EXHIBIT 2.4                                

CONTENTS

2003 ANNUAL REPORT		1

CORPORATE BOARDS

2003 ANNUAL REPORT		2

LETTER OF THE CHAIRMAN

To the Shareholders,

For Telecom Italia, 2003 was a decisive turning point in the building of structures that would be both stronger and more appropriate to meet the ambitions and challenges facing a large group committed to an industrial project abounding with development potential.

What we achieved in 2003 involved radical restructuring and the re-launching of the industrial side of the Group. Over the last two years, we have succeeded in cutting costs by more than euro 2.2 billion, equivalent to 86% of the target set for the end of 2004. Non-strategic operations were sold for euro 10 billion. The values of investments in the corporate portfolio were lowered by more than euro 12 billion, to bring them in line with fair value. Net financial indebtedness was reduced by euro 10 billion. At the same time, more than euro 10 billion was distributed to shareholders between dividends and tender offers. It is therefore legitimate that we should feel proud of having fulfilled the commitments that we made to the market when we took over the responsibility of managing the Group.

One of these commitments was to streamline the corporate structure. In fact, integration of Olivetti with Telecom Italia last summer resulted in a company that is more competitive, more flexible in financial terms, and better oriented to create value for its shareholders.

While we were working to rid ourselves of the heavy burden that had accumulated in past years, we did not neglect to build solid, competitive foundations for the future. We continued to invest almost euro 5 billion a year, mainly in the technological innovation of our networks, systems, products and services. We focused our attention even more on marketing and on the structures dedicated to serving our clientele. We never failed to continue to improve the level of professional expertise of our human resources. Since we were well aware that there could be no reliable, long-lasting growth without integrity, a good reputation and trust, we took action to make our administrative decisions even more transparent, to ensure that the interests of all our shareholders would be respected, and to establish a continuous, open dialogue with the financial community. With respect to corporate governance, we want to be at the top not only nationally but also internationally, so that every level of corporate operations will adopt the kind of conduct that will guarantee the utmost honesty and transparency. It is a continuous process: another step forward was the decision, starting with the Board of Directors taking office in 2004, that the board should have a majority of independent directors of the highest possible standing from both a personal and professional standpoint.

In more general terms, we have stepped up our commitment to implement policies of corporate responsibility that aim to satisfy all the bearers of legitimate interest – customers, employees, suppliers, the public at large, future generations – by supporting the principles of the Global Compact, the key benchmark at world level launched in 2000 by the U.N.O. to promote respect for human rights and labor standards and the safeguarding of the environment. By making the Sustainability Program an integral part of the Industrial Plan, we have planned the measures needed to assure the ethical excellence of the whole Group.

The positive economic and financial results of 2003 fit into this general framework. The results exceed the set targets in a way that places the Telecom Italia Group in a prime position within the international telecommunications scenario. The results achieved are even more impressive when we consider that 85% of the results was generated on the Italian market, where deregulation has been so far-reaching and so rigorous and where, as a result, competition in terms of prices and services has been even fiercer than in other European countries.

The main business segments generated growth. For the first time in four years, revenues from

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wireline telephone services increased as a result of effective strategies to promote customer loyalty, the ever-more rapid spread of broadband services, the development of value added services and the introduction of innovative data transmission solutions. In mobile telephone services, Tim continued its commitment to launch new multimedia services and ever more highly differentiated rate plans that are better suited to the various types of customers. Telecom Italia Media achieved a positive gross operating profit in the Internet segment, where Virgilio confirmed its role as the main Italian portal. Meanwhile, in the Television segment, the re-launching program enabled La7 to consolidate its broadcasting image, with a share of the viewing audience that was consistently above 2%, with a high level of concentration in the upper segments of the public. Despite the persisting contraction of the Italian demand for information technology solutions and increasing pressure from the competition, the Information Technology Market business unit improved its levels of profitability. With its highly competitive technological platform, Olivetti Tecnost is also emerging from a radical restructuring program and the redefinition of its industrial mission and is already producing positive operating results.

International operations are proving to be an ever-more important factor with regard to growth. We are in the process of leveraging the expertise and the most innovative solutions developed on the Italian market in the international sphere. In mobile phone services, in Brazil, services using GSM technology were successfully launched nationwide. In Turkey and Greece, we have consolidated our respective positions and are ready to benefit from the growth expected on those two markets. Thanks to investments made in France and in Germany, Telecom Italia Wireline is the first European wireline telephone services operator to expand into the market of broadband services outside its national boundaries.

It is because of these foundations that we can face the future with optimism.

In front of us lies an exciting period of innovation which is likely to radically transform the telecommunications industry. New value added services, new terminals and, more particularly, the convergence of telephone services and the Internet, made possible by broadband technology, will open up important new opportunities for growth.

When large quantities of data can be transported at high speed, it will become possible to bring movies, music, games and other innovative services into the homes of millions of customers. Thanks to digital land-based television, the TV will become interactive. Companies will be able to conduct their business on-line, thus reducing costs and improving their level of competitiveness. The true development of the “Internet Age” is finally taking place.

The Wi-Fi platform and the technologies of the third generation, EDGE (the latest development of the GSM platform) and UMTS, will ensure that broadband technology and services can be used everywhere.

Finally, a completely new range of fixed and cordless phones is about to enter our homes offering a whole range of new possibilities: “Aladino” was just the first step. We are now close to the launch of video-phones which use normal phone lines to transmit high-quality images and sounds.

Telecom Italia wishes to fully seize the opportunities for growth in the most promising areas of the international telecommunications market. A considerable proportion of our investments is being spent for this purpose, two-thirds being concentrated on innovation.

Investments, I wish to remind you, that will enable the companies which collaborate with the Group and with the TI Lab research facilities to increase their level of competitiveness and their chances of expanding onto foreign markets in one of the few hi-tech sectors in which Italy still plays a primary role on a worldwide scale.

But we can still make an even greater contribution to our country. In fact, the growth of telecommunications makes it possible not only to offer new services to the public at large, but also to give a considerable boost to the productivity of the entire economic system. This is being achieved amid declining telephone charges and, therefore, without fueling inflation. Countries which invested in this sector before us, and to a greater extent, have recorded a higher growth in GDP and a strengthening of their national industry and services. It is, therefore, extremely important that Italy should succeed in enhancing the enormous potential of the sector to its advantage.

We shall do everything we can to take up this challenge. We have the financial resources. We have the technologies needed. More particularly, as the results show, we have the human resources to sustain such a challenge. The commitment of our employees has already shown that, at every level, they are well aware of the responsibility and the privilege of participating in the growth of a group which is, and intends to remain, an asset of strategic importance in terms of the competitiveness of all the countries in which it operates. Especially Italy.

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HIGHLIGHTS

YEAR 2003

Improvement in economic results

Revenues: euro 30,850 million, –1.8% compared to 2002; excluding the foreign exchange effect and the change in the scope of consolidation, underlying growth was equal to 5.3%.

Gross operating profit: euro 14,280 million, +1.9% compared to 2002; underlying growth was equal to 5.6%.

Operating income pre-amortization of differences on consolidation: euro 8,619 million, +5.1% compared to 2002.

Operating income: euro 6,789 million, +12.1% compared to 2002; underlying growth was 15.6%.

Net income - Parent Company interest pre-amortization of differences on consolidation: euro 2,983 million (euro 1,159 million in 2002, attributing to the Parent Company, the share of the minority interest in the result of the merged company, acquired following the merger).

Net income - Parent Company interest: euro 1,192 million (net loss of euro 925 million in 2002, attributing, to the Parent Company, the minority interest in the result of the merged company, acquired following the merger).

Indebtedness

Net financial indebtedness: euro 33,346 million, a decrease of euro 53 million compared to December 31, 2002 notwithstanding the early exercise of the JP Morgan put option on Seat Pagine Gialle shares, recorded in the memorandum accounts in the 2002 financial statements for euro 2,417 million. Including proforma the expenses for the JP Morgan put option in the 2002 indebtedness situation, net financial indebtedness would be reduced by 2,470 million compared to December 31, 2002.

Compared to September 30, 2003, indebtedness would be euro 907 million lower.

Olivetti / Telecom Italia merger

The Olivetti and Telecom Italia merger was finalized on August 4. This is fully described in the section “Shareholder information”.

It should be pointed out that, following the merger, the consolidated data for the year 2003 is nevertheless comparable to the data for the previous periods under comparison since the merged company was already consolidated on a line-by-line basis.

Seat Pagine Gialle: spin-off and sale of Nuova Seat Pagine Gialle

On August 1, 2003, the proportional partial spin-off of Seat Pagine Gialle S.p.A. (the “Spun-off Company”) to a newly formed company (the “Nuova SEAT”) was finalized This event is fully described in the section “Shareholder information”.

On August 8, 2003, the 61.5% stake in Nuova Seat Pagine Gialle was sold to the consortium composed of BC Partners, CVC Capital Partners, Permira and Investitori Associati. The sales price was euro 3,033 million. Taking into account the deconsolidation of the debt of the Nuova Seat Pagine Gialle group at the date of the finalization of the sale (euro 648 million), the transaction made it possible for the Telecom Italia Group to reduce its consolidated net indebtedness by an amount of euro 3,681 million.

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TLC license fee

After the ruling handed down by the Court of Justice of the European Community stating that the TLC license fee established by Italian Law 448/1998, art. 20, is contrary to Community law, the Group no longer recorded the license fee for 2003 and the financial charges accrued in 2003 on the amount payable for the license fees recorded in previous years. Moreover, an entry was made to credit the statement of income for non-existent liabilities (payables and reserves for risks and charges) of euro 1,465 million, of which euro 922 million refers to the Parent Company, for the years 2000, 2001 and 2002. Such amount, net of the tax effect of 562 million (euro 353 million refers to the Parent Company), contributed to the improvement in the Parent Company interest and the minority interest in the net income for the year of euro 903 million.

Moreover, in anticipation of the final ruling by the administrative judge and the subsequent executive order, income has not been credited for the TLC license fee of euro 546 million (euro 362 million by Telecom Italia and euro 184 million by TIM) paid by the respective companies for the year 1999.

* * *

For purposes of the organization of the work of the Shareholders’ Meetings, especially with reference to the preparation of the documentation for preliminary filings as set forth in art. 2429 of the Italian Civil Code, the Shareholders’ Meeting to examine the annual financial statements will not be called by the end of April.

This will avoid convening the Shareholders’ Meeting – among other things – during a period when there is a particularly high concentration of meetings by listed companies.

However, the postponement is minimal, given that the Annual General Shareholders’ Meeting is called for May 5 and 6, 2004.

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SELECTED ECONOMIC AND FINANCIAL DATA TELECOM ITALIA GROUP

Beginning from August 2003, Nuova Seat Pagine Gialle was deconsolidated, since it was sold, and was therefore included in the scope of consolidation of the Telecom Italia Group only for the first seven months of 2003.

In 2002, it should be pointed out, the 9Telecom group, the Telespazio group, the company Sogei S.p.A. and other minor companies were deconsolidated.

The effects of the changes in the scope of consolidation are shown in the section on the economic and financial performance of the Telecom Italia Group in the consolidated results of operations, financial condition and cash flows for purposes of a uniform comparison.

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KEY DATA - TELECOM ITALIA GROUP BUSINESS UNITS

Telecom Italia Group operated with the following Business Unit structure:

2003 ANNUAL REPORT		8

Major economic and operating performance indicators for 2003 by Business Unit

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OPERATING HIGHLIGHTS TELECOM ITALIA GROUP

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SHAREHOLDER INFORMATION

Telecom italia S.p.A. share capital at December 31, 2003

Shareholders

Composition of Telecom Italia S.p.A. shareholders according to the

Shareholders Book at December 31, 2003 (ordinary shares)

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PERFORMANCE OF THE STOCKS OF THE MAJOR COMPANIES OF THE TELECOM ITALIA GROUP

2003 ANNUAL REPORT		12

OLIVETTI S.P.A./TELECOM ITALIA S.P.A. MERGER

On April 15, 2003, the Boards of Directors of Olivetti (“Merging Company”) and Telecom Italia (“Merged Company”) approved the Plan of Merger (“Merger”) for the incorporation of Telecom Italia into Olivetti, previously announced on March 12, 2003. The plan established the following exchange ratio:

The Plan of Merger was approved on May 24, 2003 by the Extraordinary Shareholders’ Meeting of the Merged Company and on May 26, 2003 by the Extraordinary Shareholders’ Meeting of Olivetti.

The Merger is part of the strategic plan pursued by the Olivetti-Telecom Italia Group with the aim of focusing on core businesses, optimizing the corporate structure and reducing debt. The Merger particularly falls under the reorganization plan aimed at creating value, begun in July 2001, and achieved through industrial and financial restructuring, notwithstanding the slump in the stock markets and telecommunications sector.

Under the complex plan to merge Olivetti /Telecom Italia, a tender offer was envisaged on the part of Olivetti for the ordinary and savings shares of Telecom Italia. The tender offer, besides forming part of an investment rationale, also had the purpose of ensuring the shareholders of the Merged Company that did not wish to retain their investment in Olivetti after the Merger a means of cashing-out, at least in part, such investment similarly to what occurred for the Olivetti shareholders thanks to the withdrawal rights to which they were entitled by law.

For purposes of the Merger, the balance sheets of the draft financial statements of Olivetti and the Merged Company as at December 31, 2002 were used, pursuant to art. 2501-ter of the Italian Civil Code.

On August 4, 2003 (“Date the Merger became effective”), the Merging Company adopted by-laws that generally corresponded to those of the Merged Company and took the name of “Telecom Italia S.p.A.” (“Telecom Italia”). From a juridical standpoint, the Merger led the Merging Company to become the universal successor to the Merged Company, the result being that the Merging Company assumed all the assets and liabilities, the rights and obligations of the Merged Company, and thus, as an example and not completely inclusive, all the relative fixed assets and intangible assets, receivables and payables due or becoming due and, more generally, the entire patrimony of the Merged Company without any exclusions or limitations. In particular, the Merging Company succeeded to the Merged Company in all the licenses and administrative authorizations granted to the latter, according to the manner established by existing laws.

The aforementioned exchange ratio was met by redistributing the capital of the Merging Company resulting at the time the Merger was completed, after changing the par value of the ordinary and savings shares of the Merging Company to euro 0.55 (equal to the par value of the shares of the Merged Company), in lieu of the original par value of euro 1. Consequently, starting on August 4, 2003, the shares already issued by the Merging Company and Merged Company began to be withdrawn and substituted with the shares of the Company resulting from the merger according to the following ratio:

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In accordance with the combined provisions of articles 2504-bis, paragraph 3, and 2501-bis, paragraph 1, point 6, of the Italian Civil Code, the transactions of the Merged Company were accounted for by Olivetti beginning January 1, 2003, the date also considered for tax purposes, pursuant to art. 123, paragraph 7, of D.P.R. No. 917 dated December 22, 1986.

The admission and listing of the new ordinary and savings shares of the Company resulting from the merger on the New York Stock Exchange in the form of American Depositary Shares (“ADS”) was requested and obtained on August 4, 2003.

As a result of the change in the corporate business purpose, the Olivetti shareholders that were absent or dissented to the resolution passed on the approval of the Merger had the right to withdraw from the company as set forth in art. 2437 of the Italian Civil Code. By the deadline date to exercise the withdrawal right, requests had been presented for 10,958,057 Olivetti shares which, at the conclusion of the Merger, were cashed out for a total amount of euro 10,940,524.

In order to meet the needs deriving from the cash-out of the withdrawals, and have an amount remaining for the tender offer, Olivetti could draw from lines of credit made available by a pool of banks for an amount equal to euro 9,000 million. 512,280,322 ordinary shares, at a price of euro 8.010 each, and 242,936,252 savings shares, at a price of euro 4.820 each, of the Merged Company were tendered to the offer for a total equivalent amount of euro 5,274 million paid by the partial funding from the above lines of credit.

Share capital and number of shares of Telecom Italia

Following the above transactions, the share capital of the Company resulting from the merger (Telecom Italia) was equal to euro 8,845,640,559.40 divided into 10,287,061,839 ordinary shares and 5,795,921,069 savings shares, all for a par value of euro 0.55 each.

Accounting treatment of the Merger

The Merger was accounted for at the historical values taken from the financial statements of the companies that were merged. The relative merger differences (cancellation deficit and exchange surplus) were accounted for as follows:

Telecom Italia S.p.A.

This deficit, euro 22,980 million, in accordance with accounting principles, was allocated to the carrying value of TIM shares recorded in long-term investments.

Telecom Italia Group

On consolidation, the portion of the deficit arising from the outcome of the tender offer and the consolidation – preliminary to the Merger – of the shares of the Merged Company held by the Merging Company and recorded in current assets, equal to a total of euro 4,801 million (net of amortization of euro 240 million) was recorded in the caption Differences on consolidation since it represented the goodwill paid for the acquisition of an additional stake in a company already consolidated. This difference is being amortized over 20 years.

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Telecom Italia S.p.A.

The exchange surplus was recorded in a specific caption of the Shareholders’ equity of Telecom Italia for euro 4,634 million. This amount was partly used by reclassifying euro 1,835 million to the legal reserve (including the Reserve for inflation adjustments and the Reserve under Law No. 342 11/21/2000 - art. 14) and euro 610 million to other reserves in suspension of taxes and the Reserve under Law No. 488/1992 with statutory restrictions.

Telecom Italia Group

On consolidation, the Merger gave rise to an increase in Telecom Italia’s interest in shareholders’ equity of euro 3,424 million compared to a reduction, of the same amount, in the Minority interest.

PROPORTIONAL PARTIAL SPIN-OFF AND SALE OF SEAT PAGINE GIALLE S.P.A.

On April 1, 2003, the Board of Directors of Seat Pagine Gialle S.p.A. approved the plan for the proportional partial spin-off of Seat Pagine Gialle S.p.A. (“Spun-off Company”) to a newly formed company (“Nuova SEAT”) based upon the balance sheet of the spun-off company at December 31, 2002. The Extraordinary Shareholders’ Meeting of Seat Pagine Gialle S.p.A. approved the spin-off plan on May 9, 2003. On July 25, 2003, Nuova SEAT received the corporate complex principally composed of the following business segments: Directories (consisting of the Italian operations in telephone publishing and the stakes held in TDL Infomedia and Thomson), Directory Assistance (89.24.24 Pronto Pagine Gialle and Telegate) and Business Information (Consodata group). The spun-off company took the new name of Telecom Italia Media whereas the newly formed beneficiary company took the name of “Seat Pagine Gialle S.p.A.”.

The spin-off became effective on August 1, 2003 The shareholders of the Spun-off Company were assigned, for every 40 ordinary (savings) shares held:

On August 8, 2003, the 61.5% stake in Nuova Seat Pagine Gialle was sold to the consortium composed of BC Partners, CVC Capital Partners, Permira and Investitori Associati. The sales price was euro 3,033 million. Taking into account the deconsolidation of the debt of the Nuova Seat Pagine Gialle group at the date of the finalization of the sale (euro 648 million), the transaction made it possible for the Telecom Italia Group to reduce its consolidated net indebtedness by an amount of euro 3,681 million.

Furthermore, under the agreements for the sale of the investment in Nuova Seat Pagine Gialle, Telecom Italia has pledged to provide Telecom Italia Media (the spun-off company) with the resources necessary to be able to satisfy its outstanding debts and commitments with regularity as of the date the spin-off became effective so that Nuova SEAT could avert any joint and several responsibility, as per ex art. 2504-decies of the Italian Civil Code.

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FINANCIAL INDICATORS ^(°)

RATINGS AT DECEMBER 31, 2003

When Telecom Italia and Olivetti merged, the major agencies announced their ratings of the new company.

On July 31, 2003, S&P gave a BBB+ rating, with a stable outlook, to the company resulting from the merger. This was the rating previously attributed to Telecom Italia. On that occasion, S&P stressed how, in spite of the temporary increment in the total debt due to the tender offer, the merger between Olivetti and Telecom Italia brought a considerable improvement to the debt structure of the Group. On November 26, 2003, S&P raised the outlook to positive, thus reflecting expectations of a generation of strong cash flows, a solid operating performance and a continuous focus on the part of Telecom Italia to reduce its debt.

On August 5, 2003, Fitch also gave the new company the A- rating given to Telecom Italia, with a stable outlook, commenting on the robustness of the new financial structure of the Group and the established capacity of management to reduce debt.

Lastly, on August 12, 2003, Moody’s assigned the new company the Baa2 rating previously attributed to Olivetti, with a stable outlook.

In its analysis, Moody’s took into account both the higher debt as a result of the merger and the debt situation at Olimpia, the majority shareholder of Telecom Italia.

Telecom Italia immediately expressed its opinion on Moody’s rating in a press release in which it stated that the rating agency does not sufficiently take into account the results achieved by Telecom Italia’s management in reducing the net financial debt, and that a unitary consideration of Olimpia’s and Telecom Italia’s debt situation is not justified.

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MACRO-ORGANIZATION CHART TELECOM ITALIA GROUP

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Staring in January 2004, a review was conducted of the Committee organization of the Group which represents the principal tools for the operational integration of the Business Units/Corporate Functions.

The Committees are as follows:

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INTERNATIONAL PRESENCE OF TELECOM ITALIA GROUP AT DECEMBER 31, 2003

MAJOR SUBSIDIARIES

		ITALY   WIRELINE - Atesia S.p.A. * - Path.Net S.p.A. * - Loquendo S.p.A. * MOBILE - TIM S.p.A. * INTERNET AND MEDIA - Telecom Italia Media * - Buffetti Group * - Holding Media e Comunicazione Group * - Matrix S.p.A. * IT MARKET - Finsiel Group * - Webegg Group * OLIVETTI TECNOST - Olivetti Tecnost S.p.A - Olivetti I_Jet S.p.A. IT GROUP - IT Telecom S.p.A.
EUROPE   WIRELINE - Telecom Italia Sparkle Group * - Telecom Italia Deutschland GmbH - HanseNet Telekommunikation GmbH * - BBNed (Holland) INTERNATIONAL AFFAIRS - Telecom Italia International (Holland) OTHER ACTIVITIES - Telecom Italia Finance (Luxembourg) - Telecom Italia Capital (Luxembourg)
		MEDITERRANEAN BASIN   WIRELINE - Mediterranean Nautilus Group (Mediterranean Basin) * - Med-1 Group (Mediterranean Basin) * MOBILE - Stet Hellas Telecommunication (Greece) *
		SOUTH AMERICA   WIRELINE - Latin American Nautilus Group (Latin America) * MOBILE - Tele Celular Sul Participaçoes Group (Brazil) * - Tele Nordeste Celular Participaçoes Group (Brazil)* - Maxitel S.A. (Brazil) * - TIM Celular S.A (Brazil)* - Starcel Ltda (Brazil) - TIM Perù S.A.C. (Peru) * - Corporacion Digitel C.A. (Venezuela) * - Blah ! (former TimNet Com S.A.) (Brazil) LATIN AMERICA OPERATIONS - Entel Bolivia Group (Bolivia) * - Entel Chile Group (Chile) * - Telecom Italia America Latina
*  Comments on the main economic and financial performance of these companies are provided in the report.

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ECONOMIC AND FINANCIAL PERFORMANCE

TELECOM ITALIA GROUP

RESULTS OF OPERATIONS

The consolidated net income of the Group for 2003 was euro 1,192 million (euro 2,428 million before minority interest). In 2002, the consolidated net result of the Group was a loss of euro 773 million (loss of euro 306 million before minority interest).

The consolidated net result of the Group in 2002 would have been a loss of euro 925 million, attributing to the Parent Company the minority interest in the result of the merged company, acquired following the merger of Telecom Italia into Olivetti.

The improvement in the consolidated net result of the Group (+euro 1,965 million) was due to the following factors:

net of

Sales and service revenues in 2003 amounted to euro 30,850 million, with a reduction of 1.8% compared to euro 31,408 million in 2002. Excluding the negative foreign exchange effect (euro 728 million, of which euro 641 million refers to the South American telecommunications companies) and the change in the scope of consolidation (euro 1,375 million, of which euro 797 million relates to the Internet and Media Business Unit), underlying growth was 5.3% (euro 1,545 million). A particularly incisive effect on the change in the scope of consolidation was brought about by the sale, effective August 1, 2003, of Nuova Seat Pagine Gialle and the deconsolidation, in the second part of 2002, of the 9Telecom group, Sogei and the Telespazio group.

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Contributing to organic growth in particular were:

The breakdown of sales and service revenues by customer geographic location is the following:

Gross operating profit, equal to euro 14,280 million, grew compared to 2002 by euro 265 million (+1.9%). As a percentage of revenues, the gross operating profit was 46.3% (44.6% in 2002). Excluding the foreign exchange effect (– euro 146 million ) and the effect due to the change in the scope of consolidation (– euro 344 million), underlying growth was 5.6% (+euro 755 million). Such growth takes into account the negative effect of the start-up of GSM services in Brazil (euro 131 million) and the positive impact of the cancellation of the government TLC license fee (euro 355 million in 2002).

In greater detail, gross operating profit was impacted by:

Employees at December 31, 2003 numbered 93,187 (106,620 at December 31, 2002). A breakdown is presented below:

Compared to December 31, 2002, the reduction of 13,433 employees was due to operating turnover – 4,604 (– 4,134 in Italy and – 470 outside Italy) and the change in the scope of consolidation – 8,829. The latter decrease was principally due to the sale of companies in the Internet and Media Business Unit (– 5,642, of which – 5,402 regards the sale of Nuova Seat Pagine Gialle), the sale of Tess (– 404), Olivetti Tecnost, in particular due to the sale of the Olivetti Tecnost de Mexico business segment (– 1,266), the spin-offs of the Logistics business

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by the Wireline division (– 337), the Facility Management business by Olivetti Multiservices (– 208), the Desktop Management activity (– 582 in the IT Group and – 22 in IT Market) and Corporate Solutions (– 380 in IT Group and – 21 in Olivetti Tecnost), the sale of the Netikos group (– 207) and other minor companies and activities (– 130) and the addition of Hansenet (+381), Tm News (+55) and Top Services (+21).

Operating income pre-amortization of differences on consolidation, equal to euro 8,619 million, increased, compared to 2002, by euro 419 million (+5.1%) and represented 27.9% of revenues in 2003, increasing from 26.1% in 2002.

Operating income, equal to euro 6,789 million, increased by euro 731 million (+12.1%) compared to 2002. As a percentage of revenues, operating income rose from 19.3% in 2002 to 22% in 2003. Excluding the foreign exchange effect and the impact of the change in the scope of consolidation, the growth was 15.6%. This growth includes the negative effect of the GSM start-up in Brazil (euro 273 million) and the positive impact of the cancellation of the TLC license fee (euro 395 million in 2002).

The increase in the amount itself reflects a higher gross operating profit and reductions in depreciation and amortization charges, other valuation adjustments and provisions to reserves for risks and charges.

The following factors specifically had a decisive impact on the operating result:

The breakdown is as follows:

The percentage of the amortization of other intangibles and the depreciation of fixed assets to revenues was 16.0% (16.2% in 2002).

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Net financial income (expenses) showed an expense balance of euro 2,192 million, an improvement of euro 373 million compared to 2002. Details are as follows:

The reduction in debt exposure and interest rates led to a considerable decrease in net financial expenses, despite the expenses connected with the credit lines granted to the merging company Olivetti for the share withdrawals and the tender offer (euro 98 million) and the increase in expenses (euro 84 million) relating to the JP Morgan put option on Seat Pagine Gialle shares. This last increase takes into account the expenses (euro 161 million) to exercise the put at an earlier date, in August 2003.

Compared to the corresponding period of 2002, the exchange rate effect of the companies in South America exerted a positive impact.

The improvement in value adjustments to financial assets was due to the writedown in 2002 of the bonds and the Telecom Italia ordinary and savings shares held by the merging company.

Net investment income (expenses) showed an expense balance of euro 72 million (an expense balance of euro 513 million in 2002), with an improvement of euro 441 million compared to 2002. Details are as follows:

Net revaluations (writedowns) of equity investments in 2003, in particular, included the Group’s share of equity in the losses of Sky Italia (former Stream) for euro 96 million.

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The reduction compared to 2002 principally referred to Sky Italia (former Stream) (euro 150 million), Aria IS Tim (euro 171 million) and TIM shares recorded in current assets (euro 79 million).

Net extraordinary income (expenses) showed an expense balance of euro 1,083 million (an expense balance of euro 5,496 million in 2002), with an improvement of euro 4,413 million. Details are as follows:

Extraordinary income of euro 1,851 million comprised:

Extraordinary expenses of euro 2,934 million comprised:

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Income taxes in 2003 amounted to euro 1,014 million (in 2002, there was a credit balance benefiting the result for the year of euro 2,210 million mainly due to the writedowns of investments and the positive tax effect deriving from the BLU and Tim merger). The increase in the income tax charge is due to the improvement in the result and, consequently, the taxable amount, despite posting of euro 1,266 million to deferred tax assets which became recoverable thanks to the merger of Olivetti and Telecom Italia.

FINANCIAL CONDITION

Intangibles, fixed assets and long-term investments, amounting to euro 54,573 million, decreased by euro 3,288 million compared to the end of 2002.

In particular:

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Investments totaled euro 11,454 million (euro 7,024 million in 2002). Details are as follows:

Differences on consolidation essentially referred to the difference (euro 4,551 million) between the payment for the tender offer on the shares of the merged company (euro 5,274 million) and the share of net equity acquired (euro 723 million) and the exercise of the JP Morgan put option on Seat Pagine Gialle shares (euro 428 million).

Financial investments for 2003 were in reference to the share of the net equity of the merged company acquired through the tender offer (euro 723 million), the purchase of the equity stake in LI.SIT. (euro 54 million), increases in the share capital of Sky Italia (euro 332 million ), the purchase of treasury stock by the merged company, cancelled at the time of the merger (euro 47 million), the purchase of the call option on the share capital of the Argentine company Sofora (euro 49 million) and other financial investments (euro 259 million).

Working capital showed a negative balance of euro 638 million (a negative balance of euro 3,838 million at December 31, 2002). The reduction of euro 3,200 million was caused by the early exercise of the JP Morgan put option on Seat Pagine Gialle shares (euro 1,942 million), the partial utilization (euro 279 million) of the reserve for risks for the guarantees provided on behalf of Aria-IsTim, the writeoff of the liabilities and the reserves for the cancellation of the TLC license fees carried at December 31, 2002 (euro 1,465 million) and the increase in deferred tax assets (euro 896 million excluding the effect of the deconsolidation of Seat Pagine Gialle).

These effects were partly compensated by the change in the scope of consolidation following the sale of Seat Pagine Gialle (euro 424 million) and the increase in net payables to the tax authorities (euro 937 million excluding the effect of the deconsolidation of Seat Pagine Gialle).

Shareholders’ equity amounted to euro 20,589 million (euro 20,624 million at the end of 2002), of which the Parent Company interest was euro 16,092 million (euro 11,640 million at December 31, 2002) and the minority interest was euro 4,497 million (euro 8,984 million at December 31, 2002).

Compared to December 31, 2002, the significant increase in the Parent Company’s interest and the reduction in the minority interest were due to the effects of the merger for euro 3,424 million.

2003 ANNUAL REPORT		26

The changes in shareholders’ equity are the following: