Pirelli releases it 1st Half 2002 preliminary Results

Meeting of the Board of Directors

BOARD EXAMINES PRELIMINARY RESULTS AS AT JUNE 30TH 2002:

UNPRECEDENTED CRISIS IN WORLD TLC MARKET, WITH DEMAND FOR TLC CABLES AND SYSTEMS DOWN BY TWO THIRDS WORLD-WIDE, CAUSES DROP IN GROUP PBIT OF 90 MILLION EURO (150 INCLUDING SUPPLY AGREEMENT WITH CISCO) COMPARED TO FIRST HALF OF 2001
DRASTIC COST-REDUCTIONS ALLOW FOR GROUP-WIDE FIRST HALF SAVINGS OF MORE THAN 90 MILLION EURO
PROFITABILITY UP IN ENERGY SECTOR AS TYRES SECTOR CONFIRMS STRONG PERFORMANCE

REVENUES: 3,350 MILLION EURO, AGAINST 3,946 MILLION EURO IN FIRST HALF OF 2001
GROSS OPERATING MARGIN: 278 MILLION EURO, AGAINST 432 MILLION EURO IN FIRST HALF OF 2001
OPERATING RESULT: 93 MILLION EURO, AGAINST 184 MILLION EURO (243 INCLUDING SUPPLY AGREEMENT WITH CISCO) IN FIRST HALF OF 2001
NET INDEBTEDNESS: 1,620 MILLION EURO

BOARD OF DIRECTORS ADOPTS NEW CODE OF CONDUCT IN LINE WITH THE SELF-REGULATORY CODE SET DOWN BY THE ITALIAN STOCK EXCHANGE

Milan, July 26th, 2002 - The Board of Directors of Pirelli SpA met today to examine the preliminary, non-audited results for the first half ending on June 30th, 2002.

Telecom Cables and Systems markets are reeling from an unprecedented crisis that has hit the performance of the sector harder than could possibly have been forecasted. The enormous difficulties faced by the sector have gone from bad to worse since the middle of 2001 and, as things stand today, have provoked a world-wide plunge in demand of almost two thirds. The collapse in volumes has been exacerbated by marked falls in prices.

A comparison of the two first halves of 2001 and 2002 provides a stark contrast between the brightest period in the history of telecommunications cables and systems and what is turning out to be the worst period ever.

As a result, despite positive results in the Energy Cables and Systems and Tyres Sectors, the Group's operating result for the first half, equal to 93 million euro (as compared with 184 million euro in the first half of 2001; or 243 million euro, taking into account the supply agreement with Cisco Systems), fell by almost 90 million euro.

Against such a difficult backdrop, the Group is implementing major cost containment measures. Over the first half of 2002 these measures led to gross cost efficiencies in terms of structures and operational processes of 90 million euro. These actions bear witness to the Group's ability to react to the drastic changes afflicting the market and it is significant that, in the face of the grave worsening of the market situation, we have achieved improved profitability in the second quarter of 2002 compared to the first three months.

The Energy Cables and Systems Sector, by no means unscathed by a decidedly unfavourable international economic situation, has shown improved profitability, while the Tyres Sector has confirmed the positive performance recorded in the first quarter, with further strong growth in " top range" segments.

In the first six months of 2002 Group sales totalled approximately 3,350 million euro. Compared to the first half of 2001 this represented a drop of 11,9% net of the effect of exchange rates, and largely reflects shrinking revenues in the Telecom Cables and Systems Sector (-65% approx.), despite the Company's increased market share in the sector.

The Group's gross operating margin for the first half of 2002 totalled 278 million euro, as compared with 432 million euro for the first six months of the previous year. This represented a fall of roughly 35%, albeit offset by the steady performance of the Tyres Sector and the improvements recorded in the Energy Cables and Systems sector. It is also worth recalling that the first half of 2001 benefited from the 59 million euro arising from the supply agreement with Cisco Systems.

The operating result (PBIT) for the first half of 2002 was approximately 93 million euro, against 184 million euro for the first six months of last year, a drop of 49.4% which, accounting for the first half revenue items in 2001 associated with the aforementioned supply agreement with Cisco Systems, rises to 61.7%.

This variation may be summed up as follows:
the gross cost efficiencies achieved thanks to the aforementioned actions taken, had a positive impact worth more than 90 million euro;
on the commercial side there was a drop of almost 157 million euro (the Telecom Cables and Systems Sector alone accounted for a negative impact worth 197 million euro);
the unit cost of production factors and the impact of reduced volumes impacted negatively to the extent of approximately 27 million euro;
as previously stated, the winding up of the supply agreement with Cisco Systems led to a reduction in revenues of almost 59 million euro.

In line with the forecasts set out in the Three Year Plan, as at June 30th, 2002, net debts stood at almost 1,620 million euro (1,089 million at the end of 2001), also bearing in mind: the final tax payment of 263 million relating to the sale of Optical Technologies to Corning; the payment of dividends worth 149 million euro; restructuring costs of 72 million euro.

Free cash flow was positive at approximately 60 million euro.

Despite the negative economic backdrop, the Group's priority commitments in the field of research and technological innovation received further confirmation in the first half of 2002, with research and development costs rising to roughly 115 million euro (109 million euro in the first half of 2001), equal to 3.4% of sales ( 2,8%).

The Group headcount on June 30th, 2002 stood at 38,043, as compared with 39,127 at the end of 2001 and 40,674 at the end of June 2001.

The outlook for the second half will hinge largely on developments in the Telecom Cables and Systems market. As regards the operating result, given the steady performance of the Energy Cables and Tyres sectors, and on the current assumption that there will be no significant shift in the trend in the Telecom Cables and Systems sector, we would expect that the Group's performance in the first half of the year will be largely confirmed, reflecting the wide-ranging cost efficiencies implemented by the company.

The management report as at June 30th will be examined by the Board of Directors of Pirelli SpA, when it next meets on September 9th.

In compliance with the results of the recent work of the Committee for corporate governance, which led to the modification and completion of the Self-Regulatory Code, the Board of Directors approved a procedure that establishes a code of conduct governing all operations involving interrelated parties (and in particular directors and auditors) as well as inter-Group operations. This has been stipulated independently from the fact that only certain of these (those that may " prejudice the safeguarding company assets or the completeness and fairness of information, including accounting information" ) are subject to statutory disclosure, as recently stipulated by Consob in the revised Article 71b of the " Regulations Governing Issuers" .

At the same time, even more detailed and thoroughgoing internal regulations have been redefined for the collation of detailed information to be provided to the Board of Directors and the Board of Auditors - in compliance with Article 150, paragraph 1, of the T.U.F (Unified Financial Code). These regulations not only apply to operations involving interrelated parties, but also to operations of major economic, financial or proprietary significance, as well as infra-Group or atypical operations.

The Board also confirmed its intention to remain constantly vigilant and receptive to the need to modify the regulations, whether as a response to the market and the respective supervisory authorities or whether such changes arise from organisational changes within the Group. In view of this, a resolution was passed stipulating that the Committee for Internal Control (now known as the " Committee for Internal Control and Corporate Governance" ) should also monitor the periodic updating of the regulations and compliance with the code of conduct adopted by Pirelli and its affiliates.

Details of the procedures described above may be found in the Internet site www.pirelli.com as of July 31st, 2002.