20-F 1 i00480e20vf.htm FORM 20-F FORM 20-F
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As filed with the Securities and Exchange Commission on June 30, 2006
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
 
       
o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
       
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended: December 31, 2005
OR
       
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
       
o   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
Date of event requiring this shell company report                     
For the transition period from                      to                     
Commission file number: 1-10108
FIAT S.p.A.
(Exact name of registrant as specified in its charter)
FIAT S.p.A.
(Translation of registrant’s name into English)
Italy
(Jurisdiction of incorporation or organization)
Via Nizza 250, Turin, Italy
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
     
Title of each class
Ordinary American Depositary Shares
Ordinary shares with a par value of €5 each*
Preference American Depositary Shares
Preference shares with a par value of €5 each*
Savings American Depositary Shares
Savings shares with a par value of €5 each*
  Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
 
  Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
1,092,246,316 ordinary shares, 103,292,310
preference shares and 79,912,800 savings shares
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ                     No o
     If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934.
Yes o                     No þ
     Note — checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 from their obligations under those sections.
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ                     No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ                     Accelerated filer o                     Non-accelerated filer o
     Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o                    Item 18 þ
     If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o                     No þ
 
(*)   Not for trading, but only in connection with the registration of the American Depositary Shares.
 
 


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ACCOUNTING PRINCIPLES AND REPORTING CURRENCY
     We publish our Consolidated Financial Statements in euro (“€”), the official common currency of certain Member States of the European Union (the “EU”), including Italy. In this annual report, references to “dollars,” “US$” or “$” are to United States dollars. Amounts stated in dollars, unless otherwise indicated, have been translated from euro at an assumed rate solely for convenience and should not be construed as representations that the euro amounts actually represent such dollar amounts or could be converted into dollars at the rate indicated. Unless otherwise indicated, such dollar amounts have been translated from euro at the noon buying rate in The City of New York for cable transfers in foreign currencies as announced by the Federal Reserve Bank of New York for customs purposes (the “Noon Buying Rate”) on December 31, 2005 (the last business day of 2005) of $1.1842 per €1.00. Such rate may differ from the actual rates we used in preparing our Consolidated Financial Statements included in Item 18 and dollar amounts used in this annual report may differ from the actual dollar amounts that were translated into euro in the preparation of our financial statements. For information regarding recent rates of exchange between euro and dollars, see Item 3. “Key Information—Selected Financial Data—Exchange Rates.”
     The Consolidated Financial Statements in this annual report are based on financial information prepared in accordance with the International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and adopted by the EU. The designation “IFRS” also includes all valid International Accounting Standards (“IAS”), as well as all interpretations of the International Financial Reporting Interpretations Committee, formerly the Standing Interpretations Committee.
     The adopted principles are described in the “Notes to the consolidated financial statements” included in Item 18. These principles differ in certain respects from accounting principles generally accepted in the United States (“US GAAP”). See Note 38 to the Consolidated Financial Statements included in Item 18 for a discussion of the differences between IFRS and US GAAP.
     The Fiat Group adopted IFRS on January 1, 2005 on the coming into effect of EU Regulation No. 1606 of July 19, 2002. In this context, the accounting policies applied in these financial statements are consistent with those adopted in preparing the IFRS opening consolidated balance sheet at January 1, 2004, as well the consolidated financial statements at December 31, 2004, as restated in accordance with IFRS and presented in Note 39 to the Consolidated Financial Statements included in Item 18, to which reference should be made. Reconciliations between profit or loss and equity under previous GAAP (i.e., the requirements of Italian Legislative Decree No. 127 of April 9, 1991, as interpreted and supplemented by the Italian accounting principles issued by the Consiglio Nazionale dei Dottori Commercialisti e dei Ragioneri, and, to the extent such requirements or principles are silent on particular issues and not at variance, by those standards laid down by the IASB; such requirements, as so interpreted and supplemented, “Italian GAAP”) to profit or loss and equity under IFRS for the periods shown as comparatives, as required by IFRS 1 – First-time Adoption of IFRS, together with related explanatory notes, are included in such Note 39 to the Consolidated Financial Statements included in Item 18.
     Certain of the financial measures we use to evaluate our financial and operating performance are considered to be non-GAAP measures, including our “net debt” as calculated for purposes, among other things, of financial targets agreed with our lenders, as well as measures calculated on a “comparable consolidation” basis or constant exchange rate basis. Where we discuss these measures, we also discuss the most directly comparable IFRS financial measures with equal prominence and present a reconciliation of the relevant non-GAAP measure to the most directly comparable IFRS financial measure. See Item 5. “Operating and Financial Review and Prospects” for additional information on these measures and the required reconciliation of each of them to the most comparable IFRS measure.

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     We are a corporation organized under the laws of the Republic of Italy. As used in this annual report, unless the context otherwise requires, the terms “Fiat,” “Fiat S.p.A.” and the “Company” refer to Fiat S.p.A., and the terms “we,” “us,” “our,” the “Group” and the “Fiat Group” refer to the Company and its consolidated subsidiaries.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
     Except for the historical statements and discussions contained herein, statements contained in this annual report constitute “forward-looking statements” within the meaning of Section 27A of the US Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the US Securities Exchange Act of 1934, as amended (the “Exchange Act”). When used in this annual report, the words “anticipate,” “assume,” “believe,” “could,” “estimate,” “expect,” “plan,” “project,” “intend,” “may,” “risk” and variations of such words and other similar words and expressions that are predictions or otherwise indicate future events or trends are intended to identify forward-looking statements.
     Information filed with or furnished by us to the US Securities and Exchange Commission (“SEC”) may include forward-looking statements. In addition, other written or oral statements that constitute forward-looking statements have been made and may in the future be made by us or on our behalf, including statements concerning our future operating and financial performance, our share of new and existing markets, general industry and economic trends and our performance relative thereto, our expectations as to requirements for capital expenditures and regulatory matters, the achievement of our targets and the expected benefits of restructurings, reorganizations and disposal programs and other similar corporate transactions. Our businesses include our automotive, automotive-related and other sectors, and our outlook is predominantly based on our interpretation of what we consider to be the key economic factors affecting these businesses. Forward-looking statements with regard to our businesses rely on a number of assumptions concerning future events and are subject to a number of uncertainties and other factors (many of which are outside our control) that could cause actual results to differ materially from such statements, including:
    the many interrelated factors that affect consumer confidence and worldwide demand for automotive and automotive-related products;
 
    factors affecting the agricultural machinery business, including commodity prices, weather patterns and governmental policies;
 
    general economic conditions in each of our markets, as well as changes in the level of interest rates and exchange rates;
 
    legal and regulatory developments, particularly those relating to automotive-related issues, agriculture, the environment, international trade and commerce and infrastructure development;
 
    actions of competitors in the various industries and markets in which we operate; and
 
    production difficulties, which may arise from capacity and supply constraints, excess inventory levels, labor stoppages or slowdowns, political or civil unrest, military or terrorist action and other risks and uncertainties.
     These forward-looking statements are subject to risks, uncertainties and assumptions about us that could cause our actual results to differ materially from those projected. Additional factors that could cause actual results, performance or achievements to differ materially from those projected include, but are not limited to, those discussed under Item 3. “Key Information—Risk Factors.”
     We disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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MARKET AND OTHER DATA
     The market share, ranking and other data discussed below was derived from or based upon a variety of official, non-official and internal sources believed to be reliable, including the following agencies in the indicated countries: Italy— Ministero dei Trasporti; Brazil—Associaçao Nacional dos Fabricantes de Veiculos Automotores; France—Chambre Syndicale; Germany—Kraftfahr Bundesamt; Spain—Direccion General de Trafico; the United Kingdom—Society of Motor Manufacturers and Traders. Market share, ranking and other data contained in this annual report may also be based on our good faith belief, our own knowledge and experience and such other sources as may be available. Our internal company surveys and management estimates have not been verified by an independent expert, and we cannot guarantee that a third party using different methods to assemble, analyze or compute market data would obtain or generate the same result. Market share data may change and cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in any statistical survey of market shares or size. In addition, consumption patterns and consumer preferences are subject to change. The market share data presented in this annual report represents the best estimates available from the sources indicated as of the date hereof, but as a result of the factors set forth above, you should be aware that market share, ranking and other similar data, and estimates and beliefs based on that data, may not be reliable.
     In addition, please note that we calculate our automobile market share as being equal to the percentage of the total number of vehicles registered in the relevant market during the relevant period that is attributable to our vehicles. Our automobile unit sales represent sales of vehicles to our distribution network, importers and other large direct customers in a given market during the relevant period, including vehicles sold under buy-back commitments. Therefore, unit sales in a given market during any period do not necessarily correspond to the number of our vehicles registered in that market during the same period.
     Certain financial and market information for CNH Global N.V. (“CNH”) is provided by geographic area. CNH defines its geographic areas as (1) North America, encompassing the United States and Canada; (2) Western Europe, encompassing Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom; (3) Latin America, encompassing Mexico, Central and South America and the Caribbean Islands; and (4) rest of the world, which encompasses all areas not included in North America, Western Europe and Latin America.
     Market share information for CNH presented as “worldwide” includes all countries in which CNH operates except India. Estimates of market share information for CNH are generally based on registrations of equipment in most of Europe and the rest of the world on retail data collected by a central information bureau from equipment manufacturers in North America and Brazil, as well as on shipment data collected by an independent service bureau. Not all agricultural and construction equipment is registered, and registration data may thus underestimate actual retail demand. In many countries, there may also be a period of time between the delivery, sale and registration of a vehicle; as a result, delivery or registration data for a particular period may not correspond directly to retail sales in such a period.
     Throughout this report, unless otherwise specified, market share and vehicle registration data for 2005 represent the best estimates available from the sources indicated as of the date hereof. We calculate our market share as being equal to the percentage of the total number of vehicles registered in the relevant market during the relevant period that is attributable to our vehicles. In certain cases, market share and vehicle registration data for 2004 have been revised from that presented in our Annual Report on Form 20-F for the year ended December 31, 2004 to reflect changes in such sources appearing after the date thereof.

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PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
     Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
     Not applicable.
ITEM 3. KEY INFORMATION
The Fiat Group
     We are one of the largest industrial groups in Italy. We also have extensive operations in the rest of Europe, the US and in other parts of the world.
     We are engaged principally in the manufacture and sale of automobiles, commercial vehicles and agricultural and construction equipment. We also manufacture, for use by our automotive sectors and for sale to third parties, other automotive-related products and systems, principally powertrains (engines and transmissions), components, metallurgical products and production systems. In addition, we are currently involved in other sectors, including publishing and communications and certain service operations. A detailed description of our business can be found in Item 4. “Information on the Company.”
     Our significant subsidiaries as of December 31, 2005, were:
    Fiat Auto S.p.A. (“Fiat Auto”), an Italian corporation wholly owned through our Dutch subsidiary Fiat Auto Holdings B.V.;
 
    Maserati S.p.A. (“Maserati”), an Italian corporation formerly owned by Ferrari. Maserati became a wholly owned member of the Group in April 2005, and its results are now reported as a separate sector;
 
    Ferrari S.p.A. (“Ferrari”), an Italian corporation which produces luxury sports cars, of which we own approximately 56% of the voting shares;
 
    Fiat Powertrain Technologies S.p.A. (“FPT”) a wholly owned Italian corporation established in the first half of 2005, which carries out our powertrain operations;
 
    CNH, a Dutch corporation that is the lead company of our agricultural and construction equipment sector, of which we hold approximately 90% of the voting shares, following the conversion in March 2006 of 8,000,000 Series A Preferred Shares into CNH common shares. See Item 4. “Information on the Company – Introduction — Recent Developments – Financial Initiatives;”
 
    Iveco S.p.A. (“Iveco”), a wholly owned Italian corporation that is the lead company of our trucks and commercial vehicles sector;
 
    Magneti Marelli Holding S.p.A. (“Magneti Marelli”), a wholly owned Italian corporation that is the lead company of our automotive components sector;

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    Teksid S.p.A. (“Teksid”), an Italian corporation that is the lead company of our metallurgical products sector, of which we hold 84.8% of the voting shares;
 
    Comau S.p.A. (“Comau”), a wholly owned Italian corporation that is the lead company of our production systems sector;
 
    Business Solutions S.p.A. (“Business Solutions”), a wholly owned Italian corporation that is the lead company of our services sector; and
 
    Itedi-Italiana Edizioni S.p.A. (“Itedi”), a wholly owned Italian corporation that is the lead company of our publishing and communications sector.
     Beginning in 2006, the FPT sector also includes the powertrain businesses of Iveco, Centro Ricerche Fiat (“CRF,” the Fiat Research Center) and Elasis (Fiat’s advanced research center headquartered in Pomigliano d’Arco near Naples). See Item 4. “Information on the Company—Introduction—Recent Developments.”
     Since January 1, 2005, we have aggregated our activities into five business areas for certain external communication purposes: Automobiles (including the sectors led by Fiat Auto, FPT, Maserati and Ferrari); Agricultural and Construction Equipment (the CNH sector); Trucks and Commercial Vehicles (the Iveco sector); Components and Production Systems (which includes the sectors led by Magneti Marelli, Teksid and Comau); and Other Businesses (the sectors led by Business Solutions and Itedi, as well as the results of our holding companies and other companies).
Selected Financial Data
     The following selected consolidated financial data at December 31, 2005 and 2004, and for each of the years in the two-year period ended December 31, 2005, have been derived from the audited Consolidated Financial Statements included in Item 18. This data should be read in conjunction with Item 5. “Operating and Financial Review and Prospects” and are qualified in their entirety by reference to the audited Consolidated Financial Statements and the Notes thereto included in Item 18.
     The Consolidated Financial Statements and the Notes thereto for fiscal years ending at December 31, 2005 and 2004 have been prepared in accordance with the requirements of IFRS. IFRS differ in certain respects from US GAAP. For an explanation and quantification of such differences, see Note 38 to the Consolidated Financial Statements included in Item 18. In the tables below, we also present selected statement of operation and balance sheet data calculated in accordance with US GAAP for each of the years in the period 2001-2005, as explained in more detail in the US GAAP reconciliation footnote to our consolidated financial statements for the relevant years included in our prior annual reports on Form 20-F.
     The following selected consolidated financial data for 2005 and 2004 also reflect certain changes in our structure during the years presented. See “Principles of consolidation and significant accounting policies” in the Notes to the Consolidated Financial Statements included in Item 18. In particular, this data reflects the following transactions that resulted in changes in the scope of consolidation:
    At the end of 2005, the Fiat Group acquired Enel’s share of Leasys S.p.A. (“Leasys”), which rents and manages corporate car fleets, thereby obtaining 100% control of the former joint venture. For additional details, see Item 4. “Information on the Company — Sectors — Fiat Auto.”

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    On June 1, 2005, Iveco sold to Barclays Mercantile Business Finance Ltd a 51% stake in Iveco Finance Holdings Limited, a company comprising certain financial services companies of Iveco operating in France, Germany, Italy, Switzerland and the United Kingdom. As of that date, Iveco Finance Holdings Limited was no longer consolidated on a line-by-line basis, but rather accounted for using the equity method. For additional details, see Item 4. “Information on the Company — Sectors - Trucks and Commercial Vehicles.”
 
    As of May 2005, the operations that had previously been transferred to the Fiat-GM Powertrain joint venture were consolidated in FPT. Upon termination of the 2000 master agreement that had governed our former industrial alliance (the “Master Agreement”) with General Motors Corp. (“GM”), Fiat re-acquired the full control of all such operations with the sole exception of those in Poland (which continue to be jointly managed by both parties).
 
    In the first quarter of 2005, we sold 65% of our stake in the temporary employment agency WorkNet to Generale Industrielle. For additional details, see Item 4. “Information on the Company — Sectors – Services.”
 
    In the first quarter of 2005, Magneti Marelli increased its equity investment in the Turkish automotive component manufacturer Mako Elektrik Sanayi Ve Ticaret A.S. (“Mako”) to 95%, thus acquiring control from the Turkish group Koç. As a result, the company, previously accounted for using the equity method, is now consolidated on a line-by-line basis. For additional details, see Item 4. “Information on the Company — Sectors – Components.”
 
    In September 2004, Magneti Marelli sold its Midas automotive repair and maintenance service business (“Midas”) in Europe and Latin America to the Norauto Group.
 
    As a result of our gradual acquisition of control of Magneti Marelli Sistemi Elettronici S.p.A. (“Electronic Systems”) culminating in our acquisition of full ownership, we have been consolidating Electronic Systems on a line-by-line basis since the beginning of 2004.
 
    We deconsolidated Fiat Engineering, S.p.A. (“Fiat Engineering”), as a result of its sale in February 2004 to Maire Investimenti S.p.A. (now Maire Engineering S.p.A.), a privately held Italian company.

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     Statement of Operations Data
                         
    Year ended December 31,
    2005   2005   2004
    (in million of    
    dollars except per   (in million of euro
    share data)   except per share data)
Amount in conformity with IFRS
                       
Net revenues
    55,117       46,544       45,637  
Trading profit
    1,184       1,000       50  
Gains (losses) on the disposal of investments
    1,072       905       150  
Restructuring costs
    594       502       542  
Other unusual income (expenses)
    961       812       (243 )
 
                       
Operating result
    2,623       2,215       (585 )
Financial income (expenses)
    (998 )     (843 )     (1,179 )
Unusual financial income (1)
    1,016       858        
Result from investments (2)
    40       34       135  
Result before taxes
    2,681       2,264       (1,629 )
Income taxes
    999       844       (50 )
Result from continuing operations
    1,682       1,420       (1,579 )
Result from discontinued operations
                 
Net result before minority interest
    1,682       1,420       (1,579 )
Minority interest
    106       89       55  
 
                       
Group interest in net result
    1,576       1,331       (1,634 )
 
                       
 
                       
Earnings per ordinary and preference share (3)
    1.480       1.250       (1.699 )
Earnings per savings share (3)
    1.480       1.250       (1.699 )
Diluted earnings per ordinary and preference share (3)
    1.480       1.250       (1.699 )
Diluted earnings per savings share (3)
    1.480       1.250       (1.699 )
 
(1)   The “unusual financial income” recorded in 2005 represents the excess of the aggregate subscription price paid by the lending banks for the Fiat shares received upon conversion of our €3 billion mandatory convertible facility at maturity in September 2005 and the aggregate stock market value of those shares on the subscription date of approximately €2,141 million. We had no unusual financial income in 2004.
 
(2)   This item includes investment income, as well as writedowns of and upward adjustments to equity investments accounted for using the equity method.
 
(3)   In accordance with IAS 33, the dilutive effects of the mandatory convertible facility have not been included in the determination of earnings per share for 2004, as there was a net loss for the period.

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    Year ended December 31,
    2005   2005   2004   2003   2002   2001
    (in million of    
    dollars except    
    per share    
    data)   (in million of euro except per share data)
Amounts in accordance with US GAAP :
                                               
 
                                               
Net income (loss)
    148       125       (2,100 )     (2,934 )     (3,906 )     (762 )
 
                                               
Net income (loss) from continuing operations before accounting changes
    176       149       (2,088 )     (3,542 )     (3,286 )     (1,050 )
Income (loss) per ordinary and preference share and ordinary and preference ADR (basic and diluted)
    0.14       0.12       (2.15 )     (3.89 )     (6.65 )     (1.36 )
 
                                               
Income (loss) per savings share and savings ADR (basic and diluted)
    0.14       0.12       (2.15 )     (3.89 )     (6.65 )     (1.21 )
 
                                               
Income (loss) from continuing operations per ordinary and preference share and ordinary and preference ADR (basic and diluted)
    0.17       0.14       (2.14 )     (4.70 )     (5.59 )     (1.87 )
Income (loss) from continuing operations per savings share and savings ADR (basic and diluted)
    0.17       0.14       (2.14 )     (4.70 )     (5.59 )     (1.72 )
Balance Sheet Data
                                         
    2005       2005       2004  
    (in millions of dollars   (in millions of euro except per share data) (shares  
    except per share data)   outstanding in thousands)  
Amounts in conformity with IFRS:
                                       
Total assets
    73,958               62,454             62,522    
 
                                       
Total stockholders’ equity
    11,147               9,413             4,928    
 
                                       
Capital stock
    7,552               6,377             4,918    
Dividends declared per share
                                   
Ordinary and preference
                                 
Savings
                                 
Shares outstanding (par value of €5 per share)
                                 
Ordinary
    1,092,246               1,092,246             800,418    
Preference
    103,292               103,292             103,292    
Savings
    79,913               79,913             79,913    

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    Year ended December 31,
    2005   2005   2004   2003   2002   2001
    (in million    
    of dollars    
    except per    
    share data)   (in million of euro)
Amounts in accordance with US GAAP :
                                               
Stockholders’ equity
      7,951       6,714       2,718       4,935       6,066       10,667  
Exchange Rates
     Fluctuations in the exchange rate between the euro and the dollar will affect the dollar equivalent of euro prices of shares listed on the Italian Stock Exchange and, as a result, are likely to affect the market price of our American Depositary Receipts (“ADRs”) in the United States. Exchange rate fluctuations will also affect the dollar amounts received by holders of ADRs on the conversion into dollars by the depositary for the ADRs of any cash dividends declared and paid in euro on the shares represented by the ADRs.
     The following table sets forth the Noon Buying Rate for euro expressed in dollars per euro rounded to the nearest one hundredth of a US cent for the periods indicated.
                                 
    At Period            
    End   Average(1)   High   Low
Year:
                               
2001
    0.8901       0.8909                  
2002
    1.0485       0.9495                  
2003
    1.2597       1.1411                  
2004
    1.3538       1.2478                  
2005
    1.1842       1.2400                  
 
                               
Month:
                               
December 2005
                    1.2041       1.1699  
January 2006
                    1.2287       1.1980  
February 2006
                    1.2100       1.1860  
March 2006
                    1.2197       1.1886  
April 2006
                    1.2624       1.2091  
May 2006
                    1.2888       1.2606  
 
(1)   Average of the Noon Buying Rate for euro for the last business day of each month in the period.
     The Noon Buying Rate for euro on June 26, 2006, was $1.2554= €1.0000 or $1.00 = €0.7966.

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Risk Factors
Risks Related to the Fiat Group
We have recorded significant losses in recent periods. Our future profitability and financial condition depend on the successful implementation of our current strategic objectives.
     From 2002-2004, our operating performance was negatively affected by a persistently unfavorable business environment in the automotive market and the poor performance of Fiat Auto. We recorded net losses under Italian GAAP of €1,586 million, €1,900 million and €3,948 million in 2004, 2003 and 2002, respectively. Our net loss in 2004 as recalculated in accordance with IFRS was €1,634 million. In response to these challenging conditions, we have adopted a series of organizational and industrial initiatives intended to refocus our efforts on our core automotive businesses and bring us back to profitability. These initiatives aim to achieve significant improvements in our results over the period through 2007 by restoring Fiat Auto to profitability and reorganizing our businesses to develop our innovation capabilities and expertise, while reinforcing our capital structure and maintaining a comfortable liquidity position. They also provide for significant cost savings to be generated through cost structure rationalization and improved manufacturing efficiency, further synergies among our industrial joint ventures and inter-sector cooperation, and the adoption of a more dynamic and efficient management structure. See Item 4. “Information on the Company—Introduction — Strategies and Programs.” The initial positive impact of these initiatives is reflected in our operating and financial results for 2005 and for the first quarter of 2006. See Item 4. “Information on the Company—Introduction —Recent Developments” and Item 5. “Operating and Financial Review and Prospects—Results of Operations—2005 Compared with 2004.”
     Our ability to further strengthen our capital structure, reduce our indebtedness and improve profitability, while at the same time continuing to invest in new products, research and development and our distribution network, will depend on the success of these organizational and industrial initiatives, as well as on general economic and business conditions and the performance of our companies. Any failure to implement a significant portion of these initiatives successfully, or to realize the anticipated benefits, could have a material adverse effect on our financial condition, results of operations and business prospects.
     In addition, realization of our development plans for Fiat Auto over the period through 2008 is predicated upon specified financial and operating factors, including the Group’s overall ability to generate the necessary profitability, to access financing and state grants under available regulations for research, development and innovation, and to realize specific programs, as well as upon the cooperation of unionized labor. In order to be competitive, we must also implement operational solutions that will allow for improvements in cost efficiency, flexibility with regard to plant use and productivity. See Item 4. “Information on the Company—Introduction —Recent Developments” for additional information.
Our businesses are affected by cyclical economic conditions.
     Our businesses depend upon general activity levels in our key industries, which historically have been highly cyclical. In addition, we generate a substantial portion of our revenues in Western Europe, and more particularly in Italy. Both demand for cars and our market shares have been volatile in recent periods, though in the first quarter of 2006, demand for automobiles grew by 3.3% in Western Europe as a whole, and by 9.0% in Italy, with Fiat Auto increasing its market share in both regions. See Item 4. “Information on the Company—Sectors—Fiat Auto—Markets and Competition” for more information on trends in the automobile market. Any event adversely affecting activity in the

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automotive industry, such as an economic downturn in a key market, an increase in energy prices, fluctuations in the prices of other commodities or raw materials, adverse shifts in sector specific factors such as weather, interest rates, government policies (including environmental regulation), infrastructure spending or major epidemics (such as avian flu) could negatively affect our profitability and business prospects.
We operate in highly competitive industries.
     Approximately 93% of our net revenues are generated in the highly competitive worldwide automotive industry, which includes automobiles, commercial vehicles, agricultural and construction equipment and automotive-related products. We face strong competition in Europe and Latin America from other international automobile and commercial vehicle manufacturers, and in Europe, North America and Latin America from global, regional and local agricultural and construction equipment manufacturers and suppliers of automotive-related products. We compete in these markets in terms of product quality and features, innovation and development time, pricing, reliability, safety, fuel economy, customer service and financing terms. We also face strong competition in our other businesses.
We face intense price competition in the automobile and other sectors.
     Competition, particularly with regard to price, has increased in several of our operating sectors in recent years, and has had a negative impact on sales and margins in these sectors. In addition, overall manufacturing capacity in the global automotive industry exceeds current demand. This overcapacity, combined with already intense competition in the automotive industry and persistent weakness in the global economy, may intensify pricing pressures. Our ability to maintain or improve the quality of our products, increase market share and improve profitability in the face of strong competitive pricing pressures will be fundamental to our future success.
Our future performance depends on our ability to innovate and on market acceptance of new or existing products.
     Our ability to improve our position within our product and market segments through research to improve current products, as well as the development of innovative new products and services will have a significant impact on our future performance. Failure to develop and offer products that compare favorably to those of our competitors, particularly in more profitable segments, in terms of price, quality, styling, reliability, safety, functionality or otherwise, may result in lower market share, lower sales volumes and margins, and may have a substantial adverse effect on our operational and financial results. For example, Fiat Auto’s development plans call for the launch over the 2005–2008 period of 20 new models, including the Fiat Grande Punto and the Alfa 159, which were introduced commercially at the end of the third quarter of 2005, as well as 23 restylings of existing models of the Fiat, Lancia, Alfa Romeo and Fiat Commercial Vehicle brands. See Item 4. “Sectors – Fiat Auto – Product Development.” The lack of market acceptance of these and other new automotive models, potential delays in bringing new vehicles to market or the inability to achieve efficiency targets without suffering quality losses would adversely affect our overall profitability.
Downgrades of our credit ratings would raise our cost of capital and could limit our access to financing and negatively affect our business.
     We are currently rated below investment grade, with a rating of Ba3 with a stable outlook from Moody’s Investors Service (“Moody’s”), BB- with a stable outlook from Standard & Poor’s Ratings Service, a division of the McGraw Hill Companies, Inc. (“Standard & Poor’s”), and BB- with a stable

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outlook from Fitch Ratings. Our ability to access capital markets, and the cost of borrowing in those markets, is highly dependent on our credit ratings. The rating agencies may review their ratings for possible further downgrades, and any new downgrades would increase our cost of capital, potentially limit our access to sources of financing, and could negatively affect our businesses, especially our vehicle lease and sales financing businesses, which are typically financed with a high proportion of debt. Moreover, the management and development of the core automotive and automotive-related businesses in which we operate, may require large capital investments. Consequently, we may find it necessary to secure additional financing or to refinance our outstanding debt. We cannot give any assurances as to whether we will be able to secure such funds or refinance existing indebtedness, or whether any additional measures may be required to raise funds, nor whether we will be able to effect any or all of any such transactions at all, or on favorable terms.
We may not achieve the expected benefits of mergers, acquisitions, joint ventures or other similar corporate transactions.
     We have engaged in the past and may engage in the future in significant corporate transactions, such as mergers, acquisitions, joint ventures and restructurings, the success of which is difficult to predict. We have also sold a number of businesses and equity investments as part of the refocusing of our operations on our core automotive businesses. There can be no assurance that we will be able to enter into such transactions without encountering administrative, technical, political, financial or other difficulties. Each of our automotive sectors participates in joint ventures, and Fiat Auto is currently exploring or has recently signed additional cooperation or other agreements with various auto makers, including Tata Motors of India, Severstal of Russia and Ford Motor Co. of the United States. See “Item 4 - Introduction – Recent Developments.”
     Joint ventures involve special risks associated with the possibility that the joint venture partners may:
    have economic or business interests or goals that are inconsistent with ours;
 
    take action contrary to our instructions or requests or contrary to our policies or objectives with respect to operations;
 
    be unable or unwilling to fulfill their obligations under the joint venture agreement; or
 
    experience financial or other difficulties.
We are subject to risks relating to international sales and exposure to changing local conditions.
     A significant portion of our current operations is conducted and located outside of Italy, and we expect that revenues from sales outside of Italy, and more generally outside of the EU, will continue to account for a material portion of our total revenues for the foreseeable future. We are subject to risks inherent in operating on a global basis, including risks related to:
    exposure to local economic and political conditions;
 
    export and import restrictions;
 
    currency exchange rate fluctuations;

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    multiple tax regimes, including regulations relating to transfer pricing and withholding and other taxes on remittances and other payments by subsidiaries;
 
    foreign investment restrictions or requirements, foreign exchange controls and restrictions on repatriation of funds; and
 
    local content laws.
     The degree of risk and the potential magnitude of effects of unfavorable developments in any one of these areas vary from country to country, and, depending on the circumstances, could have a material adverse effect on our business prospects, results of operations and financial condition.
Developments in emerging market countries may adversely affect our business.
     We operate in a number of emerging market countries, both directly, in markets such as Brazil and Argentina, and through joint ventures or other cooperation agreements, including in Turkey, India, China and Russia. Our Brazilian operations accounted for approximately 8.3% of our net revenues in 2005. As a result, economic and political developments in Brazil and other emerging market countries, including economic crises and political instability, have had, and may in the future have, a material adverse impact on our operating and financial results.
We are subject to extensive environmental and other governmental regulation.
     Our products and operations are subject to increasingly stringent environmental laws and regulations in many of the countries in which we operate. Such regulations govern, among other things, vehicle emissions, fuel economy, vehicle safety and the type and level of pollutants generated by industrial production facilities. We expend significant resources to comply with such regulations, and expect to continue to incur substantial compliance and remediation costs in the future.
     In addition, government initiatives that affect consumer demand for our products, such as changes in tax policy or the grant or repeal of subsidies to provide incentives for the purchase of vehicles, can substantially influence the timing and level of our revenues. Such government actions are unpredictable and beyond our control, and any adverse changes in government policy could have a significantly negative impact on our business prospects, financial condition and results of operations.
Labor matters could impair our flexibility to reposition our businesses.
     Most of our employees worldwide are represented by labor unions. In Europe, our employees are protected by various laws giving them, through local and central works councils, consultation rights with respect to specific matters regarding their employers’ businesses and operations, including the downsizing or closure of facilities and employment terminations. These laws and the collective bargaining agreements to which we are subject could impair our flexibility as we continue our efforts to reorganize and restructure our businesses.
     The processes of reorganizing and restructuring that are under way could increase conflict with our labor unions. Our policy, which we implement in accordance with local rules and labor practices, is to seek to minimize labor unrest by maintaining constructive relations with representatives of our workers and with their unions, in an effort to reach a consensus on measures to manage the social consequences of these processes. For example, our initiatives to reduce business governance costs are expected to result in a further streamlining of our (predominantly white collar) administrative, technical and sales personnel. We seek to use measures such as the so-called “mobilità lunga,” a

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program that provides a supplemental unemployment allowance to bridge the period prior to retirement, to manage the impact of these initiatives, as we and our unions believe such programs help reduce their social consequences. However, use of these programs is subject to the Italian government’s passage of specific legislation permitting us to do so.
     In the past, union dissatisfaction with our restructuring initiatives has resulted in labor unrest, including occasional wildcat and other strikes of varying severity and duration. See Item 6. “Directors, Senior Management and Employees—Employees and Labor Relations” for additional information. Any future work stoppages or labor unrest, whether involving our own employees or those of other companies on which we depend for goods and services, could have a material adverse effect on our business, results of operations and financial condition.
We are subject to risks associated with exchange rate fluctuations, interest rate changes and other market risks.
     We are subject to currency exchange rate risk in the ordinary course of our business to the extent that our costs are denominated in currencies other than those in which we earn revenues. Exchange rate fluctuations also affect our operating results because we recognize revenues in currencies other than euro but publish our financial statements in euro. Similarly, changes in interest rates affect our results by increasing or decreasing borrowing costs and financial income. Our financial services businesses also involve risks relating to changes in interest and inflation rates, consumer and dealer insolvency rates and the overall strength of the economies in which these businesses operate.
     We seek to manage these risks through the use of financial hedging instruments. However, despite these hedging transactions, exchange rate or interest rate fluctuations may continue to adversely affect our financial condition or results of operations. See Notes 22 and 34 to the Consolidated Financial Statements included in Item 18 and “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”
Our success depends on the ability of our management team to operate and manage effectively.
     Most of our current senior managers have been appointed relatively recently. Our Chairman, Luca Cordero di Montezemolo, and our Chief Executive Officer (“CEO”), Sergio Marchionne, were appointed in June 2004. In February 2005, Mr. Marchionne assumed the additional position of CEO of Fiat Auto, Paolo Monferino, who was CEO of CNH, became CEO of Iveco, and Harold Boyanovsky became interim CEO of CNH, prior to being confirmed in that position later in the year. In 2005, following the creation of FPT, we also reorganized management at certain of our other sectors. See “Item 6. Directors, Senior Management and Employees- Senior Management.”
     Our success depends in large part on the ability of our executive officers and other members of senior management continuing to operate and manage effectively, both independently and as a group. The loss of the services of any executive officer, senior manager or other key employee without adequate replacement or the inability to attract and retain new qualified personnel could have a material adverse effect upon our business, operating results and financial condition.

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ITEM 4. INFORMATION ON THE COMPANY
Introduction
     We are one of the largest industrial groups in Italy. We also have extensive operations in the rest of Europe, the US and in other parts of the world. In 1999, we celebrated our centenary, having been founded in Turin in 1899 as a manufacturer of automobiles.
     We are a società per azioni, or corporation limited by shares, organized under the laws of the Republic of Italy. Under our current Statuto, or by-laws, Fiat S.p.A. has a duration expiring on December 31, 2100. Our registered office and principal place of business is located at Via Nizza 250, Turin, Italy (telephone number +39-011-006-1111).
     We are engaged principally in the manufacture and sale of automobiles, commercial vehicles and agricultural and construction equipment. We also manufacture, for use by our automotive sectors and for sale to third parties, other automotive-related products and systems, principally powertrains, components, metallurgical products and production systems. In addition, we are currently involved in other sectors, including publishing and communications and service operations.
Strategies and Programs
     Since 2002, we have re-focused the Group on our core automotive operations, and in particular, around our three main industrial business areas: Automobiles, Agricultural and Construction Equipment, and Trucks and Commercial Vehicles. We are also active in related components manufacturing and are combining our powertrain operations to better exploit our expertise in this field, serving both Group companies and outside customers. As part of this re-focusing process, we have divested a number of non-core assets. We have also adopted industrial and organizational initiatives in order to return to profitability, to generate positive cash flow, and to reduce our indebtedness.
     Our main strategic objectives currently include:
    Restoring Fiat Auto to profitability and to positive cash flow generation;
 
    Building on our global presence and expertise in other core sectors (such as agricultural and construction equipment and commercial vehicles) through product innovation and continued efficiency improvements;
 
    Developing and integrating our significant innovation capabilities and expertise, notably in the field of automotive powertrains;
 
    Adopting a more dynamic and efficient management structure; and
 
    Reinforcing our capital structure and maintaining a healthy liquidity position.
     The major ongoing initiatives we are currently implementing in light of these objectives are:

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     Restoring Fiat Auto to Profitability and to Positive Cash Flow Generation. We aim to capitalize on initiatives already implemented and develop new projects to restore Fiat Auto to profitability. In 2005, Fiat Auto’s performance improved, as the sector narrowed its trading loss to €281 million from €822 million in 2004. In February 2005, our CEO Sergio Marchionne assumed the role of CEO of Fiat Auto to help accelerate our turnaround.
     Key initiatives being implemented include:
    The creation of a coherent and sustainable brand image through a clearer positioning of our portfolio of brands and products, each specifically targeting identified groups of consumers.
 
    The rationalization and strengthening of Fiat Auto’s product portfolio by launching carefully targeted and complementary products, with a strong focus on technological innovation and product quality. Since 2003, Fiat Auto has commercially launched 11 new models (including the award-winning new Panda in 2003, the Lancia Musa, Alfa GT, Crosswagon Q4 in 2004, the Fiat Croma, Grande Punto, the Alfa 159, and Brera in 2005), which have significantly contributed to its improved financial performance. Fiat Auto’s product pipeline for the period 2006-2008 includes several new models and restylings, including a new “C segment” mid-size model, which it expects will further strengthen and expand its product range.
 
    The revitalization of Fiat Auto’s distribution network by rationalizing the number of dealers, closing existing gaps in the geographic dealership coverage, enhancing corporate identity and improving economics for dealers. We expect that its strengthened distribution network will facilitate the introduction of new models and strengthen the image of our brands.
 
    A continuous focus on efficiency and cost reduction. Fiat Auto’s initiatives include the reduction of its workforce, an alignment of production capacity with prevailing demand through the temporary shutdown of certain manufacturing plants, as well as the optimization of dealers’ inventories. Fiat Auto intends to continue to pursue additional cost savings through improved sourcing of direct materials, including through the standardization of components and sourcing from low-cost countries, platform rationalization, increased capacity and manpower utilization, and a focus on improved quality.
 
    The pursuit of targeted, strategic industrial alliances with other auto manufacturers, such as those recently entered into with Tata Motors Ltd. (“Tata Motors”), Severstal and Ford Motor Co. (see “—Recent Developments—Industrial Alliances” below), which the sector sees as fundamental to achieving the economies of scale required to operate competitively.
     The above initiatives helped Fiat Auto to record a positive trading profit in the first quarter 2006. See “—First Quarter Results” below.
     Building on Our Global Presence and Expertise in Other Core Sectors. Initiatives being implemented include:
    Agricultural and Construction Equipment. CNH intends to expand its business through the improvement of its product offerings. CNH has significantly renewed its product range and has restructured its manufacturing facilities to achieve greater flexibility and cost

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      efficiency. CNH’s strategy is focused on strengthening customer and dealer support, making ongoing product improvements, continuing efforts to reduce costs, reducing capital employed in its business and continuing to develop its financial services business. In the fourth quarter of 2005, CNH reorganized its operations into four distinct global brand structures which will have fully independent profit and loss accountability—Case IH and New Holland in agricultural equipment and Case and New Holland in construction equipment—in order to invigorate the brands and more effectively satisfy the differentiated needs of brand dealers and customers. CNH also intends to remain focused on achieving greater purchasing and manufacturing efficiencies while counting on pricing to offset rising raw material costs. CNH believes that these initiatives will lead to increased customer satisfaction and loyalty, thereby promoting future financial stability and improved returns.
 
    Trucks and commercial vehicles. Iveco enjoys leading market positions in the Italian truck market and in the European medium commercial vehicle segment. Iveco has a strong engine platform with a full range of environmentally compliant models and has recently enhanced its vehicle portfolio. In addition, Iveco is improving its product range, including restyling of the Daily, early introduction of Euro 4- and Euro 5-compliant engines, and the launch of new special-purpose vehicles. See “—Sectors – Trucks and Commercial Vehicles” below. Iveco intends to build further on these strengths to achieve revenue growth and improved profitability, including realizing manufacturing efficiencies in order to offset higher labor and utilities costs. Iveco intends to reinforce its presence in global markets, increase its heavy segment market share, improve the perceived quality and pricing of its products and enhance its distribution network. Other areas of strategic importance for Iveco include expanding its aftermarket services and developing its financial services activities, such as through its new joint venture with Barclays.
     Developing and Integrating Our Significant Innovation Capabilities and Expertise. We are striving to develop and integrate our significant innovation capabilities and expertise.
    In May 2005, we created FPT, a new sector that is now responsible for managing our innovation capabilities and expertise with respect to engines and transmissions by coordinating management of the resources, employees and activities of our automobile powertrain activities, the powertrain activities of Iveco, and the powertrain research activities of the CRF and Elasis. We expect that our advanced engine technologies will allow us to strengthen our market positioning, product portfolio, and brands. We anticipate that the technological excellence of FPT may also enable us to benefit from engine sales and/or the licensing of its technology to third parties. We expect FPT to make a positive contribution to the Group and to become a leading player in this segment.
 
    We are striving to integrate the technological excellence of our operations throughout the Group. For example, on April 1, 2005, we transferred ownership of Maserati from Ferrari to Fiat Partecipazioni S.p.A. to allow Fiat Auto’s Alfa Romeo and Maserati units to cooperate closely, both technically and commercially, especially in significant international markets. We expect both brands to benefit from this cooperation, while allowing Maserati to continue to take advantage of Ferrari’s valuable technological expertise.
     Adopting a More Dynamic and Efficient Management Structure. We recently restructured our corporate functions and operating units to maximize intra-Group synergies and allocate capital

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efficiently. We have downsized our corporate structure and strengthened our management by hiring highly qualified and internationally experienced managers and promoting our internal group managers.
     In November 2004, we created a new governance body, the Group Executive Council (the “GEC”), to review our organizational and operating model and increase its competitiveness. The GEC comprises the CEO of Fiat, certain department heads and the CEOs of our operating sectors. The GEC is responsible for sharing best practices throughout the Group and assessing the opportunities and risks of the Group.
     Reinforcing Our Capital Structure. We seek to maintain a healthy liquidity position and a balanced ratio of net debt to Group stockholders’ equity.
    In recent years, we have successfully executed a number of transactions that have improved our capitalization and liquidity profile, including two capital increases, which generated a total of €2.8 billion, and a series of major asset disposals in 2003 and 2004, including the divestitures of our former aviation and insurance sectors (led by FiatAvio S.p.A. and Toro Assicurazioni S.p.A., respectively), which generated more than €7 billion in proceeds.
 
    We further reduced our net debt to €18,523 million at December 31, 2005, from €25,423 million at year-end 2004. Item 5. “Operating and Financial Review and Prospects—Liquidity and Capital Resources” for a reconciliation of net debt, a non-GAAP measure, to debt as reported in our IFRS balance sheet. Our total debt was €25,761 million at December 31, 2005, compared to €32,191 million at year-end 2004.
 
    As part of our agreement with General Motors to terminate the 2000 master agreement that had governed our former industrial alliance (the “Master Agreement”) and our related joint ventures, GM paid us €1.56 billion in the first half of 2005.
 
    As anticipated, the lending banks converted the €3 billion mandatory convertible facility (the “Mandatory Convertible Facility”) into equity (in the form of Fiat ordinary shares) at its maturity in September 2005, and we reduced our debt further in the same month by nearly €1.8 billion, in connection with transactions related to the sale of our stake in Italenergia Bis to Electricité de France (“EDF”).
 
    We continue to consider opportunities for the creation of joint ventures related to certain of our operations, including our financial services businesses. On June 1, 2005, Iveco sold to Barclays, for consideration of €119 million, 51% of a newly created subsidiary, Iveco Finance Holdings, to which Iveco had contributed the bulk of its financing activities. The joint venture, in which Iveco retains a 49% interest, provides commercial vehicle financing and leasing services to Iveco customers in France, Germany, Italy, Switzerland and the United Kingdom. See “—Sectors—Trucks and Commercial Vehicles” below for more information on this joint venture. As part of this transaction, the deconsolidated entities that are now part of Iveco Finance Holdings repaid Fiat more than €2 billion in intercompany indebtedness.
 
    We also pursue and execute a wide range of financing and refinancing transactions in the international banking and financial markets, with the aim of maintaining a healthy liquidity level for the Group and the financial flexibility required to implement our industrial strategy.

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     See Item 5. “Operating and Financial Review and Prospects—Liquidity and Capital Resources” for additional information on the effect of these transactions.
Operating and Financial Results for 2005
     Our net revenues1 totaled €46,544 million in 2005, an increase of 2.0% from the €45,637 million recorded in 2004. Revenues rose at all of our industrial business areas other than Fiat Auto, where revenues declined by 0.8% as a recovery in the fourth quarter did not fully offset the trend of the first nine months, during which sales slowed ahead of new product launches.
     We posted a trading profit of €1,000 million in 2005, a sharp increase from the €50 million trading profit we recorded in 2004. The €950 million increase reflected a €541 million reduction in trading losses for Fiat Auto, combined with the positive performance of other industrial sectors; trading profit rose by €231 million at CNH and €44 million at Iveco.
     We recorded operating income of €2,215 million in 2005, compared with an operating loss of €585 million in 2004. The positive operating results reflected not only the €950 million increase in trading profit, but also the €1,134 million gain (net of related costs) arising from GM’s payments to us in connection with the termination of the Master Agreement and a €878 million gain as a result of the sale of our stake in Italenergia Bis. See Item 5. “Operating and Financial Review and Prospects—Liquidity and Capital Resources” for more information about these transactions. These positive factors were partially offset by €502 million in restructuring costs and €469 million for other unusual expenses.
     Income before taxes was €2,264 million in 2005, compared with a loss before taxes of €1,629 million in 2004. This item includes “unusual financial income” of €858 million in 2005 that we recorded in connection with the capital increase resulting from the conversion of the Mandatory Convertible Facility. See Item 7. “Major Stockholders and Related Party Transactions—Description of Capital Stock.” The positive result also reflects the decline in net financial expenses to €843 million in 2005 from €1,179 million in 2004, a result that included €250 million in non-recurring financial expenses, attributable to both the unwinding of an equity swap on GM shares (see Item 5. “Operating and Financial Review and Prospects—Off Balance Sheet Arrangements”) and write-downs of financial receivables recorded in 2004.
     We recorded net income before minority interests of €1,420 million in 2005, compared with a net loss of €1,579 million in 2004. The significant improvement in our bottom line reflected the stronger financial results summarized above and was achieved notwithstanding an increase in income taxes from a tax benefit of €50 million in 2004 to a charge of €844 million in 2005, of which €277 million was attributable to a reversal of deferred tax assets related to the gain recorded in connection with the termination of the Master Agreement with GM and €119 million related to income taxes for prior years.
     Research and development expenses2 were equal to €1,558 million in 2005, as compared to €1,791 million in 2004. Investments in tangible and intangible assets (net of vehicles sold under buy-back commitments) increased by 4.7%, totaling €3,052 million in 2005, as compared to €2,915 million in 2004, including investments in long-term leasing services. See Item 5. “Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
 
1   “Net revenues” are revenues net of discount and similar concessions.
 
2   Includes capitalized research and development costs and costs charged directly to operations for the fiscal year.

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Seasonality
     We operate in a number of different business sectors, each of which, particularly the agricultural and construction equipment sector, is subject to certain seasonal fluctuations. However, management believes that, as a whole, seasonal fluctuations are not material to us or the results of our operations.
Recent Developments
     The significant transactions we undertook in the first half of 2006 included the following:
     Industrial Alliances
    Fiat Auto and Severstal Auto industrial agreement. In January, Fiat Auto and Severstal Auto signed an industrial agreement for the assembly in Russia of Fiat Palio and Fiat Albea models based on CKD kits manufactured in Turkey by Tofas, our joint venture with the Koç Group. Assembly of these models at Severstal Auto’s Naberejniye Chelni plant near Kazan in the Volga region is scheduled to start in 2007. On February 8, Fiat Auto and Severstal Auto extended the agreement to cover Fiat Doblò models (the kits for which are also produced in Turkey).
 
    Fiat Auto and Tata Motors industrial agreement. In January, the Fiat Group and Tata Motors Ltd. signed a cooperation agreement providing for dealer network sharing for the sale of Fiat branded cars in Tata outlets throughout India. As a result of this agreement, in March 2006, the Tata dealership network began to sell a targeted selection of Fiat cars, as well as the complete Tata product range (together with spare parts and sales and service assistance for both brands). The dealerships involved in this program now display the new Fiat logo alongside the Tata logo.
     Financial Initiatives
     In the first half of 2006, we completed a series of capital markets transactions that have allowed us to refinance some of our existing debt at more favorable interest rates, including:
    Fiat’s €1 Billion Eurobond. In February, Fiat marked its successful return to the international capital markets by closing the offering of €1 billion of 6.625% Senior Notes with an issue price of 100% and a maturity date on February 15, 2013 (the “2013 Notes”). The 2013 Notes, which were issued by Fiat Finance and Trade Ltd. société anonyme (“Fiat Finance and Trade”), a wholly owned subsidiary of Fiat S.p.A., and guaranteed by Fiat S.p.A., were offered to institutional investors outside the United States and have been admitted to listing on the Irish Stock Exchange. The 2013 Notes were rated Ba3 by Moody’s Investors Service, BB- by Standard & Poor’s Ratings Services, and BB- by Fitch Ratings, in line with the agencies’ ratings of the Fiat Group’s long-term debt. In January 2006, Fitch Ratings and Moody’s changed their outlook on Fiat S.p.A. from negative to stable, as Standard & Poor’s Rating Services had already done in August 2005.
 
    CNH’s US $500 million Senior Notes. In March, CNH closed a private placement to institutional investors of US $500 million in 7.125% Senior Notes due 2014 issued by its wholly owned subsidiary, Case New Holland Inc., and guaranteed by CNH.

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    Fiat stake in CNH rises to 90%. In March 2006, Fiat increased its stake in CNH from approximately 84% to approximately 90% as a result of the automatic conversion of the CNH Series A Preference Shares it had held into CNH common shares. The conversion (which was triggered by the average of the NYSE closing prices for CNH’s common shares having exceeded US$24.00 over the preceding 30 trading days) resulted in Fiat receiving 100 million newly issued CNH common shares.
 
    Fiat’s €1 Billion Global Medium Term Notes. In May, Fiat closed the offering of €1 billion of 6.625% Senior Notes due November 2011, with an issue price of 99.565% (the “2011 GMTNs”). The 2011 GMTNs were issued by Fiat Finance and Trade, and guaranteed by Fiat S.p.A. under the Fiat Group’s €15 billion Global Medium Term Note Programme, which was recently renewed and allows for the offering to institutional investors of Fiat S.p.A. guaranteed debt securities by three of the Group’s finance subsidiaries. The 2011 GMTNs were offered to institutional investors outside the United States and have been admitted to listing on the Irish Stock Exchange.
     New Contracts and Industrial Initiatives
    Major investments in FPT’s plants. In February 2006, the Italian Ministry of Productive Activities, Fiat Powertrain Italia S.r.l (“FPI”), Fabbrica Motori Automobilistici S.p.A. (“FMA” – a wholly owned subsidiary of FPI), and Elasis signed a project agreement providing for an investment plan to support Fiat’s manufacturing plants in Pratola Serra, near Avellino, and in Termoli, near Campobasso, as well as improving research activities carried out at the Pomigliano d’Arco plant near Naples. The Fiat Group has committed €647 million to this project, which is expected to be supplemented by a contribution by the Italian public authorities.
 
    Contract for renewal of the Group’s Termini Imerese manufacturing facility. In February 2006, the Italian Ministry of Productive Activities, Fiat Auto and Elasis signed an agreement to renew the Group’s manufacturing facility at Termini Imerese in Sicily under the conditions of the Program Agreement signed with the Italian government in December 2002. The Termini Imerese project, which has involved Fiat Auto, the Ministry of Productive Activities and Sicily’s regional administration since April 2004, comprises two major initiatives. The first initiative provides for Fiat to make industrial investments in the Termini Imerese plant amounting to approximately €31 million to prepare the Sicilian facility to produce the Lancia Ypsilon and the model’s subsequent facelifts. These investments are part of Fiat’s 2005-2008 Development Plan. The second phase of the plan focuses on the research and development field, where Elasis is expected to invest approximately €13 million on improving the plant’s manufacturing processes. Public funding for the project is expected to amount to about €10 million, of which €1.6 million will be provided by the Sicilian regional administration.
 
    Piedmont region and Fiat Group program for hydrogen fueled transport. On February 13, 2006, the Piedmont Region and the Fiat Group announced, by means of a joint press release, a wide-ranging cooperative program for hydrogen fueled transport, as envisaged in the protocol of intent signed at the end of December 2005.
 
      Fiat and the Piedmont Region will cooperate on local and European-level programs over the short, medium and long term. They will promote the Piedmont Region as a key research and development center in this innovative area. Fiat will support these initiatives by lending some of its internationally recognized experts, including available resources at the CRF and at the Fiat Auto innovation facilities.

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    Fiat engines for Beijing buses. On April 12, 2006, FPT signed an agreement with Beijing Public Transport Company for the supply of 1,000 natural gas-powered engines. This transaction is part of a cooperation program among the Italian Ministry for the Environment and Territory, the China State Agency for the Environmental Protection and the Municipality of Beijing. This contract is the largest ever made by Fiat Group in this field. These engines, to be manufactured at the FPT facility in Turin, will equip locally manufactured busses.
 
    New industrial agreement for the production of a PSA Peugeot Citroën gearbox in Fiat Auto’s plant in Argentina. On May 11, 2006, Fiat and PSA Group signed a new industrial agreement. Starting in 2007, the Fiat Auto plant in Cordoba, Argentina, will assemble PSA Group gearboxes to be mounted on Peugeot and Citroën cars sold in South America. Annual production over the course of the 10-year agreement is expected to reach 140,000 units.
     Disposal of subsidiaries
    Sale of Atlanet S.p.A. The most significant condition precedent to the closing of sale of Atlanet S.p.A (which provides telecommunication services in Italy to the Fiat Group) to the BT Group for consideration of approximately €80 million was satisfied in the first quarter of 2006 upon our receipt of approval from the Italian Antitrust Authority. The sale of our telecommunication businesses in Poland and Brazil is currently being finalized.
 
    Sale of Société Bretonne de Fonderie et de Mécanique S.A. In May 2006, the transfer of approximately 60% of Société Bretonne de Fonderie et de Mécanique S.A. (“SBFM”), a French company that was part of Teksid’s Cast Iron Unit, was completed. Under the terms and conditions of the transaction, Teksid and the transferee have respective put and call options on Teksids remaining stake through the end of 2008.
 
    Agreement between Fiat Group and BSI SA for the sale of Banca Unione di Credito. The Fiat Group, through IHF — Internazionale Holding Fiat, and BSI SA, a Generali Group company, reached an agreement in June 2006 whereby BSI will purchase 100% of the capital stock of Banca Unione di Credito, a Swiss bank owned by IHF, from IHF. The value of the transaction, subject to the results of due diligence, is approximately 400 million Swiss francs, or about €260 million. Closing of the transaction is subject to the approval by regulatory and antitrust authorities. This transaction is consistent with Fiat Group’s strategy of focusing on its core automotive business through the sale of non-strategic assets.
 
    Sale of 10% stake in IPI. In June 2006, Fiat Partecipazioni sold its 10% residual stake in IPI S.p.A., a central operator in the Italian and European real estate industry, to Risanamento S.p.A. for a consideration of approximately €25.7 million, thus recording a gain of approximately €9 million on a consolidated basis. The transaction was envisaged in the agreements signed with Risanamento in March 2003 and is consistent with the Group’s strategy of focusing on the core automotive business.
 
    Sale of Sestrieres S.p.A. On June 29, 2006, Fiat – through Fiat Partecipazioni S.p.A. and Business Solutions S.p.A. – completed the divestiture of its entire stake in Sestrieres S.p.A., which manages the lift facilities in the via Lattea ski area, for consideration of approximately €30 million.

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First Quarter Results
     Our consolidated net revenues totaled €12,556 million in the first quarter of 2006, compared to €10,755 million in the previous year-period. The 16.7% increase was supported by the sharp rise in the Automobiles business area, as the success of new models led to an increase in sales volume. Increases at CNH, Iveco and the Components and Production Systems business area contributed to the improvement. Effective January 1, 2006, the Components and Production Systems business area includes the results of the FPT sector, which itself now includes not only the passenger and commercial vehicles powertrain operations it had in 2005, but also the industrial powertrain activities included in the Iveco sector until December 31, 2005. To facilitate a comparison, the 2005 data presented herein has been reclassified on the same basis. In April 2005, we transferred ownership of Maserati from Ferrari to Fiat Partecipazioni S.p.A. (a wholly owned member of the Group) and established a new sector comprising the companies dedicated to the production and sale of Maserati cars. To facilitate a comparison, data for 2005 has been reclassified to conform to the current structure, with Maserati and Ferrari as separate sectors.
     We posted a trading profit of €323 million in the first quarter of 2006, or almost seven times the €47 million trading profit posted in the first three months of 2005. The most significant improvement was recorded in the Automobiles business area, and more specifically at Fiat Auto, as trading profit grew to €57 million, compared to a trading loss of €129 million in the first quarter of 2005. All the principal sectors also contributed to the improvement.
     Our operating income was €323 million in the first quarter of 2006, as compared to operating income of €729 million in the previous year-period. The first quarter of 2005 included “other unusual income,” amounting to €715 million, which reflected the gain (net of related costs) arising from the €1 billion payment received by GM in February 2005, as well as restructuring costs and other minor unusual expenses amounting to €33 million. If these items are excluded, the increase from the first quarter of 2005 was due to the improved trading profit.
     We recorded group interest in net income of €138 million in the first quarter of 2006, compared to €295 million in the first quarter of 2005.
     Among the most significant trends in our revenues and trading profit3 during the first quarter of 2006 were:
    The Automobiles business area recorded aggregate revenues of €6,139 million and trading profit of €49 million in the first quarter of 2006, compared to aggregate revenues of €4,981 million and trading losses of €166 million in the first quarter of 2005. In particular:
    In the first quarter of 2006, Fiat Auto recorded revenues of €5,718 million, an increase of 23.7% over the €4,623 million posted in the first three months of 2005.
 
      The quarter was characterized by the success of the new models that took concrete shape in a significant increase in volumes. Revenues also benefited from the positive impact of exchange rates.
 
      Also, in the first quarter of 2006 the Western European market for automobiles posted an increase of 3.3% with respect to the first quarter of 2005. Among leading European countries, increases were recorded in Italy (approximately +9%), Germany
 
3   References to revenues and trading profit for the individual business areas and operating sectors in this section are based on such measures prior to intersegment eliminations.

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      (approximately +6%) and Spain (approximately +3%); sales were stable in France, but decreased in Great Britain (-4.6%).
 
      Outside Western Europe, the Polish market for automobiles continued to perform poorly, declining by 14.7%, while the strong economic expansion of the Brazilian market drove an increase in sales, which rose by 14.0%.
 
      The Western European market for light commercial vehicles increased by 7.4% with respect to the first three months of 2005, with growth being recorded in all principal countries.
 
      In the first quarter of 2006, Fiat Auto delivered a total of approximately 485,000 units, an increase of 15.8% over the first quarter of 2005. A total of 333,000 units were delivered in Western Europe, 16.8% more than in the corresponding period of 2005. The strong performance of new models enabled the sector to outperform the favorable trend of the European market, posting notable results in almost all the principal European markets. Deliveries increased by 20.7% in Italy, 26.9% in Germany, 8.1% in France and 7.8% in Great Britain; the 5.2% decline recorded in Spain represented the only exception. Fiat Auto’s share of the automobile market in Italy grew to 30.7%, an increase of 2.4 percentage points over the corresponding quarter of 2005. A positive trend was recorded in Western Europe as a whole, where the sector’s market share increased by 1 percentage point to 8.0%. In Brazil, market expansion (+14%) positively influenced shipments which posted an overall increase of 12.5%; the sector’s share of the automobile market increased by 0.3 percentage points to 23.8%. In Poland, Fiat Auto’s market share held steady at approximately 11%.
 
      With regard to light commercial vehicles alone, a total of approximately 73,000 units were delivered, an increase of 6.6% over the corresponding period of 2005. In Western Europe, shipments were up 6.9% to approximately 49,000 units. The sector’s share of the market for light commercial vehicles increased by 2.7 percentage points to 44.0%, while in Western Europe it held steady at 10.0%.
 
      Fiat Auto had a trading profit of €57 million in the first quarter of 2006, reflecting a major improvement from the trading loss of €129 million reported in the first quarter of 2005. The change was mainly attributable to higher sales volume, improved product mix thanks to the new models, improved absorption of fixed production costs, and containment of governance costs (partially offset by higher advertising costs related to new model launches).
 
    Maserati had revenues of €121 million in the first quarter of 2006, for a decline of 6.2% over the €129 million posted in the corresponding period of 2005, which had benefited from the sales of the special MC 12 series, which is no longer being sold in 2006. The strong performance of the Quattroporte was not sufficient to offset the impact of this change and lower sales of the Coupé and Spyder, which are awaiting the introduction of new models in 2007.
 
      In the first quarter of 2006, Maserati delivered 1,332 cars to the network, a decrease of 4.3% compared with the 1,392 cars delivered in 2005.
 
      Also, in the first quarter of 2006, Maserati had a trading loss of €19 million. The

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      improvement with respect to the trading loss of €29 million of the first quarter of 2005 was mainly due to cost efficiency gains that offset the contraction in volume.
 
    Ferrari recorded revenues of €317 million in the first quarter of 2006, or 27.3% more than the €249 million posted in the corresponding period of 2005, mainly due to sales of the coupe, spider and challenge versions of the F430.
 
      A total of 1,365 units were delivered to end customers, a gain of 15.0% over the first quarter of 2005. This increase confirms the public’s appreciation of the current product line.
 
      Shipments to the sales network reached 1,266 units, 19.7% more than in the first quarter of 2005.
 
      Ferrari closed the first quarter of 2006 with a trading profit of €11 million, an improvement with respect to the trading loss of €8 million recorded in the corresponding period of 2005. This positive performance was mainly attributable to an increase in volume and efficiency gains, which amply offset higher research and development costs.
    CNH revenues in the first quarter of 2006 amounted to €2,652 million, an increase of 13.7% over the €2,333 million posted in the first quarter of 2005, in part connected to the positive translation impact of the dollar/euro exchange rate. On a constant exchange rate basis the increase would have been approximately 6%. This increase reflected the combined effect of significantly higher sales of construction equipment across all regions and higher prices in both the agricultural and construction equipment segments.
 
      In the first quarter of 2006, CNH’s sales of agricultural equipment to its dealer network declined slightly with respect to the first three months of 2005. Tractor sales decreased slightly (-1%), as the declines reported in Western Europe, Latin America and North America, combined with de-stocking efforts, were partly offset by the positive performances of rest of the world countries. Sales of combine harvesters to the network (-12%) were negatively impacted by the sharp declines reported in Latin America and in Western Europe, which were only partially offset by gains in North America and rest of the world countries.
 
      Also, in the first quarter of 2006, CNH’s sales volume of construction equipment to the network increased by 9% over the first quarter of 2005. Sales of light equipment to the network increased in Latin America and rest of the world countries. Sales of heavy equipment increased across all regions.
 
      CNH closed the first quarter of 2006 with a trading profit of €137 million, up 10.5% from €124 million in the first quarter of 2005, which included a one-time reduction in health care costs of €24 million. The increase in volumes and improved mix in the construction equipment segment, better prices, and production cost efficiency gains amply compensated for higher costs connected with product quality improvements and brand enhancement measures.
 
    Iveco closed the first quarter of 2006 with revenues of €2,071 million, posting a gain of 5.0% with respect to the €1,972 million in the corresponding period of 2005 that was made possible by higher sales volumes (+1.6%), the favorable effect of market/product mix and

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      better pricing.
 
      In the first quarter of 2006, Iveco had a trading profit of €70 million, a gain of €22 million or 45.8% over the first quarter of 2005. This positive performance was mainly attributable to an increase in volumes, the favorable market/product mix, and improved prices and efficiencies realized on materials and production costs. As previously mentioned, the Iveco sector figures for both periods are reported excluding the powertrain activities, which were included in the FPT sector effective January 1, 2006.
 
    In the first quarter of 2006, the Components and Production Systems business area, which includes, as previously mentioned, the FPT activities, had €3,204 million in revenues and €82 million in trading profit. In the same period of 2005 it had €2,132 million in revenues and €46 million in trading profit. The significant changes were primarily attributable to the inclusion of FPT.
    FPT’s revenues in first quarter of 2006 were €1.6 billion, thanks to the contribution of revenues from the former Iveco Industrial and Marine Business Unit, (€693 million in first quarter of 2006, compared with €653 million in the same period of 2005) and the Passenger and Commercial Vehicles Business Unit (€885 million in first quarter of 2006), which was still part of the Fiat-GM Powertrain joint venture in first quarter of 2005 and therefore was not included in the scope of consolidation.
 
      FPT’s trading profit for the first quarter of 2006 was €34 million, compared with €17 million recorded by the industrial and marine activities in the first quarter of 2005. The change reflects not only the consolidation of the passenger and commercial vehicles activities, which reported a trading profit of €9 million, but also the improved result of the industrial and marine activities compared with the first quarter of 2005. The 2006 trading profit also benefited from the positive volume effect and significant efficiencies in purchasing and manufacturing.
 
    With revenues of €1,196 million in the first quarter of 2006, Magneti Marelli posted an increase of 23.8% over the first quarter of 2005, when revenues totaled €966 million. The increase was due in part to the good sales performance of Fiat models, with gains excluding exchange rate effects being recorded across all the business units, and was amplified by exchange rates effects.
 
      Magneti Marelli had a trading profit of €42 million in the first quarter of 2006, an increase of 27.3% compared to €33 million in the same period of 2005. The €9 million increase was mainly attributable to the positive impact of increased sales volumes and the streamlining of the cost structure, which offset competitive price pressures.
 
    Teksid recorded revenues of €260 million in the first quarter of 2006, an increase of 9.7% over the first three months of last year. The transfer of approximately 60% of SBFM, which was part of the cast iron business unit, was completed in May 2006. Thus, the subsidiary’s assets and liabilities were reclassified as assets and liabilities held for sale. Excluding the impact of this reclassification, the increase in revenues for the period was approximately 22%, mainly due to higher volumes at the Cast Iron Business Unit and the positive impact of exchange rates effects.
 
      In the first quarter of 2006, Teksid posted a trading profit of €12 million, against a trading profit of €5 million in the first three months of 2005.

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    In the first quarter of 2006, Comau recorded revenues of €306 million, down 3.2% over the corresponding period of 2005 when revenues were €316 million. Excluding the sale of a minor activity (painting systems) in 2005 and the positive impact of foreign currency translation differences, revenues would have been substantially in line with those of the first quarter of 2005.
 
      During the first quarter of 2006, a period usually impacted by an unfavorable seasonality, Comau reported a trading loss of €6 million, somewhat less than the €9 million trading loss reported in the same period of 2005. The change stemmed from improvements both in contract work and service operations.
    Our other businesses reported aggregate revenues of €372 million in the first quarter of 2006, down 3.6% from €386 million in the prior-year period, reflecting lower revenues at Business Solutions that were only partially offset by an increase in “Holdings and other companies.” Our other businesses reported a trading loss of €15 million in the first quarter of 2006, compared to a trading loss of €5 million in the first quarter of 2005.
Outlook
     The Western European automobile market is expected to remain stable in 2006, while demand in Brazil should show moderate growth. In this context, the Group’s automobile sector plans to take advantage of the full-year contribution of its new models to boost volume and improve its mix in European markets. Meanwhile, the profit contribution from Brazil is expected to remain roughly unchanged from the 2005 level.
     Aggressive cost cutting will continue in all non-essential areas of the company. Efforts will also be made to ensure that purchasing efficiencies offset the impact of expected price hikes in raw materials.
     At CNH, the demand for construction equipment should remain strong, while agricultural equipment volumes in 2006 are expected to remain stable. The North American market is expected to outperform Europe, with soft demand forecast in Latin America. CNH should benefit from its recent brand reorganization, while relying on pricing to offset rising raw material costs. CNH will also remain focused on achieving greater purchasing and manufacturing efficiencies.
     Iveco expects a slight increase in market shares in the framework of a stable Western European market, especially for its heavy-range vehicles and buses. Growth is also expected in the rest of the world, particularly for buses. Additionally, Iveco will focus on manufacturing efficiencies to offset higher labor and utilities costs. Iveco is improving its product range, including restyling of the Daily, early introduction of Euro 4- and Euro 5-compliant engines, and the launch of new special-purpose vehicles.
     Overall, the Group expects that all its businesses will achieve sales volumes in line with the forecast of essentially flat market demand. Cost-reduction measures are on track. As a result, the Group has confirmed its principle targets for 2006: positive operating cash flow, trading profit between €1.6 and €1.8 billion and net income of approximately €700 million.
     Broken down by sector or business area, our full-year 2006 trading profit targets (trading profit or trading profit as a percentage of revenues) are as follows:
    Fiat Auto trading profit of approximately €200 million;

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    CNH, 7.0% to 7.5% of revenues;
 
    Iveco (without the powertrain activities transferred to FPT), 5.5% to 6.0% of revenues;
 
    FPT, 3.0% to 3.5% of revenues; and
 
    Components and Production Systems (Marelli, Teksid and Comau), 3.5% to 4.0% of revenues.
     The Fiat Group will continue to implement its strategy of targeted alliances, in order to reduce capital commitments, share investments and risks. Efforts will be made to complement Fiat’s advanced technological resources with better quality, commercial distribution and customer service capabilities.

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Historical Overview
     We were founded in Turin in 1899 and incorporated in 1906 as a manufacturer of automobiles, but quickly expanded into the production of buses and motor coaches, commercial vehicles and aviation and marine engines. By 1920, our product lines included metallurgical products, railway cars, automotive and industrial components and tractors. We expanded into civil engineering in 1929. In the 1950s, we began to manufacture construction equipment, developed the first Italian jet-powered aviation engine and introduced the first mass-produced Italian automobile. In the 1960s, we acquired several other major automobile manufacturers in Italy. The early 1970s witnessed the expansion of our commercial vehicles, construction equipment and production systems operations. Throughout this period, our operations developed an increasingly international character, as we marketed our products outside Italy and formed manufacturing subsidiaries, participated in joint ventures and engaged in other forms of industrial cooperation in several countries.
     In the late 1970s, we began reorganization with a specific focus on our operations in Italy, selected countries in Europe and Brazil. The 1980s and the beginning of the 1990s were characterized by expansion through acquisitions, joint ventures and marketing agreements. Beginning in 1990, the economies of the industrialized world were faced with a serious economic downturn, leading to a sharp drop in demand in key markets and heightened competitive pressures. We responded to the crisis by initiating a program to renew and modernize our facilities and products with the objective of increasing our competitiveness and further lowering our break-even point. These efforts, along with a significant improvement in economic conditions in many of our principal markets, resulted in our recording net profits in each of the years from 1994 through 2000, following the historic losses we recorded in 1993. However, in the early years of the new millennium, increased competition and the deterioration of the economic environment in many of our markets were reflected in our disappointing financial results. In 2004, we recorded a net loss for the fourth year in a row, although our losses were narrowed as we continued to work to improve the efficiency and competitiveness of our operations. The year 2005 represented a significant turning point for the Fiat Group, as we reported trading profit of €1.0 billion and net income of €1.4 billion, as described in detail in Item 5. “Operating and Financial Review and Prospects — Results of Operations — 2005 Compared with 2004.” In the fourth quarter of 2005, Fiat Auto posted a positive trading profit, after 17 consecutive quarters of losses; a trend that was confirmed in the first quarter of 2006 for both Fiat Auto and the Group as a whole.
     At December 31, 2005, we operated in 57 countries through 650 subsidiaries and affiliates; 155 of these subsidiaries and affiliates were located in Italy. As of such date, we had a total of 173,695 employees, including approximately 77,100 in Italy. The tables which follow set forth for the years indicated: (i) net revenues presented by the geographic market in which the sales were made and (ii) revenues, trading profit (loss) and the number of employees for each of our sectors and our other companies. The Consolidated Financial Statements included in Item 18 for the years ended December 31, 2005 and 2004 (from which the financial data in this table have been extracted) have been prepared in accordance with the requirements of IFRS and also reflect the changes in the scope of consolidation discussed above in Item 3. “Key Information—Selected Financial Data.”

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Net Revenues By Destination
                 
            Percentage
    Net revenues   of net revenues
    (in millions of euro)        
2005
               
Italy
    13,078       28.1 %
Europe (excluding Italy)
    18,518       39.8  
 
               
Total Europe
    31,596       67.9  
North America
    6,048       13.0  
Mercosur Region (1)
    4,364       9.4  
Rest of the World
    4,536       9.7  
 
               
Total
    46,544       100.0  
 
               
 
               
2004
               
Italy
    14,903       32.6 %
Europe (excluding Italy)
    17,646       38.7  
 
               
Total Europe
    32,549       71.3  
North America
    6,020       13.2  
Mercosur Region (1)
    3,195       7.0  
Rest of the World
    3,873       8.5  
 
               
Total
    45,637       100.0  
 
               
 
(1)   Comprising Argentina, Brazil, Paraguay and Uruguay.

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Revenues, Trading Profit and Number of employees by Sector
                                 
                            Number of
            Percentage of   Trading profit   employees at
    Revenues   revenues(1)   (loss) (2)   year end
    (in millions           (in millions        
    of euro)           of euro)        
2005:
                               
Fiat Auto
    19,533       38.0 %     (281 )     46,099  
Maserati
    533       1.0       (85 )     606  
Ferrari
    1,289       2.5       157       2,809  
Fiat Powertrain Technologies (3)
    1,966       3.8       26       10,111  
Agricultural & Construction Equipment (CNH)(4)
    10,212       19.9       698       25,420  
Trucks and commercial vehicles (Iveco)
    9,489       18.5       415       32,373  
Components (Magneti Marelli)
    4,033       7.9       162       24,213  
Metallurgical Products (Teskid)
    1,036       2.0       45       8,952  
Production Systems (Comau)
    1,573       3.1       42       12,725  
Services (Business Solutions)
    752       1.5       35       5,436  
Publishing and Communications (Itedi)
    397       0.8       16       846  
Other Companies (5)
    469       1.0       (173 )     4,105  
 
                               
Total before Eliminations and Consolidating Adjustments
    51,282       100.0       1,057          
 
                               
Eliminations and Consolidating Adjustments
    (4,738 )             (57 )        
Total
    46,544               1,000       173,695  
 
                               
2004:
                               
Fiat Auto
  19,695       40.4 %     (822 )     45,122  
Maserati
    409       0.8       (168 )     652  
Ferrari
    1,175       2.4       138       2,670  
Fiat Powertrain Technologies
                       
Agricultural & Construction Equipment (CNH)(4)
    9,983       20.5       467       25,746  
Trucks and commercial vehicles (Iveco)
    9,047       18.6       371       31,037  
Components (Magneti Marelli)
    3,795       7.8       165       21,868  
Metallurgical Products (Teskid)
    910       1.9       (39 )     8,571  
Production Systems (Comau)
    1,711       3.5       40       13,328  
Services (Business Solutions)
    976       2.0       41       6,519  
Publishing and Communications (Itedi)
    407       0.8       11       849  
Other Companies (5)
    620       1.3       (58 )     4,704  
 
                               
Total before Eliminations and Consolidating Adjustments
    48,728       100.0       146          
 
                               
Eliminations and Consolidating Adjustments
    (3,091 )             (96 )        
Total
    45,637               50       161,066  
 
                               
 
Note:   Note 33 to the Consolidated Financial Statements included in Item 18 sets forth the amounts of revenues attributable to intersegment transactions for each of our sectors, but not for our “Other Companies.” The aggregate of these amounts for all sectors is shown under “Eliminations and Consolidating Adjustments” in the above table.
 
(1)   Represents the revenues of each sector, prior to eliminations and consolidating adjustments, as a percentage of total consolidated net revenues prior to eliminations and consolidating adjustments.
 
(2)   Trading profit (loss) reflected in eliminations and consolidating adjustments arises from the consolidation process.
 
(3)   Began as of May 1, 2005, therefore 2005 data is based on eight months of 2005.
 
(4)   The revenues of CNH (as reported by us under IFRS) in dollars, CNH’s reporting currency, were $12,706 million in 2005 and $12,419 million in 2004. Similarly, trading profit at CNH (as reported by us under IFRS) in dollars totaled $869 million in 2005 and $581 million in 2004.
 
(5)   “Other Companies” include holding and miscellaneous companies (i.e. Banca Unione di Credito – BUC). See “–– Recent Developments – Disposal of subsidiaries” above.

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Sectors
     Our companies in 2005 were organized into 11 operating sectors, two more than the previous year, following the transfer of the ownership of Maserati from Ferrari to Fiat Partecipazioni S.p.A. (as a consequence, Maserati’s results which had previously been included in the Ferrari-Maserati sector, are now presented as separate sectors) and the creation of the new sector FPT. Each of the Group’s sectors functions with a high degree of operating autonomy, although key decisions in areas such as senior management appointments, human resources and capital allocation matters and other strategic development issues are closely coordinated with Group management.
Fiat Auto
     Our automobile operations are conducted primarily through Fiat Auto and its subsidiaries. The Fiat Auto sector operates internationally with three major brands – Fiat, Lancia and Alfa Romeo – and manufactures and markets automobiles, light commercial vehicles and related products primarily in Italy and in the rest of Europe, and in South America and Turkey.
     In 2005, Fiat Auto continued to pursue a strategy focused on upgrading, improving and completing its model line-up. Demand for automobiles in Western Europe as a whole decreased by 0.2% in 2005 as compared with 2004, and the pressure on prices has continued. This market environment, together with the relative strength of the euro, which favors the competitiveness of non-European original equipment manufacturers (“OEMs”), has created a situation in which European OEMs are unable to pass higher input costs on to consumers. Furthermore, in recent years, the auto industry has experienced a general reduction in sales prices. Together, all of these factors have had a generally negative effect on the profitability of the European auto industry.
     Despite this challenging environment, Fiat Auto was able to sharply reduce its trading loss in 2005, from €822 million in 2004 to €281 million in 2005. The improved result was mainly attributable to a better product mix due to the introduction of new models, a reduction in product costs reflecting the realization of purchasing efficiencies, a strong focus on more profitable sales channels and a sharp reduction in business governance costs.
     The 2005 results reflected Fiat Auto’s ongoing implementation of its reorganization, which is focused on reinforcing the sector’s value added activities for customers and businesses and simplifying its internal processes so as to speed up its responsiveness to changes in the market, while at the same time continuing to realize greater efficiencies. This reengineering process is primarily based on a cultural change focused on enhancing the entrepreneurship and involvement of Fiat Auto’s employees, which is supported by an important Leadership Development Program.
     At December 31, 2005, the sector had 46,099 employees, including 29,136 in Italy. The aggregate increase of approximately 1,000 employees over the course of the year reflected the addition of approximately 3,900 employees as a result of:
    the acquisition of purchasing activities in Italy and Latin America, after the termination of the GM/Fiat Worldwide Purchasing joint venture, and of ICT development activities, due to the termination of the Global Value joint venture between Fiat and IBM;
 
    the insourcing of stamping activities in Italy and the acquisition of full control of Leasys in Italy and directly owned dealerships in Europe; and

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    an increase in the number of blue collar workers at the Melfi Plant in Italy, in relation to the startup of Grande Punto production, and at Fiat Automoveis South America (Fiasa), in line with growing manufacturing volumes at that location.
The impact of these increases was partially offset by the departure of approximately 2,900 employees, largely as a result of the sector’s restructuring initiatives. At the end of 2005, about 900 of the sector’s employees in Italy were receiving “Cassa Integrazione” benefits. See Item 6. “Directors, Senior Management and Employees — Employees and Labor Relations”– for more details.
     Product Development
     In 2005, Fiat Auto continued to pursue a strategy focused on upgrading, improving and completing its model line. As part of its effort to round out its model line, Fiat launched the Croma, a new entry in the intermediate segment. This car, which is notable for its high levels of performance and comfort, was introduced to the market in May 2005, and generated over 27,000 orders from the dealer network by the end of the year. The Grande Punto subcompact was launched in September and generated an excellent response among customers at dealer showrooms during the “Open Doors” promotion; the model was gradually rolled-out to the rest of Western Europe, and the sector recorded more than 35,000 registrations and orders for 88,000 cars by the end of the year, with customers outside Italy accounting for approximately 45% of the total.
     The launch of the Fiat Panda Cross and Fiat Sedici during the second half of the 2005 helped the Fiat brand in gaining a strong position in the four-wheel drive segment of the market, where it had already established a presence with the Panda 4x4. Both the Panda Cross and the Fiat Sedici were unveiled in November. The Panda Cross is a new version of the four-wheel-drive Panda. The Fiat Sedici, which is being built in partnership with Suzuki, at a plant owned by Suzuki in Hungary, is Fiat’s first ever entry into the four-wheel drive segment of the market, and is expected to benefit from having been chosen as the official car of the 2006 Turin Winter Olympic Games. During the Bologna Motor Show at the beginning of December, Fiat presented the Panda Monster, a new version of the Panda four-wheel drive vehicle, co-branded with the Ducati motorcycle company, and the Fiat Oltre, a show car based on a powerful Iveco multi-use vehicle.
     Alfa Romeo also continued to renovate its product line. The Alfa 159, introduced to the market in October 2005, belongs to the great Alfa Romeo tradition of automobiles with distinctive styling. By the end of December, the model had generated more than 14,000 orders from dealers. In October, Alfa Romeo unveiled the Brera coupé, an upscale sport car whose styling elicited accolades from both the industry press and the public in general.
     In anticipation of the celebration of its 100th birthday in November 2006, Lancia presented important upgrades of some of its most successful models, including new versions of the Ypsilon (in particular one created in connection with Momo Design of Italy), Musa (Platino+) and Phedra (Unique Edition).
     The launch of numerous new models has allowed the sector to significantly rejuvenate its fleet. At the end of 2005, the Fiat and Alfa Romeo line-ups were comprised of models that were less than two years old on average, and thus highly competitive. The competitiveness of the product line is bolstered by the significant success achieved in terms of safety and customer satisfaction. Three of the major new models introduced in 2005 — the Fiat Croma, Alfa 159 and Grande Punto — were each awarded five stars, placing them at the top of the Euro NCAP safety ranking. The Grande Punto was also honored with several prizes in Europe, including the Golden Steering Wheel in Germany and the Auto Europa prize awarded by the Italian Association of Automotive Journalists (UIGA).

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     The Fiat Light Commercial Vehicles brand also had a very positive year with the launch, in October, of the new Doblò, which was awarded the 2006 Van of the Year prize by an international jury of automotive industry journalists from 19 European countries, and was able to maintain its leading market share in Italy.
     The sector’s research and development activities focused on completing the ongoing development of the Grande Punto, Croma, Alfa 159 and Doblò, continuing the development of the Nuovo Ducato, Nuovo Scudo and a new car in the subcompact segment for South America and other international markets and starting the development of the nuova Bravo, which will replace the Stilo, and Fiat 500. Another area of activity involved basic research in engines and components for future applications.
     In February 2006, Alfa Romeo launched the Alfa 159 Sportwagon, a successor to the 156 Sportwagon. In mid-May 2006, Fiat Light Commercial Vehicles presented the Nuovo Ducato, a new medium commercial vehicle replacing the previous Ducato. In mid June 2006, Alfa Romeo launched the Alfa Spider, the model that, following its world preview at the Geneva Motor Show, was named “Cabrio of the Year 2006” by the “Cabriolet Committee,” a jury of 23 specialist journalists from 12 countries.
     In 2005, Fiat Auto intensified its activity in those markets outside the EU where it already had an established presence, such as Brazil, Argentina and Turkey, while at the same time launching programs to expand in emerging markets through alliances with strong local partners.
     In Brazil, Fiat Auto benefited from healthy demand in the local market, increasing sales by 12.9% with respect to 2004, and regaining leadership of the market. The success of the flex (bi-fuel alcohol and gasoline) versions of the Palio and Mille models, which were introduced during the first half of the year, was largely responsible for this increase.
     In Argentina, where consumer demand continued to improve after the deep crisis of 2002, the automobile market expanded at a rate of 35.6%, as compared with 2004; Fiat Auto also increased its market share to 12.4%, an increase of 0.6 percentage points as compared with 2004. Due to the positive impact of new products and the contribution of a revamped sales network, deliveries of automobiles and light commercial vehicles to the dealer network increased by 43.1%, to 44,100 units.
     In Turkey, demand for automobiles and light commercial vehicles increased to about 720,000 units, up +2.9% as compared with 2004; this increase mainly reflected the positive performance of the Turkish economy. In such environment, Tofas, the local joint venture in which Fiat Auto has a 37.9% interest, achieved a market share of 11.2% compared to its market share of 11.1% in 2004, and it also increased deliveries by 8.1% as compared to 2004. Tofas’s improved performance over 2005, both in the domestic and export markets, was largely made possible by the production of the new Doblò, and the launch of the new Palio and Albea.
     Fiat Auto also has a joint venture in China with the Yuejin Motor Company, established in 2002, which sold approximately 33,000 vehicles in 2005. In India, Fiat Auto continued to rationalize its existing operations as part of its cost reduction efforts, while at the same time exploring new opportunities for strategic growth, including the industrial alliance with the Tata Group described below.
     Industrial alliances
     After termination of the Master Agreement with General Motors, Fiat Auto regained its strategic independence and was thus able to execute targeted industrial agreements with major carmakers outside of Italy. These agreements will increase the competitiveness of Fiat Auto’s products and expand its presence in emerging markets.

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     In November 2005, Fiat Auto and Ford announced a definitive agreement to cooperate on the joint development and production of a future “A segment,” or city subcompact, car. The strategic collaboration aims to bring to market in the 2007-2008 period, a separate new vehicle for each Fiat and Ford featuring highly differentiated designs: for Fiat, a new “500,” and for Ford, a replacement for its current Ka. The parties expect the collaboration, with projected annual volume of approximately 120,000 units of each vehicle, to result in reduced development and material costs for each company (as compared to the cost of individually developing a vehicle).
     In 2005, Fiat Auto also entered into cooperation agreements with the PSA Group and Tofas to design and produce a new light commercial vehicle in Turkey, with Zastava to assemble the Fiat Punto under license at a Zastava plant in Serbia, and with Suzuki. With reference to the latter, in March 2006, Fiat Auto and Suzuki Motor Corporation signed a license agreement for the production by Suzuki of the Fiat 2 liter JTD Multijet diesel engines, which are to be compliant with Euro 5 emission requirements.
     Since 1978, Fiat Auto has also had alliances with PSA Group for the production of light commercial vehicles, carried out through Sevel S.p.A., and for the production of multi purpose vehicles and utility vans, carried out through Sevel Nord S.A. The above mentioned Nuovo Ducato is manufactured at the Sevel plant in Atessa (Italy).
     In January 2006, Fiat Auto and Severstal Auto signed an industrial agreement for the assembly in Russia of Fiat Palio and Fiat Albea models based on CKD kits manufactured in Turkey by Tofas, our joint venture with the Koç Group. Assembly of these models at Severstal Auto’s Naberejniye Chelni plant near Kazan in the Volga region is scheduled to start in 2007. In February, Fiat Auto and Severstal Auto extended the agreement to cover Fiat Doblò models (the kits for which are also produced in Turkey). The two companies previously entered into a supply agreement providing for the importation and distribution in Russia of the full range of Fiat branded cars and light commercial vehicles by Severstal.
     Also in January 2006, the Fiat Group and Tata Motors Ltd. (“Tata Motors”) announced the signing of an agreement for the sale of Fiat branded cars in the Tata Motors network throughout India. As a result of this agreement, in March 2006, Tata Motors began selling a targeted selection of Fiat cars as well as the complete Tata product range (together with spare parts and sales and service assistance for both brands). The dealerships involved in this program now display the new Fiat logo alongside the Tata logo. We expect to enter into additional agreements as further analysis of the feasibility and nature of our cooperation with Tata Motors continues.
     Markets and Competition
     In 2005, the Western European automobile market (measured in terms of new registrations) remained essentially steady at 14.4 million units (0.2% less units than in 2004), with some clear differences depending on markets. In Italy, new registrations totaled 2,234,200, 1.3% less than in 2004. The United Kingdom experienced an even greater decline (5.0% less than 2004) with demand at 2,443.500 units, while France and Germany registered an increasing demand (+2.6% and +1.6% respectively) to reach 2,058,100 and 3,250,100 units respectively. Spain remained pretty stable with a 0.9% increase to 1,527,300.
     Elsewhere in Europe, registrations in the Polish market decreased by 26.5% to 234,200 vehicles, reflecting the continuing negative impact on new car sales of imports by individuals of second-hand cars as a result of the abolition, following Poland’s entry into the EU, of a tax on imported used cars that was held to be contrary to EU law. In Turkey, new registrations decreased by 2.8% to 438,500 units, reversing the positive trend recorded in the previous year.

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     In the Mercosur countries, new registrations in Brazil increased by 9.1% in 2005 to 1,414,800 units, while in the Argentine market, new registrations increased by 35.6% to 290,700 units.
     In Asia, the car market in China continued to expand, recording an increase in new registrations of 27.5% from 2004, to almost 3.2 million vehicles, while in India the market increased by 6.4%, to 1,036,800 units. In China, Fiat Auto sold approximately 33,000 vehicles in 2005 through our joint venture with the Yeujin Group. In India, Fiat Auto sold 1,700 vehicles, a 0.2% decrease as compared to 2004.
     Overall, demand for light commercial vehicles increased in Western Europe, totaling 1,925,200 units, or 2.8% more than in 2004. New registrations in Italy decreased by 1.8% to 206,300 units, reversing the positive trend recorded in 2004. The market showed healthy increases in Spain (+13.4%), and moderate increases in France (+3.4%) and Germany (+3.1%). In Poland, demand decreased to 34,300 units, or 4.5% fewer than 2004.
     Fiat Auto delivered a total of 1,697,300 vehicles to its dealer network, importers and other large direct customers in 2005 (1,804,600 units if sales by unconsolidated affiliates are added), as compared with 1,766,000 vehicles in 2004 (1,856,700 including unconsolidated affiliates). The decrease of 3.9%, or 68,700 vehicles, in the sector’s global unit sales (excluding unconsolidated affiliates) reflected the relatively small impact on the 2005 results of the new models that were launched in the last part of the year, the phase-out of the old models they replaced, and decreased unit sales in Italy and several of the sector’s major markets, particularly Germany, the United Kingdom and rest of Europe, reflecting both aggressive competition and the sector’s policy aimed at reducing sales through less profitable distribution channels and concentrating on the quality of margins, rather than the quantity of vehicles sold.
     In Western Europe as a whole, the sector’s share of the automobile market declined to 6.5%, falling by 0.7 percentage points as compared with 2004. Fiat Auto’s unit sales in Western Europe (excluding Italy) totaled 412,000 units, a decline of 15.7%, as its share of the automobile market decreased from 3.4% in 2004 to 2.6% in 2005. The sector’s unit sales in Italy decreased by 2.4% to 688,000, while its market share in Italy remained stable at 28.0%.
     In 2005, sales of light commercial vehicles followed a positive trend, with total shipments rising to 285,200 units, or 5.1% more than in 2004. In Western Europe, the sector’s share of the light commercial vehicle market declined by 0.2 percentage points to 10.4%, and sales decreased to 181,800 units, or 0.7% less than in 2004. With the exception of Italy and Germany, where shipments were down 2.7% and 0.4%, respectively, sales improved throughout Western Europe, as Fiat Auto recorded increases of 11.6% in Spain, 3.9% in France, and 1.4% in the United Kingdom.
     The following table sets forth for the years indicated: unit sales of the sector’s automobiles and light commercial vehicles in its principal markets, the percentage of the sector’s unit sales represented by each market and the sector’s automobile market shares (excluding light commercial vehicles).

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    2005     2004  
                    Auto                     Auto  
            Percentage     market             Percentage     market  
    All units     of units     share     All units     of units     share  
    sold     sold     (%)     sold     sold     (%)  
                    (Units in thousands)                  
Italy
    688       40.5       28.0       704       39.9       28.0  
 
                                               
Western Europe (excluding Italy)
    412       24.3       2.6       489       27.7       3.4  
 
                                   
Total W. Europe
    1,100       64.8       6.5       1,193       67.6       7.2  
Brazil
    404       23.8       24.4       358       20.2       23.5  
Poland
    34       2.0       10.7       61       3.5       17.1  
Rest of the World
    159       9.4               154       8.7          
TOTAL
    1,697       100.0               1,766       100.0          
     In Western Europe, Fiat Auto delivered a total of approximately 1,100,000 vehicles in 2005, a 7.8% decrease from 2004. The overall decrease in sales reflected a reduction in unit sales across Western Europe as unit sales declined by 2.4% in Italy, by 38.5% to 53,300 vehicles in the United Kingdom, by 15.8% to 90,800 units in Germany, by 3.0% to 70,300 units in Spain and by 20.3%, to 118,500 units in the rest of Europe. Only in France Fiat Auto posted an 8.3% increase.
     The sector had mixed results in Poland and Brazil, its two most important markets outside Western Europe. In Poland, Fiat Auto delivered a total of 33,800 vehicles in 2005, a decrease of 44.3% as compared with 2004, reflecting the overall decline in new registrations in the Polish market of 26.5%, amid the significant inflow of used cars during the year. The sector’s automobile market share in Poland declined by 6.4 percentage points to 10.7%. In Brazil, where new registrations increased by 9.1% in 2005, the sector delivered a total of 404,300 vehicles, a 12.9% increase from the 358,100 units sold during 2004, primarily as a result of a recovery of demand in the local market and the introduction of new models in the country. Fiat Auto’s share of the Brazilian automobile market rose by 0.9 percentage points in 2005, to 24.4%. In Argentina, Fiat Auto increased its automobile market share to 12.4% in 2005, up 0.6 percentage points from 2004, with the sector selling a total of approximately 44,100 vehicles, 43.1% more than the approximately 30,800 sold in 2004.
     The Western European market for automobiles, in which approximately 65% of the sector’s unit sales were made during 2005, is generally divided into a number of different major model segments or classes. The sector is generally represented in each of these segments, with individual models from each of its three major automobile brands designed to meet a broad range of consumer tastes.
    The Fiat brand includes models ranging from city subcompacts such as the new Panda with its 4x4 versions, to the subcompact Punto and Grande Punto, the intermediate/compact Stilo (including its station wagon version), the new comfort wagon Croma in the intermediate segment, and the Doblò, Ulysse and Multipla multipurpose vehicles. The sector also produces the subcompact Siena and Palio in Brazil, and the subcompact Albea and Palio in Turkey. In 2005, Fiat Auto started production and sales of the Idea multipurpose vehicle in Brazil, a model that is already sold in Europe. In 2005, Fiat Auto also entered the four-wheel drive segment with a new model, the Sedici.
 
      In light commercial vehicles, which this sector defines as commercial vehicles with gross vehicle weights, or “GVW,” of 3.5 tons or less, models sold under the Fiat brand include the Ducato (of which a new generation was introduced in May 2006), the Doblò Cargo

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      (awarded Van of the Year 2006), the Scudo and the Strada pickup. Our Ducato utility vans are produced in Italy through the Sevel S.p.A. joint venture. The Ducato line is also manufactured at a facility in Sete Lagoas, Brazil, which Fiat Auto operates as a joint venture with Iveco.
 
      In addition, the Fiat brand includes bifuel (gasoline and compressed natural gas) versions of the Multipla, the Punto van, the Doblò and the Ducato.
 
      The Lancia brand, traditionally associated with elegance and comfort, includes the subcompact Ypsilon, the compact multipurpose vehicle Musa, and the Thesis and Phedra, in the full-sized and multipurpose vehicle ranges, respectively.
 
    The Alfa Romeo brand, with its strong tradition of high performance, includes the Alfa 159, Alfa 159 Sportwagon, Alfa Crosswagon and the GT sport coupé in the intermediate segment, the Alfa 147 in the intermediate/compact segment, as well as the full-size Alfa 166 and the Alfa Brera, which was presented in the second half of 2005.
     The following table sets forth the number of vehicles Fiat Auto sold in each of the recognized segments in each of the years indicated, as well as the percentage of the sector’s overall unit sales represented by each segment:
                                 
    2005   2004
            Percentage           Percentage
    Units Sold   of Units Sold   Units Sold   of Units Sold
            (Units in thousands)        
City subcompacts
    269       15.9       291       16.5  
Subcompacts
    648       38.2       674       38.2  
Intermediate/compact
    247       14.5       288       16.3  
Intermediate
    83       4.9       80       4.5  
Full-sized
    4       0.2       9       0.5  
Sports cars
    1       0.1       3       0.2  
Multipurpose vehicles
    160       9.4       150       8.5  
Light commercial vehicles
    285       16.8       271       15.3  
TOTAL
    1,697       100.0       1,766       100.0  
     While Fiat Auto’s unit sales of city subcompact vehicles decreased overall (mainly due to the lower sales of the Fiat Seicento), sales of the new Fiat Panda remained largely stable. Sales of subcompact vehicles decreased primarily due to lower sales of older models and Lancia Ypsilon that were only partially offset by the first sales of the Grande Punto, which was introduced in the last months of 2005. The sector’s unit sales of intermediate/compact vehicles decreased, reflecting a decline in sales of the Fiat Stilo and the Alfa 147. The increase in Fiat Auto’s unit sales of intermediate vehicles was due to the launch of the new comfort wagon Fiat Croma, which more than offset lower sales of the Alfa GT and Lancia Lybra (production of which was stopped last year), as well as the Alfa 156, which was replaced at the end of the year by the new 159. The sector’s unit sales of multipurpose vehicles increased slightly, reflecting a full year of sales of the new Lancia Musa alongside the Fiat Idea, as well as an increase in sales of the Fiat Multipla, the impact of which was partially offset by decreases in sales of the Fiat Ulysse and the Lancia Phedra. The sector’s unit sales of light commercial vehicles increased due to higher sales of the Fiat Strada, Fiat Ducato, Fiat Fiorino and the new Fiat Doblò Cargo and Panda Van.
     The following table sets forth for the years indicated the market shares of the Fiat Group and its major competitors in each of the automobile markets indicated.

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                                                    UNITED   TOT. WESTERN
    ITALY   GERMANY   FRANCE   KINGDOM   EUROPE
    2005   2004   2005   2004   2005   2004   2005   2004   2005   2004
FIAT GROUP
    28.0       28.0       1.8       2.5       3.1       3.2       1.7       3.1       6.5       7.2  
VW GROUP
    11.2       10.6       30.4       30.0       11.0       10.2       13.7       12.8       18.7       17.8  
GM/OPEL
    7.7       7.6       10.8       10.5       5.3       5.6       14.1       13.4       9.6       9.6  
PSA GROUP
    10.1       11.2       5.8       5.6       30.7       30.8       9.9       10.6       13.7       14.0  
FORD
    8.9       9.6       8.8       9.1       6.0       6.1       18.9       18.9       11.0       11.3  
RENAULT
    6.4       7.0       5.1       5.0       25.6       27.1       7.1       7.4       9.8       10.2  
MB-CHRYSLER
    5.9       5.2       12.0       13.1       3.7       3.5       4.4       4.3       6.2       6.2  
BMW GROUP
    4.1       3.5       9.0       8.7       2.6       2.4       6.4       5.7       5.3       4.8  
JAPANESE
    12.0       12.0       11.9       11.8       8.8       8.3       17.8       16.8       13.7       13.3  
OTHERS
    5.7       5.3       4.4       3.7       3.2       2.8       6.0       7.0       5.5       5.6  
 
TOTAL
    100.0       100.0       100.0       100.0       100.0       100.0       100.0       100.0       100.0       100.0  
 
     Distribution
     Fiat Auto distributes automobiles in its principal markets through dealer networks in each market, which are based on the coverage of specific geographic areas. At December 31, 2005, its European network consisted of approximately 1,950 dealers, of which 425 were located in Italy. Fiat Auto also maintains significant dealer networks in Brazil and in Poland.
     Fiat Auto entered into new contracts with its dealer network in the EU on October 1, 2003, in compliance with the new European “block exemption” regulation. These contracts eliminated the exclusivity clauses that were included in the previous dealer agreements, permitting dealers to sell a variety of auto brands in the same showroom, provided they are separated into brand-specific areas. The new contracts also eliminated, as of September 2005, the so-called “location clause,” which gave Fiat Auto the right to determine where its dealers were located geographically, and now permit auto dealers instead to sell vehicles to consumers throughout the EU. The contracts also no longer oblige dealers to provide after-sales servicing in addition to their auto sales activities.
     Fiat Auto’s distribution strategy is based on enhancing its direct link with customers so as to increase customer satisfaction and brand loyalty, lowering distribution costs and adapting the European dealer network to take advantage of the increasing process of integration within the EU. In particular, Fiat Auto is focusing on improving the geographical coverage of its network in the major European markets.
     With the goal of lowering its distribution costs, Fiat Auto continues to monitor its dealer network, using a selection process aimed at identifying productive dealers that are capable of producing higher revenues from services, parts and used cars, and supporting those dealers through a variety of marketing initiatives and programs.
     Production
     Fiat Auto currently owns and operates ten plants, including six in Italy, and one in each of Poland, Brazil, Argentina and India.
     The sector’s capital expenditures in fixed assets (property, plant, equipment and leased assets) totaled €1,229 million in 2005, as compared with €1,203 million in 2004, of which approximately 55% were dedicated to completing the retooling of production lines for models already on the market, continuing the installation of new and modified manufacturing systems for the models launched in 2005, and retooling production lines for new models. In addition, approximately 24% of capital expenditures were for autos purchased for the sector’s long-term leasing programs, approximately 21% were for

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regular maintenance at its manufacturing plants and the remainder were for other expenditures, including the maintenance and repair of other property and equipment, as well as compliance with environmental regulations. Research and development outlays for the sector amounted to €665 million in 2005, down from €952 million in 2004.
     Financial Services
     In 2005, the sector companies that provide financing to the sales network handled loans totaling approximately €9,810 million, as compared to €11,090 million in 2004.
     The reduction in financing reflected the decrease in sales volumes in most European countries, as well as a change in the scope of consolidation following the sale of retail financing activities in the United Kingdom in the fourth quarter of 2004. In Brazil, lending activity mirrored the positive sales performance in the local market.
     In 2005, the total loan volume handled by the Sector’s activities that provide financing to suppliers declined to €3,670 million from €6,342 million in 2004. This decrease reflected a selective approach to the portfolio of loans held by these operations, and a decision to focus efforts on Fiat Auto’s strategic suppliers.
     Fiat Auto strengthened its position in the rental and corporate fleet business in Italy by acquiring Enel’s share of Leasys, which rents and manages corporate car fleets, at the end of 2005. Savarent continued to perform the function of a captive company that operates through the Fiat Auto dealer network, serving mainly individuals and small and medium-size businesses. Efforts to strengthen their sales and customer support networks enabled these two companies to end 2005 with a portfolio of more than 39,000 contracts, an increase of approximately 14% as compared with 2004. Their rental fleet also increased, rising to 144,500 vehicles at the end of 2005, an increase of approximately 3% with respect to the previous year.
*  *  *
     We control the luxury sports car manufacturers Ferrari and Maserati. The highly specialized nature of these companies’ products, design processes, manufacturing techniques and distribution channels necessitates management that is itself specialized and different from that of our core automotive business, which is the manufacture and sale of automobiles to mass market consumers. For these reasons, the management of Fiat S.p.A. has directly overseen our luxury sports car operations; accordingly, Ferrari and Maserati’s results have been excluded from those of the Fiat Auto sector and reported separately.
Maserati
     Until April 2005, Ferrari had primary operational responsibility for Maserati, of which Ferrari owned 100% of the shares. In April 2005, we transferred ownership of Maserati from Ferrari to Fiat Partecipazioni S.p.A. (a wholly owned member of the Group) and established a new sector comprising the companies dedicated to the production and sale of Maserati cars, with the goal of also permitting closer cooperation between Maserati and Fiat Auto’s Alfa Romeo unit. The Maserati sector contributed 1.0% of our total 2005 net revenues, prior to eliminations and consolidating adjustments.
     Maserati revenues totaled €533 million in 2005, an increase of 30.3% from €409 million recorded by the same operations in 2004 (when they were part of the Ferrari-Maserati sector), reflecting higher sales of most models, particularly the successful Quattroporte.
     The following table shows Maserati’s shipments to dealers in its principal markets for each of the years indicated:

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    2005   2004
Italy
    567       628  
Europe excl. Italy
    1,783       1,992  
 
               
Total Europe
    2,350       2,620  
United States
    2,311       1,124  
Rest of the World
    907       1,021  
 
               
 
               
Total
    5,568       4,765  
 
               
     Maserati’s shipments to its dealers increased by 16.9% in 2005, mainly reflecting the strong increase in sales of the Quattroporte (which almost doubled), as well as the contribution of GranSport in the coupè segment. The 2005 sales results also included shipments of the limited edition special series MC12, a road version of the MC12 Competizione race car that won the 2005 FIA GT championship.
     Sales to the Maserati network totaled 5,568 in 2005, as compared with 4,765 in 2004, an increase of 16.9%, primarily reflecting an increase in sales in the United States, where shipments more than doubled to 2,311 units. The success in North America reflected strong sales of the Quattroporte, which was introduced in this market in the summer of 2004.
     In 2005, Maserati accounted for 5,639 units sold to final customers, 22.8% more than the 4,590 vehicles sold in 2004.
     The market segment in which the Maserati Coupé and Spyder compete reached 70,137 units worldwide in 2005, with the main competitors being the BMW Series 6, the Jaguar XK, the Mercedes SL and CL and the Porsche 911 Carrera. In the luxury sedan segment, which reached 64,951 units worldwide, the Quattroporte’s main competitors include the Audi A8 4.2 – 6.0, the BMW 750-760, the Jaguar XJR and the Mercedes S 500.
     As of December 31, 2005, the sector employed 606 workers, including 580 in Italy.
     The sector currently operates one production facility, which is located in Italy in a building leased from Ferrari.
Ferrari
     As noted above, until April 2005, Ferrari had primary operational responsibility for Maserati, also a luxury sport car manufacturer, of which Ferrari owned 100%. In April 2005, Ferrari transferred ownership of Maserati to Fiat. The Ferrari sector contributed 2.5% of our total 2005 net revenues, prior to eliminations and consolidating adjustments.
     In 2005, Ferrari finished third in the Formula 1 Constructors’ Championship and its leading driver, Michael Schumacher, also finished third in the Drivers’ Championship. During the year, Ferrari entered into a number of agreements designed to ensure the long-term stability of its racing operations. Ferrari renewed its participation in the Concorde Agreement – the triangular agreement between the racing teams, the FIA (Federation Internationale de l’Automobile) and FOM (Formula One Management), which regulates the Formula 1 World Championship – until the end of 2012. It also renewed its sponsorship agreements with two key partners – Philip Morris and Shell – until the end of 2011 and of 2010, respectively.
     The sector’s revenues totaled €1,289 million in 2005, or 9.7 % more than the €1,175 million recorded by Ferrari in 2004. The increase reflected higher revenues from Formula 1 and sponsoring

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activities and higher sales volumes. These factors more than offset the negative effects of changes in the sale mix caused by the termination of deliveries of the limited edition Enzo model and the negative trend of the US dollar exchange rate.
     The following table shows Ferrari’s shipments to dealers in its principal markets for each of the years indicated:
                 
    2005   2004
Italy
    662       529  
Europe excl. Italy
    2,246       2,028  
 
               
Total Europe
    2,908       2,557  
United States
    1,580       1,450  
Rest of the World
    911       859  
 
               
 
               
Total
    5,399       4,866  
 
               
     The 11.0% increase in unit shipments in 2005 reflects the strong performance of the 612 Scaglietti and 575 Superamerica limited edition, which more than offset lower sales of the 575M Maranello, which reached the end of its life cycle. The 8-cylinder range saw the introduction of the Spider version of the F430 in spring and the presentation of the Challenge version, which is not authorized for road use, but will be a contender in the 2006 Ferrari Challenge Championship. Ferrari believes that its introduction of the FXX Supercar has further enhanced and “specialized” the brand by offering a special program for test drivers based on a laboratory car with unique features, which will be used to develop innovative content in the near future. Ferrari’s main markets are Western Europe, the United States and Japan, which is included in “Rest of the World” in the table above.
     Vehicle shipments for the Ferrari brand totaled 5,399 units in 2005, up 11.0% from 4,866 in 2004, reflecting an increase in all of the sector’s principal markets. Shipments to the United States, which remained the brand’s largest single market, increased by 9% to 1,580 units, as compared to 1,450 in 2004. In Europe, shipments increased by 13.7% to 2,908 units, as compared to 2,557 in 2004, reflecting increases of 103 units in Western Europe (excluding Italy) and of 115 units in the other European countries. The United Kingdom became the largest single market in Europe outside of Italy and the third worldwide, with 626 units sold, as compared to 533 in 2004. Sales to the Italian dealer network totaled 662 units, as compared to 529 in 2004.
     In 2005, Ferrari accounted for the sale of a total of 5,409 units to end customers, an 8.7% increase from the 4,975 vehicles sold in 2004.
     In recent years, the number of competing models in Ferrari’s primary market segment in the largest eight markets (United States, Germany, the United Kingdom, Japan, Italy, Switzerland, France, Australia) has increased to about 23,000 units, from 7,600 in 1999, primarily as a result of new entries in the category, such as the Lamborghini Gallardo and the Bentley Continental GT, as well as the Ford GT (particularly in the United States), and the development of the product ranges by other competitors, such as Aston Martin Vanquish S, DB9 and DB9 Volante, Porsche Turbo S version, Turbo Cabrio and GT2, and Mercedes with new SL55AMG, SL65AMG and SL600 models.
     As of December 31, 2005, the sector employed 2,809 workers, including 2,582 in Italy.
     The sector currently owns and operates two production facilities, both of which are located in Italy. Another plant was leased to Maserati following its transfer to Fiat in 2005.

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Fiat Powertrain Technologies
     As of May 2005, the automotive engine and transmission operations that had previously been transferred to the Fiat-GM Powertrain joint venture were consolidated in FPT. Upon termination of the Master Agreement, Fiat re-acquired the full control of all such operations with the sole exception of those in Poland (which continue to be jointly managed by both parties). As noted above, beginning in 2006, the FPT sector also includes the powertrain businesses of Iveco, CRF and Elasis.
     Approximately 77% of the sector’s revenues, which amounted to €1,966 million for the period from its creation in May to the end of 2005, were generated by transactions with other members of the Fiat Group, with non-Group customers accounting for approximately 23% of the total.
     During 2005, FPT operated through its Product Line Passenger and Commercial Vehicles (FPT-P&CV), which design and build innovative powertrain systems for Fiat, Lancia and Alfa Romeo, delivering products that are consistent with Fiat Auto’s strategy of renewing, relaunching and repositioning its product line. In 2006, FPT also began operating through its Industrial and Marine Product line, which includes the powertrain activities that were previously part of the Iveco sector.
     In the area of gasoline engines, FPT-P&CV used the opportunity provided by the launch of the Grande Punto to introduce an evolution of the Fire 1.4 liter eight-valve engine that uses a phasing transformer to deliver increased fuel efficiency and better performance. For the upscale segments of the market, FPT-P&CV developed two new gasoline engines: the four-cylinder L850, which is available in two versions (a 160-HP 1.9-liter version and a 185-HP 2.2-liter version) and the 260-HP six-cylinder HFV6 3.2. Both engines, which are available in the new Alfa 159, use a JTS direct injection system with continuous intake and exhaust phasing transformers.
     In the field of diesel engines, FPT-P&CV’s 1.3-liter Piccolo Diesel engine won “Engine of the Year 2005” honors (1.0 to 1.4 liter category) at the 2005 “International Engine of the Year” Awards selected by a distinguished panel of automotive industry journalists, and beating major European and Japanese competitors. The output of this engine has been increased to 90 HP and the engine has been made compliant with the Euro 4 pollution standards by adding a diesel particulate filter. At the higher end of the market, the sector offers the 200 HP Euro 4, a 5 cylinder, 2.4-liter engine that powers the Alfa 159 and the Fiat Croma, delivering a high level of performance in terms of power, that places it at the top of its class.
     In the future, FPT-P&CV intends to build on the technological leadership it has gained in common-rail engines (next generation Multijet powerplants); continue with the relaunching of the Fire family of gasoline engines by extending their range of application with the introduction of turbocharged versions; redouble its technological efforts to improve fuel efficiency, improve quality and ensure compliance with increasingly stringent antipollution laws; and continue to work on the development of bi-fuel and natural gas engines.
     Programs that are already being implemented pursuant to such strategy include: development of a 1.6 liter diesel engine that targets a new segment of the market, extension of Port De-Activation technology to the Fire series of engines, use of turbocharging technology in gasoline engines, launch of a new M40 transmission and more widespread use of the Selespeed automatic transmission.
     In April and May 2006, important industrial agreements were signed to supply 1,000 natural-gas supplied engines to Beijing Public Transport Company, and to assemble PSA Group gearboxes in the Fiat Auto plant in Cordoba, Argentina. For a more detailed description of these two agreements, see “– Recent Developments – New Contracts and Industrial Initiatives” above.

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     The sector operates worldwide through seven production plants, of which four are located in Italy, and one in each of Poland, Brazil and Turkey. At December 31, 2005, the sector employed 10,111 workers, including 7,424 in Italy.
Agricultural and Construction Equipment
     Our agricultural and construction equipment sector is led by CNH. As of December 31, 2005, our wholly owned subsidiary Fiat Netherlands Holding N.V. (“Fiat Netherlands”) owned approximately 83% of CNH’s outstanding common shares and all of CNH’s 8 million Series A Preference Shares (“Series A Preferred Stock”). Pursuant to their terms, the 8 million outstanding shares of Series A Preferred Stock automatically converted into 100 million newly issued CNH common shares on March 23, 2006. Upon completion of the conversion, Fiat Netherlands’s ownership of CNH increased to approximately 90%.
     CNH is a global, full-line company in both the agricultural and construction equipment industries, with strong and usually leading positions in most significant geographic and product categories in both agricultural and construction equipment. CNH’s global scope and scale includes integrated engineering, manufacturing, marketing and distribution of equipment on five continents. CNH organizes its operations into three business segments: agricultural equipment, construction equipment and financial services. CNH believes that it is, based on units sold, one of the largest manufacturers of agricultural equipment and one of the largest manufacturers of construction equipment in the world. CNH also believes that it has one of the industry’s largest equipment finance operations.
     Since the fourth quarter of 2005, CNH sells its products globally through four distinct global brand structures which will have full independent profit and loss accountability—Case IH and New Holland in agricultural equipment and Case and New Holland in construction equipment—in order to invigorate the brands and satisfy more effectively the differentiated needs of brand dealers and customers. As of December 31, 2005, CNH was manufacturing its products in 39 facilities throughout the world and distributing its products in approximately 160 countries, through an extensive network of over 11,000 dealers and distributors.
     At December 31, 2005, the sector employed 25,420 workers, including 4,223 in Italy.
     In agricultural equipment, CNH believes that it is, based on units sold, one of the leading global manufacturers of agricultural tractors and combines, and it has leading positions in hay and forage equipment and specialty harvesting equipment. In construction equipment, CNH has a leading position in backhoe loaders and a strong position in skid steer loaders in North America and crawler excavators in Western Europe. In addition, CNH provides a complete range of replacement parts and services to support its equipment. For the year ended December 31, 2005, in US dollar terms, sales of agricultural equipment represented approximately 62% of the sector’s net revenues, sales of construction equipment represented approximately 31% of net revenues and financial services represented approximately 7% of net revenues.
     CNH believes that it is the most geographically diversified manufacturer and distributor of agricultural equipment in the industry. For the year ended December 31, 2005, approximately 45% of net sales of agricultural equipment reported in US dollars were generated from sales in North America, approximately 32% in Western Europe, approximately 6% in Latin America and approximately 17% in the Rest of World. In 2005, approximately 54% of net sales of construction equipment reported in US dollars were generated in North America, approximately 28% in Western Europe, approximately 8% in Latin America and approximately 10% in the Rest of World. CNH’s broad manufacturing base includes facilities in Europe, Latin America, North America, China, India and Uzbekistan.

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     CNH offers a range of financial services products, including retail financing for the purchase or lease of new and used CNH equipment. To facilitate the sale of products, CNH offers wholesale financing to its dealers. Wholesale financing consists primarily of floor plan financing and allows dealers to maintain a representative inventory of products.
     Agricultural Equipment
     CNH’s primary product lines of agricultural equipment, which are sold primarily under the Case IH and New Holland brands, include tractors, combine harvesters, hay and forage equipment, seeding and planting equipment, tillage equipment, sprayers, and grape, cotton, coffee and sugar cane harvesters. In addition, a large number of construction equipment products, such as telehandlers, skid steer loaders and backhoe loaders, are sold to agricultural equipment customers. CNH also sells tractors under the Steyr brand in Western Europe.
     In order to capitalize on customer loyalty to dealers and CNH’s relative distribution strengths and historical brand identities, the sector continues to use the Case IH and New Holland (and Steyr for tractors in Western Europe only) brands, and to produce equipment in the historical colors of each brand. CNH believes that these brands enjoy high levels of brand identification and loyalty among both customers and dealers. Although new generation tractors have a higher percentage of common mechanical components, each brand and product remains significantly differentiated by color, interior and exterior styling, internal operator features and model designation. In addition, flagship products such as row crop tractors and large combine harvesters have significantly greater differentiation. Distinctive features that are specific to a particular brand such as the Supersteer® axle for New Holland, the Case IH tracked four-wheel drive tractor, Quadtrac®, and front axle mounted hitch for Steyr have been retained as part of each brand’s identity.
     Construction Equipment
     The current brand and product portfolio represents the history of the many companies that have been merged into the global Case or New Holland Construction brand families. Case provides a full line of products on a global scale utilizing the Sumitomo technology for its key crawler excavator product. The New Holland Construction brand family, in conjunction with its global alliance with Kobelco Japan, also provides a full product line on a global scale. In February 2005, the historical New Holland brand family reorganized all of its networks outside North America, in order to better focus on the New Holland Construction brand name.
     New generation products share common components to achieve economies of scale in research and development and manufacturing. CNH differentiates its products based on the relative product value and volume in areas such as technology, design concept, productivity, operator controllability, product serviceability, color and styling, to preserve the unique identity of each brand.
     Product Development
     CNH continuously reviews opportunities for expanding its product lines and the geographic range of its activities. CNH is focusing on improving product quality, with a goal of achieving best-in-class product quality and reliability. In addition, CNH is emphasizing enhanced differentiation between the Case and New Holland brands to increase their market attractiveness. This also includes its continuing engine development efforts by combining the introduction of new engines to meet new emissions requirements with additional innovations expected to refresh the sector’s product line. Improved product quality and reliability, coupled with initiatives to improve dealer and customer support, is expected to allow CNH to more fully capitalize on its market leadership positions throughout the world.

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     To increase its global presence and gain access to technology, CNH participates in a number of international manufacturing joint ventures and strategic partnerships. CNH has integrated its manufacturing facilities and joint ventures into a global manufacturing network designed to source products from the most economically advantageous locations and to reduce its exposure to any particular market.
     Business Strategy
     Building upon competitive strengths and the business platform established during its merger integration period, CNH believes it has the base for improving its performance, narrowing the gap between CNH and its best competitors and creating value.
     CNH’s strategic objectives are to:
  emphasize and focus on its customers and further improve its distribution and service capabilities and product quality and reliability, all designed to increase customer satisfaction and market penetration;
 
  achieve higher margins than either Case or New Holland earned prior to the merger and deliver profitability throughout the industry cycles;
 
  generate cash to reduce debt and strengthen its balance sheet; and
 
  continue to position CNH to take advantage of future opportunities for expansion.
     CNH believes that successfully achieving its goals of meeting the needs of its dealers and customers, improving the quality and reliability of its products and reducing the costs of those products and of its overall operations, will result in increased unit sales, a stronger market position and higher margins. CNH expects that higher margins will allow it to generate better overall profitability, on average, throughout industry cycles. CNH’s goal is to use improved cash flow, generated by improved profitability, to reduce debt and strengthen its balance sheet. CNH believes a stronger balance sheet, and a customer driven focus to the business, will position it to take advantage of future opportunities for product and market expansion as they arise. This could include short to medium-term opportunities, in areas such as Latin America and Eastern Europe, and longer-term opportunities, in areas such as China and India.
     Markets and Competition
     In 2005, overall worldwide market demand, on a unit basis, for major agricultural equipment product lines was approximately 4% higher than in 2004. Worldwide demand for tractors increased by about 5%, on the strength of an approximate 26% increase in demand in Rest of World markets. Industry demand in North America was flat compared with 2004, while demand in Western Europe is estimated to have declined by approximately 6% and tractor industry demand in Latin America is estimated to have declined by 19%. Worldwide demand for combines was estimated to be down approximately 16% over the level in 2004, driven by an approximate 58% decline in combine industry volumes in Latin America. Market demand in North America was flat compared with 2004 while demand in Western Europe increased by about 6% and in Rest of World markets by about 10%. On a unit basis, CNH’s worldwide retail sales of major agricultural equipment declined. The sector’s overall tractor market share declined by about 2.5 percentage points from 2004, and its combine market share declined by approximately 1 percentage point. At year-end, total company and dealer inventories were about one-half of a month higher than at year-end 2004, on a forward month supply basis.

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     Worldwide market demand for major construction equipment product lines in which CNH competes, increased by about 8% on a unit basis in 2005 compared with 2004. Market demand increased in all markets and for all of CNH’s major product categories. World market demand for backhoe loaders, on a unit basis, increased by about 15%, while demand for skid steer loaders increased by about 4%. In total, worldwide market demand for light construction equipment, on a unit basis, increased approximately 13%. Worldwide demand for the sector’s heavy construction equipment product lines increased by approximately 8%. On a unit basis, CNH’s construction equipment market share declined by approximately 1 percentage point. Worldwide wholesale unit volumes of the sector’s major construction equipment products increased by approximately 4%. At year-end, total company and dealer inventories were about one-half of a month higher than at year-end 2004, on a forward months supply basis.
     In 2005, CNH’s net revenues of agricultural equipment, in US dollar terms, were approximately 2% lower than in 2004. Excluding the results of variations in foreign exchange rates, agricultural equipment net sales would have been down by approximately 6%. Net sales were reduced by lower sales of equipment and unfavorable mix, which were offset in part by the impact of currency, improved price realization and the impact of new products.
     CNH’s net revenues of construction equipment increased by approximately 12% in 2005, compared with 2004. Approximately 1.0 percentage point of this increase resulted from the variations in foreign exchange rates. Worldwide, in addition to the currency impact, net sales increased from improved net price realization, higher volumes and improved product mix, including the contribution of new products.
     The agricultural equipment industry is highly competitive. CNH competes with large global full-line suppliers, including Deere & Company and AGCO Corporation; manufacturers focused on particular industry segments, including Kubota Corporation and various implement manufacturers; regional manufacturers in mature markets, including the CLAAS Group, the ARGO Group and the SAME Deutz-Fahr Group, that are expanding worldwide to build a global presence; and local, low-cost manufacturers in individual markets, particularly in emerging markets such as Eastern Europe, India and China.
     The construction equipment industry also is highly competitive. CNH competes with global full-line suppliers, with a presence in every market and a broad range of products that cover most customer needs, including Caterpillar, Komatsu Construction Equipment, TEREX Corporation and Volvo Construction Equipment Corporation; regional full-line manufacturers, including Deere & Company, J.C. Bamford Excavators Ltd. and Liebherr-International AG; and product specialists, operating on either a global or a regional basis, including Ingersoll-Rand Company Limited (Bobcat), Hitachi, Sumitomo Construction, Manitou B.F., S.A., Merlo S.p.A., Gehl Company, and JLG Industries Inc.
     CNH believes that multiple factors influence a buyer’s choice of equipment. These factors include the strength and quality of a company’s dealers, brand loyalty, product performance, availability of a full product range, the quality and pricing of products, technological innovations, product availability, financing terms, parts and warranty programs, resale value, customer service and satisfaction and timely delivery. CNH continually seeks to improve in each of these areas, but focuses primarily on providing high-quality and high-value products, and supporting those products through its dealer networks. In both the agricultural and construction equipment industries, buyers tend to favor brands based on experience with the product and the dealer. Customers’ perceptions of value in terms of product productivity, reliability, resale value and dealer support are formed over many years.
     The financial services industry is highly competitive. CNH competes primarily with banks, finance companies and other financial institutions. Typically, this competition is based upon customer service, financial terms and interest rates charged.

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     Distribution
     As of December 31, 2005, CNH sold and distributed its products through approximately 11,000 dealers and distributors in approximately 160 countries worldwide. Dealers typically sell either agricultural equipment or construction equipment, although some dealers sell both types of equipment. Construction equipment dealers tend to be fewer in number, larger in size, better capitalized and located in more urban areas. Agricultural dealers tend to be greater in number, but smaller in size and located in rural areas.
     Large construction equipment dealers often complete their product offering with products from more than one manufacturer, because of historical relationships that have persisted through the consolidation of the industry.
     In connection with its program of promoting unified brand names and identity, CNH generally seeks to have dealers sell a full line of its agricultural or construction equipment products (such as tractors, crop production and crop harvesting). Generally, the sector achieves greater market penetration where each of its dealers sells the full line of products from only one CNH brand. Although appointing dealers that sell more than one of its brands is not part of its business model, some joint dealers exist, either for historical reasons or in limited markets where it is not feasible to have separate dealers for each CNH brand. In some limited cases, dealerships are operated under common ownership with separate facilities for each of its brands.
     In the United States, Canada, Mexico, most of Western Europe, Brazil and Australia, the distribution of CNH products is generally accomplished directly through the dealer network. In other parts of the world, the sector’s products are sold initially to distributors who then resell them to dealers, in an effort to take advantage of such distributors’ expertise and to minimize marketing costs. Generally, each distributor has responsibility for an entire country.
     Management believes that a strong dealer network with wide geographic coverage is critical to the success of any manufacturer of agricultural and construction equipment. CNH continually works to enhance its dealer network through the expansion of product lines and customer services, including enhanced financial services, and an increased focus on dealer support. To assist dealers in building rewarding relationships with their customers, CNH has introduced focused customer satisfaction programs and seeks to incorporate customer input into the product development and service delivery processes.
     As the equipment rental business becomes a more significant factor in the markets for both agricultural and construction equipment, CNH is continuing to support its dealer network by facilitating sales of equipment to the local, regional and national rental companies through its dealers, as well as by encouraging dealers to develop their own rental activities. CNH launched several programs to support dealer service and rental operations including training, improved dealer standards, financing, and advertising. Also, as the rental market is a capital-intensive activity and sensitive to variations in construction demand, CNH believes that any such activities should be expanded gradually, with special attention to managing the resale of rental units into the secondary market by its dealers, who can utilize this opportunity to improve their customer base and generate additional parts business.
     As noted above, in early 2005, CNH rationalized its non-Case construction equipment brand family in Europe and Latin America into one brand, New Holland Construction. In connection with this brand rationalization, CNH terminated certain dealer relationships in Europe, where overlapping geographic presence would have made ongoing business impractical for maintaining multiple dealerships. CNH expects that, long-term, this consolidation will generate additional incremental revenue, allow the

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sector to provide better support to its dealers, strengthen the dealer network, and result in the availability of a greater range of products. CNH cannot make any assurance, however, that such actions will ultimately improve the competitive position or financial results of its construction equipment operations in Europe.
     In Japan, CNH owns 50% of New Holland HFT Japan Inc. (“HFT”), which distributes its products in that country. HFT imports and sells a full range of New Holland’s agricultural equipment through approximately 50 retail sales and service centers located throughout Japan. In order to complete its product offering, HFT also sells certain equipment manufactured by other producers. HFT is a leading importer of agricultural tractors in the highly competitive Japanese market and has a leading share of the Japanese markets for combine harvesters and self-propelled forage harvesters.
     Production
     CNH manufactures equipment and components in 39 manufacturing facilities, including those operated through joint ventures and alliances. Its broad manufacturing base currently includes facilities in North America, Europe, Latin America, China, India and Uzbekistan. Similar manufacturing techniques are employed in the production of agricultural and construction equipment, resulting in certain economies and efficiencies.
     CNH’s capital expenditures in fixed assets (property, plant, equipment and leased assets) for the year amounted to €214 million, as compared with a total of €210 million in 2004, and were principally related to its initiatives to introduce new products, enhance manufacturing efficiency, further integrate its operations, expand environmental and safety programs and support long term leasing business.
     Financial Services
     CNH Financial Services is the captive financing arm of CNH, providing financial services to dealers and customers in North America, Australia and Brazil. Through its joint venture with BPLG, a wholly-owned subsidiary of BNP Paribas, financial services provides customer financing in Western Europe and has begun the process of managing dealer receivables in certain countries in Western Europe. The principal products offered on a worldwide basis are retail loans to final customers and wholesale financing to the sector’s dealers. As of December 31, 2005, financial services managed a portfolio of receivables of approximately $13.8 billion, both directly and indirectly through its joint venture with BNP Paribas Lease Group in Western Europe. North America accounts for 65% of the managed portfolio, Western Europe 19% (which includes the receivables of the joint venture with BPLG), Brazil 11% and Australia 5%. Financial services provides retail loans, leases and insurance products to end-user customers as the local market requires and provides a variety of wholesale and insurance products to the dealer network.
     Financial services’ mission is to improve the effectiveness of its finance activities in supporting the growth of the sector’s equipment sales and to contribute to building dealer and end-user loyalty. Management’s strategy for meeting these objectives is to grow the core financing business through higher financing penetration of CNH’s equipment sales, expansion of services offerings, new product development and marketing promotions and events. In addition, Financial Services is focused on improving credit quality and service levels and increasing operational effectiveness. Financial Services also continues to grow its financing business in Western Europe as it leverages its joint venture arrangement with BPLG to broaden its financing activities to cover CNH-branded products in all the countries we service. Financial Services also seeks to expand the sector’s financing of used equipment through its dealers and related services, including expanded insurance offerings. In Western Europe and

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Brazil, CNH is extending its North American business model for centralizing the management of wholesale receivables within Financial Services.
Trucks and Commercial Vehicles
     Our trucks and commercial vehicles operations are conducted through Iveco and its subsidiaries and include the manufacture and sale, primarily to customers in Western Europe, of (i) trucks and commercial vehicles (under the Iveco brand); (ii) buses (under the Irisbus brand); and (iii) firefighting vehicles and other specialty vehicles (under the Iveco, Magirus and Astra brands). At December 31, 2005, the sector employed 32,373 workers, including 14,923 in Italy.
     Iveco has in recent years renovated and rationalized its manufacturing facilities, giving each of its plants a specific mission in the production of its product line. During 2005, heavy vehicles were manufactured in Germany, Spain and Argentina; medium vehicles in Italy and Argentina; light vehicles in Italy, Spain and Brazil; and specialized vehicles in Italy, Germany and France. Buses are manufactured by the sector’s Irisbus division in France, Italy, Spain, Hungary and the Czech Republic.
     In 2005, the sector’s manufacturing activity also included the production of diesel engines (in Italy, France and in Brazil), other mechanical components, such as gearboxes and axles (in Italy, Spain and Ukraine), and the production of body components such as cabs, frames and pressed parts (in Italy). In May 2005, Fiat created FPT, a new sector that is now responsible for managing our innovation capabilities and expertise with respect to engines and transmissions by coordinating management of the resources, employees and activities of our automobile powertrain activities, the powertrain activities of Iveco, and the powertrain research activities of the CRF and Elasis. Starting January 1, 2006, Iveco’s powertrain activities are managed by FPT and their results are reported as a part of that sector.
     In China, the sector’s Naveco joint venture (50% Iveco and 50% NAC Group) is active in both the light vehicle and light bus segments, while the Haveco joint venture (owned in equal shares by Iveco, the NAC Group and the Hangzhou Group) is active in gearbox production. In 2005 Iveco also had a 50-50 joint venture with Changzhou Bus Company (“CBC”) for the production and sale of buses. At the end of January 2006, Iveco transferred its 50% investment in the joint venture CBC to the other shareholder Changzhou.
     New organization structure
     With effect from the beginning of 2006, Iveco has re-shaped its organization in order to structurally improve its competitive position. The new team directed by Iveco’s CEO, Paolo Monferino, is implementing a plan based on quick and lean management processes, the realization of internal synergies, an enhanced global approach, and focusing resources on customers. In line with the objectives of the Fiat Group, the main philosophy behind the new organization is centered on the attribution of greater responsibility to individuals, team work and rapid response.
     Product Development
     In 2005, Iveco continued to renovate its vehicle line. The family of light vehicles was expanded by the addition of a new 136-HP version of the 2.3-liter Iveco Unijet engine, and the automated Agile gearbox, which is available with a 136-HP or a 166-HP 3.0-liter engine. In May 2006 Iveco launched the New Daily (Euro 4) presented with the slogan “Professional DNA.” It is a new vehicle designed starting from a deep understanding of product and brand features in order to involve the sales network, both technically and emotionally so as to meet consumers’ needs. In 2005, at the RAI Expo in Amsterdam, Iveco presented a version of the Eurocargo, which meets the Euro 5 emissions requirements that have not

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yet come into force, meeting these standards years in advance of the regulatory deadline and before all of its principal competitors. The ES, a new version of the Stralis, was introduced in the heavy road vehicle segment. The main innovations offered in this version are two safety devices: the ESP electronic stability control system that can take action to correct a vehicle’s path and the Lane Departure Warning System (a device that signals when a vehicle is crossing into another lane). Iveco also introduced the Stralis Euro 4/Euro 5, a heavy vehicle that is already in compliance with EU emissions requirements scheduled to come into effect in 2009. Irisbus also broadened its product line, focusing on low-emission vehicles, with special emphasis on urban transportation vehicles fueled with natural gas. The new Irisbus Arway was unveiled in Turin in 2005. This bus, which was created for long-distance service, is equipped with a Cursor 8 engine that complies with Euro 4 emissions standards. In the area of luxury touring buses, Irisbus presented the New Domino, a bus that accommodates up to 55 passengers in the utmost comfort and is equipped with a 430-HP Cursor engine that is already Euro 4 compliant.
     Markets and Competition
     In 2005, demand in Western Europe for commercial vehicles with a curb weight of 2.8 tons or more, as measured by new registrations, increased to approximately 1,109,700, or 5.2% more than in 2004. The main increases were recorded in France (+10.8%) and Spain (+9.6%), followed by more modest increases in the United Kingdom (+3.7%) and Germany (+2.9%). In Italy, demand decreased by 1.7%. Although Iveco conducts operations throughout the world, Western Europe is its principal market, accounting for 78.2% of its 2005 unit sales.
     Iveco sells its vehicles in three market segments: light vehicles (for this sector, this is defined to mean vehicles with a GVW of 2.8 to 6.0 tons), medium vehicles (6.1 to 15.9 tons) and heavy-vehicles (16 tons and higher).
     New registrations in the light vehicle segment in Western Europe increased 4.3%, to approximately 779,800 units in 2005, as compared to approximately 747,300 in 2004, with most major European markets posting gains that were offset in part by a decline in new registrations in Italy (-2.1%); the most significant increases were recorded in Spain (+9.4%) and France (+8.2%). Market demand for medium vehicles increased 2.9% to approximately 79,100 units, with gains recorded in almost all European markets, most notably in Germany (+8.7%) and Spain (+9.3%), although new registrations declined in Italy (-6.6%). Demand also increased in the heavy vehicle segment, with new registrations up 8.6% in 2005 to approximately 250,800 units, principally as a result of gains in France (+21.6%), Spain (+10.0%), the United Kingdom (+5.0%), Germany (+4.1%) and Italy (+1.1%).
     Iveco’s principal competitors are other European manufacturers of the full range of trucks and commercial vehicles, such as Mercedes Benz and Renault Vehicules Industriels, and manufacturers of specialized vehicles for certain segments, such as M.A.N. and Volvo (medium and heavy vehicle segments), Scania (heavy vehicle segment) and Ford Europe, Volkswagen and Fiat Auto (light vehicle segment).

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     The following table sets forth for the years indicated unit sales in thousands of Iveco vehicles (including light commercial vehicles, buses and other vehicles) in the sector’s principal markets, the percentage of the sector’s unit sales represented by each market and Iveco’s market share.
                                                 
    2005   2004
            Percentage                   Percentage    
    Units   of units   %   Units   of units   %
    sold   sold   Market share   sold   sold   Market share
Italy
    39.0       22.6       29.4       40.6       25.0       29.8  
Western Europe (excluding Italy)
    95.9       55.6       8.6       91.2       56.2       8.6  
 
                                               
Total Western Europe
    134.9       78.2       10.9       131.8       81.2       11.1  
Rest of the World
    37.6       21.8               30.5       18.8          
 
                                               
Total
    172.5       100.0               162.3       100.0          
 
                                               
     The following table sets forth the sector’s unit sales in thousands by product segment — light, medium and heavy trucks and commercial vehicles, buses and other vehicles – for each of the years indicated.
                 
    2005   2004
Light commercial vehicles
    95.7       91.0  
Medium commercial vehicles
    21.3       21.1  
Heavy commercial vehicles
    42.8       37.6  
Buses
    8.5       8.6  
Other vehicles (1)
    4.2       4.0  
Total
    172.5       162.3  
 
(1)   Astra, defense and firefighting vehicles.
     In 2005, Iveco delivered approximately 172,500 vehicles worldwide, or 6.3% more than in 2004. Iveco’s sales including those by associated licensees (approximately 64,800 units (57,500 in 2004)), amounted to approximately 237,300 units (219,800 units in 2004). In Western Europe, Iveco delivered approximately 134,900 vehicles, or 2.3% more than in 2004. Iveco reported significant increases in unit sales in France (+7.5%), the United Kingdom (+6.5%), Germany (+1.9%), and Spain (+7.1%), while its sales decreased in Italy (-3.8%), reflecting the general decline in market demand.
     Iveco’s share of the overall Western European market for vehicles with a GVW of 2.8 tons or more declined to 10.9% in 2005, or by 0.2 percentage points from the level recorded in 2004, with market share in the light vehicle segment stable at 9.3%, that in the medium vehicle segment down by 1.7 percentage points to 26.3% and that in the heavy vehicle segment down by 0.2 percentage points to 11.1%. However, Iveco nonetheless maintained its second place ranking in the Western European medium vehicle segment, behind Mercedes (in the five major individual markets, Iveco is the leader in this segment in Italy, France, the United Kingdom and Spain, and ranks second in Germany behind Mercedes).
     Iveco’s sales to Eastern European countries rose to 13,300 units, a 3.0% increase compared to 2004. In non-European markets, Iveco sold approximately 24,300 vehicles, a 38.0% increase from 17,600 vehicles in 2004, primarily as a result of strong sales in Latin America. In China, the sector’s Naveco joint venture produced and sold approximately 18,000 light vehicles, up 20.1% from 2004. In India, Iveco’s Ashok Leyland affiliate, in which the sector holds a 15.3% interest, built and sold a total of approximately 59,600 vehicles, an increase of 14.1% from 2004, mainly as a result of growth in demand in the domestic market. In Turkey, Otoyol, a joint venture with the Koç Group in which Iveco holds a

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27% interest, sold approximately 5,200 units, essentially unchanged compared to 2004. In South and Central America, Iveco’s sales and manufacturing activities increased significantly, particularly in the heavy vehicle segment. Iveco sold 11,900 vehicles in the region (mainly in the Mercosur countries) in 2005, an increase of 22.8% from 2004.
     The Irisbus Group delivered a total of 8,526 vehicles in 2005, roughly in line with the previous year (8,553 vehicles). Irisbus’s share of the Western European market (20.4% in 2005) declined by 1.0 percentage point compared with 2004. The sector’s market share for buses contracted in Italy (-3.3 percentage points) and France (-3.0 percentage points), though Iveco still controls a significant portion of the market (about 45% to 50%) in each of these countries, decreased by a smaller percentage in Spain (-1.7 percentage points) and held relatively steady in the United Kingdom (-0.4 percentage points) and Germany (+0.6 percentage points). In Western Europe, the bus market as a whole expanded to 34,800 units, or 6.6% more than in 2004. This improvement reflected a positive trend in France (+11.9%), the United Kingdom (+23.3%) and Spain (+15.9%), and steady demand in Germany and Italy.
     Iveco manufactured about 435,300 engines in 2005, about the same as in 2004; approximately 41% of this production was used directly by the sector, while approximately 48% of the total was sold to CNH and to Sevel, a joint venture between Fiat Auto and the PSA Group. Beginning in January 2006, Iveco’s entire powertrain operations are part of the FPT sector.
     Distribution
     Iveco has adopted a global strategy of distributing its products through networks of independent, professional dealers, as well as through Iveco-owned dealers and branches, seeking to provide high-quality service with a widespread geographic presence. At December 31, 2005, Iveco had 505 dealers in its network covering all parts of the world, including 226 in Western Europe, 68 in Eastern Europe, 101 in Africa and the Middle East, 69 in Central and South America and 41 in the Asia Pacific region, with a total of 1,210 sales points and 2,828 service points. The Iveco worldwide network also includes: 112 bus dealers, 33 special vehicles (Astra) dealers and 191 Iveco Motors dealers.
     During 2005, Iveco’s management took different approaches to network organization in different regions: in Western Europe and other mature markets, such as those in Central and Eastern Europe, it further consolidated its dealer network as part of its efforts to improve the quality of customer service, increase profitability and reduce the overall cost of distribution. The sector is focusing on the achievement of qualitative standards set by its dealership agreements; these standards are designed to ensure a consistent level of high-quality service, as measured through a self-assessment procedure and confirmed by specific audits. Following the introduction in 2003 of new dealership contracts to comply with the EU’s block exemption rules, an increasing number of countries outside of the EU (particularly those in Central Europe, as well as Turkey) have adopted this regulation as a standard for regulating automotive distribution. Iveco is therefore introducing new agreements based on the principles of non-exclusivity and qualitative standards in these markets, in a process that started in 2004 and Iveco expects to complete this process by the end of 2006. The reorganization of Iveco’s distribution network in South and Central America, particularly in Brazil and Argentina, on the other hand, is aimed at capitalizing on current favorable market conditions and improving dealer standards is still in progress.
     Production
     At December 31, 2005, the Iveco sector had 39 manufacturing facilities, including 14 in Italy, seven in France, four in Spain, four in Germany, two in Brazil and Hungary and one in each of Austria, the Czech Republic, Argentina, Australia, Ethiopia and Venezuela. Together, these factories produced a total of approximately 170,500 vehicles (163,000 vehicles in 2004).

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     Iveco’s international expansion in recent years has focused on joint ventures (such as those active in China, Turkey and India) and licensing agreements in markets where management believes opportunities for growth exist. Vehicles are currently produced for Iveco by companies outside the Group in Asia, the Middle East and Africa, in each case pursuant to licensing arrangements with Iveco.
     In 2005, Iveco also continued to consolidate its portfolio of maintenance and repair contracts, with a total number of approximately 41,000 contracts in force at December 31, 2005, compared to 41,800 at the end of 2004.
     Capital expenditures in fixed assets (property, plant, equipment and leased assets, excluding vehicles sold with buy-back commitments) for the year amounted to €198 million, of which €173 million related to industrial investments, as compared with a total of €140 million in 2004, with the increase being largely attributable to the completion of certain major investment programs, including that for the New Daily, Euro 4 – 5 medium heavy vehicles, and new bus ranges. Investments in vehicles used for fleet leasing activities accounted for the remaining €25 million of the 2005 total (having totaled €12 million in 2004), with the increase being largely attributable to an increase in leasing activities in Spain, France and Hungary.
     Financial Services
     On June 1, 2005, Iveco sold to Barclays 51% of Iveco Finance Holdings Limited, a new company in which Iveco contributed its financing and leasing services in France, Germany, Italy, Switzerland and the United Kingdom. The purpose of Iveco Finance Holdings is to provide Iveco’s customers and dealers with competitive truck and commercial vehicle financing by combining Barclays’ strength and competitiveness in the financing business with Iveco’s expertise in the research, development, design, manufacture and marketing of trucks and commercial vehicles. Barclays Asset and Sales Finance already has a strong presence in many of Iveco’s principal markets and management expects Iveco Finance Holdings to provide opportunities for further expansion of existing operations, as well as the development of new markets. As of June 1, 2005, Iveco Finance Holdings Limited was no longer consolidated on a line-by-line basis, but is accounted for using the equity method.
     Overall, the sector provided financing for approximately 23.4% of the vehicles sold by Iveco in 2005, a decrease from 25.2% in 2004. This reduction was primarily due to intense competition for business from banks, particularly in the German and Italian markets. In its leasing operations, Iveco’s fleet of rental vehicles numbered approximately 3,120 at the end of 2005, compared to approximately 3,770 at the end of 2004.
Components
     Our operations in the components sector are led by our wholly owned subsidiary Magneti Marelli Holding S.p.A.
     Magneti Marelli supplies components to nearly all of the world’s major car manufacturers, including the PSA Group, Renault, Volkswagen, DaimlerChrysler, BMW, Ford and Opel (GM’s European subsidiary), as well as to other companies of the Fiat Group (Fiat Auto, Iveco, FPT and Ferrari). Magneti Marelli is among the largest European producers of lighting systems. The components sector contributed 7.9% of our 2005 net revenues, prior to eliminations and consolidating adjustments.
     In 2005, Magneti Marelli operated principally through five business units: lighting, engine control, automotive suspensions, electronic systems and exhaust systems.

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     Magneti Marelli focuses on developing complete modules and systems in its main product lines, which include lighting systems using innovative technologies, engine and gearbox controls, electronic systems and exhaust and suspension systems. In a business environment that is increasingly global and competitive, the main trend characterizing the components industry continues to be the demand for increasingly sophisticated products at lower costs. At the same time, carmakers are pursuing solutions that simplify manufacturing processes and are requiring components manufacturers to supply systems and modules that are designed in cooperation with their own design staff. In response to these trends, Magneti Marelli has developed a strategy based on innovation, focusing on businesses that supply complete systems with high technology content.
     In 2005, global production of cars and light commercial vehicles increased by approximately 3.5%, reaching roughly 63 million units, although performance varied across countries and geographic regions, and increases were concentrated mainly in South America, Eastern Europe and Asia. The Western European market has remained relatively steady since 2004, with a total production of 16.1 million units, and production was stable in the majority of the region’s individual countries.
     In 2005, a significant portion of the sector’s budget was devoted to investments in research and development and capital expenditures, which amounted to €425 million, or 10.5% of Magneti Marelli’s revenues (compared to €382 million, or 10.1% of revenues, in 2004). This amount included €228 million of investments in tangible fixed assets and €197 million in research and development projects, which were focused on product innovation.
     The sector operates worldwide through 53 production plants, of which 17 are located in Italy, eight in Brazil, five in France, four in Mexico, three in each of Poland, Spain and China, two in each of the United States and Germany, and one in each of Russia, Argentina, the Czech Republic, Malaysia, Turkey and South Africa. As of December 31, 2005, the sector employed 24,213 workers, including 7,096 in Italy.
     In 2005, Magneti Marelli reported revenues of €4,033 million, an increase of 6.3% from the €3,795 million reported in 2004. The increase reflected the consolidation of Mako from January 1, 2005 (which contributed €119 million in revenues during the year), as well as improved sales results at all business units despite relatively stable volumes, largely reflecting new products with a higher technology content, such as the diesel injection systems in the engine control business unit; the first time application in Europe of headlamps equipped with infrared sensors for night vision enhancement and the successful introduction of LED tail lamp technology introduced by the lighting business unit, as well as the positive performance of Telematics Psa in the electronic systems business unit. In addition, the sector’s automotive suspension business unit reported higher sales for components sold for production of the Fiat Panda Poland, which offset declining sales in Italy, where the market picked up again late in the year thanks to the Group’s newly-introduced models, particularly the Grande Punto.
     In 2005, approximately 41% of the sector’s revenues came from sales to other Fiat Group companies, as compared with approximately 32% in 2004.
     Effective May 1, 2006 Magneti Marelli transferred to Fiat Auto the final assembling suspension activity realized in the Cassino, Pomigliano, Melfi plants, and, effective June 1, 2006, in the Mirafiori plant.
Metallurgical Products
     Our metallurgical products sector is led by Teksid S.p.A., of which we own 84.8%. The remaining 15.2% stake is owned by Renault S.A.

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     Teksid, which comprises a cast iron business unit and a magnesium business unit, contributed 2.0% of our total 2005 net revenues, prior to eliminations and consolidating adjustments. The economic environment in 2005 has slightly improved over 2004.
     In 2005, Teksid’s cast iron business unit, which produces cast iron auto parts, saw a rise of 20.4% in its revenues due to a 4.6% increase of volumes, as well as a favorable trend in exchange rates (particularly those between the euro and the Brazilian real and Polish zloty). The growth in market demand has been particularly significant in North America and in Brazil, while the Crescentino plant has continued its process of focusing on light engine blocks. Teksid do Brasil completed the initial transition phase for the cast iron producing assets it acquired from GM’s former foundry at Sao José dos Campos, producing about 45,000 tons.
     Teksid’s magnesium business activities are carried out through Meridian Technologies Inc., a 51%-owned joint venture with Hydro Aluminium AS. The predominant market for the magnesium business unit, which produces magnesium auto parts and operates under the Meridian brand, is in North America, which in both 2005 and 2004 accounted for approximately 80% of its revenues. The unit also maintained its focus on serving customers outside the Fiat Group, with the Group accounting for approximately 6% of total revenues in 2005 (approximately 5% in 2004). The unit’s revenues declined by 1.0% in 2005 due to a 6.8% decrease in volumes.
     In 2005, Teksid reported overall revenues of €1,036 million, an increase of 13.8% from €910 million in 2004, as the improved results at the cast iron unit more than offset the decline at the magnesium business unit. In 2005, approximately 20% of Teksid’s revenues were derived from sales within the Group.
     The sector’s principal competitors are divisions of other automobile manufacturers, as well as other manufacturers of metallurgical products operating in different markets. Competition is based primarily on price and the reliability of the products, which in turn is dependent upon the technology used to produce them.
     At December 31, 2005, the metallurgical products sector had 12 manufacturing facilities, consisting of two in each of Italy and France, and one in each of the United States, Brazil, the United Kingdom, Poland, Mexico, Canada, Portugal and China. At year-end, Teksid employed 8,952 workers, including 1,092 in Italy.
     In May 2006, Teksids transfer of a 60% interest of SBFM, which was part of the Cast Iron Unit, was completed. For more information about this transaction see “—Recent Developments—Disposal of subsidiaries” above.
     Renault, Teksid’s minority stockholder, has the right to sell its stake to Fiat under certain circumstances, such as:
    if Teksid fails to comply with the terms of the joint venture agreement or one party is subjected to a receivership or any other insolvency procedure;
 
    if Renault’s interest in Teksid falls below 15%;
 
    if Teksid decides to make a strategic investment outside the foundry sector; or
 
    if another auto manufacturer acquires control of Fiat.

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     Fiat also has similar rights to purchase Renault’s stake under these same conditions should they occur and Renault decide not to exercise its put right.
     In addition, Teksid and Norsk Hydro have certain rights with respect to their Meridian Technologies joint venture in the event the board of directors cannot agree unanimously with respect to certain specified strategic decisions. In such event:
    Norsk Hydro has the right to require Teksid to purchase its 49% holding in Meridian Technologies; and
 
    if Norsk Hydro declines to exercise this option, Teksid may require Norsk Hydro to sell its 49% holding to Teksid.
     The possibility that such a deadlock between Teksid and Norsk Hydro will arise is considered to be quite remote.
     See Note 32 (iii) to the Consolidated Financial Statements included in Item 18 for a discussion of these agreements.
Production Systems
     Our wholly owned subsidiary, Comau S.p.A., is the lead company of the production systems sector. Comau’s core business is the engineering and manufacturing of industrial automation systems and related products, mainly for the automotive industry. Its principal products include metalworking systems, mechanical assembly systems, body welding and assembly systems, sheet metal dies and injection molds, handling systems, robotics, product and process engineering, software engineering and systems, and specialized maintenance services. The sector’s principal customers are international automotive manufacturers, including the automotive sectors of the Fiat Group.
     In 2005, the production systems sector contributed 3.1% of our net revenues, prior to eliminations and consolidating adjustments.
     In 2005, Comau’s activities continued to be adversely affected by a climate of uncertainty and by the financial difficulties experienced by most automotive manufacturers, all of which has tended to curb capital investments. In Europe, the situation remained uncertain, and new investments by automotive manufacturers focused on rationalization of existing plants with a view to increasing re-utilization, flexibility and capacity utilization. In the United States, local automotive manufacturers face strong competition from Japanese and Korean car producers, which have increased their volumes and market shares; the excess of productive capacity has been reflected in decreases in sales prices. In South America, increased economic and political stability in the sector’s main markets drove a slow recovery in investments by automotive manufacturers. By contrast, a number of countries in Asia and Eastern Europe have shown a sharp rise in investments, often through joint ventures between western car manufacturers and local partners.
     In 2005, the sector received €1,448 million in orders, a reduction of about 9% from 2004 on a comparable consolidation basis (the actual decline being equal to 19.7%). The sector acquired €1,210 million in new orders for contract work, a decrease of 17.3% from 2004 (or approximately 14% on a comparable consolidation basis). Overall in 2005, the sector acquired approximately 48% of its orders for contract work in Europe, 35% in the NAFTA region, and 17% from the Mercosur region (comprising Argentina, Brazil, Paraguay and Uruguay) and new markets (including 7% in China). Approximately 17%

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of Comau’s orders for contract work during 2005 were from other Fiat Group companies (20% in 2004), with the significant majority coming from other automotive manufacturers.
     On a comparable consolidation basis’ orders for services activities increased by roughly 30%, (reaching €238 million) of which approximately 26% came from other Fiat companies. The unadjusted order figure shows a reduction of 30.2% that was reflected in the fact that the revenues of Comau’s service operations were about €223 million, a decline of 34.1% compared to €338 million in 2004. This reduction was largely due to the sale of the service activities in Europe related to Iveco’s, Magneti Marelli’s and CNH’s businesses, which was effective as of January 1, 2005. About 30% of the service revenues were from companies within the Group (52% in 2004) and approximately 70% from non-Group customers.
     Comau recorded revenues of €1,573 million in 2005, a decline of 8.1% from the €1,711 million recorded in 2004, largely reflecting the impact of the sale of its services activities noted above. On a comparable consolidation basis, net revenues increased by about 6% compared to 2004, largely due to the positive results of the sector’s service and body welding and assembly activities. In 2005, approximately 16% of the sector’s overall revenues came from sales to other Fiat Group companies, down from 25% in 2004, with sales to third parties and joint ventures representing approximately 84% of the sector’s revenues.
     Competition in this sector mainly consists of large diversified international groups operating in the field of production systems for the mechanical and automotive industry. The competitive environment, which reflects a structural excess of production capacity in the traditional industrialized countries, benefits producers that can offer a wide range of production systems on an international basis and are capable of engineering flexible and innovative manufacturing solutions.
     At December 31, 2005, Comau’s activities were conducted through 29 manufacturing facilities, consisting of 12 in the United States, 3 in Italy, 2 in France, in the United Kingdom and in South Africa, and 1 in Germany, Spain, Romania, Poland, Argentina, Mexico, India and China.
     At December 31, 2005, the sector employed 12,725 workers, including 2,695 in Italy.
Services
     The sector, led by Business Solutions, provides integrated corporate services and business process outsourcing. In 2005, Business Solutions continued to pursue its strategy of offering enhanced management and coordination activities for Fiat Group companies.
     Business Solutions reported revenues of €752 million in 2005, a decrease of 23.0% from the €976 million recorded in 2004, mainly reflecting changes in the scope of consolidation, primarily the disposal of WorkNet. In 2005, sales to other Group companies accounted for approximately 56% of the sector’s total revenues, compared to approximately 41% in 2004. Business Solutions contributed 1.5% of our total 2005 net revenues, prior to eliminations and consolidating adjustments.
     Business Solutions operates in the four main areas of activity described below.
     Human Resources. Human Resources provides payroll management and other human resources services. In 2005, revenues were €72 million, of which approximately 73% were from customers within Fiat Group, compared to revenues of €261 million in 2004, when third-party customers accounted for approximately 77% of revenues. The significant change was due to the sale in February 2005 of

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WorkNet, a temporary employment services company, and the sale in September of HRS, a company aimed at providing payroll services to third parties.
     Facility Management. The unit’s activities in 2005 were refocused mainly on facility management operations and maintenance activities carried out through Ingest Facility S.p.A.. Revenues in 2005 totaled €242 million, as compared to €264 million in 2004. Customers from outside the Fiat Group accounted for 45% of revenues in 2005, compared to approximately 55% in 2004.
     Administrative Services. This unit, through Fiat Gesco, provides management and back office services, mainly within the Fiat Group. The unit also includes SADI (customs services) and Risk Management S.p.A. (risk management of insurable risks). In 2005, revenues totaled €269 million (of which approximately 84% were generated by Fiat Group companies), compared to €288 million of revenues in 2004 (approximately 77% generated by Fiat Group companies).
     I.C.T. – Information and Communication Technology. This unit operated through subsidiaries including Global Value, a joint venture with IBM providing technology infrastructure management and software application development services. In June 2005, Business Solutions sold the 50% stake in Global Value it held to IBM and at the same time, it acquired from IBM some specific activities in Italy and Europe. In line with the sector’s restructuring strategy, an agreement with British Telecom for the sale of Atlanet, which provides the Fiat Group with communications services and telecommunication system in Italy, was for the most part finalized in the first quarter of 2006 (see “—Recent Developments” above). Atlanet recorded €147 million in revenues in 2005. The unit also operated e-Spin, a competence center operating particularly in the areas of online applications and business process management. The I.C.T unit as a whole recorded revenues of €194 million in 2005, of which approximately 42% were attributable to Fiat Group companies, as compared to €178 million in 2004, of which approximately 51% were attributable to non-Group companies.
     The services sector also includes Sestrieres S.p.A., which manages the lift facilities in the Via Lattea ski area and which generated revenues of €19 million in 2005. On June 29, 2006 the divesture of our stake in Sestrieres S.p.A. was completed.
     At December 31, 2005, Business Solutions employed 5,436 workers, of which 2,892 in Italy.
Publishing and Communications
     This sector’s operations consist principally of the publication and distribution of the Turin-based daily newspaper La Stampa, as well as the sale of advertising space in print, television and Internet media through Publikompass S.p.A. (“Publikompass”).
     Editrice La Stampa S.p.A. (“Editrice La Stampa”) reported an average daily circulation of 312,000 copies of La Stampa, a 8.0% decrease from 339,000 copies in 2004, reflecting lower newsstand sales and the fact that several joint marketing arrangements with other papers were discontinued during the year. Editrice La Stampa sharpened its strategic focus on “brand-stretching” measures, designed to increase newsstand sales of supplemental products by leveraging La Stampa’s nationally recognized brand name. Efforts to boost our newspaper readership base through distribution to students also continued.
     During 2005, the sector continued the process of investing in new printing presses, started in December 2004, which will allow it to produce a newspaper with up to 96 pages in full color and in a new, more compact size.

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     As of October 3, 2005, Editrice La Stampa signed a Memorandum of Understanding with M-Dis S.p.A., a company operating in newspaper distribution industry in Italy, in order to create To-Dis S.r.l., following the spin-off of La Stampa’s distribution and circulation activity. Effective May 2006 To-Dis S.r.l. is owned by Editrice La Stampa (45%) and M-Dis S.p.A. (55%). To-Dis distributes all of Editrice La Stampa’s products as well as other products, already distributed by M-Dis.
     Revenues from the sales of newspapers and other publishing products totaled approximately €70 million in 2005, a decrease of €8 million as compared to 2004, due to a contraction of newsstand sales and “brand-stretching” measures oriented more to profit than volumes.
     The advertising market in Italy increased by approximately 2.8% in 2005. Newspaper advertising increased by 2.0% (or by 1.4%, if free newspapers are excluded) and periodicals advertising increased by 3.7%, due to new magazines. Publikompass revenues of €328 million decreased by 0.6% over 2004, reflecting the loss of Sky Italia as a client, the impact of which was only partially offset by new clients.
     In this context, the publishing and communications sector posted a 2.5% decrease in revenues in 2005 to €397 million, compared to the €407 million reported in 2004, or 0.8% of our total 2005 net revenues, prior to eliminations and consolidating adjustments.
     At December 31, 2005, the sector had two plants in Italy, and employed 846 workers.
Other Companies
     In addition to our operating sectors, we also have holding companies, service companies and other operations under our direct control. In 2005, these other companies contributed 1.0% of our net revenues, prior to eliminations and consolidating adjustments. At December 31, 2005, these companies employed 4,105 workers, including 3,581 in Italy.
     The most significant of our other companies included in these results are the CRF and Elasis, which occupy an important place in our strategies and development plans (see “—Research and Innovation” below).
Supply of Raw Materials and Components
     Our increased focus on quality improvement, cost reduction, product innovation and production flexibility has required a change in our historical relationship with our suppliers. To this end, we have relied upon suppliers with a focus on quality and the ability to provide cost reductions. We view our relationships with our suppliers as partnerships, and in recent years we have established closer ties with a significantly reduced number of suppliers, selecting those that enjoy a leading position in the relevant market. To these suppliers, we offer long-term, stable relationships and high volume supply contracts, cooperation in the development of new products and joint research on cost reduction methods.
     Our purchasing coordination activities are designed to optimize Group purchasing, develop and coordinate our global sourcing initiatives, develop new purchasing policies and methods and monitor purchasing activity at each of our sectors. These activities are organized into five main areas: direct materials (including commodities), indirect materials and services, low-cost sourcing, supplier quality and transport and logistics.

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     Management believes that adequate supplies and alternate sources of the Group’s principal raw materials are available and does not believe that the prices of these raw materials are especially volatile.
Operating Environment
     As one of the largest industrial groups in Italy, the Fiat Group is affected by social, economic and political developments in Italy. At the same time, by virtue of our significant operations outside of Italy, we are subject to the risks normally associated with cross-border transactions, principally those relating to exchange rate fluctuations and delayed payments from customers in certain countries. Finally, because our operations are based in Europe, both the intensifying integration of the European market and the ongoing process of enlargement, which saw ten countries join the EU in 2004, will create new opportunities and challenges for our management.
     We continued to operate in a difficult international environment in 2005, characterized by weak economic growth and intensified competition, exacerbated by stagnation in automotive markets and the appreciation of the euro. In Europe in particular, a prolonged period of low GDP growth has led to the progressive contraction of the car market. This, together with the strength of the European currency, has put further pressure on prices, and has created a situation in which European OEMs are unable to pass higher input costs on to the market. Despite these challenges, as discussed in more detail in Item 4. Information on the Company—Sectors —Fiat Auto” below, we were able to improve our operating performance, reflecting the positive impact of our new models on profit margins and the implementation of cost savings measures.
The Republic of Italy
     The Republic of Italy is composed of 20 regions covering an area of approximately 301,000 square kilometers on a peninsula in the middle of Southern Europe, with a population of approximately 57.5 million. The most important industrial and commercial activity is situated in the north-central part of Italy.
     Government
     The Republic of Italy was proclaimed in 1946 and a President was elected in the same year. The present Constitution, which took effect in 1948, provides for the powers of a democratic state to be divided among the Parliament, the Executive and the Judiciary. The head of state is the President, who is elected by Parliament and holds office for a period of seven years. The President has the power to designate the President of the Council of Ministers, who is then confirmed (and may be removed only) by Parliament. The President of the Council of Ministers heads the executive branch. Parliament consists of the Senate and the Chamber of Deputies. Parliamentary elections must be held every five years, although they have often been held more frequently.
     The Italian government is currently led by a center-left coalition led by Romano Prodi (formerly head of the European Commission), which won a very slim majority in the Senate and a larger majority in the Chamber of Deputies in the April 2006 election. Notwithstanding the privatization of a considerable number of state industries and lower rates of inflation, Italy still lags behind most of its European partners, with a lower rate of economic growth than many of the other major European economies. The new government has announced a commitment to reduce Italy’s budget deficit so as to conform with guidelines set in the EU stability and growth pact.

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     Foreign Relations
     In 1998, Italy qualified as a founding member of the third stage of the European Monetary Union on January 1, 1999, having met the convergence criteria set forth in the Maastricht Treaty with respect to the public sector deficit, inflation, interest rates and exchange rate stability. Italy is a founding member of the EU and the third stage of European Monetary Union, a member of NATO and a member of many other regional and international organizations, including the United Nations and many of its affiliated agencies. Italy is also a member of the OECD, the International Monetary Fund, the International Bank for Reconstruction and Development, the European Investment Bank, the European Bank for Reconstruction and Development, the Asian Development Bank and the Inter-American Development Bank and a charter member of the World Trade Organization.
     Economy
     Overall, GDP in Italy was 0.1% in 2005 (compared to a growth of 1.0% in 2004 and 0.4% in each of 2003 and 2002), marking the fourth consecutive year of slow growth. At current prices, GDP reached approximately €1.42 trillion in 2005.
     The following table sets forth certain statistical information on the Italian economy for each of the years indicated:
                                         
    2005   2004   2003   2002   2001
GDP at current prices (in billions of euros)
  1,417.24     1,351.33     1,300.93     1,260.60     1,218.53  
Real GDP growth
    0.1 %     1.0 %     0.4 %     0.4 %     1.7 %
Current account deficit (in billions of euros)
  5.79     11.00     16.88     10.01     0.74  
Total employment (in thousands)
    22,685       22,404       22,241       21,913       21,605  
Harmonized consumer price index (% change)*
    1.9 %     2.2 %     2.8 %     2.6 %     2.7 %
Public administration deficit as a percentage of GDP
    4.1 %     3.0 %     2.9 %     2.6 %     3.0 %
 
*   Beginning in 2002, the “harmonized consumer price index” measure has been calculated in accordance with a Eurostat methodology which lessens sensitivity to transient changes in prices.
    Sources: Istat, National Accounts, Banca d’Italia, Economic Bulletin and Statistical Bulletin, including revisions of data reported earlier.
     Fiat in Italy
     The size and international status of the Fiat Group have significant economic implications for the Italian economy. Our net revenues on a worldwide basis in 2005 were equivalent to approximately 3.3% of Italy’s GDP and our Italian employees represented approximately 1.5% of the Italian industrial work force.
European Union
     The Treaty of Athens, signed on April 16, 2003, marked the culmination of the successful accession negotiations with ten countries that subsequently joined the EU on May 1, 2004. However, in a referendum held on May 29, 2005, approximately 55% of the French voting public rejected the approval of a constitution for the EU. Three days later, in a referendum in the Netherlands, the constitution was rejected by an even greater margin. These two rejections have created significant doubts regarding the viability of the proposed constitution and questions about future political and economic integration among member states, as scheduled referenda in a number of other Member States have been postponed.

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     From an economic standpoint, 2005 was not a particularly impressive year for the EU. While GDP of the enlarged EU as a whole grew by a respectable 1.6%, the overall result masks very heterogeneous performances within the various member states. Growth was mostly concentrated in economies where private consumption benefited from a strong performance of the housing market (including Spain, the U.K. and Ireland) and in new member states, which benefited from their accession to the EU (although the relatively small sizes of their economies failed to raise the average EU growth rate in a significant way). Two of the biggest economies, Germany and Italy, showed only extremely modest growth, and growth in the EU as a whole was lower than in 2005, reflecting both a slowdown in external demand and high oil prices. The growth in GDP did not manage to significantly decrease the unemployment rate within the EU, which continues to hover around 9.0%. However, the high unemployment rate did help keep in check the inflationary pressures caused by high commodity prices.
United States
     In 2005, the US economy continued to expand at a strong pace, with GDP growing by 3.5% (down from 4.4% in 2004), primarily due to increased domestic demand despite high oil prices and interest rate increases. Wealth gains due to the booming housing market, fueled by the still relatively low level of interest rates, helped increase private consumption. These low interest rates, along with record profit growth also led to strong growth in business investment. By contrast, net exports continued to act as a drag on growth, as imports continued to expand at a faster pace than exports, despite the weaker dollar. As a result, the current account deficit widened sharply, reaching a new record high.
Emerging Markets
     Brazil is the most significant of the many emerging markets in which we operate.
     Real GDP growth in Brazil slowed to 2.3% in 2005 from 4.6% in 2004. The slowdown reflected corruption allegations against several government officials as well as efforts by the Central Bank to reach the inflation goal of 5.1% per year, which resulted in higher interest rates. However, following the economic downturn in November, the government started to reduce the basic interest rate in order to stimulate economic growth. As of December 31, 2005, the basic interest rate established by the Central Bank was 18.0% per year. Also in 2005, the Brazilian real appreciated 11.8% against the US dollar, notwithstanding this appreciation, Brazil had a commercial surplus of US$47.7 billion, its highest ever.
Environmental and Other Regulatory Matters
     Our manufacturing facilities are spread over numerous countries, and are therefore subject to the relevant laws and regulations designed to protect the environment, particularly with respect to plant solid and liquid waste and air emissions. In addition, the vehicles we manufacture must comply with extensive EU, national and local laws and regulations, including those which regulate vehicle safety, emissions and noise. Management believes that further reductions in the environmental impact of our manufacturing processes and products are of strategic importance if we are to increase our competitiveness and meet the statutory and social requirements that exist in the countries in which we have expanded.
     For many years, Fiat has recognized the sustainable development as a strategic priority in designing new products and new processes, as well as measures and decisions that may have direct or indirect effects on the environment. These principles are outlined in the Environmental Reports that the

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Group has published yearly since 1993, a tradition carried through in the annual Sustainability Reports issued since 2004.
Environmental Policies
     The Fiat Group Code of Conduct sets out environmental policy guidelines that reflect those published in official documents since 1992. In this context, the Group companies and their production sites are responsible for the environmental impact of their products and manufacturing processes, making every effort to prevent harmful consequences.
     Our environmental policy is to be pursued and consolidated through the following fundamental guidelines:
  Prevent pollution, with a preference for using environmentally friendly materials;
 
  Conserve resources, using a Design for the Environment approach for all products and processes.
 
  Minimize environmental impact, paying attention to each phase of the product and process life cycle; and
 
  Reduce waste generation, sorting used materials so that they can be recovered, reused and recycled.
     A team-based approach ensures that environmental needs are built into every management decision.
     Environmental management goals are detailed in specific plans prepared by each Group sector, and kept up to date at all times. These environmental plans seek to achieve a balance between environmental and economic goals, and involve constructive cooperation between the Group and the relevant public authorities, with the hope that future benefits will bring broader advantages for the general public.
     In its manufacturing processes, the Group pursues ISO 14001 certification as a means of ensuring uniformity in organizational practices, procedures and methods for measuring parameters, by following the requirements mandated in internationally recognized standards.
Envirnomental Management System
     Fiat’s Environmental Management System (“EMS”) includes all the people, rules and actions designed to lessen the impact that corporate activities can have on the environment and contribute cost-effectively to achieving the goals set by management at each manufacturing site.
     The organization of regular internal and external audits is an integral part of the EMS applied at the Group’s manufacturing sites.
     These audits are aimed at verifying that working methods and practices comply with Group policies and with the mandatory and voluntary rules set forth in the Environmental Management Manual adopted by each site.
     The audit activities are carried out according to precise rules and are set with the following time schedule:

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    Annual audits. To ensure an impartial assessment, annual audits are carried out both by the site’s internal auditors, who have received special training in this area, as well as in ISO 9000 system requirements, and by Group auditors from outside the site.
 
    Annual and triennial audits. External auditors from the relevant certification bodies carry out annual and triennial audits, which certify that the requirements indicated in the site manual are implemented in full.
     Together, these audits jointly ensure that EMS’ strengths and shortcomings can be promptly identified by comparing the results from at each site with the rules and targets established for it. As a result, immediate corrective actions may be taken to remedy any weaknesses in the system, in order to prevent environmental problems from occurring, and also to reformulate improvement targets to boost participation and achieve a higher level of cost effectiveness.
Training
     Supporting and developing the EMS requires that everyone working at the site involved, whether they are employees or outside contractors, be appropriately informed and trained in order to:
    promote a general culture of prevention, ensuring that required procedures are put into actual practice; and
 
    guarantee that programs, improvement measures, objectives and targets are widely understood, and thus can be achieved.
     To achieve all these targets, personnel at different stages participate in meetings tailored to their specific role in the plant organization:
    management and upper-level supervisors formulate strategies, examine areas for action, and determine priorities.
 
    base teams stimulate their leaders in order to ensure that conduct is consistent with working procedures and the associated activities.
     Together, these measures promote facility-wide understanding of all guidelines and the results that have been achieved. In 2005, 44,799 people participated in environmental training programs for a total of 156,351 hours.
     Management believes that we are in substantial compliance with regulatory requirements affecting our facilities and our products in the relevant markets and is continuously engaged in monitoring such requirements and adjusting affected operations. Our management believes that environmental regulatory requirements have not had a material adverse effect on our operations.
Research and Innovation
     In a competitive environment characterized by continuous and rapid change, research activities are a vital component of our strategy and expansion programs. Our commitment in this area is clearly demonstrated by the financial resources and the number of researchers and technicians involved.
     In 2005, a central “Research and Innovation” function was set up with the aim of:

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    overseeing multisectorial research and innovation, ensuring a uniform approach and cost containment;
 
    optimizing and facilitating the transfer of results achieved within the Group and guaranteeing synergies between the Sectors in projects of common interest;
 
    promoting opportunities for public funding in the Group;
 
    protecting and enhancing intellectual property; and
 
    promoting the Group’s high-tech image.
     The Research and Innovation function groups together the human and engineering resources already available at the CRF, Elasis and the corresponding development centers within a number of our sectors (Fiat Auto, CNH, Iveco, Magneti Marelli and Comau).
     Consistent with this approach, a multi-sector innovation team has been set up, which is composed of upper echelon engineering and marketing personnel from each sector.
     In 2005, the Group’s two research and development companies, the CRF and Elasis, intensified their interactions with the operating sectors so as to improve policy coordination. Rationalization skills and reaching an excellent level are targets to be reached by the improvement in policies coordination.
     In 2005, research and development expenses4 totaled approximately €1.6 billion, or approximately 3.5% of the net revenues of our industrial operations, a decrease from approximately €1.8 billion in 2004. The plan for the three-year period from 2006-2008 calls for research and development expenses for a total of approximately €5.9 billion. Overall, research and development activities involved approximately 13,200 people at 120 centers in Italy and abroad.
Centro Ricerche Fiat
     In 2005, the CRF concentrated its work in several fields and applications including: environment-friendly engines, innovative vehicle structures, electronic chassis control systems, onboard electronic systems, integrated transportation safety, environmental protection and advanced manufacturing methods. The Center’s headquarters in Orbassano, on the outskirts of Torino, has branches in Trento, Bari, Foggia and Catania, as well as an interest in the C.R.P. — Centro Ricerche Plast-optica — Plastics and Optics Research Center in Amaro (Udine), a joint venture between the CRF and Automotive Lighting and Agemont, whose work in the fields of optics and plastics is instrumental in developing better lighting systems.
     With a staff of approximately 890 employees, the CRF made significant progress during the year, with research and development output totaling 460 projects. Eighty new patent applications were filed, bringing the total number of patents held by the Center to over 1,400. A further 1,000 patents are currently pending. In addition, the CRF was awarded 115 projects in the EU’s Sixth Framework Programme, confirming its leading position in European research field.
     Of the many awards testifying to the high quality of the Center’s work, some of the most important included:
 
4   Including capitalized Research and Development costs and costs charged directly to operations during the fiscal year.

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    Special Prize for “Innovative Concepts for the Vehicle of the Future” which the jury awarded to the Center’s trail-blazing “Sportiva Latina” prototype at the 33rd Barcelona International Motor Show;
 
    “Oscar Masi” 2005 award for new production technologies based on research by the CRF, which was given to Comau for the new AgiLaser laser welding system;
 
    “International Engine of the Year” award for 2005 assigned to the 1.3-litre Multijet engine, currently in production at FPT plants and developed from CRF innovations and patents; and
 
    “EuroCarBody Award” for 2005 – Recognition went to the outstanding work performed by the Fiat Auto and CRF project team in developing, planning and producing the chassis for the Grande Punto.
 
The major accomplishments of the CRF in 2005 are reviewed below:
 
    Panda Natural Power. Fueled with compressed natural gas, this version of the Fiat Panda promises to be the new benchmark in sustainable urban mobility.
 
    Fiat Panda Hydrogen. The Orbassano laboratories are continuing to develop fuel cell propulsion systems. The new Panda Hydrogen follows the Seicento Elettra H2 Fuel Cell and the Seicento Hydrogen. With the fuel cell engine neatly stowed away beneath the floor pan, the Panda Hydrogen retains all of the distinctive features of the New Panda’s occupant compartment, comfortably accommodating the driver and three passengers. At full power, the vehicle reaches a top speed of over 130 kph and can accelerate from 0 to 50 kph in 7 seconds, with grade driveaway capability of 23%. The hydrogen tank, with its total volume of 68 litres, gives the Panda Hydrogen a cruising range of over 200 kilometers in stop-and-go city traffic. Refueling, moreover, takes less than five minutes: much the same as a natural gas-powered car.
 
    Infonebbia Fog Warning System – Experimental Torino-Caselle Airport link. During the Olympic Winter Games in 2006, the Infonebbia Fog Warning System test site on the Torino-Caselle motorway was put into service. The site is integrated with the Torino 2006 Traffic Operative Center mobility and emergency management system.
 
    Motor vehicle safety. Safety, both of vehicle occupants and vulnerable road users such as pedestrians, benefits from the product improvements achieved through the use of numerical/experimental design and testing techniques that focus on crashworthy vehicle structures as well as airbags, seat belts, occupant compartment interiors and pedestrian protection systems.
 
    Lightweight materials for commercial vehicles. The CRF assisted Iveco in developing new ways to increase the competitiveness of the Daily line. The goal for 2005 – reducing vehicle weight without penalizing costs and investments – was reached through the use of high strength steels and flexible manufacturing technologies such as hydroforming and profiling.
 
    High performance thin seat structure. The CRF developed a new front seat structure for subcompact cars featuring a low-bulk seatback and cushion. With this structure, seatback and cushion padding are approximately 50% thinner than conventional seats, while continuing to provide excellent performance in terms of postural comfort and active and passive safety.

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    Spark ignition Multiair engine. The work of the CRF on optimizing the performance of the original UNIAIR electronic valve control technology in terms of feasibility and costs has made it possible to extend this system’s applications to include medium-small engines, thus cutting their CO2 emissions. The preproduction version of the Fire MULTIAIR engine has been successfully tested, demonstrating its low consumption and high performance. In addition, the UNIAIR system turned out to be fully compatible with turbocharging technologies.
Elasis
     Elasis is a highly specialized research center whose work addresses technological innovation, complete vehicle development, mobility, the environmental impact from vehicles, and traffic safety. It has a staff of over 800 employees at its two sites in Pomigliano and Lecce, both located in Southern Italy. Its sophisticated computer-aided design tools and advanced physical and virtual testing equipment are based on an ability to develop and manage information systems that put Elasis in the front ranks of the world’s research and development centers.
     In 2005, Elasis continued to pursue its strategic goals of forging new links in the research/innovation system’s value chain and of promoting local development by (i) working together with universities, private institutions and consortia in basic research and training; (ii) continuing to focus on issues related to mobility and its environmental impact; and (iii) cooperating with employers’ associations and chambers of commerce in Southern Italy to help the area’s small and medium enterprises make the most of their skills.
     Significant achievements were made in the following areas:
    Biomechanics. The Elasis Biomechanics Center developed simulation methods for the crash tests called for by international regulatory requirements and rating systems. As a consequence, the range of experimental tests that can be simulated has been expanded, and simulations represent the more accurately complex physical phenomena that can take place during impact. The testing and statistical analysis methods were applied during the development of all new Fiat Auto models, and contributed significantly to the achievement of 5-star Euro NCAP ratings for Fiat Croma, Grande Punto, and Alfa 159;
 
    225 Minicargo development project. As a part of the joint venture between Fiat Auto and PSA Group, Elasis is working together with Tofas to develop the body shell, trim, and closure panels for this new vehicle. Particular attention is devoted to optimizing weight and standardizing components by applying innovative robust design methods and an integrated system of product archetypes based on Knowledge Based Engineering (KBE) technology;
 
    New product planning. During 2005, Elasis worked with Fiat Auto to set out the requirements for the C-segment models envisaged by the product plan, and with Ferrari in developing the architecture of the new 8-cylinder front-engine roadster, which will be the forerunner of the Ferrari’s future 12-cylinder offerings;
 
    Fast Dynamics Prototype. The Fast Dynamics Prototype – known by its Italian acronym PDR – was developed in order to boost the actuation speed of vehicle dynamics systems. This prototype will serve as the foundation for further work on developing technologies capable of coping with the most extreme conditions; and

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    FIRE engine evolution. In 2005, Elasis continued its development and product engineering work on 8 and 16-valve spark ignition engines in the FIRE series with displacements ranging from 1.1 to 1.4 liters. In particular, the first engine in the new FIRE family was developed and put into production: a 1.4-liter unit with variable valve timing which will be installed on the Grande Punto, Idea, Doblò, Palio and Siena, all of which meet Euro 4 emission requirements.
     In the area of education and prevention, Elasis and Italy’s Federal Police (Polizia di Stato) jointly developed the ICARO project, which aims at promoting a culture of traffic safety through a presentation that will tour a number of Italian cities.
     The following table summarizes our research and development expenses* during 2005 and 2004 by sector:
                 
    2005   2004
    (in million of euros)
Fiat Auto
    665       952  
Maserati
    57       72  
Ferrari
    86       75  
Fiat Powertrain Technologies
    2        
Agricultural & Construction Equipment (CNH)
    234       221  
Trucks and commercial vehicles (Iveco)
    277       243  
Components (Magneti Marelli)
    197       193  
Metallurgical Products (Teskid)
    5       4  
Production Systems (Comau)
    20       17  
Services (Business Solutions)
           
Publishing and Communications (Itedi)
           
Other Companies
    15       14  
 
               
 
TOTAL
    1,558       1,791  
 
               
 
*   Including capitalized Research and Development costs and costs charged directly to operations during the fiscal year
Description of Property
     At December 31, 2005, we owned 189 manufacturing facilities, of which 56 were located in Italy. Our remaining facilities are located principally in the United States, France, Brazil, the United Kingdom, Spain, Poland and Germany. For further information with respect to the types and locations of our manufacturing facilities, see “—Sectors” above. We also own other significant properties, mainly in Italy, including spare parts centers, research laboratories, test tracks, warehouses and office buildings.
     A number of our manufacturing facilities (land and industrial buildings) are subject to mortgages and other security interests granted to secure indebtedness to certain financial institutions. This indebtedness equaled approximately €195 million at December 31, 2005, as compared to €139 million at the end of 2004.
     Management believes that our manufacturing facilities and other significant properties are in good condition and that they are adequate to meet our needs.

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ITEM 4A. UNRESOLVED STAFF COMMENTS
     Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
     Our worldwide net revenues increased by 2.0%, from €45,637 million in 2004 to €46,544 million in 2005. All of our industrial business areas posted improved revenues, except for a slight decrease at Fiat Auto, where revenues decreased by 0.8% as a recovery in car sales volumes in the fourth quarter was insufficient to offset the trend of the first nine months of 2005, when sales slowed down ahead of the launch of new models. Group trading profit for 2005 was €1,000 million, as compared to €50 million in 2004, with the sharply improved result reflecting a €541 million reduction in trading losses at Fiat Auto and the positive trading results of all our other industrial sectors. In 2005, we recorded operating income of €2,215 million, as compared to an operating loss of €585 million in 2004. The turnaround reflects the improvement in trading profit and, more significantly, the gains realized on the settlement with General Motors (€1.1 billion), and the sale of our stake in Italenergia Bis to EDF (€878 million). Income before taxes was €2,264 million, as compared a loss of €1,629 million in 2004. We recorded a positive Group interest in net result of €1,331 million for 2005, as compared to a negative €1,634 million in 2004. The dramatic improvement in our net result was primarily attributable to the increase in operating income, as well as the €858 million in unusual financial income we recorded in connection with the banks’ conversion into equity of the Mandatory Convertible Facility and a decrease in our net financial expenses. We analyze each of these items in more detail below.
     We believe that 2005 marked a turning point for the Fiat Group, as we completed our transformation into an industrial group focused on automotive activities after achieving successful resolutions of a number of key strategic and financial issues. We concluded the dispute with GM through our receipt of a €1,560 million settlement. Then, the Italenergia Bis transaction resulted in a €1.8 billion reduction in our net industrial debt. Finally, conversion of the Mandatory Convertible Facility resulted in a further reduction of €3 billion in the Group’s debt and a significant improvement in our capital structure. See “—Liquidity and Capital Resources” below for more information on each of these transactions.
Changes in the Scope of Consolidation
     Transactions that resulted in a change in the scope of consolidation during 2005 include those described below. None of these transactions had a significant impact on the comparability of our consolidated IFRS results for 2005 and 2004. Accordingly, their effects are described below as appropriate in the context of the discussions of our individual business areas and sectors. See also the Notes to the Consolidated Financial Statements included in Item 18.
    In December 2004, Business Solutions agreed to sell 65% of the temporary employment agency WorkNet to Generale Industrielle. The transaction closed in the first quarter of 2005.
 
    In the first quarter of 2005, Magneti Marelli increased its stake in Mako from 43% to 94%, thereby acquiring control of this Turkish automotive supply company from Koc Holding. Mako, previously accounted for using the equity method, has been fully consolidated on a line-by-line basis.

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    In May 2005, following termination of the Master Agreement with General Motors, we reacquired the powertrain operations that Fiat Auto had previously transferred to the Fiat-GM Powertrain joint venture (other than certain Polish operations that continue to be jointly managed with General Motors). These operations are now managed by our new FPT sector, which as a consequence has generated results starting from May 1, 2005, when we acquired these assets.
 
    On June 1, 2005, Iveco sold to Barclays 51% of a newly created subsidiary, Iveco Finance Holdings Ltd., to which Iveco had contributed the bulk of its financial services. The joint venture, in which Iveco retains a 49% interest, provides commercial vehicle financing and leasing services activities to Iveco customers in France, Germany, Italy, Switzerland and the United Kingdom. See “Item 4. Information on the Company—Sectors— Trucks and Commercial Vehicles” for additional information on this transaction.
 
    In addition, in April 2005, ownership of Maserati was transferred from Ferrari to Fiat Partecipazioni S.p.A., a subsidiary of Fiat S.p.A. The new entity, comprising the group of companies producing and selling Maserati cars, became operational on April 1, 2005. As a consequence, we now present the results of Maserati, which had previously been included in the Ferrari sector, on a standalone basis as a separate sector within our Automobiles business area. In order to present the data for 2004 and 2005 in the analysis below on a comparable basis, we have reclassified the results of the Maserati business for periods prior to April 1, 2005 to separate them from those of the former Ferrari-Maserati sector.
Critical Accounting Policies
     The Consolidated Financial Statements included in Item 18 have been prepared in accordance with IFRS; a summary of the significant differences between IFRS and US GAAP and their effect on consolidated net income and stockholders’ equity is provided in Note 38 to the Consolidated Financial Statements included in Item 18. You should also refer to the section entitled “US GAAP Reconciliation” in the analysis below. The preparation of these financial statements requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Fiat believes that its most critical accounting policies, which are those that require management’s most difficult, subjective and complex judgments, are as follows:
     Allowance for Doubtful Accounts
     The allowance for doubtful accounts reflects our estimate of losses inherent in our wholesale and retail credit portfolio. We have reserved for the expected credit losses based on past experience with similar receivables, current and historical past due amounts, dealer termination rates, write-offs and collections, the careful monitoring of portfolio credit quality and current and projected economic and market conditions. Management believes that these reserves are adequate. Different assumptions or changes in economic circumstances could, however, result in changes to the allowance for doubtful accounts.
     Recoverability of Non-Current Assets (Including Goodwill)
     Non-current assets include property, plant and equipment, investment property, intangible assets (including goodwill), investments and other financial assets. As discussed in “Significant accounting policies” in the Notes to the Consolidated Financial Statements included in Item 18, we

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review the carrying value of our non-current assets held and used and that of assets to be disposed of when events and circumstances warrant such a review. We perform this review using estimates of future cash flows from the use or disposal of the asset. If the carrying amount of a non-current asset is considered impaired, we record an impairment charge for the amount by which the carrying amount of the asset exceeds its estimated recoverable amount from use or disposal determined by reference to our most recent corporate plans. Management believes that the estimates of these recoverable amounts are reasonable; however, estimates of future cash flows may differ from actual cash flows due to many factors, and changes in such estimates would impact the amount of the impairment charges recorded.
     Residual Values of Vehicles and Equipment Leased Out under Operating Lease Arrangements or Sold with a Buy-Back Commitment
     We report vehicles and equipment rented or leased to customers under operating leases as tangible assets. In addition, “sales” of new vehicles made with a buy-back commitment that requires us to repurchase the vehicle in certain circumstances on specified terms are not recognized as sales at the time of delivery but are accounted for as operating leases if it is probable that the vehicle will be bought back. We recognize income from such operating leases over the term of the lease. The depreciation expense for vehicles subject to operating leases is recognized on a straight-line basis over the term of the lease in amounts necessary to reduce the cost of the vehicle to its estimated residual value at the end of the lease term. The estimated residual value of the leased vehicles and equipment is calculated at the lease inception date on the basis of published industry information and historical experience.
     The total value of assets rented or leased to customers under operating leases, excluding vehicles sold with a buy-back commitment and net of accumulated depreciation, was €1,254 million at December 31, 2005 (€740 million at December 31, 2004), and the net carrying amount of vehicles sold with a buy-back commitment was €1,924 million at December 31, 2005 (€1,877 million at December 31, 2004). Realization of the residual values is dependent on our future ability to market the vehicles and equipment under the then-prevailing market conditions. We continually evaluate whether events and circumstances have occurred which impact the estimated residual values of vehicles and equipment on operating leases. Management believes that its current estimates in such regard are reasonable, although changes in the underlying residual values or other external factors impacting our future ability to market these assets under then-prevailing market conditions may impact the realization of currently-estimated residual values.
     Sales Allowances
     We record the estimated impact of sales allowances provided in the form of dealer and/or customer incentives as a reduction of revenues at the time we have created a constructive obligation to provide certain forms of incentives to dealers or the time of sale to the dealer, whichever is later. A number of different types of incentives may be available at any particular time. The determination of the amounts we record in respect of sales allowances requires management to make estimates based on a number of different factors. Management believes that the amounts recorded are adequate, although the amounts actually paid in respect of sales allowances could differ from the original estimates, with a resultant impact on our results.
     Product Warranties
     We make provisions for estimated expenses related to product warranties at the time products are sold. We establish these estimates based on historical information on the nature,

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frequency and average cost of warranty claims. We seek to improve vehicle quality and minimize warranty claims, but we have also extended contractual warranty periods for certain classes of vehicles. Management believes that the warranty reserve is adequate; however, actual claims could differ from the original estimates and therefore necessitate an adjustment to the warranty reserve.
     Pension and Other Post-Retirement Benefits
     Our companies sponsor pension and other post-retirement benefits in various countries. In the US, the United Kingdom, Germany and Italy, we have major defined benefit plans. We consider several statistical and judgmental factors to attempt to anticipate future events for the calculation of the expense and liability related to these plans. These factors include assumptions about the discount rate, expected return on plan assets, rate of future compensation increases and health care cost trend rates, each determined by us within certain guidelines. In addition, our actuarial consultants also use subjective factors such as withdrawal and mortality rates in making relevant estimates. Management believes that the estimates it is currently using are reasonable; however, the actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, longer or shorter life spans of participants and changes in the actual costs of health care. Any such differences may have a significant impact on the amount of pension and other post-retirement benefit expenses we record.
     Realization of Deferred Tax Assets arising from Tax Loss Carryforwards
     As of December 31, 2005, we had gross deferred tax assets arising from tax loss carry-forwards of €5,011 million and valuation allowances against these assets of €4,046 million. The corresponding totals as of year-end 2004 were €4,591 million and €3,383 million, respectively. We have recorded these valuation allowances to reduce our deferred tax assets to the amount that we believe it is probable will be recovered. While we have considered future taxable income and used ongoing prudent tax planning strategies in assessing the need for valuation allowances, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.
     Contingent Liabilities
     We are the subject of pending legal and administrative proceedings covering a range of matters in a number of different jurisdictions, including some matters pertaining to tax issues. Due to the uncertainty inherent in such matters, it is difficult to predict their final outcome. The cases and claims against us often raise difficult and complex factual and legal issues, which are subject to many uncertainties and complexities, including but not limited to the facts and circumstances of each particular case and claim, the relevant jurisdiction and the differences in applicable law. In the normal course of business, we consult with legal counsel and certain other experts on such matters. We accrue a liability when it is determined that an adverse outcome is probable and the amount of the loss can be reasonably estimated. In the event an adverse outcome is possible (but not remote) or an estimate is not determinable, no liability is accrued, but we are required to provide certain disclosures in our financial statements.

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Transition to International Financial Reporting Standards
     Following the coming into force of European Regulation No. 1606 dated July 19, 2002, we and other EU companies whose securities are traded on regulated markets in the EU were required to adopt IFRS (known as international accounting standards, or IAS, until May 2002) in the preparation of our 2005 consolidated financial statements. Standards introduced prior to the renaming of IAS as IFRS are still referred to as IAS; we refer to the combined body of IAS and IFRS standards as IFRS.
     We published our first IFRS consolidated results in our report for the quarter ended March 31, 2005, which included prior-year comparison data recalculated in accordance with IFRS. This quarterly report also included a recalculation under IFRS of our results, including consolidated balance sheets as of January 1 and December 31, 2004, and a consolidated income statement for the year ended December 31, 2004. We prepared these results for comparative purposes in accordance with IFRS 1 – First-time Adoption of IFRS, based on the IFRS applicable from January 1, 2005, as published as of December 31, 2004, as retrospectively applied. See Note 39 to the Consolidated Financial Statements included in Item 18 which includes the restated IFRS financial data referenced above, as well as a reconciliation to IFRS of our Italian GAAP financial information as at January 1, 2004, and December 31, 2004.
     As recalculated in accordance with IFRS, our stockholders’ equity (including minority interest) at December 31, 2004, was €4,928 million, compared to the €5,757 million we reported at that date under Italian GAAP; our total assets at December 31, 2004, as recalculated in accordance with IFRS, were €62,522 million, as compared to the €47,598 million we reported at that date under Italian GAAP. Our net loss for the year ended December 31, 2004 as restated under IFRS was €1,579 million, compared to the net loss of €1,548 million we reported for the same period under Italian GAAP.
Results of Operations*
     The following discussion is based on financial information prepared in conformity with the accounting principles discussed in “Form and content of the consolidated financial statements” and “Principles of consolidation and significant accounting policies” in the Notes to the Consolidated Financial Statements included in Item 18, which have been prepared in accordance with IFRS. These principles differ in certain respects from US GAAP. The effects of such differences on consolidated net income and stockholders’ equity, as well as other disclosures required by US GAAP, are included in Note 38 to the Consolidated Financial Statements included in Item 18. See also Item 3. “Key Information—Selected Financial Data” and “—Changes in the Scope of Consolidation” above.
 
*   Unless otherwise indicated, all references to net revenues and trading profit (loss) for the individual sectors in this section are based on these measures prior to eliminations for intra-Group transactions. Aggregate net revenues for the Automobiles business area are after intra-area eliminations; there are no significant intra-area eliminations for any other business area or line item.

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2005 Compared with 2004
     The following table summarizes the principal line items from our consolidated IFRS income statement for the years presented:
                 
    Year ended 31 December,
    2005   2004
    (in millions of euros)
Net revenues
    46,544       45,637  
Trading profit
    1,000       50  
Gains (losses) on the disposal of investments
    905       150  
Restructuring costs
    502       542  
Other unusual income (expenses)
    812       (243 )
Operating result
    2,215       (585 )
Financial income (expenses)
    (843 )     (1,179 )
Unusual financial income
    858        
Result from investments (1)
    34       135  
Result before taxes
    2,264       (1,629 )
Income taxes
    844       (50 )
Net result before minority interest
    1,420       (1,579 )
Minority interest
    89       55  
Group interest in net result
    1,331       (1,634 )
 
(1)   This item includes investment income, as well as writedowns of and upward adjustments to equity investments in non-group entities accounted for using the equity method.
Net Revenues
     Our worldwide net revenues totaled €46,544 million in 2005, a 2.0% increase, as compared to the €45,637 million recorded in 2004. Increases in revenues for nearly all of our industrial sectors were only partially offset by declines at Fiat Auto, Comau and our other businesses (Business Solutions, Itedi, and our holding and other companies).
     For the Automobiles business area, aggregate net revenues after intra-area eliminations increased by 2.5% to €21,729 million in 2005, from €21,207 million in 2004. Higher revenues at Maserati and Ferrari, together with the revenues generated by FPT following its formation on May 1, 2005, more than offset a 0.8% decline in revenues at Fiat Auto. The slight decrease in revenues at Fiat Auto primarily reflected a 3.9% decrease in unit sales that was mainly concentrated in the first nine months of the year, as discussed in more detail in the discussion of Fiat Auto below. Eliminations for intra-area transactions were €1,592 million and €72 million in 2005 and 2004 respectively; with the significant increase reflecting the creation of FPT in May 2005, which provides the powertrains for nearly all of the vehicles produced by Fiat Auto.
     CNH recorded net revenues of €10,212 million in 2005, an increase of 2.3%, compared with €9,983 million in 2004, as the impact of higher sales of construction equipment in the Americas and the rest of the world, as well as higher prices, were partially offset by decrease in sales of agricultural equipment in the sector’s main markets. Net revenues at Iveco increased 4.9% to €9,489 million from €9,047 million in the prior year, primarily reflecting higher unit sales.

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     In the Components and Production Systems business area, aggregate net revenues increased by 3.5%, from €6,416 million in 2004 to €6,642 million in 2005, reflecting higher revenues at Magneti Marelli and Teksid that were only partially offset by lower revenues at Comau. Aggregate net revenues in our other business area declined 19.2% to €1,618 million in 2005 from €2,003 million in 2004, due to a decline in revenue at Business Solutions, Itedi and our other businesses.
Trading Profit
     In 2005, we recorded a trading profit of €1,000 million, a very significant increase from the €50 million recorded in 2004. The increase reflected a €669 million reduction in the trading loss of the Automobiles business area (of which €541 million related to Fiat Auto), as well as higher trading profits at CNH, Iveco and the Components and Production Systems business area, which were offset only in part by a higher trading loss at our other businesses.
     The net revenues and trading profit (loss) recorded by each of our sectors prior to eliminations are summarized in the table “Operating Results by Sector” in Item 4 and analyzed in the more detailed sector-by-sector discussion appearing below.
Net Gain on the disposal of investments
     Net gain on the disposal of investments was €905 million in 2005, more than six times higher than the €150 million net gain on such sales recorded in 2004. The principal items contributing to this were the €878 million gain on the sale of our interest in Italenergia Bis, as well as a €23 million gain on the sale of Palazzo Grassi S.p.A., which owned the historic Palazzo Grassi in Venice. In 2004, the €150 million net gain on such sales included a gain of €81 million on the sale of Fiat Engineering, a gain of €32 million on the sale of Edison shares and warrants, and a gain of €31 million on the sale of the Midas automotive repair and maintenance service business.
Restructuring Costs
     Our restructuring costs in 2005 amounted to €502 million, a reduction of 7.4% from 2004, and primarily comprised:
  €162 million in restructuring costs at Fiat Auto related to the “rightsizing” of the sector’s central business governance structures and those of certain companies outside Italy, as well as the restructuring of the former Fiat-GM Powertrain activities following the unwinding of those joint ventures in May;
 
  €103 million at Iveco, mainly for reorganization activities, particularly with regard to staff structures;
 
  €87 million at CNH, primarily attributable to the ongoing reorganization of activities and the restructuring process underway at certain production plants;
 
  restructuring costs of €46 million, €33 million and €22 million at Comau, Magneti Marelli and Business Solutions, respectively;
     In 2004, our restructuring costs totaled €542 million, and were primarily concentrated at Fiat Auto (€355 million), CNH (€68 million), Magneti Marelli (€48 million) and Iveco (€24 million).

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Other Unusual Income (Expenses)
     We recorded €812 million of unusual income in 2005, as compared to unusual expenses of €243 million in 2004, with the positive result reflecting the €1,134 million gain (net of related costs) arising from GM’s payments to us in connection with the termination of the Master Agreement, as well as a €117 million gain realized on our final sale of certain real estate assets that had been securitized in 1998. These gains were partially offset by other unusual expenses, primarily comprising €187 million in expenses relating to the process of reorganization and streamlining of relationships with the Group’s suppliers (which was launched in 2004) and with Fiat Auto dealers, €141 million in expenses at Fiat Auto associated with product platform rationalization and the reallocation of production activities, and €71 million in indemnity claims paid in connection with the unwinding of our Global Value joint venture with IBM, as well as €30 million in charges related to businesses we had disposed of in prior years.
Operating Result
     In 2005, we recorded operating income of €2,215 million, as compared with an operating loss of €585 million in 2004. The very significant improvement in our operating results reflected the notable positive change in other unusual income (expenses) described below, as well as the €950 million increase in trading profit, a €755 million increase in net gains on the disposal investments, and a reduction of approximately €40 million in our restructuring costs described above.
Financial Income (Expenses)
     Our net financial expenses totaled €843 million in 2005, a 28.5% decrease from the €1,179 million recorded in 2004. The 2004 result included approximately €150 million in net financial expenses recorded on the unwinding of an equity swap on General Motors shares (see “—Off Balance Sheet Arrangements” below for additional information on this transaction) and approximately €100 million in write downs of financial receivables. The overall reduction in our net financial expenses net of these two items reflected the lower net debt of the Group’s industrial companies and greater efficiency in our funding operations, despite a general increase in market interest rates, particularly on dollar-denominated borrowings. Net financial expenses also include interest costs on pension and other post-employment benefits to employees, which amounted to €146 million in 2005, compared to €127 million in 2004.
Unusual Financial Income
     We also separately recorded “unusual financial income” of €858 million in 2005 in connection with the capital increase resulting from the conversion of the Mandatory Convertible Facility, reflecting the excess of the aggregate €3 billion subscription price for the shares acquired by the lending banks and the actual stock market price of those shares on the subscription date. We had no unusual financial income or expenses in 2004.
Income Taxes
     The net income tax effect on our statement of operations for 2005 was a charge of €844 million (compared with a tax benefit of €50 million in 2004), including €425 million in deferred taxes, €277 million of which was attributable to a reversal of deferred tax assets related to the gain recorded in connection with the termination of the Master Agreement with GM. The remaining deferred tax charges, as well as €184 million in current tax charges recorded during 2005, principally related to income at the Group’s subsidiaries outside of Italy. In addition, €119 million was

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attributable to income taxes for prior years (compared to none in 2004). IRAP, the regional tax on production activities in Italy, totaled €116 million in 2005, compared to €122 million in 2004.
Net Result
     As a result of the factors described above, we recorded a positive net result before minority interest of €1,420 million in 2005, compared to a negative €1,579 million in 2004. Group interest in net result was positive for €1,331 million in 2005, compared to negative €1,634 million in 2004.
Earnings per Share
     Earnings per share (ordinary, preference and savings) was equal to net income per share of €1.250 in 2005, as compared with a net loss per share of €1.699 in 2004. Our earnings per share for 2005 reflected the issuance of 291,828,718 new ordinary shares to the lending banks in September 2005 in connection with the conversion of the Mandatory Convertible Facility. In accordance with IAS 33, the dilutive effects of the Mandatory Convertible Facility have not been included in the determination of earnings per share in 2004, as there was a net loss for the period.
Automobiles Business Area
     As noted above, aggregate net revenues after intra-area eliminations for the Automobiles business area increased by 2.5% to €21,729 million in 2005, from €21,207 million in 2004. Higher revenues at Maserati (+30.3%) and Ferrari (+9.7%), together with the €1,966 million in revenues generated by FPT following its creation on May 1, 2005, more than offset a 0.8% decline in revenues at Fiat Auto. Eliminations for intra-area transactions were €1,592 million and €72 million in 2005 and 2004 respectively; with the significant increase reflecting the creation of FPT, which provides the powertrains for nearly all of the vehicles produced by Fiat. The Automobiles business area reduced its trading loss by 78.5% or €669 million, from €852 million in 2004 to €183 million in 2005. Fiat Auto and Maserati each reduced their trading losses sharply, while Ferrari increased its trading profit and FPT reported positive trading profit in its first eight months of operations.
     The results of each of the business area’s sectors are analyzed in more detail below.
     Fiat Auto. Fiat Auto’s total revenues in 2005 were €19,533 million, a slight decrease of 0.8% from €19,695 million in 2004. The decrease was due to lower sales volumes, particularly in the first nine months of the year, the impact of which was only partially offset by an improved product mix and positive exchange rate effects. The sector’s performance varied over the course of 2005, as sales in the first half of the year were impacted by reduced sales of existing models in anticipation of the expected launch of new models, intense competitive pressure, and Fiat Auto’s focus on more profitable sales channels. The commercial launch of the Fiat Croma in May, and the Fiat Grande Punto and Alfa 159 in September and October, respectively, reversed the trend, as unit sales rose in the fourth quarter of the year. These launches, followed by the presentation of the Alfa Brera, Fiat Panda Cross, and Lancia Ypsilon Momo Design models in the fourth quarter, allowed Fiat Auto to reverse the sales decline.
     Fiat Auto’s global deliveries to the dealer network, importers and other large direct customers during 2005 totaled approximately 1,697,300 vehicles, a decrease of 3.9% from 1,766,000 units in 2004. In Western Europe, Fiat Auto delivered 1,100,000 vehicles in 2005, a decrease of 7.8% from 2004, with the rate of decline leveling off in the fourth quarter due to the positive contribution of new models. New registrations in the Western European automobile market as a whole remained essentially unchanged, decreasing by only 0.2% from 2004 industry totals. In Italy, the sector’s deliveries declined by 2.4% to 687,700 units, as new registrations in the Italian market as

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a whole declined by 1.3%. Fiat Auto’s deliveries in the sector’s other principal European markets declined by 15.8% in Germany, 38.5% in the United Kingdom and 3.0% in Spain, with an increase posted only in France (+8.3%). Trends in new registrations in these markets were mixed, with a decline of approximately 5% in the United Kingdom and slight gains in France (+2.6%), Germany (+1.6%) and Spain (+0.9%). Fiat Auto’s share of the Italian automobile market held steady at 28.0%, while its market share in Western Europe as a whole declined to 6.5% from 7.2% in 2004.
     In Poland, Fiat Auto sold a total of 33,800 vehicles in 2005, or 44.3% fewer than in 2004, with the decrease being mostly attributable to weak demand as new registrations in the Polish market fell by 26.5%. Fiat Auto’s automobile market share in Poland declined by 6.4 percentage points to 10.7%. In Brazil, where new automobile registrations increased by 9.1% in 2005, the sector sold a total of approximately 404,300 vehicles, a 12.9% increase from 2004, primarily as a result of a recovery of demand in the local market and the introduction of the flex (alcohol and gasoline bi-fuel) versions of Palio and Mille models in the country. Thanks to these gains, Fiat Auto’s share of the Brazilian automobile market increased by 0.9 percentage points to 24.4%. In Argentina, where the economy continued to recover from the deep crisis of 2002, the automobile market expanded by 35.6%. Fiat Auto increased its market share in Argentina to 12.4% in 2005, up 0.6 percentage points from 2004.
     Fiat Auto delivered 285,200 light commercial vehicles in 2005, an increase of 5.1% from 2004, and maintained its market share in Western Europe largely unchanged at 10.4% (down 0.2 percentage points from 2004).
     In 2005, Fiat Auto’s financial services subsidiaries provided €9,810 million in financing to the distribution network, 11.5% less than in 2004. The reduction in business volume reflected the decrease in unit sales in a number of European countries, a policy designed to reduce and selectively control dealer inventories and the sale of the sector’s retail financing activities in the United Kingdom in the fourth quarter of 2004. In Brazil, on the contrary, Fiat Auto’s lending activity mirrored the positive sales performance in the local market. The sector’s financial activities provided €3,670 million in financing to suppliers, or 42.1% less than in 2004. The sector’s financing and mobility services activities had revenues of €619 million in 2005, with the decrease of 16.7% from €743 million in 2004 reflecting the reduction in financing to suppliers as well as the divestiture in the United Kingdom.
     Fiat Auto strengthened its position in the rental and corporate fleet business in Italy by acquiring Enel’s share of Leasys, which rents and manages corporate car fleets, at the end of 2005. Savarent continued to function as a captive company that operates through the Fiat Auto dealer network, serving mainly individuals and small and medium-size businesses. The sector’s rental fleet rose to 144,500 vehicles at the end of 2005, or about 3% more than the previous year.
     Fiat Auto narrowed its trading loss by 65.8%, recording a trading loss of €281 million in 2005, as compared to €822 million in 2004. The sharp decline in the sector’s trading loss was primarily attributable to a more profitable sales mix and very sharp reductions in governance costs, as well as a reduction in production costs reflecting purchasing efficiencies and a strong focus on more profitable sales channels, which together more than offset the impact of the declines in revenues and unit sales. Fiat Auto’s 2005 trading loss was equal to -1.4% of its net revenues, exceeding both the target of approximately -1.5% set by management and the approximately -4% recorded in 2004.
     Maserati. Maserati recorded revenues of €533 million in 2005, an increase of 30.3% from €409 million recorded by the same operations in 2004 (when they were part of the Ferarri-Maserati sector). The increase reflected strong sales of the Quattroporte and the special MC 12 , a road version of the MC 12 Competizione race car that won the 2005 FIA GT championship. Maserati’s sales to dealer network

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were 5,568 units in 2005, an increase of 16.9% from the prior year. The sector recorded a trading loss of €85 million in 2005, compared to a loss of €168 million in 2004. The 2004 result had included €46 million in fixed asset write-downs, while the sector’s higher sales volumes and improved product mix in 2005 contributed to the reduction in its trading loss.
     Ferrari. Ferrari recorded revenues of €1,289 million in 2005, a 9.7% increase from €1,175 million recorded by the same operations in 2004 (when they were part of the Ferarri-Maserati sector). The increase was largely attributable to the positive performance of the F430 and 612 Scaglietti, while revenues were also boosted by sales of the limited edition Superamerica and FXX. The sector recorded €157 million in trading profit, an increase of 13.8% from €138 million in 2004. The improvement reflected higher sales volumes and efficiency gains, which were partially offset by the negative impact of exchange rates.
     Fiat Powertrain Technologies. Formed in May 2005 following the termination of the Master Agreement with GM, the new sector recorded revenues of €1,966 million during the last eight months of the year, most of which were attributable to sales to Fiat Auto, as sales to third parties accounted for approximately 23% of its total revenues. FPT recorded a trading profit of €26 million between May and December 2005.
CNH (Agricultural and Construction Equipment Business Area)
     CNH recorded IFRS net revenues of €10,212 million, an increase of 2.3% from the €9,983 million recorded in 2004. The improvement reflected higher revenues at the sector’s financial services operations and the positive impact of exchange rates, as well as higher sales of construction equipment and improved prices, all of which more than offset the impact of declines in the sector’s sales of agricultural equipment.
     The following table sets forth CNH’s net revenues from sales of agricultural and construction equipment, as reported by CNH, for the periods indicated in both US dollars and euros.
                 
Net Revenues from Sales of Equipment   2005   2004
    (in millions of euros)
Agricultural Equipment
    6,304       6,431  
Construction Equipment
    3,186       2,850  
 
               
TOTAL
    9,490       9,281  
 
               
    (in millions of dollars)
 
               
Agricultural Equipment
    7,843       8,000  
Construction Equipment
    3,963       3,545  
 
               
TOTAL
    11,806       11,545  
     CNH’s net revenues from sales of equipment increased by 2.3% to €9,490 million, from €9,281 million in 2004. In US dollar terms, net revenues from sales of equipment increased by $261 million, or approximately 2.3%, primarily due to variations in exchange rates for currencies other than the euro. When calculated so as to exclude the impact of exchange rates, net sales of construction equipment increased by roughly 11% while those of agricultural equipment decreased by about 6%.
     Overall world market demand for major agricultural equipment product lines (as measured by new registrations) was approximately 4% higher in 2005 than in 2004, reflecting a worldwide increase in

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demand for tractors (+5%) and a decline for combines (-16%). Market demand for tractors was down in Latin America (-19%) and Western Europe (- 6%), while increasing significantly in the rest of the world’s markets (+26%) and remaining flat in North America. The market for combines declined sharply in Latin America (-58%), increased in Western Europe (+6%) and in the rest of the world markets (+10%) and remained flat in North America. CNH’s overall tractor market share declined by approximately 2.5 percentage points from 2004, while the sector’s overall market share for combines declined by approximately 1 percentage point, but held steady in North America. World market demand for the construction equipment product lines in which CNH competes increased by about 8% in 2005, rising in all principal markets and for all major product categories. Market demand for loader backhoes rose by about 15% worldwide due a significant increase in Latin America (+47%) and growth in the North American market (+8%). Market demand for skid steer loaders was up approximately 4% worldwide as a result of positive trends in Latin America (+34%) and Western Europe (+9%). Retail unit demand for heavy equipment increased by about 8% worldwide, as demand rose in Latin America (+18%), North America (+15%) and Western Europe (+4%). CNH’s overall construction equipment market share (calculated on a unit basis) declined by approximately one percentage point.
     Expressed in US dollars, CNH’s net sales of agricultural equipment decreased to $7,843 million, approximately 2% lower than in 2004. This decline reflected a reduction in wholesale unit sales and an unfavorable mix, which were only partially offset by the increase due to improved price and new products. Net sales declined slightly in Western Europe as a consequence of lower sales volumes, but declined sharply in Latin America, where the reductions of unit sales reflected the market declines and a worse products mix. On the other hand, net sales grew in North America, notwithstanding lower unit sales; net sales in the rest of the world benefited from higher sales of tractors and combines.
     Net sales of construction equipment increased by approximately 12% to $3,963 million in 2005, primarily due to improved net price realization, higher wholesale unit sales and improved product mix linked to new products. Gains in net sales were recorded in North America, where CNH’s total unit sales grew due to higher market demand, and in Latin America, where net sales increased by about 58%, reflecting strong growth in volumes and the positive impact of exchange rates. Net sales declined in Western Europe as a result of lower wholesale unit sales reflecting the negative impact of CNH’s network consolidation in the first half of 2005. In early 2005, the sector consolidated its New Holland Construction brand family into one distribution network structure in Western Europe and Latin America, thereby completing the last phase of CNH’s worldwide dual brand and dual distribution network structure. Net sales of construction equipment began to increase in the second half of 2005.
     The following table sets forth certain data on CNH’s net revenues from sales of equipment by geographic region for the periods indicated in both US dollars and euros.

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Net Revenues from Sales of Equipment   2005     2004  
    (in millions of euros)  
North America
    4,580       4,213  
Western Europe
    2,929       3,082  
Latin America
    617       734  
Rest of the World
    1,364       1,252  
TOTAL
    9,490       9,281  
                 
    (in millions of dollars)  
North America
    5,698       5,241  
Western Europe
    3,643       3,834  
Latin America
    768       913  
Rest of the World
    1,697       1,557  
TOTAL
    11,806       11,545  
     Expressed in US dollars, CNH’s net revenues from sales of equipment in North America increased by 8.7% from $5,241 million in 2004 to $5,698 million in 2005, reflecting higher sales of construction equipment and higher revenues from agricultural equipment sales. Net sales of equipment in Western Europe decreased by 5.0% from $3,834 million in 2004 to $3,643 million in 2005, reflecting the effect of declines in unit sales of both agricultural equipment and construction equipment. Net sales of equipment in Latin America decreased by 15.9%, from $913 million in 2004 to $768 million in 2005, as a result of the decline in agricultural equipment sales volumes, which was partially offset by strong sales of construction equipment and the favorable impact of variations in exchange rates. In the rest of the world, sales of equipment were up 9.0%, to $1,697 million in 2005 from $1,557 million in 2004, mainly as a result of higher unit sales of combines, tractors and construction equipment.
     When stated in euros, our reporting currency, CNH’s net revenues from sales of equipment showed essentially the same trends as noted above with respect to US dollars, as there were no material variations in the average exchange rate between the dollars and the euro in 2005.
     CNH recorded a trading profit of 698 million in 2005 (6.8% of net sales, exceeding the target of 6 — 6.5% set by management), compared to 467 million (4.7% of net sales) in 2004. The 49.5% increase was primarily attributable to improved pricing, higher sales volumes of construction equipment, the realization of manufacturing efficiencies, and greater profitability in financial services. These positive variations more than offset higher raw material prices, lower volumes in the agricultural equipment segment and increased research and development costs. The sector also benefited from a structural reduction in its employee healthcare costs in North America, which also resulted in a positive 83 million reversal to previously accrued reserves. See Note 26 to the Consolidated Financial Statements included in Item 18 for further information.
Iveco (Trucks and Commercial Vehicles Business Area)
     Iveco’s revenues for 2005 totaled 9,489 million, an increase of 4.9% from the 9,047 million recorded in 2004, reflecting increased unit sales across its principal product lines, particularly for heavy and light vehicles.
     Moreover, the volumes reflect vehicles shipped, while, under the new IFRS, only rental revenues can be reported for vehicles sold with a buy-back commitment, with the total rent being equal to the

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difference between the sale price and the buy-back price, which is then allocated over the term of the contract. Consequently, sales volumes might not correlate immediately with revenue volumes.
     During 2005, Iveco delivered approximately 172,500 vehicles worldwide (15,400 of which were sold with buy-back commitments), or 6.3% more than in 2004. Iveco’s sales including those by associated companies, which amounted to approximately 64,800 units (up from 57,500 in 2004), totaled approximately 237,300 units, an increase from 219,800 units in 2004.
     In Western Europe, Iveco delivered approximately 134,900 vehicles, or 2.3% more than the 131,800 vehicles delivered in 2004, as new registrations in the Western European market for commercial vehicles (measured in terms of new registrations with a GVW of 2.8 tons or more) increased by 5.2% to approximately 1,109,700 units. Significant increases in demand were registered in France (+10.8%) and Spain (+9.6%), as well as the United Kingdom (+3.7%) and Germany (+2.9%), the exception was Italy where demand contracted by 1.7%. In this context, Iveco reported significant increases in deliveries in France (+7.5%), Spain (+7.1%), the United Kingdom (+6.5%) and Germany (+1.9%), the impact of which was offset in part by a decrease in Italy (-3.8%) reflecting the weak market. The sector’s share of the overall Western European market for vehicles with a GVW of 2.8 tons or more was 10.9%, virtually unchanged from the prior year (-0.2 percentage points).
     In Eastern Europe, Iveco delivered approximately 13,300 units, or 3.0% more than the 12,900 units delivered in 2004. Outside Europe, Iveco’s deliveries increased by 38.0%, from approximately 17,600 vehicles to 24,300 in 2005, with particular gains in Latin America (where Iveco shipped 11,900 vehicles, 22.8% more than in 2004).
     Irisbus, the sector’s bus unit, sold 8,526 buses during the period, in line with the prior year (8,553 units). Unit sales at Naveco, the sector’s joint venture in China with the NAC Group, increased by roughly 20% to approximately 18,000 vehicles. Sales by Iveco’s unconsolidated licensee in Turkey were about the same as in 2004 (5,200 units), while those of its associated company in India increased by 14.0 % to approximately 59,600 vehicles.
     Iveco produced approximately 435,300 diesel engines, about the same as in 2004 (435,000 units). Forty-one percent of these engines were used by the sector itself, while 48% were sold to CNH and Sevel, a joint venture between Fiat Auto and the PSA Group that produces light commercial vehicles. Iveco’s powertrain operations generated revenues of 2,554 million in 2005 (of which approximately 58% came from intra-sector sales), for a year-over-year gain of 6.3%, and a trading profit of 83 million, up from 76 million in 2004. Starting January 1, 2006, Iveco’s powertrain activities are managed by FPT and their results are reported as a part of that sector.
     Iveco’s financing and rental activities recorded revenues of 457 million in 2005, a decrease of 22.7% from the 591 million recorded in 2004. On June 1, 2005, Iveco sold to Barclays a 51% stake in Iveco Finance Holdings Limited, a company comprising certain financial services companies of Iveco operating in France, Germany, Italy, Switzerland and the United Kingdom. As of that date, Iveco Finance Holdings Limited was no longer consolidated on a line-by-line basis, but rather accounted for using the equity method. The decrease in revenues was mainly due to this disposal. At the end of 2005, Iveco’s fleet of rental vehicles numbered approximately 3,116, approximately 17% fewer than the 3,770 available at the end of 2004.
     Iveco recorded trading profit of 415 million in 2005, an increase of 11.9% from the 371 million posted in 2004, with the improved result reflecting higher volumes and improved pricing, which together more than offset the impact of higher raw materials prices and a less favorable

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market mix. The sector’s trading profit was equal to 4.4% of its revenues, exceeding both the target of more than 4% set by management and the 4.1% recorded in 2004.
Components and Production Systems Business Area
     The Components and Production Systems business area recorded aggregate net revenues of 6,642 million in 2005, or 3.5% more than the 6,416 million posted in 2004, reflecting the positive performance of Magneti Marelli (+6.3%) and Teksid (+13.8%), which were partly offset by a reduction in net revenues at Comau (-8.1%). The trading profit of this area was 249 million in 2005, an increase of 50.0% from 166 million in 2004. The overall increase of 83 million was primarily attributable to Teksid, whose performance in 2004 had been negatively affected by major write-downs of fixed assets. The business area’s 2005 trading profit was equal to 3.7% of its net revenues, exceeding both the target of approximately 3% set by management and the 2.6% recorded in 2004. The results of each of the business area’s sectors are analyzed in more detail below.
     Components. Magneti Marelli’s revenues amounted to 4,033 million in 2005, or 6.3% more than the 3,795 million recorded in 2004. The increase was primarily attributable to the consolidation of Mako from January 1, 2005. Excluding changes in the scope of consolidation and exchange rate effects, revenues increased by roughly 2%. The strong performance of Magneti Marelli operations in Brazil and Poland and the positive trend of its onboard electronics activities offset lower sales volumes in Italy, which started recovering in the fourth quarter. Magneti Marelli recorded trading profit of 162 million, compared to 165 million in 2004 with the 1.8% decline being attributable to higher prices of raw materials, particularly steel and plastic, the impact of which was not completely offset by efficiency gains.
     Metallurgical Products. Teksid reported revenues of 1,036 million, or 13.8% more than the 910 million recorded in 2004, reflecting improved sales volumes at the cast iron business unit (+4.6%, due to increased sales in North America and Brazil), the positive impact of exchange rates and the sector’s ability to recover higher raw materials costs through higher sales prices. These positive factors were partially offset by lower volumes in the magnesium business unit (-6.8%). Teksid recorded trading profit of 45 million in 2005, compared to a trading loss of 39 million in 2004, when the sector’s trading results reflected 68 million in writedowns of fixed assets.
     Production Systems. Comau recorded revenues of 1,573 million in 2005, a decline of 8.1% from the 1,711 million recorded during 2004, largely reflecting the impact of the transfer of Comau’s European service activities to Iveco, Magneti Marelli and CNH. When calculated on a comparable scope of consolidation, Comau’s revenues rose by approximately 6%, reflecting a strong performance in the car bodywork and service areas. The production systems sector posted trading profit of 42 million, up 5.0% from 40 million in 2004, as the negative effect of the reduced scope of the sector’s operations was offset by efficiency gains at the sector’s North American activities.
Other Businesses Business Area
     Our other businesses recorded aggregate net revenues of 1,618 million in 2005, down 19.2% from 2,003 million posted in 2004. The combined trading loss reported by the other businesses amounted to 179 million, as the area’s loss was 77 million greater than in 2004. Results for each of the business area’s sectors are analyzed in more detail below.
     Services. Business Solutions had revenues of 752 million for 2005, a decrease of 23.0% from 976 million in 2004. The decrease primarily reflected the sector’s sale of the temporary employment agency WorkNet. On a comparable scope of consolidation basis, the decrease in

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revenues was approximately 5%, mainly reflecting lower activity in the administration area, following a redefinition of the services the sector provides to other Group companies. Trading profit amounted to 35 million, as compared with 41 million in 2004, with the 14.6% decline primarily reflecting the contraction in the sector’s activities and changes in the scope of consolidation.
     Publishing and Communications. Itedi’s revenues amounted to 397 million in 2005, a decrease of 2.5% from the 407 million reported in 2004. The decrease reflected lower advertising revenues recorded by Publikompass following termination of a major concession agreement, lower newspaper sales revenues (as average daily circulation decreased to 312,000 in 2005 from 339,000 in 2004), as well as a more selective and profitability-oriented approach to brand-stretching initiatives which use La Stampa’s nationally recognized brand name. The publishing and communications sector reported trading profit of 16 million, as compared with trading profit of 11 million in 2004, with the 45.5% increase attributable to the realization of industrial, distribution and marketing efficiencies.
     Holding companies, Other companies and Eliminations. Holding companies, Other companies and Eliminations recorded a trading loss of 230 million in 2005, an increase of 49.4% from 154 million in 2004. The increased loss was mainly due to a reduction in revenues related to the “High Speed Railway” (TAV) project, for which Fiat S.p.A. serves as general contractor and the changing mix of services provided to the Group’s other sectors.
Effect of Inflation
     Management believes that the impact of inflation was not material to our net revenues, operating result or consolidated net result in the years ended December 31, 2005 and 2004.
US GAAP Reconciliation
     Our consolidated net income determined in accordance with US GAAP was 125 million in 2005 and a net loss of 2,100 million in 2004, as compared with net income of 1,420 million and a net loss of 1,579 million, respectively, for the same periods under IFRS. For a more detailed discussion of the principal differences between IFRS and US GAAP as they relate to our consolidated net income and losses, see Note 38 to the Consolidated Financial Statements included in Item 18.
     Our US GAAP net income for the year ended December 31, 2005 was 1,295 million lower than the net income we reported under IFRS due to the net effects of:
    the reversal of the unusual financial income of 858 million recorded under IFRS upon the conversion of the Mandatory Convertible Facility. Under US GAAP, this amount was recorded as additional paid-in capital;
 
    the amortization, under the corridor method, of cumulative actuarial losses fully recognized at January 1, 2004 under IFRS, and the deferral for US GAAP purposes of the income realized under IFRS as a consequence of plan amendments to certain benefit plans completed in 2005 resulting in an overall negative effect of 260 million;
 
    expensing of development costs under US GAAP, net of the effect of amortization and impairment losses, whereas such costs are capitalized under IFRS, amounting to a negative effect of 82 million;

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    the deferral of the gains realized on certain sale and leaseback transactions recorded under IFRS, amounting to a negative effect of 127 million;
 
    higher impairment losses on property, plant and equipment net of related depreciation expense, due to different carrying value of property, plant and equipment, differences in impairment calculation methodology, and the reversal of previously recorded impairment losses recorded under IFRS but prohibited under US GAAP amounting to a negative effect of 57 million;
 
    the reversal of accrued restructuring provisions due to later recognition of restructuring costs under US GAAP, amounting to 111 million;
 
    the deduction of minority interest amounting to 22 million;
 
    other differences which relate primarily to differences in accounting for the effects of foreign currency translation for subsidiaries operating in highly inflationary economies, differences arising on equity investments, differences in accounting for borrowing costs, and the effect of discounting provisions under IFRS but not under US GAAP.
     The net loss for the year ended December 31, 2004 was 521 million higher under US GAAP than the loss reported under IFRS due to the net effects of:
    the expensing of development costs under US GAAP, net of the effect of amortization and impairment losses, whereas such costs were capitalized under IFRS, amounting to a negative effect of 395 million;
 
    the amortization, under the corridor method, of actuarial losses fully recognized at January 1, 2004 under IFRS, amounting to a negative effect of 138 million;
 
    lower impairment losses on property, plant and equipment net of related depreciation expense due to different carrying value of property, plant and equipment, and differences in impairment calculation methodology under US GAAP, amounting to a positive effect of 72 million;
 
    the accrual of restructuring costs due to later recognition under US GAAP amounting to 62 million;
 
    the deduction of minority interest amounting to 42 million;
 
    other differences that relate primarily to differences in accounting for the effects of foreign currency translation for subsidiaries operating in highly inflationary economies, differences arising on equity investments, differences in accounting for borrowing costs, and the effect of discounting provisions that exist under IFRS but not under US GAAP.
     Stockholders’ equity determined in accordance with US GAAP was 6,714 million and 2,718 million at December 31, 2005 and 2004, respectively, as compared with 9,413 million and 4,928 million, respectively, under IFRS. For a more detailed discussion of the principal differences between IFRS and US GAAP as they relate to our consolidated stockholders’ equity, see Note 38 to the Consolidated Financial Statements included in Item 18.

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     The reduction in stockholders’ equity under US GAAP as compared with IFRS at December 31, 2005 amounts to 2,699 million (2,210 million at December 31, 2004) and was the result of:
    lower US GAAP intangible fixed assets of 2,604 million as of December 31, 2005 (2,489 million as of December 31, 2004) due to differences in accounting for development costs which are capitalized and amortized under IFRS but expensed under US GAAP;
 
    higher US GAAP goodwill of 464 million as of December 31, 2005 (487 million as of December 31, 2004) related to differences in accounting for goodwill recognition, amortization and impairment;
 
    higher US GAAP property, plant and equipment of 179 million as of December 31, 2005 (236 million as of December 31, 2004) relating primarily to lower impairment charges recorded under US GAAP;
 
    lower US GAAP liabilities for employee benefits of 154 million as of December 31, 2005 (363 million as of December 31, 2004) due to the positive effect of the amortization, under the corridor method, of actuarial losses fully recognized at January 1, 2004 under IFRS, net of the effect of the recognition of a minimum pension liability, as an increase to US GAAP stockholders’ equity;
 
    lower US GAAP restructuring liabilities of 168 million as of December 31, 2005 (34 million as of December 31, 2004), due to later recognition of restructuring costs;
 
    lower US GAAP equity of 164 million as of December 31, 2005 (35 million as of December 31, 2004), relating to the deferral of gains realized under IFRS in certain sale and leaseback transactions;
 
    higher US GAAP equity of 51 million as of December 31, 2005 (76 million as of December 31, 2004), due to differences in accounting for Qualifying Special Purpose Entities under US GAAP and IFRS;
 
    lower US GAAP deferred tax assets of 194 million as of December 31, 2005 (295 million as of December 31, 2004), due primarily to differences in the criteria for determination of valuation allowances and to the tax effect of the taxable US GAAP differences;
 
    lower US GAAP equity of 721 million as of December 31, 2005 (652 million as of December 31, 2004), due to the deduction of minority interest;
 
    other less significant differences resulting in an aggregate reduction of US GAAP stockholders’ equity of 32 million as of December 31, 2005. The net total of such other less significant differences had resulted in an increase of US GAAP stockholders’ equity of 65 million as of December 31, 2004.
     Liquidity and Capital Resources
     Our principal sources of liquidity in 2005 were cash provided by operations, which totaled 3,716 million, including the 1,134 million net gain on payments received from GM in connection

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with the termination of the Master Agreement, as well as the repayment to Fiat of approximately 2 billion in intercompany indebtedness by entities deconsolidated in connection with the creation of Iveco Finance Holdings (which repayment was recorded as cash provided by investing activities). We used these sources of liquidity primarily to fund our capital expenditures, which amounted to 3,052 million in 2005, as well as to repay indebtedness, primarily the repayment at maturity of approximately 1,900 million in bonds that had been outstanding at the beginning of the year. See “Cash Flow Analysis” below for additional information.
     At December 31, 2005, our total debt stood at 25,761 million, or 20.0% less than the 32,191 million recorded under IFRS at the end of 2004. Of the total at year-end 2005, 10,210 million (10,174 million at December 31, 2004) related to asset-backed financing operations that must be recorded on our IFRS balance sheet. Of our remaining 15,551 million of debt at December 31, 2005 (22,017 million at year-end 2004), bonds accounted for 7,634 million (9,326 million at the end of 2004), bank loans accounted for 5,562 million (10,450 million at the end of 2004), debt arising from the banking activities of our subsidiary Banca Unione di Credito (which had not been consolidated under Italian GAAP) accounted for 1,255 million (1,326 million at the end of 2004) and other indebtedness accounted for the remaining 1,100 million (915 million at the end of 2004). In addition, at December 31, 2005, the Group had 1.0 billion in unused committed lines of credit available in various currencies. See Note 28 to the Consolidated Financial Statements included in Item 18 for additional information on our indebtedness, including a table summarizing the maturity profile and interest rates payable on our outstanding bonds.
     At December 31, 2005, our net debt (which we calculate as debt plus financial liabilities, net of cash, cash equivalents, current securities and other financial assets, all as recorded in our IFRS balance sheet) stood at 18,523 million, a decrease of 6,900 million, or 27.1%, compared with the 25,423 million recorded at the end of 2004. This decline was primarily attributable to the conversion into equity by the lending banks of the 3 billion Mandatory Convertible Facility at its maturity in September 2005, as well as our repayment in September 2005 of the 1.147 billion loan from a pool of banks led by Citibank upon conclusion of the sale of our 24.6% stake in Italenergia Bis to EDF. The decline also reflected the cancellation of a payable of approximately 600 million to a group of banks that had purchased 14% of Italenergia Bis from us in 2002, as well as to the creation of the Iveco Finance Holdings joint venture described above. The approximately 600 million payable to the banks had arisen from a right the banks had to sell their 14% stake in Italenergia Bis back to us in the event that we did not sell our 24.6% stake in that company to EDF. This right expired in September 2005 after we and the banks sold our stakes in Italenergia Bis to EDF (as described in more detail in Note 28 to the Consolidated Financial Statements included in Item 18). These positive factors were offset in part by indebtedness assumed in connection with the dissolution of Fiat-GM Powertrain joint venture and the negative impact of currency translation effects associated primarily with borrowings in US dollars and Brazilian reals, both of which currencies strengthened against the euro during the course of 2005.
     The following table details our net debt at 31 December, 2005 and 2004, and provides a reconciliation of this unaudited non-GAAP measure to debt, the most directly comparable IFRS measure included in our consolidated balance sheet. Net debt is management’s primary measure for analyzing the Group’s debt and managing its liquidity, as this measure demonstrates how much indebtedness would remain if all of our available liquid resources were applied to the repayment of debt.

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    Year ended December 31,  
    2005     2004  
    (in millions of euros)  
Debt
    (25,761 )     (32,191 )
Asset-backed financing
    (10,210 )     (10,174 )
Other debt
    (15,551 )     (22,017 )
Other financial liabilities (1)
    (189 )     (203 )
Other financial assets (1)
    454       851  
Current Securities (2)
    556       353  
Cash and cash equivalents
    6,417       5,767  
 
           
Net Debt
    (18,523 )     (25,423 )
 
           
 
(1)   Other financial liabilities and other financial assets include, respectively, the negative and positive fair values of derivative financial instruments.
 
(2)   Current securities include short-term or marketable securities held as temporary investments of available funds which do not satisfy the requirements for being classified as cash equivalents under IFRS. See Note 21 to the Consolidated Financial Statements included in Item 18.
Cash Flow Analysis
     At December 31, 2005, we had cash and cash equivalents of 6,417 million, an increase of 650 million, or 11.3%, from the 5,767 million recorded at the end of 2004. Of the amount at year-end 2005, approximately 700 million of this amount (approximately 600 million at year-end 2004) was reserved for the repayment of securitization-related debt, primarily that included in the line item “Asset-backed financing” in the table above and our IFRS balance sheet. Our holdings of current securities, which include short-term or marketable securities held as temporary investments of available funds that do not satisfy the requirements for being classified as cash equivalents, increased by 203 million, or 57.5%, from 353 million at the end of 2004, to 556 million at December 31, 2005. Overall, what management considers our greatest liquid assets (i.e., cash, cash equivalents and current securities) totaled 6,973 million at the end of 2005, an increase of 853 million or 13.9% from the end of 2004.
     Net Cash from Operating Activities
     Cash provided by operating activities in 2005 totaled 3,716 million (compared to 2,011 million in 2004), reflecting the 1,420 million net result before minority interest we recorded during 2005, as well as:
  The positive impact of 2,590 million in non-cash charges for depreciation and amortization;
 
  The negative impact of 1,561 million in gains on disposals and other non-monetary items, including the 878 million gain recorded on the sale of our interest in Italenergia Bis and the 858 million in unusual financial income arising from the conversion of the Mandatory Convertible Facility, each as described above;
 
  The positive impact of changes in provisions of 797 million, deferred income taxes of 394 million and a 114 million reduction of working capital (the sum of trade receivables, net inventories, trade payables and other payables, receivables, accruals and deferrals); and

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  The negative impact of items related to vehicles sold under buyback commitments which accounted for 85 million in cash in 2005.*
     Net Cash from Investing Activities
     In 2005, investing activities absorbed 535 million in cash (compared to 144 million in cash provided by investing activities in 2004). During the year we received:
  2 billion in cash in repayment of intercompany debt from entities deconsolidated in connection with the creation of the Iveco Finance Holdings joint venture and 500 million received in connection with the dissolution of the Fiat-GM Powertrain joint venture, both of which were included in the 2,494 million in “other changes” in our cash flow statements (compared to 284 million in “other changes” in 2004); and
 
  500 million from the sale of non-current assets (compared to 594 million in 2004). Of this total, 427 million arose from our sale of tangible and intangible assets (including 115 million from the sale of used vehicles by our operating leases activities) and 73 million from the sale of equity investments.
     These positive flows were more than absorbed by:
  the 251 million increase in receivables from financing activities, which reflected an increase in financing provided by CNH and Fiat Auto to their respective dealer networks (reflecting the increase in sales), partially offset by the collection of financial receivables and a decrease in loans extended to Fiat Auto suppliers;
 
  investments in tangible and intangible assets that used 3,052 million in cash (compared to 2,915 million in 2004) as well as a 159 million increase in current securities (compared to a decrease of 460 million in 2004). Investments in tangible and intangible assets include investments in vehicles for our long-term leasing operations, but are net of investments relating to vehicles sold under buyback commitments, which are reflected in cash flows relating to operating activities.
     The following table summarizes our investments in tangible and intangible assets for each of the years indicated:
 
*   In connection with our transition to IFRS, we now record some cash flows items associated with sales of vehicles under buy-back commitments as a separate line item, “change in items due to buyback commitments,” in the section of the cash flow statement relating to cash flows provided by (used in) operating activities. This line item is the sum of:
       
    changes in working capital associated with sales of vehicles under buy-back commitments by the automobiles sector (changes in inventories relating to such sales and other related liabilities, which include the amounts paid in advance by such customers corresponding to the buyback price upon expiration of the relative contracts, plus total rental fees not yet recognized as revenues), and
 
    cash flows related to sales of vehicles subject to buyback by Iveco (investments, depreciation, gains/losses on and/or proceeds from disposals upon the expiration of contracts relating to assets arising from such sales, which are recorded in “Property, plant and equipment”). See “Significant Accounting Policies” in the Notes to the Consolidated Financial Statements included in Item 18 for additional information on the accounting treatment of vehicles sold subject to buybacks.

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    2005   2004
    (in million of euros)
Fiat Auto
    1,582       1,792  
Maserati
    20       51  
Ferrari
    142       143  
Fiat Powertrain Technologies
    173        
Agricultural & Construction Equipment (CNH)
    255       243  
Trucks and Commercial Vehicles (Iveco)
    444       330  
Components (Magneti Marelli)
    313       280  
Metallurgical Products (Teskid)
    45       44  
Production Systems (Comau)
    38       23  
Services (Business Solutions)
    19       25  
Publishing and Communications (Itedi)
    20       2  
Other Companies and Eliminations
    1       (18 )
 
               
TOTAL
    3,052       2,915  
 
               
     We incurred these capital expenditures to acquire property, plant and equipment necessary to introduce and manufacture new products, enhance our manufacturing efficiency and implement further environmental and safety programs, as well as for automobiles, commercial vehicles, and agricultural and construction equipment used in our long-term leasing programs.
     Net Cash from Financing Activities
     Cash flow used in financing activities totaled 2,868 million in 2005 (compared to 3,078 million in 2004), primarily reflecting the repayment of debt during the period, including approximately 1,900 million in bonds repaid at maturity and the repayment of other loans. The conversion into equity of the 3 billion Mandatory Convertible Facility and the nearly 1.8 billion reduction in debt associated with the Italenergia Bis transaction (comprising the 1.147 billion repayment of the Italenergia Bis-related loan, as well as the cancellation of the 600 million payable to certain banks, each as described under “- Liquidity and Capital Resources” above); see also Note 28 to the Consolidated Financial Statements included in Item 18) are not reflected in this measure as they were non-cash transactions.
     Capital Resources
     The cash flows, funding requirements and liquidity of Group companies are managed on a standard and centralized basis, under the control of our central treasury. This centralized system is aimed at optimizing the efficiency and effectiveness of our management of capital resources. It also guarantees the efficiency and security of treasury management processes.
     Fiat Group companies participate in a Group-wide cash management system, which we operate in a number of jurisdictions. Under this system, the cash balances of all Group companies are aggregated at the end of each business day to central pooling accounts. The central treasury offers the Group high levels of professional financial and systems expertise, as well as providing related services and consulting to our business sectors.
     At December 31, 2005, we had an aggregate amount of 7,634 million in bonds outstanding. Net of the fair value adjustments and amortized costs valuation (413 million), the principal amount of bonds issued amounted to 7,221 million. For information on the terms and conditions of the bonds, including applicable financial covenants, see Note 28 to the Consolidated Financial Statements included in Item 18.

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     Global Medium Term Note (GMTN) Programme. We have a global medium-term note programme allowing for the placement of debt securities with institutional investors which was renewed in April 2006 and has a total authorized amount of 15 billion. At December 31, 2005, 5,526 million was outstanding under the programme, which allows borrowings by Fiat Finance and Trade (5,426 million outstanding at year-end 2005), Fiat Finance Canada Ltd. (100 million) and Fiat Finance North America Inc. (none), each subject to the guarantee of Fiat S.p.A.
     In the first half of 2006, we completed a series of capital markets transactions that have allowed us to refinance some of our existing debt at more favorable interest rates, for more information please see “Item 4. Information on the Company—Introduction—Recent Developments—Financial Initiatives.”
     We also have a 1 billion commercial paper (Billets de Trésorerie) program set up in accordance with applicable French legislation. At December 31, 2005, 314 million in securities issued by Fiat Finance and Trade and guaranteed by Fiat S.p.A. were outstanding under this program.
     1.0 billion revolving credit facility. On July 22, 2005, Fiat entered into a 1 billion three-year, multi-currency revolving credit facility with a syndicate of Italian and international banks. The potential borrowers under the facility, which is currently undrawn, are Fiat Finance S.p.A., Fiat Finance North America Inc, Fiat Finance Canada Ltd, Fiat Finance and Trade and CNH. The facility, which expires in July 2008, includes:
  financial and other customary covenants (including a negative pledge and restrictions on our ability to make major disposals or to make certain acquisitions, as well as on the incurrence of indebtedness by certain subsidiaries);
 
  customary events of default, including cross-default provisions (some of which are subject to minimum thresholds); failure to pay amounts due or to comply with certain provisions under the loan agreement; and the occurrence of certain bankruptcy-related events; and
 
  mandatory prepayment obligations upon a change in control of the relevant borrower.
     Fiat S.p.A. will guarantee borrowings under the facility with cross-guarantees from each of Fiat Finance S.p.A., Fiat Finance North America Inc, Fiat Finance Canada Ltd and Fiat Finance and Trade for drawings by any other borrower, including CNH.
     For more information on our outstanding indebtedness, see Note 28 to the Consolidated Financial Statements included in Item 18.
     We also sell certain of our finance, trade and tax receivables to third parties in order to improve liquidity, to take advantage of market opportunities and, in certain circumstances, to reduce credit and concentration risk in accordance with our risk management objectives. See “—Concentrations of Credit Risk” below. The sale of financial receivables is executed primarily through securitization transactions and involves mainly accounts receivable from final (retail) customers and from the network of dealers to our financial services companies.
     At December 31, 2005, our current receivables included receivables sold and financed through both securitization and factoring transactions of 9,604 million (9,596 million at December 31, 2004), which do not meet IAS 39 derecognition requirements and therefore must be recorded on our balance sheet. These receivables are recognized as such in the Group financial statements even though they have been legally sold; a corresponding financial liability is recorded in the consolidated

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balance sheet as Asset-backed financing, as described above (see Note 28 to the Consolidated Financial Statements included in Item 18).
     At year end 2005, the Group had discounted receivables and bills without recourse having due dates after December 31, 2005 (and meeting IAS 39 requirements for de-recognition) amounting to 2,463 million (1,623 million at December 31, 2004, with due dates after that date), which refer to trade receivables and other receivables for 2,007 million (1,325 million at December 31, 2004) and receivables from financing for 456 million (298 million at December 31, 2004). The increase during the period is mainly connected with the sales of receivables to companies of the Iveco Finance Holdings Limited group, which from June 1, 2005 are no longer consolidated on a line-by-line basis.
Future Liquidity
     We have adopted formal policies and decision-making processes aimed at optimizing our overall financial situation and the allocation of financial funds, cash management processes and financial risk management. Our liquidity needs could increase in the event of an extended economic slowdown or recession that would reduce cash flow from operations and would impair the ability of our dealers and retail customers to meet their payment obligations. Increased supplies of used cars, trucks and equipment may affect resale prices and result in decreased cash flows. Any reduction of our credit ratings would increase the cost of funding and potentially limit our access to these and other sources of financing.
     Management believes that funds available under our current liquidity facilities (including approximately 1.0 billion in unused committed lines of credit available in various currencies), those realized under existing and planned asset-backed securitization programs and those expected from the ordinary course refinancing of existing credit facilities and the proceeds of notes offered during the first half 2006, together with cash provided by operating activities, will allow the Group to satisfy its debt service requirements for the coming year.
Off-Balance Sheet Arrangements
     We use certain off-balance sheet arrangements with unconsolidated third parties in the ordinary course of business, including financial guarantees, indemnification agreements and other arrangements under which we have or may have continuing obligations. Our arrangements in each of these categories are described in more detail below. For additional information, see Note 32 to the Consolidated Financial Statements included in Item 18.
     Financial guarantees
     Our financial guarantees require us to make contingent payments upon the occurrence of certain events or changes in an underlying instrument that is related to an asset, a liability or the equity of the guaranteed party. These guarantees include arrangements that are direct obligations, giving the party receiving the guarantee a direct claim against us, as well as indirect obligations, under which we have agreed to provide the funds necessary for another party to satisfy an obligation.
     At December 31, 2005, the Group had granted guarantees on the debt or commitments of third parties or associated entities totaling 1,198 million (2,360 million at December 31, 2004). An amount of 598 million of the total decrease of 1,162 million was due to lower guarantees granted on behalf of Sava S.p.A. for the bonds it has issued.

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     Indemnities
     In connection with significant asset divestitures carried out in 2005 and in prior years, the Group provided indemnities to purchasers whereby the maximum amount of potential liability under these contracts generally capped at a percentage of the purchase price. These liabilities primarily relate to potential liabilities arising from contingent liabilities in existence at the time of the sale, as well as breach of representations and warranties provided in the contracts and, in certain instances, environmental or tax matters, generally for a limited period of time. At December 31, 2005, potential obligations with respect to these indemnities are approximately 750 million, unchanged from the level at December 31, 2004. The Group have provided certain other indemnifications that do not limit potential payments; it is not possible to estimate a maximum amount of potential future payments that could result from claims made under these indemnities. We have provided certain other indemnifications that do not limit potential payments; we are unable to estimate a maximum amount of potential future payments that could result from claims made under these indemnities. See Note 32 to the Consolidated Financial Statements included in Item 18.
     Derivative Instruments
     We do not hold or issue derivative financial instruments for speculative purposes. However, certain of the derivatives we hold are not eligible for hedge accounting under IFRS. In particular, in December 2002, we entered into a “total return equity swap” with Merrill Lynch with respect to GM shares in order to hedge risk associated with our $2.2 billion bond issue exchangeable into GM shares. During the first four months of 2004, we exercised our right to terminate this equity swap. In a related transaction, we repurchased on the market $540 million in principal amount of the exchangeable bonds, which we then cancelled. To hedge our exposure under the approximately $1.7 billion in exchangeable bonds still outstanding following these transactions, we purchased call options on GM shares. In June 2004, investors holding $1,672 million in principal amount of the outstanding exchangeable bonds exercised their right to require us to redeem their bonds for cash at face value in July 2004. See Note 22 to the Consolidated Financial Statements included in Item 18 for additional information on the characteristics and accounting treatment of the call option on General Motor common stock and other derivative instruments that do not qualify for hedge accounting, including those relating to stock option plans.
Contractual Obligations
     The following table sets forth our contractual obligations and commercial commitments with definitive payment terms that will require significant cash outlays in the future, as of December 31, 2005:
                                         
            Less than                   After 5
    Total   1 year   1-3 years   3-5 years   years
Contractual Obligations   (in millions of euros)
Long-Term Debt Obligations *
    11,537       3,910       2,847       2,055       2,725  
Capital (Finance) Lease Obligations
    145       75       37       17       16  
Operating Lease Obligations
    403       71       103       68       161  
Purchase Obligations
    2,068       1,505       441       79       43  
Other Long-Term Obligations under IFRS
                             
Total
    14,153       5,561       3,428       2,219       2,945  
 
                                       
 
(*)   Amounts presented exclude the related interest expense that will be paid when due.

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     Long-Term Debt Obligations
     For information on our long-term debt obligations, see “¾Capital Resources” above and Note 28 to the Consolidated Financial Statements included in Item 18.
     Capital (Finance) Lease Obligations
     Our capital leases consist mainly of industrial buildings and plant, machinery and equipments used in our business. The amounts reported above include the minimum future lease payments and payment commitment due under such leases. For information on our capital leases, see Notes 14 and 28 to the Consolidated Financial Statements included in Item 18.
     Operating Leases
     Our operating leases consist mainly of leases for commercial and industrial properties used in carrying out our businesses. The amounts reported above under “Operating Lease Obligations” include the minimal rental and payment commitments due under such leases.
     Purchase Obligations
     Our purchase obligations at December 31, 2005, included the following:
  the repurchase price guaranteed to certain customers on sales with a buy back commitments which are included in the line item other payables in our consolidated balance sheets in an aggregate amount of 1,650 million;
 
  commitments to purchase tangible fixed assets, largely in connection with planned capital expenditures of various Group companies, in an aggregate amount of approximately 418 million.
Research and Development
     For a discussion of our research and development policies and related expenditures, see “Research and Innovation” in Item 4.
Trend Information
     For a discussion of the most significant recent trends affecting our businesses, see “Introduction — Recent Developments” and “Introduction — Outlook” in Item 4.
Concentrations of Credit Risk
     In connection with our various operating and investment subsidiaries, we maintain investments in trade and finance receivables and marketable securities. With respect to these investments, management believes that our financial policies and the distribution of our investments tend to mitigate significantly our exposure to credit risk. Among the factors reducing such risk is the widely distributed nature of our trade and finance receivables among the many of our automotive, commercial vehicle and agricultural and construction equipment customers located in Italy, the rest of Europe, North and South America and the rest of the world. Management believes that concentration of credit risk is also minimized with respect to our investments in marketable securities, given that such investments consist primarily of widely traded or other liquid securities issued by highly rated institutions located in our various markets.

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     Although Europe and North America are our principal markets, we also sell products in other regions where political, economic and financial risk can render the collection of receivables difficult. We take a number of steps on a regular basis to reduce this risk, including maintaining political risk insurance, liquidating a portion of our receivables on a non-recourse basis at a discount through the banking system, arranging buyer’s credits in favor of the importers, which allows for regular payments, as well as utilizing other techniques, including countertrade agreements, that are aimed at protecting us from financial losses in our trade relations with countries that have suspended payments abroad.

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors
     Following the annual general meeting of stockholders held on May 3, 2006, the directors of Fiat are as follows:
             
Name   Age   Position
Luca Cordero di Montezemolo(3)
    59     Chairman of the Board
Andrea Agnelli
    31     Director
Roland Berger (3)
    68     Director
Tiberto Brandolini d’Adda
    58     Director
John Philip Elkann(1)(3)
    30     Vice Chairman of the Board
Luca Garavoglia(1)
    37     Director
Gian Maria Gros-Pietro(1)
    64     Director
Hermann-Josef Lamberti(2)
    50     Director
Sergio Marchionne(3)
    54     Director, CEO
Virgilio Marrone
    60     Director
Vittorio Mincato(2)
    70     Director
Pasquale Pistorio(3)
    70     Director
Carlo Sant’Albano
    42     Director
Ratan Tata
    68     Director
Mario Zibetti(2)
    67     Director
 
(1)   Member of the Nominating and Compensation Committee
 
(2)   Member of the Internal Control Committee
 
(3)   Member of the Strategic Committee
     The terms of office for all our directors will expire at our stockholders’ meeting to approve Fiat’s annual financial statements for the year ending December 31, 2008, which we expect to take place in the second quarter of 2009.
     On May 10, 2005, our Board of Directors voluntarily adopted new requirements for directors’ independence, and at our stockholders’ meeting held on June 23, 2005, a resolution was passed increasing the number of members of our board to 15 to allow for the majority of our board members to qualify as independent under the new criteria. See Item 10. “Additional Information—By-laws—Significant Differences with Corporate Governance Practices under NYSE Rules” for a summary of our new criteria for director independence and how they differ from those applicable to US companies. At the June 23, 2005 stockholders’ meeting and in connection with the expansion of the Board to 15 directors, Gian Maria Gros-Pietro, Vittorio Mincato and Mario Zibetti were elected as independent directors. On that same day, Virgilio Marrone was also elected to the Board.
     At the May 3, 2006 stockholders’ meeting called to approve Fiat’s annual financial statements for the year ending December 31, 2005, the term of office of all our directors at that time expired and the directors named above were elected. Three new members, Roland Berger, Carlo Sant’Albano and Ratan Tata, replaced three departing directors, Angelo Benessia, Flavio Cotti and Daniel John Winteler. All of the other directors were re-elected.
     The Board of Directors has given Mr. Cordero di Montezemolo, as Chairman, and Mr. Marchionne, as CEO, broad operating powers and has authorized them to perform all acts that are consistent with the Company’s purpose. Notwithstanding the ample powers granted to them, the

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Chairman and the CEO must submit all transactions that may have a material impact on our profitability, balance sheet or financial position to the Board of Directors for approval, and must adequately inform the directors and statutory auditors about any transactions that are of an atypical or unusual nature or that involve related parties.
     Biographies of each of the current members of our Board of Directors follow:
     
Name   Position (dates)
Luca Cordero di Montezemolo
  Chairman of the Board (May 30, 2004 – present) Director (February 28, 2003 – present) Chairman and CEO of Ferrari S.p.A. (1991 – present)
 
   
 
  Born in Bologna (Italy) on August 31, 1947. Mr. Cordero di Montezemolo joined Ferrari in 1973, as a Team Manager. From 1977 to 1981 he was Senior Vice President of External Relations for Fiat. He was CEO of Itedi S.p.A. from 1981 to 1983 and CEO of Cinzano S.p.A. from 1984 to 1985. From 1986 to 1990 he chaired the organizing committee for the football World Cup in 1990, which was held in Italy. He has been Chairman and CEO of Ferrari S.p.A. since 1991. Mr. Cordero di Montezemolo is also a director of La Stampa, Pinault-Printemps-Redoute S.A., Tod’s, Indesit Company, and Chairman of Bologna Fiere. In May 2004, he also became President of Confindustria (the Federation of Italian Industries).
 
   
Andrea Agnelli
  Director (May 30, 2004 – present)
 
   
 
  Born in Turin (Italy) on December 6, 1975. Mr. Agnelli has held various positions at several companies, both in Italy and abroad, including at Iveco, Piaggio S.p.A., Auchan S.A., Juventus F.C. S.p.A., Ferrari S.p.A. and Philip Morris International Inc.
 
   
Roland Berger
  Director (May 3, 2006– present)
 
   
 
  Born in Berlin (Germany) on November 22, 1937. Mr. Berger is Chairman of the Supervisory Board of Roland Berger Strategy Consultants, Munich, one of the world’s leading strategy consulting firms with 32 offices in 23 countries. He studied in Hamburg and Munich and holds a degree in business administration from the University of Munich.
 
   
 
  He has served on the faculty and board of several German Institutes of higher education as well as the member of various advisory boards and advisory groups.
 
   
 
  Mr. Berger was appointed by Chancellor Gerhard Schröder to the “Expert Commission on the Development of Hostile Takeover Rules” and to the “Expert Group on the Reform of German Bundesbank Structures.” He was appointed by former Federal President Prof. Dr. Roman Herzog to the “President’s Advisory Council for Innovation.” He was Chairman of the “Commission for Income Reform of the State Government Officials of Bavaria and North Rhine-Westphalia” and member of the “Commission for Issues Relating to the Future of Bavaria and Saxony.” Roland Berger was appointed to the “Council of Economic Experts for a Leaner Federal

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Name   Position (dates)
 
  Government” as well as the “Commission for the Development of the Pension Insurance System.” He was appointed to the “Baden-Wuerttemberg Forum for Innovation” by State Premier Erwin Teufel and to the “Commission for the Long Term Health of Germany’s Social Security System” (Rürup Commission) by the Schröder government.
 
   
Tiberto Brandolini d’Adda
  Director (May 30, 2004 – present)
 
   
 
  Born in Lausanne (Switzerland) on March 8, 1948. Mr. Brandolini d’Adda graduated with a degree in commercial law from the University of Parma in 1971. From 1972 to 1974 he worked in Fiat S.p.A’s international activities department, and for Lazard Frères in London. In 1975, he was appointed Assistant to the Director General for Enterprise Policy at the European Economic Commission in Brussels. He joined Ifint Company in 1976, as General Manager of Ifint France, and became General Manager of Ifint Europe in 1985. In 1993, he became Managing Director of the Exor Group (formerly Ifint) and in addition to that position he was appointed Vice Chairman in 2003. He is currently Chairman and CEO of Sequana Capital (formerly Worms & Cie), as well as General Partner of Giovanni Agnelli & C., and Vice Chairman and a Member of the Executive Committee of IFIL S.p.A.
 
   
John Philip Elkann
  Vice Chairman (May 30, 2004 – present)
Director (1997 – present)
 
   
 
  Born in New York, New York (USA) on April 1, 1976. Mr. Elkann graduated with a degree in industrial engineering from Turin Polytechnic in 2000. He has been a member of the Board of Directors of Fiat since 1997. He is Chairman of Itedi S.p.A. S.p.A., IFIL S.p.A. and Giovanni Agnelli & C. S.a.p.a.z. He is also a member of the Boards of Exor Group SA, IFI S.p.A. and RCS Media Group.
 
   
Luca Garavoglia
  Director (May 13, 2003 – present)
 
   
 
  Born in Milan (Italy) on February 27, 1969. Mr. Garavoglia graduated with a degree in economics from the Università Commerciale Luigi Bocconi in Milan in 1994. He has been Chairman of Davide Campari-Milano S.p.A., the parent company of the Campari Group, since September 1994.
 
   
Gian Maria Gros-Pietro
  Director (June 23, 2005 – present)
 
   
 
  Born in Turin (Italy) on February 4, 1942. Mr. Gros-Pietro has a degree in economics from the University of Turin. His professional career began in 1964 as a lecturer at the University of Turin, subsequently becoming head of its Department of Production Management, and has also been a senior lecturer in business economics there since 1972. In addition, from 1992 to 1997 he chaired the Industrial Privatization Strategy Commission for the Italian Ministry of Industry and was member of the Permanent Committee for Global Consulting and Guarantee on Privatizations. He was Chairman and CEO of IRI S.p.A. from 1997 to 1999, and Chairman of Eni S.p.A. from 1999 to 2002. Currently, Mr.

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Name   Position (dates)
 
  Gros-Pietro is, among other things, President of Federtrasporto (the Italian association of transportation companies), and a member of the Directive Committee and General Council of Assonime, the Italian listed companies association, the board of the Union of Industrialists of Rome, and Confindustria’s General Council. He is also a member of the Board of Edison S.p.A. and of SEAT Pagine Gialle S.p.A, the Executive Committee and the General Council of the Aspen Institute Italia, the International Business Council of the World Economic Forum and the Supervisory Board of Sofipa Equity Fund, as well as Chairman of Autostrade S.p.A., Vice President of I.G.I. (Istituto Grandi Infrastrutture — Great Infrastructures Institute) and Senior Advisor for Italy of Société Générale Corporate & Investment Banking.
 
   
Hermann-Josef Lamberti
  Director (2002 – present)
 
   
 
  Born in Boppard (Germany) on February 5, 1956. Mr. Lamberti studied business administration in Cologne and Dublin and received a master’s degree in Business Administration in 1981. From 1985 to 1998 he held various management positions at IBM in Germany, France and the United States. He joined Deutsche Bank A.G. in 1998, as an executive vice president and then became Chief Operating Officer; he has been a member of the Board of Managing Directors since 1999. He is currently also Chairman of the Supervisory Board of Deutsche Bank Privat und Geschaftskunden AG, a member of the Supervisory Board of Carl Zeiss AG, and Deutsche Börse AG, and a non-executive director of Euroclear plc and Euroclear Bank SA.
 
   
Sergio Marchionne
  CEO, Fiat S.p.A. (June 1, 2004 – present)
CEO, Fiat Auto Holding B.V. and Fiat Auto S.p.A. (February 2005 – present)
Director (2003 – present)
 
   
 
  Born in Chieti (Italy) on June 17, 1952. Mr. Marchionne received a master’s degree in Business Administration from the University of Windsor, Canada in 1980 and graduated with a law degree from the Osgoode Hall Law School of York University of Toronto in 1983. He is a licensed barrister and solicitor and a chartered accountant. From 1997 to 2000, Mr. Marchionne was the Managing Director and CEO of Alusuisse Lonza Group Ltd., Zurich (“Algroup”), until its merger with Alcan. He remained Managing Director and Chief Executive of Lonza Group Ltd., Basel, the chemical entity carved out of Algroup in 1999. He has been Chairman of Lonza’s Board of Directors since 2002. He is also currently a director of Serono Ltd., Geneva, member of the Supervisory Board of Hochtief and Chairman of Société Générale de Surveillance Holding SA, Geneva, of which he has also been Managing Director and CEO since January 2002. On June 1, 2004, he was appointed CEO of Fiat S.p.A., and in February 2005, he also assumed the role of CEO of Fiat Auto Holding B.V. and Fiat Auto S.p.A. In March 2005, he was appointed Chairman of Banca Unione di Credito and in April 2006, he was appointed Chairman of CNH. He is a member of the General Council of both Confindustria and of Assonime (the

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Name   Position (dates)
 
  Association of listed Italian companies) and is a permanent member of the Fondazione Giovanni Agnelli. Since January 2006, he has been Chairman of ACEA (European Automobile Manufacturers Association).
 
   
Virgilio Marrone
  Director (June 23, 2005 – present)
 
   
 
  Born in Savona (Italy) on August 2, 1946. Mr. Marrone has a degree in management and business administration from Università Commerciale Luigi Bocconi in Milan. From 1973 to 1985, he was assistant to the CEO of IFI S.p.A. and from 1985 to 1993, he was General Secretary of IFI S.p.A. From 1993 to 2002, Mr. Marrone was Joint General Manager of IFI S.p.A. From 2002 to the present, he has been General Manager of IFI S.p.A. and from May 2006 to the present he has been CEO of the same company. Mr. Marrone is currently a member of the boards of SanPaolo IMI S.p.A. and the Exor Group.
 
   
Vittorio Mincato
  Director (June 23, 2005 – present)
 
   
 
  Born in Torrebelvicino (Italy) on May 14, 1936. Mr. Mincato worked at Eni S.p.A. for nearly 50 years, joining the company in 1957, and serving in a variety of positions before becoming CEO in 1998. In 2005, he became Chairman of Poste Italiane S.p.A., the Italian postal service. In addition, from 2002 to 2004, he was a member of CNEL (the Italian National Committee for Economy and Labor). In 2005, he was also appointed Chairman of Assonime, and is also currently a member of the Executive Board of Confindustria, Vice President of the Union of Industrialists of Rome and a member of the Board of Directors of Parmalat S.p.A., the Teatro alla Scala Foundation, the Accademia Nazionale di Santa Cecilia, and the Accademia Olimpica.
 
   
Pasquale Pistorio
  Director (December 2004 – present)
 
   
 
  Born in Agira (Italy) on January 6, 1936. Mr. Pistorio graduated with a degree in electrical engineering from the Polytechnic of Turin. In 1967, he joined Motorola Corporation, where he held various management positions. He became President and CEO of the SGS Group, an Italian microelectronics company, in July 1980. Following the merger of SGS Group with Thomson Semiconducteurs in 1987, Mr. Pistorio became President and CEO of the new company, SGS-THOMSON Microelectronics (renamed STMicroelectronics in 1998). Upon his retirement from that position in 2005, he was appointed Honorary Chairman. Mr. Pistorio is a member of numerous organizations, including the Internal Advisory Council of the Government of Singapore, the ICT Task Force of the United Nations and the International Business Council of the World Economic Forum. He is also Chairman of ENIAC, the technological platform for nanoelectronics of the EU, and Vice President of Confindustria for innovation and research. He is member of the Boards of Telecom Italia S.p.A. and of Chartered Semiconductor Manufacturing.

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Name   Position (dates)
Carlo Sant’Albano
  Director (May 3, 2006 – present)
 
   
 
  Born in Turin (Italy) on May 31, 1964. Mr. Sant’Albano received a Bachelor of Arts degree in International Relations from Brown University and completed his studies with a MBA from the Harvard Business School. He began his career in finance as a fixed income trader in New York at Drexel Burnham Lambert. Later he entered the field of investment banking at Bear Stearns & Co. and then worked in the mergers and acquisitions group of Credit Suisse First Boston in New York. After moving to London in 2001, he was first Head of M&A for the pharmaceuticals sector in Europe and then, in 2004, became Chief Operating Officer for all M&A operations in Europe. He speaks five languages: Italian, English, French, Portuguese and Spanish. In February 2006 he was appointed Managing Director and General Manager of IFIL S.p.A. He is also member of the Boards of Sequana Capital, Juventus F.C. and Alpitour.
 
   
Ratan Tata
  Director (May 3, 2006 – present)
 
   
 
  Born in Mumbai (India) on December 28, 1937. Mr. Tata received a Bachelor of Science degree in Architecture from Cornell University in 1962. Mr. Tata joined the Tata Group in December 1962. He was assigned to various companies before being appointed Director-in-Charge of the National Radio & Electronics Company Limited (NELCO) in 1971. He was named Chairman of Tata Industries Limited in 1981, where he was responsible for transforming the company into a Group strategy think-tank, and a promoter of new ventures in high technology businesses. In 1991, he was appointed Chairman of Tata Sons Limited, the holding company of the Tata Group, India’s leading industrial group. He serves as the Chairman of the major Tata companies including Tata Steel, Tata Motors, Tata Power, Tata Consultancy Services, Tata Tea, Tata Chemicals, Indian Hotels and Tata Teleservices Limited and he is also the Chairman of two of the largest private sector promoted philanthropic trusts in India. He is associated with a number of important business and philanthropic organizations in India and abroad, including through his Chairmanship of the Government of India’s Investment Commission, and membership of: the Central Board of the Reserve Bank of India (RBI), the International Advisory Boards of Mitsubishi Corporation, the American International Group, and J.P. Morgan Chase, the International Investment Council set up by the President of the Republic of South Africa, the International Business Advisory Council set up by the U.K. Government and the Asia Pacific Advisory Committee to the Board of Directors of the New York Stock Exchange. He also serves on the Board of Trustees of the Ford Foundation and the Program Board of the Bill & Melinda Gates Foundations’ India AIDS Initiative, and chairs the Advisory Board of RAND’s Center for Asia Pacific Policy.
 
   
Mario Zibetti
  Director (June 23, 2005 – present)

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Name   Position (dates)
 
  Born in Turin (Italy) on October 3, 1939. Mr. Zibetti graduated with a degree in economics and business administration from the University of Turin. Until 2000, Mr. Zibetti was a senior partner at Arthur Andersen S.p.A., where he had worked for more than 40 years. He is currently a member of the Board of Directors of Ersel Finanziaria S.p.A., Comital – Cofresco S.p.A. and Fabio Perini S.p.A.
     The Board has identified the following eight directors (a majority of the Board) as independent in accordance with the requirements for independence adopted by the Board of Directors on May 10, 2005: Roland Berger, Luca Garavoglia, Gian Maria Gros-Pietro, Hermann-Josef Lamberti, Vittorio Mincato, Pasquale Pistorio, Ratan Tata and Mario Zibetti. For a detailed description of the criteria for director independence we have adopted see Item 10. “Additional Information—By-laws—Significant Differences with Corporate Governance Practices under NYSE Rules.”
     The Board of Directors has established three internal committees: the Comitato Controllo Interno, or the Internal Control Committee, which currently includes three independent directors (Mr. Zibetti, who chairs the Committee, and Messrs. Lamberti and Mincato); the Comitato per le Nomine e Compensi, or the Nominating and Compensation Committee, which includes three directors, one of whom has executive authority and two who are independent (Mr. Elkann, who chairs the Committee, and Messrs. Garavoglia and Gros-Pietro); and the Comitato Strategico, or the Strategic Committee, which includes five directors (Mr. Montezemolo, who chairs the Committee, and Messrs. Berger, Elkann, Marchionne and Pistorio).
     The Internal Control Committee is primarily in charge of verifying that our administrative accounting system, organizational structure and internal controls systems are adequate. The committee receives periodic reports on these matters from the Group’s operating companies, and reports to the full Board of Directors at least every six months.
     The Nominating and Compensation Committee develops proposals for approval by the full Board of Directors, mainly with regard to general compensation plans for senior employees and appointments to senior positions within the Group. The Committee is also in charge of selecting and proposing new candidates to the Board of Directors or indicating the necessary qualifications, for both events of cooptation by the Board and appointment by the stockholders meeting. The independent members of the Committee also meet separately to develop proposal to the Board with regard to the compensation of executive directors (including their participation in stock option plans). For a detailed description of the tasks and duties of our Nominating and Compensation Committee, see Item 10. “Additional Information—By-laws—Significant Differences with Corporate Governance Practices under NYSE Rules.”
     The Strategic Committee, which was established following the stockholders’ meeting of June 23, 2005, is in charge of assisting the board of directors in designing strategic plans for Fiat and the Group as a whole.
     Our Board of Directors has not established an audit committee pursuant to Rule 10A-3 under the Exchange Act and NYSE listing standards, as our Board of Statutory Auditors meets the requirements to qualify for the relevant exemption under Rule 10A-3, which became applicable to us starting on July 31, 2005. See Item 10. “Other Information¾By-laws¾Significant Differences with Corporate Governance Practices under NYSE Rules.”

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Senior Management
     In July 2004, Fiat’s CEO, Sergio Marchionne, announced the creation of the GEC, which now serves as the decision-making forum for Fiat’s fundamental strategic choices, including capital allocation, the review of business operations and evaluating the opportunities and potential threats facing the Company. The GEC, which comprises the Company’s CEO, the CEOs of the Group’s principal sectors, and representatives from Group-wide functions, is also designed to serve as a forum for maximizing Group-wide synergies, sharing best practices and promoting the Group’s leadership values.
     The membership of the GEC, other than those who also serve as directors, is currently as follows:
     
Name (Age)   Position (since)
Ernesto Auci (60)
  Senior Vice President Institutional Relations, Fiat S.p.A. (2004)
 
   
 
  Mr. Auci began his training as journalist at “Il Globo” in 1969. He continued his career as a journalist until 1984, when he was nominated Director of the External Relations Department at Confindustria. In 1992, he joined Fiat S.p.A. External Relations and Communications as Head of Information and Press. In 1997, he was appointed Editor of Italian financial daily Il Sole 24 Ore. He returned to Fiat Group in 2002 as CEO of Itedi S.p.A. and La Stampa and in 2004 he was appointed Head of Institutional Relations of Fiat S.p.A.
 
   
Domenico Bordone (60)
  CEO, Fiat Powertrain Technologies (2005)
Group Purchasing Coordinator (2004)
 
   
 
  Mr. Bordone joined Fiat in 1963 in the Foundries Department. During his nearly 20 years’ stay with the Foundries and Forges Group, he held various positions, including Assistant to the Head of the Group. In 1983, he took up the responsibility of the Cast Iron Foundries Division. In 1986, he joined the Components Sector and shortly thereafter, in 1987 he became responsible for Planning and Industrial Rationalization. In 1988, he became General Manager of the Boards and Sensors Group, and in 1990, Head of the Automotive Components Sector Industrial Coordination. In 1992, he was appointed CEO of Magneti Marelli. In 2004, in addition, he assumed the role of Fiat Group Purchasing Coordination and in 2005 he left Magneti Marelli to become CEO of Fiat Powertrain Technologies.
 
   
Harold Boyanovsky (61)
  CEO, CNH Global N.V. (2005)
 
   
 
  Mr. Boyanovsky held several sales and marketing positions in the agricultural equipment industry before joining Case in 1985 as Managing Director. He subsequently was appointed to increasingly senior managerial positions, including Senior Vice President and General Manager of the Case construction business in North America, Senior Vice President and

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Name (Age)   Position (since)
 
  General Manager for the North American region, and President worldwide of agricultural equipment products. In September 2002, he was appointed President of CNH’s Construction Equipment Business. He became CEO of CNH in March 2005.
 
   
Ferruccio Luppi (56)
  Senior Vice President of Business Development and Strategies, Fiat S.p.A. (2005)
 
   
 
  Mr. Luppi joined IFIL S.p.A. in 1984 as Head of Equity Investments Control. In 1988, he became Head of the IFIL’s Development and Control Department, and in 1997 he became Head of the Industrial Investments Control Department at the Worms Group. In 1998, he was appointed Managing Director of the Worms Group. He became the CFO of Fiat S.p.A in 2002 and was appointed CEO of Business Solutions in 2004. In addition to his role as CEO of Business Solutions, in 2005 he was appointed Senior Vice President of Business Development and Strategies of Fiat S.p.A.
 
   
Mario Mairano (55)
  Senior Vice President Human Resources, Fiat S.p.A. (2005)
 
   
 
  Mr. Mairano joined Fiat in 1974 as Assistant to Head of Personnel at Industrial Vehicles Central Functions. From 1975 to 1983, he held several positions at Iveco, and in 1984 became Head of Iveco Labor Relations. In 1987, Mr. Mairano joined Fiat Auto Human Resources as Head of Labor Relations and Litigation and in 1991 he took up the responsibility of Development, Training and Communication. In 1993, he became Head of Personnel at Ferrari S.p.A. and in 1997 was appointed Head of Personnel of Ferrari and Maserati. In 2000, he joined Banca di Roma Group as Head of Personnel and in 2002 became Head of Human Resources of Capitalia Group. In 2004, he returned to Fiat Group as Senior Vice President of Human Resources at Fiat Auto and, in addition, he became interim Senior Vice President of Human Resources at Fiat S.p.A. Since 2005 he is Senior Vice President of Fiat S.p.A.
 
   
Paolo Monferino (59)
  President and CEO Iveco S.p.A. (2005)
 
   
 
  Mr. Monferino joined Fiat in 1973 as a design engineer. In 1977, he became Head of Purchasing and Procurement at Teksid, where he remained until 1980. From 1981 to 1983 he was Head of Worldwide Purchasing and Procurement at FiatAllis and from 1983 to 1987 he served as Managing Director of FiatAllis Latin America. Mr. Monferino became Chief Operating Officer of FiatAgri in 1987 and served in that position until 1991. From 1991 to 1996, he was Executive Vice President of Strategies and Business Development for New Holland, and from

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Name (Age)   Position (since)
 
  1996 to 2000, was Executive Vice President of Automotive Components and Industrial Diversified Sectors at Fiat. He became President and CEO of CNH Global N.V. in 2000, and was appointed CEO of Iveco in March 2005.
 
   
Daniele Pecchini (55)
  President and CEO Comau S.p.A (2003)
 
   
 
  Mr. Pecchini joined the Fiat Group in 1978 as an Research and Development Specialist in the Teksid Steel Division. In 1981 he moved to Fiat Allis as Director of Organization. In 1983 he joined Magneti Marelli, Components Sector, as Marelli Autronica General Manager. From 1987 to 1993 he served as Head of the Autronics Division, and he subsequently became Head of the Engine Systems Division in 1993. In 1996 he was appointed Vice President of Magneti Marelli Technical and Commercial Activities, and in 1998 he assumed the position of Vice President of Magneti Marelli’s Powertrain Business Unit. He became CEO of Comau S.p.A in 2003.
 
   
Eugenio Razelli (55)
  CEO, Magneti Marelli (2005)
 
   
 
  Mr. Razelli joined Fiat Auto in 1977 as Materials Manager at the Mirafiori plant. In 1980, he became Vice President of Manufacturing for the dishwasher division of Industrie Zanussi, a position that he held until 1982. Mr. Razelli was CEO of Gilardini Industriale from 1983 to 1984 and became General Manager of Stars and Politecna - Fiat Comind in 1985. From 1986 to 1993, he held various management positions with Magneti Marelli. Mr. Razelli became Vice President of Manufacturing at Pirelli Cavi in 1993 and President and CEO of Pirelli Cable North America in 1994. In 1996, he became Senior Executive Vice President at Pirelli Cavi, where he served until 2000. Mr. Razelli was President and CEO of Fiamm S.p.A. from 2001 to 2003. He became Senior Vice President of Business Development and Strategies at Fiat S.p.A. in 2003. In 2005, he became CEO of Magneti Marelli.
 
   
Riccardo Tarantini (57)
  President and CEO, Teksid S.p.A (2003)
 
   
 
  Mr. Tarantini joined Delchi S.p.A, Westinghouse Electric in 1975 where he held several positions, including Controller. In 1979 he moved to the Fiat Group as Controller in Teksid and in 1980 he became Head of Administration in the Aluminium Foundry Division. In 1985, he joined Toro Assicurazioni S.p.A and took charge of the Corporate Control Project. In 1987 he returned to Teksid as President and CEO of the Teksid Aluminium Foundry. In 1991 he was appointed Head of the Aluminium Foundry Division. In 1998 he became Sector Deputy Managing Director and Head of New Initiatives and International

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Name (Age)   Position (since)
 
  Development. In 2001 he was appointed Head of the Iron Business Unit and in 2003 he became President and CEO of Teksid SpA.
     In addition, our senior management includes the following individuals:
     
Name (Age)   Position (since)
Augusto Ambroso (61)
  Head of Corporate Security and Chairman of Sirio S.c.p.a. (Sirio) and Consorzio Orione (Orione) (2001)
 
   
 
  Mr. Ambroso started his career in the Carabinieri Corps in 1966, leaving the corps with the rank of Colonel. He joined the Fiat Group in 1991 and held several positions within the security field. In 1992, he became Chairman of Sirio. In 1993, he was named Head of Security for the EXPO 2000 and Lingotto.
 
   
Alessandro Baldi (53)
  Group Controller, Fiat S.p.A. (2004)
 
   
 
  Mr. Baldi started as an auditor at Earnst & Young in 1981 and later was promoted to senior manager. In 1989, he moved to Algroup, where he was Director of Internal Audit and then became Group Controller. In 1999, when Algroup spun off its chemical activities, Mr. Baldi became Group Controller of the new company, Lonza Group. In 2002, he moved to the SGS Group as Group Controller. He joined Fiat in 2004 as assistant to the Group Controller, and was named Group Controller in 2005.
 
   
Gilberto Ceresa (41)
  Fiat Auto Steering Committee and GEC secretary (2005)
 
   
 
  Mr. Ceresa joined Fiat Auto S.p.A. in 1989 as a Team leader in the IT department of Fiat Auto S.p.A.; he then became Head of IT processes at the Termoli Plant, from 1993 to 1996, and Head of the global client management project (DSI, DAL and ERP) from 1997 to 2000. From 2000 to 2002, he was the Head of the Product Data project at the GM-Fiat joint ventures. He was also Head of “Next,” the reengineering program, from 2003 to 2004. Later, he became Head of the SAP Platform project, CEO assistant and Sector Program Officer from 2004-2005.
 
   
Mauro Di Gennaro (44)
  Chief Audit Executive and Compliance Officer, Fiat S.p.A. (2004)
 
   
 
  Mr. Di Gennaro joined Price Waterhouse in 1987 as Assistant Auditor and was subsequently promoted to Senior Manager. In 1994, he became Head of Internal Audit at Stet S.p.A. In 1997, he joined Telecom Italia, where he held several positions, including Head of International Operations and Head of International Internal Auditing. In 2002, he was appointed Head of Internal Audit at the RAS Group. On January 1,

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Name (Age)   Position (since)
 
  2004, he joined Fiat S.p.A. as Chief Audit Executive and Compliance Officer.
 
   
Nevio Di Giusto (53)
  CEO, Elasis (2004)
 
  CEO, Centro Ricerche Fiat (2006)
 
   
 
  Mr. Di Giusto joined the Fiat Group in 1978 and held several positions in Fiat Auto in the Technical Department as responsible for Vehicle Engineering, Design and Development (1978-1991) and in 1992 he became Head of the Style and Design department. In 1997 he was responsible for a new department called Platform Development. In 2001 he was appointed Responsible for the Product Engineering Department and in 2002 responsible of Product Development in the BU Fiat, Lancia & Commercial Vehicles. In 2004 he was appointed CEO of Elasis and in 2006 CEO of CRF and Elasis.
 
   
Maurizio Francescatti (43)
  Group Treasurer, Fiat S.p.A. (2004)
 
  CEO, Fiat Finance S.p.A.(2004)
 
   
 
  Mr. Francescatti started his career working for GFT in the foreign Finance office in 1989. In 1997, he joined Fiat Geva (part of the Fiat Group), where he was in charge of Bank Relations. Later in 2001, he became in charge of Finance co-ordination and in 2003 he became Treasurer. In 2004 he was appointed CEO of Fiat Finance and Group Treasurer.
 
   
Giorgio Frasca (64)
  International Relations Manager, Fiat S.p.A. (2005)
 
   
 
  Mr. Frasca began his career in 1964, at the Banca Nazionale del Lavoro and held positions in different Financial groups. He joined IFI International as Manager of the Paris Office in 1975. In 1978, he took charge of International Development Direction at Fiat S.p.A and the Fiat US Representative Inc. office Manager. In 1980, he was appointed Vice President and General Manager of Fiat France S.A. (in 1987 this also included Belgium, Netherlands and Luxembourg). In 1989, he worked on an International Activities and European activities Fiat Group project (being President and General Manager of Fiat France). In 1995, he became a member of the Committee of the Paris-Dauphine University (a public French university). In 2005, he was appointed Fiat S.p.A. International Relations Manager (keeping his position at Fiat France).
 
   
Carl Heinz Kalbfell (56)
  CEO, Maserati (2005)
 
   
 
  Mr. Kalbfell started his career by taking charge of the Communication department at Eriba Hymer (caravan and camper sector) in 1975. Then in 1977, he held several Marketing positions at BMW Group, as CEO of BMW Motorsport in 1987, as Marketing Manager of BMW Group in 1993, in 1997 as Head of Brand

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Name (Age)   Position (since)
 
  and Product Strategy for BMW Group and as the Senior Vice President Group Marketing in 2001. In 2004, he was appointed CEO of Rolls Royce. He joined the Fiat Group in 2005, working for Fiat Auto as Vice President Brand and Commercial Alfa Romeo. In September 2005, he became CEO of Maserati.
 
   
Simone Migliarino (58)
  Senior Vice President Communications, Fiat S.p.A. (2004)
 
   
 
  Mr. Migliarino joined Fiat S.p.A.’s Press Office and External Relations department in 1973. Subsequent positions at Fiat S.p.A. included Responsible for Relations with Provincial Press in Italy (1980-1984), Head of Media Support and Coordination (1984-1990), Head of Automobile Press Coordination (1990-1994) at Information and Media, Head of Product and Corporate Edition Press Office (1995-2001) and Head of Communications and Media Relations (2001-2004). In December 2004, he was appointed Head of Communications of Fiat S.p.A. and in April 2005 he was appointed Head of Communications of Fiat Auto S.p.A.
 
   
Antonio Perricone (59)
  Chief Executive Officer, Itedi S.p.A. and La Stampa (2004)
 
   
 
  Mr. Perricone started his career working for Arthur Andersen as an auditor in 1972. He then held several positions in BNL, Rusconi and Howert&Howert. In 1981, he became Managing Director of Publikompass and in 1983 Head of Operations at International, a company of the IFI Group. In 1987, he was named CEO of High Touch Enterprises and in 1990, CEO of Manzoni S.p.A. In 1995, he joined Sipra where he became CEO in 1998. In 2002, he became CEO of Maserati and in 2004 he joined Ferrari as Head of Brand and Partners Development. In December 2004, he was nominated as CEO of Itedi S.p.A. and La Stampa.
 
   
Paolo Rebaudengo (58)
  Industrial Relations Manager, Fiat S.p.A. (2005)
 
   
 
  Mr. Rebaudengo’s career began in 1970 working for INPS (a public company) and he held positions in the Human Resources department of Weber Group. He joined the Fiat Group working in the Industrial Relations department in 1981 for Fiat S.p.A. and in New Holland in 1992. In 1993, he joined Fiat S.p.A.’s Industrial Relations department. In 1996 he became Industrial Relations Manager (in 1996, in the External Relations and Communication department and in 1999, in the Human Resources department). Since 2005, the Industrial Relations Manager reports directly to Fiat Group CEO.

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Name (Age)   Position (since)
Roberto Russo (46)
  Senior Counsel, Fiat S.p.A. (2004)
 
   
 
  Mr. Russo began his legal career as an attorney at the law firm Studio Legale L. Longhetto in Turin in 1984. In 1986, he joined Fiat S.p.A. Legal Affairs as an in-house Counsel. In 2001, he was nominated Mergers and Acquisitions Lead Counsel, and in 2004 he was appointed Senior Counsel of Fiat S.p.A.
     Our senior managers do not have a formal term of office.
     In addition, Mr. Marchionne assumed the role of CEO of Fiat Auto in February 2005, replacing Herbert Demel, who had left the Company. The CEO chose to take direct responsibility for the automobile sector so as to concentrate our efforts toward the recovery and relaunch of Fiat Auto. Other significant management changes in 2005 include the appointment of Paolo Monferino, former CEO of CNH, as CEO of Iveco, replacing José Maria Alapont, who left the Company. Harold Boyanovsky is currently serving as CEO of CNH as replacement for Mr. Monferino.
     On March 24, 2005, Fiat announced that Domenico Bordone was appointed CEO of the new FPT sector. On April 28, 2005 Eugenio Razelli was appointed the new CEO of Magneti Marelli, and was replaced as head of Business Development for Fiat by Ferruccio Luppi, who is also CEO of Business Solutions.
     In July 2005, Luigi Gubitosi resigned from the position of CFO. Until a successor is announced, Alessandro Baldi, the Group Controller, is in charge of Group Planning and Control and Maurizio Francescatti, the Group Treasurer, is handling all Corporate Finance responsibilities. Both Mr. Baldi and Mr. Francescatti are considered to be our principal financial officers.
     In August 2005, Nevio Di Giusto was appointed CEO of CRF replacing Gian Carlo Michellone who retired.
     During 2006, Roberto Pisa resigned from his position as Senior Vice President of Corporate Initiatives.
     Board of Statutory Auditors
     Under Italian law, in addition to appointing the Board of Directors, Fiat’s ordinary stockholders also appoint a Board of Statutory Auditors (Collegio Sindacale). The statutory auditors are appointed for a term of three years, may be re-appointed for successive terms and may be removed only for cause and with the approval of a competent court. Each member of the Board of Statutory Auditors must provide certain evidence that he is in good standing and meets certain professional standards. The Board of Statutory Auditors is required to verify that the Company (i) complies with applicable law and its by-laws, (ii) respects the principles of correct administration, (iii) maintains adequate organizational structure, internal controls and administrative and accounting systems, and (iv) adequately instructs its subsidiaries to transmit information relevant to its disclosure obligations. In addition, the Board of Statutory Auditors is required to assess the technical adequacy and independence of our external auditors.
     The following table sets forth the names of the three members of the current Board of Statutory Auditors and their respective positions. The current Board of Statutory Auditors was appointed for a

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three-year term at the annual meeting of stockholders on May 3, 2006, to serve for the period from 2006 up until the date of the stockholders’ meeting approving the statutory accounts for fiscal year 2008.
     
Name   Title
Carlo Pasteris
  Chairman
Giuseppe Camosci
  Statutory Auditor
Cesare Ferrero
  Statutory Auditor
     Our Board of Statutory Auditors meets the requirements to qualify for the audit committee exemption under Rule 10A-3, which became applicable to us starting on July 31, 2005. See Item 10. “Other Information¾By-laws¾Significant Differences with Corporate Governance Practices under NYSE Rules.”
     Compensation of Directors, Statutory Auditors and Senior Management
     In accordance with applicable Italian regulations (Article 78 of Regulation No. 11971 of the Commissione Nazionale per le Società e la Borsa (the National Commission for Companies and the Stock Exchange, or “CONSOB”), issued on May 14, 1999 (“Regulation No. 11971”)), we disclosed in our published financial statements the following information regarding compensation paid in 2005 to the current and former directors, statutory auditors and senior management indicated below, who are listed with the title and as holding the position each held during the year ended December 31, 2005. See Item 6. “Directors, Senior Management and Employees” for more information.
Fees paid to Directors, Statutory Auditors and General Managers (in thousands of euros) (Article 78 of Consob Regulation No. 11971/99)
                                             
                                Bonuses and    
        Term       Compensation   Non-cash   other   Other
First name and last name   Office held in 2005   of office   Expiration (*)   for office held   benefits (**)   incentives   fees
IN OFFICE at December 31, 2005:                                
Luca Cordero
  Chairman   1/1-12/31   2006     551.2       4.3               6,484.0  
di Montezemolo
                (1 )                     (2 )
 
John Elkann
  Vice Chairman   1/1-12/31   2006     550.0       17.1                  
 
                (3 )                        
Sergio Marchionne
  CEO   1/1-12/31   2006     2,000.0               4,648.0       351.9  
 
                                (4 )     (5 )
Andrea Agnelli
  Director   1/1-12/31   2006     77.0                          
Angelo Benessia
  Director   1/1-12/31   2006     98.0                          
Tiberto Brandolini d’Adda
  Director   1/1-12/31   2006     77.0                          
Flavio Cotti
  Director   1/1-12/31   2006     80.0                          
Luca Garavoglia
  Director   1/1-12/31   2006     92.0                          
Gian Maria Gros-Pietro
  Director   06/23-12/31   2006     41.3                          
Hermann-Josef Lamberti
  Director   1/1-12/31   2006     71.0                          
Virgilio Marrone
  Director   06/23-12/31   2006     41.3                          
 
                (6 )                        
Vittorio Mincato
  Director   06/23-12/31   2006     47.3                          
Pasquale Pistorio
  Director   1/1-12/31   2006     92.0                          
Daniel John Winteler
  Director   1/1-12/31   2006     92.0                          
 
                (7 )                        
Mario Zibetti
  Director   06/23-12/31   2006     53.3                       3.3  
 
                                        (8 )
Cesare Ferrero
  Chairman of the Board   1/1-12/31   2006     63.0                       30.0  
 
  of Statutory Auditors                                     (9 )
Giuseppe Camosci
  Statutory Auditor   1/1-12/31   2006     42.0                          
Giorgio Ferrino
  Statutory Auditor   1/1-12/31   2006     42.0                          
 
(*)   Year in which the Stockholders Meeting is convened for approval of the Annual Report, coinciding with expiration of the term of office.
 
(**)   Includes the use of means of transport for personal purposes.
 
(1)   The gross annual compensation for the office of Chairman amounts to 500,000.
 
(2)   Compensation for the office held in the Ferrari subsidiary inclusive of the variable portion of his compensation. Starting from the fourth year of office, the Chairman and CEO of Ferrari will accrue the right to receive the following severance package: a sum payable over

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    twenty years, the amount of which, after ten years, may not be greater than five times the fixed portion of his annual compensation, which in 2005 amounted to 2,742 thousand. The relevant accrual posted by Ferrari in 2005 amounted to 1.37 million. In addition, the Chairman and CEO of Ferrari was granted options for the purchase of 184,000 Ferrari shares at the price of 175 per share, exercisable until December 31, 2010. The exercise of 80,000 of said shares is subject to the placement of Ferrari shares on the stock market.
 
(3)   The gross annual compensation for the office of Vice Chairman amounts to 500,000.
 
(4)   Variable compensation whose payment is subject to the achievement of predetermined targets related to the annual budget and which may not be greater than 2.5 times the gross annual fixed compensation.
 
(5)   The amount includes compensation for the office held in the subsidiaries IHF (342.3 thousand) and Buc (9.6 thousand) but does not include compensation for the office held in Fiat Auto (500 thousand), which he does not receive but is channeled to Fiat S.p.A. In 2005, the Company posted an accrual of 800.6 thousand for the CEO’s severance package.
 
(6)   Compensation channeled to IFI S.p.A.
 
(7)   Compensation channeled to IFIL S.p.A.
 
(8)   Compensation for the office of Statutory Auditor, held until June 8, 2005, in the subsidiary Atlanet.
 
(9)   Compensation for the office of Chairman of the Board of Statutory Auditors in Fiat Auto.
Stock Options granted to Directors and General Managers (Article 78 of Consob Regulation No. 11971/99)
                                                                                                                 
                                                                                    Options                    
                    Options held                                           Options exercised   expired in           Options held        
Grantee   at the beginning of the year   Options granted during the year           during the year   the year   at the end of the year
    Office held   Number   Average   Exercise   Number   Average   Exercise   Number   Average   Average   Number   Number   Average   Exercise
First and   at the date of the   of   exercise   period   of   exercise   period   of   exercise   market price at   of   of   exercise   period
last name   grant   options   price   (mm/yy)   options   price   (mm/yy)   options   price   exercise date   options   options   price   (mm/yy)
Paolo Fresco
  Chairman     2,250,000       20.614       07/01-01/10                                                               2,250,000       20.614       07/01-01/10  
                       
Sergio
  Chief Executive                                                                                                        
Marchionne
  Officer     10,670,000       6.583       06/08-01/11 *                                                             10,670,000       6.583       06/08-01/11  
 
*   The options are exercisable for one-third of the shares only upon satisfaction of the profitability targets, whose amount and reference period are defined in advance.
     On March 27, 2003, the Board adopted a resolution to grant to Mr. Morchio 11,822,195 options to purchase Fiat ordinary shares at a price of 6.344 per share; on July 31, 2003, in connection with the capital increase approved in June 2003, the Board of Directors revoked this resolution and resolved instead to grant to Mr. Morchio 13,338,076 options to purchase Fiat ordinary shares at the price of 5.623 per share. Following Mr. Morchio’s resignation, 10,670,461 of these options expired. The remaining options expired on May 30, 2005.
     In addition, the Board of Directors has granted Mr. Sergio Marchionne, as part of his compensation as CEO, options for the purchase of 10,670,000 Fiat ordinary shares at the price of 6.583 per share. In each of the first three years following the date of the grant, Mr. Marchionne will acquire the right to purchase a maximum of 2,370,000 shares per year, all of which will be exercisable only from June 1, 2008, for a period expiring on January 1, 2011. The remaining one-third of the options to be granted, for the purchase of 3,560,000 shares, will vest on June 1, 2008, subject to the satisfaction of certain predetermined profitability targets prior to that date. These options would also be exercisable from June 1, 2008, through January 1, 2011.
     Each member of the Board of Directors in 2005 received compensation comprising the following in respect of their service for that year:
    50,000 to be paid pro-rata within the end of the fiscal year; and
 
    an additional sum based on a fee of 3,000 for every board or committee meeting attended by the director, with the exception of directors with executive authority.
     With respect to our current senior managers as listed in this Item 6 who are not directors, the aggregate expense we accrued during 2005 for their compensation during the year was approximately 20 million. Certain of these individuals held different positions within or outside of the Group during 2005. This aggregate expense is inclusive of the following:

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    the provision charged by the Group in respect of mandatory severance payments, amounting to 955,833 in 2005; these severance payments are a statutory obligation under Italian law, with the amount of each year’s accrual based on the employee’s remuneration for the year in question and the length of his or her service;
 
    the amount contributed by the Fiat Group, equal to 442,059 in 2005, to an independent pension fund that has been created for our senior and mid-level officers, the assets of which are invested in insurance policies;
 
    the amount contributed by the Fiat Group to a special defined contribution plan for the benefit of some executive officers, approved by the Board of Directors on June 2, 1995; in 2005, such contribution amounted to 83,017; and
 
    the amount contributed by the Fiat Group to a special plan for senior executives (Individual Top Hat Scheme), approved by the Board of Directors on December 7, 2000, that provides a lump sum to be paid in installments if an executive leaves the Group before the age of 65; in 2005, such contribution amounted to 1,935,221.
     As of December 31, 2005, the senior managers listed in this Item 6 owned an immaterial number of shares of Fiat S.p.A. (comprising only ordinary shares, in an aggregate amount representing significantly less than 1% of the ordinary shares outstanding). As of December 31, 2005, these individuals have also been granted an aggregate of 989,700 options in respect of an equivalent number of Fiat’s ordinary shares. See the table on the previous page and Item 10. “Additional Information—Options to Purchase Securities From Registrant or Subsidiaries.”
     In accordance with applicable Italian regulations (Article 79 of Regulation No. 11971), Fiat disclosed in its published financial statements the following information regarding shares held as of December 31, 2005 by our directors and statutory auditors.
Interest held by Directors and Statutory Auditors (Article 79 of Consob Resolution No. 11971/99)
                                         
            Number of Shares
    Class of   Held at   Acquired   Sold in   Held at
Name   Shares   12/31/04   during 2005   2005   12/31/05
Luca Cordero di Montezemolo
  Ordinary     19,172                   19,172  
Sergio Marchionne
  Ordinary           220,000             220,000  
Cesare Ferrero
  Ordinary     1                   1  
     On May 3, 2006, Mr. Montezemolo acquired 88,000 ordinary shares and on May 22, 2006, he purchased an additional 20,000 ordinary shares. Also on May 22, 2006, Mr. Marchionne acquired 20,000 ordinary shares.
     Employees and Labor Relations
     As of December 31, 2005, we had 173,695 employees, as compared to 161,066 in 2004. During 2005, we hired approximately 15,800 new employees, of which approximately 2,700 in Italy, including those hired on a temporary basis. Over the same period, approximately 17,100 people left the Group, of which approximately 5,200 in Italy. Acquisitions and divestitures completed during the year resulted in a net increase of approximately 13,900 employees. We adopt flexible employment solution, when possible, in order to make our output resources respondent to market changes.

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Number of Fiat Group Employees at 12/31/04
    161,066  
Additions
    15,820  
Reductions
    (17,132 )
Changes in the scope of consolidation
    13,941  
 
     
Number of Fiat Group Employees at 12/31/05
    173,695  
     For more information on the number of employees in each of the Group’s sectors, see the table “Operating Results by Sector” in Item 4. “Information on the Company—Historical Overview.”
     Our total personnel expenses in 2005, including wages and salaries, employee benefits and special reserves for severance indemnities, totaled 6,158 million, representing 13.2% of net sales and revenues.
     As of December 31, 2005, the number of employees based in Italy was 77,070, or 44.4% of the total number of our employees worldwide, and they represent approximately 1.5% of the Italian industrial workforce.
     Labor agreements
     At the end of 2005, approximately 40% of our employees in Italy were members of labor unions. None of our facilities in Italy is operated on a closed-shop basis. The Italian industrial relations system establishes that labor agreements are negotiated at two separate and distinct levels – a national collective bargaining agreement every four years between the national employers’ association belonging to a specific industry and national unions; the agreement is aimed at providing a basic framework on working conditions, including pay and hour provisions. The separate agreement negotiated at a company level between management and the union representatives of employees addresses issues having specific importance for the firm and may act to supplement the general and basic provisions set forth by the national collective bargaining agreement.
     Most of our employees (including both white-collar and blue-collar workers) in Italy are covered by the national collective bargaining agreement for metalworkers, which was renewed in May 2003. The agreement is applicable for 4 years, as far as work rules provisions are concerned whereas clauses on economic terms of such agreement expired on December 31, 2004. The new agreement was reached on January 19, 2006, following year-long negotiations, and provides for a 6% increase in the minimum contractual wage over an extended 30-month period (six months longer than the normal 24-month contractual period for wages provisions), from 1 January, 2005 through 30 June, 2007. During the negotiation period compensation have been paid under the term of the previous agreement.
     With regard to negotiations at the company level, even though the Group-wide agreement formally expired on September 30, 1999, we and our unions agreed that an annual bonus calculated on the basis of the old contract should be paid to covered employees with respect to 2005. The average bonus totaled 1,414 per employee before withholding, an amount similar to the bonus paid for 2004. In May 2006 the trade unions officially presented requests for renewal of the Fiat Group collective bargaining agreement asking for an 1,300 increase in the annual bonus by 2008. We declared our willingness to review the bonus introducing a new calculation system that will link any bonus dynamic to the achievement of our stated targets for the Group’s trading performance. Negotiations started on May 22, 2006 and an agreement was reached at the end of June 2006. The agreement provided for a 500 increase in the 2006 annual bonus in consideration of the sharp improvement in the Group’s performance in 2005. A further 200 increase in the annual bonus may be awarded for 2007 if the Group’s trading profit targets for 2006 are met and an additional 400 in the bonus for 2008 may be awarded if the Group and its sectors’ trading profit targets for 2007 are achieved and if quality index improvements are realized. The total increase in the annual bonus through 2008 could thus reach 1,100

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     Industrial reorganization and recover competitiveness
     The discussions carried out in 2005 with the trade unions and representatives of employees at company level focused on finding solutions to handle the social impact of the programs implemented by the various Group companies to restructure and streamline their organizations and recover competitiveness. The meetings mainly concerned measures needed to bring the Group’s manufacturing operations in line with market needs, to improve their efficiency and operational flexibility, and to manage the impact on staffing levels of reorganization programs implemented to reduce business governance costs.
     At European level, the Group has formed a representative body complying with Council Directive 94/45/EC on the establishment of a European Works Council (“EWC”) or a procedure in Community scale undertakings and Community-scale groups of undertakings for the purposes of informing and consulting employees. The agreement on the establishment of the EWC, signed in 1996 (and renewed for the first time in 2001), was further renewed on June 29, 2005 through an agreement signed by the European Metalworkers’ Federation (EMF – which represents the trade union organizations of the European countries where the Group is present) and the Italian trade organizations. The new agreement, that will be effective until the end of 2009, changed the distribution of seats by country so that employees of those countries that joined the EU as a result of its enlargement are also represented on the EWC. The 30 seats have therefore been re-distributed on the basis of the Group’s current employment distribution in Europe.
     In Italy, discussions with the trade unions, both at the national and local level, were carried out constructively. A number of meetings were held to explain and discuss the different stages of the Group’s restructuring process. A key meeting with trade unions, national government and local authorities was held on August 3. At that meeting, Sergio Marchionne, Fiat’s CEO, explained the Group’s situation, focusing in particular on Fiat Auto’s operating performance and development plan as it applies to product range planning, to production allocations and to Fiat Auto’s capital investment program, as well as the conditions for implementation of the program. The situation for the other group sectors was discussed in detail during meetings held in autumn. On those occasions, the executives in charge of the different businesses explained the relevant strategies and action plans to the trade unions, highlighting the programs that they planned to implement to achieve the profitability and competitiveness targets assigned to them. The actions that would be required at the operational level were then reviewed with local union representatives at the manufacturing facilities affected by these programs, with the goal of finding consensus solutions to manage the programs’ impact on employees and identify the most appropriate measures for each case.
     At Fiat Auto, capacity underutilization at some plants that was attributable to lower sales volumes, was handled by using the Cassa Integrazione Guadagni Ordinaria (Temporary Layoff Benefits Fund). This tool was also used in the administrative, technical and sales departments and affected mainly office staff and middle managers whose workload had decreased due to the reduction in sales volumes and ongoing organizational changes. At the end of 2005, there were approximately 900 employees in Fiat Auto’s administrative, technical and sales departments and Fiat Purchasing Italia who were receiving Cassa Integrazione benefits (which was significantly less than the 1,800 envisioned when the application process got under way in April). This figure will be further reduced to little more than 500 people by June 2006.
     As a result, during the first months of 2006, the Company and the trade unions agreed to request an extension of Cassa Integrazione benefits, while seeking consensus solutions on how to handle any remaining redundancies. Specifically, both parties believe that the mobilità lunga (long-term mobility benefit to bridge the period prior to retirement) system could be the most appropriate tool.

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     The Cassa Integrazione Straordinaria (temporary layoff benefits fund) was used in connection with the manufacturing rationalization and reorganization plan launched by FPI at the end of 2004, affecting the Mirafiori (Turin) and Arese (Milan) powertrain production facilities.
     On the other hand, in areas in which a favorable demand trend produced an increase in manufacturing activity, the Group took action to increase plant utilization. These actions, which were taken with the agreement of employee representatives and/or trade unions, included an increase in the number of shifts (e.g., agreements to reintroduce a six-day working week in production organization at the Sata plant in Melfi, specifically to ramp up production of the Grande Punto, and at Fiat Powertrain’s factories in Termoli and Pratola Serra) and the use of overtime work (e.g., CNH’s plant in Jesi).
     Solutions designed to improve the use of the Group’s manufacturing capacity are also being planned in Poland, where Fiat Auto and FPT plan to resume Saturday overtime work and where Teksid will introduce an 18-shift rotation. Iveco has reached agreements aimed at improving working flexibility at its Ulm plant in Germany, as has CNH in Belgium.
     With the exception of the strikes called in Italy for the renewal of the National Collective Labor Agreement for Metalworkers (mentioned above), instances of labor unrest were relatively minor.
     Compensation
     In Italy, average labor costs, including mandatory benefit payments and pension-plan contributions, grew roughly in line with the inflation rate. In the other countries where we operate, we focused on keeping compensation levels in line with cost-of-living. Increases in excess of the rate of inflation were granted by Group companies with favorable operating results or in special situations.
     Training and Scholarships
     In 2005, Fiat Group companies throughout the world invested a total of 90 million, or 2.1% of total payroll costs, in professional development and training programs designed to support their operations. Approximately 89,000 employees participated in these programs in 2005.
     Isvor Fiat, which acts as the corporate university of the Fiat Group and also sells its services to non-Group clients, in 2005 provided training, consulting and professional support programs representing a total of 15,475 classroom days. An additional 26,189 employees received a total of 137,748 hours of distance- and open-learning support.
     The Fiat Grants and Scholarships Program, which was created in 1996 and is reserved for the children of Group employees both in Italy and abroad, continued to enjoy considerable success. Since 2001, grants and scholarships have been awarded directly by individual Group sectors and companies, in order to give local managers a greater degree of involvement in programs affecting their employees.
     In 2005, we awarded 581 grants, including 185 to students in Italy and 396 to students in other countries (Brazil, France, Poland, Spain and the United States), in an aggregate amount of 1,032,600.

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ITEM 7. MAJOR STOCKHOLDERS AND RELATED PARTY TRANSACTIONS
Description of Capital Stock
     Fiat’s capital stock consists of ordinary shares, preference shares and savings shares with a par value of 5.00 each. As of June 15, 2006, the number of such shares outstanding was as follows: 1,092,246,316 ordinary shares, 103,292,310 preference shares and 79,912,800 savings shares.
     For a description of the capital increases effected in 2002 and 2003 see “Item 7- Major Stockholders and Related Party Transactions” in the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2004.
     On September 15, 2005, in accordance with a delegation of authority granted by the September 12, 2003 extraordinary stockholders meeting pursuant to Article 2443 of the Italian Civil Code, Fiat’s Board of Directors passed a resolution approving a capital increase in connection with the maturity of the 3 billion mandatory convertible facility. The facility was repaid in full to the lending banks in accordance with its terms at maturity on September 20, 2005 through the issuance by Fiat and subscription by the lending banks of 291,828,718 new ordinary shares. The new ordinary shares have the same characteristics as those already outstanding (including a par value of 5 and a full entitlement to any dividends) and were subscribed for by the banks at an issue price of 10.28 per share (the resultant share premium therefore equaling 5.28 per share). The issue price was determined in accordance with a formula set forth in the mandatory convertible facility, as explained in more detail in Note 25 to the Consolidated Financial Statements included in Item 18. In accordance with Italian law concerning stockholders’ preemptive rights, optional rights to purchase such new shares were offered to all existing stockholders in the ratio of 149 new shares for every 500 Fiat shares (of any class) owned.
     For additional information on our share capital, see Item 10. “Additional Information—By-laws.”
     Major Stockholders
     Fiat is directly controlled by IFIL S.p.A. (“IFIL”) , its largest single stockholder, which in turn is controlled by IFI S.p.A. (“IFI”) . As of June 15, 2006, IFIL owned 30.06% of Fiat’s ordinary shares outstanding at that date.

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     The following tables present information on each of those stockholders who owned more than 2% of Fiat’s ordinary shares and preference shares as of the dates indicated, based on information available to us as of such dates. “N/A” signifies that to our knowledge, as of the relevant date, the stockholder in question no longer owned 2% or more of our ordinary or preference shares, as applicable. Because the savings shares are in bearer form and are entered in the stockholders’ register only at the request of the stockholder, our records do not indicate the extent to which savings shares are directly held by any single stockholder, and no stockholder has notified us that it owns more than 2% of our savings shares.
                                                 
    As of June 15, 2006   As of June 23, 2005   As of May 31, 2004
    No. of           No. of           No. of    
    Ordinary   % of   Ordinary   % of   Ordinary   % of
    Shares   class   Shares   class   Shares   class
IFIL
    328,333,447       30.06       240,583,447       30.06       240,583,447       30.06  
Gruppo Banca Intesa
    66,391,197       6.08       N/A       N/A       N/A       N/A  
Gruppo Unicredito italiano
    60,838,315       5.57       N/A       N/A       N/A       N/A  
Gruppo Capitalia
    41,474,296       3.80       N/A       N/A       N/A       N/A  
Fidelity International Ltd.
    26,390,094       2.42       N/A       N/A       N/A       N/A  
FMR Corp.
    26,126,700       2.39       N/A       N/A       N/A       N/A  
Assicurazioni Generali S.p.A. (and affiliates)
    26,001,817       2.38       26,001,817       2.76       26,001,817       2.76  
ING Group
    N/A       N/A       28,500,000(* )     3.56       N/A       N/A  
Cater Allen International
    N/A       N/A       27,000,000 (** )     3.37       N/A       N/A  
Libyan Arab Foreign Investment Co.
    N/A       N/A       21,670,105       2.70       21,670,105       2.70  
Merrill Lynch & Co. Inc.
    N/A       N/A       19,037,641       2.38       N/A       N/A  
Mediobanca Banca di Credito Finanziario S.p.A.
    N/A       N/A       18,075,000       2.24       19,112,590       2.39  
SanPaolo (and affiliates)
    N/A       N/A       16,535,954       2.07       16,535,954       2.07  
 
*   ING held 15,000,000 of these shares as a lender.
 
**   Cater Allen International held 27,000,000 of these shares as a lender.
                                                 
    As of June 15,
    2006   2005   2004
    No. of   %   No. of   %   No. of   %
    Preference   of   Preference   of   Preference   of
    Shares   class   Shares   class   Shares   class
IFIL
    31,082,500       30.09       31,082,500       30.09       31,082,500       30.09  
     None of the shares held by the above stockholders provides any special voting rights.
     In June 1999, IFI, IFIL, Assicurazioni Generali S.p.A. and Deutsche Bank AG agreed to consult with each other (and with the Board of Directors of Fiat S.p.A.) prior to any sale of their respective shares in Fiat and to meet from time to discuss possible strategies to be undertaken by the Group. This arrangement does not expressly create any legal obligations among the parties and is not binding under Italian law. In September 2000, Imi Investimenti (then called Nuova Holding SanPaolo-IMI), an affiliate of SanPaolo, joined this arrangement.
     As noted above, Fiat is indirectly controlled by IFI, which in turn is controlled by Giovanni Agnelli & C. S.A.p.A. (“GA”), an Italian limited partnership, which, as of May 31, 2006, owned 100% of the voting power and 53% of the equity of IFI. John Philip Elkann, the Vice Chairman of the Board of Fiat S.p.A., is the Vice Chairman of and a partner in GA and, together with other members of the Agnelli family, owns substantially all of the ownership interest in GA. Tiberto Brandolini d’Adda, a director of Fiat since May 30, 2004, is a director of and a partner in GA, and is also a member of the Agnelli family.

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     Trading by the Group in Fiat Shares
     Under Italian law, Italian companies are not permitted to purchase their own shares unless authorized to do so by their stockholders, and then only in accordance with certain legal requirements. The annual general meeting of Fiat stockholders held on May 13, 2003, renewed an existing authorization to purchase up to an aggregate amount of 61,642,560 of Fiat’s shares of all three classes for a period of 18 months, adding the requirement that the purchased shares, when added to the shares already held by Fiat and its subsidiaries, may not exceed a maximum of 10% of the total capital stock issued. This resolution expired in November 2004, and as of June 15, 2006, Fiat S.p.A. held 4,314,458 ordinary shares in treasury.
     Subsidiaries of Italian companies may, subject to stringent restrictions under Italian law, purchase outstanding shares of their parent companies.
Related Party Transactions
     Many of the Group’s operating companies provide services to other member of the Group. Transactions among Group companies, whether they are made to support vertical manufacturing integration or to provide services, are carried out at terms that, considering the quality of the goods or services involved, are competitive with those available in the marketplace.
    The main transactions that took place during 2005 between Fiat and its subsidiaries and associated companies are summarized below:
 
    Subscription to capital increases of subsidiaries as described in the Notes to the financial statements of Fiat S.p.A.;
 
    Licensing of the right to use the Fiat trademark, for a consideration based on a percentage of sales, to Fiat Auto;
 
    Contributions provided to Group companies for initiatives to enhance the Group’s image;
 
    Services provided by Fiat S.p.A. managers to Fiat Auto, Iveco S.p.A., Teksid, Magneti Marelli, Comau, Business Solutions, Itedi and other minor Group companies;
 
    Grant of suretyships and guarantees in connection with the issuance of bonds (Fiat Finance and Trade), loans provided by banks (Fiat Finance S.p.A. – formerly Fiat Ge.Va. S.p.A., FMA — Fabbrica Motori Automobilistici S.r.l., Banco CNH Capital S.A., CNH America LLC, Fiat Automoveis S.A. and other minor companies), the issuance of “billets de tresorerie” (Fiat Finance and Trade), credit lines (CNH, CNH Capital America LLC, CNH Capital Canada Ltd., NH Credit Company LLC and other minor companies) and payment obligations under building rental contracts (Fiat Auto and its subsidiaries). In addition, a $1 billion direct credit line is in place between Fiat S.p.A. and CNH;
 
    Rental of buildings to Ingest Facility S.p.A.;
 
    Current accounts and short-term financings management (Fiat Finance S.p.A.), purchase of administrative, fiscal, corporate affairs and consulting services (Fiat Gesco S.p.A.), payroll and other general services (Fiat Servizi per l’Industria S.c.p.A.);

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    Purchase of inspection and internal auditing services from Fiat-Revisione Interna S.c.r.l.;
 
    Purchase of information technology services provided by PDL Service S.r.l. and eSPIN S.p.A.;
 
    Purchase of external relations services provided by Fiat Information and Communication Services società consortile per azioni;
 
    Office space and real property maintenance services provided by Ingest Facility S.p.A.;
 
    Security services and other services provided by Consorzio Orione and Sirio S.c.p.A.;
 
    Purchase of automobiles from Fiat Auto.
     Fiat S.p.A., as consolidating company, and almost all its Italian subsidiaries decided to comply with the national tax consolidation program according to articles 177/129 of T.U.I.R. (Consolidated Law on Income Tax).
     Relationships with related parties, whose definition was extended in accordance with IAS 24, include not only normal business relationships with listed groups or other major groups in which the directors of the Company or its parent companies hold a significant position, but also purchases of Group products at normal market prices or, in the case of individuals, the prices that are usually charged to employees. Transactions with related parties to be mentioned include professional services rendered by Mr. Franzo Grande Stevens (consultancies and activities performed in his capacity as secretary of the Board of Directors) to Fiat S.p.A. for a total of 940 thousand.
     Based on the information received from the various Group companies, there were no atypical or unusual transactions during the year. Extraordinary transactions among Group companies or with related parties that occurred during the year are as follows:
    Within Ferrari S.p.A.; an entity comprising the group of companies that manufacture and sell Maserati cars was transferred to a company that simultaneously assumed the name Maserati and was sold to Fiat Partecipazioni S.p.A.;
 
    Within the framework of the reorganization of central activities in France, aimed at transferring the role of national company to the main operating company, Fiat France S.A. was merged into Fiat Auto France S.A. which took its name. Before the merger, Fiat France S.A. had been sold by Fiat Partecipazioni S.p.A. to Fiat Finance Netherlands B.V.; concurrently, Fiat France S.A. sold its 100% interest in La Stampa Europe SAS to Itedi.
ITEM 8. FINANCIAL INFORMATION
Consolidated Financial Statements
     See Item 18. “Financial Statements.”

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Other Financial Information
Export Sales
     Export sales from Italy, which totaled 9.312 million in 2005, as compared with 9.240 million in 2004, represented 20% of the Group’s net revenues (20.2% in 2004).
Legal Proceedings
     We are parties to litigation, arbitration and other legal proceedings incidental to the ordinary course of our business, including in relation to our divestitures and asset disposals. While we have established reserves for various liabilities and risks, including certain risks arising from contractual, commercial and regulatory disputes and proceedings, we cannot assure you that the ultimate outcome of any current or future proceedings or claims against us will not result in the imposition of material damages or other costs on us in excess of these reserves. Neither we nor any of our subsidiaries are a party to any legal proceeding that is pending or, as far as our senior management is aware, that threatened or contemplated against us or any such subsidiary that, if determined adversely to us or any such subsidiary, would have a materially adverse effect, either individually or in the aggregate, on the business, financial condition or results of operations of the Fiat Group.
     In February 2006, Fiat received a subpoena from the SEC Division of Enforcement regarding a formal investigation entitled “In the Matter of Certain Participants in the Oil-for-Food Program”. Under this subpoena, we are required to provide the SEC with identified documents relating to certain members of the Group, including certain CNH subsidiaries and Iveco, regarding matters relating to the United Nations Oil-for-Food Program. A very substantial number of companies, including a handful of members of the Group, were mentioned in the October 2005 “Report of the Independent Inquiry Committee into the United Nations Oil-for-Food Programme”, which report alleged that these companies engaged in transactions under the program that involved inappropriate payments to the former government of Iraq and officials of that government. The Group has already provided a significant quantity of documents to the SEC in response to the subpoena, and continues to collect additional documents. Given the on-going nature of the inquiry, which is still in its initial stages, management is currently unable to predict what impact, if any, the SEC investigation may have on the Group.
Dividend Policy
     Upon the recommendation of our Board of Directors, dividends are declared at the annual general meeting of our stockholders following the close of each fiscal year and paid in the middle of the same fiscal year during which they are declared with respect to shares outstanding on the date such dividends are declared. The following table sets forth the annual dividends payable per ordinary, preference and savings share in respect of each of the years indicated. The table also sets forth such dividend information, translated into dollars per ordinary, preference and savings ADS on the basis of the Noon Buying Rate for euros on the date that the respective dividends were payable.

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Dividends Payable in Respect of the   Ordinary   Preference   Savings
Fiscal Year ended December 31,   Share   ADS   Share   ADS   Share   ADS
    (euros)   ($)   (euros)   ($)   (euros)   ($)
2001
    0.31       0.27       0.31       0.27       0.47       0.41  
2002
                                   
2003
                                   
2004
                                   
2005
                                   
     In recognition of the net loss we incurred in the past, notwithstanding our recording net income for the fiscal year ended December 31, 2005, we were unable to declare or pay any dividends in respect of any category of shares for the forth year in a row. Additionally, the Board of Directors proposed to allocate the net income of 223,019,671 recorded in the unconsolidated statutory accounts of Fiat to partially cover the losses carried forward, which consequently amount to 726,080,851. Fiat’s stockholders approved this recommendation at the annual general meeting on May 3, 2006.
     Under our by-laws, when the dividend paid to savings stockholders in any year amounts to less than 0.31 per share, the difference between the amount paid and 0.31 shall be added to the preferred dividend to which they are entitled in the following two years. The right to receive the amount of such difference when a dividend less than 0.31 is paid with respect to any year expires after two years, regardless of whether any dividend was paid with respect to the two subsequent fiscal years. Our failure to pay the minimum dividend of 0.31 per savings share with respect to each of fiscal years 2004 and 2005 requires that we add the amount of each missed dividend to the preferred dividend payable, if any, with respect to fiscal year 2006.
     Whether future dividends will be paid will depend upon our earnings, financial condition and other factors, including the amount of dividends paid to Fiat by its subsidiaries. In addition, before dividends may be paid out of Fiat’s unconsolidated net income in any year, an amount equal to 5% of such net income must be allocated to its legal reserve until such reserve is at least equal to one-fifth of the par value of its issued share capital. At December 31, 2005, Fiat’s legal reserve was 447 million, while the par value of its issued share capital was 6,377 million.
     We are not subject to any Italian governmental restrictions on dividend payments to foreign stockholders.
Significant Changes
     See Item 4. “Information on the Company—Introduction—Recent Developments” for a description of material developments that have occurred since December 31, 2005.
ITEM 9. THE OFFER AND LISTING
Trading Markets and Share Prices
     The principal trading market for Fiat’s ordinary, preference and savings shares is the Italian Stock Exchange, where Fiat has been listed since 1906. These shares are also listed on the Frankfurt Stock Exchange (since 1963), the Paris Stock Exchange (since 1963) and are quoted in London on SEAQ. Ordinary, preference and savings American Depositary Shares (each representing one current ordinary, preference or savings share, respectively) are listed on the New York Stock Exchange. JPMorgan Chase Bank is Fiat’s depositary for purposes of issuing the ADRs evidencing the ordinary, preference or savings ADSs.

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     The following table sets forth, for the periods indicated, the reported high and low sales prices of the ordinary and preference ADRs on the New York Stock Exchange. As there has been essentially no trading activity in the savings ADRs during the periods indicated, prices for those ADRs are not included in this table.
                                 
    Ordinary ADRs   Preference ADRs
    High   Low   High   Low
            (in dollars)        
2000
    36.06       21.19       21.87       13.00  
2001
    25.55       14.30       17.12       10.50  
2002
    16.83       7.90       11.50       4.95  
2003
    10.02       6.06       6.55       3.80  
 
2004
                               
First Quarter
    8.07       6.68       5.25       4.00  
Second Quarter
    8.45       6.24       5.00       5.00  
Third Quarter
    8.28       7.02       4.60       4.60  
Fourth Quarter
    8.06       6.85       4.97       4.35  
 
2005
                               
First Quarter
    8.28       7.18       5.90       5.00  
Second Quarter
    7.56       5.90       6.10       5.00  
Third Quarter
    9.63       7.02       8.45       6.10  
Fourth Quarter
    9.08       8.02       7.50       5.90  
December
    9.08       8.20       6.90       5.90  
 
2006
                               
January
    10.22       9.04       7.90       7.90  
February
    10.95       9.73       8.85       8.75  
March
    12.63       10.68     No trading   No trading
April
    14.32       12.51       10.00       10.00  
May
    14.92       12.14     No trading   No trading
     As of May 31, 2006, 1,092,246,316 ordinary shares, 103,292,310 preference shares and 79,912,800 savings shares were outstanding. As of the same date, there were 2,826,918 outstanding ordinary ADRs held by 540 record holders, 7,213 preference ADRs held by eight record holders and 1,365 savings ADRs held by four record holders.
     The following table sets forth, for the periods indicated, the reported high and low sales prices for the ordinary shares, preference shares and savings shares on the Italian Stock Exchange.

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    Ordinary Shares   Preference Shares   Savings Shares
    High   Low   High   Low   High   Low
    (in euros)
2000
    35.41       25.88       21.57       12.53       17.18       13.00  
2001
    27.55       15.99       18.34       10.50       16.38       9.54  
2002
    17.34       7.70       12.18       4.27       11.38       4.18  
 
                                               
2003
                                               
First Quarter
    9.440       5.599       5.609       3.253       5.514       3.320  
Second Quarter
    7.306       5.562       4.507       3.259       4.532       3.284  
Third Quarter
    7.211       5.248       5.642       3.289       4.438       3.369  
Fourth Quarter
    7.062       6.063       4.187       3.642       4.347       3.902  
 
                                               
2004
                                               
First Quarter
    6.412       5.458       3.852       3.412       4.079       3.701  
Second Quarter
    6.945       5.254       4.470       3.301       4.705       3.573  
Third Quarter
    6.851       5.763       4.394       3.837       4.668       3.965  
Fourth Quarter
    5.997       5.433       3.980       3.657       4.243       3.893  
 
                                               
2005
                                               
First Quarter
    6.259       5.585       4.692       4.021       5.15       4.384  
Second Quarter
    6.206       4.607       5.325       3.523       5.569       3.887  
Third Quarter
    7.77       5.796       7.137       5.212       7.354       5.549  
Fourth Quarter
    7.674       6.626       6.859       5.59       7.058       6.011  
December 2005
    7.674       6.998       6.14       5.775       6.8       6.416  
 
                                               
2006
                                               
January
    8.428       7.447       6.853       5.984       7.432       6.644  
February
    9.165       8.111       7.376       6.585       8.150       7.179  
March
    10.278       8.917       8.312       7.220       8.958       7.871  
April
    11.42       10.178       9.164       8.251       10.132       9.015  
May
    11.691       9.461       9.371       7.739       10.349       8.479  
          In addition to the shares represented by the ADRs, at June 30, 2002, the last date upon which we paid a dividend, 12,715,241 ordinary shares and 1,530,235 preference shares were held on record in the United States. These ordinary shares and preference shares were held on record by 269 and 139 holders, respectively, and, together with the shares represented by the ADRs, represented in the aggregate 5.32% and 1.66% of the number of ordinary shares and preference shares then outstanding. Because the savings shares are in bearer form, our records do not indicate the extent to which savings shares are directly held in the United States. Since certain of the ordinary shares, preference shares and ADSs were held by brokers or other nominees, the number of direct record holders in the United States may not be fully indicative of the number of direct beneficial owners in the United States or of where the direct beneficial owners of such shares are resident.
          On June 15, 2006, the closing prices of our ordinary, preference and savings shares on the Italian Stock Exchange were €10.088, €8.027 and €9.085 respectively, and the closing price of our ordinary ADR on the New York Stock Exchange was $13.09. There was no trading in the preference share ADRs on June 15, 2006.
ITEM 10. ADDITIONAL INFORMATION
Options to Purchase Securities from Registrant or its Subsidiaries
          Our Board has approved stock option plans that have been made available to an aggregate of approximately 900 managers at the Group’s Italian and foreign companies, specifically those who have

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the title of “direttore” or who have been included in a management development program for high-potential managers. The terms of the various stock option plans generally include the following:
  Options are granted to individual managers on the basis of objective parameters that take into account the level of responsibility assigned to each individual, as well as his or her performance.
  If employment is terminated or an employee’s relationship with the Group is otherwise severed, options that are not exercisable become null and void. However, vested options may be exercised within 30 days from the date of termination, subject to certain exceptions.
  The option exercise price is determined based on the average price of our ordinary shares on the Italian Stock Exchange for the month preceding the option grant, and is subject to an adjustment in certain circumstances involving a change in our share capital. The exercise price must be paid in cash upon purchase of the underlying shares.
  The options are normally exercisable starting one year after they are granted and for a period of eight years thereafter; however, during the first four years during which exercise is permitted, exercise is limited to annual tranches, which are cumulative, of no more than 25% of the total number of options granted.
          The following table lists each of our stock option plans by date, number of grantees, total options granted, exercise price and scheduled expiration date.
                                 
            Total            
    No. of   Options   Options Still        
Year of Grant   Grantees   Granted   Outstanding   Exercise Price*   Expiration
1999(1)
    578       1,248,000       316,000     €26.120   Mar. 31, 2007
2000
    783       5,158,000       1,788,000     €28.122   Feb. 18, 2008
2001 (February)
    16       785,000       300,000     €24.853   Feb. 27, 2009
2001 (October)
    775       5,417,500       2,299,000     €16.526   Oct. 31, 2009
2002
    731       6,100,000       3,046,500     €10.397   Sept. 12, 2010
 
*   All as adjusted following the capital increases effected by Fiat S.p.A. in 2002 and 2003. The capital increase of September 2005 did not give rise to any such adjustment.
 
(1)   Unlike the subsequent plans, the 1999 plan provided that the grantee could exercise 50% of the options granted after two years, and the remaining balance any time from and after the end of the third year following the grant. The subsequent plans generally contain the terms described in the table above.
          For information on stock options that have been granted to our directors, see Item 6. “Directors, Senior Management and Employees—Compensation of Directors, Statutory Auditors and Senior Management.”

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          The table below summarizes the information on options outstanding at January 1 and December 31 of each of 2005 and 2004.
                                                 
            2005                   2004    
            Average                   Average    
    Number   exercise   Market   Number   exercise    
    of shares   price (*)   price   of shares   price (*)   Market price
 
Options outstanding on 1/1
    10,502,543       16.38       5.9       12,697,743       16.46       6.14  
Options granted during the year
                                   
Expired options
    2,753,043                   2,195,200              
Options outstanding on 12/31
    7,749,500       17.51       7.37       10,502,543       16.38       5.9  
Options exercisable on 12/31
    6,987,875       18.28       7.37       7,144,748       18.8       5.9  
     
 
(*)   These exercise prices are as adjusted following the capital increases effected by Fiat S.p.A. in 2002 and 2003. The capital increase of September 2005, did not give rise to any such adjustment.
 
(**)   For purposes of the table, the market price for options outstanding on January 1, 2005 and 2004, means the official share price on the Italian Stock Exchange on the last trading day of the year in 2004 and 2003, respectively; the market price for options outstanding on December 31, 2005 and 2004, means the official share price on the Italian Stock Exchange on the last trading day of the year in those years; and the market price for options granted during the year is calculated as the average price of our shares on the Italian Stock Exchange over the month preceding the date of grant (the same method used to calculate the exercise price of the option granted).
          For additional information on our stock option plans, see Note 24(v)(u) to the Consolidated Financial Statements included in Item 18.
          Finally, the general stockholders’ meeting held on May 3, 2006, authorized the adoption and implementation by the Board of Directors of an incentive plan to be based on financial instruments linked to Fiat shares that are issued by leading financial institutions. Such a plan will be offered to a maximum of 200 Group managers who have significant impact on our business results and will involve the equivalent of no more than of 20 million Fiat shares.
          By-laws
          The following is a summary of certain information concerning our shares and by-laws (Statuto) and of Italian law applicable to Italian companies whose shares are listed in a regulated market in the EU, as in effect at the date of this annual report. The summary contains all the information that we consider to be material regarding the shares but does not purport to be complete and is qualified in its entirety by reference to Italian law, namely the Italian Civil Code and the Consolidated Financial Act (Legislative Decree n. 58, February 24, 1998, as amended, “CFA”) or our by-laws, as the case may be.
          In December 2005, the Italian Parliament enacted Law n. 262 (“Law 262”), which sets forth rules on corporate governance for listed companies. While certain of these new rules still need to be implemented by regulation to become effective, amendments to by-laws complying with the new statutory requirements will have to be adopted by Italian listed companies by January 2007.
          According to CFA, as amended by Law 262, listed companies’ by-laws shall lay down (by January 2007) the procedures for appointing a manager in charge of preparing the company’s financial reports, subject to the mandatory opinion of the statutory auditors. Such manager shall also attest that (i) the company’s acts and disclosures containing financial data and information are reliable, and (ii) the annual unconsolidated and consolidated accounts reflect the company’s accounting records.

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General
          Our issued and outstanding share capital consists of 1,092,246,316 ordinary shares, 103,292,310 preference shares and 79,912,800 savings shares, all with a par value of €5 each. All of the issued and outstanding shares are fully paid, non-assessable and in registered form.
          Fiat S.p.A., whose registered office is in Turin, Italy, at Via Nizza 250, is registered with the Companies’ Registry of Turin at n. 00469580013.
          As set forth in Article 3 of the by-laws, our corporate purpose is to engage in activities relating to the passenger and commercial vehicles, transport, mechanical engineering, agricultural equipment, energy and propulsion industries, as well as any other manufacturing, commercial, financial or other activities and services. We are generally authorized to take any actions necessary or useful to achieve our corporate purpose.
Authorization of Shares
          An aggregate of up to 16,377,292 new ordinary shares have been authorized for issuance on February 1, 2007 to the extent required to satisfy exercise of the warrants issued in connection with the capital increase in 2002. The Company’s capital stock may also be increased by issuing ordinary and/or preference and/or savings shares with the same characteristics as those already outstanding in exchange for the contribution of assets or the cancellation of accounts payable. In addition, our Board of Directors is authorized, by and not later than September 11, 2007, to increase the capital stock, on one or more occasions, to a maximum of €8 billion, and to issue convertible debentures, on one or more occasions, up to the same limit. Increases in capital pursuant to this authorization may be reserved for employees of the Company and its subsidiaries, in accordance with the procedures and criteria established by the Board of Directors provided the amount each time does not exceed 1% of the Company’s capital stock.
          Capital stock increases deriving from the exercise of the powers delegated to the board, including those required by the conversion of debentures or the exercise of warrants, are implemented through the issue of shares belonging to the existing classes of shares. In the event of a capital stock increase, the holders of shares of each class hold preemptive rights to subscribe for a proportionate number of newly issued shares of the class they hold, or shares of another class (or classes) if shares of their class are not available or are insufficient. See “—Preemptive Rights” below.
Form and Transfer of Shares
          Pursuant to the CFA, Legislative Decree No. 213 of June 24, 1998 (“Decree No. 213”) and CONSOB Regulation No. 11768 of December 23, 1998 (“Regulation No. 11768”), stockholders may no longer obtain physical delivery of share certificates representing shares of Italian listed companies since January 1, 1999. The transfer and exchange of shares takes place exclusively through an electronic book-entry system. The owners of shares must accordingly, deposit all shares with an intermediary (each an “Intermediary”), which is defined by Regulation No. 11768 as:
    an Italian or EU bank; a non-EU bank authorized by the Bank of Italy to operate in the Italian market;
 
    an Italian or EU investment company;

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    a non-EU investment company authorized by CONSOB to provide investment services in Italy;
 
    an Italian asset management company;
 
    a stock broker;
 
    the company that issued the shares, or that controls the company that issued the shares;
 
    the Bank of Italy;
 
    an EU or non-EU entity operating a centralized clearing system;
 
    a financial intermediary operating a clearing system governed by art. 69(2) and 70 of the CFA;
 
    a financial intermediary registered on the list kept by the Bank of Italy under art. 107 of Legislative Decree No. 385 of September 1, 1993, as amended;
 
    the Italian Post Office (Poste Italiane S.p.A.);
 
    Cassa Depositi e Prestiti S.p.A. (a state-owned entity mainly responsible for extending loans to public administration bodies);
 
    the Ministry of Economy and Finance; or
 
    the managers of foreign clearing, settlement and guarantee systems for financial instruments, provided that they are subject to supervision equivalent to that provided by Italian law.
          The Intermediary in turn deposits the shares with Monte Titoli S.p.A. (“Monte Titoli”), which operates the Italian centralized securities clearing system, or, at the election of the company issuing the shares, with another company authorized by CONSOB to operate a centralized clearing system in Italy.
          To transfer shares under the system introduced by Decree No. 213, an owner of shares is required to give instructions to its Intermediary. If the transferee is a client of the transferor’s Intermediary, the Intermediary transfers the shares from the transferor’s account to the account of the transferee. If, however, the transferee is a client of another Intermediary, the transferor’s Intermediary instructs the clearing system to transfer the shares to the account of the transferee’s Intermediary, which will then credit the shares to the transferee’s account.
          Each Intermediary maintains a custody account for each of its clients containing the client’s financial instruments and keeps a record of all transfers, payments of dividends, exercises of rights attributable to such instruments and charges or other encumbrances on the instruments. An account holder may obtain proof of ownership of the shares by submitting a request to the Intermediary for the issue of a certified statement of account. The request must indicate the quantity of the financial instruments for which the statement is requested, (ii) the rights that the applicant intends to exercise (and, in the case of rights exercisable at stockholders’ meetings, the date and nature of the meeting) and (iii) the period of time for which the certificate is valid. Within two business days of receipt of such request, the Intermediary must issue a certified statement of account constituting evidence of the account holder’s

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ownership of the financial instruments indicated. Once a certificate has been issued, the Intermediary may not transfer any corresponding securities until the certificate expires or is returned.
Dividend Rights
          The payment by the Company of any annual dividend is proposed by the Board of Directors and is subject to the approval of the stockholders at the annual stockholders’ meeting. Before dividends may be paid out of the Company’s unconsolidated net income in any fiscal year, an amount equal to 5% of such net income must be allocated to the Company’s legal reserve until such reserve is at least equal to one-fifth of the par value of the Company’s issued share capital. If the Company’s capital is reduced as a result of accumulated losses, dividends may not be paid until the capital is reconstituted or reduced by the amount of such losses. The Board of Directors may authorize the distribution of interim dividends, subject to certain statutory limitations.
          Dividends are payable to those persons who hold the shares through an Intermediary on the dividend payment date declared by the stockholders’ meeting. Dividends not collected within five years from the dividend payment date are waived. Payments in respect of dividends are distributed through Monte Titoli and each stockholder’s Intermediary. Holders of ADSs are entitled to receive payments in respect of dividends on the underlying shares through JPMorgan Chase Bank, as ADR depositary (“JPMorgan Chase”), in accordance with the deposit agreement relating to the ADRs. See Item 8. “Financial Information-Dividend Policy.”
Voting Rights
          Stockholders are entitled to one vote per share, although members of the Board of Statutory Auditors are elected through a cumulative voting system and minority stockholders have the right to appoint at least one statutory auditor. See “—Statutory Auditors” below.
          Proxy solicitation is permitted, but may be conducted only by certain professional investment and financial intermediaries, as well as certain companies whose sole purpose is to carry out proxy solicitation, on behalf of a qualified soliciting stockholder (generally, one or more stockholders who own and have owned at least 1% of the voting capital of the Company for more than six months and who have been registered with the Company as such during that time).
          Proxies may be collected by a stockholders’ association provided that such association has been formed by notarized private agreement, does not carry out business activities and is made up of at least 50 individuals, each of whom owns not more than 0.1% of the Company’s voting capital. Members of the stockholders’ association may, but are not obliged to, grant proxies to the legal representative of the association, and proxies may also be granted in respect of only certain of the matters to be discussed at a given stockholders’ meeting. The association votes in compliance with the instructions, whether the same or different, given by each member who has granted a proxy to the association.
          As a registered stockholder, JPMorgan Chase as ADR depositary or its nominee is entitled to vote the shares underlying the ADSs. The Deposit Agreement requires JPMorgan Chase (or its nominee) to accept voting instructions from owners of ADSs and to execute such instructions to the extent permitted by law. Neither Italian law nor the Company’s by-laws limit the right of non-resident or foreign owners to hold or vote the shares.

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Board of Directors
          Pursuant to the Company’s by-laws, the Company’s Board of Directors must consist of nine to fifteen individuals. The Board of Directors is elected at a stockholders’ meeting for a term of up to three fiscal years, as determined by the stockholders from time to time. The directors, who may but are not required to be stockholders of the Company, may be re-elected for successive terms. In accordance with the by-laws, the Board of Directors has complete power of ordinary and extraordinary administration of the Company and in particular may perform all acts it deems advisable for the achievement of the Company’s corporate purposes, except for the actions reserved by applicable law or the by-laws to the competence of the stockholders.
          The Board of Directors appoints from among its members a chairman, a vice chairman if deemed advisable, and one or more CEOs. In the case of the absence or incapacity of the chairman, the vice chairman, if appointed, will assume the chairman’s functions. The chairman of the board, the vice chairman, if appointed, and the CEO(s), separately, are the Company’s legal representatives and have the power to execute the duties conferred on them by the board. The Board of Directors is charged with establishing a committee to supervise the internal control system and committees for the nomination and compensation process for directors and senior managers with strategic responsibilities, and may set up an Executive Committee and other committees with specific functions and tasks, and fix the composition and operating procedures of such committees (see Item 6. “Directors, Senior Management and Employees—Directors”). The Board of Directors may also appoint one or more chief operating officers and may designate a secretary, who need not be a member of the board.
          Meetings of the Board of Directors are called by written notice, containing a full agenda for the meetings, sent at least five days before the day on which the meeting is to be held, except in urgent situations. Board meetings can be called by the chairman, at least once every quarter and whenever the chairman deems it appropriate, or when requested by at least three directors, acting together, or by one of the directors to whom powers have been delegated. Meetings of the Board of Directors can also be called, after consultation with the chairman, by a statutory auditor.
          Board meetings are presided over by the chairman, or in his absence, by the vice chairman, if appointed; in their absence, the board designates another director to take the chair. Directors to whom powers have been delegated must report to the Board of Directors and the Board of Statutory Auditors on a quarterly basis on their activities and business outlook, as well as on transactions carried out by the Company or its subsidiaries that are particularly significant in terms of size or characteristics, and each Director is required to disclose any interest that he/she may have, either directly or on behalf of third parties, in any transaction to which the Company is a party. Based on the information it receives, the Board of Directors evaluates the adequacy of the Company’s organization, administrative structure and accounting system; reviews the Company’s strategic, industrial and financial plans; and based on reports provided by the bodies with delegated powers, assesses the general performance of the Company’s operations. The quorum for board meetings is a majority of directors in office. Resolutions are passed by an absolute majority of votes of the directors present. In the case of a tie, the chairman of the meeting has the deciding vote. Resolutions are recorded in the minutes and signed by the chairman of the meeting and the secretary.
          Under Italian law, directors may be removed from office at any time by the vote of stockholders at an ordinary stockholders’ meeting, although, if removed in circumstances where there was no just cause, removed directors may have a claim for indemnification against the Company. Directors may resign at any time by written notice to the Board of Directors and to the chairman of the Board of Statutory Auditors. The Board of Directors must appoint substitute

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directors to fill vacancies arising from removals or resignations, subject to the approval of the Board of Statutory Auditors, to serve until the next ordinary stockholders’ meeting. If at any time more than half of the members of the Board of Directors appointed at a stockholders’ meeting resign or otherwise cease to be directors, the term of the entire Board of Directors will be considered to have lapsed and the remaining members of the Board of Directors (or the Board of Statutory Auditors if all the members of the Board of Directors have resigned or ceased to be directors) must promptly call an ordinary stockholders’ meeting to appoint a new Board of Directors.
          The compensation of directors is determined by the stockholders, and remains in effect until they resolve otherwise. The compensation of directors holding particular offices is determined by the Board of Directors, after consultations with the Board of Statutory Auditors.
          According to the CFA, as amended by Law 262, by-laws of Italian listed companies shall provide for the members of the board of directors to be appointed on the basis of candidate lists and shall specify the minimum shareholding needed to present a list (which shall not be more than one fortieth of the share capital). Furthermore, at least one director shall be elected from the minority list that obtained the largest number of votes. Amendments to listed company’s by-laws to comply with the new rules on appointment of directors must be adopted by January 2007.
Statutory Auditors
          In addition to electing the Board of Directors, the Company’s stockholders elect a Board of Statutory Auditors (Collegio Sindacale). At ordinary stockholders’ meetings of the Company, the statutory auditors are elected for a term of three fiscal years, may be re-elected for successive terms and may be removed only for cause and with the approval of a competent court. Each member of the Board of Statutory Auditors must provide evidence that he/she is in good standing and meets certain standards of integrity, professionality and independence.
          Pursuant to the CFA, as amended by Law 262:
  by-laws must specify the number of statutory auditors (not fewer than three) and alternate members (not fewer than two);
  CONSOB will set forth by regulation a procedure through which one member of the board will be appointed by the minority stockholders;
  the statutory auditor (or one of the statutory auditors) elected by the minority stockholders’ shall become Chairman of the Board;
  statutory auditors are subject to certain limits (that shall be set forth by CONSOB regulation) concerning the cumulation of management and control positions that they may have in other companies.
          The Company’s by-laws (art. 17) currently provide that the Board of Statutory Auditors is to consist of three statutory auditors and three alternate statutory auditors (who automatically replace statutory auditors who resign or are otherwise unable to serve). The by-laws require that each of our statutory auditors be a registered chartered accountant and have at least three years’ experience as a statutory auditor. The by-laws also require that statutory auditors not hold the position of statutory auditor in more than five other listed companies (not including parent or subsidiaries of the Company). According to the Company’s by-laws, the statutory auditors are elected according to a cumulative voting system, whereby each stockholder or group of stockholders holding at least 1% of

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the capital with the right to vote at an ordinary stockholders’ meeting may present a slate, or a list of candidates. Each stockholder or group of stockholders may present and vote for only one list, and each candidate may be named on only one list. Two auditors and two alternate auditors are elected from the list which gets the highest number of votes, and the remaining auditor and alternate auditor are elected from the list getting the second-highest number of votes. Therefore, the minority has the right to appoint one regular and one alternate auditor. The lists presented must be deposited at the Company’s offices at least ten days prior to the original date set for the ordinary stockholders’ meeting at which the vote is to take place.
          The CFA provides further that the board of statutory auditors will be required to verify that the company (i) complies with applicable law and its by-laws, (ii) respects the principles of correct administration, (iii) maintains adequate organizational structure, internal controls and administrative and accounting systems, (iv) adequately instructs its subsidiaries to transmit to it information relevant to the its disclosure obligations, and (v) correctly implements the corporate governance rules set forth by codes of conduct drawn up by management companies of regulated markets or by trade associations that the company, by means of public disclosures, declares to comply with.
          The Board of Statutory Auditors is required to meet at least once every 90 days. In addition, the statutory auditors are entitled to call and must attend the board of directors’ meetings, the stockholders’ meetings and the executive committee’s (if any) meeting. In particular the right to call the stockholders’ meeting must be exercised by at least two members of the board, whereas the right to call the other meetings may be exercised individually by each statutory auditor. Statutory auditors may exchange information with the Company’s external auditors, and, even individually, request information on the management of the Company or of its subsidiaries from the directors and carry out inspections and verifications at the Company. The Board of Directors must report to the statutory auditors at least quarterly on its activities and on the main transactions carried out by the company and its subsidiaries.
          The Board of Statutory Auditors may report to the competent court serious breaches of the duties of the directors. The Company’s Board of Statutory Auditors is also required to notify the CONSOB without delay of any irregularities found during its review activities. CONSOB may report to the competent court serious breaches of the duties of the statutory auditors of a listed company.
External Auditors
          The CFA requires companies whose shares are listed on regulated markets of EU Member States to appoint a firm of external auditors to verify that (i) during the fiscal year, the company’s accounting records are correctly kept and accurately reflect the company’s activities, and (ii) the financial statements correspond to the accounting records and the verifications conducted by the external auditors and comply with applicable rules. The external auditors express their opinion on the financial statements in a report that may be consulted by the stockholders prior to the annual stockholders’ meeting.
          The external auditors are appointed by a resolution taken at the annual stockholders’ meeting. Before the enactment of Law 262, the external auditors were appointed for a three-year term (which could not be renewed more than twice). Under the new statutory provisions, the external auditors are appointed for a six-year term.
          The stockholders’ meeting held on May 13, 2003, appointed Deloitte & Touche Italia S.p.A. as the Company’s external auditors for each fiscal year in the three-year period 2003 through 2005.

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          On July 31, 2003, Deloitte & Touche Italia S.p.A. contributed its audit business to a newly incorporated company, Deloitte & Touche S.p.A., which combined the businesses of the two previously existing Italian entities affiliated with the Deloitte Touche Tohmatsu international network and is registered with CONSOB. As a result of this legal contribution, Deloitte & Touche Italia S.p.A.’s engagement as our external auditors for the three-year period 2003-2005 was transferred to the new entity Deloitte & Touche S.p.A.
          The stockholders’ meeting held on May 3, 2006, reappointed Deloitte & Touche S.p.A. as the Company’s external auditors for each fiscal year in the six-year period 2006 through 2011.
Meetings of Stockholders
          Stockholders are entitled to attend and vote at ordinary and extraordinary stockholders’ meetings. Votes may be cast personally or by proxy. Stockholders’ meetings may be called by the Company’s Board of Directors. According to the Company’s by-laws (art.7), stockholders are informed of all stockholders’ meetings to be held by publication of a notice in the Italian daily newspapers La Stampa and Il Sole 24 Ore or, if both these newspapers are not published, in the Official Gazette of the Republic of Italy. Stockholders’ meetings must be convened at least once a year. Pursuant to CFA, as amended by Law 262, stockholders who, separately or jointly, represent at least 2.5% of the share capital may request additions to the agenda, within five days of the publication of the notice convening the meeting. The annual unconsolidated financial statements of the Company are submitted for approval to the ordinary stockholders’ meeting, which must be convened within 180 days after the end of the Company’s financial year. At ordinary stockholders’ meetings, stockholders also appoint the external auditors, approve the distribution of dividends, elect and determine the remuneration of the boards of directors and statutory auditors and vote on any other business matter the resolution or authorization of which is entrusted to them by law or by the Company’s by-laws, including authorizing the company to purchase its own shares.
          Extraordinary stockholders’ meetings may be called to approve spin-offs, dissolutions, the appointment of receivers and similar extraordinary actions. Extraordinary stockholders’ meetings may also be called to resolve upon proposed amendments to the by-laws, issuance of convertible debentures, mergers and de-mergers and capital increases and reductions where such resolutions may not be taken by the Company’s Board of Directors. In particular, the Company’s Board of Directors may transfer the Company’s registered office within Turin or resolve upon other amendments to the by-laws when these amendments are required by law, resolve upon mergers by absorption into the Company of its subsidiaries in which it holds at least 90% of the issued share capital and reductions of the Company’s share capital in case of withdrawal of a stockholder. The Company’s Board of Directors may also resolve upon the issuance of shares or convertible debentures if such powers have been previously delegated to the Board of Directors by vote of the extraordinary stockholders’ meeting.
          The notice of a stockholders’ meeting may specify up to two meeting dates for an ordinary stockholders’ meeting and three meeting dates for an extraordinary stockholders’ meeting; such meeting dates are generally referred to as “calls.”
          The quorum required for stockholder action at an ordinary stockholders’ meeting on first call is at least 50% of the capital stock entitled to vote, while on second call there is no quorum requirement. According to Article 9 of the Company’s by-laws, resolutions may be approved in either case by holders of an absolute majority of the shares present or represented at the meeting, except for the election of directors, for which a simple majority of the vote is sufficient, and for the

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election of statutory auditors, for which the provisions of Article 17 of the by-laws shall apply. See “Statutory Auditors” above.
          The quorum required at an extraordinary stockholders’ meeting on first call is at least 50% of the capital stock with voting rights, while on second and third call, the quorum required is more than one-third and at least one-fifth of the capital stock, respectively. Resolutions of any extraordinary stockholders’ meeting require the approval of at least two-thirds of the shares represented at such meeting, except for special cases where particular majorities are expressly required by law.
          To attend any stockholders’ meeting, holders of shares must obtain a certified statement of account evidencing their ownership of the shares. Such statements, which must be communicated to the Company ahead of time, may be obtained by owners of shares through their Intermediary.
          Stockholders may attend the stockholders’ meeting by proxy. A proxy may be given only for a single stockholders’ meeting (including, however, the first, second and, where applicable, third calls of such meeting) and may be exercised only by the person expressly named in the applicable form. The person exercising the proxy cannot be a subsidiary of the Company, or a director, statutory auditor or employee of the Company or of any of its subsidiaries.
          Proxy solicitation is permitted. See “--Voting Rights” above.
Preemptive Rights
          Pursuant to Italian law, holders of shares are entitled to subscribe for new issuances of shares, debentures convertible into shares and any other warrants, rights or options entitling the holders to subscribe for shares in proportion to their holdings, unless such issues are for non-cash consideration or preemptive rights are waived or limited by a resolution adopted at an extraordinary stockholders’ meeting. There can be no assurance that the owners of ADSs will be able to exercise fully any preemptive rights to which the holders of shares are entitled.
Reports to Stockholders
          The Company is required to publish, in the Italian language, its audited annual unconsolidated financial statements and audited annual consolidated financial statements, accompanied by a directors’ report on operations.
          The Company is required to produce unaudited quarterly directors’ reports on operations in the Italian language, semi-annual reports to stockholders in the Italian language which contain a directors’ report on operations and unaudited semi-annual condensed unconsolidated and consolidated financial statements. The Company is also required to prepare annual reports on Form 20-F to be filed with the US Securities and Exchange Commission containing, among other things, audited consolidated financial statements of the Company.
          For fiscal years through and including the year ended December 31, 2004, the Company prepared all of its consolidated and unconsolidated financial statements in accordance with Italian GAAP. Since January 1, 2005, the Company publishes audited annual consolidated financial statements and unaudited semi-annual and quarterly consolidated reports in conformity with IFRS. The Company published its unconsolidated annual financial statements for the year 2005 in accordance with Italian GAAP. Since January 1, 2006, the Company publishes audited annual unconsolidated financial statements and unaudited semi-annual unconsolidated reports in conformity with IFRS. For more information on these

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new accounting principles and certain of the differences between IFRS and Italian GAAP that are material to us, see Item 5. “Operating and Financial Review and Prospects—Transition to International Financial Reporting Standards” and Note 39 to the Consolidated Financial Statements included in Item 18, which also contains a reconciliation to IFRS of our Italian GAAP financial information as at January 1, 2004, and December 31, 2004, and for the year ended December 31, 2004.
Preference and Savings Shares
          The Company is permit