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Directors' Report on the Group

To our Shareholders,

The consolidated financial statements of the Rai Group closed with a loss of 61.8 million euros and a negative net financial position of 151.5 million euros.
The result for 2009 is worse than that for 2008, largely due to the considerable reduction in advertising income (about 200 million euros) due to the severe situation affecting the economic marketplace.

This situation strongly influenced the purchasing decisions made by companies and imposed a dramatic adjustment of the advertising expenditure budget.
The adaptation of the individual licence fee, which was in line with the historical per-unit licence fee, was unable to contrast this phenomenon, other than only marginally.
We must mention however that there has been an increase in come from licence-fees, due to the increase in the individual licence-fee from 106.00 euros to 107.50 euros, in line with the scheduled rate of inflation, and also to the number of paying subscribers, which has now reached 16 million households.

The annual increase policy of the individual licence-fee was confirmed for 2010, with a rise of 1.5 euros.
The licence fee continues to be the lowest in Europe for public broadcasting companies, with the additional drawback of a level of tax evasion of around 25%.

We must also remember that the imbalance between public resources and the costs sustained by the concession holder for the fulfilment of public-service responsibilities for 2008 amounts to almost 550 million euros, falling to 335 million euros after the allocation of the share of advertising revenue from the programming of the Public Service. These figures are recorded in the latest separate accounts.

The Group also pursued an important cost correction manoeuvre, implementing rationalisation and improvement actions, also relating to personnel costs, which made it possible to limit the effects linked to the advertising market crisis.

In a macro economic context which continues to be week and influenced by the recession, all areas of the advertising market recorded a decline estimated at about 13% (Nielsen figures), much higher than the total for 2008 (-3%). Television advertising in particular suffered an overall effective loss of about 10%. The only media that retained a positive sign were the Internet and, to a lesser extent, satellite broadcasting.

The broadcasting scenario is undergoing extensive development, with a structural change in the competitive arena: the competition is no longer so much between the players present on the same platforms, as between different platforms, carried out by operators with a marked multi-platform vocation. The multiplication of the multimedia offering, considered to be the exclusive prerogative of the generations which have grown up with digital technology, also involved the users of traditional television, which is enjoying an important rethinking and repositioning phase.

Rai has made a conscious choice of DTT as its main platform, around which it is building the public service mission for the future. Its strategy within the new multi-channel digital environment consists in flanking the traditional offering with new specialised channels.
At the end of 2009, the all digital population was about 17 million people, accounting for almost 30% of the whole population.
The switchover to digital will involve five new areas of the country in 2010, the year characterised by the platform��s main development, taking the percentage to 70% of users.

Competition between the terrestrial platform and the other platforms will increase in intensity in 2010, inasmuch as the delicate switchover phases will represent the best way of intercepting ��terrestrial�� users who might be feeling a little disoriented, using aggressive promotional campaigns.
The public service concession holder��s entire offering is also available on the free satellite platform, launched in 2009 by Tivu, a company partly owned by Rai together with other national broadcasters.

Rai has made significant innovations to its free editorial offering of the DTT platform, flanking the simulcast of the three general-interest channels with three specially created channels: Rai Gulp, Rai Sport Piu and, since July 2008, Rai 4 and two satellite channels broadcast via simulcast with national coverage: RaiNews 24 and, more recently, Rai Storia.
These are joined, in the all digital areas only, by four more specialised channels (also former RaiSat): Cinema, Premium, YoYo, Extra, Rai Scuola and an experimental broadcast in HD.

For the construction of the network infrastructure, Rai will implement a significant programme of investments which will absorb resources of around 300 million euros by the end of 2012, with much of this figure being concentrated in 2010, also adding relevant commitments and investments in the area of the content to expand the offering.

The undeniable transformation of the communications system imposes flexibility and a quick capacity for reaction, as well as financial equipment which can adequately support growth strategies.

The Consolidated Broadcasting Law makes express provision, in order to protect the Concession-holder, for a mechanism which protects the company��s economic balance, acknowledging that the public resources owing to Rai must cover the costs sustained by the latter for the pursuit of the public service activities assigned to it.
This law, also referred to in the Service Contract �V the ��operating charter which, on the basis of EU and Italian legislation, established the details of the individual tasks to be performed by the Concession-holder �V has been largely ignored up to now.

If the principle of proportionality between costs and resources had been respected, Rai could have had income for over 1 billion Euros in 2005-2008.
The acknowledgement to Rai of public resources for the amount envisaged, certified by an independent auditor chosen by the Authority for the sector, would have created a better balance in terms of market resources, with benefits being extended to the audiovisual industry as a whole, and would have favoured the focus by the Concession-holder on the pursuit of its mission as a public service broadcaster.

Besides being penalised in this way, Rai has also lost out in terms of public resources due to evasion of payment of the licencefee to an extent unlike any other European country, with about 500 million euros less revenue per annum.
In a context which is increasingly focused on pay TV models and in which the public service broadcaster performs the role of bulwark of a free, diversified and attractive offering for most users, the issue of rebalancing the Concession-holder��s main source of funding seems to be central importance and cannot be delayed.

Rai is flanked in this need by public appreciation which continues to reward its offering, as proven by the first important success in the new dimension of DTT.