WorldReginfo - 5bd6572b-7c26-481f-9df1-6c4268b79c2f WorldReginfo - 5bd6572b-7c26-481f-9df1-6c4268b79c2f ANNUAL REPORT 2007 WorldReginfo - 5bd6572b-7c26-481f-9df1-6c4268b79c2f WorldReginfo - 5bd6572b-7c26-481f-9df1-6c4268b79c2f contents Boards and committees 12 Report on Operations at 31 December 2007 14 Finmeccanica Group results 16 “Non-GAAP” performance indicators 25 Financial position 27 Performance by division 30 Helicopters 30 Defence and Security Electronics 36 Aeronautics 44 Space 50 Defence Systems 58 Energy 64 Transportation 70 Other Activities 76 Reconciliation of net profit and shareholders’ equity of the Group Parent with the consolidated figures at 31 December 2007 80 Significant events in 2007 and events subsequent to closure of the accounts for the period 81 Finmeccanica: Research and Development 90 Finmeccanica: Human Resources 99 Finmeccanica: Security Policy Statement (SPS) 113 Incentive plans (stock option and stock grant plans) 114 Corporate Governance 119 Outlook 121 WorldReginfo - 5bd6572b-7c26-481f-9df1-6c4268b79c2f 2007 ANNUAL REPORT Accounting statements and Notes to the consolidated financial statements at 31 December 2007 122 Consolidated Income Statement 125 Consolidated Balance Sheet 126 FINMECCANICA Consolidated Cash Flow Statement 127 Statement of Recognised Income and Expenses 127 Notes to the consolidated financial statements at 31 December 2007 128 1. General information 128 2. Form, content and applicable accounting standards 128 3. Accounting policies adopted 129 4. Significant issues 148 5. Effects of changes in accounting policies adopted 150 6. Significant non-recurring events or transactions 153 7. Segment information 155 8. Intangible assets 157 9. Property, plant and equipment 159 10. Investment properties 160 11. Equity investments 160 12. Business combinations 162 13. Financial assets at fair value 167 14. Equity transactions with related parties 167 15. Receivables and other non-current assets 174 16. Inventories 174 17. Contract work in progress and advances from customers 175 18. Trade and financial receivables 175 19. Current financial assets at fair value 175 20. Income tax receivables and payables 176 21. Other current assets 176 22. Cash and cash equivalents 176 23. Shareholders' equity 177 24. Borrowings 181 25. Provisions for risks and charges and contingent liabilities 184 26. Severance pay and other employee liabilities 189 27. Other current and non-current liabilities 192 28. Derivatives 193 29. Guarantees and other commitments 193 30. Transactions with related parties 194 31. Revenue 197 32. Other operating income (costs) 197 33. Raw materials and consumables used and purchase of services 198 34. Personnel costs 198 35. Depreciation, amortisation and impairment 199 36. Work performed by the Group and capitalised 199 37. Finance income and costs 200 38. Share of profit (loss) of equity accounted investments 202 WorldReginfo - 5bd6572b-7c26-481f-9df1-6c4268b79c2f CONTENTS 39. Income taxes 202 40. Discontinued operations and assets held for sale 204 41. Earnings per share 206 42. Cash flow from operating activities 206 43. Financial risk management 207 44. Information pursuant to article 149 duodecies of the Consob issuer regulation 215 45. Remuneration to key management personnel 215 Certification of the consolidated financial statements pursuant to art. 81-ter of Consob regulation 11971 of 14 May 1999, as amended 219 ATTACHMENTS 221 Report of the Board of Statutory Auditors on the consolidated financial statements at 31 December 2007 223 Auditors’ Report on the consolidated financial statements at 31 December 2007 224 WorldReginfo - 5bd6572b-7c26-481f-9df1-6c4268b79c2f 2007 6 letter to shareholders ANNUAL REPORT Dear Shareholders, due to the general operating context, 2007 was a particularly FINMECCANICA demanding year for the company. At the same time, it was also a very important year in terms of the results achieved and the operations carried out. The international context has recently been characterised by fears of a recession in the United States. The various factors fuelling these worries include signs of a slump in the home property market and of a slowdown in the job market, where the services sector no longer appears able to offset diminishing employment opportunities in the construction and manufacturing industries. Another significant factor is the impact that rising international energy and food prices has on the domestic market, also due to depreciation of the US dollar in foreign-exchange markets. Furthermore, financial brokers have lost confidence in the market owing to the sub-prime mortgage crisis in the United States. The European Union has not been spared from nervousness concerning the overall economic slowdown at world level. Quality indicators and conditions in the liquidity market point to a similar outlook for Europe which, from some perspectives, has a more fragile market than that of the US. Nonetheless, good labour market conditions, income policies that do not impact prices, and sufficient manoeuvring room for eco- nomic policies all help to ward off the risk of a sharp downturn in GDP growth between 2007 and 2008. WorldReginfo - 5bd6572b-7c26-481f-9df1-6c4268b79c2f 7 The Italian economy has not escaped the negative effects of the international economic situation. Inflation concerns are being reignited and growth is moving at an ever slower pace. Unfortunately, the latter trend was already underway when the crisis in financial markets exploded, bringing forecasts for GDP growth in 2008 down to 1%. In contrast, leading developing countries continue to post sustained growth. Brazil, China, India and Russia have kept their rates between 5% and 11%. The backdrop in which the aerospace and defence industry, and more generally the high-tech industry, operates has changed considerably in recent years. This is true in Italy, in Europe and in the rest of the world. Changes have regarded not only evolutions in products and process technologies, which have continued at an even faster pace compared with the past. Perhaps even more importantly, they have involved a vast reorganisation of firms’ production and ownership structures and the definition of new, more far-reaching growth strategies. Rather than focusing on the procurement of national government contracts, compa- nies are adopting a broader approach to competition that also leads them to compete in international markets. More than one factor has contributed to bringing about such a thorough and across the board process of renewal. The resurgence of international terrorism has contributed to radically altering the para- digms of national defence borders. The concept of “security” has been expanded and rendered more complex than ever before. On the one hand, military demand in Europe, and especially in Italy, has fallen with respect to the past. In contrast, it has risen in the United States and in certain emerging and developing countries. At the same time, we are witnessing an evolution in defence sector procurement models, especially in the United Kingdom, as well as some steps towards greater coordination in EU activities, even if sharp national seg- mentation of markets continues. More so than in the past, these surrounding conditions have led to restructurings, alliances and mergers on the offer side as well as to greater competition. Moreover, ongoing technological advances continuously produce new solutions in the sectors of information and communication, nanotechnologies, composite materials and microelectronics. These new opportunities have accentuated, also in the sectors of aerospace and defence, an ever greater fragmentation and specialisation of the markets and of the production cycles. As noted above, security requisites are becoming ever more pervasive, to the point that large infrastructures, both hardware and software, can no longer be without them. This increases companies’ need to offer integrated solutions incorporating this dimen- sion from the moment of conception and planning rather than simpler products and systems. Finally, the request for new infrastructures (especially in the transport sector) on the part of emerging and developing countries and the pressing need to meet their grow- ing energy requirements can create important business opportunities for firms able to carry out the necessary foreign investment. In 2007 the world energy and electricity production market confirmed the growth trend underway in the last three years. Price increases in primary energy sources, particular- ly oil and natural gas, have not slowed the growth in orders for thermoelectric genera- tion machinery and equipment. The market for new energy generation plants and sys- tems is expected to remain stable in upcoming years. North America and western Europe (where demand essentially involves the modernisation and replacement of obsolete plants) are going through a negative cyclical phase. In contrast, in the Asian WorldReginfo - 5bd6572b-7c26-481f-9df1-6c4268b79c2f 2007 8 ANNUAL REPORT Pacific, the Middle East and Latin America, there is a strong request for expansion of installed capacity. In the transportation field, motorised vehicles form the largest and most mature sec- FINMECCANICA tor, as shown by the stable, but relatively low annual growth rate of 2%. Demand is sustained by the constant attention paid to environmental policies, consequently favouring rail transportation over road transportation, and by economic development in new geographical areas. In the railway segment, the urban