ANNUAL REPORT International Financial Statements

ANNUAL REPORT 2002 International Financial Statements

ANNUAL REPORT 2002 International Financial Statements SpA and Subsidiaries Consolidated Financial Statements as of December 31, 2002 and 2001 The attached Consolidated Financial Statements (following the Consolidated Financial Statements ) are derived from the Consolidated Financial Statements prepared for the Italian legal and statutory purposes, reclassified in order to present them in a format that follows international practice. The Financial Statements include substantially the same level of information included in the Consolidated Financial Statements prepared for the Italian legal and statutory purposes for the year ended December 31, 2002.

02. 1 Contents 1. Consolidated Financial Statements 2 Consolidated Balance Sheet as of December 31, 2002 and 2001 4 Consolidated Statements of Income for the years ended December 31, 2002 and 2001 6 Consolidated Statements of Cash Flows for the years ended December 31, 2002 and 2001 7 Consolidated Statements of Changes in Shareholders Equity for the years ended December 31, 2002 and 2001 8 2. Notes to the Consolidated Financial Statements 9

Consolidated Financial Statements

4.02 02. 5 CONSOLIDATED BALANCE SHEET as of December 31, 2002 and 2001 Assets IN MILLIONS OF EURO CONSOLIDATED BALANCE SHEET as of December 31, 2002 and 2001 Liabilities and Shareholders Equity IN MILLIONS OF EURO cont d Current assets Cash and cash equivalents (Note 5) 956 2,198 Accounts receivable: - Trade, net of allowance for doubtful accounts of e 167 in 2002 and e 125 in 2001 2,974 2,286 - Related parties (Note 6) 621 537 - Taxes 665 551 Inventories (Note 7) 3,064 2,555 Contracts in progress (Note 7) 2,634 2,417 Prepaid expenses (Note 8) 209 302 Financial receivables from the shareholders of JVC (Note 9) 433 383 Other current assets (Note 8) 663 558 Total current assets 12,219 11,787 Property, plant and equipment (Note 10) - Land and buildings 1,145 1,151 - Machinery, equipment and other 1,785 1,771 2,930 2,922 - Accumulated depreciation (1,504) (1,609) - Construction in progress 139 59 Property, plant and equipment, net 1,565 1,372 Current liabilities Short-term borrowings (Note 15) 215 443 Current portion of bank long-term debt (Note 15) 48 467 Other financial liabilities (Note 16): - Third parties 83 102 - Current portion of other financial long-term debt 8 20 - Related parties 371 378 Advances from customers 4,189 3,864 Payables: - Trade 2,598 2,119 - Related parties 90 108 - Taxes, other income taxes 214 185 Provisions for risks and contingencies (Note 18) - Investments 99 116 - Taxes 34 25 - Other 988 1,020 Liabilities for payroll and social contributions 317 272 Accrued liabilities (Note 20) 273 268 Other current liabilities (Note 19) 1,468 1,135 Total current liabilities 10,995 10,522 Intangible assets, at amortized cost (Note 11) 1,220 965 Investments and securities (Note 12) 1,349 1,272 Treasury shares 1 1 Non-current receivables from related parties (Note 13) 115 111 Other assets (Note 14) 86 138 TOTAL ASSETS 16,555 15,646 See accompanying notes Long-term debt, less current portion Bank long-term debt (Note 15) 1,370 1,139 Other financial long-term debt 43 34 Total long-term debt, less current portion 1,413 1,173 Employee benefit obligations, less current portion (Note 17) 682 604 Deferred income, unearned portion 159 170 Minority interest 1 (12) Shareholders equity (Note 21): Share capital 8,429.5 million ordinary shares in 2002 (8,423.8 million ordinary shares in 2001), authorized, issued and outstanding, par value e 0.22 in 2002 and 2001 1,855 1,871 Legal reserve 89 60 Reserve for treasury shares 1 1 Retained earnings 1,360 1,257 Total shareholders equity 3,305 3,189 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 16,555 15,646 See accompanying notes

6.02 02. 7 CONSOLIDATED STATEMENTS OF INCOME for the years ended December 31, 2002 and 2001 IN MILLIONS OF EURO CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 2002 and 2001 IN MILLIONS OF EURO Net revenue (Note 22 and 23) 7,811 6,619 Cost and expenses: Purchases, services and other operating costs (Note 24) (4,941) (4,278) Change in inventory (100) 119 Labour (2,071) (1,824) Depreciation and amortization (258) (225) (7,370) (6,208) Income from operations, before non-recurring costs 441 411 Non-recurring costs (Note 4) (116) (840) Income (loss) from operations, after non-recurring costs 325 (429) Other income (expenses) Equity in earnings of investee STMicroelectronics N.V. 79 878 Interest income 124 132 Interest expenses (145) (166) Other income (expenses), net (Note 25) 23 (98) 81 746 Income before income taxes 406 317 Income taxes (Note 26) Current (220) (150) Deferred 17 21 (203) (129) Net income before minority interests 203 188 Minority interests (3) 24 NET INCOME 200 212 Cash flow from operating activities Net income: 200 212 Adjustments to reconcile net income to net cash provided by operating activities: Minority interests 3 (24) Non-recurring costs 46 796 Depreciation and amortization 258 225 Provision for employee benefit obligation 87 82 STMicroelectronics gain and equity in earnings (79) (878) Write-off of investments, securities and other 27 136 (Gain) loss on sale of investments and fixed assets (6) (34) Payment of employee benefit obligations (68) (73) Change in operating assets and liabilities: Trade receivables (346) (24) Inventory and contracts in progress (386) (92) Trade payables 28 (57) Advances from customers 282 544 Legal financial settlements related to Law 184/75 0 (156) Other, net 383 (247) Net cash provided by operating activities 429 410 Cash flow from investing activities: Additions to property, plant and equipment and intangible assets (304) (204) Acquisition of MBDA, net of cash acquired 0 (245) Acquisition of Marconi and Telespazio, net of cash acquired (632) 0 Acquisition of investments, net of cash acquired and coverage of losses of investees (8) (246) Proceeds from disposal of property, plant and equipment 75 92 Dividends received from STM 8 1,060 Net proceed from disposal of other investments (39) (202) Proceeds from government grants 39 39 Net cash provided by (used in) investing activities (861) 294 Cash flow from financing activities: Proceeds from capital increase, net of related expenses 1 0 Payment of dividends (84) 0 Cash payment to Ansaldo Trasporti shareholders for merger in 0 (5) Issue of bonded loan 297 0 Proceeds from long-term debt 22 11 Payment of long-term debt (559) (92) Net change in short-term borrowings and other financial payables (487) 286 Net cash provided by (used in) financing activities (810) 200 Net increase (decrease) in cash and cash equivalents (1,242) 904 See accompanying notes Cash and cash equivalents at beginning of year 2,198 1,294 Cash and cash equivalents at end of year 956 2,198 See accompanying notes

8.02 02. 9 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY for the years ended December 31, 2002 and 2001 IN MILLIONS OF EURO Number of Share capital Legal reserve Reserve for Other reserves Total shares (million) Treasury shares (including foreign currency translation adjustments) Balance as at January 1, 2001 8,395 1,865 41 1 1,199 3,106 Allocation of 2000 profit 19 (19) - Foreign currency translation adjustments and other (135) (135) Increase of share capital for stock options Merger with Ansaldo Trasporti SpA (effect of merger) 28.8 6 6 Net income 2001 212 212 Balance as at December 31, 2001 8,423.8 1,871 60 1 1,257 3,189 Increase of share capital for stock options 1 1 Translation into Euro of shares and stock options (17) 17 Allocation of 2001 profit 11 (11) - Dividends (84) (84) Foreign currency translation adjustments and other (1) (1) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2002 and 2001 (All amounts in millions of Euro, unless otherwise indicated) 1. DESCRIPTION OF THE ORGANIZATION AND THE BUSINESS SpA (together with its subsidiary companies, the Company, the Group or ) is a holding company that at December 31, 2002 is 32.3141% owned by the Italian Treasury Ministry, while the remaining percentage is publicly held. Aeronautics - Operations include design, engineering, production and sale of civil and military aircrafts (primarily in conjunction with prime global aircraft manufacturers), overhaul and maintenance of many different types of commercial and military aircraft and the supply of components for large commercial aircrafts and executive jet aircrafts. Space - Operations include the development of logistical systems for space and land stations, development and sale of on-board equipment for commercial satellites, telecommunication systems and the manufacturing of sensors for satellite observation and the transmission of images. The main companies belonging to this category are Alenia Spazio SpA and Telespazio. Helicopters - Operations include the design, engineering, manufacturing and sale of helicopters and non-fixed wing aircrafts. Defence Electronics - Operations include the manufacture of avionics equipment, remote-controlled aircraft, Radar Systems, Command & Control Land and Naval Systems, Air Traffic Control Systems, integrated communication systems and networks for naval, land, avionics and satellite applications. The main companies belonging to this category are Galileo Avionica SpA, JV Alenia Marconi Systems and Marconi Selenia Group. Net income 2002 200 200 Balance as at December 31, 2002 8,429.5 1,855 88 1 1,361 3,305 Defence Systems - Operations include missile systems, aeronautical, land and naval weapon systems, underwater naval defence systems and sonar systems. The main companies belonging to this category are JV MBDA, Oto Melara SpA, WASS SpA and Sistemi Navali Internazionali Division (manages relationship with Horizon Sas for manufacturing of frigates). See accompanying notes Transportation - Operations include the design, manufacturing and distribution of rolling stock and mass transit systems, manufacturing of diesel and electrical locomotives, business and light rail vehicles, and the construction and supply of electrified transport systems and signalling systems for rail networks and metropolitan underground systems. Microelectronics - Operations include design, manufacturing and distribution of a broad range of products relating to the semiconductors segment, such as discrete, memories and standard

10.02 02. 11 commodity components and to the subsystems segment, including modules for the telecom, automotive and industrial markets like mobile phone accessories, ISDN power supplies and invehicle equipments for electronic toll payment. Energy, Information Technology and Other Activities - Operations include manufacture of power generation components, Information Technology systems, local and suburban busses, satellite telephony services, Corporate activities, subsidiaries that are not part of the core business (for which the Company is acting or planning a restructuring process oriented to the search of potential buyers) and subsidiaries that carry out auxiliary services for the other business segments, such as real estate and financial services companies. The main companies belonging to this category are Ansaldo Energia SpA, Elsag SpA, BredaMenarinibus SpA, Elsacom NV, Otto SpA, Mecfin SpA, Iritech SpA and Finance S.A. Selected key data by business sector and geographic areas for the fiscal years ended December 31, 2002 and 2001 are presented in Notes 22 and 23. b. The financial statements used for consolidation purposes are those approved or prepared for approval at the shareholders' meetings of the respective Group companies. They are adjusted, where necessary, to conform with the Company's accounting policies, which are in conformity with accounting principles issued by the Italian Accounting Profession (Consiglio Nazionale dei Dottori Commercialisti e dei Ragionieri). c. Business combinations (acquisitions from third parties) are accounted for by the purchase method of accounting: i) Goodwill is recognized for the excess of the purchase cost of the acquisition over the fair value of the identifiable tangible and intangible assets acquired, less liabilities assumed; ii) If the fair value of the acquired net assets is higher than the purchase cost, after reducing the value of long-term assets, if applicable, the remaining difference is accrued to cover risks and expected future losses; in case the expected losses are not expected to occur, the remaining difference (negative goodwill) is recorded as a deferred credit and amortized to income. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of presentation - The accompanying financial statements are derived from the consolidated financial statements presented for the Italian legal and statutory purposes, reclassified in order to present them in a format that follows international practice. The reclassification, however, does not affect consolidated net income and consolidated shareholders equity in any of the years presented, except for the reclassification of minority interest from equity to liabilities. In addition, the notes to the consolidated financial statements include a level of detail as is customary for international reporting which is considered equivalent to the information contained in the notes to the consolidated financial statements presented for the Italian legal and statutory practice. Principles of consolidation - The consolidated financial statements of the Company include the financial statements of, its majority-owned subsidiaries and the financial statements of the 50% joint ventures Alenia Marconi Systems Holding N.V. ( AMS ), AgustaWestland NV ( AgustaWestland ) and of the 25% joint venture MBDA Sas ( MBDA ). These joint ventures are consolidated using the proportional method, thus including assets and liabilities on the basis of the percentage of the owned interest. Certain majority-owned subsidiaries, including those in liquidation, have not been consolidated because in aggregate they are not significant to the consolidated financial statements or the investment was a temporary investment. In the consolidation process: Use of estimates in preparation of financial statements - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. The use of estimates is an integral part of applying percentage-of-completion accounting for contracts and programs. Foreign currency translations - Financial statements of foreign subsidiaries are translated into Euro using the year-end exchange rate for balance-sheet items and the average rate of the year for statement of income items. The translation differences are recorded in a separate component of shareholders' equity. Foreign currency transactions - Monetary assets and liabilities denominated in foreign currencies have been recorded at the exchange rate in effect at the date of the transaction. Individual monetary assets and liabilities expressed in non-euro currencies have been remeasured to the current exchange rates at year end, except for those receivables related to long term contracts covered by specific hedges, which are recorded at the hedged rate. Any resulting short-term gain or loss is credited or charged to income, whereas any eventual gain resulting from the re-measurement of long-term assets and liabilities expressed in non-euro currencies is deferred. a. All intercompany transactions and balances have been eliminated. Unrealised intercompany profits and gains and losses arising from transactions between Group companies (other than those related to contract in progress for long-term contracts or programs) have also been eliminated. Marketable securities - Marketable securities consisting of government bonds are stated at the lower of cost or market value.

12.02 02. 13 Inventory valuation and revenue recognition iii) Progress billings and advances a. Inventory valuation Inventories of raw materials, supplies and finished products are stated at the lower of cost or market. Cost is determined using the weighted average cost method or the first in first out (FIFO) method. b. Product and service revenues Product and service revenues are recognized upon shipment of product or when services are performed. c. Long-term contracts and program accounting A significant portion of the Company s revenues is related to long-term contracts and programs. i) Long-term contracts The Company uses the percentage-of-completion method in recognizing revenue of long-term contracts. Under this method, income is recognized as work progresses on the contracts. The percentage of work completed is determined principally by comparing the accumulated costs incurred to date with management s current estimate of total costs to be incurred at contract completion. Revenue from contracts accounted for under the percentage-of-completion method is recognized on the basis of actual costs incurred plus the portion of income earned. Contract costs include all direct material, subcontractor costs, and labour costs and those indirect costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred. Revisions in profit estimates during the period of a contract are reflected in the accounting period in which the revised estimates are made. If estimated total costs on a contract indicate a loss, the entire amount of the estimated loss is provided for currently. Progress billings issued on contracts and programs are shown as deducted from the related carrying value of the contracts in progress. Advances are shown as liabilities. Estimates of revenues, cost of sales and delivery periods associated with forecasted orders are an integral component of program and long-term contracts accounting, and the ability to reasonably estimate those amounts is a requirement for the use of the above-mentioned accounting. Revenues, costs and earnings are determined, in part, based on estimates. Adjustments of such estimates are accounted for prospectively with the exception of anticipated losses on specific programs and contracts, which are recognized in the period when losses are reasonably assured. Inventories include amounts relating to programs and contracts with long-term production cycles, a portion of which will not be realized within one year. Investments - Investments in certain unconsolidated operating subsidiaries (see principles of consolidation) and significant affiliates (equity investees in which participation is between 20-50%, including STMicroelectronics Holding NV) are accounted for under the equity method. Accordingly, the carrying amount of the investment is increased or decreased in each reporting period to recognize the Group s share of profit or loss (after eliminating unrealised intercompany profits) after the date of the acquisition and to decrease the investment for the Group s share of dividends. Goodwill arising from the purchase of investments in equity investees is included in the carrying value of the investment and is amortized on a straight-line basis over a period of 5 years. Other long-term investments are accounted for by the cost method. Provisions for impairments are recorded when there is a decline, other than temporary, in the value of a long-term investment to recognize the decline. Contracts are considered complete when all essential contract work, including support to integrated testing and customer acceptance, is completed. ii) Programs Contracts in progress costs include material, labour, production costs incurred in the early stages of a program, and they also comprise related pre-operating development and tooling costs. The relative pre-operating costs of products and specific projects are capitalized into contracts in progress and absorbed in the valuation of contracts in progress. The absorption is determined on the basis of plans of production and sales in relation to the type of product, generally within 10 years from the start of normal production. Research and development - The Group is engaged in research development and general engineering programs. Self-funded research costs and those development costs, for which there is insufficient certainty that future economic benefits will flow to the Company as a result of the development costs, are recognized as an expense in the period in which they are incurred. Property, plant and equipment - Property, plant and equipment are recorded at cost, as adjusted by revaluations pursuant to various Italian revaluation laws. Cost includes interest charges capitalized over the period of construction, which are related to specific debt obtained to finance the construction of the asset. When property is sold or retired, the cost of the property and related accumulated depreciation are removed from the balance sheet and any gain or loss is recorded in income.

14.02 02. 15 Expenditures on fixed assets that improve the performance of the assets or extend the useful lives of the assets are capitalized. Other maintenance and repairs are expensed as incurred. Depreciation expense is computed using the straight-line method by applying depreciation rates which reflect the estimated useful lives of the related assets. The estimated useful lives are as follows: Buildings from 20 to 33 years Plant and machinery from 5 to 10 years Tools from 3 to 5 years Other assets from 5 to 8 years Statement of cash flows - The Company s short-term borrowings arise primarily under its bank overdraft facilities. These short-term obligations are payable on demand. The cash flows from these items are included under the caption Net change in short-term borrowings and other financial liabilities in the Consolidated Statements of Cash Flows. Cash and cash equivalents - The Company considers cash deposits and state bonds collectible within three months as cash equivalents. Reclassifications - Certain amounts in the financial statements of the year 2001 have been reclassified in order to conform to the 2002 presentation. Goodwill - Goodwill, representing the excess of purchase cost of investments in consolidated subsidiaries over the fair value of the assets acquired, is amortized on a straight-line basis over a period ranging from 10 to 20 years. On an annual basis, management evaluates recorded goodwill for potential impairment. Derivative products - The Company uses derivative products to manage exposure to fluctuations in interest rates and foreign currency exchange rates. The interest differential on interest rate swap contracts used to hedge underlying debt obligations is reported as an adjustment to interest expense over the life of the swap. To hedge against exposure to changes in foreign currency exchange rates on borrowing arrangements, assets, liabilities, and purchase and sales commitments (related primarily to long-term contracts) denominated in currencies other than the functional currency, the Company enters into foreign currency forward contracts, swaps and options. Discounts or premiums on forward contracts (the difference between the current spot exchange rate and the forward exchange rate at the inception of the contract) are charged or credited to income over the contract lives using the straight-line method. Income taxes - Income taxes are provided for on the basis of the estimated taxable income of the individual companies included in consolidation. Deferred income taxes are accounted for under the liability method and reflect the tax effects of significant differences between the tax basis of assets and liabilities and their reported amount in the financial statements, except that net deferred tax assets are recognized only if there exists evidence that the assets will be realized with reasonable certainty. Government grants - Capital grants received from the Italian government under its program to provide incentives for investments in certain areas and in certain activities are recorded as deferred income and amortized to income over the economic life of the assets acquired for which the grant was received. Grants related to research and development are credited to income. Treasury shares - Treasury shares are reported as an asset, at cost, in the balance sheet. Shareholders equity includes a reserve for treasury shares for an amount equal to the carrying value of treasury shares.

16.02 02. 17 3. JOINT VENTURES, SPIN-OFFS AND ACQUISITIONS, ALLIANCES, GROUP REORGANIZATION In the years ended December 31, 2002 and 2001, the Company has been engaged to: i) search international alliances, ii) dispose non-strategic investments, iii) reduce general and administrative costs, in order to implement the restructuring plan that was approved at the end of the year 1997. During 2002 the Company concluded the cash-pooling project, aimed to concentrate at level the cash management process, the issuance of performance bonds and the foreign currency and interest rate risk management. arranged a timely reporting system relating to long-term contracts trends. Other Year 2002 Acquisition of Marconi and Telespazio Group During 2002 purchased the Marconi Selenia Group (former Marconi Mobile ) from Marconi Plc (Bruton Street Ltd) and the Telespazio Group from Telecom Italia. In August 2002 Alenia Aeronautica and the Italian Ministry of Defence signed an agreement to settle the AMX claim. The two parties agreed technical changes to be implemented by Alenia Aeronautica to meet the required performance. The foreseen costs deriving from the changes to be implemented were already provided for during the year 2001. During the year 2002, the Company accrued the additional costs deriving from the above-mentioned settlement. Year 2001 Marconi Selenia activities show a high level of integration with the ones, with respect to avionic systems, communications security systems, land and naval platforms. The purchase price was e571, plus the assumption of financial debts, with an excess of purchase price over the fair value of the assets acquired of e186 allocated to goodwill: following the acquisition, has achieved a strong competitive position in Europe related to military and strategic communications, increasing Avionics and Command and Control portfolio. Such an increased portfolio will allow to join the world-wide defence industry growth process. The purchase price for Telespazio was e127 (with an excess of purchase price over the fair value of the assets acquired of e92 allocated to goodwill), plus financial debt for e93 and debts for leasing for e20. As a consequence of the acquisition, will take part in satellite navigation systems (mainly the Galileo project), Earth observation systems (Cosmo Sky-Med), television services and Telecommunications. The business segment in which Telespazio operates is now facing a negative trend. However, the management believes that low margins will be compensated by the increase of the demand, both from institutional and from private customers. The Sale and Purchase agreement of both of the two acquisitions provided for a price adjustment mechanism; such adjustment is currently being determined. Role reorganization established the Product Policy function to strengthen its leader role in technological and industrial activities and to take profit by synergies between Group activities. The central Marketing and Commercial Affairs department coordinates Italian and foreign activities. The Company also established a Logistic department in order to increase and coordinate defence services activities and to develop on its own the activities thereof. Joint venture During 2001 the Company entered into an agreement with BAE Systems and EADS for the establishment of the new company MBDA, and re-definition of AMS joint venture agreement. On the basis of the agreement, maintained joint control in AMS, and joint control on MBDA, indirectly through the 50% owned holding company AMS Holdings NV, which also owns 100% of AMS NV. In February, the joint venture agreement in the helicopter business between and GKN was executed, leading to the formation of AgustaWestland NV which started its joint-venture operations, following the completion of the joint-venture agreements. Merger with Ansaldo Trasporti The reorganization process of the Transportation sector involved the internal Group reorganization of the Vehicles division of Ansaldo Trasporti, Ansaldobreda, the Systems division and Ansaldo Trasporti Sistemi Ferroviari SpA. The reorganization was completed with the merger of the majority owned sub-holding Ansaldo Trasporti into. Other The business of Divisione Avionica ed Equipaggiamenti and Otobreda Division were transferred to the wholly-owned consolidated subsidiaries Galileo Avionica SpA and Oto Melara SpA. Negotiations on the sale of Ansaldo Energia came to an end. However, the first half of 2001 has been characterized by the disposals of non-core business, such as the sale of the 60% interest in Ansaldo Caldaie (ex Termosud), the net assets of Componenti Speciali Milano and the subsidiary Ansaldo Superconduttori SpA.

18.02 02. 18 19.02 02. 19 4. NON-RECURRING COSTS The Company in the years ended December 31, 2002 and 2001 incurred the following net operating costs, representing: i) Risks for situations implying probable contingencies; ii) Costs connected with the disposal of subsidiaries or businesses; iii) Various costs identified as non-recurring. Such identified costs have been allocated to the operating segments as follows: Aeronautics (29) (54) Space (17) (33) Helicopters - (18) Defence Electronics (16) (416) Defence Systems (7) (27) Transportation 1 (24) Energy, IT and Other (Corporate, financial activities and non-core business) (48) (268) (116) (840) Restructuring/reconfiguration of some manufacturing activities. This includes the effects of the reorganization process, including exiting from non-core businesses, the restructuring of certain businesses and rationalization of the Group legal structure: - Restructuring of the road transportation business (e31), and of the transport division (e33); - Extraordinary costs relating to guarantees given by in order to exit certain nonstrategic businesses (e36); - Closure of production facilities (e42), following the formation of the AgustaWestland jointventure, the new configuration of AMS and the formation of MBDA; - Other restructuring costs (e29), relating to other personnel redundancies; - Other direct cost (e25) incurred in connection with the formation of the above-mentioned joint ventures and the reorganization of the Group legal structure; - Non-recurring costs and write-offs in connection with the contribution to the MBDA joint venture and the redefinition of the AMS joint venture perimeter, as noted above. Non-recurring costs decreased significantly if compared to 2001 as a consequence of the restructuring plan, started in 1997 and concluded in 2002. The breakdown by nature of non-recurring costs of 2002 is as follows: - Costs incurred to eliminate personnel redundancies (e74); - Costs accrued to close litigations in which the Company has been engaged (e40); - Other non-recurring costs, net (e2). Non-recurring costs in 2001 was due to: Risk situation in some of the Group s countries/markets of operation and product outlook. This includes: - e122 from the re-defintion of commercial relations with (and related investments in) higherrisk countries; - e127 brought about by the events which took place in the last quarter of the year and reported in the legal Group reorganization process, principally related to the reduced forecast of the regional ATR aircraft and other military business; - e116 of write-off of assets related to the Fire Control System T72, following changes in the international political arena and contract changes imposed by a foreign customer; - e41 of write-off of all Elsacom s assets, following the crisis of the satellite telephone sector and the complete redefinition of products offered;

20.02 02. 21 5. CASH AND CASH EQUIVALENTS 7. INVENTORIES AND CONTRACTS IN PROGRESS Cash and cash equivalents consist of: Inventories consist of: Cash 6 5 Bank and postal deposits 950 2,091 Government bonds - 2 956 2,098 Deposits with financial institutions - 100 956 2,198 Raw materials 983 861 Semi-finished products and contracts in progress 1,507 1,447 Finished products 139 134 2,629 2,442 Less allowance for obsolete and slow moving items (272) (226) 2,357 2,216 Advances to suppliers 707 339 Total 3,064 2,555 Bank and postal deposits mainly decreased as a result of the acquisition of Marconi Mobile (e571, see Note 3) and Telespazio (e127, see Note 3), and of the 2001 dividend paid by the Company (e84). Contracts in progress consist of: Long-term contracts and programs 10,242 9,383 Less progress billings (7,608) (6,966) Total 2,634 2,417 6. RECEIVABLES FROM RELATED PARTIES Receivables from related parties consist of: Contracts in progress include projects for research and development finalized to aeronautic and helicopter production, mainly financed by Law 808. Financial receivables 158 235 Other receivables 463 302 621 537 Financial receivables as of December 31, 2002 include e18 (e18 as of December 31, 2001) related to consortia, e16 related to SIAI Marchetti in liquidation (e16 as of December 31, 2001), e16 related to Fata Group (e25 as of December 31, 2001) and e84 related to Alenia Marconi Systems (e96 as of December 31, 2001), which is consolidated using the proportional method (hence, receivables are shown for the 50% of their nominal amount). Financial receivables decreased by e77 due to: waiver of the receivables from Italcad (e33 as of December 31, 2001). The Company did not incur any losses, since the whole amount had already been provided for in previous exercises; the reclassification of receivables from Ansaldo Invest Denmark as other receivables. Advances to suppliers increased as a consequence of the reclassification of advances paid to the other parties of the European aeronautical program EFA, with respect to the Eurofighter contract, formerly represented as receivables (e284 as of December 31, 2002, e148 as of December 31, 2001). The increase of long-term contracts and programs is partially due (e504) to the consolidation of the Marconi Group and of Telespazio. Other receivables include receivables from Ansaldo Invest Denmark as said, for e16, receivables from Consortium GIE/ATR (that sells the ATR planes and that is 50% owned by the Company), for e60 (e89 as of December 31, 2001), and receivables from Eurofighter Jagdflugzeug for e89.

22.02 02. 23 8. PREPAID EXPENSES AND OTHER CURRENT ASSETS 10. PROPERTY, PLANT AND EQUIPMENT Prepaid expenses and other current assets consist of: Gross property, plant and equipment consist of: Prepaid expenses: Financial 146 238 Other 63 64 209 302 Other current assets: Financial receivables 123 32 Receivables from public entities 69 52 Personnel 21 13 Social contributions 8 24 Other 442 437 663 558 Land and buildings: - Residential 40 12 - Industrial 1,105 1,139 1,145 1,151 Plant, machinery and equipment 1,098 1,126 Tools 367 257 Other 320 388 1,785 1,771 Assets under construction and advances 139 59 3,069 2,981 Financial prepaid expenses mainly consist of exchange differences related to hedging operations renewed ( rolling ) that have been deferred to neutralize the future economic effect of the hedged item. Other prepaid expenses include costs incurred for the issuance of the convertible bond pertaining to the following years. Other current assets include e43 due to credit derivatives and structured bonds, receivables from China Great Wall Industries Co. related to the Long March contract for e23, receivables from Nuova Safim in liquidation for e11 (e11 as of December 31, 2001) for e19 from Enea (as of December 31, 2001) related to PEC programme. The amount of receivables from Nuova Safim and Enea are covered by specific provisions. Accumulated depreciation consists of: Land and buildings: - Residential (15) (3) - Industrial (278) (326) (293) (329) Plant, machinery and equipment (752) (825) Tools (270) (188) Other (189) (267) (1,211) (1,280) (1,504) (1,609) 9. FINANCIAL RECEIVABLES DUE FROM THE SHAREHOLDERS OF JOINT VENTURES The increase of tangible assets is due to the acquisition of Marconi and Telespazio, partially offset by other changes in consolidation area. Financial receivables due from joint ventures consist of: Receivables from GKN due to JV AgustaWestland 77 138 Receivables from EADS and BAE Systems PLC due to JV MBDA 356 245 433 383 Both of the joint ventures are consolidated using the proportional method. Therefore the above mentioned assets are included on the basis of the percentage of the owned interest (50% for AgustaWestland and 25% for MBDA).

24.02 02. 25 11. INTANGIBLE ASSETS 14. OTHER ASSETS Intangible assets consist of: Other assets consist of: Goodwill 1,041 817 Capitalized costs: - Trademarks and licenses 24 12 - Research and development 33 39 - Other 122 97 1,220 965 Goodwill mainly refers to the joint venture AMS Holdings (e 600), to the joint venture AgustaWestland (e112), to the new acquired business (Marconi Group for e177 and Telespazio for e91), and to Ansaldo Signal (e48). Financial loans to third parties issued by: Financial foreign subsidiaries 23 23 Mediofactoring - 71 Other assets 63 44 86 138 Other assets decreased by e 19 as a consequence of the acquisition of taxes receivables, previously sold with recourse to Mediofactoring. 15. SHORT-TERM BORROWINGS AND BANK LONG-TERM DEBT 12. INVESTMENTS AND SECURITIES Investments and securities consist of: Unconsolidated subsidiaries 6 6 Affiliates 1,320 1,184 Other securities 23 82 1,349 1,272 Investments in affiliates as of December 31, 2002 include the investment in STMicroelectronics Holding NV for e1,234 (e1,106 as of December 31, 2001). Short-term borrowings Short-term borrowings consist of: Banks 167 306 Other financial institutions 48 137 215 443 As of December 31, 2002 and 2001, the Group s short-term lines of credit with banks amounted to approximately e1,624 and e2,113 respectively, and the unused portion of these lines of credit were e1,426 and e1,671 respectively. Other securities decreased by e 41 due to the disposal of Eurobond issues by the Russian Federation Government. The lines of credit are unsecured and the amounts outstanding are principally payable upon demand. 13. NON-CURRENT RECEIVABLES FROM RELATED PARTIES Non-current receivables from related parties consist of: Loan receivable from Agusta SpA 110 110 Receivables from AMS 5 - Others - 1 115 111

26.02 02. 27 Bank long-term debt Bank long-term debt consists of: Premium redemption convertible notes 878 878 e297 million cap and floor 2002-2008 297 - Loans with subsidized rates 141 121 Japanese Yen debenture loan 28 152 Efibanca, loan in Lire 32 48 Mediocredito Lombardo 19 25 Other long-term loans in various currencies 23 82 e300 million debenture loan - 300 Total bank long-term loans 1,418 1,606 Less: current portion (48) (467) TOTAL BANK LONG-TERM DEBT LESS CURRENT PORTION 1,370 1,139 E297 million Cap&Floor FRN bond 2002-2008 Finance, a Luxemburg consolidated subsidiary, in December 2002 issued a e297 bond guaranteed by on the retail Italian domestic market through the UBM network on a six-month floating rate basis, with a cap and floor, plus a spread of 90 basis points on six-month EURIBOR. At the same time Finance entered into hedge transactions in relation to the offering. The bullet repayment is foreseen on December 2008. Subsidized loans Certain capital expenditures for the construction and the improvement of the manufacturing plants, in addition to certain research and development programs are financed utilizing the Italian specific laws that contemplate investments grants and long-term loans at subsidized interest rates. Total long-term at subsidized rates ranging from 0.82% to 8.75%, in accordance with the laws described above, was e141 at December 31, 2002 (e121 at December 31, 2001). Loans in non-euro currencies, as reported below in the paragraph related to derivative products, are hedged. Accordingly the above-reported amounts in Euro are the amounts translated applying the rates of the hedging contract. Premium Redemption Convertible notes (convertible into ordinary shares of SpA) In order to implement the Company s strategic plans, including making any necessary investments in the defence business, the extraordinary shareholders meeting of November 23, 1999 approved a proposal to authorize the board of directors to issue a debenture loan convertible into ordinary shares (following the Convertible ), to be issued for a maximum amount of e878 and to increase the capital for a maximum amount of e 252, at par value, to service the conversion of the Convertible. According to the approved proposal, a number of 468,254,250 convertible notes at a price of e1,875 each have been issued on June 8, 2000, for a total amount of e878. The proceeds, net of commissions, were e865. The notes bear interest at 2% per annum of the issue price, from and including June 8, 2000, payable in cash annually in arrears on June 8, of each year. In addition, will pay an accretion on the notes on an annual compound basis to those investor who will convert the notes if the market price of the ordinary shares of SpA will be lower than e 2.001 so that the annual yield to maturity of the note equals 3.25%. will redeem the convertible notes on June 8, 2005. has the faculty to redeem the convertible notes, in whole but not in part, at any time after June 8, 2003, subject to certain conditions (see the related offering circular for more details). The conversion rate is one ordinary share per each convertible note, subject to adjustment upon the occurrence of certain events. Japanese Yen debentures The debentures were issued by a Luxembourg consolidated subsidiary, Finance (formerly Asterisque S.A.), and are guaranteed by. The original debt was Japanese Yen 72 billion. The outstanding debt at December 31, 2001 was Japanese Yen 17.5 billion. In 2002 the Company repaid Japanese Yen 14 billion, so that the outstanding debt at December 31, 2002 amounts to Japanese Yen 3.5 billion. has entered into certain foreign exchange and interest rate swap agreements whereby the effective average interest rate in Lire as at December 31, 2002 is 4% (4.4% as at December 31, 2001). Efibanca Loan in Lire Loan of Lire 92 billion (e48 million), granted by a syndicate of banks led by Efibanca in December 1999. The term of the loan is for a period of 6.5 years and repayments are required starting 18 months after the granting date. The amount outstanding as of December 31, 2002 was e32. Interest rate is based on six-month EURIBOR plus spread 0.8. Early reimbursement is permitted. E300 million-debenture loan Finance (formerly Asterisque S.A.), a Luxemburg consolidated subsidiary, in March 1999 issued a bond of e300 on the European market at six-month EURIBOR plus a spread of 0.7625. According to the redemption plan, on March 19, 2002 the debt has been fully repaid.

28.02 02. 29 At December 31, 2002 the maturities of the long-term debt, assuming that the Convertible will be entirely repaid on June 8, 2005, are as follows: Year 2002 2003 66 2004 76 2005 910 2006 16 Thereafter 350 1,418 Derivatives At December 31, 2002 the Company has approximately e2,860 (e1,853 at December 31, 2001) of foreign exchange contracts outstanding with banks and other financial institutions, primarily in U.S. Dollars and Japanese Yen, to hedge certain foreign exchange transactions, principally long-term contracts and financial indebtedness, including the contracts for the debentures in Japanese Yen (Japanese Yen 3.5 in 2002 and Japanese Yen 17.5 in 2001). For these financial loans and for all financial loans in foreign currencies covered by hedges, the amount reported in the financial statements is the amount of the loan translated at the hedged rate. Certain long-term debts are hedged through short-term transactions that are periodically renewed and whose effects are recognized in the income statements based on the life of the loan. In addition, the Company entered into several interest rate swap agreements with banks and other financial institutions, in connection with certain of the above mentioned borrowing agreements in foreign currencies and in conjunction with foreign exchange swap contracts in order to minimize the cost associated with the loans. The agreements are entered into for the term of the loans, through the year 2007, for a total notional principal amount of approximately e23 at December 31, 2002 (e421 as of December 31, 2001) whereby the effective interest rate will be adjusted for the difference between certain variables rates and certain fixed rates. These agreements involve the receipt of fixed (or variable) rate amounts of interest in exchange for variable (or fixed) rate interest payments over the life of the agreement without an exchange of the underlying principal amount. The differential to be paid or received is accrued as interest rate changes and recognized as an adjustment to interest expense related to the debt. The related amount receivable from, or payable to, the counter parties is included in other current assets or liabilities. The fair value of the swap agreement, in accordance with Italian accounting principles, is not recognized in the financial statements. 17. EMPLOYEE BENEFIT OBLIGATIONS The employee benefit obligations are comprised of accruals made by the Group companies for the Italian termination severance indemnity plans that relates to employees of Italian operations in the Group. In accordance with Italian severance pay statutes, an employee benefit is accrued for service to date and is payable immediately upon separation. The termination indemnity liability is calculated in accordance with local civil and labour laws based on each employee s length of service, employment category and remuneration. The termination liability is adjusted annually by a cost-ofliving index provided by the Italian government. There is no vesting period or funding requirement associated with the liability. The liability recorded in the balance sheet is the amount that the employee would be entitled to if the employee left immediately. During the year 2002, the liability increased by e78, mainly as a consequence of the consolidation of Telespazio and Marconi Group. 18. PROVISIONS FOR RISKS AND CONTINGENCIES Provision for risks and contingencies consist of: Investments 99 116 Taxes 34 25 Other 988 1,020 1,121 1,161 Provisions for risks on investments at December 31, 2002 include e24 for Ansaldo Industria, e16 for Ansaldo Invest Denmark, e27 for Ansaldo Invest SpA, e15 for SIAI Marchetti and e6 for Elsacom Ucraina. Such amount also covers the expected net liabilities that could arise from the liquidation of the subsidiaries. As said (Note 6), the provision was partially reversed after the waiver of receivables from Italcad for e32. Provisions for risks related to litigations with the tax Authorities increased as a consequence of the amounts provided for tax amnesty ex lege 289/2002. Provisions for risks and contingencies (other than investments and tax litigations) consist of: 16. OTHER FINANCIAL LIABILITIES Financial payables to related parties refer for e357 to MBDA (e355 as of December 31, 2001). Third parties financial liabilities include debt due to the other shareholder GKN from the JV AgustaWestland for e72 (e79 as of December 31, 2001). Warranties 52 49 Litigations 153 151 Other 783 820 988 1,020

30.02 02. 31 The Group provides for costs related to contingencies when a loss is probable and the amount is reasonably determinable. Other provisions include the following: 20. ACCRUED LIABILITIES Accrued liabilities consist of: e100 (e100 as of December 31, 2001) in connection with the risk related to the consortium GIE - ATR. The provision is recorded in addition to the amount already accrued by the affiliate GIE-ATR; Provisions for other risks and charges on long-term contracts for e129 (e103 as of December 31, 2001); Provisions for e103 (e115 as of December 31, 2001) related to the estimated costs for the restructuring of the different sectors, mainly Space and Energy; e33 (e41 as of December 31, 2001) for estimated losses on disposal of non-core activities; e172 (e253 as of December 31, 2001) related to guarantees furnished to subsidiaries, mainly with respect to the Aeronautic segment; e55 for penalties on long-term contracts (e52 as of December 31, 2001); e54 (e54 as of December 31, 2001) relating to the C27 J and AMX Aeronautic programmes; e29 (e17 as of December 31, 2001) related to convertible bond costs (see Note 15). Financial 134 105 Other 139 163 273 268 Financial accrued liabilities mainly consist of exchange differences related to hedging operations renewed ( rolling ) that have been deferred to neutralize the future economic effect of the hedged item. 21. SHAREHOLDERS EQUITY In accordance with the Italian Law, 5% of the net income of the Company must be set aside in the legal reserve until such reserve represents 20% of the issued capital. 19. OTHER CURRENT LIABILITIES Other current liabilities consist of: Pursuant to Italian Law, dividends may be paid on an unconsolidated basis only out of retained earnings plus distributable reserves. A portion of this unrestricted amount is subject to taxation upon distribution. No provision has been made for such tax as management has no intention to distribute these reserves at present time. Payable to Government for subsidies for research and development projects in accordance with Law 808 1,150 860 Other 318 275 1,468 1,135 The payable related to Law 808 refers to amounts received from the Ministry of Industry (in accordance with article 3.a. of Law 808/85). Such amounts have been received for certain projects of research and development undertaken mainly for the aeronautic, helicopter and defence electronics segments. Repayment of such amounts will follow the sale of the products developed according to the research and development projects. This payable is classified as current liability because of the classification as contract in progress in current assets of related projects. Other liabilities include payables to Efim for e16 (e18 as of December 31, 2001), deferred taxes for e44 (e30 as of December 31, 2001), payables for commissions for e17 (e22 as of December 2001) and payables deriving from penalties for e11 (e11 as of December 31, 2001). The Extraordinary Shareholders Meeting of November 23, 1999 authorized the Board of Directors to increase the Company s capital stock through the issue and sale of new ordinary shares, to be subscribed by the Company s managers and by senior managers of its susbidiaries for a total of e7.7. The increase will consist of the issue of 35 million ordinary shares of 0.22 par value (whole Euro). In accordance with such resolution, the Board of Directors established an Incentive scheme Committee. On December 22, 1999 the Board approved the Stock Option Plan and the Implementation Rules, in compliance with the above-mentioned decision. Accordingly, on January 26, 2000, in connection with the underwriting of a portion of stock options, the capital stock has been increased by e0.7. On November 14, 2001, the Board approved a further capital stock increase up to e1.9 through the issue of 8.7 million ordinary shares of 0.22 par value (whole Euro). The total amount of stock option assigned on December 19, 2001 by the Board of Directors was 7.5 million. On June 26, 2002 the capital stock has been increased by e 1.5 through the issue of 7 million ordinary shares of 0.22 par value (whole Euro) under the above-mentioned stock option plan. At the year-end the total amount of assigned stock options was 17.3 million. The Company s manager and senior managers underwrote only 8.3 million shares as of December 31, 2002.