Consolidated Financial Position Data ^(*)

Consolidated Profit Ratios ^(*)

(*) Starting in the first half of 2010, certain taxes paid in Brazil, that were not significant, were reclassified from “Other operating expenses” to “Revenues” and “Other income” as deductions. Specifically, such reclassifications allow the Telecom Italia Group to align its accounting presentation to that of the main telecommunications operators, thus ensuring better comparability and understanding of its income statement and financial information. The data relating to the first quarter of 2010 has also been reclassified on a consistent basis. The amounts reclassified are as follows:

Also at the date of March 31, 2011, the board committees were as follows:

–

Executive Committee, composed of: Gabriele Galateri di Genola (Chairman), Franco Bernabè, Roland Berger, Elio Cosimo Catania, Julio Linares López, Aldo Minucci and Renato Pagliaro.

–

Committee for Internal Control and Corporate Governance, composed of: Paolo Baratta (Chairman), Roland Berger, Jean Paul Fitoussi and Aldo Minucci.

–

Nomination and Remuneration Committee, composed of: Elio Cosimo Catania (Chairman), Aldo Minucci and Luigi Zingales.

The ordinary shareholders’ meeting held on April 12, 2011 appointed the new board of directors of the Company composed of 15 directors who will remain in office for three years until the approval of the financial statements for the year ended December 31, 2013.

On April 13, 2011, the new Telecom Italia board of directors appointed Franco Bernabè Chairman and Chief Executive Officer, Aldo Minucci Deputy Chairman and Marco Patuano Chief Operating Officer and Managing Director of the Company. Consequently, the board of directors of the Company is now composed as follows:

All the board members are domiciled for the positions they hold in Telecom Italia at the registered offices of the Company in Milan, Piazza degli Affari 2.

The board of directors also appointed the members of the board committees which are formed as follows:

–

Executive Committee, composed of: Chairman and CEO, Deputy Chairman, COO and Managing Director, Ferdinando Falco Beccalli, Elio Cosimo Catania, Julio Linares López, Renato Pagliaro and Mauro Sentinelli;

–

Committee for Internal Control and Corporate Governance, composed of: Elio Cosimo Catania, Jean Paul Fitoussi, Francesco Profumo, Mauro Sentinelli and Luigi Zingales;

–

Nomination and Remuneration Committee, composed of: Elio Cosimo Catania, Jean Paul Fitoussi, Gabriele Galateri di Genola and Francesco Profumo.

In addition to the responsibilities of the internal Committees which remain those established by the Company’s Self-regulatory Code, the following duties were also attributed to:

–

the Executive Committee: responsibility for expressing a preliminary opinion on the transactions submitted for approval to the board of directors pursuant to point 3.2 of the Self-regulatory Code, that is, on the transactions which, by their nature, strategic importance, size or commitments which they may involve, have a significant impact on the operations of the Company and the Group;

–

the Committee for Internal Control and Corporate Governance: responsibility over matters regarding transactions with related parties according to the specific Procedure on this subject and the task of high-level oversight regarding corporate social responsibility;

–

the Nomination and Remuneration Committee: responsibility over matters regarding the management succession and replacement process and the selection/designation of the external member of the Supervisory Board, as well as the task of formulating proposals for allocating the total compensation established by the shareholders’ meeting among the entire board of directors.

Board of Statutory Auditors

The board of statutory auditors of Telecom Italia was elected by the shareholders’ meeting held on April 8, 2009 and will remain in office until the approval of the 2011 annual financial statements.

The board of statutory auditors is composed as follows:

Macro-Organization Chart of the Telecom Italia Group at March 31, 2011

Following the appointments by the new board of directors of Telecom Italia on April 13, 2011, the organizational structure of the Telecom Italia Group has been redesigned as of April 15, 2011.

Specifically, the board of directors voted to appoint Franco Bernabè Chairman and Chief Executive Officer, Aldo Minucci Executive Deputy Chairman and Marco Patuano Chief Operating Officer and Managing Director of the Domestic business.

The Chairman of the Board and Chief Executive Officer shall have the following responsibilities: representation of the Company, in accordance with the bylaws, and all the powers, to be exercised by single signature, necessary to carry out the duties pertinent to the business of the Company in its various forms, the overall governance of the Group, including the coordination of the corporate activity of the COO and the definition of the strategic guidelines of the Company, responsibility for extraordinary operations and financial extraordinary transactions to be submitted to the board of directors, as well as the authority to govern communications to the public regarding privileged information. The following report to this office:

•

the Functions

–

Legal Affairs

–

Public & Regulatory Affairs

–

Administration, Finance and Control & International Development

–

Strategy

–

External Relations

–

Security

Information for Investors

Telecom Italia S.p.A. Share Capital at March 31, 2011

Shareholders

Composition of Telecom Italia S.p.A. shareholders according to the Shareholders Book at March 31, 2011, supplemented by communications received and other available sources of information (ordinary shares):

The shareholders of Telco (Generali Group: 30.58%; Mediobanca S.p.A.: 11.62%; Intesa Sanpaolo S.p.A.: 11.62%; Telefónica S.A.: 46.18%) signed a Shareholders’ Agreement, relevant for Telecom Italia pursuant to Legislative Decree 58/1998, art. 122.

The description of the fundamental contents of the agreement is contained in the Report on the Corporate Governance and Share Ownership Structure, published on the website: www.telecomitalia.com.

Major Holdings in Share Capital

At March 31, 2011, taking into account the results in the Shareholders Book, communications sent to Consob and the Company pursuant to Legislative Decree 58 dated February 24, 1998, art. 120 and other sources of information, the principal shareholders of Telecom Italia S.p.A. ordinary share capital are as follows:

(*) of which shares with voting rights are equal to 1.31% of total Telecom Italia ordinary shares.

Furthermore, the following companies, as investment advisory firms, notified Consob that they are in possession of Telecom Italia S.p.A. ordinary shares:

•

Brandes Investment Partners LP: on July 23, 2008, for a quantity of ordinary shares which at March 31, 2011 is equal to 4.02% of total Telecom Italia S.p.A. ordinary shares;

•

Blackrock Inc.: on May 20, 2010, for a quantity of ordinary shares which at March 31, 2011 is equal to 2.89% of total Telecom Italia S.p.A. ordinary shares;

•

Alliance Bernstein LP: on November 14, 2008, for a quantity of ordinary shares which at March 31, 2011 is equal to 2.06% of total Telecom Italia S.p.A. ordinary shares.

Common Representatives

The special meeting of the savings shareholders held on May 28, 2010 elected Emanuele Rimini as the common representative for three financial years (up to the approval of the financial statements for the year ended December 31, 2012).

Francesco Pensato is the common representative of the bondholders for the Telecom Italia S.p.A. 1,250,000,000 euros, 5.375% notes due 2019 (with a mandate for the three-year period 2009-2011).

By decree of March 7, 2011, the Milan Court appointed Enrico Cotta Ramusino as the common representative of the bondholders for the Telecom Italia S.p.A. 2002-2022 bonds at variable rates, open special series, reserved for subscription by employees of the Telecom Italia Group, in service or retired (with a mandate for the three-year period 2011-2013).

Performance of the Stocks of the Major Companies in the Telecom Italia Group

Relative performance by Telecom Italia S.p.A.

1/1/2011 – 3/31/2011 vs. FTSE Italia All-Share Index and DJ Stoxx TLC Index ^(*)

^(*) Chart based on Telecom Italia ord. price of EUR 0.99151 at 1/1/2011 - Stock market prices. Source: Reuters.

Relative performance by Telecom Italia Media S.p.A.

1/1/2011 – 3/31/2011 vs. FTSE Italia All-Share Index and DJ Stoxx Media Index^(*)

^(*) Chart based on Telecom Italia Media ord. price of EUR 0.23797 at 1/1/2011 - Stock market prices. Source: Reuters.

Relative performance by Tim Participações S.A.

1/1/2011 – 3/31/2011 vs. BOVESPA Index and ITEL Index (in Brazilian reais) ^(*)

^(*) Chart based on Tim Participações ord. price BRL 6.705938 at 1/1/2011 - Stock market prices. Source: Reuters.

Relative performance by Telecom Argentina S.A. (Class B ordinary shares)

1/1/2011 – 3/31/2011 vs. MERVAL Index (in Argentine pesos) ^(*)

^(*) Chart based on Telecom Argentina Class B price ARS 19.4447 at 1/1/2011 - Stock market prices. Source: Reuters.

Telecom Italia S.p.A. ordinary and savings shares, Tim Participações S.A. preferred shares, Telecom Argentina S.A. Class B ordinary shares and Nortel Inversora S.A. Class B preferred shares are listed on the New York Stock Exchange (NYSE). The shares are listed through American Depositary Shares (ADS) representing, respectively, 10 Telecom Italia S.p.A. ordinary shares and 10 savings shares, 10 Tim Partecipações preferred shares, 5 Telecom Argentina S.A. Class B ordinary shares and, for Nortel Inversora S.A., through American Depositary Receipts (ADRs) representing 0.05 Class B preferred shares.

Rating at March 31, 2011

The following chart summarizes the main line items which had an impact on the profit attributable to owners of the Parent in the first quarter of 2011:

The following chart summarizes the changes in organic revenues in the periods under comparison:

The Domestic Business Unit (divided into Core Domestic and International Wholesale) reports a declining trend in organic revenues of 7.4% compared to the first quarter of 2010. The principal operating indicators show a structural improvement and affirm the repositioning strategy undertaken in the mobile business and the defense of the value of the customer base in the fixed-line area.

The organic services component (4,449 million euros in the first quarter of 2011) records a contraction of 7.6% (-6.5% in the first quarter of 2010). Such change in the mobile area (-11.7% in the first quarter of 2011) is due to the necessary investment made for the competitive repositioning of TIM’s rate plans from which improvements are expected in sales performance in the second half of 2011, partly due to the expiration of the promotions launched during 2010. The fixed area, with a contraction in revenues of 167 million euros (-4.9% in the first quarter of 2011 compared to -5.3% in the first quarter of 2010), is also shaped by the regulatory framework which does not favor the activities for recapturing Telecom Italia’s customers. As for handset sales (revenues of 147 million euros in the first quarter of 2011), a improving trend is recorded (-2.0% in the first quarter of 2011 compared to -23.9% in the first quarter of 2010). Such recovery, in the fixed area (+9.8% in the first quarter of 2011 compared to -29.8% in the first quarter of 2010) is also associated with better ICT sales (+35.9%), whereas the performance in the mobile area is influenced by a greater focus on handsets which offer mobile internet service.

As for the Brazil Business Unit, organic revenues grew 13.8% in the first quarter of 2011 compared to the first quarter of 2010. Service revenues confirm the positive trend (+9.0% in the first quarter of 2011), driven by the growth of the customer base  (52.8 million lines at March 31, 2011). Handset sales also show an increasing trend (+140.8% in the first quarter of 2011 compared to -34.4% in the first quarter of 2010).

An in-depth analysis of revenue performance by individual Business Unit is provided in “The Business Units of the Telecom Italia Group”.

EBITDA

EBITDA is 2,929 million euros, increasing 103 million euros (+3.6%) compared to the same period of the prior year; the EBITDA margin is 41.4% (44.1% in the first quarter of 2010). In organic terms, EBITDA decreased 3.6% and the EBITDA margin is down 1.5 percentage points (41.9% in the first quarter of 2011 versus 43.4% in the first quarter of 2010).

Details of EBITDA and EBITDA margins by operating segment are as follows:

The following chart summarizes the changes in organic EBITDA:

(Revenues and income) / costs and expenses excluded from the calculation of organic EBITDA are the following:

EBITDA was particularly impacted by the change in the line items analyzed below:

Acquisition of goods and services

Acquisition of goods and services amounts to 2,995 million euros, increasing 497 million euros (+19.9%) compared to the first quarter of 2010 (2,498 million euros). The increase is largely due to the entry of the Argentina Business Unit in the scope of consolidation (an impact of 307 million euros in the first quarter of 2011) and exchange differences of the Brazil Business Unit (65 million euros). As for the other business units, the reduction of 98 million euros in the Domestic Business Unit, principally relating to the portion of revenues to be paid to other operators and rent and lease costs, is offset by the increase in all the cost items of the Brazil Business Unit, particularly purchases of goods and products for marketing purposes and the portion of revenues to be paid to other operators.

In detail:

Employee benefits expenses

Details are as follows:

As for the Italian component of ordinary employee benefits expenses, the decrease of 55 million euros is mainly due to the reduction in the average headcount of the salaried workforce (-4,193 compared to the first quarter of 2010, of whom -1,507 are under so-called “solidarity contracts” in Telecom Italia S.p.A. and Shared Service Center S.r.l.).

With regard to the foreign component of employee benefits expenses, the increase of 107 million euros mainly came from the entry of the Argentina Business Unit in the scope of consolidation (an impact of 99 million euros in the first quarter of 2011) and the effect of the exchange differences of the Brazil Business Unit (+6 million euros).

Group’s average headcount of the salaried workforce is the following:

(1)

Includes the average headcount with temp work contracts: 97 in the first quarter of 2011 (79 in Italy and foreign). In the first quarter of 2010, the headcount was 72 (61 in Italy and 11 foreign).

The increment in the average headcount of the salaried workforce in the first quarter of 2011, compared to the same period to the prior year, is primarily attributable to the consolidation of the Argentina Business Unit (14,831 average headcount in the first quarter of 2011).

Headcount at March 31, 2011 is the following:

(1)

Includes headcount with temp work contracts: 100 at March 31, 2011 and 71 at December 31, 2010.

Other income

Details are as follows:

Other operating expenses

Details are as follows:

Other operating expenses grew 133 million euros compared to the first quarter of 2010 due to the entry of the Argentina Business Unit in the scope of consolidation (an impact of 77 million euros in the first quarter of 2011), the increase of the Brazil Business Unit (+21 million euros including an exchange rate effect of 13 million euros) and the Domestic Business Unit (+37 million euros).

In particular:

•

writedowns and expenses in connection with credit management include 80 million euros referring to the Domestic Business Unit (68 million euros in the first quarter of 2010), 18 million euros to the Brazil Business Unit (37 million euros in the first quarter of 2010) and 7 million euros to the Argentina Business Unit;

•

provision charges recorded mainly for pending disputes include 27 million euros referring to the Domestic Business Unit (10 million euros in the first quarter of 2010), 14 million euros to the Brazil Business Unit (7 million euros in the first quarter of 2010) and 2 million euros to the Argentina Business Unit.

The increase of 48 million euros in telecommunications operating fees and charges refers principally to the Brazil Business Unit which contributes a positive exchange rate effect of 8 million euros, and also the entry of the Argentina Business Unit in the scope of consolidation (14 million euros).

Depreciation and amortization

Details are as follows:

The increase in amortization and depreciation charges is due to the entry of the Argentina Business Unit in the scope of consolidation (an impact of 133 million euros in the first quarter of 2011) countered by the decrease in amortization and depreciation charges of the Domestic Business Unit (-66 million euros) and the Brazil Business Unit (-46 million euros, including the change in the real/euro exchange rate of +29 million euros).

EBIT

EBIT is 1,499 million euros, increasing 91 million euros compared to the first quarter of 2010 (+6.5%); the EBIT margin is 21.2% (22.0% in the first quarter of 2010). The organic change in EBIT is an increase of 18 million euros (+1.2%); the organic EBIT margin grew from 21.4% in the first quarter of 2010 to 21.7% in the first quarter of 2011.

The following chart summarizes the changes in EBIT:

(Revenues and income) / costs and expenses excluded from the calculation of organic EBIT are the following:

Share of profits (losses) of associates and joint ventures accounted for using the equity method

Details are as follows:

The investment in EtecSA (Cuba), which was classified in Non-current assets held for sale starting from the month of October 2010, was sold on January 31, 2011.

Other income (expenses) from investments

In the first quarter of 2011, Other income (expenses) from investments is an income balance of 17 million euros and refers to the gain on the sale of the entire 27% investment in the Cuban operator EtecSA. That amount is in addition to the benefit from the impairment reversal of 30 million euros, recorded in 2010.

In the first quarter of 2010, Other income (expenses) from investments was an income balance 2 million euros and mainly included the net gains on the sale of minor companies.

Finance income (expenses)

Details are as follows:

The change in finance income (expenses) benefited from the general reduction in interest rates and lower net debt exposure.

Income tax expense

Income tax expense is 394 million euros and posts an increase of 39 million euros compared to the first quarter of 2010 (355 million euros) owing to higher taxable profit reported by the South American Business Units.

Profit for the period

The profit for the period can be analyzed as follows:

Non-current assets

•

Goodwill: decreased 74 million euros due to fluctuations in the exchange rates of the companies in Brazil and Argentina.

During the first quarter of 2011, there were no events or circumstances such as to require an updating of the impairment test on goodwill carried out for the preparation of the consolidated financial statements at December 31, 2010. Specifically, the trend of the key outside parameters (EBITDA and Capex) of the Telecom Italia Group in the first quarter of 2011 are in line with the targets announced to the public and assumed as the basis for the impairment test at December 31, 2010 and there were no significant negative variations in the outside parameters.

•

Other Intangible assets: decreased 358 million euros, from 7,903 million euros at the end of 2010 to 7,545 million euros at March 31, 2011, being the balance of the following:

–

additions (+404 million euros);

–

amortization charge for the period (-566 million euros);

–

disposals, exchange differences, other changes in the scope of consolidation, reclassifications and other movements (for a net balance of -196 million euros).

•

Tangible assets: decreased 630 million euros from 16,550 million euros at the end of 2010 to 15,920 million euros at March 31, 2011, being the balance of the following:

–

additions (+497 million euros);

–

depreciation charge for the period (-865 million euros);

–

disposals, exchange differences, other changes in the scope of consolidation, reclassifications and other movements (for a net balance of -262 million euros).

Discontinued operations/Non-current assets held for sale

At December 31, 2010, this line item included the entire investment held in EtecSA (Cuba) which was sold on January 31, 2011.

Consolidated equity

Consolidated equity amounts to 32,975 million euros (32,610 million euros at December 31, 2010), of which 29,413 million euros is attributable to owners of the Parent (28,819 million euros at December 31, 2010) and 3,562 million euros is attributable to Non-controlling interests (3,791 million euros at December 31, 2010).

In greater detail, the changes in equity are the following:

(*) Includes the change in trade payables for amounts due to fixed asset suppliers.

In addition to what has already been described with reference to EBITDA, net operating free cash flow during the first quarter of 2011 has been particularly impacted by the following:

Capital expenditures on an accrual basis

The breakdown is as follows:

Capital expenditures in the first quarter of 2011 total 901 million euros, decreasing 141 million euros compared to the first quarter of 2010. Specifically, the significant decrease in capital expenditures of the Domestic Business Unit (89 million euros; -11.8%) benefits also from the spread of the effects of the programs to cut costs and capital expenditures of the Brazil Business Unit (-147 million euros). Such benefit, however, is offset by the entry of the Argentina Business Unit in the scope of consolidation (+91 million euros).

Net financial debt during the first quarter of 2011 was also affected by the following:

Financial investments: acquisition of stakes in the Sofora – Telecom Argentina group

During the first quarter of 2011, the Telecom Italia Group increased the stakes held in Sofora Telecomunicaciones S.A. and in Nortel Inversora S.A. (the controlling holding company of the Telecom Argentina group, which, in turn, is controlled by Sofora Telecomunicaciones) for a total investment of 155 million euros.

In particular:

•

on January 24, 2011, the Telecom Italia Group, through its subsidiary Telecom Italia International N.V., purchased 2,351,752 Nortel American Depositary Shares (ADS), representing Preferidas B shares, from Fintech Investment Ltd for 65.8 million U.S. dollars. The ADSs in question represent 117,587.6 Preferidas B shares, which correspond to 8% of total Preferidas B shares (without voting rights);

•

on March 9, 2011, Telecom Italia, through its subsidiary Telecom Italia International N.V., purchased a 10% stake in Sofora Telecomunicaciones S.A. from the local partner Werthein and thus increased its investment holding in Sofora from 58% to 68% of the company’s share capital. The transaction did not alter or modify either the governance rights of the Telecom Argentina group established by agreement between the shareholders signed by the Telecom Italia Group and Werthein, which is still in force, or the commitments undertaken by the Telecom Italia Group before the Argentine antitrust authorities.

In view of the above increments in the investments, the economic interest of the Telecom Italia Group in Telecom Argentina rose from 16.2% at December 31, 2010 to the current 21.1%.

Sale of investments and other disposals flow

Sale of investments and other disposals flow amounts to 377 million euros and 374 million euros of that amount refers to the portion already received, net of related accessory charges, on the sale of EtecSA Cuba. The transaction specifically provides that Telecom Italia Group will receive a total of 706 million U.S. dollars, of which 500 million U.S. dollars has already been paid by the buyer on January 31, 2011; the remaining amount will be paid by EtecSA in 36 monthly installments, of which two have already been paid at the date of March 31, 2011. The receivable is secured by specific guarantees.

Finance expenses, income taxes and other net non-operating requirements flow

Finance expenses, income taxes and other net non-operating requirements flow mainly includes the payment, made in the first quarter of 2011, for net finance expenses, income taxes and also the change in non-operating receivables and payables.

Sales of receivables to factoring companies

The sales of receivables to factoring companies finalized during the first quarter of 2011 resulted in a positive effect on net financial debt at March 31, 2011 of 698 million euros (1,209 million euros at December 31, 2010).

Gross financial debt

Bonds

Bonds at March 31, 2011 are recorded for 28,148 million euros (29,578 million euros at December 31, 2010). Their nominal repayment amount is 27,312 million euros, decreasing 1,017 million euros compared to December 31, 2010 (28,329 million euros).

The change in bonds during the first quarter of 2011 is as follows:

Buybacks

As occurred in past years, during the first quarter of 2011, the Telecom Italia Group bought back bonds, with the aim of:

•

giving investors a further possibility of monetizing their positions;

•

partially repaying some debt securities before maturity, increasing the overall return on the Group’s liquidity without inviting any additional risks.

In particular, the following bonds were repurchased:

⁽¹⁾

During the years 2009 and 2010, bonds had already been bought back for 116.115 million euros. Therefore the total amount bought back is 209.038 million euros.

In reference to the Telecom Italia S.p.A. 2002-2022 bonds, reserved for subscription by employees of the Group, the nominal amount at March 31, 2011 is equal to 297 million euros and decreased by 8 million euros compared to December 31, 2010 (305 million euros).

─ ● ─

Revolving Credit Facility and Term Loan

The following table shows the composition and the drawdown of the committed credit lines available at March 31, 2011. These are represented by the Revolving Credit Facility for a total of 8 billion euros expiring August 2014, the syndicated revolving line for a total of 1.25 billion euros expiring February 2013 and the revolving credit line for a total of 200 million euros signed December 20, 2010 and expiring June 19, 2012 (renewable at the discretion of Telecom Italia up to December 18, 2013):

Lehman Brothers Bankhaus AG London Branch bank is the Lender of the Revolving Credit Facility expiring 2014 with a commitment of 19 million euros and an amount disbursed of 3.56 million euros.

With regard to Lehman Brothers Bankhaus AG’s commitment, the Telecom Italia Group has not received any communication from Lehman Brothers Bankhaus AG, or from its representatives or directors or agent of the committed facility which, at this time, entails changes compared to the situation prior to the bankruptcy of Lehman Brothers Holding Inc..

Maturities of financial liabilities and average cost of debt

The average maturity of non-current financial liabilities (including the current portion of medium/long-term financial liabilities) is 7.55 years.

The average cost of the Group’s debt, considered as the cost for the period calculated on an annual basis and resulting from the ratio of debt-related expenses to average exposure, is about 5.4%.

For details of the maturities of financial liabilities in terms of expected nominal repayment amounts, as contractually agreed, reference should be made to the table that follows:

Current financial assets and liquidity margin

The Telecom Italia Group’s available liquidity margin, calculated as the sum of Cash and cash equivalents and current Securities other than investments, amounts to 6,797 million euros at March 31, 2011 (6,842 million euros at December 31, 2010) which, together with its unused committed credit lines for 7.8 billion euros, allows the Group to amply meet its repayment obligations over the next 24 months.

In particular:

•

Cash and cash equivalents amount to 5,487 million euros (5,526 million euros at December 31, 2010). The different technical forms of investing available cash at March 31, 2011, which include euro commercial paper for 410 million euros, can be analyzed as follows:

–

Maturities: investments have a maximum maturity of three months;

–

Counterpart risk: investments by European companies are made with leading banking, financial and industrial institutions with high-credit-quality and at least an A- rating. Investments by companies in South America are made with leading local counterparts;

–

Country risk: investments are made mainly in major European financial markets.

•

Securities other than investments amount to 1,310 million euros (1,316 million euros at December 31, 2010). Such forms of investment represent alternatives to the investment of liquidity with the aim of raising the yield. These mainly consist of 1,155 million euros of Italian treasury bonds purchased by Telecom Italia S.p.A. (with A ratings by S&P’s) and 152 million euros of bonds issued by counterparts with a rating of at least BBB+ with different maturities, but all with an active market, that is, readily convertible into cash.

Covenants and negative pledges relating to outstanding positions at March 31, 2011

With reference to loans received by Telecom Italia S.p.A. from the European Investment Bank (EIB), an amount of 1,056 million euros (out of a total of 2,668 million euros at March 31, 2011) is not secured by bank guarantees but there are covenants which cover the following:

•

in the event the company becomes the target of a merger, demerger or contribution of a business segment outside the Group, or sells, disposes or transfers assets or business segments (with the exception of certain acts of disposal expressly envisaged), it shall immediately inform EIB which shall have the right to ask for guarantees to be provided or changes to be made to the loan contract. The same clause applies to two loan contracts signed between the EIB and Telecom Italia S.p.A. on July 17, 2006 and on November 30, 2007 for a total principal amount of 332,200,000.00 euros, in which the EIB also has the right to rescind from the contract under ex. art. 1456 of the Italian Civil Code (demanding repayment of the loan and payment of an indemnity) should Telecom Italia S.p.A. cease to hold, directly or indirect, more than 50% of the voting rights in the ordinary shareholders’ meeting of HanseNet Telekommunication GmbH Germany or, in any case, a number of shares such as to represent more than 50% of its share capital. Following the sale of HanseNet on February 16, 2010, the Group decided to voluntarily repay the loan of 182,200,000.00 euros stipulated on November 30, 2007, of which 40,000,000.00 euros had already been repaid on June 18, 2010 while the remaining 142,200,000.00 euros was repaid on September 30, 2010. The loan of 150,000,000.00 euros will remain outstanding until its natural due date of July 2014;

•

for all loans not secured by collateral, if the Company’s rating of unsubordinated and unsecured medium/long-term debt is lower than BBB for Standard & Poor’s, Baa2 for Moody’s and BBB for Fitch Ratings, the company shall immediately inform the EIB which shall have the right to ask for suitable guarantees to be provided, indicating a date for setting up these guarantees. After that date and if Telecom Italia S.p.A. fails to provide the guarantees, the EIB shall have the right to demand immediate repayment of the amount disbursed. The current ratings did not require new guarantees or repayments of loans.

The syndicated bank lines of Telecom Italia S.p.A. do not contain financial covenants (e.g. ratios such as Debt/EBITDA, EBITDA/Interest etc.) which would oblige the Company to automatically 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 added to the Euribor of between a minimum of 0.0875% and a maximum of 0.2625% for the line expiring in 2014 and a minimum of 0.90% and a maximum of 2.50% for the line expiring in 2013.

The two syndicated bank lines contain the usual other types of covenants, including the commitment not to use the company’s assets as collateral for loans (negative pledges), the commitment not to change the business purpose or sell the assets of the company unless specific conditions exist (e.g. the sale takes place at fair market value). Covenants with basically the same content are also found in the export credit loan agreements.

A series of agreements in which Telecom Italia is a party provides for communication of a change in control:

•

Multi-currency revolving credit facility (8,000,000,000 euros). The agreement was signed between Telecom Italia and a syndicate of banks on August 1, 2005 and subsequently modified. In the event of a change in control, Telecom Italia shall inform the agent within five business days and the agent, on behalf of the lending banks, shall negotiate, in good faith, how to continue the relationship. None of the parties shall be obliged to continue such negotiations beyond the term of 30 days, at the end of which, in the absence of an agreement, the credit facility shall cease to be effective and Telecom Italia shall be held to repay any sum disbursed (currently equal to 1,500,000,000 euros) to the same. Conventionally, no change of control is held to exist in the event control, pursuant to art. 2359 of the Italian Civil Code, is acquired (i) by shareholders who at the date of signing the agreement held, directly or indirectly, more than 13% of the voting rights in the shareholders’ meeting, or (ii) by the investors (Telefónica S.A., Assicurazioni Generali S.p.A., Intesa Sanpaolo S.p.A. and Mediobanca S.p.A.) which had signed a shareholders’ agreement on April 28, 2007 regarding the Telecom Italia shares, or (iii) by a combination of parties belonging to the two categories.

•

Revolving credit facility (1,250,000,000 euros). The agreement was signed between Telecom Italia and a syndicate of banks on February 12, 2010 and envisages a discipline similar to that contained in the August 1, 2005 credit facility agreement, even though it was updated to take into account the October 28, 2009 modifications to the April 28, 2007 shareholders’ agreement. Therefore, no change of control is held to exist in the event control, pursuant to art. 2359 of the Italian Civil Code, is acquired, directly or indirectly (through subsidiaries) by the investors Telefónica S.A., Assicurazioni Generali S.p.A., Intesa Sanpaolo S.p.A. and Mediobanca S.p.A.), with the provisions described above remaining unchanged.

•

Revolving credit facility (200,000,000 euros). The agreement was signed between Telecom Italia and Unicredit S.p.A. on December 20, 2010 and envisages a discipline basically identical to that of the February 12, 2010 credit facility. The amount disbursed is currently 120,000,000 euros.

•

Bonds. The regulations covering the bonds issued under the Telecom Italia EMTN Programme by both Olivetti and Telecom Italia and the bonds denominated in U.S. dollars typically provide that, in the event of mergers or transfer of all or substantially all of the assets of the issuing company or the guarantor, the incorporating or transferee company shall assume all of the obligations of the merged or transferor company. Non-fulfillment of the obligation, for which a solution is not found, is an event of default.

•

Contracts with the European Investment Bank (EIB). The contracts signed by Telecom Italia with the EIB, for a total maximum amount of approximately 2.7 billion euros, carries the obligation of promptly informing the bank about changes regarding the bylaws or the allocation of share capital among the shareholders which can bring about a change in control. Failure to communicate this information to the bank shall result in the termination of the contract. The contract shall also be terminated when a shareholder, which, at the date of signing the contract does not hold at least 2% of the share capital, comes to hold more than 50% of the voting rights in the ordinary shareholders’ meeting or, in any case, a number of shares such that it represents more than 50% of the share capital, whenever, in the bank’s reasonable opinion, this fact could cause a detriment to the bank or could compromise the execution of the loan project.

•

Export Credit Agreement (residual nominal amount of 63 million euros). The contract was signed in 2004 by Telecom Italia and Société Générale and provides for the repayment of the loan in 2013. It is provided that, in the event of a change in control and subsequent failure to reach an agreement with the lender bank, Telecom Italia shall reimburse the outstanding loan on the first date on which payment of interest shall be due.

•

Finally, in the documentation of the loans granted to certain companies of the Tim Brasil group, the companies must generally respect certain financial ratios (e.g. capitalization ratios, ratios for servicing debt and debt ratios) as well as the usual other pledge clauses, under pain of a request for the early repayment of the loan.

Finally, it should be pointed out that, at March 31, 2011, no covenant, negative pledge clause or other clause relating to the above-described debt position, has in any way been breached or violated.

(*) Headcount at December 31, 2010.

Core Domestic

(*) Headcount at December 31, 2010.

⁽¹⁾ The amounts indicated exclude infrasegment transactions.

International Wholesale

(*) Headcount at December 31, 2010.

Revenues

As regards the market segments, for the first quarter of 2011, the following changes compared to the same period of 2010 are noted:

•

Consumer: segment revenues decreased 224 million euros (-9.2%), mainly in revenues from services (-219 million euros, -9.2%) and marginally in product revenues ­­(-5 mil­lion euros, ­­-10.4%). The decrease in revenues from services is almost entirely attributable to the contraction in traditional voice service revenues, both Fixed-line (voice revenues: -76 million euros, of which -41 million euros refers to traffic and -27 million euros to access revenues) and outgoing Mobile (voice revenues: -126 million euros, of which -91 million euros is outgoing and -35 million euros is incoming). Such results are still affected by the in-depth review of the rate plan portfolio (with the introduction of increasingly clearer, more attractive and cheaper rate plans and solutions) in the previous year to meet competitive pressure, stem the loss of the customer base and prompt a recovery and improvement in revenues, as can already been seen in the first three months of the year.

•

Business: segment revenues in the first quarter of 2011 record a reduction of 65 million euros (-7.3%); the decrease in Services revenues of 61 million euros (-7.1%) is lower than in the first quarter of 2010 (-8.2%) and basically in line with the fourth quarter of 2010 (-6.9%). Fixed-line and mobile traffic are the areas most affected by the reduction where competitive pressure is very fierce. Sales efforts were aimed at containing the erosion of the fixed-line customer base and expanding the mobile customer base. In the Fixed area, the voice customer base in the quarter is down by about 30,000 accesses, confirming the figure in the fourth quarter of 2010; Broadband accesses are up by about 19,000, increasing compared to the previous quarter (about +12,000). In the Mobile segment, human lines increased about 3,000 in the quarter (about +25,000 in the fourth quarter of 2010).

•

Top:: segment revenues record a decrease of 48 million euros (-5.8%) which is lower than that posted in the corresponding quarter of the prior year (-64 million euros, -7.2%). The comparison particularly benefits from a better performance in the fixed-line area owing to higher sales volumes and a lower contraction in services revenues, partly due to the positive trend of ICT revenues (+10.6%). Conversely, mobile revenue are down (-14.0%).

•

National Wholesale: segment revenues gained ground (+18 million euros, +3.6%) because of the growth of the OLOs (Other Licensed Operators) customer base for Local Loop Unbundling, Wholesale Line Rental and Bitstream services.

International Wholesale Revenues

During the first quarter of 2011, International Wholesale (Telecom Italia Sparkle group) reported revenues of 317 million euros, down 81 million euros (-20.4%) compared to the same period of 2010. The decline is almost entirely due to the voice business (-73 million euros), which is penalized by strong price pressure caused by market competition and also measures taken to rationalize the sector based on a more selective approach to the client portfolio. IP&Data revenues are basically in alignment with the prior year whereas Multinational Client Services revenues grew slightly. Moreover, revenues in the first quarter of 2010 included 10 million euros generated by the subsidiary Elettra which was sold in September 2010.

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Besides the summary by market segment reported above, sales information by technology (fixed and mobile) is also presented below as a continuation of the information presented in the annual and interim reports of the previous periods.

Revenues of the Business Unit by technology and market segment are reported below:

(*)

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

Fixed-line Telecommunications Revenues

In the first quarter of 2011, fixed-line telecommunications revenues amount to 3,331 million euros, decreasing 167 million euros (-4.8%) compared to the same period of the prior year. The organic change in these revenues is a negative 158 million euros (-4.5%). At March 31, 2011, the number of retail accesses is 15.1 million, with the loss of lines slowing down (-206,000 lines) compared to the fourth quarter of 2010 (-233,000 lines) thanks to sales policies aimed at keeping and increasing the customer base. Growth is recorded in broadband customers which reached a total portfolio of 7.2 million retail accesses on the domestic market after the contraction of the last quarter of 2010, although there remains a decisive escalation in the competitive environment.

The total Broadband portfolio at March 31, 2011 is approximately 9.1 million accesses (+73,000 compared to December 31, 2010), of which wholesale accesses are about 1.9 million (+54,000, compared to the end of 2010).

The following chart shows the trend of revenues in the major business areas:

Retail Voice

The first quarter of 2011 posts a decline of 132 million euros in retail voice revenues due to the reduction in the customer base, price pressure over voice traffic and the effect of the replacement of fixed lines with mobile lines. It should be noted that Telecom Italia, in April, announced simpler rate place which will take effect in July. This applies to calls from fixed-lines without any restrictions on the time frame and a change in the subscriber charge. The simplified rates are aimed at enhancing the customer’s appreciation of the service and increasing the customer base.

The decrease in revenues from accesses in the retail area (-45 million euros) is compensated in part, in the domestic business, by the increase in national Wholesale services (+27million euros for regulated intermediate services such as Local Loop Unbundling and Wholesale Line Rentals).

Internet

Internet revenues total 422 million euros, decreasing 28 million euros (-6.2%) compared to the first quarter of 2010, due mainly to lower content/portal revenues associated with the termination of the contracts for soccer rights. In fact, as of July 2010, the sales/purchases contracts on soccer rights ended and were not renewed; such revenues had a nil impact on EBITDA. As already said, growth is recorded in broadband customers. Telecom Italia is also working on the quality of its network with rate plans offering higher speeds, with guaranteed quality, compared to the competition, by upselling new services such as parental control and anti-spamming and continuing to invest in the effectiveness of its customer care. The clientele taking out flat rate places continues to grow and now account for 87% (84% in the same period of 2010), thanks partly to the “Internet senza limiti”, plans aimed at the Consumer segment.  

Business Data

Business Data revenues grew 13 million euros (+3.7%) compared to the first quarter of 2010 despite the current negative economic picture and the contraction of prices in the traditional leased lines and data transmission businesses. In particular, in the ICT area, the increase recorded in revenues is 21 million euros (+13.3%) and is due to both higher product sales (+14 million euros) and revenues from services (+7 million euros).

Wholesale

(*)

Includes sales to the third-party market and the domestic mobile telecommunications component.

The customer portfolio of Telecom Italia’s National Wholesale division reached 7.0 million accesses for voice services and about 1.9 million for broadband services at the end of March 2011.

On the whole, revenues from National Wholesale services show an increase of 40 million euros (+5.3%) compared to the first quarter of 2010. The change in Wholesale revenues is related to the expansion of the customer base of the alternative operators served through the various types of accesses.

Mobile Telecommunications Revenues

The key operating indicators show a structural improvement and confirm the repositioning strategy adopted for the mobile business: the customer base grew by 20,000 lines over the end of 2010 to 31.0 million with a churn rate in the quarter equal to 5.5%, down 6.4% compared to the first quarter of 2010. Mobile telecommunications revenues total 1,679 million euros in the first quarter of 2011, decreasing 228 million euros (-12.0%) compared to the same period of 2010; revenues from services posted a decline of 11.7% and product revenues a contraction of 22.4%. Improvements in sales performance are expected in the second part of 2011 thanks to the consolidation of the positive trends in the operating indicators indicated above.

The following chart summarizes the trend of the main types of revenues:

Outgoing voice

Outgoing Voice revenues total 876 million euros, decreasing 115 million euros (-11.6%). The comparison with the first quarter of the prior year is penalized by the sales policies begun during 2010 and aimed at bringing the rate plans to more competitive levels. The recovery in terms of volumes is not yet such as to compensate the decrease in prices which are at the same level as the fourth quarter of 2010.

Incoming Voice

Incoming Voice revenues amount to 283 million euros, decreasing 66 million euros (-18.9%) compared to the first quarter of 2010, principally due to lower termination prices on the mobile network (-39 million euros in the retail area).

Value-Added Services (VAS)

Value-added services (VAS) revenues amount to 475 million euros, decreasing 6.9% compared to the same period of 2010 mainly in interactive VAS (-11.0%). Browsing revenues, in particular, are down 6.9%. VAS revenues account for 29.1% of revenues from services (27.6% in the first quarter of 2010).

Handset/Smartphone Sales

Handset/Smartphone Sales revenues stand at 45 million euros, decreasing 13 million euros (-22.4%) compared to the same period of 2010. The strategy of focusing on smartphones continues, favoring the expansion of the penetration of the broadband services to the customer base.

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EBITDA

EBITDA of the Domestic Business Unit is 2,236 million euros in the first quarter of 2011, decreasing 215 million euros compared to the same period of 2010 (-8.8%). The EBITDA margin is 48.7%, down 0.6 percentage points from the same period of 2010. The contraction in revenues is partly compensated by selective control over commercial expenses and rigorous fixed-cost cutting measures.

Organic EBITDA is 2,273 million euros (-187 million euros, -7.6% compared to the first quarter of 2010); the organic EBITDA margin is 49.5%, unchanged compared to the same period of 2010.

In detail:

With regard to changes in costs, the following is noted:

In particular:

•

acquisition of goods and services decreased 98 million euros (-5.7%) compared to the same period of 2010. Such contraction is mainly due to a reduction in the amounts to be paid to other operators, owing to both the effect of the development of the “Community TIM” rate plans and the reduction in the voice call termination rates on the network of other operators from fixed and mobile networks, offset in part by higher commercial costs;

•

employee benefits expenses fell 55 million euros (-6.6%) compared to the first quarter of 2010. The decrease is mostly due to the reduction in the average headcount of the salaried workforce (-4,208 compared to the first quarter of 2010, of whom -1,507 persons are under “solidarity contracts” in Telecom Italia S.p.A. and Shared Service Center S.r.l.);

•

other operating expenses rose 37 million euros compared to the same period of 2010, mostly on account of provision charges and expenses connected with credit management.

EBIT

EBIT is 1,222 million euros, decreasing 144 million euros (-10.5%) compared to the first quarter of 2010; the EBIT margin is 26.6% (27.5% in the corresponding period of 2010). EBIT, apart from the factors commented under EBITDA, benefits from a decrease in depreciation and amortization charges of 66 million euros, following the reduction in depreciable assets as a result of lower capital expenditures in recent years.

The organic change in EBIT is a negative 117 million euros (-8.5% compared to the first quarter of 2010);  the organic EBIT margin is 27.4% (27.7% in the first quarter of 2010).  Details are as follows: