EXHIBIT A

CITY OF NAPLES

TABLE OF CONTENTS

Page
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INTRODUCTION...........................................................................7

CITY OF NAPLES.........................................................................9

THE ECONOMY...........................................................................14

FINANCIAL CONDITION OF THE CITY.......................................................16

DEBT OF THE CITY......................................................................25

THE REPUBLIC OF ITALY.................................................................27

OFFICIAL STATEMENTS...................................................................51

AUTHORIZED REPRESENTATIVE IN THE UNITED STATES........................................51

SCHEDULE OF OUTSTANDING DEBT AS OF DECEMBER 31, 2004..................................52

INTRODUCTION

The Euro

The Treaty on the European Union (the "Maastricht Treaty"), which came into
effect on November 1, 1993, established the guidelines for a single European
currency under the monetary control of a European Central Bank. The European
Monetary Institute ("EMI") was subsequently established with responsibility for
the technical preparations for European Monetary Union (including instruments,
procedures and regulations) as well as for strengthening cooperation and
coordination among the monetary authorities of the member states. With the
approval of the Council of the European Union, Italy, Austria, Belgium, Finland,
France, Germany, Greece, Ireland, Luxembourg, the Netherlands, Portugal and
Spain (the "Participating Member States") agreed to adhere to the Maastricht
Treaty.

On January 1, 1999, the Euro officially became a currency, alongside each of the
national currencies of Participating Member States, which were fixed at
irrevocable conversion rates to the Euro, and the currencies of other European
Union member countries that are not Participating Member States also became
linked to the Euro. The national currency of each Participating Member State
continued to be the sole legal tender for cash transactions in each nation. The
conversion rate between the Euro and the Italian Lira was fixed at Lit.1,936.27
per Euro. The following table sets forth the fixed conversion rates between the
Euro and each of the twelve Participating Member States' national currencies:

Belgian/
Luxembourg French Deutsche Irish Dutch Portuguese Spanish Austrian Finnish Italian Greek
Francs Francs Mark Pounds Guilder Escudos Pesetas Schillings Marks Lira Drachma
---------- ------ -------- ------ ------- ---------- ------- ---------- ------- ------- -------

'E'1.00..... 40.3399 6.55957 1.95583 0.787564 2.20371 200.482 166.386 13.7603 5.94573 1936.27 340.750

Also on January 1, 1999, the European Central Bank in Frankfurt began to
determine the monetary policy for the Participating Member States centrally.
Beginning on January 1, 2002, the Euro was introduced as the legal tender in
each of the Participating Member States and each of the pre-existing national
currencies continued to be accepted for temporary periods ending no later than
March 1, 2002. The Italian Lira ceased to be legal tender on March 1, 2002, and
has been removed from circulation and replaced by the Euro.

All Lira amounts have been converted into Euro at the fixed exchange rate of
Lit.1,936.27 to 'E'1.00.

Exchange Rates

The following table sets forth, for the periods and dates indicated, certain
information regarding exchange rates between the U.S. Dollar and the Euro, based
on the Noon Buying Rate for Euros expressed in Euro for $1.00 (rounded to the
nearest Euro). These rates are provided solely for your convenience. We do not
represent that the named currencies could have been converted at these rates or
any other rate.

The column of averages in the tables below shows the averages of the relevant
exchange rates on the last business day of each month during the relevant
period. The high and low columns show the highest and the lowest mid-market
quotes, respectively, on any business day during the relevant period. Except as
otherwise specified, all amounts in this Annual Report are expressed in Euro
("EUR", "Euro" or "'E'") or in United States Dollars ("Dollars", "$", "US$"
or "U.S. 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 or
any other rate.

U.S. Dollar per Euro(1)

Year ended December 31, End of Period Average(2) High Low
- -------------------------------------------------- ------------- ---------- ---- ---

2004.............................................. 1.36 1.24 1.36 1.18
2003 ............................................. 1.26 1.13 1.26 1.04
2002 ............................................. 1.05 0.95 1.05 0.86
2001 ............................................. 0.89 0.89 0.95 0.84
2000.............................................. 0.94 0.90 1.03 0.83

- ---------------
(1) Based on the U.S. Federal Reserve Bank noon buying rate for Euro for 2000,
2001, 2002, 2003 and 2004.

(2) Based on the average of the exchange rates for the last business day of
each month during the relevant period.

CITY OF NAPLES

General

The City of Naples (the "City" or the "City of Naples") is located in the
Southern portion of the Republic of Italy ("Italy" or the "Republic") on the
Mediterranean coast in the region of Campania.

The City dates from the sixth or seventh century B.C., when Greek colonists
established an outpost under the name of "Parthenope" on what is now Naples.
"Parthenope" later changed its name to "Palepolis" (old town) before the
inhabitants of the Greek colony Cuma founded "Neapolis" (new town) in 475 A.D.
Over the centuries, Naples became a prosperous commercial center and has
remained an important trading port on the Mediterranean Sea ever since.

Today, the City occupies an area of 117.2 square kilometers (approximately 453
square miles). With a population of approximately one million as of December 31,
2004, Naples is the third largest city in Italy, after Rome and Milan. The
population of the Naples metropolitan area (known as the Provincia di Napoli)
amounted to approximately 3 million as of December 31, 2004.

Naples is the capital of the region of Campania (hereinafter referred to as the
"Region of Campania" or the "Region"), the second most populous of Italy's 20
regions. As of December 31, 2004, Campania had a population of approximately 5.8
million representing approximately 9.9% of the population of Italy. Campania,
along with the regions of Abruzzo, Molise, Puglia, Calabria, Basilicata, Sicily
and Sardinia, form an area in Southern Italy known as the "Mezzogiorno".

With an international airport, an extensive road and rail network and one of the
most important ports in the Mediterranean Sea, the City of Naples is well
connected to local communities as well as strategically placed to conduct
international trade. Its strategic location historically led to the growth of
Naples into one of Italy's major cities while the City's local environment and
proximity to the islands of Capri, Ischia and Procida have established tourism
as one of its most important industries.

In June 1996, the City of Naples issued $195 million in aggregate principal
amount of senior notes (the "Notes") in a registered offering in the United
States and listed the Notes on the New York Stock Exchange. The Notes bear
interest at a rate of 7.52% per annum and mature on July 15, 2006.

The principal office of the City is located at Palazzo San Giacomo, Piazza del
Municipio, Naples, Italy.

Governmental Organization

Relationship between Central Government and Local Governments

The Republic of Italy has been a democratic republic since June 2, 1946. Its
government is organized territorially and administratively on national, regional
and local levels. Legislative, executive and judicial powers are exercised at
the national level by the Central Government of Italy (the "Central
Government"). Limited legislative and executive powers are exercised by the
governments of regions (regioni, of which there are 20), provinces (province, of
which there are 103) and municipalities (comuni, of which there are
approximately 8,100).

The Central Government has exclusive powers to act, inter alia, in the areas of
international relations, defense, armed forces and national security, foreign
trade and economic, monetary and energy policies. The Central Government also
has powers to act in other areas, such as public works, water resources,
railways and transportation. The Central Government provides a substantial
portion of the funds of regions, provinces and municipalities.

Due to amendments to the Italian Constitution (the "Constitution") introduced by
Constitutional Law No. 3 of October 18, 2001, regions were granted greater
legislative powers which can be exercised on all those matters not expressly
reserved to the competence of the Central Government as well as on such other
matters falling within the concurrent competence of regions and the Central
Government, while provinces and municipalities exercise certain regulatory and
executive powers at local level.

In particular, new Article 118 of the Constitution attributes administrative
functions to municipalities with the exception of those functions that are
attributed to provinces, metropolitan cities, regions or the Central Government

in order to guarantee the co-ordinated exercise of these functions. The recent
amendments to the Constitution implement the principle that the management of
public functions should be attributed to those entities which are nearest to
citizens and consequently in a position to grant them the most efficient support
(principio di sussidiarieta), such as municipalities.

As a consequence of the federalist reform which started with Law No. 59 of March
15, 1997 (the "Legge Bassanini") and which is still in progress today,
municipalities currently derive the majority of their revenues from their own
sources (namely taxes and income from the provision of public services).

In particular, Constitutional Law No. 3 provides that: (i) municipalities have
financial autonomy within certain limits; (ii) municipalities are entitled to
establish and collect their own taxes and other revenues in a manner consistent
with the general criteria set forth by the Constitution and in compliance with
the principles of co-ordination of public debt and the domestic tax system;
(iii) municipalities are entitled to receive a portion of Central Government
taxes collected within their territory; (iv) the redistribution of resources
from richer to poorer areas shall be effected by means of an equalization fund;
(v) the revenues listed in the preceding paragraphs (i) to (iv) be used to fund
the public functions devolved to municipalities; (vi) to promote economic
development, cohesion and economic and social balance, the Central Government
shall devote additional resources to and, where necessary, intervene in support
of, specific municipalities; and (vii) the municipalities shall have their own
assets attributed according to the general principles set forth by the Central
Government and may incur indebtedness only to finance investment which
indebtedness cannot be guaranteed by the Central Government.

The Region of Campania has powers with respect to general economic and social
issues and is responsible for providing resources to finance municipal and
provincial investment programs. Its powers are largely administrative and cover
the regulation of regional offices and administrative authorities; local, rural
and urban policing; fairs and markets; charities, health trusts and hospitals;
professional training and education; museums and libraries belonging to local
authorities; town planning; tourism and hotels; national tramways and motorways;
road maintenance, aqueducts and public works of national interest; navigation;
regulations relating to minerals and thermal water; regulations relating to
quarries; agriculture; forestry; and arts and crafts.

The City is responsible for managing City-owned properties, providing City-wide
services such as urban transportation, water, sewers and waste disposal,
constructing and managing government housing on behalf of the Central
Government, certain pre-schools, museums and cultural sites, local economic
promotion, certain social services for the elderly, foster children and
handicapped individuals (retirement homes, foster care and renovation for
handicapped access) and various local civil services. See "--Major Activities."
The City conducts a number of these services through its subsidiaries. See
"Financial Condition of the City--Subsidiaries."

Local Administration

Naples is governed by a Mayor, a City Council (Consiglio Comunale) and a City
Board (Giunta Comunale). Supervisory and advisory assistance is provided to the
City Council through the Board of Auditors (Collegio dei Revisori). Since the
electoral reforms of June 1993, the Mayor is elected directly by popular vote
for an uninterrupted term of five years. The Mayor is responsible for appointing
the members of the City Board. In Naples, the City Council consists of 60
members elected by popular vote for terms of five years. The City Council has
responsibility for the City's policy and regulation. In particular, the City
Council is responsible for the City's accounts and budgets and enacting relevant
statutes and by-laws; the City's investment programs; provisions of and setting
tariffs for public services; bond issues and other debt financing; and managing
the City's fixed assets. The City Board is an administrative and executive body,
responsible for making proposals to the City Council and administration of the
City Council's policies. The City Board is in charge of drawing up the
provisional and final financial statements and the long-term budget. The City
Board consists of the Mayor and sixteen assessori, which are chosen directly by
the Mayor and cannot be members of the City Council. Each assessore is
responsible for one or more administrative departments.

The Board of Auditors, which is nominated by the City Council, consists of three
members that have three-year terms. Members of the Board of Auditors have the
right to access all municipal records and documents and to attend meetings of
the City Council. The Board of Auditors is empowered to provide comments on
draft budgets and budget amendments, monitor the City's accounting and financial
management, prepare an annual report on the City's financial statements, conduct
cash controls on the City's treasury department on three-month intervals and
refer serious mismanagement or fraud to the City Council and to law enforcement
authorities.

Today, the Mayor must attain an absolute majority of votes. In the event that a
candidate obtains less than a majority, a second ballot must be held between the
two candidates with the highest number of votes. Each list of candidates for the
City Council is linked to one candidate for the position of Mayor. The
candidates on the elected Mayor's list are automatically awarded the greater of
60.0% of the City Council seats or the percentage of the City Council seats
equal to the percentage vote obtained in the election. The remaining seats are
distributed among the candidates on the other lists based on the percentage vote
obtained in the election.

As of December 31, 2004, the mayor, Mrs. Rosa Russo Jervolino, a member of the
center-left coalition (L'Ulivo), was in office. Mrs. Jervolino was elected to
office in May 2001. Her term expired in May 2006 and she was re-elected for
another term.

The following table shows the political party affiliations of the City
Councilors elected in the most recent election:

Representation of Political Parties in the City Council

Administrative Election of
May 13, 2001
-----------------------------
Political Party Seats Percentage
- -------------------------------------------------------------------------------- ----- ----------

Democratic Party of the Left (Partito Democratico della Sinistra)............... 18 30.0%
Daisy (Margherita).............................................................. 5 8.3%
Popular Party (Partito Popolare)................................................ 3 5.0%
Communist Refoundation (Rifondazione Comunista)................................. 3 5.0%
Greens (Verdi).................................................................. 3 5.0%
Renew Italy (Rinnovamento Italiano)............................................. 1 1.6%
Italian Democratic Left (Sinistra Democratica Italiana)......................... 1 1.6%
Republican Party (Partito Repubblicano)......................................... 1 1.6%
Italian Communist Party (Partito dei Comunisti Italiani)........................ 1 1.6%
Total Majority.................................................................. 36 60.0%
----- ----------
Go Italy (Forza Italia)......................................................... 11 18.3%
National Alliance (Alleanza Nazionale).......................................... 5 8.3%
House of Liberties - Martusciello for Major
(Casa delle Liberta per Martusciello per Sindaco)............................... 5 8.3%
Christian Democratic Party (Partito Democratico Cristiano)...................... 2 3.3%
White Flower (Bianco Fiore)..................................................... 1 1.6%
----- ----------
Total Opposition................................................................ 24 40.0%
----- ----------

Total City Council 60 100.0%
===== ==========

Employees of the City

The following table shows the employees of the City at the dates indicated:

Employees of the City of Naples

Year ended December 31,
------------------------------------------------------------
2000 2001 2002 2003 2004
------ ------ ------ ------ ------

City of Naples.................................. 13,471 13,457 13,432 13,537 13,303
====== ====== ====== ====== ======

As of December 31, 2004, the City employed 13,303 employees, representing a 1.7%
decrease from the December 31, 2003 total of 13,537. The decrease was the result
of the retirement of employees without replacing them with new employees in
accordance with the cost-cutting measures set forth in a law passed by the City
in 2003.

Unions represent City employees. Separate contracts are negotiated on a national
basis for non-executive and executive employees. Generally, the contracts are
for four-year terms and the economic aspects of the contract are

negotiated every two years. The contracts generally expire prior to the
negotiation of a new contract. Until the new contract is in effect, the terms of
the prior contract are generally respected and upon effectiveness of the new
contract retroactive payments are made. The City's national contracts expired on
December 31, 2003. New national contracts were entered into on January 1, 2004.
Naples has not experienced significant work stoppages by City employees in the
past three years. The pensions of City employees are paid by the Central
Government entity INPDAP (Institute of Social Security for Public Administration
Employees), which was created specifically for public sector employees.

Major Activities

The City is responsible for managing City-owned properties. The management of
these properties was outsourced to an external company, Romeo Immobiliare, which
provides City-wide services such as urban transportation, water, sewers and
waste disposal, constructing and managing government housing on behalf of the
Central Government, certain pre-schools, museums and cultural sites, local
economic promotion, certain social services for the elderly, foster children and
handicapped individuals (retirement homes, foster care and renovation for
handicapped access) and various local civil services. The City conducts a number
of these services through its subsidiaries (joint stock companies (societa per
azioni)). See "Financial Condition of the City--Subsidiaries."

Public Housing. The construction and maintenance of public housing is
substantially funded by the Central Government with a lesser part sustained by
the City. The Central Government provides its funding allotment through direct
project grants to the City, which are then disbursed under the supervision of
the City's administration. After several years of low capital expenditures on
public housing due to dissesto, in 2004 the City spent approximately
'E'31,011,336 million on housing improvement, renovation and construction.

Education. Primary and secondary education is principally the responsibility of
the Central Government. The City operates nursery schools and kindergartens. The
City also provides funding for certain expenses of primary and secondary
schools. Furthermore, five universities are located in Naples, however, they are
not the responsibility of the City.

Waste Collection and Disposal. The City and the Region of Campania share
responsibility for waste disposal. Garbage collection is performed by ASIA
S.p.A., which is 100.0% owned by the City. Identifying and constructing new
dumps is the responsibility of the Region of Campania.

Public Security. The City maintains a municipal police force of approximately
2,470 officers. The main responsibilities of the police force are traffic
control and traffic violations, audits for evasion of City fees and taxes,
public building security and enforcement of building codes. In 2004, significant
expenses were incurred totaling 'E'78 million for public security purposes.

Sewage System and Waterworks. The City is responsible for the construction,
maintenance and management of the sewage system in the City. As of December 31,
2004, the sewage system consisted of over 1,000 kilometers of sewers. Due to the
age of the sewage system, for the past few years the City has budgeted and
incurred significant maintenance and capital expenditures for the system. The
City supplies drinkable water to its inhabitants through ARIN (Azienda Risorse
Idriche di Napoli), a joint stock company (societa per azioni) wholly owned by
the City. See "Financial Condition of the City--Subsidiaries." ARIN utilizes a
network of approximately 2,360 kilometers of pipes to distribute drinking water
to more than 2 million people in the Naples metropolitan area with an average
water supply of approximately 104,084,151 cubic meters in 2004. As part of a
process towards a more efficient management system of water resources, including
sourcing, distribution, depuration and sewerage, the Region of Campania has
recently implemented a reorganization plan, whereby the management of water
resources has been entrusted to macro-urban areas, each named "Ambito
Territoriale Ottimale" ("ATO"), which must assign the activities to private
companies by calling for tenders. ARIN, as the leading company in the Region of
Campania, would in a good position to obtain such assignments. However, as of
December 31, 2004, such assignment had not yet been carried out.

Urban and Suburban Transportation. The City provides urban transportation
through ANM (Azienda Napoletana Mobilita), a joint stock company (societa per
azioni) 100.0% owned by the City and Metronapoli S.p.A., which is 62.0% owned by
the City. ANM also provides suburban transportation through CTP (Consorzio
Trasporti Pubblici), a consortium 50.0% owned by the City and 50.0% owned by the
Provincia di Napoli. See "Financial Condition of the City--Subsidiaries."

Urban Infrastructure. City planning is designed to promote the orderly
development and continual improvement of the City and to provide the
infrastructure for a healthy and cultural urban life for its citizens. For these
purposes the City prepared and recently approved a regulatory plan (piano
regolatore) relating to the design, construction and maintenance of urban
infrastructure, including roads, subways, waterworks, sewage works, parks, and
urban development for residential area projects and redevelopment projects.
Building regulations are also imposed for land use control and for safety, fire
prevention and sanitation purposes, as well as to ensure the conformity of
buildings with zoning and occupancy regulations.

Roads. There were approximately 1,211 kilometers of public roads in the City as
of December 31, 2004. While the City is not responsible for the construction of
new roads, it is responsible for their maintenance and lighting.

Other Transport. Naples International Airport (Capodichino) connects Naples with
other major Italian and international airports. The operations of Capodichino
are conducted by GE.S.A.C. (Societa Gestione Servizi Aeroporti Campania S.p.A.),
a limited liability corporation which is owned by British Airport Authorities
Plc ("BAA", which owns 65.0% through its subsidiary BAA Italia S.p.A.), the City
of Naples and Provincia di Napoli (which own 12.5% each), SEA S.p.A. and
Interporto Campano S.p.A. (which own 5.0% each); see "Financial Condition of the
City--Subsidiaries." In 2004, approximately 4.63 million passengers traveled on
flights arriving at or departing from Capodichino resulting in an 1.0% increase
from the approximately 4.59 million passengers registered in 2003. In addition,
approximately 25,000 tons of merchandise were transported through the airport in
2004 as compared to 29,000 tons in 2003 (Source: Bank of Italy Annual Report for
2004 - May 2000).

The port of Naples is one of the largest Italian ports with respect to the
number of passengers and ships and the fourth-largest with respect to tonnage.
In 2004, the port had a flow of approximately 1,027,235 passengers and
approximately 19,448,709 tons of cargo as compared to 859,849 passengers and
approximately 19,414,315 tons of cargo in 2003 representing a 19.5% and a 0.2%
increase, respectively. The port is managed by an autonomous entity (Ente
Autonomo Porto) (Source: Bank of Italy Annual Report for 2004 - May 2005).

City Properties. The City owns properties, including land and buildings (both
for public use and residential housing) which at December 31, 2004, had a value
of approximately 'E'3,733 million, according to the public registrar's
office. All such properties are subject to the dissesto procedure. See
"Financial Condition of the City--Dissesto Finanziario."

Utilities. As in other parts of Italy, the construction of the network and its
maintenance are provided by Telecom Italia S.p.A. The electrical power in Naples
is supplied primarily by ENEL, the formerly state-owned electric power
distribution company.

THE ECONOMY

Region of Campania

The following discussion of the economy of Campania and the City is based on
data of Istat (Istituto Nazionale di Statistica), the Bank of Italy (Banca
d'Italia), and the Region of Campania.

In 2004, approximately 6.5% of Italy's gross domestic product ("GDP") was
generated in Campania and 3.36% of Italy's GDP (as added value) was generated in
Naples. In the year ended December 31, 2004, Campania's GDP per capita was
approximately 'E'15,496 as compared to approximately 'E'22,930 for Italy
as a whole. The unemployment rate in 2004 was 15.6% in Campania (as compared to
8.0% in Italy during the same period).

The European Union's Operational Program for Campania. On August 8, 2000, the
European Commission approved an operational program (the "Program") for Campania
to support the Region's development through measures on natural, cultural and
human resources, local development systems, urban areas, networks and service
centers. The Program is part of the Community Support Framework for the period
2000-2006 (Quadro Comunitario di Sostegno) which operates in underdeveloped
areas by assisting their development and supporting their economic and social
stability. In Italy, such areas comprise the entire Mezzogiorno. The total
amount of the grant is approximately 'E'9,216 million. The Community
contribution amounts to 'E'3,825 million (41.5% of the total), the balance
being borne by national and regional authorities and by the private sector.
Community funding will be provided by the European Regional Development Fund
(65.5%), the European Social Fund (16.5%), the European Guidance and Guarantee
Fund (17.0%) and the Financial Instrument for Fisheries Guidance (1.0%).

Funds provided by the Central Government and the European Union are contingent
upon their being allocated to specific projects and must be returned to the
European Union if not spent on such projects.

The Program principally focuses on six areas: (i) Natural Resources (measures
relating to the improvement of water resources, soil and coastline protection,
upgrading of natural areas, waste processing and energy management with special
reference to renewable resources); (ii) Cultural Resources (enhancement of the
region's cultural resources as a factor contributing to its economic and social
development); (iii) Human Resources (measures are closely linked to the
Commission's recommendations and the national action plan in the context of the
European strategy for employment; research and technological innovation measures
are also planned); (iv) Local Development Systems (promoting local development
systems, in particular industrial districts and export systems, and new
companies, supporting demand for high-quality services and upgrading
professional qualifications; special emphasis is placed on boosting the
competitiveness of tourism and developing its potential); (v) Cities
(enhancement of the City's role in its territorial context as a means of
improving competitiveness and the social potential of urban areas); and (vi)
Networks and Service Centers (the measures aim to develop transport
infrastructures and to accelerate the introduction of the information society in
education, public administrations and the production base; actions to
internationalize the regional economy are also planned). In addition, technical
assistance measures will be provided to assist with the management of,
information on, implementation of, control and evaluation of all aspects of the
Program.

The City of Naples

General. Naples is the major business, commercial and cultural center of the
Region of Campania. In 2004, the City's GDP per capita was approximately
'E'14,000 as compared to an average of 'E'15,496 for the Region of
Campania as a whole.

Naples is a center for tourism due to its historic value and the proximity of
Pompei, Hercolaneum, the Amalfi Coast and the islands of Capri, Ischia and
Procida. In 2004, approximately 21.4 million tourists visited the Region as
compared to 21.3 million in 2003, representing a increase of 0.7%. The
administration has made the restoration of the historic areas of the City, in
particular near the port, a centerpiece of its agenda to promote tourism.

Employment. The unemployment rate for the City of Naples is higher than the
Italian national average, as is the case for the Region of Campania as a whole.
In 2004, the unemployment rate was 18.9% in Naples and 15.6% in the Region as
compared to a national average of 8.0%. Since 1995, the unemployment rate for
the City of Naples has decreased by approximately 30.8%.

Inflation. The table below shows annual increases in the consumer price index of
Naples and Italy for the periods indicated.

Change of Consumer Price Index

Year Ended December 31,
----------------------------------------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----

Naples.................................. 1.9% 2.7% 2.4% 2.7% 2.6%
Italy................................... 2.5% 2.7% 2.5% 2.5% 2.2%

- ---------------
Source: Istat, Servizi Statistici Comune di Napoli.

FINANCIAL CONDITION OF THE CITY

Summary

The City of Naples prepares its financial statements in accordance with
accounting principles and standards established by the Local Authorities Act
(regolamento di contabilita), which requires the preparation of the annual
provisional budget (bilancio annuale di previsione), the pluri-annual budget
(bilancio pluriennale) and the financial report (rendiconto).

The relationships between the City, the Central Government and the regional
government are governed by one principal law, Law 267/2000 (the "Municipal law")
and by the annual financial laws (leggi finanziarie). The City derives the
majority of its revenues from transfers, primarily from the Central Government.
Municipalities are permitted to levy direct and indirect taxes and charges and
fees for services.

The general administration of Naples' finances is the responsibility of the City
Board and the City Council. The budget is initially developed by the respective
departments of the City and consolidated by the financial services department.
After approval by the City Board, the budget is provided to the Board of
Auditors for its review and comments. Thereafter, the budget together with an
annual report prepared by the Board of Auditors is submitted to the City Council
for approval. The City Council is required to approve year-end financial
statements no later than on June 30 of each year. The budget for each year is
required to be approved by December 31 of the previous year. In practice,
however, the budget may be delayed due to the lack of a budget at the Central
Government. The City budget is completed after the approval of the Central
Government budget, so that the budgeted revenues from Central Government
transfers are committed, not estimated. If the City's budget has not been
approved by the beginning of the year, expenditures are limited to one twelfth
of the previous year's amounts, except for payment of personnel, outstanding
obligations, debt payments, taxes and operations necessary to avoid severe
damage to the local authority which are not subject to such limit. At least once
a year, by September 30, the administration is required to review the budget for
imbalances and to make any necessary adjustments by November 30. Local
authorities must include in the budget a reserve of not less than 0.3% and not
more than 2.0% of budgeted expenses to be used for extraordinary or greater than
expected expenses.

The current surplus is calculated on an accrual basis. The current revenues are
required to exceed current expenditures and debt repayments. The issuance of
bonds is permitted only for capital investments or to refinance older, more
expensive loans, where bonds would provide access to more favorable funding. New
borrowing is only permitted if interest expense, net of interest transfers from
the central and regional governments, is less than 25.0% of the year's current
revenue.

Municipal Treasurer (Tesoriere Comunale). Municipalities in Italy are required
to effect all payments and collect all revenues through an account with a
specially appointed municipal treasurer (Tesoriere Comunale). The municipal
treasurer intermediates funds between the City and the Bank of Italy. The
municipal treasurer is required to deposit all surplus cash on a daily basis
into an account at the local branch of the Bank of Italy (Tesoreria Unica). In
the case of Naples, the municipal treasurer is SanPaolo - Banco di Napoli.

Irrevocable Payment Delegation (Delegazione di Pagamento). The municipal
treasurer can be granted an irrevocable authorization to pay interest on, and
repay the principal of, debt when due on behalf of the City (delegazione di
pagamento). Upon entering into a bond issue, the City is required to implement
such a delegazione di pagamento by providing the municipal treasurer with the
required power as well as a timetable for payments of interest and principal.
The City may, but is not required to, provide for a delegazione di pagamento on
loans other than bonds. Historically, the City has made such irrevocable payment
delegations on all its financial indebtedness. See "Debt of the City." Once the
authority has been delegated, the municipal treasurer is required to make future
payments as interest and principal become due. The Municipal law requires the
municipal treasurer to allocate appropriate funds in a reserve for payment of
interest and principal on debt. Payments are made out of funds arising from tax
revenues, transfers from the Central Government, the Region and other public
entities and certain non-tax revenues.

Revenues and Expenditures. The following table sets forth the current revenues,
expenditures, capital revenues and spending for the periods indicated:

Year Ended December 31,
---------------------------------------------------------------------------
Budget
2000 2001 2002 2003 2004 2005(2)
('E' millions)
---------------------------------------------------------------------------

Current revenues............... 1,164.0 1,301.5 1,304.5 1,266.0 1,277.0 1,452.0
Previous Year Balance for
Current Expenditures(1)........ 0 5.0 7.2 0 0 0
Current Expenditures........... (1,036.2) (1,167.3) (1,149.8) (1,112.0) (1,190.0) (1,409.0)
--------- --------- --------- --------- --------- ---------
Current Balance................ 127.8 139.2 161.0 154.0 87.0 43.0
--------- --------- --------- --------- --------- ---------
Capital Revenues............... 263.6 114.0 248.8 253.0 197.0 1,066.0
Previous Year Balance for
Capital Expenditures(1)........ 13.3 1.3 0 0 0 0
Capital Spending............... (513.3) (235.7) (359.7) (515.0) (474.0) (1,278.0)
--------- --------- --------- --------- --------- ---------
Balance Before Financing....... (121.9) 17.5 (51.0) (108.0) (190.0) (169.0)
--------- --------- --------- --------- --------- ---------
New Borrowing.................. 203.3 93.8 51.2 205.0 501.0 379.0
Reimbursement of Borrowing..... 72.8 74.3 73.4 78.0 (297.0) (210.0)
--------- --------- --------- --------- --------- ---------
Total Balance.................. 21.9 38.3 28.8 19.0 14.0 0
========= ========= ========= ========= ========= =========

- ---------------
(1) Represent surpluses from previous years allocated to Current Expenditures
and Capital Expenditures, as indicated.

(2) Approved by the City Council on June 1, 2005.

The City's current balance has shown a surplus since 1991. In the past years, as
a result of increases in current revenues and decreases in expenditures from
budgeted amounts, there has been a significant increase in the current balance
from the budgeted amount. From 1998 to 2002, capital spending was greater than
capital revenues because the City used surpluses from previous years to finance
both current expenditures and capital spending. In 2004, the City's current
balance decreased while capital revenues decreased.

Dissesto Finanziario

Naples declared dissesto in May 1993. Dissesto occurs when a municipality is
either insolvent or unable to further guarantee the supply of basic services.
The City remains subject to dissesto, which does not affect the payments on
financial indebtedness subject to delegazione di pagamento and does not apply to
transactions entered into by the City subsequent to the date on which dissesto
was declared. The City has made all payments, both interest and principal, on
all financial indebtedness since entering dissesto.

The primary reason Naples went into dissesto was that special entities for which
the City was financially responsible made expenditures that were not
appropriated in the budget. Recent legislation now provides that unappropriated
expenses are not deemed to be expenditures of the municipality and that a
creditor only has recourse against the employee, as an individual, who agreed to
such unauthorized expenditure. In addition, the special entities have been
transformed into joint stock companies, therefore their indebtedness is not
reflected on the financial statements of the City.

The procedure of dissesto is governed by Legislative Decree No. 66 of March 2,
1989, which has been amended and the procedures streamlined and simplified on
several occasions in the past years. The state of dissesto is commenced by a
declaration to that effect by the City Council, publication of such notice by
the Italian Ministry of the Interior and the appointment by the President of the
Republic of Italy of the Organo Straordinario di Liquidazione, a three person
committee (the "Statutory Receivers"). The primary purpose of the Statutory
Receivers is to perform a full audit of claims entered into prior to the date of
dissesto (the "pre-dissesto Claims") against the City and to assess the assets
available to pay these claims and to recover all unpaid amounts owed to the
City. The Statutory Receivers in Naples were appointed by Presidential decree of
the Italian Republic dated May 3, 1993.

Upon conclusion of a full accounting and verification of the pre-dissesto Claims
and the recovery of credits owed to the City, the Statutory Receivers must
present to the Ministry of Interior a plan for repayment of the verified
pre-dissesto Claims (the "Verified Claims") for its approval. The Central
Government is required to grant a loan through Cassa Depositi e Prestiti, the
amount of which varies based on the number of inhabitants of the entity in
dissesto. Subsequent debt service for the loan is funded by transfers from the
Central Government. In preparing its

plan for repayment of Verified Claims, the Statutory Receivers consider whether
the size of the loan to be received by the Cassa Depositi e Prestiti is
sufficient to cover all Verified Claims.

On July 23, 2002, the City applied for the official closure of dissesto, which
had not been granted as of December 31, 2004. As a result, the City remains
subject to dissesto.

As of December 31, 2004, the total amount outstanding pursuant to the repayment
plan for the dissesto amounted to approximately 'E'854,460,000.0, which
included the following claims:

Creditors Amount Outstanding
- --------- ------------------

Ordinary creditors............................................................. 'E'767,506,000.0
City employees................................................................. 'E' 26,167,000.0
Other preferred creditors...................................................... 'E' 56,397,000.0
Statutory Receiver............................................................. 'E' 4,390,000.0
-----------------
Total.......................................................................... 'E'854,460,000.0
=================

Preferred creditors (City employees and other preferred creditors) shall be
repaid in full. With respect to ordinary creditors, the City has opted to use a
simplified procedure pursuant to which ordinary creditors have the option to
receive immediate payment of the relevant debt in an amount equal to 60.0% of
the amount owed. This amount will be paid within 30 days of the acceptance by
the creditor of the option to receive such lesser amount. The majority of
ordinary creditors have opted to accept the simplified procedure. With respect
to the remaining ordinary creditors, payment in full by the City will take place
in accordance with the normal procedure.

As of December 31, 2004, creditors have been paid a total of 'E'615,491,000.0
of the total amount initially owed, and the City saved approximately
'E'229,494,400.0 through the simplified procedure described above. In
addition, 'E'890,000.0 was subsequently excluded from the total amount due.

As of December 31, 2004, approximately 'E'8,584,600.0 remained to be paid.
Funds available to the Statutory Receiver as at that date totaled
'E'19,941,000.0. Accordingly, the Statutory Receiver would have approximately
'E'11,356,000.0 in available funds following the payment of the remaining
creditors. Since July 23, 2002, further creditors have filed requests for an
amount equal to 'E'35 million. In addition the City has approximately
'E'172 million (yet to be received) in credits available to cover these
debts.

Financial Federalism

Transfers of funds by the Central Government represent approximately 50.0% of
the revenues of the City. The Municipal law transformed the financial
relationship between the Central Government and local authorities by focusing on
greater financial autonomy and financial responsibility of local authorities.

In order to implement such changes, the collection of certain taxes and fees
that were previously the responsibility of the Central Government are or will
become the responsibility of the City. This has resulted and will result in a
proportional reduction of tax transfers to local authorities by the Central
Government. See "--Current Revenues."

Furthermore, the Municipal law established three basic types of Central
Government transfers: ordinary transfers, equalization transfers and capital
transfers. Ordinary transfers are and will continue to be increasingly based on
objective standards such as the size and population of the city and its economic
and social indicators. Equalization transfers are allocated by the Central
Government where the median income of the residents is lower than the national
average, as is the case in Naples. Capital transfers are based on the size and
population of the city and made for specific capital expenditures in connection
with public work projects and cannot be used to finance current expenditures.

Transfers of funds to local authorities are dependent on the finances of the
Central Government. While the City is not aware of any plan to change the
current transfer system, there can be no assurance that transfers from the
Central Government will continue in the manner or the amounts of the past. See
"Republic of Italy."

Current Revenues

Sources of Revenue. Transfers of funds by the Central Government and the Region
represent approximately 50.0% of the revenues of the City. The City collects
certain taxes, fees and charges. The specific taxes and fees that municipalities
are allowed to levy are as follows: use tax for use of public spaces; waste
collection and disposal and sewage treatment and disposal fees; advertising
taxes; and real estate taxes (Imposta Comunale sugli Immobili (ICI)). In
addition, in 1998 the Central Government passed a law introducing a new tax
regime for the year 1999-2000, whereby each municipality could apply a local
personal income tax not to exceed 0.5% of the personal taxable income
(Addizionale IRPEF). The rate of this local personal income tax could be
introduced progressively over a period of three years, through annual increases
not to exceed 0.2% each year, up to the 0.5% maximum rate. The rate would become
fixed in the third year. The City applied an initial 0.2% tax for the year
1999-2000 and has increased the rate to 0.4% for the year 2001, and to 0.5% for
the years 2002, 2003 and 2004.

The following table shows a breakdown of the sources of the City's current
revenues for the periods indicated:

Current Revenues

Year Ended December 31,
---------------------------------------------------------------------------
Budget
2000 2001 2002 2003 2004 2005(2)
------- ------- ------- ------- ------- -------
('E' millions)
---------------------------------------------------------------------------

Tax Revenues
Imposte......................... 204.3 218.4 214.6 328.1 330.1 331.4
Tasse........................... 119.9 106.5 112.6 112.8 128.0 134.7
Tributi speciali................ 20.7 1.2 78.3 2.6 2.6 0
------- ------- ------- ------- ------- -------
Total tax revenue............ 345.0 326.1 405.5 443.5 460.7 466.1
Current Transfers
Central Government.............. 641.8 715.2 640.9 557.9 560.3 546.1
Campania........................ 20.3 27.9 70.4 52.6 33.9 92.5
Other........................... 3.0 4.4 1.0 1.1 5.0 7.6
------- ------- ------- ------- ------- -------
Total current transfers...... 665.1 747.6 712.3 612.0 599.2 646.2
Non-Tax Revenue
Public services................. 82.3 94.5 111.2 98.3 101.3 97.6
Rents........................... 23.2 27.4 28.0 25.9 40.1 43.8
Interest income................. 12.2 9.5 5.9 6.5 7.2 4.8
Competitions, refunds and payoffs -- 0.7 0.2 0 0.3 1.5
Corrections..................... -- -- -- 0 0 0
Other revenues.................. 36.2 95.5 41.3 79.4 68.2 70.2
------- ------- ------- ------- ------- -------
Total non-tax revenues....... 154.0 227.9 186.6 210.4 217.1 217.9
------- ------- ------- ------- ------- -------
Current Revenues................ 1,164.0 1,301.5 1,304.4 1,265.5 1,277.0 1,330.2
======= ======= ======= ======= ======= =======
Previous year balance for current
expenditures(1)............... -- 5.0 7.2 190.6 0 122.2
------- ------- ------- ------- ------- -------
Total Current Revenues.......... 1,164.0 1,306.5 1,311.6 1,456.1 1,277.0 1,452.4
======= ======= ======= ======= ======= =======

- ---------------
(1) Represent surpluses from previous years allocated to current expenditures,
as indicated.

(2) Approved by the City Council on June 1, 2005.

Tax Revenues consist of imposte, tasse and tributi speciali (taxes, fees and
special fees). Imposte, the principal source of tax revenue, are real estate
taxes (Imposta Comunale sugli Immobili (ICI)) based on the value of real estate
registered with the public registrar's office at a rate of 0.55% for household
residences. Tasse include fees for the exploitation of public areas for private
use, for the consumption of electric power and for the performance of
administrative duties (such as the issuance of stamps or notarizations). Tributi
speciali are fees for the right to make street advertisements and fees for water
purification. In 2004, tax revenues increased by 'E'17.2 million, or 3.9% as
compared to 2003, due to the increase of the TARSU.

Current Transfers are made by the Central Government and the Region of Campania.
The transfers take the form of both ordinary transfers and equalization
transfers. The median income of the residents of Naples is below the national
average and consequently Naples receives significant equalization transfers from
the Central Government. The decline in current transfers between 1999 and 2000
was mainly due to the assignment of the employment agreements of approximately
1,500 support staff employees for local schools to the Central Government,
thereby decreasing the City's need for Central Government funds to cover the
salaries of such employees, as well as a decrease in the number of public
projects financed by the Central Government. In 2004, current transfers
decreased by 'E'12.8 million, or 2.1% as compared to 2003. The decrease was
due mainly to a decrease of 'E'18.7 million in transfers from the Region.

Non-Tax Revenues include revenues from public services, rents, interest income,
concorsi (credits), rimborsi (reimbursements), recuperi (recoveries) and
corrections. Public services include fees charged for services provided by the
City (such as sport centers), as well as for the private use of public property
(such as parking lots) and fines for traffic law violations and other offenses.
Rents consist of payments made to the City for the lease of City-owned
properties. interest income is the interest earned on overdue payments to the
City. Concorsi, Rimborsi and Recuperi include value added tax credits payable to
the City, social security grants for elderly people and reimbursements by the
Central Government, Region of Campania and the Provincia di Napoli for the
conduct of elections. Corrections will result from matching, with equal
expenses, the notional rents for schools and other municipal buildings. In 2004,
non-tax revenues increased by 'E'6.7 million, or 3.2%, primarily as a result
of (i) revenues from public services, and (ii) rents.

Current Expenditures

Current expenditures include personnel, goods and services, current transfers,
interest expense and corrections.

The following table sets forth the current expenditures of the City for the
periods indicated.

Current Expenditures

Year Ended December 31,(1)
------------------------------------------------------------------------------------
Budget
2000 2001 2002 2003 2004 2005(2)
------- ------- ------- ------- ------- --------
('E' millions)
------------------------------------------------------------------------------------

Personnel expenses........................ 388.8 402.6 421.2 419.0 428.4 433.1
Goods and services........................ 398.1 493.7 485.4 490.2 536.4 596.2
Rents, leases and related costs........... 9.1 9.8 10.5 12.2 11.2 14.1
Current transfers......................... 98.9 97.3 118.0 64.3 56.7 86.5
Interest expense.......................... 56.5 53.5 51.5 50.0 54.3 74.0
Corrections............................... 0 0 0 0 0 0
Taxes..................................... 30.6 28.6 32.0 32.8 34.2 33.8
Extraordinary expenses.................... 54.2 81.7 31.2 45.1 69.6 46.8
Others.................................... -- -- -- -- -- 125.1
------- ------- ------- ------- ------- --------
Total Current Expenditures................ 1,036.2 1,167.2 1,149.8 1,112.6 1,190.8 1,409.6
======= ======= ======= ======= ======= ========

- ---------------
(1) Pursuant to the Legislative Decree of the Republic of Italy no. 194/96 of
January 1, 1996, the accounting criteria employed to compile financial
statements of regional and local governmental entities have changed,
requiring monies transferred from the City to the Special Entities to be
reclassified as payment for goods and services as opposed to current
transfers.

(2) Approved by the City Council on June 1, 2005.

Personnel expenses are salaries, social security expenses and expenses in
connection with early retirement. Goods and services include amounts spent on
goods and services provided by independent contractors, such as street
maintenance, and by certain of the City's subsidiaries. Current transfers are
transfers made by the Central Government and the Region of Campania and take the
form of both ordinary transfers and equalization transfers. Interest expense is
the interest paid on the City's long-term and short-term debt. Corrections are
the accounting adjustments that reflect revenues relating to matters such as
regional funding.

The following table sets forth the current expenditures of the City attributable
to its major activities for the periods indicated.

Current Expenditures by Major Activity

Year Ended December 31,
------------------------------------------------------------------
Budget
Activity 2000 2001 2002 2003 2004 2005(2)
-------- ------- ------- ------- ------- ------- -------
('E' millions)
------------------------------------------------------------------

Administration................................ 331.9 375.6 435.9 394.3 419.2 604.4
Roads and Transportation...................... 190.7 183.5 138.5 147.4 159.5 158.4
Education, Culture, Sport and Recreational 95.2 99.7 114.3 116.3 124.4
Activities.................................... 101.8
Public Security............................... 60.9 77.3 71.7 80.4 78.0 80.4
Housing and Environmental Management.......... 242.8 294.4 258.3 258.1 303.2 292.7
Social Services(1)............................ 102.3 122.7 126.9 106.9 100.6 139.3
Services and Local Economic Promotion......... 8.1 12.0 14.6 8.4 11.0 6.2
Other......................................... 89.7 2.0 2.1 2.4 3.0 3.9
------- ------- ------- ------- ------- -------
Total......................................... 1,037.1 1,167.2 1,149.8 1,112.6 1,190.8 1,409.6
======= ======= ======= ======= ======= =======

- ---------------
(1) Primarily services for elderly and disabled persons as well as foster
service.

(2) Approved by the City Council on June 1, 2005.

Current Expenditures in 2000 increased as compared to 1999, mainly due to a
substantial increase in housing and environmental matters, public security, and
other expenses, which was partially offset by a decrease in social services.
Current Expenditures in 2001 increased by 'E'130.1 million, or 12.5%, as
compared to 2000, mainly due to a substantial increase in administration,
education, culture, sport and social activities, partially offset by a decrease
in roads and transportation activities. Current Expenditures in 2002 decreased
by 'E'17.4 million, or 1.5%, as compared to 2001, mainly due to a decrease in
roads and transportation activities. Current Expenditures in 2003 decreased by
'E'37.2 million, or 3.2%, as compared to 2002, due to a decrease in
administrative expenses, and a slight decrease in services and local economic
promotion. Current Expenditures in 2004 increased by 'E'78.2 million, or
7.0%, as compared to 2003, due to an increase in expenditures for goods and
services.

Capital Revenues and Capital Expenditures

Capital Revenues consist of asset sales, capital transfers and credit
collections. Asset sales consist of the sale of City-owned assets. Capital
Transfers include contributions from the Central Government, the Region, the
European Union and other public entities. The City incurs Capital Expenditures
for the development and improvement of facilities for housing, transportation,
the renovation of public property for general use and other civic purposes.

The following table sets forth the capital revenues of the City for the period
indicated.

Capital Revenues

Year Ended December 31,
---------------------------------------------------------------
Budget
2000 2001 2002 2003 2004 2005(1)
----- ----- ----- ------ ----- -------
('E' millions)
---------------------------------------------------------------

Asset sales................................... 9.7 0.1 0.6 0.11 0.2 25.7
Capital transfers............................. 253.9 114.2 248.1 253.29 197.0 1,040.4
----- ----- ----- ------ ----- -------
Total......................................... 263.6 114.3 248.7 253.4 197.2 1,066.1
===== ===== ===== ===== ===== =======

- ---------------
(1) Approved by the City Council on June 1, 2005.

The decrease in 2000 was mainly due to a substantial decrease in transfers from
the Central Government for works related to the City's subway system. The
significant decrease in 2001 was attributable to a substantial decrease in
capital transfers from the Central Government and the Region, due to a slowdown
in the implementation of certain public projects, including roads and
transportation projects such as the subway system, land development and
environmental projects and maintenance works for municipal buildings. The
increase in 2002 was attributable to the

implementation of additional public projects. In 2003, the increase was due to
higher transfers from the Central Government. The decrease in 2004 was
attributable mainly to a decrease in transfers from the Central Government.

The following table sets forth the capital expenditures of the City attributable
to its major activities for the periods indicated.

Capital Expenditures

Year Ended December 31,
---------------------------------------------------------------
Budget
2000 2001 2002 2003 2004 2005(2)
----- ----- ----- ----- ----- -------
('E' millions)
---------------------------------------------------------------

Administration............................. 131.9 13.3 22.7 73.8 150.5 890.1
Roads and Transportation................... 187.8 63.8 265.5 264.7 129.6 178.9
Education, Culture, Sport and Recreational 39.6 21.5 10.5 38.5 35.8 30.8
Activities.................................
Public Security............................ 0.0 1.2 1.5 0.1 0 2.5
Housing and Environmental Management....... 132.8 132.9 54.4 119.7 141.2 134.7
Social Services(1)......................... 12.9 0.9 1.6 8.3 4.9 31.1
Services and Local Economic Promotion...... 7.8 2.2 3.5 9.7 10.7 3.5
Other...................................... 0.5 0.0 0.0 0.0 1.3 6.5
----- ----- ----- ----- ----- -------
Total...................................... 513.3 235.7 359.7 514.8 474.0 1,278.1
===== ===== ===== ===== ===== =======

- ---------------

(1) Includes primarily services for elderly and disabled persons as well as
foster service. (2) Approved by the City Council on June 1, 2005.

Capital expenditures included both capital expenditures financed in part by the
City and capital expenditures financed through transfers from the Central
Government, the Region and the European Union. The amount financed by the City
includes funds accumulated from budget surpluses in previous years, borrowings
and asset sales. In 2001, the significant decrease in Capital expenditures was
due to a slowdown in implementation of certain public projects, including roads
and transportation projects such as the subway system, land development and
environmental projects and maintenance works for municipal buildings. Capital
expenditures in 2002 and 2003 included both capital expenditures financed in
part by the City and capital expenditures financed through transfers from the
Central Government, the Region and the European Union. The increases in 2002 and
2003 were attributable to the implementation of additional public projects. In
2004, the decrease was due to a decrease in roads and transportation
expenditures.

Subsidiaries

The City owns interests in 22 companies, seven of which operate in the public
service sector. The value of the fixed assets of the City's subsidiaries amounts
to over 'E'700 million. In addition, these subsidiaries use assets of the
City such as infrastructure, warehousing, stations and vehicles. All public
service sector subsidiaries were converted into joint stock companies (societa
per azioni) to permit efficient use of cash flow and to increase their asset
base.

The following table lists the most significant subsidiaries of the City:

Shareholding of the
Subsidiary City (%) Value of assets 2003 Net assets 2004
- ---------------------------------------- ------------------- -------------------- ---------------

A.R.I.N. S.p.A.......................... 100.00 180.6 180.6
A.N.M. S.p.A............................ 100.00 69.7 67.0
A.S.I.A. S.p.A.......................... 100.00 38.2 38.0
C.T.P. S.p.A............................ 50.00 8.3 6.8
GE.S.A.C. S.p.A......................... 12.50 39.0 41.0
Mostra d'Oltremare S.p.A................ 66.99 166.0 168.6
Metronapoli S.p.A....................... 51.00 1.7 2.0

Balance Sheet 2004

As of December 31, 2004
-----------------------------------------------------------------------------------
Metronapoli
Subsidiary A.R.I.N. SpA A.N.M. SpA A.S.I.A. SpA C.T.P. SpA Mostra SpA SpA
- ------------------------------- ------------ ---------- ------------ ---------- ---------- -----------
('E' millions)
-----------------------------------------------------------------------------------

Liquid asset.................... 51.9 1.5 6.7 5.4 1.8 2.5
Credits......................... 195.5 179.2 179.2 91.3 5.4 66.3
Tangible assets................. 314.0 87.7 24.3 63.8 190.8 1.1
Intangible assets............... 137.8 11.1 0.2 1.4 0.3 0.2
Other........................... 58.6 16.3 0.7 4.7 2.6 0.3
----- ----- ----- ----- ----- ----
Total assets.................... 757.8 285.8 211.1 166.6 200.9 70.4
===== ===== ===== ===== ===== ====
Other liabilities............... 310.2 89.4 137.0 62.6 7.1 41.5
Financial liabilities
(including Retirement Allowance) 17.1 107.7 35.0 73.1 1.2 22.1
Other........................... 249.9 21.7 1.1 24.1 24.0 4.8
----- ----- ----- ----- ----- ----
Net equity...................... 180.6 67.0 38.0 6.8 168.6 2.0
----- ----- ----- ----- ----- ----
Total liabilities............... 757.8 285.8 211.1 166.6 200.9 70.4
===== ===== ===== ===== ===== ====

A.N.M.

A.N.M. S.p.A. (Azienda Napoletana Mobilita) is primarily responsible for the
operation of the bus and tramway transport in the City of Naples. In 2004, its
fleet comprised approximately 1,000 vehicles. The A.N.M. fleet makes
approximately 500,000 journeys per day on 167 routes, covering an urban network
of approximately 404 kilometers and a suburban network of approximately 119
kilometers. A.N.M. manages five bus depots, one filobus depot, one tram depot,
five car parks, two workshops and six electrical control centers.

A surveillance system was installed which constantly monitors the service and
allows for the real-time central management of the fleet.

In 2002, ANM incurred a loss of 'E'14.3 million, mainly as a result of a
decrease in payments for services transferred from the City and an increase in
costs for services. In 2003, ANM's loss amounted to 'E'6.4 million. This
improvement was due to a revised organization of the subsidiaries implemented in
2003. In 2004, ANM incurred a loss of 'E'9.6 million, which was primarily
attributable to personnel expenses.

C.T.P.

C.T.P. S.p.A. (Compagnia Trasporti Pubblici), was converted into a joint stock
company in March 2001 and manages the urban and suburban public transport
services within the provinces of Naples and Caserta.

The service for the year 2004 was carried out, pursuant to article 46 of
Regional Law No.3 dated March 28, 2002, by means of temporary service contracts
(contratti di Servizio Ponte) between the company and local authorities. In
recent years, C.T.P. has extended its scope of activity to services and
operations relating to transportation, creating numerous subsidiaries.

At December 31, 2004, the entity employed approximately 1,800 persons. In 2004,
its fleet was comprised of approximately 500 buses, which covered approximately
2,300 kilometers and transported approximately 35 million passengers per year.
During 2003, C.T.P. completed a process of transformation and reorganization. As
of December 31, 2004, a central structure co-ordinated the control and
governance of activities of the company and its subsidiaries, and the company
was divided into three operating divisions: services, workshops, and assets. The
company established NAMET S.p.A. and brought into service 50 methane operated
buses, the largest such fleet in Central and Southern Italy. C.T.P. obtained the
ISO 9001/2000 and SA 8000 certificates and publishes a report on environmental
sustainability on a yearly basis.

In 2004, CTP incurred a net loss of 'E'38.8 million, as compared to a net
loss of 'E'43.1 million in 2003 and a net loss of 'E'36.9 million in 2002.
Losses are funded annually in proportion to the share ownership. Annual losses
reflect the ongoing need for subsidies to cover expenses not covered by other
transfers or reserves.

A.R.I.N.

A.R.I.N. S.p.A. (Azienda Risorse Idriche Napoli) supplies water to the City of
Naples and to the provinces of Avellino, Benevento, Naples and Caserta. It is
one of the largest companies supplying water to Southern Italy. As of December
31, 2004, the company supplied more than 1 million inhabitants of the City of
Naples and approximately 650,000 inhabitants in the provinces. It had 552
employees and 280,000 user contracts across 26 municipalities of Campania. In
2003, A.R.I.N. also obtained the ISO9001 (Vision 2000) certificate of quality
and the research department acquired the SINAL accreditation.

In 2002, ARIN's recorded a net loss of 'E'4.1 million and in 2003, ARIN's net
loss amounted to 'E'1.2 million. In 2004, ARIN recorded a net gain of
'E'41,971, which was primarily due to improved efficiency.

A.S.I.A.

A.S.I.A. S.p.A. (Azienda Servizi Igiene Ambientali) manages health and
environmental services for the City of Naples. It was originally incorporated as
a special company (azienda speciale) but became a joint stock company in
December 2003. A.S.I.A. carries out the collection and transportation of waste
refuse of the area. The service provided is limited exclusively to refuse
collection and removal. The company is not responsible for recycling or
disposal, which are the responsibility of the Region.

The municipal program for the management of urban solid waste disposal, which
was recently approved, gives A.S.I.A. the most important role in the new
program. The program provides for the change of the TARSU (Tassa sui rifiuti
solidi urbani - solid refuse tax) fee into a tariff as of January 1, 2005, and
A.S.I.A. will carry out the assessment and collection of such tariff. As a
result, the consideration for the service will no longer be accounted for in the
balance sheet of the municipality, but instead will be accounted for in the
balance sheet of the company which will have sole responsibility for the
management of the revenues.

In 2004, A.S.I.A. recorded a net loss of 'E'9.9 million as compared to a net
loss of approximately 'E'29.4 million in 2003.

Metronapoli S.p.A

Metronapoli S.p.A was incorporated on July 26, 2000, and became operative as of
February 1, 2001, when it was assigned the management of the subway network of
the City. The City's subway network is comprised of Line 1 and the four urban
funiculars. In addition, it was assigned the urban railway service section of
Line 2 by Trenitalia, the subsidiary of Ferrovie dello Stato, the national
railway operator.

The City of Naples owns Line 1 and the four urban funiculars, and owns a 51.0%
stake in Metronapoli. Ferrovie dello Stato owns the infrastructure of Line 2
and, through its subsidiary Trenitalia, owns 38.0% of Metronapoli. The remaining
11.0% is owned by ANM.

All of the transport services managed by the company are characterized by high
level of frequency and by an equally high number of stops and stations. The
transport is largely concentrated in the City of Naples and uses approximately
79 kilometers of railways serving 53 stations. The high level of frequency is
guaranteed by a fleet of 30 trains and eight funiculars. Metronapoli transports
approximately 250,000 people per day.

In 2004, Metronapoli S.p.A recorded a net profit of 'E'349,226 as compared to
a net profit of approximately 'E'0.02 million in 2003 and approximately
'E'0.04 million in 2002.

DEBT OF THE CITY

Debt of the City principally consists of loans borrowed in the domestic market
from the Cassa Depositi e Prestiti (approximately 'E'427.3 million at
December 31, 2004) and from Italian banking institutions ("Internal Funded
Debt") (approximately 'E'227.6 million) and the Notes, of which 'E'431.0
million remained outstanding as of December 31, 2004. The Cassa Depositi e
Prestiti is an entity managed and funded by the Central Government and lends
exclusively to local authorities. The City regularly includes borrowings in its
budgets provisions to permit short term borrowings. The Central Government
contributes to the debt service of the City. For loans contracted prior to 1980,
the Central Government is responsible for 100.0% of debt service. For subsequent
years, the amount of contribution depends on the use of proceeds.

The following table sets forth the debt of the City outstanding for the periods
indicated:

Year Ended December 31,
--------------------------------------------------------------
2000 2001 2002 2003 2004
----- ----- ----- ----- ----
('E' millions)
--------------------------------------------------------------

Fixed Rate Debt............................ 782.6 758.1 752.5 874.6 1,060.5
Floating Rate Debt......................... 8.5 8.1 7.7 7.2 25.4
----- ----- ----- ----- -------
Total Debt Outstanding..................... 791.1 766.2 760.2 881.8 1,085.9
===== ===== ===== ===== =======
Debt for which service is paid with Central
Government transfers..................... 47.8 41.6 80.5 41.0 39.0

The following table sets forth the changes in the debt of the City for the
periods indicated:

Outstanding at Beginning of Year........... 797.6 791.1 766.2 760.2 881.8
New Borrowings............................. 66.3 49.6 67.4 199.7 500.9
Debt Repayments............................ (72.8) (74.5) (73.4) (78.1) (296.7)
----- ----- ----- ----- -------
Outstanding at End of Year................. 791.1 766.2 760.2 881.8 1,085.9
===== ===== ===== ===== =======

The following table sets forth the maturity and debt service schedules of the
City's debt outstanding on December 31, 2004.

Maturity of Debt and Debt Service
- -------------------------------------------------------------------------------------------------------------------
Maturing during the Transfers from
Year Principal Due Interest Due(1) Debt Service Central Government Net Debt Service
- -------------------- ------------- --------------- ------------ ------------------ ----------------
('E' thousands)
- -------------------------------------------------------------------------------------------------------------------

2005................ 76,560 46,163 122,723 36,952 85,771
2006................ 80,487 40,715 121,203 26,949 94,254
2007................ 65,475 35,419 100,895 25,446 75,449
2008................ 59,748 31,303 91,051 18,805 72,246
2009................ 56,330 27,553 83,883 14,583 69,300
2010................ 56,176 23,970 80,146 12,879 67,267
2011................ 52,650 20,451 73,101 6,330 66,771
2012................ 48,343 17,203 65,547 6,330 59,217
2013................ 30,986 14,536 45,522 5,678 39,844
2014................ 32,612 12,909 45,522 5,678 39,844
2015................ 31,609 11,234 42,844 5,678 37,166
2016................ 27,323 9,667 36,991 0 36,991
2017................ 28,741 8,250 37,991 0 36,991
2018................ 28,582 6,758 35,340 0 35,340
2019................ 28,346 5,343 33,689 0 33,689
2020................ 25,033 3,965 28,999 0 28,999
2021................ 22,022 2,751 24,774 0 24,774
2022................ 19,044 1,715 20,759 -- 20,759
2023................ 14,412 862 15,274 -- 15,274
2024................ 7,581 271 7,852 -- 7,852

- ---------------
(1) The interest due on floating rate debt was calculated at 12.75% per annum.

Short-term Debt

As of December 31, 2004, the City had no outstanding principal amount of
short-term debt. Short-term borrowings of the City are limited by law to 25.0%
of budgeted current revenues.

Debt Record

Since 1946, the City has never failed to pay when due the full amount of
principal of, and interest and premium on, and amortization or sinking fund
requirements with respect to, its outstanding public debt. Although the City
entered into dissesto in 1993, payments on financial indebtedness were not
affected. See "Financial Information of the City--Summary--Dissesto
Finanziario."

THE REPUBLIC OF ITALY

The Notes are not the obligations of, or guaranteed by, the Republic of Italy.

The discussion set forth below is primarily based on the Bank of Italy Annual
Report for 2004 (May 2005); the Annual Report of the Ministry of the Economy and
Finance (Ministero dell'Economia e delle Finanze) (2004); the Central
Government's 2005-2008 Economic Program Document (Documento di Programmazione
Economica); the 2005-2008 Stability and Growth Program of the Central
Government; and on data provided by Istat (Istituto Nazionale di Statistica),
and the Italian statistical service.

Central Government Administration

The Executive Branch

The head of state is the President, who is elected for a seven-year term by an
electoral college that includes members of Parliament and 58 regional delegates.
The current President, Carlo Azeglio Ciampi, was elected in May 1999. The
President has the power to appoint the Prime Minister (who is the effective head
of the Central Government) and to dissolve Parliament. Silvio Berlusconi has
served as Prime Minister since June 11, 2001. The Constitution also grants the
President the power to appoint one-third of the members of the Constitutional
Court, to call general elections and referenda and to command the armed forces.
The Council of Ministers is appointed by the President on the Prime Minister's
advice. The Prime Minister and Council of Ministers are responsible to both
houses of Parliament and must resign if Parliament passes a vote of no
confidence in the administration.

The Judicial Branch

Italy is a civil law jurisdiction. Judicial power is vested in the ordinary and
administrative courts and courts of accounts. The highest ordinary court is the
Corte di Cassazione in Rome, where judgments of lower courts of local
jurisdiction may be appealed. The highest of the administrative courts, which
hears claims against the state and local authorities, is the Consiglio di Stato
in Rome. The Corte dei Conti in Rome supervises the preparation of, and
adjudicates, the state budget of Italy. The Constitutional Court (Corte
Costituzionale) does not exercise general judicial powers, but adjudicates
conflicts among the other branches of the Central Government and determines the
constitutionality of statutes.

The Legislative Branch

The Parliament constitutes the legislative branch of the Central Government. It
consists of a Chamber of Deputies and a Senate with 630 and 315 elected members,
respectively. The Chamber of Deputies and the Senate equally share and have
substantially the same power. Any statute must be approved by both assemblies
before being enacted. Members of Parliament are elected for five years by direct
universal adult suffrage. The electoral reform legislation adopted by Parliament
in August 1993 provides that 75.0% of the members of both houses of Parliament
be elected through a "first past the post" system or single-member districts in
which the candidate receiving the largest number of votes wins. The remaining
25.0% are elected through a proportional representation system. In the Chamber
of Deputies, only parties that receive at least 4.0% of the total vote on a
nationwide basis are eligible for the seats elected by proportional
representation. These modifications of the voting system have significantly
reduced the number of parliamentary seats held by parties that receive a
relatively small share of the popular vote.

Since the electoral reforms, Italy has held three general elections, the latest
on May 13, 2001. The following tables show the results of the last election:

General Election of May 13, 2001

House of Deputies Senate
- ------------------------------------------------ ------------------------------------------------ -----
Political Party Seats Political Party Seats
- ------------------------------------------------ ----- ------------------------------------------------ -----

Center-Right Coalition (Casa delle Liberta) ..... 368 Center-Right Coalition (Casa delle Liberta) .... 177
Center-Left Coalition (L'Ulivo).................. 242 Center-Left Coalition (L'Ulivo)................. 125
Communist Refoundation (Rifondazione Comunista).. 11 Italian Values (Italia dei Valori).............. 1
Sudtiroler Volkspartei - Olive (SVP-Ulivo)....... 8 European Democrats (Democrazia Europea)......... 2
Others (Altri)................................... 1 Sudtiroler Volkspartei - Olive (SVP - L'Ulivo).. 3
Communist Refoundation (Rifondazione Comunista). 3
Sudtiroler Volkspartei (SVP).................... 2
Individual Candidates (Candidati Individuali)... 1
Autonomist List (Lista Autonoma)................ 1
--- ---
Total............................................ 630 Total........................................... 315
=== ===

The general elections held on May 13, 2001, resulted in a victory of the
Center-Right Coalition, which includes Go Italy (Forza Italia), the National
Alliance (Alleanza Nazionale), the Northern League (Lega Nord), the Christian
Democratic Center (Centro Cristiano Democratico) and the Christian Democratic
Union (Cristiani Democratici Uniti). A new government, led by Silvio Berlusconi,
was formed on June 11, 2001, and won the vote of confidence in Parliament on
June 20, 2001. The Center-Right Coalition obtained an unprecedented majority of
both the House of Deputies and the Senate.

Economy

The economy of the Republic of Italy, as measured by gross domestic product
("GDP"), was the sixth largest in the developed world at the end of 2004, after
the United States, Japan, Germany, the United Kingdom and France (Source: OECD).
Italy is a founding member of the European Union, and its economy is closely
linked with those of the other EU members.

As a result of persistent budget deficits financed by borrowing, Italy's public
debt reached 124.3% of GDP in 1995. In 1995, the Central Government achieved its
long standing objective of stabilizing the debt-to-GDP ratio. Italy's public
debt as a percentage of GDP further decreased in subsequent years reaching an
estimated 108.3% of GDP at the end of 2002, 106.8% at the end of 2003 and 106.6%
at the end of 2004, although it remains above the debt ceiling of 60.0% required
under the Maastricht Treaty (Source: Istat Annual Report for 2004, and Bank of
Italy Annual Report for 2004 (May 2005)).

In 2000, Italy's real GDP growth rate amounted to 3.1%, the highest rate since
1995, as compared to an average annual increase of 3.4% in the member countries
of the European Union. The growth in 2000 was primarily attributable to
increased domestic demand and expenditures, coupled with higher exports. In
2001, real GDP grew by 1.8% and Italy's GDP growth rate was higher, for the
first time since 1995, than the GDP growth of the European Economic Area as a
whole. In 2002, the real GDP growth rate decreased to 0.4%, the slowest growth
rate registered by Italy since 1993. The decrease in real GDP growth in 2002 was
due primarily to the decrease in world trade resulting from the slowdown in the
global and U.S. economies, the volatility of financial markets, a slowdown in
domestic private sector consumption and investments and a decrease in net
exports. In 2003, real GDP grew at a seasonally adjusted rate of 0.3%. The
increase in real GDP growth in 2003 was due primarily to the increase in
economic activity in the third quarter, in conjunction with the world recovery,
although offset in part by a decrease in household spending and exports. In
2004, Italy's real GDP grew at a seasonally adjusted rate of 1.2%. After
expanding moderately in the first half of the year, GDP growth slowed and turned
negative in the last quarter, when the appreciation of the euro accentuated the
difficulties faced by Italian firms in coping with competitive pressures.

The following tables set forth nominal and real GDP and expenditures for Italy
for the periods indicated:

GDP Summary

Year Ended December 31,
---------------------------------------------------------------------
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------

Nominal GDP(1)......................... 1,166,548 1,218,535 1,260,598 1,300,929 1,351,328
Real GDP(1)(2)......................... 1,015,077 1,032,985 1,036,945 1,039,581 1,052,308
% Change (real)........................ 3.1% 1.8% 0.4% 0.3% 1.2%
Population (thousands)................. 57,189 57,348 57,474 57,478 57,553
Nominal per capita GDP(2)(3)........... 20,167 21,406 21,953 21,988 21,583
Real per capita GDP(3)................. 17,568 18,152 18,115 18,029 16,807

- ---------------

(1) In Euro millions.

(2) Constant Euro, with purchasing power equal to the average for 1995.

(3) In Euro.

Source: Bank of Italy Annual Report for 2004 (May 2005) and Istat Annual Report
for 2004.

GDP and Expenditures

Year Ended December 31,
-----------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
('E' millions)
-----------------------------------------------------------------------------------------

Real GDP ......................... 1,015,077 1,032,985 1,036,945 1,039,581 1,052,308
Imports of goods and services .... 286,418 287,798 286,466 290,187 297,470
--------- --------- --------- --------- ---------
Total supply of goods and
services ......................... 1,301,495 1,320,783 1,323,410 1,329,768 1,349,779
========= ========= ========= ========= =========
Less: Exports of goods and
services ......................... 303,311 308,131 298,147 292,478 301,750
--------- --------- --------- --------- ---------
Total goods and services
available for domestic expenditure 998,184 1,012,652 1,025,263 1,037,290 1,048,029
========= ========= ========= ========= =========
Private sector consumption ....... 611,570 616,427 618,920 627,722 633,815
Public sector consumption ........ 177,227 184,011 187,468 191,702 193,075
--------- --------- --------- --------- ---------
Total consumption ................ 788,797 800,438 806,388 819,424 826,890
========= ========= ========= ========= =========
Gross fixed investment ........... 209,217 213,121 215,702 211,907 216,267
Changes in inventories ........... 171 (906) 3,173 5,959 4,872
--------- --------- --------- --------- ---------
Total domestic expenditure ....... 998,185 1,012,653 1,025,263 1,037,290 1,048,029
========= ========= ========= ========= =========

- ---------------
Source: Bank of Italy Annual Report for 2004 (May 2005).

In 2000, household consumption registered a growth of 2.8% as a result of an
increase in the purchases of durable goods (particularly motor vehicles,
telecommunication and recreational products, furniture and electric appliances)
and services (primarily communication services, hotels and recreational
services, insurance and other financial services).

Household consumption grew by 0.8% in 2001, 0.4% in 2002. The slowdown in the
growth of private sector consumption in Italy reflected primarily a decrease in
demand for durable and non-durable goods and a slowdown in the growth of demand
for services, due principally to the low growth in disposable income, reflecting
stagnating wages and salaries and low income from capital, and to uncertainties
regarding the worldwide economic slowdown. In 2003, household consumption grew
by 1.4%, driven in particular by increased spending on durable goods and
expenditure on services. In 2004, household consumption increased by 1.0%. The
growth in consumption was mainly fueled by spending on durable goods, with an
especially large rise for high-tech products most of which were imported.

Gross fixed investment grew by 6.9% in 2000, 1.9% in 2001, 1.2% in 2002,
decreased to (1.8)% in 2003 and increased to 2.1% in 2004. The significant
growth in 2000 was mainly attributable to increased investments in construction,
motor vehicles and intangibles. The slowdown in investment in 2001 and 2002 was
mainly attributable

to the decrease in domestic and worldwide demand. In 2003, gross fixed
investment diminished for the first time since the recession of the early
1990's, as the decrease in purchases of machinery and equipment more than offset
an increase in construction investment. In 2004, total gross fixed investment
made-up for the decline in 2003. The increase resulted from favorable financial
conditions and low interest rates involved building. Spending on capital
equipment was closely in-line with developments in foreign demand.

In 2004, the following sectors of the economy contributed the indicated
percentage of GDP: agriculture, fishing and forestry (2.5%), industry and
manufacturing (21.4%), construction (5.2%) and services (70.9%) (including
commerce, hotels, public works, transport and communications, financial
services, rent and other miscellaneous services) (Source: Istat Annual Report
for 2004).

Principal Sectors of the Economy

Services

In 2004, services represented 70.9% of GDP and employed 64.9% of the
economically active population (Source: Istat Annual Report for 2004). The most
important service sectors include: commerce, hotels and public works; transports
and communications; financial services and public administration.

Transport

Italy's transport sector has been relatively fast-growing in recent years,
largely as a result of trade integration with European markets. Roads are the
dominant mode of transportation in Italy and include, among others, local roads
that are managed and maintained by regions and local authorities, roads outside
the local areas that are managed and maintained by the State Road Board (ANAS)
and a system of toll highways that are in part managed and maintained by
Concessioni e Costruzioni Autostrade S.p.A. ("Autostrade"), Italy's largest
motorway company. Autostrade manages approximately 3,408 kilometers of the 6,487
kilometer system of motorways under a twenty-year concession granted by ANAS.
Toll motorways represent 86.2% of the total motorway network.

Italy's railway system is small in relation to its population and land area, and
has historically suffered from overstaffing, high pay and inadequate
infrastructure. Approximately 30.0% of the network carries 80.0% of the traffic,
resulting in congestion and under-utilization of large parts of the network. In
2004, there were approximately 22,200 kilometers of railroad track, a large
majority of which were controlled by state-owned railways, with the remainder
controlled by private firms operating under concession from the Central
Government. In 2004, Italian railways carried 23.2 billion tons-km of freight
and recorded 45.5 billion passenger-km. The Italian State Railway Company
(Ferrovie dello Stato S.p.A., or "FS") recorded a loss of 'E'125 million in
2004 compared to a consolidated profit of 'E'31 million in 2003 and a
consolidated profit of 'E'77 million in 2002 (Source: Istat Annual Statistics
for Italy 2005).

In 1991, the European Union initiated a series of reforms to render the railway
industry more economical and efficient. The European Union directives provided
for the privatization of the railway; the division of the railway activities
between the network and train operators; the regulation of the network and
granting of licenses to train operators; financial reconstruction; and the right
of access to railway networks and structures. The Central Government initiated
the required liberalization of the Italian railways in 1992 by legislative
decree no. 333/1992, which transferred the responsibilities of the former public
body to a joint stock company, FS, owned by the Ministry of Economy and Finance.
In 2000, a limited liability company, FS Holding was created which owns, among
others, Rete Ferroviaria Italiana or "RFI", the infrastructure manager, and
Trenitalia, the railway operator. The transport activity has been divided into
three separate business units (freight and inter-city businesses, which the
Central Government plans to privatize, as well as local transport and
infrastructure, which will continue to be government-operated). The Central
Government's objective is to devolve to the regions a significant part of the
State responsibilities for local railways. Under the planned decentralization
process, regions will become responsible for the whole range of local
transportation services through contracts entered into with the State. The
international segment of railway transport was liberalized in 2000 and as of
October 30, 2005, 40 licenses had been granted to international operators.
Projects for new high-speed train systems (Treno ad alta velocita) linking the
principal urban centers within Italy and with neighboring European countries as
well as other infrastructure projects designed to upgrade the railway network,
are underway.

In 2004, La Spezia and Genova were among the largest European Mediterranean
ports for container shipping. In 2004, the total volume of container traffic
(loading and unloading) for the port of Genova was 55,048,533 metric

tons and 18,434,755 metric tons for La Spezia. In an effort to make Italian
ports more competitive, regulations have been liberalized and an early
retirement scheme adopted. In the late 1990s, IRI S.p.A. ("IRI") completed the
privatization of its international maritime companies. Tirrenia di Navigazione
S.p.A. conducts ferry operations and regional maritime activities.

Alitalia, Italy's national airline, was partially privatized in 1998 and
re-capitalized in 2002. As of December 31, 2004, 37.7% of Alitalia's share
capital was owned by the public and by employees and 62.3% was owned by the
Ministry for the Economy and Finance. In 2004, it registered a loss of
approximately 'E'812 million as compared to a loss of approximately 'E'520
million in 2003 and a consolidated net profit of approximately 'E'93 million
in 2002. Alitalia has commercial alliances with the following airlines: Air
France, Delta, Aeromexico, Korean Air, CSA Czech Airlines, KLM, Continental and
Northwest. Passenger air traffic in Italy is concentrated, with 49.4% of all air
traffic in 2004 attributable to Ciampino and Fiumicino airports in Rome, and
Linate and Malpensa airports in Milan.

Communications

In 1997, Parliament enacted legislation to reform the telecommunications market
with the aim of promoting competition in accordance with European Union
directives. This legislation permits companies to operate in all sectors of the
telecommunications market, including radio, television and telephone, subject to
certain antitrust limitations and provided for the appointment of a supervisory
authority. The Italian Telecommunication Authority (Autorita per le Garanzie
nelle Comunicazioni, "AGCOM"), established in January 1998, is responsible for
issuing licenses to fixed and mobile telephony operators, which are valid for 15
years and are renewable, and has the power to regulate tariffs and impose fines
and other sanctions.

Italy's telecommunications market has historically been one of the fastest
growing telecommunication markets in Europe. Its growth rate was 7.3% in 2002,
decreased to 3.7% in 2003 and increased to 5.7% in 2004 (Source: Istat, Annual
Statistics 2005). The market was deregulated in January 1998 and Telecom Italia,
which was privatized in 1997, remains the largest operator, but is facing
increasing competition from new operators. In January 2000, access to local loop
telephony was liberalized. Licenses for national and local telephone services
were granted to several telecommunications operators, including Tele2, Tiscali,
Colt, Atlanet, Edisontel, Eplanet, Fastweb and Plug It. Competition among
telecommunications operators has resulted in lower charges and a wider range of
services offered.

In 1995, following the adoption of legislation aimed at developing competition
in the mobile telephone business, Telecom Italia Mobile ("TIM") was spun-off
from Telecom Italia and publicly listed. The Central Government also granted
mobile licenses to Omnitel (controlled by the Vodafone Group) and Wind. The
penetration of mobile telecommunications services in Italy is above the Western
European average at approximately 109 lines per 100 inhabitants at the end of
2004 and growth rates have been substantially higher than European average. This
compares to a penetration rate of 94 and 99 lines per 100 inhabitants at the end
of 2002 and 2003 respectively.

In 1998, the European Parliament authorized European Union member countries to
grant a limited number of Universal Mobile Telecommunications System, or UMTS,
licenses for third-generation, or 3G, mobile telephony services, through which
companies will provide additional and enhanced services including high-speed
wireless internet access. The allocation process of UMTS licenses in Italy was
carried out by an auction among pre-qualified applicants. In November 2000, the
Italian Government awarded five UMTS licenses to the following companies: Wind,
Omnitel (now, Vodafone Omnitel N.V.), Tim, IPSE and Andala (now, H3G). Each
license lasts for 20 years.

Internet penetration rates in Italy have grown substantially in recent years. In
2004, the number of people with internet access was 28.6 million. Between 2000
and 2004 internet users have increased by 116.7%. In 2004, the internet
penetration rate in Italy was 48.8%. The market for internet services is
dominated by three service providers (Telecom Italia Net/Tin.it, Wind/Infostrada
and Tiscali).

In 2004, the performance of the Italian information technology sector increased
by 1.3% compared to (0.4)% in 2003 and 1.9% in 2002.

Financial Assets

In 2004, households' financial investment was directed towards low-risk
instruments. Net holdings of bank and post-office deposits increased by 'E'38
billion and bank bonds by 'E'35 billion (compared with 'E'21 billion in
2003). Households' made net purchases of government securities ('E'17 billion
in 2004, against disposals of 'E'38 billion in

2003) and insurance and pension products. They invested in deposits, bank bonds
and Italian government securities which accounted for 73% of the flow of
financial assets. Households made net disposals of corporate bonds, shares and
other equity and investment fund units totaling 'E'32 billion, compared with net
purchases of 'E'30 billion in 2003. The proportion of shares and other equity
and investment fund units in the stock of financial assets remained unchanged in
2004 at 31%.

Households' financial saving invested in external assets fell to 'E'1.2
billion in 2004. They made net purchases of units of foreign investment funds
totaling 'E'8 billion, compared with 'E'3.5 billion in 2003, but they
reduced their holdings of deposits and medium and long-term securities. The
overall share of external assets in households' total financial assets declined
slightly, to 6.5% in 2004.

The composition of households' financial portfolio in Italy, which in the 1990s
was distinguished by a high proportion of cash, deposits and government
securities, has gradually come closer to that in the other European Union
countries. Between 1995 and 2003 the portion invested in deposits and directly
held debt securities decreased by 20%, while the percentage of shares and
investment fund units increased, rising above the euro-area average as early as
1998. Assets in respect of insurance companies and pension funds also grew in
2004, but their share of the total remains lower than the European Union average
(Source: Bank of Italy Annual Report for 2004).

Financial liabilities

Households' financial debt grew by 12.4% in 2004 (compared with 10.2% in 2003)
to reach 'E'380 billion. The expansion, concentrated in the medium and
long-term component, was driven by strong demand for home mortgage loans.
Despite rising sharply in recent years, household debt is still low in Italy by
comparison with the other industrial countries. The sector's financial debt is
equal to 28% of GDP in Italy, compared with 54% in the European Union Euro area
and more than 80% in the United States and the United Kingdom.

Tourism

Tourism is an important sector of the Italian economy. In 2004, tourism
revenues, net of amounts spent by Italians traveling abroad, were approximately
'E'12.1 billion as compared to 'E'9.4 billion in 2003 and 'E'10.4
billion in 2002 (Source: Istat Annual Statistics for Italy, 2005).

Manufacturing

In 2004, manufacturing represented 21.5% of GDP and employed 22.5% of the
economically active population compared to 2003 when it represented 21.6% of GDP
and employed 20.9% of the economically active population. In the traditional
sectors of manufacturing, the index of industrial production has been falling
since 2002, as a result of reductions by 4.6% in textiles and clothing and 8.2%
in leather and footwear. These industries are suffering from the growing
competition of countries with low labour costs.

The difficulties in the traditional sectors have not been offset by increased
competitiveness in technology-intensive sectors or those distinguished by
substantial economies of scale. Between 2001 and 2004 production fell at an
average annual rate of 7.2% in the electrical and electronic equipment sector
and 3.9% in transport equipment (Source: Istat Annual Report for 2004).

Non-energy production

Italy's principal manufacturing industries include metal products, precision
instruments and machinery, textiles, leather products and clothing, wood and
wood products, paper and paper products, food and tobacco, chemical and
pharmaceutical products and transport equipment, including motor vehicles.

The number of large private companies in Italy is relatively small in comparison
to other European Union countries. The most significant include Fiat
(automobiles and other transportation equipment), Pirelli (tires, cables and
industrial rubber products), Fininvest (media and publishing), Ferrero (food)
and Benetton (clothing). However, much of Italy's industrial output is produced
by small and medium-sized firms, which also have accounted for much of the
economic growth over the past 20 years. They are active especially in the light
industry (including the manufacture of textiles, clothing, food, shoes and
paper), where they act as innovators and export a significant share of their
production. These companies have significant market shares in their respective
product markets in Europe.

Traditionally, investments in research and development ("R&D") activities have
been very limited in Italy. Italy's trade specialization in products
characterized by low R&D was accentuated in recent years, despite the fact that
the country was already a strong exporter of these goods at the beginning of the
1990s. Total and corporate R&D spending has continued to be proportionally lower
in Italy than in other industrial countries, reflecting Italian industry's
persistent difficulty in closing the technology gap with other advanced
economies. According to OECD data, Italy's relatively low total expenditure on
research and development is mainly due to the small contribution of the private
sector. Total R&D spending in Italy was 1.16% in 2002. This compares to total
R&D spending as a percentage of GDP in 2002 of 2.52% in Germany, 2.20% in
France, 1.83% in the EU (including the ten EU member states which joined in May,
2004), 2.67% in the United States and 3.12% in Japan. In 2003, central
government contributions to firms' investment in R&D were equal to 0.08% of GDP,
compared with 0.10% in the EU, 0.12% in France and 0.11% in Germany.

Energy production

The demand for energy, measured in terms of million tons of oil equivalent, or
MTOE, increased by 1.1% in 2004, compared to a 4.0% increase in 2003. The
increase of energy demand was due to an increased demand for industry (1.5%),
transportation (1.6%) and "other uses" (5.6%), partially offset by a decrease in
demand for heating and agriculture (0.5% and 2.9%, respectively). In 2004, oil
represented 45.4% of Italy's primary energy consumption, with natural gas
accounting for 33.9%, renewable energy resources (which includes solar and wind
energy, recyclable material, waste material and biogas) accounting for 7.2%,
solid combustibles accounting for 8.7% and net purchased electricity accounting
for 5.1%.

In 2004, Italy imported 94.2 % of its oil requirements and 83.7 % of its natural
gas requirements. The only other significant imported energy source is coal. A
referendum held in 1987 rejected the use of nuclear power in Italy.

The domestic energy industry is dominated primarily by ENI and ENEL. As of
December 31, 2004, ENI was 20.3% owned by the Central Government, and is active
in the exploration, development and production of oil and natural gas in Italy
and abroad, the refining and distribution of petroleum products, the supply,
transmission and distribution of natural gas and oil field services contracting
and engineering. ENEL, which is 31.5% owned by the Central Government, is the
largest electricity company in Italy and is active principally in the
generation, importation, transmission and distribution of electricity. Domestic
capacity is insufficient to meet current demand, and Italy imports the remainder
of its electricity requirements. (Source: Bank of Italy Annual Report for 2004).

The Electricity and Gas Authority (Autorita per l'Energia Elettrica e il Gas)
regulates electricity activities and natural gas distribution in Italy with the
aim of promoting competition while ensuring adequate levels of service quality.
The Authority is led by a board of three members appointed by Parliament. It has
a large degree of independence and significant powers, including the power to
establish base tariffs and the criteria for tariff adjustments, as well as the
power to issue fines and other sanctions.

In April 2004, ENI made a public offering of 9.5% of the share capital of Snam
rete gas, the company that owns the natural gas transport network, for 'E'651
million. The transaction falls within the scope of policies for the
liberalization of the energy sector (electricity and gas) promoted by the
European Commission and implemented by a decree issued by the Prime Minister on
May 11, 2004. With a view to ensuring equal conditions of access to network
services, gas and electricity producers are required to reduce their equity
interest in network companies to below 20% by July 1, 2007. In line with these
provisions, Enel sold 50% of Terna in 2004, the company that owns the national
electricity grid in a public offering for 'E'1.7 billion. Enel also sold New
Real, a company to which it had transferred most of its property portfolio, for
approximately 'E'1.4 billion.

Conforming with European Community legislation, since July 1, 2004 all end-users
who buy electricity for non-domestic uses may choose their supplier in the
so-called "free market". Previously this right was only granted to those who
consumed at least 100,000 kWh per year. According to data released by GRTN, the
national transmission network operator, with the removal of this restriction the
free market's share of total electricity consumption rose from 37.7% in 2003 to
42.8% in 2004.

In April 2004 the electricity exchange established by Legislative Decree 79/1999
started operating. The exchange offers customers of the free market an
alternative means of supply with respect to direct bilateral contracts with
producers. From April through December 2004 the volume traded on the exchange
was equal to about 30% of total electricity demand.

Between 2002 and 2004 the Ministry for Productive Activities issued 40 approvals
for the construction or modification of thermoelectric power plants with a
capacity of more than 300 thermal MWh. According to GRTN, nine are expected to
be running in 2005 and another nine by 2007. Most of them are allocated in the
North-West and the South of Italy. (Source: Annual Report for the Bank of Italy
2004).

Construction

In 2004, construction represented 5.2% of the GDP and employed 8.2% of the
economically active population as compared to 2003, when it represented 4.9% of
GDP and employed 6.9% of the economically active population. Construction
activity increased by 0.2% in 2003 as compared to 0.5% in 2002, and 4.1% in
2001. Gross fixed investment in construction, which includes investment for
building renovations by the public administration, increased by 3.1% in 2004,
compared to 1.8% in 2003 and 0.3% in 2002. Factors contributing to the rise in
2004 included the tax incentives for the renovation of residential property,
first introduced in 1997, and the growth in the real estate market, strengthened
by ample liquidity and the low cost of mortgages.

Agriculture, Forestry and Fisheries

Agriculture, forestry and fisheries accounted for 2.5% of GDP in 2004, and
employed 4.4% of the economically active population. The agricultural share of
Italian GDP has declined steadily with the growth of industrial output since the
1960s. Italy's average farm size remains less than half of EU average. Italy is
a net importer of all categories of food, except fruits and vegetables. The
principal crops are wheat (including the durum wheat used to make pasta), maize,
olives, grapes and tomatoes. Cereals are grown principally in the Po valley in
the North and in the Southeast plains, olives are grown principally in Central
and Southern Italy, and grapes are grown throughout the country.

Other Characteristics of the Italian Economy

Role of the Central Government in the Economy

Since 1993, the Central Government has been privatizing various operating
subsidiaries of the state holding companies and certain entities owned directly
by the Ministry of Treasury. These privatizations include entities in the
financial institution sector (IMI, INA, Istituto Bancario San Paolo di Torino,
Banco di Napoli, Mediocredito Centrale), the telecommunications sector (Telecom
Italia), oil integrated companies (ENI) and electricity utilities (ENEL). Under
Italian law, all proceeds of the privatization of entities directly owned by the
Treasury must be deposited into a fund established in 1993 for the purchase and
repayment of outstanding Treasury securities. Accordingly, such proceeds reduce
the ratio of public debt to GDP, but cannot be taken into account to offset
current account deficits. From February 1994 to June 30, 2002, the Central
Government raised approximately 'E'66 billion, making the Italian
privatization program one of the largest privatization programs in Europe.

In 2004, privatizations generated approximately 'E'13 billion compared to
'E'4.49 billion in 2003. In October 2004, the third public offering was made
of a tranche of Enel's capital, equal to 19.6% of the total. The transaction's
gross proceeds of 'E'7.6 billion were the largest of any privatization in
Europe in 2004. Other transactions in 2004 were with firms that were only
indirectly controlled by the State. In 2004, the Ministry for the Economy and
Finance held equity interests of 20.3% in ENI, 31.5% in Enel and 62.3% in
Alitalia.

Budget Deficits

Substantial budget deficits have been a persistent problem affecting the Italian
economy. Prior attempts to deal with this problem have been hampered by, among
other things, high levels of social spending. Countries participating in the
European Monetary Union are required to reduce "excessive deficits" and adopt a
budgetary balance as a medium term objective. The reduction of the budget
deficit has been a Central Government priority since 1992, as Italy pursued a
policy of debt reduction to meet the conditions for membership in the European
Monetary Union.

In 1995, the Central Government achieved its long standing objective of
stabilizing its debt-to-GDP ratio, however, it remains above the debt ceiling
required under the Maastricht Treaty. As a result, Italy's public debt as a
percentage of GDP reached 124.3% in 1995, and has been dropping gradually since
then, reaching 110.9% in 2001, 108.3% in 2002, 106.8% in 2003 and 106.6% in
2004. General government net borrowing amounted to 3.2% of GDP in 2004 compared
to 3.2% in 2003 and 2.7% in 2002. One-off measures reduced the deficit in 2004
by more than 1.5% of GDP, compared with approximately 2% in 2003. The primary
surplus decreased by 1.8% of GDP in

2004 compared to 2.1% in 2003. The ratio of taxes and social security
contributions to GDP fell by 0.9% resulting in a reduction in receipts from tax
regularization schemes. (Source: Bank of Italy Annual Report for 2004 (May
2005)).

Savings Rate

Historically, Italy has had a high savings rate. Although the savings rate has
declined over the past three decades (most notably in the last five years) in
Italy as in most of the developed world, household savings as a percentage of
gross national disposable income was 19.2% in 2001, 19.2% in 2002, 19.4% in 2003
and increased to 19.6% in 2004, among the highest of any G-7 country, according
to OECD data. As a consequence, Italy has a significant domestic pool of capital
available for investment and, although its fiscal deficits historically have
been large, the high private savings rate has enabled the Central Government to
finance those deficits principally in the domestic bond market.

The Cassa Depositi e Prestiti acts as the financial agency of the Central
Government and provides financing, through postal savings, for investments of
public entities at a local level. The Cassa Depositi e Prestiti was recently
converted from a governmental agency into a private company.

Regional Disparities

The Italian economy is characterized by significant regional disparities. The
level of economic development of Southern Italy is well below that of Northern
Italy; per capita GDP of the Mezzogiorno (which includes the regions of Abruzzo,
Molise, Campania, Puglia, Calabria and Basilicata, as well as the islands of
Sicily and Sardinia) is lower than the per capita GDP of Northern Italy,
although it has been narrowing in recent years due mainly to migration from the
South to the Northern regions of Italy, despite large and long-standing
infusions of development funds and other income transfers from the Central
Government.

Since 1985, growth in Southern Italy has lagged as compared to Northern and
Central Italy and has been concentrated in services, while agriculture has
declined and industrial output has been stagnant. Despite significant state
intervention, the employment disparity between the Mezzogiorno and the rest of
the country grew in the 1980s and 1990s. Unemployment in Southern Italy was
approximately 18.3% in 2002, 17.7% in 2003 and 15.0% in 2004 as compared to
9.0%, 8.7% and 8.0% respectively, for Italy as a whole. The increase in
employment has been concentrated in the Center and the North. In the South,
compared with the mid-1990s, there has been a resumption of migration of people
with higher educational qualifications towards the central and northern regions.
(Source: Istat Annual Report for 2004 and Bank of Italy Report for 2004).

Investment Incentive Scheme

The Central Government has in the past funded an investment incentive scheme to
encourage investment in the Mezzogiorno. This program has been terminated and
its benefit was gradually phased out at the end of 1999. The Mezzogiorno
investment scheme consisted of investment grants, tax incentives and exemptions
from social security contributions for businesses operating in the Mezzogiorno.
The Mezzogiorno Investment Scheme has been replaced by a new incentive scheme
that covers all under-industrialized areas of Italy. The areas covered by this
new scheme are the same areas covered by the European Union Regional Development
Fund. See "The Economy -- Region of Campania." Italy receives certain grants and
other transfers from the European Union. However, in each of the past ten years,
its payments to the European Union have exceeded its receipts from the European
Union.

Imports and Exports and Balance of Trade

Italy is fully integrated into the European and world economies, with imports
and exports accounting for 28.3% and 28.7%, respectively, of Italian GDP in
2004. In 2004, exports of goods and services recovered partially in volume terms
increasing by 3.2% compared to a decrease of (1.9)% in 2003 and (3.2)% in 2002.
In 2004 the largest contribution to the growth in Italy's export volumes came
from sales of metals and metal products, as a result of strong world demand for
steel, mechanical machinery and equipment and transport equipment, especially
"motor vehicle parts and accessories and motor vehicle engines" and "ships and
boats". There was a decline in exports of textiles and clothing, leather and
leather goods, including footwear, and "other manufactures", which include
furniture. Italian merchandise exports have been held back by the progressive
loss of price competitiveness in a environment of increasing penetration of the
world market by the emerging economies, whose product specialization

partially overlaps with that of Italian exports. In 2004, imports of goods and
services increased by 2.5%, compared with 1.3% in 2003 and 0.9% in 2002.

The growth of imports in Italy is primarily attributable to purchases of
electrical machinery and equipment (up to 8%), metals and metal products (4.7%)
and transport equipment (2.4%). Imports from non-European Union countries
expanded much more rapidly than those from the member states, reflecting the
rapid growth in imports from China (22%) and, to a lesser extent, from other
Asian economies and Russia.

China's share of total Italian imports continued to expand, from 3.6% in 2003 to
4.1% in 2004. The country has become Italy's chief non-European Union supplier
of manufactures. Chinese exports to Italy of mid-tech products, especially
electrical machinery, accounted for 22.3% of the total, while its share of
advanced goods, such as machinery and chemical products, was 19.4%, and almost
the same as that for textiles and clothing.

The European Union accounts for over half of Italian trade value. In 2004,
countries within the European Union purchased 59.8% of Italian exports and
supplied approximately 60.4% of imports. The current account balance improved in
2004, the deficit declining from 1.3% to 0.9% of GDP. The low domestic demand
contributed to slowing down the growth in imports of goods and services with
respect to exports. (Source: Istat and Bank of Italy Annual Report for 2004 (May
2005)).

Employment

The following table shows the change in total employment, the official
employment rate and the official unemployment rate between 2000 and 2004. The
unemployment rate does not include workers paid by the Wage Supplemental Fund
(Cassa Integrazione Guadagni, "CIG"), which guarantees part of the wages of
workers in the industrial sector who are temporarily laid off or have had
reduced working hours.

Employment and Unemployment

Year Ended December 31,
---------------------------------------------------------------------
2000 2001 2002 2003 2004
------ ------ ------ ------ ------

Employment Volume (entire economy) (1) 23,575 23,781 23,993 24,150 22,162
Participation Rate (%)(2)........... 53.5% 54.6% 55.4% 56.0% 57.7%
Unemployment Rate (%)(2)............ 10.6% 9.5% 9.0% 8.7% 7.5%

- ---------------
(1) In thousands.

(2) Population aged 15-64.

Source: Istat Annual Report for 2004 (May 2005).

The unemployment rate amounted to 10.6% in 2000, principally due to positive
trends in the service sector (in particular, business and household services)
resulting in a greater number of available jobs. The unemployment rate in Italy
fell to 9.5% in 2001, to 9.0% in 2002, to 8.7% in 2003 and to 7.5% in 2004, but
it still remains higher than the European Union average (Source: Bank of Italy
Annual Report for 2004 (May 2005)).

Unemployment in Southern Italy has been persistently higher than in Northern
Italy and was approximately 18.3% in 2002, 17.7% in 2003 and 15.0% in 2004 as
compared to 4.0%, 4.2% and 4.9% respectively in the Center-North regions. The
differential narrowed slightly in the early 1990s, principally because
unemployment in Northern and Central Italy is more sensitive to the business
cycle than employment in Southern Italy, but the gap widened again in the last
few years, as the economic contraction was larger in the South. Unemployment is
also substantially higher among younger workers and women. The Central
Government has adopted a number of programs to correct these imbalances,
including programs that provide money for job trainings, particularly in the
South, and programs that provide certain incentives to companies that hire young
workers. The Central Government believes that a substantial "hidden economy"
exists in Italy, consisting of persons who claim, for tax and other purposes, to
be unemployed but actually hold a job, or who claim to hold a job but also
perform other income-earning activities. In 2004, Italy's share of off-the-books
employment remained large. The hidden economy is believed to be particularly
persistent in areas of high official unemployment and among immigrant workers.

Although there were a series of short strikes between 1992-1994 protesting
against certain aspects of the Central Government's program to reduce the budget
deficit, the disruption to the economy from labor disputes has decreased

significantly since the 1970s and early 1980s. In the six-year period 1992-1997,
an average of 8.4 million man-hours of labor per year were lost as a consequence
of labor disputes. By contrast, the average number of man-hours lost per year as
a consequence of labor disputes was 116.6 million over the period 1978-1982, and
43.6 million over the period 1983-1990, 50.2 million in the period 1991-1997,
and 23.3 million in the period 1998-2001 In 2004, 4.8 million hours were lost to
strikes compared to 13.1 million hours in 2003 and 32.7 million hours lost in
2002 (Source: Istat).

There has been a significant transformation of the Italian labor market. The
number of people employed in government grew constantly from the early 1960s
onwards, reached 23.6% in 1993-94, and declined to 20.8% in 2003 (3.6 million
standard labor units). According to labour force surveys, between 1994 and 2004
the employment rate for those aged between 15 and 64 rose by 5% to 57.5%,
although this is still low by international standards. The majority of the
increase came from part-time and fixed-term jobs. These changes , mainly
involved new workers, whose compensation has decreased with respect to the
average. The expansion of employment in the private sector was less pronounced
in the South, despite the slower growth in wages than in the Centre and North.

Wages and Prices

Wages

Unit labor costs have historically been lower in Italy, on average, than in most
other European countries. This is due to lower average earnings per employee,
combined with higher productivity levels.

Wages, as measured by gross earnings per standard labor unit, increased by an
average of 2.8% in 2004 compared to 2.5% in 2003, and 3.4% in 2002. Labor costs
per employee per standard labor unit, measured in terms of unit remuneration
(i.e. the total of gross wages and social security charges) increased by 3.8% in
2004 as compared to 2.5% in 2003 and 3.2% in 2002. Labor costs per employee in
the private sector increased by 3.0% in 2004 as compared to 2.2% in 2003 and
2.9% in 2002. This was largely due to the gain in productivity in industry
excluding construction which off-set the pick-up in employee earnings. Labor
costs per product unit, or LCPU, increased by 2.8% in 2002, 3.2% in 2003 and
4.2% in 2004 (Source: Bank of Italy Annual Report for 2004 (May 2005)).

In 2002 and 2003, the Consumer Price Index grew by 2.6% and 2.7% respectively
and fell to 2.2% in 2004. The increase in 2002 was mainly due to price increases
in education, hotels rents and clothing; 2.7% in 2003, mainly due to higher
taxes on tobacco products and increases in energy charges, restaurants and
similar services, repair and maintenance services and financial services, and
2.2% in 2004. In 2004, there was a gradual slowdown during the year from 2.3% in
the first quarter to 2% in the fourth quarter. This trend was a result of weak
demand and slow growth of unit labor costs (about 2%).

Italian core inflation (net of energy, fresh and processed foods and
administered-price items) also declined in 2004, from an average of 2.7% to
2.1%. This was due mainly to the slowdown in the prices of goods (0.8% in 2004
compared to 1.9% in 2003), in connection with the slowdown of domestic costs and
the nominal effective appreciation of the euro.

The following table illustrates trends in prices and wages for the periods
indicated:

Prices and Wages

Year Ended December 31,
-----------------------------------
2002 2003 2004
---- ---- ----
('E' thousands, except percentages)
-----------------------------------

Cost of Living Index(1)............................................ 2.5 2.5 2.5
Consumer Price Index(1) (2)........................................ 2.6 2.7 2.2
Change in per capita gross wages .................................. 3.5 2.6 3.2
Change in unit labor costs (3)..................................... 2.8 3.2 4.2
Core Inflation Index(4)............................................ 2.5 2.7 2.1

- ---------------
(1) The cost of living index reflects the change in price of a basket of goods
and services (net of tobacco) typically purchased by non-farming families
headed by an employee. It differs from the harmonized consumer price index
in that the cost of living index is smaller in scope.

(2) In accordance with European Commission regulations, since January 2002 the
harmonized consumer price index reflects reductions in prices (e.g.
seasonal sales and promotional offers) taking place for a minimum period of
15 days (formerly 30 days). As a consequence, figures for 2002 are not
directly comparable to previous data.

(3) Unit labor costs are per capita wages reduced by productivity gains.

(4) The basket of goods and services used to measure the core inflation index
is equivalent to the harmonized consumer price index basket less energy,
unprocessed food, alcohol and tobacco products.

Source: Bank of Italy Annual Report for 2004 (May 2005).

Foreign Trade

Italy is fully integrated into the European and world economies, with imports
equal to 28.3% of GDP and exports accounting for 28.7% of GDP in 2004. In 2003,
imports and exports amounted to 27.4% of GDP and exports accounted for 27.5% of
GDP. In 2002, imports and exports amounted to 28.7% and 29.8% of GDP,
respectively. Even though exports increased in 2004, Italy's trade surplus
decreased to 'E'8.8 billion compared to 'E'9.9 billion in 2003, due to
larger spending on raw materials, and in particular oil.

In 2004, the volume of goods exported increased by 3.1% compared to a decline of
2.7% in 2003 and a decrease of 3.4% in 2002. Italy's loss of competitiveness in
2004 mainly reflected demand from non-European Union Countries; together with an
appreciation of the euro which made Italian goods less competitive. In 2004, the
volume of imports of goods and services increased by 3.5% in volume compared to
a decrease of 0.7% in 2003 and 0.2% in 2002 (Source: Bank of Italy Annual Report
2003 (May 2005)).

The following tables illustrate Italy's exports and imports for the years 2000
through 2004. Export amounts do not include insurance and freight costs and only
include the costs associated with delivering and loading the goods for delivery.
This is frequently referred to as "free on board" or "fob". Import amounts
include all costs, insurance and freight, frequently referred to as "charged in
full" or "cif".

Foreign Trade

Year Ended December 31,
-----------------------------------------------------------
2000 2001 2002 2003 2004
------- ------- ------- ------- -------
('E' millions)
-----------------------------------------------------------

Exports (fob)
Agriculture, forestry and fishing............... 3,858 4,251 4,171 4,144 3,816
Minerals........................................ 525 546 683 687 790
Manufactured products........................... 254,679 265,490 261,520 254,541 274,596
Food, beverage and tobacco products........... 13,066 14,009 15,010 14,904 15,743
Textiles, leather products and clothing....... 40,078 43,302 41,207 38,945 38,979
Wood and wood products........................ 1,510 1,505 1,471 1,326 1,378
Paper, printing and publishing................ 5,933 6,084 6,156 6,017 6,222
Refined oil products.......................... 5,181 5,061 4,454 5,371 6,355
Chemical and pharmaceutical products.......... 24,136 25,754 26,906 26,059 27,555
Rubber and plastic products................... 9,389 9,673 9,853 9,845 10,675
Non-metallic minerals and mineral products.... 9,230 9,406 9,232 8,711 9,104
Metals and metal products..................... 21,257 21,986 21,627 21,894 27,370
Mechanic products and machinery............... 50,678 53,957 53,126 53,326 58,142
Electric and precision machinery.............. 26,383 27,625 25,007 23,761 23,761
Transport equipment........................... 30,389 29,620 30,520 29,169 31,879
Other manufactured products................... 17,449 17,508 16,951 15,214 15,288
Furniture..................................... -- 9,440 9,266 8,688 8,831
Energy, gas and water production................ 22 46 35 20 59
Other........................................... 1,302 2,656 2,654 5,224 5,387
------- ------- ------- ------- -------
Total exports................................. 260,414 272,990 269,064 264,615 284,647
======= ======= ======= ======= =======

- ---------------
Source: Bank of Italy Annual Report for 2004 (May 2005).

Year Ended December 31,
-------------------------------------------------------------
2000 2001 2002 2003 2004
------- ------- ------- ------- -------
('E' millions)
-------------------------------------------------------------

Imports (cif)
Agriculture, forestry and fishing .............. 9,228 9,021 9,047 9,292 9,266
Extractive industries .......................... 29,561 28,718 26,282 27,457 31,847
Manufactured products .......................... 217,023 220,985 220,441 218,090 236,033
Food, beverage and tobacco products .......... 17,135 18,373 18,450 18,671 19,569
Textiles, leather products and clothing ...... 18,249 20,189 20,266 20,082 20,787
Wood and wood products ....................... 3,393 3,249 3,356 3,390 3,498
Paper, printing and publishing ............... 7,207 6,719 6,556 6,271 6,313
Refined oil products ......................... 5,378 4,626 5,045 4,735 4,754
Chemical and pharmaceutical products ......... 33,231 33,991 35,279 35,824 38,476
Rubber and plastic products .................. 5,387 5,396 5,509 5,566 6,007
Non-metallic minerals and mineral products ... 2,843 2,955 2,956 2,881 3,024
Metals and metal products .................... 26,277 25,674 24,288 24,039 29,675
Mechanic products and machinery .............. 20,354 20,707 20,720 19,902 21,174
Electric and precision machinery ............. 38,269 37,275 34,748 33,600 37,501
Transport equipment .......................... 35,038 37,544 39,129 38,935 40,574
Other manufactured products .................. 4,262 4,287 4,140 4,193 4,679
Furniture..................................... -- 1,051 1,066 1,105 1,296
Energy, gas and water production ............... 1,535 1,777 1,879 1,796 1,804
Other .......................................... 1,160 3,257 3,577 6,363 6,311
------- ------- ------- ------- -------
Total imports ................................ 258,507 263,756 261,226 262,997 285,261
======= ======= ======= ======= =======
Trade Balance................................. 1,907 9,234 7,838 1,618 (616)
======= ======= ======= ======= =======

- ---------------
Source: Bank of Italy Annual Report for 2004 (May 2005).

The Italian economy relies heavily on foreign sources for energy and other
natural resources, and Italy is a net importer of chemical and pharmaceutical
products and agricultural and food industry products as well as minerals, metals
and metal products, electric and precision machinery and transport equipment. Of
all major European countries, Italy is the most heavily dependent on imports of
energy, importing 84.8% of its energy requirements in 2003. As a result, Italy's
trade balance is vulnerable to fluctuations in oil prices. The long term
challenge of Italian industries is to produce the surplus necessary to fund the
purchase of imported energy, raw materials and agricultural products.

Balance of Payments

The balance of payments tabulates the credit and debit transactions of a country
with foreign countries and international institutions for a specific period.

Current Account

In 2004, Italy's current account balance improved the deficit declining from
'E'17.4 billion in 2004 compared to 'E'12 billion in 2003 (1.3% of GDP in
2004 to 0.9% of GDP in 2003). The slowdown in domestic demand was a factor in
curbing the growth in imports of goods and services with respect to that in
exports. Despite the increase in world trade, exports, particularly manufactured
products, were effected by losses of competitiveness deriving from the
appreciation of the euro and from insufficient gains in efficiency in the
manufacturing sectors.

Capital Account

Italy's capital account surplus fell from 'E'2.5 billion in 2003 to 'E'2.1
billion in 2004. The major part of the decline was attributable to the
contraction in the surplus on public transfers (from 'E'3.6 billion in 2003
to 'E'2.8 billion in 2004) stemming from the reduction of 'E'0.8 billion
in European Union transfers from the Regional Development Fund. Debits for debt
forgiveness fell to 'E'0.1 billion, from 'E'1.1 billion in 2002 and
'E'0.7 billion in 2003.

The following table illustrates the balance of payments for the periods
indicated:

Balance of Payments

Year Ended December 31,
-----------------------------------------------------------
2000 2001 2002 2003 2004
------- ------- ------- ------- -------
('E' millions)

Current Account.................................. (6,305) (740) (10,014) (17,351) (12,035)
Goods............................................ 10,368 17,405 14,409 9,922 8,838
Exports....................................... 260,906 273,596 267,582 263,599 283,331
Import........................................ 250,538 256,191 253,533 253,677 274,493
Services......................................... 1,167 18 (3,043) (2,362) 1,528
Income........................................... (13,099) (11,635) (15,396) (17,811) (14,711)
Transfers........................................ (4,742) (6,527) (5,624) (7,101) (7,690)
to European Union Institutions................ (4,905) (5,634) (5,727) 6,289 (6,537)
Capital Account.................................. 3,195 936 (67) 2,494 2,081
Intangible assets................................ (72) (312) (206) (86) (38)
Transfers........................................ 3,267 1,248 139 2,580 2,118
to European Union Institutions................ 3,624 1,748 1,625 3,635 2,814
Financial Account................................ 4,287 (3,294) 8,532 17,319 8,884
Direct Investments............................... 1,149 (7,377) (2,739) 6,507 (1,971)
Abroad........................................ (13,368) (23,995) (18,194) (8,037) (15,513)
In Italy...................................... 14,517 16,618 15,455 15,544 13,542
Portfolio Investments............................ (26,255) (7,640) 16,107 3,369 26,447
Assets........................................ (86,340) (40,070) (16,968) (51,068) (21,065)
Liabilities................................... 60,085 32,430 33,075 (54,473) 47,512
Financial derivatives............................ 2,501 (477) (2,710) (4,827) 1,833
Other Investments................................ 29,950 11,716 985 13,676 (19,687)
Change in official reserves...................... (3,058) 484 (3,111) (1,406) 2,262
Errors and Omissions............................. (1,177) 3,098 1,549 (2,462) 1,071

- ---------------
(1) Both exports and imports are stated on a "FOB" basis for purposes of the
current account.

Source: Bank of Italy Annual Report for 2004 (May 2005).

Exchange Rates

In January 1999, Italy, together with ten other European countries, introduced
the Euro as its new national currency. The exchange rate was invariably fixed at
Lit. 1,936.27 per Euro. As of January 1, 2002, the Euro was adopted as a single
common currency, which replaced, over a maximum period of two months, the
existing national currencies.

Reserves

Since 1992, the Central Government has followed a policy of generally
strengthening official reserves. By the end of 2004, official reserves decreased
to 'E'45.8 billion compared to 'E'50.1 billion in 2003. Flows accounted
for 'E'2.3 billion of the reduction and exchange rate and valuation
adjustments for 'E'2 billion. Convertible currency reserves diminished by
'E'3 billion and gold reserves by 'E'0.7 billion (Source: Bank of Italy
Annual Report for 2004 (May 2005)).

The following table illustrates the foreign exchange reserves of Italy for the
periods indicated:

Foreign Exchange Reserves

Year Ended December 31,
----------------------------------------------------------
2000 2001 2002 2003 2004
------ ------ ------ ------ ------
('E' millions)
----------------------------------------------------------

Gold............................................. 23,098 24,732 25,764 26,042 25,348
SDRs(1).......................................... 255 337 103 123 106
Total position with IMF.......................... 2,916 3,647 3,726 3,289 2,719
Net foreign exchange............................. 24,097 23,721 23,447 20,634 17,628
Other net reserves............................... -- -- -- -- --
------ ------ ------ ------ ------
Total reserves................................... 50,366 52,437 53,040 50,088 45,801
====== ====== ====== ====== ======

- ---------------
(1) Special Deposit Rights

Source: Bank of Italy Annual Report for 2004 (May 2005).

Monetary Policy

The European System of Central Banks

Prior to Italy's adoption of the Euro, the Bank of Italy was responsible for
conducting monetary policy. As of January 1, 1999, which marked the beginning of
Stage III of the European Economic and Monetary Union, the 11 countries joining
the EMU officially adopted the Euro, and the Eurosystem became responsible for
conducting a single monetary policy.

The European System of Central Banks ("ESCB") consists of the European Central
Bank ("ECB"), established on June 1, 1998, and the national central banks of the
European Union member states. The Eurosystem is formed by the 12 national
central banks in the Euro area and the ECB. So long as there are European Union
member states that have not yet adopted the Euro, there will be a distinction
between the 12-country Eurosystem and the 25-country ESCB. The national central
banks of non-participating countries do not take part in the decision-making of
the single monetary policy, they maintain their own national currencies and
conduct their own monetary policies. The Bank of Italy, as a member of the
Eurosystem, participates in Eurosystem decision-making.

The Eurosystem is principally responsible for:

o defining and implementing the monetary policy of the Euro area;

o conducting foreign exchange operations and holding and managing the
official foreign reserves of the Euro area countries;

o issuing banknotes in the Euro area; and

o promoting the smooth operation of payment systems.

The ESCB is governed by the decision-making bodies of the ECB which are:

o the Executive Board, composed of the President, Vice-President and
four other members, responsible for implementing the monetary policy
formulated by the Governing Council;

o the Governing council, composed of the members of the Executive Board
and the governors of the 11 national central banks, in charge of
formulating the monetary policy in the Euro area; and

o the General Council composed of the Executive Board and the 25
national central banks and contributes to the advisory functions of
the ECB.

The ECB is independent of the national central banks and the governments of the
member states and has its own independent budget, its capital is not funded by
the European Community but has been subscribed and paid up by the national
central banks of the member states which have adopted the Euro, pro-rated to the
GDP and population of each such member state. The fully paid-up subscriptions of
euro area national central banks to the capital of the

ECB of 'E'5,564,669,247.19 amounted to a total of 'E'3.978,226,562.17 at April
29, 2004 (Source: European Central Bank).

The Bank of Italy

The Bank of Italy was founded in 1893. It supervises and regulates the Italian
banking industry, as discussed below, and operates services for the banking
industry as a whole, including a central information office on credit risks. It
also supervises and regulates non-bank financial intermediaries. The Bank of
Italy had assets of 'E'159,585,500,925 at December 31, 2004.

Regulation of Italian banks is conducted by the Interministerial Committee for
Credit and Savings, the Treasury and the Bank of Italy. The principal objectives
of such regulation are the sound and prudent management of the institutions
subject to supervision and the overall stability, efficiency and competitiveness
of the financial system. During the 1980s, Italian banking and European
Community authorities began a process of substantial deregulation, which
resulted in a significant increase in competition in the Italian banking
industry in virtually all bank and bank-related services.

The Interbank Fund (Fondo Interbancario di Tutela dei Depositi), established in
1987 by a group consisting of the principal Italian banks, protects depositors
against the risk of insolvency of their bank and the loss of their deposited
funds. The Interbank Fund assists banks that are declared insolvent or are
subject to temporary financial difficulties and, in the case of declared
insolvency, guarantees the refund of deposits of banking customers up to a
predetermined percentage of each deposit account (which is 100.0% for accounts
up to 'E'103.29 million and 75.0% for the subsequent 'E'435.17 million),
subject to a maximum limit of 'E'516.46 million per account.

Italian banks' bad debts as percentage of total loans increased in 2004 to 4.7%
('E'54.31 million) compared to 4.7% ('E'51.27 million) in 2003, 4.5%
('E'46.32 million) in 2002, 4.7% ('E'45.43 million) in 2001 and 5.7%
('E'51.93 million) in 2000. Further, two major Italian industrial groups
recently defaulted on their payment obligations. Cirio defaulted in November
2002 and Parmalat defaulted in December 2003, and in both cases special
insolvency proceedings have been initiated.

Public Finance

The State budget includes the revenues and expenditures of the Central
Government and certain agencies and entities whose budgets must be approved by
Parliament. Other entities whose budgets are not subject to Parliamentary
approval, including autonomous agencies, regional and local governments and
authorities and the national social security agencies (which are referred to,
collectively with the Central Government and the agencies included in the
budget, as the "public sector"), are reflected in the state budget only to the
extent of the Central Government's receipts from and transfers to such entities.
In April 1997, Parliament enacted legislation to reform the budget process. The
objectives of the reform are to simplify the structure of the budget, to enable
quicker decision making by Parliament, to promote a more efficient allocation of
resources and more effective monitoring of expenditures and to increase the
responsibility and administrative autonomy of senior civil servants.

Measures of Fiscal Balance

Italy reports the fiscal balance of the public sector using the following two
principal measures:

(i) Net borrowing is the consolidated revenues minus the consolidated
expenditures of the general government (as defined and adopted by
European Union countries). This is the principal measure of fiscal
balance, and is calculated in accordance with European Union
accounting requirements. For most internal purposes, Italy uses the
state sector borrowing requirement as its principal measure of
financial balance. The state sector is narrower than the public sector
because it excludes local and regional governments and authorities and
the national social security agencies. However, in the past, the
Central Government has been the principal source of funds for
financing deficits of the public sector, and consequently in the past
the state sector borrowing requirement and the NBR have not been
materially different. General government is narrower than the public
sector because it excludes certain agencies and authorities; and

(ii) Primary surplus, which is the Financial Balance less interest payments
and other borrowing costs of the Central Government. The primary
balance is used to measure the effect of discretionary actions taken
to control expenditures and increase revenues.

The Statistical Office of the European Communities, or Eurostat, published a
decision relating to the methods of accounting for securitizations in July 2002.
Pursuant to the Eurostat decision, Italy will be required to account for
receipts, aggregating approximately 'E'6.7 billion, from certain real estate
and state lottery proceeds securitization transactions, which took place in
2001, in the three-year period 2002 - 2004 and not in 2001.

The table below shows selected public finance indicators for the periods
indicated.

Selected Public Finance Indicators

Year Ended December 31,
-------------------------------------------------------------
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
('E' millions)
-------------------------------------------------------------

Public government expenditure.................... 541,944 592,456 604,176 638,923 653,226
% of GDP......................................... 46.5% 48.6% 47.9% 49.1% 48.3%
General government revenues...................... 534,400 556,493 517,520 601,131 612,349
% of GDP......................................... 45.8% 45.7% 45.3% 46.2% 45.3%
Net borrowing.................................... 7,544 35,963 32,656 37,792 40,877
% of GDP......................................... 0.6% 3.0% 2.6% 2.9% 3.0%
Primary surplus.................................. 67,789 43,607 39,891 31,483 27,034
% of GDP......................................... 5.8% 3.9% 3.2% 2.4% 2.0%
Public debt...................................... 1,298,670 1,350,948 1,364,880 1,385,884 1,429,256
% of GDP......................................... 111.3% 110.9% 108.3% 106.6% 105.8%

- ---------------
Source: Bank of Italy Annual Report for 2004 (May 2005) and Istat Annual Report
for 2004.

Government net borrowing in 2004 was 3.0% of GDP compared to 2.9% in 2003 and
2.6% in 2002. The objective for net borrowing in 2004 was raised from 1.8% of
GDP in July 2003 to 2.9%; the revisions mainly reflected the deteriorations in
the underlying performance of accounts, owing partly to less than expected
economic growth. One-off measures reduced the deficit in 2004 by more than 1.5%,
compared to approximately 2.0% in 2003. The primary surplus declined to 1.8% of
GDP in 2004 compared to 2.1% in 2003 and 3.5% in 2002. The ratio of taxes and
social security contributions to GDP fell by 0.9% in 2004 as a result of the
reduction in receipts from tax regularization schemes.

Between 2000 and 2004 the deterioration in the primary balance, excluding the
effects of one-off measures, was due for nearly 2.0% of GDP to the decrease in
revenue and for nearly 2.5% to the increase in expenditure. The fall in revenue
was mainly the result of tax reliefs. The rise in expenditures was above all due
to current expenditure, which was pushed up by outlays on pensions, health care
and public employment. Capital expenditure increased by 0.6% of GDP.

Governmental Objectives

The Central Government sets forth the principal policy objectives, which, since
1992, have mainly focused on reducing net borrowing and stabilizing the
debt-to-GDP ratio, in a four year planning document (referred to as the
"Economic and Financial Planning Program Document," "2005 - 2008 Program
Document" and "DPEF 2005 - 2008").

The Economic and Finance Program Document (Documento di Programmazione Economica
e Finanziaria or "DPEF 2005 - 2008"), prepared by the Treasury and presented
each year to the Parliament, sets forth two sets of forecast revenues and
expenditures: the first assuming no change from current policy and the second
assuming the Central Government's proposed programmatic changes are adopted. The
Economic and Financial Planning Program Document published in July 2004 set
objectives for 2005 of 2.7% of GDP for net borrowing and 2.6% for primary
surplus. GDP growth was forecast at 2.1%. In December 2004 a budget adjustment
officially estimated at 1.7% was approved.

The 2005 - 2008 Program Document

For the past four years Italy has been successful at meeting the ambitious
targets set for fiscal consolidation, while introducing reforms to modernize the
public sector and tax system. Although Italy substantially reduced its budget
deficit, the ratio of public debt-to-GDP remains well above the 60.0% reference
rate established by the Maastricht Treaty.

In July 2004, the Central Government finalized and presented to Parliament its
2005 - 2008 Program Document, which contemplates the following reforms:

o fiscal reform, designed to continue to reduce the tax burden in order
to stimulate economic growth while reducing current expenditures to
balance the lower tax revenues;

o labor market reforms, aimed at increasing the efficiency and liquidity
of the labor market by introducing new standard forms of labor
contracts, improving the flow of information relating to job
opportunities, strengthening job training programs and reforming
unemployment and other types of employment-related compensation
especially to facilitate the access of women to the labor market;

o energy reform, aimed at increasing the efficiency and liberalization
of the market as well as diversify the sources and development of the
current network; and

o environmental reform, aimed at improving the safety of the soil,
cleaning up polluted areas, improving the air quality and conforming
to the Kyoto protocol.

The following table shows Italy's principal public finance targets for the years
indicated, as well as the gross domestic product, inflation and unemployment
assumptions underlying the 2005 - 2008 Program Document.

2005 2006 2007 2008
------- ------- ------- -------
(Target)
--------------------------------------------------------

Current account surplus, as % of GDP............. (1.2) (1.1) (1.2) (1.1)
Interest expense, as % of GDP ................... 5.3 5.5 5.7 6.0
Net borrowing, as % of GDP....................... (2.7) (2.2) (1.7) (1.2)
Structural net borrowing, as % of GDP............ (2.2) (1.9) (1.5) (1.1)
Public debt, as % of GDP......................... 104.1 101.9 99.3 98.1
GDP (% real growth rate)......................... 2.1 2.2 2.3 2.3
Inflation (% real growth)........................ 1.6 1.5 1.4 1.4
Unemployment rate (%)............................ 8.2 7.6 7.3 7.0

- ---------------
Source: Ministero dell'Economia e delle Finanze, Economic and Financial
Planning Program Document 2005 - 2008 and; Nota di Aggiornamento al
Documento di Programmazione, Per Gli Anni 2005-2008.

The 2005 - 2008 Stability and Growth Program

In November 2004, Italy presented its update to its stability and growth program
for the period 2005 - 2008 ("2004 Stability Program") to the Council of the
European Union and the European Union Commission. The 2004 Stability Program is
based on the 2005 - 2008 Program Document approved by parliament in July 2004
and amended on September 29, 2004; the Forecasting and Planning Report for 2005;
on the Finance Bill for 2005; and on the law decree number 269/2003. The
following table compares the principal finance indicators included in the 2004
Stability Program:

2004 Stability Program

2003 2004 2005 2006 2007 2008
------ ------ ------ ------- ------ ------
(Percentage of GDP)
-----------------------------------------------------------------------

Real GDP growth rate at constant market
prices................................. 0.3 1.2 2.1 2.2 2.3 2.3
Net borrowing, as % of GDP............. (2.4) (2.9) (2.7) (2.0) (1.4) --
Public debt, as % of GDP .............. 106.2 106.0 104.1 101.9 99.2 --

- ---------------
Source: 2004 Stability Program, Update November 2004, Ministero
dell'Economia e delle Finanze.

The 2004 Stability Program follows the Code of Conduct adopted by the European
Union's Council on July 10, 2001, and follows the strategy outlined by the
Central Government in the DPEF 2005-2008 document. It describes

the structural improvements in public finances in the medium term and analyses
the impact of the population's ageing trends on public finances up to the year
2050. Further, it indicates a set of preliminary estimates for the public
sector's assets and liability balance sheet.

The Council of the European Union issued an opinion on February 17, 2005,
setting forth the following considerations associated with the achievement of
the budgetary targets set forth in Italy's 2004 Stability Programs and the
November 2004 Program Update:

o Projected real GDP in 2005 growth appears to be within the higher end
of the forecasting range;

o The debt ratio is estimated to have reached 106% of GDP in 2004, only
marginally below the level recorded in 2003 and far above the 60% of
GDP Treaty reference value. The program projects the debt ratio to
decline by over 8% over the program period mainly on account of an
ambitious privatization plan. The evolution of the debt may be less
favorable than projected notably given the risks to the budgetary
targets and the remaining uncertainties related to stock-flow
adjustments; and

o the planned replacement of one-off measures, the implementation of
structural expenditure cuts and the pace of reduction in the debt
ratio may fail to be successful.

Furthermore, the Council of the European Union recommended:

o do the necessary to ensure the achievement of the 2005 deficit target;

o make the necessary effort in structural terms in 2006 and beyond to
achieve a budgetary position of close to balance by the end of the
period covered by the program; and

o ensure that the debt-to-GDP ratio is declining towards the 60% of GDP
Treaty reference value at a more rapid pace, paying particular
attention to factors other than net borrowing which contribute to the
change in debt levels.

(Source: Official Journal of the European Union, Council Opinion,
February 17, 2005.)

Taxation

Italy's tax structure includes taxes imposed at the Central Government and local
level and provides for both direct taxation and indirect taxation through a
value added tax ("VAT") and other transaction-based taxes. Direct taxes include
personal income taxes, corporate taxes and local taxes. In 2004, direct taxes
increased by 3.4% billion on a cash basis and indirect taxes increased by 4.2%
(Source: Bank of Italy Annual Report for 2004 (May 2005)). In January 2003, the
first step of the personal income tax reform came into force. The tax reforms
introduced in the Finance Law for 2003 are aimed at reducing the overall tax
burden and simplifying the tax system and will lead to two personal income tax
rates instead of the present five. Deductions are aimed primarily at low and
medium-income taxpayers. In the first phase of the reform changes were made to
the first three income brackets and the relevant tax rates. The tax rate applied
to the first income bracket was increased while that applicable to the third tax
bracket was decreased (Source: Bank of Italy, Economic Bulletin, No. 36, March
2003). In 2003, the corporate tax rate (IRPEG) was decreased to 34.0% compared
to 35.0% in 2002 (Source: Bank of Italy Annual Report for 2004 (May 2005)). As
of January 1, 2004, the IRPEG tax will be replaced by the IRES, which has only
one tax bracket, amounting to 33.0%. The regional tax on productive activities
(IRAP) is also to be phased out by the tax reform (Source: DPEF 2004 - 2007
Program Document).

The new tax regime brings Italy in line with European standards, increasing
national competition and the ability to attract foreign direct investment. The
tax reform is also aimed at decreasing the size of the underground economy
through the introduction by the 2003 budget law of a number of tax amnesties
(concordato e condono). These are different from other tax amnesties in that
there are no penalties for unpaid taxes from previous periods, and only require
a one-off payment from the taxpayer. They are also intended to allow for future
efficiency and a greater capacity to fight tax evasion.

VAT is imposed on the sale of goods and the rendering of services performed for
consideration in connection with a business or profession, and on all imports of
goods or services. Italy has already issued legislation to harmonize its

VAT with applicable European Union directives. The basic VAT rate is 20.0%,
although certain goods and services qualify for an exemption from VAT or a
reduced rate. In addition to VAT, indirect taxes include customs duties, IRAP,
taxes on real estate and certain personal property, stamp taxes and excise taxes
on energy consumption, tobacco and alcoholic beverages.

Low tax compliance has been a longstanding concern for the Central Government,
which has adopted measures to increase compliance. Some of these measures are
aimed at identifying tax evasion, and include systems of cross-checks between
the tax authorities and social security agencies, public utilities and others.
One of the areas of greatest concern to the Central Government is
under-reporting of income by self-employed persons and small enterprises. In
response to this problem, Parliament enacted a new form of minimum income tax
for self-employed persons and small enterprises. The minimum tax is determined
on a presumed minimum income for such a self-employed person or small
enterprise, based on location, age, organization and type of activity. If the
taxpayer does not declare the minimum income set forth, there will be an
automatic intervention by the tax authorities to verify the accounts of such
taxpayer. The Parliament also enacted a new tax on enterprises' capital which
may, in the case of medium- and small-sized enterprises, be levied based on
assets. The Central Government's efforts to increase tax compliance during the
last three years have led to an increase in the general tax base and to an
improvement in compliance.

Health, Education, Labor and other Social Welfare Expenditures

The Central Government currently administers almost all the country's social
security and welfare programs. These programs are funded in part by
contributions from employers and employees and in part from general tax
revenues. In 2004, social benefits in cash which include pensions, unemployment
benefits and wage supplementation, family allowances and public employees'
severance pay amounted to 17.3% of GDP as compared to 17.2% in 2003 and 17.0% in
2002. In 2004, compensation of employees which includes general government
social security contributions was 11.0% of GDP as compared to 11.1% in 2003 and
10.8% in 2002. In 2004, other current expenditures which include expenditures on
pharmaceuticals, were 3.4% of GDP as compared to 3.3% in 2003 and 2.9% in 2001.
Italy's health expenditures are in line with the European Union average,
accounting for approximately one-fifth of total social expenditures. A key
objective of the Central Government is to shift social spending from pensions,
through reforms of the state pension system, to programs designed to increase
employment (Source: Annual Report of Bank of Italy for 2004 (May 2005)).

In 1995, Parliament enacted legislation to reform the pension system and reduce
pension expenditures by approximately 'E'51 billion over ten years. The new
pension system, which will apply to all employees with 18 years or less of
employment experience, has begun to be implemented and will be completed at the
end of 2013. Once phased in, each individual's pension will be determined on the
basis of the contributions, adjusted for GDP growth, made to the system by the
individual or by his or her employer on their behalf. No additional
contributions will be made by the Central Government.

Since October 1992, the Central Government has initiated a series of reforms to
the state pension system designed to reduce the level of benefits provided by
the Central Government and to promote the development of private pension funds
to supplement Central Government retirement benefits. Employer and employee
contributions to the national social security pension system continue to be
compulsory and have not been reduced by the reforms, although benefits have been
reduced. In August 1995, the Central Government reformed the pension system by
linking each individual's benefits to the contributions made by such individual
to the system. This plan is to be implemented over an 18-year period and is
expected to produce a reduction in projected pension expenditures over the next
ten years. Further reforms to the pension system have been enacted by
legislation tied to the 1998 budget law, which are aimed at further reducing and
harmonizing the level of benefits.

Italy's public health service was traditionally run principally by regional
governments with funds provided by the Central Government. In lieu of such
transfers, the regions will be granted rights to raise certain taxes and to
receive a portion of certain taxes raised by the Central Government. All local
health care authorities were converted to joint stock companies in 1993 and are
directed by managers with fixed-term work contracts and with pay partly
contingent on performance. In response to rising costs, the Central Government
began imposing charges for treatment and drugs beginning in 1998, subject to
exemptions for low-income patients and for life-preserving measures. Health
expenditure increased by 7.1% in 2004, as compared to 2.5% in 2003. This was
largely due to the 8% increase in pharmaceuticals expenditures compared to a
decrease of 5.3% in 2003.

Most children attend the state school system, and attendance is compulsory from
ages six to fifteen. The Central Government has introduced programs to increase
vocational and technical training. In 1997, the Central Government implemented a
major reform of the education system, which among other things, increased the
number of years of compulsory education from eight to ten years and imposed
higher standards for the end-of-school exam.

Public Debt

Italy's public debt includes Treasury securities and borrowings, debt incurred
by the social security agencies and regional and local governments and
authorities and debt incurred by autonomous agencies within the state sector.

Italy's public debt as a percentage of GDP remains the highest among G-7
countries. However, in 1995, the Central Government reduced the debt-to-GDP
ratio for the first time in 16 years. The ratio of general government debt to
GDP decline in 2004 to 106.6% compared to 106.8% in 2003. Because of the
substantial interest component in the annual budget, continued stabilization
will require significant reductions in expenditures.

In this section, "external debt" means debt initially incurred or issued outside
Italy, regardless of the currency of denomination and "short term debt" means
debt that has a maturity at issuance of up to eighteen months.

The following table summarizes Italy's public debt as of the periods indicated:

Year Ended December 31,
--------------------------------------------------------------------------
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
('E' millions)
--------------------------------------------------------------------------

Medium and long term debt.......... 1,014,560 1,035,237 1,038,596 1,054,083 1,087,543
Short term debt.................... 102,053 113,947 113,515 119,598 118,674
Other debts........................ 102,489 107,455 108,401 130,267 127,310
Money and Deposits 113,436 131,349 145,845 104,427 119,935
--------- --------- --------- --------- ---------
Total public debt.................. 1,332,539 1,387,987 1,406,357 1,408,375 1,453,462
========= ========= ========= ========= =========

- ---------------
Source: Bank of Italy Annual Report for 2004 (May 2005).

External Debt

External debt is debt initially incurred or issued outside Italy, regardless of
the currency of denomination. At the end of 2004 net external public debt was
'E'98.6 billion (7.3% of GDP) compared to 'E'6.9 billion in 2003 (5.3% of
GDP) (Source: Bank of Italy Annual Report for 2004 (May 2005)).

The following table summarizes the external public debt as of December 31 in
each of the years 2000 through 2004.

External Public Debt

Year Ended December 31,
--------------------------------------------------------------
2000 2001 2002 2003 2004
------ ------ ------ ------- ------
('E' millions)
--------------------------------------------------------------

External Treasury Bonds(1).................... 69,471 79,795 81,201 84,147 85,262
FS Bonds and loans(2)......................... 5,434 4,867 3,857 2,376 1,753
ANAS Bonds.................................... 519 516 -- -- --
Other State sector entities................... 1,833 1,453 1,018 814 676
Other general Government entities............. 5,955 7,082 8,825 13,754 4,858
------ ------ ------ ------- ------
Total external public debt ................... 83,305 93,713 99,901 101,091 92,549
====== ====== ====== ======= ======

- ---------------
(1) Italy often enters into currency swap agreements in the ordinary
course of the management of its debt. The total amount of external
bonds shown above takes into account the effect of these arrangements.
All amounts of debt outstanding under Italy's $10 billion Commercial
Paper program are repaid in full every year by year-end.

(2) Includes FS bonds and other debt incurred by FS outside Italy and
assumed by the Treasury by law in 1996.

Source: Registration Statement filed by the Republic of Italy under
Schedule B of the Securities Act of 1933 (April 10, 2006).

The following table sets forth a breakdown of the external public debt,
excluding external public debt of other State sector entities and other Central
Government entities, by currency, as of December 31 in each of the years 2000
through 2004.

Year Ended December 31,
-----------------------------------------------------------------
2000 2001 2002 2003 2004
--------- --------- --------- --------- --------
(millions)
-----------------------------------------------------------------

Euro................................... 21,496 25,310 21,753 21,354 20,328
U.S. Dollars........................... 29,074 30,866 38,591 45,675 49,589
Swiss Francs........................... 5,800 6,800 7,800 8,800 9,800
Japanese Yen........................... 1,675,000 1,475,000 1,475,000 1,325,000 1,225.00
British Pounds......................... 1,305 2,505 2,005 2,605 20,328
Norwegian Kroner....................... -- -- 2,000 4,000 4,000

- ---------------
Source: Registration Statement filed by the Republic of Italy under
Schedule B of the Securities Act 1933 (April 10, 2006).

Italy accesses the international capital market through a Global Bond Program
registered under the United States Securities Act of 1993, a US$40 billion
Medium-Term Note Program established in 1998 and a US$10 billion Commercial
Paper Program established in 1999. The Global Bond Program has been Italy's
principal source of funding from the international capital markets since 2001.
Italy introduced collective action clauses (CACs) in the documentation of all
New York law governed bonds issued after June 16, 2003.

Debt Service

The aggregate nominal amount, before giving effect to currency swaps, of
schedules repayments in respect of the principal amount of Treasury securities
constituting external debt outstanding as at December 31, 2004 was as follows:

Year Ended December 31,
------------------------------------------------------
2005 2006 2007-2012 2013 andafter
------- ------- --------- -------------
(millions)
------------------------------------------------------

Euro................................................. 3,000 2,000 8,763 6,565
British Pounds....................................... 105 -- 600 2,150
Swiss Francs......................................... 1,300 2,000 6,500 --
U.S. Dollars......................................... 4,100 15,000 22,989 7,500
Japanese Yen......................................... 225,000 200,000 350,000 450,000
Norwegian Kroner..................................... -- -- 2,000 2,000

- ---------------
Source: Registration Statement filed by the Republic of Italy under
Schedule B of the Securities Act 1933 (April 10, 2006).

Debt Record

Since its founding in 1946, the Republic of Italy has never defaulted on the
payment of principal or interest on any of its internal or external
indebtedness.

Exchange Controls

The following discussion of exchange controls in Italy summarizes relevant
Italian laws in force at the date hereof, but may not contain all of the
exchange control considerations that may be relevant to an investor in deciding
whether to invest in the Notes.

There are no exchange controls as such in Italy restricting rights deriving from
the ownership of the Notes. Residents and non-residents of Italy may effect any
investments, divestments and other transactions relating to transfers of assets
to or from Italy, subject only to the reporting, record-keeping and disclosure
requirements described below. Residents of Italy may hold foreign currency and
foreign securities of any kind, within or outside of Italy. Non-residents of
Italy may invest in Italian securities without restriction and may export funds,
instruments of credit or payment and securities from Italy, whether in foreign
currency or Euro, representing interest, dividends, other asset distributions
and the proceeds of dispositions.

Certain procedural requirements, however, are imposed by law. Italian residents,
as well as non-resident investors who transfer, directly or indirectly (through
banks or other intermediaries) into or out of Italy, cash, investments of credit
or other securities in excess of 'E'10,329 must report all such transfers to
the Italian Exchange Office (Ufficio Italiano dei Cambi or "UIC"). In case of
indirect transfers, banks or other intermediaries are required to maintain
records of all such transfers for five years (for inspection, inter alia, by
Italian tax and judicial authorities). Non-compliance with these reporting and
record-keeping requirements may result in administrative fines or, in the case
of false reporting or in certain cases of incomplete reporting, criminal
penalties. The UIC is required to maintain reports for a period of ten years and
may use such reports, directly or through other government offices, to police
money laundering, tax evasion and any other crime or violation.

Individuals, non-profit entities and informal partnerships that are residents of
Italy must disclose on their annual tax returns all investments and financial
assets held outside Italy, as well as the total amount of transfers to, from,
within and between countries other than Italy relating to such foreign
investments or financial assets, even if at the end of the taxable period such
persons no longer own foreign investments or financial assets. No such tax
disclosure is required if: (i) such foreign investments or financial assets are
exempt from income tax; or (ii) the total value of such foreign investments of
financial assets at the end of the taxable period of the total amount of the
transfers effected during the fiscal year does not exceed 'E'10,329.
Corporate residents of Italy are exempt from such tax disclosure requirements
with respect to their annual tax returns because this information is required to
be discussed in their financial statements.

There can be no assurance that the present regulatory environment in or outside
Italy will stay intact or that particular policies presently in effect will be
maintained, although Italy is required to maintain certain regulations and
policies by virtue of its membership in the European Union and other
international organizations and its adherence to various bilateral and
multilateral international agreements.

OFFICIAL STATEMENTS

Information included herein which is identified as being derived from a
publication of the City or one of its agencies or instrumentalities is included
herein on the authority of such publication as a public official document of the
City. All other information herein and in the Registration Statement of which
this Prospectus is a part, other than that included under the caption
"Underwriting" herein, is included as a public official statement made on the
authority of Dott. Enrico Cardillo, Assessore alle Risorse Strategiche, City of
Naples.

AUTHORIZED REPRESENTATIVE IN THE UNITED STATES

The Authorized Representative of the City in the United States of America is Mr.
Donald J. Puglisi, Puglisi & Associates, whose address is 850 Library Avenue,
Suite 204, P. O. Box 885, Newark, Delaware 19715.

SCHEDULE OF OUTSTANDING DEBT AS OF DECEMBER 31, 2004

Outstanding at
Final year of Original Amount December 31 2004/
Lender maturity (euro) Issued (euro) January 1, 2005 (euro)
- ------------------------------------------------- --------------- --------------- ----------------------

Cassa Depositi e Prestiti........................ 2005 139,443.36 651.66
Cassa Depositi e Prestiti........................ 2006 157,519.35 2,569.01
Cassa Depositi e Prestiti........................ 2007 98,667,696.14 26,229,251.87
Cassa Depositi e Prestiti........................ 2008 75,906,776.84 24,876,916.27
Cassa Depositi e Prestiti........................ 2009 20,258,021.45 7,212,961.80
Cassa Depositi e Prestiti........................ 2010 71,651,021.29 34,039,971.58
Cassa Depositi e Prestiti........................ 2011 77,306,461.39 41,249,563.60
Cassa Depositi e Prestiti........................ 2012 8,949,337.30 4,433,565.71
Cassa Depositi e Prestiti........................ 2013 26,223.10 5,280,.5
Cassa Depositi e Prestiti........................ 2014 933,674.63 933,674.63
Cassa Depositi e Prestiti........................ 2015 61,974,827.89 29,088,684.00
Cassa Depositi e Prestiti........................ After 2015 246,888,570.85 259,278,078.87

Banca OPI........................................ 2012 164,494,962.89 112,857,756.67
Banca OPI........................................ 2018 37,536,354.11 29,891,014.83
Banca OPI floating............................. 2023 450,000.00 433,802.99
Banca OPI floating............................. 2024 350,000.00 350,000.00
Crediop 4.95%.................................... 2006 24,015,422.68 6,899,959.77
Crediop 6.35%.................................... 2009 15,925,538.14 8,576,886.34
INPDAP 6%........................................ 2014 26,395,480.20 20,002,888.34
Crediop floating................................. 2015 3,873,426.74 3,103,897.29
Unicredit floating............................... 2015 4,648,112.09 3,666,421.09
Banca Nazionale Lavoro........................... 2024 7,000,000.00 7,000,000.00
Banca Nazionale Lavoro........................... 2024 769,200.00 769,200.00
Banca Nazionale Lavoro........................... 2025 23,996,000.00 23,996,000.00
Monte Paschi Siena............................... 2024 10,000,000.00 10,000,000.00
Prestito Obbligazionario......................... 2006 154,937,069.72 30,987,413.95
Prestito Obbligazionario......................... 2024 400,000,000.00 400,000,000.00
-----------------
TOTAL....................................... 1,085,886,410.97
=================

Schedule of Outstanding Debt as of January 1, 2000, 2001, 2002, 2003
and 2004 by Lender

Outstanding at January 1,
---------------------------------------------------------------
Lender 2000 2001 2002 2003 2004
- ------------------------------------------- ----- ----- ----- ----- -----
('E' millions)
---------------------------------------------------------------

CASSA DEPOSITI E PRESTITI................... 434.5 448.7 454.1 479.0 632.0
BANCA OPI................................... 190.8 182.6 173.8 164.2 154.3
ISTITUTI DI PREVIDENZA...................... 26.4 25.3 24.0 22.8 21.4
I.B. S. PAOLO DI TORINO (CREDIOP)........... 36.4 36.5 32.4 28.0 23.5
OTHER....................................... 5.7 5.0 4.4 4.2 4.1
PRESTITO OBBLIGAZIONARIO.................... 108.5 93.0 77.5 62.0 46.5
----- ----- ----- ----- -----
TOTAL OUTSTANDING DEBT................. 802.3 791.1 766.2 760.2 881.8
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