Financial Overview

(in million euros)

	FY2008	FY2007	Rate of change(%)	Factors
Net Sales	4,100.2	4,161.7	(1.5)	1)
Operating Profit	150.7	358.1	(57.9)	2)

Factors
1)
-Net sales amount to Euros 4,100 million, with a reduction of 1.5 percent compared to the prior year. Instead, the organic change is a growth in net sales of 1.3 percent, with volumes down (-6 percent) particularly in the last quarter (-19 percent). The price/mix shows a positive change (+7.3 percent), thanks primarily to the continued focus on higher-end product segments and price increases made to partly compensate the increase in per unit costs. The exchange rate change is negative (-2.8 percent). In the last quarter, the change in sales is a negative 10.2 percent compared to the corresponding period of 2007, with a negative exchange rate effect of 5.2 percent and an organic reduction of 5 percent (-19 percent in volumes and +14 percent in the price/mix). Sales continue to grow in South America in response to a positive market trend and an increase in the currency value in the first three quarters while the overall reduction in sales volumes is mainly due to the contraction of markets in Europe and North America.

2)
In 2008, operating profit was basically influenced by the following factors:
-a strong and gradual growth of all production cost factors (raw materials, energy, etc). Raw materials, in particular, grew by Euros 195 million compared to 2007 (of which Euros 150 million in the second half);

-a downturn in the second part of the year (in particular, in the fourth quarter) in the Original Equipment market;

-the decision to initiate restructuring actions for a total of Euros 100 million to combat this negative scenario.


Business overview in the OE Channel
-In the Original Equipment channel, the marked reduction in demand in the automotive market began in the second half of the year, whereas the first half was positive in terms of production in Europe and very positive in South America and in the emerging markets, although a negative trend had already been posted in the U.S.A.. This reduction of demand was concentrated in the last quarter, forcing vehicle manufacturers to slow down production considerably in order to reduce stock levels, resulting in a lower demand for tyres (in the fourth quarter, the tyre market was -23% in Europe, - 26% in North America, -26% in Mercosur, with an annual total of -5% in Europe, - 17% in North America and + 8% in Mercosur).


Acquisition
-The Company purchased from Isbank the minority stakes of its two Turkish subsidiaries. The Company bought a 25.75% stake in Pirelli Turk Lastikleri (car and industrial vehicle tyre manufacturing and sales) and a 48% stake in Celikord (steelcord manufacturing and sales). Pirelli also purchased from other shareholders a further 1% stake in Celikord. The overall amount of the transactions amounted to approximately 43 million euros. The Company now owns a 95.35% stake in Pirelli Turk Lastikleri and a 100% stake in Celikord. (From a press release on Aug 21, 2008)


Joint Venture
-Pirelli & C. SpA and Russian Technologies have signed a letter of intent to begin negotiations for the creation of a Joint Venture with the purpose of the production and sale of Car, Light Truck and Heavy Truck Tyres, Steel Cord Tyre Reinforcements and Automotive Filters in the territory of Russian Federation and CIS countries. The two partners would jointly control the Joint Venture, while Pirelli would be responsible for the development of the business strategy and the conduction of the operations of the JV, which would be carried out under the brand name of Pirelli. (From a press release on Jun 4, 2008)

R&D Expenditure

(in million euros)

	FY2008	FY2007	FY2006
Overall	145	148	147
% of Sales	3.5%	3.6%	3.7%

Capital Expenditure

(in million euros)

	FY2008	FY2007	FY2006
Tire Sector	285	262	224

Cars
-To meet market demand, it was decided to augment top range tyre production in Europe and to consolidate the actions to delocalize production to geographical areas with low costs, focusing in particular on China, Romania and Brazil.

Truck - All Steel
-Actions aimed at delocalization proceeded with the increase of production in the low-cost areas of China and Turkey and the start-up of projects in Brazil and Egypt. In the field of processes, installation of machinery for producing products with the SATT (Spiral Advanced Technology for Truck) technology derived from its MIRS technology continued.

Steel Cord
-The plan to increase production of brass-coated steel wire in Brazil and activities to develop prototypes for new products and materials in Italy are nearing completion.