ANNUAL REPORT Management Discussion and Analysis

Transcription

1 ANNUAL REPORT 2002 Management Discussion and Analysis

2 ANNUAL REPORT 2002 Management Discussion and Analysis

3 Management Discussion and Analysis II III MAIN GROUP ACTIVITIES Aeronautics structural components for regional jets and civil aircraft, military transport aircraft and fighter jets; maintenance and conversion of military and civil aircraft. The Group Space telecommunications and remote monitoring satellites, space infrastructures, multimedia satellite systems, control centres for space systems, special software applications. Helicopters design and production of a complete range of military and civil helicopters. Defence Systems missiles and missile systems, armoured vehicles, land and naval weapon systems, surface and underwater naval systems. Defence Electronics radar, land and naval command and control systems, air and naval traffic control systems, avionics systems and equipment, optoelectronics systems, integrated communication systems and networks for naval, land, avionics and satellite applications. FINMECCANICA IS PRESENT IN EVERY MAJOR INTERNATIONAL AEROSPACE PROGRAMME. THE FINMECCANICA GROUP IS RECOGNISED AS A SIGNIFICANT PLAYER IN SPACE AND IN DEFENCE ELECTRONICS AND DEFENCE SYSTEMS. IT IS ALSO ACTIVE IN TRANSPORTATION SYSTEMS, ENERGY AND INFORMATION TECHNOLOGY. FINMECCANICA ALSO HOLDS AN INDIRECT SHARE-HOLDING IN STMICROELECTRONICS, THE WORLD S THIRD LARGEST MICROELECTRONICS COMPANY. Transportation complete trains, high-speed trains, electric and diesel locomotives, double-decker electric trains, electric multiple units (EMU), passenger carriages, metro carriages, trams, complete rail and metro systems, rail signalling, automation and control systems and equipment. IT Services design, integration and supply of IT systems to improve manufacturing processes and provide logistics solutions for industry, banking, public and private services and postal companies. Provision of services including outsourcing of IT systems, management and ongoing maintenance of systems and equipment; provision of administrative and personnel management services; production of postal automation systems and technical assistance. Energy gas and steam turbines, single-cycle and combined-cycle systems, hydroelectric power stations, turbogenerators, hydroelectric generators, steam plant repowering projects, maintenance and assistance for power stations and components. Microelectronics semiconductor and discrete integrated circuits.

4 Management Discussion and Analysis IV V FINMECCANICA HOLDING FINANCIAL HIGHLIGHTS Aeronautics Space 100% Helicopters Alenia Aeronautica Officine Aeronavali 100% 100% Società Italiana Avionica Lockheed Martin Alenia 50% Tactical Transp. Systems Alenia Spazio 100% Laben 100% Space Software Italia 100% 100% Telespazio 50% AgustaWestland Bell Agusta Aerospace Co. 45% emil Value of production 6,225 6,773 7,758 Operating profit Net profit excluding STM (2) Net profit before minorities Net profit Net invested capital 3,756 2,768 3,554 Net assets 3,120 3,176 3,306 Net debt 636 (409) 249 Additions to non-current assets R&D expenditure ,005 ROS 5.9% 6.1% 5.7% ROI excluding STM 16.0% 20.6% 22.1% Value added * New orders 9,149 7,013 8,694 Order backlog 17,503 19,571 21,708 Number of employees 39,370 41,093 44,963 (*) The scope of consolidation is the same as 2001 Defence Electronics Galileo Avionica 100% Marconi Mobile 100% Alenia Marconi Systems 50% Defence Systems Oto Melara 100% WASS 100% MBDA 25% Microelectronics STMicroelectronics 18% IT Services Elsag 100% Transportation AnsaldoBreda 100% Ansaldo Trasporti Sistemi Ferroviari 100% Ansaldo Signal 100% Consolidated revenues 2002: Emil. 7,758 Defence Systems 12% Helicopters 15% Defence Electronics 17% Aeronautics 16% Space 7% Energy, IT Services and Other Activities 17% Transportation 16% Energy 100% Ansaldo Energia Owned Companies Joint Ventures

5 Management Discussion and Analysis VI Contents Boards Operating environment 6 2. Results Main events in Business development strategy Financial position Management performance by sector Breakdown of results by division Breakdown of results by market : research and development : organisation and human resources Stock option scheme Outlook 63

6 02. 3 Boards BOARD OF DIRECTORS (for the period ) BOARD OF STATUTORY AUDITORS (for the period ) PIER FRANCESCO GUARGUAGLINI Chairman/Chief Executive Officer (since 24 April 2002) ROBERTO TESTORE Chief Executive Officer/Managing Director (since 24 April 2002) MAURIZIO PRATO Director VITTORIO RIPA DI MEANA Director FRANCESCO SANNA Director DOMENICO PIACENZA Chairman GIORGIO CUMIN FRANCESCO FORCHIELLI DOMENICO LUNEDEI ANGELO NATILI Auditors LORENZO BINI SMAGHI Director SERGIO MARIA CARBONE Director ALBERTO CLÔ Director ACHILLE COLOMBO Director MAURIZIO DE TILLA Director CARLO TAMBURI Director ALBERTO LINA Chairman/Chief Executive Officer (until 23 April 2002) GIUSEPPE BONO Chief Executive Officer/Managing Director (until 23 April 2002) Director (from 24 April until 20 May) PIERLUIGI ALEMANNI PIERO SANTONI Substitute Auditors ERNESTO MONTI Director CORRADO PASSERA Director LUCIANO ACCIARI Secretary of the Board of Directors INDEPENDENT AUDITORS (for the period ) RECONTA ERNST & YOUNG SpA

7 AT DECEMBER 31, 2002

8 OPERATING ENVIRONMENT Against a backdrop of increasing geopolitical insecurity and economic instability, the trends that marked 2001 as a turnaround year on the previous decade emerged more fully in 2002, giving weight to the view that the world has entered a new, uncertain phase which is set to last some time and which will completely redraw the map of relationships between countries and economies. Although the upsurge in international terrorism that began with the September 11 attacks did not (as some predicted) have immediate and devastating consequences for the global economy, it has certainly played no small part in laying the foundations for a severe recession. generating rising (and not always justified) returns on investment, led to the rapid harmonisation of corporate and fiscal law between countries, the liberalisation of capital movements and the deregulation of those markets which had not yet opened themselves up fully to competition. Thus, big companies became increasingly international in outlook as the trend moved towards a view of the world as one big market, and began shifting production and diversifying into sectors and markets previously considered inaccessible. The financial sector threw itself into this process with particular enthusiasm, thanks to monetary policies (especially that of the US Federal Reserve) introduced to aid the development of modern financial systems worldwide, and to low and stable raw materials prices. The resulting low cost of capital in turn led to a flurry of mergers and acquisitions and the disappearance of many medium-sized operators from the market. Also making itself felt is the current geopolitical instability. The war in Afghanistan, the continuing crisis in the Middle East due to the Palestinian-Israeli conflict, and the recent invasion of Iraq have led to profound shifts in the relationships between western nations. The United States governing influence in the international political arena has become even more marked than before, and the country s dominance in building partnerships and alliances is now beyond all doubt. This new political and diplomatic direction has not only raised doubts of the trustworthiness of some countries in the matter of international security, thus redrawing the map of global economic and trade links, but has also significantly changed relations within NATO itself. Whether or not the current discord between the western nations will become permanent is not clear yet. But one fact that has plainly emerged from recent events is the limited political influence of the European Union. Europe a region that has been at peace for only a relatively short time following centuries of conflict appears to be hampered in its ability to play a major role not only by the widely diverging views of some of its major countries, but also (and more importantly) by the lack of an efficient military structure able to provide material backup in crisis situations and thus lend credibility to the EU s foreign policy decisions. The rapid redefinition of international relations, the emergence of inherent contradictions in the globalisation process (such as unjustified growth in dotcom share prices and a rash of accounting scandals at companies like Enron and Worldcom), and the increasing regulatory intervention of governments (especially in the financial sector), have radically changed the outlook. But whereas the United States was able to grow by 2.9% in 2002, Europe languished in the doldrums: not only was GDP growth a mere 1.3% last year, but capital investment fell by 3% and manufacturing output by 0.5%. Against this backdrop, exacerbated by fluctuating raw materials prices (especially oil, whose volatility increased by 28% last year) and falling company profits, the world financial markets plummeted: the global index dropped by over 25% in 2002, and today stock market capitalisation is at only 50% of the highs reached in Lower corporate profitability and the slump in equities made it difficult to raise capital on the markets, while more importantly banks began to introduce a credit squeeze that still continues today. Even companies with a solid financial structure are therefore unable to take full advantage of the current low interest rates (long-term rates fell from 4.98% to 4.2% during 2002), and are finding great difficulty in refinancing and extending their debt. This is a further hindrance to growth in investment and output. On top of this, Europe is also experiencing difficulties in its integration process. At a time when the euro is beginning to consolidate its role as a reserve currency, the important and historic process of enlarging the EU eastwards does not appear to have been accompanied by the necessary deepening and centralisation of decision-making and political procedures, while the unification process begun with the Nice summit could be jeopardised by the current disagreements. This crisis in international relations has had and will probably continue to have a significant impact on the economy and financial markets. The first (not-so-innocent) victim of this situation appears to have been the economic globalisation that was a major feature of the 1990s. During that period, the all-important objective of increasing and maximising capital investment while at the same time * * * The situation outlined above had a mixed impact on s various sectors of activity, while the reaction from the markets was also mixed: the global index of Aerospace and Defence stocks dropped by 37% during 2002, with investors punishing those companies that focus on the civil sector, while more specifically military operators (especially American companies) were less hard hit. The difficulties in the civil segment of the Aerospace and Defence sector are severe. Airlines are suffering financial troubles as their cash flows dry up, while problems in the wider economy, with

9 GDP growth slowing sharply, are causing a more than proportionate (1.5x) reduction in air traffic growth. The number of aircraft delivered last year was therefore only around 670, against the expected 930, while the initial forecast of 980 for this year has now been brought down to 575. This trend has been accompanied by a shift in demand towards aircraft with lower running costs, and towards more sustainable forms of acquisition like leasing, which dilutes manufacturers cash generation, and many new aircraft are now lying idle as they wait to be sold. systems are not always compatible with each other. The future of the European armed forces and whether they can become more co-ordinated will depend crucially on the situation that develops following the current crisis. This could take the form of a renewed push towards the development of a common foreign and security policy, or, equally, a complete shift in the relationships between each European country and the US. Similar problems have emerged in the production and launch of civil satellites. The severe difficulties of telecommunications companies, the main owners and users of commercial satellites, have led to a collapse in private demand in the space sector; and this has not been counterbalanced by important public programmes which at least in Europe are struggling to take off owing to both persistent difficulties in raising the necessary funds from national finances, and to problems in reaching agreement between the governments and space agencies of the countries involved. The situation in the defence industry is very different. Recent political and military events have had, and are likely to have in future, a huge impact on the sector. Although the sharp growth in defence spending last year was attributable almost entirely to the United States, over the next few years the major European countries are also set to increase their budgets. Between 2003 and 2008 France and the UK expect to raise their total expenditure by around e11 billion, bringing their respective defence spending to 2.3% and 2.9% of GDP. Italy has earmarked 1.04% of its 2002 GDP for defence; this figure is unlikely to rise significantly over the next few years. The situation described above is a source not only of great uncertainty, but also of great opportunities for the European defence industry. The expected rise in demand in the medium term (less likely in the short term given the industry s slowness to adjust production) will be accompanied by an increase in the technology content of the products and services required and offered. In this case, a resumption of the consolidation trend in the industry which began in the 1990s will depend not only on integration between Europe s armed forces, but also on increasing integration between its research and development processes arising from customer demand. Operators will increasingly have to develop high-tech products at the lowest possible cost for their clients, who are bound especially in Europe by strict spending limits. This puts immediate pressure on suppliers to reach a certain critical mass: there is a progressive relationship between size and cash flows in the defence industry, and only the biggest companies are able to generate the cash necessary to invest in R&D for defence products. Moreover, only groups with a solid capital and financial structure are in a position to take full advantage of the opportunities that size brings. The EU as a whole and its member countries have repeatedly expressed the wish to develop bigger and better defence systems and increase military spending: as recent studies show, this last sharply boosts aggregate demand, with significant repercussions on the civil industry, which is often the source of technological and scientific innovation for the military sector. In reality, however, the expected (and to some extent hoped-for) rise in defence expenditure has been held back by national budgets: with GDP growing only slowly and unemployment struggling to fall, European governments have been unable to reduce social security spending and free up funds for other purposes. Lower growth in military spending here has obviously widened the technology gap between Europe and the United States, a gap which is now unlikely to be closed in some important areas of the military industry. Given the relationship between the military and civil sectors mentioned earlier, this could also have long-term repercussions on Europe s technological advancement in many nonmilitary industries. is well aware of these facts, and has acted accordingly. Its constant quest for operating efficiency has not only enabled it to generate satisfactory profitability in an uncertain market, but has also given it the financial solidity to ride out the crisis on the international market and deal with cuts in Italian defence spending and government measures aimed at curbing the domestic budget deficit. Given that, owing to both market trends and its particular shareholder base, is not in a position to use its own capital for investment purposes, the Group has focused strongly on maintaining a financial solidity that allows it to gain finance at favourable rates, which it uses to fund its investment and growth. Finally, has not only continued in the strategic direction of the last few years, aimed at generating more orders on the international markets by linking up with other European operators, but has also begun a process of growth, asset restructuring and knowledge acquisition with the aim of meeting the demands of today s market. As this report will show, believes it has the qualities and resources necessary to play a leading role in the European aerospace and defence industry as it enters this new and exciting phase. In addition to the problem of lower expenditure (military procurement spending in Europe amounts to only around 60% of that in the US), Europe also suffers from inefficiency in its investment, since the continent s armed forces are unco-ordinated, research is fragmented and weapons and defence

10 RESULTS 7,758 Elsewhere, the Group s Transport In 2002, despite increasing economic and financial instability worldwide which hit many of the 2,329 6,774 2,601 business made a positive contribution to overall growth, posting a emil. 154 biggest global players, the Group succeeded in generating positive results which were also better than those posted the year before. The Group has therefore consolidated the economic 5,157 4,445 16% 14.50% (14%) rise in value of production, following the even more exceptional and financial stability gained as a result of a far-reaching restructuring process, and is now in an excellent position to pursue a policy of expansion and profits growth. ended 2002 with consolidated net profit of emil. 203, compared with emil. 188 in The 2002 result includes the Aerospace & Defence Other Total increase of 21% seen in The Group s operating profitability improved sharply, with EBITDA increasing emil. 79 share of the Group s stake in STMicroelectronics NV (valued at equity), which is higher than by emil. 57 (9%), from emil. 641 in 2001 the emil. 53 contribution posted in 2001, given that the global semiconductors market has begun to show signs albeit faint of a recovery, following a period of severe production overcapacity. Without the contribution from STMicroelectronics NV, s net profit was emil. 124 Value of production emil. to emil. 698 in million, slightly lower than the emil. 135 posted the previous year (despite higher operating profit of emil. 441 million, from emil. 411 in 2001), since the 2001 result was boosted by the sale of part of s indirect stake in STMicroelectronics NV as part of a restructuring of its shareholder base. Net attributable, net of emil. 3 in minorities, stood at emil. 199, from emil. 212 in This improvement was seen equally right across the board. More specifically, EBITDA from Aerospace and Defence grew by emil. 47 overall, from emil. 537 in 2001 to emil. 584 in 2002; although the figure dropped significantly in the aeronautics and space businesses, which were hit by the negative economic situation, this was more than offset by a good performance from helicopters, and from the change in the consolidation base excl. STM STM contrib Total 8.9% 8.6% Consolidated net profit Net attributable profit emil. emil Value of production saw significant growth of 14.5%, in line with targets, rising from emil. 6,774 in 2001 to emil. 7,758 in This was an increase of emil. 984 million. The result was mainly thanks to Defence Electronics and Defence Systems, which together Consolidated EBITDA emil. EBITDA - Aerospace & Defence emil. increased their revenues by around emil. 870 million. The increase was partly due to the acquisition 6.1% 5.7% Growth was also good in the Transportation division, where EBITDA of 100% of Marconi Mobile, with effect from August 2002, and to the complex operation that led to shot up by emil. 19 (25%) thanks not only to increased revenues, taking a 25% stake in the MBDA joint venture at the end of 2001, and transferring into but also to the restructuring process implemented in previous years. it at the same time the missile activities of AMS (while this last in turn bought CARS from BAE Systems). Although the aeronautics business saw its value of production dip slightly by 5%, it was While depreciation remained broadly stable (net of capital grants), able to offset a significant fall in business from major civil aircraft manufacturers with good growth in consolidated EBIT increased by emil. 30. ROS declined slightly other programmes, and the aerospace and defence business as a whole increased its value of production by emil however, from 6.1% in 2001 to 5.7% in 2002, owing to a significant increase in goodwill amortisation arising from the new acquisitions. ROS

11 Net debt stood at emil. 249 at 31 December 2002; the figure includes emil. 845 in debt from the acquisitions and another emil. 84 from the payment 7.3% 2.5% 12.1% of dividends approved at the 2001 shareholders meeting Consolidated EBIT EBIT - Aerospace & Defence Consolidated EBITA emil. emil. emil. Bearing this out is the fact that the EBITA (earnings before interest, tax and amortisation) margin remained essentially stable, at 6.5% (from 6.6% the previous year), with an increase in absolute terms of emil. 54, from emil. 448 in 2001 to emil. 502 in Together, the Group s Aerospace and Defence activities generated EBIT of emil. 413, just above the 2001 result of emil However, despite being the Group s biggest source of profits, the Aeronautics business saw its operating profit fall, owing to the crisis in the civil aircraft market, and more importantly to the increasing share of self-financed projects (e.g. the A380 programme); Space produced a negative operating result, confirming the difficulties in the market as a whole as well as in the business itself. These problems were already known in 2001, and a wide-ranging restructuring and rationalisation process has begun; The Helicopters business saw its profitability increase significantly, thanks partly to the completion of the restructuring plan announced last year; Defence Electronics saw good growth, thanks partly to the acquisition of Marconi Mobile; Defence Systems experienced a sharp drop in profitability due to higher goodwill amortisation arising from the MBDA operation. However, EBIT increased in absolute terms. The Group s Other Activities generated a emil. 20 increase in EBIT, following the reorganisation programmes put in place, especially in the Transport business. The positive outcome of the restructuring initiatives of previous years was also seen in cash flow, which, excluding the effects of the Marconi and Telespazio acquisitions, was solidly positive Net debt emil bef. acquis. & dividends Marconi & Telespazio dividends 2002 Excluding these figures (i.e. in like-for-like terms with 31 December 2001), the Group was cash positive to the tune of emil. 680, compared with emil. 409 at the end of 2001, an increase of emil Debt was not only reined in but also completely restructured last year, with the aim of bringing its conditions and duration into line with the Group s supply contracts, which are typically of a mediumto long-term nature. To this end,, with a reputation as a sound and relatively stable debtor in the mediumterm, partly refinanced its debt by issuing a 6-year bond worth emil. 297; it also set up a 5-year credit line worth emil. 150 with a group of Italian banks, which is not being used at present. The average remaining life of the Group s debt lengthened from 2 years to 2.9 years, more in line with the average life of its contracts. Debt containment and management through careful attention to interest rates and exchange rate risks enabled the Group to minimise its net financial charges, which stood at emil. 18 (including those for the debts taken on with the new acquisitions), or 4% of consolidated EBIT. Also bearing out the Group s financial soundness is the fact that extraordinary net charges were around a seventh of their 2001 figure (although this was partly offset by the capital gain from the sale of 30 million STMicroelectronics shares). Net charges in 2002 totalled emil ; emil. 74 of this consisted of restructuring provisions, while around emil. 30 was for the settlement of the AMX dispute, as described in the 2002 Interim Report. Research and Development spending last year amounted to emil. 1,005, compared with emil. 850 in 2001, as proof of the importance the Group attaches to consolidating and developing its technology assets. Net invested capital increased from emil. 2,768 to emil. 3,554, owing mainly to the acquisition of Marconi and Telespazio; without these operations, the figure would have remained in line with that of 2001, at emil. 2,819. Despite the increase, however, ROI improved from 20.6% in 2001 to 22.1%, as a result of actions taken to increase operating efficiency and rein in working capital (the figure does not include the value of the stake in STMicroelectronics, which is valued at equity and therefore does not contribute to consolidated operating profit).

12 Working capital remained stable, thanks to a constant focus on keeping it under control, even though the companies acquired have much higher levels than the Group average: stripping these out, in fact, working capital declined by around emil. 78 last year. 22.1% 20.6% Orders acquired by the Group during the year were worth a total of emil. 8,694, an increase of emil. 1,681 on The rise was due not only to the new acquisitions, but also to a good performance from Oto Melara and WASS in the area of defence systems, and to a sharp improvement in the transport division, which enjoyed the benefits of a growing market. The order backlog at the end of 2002 stood at emil. 21,708 (an ROI increase of emil. 2,137 on 2001), equivalent to more than two years activity for the Group. At the end of the year the headcount stood at 44,963, a rise of 3,870 compared with the figure of 41,093 the previous year. The acquisition of Telespazio and Marconi added 5,210 employees to the total, while the rest of the Group reduced its numbers by over 1,300 as a result of rationalisation and disposals. Below is a brief overview of performances in each of the Group s areas of business. The Aeronautics business once again suffered from a tough market environment, which was especially critical as regards the civil segment. Despite growth in the military business therefore, value of production fell by 5% to emil. 1,261. EBIT declined by emil. 36 against the previous year, to emil. 139, owing chiefly to higher research and development spending, particularly on the A380 programme. In early 2002 the company began a restructuring process aimed at addressing the difficulties in the civil sector, which led to 297 job cuts. Helicopters, in which operates through the joint venture AgustaWestland (50% consolidated, but here described with reference to 100% of its activities), benefited from a positive military and civil market environment. Value of production increased by 2.7% on 2001, to emil. 2,476. EBIT increased sharply by emil. 54 to emil. 300, while the EBITA margin rose by almost 2 percentage points to 12.1%. During the year AgustaWestland completed its reorganisation with the closure of two factories in the UK, which led to a reduction of 800 in the headcount. New orders were up 6.8%, with important contracts being won on overseas markets, confirming the joint venture s excellent competitive position. The Space business, which includes the recently-acquired Telespazio (consolidated with effect from December 2002), remains critical and its short-term outlook is uncertain, given stagnating demand in both the public and private sectors. Despite a 6.8% rise in value of production to emil. 528, therefore, profitability fell sharply. The division made an operating loss of emil. 2 (from a profit of emil. 29 in 2001), due to the combined effect of a worse production mix, increased development activity, the higher costs of some orders, and a fall in capacity usage. Given this performance, the division has launched a restructuring and rationalisation programme that has already led to the adoption of a new organisational model, and will also involve the restructuring of production facilities as well as significant cost-cutting measures. To this end, a programme of job cuts and governmentsubsidised layoffs is being implemented. operates in the Defence Electronics business via its wholly-owned subsidiary Galileo Avionica, Alenia Marconi Systems (a joint venture with BAE Systems which is 50% consolidated using the proportional method) and the newly-acquired Marconi Mobile, which was consolidated with effect from 2 August Activities include the manufacture of avionics equipment, unmanned aircraft, radar systems, land and naval command and control systems, air traffic control systems and integrated communication systems and networks for land, naval, satellite and avionic applications. In 2002 value of production stood at emil. 1,354 (a comparison cannot be made with 2001 owing to the changed consolidation base following the acquisition of Marconi), while EBIT totalled emil. 68 and the ROS was 5%, thanks to a sharp improvement in the profitability of the avionics business and AMS. The Defence Systems business includes missiles company MBDA (a joint venture with BAE Systems and EADS, of which owns 25%, and which was consolidated using the proportional method from 2002), Oto Melara SpA in the area of land, naval and air weapons systems, WASS SpA, which makes underwater weapons (torpedoes and counter-measures) and sonar systems, and the International Naval Systems division, which manages relations with Horizon SAS as part of the contract to produce 4 Horizon (Orizzonte) class frigates for the Italian and French navies. In 2002 value of production stood at emil. 968, while EBITA totalled emil. 58; this performance was thanks partly to MBDA, even though the joint venture generates lower profitability than the sector average. With this in mind, and as part of the internal integration process, MBDA s management has developed a far-reaching restructuring plan which was launched in the first half of 2002, and should begin to bear fruit as early as next year. By contrast, Oto Melara saw its EBITA margin shoot up from 6.1% to 9.1%, while WASS continued to show excellent profitability, with a ROS margin of 21.2%. The Transportation business put in a good performance last year against the backdrop of a public transport systems market showing moderate growth worldwide, while the recent orders won in Italy bear witness to an upturn in infrastructure investment. Value of production jumped by 13.6%, from emil. 1,135 in 2001 to emil. 1,289, thanks to increased activity in signalling and systems, while EBIT shot up from emil. 34 in 2001 to emil. 53, and the ROS went up from 3% to 4.1%. Energy, Information Technology and Other Activities comprise Ansaldo Energia (equipment and components for the production of simple and combined-cycle energy, services and nuclear power plants) and Elsag (IT services), plus other smaller companies including BredaMenarinibus, Elsacom,

13 Otto, Mecfin, Iritech and Finance. Following the growth seen in recent years, the energy market slowed last year, with orders for steam and gas turbines falling. Despite this, Ansaldo Energia consolidated its 3% share of the world market, while in Italy, the company s share of the gas turbine market stood at 60%. Elsag suffered from the continuing recession in the IT market, which began in 2001 and as yet shows no signs of an upturn. This led to greater price pressures, which squeezed average profitability in the sector. To address the negative market situation, Elsag has launched a rationalisation programme, and is gradually refocusing its product portfolio towards higher value-added activities. also holds an indirect stake of around 18% in STMicroelectronics, the world s thirdlargest producer of semiconductors, which is consolidated at equity. STM designs, develops, produces and sells a wide range of integrated semiconductor circuits and discrete devices for use in numerous microelectronic applications including telecommunications, IT, consumer electronics, auto electronics and industrial control and automation systems. The company saw a gradual improvement in performance in 2002, despite the continuing difficult market situation of volatile prices and an uncertain outlook for demand, producing solid growth in operating and net profit, while revenues remained broadly in line with the previous year. 3. MAIN EVENTS IN 2002 Last year, Group launched numerous initiatives aimed both at tightening organisational control and efficiency, and at developing and strengthening its position in its main sectors of activity. Most notably, it created several new departments that should allow it to fulfil its new role as an industrial and strategic holding more effectively. The new Product Policy department is intended to strengthen the Parent Company s role in the Group s technological and industrial activities, take advantage of existing synergies and harmonise programme development with a view to increasing efficiency, while the Marketing and Commercial Affairs department was introduced as a means of co-ordinating the commercial activities of the Group s subsidiaries not only in Italy but also internationally. Moreover, s increasing interest in services as well as manufacturing for its military clients led it to set up a Logistic Services department, aimed both at expanding and co-ordinating the Group s defence services activities, and at overseeing their development at close hand. Last year the Group also completed the process of centralising all its financial activities in the areas of cash management, the issuing of performance guarantees and the management of forex and interest rate risks. It also launched new, more complete systems for the economic and financial control of orders, with the aim of providing up-todate information on the status of contracts and enabling any problems to be addressed promptly. In 2002 and the first few months of 2003 once again concentrated on expanding its strategic investment portfolio. The sale of part of its indirect stake in STMicroelectronics in 2001 enabled it to spend around e 1 billion (which included the price of the investments and debts taken on) as part of the initiative to complete its product portfolio in defence electronics and security, gain a foothold in the satellite services business and strengthen its role in targeted areas of the civil and military aeronautics industry. Specifically, the Group acquired Marconi Mobile Holding and OTE from Marconi (Bruton Street Ltd), and Telespazio from Telecom Italia. Also nearing completion is the purchase of the remaining 74.5% of Aermacchi, of which Group subsidiary Alenia Aeronautica already owns 25.5%. Marconi Mobile, valued at emil. 571 plus debts, generated value of production of emil. 576 and EBITDA of emil. 66 in The company is leader in Italy, and also has a strong competitive position on foreign markets including the UK, which accounts for 20% of revenues, Germany, where it controls the defence operations previously owned by Bosch, and Turkey. Its European leadership (together with other groups like Thales and BAE Systems) in military and strategic communications systems one of the most promising sectors for future growth enables Group to complete its portfolio of products in the defence electronics business in general, and avionic and command and control systems in particular. The acquisition will also allow the Group to take a more leading role in guiding the development of the global defence industry.

14 Marconi Mobile provides a good business fit with, given the cross-application potential of communications systems. Around 30% of Marconi s business is avionics systems where operates in both platforms and avionics through Galileo Avionica and secure communications systems, while the remaining 70% is terrestrial systems (including satellite terminals) and naval platforms. is present in all these sectors through AMS, MBDA and Oto Melara. OTE is Italy s foremost operator in the area of private mobile radiocommunications for the police, carabinieri (military police) and other public sector agencies. It is also the leading developer of the new digital radiomobile communications system for public utilities, transport and law enforcement, known as Tetra. In 2001 OTE posted revenues of emil. 79 and gross profit of emil. 19, while its current order backlog stands at some emil For Telespazio, which provides satellite and space operations management services, the acquisition price was emil. 127, plus emil. 93 in financial debt and emil. 20 in leasing debt. In 2001 Telespazio posted pro forma value of production (i.e. excluding the Astrolink order) of emil. 301, and EBITDA of emil. 34. The space sector has for some time been experiencing a slump in manufacturing, especially in Europe. But although the area of satellite and component design and construction is suffering (and growth rates are not expected to pick up in the near future), significant growth is expected in demand for private, public, civil and military services. The acquisition of Telespazio not only enables to safeguard its existing satellite activities but more importantly will give the Group access to a high-growth market segment, and more generally, expand its range of services, consistently with the strategy of refocusing on value-added businesses. Aermacchi is a European leader in the manufacture of military training aircraft, and has sold 224 of its MB 339 aircraft in 10 countries. It is also finalising development of a new, high-tech training aircraft, the MB 346, which aims to beat off European competition to become the linchpin of the Europe-wide air force training programme, Eurotrainer. In other developments, in August 2002 Alenia Aeronautica SpA and the Italian Ministry of Defence settled their dispute over the technical modifications to AMX aircraft needed to enable them to perform as required. had already earmarked provisions for this dispute in The agreement sets out a timescale for the modifications, and also includes a sum in settlement of the long-running disagreement, to be paid through changes in existing contracts between the two parties. The settlement was reached with a view to maintaining good business relations between Alenia Aeronautica and its main client, which are crucial for the Company s growth and continued success. Telespazio plays an important role in the satellite services market, operating in satellite navigation (where it is part of the Galileo project, the first integrated satellite-based navigation system for civil use), the COSMO-Skymed Earth observation system, television services, telecommunications and Earth observation (providing satellite images and scans of geographic areas for civil use). financed both acquisitions using own funds. Thanks to operating cash flows and the reduction of its stake in the semiconductors producer STMicroelectronics from around 22% to around 18% in December 2001, has maintained a sound financial structure even after the two acquisitions. Aermacchi is a long-established Italian manufacturer of aeroplanes for both the civil and military markets. In 2001 the company generated value of production of emil. 295 and EBITDA of emil. 56. The purchase agreement for 75% of the company (on which due diligence is currently under way) is based on a price of emil. 228 for 100% of the company. In civil aeronautics Aermacchi is active in the production of aerostructures and engine nacelles, in partnership with other big European names.

15 BUSINESS DEVELOPMENT STRATEGY has reviewed its objectives, based on its portfolio of activities, its competitive position and the state of the market. Its mission is to be a big industrial Group operating in highly-complementary technology-based activities, focused on the Aerospace and Defence sector but achieving excellence also in other areas, while meeting the needs of domestic customers, taking part in European and international programmes and competing in selected areas of the global market. is wholly dedicated to creating shareholder value and strengthening its domestic presence in different businesses. manufacturing sectors by its unique combination of product types, production processes, clients, markets and competitor relationships. Its products are typically highly-complex equipment and systems, which incorporate basic elements but demand considerable engineering input in design, component development and final production, in a process which often stretches over many years, and requires the company to manage its orders and the related risks effectively. The manufacturing process itself largely consists of developing these products and systems, which are mostly produced in limited numbers, demand high levels of initial investment and require a large body of technological knowledge ranging from sophisticated materials to electronics and software and, above all, systems integration expertise. With this in mind, has mapped out its growth strategies, and has set out specific targets for each of its areas of business. Despite its focus on the Aerospace and Defence businesses, the company is still committed to increasing the value of its other activities, including energy, where it is considering strategic opportunities while continuing to successfully reposition and restructure its industrial and business activities. The IT services division, represented by Elsag, is currently primarily focused on traditional applications and is only partly involved in Aerospace and Defence. plans to refocus this business and thus increase profitability. Specifically, the Group is currently carrying out valuations with a view to developing its portfolio of defence and security services. The rail Transport business groups together companies with considerable technological expertise and exciting prospects. The Italian market, which for a long time only accounted for a small part of this business, has shown signs of making a significant recovery, and the Group s companies are well placed to capitalise on this with their technology and products. Here, value may be enhanced through agreements with other operators, which will provide the investment required to significantly increase levels of activity. In the civil sector, its clients are primarily manufacturers of large commercial aircraft, air transport companies, companies requiring complex systems, such as satellites or air traffic control systems, and national and European space agencies. Its clients in the military sector are government defence departments. Demand, therefore, depends both on strictly commercial factors driven by general economic conditions and the military market, driven by the need to modernise defence capabilities. This demand is not so much for products as for production programmes which last several years, often preceded by equally-long planning and launch phases. Overall, this market tends to be highly cyclical. In the early 1990s, demand in the Aerospace and Defence industry fell sharply as a result of changes in international relations brought about by the end of the cold war. In the US, this set off an extensive process of consolidation which, through mergers and acquisitions, produced a small number of very large groups that today dominate the world market. In Europe, because of the market s fragmentation and the national nature of companies, consolidation is happening more slowly, through mergers and acquisitions but more especially through the formation of joint ventures that cross national boundaries, often based on pre-existing partnerships between companies. The Aerospace and Defence sector where plans to focus its efforts encompasses business areas which are very diverse but nevertheless share certain characteristics that give the division its own unique character. The division makes systems and products for armed forces and the civil air transport market, including civil and military transport aircraft, combat and training aircraft, helicopters for civilian and military use, satellites, launching systems and orbiting structures, satellite services, missile defence systems, land combat vehicles, warship and submarine defence systems, aircraft and helicopter weapons systems, avionics systems, electronic systems for defence and land and naval surveillance, military communications systems and security systems. The industry differs from other A leading player in the European Aerospace and Defence industry, can boast of cutting-edge production facilities and is renowned for its technological expertise. The Group works with other European operators both in major international programmes and in partnership, achieving excellence and global leadership in areas such as helicopters and missile systems. It has also developed successful alliances with US leaders in aeronautics and helicopter technology. Given this situation, has adopted a strategy of selective development, aimed at generating significant growth that will add value to the businesses in which it excels and in which it shows strong leadership potential. Meanwhile, in areas that do not offer the critical mass necessary to compete on world markets, the Group plans to form strategic partnerships with other operators.

16 This growth strategy takes into account both the main features of a company competing on today s market, and those of a defence company, and gives equal consideration to safeguarding national technology assets and expertise and maintaining close ties with the armed forces. An analysis by sector shows that the Group has numerous areas of excellence, in which it ranks among the world leaders. AgustaWestland is one of the biggest players in the Helicopters sector, thanks to its high-tech and innovative range of products, through which the company aims to consolidate its competitive position on both sides of the Atlantic. Following its entry into the military communications sector, the Group now has a complete range of manufacturing expertise in the various applications of military electronics. It now plans to strengthen its presence in the segment, especially in systems, to keep up with the shift of military strategy towards Information & Network-Centric Warfare. The Group is currently holding talks with other key operators in the sector on this very subject, and aims to broaden its partnership horizons to all segments of defence electronics. s strategy is to form joint ventures, exploiting its position as national operator to the full and ensuring it has a part to play in future technological developments in this sector. is also pursuing a strategy of external growth in the Aeronautics business. In the civil sector, this is intended to strengthen the position and capacities of Alenia Aeronautica, which can boast of first-rate technological know-how and manufacturing assets. Its strategy of alliances in the military sector is aimed at increasing the value of its assets, with specific reference to (i) its participation in the EFA programme and its future developments, (ii) training aircraft produced by Aermacchi and (iii) new technologies which may be applied to leadingedge aeronautics programmes such as UCAV (unmanned combat aircraft vehicle). The Group is also looking for a partner in the Space sector, as part of its drive to safeguard national expertise and production. It is leader in the space services sector, following the recent acquisition of Telespazio and a series of programmes in which Italy has a key role in all the main space segments. These include COSMO-Skymed in the remote sensing sector, Galileo in navigation and Sicral in communications. In the more wide-ranging Defence sector, is well-positioned in the missile segment through its stake in the joint venture MBDA, a world leader that offers the Group further development opportunities. Oto Melara and WASS are key players in weapons and underwater systems in specific market segments such as wheeled vehicles, naval cannons and torpedoes, and aim to become global leaders in their fields through partnerships with other operators. operates in Defence Electronics through Galileo Avionica (avionics and electro-optical systems), AMS, the joint venture with BAE Systems (radar and land and naval command and control systems) and the recently-acquired Marconi group (military communications). Consolidation in this sector has been slow, but it still offers significant growth potential, given the increasing demand for high-tech solutions and innovative systems.

17 FINANCIAL POSITION To provide further information on the Group s financial position, the following tables, Reclassified consolidated income statement, Reclassified consolidated balance sheet, Consolidated statement of changes in short-term financial position and Consolidated net debt, have been drawn up using the same formats as in previous years. The Table below shows the company s profit and loss in For a better understanding of the results, please note that: Marconi and Telespazio groups were acquired in The income statement therefore includes their results from the date of purchase (August 2002 for Marconi and December 2002 for Telespazio); the results for 2001 do not include the MBDA joint venture set up at the end of 2001, but do include the figures for the missile activities of the AMS joint venture (50%-owned by ). RECLASSIFIED CONSOLIDATED INCOME STATEMENT EURO THOUSAND A. - REVENUES 7,810,847 6,618,995 Changes in work in progress, semi-finished goods and finished goods (100,332) 119,057 Capitalisation of internal costs on fixed assets 47,350 35,515 B. - VALUE OF PRODUCTION 7,757,865 6,773,567 Cost of goods and services (4,966,545) (4,293,814) C. - VALUE ADDED 2,791,320 2,479,753 Personnel costs (2,084,340) (1,837,735) Other provisions (19,817) (6,534) Provisions for risks and charges (83,513) (61,674) Other income and charges 94,694 66,982 D. - EBITDA 698, ,792 Depreciation (216,087) (230,002) Deferred revenue from capital grants 19,437 36,711 E. - EBITA 501, ,501 Goodwill amortisation (61,157) (36,448) F. - EBIT 440, ,053 Financial income (charges) (20,711) (34,386) Exchange rate gains (losses) 2,690 (17,808) Increase/decrease in the value of investments 103, ,661 G. - PROFIT BEFORE EXTRAORDINARY ITEMS AND TAX 525,562 1,198,520 Extraordinary income (costs) (119,568) (881,591) H. - PRE-TAX PROFIT 405, ,929 Tax (203,293) (128,827) I. - NET PROFIT 202, ,102 of which: Parent Company 199, ,187 minorities 3,344 (24,085)

18 Value of production was emil. 7,758, an increase of 14.5% on the emil. 6,774 generated in The rise was due mainly to the missiles joint venture MBDA, created at the end of 2001, of which owns 25%, and to the Marconi group, acquired in August An increased contribution also came from transport (high-speed train projects in China, Spain and Italy, and contracts from Railtrack in the Signalling division), although this was offset by lower revenues in civil Aeronautics and Energy. The Cost of goods and services rose 15.7%, from emil. 4,294 in 2001 to emil. 4,967. As with value of production, this was due mainly to the MBDA missiles joint venture and Marconi, and to increased activity in the transport business. Personnel costs stood at emil. 2,084, compared with emil. 1,838 in The average headcount was 39,798, from 38,416 in the previous year. At 31 December 2002 the Group had 44,963 staff, up 3,870 on the figure of 41,093 at end This result was due to the combined effect of company disposals and acquisitions over the year (+4,953) and to normal turnover (1,083). The average unit cost per employee increased, owing to changes in the breakdown of job categories and the variation in the consolidation base both in Italy and abroad. Provisions for risks and charges stood at emil. 103, compared with emil. 68 in 2001, and related to ordinary operating activities (product guarantees, receivables, fines, outstanding disputes, financial guarantees, contractual charges and miscellaneous). Other income and charges were positive to the tune of emil. 94, up from emil. 67 in The income component included gains on real estate investments, insurance refunds of emil. 17 (emil. 6 in 2001), the use of funds (emil. 74, from emil. 52 in 2001, for contractual risks, disputes, product guarantees and other) established in previous years and made available following ordinary operations and costs incurred over the year, as well as the recovery of receivables from insolvent countries (fully written off as ordinary losses in previous years). Charges included indirect and direct taxes of emil. 19 (from emil. 17 in 2001), fines and contributions to severance funds. Depreciation amounted to emil. 216 (from emil. 230 in 2001); emil. 163 of this related to tangible fixed assets (from emil. 179 in 2001), and emil. 53 to intangible fixed assets (emil. 51 in 2001). Goodwill amortisation rose from emil. 37 in 2001 to emil. 61 in 2002, owing to MBDA joint venture and Marconi group. Following the fall in depreciation and the rise in goodwill amortisation (mainly for MBDA), EBIT increased by emil. 30 (or 7.3%), from emil. 411 in 2001 to emil. 441 in 2002, for the same reasons outlined under Value of production and EBITDA. Net financial charges fell by emil. 14, from emil. 35 in 2001 to emil. 21, thanks mainly to the Group s strong cash position at the end of 2001, which had a positive effect on most of 2002, and to a decrease in medium- to long-term debt due to the combined effect of repayments and new debt. The main financial charges related to interest payments and provisions for adjustments on bond loans (emil. 36 in 2002, from emil. 51 the previous year). Net interest receivable from banks stood at around emil. 5 (from emil. 2 of net interest payable in 2001). Exchange rate gains, arising mainly from hedging operations, stood at emil. 3 (from emil. 18 in losses in 2001). The improvement was due to the lower hedging costs that resulted from the difference between dollar and euro interest rates. The increase in the value of investments was emil. 103, from emil. 840 in This figure includes: - s share of STMicroelectronics Holding NV (emil. 79, from emil. 878 in 2001), which, like all the Group s important non-consolidated holdings, is valued at equity. Note that the 2001 figure included a significant capital gain from the disposal of STMicroelectronics NV shares held directly by STMicroelectronics Holding NV; - net increases from other investment holdings valued at equity (emil. 7); - net capital gains on the disposal of investment holdings (emil. 12); - net provisions for holdings valued at cost (emil. 19); - tax credits on dividends (emil. 24). EBITDA rose by emil. 57 (9%) to emil. 698, thanks mainly to the MBDA joint venture, the acquisition of Marconi group, higher profitability in the helicopters business and growth in the transport division. By contrast, EBITDA fell in the aeronautics business, owing mainly to higher research and development costs, and in the space business, because of a deterioration in the production mix. Depreciation (and the attributable shares of capital grants) fell against 2001, mainly because of the transfer of assets carried out by the Parent Company in late 2001 and early 2002, which were only partly offset by MBDA and Marconi group. Net extraordinary costs totalled emil. 120, down from emil. 882 in The 2001 figure included the costs of the final stage of the Group restructuring programme begun in 1997 and completed in The main cost items in 2002 related to redundancy payments and other restructuring costs net of previously earmarked provisions (emil. 74); costs incurred for the Group s international expansion (emil. 12); and net charges for the settlement of transactions and disputes (emil. 40). Of these last, emil. 30 were extra costs arising from the settlement of a dispute in the aeronautics business, in addition to provisions already earmarked at 31 December 2001 as part of the restructuring of the Group along company lines. The increase was partly because the issues involved in the dispute were more wide-ranging than originally expected.

19 Tax totalled emil. 203 (from emil. 129 in 2001), of which emil. 80 was IRAP, emil. 140 IRPEG and other direct taxes and emil. 17 net deferred tax credits. The consolidated and Parent Company profit and loss accounts do not include current taxes or deferred net tax credits relating to SpA, given the lack of reasonable certainty that the tax credits will be generated in future, and with respect to previous tax losses since the conditions set out in the generally accepted accounting principles are not in place. The Table below shows the reclassified consolidated balance sheet at 31 December RECLASSIFIED CONSOLIDATED BALANCE SHEET EURO THOUSAND Change A. - NON-CURRENT ASSETS Intangible assets 1,219, , ,280 Tangible assets 1,564,822 1,371, ,140 Long-term investments 1,447,683 1,403,970 43,713 4,232,136 3,741, ,133 B. - WORKING CAPITAL Inventories 13,306,061 11,990,640 1,315,421 Trade receivables 3,379,066 2,508, ,895 Other assets 1,354,103 1,430,696 (76,593) Trade payables (2,658,331) (2,219,604) (438,727) Customer advances and progress billings (11,796,756) (10,830,203) (966,553) Provisions for risks and charges (1,181,462) (1,254,649) 73,187 Other liabilities (2,416,652) (2,010,771) (405,881) (13,971) (385,720) 371,749 C. - INVESTED CAPITAL, minus liabilities 4,218,165 3,355, ,882 D. - STAFF SEVERANCE FUND (664,086) (587,724) (76,362) E. - INVESTED CAPITAL, minus liabilities and staff severance fund 3,554,079 2,767, ,520 covered by: F. - SHAREHOLDERS EQUITY Group capital and reserves 3,105,136 2,976, ,403 Net profit attributable to Group 199, ,187 (12,830) Minorities capital and reserves (2,287) 11,493 (13,780) Net profit attributable to minorities 3,344 (24,085) 27,429 3,305,550 3,176, ,222 G. - NET DEBT i) medium- to long-term bank debt 1,469,494 1,664,913 (195,419) ii) short-term debt: bank debt 671, ,113 (246,183) cash and financial receivables (1,742,853) (2,877,587) 1,134,734 (1,070,923) (1,959,474) 888,551 iii) restated items (*) (150,042) (114,208) (35,834) 248,529 (408,769) 657,298 I. - NET INVESTED CAPITAL AS IN E 3,554,079 2,767, ,520 (*) Include: marketable securities (169,947) (165,116) (4,831) portion of provisions for risks and charges in respect of liabilities of non-consolidated subsidiaries 19,905 50,908 (31,003) (150,042) (114,208) (35,834)

20 Non-current assets increased by emil. 491, from emil. 3,741 at 31 December 2001 to emil. 4,232 at 31 December 2002, thanks mainly to: the fixed assets of Marconi (emil. 106) and Telespazio (emil. 112) groups; Other liabilities increased by emil. 406, from emil. 2,011 at 31 December 2001 to emil. 2,417 at 31 December 2002 owing to increased payables to the Industry Ministry (pursuant to art. 3a of Law no. 808/85) with respect to research and design activities relating to aeronautic and helicopter products, and to the change in the consolidation base; goodwill of emil. 278 taken on following the consolidation of Marconi and Telespazio groups; the valuation at equity of the stake in STMicroelectronics Holding NV, which rose from emil. 1,106 at 31 December 2001 to emil. 1,234 at 31 December 2002; investment and amortisation over the period, and exchange rate losses following the conversion of balance sheets in foreign currency (mainly dollars and sterling) into euro. the Staff severance fund increased by emil. 76, from emil. 588 at 31 December 2001 to emil. 664 at 31 December Stripping out the change in the consolidation base, however, the figure remained broadly the same, since the funds used were covered by provisions made for the period. Invested capital, at emil. 3,554 (from emil. 2,767 at 31 December 2001), comprised net shareholders equity of emil. 3,305 (emil. 3,176 at 31 December 2001), and net debt of emil. 249 (compared with a cash positive position of emil. 409 at 31 December 2001). Working capital was negative to the tune of emil. 14, compared with a negative figure of emil. 386 at 31 December Specifically: Inventories (net of progress billings, which were emil. 7,608 at 31 December 2002 and emil. 6,966 at 31 December 2001, recorded under the item Customer advances and progress billings ) increased. This increase related to advance payments made to the other companies in the EFA programme (partly offset by advances from customers) in the aeronautics business, and to the change in the consolidation base; In line with 2001, financial receivables from non-consolidated companies in liquidation have been offset with the related provisions for risks and charges (which cover the relevant negative net assets) to provide a clearer picture of the Group s debt. The Table below shows consolidated net debt at 31 December 2002, together with figures at 31 December 2001 for ease of comparison. Trade receivables net of trade payables went up significantly compared with 2001, owing mainly to Marconi and Telespazio groups, and to the cyclical trend of receivables and payables (moreover, in the energy business payment times to suppliers fell owing to an improved cash position); Other assets decreased, owing mainly to a reduction in receivables from other participants in the EFA programme, partly offset by a rise in tax credits and the change in the consolidation base; Advance payments from customers (recorded under the item Customer advances and progress billings ) went up by emil. 325, from emil. 3,864 at 31 December 2001 to emil. 4,189 at 31 December This rise was due to Telespazio and Marconi groups, as well as to increased production in the missiles business and to receipts in the aeronautics division, which were partly offset by a reduction following billing in the Helicopters and Energy divisions; Provisions for risks and charges showed a net decrease of emil. 73. The biggest provisions related to risks in the aeronautics business, the reorganisation and restructuring of some sectors, guarantees provided and contractual risks. The most significant use of funds was for the settlement of disputes, for the cost of restructuring begun in previous years and to cover the past losses of subsidiaries; Emil Short-term bank debt Current portion of medium- to long-term bank debt Medium- to long-term bank debt (excl. current portion) 1,370 1,139 Cash or cash equivalents (956) (2,198) Net bank debt 677 (149) Other financial receivables and payables Marketable securities (29) (55) Government bonds (71) (29) Loans to third parties (557) (415) Loans to subsidiaries and associated companies (276) (295) Loans from subsidiaries and associated companies Liabilities to Industry Ministry Other financial liabilities NET DEBT 249 (409)

21 Management Discussion and Analysis The Group moved from a cash positive position of emil. 409 at 31 December 2001, and of emil. 229 at 30 June 2002, to net debt of emil. 249 at 31 December CONSOLIDATED STATEMENT OF CHANGES IN SHORT-TERM FINANCIAL POSITION EURO THOUSAND This change was due mainly to: dividend payments for 2001 of emil. 84, paid in June 2002; the acquisition of Marconi group in August 2002 for emil. 571 plus debts of emil. 60; the acquisition of Telespazio group in November 2002 for emil. 127 plus debts of emil. 87. These items were offset by high operating cash flows in many divisions, which helped curb overall debt. Bank debt went from a positive figure of emil. 149 to a negative one of emil. 677 at 31 December 2002, owing to the combined effect of: a reduction in short-term debt from emil. 443 to emil. 215, due mainly to the repayment of the most expensive loans by Group companies; a decrease in medium- and long-term debt from emil. 1,606 to emil. 1,418, owing to the combined effect of whole or part repayments of debt reaching maturity, and new medium- and long-term debt, including a emil. 297 bond issued onto the Italian retail market by Finance SA in December 2002, the proceeds from which went entirely to the Parent Company; a sharp drop in cash, from emil. 2,198 at 31 December 2001 to emil. 956 at 31 December This decline was due chiefly to investment activities and to the repayment of debt as described above. For the same reasons outlined in previous quarterly results, the company ATIL, indirectly affiliated to SpA, was not consolidated at 31 December A summary of the key figures relating to s 25% of the company according to the available information is as follows: ATIL revenues increased by emil. 76, financial debt rose by emil. 77, working capital stood at emil. 4 and net equity was emil. 3. The following Table shows the Consolidated statement of changes in short-term financial position A. - OPENING SHORT-TERM NET FINANCIAL POSITION (Opening net short-term financial debt) 1,959,474 1,381,410 B. - CHANGES IN SHORT-TERM FINANCIAL POSITION FROM OPERATING ACTIVITIES Profit (loss) for the period 202, ,102 Depreciation and amortisation 278, ,450 Capital loss (gain) on asset disposals (6,025) (33,876) Asset write-downs (73,819) (674,494) Decrease (increase) in working capital (*) (449,879) 776,781 Net change in staff severance fund (*) 76,362 (65,053) 27, ,910 C. - CHANGES IN SHORT-TERM FINANCIAL POSITION FROM INVESTING ACTIVITIES Investment in non-current assets: Intangible fixed assets (347,178) (326,860) Tangible fixed assets (233,759) (157,773) Investments (40,998) (51,309) Other changes in fixed assets (*) (167,736) Proceeds from disposals 95, ,643 (694,614) 306,701 D. - CHANGES IN SHORT-TERM FINANCIAL POSITION FROM FINANCING ACTIVITIES New loans 319,054 11,557 Share capital increase 1,248 6,402 Grants received 38,702 39,324 Loan repayments (559,965) (91,979) Other changes in medium- and long-term debt (*) 53,916 (13,817) Other changes in shareholders equity (**) 9,483 (138,034) (137,562) (186,547) E. - DIVIDENDS (84,210) F. - CHANGES IN SHORT-TERM FINANCIAL POSITION FOR THE PERIOD (B+C+D+E) (888,551) 578,064 G. - CLOSING SHORT-TERM NET FINANCIAL POSITION (Closing net short-term financial debt) (A+F) 1,070,923 1,959,474 (*) Includes changes in consolidation base. (**) Includes changes in minority interests. Before moving on to a detailed analysis of individual business areas, a table showing the receivables and payables from and due to non-consolidated subsidiaries and associated companies is provided below.

22 CONSOLIDATED STATEMENT OF CHANGES IN SHORT-TERM FINANCIAL POSITION EURO THOUSAND A. - OPENING SHORT-TERM NET FINANCIAL POSITION (Opening net short-term financial debt) 1,959,474 1,381,410 B. - CHANGES IN SHORT-TERM FINANCIAL POSITION FROM OPERATING ACTIVITIES Profit (loss) for the period 202, ,102 Depreciation and amortisation 278, ,450 Capital loss (gain) on asset disposals (6,025) (33,876) Asset write-downs (73,819) (674,494) Decrease (increase) in working capital (*) (449,879) 776,781 Net change in staff severance fund (*) 76,362 (65,053) 27, ,910 C. - CHANGES IN SHORT-TERM FINANCIAL POSITION FROM INVESTING ACTIVITIES Investment in non-current assets: Intangible fixed assets (347,178) (326,860) Tangible fixed assets (233,759) (157,773) Investments (40,998) (51,309) Other changes in fixed assets (*) (167,736) Proceeds from disposals 95, ,643 (694,614) 306,701 D. - CHANGES IN SHORT-TERM FINANCIAL POSITION FROM FINANCING ACTIVITIES New loans 319,054 11,557 Share capital increase 1,248 6,402 Grants received 38,702 39,324 Loan repayments (559,965) (91,979) Other changes in medium- and long-term debt (*) 53,916 (13,817) Other changes in shareholders equity (**) 9,483 (138,034) (137,562) (186,547) E. - DIVIDENDS (84,210) F. - CHANGES IN SHORT-TERM FINANCIAL POSITION FOR THE PERIOD (B+C+D+E) (888,551) 578,064 G. - CLOSING SHORT-TERM NET FINANCIAL POSITION (Closing net short-term financial debt) (A+F) 1,070,923 1,959,474 (*) Includes changes in consolidation base. (**) Includes changes in minority interests. Before moving on to a detailed analysis of individual business areas, a table showing the receivables and payables from and due to non-consolidated subsidiaries and associated companies is provided below.

23 RECEIVABLES AND PAYABLES FROM/DUE TO NON-CONSOLIDATED SUBSIDIARIES AND ASSOCIATED COMPANIES AT 31 DECEMBER 2002 (SIGNIFICANT VALUES, STATED IN EURO THOUSAND) In general, business relationships with subsidiaries and associated companies are conducted under normal market conditions, as are interest-bearing receivables/payables, where no specific contractual conditions apply. 6. MANAGEMENT PERFORMANCE BY SECTOR Medium/long-term Short-term Trade Other Total RECEIVABLES receivables receivables receivables receivables SUBSIDIARIES SIAI Marchetti (in liq.) 16,207 (*) 16,207 Ansaldo Invest Denmark 15,993 15,993 Ansaldo Invest 370 2,412 3,876 6,658 Ansaldo Industria (in liq.) 4,580 (*) 2,012 6,592 S.I.C.O.M. (in liq.) 3,749 3,749 S.I.C.A ,500 3,082 CLC (in liq.) 2,688 2,688 Globalstar N.E. 1,020 1,653 2,673 Marconi do Brasil 2,279 (**) 189 2,468 Mecfin Nederland (in liq.) 1,807 1,807 ASSOCIATED COMPANIES Eurofighter Jagdflugzeug 89,143 89,143 Fata Automation 24,100 24,100 Firema Trasporti 7,740 9,734 17,474 Fata Group 15, ,434 Eurosysnav 14,151 14,151 Eurofighter Simulation System 8,416 8,416 Euromids 188 7,180 7,368 Altram L.R.T. 6, ,851 Altram 5,229 5,229 Elettronica 3,410 3,410 Ansaldo Caldaie 3,143 3,143 Intermetro 2,869 2,869 J.V./G.I.E. Agusta 110, ,369 Alenia Marconi Systems 5,350 84,140 20, ,814 Gruppo MBDA , ,271 G.I.E./ATR 60,233 60,233 Medium/long-term Short-term Trade Other Total PAYABLES payables payables payables payables SUBSIDIARIES Ansaldo Industria (in liq.) 203 2,784 2,987 Alifana 1,681 1,681 S.I.C.A. 1, ,571 CPA Sud (in liq.) 1,379 1,379 Ansaldo Invest ,356 ASSOCIATED COMPANIES Firema Trasporti 14,320 14,320 Pegaso 10,600 10,600 Ansaldo Caldaie 6,222 6,222 Europea Microfusioni Aerospaziali 3, ,208 Dataspazio 1,782 1,782 Elettronica 1,676 1,676 Aeronautica Macchi 1,579 1,579 J.V./G.I.E. Gruppo MBDA 357,212 6, ,241 Alenia Marconi Systems 11,451 1,281 12,732 Agusta 2,487 1,678 4,165 (*) Mainly covered by Provisions for risks on investments to cover negative net assets. (**) Included in Other activities in the Reclassified consolidated balance sheets. Aeronautics With effect from 1 January 2002 the aeronautics division of, including the whollyowned subsidiary Officine Aeronavali, was transferred to Alenia Aeronautica SpA as part of the process of reorganising the Group along company lines. During 2002 Alenia Aeronautica operated in extremely difficult market conditions, marked by a sharp fall in production by the two main players in the civil segment Airbus and Boeing. The latter, especially, suffered more than its European competitor as a result of the severe crisis affecting the main US carriers. Aeronautics Emil. New orders 1,142 1,210 Order backlog 3,688 3,810 Value of production 1,261 1,328 EBITDA EBIT Working capital (646) (516) Net invested capital 400 (189) Investment in non-current assets ROS 11.0% 13.2% ROI (*) 34.8% N.S. R&D costs Personnel (no.) 9,055 9,352 (*) Based on invested capital at 31 December.

24 In this climate, Alenia Aeronautica continued to supply the world s biggest aircraft manufacturers, specifically: Boeing: producing the fuselage of the B717 aircraft, and fuselage components and control surfaces for the B767 and B777. During 2002 production of superpanels for the B757 fuselage began, with first deliveries due in In January 2003 SpA and Boeing signed an agreement for strengthening industrial and commercial co-operation in aerospace and defence. Alenia Aeronautica is especially involved in the development and production of the new-generation 7E7 Super-Efficient Aircraft; Airbus: manufacturing the tail cone and mechanical wing components for the A /-600 aircraft, a fuselage section for the A321, and mechanical wing components for the single-aisle family. There has been a substantial increase in development and pre-production activity for the super jumbo A380, where Alenia Aeronautica is responsible for part of the central fuselage section. The first series will be delivered in 2003; G.I.E. ATR, in partnership with EADS: producing the ATR 42/72 turboprop aircraft. A total of 11 new orders for this were secured in 2002, and 19 were delivered to clients; Dassault Aviation: producing important aerostructure components, such as the central rear section of the new Falcon 2000 Extended Range aircraft, and the nacelles for the Falcon 900EX. Certification was also completed for the cargo version of the ATR72, with the first delivery made in October to the Swiss operator Farnair. Orders worth emil. 1,142 were acquired during the year. Besides those mentioned above, these include an order for 200 series of sections for the B777 aircraft, contracts for developing the Storm Shadow weapons system for the Tornado, 30 Falcon 2000 fuselages, and contracts for logistics and additional development to improve the performance of the EFA. The order backlog, net of work in progress, came to emil. 3,688, of which the EFA programme accounted for 59%. Value of production was emil. 1,261 a drop of 5% compared with the previous year due to reduced production in the civil segment. This was however partly offset by growth in military work, although there were delays in securing the Italian air force orders for the C27-J aircraft and Tornado modernisation. EBIT was emil. 139, or 11% of value of production, down from emil. 175 in The fall was essentially due to higher research and development spending (emil. 47 as against emil. 20 in 2001), especially on the A380 programme. Given the difficulties in the civil market, the year s most important developments involved Alenia Aeronautica s military activities, with short-term as well as medium- and long-term repercussions: in the tactical transport aircraft segment, an agreement was signed with the Italian air force in June for the supply of five C27-J aircraft with an option on a further seven. The agreement includes five years of logistics support and the supply of spare parts. The first aircraft is due for delivery in The C27-J aircraft has also been chosen by the Greek government: in January 2003, negotiations were concluded for the sale of 12 aircraft; in April, the inaugural flight of the first pre-series Eurofighter produced by Alenia Aeronautica as part of the Eurofighter consortium took place at Torino-Caselle; in June a memorandum of agreement was signed between the Italian and US governments for Italian participation (including Alenia Aeronautica) in the development of the new generation fighterbomber, the F35 Joint Strike Fighter; on the AMX programme, agreement was reached with the Italian air force on the changes to be made to the AMX aircraft. During the year modification work began on the first three aircraft; the Italian air force sent the first four of 18 Tornado aircraft to Alenia Aeronautica for a mid-life update, under a contract signed during the year; a total of 29 series of semi-wings and 24 series of rear fuselages were completed for the EFA programme. Net invested capital, at emil. 400 on 31 December 2002, grew markedly because of goodwill and write-downs of emil. 670 (net of the share amortised during the year) following the transfer of the aeronautics division to Alenia. The headcount at the end of the year was 9,055, a fall of 297 from December 2001, chiefly due to redundancies and a freeze on hiring as part of measures taken to weather the crisis in the civil market. Refurbishment and conversion work carried out by Officine Aeronavali during the year includes an agreement with Boeing Integrated Defence Systems for work on the new B767 T/T project a tanker and/or transport aircraft destined both for the Italian air force and for the international market and the signing of an agreement with Boeing Airplane Services for modification of 52 DC-10 aircraft.

25 Helicopters is a leading player in the global helicopter industry with AgustaWestland, a joint venture with the British group GKN. To convey the true extent of the business, total figures for AgustaWestland JV are given, and the notes below refer to 100% of the company. To complete the picture, figures are also given for s 50% share, proportionally consolidated. Helicopters Emil. at 100% at 50% at 100% at 50% New orders 2,536 1,268 2,375 1,187 Order backlog 7,146 3,573 7,604 3,802 Value of production 2,476 1,238 2,412 1,206 EBITDA EBIT Working capital (194) (97) (116) (58) Net invested capital 1, , Investment in non-current assets ROS 12.1% 12.1% 10.2% 10.2% ROI (*) 27.7% 27.7% 19.0% 19.0% R&D costs Personnel (no.) 8,942 4,471 9,730 4,865 (*) Based on invested capital at 31 December. Value of production grew slightly, by 2.7%, on 2001, thanks mainly to: the delivery of the final ten EH101 helicopters to the Italian navy, Royal Air Force and Royal Navy; the delivery of 19 Apache combat helicopters to the British armed forces; the A129 combat helicopter, and the conversion of the A129 Mangusta used by the Italian army to combat use; pre-production programmes for the NH 90 helicopter. On the civil side, work included orders for the AB 412 for the Turkish coastguard, and for EH101 helicopters for the Canadian government. Product support in the form of the supply of spare parts for the EH101s belonging to the Italian and British defence ministries also made a contribution. EBIT increased both in absolute terms by emil. 54 and as a proportion of value of production, recording ROS of 12.1% compared with the 10.2% achieved the previous year. This improvement is attributable both to the increase in high value-added activities and to efficiency measures implemented last year as part of the integration of Italian and UK operations. The reduction in working capital, as a result of cash inflows from work in progress, contributed significantly to the drop in invested capital compared with the previous year. This effect can also be seen in the clear improvement in the return on investment (ROI) of about 9%. Research and development spending related chiefly to the following projects and programmes: continuing development of the new medium-sized AB139 helicopter, due to replace the AB412 (of which more than 10,000 have been sold worldwide). Certification of the new helicopter is expected in 2003; the BA609 programme which, though less further forward than planned, is nevertheless breaking new ground in vertical flight technology. Despite generally unfavourable economic conditions, the helicopter market grew. In the civil market, which in the past has been worth only a fraction of the value of the global market, demand for new helicopters was buoyed up by public services such as fire fighting, forestry and security services. In the military segment, it was driven by both new helicopters and the updating of existing fleets. On the military side AgustaWestland secured contracts to supply 12 EH101 aircraft to the Portuguese government and 16 Super Lynxes to the Omani air force; on the civil and government side, there were orders for eight AB 412 aircraft for the Italian fire service and a further eight for the state forestry authority, all confirming the company s excellent competitive position in its main markets. During the year AgustaWestland finished restructuring its production lines with the closure of the plant at Weston-Super-Mare, UK, and the rationalisation of production lines at its Yeovil facility in the UK, with total staff reductions of about 800. The costs of this restructuring do not figure on s results as they were covered by provisions set aside for the purpose in The number of new orders was boosted by growth in product support, which increased the value of contracts by 6.8% on the previous year. The order backlog, though 6% lower than in 2001, remained high, at emil. 7,146. This is equivalent to about three years value of production.

26 Space operates in the space industry through Alenia Spazio (which produces space infrastructure and scientific telecommunication, remote sensing and payload satellites) and Telespazio (earth stations and telecommunications services). The latter became part of at the end of the year and its results are therefore consolidated only for December. Its assets and order backlog, on the other hand, are listed in their entirety. Space Emil. New orders Order backlog 1, Value of production EBITDA EBIT (2) 29 Working capital 73 (54) Net invested capital Investment in non-current assets ROS (0.4%) 5.8% ROI (*) (0.5%) 16.1% R&D costs Personnel (no.) 3,920 2,880 (*) Based on invested capital at 31 December. The slump in the space sector continued last year, and uncertainty remains over its short- and medium-term prospects, owing to stagnating demand in the government and more importantly commercial segments, where demand for new traditional satellites continues to fall. Problems have also arisen given the delays in implementing broadband systems for multimedia applications. Unlike in the US, the European military market was not big enough to offset the slowdown in other segments. The multinational agreements on the International Space Station, reached by the project s international partners in Tokyo last December which had raised the prospect of its completion and operation with a crew of six astronauts may have to be revised following the Columbia space shuttle disaster in early February Against this backdrop, the space sector has also suffered from continuing delays in starting up big programmes like COSMO-Skymed and Galileo. Systems engineering and supply work have started on COSMO-Skymed and, after contracts were awarded for the first phase of work in February 2003, negotiations on the entire system are expected to be completed within the year. The Galileo project received the green light at the EU summit in Barcelona on 15 and 16 March The meeting asked the Transport Council to take decisions regarding the financing and start-up of the programme, for which some emil. 1,100 in EU and European Space Agency funds have been set aside. However, there remain some areas of uncertainty over the form of the contract and the role of the manufacturing companies involved, which could lead to delays in the programme s start-up. During 2002 the continuing downturn in the main markets hit profits in the sector, demanding urgent structural measures to maintain business strength and improve competitiveness. To this end Alenia Spazio set in train a restructuring and rationalisation plan involving the adoption of a new organisational model to gain tighter control over the business and improve the efficiency of its processes (implemented in the second half of 2002), and the reorganisation of production and support facilities and the rationalisation of external costs to restore efficiency and profitability. The company also implemented a redundancy scheme and a partial freeze on new hirings, as well as a programme of government-subsidised layoffs which will continue in Orders for emil. 371 were secured during the year. The main ones included further work on the Herschel-Planck and GOCE scientific satellites, the contract for four additional transponders installed on the Atlantic Bird satellite, further work on Artemis, feasibility studies on Teledesic, and the sale of SkyplexNet multimedia connectivity by satellite. Value of production, at emil. 528, was chiefly generated by: in Telecommunications and Remote sensing, continuing work on the C/D phase of COSMO- Skymed, completion and launch of the Atlantic Bird satellite, work on antennas and electronic components for Yamal, production of the AMOS commercial payload and work on the Radarsat telecommunications satellite. In multimedia, work included continuing development of the Artes 3 programme for the ESA; in scientific satellites, the Integral satellite was completed and launched, and work continued on GOCE and Herschel-Planck; in infrastructure, production continued on programmes linked to the International Space Station (Nodes 2&3, Columbus Pica, and Cupola). The business made a emil. 2 operating loss in 2002, from a profit of emil. 29 in This reflects the higher level of development activity in the commercial market (essentially Atlantic Bird) and in multimedia (EuroSkyWay especially), as well as a lower contribution from the more profitable International Space Station programmes, which are now being completed. This less favourable production mix and the additional costs of some orders, together with the under-use of

27 production capacity, led to a sharp drop in profitability: the EBITA margin fell from 5.8% in 2001 to -0.4% in For Alenia Spazio the losses of the last two years, together with uncertain medium-term prospects in difficult market conditions, have raised doubts over the recoverability of goodwill. This was therefore written down by emil. 79, and, added to the share of amortisation (emil. 8), reduced the remaining value at 31 December 2002 to emil. 56. The headcount at 31 December 2002 was 3,920. Of these, 2,758 related to Alenia Spazio (a fall of 122 from 31 December 2001 as a result of restructuring) and 1,162 to the acquisition of Telespazio. Defence Electronics operates in defence electronics through Galileo Avionica (100%-owned), Alenia Marconi Systems, a joint venture with BAE Systems (consolidated proportionally), and the newly-acquired Marconi Mobile, consolidated with effect from 2 August The defence electronics sector comprises production of avionics equipment, unmanned aircraft, radar systems, land and naval command and control systems, air traffic control systems, and integrated communications networks for land, naval, satellite and avionic applications. Defence Electronics Emil. New orders 1,523 1,469 Order backlog 3,267 2,378 Value of production 1,354 1,106 EBITDA EBIT Working capital Net invested capital 1, Investment in non-current assets ROS 5.0% 4.0% ROI (*) 4.9% 4.8% R&D costs Personnel (no.) 11,139 7,198 (*) Based on invested capital at 31 December. The figures in the table are not like-for-like, owing to a change in the consolidation base between 2001 and 2002 due to the acquisition of Marconi Mobile. The main orders secured in 2002 include: avionics systems: supplies for the NH90 helicopter and the EFA, and work on Mirach training drones; ground-based radar systems: updating of the NATO ACCF ground-based air defence system, and

28 the supply of 10 3D NATO radar systems to the Czech Republic, Hungary, Greece, and Turkey. Anti-aircraft defence radar: Dagger for the British army, Jernas for Malaysia and Commander Compars for Greece; ship-borne radar systems: orders for the Orizzonte and Type 45 programmes, long-range radar for the PAAMS systems, and updating of the ship-borne units De la Penne (Italian navy) and KDX (Korean navy); air traffic control (which has suffered from the general slowdown in traffic): orders from the Italian authority ENAV, Turkey, Hong Kong and Ecuador; simulators and training equipment: the contract for training crews on the Astute class of submarines; communications systems: the contracts for the 21st century soldier project for the Italian air force, the digital interforce defence network, satellite systems for the Orizzonte frigate, V/UHF systems for the Tornado and EFA aircraft, the communication system for the NH90 helicopter, the IFFDMS system for NATO s AWACF aircraft, and the encrypted high-security system for communications between Italian air force bases. Revenues stood at emil. 1,354, chiefly related to the production of avionics equipment for the EFA, naval radar systems for the PAAMS/FSAF programmes and the Royal Navy Type 45 programme, and numerous contracts for land and naval transmission and communications systems. The business generated EBIT of emil. 68, thanks not only to the consolidation of Marconi Mobile for five months, but also to considerable improvements both in avionics systems and in AMS. During the year the latter continued the integration and rationalisation of its Italian and UK operations following the acquisition of CARS from BAE Systems at the end of Invested capital at emil. 1,385 grew as a result of Marconi Mobile (which accounted for emil. 618 including goodwill), while the figure fell for AMS owing to advance payments for programmes already in progress. The headcount at 31 December 2002 was 11,139, an increase of 3,941 on the previous year essentially due to the acquisition of Marconi Mobile with 4,080 staff. Defence Systems Defence Systems comprises missiles company MBDA (a joint venture with BAE Systems and EADS, of which owns 25% share), Oto Melara SpA in land, naval and airborne weapons systems, WASS SpA, which makes underwater weapons (torpedoes and counter-measures) and sonar systems, and the International Naval Systems division which manages relations with Horizon SAS as part of the contract to produce four Horizon (Orizzonte) class frigates for the Italian and French navies. Defence Systems Emil. New orders 1, Order backlog 4,398 3,818 Value of production EBITDA EBIT Working capital (349) (275) Net invested capital Investment in non-current assets ROS 5.9% 8.2% ROI (*) 25.8% 12.1% R&D costs Personnel (no.) 4,234 4,240 (*) Based on invested capital at 31 December. The figures in the table are not like-for-like owing to a change in the consolidation base, which in 2001 did not include the MBDA joint venture (consolidated at 25%). Orders worth emil. 1,598 were received in 2002, including: missile systems: the order to develop and produce the Meteor long-range air-to-air missile for the UK Defence Ministry, the contract to supply the Jernas surface-to-air missile system to Malaysia, and the order to supply Exocet missiles to Malaysia, Brunei, and the United Arab Emirates; ground-based weapons systems: finalisation of the contract (through the Iveco Fiat-Oto Melara consortium) for the supply of 70 PZH 2000 self-propelled howitzers and related logistical support to the Italian army, orders for the weapons systems of the Horizon (Orizzonte) frigates for the Italian

29 and French navies, supply of four 76/62 SR naval cannons for frigates (to be built in France), for Saudi Arabia, and the supply to Agusta of a second consignment of gun turrets for installation on the A129 helicopter for the Italian army; underwater weapons systems: an order for 32 Black Shark heavy torpedoes for Malaysia, and the first phase of the contract to supply MU 90 torpedoes to Australia. Value of production was emil. 968, with significant contributions from the following: in missile systems: work on ASRAAM short-range air-to-air missiles for the UK Defence Ministry, the Mica multimission missile for the French DGA and the United Arab Emirates, the PAAMS surface-to-air ship-launched missile system and the FSAF ground-based missile, the Storm Shadow air-to-surface missile systems for the UK Defence Ministry and the SCALP EG air-tosurface missile systems for the French DGA, as well as customer support; in land, naval, and air weapons systems, supply of the Ariete tank and Dardo armoured vehicle to the Italian army, production of guided bombs for the Italian air force, and production of 76/62 naval cannons and KBA 25 mm naval automatic cannons; in underwater weapons systems, production of MU 90 light torpedoes. EBIT at 31 December 2002 was emil. 58. This performance was obtained thanks partly to MBDA, even though the joint venture generates lower profitability than the sector average. As part of the internal integration process, MBDA s management has developed a far-reaching restructuring plan which was launched in the first half of 2002, and should begin to bear fruit as early as next year. The other two companies in the division showed marked improvements, especially Oto Melara, whose ROS went from 6.1% to 9.1% thanks to more profitable activities than in the past and better use of resources, especially at the Brescia plant. EBITA at WASS on the other hand was broadly in line with the previous year, while the EBITA margin increased by about one percentage point, from 20.4% to 21.2% another first-class result. Working capital was negative to the tune of emil. 349, essentially because of advance payments from MBDA clients, while invested capital was emil. 221, including around emil. 425 in goodwill from the joint venture. The headcount at 31 December 2002 was 4,234, broadly in line with the previous year. Transportation During 2002 the global market for rail and mass transit systems continued the moderate growth of recent years, with the biggest market to be found in Europe. In Italy, recent orders bear witness to the upturn in transport infrastructure investment. The government has placed great emphasis on big strategic projects of vital national interest, and during the year enacted legislation aimed at speeding up the approval and awarding of public works contracts. Transportation Emil. New orders 1,490 1,196 Order backlog 3,138 2,993 Value of production 1,289 1,135 EBITDA EBIT Working capital Net invested capital Investment in non-current assets ROS 4.1% 3.0% ROI (*) 13.0% 6.6% R&D costs Personnel (no.) 5,750 5,596 (*) Based on invested capital at 31 December. Orders were received to the value of emil. 1,490, an increase of almost emil. 300 on This growth took place mainly in the vehicles and systems businesses, and the main orders included: Vehicles: E402B and ETR500 locomotives for Trenitalia; Systems: Alifana railway and Line 6 for the Naples local authority; Signalling: train control systems (SCMT) and the Turin-Novara high-speed rail link.

30 At 31 December 2002 the order backlog stood at emil. 3,138, a slight increase of emil. 145 on the emil. 2,993 posted in Value of production also saw a sharp increase of 13.6%, from emil. 1,135 in 2001 to emil. 1,289. This growth was achieved mainly in Signalling and Systems. The main orders during the year were as follows: Vehicles: the Atlanta and Madrid Metros, DMU trains for Danish railways, Sirio trams for Milan and vehicles for the Copenhagen Metro; Systems: orders relating to the Italian high-speed rail network, and the Copenhagen, Genoa and Dublin Metros; Signalling: orders for Railtrack NMC, the Copenhagen Metro, the Dallas DART, CTC Grandi Reti, and high-speed rail links in Italy, Spain and China, as well as components production, and services. EBIT was emil. 53, again a distinct improvement on the 2001 figure of emil. 34, while the EBITA margin rose from 3% to 4.1%. ROI increased from 6.6% in 2001 to 13% in 2002, owing to improved operating profitability and a fall in invested capital. Working capital fell by emil. 78 to emil. 226, with all companies making a contribution. Net invested capital also declined, by emil The headcount at the end of the year stood at 5,750, an increase of 154 on 31 December The biggest changes were in the vehicles business, where staff numbers fell as a result of the ongoing restructuring plan, and more especially following the sale of the Matera plant (formerly Ferrosud), while in signalling there was a significant increase as production volumes rose. Energy, Information Technology and Other Activities This segment comprises Ansaldo Energia (plant and components for the production of combined and simple cycle energy, services and nuclear plants); Elsag (IT services); BredaMenarinibus (urban and long-distance buses); Elsacom (satellite telephone services); Otto (which is expected to be wound up shortly once contractual disputes have been settled); Mecfin (real estate management and services); Iritech (which has completed the disposal of minor shareholdings and has acquired a stake in Ansaldo Ricerche with the aim of spinning off its divisions and managing them in co-operation with other companies); Finance (providing financial support to the Group as a whole), and other smaller companies. Energy, Information Technology and Other Activities Emil. New orders 1,580 1,336 Order backlog 2,367 2,242 Value of production 1,373 1,343 EBITDA EBIT (25) (26) Working capital 175 (176) Net invested capital 1,804 1,602 Investment in non-current assets ROS (1.8%) (1.8%) ROI (*) (1.4%) (1.5%) R&D costs Personnel (no.) 6,394 6,962 (*) Based on invested capital at 31 December. The two main businesses saw the following developments. The Energy market slowed following the growth seen in recent years, with a drop in orders for gas and steam turbines. However, the growth in the number of gas turbines in operation boosted the after-sales support segment, which generates higher margins than manufacturing and has a lower risk profile. Against this backdrop, Ansaldo Energia consolidated its 3% global market share and significantly added to its stock of machinery, which should benefit after-sales services in the future. The company s share of the domestic market was bigger: it accounted for 60% of the gas turbine market in 2002.

31 The main plant orders were for the supply of four combined cycle turbines to Enipower, two singleshaft units for two combined-cycle plants to Tractebel, two steam turbines to Enelpower, and four gas turbines and four alternators for the Pareh Sar combined cycle plant in Iran. Service activities included multi-year contracts linked to the Enipower and Tractebel orders, and contracts with Enelpower and other operators. Production during the year consisted chiefly of power blocks for Enipower, gas turbines and alternators for Iran, start-up of Ansaldo-designed hydrogen alternators at Hamma (Algeria), and Neyveli (India), and the first 250-MW new-generation gas turbine for the Enel plant at Pietrafitta. Elsag s main market, the IT sector, continued the slowdown witnessed in 2001, from which there are no signs of a recovery as yet. This increased competitive pressures and reduced average profitability in the sector. Faced with these difficulties, Elsag launched a rationalisation programme, and began refocusing its product portfolio towards higher value-added activities. Elsag was active in: - designing, integrating, and supplying IT systems for improving production processes and solving logistic problems of companies operating chiefly in industry, banking, public and private services, postal services and defence; - supplying long-term services such as outsourced information systems, management and maintenance of equipment and systems, and administrative and personnel management services; - manufacture of and technical assistance for automated postal systems. STMicroelectronics STMicroelectronics is the world s third-biggest semiconductor manufacturer, and the global leader in developing and selling semiconductors and solutions for all microelectronic applications. The company designs, develops, produces and sells a wide range of integrated semiconductor circuits and discrete devices for use in telecommunications, IT, consumer electronics, auto electronics and control and automation systems for industry. STMicroelectronics USD mil. Revenues 6,318 6,357 EBIT Net profit Net invested capital 7,433 6,513 Investments 996 1,700 Depreciation and amortisation 1,382 1,320 ROS 9.5% 5.3% R&D costs 1, Personnel (no.) 43,100 40,291 The company s shares are listed on the New York stock exchange, Euronext Paris and the Milan stock exchange. At 31 December 2002 held an indirect stake in STMicroelectronics of about 18%. The company is valued at equity in s balance sheet. STM saw a progressive improvement in its business in 2002, despite the continuing difficult market situation of volatile prices and an uncertain outlook for demand, which has persisted since Operating and net profit posted solid growth, while revenues remained at broadly the same level as the previous year.