Financial overview

(in millions of euro)	FY2006	FY2005	Rate of change	Factors
Net Sales	3,949.5	3,632.9	8.7%	(1)
Operating Profit	342.3	328.8	4.1%	(2)

Factors
(1) Net sales in 2006 amount to Euros 3,949.5 million, with an increase of 8.7 percent compared to the prior year. The trend is positive in terms of volumes and prices/mix which record increases of 3.9 percent and 3.1 percent, respectively. The foreign exchange difference also produced a positive effect on net sales (+1.7 percent).

(2) Operating profit, although influenced by nonrecurring costs incurred for the project to list Pirelli Tyre S.p.A. (Euros 7.4 million), amounts to Euros 342.3 million (8.7 percent of net sales). This is a growth of 4.1 percent compared to 2005 in which the operating profit amounted to Euros 328.8 million with a margin on net sales of 9.1 percent.
The positive impact associated with the growth of sales, mix and efficiencies, in addition to the positive contribution by exchange rates, more than compensated the increase in production factors and, in particular, the increase in raw material costs (Euros 111 million) which is the main cause of the decline in the profit margin, besides the effect of the start-up of the truck tyre factory in China.

Business overview by products
Original Equipment for Cars
Sales for the Original Equipment for Cars remained fairly steady in terms of volumes and reported an increase in value in Europe and the United States. The result was achieved by the growth of supply contracts to the largest American car manufacturers (Ford, GM and DaimlerChrysler) and an improvement in the mix obtained through consolidated collaboration with the main manufacturers in the high-performance segments (Alfa Romeo, Audi, Bentley, BMW, Ferrari, Maserati, Mercedes, Jaguar, Land Rover, Peugeot, Porsche, Saab, Volvo, and VW.)
In South American area, an increase in both volumes and sales was reported on all the Mercosur manufacturers (Fiat, Ford, GM, Honda, Peugeot. Toyota, VW), compared to the prior year.

Tyres for Trucks
In the segment of tyres for Trucks, the Company consolidated its share of the market in all its reference markets (Europe, the Mediterranean area and South America), whereas, in China, where operations were conducted for the first whole year, attention focused on creating a sales network, geographical coverage and the development of the the Company's product. The mix of new products was enhanced with new sizes using SATT technology (derived from MIRS technology) and by extending this technological platform to Brazil.

Steelcord
In 2006, the economic performance of Steelcord operations improved compared to the prior year despite strong competition on the market. The growth in volumes was concentrated particularly on third-party customers and on products with very complex applications.

During 2006, work continued on the large-scale expansion of the production capacity of the plants at Sumare in Brazil and the plant opened in 2005 at Slatina in Romania.

R&D expenditure

(in millions of euro)	FY2006	FY2005	FY2004	FY2003	FY2002
R&D	147	146	124	123	122
% of Sales	3.7%	4.0%	3.8%	4.1%	4.3%

Traditionally this activity has focused on the development of new high-performance products (e.g. Run-Flat, SUV and motorcycle
tires) by exploiting technological components and very advanced know-how which are the result of intensive research in the areas of materials, design, profiles, tread patterns and processes. To sustain improvement and innovation of the product portfolio, research is under way to find innovative solutions through the study and application of new types of polymers and nanotechnologies.

Technological partnership
In May, 2006, the Company and Schrader Electronics signed an agreement with the aim of developing and marketing an innovative system, located, for the first time, directly inside the tire and capable of detecting all kinds of identifying data in addition to temperature and pressure. The heart of the system consists of a miniature sensor which can function without batteries thanks to its capacity to generate its own energy.
Thanks to the new sensor, the tire is able to interact with the vehicle, optimizing the on-board electronic systems, whose parameters adapt according to the information received from the device, leading to improved safety and performance.
The system, which was specially developed for original equipment, is particularly suitable for Run Flat tires, since it allows for optimum management of the parameters when traveling.

Product development
- In terms of day-by-day development, close collaboration continues with carmakers. This resulted in products of the PZero range being fitted on the latest models of many leading car manufacturers, both Italian companies like Ferrari, Lamborghini, Maserati and Alfa
Romeo (at the Paris Motor Show with the new Alfa Romeo 8C Competizione), and foreign companies (like Porsche, Bentley, Audi, Aston Martin, Volvo and Jaguar).

- As for the SUV segment, in Tunisia in May, the Company presented its latest product for 4x4 vehicles (SUVs and pick-ups), the new Scorpion ATR product line. This special product is the result of development conducted in cooperation with the most prestigious automotive companies, combined with Pirelli's long experience in the segment.
It can be used in many different applications because of its special characteristics, and performs safely at a very high level, both offroad and on asphalt. The tire will be distributed on worldwide markets (North and South America, Europe, Africa and Asia): a truly global product.

Capital Expenditure (In Million Euro)

	FY2006	FY2005	FY2004	FY2003	FY2002
Tire Sector	224	208	190	173	182

Car:
- In the sphere of innovative processes, the production capacity of the MIRS (Modular Integrated Robotized System) process was increased in Germany, the U.S.A. and the U.K., by optimizing existing lines. With regard to traditional processes, conversion of the production capacity of "high-performance" products and the revamping of existing machinery continued. With the aim of meeting increased market demand by reducing production costs, a greater boost was given to increasing production in geographical areas with low costs. In particular, a new factory was opened at Slatina in Romania and building work began on a new factory at Yanzhou in China. Work is continuing to augment the capacity of the factory at Bahia (Brazil) where semi-automatic processes are being installed.

Industrial vehicles:
- The new All Steel plant has been completed at Gravatai in Brazil and the new plant at Yanzhou in China is now fully operational.
In the field of innovative processes, production continued to increase at the factory at Settimo Torinese for the new Amaranto product line using the innovative SATT (Spiral Advanced Technology for Truck) technology derived from MIRS technology. The extension of this production process began in the plants at Izmit in Turkey and at S. Andre in Brazil.
Furthermore, the group continues to follow the strategy of renewing the product line-up and extending programs for improving efficiency and quality in all the factories.

Steelcord:
- The expansion plan continued to move forward, especially at the new plant at Slatina in Romania and in Brazil, whereas, in Italy, efforts were concentrated on researching and developing prototypes for new products and materials.