The Committee for Internal Control and Corporate Governance

The Board has established the Committee for Internal Control and Corporate Governance, which is charged with fact-finding and advisory functions, from amongst its members since 2000. In particular, this committee:

a) assists the Board of Directors in establishing the guidelines for the internal control system and periodically verifying its adequacy and effective working, so as to ensure that the risks facing the Company are managed appropriately;

b) evaluates the work plan prepared by the persons responsible for internal control, from whom it receives periodic reports;

c) assesses, together with the financial officers and the independent auditors of the Company, the appropriateness of the accounting standards applied and their homogeneousness for the purpose of preparing the consolidated financial statements;

d) evaluates the proposals made by independent auditors in order to be awarded the appointment, as well as the audit plan and the results set out in the auditors' report and in the letter of suggestions;

e) reports to the Board of Directors at least once every half year, on the occasion of the approval of the draft of annual financial statements and the half-yearly report on the activity performed and the adequacy of the internal control system;

f) performs the additional tasks that may be assigned to it by the Board of Directors, particularly with regards to relations with the independent auditors; and

g) monitors compliance with the rules of corporate governance and their periodic updating and compliance with the rules of conduct adopted by the Company and its subsidiaries.

Similarly to the Remunerations Committee, the Board of Directors that convened on March 12th, 2007 provided for the adjustment of duties mentioned above to those required in the new Code of Conduct for committees and internal control (art. 8), as well as deciding that the Committee should continue to maintain the corporate governance prerogatives (see letter g above) that have characterised it since its establishment, as well as additionally providing for the following:

• that it expresses an opinion on those proposed for election, revocation or assigning of duties to the internal control provost and the manager proposed as the manager responsible for the preparation of company accounting reports;
• in case of the substitution of an independent Director, it shall propose a candidate to the Board of Directors for co-optation;
• that it defines the methods and effective times of the Board of Directors annual evaluation.

The Committee - which, as it has in the past, may also request the assistance of external consultants to fulfil its role - normally meets before the Board of Directors meetings are called for approval of the draft annual financial statements, the half-yearly report and the quarterly reports; it also meets whenever its chairman deems it appropriate or a meeting has been requested by another member of the committee or by a Managing Director.

The members of the Board of Statutory Auditors, the head of the Internal Control Committee and if deemed necessary other company representatives may participate in the meetings of the committee.

In line with best practices and in full compliance with the recommendations in the new Code of Conduct for listed companies, the Committee is exclusively composed of the following independent Directors: Carlo Secchi (Chairman), Carlo Angelici and Franco Bruni, two of which 7 , as ascertained by the Board of Directors convened on March 12th, 2007, possess adequate accounting and financial experience.

During 2006, the Committee for Internal Control and Corporate Governance met seven times and all members participated in these meetings.
The Committee actively contributed to the implementation process and the updating of Company corporate governance instruments. Specifically, following the addition of market abuse regulations in national law (EU Law 2004), the issuing of the Savings Law, the Corrective Decree and the new Code of Conduct, the Committee for Internal Control and Corporate Governance in 2006 - availing itself of support from various Company departments - contributed to the defining of a procedure for the management and the market communication of sensitive information.

Moreover, in 2007 it had already approved the interventions necessary regarding alignment with the new Code of Conduct (as cited throughout this Report), as well as drafting a procedure regarding information flows to Directors and Auditors, besides formulating proposals for modifications to the Company bylaws and shareholders' meeting regulations, which will be put forth at the Meeting called to examine the 2006 financial statements.

Also during 2006, the internal control provost of the Company (who is the head of the Internal Auditing Department) was able to refer his actions to the Committee for Internal Control and Corporate Governance through the submission of four reports.

The Committee also monitored the activities carried out by the Internal Auditing Department of the Company, specifically examining the result of activities regarding the 2006 Audit Plan and approving the Audit Plan for the financial year 2007.
The Committee was also constantly informed on the auditing activities of the "231 organisational model" and the implementation of the "262 Project" (described below in paragraph 4) and, with the representatives of  PricewaterhouseCoopers, verified the auditing activities plan.

Lastly, it was felt opportune to give an account of the development of the actions, legal and otherwise, that involved two ex-heads of Company Security that were subject to an investigation by the Committee for Internal Control and Corporate Governance, along with the Board of Statutory Auditors.

Specifically, during the meeting held on July 20th, 2006, the Committee analysed the affair that involved an ex-Manager of the Company, Giuliano Tavaroli - who up until a few years earlier had been the head of the Security Department - in a criminal proceedings case for conspiring to violate professional discretion.

At this meeting, the Committee was informed of the verification activities carried out by the Company with the assistance of legal consultants, as well as the conduct taken in order to ensure a maximum level of collaboration and transparency of the Company regarding the court of jurisdiction, which - in June 2006 - had deposited a memorandum at the public prosecutor's office in Milan (an additional memorandum was thereafter deposited with the national prosecutor's office on December 6th, 2006).

During a meeting on September 8th, 2006, the Committee received notice of the outcome of the intrinsic verifications to the passive cycle of the security activities made during the April-May 2006 period by the Internal Auditing Department of the Company.

This intervention allowed to the identification of some areas of improvement for which corrective actions were held necessary (i.e. the complete involvement of the Purchasing Division in security services procurement; the creation of a suppliers' registry listing only those who satisfy certain requirements regarding quality, financial reliability and trustworthiness; the establishment of adequate authorisation levels regarding security service purchase flows; the adoption of additional control measures that guarantee complete traceability for each phase of the purchasing process and the monitoring of the costs of the Security Department).

Subsequently, in October 2006, the Committee - with the assistance of legal consultants that aided the Company on this theme - investigated further developments that took place regarding the legal process following the injunction issued on September 20th, 2006 by the Preliminary Investigations at the Court of Milan (which became public domain following the full publication of this provision on the web site www.ilvelino.it ) which remanded in custody Giuliano Tavaroli, as well as Pierguido Iezzi (along with others) who at that moment held the role of head of Pirelli & C.'s Security Division.

The individuals mentioned above were charged with (i) conspiracy to commit crimes aimed at corrupting public officials, using data retrieved from unlawful use of their access to IT systems and embezzlement of Pirelli Group and Telecom Italian funds, (ii) several counts of embezzlement, (iii) corruption of a public official, and (iv) unlawful divulgation of sensitive and reserved information.

The Committee specifically examined the position of Pierguido Iezzi since, up until the date of the injunction, no reasons existed that would lead one to believe or even presume that this individual could have been implicated in the affair and, following the application of precautionary measures, he was suspended from his position as head of Security.

Regarding the injunction, the legal consultants of the Company noted that (considering the signifi- cant level of transparency and collaboration shown by the Company, among other reasons) the order qualified Pirelli as an offended party and therefore subject to damages that occurred due to the felonies and - as of now - excludes the same from the application of the provisions in legislative decree no. 231/2001 on the administrative responsibility of companies, on the premises (i) that Company Top Management was unaware of the felonies, and (ii) according to the fact that the felonies were committed against, and not in favour, and not even in the interests of the Company.

Lastly, the Committee inquired as to the need for corrective actions regarding the internal control system, and acknowledged that the improvements made based on suggestions from an internal audit on Security functions (which, as mentioned, had already taken place during April and May 2006 based on an independent decision of the Company) constituted an adequate solution, despite having examined and promoted possible refinements to the system at subsequent meetings.

Lastly, during a meeting held on November 6th, the Committee - again discussing the matter - mandated the Internal Audit Department of the Company to launch the collection of data on the security service performance required by various company functions during the past few years through the initiation of a specific data requirements memo sent to all "front line" Company members.

In tandem, the Internal Audit Department was also given the task of requiring employees in the Security division of companies in the Pirelli Group to declare if they had or had not kept copies of files or documents regarding duties assigned to this Department during the January 2000 - June 2006 period.

From initial reports of the verifications made until now - which were still being made during the preparation of this report - no particular critical findings had come to light.

Finally, it should be noted that the Company has launched a civil lawsuit against the security service suppliers involved in the investigations, in order to be compensated for services that were not contractually fulfilled or were even illegal.

The Committee for Internal Control and Corporate Governance and the Board of Directors, taking into account the comments of the Board of Statutory Auditors, judged the internal control system of the Company and of its underlying Group to be adequate.
 
  7 Mr Bruni and Mr Secchi.