In 1935, a slightly improved model of the CV-33 was introduced and designated as the CV-35. The primary differences were that the armour was bolted rather than riveted and the replacement of the single 6.5 mm machine gun with tandem mounted 8 mm machine guns. Many older CV-33s were retrofitted to meet the specifications of the CV-35s. In 1938, both vehicles were redesignated as the L3/33 and the L3/35.
In 1938, a further development of the L3 vehicle was created and designated as the L3/38. It does not appear that many of these vehicles were built or saw service. The torsion bar suspension of the L3/38 differed greatly from the suspension of the L3/33 and L3/35. The L3/38 also featured a single 13.2 mm Madsen machine gun.
The official Italian classification of the L3/35 was as a light tank. However, this type of vehicle is classified as a "tankette" by Anglo-American militaries.
With few exceptions (see Variants below), the L3/35 was a lightly armored two-man vehicle typically armed with two tandem mounted 8 mm machine guns. Other than the number and type of machine guns, the differences between the L3/35 and the L3/33 were not many. Both featured riveted and welded construction. The vehicle's commander/gunner sat on the left and the driver sat on the right. The engine was mounted transversely in the rear. A circular radiator was mounted behind the engine. The transmission went to the front to the final drive. The suspension had two three-wheel bogies on leaf spring and a single unsprung wheel on each side. There was a acacia wood rail that the top run of the tracks went on.
Captured L3 tankettes were also used by the Greek Army during the Greco-Italian War (1940-41). After the invasion of Yugoslavia (1941) and Greece (1941), L3 tankettes were also captured by the Yugoslav and Greek resistance forces. From 1941, some L3 tankettes were given to the German puppet government of the Independent State of Croatia (Nezavisna Država Hrvatska, or NDH).
The combat history of the L3s during the interwar period was not good. On at least two occasions during the invasion of Ethiopia, L3s were put out of action by massed infantry attacks. In Spain, L3s were totally out-classed by the tanks provided by the Soviet Union. Luckily for the Hungarians, the L3s were not a factor in their brief war with Slovakia.
On 10 June 1940, when Italy entered World War II, the Royal Army possessed only about one-hundred M11/39 medium tanks in two tank battalions. L3 tankettes still equipped all three Italian armored divisions, they equipped the tank battalions in the motorized divisions, they equipped the light tank squadron group in each "Fast" (Celere) division, and they equipped numerous independent tank battalions.
Though numerous, Italy's tankettes soon proved to be nearly worthless. In many places L3s were used as stationary pillboxes or were just pushed to the sidelines or abandoned as soon as they malfunctioned. Few L3s remained in front line service past the end of 1940.
On 8 August 1937, Major General García Pallasar had received a note from Generalísimo Francisco Franco which expressed the need for a Panzer I armed with a 20 mm gun. Ultimately, the piece chosen was the gun available from Breda. This was due to the simplicity of the design over competitors such as the German Flak 30. Furthermore, the 20 mm Breda was capable of perforating 40 mm of steel at 250 meters, which was more than sufficient to penetrate the frontal armor of the rival T-26 tanks provided by the Soviets. Although originally forty Italian L3/35 tankettes were ordered with the original armament exchanged for the 20 mm Breda Model 35, this order was subsequently cancelled after it was thought that the adaptation of the same gun to the Panzer I would yield better results. Prototypes were ready by September 1937 and an order was placed after successful results. The mounting of the Breda machine gun onto the Panzer I required the original turret to be opened at the top and then extended by a vertical supplement. Four of these tanks were finished at the Armament Factory of Sevilla, but further production was cancelled as it was decided that sufficient numbers of Republican T-26 tanks had been captured to fulfill the Nationalist leadership's request for more lethal tanks. The Breda modification of the Panzer I was not particularly liked by German crews, as the unprotected gap in the turret, designed to allow the tank's commander to aim, was found to be a dangerous weak point.