1 Summary data and general information >> 2 Corporate boards 20 Report on operations 3 LETTER Of THE chairman 201 Consolidated financial statements 5highlights 267 financial statements Telecom Italia S.p.A. 7 Selected eco. and financial data T.I. Group 342 other information 8 Key data Telecom Italia Group B.U. 10 Operating highlights Telecom Italia Group 11 Shareholder information 17 Macro-organization chart of T.I. Group 19 International presence { CONTENTS Summary data Corporate boards 2 and general Letter of the Chairman 3 information Highlights 5 Selected economic and financial data - Telecom Italia Group 7 Key data - Telecom Italia Group Business Units 8 Operating highlights - Telecom Italia Group 10 Shareholder information 11 Macro-organization chart - Telecom Italia Group 17 International presence 19 Report Economic and financial performance - Telecom Italia Group 20 on operations Economic and financial performance - Telecom Italia S.p.A. 39 Subsequent events 50 Business outlook 52 Related party transactions 53 Transition to IAS/IFRS 55 Economic and financial performance – Telecom Italia Group Business Units 57 Wireline 57 Mobile 68 South America 76 Internet and Media 81 Information Technology Market 87 Information Technology Group 93 Olivetti Tecnost 97 Other activities 101 Disputes, litigations and legal proceedings pending 111 Sustainability section 124 Context 124 Customers 129 Suppliers 135 Competitors 137 - Regulatory framework 138 - Interbusiness services 141 The State and institutions 143 The Environment 146 The Community 161 - Research & Development 169 Human resources 170 Shareholders 181 - Financial communications 181 - Safeguarding of privacy and data protection 181 Corporate governance 183 Equity investments held by Directors, Statutory Auditors and General Managers 197 Telecom Italia Group Consolidated balance sheets 202 Consolidated Consolidated statements of income 204 financial statements Notes to the consolidated financial statements 206 Independent Auditors’ report 265 Telecom Italia S.p.A. Balance sheets 268 Financial statements Statements of income 270 Notes to the financial statements 272 Independent Auditors’ report 331 Board of Statutory Auditors’ report 333 Other information Resolutions 342 Useful information 364 2003 ANNUAL REPORT 1 1 Summary data and general information >> 2 Corporate boards 20 Report on operations 3 LETTER Of THE chairman 201 Consolidated financial statements 5highlights 267 financial statements Telecom Italia S.p.A. 7 Selected eco. and financial data T.I. Group 342 other information 8 Key data Telecom Italia Group B.U. 10 Operating highlights Telecom Italia Group 11 Shareholder information 17 Macro-organization chart of T.I. Group 19 International presence { CORPORATE BOARDS Board of Directors (1) Chairman (2) Marco Tronchetti Provera (E) Ĩ (1) Appointed by the Olivetti Shareholders’ Deputy Chairman (2) Gilberto Benetton Meeting held on May 26, 2003. Directors (2) Carlo Orazio Buora (E) Ĩ (2) Appointed by the Board of Directors’ Riccardo Ruggiero (E) Meeting held on August 4, 2003. Directors Umberto Colombo (I) Ĩ (E) Executive director. Giovanni Consorte Ĩ (I) Independent Francesco Denozza (I) director. Luigi Fausti (I) Guido Ferrarini (I) Natalino Irti (I) Gianni Mion Pietro Modiano Massimo Moratti Carlo Alessandro Puri Negri Pier Francesco Saviotti Secretary to the Board (2) Francesco Chiappetta Remuneration Chairman Luigi Fausti Committee Members Umberto Colombo Pier Francesco Saviotti Committee for Chairman Guido Ferrarini Internal Control and Corporate Governance Members Luigi Fausti Natalino Irti General Managers (2) Riccardo Ruggiero Giuseppe Sala Board of Statutory Chairman Ferdinando Superti Furga (1) Auditors Acting auditors Rosalba Casiraghi Paolo Golia Salvatore Spiniello Gianfranco Zanda Alternate auditors Enrico Bignami Enrico Laghi Independent auditors (3) Reconta Ernst & Young S.p.A. Ĩ (3) Appointment conferred by the Olivetti Shareholders’ Meeting held on July 4, 2000. 2003 ANNUAL REPORT 2 1 Summary data and general information >> 2 Corporate boards 20 Report on operations 3 LETTER Of THE chairman 201 Consolidated financial statements 5highlights 267 financial statements Telecom Italia S.p.A. 7 Selected eco. and financial data T.I. Group 342 other information 8 Key data Telecom Italia Group B.U. 10 Operating highlights Telecom Italia Group 11 Shareholder information 17 Macro-organization chart of T.I. Group 19 International presence { LETTER OF THE CHAIRMAN To the Shareholders, good reputation and trust, we took action to make our administrative decisions even more For Telecom Italia, 2003 was a decisive turning transparent, to ensure that the interests of all our point in the building of structures that would be shareholders would be respected, and to establish both stronger and more appropriate to meet the a continuous, open dialogue with the financial ambitions and challenges facing a large group community. With respect to corporate governance, committed to an industrial project abounding we want to be at the top not only nationally but with development potential. also internationally, so that every level of corporate What we achieved in 2003 involved radical operations will adopt the kind of conduct that will restructuring and the re-launching of the industrial guarantee the utmost honesty and transparency. It side of the Group. Over the last two years, we have is a continuous process: another step forward was succeeded in cutting costs by more than euro 2.2 the decision, starting with the Board of Directors billion, equivalent to 86% of the target set for the taking office in 2004, that the board should have a end of 2004. Non-strategic operations were sold majority of independent directors of the highest for euro 10 billion. The values of investments in possible standing from both a personal and the corporate portfolio were lowered by more than professional standpoint. euro 12 billion, to bring them in line with fair In more general terms, we have stepped up our value. Net financial indebtedness was reduced by commitment to implement policies of corporate euro 10 billion. At the same time, more than euro responsibility that aim to satisfy all the bearers of 10 billion was distributed to shareholders between legitimate interest – customers, employees, dividends and tender offers. It is therefore suppliers, the public at large, future generations – legitimate that we should feel proud of having by supporting the principles of the Global fulfilled the commitments that we made to the Compact, the key benchmark at world level market when we took over the responsibility of launched in 2000 by the U.N.O. to promote managing the Group. respect for human rights and labor standards and One of these commitments was to streamline the the safeguarding of the environment. By making corporate structure. In fact, integration of Olivetti the Sustainability Program an integral part of the with Telecom Italia last summer resulted in a Industrial Plan, we have planned the measures company that is more competitive, more flexible needed to assure the ethical excellence of the in financial terms, and better oriented to create whole Group. value for its shareholders. The positive economic and financial results of While we were working to rid ourselves of the 2003 fit into this general framework. The results heavy burden that had accumulated in past years, exceed the set targets in a way that places the we did not neglect to build solid, competitive Telecom Italia Group in a prime position within foundations for the future. We continued to invest the international telecommunications scenario. almost euro 5 billion a year, mainly in the The results achieved are even more impressive technological innovation of our networks, when we consider that 85% of the results was systems, products and services. We focused our generated on the Italian market, where attention even more on marketing and on the deregulation has been so far-reaching and so structures dedicated to serving our clientele. We rigorous and where, as a result, competition in never failed to continue to improve the level of terms of prices and services has been even fiercer professional expertise of our human resources. than in other European countries. Since we were well aware that there could be no The main business segments generated growth. reliable, long-lasting growth without integrity, a For the first time in four years, revenues from 2003 ANNUAL REPORT 3 1 Summary data and general information >> 2 Corporate boards 20 Report on operations 3 LETTER Of THE chairman 201 Consolidated financial statements 5highlights 267 financial statements Telecom Italia S.p.A. 7 Selected eco. and financial data T.I. Group 342 other information 8 Key data Telecom Italia Group B.U. 10 Operating highlights Telecom Italia Group 11 Shareholder information 17 Macro-organization chart of T.I. Group 19 International presence wireline telephone services increased as a result become interactive. Companies will be able to of effective strategies to promote customer conduct their business on-line, thus reducing loyalty, the ever-more rapid spread of broadband costs and improving their level of services, the development of value added services competitiveness. The true development of the and the introduction of innovative data ”Internet Age” is finally taking place. transmission solutions. In mobile telephone The Wi-Fi platform and the technologies of the services, Tim continued its commitment to launch third generation, EDGE (the latest