedin the preceding art. 2 will be changed;

IV) stock splits or reverse stock splits, the number of shares subscribable for each Warrant and thesubscription price of the shares indicated in the preceding art. 2, consequently, will be changed;

V) changes in the provisions of its deed of incorporation concerning the distribution of profits or theincorporation of another company, neither the number of shares subscribable for each Warrant nor thesubscription price of the shares indicated in the preceding art. 2 will be changed;

VI) share capital increases through the issue of shares without option rights pursuant to art. 2441,paragraphs 4, 5, 6 and 8 of the Italian Civil Code, neither the number of shares subscribable foreach Warrant nor the subscription price of the shares indicated in the preceding art. 2 will bechanged.

Should another transaction be executed, other than the ones considered in the previous points and capableof causing the same effects, the number of the shares subscribable and/or, if necessary, the price to exercisethe Warrants according to generally acceptable methods will be changed.

In cases in which, as a result of the provisions of this article, the holder is not entitled to a whole number ofshares at the time of exercising the Warrants, the holder will have the right to subscribe to shares up to thewhole number and will have no right to the fractional part. In no case can the price for the subscription ofthe shares by the exercising the Warrants be lower than their par value.

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Art. 4 – Authorized agentsThe transactions for exercising the Warrants will take place with authorized depositary agents registeredwith centralized management system of Monte Titoli S.p.A..

Art. 5 – TermsThe right to exercise the Warrants must be exercised, under penalty of forfeit, by presenting the request byJune 20, 2006.

Art. 6 – Tax system The gains from the sale against payment of the warrants for the subscription of investments in companiesresident in Italy with stock traded on regulated markets, if not resulting from exercising arts and professionsor business activity, constitutes sundry financial income subject to the substitute equalization tax.The substitute equalization tax is applied as follows:

– 27% for the sale of warrants made also with different subjects over a period of 12 months, even if fallingin different tax periods, which make it possible to acquire a qualified investment as defined by art. 81,paragraph 1, letter c) of D.P.R. 917/1986 (T.U.I.R.), taking into account for this purpose the direct salesof investments and other rights made during the same 12-month period.

– 12.5% for the sale of warrants, which, always made over a period of 12 months, even with differentsubjects, does not make it possible to acquire a qualified investment, even together with the direct sale ofinvestments and other rights.

Gains realized by non-resident subjects in Italy, if relating to non-qualified investments, or the sale ofwarrants traded on regulated Italian or foreign stock markets, are not subject to the aforementionedsubstitute equalization tax.Gains realized on qualified investments by the same subjects are, in any case, subject to the 27% substituteequalization tax, except for the application of more favorable treatment under double taxation avoidanceagreements between Italy and the countries of resident of the payee.For additional information and details on the tax rules concerning the above-mentioned income and anyrelative interference with the separate rules for capital gains, reference should be made to Legislative DecreeNo. 461 dated November 21, 1997, as later amended, and the Tax Code (T.U.I.R.), as well as other legaland administrative rulings.

Art. 7 - ListingBorsa Italiana S.p.A. will be asked to admit the Warrants for listing on the stock exchange.

Art. 8 - SundryAll the communications between Pirelli & C. and the holders of Warrants will be made, where not otherwiseprovided by law, through a notice published in at least one national newspaper.The possession of the Warrants implies the full acceptance of all the conditions established in theseregulations.For any controversy relating to the Warrants and the provisions of these regulations the legal jurisdictionwill exclusively be the courts of Milan.

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PIRELLI & C. ACCOMANDITA PER AZIONI VOTING TRUST AGREEMENT

1. Type of agreement and purpose

The purpose of the Pirelli & C. voting trust agreement is to ensure a stable shareholder base and a uniformstrategy in the management of the company.

2. Parties to the agreement and Pirelli & C. shares transferred to the voting trust:

Number of shares % of total % of total transferred shares transferred ordinary

to trust to trust shares issued

CAMFIN S.p.A. 126.090.714 36,10% 20,39%

HOLDING DI PARTEC. INDUST. S.p.A. 36.583.598 10,47% 5,92%

FONDIARIA – SAI S.p.A. 34.685.046 9,93% 5,61%

MEDIOBANCA S.p.A. 31.378.375 8,98% 5,07%

EDIZIONE HOLDING S.p.A. 31.377.170 8,98% 5,07%

R.A.S. S.p.A. 31.377.170 8,98% 5,07%

ASSICURAZIONI GENERALI S.p.A. 31.377.170 8,98% 5,07%

S.M.I. S.p.A. 12.228.540 3,50% 1,98%

Massimo MORATTI (*) 8.120.616 2,33% 1,31%

SINPAR HOLDING S.A. 6.115.487 1,75% 0,99%

Total 349.333.886 100% 56,48%

(*) of which 6,792,046 shares through CMC 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) isprohibited. 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 of the voting trust.Each participant may buy or sell additional shares for an amount not in excess of the higher of 20% of theshares already transferred and 2% of the ordinary share capital issued; purchases of greater amounts arepermitted only with the intent of reaching a holding equal to 5% of the ordinary share capital issued, oncondition that the amount in excess of the above limits came under the voting trust.CAMFIN S.p.A. is authorized to freely purchase additional Pirelli & C. shares; it can transfer shares to thevoting trust, but to the extent that, at any one time, the shares do not exceed 40% of total shares transferredby all the participants in the voting trust. This has been decided so that a stable predominate position is notassumed in the voting trust or a stable veto power is not exercised over common decisions.

5. Disposition of the shares

The shares transferred shall remain at the disposition of the participants in the voting trust.

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6. Bodies governing the agreement, criteria and manner of composition, cases when meetings are called andpowers delegatedThe Body governing the agreement is the management of the voting trust.Management of the voting trust shall consist of a president and vice-president designated by Pirelli & C.from among its directors and by a member representing each participant unless a participant has depositedmore than 10% of ordinary share capital, in which case another member may be designated: for thispurpose, in the event the voting trust is composed of several companies related by a controlling relationshipor belonging to the same parent company, their aggregate shall be considered for this purpose as one soleparticipant in the voting trust.The management of the voting trust shall be convened to evaluate the proposals to be submitted to theShareholders’ Meetings, for the possible earlier termination of the agreement and for the admission ofnew participants. The Shareholders’ Meeting shall also meet at least twice a year to examine, with thedirectors of Pirelli & C., the semiannual performance, the annual results, the general guidelines for thecompany’s development, the investment policy and proposed significant divestitures. and more ingeneral, all the relevant matters of discussion by both the ordinary and extraordinary sessions of theShareholders’ Meetings.The agreement shall be terminated when the majority of the directors of Pirelli & C. do not share theguidelines decided by the management of the voting trust.

7. Matters covered by the agreement

Those contemplated in points 4 and 6.

8. Majority vote required for decisions relating to matters in the agreement

The management of the voting trust passes resolutions by casting votes in favor by the members representingat least three-fifths of the shares transferred; management of the voting trust can designate trustees torepresent the shares in the voting trust at the Shareholders’ Meetings in order for voting to take placeaccording to the instructions of the management of the voting trust. Whenever the decisions of themanagement of the voting trust are not voted unanimously, the dissenting participant shall have the right tofreely exercise his/hers/its vote in the Shareholders’ Meeting.

9. Term, renewal and cancellation of the agreement

The agreement shall be valid until April 15, 2004 and shall be tacitly renewed for a period of three yearsexcept for withdrawal, which can be exercised between December 15 and January 15 prior to the expirationdate. In case of withdrawal, the shares transferred by the withdrawing party shall be automatically offeredpro-quota to the other participants. The agreement shall remain in force, whenever it is possible, at everyexpiration date, to renew the agreement for a percentage of Pirelli & C.’s subscribed ordinary share capitalof 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, December 31, 2002

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NOTICE PURSUANT TO ART. 10, PARAGRAPH 4, LAW NO. 149 OF FEBRUARY 18, 1992 ANDCONSOB RESOLUTION NO. 7835 OF MARCH 8, 1994

Pirelli S.p.A. reached an agreement for a loan of about Lire 290 billion coming from the issue of“Mediocredito Lombardo S.p.A. 1998/2003 2.2% special series bonds cum warrants for Pirelli S.p.A.ordinary shares” (the “Loan”) issued by Mediocredito Lombardo S.p.A. (“Mediocredito”) and subscribed toby Fondazione Cariplo Iniziative Patrimoniali S.p.A. (“Fondazione”).Each bond carries a “Mediocredito Lombardo Warrant - Pirelli S.p.A. ordinary shares 98-03” (the“Warrants”) to acquire at pre-fixed prices, over the next five years, up to a maximum of 46,154,000 PirelliS.p.A. ordinary shares (the “Shares”). The Shares shall be made available by the same Pirelli S.p.A. whichwill draw them from the treasury shares. The Loan contains the so-called cash equivalent clause wherebyPirelli S.p.A. has the right, should Mediocredito declare that the holder of the Warrants intends to exercisethem, to choose between delivering the shares or paying the difference, if positive, between the market priceof the shares, in reference to the arithmetic average of the last three official prices available at the time thewarrants are exercised, and the price of exercising the Warrants.

Agreement between Pirelli S.p.A. and Mediocredito Lombardo S.p.A.1. Type of agreement and purpose

Compendium agreement having the purpose of guaranteeing the issuer Mediocredito the amount of PirelliS.p.A. ordinary shares or money needed to allow the same Mediocredito to fulfill its obligations to thecarriers of Warrants at the time they are eventually exercised.

2. Parties to the agreement

The parties to the agreement are Mediocredito and Pirelli S.p.A..

3. Financial instruments covered by the agreement

The Pirelli S.p.A. ordinary shares covered by the agreement are a maximum of No. 46,154,000.They represent 2.44% of the ordinary share capital of Pirelli S.p.A. as of today’s date.


There is no party which, through the agreement, can exercise control over Pirelli S.p.A..

5. Restrictions on the sale of the shares

There are no restrictions whatsoever on the Shares or destined in any way whatsoever to limit theirdisposition.

6. Disposition of the shares

The Shares shall remain at the disposition of Pirelli S.p.A..

7. Bodies governing the agreement


8. Matters covered by the agreement.

Those covered in paragraph 1.

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The agreement runs until the expiration date for the exercise of the Warrants (July 31, 2003) and it is notrenewable nor is it subject to cancellation or withdrawal.



Agreements between Pirelli S.p.A. and Fondazione Cariplo Iniziative Patrimoniali S.p.A.1. Type of agreement and purpose

Pre-emptive agreement having the purpose of guaranteeing Pirelli S.p.A., or parties indicated by it, the pre-emptive right to acquire the Warrants (or the rights to the Warrants) assigned, at issue, to the Loan.

2. Parties to the agreement

The parties to the agreement are Fondazione and Pirelli S.p.A..

3. Financial instruments covered by the agreement

Warrants covered by the agreement are a maximum of No. 46,154,000.In the event the Warrants are exercised, they give the right to acquire Shares representing 2.44% of theordinary share capital of Pirelli S.p.A. as of today’s date.


There is no party which, through the agreement, can exercise control over Pirelli S.p.A..

5. Restrictions on the sale of the warrants.

There are no restrictions whatsoever on the Warrants or destined in any way whatsoever to limit theirdisposition.The sale of the Warrants, or the rights to them, to subsidiaries as set forth by art. 2359, paragraph 1, pointl, of the Italian Civil Code and to the parent companies of the Fondazione, is freely permitted; to thirdparties it is allowed by pre-emption; to commercial competitors of Pirelli S.p.A. it is permitted withapproval.

6. Disposition of the warrants

The Warrants remain at the disposition of the holders.

7. Bodies governing the agreement


8. Matters covered by the agreement.

Those covered in paragraphs 1 and 5.


The agreement runs until August 1, 2003; it is not renewable nor is it subject to cancellation or withdrawal.

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Notice pursuant to art. 122 of Legislative Decree No. 58 of February 24, 1998 and the regulation forits introduction adopted with Consob resolution No. 11971 of May 14, 1999 (and subsequentamendments)Agreement between Pirelli S.p.A. and Fondazione Cariplo Iniziative Patrimoniali S.p.A.(the extract of which was published in the Press on December 15, 1998)

Be it communicated, that in accordance with above provisions, that the agreement between Pirelli S.p.A.and Fondazione Cariplo Iniziative Patrimoniali S.p.A., has been renewed, in accordance with the originalwish of the contracting parties, up to August 2003.At this time, be it furthermore communicated, that also the agreement between Pirelli S.p.A. andMediocredito Lombardo S.p.A. (which was taken over, in the meantime, by IntesaBci Mediocredito S.p.A.)will be binding up to August 2003.The above agreements have been filed with the Milan Companies Registry.


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AGREEMENT BETWEEN PIRELLI S.P.A. AND EDIZIONE HOLDING S.P.A. – EDIZIONE FINANCEINTERNATIONAL S.A.

Notice published according to article 122 of Legislative Decree No. 58 dated February 24, 1998 andto the regulation for its introduction adopted with Consob’s resolution No. 11971 of May 14, 1999(and subsequent changes)

Provided that:• Registry under tax code and VAT No. 00886890151 hereafter referred to as “Pirelli”), and Edizione

Holding S.p.A. (with registered offices in Treviso, at Calmaggiore 23, registered in the Treviso CompaniesRegistry under tax code No. and VAT No. 00778430264 hereafter referred to as “Edizione”) executedon August 7, 2001 an agreement in order to govern as shareholders a vehicle company designatedspecifically for the acquisition from BELL S.A. and other parties of No. 1,552,662,120 ordinary shares(the “Shares”) and No. 68,409,125 “warrants ordinary shares Olivetti 2001-2002”(“Warrants” andtogether with the Shares, the “Investment”) of Olivetti S.p.A. (hereafter “Olivetti”);

• On August 9, 2001, Edizione and Pirelli transferred to Olimpia S.p.A. (with registered offices inMilan, at Viale Sarca 222 “Newco” or “Olimpia”) respectively No. 134,322,250 and No.130,980,000 Olivetti ordinary shares, equal, respectively, to 1.84% and to 1.80% of Olivetti sharecapital with voting rights;

• On August 9, 2001, an additional No. 147,337,880 of Olivetti ordinary shares were transferred to Newcothat Pirelli purchased, through a subsidiary, from Bell S.A. and from another party on July 30, 2001(equal to 2.02% of Olivetti share capital with voting rights);

• Effective August 7, 2001, Edizione Finance International S.A. (a subsidiary of Edizione) tookover the rights and obligations of Edizione under the Agreement as defined below;

• Pirelli, Edizione and Edizione Finance International S.A. (the “Parties” and individually the “Party”) onSeptember 14, 2001 signed an amendment, publicly announced on September 22, 2001, in accordancewith existing laws.

Moreover: • the Parties, on February 13, 2002, stipulated a second amendment to the Agreement, which is

underlined in bold later in the report in the paragraph “Further commitments of the parties”, so that theParties may purchase (and eventually convert) convertible bonds into Olivetti shares (hereafter referredto as the “Bonds”).

The entire agreement is summarized below, specifying that Olimpia’s investment in the share capital ofOlivetti is equal to approximately 28.7%.

1 Content of the agreement

Purpose and content of the agreemenThe Parties have reached an agreement (the “Agreement”) as to the criteria governing the shareholders of aspecifically identified vehicle company (Olimpia) for the acquisition of the Investment from BELL S.A.and/or other parties designated by it.

Transfer of Olivetti shares to NewcoThe Investment shall be transferred to Newco.

Share capital of NewcoNewco’s share capital is 80% held by Pirelli and 20% by Edizione. Pirelli will have the right, with priorconsent from Edizione, to sell up to 20% of the share capital of Newco to one or more parties.

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Shareholders’ Meeting, Board of Directors and Board of Statutory Auditors of NewcoThe By-laws of Newco state that the Extraordinary Shareholders’ Meeting shall pass resolutions with 81% ofthe share capital casting a vote in favor both in first and second call.The Board of Directors of Newco shall be formed by ten members nominated by voting list. Edizione willhave the right to nominate two directors. Pirelli agrees to do everything in its power so that, within thelimits of law, no decision shall be made by the Board of Directors of Newco without a vote cast in favor by atleast one of the board members appointed by Edizione (if present) on certain key issues such as:• an indication of the vote to be expressed in the Ordinary and Extraordinary Shareholders’ Meetings of

Olivetti;• the purchase, sale or acts to dispose in any manner of investments with a total value greater than Euros

100,000,000 per single transaction. The Parties hereby agree to do everything in their power so that one acting statutory auditor and onealternate statutory auditor of Newco shall be named by Edizione.

Corporate boards of Olivetti and its listed subsidiaries, resolutions passed by the Board of Directors ofOlivetti and its listed subsidiariesThe Parties agree to do everything in their power, within the limits of law, so that, as regards the directorsof Olivetti S.p.A., Telecom Italia S.p.A., TIM – Telecom Italia Mobile S.p.A. and Seat Pagine Gialle S.p.A.(hereinafter “Listed Companies”), Edizione may designate one-fifth of the available members of theBoards of Directors for nomination (net of the directors nominated by the market and government entities)and the Deputy President with vice-representation in the aforementioned companies.• For the entire term of this Agreement, Edizione agrees not to present opposition to the fact that the

members of the Board of Directors of Listed Companies and the subsidiaries not named by Edizione, themarket, or government agencies, shall be named by Pirelli.

• The parties agree to do everything in their power so that no decision shall be made by the Board ofDirectors of Olivetti and Listed Companies without a vote cast in favor by at least one of the boardmembers named by Edizione on the following points of business: – individual investments greater than Euros 250 million; – purchase, sale and acts to dispose for any reason whatsoever of subsidiary or affiliate investments with

a unit value of greater than Euros 250 million; – acts to dispose for any reason whatsoever of companies or business segments individually greater

than Euros 250 million; – proposals to call the Extraordinary Shareholders’ Meeting; – infragroup transactions between the Olivetti group and the Pirelli group for amounts individually

greater than Euros 50 million; – related party transactions.

PenaltyThe breach of the provisions of this Agreement shall cause the breaching party to pay to the complyingparty a penalty equal to 10% of the principal amount invested by the complying party, including the rightto higher damages.

TermThis Agreement shall run for three years and shall be deemed to be tacitly renewed on each expiration dateunless notice of withdrawal has been given by Edizione 6 (six) months in advance.

Further commitments of the PartiesThe Agreement provides that the Parties and/or their subsidiaries or parent companies pursuant to article2359, paragraph 1 of the Italian Civil Code may not purchase further shares or bonds which may be

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converted into Olivetti shares. Nevertheless, the Parties may, with prior notice to the other party,purchase bonds; the Party which holds the bonds may exercise the conversion right, with priornotice of 60 days to the other party, only to the extent that the amount of the Olivetti shares comingfrom the conversion (eventually increased by the numbers of Olivetti shares owned at the samedate, coming from prior conversion), does not exceed after conversion, the percentage of the Olivettishare capital corresponding to the difference between 28.74% and the percentage of Olimpia’sinvestment in the share capital with voting rights in Olivetti at the time of conversion. Such limitmay be exceeded with the consent of the other Party within the applicable threshold for TakeoverBids (OPA). In this case, the Party which has exercised the conversion right shall have theobligation to sell to the other Party, if requested, shares of the same nature and typology of thosecoming from the exercise of the conversion of the Bonds, to the extent that such shares shall bedivided between the Parties in relation to the original proportion of the Investment by the Partiesin the share capital of Olimpia: Pirelli 80% and Edizione 20%.In the event that third parties should make a Takeover Bid (OPA) for Olivetti, Edizione hereby agrees, whenso requested by Pirelli, not to oppose Newco’s acceptance of the OPA.In the event of non-renewal of the Agreement upon expiration by Pirelli, Edizione shall have the right to sellto Pirelli, which shall have the corresponding obligation to buy, all of its Newco shares.The Agreement in addition provides for the terms and conditions to overcome a deadlock situation in Newcoor in the Board of Directors of the Listed Companies which are resolved as follows: (i) Edizione shall havethe right to sell to Pirelli, which shall have the corresponding obligation to purchase all the Newco shares; ii)Pirelli shall have the right to purchase from Edizione, which shall have the corresponding obligation to sellall the Newco shares.The by-laws of Newco shall provide for a pre-emptive right in case of acts for disposal which will cause adirect or indirect transfer of Newco’s shares and, in accordance with the pre-emptive right, a co-sale right infavor of the minority shareholder/s/ where Newco’s shares are offered to third parties by the majorityshareholder (50.01%).Whenever, during the term of this Agreement, following one or several acts inter vivos carried out forwhatsoever reason, there occurs, with reference to the situation that existed at the time the agreement wassigned, a material change in the controlling structure of Edizione or Pirelli (including Pirelli & CAccomandita per Azioni for these purposes), meaning that parties other than those currently having thepower may nominate the majority of the members of the governing body with a subsequent possible changein the strategic guidelines, this will constitute a “Key Event”. In the presence of a Key Event concerning one Party, the other Party shall have the right to transfer all of itsNewco shares to the party which caused the Key Event to occur.

2 Registration at the office of the Companies Registry The Agreement is registered at the office of the Milan and Turin/Ivrea Companies Registry.

February 21, 2002

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AGREEMENT BETWEEN PIRELLI S.P.A., UNICREDITO ITALIANO S.P.A. AND INTESABCI S.P.A

Notice published according to article 122 of Legislative Decree No. 58 dated February 24, 1998 andto the regulation for its introduction adopted with Consob’s resolution No. 11971 of May 14, 1999(and subsequent changes)

Considering that:Pirelli S.p.A., IntesaBCI S.p.A. and Unicredito Italiano S.p.A. on October 24, 2001 have agreed to amendthis Agreement, underlined in bold in paragraph 11, Further Commitments points 11.1 and 11.2 such as toallow the Parties to subscribe to bonds convertible into Olivetti shares and/or warrants with rights toacquire shares and/or bonds convertible into Olivetti shares, the entire agreement is summarized below,which has been updated, and reports the data relating to the investment held by Olimpia in Olivetti(paragraph 1, Purpose and content of the agreement) and the equity interest of the shareholders in Olimpia(paragraph 2, Olimpia’s share capital).

1. Purpose and content of the AgreementThe Parties as defined herein, have reached an agreement (the “Agreement”) regarding the entry ofUnicredito Italiano S.p.A. (”UCI”) and IntesaBCI S.p.A. (“BCI”, BCI and UCI together “the NewShareholders”, each of the New Shareholders individually the “New Shareholder” and the Newshareholders jointly with Pirelli “the Parties”) in Olimpia’s S.p.A. share capital (“Olimpia” or“Company”) and the criteria of the management and rules concerning their quality as Olimpia’sshareholders. Olimpia currently owns overall No. 2,019,302,250 Olivetti S.p.A. ordinary shares(“Olivetti”), equal to approximately to 27.7% of Olivetti share capital and No. 68,409,125 warrantsOlivetti ordinary shares 2001-2002.

2. Olimpia’s share capitalOlimpia’s share capital is divided as follows: 60% Pirelli, 20% Edizione Finance International S.A. 10% UCI(“Olimpia UCI Investment”) and 10% BCI (“Olimpia BCI Investment”).

3. Olimpia’s Board of Directors3.1 It is understood that, within the limits allowed by law and for the entire term of this Agreement: (i) the

Board of Directors of the Company will be made up of 10 (ten) members; (ii) 1 (one) director out of 10(ten) shall be appointed at the request and upon indication of UCI; (iii) 1 (one) director out of 10 (ten)shall be appointed at the request and upon indication of BCI; (iv) should an Executive Committee beinstituted, UCI and BCI will have, respectively, the right to request at any time the inclusion of thedirectors designated by them in said committee.

3.2 It is understood that the power of UCI and BCI to designate, each, a member of the Board of Directorsof the Company will remain valid even after the first expiration of this Agreement, if it is extendedpursuant to Art. 8.1 (a), provided UCI and BCI hold, jointly, a percentage of the company’s sharecapital above 10%. However, if the joint holding of BCI and UCI in the company’s share capital is 10%or less, then BCI and UCI may designate, jointly, only one director.

4. Composition of the Board of Directors in Olivetti, Telecom Italia S.p.A. (“Telecom”), Seat-Pagine Gialle S.p.A. (“Seat”) and Telecom Italia Mobile S.p.A. (“TIM”)

4.1 It is understood that, within the limits allowed by law and for the entire term of this Agreement, in theBoard of Directors of Olivetti, Telecom, Seat and TIM (the “Olivetti Companies”), one director mustbe appointed at the request and upon designation of UCI and another director at the request and upondesignation of BCI.

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4.2 It is understood that the power of UCI and BCI to designate, each, a member of the Board ofDirectors of the Olivetti Companies will remain valid even after the first expiration of thisAgreement, if it is extended pursuant to Art. 8.1, provided UCI and BCI hold, jointly, apercentage of the company capital above 10%. However, if the joint holding of BCI and UCIin the company capital is 10% or less, then BCI and UCI may designate, jointly, only onedirector.

5. Key IssuesPursuant to Art. 6 below, the following shall be deemed Key Issues:a) the decisions of the Extraordinary Shareholders’ Meeting and those of the Board of Directors of the

Company, the latter referring to the following:– indication as to how to vote in Olivetti’s Ordinary Shareholders’ Meeting on Key Issues, for the

purposes of the application of Articles 104 or 107 T.U. No. 58 of February 24, 1998, and inmatters of acquisition of treasury shares, as well as voting in Olivetti’s ExtraordinaryShareholders’ Meeting;

– acquisition, sale and acts of disposal under any status (i) of treasury shares in any amount and (ii)holdings (including shares and financial instruments of any type issued by Olivetti and/or theOlivetti Companies) at a value, by individual transaction, greater than Euros 100 million;

– determination of the ratio between equity and debt of the Company and methods, terms andconditions for resorting to outside financing sources;

– draft proposals to be submitted to the Company’s Extraordinary Shareholders’ Meeting;b) resolutions of the Board of Directors of Olivetti and Telecom, referring to:

– individual investments greater than Euros 300 million;– acquisition, sale and acts of disposal under any status (i) of treasury shares in any amount and (ii)

affiliate and subsidiary holdings (including shares and other financial instruments issued by theCompany or the Olivetti Companies) at a value, by individual operation, greater than Euros 300million;

– acts of disposal under any status of companies or business segments thereof, with an individual valuegreater than Euros 300 million;

– proposals to call the Extraordinary Shareholders’ Meeting for resolutions in matters of modificationof the corporate purpose, transactions involving share capital of any nature, merger, spin-off,transformation and dissolution;

– transactions between Olivetti, Telecom and the Pirelli Group, with an individual value greater thanEuros 50 million;

– related party transactions.

6. Provisions on Deadlock6.1 Obligation to ConsultPirelli and the New Shareholders, the latter jointly between them, pledge to consult each otherpreviously whenever a decision on one of the Key Issues, identified in paragraph 5, must bediscussed or decided upon.

6.2 Manifestation of WillWhenever, in the previous consultation referred to in paragraphs 6.1 above, Pirelli and the NewShareholders did not reach an agreement concerning the issues under consultation, the dissenting NewShareholders, separately or jointly, will have, or the single dissenting New Shareholder will have, the right tosend to Pirelli, by telegram or registered letter, pursuant to paragraph 12.02, a “Notice of Deadlock”within 15 (fifteen) days of the end of the consultation referred to in paragraph 6.1.

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6.3 Rights of the New Shareholders.(a) Whenever UCI and/or BCI send a Notice of Deadlock, the New Shareholder which sent the Notice of

Deadlock will have the right to sell to Pirelli, which will have the corresponding obligation to buy fromthe respective New Shareholder, respectively, all but not part of the Olimpia UCI Investment and/or allbut not part of the Olimpia BCI Investment at a price determined pursuant to the provisions in item (b)below.

(b) For the purposes of item (a) above, the Parties agree, including in an aleatory manner, that the object ofthe decision must be: (x) the price of the Olimpia BCI Investment and/or Olimpia UCI Investment,corresponding proportionately to the value of the Company’s economic capital (“Price of the OlimpiaUCI Investment” and/or “Price of the Olimpia BCI Investment”), as well as (y) an increaseexpressing the proportion of the increase premium, as if the Olimpia BCI Investment and/or OlimpiaUCI Investment were the expression of Olivetti’s control, assuming that the latter controls Telecom andthe companies controlled by the latter (“Premium”).

(c) the price owed by Pirelli will not be lower than the amounts paid by the New Shareholder for theacquisition and subscribing of shares in the Company, less any dividends received (“Floor”), nor higherthan an amount which implies, in connection to the same amounts, less any dividends received, anannual IRR, including taxes, equal to 15% (“Cap”).

7. PenaltyIn the event of breach of one or several commitments made pursuant to the provisions of thisAgreement, the breaching Party, at the simple written request of the Parties or of the other Party,and without prejudice to any other of its/their rights (including the right to higher damages), willbe obligated to pay, as penalty, to the complying Party or complying Parties, a single and totalamount equal, for each breach, to 5% (five percent) of the amounts paid by the breaching Party forthe acquisitions and subscriptions of shares made in the Company as of that date.

8. Term8.1 This agreement will have a term of three years from October 5, 2001 (Effective Date) and will be

deemed tacitly renewed from time to time on expiration for the following two years, in the absence of anopt-out notice from one of the Parties, without prejudice to the provisions of point 9. below.

8.2.Except in the cases required by law, each of the Parties may opt out of this Agreement before everyexpiration, with notice sent 6 (six) months in advance.

9. Absence of Renewal(a) If, before the first expiration of this Agreement or successive ones, Pirelli should send to the

New Shareholders, jointly or separately, the opt-out notice referred to in point 8.2 above, UCIand BCI will individually have the right to send to Pirelli which, upon simple request, will havethe corresponding obligation to acquire, respectively, all but not part of the Olimpia UCIInvestment and Olimpia BCI Investment held by the New Shareholders which exercised theoption right set forth herein, under terms and conditions determined, mutatis mutandis,pursuant to paragraph 6.3 (b) above (and the provisions mentioned therein), giving notice toPirelli within 30 (thirty) Business Days, notwithstanding paragraph 6.3(c). The above price willbe paid in cash.

(b) If, on the first expiration date of this Agreement, both or one of the New Shareholders should, jointly orseparately, send to Pirelli, the opt-out notice in the terms set forth in paragraph 8.2 above, Pirelli willhave the right to acquire from both New Shareholders opting out, or from the single New Shareholderopting out, which, upon simple request, will have the corresponding obligation to sell, respectively, allbut not part of the Olimpia UCI Investment and Olimpia BCI Investment held by the New Shareholders

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which exercised the opt out right set forth herein, under terms and conditions determined, mutatismutandis, pursuant to paragraph 6.3(b)above (and the provisions mentioned therein), less thePremium, giving notice to the New Shareholders which sent the opt-out notice, within 30 (thirty)Business Days.

(c) If, both or one of the New Shareholders should send to Pirelli, at the expiration of the first renewal forthe following two years, the opt-out notice referred to in paragraph 8.1, and therefore, on the expirationof the fifth year after the effective Date of this Agreement, or on the successive additional expirationdates, both New Shareholders opting out, jointly or separately, or the single New Shareholder optingout, will have the right to sell to Pirelli, which, upon simple request, will have the correspondingobligation to acquire, respectively, all but not part of the Olimpia UCI Investment and/or all but notpart of the Olimpia BCI Investment held by the New Shareholders which exercised the opt out right setforth herein, under terms and conditions determined, mutatis mutandis, pursuant to paragraph 6.3 (b)above (and the provisions mentioned therein), giving notice to the New Shareholders that sent the opt-out notice, within 30 (thirty) Business Days notwithstanding paragraph 6.3(c).

10. Changes in shareholder base10.1 For the purposes of this paragraph, “Change of Control” means a substantial modification in the direct

and indirect shareholder control base of Pirelli, which means the stoppage of the control of Pirelli & C.Accomandita per Azioni over Pirelli S.p.A., as exercised today.

10.2 If the Change of Control occurs, each of the New Shareholders will have the right to transfer,respectively, all but not part of the Olimpia UCI Investment and/or all but not part of the Olimpia BCIInvestment owned by Pirelli which, upon simple request, will have the obligation to acquire, underterms and conditions determined, mutatis mutandis, pursuant to paragraph 6.3 (b) above (and theprovisions mentioned therein), giving notice to Pirelli within 30 (thirty) Business Days of the date theNew Shareholders, separately or jointly, declared in writing that they have learned about the Change ofControl, or received written communication about this circumstance. It is, however, agreed, includingin an aleatory manner, that the price owed by Pirelli will not be lower than the amounts paid by theNew Shareholder for the acquisitions and subscriptions of shares in the Company, less any dividendsreceived (“Floor”), nor higher than an amount which implies, in connection to the same amounts, lessany dividends received, an annual IRR, including taxes, equal to 15% (“Cap”).

10.3 If Pirelli intends to divest, in any form, part of its investment in the Company, so that Pirelli wouldhold less than a majority of the capital thereof, Pirelli may not sign any agreement in this sense, beingfirst obligated to give prior timely notice to both the New Shareholders about the planned transfer,fully indicating the terms and conditions of the transfer operation and any possible outside agreements(of blockage and vote) with the buyers.

10.4 Within 30 (thirty) Business Days of receipt of the aforementioned communication, UCI and/or BCIwill, individually, have the right to sell to Pirelli, which, upon simple request, will have thecorresponding obligation to acquire, respectively, all but not part of the Olimpia UCI Investmentand/or all but not part of the Olimpia BCI Investment held by the New Shareholders that exercised theOption Right set forth herein, under terms and conditions determined, mutatis mutandis, pursuant toparagraph 6.3 (b) above, with the understanding, including in an aleatory manner, that the price owedby Pirelli will not be lower than the amounts paid by the New Shareholder for the acquisitions andsubscriptions of shares in the Company, less any dividends received (“Floor”).

11. Further commitments11.1 For the entire term of the Agreement, the Parties agree, also through their subsidiaries and/or parent

companies according to article 2359, paragraph 1, of the Italian Civil Code, that they shall neitheracquire nor hold Olivetti ordinary shares (including those deriving from the conversion of

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convertible bonds and/or the exercise of the Warrants). Nonetheless UCI and BCI are allowed toacquire and to hold such securities within the maximum limit of 0.40% of the Olivetti’s capital foreach of them.

11.2 The Company, save for different agreements among the Parties, may not acquire Olivetti ordinaryshares (neither exercise the conversion rights, nor acquire or subscribe Olivetti ordinaryshares as per paragraph 11.1) in such a measure as to exceed the takeover threshold currently at30% (thirty percent) and also taking into account, for this purpose, the impact of the securitiesdescribed in paragraph 11.1 held by BCI and UCI and the treasury shares owned directly andindirectly by Olivetti, according to the provisions of the law and regulations in force, including therules issued by Consob.

12. DisputesAny dispute arising from this Agreement will be submitted to the unappealable judgement of an ArbitrationBoard.

13. Registration of the agreement at the Companies RegistryThe agreement is registered at the office of the Milan and Turin/Ivrea Companies Registry.

Milan, November 3, 2001

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AGREEMENT BETWEEN PIRELLI S.P.A. - EDIZIONE FINANCE INTERNATIONAL S.A – EDIZIONE HOLDING S.P.A. - BANCA INTESA S.P.A. - UNICREDITO ITALIANO S.P.A. - OLIMPIA S.P.A. - HOPA S.P.A.NOTICE ACCORDING TO ARTICLE 122 OF LEGISLATIVE DECREE NO. 58/98 AND ARTICLES 127 AND 129 OF THE REGULATIONS ADOPTED BY CONSOB WITHRESOLUTION NO. 11971/99

According to article 122 of Legislative Decree 58/98 and articles 127 of the Regulations adopted byCONSOB with resolution No. 11971 of May 14, 1999 (as subsequently modified with resolutions No.12475 of April 6, 2000, No. 13086 of April 18, 2001, No. 13106 of May 3, 2001, No. 13130 of May 22,2001, No. 13605 of June 5, 2002 and No. 13616 of June 12, 2002), Pirelli S.p.A., with registered officesin Milan, at Viale Sarca 222, registered in the Milan Companies Registry under tax code and VAT No.0088689015, (“Pirelli”) states that it has stipulated on February 21, 2003 the agreement(“Agreement”) with Edizione Finance International S.A., with registered offices at Place d’Armes 1, L-1136, registered with the Luxembourg Chamber of Commerce under number B77504, (“EdizioneFinance”); Banca Intesa S.p.A. (formerly Intesa BCI S.p.A.), with registered offices in Milan, at PiazzaPaolo Ferrari 10, Administrative Offices at Via Monte de Pietà 8, registered in the Milan CompaniesRegistry under tax code No. 00799960158 and VAT No. 108107000152 (“Intesa”); Unicredito ItalianoS.p.A., with registered offices in Genoa, at Via Dante 1, Central Administration in Milan, PiazzaCordusio, registered in the Genoa Companies Registry under tax code No. and VAT No. 00348170101(“Unicredito”); Olimpia S.p.A., with registered offices in Milan, at Viale Sarca 222, registered in theMilan Companies Registry under tax code No. and VAT No. 03232190961 (“Olimpia”); Hopa S.p.A.,with registered offices in Brescia, at Corso Zanardelli 32, registered in the Brescia Companies Registryunder tax code No. and VAT No. 03051180176 (“Hopa”) and Edizione Holding S.p.A., with registeredoffices in Treviso, at Calmaggiore 23, registered in the Treviso Companies Registry under number 13945,tax code No. and VAT No. 00778430264 (as the guarantor of the Edizione Finance bonds “Edizione”)including, inter alia, the following clauses of the shareholders’ agreement which - by wish of thecontracting parties - is published herein in its entirety:

OMISSIS

Article IDefinitions1.01 “Olivetti Shares”: ordinary shares with voting rights in Olivetti (as defined in paragraph 1.23 below).1.02 “Current Olimpia Shareholders”: Pirelli, Edizione Finance, Unicredito and Intesa, collectively.1.03 “Hopa Controlling Companies”: Fingruppo Holding S.p.A., Banca Monte dei Paschi di Siena, S.p.A.,

Compagnia Assicuratrice Unipol S.p.A., Banca Popolare di Lodi S.c.a.r.l. and other private individualssignatory to the voting trust with regard to Hopa.

1.04 “Notice of Deadlock”: shall have the meaning set forth in paragraph 8.04(d) below.1.05 “Notice of Accelerated Deadlock”: shall have the meaning set forth in paragraph 8.06 (b)(i) below.1.06 “Control”, “to control”, “Subsidiaries,” and “Controlling companies”: other than cases that expressly differ

from the context herein, shall have the meaning set forth in Article 2359, paragraph 1, No. 1 and No. 2 ofthe Italian Civil Code.

1.07 “Relevant Date”: shall have the meaning set forth in paragraph 9.01 of the present Contract.1.08 “Term of Agreement”: shall have the meaning set forth in paragraph 6.00 below.

OMISSIS

1.12 “Business Day”: every calendar day other than Saturday, Sunday, and other days when as ageneral rule the banks of Milan are not open for performing their usual activities.

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1.13 “Holinvest”: Holinvest S.p.A., with registered offices in Brescia, at Corso Zanardelli 32, issued capitalof _ 700,000,000 and subscribed capital of _ 514,000,000.00, registered in the Brescia CompaniesRegistry under registration No., tax code No. and VAT No. 03562710172.

1.14 “Holy”: Holy S.r.l., with registered offices in Brescia, at Corso Zanardelli 32, capital of _ 10,000.00,registered in the Brescia Companies Registry under registration No., tax code No., and VAT No.03517530170.

OMISSIS

1.16 “Net Financial Borrowings”: unless otherwise specified with regard to specific cases, shall be the algebraicsum on a consolidated basis (with the understanding that for each case net financial borrowings forOlimpia, borrowings for Olivetti and its Subsidiaries will not be taken into account) of the following itemsentered in the balance sheet prepared pursuant to Art. 2424 of the Italian Civil Code: “bonds (D1) =convertible bonds (D2) + due to banks (D3) + due to other financial backers (D4) + financial debts owedto unconsolidated subsidiaries (D8) + financial debts owed to affiliates (D9) + financial debts owed tocontrolling companies (D10) – amounts due from unconsolidated subsidiaries (C II 2) – amounts due fromaffiliates (C II 3) – amounts due from controlling companies (C II 4) – financial assets other than fixedassets (C III) – liquid assets (C IV).” Any existing present value must be added to this amount, for financialleases, if such are not included in the aforementioned items.

OMISSIS

1.18 “Key Issues”: shall have the meaning set forth in paragraph 6.02 below.1.19 “Net Asset Value”: shall mean the valuation method used for calculating the value, according to

market practice and at current values, of financial assets and liabilities.1.20 “Olimpia Bonds”: 1.5% Olimpia bonds, 2001-2002, each of which is an “Olimpia bond.”1.21 “Olivetti Bonds”: 1.5% convertible bonds, 2001-2010, convertible to Olivetti Shares issued by Olivetti,

each of which is an “Olivetti Bond”.

OMISSIS

1.24 “Extraordinary Transactions”: every merger or spin-off involving Olivetti, on the one hand, and one ormore of its direct or indirect subsidiaries, on the other.

1.24bis “Capital Transactions”: such extraordinary transactions as may involve Olivetti capital and whichchange the number of shares or which result in, by way of example though not exclusively: stock splits,reverse splits, assignments of Olivetti shares to shareholders for bonus increases in share capital.

1.25 “Holy holding in Holinvest”: Holy holding in Holinvest capital, or 19.999% of this capital. 1.26 “Hopa holding in Holinvest”: Hopa holding in Holinvest capital, or 80.001% of this capital.1.27 “Olivetti holding”: alternately:

(i) when there are no Extraordinary Transactions, holding with full voting rights equal to at least25% of Olivetti capital on the date the present Contract is signed, or

(ii) when there are Extraordinary Transactions, the entire package of Olivetti Shares and/or FinancialInstruments (granting equal voting rights) arising from the exchange of shares with voting rightsequal to at least 25% of Olivetti capital that would be attained through ExtraordinaryTransactions executed prior to the Relevant Date.

OMISSIS

1.29 “Net Assets”: the difference – to be determined in accordance with Accounting Principles – betweenassets and liabilities on the “statutory” balance sheets of a corporation where, upon drafting theresultant consolidated balance sheet, it is understood that for purposes of determining Olimpia’s NetAssets the assets of Olivetti and its Subsidiaries are not taken into account.

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1.30 “Agreements”: agreements among shareholders set forth in Articles VI and VII of the present Contract.

OMISSIS

1.32 1.32 “Increase Premium”: shall have the meaning set forth in paragraph 10.00 below.1.33 “Accounting Principles”: Accounting principles as provided by law, and when not specifically stated

therein, those set forth by the National Council of Professional Accountants, or otherwise by theInternational Accounting Standards Committee.

1.34“Debt/equity ratio”: the ratio between Net Assets (as defined in paragraph 1.29 above) and NetFinancial Borrowings (as defined in paragraph 1.16 above). Possible derivative instruments (asdefined in Decree Law No. 58 dated February 24, 1998,– Draghi Law, Article 1, paragraph 2), not forhedging, (as defined by Banca d’Italia Measure of July 30, 2002) put into place as of November 30,2002, must be valued at cost or market price, whichever is less, and any necessary write-off mustresult in a reduction in Net Assets. Possible derivative instruments for hedging must be valued in amanner consistent with the asset or liability being hedged, with it understood that the so-called equityswap underwritten by Olimpia on November 20, 2001, will be valued at cost as a matter of course.

OMISSIS

1.36 “Spin-off”: shall have the meaning set forth in paragraph 9.01 below.1.37 “Holinvest Spin-off”: shall have the meaning set forth in paragraph 9.05 below.

OMISSIS

1.39 “Holy Position”: Balance sheet of Holy at December 31, 2002, with the accompanying reports,attached hereto as number 5.02(ii) which – in accordance with the provisions of paragraph 5.02(ii)below – shall represent the Holy financial position of reference for the plan of Merger.

1.40 “Olimpia Position”: Balance sheet of Olimpia at November 30, 2002, with the accompanying reports,attached hereto as number 5.02(i) which – in accordance with the provisions of paragraph 5.02(i)below – shall represent the Olimpia financial position of reference for the plan of Merger.

1.41 Olivetti Companies”: Telecom, TIM, and Seat, collectively.1.42 “Deadlock”: shall have the meaning set forth in paragraph 8.01 below.1.42bis“Accelerated Deadlock”: shall have the meaning set forth in paragraph 8.06 below.1.43 “Financial Instruments”: every financial instrument (including Olivetti Instruments as defined

below) that directly or indirectly grants subscription rights to Olivetti Shares (which, by way ofexample and not exclusively, includes convertible bonds, forward contracts, call options, andprepaid swaps).

1.44 “Olivetti Instruments”: instruments with the characteristics as set forth in the attached document 1.44.

OMISSIS

1.46 “Initial Term”: shall have the meaning set forth in paragraph 8.05 below.

OMISSIS

Article IIObject of Contract(a) Under the present Contract, the various transactions governed thereby and the Shareholder

Agreements contained herein, the Current Olimpia Shareholders, Olimpia, and Hopa hereby agree onthe terms and conditions for creating a partnership with strategic connotations.

(b) The partnership referred to in the previous paragraph shall be achieved by Hopa’s joining its capital tothat of Olimpia (by Holy’s merger with Olimpia) together with the Current Olimpia Shareholders, andthe subsequent joining of Olimpia’s capital to that of Holinvest, together with Hopa.

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(c) The following stipulations in the present Contract shall, inter alia, govern:(i) the steps taken to achieve the aforesaid situation (setting the terms and conditions thereof), in

particular with regard to the provisions of Articles II, IV, and V below;(ii) the rules of corporate governance and other provisions in shareholders’ agreements to which the

Parties have agreed, in particular with regard to the provisions of Articles VI and VII below;(iii)

(A)the mechanisms for settling possible Deadlocks or Accelerated Deadlocks such as may arise inthe administration of Olimpia (also with regard to voting instructions for OlivettiExtraordinary Shareholders’ Meeting) and/or of Holinvest; and

(B) the means of any possible dissolution of the partnership carried out under the presentContract, with regard to confirming a Deadlock or Accelerated Deadlock, as well as to thefailure to renew Agreements upon their expiration;

with particular regard to the provisions of Articles VIII, IX, and X below.

Article IIIPreliminary Obligations of the Parties

OMISSIS

Article IVSuspensive Conditions

OMISSIS

Article VMerger

OMISSIS

5.09 Olimpia and Holinvest post-Merger ownership. The Parties mutually recognize that, on the basis of theStipulated Exchange Rate:(i) Olimpia post-Merger shall be owned as follows:

Pirelli: 50,40%;Edizione: 16,80%;Hopa: 16,00%;Unicredito: 8,40%; eIntesa: 8,40%.

(ii) Holinvest post-Merger shall be owned as follows: Hopa: 80,001%; eOlimpia: 19,999%.

OMISSIS

Article VIShareholder Agreements concerning Olimpia and Olivetti Companies6.00 Agreements and Term of Agreement. (a) The Parties mutually recognize that the provisions in this

Article VI, as well as those in Article VII below (collectively, the “Agreements”) shall be effective for theentire period (“Term of Agreement”) between the effective date of the Merger and the earlier of either:(i) the natural expiration of such Agreements, as regulated under paragraph (b) below; or(ii) the date on which, in compliance with the applicable provisions herein, (A) – as a result of a

Deadlock, the Spin-off and Holinvest Spin-off become effective; (B) as a result of an AcceleratedDeadlock, the Current Olimpia Shareholders receive an Notice of Accelerated Deadlock.

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(b) The Agreements shall have a term of three years as from the effective date of the Merger, and uponexpiration shall be deemed tacitly extended [for an equal period], unless a notice of termination isserved by either Party to the other, subject to the provisions in paragraph (c) below.

(c) Without prejudice to the provisions of the law, the Parties may withdraw from the Agreements,effective on the expiration date, by written notice to the other Party 3 (three) months before suchexpiration date.

6.01 Board of Directors of Olimpia. (a) For the entire Term of the Agreements, the Board of Directors ofOlimpia will be made up of a fixed and unchangeable group of 10 members, one of which will beappointed upon designation by Hopa. The first Director appointed by Hopa will be Emilio Gnutti.(b) In the event the Director appointed by Hopa should cease to be on the Board, a replacement shall

be designated within the next 20 (twenty) Business Days, and it is understood that thedesignation of the replacement will be still made by Hopa, with the consent of Pirelli, which shallnot withhold it unreasonably.

(c) Should Hopa wish to revoke one or more of the Directors it designated, the CurrentOlimpia Shareholders will cooperate fully, in order for this revocation to proceed asrapidly as possible. Hopa shall have the right to designate – in accordance to what was setforth in the preceding paragraph (b) – the Director to be appointed as a replacement forthe Director who was revoked, subject to the consent of Pirelli, which shall not withholdsuch consent unreasonably.

(d) The Parties commit to holding each other exonerated and discharged and to holdingOlimpia exonerated and discharged from any onus or damage deriving from the revocationwithout just cause of the Directors that each one of them from time to time designates,pursuant to paragraph 6.01.

6.02 Key Issues. (a) For the purposes of this contract and in particular of subsequent Article VIII thefollowing shall be considered to be Key Issues:(i) In reference to the resolutions to be adopted by Olimpia’s Extraordinary Shareholders’ Meeting in

relation to any subject that pertains to it, any time the resolution is adopted:(A) In opposition to a proposal by Olimpia’s Board of Directors passed with the agreement of the

Directors appointed by Olimpia’s Current Shareholders and by Hopa; or (B) In agreement with a proposal by Olimpia’s Board of Directors passed without the agreement of

the Director appointed by Hopa;(ii) In reference to the resolutions to be adopted by Olimpia’s Board of Directors in relation to those

pertaining to:(A) The suggested vote to be cast during Olivetti’s Extraordinary Shareholders’ Meeting;(B) the purchase, sale and transfer of any interest valued over _ 100,000,000.00 per transaction,

or for multiple transactions carried out during the same calendar year, with the exception ofthat which is provided for in the subsequent paragraph (b);

(C) Acts or initiatives that modify or will modify the debt/equity ratio from a 1:1 ratio (whilekeeping open the option to remedy this situation pursuant to the procedure outlined insubsequent paragraph 8.07(a)(ii) and with the understanding that in this case it will not beconsidered to be a situation causing a Deadlock) and/or that concern the definition of theterms and conditions for using outside sources of financing;

(D) Proposals for resolutions to be submitted to Olimpia’s Extraordinary Shareholders’ Meeting.(b) The Parties reciprocally acknowledge that – in spite of being slightly different from what was

outlined in the preceding paragraph (a) (ii) (B) – the following shall not be considered Key Issuesfor the purposes of this Contract: actions relating to the purchase or sale of Olivetti shares, theconversion of convertible Olivetti bonds into Olivetti shares or equivalent financial instruments, aslong as Olimpia’s debt/equity ratio remains below 1:1 even after these transactions.

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6.03 Board of Directors of Olivetti Companies. (a) For the entire Term of the Agreements the CurrentOlimpia Shareholders will do whatever is in their power to ensure that, in the meetings of the Boardsof Directors of the Olivetti Companies, a director shall be appointed as a result of being designated byHopa. The first directors that Hopa designates to this end are those indicated in the attacheddocument by number 6.03(a).(b) The new Boards of Directors of the Olivetti Companies, made up according to the dispositions in

the preceding paragraph (a), will be appointed as soon as possible after the Merger and in anyevent within and no later than 60 Business Days after the effective date of the Merger itself.

(c) The dispositions in the preceding paragraphs 6.01(b) and (c) will apply, mutatis mutandis, alsoregarding the meetings of the Board of Directors of the Olivetti Companies.

6.04 Tender Offers for Olivetti Shares. Hopa commits itself to the fact that, in the event Olivetti Shares aresubject to a tender offer, the Director that it designated in Olimpia’s Board of Directors – if the CurrentOlimpia Shareholders requests it in writing – will not oppose Olimpia’s agreeing to such tender offer.

6.05 Deadlock. (a) Except for what is set forth in the subsequent paragraph (b) or expressly provided for bythis Contract, the Current Olimpia Shareholders and Hopa (also with respect to its respectivecontrolling companies and subsidiaries) commit themselves not to purchase Olivetti Shares for theTerm of the Agreements, and agree to the fact that Olimpia – in partial derogation from this limitation- notwithstanding what is set forth in subsequent paragraph 8.06, will have the right to buy and sellOlivetti Shares as long as these transactions do not cause the limits described in paragraph 4.01(iii) tobe exceeded, notwithstanding the fact that in order to calculate the threshold specified in theaforementioned paragraph, one shall have to take into account the quantities allowed by paragraph (a)of Article III.(b) The following cases are exceptions to the Deadlock commitment specified in paragraph 6.05(a):

(i) The exercise on Pirelli’s part of the rights already acquired before executing this Contract, inrelation to the exercise of call options and swap contracts relating to the purchase of OlivettiShares and Bonds (which are described in detail in the attached document designated bynumber 6.05(b)(i);

(ii) For purchases of Olivetti Shares which were already allowed: (A) to Unicredito and Intesa, by the current Shareholder Agreements agreed to by these

entities with Pirelli, which is described in the attached document designated by number6.05 (b) (ii) (A); and

(B) to Edizione, within the limits outlined by the current Shareholder Agreements agreed toby this entity with Pirelli, which are described in the attached document designated bynumber 6.05(b) (ii) (B).

(iii) The maximum number of Olivetti Shares that the Hopa Controlling Companies areauthorized to possess pursuant to paragraph 4.01.

(c) Notwithstanding the above mentioned rights, furthermore, the Parties reciprocally acknowledgethat the purchase by one Party of convertible bonds and/or warrants that grant the right tosubscribe to bonds convertible into Olivetti Shares and the exercise of the rights that go with it willbe allowed only following the consent of the other Party, consent that shall not be unreasonablywithheld, with the proviso that in the event of a request by Hopa there will have to be theunanimous consent of all the Current Olimpia Shareholders that at the time of this request areOlimpia shareholders.

6.06 Olimpia’s Business Purpose. The Current Olimpia Shareholders commit themselves not to changeOlimpia’s business purpose (as reflected in the sample by-laws which are found under attachment 5.07(b) up to the latter of the following dates (i) the date of the natural expiration of the Agreements as setforth by paragraph 6 (b) of this Contract; and (ii) in the event of a Deadlock or an AcceleratedDeadlock, the effective date of the Spin-off and the Holinvest Spin-off.

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6.07 Other Commitments Relating to Olimpia. The Current Olimpia Shareholders commit to make it sothat, for the entire term of the Agreements, Olimpia:(i) Does not have other holdings or financial investments other than its holding in Olivetti, Olivetti’s

bonds, Olivetti’s instruments and the holding by Olimpia in Holinvest possessed as a result of theMerger;

(ii) Has a debt/equity ratio that does not exceed 1:1; and(iii) Does not sell its holding in Olivetti to entities controlled by Olimpia or that are parts of groups

whose ownership can be ascribed to the Current Olimpia Shareholders.6.08 Co-sale Rights and Obligations. (a) Except when otherwise set forth in this Contract and in

particular in the following paragraph 8.06(b)(iii) and 8.07(b)(ii), for the entire Term of theAgreements – and in any case until the effective date of the Spin-off and of the Holinvest Spin-off– if the holding of Pirelli in the capital of Olimpia is reduced by transfer, contribution, assignment(including by spin-off), or sale of a portion thereof, directly or indirectly, or a financial instrumentthat may be converted and/or which gives right to a holding in the capital of Olimpia (hereinaftercollectively the “Assigned Holding”) for payment, free of charge, for cash, or for payment in kind,under any status, including in several tranches as compared to that held as of the signing date ofthis Contract, Hopa will have the right to claim (and therefore Pirelli will be obligated to cause)that the buyer (hereinafter the “Third-Party Buyer”) – pursuant to the applicable provisions of thisparagraph 6.08:(i) whenever, notwithstanding the transfer and/or sale of the Assigned Holding, Pirelli, together with

Unicredito and Intesa, maintains absolute majority in the capital of Olimpia, acquires:(A) a percentage of the holding of Holinvest equal to the percentage between the Assigned Holding

and 50.4% according to the following formula:PPiH : PiH = PC : 50,4%

Where:PPiH: is the holding percentage of Hopa in Holinvest that Hopa may claim transfer to the

Third-Party Buyer;PiH: is the total holding (expressed as a percentage of the capital of Holinvest) of Hopa in

Holinvest;PC: is the Assigned Holding (expressed as a percentage of the capital of Olimpia);or, as an alternative

(B) a percentage of the Olivetti Instruments and/or of the Olivetti Shares and/or of theFinancial Instruments held by Holinvest on the date Pirelli communicates its intent, equalto the percentage between the Assigned Holding and 50.4% according to the followingformula:

PSOH : SOH = PC : 50,4%Where: PSOH: is the portion of the Olivetti Instruments and/or Olivetti Shares and/or of the

Financial Instruments held by Holinvest on the date Pirelli communicates its intent,for which Hopa may claim transfer to the Third-Party Buyer;

SOH: the total number of Olivetti Instruments and/or Olivetti Shares and/or of theFinancial Instruments on the date Pirelli communicates its intent, held byHolinvest;

PC: is the Assigned Holding (expressed as a percentage of the capital of Olimpia);and therefore

(C) a percentage of its own holding in Olimpia equal to the percentage between the AssignedHolding and 50.4%:

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PPiO: PiO = PC : 50,4%Where:

PPiO: is the portion of Hopa’s holding in Olimpia for which Hopa may claim transfer to theThird-Party Buyer;

PiO: the total holding held by Hopa in Olimpia;PC: Assigned Holding (expressed as a percentage of the capital of Olimpia);

(ii) whenever the sale and/or transfer with price paid in kind (contribution and/or spin-off) of theAssigned Holding implies the loss of the absolute majority in the ordinary capital of Olimpia byPirelli together with Unicredito and Intesa, acquires the entire holding held by Hopa in Olimpiaand/or Holinvest;

(iii) whenever the sale and/or transfer with the price paid in cash of the Assigned Holding implies theloss of the absolute majority in the ordinary capital of Olimpia, by Pirelli, together with Unicreditoand Intesa, Hopa will also have the obligation to sell (and, respectively, Pirelli will have theobligation and the right to cause Hopa to sell) to the Third-Party Buyer the entire holding of Hopain Olimpia and/or in Holinvest;

with the understanding that:(x) for the purposes of this paragraph 6.08, the financial instruments whose acquisition by the Third

Party-Buyer must be imposed by Hopa, exercising the alternative power set forth in thisparagraph 6.08(a), will be identified as “Instruments to be Assigned”;

(y) once Hopa communicates – pursuant to the following paragraph (c) – to Pirelli that it wishes toexercise the co-sale right set forth in this paragraph 6.08(a), Hopa will be obligated to sell theInstruments to be Assigned under the terms and conditions set forth in this paragraph 6.08 and, inparticular, the following paragraphs (d) and (e); and

(z) the choice between the options referred to in the previous paragraph 6.08(a)(i) will be exerciseddiscretionally by Hopa and will be final.

(b) In order to allow Hopa to exercise the rights set forth in the previous paragraph (a), Pirelliundertakes to communicate to Hopa any intention to sell, transfer, assign (including by spin-off)or otherwise transfer under any status all or part of its own holding in Olimpia, as soon as allowedby the negotiations with the Third-Party Buyer (taking into consideration possible reasons ofconfidentiality), communicating to Hopa the nature of the Third-Party Buyer and the terms andconditions of the possible transfer transaction.

(c) Hopa, after receiving the communication about the plan to transfer the Assigned Holding by Pirelli,must communicate to Pirelli within twenty (20) Business Days from receipt of the communication,whether or not it intends to exercise its own co-sale right and whenever Pirelli’s communication refersto a transaction of the type indicated in the previous paragraph (a)(i), which of the options set forthin Sections (A) through (C) of said paragraph (a)(i) it intends to choose.

(d) Should Hopa exercise the co-sale right set forth in this paragraph 6.08, the transfers of theInstruments to be Assigned to the Third-Party Buyer following such exercise must be perfectedsimultaneously with the transfer of the Assigned Holding by Pirelli to the Third-Party Buyer.

(e) The transfer price of the Instruments to be Assigned must be established pursuant to the followingprovisions:(i) whenever Hopa exercised the co-sale right set forth in its favor in the previous paragraph

6.08(a)(i)(C) or 6.08(a)(ii), the latter in the portion referring to the Olimpia holding, theprice will be equal to the same price for each Olimpia share obtained by Pirelli from the saleof the Assigned Holding;

(ii) whenever Hopa exercised the co-sale right in its favor pursuant to the previous paragraph6.08(a)(i)(A) or 6.08(a)(ii), the latter in the portion referring to the holding in Holinvest, theprice will be established by considering the implicit value assigned by the Third-Party Buyerto the Olivetti shares and to any Financial Instrument held by Olimpia valuing Holinvest onthis basis at Net Asset Value;

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(iii) whenever Hopa exercised the co-sale right in its favor pursuant to the previous paragraph6.08(a)(i)(B), the price of the Olivetti Instruments will be established considering the implicitvalue assigned by the Third-Party Buyer to the Olivetti shares and to any FinancialInstrument held by Olimpia.

with the understanding that, for the purposes of this paragraph, the Net Asset Value (referred to in theprevious paragraph (ii)) and the price of the Financial Instruments (referred to in the previousparagraph (iii)) will be established pursuant to the previous paragraph (e) and, in the event ofdisagreement between Pirelli and Hopa, by an audit firm included among the so-called “Big Four” –appointed by the Parties by mutual agreement or, in the absence of such agreement, by the PresidingJudge of the Court of Milan at the request of the most diligent Party; with the understanding that – thedeterminations made by audit firm will be unappealable and final.(f) It is understood between the Parties that the obligations set forth in this paragraph 6.08 must be

considered exclusively at the charge of Pirelli, excluding any joint liability of the Current OlimpiaShareholders.

6.08bis Co-sale Rights concerning Olimpia’s assets. (a) For the entire Term of the Agreements – and in anyevent until the effective date of the Spin-off and of the Holinvest Spin-off – if Olimpia’s holding isreduced to a level below 25% of Olivetti’s capital or, whenever it is so reduced, it is further reduced bytransfer, assignment (including by spin-off) or sale of a portion thereof for payment, free of charge, forcash or by payment in kind, under any status, including in several tranches (hereinafter, together, the“Assigned Olivetti Holding”), Holinvest will have the right to claim (and therefore Olimpia will beobligated to cause) that the buyer (hereinafter the “Third-Party Buyer of Olivetti Instruments”) –pursuant to the applicable provisions of this paragraph - acquire a percentage of the Olivetti Shares(and/or Financial Instruments) held by it on that date, equal to the percentage between the AssignedOlivetti Holding and Olimpia’s holding in Olivetti, held before the assignment of the Assigned OlivettiHolding:

PAOH : AOH = POC : POWhere:PAOH: is the number of Olivetti Shares (and/or Financial Instruments) held by it, for which Holivest

[sic] may claim the transfer to the Third-Party Buyer;AOH: is the total number of Olivetti Shares (and/or Financial Instruments) held by Holinvest on the

date Olimpia communicates its intent to transfer the Assigned Investment;POC: is the Assigned Olivetti Holding (expressed as a percentage of the Olivetti Shares (and/or of

the Financial Instruments) held by Olimpia on the date Olimpia communicates its intent totransfer the Assigned Olivetti Holding);

PO: the total holding in Olivetti and/or all Financial Instruments held by Olimpia before theassignment of the Assigned Olivetti Holding;

with the understanding that:(x) for the purposes of this paragraph 6.08bis, the Olivetti Shares and/or Financial Instruments for

which Holinvest must impose the acquisition of the Olivetti Instruments by the Third-Party Buyerwill be identified as “Olivetti Instruments to be Assigned”;

(y) once Holinvest communicates – pursuant to the following paragraph (c) – to Olimpia that itwishes to exercise the co-sale right set forth in this paragraph 6.08bis, Holinvest will be obligatedto sell the Olivetti Instruments to be Assigned under the terms and conditions set forth in thisparagraph 6.08bis and, in particular, the following paragraphs (d) and (e); and

(b) In order to allow Holinvest to exercise the rights set forth in the previous paragraph (a), Olimpiaundertakes to communicate to Holinvest any intention to sell, transfer, assign (including by spin-off), or otherwise transfer under any status all or part of its own holding in Olivetti, as soon asallowed by the negotiations of the Olivetti Instruments with the Third-Party Buyer (taking into

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consideration possible reasons of confidentiality), communicating to Holinvest the nature of theThird-Party Buyer of the Olivetti Instruments and the terms and conditions of the possible transfertransaction.

(c) Holinvest, after receiving the communication about the plan to transfer the Assigned Olivetti Holdingby Olimpia, must communicate to Olimpia within twenty (20) Business Days from receipt of thecommunication, whether or not it intends to exercise its own co-sale right.

(d) Should Holinvest exercise the co-sale right set forth in this paragraph 8.06(ii)[sic], the transfers ofthe Assigned Olivetti Instruments to the Third-Party Buyer of the Olivetti Instruments to beAssigned following such exercise must be perfected simultaneously with the transfer by Olimpia tothe Third-Party Buyer of the Olivetti Instruments of the Assigned Olivetti Holding.

(e) The transfer price of the Olivetti Instruments to be Assigned will be equal to the price for eachOlivetti share (and/or Financial Instrument) obtained by Olimpia from the transfer for theassignment of the Assigned Olivetti Holding.

(f) The Parties mutually take note and agree that – as a partial exception to the provisions of thisparagraph 6.08bis – whenever Holinvest exercises the co-sale right referred to in this paragraph6.08bis, the assignment of the Assigned Olivetti Holding which – pursuant to the terms of thepreceding paragraph would give rise to an event of Accelerated Deadlock – will not be consideredAccelerated Deadlock.

6.09 Taking Note. The parties mutually take note that:(i) the Agreements set forth in this Contract do not replace and therefore do not impair the validity,

efficacy and enforceability of the Agreements referred to in the Shareholder Agreement executedon September 14, 2001 between Pirelli, Unicredito, and Intesa;

(ii) in light of the preceding paragraph (i), the exercise by Unicredito and/or Intesa of the rights setforth in their favor in the Shareholder Agreement referred to in the previous paragraph (i) may notin any manner represent nonperformance of any commitments assumed by Unicredito and Intesa(as Current Olimpia Shareholders) under this Contract, nor cause under any other status anyliability for Unicredito and Intesa themselves;

(iii) whenever Unicredito and/or Intesa exercise the put right pursuant to the Shareholder Agreementreferred to in the preceding paragraph (i), they will immediately be released from any obligationtowards Hopa arising from this Contract, regardless of the date of the actual transfer of theOlimpia shares subject to the put, without prejudice to the fact that Pirelli will be automaticallyobligated towards Hopa to perform all such obligations towards Hopa itself;

(iv) (iv) whenever Unicredito and/or Intesa exercise the put right referred to in the previous paragraph(iii), Edizione Finance and Hopa waive, as of now, exercising the pre-emptive right established intheir favor in the by-laws.

Article VIIShareholder Agreements Concerning Holinvest7.01 Board of Directors of Holinvest. (a) For the entire Term of the Agreements, the Board of Directors of

Holinvest will be made up of a fixed, unchangeable number of 7 members, one of whom will beappointed by Olimpia’s designation.(b) The provisions of the previous paragraphs 6.01(b), (c) and (d) will apply, mutatis mutandis, to

the Board of Directors of Holinvest.7.02 Lock-up Commitments. (a) As of the date of this Contract and for a period of twenty months from the

effective date of the Merger, Hopa:(i) undertakes not to:

(A) offer, constitute in pledge, sell, carry out preliminary sales, lend or otherwise transfer or assign(including by contribution or partial spin-off), directly or indirectly, Hopa’s Holinvest Holding

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or any financial instrument that may be converted or which would give right to a holding inthe capital of Holinvest, or

(B) execute swap contracts and other acts and/or contracts transferring to a different party, in fullor in part, any risk or economic profit arising from Hopa’s ownership of the HolinvestHolding, regardless of the fact that the transactions described in the preceding points (A) and(B) must be liquidated by delivery of Hopa’s Holinvest Holding or of the aforementionedfinancial instruments, for cash or otherwise.

(ii) it pledges – without prejudice to the provisions of the following paragraphs (b) and (c) – to takeall necessary steps to prevent Holinvest from:(A) offering, selling, carrying out preliminary sales, lending, granting in pledge to guarantee

obligations of third parties or otherwise transferring or assigning (including by contribution orpartial spin-off), directly or indirectly, the Olivetti Instruments which, as of the date of thisContract, are owned by it, or any other financial instrument that may be converted or whichgives right to a holding in the capital of Olivetti; or

(B) executing swap contracts or other acts and/or contracts transferring to a different party, in fullor in part, any risk or economic profit arising from the ownership of the Olivetti Instrumentswhich, as of the date of this Contract, are owned by it, regardless of the fact that thetransactions described in the preceding points (A) and (B) must be liquidated by delivery ofthe Olivetti Instruments or of the other aforementioned financial instruments, for cash orotherwise.(b) Concerning the provisions of the following paragraph 7.03:

(i) the Parties mutually take note of their awareness of the following:(A) Holinvest gave in pledge to the banks which financed it (the “Creditor Banks”) the Olivetti

Instruments which, as of the date of this Contract, are owned by it (as identified in thedocument enclosed herewith under No. 7.02(b)(ii)(A)) as guarantee of the obligations toreimburse the financing granted to it by said Creditor Banks;

(B) Hopa undertakes to take all possible steps to avoid any enforcement of the pledge by theCreditor Banks and therefore to preserve the pre-emptive rights in favor of Olimpia referred inparagraph 7.03 below;

(ii) in light of the provisions of the preceding paragraph (i), the Parties agree that:(A) following the execution of this Contract, Hopa will do everything possible so that the Creditor

Banks:(1) consent that, in the event of sale of the Olivetti Instruments following the enforcement of the

pledge referred to in the preceding paragraph (i)(A), Olimpia be granted a pre-emptive rightconcerning the acquisition of the Olivetti Instruments so sold; or, whenever such hypothesis is notfeasible,

(2) accept – in the event that the pledge referred to in the preceding paragraph (i)(A) must beenforced – to transfer to Olimpia the financing contracts and the respective guarantees, at a priceequal to the market value as of that date of the credit granted by the Creditor Banks to Holinvest,under the same financing contracts so assigned; on the other hand, it is understood that Hopaundertakes as of now to cause Holinvest – in the event that the Creditor Banks declare theiravailability to transfer the contract as indicated in this paragraph (ii)(A)(2) to accept – andtherefore consent to – such assignments:(B) without limitation to the provisions of the preceding paragraph (A), immediately after the

execution of this contract, the Parties will send a joint communication to the Creditor Banks toinform them of the existence of the pre-emptive right referred to in paragraph 7.03 below, andalso requesting the Creditor Banks to a meeting to discuss the provisions of theaforementioned paragraph (ii)(A);

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(C) in order to help Olimpia achieve the purposes set forth in the previous paragraph (i)(C), Hopawill allow a representative of Olimpia (chosen by Olimpia with the consent of Hopa – whichmay not be unreasonably denied) to participate in all the meetings with the Creditor Bankswhich are the consequence or related to the provisions of the previous paragraph (ii)(A);

(iii) the sections in the previous paragraphs(i) and (ii) will apply, mutatis mutandis, also in the case ofsubsequent financing and the respective pledges, with the understanding that the pledges sogranted by Holinvest may refer only to the debts contracted by it, to the exclusion of theguarantees pledging the debts of other parties.

(c) Hopa’s obligation referred to in the previous paragraph (a)(ii) is understood in the sense ofallowing Holinvest to freely dispose – during the lock-up period – of the Olivetti Instrumentsand/or Financial Instruments (but without application of the pre-emptive right referred to inparagraph 7.03 below) provided that during said period, Holinvest keeps its ownership of anumber of securities of not less than 65% and not more than 125% of those listed in the previousparagraph 4.01(ii)(A) and provided the shares of the companies directly or indirectly controlledby Olivetti do not exceed 10% of the assets of Holinvest, without prejudice to the composition ofthe assets of Holinvest on the Relevant Date.

7.03 First Pre-emptive Right in Favor of Olimpia. (a) At the end of the Lock-up period referred to inthe previous paragraph 7.02(a)(ii) and for the entire residual Term of the Agreements – and in anycase until the effective date of the Spin-off and of the Holinvest Spin-off – Holinvest may freelydispose of the Financial Instruments and of the Olivetti Shares, provided – should it carry out anyof the transactions set forth in the previous paragraph 7.02(a)(ii)(A) and (B) – it grants Olimpia(with written communication detailing the identity of the potential buyer whenever it is known toHolinvest, regardless of the fact that the sale takes place on the regulated market, and all theelements necessary for the adequate evaluation of the offer of the latter and of the elementsshowing seriousness) a pre-emptive right to the Olivetti Instruments which are the object of suchtransaction.(b) It is understood that:(i) the offer must be presented by the third party within (30) thirty Business Days from the date

Olimpia received Holinvest’s communication referred to in the previous paragraph 7.03(a);(ii) the pre-emptive right referred to in the previous paragraph (b) must be exercised by Olimpia

within two (2) Business Days after Olimpia’s receipt of the respective denunciatio.7.04 Holinvest’s By-laws. Hopa will take all necessary steps so that, by the date of the Merger and not later,

Holinvest’s by-laws will be amended to allow Holinvest exclusively to engage in the holding andfinancial activity concerning holding and trading of the Olivetti Shares, Olivetti Instruments andFinancial Instruments, as well as the shares and/or financial instruments of the companies directly orindirectly controlled by Olivetti; Hopa’s commitment is subject to the admissibility of such amendmentpursuant to current legislation, without prejudice to the fact that Hopa will not be obligated to makesuch amendment whenever it implies that Holinvest will be prohibited from continuing to holdinvestments in securities other than those indicated in this paragraph currently held, with theunderstand that, in this case, Hopa undertakes to cause Holinvest not to acquire new investmentsecurities other than those described above. In addition, within the same term, Hopa undertakes tomake in the current by-laws of Holinvest [sic] the amendments necessary to make it consistent withthe model by-laws enclosed herewith under No. 7.04.

7.05 Second Pre-emptive Right in Favor of Olimpia. (a) Unless there is an Accelerated Deadlock, on theexpiration of the first three-year period of the Term of the Agreements (but completely independentlyfrom the fact that the agreements are extended for a subsequent three-year period or not) Hopa willcause Holinvest to execute with Olimpia a pre-emptive rights agreement with a term of two years,under which – as of that date – Holinvest – whenever it intends to offer, pledge, sell, carry out

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preliminary sales, sell any purchase option or contract, purchase any sale option or contract, grant anyoption, right or warrant for acquisition, lend or otherwise transfer, assign or dispose (including bycontribution or partial spin-off), directly or indirectly, all or part of Olivetti’s holding post-Spin-off – itmust offer it pre-emptively to Olimpia to the extent that, due to the transaction planned, Hopa andHolinvest would own together less than:(i) 65% of the holding in Olivetti belonging to them by the effect of the Spin-off; or(ii) 65% of the Olivetti Instruments owned by Holinvest on the reference date of the Spin-off.(b) The pre-emptive right referred to in the previous paragraph (a) must be exercised by Olimpia

within 15 days after its receipt of the respective denunciatio.(c) For the entire term of the pre-emptive rights agreement set forth in this paragraph 7.05, the

provisions of the previous paragraph 6.05 apply, mutatis mutandis.

Article VIIIDeadlock and Accelerated Deadlock8.01 Identification of Deadlock cases. For the purposes of this Contract, “Deadlock” means a situation of

disagreement, expressed in preliminary consultations or, in the absence thereof, in the ExtraordinaryShareholders’ Meeting of Olimpia or in the Board of Directors’ Meeting of Olimpia, among the CurrentOlimpia Shareholders, on the one hand, and Hopa, on the other hand, on a Key Issue, at any timeduring the Term of the Agreements.

8.02 Obligation of consultation. The Current Olimpia Shareholders undertake to first consult Hopawhenever a Relevant Deliberation must be discussed or approved.

8.03 Procedure. (a) For the performance of the obligation referred to in paragraph 8.02 above, the CurrentOlimpia Shareholders and Hopa undertake to meet, or to first consult each other by telephoneconference or videoconference, subject to the appropriate minutes, within and not later than the third(3rd) day prior to the day scheduled for the meeting of the board or shareholders of Olimpia, orimmediately after they become aware, in the event of urgent invitation to call a meeting of the Boardof Olimpia pursuant to the applicable by-laws’ provisions.(b) In the consultation referred to in this paragraph, the Current Olimpia Shareholders and Hopa will

do everything possible to reach an agreement and/or identify a common position on the issuessubmitted to their examination, and undertake for this purpose to act in good faith.

(c) The unjustified absence of a Party in the preliminary consultation or its abstention from decisionsreached during the consultation, implies acceptance of the decisions reached by the other Partyand imposes on the absent or abstaining Party the obligation to comply with and observe suchdecisions.

8.04 Manifestation of will. Whenever the Current Olimpia Shareholders and Hopa, in the preliminaryconsultation referred to in paragraphs 8.02 and 8.03 above, reach an agreement concerning the issuessubmitted to said consultation, they will be obligated to express their will at the relevant level,according to the following provisions:(i) by delegating a common representative to participate in Olimpia’s Extraordinary Shareholders’

Meeting and to cast the vote in said meeting, according to the decision made; or, as applicable,(ii) to cause its representatives on the Board of Directors of Olimpia to participate in the meeting of

the board and cast their vote there, according to the common decisions reached in the preliminaryconsultation.

(b) Otherwise, in the absence of mutual agreement on the issues submitted to consultation, Hopa willbe obligated to refrain from participating in the meeting of the shareholders or of the board andfrom casting or causing its vote to be cast at said level and/or refrain from expressing, at any leveland mode, its will or position concerning the issue subject to said preliminary consultation, exceptas indicated in point (d) below.

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(c) Whenever the preliminary consultation referred to in the previous paragraphs 8.02 and 8.03 doesnot take place by the fault of the Current Olimpia Shareholders, Hopa will have the right toparticipate in the meeting of the shareholders and/or board and cast or cause casting of its vote atthat level and/or to express, at any level and mode, its will or position concerning the Key Issue,except as set forth in point (d) below.

(d) Whenever the situation referred to in point (b) or the situation referred to in point (c) aboveoccur, Hopa will have the right to send to the Current Olimpia Shareholders, by telegram orregistered letter and pursuant to paragraph 12.03, a “Notice of Deadlock” within the term of15 (fifteen) days from the end of the consultation referred to in paragraph 8.03 or, in theabsence of consultation, from the date of the decision referred to in the preceding paragraph8.04(c).

(e) Within 30 Business Days from the date the Current Olimpia Shareholders received the Notice ofDeadlock, the Parties must submit – for the only purpose referred to in paragraph 10.01 below –to the unappealable judgement of an Arbitration Board, to be appointed in accordance with ArticleXIII below, as regards the ascertainment, for the purposes set forth in Article X, of whether or notthe Deadlock situation was declared by Hopa in good faith.

In any event, it is understood in order to avoid any doubt, that Hopa’s right (as referred to in ArticleIX below) to have the Spin-off [and] the Holinvest Spin-off take place without the results of suchascertainment and therefore the Current Olimpia Shareholders must implement all necessary steps forthe Spin-off and Holinvest Spin-off to take place within the term indicated in paragraph 9.01(c)below.

8.05 Rights of the Parties. (a) Whenever Hopa sends to the Current Olivetti Shareholders a Notice ofDeadlock pursuant to paragraph 9.04 (c) above, Hopa will have the right (which will be deemedexercised by the receipt of the Notice of Deadlock by the Current Olimpia Shareholders pursuant topoint (c) paragraph 8.04 above) to claim – as of the end of the thirty-sixth (36) month after the dateof the Merger (the “Initial Term”) – all necessary steps to be taken so that within 6 months from theInitial Term, the Spin-off and Holinvest Spin-off take place pursuant to the applicable provisions ofArticle IX below.(b) The Parties agree that in any case of absence of opt-out of the Agreements and their consequent

automatic renewal pursuant to the provisions of paragraph 6.00(b) above, the Initial Term mustbe considered from time to time [the end of the thirty-sixth (36) month after the date of eachrenewal].

8.06 Identification of Cases of Accelerated Deadlock. (a) Whenever - during the Term of the Agreements –one of the following events takes place (each of them an event of “Accelerated Deadlock”):(i) a decision is made for the merger and/or spin-off of Olimpia and/or Olivetti with companies other

than companies directly or indirectly controlled;(ii) Olimpia stops owning a holding in Olivetti at least equal to the Holding in Olivetti, also as a

consequence of:(A) sale and/or assignment (including by spin-off) and/or contribution of all or part of its holding in

Olivetti and/or Financial Instruments (with voting right) to companies belonging to the groups inwhich the Current Olimpia Shareholders are members or which are managed by them; or

(B) sale and/or assignment (including by spin-off) of all or part of its holding in Olivetti and/orFinancial Instruments (with voting right) to third parties with payment in kind (for example byswap or contribution).

(iii) Olimpia’s debt/equity Ratio - without prejudice to paragraph (b) below – exceeds 1:1;(iv) the Current Olimpia Shareholders decide to contribute all or part of their total holding in Olimpia

to companies belonging to groups in which the Current Olimpia Shareholders are members orwhich are managed by them;

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(v) without prejudice to the provisions of paragraph 8.06(b) (iii) (C) below, there are plans for transfer,sale and/or assignment (including by spin-off) under any status, of all or part of the total holding ofthe Current Olimpia Shareholders in Olimpia, to companies belonging to groups in which the CurrentOlimpia Shareholders are members or which are managed by them, at a price lower than the marketprice of Olimpia’s holding in Olivetti plus _ 0.60 per Olivetti Share and/or Financial Instrumentowned by Olimpia. It is understood that, whenever Extraordinary Transactions or CapitalTransactions are carried out, such increase of _ 0.60 must be determined for a number of OlivettiShares and/or Financial Instruments appropriately adjusted or changed as a consequence of suchTransactions, according to market practice, with the understanding that whenever, due to thedetermination of such number there is a disagreement among the Parties, such determination will berequested by the most diligent Party from a prime business bank chosen by mutual agreement or, inthe absence thereof, designated by the Presiding Judge of the Court of Milan;

(vi) there are plans for the sale and/or assignment (including by spin-off) of all or part of the totalinvestment of the Current Shareholders in Olimpia to third parties, with payment in kind (forexample by swap or contribution), whenever the third party does not assume towards Hopa thesame obligations assumed by the Current Olimpia Shareholders pursuant to the Agreements,without prejudice to the fact that in such case Hopa will not be subject to any co-sale obligation;

in all these cases, Hopa will have the right to ask Olimpia and the Current Olimpia Shareholders totake all necessary steps in order to decide – pursuant to the applicable provisions of Article IX below –on the Spin-off and Holinvest Spin-off.(b) The Parties mutually take note that: (i) the right granted to Hopa in paragraph (a) above will be deemed exercised when the Current

Olimpia Shareholders receive a written communication from Hopa indicating to the CurrentOlimpia Shareholders its desire to enforce its rights established in the event of AcceleratedDeadlock, “Notice of Accelerated Deadlock”;

(ii) this communication must be sent by Hopa to the Current Olimpia Shareholders not later than bythe fifteenth (15th) day after the occurrence of one of the events referred to in paragraph (a)above;

(iii) in the event referred to in paragraph 8.06(a)(v) above, Hopa will not have:(A) the right to exercise the co-sale rights reserved in its favor in paragraph 6.08(a) above;(B) the right to exercise its pre-emptive right established in the by-laws; and(C) any co-sale obligation.

8.07 Exceptions to Cases of Accelerated Deadlock. (a) In partial derogation to the provisions of paragraph8.06(a)(iii) above, the Parties mutually take note that:(i) the verification of whether the threshold of 1:1 in the debt/equity Ratio of Olimpia was possibly

exceeded, relevant for the purposes of paragraph 8.06(iii) above, will exclusively be carried out byOlimpia and the Current Olimpia Shareholders and communicated by them to Hopa (including aspart of the approval of the periodic balance sheet situation and the financial statements of Olimpiaby its Board of Directors) quarterly, and at any time following a written request from Hopa toOlimpia; and

(ii) it may be considered that the event referred to in the previous paragraph 8.06(iii) took place onlyif, following said event, the debt/equity Ratio of Olimpia is not restored to a value equal to orlower than 1:1 within the next 5 days from the date of the communication by which Olimpianotifies Hopa that the debt/equity Ratio of Olimpia has exceeded 1:1 or, as an alternative, thelatter does not irrevocably undertake to restore it, with the understanding that such restorationmay occur (A) by non-refundable payments to the capital account made by the Current OlimpiaShareholders and without causing economic difficulties for Hopa or dilutions of the latter’s holdingin Olimpia or (B) by subordinated financing, with the understanding that, in this case, the Current

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Olimpia Shareholders will be obligated (in order to avoid an Accelerated Deadlock) to convert orreplace within 60 (sixty) days such subordinated financing by non-refundable payments to thecapital account, without causing economic difficulties for Hopa or dilution of the latter’s holding inOlimpia.

(b) In addition, the Parties mutually take note that:(i) the sale or contribution of their holding in Olimpia will not constitute a case of Accelerated

Deadlock pursuant to paragraph 8.06(v) above:(A) by one of the Current Olimpia Shareholders, to a company which is (and remains) controlled

by it; and(B) by Unicredito and Intesa to:(1) a company subject to joint control of said parties in their respective bank group and as long as

they remain members thereof; and/or(2) to Pirelli, pursuant to the provisions of the current Voting Trust Agreement between Pirelli, on the

one hand, and Unicredito and Intesa on the other hand, provided that Pirelli – simultaneously withsuch sale or contribution – is subrogated in the obligations assumed by Unicredito and Intesatowards Hopa pursuant to the Agreements and in general pursuant to this Contract;

(C) by Edizione to Pirelli pursuant to the provisions of the current Voting Trust Agreement betweenPirelli, on the one hand, and Edizione, on the other hand, whereby Pirelli is subrogated as of now,in the event of such sale or contribution, in the obligations assumed by Edizione towards Hopapursuant to the Agreements and, in general, pursuant to this Contract;

(ii) the sales referred to in paragraph 8.07(b)(i) above will not give Hopa the right to exercise the co-sale rights reserved to it under paragraph 6.08(a) above, nor the pre-emptive right established forit in the by-laws, nor will they create any co-sale obligation for Hopa.

8.08.Relations between Deadlock and Accelerated Deadlock. The Parties mutually take note thatwhenever, in the event of a Deadlock, there is an event of Accelerated Deadlock, the applicableprovisions in the case of Accelerated Deadlock will prevail and, whenever there is an AcceleratedDeadlock, there may be no Deadlock or a subsequent Accelerated Deadlock, with theunderstanding that in the event of a Deadlock, an Accelerated Deadlock may take place but asubsequent Deadlock may not be deemed to occur.

Article IXSpin-off and Holinvest Spin-off9.00 Triggering Events. Should Hopa exercise the rights set forth in its favor in paragraphs 8.05 and

8.06(a) above, and in the event of failure to renew the Agreements on their initial expiration or at theexpiration of the subsequent renewals periods pursuant to paragraph 6.00 above:(i) the Current Olimpia Shareholders undertake to do everything necessary so that – pursuant to the

following paragraphs of this Article IX and in particular paragraph 9.01 – the Spin-off takesplace; and

(ii) Hopa and Olimpia undertake to do everything necessary so that - pursuant to the followingparagraphs of this Article IX and in particular paragraph 9.04 – the Holinvest Spin-off takesplace.

9.01 The Spin-off. (a) The Spin-off will consist of a partial spin-off of Olimpia as a consequence of whichHopa will receive the pro-quota of Olimpia’s assets and liabilities.(b) The reference date, including for the determination of the pro-quota of the assets and liabilities

and without prejudice to paragraph 9.02, of the Spin-off (the “Relevant Date”) will be:(i) the Initial Term, in the event of Deadlock and in the event of failure to renew the Agreements

on the original expiration or on the expiration of the subsequent renewal periods (withoutprejudice to paragraph 8.05(b) above); and

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(ii) a date coinciding with the third (3rd) Business Day following the date of the key issue for thepurposes of Accelerated Deadlock, in the event of Accelerated Deadlock.

(c) Without prejudice to paragraph 9.06 below, the Current Olimpia Shareholders must take allnecessary steps to complete the Spin-off within six (6) months:(i) from the Initial Term, in the event of Deadlock and in the event of failure to renew the

Agreements on the original expiration or on the expiration of the subsequent renewalsperiods; and

(ii) from the date of receipt of the Notice of Accelerated Deadlock, in the event of AcceleratedDeadlock.

9.02 Commitment of the Current Olimpia Shareholders. Without prejudice to paragraph 9.07 below for theso-called cash settlements, in all cases in which, pursuant to this Contract, it is necessary to proceedwith the Spin-off, the Current Olimpia Shareholders must do everything necessary so that, on theRelevant Date:(i) the assets of Olimpia consist at least of the Olivetti Holding(ii) the share of the Olivetti Holding and Financial Instruments to be attributed to Hopa in the Spin-

off is equal to the percentage of Hopa’s holding in the capital of Olimpia, without prejudice to thefact that, in the Spin-off, Hopa must be attributed a share of the Olivetti Holding including in theevent that, on the Relevant Date, Olimpia has a holding lower than the Olivetti Holding, exceptthat, upon the reduction of Olimpia’s holding in Olivetti below the Olivetti Holding, the exercise ofthe co-sale right is obtained by Hopa; in this case, Hopa will be attributed the prorata of Olimpia’sholding in Olivetti and of its financial instruments;

(ii) Hopa will be attributed a portion, in a percentage equal to Hopa’s holding percentage in Olimpia’scapital,

(A) of Olimpia’s holding in Holinvest on the Relevant Date; or(B) the share reserved to Olimpia in connection with Holinvest’s assets and liabilities on the same date.

9.03 Further Commitments in the Event of Deadlock, Accelerated Deadlock and Failure to Renew. Inaddition to the provisions of Paragraph 9.02 above, in the event of a Spin-off following a Deadlock,and an Accelerated Deadlock or failure to renew the Agreements, the Current Olimpia Shareholdersmust take all necessary steps so that the debt/equity Ratio of Olimpia on the Relevant Date is nothigher than 1:1.

9.04 Subsequent Commitments only in the Event of Accelerated Deadlock. In addition to the provisions ofparagraph 9.02 above, in the event of Spin-off following an Accelerated Deadlock (and therefore notin the case of Deadlock or failure to renew the Agreements), the Current Olimpia Shareholders musttake all necessary steps so that the effects of the event which gives rise to Hopa’s right to enforce theAccelerated Deadlock (provided it does not consist of the events referred to in paragraphs 8.06(ii) and8.06(iii) above) do not prejudice the Spin-off.

9.05 Holinvest Spin-off. (a) The Holinvest Spin-off will consist of a partial Spin-off of Holinvest as aconsequence of which Olimpia will be attributed the pro-quota of the assets and liabilities of Holinvest.(b) Without prejudice to paragraph 9.07 below, the reference date of the Holinvest Spin-off will be the

Relevant Date of the Spin-off (and must therefore be determined pursuant to paragraph 9.01(b)above).

(c) Without prejudice to paragraph 9.07 below, Hopa must take all necessary steps for the HolinvestSpin-off to be completed within six (6) months:(i) from the Initial Term, in the event of Deadlock and in the event of failure to renew the

Agreements on the original expiration or on the expiration of the subsequent renewalsperiods; and

(ii) from the date of receipt of the Notice of Accelerated Deadlock, in the event of AcceleratedDeadlock.

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9.06 Commitment of Hopa. In all cases in which the Holinvest Spin-off must be carried out, Hopa will takeall necessary steps so that, on the Relevant Date:(i) Holinvest’s debt/equity Ratio is not higher than 1:1; and(ii) Holinvest’s assets do not include financial instruments other than Olivetti Bonds or other Olivetti

Instruments or financial instruments coming from Extraordinary Transactions or Olivetti Sharesarising from the conversion of the instruments mentioned above, in addition to the Olivetti Sharesreferred to in paragraph 4.01 (a) (ii) (A) (4) above.

9.07 Procedures for the Spin-off and Holinvest Spin-off.(a) Without prejudice to the previous paragraphs of this Article IX, the Parties mutually take note that,

in order to carry out the agreement of the Parties in the event that it is necessary to proceed withthe Spin-off and the Holinvest Spin-off:(i) the Holinvest Spin-off must proceed and be effective before the Spin-off becomes effective,

and must attribute to Olimpia (or, should it so require, in writing, to one of its 100%-ownedsubsidiaries) the pro-quota of the assets and liabilities of Holinvest (as set forth in paragraphs9.05 and 9.06 above); however, it is understood that, whenever Hopa so desires, instead of theHolinvest Spin-off (and therefore instead of the allocation to Olimpia of the pro-quota of theassets and liabilities of Holinvest) Hopa may liquidate Olimpia [and therefore buy Olimpia’sholding in Holinvest] with a payment in cash (so-called cash settlement) whose amount mustbe calculated equal to the difference, calculated at market prices on the Relevant Date,between the assets and liabilities which, in the event of the Holinvest Spin-off (and thereforein the event of allocation to Olimpia of the pro-quota of the assets and liabilities of Holinvest)would have been reserved for Olimpia; with the understanding that this right may be exercisedby Hopa only within 15 (fifteen) Business Days from the Relevant Date, and that the paymentof the aforementioned amount must take place within 15 (fifteen) Business Days after theexercise of said right.

(ii) subsequently – although uninterruptedly – at the time the Holinvest Spin-off becomeseffective, the Spin-off will be carried out attributing to Hopa (or, if it so desires, to one of its100% subsidiaries) the pro-quota of the assets and liabilities of Olimpia (as set forth inparagraphs 9.01 to 9.04 above); however, it is understood that, whenever the Current OlimpiaShareholders so desire, instead of the Spin-off (and therefore instead of the allocation to Hopaof the pro-quota of the assets and liabilities of Olimpia) the Current Olimpia Shareholdersmay liquidate Hopa [and therefore buy the pro-quota, unless decided otherwise, of Hopa’sentire holding in Olimpia] with a payment in cash (so-called cash settlement) whose amountmust be calculated equal to the difference, calculated at market prices on the Relevant Date,between the assets and liabilities which, in the event of the Spin-off (and therefore in the eventof allocation to Hopa of the pro-quota of the assets and liabilities of Olimpia) would have beenreserved for Hopa; with the understanding that this right may be exercised by the CurrentOlimpia Shareholders only within 15 (fifteen) Business Days from the Relevant Date, and thatthe payment of the aforementioned amount must take place within 15 (fifteen) Business Daysafter the exercise of said right.

(iii) including in the event of cash settlement, Hopa will be paid or attributed the IncreasePremium to which it is entitled pursuant to Article X below.

(iv) the stipulation of the Spin-off instrument will be subject to the stipulation of the pre-emptiveright agreement referred to in paragraph 7.05 above, whose enforceability will be, in turn,subject, as a suspensive condition, to the completion of the Spin-off.

(b) Furthermore, the Parties mutually take note of the fact that Olimpia’s liabilities include a “syndicatedloan,” in the amount of _ 1.8 billion maturing in October 2006, which cannot be distributed as part ofthe Spin-off between the company subject to spin-off and the beneficiary, and that therefore:

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(i) such syndicated loan will fully remain in the liabilities of Olimpia;(ii) as part of the Spin-off, Olimpia will attribute to the beneficiary another financial loan, equal

to the portion of the syndicated loan which would be due to the beneficiary of the Spin-off,without changing the preexisting pro-quota of the assets and liabilities to which thebeneficiary is entitled.

(c) The Parties mutually take note that, as part of the Holinvest Spin-off, as part of theattribution of the pro-quota of the applicable assets and liabilities, Hopa will be attributed100,000,000 Olivetti Bonds and the respective debt as referred to in paragraph4.01(ii)(D)(2).

OMISSIS

Article XIncrease Premium10.00 Description. In all the events in which it is necessary to proceed with the Spin-off, pursuant to the

applicable provisions of this contract and in particular Article 9 above (in the calculation of thepro quota of the assets and liabilities to which the beneficiary is entitled under the Spin off)Olimpia or the Current Olimpia Shareholders, if Olimpia fails to do so, must pay to Hopa, by themethods referred to in paragraph 10.04 below, but in addition to any right of Hopa by the effectof the Spin-off pursuant to Article IX above, an Increase Premium (the “Increase Premium”) foreach Olivetti share and/or financial instrument which, by the effect of the Spin-off, must beattributed to Hopa (or should have been attributed to Hopa in the event that the Current OlimpiaShareholders would have exercised their right to the cash settlement pursuant to the paragraph9.07(a) above, to be determined and paid pursuant to the provisions of the following paragraphsof this Article X. It is understood that, whenever Extraordinary Transactions or CapitalTransactions are carried out, such Increase Premium must be paid for the entire number ofOlivetti Shares and/or Financial Instruments timely adjusted or changed as a consequence of suchtransactions, according to market practice, with the understanding that whenever, due to thedetermination of such number there is a disagreement between the Parties, such determinationwill be requested by the most diligent Party from a prime business bank chosen by mutualagreement or, in the absence thereof, designated by the Presiding Judge of the Court of Milan;with the understanding that, without prejudice to paragraph (i) above, the Increase Premium willbe paid only for the Olivetti shares and Financial Instruments directly or indirectly owned, held,or available to Olimpia as of the date of the Spin-off (net of those arising from the HolinvestSpin-off, which will consequently not be considered for the determination of the IncreasePremium). Whenever actually paid, the Increase Premium must be considered to include allHopa’s claims following the Deadlock or the Accelerated Deadlock, as the case may be.

10.01 The Increase Premium in the Event of Deadlock: In the event that the Spin-off takes place following aDeadlock, the Increase Premium must be determined as follows:(i) at € 0.35, whenever the Arbitration Board referred to in Article XIII below, selected by the

Parties pursuant to paragraph 8.04(d) above, determines that the Deadlock was not declared byHopa in good faith; or instead

(ii) at € 0.60, whenever the Arbitration Board referred to in Article XIII below, selected by theParties pursuant to paragraph 8.04(d) above, determines that the Deadlock was declared byHopa in good faith.

10.02 The Increase Premium in the Event of Accelerated Deadlock. In the event that the Spin-off takesplace following an Accelerated Deadlock, the Increase Premium will be equal to € 0.60, withoutprejudice to the fact that, in the case referred to in paragraph 8.06 (ii) above, the Increase Premium

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will be equal to € 0.70.10.03 The Increase Premium in the Event of Failure to Renew the Agreements. In the event that the Spin-

off takes place as the consequence of the failure to renew the Agreements, the Increase Premium willbe determined according to the following provisions:(i) the Increase Premium may not in any event and therefore not even if the Parties resort to the

evaluation of the investment banks referred to in paragraph (ii) below, be determined at anamount of less than € 0.35;

(ii) the Increase Premium will be determined by mutual agreement between the Current OlimpiaShareholders and Hopa within 10 business days from the last day of the term of the agreementor, in the absence of such agreement, by two “investment banks” with the national standingselected one by each Party; for the purposes of this paragraph 10.03. Party means Hopa, on theone hand, and the Current Olimpia Shareholders on the other hand, without prejudice to the factthat, whenever the “investment banks” so appointed disagree on the evaluation within 30business days from their appointment, the evaluation will be made by a third “investment bank”with the same standing, selected by agreement between the first two (at the time the Parties givethe assignment) or, in the absence of agreement, by the Presiding Judge of the Court of Milan;

(iii) the Presiding Judge of the Court of Milan will be (in the order and in the terms indicated above)also requested to appoint the “investment bank” which one of the Parties may have omitted toappoint or to replace it, in the event it is released from its assignment;

(iv) the evaluation referred to in point (i) above will be final and binding for the Parties pursuant toarticles 1349 and 1473 of the Italian Civil Code, for the purposes of this Article X and inparticular this paragraph 10.03.

10.04 Terms and Manner of Payment of the Increase Premium. The Increase Premium must be paid orallocated to Hopa by Olimpia – or by the Current Olimpia Shareholders pursuant to paragraph 10.00above – in immediately available funds;(i) in the event referred to in paragraph 10.01 above;

(A) concerning the _ 0.35, at the time of affecting the Spin-off: and(B) concerning the possible balance (equal to _ 0.25), within 15 (fifteen) business days from the

decision of the Arbitration Board, determining that the Deadlock was determined by Hopa ingood faith;

(ii) in the event referred to in paragraph 10.02 above, concerning the _ 0.35, within 30 (thirty)calendar days from receipt of the notice of Accelerated Deadlock by the Current OlimpiaShareholders, and the balance of the applicable Increase Premium at the time of perfecting theSpin-off;

(iii) in the event referred to in paragraph 10.03 above, within 30 (thirty) business days from thedetermination referred to in points (ii) to (iv) of paragraph 10.03 above.

Article XI Tax expenses

OMISSIS

Article XII General Provisions

OMISSIS

Article XIII Disputes

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OMISSIS

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The full text of the Contract (without any OMISSIS):(i) will be filed – in accordance with the paragraph 1, letter (c) of article 122 of Legislative Decree No.

58/98 – at the Milan and Turin/Ivrea Companies Registry; and (ii) is already available for viewing on the corporate website www.pirelli.com

Milan, March 1, 2003

PLAN FOR THE MERGER BY INCORPORATION IN PIRELLI & C. A.P.A. (AFTER ITS TRANSFORMATION TO A CORPORATION) OF PIRELLI & C.LUXEMBOURG S.P.A. AND PIRELLI S.P.A. DRAWN UP IN ACCORDANCEWITH ART. 2501 BIS OF THE ITALIAN CIVIL CODE.

Considering that:

a. the intention is to proceed with the merger by incorporation in Pirelli & C. A.p.A.(after its transformation, in the same shareholders’ meeting called to approvethis plan of merger, but with immediate effect, from a limited partnership to acorporation – hereinafter Pirelli & C.) of Pirelli & C. Luxembourg S.p.A.(hereinafter Pirelli & C. Luxembourg) and Pirelli S.p.A.;

b. the assumptions for the merger are described in the reports by the Board ofManaging Partners of Pirelli & C. and the Board of Directors of Pirelli S.p.A. tothe respective shareholders’ meetings;

c. the plan of merger makes reference to the balance sheet data at December 31,2002 of the companies taking part in the merger, that in all cases coincide withthe respective annual financial statements. For purposes of determining theexchange ratios and the valuations needed of the relative value of the economiccapitals of the companies, account was also taken of the following significantevents subsequent to such date:(i) the purchase by Pirelli & C. of 47,973,139 Pirelli S.p.A. ordinary shares

(equal to 2.5 percent of ordinary share capital) from BZ Group HoldingLimited for a total price of about Euros 43.1 million;

(ii) the merger of Holy S.r.l. in Olimpia S.p.A. on the basis of the agreementssigned between the shareholders of Olimpia S.p.A., Olimpia S.p.A. andHopa S.p.A. and announced to the market on December 19, 2002(published in accordance with the law), after which Pirelli S.p.A.’sinvestment in Olimpia S.p.A. will be reduced from 60 percent to 50.4percent;

(iii) the proposed pay out of dividends from 2002 profits by both Pirelli & C.(Euros 0.08 per ordinary share and Euros 0.0904 per savings share, for atotal of about Euros 52 million) and Pirelli S.p.A. (Euros 0.0364 per savingsshare for a total of about Euros 3 million), submitted to the approval of therespective shareholders’ meetings;

(iv) the capital increase cum warrants offered on option to the shareholders ofPirelli & C. referred to in the preceding paragraph 2.

Having said that

The following plan of merger by incorporation is submitted for approval to theshareholders’ meetings of Pirelli & C., Pirelli & C. Luxembourg and Pirelli S.p.A..

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1. Type, name of company and registered offices of the companies takingpart in the merger

Merging companyPirelli & C. A.p.A. (Pirelli & C. S.p.A. after transformation of its legal entity asstated in the introduction), with registered office in Milan, Via Gaetano Negri 10,with share capital of Euros 339,422,773.56, fully paid-in, subdivided into652,736,103 shares of par value Euros 0.52 each, of which 618,317,846ordinary shares and 34,418,257 savings shares, Milan Companies Registrynumber 00860340157, tax code number 00860340157, established in Milan onMay 15, 1883 by deed of the notary public Stefano Allocchio, file number10752.

Companies to be mergedPirelli & C. Luxembourg S.p.A., with registered office in Milan, Via Gaetano Negri10, (formerly Pirelli & C. Luxembourg S.A., with registered offices in Luxembourg,13 Boulevard du Prince Henri), share capital of Euros 183,600,000.00, fully paid-in, subdivided into 270,000 ordinary shares of par value Euros 680.00 each, MilanCompanies Registry number 03913350967, tax code number 03913350967,established in Luxembourg on February 28, 1997 by deed of the notary publicJacques Delvaux.

Pirelli S.p.A., with registered office in Milan, Viale Sarca 222, share capital of Euros1,043,707,463.24, fully paid-in, subdivided into 2,007,129,737 shares of par valueEuros 0.52 each, of which 1,919,123,721 ordinary shares and 88,006,016 savingsshares, Milan Companies Registry number 00886890151, tax code number00886890151, established in Milan on November 3, 1920 by deed of the notarypublic Gerolamo Serina, file number 18657.

2. By-laws of the merging company and amendments to the by-laws as aresult of the merger

The shareholders’ meeting of Pirelli & C. called to vote on the merger will beasked to pass resolutions, beforehand, on the transformation of the mergingcompany to a corporation, the change in the corporate business purpose and aseries of consequent amendments to the by-laws, the one and the other effectiveimmediately.

Specifically, amendments will be made to articles 1 (name of the company), 2(corporate business purpose), 7 (convocation of shareholders’ meetings), 8(constitution of shareholders’ meetings), 9 (chairmanship of shareholders’meetings), 10 (management of the company), 11 (convocation of the Board ofDirectors and majorities), 12 (representation of the company), 13 (compensation tothe directors), 14 (resignation of the directors) and 17 (distribution of profits) of theby-laws of Pirelli & C..

A new article will also be inserted between articles 10 and 11 relating to the powersof the Board of Directors and will be numbered article 11, with the consequent re-numbering of the following articles.

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The same shareholders’ meeting, always before the resolution on the merger, will beasked to approve a share capital increase cum warrants that will be offered onoption to shareholders of Pirelli & C. prior to the effective date of the merger, as aresult of which article 5 of the by-laws of the aforementioned company will beconsequently amended.

Specifically, the shareholders of Pirelli & C. will be asked to approve:

a) a share capital increase by Pirelli & C., separable, against payment for a maximumpar value of Euros 1,014,185,020.68 through the issue of a maximum of1,950,355,809 ordinary shares, all with a par value of Euros 0.52, with regulardividend rights from January 1, 2003, to be granted on option to the shareholders,in a ratio of 3 new ordinary shares for every 1 share of any class of stock held, at aprice equal to par value, for a total equivalent spot amount of a maximum of Euros1,014,185,020.68. Each new share issued will also have a free warrant attached,that can be traded separately, valid to subscribe, from January 1, 2004 to June 30,2006, to Pirelli & C. ordinary shares in a ratio of 1 new Pirelli & C. share for every4 warrants held, at a unit price equal to par value;

b) a consequent share capital increase, separable, against payment for a maximumpar value of Euros 253,546,255.04 through the issue, at one or more times, of amaximum of 487,588,952 ordinary shares, all with a par value of Euros 0.52,with regular dividend rights, to be reserved exclusively and irrevocably for theexercise of the warrants attached to the shares that will be issued as described inthe preceding point a), for a further equivalent amount in the future of amaximum of Euros 253,546,255.04.

Again on the basis of the resolutions that will be proposed to the aforementionedextraordinary shareholders’ meeting, as a result of the merger, and effective from thedate the merger comes into effect with third parties, articles 5 and 17 (previouslynumbered article 18) of the by-laws of the merging company will be further amended.As for article 5, the amendments incorporate: (i) the capital increase to service themerger and (ii) the delegation of power to the Directors of Pirelli & C. to increaseshare capital through the issue, at one or more times, of a maximum of100,000,000 Pirelli & C. ordinary shares, by April 30, 2008, to be granted to themanagers and cadres of the company and its subsidiaries, in Italy and abroad,pursuant to articles 2441 and/or 2349 of the Italian Civil Code.

As for art. 17 (renumbered art. 18), the amendment refers to the increase in thepreference dividend from 5 percent to 7 percent of the par value of the savingsshares (Euros 0.52 for both Pirelli & C. and for Pirelli S.p.A.) to be paid from theannual earnings calculated net of the portion to appropriate to the legal reserve.This was done in order to render the economic treatment of Pirelli & C. savingsshareholders the same as Pirelli S.p.A. savings shareholders.

A copy of the by-laws – in the version reflecting the changes that will be submittedto the extraordinary shareholders’ meeting of Pirelli & C. convened to approve,among other things, this plan of merger, described in the preceding paragraphs – isattached to the plan of merger.

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The renewal of the corporate boards will also be proposed to the Pirelli & C.shareholders’ meeting.

3. Share exchange ratioThe exchange ratio is equal to the following:– 4 new Pirelli & C. ordinary shares for every 3 Pirelli S.p.A. ordinary shares;– 10 new Pirelli & C. non-convertible savings shares for every 7 Pirelli S.p.A. non-

convertible savings shares.

There is no cash differential anticipated.

The shares of Pirelli & C. Luxembourg (a wholly-owned subsidiary of the mergingcompany) will be cancelled, without exchange.

4. Manner of assigning the shares of the merging companyPirelli & C. will execute the merger by:– cancellation, without exchange, of the shares representing the entire share capital

of Pirelli & C. Luxembourg, since it is a wholly-owned subsidiary of the mergingcompany;

– cancellation, without exchange, of the Pirelli S.p.A. ordinary and savings sharesthat, at the date the merger becomes effective, are owned by Pirelli & C. or Pirelli& C. Luxembourg;

– cancellation, without exchange, of the shares of the company to be merged,Pirelli S.p.A., which, at the date the merger becomes effective, are owned by thesame company to be merged;

– increase of its share capital for a maximum par value of Euros 786,127,230.72through the issue of a maximum number of 1,398,203,116 ordinary shares and amaximum number of 113,580,020 non-convertible savings shares of par valueEuros 0.52 each with dividend rights from January 1 of the year in which themerger comes into effect with third parties, to be reserved for the shareholders ofPirelli S.p.A. (other than Pirelli & C. and Pirelli & C. Luxembourg) on the basisof the exchange ratios indicated in the preceding paragraph 3.

The amount of the capital increase to service the exchange ratio represents themaximum theoretical amount based upon the structure of the shareholder base as ofthe date of this report, assuming: (i) full exercise of the 46,154,000 “MediocreditoLombardo Warrants – Pirelli S.p.A. ordinary shares 1998-2003”, held by a singleparty, valid for the subscription, in the period July 1 – 31, 2003, of 1 Pirelli S.p.A.ordinary share for each 1 warrant held at the price of approx. Euros 3.24 per share,and (ii) full exercise of the options granted by Pirelli S.p.A. under the existingincentive plans giving the beneficiaries the right to subscribe to a maximum of46,829,692 Pirelli S.p.A. ordinary shares.

In order for the Pirelli S.p.A. shares, that are to be exchanged for the exchange ratioto be exactly separable, up to a maximum of 2 ordinary shares and up to amaximum of 6 savings shares of Pirelli S.p.A. will be cancelled and made availableto a shareholder. The exact amount of the shares to be cancelled will be determinedat the time of signing the deed of merger, taking into account the number of Pirelli

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S.p.A. ordinary and savings shares held by Pirelli & C., Pirelli & C. Luxembourgand the same Pirelli S.p.A. at that date, as well as the eventual exercise of“Mediocredito Lombardo Warrants – Pirelli S.p.A. ordinary shares 1998-2003” andthe eventual exercise of the options granted by Pirelli S.p.A. to the beneficiaries ofthe existing incentive plans.

The Pirelli & C. shares issued under the exchange ratios referred to in the precedingparagraph 3 will be made available to those entitled, under conditions ofdematerialization, through the respective authorized depositary agents registeredwith Monte Titoli S.p.A. beginning from the date the merger becomes effective, ifthe stock market is open for trading or from the first trading day thereafter.

Where necessary, Pirelli S.p.A. will ensure, through a broker charged especially for thepurpose, that shareholders can purchase or sell the minimum number of Pirelli S.p.A.shares in order to have a whole number of Pirelli & C. shares without any additionalexpenses, stamps, duties and commissions. This information will be announced on atimely basis through a specific notice published in at least one national newspaper.

Pirelli & C. and Pirelli S.p.A. will advise those concerned of the necessaryprocedures to be followed to exchange the shares after the merger has been executedthrough publication of a specific notice in at least one national newspaper.

As from the date the merger becomes effective, if the stock market is open fortrading, or from the first trading day thereafter, the Pirelli S.p.A. shares of allclasses of stock will be delisted from the Mercato Telematico Azionario organizedand operated by Borsa Italiana S.p.A..

Pirelli & C. shares, including the new shares issued to service the exchange ratio,will continue to be listed on the Mercato Telematico Azionario organized andoperated by Borsa Italiana S.p.A.

5. Date from which the new Pirelli & C. shares accrue dividend rightsThe new Pirelli & C. ordinary and non-convertible savings shares to service theexchange will have dividend rights from January 1 of the year in which the mergercomes into effect with third parties.

6. Date the merger becomes effectiveThe deed of merger will establish the date from which the merger will be in effect exart. 2504 bis of the Italian Civil Code. The date could also be subsequent to thedate in which the final registrations required by art 2504 of the Italian Civil Codehave been completed.

In accordance with the combined provision of articles 2504 bis, paragraph 3, and 2501bis, paragraph 6 of the Italian Civil Code, the transactions of Pirelli & C. Luxembourgand Pirelli S.p.A. will be taken up by Pirelli & C. in its financial statements beginningfrom January 1 of the year in which the merger comes into effect with third parties, andthis is also the date on which the merger becomes effective for tax purposes, pursuantto art. 123, paragraph 7, of D.P.R. No. 917 of December 22, 1986.

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7. Eventual treatment reserved for specific categories of shareholders andholders of securities other than shares

The exchange ratio to which the Pirelli S.p.A. ordinary and savings shareholders areentitled are indicated in the preceding paragraph 3.

As a result of the amendment to art. 17 (renumbered art. 18) of the by-lawsfollowing the approval of the plan of merger, the Pirelli & C. holders of savingsshares (including those coming from the exchange ratio with Pirelli S.p.A. shares)will be entitled to a preference dividend on profits equal to 7 percent of the parvalue of the savings shares (Euros 0.52) to be paid from the annual earnings,calculated net of the portion to appropriate to the legal reserve. This change willcome into force from the date the merger comes into effect with third parties, takinginto account the comments in the preceding paragraph 5.

The Pirelli & C. savings shares granted in the exchange ratio for the Pirelli S.p.A.savings shares will have all the features of the latter.

As for the 46,154,000 “Mediocredito Lombardo Warrants – Pirelli S.p.A. ordinaryshares 1998-2003”, valid for the subscription, in the period July 1 – 31, 2003, of 1Pirelli S.p.A. ordinary share for each 1 warrant held at the price of approx. Euros3.24 per share, account was taken of the eventual exercise of the warrants forpurposes of determining the maximum number of shares to be issued to service theexchange.

Lastly, Pirelli & C. will substitute: (i) Pirelli & C. Luxembourg as the issuer of the“Pirelli & C. Luxembourg S.A. – 5.125% Guaranteed Notes due 2009” of Euros150,000,000 (ii) Pirelli S.p.A. as the issuer of “Pirelli S.p.A.– 4.875% Notes due2008” of Euros 500,000,000 and (iii) Pirelli S.p.A. as the guarantor of the “PirelliFinance (Luxembourg) S.A.– 6.50% Guaranteed Notes due 2007” of Euros500,000,000”.

There are no treatments reserved for the holders of securities other than thosementioned above.

However, the absent or dissenting holders of Pirelli & C. ordinary shares regardingthe specific resolutions on the transformation of Pirelli & C. to a corporation andthe change in the corporate business purpose (more fully described in the precedingparagraph 2) referred to in point 1 of the agenda of the extraordinary session of thePirelli & C. shareholders’ meeting called to approve, among other things, the plan ofmerger, and the holders of Pirelli & C. savings shares, will be entitled to the right ofwithdrawal pursuant to art. 2437 of the Italian Civil Code to be exercised in themanner indicated in the specific notice that will be published in at least one nationalnewspaper subsequent to the registration of the relative resolutions in theCompanies Registry.

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8. Specific advantages eventually proposed in favor of the directors of themerging company and/or merged companies

There are no particular advantages anticipated for the directors of the mergingcompany and/or merged companies.

Milan, March 11, 2003

Pirelli & C. Accomandita per AzioniThe Chairman

Dott. Marco Tronchetti Provera

Pirelli Società per AzioniThe President and CEO

Dott. Marco Tronchetti Provera

Milan, April 2, 2003

Pirelli & C. Luxembourg S.p.A.The Chairman

Dott. Pierluigi Zanaboni

Attachment: By-laws

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BY-LAWS

COMPANY’S NAME, PURPOSE, REGISTERED OFFICE AND DURATION

Article 1A Corporation is hereby incorporated under the name Pirelli & C. Società perAzioni.

Article 2The purpose of the Company is the following:a) the acquisition of participating interests in other companies or corporations, bothin Italy and abroad;b) the financing, the technical and financial co-ordination of the companies orcorporations in which it has interests;c) the sale, ownership, management or placement of both government and privatesecurities;The Company may carry out all transactions of any type whatsoever - excluding thecollection of savings deposits from the public - connected to its corporate businesspurpose.

Article 3The registered office of the Company is in Milan, at Via G. Negri 10.

Article 4The duration of the Company is fixed until the date of December 31, 2100.

SHARE CAPITAL

Article 5The share capital is Euros 339,422,773.56 (threehundredthirtyninemillion-fourhundredtwentytwothousandsevenhundredseventythreeandfiftysixcents) dividedinto 652,736,103 (sixhundredfiftytwomillionsevenhundredthirtysixthousand-onehundredthree) shares with a par value of Euros 0.52 (fiftytwocents) each consistingof 618,317,846 (sixhundredeighteenmillionthreehundredseventeenthousand-eighthundredfourtysix) ordinary shares and 34,418,257 (thirtyfourmilion-fourhundredeighteenthousandtwohundredfiftyseven) savings shares.By resolution passed by the extraordinary shareholders’ meeting held on December22, 1998, the Directors were granted the power to increase the share capital, at oneor more times, by a maximum amount of Euros 103,291,379.81(onehundredthreemilliontwohundrednintyonethousandthreehundredseventynineandeightyonecents) and for a maximum time period of five years from the date of saidresolution. The share capital increase may be carried out by issuing, also with apremium, both ordinary and savings shares, and must be reserved for shareholdersand/or holders of convertible bonds.By resolution passed by the extraordinary shareholders’ meeting held on December

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22, 1998, the Directors were granted the power to issue bonds, at one or moretimes, including bonds that are convertible both into ordinary shares or into savingsshares, or bonds with warrants valid for the subscription of said shares, for amaximum par value amount of Euros 206,582,759.63 (twohundredsixmillion-fivehundredeightytwothousandsevenhundredfiftynineandsixtythreecents) and for amaximum time period of five years from the date of said resolution, with theconsequent possible increase of the share capital to serve the bond conversion.The extraordinary shareholders’ meeting of May 7, 2003 voted the following:a) to increase share capital, against payment, separable, by and no later than

December 31, 2003, of a maximum of Euros 1,014,185,020.68 (onebillion-fourteenmilliononehundredeightyfivethousandandtwentyandsixtyeightcents),through the issue of a maximum of 1,950,355,809 (onebillionninehundred-fiftymillionthreehundredfiftyfivethousandeighthundredandnine) ordinary sharesof par value Euros 0.52 (fiftytwocents) each, with dividend rights from January1, 2003, to be offered on option to the shareholders, at a unit price equal to parvalue, in a ratio of 3 new ordinary shares for every 1 share of whatsoever class ofstock owned;

b) to attach to each share referred to in point a) a free warrant, that can be tradedseparately, valid to subscribe, at any time from January 1, 2004 to June 30,2006, in a ratio of 1 Pirelli & C. ordinary share, with regular dividend rights anda par value of Euros 0.52 (fiftytwocents) for every 4 warrants held, at a unitprice equal to par value;

c) to consequently increase share capital against payment, separable, by and notlater than June 30, 2006, of a maximum par value of Euros 253,546,255.04(twohundredfiftythreemillionfivehundredfortysixthousandtwohundredfiftyfiveandfourcents) through the issue, at one or more times, of a maximum of487,588,952 (fourhundredeightysevenmillionfivehundredeightyeightthousand-ninehundredfiftytwo) ordinary shares, of par value Euros 0.52 (fiftytwocents)each, with regular dividend rights, to be reserved exclusively and irrevocably forthe exercise of a maximum of 1,950,355,809 (onebillionninehundred-fiftymillionthreehundredfiftyfivethousandeighthundredninne) warrants attachedto the shares referred to in the preceding point b).

The extraordinary shareholders’ meeting of May 7, 2003 which approved the mergerby incorporation in Pirelli & C. S.p.A. of Pirelli & C. Luxembourg S.p.A. and PirelliS.p.A. voted to increase share capital to service the exchange ratio by a maximum parvalue of Euros 786,127,230.72 (sevenhundredeightysixmilliononehundred-twentyseventhousandtwohundredthirtyandseventytwocents) through the issue of amaximum of 1,398,203,116 (onebillionthreehundredninetyeightmillion-twohundredandthreethousandonehundredandsixteen) ordinary shares and a maximumof 113,580,020 (onehundredthirteenmillionfivehundredeightythousandtwenty) savingsshares of par value Euros 0.52 (fiftytwocents) each with dividend rights from January1 of the year in which the merger comes into effect with third parties, to be reserved forthe shareholders of Pirelli S.p.A., other than Pirelli & C. S.p.A. and Pirelli & C.Luxembourg S.p.A., on the basis of the exchange ratio of: (i) 4 new Pirelli & C.ordinary shares for every 3 Pirelli S.p.A. ordinary shares and (ii) 10 new Pirelli & C.non-convertible savings shares for every 7 Pirelli S.p.A. non-convertible savings shares.By resolution voted by the extraordinary shareholders’ meeting of May 7, 2003, theDirectors were granted the power to issue, at one or more times, up to a maximum

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of 100,000,000 (onehundredmillion) ordinary shares, by April 30, 2008, to begranted to the managers and cadres of the Company and its subsidiaries and thesubsidiaries of the latter, in Italy and abroad, pursuant to articles 2441 and/or 2349of the Italian Civil Code.

Article 6The shares are divided into ordinary shares and savings shares.Ordinary shares give the right to one vote per share; they may be either registered orbearer shares insofar as the law permits, and in this case may be converted,especially at the holder's request and expense, from one type to the other.Savings shares do not give the right to vote and, unless the law provides otherwise,are bearer shares.At the request and expense of the shareholder they may be converted into registeredshares.As well as any rights and privileges provided for by law and in other parts of thepresent by-laws, savings shares shall have pre-emptive rights in the matter ofpaying-off of capital up to the full par value of same; in the event of a capitalreduction due to loss, the par value of the saving shares will be reduced only by thatpart of loss exceeding the total par value of the other shares.Savings shares keep the rights and privileges foreseen by law and by the present by-laws even in the event of exclusion of ordinary shares and savings shares from trading.In order to ensure the common representative of the holders of savings shares, ofadequate information about any transactions which might influence the trend in themarket prices of the shares in that class, any communications concerning saidtransactions will promptly be sent to same, by the legal representatives.In the event of a share capital increase being carried out by issuing shares of onlyone class, same must be offered on option to the shareholders of all classes of shares.In the event of both ordinary shares and savings shares being issued:a) the holders of ordinary shares shall have the right to receive ordinary shares on

option, and savings shares to make up any difference;b) the holders of savings shares shall have the right to receive savings shares on

option, and ordinary shares to make up any difference.

SHAREHOLDERS’ MEETING

Article 7The convocation of the shareholders’ meeting, which may take place anywhere inItaly including in a place other than the registered office, the right to attendmeetings and representation at same are all governed by law.In view of the nature of the Company's business and the special requirementsarising therefrom, the ordinary shareholders’ meeting may be convened within sixmonths of the end of the financial period.Article 8The due convocation of the meeting and the validity of its resolutions are governedby law.The voting quorum for the appointment of Directors is established as a relativemajority of the votes.

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Article 9The meeting shall be presided over by the Chairman of the Board of Directors, by aDeputy Chairman or by a Managing Director, in that order; whenever there are twoor more Deputy Chairmen or Managing Directors, the chair shall be takenrespectively by the senior in age. In the event of the absence of the above-indicatedindividuals, the chair shall be taken by another person chosen by the shareholders’meeting among the shareholders present.The Chairman is assisted by a Secretary appointed by the meeting; there is no need toappoint a Secretary when the minutes of the meeting are drawn up by a notary public.It is the duty of the Chairman of the meeting to verify the right to attend themeeting, including by means of proxy; to ascertain whether or not the meeting hasbeen duly constituted and has achieved the quorum required in order to passresolutions; to conduct and moderate the discussion; to establish the order andmanner of voting as well as announce the results thereof.The resolutions of the meeting shall be recorded in the minutes, which shall besigned by the Chairman and the Secretary of the meeting or the notary public.The minutes of the extraordinary shareholders’ meeting must be drawn up by anotary public appointed by the Chairman.Any copies and extracts thereof, that have not been drawn up by a notary public,shall be certified as true copies by the Chairman of the Board of Directors.

MANAGEMENT OF THE COMPANY

Article 10The Company is managed by a Board of Directors composed of between seven andtwenty-three members who shall remain in office for three years (unless the meetingfixes a shorter term of office at the time of making the appointment) and may be re-elected.A Chairman, and if necessary, one or more Deputy Chairmen shall be appointedfrom amongst the members of the Board.In the event of the Chairman being absent, the chair shall be taken by a DeputyChairman or a Managing Director, in that order; if there should happen to be two ormore Deputy Chairmen or Managing Directors, the chair shall be taken respectivelyby the senior in age.The Board shall appoint a Secretary, who is not necessarily a member of the Board.Unless otherwise decided by the shareholders’ meeting, the Directors are not boundover by the prohibition mentioned under art. 2390 of the Italian Civil Code.

Article 11The Board is empowered with the management of the Company and, for thispurpose, is invested with the fullest powers for administration, except those, whichaccording to the by-laws or by law, are reserved for the shareholders’ meetings.The Board of Directors, also through delegated bodies, informs the Board ofStatutory Auditors on a timely basis about the activities conducted and the mostimportant economic, financial and equity transactions carried out by the Companyand its subsidiaries; it specifically makes reference to transactions with potentialconflicts of interest. The information is provided, at least quarterly, at the board

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meetings or Executive Committee meetings or by written communication to theBoard of Statutory Auditors.The Board is authorized to delegate those powers it wishes to confer on one or moreof its members, eventually through the positions of Managing Directors, attributingsingle or collective signature powers as it deems to establish for the administrationof the Company.It may also delegate its competence to an Executive Committee composed of some ofits members, whose compensation shall be established by the shareholders’ meeting.It may also nominate one or more committees with consulting functions, also forpurposes of updating the corporate governance structure to the recommendationsissued from time to time by the competent authorities.Lastly, the Board may appoint General Managers, Deputy General Managers, Managersand Deputy Managers and persons with power of attorney for single acts or categoriesof acts, establishing powers and competence. The appointment of Managers, DeputyManagers and persons with power of attorney for individual acts or categories of acts,can also be referred by the Board to the Managing Directors and the General Managers.

Article 12The Board shall meet at the invitation of the Chairman or whomsoever is acting onhis behalf, at the registered office of the Company or in any other place stated in theletter of convocation, every time he considers it in the best interests of the Company,or whenever a meeting has been requested by one of the Managing Directors or byat least two standing statutory auditors.However, the Board may validly pass resolutions, even failing any formalconvocation, if all the board members and all the standing statutory auditors inoffice are present.Board meetings shall be convened by means of a letter, telegram, telex or fax sent tothe address of each Director and each Standing Statutory Auditor, at least five daysbefore (or in urgent cases at least six hours before) the day set for the meeting.Meetings of the Board and of the Executive Committee may be held byteleconference or videoconference. In this case the following must be guaranteed:a) identification of all the participants at each point in the connection;b) the possibility for each participant to intervene, to orally put forward same’s own

opinion, to view, receive and transmit all documentation, as well as thecontextuality of considerations and resolutions.

Meetings of the Board of Directors and of the Executive Committee are consideredto be held in the place in which the Chairman and the Secretary must besimultaneously.The presence of at least half the members plus one is necessary for the resolutions ofthe Board to be deemed valid, and the favorable vote of the majority of those present isrequired. In the event of a tie in votes, the casting vote shall be that of the Chairman.The resolutions of the Board, even when passed by meetings held by teleconferenceor by videoconference, are recorded in a special book signed by the Chairman andthe Secretary. Any copies and extracts thereof, that have not been drawn up by anotary public, shall be certified as true copies by the Chairman.

Article 13Legal representation of the Company vis-à-vis third parties and in court proceedingsshall be the duty, with separate and several signatory powers, of the Chairman of the

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Board of Directors and, if appointed, of the Deputy Chairmen and Managing Directors,within the limits of the powers granted to them by the Board of Directors.Each one of the aforesaid shall in any case have full powers to take legal action and fileappeals before any judicial authority and any court of any degree, including inrevocation or cassation (supreme court) proceedings, to file statements and prosecute incriminal cases, to sue on behalf of the Company in criminal proceedings, to begin legalproceedings and file petitions before all administrative jurisdictions, to intervene andprotect the Company's interests in case of proceedings and claims against the Company,granting for this purpose all necessary mandates and powers of attorney ad litem.The Board of Directors and, within the limits of the powers granted to them by saidBoard, the Chairman of the Board and, if appointed, the Deputy Chairmen and theManaging Directors, are authorized to grant Managers and staff in general, andwhen necessary third parties, the power to represent the Company vis-à-vis thirdparties and in court proceedings.

Article 14The members of the Board of Directors are entitled to annual compensationestablished by the shareholders’ meeting and shall be reimbursed for all expensesincurred during the course of their duties.The compensation to Directors invested with special duties is established by art.2389, paragraph 2, of the Italian Civil Code.

Article 15If, due to resignation or any other cause, more than half the Directors should leaveoffice, then the entire Board of Directors is considered to have resigned with effectas from the time of its re-constitution.

BOARD OF STATUTORY AUDITORS

Article 16The Board of Statutory Auditors is composed of three standing statutory auditors andtwo alternate statutory auditors who must hold the requisites required by existing lawsand regulations; to this end, account will be taken that the matters and sectors ofbusiness strictly inherent to those of the Company are those indicated in the corporatebusiness purpose with particular reference to companies or entities operating in theindustrial, banking, insurance, real estate and services sectors in general.The ordinary shareholders’ meeting shall elect the Board of Statutory Auditors anddetermine its compensation. The minority shareholders shall appoint one standingstatutory auditor and one alternate statutory auditor.With the exception of the provisions of the second last paragraph of the presentarticle, the appointment of the Board of Statutory Auditors shall be made on thegrounds of lists put forward by the shareholders in which candidates are listedunder progressive numbers.Each list shall contain a number of candidates which does not exceed the number ofmembers to be appointed. All shareholders who, alone or together with othershareholders, represent at least 2 percent of the shares with voting rights in theordinary shareholders’ meeting, have the right to put forward a list.

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The lists of candidates, undersigned by the parties presenting them, must be filed at theCompany’s registered office at least ten days before the day fixed for the meeting in firstcall. A description of the professional résumé of the individuals standing for electionmust be enclosed with the lists together with statements whereby the single candidatesaccept the nomination and attest, under their own personal responsibility, that nocircumstances exist for ineligibility or incompatibility, and that they comply withrequirements prescribed by law or by the articles for the position Any lists put forward which do not comply with the aforesaid provisions shall beconsidered not to have been put forward.Each candidate may be included on only one list, under penalty of ineligibility.Likewise, any individuals who are not in possession of the requisites established by theapplicable rules and regulations or who already hold the position of statutory auditor inmore than five companies with stocks listed on regulated Italian markets, with theexception of the subsidiaries of Pirelli & C. may not be appointed as statutory auditors.Each individual with voting rights may vote for only one list.The election of the members of the Board of Statutory Auditors is performed asfollows: two standing statutory members and one alternate member are taken fromthe list which has obtained the highest number of votes, in the progressive order inwhich they are listed thereon; the remaining standing statutory member and theother alternate member are taken from the list which has obtained the highestnumber of votes from the meeting after the first list, again in the progressive orderin which same are listed thereon; in the event of several lists obtaining the samenumber of votes, a new run-off vote between the said lists will be cast by all theshareholders present at the meeting, and the candidates on the list which obtainsthe simple majority of the votes will be appointed.The Chairman of the Board of Statutory Auditors shall be the statutory memberindicated as the first candidate on the list which obtained the highest number of votes.In case of death, waiver or resignation of a Statutory Auditor, the alternate belonging tothe same list as the resigned statutory auditor shall replace him. In the event ofreplacement of the Chairman the Board of Statutory Auditors, the chair shall be takenby the other statutory member on the list to which the resigning chairman belonged; ifit is not possible to perform substitutions and replacements as set out hereinabove, thena meeting shall be convened to integrate and complete the Board of Statutory Auditorsand which shall pass resolutions with a relative majority.When the meeting has to make provisions, pursuant to the terms of the aforegoingparagraph or to the terms of law, for the appointment of statutory auditors and/oralternates needed to complete the Board of Statutory Auditors, it shall proceed asfollows: if statutory auditors appointed from the majority list have to be replaced,then the appointment is made with a relative majority vote without being tied toany list; if, on the other hand, statutory auditors appointed by the minorityshareholders have to be replaced, the meeting shall replace them with a relativemajority vote choosing names where possible from amongst the candidates indicatedon the list on which the statutory auditor to be replaced appeared.If only one single list has been put forward, then the meeting shall cast its vote inrelation to that list; if the list obtains a relative majority, then the first threecandidates on the list in progressive order shall be appointed as the standingstatutory auditors, and the fourth and fifth candidate shall be appointed asalternate statutory auditors; Chairman of the Board of Statutory Auditors shall bethe person indicated at the top of the list put forward; in case of death, waiver or

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resignation of a statutory auditor, and in the event of substitution of the Chairmanof the Board of Statutory Auditors, they shall be replaced respectively by analternate statutory auditor and a standing statutory auditor in the order arisingfrom the progressive numbering of the said list.Failing any lists, the Board of Statutory Auditors and its Chairman shall beappointed by the shareholders’ meeting with the majorities prescribed by law.Resigning statutory auditors may be re-elected.

FINANCIAL STATEMENTS – DISTRIBUTION OF PROFITS

Article 17The Company's financial period shall end on the December 31 each year.

Article 18After all the appropriations to the reserves prescribed by law have been carried out,the annual profits shall be distributed as follows:a) savings shares shall be attributed an amount of up to seven per cent of their par

value; if, in any financial period, a dividend of less than seven per cent of the parvalue has been distributed to the savings shares, the said difference is calculated asan increase to be added to the preference dividend during the following twofinancial periods; any profits remaining after the aforesaid appropriations andprovisions and which the meeting resolves to distribute, shall be distributed amongstall the shares in such a manner that the savings shares shall receive a total dividendwhich is increased, compared to the dividend received by the ordinary shares, by anamount equivalent to two percent of their par value;

b) aside from what has been established above in respect of the total higherdividends attributed to the savings shares, the ordinary shares shall be attributedan amount up to five percent of their par value.

The profits remaining shall be distributed among all the shares, in addition to theattribution described in the preceding letters a) and b), unless the shareholders’meeting, based upon the proposal of the Board of Directors, votes specialappropriations to the extraordinary reserves, or other destination or decides toappropriate a part of such profits to retained earnings.In the event of distribution of reserves, savings shares shall have the same rights asthe other shares.Interim dividends can be paid, in observance of the law.

GENERAL PROVISIONS

Article 19Insofar as their relationships with the Company are concerned, the domicile of theshareholders is understood, for all legal purposes, to be that shown in theShareholders’ Register.

Article 20All matters not provided for in the present by-laws shall be governed by theprovisions of law.

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2002 Annual Report - 131th Year · – The parent company - Pirelli & C. » 67 Shareholders’...

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Transcript of 2002 Annual Report - 131th Year · – The parent company - Pirelli & C. » 67 Shareholders’...