A slide presentation with audio streaming will be available at www.telecomitalia.com/9m2010. Those unable to connect live may follow the presentation until 11 November 2010 by calling: +39 06 334843 (access code 311975#).

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Milan, 4 November 2010

The Telecom Italia Board of Directors, chaired by Gabriele Galateri di Genola, today examined and approved the Interim Financial Statements at 30 September 2010.

Franco Bernabè, CEO of Telecom Italia, said: “The results for the nine months confirm that our strategy to reposition in core markets has been fully accomplished in Brazil, and that it is delivering concrete results in Italy in the fixed line segment, while it will require more time in the mobile one. The ongoing cost control together with rigorous financial management have allowed us to achieve a strongly improving net income of €1,819 million and to confirm our full-year EBITDA and debt reduction targets.

Finally, with the acquisition of control over Telecom Argentina - whose results will be consolidated starting in Q4 2010 - we have added a valuable asset in Latin America, a key area for the Group”.

TELECOM ITALIA GROUP

In the first nine months of 2010 the following companies left the consolidation area:

-       HanseNet Telekommunikation GmbH (a German broadband carrier) already posted under Discontinued Operations; the sale took place on 16 February 2010;

-       Elettra (included in the Domestic Business Unit – International Wholesale) sold on 30 September 2010.

The main changes during 2009 were as follows:

-       the entry on 30 December 2009 of the Brazilian fixed network operator Intelig Telecomunicações Ltda, following the acquisition of 100% by TIM Participações, consolidated within the Brazil Business Unit;

-       exclusion of Telecom Media News S.p.A. from the consolidation area from 1 May 2009, following the sale of a 60% stake in the company by Telecom Italia Media S.p.A.

Revenues in the first nine months of 2010 amounted to €19,899 million, down 0.5% from €19,995 million in the first nine months of 2009. In terms of organic variation, the decrease in consolidated revenues was 4.9%.

In detail, the organic variation in revenues is calculated by excluding:

-       the effect of changes to the consolidation area (+€190 million, referring to the entry of Intelig Telecomunicações Ltda into the Brazil BU in the first nine months of 2010);

-       the effect of exchange rate variations (+ €733 million, resulting mainly from forex gains of the Brazil BU);

-       other non organic profits of €6 million over the first nine months of 2009.

Revenues, broken down by business unit, are as follows:

EBITDA came to €8,475 million, down €51 million (-0.6%) on the previous year period, EBITDA margin at 42.6% of revenues remaining unchanged compared  with the first nine months of 2009. In organic terms EBITDA fell by 0.8%, though 1.9% higher in proportion to revenues (44.0% in the first nine months of 2010 compared with 42.1% in the first nine months of 2009).

EBIT amounted to €4,304 million, up €11 million (+0.3%) from the first nine months of 2009, with EBIT margin stable at 21.6% (21.5% in the first nine months of 2009). The organic EBIT variation was a positive €126 million (+2.8%) while organic EBIT margin rose 1.7 percentage points to reach 22.9% in the first nine months of 2010 (21.2% in the  previous year period).

Consolidated net income amounted to €1,819 million, up 57.2% compared with the first nine months of 2009 (€1,157 million). Excluding non-recurring items — primarily depreciations totalling around €590 million posted in Q3 2009 and provisions of €240 million posted in Q3 2010 for headcount reduction plan — the increase in net profits would be +14.6% compared with the first nine months of 2009. 

Capex amounted to €2,938 million, down €60 million compared with the first nine months of 2009, broken down as follows:

Cash flow from operations came to €3,451 million, down €481 million from the first nine months of 2009, mainly due to the utilization of operating funds set aside in previous years in relation to the Sparkle case. Excluding this effect, cash flow generation for the period (€3,840 million) is substantially in line with the same period of the previous year.

In Q3 2010 adjusted net financial position fell by €594 million from the €33,579 million at 30 June 2010: income tax payments were amply offset by the positive operating free cash flow generated in the quarter. 

Accounting net financial position stood at €33,773 million, down by €974 million from 31 December 2009 (€34,747 million) and by €256 million against 30 June 2010 (€34,029 million).

Group headcount stood at 70,054 employees, of whom 59,903 in Italy.

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BUSINESS UNIT RESULTS

Figures for Telecom Italia Group included in this press release refer to the following business units:

-       Domestic Business Unit: includes domestic fixed-line and mobile-line voice and data services provided to end users (retail) and other carriers (wholesale), Telecom Italia Sparkle business (international wholesale) as well as associated support operations;

-       Brazil Business Unit: refers to telecommunications operations in Brazil;

-       Media Business Unit: includes TV network-related activities and operations;

-       Olivetti Business Unit: focuses on the development and manufacturing of digital printing systems, office products and IT services;

-       Other Operations: includes financial firms and other smaller operations not strictly related to Telecom Italia Group's core business.

Following the sale in the first nine months of 2010 of HanseNet, already classified among Discontinued Operations, the European BroadBand business unit has been removed. The other companies originally included in that business unit have been moved under Other Operations.

From 1.1.2010 the companies Shared Service Center and HR Services, previously consolidated under Other Operations, were included in the Domestic BU perimeter. In order to make a proper comparison possible, segment reporting for comparable periods has been restated accordingly.

Figures for Telecom Italia Media at 30 September 2010 can be found in the press release issued on 29 October 2010, following the Board Meeting's approval.

DOMESTIC

-       Domestic revenues amounted to €15,032 million, down 7.4% on the same period of 2009 (€16,234 million) and with an organic variation of -7.5%.

Core Domestic Revenues

Core Domestic revenues amounted to €14,251 million, down 7.6% (€15,416 million in the first nine months of 2009) and with an organic variation of -7.6%.

The performance of the individual market segments as compared with the same period of 2009 is as follows:

·         Consumer: revenues fell by €947 million (-11.4%), of which €760 million (-9.5%) from services and €187 million from product sales. This was mainly attributable to a fall in revenues from voice services, in particular fixed-line telephony (-€298 million) and outgoing mobile calls (-€355 million). In response to not sustainable pricing premium new commercial policies have been introduced since the end of 2009, designed to reposition the offering more competitively, and thanks to which the contraction in the customer base was substantially halted in the last quarter. Although the recovery of costumer base was less important than expected. A further factor was the decline in mobile termination revenues (-€127 million, of which €83 million resulting from the reduction in tariffs) and in Mobile messaging (-€67 million). Meanwhile Internet services have trended positively compared with the first nine months of 2009 thanks to the continued growth of broadband services both fixed-line (+€50 million) and mobile (+€43 million).

·         Business: this segment reported a fall in revenues of €166 million (-5.9%), nevertheless demonstrating also in the third quarter a gradual recovery on previous quarters (Q3 2010: -4.3%; Q2:-5.4%; Q1: -8.0%; Q4 2009: -10.2%). The improvement is a result of the positive marketing strategy already introduced in the second half of 2009, aimed at more effectively protecting the customer base and the acquisition of higher quality new customers, especially in the mobile segment. In the fixed-line segment, the contraction in voice subscribers in Q3 2010 was around 30,000, -24,000 in Q2, -25,000 in Q1; with smaller quarterly declines than in 2009. Broadband accesses grew by  approx. 12,000, less than in Q2 2010 (+16,000) and in Q1 2010 (+27,000). In the mobile segment, the net increase in lines came to +40,000.

·         Top: total revenues fell by €147 million (-5.5%) compared with the corresponding period of 2009, with a Q3 2010 performance (-4.5%) substantially in line with the previous quarter (-4.8%) and better than Q1 (-7.2%). Revenues from services held firm, in particular in the fixed-line business, partly thanks to the resilience of revenues from ICT services. This result was achieved despite the continued fall in voice and data revenues for the fixed-line segment, largely due to pricing dynamics typical of mature services. Mobile revenues continue to grow (+7.7%), driven by the continual expansion of the customer base and of VAS (+21% ca.), especially Interactive services (+19% ca.).

·         National Wholesale: the increase in revenues (+€66 million; +4.5%) was driven by the growth of OLO (Other Licensed Operators) Local Loop Unbundling, Wholesale Line Rental and Bitstream customers.

In the first nine months of 2010 the International Wholesale segment (Telecom Italia Sparkle Group) posted revenues of €1,207 million, down €91 million from the same period of 2009 (-7.0%), mainly as a result of the price reduction for voice services (-€87 million).

Capex amounted to 1,736 million reais, an increase of 206 million with respect to the first nine months of 2009, mainly due to higher spending on the network and IT platforms.

The headcount came to 9,445 employees.

OLIVETTI

Revenues in the first nine months of 2010 were €259 million, up €40 million compared with the first nine months of 2009. The growth is seen in all distribution channels, also thanks to the positive effects of the renewed offering following the company's strategic repositioning in the IT market. A particularly important contribution came from sales of new product lines (Data Cards, NetBooks and NoteBooks) through the Olivetti and Telecom Italia channels.

EBITDA was a negative €24 million, €6 million lower than in the first nine months of 2009. This is attributable on the one hand to marketing activities needed to support the company's growth, and on the other to the fact that the new offerings, while significant in volume terms, deliver lower EBITDA margin than traditional products whose cost structure has remained unchanged and sales are falling. 

EBIT was a negative €27 million, €5 million lower than in the first nine months of 2009.

Capex amounted to €4 million, up €1 million from the same period of 2009.

Headcount came to 1,107 employees (1,018 in Italy and 89 overseas).

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OUTLOOK FOR THE 2010 FINANCIAL YEAR

As regards Telecom Italia Group's outlook for the ongoing financial year, based on the first nine months results, the following targets for the full year 2010 are confirmed:

·         Organic EBITDA broadly stable compared with previous year;

·         Capex of around €4.3 billion;

·         Adjusted net financial position of around €32 billion by year-end 2010.

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-       Bond repayment
On 1 October 2010 the bond issued by Telecom Italia Capital S.A., with a semi-annual coupon of 4,875%, reached maturity and was repaid for a total USD 700 million.

-       BBNed Sale
On 5 October 2010, after receiving authorization from the Dutch Antitrust Authority, Telecom Italia completed the sale of its entire stake in BBNed to Tele2 AB in line with its intention to reposition itself in its core markets.

-       Telecom Argentina
On 13 October 2010, having received the necessary government authorizations, the company completed the transfer of Werthein Group's 8% stake in Sofora Telecomunicaciones S.A. (“Sofora”) - the holding company that controls Telecom Argentina - to Telecom Italia International, as foreseen by the agreements signed between the Group and Werthein on 5 August 2010.
The Argentine antitrust authorities and telecoms regulator have approved the deal, which allowed Telecom Italia to increase its stake in Sofora to 58% and thus obtain control of Telecom Argentina.
The agreements signed on 5 August also included a settlement of the ongoing legal proceedings with Telecom Italia’s partner Werthein, as well as a new shareholders' agreement regarding the governance of Telecom Argentina giving Telecom Italia management control of the Group, including the right to appoint the majority of corporate officers and top management. Werthein retains certain rights to protect its investment as well as the right to verify fulfilment of obligations regarding Telecom Argentina through a specially appointed independent compliance committee.
Under IAS/IFRS accounting principles (IFRS 3 revised), the operation will have a one-off positive effect on the bottom line of Telecom Italia Group's separate consolidated income statement for Q4 2010 of around €280 million, after recalculating the fair market value of the previous stake in Sofora at the acquisition date. The transaction will not have an impact on the accounts of Telecom Italia S.p.A..

 The document will be published shortly on the company web site www.telecomitalia.it, Corporate Governance section.

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The Manager designate for the preparation of corporate accounting documents, Andrea Mangoni, hereby declares, pursuant to paragraph 2, Art.154-bis of Italy’s Financial Law, that the accounting information contained herein corresponds to the company’s documentation, accounting books and records.

ALTERNATIVE PERFORMANCE MEASURES

In this press release in addition to the conventional financial performance measures established by IFRS, certain alternative performance measures are presented for purposes of a better understanding of the trend of operations and the financial condition related to the Telecom Italia Group.  However, such measures should not be considered as a substitute for those required by IFRS.

Specifically, the non-IFRS alternative performance measures used are described below:

·     EBITDA.This financial measure is used by Telecom Italia as the financial target in internal presentations (business plans) and in external presentations (to analysts and investors). It represents a useful unit of measurement for the evaluation of the operating performance of the Group (as a whole and at the level of the Business Units) in addition to EBIT. These measures are calculated as follows:

·     Organic change in Revenues, EBITDA and EBIT: these measures express changes (amount and/or percentage) in Revenues, EBITDA and EBIT, excluding, where applicable, the effects of the change in the scope of consolidation, exchange differences and non-organic components constituted by non-recurring items and other non-organic income/expenses.

Telecom Italia believes that the presentation of such additional information allows to understand in a more complete and effective manner the operating performance of the Group (as a whole and at the level of the Business Units).

The organic change in Revenues, EBITDA and EBIT is also used in presentations to analysts and investors.

This press release provides details of the separate income statement amounts used to arrive at the organic change as well as an analysis of the major non-organic components for the nine months ended September 30, 2010 and 2009.

·     Net Financial Debt: Telecom Italia believes that the Net Financial Debt provides an accurate indicator of its ability to meet its financial obligations. It is represented by Gross Financial Debt less Cash and Cash Equivalents and other Financial Assets. Below is included a table showing the amounts taken from the statement of financial position and used to calculate the Net Financial Debt of the Group.

In order to better represent the real dynamic in net financial debt, starting with the Half Yearly Financial Report at June 30, 2009, in addition to the usual measure (renamed “net financial debt carrying amount”) a new measure has been introduced denominated “adjusted net financial debt”, which excludes effects that are purely accounting in nature resulting from measurement at fair value of derivatives and related financial liabilities/assets.

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TELECOM ITALIA GROUP  - SEPARATE CONSOLIDATED INCOME STATEMENTS

According to IAS 1 (Presentation of Financial Statements) here below are presented the Consolidated Statements of Comprehensive Income, beginning with the Profit for the period, derived from the Separate Consolidated Income Statements, and displaying income and expenses recognized directly in equity and related to all non-owner changes.

TELECOM ITALIA GROUP – INFORMATION BY OPERATING SEGMENTS

(*)Headcount at December 31, 2009.

(1) The amount indicated are net of infra CGU transactions.

(*) Headcount at December 31, 2009.

(*) Headcount at December 31, 2009.

(*)The breakdown by fixed and mobile technology is presented gross of intersegment eliminations.

Revolving Credit Facility and Term Loan

In the table below are shown the composition and the drawdown of the syndacated committed credit lines available as of September 30, 2010 represented by the Revolving Credit Facility for the total amount of 8 billion euros maturing on August 2014 and by the new Revolving Credit Facility for the total amount of 1.25 billion euros signed on February 12, 2010 and maturing on February 2013. In January 2010 the syndacated credit line named Term Loan 2010 for the amount of 1.5 billion euros  was regularly repaid using the available liquidity:

Bonds

With reference to the evolution of the bonds during the first nine months of 2010, we point out the following events:

NEW ISSUES

REPAYMENTS

BUYBACKS

·          give investors a further possibility of monetizing their position;

·          partially anticipate the repayment of some debt maturities thus increasing the overall return of the Group’s liquidity, without taking any additional risk.

In particular we point out the following buybacks:

With reference to the Telecom Italia S.p.A. 2002-2022 bonds, reserved for subscription by employees of the Group, we point out that as of September 30, 2010 amount 313 million euros (nominal value) and decreased by 35 million euros in comparison with December 31, 2009 (348 million euros).

The nominal amount of repayment, net of the Group’s bonds buy-back, related to the bonds expiring in the following 18 months as of September 30, 2010 issued by Telecom Italia S.p.A., Telecom Italia Finance S.A. and Telecom Italia Capital S.A. (fully and unconditionally guaranteed by Telecom Italia S.p.A.) totals 5,970 million euros with the following detail:

·          513 million euros, due October 1 st, 2010;

·          750 million euros, due January 28, 2011;

·          293 million euros, due February 1 st, 2011;

·          1,884 million euros, due April 20, 2011;

·          623 million euros, due July 18, 2011;

·          549 million euros, due July 18, 2011;

·          1,250 million euros, due February 1 st, 2012;

·          108 million euros, due March 14, 2012.

With reference to the loans issued by Telecom Italia S.p.A. and directly granted by the European Investment Bank (EIB), we inform that two of them for 854 million euros (on a total amount of 2,366 million euros at September 30, 2010), are not covered by bank guarantees and there are such covenants that:

·       in case the company is object of merger, division or transfer of a company branch beyond the Group, or rather alienates, sells or transfers assets or branches, the company must give immediate communication to the EIB which can require guarantees or changes in the contract of funding. With reference to the two contracts of funding signed between EIB and Telecom Italia S.p.A.: on July 17, 2006 for the amount of 150,000,000.00 euros and on November 30, 2007 for the amount of 182,200,000.00 euros, EIB can also rescind the contract ex art. 1456 Italian Civil Code in case Telecom Italia S.p.A. ceases to detain, directly or indirectly, more of the 50% (fifty percent) of the voting rights in the ordinary board of HanseNet Telekommunikation GmbH Germany or, however, such a number of shares to represent more of the 50% (fifty percent) of the share capital of that company; to this end, we remind that on February 16, 2010 the Group sold the subsidiary HanseNet to the Telefónica group. Following HanseNet’s sale, the Group decided to voluntarily repay the loan for the amount of 182,200,000.00 euros of which 40,000,000.00 euros on June 18, 2010 and 142,200,000.00 euros on September 30, 2010; the loan for the amount of 150,000,000.00 euros will be kept until its contractual due date fixed in July 2014;

·       if the credit rating of the company underlies BBB+ for Standard & Poor’s, Baa1 for Moody’s and BBB+ for Fitch Ratings (for the loan of  the nominal amount of 350 million euros) and, if the credit rating of the company underlies BBB for Standard & Poor’s, Baa2 for Moody’s and BBB for Fitch Ratings (for the loans of a total nominal amount of 500 million euros), the company must give immediate communication to the EIB, which can require eligible guarantees within a fixed term; beyond that term and in absence of the above mentioned guarantees provided by Telecom Italia S.p.A., the EIB can demand the immediate repayment of the issued amount. The existing rating levels don’t entail the constitution of new guarantees nor the repayment of the loans.

The syndicated bank credit lines of Telecom Italia S.p.A. do not contain financial covenants (e.g. ratio as Debt/EBITDA, EBITDA/Interests, etc.) which would oblige Telecom Italia to repay the outstanding loan if the covenants are not observed. Mechanisms are provided for adjusting the cost of funding in relation to Telecom Italia’s credit rating, with a spread compared to the Euribor of between a minimum of 0.0875% and a maximum of 0.2625% for the line expiring 2014, and between a minimum of 0.90% and a maximum of 2.50% for the line expiring 2013.

The two syndicated bank credit lines contain the usual negative pledge clauses, consisting of the commitment not to modify the business purpose or sell corporate assets unless specific conditions exist (e.g. the sale at the fair market value). Similar covenants can be found in the export credit agreements.

• Multi currency revolving credit facility (8,000,000,000 euros). This agreement was entered into by Telecom Italia and a pool of banks on August 1, 2005 and subsequently amended. In the event of a change of control, Telecom Italia must inform the agent of this within 5 business days and the agent, on behalf of the financing banks, must negotiate in good faith to determine how the relationship can continue. None of the parties will be required to continue such negotiations beyond a term of 30 days, upon the expiry of which, in the absence of any agreement, the facility will cease to be effective and Telecom Italia will be required to return the sums eventually disbursed to it (presently equivalent to 1,500,000,000 euros). Traditionally, a change of control does not arise in cases where control, within the meaning of art. 2359 of the Italian Civil Code, is acquired (i) by shareholders who, as of the date of the signing of the agreement, directly or indirectly hold more than 13% of the voting rights in shareholders’ meetings or (ii) by investors (Telefónica, Assicurazioni Generali, Sintonia, Intesa Sanpaolo and Mediobanca) that entered into a shareholder agreement on April 28, 2007 concerning the Telecom Italia shares or else (iii) by a combination of entities belonging to the two categories;

• Revolving credit facility (1,250,000,000 euros). This agreement was entered into by Telecom Italia and a pool of banks on February 12, 2010 and it provides for a regime similar to that contained in the facility of August 1, 2005, but updated to take into account the October 28, 2009 amendment of the shareholder agreement of April 28, 2007. No change of control therefore arises in cases where the control, within the meaning of art. 2359 of the Italian Civil Code, is directly or indirectly acquired (through subsidiaries) by the investors Telefónica, Assicurazioni Generali, Intesa Sanpaolo and Mediobanca, with the provisions described above remaining otherwise unchanged;

• Bonded loans. The rules on loans issued within the context of the EMTN Programmes (both ex Olivetti and Telecom Italia) and loans denominated in US dollars typically provide that, in the event of mergers or transfers of all or substantially all of the assets of the issuer or guarantor company, the absorbing or transferee company must assume all of the obligations of the absorbed or transferring company. The non-fulfilment of the obligation, if not remedied, sets up an event of default;

• Contracts with the European Investment Bank (EIB). In the contracts entered into by Telecom Italia and the EIB, for a total maximum amount of around 2.5 billion euros, there is a duty to inform the Bank promptly of any modifications regarding the Bylaws or the distribution of the capital among the shareholders that could entail to a change of control. Any failure to provide this information leads to termination of the contract, which also occurs when a shareholder, who does not hold at least 2% of the share capital as of the date of signing the contract, comes to hold more than 50% of the rights to vote in ordinary shareholders’ meetings or, however, of the share capital, in case that, according to the reasonable judgment of the Bank, this could cause prejudice to the Bank or compromise the performance of the financing project;

• Export Credit Agreement. In a contract for the nominal outstanding amount of 75 million euros, in case of change of control, Telecom Italia must give communication to the Borrower within 5 working days and the parties will negotiate in good faith how to continue the relationship. None of the parties will be obliged to continue that negotiation beyond the term of 30 days (“Negotiation Termination Date”), after which, and in absence of any agreement, the Export Credit Agreement will be always operative but the period of drawing will finish on the negotiation termination date. The residual capital can be no repaid until the terms provided in the agreement or, if former, until the next date of interests’ payment.

Furthermore, in the documentation of loans granted to certain companies of Tim Brasil group, the companies must generally respect certain financial ratios (e.g. capitalization ratios, ratios for servicing debt, profitability and debt ratios), as well as the usual non financial covenants, worth the request for the repayment in advance of the loan.

Finally, we point out that on September 30, 2010 none of the covenants, negative pledge clauses or other clauses regarding the above described debt positions have been violated in any way.

TELECOM ITALIA GROUP – EFFECTS OF NON-RECURRING EVENTS AND TRANSACTIONS ON EACH ITEM OF THE SEPARATE CONSOLIDATED INCOME  STATEMENTS

The effect of non-recurring events and transactions on the separate consolidated income statements is set out below in accordance with Consob Communication DME/RM/9081707 dated September 16, 2009.