To New Levels
Financial Statements and Corporate Governance 2003

BOOK2-790-B

29 MARCH 2004

This Reference Document was filed in French with the Autorité des Marchés Financiers on April 1, 2004 pursuant to Règlement No. 98-01 of theCommission des opérations de bourse. It may be used in support of a financial transaction only if it is supplemented by a transaction note approved by the
Autorité des Marchés Financiers.

Warning
The AMF draws the attention of the public to the fact that:
European Aeronautic Defence and Space Company EADS N.V. (“EADS” or the “Company”) is a Dutch company, which is listed in France, Germany andSpain. Given this fact, the applicable regulations with respect to public information and protection of investors, as well as the commitments made by theCompany to securities and market authorities, are described in this Reference Document.

This document contains information which forms an integral part of EADS’ Reference Document filed with the Autorité des Marchés
Financiers on April 1, 2004. When used as a Reference Document, it must be read in conjunction with the document entitled Businessand Legal Description – 2003 (Reference Document Part 2).

On the cover: wing of Multi-Role Tanker Transport Aircraft (MRTT)BOOK2-790-1
European Aeronautic Defence
and Space Company EADS N.V.
Financial Statements
and Corporate Governance —2003
Reference Document (Part 1)
Financial Year 2003

29 MARCH 2004

EADS Financial Policy
Chapter 1 – Net Assets – Financial
Position – Results
1.1 Management’s Discussion 5
and Analysis of Financial
Condition and Results ofOperations
1.1.1 Introduction and Overview 5
1.1.2 Critical Accounting
6
Considerations, Policies
and Estimates
1.1.3 Measurement of
10
Management’s Performance
1.1.4 EADS Results of Operations 14
1.1.5 Statement of Changes
20
in Consolidated
Shareholders’ Equity
1.1.6 Liquidity and21
Capital Resources
1.1.7 Management
28
of Market Risks
1.2 Financial Statements
1.2.1 Consolidated Financial
Statements
1.2.2 Statutory Financial
Statements

30
30

1.3 Statutory Auditors’ Fees

80

73

Chapter 2 – Corporate
81
Governance
2.1 Management and Control 81
2.1.1 Board of Directors, Chairmen 81
and Chief Executive Officers
2.1.2 Audit Committee
87

2.1.3 Remuneration and
Nomination Committee
2.1.4 Executive Committee
2.1.5 Internal Risk Management andControl Procedures

87
88
90

2.2 Interests of Directors and94
Principal Executive
Officers
2.2.1 Compensation Granted to94
Directors and Principal Executive
Officers
2.2.2Options Granted to the95
Two Chief Executive
Officers
2.2.3Related Party Transactions
95
2.2.4Loans and Guarantees
95
Granted to Directors
2.3 Employee Profit Sharing
and Incentive Plans
2.3.1 Employee Profit Sharing andIncentive Agreements
2.3.2Employee Share Offering
2.3.3Options Granted to
Employees
Chapter 3 – Outlook
3.1 2004 Financial Outlook
3.2 2004 Calendar of Financial
Communication
Reference Document Thematic
Index

95
95
95
97

99
99
100

EADS 2003 Table of contents 1

BOOK2-790-2

29 MARCH 2004

Financial Policy

Once again, EADS management has delivered on its
commitment to adding sustainable long-term value for all
stakeholders: shareholders, employees, and customers.
Underlying this success are strong business ethics, financial
discipline and dependability, shared throughout ourbusinesses and headquarters. We take pride in these.
Three priorities are embedded in our financial strategy.
First, we aim at increasing overall profitability and cash
generation. Managers have incentives to meet or exceed
their targets, which are set as milestones in our plan towards
the double digit EBIT* margin. Capacity adaptation plans,such as we are conducting in the Space division, or
productivity improvements and cost saving initiatives, suchas the Airbus “Route 06” plan, are also part of the executionof our financial strategy.
We are not acting on cost structure alone, as we pursue
sensible investments to sustain profitable growth. For
instance, the civil aviation weakness has not undermined our
R&D and capital expenditure effort in the Airbus A380
program, from which we expect large cash and profit
generation (Graph 1).

Graph 2:Net Cash Position (in €m) 2001-2003
2001

2002

2003 (*)

1,533

2,370

3,105

(*) From 2003, €1.1 billion of financial liabilities are netted against security deposits. The 2002 figure
was restated accordingly for comparison.

Second, our financial strategy supports the EADS goal of
rebalancing our civil and defence businesses, in order tobuffer the effects of civil aviation cycles and optimise
resource allocation.

Rating Agencies have rewarded our discipline by keeping
our ratings unchanged (S&P: single A- negative outlook;
Moody’s: A3 stable outlook).

We foster our financial engineering expertise to respond toexacting governmental customers requirements. As
European Defence budgets are under pressure, the ability todesign customer-tailored, tax-payer friendly, financial
solutions will be a key asset for our defence growth strategy:so, in 2003, we gathered highly skilled resources in-house tocapture important PFI (Private Financing Initiatives)opportunities. First, the UK MoD awarded our Paradigm
subsidiary a contract, worth £ 2.5 billion, to provide securecommunication satellites services over the next 20 years;
currently, we are negotiating another record-size PFI with the
UK MoD to provide tanker aircraft services. We expect
further prospects worldwide in military space, securecommunications, mission aircraft businesses and their related
services.

Graph 1:

Thirdly, EADS strives to deserve the reputation of financial
reliability, and transparency with which it is increasingly
credited by financial markets, contractors and customers.

Regarding the high level of our net cash position (Graph 2),
we are particularly satisfied that we ended the year well
above plan: it reflects our focus on cash preservation.
Working capital requirement is tightly managed, andmanagers of our Businesses are strongly encouraged to
implement cash savings actions.

EBIT* Margin Pre-R&D (%) 2001-2003
5.5%

6.0%
11.5%

2001
4.8%

7.0%
11.8%

2002
5.1%

7.3%
12.4%

2003
EBIT* Margin

R&D Expense

EBIT* is earnings before interest and tax, pre-goodwill amortisation and exceptionals.

2 EADS 2003 Financial Policy

Programme control is key as we start on such giant projects
as the € 20 billion A400M military transport aircraft contract,
or as we implement technologically demanding telecom
satellites and qualify the 10t version of Ariane 5, expected tobe launched in 2004. To effectively monitor programme
progress, we have enhanced regular and methodical
reporting procedures comprehensively addressing
technological, commercial and financial milestones.
The U.S. dollar value against the Euro and Pound Sterlingcalls for close scrutiny. While we generate around U.S.$20
billion annual revenues denominated in US dollars, mostly
from aircraft sales, we still have a high proportion of EuroBOOK2-790-3

29 MARCH 2004

and Pound Sterling denominated costs; this leaves us with anannual net exposure of broadly U.S.$10 billion, dealt withthrough a systematic and prudent hedging policy.
Presently, our 2004 and 2005 results are fully hedged against
currency volatility, as well as a very significant part of the
cash flows from 2006 and 2007 firmly contracted deliveries.
A380 firm orders, which extend into 2011, have also been
hedged as they were placed (Graph 3). Hedging allows us to“buy time” and to improve our financial dependability.
Besides that, we constantly look for devices to reduce net
U.S. dollar exposure, such as Euro-denominated sales – theA400M contract is a good example – or through a higher
proportion of U.S. dollar denominated outlays, for which theintroduction of new programmes, the civil market upturn andnew investments all present opportunities.

Graph 3:
Hedging Portfolio 2004-2011 (in U.S. $ bn)
Total : U.S. $43 billion
9.6
8.7
8.0
6.4
5.4

3.1

1.1
0.4
2004

2005

2006

2007

2008

2009

2010

2011

Hans Peter Ring
Chief Financial Officer
EADS Executive Committee Member

EADS 2003 Financial Policy 3

BOOK2-790-4

29 MARCH 2004

Chapter 1
Net Assets – Financial Position – Results

Management’s
5Discussion and Analysisof Financial Condition
and Results ofOperations
1.1.1 Introduction and5
Overview
1.1.2 Critical Accounting
6
Considerations, Policies
and Estimates
1.1.2.1 Scope of and Changes in
6
Consolidation Perimeter
1.1.2.2 Dilution Gains
6
1.1.2.3 Fair Value Adjustments
6
1.1.2.4 Impairment of Assets
7
1.1.2.5 Research and Development
Expenses7
1.1.2.6 Accounting for Hedged
7
Transactions in the
Financial Statements
1.1.2.7 Accounting for Sales
8
Financing Transactionsin the Financial Statements
1.1.3 Measurement of
10
Management’s
Performance
1.1.3.1 Order Backlog
10
1.1.3.2 Use of EBIT
11
Pre-Goodwill
Amortisation andExceptionals
1.1.3.3 EBIT* Performance12
by Division

1.1

4 EADS 2003 Chapter 1 Net Assets – Financial Position – Results

EADS Results ofOperations
1.1.5 Statement of Changes
in Consolidated
Shareholders’ Equity
1.1.6 Liquidity and Capital
Resources
1.1.6.1 Movement of Net CashPosition
1.1.6.2 Consolidated Financial
Liabilities
1.1.6.3 Sales Financing
1.1.7 Management of Market
Risks
1.1.7.1 Interest Rate Risk
1.1.7.2 Exchange Rate Risk
1.1.7.3 Counterparty Credit
Risk
1.1.7.4 Risks on Equity
Investment Portfolio

14

1.2
1.2.1

30
30

1.1.4

Financial Statements
Consolidated Financial
Statements
1.2.2 Statutory Financial
Statements
1.3

Statutory Auditors’
Fees

20

21
21
24
24
28
28
28
29
29

73

80

BOOK2-790-5

29 MARCH 2004

1.1 Management’s Discussion and Analysis of Financial
Condition and Results of Operations
In addition to historical information, this document includes
forward-looking statements. The forward-looking statements
are generally identified by the use of forward-looking words,
such as “anticipate”, “expect” “estimate”, “intend”, “plan”,“predict, “ project”, “will”, “believe”, “should”, “may” or othervariations of such terms, or by discussion of strategy thatinvolves risks and uncertainties. These statements relate to
EADS’ future prospects, developments and business strategies
and are based on analyses or forecasts of future results andestimates of amounts not yet determinable. These forwardlooking statements represent the view of EADS only as of thedates they are made, and EADS disclaims any obligation to
update forward-looking statements, except as may beotherwise required by law. The forward-looking statements inthis document involve known and unknown risks, uncertainties
and other factors that could cause EADS’ actual future results,
performance and achievements to differ materially from those
forecasted or suggested herein. These factors include changes
in general economic and business conditions and currency
exchange rates, as well as those described in Part 2/1.5 Risk
Factors.
1.1.1 Introduction and Overview
The following discussion is based upon the audited consolidated
financial statements of EADS for 2003, 2002 and 2001 (together,
the “Financial Statements”). The Financial Statements wereprepared in accordance with International Financial ReportingStandards (“IFRS”) issued by the International AccountingStandards Board (“IASB”). In 2003, EADS changed its
accounting policy for the treatment of development costs inorder to fully comply with International Accounting Standard(“IAS”) 38. See “– 1.1.2 Critical Accounting Considerations,
Policies and Estimates – Research and Development Expenses”
and “Notes to the Consolidated Financial Statements – Note 2:
Summary of Significant Accounting Policies “and” Note 11:
Intangible Assets”.
With consolidated revenues of € 30.1 billion for 2003, EADSis Europe’s premier aerospace and defence company and thesecond largest aerospace and defence company in theworld. In terms of market share, EADS is among the top two
manufacturers of commercial aircraft (surpassing Boeing interms of deliveries and orders in 2003), 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 defence
sector. As of December 31, 2003, EADS’ active headcountwas 109,135.
EADS organises its businesses into the following five operating
divisions:• Airbus: Development, manufacturing, marketing and sale ofcommercial jet aircraft of more than 100 seats and thedevelopment and manufacturing of aircraft for military use;
• Military Transport Aircraft: Development, manufacturing,marketing and sale of military transport and special
mission aircraft;• Aeronautics: Development, manufacturing, marketing andsale of civil and military helicopters, regional turboprop
aircraft and light commercial aircraft; civil and military
aircraft conversion and maintenance services; and civil
aircraft aerostructures;• Defence & Security Systems: Development,
manufacturing, marketing and sale of missile systems;
military combat aircraft and training aircraft; defence
electronics; defence-related (and some civil)
telecommunications solutions; and logistics, training,
testing, engineering and other related services; and• Space: Development, manufacturing, marketing and sale ofsatellites, orbital infrastructures and launchers; andprovision of launch services.
In general, these manufacturing businesses are characterised bylong-term production cycles. Another significant characteristic ofmany of these businesses is the extent of their dependence on
governmental budgets.
In 2003, as part of the restructuring of the former Defence andCivil Systems Division, the Military Aircraft business unit of the
Aeronautics Division was transferred to the newly organized
Defence & Security Systems Division (the “DS Division”).
2002 segment information for the two divisions has beenadjusted to reflect this transfer. See “Notes to the Consolidated
Financial Statements – Note 5: Segment Reporting“.
EADS currently is rated A3 with a stable outlook by Moody’s,
and A-/negative outlook by Standard and Poor’s.
Exchange Rate Information
The financial information presented hereinafter in thisdocument is expressed in Euro, U.S. dollars or Pounds
Sterling. The following table sets out, for the periods
indicated, certain information concerning the exchange rate
between the Euro and the U.S. dollar and Pound Sterling,
calculated using the official European Central Bank fixing
rate:Year ended

Average€-U.S.$

December 31, 2001

0.89570.60850.88130.6219December 31, 2002

0.94510.6505

1.04870.6424

December 31, 2003

1.13040.69191.26300.7048€-£Period End€-U.S.$€-£EADS 2003 Chapter 1 Net Assets – Financial Position – Results 5

BOOK2-790-6-000

29 MARCH 2004

1.1.2 Critical Accounting Considerations, Policies andEstimates
1.1.2.1 Scope of and Changes in Consolidation Perimeter
Sales and acquisitions of interests in various businesses canaccount, in part, for differences in EADS’ results of operations for
one year as compared to those of another year.
Airbus: Airbus S.A.S. was established in July 2001 to integrate
all design, manufacturing and marketing activities of Airbus
following the acquisition by EADS of Airbus UK and of the 20%
stake in Airbus GIE held by BAE SYSTEMS (the “Airbus
Combination”). BAE SYSTEMS received 20% of the sharecapital of Airbus S.A.S. through a capital increase as part of the
Airbus Combination, diluting EADS’ interest in Airbus S.A.S. to80%. See “– 1.1.4 EADS Results of Operations – Consolidated
Minority Interest” and “Part 2/1.1.2 Airbus – Organisation of
Airbus – Integration of the Airbus Activities”.
Airbus is fully consolidated by EADS in light of the effective
control EADS has exercised, by agreement with BAE SYSTEMS,
over the assets and operations of Airbus since January 1, 2001.
MBDA: On December 18, 2001, EADS, BAE SYSTEMS and
Finmeccanica formed MBDA, which combines the businessesof MBD and of AMM, and the missile systems activities of
AMS. EADS and BAE SYSTEMS each hold a 37.5% stake in
MBDA, with Finmeccanica holding the remaining 25%.
Pursuant to the shareholder agreements relating to the MBDA
group, EADS and BAE SYSTEMS together exercise certain
controlling rights over MBDA through MBDA Holdings,
including the right of MBDA Holdings to appoint MBDA’s CEO,COO-Operations and CFO.
In 2001, the consolidated statement of income reflected a 50%
consolidation of MBD and a full consolidation of AMM throughto the formation of MBDA on December 18. From December
18, and as reflected in the December 31, 2001 consolidatedbalance sheet, EADS proportionally consolidates 50% of MBDA
within the DS Division, consistent with its ability to influence
operations, with Finmeccanica’s holding reflected as a 12.5%
minority interest. Since 2002, EADS has recognised a 50%
proportionate share of MBDA’s full year profit and loss accounts
in its annual consolidated statement of income.
Acquisition of Astrium, Dornier GmbH, Tesat Spacecom,
Cogent and EADS Telecom France: On January 30, 2003,
EADS acquired BAE SYSTEMS’ 25% interest in Astrium N.V.,
control of which transferred to EADS on the same date.
Astrium was fully consolidated by EADS beginning in fiscal
year 2003.
On September 18, 2003, EADS acquired the remaining 41%
interest in EADS Telecom France S.A.S. from Nortel Networks
as part of an exchange for EADS’ interests in Nortel Networks
Germany GmbH & Co. KG and Nortel Networks France S.A.S.
EADS now holds 100% of EADS Telecom France S.A.S.
6 EADS 2003 Chapter 1 Net Assets – Financial Position – Results

On October 21, 2003, EADS, through its subsidiary DADC,
acquired an additional 17.7% of the share capital of DornierGmbH for € 62 million, bringing its total stake in Dornier GmbHto 94%.
Following the acquisitions of Tesat Spacecom on November 30,
2001 and Cogent Defence Systems on December 1, 2001, the2002 operations of these companies were consolidated fully forthe first time in the EADS 2002 consolidated statement ofincome.
Disposal of Aircelle and EADS Matradatavision (“MDTV”):
On March 6, 2002, EADS sold its interest in the Aircelle joint
venture to Snecma for a disposal gain of € 63 million. On
November 20, 2002, EADS sold MDTV (except for two
remaining subsidiaries of MDTV) to IBM for € 12 milion. From
the dates of disposal, these businesses were no longer includedin the Financial Statements.
See “Notes to the Consolidated Financial Statements – Note 4:
Acquisitions and Disposals”.
1.1.2.2 Dilution GainsThe 2001 transactions leading to the formation of Airbus S.A.S.
and MBDA resulted in a dilution of EADS’ economic ownershipin Airbus, MBD and AMM. These transactions required avaluation of the contributed businesses, whose market value,estimated in the course of negotiations, exceeded the carrying
value of their consolidated net assets for EADS. Consequently,
EADS recognised dilution gains of € 2.5 billion for a 20%
dilution stake in Airbus, and of € 0.26 billion for 12.5% of MBD
and 62.5% of AMM, all net of transaction-related charges. These
dilution gains were reported in other income in 2001 and weredeemed items of a non-recurring nature by EADS. See “– 1.1.3
Measurement of Management’s Performance – Use of EBIT PreGoodwill Amortisation and Exceptionals”.
1.1.2.3 Fair Value Adjustments
The merger of the operations of ASM, Dasa and CASA leading to
the creation of EADS in 2000 was recorded using the purchasemethod of accounting with ASM as the acquirer. Accordingly, thebook value of certain assets and liabilities, mainly property, plantand equipment and inventories, was adjusted by an aggregate
amount of € 1.8 billion, net of income taxes, to allocate a portionof the respective fair market values of Dasa and CASA at the timeof the merger (the “fair value adjustments”). These aggregate
additions in value are generally being depreciated over four tofifteen years for fixed assets and amortised over approximately
24 months for inventories. In addition, in 2001 in connection withthe formation of Airbus S.A.S., EADS adjusted the book value of
Airbus fixed assets and inventories by an aggregate amount of€ 0.3 billion, net of income taxes, to reflect their fair market
values. The fair value adjustments lead to depreciation expensein the consolidated statements of income classified within cost of
sales. For management reporting purposes, EADS treats these
depreciation charges as non-recurring items in EBIT pre-goodwill

BOOK2-790-7

29 MARCH 2004

amortisation and exceptionals. “– 1.1.3 Measurement ofManagement’s Performance – Use of EBIT Pre-Goodwill
Amortisation and Exceptionals”.

allocating costs for previous R&D programs, as required by
IAS. Consequently, prior-year financial statements have notbeen impacted by the application of IAS 38.

1.1.2.4 Impairment of Assets
When, in the view of EADS’ management (“Management”), a
triggering event such as an adverse material market event or asignificant change in forecasts or assumptions occurs, EADS
performs an impairment test on the assets, group of assets,
subsidiaries, joint ventures or associates likely to be affected.
Generally, the discounted cash flow method is used todetermine the value of the assets. The discounted cash flow
method is sensitive to the selected discount rate andManagement’s estimate of future cash flows. Consequently,
slight changes to these elements can materially impact theresulting asset valuation and therefore the amount of theimpairment.

Most of the estimated future development costs that will becapitalised as a result of compliance with IAS 38 relate to theA380 programme. Through 2008, Management expects thatapproximately € 0.5 billion of future A380-related development
costs will meet the IAS 38 recognition criteria for internallygenerated intangible assets, including approximately € 0.1
billion in 2004.

As was the case in 2001, EADS conducted impairment tests in2002 on the net assets of businesses in the Space Division
resulting in a goodwill impairment charge of € 0.4 billion relating
to the commercial space business. The impairment of goodwill
has an effect on profitability, as it is recorded in the line item
“other expense” on EADS’ consolidated statement of income.
No additional assets needed to be impaired in 2003.
See “– 1.1.4 EADS Results of Operations – Consolidated
Amortisation of Goodwill and Impairment Losses” and “Notes to
the Consolidated Financial Statements – Note 11: Intangible
Assets”.
1.1.2.5 Research and Development Expenses
In 2003, with the application of IAS 38, “Intangible Assets”, the
EADS group (the“Group”) assessed whether product-related
development costs qualified for capitalisation as internallygenerated intangible assets. Criteria for capitalisation recognition
are strictly applied. Consequently, all research and development
costs not meeting the IAS 38 criteria are expensed as incurred in
the consolidated statement of income.
Current and previous research and development programs havebeen reviewed to determine the extent to which potential
expenses in the development phase of such programs meet therecognition criteria of IAS 38. As a result of the transition to IAS
38 in 2003, EADS capitalised € 4 million of product-related
development costs incurred in 2003 as internally generated
intangible assets.
EADS considers that, due to the complexity of its products(especially civil aircraft, such as the A380), processes carriedout in the various research and development phases are toointertwined to allow a proper distinction between thesephases prior to the very late stages of particular programs. In
addition, the absence in prior years of systems able to gather
the relevant information prevents EADS from retroactively

Since 2002, the depreciation of jigs and tools has been recordedin cost of sales in accordance with IFRS. In prior years, it had
been recorded in the line item “research and development
expenses”. For reasons of comparability, the 2001 consolidated
statement of income were restated to reflect jigs and tools
depreciation (€ 0.2 billion) in cost of sales.
1.1.2.6 Accounting for Hedged Transactions in the
Financial Statements
Approximately two-thirds of EADS’ revenues are denominated in
U.S. dollars, whereas the major portion of its costs is incurred inEuro. As the Group intends to generate profits only from its
operations and not through speculation on foreign currency
exchange rate movements, EADS uses hedging strategies tomanage and minimise the impact of exchange rate fluctuations
on these profits. See “– 1.1.7 Management of Market Risks –Exchange Rate Risk” and “Part 2/1.5.1 Market Risk – Exposure
to Foreign Currencies”.
Historically, EADS’ currency hedge portfolio consisted of both
micro and macro hedges, the accounting for which differs as
explained below. As a result of the application of IAS 39“Financial Instruments: Recognition and Measurement” cash
flow hedging treatment to the majority of EADS’ hedge portfolio
since 2001, the significant variations in financial income that
EADS experienced in earlier periods are significantly reduced
and changes in net income are more in line with variations inoperating income than they had been in prior periods.
Micro Hedges. When hedges form a hedging relationship withcustomer orders to which they specifically relate, they qualify for
IAS 39 hedge accounting and are referred to as “micro” hedges.
Revenues from such customer orders are recorded in Euro at thehedged rate and the impact of the hedges is recognised in grossmargin and operating income at the time of revenue recognition.
At the end of each accounting period, the value of each
outstanding micro hedge contract is marked-to-market in thebalance sheet on the basis of the then prevailing forward
exchange rate. See “– 1.1.5 Statement of Changes inConsolidated Shareholders’ Equity”. For products such as
aircraft, EADS typically hedges the first forecasted highly
probable future cash inflows for a given month based upon final
payments at delivery. See “– 1.1.7 Management of Market Risks– Exchange Rate Risk”.
EADS 2003 Chapter 1 Net Assets – Financial Position – Results 7

BOOK2-790-8

29 MARCH 2004

Micro hedges associated with cancelled or postponed customer
orders, to the extent such cancellations result in an overhedging
situation, are deemed terminated for accounting purposes. The
sum of (i) changes in the fair value of these hedges since
January 1 and (ii) a reversal of the portion of AOCI
corresponding to these hedges prior to January 1, would berecorded in financial income and deferred tax income (loss) inthe consolidated statement of income. No such accounting
entries were recorded in 2003.
Macro Hedges. Hedges that do not relate to a specified
customer order, referred to as “macro” hedges, do not qualify
for IAS 39 hedge accounting treatment. Unlike micro hedges,
macro hedges do not have an impact on gross margin or
operating income, even though they initially were intended tohedge cash flows from deliveries. Upon maturing, they areaccounted for in the line item “financial result”. At the end ofeach accounting period, each outstanding macro hedge
contract is marked-to-market on the basis of the thenprevailing forward exchange rate. Changes in pre-tax mark-tomarket values from the previous accounting period arerecorded in the line item “other financial result” in the
consolidated statement of income. See “Notes to theConsolidated Financial Statements – Note 9: Financial Result”.
On January 1, 2001, most macro hedges then outstanding weretied to specified customer orders and thereby qualified for IAS
39 micro hedge accounting treatment. These hedges wereascribed an implicit conversion rate corresponding to theforward Euro-U.S. dollar exchange rate frozen at December 31,
2000. As of January 1, 2003, there were no longer any
outstanding sales-related macro hedges not tied to specified
customer orders.
Revenues in currencies other than the Euro that are not hedged
through financial instruments are translated into Euro at the spot
exchange rate at the date the underlying transaction occurs.
1.1.2.7 Accounting for Sales Financing Transactions in the
Financial Statements
In order to support product sales, primarily at Airbus and ATR,EADS may agree to participate in the financing of customers, ona case-by-case basis, directly or through guarantees provided tothird parties. See “– 1.1.6 Liquidity and Capital Resources – Sales
Financing”. The accounting treatment of sales financing
transactions varies based on the nature of the financing
transaction and the resulting exposure.
On Balance Sheet. When, pursuant to a financing transaction,
the risks and rewards of ownership of the financed aircraft
reside with the customer, the transaction is characterised aseither a loan or a financial lease. In such instances, revenues
from the sale of the aircraft are recorded upon delivery, while
financial interest is recorded over time as financial income. The
outstanding balance of principal is recorded on the balance
sheet in other long-term financial assets, net of accumulated
8 EADS 2003 Chapter 1 Net Assets – Financial Position – Results

write-downs. See “Notes to the Consolidated Financial
Statements – Note 13: Investments in Associates, Other
Investments and Long-term Financial Assets”.
By contrast, when the risks and rewards of ownership remain
with Airbus or ATR, the transaction is characterised as an
operating lease. EADS’ general policy is to not enter into
operating leases for new aircraft to be delivered to customers.
Therefore, new operating leases primarily arise in connection
with the re-marketing of repurchased or repossessed aircraft.
Rather than recording 100% of the revenues from the “sale” ofthe aircraft at the time of such “sale”, rental income from suchoperating leases is recorded in revenues over the term of therespective leases. The leased aircraft are recorded at cost on thebalance sheet as tangible assets, the corresponding depreciation
and allowance charges are recorded in cost of sales and themargin is recorded as deferred income. See “Notes to theConsolidated Financial Statements – Note 12: Property, Plant
and Equipment”.
Off Balance Sheet – Contingent Commitments. Certain sales
financing commitments, such as lease in/lease out structuresand certain asset value guarantees (“AVGs”), are not recordedon the balance sheet.
Under lease in/lease out structures, which Airbus and ATR
applied in the past to take advantage of certain jurisdictions’leasing-related tax benefits, the risks and rewards of ownershipof the aircraft are typically borne by a third party, usually referred
to as the head lessor. The head lessor leases the aircraft to
Airbus or ATR, which in turn sub-leases it to the customer. To
the extent possible, the terms of the head lease and sub-leasematch payment streams and other financial conditions. Suchcommitments by Airbus or ATR are reported as off-balance
sheet contingent liabilities.
Asset Value Guarantees. Certain sales contracts may include
the provision of an AVG, whereby Airbus or ATR guarantee a
portion of the market value of an aircraft during a limited period
after its delivery. See “Notes to the Consolidated Financial
Statements – Note 25: Commitments and Contingencies”.
If the present value of the AVG exceeds 10% of the sales price of
the aircraft, the sale of the underlying aircraft is accounted for as
an operating lease in the Financial Statements. In this case, uponaircraft delivery, the cash payment received from the customer isrecognised on the consolidated balance sheet as deferredincome and amortised straight-line to the amount, and up to thelast exercise date, of the AVG. The production cost of theaircraft is recorded in tangible assets, and the difference
between production cost and the AVG amount is depreciated up
to the exercise date of the AVG. Depreciation expenses arerecorded in cost of sales in the consolidated statement ofincome. See “Notes to the Consolidated Financial Statements –Note 12: Property, Plant and Equipment” and “Note 22:
Deferred Income”.

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29 MARCH 2004

If the present value of an AVG is below the 10% threshold, thetransaction concerned by the AVG is not recorded on the
consolidated balance sheet, but accounted for as a sale. To
reduce exposure under AVGs and to minimise the likelihood of
their occurrence, Airbus and ATR extend them with prudent
guaranteed asset values and restrictive exercise conditions,
including limited exercise window periods. AVGs are generally
not expected to be exercised.
Provisions and Allowances. Under its provisioning policy forsales financing risk, EADS records provisions to fully cover its
financing and asset value net exposure. Provisions pertaining tosales financing exposure, whether on-balance sheet or offbalance sheet, are recorded in provisions, or as write downs of
the related assets. Provisions recorded as liabilities relate
primarily to off-balance sheet commitments. See “Notes to theConsolidated Financial Statements – Note 19 (d): Other
Provisions”. Provisions are recorded as write downs of therelated assets when they can be directly related to thecorresponding asset. See “Notes to the Consolidated Financial
Statements – Note 12: Property, Plant and Equipment” and“Note 13: Investments in Associates, Other Investments andLong-term Financial Assets”. While Management views its
valuations of collateral as conservative, changes in provisions toreflect revised valuations may have a material impact on net
income in future periods.

EADS 2003 Chapter 1 Net Assets – Financial Position – Results 9

BOOK2-790-10

29 MARCH 2004

1.1.3 Measurement of Management’s Performance
1.1.3.1 Order Backlog
Year-end order backlog represents firm future revenues fromcontracts signed up to that date. EADS uses order backlog as ameasure of commercial performance, and growth of EADS’order backlog is an ongoing goal of Management. Only firm
orders are included in calculating order backlog – forcommercial aircraft, a firm order is defined as one for which
EADS receives a non-refundable down payment on a definitive
contract not containing a “walk-away” provision. Defencerelated orders are included in the backlog upon signature of
the related procurement contract. Commitments underConsolidated Backlog for the Years Ended
December 31, 2003, 2002 and 2001

“umbrella” or “framework” agreements by governmental
customers are not included in backlog until they are officiallynotified to EADS.
For civil market contracts, amounts of order backlog reflected in
the table below are derived from catalogue prices, escalated tothe expected delivery date and, to the extent applicable,
converted into Euro (at the corresponding hedge rate for thehedged portion of the flows, and at the year-end spot rate forthe non-hedged portion of the flows). The amount of defencerelated order backlog is equal to the contract values of thecorresponding programs.

Year EndedYear EndedYear Ended

December 31, 2003

December 31, 2002

December 31, 2001

Amountin billionsof € Percentage(5)Amountin billionsof € Percentage(5)Amountin billionsof € Percentage(5)Backlog:(1)Airbus(2)

141.8

73

140.9

84

156.1

85

20.0

11

0.6

0

1.3

1

9.8

5

10.1

6

13.7

7

14.3

7

13.5

8

9.1

5

7.9

4

3.9

2

3.8

2

Total Divisional Backlog

193.8

100

169.1

100

184

100

Headquarters/Eliminations(14.5)

(0.8)

(0.7)

Total

179.3

168.3

183.3

Military Transport Aircraft
Aeronautics(3)

Defence & Security Systems
Space

(3)

(4)

(1)

Without options.
Based on catalogue prices.
(3)
In 2003, the Military Aircraft business unit was transferred from the Aeronautics Division to the DS Division, with a corresponding impact on the backlog of each
Division of € 3.2 billion. 2002 figures have been restated to be comparable with 2003.
(4)
Astrium consolidated at 100% in 2003; proportionally consolidated at 75% in 2002 and 2001.
(5)
Before headquarters/eliminations.
(2)The € 11 billion increase for 2003 order backlog resulted mainly
from high level of order intake (€ 61 billion), partially offset by the
impact of the weakening U.S. dollar used for conversion.
Significant contracts recorded in the backlog in 2003 include theA400M (€ 19.7 billion for 180 aircraft) and Paradigm (€ 3.6 billion)
contracts. Airbus’ net order intake was 254 aircraft in 2003 (€ 31
billion). In 2003, Airbus received 34 new orders for the A380,
bringing the total firm order backlog for the A380 to 129 aircraft.
These increases were offset by net foreign currency adjustments
to the Airbus backlog of € 19 billion, reflecting the year-end
valuation of the non-hedged portion of its order book.
The change in eliminations from 2002 to 2003 mainly relates tothe impact of the A400M program on 2003 backlog. Airbus
included approximately 70% of the order value in its backlog toreflect its work share of the A400M program. The Military

10 EADS 2003 Chapter 1 Net Assets – Financial Position – Results

Transport Aircraft (“MTA”) Division’s order backlog included
100% of the value of the A400M order to reflect the Division’s
prime-contractor responsibility over the program. The doublecounting was therefore eliminated in EADS’ consolidated orderbacklog.
The decrease in order backlog from 2001 to 2002 was primarilya result of decreased net order intake at Airbus following theterrorist events of September 11, 2001, as well as the effects of
the weakening U.S. dollar used for conversion.
Reflecting the results of Management’s efforts to increase
revenues from the defence sector to approximately 30% of total
revenues over the long term, backlog in the defence sector
continues to grow, with Paradigm and the A400M contributing
significantly to the 2003 increase.

BOOK2-790-11

29 MARCH 2004

The table below illustrates the proportion of defence andcommercial backlog at the end of each of the past two years.
Year Ended
December 31, 2003

Year Ended
December 31, 2002

Amountin billionsof €(2)

Percentage

Amountin billionsof €(2)

Percentage

Commercial Sector

133

74%

146

87%

Defence Sector

46

26%

22

13%

Total

179

100%

168

100%

Backlog:

(1)
(2)

(1)

Without options.
After headquarters/eliminations.

1.1.3.2 Use of EBIT Pre-Goodwill Amortisation andExceptionals
EADS uses earnings before interest and taxes, pre-goodwill
amortisation and exceptionals (“EBIT*”) as a key indicator of its
economic performance. The term “exceptionals” refers toincome or expenses of a non-recurring nature, such asamortisation expenses of fair value adjustments relating to the

EADS Merger, impairment losses, and dilution gains from theformation of Airbus S.A.S. and MBDA. It does not correspondto the definition of extraordinary items under IFRS.
Set forth below is a table reconciling EADS’ income fromoperating activities (as reflected in EADS’ consolidated
statement of income) with EADS’ EBIT*.

in €mYear ended December 31,
2003
2002
2001

Income from operating activities

561

160

2,514

Income from investments

186

87

(342)

Dilution gain Airbus, MBDA

00(2,794)

Goodwill amortisation and impairment losses

567

936

1,466

Exceptional depreciation (fixed assets)

214

227

260

Exceptional depreciation (financial assets)

0

0

315

Exceptional depreciation (inventories)

15

16

275

1,543

1,426

1,694

EBIT pre-goodwill amortisation and exceptionals

EADS 2003 Chapter 1 Net Assets – Financial Position – Results 11

BOOK2-790-12

29 MARCH 2004

1.1.3.3 EBIT* Performance by Division
Set forth below is a breakdown of EADS’ consolidated EBIT* bydivision for the past three years. To facilitate comparison of 2003
and 2002 performance in light of the transfer in 2003 of theMilitary Aircraft business unit from the Aeronautics Division to

the DS Division, 2002 EBIT* figures for the two divisions havebeen adjusted accordingly, presenting EBIT* as if the transfer
had occurred on January 1, 2002. Pre-adjustment 2002 EBIT* forthe two divisions is also presented for purposes of comparison
with 2001.
Year ended
December31, 2003

in €mYear ended
December31, 2002

Year ended
December31, 2001

Adjusted

Unadjusted

1,353

1,361

1,361

1,655

Military Transport Aircraft

30

(80)

(80)

1

Aeronautics

217

180

261

308

Defence and Security Systems

171

122

40

(79)

(400)

(268)

(268)

(222)

1,371

1,315

1,314

1,663

172

111

112

31

1,543

1,426

1,426

1,694

AirbusSpace(1)

Subtotal(2)

HQ/Consolidation
EADS
(1)
(2)

Astrium consolidated at 100% in 2003; proportionally consolidated at 75% in 2002 and 2001.
HQ/Consolidation primarily includes results from headquarters, which mainly includes income from the investment in Dassault Aviation.

2003 compared to 2002. EADS’ consolidated EBIT* increasedto € 1.5 billion for 2003 from € 1.4 billion for 2002. The increaseprimarily reflects the ramp-up of defence programs at the DS
Division and the Aeronautics Division and, to a lesser extent, at
the MTA Division. Significant losses at the Space Divisionpartially offset these increases.
Airbus’ EBIT* remained relatively unchanged at € 1.4 billion for
2003, reflecting the roughly equivalent number of deliveries(305 in 2003 – of which 302 were recognized in revenues, ascompared to 303 in 2002). The positive effects of improved
margins resulting from a more favourable product mix mostly
offset the negative impact of higher research and development
costs for the A380 program. The EBIT* margin pre-research anddevelopment of 16.7% reflects the cost benefits of Airbus’ builtin manufacturing flexibility. See “Part 2/1.1.2 Airbus –Production – Adaptability to Changes in Demand” for further
discussion of built-in manufacturing flexibility.
Higher margins on military derivatives aircraft (e.g., the multi-roletanker program) and reduced research and development costs
contributed to the MTA Division’s 2003 EBIT* of € 30 million.
This result represents a € 110 million improvement from the 2002
negative EBIT* of € 80 million, which included the € 54 million
write-off of assets relating to the Do 728 program.
The effect on cost structures resulting from restructuring
measures at the DS Division, as well as increased deliveries of
missiles and combat aircraft, led to a 40% increase of the Division’s
EBIT* from € 122 million for 2002 to € 171 million for 2003.
Strong results at Eurocopter, mostly relating to the ramp-up of
the NH90 and Tiger programmes, led to a 2003 EBIT* at the
12 EADS 2003 Chapter 1 Net Assets – Financial Position – Results

Aeronautics Division of € 217 million, a 21% increase over 2002
EBIT* of € 180 million.
Headquarters also contributed € 172 million to EADS’
consolidated EBIT* for 2003, as compared to € 111 million for
2002, resulting primarily from the € 114 million increase in
results from EADS’ investment in Dassault Aviation. The
increase includes a € 77 million catch-up of prior-year income of
Dassault Aviation, in accordance with IFRS. See “Notes to theConsolidated Financial Statements – Note 13: Investments in
Associates, Other Investments and Long-term Financial Assets”.
These increases to EADS’ consolidated 2003 EBIT* were partly
offset by a € 400 million negative EBIT* at the Space Division,
resulting from (i) expenses and provisions of € 288 million
relating to the previously announced restructuring programs, (ii)asset depreciation at Astrium and (iii) further provisioning for
program cost overruns.
The impact of the year-to-year change in average hedge rates for
net foreign currency exposure from 2002 (€-U.S $ 0.967) to2003 (€-U.S. $ 0.969) had a non-material impact (negative € 26
million) on EADS’ consolidated EBIT* for 2003.
2002 compared to 2001. Consolidated EBIT* for EADS reached€ 1.4 billion for 2002, a decrease of € 0.3 billion from 2001. The
decrease reflected the downturn in the commercial aviation
market, partly offset by growth in the defence sector.
The restructuring efforts in the defence business contributed topositive EBIT* of € 40 million (unadjusted) at the DS Division, as
compared to negative EBIT* of € 79 million for 2001. In addition
to the turnaround at the DS Division, EADS headquarters, after

BOOK2-790-13

29 MARCH 2004

significant downsizing of the workforce in 2001 and 2002,
achieved substantial cost savings in 2002, thus boosting its 2002
EBIT*.

marketing and functional costs in the military aircraft business,and reduced aerostructure/maintenance activity as a result of
the downturn in the commercial industry.

Offsetting these positive items were effects stemming from thedifficulties facing EADS’ commercial markets. Following theinsolvency of Fairchild Dornier in 2002, the MTA Division wrote
off € 54 million of assets relating to the Do 728 program inwhich it was a risk sharing partner.

Hedging Impact on EBIT*. Nearly two-thirds of EADS’
consolidated revenues in 2003 were received in currencies
other than the Euro. Given the long-term nature of EADS’
business cycles (evidenced by its multi-year backlog), theCompany hedges its net foreign exchange exposure to mitigate
the impact of exchange rate fluctuations on its EBIT*. See “–
1.1.7 Management of Market Risks – Exchange Rate Risk” and“Part 2/1.5.1 Market Risks – Exposure to Foreign Currencies”.
During 2003, hedges covering approximately U.S.$ 9.6 billion
of EADS’ U.S. dollar-denominated revenues matured. In 2003,
the compounded conversion rate at which hedged U.S. dollardenominated revenues were accounted for was €-U.S. $ 0.97,
virtually unchanged from 2002. Consequently, there was nomaterial exchange rate-related variance in EBIT*.

The Space Division reported steeper losses than for 2001,
amounting to € 268 million for 2002. These losses related
primarily to further restructuring at Astrium, the continued
impact of a market downturn in commercial telecommunications(including the cancellation of one satellite), program cost
overruns and further investment depreciations.
Airbus suffered from weakening passenger traffic and theresulting downturn in world commercial aircraft deliveries; higher
research and development costs for the A380 and reduced
deliveries of aircraft (325 in 2001; 303 in 2002) limited the
profitability of Airbus in 2002. However, further cost reductions
and built in production rate flexibility partially offset these factors
and allowed Airbus to achieve an EBIT* margin pre-research anddevelopment for 2002 of 15.6%, as compared to 15% in 2001.
EBIT* at the Aeronautics Division decreased slightly, from € 308
million for 2001 to € 261 million (unadjusted) for 2002. Thisdecrease was mostly attributable to higher R&D, selling,

It is expected that the hedge book will increase in coming years
in line with the forecasted growth in demand for aircraft and thecorresponding impact on future deliveries combined with theactive hedging policy of EADS. The conversion rates of the newhedges will reflect the state of the U.S. Dollar versus the Euro at
the time such hedges are entered into.
The tables below set forth the notional amount of foreignexchange hedges in place as of December 31, 2003, and the
U.S. dollar rates applicable to corresponding EBIT*.

(in billions of U.S. $)

2004

2005

2006

2007

2008

2009

2010

2011

Total

Total Hedges

9.6

8.7

8.0

6.4

5.4

3.1

1.1

0.4

42.7

of which €-U.S. $

8.1

7.3

6.6

5.2

4.5

2.5

0.9

0.3

35.4

of which £-U.S. $

1.5

1.5

1.4

1.1

1.0

0.6

0.2

0.1

7.3

€-U.S. $

0.96

0.97

0.99

0.99

0.99

1.02

1.04

1.13

£-U.S. $

1.54

1.49

1.49

1.48

1.48

1.50

1.53

1.54

Forward Rates

Restructuring. Since its formation in 2000, EADS has
implemented, and continues to implement, a number ofrestructuring plans to further enhance its competitive positionin the challenging markets in which it operates. Total
restructuring charges of € 362 million were recorded in the2003 consolidated statement of income. This included newprovisions and current year charges primarily related to (i)headcount reductions, divisional budgetary constraints at theSpace Division (€ 288 million for 2003 as compared to€ 105 million for 2002); (ii) headcount reductions and early
retirements at the DS Division (€ 50 million for 2003); and(iii) other restructuring provisions relating to the MTA Division(€ 17 million) and the Aeronautics Division (€ 7 million).
The related restructuring burden is accounted for both as aprovision and as other liabilities.

EADS 2003 Chapter 1 Net Assets – Financial Position – Results 13

BOOK2-790-14

29 MARCH 2004

1.1.4 EADS Results of Operations
The following table sets forth a summary of the consolidated
statements of income of EADS for the twelve-month periods
indicated.
Consolidated Statements of Income for the Years Ended
December 31, 2003, 2002 and 2001
Year ended December 31,
2003
2002
2001

in €m, except for EPS

Revenues

30,133

Cost of sales(24,594) (24,465) (25,440)

Gross margin

5,539

5,436

5,358

Selling and administrative expenses(2,162)(2,251)(2,186)

Research and development expenses(2,189)(2,096)(1,841)

196

248

3,024

(256)

(241)

(375)

(567)

(936)

(1,466)

Income from operating activities

561

160

2,514

Income (loss) from investments

186

87

(342)

Interest income (expense)

(203)

(81)

63

Other financial result

148

21

(234)

Income taxes

(474)

(453)

(646)

Profit (loss) from ordinary activities

218

(266)

1,355

Minority interests

(66)

(33)

17

Net income (loss)

152

(299)

1,372

Earnings per share (in €)0.19(0.37)

1.70

Other income(1)

Other expense

Goodwill amortisation & related impairment losses

(1)

(1)

29,90130,798For purposes of this discussion, the presentation of the summary consolidated statements of income differs from the actual consolidated statements of income, inwhich “goodwill amortisation & related impairment losses” is included within the line item “other expense”.

Set out below are year-to-year comparisons of results of operations,based upon EADS’ consolidated statements of income.
Consolidated Revenues
Consolidated revenues for EADS for 2003 reached € 30.1
billion, a slight increase from € 29.9 billion for 2002. Excluding

14 EADS 2003 Chapter 1 Net Assets – Financial Position – Results

the effects of currency fluctuations on the non-hedged portionof EADS’ revenues, the increase would have been nearly 6%.
2002 consolidated revenues were 3% lower than the € 30.8
billion of consolidated revenues for 2001.

BOOK2-790-15

29 MARCH 2004

Set forth below is a breakdown of EADS’ consolidated
revenues by division for the past three years. To facilitatecomparison of 2003 and 2002 revenues in light of the transfer
in 2003 of the Military Aircraft business unit from the
Aeronautics Division to the DS Division, 2002 revenue figures

for the two divisions have been adjusted accordingly,
presenting revenues as if the transfer had occurred on
January 1, 2002. Pre-adjustment 2002 revenues for the twodivisions are also presented for purposes of comparison
with 2001.
Year ended
December31, 2003

in €mAirbusYear ended
December31, 2002
Adjusted Unadjusted

Year ended
December31, 2001

19,04819,512

19,512

20,549

934

524

524

547

Aeronautics

3,803

3,834

5,304

5,065

Defence and Security Systems

5,165

4,770

3,306

3,345

2,424

2,216

2,216

2,439

31,37430,85630,862

31,945

HQ/Consolidation(1,241)

(955)

(961)

(1,147)

EADS

30,13329,901

29,90130,798

Military Transport Aircraft

Space

(1)

Subtotal
(2)

(1)
(2)

Astrium consolidated at 100% in 2003; proportionally consolidated at 75% in 2002 and 2001.
HQ/Consolidation includes, in particular, adjustments and eliminations for intercompany transactions and revenues from leases of office space.

Airbus
2003 compared to 2002. Airbus’ 2003 consolidated revenues
decreased by 2.4%, to € 19 billion from € 19.5 billion for 2002.
This decrease primarily reflects the negative effect of theweakening U.S. dollar. The changing Euro-U.S. dollar exchange
rate (average spot rate of €-U.S. $ 1.13 in 2003 compared to€-U.S. $ 0.95 in 2002) translated into a negative € 1.5 billion
impact on the non-hedged portion of Airbus’ 2003 consolidated
revenues. For a discussion of the impact of exchange ratevariations on EADS’ results of operations and EADS’ hedging
policy, see “– 1.1.2 Critical Accounting Considerations, Policies
and Estimates – Accounting for Hedged Transactions in the
Financial Statements“, “– 1.1.7 Management of Market Risks –Exchange Rate Risk” and “Part 2/1.5.1 Market Risks – Exposure
to Foreign Currencies”.

2002 compared to 2001. Airbus consolidated revenues were
€ 19.5 billion for 2002, a decrease of € 1.0 billion from 2001.
This decrease was attributed mostly to the reduction in aircraft
deliveries from 325 in 2001 to 303 in 2002, as well as to theweaker U.S. Dollar (average spot rate of €-U.S. $ 0.95 in 2002,
as compared to €-U.S. $ 0.90 in 2001). As in 2001, most of thedeliveries were for single-aisle A319/A320/A321 aircraft. Airbus
delivered 236 units of this type of aircraft in 2002, comparedwith 257 in 2001.
Set forth below is a breakdown of Airbus’ deliveries by aircraft
type for the past three years.
Year ended
December31, 2003

Year ended
December31, 2002

Year ended
December31, 2001

Single Aisle

233

236

257

Widebody

8

911Long-Range

64

58

57

8

0

303

325

number of aircraft

Offsetting the negative impact of the weaker U.S. dollar was the
positive impact of a more favourable mix of aircraft being
delivered in 2003 as compared to 2002. As in 2002, most of thedeliveries in 2003 were for single-aisle A319/A320/A321 aircraft.
Airbus delivered 233 units of this type of aircraft in 2003, ascompared with 236 in 2002. However, deliveries of long range
aircraft increased from 58 in 2002 to 64 in 2003, including 23 of
the higher-priced A340-500/600 “stretched” versions (ascompared to 8 A340 stretched versions delivered in 2002).

thereof “Stretched”
Total

23
305

(1)

(1)

For 2003, revenues were recognized in the consolidated statement of income
for only 302 of the 305 planes delivered.

EADS 2003 Chapter 1 Net Assets — Financial Position — Results 15

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29 MARCH 2004

Military Transport Aircraft
Consolidated revenues of the MTA Division increased by 78%,from € 0.5 billion for 2002 to € 0.9 billion for 2003. The € 0.4
billion increase in revenues relates primarily to the attainment of
the first development milestones for the A400M program (€ 0.3
billion) and growth in the mission aircraft business.
2002 revenues decreased slightly from € 0.5 billion for 2001.
While deliveries of the CN-235 in 2002 increased to 8 units from 4
in 2001 (plus 2 C-212 aircraft), delays on the A310 VIP program
and lower sales of its C-295 SAF aircraft in 2002 offset these gains.

Set forth below is a breakdown of the Aeronautics division’sdeliveries by product type for the past three years.
Year ended
December31, 2003

Year ended
December31, 2002

Year ended
December31, 2001

Eurocopter

297

367

335

ATR

12

19

20

EADS Socata

49

105

92

EFW/Conversions

8

6

6

number of aircraft

Set forth below is a breakdown of the MTA Division’s deliveries
by aircraft type for the past three years.
Year ended
December31, 2003

Year ended
December31, 2002

Year ended
December31, 2001

C-212

2

0

2

CN-235

7

8

4

C-295

5

2

3

Total

14

10

9

number of aircraft

Aeronautics
2003 consolidated revenues of € 3.8 billion at the Aeronautics
Division remained unchanged from the Division’s 2002
consolidated revenues. Increased revenues generated by
Eurocopter’s customer support services and the recording of
milestone payments for the NH90 and Tiger helicopters offset
the effect of fewer helicopter deliveries in 2003. Eurocopter’srevenue increase was offset by the impact of lower deliveries at
ATR and Socata.
Consolidated revenues increased by 5% from 2001 (€ 5.1 billion) to
2002 (€ 5.3 billion, unadjusted), primarily as a result of Eurocopter’s
increased level of helicopter deliveries in 2002 (367 compared to
335 in 2001) and customer support services. This increase waspartially offset by the impact of the downturn in the commercial
airline industry on the Division’s aerostructure businesses.

16 EADS 2003 Chapter 1 Net Assets — Financial Position — Results

Defence & Security Systems
The DS Division generated consolidated revenues of€ 5.2 billion for 2003, an increase of 8% over 2002 revenuesof € 4.8 billion. The increase was primarily due to the rampup of the MICA, ASRAAM and Storm Shadow missile
programs and to the first deliveries of Eurofighters to Spainand Germany.
As compared to 2001, the DS Division’s 2002 revenues
remained relatively unchanged at € 3.3 billion (unadjusted).
The accounting impact of the decreases in the investment in
AMM following the MBDA transaction at the end of 2001 wereoffset by (i) the full-year consolidation of Cogent in 2002 and (ii)
an approximate 10% revenue growth across all business units
except MBDA. See “– 1.1.2 Critical Accounting Considerations,
Policies and Estimates – Scope of and Changes in Consolidation
Perimeter”.
Set forth below is a table showing the number of Eurofighter
deliveries by EADS for the past three years.

number of aircraft

Eurofighter(1)Year ended
December31, 2003

Year ended
December31, 2002(1)Year ended
December31, 2001(1)

7

0

0

The first Eurofighter deliveries were scheduled for 2003.

BOOK2-790-17

29 MARCH 2004

SpaceThe consolidation effect of the 2003 acquisition of the 25% ofAstrium not previously owned by EADS translated into a 9%
increase in consolidated revenues for the Space Division, from€ 2.2 billion for 2002 to € 2.4 billion for 2003. Excluding theconsolidation effect, the Division’s revenues would havedecreased to € 2.0 billion for 2003, reflecting the termination of
the Ariane 4 program and the continuing downturn in thecommercial telecommunications satellite market.
The Space Division’s consolidated revenues decreased by 9%,
to € 2.2 billion for 2002 from € 2.4 billion for 2001. The
decrease was principally related to (i) production-relateddifficulties with Astrium’s civil telecommunications programsand (ii) slower than anticipated ramp-up of the Ariane V
program at EADS Space Transportation.
Set forth below is a breakdown of the Space Division’sdeliveries of commercial telecommunications satellites for the
past three years.

(number of units)

Commercial
Telecommunications
Satellites

Year ended
December31, 2003

Year ended
December31, 2002

Year ended
December31, 2001120Consolidated Cost of Sales
Consolidated cost of sales remained relatively unchanged at€ 24.6 billion for 2003 as compared to € 24.5 billion for 2002.
This primarily reflects the stable delivery levels at Airbus (302
in 2003 versus 303 in 2002). Significant increases in cost of
sales at (i) the Space Division, reflecting the 100% consolidationof Astrium (€ 0.3 billion) and (ii) the DS Division, reflecting theramp-up of Eurofighter and missile system production (€ 0.3
billion) were offset by a € 0.5 billion decrease in cost of sales atAirbus primarily due to the effects of the weaker U.S. dollar.
Consolidated cost of sales decreased 4% from € 25.4 billion for2001 to € 24.5 billion for 2002. This change mainly reflects the
reduction of deliveries at Airbus as well as the significant
decrease in depreciation of the fair value adjustments toinventories stemming from the formation of EADS (€ 275
million for 2001 compared to € 16 million for 2002). See “– 1.1.2
Critical Accounting Considerations, Policies and Estimates – Fair
Value Adjustments”.
Consolidated Selling and Administrative Expenses
For 2003, consolidated selling and administrative expenses
decreased slightly from € 2.3 billion for 2002 to € 2.2 billion for
2003, reflecting the results of realised cost reductions at
headquarters and other ongoing effects from restructuring of

EADS’ general and administrative activities.
2002 consolidated selling and administrative expenses increasedslightly from € 2.2 billion in 2001. This increase was principally
due to increases in staffing and higher insurance premiums at
Airbus and the Aeronautics Division. However, ongoing effects
from restructuring of general and administrative activities, such as
realised cost reductions at headquarters offset these increases.
Consolidated Research and Development Expenses
EADS’ consolidated research and development expenses
increased by 4%, from € 2.1 billion for 2002 to € 2.2 billion for2003. This increase primarily relates to ongoing programs at
Airbus (€ 1.8 billion for 2003). Expenses at Airbus relating to
the A380 program reached € 1.1 billion for 2003, an increase of€ 0.3 billion from 2002 levels. From 2001 through 2003,
cumulative research and development expenses on the A380
program amount to € 2.3 billion. Further research anddevelopment expenses totalling € 2.1 billion are forecasted to
be incurred from 2004 through 2006, in line with previous
forecasts, taking into account the impact of the application of
IAS 38. Research and development expenses related to the final
phases of the flight certification of the A340 500/600 program,as well as further specific enhancements on existing programs,
also contributed to the overall Airbus R&D expenses for theyear. Other non-Airbus consolidated R&D expenses totalled€ 370 million – a reduction of approximately € 40 million from2002. See “– 1.1.2 Critical Accounting Considerations, Policies
and Estimates – Research and Development Expenses” for an
explanation of the impact of the accounting change related tothe capitalisation of certain development costs in accordancewith IAS 38.
EADS’ consolidated research and development expenses
increased by 14%, from € 1.8 billion for 2001 to € 2.1 billion for2002. This increase primarily relates to ongoing programs at
Airbus (€ 1.7 billion for 2002). Expenses at Airbus relating to
the A380 program reached € 0.8 billion for 2002, an increase of€ 0.4 billion from 2001 levels. From 2001, cumulative researchand development expenses on the A380 program amount to€ 1.2 billion. Although reduced by € 0.1 billion from 2001
levels, R&D expenses related to flight certification of the A340
500/600 program obtained in December 2002 (€ 0.2 billion for2002), as well as further enhancements on existing programs,
also contributed to the overall R&D expenses for the year. Other
than increased R&D expenses at the Aeronautics Division
primarily related to the A380 program, non-Airbus related
consolidated R&D expenses remained relatively unchanged
from 2001. Excluding Airbus, EADS’ other divisions incur
approximately € 0.4 billion annually in consolidated R&D
expenses related to ongoing businesses.

EADS 2003 Chapter 1 Net Assets — Financial Position — Results 17

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29 MARCH 2004

Consolidated Other Income and Other Expense
Consolidated other income and other expense represents gains
and losses on disposals of investments, income from rental
properties and certain provisions. For 2003, the net of otherincome and other expense was negative € 60 million ascompared to positive € 7 million for 2002. € 63 million from thedisposal of EADS’ 50% share in Aircelle to Snecma were
included in consolidated other income for 2002.
For 2002, the net of other income and other expense decreasedto € 7 million from € 2.6 billion for 2001. Non-recurring dilution
gains arising from the creation of Airbus S.A.S (€ 2.5 billion)
and MBDA (€ 0.3 billion) were included in consolidated otherincome for 2001. See “– 1.1.2 Critical Accounting
Considerations, Policies and Estimates – Dilution Gains”.
Excluding the effect of 2001 dilution gains, net other income
increased by € 0.2 billion, reflecting the Aircelle disposal, thesale of MDTV to IBM, and lower expenses at headquarters in2002.

Consolidated Amortisation of Goodwill and Impairment
LossesFor 2003, the consolidated amortisation of goodwill decreasedto € 0.6 billion from € 1.0 billion for 2002. The € 0.4 billion
decrease from 2002 reflects the impairments taken in 2002 forassets held within the Space Division (€ 350 million). By
contrast, no assets were impaired in 2003.
For 2002, consolidated amortisation of goodwill and impairment
losses decreased by 36%, to € 1.0 billion from € 1.5 billion for2001. Excluding impairment losses, consolidated amortisation of
goodwill decreased by € 0.1 billion, from € 0.7 billion for 2001
to € 0.6 billion for 2002. This change is the result of thedecrease in the net book value of goodwill resulting from the2001 impairment charges. See “– 1.1.2 Critical Accounting
Considerations, Policies and Estimates – Impairment of Assets”.
Goodwill at the Space Division was subject to a further
impairment test, leading to a charge of € 0.4 billion for 2002.
2003

2001

Goodwill
Goodwill
Goodwill
amortisationamortisationamortisation
andThereofandThereofandThereofimpairment impairment impairment impairment impairment impairment
losses of goodwill
losses of goodwill
losses of goodwill

in €mAirbusMTA Division
Aeronautics

2002

(1)

373

–

373

–

372

–

–

–

–

–

–

–

7

–

54

–

51

–

DS(1)

150

–

107

–

739

580

Space (2)

33

–

397

350

255

210

HQ

4

–

5

–

49

–

EADS

567

–

936

350

1,466

790

(1)
(2)

Changes from 2002 to 2003 reflect in part the transfer of the Military Aircraft business unit from the Aeronautics Division to the DS Division.
Astrium consolidated at 100% in 2003; proportionally consolidated at 75% in 2002 and 2001.

Consolidated Income (Loss) from Investments
Consolidated income (loss) from investments principally
includes results from companies accounted for under the equity
method and the results attributable to non-consolidated
investments. For 2003, EADS recorded € 186 million inconsolidated investment income as compared to € 87 million for2002. The € 99 million increase is mainly due to a € 77 million
catch-up of prior year income related to EADS’ investment in
Dassault Aviation. In 2003, EADS restated Dassault Aviation’s
2002 and 2003 IFRS actual financial performance – in previous
periods, EADS had relied on estimated financial performance
reported under French GAAP. Including the IFRS restatement,
investment income for the 46% stake in Dassault Aviation
amounted to € 225 million as compared with € 111 million for2002. See “Part 2/1.1.7 Investments – Dassault Aviation”. These
increases were partially offset by depreciation of various nonconsolidated investments.

18 EADS 2003 Chapter 1 Net Assets — Financial Position — Results

For 2002, EADS recorded € 87 million in consolidated
investment income as compared to a € 342 million consolidated
loss for 2001. This change primarily reflects the € 315 million
impairment charge taken on civil telecommunications
investments (Nortel joint ventures, carried at cost since October
1, 2001), and a € 63 million write-off of commercial space
investments (Nahuelsat) in 2001. As in 2001, EADS accounted
for a further € 29 million write-down of its investment in
Arianespace in 2002. Following the write-down, thisparticipation had a book value of zero. Dassault Aviation
contributed € 111 million of investment income in 2002,
unchanged from 2001.
Consolidated Interest Income (Expense)
Consolidated interest income (expense) reflects the net ofinterest income and expenses arising from financial assets or
liabilities. For 2003, EADS reported a consolidated net interest

BOOK2-790-19

29 MARCH 2004

expense of € 203 million, as compared to € 81 million of
consolidated net interest expense for 2002. This change isprincipally due to (i) higher interest charges for 2003 on
European government refundable advances received; and (ii)the increasing spread between interest received on positivebalances invested in short-term liquid instruments and interest
paid on longer-term debt . See “– 1.1.6 Liquidity and Capital
Resources – Consolidated Financial Liabilities”.

over plan not been implemented, the affected hedges would
have been deemed cancelled for accounting purposes. As theaffected hedges had a negative mark-to-market value at the endof 2001, cancellation would have had a negative impact on
consolidated other financial result. See “– 1.1.2 Critical
Accounting Considerations, Policies and Estimates –Accounting for Hedged Transactions in the Financial
Statements”.

For 2002, EADS reported a consolidated net interest expense of€ 81 million, as compared to € 63 million of consolidated net
interest income for 2001. This change is principally due to (i)higher interest charges for 2002 on European government
refundable advances received (€ 45 million expense increaseprimarily related to the A380); (ii) an increasing interest rate
difference between the remuneration of cash deposits and thecost of debt; and (iii) reduced average net cash position for 2002
as compared to 2001.

Consolidated Income Taxes
See “Notes to the Consolidated Financial Statements – Note 10:
Income Taxes”.

Consolidated Other Financial Result
Consolidated other financial result increased to € 148 million for2003 from € 21 million for 2002. This change primarily results froma positive mark-to-market valuation of currency hedges that, foraccounting purposes, are deemed to be embedded in U.S. dollardenominated purchase orders of equipment, where the U.S. dollar
is not conclusively the currency in which the price of the related
equipment is routinely denominated in international commerce.

Consolidated Net Income
As a result of the factors discussed above, EADS recorded aconsolidated net income of € 152 million for 2003 as compared
to consolidated net loss of € 299 million for 2002 andconsolidated net income of € 1,372 million for 2001.

Consolidated other financial result increased to € 21 million for2002 from € (234) million for 2001. This change primarily resultsfrom a € 117 million income from the mark-to-market revaluationand maturing of remaining macro hedges in 2002, as compared
to a € 153 million loss with respect to such macro hedges in
2001.
In 2001, postponed deliveries of commercial aircraft related tothe events of September 11, 2001 resulted in a mismatch
between hedged positions and expected cash flows. A roll-overplan was carried out in 2002 and 2003 to rephase the maturitiesof the affected hedges with new delivery dates. The roll-overplan was completed as of December 31, 2003. Had this roll-Consolidated Minority Interest
Consolidated minority interest was € (66) million in 2003 ascompared to € 33 million in 2002, reflecting primarily the claims
by BAE SYSTEMS and Finmeccanica on the results of Airbus
and MBDA, respectively.

Earnings Per Share (EPS)
Earnings per share increased by € 0.56 per share from € (0.37)
per share in 2002 to € 0.19 per share in 2003. The number ofoutstanding shares at the end of December 31, 2003 was
800,957,248. The denominator used in EPS was 800,957,248
shares, the average number of outstanding shares during 2003.
The reduction from 2001 EPS of € 1.70 per share to € (0.37)
per share in 2002 resulted from the net loss in 2002, as well asfrom the effects of the repurchase of 10,241,252 shares offset by
the issuance of 2,022,939 shares through the October 2002
employee share offering plan. See “Part 2/3.3.7 Shareholdings
and Voting Rights – Purchase by the Company of its Own
Shares” and “2.3.2 Employee Profit Sharing and Incentive Plans– Employee Share Offering”.

EADS 2003 Chapter 1 Net Assets — Financial Position — Results 19

BOOK2-790-20

29 MARCH 2004

AOCI. These adjustments to AOCI are net of corresponding
changes to (i) deferred tax assets (for micro hedges withnegative mark-to-market valuations) and deferred tax liabilities(for micro hedges with positive mark-to-market valuations) and(ii) minority interests (where the hedge contract is held by anentity that is not wholly owned by EADS, e.g. Airbus).

1.1.5 Statement of Changes in Consolidated
Shareholders’ Equity
The following table sets forth a summary of the consolidated
statement of changes in shareholders’ equity for the period
January 1, 2003 through December 31, 2003.
in €mBalance at December 31, 2002

12,765

Capital increase21

Net income

152

Cash distribution to shareholders(240)

Purchase of treasury shares(31)

Accumulated other comprehensive income

3,482

Balance at December 31, 2003

16,149Set out below is a graphic presentation of micro hedge related
movements in AOCI over the past three years.
Graph 4:
in €m

7,847

4,022

The increase in consolidated shareholders’ equity in 2003
relates primarily to the effects of changes in accumulated othercomprehensive income (“AOCI”). For a discussion of the otherline items impacting consolidated shareholders’ equity, see“Notes to the Consolidated Financial Statements – Note 18:
Shareholders’ Equity”.

2,965

1,498
1,015
416

828

–216
–1,051–1,215–2,259In 2003, AOCI increased by € 3.5 billion. Changes in AOCI
were due to (i) the positive variation (€ 2.5 billion), after
accounting for deferred taxes and minority interest, of the yearend mark-to-market valuation of that portion of EADS’ hedge
portfolio qualifying for hedge accounting under IAS 39, (ii)positive currency translation adjustments generated by the
consolidation of subsidiaries not reporting their financial
statements in Euro (€ 0.8 billion) and (iii) positive changes in
the fair value of securities (€ 0.2 billion).
At December 31, 2003, the notional amount of the outstanding
portfolio of hedges qualifying for IAS 39 hedge accounting
treatment (“micro hedges”) amounted to approximately
U.S.$ 42.7 billion hedged against the Euro and the Pound Sterling.
The year-end mark-to-market valuation of EADS’ portfolio of micro
hedges resulted in a positive valuation change of € 4.9 billion from
December 31, 2002 based on a closing rate of €-U.S. $ 1.26.
Micro hedges with positive pre-tax mark-to-market values areincluded in other assets, while micro hedges with negative pretax mark-to-market values are included in provisions forfinancial instruments. Year-to-year changes in the mark-tomarket value of micro hedges are recognised as adjustments to

20 EADS 2003 Chapter 1 Net Assets — Financial Position — Results–2,810Assets and Liabilities
Related to the Value of
Hedging Instruments

Deferred Taxes

12.31.2001 U.S.$: 0.8813

Minority Interest(20% Airbus)

12.31.2002 U.S.$: 1.0487

Net Equity
OCI

12.31.2003 U.S. $: 1.2630

As a result of the positive change in the fair market valuation of the
micro hedge portfolio in 2003, AOCI-related other assets increasedto € 7.8 billion for 2003 from € 3.0 billion for 2002. The
corresponding € 1.8 billion tax effect increased the AOCI-related
deferred tax liability to € 2.8 billion at December 31, 2003.
A € 0.6 billion adjustment to minority interest was recorded toreflect mainly BAE SYSTEMS’ 20% share of the positive after-tax
mark-to-market valuation change in the Airbus hedge portfolio.
As a result of this adjustment, AOCI-related minority interest was€ 1.0 billion at December 31, 2003 as compared to € 0.4 billion
at December 31, 2002.
A stronger Euro spot rate versus other currencies at December
31, 2003 was also reflected in the impact of currency translation
adjustments on AOCI of positive € 0.8 billion.

BOOK2-790-21

29 MARCH 2004

1.1.6 Liquidity and Capital Resources
The Group’s policy is to maintain sufficient cash and cash
equivalents at all times to meet its present and future cash
requirements. This policy objective is met through:• implementation of measures designed to generate free cashflow;
• developing and maintaining access to the capital markets; and• containment of exposure to customer financing.
EADS benefits from a strong cash position, with € 7.8 billion of
consolidated gross cash (including available-for-sale securities of€ 0.5 billion) at December 31, 2003. This cash position isfurther supported by a € 2.85 billion syndicated back-up facility
and a € 0.7 billion credit line from the European Investment
Bank (“EIB”). These facilities remained undrawn as at December
31, 2003.
The factors affecting EADS’ cash position, and consequently its
liquidity risk, are discussed below.

1.1.6.1 Movement of Net Cash Position
EADS generally finances its manufacturing activities and productdevelopment programs, and in particular the development of
new commercial aircraft, through a combination of flows
generated by operating activities, customers’ advance payments,
risk-sharing partnerships with sub-contractors and European
government refundable advances. In addition, EADS’ militaryactivities benefit from government-financed research anddevelopment contracts. If necessary, EADS may raise funds inthe capital markets.
EADS calculates its consolidated net cash position as thedifference between (i) cash, cash equivalents and securities and(ii) financial liabilities (as recorded in the consolidated balance
sheet). In 2003, the 2002 consolidated net cash position was
restated to reflect a change in the accounting for financial debts
relating to certain sales financing transactions secured bydefeased bank deposits. See “– Consolidated Financial
Liabilities”.
The following table sets forth the variation of EADS’
consolidated net cash position over the periods indicated.
Year ended
December 31
2003
2002

in €m

Net cash at beginning of period

2,370

2,679

Gross cash flows from operations

2,690

1,862

Changes in working capital

2,019

804

Cash used for investing activities(3,659)(2,953)

Thereof industrial capital expenditures(2,672)(2,213)

Thereof customer financing(1,093)(865)

Thereof others

(106)

125

(1)

1,050

(287)

2,143

578

Treasury share buy-back

(31)

(156)

Cash distribution to shareholders

(240)

(403)

Capital increase

21

16

Other changes in financial position

(65)

521

3,105

2,370

Free Cash Flows

Thereof Free Cash Flows before customer financing

Consolidated net cash position at December 31

Does not reflect (i) investments in, or disposals of, available-for-sale securities (disposal of € 336 million for 2003; investment of € 264 million for 2002), which are classified
as cash and not as investments solely for the purposes of this net cash presentation or (ii) changes in cash from change in consolidation (€ (152) million for 2002).
(1)

EADS 2003 Chapter 1 Net Assets — Financial Position — Results 21

BOOK2-790-22

29 MARCH 2004

The consolidated net cash position at December 31, 2003 was€ 3.1 billion, a 31% increase from December 31, 2002 (on acomparable basis after accounting for the netting of defeasedbank deposits against the corresponding financial liabilities).
Efforts at Airbus to limit the growth of customer financing
exposure and a Company-wide focus on cash management,
combined with the maturing of remaining unfavorable ”old”
macro hedges, newly received European government
refundable advances (primarily related to the A380 program)and sustained levels of pre-delivery payments from customers
were offset by continued research and development costs on
the A380 program, substantial investments in fixed assets, aswell as cash payments to shareholders in 2003.
Gross Cash Flows from Operations
Gross cash flow from operations in 2003 of € 2.7 billion reflects
the higher earnings generated in 2003 combined with fewer
maturing unfavourable “old” macro hedges than in 2002,
corrected for the effect of the following non-cash items recordedin the consolidated statement of income: (i) depreciation andamortisation of fixed assets (€ 2.4 billion) and valuation
adjustments (€ 0.3 billion), (ii) a net increase in provisions
relating to restructuring efforts at the Space Division, (iii) income
from investments in associates (e.g., Dassault Aviation: € (0.2)
billion) and (iv) deferred tax income (€ (0.1) billion).
In 2003, the maturing of remaining “old” macro hedges that had
been reclassified as micro hedges in January 2001, had anegative € 0.2 billion effect on gross cash flows fromoperations, as compared to a negative € 1.0 billion effect in2002. No further material impacts on gross cash flow are
expected in relation to such hedges. See “– 1.1.2 Critical
Accounting Considerations, Policies and Estimates – Accountingfor Hedged Transactions in the Financial Statements”.
Changes in Working Capital
Working capital is comprised of trade receivables, net inventory,
other assets and prepaid expenses netted against tradeliabilities, other liabilities and deferred income. Changes inworking capital resulted in a € 2.0 billion positive impact on the
net cash position for 2003. The main net contributors to thepositive working capital variation were (i) a further net inflow ofEuropean government refundable advances (€ 0.7 billion for
2003, unchanged from 2002) and (ii) an increase of advancepayments from customers (approximately € 1.3 billion in 2003,
as compared to € 0.3 billion in 2002). Further contributing to
the positive working capital was a reduction of trade receivables
and an increase in “other liabilities” relating primarily to certain
tax liabilities. These positive items were partly offset by higher
inventory build-up of approximately € 0.6 billion before
allocation of customer advances.
European Government Refundable Advances. As of December 31,
2003, total European government refundable advances received,
recorded on the balance sheet in the line item “other liabilities”,
amounted to € 4.9 billion, an increase of € 0.7 billion from 2002.
22 EADS 2003 Chapter 1 Net Assets — Financial Position — Results

Of this amount, (i) € 2.0 billion relate to long-range Airbus
aircraft (with approximately € 0.3 billion repaid in 2003 and€ 0.1 billion re-valued at the year-end €-£ spot rate), (ii) € 2.0
billion relate to the A380 program (a € 1.0 billion increase from2002, before adjustment for exchange rate effects). For 2003,
new receipts of European government refundable advances
totalled € 1.0 billion and reimbursements totalled € 0.3 billion.
Related accrued interest payments for 2003 of € 0.2 billion wererecorded on the balance sheet in the line item “other liabilities”.
Set out below is a breakdown of total amounts of European
government refundable advances outstanding, byproduct/project.
in billions of €2003

Long Range & Wide Body

2.1

A380

2.2

Eurocopter

0.2

Others

0.4

EADS

4.9

Cash used for Investing Activities
Management categorises cash used for investing activities into
three components: (i) industrial capital expenditures, (ii)customer financing and (iii) net investments in subsidiaries.
Industrial Capital Expenditures. Industrial capital expenditures(investments in plant, property and equipment) amounted to€ 2.7 billion for 2003 as compared to € 2.2 billion for 2002.
A380-related capital expenditure totalled € 1.2 billion for 2003,
as compared to € 0.9 billion for 2002. See “Part 2/ 1.1.2 Airbus– Products and Services”. To date, total A380-related capital
expenditures is € 2.4 billion.
The remaining portion of capital expenditures related to otherprogrammes at Airbus of € 0.6 billion (manufacturing facilities
and common information technologies systems) and additional
programmes in the other divisions of € 0.9 billion, including
investments in fixed assets at Paradigm Secure Communication
Ltd. Excluding Airbus and Paradigm-related expenditures, EADS’
other divisions incur approximately € 0.5 billion annually incapital expenditures related to ongoing businesses. Investments
in aircraft leases are included in customer financing, and not inindustrial capital expenditures, even though the underlying
assets are eventually recorded in property, plant andequipment.
For the period 2004 to 2006, it is estimated that most of EADS’capital expenditure will occur in connection with Airbus
activities, such as the ongoing establishment and expansion of
production facilities for Airbus aircraft. In particular, thedevelopment programme for the A380 very large aircraft will
require substantial capital expenditures. See “Part 2/1.1.2 Airbus– Products and Services”.

BOOK2-790-23

29 MARCH 2004

Customer Financing. Net consolidated cash flows corresponding
to additions in customer financing amounted to € 1.1 billion for2003. The Airbus gross addition to customer financing for 2003
amounted to U.S.$ 1.5 billion. See “– Sales Financing”.
This increase mainly relates to new finance leases and loans.
EADS sold down approximately € 0.2 billion of customer
financing exposure in 2003. EADS aims to structure financing so
as to facilitate the future sell-down or reduction of its exposure.
The amortisation of existing exposure (primarily amortisation ofoperating lease aircraft) relating to Airbus and ATR customer
financing (approximately € 0.2 billion) is not included in net
additions. This amortisation is recorded in the line item “cash flowfrom operations”. Net of the amount of such amortisation, theincrease in customer financing is in line with the corresponding
increase in gross exposure at constant U.S. dollar exchange rate.
See “– Sales Financing” and “Notes to the Consolidated Financial
Statements – Note 25: Commitments and Contingencies”.
In response to the continued need for financing from its
customers, EADS expects to undertake additional outlays inconnection with customer financing of commercial aircraft
through finance leases and loans, although it intends to keep theamount as low as possible, and expects the net increase of sales
financing gross exposure to be below U.S$ 0.9 billion in 2004.

to “financial liabilities” and by the change in net cash fromchange in consolidation following the first-time consolidation of
100% of Astrium.
Cash and Cash Equivalents
The cash and cash equivalents and securities portfolio of theGroup is invested in non-speculative financial instruments,
mostly highly liquid, such as certificates of deposits, overnight
deposits, commercial paper and other money market
instruments which, for cash and cash equivalents, generally havea maturity of less than three months. Therefore, EADS assesses
its exposure towards price risk due to changes in interest rates
and spreads as minimal. See “– 1.1.7 Management of Market
Risks – Interest Rate Risk”.
In 2003, the fully automated cross-border cash pooling system(covering France, Germany, Spain, the Netherlands and theU.K.) became operational. A Group-wide implementation of thissystem to cover entities located in other countries is ongoing.
The cash pooling system enhances Management’s ability toassess reliably and instantaneously the cash position of eachsubsidiary within the Group and enables Management toallocate cash optimally within the Group depending upon
shifting short-term needs.

Free Cash FlowsAs a result of the factors discussed above, positive free cash
flows amounted to € 1.0 billion for 2003, as compared tonegative € 0.3 billion for 2002. Positive free cash flows before
customer financing were € 2.1 billion for 2003 as compared to €0.6 billion for 2002.

At December 31, 2003, the outstanding balance of gross cash
and cash equivalents was € 7.8 billion (including € 0.5 billion inavailable-for-sale securities), as compared to € 6.2 billion(including € 0.8 billion in available-for-sale securities) at
December 31, 2002. To conform with the consolidated cashflow statement, as of December 31, 2003 and in line with IAS 7,“Cash Flow Statements”, EADS changed its presentation
regarding cash and cash equivalents in the consolidatedbalance sheet. Short-term securities that are readily convertible
to known amounts of cash and which are subject to an
insignificant risk of changes in value, which had previously been
included in the line item “securities” in the consolidated balance
sheet, have been reclassified to the line item “cash and cash
equivalents”.

Other Changes in Financial Position
Other changes in financial position represent mainly foreignexchange rate valuation changes on cash and debt instruments.
The positive change for 2003 relates primarily to positive
valuation changes of U.S. dollar-denominated debt, offset inpart by the restructuring of certain debts from “other liabilities”

Total cash and cash equivalents (including available-for-salesecurities) includes the full consolidation of cash at Airbus in an
amount of € 1.7 billion. However, EADS’ stake therein is only
80%. Similarly, total cash and cash equivalents includes the 50%
consolidation of cash at MBDA of € 1.4 billion. However, EADS’
stake therein is only 37.5%.

Others. For 2003, the negative € 0.1 billion figure reflects
primarily the effects of acquisitions of subsidiaries, namely DornierGmbH. See “– 1.1.2 Critical Accounting Considerations, Policies
and Estimates – Scope of and Changes in Consolidation
Perimeter”.

EADS 2003 Chapter 1 Net Assets – Financial Position – Results 23

BOOK2-790-24

29 MARCH 2004

1.1.6.2 Consolidated Financial Liabilities
The following table sets forth the composition of EADS’
consolidated financial liabilities, including both short-and longterm debt, as of December 31, 2003:
December 31, 2003
Not
Over
exceeding 1 year up to
1 year
5 yearsin €mFinance Leases

(1)

More
than
5 years

Total

82

222

47

351

Bonds

21

42

1,598

1,661

Liabilities to financial institutions

314

505

570

1,389

Loans

84

258

541

883

Other

477

3

3

483

Total

978

1,033

2,756

(1)
(2)

4,767 (2)This figure reflects the € 1,131 million effect of the netting of defeased bank deposits against sales financing liabilities.
Financial liabilities include a non-recourse debt for € 679 million.

The outstanding balance of financial liabilities was € 4.8 billion
at December 31, 2003, compared to € 3.8 billion at December
31, 2002. The restatement of 2002 financial liabilities to reflect
the netting of defeased bank deposits against certain sales
financing liabilities performed in 2003 reduced 2002 financial
liabilities by € 1.1 billion, from € 4.9 billion to € 3.8 billion. In
2003, € 1.1 billion of defeased bank deposits were netted
against sales financing liabilities. In prior periods, the amounts ofthe defeased bank deposits were recorded in the line item
“financial assets” on the consolidated balance sheet.
The net increase of consolidated financial liabilities of € 0.9
billion from 2002 resulted from (i) the two note issuances
under the EMTN program amounting to € 1.5 billion, (ii)
additional borrowings of € 0.4 billion (of which € 0.3
billion relates to financing by Paradigm), and (iii) the
restructuring of certain European government refundable
advances into financial debt (€ 0.2 billion), offset in partby the settlement of bond obligations and the repayment ofdebt owed to financial institutions totalling € 0.7 billion. A
further downward adjustment of € 0.4 billion reflected thecurrency translation impact of the weakening U.S. dollar on
dollar-denominated Financial Liabilities.
Total financial liabilities include the full consolidation of Airbus
financial debt for an amount of € 2.7 billion. However, EADS isliable for only 80% of such financial debt incurred after January
1, 2001, in line with its stake in Airbus. See “– Sales Financing”.
Overall, Management believes that the maturity profile of theconsolidated financial liabilities is prudent and consistent with thestructure of EADS’ consolidated assets and expected cash flows.
EMTN Programme. In February 2003, EADS launched a € 3billion Euro Medium Term Note (“EMTN”) Programme, with asubsequent initial € 1.0 billion issue of a seven year 4.625%
24 EADS 2003 Chapter 1 Net Assets – Financial Position – Results

Eurobond. In September 2003, EADS issued an additional€ 0.5 billion of fifteen year 5.5% fixed rate notes under the
EMTN program. The objectives of the two issuances under the
EMTN program are to refinance existing debt and to lengthen
the maturity profile of the Company’s debt. Management
believes that the establishment of such financing schemes will
enhance its overall presence and standing in the capital markets
and increase its flexibility in responding to fluctuating funding
requirements.
EADS has a strict policy in place with respect to contractual
provisions relating to accelerated repayment of financial debts. It
systematically rejects acceleration clauses which are based on acredit rating downgrade or on any non-material measurable
event not under the control of EADS. However, the € 2.85
billion back-up facility contains an acceleration clause tied to
EADS’ debt/equity ratio.
1.1.6.3 Sales Financing
EADS favours cash sales, and encourages independent
financing by customers, in order to avoid retaining credit or asset
risk in relation to delivered products.
However, in order to support product sales, primarily at
Airbus and ATR, EADS may agree to participate in thefinancing of customers, on a case-by-case basis, directly or
through guarantees provided to third parties. Dedicated andexperienced teams at headquarters and at Airbus and ATR,
respectively structure such financing transactions and closely
monitor total EADS finance and asset value exposure and its
evolution in terms of quality, volume and cash requirements
intensity. EADS aims to structure all financing it provides tocustomers in line with market-standard contractual terms so as
to facilitate any subsequent sale or reduction of such
exposure.

BOOK2-790-25

29 MARCH 2004

In determining the amount and terms of a financing transaction,
Airbus and ATR take into account the airline’s credit rating aswell as risk factors specific to the intended operating
environment of the aircraft and its expected future value. Market
yields and current banking practices also serve to benchmark
the financing terms offered to customers.
More than 40% of the € 4.8 billion of total consolidated
financial liabilities as at December 31, 2003, are derived fromthe funding of EADS’ sales financing assets, which are of along-term nature and have predictable payment schedules. The
decrease from 75% of total financial liabilities in 2002 results
primarily from the increase in overall financial liabilities due tothe 2003 Eurobond issues under the EMTN program. See “–Consolidated Financial Liabilities”. The following table presents
a breakdown of consolidated financial liabilities related to sales
financing:in €mPrincipal Amount
Outstanding
2003
2002

Finance Leases(1)

351

420

Liabilities to financial institutions

757

1,266

866

958

1,974

2,644

Loans
(1)

Total Sales Financing Liabilities

These figures reflect the effect (€ 1,131 million in 2003; € 1,146 million in2002) of the netting of defeased bank deposits against sales financing liabilities.

(1)

The amounts of total sales financing liabilities at December 31,
2003 and 2002 reflect the offsetting of sales financing liabilitiesby € 1.1 billion (for 2003) and € 1.1 billion (for 2002) ofdefeased bank deposits securing such liabilities. Of theremaining € 2.0 billion total sales financing liabilities at
December 31, 2003, € 0.7 billion is in the form of limited
recourse debt, where EADS’ repayment obligations are limited
to its receipts from transaction counterparties. Additionally, asignificant portion of financial assets representing noncancellable customer commitments have terms closely
matching those of the related financial liabilities. See “Notes to
the Consolidated Financial Statements – Note 20: Financial
Liabilities”. See also “– 1.1.2 Critical Accounting Considerations,
Policies and Estimates – Accounting for Sales Financing
Transactions in the Financial Statements”.
Sales financing transactions are generally collateralised by theunderlying aircraft. Additionally, Airbus and ATR benefit fromprotective covenants and from security packages tailoredaccording to the perceived risk and the legal environment ofeach transaction.
EADS classifies the risks arising from its sales financing activities
into two categories: (i) Financing Exposure, where thecustomer’s credit – its ability to perform its obligations under afinancing agreement – constitutes the risk; and (ii) Asset Value
Exposure, where the risk relates to decreases in the future valueof the financed aircraft. See also “Part 2/1.5.1 Market Risks –Exposure to Sales Financing Risk”.
Financing Exposure. Certain EADS and BAE SYSTEMS groupcompanies retain joint and several liability for sales financing
exposure incurred by Airbus prior to the formation of Airbus
S.A.S. EADS’ exposure to liabilities incurred by Airbus following
January 1, 2001, is limited by its status as a shareholder in Airbus
S.A.S., of which it owns 80% of the shares. EADS proportionallyconsolidates only 50% of ATR and shares the risk with its
partner, Alenia.
Airbus Financing Exposure as of December 31, 2003 is spreadover approximately 231 aircraft, operated at any time byapproximately 35 airlines; the breakdown by aircraft type isbalanced between A300/310, A320 family and A330/340. In
addition, other aircraft related assets, such as spare parts, mayalso serve as collateral security. 75% of Airbus Financing
Exposure is distributed over 9 airlines in 8 countries, not taking
backstop commitments into account.
ATR customer exposure as of December 31, 2003 is distributed
over 229 aircraft.
Gross Exposure: Gross Financing Exposure is computed as thesum of (i) the net book value of aircraft under operating leases;(ii) the outstanding principal amount of finance leases or loans;and (iii) the net present value of the maximum commitment
amounts under financial guarantees.
Gross Financing Exposure from operating leases, financial leases
and loans differs from the value of related assets on EADS’balance sheet and related off-balance sheet contingent
commitments for the following reasons: (i) assets are recorded incompliance with IFRS, but may relate to transactions where there
is limited recourse to Airbus or ATR; (ii) the value of the assets iswritten down or depreciated on the consolidated balance sheet;(iii) off-balance sheet gross exposure is calculated as the netpresent value of future payments, whereas the Financial
Statements present the total future payments in nominal terms;and (iv) exposure related to AVGs recorded as operating leases
in the Financial Statements is categorised under Asset Value
Exposure, not Financing Exposure.
Airbus has reduced Gross Financing Exposure by 20% from its
1998 peak of U.S.$ 6 billion, to U.S.$ 4.8 billion (€ 3.8 billion) asof December 31, 2003, while the Airbus fleet in operation has
increased from 1,838 aircraft to 3,468 over the same period.
Management believes the current level of Gross Financing
Exposure enhances Airbus’ ability to assist its customers in thecontext of a tight aircraft financing market.

EADS 2003 Chapter 1 Net Assets – Financial Position – Results 25

BOOK2-790-26

29 MARCH 2004

Graph 5:
Changes of Airbus Gross Customer Financing Exposure in 2003

U.S.$ 1,470 million

U.S.$ (163) million
U.S.$ (264) million
Disposal

U.S.$ 4,834 million
Euro 3,822 million
Amortisation

U.S.$ 3,791 million
Euro 3,581 million
Additions

December 2003
December 2002

ATR 100% has reduced gross exposure by approximately 45%
from a peak of U.S.$ 1.8 billion in 1997 to under U.S.$ 1 billion
as of December 31, 2003, despite a challenging market for
turboprop aircraft.
Net Exposure. Net exposure is the difference between gross
exposure and the estimated value of the collateral security.
Collateral value is assessed using a dynamic model based on the
net present value of expected future rentals from the aircraft in
the leasing market and potential cost of default. This valuation
model yields results that are typically lower than residual value

estimates by independent sources in order to allow for what
Management believes is its conservative assessment of market
conditions, as well as for repossession and transformation costs.
See “– 1.1.2 Critical Acconting Considerations, Policies andEstinates – Accounting for Sales Financing Transactions in the
Financial Statements”.
The table below shows the transition from gross to net financing
exposure (which does not include AVGs) as at December 31,
2002 and 2003.
Airbusin €m

ATR 50%

2003

2002

2003

2002

Financing Gross Exposure

3,822

3,581

403

610

On-balance sheet

3,098

2,690

277

454

724

891

126

156

Estimated collateral value

Off-balance sheet(2,229)(2,061)

(365)

(538)

Net exposure before provision

1,593

1,520

38

72

Provision/Write-Down for customer financing(1,593)(1,520)

(38)

(72)

0

0

0

0

Residual net exposure

The € 3.4 billion of on-balance sheet customer financing
exposure at Airbus and 50% ATR shown in the table above differsfrom the € 3.0 billion book value of corresponding assets on
EADS’ balance sheet (including inventory for € 0.1 bllion). Thisdifference is the result of (i) the consolidation of assets incompliance with IFRS where there is no recourse to Airbus(€ (0.7) billion) and (ii) the depreciation and write down of therelated assets (€ 1.1 billion). See “Notes to the Audited
Consolidated Financial Statements – Note 12: Property, Plant andEquipment” and “Note: 13: Investments in Associates, Other
Investments and Long-term Financial Assets” for a description ofcustomer financing assets book value, including Airbus (€ 2.7
billion) and 50% ATR (€ 0.3 billion).
26 EADS 2003 Chapter 1 Net Assets – Financial Position – Results

The amount of off-balance sheet customer financing exposure at
Airbus and 50% ATR of € 0.8 billion primarily reflects the netpresent value of lease in/lease out structures. The corresponding
cumulative nominal value of future payments corresponding to
off-balance sheet exposure is € 1.1 billion; a corresponding
provision of € 0.6 billion exists in EADS’ balance sheet. See“Notes to the Audited Consolidated Financial Statements – Note
25: Commitments and Contingencies”. The year-to-year decrease
in off-balance sheet exposure is primarily due to the impact of theweakening U.S. dollar on the Euro amount of such exposure.
Asset Value Exposure. A significant portion of EADS’ asset
value exposure arises from outstanding AVGs, primarily at

BOOK2-790-27

29 MARCH 2004

Airbus. Airbus’ management considers the financial risks
associated with such guarantees to be manageable. Threefactors contribute to this assessment: (i) the guarantee only
covers a tranche of the estimated future value of the aircraft, andits level is considered prudent in comparison to the estimatedfuture value of each aircraft; (ii) the AVG-related exposure isdiversified over a large number of aircraft and customers; and(iii) the exercise dates of outstanding AVGs are distributed
through 2015, resulting in low levels of exposure maturing in any
year. Because exercise dates for AVGs are on average in the 10thyear following aircraft delivery, AVGs issued in 2004 will
generally not be exercisable prior to 2014, and, therefore, anincrease in near-term exposure is not expected.
Gross Exposure. Gross Asset Value Exposure is defined as thesum of the maximum guaranteed tranche amounts (asopposed to the sum of the maximum guaranteed asset value
amounts) under outstanding AVGs. At December 31, 2003,
Airbus Gross Asset Value Exposure totalled U.S. $ 3.0 billion(€ 2.3 billion at an exchange rate of €-U.S. $ 1.263).The
portion of Airbus Gross Asset Value Exposure treated as
operating leases on the consolidated balance of EADS sheet
was U.S. $ 1.5 billion (€ 1.2 billion at an exchange rate of €U.S. $ 1.263) at December 31, 2003, with the remaining
portion, representing AVGs with net present values of lessthan 10 % of the sales prices of the corresponding aircraft,recorded off-balance sheet. As at December 31,2003, averageannual Airbus Gross Asset Value Exposure is approximately
U.S.$ 240 million (€ 190 million at an exchange rate of €-U.S.
$ 1.263).
Net Exposure. The outstanding net exposure from AVGs at yearend 2003 was € 0.4 billion, which was fully provisioned for.
Backstop Commitments. While commitments to provide
financing related to orders on Airbus’ and ATR’s backlog are also
given, such commitments are not considered to be part of gross
exposure until the financing is in place, which occurs when theaircraft is delivered. This is due to the fact that (i) past experiencesuggests it is unlikely that all such proposed financings actually
will be implemented (although it is possible that customers notbenefiting from such commitment may nevertheless request
financing assistance ahead of aircraft delivery), (ii) until theaircraft is delivered, Airbus or ATR retain the asset and do notincur an unusual risk in relation thereto (other than thecorresponding work-in-progress), and (iii) third parties may
participate in the financing. In order to mitigate Airbus and ATR
exposure to unacceptable credits, such commitments typicallycontain financial conditions that guaranteed parties must satisfy
in order to benefit therefrom.
See “Notes to the Consolidated Financial Statements – Note 25:
Commitments and Contingencies” for further discussion of
EADS’ sales financing policies and accounting procedures.

EADS 2003 Chapter 1 Net Assets – Financial Position – Results 27

BOOK2-790-28

29 MARCH 2004

1.1.7 Management of Market Risks
1.1.7.1 Interest Rate Risk
EADS uses an asset and liability management approach with theobjective of limiting its interest rate risk. The Company attempts
to match the risk profile of its assets with a corresponding
liability structure. The net interest rate exposure is managed
through several types of instruments in order to minimise risks
and financial impacts. Therefore, EADS may use interest rate
derivatives for hedging purposes.
Hedging instruments that are specifically related to debt
instruments have at most the same nominal amounts, as well as
the same maturity dates, as the corresponding hedged item.

Regarding the management of its cash balance, EADS only
invests in short-term instruments and/or floating rate
instruments in order to further minimise any interest risk in its
cash and securities portfolio.
The contract or notional amounts of EADS’ interest rate
derivative financial instruments shown below do not necessarily
represent amounts exchanged by the parties and, thus, are notnecessarily a measure for the exposure of the Group through its
use of derivatives.
The notional amounts of such interest rate derivative financial
instruments are as follows, specified by expected maturity.
Remaining period

Interest rate contracts
in €m

Not
Over
exceeding 1 year up to
1 year
5 yearsMorethan
5 years

Total

2,964

3,766

Year ended December 31, 2003
Interest rate swaps

Since its creation, EADS has been in a positive net cash
position. As interest rate sensitivity analysis is mostly relevant
to large borrowers, EADS considers that the added value ofsuch analysis to an understanding of the Company’s interest
rate exposure is minimal. Such analysis has therefore not been
included herein, and the above table of interest rate
derivatives has not been correlated with the preceding tableof financial debt. As circumstances warrant, EADS willconsider including such an analysis in future reference
documents.
1.1.7.2 Exchange Rate Risk
Exchange Rate Exposure. Most of EADS’ revenues aredenominated in U.S. dollars (approximately U.S.$ 20 billion for2003), with approximately half of such currency exposure“naturally hedged” by U.S. dollar-denominated costs. The
remainder of costs is incurred primarily in Euro, and to a lesser
extent, in Pounds Sterling. Consequently, to the extent that
EADS does not use financial instruments to hedge its net current
and future exchange rate exposure from the time of a customer
order to the time of delivery, its profits will be affected by market
changes in the exchange rate of the U.S. dollar against thesecurrencies. Consistent with EADS’ policy of generating profits
principally from its operations, EADS uses hedging strategies tomanage and minimise the impact on its EBIT* from the volatilityof the U.S. dollar. See “– Measurement of Management’s
Performance – EBIT* Performance by Division – Hedging Impact
on EBIT*”. See also “Part 2/1.5.1 Market Risks – Exposure to
Foreign Currencies”.
As EADS uses financial instruments to hedge only its net foreign
currency exposure, the portion of its revenues not hedged byfinancial instruments (approximately 30%) is exposed to changes
in exchange rates. Therefore, a € 0.10 change in the average
28 EADS 2003 Chapter 1 Net Assets – Financial Position – Results08022003 Euro-U.S. dollar spot rate (€-U.S. $ 1.13) would have had
an impact of approximately 2% on EADS’ consolidated revenues,
assuming 300 deliveries at Airbus.
Exposure on aircraft sales – For products such as aircraft,
EADS’ policy is to hedge 60% to 100% of the forecasted
flows in U.S. dollars related to firm contracts for the following
year through 2011. The hedged items aredefined as the first forecasted highly probable future cash
inflows for a given month based upon final payments atdelivery. The amount of the first flows is decided by a treasurycommittee and typically covers up to 100% of the equivalent of
the net U.S. dollar exposure. For EADS, a forecasted
transaction is regarded highly probable if the future delivery is
included in the firm order book or is very likely to materialise inview of contractual evidences (e.g., a letter of intent). The
coverage ratio may be adjusted to take into accountmacroeconomic movements affecting the spot and interest
rates, as applicable.
Exposure on project related business – For project-related
business, EADS generally hedges 100% based on specific flows
arising out of firm and individual contracts. Hedging is
implemented on an individual project basis.
Exposure on treasury operations – In connection with its treasury
operations, EADS headquarters enters into foreign exchange
swaps (notional amount of € 1.8 billion in 2003) to adjust for
short-term fluctuations of non-Euro cash balances at the business
unit level. Year-to-year changes in the fair market value of theseswaps is recorded on the consolidated statement of income in theline item “other financial result”. No assurances can be given thatthese changes will not have a material impact on EADS’ net
income.

BOOK2-790-29

29 MARCH 2004

Hedge Portfolio. EADS manages a long-term hedge portfoliowith a maturity of several years covering its net exposure to U.S.
dollar sales, mainly from the activities of Airbus. The net
exposure is defined as the total currency exposure (U.S. dollardenominated revenues), net of the part that is “naturally
hedged” by U.S. dollar-denominated costs. The hedge portfolio
covers the vast majority of the Group’s hedging transactions. As
hedging instruments, EADS primarily uses foreign currency
forwards and option contracts.

The contract or notional amounts of EADS’ foreign exchange
derivative financial instruments shown below do not necessarily
represent amounts exchanged by the parties and, thus, are notnecessarily a measure for the exposure of the Group through its
use of derivatives.
The notional amounts of such foreign exchange derivative
financial instruments are as follows, specified by expectedmaturity:
Remaining period

Foreign exchange contracts
in €m

Not
Over
exceeding 1 year up to
1 year
5 yearsMorethan
5 years

Total

Year ended December 31, 2003
Net forward sales contracts

7,104

22,581

3,604

33,289Purchased put options

285

0

0

285

1,800

0

0

1,800

U.S. dollar swap contracts

1.1.7.3 Counterparty Credit Risk
EADS is exposed to credit risk to the extent of non-performanceby its financial instrument counterparties. However, the Grouphas policies in place to avoid concentrations of credit risk and toensure that credit risk is limited.
Cash transactions and derivative counterparties are limited tohigh credit quality financial institutions. EADS has set up a credit
limit system to actively manage and limit its credit risk exposure.
This limit system assigns maximum exposure lines to counterpartiesof financial transactions, based at a minimum on their credit ratings
as published by Standard & Poor’s, Moody’s and Fitch IBCA. The
respective limits are regularly monitored and updated.
As counterparty credit risk also arises in the context of sales
financing transactions, EADS’ policy is to provide financing only
to customers and through structures with an appropriate credit
standing.
1.1.7.4 Risks On Equity Investment Portfolio
EADS holds several equity investments for industrial reasons.
None of the equity investments are held for speculative or
trading purposes. Equity investments are either accounted forusing the equity method (associated companies), if EADS has

the ability to exercise significant influence, or at fair value. If fairvalue is not readily determinable, the investment is measured
at cost.
Changes in the value of equity investments mainly depend on
their performance. EADS’ principal investment in associates is
Dassault Aviation. The net asset value of this investment was€ 1.6 billion at December 31, 2003. EADS considers its risk to
unexpected changes in the value of Dassault Aviation as well as
to all other associated companies as remote.
For equity investments other than associates which make up
only a fraction of EADS’ total assets, EADS regards the risk ofnegative changes in fair value or impairments on theseinvestments as non-significant.
Treasury shares held by EADS are not considered to beequity investments. Additionally, treasury shares are notregarded as being exposed to risk, as any change in value oftreasury shares is recognised directly in equity only whensold to the market and never affects net income. Treasury
shares are primarily held to hedge the dilution risk arisingfrom employee stock option plans and the exercise of stock
options.

EADS 2003 Chapter 1 Net Assets – Financial Position – Results 29

BOOK2-790-30

29 MARCH 2004

1.2 Financial Statements
1.2.1 Consolidated Financial Statements
Consolidated Income Statements for the years 2003, 2002,2001
in €m

Note

Revenues
Cost of sales

5, 6
7

Gross margin

2002

2001

30,13329,901 30,798(24,594) (24,465) (25,440)
5,539

5,436

5,358

(829)
(1,422)(2,096)248(1,177)
(936)

(800)
(1,386)(1,841)
3,024(1,841)(1,466)

Selling expenses
Administrative expenses
Research and development expenses
Other income
Other expenses
thereof goodwill amortisation and related impairment losses

8
7
11

(776)
(1,386)(2,189)
196
(823)
(567)

Income from operating activities

5

561

160

2,514

9
10

186
224
(203)
148
131
(474)

87
108
(81)
21
27
(453)

(342)
22
63
(234)
(513)
(646)

Profit (loss) from ordinary activities

218

(266)

1,355

Minority interests

(66)

(33)

17

Net income (loss)

152

(299)

1,372

31

€0.19

€(0.37)

€1.70

18

€0.40

€0.30

€0.50

Income (loss) from investments
thereof income from associates
Interest income (expense), net
Other financial result
Financial result
Income taxes

7
7

2003

Earnings per share
Basic and diluted
Cash distribution per share (2003: proposal)
The accompanying notes are an integral part of these Consolidated Financial Statements.

30 EADS 2003 Consolidated Financial Statements

BOOK2-790-31

29 MARCH 2004

Consolidated Balance Sheets at December 31, 2003 and 2002
in €m

Note

2003

2002

11
12
13
13

9,694
11,448
1,640
2,489

9,789
10,5091,333
2,396

25,271

24,027

AssetsIntangible assets
Property, plant and equipment
Investments in associates
Other investments and long-term financial assets
Fixed assets
Inventories

14

3,279

2,700

Trade receivables

15

4,001

4,114

Other receivables and other assets

16

10,2805,256

Securities

17

468

799

7,404

5,401

25,432

18,270

2,724

2,992

951

965

54,37846,254

813
9,589
5,934
(187)

811
9,658
2,452
(156)

16,14912,765

2,179

1,361

Cash and cash equivalents
Non-fixed assets
Deferred taxes

10Prepaid expenses
Total assets
Liabilities and shareholders’ equity
Capital stockReserves
Accumulated other comprehensive income
Treasury shares
Shareholders’ equity

18

Minority interests
Provisions

19

8,726

8,248

Financial liabilities
Trade liabilities
Other liabilities

20
21
21

4,767
5,117
11,3183,830
5,070
10,246

21,202

19,146

Liabilities
Deferred taxes

10

3,664

2,014

Deferred income

22

2,458

2,720

54,37846,254

Total liabilities and equity
The accompanying notes are an integral part of these Consolidated Financial Statements.

EADS 2003 Consolidated Financial Statements 31

BOOK2-790-32

29 MARCH 2004

Consolidated Statements of Cash Flows for the years 2003, 2002 and 2001
in €m

2003

2002

2001

Net income (loss)
Income applicable to minority interests

152
66

(299)
33

1,372
(17)

Depreciation and amortization of fixed assets
Valuation adjustments
Dilution gain Airbus/MBDA
Deferred tax (income) expense
Results on disposal of fixed assets/businesses and result of associates (equity method)
Change in provisions

2,375
263
0
(138)
(274)
246

2,768
177
0
255
(227)
(845)

3,560
493
(2,817)
109
(93)
47

Change in other operating assets and liabilities:

2,019

804

2

– Inventories, net– Trade receivables– Trade liabilities– Other assets and liabilities

160
168
116
1,575

274
895
(139)
(226)

(655)
(894)
766
785

Cash provided by operating activities

4,709

2,666

2,656

– Purchases of fixed assets and increase in equipment of leased assets– Payments for investments in financial assets and acquisitions of subsidiaries– Proceeds from disposal of fixed assets and decrease in equipment of leased assets– Proceeds from disposal of financial assets and subsidiaries– Change in finance lease receivables
Change in securities
Cash from changes in consolidation(2,951)
(820)
55
416
(359)
336
(152)

(2,314)(1,134)
240
849
(599)
(264)
5

(2,196)(1,096)
402
850
138
(390)
20

Cash used for investing activites(3,475)(3,217)(2,272)

Change in financial liabilities
Cash contribution by minority interests
Cash distribution to EADS N.V. shareholders
Repayments/dividends to minorities
Capital increase
Purchase of treasury shares
Others

1,132
0
(240)
(38)
21
(31)
8

(774)
0
(403)
(127)
16
(156)
(3)

(465)
253
(404)
(52)
21
0
(30)

Cash provided by (used for) financing activities

852(1,447)(677)

Effect of foreign exchange rate changes on cash and cash equivalents

(83)

(82)

14

Net increase (decrease) in cash and cash equivalents

2,003(2,080)(279)

Cash and cash equivalents at beginning of period

5,401

7,481

7,760

Cash and cash equivalents at end of period

7,404

5,401

7,481

Adjustments to reconcile net income (loss) to cash provided by operating activities:

Investments:

The accompanying notes are an integral part of these Consolidated Financial Statements.

32 EADS 2003 Consolidated Financial Statements

BOOK2-790-33

29 MARCH 2004

The following represents supplemental information with respect to cash flows from operating activities:
in €m

2003

2002

2001

Interest paid

(311)

(407)

(335)

Income taxes paid

(383)

(318)

(520)

Interest received

338

403

506

Dividends received

55

49

50

For details, see Note 23 “Consolidated Cash-Flow Statements”.

EADS 2003 Consolidated Financial Statements 33

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29 MARCH 2004

Consolidated Statements of Changes in Shareholders’ Equity for the years 2003, 2002 and 2001

in €m

Note

Balance at December 31, 2000

Capitalstock

Reserves

Accumulated
othercomprehensive
income

807

9,359

84

10,250

(337)

(337)

(253)

9,913

First application of IAS 39
Balance at January 1, 2001, adjusted

Capital increase ESOPNet income
Cash distribution to EADS N.V. shareholders
Other comprehensive income
thereof changes in fair values of securities
thereof changes in fair values of hedging instruments
thereof currency translation adjustments

Capital increase ESOPNet loss
Cash distribution to EADS N.V. shareholders
Purchase of treasury shares
Other comprehensive income
thereof changes in fair values of securities
thereof changes in fair values of hedging instruments
thereof currency translation adjustments

2

19
1,372
(404)

809

10,346

2

14
(299)
(403)

(1,278)

9,877

(156)

18,31

811

9,658

2

19
152
(240)

18
18

Balance at December 31, 2003
The accompanying notes are an integral part of these Consolidated Financial Statements.

2,452

(156)

(31)
3,482
154
2,524
804
813

9,589

5,934

Total

21
1,372
(404)
(1,025)

3,730
(10)
2,713
1,027

Balance at December 31, 2002

34 EADS 2003 Consolidated Financial Statements

9,359(1,025)
(10)
(878)
(137)

Balance at December 31, 2001/January 1, 2002

Capital increase ESOPNet income
Cash distribution to EADS N.V. shareholders
Purchase of treasury shares
Other comprehensive income
thereof changes in fair values of securities
thereof changes in fair values of hedging instruments
thereof currency translation adjustments

807

Treasuryshares

(187)

16
(299)
(403)
(156)
3,730

12,765

21
152
(240)
(31)
3,482

16,149

BOOK2-790-35

29 MARCH 2004

Consolidated Financial Statements
Basis of Presentation
1. The Company
2. Summary of Significant
Accounting Policies
3. Scope of Consolidation
4. Acquisitions and Disposals
Notes to the Consolidated
Statements of Income
5. Segment Reportinga) Business Segment
Information for the Year
Ended December 31, 2003b) Business Segment
Information for the Year
Ended December 31, 2002c) EBIT Pre Goodwill
Amortization andExceptionalsd) Revenues by Destination
6. Revenues
7. Functional Costs and Other
Expenses
8. Other Income
9. Financial Result
10. Income Taxes

36 17. Securities
36 18. Shareholders’ Equity
36 19. Provisionsa) Provisions for Deferred
Compensation
40b) Provisions for Retirement
40
Plansc) Financial Instruments
42d) Other Provisions
42 20. Financial Liabilities
42 21. Trade and other Liabilities
22. Deferred Income

53
53
53
54

43 Notes to the Consolidated
Statements of Cash-Flows
23. Consolidated Cash-Flow
Statement
44

59

Other Notes
44 24. Litigation and Claims
44 25. Commitments andContingencies
45
26. Information about Financial
Instruments
45a) Financial Risk Management
45b) Notional Amounts
45c) Fair Value of Financial
Notes to the Consolidated
Instruments
49
Balance Sheets
27. Stock-based Compensation
11. Intangible Assetsa) Stock Option Plans
49
12. Property, Plant andb) Employee Stock Ownership
50
Equipment
Plan (ESOP)
13. Investments in Associates, Other 51 28. Related Party Transactions
Investments and Long-Term
29. Investment Property
Financial Assets
30. Interest in Joint Ventures
14. Inventories
52 31. Earnings Per Share
15. Trade Receivables
52 32. Number of Employees
16. Other Receivables and Other
52 33. Events after the Balance Sheet
Assets
Date

54
56
56
57
58
58

59

60
60
60
62
62
63
64
65
65
67
68
68
68
69
69
69

EADS 2003 Consolidated Financial Statements 35

BOOK2-790-36

29 MARCH 2004

Consolidated Financial Statements
Basis of Presentation

1. The Company
The accompanying consolidated financial statements present
the operations of European Aeronautic Defence and Space
Company EADS N.V. and its subsidiaries (“EADS” or the“Group”), a Dutch public limited liability company (Naamloze
Vennootschap) legally seated in Amsterdam (Le Carré,
Beechavenue 130-132, 1119 PR, Schiphol-Rijk, The
Netherlands). EADS’ core business is the manufacturing ofcommercial aircraft, civil helicopters, commercial space launchvehicles, missiles, military aircraft, satellites, defence systems
and defence electronics and rendering of services related tothese activities. The consolidated financial statements wereauthorised for issue by EADS’ Board of Directors on March 5,
2004 and are prepared and reported in euros (“€”).
2. Summary of Significant Accounting Policies
Basis of Preparation – The consolidated financial
statements are prepared in accordance with International
Financial Reporting Standards (“IFRS”), the accounting
standards and interpretations approved by the International
Accounting Standards Board (“IASB”). Improvements andamendments to International Accounting Standards (IAS) andrecently issued IFRS have not been adopted before theireffective date.
The consolidated financial statements are prepared under thehistorical cost convention as modified by the revaluation ofavailable-for-sale financial instruments, financial assets andfinancial liabilities classified as held-for-trading, and hedged
items in fair value hedges. To be in full compliance with IFRS,EADS changed its accounting policy regarding IAS 38“Intangible assets”, in particular capitalisation of development
costs.
Changes in Accounting Policy – In 2003, EADS changed its
accounting policy regarding capitalisation of product related
development costs, as applied under the benchmark rules
detailed in IAS 8, “Net Profit or Loss for the Period, Fundamental
Errors and Changes in Accounting Policies”. As of December
31, 2003, product related development costs that had, as apolicy, previously been expensed in the period incurred, havebeen retrospectively assessed for capitalisation unless theamount of any resulting adjustment that relates to prior periods
has not been reasonably determinable. The policy forcapitalising product related development as internally generated
intangible assets is described below. The effects of theapplication of IAS 38, “Intangible Assets”, are disclosed in
Note 11.
Consolidation – The consolidated financial statements include
the subsidiaries under the control of EADS. Investments inwhich EADS has significant influence (“associated companies”)
are accounted for using the equity method. For investments inmaterial joint ventures, EADS uses the proportionate method of
consolidation. The effects of intercompany transactions are
eliminated.
36 EADS 2003 Consolidated Financial Statements

Business combinations are accounted for under the purchaseaccounting method; all assets acquired and liabilities assumed
are recorded at fair value. Any excess of the purchase price overthe fair value of net assets acquired is capitalized as goodwill
and amortized over the estimated period of benefit on astraight-line basis. Any minority interest in the acquiree is statedat the minority’s proportion of the net fair value of those items.
Special purpose entities are consolidated, when the substanceof the relationship between the Group and a special purpose
entity indicates that the special purpose entity is controlled by
the Group. Special purpose entities are entities which are
created to accomplish a narrow well-defined objective.
Foreign Currency Translation – The assets and liabilities offoreign entities, where the reporting currency is other than Euro,are translated using period-end exchange rates, while thestatements of income are translated using average exchange
rates during the period, approximating the foreign exchange
rate at the dates of the transactions. All resulting translationdifferences are included as a separate component ofshareholders’ equity (“Accumulated other comprehensive
income” or “AOCI”).
Transactions in foreign currencies are translated into Euro at theforeign exchange rate in effect at the date of the transaction.
Monetary assets and liabilities denominated in foreign
currencies at the balance sheet date are translated into Euro at
the exchange rate in effect at that date. Foreign exchange gains
and losses arising from translation are recognized in the income
statement. Non-monetary assets and liabilities denominated inforeign currencies, which are stated at historical cost, aretranslated into Euro at the foreign exchange rate in effect at thedate of the transaction.
Goodwill and fair value adjustments arising on the acquisition of
a foreign entity are treated as assets and liabilities of theacquiring company and are recorded at the exchange rate at thedate of the transaction.
Revenue Recognition – Revenue from the sale of goods isrecognized upon the transfer of risks and rewards of ownershipto the buyer and when the amount of revenue can be measured
reliably. Revenue from services rendered is recognized inproportion to the stage of completion of the transaction at thebalance sheet date. For construction contracts, when theoutcome can be estimated reliably, revenue is recognized byreference to the stage of completion of the contract activity. The
stage of completion of a contract may be determined by avariety of ways. Depending on the nature of the contract,
revenue is recognized as contractually agreed-upon milestones
are reached, the work progresses or units are delivered.
Changes in profit rates are reflected in current earnings as
identified. Contracts are regularly reviewed for possible losses
and provisions for estimated losses on contracts are recorded
when identified.

BOOK2-790-37

29 MARCH 2004

Incentives applicable to performance on contracts are
considered in estimated profit rates and are recorded whenanticipated contract performance is probable and can be reliably
measured.
Sales of aircraft that include asset value guarantee commitments
are accounted for as operating leases when these commitments
are considered substantial compared to the fair value of therelated aircraft. Revenues then comprise lease income fromsuch operating leases.
Product-Related Expenses – Expenses for advertising andsales promotion and other sales-related expenses are charged to
expense as incurred. Provisions for estimated warranty costs arerecorded at the time the related sale is recorded.
Research and Development Expenses – Research anddevelopment activities can be (a) contracted or (b) self-initiated.
a) Costs for contracted research and development activities,
carried out in the scope of externally financed research anddevelopment contracts, are expensed when the related
revenues are recorded.
b) Costs for self-initiated research and development activities
are assessed whether they qualify for recognition asinternally generated intangible assets. Apart from complying
with the general requirements for and initial measurement of
an intangible asset, qualification criteria are met only whentechnical as well as commercial feasibility can bedemonstrated and cost can be measured reliably. It mustalso be probable that the intangible asset will generate future
economic benefits and that it is clearly identifiable andallocable to a specific product.
Further to meeting these criteria, only such costs that relatesolely to the development phase of a self-initiated project arecapitalised. Any costs that are classified as part of the researchphase of a self-initiated project are expensed as incurred. If theresearch phase can not be clearly distinguished from thedevelopment phase, costs for that project are treated as if they
were incurred in the research phase only.
Development costs that have been capitalised are generally
amortised over the estimated number of units produced and arereviewed for impairment annually when the asset is not yet in
use and further on whenever events or changes incircumstances indicate that the carrying amount may not berecoverable.
Income Taxes – Deferred tax assets and liabilities reflect lower
or higher future tax consequences that result for certain assets
and liabilities from temporary valuation differences between thefinancial statement carrying amounts and their respective tax
bases as well as from net operating losses and tax credit
carryforwards. Deferred tax assets and liabilities are measured

using enacted tax rates to apply to taxable income in the years
in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in the period the
new rates are enacted. As deferred tax assets anticipate
potential future tax benefits, they are recorded in the
consolidated financial statements of EADS only when thelikelihood that the tax benefits will be realized is probable.
Intangible Assets – Purchased intangible assets, other than
goodwill, are valued at acquisition cost and are generally
amortized over their respective useful lives (3 to 10 years) on astraight line basis. Goodwill arising from purchase accounting isamortized over 5 to 20 years.
Property, Plant and Equipment – Property, plant andequipment is valued at acquisition or manufacturing costs lessaccumulated depreciation. Depreciation expense is recognizedprincipally using the straight-line method. The costs of internallyproduced equipment and facilities include direct material andlabour costs and applicable manufacturing overheads, including
depreciation charges. Borrowing costs are not capitalized. The
following useful lives are assumed: buildings 6 to 50 years; site
improvements 6 to 20 years; technical equipment andmachinery 3 to 20 years; and other equipment, factory andoffice equipment 2 to 10 years.
Property, plant and equipment includes capitalised
development costs for tangible developments of specialized
tooling for production such as jigs and tools, design,
construction and testing of prototypes and models. In caserecognition criteria of property, plant and equipment are met,these costs are capitalized and generally depreciated using thestraight-line method over 5 years or, if more appropriate, using
the number of production or similar units expected to beobtained from the tools (sum-of-the-units method). Especiallyfor aircraft production programs such as the Airbus A380 withan estimated number of aircraft to be produced using suchtools, the sum-of-the-units method effectively allocates thediminution of value of specialized tools to the units produced.
Investment Property – The group accounts for investment
property using the cost model. Investment property is recordedon balance sheet at book value, that is, at cost less any
accumulated depreciation and any accumulated impairment
losses. The fair value of investment property is reviewed
annually by using cash-flow models or by determinations ofopen market prices.
Non-Current Available-for-Sale Financial Assets – Noncurrent available-for-sale financial assets are included in the line
”Other investments and long-term financial assets” in the
consolidated balance sheet and are accounted for at fair value.
Unrealised gains and losses on available-for-sale investments arerecognised directly as part of a separate component ofshareholders’ equity (“AOCI”), net of applicable deferred
EADS 2003 Consolidated Financial Statements 37

BOOK2-790-38

29 MARCH 2004

income taxes. As soon as such investments are sold orotherwise disposed of, or are determined to be impaired, thecumulative gain or loss previously recognised in equity is
included in “Financial result” in the consolidated income
statement for the period. Available-for-sale equity investmentsthat do not have a quoted market price in an active market andwhose fair value cannot be reliably estimated by alternative
valuation methods are measured at cost, less any accumulated
impairment losses. The fair values of investments are based onquoted market or bid prices or amounts derived from cash-flow
models.
Impairment of Assets – The Group reviews property, plantand equipment and other non-current assets, including goodwill
and intangible assets allocated to cash-generating units for
impairment whenever events or changes in circumstancesindicate that the carrying amount may not be recoverable. If any
such indication exists and the carrying amount exceeds therecoverable amount, the respective asset or the assets in the
cash-generating unit are written down to their recoverable
amounts.
Leasing – The Group is a lessor and a lessee of assets,
primarily in connection with commercial aircraft sales financing.
Lease transactions where substantially all risks and rewards
incident to ownership are transferred from the lessor to thelessee are accounted for as finance leases. All other leases areaccounted for as operating leases.
Assets held for leasing out under operating leases are included
in property, plant and equipment at cost less depreciation (seeNote 12, “Property, plant and equipment”). Rental income fromaircraft operating leases is recorded as revenue over the term of
the lease. Assets leased out under finance leases cease to berecognized in the balance sheet after the inception of the lease.
Instead, a finance lease payments receivable representing thediscounted future lease payments to be received from thelessee plus any discounted unguaranteed residual value isrecorded as long-term financial assets (see Note 13, “Other
investments and long-term financial assets”). Unearned financeincome is recorded over time in “Financial result”. Revenues andthe related cost of sales are recognised at the inception of thefinance lease.
Assets obtained under finance leases are included in property,
plant and equipment at cost less depreciation (see Note 12,“Property, plant and equipment”), unless such assets havebeen further leased out to customers. In such a case, therespective asset is either qualified as an operating lease or as afinance lease with EADS being the lessor (headlease-subleasetransaction) and is recorded accordingly. For the relating
liability from finance leases see Note 20, “Financial liabilities”.
When EADS is the lessee under an operating lease contract,
rental payments are recorded when they fall due (see Note 25,“Commitments and contingencies” for future operating leasecommitments). Such leases often form part of commercial
38 EADS 2003 Consolidated Financial Statements

aircraft customer financing transactions with the related
sublease being an operating lease (headlease-subleasetransaction).
Non-Fixed Assets – Non-fixed assets represent the Group’s
inventories, receivables, securities and cash and cash
equivalents, including amounts to be realized in excess of one
year. In the accompanying notes, the portion of assets andliabilities to be realized and settled in excess of one year has
been disclosed.
Inventories – Inventories are measured at the lower ofacquisition or manufacturing cost or net realizable value.
Manufacturing costs comprise direct material and labour andapplicable manufacturing overheads, including depreciation
charges. Borrowing costs are not capitalized. Inventory ispresented in the consolidated balance sheet net of allocableadvance payments received.
Securities – The group’s securities are accounted for at fairvalue. All of the Group’s securities are classified as available-forsale securities. Management determines the appropriateclassification at the time of purchase and revaluates suchdetermination at each balance sheet date. Unrealised gains andlosses on available-for-sale securities are recognised directly
within a separate component of stockholders’ equity (“AOCI”),
net of applicable deferred income taxes. As soon as suchsecurities are sold or otherwise disposed of, or are determined
to be impaired, the cumulative gain or loss previously
recognised in equity is recorded as part of “Financial result” inthe consolidated income statement for the period. The fair valueof available-for-sale securities is determined using quoted
market prices. If a quoted market price is not available, fair value
is determined on the basis of generally accepted valuation
methods on the basis of market information available at thereporting date. All purchases and sales of securities arerecognized on settlement date according to market conventions.
Cash and Cash Equivalents – Cash and cash equivalents
consist of cash on hand, cash in bank, checks, fixed deposits
having a short-term maturity and short-term securities that arereadily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value.
To conform with the consolidated cash-flow statement, as ofDecember 31, 2003 and in line with IAS 7, “Cash Flow
Statements”, EADS changed its presentation regarding cash andcash equivalents in the consolidated balance sheet. Short-term
securities that are readily convertible to known amounts of cash
and which are subject to an insignificant risk of changes invalue, which had previously been disclosed as part of the line
item “Securities” in the consolidated balance sheet, have been
reclassified to the line item “Cash and cash equivalents”.
Derivative Financial Instruments – Effective January 1, 2001,
EADS adopted IAS 39, “Financial Instruments: Recognition and

BOOK2-790-39

29 MARCH 2004

Measurement”, which requires all derivative financial
instruments be recognized in the financial statements.
Derivative financial instruments are initially recognized in the
consolidated balance sheet at cost and are subsequently
measured at fair value. Changes in the fair value of derivative
financial instruments are recognized either in income or, in thecase of a cash flow hedge, within a separate component ofstockholders’ equity (“AOCI”), net of applicable income taxes,
and subsequently recognized in the consolidated income
statement as a component of the related transactions, whenrealized. For derivative financial instruments designated as fairvalue hedges, changes in the fair value of the hedged item andthe derivative are recognised in the consolidated income
statement. Gains and losses on derivative financial instruments,
both realized and unrealized, that do not qualify for hedge
accounting are included in “Net income (loss)”.
EADS uses derivative financial instruments for hedging
purposes. Derivative financial instruments used in microhedging strategies to offset the Group’s exposure to identifiabletransactions are accounted for together with the underlying
business transactions (“hedge accounting“). The Group’s criteria
for classifying a derivative financial instrument as a hedge
include: (1) the hedge transaction is expected to be highly
effective in achieving offsetting changes in cash flows
attributable to the hedged risk, (2) for cash flow hedges, aforecasted transaction that is subject of the hedge must be
highly probable, (3) the effectiveness of the hedge can bereliably measured, (4) there is adequate documentation of thehedging relationships at the inception of the hedge.
With the adoption of IAS 39, all derivative financial instruments
have been recognized as assets or liabilities. Derivative financial
instruments with a negative fair value are recorded as“Provisions for financial instruments”. Derivative financial
instruments with positive air values are recorded in “Other
receivables and other assets”.
The opening balance of equity as at January 1, 2001 has beenadjusted. Under the new standard, the Group applies hedge
accounting for certain foreign currency derivative contracts on
qualifying cash flow hedges of future sales as well as for certain
interest rate swaps used as cash flow and fair value hedges of
future interest payments. In case certain derivative transactions,while providing effective economic hedges under the Group’s
risk management policies, do not qualify for hedge accounting
under the specific rules in IAS 39, changes in fair value of suchderivative financial instruments are recognized immediately in“Net income (loss)”. Up to December 31, 2000, certain of theGroup’s hedging instruments have been used as
macro–hedging instruments. In order to achieve the same
treatment as for the existing micro-hedges, EADS was able todocument for most of these instruments that from the date ofdesignation, a hedging relationship existed between eachposition being hedged and each hedging derivative financial
instrument. Those derivative financial instruments that did not

qualify for hedge accounting are classified as held-for-trading
and are carried at fair value, with changes in fair value included
in “Financial result”. The provision established for the mark-tomarket valuation of the derivate financial instruments thatformed part of macro-hedges as of December 31, 2000, will
evolve until the derivatives mature.
See Note 26, “Information about financial instruments” for a
description of the group’s financial risk management strategies,
the fair values of the Group’s derivative financial instruments aswell as the methods used to determine such fair values.
Provisions – Provisions are recognized when the Group has apresent obligation (legal or constructive) as a result of a past
event, it is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation and a
reliable estimate of the obligation’s amount can be made.
Provisions for financial guarantees corresponding to aircraft
sales are recorded to reflect the underlying risk to the Group in
respect of guarantees given when it is probable that an outflow
of resources embodying economic benefits will be required tosettle the obligation and reliable estimates can be made of theamount of the obligation. The amount of these provisions is
calculated to cover the difference between the Group exposureand the estimated value of the collateral.
Outstanding costs are provided for at the best estimate of future
cash outflows. Provision for other risks and charges relate to
identifiable risks representing amounts expected to be realized.
Provisions for contract losses are recorded when it becomesprobable that total estimated contract costs will exceed total
contract revenues. Such provisions are recorded as write-downsof work-in-process for that portion of the work which has
already been completed, and as provisions for risks for theremainder. Losses are determined on the basis of estimatedresults on completion of contracts and are updated regularly.
Provisions for litigation and claims are set in case legal actions,
governmental investigations, proceedings and other claims are
pending or may be instituted or asserted in the future against
the Group which are a result of past events, where it is probablethat an outflow of resources embodying economic benefits will
be required for the settlement and a reliable estimate of theobligation’s amount can be made.
The valuation of pension and post-retirement benefits
classified as defined benefit plans is based upon the projected
unit credit method in accordance with IAS 19, “Employee
Benefits”. According to the corridor approach of IAS 19.92,
EADS does not recognize actuarial gains and losses as income
and expense unless, for each individual plan, they exceed 10%of the higher of the present value of the defined benefit
obligation and the fair value of plan assets. Such actuarial gains
and losses are deferred and recorded over the expected
EADS 2003 Consolidated Financial Statements 39

BOOK2-790-40

29 MARCH 2004

average remaining working lives of the employees participatingin each plan.
Termination benefits are payable whenever an employee’s
employment is terminated before the normal retirement date or
whenever an employee accepts voluntary redundancy in exchange
for these benefits. The Group recognizes termination benefits
when it is demonstrably committed to either terminate theemployment of current employees according to a detailed formal
plan without possibility of withdrawal or to provide termination
benefits as a result of an offer made to encourage voluntary
redundancy.
Financial Liabilities – Financial liabilities are recorded initiallyat the proceeds received, net of transaction costs incurred.
Subsequently, financial liabilities are measured at amortized costusing the effective interest rate method with any difference
between proceeds (net of transaction costs) and redemption
amount being recognized in “Financial result” over the period of
the financial liability.
Refundable Advances – Refundable advances from European
Governments are provided to the Group to finance research anddevelopment activities for certain projects on a risk-sharing
basis, i.e. they have to be repaid to the European Governments
according to the success of the project. Because of their risksharing basis, such refundable advances are fully recorded as“Other Liabilities”.
Equity Compensation Plans – EADS classifies equity
compensation plans as either compensatory plans or noncompensatory plans. If a plan qualifies as a non-compensatory
plan, no compensation expense is recorded. On the other hand,a compensatory plan may result in recognition of compensation
expense. Upon adoption of a new plan, the Group determines
whether the plan is compensatory or non-compensatory. EADS
recognises all employee stock ownership plans to be noncompensatory if, at grant date, the granted discount does notexceed 15% of the market share price, and the plan covers
virtually all of the Group’s employees.
Compensation cost for compensatory equity compensationplans is measured on the measurement date, which is the dateon which both the number of shares and the exercise price are
first known, using the intrinsic-value-based method of
accounting. If the terms of the plan or award are such that the
number of shares and exercise price are set on the grant date,fixed-plan accounting applies. If, on the other hand, the numberof shares, the exercise price, or both are not “fixed” on the grantdate, variable-plan accounting applies.
Fixed-plan accounting prescribes calculating compensation coston the grant date. When the share price at grant date isexceeding the granted exercise price, compensation has to berecognized as compensation expense over the vesting period.
The compensation cost that is calculated cannot be adjusted
40 EADS 2003 Consolidated Financial Statements(assuming that future events do not trigger the need tosubsequently apply variable-plan accounting or to re-measurecompensation cost) for future changes in the stock-based
compensation award’s intrinsic value. On the other hand,variable-plan accounting requires a continual recalculation ofcompensation cost until both the number of shares and theexercise price are known (i.e., until there has been ameasurement date).
Use of Estimates – The preparation of financial statements
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities anddisclosure of contingent amounts at the date of the financial
statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ fromthose estimates.
Reclassification and Changes in Presentation – The
presentation of certain prior year information has been
reclassified to conform to the current year presentation (seeNote 13 “Investments in associates, other investments and longterm financial assets”, Note 17 “Securities” and Note 20“Financial liabilities”).
In order to more appropriately present the financial performancein line with IAS 1 “Presentation of Financial Statements” theincome statement presentation is changed as follows. The
subtotal “Income before financial result, income taxes andminority* interest” is renamed to “Income from operating
activities”. “Goodwill amortization and related impairment
losses” previously presented in a separate caption are included
in “Other expenses”. The new subtotal “Profit (loss) fromordinary activities” is inserted and the previously presented
subtotal “Profit (loss) before income taxes and minority
interests” is deleted.
3. Scope of Consolidation
Perimeter of Consolidation (December 31, 2003) – The
consolidated financial statements include, in addition to EADS
N.V.:
• 237 companies which are fully consolidated (2002: 216),• 17 companies which are proportionately consolidated (2002:34),• 17 companies, which are investments in associates and areaccounted for using the equity method (2002: 16).
Significant subsidiaries, associates, and joint ventures are listed
in the appendix entitled “Information on principal investments”.
4. Acquisitions and Disposalsa) Acquisitions
EADS acquired BAe Systems’ (“BAES”) 25 percent interest (27.5
percent economic share) in Astrium N.V. The transaction was
signed on January 30, 2003 and is accounted for under thepurchase method. Control of Astrium N.V. has been transferredBOOK2-790-41

29 MARCH 2004

to EADS at this date. At completion of this transaction, EADS
acquired BAES’ share in Astrium N.V. for 84 M €. Prior tocompletion, EADS and BAES each made a capital contribution
into Astrium N.V. of 84 M € (total 168 M €). Taking the cash
contribution into account, BAES’ interest has been effectivelytransferred to EADS for no net cash consideration.
On October 21, 2003, a Dornier family member being
shareholder of Dornier GmbH exercised a put option andoffered 17.7% of the shares in Dornier GmbH to
DaimlerChrysler. DaimlerChrysler exercised the right to sell its
shares to DADC Luft- und Raumfahrt Beteiligungs AG(“DADC”), a subsidiary of EADS, in the amount of 62 M €. As aresult, EADS holds indirectly through DADC 94% of the share of
Dornier GmbH (2002: 76%).
As of December 31, 2003, EADS obtained control of ASL
Aircraft Services Lemwerder GmbH. The acquisition costs forthe company amount to 15 M €.
Apart from those mentioned, other acquisitions by the Groupare not material.
b) Disposals
Nortel Networks and EADS reorganized their joint
telecommunications activities in France and Germany. On
September 18, 2003, EADS exchanged its 42 percent ownershipinterest in Nortel Networks Germany GmbH & Co. KG and its 45
percent ownership interest in Nortel Networks France S.A.S. for a
41 percent interest in EADS Telecom France S.A.S. (“ETF”), a net
additional payment of 42 M € by Nortel Networks and a waiver of
Nortel Networks for financial receivables of 72 M €. At
completion of transaction, EADS holds 100 % of the shares of ETF.
On March 6, 2002, Airbus sold its share in Aircelle, a joint
venture with Snecma, to Snecma. The selling price amounted to
63 M €.
On November 20, 2002, EADS sold EADS Matradatavision(“MDTV”) to IBM. The sales agreement includes all except two
subsidiaries of MDTV. The selling price amounted to 12 M €.
Apart from those mentioned, other dispositions by the Group
were not significant.
c) Subsequent Changes in Value of Assets and Liabilities
Acquired and Cost of Acquisition
Subsequent to the creation of MBDA and the acquisitions of
Tesat and Cogent, all in 2001, it became evident in 2002 that
previous estimates of assets and liabilities regarding these threetransactions had to be adjusted. Further to this, subsequent tothe acquisition of Tesat and Cogent, the amounts of the final
purchase prices were resolved in 2002. Accordingly, goodwill
was increased by 73 M € in 2002.

EADS 2003 Consolidated Financial Statements 41

BOOK2-790-42

29 MARCH 2004

Notes to the Consolidated Statements of Income

5. Segment Reporting
The Group operates in 5 divisions (segments) which reflect theinternal organisational and management structure according to
the nature of the products and services provided:

military combat and training aircraft; and provision of
defence electronics, defence-related telecommunications
solutions; and logistics, training, testing, engineering andother related services• Airbus – Development, manufacturing, marketing and saleof commercial jet aircraft of more than 100 seats and thedevelopment and manufacturing of aircraft for military use.

• Space – Development, manufacturing, marketing and saleof satellites, orbital infrastructures and launchers; andprovision of space services.

• Military Transport – Development, manufacturing,marketing and sale of military transport aircraft and special
mission aircraft.

The following tables present information with respect to theGroup’s business segments. Consolidation effects, the holding
function of EADS headquarters and other activities not allocableto the divisions are disclosed in the column “HQ/Conso”.

• Aeronautics – Development, manufacturing, marketingand sale of civil and military helicopters, regional turboprop
aircraft and light commercial aircraft; and civil and military
aircraft conversion and maintenance services.

Due to the new organizational structure of the Group, theDefence & Civil Systems division has been renamed in Defence& Security Systems and restructured, especially the Military
Aircraft business unit has been transferred from Aeronautics
division to Defence & Security Systems division. Prior year
figures are adjusted accordingly in these notes.

• Defence & Security Systems – Development,
manufacturing, marketing and sale of missiles systems;a) Business Segment Information for the Year Ended
December 31, 2003
Business Segment Information
Year ended December 31, 2003
in €mAirbusMilitary
Transport

Aeronautics

Defence& Security
SystemsSpace

HQ/
Conso.

Consolidated

Total revenues

19,411

1,170

4,175

5,484

2,434

(1,219)31,455Internal revenues

(363)

(236)

(372)

(319)

(10)

(22)

(1,322)

19,048

934

3,803

5,165

2,424

1,353

30

217

171

(400)

172

1,543

Income from operating activities

809

15

203

19

(425)

(60)

561

Share of net profit of associates

5

0

0

(6)

0

225

224

External revenues
EBIT pre goodwill amortization and exceptionals(see definition below)(1,241) 30,133

Income/loss from other investments, interest andother financial result(93)

Income taxes(474)

Result from ordinary activities

218

Minority interest(66)

Net income (loss)

152

Other information
Identifiable segment assets (incl. goodwill)

30,960

950

4,139

9,236

3,931

5,162

54,378Goodwill

6,342

0

111

2,321

545

53

9,372

0

0

0

7

0

1,633

1,640

Segment liabilities

20,784

693

3,000

3,609

6,791

1,173

36,050Capital expenditures

2,027

28

142

207

473

74

2,951

Depreciation, amortization

1,628

31

136

287

134

159

2,375

Research and development expenses

1,819

23

62

223

62

0

2,189

Investments in equity method associates

42 EADS 2003 Notes to the Consolidated Statements of Income

BOOK2-790-43

29 MARCH 2004b) Business Segment Information for the Year Ended
December 31, 2002
Business Segment Information
Year ended December 31, 2002
in €mAirbusMilitary
Transport

Aeronautics

Defence& Security
SystemsSpace

HQ/
Conso.

Consolidated

Total revenues

19,689

708

4,205

5,089

2,223

(912)

31,002

Internal revenues

(177)

(184)

(371)

(319)

(7)

(43)

(1,101)

External revenues

19,512

524

3,834

4,770

2,216

(955) 29,901

EBIT pre goodwill amortization and exceptionals(see definition below)

1,361

(80)

180

122

(268)

111

1,426

Income from operating activities

818

(87)

168

(93)

(626)

(20)

160

Share of net profit of associates

0

0

0

0

(3)

111

108

Income/loss from other investments, interest andother financial result(81)

Income taxes(453)

Result from ordinary activities(266)

Minority interest(33)

Net income (loss)(299)

Other information
Identifiable segment assets (incl. goodwill)

26,776

696

4,169

9,240

3,068

3,451

47,400Goodwill

6,715

0

118

2,285

436

32

9,586

0

0

0

0

0

1,333

1,333

Segment liabilities

20,797

521

3,227

6,464

2,698

(433)

33,274

Capital expenditures

1,674

68

137

189

89

157

2,314

Depreciation, amortization

1,614

64

198

241

141

160

2,418

0

0

0

0

350

0

350

1,682

40

90

227

59

(2)

2,096

Investments in equity method associates

Impairment losses recognized in income
Research and development expenses

As a rule, inter-segment transfers are carried out on an arm’s
length basis. Inter-segment sales predominantly take place
between Aeronautics, Defence & Security Systems and Airbus,
as the Aeronautics and Defence & Security Systems divisions
act as main suppliers for Airbus aircraft as well as between the
Military Transport and Airbus division regarding the A400 M
program.
Capital expenditures represent the additions to property, plantand equipment and to intangible assets (excluding goodwill).

EADS 2003 Notes to the Consolidated Statements of Income 43

BOOK2-790-44

29 MARCH 2004c) EBIT Pre Goodwill Amortization and Exceptionals
EADS uses EBIT pre goodwill amortization and exceptionals as a
key indicator of its economic performance. The term
“exceptionals” refers to income or expenses of a non-recurring
nature, such as amortization expenses of fair value adjustments

relating to the EADS merger, the Airbus Combination and theformation of MBDA, as well as impairment charges. EBIT pre
goodwill amortization and exceptionals is treated by management
as a key indicator to measure the segments’ economic
performances.

in €m

2003

2002

2001

Income from operating activities

561

160

2,514

Dilution gain Airbus UK, MBDA

00(2,794)

Goodwill amortization and related impairment charges

567

936

1,466

Exceptional depreciation (fixed assets)

214

227

260

Exceptional depreciation (financial assets)

0

0

315

Exceptional depreciation (inventories)

15

16

275

Income from investments

186

87

(342)

1,543

1,426

1,694

in €m

2003

2002

2001

France

3,521

3,872

3,521

Germany

3,651

2,476

3,588

United Kingdom

2,121

2,452

1,756

Spain

1,000

1,309

1,101

Other European Countries

3,687

4,248

4,089

North America

8,056

10,562

10,394Latin America

677

1,259

1,749

Asia/Pacific

4,033

2,010

1,601

Middle East

2,873

1,258

1,400

Other Countries

514

455

1,599

Consolidated

30,13329,90130,798EBIT pre goodwill amortization and exceptionalsd) Revenues by Destination

Revenues are allocated to geographical areas based on the location of the customer.
Most of the Group’s assets and capital expenditures are located in the European Union.
6. Revenues
Revenues in 2003 reached 30,133 M € compared with 29,901
M € in 2002 and 30,798 M € in 2001. Revenues in 2003 slightly
increased in comparison with 2002 mainly contributed byMilitary Transport, Defence & Security Systems and Space (fullconsolidation of Astrium). Despite a more favourable aircraft mix
and stable deliveries of Airbus, revenues decreased due to alower US Dollar exchange rate compared to Euro.

Revenues are mainly comprised of sales of goods andservices, as well as of revenues associated with construction
contracts accounted for under the percentage-of-completionmethod, contracted research and development and customer
financing revenues. For a breakdown of revenues by businesssegment and geographical region, refer to Note 5, “Segment
Reporting”.

Detail of Revenues:
in €m

2003

2002

2001

30,13329,90130,798Thereof revenues from the delivery of goods & services

25,11025,832

26,382

Thereof revenues from construction contracts (including contracted research and development)

4,295

3,741

2,996

Total revenues

44 EADS 2003 Notes to the Consolidated Statements of Income

BOOK2-790-45

29 MARCH 2004

7. Functional Costs and Other Expenses
Included in cost of sales and other functional costs are Cost of
materials of 18,838 M € (2002: 19,216 M €; 2001: 20,036 M €).

9. Financial Result
in €m

2003

2002

2001

Income (loss) from investments

186

87

(342)

Cost of sales include the amortization charge of the remaining
capitalized settlement payment to the German Government withrespect to refundable advances of 40 M € (2002: 99 M €; in2001: 317 M €).

Interest income/(expense), net

(203)

(81)

63

Other financial result

148

21

(234)

Total

131

27

(513)

Cost of sales also include the amortization expenses of fair value
adjustments of fixed assets and inventory for 229 M € (2002:
243 M €); these are relating to the EADS merger, the Airbus
Combination and the formation of MBDA.

The income from investments in 2003 is mainly derived fromthe result of the equity investments in Dassault Aviation of 225
M € (2002: 111 M €; 2001: 111 M €) partly offset by
impairment of investments (in 2003: 30 M € for CAC Systèmesand Hispasat; in 2002: 29 M € for Arianespace Participation
S.A.; in 2001: 315 M € for Nortel Networks France and Nortel
Networks Germany).

Selling, administrative and other expenses are comprised of:
in €m

2003

2002

2001

Selling cost

776

829

800

General administration cost

1,386

1,422

1,386

Other operating expenses

256

241

375

Thereof losses from salesof fixed assets

15

5

20

Thereof restructuring
measures

12

16

31

2,418

2,492

2,561

in €m

2003

2002

2001

Wages, salaries and social
contributions

7,238

7,147

6,606

Net periodic pension cost(see Note 19 b)

359

319

257

7,597

7,466

6,863

in €m

2003

2002

2001

Other operating income

196

248

3,024

Thereof rental income

39

38

33

Thereof release of allowances

17

8

21

Thereof income from salesof fixed assets

7

89

100

Total
Personnel expenses are:Total
8. Other Income

Thereof dilution gain as aresult of the Airbus UK/MBDA
transactions

0

0

2,817

The income from sale of non-current assets included in 2002 again on the disposal of EADS’ 50 % share in Aircelle (63 M €).

Since for the second half-year 2003 no financial informationaccording to IFRS is available yet from Dassault Aviation, the net
income of the second half year 2002 of Dassault Aviation has
been used as the best estimate to report the current second half
year’s net income for 2003. The current year’s equity
investment income from Dassault Aviation also includes a catchup of the prior year financial performance in accordance with
IFRS, which amounts to 77 M €.
Interest income/(expense), net, in 2003 comprises interest
income of 456 M € (2002: 526 M €) and interest expense of(659) M € (2002: (607) M €). Included in interest income is thereturn on cash and cash equivalents, securities and financial
assets such as loans and finance leases. Interest expense
includes interest on financial liabilities and European
Government refundable advances.
Other financial result in 2003 includes fair value gains onembedded derivatives not qualifying for “hedge accounting” inthe amount of 70 M € (in 2002: 26 M €). In 2001 otherfinancial loss mainly resulted from mark-to-market revaluation offinancial instruments that did not qualify for “hedge
accounting”.
10. Income Taxes
The (expense for) benefit from income taxes is comprised of
the following:
in €m

2003

2002

2001

Current tax expense

(612)

(198)

(549)

Deferred tax (expense)/benefit

138

(255)

(97)

Total

(474)

(453)

(646)

The Group’s parent company, EADS N.V., legally seated in
Amsterdam, The Netherlands, applies Dutch tax law using an
income tax rate of 34.5% for December 31, 2003 and 2002 (35% at
December 31, 2001). All foreign subsidiaries however apply theirnational tax rates, among others Great Britain 30% and Spain 35%.
EADS 2003 Notes to the Consolidated Statements of Income 45

BOOK2-790-46

29 MARCH 2004

In France, the corporate tax rate in effect for 2003 and 2002 was
33 1/3 % plus surcharges of 3% (“contribution permanente”)
and 3,3% (“contribution sociale”). For the year 2001, the“contribution permanente” was 6%. Accordingly, deferred tax
assets and liabilities for the Group’s French subsidiaries were
calculated using the enacted tax rate of 35.43 % at December
31, 2003 and 2002 for temporary differences (36.43 % at
December 31, 2001).

with the above mentioned tax rate of 40.0%. Deferred taxes as
at December 31, 2003 as well as for December 31, 2002
with a reversal scheduled for later than 2003 and as at
December 31, 2001, were calculated using a federal corporate
tax rate of 25%, plus (i) an annual solidarity surcharge of 5.5%and (ii) the after federal tax benefit rate for trade tax of 12.125%.
In aggregate, the tax rate applied to German deferred taxes
amounts to 38.5%.

In Germany, the “Flutopfersolidaritätsgesetz (flood victim
solidarity act)“ was enacted in September 2002, leading to a
1.5% increase of federal corporate tax for the fiscal year 2003.
Accordingly, for the Group’s German subsidiaries, income taxes
are calculated using a federal corporate tax rate of 26.5% for
December 31, 2003, plus (i) an annual solidarity surcharge of
5.5% on the amount of federal corporate taxes payable and (ii)the after federal tax benefit rate for trade tax of 12.125% for2003. In aggregate, the tax rate applied to German income taxes
amounts to 40.0% in 2003. As at December 31, 2002,
deferred taxes reversing in 2003 had been calculated

The following table shows a reconciliation from the theoreticalincome tax expense – using the Dutch corporate tax rate of
34.5 % as at December 31, 2003 and December 31, 2002 (35 %as at December 31, 2001) – to the reported tax expense. The
reconciling items represent, besides the impact of tax rate
differentials and changes, non-taxable benefits or nondeductible expenses arising from permanent differences
between the local tax base and the reported financial
statements according to IFRS rules.

in €m

2003

Profit before income taxes and minority interests

2003 in %of “Profit before
income taxes andminority interests”

2002

2001

692

187

2,001

Corporate income tax rate

34.5%

34.5%

35%

Expected benefit (expense) for income taxes

(239)

34.5%

(65)

(700)

Effects from tax rate differentials and changes

(26)

3.8 %

(35)

(5)

0

–

0

936

Goodwill amortization and impairments

(191)

27.6%

(321)

(588)

Write down of deferred tax assets

(119)

17.2%

(11)

(264)

Tax credit for R&D expenses

69(10.0)%

53

48

Results on associates (at equity)76(11.0)%

28

15

Tax effect on investments

(35)

5.1%

(39)

(73)

Other

(9)

1.3%

(63)

(15)

(474)

68.5%

(453)

(646)

Effect from dilution gain as a result of the Airbus UK/MBDA
transactions in 2001

Reported tax benefit (expense)

46 EADS 2003 Notes to the Consolidated Statements of Income

BOOK2-790-47

29 MARCH 2004

Deferred income taxes are the result of temporary differences
between the carrying amounts of certain assets and liabilities in
the financial statements and their tax bases. Future tax impacts
from net operating losses and tax credit carry forwards are also
considered in the deferred income tax calculation. Deferredincome taxes are related to the following assets and liabilities:
Deferred tax
assetsDeferred tax
liabilities

Net
December 31,

in €m

2003

2002

2003

2002

2003

2002

Intangible assets

23

18

(37)

(3)

(14)

15

Property, plant and equipment

7

208(1,108)(1,140)(1,101)(932)

Investments and long-term financial assets

25

38

(145)

(145)

(120)

(107)

Inventories

287

346

(273)

(5)

14

341

Receivables and other current assets

666

489

(3,159)(1,389)(2,493)(900)

Prepaid expenses

8

1

(45)

(33)

(37)

(32)

Retirement plans

674

587

0

(2)

674

585

Other provisions

729

747

(82)

(265)

647

482

Liabilities

1,230

1,164

(505)

(453)

725

711

Deferred income

698

743

(21)

(18)

677

725

Net operating loss and tax credit carry forwards

817

654

–

–

817

654

Deferred tax assets/(liabilities) before netting

5,164

4,995

(5,375)(3,453)

(211)

1,542

Write down of deferred tax assets

(729)

(564)

–

–

(729)

(564)

Set-off of tax(1,711)(1,439)

1,711

1,439

–

–

Net Deferred tax assets/(liabilities)

2,724

2,992

(3,664)(2,014)

(940)

978

Thereof less than one year

1,237

1,115

(955)

(664)

282

451

Thereof more than one year

1,487

1,877

(2,709)(1,350)(1,222)

527

The increase in deferred tax liabilities in 2003 on receivables andother current assets is mainly related to the variation of the fairvaluation of the financial instruments according to IAS 39.
The amount of the Group’s deferred tax assets’ allowances isbased upon management’s estimate of the level of deferred tax
assets that will be realized in the future. In future periods,
depending upon the Group’s financial results, management’s
estimate of the amount of the deferred tax assets considered
realizable may change, and hence the write down of deferred
tax assets may increase or decrease.

EADS 2003 Notes to the Consolidated Statements of Income 47

BOOK2-790-48

29 MARCH 2004

Deferred taxes on Net Operating Losses and Tax Credit
carry forwards:in €mFranceGermany

Spain

UK

Other
countries

December31, 2003

December31, 2002

Net Operating Losses (NOL)

422

753

30

661

108

1.974

1.659

Capital losses

18

18

24

Trade tax loss carry forwards

706

706

524

5

131

87

45

817

654

Write downs

(357)

(282)

Deferred tax assets on NOL’s and tax credit carry forwards

460

372

in €m

2003

2002

Net deferred tax asset beginning of the year

978

3.482

Deferred tax income (expense) in income statement

138

(255)

Deferred tax recognised directly in equity(1.762)(1.872)Others

(294)

(377)

Net deferred tax (liability)/asset at year end

(940)

978

2003

2002

5

8

Cash flow hedges(2,810)(1,051)

Total(2,805)(1,043)

Tax credit carry forwards
Tax effect

126
153

285

136

198

NOL’s, capital losses and trade tax loss carry forwards areindefinite in France, Germany and in Great Britain. In Spain NOL’s
and tax credit carry forwards expire after 15 years. The first trancheof tax credit carry forwards (11 M €) will expire in 2014.
Roll forward of deferred taxes:

In the above table in the line “Others” mainly represents foreignexchange differences.
The deferred tax recognised directly in equity is as follows:in €mAvailable-for-sale investments

48 EADS 2003 Notes to the Consolidated Statements of Income

BOOK2-790-49

29 MARCH 2004

Notes to the Consolidated Balance Sheets

11. Intangible Assets
Intangible assets principally represent goodwill. Schedules
detailing gross values, accumulated depreciation and net valuesof intangible assets are as follows:
Cost
in €m

Balance atJanuary
1, 2003

Exchangedifferences

Additions

Changes in
consolidation scope

Reclassification

Disposals

Balance at
December31, 2003

Goodwill

12,339

(15)

334

52

–

–

12,710

470

(11)

199

2

–

(10)

650

Total

12,809

(26)

533

54

–

(10)

13,360

Amortization

Balance atJanuary
1, 2003

Exchangedifferences

Additions

Changes in
consolidation scope

Reclassification

Disposals

Balance at
December31, 2003(2,753)

3

(567)

(21)

–

–

(3,338)

(267)

7

(74)

(2)

–

8

(328)

Total

(3,020)

10

(641)

(23)

–

8

(3,666)

Net book value

Balance atJanuary
1, 2003

Exchangedifferences

Additions

Changes in
consolidation scope

Reclassification

Disposals

Balance at
December31, 2003

9,586

(12)

(233)

31

–

–

9,372

203

(4)

125

–

–

(2)

322

9,789

(16)

(108)

31

–

(2)

9,694

Other intangible assets

in M €

Goodwill
Other intangible assets

in €mGoodwill
Other intangible assets
Total

Goodwill mainly increased in 2003 due to acquisition of EADS
Telecom France (+131 M €), Astrium (+94 M €), Dornier (+62M €), ASL Lemwerder (+38 M €) and Gesellschaft für
Flugzieldarstellung (+7 M €).
Goodwill Impairment Tests
Similar to previous periods, EADS performed impairment
tests on level of Cash Generating Units. Based on current
forecasts and projections of pre-tax cash-flows the value in
use of Cash Generating Units was determined applying
a pre-tax discount rate of 12.5%. The recoverable amounts
have exceeded the carrying amounts of the Cash Generating
Units under review, indicating no goodwill impairment for2003.
In 2002 an impairment charge of 350 M € was set up for the
Cash Generating Units Satellite and Communication and Casa
Space Business, furthermore in 2001, impairment tests were
performed for goodwill for the Space and Defence & Security
Systems divisions, which resulted in impairments charges for
Astrium of 210 M €, for Systems & Defence Electronics(S&DE) of 240 M €, for LFK of 170 M € and for Matra
Datavision of 170 M €.
Development Costs
In 2003, with the application of IAS 38,”Intangible Assets”, theGroup assessed whether product related development costs
qualify for capitalisation as internally generated intangible assets.
Current and previous research and development programs havebeen reviewed regarding potential expenses in the development
phase of such programs that meet the recognition criteria. EADS
considers that due to the complexity of its products (especiallycivil aircraft like A 380), processes carried out in the various
research and development phases are of such interaction that aproper distinction between the research phase from thedevelopment phase can not be made up to only a very late stageof the program. In addition, for past programs, retroactive proper
allocation of costs as required by IAS 38 has not been possible
because there was no system in place to gather the necessary
information. As a consequence, EADS capitalised 4 M €incurred in 2003 as internally generated intangible asset.
Previous financial statements had not been impacted.

EADS 2003 Notes to the Consolidated Balance Sheets 49

BOOK2-790-50

29 MARCH 2004

12. Property, Plant and Equipment
Schedules detailing gross values, accumulated depreciation andnet values of property, plant and equipment show the following:
Cost

Balance atJanuary
1, 2003

Exchangedifferences

Additions

Changes in
consolidation scope

Reclassification

Disposals

Balance at
December31, 2003

Land, leasehold improvements and buildings including
buildings on land owned by others

4,222

(47)

231

38

461

(36)

4,869

Technical equipment and machinery

5,791

(269)

462

56

285

(184)

6,141

Other equipment, factory and office equipment

5,864

(310)

550

83

125

(98)

6,214

Advance payments relating to plant and equipment aswell as construction in progress

1,687

(51)

1,509

5

(810)

(27)

2,313

Total

17,564

(677)

2,752

182

61

(345)

19,537

Depreciation

Balance atJanuary
1, 2003

Exchangedifferences

Additions

Changes in
consolidation scope

Reclassification

Disposals

Balance at
December31, 2003

Land, leasehold improvements and buildings including
buildings on land owned by others(1,472)

19

(204)

(20)

(82)

20

(1,739)Technical equipment and machinery(3,352)

190

(594)

(36)

103

163

(3,526)

Other equipment, factory and office equipment(2,179)

187

(749)

(64)

(65)

87

(2,783)

(52)

–

–

–

–

11

(41)

Total

(7,055)396(1,547)

(120)

(44)

281

(8,089)Net book value

Balance atJanuary
1, 2003

Exchangedifferences

Additions

Changes in
consolidation scope

Reclassification

Disposals

Balance at
December31, 2003

Land, leasehold improvements and buildings including
buildings on land owned by others

2,750

(28)

27

18

379

(16)

3,130

Technical equipment and machinery

2,439

(79)

(132)

20

388

(21)

2,615

Other equipment, factory and office equipment

3,685

(123)

(199)

19

60

(11)

3,431

Advance payments relating to plant and equipment aswell as construction in progress

1,635

(51)

1,509

5

(810)

(16)

2,272

10,509

(281)

1,205

62

17

(64)

11,448in €m

in M €

Advance payments relating to plant and equipment aswell as construction in progress

in €m

Total

The item “Other equipment, factory and office equipment”
includes aircraft which (i) have been leased out tocustomers and are classified as operating lease with a net
book value of 1,266 M € and 1,336 M € at December 31,
2003 and 2002, and (ii) have been sold under terms that
include asset value guarantee commitments with thepresent value of the guarantee being more than 10% of theaircraft’s sales price (assumed to be the fair value) and thus
accounted for as operating lease with a net book value of
1,505 M € and 1,709 M € at December 31, 2003 and2002. Upon the initial sale of these aircraft to the customer,
their total cost previously recognized in inventory istransferred to “Other equipment, factory and office
50 EADS 2003 Notes to the Consolidated Balance Sheets

equipment” and depreciated over its estimated useful
economic life, with the proceeds received from thecustomer being recorded as deferred income (see Note 22,“Deferred Income”).
The net book value of aircraft under operating lease amounts to
2,771 M € and 3,045 M € as of December 31, 2003 and 2002,
respectively (related accumulated depreciation is 1,702 M € and1,445 M € including accumulated impairment of 590 M € and459 M €, respectively). Depreciation expense for 2003
amounts to 439 M € (2002: 263 M €). See Note 25,“Commitments and Contingencies” for details on sales financing
transactions.

BOOK2-790-51

29 MARCH 2004

Non-cancellable future operating lease payments (notdiscounted) due from customers to be included in revenues,
at December 31, 2003 are as follows:in €m

Not later than 2004

184

Later than 2004 and not later than 2008

280

Later than 2008

101

Total

565

In 2002, the Group reclassified five Beluga aircraft from “Other
equipment, factory and office equipment” to “Technicalequipment and machinery”. These Beluga aircraft are used for
production purposes. This was partly offset by areclassification of certain leased Airbus aircraft from financelease to operating lease, following a re-negotiation of terms,
which are now part of “Other equipment, factory and officeequipment”.
At December 31, 2003 and 2002, Property, plantand equipment include buildings, technical equipment andother equipment accounted for in fixed assets under financelease agreements for net amounts of 122 M € and 146 M €,net of accumulated depreciation of 317 M € and 296 M €.
The related depreciation expense for 2003 was 22 M € (2002:
23 M €).
For investment property recorded under property, plant andequipment refer to Note 29.
13. Investments in Associates, Other Investments andLong-term Financial Assets
The following table sets forth the composition of investments inassociates, other investments and long-term financial assets:
December31, 2003

December31, 2002

1,640

1,333

Other investments

560

810

Other financial assets

in €m

Investments in associates

1,929

1,586

Thereof loans from aircraft financing

812

656

Thereof finance lease receivables from aircraft financing

898

749

Others

219

181

4,129

3,729

Total
Investments in associates are accounted for using the equity
method. As of December 31, 2003 and 2002, investments inassociates contain EADS’ interest in Dassault Aviation (46.03%
at December 31, 2003, 45.96 % at December 31, 2002) of
1,633 M € and 1,333 M €. Since for the second half-year 2003
no specific financial information is available yet from Dassault
Aviation, the net income of the second half-year 2002
according to IFRS has been used as the best estimate to report
the current second half year’s net income from this equity
investment. The current year’s equity investment from Dassault
Aviation also includes a catch up of the prior year equity
according to IFRS in the amount of 146 M € of which 77 M €relate to income from investments (see Note 9, “Financial
Result”). A list of major investments in associates and the
proportion of ownership is included in Appendix “Information
on principal investments”.

Other investments comprise EADS’ investment in various nonconsolidated entities, the most significant being at December
31, 2003, investments in Embraer of 86 M € (2002: 75 M €)and in Patria of 42 M € (2002: 42 M €).
Other financial assets encompass mainly the Group’s sales
finance activities. Loans from aircraft financing are provided tocustomers to finance the sale of aircraft. These loans are longterm and normally have a maturity which is linked to the use of
the aircraft by the customer. Finance lease receivables and loans
from aircraft financing are part of the aircraft finance risk
exposure, presented net of accumulated impairments of 431 M €and 444 M € at December 31, 2003 and 2002, respectively.
These sales financing transactions are generally secured by theunderlying aircraft used as collateral. (See Note 25, “Commitments
and contingencies” for details on sales financing transactions).

EADS 2003 Notes to the Consolidated Balance Sheets 51

BOOK2-790-52

29 MARCH 2004

The components of investment in finance leases are as follows:
December31, 2003

December31, 2002

Minimum lease payments receivables

1,262

1,114

Unearned finance income

(201)

(217)

Allowance

(163)

(148)

Total

898

749

in €m

Future minimum lease payments and investments in financeleases to be received are as follows (not discounted):

15. Trade Receivables
Trade receivables at December 31, 2003 and 2002 consist of thefollowing:in €mNot later than 2004

The decrease in work in progress of 390 M € was caused by areduction in Airbus and Eurocopter, partly compensated by anincrease in Defence & Security Systems and Space. Finishedgoods, parts and products held for resale increased by 279 M €,mainly resulting from Airbus and Aeronautics. Advancepayments made increased by 457 M €, mainly caused by
Defence & Security Systems and Airbus. Eliminating a currency
effect of 948 M € in the advanced payments received, there isan increase of 800 M € mainly resulting from Airbus, Defence &Security Systems and Space.

98

December31, 2003

December31, 2002

Later than 2004 and not later than 2008

369

in M €

Later than 2008

795

Receivables from sales of goods and services

4,335

4,472

Allowance for doubtful accounts

(334)

(358)

Total

4,001

4,114

Total

1,262

Other financial assets include 219 M € and 181 M € of otherloans as of December 31, 2003 and 2002, e.g. loans to employees.

Trade receivables are classified as current assets. As of December
31, 2003 and 2002, respectively, 223 M € and 275 M € of tradereceivables are not expected to be collected within one year.

Defeased bank deposits of 1,131 M € and 1,146 M € as ofDecember 31, 2003 and 2002, respectively have been offset
against financial liabilities. Prior year’s figure has been adjusted
accordingly (see Note 2: “Summary of Significant Accounting
Policies”).

In application of the percentage of completion method, as ofDecember 31, 2003 an amount of 972 M € (in 2002: 593 M €)for construction contracts is included in the trade receivables.

14. Inventories
Inventories at December 31, 2003 and 2002 consist of thefollowing:

16. Other Receivables and Other Assets
Other receivables and other assets at December 31, 2003 and2002 consist of the following:

December31, 2003

December31, 2002

December31, 2003

December31, 2002

938

853

Receivables from affiliated companies

171

247

Work in progress

8,088

8,478

Receivables from related companies

479

357

Finished goods, parts and products held
for resale

1,804

1,525

Positive fair values of derivative financial
instruments

7,964

2,819

Advance payments to suppliers

1,799

1,342

12,62912,198

Capitalized settlement payments toGerman Goverment

315

355

Less: Advance payments received(9,350)(9,498)

Income tax claims

332

389

Total

3,279

2,700

Others

1,019

1,089

Total

10,280

5,256

in €m

Raw materials and manufacturing supplies

52 EADS 2003 Notes to the Consolidated Balance Sheetsin €mBOOK2-790-53

29 MARCH 2004

The capitalized settlement payments to the German
Government is attributable to refundable advances which areamortized through the income statement at the delivery pace ofthe corresponding aircraft.
The residual amount in other receivables and other assets as ofDecember 31, 2003 and 2002 (1,019 M € and 1,089 M €,respectively) includes Value Added Tax claims of 386 M € and
460 M € and positive market value of embedded derivatives
within purchase contracts amounting to 96 M € and 26 M €,respectively.
Other receivables and other assets, which are expected to becollected within one year, amount to 4,664 M € as ofDecember 31, 2003 (2,243 M € as of December 31, 2002) andare classified as current assets.
17. Securities
The Group’s security portfolio amounts to 468 M € and 799 M €as of December 31, 2003 and 2002, respectively. It includes
only debt securities classified as “Available-for-Sale”. To conformwith the consolidated cash-flow statement, as of December 31,
2003 and in line with IAS 7, “Cash Flow Statements”, EADS
changed its presentation regarding cash and cash equivalents inthe consolidated balance sheet. Short-term securities that arereadily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value, which had
previously been disclosed as part of the line item “Securities” inthe consolidated balance sheet, have been reclassified to line
item “Cash and cash equivalents” amounting to 5,555 M € and
3,698 M € as of December 31, 2003 and 2002, respectively.
18. Shareholders’ Equity
The change of shareholders’ equity is provided in theConsolidated Statements of Changes in Shareholders’ Equity.
The issued share capital of the Group consists of 812,885,182
and 811,198,500 shares as of December 31, 2003 and 2002
respectively. EADS’ shares are exclusively ordinary shares with apar value of 1.00 €. The authorized share capital consists of
3,000,000,000 shares. In connection with the 2003 Employee
Stock Ownership Plan (see Note 27, “Stock-based
Compensation“), EADS issued 1,686,682 shares (in 2002:
2,022,939), representing a nominal value of 1,686,682 € (in2002: 2,022,939 €).
Authorized by the Shareholders’ General Meeting of EADS heldon May 17, 2002, the Board of Directors resolved on August 9
and October 11, 2002 to direct the Chief Executive Officers to
implement a plan for the Company to repurchase up to a
maximum of 10,100,000 of its own shares, representing 1.25%of the issued share capital of the Company. On July 12 andSeptember 18, 2001, the Group’s Board of Directors decided tolaunch a share buy back plan as authorized by the general
meeting of shareholders on May 10, 2001. As a result, theBoard of Directors directed the Chief Executive Officers to set
up a buy back plan for 10,500,000 shares. In aggregate, theCompany is entitled to repurchase up to 20.6 million of EADS
shares, representing 2.54% of the Company’s share capital.
The Shareholders’ General Meeting of EADS held on May 6,
2003, renewed the authorization given to the Board of
Directors to repurchase shares of the Company within the limit
of 5% of the Company’s issued share capital. As of October 10,
2003, the Group’s Board of Directors decided to set up andimplement plans for the repurchase of up to 2,027,996 shareswithin the limits approved by the Shareholders’ General
Meeting of EADS.
As a result, EADS purchased in 2003 1,686,682 (in 2002:
10,241,252) of its own shares, resulting in an amount of
800,957,248 (in 2002: 800,957,248) shares outstanding at
December 31, 2003. Prior to 2002, the Group had not
repurchased any shares.
On May 6, 2003, the Shareholders’ General Meeting also decided
to pay a cash distribution related to the fiscal year 2002 for a grossamount of 0.30 € per share, which was paid on June 12, 2003.
Capital stock comprises the nominal amount of shares
outstanding. The addition to capital stock represents thecontribution of 1,686,682 € (in 2002: 2,022,939 €) by employees
under the 2003 Employee Stock Ownership Plan. Reservescontain capital reserves, retained earnings as well as the net result
for the period. Accumulated other comprehensive income
consists of all amounts recognized directly in equity resulting fromchanges in fair value of financial instruments that are classified asavailable-for-sale or that form part of hedging relationships ineffective cash-flow hedges as well as from currency translation
adjustments of foreign entities. Treasury shares represent theamount paid for own shares held in treasury.
19. Provisions
Provisions are comprised of the following:
December31, 2003

December31, 2002

3,718

3,357

54

35

3,772

3,392

100

161

Other provisions (see Note 19 d)

4,854

4,695

Total

8,726

8,248

in €m

Provision for retirement plans(see Note 19 b)
Provision for deferred compensation(see Note 19 a)
Subtotal
Financial instruments (see Note 19 c)

EADS 2003 Notes to the Consolidated Balance Sheets 53

BOOK2-790-54

29 MARCH 2004

As of December 31, 2003 and 2002, respectively, 3,533 M €and 3,209 M € of retirement plans and similar obligations, 1 M €and 11 M € of financial instruments as well as 2,844 M € and
3,194 M € of other provisions mature after more than one year.
a) Provisions for Deferred Compensation
This amount represents obligations that arise if employees electto convert all or part of their variable remuneration or bonus into
an equivalent commitment for deferred compensation. Unlike
retirement plans, deferred compensation is paid out in a lumpsum upon the employee’s retirement.
b) Provisions for Retirement Plans
When Group employees retire, they receive indemnities
as stipulated in retirement agreements, in accordance withregulations and practices of the countries in which theGroup operates. French law stipulates that employees arepaid retirement indemnities on the basis of the length ofservice. In Germany, retirement indemnities are principally
paid on the basis of salaries and seniority. Certain pension
plans are based on salary earned in the last year or on anaverage of the last three years of employment while others
are fixed plans depending on ranking (both salary level andposition).
Actuarial assessments are regularly made to determine theamount of the Group’s commitments with regard to retirement
indemnities. This assessment includes an assumption
concerning changes in salaries, retirement ages and long-term
interest rates. It comprises all the expenses the Group will be
required to pay to meet these commitments.
The weighted-average assumptions used in calculating theactuarial values of the retirement plans are as follows:
December31, 2003

in %December31, 2002

December31, 2001

5.0-5.25 5.0-5.75

5.0-6.0

Assumptions
Discount rate
Rate of compensation increase
Inflation rate

Actuarial gains and losses of the current year are not recognized in
profit/loss but added to the balance of unrecognized net actuarial
gain or loss. If the accumulated amount of unrecognized net gains
and losses as of the beginning of the year exceeds the greater of 10 %of the present value of the defined benefit obligation and 10 % of thefair value of plan assets of each respective legal entity, the excess
in €m

3.0

3.0

3.0-3.5

1.25-2.0

1.75

2.0

is amortized through profit and loss on a straight line basis over the
average remaining working lives of the employees participating ineach plan.
The amount recorded as provision on the balance sheet can bederived as follows:
2003

2002

2001

4,287

3,880

3,512

Service cost

122

124

84

Interest cost

241

229

220

Plan amendments

14

0

(8)

Actuarial losses

9

201

191

Acquisitions and other

237

8

12

Benefits paid

(175)

(155)

(131)

4,735

4,287

3,880

Change in defined benefit obligations
Defined benefit obligations at beginning of year

Defined benefit obligations at end of year

54 EADS 2003 Notes to the Consolidated Balance Sheets

BOOK2-790-55

29 MARCH 2004

in M €

2003

2002

2001

532

571

682

Actual return on plan assets

27

(35)

(70)

Contributions

16

42

1

Acquisitions and other

92

0

0

Benefits paid

(48)

(46)

(42)

619

532

571

December31, 2003

December31, 2002

December31, 2001

Funded status(1)

4,116

3,755

3,309

Unrecognized actuarial net losses

(384)

(398)

(158)

Unrecognized past service cost

(14)

0

0

3,718

3,357

3,151

Change in plan assets
Fair value of plan assets at beginning of year

Fair value of plan assets at end of yearin €mNet amount recognized as provision(1)

Difference between the defined benefit obligations and the fair value of plan assets at the end of the year.

The defined benefit obligation at end of the year is the present
value, without deducting any plan assets, of expected future
payments required to settle the obligation resulting from
employee service in the current and prior periods. Actuarial
losses of 384 M € at December 31, 2003 (in 2002 398 M €),result mainly from the decrease of the discount rate for pension
obligations in Germany from 5.75% to 5.25%. The increase of
the defined benefit obligation and plan assets based on“acquisitions and others” is mainly due to the purchase ofadditional 25% shares in Astrium.

choose to transfer their benefits, amounts to 117 M GBP. Plan
assets are recorded at 65 M GBP resulting in a net liability of
52 M GBP which covers the maximum risk associated with thecreation of the new plan. All amounts are translated into Euro
using the EUR/GBP conversion rate as of December 31, 2003 (1Euro = 0,7048 GBP). In connection with the purchase of theremaining 25% of Astrium from BAE, the liability of the UK
pension plan is accounted for as a purchase price consideration,
thereby leading to the capitalization of additional goodwill in theamount of 74 M € (52 GBP).

The fair value of plan assets at end of the year comprises assets
held by long-term employee benefit funds that exist solely to
pay or fund employee benefits. Plan assets are not entirely
exposed to fluctuations of stock markets, as only the smaller
portion of plan assets is invested in such instruments.

The net amount of 3,718 M € (2002: 3,357 M €) recognizedas provision represents the amount recorded as provision on
the balance sheet. The provision contains the funded status,
adjusted by actuarial net gains/losses which do not have to berecognized because they do not meet the recognition criteria.
Net actuarial gains and losses include both actuarial
gains/losses on the defined benefit obligation and thedifference between the actual and expected return on plan
assets.

On November 1, 2003 EADS has established a new pension
scheme for Astrium UK. The defined benefit obligation of the
new plan, calculated under the assumption that all employees

EADS 2003 Notes to the Consolidated Balance Sheets 55

BOOK2-790-56

29 MARCH 2004

The components of the net periodic pension cost, included in“Income from operating activities”, are as follows:
in €m

2003

2002

2001

Service cost

122

124

84

Interest cost

241

229

220

Expected return on plan assets

(33)

(42)

(47)

Net actuarial loss

29

8

0

Net periodic pension cost

359

319

257

The following table sets forth the development of the provision
for pension obligations:
in €m

2003

2002

3,357

3,151

Net periodic pension cost

359

319

Contributions

(16)

(16)

Consumption (benefits paid)

(127)

(109)

Acquisitions and other

145

12

3,718

3,357

Used

Released

Balance at
December31, 2003

Change in provision for pension obligations in 2003
Provision for pension obligations at beginning of year

Provision for pension obligations at end of yearc) Financial Instruments
The provision for financial instruments amounts to 100 M € as ofDecember 31, 2003 (161 M € as of December 31, 2002) anddepicts the negative fair market value mainly of interest rate swapsof 82 M € whereas prior year’s provisions consisted of negative
fair market values of foreign currency deriative instruments.
d) Other Provisions
Movements in provisions during the year were as follows:
Reclassification/
Change inconsolidated
Additionsgroup

Balance atJanuary
1, 2003

Exchangedifferences

Aircraft financial risks

1,215

(222)

286

(1)

(145)

(112)

1,021

Outstanding costs

802

(1)

391

25

(260)

(74)

883

Contract losses

433

(2)

107

28

(102)

(25)

439

Tax provisions

255

0

267

4

(181)

(6)

339

Warranties

180

(6)

52

3

(46)

(23)

160

Litigations and claims

175

(13)

108

0

(6)

(44)

220

Personnel charges

322

0

158

7

(112)

(10)

365

Restructuring measures

300

(1)

304

16

(134)

(40)

445

Obligation from services and maintenance agreements

252

(40)

61

7

(57)

(34)

189

Other risks and charges

761

(17)

394

(78)

(164)

(103)

793

4,695

(302)

2,128

11

(1,207)

(471)

4,854

in €m

Total
56 EADS 2003 Notes to the Consolidated Balance Sheets

BOOK2-790-57

29 MARCH 2004

The provision for aircraft financial risks fully covers, in line with
the Group’s policy for sales financing risk, the net exposure toaircraft financing of 583 M € (689 M € at December 31, 2002)
and asset value risks of 438 M € (526 M € at December 31,2002) related to Airbus and ATR (see Note 25 “Commitments
and Contingencies”).

20. Financial Liabilities
EADS raised 1.5 bn € through two Eurobond issues under its
EMTN (Euro Medium Term Note) programme. The first issue of
1 bn € carries a coupon of 4.625% which was swapped into
variable rate of 3 M-Euribor +1.02%. The second issue of 0.5 bn€ carries a coupon of 5.5%.
December31, 2003

December31, 2002

Bonds

21

209

Liabilities to financial institutions

314

256

Liabilities to affiliated companies

90

166

Loans

84

80

Liabilities from finance leases

82

100

Others387

374

Short-term financial liabilities (due within one year)

978

1,185

Bonds
thereof due in more than five years: 1,598 (December 31, 2002: 0)

1,640

44

Liabilities to financial institutions
thereof due in more than five years: 570 (December 31, 2002: 810)

1,075

1,313

6

0

Loans
thereof due in more than five years: 541 (December 31, 2002: 667)

799

968

Liabilities from finance leases
thereof due in more than five years: 47 (December 31, 2002: 150)

269

320

Long-term financial liabilities

3,789

2,645

Total

4,767

3,830

in €m

Liabilities to affiliated companies
thereof due in more than five years: 3 (December 31, 2002: 0)

The effect of foreign exchange rate changes on financial liabilities
amounts to –433 M €, mainly caused by the weakening of the
US Dollar in 2003.

The aggregate amounts of financial liabilities maturing during
the next five years and thereafter are as follows:

Included in “Others” are financial liabilities against joint venture
partners.

in €mFinancialliabilities

2004

978

2005

238

2006

392

2007

156

2008

244

Non recourse Airbus financial liabilities amount to 679 M € (749M € in 2002).
Defeased bank deposits for aircraft financing of 1,131 M € and
1,146 M € of December 31, 2003 and 2002 respectively havebeen offset against financial liabilities. Prior year’s figure has
been adjusted accordingly (see Note 2: “Summary of Significant
Accounting Policies”).

Thereafter

2,759

Total

4,767

An amount of 236 M € of refundable advances has been
restructured from a risk sharing bank loan to a normal bank loan
and was thus reclassified from other liabilities.

EADS 2003 Notes to the Consolidated Balance Sheets 57

BOOK2-790-58

29 MARCH 2004

21. Trade and Other Liabilities
December31, 2003

December31, 2002

Trade liabilities

5,117

5,070

Other liabilities

11,318

10,246

Thereof customer advance payments

3,807

3,578

Thereof European Governments
refundable advances

4,851

4,265

Thereof tax liabilities including wage tax

833

623

Thereof liabilities to affiliated companies

50

80

Thereof liabilities to related companies

31

85

1,746

1,615

16,435

15,316in €mOthersTotal

Eliminating the currency effect, customer advance payments
increased by 570 M €. The increase in European
Governments refundable advances relates mostly to the A380program.

58 EADS 2003 Notes to the Consolidated Balance Sheets

An amount of 236 M € has been restructured from a risk
sharing bank loan to a normal bank loan and was thus
reclassified to financial liabilities.
Maturities – Out of trade liabilities as of December 31, 2003,
46 M € (33 M € as of December 31, 2002) mature after morethan one year. Included in “Other liabilities” are 4,135 M €(3,982 M € as of December 31, 2002) due within one year and
4,264 M € (3,715 M € as of December 31, 2002) maturing
after more than five years.
22. Deferred Income
The main part of deferred income is related to sales of Airbus
and ATR aircraft that include asset value guarantee
commitments and that are accounted for as operating leases(2,009 M € and 2,273 M € as of December 31, 2003 and 2002,
respectively).

BOOK2-790-59

29 MARCH 2004

Notes to the Consolidated Statements of Cash-Flows

23. Consolidated Cash-Flow Statement
As of December 31, 2003, EADS’ cash position (stated as cash
and cash equivalents in the consolidated statement of cashflows) includes 273 M € (227 M €, 386 M € as of December
31, 2002 and 2001) representing the amount Airbus has
deposited at BAES. Additionally included are 613 M €, 596 M €and 414 M € as of December 31, 2003, 2002 and 2001,
respectively, which represent EADS’ share in MBDA’s cash andcash equivalents, deposited at BAES and Finmeccanica and areavailable upon demand.
For the December 31, 2002 Consolidated Balance Sheet’s andthe 2002 Consolidated Statement of Cash-Flow’s presentation,
EADS considered as part of the cash position (being cash andcash equivalents and certain qualifying securities), inter alia, anamount of 160 M € related to Astrium. Due to the
proportionate consolidation method for Astrium, this amountcorresponds to cash advances made to Astrium for which EADS
could claim the reimbursement from BAES, in accordance with
the Astrium shareholders’ agreement.
in €m

The following charts provide details on acquisitions (resulting in
additional assets and liabilities acquired) and disposals ofsubsidiaries and business units:
December31, 2003

in €mTotal selling (purchase) price, net

32

thereof received by cash and cash equivalents

32

Cash and cash equivalents included in the(disposed)/acquired subsidiaries or otherbusiness units, net(3)

Cash Flow from net disposals, net of cash

29

Included in the aggregate net selling (purchase) price received
in 2003 of 32 M € is the acquisition of shares in ASL Lemwerderand of 25 % of Astrium for no net cash consideration and theselling price received for the disposals mainly of Celerg (13 M €)and RACOM (19 M €).
December31, 2003

Property, plant and equipment

62

Financial assets

5

Inventories (net)115

Trade receivables

126

Cash and cash equivalent

3

Assets311

Provisions(235)

Trade liabilities(143)

Financial liabilities(109)

Other assets and liabilities(14)

Liabilities(501)

Fair value of net assets(190)

Goodwill arising on acquisitions

164

Less own cash and cash equivalent of (sold)/purchased subsidiaries(3)

Cash Flow from net disposals, net of cash

(29)

Besides the above detailed acquisitions and disposals, there
have been additional cash investments in the following alreadyfully consolidated subsidiaries; Dornier (62 M €), Aeronautica
Industrial (12 M €), EADS Telecom France (10 M €) and
Gesellschaft für Flugzieldarstellung (7 M €).

statement includes the result of associated companies (246 M €,134 M € and 22 M € in 2003, 2002 and 2001, respectively).
The effect of foreign exchange rate changes on cash and cash
equivalents amounts to (–83 M €), mainly caused by the
weakening of the US Dollar in 2003.

The line ”Results on disposal of fixed assets/businesses and resultof associates (equity method)” in the consolidated cash flow

EADS 2003 Notes to the Consolidated Statements of Cash-Flows 59

BOOK2-790-60

29 MARCH 2004

Other Notes

24. Litigation and Claims
Various legal actions, governmental investigations, proceedings
and other claims are pending or may be instituted or asserted in
the future against the Group. Litigation is subject to many
uncertainties, and the outcome of individual matters is notpredictable with assurance. EADS believes that it has madeadequate provisions to cover current or contemplated litigation
risks. It is reasonably possible that the final resolution of some ofthese matters may require the Group to make expenditures, inexcess of established reserves, over an extended period of timeand in a range of amounts that cannot be reasonably estimated.
The term “reasonably possible” is used herein to mean that the
chance of a future transaction or event occurring is more thanremote but less than likely. Although the final resolution of any
such matters could have an effect on the Group’s consolidated
operating results for the particular reporting period in which an
adjustment of the estimated reserve would be recorded, theGroup believes that any such potential adjustment should notmaterially affect its consolidated financial statements.
EADS is not aware of any other exceptional items or pending or
threatened legal or arbitration proceedings that may have, or
may have had in a recent period, a material adverse effect on its
financial position, its activities, its results or its group, except as
stated below. EADS (more specifically, DADC and DornierGmbH) is and was a party to several disputes and arbitration
proceedings with the Dornier family shareholders, minority
shareholders of Dornier GmbH. These disputes concerned thevalidity of various resolutions of shareholders’ meetings of
Dornier GmbH primarily relating to contributions of Dornier
activities and assets. These contributions were subject to two
arbitration proceedings, which were successfully completed
recently with the decisions being made in favour of
EADS/Dornier GmbH. Also, the validity of some of thesecontributions was confirmed by the regional court of appeals in
Stuttgart. However, other proceedings, in particular regarding
the contribution of shares in Dornier Luftfahrt GmbH by Dornier
to Fairchild Dornier Luftfahrt Beteiligungs GmbH, are still
pending. EADS and Dornier GmbH expect that the remaining
proceedings will be decided in their favour, as was the case withthe recent decisions.
At the end of 2002, a request for arbitration was filed against a
subsidiary of EADS involved in the supply of equipments undera commercial contract that was completed several years ago.
EADS considers to have strong defences, both procedural andof substance, to oppose the claim. At this early stage of theprocedure the financial risk cannot be assessed. In June 2003,
EADS was notified that the arbitration procedure wassuspended at the request of the claimant.

60 EADS 2003 Other Notes

EADS (more specifically Euromissile GIE) has been successful atthe end of 2002 in an arbitration proceeding initiated by Thales
and has been awarded damages on the basis of its counterclaim
for which the principal amounts to Euro 108 million. Thales
failed through summary proceedings to stop the immediate
enforceability of the arbitration award and the sums were paid
to Euromissile on February 17, 2003. Thales has filed an appeal
for annulment of the arbitration decision. Briefs are being
exchanged between the parties and a decision of the Paris
Court of Appeal may be expected by the end of the year 2004.
Therefore, the payment was neutralised in 2003 in provisions forlitigations and claims.
25. Commitments and Contingencies
Commitments and Contingent Liabilities
Sales Financing – In relation to its Airbus and ATR activities,
EADS is committing itself in sales financing transactions withselected customers. Sales financing transactions are generally
collateralized by the underlying aircraft. Additionally, Airbus and
ATR benefit from protective covenants and from security
packages tailored according to the perceived risk and the legal
environment. EADS believes that the estimated fair value of theaircraft securing such commitments will substantially offset any
potential losses from the commitments. Any remaining
difference between the amount of financing commitments given
and the collateral value of the aircraft financed is provided for as
an impairment to the relating asset, if assignable, or as aprovision for aircraft financial risk. The basis for this write-down
is a risk-pricing-model, which is applied at every closing toclosely monitor the remaining value of the aircraft.
Depending on which party assumes the risks and rewards ofownership of a financed aircraft, the assets relating to sales
financing are accounted for on the balance sheet either as (i) an
operating lease (see Note 12, “Property, plant and equipment”)or (ii) a loan from aircraft financing or (iii) a finance leasereceivable (see Note 13, “Investments in associates, otherinvestments and long-term financial assets”) or (iv) in inventory.
As of December 31, 2003, related accumulated impairment
amounts to 590 M € for operating lease, 431 M € for loans andfinance lease and 27 M € for inventories. 38 M € are recorded
as part of provisions for aircraft financial risk (see Note 19d,
“Other provisions”).
Certain sales financing transactions include the sale and leaseback of the aircraft with a third party lessor under operatinglease. Unless the Group has sold down the relating operatinglease commitments to third parties, which assume liability forthe payments, it is exposed to future lease payments. Futurenominal operating lease payments that result from aircraft sales

BOOK2-790-61

29 MARCH 2004

financing transactions are recorded off balance sheet andare scheduled to be paid as follows:

Detail of provisions/accumulated impairments are as follows:

in €m

in €m

December31, 2003

December31, 2002

Not later than 2004

203

Accumulated impairment on operating leases

590

459

Later than 2004 and not later than 2008

861

Accumulated impairment on loans fromaircraft financing and finance leases

431

444

Accumulated impairment on inventories

27

0Provisions for aircraft financial risk
(on balance sheet)

38

72

Provisions for aircraft financial risk
(commitment off balance sheet)

545

617

Total provisions/accumulated
impairments for sales financing
exposure

1,631

1,592

Later than 2008

1,216

Total

2,280

Of which commitments where the transaction
has been sold to third parties(1,204)

Total aircraft lease commitments where
EADS bears the risk (not discounted)

1,076

Total aircraft lease commitments of 2,280 M € as of December
31, 2003, arise from aircraft head-leases and are typically backed
by corresponding sublease income from customers with anamount of 1,561 M €. A large part of these lease commitments(1,204 M € as of December 31, 2003) arises from transactions
that were sold down to third parties, which assume liability forthe payments. The nominal value of future aircraft lease commitments (after these sell downs) has decreased from 1,452 M €at December 31, 2002 to 1,076 M €, mainly due to theweakening of the US Dollar (–246 M €). EADS determines its
gross exposure to such operating leases as the present value ofthe related payment streams. The difference between gross
exposure and the estimated value of underlying aircraft used ascollateral, the net exposure, is provided for in full with an amountof 545 M € as of December 31, 2003, as part of the provision foraircraft financial risk (see Note 19d, “Other provisions”).
As of December 31, 2003 and 2002, the total consolidated
Commercial Aviation Sales Financing Exposure is as follows(Airbus 100% and ATR 50%):
December31, 2003

December31, 2002

4,225

4,191

Estimated fair value of collateral(aircraft)(2,594)(2,599)Net exposure (fully provided for)

1,631

1,592

in €m

Total gross exposure

Asset Value Guarantees – Certain sales contracts may include
the obligation of an asset value guarantee whereby Airbus or
ATR guarantee a portion of the value of an aircraft at a specificdate after its delivery. Management considers the financial risks
associated with such guarantees to be manageable. Threefactors contribute to this assessment: (i) the guarantee only
covers a tranche of the estimated future value of the aircraft,and its level is considered prudent in comparison to theestimated future value of each aircraft; (ii) the asset value
guarantee related exposure is diversified over a large number ofaircraft and customers; and (iii) the exercise dates ofoutstanding asset value guarantees are distributed through2015. If the present value of the guarantee given exeeds 10% of
the sales price of the aircraft, the sale of the underlying aircraft
is accounted for as an operating lease (see Note 12 “Property,
plant and equipment” and Note 22 “Deferred income”). In
addition, EADS is contingently liable in case asset value
guarantees with less than 10% are provided to customers as partof aircraft sales. Counter guarantees are negotiated with third
parties and reduce the risk to which the group is exposed. As of
December 31, 2003 the nominal value of asset value guarantees
provided to airlines, that do not exceed the 10% criteria, amountto 733 M €, excluding 408 M € where the risk is considered tobe remote. In many cases the risk is limited to a specific portionof the residual value of the aircraft. The present value of the risk
inherent to the given asset value guarantees where a settlement

EADS 2003 Other Notes 61

BOOK2-790-62

29 MARCH 2004

is being considered as probable is fully provided for andincluded in the total amount of provisions for asset value risks of
438 M € (see Note 19d: “Other provisions”). This provision
covers a potential expected shortfall between the estimatedvalue of the aircraft of the date upon which the guarantee canbe exercised and the value guaranteed on a transaction basis
taking counter guarantees into account.
Because exercise dates for asset value guarantees are on average inthe 10th year following aircraft delivery, asset value guarantees
issued in 2003 will generally not be exercisable prior to 2013, and,
therefore, an increase in near-term exposure is not expected.
Despite the underlying collateral, if Airbus should be unable tohonour its obligations under sales financing transactions andasset value guarantees, certain EADS and BAES groupcompanies retain joint and several liability for sales financing
exposure incurred by Airbus prior to January 1, 2001. EADS’
exposure to liabilities incurred by Airbus following January 1,
2001 is limited by its status as a shareholder in Airbus S.A.S.
With respect to ATR, each shareholder is jointly and severally
liable to third parties without limitation. Amongst theshareholders, the liability is limited to each partner’s
proportionate share.
While backstop commitments to provide financing related toorders on Airbus’ and ATR’s backlog are also given, suchcommitments are not considered to be part of gross exposure
until the financing is in place, which occurs when the aircraft isdelivered. This is due to the fact that (i) past experiencesuggests it is unlikely that all such proposed financings actually
will be implemented (although it is possible that customers notbenefiting from such commitments may nevertheless request
financing assistance ahead of aircraft delivery), (ii) until theaircraft is delivered, Airbus or ATR retain the asset and do notincur an unusual risk in relation thereto (other than thecorresponding work-in progress), and (iii) third parties may
participate in the financing. In order to mitigate Airbus and ATR
exposure to unacceptable credits, such commitments typicallycontain financial conditions which guaranteed parties mustsatisfy in order to benefit therefrom.
Pension Commitments – EADS has several common
investments with BAES, of which the most significant in terms of
employees are Airbus and MBDA. In respect of each investment,
for so long as BAES remains a shareholder, UK employees may
stay in the BAES pensions schemes, which currently qualify as
defined benefit plans. BAES has indicated a shortfall in post
retirement pension assets amounting to 2,099 M GBP whencompared with the respective liabilities which would have beenrecognised in BAES’ books had the U.K. accounting standard
FRS 17 already been implemented. As participants in the BAES
schemes, EADS investments are potentially affected by any
shortfall of BAES schemes. However, the agreements between
EADS and BAES have the effect of capping the contributions
that the investment has to make to the pension scheme for a
62 EADS 2003 Other Notes

certain period of time (e.g. until 2011 for Airbus). Any additional
contribution would be paid by BAES. EADS is therefore notexposed to increased contribution payments resulting from thepension underfunding during the period of the contribution
caps. At present, EADS has only limited information about how
the underfunding could impact the investments after the periodof contribution caps has expired. Consequently, EADS expenses
the contributions made to the pension scheme as if the plans
were defined contribution plans.
Other Commitments – Other commitments comprisecontractual guarantees and performance bonds to certain
customers as well as commitments for future capital
expenditures.
Future nominal operating lease payments (for EADS as a lessee)
for rental and lease agreements (not relating to aircraft sales
financing) amount to 940 M € as of December 31, 2003, andrelate mainly to procurement operations (e.g., facility leases, carrentals). Maturities are as follows:in €m

Not later than 2004

91

Later than 2004 and not later than 2008

288

Later than 2008

561

Total

940

26. Information about Financial Instrumentsa) Financial Risk Management
By the nature of the activities carried out, EADS is exposed to avariety of financial risks, especially foreign currency exchange raterisks and interest rate risks, as explained below. The management
and limitation of the foreign exchange currency risks at EADS is
generally carried out by a central treasury department at EADSHeadquarters under policies approved by the Board of Directors.
The identification, evaluation and hedging of the financial risks isin the responsibility of established treasury committees and theGroup’s Divisions and Business Units.
Market Risk
Currency Risk – EADS manages a long-term hedge portfoliowith a maturity of several years covering its net exposure to US
Dollar sales, mainly from the activities of Airbus. This hedge
portfolio covers the vast majority of the Group’s highly probabletransactions.
EADS’ revenues are mainly denominated in US Dollars, whereasa major portion of its costs is incurred in Euros and to a smaller
extent in GBP. Consequently, to the extent that EADS does notuse financial instruments to cover its net current and future
foreign currency exchange rate exposure, its profits would be
affected by changes in the Euro-US Dollar exchange rate. As theGroup intends to generate profits only from its operations andnot through speculation on foreign currency exchange rate

BOOK2-790-63

29 MARCH 2004

movements, EADS uses hedging strategies to manage andminimize the impact of exchange rate fluctuations on these
profits.
For financial reporting purposes, EADS designates a portion of
the underlying items as the hedged position to cover its net US
Dollar exposure, as appropriate. As hedging instruments,
EADS primarily uses foreign currency forwards and option
contracts.
EADS endeavours to hedge the majority of its exposure basedon firm commitments and forecasted transactions. For products
such as aircraft, EADS typically hedges forecasted sales in US
Dollar for the following year up to 2011. The hedged items aredefined as the first forecasted highly probable future cash
inflows for a given month based upon final payments atdelivery. The amount of the first flows is decided by a treasurycommittee and typically covers up to 100 % of the equivalent of
the net US Dollar exposure. For EADS, a forecasted transaction
is regarded as highly probable if the future delivery is includedin the internally audited order book or is very likely tomaterialize in view of contractual evidence. The coverage ratio
may be adjusted to take into account macroeconomic
movements affecting the spot and interest rates, as applicable.
For project related business EADS generally hedges 100% basedon specific flows arising out of firm and individual contracts.
Hedging is implemented on a individual project basis, i.e. a newcontract.
Interest Rate Risk – The Group uses an asset and liability
management approach with the objective to limit its interest raterisk. The Group undertakes to match the risk profile of its assets
with a corresponding liability structure. The net interest rate
exposure is managed through several types of instruments inorder to minimize risks and financial impacts. Therefore, theGroup uses interest rates derivatives for hedging purposes.
Hedging instruments that are specifically designated to debt
instruments have at the maximum the same nominal amounts aswell as the same maturity dates compared to the hedged item.
Regarding cash, EADS is only investing in short-term
instruments and/or instruments that are related to a floatinginterest index in order to further minimize any interest risk in its
cash and securities portfolio.

Liquidity Risk
The Group’s policy is to maintain sufficient cash and cash
equivalents at any time to meet its present and futurecommitments. This is safeguarded by the reported total amountof the Group’s cash and cash equivalents, which is further
supported by a substantial amount of unused committed credit
facilities (2.85 bn € as December 31, 2003 and a 700 M €credit line from the European Investment Bank. On a daily basis,
EADS invests any surplus cash in non-speculative highly liquid
financial instruments, such as certificates of deposits, overnight
deposits, commercial papers and other money market
instruments which are generally short term.
Credit Risk
EADS is exposed to credit risk to the extent of non-performanceby its counterparts (e.g., airlines) with regards to e.g. financial
instruments. However, the Group has policies in place to avoid
concentrations of credit risk and to ensure that credit risk islimited. Sales of products and services are made to customers
with an appropriate credit history. Cash transactions andderivative counterparts are limited to high credit quality financial
institutions. EADS has set up a credit limit system to actively
manage and limit its credit risk exposure. This limit systemassigns maximum exposure lines to counterparts of financialtransactions, based at a minimum on their credit ratings as
published by Standard & Poors, Moody’s and Fitch IBCA. The
respective limits are regularly monitored and updated.
In order to support product sales, primarily at Airbus and ATR,EADS may agree to participate in the financing of customers, ona case-by-case basis, directly or through guarantees provided tothird parties. In determining the amount and terms of thefinancing transaction, Airbus and ATR take into account theairline’s credit rating as well as risk factors specific to theintended operating environment of the aircraft and its expected
future value. Market yields and current banking practices also
serve to benchmark the financing terms offered to customers,
including price.
b) Notional Amounts
The contract or notional amounts of derivative financial
instruments shown below do not necessarily represent amounts
exchanged by the parties and, thus, are not necessarily a measurefor the exposure of the Group through its use of derivatives.

Price Risk – The cash and cash equivalents and securities
portfolio of the Group is invested in non-speculative financial
instruments, mostly highly liquid, such as certificates ofdeposits, overnight deposits, commercial papers and othermoney market instruments which generally are on short termand subject to only an insignificant price risk. Therefore, theGroup assesses its exposure towards price risk as minimal.

EADS 2003 Consolidated financial statements 63

BOOK2-790-64

29 MARCH 2004

The notional amounts of foreign exchange derivative financial
instruments are as follows, specified by year of expected maturity:
Year ended December 31, 2003

in €m

Not
exceeding
1 yearRemaining period
1 yearMore
up to5thanyears
5 years

Total

Foreign Exchange Contracts:
Net forward sales contracts

7,104

22,581

3,604

33,289Purchased USD put options

285

0

0

285

1,800

0

0

1,800

USD swap contracts

Year ended December 31, 2002

in €m

Not
exceeding
1 yearRemaining period
1 yearMore
up to5thanyears
5 years

10,852

23,408Total

Foreign Exchange Contracts:
Net forward sales contracts

6,122

40,382

Purchased put options

1,094

343

0

1,437

Written call options

1,094

343

0

1,437

The notional amounts of interest rate contracts are as follows,
specified by year of expected maturity:
Year ended December 31, 2003

in €mInterest Rate Contractsc) Fair Value of Financial Instruments
The fair value of a financial instrument is the price at which one
party would assume the rights and/or duties of another party.
Fair values of financial instruments have been determined withreference to available market information at the balance sheet
date and the valuation methodologies discussed below.
Considering the variability of their value-determining factors and
in %

Not
exceeding
1 year0

Remaining period
1 yearMore
up to5thanyears
5 years

802

2,964

Total

3,766

the volume of financial instruments, the fair values presented
herein may not be indicative of the amounts that the Group
could realize in a current market exchange.
The following interest rate curves are used in the determinationof the fair value in respect of the financial instruments as ofDecember 31,2003:
EUR

USD

GBP

6 months

2.19

1.18

4.16

1 year

2.33

1.42

4.35

5 years

3.73

3.77

4.95

10 years

4.52

4.90

5.04

Interest rate

64 EADS 2003 Other Notes

BOOK2-790-65

29 MARCH 2004

The carrying amounts and fair values of the Group’s financial
instruments are as follows:in €mDecember 31, 2003

December 31, 2002

Carrying
amountFair value

Carrying
amountFair value

Balance Sheet Treasury Instruments
Assets:Other investments and long-term financial assets

2,489

2,489

2,396

2,396

Securities

468

468

799

799

Cash and cash equivalents

7,404

7,404

5,401

5,401

4,767

4,776

3,830

3,830

Currency contracts with positive fair values

7,932

7,932

2,804

2,804

Currency contracts with negative fair values

(18)

(18)

(161)

(161)

Interest rate contracts with positive fair values

32

32

15

15

Interest rate contracts with negative fair values

(82)

(82)

0

0

Liabilities:
Financial liabilities
Derivative Financial Instruments

The fair value gains and losses at December 31, 2003 on open
currency contracts which hedge future foreign currency sales willbe transferred from the accumulated other comprehensive
income to the income statement when the related transactions
occur, at various dates between the balance sheet date and 8
years from the balance sheet date. Gains and losses fromvaluation of these instruments in 2003 (net of deferred taxes of
2,285 M €) amount to 4,068 M €. The amount that has been
reclassified from other comprehensive income to income
statement in 2003 is 945 M € (net of deferred taxes of 526 M€). As at December 31, 2003, a net unrealised gain for derivative
financial instruments of 2,524 (net of deferred tax of 1,424 M €),was recognized in equity excluding minority interests.
Financial Assets and Liabilities – Fair values are based on
estimates using various valuations techniques, such as present
value of future cash flows. However, methods and assumptions
followed to disclose data presented herein are inherently
judgmental and involve various limitations like estimates as ofDecember 31, 2003 and 2002, which are not necessarily
indicative of the amounts that the Company would record uponfurther disposal/termination of the financial instruments.
The methodologies used are as follows:
Short-term Investments, Cash, Short-term Loans, Suppliers –The carrying amounts reflected in the annual accounts arereasonable estimates of fair value because of the relatively shortperiod of time between the origination of the instruments andits expected realization.

Long-term Debt; Short-term Debt – Neither long term nor
short term debt is classified as liabilities held for trading.
Securities – The fair value of securities included in availablefor-sale investments is estimated by reference to their quoted
market price at the balance sheet date. If a quoted market priceis not available, fair value is determined on the basis of generally
accepted valuation methods on the basis of market information
available at the reporting date.
Currency and Interest Rate Contracts – The fair value ofthese instruments is the estimated amount that the Company
would receive or pay to settle the related agreements as ofDecember 31, 2003 and 2002.
27. Stock-based Compensationa) Stock Option Plans
Based on the authorization given to it by the shareholders’meetings (see dates below), the Group’s Board of Directors
approved (see dates below) stock option plans in 2003, 2002,
2001 and 2000. These plans provide to the members of the
Executive Committee as well as to the Group’s senior
management the grant of options for the purchase of EADS
shares.
For the 2003 stock option plan, analogous to all of EADS’
previous existing stock option plans, the granted exercise price
was exceeding the share price at grant date. Therefore, nocompensation expense has been recognized.

EADS 2003 Other Notes 65

BOOK2-790-66

29 MARCH 2004

The principal characteristics of these options are summarized in
the tables below:
First Tranche

Second Tranche

Third Tranche

Date of shareholders’ meeting

May 24, 2000

May 24, 2000

May 10, 2001

Date of Board of Director meeting (grant date)

May 26, 2000

October 26, 2000

July 12, 2001

Number of options granted

5,324,884

240,000

8,524,250

Number of options outstanding

5,060,400

240,000

7,818,725

850

34

1,650

Total number of eligible employees
Exercise Date

Expiry date

50% of options may be exercised after a period of two years andfour weeks from the date of grant of the options; 50% of
options may be exercised as of the third anniversary of the dateof grant of the options; moreover, the options may not be
exercised during a period of 3 weeks preceding each annual
general meeting of shareholders or the date of announcementof annual or semi-annual results or quarterly figures.
Tenth anniversary of the date of the grant of the option

Conversion Right
VestedExercise Price
Exercise Price Conditions

Number of exercised options

One option for one share
100 % vested

100 % vested

50 % vested

Euro 20.90

Euro 20.90

Euro 24.66

110% of fair market 110% of fair market 110% of fair market
value of the shares value of the shares value of the sharesat the date of grant at the date of grant at the date of grant
00Fourth Tranche

Fifth Tranche

Date of shareholders’ meeting

May 10, 2001

May 6, 2003

Date of Board of Director meeting (grant date)August 9, 2002

October 10, 2003

Number of options granted

7,276,700

7,563,980

Number of options outstanding

7,205,975

7,563,980

1,562

1,491

Total number of eligible employees
Exercise date

Expiry date

50% of options may be exercised after a period of two years andfour weeks from the date of grant of the options; 50% of
options may be exercised as of the third anniversary of the dateof grant of the options; moreover, the options may not be
exercised during a period of 3 weeks preceding each annual
general meeting of shareholders or the date of announcementof annual or semi-annual results or quarterly figures.
Tenth anniversary of the date of the grant of the option

Conversion Right
VestedExercise Price
Exercise Price Conditions

Number of exercised options

66 EADS 2003 Other Notes0

One option for one share0%0%Euro 16.96

Euro 15.65

110% of fair market 110 % of fair market
value of the shares value of the sharesat the date of grant at the date of grant00BOOK2-790-67

29 MARCH 2004

The following table summarizes the development of the numberof stock options:
Number of Options
Options
grantedBalance atJanuary 1

Exercised

Forfeited

Balance at
December 31

2000

5,564,884––(189,484)

5,375,400

2001–

5,375,400––

5,375,400

2002–

5,375,400––

5,375,400

2003–

5,375,400–(75,000)

5,300,400

Options
grantedBalance atJanuary 1

Exercised

Forfeited

Balance at
December 31

2001

8,524,250––(597,825)

7,926,425

2002–

7,926,425––

7,926,425

2003–

7,926,425–(107,700)

7,818,725

Options
grantedBalance atJanuary 1

Exercised

Forfeited

Balance at
December 31

2002

7,276,700

–

–

(600)

7,276,100

2003-

7,276,100–(70,125)

7,205,975

Options
grantedBalance atJanuary 1

Exercised

Forfeited

Balance at
December 31

7,563,980–––

7,563,980

28,929,814 20,577,925–

First & Second Tranch

Number of Options
Third Tranch

Number of Options
Fourth Tranch

Number of Options
Fifth Tranch

2003
Total

b) Employee Stock Ownership Plan (ESOP)In 2003, the Board of Directors approved an additional ESOP
following three ESOPs established in 2002, 2001 and in 2000.
For the 2003 ESOP, eligible employees were able to purchase amaximum of 500 shares per employee of previously unissued
shares. The offer was broken down into two tranches whichwere available for all employees to choose. The subscription
price for tranche A was 12.48 €, calculated as a discount of
14.5% from the lowest market price on the Paris stock exchange
on October 10, 2003 (fixed at 14.60 €), the day the Board of
Directors granted the right to purchase shares within the ESOP2003. The subscription price for tranche B was the higher of the(1,040,734) 27,889,080

subscription price for tranche A or 80% of the average opening
market price for EADS shares on the Paris stock exchange
during the twenty stock market days preceding October 10,
2003, resulting in a subscription price of 12.48 €.
During a lockup period of at least one year under tranche A or
five years under tranche B, employees are restricted from sellingthe shares, but have the right to receive all dividends paid aswell as have the ability to vote at the annual shareholder
meetings. EADS sold 1,686,682 ordinary shares with a nominal
value of 1.00 € under both tranches. No compensation
expense was recognized in connection with the ESOP 2003.

EADS 2003 Other Notes 67

BOOK2-790-68

29 MARCH 2004

29. Investment Property
The Group owns investment property accounted for underproperty, plant and equipment, mainly contributed by Dasa to
EADS, that is leased to third parties. The investment property
contributed by Dasa was recorded at fair value as of July 1,
2000. For the purposes of IAS 40, “Investment property”,
disclosure requirements, EADS developed the fair values ofinvestment property based on the values on the opening
balance sheet of EADS.

28. Related Party Transactions
Related Parties – The Group has entered into varioustransactions with related companies in 2003, 2002 and 2001
that have all been carried out in the normal course of business.
As is the Group’s policy, all related party transactions have to
be carried out at arm’s length. Transactions with related parties
include the French State, DaimlerChrysler, Lagardère, and SEPI
(Spanish State). Except for the transactions with the French
State the transactions are not considered material to the Groupeither individually or in the aggregate. The transactions with
the French State include mainly sales from the Aeronautics,
Defence & Security Systems, and Space divisions.
Remuneration – Remuneration and related costs of themembers of the Board of Directors and former Directors
amount to 8.01 M € as of December 31, 2003 (2002: 8.39 M €).
Since the exercise price for stock options granted to Directors
exceeded the share price at grant date, this amount does notcomprise compensation cost for stock-based compensation.
EADS has not provided any loans to/advances to/guarantees onbehalf of (retired) Directors. Reference is made to Note 27,“Stock-based Compensation”, in this document and to Note 9,“Remuneration”, of the Notes to EADS N.V. Financial
Statements.

in €m

The fair values have been determined using official guideline
numbers for land and insured values as well as values reconciled
from rental income for buildings. The determination of fairvalues is mainly supported by market evidence and was
performed with regard to the fair values as of July 1, 2000 by aregistered independent valuer having an appropriate recognizedprofessional qualification and recent experience in the locationand category of the property being valued. As there have only
been very minor changes since that date, the Group has not
used an independent certifier since then.
Buildings held as investment property are depreciated on alinear basis over their useful life of 20 years. The values assigned
to investment property are as follows:

Accumulated
depreciation
Historical December
cost
31, 2002

Book value of Investment Property

283

(31)

Book value
December Depreciation
31, 2002 Amortisation

252

(8)

Accumulated
depreciation
December
Disposals
31, 2003

(3)

(42)

Net atDecember31, 2003

241

As of December 31, 2003, the fair value of the Group’s
investment property amounts to 258 M € (2002: 258 M €).
Related rental income in 2003 is 12 M € (2002: 13 M €, 2001:
12 M €) with direct operating expenses arising from investment
property that generated rental income amounting to 12 M €(2002: 10 M €, 2001: 7 M €).

“Information on principal investments”. Joint ventures
are consolidated for using the proportionate method.
Due to the purchase of the remaining shares of Astrium N.V.
in 2003, the company and its subsidiaries areconsolidated fully in 2003 (see Note 4 “Acquisitions andDisposals”).

30. Interest in Joint Ventures
The Group’s principal investments in joint ventures and the
proportion of ownership are included in Appendix

The following amounts represent the Group’s aggregate shareof the assets and liabilities and income and expenses of the joint
ventures:

in €m

2003

2002

Fixed assets

572

1,073

Non-fixed assets

1,745

2,909

Provisions

176

661

Liabilities

1,599

2,937

Revenues

1,471

2,556

Profit (loss) from ordinary activities

88

(203)

Net income (loss)

76

(212)

68 EADS 2003 Other Notes

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29 MARCH 2004

31. Earnings Per Share
Basic Earnings Per Share – Basic earnings per share is
calculated by dividing net income (loss) attributable to
Net income/(loss) attributable to shareholders (in M €)Weighted average number of ordinary shares
Basic earnings per share (in €)Diluted Earnings Per Share – For the calculation of thediluted earnings per share, the weighted average number ofordinary shares is adjusted to assume conversion of all
potential ordinary shares. The Group’s only category of
dilutive potential ordinary shares is stock options. Since theexercise price of the stock options under all existing stock
Net income/(loss) attributable to shareholders (in M €)Weighted average number of ordinary shares
Diluted earnings per share (in €)32. Number of Employees
The number of employees at December 31, 2003 is 109,135 ascompared to 103,967 at December 31, 2002.

shareholders by the weighted average number of issued
ordinary shares during the year, excluding ordinary sharespurchased by the Group and held as treasury shares.
2003

2002

2001

152

(299)

1,372

800,957,248

804,116,877

807,295,879

0.19(0.37)

1.70

option plans initiated by the Group exceeded the average
share price of EADS shares, to include these potential
ordinary shares would be anti-dilutive. As a consequence, net
income as well as the weighted number of ordinary shares inissue is the same for both basic and diluted earnings per
share.
2003

2002

2001

152

(299)

1,372

800,957,248

804,116,877

807,295,879

0.19(0.37)

1.70

33. Events after the Balance Sheet Date
No events have taken place after December 31, 2003 that require
disclosure. The financial statements have been authorized forissuance by the Board of Directors on March 5, 2004.

EADS 2003 Other Notes 69

BOOK2-790-70

29 MARCH 2004

Appendix“Information on Principal Investments” - Consolidation Scope

Airbus

2003

%

2002

%

F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F

80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00

F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F

80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00

F

80,00

F

80,00

F
F
F
F

80,00
80,00
80,00
80,00

F
F
F
F

80,00
80,00
80,00
80,00

F
F
F
F
F
E
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F

80,00
80,00
80,00
80,00
80,00
16,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00

F
F
F
F
F
E
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F

80,00
80,00
80,00
80,00
80,00
16,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00
80,00

F
P
F
F
F
P

100,0037,50
100,00
99,99
55,00
50,00

P

37,50

F
F
P

99,99
55,00
50,00

F
F
F
F
F
F

100,00100,0093,58
93,58
100,00100,00

F
F
F
F
F
F

100,00100,0075,8975,89100,00100,00F

100,00F

100,00F

100,00F

100,00

E

25,00

F

100,00FF100,00100,00F

100,00F

100,00F

100,00Company

Head Office128829 Canada Inc.
A 320 Financing limited
AA Credit Aircraft Leasing Limited
AFC (USA) 1 inc
AFS (Cayman) 11 Limited
AFS (Cayman) Ltd
AFS Cayman Aerospace Limited
AI Leasing Inc.
AI Participations S.A.R.L.
AIFI LLC
AIFS (Cayman) ltd.
AIFS Cayman Liquidity ltd.
AIFS Leasing Company Limited
AINA Inc.
Airbus China limited
Airbus Deutschland GmbH
Airbus Espana SL
Airbus Finance Company Ltd
Airbus France S.A.S
Airbus Holding SA
Airbus Industrie Financial Service
Holdings B.V.
Airbus Industrie Financial Service
Holdings ltd.
Airbus Industrie Financial Service ltd.
Airbus Industrie G.I.E.
Airbus Invest
Airbus North American Holdings Inc.
(AINA)
Airbus S.A.S
Airbus Service Company Inc. (ASCO)
Airbus Transport International S.N.C. (ATI)
Airbus UK Limited
Aircabin GmbH
Alexandra Bail G.I.E
Avaio Aerospace Limited
Avaio Aviation Limited
Avaio International Limited
Avaio Leasing Limited
Avaio Limited
Aviateur Aerospace Limited
Aviateur Eastern Limited
Aviateur Finance Limited
Aviateur International Limited
Aviateur Leasing Limited
Aviateur Limited
Avion Finance Limited
AVSA SARLKID-Systeme GmbH
NorbusStar Real Estate SAS
Total Airline Service Company
WichitaCanadaIrelandIsle Of Man
USA
Cayman Isle
Cayman Isle
Cayman Isle
U.S.A.
Blagnac (France)
Isle Of Man
Cayman Isle
Cayman Isle
Ireland
U.S.A.
Hong-Kong
Hamburg (Germany)
Madrid (Spain)
Dublin (Ireland)
Toulouse (France)
FranceNetherlands
Ireland
IrelandBlagnac (France)
Toulouse (France)
U.S.A.
Toulouse (France)
U.S.A.
Blagnac (France)UK
Laupheim (Germany)
FranceIreland
Ireland
Ireland
IrelandIsle Of Man
Ireland
Ireland
Ireland
Ireland
Ireland
Ireland
IrelandBlagnac (France)
Buxtehude (Germany)
U.S.A.
Boulogne (France)
United Arab Emirates
U.S.A.

Additionally consolidated are 38 SPEs.

Defence & Security Systems

70 EADS 2003 Appendix “Information on Principal Investments” Consolidation Scope

Aircraft Services Lemwerder GmbH
ALKAN
Apsys
ARC
Aviation Defense Service S.A.
Bayern-Chemie Gesellschaft für
flugchemische Antriebe mbH
Cogent Defence & Security Networks
Dornier Flugzeugwerft GmbH
Dornier Services GmbH
Dornier Verteidigung und Zivile Systeme
EADS CASA Military Aircraft
EADS Deutschland GmbH Military Aircraft TB 51
EADS Deutschland GmbH –VA (Restaktivitäten)EADS Deutschland GmbH –Verteidigung und Zivile Systeme
EADS Radio Communication Systems
GmbH & Co. KG
EADS Services
EADS System & Defence Electronics
Belgium
EADS System & Defence Electronics SA

Lemwerder (Germany)
Valenton (France)
FranceCA, USASaint-Gilles (France)
Aschau/Inn (Germany)
Newport, Wales (UK)
Manching (Germany)
Friedrichshafen (Germany)
Friedrichshafen (Germany)
Madrid (Spain)
Munich (Germany)
Unterschleißheim (Germany)
Ulm (Germany)
Ulm (Germany)
Boulogne (France)
Oostkamp (Belgium)
Velizy (France)

BOOK2-790-71

Defence & Security Systems

Space

29 MARCH 2004

2003

%

2002

%

F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
P
F
F
F
F
F
F
F
F
P
F
P
F
F
P
F
P
P
P
P
P
P
P
P
F
F
F
F
P
F
E
E
F
F
P
F

100,00100,00100,00100,00100,00100,00100,00100,00100,00100,0098,95
100,00100,00100,00100,00100,00100,0050,00
100,00100,00100,00100,0098,95
81,25100,00100,0050,00
100,0037,50
100,00100,0037,50
100,00
37,50
37,50
37,50
37,50
37,50
37,50
37,50
37,50
100,00100,0080,00
100,00
50,00
98,95
33,00
18,75
100,00
67,00
50,00
98,00

F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
P
F
F
F
F
F
F
F
F

59,10
100,00
59,10
59,10
59,10
59,10
100,00100,00100,00
59,10
98,95
59,09
59,10
59,10
100,00100,00100,0050,00
100,00100,00100,00100,0098,95
81,25100,00100,00

F
P
F
F
P
F
P
P
P
P
P
P
P
P
F
F
F
F
P
F

100,0037,50
100,00100,0037,50
100,00
37,50
37,50
37,50
37,50
37,50
37,50
37,50
37,50
100,00100,0080,00
100,00
50,00
98,95

F
F
P
F

100,00
67,00
50,00
98,00

F
F
E

100,00100,0050,00

FF100,00100,00

E

50,00

E

50,00

F

100,00

P

75,00

F
F
F
F
F
F
F

100,00100,00100,00100,00100,00100,00100,00

P

75,00

P
P
P
F
F

75,00
75,00
75,00
100,00100,00

F

68,40

F

68,40

F
F
F
F
F
F

100,00100,00100,00100,00100,00100,00F

100,00FF100,00100,00Company

Head Office

EADS Telecom Benelux
Bruxelles (Belgium)
EADS Telecom Canada Ldt
Dallas, Texas (USA)EADS Telecom Danmark
Copenhague (Denmark)
EADS Telecom Deutschland GmbHUlm (Germany)
EADS Telecom Deutschland GmbH
Untershleissheim (Germany)
EADS Telecom Espana
Barcelona (Spain)
EADS Telecom Federal Systems Division San Antonio, TX, USA
EADS Telecom Holding
Paris (France)
EADS Telecom Inc (MATRA CUSA)
Dallas, Texas (USA)EADS Telecom Mexico SA de CV
Mexico DF (Mexico)
EADS Telecom North America
Dallas, Texas (USA)EADS Telecom SAS
Bois d’Arcy (France)
EADS Telecom Spa
Milan (Italy)
EADS Telecom UK Ltd
UK
EUROBRIDGE Mobile Brücken GmbHFriedrichshafen (Germany)
Ewation GmbHUlm (Germany)
Fairchild Controls Corporation
Frederick Maryland (USA)Forges de Zeebrugge S.A.
Herstal-Liege (Belgium)
Germantown Holding Company
Frederick Maryland (USA)
Gesellschaft für Flugzieldarstellung mbH Germany
FmElo Elektronik- und Luftfahrtgeräte GmbH Ulm (Germany)
Hagenuk Marinekommunikation GmbH
Flintbek (Germany)
Intecom Holding ULC
Dallas, Texas (USA)LFK – Lenkflugkörpersysteme GmbH
Unterschleißheim (Germany)
M.C.N. SAT HOLDING
Velizy (France)
M.P. 13
Paris (France)Maîtrise d'Oeuvre SyStème
Issy les Moulineaux (France)
Manhattan Beach Holdings Co.
Frederick Maryland (USA)
Marconi Overside Ldt.
Chelmsford (UK)
Matra Aerospace Inc.
Frederick Maryland (USA)Matra Défense
Velizy (France)
Matra Electronique
La Croix Saint-Ouen (France)
Matra Holding GmbH
Frankfurt (Germany)
MBDA France
Velizy (France)
MBDA Inc
Westlack, CA (USA)MBDA Italy SpA
Roma (Italy)
MBDA M S.A.
Chatillon sur Bagneux (France)
MBDA SAS
Velizy (France)
MBDA Services
Velizy (France)
MBDA Treasury
Jersey (UK)
MBDA UK Ltd.
Stevenage, Herts (UK)
MULTICOMS
Vélizy (France)
Operations Services Germany
Unterschleißheim (Germany)
Pentastar Holding
Paris (France)
Proj2
Paris (France)
Propulsion Tactique S.A.
La Ferte Saint Aubin (France)
Pyderion Contact Technologies Inc.
Dallas, Texas (USA)
Reutech Radar Systems (Pty) Ltd.
Stellenbosch (South Africa)
RoxelSaint-Médard-en-Jalles (France)
Sycomore S.A.
Boulogne-Billancourt(France)
TAURUS Systems GmbH
Schrobenhausen (Germany)
TDA – Armements S.A.S.
La Ferte Saint Aubin (France)
TDW- Ges. für verteidigungstechnische
Schrobenhausen (Germany)
Wirksysteme GmbHInternational Test & Services
Velizy (France)
TYX Corp.
Reston, VA, USA
United Monolithic Semiconductors
Orsay (France)
France SAS
United Monolithic Semiconductors
Orsay (France)
Holding
United Monolithics Semiconductor GmbH Ulm (Germany)
Computadoras, Redes e Ingenieria
SA (CRISA)EADS Astrium GmbHEADS Astrium Jersey Ltd.
EADS Astrium Ltd.
EADS Astrium N.V.
EADS Astrium SAS
EADS CASA Spacio S.L.
EADS Deutschland GmbH –Space Services
EADS Dornier Raumfahrt Holding
GmbH
EADS Space B.V.
EADS Space Transportation (Holding) SAS
EADS Space Transportation GmbHEADS Space Transportation N.V.
EADS Space Transportation S.A.
Global DASA LLC

Madrid (Spain)
Munich (Germany)
Jersey (UK)
Stevenage (UK)The Hague (Netherlands)
Toulouse (France)
Madrid (Spain)
Munich (Germany)
Munich (Germany)
Amsterdam (Netherlands)
Paris (France)
Munich (Germany)
Amsterdam (Netherlands)
Les Muraux (France)
New York (USA)EADS 2003 Appendix “Information on Principal Investments” - Consolidation Scope 71

BOOK2-790-72

29 MARCH 2004

Military Transport Aircraft

Aeronautics

2003

%

20022

%

F
F
E
F
F

100,00100,0047,40
100,00100,00

P
P
E
P

75,00
75,00
47,40
75,00

F
F
F

100,00100,00100,00

P

75,00

F

100,00

P

75,00

F
F
F

90,00
100,00100,00

F
F
F
P
F
F
F
F
F

80,00
100,00
60,00
50,00
50,10
50,00
88,00
100,00100,00

F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F
F

F

100,00FF

50,00
100,00

P
F
F
F
F
F

51,00
50,10
50,00
88,00
100,00100,00100,00100,00100,00100,00100,0050,10100,0075,00
100,00100,00100,00100,0076,52
100,00100,00100,00100,00100,00

F
F
F
F
F
F
F
F
F
F
F
F
F
F
F

100,00100,00100,00100,00100,0050,10100,0075,00
100,00100,00100,00100,0076,52
100,00100,00F

100,00FF100,0075,00

FF100,00
75,00

E
E
E
E
E
E
E
F
F
F
F
F

46,03
46,03
46,03
46,03
46,03
46,03
46,03
93,58
100,00100,00100,00100,00

E
E
E
E
E
E
E
F
F
F
F
F

45.96
45.96
45.96
45.96
45.96
45.96
45.96
75,89
100,00100,00100,00100,00F

100,00F

100,00

F
F
F
E
E
E

100,00100,00100,00
46,03
46,03
46,03

F

100,00FE
E
E

100,00
45.96
45.96
45.96

Company

Head Office

Matra Marconi Space UK Ltd.
MMS Systems Ltd
Nahuelsat S.A.
NRSCL Infoterra Ltd
Paradigm Secure Communications(Holding) Ltd.
Paradigm Secure Communications Ltd
Paradigm Services Ltd
TESAT-Spacecom Geschäftsführung
mbH
TESAT-Spacecom GmbH & Co. KG

Stevenage (UK)
Stevenage (UK)
Buenos Aires (Argentina)
Southwood (UK)
Stevenage (UK)

Airbus Military S.L.
CASA Aircraft USA, Inc.
EADS CASA S.A. (Unit: EADS CASA
Military Transport Aircraft)

Madrid (Spain)
Chantilly / Virginia (USA)Stevenage (UK)
Stevenage (UK)
Backnang (Germany)
Backnang (Germany)

Madrid (Spain)

Aerobail GIE
American Eurocopter Corp.
American Eurocopter LLC
ATR GIE
Composites Aquitaine S.A.
Composites Atlantic Ltd.
EADS Aeroframe services LLC
EADS ATR S.A.
EADS EFW Beteiligungs- und
Verwaltungsgesellschaft GmbHEADS Revima APU S.A.
EADS Revima S.A.
EADS Seca S.A.
EADS Socata S.A.
EADS Sogerma S.A.
EADS Sogerma Tunisie
Elbe Flugzeugwerke GmbHEurocopter South East Asia
Eurocopter Canada Ltd.
Eurocopter Deutschland GmbHEurocopter Holding S.A.
Eurocopter S.A.
Helibras - Helicopteros do Brasil S.A.
Maroc Aviation S.A.
Noise Reduction Engineering B.C.
Socata Aircraft Inc.
Sogerma America Barfield B.C.
Sogerma Drawings S.A.

Paris (France)
Dallas, Texas (USA)
Dallas, Texas (USA)
Toulouse (France)
Salaunes (France)
Halifax (Canada)
Lake Charles, Louisiana (USA)
Toulouse (France)
Munich (Germany)

Airbus Financial Company Holding B.V.
DADC Luft- und Raumfahrt
Beteiligungs AG
Dassault Aero Service
Dassault Assurances Courtage
Dassault Aviation
Dassault Falcon Jet and subsidiaries
Dassault Falcon Service
Dassault International France
Dassault lntemational lnc
Dornier Zentrale
EADS CASA France
EADS CASA S.A. (Headquarters)
EADS Deutschland GmbH – Zentrale
EADS Deutschland GmbH, FO Forschung
EADS Deutschland GmbH, LO Liegenschaften OTN
EADS France
EADS North America Inc.
EADS Raumfahrt Beteiligungs GmbHIPS
Société Toulouse Colomiers
Sogitec Industries

Dublin (Ireland)
Munich (Germany)

Caudebec en Caux (France)
Tremblay en France (France)
Le Bourget (France)
Le Bourget (France)
Mérignac (France)
Monastir (Tunisia)
Dresden (Germany)
Singapore
Ontario (Canada)
Munich (Germany)
Paris (France)
Marignane (France)
Itajuba (Brazil)
Casablanca (Morocco)
Washington D.C. (USA)Miami, Florida (USA)Miami, Florida (USA)
Mérignac (France)

Additionally consolidated are 40 SPEs.

Headquarters

F: Fully consolidated
P: Proportionate
E: Equity method
The respective stated percentage of ownership is considered to represent the direct participation in the company.

72 EADS 2003 Appendix “Information on Principal Investments” - Consolidation Scope

Paris (France)
Teterboro NJ (USA)
Vaucresson (France)
Paramus NJ (USA)Friedrichshafen (Germany)
Paris (France)
Madrid (Spain)
Munich (Germany)
Munich (Germany)
Munich (Germany)
Paris (France)
Washington (USA)Ottobrunn (Germany)
Suresnes (France)

BOOK2-790-73

29 MARCH 2004

1.2.2 Statutory Financial Statements
EADS N.V.
Balance Sheetsin €mAssets

Note

Goodwill

3

Financial assets

3

Fixed assets

At December 31,
2003
2002

4,354

4,618

9,647

5,479

14,001

10,097

Receivables and other assets

4

3,778

5,343

Securities

5

307

657

Cash and cash equivalents

5

6,117

3,793

Non-fixed assets

10,202

9,793

Total assets

24,20319,890813

811

15,336

11,954

16,14912,765

194

–

7,860

7,125

Liabilities

8,054

7,125

Total liabilities and stockholders’ equity

24,20319,890

in €m

2003

2002

Income from investments

398

118

Other results

(246)

(417)

Net result

152

(299)

Liabilities and stockholders’ equity
Capital stock
General reserves
Stockholders’ equity

6

Financial liabilities
Other liabilities

7

Statements of Income

EADS 2003 Statutory Financial Statements 73

BOOK2-790-74

29 MARCH 2004

1. General
EADS N.V., having its legal seat in Amsterdam, the Netherlands,
is engaged in the holding, coordinating and managing ofparticipations or other interests in and to finance and assume
liabilities, provide for security and/or guarantee debts of legal
entities, partnerships, business associations and undertakingsthat are involved in the aeronautic, defence, space and/or
communication industry or activities that are complementary,
supportive or ancillary thereto.

statements, also apply to the company statutory financial
statements. In accordance with article 402 Book 2 of the Dutch
Civil Code the statement of income is presented in abbreviatedform.

The description of the company’s activities and the groupstructure, as included in the notes to the consolidated financial

3. Fixed Assets
The movement in fixed assets are detailed as follows:

2. Accounting Principles
The accounting principles as described in the notes to theconsolidated financial statements also apply to the company
statutory financial statements, unless indicated otherwise.

in €mFinancial
AssetsParticipating
GoodwillInterests

Balance at December 31, 2002

4,618

5,479

10,097

Additions

–

449

449

Amortization

Total

(264)

–

(264)

Net income from investments

–

398

398

Fair value adjustments financial instruments/others

–

3,482

3,482

Dividends received

–

(161)

(161)

4,354

9,647

14,001

Balance at December 31, 2003
The fair value adjustments on financial instruments/othersreflect mainly the impact in the Other Comprehensive Income
related to the application of IAS 39.
4. Receivables and Other Assets

December 31,
in €m

2003

2002

Receivables from affiliated companies

3,561

5,214

Receivables from related companies

57

49

Other assets
Total receivables and other assets
The receivables from affiliated companies include mainly
receivables in connection with the cash pooling in EADS N.V.
All receivables and other assets mature within one year.
5. Securities, Cash and Cash Equivalents
EADS changed its disclosure regarding short term securities.
Short term securities which are subject to an insignificant risk ofchanges in value which had previously been disclosed as part ofthe line item “Securities” have been classified to line item “Cashand cash equivalents”. For further information please see note 2of the consolidated financial statements.
The securities comprise mainly Available-for-Sale
Securities.

74 EADS 2003 Notes to the Statutory Financial Statements

160

80

3,778

5,343

BOOK2-790-75

29 MARCH 2004

6. Stockholders’ Equity

in €m

Share
premium
Capitalfromstock contributions

Accumulated
other
Share
comprepremium
hensivefrom cash
incomeBalance at December 31, 2001

809

1,065

Capital increase

8,459

2

(1,278)TreasurysharesLegalreserves

Retainedearnings

Total
equity

–

240

582

9,877

14

16

Net loss

(299)

(299)

Cash distribution

(403)

(403)

Transfer to legal reserve

40

Repurchase treasury shares(156)

Other comprehensive income
Balance at December 31, 2002
Capital increase

(156)

3,730
811

8,459

2

1,079

2,452

3,730
(156)

280

(160)

19
152

Cash distribution

(240)
190

Repurchase treasury shares

(190)

(31)

(31)

3,482
813

8,459

For further information to the Stockholders’ equity, please see
note 18 of the consolidated financial statements.
The cumulative foreign exchange translation adjustments arepart of the accumulated other comprehensive income.

858

152
(240)

Transfer to legal reserve
Other comprehensive income

12,76521

Net income

Balance at December 31, 2003

(40)

5,934

3,482
(187)

470

(198)

16,149The accumulated other comprehensive income relates mainly tothe fair value adjustments of financial instruments in relation toparticipating interests.
The Legal reserves as required by Dutch law are related to
EADS’ share in the undistributed results from investments for€ 466 million (2002: € 280 million) and the internally generated
capitalized development costs of € 4 million (2002: nil).

7. Other Liabilitiesin €m

December 31,
2003
2002

Liabilities to affiliated companies

6,999

6,335

Liabilities to related companies

765

741

Other liabilities
Total

The liabilities to affiliated companies include mainly liabilities inconnection with the cash pooling in EADS N.V.
8. Commitments and Contingent Liabilities
Guarantees totaling € 56 million have been given on behalf ofother group companies.

96

49

7,860

7,125

9. Remuneration
EADS changed in 2003 its disclosure regarding bonuses.
Previously, bonuses were disclosed in the period the payment
took place. In accordance with Dutch regulations, in 2003, thebonuses related to the reporting period, normally paid in thefollowing year, are disclosed. The prior year bonuses are adjusted.

EADS 2003 Notes to the Statutory Financial Statements 75

BOOK2-790-76

29 MARCH 2004

The total remuneration and related costs of the members of theBoard of Directors and former directors in 2003 can be specified
as follows:
in €

2003

2002

Fixum

3,981,000

4,493,538

Bonus (related to reporting period)

3,821,930

3,672,425

Fees

205,000

220,000

8,007,930

8,385,963

The cash remuneration of the individual members of the Boardof Directors was as follows:Fixum
in EuroBonus in Euro
related to 2003

Fees
in EuroTotal
in Euro60,000153,000

70,000283,000–

102,000

40,000142,000

Philippe Camus

1,114,500

916,309–2,030,809

Rainer Hertrich

1,114,500

916,309–2,030,809

Noël Forgeard

1,097,000

1,067,949–

2,164,949

Hans-Peter Ring

310,000

322,113–632,113

Eckhard Cordes

30,00076,50025,000131,500

Pedro Ferreras

30,00076,50025,000131,500

Jean-René Fourtou

30,00076,50010,000116,500

Michael Rogowski

30,00076,50025,000131,500

Jean-Luc Lagardère(1)60,00038,25010,000108,250

Axel Arendt

105,000––

105,000

3,981,000

3,821,930

205,000

8,007,930

2003

Directors
Manfred Bischoff
Arnaud Lagardère(1)

Former directors

Total
(1)

The bonuses for Mr. Jean-Luc Lagardère and Mr. Arnaud Lagardère are included pro rata in accordance with their membership in the Board of Directors.

76 EADS 2003 Notes to the Statutory Financial Statements

BOOK2-790-77

29 MARCH 2004

Fixumin EuroBonus in Euro
related to 2003

Fees
in EuroTotal
in EuroManfred Bischoff

60,000142,000

70,000272,000

Jean-Luc Lagardère

60,000142,000

70,000272,000

1,202,281(1)

849,000–

2,051,281

Rainer Hertrich

1,500,146(2)

849,000–

2,349,146Noël Forgeard

1,042,997

1,087,925–

2,130,922

Eckhard Cordes

30,00071,00025,000126,000

Pedro Ferreras

30,00071,00035,000136,000

Jean-René Fourtou

30,00071,0005,000

106,000

Michael Rogowski

30,00071,00015,000116,000

508,114

318,500–

826,614

4,493,538

3,672,425

220,000

8,385,963

2002

Directors

Philippe Camus

Former directors
Axel Arendt
Total
(1)
(2)

Iincluding € 57,399 additional payments related to previous years
Including € 355,632 additional payments related to previous years

The table below gives an overview of the interests of themembers of the Board of Directors under the stock options plans
of EADS:
As ofJan. 1 2003

Grantedduring 2003

As ofDec. 31 2003

Exercise priceEuro

Expiry datePhilippe Camus

135,000
135,000
135,000––––
135,000

135,000
135,000
135,000
135,000

20.90
24.66
16.96
15.65

July 8, 2010
July 12, 2011
August 8, 2012
October 9, 2013

Rainer Hertrich

135,000
135,000
135,000––––
135,000

135,000
135,000
135,000
135,000

20.90
24.66
16.96
15.65

July 8, 2010
July 12, 2011
August 8, 2012
October 9, 2013Noël Forgeard

110,000
88,000108,000––––
108,000

110,000
88,000108,000
108,000

20.90
24.66
16.96
15.65

July 8, 2010
July 12, 2011
August 8, 2012
October 9, 2013

Hans-Peter Ring

10,00028,00037,000––––50,00010,00028,00037,00050,000

20.90
24.66
16.96
15.65

July 8, 2010
July 12, 2011
August 8, 2012
October 9, 2013

1,191,000

428,000

1,619,000

Number of options

Total

EADS 2003 Notes to the Statutory Financial Statements 77

BOOK2-790-78

29 MARCH 2004

The pension benefit obligation for the Executive members of
the Board of Directors is as follows:
The Executive Board members have pension promises as part oftheir employment agreements. The general policy is to givethem annual pension of 50% of their annual base salary after
five years in the Executive Committee of EADS at the age of 60
to 65. In case of the CEO’s, the policy allows retirement startingat age 60 (but they are not forced to retire at age 60). Thisobligation will increase to 60% after a second term, usually after
ten years of service in the EADS Executive Committee.
These pension schemes have been implemented and financed
through collective executive pension plans in France andGermany. These pension promises have also separate rules e.g.
for minimum length of service and other conditions to comply
with national regulations.
The amounts reported for the Executive Board members arefree of benefits in kind they are entitled to as well as the nationalsocial and tax impact.
Executives Board members are entitled to a company car. Mr.
Rainer Hertrich benefits also from a free accommodation in France.
EADS has not provided any loans to/advances to/guarantees onbehalf of (retired) directors.

78 EADS 2003 Notes to the Statutory Financial Statements

BOOK2-790-79

29 MARCH 2004

Supplementary Information

1. Auditors’ Report
Introduction
We have audited the accompanying financial statements of
EADS N.V., Amsterdam for the year 2003. These financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion onthese financial statements based on our audit.
Scope
We conducted our audit in accordance with International
Standards on Auditing. Those standards require that weplan and perform the audit to obtain reasonable assurance
about whether the financial statements are free frommaterial misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also
includes assessing the accounting principles used andsignificant estimates made by management, as well as
evaluating the overall presentation of the financial statements.
We believe that our audit provides a reasonable basis for our
opinion.

2. Appropriation of Result
Articles 30 and 31 of the Articles of Association provide that theboard of directors shall determine which part of the result shallbe attributed to the reserves. The general meeting ofshareholders may dispose of a reserve only upon a proposal of
the Board of Directors and to the extent it is permitted by law
and the Articles of Association. Dividends may only be paid
after adoption of the annual accounts from which it appears thatthe shareholders’ equity of the company is more than theamount of the issued and paid-in part of the capital increased by
the reserves that must be maintained by law.
It will be proposed at the Annual General Meeting of
Shareholders that the net profit of € 152 million as shown in the
profit and loss statement for the financial year 2003 is to be
added to retained earnings and that a payment of a grossamount of € 0.40 per share shall be made to the shareholders
from distributable reserves.
3. Subsequent Events
For further information please see note 33 of the consolidated
financial statements.

OpinionIn our opinion, the financial statements give a true and fair viewof the company’s financial position as of December 31, 2003
and of the result for the year then ended in accordance with
International Financial Reporting Standards and in accordancewith accounting principles generally accepted in the
Netherlands and comply with the financial reporting
requirements included in Part 9 of Book 2 of the Netherlands
Civil Code.
The Hague, March 5, 2004 Amsterdam, March 5, 2004
KPMG Accountants N.V.

Ernst & Young Accountants

EADS 2003 Supplementary Information 79

BOOK2-790-80

29 MARCH 2004

1.3 Statutory Auditors’ Fees
Services of Statutory Auditors and Members of Their Network
Rendered to the Group for the Financial Years 2003 and 2002
KPMG
Accountants N.V.
2003
Amount(in thousandsof €)• Audit process, certification,
examination of individualand consolidated accounts

Ernst & Young
Accountants
2002%

Amount(in thousands
of €)

4,514

65.1

• Additional tasks

2,133

Sub-total

2003%

Amount(in thousands
of €)

4,049

62.0

30.7

1,804

6,647

95.8

• Legal, tax, employment

294• Information technology

2002

%

Amount(in thousands
of €)

%

4,263

64.2

3,728

56.8

27.7

1,108

16.7

2,785

42.5

5,853

89.7

5,371

80.9

6,513

99.3

4.2

675

10.3

1,105

16.7

45

0.7

–

–

–

–

28

0.4

–

–

• Internal audit

–

–

–

–

–

–

–

–

• Other (to be specified
if > 10% of the fees forthe audit)

–

–

–

–

132

2.0

–

–

294

4.2

675

10.3

1,265

19.1

45

0.7

6,941

100.0

6,528 100.0

6,636

100.0

6,558

100.0

Audit

Other services as relevant

Sub-total
Total

80 EADS 2003

BOOK2-790-81

29 MARCH 2004

Chapter 2
Corporate Governance

2.1 Management and Control
2.1.1 Board of Directors, Chairmen and Chief Executive
Officers
Pursuant to the Articles of Association of the Company, theBoard of Directors is responsible for the affairs of the Company.
The Board of Directors consists of a maximum of eleven members
appointed and removed by the shareholders’ meeting. The Boardof Directors adopted rules governing its internal affairs (the“Rules”) at a Board of Directors’ meeting held on July 7, 2000. The
Rules were most recently amended at a Board of Directors’
meeting held on December 5, 2003 to take into accountrecommendations for changes to corporate governance, as
described below. The Rules specify the composition, the role andthe key responsibilities of the Board of Directors, and also
determine the manner of appointment and the responsibilities of
the Chairmen and the Chief Executive Officers. The Rules also
specify the creation of two committees (the Audit and theRemuneration and Nomination Committees) and specify theircomposition, role and operating rules.
The Board of Directors has also adopted specific Insider Trading
Rules, which restrict its members from trading in shares in theGroup in certain circumstances (for more information, pleasesee “Part 2/3.1.3 Governing Law – Dutch Regulations”).
The parties to the Participation Agreement have agreed that thevoting rights attached to the Indirect EADS Shares shall be
exercised by EADS Participations B.V. to ensure that the Boardof Directors of EADS comprises the Directors of EADSParticipations B.V. and two additional independent Directors
who are not officers, directors, employees or agents of orotherwise have no significant commercial or professional
connection either with the DaimlerChrysler, SOGEPA or
Lagardère groups or the French State. Pursuant to theParticipation Agreement, the initial Board of Directors comprises
eleven members of whom:

The initial Board of Directors appointed two Chairmen, onechosen from the DaimlerChrysler-nominated Directors and one
chosen from the SOGEADE-nominated Directors.
The Chairmen ensure the smooth functioning of the Board of
Directors in particular with respect to its relations with the Chief
Executive Officers whose efforts they support with regard totop level strategic discussions with outside partners.
The Board of Directors also appointed two Chief Executive Officers
to be responsible for the day-to-day management of the Company,
one chosen from the DaimlerChrysler-nominated Directors andone chosen from the SOGEADE-nominated Directors.
The Company is represented by the Board of Directors or by the
Chief Executive Officers acting jointly. Furthermore, theCompany has granted general powers to each of the Chief
Executive Officers, authorizing them to each individually
represent the Company.
In the event of a deadlock between the two Chief Executive
Officers, the matter shall be referred to the two Chairmen.
The Chief Executive Officers shall not enter into transactions
which form part of the key responsibilities of the Board of
Directors unless these transactions have been approved by the
Board of Directors.
The key responsibilities of the Board of Directors include
amongst others:– approving any change in the nature and scope of theactivities of the Group;– approving the overall strategy and the strategic plan of theGroup;– four nominated by DaimlerChrysler;– approving the business plan and the yearly budget of theGroup;– four nominated by SOGEADE;– setting the major performance targets of the Group;– one nominated by SEPI;– appointing the members of the Executive Committee (seebelow) and the Corporate Secretary;– two independent Directors, one nominated byDaimlerChrysler and one nominated by SOGEADE.
Pursuant to the Articles of Association, each Board member ofthe first Board of Directors holds office for a term expiring at theannual general meeting of the Company to be held in 2005.
Members of the Board of Directors will be elected at suchmeeting and at each fifth annual general meeting thereafter.
The general meeting of shareholders may at all times suspend
or dismiss any member of the Board of Directors. There is nolimitation on the number of terms that a Director may serve.

– approving proposals for appointments of the chairmen of
the supervisory board (or similar bodies) and the chief
executive officers (or equivalent position) of importantGroup companies and business units;– approving material changes to the organizational structure of
the Group;– approving major investments, projects or product decisions
or divestments of the Group contemplated in the businessplan with a value exceeding € 200 million;
EADS 2003 Chapter 2 Corporate Governance 81

BOOK2-790-82

29 MARCH 2004

– approving major strategic alliances and cooperations of theGroup;of the Board of Directors to replace Axel Arendt who resignedwith effect from November 1, 2002.

– approving any material decision affecting the ballistic
missiles activity of the Group;

Philippe Camus and Rainer Hertrich were appointed Directors by
the general meeting of shareholders of EADS held on May 10,2000 and Chief Executive Officers at the Board of Directors’
meeting held the same day. Manfred Bischoff and Jean-Luc
Lagardère were appointed Directors by the general meeting ofshareholders of EADS held on June 19, 2000 and their
appointments became effective on July 7, 2000; they wereappointed Chairmen at a meeting held on July 7, 2000. As
successor to Jean-Luc Lagardère, Arnaud Lagardère wasappointed as one of the Chairmen of the Board of Directors and amember of the Audit and Remuneration and Nominationcommittees at a meeting of the Board of Directors held on March
28, 2003 to take immediate effect from the date of his
appointment as Director by the general meeting of shareholders
of EADS held on May 6, 2003.

– approving matters of shareholder policy, major actions or
major announcements to the capital markets;– approving other measures and business of fundamental
significance for the Group or which involve an abnormal
level of risk.
The Board of Directors met eight times during 2003. The
average attendance rate at such meetings was 76%. Topics
discussed and operations authorized at these meetings included
EADS strategy, reorganization processes (such as thecontinuation of the Space Division restructuring and thereorganization in the field of Defence and Security), major
business issues and contracts (such as the A340 HGW
authorization, the Future Strategic Tanker Aircraft (FSTA) offer,
the Skynet 5/Paradigm, A400M and NH90 contracts), and theapproval of operational plans, budgets, hedging and funding
policy, remuneration (including a stock option plan and an
employee share ownership plan) and the Group’s financial
results and forecasts. The Board of Directors also dealt with
topics regarding personnel and human resources, such as
management qualification as well as attracting, retaining anddeveloping high potentials in order to ensure the future quality
of EADS’ management and the multi-national leadership
structure. During this period, the Board of Directors wasregularly informed of developments through business reports
from the Chief Executive Officers, which included rolling
forecasts and strategic and operational plans.
In addition, the Board of Directors held on December 5, 2003
discussed recommendations for changes to EADS’ corporate
governance in the light of corporate governance best practices
applicable in the jurisdictions relevant to EADS. The Board of
Directors adopted the recommendations which relate to its
functioning including the implementation of an evaluation processof its performance, the personal status of the Directors including
their individual compensation and the Board of Directors’
remuneration policy, the role of the committees of the Board of
Directors and the enhancement of shareholders’ rights, including,inter alia, the access to information by the setting-up of specificpages regarding corporate governance on the EADS website.
Following the adoption of these recommendations, the Board of
Directors decided to establish internal directors guidelines (the“Directors’ Guidelines”), detailing the rights and duties of themembers of the Board of Directors and the role of thecommittees of the Board of Directors as set out in the Rules.
During 2003, the shareholders general meeting of EADS heldon May 6, 2003 appointed Hans Peter Ring (Chief Financial
Officer and member of the Executive Commitee) as a member
82 EADS 2003 Chapter 2 Corporate Governance

Each director shall have one vote, provided that if there is avacancy on the Board of Directors’ in respect of a DaimlerChryslernominated Director or a SOGEADE-nominated Director, theDaimlerChrysler-nominated Directors being present or
represented at the meeting can jointly exercise the same numberof votes that the SOGEADE-nominated Directors who are present
or represented at the meeting can exercise and vice versa. Alldecisions of the Board of Directors require a vote in favour by atleast seven Directors voting in person or by proxy. As of
July 8, 2003, the SEPI-nominated director no longer has the ability
to block any decisions of the Board of Directors relating to CASA
Matters (as defined in “Part 2/3.3.2 Relationships with Principal
Shareholders – Organization of EADS Participations B.V.”).
The quorum for the transaction of business at meetings of theBoard of Directors requires the presence of at least one of the
SOGEADE-nominated Directors and one of theDaimlerChrysler-nominated Directors.
In the event of a deadlock in the Board of Directors, other thana deadlock giving DaimlerChrysler the right to exercise the put
option granted to it by SOGEADE (see “Part 2/3.3.2
Relationships with Principal Shareholders – Put Option “), thematter shall be referred to Arnaud Lagardère (or such person as
shall be nominated by Lagardère) as representative of
SOGEADE and to the Chief Executive Officer ofDaimlerChrysler. In the event that the matter in question,
including a deadlock giving DaimlerChrysler the right toexercise the put option (but in this case with the agreement of
SOGEPA and DaimlerChrysler) is a matter within thecompetence of the general meeting of EADS, a resolution on
the issue shall be put to the general meeting, with the voting
rights of SOGEADE, DaimlerChrysler and SEPI being negated.
Pursuant to the Rules, the Board of Directors is empowered toform committees from its members. In addition to the Audit
Committee and the Remuneration and Nomination Committee,

BOOK2-790-83

29 MARCH 2004

the Board of Directors may form other committees to which it
may transfer certain minor or ancillary decision-making
functions although such assignment does not negate the joint
responsibility of all Directors. The quorum for the transaction ofbusiness at any meeting of a committee shall be at least one
Director appointed by SOGEADE and at least one Director
appointed by DaimlerChrysler. All decisions of a committee
require the simple majority of the members.

Composition of the Board of Directors
Name

Age

Term
startedTerm
expires

Principal functionin the Group

Principal role outside
the Group

Manfred Bischoff

61

2000

2005

Chairman of EADS

DaimlerChrysler Delegate
for the Aerospace Industry

Arnaud Lagardère

43

2003

2005

Chairman of EADSGeneral Partner and CEO of
LagardèrePhilippe Camus

55

2000

2005

CEO of EADS

Deputy Chairman and
Deputy CEO of Arjil
Commanditée Arco
(General Partner and CEO
of Lagardère)

Rainer Hertrich

54

2000

2005

CEO of EADS

President of the German
Association of Aerospace
Industries, BDLI

Hans Peter Ring

53

2003

2005

CFO of EADSMember of the Supervisory
Board (Aufsichtsrat) of
M+W Zander - D.I.B.
Facility Management GmbHEckhard Cordes

53

2000

2005

Member of the Boardof Directors of EADSMember of Management
Board of DaimlerChrysler

Pedro Ferreras

48

2000

2005

Member of the Board of
Directors of EADS

Chairman of the boardof directors of Corporación
Uniland SANoël Forgeard

57

2000

2005

President and CEO of
AirbusMember of the board of
directors of IMS SALouis Gallois

60

2000

2005

Member of the Board of
Directors of EADS

President of SNCF

Jean-René Fourtou

64

2000

2005

Member of the Board of
Directors of EADS

Chairman and CEO ofVivendi Universal

Michael Rogowski

65

2000

2005

Member of the Board of
Directors of EADS

Chairman of theSupervisory Board of J.M.
Voith AG

Curriculum Vitae and other Mandates and Duties Performed in
any Company by the Members of the Board of Directors
Manfred Bischoff
Dr. Manfred Bischoff joined Daimler-Benz AG in 1976. He was amember of the Board of Management of DaimlerChrysler from1995 until December 15, 2003, responsible for Aerospace &Industrial Businesses. Prior to his present position with EADS,
Dr. Bischoff was first Chief Financial Officer from 1989 and thenPresident and Chief Executive Officer from 1995 to March 2000
of Dasa AG, one of the three EADS founding companies. He
holds a master’s degree and a PhD (Dr. rer. pol.) in Economics
from the University of Heidelberg.

Current mandates in addition to those listed in the chart above• Chairman of the board of directors of EADS Participations
B.V.;• Chairman of the supervisory board of Dasa AG;• Chairman of the supervisory board of DCLRH;• Member of the supervisory board of Lagardère;• Member of the supervisory board of Bayerische Hypo- undVereinsbank AG;• Member of the supervisory board of Fraport AG;• Member of the supervisory board of Gerling-Konzern
Versicherungs-Beteiligungs-AG;• Member of the supervisory board of J.M. Voith AG;• Member of the supervisory board of Royal KPN N.V.

EADS 2003 Chapter 2 Corporate Governance 83

BOOK2-790-84

29 MARCH 2004

Arnaud Lagardère
Mr. Arnaud Lagardère has been General Partner and Chief
Executive Officer of Lagardère since 2003. He began his career in1986 as general manager of MMB, the holding company ofHachette and Europe 1. In 1987, he was appointed vice-presidentof the Supervisory Board of Arjil bank followed by his
appointment as head of emerging activities and electronic media
for Matra. In 1994 he became Chief Executive Officer of Grolier
Inc. in the United States. He has been Managing Partner of
Lagardère since 1998. In 1999, he was appointed Chief Executive
Officer of both Lagardère Media and Lagardère Active. Arnaud
Lagardère graduated in Economics from the University Paris
Dauphine.

• Member of the board of directors of LVMH;

Current mandates in addition to those listed in the chart above• Chairman of the board of directors of EADS Participations
B.V.;• Member of the supervisory board of Virgin Stores;• Chairman of the board of directors of Lagardère
Thématiques;• Chairman and chief executive officer of Lagardère Active;• Chairman and chief executive officer of Lagardère Images;• Chairman and chief executive officer of Lagardère Active
Broadcast;• Chairman and chief executive officer of Lagardère Active
Broadband;• Chairman and chief executive officer of Lagardère SAS;
• Chairman and chief executive officer of Lagardère Media(Hachette SA);• Chairman and chief executive officer of Lagardère Capital &Management;• Member of the board of directors of France Télécom;• Member of the board of directors of Hachette Livre;• Member of the board of directors of Hachette Distribution
Services;• Member of the board of directors of Fimalac;• Member of the board of directors of Hachette Filipacchi
Médias;• President of the Association of companies supporting Paris’s
candidacy of the 2012 Olympic games.
Philippe Camus
Mr Philippe Camus was previously Chairman of theManagement Board of Aerospatiale Matra. In 1982, he joined
the general management of the Lagardère Group where he was
Chairman of the Finance Committee of the Matra Group until
1992, appointed Chairman and Managing Director of the
Finance Committee of the Lagardère Group in 1993, and thenManaging Partner of Lagardère in 1998. Mr. Camus is a former
student of the École Normale Supérieure de Paris, an agrégé inphysical sciences and actuarial science and a graduate of theInstitut d’Études Politiques de Paris.
Current mandates in addition to those listed in the chart above• Chief executive officer of EADS Participations B.V.;• Chairman of GIFAS – Groupement des Industries Françaises
Aéronautiques et Spatiales;• Permanent representative of Lagardère on the board of
directors of Hachette SA;• Chairman of Fondation Jean-Luc Lagardère;• Deputy-chairman of the supervisory board of Banque Arjil & Cie;
• Chairman and chief executive officer of Arjil Commanditée ARCO;• Permanent representative of Hachette SA on the board of
directors of Hachette Distribution Services;• President of EADS France;• Member of the board of directors of Dassault Aviation;• Permanent representative of Lagardère Active Publicité tothe board of directors of Lagardère Active RadioInternational;• Member of the board of directors of Lagardère Active
Broadcast;• Representative of Hachette SA to the Management
Committee of SEDI TV-TEVA;• Member of the board of directors of Hachette Filipacchi
Médias;• Manager of Lagardère Elevage;• Member of the board of directors of La Provence;• Member of the board of directors of Lagardère Ressources;• Member of the board of directors of Nice Matin;

84 EADS 2003 Chapter 2 Corporate GovernanceBOOK2-790-85

29 MARCH 2004

• Member of the supervisory board of Editions P. Amaury;• Member of the Board of Directors of EADS North America;• Member of the shareholders and remuneration committeesof Airbus;• Member of the advisory Board of Deutsche Bank (Region
Munich).

• Manager of Internal Control Group of Aero Ré.

Eckhard Cordes
Dr. Eckhard Cordes joined Daimler-Benz AG as a management
trainee in 1976. He has been a member of the Board ofManagement of DaimlerChrysler since 1998. At first he was
responsible for Corporate Development, IT Management,
MTU/Diesel Engines and TEMIC before he took over
responsibility for the Commercial Vehicle Division in 2000. He
studied business management at the University of Hamburg,where he graduated in business studies and earned a doctorate
in business administration.

Rainer Hertrich
Mr Rainer Hertrich started his career in 1977 at MesserschmittBölkow-Blohm (MBB). In 1994 he became Senior Vice President
for Corporate Controlling of Deutsche Aerospace AG. In 1996,
he was appointed Head of Dasa’s Aero Engine Business Unit
and Chief Executive Officer of Dasa’s subsidiary MTU. In 2000
he became President and Chief Executive Officer of Dasa AG.
At the end of 2001, he was elected President of BDLI, theGerman Aerospace Industries Association. Mr. Hertrich studied
Business Administration at the Technical University of Berlin andthe University of Nuremberg, graduating with a Bachelor ofCommerce.
Current mandates in addition to those listed in the chart above• Chief executive officer of EADS Participations B.V.;

Current mandates in addition to those listed in the chart above• Chairman of Detroit Diesel Corporation;• Chairman of MTU Motoren-und Turbinen-UnionFriedrichshafen GmbH;• Chairman of EvoBus GmbH;• Chairman of the supervisory board of EADS Deutschland
GmbH;• Member of the board of directors of Rheinmetall AG;• Chairman of the board of directors of EADS Space B.V.;• Member of the board of directors of Deutsche Messe AG;• Chairman of the shareholders committee and member of the
remuneration committee of Airbus;• Member of the board of directors of Deutsche BP AG.

• Member of the board of directors of Stichting
Administratiekantoor EADS (the “Foundation”).
Hans Peter Ring
Mr Hans Peter Ring began his career at MBB in 1977. In 1987 he
was appointed Head of Controlling of the company’s Missiles
business. Subsequently, he was named Head of Controlling of
the Aviation and Defense Division of Dasa AG. From 1992-1995,
he was Chief Financial Officer and member of the Board of
Dornier Luftfahrt, a Dasa AG subsidiary. In 1996, he wasappointed Senior Vice President of Controlling of Dasa andsubsequently of EADS. Hans Peter Ring was appointed Chief
Financial Officer of EADS in 2002. Mr Hans Peter Ring has adegree in business administration.

Pedro Ferreras
Mr Pedro Ferreras has been Secretary of the Ministry ofIndustry and Energy and President of Sociedad Estatal deParticipaciones Industriales (SEPI), President of the Spanish
Patents Office and member of the Board of Directors ofimportant companies such as Telefonica, Repsol and Argentaria.
Mr Pedro Ferreras is a lawyer and is the founding partner of thelegal firm Ferreras Abogados. He has also been a professor ofadministrative law at the University of León.
Current mandates in addition to those listed in the chart above• President of Ferreras Abogados;• Chairman of the board of directors of ALCASA;• Vice-chairman of Consorcio Zona Franca de Barcelona;

Current mandates in addition to those listed in the chart above• Member of the shareholders committee of Airbus;• Member of the board of directors of EADS Space B.V.;• Member of the Supervisory Board of Eurocopter;• Member of the Supervisory Board of Eurocopter Holding;• Member of the Board of Directors of EADS CASA;• Member of the rector board of the Asociación para el
Progreso y la Dirección (A.P.D) and Asociación para el
Progreso y la Direccion (A.P.D. zona mediterranea).
Noël Forgeard
Mr. Forgeard joined Matra in 1987 as Senior Vice President of
the Defense and Space activities. In 1992, he was appointed
Managing Director of Lagardère and Chief Executive Officer ofMatra Hautes Technologies. He joined Airbus Industrie as
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Managing Director in 1998 and became the first President andChief Executive Officer of the Airbus integrated company in2001. He graduated from the Ecole Polytechnique and the Ecoledes Mines in Paris.

• Member of the executive committee of Axa Millesimes SAS;

Current mandates in addition to those listed in the chart above• Chairman and chief executive officer of Airbus Holding SA;• Member of the board of directors of The Equitable Life
Assurance;• Chairman of the executive committee of Airbus France;• Member of the board of directors of Cap Gemini;• Chairman of the board of directors of Airbus España, SL;• President of ICC, Chambre de Commerce Internationale.

• Chairman of the supervisory board of Airbus Deutschland
GmbH;

Michael Rogowski
Dr. Michael Rogowski has been Chairman of the Supervisory
Board of J.M. Voith AG since 2000 and is also the President of
the Association of German Industry. Dr. Michael Rogowski
joined J.M.Voith GmbH in 1974, where he was responsible forhuman resources as well as materials management. In 1982 hetook over responsibility for the propulsion technology division
and was named Chairman of the Management Board of J.M.
Voith GmbH in 1986 and then J.M. Voith AG in 1997. He
studied economical engineering and earned a doctorate at the
University of Karslruhe in 1969.

• Chairman of the board of directors of Airbus Military, SL;• Member of the board of directors of Airbus U.K. Ltd;• Member of the board of directors of EADS CASA;• Member of the board of directors of Ecole Polytechnique.
Louis Gallois
Mr. Louis Gallois has been Chairman of SNCF since 1996. From1972 he worked in various posts for the Ministry of Economy
and Finance, the Ministry of Research and Industry and theMinistry of Defense. In 1989 he was nominated Chairman andChief Executive Officer of SNECMA and subsequently, in 1992
Chairman and Chief Executive Officer of Aerospatiale. He
graduated from the Ecole des Hautes Etudes Commerciales(HEC) in Economic sciences and is an alumnus of the Ecole
Nationale d’Administration (ENA).

• Member of the board of directors of Stichting
Administratiekantoor EADS (the “Foundation”);

Current mandates in addition to those listed in the chartabove• Member of the board of directors of Stichting
Administratiekantoor EADS (the “Foundation”);• Member of the supervisory board of Deutsche Messe AG;• Member of the supervisory board of Talanx AG/HDI
Versicherung;

Current mandates in addition to those listed in the chart above• Member of the board of directors of Thales;• Member of the supervisory board of IKB Deutsche
Industrie-Bank AG;• Member of the board of directors of Ecole Centrale des Arts
et Manufactures.

• Member of the supervisory board of KfW Kreditanstalt fürWiederaufbau;

Jean-René Fourtou
Mr Jean-René Fourtou joined Brossard & Michel as a consultant
in 1963. Subsequently, he was named member of the Board of
Brossard Consulting and finally Chief Operating Officer. In 1986,
he joined Rhone-Poulenc as Chairman and Chief Executive
Officer and then became Vice-Chairman of the Management
Board of Aventis. In 2002 he was named Chairman and Chief
Executive Officer of Vivendi Universal. Mr Jean-René Fourtou
graduated from the Ecole Polytechnique.

• Member of the supervisory board of KSB AG.

Current mandates in addition to those listed in the chart above• Chairman of the supervisory board of Groupe Canal +;• Member of the supervisory board of Axa;
• Member of the supervisory board of Aventis;
86 EADS 2003 Chapter 2 Corporate Governance

Resolutions to take note of the resignations of Mr. Jean-RenéFourtou and Mr. Eckhard Cordes as members of the Board of
Directors and to appoint Mr. François David (chairman and chief
executive officer of COFACE since 1994) and Mr. Rüdiger Grube(member of the board of management of Dasa AG in charge ofcorporate development since 2002) as their respective successors
will be submitted to the shareholders’ general meeting of EADS
called for May 6, 2004. Such appointments shall be effective as ofthe end of such shareholders’ general meeting.
The Company has not appointed observers to the Board of
Directors. Pursuant to applicable Dutch law, the employees are
not entitled to elect a Director. There is no minimum number ofshares that must be held by a Director.

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Independent Directors
The two independent directors appointed pursuant to thecriteria of independence set out above are Jean-René Fourtou
and Michael Rogowski.
Assessment of the Performance of the Board of Directors
At its December 5, 2003 meeting, the Board of Directors
decided to carry out an annual assessment of its performance as
from January 2004. A more thorough assessment of theperformance of the Board of Directors will be carried out every
three years, possibly using external consultants.
This year’s self-evaluation was conducted by the Chairmen of
the Board of Directors, based upon responses of members of
the Board of Directors to a questionnaire. The Chairmen jointly
evaluated the feedback of the members of Board of Directors
and led a discussion of the results at the March 5, 2004 Board of
Directors meeting.
The self-evaluation of the Board of Directors and its committees
comprises a general assessment of the meetings and processesof the Board of Directors, a review of the activities of the Boardof Directors and its Committees in the past year. The
questionnaire addressed matters such as the frequency of
meetings, the content of discussions and the thoroughness of
meeting preparation. The members of the Board of Directors
were also asked to consider the functioning and thecomposition of the Board of Directors, the quality and opennessof discussion, the independence of expressed opinions, theability to build on differing positions and the Director’s access tonecessary information.
The findings of the first self-assessment concluded that theoverall performance of the Board of Directors is verysatisfactory. Additional facilities for attendance by videoconference will further improve overall attendance.
The self-assessment confirmed that the nominees from theblock shareholders held opinions and defended positions
which are in all relevant questions aligned with theeconomic interests of individual shareholders. Given theabsence of material business interests between EADS and
its controlling shareholders, and the independence of thecontrolling shareholders from one another, the members of
the Board of Directors nominated by the controllingshareholders are deemed to fairly represent the interests ofall shareholders.
Furthermore, the members of the Board of Directors indicatedin self-assessment that the Board of Directors’ composition witha wide range of different experiences represented in the Boardof Directors and the running of meetings was conductive to theexpression of autonomous and complementary views, and thatthey had fairly substantial discussions on the strategic andoperational tasks for 2004.

Overall, the quality of the work carried out by the committees
was also judged very satisfactory. With its decision at theDecember 5, 2003 meeting, the Board of Directors empowered
the Audit Committee and the Remuneration and Nomination
Committee with an increased scope of authority to align with
the improved corporate governance standards in the EADS
home countries.
2.1.2 Audit Committee
The Audit Committee makes recommendations to the Board of
Directors on the appointment of auditors and the determinationof their remuneration, the approval of the annual financial
statements and the interim accounts, discusses with theauditors their audit programme and the results of their audit of
the accounts and monitors the adequacy of the Group’s internal
controls, accounting policies and financial reporting. The Audit
Committee has responsibility for ensuring that the internal andexternal audit activities are correctly directed and that the audit
matters are given due importance at meetings of the Board of
Directors.
The Audit Committee reviews the quarterly, half and full year
accounts on the basis of both documents distributed in advanceand discussions with the auditors. The head of accounting andthe Chief Financial Officer are invited to meetings of the Audit
Committee to answer any question.
The Audit Committee is chaired by Manfred Bischoff andArnaud Lagardère and also includes Eckhard Cordes and Louis
Gallois. The Audit Committee meets twice a year, or more
frequently according to requirements. It met twice during 2003,
with an 88% attendance rate, to review the 2002 results as wellas the first half-year results for 2003 of the Company. The Boardof Directors held on December 5, 2003, decided that the role of
the Audit Committee will be increased with new tasks as of2004, including, in particular, the review of the quarterly
financial reports and the supervision of the internal risk
management and control system. In relation to internal risk
management and control system, the Board of Directors
mandated the formalization and implementation of an improved
risk management and control system. See “– Internal Risks
Management and Control Procedures”.
2.1.3 Remuneration and Nomination Committee
The Remuneration and Nomination Committee (name changed
from Personnel Committee at Board meeting held on
December 5, 2003) makes recommendations to the Board of
Directors regarding appointments of the Executive Committee
members, the chief executive officers of main EADS business
units and the Corporate Secretary, human resources andremuneration related strategy and long-term remunerationplans (including playing a central role in determining andreviewing the variable portion of the remuneration of themembers of the Board of Directors and the Executive
Committee) and decides the service contracts and other

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contractual matters in relation to the Board of Directors andExecutive Committee members. The Remuneration and
Nomination Committee is chaired by Manfred Bischoff andArnaud Lagardère and also includes Philippe Camus, Rainer
Hertrich, Eckhard Cordes and Louis Gallois.

The following matters are discussed, amongst others, at the
Executive Committee meetings:

The Remuneration and Nomination Committee meets twice ayear, or more frequently according to requirements. It met six
times during 2003, with an 86% average attendance rate, toreview the compensation policy (including pension scheme formembers of the Executive Committee), the bonus payments for
2002, the stock option plan and the employee share ownershipplan for 2003, and to recommend the appointment of the chief
executive officers of the Company’s main business units such as
EADS Space, EADS Defence and Security Systems divisions’ newbusiness units and EADS EFW. Furthermore, the Remuneration
and Nomination Committee made a recommendation to theBoard of Directors on the name of a new member of the Airbus
executive committee. Pursuant to the decision of the Board of
Directors to amend the Rules on December 5, 2003, new tasks
have been attributed to the Remuneration and Nomination
Committee such as making recommendations regarding theappointment of the chairmen of the supervisory board (or similar
bodies) and the chief executive officers (or equivalent position) ofimportant Group companies and business units, as well as theCompany’s Corporate Secretary.

• Management, organizational and legal structure of theGroup;

2.1.4 Executive Committee
The Chief Executive Officers, supported by an Executive
Committee (the “Executive Committee”), are responsible formanaging the day-to-day operations of the Company. The
Executive Committee, chaired by the Chief Executive Officers,
also comprises the heads of the major and functional divisionsof the Group. The Executive Committee met nine times during
2003.

88 EADS 2003 Chapter 2 Corporate Governance• Setting up and control of the implementation of the strategy
for EADS businesses;• Performance level of the Group’s businesses and support
functions; and• All business issues.
The internal organization of the Executive Committee is definedby the business allocation among the members under thesupervision of the Chief Executive Officers. Notwithstanding
the joint responsibilities as defined above, each member of the
Executive Committee is individually responsible for the
management of his portfolio and must abide by decisions takenby the Chief Executive Officers and the Executive Committee,
as the case may be.
The Chief Executive Officers endeavour to reach consensus
among the members of the Executive Committee on the matters
discussed at the Executive Committee meetings. In the event ofconsensus not being reached, the Chief Executive Officers areentitled to decide the matter. If there is a fundamental orsignificant disagreement with respect to any undecided matter,the dissenting Executive Committee member may request that
the Chief Executive Officers submit such matter to the
Chairmen for their opinion.
The term of office for the Executive Committee members is five
years.

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Composition of the Executive Committee
Name

Age

Term
startedTerm
expires

Principal Occupation

Philippe Camus

55

2000

2005

Chief Executive Officer

Rainer Hertrich

54

2000

2005

Chief Executive Officer

François Auque

47

2000

2005

Head of Space Division

Ralph Crosby

56

2002

2007

Chairman and CEO of EADS North
America

Thomas Enders

45

2000

2005

Head of Defence and Security
Systems Division

Francisco Fernández-Sainz

58

2002

2007

Head of Military Transport Aircraft
DivisionNoël Forgeard

57

2000

2005

Head of Airbus Division andPresident and CEO of Airbus

Jean-Louis Gergorin

57

2000

2005

Head of Strategic Coordination

Jean-Paul Gut

42

2000

2005

Head of EADS International

Gustav Humbert

54

2000

2005

Airbus Chief Operating Officer

Jussi Itävuori

48

2002

2007

Head of Human Resources

53

2002

2007

Chief Financial Officer

62

2000

2005

Head of Aeronautics DivisionHans Peter Ring
Dietrich Russell

(*)

(*)

The Board of Directors held on March 5, 2004 accepted the resignation of Dietrich Russell for personal reasons as of April 30, 2004. In addition to his current
position as one of the Chief Executive Officers of EADS, Rainer Hertrich will take up these duties with effect from May 1, 2004.

Philippe Camus, Chief Executive Officer
See “2.1.1 Curriculum Vitae and other Mandates and Duties
Performed in any Company of the Members of the Board of
Directors”.
Rainer Hertrich, Chief Executive Officer
See “2.1.1 Curriculum Vitae and other Mandates and Duties
Performed in any Company of the Members of the Board of
Directors”.
François Auque, Head of Space Division
He joined Aerospatiale as Chief Financial Officer in 1991,
after a career with the Suez group and the French Cour desComptes. He was executive vice president finance andstrategy of Aerospatiale, Chief Financial Officer and GroupManaging Director for satellites and member of theManagement Board of Aerospatiale Matra. He graduatedfrom Ecole des Hautes Etudes Commerciales (HEC), from
Ecole Nationale d’Administration (ENA), and from Institutd’Etudes Politiques of Paris (IEP).
Ralph D. Crosby Jr., Head of EADS North America
Previously, Mr. Crosby was President of the Integrated Systems
Sector at Northrop Grumman Corporation, Corporate Vice
President and General Manager of the company’s Commercial
Aircraft Division and of the B-2 Division. He has a Bachelor of
Science degree from the US Military Academy, a master’s
degree in international relations from the Graduate Institute ofInternational Studies in Geneva and in public administrationfrom Harvard University.
Thomas Enders, Head of Defence and Security Systems
Division
He joined MBB/Dasa AG in 1991, after various posts ininternational research institutes, the German Parliament and thePlanning Staff of the German Minister of Defense. After several
years in the company’s marketing sector, he became Corporate
Secretary of Dasa AG in 1995. From 1996 to 2000 he was incharge of Corporate Strategy & Technology. Mr Enders holds
degrees from the University of Bonn and UCLA, California.
Francisco Fernandez Sainz, Head of Military Transport
Aircraft Division
Previously General Manager of Airbus España. He joined CASA
in 1971 as a design engineer, occupied various positions of
Product Engineering Manager (1975), Project Manager (1979),
Engineering Development Director of the Technical Directorate(1982), Vice President of Engineering (1984) and Executive Vice
President Programs (1997). Mr Fernandez-Sainz is a graduate of
ICADE (Master in Business Administration) and is a Senior
Aeronautical Engineer.
Noel Forgeard, Airbus President and Chief Executive Officer
See “2.1.1 Curriculum Vitae and other Mandates and Duties
Performed in any Company of the Members of the Board of
Directors”.
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Jean-Louis Gergorin, Head of Strategic Coordination
Mr Gergorin started his career with the French Government,
becoming Head of Policy Planning of the French Foreign
Ministry and member of the French German Committee on
Security and Defence. Then he joined the private sector,
holding senior strategic positions at Matra Lagardere andAerospatiale Matra. He graduated from Ecole Polytechniqueand Ecole Nationale d’Administration (ENA) in Paris and is analumnus of the Stanford Executive Program.
Jean-Paul Gut, Head of EADS International
Prior to July 2000, he was Executive Chairman of Aerospatiale
Matra Lagardère International and Group Managing Director of
Defence and Space Transport at Aerospatiale Matra. In March
1998, he was named Director of the Lagardere Group Board ofManagement, responsible for International Operations and theHigh Technology sector. He graduated from the Institut d’Etudes
Politiques of Paris (IEP), with a master’s degree in Economics.
Gustav Humbert, Airbus Chief Operating Officer
Previously a member of the Dasa AG Management Board
responsible for the Commercial Aircraft Division, Mr Humbertjoined Messerschmitt-Bölkow-Blohm (MBB) in 1980, andbecame President and Chief Executive Officer of Daimler Benz
Aerospace Airbus GmbH in 1994. He holds a degree inmechanical engineering and production technology from
Hanover Technical University as well as a PhD in engineeringfrom the University of Hanover, School of Machinery.
Jussi Itävuori, Head of Human Resources
Mr Itävuori joined EADS in September 2001. Previously, heworked for KONE Corporation since 1982 and was appointed in
1989 as head of Human Resources and member of Executive
Committee of KONE Elevators. In 1995 he was appointed
member of the Executive Committee and head of Human
Resources of KONE Corporation. He served in the Finnish Air
Force as a pilot and officer. He has a Master’s degree from the
Vaasa School of Economics, Finland.
Hans Peter Ring, Chief Financial Officer
See “2.1.1 Curriculum Vitae and other Mandates and Duties Performed
in any Company of the Members of the Board of Directors”.
Dietrich Russell, Head of Aeronautics Division
Former Chief Operating Officer of Airbus Industrie. Mr.
Russell joined Dasa AG in 1995 where he was appointed
member of the Board responsible for the Aeronautics Division.
Mr. Russell graduated from the Departments of Economics
and Metallurgical Engineering and holds a Doctorate inEngineering from the Technical University RWTH of Aachen.
He worked for 24 years for Mannesmann before joining Dasa.
2.1.5 Internal Risk Management and Control Procedures
2.1.5.1 Purpose of Internal Control Procedures
One of Management’s fundamental missions is to foster apositive internal control (“IC”) environment at EADS in line with
90 EADS 2003 Chapter 2 Corporate Governancecorporate governance best practices. Set out below is an
overview of the system of policies and procedures in place
within the Group that are designed to:• enable EADS to identify and respond to significant operational,
financial and compliance risks throughout the Group;• ensure the quality of financial reporting, including design
and implementation of processes to generate a flow oftimely, relevant and reliable information; and• ensure compliance with laws and regulations applicable to
the Group, as well as with internal Group policies.
However well designed, IC systems have inherent limitations,such as vulnerability to circumvention or overriding of thecontrols in place. Consequently, no absolute assurance can begiven that Group’s IC procedures are, despite all care and effort,
entirely effective.
2.1.5.2 Overview of Internal Control Framework
The Board of Directors has overall responsibility for the Group’s
IC environment. EADS’ Chief Executive Officers and EADS’
Chief Financial Officer, along with the Executive Committee, areresponsible for ensuring that IC procedures are implemented
throughout the Group, subject to the oversight of theCompany’s Audit Committee. Day-to-day control functions aredelegated to the Group’s divisions (Airbus, MTA, DS,
Aeronautics, Space) and business units. The particular actors
and structures involved in specific IC procedures of the Groupare identified in paragraph 2.1.5.3 below in connection with thedescription of those procedures.
Interaction with the EADS Management Process
The Group’s IC framework is intertwined with its management
process, and shaped by its management principles.
A general management principle of the Group is the delegationof entrepreneurial responsibility and powers to the operational
units. This principle of subsidiarity entails a clear separation of
responsibilities between EADS headquarters and the divisions
or business units. EADS headquarters sets the overall strategicand operational targets for the Group and assumes the ultimate
responsibility for the Group’s guidance. The divisions andbusiness units retain responsibility for all operational matters andactivities within their scope.
Management must have good visibility in matters related toentrepreneurial decision-making. Reporting procedures andtools have been established not only to provide this visibility, butalso to enable Management to safeguard the consistent
application of IC procedures throughout the organization.
Under these reporting procedures, material transactions,activities and risks (including those exceeding pre-defined
thresholds) must be reviewed at relevant supervisory levels of
the organization.

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Sources and Standards for Internal Control Procedures
The core policies, procedures and thresholds that define theGroup’s IC environment are communicated throughout theGroup through:• handbooks (e.g., “EADS Corporate Management Principles
and Responsibilities”, the “Financial Control Handbook”),• manuals (e.g., Treasury Procedures, “Accounting Manual”,“Reporting Manual”) and• guidelines (e.g., “Funding Policy”).
Written internal rules govern the operations of key elements of
the IC system; that is, (i) the Board of Directors, including its
Audit Committee and the Remuneration and Nomination
Committee, (ii) the Executive Committee and (iii) the
Commercial Committee and the M&A Committee. IC
procedures at certain subsidiaries and joint ventures are derived
from the relevant shareholders’ agreements applicable thereto.
External standards influencing the EADS IC system include the“Internal Control - Integrated Framework” defined by theCommittee of Sponsoring Organizations of the Treadway
Commission (“COSO”), as well as industry-specific standards
such as those defined by the International Standards
Organization (“ISO”).
2.1.5.3 Overview of Specific Internal Control Procedures
The Group maintains an IC system with the purpose ofproviding reasonable assurance to the Board of Directors,
Chief Executive Officers and Chief Financial Officer that risks
arising from the Group’s activities are being managed inaccordance with the Group’s established policies andprocedures. This report focuses on the IC procedures definedat EADS headquarters, to which the Group’s subsidiaries are
generally subject. Certain subsidiaries, such as Airbus, andjoint ventures, such as MBDA, possess IC systems that are
customized to their specific businesses and are designed forconformity with the Group’s IC framework. Continuity with the
EADS framework is ensured, inter alia, through EADS’
presence on such affiliates’ supervisory and management
bodies (e.g., Airbus Shareholders’ Committee, MBDA Boardof Directors).
Set out below is a description of the Group’s IC relating to risks
that have a significant potential of affecting the Group’s financial
condition and results of operations.(1) See “Part 2/1.5 Risk Factors”
and “1.1.7 Management of Market Risks” for additional informationon these and other risks to which the Group is exposed.
Financial Reporting Controls and Procedures
At the core of the Group’s IC system are the procedures
designed to ensure the reliability of the financial statements andother financial information used by Management and disclosed
to EADS’ investors. These procedures are part of an overall
financial control model integrating strategic planning, operativeplanning, measurement and reporting, decisions/actions andfinancial market communication. This integrated approach toplanning and reporting aims to improve internal communicationand transparency across departments and organizational units
within the Group, which are essential to the preparation of
accurate and reliable financial statements.
Consolidation Procedures – External Financial Reporting
The financial control model defines the planning andreporting procedures that apply to all operational units of theGroup, as well as the responsibilities of the Chief Financial
Officer, who is charged with developing, implementing andmonitoring these procedures. Among the Chief Financial
Officer’s primary tasks is overseeing the generation of
consolidated financial statements, which are prepared under
the direct supervision of the chief accounting officer. The
chief accounting officer is responsible for the operation of theGroup’s consolidation systems and rules and for the definitionof Group-wide accounting policies, reporting rules andfinancial guidelines that ensure the consistency and quality offinancial information reported by the business units anddivisions. The accounting policies are set out in a written
accounting manual, which is agreed with the Company’s
external auditors. Changes to the accounting manual requireapproval by the chief accounting officer, and, where
significant changes are involved, the Chief Financial Officer orthe Board of Directors (based upon the advice of the EADS
Audit Committee).
Control of the financial reporting process is effected not only
through the elaboration of Group-wide accounting a systems
and policies, but also through an organized process for
extracting quality information from the reporting units on atimely basis. The reporting process is briefly summarized
below:
Business unit accounting departments record information
using the Group accounting consolidation software, following
the accounting principles set out in the common Group-wideaccounting policy. EADS headquarters accountants
responsible for each division monitor and verify the work of
the relevant business unit accounting departments. The
division accountants also provide direct support to thebusiness units to ensure the correct application of the Group’s
accounting policies.
During the course of each reporting cycle, business unit chief
financial officers frequently meet with the EADS chief
accounting officer to discuss the financial information generated
by the business units.

(1)

This report is therefore not an exhaustive description of all of the Group’s
internal control procedures.

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Prior to being disclosed to the public and subsequently
submitted for approval to the shareholders, the consolidated
financial statements are audited by the Company’s external
auditors, reviewed by the EADS Audit Committee andsubmitted for approval by the Board of Directors.
Internal Management Reporting
In addition to being used in the preparation of the Company’s
consolidated financial statements, the Group’s financial
reporting policies and procedures are also designed to provide
Management frequently, at least monthly, with decisionoriented management information to control the operational
performance of the Group. This information includes regularcash and treasury reports, as well as other financial information
used for future strategic and operative planning and control andsupervision of economic risks arising from the Group’s
operations.
Procedures for Monitoring Off-balance Sheet Liabilities
Within the Group, off-balance sheet liabilities mainly arise inconnection with lease arrangements, extensions of guarantees
and pending or threatened litigation. Business units and divisions
are required to record, or to provide information on, all financial
guarantees in a tracking system. Guarantees for amounts inexcess of a certain threshold must be approved by the Chief
Financial Officer, the Chief Executive Officers or the Board of
Directors, as the case may be.
Management is currently optimizing procedures to monitor thelevel of certain off-balance sheet liabilities throughout theGroup. In particular, a specialized guarantee tracking system isbeing rolled out to monitor exposure arising from guarantees
throughout the Group.
For Airbus and jointly-controlled affiliates, such as MBDA,
summary information on guarantee-related off-balance sheet
exposure is captured by EADS headquarters based on regular
reports of this exposure and discussed in the Airbus and MBDA
treasury committee.
Other Significant Controls and Procedures
Treasury Procedures
Treasury management procedures, defined by the central
treasury department at EADS headquarters, enhanceManagement’s ability to identify and assess risks relating toliquidity, foreign exchange rates and interest rates. Controlledsubsidiaries fall within the scope of the centralized treasury
management procedures. For instance, besides daily
operational interface, Airbus treasury committee meetings,
comprising the EADS treasurer, the Airbus chief finance officer
or treasurer, and BAE’s treasurer (and/or its nominee), areheld on a regular basis to oversee Airbus’ foreign exchange
and interest rate exposures and hedging activities, funding,and sales and project finance activities. Similar monitoringprocedures exist for jointly-controlled affiliates, such as
MBDA.
92 EADS 2003 Chapter 2 Corporate Governance– Cash Management. Maintenance of liquidity to support
operations is one of the primary missions of the central
treasury department. Monthly cash planning and reportingby the central treasury department, in conjunction with thecontrolling department, provides Management with theinformation required to oversee the Group’s cash profileand to initiate necessary corrective action in order toensure overall liquidity. See “1.1.6 Liquidity and Capital
Resources”.
To maintain targeted liquidity levels, and to safeguard cash,
the Group has implemented a cash pooling system with daily
cash sweeps from the controlled subsidiaries to centrally
managed accounts. Payment fraud prevention procedures arein the process of being standardised throughout the Group.
– Hedge Management. Commercial operations generatematerial foreign exchange and interest rate exposures. See“1.1.7 Management of Market Risks – Interest Rate Risk”;“1.1.7 Management of Market Risks – Exchange Rate Risk”
and “Part 2/1.5.1. Market Risks – Exposure to Foreign
Currencies”. A Group hedging policy is defined and updated
regularly by the Board of Directors. In order to ensure that all
hedging activity is undertaken in line with the Group
hedging policy, the central treasury department executes all
hedging transactions. The central treasury department
conducts ongoing risk analysis and proposes appropriate
measures to the business units/divisions with respect toforeign exchange and interest rate risk. Subsidiaries are
required to calculate, update and monitor their foreignexchange and interest rate exposure with the central
treasury department on a monthly basis, in accordance withdefined treasury procedures.
A significant portion of the Group’s foreign exchange
exposure relates to the activities of Airbus, theimplementation of whose hedging policy is overseen by
the Airbus Shareholders’ Committee. The Airbus Treasury
Committee monitors foreign currency exposure anddecides on the detailed implementation of the Airbus
hedging policy. However, actual hedging transactions are
executed by the central treasury department.
Mergers and Acquisitions
With respect to merger, acquisition and divestiture activities of
the Group, Management has implemented transaction review
and approval procedures centralized at EADS headquarters.
The IC procedures require all M&A transactions to bereviewed by a M&A committee on behalf of the Executive
Committee prior to approval. The M&A committee is chairedby the head of strategic coordination, and includes the Chief
Financial Officer and the directors of EADS headquarters-level
M&A and controlling departments. Legal Affairs ispermanently represented on the M&A committee, andrepresentatives of other departments are also invited to attend
meetings.

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Projects that are considered non-strategic and fall under adefined value threshold are reviewed and approved by the
M&A committee. High-value strategic projects require approval
either by the Chief Executive Officers or the Board of Directors,
in line with criteria set out in the Board of Directors’ internal
rules. The specific role and responsibilities of the M&A
committee are defined in a set of internal rules adopted by the
Executive Committee. This review and approval procedure is
carried out at four critical stages of the M&A process, beginningwith an analysis of the strategic fit and definition of the legal
framework and concluding with a final review of the overall
transaction.
Commercial Contract/Sales Activity
Commercial contracts entered into by EADS or any of its
operating subsidiaries have the potential to expose the Group tosignificant financial, operational and legal risks. To control theserisks, Management has implemented contract proposal review
procedures to insure that the Group does not enter into material
commercial contracts that expose it to unacceptable risk or are
not in line with the Company’s overall objectives. These
procedures include (i) Board-approved thresholds and criteria
for determining the risk and profitability profile of proposed
contracts and (ii) a mandated pre-approval process for contracts
defined as high-risk.
Contracts falling below the defined thresholds require approvalby the Chief Financial Officer. Contracts that are deemed highrisk must be submitted to a standing Commercial Committee(with the Chief Financial Officer and the head of EADSInternational serving as permanent members). This committee is
responsible for reviewing the proposal and submitting adecision-leading recommendation to the Chief Executive
Officers. Its specific role and responsibilities are defined in a setof internal rules adopted by the Executive Committee.
In the case of Airbus, contracts are approved in accordance with
Airbus’ own corporate governance policy, which is based onGroup - wide guidelines. Certain Airbus contracts are nonethelessrequired to be reviewed by the EADS Commercial Committee ifthey exceed specified thresholds. In general, where EADS sharescontrol of a subsidiary with a third party, the Commercial
Committee is responsible for forming the EADS position on
proposed commercial contracts.
– Sales Financing. In connection with certain commercial
contracts, the Group may agree to enter into sales
financing arrangements. In respect of sales financing at
Airbus, an annual sales financing budget, defined in theGroup’s operative planning process, is agreed by the
Airbus Shareholders’ Committee. The Airbus Treasury
Committee approves sales financing transactions on a caseby-case basis, in line with its risk assessment guidelines.
See “1.1.6 Liquidity and Capital Resources – Sales
Financing” and “Part 2/1.5.1 Market Risks – Exposure to
Sales Financing Risk”.

Sourcing
A group with the size and complexity of EADS requires acommon sourcing policy to maximize market effort andminimize inefficiencies in the procurement process. To ensurethat corporate sourcing is carried out in an efficient and ethicalmanner, a set of common purchasing processes, in line with acommon sourcing strategy, is defined and implemented by thehead of corporate sourcing and the procurement directors
board.
Specialized Internal Control Functions
Internal Audit
Internal audits are conducted by the EADS corporate audit
department under the direction of the Corporate Secretary.
Based upon an approved annual audit plan and a global risk
assessment of the Group’s activities, the corporate audit
department (i) reviews operational processes for risk
management and operating efficiency improvement
opportunities and (ii) monitors compliance with legal
requirements and internal policies, process guidelines andprocedures (e.g., compliance with Group-wide accounting
policies). Internal audit also involves ad hoc reviews,
performed at the request of Management, focusing on
current (e.g., suspected illegal activities) and future (e.g.,contract management) risks.
Controlling
The core planning, tracking and reporting tasks of thecontrolling department provide it with a global overview of
the Group. As a result, the controlling department is also
called on to interact with other headquarters functions toensure that corporate activities, such as M&A and sourcing,are carried out in accordance with Group policy and strategy.
This global overview also makes controlling an integral
element of the risk assessment process, and the controlling
department is responsible for managing the Group’s
insurance coverage.
Legal Compliance
The Group is subject to a myriad of legal regimes in eachjurisdiction in which it conducts business. The EADS Legal
Affairs directorate, in coordination with the division andbusiness unit legal departments, is responsible for
implementing and overseeing the procedures designed toensure that the Group’s activities comply with all applicablelaws, regulations and requirements. It is also responsible foroverseeing all litigation affecting the Group, as well as for thelegal safeguarding of the Group’s assets, including intellectual
property. The Legal Affairs directorate is directly implicated in
key control processes. For example, it is involved in the legal
aspects of M&A transactions and the review and approval ofcommercial contracts.
Legal Affairs, together with the Corporate Secretary, also plays
an essential role in the design and administration of (i) the EADS
corporate governance procedures and (ii) the legal
EADS 2003 Chapter 2 Corporate Governance 93

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29 MARCH 2004

documentation underlying the delegation of powers andresponsibilities and defining the Group’s management and IC
environment.

2.1.5.4 Outlook for Evolution of Internal Controls
The overall IC process is currently the subject of acomprehensive review and evaluation process being conductedin coordination with outside consultants. Consequently, the IC
environment described in this report is likely to evolve in the
coming years.
Specifically, the IC and risk management review process isintended to:– ensure compliance with current and expected future Dutch
requirements, in particular the Dutch Corporate Governance
Code, while taking into account German, French, Spanish
and U.S. regulations;– prepare the Group to meet the standards of the SarbanesOxley Act relating to IC over financial reporting anddisclosure controls and procedures;– identify weak areas in the Group’s existing IC and propose
improvements in risk management procedures;– enable the Group to manage and minimize its control risks; and– combine the documentation and analysis of control
procedures with the objective of an integrated risk
management system (including financial statement,compliance and operational risks).
2.2 Interests of Directors and Principal Executive
Officers
2.2.1 Compensation Granted to Directors and Principal
Executive Officers
EADS’ remuneration policy aims at attracting and retaining
talents that will contribute to the Group’s business success. The
compensation policy is therefore designed to focus efforts onwhat the Group wants to value and reward.
The Board of Directors is composed of Non-Executive Directors
and Executive Directors (who are also members of the Executive
Committee).
Compensation of the Directors
The Non-Executive Directors are entitled to receive an
accumulated total target compensation as a group of NonExecutive Directors on a full year basis of € 900,000. This target
compensation includes (i) a fixed part of € 30,000 per directorand € 60,000 per chairman, (ii) a fee for participation in Boardof Directors’ meetings and committee meetings (if suchcommittee meetings take place on a different date than the
Board of Directors’ meetings) of € 5,000 per director and€ 10,000 per chairman, per meeting and (iii) a variable part
94 EADS 2003 Chapter 2 Corporate Governancecomposed of a profit sharing calculated on the basis of EBIT*
results of the Group, of € 50,000 per director and € 100,000
per chairman at 100% target achievement. The rules for the
profit sharing calculation on the basis of EBIT* results of theGroup for the Non-Executive Directors are the same as for themembers of the Executive Committee (see below“Compensation of the Members of the Executive Committee”).
The Non-Executive Directors do not have termination packages.
The Executive Directors receive neither fees for participation inboard meetings nor any dedicated compensation as members of
the Board of Directors in addition to their compensation as
members of the Executive Committee (see below“Compensation of the Members of the Executive Committee”).
The Executive Directors are eligible for benefits under stock
option plans (see “2.3.3 Options Granted to Employees”) andunder employee share ownership plans in their capacity as
qualifying employees (see also “2.3.2 Employee Share
Offering”). Additionally, the Executive Directors are entitled topension benefits.
The amounts of the various components constituting thecompensation granted to Executive Directors and Non-Executive
Directors during 2003 together with additional information suchas the number of stock options and details of the pension benefits
entitlements of the Executive Directors are set out in “Notes to the
Statutory Financial Statements – Note 9: Remuneration”.
The Executive Directors are also entitled to a termination
package when they leave the Company as a result of a decisionof the Company. Such termination package varies according to
the type of their contracts (either fixed term contracts of five
years with full pay until the end of the contract period plus an
indemnity of up to a maximum of 18 months of their target
income or contracts for an indefinite term with an indemnity of
up to a maximum of 24 months of their target income).
As of the date of this document, the members of the Board of
Directors (including those who are also members of the
Executive Committee) hold a total of 39,788 EADS shares (notincluding shares held through mutual funds).
Compensation of the Members of the Executive Committee
The members of the Executive Committee, including Executive
Directors but also members of the Executive Committee whoare not members of the Board of Directors, are entitled toreceive an accumulated total target compensation on a full year
basis of € 12,294,955. This target compensation is divided into
a 50% fixed part and a 50% variable part (in practice, thevariable part can exceed 50% of the total compensation in caseof overachievement of the targets). The variable part iscalculated on the basis of two equal components: (i) a profit
sharing calculated on the basis of EBIT* results of the Group(starting 2004, a 25% cash indicator will be introduced as acomplementary component to EBIT*) and (ii) a bonus
corresponding to individual achievements.

BOOK2-790-95

29 MARCH 2004

The total compensation paid by EADS and all its Group
companies to the two Chief Executive Officers of the Company,
Mr. Philippe Camus and Mr. Rainer Hertrich, during the year
2003 was € 1,963,500 each.
2.2.2 Options Granted to the two Chief Executive
Officers
See “2.3.3 Options Granted to Employees”.
2.2.3 Related Party Transactions
EADS being a company incorporated under Dutch law, Articles
L.225-38 to L.225-43 and L.225-86 to L.225-91 of the French
Code de Commerce on related party transactions are notapplicable to it.
Article 2:146 of the Dutch Civil Code provides as follows:“Unless the articles of association provide otherwise, a company(naamloze vennootschap) shall be represented by its board of
supervisory directors in all matters in which it has a conflict ofinterest with one or more of the members of its board of
directors. The general meeting of shareholders shall at all times
have powers to designate one or more persons for thispurpose.” In the case of EADS, the Articles of Association doprovide otherwise since they enable the Board of Directors tohave power to represent the Company in matters where theCompany has a conflict of interest with one or more membersof the Board of Directors.
During the year 2003, no agreement was entered into by theCompany with one of its directors or principal officers or ashareholder holding more than 5% of the voting rights of theCompany outside the ordinary course of business and in
conditions other than arm’s length conditions.
For a description of the relationships between the Company andits principal shareholders, see “Part 2/3.3.2 Relationships with
Principal Shareholders”.
As indicated in “Part 2/3.1.3.1 Ongoing Disclosure Obligations”,
pursuant to the Spanish Financial Law the Company is obliged
to provide the CNMV with certain information in relation to
every transaction carried out with any related party.
2.2.4 Loans and Guarantees Granted to Directors
EADS has not granted any loans to its Directors or members of
the Executive Committee.
2.3 Employee Profit Sharing and Incentive Plans
2.3.1 Employee Profit Sharing and Incentive Agreements
EADS’ remuneration policy is strongly linked to theachievement of individual and Company objectives, both foreach division and for the overall Group. A stock option plan has
been established for the senior management of the group (see“– Options Granted to Employees”) and employees were
offered shares at favourable conditions at the time of the public
offering and listing of EADS (see “– Employee Share Offering”).

EADS France has profit sharing plans (accords de participation),in accordance with French law, and specific incentive plans(accords d’intéressement), which provide bonuses to
employees based on the achievement of productivity, technicalor administrative milestones.
EADS Deutschland GmbH’s remuneration policy is, to a large
extent, flexible and strongly linked to the operating profit of thecompany, the increase in value of the company and theachievement of individual objectives.
EADS CASA, which does not have a profit sharing policy, allows
technicians and management to receive profit-related pay,
subject to the achievement of the general company objectives
and individual performance.
2.3.2 Employee Share Offering
As part of its initial public offering, EADS offered to qualifying
employees approximately 1.5% of its total share capital after the
global offering. This employee offering of up to 12,222,385
shares included an option allowing qualifying employees toleverage their investment in the shares they purchased. Under
this option, the investment consisted of the amount paid plus anamount resulting from a swap agreement of the investment
management company for this option, that equalled 9 times
such amount paid. Qualifying employees were offered shares ata price of € 15.30, being the price for the retail offering, less a
discount of 15%.
The employee offering was open only to employees who:
• had at least three months’ seniority;• had French, German or Spanish employment contracts; and• were employed by companies incorporated under French,
German or Spanish law in which EADS held (i) the majorityof the share capital or (ii) at least 10% of the share capital,
provided such minority-owned companies were designatedas eligible by EADS.
Depending on whether the employee purchased shares througha French, German or Spanish plan, directly or via a mutual fund,the employee is restricted from selling the shares for one of thefollowing lock-up periods: 18 months, 3 years, 5 years or 6
years.
A total number of 11,769,259 shares were subscribed for in theemployee offering. Shares were delivered on September 21,
2000.
In October 2001, EADS offered to qualifying employees amaximum of 0.25% of its total issued share capital before theoffering. This employee offering was for up to 2,017,894 sharesof a nominal value of € 1 each.
EADS 2003 Chapter 2 Corporate Governance 95

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29 MARCH 2004

The employee offering (note d’opération préliminaire approvedby the COB on October 8, 2001 under number 01-1200
and note d’opération définitive approved by the COB on
October 13, 2001 under number 01-1209) was open only toemployees who:
• had at least three months’ seniority;

The employee offering was divided into two tranches:– shares subscribed for by qualifying employees in Group
employee savings plan were offered for a price of € 8.86
per share;– shares subscribed for by qualifying employees directly were
offered for a price of € 7.93 per share.

• were employed by (i) EADS or (ii) one of its subsidiaries or(iii) a company in which EADS holds at least 10% of theshare capital and over whose management it has adetermining influence and whose registered office is locatedin South Africa, Germany, Brazil, Canada, Spain, the UnitedStates, the United Kingdom, France, Italy, Morocco, Mexicoand Singapore.

The employees are generally restricted from selling the shares
offered in this employee offering for one year and sometimes
more in certain countries.

The employee offering was divided into two tranches:

In October 2003, EADS offered to qualifying employees amaximum of 0.25% of its total issued share capital before theoffering. This employee offering was for up to 2,027,996 sharesof a nominal value of € 1 each.

– shares subscribed for by qualifying employees in Group
employee savings plan were offered for a price of € 10.70
per share;– shares subscribed for by qualifying employees directly were
offered for a price of € 10.70 per share.
The employees are generally restricted from selling the shares
offered in this employee offering for one year and sometimes
more in certain countries.
A total number of 2,017,894 shares were subscribed for in theemployee offering. Shares were delivered on December 5,
2001.
In October 2002, EADS offered to qualifying employees amaximum of 0.25% of its total issued share capital before theoffering. This employee offering was for up to 2,022,939 sharesof a nominal value of € 1 each.
The employee offering (note d’opération préliminaire approvedby the COB on September 30, 2002 under number 02-1062 andnote d’opération définitive approved by the COB on October
11, 2002 under number 02-1081) was open only to employees
who:

A total number of 2,022,939 shares were subscribed for in theemployee offering. Shares were delivered on December 4,
2002.

The employee offering (note d’opération approved by the COB
on September 25, 2003 under number 03-836) was given only
to employees who:
• had at least three months’ seniority;• were employed by (i) EADS on (ii) one of its subsidiaries or(iii) a company in which EADS holds at least 10% of theshare capital and over whose management it has adetermining influence and whose registered office is locatedin Germany, Belgium, Canada, Spain, the United States, theUnited Kingdom, France, Ireland, Mexico, the Netherlands
and Singapore.
The employee offering was divided into two tranches:– shares subscribed for by qualifying employees in Group
employee savings plan were offered for a price of € 12.48
per share;– shares subscribed for by qualifying employees directly were
offered for a price of € 12.48 per share.

• had at least three months’ seniority;• were employed by (i) EADS or (ii) one of its subsidiaries or(iii) a company in which EADS holds at least 10% of theshare capital and over whose management it has adetermining influence and whose registered office is locatedin Germany, Brazil, Canada, Spain, the United States, theUnited Kingdom, France, Italy, Mexico and Singapore.

96 EADS 2003 Chapter 2 Corporate Governance

The employees are generally restricted from selling the shares
offered in this employee offering for one year and sometimes
more in certain countries.
A total number of 1,686,682 shares were subscribed for in theemployee offering. Shares were delivered on December 5,
2003.

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29 MARCH 2004

2.3.3 Options Granted to Employees
At its May 26, 2000, October 20, 2000, July 12, 2001, August 9,
2002 and October 10, 2003 meetings, the Board of Directors of
the Company, using the authorisation given to it by theshareholders’ meetings of May 24, 2000, May 10, 2001 andMay 6, 2003, approved the granting of stock options forsubscription of shares in the Company. The principal
characteristics of these options are summarised in the table below:

First Tranche

Second Tranche

Date of general meeting

May 24, 2000

May 24, 2000

Date of board meeting

May 26, 2000

October 20, 2000

Number of options that were granted

5,324,884

240,000

Number of options outstanding

5,060,400

240,000

Of which: shares that may be subscribed bydirectors and officers

720,000

60,000Total number of eligible employees

Approximately 850

34

Date from which the options may be
exercised

50% of options may be exercised after aperiod of two years and four weeks fromthe date of grant of the options; 50% of
options may be exercised as of the third
anniversary of the date of grant of theoptions; moreover, the options may not
be exercised during a period of 3 weeks
preceding each annual general meetingof shareholders or the date ofannouncement of annual or semi-annual
results or quarterly figures.

50% of options may be exercised after aperiod of two years and four weeks fromthe date of grant of the options; 50% of
options may be exercised as of the third
anniversary of the date of grant of theoptions; moreover, the options may not
be exercised during a period of 3 weeks
preceding each annual general meetingof shareholders or the date ofannouncement of annual or semi-annual
results or quarterly figures.

Date of expiration

Tenth anniversary of the date of grant of
the options

Tenth anniversary of the date of grant of
the options

Exercise price€ 20.90€ 20.90

Number of options exercised00Third Tranche

Fourth Tranche

Date of general meeting

May 10, 2001

May 10, 2001

Date of board meeting

July 12, 2001

August 9, 2002

Number of options that were granted

8,524,250

7,276,700

Number of options outstanding

7,818,725

7,205,975– Mr. Philippe Camus(*)

135,000

135,000(*)– Mr. Rainer Hertrich

135,000

135,000– the 10 employees having being granted
the highest number of options during
the year 2001 (third tranche) and 2002
(fourth tranche)

738,000

808,000

Total number of eligible beneficiaries

Approximately 1,650

Approximately 1,562

Of which: shares that may be subscribed by:

EADS 2003 Chapter 2 Corporate Governance 97

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29 MARCH 2004

Third Tranche

Fourth Tranche

Date from which the options may be
exercised

50% of options may be exercised after aperiod of two years and four weeks fromthe date of grant of the options; 50% of
options may be exercised as of the third
anniversary of the date of grant of theoptions; moreover, the options may not
be exercised during a period of 3 weeks
preceding each annual general meetingof shareholders or the date ofannouncement of annual or semi-annual
results or quarterly figures.

50% of options may be exercised after aperiod of two years and four weeks fromthe date of grant of the options; 50% of
options may be exercised as of the third
anniversary of the date of grant of theoptions; moreover, the options may not
be exercised during a period of 3 weeks
preceding each annual general meetingof shareholders or the date ofannouncement of annual or semi-annual
results or quarterly figures.

Date of expiration

Tenth anniversary of the date of grant of
the options

Tenth anniversary of the date of grant of
the options

Exercise price€ 24.66€ 16.96

Number of options exercised

00Fifth Tranche

Date of general meeting

May 6, 2003

Date of board meeting

October 10, 2003

Number of options that may be subscribed

7,563,980

Number of options outstanding

7,563,980

Of which: shares that may be subscribed by:– Mr. Philippe Camus(*)

135,000(*)– Mr. Rainer Hertrich

135,000– the 10 employees having being granted
the highest number of options during
the year 2003

808,000

Total number of eligible beneficiaries

Approximately 1,491

Date from which the options may be
exercised

50% of options may be exercised after aperiod of two years and four weeks fromthe date of grant of the options; 50% of
options may be exercised as of the third
anniversary of the date of grant of theoptions; moreover, the options may not
be exercised during a period of 3 weeks
preceding each annual general meetingof shareholders or the date ofannouncement of annual or semi-annual
results or quarterly figures.

Date of expiration

Tenth anniversary of the date of grant of
the options

Exercise price€ 15.65

Number of options exercised0

Number of options cancelled during theyear 2003

0(*)

For more information in respect of options granted to the Executive Directors, see “Notes to the Statutory Financial Statements – Note 9: Remuneration”.

98 EADS 2003 Chapter 2 Corporate GovernanceBOOK2-790-99

29 MARCH 2004

Chapter 3
Outlook

3.1 2004 Financial Outlook
Revenues
For 2004, the Company is targeting generally stable revenues ofapproximately € 29 to 30 billion for the fourth straight year inthis general downturn of the industry. Defence business growthis expected to offset the decline of Airbus revenues attributable
to the combination of the U.S. currency weakness and slightly
lower deliveries.
The 2004 revenues target is based on the assumption of a
weaker U.S. Dollar than in 2003 (€-U.S. $ 1.20, as compared to€-U.S. $ 1.10) for the calculation of the portion of revenues thatis naturally hedged by U.S. dollar-denominated purchasing(amounting to approximately one third of overall EADS
revenues).
Following a careful assessment of its order book, Airbus
anticipates delivering close to 300 aircraft in 2004, compared to
305 in 2003. A conservative management of delivery slots gives
Airbus flexibility to face unexpected events and to keep
customer financing within strict limits.
The Space Division’s revenues are expected be stable in 2004,
supported by a robust order book (including 10 civil
telecommunications satellites). Major programs such as the£ 2.5 billion Paradigm contract (Skynet5 secure communication
services for the U.K. MoD) and opportunities such as thedesign, delivery and operation of Galileo (European satellite
navigation system) should fuel medium-term growth.
The ramp up of defence programs in the other Divisions(Military Transport Aircraft, Aeronautics, Defence and Security
Systems) is expected to prompt revenue growth. The strongest
drivers of growth in 2004 will be the A400M, the Tiger andNH90 helicopters and missile programmes.
EBIT Pre-Goodwill Amortisation and Exceptionals
Management expects an increase of operating results in theyear 2004. Ahead of the commercial aviation market upturn
expected in 2005, EADS targets earnings before interest andtaxes, pre-goodwill amortization and exceptionals (“EBIT*”)
result of approximately € 1.8 billion in 2004 (€ 1.5 billion in2003).
With respect to the slow recovery of the airline industry which isstill under pressure, EADS considers this guidance realistic andconsistent with its emphasis on financial prudence andreliability. This target is a milestone on the road to double digit
EBIT* margins in the medium-term, and supports EADS’ solid
financial position.
In anticipation of the legal requirement to apply IFRS rules,
EADS has changed its accounting policy regarding development
costs, to be fully compliant with IAS 38. This change had nomaterial effect in 2003, but it is expected that approximately€ 100 million of development costs will be capitalised in 2004.
This accounting change is included in the 2004 EBIT* target of€ 1.8 billion.
The successful delivery ramp-up of missile programmes,
Eurofighter, military helicopters and the acceleration of the
A400M development revenues will contribute to the growth of
EBIT*. At the same time, following the high level of defence
contract acquisition, Management will focus on the profitable
execution of these large programmes and to the performance ofthe overall defence business. 2004 EBIT* will include costs andinvestments associated with the efficiency improvement plans to
be launched at LFK and the Defence and Communication
Systems business units.
While the potential slight decrease in Airbus deliveries in 2004
and the continuing A380 R&D effort are expected to hamper
2004 EBIT*, the anticipated turnaround of the Space Division
should act as a significant source of increased profitability. The
dramatic restructuring plan currently under implementation anda number of organizational improvements are the main driversof the expected swing to breakeven EBIT* of the Space Divisionin 2004.
Cash
In 2004, EADS expects to continue generating a positive
Free Cash Flow before Customer Financing. Indeed, theCompany will continuously strive to offset the cash outlays for
the A380 investment and the Skynet 5 construction by
ongoing cash preservation initiatives. Maintaining its financial
discipline, EADS also intends to pursue its control ofcommercial aviation customer financing with gross exposure
not expected to increase by more than approximately
U.S.$ 0.9 billion for 2004.
3.2 2004 Calendar of Financial Communication
2004 Annual Results Release:
March 8, 2004
Annual General Meeting:May 6, 2004
First Quarter 2004 Results Release:
May 12, 2004
Global Investor Forum:
June 21-22, 2004
First Half 2004 Results Release:
July 29, 2004
Third Quarter 2004 Results Release:
November 4, 2004

EADS 2003 Chapter 3 Outlook 99

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29 MARCH 2004

Reference Document Thematic Index

In order to simplify the reading of this document which is filed as part of the EADS Reference Document for the financial year 2003,
the following thematic index permits the identification of the main information required by the Autorité des Marchés Financierswithin the framework of its regulation.
Statements of Responsible Persons• Statement of the Persons Responsible for the Reference Document• Statement of the Persons Responsible for the Financial Statements• Information Policy

Part 2

Sections
5.2
5.3.2
5.4

General Information on EADS and its Share Capital
Governing Law and Regulations Applicable to EADS
Share Capital• Modification of Share Capital or Rights Attaching to the Shares• Issued Share Capital• Authorised Share Capital• Table Showing Changes in the Share Capital over the Last Five Years
Stock Exchange Information• Table Showing Changes in Prices and Volume since July 2000
• Dividends
Share Capital, Voting Rights• Shareholding Structure and Voting Rights• Changes in the Shareholding of the Company since its Incorporation• Relationships with Principal Shareholders

Part 2

Sections
3.1.3 - 3.1.11 - 3.1.12

Information Concerning EADS Business Activities• Presentation of the EADS Group (relationships between EADS and its subsidiaries)• Key Figures for the EADS Group• Information by Divisions• EADS’ Markets and Competitive Positioning• Investment Policy

Part 2

Sections
1.1.1
1.1.1
1.1.1 to 1.1.6
1.1.2 to 1.1.6
1.1.7

Analysis of EADS Risk Factors• Risk Factors– Market Risks– Specific Risks Linked to EADS Business– Legal Risks– Industrial and Environmental Risks• Insurance and Risks CoverPart 2

Sections

Net Assets, Financial Position and Results• Consolidated Financial Statements and Related Notes• Off Balance Sheet Commitments• Statutory Auditors’ Fees
• Statutory Financial Statements and Related Notes

Part 2

Sections
1.2.1
1.1.6
1.3
1.2.2

Corporate GovernancePart 1• Composition and Functioning of the Board of Directors, Chairmen and Chief Executive Officers• Composition and Functioning of the Board Committees• Compensation Granted to Directors and Principal Executive Officers• The Ten Highest Granted Options Employees that are not Corporate Officers• Related Party Transactions

Sections
2.1.1
2.1.2 - 2.1.3
2.2.1 - 2.3.3
2.3.3
2.2.3

3.2.1
3.2.2
3.2.3
3.2.5
3.4
3.5
3.3.1
3.3.4
3.3.2

1.5.1 and Part 1/1.1.7
1.5.2
1.5.3
1.5.4
1.5.5

Recent Developments

Part 2

Section
2.1

OutlookPart 1

Section
3.1

100 EADS 2003 Reference Document Thematic Index

This document is also available at thefollowing addresses:
European Aeronautic Defence and Space
Company – EADSIn France
37, boulevard de Montmorency
75781 Paris cedex 16 – France
In Germany
81663 Munich – Germany
In Spain
Avenida de Aragón 404
28022 Madrid – Spain

European Aeronautic Defence
and Space Company – EADS N.V.
Le Carré
Beechavenue 130 – 132
1119 PR Schiphol-Rijk
The Netherlands
www.eads.net