Pirelli

35. Financial expenses

Financial expenses include the following:

Other financial expenses mainly include Euros 11,353 thousand for impairment losses on the junior notes generated by the adjustment of their carrying amount to the present value of future cash flows discounted at the original effective interest rate and Euros 4,606 thousand for banking fees, listing rights and other financial expenses.

Losses on exchange include the adjustment to the year-end exchange rates of open positions at the end of the year expressed in currencies other than the functional currency and losses realized on closed positions.

Losses on disposal of available-for-sale financial assets refer to the sale of 5,000,000 Telecom Italia S.p.A. ordinary shares.

36. Impairment losses on investments

This line item includes impairment losses on listed companies for Euros 263,060 thousand, in particular RCS Mediagroup S.p.A. for Euros 65,721 thousand and Telecom Italia S.p.A. for Euros 173,004 thousand, and Avanex for Euros 24,335 thousand and also impairment losses in other unlisted companies for Euros 12,202 thousand, mainly CyOptics Inc. (Euros 8,700 thousand).

Last year, impairment losses on investments referred to those taken on Telecom Italia S.p.A. (Euros 21,929 thousand), Avanex (Euros 7,670 thousand) and Equinox (Euros 3,362 thousand).

37. Dividends

Dividends principally refer to those received from Telecom Italia S.p.A. (Euros 14,569 thousand), RCS Mediagroup S.p.A. (Euros 4,300 thousand), Mediobanca (Euros 9,752 thousand), Fin. Priv. S.r.l. (Euros 1,269 thousand) and Banca Leonardo (Euros 278 thousand).

In 2007, dividends included those received from Telecom Italia S.p.A. (Euros 6,602 thousand), RCS Mediagroup S.p.A. (Euros 3,871 thousand), Mediobanca S.p.A. (Euros 9,752 thousand), Equinox (Euros 9,022 thousand), Fin. Priv. S.r.l. (Euros 1,269 thousand) and Servizio Titoli S.r.l. (Euros 873 thousand).

38. Gains (losses) from changes in fair value
of financial assets

The gains (losses) from changes in the fair value of financial assets refer to:

The measurement of financial assets at fair value through profit or loss includes a loss of Euros 6,055 thousand for the negative fair value change in securities classified in the financial statements as “Securities held for trading” (a negative Euros 2,989 thousand in 2007) and a loss of Euros 1,616 thousand for the negative fair value change of other financial assets designated at fair value through profit or loss (Cloe Fondo Uffici – Closed-end unlisted reserved real estate investment fund, relating to the Real Estate sector) and classified in the financial statements in “Non-current other financial assets” (a positive Euros 4,526 thousand in 2007).

The measurement of currency derivatives at fair value refers to forward currency purchases and sales hedging trading and financial transactions and is affected by the volatility of the exchange rates which marked the entire year 2008. For open items at December 31, 2008, the fair value is determined by applying the forward exchange rate at the balance sheet date.

The fair value measurement is divided into two components: the interest component associated with the interest rates differential between the two currencies in the individual hedges, equal to a net hedging cost of Euros 19,879 thousand and the exchange rate component, equal to a net income of Euros 24,808 thousand.

Comparing the latter with the exchange difference on the items in foreign currency, equal to a net loss of Euros 29,738 thousand (exchange losses of Euros 450,236 thousand, included in financial expenses, and exchange gains of Euros 420,498 thousand, inclued in financial income), it can be said that the management of exchange risks is basically at a breakeven.

The measurement of other derivatives at fair value shows a gain of Euros 2,054 thousand compared to a gain of Euros 9,571 for 2007. It refers almost entirely to the fair value measurement of derivatives in connection with interest rate risk.

39. Share of earnings (losses) of associates
and joint ventures

The share of earnings (losses) of associates and joint ventures accounted for using the equity method is a loss of Euros 175,677 thousand (earnings of Euros 116,543 thousand in 2007). The line item mainly includes the results of investments accounted for using the equity method of the Pirelli & C. Real Estate group which shows a loss of Euros 177,019 thousand (earnings of Euros 114,977 thousand in 2007).

40. Income taxes

Income taxes for the period are composed as follows:

The reconciliation between theoretical and effective taxes is as follows:

The effective tax change of the Group in 2008 (equal to Euros 72.6 million) on a total negative taxable income, is largely attributable to the tax charges of the Tyre sector (equal to Euros 70.1 million) on taxable income of the relative investees.

This also reflects the presence of income taxes unrelated to income components, including IRAP taxes on labor costs, as well as the non-recognition of deferred tax assets on tax losses, mainly referring to the investment holdings of the Corporate sector.

The amount of income taxes includes the recognition, by Pirelli & C. S.p.A. of positive tax effects generated by the national consolidated tax return.

The theoretical tax charge of the Group is calculated by taking into account the nominal tax rates in the countries in which the major companies of the Group operate, as indicated in the following table: