Annual Report and Reference Document 2003

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Information on EADS Activities

Presentation of the EADS Group

Overview

Except where stipulated otherwise, all the data provided below were prepared on the basis of information from the Company.

With consolidated revenues of € 30.1 billion in 2003, EADS is Europe’s premier aerospace and defence company and the second largest aerospace and defence company in the world. In terms of market share, EADS is among the top two manufacturers of commercial aircraft, civil helicopters, commercial space launch vehicles and missiles, and a leading supplier of military aircraft, satellites and defence electronics. In 2003, it generated approximately 76% of its total revenues in the civil sector and 24% in the military sector.

2003 Highlights

In 2003, EADS continued to pursue its strategic lines of development and the rebalancing of its business activities in favour of defence. The rebalancing is aimed at reducing the impact on EADS of business cycles in the civil aircraft market, as well as at reinforcing the successful dynamics of EADS’ young portfolio of well-targeted products through sustained R&D efforts. The record order book of € 179.3 billion at the end of the year constitutes a considerable asset for EADS. 2003 was a year of across the board growth and included the signature of the € 19.7 billion A400M contract and the Paradigm/Skynet-5 contracts. In addition, 2003 was the first year since Airbus’ creation that it surpassed Boeing in terms of both deliveries and order book. In 2003 the Airbus A380 programme, a source of long-term growth for sales and profitability, moved into the component and major subassembly production phase. 34 new orders for the A380 in 2003, bringing the total order backlog to 129 aircraft, highlight the continued attractiveness of this product.

The economic climate in 2003 continued to be a difficult one, with concerns over the SARS virus contributing to disruptions in the travel market and exacerbating the terrorism-related impact on demand for air travel. Operational measures implemented by airlines in response to decreasing passenger numbers and continuing market uncertainties created downward pressure on orders and deliveries in 2003. Notwithstanding these challenges, EADS met and exceeded its planned 2003 delivery goal of 300 aircraft at Airbus. In 2003, EADS implemented a € 1.5 billion cost-reduction plan at Airbus to address uncertainties over the evolution of the Euro-U.S. dollar exchange rate and its impact on future profitability. Restructuring activities within EADS Space continued and were reinforced in 2003, aimed at breaking even in 2004. Owing to active cash management policies, an ongoing focus on managing sales financing exposure and the weakening U.S. dollar’s impact on the cost of its U.S. dollar-denominated debt, EADS ended the year with positive net cash of € 3.1 billion.

Strategy

In order to maximise value for its shareholders and to balance its portfolio, the management of EADS (the “Management”) intends to position EADS as a leading company in major global aerospace and defence markets. The following elements constitute the four stepping stones of the EADS strategy:

• Continue to strengthen EADS’ competitive position.
  EADS intends to further position itself as a global company with a highly visible domestic presence in all major aerospace and defence markets. While EADS already has a global presence in such markets as commercial aircraft through Airbus, helicopters through Eurocopter, missiles through MBDA and LFK and commercial space launchers through EADS Space Transportation, it is seeking to strengthen or to capitalise on its existing line of platforms and systems to meet the global demand for defence-related products such as military helicopters, combat and transport aircraft, defence electronics systems and secure communications.
  
  Supported by programmes such as the A400M military transport aircraft, Eurofighter, Tiger helicopter, the Meteor and Aster missile programmes and Skynet 5/Paradigm secure communications network, and based on its year-end 2003 defence backlog of approximately €45.7 billion, EADS is targeting € 10 billion in defence-related sales by 2005 in an effort to gain ground against its key competitors in the defence and space sectors.
• Enlarge EADS’ global reach
  EADS is a leading actor in its four home countries: France, Germany, Spain and the U.K. Here, and throughout Europe, EADS’ main challenge is to make the most efficient use of its customers’ defence budgets. The Company aims to harmonise procurement efforts and to participate in research and technology efforts to narrow the capability gap between the U.S. and Europe.
  
  EADS will vigorously pursue opportunities to establish local industrial footholds and technological co-operations in key export markets. The Company intends to make use of its established reputation as a technology leader and its growing credibility as a systems integrator to support its regional commercial endeavours.
  
  In the U.K., EADS has approximately 12,000 employees, and it is exploring opportunities to increase its local presence through acquisitions and strategic partnerships in the defence sector. EADS intends to strengthen its position as a defence prime contractor in the U.K. whose defence procurement budget is the fastest growing in Europe. To this end, EADS is leading key projects such as Paradigm/Skynet 5, the future strategic tanker aircraft (“FSTA”) and groundbased air defence (“GBAD”).
  
  In the U.S., EADS seeks to become a valued corporate citizen, with a view towards gaining a foothold in the U.S. defence procurement process. EADS continues to expand its overall footprint in the U.S., with the opening of an Airbus design centre in Kansas in 2002 and a Eurocopter facility in Mississippi in 2003. EADS’ strengths in technology and market reach have also enabled the Company to develop strategic partnerships with the principal actors in the U.S. aerospace and defence market. Opportunities in ballistic missile defence, mission aircraft and intelligence, surveillance and reconnaissance (“ISR”) systems, approached jointly with such partners as Boeing, Lockheed Martin, Northrop Grumman and Raytheon, provide attractive avenues for growth in the U.S.
  
  Management sees Asia, and in particular China, as a rich market for future growth and, in 2003, took its first step into the Chinese market through its stake in AviChina, localising Eurocopter manufacturing in Beijing. In Japan, EADS now has 15 Japanese partners on the A380 programme, with Bridgestone Corporation and Mitsubishi Rayon Co. recently joining the programme.
  
  In Russia, EADS intends to participate actively in ongoing industrial restructuring through cooperation with local partners and through the consolidation of its existing operations in a new EADS Russia company under the aegis of EADS International.
• Exploit cross-business synergies by leveraging EADS’ broad group portfolio of products and services
  By combining a wide range of products and expertise into high value-added, integrated systems, EADS will seek to enter new markets, maximise margins and offer strongly differentiated solutions that are tailored to increasingly complex customer needs in both the civil and defence sectors. The ongoing FSTA tanker programme and A400M military transport aircraft programme illustrate EADS’ ability to combine know-how and products in the development of incremental businesses. Furthermore, a broad portfolio of products and services covering both the private and governmental sectors enables EADS to mitigate the effects of its cyclical commercial aviation business through growth in governmental business.
  
  The breadth of EADS’ activities and technologies also enables it to benefit from group-wide efforts in R&D and sourcing, which support EADS’ competitiveness and cost-efficiency against the background of the budgetary conditions favourable to its U.S. competitors.
• Develop EADS’ role as a systems and solutions provider
  The transformation of U.S. and European defence forces and public safety agencies is driving demand for network enabled capabilities in areas such as extended air defence, C4ISR, unmanned aerial vehicles and military space, where EADS seeks to be a lead system integrator and service solutions provider. EADS, as the sole European group with combined control of both space and defence businesses, possesses a vital combination for technological superiority, and is therefore uniquely positioned to capitalise on these new demands by offering innovative systems-of-systems solution to meet its customers needs.
  
  In the civil sector, EADS seeks to draw on its technological base to offer complex commercial systems such as air traffic management and obstacle warning systems for helicopters.
  
  In addition to systems, EADS is committed to extending its programme leadership through the provision of service solutions, including outsourcing, to defence forces and public safety agencies, such as the secure communication services of Paradigm and the in-flight refuelling capabilities under the FSTA program.

Organization of EADS Businesses

EADS businesses fall under five divisions: (1) Airbus, (2) Military Transport Aircraft, (3) Aeronautics, (4) Defence and Security Systems and (5) Space. The following simplified structure chart illustrates the allocation of activities among these five divisions.

Airbus
Airbus is one of the world’s two leading suppliers of commercial aircraft of more than 100 seats. Since it was founded in 1970 up to the end of 2003, Airbus has received 4,886 orders for aircraft from 186 customers worldwide. Its market share of annual deliveries worldwide has grown from 15% in 1990 to 52% in 2003, surpassing its rival Boeing for the first time. At December 31, 2003, its backlog of orders (1,454 aircraft) stood at 52% of total worldwide backlog. After accounting for cancellations, net order intake for 2003 was 254 aircraft. In 2003, the Airbus division of EADS earned revenues of € 19 billion, representing 61% of EADS total revenues.

Military Transport Aircraft
The Military Transport Aircraft Division (the “MTA Division”) manufactures and sells light and medium military transport aircraft and is responsible for the development of the European heavy military transport A400M project. In addition, the MTA Division produces and sells mission aircraft, which are derived from existing platforms and dedicated to specialised military tasks such as maritime surveillance, antisubmarine warfare and in-flight refuelling capabilities. The MTA Division also designs and manufactures aerostructure elements. The MTA Division earned consolidated revenues of €0.9 million accounting for 3% of EADS’ total revenues for 2003. The €19.7 billion contract to manufacture and deliver the A400M was signed in 2003, contributing to significant future revenue growth for EADS.

Aeronautics
The Aeronautics Division groups together a number of civil and military aviation-related businesses, including helicopters, regional and general aviation aircraft and aircraft conversion and maintenance. The Aeronautics Division is also involved in the manufacturing of aerostructures for Airbus. Management views the mix of young and mature civil and military programmes and services as an effective means of assuring consistent positive results in markets subject to cyclical or fluctuating demand. For 2003, the Aeronautics Division earned consolidated revenues of € 3.8 billion representing 12% of EADS’ total revenues.

Defence and Security Systems
The Defence and Security Systems Division (the “DS Division”) is active in the field of integrated systems including missile systems, combat aircraft, defence electronics, military communications and services. Based on 2003 revenues, EADS’ subsidiary MBDA is the largest manufacturer of tactical missile systems in Europe and the second largest in the world. Its military aircraft business unit, which was transferred from the Aeronautics division in 2003, is a leading partner in the Eurofighter consortium. EADS is the third largest supplier of defence electronics in Europe and plays a significant role in the secure and encrypted military communications market. On a consolidated basis, the DS Division earned revenues of €5.2 billion for 2003, representing 16% of EADS’ total revenues.

Space
EADS is the third largest space systems manufacturing company in the world after Boeing and Lockheed Martin and the leading European supplier of satellites, orbital infrastructures and launchers. The Space Division designs, develops and manufactures satellites, orbital infrastructures and launchers largely through its subsidiaries EADS Astrium and EADS Space Transportation (“EADS ST”), and provides space services through its EADS Space Services subsidiary. The Space Division also provides launch services, through its shareholdings in Arianespace, Starsem and Eurockot, as well as services related to telecommunications and earth observation satellites, through dedicated companies, such as Paradigm. For 2003, the consolidated revenues of the EADS Space Division amounted to €2.4 billion, or 8% of EADS’ total consolidated revenues.

Investment
Among its significant investments, EADS holds a 46.03% stake in Dassault Aviation, a major participant in the world market for military jet aircraft and business jets.

Summary Financial and Operating Data

The following tables provide summary financial and operating data for EADS for the years ended December 31, 2003 and December 31, 2002.

Relationship Between EADS N.V. and the EADS Group

EADS N.V. itself does not engage in the core aerospace, defense or space business of its group (the "Group") but coordinates related businesses, sets and controls objectives and approves major decisions for its group. As the parent company, EADS N.V. conducts activities which are essential to the group activities and which are an integral part of the overall management of the group. In particular, finance activities pursued by EADS N.V. are in support of the business activities and strategy of the Group. In connection therewith, EADS N.V. provides or procures the provision of services to the subsidiaries of the Group. General management service agreements have been put in place with the subsidiaries and services are invoiced on a cost plus basis.

For management purposes, EADS N.V. acts through its Board of Directors, Executive Committee, and Chief Executive Officers in accordance with its corporate rules and procedures.

Within the framework defined by EADS, each Division, Business Unit, and subsidiary is vested with full entrepreneurial responsibility.

To the best knowledge of Management, there are no pledges over any of the assets of EADS N.V. As a group of companies with consolidated revenues in 2003 of € 30.1 billion, EADS' subsidiaries have granted numerous pledges and other sureties of their assets in connection with their operations.