Directors’ report

To the Shareholders,

in 2007, the Pirelli & C. S.p.A. Group continued on its course of growth and the international expansion of its core activities, particularly tyre and real estate businesses. It also strengthened its equity and financial structure, partly due to the proceeds obtained from the sale of the stake in Olimpia S.p.A., the company that held about 18 percent of the ordinary share capital of Telecom Italia S.p.A..

In the consolidated financial statements at December 31, 2007, the achievement of these results is confirmed by three indicators: the return to a profit position after the loss reported in 2006 due to the writedown of Olimpia, the surpassing of the threshold of Euros 5 billion in revenues (net of sales for the deconsolidation of DGAG’s real estate operations in Germany) and the reduction of the Group’s net debt to zero-debt, with a net financial liquidity position at the end of 2007 of more Euros 300 million, including the payable anticipated for the payout of more than Euros 826 million for the extraordinary dividend to be distributed to shareholders shortly.

The sale of the stake in Olimpia S.p.A. for Euros 3,329 million, concluded during the year, allowed Pirelli to further focus on its core business and to implement a plan to distribute resources to its shareholders and to optimize its equity structure.

With regard to business performance in 2007, in the industrial businesses, Pirelli Tyre reported an increase in revenues on a like-for-like basis of 6.5 percent, exceeding Euros 4 billion, and an increase in operating profit (+4.6 percent), despite the high level of the costs of raw materials, which are higher those of 2006. During the year, Pirelli Tyre launched a new manufacturing
unit for car tyres in China and expanded and consolidated its operations at the new industrial pool in Romania, with the aim of reinforcing its presence in the markets of the Far East and Central and Eastern Europe.

In the real estate business, despite the difficulties encountered on the market worldwide, Pirelli & C. Real Estate closed 2007 with a higher operating profit including earnings from investments of 10 percent (in line with 2006 net of the effects of the temporary consolidation of DGAG). Consolidated income was 5 percent lower than in 2006 (+2 percent net of the effects of the temporary consolidation of DGAG). In 2007, the company made another important acquisition in Germany and launched activities in Romania and Bulgaria. Assets under management at market value reached Euros 15 billion, up 3 percent compared to 2006 (Euros 14.5 billion), placing Pirelli RE among continental Europe’s top asset managers.

In new business areas, broadband access and second-generation photonics activities displayed a contraction in revenues and margins due to falling investments in the world telecommunications market. On the other hand, investments in R&D continued, especially in photonics, where phases of product qualification were completed by a number of important operators.

Activities in the environmental sector and sustainable mobility reported an increase in sales, although profitability was again negative, especially as a result of industrial investments in the new business of anti-particulate filters.