Management Discussion & Analysis*

Management Discussion & Analysis* *based on Italian Financial Statements reclassified according to internal management criteria. Finmeccanica SpA consolidated annual accounts as of and for the year ended 31 December 2001. Translation from the original Italian Accounts. The amounts presented in this translation have been converted into Euro at the rate of Euro 1 = Lire 1936.27. PREPRINT 1

Board The Finmeccanica Group Management Discussion & Analysis* 1. Operating environment 2. Results 3. Main events in 2001 Establishment of the MBDA joint venture and reorganisation of AMS STMicroelectronics transaction 4. Changes in the Group s structure 5. Growth prospects 6. Financial position 7. Management performance by sector 8. Breakdown of results by division 9. Breakdown by market 10. Finmeccanica and the European aerospace and defence industry 11. Research and Development 12. Finmeccanica: organisation and human resources 13. Stock option scheme 14. Corporate Governance 15. Subsequent events 16. Outlook *based on Italian Financial Statements reclassified according to internal management criteria. Operating environment 2

BOARDS BOARD OF DIRECTORS (for the 3 year period 2000/2002) BOARD OF STATUARY AUDITORS (for the 3 year period 2000/2002) ALBERTO LINA Chairman and CEO GIUSEPPE BONO Managing Director and COO LORENZO BINI SMAGHI Director DOMENICO PIACENZA Chairman GIORGIO CUMIN, FRANCESCO FORCHIELLI, DOMENICO LUNEDEI, ANGELO NATILI Auditors PIERLUIGI ALEMANNI, PIERO SANTONI Substitute Auditors SERGIO MARIA CARBONE Director ALBERTO CLæ Director VITTORIO AMEDEO COLAO Director ACHILLE COLOMBO Director MAURIZIO DE TILLA Director ERNESTO MONTI Director ANTONIO LIROSI Director CORRADO PASSERA Director MAURIZIO PRATO Director VITTORIO RIPA DI MEANA Director FRANCESCO SANNA Director CARLO TAMBURI Director LUCIANO ACCIARI Secretary of the Board of Directors INDEPENDENT AUDITORS (for the 3 year period 2000/2002) RECONTA ERNST & YOUNG S.p.A 3

BOARDS (before start of Annual Shareholders Meeting of 16.05.2002) BOARD OF DIRECTORS BOARD OF STATUARY AUDITORS (for the 3 year period 2000/2002) (for the 3 year period 2000/2002) PIER FRANCESCO GUARGUAGLINI (*) Chairman and CEO ROBERTO TESTORE (*) Managing Director and COO LORENZO BINI SMAGHI Director DOMENICO PIACENZA Chairman GIORGIO CUMIN, FRANCESCO FORCHIELLI, DOMENICO LUNEDEI, ANGELO NATILI Auditors PIERLUIGI ALEMANNI, PIERO SANTONI Substitute Auditors GIUSEPPE BONO Director SERGIO MARIA CARBONE Director ALBERTO CLæ Director ACHILLE COLOMBO Director MAURIZIO DE TILLA Director ERNESTO MONTI Director CORRADO PASSERA Director MAURIZIO PRATO Director VITTORIO RIPA DI MEANA Director FRANCESCO SANNA Director CARLO TAMBURI Director LUCIANO ACCIARI Secretary of the Board of Directors INDEPENDENT AUDITORS (for the 3 year 2000/2002) RECONTA ERNST & YOUNG S.p.A. (*) Appointed by the Board of Directors on the 24 th of April 2002 4

The Finmeccanica Group Finmeccanica is Italy s second-largest manufacturing group and the country s leading high technology sector company. The group operates mainly in the aerospace and defence industry, but also possesses significant expertise and manufacturing assets in the IT services, transport and energy sectors. In addition, Finmeccanica has an interest in the microelectronics sector through STMicroelectronics. Main group activities Aeronautics Structural components for regional jets and civil transport aircraft, military transport aircraft and fighter jets; maintenance and conversion of military and civil aircraft. Space Telecommunications and remote monitoring satellites, space infrastructures, multimedia satellite systems, control centres for space systems, special software applications. Helicopters Production of complete military and civil helicopters. Defence Radar, land and naval command and control systems, air and naval traffic control systems, missiles, missile systems, avionics systems and equipment, optoelectronics systems, armoured vehicles, land and naval weapons systems, surface and underwater naval systems. 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. Microelectronics Semiconductor and discrete integrated circuits. Transport 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. Energy 5

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. Main group companies FINMECCANICA Holding Aeronautics Space Helicopters Defence 100% Alenia Aeronautica 100% Alenia Spazio 50% AgustaWestland 100% Galileo Avionica Officine Aeronavali 100% Societ Italiana Avionica 75% Lockheed Martin Alenia 50% TacticalTransp. Systems 100% 100% Laben Space Software Italia 45% Bell Agusta Aerospace Co. 100% 100% 50% Oto Melara Whitehead Alenia Sistemi Subacquei Alenia Marconi Systems 50% MBDA Microelectronics IT Services Transport Energy 18% STMicroelectronics 100% ELSAG 100% Ansaldo Breda 100% Ansaldo Energia 100% Ans. Trasp. Sist. Ferr. Subsidiary Joint venture 100% Ansaldo Signal 6

KEY CONSOLIDATED FIGURES IN 2001 mil. 1999 2000 2001 Value of production 6,209 6,225 6,773 Operating profit 312 366 411 Net profit excluding STM-56-2 135 Net profit before minorities 66 339 188 Net profit 73 403 212 Net invested capital 3,291 3,756 2,768 Net assets 2,765 3,120 3,176 Net debt 526 636-409 Additions to non-current assets 242 163 484 R&D expenditure 748 821 850 ROS 5.0% 5.9% 6.1% ROI excluding STM11.3% 16.0% 20.6% Value added -37 52 113 New orders 7,212 9,149 7,013 Order backlog 14,758 17,503 19,571 Number of employees 43,688 39,370 41,093 Consolidated revenues 2001: 6.773 MIL. Helicopters 17% Defence 21% Space 7% IT Services 6% Energy 12% Aeronautics 19% Other activities 2% Transport 16% 7

Pro forma aggregate of wholly owned or jointly controlled subsidiaries Aggregate revenues for all group companies which are either wholly owned, or jointly controlled with international partners totalled 18,334 mil. in 2001. At the end of the year the group had around 97,500 employees, of whom 50% are based abroad. Pro forma revenues 2001: ~ 18.334 mil. Defence 22% Space 3% IT Services 2% Energy 5% Transport 6% Other activities 1% Helicopters 13% Aeronautics 7% STMicroelectro nics 41% Pro forma employees 2001: 97,500 Europe 30% Italy 47% North America 5% Rest of the world 18% 8

Management Discussion & Analysis 1. Operating environment 2001 was an exceptional year marked by extraordinary events that led to profound changes at global level, indicating a distinct break with the past. After several years of growth, the world economy and especially the most industrialised countries was suddenly in recession, with the United States particularly affected. The euphoria surrounding the new economy that had dominated the stock markets at the tail end of the 1990s quickly dissipated. The adjustment of expectations for short-term growth in the internet-related sector led to a collapse in share prices for those companies which had gone to the markets with ambitious plans and benefited from the wealth effect which investors were feeling at that time. The natural consequences of this scenario were cuts in growth and consumption forecasts particularly in countries such as the US which display no, or even a negative propensity for saving, a flight to quality, a greater focus on earnings visibility rather than expansion, and a renewed interest in company fundamentals, particularly in the old economy sector. The general slowdown in the economy hit certain sectors more severely, such as air transport, telecommunications and consumer electronics, and filtered through to the secondary sectors of microelectronics and equipment suppliers. Against this unfavourable economic backdrop in which there were already signs of a fast anti-cyclical response the tragic events of 11 September unfolded, threatening to unleash major political, economic and institutional repercussions on the entire western world. The reaction of the international community to the terrorist attacks was swift and decisive, and the war against terrorism is still under way. The predominant role of the US in international politics has been reinforced more than ever before as it has assumed an undisputed leading role in building international alliances and relationships. 9

The new political and diplomatic order has also influenced the way certain countries are viewed with regard to international security, and the map of business and commercial relationships has been redrawn as a result. Turning to the economy, monetary policy measures were quickly introduced during 2001 to boost growth (interest rates were cut by almost five percentage points in the US and 1.5 points in Europe), especially in the US, which limited the negative effects. However, these measures were unable to prevent the difficulties of certain sectors worsening, and in some cases entering a recession, partly due to structural factors. In this context, the collapse of Enron took on a particular significance in the first few months of 2002. Beyond the specific financial repercussions that such a large-scale failure can have on all parties involved, this case highlights the need for listed companies to strengthen systems of internal and external control, and to follow principles of transparency, presenting accurate information to the market along with reliable balance sheets. Another major development in 2001 was the globalisation movement. This prompted reflection of the impact of globalisation on society and how it should be managed. * * * This set of events represented a distinct break with the past, which was even more marked as it came after a long period in which stability, growth and security reigned throughout the western world. The extent of the changes has significantly increased the level of uncertainty in the economy, raising the risk premium required on investments, whether made directly or through portfolios, as a result. This puts the onus on companies to impose stringent standards of efficiency on management, to develop their own technological resources and re-engineer production methods, adapting their operations to a market environment in which the nature of demand is being transformed and where competition is increasingly fierce. Certain industries have been affected more than others by the new environment: in the key Finmeccanica sector of aerospace and defence this was to be expected. But so far there 10

have been positive as well as negative consequences, although the effects could be felt more gradually and display some structural aspects. The civil aeronautics and air transport sectors were among the first to suffer: the fall in passenger traffic led the airlines to revise their investment plans for new aircraft. The difficulties in this market then fed through to aeronautics manufacturers, who revised down their short-term order forecasts and cut back production plans, adjusting the activity rates of their production facilities to the new demand conditions. In the meantime, new requirements of a political and military nature have emerged which should benefit sectors closely linked to defence and security, although the scale and time frame are difficult to predict. International terrorism is currently posing a major problem for governments, given their responsibility to protect their citizens. Now that terrorism has become highly unpredictable, new and highly sophisticated solutions must be developed to counteract it. The military response of the international community to terrorism is also prompting governments to review their defence policies, which in some cases has already happened where military action has been required to resolve local conflicts. The new demands placed on armed forces in the sphere of international co-operation make it necessary to adopt integrated management systems for operations and therefore more advanced and complex systems and methods of intervention. In the US where defence spending is the highest in the world the government immediately increased its 2003 defence budget by 30% (versus 2001), with the aim of strengthening structures to protect the country from terrorist attacks, and giving its military new national defence capacities which will also help it conduct operations in other areas of the world, thereby consolidating its leading role in international politics. In Europe, these new requirements add to those which were already part of the process of drafting a European Union defence policy, which started a few years ago, and should enable a common operational structure and military force to be set up. However, the need to increase European investment in defence to achieve these political aims faces the obstacle of strict public spending controls, and it is important that technical and administrative procedures do not increase the time taken between making spending decisions and implementing modernisation programmes. 11

It is vital that Europe continues to pursue the process of integration and establishment of a common foreign, security and defence policy, and to fully commit to preventing the (mainly technological) gap that separates it from the US from widening, by devoting more resources to technological innovation and research. Co-operation will therefore be essential between the member states involved in these initiatives especially in industry, where the countries can pool competencies and R&D spending as well as their armed forces clients. The differences between the US and Europe in this context should boost the political, military and industrial co-operation that has always represented an element of stability and growth for the two continents. This could ultimately bring greater reciprocity and development that will be fundamental to the economies and well-being of the rest of the world. As for Italy, it is important that the government is committed to bringing its defence spending in line with other European countries, and that the defence budget is sufficient to meet the requirements of modernisation that a wider Italian role in European initiatives would require. Making Italy s armed forces more professional, participating in the European Rapid Reaction Force, redefining the operations of military structures and raising the efficiency of service functions are all requirements which necessitate a review of the composition and size of the country s defence budget. New requirements for security and advanced operating capacity of military apparatus is likely to boost the defence industry, but only when these new demands are objectively acknowledged through the earmarking of new investment via a process of adjusting to future demand. Finmeccanica aims to meet the new requirements of its traditional clients by extending its product ranges, providing complementary services and support for complex defence activities and developing products and systems both more efficiently and at more competitive prices. Innovation will be key in satisfying this new demand and companies will be expected to make considerable advances in technology to enhance their products and services. They will also have to review their current ranges of products and systems and assess their degree of obsolescence based on the new requirements. 12

These new challenges will require greater production efficiency from industry as well as increased productivity. Finmeccanica has already undertaken initiatives to make its own production facilities more efficient, encouraging international joint venture partners to follow its lead. 13

2. Results Despite last year s turbulent market scenario, Finmeccanica achieved good results in 2001, thanks partly to the foundations laid by the restructuring process begun in 1997 and implemented over the last few years. In that time Finmeccanica has emerged from a deep economic and financial crisis and begun moving towards profitability and financial stability. The group posted a net profit of 188 mil. in 2001, compared with 339 mil. in 2000, which benefited by 341 mil from the equity share in the results of STMicroelectronics NV. The global downturn in the semiconductors industry meant that STM was unable to repeat this exceptional result, and in 2001 its share of net profit fell to 53 mil. The reduced contribution by STMicroelectronics NV to net profit was however offset by the performance of the rest of the group (Finmeccanica SpA plus subsidiaries), which generated a net profit of 135 mil., versus approximate breakeven (-2 mil.) in 2000. 339 Consolidated net profit mil 341 53 188 135-2 2000 2001 Finmeccanica without STM STM contribution TOTAL Net profit including STMicroelectronics NV and after minorities stood at 212 mil., compared with 403 mil. in 2000. Stripping out the contribution from Finmeccanica s stake in STM (341 mil. in 2000 and 53 mil. in 2001), net profit rose from 61 mil. in 2000 to 160 mil. in 2001. 14

403 Net profit ( mil.) 341 53 212 61 160 2000 2001 Finmeccanica without STM STM contribution TOTAL Value of production in 2001 was broadly in line with growth forecasts and targets: the consolidated figure advanced 9% to 6,773 mil., from 6,225 mil. in 2000. This increase was attributable to aeronautics activities (the Eurofighter was launched and entered production in 2001) and the helicopter business (boosted by a change in the consolidation area following the establishment of the AgustaWestland joint venture, 50% consolidated in place of 100% of Agusta), together with the AMS joint venture (increased sales of air traffic control systems). Space operations, meanwhile, saw a drop in revenues. Value of production ( mil.) 6,225 +9% 6,773 Other Aerospace & Defence +10% 4057 4445 2000 2001 For aerospace and defence, the aggregate value of production increased by 338 mil., 9.6% ahead of 2000. Transport made a 200 mil. contribution to overall growth, reversing the decline registered in 2000 (which was partly due to problems in the signalling division), 15

and partly offsetting the effect of de-consolidating non-core activities in the energy business (steam boilers and superconducting magnets). Operating performance was in line with the previous year: consolidated EBITDA was up 9% at 641 mil., 53 mil. higher than the 2000 figure of 588 mil.. Aggregate EBITDA for aerospace and defence remained almost unchanged, at 540 mil. in 2001 (541 mil. in 2000), with an 11 mil. increase in the helicopter business partly offsetting the 21 mil. drop posted by space operations. In other areas, transport increased its contribution to EBITDA by 80 mil., more than compensating for lower contributions from energy ( 4 mil.) and IT services (-14 mil.). Consolidated EBITDA ( mil.) 641 588 EBITDA - Aerospace & Defence ( mil.) 541 540 +9% 2000 2001 2000 2001 Although depreciation remained broadly unchanged and goodwill amortisation increased, consolidated EBIT went up by 45 mil., from 366 mil. in 2000 to 411 mil. in 2001 (+12%), taking ROS from 5.9% to 6.1%. 2001 EBIT for aerospace and defence was in line with 2000 at 403 mil., compared with 368 mil. the previous year (-1.5%), while other activities benefited from the restructuring of the energy and transport divisions. 16

Consolidated EBIT ( mil.) 366 411 EBIT - Aerospace & Defence ( mil.) 410 403 +12% -1.5% 2000 2001 2000 2001 The lack of a significant change in this result was due to: operating profit remaining flat in the aeronautics business, following an increase in self-funded operations (such as the 12 mil. spent on the A380 programme) and a less positive performance in the last quarter of 2001; profit dilution in the helicopter business owing to the lower profitability of the UK side of the AgustaWestland joint venture (consolidated for the first time in 2001); and a poor performance in the space business caused by market and operating difficulties. These negatives were partly offset by AMS, which posted its first operating profit since the joint venture was set up, and by an improved performance from OTO Melara. EBITA went up by 54 mil., from 393 mil. in 2000 to 447 mil. in 2001 (+14%), increasing from 6.3% to 6.6% of the value of production. Consolidated EBITA ( mil.) 393 447 +14% 2000 2001 In 2001 Finmeccanica increased its R&D expenditure to 849 mil., from 821 mil. in 2000; solid proof of the importance the group attaches to maintaining and consolidating its technology assets. 17

The improvement in operating efficiency can be seen from the rise in operating cash flow compared to 2000, largely thanks to a significant reduction in working capital. The reduction in working capital also helped to improve the group s net financial position: at end-2001 it was positive at 409 mil., compared with net debt of 636 mil. in 2000. This reversal was chiefly due to the 1,051 mil. generated from the sale of 3% of STMicroelectronics NV (discussed in more detail later). However, stripping out this operation and excluding investments in the MBDA missile joint venture and reorganisation of AMS (costing 245 mil. net), group debt was still 37% lower in 2001 than the previous year, at 397 mil.. Net financial position ( mil.) 636 397 +245-37% 2000 2001 bef. extr. op. -1051-409 MBDA STM sale 2001 Net invested capital fell from 3,756 mil. at end 2000 to 2,768 mil. at the end of 2001. This sharp fall was due to a rise in customer advances for work in progress and the net effect of setting up MBDA together with the AMS restructuring, as well as to the fact that depreciation was higher than investment over the year. ROI increased from 16% in 2000 to 20.6% in 2001 (calculated excluding the value of the stake in STMicroelectronics, which does not contribute to consolidated operating profit as it is valued at equity). EBIT margin ROI 5.9% 6.1% 16.0% 20.6% 2000 2001 2000 2001 18

At consolidated level Finmeccanica won orders worth 7,013 mil. in 2001, which was less than the 9,100 mil. plus generated in 2000, although this figure included the exceptionally large 1,735 mil. NH90 helicopter order. At end-2001 the order book was worth around 19,600 mil., 16.3% higher than the 17,503 mil. backlog at end-2000. The group s average workload is therefore equivalent to over three years of activity. Around 2,851 mil. of this 2,000 mil. increase was due to MBDA. The joint venture (25% consolidated) boasts an order backlog worth around 10,300 mil., thanks to its leading market position and participation in most of Europe s missile programmes. At the end of 2001 the group had 41,093 employees compared with 39,370 the previous year, an increase of 1,723. The MBDA/AMS operation also had a significant effect in this area, accounting for around 2,000 employees. A brief description of the results of each group business is set out below. The deepening crisis in the aviation industry in the last quarter of 2001 led to growth rates significantly lower than forecast in the aeronautics business, where the value of production was 1,328 mil. (+6.6%), with operating profit unchanged at 175 mil. Also significant was a shift in orders towards the military and away from the civil sector. In the civil sector, Alenia Aeronautica signed two agreements important for future growth: one is for development and production of structural components for the Airbus A380, while the other involves participation in developing Boeing s new Sonic Cruiser. The fall in revenues from 533 mil. to 496 mil (-7.0%). and the significant decline in operating profit from 50 mil. to 29 mil. (-41.7%) in the space business derived from flat demand in the sector, along with a manufacturing structure in need of restructuring in order to enhance the business s competitive position and significantly improve its efficiency. In the helicopter business, the 50%-consolidated AgustaWestland joint venture became fully operative on 9 February 2001. The company s value of production stood at 2,412 mil., with total operating profit at 246 mil. Thanks to its comprehensive product range and a 7,604 mil.order backlog, AgustaWestland is a world leader in terms of technological and manufacturing expertise, with a 20% share of the global market. The company has 19

achieved considerable commercial success, while to improve on its current level of profitability it plans to shed 950 jobs in 2002. 18 December 2001 saw the establishment of MBDA, a joint venture which received all of the missile and missile systems assets of BAE Systems, EADS and Finmeccanica. Under its system of corporate governance, each of the shareholders is guaranteed equal participation in the running of the company, even though Finmeccanica s stake is only 25%, compared with 37.5% each for BAE Systems and EADS. MBDA is Europe s largest and the world s second largest missile producer, with an order backlog of 10,111 mil. at 31 December 2001. Alenia Marconi Systems (AMS), a 50% consolidated joint venture operating in the field of radar and command and control systems, increased its value of production by 13.6% last year (up from 1,163 mil. in 2000 to 1,322 mil.), while its operating result returned to profit at 14 mil. (from a loss of 7 mil. in 2000). As part of the reorganisation process which followed the spin-off of its missile activities into MBDA, AMS acquired the radar, naval integration and naval command and control assets of BAE Systems (Combat and Radar Systems, or CaRS). Although better than in the past, the joint venture s profitability is still unsatisfactory, and and being below that of competitors. In addition to the reorganisation currently under way, further efforts will therefore be necessary to bring about greater integration between the UK and Italian activities. The rationalisation of the defence business continued last year, with the creation of Galileo Avionica SpA and OTO Melara SpA, which operates in the sector of land armaments. This business also includes WASS (underwater systems) and International Naval Systems. Value of production was up just 1.4% in 2001 at 790 mil., following the cancellation of supply contracts for the T72 tank, although operating profit rose by 4.7% on 2000 to 70 mil. The restructuring currently under way, aimed at generating industrial synergies between the various operations, should begin to impact on results in the next few years. The slowdown in demand in the IT market was reflected in greater price pressures, which look as if they could become structural, and which affected the profitability of the IT services business. Operating profit dropped 39.5% to 25 mil.. Despite the market difficulties however, both sales and value of production improved significantly compared to 2000, with the value of production in particular rising 10.5% to 415 mil. This business is 20

currently working towards refocusing on defence-related activities, and is implementing a reorganisation programme aimed at curbing costs. In 2001 the restructuring of the energy business was completed with the sale of its steam boilers and superconducting magnet operations. The disposal of these activities led to a 5% fall in the value of production to 827 mil. The fall in operating profit down 7.8% to 24 mil. was due to lower extraordinary income than in 2000. However, operating profit benefited from the higher profitability of recent orders, against the backdrop of a buoyant market that continues to grow rapidly. In 2001 the reorganisation of the legal structure of the transport division was completed. As a result, Finmeccanica now directly controls AnsaldoBreda SpA, Ansaldo Trasporti Sistemi Ferroviari SpA and Ansaldo Signal NV. The three companies posted significantly improved results versus 2000, with value of production up 21.4% to 1,135 mil. and an operating profit of 34 mil. against a negative figure of 51 mil. in 2000, owing to heavy provisions made to offset serious problems related to certain signalling orders. Further rationalisation of production facilities (still being evaluated) should put the transport business in a position to gain full benefit from the spending earmarked by the Italian government as part of its National Transport Plan, which could provide a further boost to revenues and profitability. The performance of STMicroelectronics in 2001 was impacted by the continuing and deepening crisis in the semiconductors industry, where overcapacity plus weak sales on end markets led to an intensification of competition and drastic price cutting. Last year world demand for semiconductors fell 32% in value terms to USD 139bn, compared with USD 204bn in 2000. STMicroelectronics NV, in which Finmeccanica owns a stake via STMicroelectronics Holding NV, generated revenues of USD 6,3bn, 18% lower than the previous year. However, this decline was not as steep as those of its competitors, improving the company s relative market position. Despite the difficult operating environment, STMicroelectronics NV produced a positive net profit of USD 257m after restructuring costs of over USD 350m and R&D costs of USD 978m. 21

3. Main events in 2001 2001 was a very important year for Finmeccanica from a strategic, organisational and financial point of view. As expected, the reorganisation of the legal structure was completed, according to the plan introduced in 1997, while the year also saw the launch of some key international initiatives (see below). The transport division was reorganised as follows: Ansaldo Trasporti transferred its vehicles business and traction operations to AnsaldoBreda (which also received the mechanical activities of Breda Costruzioni Ferroviarie), and its systems business to Ansaldo Trasporti Sistemi Ferroviari. Ansaldo Trasporti was then left with the structure of a holding company and was later merged into Finmeccanica SpA. The defence division was reorganised following the transfer by Finmeccanica SpA of its avionics systems and equipment business to its wholly owned subsidiary Galileo Avionica SpA, and its Otobreda business to its wholly owned subsidiary OTO Melara SpA. Finmeccanica SpA transferred its aeronautics division to the wholly owned subsidiary Alenia Aeronautica SpA on 1 January 2002. The AgustaWestland helicopter joint venture with GKN became fully operational, and now ranks first in Europe and second in the world. MBDA, a missiles joint venture was established with the Franco-German-Spanish company EADS and the UK s BAE Systems. MBDA also ranks first in Europe and second in the world. As part of the same operation, a plan to restructure the AMS joint venture was drawn up, with BAE Systems contributing its activities in the land and naval command and control systems sector. The shareholder base of STMicroelectronics Holding NV changed following the sale of around 3% of STMicroelectronics NV. The joint venture under negotiation with EADS in the aeronautics sector (civil and military) since 2000 did not go ahead. The talks ran into difficulty because of the changes in the market environment, particularly with regard to civil aeronautics, which prevented an agreement being reached. Ansaldo Energia was not sold. Talks with the Genpower consortium encountered insurmountable difficulties over asset valuations and were discontinued. Finmeccanica still intends to exit the sector, thanks also to the business restructuring 22

carried out over the last few years. Ansaldo Energia now offers considerable management know-how and development potential. 3.1Establishment of the MBDA joint venture and reorganisation of AMS Together with BAE Systems, Finmeccanica controls Alenia Marconi Systems (AMS), which operates in the following sectors: missiles, radar, command and control systems, and air traffic control systems. In April 2001, an agreement was concluded between Finmeccanica, BAE Systems and Franco-German-Spanish company EADS to transfer the missile activities of AMS to a new company called Matra BAE Dynamics Alenia (MBDA), and BAE Systems land and naval control systems (Combat and Radar Systems division, or CaRS) to AMSH, to be followed by a restructuring of the latter. MBDA and new AMS: corporate structure Finmeccanica BAE Systems EADS 50% 50% AMS Holding 25% 75% MBDAH SAS 100% 50% MBDA SAS 50% AMS NV 100% AMS Ltd 100% AMS SpA 100% 100% 100% Op. Co. IT Op. Co. FR Op. Co. UK Under this agreement, Finmeccanica retains joint control of AMS, while the nature of the joint venture s business was partially changed via the sale of its missile activities and the strengthening of its expertise in the other sectors in which it is present. In the light of these changes the company has had to review its integration projects and synergy strategies. Finmeccanica has also acquired a 25% indirect interest in MBDA, which now accounts for almost the entire missile industry in Europe. 23

This acquisition came about partly through the transfer of the AMS missile business, and partly through the purchase of an interest large enough to influence the corporate governance structure of MBDA, effectively giving Finmeccanica joint control over the largest missile company in Europe, second only to US producer Raytheon. This was clearly a strategic investment giving Finmeccanica a far more significant role in Europe s missile industry than its own activities could have achieved. 3.2 STMicroelectronics transaction As of 31 December 2000, Finmeccanica indirectly owned around 22% of STM via ST Holding NV (STH), as shown below. Finmeccanica Areva France Telecom 51% 49% 50% ST Microelectronics Holding FT1CI 50% 100% STM Holding II 43% ST Microelectronics 57% Free float The agreement signed on 10 December 2001 with the French shareholders of the holding company FT1CI, Areva and France Telecom, establishes: the confirmation of STMicroelectronics Holding as a means to manage the controlling stake in STMicroelectronics and the only corporate vehicle through which the indirect interests of Areva, Finmeccanica and France Telecom in STMicroelectronics can be changed; the definition of a corporate governance structure for STMicroelectronics Holding whereby after March 2004, a shareholder owning more than 52.5% of STH will automatically become the majority shareholder with all normal majority shareholder rights, while the minority shareholders will be granted certain protection rights; 24

an option for shareholders to adopt measures to reject takeover bids for control of STMicroelectronics which are not deemed to be in the interest of the company and its shareholders; an option for Finmeccanica to sell up to 50% of its indirect interest in STMicroelectronics (corresponding to 11% of STMicroelectronics). After this agreement was reached with Areva and France Telecom, Finmeccanica indirectly sold 30 million ordinary shares in STMicroelectronics (at 35,75 per share) through ST Holding on 10 December 2001, raising proceeds of 1,051 mil. The gain from the sale was 825 mil. As part of the same operation, France Telecom sold 39 million ordinary STMicroelectronics shares and placed a convertible bond issue on 30 million ordinary STMicroelectronics made available by STMicroelectronics Holding. Following these transactions, the shareholder structure and Finmeccanica s interest in STMicroelectronics is as follows: Finmeccanica Areva France Telecom 64% 36% 50% ST Microelectronics Holding FT1CI 50%% 100% STM Holding II 35.7% (*) 64.3% Free float ST Microelectronics (*) Through a tracking stocks mechanism, Finmeccanica has an 18.33% interest in STMicroelectronics. The agreement has also applied the mechanism under Dutch law known as tracking stocks to ST Holding, under which two types of shares are created ( A and B ). At the same time, the assets held by the company (in this case, the ordinary shares in STM) are allocated equally to the A and B shares. Under this mechanism, the assets held by the two groups of shareholders are segregated, so each can sell its shares independently, and at different prices. 25

4. Changes in the group s structure The establishment of the joint ventures and completion of the group legal reorganisation programme (including the transfers between different parts of the group), gave Finmeccanica the opportunity to structure the assets belonging to its different businesses, in order to enhance the value of the subsidiaries and maximise their earnings potential. This process was supported by the results of valuations and estimates carried out by external consultants. As a result, Finmeccanica has completed the transformation from a manufacturing and systems conglomerate into an industrial holding company mainly comprising wholly-owned subsidiaries or majority stakes in ventures with other industrial partners. Following the conclusion of this process and in line with its new role, the company has been pursuing management objectives for its asset portfolio, which can be summarised as follows: raising the liquidity of its assets; strengthening and consolidating control over its industrial activities and holdings; generating higher returns on invested capital. Likewise the reduction in the company s indirect stake in STMicroelectronics NV (STM) has enabled the company to raise the liquidity of its own assets, take a more flexible approach to managing its stake in STMicroelectronics and further consolidate the group s financial structure. This operation has also helped Finmeccanica to achieve its objectives of strengthening control over its own holdings and at the same time start a process of increasing the relative weight of aerospace and defence in the group s assets with respect to its holding in STMicroelectronics. The sale of 30 million STMicroelectronics shares by Finmeccanica and 39 million by France Telecom (in addition to the placement of a convertible bond), has enabled Finmeccanica to increase its interest in ST Holding, the company which manages the majority stake in STMicroelectronics, to 57% (fully diluted), If Finmeccanica becomes the majority shareholder in STMicroelectronics Holding, it could benefit from a financial control premium by virtue of owning a controlling stake, while 26

managing the interest strategically to maximise value for its own shareholders as is appropriate for an industrial holding company. Both the aim of generating a higher return on invested capital and the general need to raise the group s production and management efficiency, lay behind the decision to restructure the group along company lines, are intended to enhance the value of Finmeccanica s assets. In this regard (bearing in mind the analysis of the wider economic context described in more detail above) Finmeccanica has undertaken initiatives to optimise the effects of the restructuring already under way, so as to enable it to reap full advantage of strategic market opportunities and bring its business plans to fruition, and therefore continue to reward its shareholders over time. In the light of the altered market environment and the events of last year, this has prompted a review of the value attributed to Finmeccanica s businesses, with the adoption of criteria intended to improve the quality of invested capital and the returns generated over time as part of its business plan. This has led to: acknowledgement of the existence of items amounting to 182 mil. relating to areas of potential risk already mentioned in the accounts, which have undergone changes during the course of the year and warrant provisions or write-downs; allocation of 78 mil. for contingent liabilities arising in 2001; definition of 153 mil. for charges relating to the restructuring plans for several group companies; allocation of 288 mil. for greater risk and/or writedowns, partly supported by the findings of independent consultants, following the reorganisation of the group s legal structure. The restructuring has also resulted in intercompany capital gains of 1,000 mil. (around three times the figure identified for greater risk/lower valuations, and inclusive of the transfer of the Aeronautics division, effective from 1 January 2002), which have been deferred; the decision to write down goodwill of 288 mil. relating to MBDA and AMS, equivalent to the costs incurred on establishing the former and restructuring the latter, the value of the premium paid in the MBDA acquisition for obtaining a controlling stake and an amount for the synergies to be generated by AMS (following the change in the consolidation area), as defined in the articles of association of the joint venture. 27

The identification of risk and writedowns referred to above (together with the deferral of intercompany capital gains) will enable Finmeccanica to improve the quality of its invested capital, increasing the flexibility of its asset structure and securing a satisfactory return on its assets. 28

5. Growth prospects Finmeccanica s strategy is to rationalise its businesses and focus on aerospace and defence, which together accounted for 75% of the group s total orders at the end of last year, and contributed over 98% of consolidated operating profit. The energy and transport businesses do not figure as priorities in Finmeccanica s development plans and are therefore likely to be sold off in the near future. The group has already decided to exit the energy sector, whereas its transport interests are more likely to be disposed of gradually, possibly through the completion of the restructuring under way and the establishment of agreements and alliances consolidating the competitiveness of the newly restructured activities. In addition, recent studies have examined the potential involvement of Elsag in the defence services sector. Here, Finmeccanica has plans to expand along the value chain, bringing its own manufacturing activities together with the provision of valueadded services related to aerospace and defence. The development of defence operation requirements in the new international environment, with a move towards a more professional approach by the armed forces, and the commitments undertaken at European and international level to attain higher levels of co-operation and integration, open up significant opportunities for Finmeccanica to leverage its knowledge of institutional clients needs, thanks to longstanding relationships with these clients. To offer the type of services required will mean substantial investments in financial and human resources by Finmeccanica, which has begun an ambitious project in this area, and represents the natural progression from a manufacturing company to an organisation offering integrated product and system solutions, together with related management, maintenance and logistics services. In addition, expertise in planning and managing complex systems enables the company to produce solutions which can be used to carry out the most stringent defence operations. The IT services business, represented by Elsag, features in Finmeccanica s comprehensive strategy for aerospace and defence growth and development. Its 29

systems integration and advanced IT expertise represent an important asset, helping the company to expand its range of defence products, following recent trends that Finmeccanica s European competitors have already developed. The group s strong financial position positive net financial position of 409 mil. at end- 2001), the cash available to the holding company and its access to substantial financial resources, enable it to keep an eye on the consolidation process under way in the European aerospace and defence industries, particularly in the Italian market, with the aim of taking advantage of investment opportunities that arise in the sector. In Europe, opportunities exist in the aeronautics, space and defence electronics sectors. Finmeccanica s presence in the AgustaWestland (helicopters) and MBDA (missile systems) joint ventures, both represent a point of arrival and a basis for further growth and international competitiveness, whereas in the other segments of aerospace and defence the consolidation process has still to be completed. In the aeronautics sector, negotiations to establish the EMAC joint venture with EADS broke down, so the need remains for Finmeccanica and other European operators to arrive at a different grouping in the military sector that will enable the European industry to compete effectively with US manufacturers. The latter benefit substantially from sustained US demand relating to the launch of the JSF programme, a de facto worldwide standard which European companies will have to take on board. In Finmeccanica s case it will be essential for the company to safeguard its own production capacities in airstructure components. The need for rationalisation in Europe s space sector demands an efficient and competitive solution in a market which typically offers limited growth prospects. As well as evaluating opportunities for partnerships and alliances with European and US operators, Finmeccanica is committed to restructuring Alenia Spazio, to bring the company into line with current market requirements and provide efficient management and appropriate returns on invested capital. In Italy over the last few months specific opportunities have arisen for acquisitions in the aeronautics, space and defence electronics sectors, which if brought to a successful 30

conclusion could reinforce Finmeccanica s undisputed leadership of the Italian market and increase its influence in international deals. 31

6. Financial position To provide further information on the group s financial position, the following tables c onsolidated profit and loss account (reclassified), reclassified consolidated balance sheet, Consolidated cash flow statement and Consolidated net debt have been drawn up using the same formats as in previous years. The table below shows the company s results for 2001. For ease of comparison with 2000, depreciation has been separated from goodwill amortisation in this table. 32

RECLASSIFIED CONSOLIDATED PROFIT AND LOSS ACCOUNT ( MILLION) 2001 2000 A. - REVENUES 6,618,995 6,012,856 Changes in work in progress, semi-finished goods and finished goods 119,057 193,746 Capitalisation of internal costs on fixed and intangible assets 35,515 18,253 B. - VALUE OF PRODUCTION 6,773,567 6,224,855 Cost of goods and services (4,293,815) (3,903,048) C. - VALUE ADDED 2,479,753 2,321,807 Personnel costs (1,837,735) (1,804,583) Other provisions (6,534) (7,166) Provisions for risks and charges (61,674) (33,596) Other income / charges 66,982 111,419 D. - EBITDA 640,791 587,881 Depreciation (230,001) (231,204) Deferred revenue from capital grants 36,711 36,362 E. - EBITA 447,501 393,039 Goodwill amortisation (36,448) (27,152) F. - EBIT 411,053 365,887 Financial income (expenses) (34,386) (63,865) Exchange rate gains (losses) (17,808) (52,723) Increase/decrease in the value of assets and investments 839,661 301,545 G. - EARNINGS BEFORE EXTRAORDINARY ITEMS AND TAX 1,198,520 550,844 Extraordinary income (charges) (881,591) (90,973) H. - PRE-TAX PROFIT 316,929 459,871 Tax (128,827) (120,635) I. - PROFIT BEFORE MINORITIES 188,102 339,236. Minorities (24,085) (63,375) PROFIT AFTER MINORITIES 212,187 402,611 33

Value of production was 6,773 mil., an increase of over 8.8% on the previous year (6,225 mil.). This increase was attributable to the aeronautics and helicopter businesses (which also benefited from a change in the consolidation area following the establishment of the AgustaWestland joint venture, 50% consolidated in place of 100% of Agusta alone), the AMS joint venture and transport. The disposals made during the year, and the de-consolidation of non-strategic activities (heating systems and Termosud in the energy division, and Coemsa in Other Activities), reduced the value of production by around 234 mil. The cost of goods and services rose from 3,903 mil. at 31/12/2000 to 4,294 mil. at 31/12/2001. This was an increase of 10%, more than the increase in value of production. The difference was chiefly due to the greater use of outsourcing following the start of Eurofighter production, and the large proportion of production sub-contracted on the Apache combat helicopter. Personnel costs were 1,838 mil., against 1,805 mil. in 2000. The average number of employees stood at 38,416, compared with 39,466 in the same period last year. The total number of employees at 31/12/2001 was 41,093, a net increase of 1,723 on the 2000 figure of 39,370. This net increase is attributable to the addition of 2,943 employees following the change in the consolidation area, and the loss of 1,220 employees through staff turnover. The average unit cost per employee working in Italy rose in line with the salary increases agreed in the new collective employment contract (CCNL) signed during the year. The average unit cost per employee working abroad fell because of changes in the consolidation area, with a higher share of overseas helicopter manfacturing. Provisions for risks and charges stood at 68 mil., compared with 41 mil. in 2000, relate to operating items (product guarantees, receivables, fines, outstanding disputes, financial guarantees and miscellaneous). Other income and charges were positive to the tune of 67 mil., down from 111 mil. in 2000. The income component included gains on real estate investments, the reversal of provisions (contractual risks, disputes, product guarantees and other) set up in previous years in connection with recurring operations and as a result of costs sustained over the year, as well as the recovery of receivables from insolvent countries (fully written off in previous years). Charges included indirect and direct taxes, fines and association fees. EBITDA came in at 641 mil., an increase of 53 mil. (+9%) on 2000. This growth was broadly in line with the rise in production volumes, even though 2001 saw a significant 34