Board of Directors approves quarterly report at 31 Mar'05

Milan, 12 May 2005 The Board of Directors of Pirelli & C. SpA met today and examined the impact of adoption of the international financial reporting standards IAS/IFRS on the 2004 financial statements. The independent auditor PricewaterhouseCoopers is completing its audit of the reconciliation tables prepared in accordance with IFRS 1. The audited report of the IAS/IFRS reconciliations will be disclosed as soon as available and, in any case, within the date of the presentation of the half year report at 30th June 2005.

The Board of Directors also examined and approved the quarterly report at 31 March 2005, the first to be drafted in accordance with IAS/IFRS.

Principal effects of adoption of IAS/IFRS
Main impacts on the 2004 financial statements and on shareholders' equity at 1 January 2005 deriving from transition to the new international accounting standards can be summarized as follows:

• Operating income grows by 19 million from 380 million euros to 399 million euros. In particular, these are due to: lower amortizations of intangible assets (goodwill) for 39 million euros, lower labour cost due to the recognition of all actuarial losses on employee benefits at the transition date (previously amortized on the residual life of participants to funds) for 10 million euros and negative components (as stock options, non capitalized charges and other minor charges) for a value of -12 million euros, for a total amount of 37 million euros. These are counterbalanced by -18 million euros for the restatement of the balance of costs (mainly restructuring charges) and revenues (mainly sale of assets) from extraordinary to operating, without therefore an impact on the net result.
• Consolidated net profit increases by 35 million euros (from 274 million euros to 309 million euros).
• The shareholders' equity of Pirelli & C. SpA at 1 January 2005 shows a decrease of 52 million euros (from 4,088 million euros to 4,036 million euros), principally in consequence of the impact of: the evaluation of employee defined benefit plans (-147 million euros), previously disclosed in the notes to the consolidated financial statements, the evaluation of securities and financial instruments at fair value (+138 million euros) and other minor changes (-43 million euros). In particular, as for the above mentioned defined benefit plans, the Group has opted for the recognition of all actuarial gains and losses at the transition date to IAS/IFRS. As for the evaluation of securities and financial instruments the Group opted, in compliance with IFRS 1, for the adoption of IAS 32 and 39 from 1 January, 2005.
  Change in attributable shareholders' equity at 1 January, 2005 corresponds to -40 million euros (from 3,736 million euros to 3,696 million euros).
• Net debt at 1 January, 2005 changed from 1,469 million euros to 1,586 million euros, mainly in consequence of IAS/IFRS valuation of put options sold to banks that are shareholders of Olimpia SpA, which resulted in an increase of the equity investment corresponding to the debt increase, for an amount of 130 million euros.
• Olimpia, in accordance with IAS 31, is considered a jointly controlled entity that is valued applying the equity method; the shareholders' equity of Olimpia must be restated on the basis of IAS/IFRS.
  
  According to IAS 28, the investment held by Olimpia in Telecom Italia is qualified as an associate and thus must be consolidated applying the equity method.

An Appendix illustrates details of the individual adjustments made to shareholders' equity and result 2004.

Group operating performance in the first quarter of 2005
The financial and operating results of the Pirelli Group in the first quarter of 2005 and comparative periods were determined in accordance with IAS/IFRS (the appended tables also illustrate the historic data for the first quarter of 2004 that were determined in accordance with Italian accounting standards).

During the first three months of the year, the significant improvement in all economic indicators of the Pirelli & C. SpA Group continued, thanks to the continuous focus on segments with higher added value. The first quarter of 2005 thus closed with a doubling in net income for the Group, which totaled 83 million euros, compared with 40 million euros in the same period of the previous year.

In particular, Industrial Activities reported further improvement in the profitability of the Tyres Sector, which topped 10%, improving its historic highs and achieving the highest levels in its reference market. Growth trend continued both in North America, where Pirelli aims at realizing 10% of the Sector's sales by 2006, and in South America, where the market posted growth in all segments. On the European market, Pirelli consolidated its position as the market leader in the performance car, SUV, and motorcycle segments. In the industrial segment, high performance Truck products, developed partly with innovative technologies, were extremely successful both on the European and other markets. The steelcord business also reported growth.

The Energy Cables and Systems Sector confirmed its position as a technological and market leader on the international level, with operating income of 30 million euros, up by over 40%. In the first quarter of 2005, Pirelli consolidated its role as preferred partner for the world's principal utility companies. On this market, the company is involved in the most important international projects for interconnection currently underway to improve the efficiency of electric power transmission networks.
On the Trader& Installers market, the measures undertaken to improve efficiency are leading to a recovery in profitability, while in the special cable sector, greater focus is being dedicated to high technology segments.

Pressure on prices and margins persisted in the Cables and Fiber Optics business. Nevertheless, fiber volumes increased significantly, especially on the North American market, where Pirelli is one of the suppliers chosen by Verizon to expand its fiber optic network. In Europe, growth in the copper cable segment continued thanks to investments by telecommunication operators in ADSL networks.
The broadband access and second generation photonics activities of Pirelli Broadband Solutions, the new Group company that sells the innovations developed with Pirelli Labs, tripled their sales (31 million euros). In the access market, products offered by Pirelli Broadband Solutions are considered among the most innovative at the European level; in the photonics segment, leading international telecommunication operators are showing major interest in the new products that are being introduced.

The principal financial and operating figures for Real Estate Activities continue to show growth; the first quarter posted a 17% growth of the operating income including income from equity participations, the most significant indicator for the Group's business model performance, compared to march 2004.


The Pirelli & C. SpA Group
In the first quarter of 2005, consolidated revenues of the Pirelli & C. SpA Group totaled 1,870 million euros, up by 10% compared with the 1,700 million in the same period of 2004. On a like for like basis net of exchange rates, metal prices, and changes in the scope of consolidation - they increased by 8.3 %.

EBITDA increased by 15%, rising from 167 million euros to 192 million euros. The impact on sales thus increased from 9.8% to 10.3%.

Consolidated EBIT totaled 118 million euros, up by 35 % with respect to the 87 million euros in the first quarter of 2004.

Consolidated ROS (Return on Sales) totaled 6.3%, reflecting an increase of 5.1% with respect to the previous year.

The result of equity investments was a positive 50 million euros, compared with 31 million in the first quarter of 2004 and includes the effect of the income of companies valued according to the equity method. In particular, it includes the effect of Olimpia SpA, which was a positive 30 million euros (10 million euros in the same period of 2004), while the results of the real estate sector (Pirelli RE Group) was a positive 20 million euros (21 million in the previous year).

The balance of financial charges and income was negative for 46 million euros, compared with -45 million euros in the first quarter of 2004.

Net profit at 31 March 2005 was positive for 83 million euros (after tax charges of 39 million euros), compared with 40 million in the first quarter of 2004.

The Pirelli & C. SpA attributable net profit was positive for 70 million euros, compared with 32 million euros at 31 March 2004.

Shareholders' equity totaled 5,276 million euros, compared with 3,549 million euros at 31 March 2004. The Pirelli & C. SpA attributable shareholders' equity was 4,909 million euros (0.92 euros per share), compared with 3,294 million euros (0.95 euros per share) in the same period of 2004.

Net debt at 31 March 2005 was negative for 2,120 million euros, in line when compared to 2,089 million euros at 31 March, 2004 though the negative balance between the Olimpia SpA capital increase for 1,344 million euros and the 1,062 million euros share capital increase approved last 21 January, 2005. The change from -1,601 million euros at 31 December 2004 is also attributable to the usual seasonal factors caused by an increase in Group activities which led to a negative operating cash flow for 226 million euros (-214 million euros at 31 March 2004).

Group personnel at 31 March 2005 totaled 38,011 employees (including 4,104 temporary employees), compared with 37,154 at 31 December 2004 (including 3,513 temporary employees).


Group industrial activities
In the first quarter of 2005, sales totaled 1,745 million euros, reflecting an increase of 8.7 %. On a like for like basis (net of exchange rates, metal prices, and changes in the scope of consolidation), revenues increased by 7 %.

EBITDA totaled 183 million euros (10.5% of sales), compared with 162 million euros during the same period of 2004 (10.1% of sales).

EBIT totaled 115 million euros, up sharply (+29%) from the 89 million euros in the first quarter of 2004; ROS rose to 6.6% from 5.5% at 31 March 2004.

The net profit of industrial activities at 31 March 2005 was 61 million euros, almost doubling the 35 million euros reported in the first quarter of 2004.

The priority commitment made by the Group to research and technological innovation was confirmed again in the first quarter of 2005, with research and development costs at 54 million euros, equal to 3.1% of the sales of Industrial Activities, in line with the previous year. Thanks to continuous investments, Pirelli has now achieved a position of excellence in the system of Italian and international excellence, as testified by the over 5,000 alive patents held by the Group.

The personnel of industrial activities at 31 March 2005 totaled 34,873 employees (including 3,968 temporary employees), compared with the 33,956 at 31 December 2004 (including 3,368 temporary employees).


Industrial Sectors Operations
Tyres
Sales totaled 862 million euros, with an increase of 4.6% that was almost entirely due to price/mix, in confirmation of the continuous focus on high performance market segments.

EBIT was 88 million euros, with ROS of 10.2% (9.1% in the same period of 2004), up by over 17% from the 75 million euros in the first quarter of 2004.

Net profit was 53 million euros (after financial charges of 8 million and tax charges of 27 million), compared with 38 million at 31 March 2004.

There were 22,226 employees at 31 March 2005, including 2,949 temporary employees: the increase was mainly due to the opening of the new steelcord production plant in Romania and reorganization of the distribution in Brazil.


Energy Cables and Systems Sector
Sales were 759 million euros, reflecting growth of 10.6% compared with the first quarter of 2004; on a like for like basis, net of exchange rates, metal prices, and changes in the scope of consolidation, sales increased by 6.1% with respect to the same period of the previous year.

EBIT totaled 30 million euros, up by 43% from the 21 million euros at 31 March 2004, with ROS rising to 4% from 3.1%.

Net profit was 14 million euros (after financial charges of 8 million euros and tax charges of 8 million) from the 8 million euros in the first quarter of 2004.

There were 10,725 employees at 31 March 2005, including 927 temporary employees.


Telecom Cables and Systems Sector
Sales totaled 93 million euros, up by 8% compared with the 86 million euros in the first quarter of 2004. On a like for like basis, the increase was 13.4%, due to a marked increase in volumes.

EBIT was negative for 2 million euros (-4 million euros in the first quarter of 2004).

The net loss was 4 million euros (after financial charges of 2 million euros), compared with a loss in the first quarter of 2004 of 8 million euros.

There were 1,821 employees at 31 March 2005, including 86 temporary employees.


Pirelli BroadBand Solutions
Sales totaled 31 million euros, more than three times higher than the 10 million euros reported for the first quarter of 2004.

EBIT for this company even if it is in the start-up phase was negative for just 1 million euros (-3 million euros in the first quarter of 2004). The operating result for the activities connected with broad band access alone was positive.

The net loss was 2 million euros, against a loss of 3 million euros in the first quarter of 2004.

There were 101 employees at 31 March 2005, including 6 temporary employees.


The Group Real Estate activities
Pirelli RE is a management company that manages companies and funds that in turn own real estate and non-performing loans, in which it invests through minority shareholdings (asset management and fund management activities), providing these and other clients with a full range of specialized property services (service provider activity). Consequently, the aggregate production value net of acquisitions and EBIT including the Group's interest in the income of equity investments are the most significant indicators of the business volume managed by the Group and results at the operating level, respectively.

The aggregate production value during the first quarter of 2005 was, net of acquisitions, equal to 727 million euros, up by 30% with respect to the 560 million euros during the same period of 2004. EBIT including income from equity participations (pro-quota) was 33.8 million euros, compared with 28.8 million euros in the first quarter of 2004, up by 17%.

The net profit of Real Estate activities was 26.9 million euros, compared with 24.1 million euros in the first quarter of 2004, up by 12%.

For more information on the performance of Real Estate Activities, please refer to the press release issued by Pirelli RE on 10 May 2005.


Olimpia
Olimpia net profit at 31 March 2005 determined in accordance with IAS/IFRS was positive for 52 million euros (20 million euros in the first quarter of 2004), thanks to the positive performance of Telecom Italia SpA. The investment held by Olimpia in this company is valued according to the equity method.


Forecasts for the 2005 fiscal year
The first quarter results confirm the forecasts of increased profitability for the Group in 2005 compared to the previous year - with the exception of extraordinary external events that cannot be forecast today.

In the Tyres Sector, Pirelli expects improvement in its results compared to 2004, thanks to the continuous focalization on performance products and the growth in North America and South America.
In the Energy Cables and Systems Sector, Pirelli aims at further consolidation of its recovery of profitability thanks to focus on higher margin products.
In the Telecom Cables and Systems Sector, in a market that is still characterized by competitive prices, Pirelli aims to consolidate its 2004 result, especially through the previously mentioned recovery of volumes on the North American market.

Pirelli BroadBand Solutions should continue to see growth in sales of its broadband access products, in line with forecasts of the 2004-2006 Outlook. In regard to second generation photonics, which are in the start-up phase, research and development of innovative products continues.

In the Real Estate Activities, according to the results posted during the first quarter and available information, it is forecasted a growth of operating income including income from equity participations that will enable achievement of targets included in the three-year Outlook 2003-2005.

Olimpia should post an improved result, benefiting from the results of Telecom Italia.