#### ** **

#### **As filed with the Securities and Exchange Commissionon April 23, 2004**

 

**UNITED STATES**

###### **SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

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###### **FORM 20-F**

**ANNUAL REPORT PURSUANT TOSECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF1934**

 

**Forthe fiscal year ended: December 31, 2003**

**Commissionfile number: 333-13690**

 

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###### **ALFA LAVAL SPECIAL FINANCEAB**

(Exact name ofRegistrant as specified in its charter)

 

**TheKingdom of Sweden**

(Jurisdictionof incorporation or organisation)

 

**Rudeboksvägen 3**

**Lund, Sweden**

**+(46 46) 36 7000**

(Address ofprincipal executive office)

 

SECURITIESREGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b)OF THE ACT:

**None**

 

SECURITIESREGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(g)OF THE ACT:

**None**

 

SECURITIES FORWHICH THERE IS A REPORTING OBLIGATION PURSUANTTO SECTION 15(d) OF THE ACT:

**121/8% Senior Notes due 2010**

 

The number ofoutstanding shares of Alfa Laval Special Finance AB’s classes ofcapital or common stock as of December 31, 2003:

**8,191,000Ordinary Shares, nominal value SEK 100 per share**

 

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Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for suchshorter period that the Registrant was required to file such reports), and(2) hasbeen subject to such filing requirements for the past 90 days:

 

Yes o  No ý

 

Indicate bycheck mark which financial statement item the Registrant has elected to follow:

Item 17 ý  Item 18 o

 

 

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**TABLEOF CONTENTS**

 
| INTRODUCTION                                                                           |   |
|----------------------------------------------------------------------------------------|--------|
| FORWARD-LOOKING STATEMENTS                                                             |   |
| MARKET SHARE AND INDUSTRY DATA                                                         |   |
| CERTAIN DEFINITIONS                                                                    |   |
| **PART I**                                                                             |   |
| ITEM 1: IDENTITY OF DIRECTORS, SENIOR  MANAGEMENT AND ADVISERS                         |   |
| ITEM 2: OFFER STATISTICS AND EXPECTED  TIMETABLE                                       |   |
| ITEM 3: KEY INFORMATION                                                                |   |
| ITEM  4: INFORMATION ABOUT THE COMPANY                                                 |   |
| ITEM 5:  OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                  |   |
| ITEM 6:  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                    |   |
| ITEM 7:  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                             |   |
| ITEM 8:  FINANCIAL INFORMATION                                                         |   |
| ITEM 9:  THE OFFER AND LISTING                                                         |   |
| ITEM  10: ADDITIONAL INFORMATION                                                       |   |
| ITEM  11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   |   |
| ITEM  12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       |   |
| **PART II**                                                                            |   |
| ITEM  13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              |   |
| ITEM 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS  AND USE OF PROCEEDS |   |
| ITEM  15: CONTROLS AND PROCEDURES                                                      |   |
| ITEM 16A: AUDIT COMMITTEE FINANCIAL EXPERT                                             |   |
| ITEM  16B: CODE OF ETHICS                                                              |   |
| ITEM 16C: PRINCIPAL ACCOUNTANT FEES AND  SERVICES                                      |   |
| **PART III**                                                                           |   |
| ITEM  17: FINANCIAL STATEMENTS                                                         |   |
| ITEM  18: FINANCIAL STATEMENTS                                                         |   |
| ITEM  19: EXHIBITS AND CERTIFICATIONS                                                  |   |

 

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##### **INTRODUCTION**

 

The discussion under the caption “Item 5:Operating and Financial Review and Prospects” in this annual report containsreferences to Swedish kronor amounts on a constant exchange rate basis.  These Swedish kronor amounts, which alsoinclude the impact of Alfa Laval’s hedging activities, have been converted froma variety of foreign currencies, including the euro at a rate of €1.00 =SEK 9.1180, the average rate calculated on monthly closing rates issued byReuters.

 

Certain amounts and percentages included inthis annual report have been rounded and accordingly may not total.

 

##### **FORWARD-LOOKING STATEMENTS**

 

This annual report includes variousforward-looking statements and includes assumptions about future marketconditions, operations and results. These statements appear in a number of places, including “Item 3.D:Key Information—Risk Factors”, “Item 4.B: Information about theCompany—Business Overview” and “Item 5: Operating and Financial Review andProspects”, and include statements regarding our intentions, beliefs or currentexpectations.  The words “believe”,“expect”, “anticipate”, “intend” or “plan” and similar expressions identifycertain of such forward-looking statements. Others can be identified from the context in which the statements aremade.  Actual events or results maydiffer materially as a result of risks and uncertainties that we face.  Important factors that could cause thesedifferences include:

 

•                  worldwideeconomic and business conditions and regulatory, legislative and judicialdevelopments;

 

•                  businessconditions of our customers;

 

•                  increasedcompetition from other companies in our industry;

 

•                  emergenceof new or substitute technologies;

 

•                  availabilityand price fluctuations of raw materials;

 

•                  changesin our business strategy or development plans;

 

•                  successwith our product development;

 

•                  implementationof our corporate and operational restructuring;

 

•                  thesignificant amount of debt we and our subsidiaries have incurred and ourobligations to service such debt; and

 

•                  contractualrestrictions on our ability to receive loans and dividends from certain of oursubsidiaries.

 

We caution you that any such forward-lookingstatements are not guarantees of future performance and involve risks anduncertainties.  We also caution you thatactual results may differ materially from those made in or suggested by theforward-looking statements as a result of various factors.  The information contained in this annualreport, including, without limitation, the information under “Item 3.D:Key Information—Risk Factors”, “Item 4.B: Information about theCompany—Business Overview” and “Item 5: Operating and Financial Review andProspects” identify important factors that could cause such differences.  We undertake no obligation to publiclyupdate or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.

 

i

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##### **MARKET SHARE AND INDUSTRY DATA**

 

This annual report contains historical marketdata and industry forecasts, which have been obtained from industrypublications, market research and publicly available information.  The industry publications state that thehistorical information they provide has been obtained from sources, and throughmethods, believed to be reliable, but that they do not guarantee the accuracyand completeness of this information. Similarly, industry forecasts and market research, while believed to bereliable, have not been independently verified by us.  We make no representation that this historical information isaccurate.  Industry forecasts are, bytheir nature, subject to significant uncertainty.  There can be no assurance that any of the forecasts will beachieved.

 

We define the compact heat exchanger marketto include brazed, welded and gasketed plate heat exchangers.  We define the centrifugal separation marketas decanter centrifuges and high speed separators.  We define the sanitary flow market as sanitary liquid handlingequipment, including pumps, valves and fittings.

 

##### **CERTAINDEFINITIONS**

 

Unless otherwise noted, reference in this annual report to:

 

•                                          “Acquisition”refers to the acquisition by Industri Kapital and others, as described herein,of all of the outstanding capital stock of the former Alfa Laval Holding ABfrom Zarus Holding B.V., now operating under the name of Tetra Laval B.V.;

 

•                                          “AlfaLaval AB” means Alfa Laval AB, our parent holding company;

 

•                                          “AlfaLaval Special Finance”, “Company”, “we”, “our” and “us” mean Alfa Laval SpecialFinance AB, a limited liability company registered under the laws of Sweden, and,where the context requires, its consolidated subsidiaries, which include theGuarantor;

 

•                                          “AlfaLaval Special Finance Group” means Alfa Laval Special Finance AB and thesubsidiaries in which it holds more than 50 percent;

 

•                                          “BondLoan” or, where the context so requires “Senior Notes” means the€220 million 12 1/8% senior notes due 2010 issued byus on November 9, 2000 and guaranteed on a senior subordinated basis byAlfa Laval Holding AB (renamed from Alfa Laval Credit Finance AB), theGuarantor (as defined below);

 

•                                          “EBITA”means Earnings Before Interest, Tax and Amortisation and is calculated asoperating income or loss (including share of earnings from associatedcompanies), before interest, taxes and goodwill Amortisation.  In addition, we have added back to EBITAdepreciation expense recorded on the additional basis recognised on certaintangible and intangible assets in connection with the Acquisition (“Step-UpDepreciation”) when calculating EBITA because we view the step-up in assetvalues as equivalent to goodwill and the Step-Up Depreciation as equivalent togoodwill Amortisation;

 

The following table shows how EBITA iscalculated for 1999, 2000 un-audited pro forma combined, 2001, 2002 and 2003:

 
|                     |   | **Year Ended  December 31,** |   |
|--------------------------|--------|-----------------------------------|--------|
|                     |   |                              |   | **Un-audited  Pro Forma  Combined** |   |   |   |   |   |   |   |
|                     |   | **1999**                          |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
|                     |   | **(SEK  millions)**               |   |
|                     |   |                              |   |   |   |   |   |   |   |   |   |
| Operating Income         |   | 249                               |   | 810 |   | 1,233 |   | 1,224 |   | 1,144 |   |
| Amortisation of goodwill |   | 715                               |   | 164 |   | 178 |   | 188 |   | 191 |   |
| Step-Up Depreciation     |   | —                            |   | 316 |   | 334 |   | 319 |   | 303 |   |
| EBITA                    |   | 964                               |   | 1,290 |   | 1,745 |   | 1,731 |   | 1,638 |   |

 

•                                          “EBITDA”means Earnings Before Interest, Tax, Depreciation and Amortisation and iscalculated as

 

ii

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operating income or loss (including share ofearnings from associated companies), before interest, taxes, depreciation andgoodwill Amortisation.  In addition, wehave added back to EBITDA depreciation expense recorded on the additional basisrecognised on certain tangible and intangible assets in connection with theAcquisition (“Step-Up Depreciation”) when calculating EBITDA because we viewthe step-up in asset values as equivalent to goodwill and the Step-UpDepreciation as equivalent to goodwill Amortisation;

 

The following table shows how EBITDA iscalculated for 1999, 2000 un-audited pro forma combined, 2001, 2002 and 2003:

 
|                     |   | **Year Ended  December 31,** |   |
|--------------------------|--------|-----------------------------------|--------|
|                     |   |                              |   | **Unaudited  Pro Forma  Combined** |   |   |   |   |   |   |   |
|                     |   | **1999**                          |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
|                     |   | **(SEK  millions)**               |   |
|                     |   |                              |   |   |   |   |   |   |   |   |   |
| Operating Income         |   | 249                               |   | 810 |   | 1,233 |   | 1,224 |   | 1,144 |   |
| Depreciation             |   | 476                               |   | 466 |   | 400 |   | 331 |   | 293 |   |
| Amortisation of goodwill |   | 715                               |   | 164 |   | 178 |   | 188 |   | 191 |   |
| Step-Up Depreciation     |   | —                            |   | 316 |   | 334 |   | 319 |   | 303 |   |
| EBITDA                   |   | 1,440                             |   | 1,756 |   | 2,145 |   | 2,062 |   | 1,931 |   |

 

•                                          “ExistingSenior Credit Facility” means the senior facilities agreement datedApril 29, 2002 as amended and restated on July 11, 2002 entered intoby Alfa Laval Treasury International AB and Alfa Laval US Treasury Inc.,as borrowers, and Alfa Laval Special Finance AB and others as guarantors for a maximumprincipal amount of €575 million, being €425 million term loanfacilities and €150 million revolving loan facilities.  This facility was refinanced with theproceeds of the New Senior Credit Facility on April 19, 2004;

 

•                                          “Group”means Alfa Laval Special Finance AB and the subsidiaries in which it holds morethan 50 percent for the period after August 24, 2000 and it means theformer Alfa Laval Holding AB and the subsidiaries in which it held more than 50percent for the period up to August 24, 2000;

 

•                                          “Guarantor”and “Alfa Laval Holding” means Alfa Laval Holding AB (formerly known as AlfaLaval Credit Finance AB and before that Alfa Laval Bostadsförvaltning AB), alimited company being a subsidiary of Alfa Laval Special Finance AB, registeredunder the laws of Sweden. Alfa Laval Credit Finance AB was renamed Alfa LavalHolding AB as part of its merger with its subsidiary Alfa Laval Holding AB in2003;

 

•                                          “IndustriKapital” means Industri Kapital Ltd., a private equity firm, togetherwith, and, where the context requires, certain investment funds advised byIndustri Kapital Ltd. and certain of its affiliates;

 

•                                          “IndustriKapital 2000” means a number of limited partnerships, commonly referred to asthe Industri Kapital 2000 Fund, the general partner of each of which isIndustri Kapital 2000 Ltd. Industri Kapital 2000 Ltd. is advised byIndustri Kapital;

 

•                                          “IntercreditorAgreement” has the meaning given under the caption “Item 5.B: Liquidity andCapital Resources—Intercreditor Agreement”;

 

•                                          “ManagementWarrants” means warrants to subscribe for 3,721,310 ordinary shares held byexecutive officers of Alfa Laval AB and having an exercise price ofapproximately SEK 59.5 per share.  Thesewarrants were exercised on April 23, 2002;

 

•                                          “NewIntercreditor Agreement” has the meaning given under the caption “Item5.B:  Liquidity and Capital Resources —New Intercreditor Agreement”;

 

•                                          “NewSenior Credit Facility” means the senior multi-currency revolving facilitiesagreement dated April 15, 2004 entered into by Alfa Laval TreasuryInternational AB and Alfa Laval US Treasury Inc., as borrowers,

 

iii

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and Alfa Laval AB (publ) and others, asguarantors, for a maximum principal amount of U.S.$325 million and €150million;

 

•                                          “Offering”means the offering by Alfa Laval AB, Industri Kapital 2000, Tetra Laval B.V.and certain of Alfa Laval AB’s officers and directors of 56,515,022 ordinaryshares in Alfa Laval AB.  The ordinaryshares in Alfa Laval AB were offered pursuant to an institutional offering, apublic offering to investors in Sweden and an employee offering to employees inDenmark, Finland, Norway and Sweden. The ordinary shares offered were delivered to purchasers on May 23,2002.  Alfa Laval AB listed its ordinaryshares on the O-list of the Stockholm Exchange at that time.  The ordinary shares of Alfa Laval AB wereoffered in the United States only to qualified institutional buyers in relianceon Rule 144A under the Securities Act of 1933, as amended (the “SecuritiesAct”) and outside the United States in compliance with Regulation S underthe Securities Act;

 

•                                          “Predecessor”or “the former Alfa Laval Holding” means the former Alfa Laval Holding AB,including its consolidated subsidiaries. The former Alfa Laval Holding AB was an indirect wholly owned subsidiaryof Alfa Laval AB and was during 2003 merged into Alfa Laval Credit Finance AB,which was then renamed Alfa Laval Holding AB;

 

•                                          “PreviousSenior Credit Facility” means the senior facilities agreement datedAugust 22, 2000 entered into by Alfa Laval AB, Alfa Laval Holding AB(renamed from Alfa Laval Credit Finance AB) as borrower and other Groupcompanies for a maximum principal amount of €651.8 equivalent term loanfacilities and € 475 million equivalent revolving loan facilities.  This facility was refinanced with theproceeds of the Existing Senior Credit Facility on May 28, 2002;

 

•                                          “SeniorNotes”. See “Bond Loan” above.

 

•                                          “ShareSale and Purchase Agreement” means the agreement dated June 16, 2000, asamended on August 24, 2000, relating to the Acquisition;

 

•                                          “SubordinatedLoan” means the €200.0 million subordinated vendor loan, extended by TetraLaval Finance Limited.  Alfa Laval ABused the proceeds from the Offering and the exercise of the Management Warrantsand drawings under the Existing Senior Credit Facility to repay theSubordinated Loan, together with accrued and unpaid interest thereon, onMay 23, 2002;

 

•                                          “TetraLaval” and “Tetra Laval Group” means Tetra Laval and its affiliated entities asof the date of this annual report;

 

•                                          “TetraPak” and “Tetra Pak Group” means Tetra Pak International S.A. and allaffiliated companies which are under the management control of Tetra PakInternational S.A.;

 

•                                          “TetraLaval B.V.” means Zarus Holding B.V., a member of the Tetra Laval Group, nowoperating under the name Tetra Laval B.V. and;

 

•                                          “Vendor”means Tetra Laval B.V..

 

For definitions of operating data and key ratios used throughout thisannual report, see “Item 3.A—Key Information—Definitions of Operating Dataand Key Ratios”.

 

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**PART I**

 

**ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENTAND ADVISERS**

 

Not applicable.

 

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**ITEM 2: OFFER STATISTICS ANDEXPECTED TIMETABLE**

 

Not applicable.

 

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**ITEM 3: KEY INFORMATION**

 

**3.A. Selected Financial Data**

 

***Alfa Laval Special Finance AB***

 

The table below sets forth (a) selectedaudited consolidated financial data of the former Alfa Laval Holding and itssubsidiaries, Alfa Laval’s predecessor, for the year ended December 31,1999, (b) selected unaudited pro forma combined financial data for AlfaLaval Special Finance AB for the year ended December 31, 2000, and(c) selected audited consolidated financial data for Alfa Laval SpecialFinance AB for the years ended December 31, 2001, 2002 and 2003.  We acquired the former Alfa Laval Holding onAugust 24, 2000.  The selectedconsolidated financial data set forth below as of and for the financial yearsended December 31, 1999, 2000, 2001, 2002 and 2003 have been derived from,and are qualified by reference to, Alfa Laval Special Finance AB’s consolidatedfinancial statements and those of its predecessor, which have been audited byErnst & Young, independent public accountants.  The consolidated financial statements havebeen prepared in accordance with Swedish GAAP, which differs in certainmaterial respects from US GAAP.  Theprincipal differences between Swedish GAAP and US GAAP, as applicable to AlfaLaval Special Finance AB and the Predecessor, are summarised in note 33 toour audited consolidated financial statements included elsewhere in this annualreport.

 

The following information should be read inconjunction with (i) ”Item 3.A: Key Information—Unaudited Pro FormaConsolidated Financial Information”, (ii) ”Item 5: Operating andFinancial Review and Prospects” and (iii) the audited consolidatedfinancial statements of Alfa Special Finance AB and its Predecessor includedelsewhere in this annual report.

 

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**SelectedConsolidated Historical Financial Data for**

**AlfaLaval Special Finance AB**

 
|                                                                                                 |   | **Year  Ended  December 31  1999**      |   | **Period  ended  August 23  2000** |   | **Period  Ended  December 31   2000** |   | **Pro  Forma(1)  Combined  2000** |   | **Year  Ended  December 31   2001** |   | **Year  Ended  December 31   2002** |   | **Year  Ended  December 31   2003** |   |
|------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|-----------------------------------------|--------|--------------------------------------------|--------|-----------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|
|                                                                                                 |   | **Predecessor**                              |   | **Successor**                           |   |
|                                                                                                 |   | **(SEK  millions, unless otherwise stated)** |   |
|                                                                                                 |   |                                         |   |                                    |   |                                       |   |                              |   |                                     |   |                                     |   |                                     |   |
| **Consolidated  Statement of Operations Data:**                                                      |   |                                         |   |                                    |   |                                       |   |                              |   |                                     |   |                                     |   |                                     |   |
| **Swedish GAAP:**                                                                                    |   |                                         |   |                                    |   |                                       |   |                              |   |                                     |   |                                     |   |                                     |   |
| Net sales                                                                                            |   | 14,405                                       |   | 9,295                                   |   | 5,717                                      |   | 15,012                            |   | 15,830                                   |   | 14,595                                   |   | 13,909                                   |   |
| Cost of goods sold                                                                                   |   | (9,355                                       | )      | (5,963                                  | )      | (3,951                                     | )      | (10,124                           | )      | (10,348                                  | )      | (9,262                                   | )      | (8,976                                   | )      |
| Gross profit                                                                                         |   | 5,051                                        |   | 3,333                                   |   | 1,766                                      |   | 4,888                             |   | 5,482                                    |   | 5,333                                    |   | 4,933                                    |   |
| **Other operating  expenses:**                                                                       |   |                                         |   |                                    |   |                                       |   |                              |   |                                     |   |                                     |   |                                     |   |
| Sales costs                                                                                          |   | (2,695                                       | )      | (1,748                                  | )      | (835                                       | )      | (2,584                            | )      | (2,443                                   | )      | (2,115                                   | )      | (2,246                                   | )      |
| Administrative costs                                                                                 |   | (976                                         | )      | (643                                    | )      | (218                                       | )      | (862                              | )      | (787                                     | )      | (1,027                                   | )      | (866                                     | )      |
| Research and development costs                                                                       |   | (435                                         | )      | (279                                    | )      | (162                                       | )      | (441                              | )      | (341                                     | )      | (355                                     | )      | (368                                     | )      |
| Other operating income/(costs)                                                                       |   | (11                                          | )      | (69                                     | )      | (88                                        | )      | (157                              | )      | (504                                     | )      | (395                                     | )      | (124                                     | )      |
| Goodwill amortisation                                                                                |   | (715                                         | )      | (485                                    | )      | (55                                        | )      | (164                              | )      | (178                                     | )      | (188                                     | )      | (191                                     | )      |
| Comparison distortion items                                                                          |   | 30                                           |   | 523                                     |   | (394                                       | )      | 130                               |   | 5                                        |   | (29                                      | )      | 6                                        |   |
| Operating income/(loss)                                                                              |   | 249                                          |   | 631                                     |   | 14                                         |   | 810                               |   | 1,233                                    |   | 1,224                                    |   | 1,144                                    |   |
| Interest and other financial income/(costs)                                                          |   | (133                                         | )      | (125                                    | )      | (329                                       | )      | (802                              | )      | (861                                     | )      | (764                                     | )      | (327                                     | )      |
| Income/(loss) before taxes and minority  interests                                                   |   | 116                                          |   | 506                                     |   | (315                                       | )      | 8                                 |   | 373                                      |   | 460                                      |   | 817                                      |   |
| Income tax benefit/(expense)                                                                         |   | (333                                         | )      | (245                                    | )      | (56                                        | )      | (105                              | )      | 26                                       |   | (218                                     | )      | (134                                     | )      |
| Minority interests                                                                                   |   | (27                                          | )      | (36                                     | )      | (12                                        | )      | (48                               | )      | (32                                      | )      | (34                                      | )      | (42                                      | )      |
| Net income/(loss)                                                                                    |   | (244                                         | )      | 225                                     |   | (383                                       | )      | (145                              | )      | 367                                      |   | 208                                      |   | 641                                      |   |
|                                                                                                 |   |                                         |   |                                    |   |                                       |   |                              |   |                                     |   |                                     |   |                                     |   |
| **US GAAP:**                                                                                         |   |                                         |   |                                    |   |                                       |   |                              |   |                                     |   |                                     |   |                                     |   |
| Net income/(loss)                                                                                    |   | 223                                          |   | 447                                     |   | (443                                       | )      | (316                              | )      | 294                                      |   | 633                                      |   | 1,017                                    |   |
| Income/(loss) from continuing operations  before cumulative effect of change in accounting principle |   | 201                                          |   | 447                                     |   | (443                                       | )      | (316                              | )      | 356                                      |   | 633                                      |   | 1,017                                    |   |
| Depreciation and Amortisation                                                                        |   | 757                                          |   | 516                                     |   | 346                                        |   | N/A                               |   | 883                                      |   | 704                                      |   | 651                                      |   |
| Ratio of earnings to fixed charges,  times(3)                                                        |   | 2.9                                          | x      | 4.0                                     | x      | —                                     |   | N/A                               |   | 1.3                                      | x      | 2.2                                      | x      | 3.6                                      | x      |
|                                                                                                 |   |                                         |   |                                    |   |                                       |   |                              |   |                                     |   |                                     |   |                                     |   |
| **Operating Data and  Key Ratios(2):**                                                               |   |                                         |   |                                    |   |                                       |   |                              |   |                                     |   |                                     |   |                                     |   |
| Orders received                                                                                      |   | 13,897                                       |   | 10,301                                  |   | 5,073                                      |   | 15,374                            |   | 15,894                                   |   | 14,675                                   |   | 14,145                                   |   |
| Order backlog                                                                                        |   | 3,532                                        |   | N/A                                     |   | N/A                                        |   | 4,063                             |   | 4,314                                    |   | 4,340                                    |   | 4,021                                    |   |
| Gross margin,%                                                                                       |   | 35.1                                         | %      | 35.9                                    | %      | 30.9                                       | %      | 32.6                              | %      | 34.6                                     | %      | 36.5                                     | %      | 35.5                                     | %      |
| Operating income                                                                                     |   | 249                                          |   | 631                                     |   | 14                                         |   | 810                               |   | 1,233                                    |   | 1,224                                    |   | 1,144                                    |   |
| Operating margin%                                                                                    |   | 1.7                                          | %      | 6.8                                     | %      | 0.2                                        | %      | 5.4                               | %      | 7.8                                      | %      | 8.4                                      | %      | 8.2                                      | %      |
| EBITDA                                                                                               |   | 1,440                                        |   | 1,427                                   |   | 329                                        |   | 1,756                             |   | 2,145                                    |   | 2,062                                    |   | 1,931                                    |   |
| EBITA                                                                                                |   | 964                                          |   | 1,116                                   |   | 174                                        |   | 1,290                             |   | 1,745                                    |   | 1,730                                    |   | 1,638                                    |   |
| EBITDA  margin,%                                                                                     |   | 10.0                                         | %      | 15.4                                    | %      | 5.8                                        | %      | 11.7                              | %      | 13.6                                     | %      | 14.1                                     | %      | 13.9                                     | %      |
| EBITA  margin,%                                                                                      |   | 6.7                                          | %      | 12.0                                    | %      | 3.0                                        | %      | 8.6                               | %      | 11.0                                     | %      | 11.9                                     | %      | 11.8                                     | %      |

 

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|                                            |   | **Year  Ended  December 31  1999**      |   | **Period  ended  August 23  2000** |   | **Period  Ended  December 31   2000** |   | **Pro  Forma(1)  Combined  2000** |   | **Year  Ended  December 31   2001** |   | **Year  Ended  December 31   2002** |   | **Year  Ended  December 31   2003** |   |
|-------------------------------------------------|--------|----------------------------------------------|--------|-----------------------------------------|--------|--------------------------------------------|--------|-----------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|
|                                            |   | **Predecessor**                              |   | **Successor**                           |   |
|                                            |   | **(SEK  millions, unless otherwise stated)** |   |
|                                            |   |                                         |   |                                    |   |                                       |   |                              |   |                                     |   |                                     |   |                                     |   |
| Depreciation and amortisation                   |   | 1,191                                        |   | 796                                     |   | 315                                        |   | 946                               |   | 912                                      |   | 838                                      |   | 787                                      |   |
| Investment in fixed assets                      |   | 431                                          |   | 133                                     |   | 179                                        |   | 312                               |   | 275                                      |   | 277                                      |   | 259                                      |   |
| Return on capital employed,%                    |   | 15.2                                         | %      | N/A                                     |   | N/A                                        |   | 16.1                              | %      | 18.5                                     | %      | 20.3                                     | %      | 22.2                                     | %      |
| Capital employed                                |   | 6,357                                        |   | N/A                                     |   | N/A                                        |   | 8,013                             |   | 9,415                                    |   | 8,527                                    |   | 7,370                                    |   |
| Capital turnover rate, times                    |   | 2.3                                          | x      | N/A                                     |   | N/A                                        |   | 1.9                               | x      | 1.7                                      | x      | 1.7                                      | x      | 1.9                                      | x      |
| Return on equity,%                              |   | N/M                                          |   | N/A                                     |   | N/M                                        |   | N/M                               |   | 10.1                                     | %      | 4.7                                      | %      | 14.6                                     | %      |
| Equity/assets ratio,%                           |   | 26.3                                         | %      | N/A                                     |   | 16.8                                       | %      | 16.8                              | %      | 20.6                                     | %      | 28.6                                     | %      | 30.0                                     | %      |
| Net debt/equity ratio, times                    |   | 0.9                                          | x      | N/A                                     |   | N/A                                        |   | 2.1                               | x      | 1.6                                      | x      | 0.8                                      | x      | 0.5                                      | x      |
| Average number of employees                     |   | 11,696                                       |   | N/A                                     |   | N/A                                        |   | 11,001                            |   | 9,693                                    |   | 9,292                                    |   | 9,194                                    |   |
| Interest coverage ratio, times                  |   | 5.9                                          | x      | 5.4                                     | x      | 0.75                                       | x      | 2.0                               | x      | 2.5                                      | x      | 3.4                                      | x      | 5.0                                      | x      |
| Ratio of earnings to fixed charges,  times(3)   |   | 1.3                                          | x      | 3.2                                     | x      | —                                     |   | N/A                               |   | 1.4                                      | x      | 1.6                                      | x      | 2.6                                      | x      |
| **Consolidated Cash  Flow Statement Data:**     |   |                                         |   |                                    |   |                                       |   |                              |   |                                     |   |                                     |   |                                     |   |
| **Swedish GAAP:**                               |   |                                         |   |                                    |   |                                       |   |                              |   |                                     |   |                                     |   |                                     |   |
| Cash flows from operating activities            |   | 1,324                                        |   | 587                                     |   | 583                                        |   | 1,630                             |   | 1,977                                    |   | 2,047                                    |   | 1,488                                    |   |
| Cash flows from investing activities            |   | (600                                         | )      | 278                                     |   | (8,563                                     | )      | (8,284                            | )      | 112                                      |   | (548                                     | )      | (457                                     | )      |
| Cash flows from financing activities            |   | (586                                         | )      | (997                                    | )      | 8,381                                      |   | 6,618                             |   | (2,069                                   | )      | (1,443                                   | )      | (1,002                                   | )      |
| **Consolidated  Balance Sheet Data:**           |   |                                         |   |                                    |   |                                       |   |                              |   |                                     |   |                                     |   |                                     |   |
| **Swedish GAAP:**                               |   |                                         |   |                                    |   |                                       |   |                              |   |                                     |   |                                     |   |                                     |   |
| Cash and bank and other current deposits        |   | 960                                          |   | N/A                                     |   | 1,230                                      |   | 1,230                             |   | 960                                      |   | 1,020                                    |   | 1,213                                    |   |
| Net working capital, excluding financial  items |   | 3,346                                        |   | N/A                                     |   | 3,458                                      |   | 3,458                             |   | 3,323                                    |   | 2,151                                    |   | 1,729                                    |   |
| Total assets                                    |   | 12,704                                       |   | N/A                                     |   | 18,791                                     |   | 18,791                            |   | 17,637                                   |   | 15,427                                   |   | 14,685                                   |   |
| Total interest bearing debt                     |   | 3,750                                        |   | N/A                                     |   | 7,880                                      |   | 7,880                             |   | 6,652                                    |   | 4,519                                    |   | 3,614                                    |   |
| Total shareholders’ equity                 |   | 3,343                                        |   | N/A                                     |   | 3,165                                      |   | 3,165                             |   | 3,629                                    |   | 4,413                                    |   | 4,402                                    |   |
| **US GAAP:**                                    |   |                                         |   |                                    |   |                                       |   |                              |   |                                     |   |                                     |   |                                     |   |
| Total assets                                    |   | 13,544                                       |   | N/A                                     |   | 19,530                                     |   | 19,530                            |   | 18,731                                   |   | 16,477                                   |   | 15,786                                   |   |
| Total interest bearing debt                     |   | 3,750                                        |   | N/A                                     |   | 7,880                                      |   | 7,880                             |   | 6,847                                    |   | 4,683                                    |   | 3,727                                    |   |
| Total shareholders’ equity                 |   | 4,963                                        |   | N/A                                     |   | 3,537                                      |   | 3,537                             |   | 4,099                                    |   | 5,168                                    |   | 5,304                                    |   |

 

----

(1)                                                          Adjustedto give effect to the Acquisition and related financing, including the issue ofthe Senior Notes, as if they had 

occurred on January 1, 2000.  See “Unaudited Pro Forma ConsolidatedFinancial Information” appearing on page I-10 of this annual report for adescription of the pro forma adjustments made to the 2000 accounts.

 

(2)                                                          Fordefinitions, see “Definitions of Operating Data and Key Ratios” below.

 

(3)                                                          Forpurposes of determining the ratio of earnings to fixed charges, earnings aredefined as income before taxes plus fixed charges.  Fixed charges include interest expense and one-third of rentalexpense on operating leases (representing that portion of rental expense deemedto be attributable to interest). Earnings in accordance with Swedish GAAP and US GAAP were insufficientto cover fixed charges by SEK 327 million and SEK 292 millionrespectively, during the period ended December 31, 2000.

 

I-5

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**Definitions of Operating Data and Key Ratios**

 

The key ratios and certain other operatingand per share data are provided in accordance with recommended Swedish marketpractice and are defined as follows:

 
| *Orders received*  |   | — |   | Represents the total of orders received from customers during the  year.  Management believes that orders  received represents a measure of current demand a for the Group’s products  and services.  Orders received cannot  be directly related to future annual revenues due to the nature of certain  orders (long-term contracts), which may be recognised in earnings over  several periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------------------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| *Order backlog*    |   | — |   | Represents total orders received, which have not yet been recognised  as revenues.  Management believes that  order backlog provides a general indication of the trend a of future net  sales as the Group’s order backlog represents orders for products and  services which management expect to complete and recognise as revenue in  future periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|               |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| *Gross margin (%)* |   | — |   | The ratio of gross profits to net sales, expressed as a percentage.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|               |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| *EBITDA*           |   | — |   | EBITDA is not a measure of operating performance calculated in  accordance with Swedish GAAP or US GAAP.   EBITDA should not be considered a substitute for a operating income,  net income, cash flow from operating activities or other statement of  operations data as determined in accordance with Swedish GAAP, or as a  measure of profitability or liquidity.   EBITDA does not necessarily indicate whether cash flow will be  sufficient or available for cash requirements.  EBITDA is included as supplemental disclosure because we  believe that it, when considered in connection with cash flows from  operating, investing and financing activities, provides useful information to  investors and because management considers this a key measure used to  evaluate financial operating performance.   EBITDA, as it is generally defined, is calculated as operating income  or loss (including share of earnings from associated companies), before interest,  taxes, depreciation and amortisation.   EBITDA may not be indicative of our historical operating results, nor  is it indicative of potential future results.  Since all companies do not calculate EBITDA identically, the  presentation of EBITDA may not be comparable to similarly entitled measures  of other companies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|               |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| *EBITA*            |   | — |   | EBITA is not a measure of operating performance calculated in  accordance with Swedish GAAP or US GAAP.   EBITA should not be considered a substitute for operating income, net  income, cash flow from operating activities or other statement of operations  data as determined in accordance with Swedish GAAP or US GAAP, or as a  measure of profitability or liquidity.   EBITA does not necessarily indicate whether cash flow will be  sufficient or available for cash requirements.  EBITA is included as supplemental disclosure, because we  believe that it, when considered in connection with cash flows from  operating, investing and financing activities, provides useful information to  investors and because management considers this a key measure used to  evaluate financial operating performance.   EBITA, as it is generally defined, is calculated as operating income  or loss (including share of earnings from associated companies), before  interest, taxes and goodwill amortisation.   In addition, we have added back to EBITA depreciation expense recorded  on the additional basis recognised on certain tangible and intangible assets  in connection with the Acquisition (“Step-Up Depreciation”) when calculating  EBITA because we view the step-up in asset values as equivalent to goodwill  and the Step-Up Depreciation as equivalent to goodwill amortisation.  Step-Up Depreciation totaled SEK 303  million in 2003, SEK 319 million in 2002, SEK 334 million  in 2001 and SEK 316 million for 2000 on a pro forma annual  basis.  This Step-Up Depreciation is  included in costs of goods sold in our financial statements.  EBITA may not be indicative of our  historical operating results, nor is it meant to be predictive of potential  future results.  Since all companies  do not calculate EBITA identically, the presentation of EBITA may not be  comparable to similarly entitled measures of other companies. |
|               |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| *Operating income* |   | — |   | Gross profit less operating expenses (including comparison distortion  items).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

I-6

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| *Operating margin  (%)*                           |   | — |   | The ratio of Operating income to net sales expressed as a percentage.                                                                                                                                                                                                                                                                                                                                                                                            |
|---------------------------------------------------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *EBITDA margin (%)*                               |   | — |   | The ratio of EBITDA to net sales expressed as a percentage.                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *EBITA margin (%)*                                |   | — |   | The ratio of EBITA to net sales expressed as a percentage.                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *Investment in  fixed assets*                     |   | — |   | Cash flows used to acquire and/or maintain plant, property and  equipment (Investments in fixed assets under cash flow from investing  activities in the consolidated cash flow statement).                                                                                                                                                                                                                                                                      |
|                                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *Return on capital  employed%*                    |   | — |   | EBITA in relation to average capital employed, expressed as a  percentage.                                                                                                                                                                                                                                                                                                                                                                                       |
|                                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *Capital employed*                                |   | — |   | Total assets less liquid funds, capitalised financing costs, other  long-term securities, accrued interest income, operating liabilities and  other non-interest bearing liabilities, including tax and deferred tax, but  excluding accrued interest costs.   Reflects the capital that is used in the operations.  The capital employed for the Group differs  from the net capital for the segments concerning taxes, deferred taxes and  pensions. |
|                                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *Capital turnover  rate, times*                   |   | — |   | Ratio of net sales to average capital employed.                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *Return on equity%*                               |   | — |   | The ratio of net income divided by total equity expressed as a  percentage.                                                                                                                                                                                                                                                                                                                                                                                      |
|                                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *Total interest  bearing debt*                    |   | — |   | Total interest bearing debt comprises the sum of long-term  liabilities, liabilities to credit institutions as reported under current  liabilities, capitalised financial leases, and interest bearing pension  liabilities.                                                                                                                                                                                                                                     |
|                                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *Net debt*                                        |   | — |   | Net debt comprises total interest bearing debt (see definition above)  less cash and bank and other current deposits.                                                                                                                                                                                                                                                                                                                                            |
|                                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *Equity/assets  ratio%*                           |   | — |   | The ratio of total equity to total assets expressed as a percentage.                                                                                                                                                                                                                                                                                                                                                                                             |
|                                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *Net debt/equity  ratio*                          |   | — |   | Ratio of net debt (see definition below) to total equity, expressed  as a multiple.                                                                                                                                                                                                                                                                                                                                                                              |
|                                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *Interest coverage  ratio, times*                 |   | — |   | The ratio of EBITDA less interest and other financial income/(costs),  plus interest costs to interest costs, expressed as a multiple.                                                                                                                                                                                                                                                                                                                           |
|                                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *Net working  capital excluding  financial items* |   | — |   | Current assets, excluding cash and bank and other current deposits,  less current liabilities excluding liabilities to credit institutions.                                                                                                                                                                                                                                                                                                                      |
|                                              |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| *Ratio of earnings  to fixed  charges*            |   | — |   | The ratio of earnings (as defined) to fixed charges, expressed as a  multiple.  Earnings are defined as  income before taxes plus fixed charges.   Fixed charges are defined as interest expenses plus one-third of  rental expense on operating leases, which represents the portion of rental  expenses deemed to be attributable to interest.                                                                                                       |

 

I-7

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**UnauditedPro Forma Consolidated Financial Information for**

**AlfaLaval Special Finance AB**

 

The unaudited pro forma consolidatedfinancial information for the year ended December 31, 2000 has beenprepared on the basis of our audited consolidated statement of operations andthe audited consolidated statement of operations of the former Alfa LavalHolding, our predecessor, for 2000 included elsewhere in this annual report,which has been prepared in accordance with Swedish GAAP.  Swedish GAAP differs in certain significantrespects from US GAAP.  See note 33to our consolidated financial statements for the year ended December 31,2000, included elsewhere in this annual report for a description of suchdifferences, as they apply to Alfa Laval Special Finance AB.  This pro forma consolidated financialinformation has not been prepared in accordance with Article 11 ofRegulation S-X.  The auditedconsolidated information has been adjusted to give effect to the Acquisitionand related financing transactions including the offering of the Senior Notes,in each case as if such transactions had been completed on January 1,2000, as described in the notes set forth below.  In addition, the pro forma consolidated financial information hasbeen adjusted to reflect purchase accounting under US GAAP.  The pro forma adjustments are based uponavailable information and certain assumptions that management believes arereasonable.  The unaudited pro formafinancial information does not purport to represent what our results ofoperations or financial condition would actually have been had such transactionsin fact occurred on January 1, 2000 or to project our results ofoperations for any future period or our financial condition for any futuredate.  The unaudited pro formaconsolidated financial information should be read in conjunction with “Item 5:Operating and Financial Review and Prospects” and our consolidated financialstatements included elsewhere in this annual report.

 

I-8

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**AlfaLaval Special Finance AB**

**UnauditedPro Forma Consolidated Statement of Operations**

**forthe year ended December 31, 2000**

 
|                                                                     |   | **Swedish  GAAP**                                    |   | **US GAAP**                                          |   |
|--------------------------------------------------------------------------|--------|------------------------------------------------------|--------|------------------------------------------------------|--------|
|                                                                     |   | **Predecessor  period ended  August 23,  2000** |   | **Successor  period ended  December 31,  2000** |   | **Pro Forma  Adjustments** |   | **Pro Forma  CombinedYear  ended  December 31,  2000** |   | **Adjustments** |   | **Pro Forma  Year ended  December 31,  2000** |   |
|                                                                     |   | **(SEK  millions)**                                  |   |
|                                                                     |   |                                                 |   |                                                 |   |   |   |   |   |   |   |   |   |
| **Consolidated  Statement of Operating Data:**                           |   |                                                 |   |                                                 |   |   |   |   |   |   |   |   |   |
| Net sales                                                                |   | 9,295                                                |   | 5,717                                                |   |   |   | 15,012 |   | (200 | ) | 14,812 |   |
| Cost of goods sold                                                       |   | (5,963                                               | )      | (3,951                                               | )      | (210 | )(1) | (10,124 | ) | (82 | ) | (10,206 | ) |
|                                                                     |   |                                                 |   |                                                 |   |   |   |   |   |   |   |   |   |
| Gross profit                                                             |   | 3,332                                                |   | 1,766                                                |   |   |   | 4,888 |   |   |   | 4,606 |   |
| Other operating expenses:                                                |   |                                                 |   |                                                 |   |   |   |   |   |   |   |   |   |
| Sales costs                                                              |   | (1,749                                               | )      | (835                                                 | )      |   |   | (2,584 | ) |   |   | (2,584 | ) |
| Administration costs                                                     |   | (643                                                 | )      | (218                                                 | )      |   |   | (861 | ) | 61 |   | (800 | ) |
| Research and development costs                                           |   | (279                                                 | )      | (162                                                 | )      |   |   | (441 | ) | (45 | ) | (486 | ) |
| Other operating income                                                   |   | 258                                                  |   | 268                                                  |   |   |   | 525 |   | 30 |   | 555 |   |
| Other operating costs                                                    |   | (327                                                 | )      | (356                                                 | )      |   |   | (683 | ) | (291 | ) | (974 | ) |
| Goodwill amortisation                                                    |   | (485                                                 | )      | (55                                                  | )      | 376 | (2) | (164 | ) | 6 |   | (158 | ) |
| Comparison distortion items                                              |   | 524                                                  |   | (394                                                 | )      |   |   | 130 |   | 394 |   | 524 |   |
| Operating income/(loss)                                                  |   | 631                                                  |   | 14                                                   |   |   |   | 810 |   |   |   | 683 |   |
| Interest and other financial income                                      |   | 139                                                  |   | 111                                                  |   |   |   | 250 |   |   |   | 250 |   |
| Interest and other financial costs                                       |   | (264                                                 | )      | (440                                                 | )      | (348 | )(3) | (1,052 | ) | (10 | ) | (1,061 | ) |
| Income/(loss) after financial items before  taxes and minority interests |   | 506                                                  |   | (315                                                 | )      |   |   | 8 |   |   |   | (128 | ) |
| Income tax benefit/(expense)                                             |   | (245                                                 | )      | (56                                                  | )      | 195 | (4) | (105 | ) | (34 | ) | (140 | ) |
| Minority interests                                                       |   | (36                                                  | )      | (12                                                  | )      |   |   | (48 | ) |   |   | (48 | ) |
| Net income/(loss)                                                        |   | 225                                                  |   | (383                                                 | )      |   |   | (145 | ) |   |   | (316 | ) |

 

I-9

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##### **Notes to theUnaudited Pro Forma Financial Data for 2000**

 

**Swedish GAAP adjustments for the Acquisitionand related financing, including the offering of Senior Notes**

 

The pro forma adjustments described belowreflect the purchase accounting adjustments in accordance with Swedish GAAP, asdescribed in our December 31, 2000 consolidated financial statements.

 

(1)                                                          Reflectsthe adjustments to depreciation and amortisation expense related to thestepped-up fair values of tangible and intangible assets acquired upon theAcquisition of the former Alfa Laval Holding, as if the Acquisition and relatedfinancing had occurred on January 1, 2000.

 

(2)                                                          Reflectsthe elimination of prior goodwill amortisation recorded for the periodJanuary 1, 2000 to August 23, 2000 and the addition of goodwillamortisation associated with the goodwill established as a result of theAcquisition and related financing as if the Acquisition and financing hadoccurred on January 1, 2000.

 

(3)                                                          Reflectsthe elimination of interest expense associated with Tetra Laval debt incurredprior to the Acquisition and the related financing and the addition of interestexpense associated with the incurrence of the new debt under the PreviousSenior Credit Facility and the issuance of the Senior Notes to refinance thebridge loan facility as if the Acquisition and the related financing hadoccurred on January 1, 2000.  Theadjustment also includes the amortisation of additional debt issuance costsrelated to the Previous Senior Credit Facility and the Senior Notes as if theAcquisition and the related financing had occurred on January 1,2000.  The amounts outstanding under thePrevious Senior Credit Facility bear interest at a rate of 1.5% over theapplicable inter-bank offered rate.  Forpurposes of this pro forma financial information, we have assumed an effectiveinterest rate of 7.2%. A  1/8per cent variance in floating interest rates would result in a change ininterest expense of SEK 7 million. The interest on the Senior Notes is 12.125%.

 

The adjustment to interest expense isdetermined as follows:

 
|                                                                     |   | **Interest Rate** |   | **Amount** |   | **Additional  interest as if  incurred on  January 1,  2000** |   |
|--------------------------------------------------------------------------|--------|------------------------|--------|------------|--------|-----------------------------------------------------------------------------------|--------|
|                                                                     |   | **(SEK in  millions)** |   |
|                                                                     |   |                   |   |       |   |                                                                              |   |
| Actual interest on refinanced Tetra Laval  Debt                          |   |                   |   |       |   | (84                                                                               | )      |
| Previous Senior Credit Facility                                          |   | 7.2                    | %      | 5,730      |   | 250                                                                               |   |
| Actual interest on bridge loan facility                                  |   |                   |   |       |   | (44                                                                               | )      |
| Senior Notes issued to repay bridge loan  facility                       |   | 12.125                 | %      | 1,950      |   | 202                                                                               |   |
|                                                                     |   |                   |   |       |   |                                                                              |   |
|                                                                     |   |                   |   |       |   | 324                                                                               |   |
| Previous Senior Credit Facility debt issue  costs amortised over 8 years |   |                   |   | 228        |   | 18                                                                                |   |
| Senior Notes issue costs amortised over 10  years                        |   |                   |   | 71         |   | 6                                                                                 |   |
| Total incremental interest expense                                       |   |                   |   |       |   | 348                                                                               |   |

 

----

*                                                                 Preparedon the basis of our capital structure in 2000.

 

(4)                                                          Reflectsthe tax impact at our effective tax rate of 35% of the change in interestexpense, depreciation and amortisation expense related to the stepped-up fairvalues of tangible and intangible assets as a result of the pro formaadjustments.  The goodwill is notdeductible for tax purposes; thus no tax impact is included for the adjustmentsto goodwill amortisation.

 

There are no other adjustments.

 

I-10

----

 

**US GAAP Adjustments**

 

The adjustments reflect the sum of thereconciliation adjustments of the consolidated statements of operations for theperiod January 1, 2000 to August 23, 2000 and for the periodAugust 24, 2000 to December 31, 2000, as described in note 33 ofour December 31, 2000 consolidated financial statements included elsewherein this annual report.  The adjustmentsalso reflect certain reclassifications for the realisation of stepped-up valuesrelating to the Acquisition that are presented as comparison distortion itemsin the Swedish GAAP financial statements. In addition, the US GAAP adjustments reflect the pro forma impact ofapplying US GAAP differences in purchasing accounting as if the transaction hadoccurred on January 1, 2000.  Suchdifferences result in higher cost of goods sold relating to amortisation ofintangible assets and lower goodwill amortisation.

 

I-11

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**Exchange Rate Information**

 

The following table sets forth, for theperiods ended and dates indicated, certain information concerning the exchangerate for Swedish kronor to US dollars based information published by theSwedish Central Bank, or *Riksbanken*.  No representation is made that Swedishkronor amounts have been, could have been or could be converted into US dollars,or vice versa, at such exchange rates or at any other rate.  On April 8, 2004, the rate was$1.00 = SEK 7.58.

 
|                                          |   | **Swedish  kronor per one US dollar** |   |
|-----------------------------------------------|--------|---------------------------------------|--------|
| **Year ended December 31,**              |   | **Period  End(1)**                    |   | **Average  Rate(2)** |   | **High** |   | **Low** |   |
|                                          |   |                                  |   |   |   |   |   |   |   |
| 1999                                          |   | 8.53                                  |   | 8.27 |   | 8.66 |   | 7.71 |   |
| 2000                                          |   | 9.54                                  |   | 9.17 |   | 10.33 |   | 8.34 |   |
| 2001                                          |   | 10.67                                 |   | 10.33 |   | 11.00 |   | 9.27 |   |
| 2002                                          |   | 8.83                                  |   | 9.71 |   | 9.08 |   | 8.81 |   |
| 2003                                          |   | 7.25                                  |   | 8.08 |   | 8.80 |   | 7.25 |   |
| 2003 October                                  |   | 7.78                                  |   | N/A |   | 7.78 |   | 7.58 |   |
| 2003 November                                 |   | 7.56                                  |   | N/A |   | 7.89 |   | 7.52 |   |
| 2003 December                                 |   | 7.25                                  |   | N/A |   | 7.53 |   | 7.25 |   |
| 2004 January                                  |   | 7.41                                  |   | N/A |   | 7.42 |   | 7.08 |   |
| 2004 February                                 |   | 7.41                                  |   | N/A |   | 7.42 |   | 7.13 |   |
| 2004 March                                    |   | 7.53                                  |   | N/A |   | 7.64 |   | 7.37 |   |
| 2004 April (through April 8,  2003) |   | 7.58                                  |   | N/A |   | 7.65 |   | 7.46 |   |

 

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(1)                                                          Representsthe exchange rate on the last business day of the applicable period.

 

(2)                                                          Representsthe average of the exchange rates on the last business day of each month duringthe relevant period.

 

**European Monetary Union and Sweden’s CurrencyPolicy**

 

On January 1, 2002, the euro replacednational currencies in the twelve member states of the EMU.  Monetary policy with respect to the euro isconducted by the European Central Bank which sets interest rate policy for, andmanages the foreign reserves of, the euro states.

 

Three members of the European Union, Denmark,Sweden and the United Kingdom have not adopted the euro.

 

**3.B. Capitalisation and Indebtedness**

 

Not applicable.

 

**3.C. Reasons for the Offer and Use of Proceeds**

 

Not applicable.

 

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**3.D. Risk Factors**

 

*Set forth below is a description of certainrisks that may affect our business, financial condition and results ofoperations from time to time.*

 

***This annual reportcontains certain forward-looking statements concerning, among other things, ourrevenue and EBITA margin targets, as well as expected cost savings andoperating efficiencies in connection with our cost reduction programme, knownas “Beyond Expectations”.  Theseforward-looking statements are subject to risks and uncertainties that couldcause actual revenue targets, EBITA targets, cost savings and operatingefficiencies to be substantially lower than those expressed or implied by suchstatements.***

 

We have set as a target for our revenuegrowth that we should outperform the markets in which we operate over thecourse of the business cycle.  Inaddition, we have set an EBITA margin target excluding comparison distortionitems of greater than 12%.  Thisfinancial target requires that we obtain certain cost savings and operatingefficiencies we expect to achieve from our Beyond Expectations restructuringprogramme.  Our cost reductionprogramme, the implementation of which commenced in late 1999 and which wascompleted after the third quarter in 2003, had at completion generated costsavings and other operating efficiencies of approximatelySEK 850 million on an annualised basis.  At the end of 2002, the achieved savings amounted to about SEK775 million on an annualised basis.  Inthe income statements for 2003, 2002 and 2001 there are savings correspondingto approximately SEK 800, 670 and 450 million respectively.

 

The discussion under “Item 5.A: Operating and Financial Review andProspects—Operating Results—Our Restructuring and Cost ReductionProgramme—Beyond Expectations” describes generally our revenue and EBITAmargins targets, together with the cost savings and operating efficienciesattributable to the Beyond Expectations programme, as well as the expectedcosts incurred in achieving such savings and efficiencies, to the extent notalready recorded in our financial results. There can be no assurances, however, that such revenue targets, EBITAmargin targets, cost savings and operating efficiencies actually will berealised.

 

***Our operatingresults, including our revenues, operating income, EBITA and cash flows, couldbe harmed during economic downturns as demand for our products and services isreduced.  This, in turn, could affectour ability to make payments due to you on the Senior Notes.***

 

The businesses of most of our industrialcustomers, particularly those operating within the marine and oil and gasproduction industries are, to varying degrees, cyclical and have experiencedperiodic downturns.  Margins in thoseindustries are sensitive to demand cycles, and our customers in thoseindustries historically have tended to delay large capital projects, includingexpensive maintenance and upgrades, during economic downturns.  For example, due to the simultaneous declinein oil and chemical prices in 1998 and 1999, as well as a decline in shipconstruction, many of our key customers reduced their capital spending, whichresulted in declines in our revenues, operating income, EBITA and cash flowsduring those years.  These industrydownturns led to diminished product demand and excess manufacturing capacity.

 

Any significant downturn in our customers’markets or in general economic conditions could result in a reduction in demandfor our products and services and under-utilisation of our facilities.  Historically, we have experienced thenegative impact of an economic downturn between 6 to 12 months after theonset of the decline.  Since ourpersonnel costs constitute a significant component of our operating expensesand these costs, as well as the cost of our facilities, are fixed at thecommencement of each financial period, under-utilisation of our personnel andour facilities will negatively impact our revenues, operating income, EBITA andcash flow.  This, in turn, could affect ourability to make payments due to you on the Senior Notes.  Our business is also affected by theseasonality of end-user markets and invoicing, more fully discussed under “Item5.A: Operating and Financial Review and Prospects—Operating Results—Seasonalityof end-user markets and invoicing”.

 

***The markets for ourproducts are highly competitive.  If wedo not respond effectively and on a timely basis to changes in the industrieswe serve, our competitiveness may be affected and our business could suffer.  We may also experience pricing pressure as aresult of competition.***

 

The markets for many of our products arehighly competitive, especially as to product quality, product price,reliability of product supply, technical support and service.  From time to time, we experience pricing pressureas a result of competitive pressures. To remain competitive, we will need to continue to invest inmanufacturing, research and development, marketing, customer service andsupport and our distribution networks. We may not have

 

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sufficient resources to continue to make these investments and we maynot maintain our competitive position. Our competitors include large, integrated companies that may have accessto greater financial and other resources than we do.  See “Item 4.B: Information about the Company—BusinessOverview—Competition” where the competition we face in our business is morefully described.

 

***We may not be ableto continue to increase our sales as a result of our recent corporate andoperational reorganisation.  This mayhave a material adverse effect on our results of operations.***

 

Following the completion of our recentcorporate and operational reorganisation, additional sales are dependent uponour ability to develop the necessary implementation plans, commit the necessarypersonnel and rationalise our workforce and operations to establish anintegrated business focusing on our customers. In addition, as part of our recent reorganisation, we have integratedand centralised various systems and processes, such as management information,accounting and information technology systems. We may not be able to fully and successfully recognise any expectedbenefits from our reorganisation and consequently we may not be able toincrease our sales.  As a result, theremay be a material adverse effect on our results of operations.

 

***We are exposed toeconomic, political and business risks associated with international sales andoperations.  If we do not address theserisks in a cost-effective manner, the growth of our operations may be limited,our operating margins could be reduced and our business, operating results andfinancial condition could materially adversely affected.***

 

As we sell our products worldwide, ourbusiness is subject to risks associated with doing businessinternationally.  Accordingly, ourfuture results could be harmed by a variety of factors, including, but notlimited to:

 

•                  changesin a specific country’s or region’s political or economic conditions,particularly in the emerging markets;

 

•                  tradeprotection measures and import or export licensing requirements;

 

•                  potentiallynegative consequences from changes in tax laws;

 

•                  difficultyin staffing and managing global operations;

 

•                  stringentlabour regulations;

 

•                  inadequateprotection of intellectual property;

 

•                  unexpectedchanges in regulatory requirements; and

 

•                  state-imposedrestrictions on repatriation of funds.

 

We manufacture and distribute our products inmany countries around the world.  We areconfronted with different legal and regulatory requirements in manyjurisdictions.  These include tariffsand trade barriers, requirements relating to withholding taxes on remittancesand other payments by subsidiaries and different regimes controlling theprotection of our intellectual property. Our international operations also expose us to different local businessrisks and challenges.  We are faced withpotential difficulties in staffing and managing local operations.  We have to manage credit risks of localcustomers and distributors.  Ourexpansion in emerging markets requires us to respond to rapid changes in marketconditions in these countries. Therefore, our overall success as a global business depends, in part,upon our ability to succeed in differing economic, social and politicalconditions.

 

We may not be able to succeed in developingand implementing policies and strategies that are effective in each locationwhere we do business.  If we fail toaddress the risks associated with our international operations in a cost-effectiveand timely manner, the growth of our operations may be limited, our operatingmargins could be reduced and our business, operating results and financialcondition could be materially adversely affected.

 

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***Our operationsdepend on certain raw materials, the prices for which are volatile, and wedepend on certain suppliers for those raw materials.  Shortage of, or price increases for, supplies could harm ourability to manufacture and sell our products.***

 

We rely on raw materials such as stainlesssteel, carbon steel, copper and titanium for the manufacture of ourproducts.  Shortages of supply haveoccurred in the past and may occur in the future.  We depend on three suppliers for titanium and are subject to asubstantial lead time in ordering and obtaining titanium from sources otherthan our key suppliers.  The number oftitanium suppliers is limited and a change of suppliers could cause a delay inmanufacturing products such as our large heat exchangers, increase our costsand result in a loss of sales. Shortages of, or price increases for, supplies could have a materialadverse effect on our ability to manufacture and sell certain of our productsin a timely and cost-effective manner.

 

Prices under these contracts for rawmaterials are negotiated on a six-month or yearly basis.  We also purchase raw materials directly onthe spot market.  Spot prices fluctuateand may be significantly less than or significantly greater than the prices wepay for our raw materials under long-term agreements.  While we seek to balance increases in raw material costs withcorresponding increases in the prices of our products, there have been in thepast, and may be in the future, periods of time during which we cannot recovercost increases.  These failures torecover costs can result in part because of competitive pressures, the timingof changes to the prices of raw materials and because at times, in certainmarkets, over-capacity prevents selling prices from being raised.  Cost decreases are generally reflected morequickly in our sales prices than cost increases due to competitive pressures.

 

***We are exposed tothe risk of currency fluctuations in many countries and these fluctuations mayhave a material effect on our results of operation and financial position.  Currency fluctuations may also affect thecomparability of our results between financial periods.***

 

Our operations are conducted by inapproximately 100 countries.  Theresults of the operations and the financial position of these subsidiaries arereported in the relevant foreign currencies and then translated into Swedishkronor at the applicable exchange rates for inclusion in our consolidatedfinancial statements which are stated in Swedish kronor.  The exchange rates between these currenciesand the Swedish kronor in recent years have fluctuated significantly and may inthe future fluctuate significantly. These fluctuations have had in the past, and may have in the future, amaterial effect on our results of operations and financial position and maysignificantly affect the comparability of our results between financialperiods.

 

In addition, we incur currency transactionrisk whenever one of our operating subsidiaries enters into a transaction usinga different currency than its functional currency.  We attempt to reduce currency transaction risk by:

 

•                  matchingcash flows and debt in the same currency;

 

•                  foreigncurrency borrowing; and

 

•                  enteringinto foreign exchange contracts for hedging purposes.

 

However, we may not be able to hedge thisrisk completely or at an acceptable cost, which may adversely affect ourresults of operations and financial condition. See “Item 11.A: Quantitative and Qualitative Disclosures About MarketRisk—Foreign Currency Exchange Rate Exposure”.

 

Principal and interest on the Senior Noteswill be payable in euros.  Our abilityto pay interest and principal on the Senior Notes when due is in part dependenton the then current exchange rates between euros, on the one hand, and the Swedishkronor and other European, as well as US and Asian currencies that our salesare denominated in, on the other hand, which rates are and will be subject tofluctuation.  Exchange rate fluctuationsmay have a material adverse effect on our results of operations and financialcondition and therefore on our ability to make principal and interest paymentson our debt, including the Senior Notes, when due.

 

***We may haveliabilities associated with the pending Desert Storm litigation.  If we are found liable for the claims, ourfinancial condition could be materially adversely affected.***

 

Some of our subsidiaries, along withapproximately 70 other defendants, have been sued in lawsuits in the UnitedStates arising from claims related to injuries allegedly suffered in the GulfWar in 1991, also known as Desert Storm. These two lawsuits were initiated in 1994.  The lawsuits claim damages in excess of $1 billion each

 

I-15

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and allege that equipment supplied by our subsidiaries, among otherdefendants, was used to manufacture Iraqi chemical and/or biologicalweapons.  While we consider ourliability remote in these cases, litigation is impossible to predict and we maybe found liable for these claims, which could have a material adverse effect onour financial condition.  See “Item 8.A:Financial Information—Legal Proceedings” for further information regarding thislitigation and for a description of the indemnification provisions set forth inthe Share Sale and Purchase Agreement between us and Tetra Laval B.V. inrespect of this litigation.

 

***We may in the futureface large liability and breach of contract claims for defective products,which may cause us to lose revenues, cause a delay in market acceptance of ourproducts or harm our reputation.  Theseclaims could also be costly and time-consuming to defend.***

 

We are subject to litigation in the ordinarycourse of our business.  Except asdescribed in the previous risk factor, we are not engaged in and do not foresee,at the present time, any litigation that we believe could have a materialadverse effect on our financial condition or results of operations.  However, litigation having a materialadverse effect on our financial condition or results of operations may arise inthe future and this may adversely affect our reputation, cause us to loserevenues, cause a delay in the market acceptance of our products and adverselyaffect our ability to make principal and interest payments on our debt,including the Senior Notes.  Ourbusinesses expose us to possible claims for personal injury, death, propertydamage, breach of contract or other product liability claims, which couldresult from a failure of a product we manufactured or of a product integratedinto a product we manufactured, particularly in relation to our high-speedseparators.  Many factors beyond ourcontrol could lead to liability claims, including, but not limited to:

 

•                  thefailure of a product manufactured by a third party which incorporatedcomponents manufactured by us;

 

•                  thereliability and skills of persons using our products or the products of ourcustomers;

 

•                  theuse of our products that we produce for applications for which our product wasnot designed; and

 

•                  thefailure of a product manufactured by a third party whose products we lateracquire.

 

These claims could also cause damage to ourreputation.  Although we test ourproducts extensively and our products are manufactured to industry standards,we have obtained insurance coverage for most of these types of liabilities andwe believe that this insurance coverage is adequate.  We could, however, be required to pay a material amount if aclaim is made against us that is not fully covered by insurance and no thirdparty is required to indemnify us or if a third party fails to indemnifyus.  Litigation involving significantproduct recalls or product liability could have a material adverse effect onour financial condition or results of operations.  For a discussion of our litigation matters, see “Item 8.A:Financial Information—Legal Proceedings”.

 

***Environmentalcompliance costs and liabilities could adversely affect our financial conditionand this, in turn, may adversely affect our ability to make principal andinterest payments on our debt, including the Senior Notes.***

 

Our operations and properties are subject toincreasingly stringent laws and regulations relating to environmentalprotection, including laws and regulations governing air emissions, waterdischarges, waste management and workplace safety.  These laws and regulations can impose substantial fines andsanctions for violations and require the installation of costly pollutioncontrol equipment or operational changes to limit pollution emissions and /ordecrease the likelihood of accidental hazardous substance releases.  We must conform our operations andproperties to these laws, and adapt to regulatory requirements in all countriesas these requirements change.

 

We use and generate hazardous substances andwastes in our manufacturing operations. In addition, many of our current and former properties are or have beenused for industrial purposes and we have arranged for disposal of wastes atthird-party disposal sites.  Undercertain environmental laws, liability for response actions at contaminatedsites, including buildings and other facilities, is strict, and in some cases,joint and several.  We may be subject topotentially material liabilities relating to the investigation and clean-up ofcontaminated areas, including groundwater at properties now or formerly owned,operated or used by us, and to claims alleging personal injury or damage tonatural resources.

 

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We have experienced, and expect to continueto experience, operating costs to comply with environmental laws andregulations.  In addition, new laws andregulations, stricter enforcement of existing laws and regulations, thediscovery of previously unknown contamination or the imposition of new clean-uprequirements could require us to incur costs or become the basis of new orincreased liabilities that could have a material adverse effect on ourbusiness, financial condition or results of operations and this may adverselyaffect our ability to make principal and interest payments on our debt,including the Senior Notes.

 

***Our business couldsuffer if we are unsuccessful in negotiating new collective bargainingagreements.  Strikes and otherindustrial actions could disrupt our operations or make it more costly tooperate our facilities.***

 

As of December 31, 2003, we hadapproximately 9,358 employees, the majority of whom are represented byunions.  The majority of our materialcollective bargaining agreements with these unions range from one to five yearsin duration.  We may not be successfulin negotiating new collective bargaining agreements.  Moreover, negotiations may result in significant increases in thecost of labour or a breakdown in negotiations leading to a disruption of ouroperations.  Any such action could havea material adverse effect on our results of operations.

 

***Third parties mayinfringe our intellectual property, and we may expend significant resourcesenforcing our rights or suffer competitive injury, which could harm ouroperating results and, in turn, our ability to make principal and interestpayments on our debt, including the Senior Notes.***

 

Our success depends in part on ourproprietary technology.  We rely on acombination of patents, copyrights, trademarks, trade secrets andconfidentiality provisions to establish and protect our proprietaryrights.  If we fail to successfullyenforce our intellectual property rights, our competitive position couldsuffer, which could harm our operating results.  We may be required to spend significant resources to monitor andprotect our intellectual property rights.

 

***Failure to continueto pursue product innovation would impair our future growth and competitiveposition.  As a result, there could be amaterial adverse affect on our business, financial position and results ofoperations and this may affect our ability to make payments of principal andinterest on our debt, including the Senior Notes.***

 

Our business experiences technologicalchange, ongoing product improvements and obsolescence of existing products,leading to the introduction of new products or production processes.  Our future growth will depend on our abilityto gauge the direction of the commercial progress in all key markets and uponour ability to successfully develop, manufacture, market products and sellproducts in these changing markets.  Wewill have to continue to identify, develop, market and sell innovative productson a timely basis to replace existing products in order to maintain ourcompetitive position.

 

We intend to devote significant resources tothe development of new products and intend to continue to devote a substantialamount of spending to the research, development and technology processfunctions of our business.  However, wemay not be successful in developing new products or new products may not beaccepted by our customers.  If we failto keep pace with the innovations in our markets, then there could be amaterial adverse affect on our business, financial position and results ofoperations and this may affect our ability to make payments of principal andinterest on our debt, including the Senior Notes.

 

***Our substantialamount of debt could hurt our financial health and stop us from fulfilling ourobligations under our Senior Notes.***

 

We have a significant amount of debt.  As of December 31, 2003, we had totalconsolidated debt of SEK 3,614 million.  If we had drawn down all amounts available under our ExistingCredit Facility, the maximum amount of debt that would have been outstanding atDecember 31, 2003 would have increased by SEK 1,360 million toSEK 4,974 million.

 

Our annual debt service based on theoutstanding debt at December 31, 2003 is SEK 217 million ininterest expense and interest payments. The Existing Senior Credit Facility was amortisation free.  Actual repayments for 2003 totalledSEK 298 million. Through April 8, 2004, actual repaymentstotalled SEK nil million.

 

Our Senior Notes have a fixed charge of12.125%.  We were not required tomaintain hedging under the terms of the Existing Senior Credit Facility andwill not be required to do so under our New Senior Credit Facility.

 

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If the interest rate is increased by 1 percentage unit on allloans with a floating interest charge, our annual debt service cost will increaseby SEK 17 million.

 

Our substantial debt could have importantconsequences to you as a holder of the Senior Notes.  For example it could:

 

•                  limitour ability to obtain additional financing in order to fund future workingcapital requirements, capital expenditures, acquisitions or other needs;

 

•                  requirethat a substantial portion of our cash flow from operations be dedicated tomaking periodic payments with respect to principal and interest on our debt,thereby reducing the funds available for operations and future businessopportunities;

 

•                  restrictour use of funds we acquire through asset dispositions or which constituteexcess cash flow;

 

•                  requireus to maintain specified financial ratios;

 

•                  increaseour vulnerability to adverse economic and industry conditions;

 

•                  limitour flexibility in planning for, or reacting to, changes in our business andthe industry in which we operate; and

 

•                  placeus at a comparative disadvantage compared to our competitors with less debt.

 

In addition, since all the borrowings underour New Senior Credit Facility will be at variable rates of interest, we willbe required to make larger payments if interest rates increase.

 

Our ability to make scheduled payments of theprincipal of, to pay interest on or to refinance our debt, including the SeniorNotes, and to make payments on our other obligations depends on our futureperformance.  Furthermore, we expectthat we will need to refinance all or a part of the Senior Notes at finalmaturity.  Certain aspects of our futureperformance are subject to economic, financial, competitive and other factorsbeyond our control.  We may not be ableto generate sufficient cash flow from operations in the future to service ourdebt and make necessary capital expenditures. If we fail to do so, we may be required:

 

•                  torefinance some or all of our existing debt;

 

•                  tosell assets in order to make debt service payments; or

 

•                  toobtain additional financing.

 

We may not be able to undertake any of theserefinancings, sell any of our assets or obtain additional financing,particularly as our New Senior Credit Facility contains a covenant restrictingdisposals of assets.

 

If we fail to comply with the paymentrequirements of any of our debt, including the Senior Notes, it could lead tothe acceleration of the related debt and the acceleration of debt under otherdebt instruments containing cross acceleration or cross defaultprovisions.  If this occurred, we mightnot be able to refinance or otherwise repay this debt.

 

***Despite current debtlevels, we may still be able to incur substantially more debt, which may besenior to the guarantee and the Senior Notes and this could further exacerbatethe risks described above.***

 

We and our subsidiaries may be able to incursubstantial additional debt in the future. If additional debt is added to our current debt levels, the risks thatwe now face could intensify.  The termsof the indenture restrict but do not fully prohibit us and our subsidiariesfrom borrowing.  The additional debt weincur could be secured and debt of the Guarantor could be senior to theguarantee and the Senior Notes.  Debtincurred by our subsidiaries, other than the Guarantor, will be senior in rightof payment to the Senior Notes.  If weincur additional debt, the related risks described above that we face couldintensify.

 

***We depend onpayments from our subsidiaries to make payments on the Senior Notes. Oursubsidiaries may not***

 

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***generate cash flowsufficient to enable us to meet our payment obligations on the SeniorNotes.  In addition, our New SeniorCredit Facility restricts our subsidiaries’ ability to provide funds to us andwe may be unable to pay you amounts due on the Senior Notes.***

 

Our only assets are shares in our whollyowned subsidiary, the Guarantor, and an intercompany loan to theGuarantor.  Our cash flow and ourability to service the Senior Notes and any other debt depend solely upon thecash flow of our subsidiaries and our receipt of funds from them in the form ofloans, dividends, interest or otherwise. Our subsidiaries may not generate cash flow sufficient to enable us tomeet our payment obligations.  Oursubsidiaries have debt that is senior to the Senior Notes aggregating toSEK 2,550 million.

 

In addition, the terms of the New SeniorCredit Facility restrict our subsidiaries’ ability to provide funds to us.  See “Item 5.B: Operating and FinancialReview—Liquidity and Capital Resources”. This ability may be further restricted by applicable laws and regulationsand the terms of other agreements to which our subsidiaries may becomesubject.  In particular, the NewIntercreditor Agreement for the New Senior Credit Facility restricts paymentsunder the intercompany loan.  Paymentsto us under this loan, and therefore payments under the guarantee in relationto the Senior Notes, may also be suspended in the case of a payment defaultunder the senior credit facilities until the payment default is remedied and,in the case of a non-payment default, are subject to standstill provisions forup to 179 days.

 

The New Intercreditor Agreement permits us,subject to certain restrictions, to make payments of principal on the SeniorNotes.

 

***None of ouroperating subsidiaries are guarantors of our obligations under the Senior Notesand your rights to receive payments on the Senior Notes may be affected if anyof our non-guarantor subsidiaries declare bankruptcy, liquidation orreorganises.***

 

We expect to obtain the money to pay theprincipal and interest on the Senior Notes from our operatingsubsidiaries.  We are a holding companythat does not conduct any business operations. Accordingly, the Senior Notes are structurally subordinated to the obligationsof our subsidiaries other than the Guarantor, which guaranteed the Senior Noteson a senior subordinated basis.  Oursubsidiaries are separate and distinct legal entities.  Other than the Guarantor, which is also aholding company, our subsidiaries will have no direct obligation, contingent orotherwise, to pay any amount due under the Senior Notes or to make any fundsavailable to us to allow us to make those payments.  In the event of an insolvency, liquidation or otherreorganisation of any of our subsidiaries, our creditors (including you) willhave no right to proceed against their assets. Creditors of these subsidiaries, including lenders under the terms ofthe New Senior Credit Facility, will be entitled to payment in full from thesale or other disposal of these assets before we, as a shareholder, would beentitled to receive any distribution therefrom, except to the extent that wemay be a creditor with recognised claims against these subsidiaries.  Moreover, the guarantee of our obligationsby the Guarantor ranks behind, and is subordinated to, all of its existing andfuture obligations under the New Senior Credit Facility and can besubordinated, at our designation, to other senior debt incurred by theGuarantor.  Payments under the guaranteemay be suspended in the case of a payment default under the New Senior CreditFacility until the payment default is remedied and, in the case of anon-payment default, are subject to standstill provisions for up to179 days.

 

***The terms of ourdebt, including the indenture pursuant to which our Senior Notes were issued,impose various restrictions on us. These restrictions may affect our ability to successfully carry out ourbusiness strategy, which could materially and adversely affect our business,financial condition, results of operations and our ability to make payments ofprincipal on interest on the Senior Notes.***

 

The indenture under which our Senior Noteswere issued and our New Senior Credit Facility restrict our ability to, amongother things:

 

•                  borrowmoney;

 

•                  paydividends on, make distributions on or repurchase shares;

 

•                  makecertain investments;

 

•                  createliens on our assets to secure debt;

 

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•                  substituteanother person as issuer of the Senior Notes;

 

•                  sellassets, including the capital stock of certain of our subsidiaries and anyother property or assets that are sold other than in the ordinary course ofbusiness, or merge with or into other companies;

 

•                  enterinto transactions with affiliates; and

 

•                  enterinto joint ventures.

 

These restrictions may adversely affect ourability to carry out our business strategy and could materially and adverselyaffect our business, financial condition or results of operations.  This could affect our ability to makepayments of principal or interest on the Senior Notes as those payments becomedue.  A breach of the covenants of theindenture under which the Senior Notes were issued could cause a default underthe terms of the other financings of our subsidiaries, causing all debt under thosefinancings to become due.

 

The New Senior Credit Facility requires us,to meet certain financial tests and ratios. We may not be able to meet these tests for reasons beyond our control,which would trigger an event of default under that facility even if we couldstill continue to make payments to you on the Senior Notes.

 

***A change in theestimated useful life, or a write-off, of goodwill could negatively affect ouroperating results and net worth.***

 

A change in the estimated useful life ofgoodwill or the write-off of a portion of goodwill could negatively affect ouroperating results and net worth.  TheAcquisition and the related financing resulted in the recognition of asubstantial amount of goodwill.  At December 31,2003, goodwill totaled SEK 3,098 million, compared to total assets ofSEK 14,685 million and shareholders’ equity ofSEK 4,402 million.  We haveestimated the useful life associated with the goodwill acquired in 2000 to be20 years.  Subsequent changes inthe industries in which we operate, including competition and advances intechnology, may in the future shorten the estimated useful life of goodwill orresult in the write-off of a portion of goodwill, which would have a materialadverse effect on our earnings.

 

***Industri Kapital2000 controls us, and its interests may conflict with yours.  Industri Kapital 2000 may take actions thatprevent or hinder us from making payments on the Senior Notes.***

 

Industri Kapital 2000 is the beneficial ownerof approximately 17.9% of the shares of Alfa Laval AB, our parent holdingcompany, which owns 100% of our outstanding share capital.  Consequently Industri Kapital 2000 canaffect our strategic decisions, our legal and capital structure and ourday-to-day operations.

 

If circumstances arise where Industri Kapital2000’s interests conflict with your interests—if, for example, we were toencounter financial difficulties or were unable to pay our debts as theymatured—you could be disadvantaged by Industri Kapital 2000’s ability to takeactions contrary to your interests.  Inaddition, Industri Kapital 2000 may benefit if we pursue acquisitions,divestitures, financings, currency exchange or interest rate hedging or othertransactions that, in their judgement, could enhance the value of their equityinvestment, even though these transactions might involve risk to holders of theSenior Notes.

 

***Tetra Laval is ourlargest customer based on net sales.  Ifwe fail to retain Tetra Laval as a customer and/or distributor for our productsand services, our business and financial condition could be adversely effected.***

 

For the year ended December 31, 2003,approximately 5.7% of our net sales were attributable to direct sales to TetraLaval.  If our sales to or through TetraLaval were to significantly decrease, we may not be able to offset thisdecrease through a corresponding increase in sales to or through othercustomers and distributors, and such decrease, over time, could have a materialadverse effect on our business, financial condition or results of operation.

 

***If we, the Guarantoror any of our Swedish operating subsidiaries incur substantial operatinglosses, we or they may be subject to liquidation under Swedish law.***

 

The various Companies Acts and insolvency andreorganisation laws of Sweden apply to us, the Guarantor and our and theGuarantor’s Swedish subsidiaries.  Underthis regime, if losses reduce our equity or the

 

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equity of certain of our subsidiaries, on a stand-alone rather than aconsolidated basis, to an amount less than 50% of our or their registered sharecapital, or if the equity becomes inadequate compared to the risks and the sizeof its business, the directors of the entity concerned would be obligated bylaw to convene a general shareholders meeting to resolve to liquidate theentity unless the directors were able to balance the amount of the equity andshare capital by increasing the equity in an amount sufficient to achieve thebalance and to ensure that its equity becomes adequate compared to the risksand the size of its business, or reducing the share capital to pay off lossesin an amount sufficient to achieve the balance, provided, however, that itsequity remains adequate compared to the risks and the size of itsbusiness.  Similar regimes exist inother jurisdictions in which we have subsidiaries.

 

***Fraudulent conveyance laws of the Kingdom ofSweden may protect our creditors to your disadvantage.***

 

Under Swedish law relating to fraudulentconveyance, it is possible that other creditors may claim that payments to youunder the Senior Notes or the guarantee should be voided because they werefraudulent conveyances.

 

Under Swedish law, in the case of bankruptcyor company reorganisation proceedings affecting us, the payments to you underthe Senior Notes or the guarantee, which have been made less than three months(or two years if effected to a related party) before the application forbankruptcy or company reorganisation proceedings was filed with the competentcourt may, in certain situations, be recovered if the payment has been carriedout:

 

•                  usingunusual means of payment;

 

•                  prematurely;or

 

•                  inan amount which has materially affected our financial position.

 

Payments which are deemed to be customaryare, however, permissible.

 

A Swedish court could also determine that afraudulent conveyance has taken place under the general provision on recoveryin circumstances where a payment to you under the Senior Notes or the guaranteecould be revoked if an agreement, transaction or other act, such as theissuance of the Senior Notes or the guarantee was held to favour a creditor inan unsuitable manner to the detriment of another creditor or to transferproperty out of the reach of the creditors or to increase the debt to thedetriment of the creditors, provided that:

 

•                  thedebtor was insolvent at the time the agreement, transaction or other act wasconcluded or the transaction contributed to the debtor’s insolvency; and

 

•                  theother party knew or should have known of the insolvency or over-indebtedness orof the impact of the payment on the debtor’s financing state as well as of thecircumstances due to which the payment under the Senior Notes or the guaranteewas unsuitable.

 

However, under Swedish law, if an agreement,transaction of other act was concluded earlier than five years before theapplication for bankruptcy or company reorganisation was filed, the payment toyou under the Senior Notes or the guarantee could be revoked only if a party tothe agreement, transaction or other act was someone related to the bankrupt or reorganisedparty such as a Group company.

 

In addition, as we have operations all overthe world, if any of our major subsidiaries were to enter bankruptcyproceedings, a court in that jurisdiction could prevent our subsidiaries frommaking payments to us, thereby possibly impairing our ability to pay theamounts due under the Senior Notes.

 

***Your rights as acreditor may not be as strong under Swedish insolvency laws as under US orother insolvency laws and the Guarantor’s and our liabilities in respect of theSenior Notes may rank after our debts which are entitled to priority.***

 

The Guarantor’s and our liabilities inrespect of the Senior Notes may, in the event of bankruptcy or similarproceedings under Swedish insolvency law, rank after certain of our debts whichare entitled to priority and after our debt to creditors with rights ofset-off.

 

The business reorganisation laws of Swedenapply to us.  Under an official businessreorganisation,

 

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creditors may be forced to approve the terms of the businessreorganisation.  During a businessreorganisation, we will not be allowed to fulfil any obligations incurredbefore the reorganisation with the permission of the bankruptcy administratorappointed by the local district court.

 

Furthermore, under Swedish laws there is noconsolidation of bankruptcies of the assets and liabilities of a group ofcompanies.  Each individual companywould thus be treated separately by a bankruptcy administrator appointed by thelocal district court.  The assets of oursubsidiaries would first be used to satisfy the debts of each respectivesubsidiary and only the remaining surplus (if any) would be available to ourcreditors.  As a result, your ability toprotect your interest as a creditor of a parent of a subsidiary may not be asstrong under Swedish law as it would be under US law, or the laws of othercountries.

 

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**ITEM 4**: INFORMATION ABOUT THE COMPANY

 

*The following is a description of thebusiness operations of Alfa Laval Special Finance AB and its respectivesubsidiaries.  The only substantialassets of Alfa Laval Special Finance AB are the capital stock of its subsidiaries.  Such subsidiaries include the Guarantor,Alfa Laval Holding AB (renamed from Alfa Laval Credit Finance AB), and theformer Alfa Laval Holding AB, which holds several subsidiaries, includingintermediate holding and operating companies.*

 

**4.A.  History and Development of the former Alfa Laval Holding AB, theCompany and the Guarantor**

 

Alfa Laval was founded in 1883 as ABSeparator by Gustav de Laval, the inventor of the first continuous separator,to produce and sell dairy cream separators. In 1901, Alfa Laval was listed on the Stockholm Exchange.  In 1938, Alfa Laval introduced its firstheat exchanger and in 1962 it expanded into the spiral heat exchanger marketand introduced a series of industrial plate heat exchangers.  In 1971 Alfa Laval entered into the sanitaryflow business.  In 1991, the Alfa LavalGroup was acquired and became privately owned by an entity within the Tetra PakGroup, itself a privately owned Group consisting of the industry groups DeLaval and Tetra Pak.  At the time, AlfaLaval consisted of three major lines of business:

 

•                  afood division, including liquid food processing activities, which wassubsequently merged into Tetra Pak;

 

•                  anagricultural division, including farm equipment and systems, which is now DeLaval, a subsidiary of the Tetra Laval Group; and

 

•                  anindustry division.

 

Alfa Laval’s industry division at the timeconsisted of five principal business areas: Thermal, Separation, Flow,Automation and Dosing & Analysing. Dosing & Analysing wasdivested in 1993 and Alfa Laval Automation was divested in 1998.  The remaining three business areas providedthe basis for our internal organisational structure.

 

In August 2000, Industri Kapital 2000and management completed the Acquisition of a majority shareholding in AlfaLaval from Tetra Laval B.V.  Alfa LavalSpecial Finance AB, together with Alfa Laval AB, its parent company, wereincorporated by Industri Kapital 2000, Tetra Laval B.V. and management onMarch 27, 2000 for the purposes of the Acquisition.  The Guarantor, formerly known as Alfa LavalCredit Finance AB (formerly known as Alfa Laval Bostadsförvaltning AB), wasincorporated on October 11, 1926 and re-named Alfa Laval Credit Finance ABas part of the Acquisition of the former Alfa Laval Holding AB.  In 2003, Alfa Laval Credit Finance AB wasmerged with the former Alfa Laval Holding AB and then renamed Alfa LavalHolding AB.

 

Our registered and principal executiveoffices are located at Rudeboksvägan 3, Lund, Sweden, and the telephonenumber at that address is +46 46 36 70 00. Our agent in the United States is CT Corporation, 1633 Broadway,New York, New York 10019.  We are aprivate company with limited liability incorporated under the laws of theKingdom of Sweden.

 

The purchase price for the operations of AlfaLaval (conducted through the former Alfa Laval Holding AB and its subsidiaries)was SEK 8,286 million, including transaction costs of SEK72 million.  As part of theAcquisition, an excess purchase price of SEK 7,300 million was paid overthe net book value of assets acquired. This excess purchase price was attributable to goodwill totalling SEK3,277 million and the balance of SEK 4,023 million to tangible andintangible assets.

 

The Acquisition was financed, in part, byborrowings under a bridge loan facility which was subsequently refinancedthrough the issuance of our Senior Notes and a €200 million investment byTetra Laval B.V. in Alfa Laval AB in the form of the Subordinated Loan.  The balance was subscribed for in cash byIndustri Kapital 2000 and management, and by Tetra Laval retaining ownership inAlfa Laval AB.

 

In connection with the Offering, the capitalstructure of the Alfa Laval Group was changed. See “Item 5.B: Operating and Financial Review andProspects—Liquidity and Capital Resources—Liquidity Requirements”.

 

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For an illustration of our corporateorganisation after the Acquisition and its financing, see “Item 4.C:Information on the Company—Organisational Structure”.

 

***Historic Capital Expenditures***

 

In 2001, 2002 and 2003 we made investments in fixed assets of SEK275 million, SEK 277 million and SEK 259 million respectively, ineach case principally to maintain and upgrade our machinery and equipment.  We also invested to increase our capacityfor the production of brazed heat exchangers. An investment in additional plate pressing capacity and brazing furnacesat our Ronneby facility in Sweden and our Jiang Yin City facility in Chinacommenced in late 2000 and was completed in 2002.  Our investments in fixed assets in 2001 declined principally dueto our divestment of a substantial number of properties, together with areduction in the number of our production sites.  In addition, we consolidated much of our I.T. infrastructure,which contributed to a reduction in expenditure on hardware.  Among the larger investments during 2002 wasan expansion of the production facility in Richmond, Virginia in the UnitedStates and capacity investments for manufacturing of brazed heat exchangers.  The investments during 2003 have beencharacterized mostly by ordinary replacements of machinery.

 

For a discussion of our divestitures, see “Item 5.A: Operating andFinancial Review and Prospects—Operating Results—Acquisitions andDivestitures.”

 

For a discussion of our current capital expenditure programme, see“Item 5.B: Operating and Financial Review and Prospects—Liquidity andCapital Resources—Commitments for Future Capital Expenditure”.

 

**4.B. Business Overview**

 

**Overview**

 

We are a leading global provider ofspecialised process engineering solutions and equipment based on three keytechnologies—heat transfer, centrifugal separation and sanitary flowtechnology.  Under our widely recognisedbrand name, Alfa Laval, we service our customers globally through ten distinctcustomer segments with an international sales force in over 100 countries.  We were founded in Sweden in 1883 by Gustavde Laval, the inventor of the continuous separator.  We are a market leader in our target markets of compact heatexchangers, centrifugal separators and sanitary flow equipment.  Our products, which we sell individually andin combination with each other to form systems and solutions, are designed tooptimise the performance of our customers’ manufacturing processes, and as aresult are often critical to them.  Forthe year ended December 31, 2003, we had net sales ofSEK 13,909 million, operating income of SEK 1,144 millionand EBITA (as defined herein) of SEK 1,638 million.

 

Our key technologies are as follows:

 

•                  ***Heat transfer technology.*** Our heat exchangers are used in avariety of industries for applications such as heating, cooling, ventilation,evaporation and condensation of fluids. Due to the many applications in which heat exchangers can be used, wehave a very large and geographically diversified customer base consisting ofplant owners and operators of manufacturing facilities within industries suchas marine, oil and gas production, refining, heating, ventilation and airconditioning, food processing and power generation.  We believe, based on our market knowledge, that we are the marketleader in plate heat exchangers in the European and US markets and that we hada combined European and US market share of approximately 36% in the plate heatexchanger market in 2003.

 

•                  ***Centrifugal separation technology****.* Our centrifugal separation equipment, systems and decanters areused to separate liquids from liquids and solid particles from liquids and arean integral part of a wide variety of industrial processes.  Examples of applications include fuel oilcleaning systems for ship engines and power stations, the separation of creamfrom milk in the dairy industry and the removal of sludge from water inwaste-water treatment plants.  Ourproducts are vital to raising quality and productivity in areas such as processindustries, crude oil extraction and production and waste-water treatment.  Our separation equipment is sold to a widevariety of industries, including the food and beverage, marine, watertechnology, power generation and oil and gas industries.  We believe, based on our market knowledge,that we are a global market leader in centrifugal separation equipment and thatwe had the leading global market share of approximately 24% in 2003.

 

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•                  ***Sanitary flow technology.*** Our pumps, valves and installation material,including piping and connections, are used for fluid handling applications suchas the production of dairy products, beverages, food, health and beautyproducts and pharmaceutical products. Due to the many applications for which we provide sanitary flowequipment, we have a very large and geographically diversified customers base,principally in the food and beverage industry and waste-water treatment, powergeneration, biochemical and pharmaceutical industries.  Tetra Pak is our preferred distributor forcertain sanitary flow products, principally to liquid food processor end-users,the area in which Tetra Pak itself operates. We believe, based on our market knowledge, that we are a market leaderin sanitary applications and that we had a global market share of 10% in 2003.

 

We service over 20,000 customers through tencustomer segments: Comfort & Refrigeration; Marine & Diesel;Sanitary; Fluids & Utility; OEMs; Food Technology; Energy &Environment; Process Industry; Life Science Technology and Parts &Service.  Our customers are some of theworld’s leading blue-chip manufacturers, distributors and OEMs, such as Bayer,Coca-Cola, Exxon, Tetra Pak and Unilever. Through our customer segments, we cross-sell our systems and fullproduct range, including our parts and services business, and developcustomised solutions by identifying new applications for existing products, aswell as developing new products.

 

Our customer segments are organised into twodivisions, the Equipment division and the Process Technology division.  In the Equipment division, we sell andmarket products to customers that have a well defined and regular product basedequipment need, such as OEMs that require a large number of small plateheat exchangers for integration into boilers, diesel engines and airconditioning units.  In the ProcessTechnology division, we sell and market our customers with specialised orunique solutions for industrial systems and processes, such as for theproduction of beverages, dairy products, beer and vegetable oils, as well asthe purification of fuel and lubricating oil within power plants.

 

Each of the Equipment and Process Technologydivisions is responsible for the world-wide marketing and selling of ourproducts, systems and parts and services with respect to their respectivecustomer segments.  Our global parts andservices activities cover a broad range of activities, such as provision ofparts, maintenance of equipment and systems, training of personnel andefficiency audits, and enables us to serve our customers’ needs on a 24-hourbasis.  We derive an increasing amountof our revenue from the sale of parts and services, which typically generates ahigher margin than the sale of our products, systems and or capital sales.  Our Equipment and Process Technologydivisions are also responsible for research and development for theirrespective customer segments. Supporting our organisation is an Operations division that performscentralised purchasing, logistics and manufacturing functions.

 

We have a diverse customer and geographicbase, which we believe mitigates the impact of an economic downturn in any onepart of the world or in any given industry. The following charts illustrate our sales by customer segment and bygeographic region for the year ended December 31, 2003:

 
|  |   |  |
|--|--------|--|

 

 

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**Our Competitive Strengths**

 

We believe we have a number of competitivestrengths which set us apart from our competitors, more fully described under“—Competition” below.  These competitivestrengths include:

 

•                  **Global market leadership in key technologies.** We are a market leader in our target marketsof compact heat exchangers, centrifugal separators and sanitary flow products,and we operate in attractive and growing segments of our target markets.  Our technological leadership and focus onfinding solutions to our customer needs makes us a natural choice for customersseeking a customised solution for their needs. Due to the need for proprietary design and manufacturing techniques, ourproducts have high technological barriers to entry.

 

•                  **Diversification by customers and geographicalpresence.** We serve over20,000 customers.  During 2003, our tenlargest customers accounted for less than 10% of our net sales.  Our products are sold separately or incombination to a wide variety of industries in over 100 countries.  We believe that this customer and geographicdiversity mitigates the impact of an economic downturn in any one part of theworld or in any given industry.

 

•                  **Large base of installed products.**  Our base of installed products is ofstrategic importance to us as it provides a stable, recurring stream of partsand services revenues.  Our installedbase of heat exchangers and separators have a life span of 5 to 20 yearsand begin generating significant parts and services revenues after 5 to10 years of use.  In addition, ourlarge installed base enables us to identify opportunities for repeat business.

 

•                  **Potential for margin expansion and strong cash flows.** Since the Acquisition, our management hasestablished a successful record of cost reduction and margin expansion,evidenced in having increased operating margins from 1.7% in 1999 to 8.2% in2003 and EBITA margins from 6.7% in 1999 to 11.8% in 2003.  Our continuing focus on cost reduction alsoafter the completion of the “Beyond Expectations” programme provides us with apotential for further margin improvement. This focus, combined with the low capital intensity of our business,generates strong cash flows, which provide a stable basis from which torealises our future growth potential.

 

•                  **Future growth potential.** Our focus on customer segments providessignificant opportunities to grow revenues as it enables us to cross-sell ourproducts, systems and services and strengthens our market position, for exampleby identifying more customers through these segments.  We also have a solid base of business from which to leverage inthe fast growing markets such as China and India.  Additionally, our recently established business developmentfunction will help us to pursue growth through selective acquisitions, joint venturesand alliances in areas related to our existing business.

 

•                  **Premium brand name.** The Alfa Laval brand is a widely recognisedglobal brand and we believe that customers around the world associate our brandwith characteristics such as reliability, superior product quality and highperformance.  Our reputation for qualityand performance, along with the critical nature of our products for ourcustomers’ manufacturing processes, enhances our competitiveness and providesus with a solid foundation for future growth.

 

**Our Strategy**

 

Our strategic objective is to growshareholder value by delivering growth and continuous improvement in ouractivities.  In order to achieve ourstrategic objective we intend to focus on the following strategies:

 

***Growth***

 

•                  **Focus on individual customer segments.** In 2001, we reorganised into ten customersegments within our two principal business divisions, allowing us to increaseour focus on our customers and their particular needs for service.  We believe that this has enabled us torespond quickly and effectively to different customers’ needs with a range ofsystems solutions, from individual pieces of equipment to tailored packagesthat combine high-quality equipment with process knowledge and expertise.  By focusing on customer segments, we will beable to cross-sell our existing products, systems

 

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and solutions, facilitate the development of new applications andexisting products, and expand the use of existing products, systems andsolutions in new markets.  We willcontinue to focus on customer segments and seek to enhance our presence andsales with each of our customers.

 

•                  **Expand the parts and services business.** We intend to continue to expand our highermargin, stable and recurring parts and services business.  As part of this strategy, we have nowestablished a more focused parts and services function within our twodivisions.  We will continue to leverageoff our substantial installed base of heat exchangers and centrifugalseparators, many of which consume spare parts and require servicing throughouttheir typical life span of approximately 5 to 20 years.  We intend to increase the level of our partsand services business by more effectively tracking our installed base ofequipment and by selling ongoing customer service contracts along with ourproducts and systems and at the time of their original sale.  We believe that by emphasising parts andservices we can improve margins with limited additional capital investment. Ourfocus on the parts and services business is reflected in the increasedcontribution of this business from 22% of net sales in 1999 to 26% of net salesin 2003.

 

•                  **Develop new industry applications.** Wecontinue to work on providing our customers with efficient and high-qualityproducts. We intend to continue developing our sales by improving existingproducts and by identifying new applications for existing products. Forexample, we have recently leveraged our leading position as a supplier ofmarine-based desalination systems in order to enter the market for land-baseddesalination technology. Moreover, we are also working with OEMs todevelop new industry applications in a variety of areas, including for use inrefrigerators and diesel engines.

 

•                  **Seek new growth opportunities.** We will seeknew growth opportunities through strategic add-on acquisitions, joint venturesand alliances in areas related to our existing businesses with a view tobroadening our services and product lines. For this purpose, we haveestablished a dedicated business development function within our organisation.We also intend to focus on leveraging our existing strong market positions incertain fast growing emerging markets, such as China and India. We also intendto capitalise on demand for our products, systems and services driven byenvironmental, legislative and technological advances.

 

***Continuous improvement***

 

•                  **Reduce our cost base.** We will continue ourefforts to reduce our cost base and increase our operating margins and EBITAmargins by consolidating and reducing excess manufacturing capacity, reducingheadcount, increasing the outsourcing of certain components and shiftingcertain production to lower cost manufacturing countries. We will continue torestructure our sales and distribution organisation with the goal of reducingoverhead costs by centralising shared services. We aim to achieve further costsavings through various initiatives in purchasing, as well as seek savings inour day to day non-production related activities. In addition, we plan to streamlineour inventory management by consolidating and eliminating inventory from oursales companies to a few strategically located centres. Through our continuingcost reduction activities, we have successfully increased our Operating marginfrom 1.7% in 1999 to 8.2% in 2003 and EBITA margin from 6.7% in 1999 to 11.8%in 2003.

 

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***Equipment Division***

 

The following table sets forth details of ourfive customer segments, their principal end-user markets and theirrepresentative customers within our Equipment division. The Parts and Servicessegment for both the Equipment division and the Process Technology divisionconstitutes the tenth customer segment within Alfa Laval.

 
| **Customer Segment**        |   | **End-User  Markets**                                                                              |   | **Representative  Customers**                            |   | **% of2003  Sales** |   |
|-----------------------------|--------|----------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|--------|---------------------|--------|
|                        |   |                                                                                               |   |                                                     |   |                |   |
| Sanitary                    |   | Dairy, food products and beverages, pharmaceutical and healthcare  industries                      |   | Nestlé, Coca Cola, Procter &  Gamble, Tetra Pak |   | 25                  | %      |
| Comfort & Refrigeration |   | Heating, cooling, air conditioning and refrigeration industry                                      |   | Uppsala Energi, Climespace, York, Mycom                  |   | 24                  | %      |
| Marine & Diesel         |   | Shipping, ship building and power generation industries                                            |   | Hyundai, Finncantieri, Wärtsila                     |   | 16                  | %      |
| OEM Equipment               |   | Manufacturing (diesel engines, boilers, air conditioning, air dryer  and condensing unit) industry |   | Vaillant, Caterpillar, Carrier                           |   | 8                   | %      |
| Fluids & Utility        |   | Manufacturing (automotive, metal working and electronic) industry                                  |   | GM, Scania, Daimler Chrysler, Samsonite                  |   | 3                   | %      |
|                        |   |                                                                                               |   |                                                     |   |                |   |
| Total Capital Sales         |   |                                                                                               |   |                                                     |   | 76                  | %      |
| Parts and Services          |   |                                                                                               |   |                                                     |   | 24                  | %      |
|                        |   |                                                                                               |   |                                                     |   |                |   |
| Total                       |   |                                                                                               |   |                                                     |   | 100                 | %      |

 

Our Equipment division, employing 2,015personnel as of December 31, 2003 and accounting for SEK7,842 million, or 56%, of our total net sales in the year endedDecember 31, 2003, serves customers who typically have a well-defined andregular need for our products and require more component-type products. OurEquipment division utilises multiple distribution channels to generate sales,including its direct sales force, distributors, strategic partners (includingTetra Pak), OEMs (such as boiler manufacturers) and the Internet, all asmore fully described under “—Marketing and Distribution” below. In 2003,approximately 44% of net sales in our Equipment division were related to ourheat transfer technology, approximately 28% to our sanitary flow equipment, andapproximately 22% to our centrifugal separation technology and approximately 6%to other proprietary equipment

 

*Sanitary.*  The Sanitary customer segment is focused onthe provision of fluid handling equipment to the dairy, beverage, food andpharmaceutical industries. These industries are characterised by stringentsafety and hygiene requirements. Our heat exchangers, pumps, valves,installation and tank equipment are used to heat, pump, regulate, process andtransport fluid products such as milk, cheese, yoghurt, soft drinks, beer,processed food, skin lotions, shampoo and medicine. Transporting and directingsuch liquids safely and efficiently is critical to our customers’ processes. Webelieve we are a significant supplier of hygienic fluid handling equipment,manufacturing a comprehensive range of pumps, valves and fittings. OnJanuary 31, 2003, the Danish Toftejorg A/S Group was acquired addingadvanced tank cleaning equipment to Alfa Laval’s offering to the Sanitary andMarine industries.

 

*Comfort & Refrigeration.*  In the Comfort & Refrigerationcustomer segment, we sell our heat exchangers to a broad spectrum of customers,ranging from large multinational companies to one-man installation firms,principally for use in the context of indoor climate control, refrigeration andindustrial cooling processes. In particular, our welded plate heat exchangersare suitable for extremely high temperatures and pressures and can be used inplace of shell and tube technology. We believe our brazed heat exchangers forevaporation and condensation have a well-established performance record in themarket.

 

*Marine & Diesel.*  In the Marine & Diesel customersegment, we are a significant supplier of separators, compact heat exchangersand fresh-water generators, which we sell to ship yards and diesel enginemanufacturers. We believe that more than half of all ships in service areequipped with our equipment, giving us a leading market position in thissector. Our equipment is used for fuel and lubricating oil cleaning processesand engine cooling and fresh water production. On January 31, 2003, theDanish Toftejorg A/S Group was acquired adding advanced tank cleaning

 

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equipment to Alfa Laval’s offering to the Sanitary and Marineindustries.

 

*OEM.*  In the OEM customer segment, we have closerelationships with manufacturers of medium and high-speed diesel engines, airconditioning units and boilers, who typically integrate our products, such asour small brazed heat exchangers into their units. We aim to build allianceswith these manufacturers in order to undertake joint development programmes fornew products. We are a significant supplier of small brazed heat exchangers tothe boiler manufacturing industry, brazed heat exchangers to theair-conditioning industry and gasketed heat exchangers to the diesel enginemanufacturing industry.

 

*Fluids & Utility.*  In the Fluids & Utility customersegment, our knowledge of heating, cooling and separation is focused on alimited number of industries, principally the automotive, metalworking andelectronic and plastic products industries. These industries typically use ourheat exchangers, separators and sanitary flow products for temperature controland for the cleaning of hydraulic and lubricating oils.

 

***Process TechnologyDivision***

 

The following table sets forth details of ourfour customer segments, their principal end-user markets and theirrepresentative customers within our Process Technology division. The Parts andServices segment for both the Process Technology division and the Equipmentdivision constitutes the tenth customer segment within Alfa Laval. 

 
| **Customer Segment**    |   | **End-User  Markets**                                                                 |   | **Representative  Customers**                                                          |   | **% of  2003  Sales** |   |
|-------------------------|--------|---------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------|--------|-----------------------|--------|
|                    |   |                                                                                  |   |                                                                                   |   |                  |   |
| Food Technology         |   | Food products, protein and beverage industries                                        |   | Anheuser-Busch, ADM, Heineken                                                          |   | 27                    | %      |
| Process Industry        |   | Chemical, petrochemical and natural resources (sugar, starch and  yeast) industries   |   | BASF, Bayer, Cargill,                                                                  |   | 20                    | %      |
| Energy and Environment  |   | Waste-water treatment, oil, gas and power industry, land based  desalination industry |   | General Electric, Exxon, Statoil, City of Chicago, Mitsubishi (power  plants), Siemens |   | 18                    | %      |
| Life Science Technology |   | Biotech and pharmaceutical industry                                                   |   | Eli Lilly, GlaxoSmithKline, Genentech                                                  |   | 4                     | %      |
|                    |   |                                                                                  |   |                                                                                   |   |                  |   |
| Total Capital Sales     |   |                                                                                  |   |                                                                                   |   | 69                    | %      |
| Parts and Services      |   |                                                                                  |   |                                                                                   |   | 31                    | %      |
|                    |   |                                                                                  |   |                                                                                   |   |                  |   |
| Total                   |   |                                                                                  |   |                                                                                   |   | 100                   | %      |

 

Our Process Technology division, employing2,621 personnel as of December 31, 2003 and accounting for SEK5,994 million, or 43%, of our total net sales in the year endedDecember 31, 2003, serves customers that require customised solutions tooptimise their processes and for which it is critical for us to demonstrate anin-depth knowledge of their processes. For example, we supply customisedturn-key process technology solutions (including high speed separators,decanter centrifuges, hydro-cyclone systems and filters) for the extraction ofstarch from corn, wheat, potatoes and tapioca. Our systems handle the preparationof the raw materials through to the final processing of the various endproducts. Our decanters, hydro-cyclone systems and dryers are used insplitting, purifying and washing processes in starch extraction. Sales tocustomers requiring customised solutions are principally channeled through ourown sales companies, more fully described under “—Marketing and Distribution”below. Based upon our process and product expertise, in combination with ourtechnologies, we offer a range of bundled packages, from individual products tospecialised solutions, together with attentive customer service. In 2003,approximately 54% of net sales in our Process Technology division were relatedto our centrifugal separation technology, approximately 36% to our heat transfertechnology, approximately 7% to other proprietary equipment, approximately 2%to our sanitary flow technology and approximately 1% to our membranetechnology.

 

*Food Technology.*  Within the Food Technology customer segment,we hold a strong position as a supplier of processing solutions to the food andbeverage industry. We supply stand-alone equipment, modules, process lines,complete plants and/or specialised services according to customers’ needs. Theprimary products we supply are separators and plate heat exchangers, as well aspumps, valves and installation materials. Our products are used in theproduction of beverages (including coffee, tea, soft drinks, fruit juices andviscous foods, such as soups, sauces

 

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and chocolate products), beer, wine, olive oil, other vegetable oilsand meat and fish proteins. We are a significant supplier of process technologyin the refining of rapeseed, soy and palm oil and other vegetable oils and,with our acquisition of Scandi-Brew in 1999, we are also a significant supplierof process technology solutions in the production of beer.

 

*Process Industry.*  In the Process Industry customer segment,our heat exchangers and separators are used in a wide variety of our customers’processes, including those processes involving high temperatures andconcentrated petrochemicals, plastics, polymers, metals, minerals and paper.Our new centrifuges are well-suited to the demands of the chemical industry.With our acquisition of the Merco Dorr Oliver starch business in 2000, webelieve we are also a significant supplier of equipment to those industriesactive in the extraction, refinement and modification of starch.

 

*Energy & Environment.*  In the Energy & Environmentcustomer segment, our products and systems play a critical role in areas suchas waste-water treatment, oil and gas production, the production of energy fromoil, gas, other fossil fuels, hydroelectric and nuclear power. In particular,our decanters have a leading market share for use in the treatment of sludge inwaste-water treatment plants and are often combined with other core productsfor use in this context. We supply compact heat exchangers that are used for avariety of heating and cooling applications on oil platforms, where weight andspace savings are important criteria. Our centrifugal separation systems forthe treatment of fuel oils and lubricating oils are typically used at diesel,gas or steam power stations.

 

*Life Science Technology.*  In the Life Science Technology customersegment, we have a strong position in the traditional chemical and thepharmaceutical industry, as well as in the bio-tech industry. Our centrifugalseparators play a key role in cell separation during the manufacture of pharmaceuticalproducts in the bio-tech industry. Our heat exchangers are used for heating,cooling and thermal regulation of their processes. On October 2, 2003,Alfa Laval acquired the Life Science division, bioKinetics, from Kinetics GroupInc. in the United States. bioKinetics is a North American leader in technology-driven integrated processsolutions for the biotech and pharmaceutical industries. bioKinetics’ main products are modular designsthat mainly focus on mammalian cell cultures. These modules are predominantlybioreactor modules, but also modules for cell harvesting, purification andbio-deactivation. In the bioKinetics customer base leading pharmaceutical andbiotech companies such as Amgen, IDEC, Lonza and Merck can be found.Life Science is a market where Alfa Laval already today is active with all coreproducts. However, as the Life Science market shows a very high growth AlfaLaval has to secure that the potential is captured also through acquisitions.

 

***Parts and Services***

 

We have recently increased our focus on thehigher margin parts and services business within both our Equipment and ProcessTechnology divisions. Our parts and services business covers the maintenance ofequipment and systems, the supply of spare parts, the training of personnel andefficiency audits. We have 70 service centres around the world. In 2003, 26% ofGroup sales were derived from this business, as compared to 22% in 1999.

 

We have a large and growing installed base ofheat exchangers and separators, which require service and spare parts. Due tothe natural ageing of this installed base, particularly in heat exchangers,which have a typical life span of 5 to 20 years, and separators, whichhave a typical life span of 10 to 20 years, we expect the demand for ourparts and services to increase. We intend to increase our parts and servicesbusiness by more effectively tracking our installed base of equipment and byselling ongoing service contracts along with our systems and products at thetime of their original sale. In addition to leveraging off our large andgrowing installed base of heat exchangers and separators, we believe thatanother key driver to growth in the parts and services business is theincreased outsourcing of equipment maintenance by customers whose core competenceis not in the maintenance field, particularly where the plant is sophisticatedand downtime costs are high. We also service and sell spare parts for productsmanufactured by our competitors in the heat transfer and sanitary flowtechnology markets, which also provide us with an opportunity to expand ourcustomer base and cross-sell our products.

 

***Operations Division***

 

Supporting our two principal divisions is a centralised Operationsdivision that performs three functions for our Group—purchasing, logistics andmanufacturing. Our Operations division employed 3,873 personnel, as ofDecember 31, 2003. The purchasing unit, which is organised by commoditygroup and region, is responsible for purchasing strategy, volume and supplyagreements, development of relationships with suppliers and outsourcing. Thelogistics unit, which is organised by region and product, is responsible forall distribution operations in the sales

 

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organisation supply chain between us, our customers and ourdistributors. It is also responsible for inventory management, orderprocessing, warehousing, transport and freight. The manufacturing unit, whichis also organised by product and region, is responsible for all of our manufacturingsites which produce both components and complete products for supply to ourcustomers. The production unit has the responsibility for long-term productionplanning and development. In centralising these three principal functions, weaim to streamline our operations, increase our efficiency and productivity,reduce our operating costs and exploit economies of scale. Our Groupheadquarters continues to have sole responsibility for all human resource,information technology and information systems, communications, finance andlegal activities.

 

For a description of our manufacturingfacilities, see “Item 4.D: Information about the Company—Property, Plantand Equipment”.

 

**Supplies**

 

Our principal raw materials are titanium,sheet stainless steel, rubber gaskets, carbon steel frames, copper and, inrelation to our sanitary flow products, rubber, plastic and cast iron. Wepurchase our supplies from over 3,500 suppliers located in Europe, NorthAmerica and Asia. No single supplier accounted for more than 3% of ourpurchasing volume in 2003. We are not dependent on any one supplier andalternative sources of supply are generally available, although we do depend onthree suppliers for titanium and we are subject to a substantial lead time inordering and obtaining titanium from other sources. Supply contracts aretypically negotiated on a 6 to 12 month basis and use of consignmentstock, or stock that is owned by the supplier until used in production, is morefrequently being used with core suppliers as a way to free up working capital.In addition to purchasing raw materials, we also purchase certain components,including motors and electrical systems, which we integrate into some of ourproducts, principally our separators.

 

**Our Products and Services**

 

***Heat TransferTechnology Products***

 

Heat transfer technology is used in almostall industrial process activities. Typical heat transfer applications performheating, cooling, ventilation, evaporation and condensation functions in a widerange of industries such as food, chemical processing and power generationindustries. Heat exchangers work by passing fluids or gases close together,with heat moving from the hot substance to the colder one. Such products arecritical for the overall efficiency of a process within a manufacturing plantand are generally considered to be an essential purchase in circumstances wheretechnical specifications and superior quality are key factors. These productsare either purchased individually, or as part of a larger piece of equipment oran entire processing system. Our heat transfer products, many of which can becustomised for specific customer needs, consist principally of:

 

•                  compactplate heat exchangers, including gasketed heat exchangers, brazed heatexchangers and welded heat exchangers;  

 

•                  spiralheat exchangers; and

 

•                  aircooling heat exchangers for refrigeration.

 

A heat exchanger is typically in operationfor 5 to 20 years and consumes spare parts and requires qualified servicethroughout its life. As a result, customers who have purchased our systems andproducts create a reliable customer base for our parts and services business.We have the capability to service most kinds of plate heat exchanger, includingthose not manufactured by us. This capability provides a platform for expandingour higher margin parts and services business and provides exposure to newcustomers to whom we can market our heat transfer products.

 

*Plate heat exchangers*

 

The plate heat exchanger is our main product.We believe that plate heat exchangers combine high efficiency with lowinvestment and operating cost. It consists of a pack of metal plates withportholes for the passage of two fluids, between which heat transfer takesplace. There are three types of plate heat exchangers; gasketed, brazed andwelded. Gasketed plate heat exchangers are sealed with rubber gaskets and aretypically used on ships as part of the cooling process of engine oil. Brazedheat exchanges are a variant of the gasketed heat exchanger and

 

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evolved in response to the need for a compact plate heat exchanger forhigh pressure and high temperature applications, such as district heating orrefrigeration. Welded heat exchangers are heavy-duty products and are typicallyused for high pressure and high temperature applications. The price range forgasketed plate heat exchangers is approximately SEK 5,000-SEK5 million, for brazed heat exchangers, approximatelySEK 100-SEK 20,000 and for welded heat exchangers approximatelySEK 5,000-SEK 1.5 million.

 

*Spiral heat exchangers*

 

Spiral heat exchangers, which areself-cleaning, are typically used for more difficult applications where, forexample, temperatures and pressures are higher or where fluids contain a highlevel of solids, such as sludge or pulp fibers. The price range for a spiralheat exchanger is approximately SEK 5,000-SEK 2 million.

 

*Air cooling heat exchangers*

 

Air cooling heat exchangers are widely usedfor air conditioning and refrigeration. The price range for an air cooling heatexchanger is approximately SEK 6,000-SEK 120,000.

 

***CentrifugalSeparation Products***

 

We use technologies based on centrifugalforce to separate liquids from other liquids or solids from liquids by rotatinga vessel at very high speeds. Our separators are vital to raising quality andproductivity in areas such as:

 

•*                  process industries—*food andbeverage, pharmaceutical, biotech, chemical and petrochemical processing;

 

•*                  crude oil extraction and production—*cleaningand recycling of drilling fluids, cleaning of lubrication oil and crude oil;

 

•*                  marine and power—*treatment andcleaning of fuel and lubrication oil for use on board ships and electricitygeneration plants; and

 

•*                  waste-water treatment—*de-wateringof sludge using decanter centrifuges as an alternative to traditional filterpresses.

 

Our principal products include separators anddecanters. The separation technology is mainly used for seven basic separationtasks:

 

•*                  clarification—*the removal ofsolid particles from a liquid;

 

•*                  purification—*the separation oftwo liquids where the light liquid is the dominating liquid, for example, asmall amount of water in oil;

 

•*                  concentration—*the separation oftwo liquids where the heavy liquid is the dominating liquid, for example, asmall amount of oil in water;

 

•*                  de-watering—*the concentration ofa slurry, or a high concentration of solids in a liquid phase;

 

•*                  classification*—the separation ofa suspension of solids in a liquid into two streams with differentparticle size distribution;

 

•*                  washing—*the dissolving ofimpurities in suspended, crystallised or amorphous solids; and

 

•*                  extraction*—the separation of aliquid agent from an original liquid, where the liquid agent contains a mineralor an extract absorbed through mixing.

 

A separator or a decanter is in operation forapproximately 10 to 20 years and consumes spare parts and servicesthroughout its life.

 

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*High-speed separators*

 

High-speed separators can perform tasks thatrange from separating liquid from liquid to the separation of slurries having asolids content of up to 30.0%. We manufacture a wide range of sizes andversions of high-speed separators which are used, for example, in the oil andgas industry to extract water from crude oil, the marine industry to cleandiesel oil on board ships and in the dairy industry to separate cream frommilk. The price ranges for high-speed separators vary depending on the degreeof customisation and the particular end-user market, but typically range betweenapproximately SEK 50,000-SEK 2 million in the marine and powerindustry and approximately SEK 200,000-SEK 5 million in theprocess industry.

 

*Decanter centrifuges*

 

A decanter centrifuge is a horizontalseparation technique which uses a slower speed than high speed separationtechniques and a system of continuous discharge of the liquid and theconcentrated solid. The main uses for decanter centrifuges are applicationsthat require separation of a relatively higher solid content. For example,decanter centrifuges are used in municipal waste-water treatment plans todewater sludge. Decanter centrifuges range in price from approximatelySEK 300,000-SEK 6 million.

 

***Sanitary FlowProducts***

 

Pumps, valves and installation material areused in almost every process and production industry. We provide pumps, valvesand fittings for fluid handling in a sanitary context. These applicationscompliment our overall engineering solutions and demand high quality productsthat maintain a high level of hygiene. These applications are typically used inthe production of dairy products, beverages, food, health and beauty productsand pharmaceutical products. OEMs typically incorporate our sanitary flowproducts in their systems and therefore need a continuing supply of our components.These products perform supportive functions within an overall process and areused with our heat transfer and centrifugal separation products.

 

The average life of our sanitary flowproducts varies according to type and application. In a corrosive environmentproduct life can be limited to a few months, while in other applications oursanitary flow products have been in place for more than 20 years. Serviceis strategically important for us since contact with the customer is a sourceof repeat sales. We also provide parts and services to customers who haveproducts that were not manufactured by us.

 

*Pumps*

 

Positive displacement pumps are primarilyused to aid the movement of thicker and more sensitive media, for example, inthe production of syrup. Sanitary centrifugal pumps are primarily used incircumstances where hygiene is critical, for example, in the dairy industry.Prices range from approximately SEK 5,000-SEK 300,000.

 

*Valves*

 

Valves are used to regulate and redirectliquid flows. Our sanitary diaphragm valve combines reliability with steriletreatment capacity. For example, butterfly valves are shut-off valves thatrequire limited space in a production line, are low-weight and relativelyinexpensive. Prices range from approximately SEK 300-SEK 35,000.

 

*Installation material*

 

We have a complete range of installationmaterial, including piping and connections, available in a range of sizes.Prices range from approximately SEK 30-SEK 1,000.

 

**Marketing and Distribution**

 

We are represented in over 100 countriesthrough 50 sales companies and our various distributors. Our sales companiesare organised to reflect our two principal divisions and each is responsiblefor selling and marketing all of our products and services to industries withinour ten customer segments. Every sales company also has a senior managerresponsible for all the parts and services business. Our European and US salescompanies are respectively supported by two shared-services entities—one in theUnited States and the other in Europe—from

 

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which they purchase administrative services (including financial andaccounting services, information technology and information systems, orderprocessing, billing and site service management functions), thus allowing themanaging directors of each sales company to focus purely on sales activities.Our entire sales organisation is managed centrally by our senior Groupmanagement.

 

The Equipment division depends on our ownsales companies, as well as external channels such as distributors, strategicpartners (including Tetra Pak), OEMs (including boiler manufacturers) andthe Internet. The Process Technology division focuses on interaction withcustomers and sells its systems, production lines and product service packagesdirectly through the Alfa Laval sales force.

 

The majority of our sales force, comprisingapproximately 2,000 personnel, are qualified engineers and are trained indesign, configuration, delivery, installation and service as part of the salesand marketing process. Where possible, we compensate our sales force through abase salary and bonuses tied to sales volumes and consolidated gross margins ontotal sales volumes.

 

Our sales companies are the vehicle fordelivering parts and services to customers and they generally have access tocentralised parts stock and workshops for repairs. We use agents anddistributors in circumstances where these additional sales channels provideaccess to customers who would not, due to geographical or politicalconstraints, be reached by our sales companies, or where it would not be costeffective for the customers to be served by one of our sales companies. We aredeveloping our use of e-commerce in the distribution of our products andservices. To this end, we have created one Group organisation for productionand logistics in order to interface with our key distributors and agents withthe aim of facilitating the efficiency and speed in the placing of orders,particularly in relation to spare parts, sanitary flow installation equipmentand brazed heat exchangers.

 

**Our Markets**

 

The impetus behind our restructuring was acommitment to shift our focus from our products to our customers. Our productsand services, however, remain based upon our three key technologies of heattransfer, centrifugal separation and sanitary flow. Our newly created Equipmentand Process Technology divisions, therefore, continue to operate and compete inour traditional markets for heat transfer, centrifugal separation and sanitaryflow products.

 

The markets for plate heat exchanger andcentrifugal separation technology, in particular, have high barriers to entry,principally due to the need for:

 

•                  proprietarydesign and manufacturing techniques;

 

•                  largecapital investments required to replicate the necessary manufacturinginfrastructure; and

 

•                  awell-established brand and historic track record of product quality andreliability.

 

*Heat transfer technology industry*

 

The heat transfer technology market includesa number of different heat exchangers, including shell and tube heatexchangers, air cooling exchangers, cooling towers and plate heat exchangers.Alfa Laval is focused on the compact heat exchanger market, in particular theplate heat exchanger market. We define the compact heat exchanger market toinclude brazed, welded and gasketed plate heat exchangers. The market for plateheat exchangers, which has historically been characterised by strong growth anda small number of global players, includes a number of different heatexchangers, including brazed, gasketed and welded heat exchangers, which areall variations on the plate design. We estimate that the size of the combinedEuropean and US heat exchanger market is approximately US$6.0 billion, ofwhich we estimate US$ 1.0 billion, represents the combined European and USmarket for our current range of plate heat exchangers. Plate heat exchangersrepresent the fastest growing segment of the European and US heat exchangermarkets. Plate heat exchangers represent the fastest growing segment of theEuropean and US heat exchanger markets. We believe this is due to the more compact size, modular design, lowerprice and higher energy efficiency of the plate heat exchangers as compared tothe more traditional shell and tube heat exchangers technology. Moreover, plateheat exchangers are typically more hygienic, easier to maintain and bettersuited to higher temperature/higher pressure environments than shell and tubeheat exchangers. As end users become increasingly confident with the plate heatexchanger technology, we believe that the European, Asian and US markets willcontinue their strong growth as traditional shell and tube technology isreplaced with plate heat

 

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exchanger technology.

 

As heat exchangers improve in sophistication,after-sales support has become an essential service for end users. There hasalso been a greater emphasis on giving advice to customers relating to theoperation and maintenance of equipment. Customer support has therefore becomean important competitive factor. The market for parts and services businessgenerates high margins but is highly fragmented, consisting of a number ofsmall companies which primarily operate on a local basis.

 

*Separation equipment industry*

 

The separation equipment market includes themarket for filtration equipment, gravitational (or sedimentation) separationequipment and centrifugal separation equipment. We define the centrifugalseparation market as decanters centrifuges and high speed separators. Weestimate that the market for liquid sedimentation and centrifugal separationequipment is worth US$5.0 billion. Of this, US$2.0 billion representsthe centrifugal separation equipment market, defined as decanter centrifuges,disc centrifuges and other centrifuges. Within the centrifugal separationequipment market, disc centrifuges and decanter centrifuges are the twodominant technologies, representing 70% of this market. The centrifugalseparation market is served primarily by a small number of global players.

 

In recent years, there has been a move awayfrom conventional methods of separation, such as gravitational (orsedimentation) separation techniques towards centrifugal technology. Unlikeconventional techniques, which require regular interruption to the process inorder to allow cleaning to take place, centrifugal separation is a continuousprocess. We believe our customers are becoming more confident in theapplication of centrifugal technology, particularly in relation to theclarification process within the brewing industry. However, we expect thehighest growth to come from the biotechnology, pharmaceutical and environmentalindustries.

 

Parts and services support is becomingincreasingly more important. The market for parts and services for centrifugalseparation equipment is highly attractive as the technology is relativelycomplex and few competitors possess the technological know-how. This comparesto the service environment for other less sophisticated centrifugal separatorswhere the competition is based on customer proximity and response time.

 

*Flow applications industry*

 

The market for flow control equipmentconsists principally of sanitary liquid handling equipment, including pumps,valves and fittings. Alfa Laval is active within the sanitary flow technologymarket, a market which demands high quality products with an ability to treatliquids with a high level of hygiene in industries such as food,bio-technology, pharmaceutical, cosmetics, healthcare, oil and protein. Weestimate that the overall market for sanitary flow applications isapproximately $2.2 billion. Flow applications are integral in the contextof an overall, systemic process and as companies continue to improve efficiencyin their processes, automation is becoming an increasing focus evidenced by thedemand to increase the ratio of automated to manual valves.

 

The market for sanitary liquid handlingequipment historically has been characterised by slow market growth and a largenumber of small, regional industry participants, particularly in relation tocommodity products such as butterfly valves and installation material. Inrecent years, growth among the industry participants has been achieved byconsolidation, resulting in an increase in market share. It is expected thatfurther significant consolidation among smaller industry participants willcontinue. Competitors principally compete on product range, price, a wellestablished brand name, delivery time and distribution networks.

 

**Competition**

 

Our main competitors are still differentiatedaccording to technology. The competition we face in each of our keytechnologies of heat transfer, centrifugal separation and sanitary flowequipment is as follows:

 

•                  *Heat transfer technology.* Our competitorsin the heat technology industry vary in size and in the scope and breadth ofthe products and services they offer. In addition, competition variessignificantly among geographic regions. Our principal competitors in plate heatexchangers include Tranter/SWEP, Invensys/APV, mg technologies/GEA, Hisaka andSondex. We also compete with Kapp(HES), Kurose and Canzler in relation tospiral heat exchangers. In relation to our production of air cooling heatexchangers, specifically for the refrigeration market, we compete principallywith Günter, Eco and Frigabohm.  Of our

 

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competitors, Tranter/SWEP, Invensys/APV, mgtechnologies/GEA and Sondex operate globally. Some of our competitors in therefrigeration market generally are niche players, aiming their productsspecifically at that market. We believe that we have the greatest breadth ofproduct range in heat transfer technology on offer. Tranter/SWEP, Invensys/APVand mg technologies/GEA also have a wide range of technology, although they donot produce spiral heat exchangers.

 

•                  *Separation technology.* Our centrifugalseparation technologies compete with similar technologies of other companies aswell as with other alternative separation solutions, such as filtration. Inrespect of disc centrifuge technology, Westfalia (mg technologies/GEA) is ourprincipal competitor. We also compete with Mitsubishi and Veronesi in respectof the mineral oil separation market. In respect of decanter centrifuge technology,Andritz-Guinard and Westfalia are our principal competitors in the wasteseparation market, Pieralisi in the olive oil separation market and Swaco inthe oil and gas market. In the market for filtration of mineral oils for themarine and diesel industry, we compete principally with Boll & Kirsch.Of our competitors, we believe that Westfalia is the most global in nature andhas a product range most comparable to ours. We also believe that Westfalia hasa strong market position in the chemical processing, pharmaceutical and foodprocessing industries. In 2002, Alfa Laval started to provide membranefiltration equipment for the food & beverage and for the life sciencemarkets. Our main competitors in the food & beverage market are Orelis(Rhodia), Koch Membrane Systems and PCI Membranes (ITT). Our main competitorsin the life science market are Orelis (Rhodia), Koch Membrane Systems, PCIMembranes (ITT) and Millipore.

 

•                  *Sanitary flow industry.* We compete with alarge number of small, regional competitors. Our principal competitors in themarket for sanitary flow products are Invensys/APV mg technologies/GEA. We alsocompete with Waukesha/Cherry Burrell (a subsidiary of United DominionIndustries/SPX), ITT Industries, Fristam Pumps, Norit Sudmo, Jensen, ToyoStainless and Johnson Pump. Of our principal competitors, APV, GEA, Waukesha,Norit Sudmo, ITT and Fristam Pumps are global in nature. We believe that bothWaukesha and GEA have a product range, which is comparable to ours. With theacquisition of Toftejorg in 2003 we have expanded our offering for tankcleaning equipment. Our major competitor within tank cleaning equipment for themarine industry is Scan Jet.

 

**Environmental Matters**

 

We are subject to extensive, evolving andincreasingly stringent environmental, health and safety laws and regulationsgoverning our operations. The laws and regulations applicable to our operationsaddress, among other things, emissions to the air, waste-water discharges tosurface and subsurface waters, other releases into the environment, thegeneration, handling, storage, transportation, treatment and disposal of wastesand the remediation of contaminated areas. We believe we are in substantialcompliance with all applicable environmental laws and regulations and, based oncurrently available information, this compliance has not had and is notexpected to have an adverse effect on our competitive position or business.

 

Historical operations at many of ourfacilities may have resulted in the discharge of hazardous materials to soil orgroundwater that may require investigation or remediation in the future. Inaddition, future regulatory developments, changes in existing requirements orenforcement policies or the development or discovery of new environmental factsor conditions could require significant expenditures, result in the impositionof fines or penalties or prevent or restrict our operations. There can be noassurance that these developments or changes will not have a material adverseeffect on the results of our operations or our financial condition.  

 

Tetra Laval B.V. has indemnified us and AlfaLaval Holding AB (renamed from Alfa Laval Credit Finance AB), together with ourpredecessor, the former Alfa Laval Holding AB and its subsidiaries, for anyenvironmental liabilities existing at the time of the Acquisition and, withrespect to Alfa Laval Holding AB (renamed from Alfa Laval Credit Finance AB)and the former Alfa Laval Holding AB and its subsidiaries, for anycontamination or pollution existing at the time of the Acquisition thatconstitutes a violation of environmental law. This indemnification is subjectto a €5.5 million (SEK 52 million) deductible and an aggregatelimit of €575 million (SEK 5.4 billion) for environmental andnon-environmental matters alike. Environmental claims may be brought under theindemnity for seven years from the date of the Acquisition. However, there canbe no guarantee that this indemnification will cover all related claims orlosses or that the indemnifying party will have sufficient assets to cover suchclaims or losses.

 

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**Insurance**

 

We hold insurance in respect of our propertyportfolio, with sums insured up to the full value of our plants, equipment andother assets, and in respect of business interruption. The indemnity period forbusiness interruption varies depending on the activity, but is generally forperiods of up to twelve months. We also hold insurance in respect of productliability (including insurance coverage for the asbestos-related lawsuits inthe United States, more fully described under “Item 8.A: FinancialInformation—Legal Proceedings”), directors and officers liability and, inrelation to our US operations, employment practices liability. We believe thatthe type and relative amounts of insurance which we hold are in accordance withwhat is customary in the industries and geographic jurisdictions in which weoperate.

 

For a discussion of the principal markets inwhich the company completes see Item 5.A: Operating and Financial Reviewand Prospects—Operating Results—Geographic distribution of sales”.

 

For a discussion of the seasonality of ourbusiness see Item 5.A: Operating and Financial Review andProspects—Operating Results—Seasonality of end-user markets and invoicing”.

 

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**4.C. Organisational Structure**

 

We are a direct wholly-owned subsidiary ofAlfa Laval AB, our parent holding company. The table below outlines ourcorporate organisation after the Acquisition and its financing:

 
| **Industri Kapital 2000** |   | **Other**                                                                        |   | **Tetra Laval B.V.** |
|---------------------------|--------|----------------------------------------------------------------------------------|--------|----------------------|
| 17.9%                     |   | 64.4%                                                                            |   | 17.7%                |
|                      |   |                                                                             |   |                 |
|                      |   | **Alfa Laval AB**                                                                |   |                 |
|                      |   |                                                                             |   |                 |
|                      |   | **Alfa  Laval Special Finance AB**                                               |   |                 |
|                      |   | the issuer of Senior  Notes                                                      |   |                 |
|                      |   |                                                                             |   |                 |
|                      |   | **Alfa  Laval Holding AB (renamed  from Alfa Laval Credit Finance AB)**          |   |                 |
|                      |   | and its subsidiaries,  including  intermediate holding and  operating companies; |   |                 |
|                      |   |                                                                             |   |                 |
|                      |   | the guarantor of Senior Notes                                                    |   |                 |

 

For a description of Industri Kapital 2000and Tetra Laval B.V., see “Item 7.A: Major Shareholders and Related PartyTransactions”.

 

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The following table sets forth our subsidiaries as at December 31,2003:

 

**Specification of shares in subsidiaries**

 
| **Company name**                                 |   | **Domicile**       |   | **Country of  incorporation** |   | **No. of  shares** |   | **Share of  capital%** |
|--------------------------------------------------|--------|--------------------|--------|-------------------------------|--------|--------------------|--------|------------------------|
|                                             |   |               |   |                          |   |               |   |                   |
| Alfa Laval Special Finance AB                    |   | Lund               |   | Sweden                        |   |               |   | 100                    |
| Alfa Laval Holding AB                            |   | Lund               |   | Sweden                        |   |               |   | 100                    |
| **Alfa Laval Holding AB**                        |   | Lund               |   | Sweden                        |   | 12,500,000         |   | 100                    |
| Alfa Laval NV                                    |   | Maarssen           |   | Netherlands                   |   | 227,754            |   | 100                    |
| Alfa Laval Inc                                   |   | Newmarket          |   | Canada                        |   | 1,000,000          |   | 67                     |
| Alfa  Laval S.A. DE C.V.                         |   | Tlalnepantla       |   | Mexico                        |   | 45,057,057         |   | 100                    |
| Alfa Laval S.A.                                  |   | San Isidro         |   | South Africa                  |   | 699                |   | 100                    |
| Alfa Laval S/A                                   |   | Sao Paulo          |   | Brazil                        |   |               |   | 100                    |
| Roston do Brasil Ltda                            |   | Sao Paulo          |   | Brazil                        |   | 5,249              |   | 100                    |
| Alfa Laval S.A.C.I.                              |   | Santiago           |   | Chile                         |   | 2,735              |   | 100                    |
| Alfa  Laval S.A.                                 |   | Bogota             |   | Colombia                      |   | 12,195             |   | 100                    |
| Alfa  Laval S.A.                                 |   | Lima               |   | Peru                          |   | 4,346,832          |   | 100                    |
| Alfa  Laval Venezolana S.A.                      |   | Caracas            |   | Venezuela                     |   | 10,000             |   | 100                    |
| Alfa  Laval Oilfield C.A.                        |   | Caracas            |   | Venezuela                     |   | 203                |   | 81                     |
| Alfa Laval Phe Co Ltd                            |   | Jiang Yin          |   | China                         |   |               |   | 100                    |
| Alfa Laval Flow Equipment (Kunshan)  Co Ltd |   | Jiangsu            |   | China                         |   |               |   | 100                    |
| Alfa Laval (Shanghai) Technologies Co Ltd        |   | Shanghai           |   | China                         |   |               |   | 100                    |
| Alfa Laval Taiwan Ltd                            |   | Taipei             |   | Taiwan                        |   | 1,499,994          |   | 100                    |
| Alfa  Laval (Hongkong) Ltd                       |   | Hongkong           |   | Hongkong                      |   | 79,999             |   | 100                    |
| Alfa  Laval (China) Ltd                          |   | Hongkong           |   | Hongkong                      |   | 9,999              |   | 100                    |
| PT Alfa  Laval Separatama                        |   | Jakarta            |   | Indonesia                     |   | 1,000              |   | 80                     |
| Alfa  Laval Iran Ltd                             |   | Teheran            |   | Iran                          |   | 2,199              |   | 100                    |
| Alfa  Laval KK                                   |   | Tokyo              |   | Japan                         |   | 1,200,000          |   | 100                    |
| Alfa Laval Industry (PVT) Ltd                    |   | Lahore             |   | Pakistan                      |   | 119,110            |   | 100                    |
| Alfa Laval Philippines Inc                       |   | Makati             |   | Philippines                   |   | 72,000             |   | 100                    |
| Alfa Laval Singapore Pte Ltd                     |   | Singapore          |   | Singapore                     |   | 5,000,000          |   | 100                    |
| Alfa Laval (Thailand) Ltd                        |   | Bangkok            |   | Thailand                      |   | 792,000            |   | 100                    |
| Alfa Laval Middle East Ltd                       |   | Nicosia            |   | Cyprus                        |   | 40,000             |   | 100                    |
| Alfa  Laval Benelux NV/SA                        |   | Brussels           |   | Belgium                       |   | 33,811             |   | 100                    |
| Alfa Laval Slovakia S.R.O.                       |   | Bratislanva        |   | Slovakia                      |   |               |   | 1                      |
| Cetetherm SR spol S.R.O.                         |   | Liptovsky  Mikulas |   | Slovakia                      |   |               |   | 15                     |
| Alfa Laval Spol S.R.O.                           |   | Hradec Kralove     |   | Czech Republic           |   |               |   | 20                     |
| Cetetherm S.R.O.                                 |   | Prague             |   | Czech Republic           |   |               |   | 5                      |
| Alfa Laval Denmark Holding A/S                   |   | Kolding            |   | Denmark                       |   |               |   | 100                    |
| Alfa Laval Kolding A/S                           |   | Kolding            |   | Denmark                       |   | 100,000            |   | 100                    |
| Alfa Laval Nordic A/S                            |   | Rödovre       |   | Denmark                       |   | 1                  |   | 100                    |
| Alfa Laval Copenhagen A/S                        |   | Söborg        |   | Denmark                       |   | 1                  |   | 100                    |
| Alfa Laval  Nakskov A/S                          |   | Nakskov            |   | Denmark                       |   | 1                  |   | 100                    |
| Alfa Laval Tank Equipment A/S                    |   | Ishoej             |   | Denmark                       |   | 1                  |   | 100                    |
| Alfa Laval Tank Equipment AB                     |   | Gothenburg         |   | Sweden                        |   | 100,000            |   | 100                    |
| Gunclean Toftejorg Pte Ltd                       |   | Singapore          |   | Singapore                     |   | 300,000            |   | 100                    |
| Alfa Laval Ltd                                   |   | Sofia              |   | Bulgaria                      |   | 100                |   | 100                    |
| Alfa Laval Nordic OY                             |   | Espoo              |   | Finland                       |   | 20,000             |   | 100                    |
| Cetetherm OY                                     |   | Tuusula            |   | Finland                       |   | 5,000              |   | 100                    |
| Alfa Laval Nederland B.V.                        |   | Maarssen           |   | Netherlands                   |   | 10,000             |   | 100                    |
| Alfa Laval Benelux B.V.                          |   | Maarssen           |   | Netherlands                   |   | 1,475              |   | 100                    |
| Alfa Laval Merco B.V.                            |   | Hoofddorp          |   | Netherlands                   |   | 1,475              |   | 100                    |
| Alfa Laval Holding A/S                           |   | Oslo               |   | Norway                        |   | 520,000            |   | 100                    |
| Alfa Laval Nordic A/S                            |   | Oslo               |   | Norway                        |   | 10,000             |   | 100                    |
| Alfa Laval Tank Equipment AS                     |   | Billingstad        |   | Norway                        |   | 7,500              |   | 100                    |
| CTC Ronneby AB                                   |   | Ronneby            |   | Sweden                        |   | 138,000            |   | 100                    |
| Alfa Laval ExCell AB                             |   | Skogstorp          |   | Sweden                        |   | 2,500              |   | 100                    |

 

I-39

 

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| **Company name**                                   |   | **Domicile**       |   | **Country of  incorporation** |   | **No. of  shares** |   | **Share of  capital%** |
|----------------------------------------------------|--------|--------------------|--------|-------------------------------|--------|--------------------|--------|------------------------|
|                                               |   |               |   |                          |   |               |   |                   |
| Alfa Laval Nordic AB                               |   | Tumba              |   | Sweden                        |   | 1,000              |   | 100                    |
| Cetetherm AB                                       |   | Ronneby            |   | Sweden                        |   | 20,000             |   | 100                    |
| Alfa Laval Corporate AB                            |   | Lund               |   | Sweden                        |   | 13,920,000         |   | 100                    |
| Alfa Laval (India) Ltd                             |   | Poona              |   | India                         |   | 9,261,889          |   | 64                     |
| Skansen Engineering & Consultancy  Co Ltd |   | Poona              |   | India                         |   | 50,000             |   | 64                     |
| Alfa Laval Korea Ltd                               |   | Seoul              |   | South Korea                   |   | 3,640,000          |   | 100                    |
| Alfa Laval (Malaysia) Sdn Bhd                      |   | Shah Alam          |   | Malaysia                      |   | 10,000             |   | 100                    |
| Mosgormash Alfa Laval Moloko                       |   | Moscow             |   | Russia                        |   |               |   | 55                     |
| Alfa Laval Oilfield C.A.                           |   | Caracas            |   | Venezuela                     |   | 47                 |   | 19                     |
| Alfa Laval Treasury International AB               |   | Lund               |   | Sweden                        |   | 50,000             |   | 100                    |
| Alfa  Laval Europe AB                              |   | Lund               |   | Sweden                        |   | 500                |   | 100                    |
| Alfa Laval Lund AB                                 |   | Lund               |   | Sweden                        |   | 100                |   | 100                    |
| Alfa Laval International Engineering AB            |   | Lund               |   | Sweden                        |   | 4,500              |   | 100                    |
| Alfa Laval Tumba AB                                |   | Lund               |   | Sweden                        |   | 1,000              |   | 100                    |
| Bitec Enterprise AG                                |   | Volketswil         |   | Schweiz                       |   | 97,900             |   | 100                    |
| Alfa Laval Dis Ticaret Ltd Sti                     |   | Istanbul           |   | Turkey                        |   | 27,001,755         |   | 99                     |
| OÜ Cetetherm                                  |   | Tallinn            |   | Estonia                       |   | 100                |   | 100                    |
| Alfa Laval SIA                                     |   | Riga               |   | Latvia                        |   | 125                |   | 100                    |
| SIA Cetetherm                                      |   | Riga               |   | Latvia                        |   | 200                |   | 100                    |
| Alfa  Laval UAB Ltd                                |   | Vilnius            |   | Lithuania                     |   | 2,009              |   | 100                    |
| UAB Cetetherm                                      |   | Vilnius            |   | Lithuania                     |   | 100                |   | 100                    |
| Alfa Laval Australia Pty Ltd                       |   | Homebush           |   | Australia                     |   | 2,088,076          |   | 100                    |
| Alfa Laval Pty Ltd                                 |   | Homebush           |   | Australia                     |   | 3,500,000          |   | 100                    |
| Alfa Laval New Zealand Ltd                         |   | Hamilton           |   | New Zealand                   |   | 1,000              |   | 100                    |
| Alfa Laval Holding BV                              |   | Maarssen           |   | Netherlands                   |   | 70,000,000         |   | 100                    |
| Alfa Laval (Pty) Ltd                               |   | Isando             |   | South Africa                  |   | 2,000              |   | 100                    |
| Alfa  Laval Slovakia S.R.O.                        |   | Bratislava         |   | Slovakia                      |   |               |   | 99                     |
| Cetetherm SR spol S.R.O.                           |   | Liptovsky  Mikulas |   | Slovakia                      |   |               |   | 85                     |
| Alfa Laval Spol S.R.O.                             |   | Hradec Kralove     |   | Czech Republic           |   |               |   | 80                     |
| Cetetherm S.R.O.                                   |   | Prague             |   | Czech Republic           |   |               |   | 95                     |
| Alfa  Laval France SAS                             |   | Les Clayes         |   | France                        |   | 920,000            |   | 100                    |
| Alfa  Laval SAS                                    |   | Les Clayes         |   | France                        |   | 560,000            |   | 100                    |
| Alfa  Laval Moatti SNC                             |   | Les Clayes         |   | France                        |   | 24,000             |   | 100                    |
| Alfa Laval Spiral SNC                              |   | Nevers             |   | France                        |   | 79,999             |   | 100                    |
| MCD SAS                                            |   | Guny               |   | France                        |   | 71,300             |   | 100                    |
| Alfa  Laval Vicarb SA                              |   | Grenoble           |   | France                        |   | 200,000            |   | 100                    |
| Canada Inc                                         |   | Newmarket          |   | Canada                        |   | 480,000            |   | 100                    |
| Alfa Laval Inc                                     |   | Newmarket          |   | Canada                        |   | 481,600            |   | 33                     |
| SCI du  Companil                                   |   | Grenoble           |   | France                        |   | 32,165             |   | 100                    |
| Cetetherm  SA                                      |   | Lyon               |   | France                        |   | 150,000            |   | 100                    |
| Alfa Laval Holding GmbH                            |   | Glinde             |   | Germany                       |   |               |   | 100                    |
| Alfa Laval Mid Europe GmbH                         |   | Wiener Neudorf     |   | Austria                       |   |               |   | 100                    |
| Alfa Laval Mid Europe GmbH                         |   | Glinde             |   | Germany                       |   | 1                  |   | 100                    |
| Alfa Laval Tank Equipment GmbH                     |   | Glinde             |   | Germany                       |   | 1                  |   | 100                    |
| Cetetherm Wärrmetauschersysteme GmbH          |   | Glinde             |   | Germany                       |   | 1                  |   | 100                    |
| Alfa Laval AG                                      |   | Dietlikon          |   | Schweiz                       |   | 647                |   | 100                    |
| Alfa Laval AEBE                                    |   | Holargos           |   | Greece                        |   | 10,000             |   | 100                    |
| Alfa Laval Kft                                     |   | Budapest           |   | Hungary                       |   | 1                  |   | 100                    |
| Cetetherm Vicarb Hungary Kft                       |   | Budapest           |   | Hungary                       |   |               |   |                   |
| Alfa Laval SpA                                     |   | Monza              |   | Italy                         |   | 1,930,500          |   | 99                     |
| Alfa Laval Polska Sp.z.o.o.                        |   | Warzaw             |   | Poland                        |   | 6,862              |   | 100                    |
| Cetetherm Polska Sp.z.o.o.                         |   | Warzaw             |   | Poland                        |   |               |   | 100                    |
| Wytwornia  Separator Krakow Sp.z.o.o.              |   | Krakow             |   | Poland                        |   |               |   | 100                    |
| Alfa  Laval (Portugal) Ltd                         |   | Linda-A- Velha     |   | Portugal                      |   |               |   | 1                      |
| Alfa Laval SRL                                     |   | Bucharest          |   | Romania                       |   | 61,435             |   | 100                    |
| Alfa Laval Iberia SA                               |   | Madrid             |   | Spain                         |   |               |   | 100                    |

 

I-40

 

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| **Company name**                 |   | **Domicile**     |   | **Country of  incorporation** |   | **No. of  shares** |   | **Share of   capital%** |
|----------------------------------|--------|------------------|--------|-------------------------------|--------|--------------------|--------|-------------------------|
|                             |   |             |   |                          |   |               |   |                    |
| Alfa Laval (Portugal) Ltd        |   | Linda-A-Velha    |   | Portugal                      |   | 1                  |   | 99                      |
| Alfa Laval Dis Ticaret Ltd Sti   |   | Istanbul         |   | Turkey                        |   | 1                  |   | 1                       |
| Alfa Laval Holdings Ltd          |   | Camberley        |   | United Kingdom                |   | 28,107,000         |   | 100                     |
| Alfa Laval 2000                  |   | Camberley        |   | United Kingdom                |   | 28,106             |   | 100                     |
| Alfa Laval Ltd                   |   | Camberley        |   | United Kingdom                |   | 12,710,000         |   | 100                     |
| Alfa Laval  Finance Co Ltd       |   | Camberley        |   | United Kingdom                |   | 856,000            |   | 100                     |
| Alfa Laval  Oilfield Ltd         |   | Aberdeen         |   | United Kingdom                |   | 500,000            |   | 100                     |
| Alfa Laval Flow  Ltd             |   | Sutton Coldfield |   | United Kingdom                |   | 100                |   | 100                     |
| Alfa Laval  Pumps Ltd            |   | Eastbourne       |   | United Kingdom                |   | 100                |   | 100                     |
| Alfa Laval  Thermal Ltd          |   | Camberley        |   | United Kingdom                |   | 1,000              |   | 100                     |
| Alfa Laval  Separation Ltd       |   | Camberley        |   | United Kingdom                |   | 375,000            |   | 100                     |
| Rolls Laval  Heat Exchangers Ltd |   | Wolverhampton    |   | United Kingdom                |   | 5,000              |   | 50                      |
| Toftjorg Ltd                     |   | Camberley        |   | United Kingdom                |   | 50,000             |   | 100                     |
| Alfa Laval USA inc               |   | Kenosha          |   | United States                 |   | 100                |   |                    |
| Alfa Laval US Holding Inc        |   | Kenosha          |   | United States                 |   | 180                |   | 100                     |
| Alfa Laval Inc                   |   | Kenosha          |   | United States                 |   | 44,000             |   | 100                     |
| Tri-Lad  Inc                     |   | Brantford        |   | Canada                        |   | 4,000              |   | 100                     |
| BioKinetics Inc                  |   | Philadelphia     |   | United States                 |   | 100                |   | 100                     |
| Kinetics  Modular Systems Inc    |   | Toronto          |   | Canada                        |   | 1800               |   | 100                     |
| Kinetics  Engineering P C        |   | Durham           |   | United States                 |   | 100                |   | 100                     |
| Hynetics Inc                     |   | Logan            |   | United States                 |   |               |   | 50                      |
| Alfa Laval US Treasury Inc       |   | Kenosha          |   | United States                 |   | 1,000              |   | 100                     |
| AO Alfa Laval Potok              |   | Koroljov         |   | Russia                        |   | 31,057,529         |   | 100                     |
| OÜ Alfa Laval               |   | Tallinn          |   | Estonia                       |   | 1                  |   | 100                     |
| Gigantissimo 2444 AB             |   | Stockholm        |   | Sweden                        |   |               |   | 50                      |
| Alfa Laval SpA                   |   | Monza            |   | Italy                         |   |               |   |                    |

 

I-41

 

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**4.D. Property, Plant and Equipment**

 

The following table sets forth the location, number of employees,products manufactured and capacity utilisation of each of our manufacturingfacilities for 2003: 

 
| **Manufacturing Unit** |   | **Employees(1)** |   | **Products**                                                        |   | **Capacity  Utilisation  (2)** |   | **Size(m2)** |   | **Use of  Unit**               |   | **Production  Capacity in Delivery Value** |   |
|------------------------|--------|------------------|--------|---------------------------------------------------------------------|--------|--------------------------------|--------|--------------|--------|--------------------------------|--------|--------------------------------------------|--------|
|                   |   |             |   |                                                                |   | **(%)**                        |   |         |   |                           |   | **SEK  millions**                          |   |
|                   |   |             |   |                                                                |   |                           |   |         |   |                           |   |                                       |   |
| **Europe:**            |   |             |   |                                                                |   |                           |   |         |   |                           |   |                                       |   |
| Alonte, Italy          |   | 213              |   | Air conditioners, brazed plate heat exchangers                      |   | 90                             |   | 19,562       |   | Offices, Factory and Warehouse |   | 456                                        |   |
| Eastbourne, UK         |   | 107              |   | Pumps                                                               |   | 70                             |   | 7,726        |   | Offices, Factory and Warehouse |   | 121                                        |   |
| Eskilstuna,  Sweden*   |   | 197              |   | Separators                                                          |   | 85                             |   | 17,682       |   | Factory                        |   | 305                                        |   |
| Grenoble, France       |   | 166              |   | Gasketed and welded plate heat exchangers                           |   | 80                             |   | 10,710       |   | Offices and Factory            |   | 244                                        |   |
| Guny, France           |   | 60               |   | Gaskets                                                             |   | 80                             |   | 3,203        |   | Factory                        |   | 52                                         |   |
| Ishoej, Denmark*       |   | 70               |   | Tank cleaning equipment                                             |   | 95                             |   | 3,600        |   | Factory and Warehouse          |   | 150                                        |   |
| Kolding, Denmark       |   | 291              |   | Pumps, fittings and valves                                          |   | 85                             |   | 17,176       |   | Offices, Factory and Warehouse |   | 550                                        |   |
| Krakow,  Poland        |   | 62               |   | Separators                                                          |   | 85                             |   | 5,558        |   | Factory                        |   | 43                                         |   |
| Les Clayes, France*    |   | 21               |   | Filters                                                             |   | 75                             |   | 9,526        |   | Offices and Factory            |   | 40                                         |   |
| Lund, Sweden           |   | 503              |   | Gasketed plate heat exchangers                                      |   | 90                             |   | 21,329       |   | Offices, Factory and Warehouse |   | 1054                                       |   |
| Lyon, France           |   | 30               |   | Heat exchanger modules                                              |   | 85                             |   | 3,100        |   | Offices and Factory            |   | 81                                         |   |
| Madrid, Spain          |   | 115              |   | Separators                                                          |   | 85                             |   | 13,124       |   | Offices and Factory            |   | 188                                        |   |
| Monza, Italy           |   | 63               |   | Separator modules                                                   |   | 80                             |   | 22,149       |   | Offices, Factory and Warehouse |   | 359                                        |   |
| Nakskov, Denmark       |   | 33               |   | Membranes                                                           |   | 50                             |   | 6,611        |   | Offices and Factory            |   | 75                                         |   |
| Nevers, France         |   | 93               |   | Spiral heat exchangers                                              |   | 85                             |   | 16,137       |   | Offices and Factory            |   | 92                                         |   |
| Potok, Russia          |   | 101              |   | Gasketed plate heat exchangers                                      |   | 75                             |   | 27,382       |   | Offices and Factory            |   | 81                                         |   |
| Ronneby, Sweden        |   | 216              |   | Brazed plate heat exchangers, modules                               |   | 90                             |   | 15,000       |   | Offices, Factory and Warehouse |   | 496                                        |   |
| Söborg, Denmark   |   | 154              |   | Decanters and modules                                               |   | 90                             |   | 21,775       |   | Offices and Factory            |   | 429                                        |   |
|                   |   |             |   |                                                                |   |                           |   |         |   |                           |   |                                       |   |
| **North America:**     |   |             |   |                                                                |   |                           |   |         |   |                           |   |                                       |   |
| Lykens, USA            |   | 42               |   | Spiral heat exchangers                                              |   | 70                             |   | 5,388        |   | Factory                        |   | 75                                         |   |
| Richmond, USA          |   | 160              |   | Scrape, brazed and gasketed plate heat exchangers, pumps and valves |   | 60                             |   | 12,355       |   | Offices, Factory and Warehouse |   | 627                                        |   |
| Toronto, Canada*       |   | 192              |   | Bioreactor modules                                                  |   | 30                             |   | 8,856        |   | Offices, Factory and Warehouse |   | 455                                        |   |
|                   |   |             |   |                                                                |   |                           |   |         |   |                           |   |                                       |   |
| **Asia:**              |   |             |   |                                                                |   |                           |   |         |   |                           |   |                                       |   |
| Jiang Yin City, China  |   | 155              |   | Brazed and gasketed plate heat exchangers, gaskets                  |   | 85                             |   | 6,294        |   | Factory                        |   | 148                                        |   |
| Kunshan, China*        |   | 116              |   | Fittings                                                            |   | 90                             |   | 6,988        |   | Factory                        |   | 74                                         |   |
| Pune, India            |   | 403              |   | Decanters and separators                                            |   | 90                             |   | 22,586       |   | Offices, Factory and Warehouse |   | 201                                        |   |
| Sarola, India          |   | 118              |   | Fittings                                                            |   | 85                             |   | 5,750        |   | Offices, Factory and Warehouse |   | 48                                         |   |

 

I-42

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| Satara, India |   | 93 |   | Plate and spiral heat exchangers |   | 30 |   | 8,550 |   | Factory             |   | 51  |   |
|---------------|--------|----|--------|----------------------------------|--------|----|--------|-------|--------|---------------------|--------|-----|--------|
| Shonan, Japan |   | 40 |   | Gasketed plate heat exchangers   |   | 85 |   | 7,549 |   | Offices and Factory |   | 242 |   |

 

----

*                                                                 Indicatesthe manufacturing unit premises are leased and not owned by Alfa Laval.

 

(1)                                                          Averagenumber of employees for the year ended December 31, 2003.

 

(2)                                                          Capacityutilisation is measured as actual utilisation against a pre-defined maximumload and assuming a constant product mix. The pre-defined maximum load isdefined by reference to legal, operating cost, labour and other localrestrictions.

 

In addition to the manufacturing facilitiesset forth in the table above, Alfa Laval owns several other properties,together having a market value that is substantially in line with book value.

 

For a discussion of our material plans toconstruct, expand and improve our manufacturing facilities, see “Item 5.B:Operating and Financial Review and Prospects—Liquidity and CapitalResources—Commitments for Future Capital Expenditure”.

 

For a discussion of the environmental issuesaffecting us, see “Item 4.B Information About the Company—BusinessOverview—Environmental Matters”.

 

I-43

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**ITEM5****:  OPERATING AND FINANCIAL REVIEW AND PROSPECTS**

 

**5.A. Operating Results**

 

*We have prepared the following operating andfinancial review and prospects based on our consolidated financial data for theyears ended December 31, 2001, 2002 and 2003. Our financial statementshave been prepared in accordance with Swedish GAAP, which differs from US GAAPin certain material respects. For a discussion of the principal differencesbetween Swedish GAAP and US GAAP as they relate to us; see note 33 to ouraudited consolidated financial statements included elsewhere in this annualreport.*

 

**Critical Accounting Policies and Estimates**

 

*General.*  The following discussion and analysis ofAlfa Laval’s financial condition and results of operations is based upon itsconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in Sweden. The preparation of itsfinancial statements requires Group management to make estimates and judgementsthat affect the reported amounts of assets, liabilities, revenues and expenses,and related disclosure of contingent assets and liabilities. On an on-goingbasis, management evaluates its estimates, including those related to baddebts, inventories, intangible assets, warranty obligations and pensions andother post-retirement benefits. Management of the Group bases its estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgements about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

 

We believe the following critical accountingpolicies affect our more significant judgements and estimates used in thepreparation of our consolidated financial statements.

 

*Bad Debt.*  The Group maintains allowances for doubtfulaccounts for estimated losses resulting from the inability of its customers tomake required payments. If the financial condition of the Group’s customerswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances may be required.

 

*Inventories.*  The Group writes down its inventory forestimated obsolescence or unmarketable inventory equal to the differencebetween the cost of inventory and the estimated market value based uponassumptions about future demand and market conditions. If actual marketconditions are less favourable than those projected by management, additionalinventory write-downs may be required.

 

*Intangible Assets.*  The Group has significant intangible assetsrelated to goodwill and other acquired intangibles. In assessing therecoverability of the goodwill and other intangibles management must make assumptionsregarding estimated future cash flows and other factors to estimate the fairvalue of the respective assets. Changes in strategy, market conditions or otherfactors could impact these estimates in the future resulting in the Grouprecording impairment charges related to these assets.

 

The Financial Accounting Standards Board inthe United States has issued Statement of Financial Accounting StandardsNo. 142, “Goodwill and Other Intangible Assets”. FAS 142 requiresthat goodwill, including previously existing goodwill, and intangible assetswith indefinite useful lives not be amortised; these assets should be testedfor impairment annually. Goodwill and intangible assets with indefinite usefullives will no longer be tested for impairment under FAS 121, “Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of”. The Group has adopted the provisions of FAS 142 as ofJanuary 1, 2002 in the US GAAP reconciliation and management determinedthat goodwill was not impaired. The effect of FAS 142 can be considerablefor the Group if the profitability within the Group or parts of the Group goesdown in the future, since this could trigger a substantial impairment writedown of the goodwill. Such a write down will affect the net income and therebythe position of the Group according to US GAAP.

 

According to RR 17 impairments on assetsincluding goodwill shall be calculated if there is any indication that thevalue of the asset has decreased. This is different to FAS 142, whichrequires that the impairment test must be made annually irregardless of whetherthere is an indication or not. If a FAS 142 calculation shows animpairment, this can however be seen as such an indication that could trigger awrite down even in the part of the financial reporting that is regulated by therecommendations from the Financial Accounting Standards Council.

 

*Product Claims and Warranty.*  The Group provides for the estimated cost ofproduct warranties at the

 

I-44

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time revenue is recognised. While the Group engages in extensiveproduct quality programmes and processes, including actively monitoring andevaluating the quality of its suppliers, the Group’s warranty obligation isaffected by product failure rates, material usage and repair costs incurred incorrecting a product performance issue. Should actual product failure rates,material usage or repair costs differ from the Group’s estimates, revisions tothe estimated warranty liability would be required.

 

*Pension and Post-retirement Benefits.*  The Group has significant pension andpost-retirement benefit costs and credits that are developed from actuarialvaluations. Inherent in these valuations are key assumptions including discountrates and expected return on plan assets. Management is required to considercurrent market conditions, including changes in interest rates, in selectingthese assumptions. Changes in the related pension and post-retirement benefitcosts or credits may occur in the future due to changes in these assumptions inaddition to fluctuations related to changes in our employee population.

 

*Provisions.*  The Group’s reporting of provisionsaccording to RR16 means that SEK 891.2 (989.3) million is reported as otherprovisions.  This constitutes 6.1 (6.4)percent of the Group’s assets and is important for the assessment of theGroup’s financial position, not the least since provisions normally are basedon estimates of costs and risks.  If theaccounting principles for provision would be changed sometime in the future,this could have a substantial impact on the Group’s financial position.

 

**Overview**

 

We are a leading global provider ofspecialised process engineering solutions and equipment based on three keytechnologies—heat transfer, centrifugal separation and sanitary flowtechnology.  Under our widely recognisedbrand name, Alfa Laval, we service our customers globally through ten distinctcustomer segments with an international sales force in over 100 countries.  We were founded in Sweden in 1883 by Gustavde Laval, the inventor of the continuous separator.  We are a market leader in our target markets of compact heatexchangers, centrifugal separators and sanitary flow equipment.  Our systems and products are designed to optimisethe performance of our customers’ manufacturing processes, and as a result areoften critical to them.

 

**Our Restructuring and Cost ReductionProgramme—”Beyond Expectations”**

 

In late 1999, we began to implement arestructuring programme, which we call “Beyond Expectations”, in order toreduce costs and increase our operating efficiency and productivity.  This restructuring, which was completedafter the third quarter in 2003, consisted of measures aimed at redesigning ourorganisational structure, consolidating human resource management, informationand systems technology and communications functions into one headquarteredGroup operation, rationalising and consolidating our manufacturing operations,centralising our purchasing, logistics and manufacturing functions,restructuring our sales and marketing network and divesting non-core businessesand properties.  Due to thisrestructuring programme, we have successfully reduced our headcount from 11,330in 1999 to 8,852 in 2003, excluding acquisitions, which is a reduction of21.9%, and increased net sales per employee by 25% from SEK 1.2 millionper employee in 1999 to SEK 1.5 million per employee in 2003.  The following actions were part of the“Beyond Expectations” restructuring programme:

 

•                  **Organisational Redesign.** During 1998, we created four customersegments—Brewery Systems, Water Technology, Marine & Power andOil & Protein Technology—in order to better leverage the synergiesacross our three former business areas, Thermal, Separation and Flow.  Building on this success, we changed ourorganisational structure from a product focus to a customer oriented focus byorganising our sales and marketing infrastructure into two divisions coveringten customer segments.  This change waseffective beginning January 2001. Our Equipment division provides products to customers that have a welldefined and regular need for equipment and includes the Comfort &Refrigeration, Marine & Diesel, Sanitary, Fluids & Utilityand OEM customer segments.  Our ProcessTechnology division provides our customers with specialised solutions forindustrial systems and processes and includes the Food Technology,Energy & Environment, Process Industry and Life Science Technologycustomer segments.  Through our tencustomer segments, we cross-sell our systems and full product range, includingour parts and services business, and develop customised solutions byidentifying new applications for existing and new products, as well asidentifying new customers.  We believethat our new customer segments will improve our sales growth and strengthen ourmarket position.  As part of ourorganisational redesign, we also consolidated the management of our engineeringresources with a view to increasing the output and efficiency of our engineersand reducing the extent to which we outsource our engineering designrequirements, with the aim of reducing our operating costs.

 

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•                  **Centralising Group Functions.** We have centralised all human resourcemanagement, information and systems technology and communications functions inorder to reduce costs, increase efficiency and realises economies ofscale.  For example, each of our formerbusiness areas had different and incompatible software systems and it was notpossible for us to standardise functions such as order entry and confirmation,delivery tracking and invoicing across these various systems.  In order to secure the necessary convergenceof these systems so that we may reduce costs and realises economies of scale,we centralised our information and systems technology function.

 

•                  **Rationalising and Consolidating ManufacturingOperations.** With a view toreducing operating costs, we are continuing to rationalise and consolidate ourmanufacturing operations by reducing excess capacity, increasing theoutsourcing of certain standard components, and shifting production to lowercost manufacturing facilities and countries. For example, we have already closed our decanter manufacturing facilityin Warminster, USA, where the cost of production was high, and relocated thismanufacturing operation to Denmark and India. We have shifted our valve and pump production from Kenosha, Wisconsin,which has high costs of production, to China, India, Mexico and Richmond,Virginia and we have relocated some of our heat exchanger manufacturing fromNewmarket, Canada to existing plants in the United States.

 

•                  **Centralising Purchasing, Logistics and CertainManufacturing Functions.** Wehave rationalised our purchasing, logistics and manufacturing operations bycreating a separate, discrete and centralised Operations business divisionresponsible for all of these functions. For purchasing, there is now a common unit responsible for purchasingstrategy, volume agreements, development of relationships with suppliers andoutsourcing.  The logistics unit isresponsible for all distribution operations in the sales organisation, as wellas for inventory management, order handling, warehousing, transport andfreight.  The manufacturing unit isresponsible for all of our manufacturing sites and has the responsibility forlong-term production planning and development. In centralising these three principal functions, we have streamlined ouroperations and increased our efficiency and productivity, reduced our operatingcosts and exploited economies of scale. For example, several purchasing initiatives to date, includingrenegotiating supply arrangements with several of our key suppliers, havealready resulted in lower purchasing costs, while Group inventories, previouslyheld in various sales companies around the world, are in the process of beingreorganised into a limited number of strategically located centres.  We have also consolidated our warehousingand distribution centres in the United States, which has resulted in areduction in working capital.

 

•                  **Restructuring Sales and Marketing Network.** We are continuing to restructure our localsales companies with the goal of reducing costs by centralising theiradministrative, order processing and billing functions into a Europeanshared-service centre from which our sales companies purchase such services,irrespective of where the sales companies are located, leaving them to focus oncross-selling our solutions, products and services.  For example, our European shared-service centre has alreadyinstalled a single Alfa Laval order processing system for Intranet-based orderhandling and the collection and analysis of business statistics.  We believe this will reduce our operatingcosts, improve sales growth and strengthen our market position.

 

•                  **Divestment of Non-Core Business and Properties.** We have divested many of those businesses andproperties that we believe would not benefit from our core businessstrategy.  For example, until April 2001,we were active in industrial flow market applications, developing, marketingand selling pumps and valves used in the chemical, fresh and waste-water, oil,petrochemical and mining industries. Our industrial flow business generated sales of approximately SEK656 million in 2000, employed approximately 689 personnel and includedmanufacturing facilities in India, Germany and the United Kingdom.  We believed that this business would betterdevelop under an owner focused on becoming a market leader in industrial valvesand pumps and in April 2001, we sold our industrial flow business for SEK331 million.  We have also divestedour properties in Johannesburg, South Africa, Glinde, Germany, Warminster, theUnited States and Newmarket, Canada. The sale of the property in Kenosha in Wisconsin has been delayed due tothe situation on the real estate market in the US.  Other properties in Spain, Brazil, Canada, Denmark, Wales andPeru are also planned for sale.

 

As a result of our restructuring and cost reductionprogramme, we expect to increase our sales and reduce our existing operatingcosts, as well as to generate additional quantifiable and unquantifiableoperating efficiencies.  We started toincur restructuring costs in connection with our restructuring programme inlate 1999.  In

 

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2000, we recorded restructuring provisions of SEK408 million.  This provisionprincipally related to restructuring measures that management committed to takeat the time of the Acquisition.  Suchmeasures included redundancies in connection with the closure of manufacturingsites, the rationalisation of our logistics function and the introduction ofour customer segment based organisation. As of December 31, 2003, nothing of this provision remainedoutstanding.  In addition to thisprovision, expenses of approximately SEK 181 million, SEK 72 millionand SEK 25 million have been recorded in our profit and loss account in 2001,2002 and 2003, respectively.

 

In order to achieve our strategic objectives,we have set as a target for our revenue growth that we should outperform themarkets in which we operate over the course of the business cycle.  In addition, we have set an EBITA margintarget excluding comparison distortion items of greater than 12%.  This financial target required that weobtained the cost savings and operating efficiencies we expected to achievefrom our Beyond Expectations restructuring programme.  This cost reduction programme, the implementation of whichcommenced in late 1999 and which was completed after the third quarter in 2003,had at completion generated cost savings and other operating efficiencies ofapproximately SEK 850 million on an annualised basis.  At the end of 2002, the achieved savingsamounted to about SEK 775 million on an annualised basis.  In the income statements for 2003, 2002 and2001 there are savings corresponding to approximately SEK 800, 670 and 450million respectively as a result of headcount reductions, improved manufacturingand sales productivity, reduced operating costs and purchasing initiatives thatresulted in lower supply costs.  Overthe implementation period, however, our operating costs have increased as aresult of the execution of our strategy and our expected sales growth.  There can be no assurance that we will beable to generate additional sales.  Anysuch failure may make it more difficult to attain our EBITA margin financialtarget excluding comparison distortion items of greater than 12%.  See “Item 3.D: Key Information—RiskFactors”.  The statements in thisparagraph are forward-looking and readers are cautioned not to place unduereliance on such statements.  See“Forward-Looking Statements”.

 

**Factors Affecting Results of Operations**

 

***Presentation ofFinancial Statements***

 

Sales of our products and services aregenerally recorded upon delivery of the product or the performance of aparticular service, except for certain longer term projects for the developmentand installation of customised systems. These longer term projects, typically involving large sales of capitalgoods, including customised products, are recorded as sales under thepercentage of completion method and comprised no more than one-third of oursales in 2003.  In respect of thesesales, there is often a period between the time we receive an order (for whichthere is a purchase commitment) and when we record the order as a sale.  This period typically ranges from severalmonths to, in certain cases, more than one year, depending upon the nature ofthe contract.

 

The principal elements comprising cost ofgoods sold are raw materials, labour and manufacturing overhead costs.  Raw materials typically account for slightlymore than half of the cost of goods sold. Principal raw materials we use include sheet stainless steel, titanium,rubber gaskets, carbon steel frames, forged steel, cast iron and copper.  We generally have a number of suppliers ofany given material in each of Europe, North America and Asia and are notdependent on any one supplier.  We dohowever have three key suppliers of titanium and are subject to a substantiallead time in ordering and obtaining titanium from sources other than our keysuppliers.  Labour costs include costsof salaried and hourly employees. Manufacturing overhead costs include lease costs, depreciation onproperty, plant and equipment, utilities, property taxes and repairs andmaintenance.

 

Operating costs includes, among other things,sales costs, administrative costs, research and development costs and otheroperating costs.  Sales costs consistprimarily of salaries and benefits paid to our sales force and commissions paidto independent sales representatives and agents.  Members of our sales force are also paid bonuses based on salesvolume and consolidated gross margin targets. Administration costs include corporate overhead costs relating toemployee costs, rent expense, professional fees and information systemcosts.  Research and development costsare incurred for the development of new products and the enhancement ofexisting products.

 

Other operating income consists of, amongother things, royalty and license income from third parties who use ourtechnology, and rental income from third parties renting our property and/orequipment.  Other operating costsincludes commission and royalties we pay to third parties in respect of use oftheir technology and certain exceptional items, such as restructuring charges,provisions made for loss of value on net operating capital, and provisions madein respect of legal claims.

 

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***Foreign CurrencyEffects***

 

As we service our customers globally throughten distinct customer segments with an international sales organisation in over100 countries, our results of operations are subject to currency transactionrisks and currency translation risks. Currency transaction risks occur as a result of one of our operatingsubsidiaries entering into either a purchase or sales transaction using acurrency other than its regular operating currency.  We incur most of our costs in Swedish kronor, euro, Danish kronerand US dollars.  Our revenues arehowever far more broadly distributed. We aim to hedge against currency transaction risk by matching revenuesand costs in the same currency. Currency translation risks occur as a result of fluctuations in theexchange rates between the currency in which our consolidated assets andliabilities and profit and loss are reported, the Swedish kronor, and thevarious currencies in which our subsidiaries’ assets and liabilities and profitand loss are reported.  See “Item11:—Quantitative and Qualitative Disclosures about Market Risk”.

 

The discussion under the caption “Item 5A:Operating and Financial Review and Prospects—Operating Results—Results ofOperations” below contains references to Swedish kronor amounts on a constantexchange rate basis.  These Swedishkronor amounts have been converted from various foreign currencies, includingthe euro at a rate of €1.00 = SEK 9.1180, the average rate calculated onmonthly closing rates issued by Reuters.

 

***Cyclicality ofend-user markets and commodity prices***

 

Given the industrial nature of our products,we are affected by economic cycles that impact demand in our end-usermarkets.  For example, orders from theoil production and chemical processing industries are dependent on global oilprices, while orders from our customers in the heating, ventilation and airconditioning businesses are subject to the cyclicality of the constructionindustry in each geographical market we serve. In our higher margin parts and services business, which representedapproximately 26% of our net sales in 2003, we generally experiencesignificantly less cyclicality, which contributes to more stable margins.  Although we believe our diverse geographicand customer base, as well as our parts and services business, serve tomitigate our exposure to economic cycles in any one region and the volatilityof individual industries, we have experienced fluctuations in our operatingresults due to economic cycles.

 

During 1998, there was a downturn in the shipbuilding industry that adversely affected our business.  With the recovery in 2000 of oil andchemical prices and renewed economic growth in Asia, our orders received increasedin 2000 by 12.2% as compared to prior years, excluding currency exchangefluctuations and divested operations. In 2001, our orders received decreased by 1.6%, excluding currencyexchange rate fluctuations and divested operations.  In 2002, our orders received decreased by 2.0%, excludingcurrency exchange rate fluctuations.  In2003, our orders received increased by 4.9%, excluding currency exchange ratefluctuations.  As discussed above,market improvements reflected in our orders received generally precede salesgrowth by several months.

 

In addition, raw material commodity pricesaffect our profitability.  We generallypass on price increases of raw materials to customers, although increases inthe prices of our products generally lag increases in raw material costs.  The length of this delay varies, dependingon the composition of the relevant backlog of orders.  In addition, key raw materials, such as sheet stainless steel,are purchased on the basis of 12-month contracts, which fix the price of sheetstainless steel for the contract period. As a result, benefits in the past have been realised as a result ofincreases in the price of these materials. When prices for these materials fall, however, market pressures mayrequire us to offer our products at correspondingly lower prices, followingwhich we may experience margin pressures.

 

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***Geographic distribution of sales***

 

Our products are sold in over 100 countries.The following table illustrates our net sales by geographic region in 2001,2002 and 2003:

 
|             |   | **Year Ended  December 31,** |   |
|------------------|--------|-----------------------------------|--------|
|             |   | **2001**                          |   | **2002** |   | **2003** |   |
|             |   | **(% of  total sales)**           |   |
|             |   |                              |   |   |   |   |   |
| European Union   |   | 39                                |   | 40 |   | 41 |   |
| Other Europe     |   | 9                                 |   | 10 |   | 11 |   |
| North America(1) |   | 21                                |   | 21 |   | 18 |   |
| South America    |   | 4                                 |   | 4 |   | 4 |   |
| Asia             |   | 24                                |   | 23 |   | 23 |   |
| Africa           |   | 1                                 |   | 0 |   | 1 |   |
| Oceania(2)       |   | 2                                 |   | 2 |   | 2 |   |
| Total            |   | 100                               | %      | 100 | % | 100 | % |

 

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(1)                   ExcludesMexico.

(2)                   Includes Australiaand New Zealand.

 

We are *exposed*to changes in a specific country’s or region’s economic conditions. However, webelieve that the diversity of our geographic base mitigates the impact of aneconomic downturn in any one part of the world on our financial performance.

 

*European Union and Other Europe.*  Sweden, Germany, Italy, France, UnitedKingdom, Denmark and Russia are our main markets in Europe. In 2003, the salesincreased in Sweden, Italy, Denmark and Russia whereas there was a decrease inGermany, France and the United Kingdom. After considering the effect ofexchange rate variations, the invoicing increased in Central and EasternEurope, was unchanged in Western Europe and was slightly below the level oflast year for the Nordic countries.

 

*North America.*  The United States has reported a decrease innet sales that is mostly related to the effect of exchange rate variations.

 

*South America.*  Our main markets in South America are Braziland Chile. Almost all countries in the region have reported lower sales during2003. This is entirely due to the effect of exchange rate variations. Afterconsidering the effect of exchange rate variations, the invoicing increased inLatin America.

 

*Asia.*  China, Japan, India and South Korea are ourlargest markets in Asia. In 2003, our sales into China increased, whereas thesales in Japan, India and South Korea decreased. After considering the effectof exchange rate variations, the invoicing in Asia was above the level of 2002.

 

*Oceania and Africa.*  We experienced an increase in sales in theseregions in 2003.

 

***Seasonality of end-user markets and invoicing***

 

Some segments of our business havehistorically experienced generally higher sales in the third and fourthquarters of the calendar year. For example, the heating, ventilation and airconditioning industry and the refrigeration industry experience higher salesdue to increased demand for these products in the summer months and prior tothe start of late autumn and winter. We also experience strong seasonality ofdemand in the olive oil business, where separators and decanters must typicallybe delivered and installed in time for the harvest season in September,October and November. However, we believe our diverse geographic andcustomer base, in addition to our stable parts and services business, mitigatethe effects of seasonality on our financial performance.

 

Historically, customer spending patterns havealso impacted the seasonality of our business, with a substantial number oforders being received during the first and second quarters, which weresubsequently recorded as sales in the third and fourth quarters, resulting inhigher revenues in these quarters. This trend is especially apparent withregard to contracts for our separation equipment. In contrast, lower costitems, such as valves, fittings

 

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and other standard products, are purchased regularly by our customersthroughout the year.

 

The following table sets forth ourconsolidated orders and net sales for the periods indicated, and the percentageof orders and net sales, respectively, recorded in each quarter of each suchperiod:

 
|                |   | **2001(1)**                       |   | **2002**                |   | **2003**                |   |    |   |
|---------------------|--------|-----------------------------------|--------|-------------------------|--------|-------------------------|--------|---------|--------|
|                |   | **Year Ended  December 31,** |   |                    |   |
|                |   | **(SEK millions)**           |   | **(SEK millions)** |   | **(SEK millions)** |   | **(%)** |   |
|                |   |                              |   |                    |   |                    |   |    |   |
| **Orders Received** |   |                              |   |                    |   |                    |   |    |   |
| First quarter       |   | 4,118                             |   | 3,682                   |   | 3,378                   |   | 24      | %      |
| Second quarter      |   | 4,087                             |   | 3,964                   |   | 3,554                   |   | 25      | %      |
| Third quarter       |   | 3,983                             |   | 3,528                   |   | 3,463                   |   | 24      | %      |
| Fourth quarter      |   | 3,706                             |   | 3,501                   |   | 3,750                   |   | 27      | %      |
| Total               |   | 15,894                            |   | 14,675                  |   | 14,145                  |   | 100     | %      |
|                |   |                              |   |                    |   |                    |   |    |   |
| **Net sales**       |   |                              |   |                    |   |                    |   |    |   |
| First quarter       |   | 3,452                             |   | 3,262                   |   | 2,995                   |   | 22      | %      |
| Second quarter      |   | 3,807                             |   | 3,654                   |   | 3,402                   |   | 24      | %      |
| Third quarter       |   | 3,832                             |   | 3,504                   |   | 3,426                   |   | 25      | %      |
| Fourth quarter      |   | 4,739                             |   | 4,175                   |   | 4,086                   |   | 29      | %      |
| Total               |   | 15,830                            |   | 14,595                  |   | 13,909                  |   | 100     | %      |

 

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(1)                   Includesoperations now divested that had orders of SEK 213 million and generatednet sales of SEK 212 million in the year ended December 31, 2001.

 

***Acquisitions and Divestitures***

 

A number of acquisitions and divestitureshave affected our results of operations and financial condition and those ofthe former Alfa Laval Holding over the last years. The following tablehighlights the most significant of these transactions.

 
| **Businesses Acquired**       |   | **Date**            |   | **Sales(1)**          |   |
|-------------------------------|--------|---------------------|--------|-----------------------|--------|
|                          |   |                |   | **(SEK in millions)** |   |
| Vicarb Group                  |   | January 1999   |   | 425                   |   |
| Scandi-Brew                   |   | February 1999  |   | 67                    |   |
| Kvaerner Hetland              |   | March 1999     |   | 57                    |   |
| Dorr  Oliver                  |   | December 1999  |   | 127                   |   |
| Danish Separation Systems A/S |   | September 2002 |   | 90                    |   |
| Toftejorg A/S                 |   | January 2003   |   | 210                   |   |
| BioKinetics Inc               |   | October 2003   |   | 550                   |   |

 
| **Businesses Divested**                 |   | **Date**           |   | **Sales(1)**          |   |
|-----------------------------------------|--------|--------------------|--------|-----------------------|--------|
|                                    |   |               |   | **(SEK in millions)** |   |
| Thermotechnik                           |   | January 1999  |   | 49                    |   |
| Cardinal                                |   | November 1999 |   | 39                    |   |
| Tetra Pak division of Indian subsidiary |   | May 2000           |   | 47                    |   |
| Aircoil                                 |   | December 2000 |   | 51                    |   |
| Rema Control                            |   | January 2001  |   | 68                    |   |
| Industrial Flow                         |   | April 2001    |   | 656                   |   |

 

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(1)           Sales for the most recent year ended priorto transaction in question.

 

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On December 5, 2003 an asset purchaseagreement was signed between the subsidiary Tri-Lad Inc in Canada and localmanagement of the company whereby all non-financial assets were sold to localmanagement. The closing date is January 30, 2004. Tri-Lad Inc is sellingequipment to the oil and gas industry and was a non-core activity within AlfaLaval. It has been up for sale since several years.

 
| **Properties Divested**     |   | **Date**            |   |
|-----------------------------|--------|---------------------|--------|
|                        |   |                |   |
| Oslo (Norway)               |   | February 2000  |   |
| Volketswill  (Switzerland)  |   | April 2000     |   |
| Brentford  (UK)             |   | June 2000      |   |
| Les  Clayes (France)        |   | July 2000      |   |
| Tumba (Sweden)              |   | August 2000    |   |
| Maarsen (Netherlands)       |   | September 2000 |   |
| Johannesburg (South Africa) |   | February 2001  |   |
| Glinde (Germany)            |   | October 2001   |   |
| Warminster (US)             |   | March 2002     |   |
| Newmarket (Canada)          |   | February 2003  |   |

 

**Step-Up in Asset Base; Goodwill Amortisationand Depreciation**

 

Our goodwill increased significantly in 2000,relative to our Predecessor, as a result of the Acquisition of the former AlfaLaval Holding. The purchase price for the shares of the former Alfa LavalHolding was SEK 8,286 million, including transaction costs ofSEK 72 million. As part of the Acquisition, an excess purchase priceof SEK 7,300 million was paid over the net book value of assetsacquired. This excess purchase price was attributable to goodwill totalling SEK3,277 million, which is being depreciated over 20 years, with thebalance allocated to tangible and intangible assets in an amount ofSEK 4,023 million. This allocation (or “Step-Up”) was required toconform with US GAAP and Swedish GAAP accounting standards and was finalisedduring the second quarter of 2001. In connection with the Acquisition, arestructuring provision of SEK 408 million was recorded. For moredetailed information about the book value and the fair value of these tangibleand intangible assets, see notes 13 and 14 to our consolidated financialstatements, included elsewhere in this annual report.

 

Depreciation on the Step-Up (the “Step-UpDepreciation”) amounted to SEK 303 million in 2003, SEK 319 million in2002 and SEK 334 million for 2001. This Step-Up Depreciation is includedin costs of goods sold within the financial statements of Alfa Laval. Thefollowing table sets forth the effects of the Step-Up Depreciation for theyears shown:

 
|                                     |   | **Year ended  December 31,** |   |
|------------------------------------------|--------|-----------------------------------|--------|
|                                     |   | **2001**                          |   | **2002** |   | **2003** |   |
|                                     |   | **(SEK  million)**                |   |
|                                     |   |                              |   |   |   |   |   |
| Depreciation on pre-Step-Up asset values |   | 400                               |   | 331 |   | 293 |   |
| Step-Up Depreciation                     |   | 334                               |   | 319 |   | 303 |   |
| Total Depreciation                       |   | 734                               |   | 650 |   | 596 |   |

 

Goodwill amortisation amounted to SEK 191million, SEK 188 million and SEK 178 million for the years ended December 31,2003, 2002 and 2001, respectively. The increase in goodwill amortisation in2002 was due to the additional goodwill relating to the additional purchaseprice paid for Alfa Laval Holding AB (renamed from Alfa Laval Credit FinanceAB) and the acquisition of shares in Danish Separation Systems A/S. Theincrease in goodwill amortisation in 2003 was due to the acquisition ofToftejorg A/S and bioKinetics. In the near future, management expects thatincremental depreciation related to the step-up asset values to be in line withthe Step-Up Depreciation for 2003.

 

**Effective Tax Rates**

 

Alfa Laval has significant net operatinglosses that it can use to offset its taxable income in a number ofjurisdictions, primarily in the United States. In the United States, operatinglosses can be offset against taxable income for a six year period, after whichthe tax-loss carry forwards expire. As of December 31, 2003, Alfa Lavalhad tax-loss carry forwards amounting to SEK 352 million in the UnitedStates. Utilisation of these tax-loss carry

 

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forwards may be limited by tax restrictions. As at December 31,2003, Alfa Laval had SEK 8 million in deferred tax assets, comprising taxlosses and tax grants.

 

Goodwill amortisation and Step-UpDepreciation are not tax deductible and consequently have the effect ofincreasing Alfa Laval’s effective tax rate. However, Step-Up Depreciation hasbeen fully provided for as a deferred tax asset and therefore does not resultin differences between Alfa Laval’s applicable tax rates and the tax ratereported in the income statement as a consequence of the amortisation of thisliability in accordance with the amount of Step-Up Depreciation each year.

 

**Change in Financial Reporting**

 

As a result of our organisational redesigndiscussed above under “Item 5.A: Operating and Financial Review andProspects–Operating Results Our Restructuring and Cost ReductionProgramme—Beyond Expectations”, we now report our financial results by our tworeorganised divisions–the Equipment division and the Process Technologydivision. In addition, certain project sales, engineering, ancillary productsand installation services, our common procurement, production and logisticsfunction, certain corporate overhead costs, the financial results ofTri-Lad Inc., our Canadian-based manufacturer of industrial flanges, andcertain projects sales in India are incorporated under the heading “Operationsand other” as a third financial reporting division. This change has beeneffective since the beginning of 2001.

 

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**Results of Operations**

 

The following table sets forth certain profitand loss account data as a percentage of sales for the years endedDecember 31, 2001, 2002 and 2003:

 
|                                               |   | **Year ended  December 31,** |   |
|----------------------------------------------------|--------|-----------------------------------|--------|
|                                               |   | **2001**                          |   | **2002** |   | **2003** |   |
|                                               |   | **(SEK  millions)**               |   | **(% of  sales)** |   | **(SEK  millions)** |   | **(% of  sales)** |   | **(SEK  millions)** |   | **(% of  sales)** |   |
|                                               |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                          |   | 15,830                            |   | 100.0 |   | 14,595 |   | 100.0 |   | 13,909 |   | 100.0 |   |
| Cost of goods sold                                 |   | (10,348                           | )      | (65.4 | ) | (9,262 | ) | (63.5 | ) | (8,976 | ) | (64.5 | ) |
|                                               |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                       |   | 5,482                             |   | 34.6 |   | 5,333 |   | 36.5 |   | 4,933 |   | 35.5 |   |
| Other operating expenses:                          |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Sales costs                                        |   | (2,443                            | )      | (15.4 | ) | (2,115 | ) | (14.5 | ) | (2,246 | ) | (16.1 | ) |
| Administrative costs                               |   | (787                              | )      | (5.0 | ) | (1,027 | ) | (7.0 | ) | (866 | ) | (6.2 | ) |
| Research and development costs                     |   | (341                              | )      | (2.2 | ) | (355 | ) | (2.4 | ) | (368 | ) | (2.6 | ) |
| Other operating income/(costs)                     |   | (504                              | )      | (3.2 | ) | (395 | ) | (2.7 | ) | (124 | ) | (0.9 | ) |
| Goodwill Amortisation                              |   | (178                              | )      | (1.1 | ) | (188 | ) | (1.3 | ) | (191 | ) | (1.4 | ) |
| Comparison distortion items                        |   | 5                                 |   | — |   | (29 | ) | (0.2 | ) | 6 |   | — |   |
| Operating income/(loss)                            |   | 1,233                             |   | 7.8 |   | 1,224 |   | 8.4 |   | 1,144 |   | 8.2 |   |
| Interest and other financial income/(costs)        |   | (861                              | )      | (5.4 | ) | (764 | ) | (5.2 | ) | (327 | ) | (2.4 | ) |
| Income/(loss) before taxes and minority  interests |   | 373                               |   | 2.4 |   | 460 |   | 3.2 |   | 817 |   | 5.9 |   |
| Income tax benefit/(expense)                       |   | 26                                |   | 0.2 |   | (218 | ) | (1.5 | ) | (134 | ) | (1.0 | ) |
| Minority interests                                 |   | (32                               | )      | (0.2 | ) | (34 | ) | (0.2 | ) | (42 | ) | (0.3 | ) |
| Net income/(loss)                                  |   | 367                               |   | 2.3 |   | 208 |   | (1.4 | ) | 641 |   | 4.6 |   |
|                                               |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Orders received                                    |   | 15,894                            |   | 100.4 |   | 14,675 |   | 100.5 |   | 14,145 |   | 101.7 |   |
| Order backlog                                      |   | 4,314                             |   | 27.3 |   | 4,340 |   | 29.7 |   | 4,021 |   | 28.9 |   |

 

**Years ended December 31, 2002 and 2003**

 

***Net Sales***

 

*Consolidated.*  Net sales decreased by SEK 686 million,or 4.7%, to SEK 13,909 million in 2003 from SEK 14,595 million in2002. Our net sales were significantly affected by currency exchange ratefluctuations. On a constant exchange rate basis, our consolidated net salesincreased SEK 525 million, or 3.6%. This increase in net sales was dueprimarily to stronger sales in the Equipment division and the acquisition ofbioKinetics for the Process Technology division.

 

Orders received decreased by SEK530 million, or 3.6%, to SEK 14,145 million in the year ended December 31,2003 from SEK 14,675 million in the year ended December 31, 2002.Order backlog decreased by SEK 319 million, or 7.3%, toSEK 4,021 million at December 31, 2003 fromSEK 4,340 million at December 31, 2002.

 

I-53

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Net sales by division for the year ended December 31, 2002 and2003 were as follows:

 
|                       |   | **Year ended  December 31,** |   |
|----------------------------|--------|-----------------------------------|--------|
|                       |   | **2002**                          |   | **2003** |   |
|                       |   | **(SEK in  millions)**            |   |
|                       |   |                              |   |   |   |
| **Net sales by  division** |   |                              |   |   |   |
| Equipment                  |   | 8,130                             |   | 7,842 |   |
| Process Technology         |   | 6,377                             |   | 5,994 |   |
| Operations and other       |   | 88                                |   | 73 |   |
| Net sales                  |   | 14,595                            |   | 13,909 |   |

 

*Equipment.*  Net sales decreased by SEK 288 million,or 3.5%, to SEK 7,842 million in 2003 compared with SEK 8,130 millionin 2002. This decrease was due primarily to the effect of currency exchangerate fluctuations, despite an increase in sales volumes and the acquisition ofToftejorg, which added SEK 113 million to the 2003 net sales for the Equipmentdivision. On a constant exchange rate basis, net sales in our Equipment divisionincreased by SEK 301 million, or 3.7%. This increase in net sales was dueto increased sales for all customer segments in the Equipment division during2003 compared to 2002. Applications such as refrigeration, diesel power,industrial original equipment manufacturers and air conditioning reportedstrong sales during the year.

 

Orders received decreased by SEK23 million, or 0.3%, to SEK 8,070 million in the year endedDecember 31, 2003 from SEK 8,093 million in the year endedDecember 31, 2002. Order backlog increased by SEK 34 million, or2.2%, to SEK 1,599 million at December 31, 2003 from SEK1,565 million at December 31, 2002.

 

*Process Technology.*  Net sales decreased by SEK 383 million,or 6.0%, to SEK 5,994 million in 2003 compared with SEK 6,377 millionin 2002. This decrease was due primarily to the effects of exchange ratefluctuations, partly offset by the acquisition of bioKinetics, which added SEK133 million to the 2003 net sales for the Process Technology division. On aconstant exchange rate basis, sales in our Process Technology divisionincreased by SEK 230 million, or 3.6%. This increase in sales wasprincipally due to increased sales in the Food Technology, Life Science andParts & Service customer segments, partially offset by a decrease insales in the Energy & Environment and Process Industry customersegments. Applications such as wine, beverages, olive oil, vegetable oil andenvironment have reported strong sales during the year.

 

Orders received decreased by SEK497 million, or 7.7%, to SEK 5,991 million in the year endedDecember 31, 2003 from SEK 6,488 million in the year endedDecember 31, 2002. Order backlog decreased by SEK 355 million,or 12.9%, to SEK 2,398 million at December 31, 2003 from SEK2,753 million at December 31, 2002.

 

*Operations and other.*  Net sales decreased to SEK 73 millionin 2003 from SEK 88 million in 2002. This decrease was due primarily tothe effects of exchange rate fluctuations.

 

***Costs of Goods Sold***

 

Costs of goods sold decreased by SEK286 million, or 3.1% to SEK 8,976 million in 2003 compared with SEK9,262 million in 2002. The decrease in cost of goods sold was dueprimarily to the lower sales volume. In 2003, costs of goods sold included SEK303 million of Step-Up Depreciation in connection with the Acquisition of theformer Alfa Laval Holding compared with SEK 319 million in 2002.

 

***Gross Profit***

 

Gross profit in 2003 was SEK 4,933, or 35.5%of net sales, as compared to SEK 5,333, or 36.5% of net sales, in 2002. Thedecrease of SEK 400 million, or 7.5%, was primarily due to the effect ofcurrency exchange rate fluctuations. On a constant exchange rate basis andexclusive of Step-Up Depreciation in 2003 of SEK 303 million, gross profitdecreased by SEK 79 million, or 1.4%.

 

I-54

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***Operating Expenses***

 

*Sales costs.*  Sales costs were SEK 2,246 million in2003 compared with SEK 2,115 million in 2002. The increase of SEK131 million, or 6.2%, was due primarily to addition of the sales costs inthe acquired Toftejorg and bioKinetics companies and customary increases insalaries for employees within the Group.

 

*Administration Costs.*  Administration costs wereSEK 866 million in 2003 compared with SEK 1,027 million in2002. The decrease of SEK 161 million, or 15.7% was due primarily to costsavings resulting from our “Beyond Expectations” restructuring programme,partly offset by the addition of the administration costs in the acquiredToftejorg and bioKinetics companies.

 

*Research and Development Costs.*  Research and development costs increasedfrom SEK 355 million or 2.4% of net sales in 2002 toSEK 368 million or 2.6% of net sales in 2003. At constant exchangerates, this represents an increase by SEK 14 million or 4.0 percent between2003 and 2002. This increase was partly due to automatic costs increasesrelated to salaries. Over the next few years, management expect research anddevelopment costs to be approximately 2.5% to 3.0% of net sales.

 

*Other Operating Income.*  Other operating income decreased bySEK 27 million, or 10.0%, to SEK 242 million in 2003 comparedwith SEK 269 million in 2002 due principally to a number of differentfactors affecting, among other things, lower rental income and lower reversalof provisions in a large number of our subsidiaries.

 

*Other Operating Costs.*  Other operating costs decreased bySEK 298 million, or 44.9%, to SEK 366 million in 2003compared with SEK 664 million in 2002 due to lower restructuringcosts.

 

*Comparison distortion items, net.*  Comparison distortion items were a gain ofSEK 6 million in 2003 compared to a loss of SEK 29 million in 2002.The comparison distortion items in 2003 were attributable to a gain of SEK 3.6million related to the sales of the property in Newmarket, Canada and a gain ofSEK 2.0 million on the sale of a piece of land to the new landlord inconnection with the construction of a new headquarter building in Lund.  Comparison distortion items in 2002comprised a loss of SEK 43 million related to the sale of real estate,offset by a further gain of SEK 14 million on the sale of Industrial Flow.

 

*Goodwill amortisation.*Goodwill amortisation costs were SEK 191 million in 2003 compared with SEK188 million in 2002. The increase of SEK 3 million, or 1.6%, was dueprimarily to the acquisition of Toftejorg and bioKinetics, offset by exchangerate fluctuations.

 

***Operating Income***

 

Operating income decreased to SEK1,144 million in 2003 from SEK 1,224 million in 2002. This decreaseof SEK 80 million was due primarily to exchange rate fluctuations,offset by a decrease of SEK 13 million in Step-Up Depreciation andgoodwill amortisation. On a constant exchange rate basis and exclusive of thedecrease in goodwill amortisation and Step-Up Depreciation ofSEK 13 million and the positive increase in comparison distortionitems of SEK 35 million, our operating income increased bySEK 30 million or 2.5%. Included in our operating income are certainone-off costs of approximately SEK 72 million in 2002 andSEK 25 million in 2003, related to our restructuring programme.

 

I-55

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***EBITA***

 

The following table shows the development ofEBITA for 2002 and 2003:

 
|                     |   | **Year ended  December 31,** |   |
|--------------------------|--------|-----------------------------------|--------|
|                     |   | **2002**                          |   | **2003** |   |
|                     |   | **(SEK  millions)**               |   |
|                     |   |                              |   |   |   |
| Operating Income         |   | 1,224                             |   | 1,144 |   |
| Amortisation of goodwill |   | 188                               |   | 191 |   |
| Step-Up Depreciation     |   | 319                               |   | 303 |   |
| EBITA                    |   | 1,731                             |   | 1,638 |   |

 

EBITA decreased by SEK 93 million in2003 to SEK 1,638 million compared to SEK 1,731 million in2002. On a constant exchange rate basis, the increase in EBITA was SEK 28million.

 

***Net Interest and Other Financial Income/Costs***

 

Interest and other financial income/costsdecreased by SEK 437 million, or 57.2%, to SEK 327 millionin 2003 compared with to SEK 764 million in 2002. Total bankborrowings amounted to SEK 2,531 million at the end of 2003 comparedto SEK 3,360 million at the end of 2002. The total financialindebtedness including leasing and interest bearing pension liabilitiesamounted to SEK 3,614 million at the end of 2003 compared toSEK 4,519 million at the end of 2002. These two circumstances havereduced the interest costs by SEK 239 million or 37.2%. During 2003, thenet realised and unrealised exchange gains and losses deteriorated by SEK88 million compared to 2002. The financial comparison distortion costswere nil in 2003 and SEK 290.7 million in 2002. This cost is relating totwo items. In connection with the repayment of the previous syndicated loansand the amortisation of the bond loan, capitalised financing costs of totallySEK 205.5 million have been reversed. On June 24, 35 percent ofthe bond loan of EUR 220 million was amortised. This was made at a premiumof 12.125 percent corresponding to one year’s interest, which amounted toSEK 85.2 million. Both of these costs have been reported ascomparison distortion financial costs.

 

***Income Taxes***

 

The Swedish statutory tax rate on income was28.0% in 2003 and 2002. Our weighted average tax rate was 33% in 2003 and 2002.Alfa Laval’s taxation charge was SEK 134 million in 2003, compared with ataxation charge of SEK 218 million in 2002 primarily due to theutilization of tax losses in Sweden.

 

***Net Income***

 

Principally as a result of the above factors,Alfa Laval had net income of SEK 641 million in 2003 compared with netincome of SEK 208 million in 2002.

 

**Years ended December 31, 2001 and 2002**

 

***Net Sales***

 

*Consolidated.*  Net sales decreased by SEK1,235 million, or 7.8%, to SEK 14,595 million in 2002 from SEK15,830 million in 2001. Our net sales were significantly affected bycurrency exchange rate fluctuations. On a constant exchange rate basis andexcluding divested activities, our consolidated net sales decreased SEK364 million, or 2.3%. This decrease in net sales was due primarily toweaker sales in both the Process Technology division and in the Equipment division.

 

Orders received decreased by SEK1,219 million, or 7.7%, to SEK 14,675 million in the year endedDecember 31, 2002 from SEK 15,894 million in the year endedDecember 31, 2001. Orders received for divested operations were SEK 213 millionand SEK nil million in 2001 and 2002, respectively. Order backlog increased bySEK 26 million, or 0.6%, to SEK 4,340 million atDecember 31, 2002 from SEK 4,314 million at December 31,2001. Order backlog for divested operations was SEK 11 million andSEK nil million in 2001 and 2002,

 

I-56

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respectively.

 

Net sales by division for the year endedDecember 31, 2001 and 2002 were as follows:

 
|                                            |   | **Year ended  December 31,** |   |
|-------------------------------------------------|--------|-----------------------------------|--------|
|                                            |   | **2001**                          |   | **2002** |   |
|                                            |   | **(SEK in  millions)**            |   |
|                                            |   |                              |   |   |   |
| Net sales by division                           |   |                              |   |   |   |
| Equipment                                       |   | 8,576                             |   | 8,130 |   |
| Process Technology                              |   | 6,872                             |   | 6,377 |   |
| Operations and other                            |   | 169                               |   | 88 |   |
|                                            |   | 15,617                            |   | 14,595 |   |
| Divested businesses/businesses for  disposal(1) |   | 212                               |   | — |   |
| Net sales                                       |   | 15,830                            |   | 14,595 |   |

 

----

(1)           Includes Industrial Flow, Rema Control,Aircoil and Cardinal.

 

*Equipment.*  Net sales decreased by SEK 446 million,or 5.2%, to SEK 8,130 million in 2002 compared with SEK 8,576 millionin 2001. This decrease was due primarily to the effect of currency exchangerate fluctuations, as well as to a decrease in sales volumes. On a constantexchange rate basis, net sales in our Equipment division decreased by SEK153 million, or 1.8%. This decrease in net sales was due to decreasedsales in the Marine & Diesel customer segment, principally due tofewer contracts for new-buildings at the shipyards. The decrease in net salesin our Equipment division was partially offset by an upturn in sales for boththe Parts & Services and OEM customer segments. The increase in netsales in OEM is explained among other factors by an inventory reduction atcertain customers that has been completed and the orders have returned to amore normal level.

 

Orders received decreased by SEK465 million, or 5.4%, to SEK 8,093 million in the year endedDecember 31, 2002 from SEK 8,558 million in the year endedDecember 31, 2001. Order backlog decreased by SEK 83 million, or5.0%, to SEK 1,565 million at December 31, 2002 fromSEK 1,648 million at December 31, 2001.

 

*Process Technology.*  Net sales decreased by SEK 495 million,or 7.2%, to SEK 6,377 million in 2002 compared with SEK 6,872 millionin 2001. This decrease was due primarily to the effects of exchange ratefluctuations. On a constant exchange rate basis, sales in our ProcessTechnology division decreased by SEK 157 million, or 2.3%. This decreasein sales was principally due to decreased sales in the Food Technology andProcess Industry customer segments, partially offset by an increase in sales inthe Energy & Environment, Life Science and Parts & Servicecustomer segments. Life Science has increased sales principally due tocontinued investments within pharmaceuticals and biotechnology.

 

Orders received decreased by SEK539 million, or 7.7%, to SEK 6,488 million in the year endedDecember 31, 2002 from SEK 7,027 million in the year endedDecember 31, 2001. Order backlog increased by SEK 98 million, or3.7%, to SEK 2,753 million at December 31, 2002 fromSEK 2,655 million at December 31, 2001.

 

*Operations and other.*  Net sales decreased to SEK 88 million in2002 from SEK 169 million in 2001. This decrease was due primarily todecreased demand.

 

***Costs of Goods Sold***

 

Costs of goods sold decreased by SEK1,086 million, or 10.5% to SEK 9,262 million in 2002 compared withSEK 10,348 million in 2001. The decrease in cost of goods sold was dueprimarily to the lower sales volume. In 2002, costs of goods sold also includedSEK 319 million of Step-Up Depreciation in connection with the Acquisitionof the former Alfa Laval Holding.

 

I-57

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***Gross Profit***

 

Gross profit in 2002 was SEK 5,333, or 36.5%of net sales, as compared to SEK 5,482, or 34.6% of net sales, in 2001. Thedecrease of SEK 149 million, or 2.7%, was primarily due to the effect ofcurrency exchange rate fluctuations. On a constant exchange rate basis andexclusive of Step-Up Depreciation in 2002 of SEK 319 million, gross profitincreased by SEK 40 million, or 0.7%. This increase is a reflection of theincreased gross profit margin, which is due to reduced overheads.

 

***Operating Expenses***

 

*Sales costs.*  Sales costs were SEK 2,115 million in2002 compared with SEK 2,443 million in 2001. The decrease of SEK328 million, or 13.4%, was due primarily to a changed definition of salesand administration costs, offset in part by customary increases in salaries foremployees within the Group.

 

*Administration Costs.*  Administration costs wereSEK 1,027 million in 2002 compared with SEK 787 million in2001. The increase of SEK 240 million, or 23.4% was due primarily to achanged definition of sales and administration costs, offset in part by costsavings resulting from our “Beyond Expectations” restructuring programme.

 

*Research and Development Costs.*  Research and development costs increasedfrom SEK 341 million or 2.2% of net sales in 2001 toSEK 355 million or 2.4% of net sales in 2002. This increase waspartly due to automatic costs increases related to salaries. Over the next fewyears, management expect research and development costs to be approximately2.5% to 3.0% of net sales.

 

*Other Operating Income.*  Other operating income decreased bySEK 120 million, or 30.8%, to SEK 269 million in 2002 comparedwith SEK 389 million in 2001 due principally to a number of differentfactors affecting, among other things, lower rental income and lower reversalof provisions in a large number of our subsidiaries.

 

*Other Operating Costs.*  Other operating costs decreased bySEK 229 million, or 25.6%, to SEK 664 million in 2002compared with SEK 893 million in 2001 due to lower restructuringcosts and bank charges.

 

*Comparison distortion items, net.*  Comparison distortion items were a loss ofSEK 29 million in 2002 compared to a gain of SEK 5 million in 2001.The comparison distortion items in 2002 were primarily attributable to a lossof SEK 43 million related to the sale of real estate, offset by a furthergain of SEK 14 million on the sale of Industrial Flow. Comparisondistortion items in 2001 comprised a gain of SEK 10 million realised fromthe sale of Industrial Flow, offset by a loss of SEK 5 millionattributable to the sale of real estate.

 

*Goodwill amortisation.*  Goodwill amortisation costs were SEK188 million in 2002 compared with SEK 178 million in 2001. Theincrease of SEK 10 million, or 5.6%, was due primarily to the additional goodwillrelating to the additional purchase price paid for Alfa Laval Holding AB(renamed from Alfa Laval Credit Finance AB) and the acquisition of shares inDanish Separation Systems A/, offset by exchange rate fluctuations.

 

***Operating Income***

 

Operating income decreased to SEK1,224 million in 2002 from SEK 1,233 million in 2001. Thisdecrease of SEK 9 million was due primarily to exchange ratefluctuations, offset by a decrease of SEK 5 million in Step-UpDepreciation and goodwill amortisation. On a constant exchange rate basis andexclusive of the decrease in goodwill amortisation and Step-Up Depreciation ofSEK 5 million and the negative increase in comparison distortionitems of SEK 34 million, our operating income increased by SEK 88 millionor 5.1%. Included in our operating income are certain one-off costs ofSEK 181 million in 2001 and SEK 72 million in 2002, relatedto our restructuring programme.

 

I-58

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***EBITA***

 

The following table shows the development ofthe EBITA for 2001 and 2002:

 
|                     |   | **Year ended  December 31,** |   |
|--------------------------|--------|-----------------------------------|--------|
|                     |   | **2001**                          |   | **2002** |   |
|                     |   | **(SEK  millions)**               |   |
|                     |   |                              |   |   |   |
| Operating Income         |   | 1,233                             |   | 1,224 |   |
| Amortisation of goodwill |   | 178                               |   | 188 |   |
| Step-Up Depreciation     |   | 334                               |   | 319 |   |
| EBITA                    |   | 1,745                             |   | 1,731 |   |

 

EBITA decreased by SEK 14 million in2002 to SEK 1,731 million compared to SEK 1,745 million in2001. On a constant exchange rate basis, excluding divested operations, theincrease in EBITA was SEK 54 million.

 

***Net Interest and Other Financial Income/Costs***

 

Interest and other financial income/costsdecreased by SEK 97 million, or 11.3%, to SEK 764 millionin 2002 compared with to SEK 861 million in 2001. Total bankborrowings amounted to SEK 3,360.2 million at the end of 2002 comparedto SEK 4,573.1 million at the end of 2001. The total financialindebtedness including leasing and interest bearing pension liabilitiesamounted to SEK 4,518.7 million at the end of 2002 compared to SEK6,651.6 million at the end of 2001. These two circumstances have reducedthe interest costs by SEK 187.2 million or 29.0%. During 2002, the netrealised and unrealised exchange gains and losses improved by SEK171.8 million compared to 2001. The financial comparison distortion costof SEK 290.7 million offset most of these improvements. This is relatingto two items. In connection with the repayment of the previous syndicated loansand the amortisation of the bond loan, capitalised financing costs of totallySEK 205.5 million have been reversed. On June 24, 35 percent ofthe bond loan of EUR 220 million was amortised. This was made at a premiumof 12.125 percent corresponding to one year’s interest, which amounted toSEK 85.2 million. Both of these costs have been reported ascomparison distortion financial costs.

 

***Income Taxes***

 

The Swedish statutory tax rate on income was28.0% in 2002 and 2001. Our weighted average tax rate was 33% in 2002 and 35%in 2001. Alfa Laval’s taxation charge was SEK 218 million in 2002,compared with a taxation credit of SEK 26 million in 2001 primarily due toreimbursement of taxes in prior years.

 

***Net Income***

 

Principally as a result of the above factors,Alfa Laval had net income of SEK 208 million in 2002 compared with netincome of SEK 367 million in 2001.

 

I-59

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**5.B. Liquidity and Capital Resources**

 

*The following summary of certain provisionsof our Senior Notes, the Existing Senior Credit Facility, our New Senior CreditFacility, the Subordinated Loan, the Intercompany Note, the IntercreditorAgreement, our New Intercreditor Agreement and continuing indebtedness does notpurport to be complete and is subject to, and is qualified in its entirety byreference to, the underlying documents.*

 

***•******      TheSenior Notes***

 

In November 2000, we issued€220 million in aggregate principal amount of 12 1/8%Senior Notes due 2010 in reliance on exemptions from registration requirementsunder the US Securities Act of 1933, as amended (the “Securities Act”). InJuly 2001, we completed a public exchange offer pursuant to which ourSenior Notes issued in November 2000 were exchanged for substantiallyidentical Senior Notes registered under the Securities Act.

 

Interest on the Senior Notes is paidsemi-annually in arrears on May 15 and November 15, beginningMay 15, 2001. Holders of the Senior Notes may under certain circumstancesbe entitled to receive additional payments in respect of taxes and similarcharges in respect of payments on the Senior Notes.

 

The Senior Notes are redeemable (i) atany time prior to November 15, 2005 in whole but not in part at our optionat 100% of their principal amount, plus an applicable redemption premium andaccrued and unpaid interest, and (ii) at any time on or afterNovember 15, 2005 at our option, at 106.063% of their principal amount,plus accrued and unpaid interest, declining to 100% of their principal amount,plus accrued and unpaid interest, on or after November 15, 2008.

 

In the event that, as a result of any changeor amendment to the laws or treaties of Sweden or certain other jurisdictions,we become obligated to pay material additional payments that we determinecannot be avoided by taking reasonable measures, the Senior Notes areredeemable in whole but not in part at 100% of their principal amount plusaccrued and unpaid interest, at our option. We may also, at our option, redeemup to 35% of the Senior Notes using the net proceeds of one or more publicequity offerings received by us, at 112.125% of their principal amount, plusaccrued and unpaid interest to the redemption date.

 

On June 24, 2002, we redeemed 35%, or€77 million, of the Senior Notes with the proceeds of the Offering.

 

The Senior Notes rank equal in right ofpayment with all of our other unsecured and unsubordinated indebtedness, andare senior in right of payment to any of our future subordinated indebtedness.The Senior Notes are also guaranteed on a senior subordinated basis by AlfaLaval Holding AB (renamed from Alfa Laval Credit Finance AB).

 

The indenture governing the Senior Notes issubject to the Trust Indenture Act of 1939, as amended. It contains covenantsapplicable to us and certain of our subsidiaries, including Alfa Laval HoldingAB (renamed from Alfa Laval Credit Finance AB), limitations and requirementswith respect to indebtedness, restricted payments, dividends and other paymentsaffecting restricted subsidiaries, the ownership of capital stock of restrictedsubsidiaries, issuances of guarantees of indebtedness by restrictedsubsidiaries, transactions with affiliates, liens, asset sales, consolidationsand mergers and the provision of financial statements and reports. Theindenture also requires us to make an offer to purchase all outstanding SeniorNotes at a purchase price of 101% of their principal amount upon the occurrenceof a change of control. Under the terms of the indenture, the Offering did notcause a change of control to occur. In addition, under certain circumstances,we are required by the indenture to offer to purchase the Senior Notes with theproceeds of sales of certain assets. The indenture also provides for events ofdefault which, if any of them occurs, would permit or require the principal of,premium, if any, interest and any other monetary obligations on the SeniorNotes to become or to be declared to be immediately due and payable.

 

As of April 8, 2004 our Senior Notes,which are listed on the Luxembourg Stock Exchange, traded at 118.25%. This isthe most recent date the Senior Notes were traded.

 

For a description of the optional redemptionprovisions of our Senior Notes, see “Item 5.B:—Maturity Profile of OurBorrowings” below.

 

I-60

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***•******      TheExisting Senior Credit Facility***

 

Following completion of the Offering, werefinanced borrowings under our Previous Senior Credit Facility with borrowingsunder our Existing Senior Credit Facility. Our Existing Senior Credit Facilitycomprised of a senior multi-currency credit facility with SEB Merchant Banking,a unit within Skandinaviska Enskilda Banken AB (publ) and Svenska HandelsbankenAB (publ), as arrangers, of up to €575 million and was structured in twotranches—a Tranche A €425 million 5 year multi-currency term loanfacility and a Tranche B €150 million 5 year multi-currency revolvingcredit facility. Following the Offering, we applied the proceeds of Tranche Amainly to the refinancing of term loans under our Previous Senior CreditFacility and for other purposes in connection with the Offering. We used theproceeds of Tranche B for working capital and other general corporate purposes.

 

Borrowings under the Existing Senior CreditFacility were guaranteed by Alfa Laval AB, our parent, us, Alfa Laval HoldingAB (renamed from Alfa Laval Credit Finance AB), the Guarantor of our SeniorNotes, and the former Alfa Laval Holding AB, on a joint and several basis.

 

The Existing Senior Credit Facility couldhave been cancelled and/or pre-paid without premium in whole or in part, inminimum amounts of €5 million, or, if greater, in integral multiples of€1 million with the giving of appropriate notice. If a change of controlhad occured (that is, if any person or group of persons, other than Tetra LavalB.V. and any of its affiliates and Industri Kapital 2000 Ltd. and any ofits subsidiaries and any partnership in which Industri Kapital 2000 Ltd.or any of its subsidiaries is general partner, acquire shares in Alfa Laval ABrepresenting more than 50% of Alfa Laval AB’s share capital or voting rights),the borrowers would have been required by the lenders to prepay the ExistingSenior Credit Facility.

 

The interest payable on each tranche was therelevant inter-bank rate plus a relevant margin and mandatory costs.

 

In connection with the Existing Senior CreditFacility, on April 29, 2002, we entered into inter-creditor arrangementsunder which the Intercompany Note between us and Alfa Laval Holding AB (renamedfrom Alfa Laval Credit Finance AB), was subordinated to debt outstanding underthe Existing Senior Credit Facility. The guarantee of the Senior Notes given byAlfa Laval Holding AB (renamed from Alfa Laval Credit Finance AB) was alsosubordinated to outstandings under the Existing Senior Credit Facility. Thesesubordination arrangements included restrictions on the repayment of, orpayments in relation to, this intercompany loan. The additional conditionsubsequent under the Existing Senior Credit Facility was that all the securityunder the Previous Senior Credit Facility be released.

 

The Existing Senior Credit Facility containedfinancial covenants which are required ratios of consolidated net debt toconsolidated EBITDA of Alfa Laval AB group, consolidated EBITDA to totalinterest expense of the Group and consolidated net debt to shareholders’ equityof the Alfa Laval AB group. In addition to these, there were other covenants,including covenants which restrict borrowing by certain subsidiaries, thecreation of security interests over the assets of the Alfa Laval AB group,lending, the giving of guarantees by members of the Group and the disposal ofassets by members of the Alfa Laval AB group.

 

The Existing Senior Credit Facility alsocontained standard representations and warranties customarily found in creditagreements for similar financings. There were standard events of default,including (i) failure to pay, (ii) misrepresentation,(iii) certain events of insolvency and (iv) cross default.

 

The Existing Senior Credit Facility wasrefinanced with the proceeds of our New Senior Credit Facility onApril 19, 2004, as more fully described below.

 

***•******      TheNew Senior Credit Facility***

 

Our New Senior Credit Facility comprises a seniormulti-currency credit facility with SEB Merchant Banking, a unit withinSkandinaviska Enskilda Banken AB (publ), as arranger, and is structured in twotranches—a Tranche A US$325 million 5 year multi-currency revolvingcredit facility and a Tranche B €150 million 5 year multi-currencyrevolving credit facility. Proceeds of Tranche A and Tranche B may only be usedto refinance the Existing Senior Credit Facility and for the general corporatepurposes of the Alfa Laval AB group.

 

Borrowings under the New Senior CreditFacility are guaranteed by Alfa Laval AB, our parent, us and Alfa

 

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Laval Holding AB (renamed from Alfa Laval Credit Finance AB), theGuarantor of our Senior Notes, on a joint and several basis.

 

The New Senior Credit Facility may becancelled and/or pre-paid without premium in whole or in part, in minimumamounts of US$5 million in respect of Tranche A or €5 million in respectof Tranche B, or, if greater, in either case, in integral multiples of1 million units of that currency with the giving of appropriate notice. Ifa change of control occurs (that is, if any person or group of persons, otherthan Tetra Laval B.V. and any of its affiliates and Industri Kapital2000 Ltd. and any of its subsidiaries and any partnership in whichIndustri Kapital 2000 Ltd. or any of its subsidiaries is general partner,acquire shares in Alfa Laval AB representing more than 50% of Alfa Laval AB’sshare capital or voting rights), the borrowers will be required by the lendersto prepay the New Senior Credit Facility.

 

The interest payable on each tranche is therelevant inter-bank rate plus a relevant margin and mandatory costs.

 

In connection with the New Senior CreditFacility, on April 15, 2004, we entered into inter-creditor arrangementsunder which the Intercompany Note between us and Alfa Laval Holding AB (renamedfrom Alfa Laval Credit Finance AB), has been subordinated to debt outstandingunder the New Senior Credit Facility. The guarantee of the Senior Notes givenby Alfa Laval Holding AB (renamed from Alfa Laval Credit Finance AB) is alsosubordinated to outstandings under the New Senior Credit Facility. Thesesubordination arrangements include restrictions on the repayment of, orpayments in relation to, this intercompany loan.

 

The New Senior Credit Facility containsfinancial covenants which are required ratios of consolidated net debt toconsolidated EBITDA of the Alfa Laval AB Group, consolidated EBITDA to totalinterest expense of the Alfa Laval AB Group and consolidated net debt toshareholders’ equity of the Alfa Laval AB Group. In addition to these, thereare other covenants, including covenants which restrict borrowing by certainsubsidiaries, the creation of security interests over the assets of the AlfaLaval AB Group, lending, the giving of guarantees by members of the Alfa LavalAB Group and the disposal of assets by members of the Alfa Laval AB Group.

 

The New Senior Credit Facility also containsstandard representations and warranties customarily found in credit agreementsfor similar financings. There are standard events of default, including(i) failure to pay, (ii) misrepresentation, (iii) certain eventsof insolvency and (iv) cross default.

 

***•******      SubordinatedLoan***

 

On August 24, 2000 Alfa Laval AB, ourparent company, issued a subordinated vendor note for €200.0 million tothe vendor, Tetra Laval B.V. The Subordinated Loan carried interest at 12% perannum, which was capitalised annually in arrears and paid on maturity. TheSubordinated Loan was scheduled to be repaid on the date that was (i) tenyears and six months after the later of the date of issuance of the vendor noteand the date of issuance of the notes or, (ii) if earlier, a flotation ortrade sale.

 

Upon consummation of the Offering, Alfa LavalAB used the proceeds from the Offering and the exercise of the ManagementWarrants and drawings under the Existing Senior Credit Facility to, among otherthings, repay the Subordinated Loan on May 23, 2003, together with accruedand unpaid interest thereon.

 

***•******      TheIntercompany Note***

 

Funds advanced to us at the time of the Acquisitionwere on lent to the Guarantor under an intercompany loan facility (the“Intercompany Note”) entered into on August 22, 2000 between us and theGuarantor. The Intercompany Note remained in place following the issuance ofour Senior Notes on November 9, 2000. Interest is payable thereundersemi-annually in arrears at a rate which matches the funding requirement forinterest payments on our Senior Notes.

 

The Intercompany Note is repayable on demandby us. Payments and other rights under the Intercompany Note are subordinatedunder, or otherwise subject to the terms of, the New Intercreditor Agreementfor the New Senior Credit Facility. The New Intercreditor Agreement providesfor payment suspensions and limitations on enforcement in relation to the IntercompanyNote.

 

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***•******      IntercreditorAgreement***

 

On April 29, 2002, we, the Guarantor,the lenders in under the Existing Senior Credit Facility and SEB MerchantBanking as facility agent entered into an intercreditor agreement (the“Intercreditor Agreement”). The Intercreditor Agreement set out the respectiverights of certain creditors of us and the Guarantor as regards ranking of debt,security, enforcement and subordination.

 

 *Ranking of Debt and Security.*  The Intercreditor Agreement provided, among other things, thatliabilities under the Existing Senior Credit Facility will rank for allpurposes and at all times in priority to the Intercompany Note.

 

 *Certain Restrictions on Payment and Enforcement.*  The Intercreditor Agreement prohibitedpayments under the Intercompany Note except to fund (i) any scheduledpayments due on the Senior Notes, (ii) any payments of principal,interest, premium, additional amounts and amounts payable on account of taxesin relation to the Senior Notes, (iii) any amounts payable to the trusteeon the Senior Notes, and (iv) dividends to Alfa Laval AB or otherwise fundAlfa Laval AB to enable it to pay dividends or other amounts for corporatepurposes. However payments to us under the Intercompany Note would have beensuspended, in the case of a payment default, under the Existing Senior CreditFacility until such payment default was remedied and, in the case of a nonpayment default, for 179 days after any payment blockage notice had beenserved (or if earlier until such default was remedied or waived or the ExistingSenior Credit Facility was repaid in full). Only one such blockage notice couldhave been served in a 365-day period. The Intercreditor Agreement providedthat, in addition to the payment blockage described above, no enforcementaction could have been taken by us in relation to the Intercompany Note priorto the date the Existing Senior Credit Facility was repaid in full unless(i) an insolvency event occurred in relation to the Guarantor or(ii) default occurs in relation to our Senior Notes (unless as a result ofa default under the Existing Senior Credit Facility) and (1) we hadnotified the facility agent under the Existing Senior Credit Facility of suchdefault, (2) a period of not less then 120 days had passed from thedate of receipt of such notice and (3) the default was still continuing atthe end of such period. Enforcement action included any demand for payment orcommencement of legal proceedings.

 

The Intercreditor Agreement prohibited anypayments or distributions of any kind to us by the Guarantor, except aspermitted by the previous paragraph or with the consent of the facility agentfor the Existing Senior Credit Facility.

 

The Intercreditor Agreement was terminated onApril 20, 2004 following repayment of the Existing Senior Credit Facility.

 

***•******      NewIntercreditor Agreement***

 

On April 15, 2004, we, the Guarantor,the lenders under the New Senior Credit Facility and SEB Merchant Banking asfacility agent entered into an intercreditor agreement (the “IntercreditorAgreement”). The Intercreditor Agreement sets out the respective rights ofcertain creditors of us and the Guarantor as regards ranking of debt, security,enforcement and subordination.

 

 *Ranking of Debt and Security.*  The Intercreditor Agreement provides, among other things, thatliabilities under the New Senior Credit Facility will rank for all purposes andat all times in priority to the Intercompany Note.

 

 *Certain Restrictions on Payment and Enforcement.*  The Intercreditor Agreement prohibitspayments under the Intercompany Note except to fund (i) any scheduledpayments due on the Senior Notes, (ii) any payments of principal,interest, premium, additional amounts and amounts payable on account of taxesin relation to the Senior Notes, (iii) any amounts payable to the trusteeon the Senior Notes, and (iv) dividends to Alfa Laval AB or otherwise fundAlfa Laval AB to enable it to pay dividends or other amounts for corporatepurposes. However payments to us under the Intercompany Note will be suspended,in the case of a payment default, under the New Senior Credit Facility untilsuch payment default is remedied and, in the case of a non payment default, for179 days after a payment blockage notice has been served (or if earlieruntil such default is remedied or waived or the New Senior Credit Facility isrepaid in full). Only one such blockage notice can be served in a 365-dayperiod. The Intercreditor Agreement provides that, in addition to the paymentblockage described above, no enforcement action can be taken by us in relationto the Intercompany Note prior to the date the New Senior Credit Facility isrepaid in full unless (i) an insolvency event occurs in relation to theGuarantor or (ii) default occurs in relation to our Senior Notes (unlessas a result of a default under the New Senior Credit Facility) and (1) wehave notified the facility agent under the New Senior Credit Facility of suchdefault, (2) a period of not less then 120 days has passed from thedate of receipt of such notice and (3) the default is still continuing at

 

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the end of such period. Enforcement action includes any demand forpayment or commencement of legal proceedings.

 

The Intercreditor Agreement prohibits anypayments or distributions of any kind to us by the Guarantor, except aspermitted by the previous paragraph or with the consent of the facility agentfor the New Senior Credit Facility.

 

***•******      OtherContinuing Indebtedness***

 

In addition to the debt we will or may incurunder the New Senior Credit Facility and our Senior Notes, we and our operatingsubsidiaries will continue to retain other debt, contingent liabilities andreceivable discounting facilities.

 

We have central bilateral committedfacilities with banks for the provision of guarantees and letters of credit inamounts of up to €119 million. In addition, we have central bilateraluncommitted facilities with banks for the provision of loans, guarantees andletters of credit in amounts of up to €64 million.

 

In addition, we are entitled by the NewSenior Credit Facility to retain, at our operating subsidiaries, borrowings andguarantees for financial indebtedness, counter-indemnities for third partyperformance bonds and guarantees (which are not in respect of financialindebtedness) and receivable discounting facilities (with recourse) up toagreed limits. Utilisations of our local facilities must also fall within thegeneral financial indebtedness ratios set by our Senior Notes and the NewSenior Credit Facility.

 

As at December 31, 2003 there wasapproximately €13.6 million outstanding of borrowings and guarantees forfinancial indebtedness under local facilities, which included:

 

•      aloan in PLN equivalent to €1.9 million incurred by Wytwornia SeparatorKrakow Sp.z.o.o in Poland; and

 

•      aloan of €2.0 million incurred in Italy by Alfa Laval SpA.

 

Approximately €110 million in faceamount of guarantees and performance bonds (of which €76 million refers toperformance bonds) have been issued and were outstanding as ofDecember 31, 2003 on behalf of various operating subsidiaries by banks,insurance companies and other financial institutions. The performance bonds andguarantees were issued to support performance under contracts entered into inthe ordinary course of business.

 

Some of our operating subsidiaries,principally in Italy and Spain, have receivable discounting facilities, whichallow for the discounting of receivables from time to time. These facilitieswere utilised in an amount of €19 million as at December 31, 2003.The financial institutions with whom these receivables are discounted haverecourse to us in respect of most of these receivables if they prove unable tocollect them.

 

***Liquidity Requirements***

 

Historically, our principal sources of fundshave been cash flows from operations, equity contributions, financings fromthird-party financial institutions and, prior to the Acquisition, borrowingsfrom Tetra Laval. In the future, we expect that our principal sources of fundswill be cash flows from operations and we intend to use a significant portionof such cash to continue to reduce our debt. Our liquidity requirements ariseprimarily from funding our working capital requirements and our capitalexpenditures for the general maintenance of our facilities and to meet ourongoing debt service requirements. Due to the seasonality of our business, ourliquidity needs are highest in the second and third quarters of our fiscalyear.

 

On April 15, 2004, we entered into theNew Senior Credit Facility comprising a U.S.$325 million 5 year revolvingcredit facility, and a €150 million 5 year revolving credit facility.  We used drawings under the New Senior CreditFacility to refinance our Existing Senior Credit Facility.  We expect that we will need to refinance allor part of the New Senior Credit Facility at maturity, in order to make fullrepayment.

 

We replaced our old €79 millionancillary facilities under the Previous Senior Credit Facility with new centralbilateral facilities in an amount of up to €35 million and our oldsyndicated guarantee facilities with new central bilateral guarantee facilitiesof up to € 145 million. We also retain local facilities at our operatingcompanies within the limits to be provided under the New Senior Credit Facilityfor financial indebtedness, receivable financing

 

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facilities and counter-indemnities for performance bonds and guarantees(which are not treated as part of financial indebtedness).

 

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***Sources and Amounts of Cash Flows***

 

***Cash Flow from Operating, Investing andFinancing Activities***

 

The table below sets forth the principalcomponents of Alfa Laval’s cash flow for the years indicated:

 
|                                                         |   | **Year ended  December 31,** |   |
|--------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                         |   | **2001**                          |   | **2002** |   | **2003** |   |
|                                                         |   | **(SEK in  millions)**            |   |
|                                                         |   |                              |   |   |   |   |   |
| Operating income                                             |   | 1,233                             |   | 1,224 |   | 1,144 |   |
| Depreciation and amortisation                                |   | 912                               |   | 838 |   | 787 |   |
| Adjustment for non cash items                                |   | 4                                 |   | 35 |   | 22 |   |
|                                                         |   |                              |   |   |   |   |   |
|                                                         |   | 2,150                             |   | 2,097 |   | 1,953 |   |
| Taxes paid                                                   |   | (463                              | )      | (396 | ) | (269 | ) |
|                                                         |   |                              |   |   |   |   |   |
| Cash flow from operations before changes in  working capital |   | 1,687                             |   | 1,701 |   | 1,684 |   |
|                                                         |   |                              |   |   |   |   |   |
| Changes in working capital:                                  |   |                              |   |   |   |   |   |
| (Increase)/decrease of current receivables                   |   | 209                               |   | 340 |   | (26 | ) |
| (Increase)/decrease of inventories                           |   | 263                               |   | 140 |   | (17 | ) |
| Increase/(decrease) of liabilities                           |   | (182                              | )      | (134 | ) | (153 | ) |
|                                                         |   | 290                               |   | 346 |   | (196 | ) |
| Cash flow from operating activities                          |   | 1,977                             |   | 2,047 |   | 1,488 |   |
|                                                         |   |                              |   |   |   |   |   |
| Cash flow from investment activities                         |   | 112                               |   | (548 | ) | (457 | ) |
|                                                         |   |                              |   |   |   |   |   |
| Cash flow from financing activities                          |   | (2,069                            | )      | (1,443 | ) | (1,002 | ) |

 

Cash flows from operating activities were SEK1,488 million in 2003 compared with SEK 2,047 million in 2002. Thisdecrease was due primarily to an increase in net working capital. Cash flowsfrom operating activities were SEK 2,047 million in 2002 compared with SEK1,977 million in 2001. This increase was due primarily to a reduction innet working capital.

 

Cash flows from investing activitiesincreased by SEK 91 million from a negative cash flow of SEK548 million in 2002 to a negative cash flow of SEK 457 million in2003. This increase in cash flow from investing activities was principally dueto the additional purchase price paid for Alfa Laval Holding (renamed from AlfaLaval Credit Finance) in 2002 partly offset by the higher cash-out for acquiredbusinesses in 2003 together with the decrease in proceeds from sale of fixedassets compared to 2002. Cash flows from investing activities decreased by SEK660 million from a positive cash flow of SEK 112 million in 2001 to anegative cash flow of SEK 548 million in 2002. This decrease in cash flowfrom investing activities was principally due to the additional purchase pricepaid for Alfa Laval Holding (renamed from Alfa Laval Credit Finance) and theacquisition of Danish Separation Systems A/S together with the lack of proceedsfrom divested business compared to 2001.

 

Cash flows from financing activitiesincreased in 2003 to a negative cash flow of SEK 1,002 million as comparedto negative cash flow of SEK 1,443 million in 2002 mainly due a reductionin the paid financial net. Cash flows from financing activities increased in2002 to a negative cash flow of SEK 1,443 million as compared to negativecash flow of SEK 2,069 million in 2001 due to new issue of shares of SEK819 million.

 

***Commitments for Future Capital Expenditure***

 

For a discussion of our historical capitalexpenditure, see “Item 4.A: Information on the Company—Historic CapitalExpenditures”.

 

We are currently investing primarily inreplacement machinery and equipment. We have funded, and expect to continuefunding, such capital investments from cash generated from our businessoperations.

 

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***Maturity Profile of Our Borrowings***

 

Under the New Senior Credit Facility, if achange of control occurs, we may be required by the lenders to prepay the NewSenior Credit Facility. We are also permitted to make voluntary prepayments onthe loans under the New Senior Credit Facility. Borrowings under the New SeniorCredit Facility will bear interest at applicable interbank offered rates forvarying interest periods, plus a margin and mandatory costs.

 

Our Senior Notes are scheduled to be repaidin one instalment in 2010. However, holders of our Senior Notes will be able torequire us to purchase the Senior Notes in the event of a change of control. Wewill not be able to do so without the consent of our lenders under the NewSenior Credit Facility. In addition, prior to November 15, 2003, we willbe permitted to repurchase up to 35% of our Senior Notes at specifiedredemption rates from the proceeds of a public equity offering and, prior toNovember 15, 2005, we will be permitted to repurchase all but not part ofour Senior Notes at their principal amount plus an applicable redemption premium.

 

Following the Offering on May 17, 2002,we redeemed 35%, or €77 million, of the outstanding principal amount ofour Senior Notes, together with accrued and unpaid interest thereon with theproceeds of the Offering.

 

We believe that cash flow generated from ouroperations, together with amounts available under the New Senior CreditFacility and new central bilateral facilities, local financing facilities andexisting cash balances should be sufficient to fund our debt servicerequirements, working capital needs, anticipated capital expenditures and otheroperating needs for the foreseeable future. We expect, however, that we willneed to refinance all or a part of our Senior Notes at final maturity. Ourfuture operating performance and ability to service or refinance our existingand future debt, including our Senior Notes, will be subject to future economicconditions and to financial, business and other factors, many of which arebeyond our control. See the discussion in the section “Item 3.D: Key Information—RiskFactors”.

 

***Restrictions on Ability of Subsidiaries toTransfer Funds***

 

Our only assets are shares in our whollyowned subsidiary, the Guarantor, and an intercompany loan to the Guarantor. Ourcash flow and our ability to service our Senior Notes and any other debt dependsolely upon the cash flow of our subsidiaries and our receipt of funds fromthem in the form of loans, dividends, interest or otherwise. Our subsidiariesmay not generate cash flow sufficient to enable us to meet our payment obligations.

 

In addition, the terms of the New SeniorCredit Facility and the New Intercreditor Agreement restrict our subsidiaries’ability to provide funds to us. See “Item 5.B: Operating and Financial Reviewand Prospects—Liquidity and Capital Resources—New Intercreditor Agreement”above. This ability may be further restricted by applicable laws andregulations and the terms of other agreements to which our subsidiaries maybecome subject. In particular, the New Intercreditor Agreement prohibitspayments under the intercompany loan except to fund (i) any scheduledpayments due on the Senior Notes, (ii) any payments of principal,interest, premium, additional amounts and amounts payable on account of taxesin relation to the Senior Notes, (iii) any amounts payable to the trusteeon the Senior Notes, and (iv) dividends to Alfa Laval AB or otherwise fundAlfa Laval AB to enable it to pay dividends or other amounts for corporatepurposes. However payments to us under this loan will be suspended in the caseof a payment default under the New Senior Credit Facility until such paymentdefault is remedied and in the case of a non payment default for 179 daysafter a payment blockage notice has been served (or if earlier until suchdefault is remedied or waived or the Senior Credit Facility is repaid infull).  Only one such blockage noticecan be served in a 365 day period. The New Intercreditor Agreementprovides that, in addition to the payment blockage described above, no enforcementaction can be taken by us in relation to the intercompany Loan prior to thedate of repayment of the New Senior Credit Facility unless (i) aninsolvency event occurs in relation to the Guarantor or (ii) defaultoccurs in relation to our Senior Notes (unless as a result of a default underthe New Senior Credit Facility) and (1) we have notified the facilityagent under the New Senior Credit Facility of such default, (2) a periodof not less then 120 days has passed from the date of receipt of suchnotice and (3) the default is still continuing at the end of such period.

 

Until the date on which all indebtednessunder the New Senior Credit Facility has been fully repaid, to the extent andsubject to the restrictions described in the previous paragraph, the NewIntercreditor Agreement and the New Senior Credit Facility permits us to makepayments of principal on our Senior Notes.

 

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**5.C. Research and Development, Patents andLicenses, etc.**

 

Our research and development expenditure wasSEK 341 million (2.2% of total sales), SEK 355 million (2.4% of totalsales) and SEK 368 million (2.6% of total sales) in the three years 2001, 2002and 2003 respectively. Management expect research and development expenditureto be approximately 2.5% to 3.0% of net sales in the foreseeable future.

 

We conduct research and development atvarious facilities and employ approximately 290 qualified engineers andtechnicians. The research and development function for our Process Technologydivision is located in four centres, in Copenhagen (Denmark), Grenoble(France), Lund (Sweden) and Tumba (Sweden). The research and developmentfunction for our Equipment division is located in five centres, in Tumba(Sweden), Lund (Sweden), Kolding (Denmark), Ronneby (Sweden) and Alonte(Italy).

 

As a result of our research and developmentefforts in heat transfer we have achieved the following results. We arecontinuing to develop of the unique plate condensers and extending the productrange. AlfaCond isthe first plate condenser in the world, purpose-built for the market forcondensation of vapors at low pressure. That makes this product special is itssize, and the placement of the input and output steam channels, condensationand cooling water. The compact design saves space and reduces shipping andinstallation costs. One market segment that has shown great interest inAlfaCond is the fishing industry. In 2003 the spiral heat exchanger wasredesigned to meet the demands from the growing wastewater market. AlfaNova is a completely new plate heatexchanger made from a single material: stainless steel. The actual brazedmaterial in combination with the manufacturing technique is patented. AlfaNovatolerates the combination of high temperature and high pressure better thanother brazed plate heat exchangers. These characteristics broaden the marketfor the product. New areas of application include processors that involve theuse of ammonia.

 

In the centrifugal separation market, wecontinue to develop sterilisable centrifuges for the bio-pharmacy industry. Inaddition, a new hermetic separator with extremely gentle treatment formammalian cell cultures was recently launched, called Culturefuge 100. This is a small, powerfulseparator for the biotechnology sector. Many new biological products areproduced from delicate organisms that are difficult to separate so that the keyparts of the cells are not destroyed. Culturefuge 100 separates the delicatecells carefully and effectively. The product is aimed at the most advancedsegment of the Life Science market: customers that develop monoclonalantibodies. Monoclonal antibodies are becoming increasingly important in thediagnosis and treatment of tumors and the development of new vaccines. Anew platform of medium sized separators is under development and the firstversion for vegitable oil will be launched during May 2004. A new range ofdecanters for environmental applications (Aldec G2) was launched in 2003 and isnow under implementation. Aldec G2 is anew generation of decanters that improve performance by up to 30 percent. It isbased on a new platform that represents a technical advance in sludge treatmentdecanters. Aldec G2 carries out sludge thickening and dewatering. Aldec G2 hasa gearbox that, in addition to improving performance, minimizes the need forinstalled electricity, improves process control and reduces the need formaintenance. During 2004 two new platforms of decanters will also belaunched.

 

In the sanitary flow sector, our main productlaunch during 2003 was Solid C — a completely new standard pump for hygienicapplications. Solid C has an advanced hygienic design for gentle treatment offluids.

 

During 2003, we brought 15 new centrifuges tothe market. For heat exchangers several new or refined heat exchangers wereintroduced. New projects for 2004 include a new platform for the medium sizedplate heat exchangers. For wastewater sludge treatment, Alfa Laval has recentlystarted marketing of a new automatic optimisation solution that can reduceoperating cost in sewage treatment plants substantially. A complete range ofnew cost efficient sewage decanters was launched during mid of 2003.

 

We have a strong focus on future market requirements and customerdemands and research and development projects are often conducted in closecooperation with OEMs (Original Equipment Manufactures) who are using AlfaLaval products as an integrated part of their product offering. YorkInternational, Carrier International and US companies within cooling, heatingand ventilation are such examples. Expanding and developing our technology intonew applications is one of our growth strategies. One such example is Alfdex, an innovative solution for cleaningexhaust fumes from diesel engines by separating oil drops and particles fromcrankcase gases. The market potential for the products is believed to be verylarge: in the next few years, environmental legislation in both the EU and theUS will regulate levels of exhaust emissions from heavy vehicles much moresharply than is the case today. Alfdex is a project in which Alfa Lavalcooperates, on market terms, with the

 

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Swedishlisted company, Haldex.

 

We own more than 200 patents relating to thedesign of our products, a number of which we consider to be important to ourbusiness. The Alfa Laval® trademark is owned by us and is registered inapproximately 100 countries.

 

Many of our products are based on establishedtechnology but all material improvements are continuously patented to theextent possible. Our pool of proprietary information, consisting of know-howand trade secrets relating to the design, manufacture and operation of ourproducts and their use, is considered particularly important and valuable.Accordingly, we protect this proprietary information, principally through theinclusion of confidentiality clauses in employment contracts with ourworkforce. In general, we are the owner of the rights to the products which wemanufacture and sell, and we are not dependent in any material way upon anylicense or franchise to operate.

 

**5.D. Trend Information**

 

Markets recovered during the second half of2003 within most of the customer segments in which Alfa Laval is active. It isour opinion that the recovery will continue during 2004. Assuming that therecovery will not be affected by unforeseen events in the world, we believe ina strong increase in orders received during 2004.

 

We assess that the EBITA-margin, excluding currency effects, will beimproved.

 

**5.E. Off –balance sheet financing arrangements**

 

The Group does not have any off-balance sheetfinancing arrangements, except for receivables sold with recourse. As ofDecember 31, 2003, the Group had sold receivables with recourse totallingSEK 113.7 (164.5) million. These are disclosed as discounted bills in note 28(Pledged assets and contingent liabilities) in the consolidated financialstatements. Under US GAAP, the recourse provisions prevent the transaction frombeing reported as a sale. Accordingly, the receivables would be kept on the balancesheet, and a loan would be reported for the amount of cash received. The losson the sale was not material, and this transaction results in no significantimpact on US GAAP equity.

 

*Other Commercial Commitments*

 
|                         |   | **Amount of  Commitment Expiration Per Period** |   |
|------------------------------|--------|-------------------------------------------------|--------|
|                         |   | **Total  Amounts  Committed**                   |   | **Less than  1 year** |   | **1-3 years** |   | **4-5 years** |   | **More than  5 years** |   |
|                         |   | **(SEK  millions)**                             |   |
|                         |   |                                            |   |   |   |   |   |   |   |   |   |
| Guarantees                   |   | 688.4                                           |   | 229.5 |   | 458.9 |   |   |   |   |   |
| Other Commercial Commitments |   | 782.7                                           |   | 322.6 |   | 404.1 |   | 56.0 |   |   |   |
| Total Commercial Commitments |   | 1,471.1                                         |   | 552.1 |   | 863.0 |   | 56.0 |   |   |   |

 

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**5.F. Tabular disclosure of contractual obligations**

 

***Contractual Obligations and CommercialCommitments***

 

The following summaries our contractual obligationsand other commercial commitments as of December 31, 2003, and the effectsuch obligations and commitments are expected to have on our liquidity and cashflow in future periods:

 

*Contractual Obligations*

 
|                               |   | **Payments  Due by Period** |   |
|------------------------------------|--------|-----------------------------|--------|
|                               |   | **Total**                   |   | **Less than  1 year** |   | **1-3 years** |   | **4-5 years** |   | **More than  5 years** |   |
|                               |   | **(SEK  millions)**         |   |
|                               |   |                        |   |   |   |   |   |   |   |   |   |
| Long Term Debt                     |   | 3,491.8                     |   | — |   | 36.8 |   | 2,390.2 |   | 1,064.8 |   |
| Capital Lease Obligations          |   | 13.6                        |   | 7.1 |   | 5.2 |   | 1.3 |   | — |   |
| Operating Leases                   |   | 274.2                       |   | 77.3 |   | 111.7 |   | 49.4 |   | 35.8 |   |
| Total Contractual Cash Obligations |   | 3,779.6                     |   | 84.4 |   | 153.7 |   | 2,440.9 |   | 1,100.6 |   |

 

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**ITEM 6**: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

**6.A. Directors, Senior Management andEmployees**

 

***Directors***

 

At present, our board of directors iscomposed of three members, including the chairman. None of the directors areaffiliated with our principal shareholders. The current members of our board,their positions and the years of their original elections are as follows:

 
| **Name**         |   | **Member  Since** |   | **Age** |   | **Position** |   |
|------------------|--------|-------------------|--------|---------|--------|--------------|--------|
|             |   |              |   |    |   |         |   |
| Thomas Thuresson |   | 2002              |   | 46      |   | Chairman     |   |
| Sigge Haraldsson |   | 2000              |   | 59      |   | Director     |   |
| Johan Ahlgren    |   | 2002              |   | 42      |   | Director     |   |

 

**Thomas Thuresson** hasbeen our chairman since 2002. He is also our chief financial officer of theGroup. He held various positions at PLM in Sweden and Germany.Mr. Thuresson joined Alfa Laval in 1988 and has held various positions,including controller of business area Automation 1988 to 1990, controller ofbusiness area Flow from 1990 to 1991 and vice president Group controller from1991 to 1994. He has served in his current role since 1995, with keyresponsibilities including Group finance and control, treasury, real estate andinformation technology. Mr. Thuresson received his Bachelor’s Degree inBusiness Administration from the University of Lund in 1981. Mr. Thuressonhas no outside directorships.

 

**Johan Ahlgren** hasbeen our director since 2002. Mr. Ahlgren is General Counsel of the AlfaLaval Group. He worked as a notarial clerk at the District Court of Ängelholmfrom 1986 to 1988 and as a lawyer at Wistrand Advokatbyrõ from 1988 to 1992. MrAhlgren joined Alfa Laval in 1992. He worked as Corporate Counsel from 1992 toDecember 1999 in Group staff legal matters. He has held his currentposition since January 2000. Mr. Ahlgren holds a Master of Law fromthe University of Lund, which he received in 1986. Mr. Ahlgren has nooutside directorships.

 

**Sigge Haraldsson**,the Alfa Laval Group chief executive officer since 1998, has been a director ofours since 2000. From 1970 to 1992, Mr. Haraldsson has held variouspositions within the Alfa Laval Group, including president of Alfa LavalThermal AB from 1983 to 1992. From 1993 to 1998, he was a member of the TetraPak Group management, initially heading Processing and Packaging Systems, andfrom 1995 heading the Fibre Packaging division, the largest of the threedivisions in Tetra Pak. He received a M.Sc. from LTH in 1970.Mr. Haraldsson is a member of the board of Hans Stahles Minnesfond.

 

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***Senior Management***

 

Alfa Laval Special Finance has no directlyemployed members of senior management. However, the following table sets forththe names of the Alfa Laval Group’s executive officers. Such executive officersare appointed by and serve at the discretion of the board of directors of AlfaLaval AB.

 
| **Name**              |   | **Year of  Employment** |   | **Age** |   | **Position**                                         |   |
|-----------------------|--------|-------------------------|--------|---------|--------|------------------------------------------------------|--------|
|                  |   |                    |   |    |   |                                                 |   |
| Sigge Haraldsson      |   | 1970                    |   | 59      |   | President and Chief Executive Officer                |   |
| Thomas Thuresson      |   | 1988                    |   | 46      |   | Executive Vice President and Chief Financial Officer |   |
| Svante Karlsson       |   | 1984                    |   | 48      |   | President Equipment Division                         |   |
| Ulf Granstrand        |   | 1975                    |   | 56      |   | President Process Technology Division                |   |
| Göran Mathiasson |   | 1979                    |   | 50      |   | President Operations Division                        |   |
| Per Erik  Lindquist   |   | 2001                    |   | 44      |   | Executive Vice President, Regions                    |   |
| Peter Leifland        |   | 1985                    |   | 50      |   | Executive Vice President, Regions                    |   |
| Peter Torstensson     |   | 1999                    |   | 48      |   | Vice President, Corporate Communications             |   |
| David Ford            |   | 1993                    |   | 49      |   | Senior Vice President, Human Resources               |   |
| Nils Olof Björk  |   | 1975                    |   | 57      |   | Senior Vice President, Corporate Development         |   |

 

**Sigge Haraldsson.**Seeabove.

 

**Thomas Thuresson.**Seeabove.

 

**Svante Karlsson** isan executive vice president of Alfa Laval and president of our Equipmentdivision. Mr. Karlsson joined us in 1984, where he has held variouspositions, including president of our former business area Thermal from 2000until 2001, managing director of business segment Marine & Power from1995 to 2000, business area controller of our former business area Separationfrom 1991 to 1995 and financial controller of Alfa Laval Industrie B.V., theNetherlands from 1986 to 1988. He has held his current position since 2001.Mr. Karlsson holds a B.Sc. in Business Administration.

 

**Ulf Granstrand** is anexecutive vice president of Alfa Laval and president of our Process Technologydivision. Since joining us in 1975, Mr. Granstrand has been executive vicepresident with regional responsibilities from 1999 to 2000, president ofbusiness area Thermal from 1992 to 1999 and head of business unit “HeatTransfer Components” from 1987 to 1992. Mr. Granstrand holds a M.Sc. fromCTH.

 

**Göran Mathiasson**isan executive vice president of Alfa Laval and president of our Operationsdivision since April 2003. Since joining us in 1979, Mr. Mathiassonhas been in charge of Alfa Laval manufacturing and prior to that of thermaltechnology, including research and development, production development, systemdevelopment and purchasing. Mr. Mathiasson holds a M.Sc. from LTH.

 

**Per Erik Lindquist**is an executive vice president with regional responsibilities.Mr. Lindquist joined us in 2001, prior to which he was employed by Scaniawhere he worked in the European sales and marketing organisation.Mr. Lindquist was formerly managing director of Scania, Belgium, a post heheld until 2000. Mr. Lindquist holds an M.Sc. from Royal Institute ofTechnology, Stockholm.

 

**Peter Leifland** is anexecutive vice president with regional responsibilities. Since joining us in1985, Mr. Leifland has been senior vice president in Alfa Laval Groupmanagement from 1997 to 1999, president of Alfa Laval Engineering AB from 1995to 1997 and vice president and General Counsel from 1990 to 1995. He has heldhis current position since 1999. Mr. Leifland holds an LL.B., Lic. Specand IMD (PED).

 

**Peter Torstensson** isa vice president with overall responsibility for corporate communications. Hehas held this position since 1999. Prior to that, he was managing director andkey account director of Borstahusen Informationsdesign from 1992 to 1998 andmanaging director and account director of Marknadsbyrån, Malmö, Sweden from1988 to 1991.

 

**David Ford** is seniorvice president with overall responsibilities for personnel and human resources.Mr. Ford has held this position since 1993. Prior to that, he waspersonnel manager and director of Tetra Pak U.K. from 1990 to 1993, andtechnical training manager of Tetra Pak, U.K. from 1986 to 1990. He holds adiploma in

 

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Careers Guidance and a B.Sc. in Mechanical Engineering.

 

**Nils Olof Björk**became our senior vice president responsible for corporate development inApril 2002. Mr. Björk joined Alfa Laval in 1975 and since then hasheld various positions in the company. He started as head of the materialslaboratory in Lund, followed by positions as product manager for heatexchangers, head of Thermal in Canada, marketing director at Alfa Laval Thermalin Lund, head of Alfa Laval, Asia Pacific in Hong Kong and, since 1996,president of Alfa Laval, Japan. Mr. Björk has an M.Sc. and Ph.D. inchemistry from Lund University, Sweden.

 

None of the above members of seniormanagement has any family relationship with any director or any other member ofsenior management.

 

**6.B. Compensation**

 

Total compensation, including salaries andpension payments paid by us and our subsidiaries to (a) the currentmembers of our board of directors and (b) the executive officers who wereemployed by us in the year ended December 31, 2003 were SEKnil million and SEK 26 million, respectively.

 

Total compensation paid to our auditors,Ernst & Young, for the year ended December 31, 2003 wasapproximately SEK 14 million.

 

**6.C. Board Practices**

 

Under the Swedish Companies Act, our board ofdirectors is ultimately responsible for the organisation and the management ofour affairs. According to our articles of association, the board of directorsshall consist of no less than three members and no more than eight members.

 

Under Swedish law, the managing director andat least half of our board members must be resident in a European Economic Areacountry unless exempted by the Swedish Patent and Registration Office. UnderSwedish law, a director’s term of office (other than a union appointee) may notbe more than four years, but is normally one year. Our articles of associationprovide that board members shall be elected at the annual general meeting ofshareholders for a period until the end of the next annual general meeting ofshareholders. A director may, however, serve any number of consecutive terms.

 

Directors elected at the general meeting ofthe shareholders may be removed from office by a meeting of the shareholders,and vacancies on the board, except when filled by an alternate director, mayonly be filled by a resolution of shareholders. Each year, if not otherwisestipulated in our articles of association, one director is elected chairman ofthe board by resolution of the board (unless elected by our shareholders) atthe first meeting following its appointment.

 

*Committees of the Board*

 

Our remuneration committee of the Board ofAlfa Laval AB consists of Anders Narvinger, Björn Savén and Jörn Rausing. Theremuneration committee meets when necessary, but usually not less than twice ayear. Executive directors are invited to attend the remuneration committee’smeetings as the members consider appropriate. The remuneration committeeestablishes and reviews remuneration and terms of employment of our executivedirectors, senior executives and other key personnel.

 

The questionof appointing an audit committee according to the “Sarbanes-Oxley Act” has beendiscussed in the Board of Alfa Laval AB. The Board has chosen not to appoint anaudit committee since the judgement is that the financial reporting and controlwithin the Alfa Laval Group, the Alfa Laval Group’s policies concerninginternal control, the external and internal audit and the reporting to theBoard in these matters are such that a separate audit committee within theBoard would not increase the Board’s insight and control over the operations.As a result, the entire Board will act as the audit committee. At two Boardmeetings during 2003 the Board has received reports from and met the externalauditors of the Alfa Laval Group. At one Board meeting during 2003, the Boardhas received reports from and met the internal auditor of the Alfa Laval Group.

 

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*Management Service Contracts*

 

Unless required by legislation, we aim tohave “at will” contracts with our senior management. Upon termination, oursenior management is typically entitled to one month’s pay per year of service,subject to a minimum of 6 months’ and a maximum of 24 months’compensation. Each contract with our senior management includes anon-competition clause.

 

Sigge Haraldsson, in his capacity as ourchief executive officer, has an early retirement clause in his servicecontract, which gives him the option of retiring at 60 years of age at hisrequest, or 55 years of age at the request of the company. In a pressrelease on January 27, 2004 Sigge Haraldsson communicated his intention toretire in accordance with the agreement in connection with his sixtiethbirthday in October 2004. He is entitled to a pension equal to 50.0% ofhis pensionable salary at the time of retirement if he retires after reaching55 years of age but before reaching 58 years of age, and 70.0% of hispensionable salary at the time of retirement after 58 years of ageirrespective of when he retires.

 

After the age of 65 years, SiggeHaraldsson is entitled to the following pension benefits:

 

For the part of Sigge Haraldsson’s salary atthe time of retirement that corresponds to an amount up to 30 basic amounts(one basic amount being equivalent to SEK 38,600 in 2003 under the NationalInsurance Scheme), Sigge Haraldsson is entitled to Swedish mandatory legalbenefits and the Swedish ITP pension plan scheme (“IPT”). For that part ofSigge Haraldsson’s salary at the time of retirement that corresponds to anamount between 30 basic amounts and 80 basic amounts, Sigge Haraldsson isentitled to receive an amount, which is 52.5% of such salary. For that part ofSigge Haraldsson’s salary Haraldsson is entitled to receive an amount, which is32.5% of such salary.

 

For that part of Sigge Haraldsson’s salary atthe time of retirement that corresponds to an amount up to 30 basic amounts,,Mr Haraldsson’s surviving family is entitled to a family pension in accordancewith ITP. For that part of Sigge Haraldsson’s salary at the time of retirementthat corresponds to an amount of 30 basic amounts and above, Mr Haraldsson’ssurviving family is entitled to receive a family pension which is 16.3% of suchamount. In addition to his entitlements under ITP, Sigge Haraldsson has aspecial family pension that represents a life long supplement.

 

Sigge Haraldsson does not have any separateagreement in relation to severance pay.

 

During 2003, we have recorded costs inrelation to Mr. Haraldsson’s pension premiums ofSEK 4.9 million, of which SEK 1.7 million relates to premiumpayments he would be entitled to receive upon early retirement.

 

Early retirement agreements are also in placefor those directors and members of senior management over 50 years of age.This currently includes Ulf Granstrand, President for our Process Technologydivision, and approximately 20 managing directors throughout Alfa Laval. Noother termination agreements exist with our directors and members of seniormanagement.

 

**6.D. Employees**

 

Alfa Laval Special Finance AB has no directemployees. However, during the years ended December 31, 2003, 2002 and2001 the Group employed 9,194, 9,292 and 9,693 employees, respectively. Thesefigures are based on the average number of employees in each year.

 

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The following charts illustrate the geographical and functionaldistribution of the Group’s workforce for the year ended December 31,2003:

 
| Employees by geographic region in 2003 |   | Employees by functions in 2003 |
|----------------------------------------|--------|--------------------------------|
|                                        |   |                                |

 

The majority of our manufacturing personnelare members of a trade union, with the exception of those located at ourmanufacturing unit in Richmond, USA and those located at smaller manufacturingunits in countries where union representation is not customary. Our salespersonnel are typically not represented by trade unions. None of our seniormanagement are members of any trade union. We believe that our relations withour employees and the unions to which they belong are good and we expectfavourable relations to continue in the future.

 

**6.E. Share Ownership**

 

For a discussion of share ownership of theCompany, see “Item 7: Major Shareholders and Related Party Transaction”.

 

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**ITEM 7**:  MAJORSHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

**7.A. MajorShareholders**

 

We were incorporated onMarch 27, 2000 by Alfa Laval AB as part of the Acquisition more fullydescribed in “Item 4.A: Information About the Company—History and Developmentof the former Alfa Laval Holding AB, the Company and the Guarantor”. At thetime of this Acquisition, Alfa Laval AB owned all of our outstanding shares.The outstanding shares of the Guarantor were previously held by Alfa Laval N.V.until August 24, 2000. As part of the Acquisition the Guarantor was soldto us.

 

The following table sets forthinformation regarding the ownership of Alfa Laval AB’s ordinary shares as ofDecember 31, 2003. Alfa Laval AB still owns all of our outstanding shares,and we still own all of the outstanding shares of Alfa Laval Holding AB(renamed from Alfa Laval Credit Finance AB), the Guarantor. As of the date ofthis annual report, Alfa Laval AB had 111,671,993 shares outstanding. Allshareholders have the same voting rights.

 
| **Beneficial Owner**                                                                 |   | **Number of  Shares  Beneficially Owned** |   | **Percentage  of  Shares  Beneficially  Owned** |   |
|--------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------------|--------|
|                                                                                 |   |                                      |   |                                            |   |
| Industri  Kapital 2000(1)26 New Street  St. Helier  Jersey  JE2 3RA  Channel Islands |   | 20,015,628                                |   | 17.9                                            | %      |
| Tetra Laval  B.V.  Amsteldijk 166  1079 LH Amsterdam  The Netherlands                |   | 19,744,014                                |   | 17.7                                            | %      |
| Tredje  AP-fonden                                                                    |   | 5,072,407                                 |   | 4.5                                             | %      |
| State Street Bank and Trust Co.                                                      |   | 4,577,164                                 |   | 4.1                                             | %      |
| Fjärde  AP-fonden                                                               |   | 4,291,700                                 |   | 3.8                                             | %      |
| Robur Fonder                                                                         |   | 3,849,529                                 |   | 3.5                                             | %      |
| Fidelity Funds – European Growth                                                |   | 2,819,800                                 |   | 2.5                                             | %      |
| Lannebo Fonder                                                                       |   | 2,523,995                                 |   | 2.3                                             | %      |
| MSF Mutual Funds                                                                     |   | 2,228,400                                 |   | 2.0                                             | %      |
| Första  AP-fonden                                                               |   | 1,914,800                                 |   | 1.7                                             | %      |
| Other                                                                                |   | 44,634,556                                |   | 40.0                                            | %      |
| Total                                                                                |   | 111,671,993                               |   | 100                                             | %      |

 

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(1)                   IndustriKapital 2000 represents eleven limited partnerships through a contractualarrangement through which Industri Kapital 2000 Ltd., as general partner ineach limited partnership, exercises management control. The directors ofIndustri Kapital 2000 Ltd. are Bo Ennerberg, Björn Savén, Michael Richardson,Peter Byrne, Kim Wahl, Gerrit Russelman and Carl-Johan Granvik. The alternatedirectors are Jan-Willem van Oostveen, Esa Auvinen (resigned 1 January 2004),Niklas Johansson, Michael Rosenlew, Gustav Öhman, Alan Oke Dart, MichaelRobinson and Stephanie Guyer. Except for Björn Saven, Kim Wahl, MichaelRosenlew and Gustav Öhman each of these directors and alternate directorsdisclaim beneficial ownership of the shares managed by Industri Kapital 2000Ltd.

 

Industri Kapital is a private equity firm,which has significant experience and expertise in the manufacturing, service,retailing, speciality chemicals and building materials industries. IndustriKapital creates value in companies through refining strategy, operations and byrestructuring. Industri Kapital has, through its

 

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four funds,acquired 47 European companies since 1989 and has a current portfolio of 26companies. The Industri Kapital 2000 Fund comprises a number of limitedpartnerships, the general partner of each of which is Industri Kapital 2000Ltd.

 

Tetra Laval B.V. is a member ofthe Tetra Laval Group. Tetra Laval is a privately owned Swedish groupheadquartered in Switzerland with its major subsidiary being Tetra Pak. TetraPak develops, manufacturers and markets systems for the processing, packagingand distribution of liquid food. With approximately 21,100 employees, Tetra Pakhad € 7.3 billion in sales in 2003.

 

To our knowledge, there are noarrangements the operation of which may at a subsequent date result in a changeof control of us or the Guarantor.

 

In order to repay €220 million under a bridge loan facility, which was arranged as part ofthe financing of the Acquisition, we issued € 220 million Senior Notes.Our Senior Notes are guaranteed by the Guarantor.

 

**7.B. Related PartyTransactions**

 

The Tetra Laval Group ofcompanies, which includes Tetra Pak International S.A. and all affiliatedcompanies which are under the management control of Tetra Pak InternationalS.A., together with the Tetra Laval holding and financial entities as of thedate of this annual report, is a privately owned group of companies with itsmajor subsidiary being Tetra Pak. Tetra Pak develops, manufacturers and marketssystems for the processing, packaging and distribution of liquid food. Withapproximately 21,100 employees, Tetra Pak had € 7.3 billion in sales in2003. The Tetra Laval Group acquired the Alfa Laval Group in 1991. The formerAlfa Laval Holding AB was acquired by us in August 2000. See “Item 4.A:Information about the Company—History and Development of the former Alfa LavalHolding AB, the Company and the Guarantor” for a description of thisAcquisition.

 

The Tetra Laval Group is one ofour most important customers. For example, Tetra Pak, the major subsidiarywithin the Tetra Laval Group which develops, manufactures and markets systemsfor the processing, packaging and distribution of liquid food, is currently oursingle largest customer, accounting for 5.7% of our sales in 2003. Tetra Pak isalso the preferred distributor of certain of our sanitary products, principallyto liquid food processor end-users, the area in which Tetra Pak itselfoperates.

 

Our chief executive officer,Sigge Haraldsson, was a member of the Tetra Pak Group management from 1993 to1997. Both Finn Rausing and Jörn Rausing, each a director of Alfa Laval AB, aredirectors of Tetra Laval. Tetra Laval B.V., which currently owns 17.7% of ouroutstanding share capital of Alfa Laval AB, is a wholly-owned subsidiary ofTetra Laval.

 

***Purchasing Contract with Tetra Pak***

 

In June 1999, Alfa LavalAB, on behalf of itself and all the companies in which our subsidiary, theformer Alfa Laval Holding AB, directly or indirectly holds or controls more than50% of the votes of all shares, and Tetra Pak International SA, on behalf ofall the Tetra Pak companies under the control of the Tetra Laval Group, enteredinto an agreement which governs the relationship between the two companies inthe areas of distribution, research and development, market sales andinformation, use of trademarks and intellectual property.

 

The agreement addresses theprice and terms upon which all purchasing transactions between the Alfa Lavalcompanies and the Tetra Pak companies are effected. The agreement provides thatrepresentatives acting on behalf of the Alfa Laval companies and the Tetra Pakcompanies will, subject to the terms of the agreement, agree upon the followingmatters from time to time:

 

•      products which are subject to the agreement;

 

•      prices of these products, applicable discounts and sales allowances;

 

•      geographical markets and product areas where the Tetra Pak companieswill or will not be the Alfa Laval companies’ preferred distributors;

 

•      the right of Tetra Pak to affix its trademarks to agreed Alfa Lavalproducts;

 

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•      sales goals of the Tetra Pak companies in defined geographical markets;

 

•      products and technologies that are the focus of joint research anddevelopment and the goals, funding obligations, and ownership rights ofproducts that result from joint research and development; and

 

•      use of market and sales information.

 

The agreement was prolonged by two years from December 31, 2003. It hasa 12-month period of notice.

 

•      Prices are fixed on a calendar year basis, taking into account thefollowing factors:

 

•      Tetra Pak’s efforts in establishing the market, sales and distributionorganisation for the products;

 

•      order volumes;

 

•      price competitiveness; and

 

•      that prices of products sold to Tetra Pak are no less favourable toTetra Pak than prices we offer to third parties.

 

*Tetra Pak asPreferred Distributor in Tetra Pak Areas*

 

Under this agreement, Tetra Pakis the preferred distributor of those Alfa Laval products covered by theagreement in specified geographical areas for specified customer segments. TheAlfa Laval companies do not actively sell directly to end-users in the TetraPak areas, except for spare parts under certain limited circumstances, subjectto Tetra Pak using reasonable endeavors to ensure good and adequate marketcoverage with end-users in these areas. The Alfa Laval companies also offerTetra Pak certain lead time advantages (ranging from six to twelve months) inintroducing certain new products for which Tetra Pak has contributed in thedevelopment or design through joint research and development activity. Theselead time advantages do not apply in relation to customers outside the TetraPak areas or in respect of customers who request to buy from the Alfa Lavalcompanies directly. The agreement does not restrict the ability of the AlfaLaval companies to market and sell their products to indirect channels such asOEMs, contractors and distributors; provided, however, the Alfa Laval companieshave agreed, where such an undertaking is in compliance with applicablelegislation, not to actively market and sell Alfa Laval dairy separators tothese indirect channels. Alfa Laval is unrestricted in actively promoting itsproducts to end-users if the products will be used for purposes other than foodprocessing.

 

*Use of Tetra PakTrademarks; Market and Sales Information*

 

Tetra Pak has the right to brandwith its own trademark certain Alfa Laval products for which Alfa Laval hasgranted written permission to Tetra Pak. In order to evaluate the efficiency ofthe parties’ activities under the agreement, the parties exchange market andsales information in accordance with this agreement.

 

*IntellectualProperty Rights*

 

The agreement also provides forcooperation in research and development processes relating to the productssubject to the agreement. The agreement provides that Alfa Laval retainsownership of any invention related to products that result from joint researchand development efforts by the parties; Tetra Pak is granted a perpetual,irrevocable, free and non-exclusive license to use the invention. Tetra Pakowns any invention deriving from joint research and development and related toprocess applications within the Tetra Pak areas, provided that Alfa Laval has aperpetual, irrevocable, free and non-exclusive license to use this invention.Tetra Pak further owns any invention that was 100% funded by Tetra Pak,provided that Alfa Laval has a non-exclusive, perpetual and irrevocable rightto use such invention outside the Tetra Pak Areas subject to a royalty paymentto be agreed upon on a case-by-case basis. Sub-licensing of either the AlfaLaval or the Tetra Pak licenses granted under the agreement requires consentfrom both parties during an initial period of five years from the time aproduct incorporating the invention is first marketed.

 

*Future OfferingsAgreement*

 

Tetra Laval B.V. and IndustriKapital 2000 Ltd. have entered into an agreement with Alfa Laval AB

 

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regarding future offerings and sales of ordinary shares by Tetra Lavaland/or Industri Kapital 2000. The agreement provides, among other things, thatat the request of Tetra Laval and/or Industri Kapital 2000, Alfa Laval willcooperate in future offerings of ordinary shares, including assisting in thepreparation of an offering circular, making all filings with all relevantauthorities and stock exchanges required to complete such transaction,participating in marketing efforts and entering into customary agreements forsuch transactions. The agreement provides that Alfa Laval cannot be required tocooperate in more than two offerings and that Tetra Laval and/or IndustriKapital 2000 will pay the offering related expenses.

 

**7.C. Interest ofExperts and Counsel**

 

Not applicable.

 

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**ITEM 8**:  FINANCIALINFORMATION

 

**8.A. ConsolidatedStatements and Other Financial Information**

 

The audited consolidatedfinancial statements for Alfa Laval Special Finance AB are included under “Item17: Financial Statements”. Except for the consolidated financial statementsincluded under Item 17, our auditors have audited no other information in thisannual report.

 

***Export Sales***

 

For a breakdown of our net salesin Europe, North America, Latin America, Asia and other jurisdictions, see“Item 4.B: Information about the Company—Business Overview”.

 

***Legal Proceedings***

 

*Desert Storm.*  Inaddition to routine legal proceedings incidental to the conduct of ourbusiness, some of our subsidiaries, along with approximately 70 otherdefendants, have been sued in two lawsuits in the District Court for BrazoriaCounty in Texas USA arising from claims related to injuries allegedly sufferedin the Gulf War. The lawsuits, which were initiated in 1994, claim damages inexcess of US$1.0 billion (SEK 7.6 billion) each and allege thatequipment supplied by our subsidiaries, among other defendants, was used tocreate Iraqi weaponry. With the exception of one of our defendant subsidiaries,we have filed motions to dismiss for lack of personal jurisdiction in the stateof Texas and have been awaiting a ruling from the trial court sinceNovember 1995. While we consider our liability remote, litigation isimpossible to predict and there can be no assurance that we will not be foundliable for these claims, which could have a material adverse effect on ourfinancial condition.

 

Tetra Laval B.V. has indemnifiedus in respect of any losses we may suffer in respect of these claims in accordancewith indemnification provisions set forth in the Share Sale and PurchaseAgreement. These provisions provide that any amounts paid under thisindemnification shall not exceed an amount determined by reference to a formulaset forth in the Share Sale and Purchase Agreement. This amount isapproximately €800 million (SEK 7.5 billion). Claims may be broughtunder the indemnity for fifteen years from the date of the Acquisition. Thisindemnity from Tetra Laval B.V. was secured by a pledge of its shares inAlfa Laval AB to us, Alfa Laval Special Finance AB, the wholly ownedsubsidiary of Alfa Laval AB. However, this pledge was released uponconsummation of the Offering. Tetra Laval B.V. currently owns 17.7% of theoutstanding share capital in Alfa Laval AB. Tetra Laval B.V. may sellfurther shares in Alfa Laval AB. In addition, the Share Sale and PurchaseAgreement requires Tetra Laval B.V. to maintain minimum net worth targets,which decrease over time. Tetra Laval B.V. is currently obliged tomaintain minimum shareholders’ equity of € 280 million throughJune 30, 2004; thereafter €140 million from July 1, 2004 throughDecember 31, 2006 and €70 million from January 1, 2007 throughDecember 31, 2010. There can be no guarantee that this indemnification willcover all related claims or losses or that the indemnifying party will havesufficient assets to cover such claims or losses.

 

*Asbestosrelated lawsuits in the United States.*  Duringthe second half of 2002, a subsidiary of ours in the United States, AlfaLaval Inc., was named with increasing frequency as a co-defendant inlawsuits related to injuries allegedly suffered from the use of asbestos. Theselawsuits relate to claims alleging injuries from exposure to asbestos primarilyfrom the 1930s to the present. Historically, claims against AlfaLaval Inc. had been dismissed due to lack of relevance or have beensettled for insignificant amounts, far below expected defence costs.

 

As ofDecember 31, 2003, Alfa Laval Inc, was named as co-defendant in a total of 123asbestos-related lawsuits with a total of approximately 19,900 plaintiffs. Thelawsuits filed in Mississippi account for approximately 99 percent of allplaintiffs.

 

Alfa Laval strongly believes the claimsagainst the company are without merit and intends to vigorously contest eachlawsuit.

 

After thoroughinvestigations Alfa Laval continues to believe that potential claims inconnection with asbestos related lawsuits against Alfa Laval Inc will becovered by insurance policies. Furthermore, primary insurance policies issuedin favour of Alfa Laval Inc. provide for coverage of its defence costs.

 

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During thefourth quarter 2003 Alfa Laval Inc has been named as co-defendant in anadditional 9 lawsuits with a total of 13 plaintiffs. During the fourth quarter7 lawsuits involving approximately 400 plaintiffs have been resolved. Thisgives a grand total of 70 lawsuits that have been resolved.

 

Based on current information and Alfa Laval’sunderstanding of these lawsuits, Alfa Laval continues to believe that theselawsuits will not have a material adverse effect on the company’s financialcondition or results of operation.

** **

In October 2003, Alfa Laval acquired the Life Science division,bioKinetics, from the Kinetics Group. In December 2003 Alfa Laval made publicthat Alfa Laval suspected irregularities with regard to revenue recognition forcertain customer projects in the bioKinetics division and therefore hadinitiated a further investigation specifically addressing the suspectedirregularities.  The irregularities areestimated not to exceed SEK 40 million. As the findings from the investigationsupported the suspicions, Alfa Laval decided to initiate new negotiations withthe Kinetics Group.  In April 2004 AlfaLaval made public that the negotiations had not led to any settlement and AlfaLaval therefore decided to file a lawsuit against the Kinetics Group andcertain individuals.

 

***Dividend Policy***

 

We have never declared or paidany dividends on our ordinary shares and we do not anticipate paying any cashdividends in the foreseeable future. The indenture that governs our SeniorNotes limits and, for the foreseeable future, effectively prohibits our abilityto declare or pay cash dividends.

 

**8.B. SignificantChanges**

 

None.

 

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**ITEM 9**:  THE OFFER ANDLISTING

 

**9.A. Offer andListing Details**

 

Not applicable.

 

**9.B. Plan ofDistribution**

 

Not applicable.

 

**9.C. Markets**

 

Our ordinary shares are notlisted on any stock exchange. Our Senior Notes are listed on the LuxembourgStock Exchange.

 

**9.D. SellingShareholders**

 

Not applicable.

 

**9.E. Dilution**

 

Not applicable.

 

**9.F. Expenses of theIssue**

 

Not applicable.

 

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**ITEM 10**:  ADDITIONALINFORMATION

 

**10.A. Share Capital**

 

Not applicable.

 

**10.B. Memorandum andArticles of Association of the Issuer**

 

***Alfa Laval Special Finance AB***

 

Our corporate name is Alfa LavalSpecial Finance Aktiebolag. Our objects and purposes can be found insection 2 of our articles of association. The object of our business is toown and manage property as well as to carry out other activities compatibletherewith. Our registered office shall be in the municipality of Stockholm.

 

*Board of Directors*

 

The board shall consist of noless than three members and no more than eight members with no more than threedeputy members. In the event that only one or two members are appointed, adeputy member shall be elected. Members and deputy members shall be electedannually at the annual shareholders’ meeting for the time until the end of thenext annual shareholders’ meeting. In addition to the board any person, withinor outside the board, appointed by the board, shall be authorised to sign forus.

 

*Share Capital*

 

Our share capital shall amountto not less than SEK two hundred and ten million (210,000,000) and not morethan SEK eight hundred and forty million (840,000,000).

 

The nominal value of each shareshall be SEK one hundred (100).

 

*Shareholder Meetings*

 

At the annual shareholders’meeting, the following matters shall be dealt with:

 

•      election of a chairman to conduct the meeting;

 

•      drawing up and approval of the voting list;

 

•      approving of the agenda for the meeting;

 

•      election of one or two persons to sign the minutes;

 

•      determination as to whether the meeting has been duly convened;

 

•      presentation of the annual statement of accounts and the auditor’sreport and, when applicable, the Group annual statement and the auditor’s Groupreport;

 

•      decisions concerning:

 

1.             adoptionof the profit and loss statement and the balance sheet and the consolidatedprofit and loss statement and consolidated balance sheet;

 

2.             appropriationof the company’s profit or loss according to the adopted balance sheet; and

 

3.             dischargeof the directors and managing director from liability.

 

•      decision in respect to the fees for the board of directors and for theauditors;

 

•      election of board members and, where appropriate, of auditor; and

 

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•      other matters which according to the Companies Act (1975:1385) shall bedealt with at the meeting.

 

At a shareholders’ meetinganyone having the right to vote may vote for the full number of sharesrepresented by him.

 

Notice convening a shareholders’meeting shall be issued by mail not earlier than four and not later than twoweeks before the meeting.

 

*Financial Year*

 

The financial year of thecompany shall be January 1-December 31.

 

**10.C. MaterialContracts**

 

***Purchasing Contract with Tetra Pak***

 

In June 1999, Alfa LavalAB, on behalf of itself and all the companies in which the former Alfa LavalHolding AB directly or indirectly holds or controls more than 50% of the votesof all shares (the “Alfa Laval Companies”), and Tetra Pak International SA,on behalf of all the Tetra Pak companies under the control of the Tetra LavalGroup (the “Tetra Pak Companies”), entered into an agreement which governs therelationship between the two companies in the areas of distribution, research anddevelopment, market sales and information, use of trademarks and intellectualproperty. A description of the terms of this contract can be found in“Item 7.B: Major Shareholders and Related Party Transactions—Related PartyTransactions”.

 

***Existing Senior Credit Facility***

 

For a description of ourExisting Senior Credit Facility see “Item 5.B: Operating and Financial Reviewand Prospects—Liquidity and Capital Resources—Existing Senior Credit Facility”.

 

***NewSenior Credit Facility***

 

For a description of our New SeniorCredit Facility see “Item 5.B.: Operating and Financial Review and Reports—NewSenior Credit Facility”.

 

***Intercompany Notes***

 

For a description of theIntercompany Note between us and the Guarantor, see “Item 5.B: Operatingand Financial Review and Prospects—Liquidity and Capital Resources—TheIntercompany Note”.

 

***Intercreditor Agreement***

 

For a description of theIntercreditor Agreement between us, the Guarantor, the financial institutionsnamed therein as lenders and SEB Merchant Banking as facility agent, see“Item 5.B: Operating and Financial Review and Prospects—Liquidity andCapital Resources—Intercreditor Agreement”.

 

***NewIntercreditor Agreement***

 

For a description of the NewIntercreditor Agreement between us, the Guarantor, the financial institutionsnamed therein as lenders and SEB Merchange Banking, Skandinavista EnskildaBanken AB (publ) as facility agent, see “Item 5.B: Operating and FinancialReview and Prospectus—Liquidity and Capital Resources—New Intercreditor Agent”.

 

***Purchase Agreement***

 

In connection with our issuanceof Senior Notes we, together with the Guarantor, entered into a purchaseagreement with Donaldson, Lufkin and Jenrette International and UBG AG, actingthrough its business group UBS Warburg, as underwriters. The purchase agreementobliged the underwriters to purchase and accept delivery of our Senior Notes,subject to certain conditions. The purchase agreement obliges us, together withthe Guarantor, to indemnify the underwriters and certain person controlling theunderwriters against certain liabilities

 

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and expenses, including liabilities under the US Securities Act of1933, or to contribute to payments the underwriters are required to make inrespect thereof.

 

***Indenture***

 

Our Senior Notes, issued inNovember 2000, were issued under an indenture which we, together with theGuarantor, executed with The Bank of New York, as trustee. The indenture, amongother things, place certain limitations on our ability and the ability of ourrestricted subsidiaries to borrow money, pay dividends on, make distributionson or repurchase stock, make certain investments, create liens on our assets tosecure debt, substitute another person as issuer of the Senior Notes, sellcertain assets or merge with or into other companies, enter into transactions,with affiliates and enter into joint ventures.

 

**10.D. ExchangeControls**

 

There are currently no foreignexchange control restrictions, other than in certain national crisissituations, that would restrict payments that may be remitted by a Swedishcompany to non-Swedish residents. There is no maximum transferable amounteither to or from Sweden, although single cross-border transactions in aprincipal amount greater than SEK 100,000 must be reported to the SwedishCentral Bank, or *Riksbanken*, forstatistical purposes. Furthermore, payments to or from Sweden exceeding SEK100,000 may be reported to Swedish tax authorities. Such information may alsobe forwarded to authorities in the countries where the holders of the sharesare resident.

 

**10.E. Taxation**

 

***Swedish Taxation***

 

*The followingis a general description of certain Swedish income tax considerations relatingto our Senior Notes. It does not purport to be a complete analysis of all taxconsiderations relating to the Senior Notes. Investors in our Senior Notesshould consult their own tax advisers as to which countries’ tax laws could berelevant to acquiring, holding and disposing of Senior Notes and receivingpayments of interest, principal and/or other amounts under our Senior Notes andthe consequences of such actions under the tax laws of those countries. Thissummary is based upon the law as in effect on the date of this annual reportand is subject to any change in law that may take effect after such date.*

 

Under Swedish law as presentlyin effect, payments of any principal or interest to the holder of any SeniorNote will not be subject to Swedish income tax, provided that such holder isnot resident in Sweden for tax purposes and provided that the Senior Note doesnot pertain to a permanent establishment or fixed place of business in Sweden.Payments of any principal or interest to the holder of any Senior Note are notsubject to withholding tax under Swedish law. However, for a private individualor an estate of a deceased individual with tax residence in Sweden apreliminary tax of 30 per cent on payments of interest is normallywithheld.

 

***US Federal Income Tax***

 

*The followingdescribes certain US federal income tax consequences relating to the ownershipand disposition of Senior Notes by a “US holder” (as defined below). Thesummary does not purport to be a comprehensive description of all of the taxconsiderations that may be relevant to a US holder of Senior Notes. A US holderis a beneficial owner of Senior Notes that is (a) a citizen or individualresident of the United States for US federal income tax purposes; (b) acorporation (or other entity taxable as a corporation for US federal income taxpurposes) created or organized in or under the laws of the United States or anystate thereof (including the District of Columbia); (c) an estate the income ofwhich is subject to US federal income taxation regardless of its source or (d)a trust if a court within the United States is able to exercise primarysupervision over its administration and one or more US persons have theauthority to control all of the substantial decisions of the trust. Inparticular, the following discussion deals only with US holders that purchasedtheir Senior Notes at the issue price as part of the initial distribution andwho hold Senior Notes as capital assets, and does not address the tax treatmentof holders that are subject to special tax rules, such as US expatriates,persons subject to the alternative minimum tax, banks, financial institutions,regulated investment companies, tax-exempt entities, insurance companies,dealers in securities or currencies, traders in securities electing to mark tomarket, persons that hold Senior Notes as a hedge against currency risk or as aposition in a “straddle” or conversion transaction, and persons that have a“functional currency” other than the US dollar. If a partnership (including forthis*

 

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*purpose any entitytreated as a partnership for US federal income tax purposes) holds SeniorNotes, the tax treatment of a partner generally will depend upon the status ofthe partner and the activities of the partnership. If a US holder is a partnerin a partnership that holds Senior Notes, the holder is urged to consult withits tax adviser regarding the specific tax consequences of holding anddisposing of the Senior Notes. The summary is based on the Internal RevenueCode of 1986, as amended, existing, temporary and proposed Treasuryregulations, administrative pronouncements, rulings and judicial decisions, allas in effect on the date hereof and all of which are subject to change,possibly with retroactive effect, and differing interpretations. Holders shouldconsult their own advisers regarding the tax consequences of holding anddisposing of the Senior Notes in light of their particular circumstances,including the effect of any state, local or other national laws*.

 

*Interest*

 

Interest on the Senior Noteswill be includable in a US holder’s income at the time the interest is accruedor received, in accordance with the holder’s method of tax accounting for USfederal income tax purposes.

 

A US holder that uses the cashmethod of accounting for tax purposes will realises interest income equal tothe US dollar value of the interest payment, based on the exchange rate on thedate of receipt, regardless of whether the payment in fact is converted into USdollars.

 

A US holder that uses theaccrual method of accounting for tax purposes will accrue interest income onthe Senior Notes in euros and translate that amount into US dollars at theaverage exchange rate in effect during the interest accrual period (or portionthereof within the US holder’s taxable year). Alternatively, an accrual basisholder may make an election (which must be applied consistently to all debtinstruments from year to year and may not be revoked without the consent of theInternal Revenue Service (the “IRS”)) to translate accrued interest income atthe spot rate of exchange on the last day of the accrual period (or the lastday of the taxable year within that accrual period if the accrual periodincludes more than one taxable year), or at the spot rate on the date ofreceipt, if that date is within five business days of the last day of theaccrual period. A US holder that uses the accrual method of accounting for taxpurposes will recognise foreign currency gain or loss if the exchange rate ineffect on the date the payment is received differs from the rate applicable toa previous accrual of that interest. This foreign currency gain or loss will betreated as ordinary income or loss, and generally will not be treated as anadjustment to interest income.

 

*Sale and Retirementof Senior Notes*

 

A US holder’s initial tax basisin a Senior Note generally will equal the US dollar value of the foreigncurrency amount paid for the note determined on the date of purchase. In thecase of a Senior Note that is traded on an established securities market, acash basis US holder (or an accrual-basis US holder that makes a specialelection), will determine the US dollar value of the cost of the Senior Note bytranslating the amount of the foreign currency paid for the Senior Note at thespot rate of exchange on the settlement date of the purchase. The conversion ofUS dollars to a foreign currency and the immediate use of the foreign currencyto purchase a Senior Note generally will not result in taxable gain or loss fora US holder.

 

Upon the sale, exchange orretirement of a Senior Note, a US holder generally will recognise gain or lossequal to the difference between the amount realised (less any accrued andunpaid interest, which will be taxable as interest income) and the holder’sadjusted tax basis in such Senior Note. If a US holder receives foreigncurrency in respect of the sale, exchange or retirement of a Senior Note, theamount realised will be the US dollar equivalent of the amount received,calculated at the exchange rate in effect at the time of the sale, exchange orretirement. If Senior Notes are traded on an established securities market, acash basis taxpayer (and if it elects, an accrual basis taxpayer) willdetermine the US dollar equivalent of the amount realised by translating thatamount at the exchange rate on the settlement date of the sale, exchange orretirement. If an accrual method taxpayer makes such an election, the electionmust be applied consistently to all debt instruments from year to year and maynot be changed without the consent of the IRS.

 

Except as discussed below withrespect to foreign currency gain or loss, gain or loss recognised by a USholder on the sale, exchange or retirement of a Senior Note generally will beUS source capital gain or loss and will be treated as long-term capital gain orloss if the US holder has held the Senior Note for more than one year at thetime of disposition. The deductibility of capital losses is subject tosignificant limitations. If the US holder is an individual, any capital gaingenerally will be subject to US federal income tax at preferential rates ifspecified minimum holding periods are met.

 

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Gain or loss recognised by a USholder on the sale, exchange or retirement of a Senior Note generally will betreated as US source ordinary income or loss to the extent that the gain orloss is attributable to changes in exchange rates during the period in whichthe holder held such Senior Note. Gain or loss attributable to fluctuations inexchange rates will equal the difference between the US dollar value of theprincipal amount of the Senior Note, determined on the date such payment isreceived or the Senior Note is disposed of, and the US dollar value of theSenior Note, determined on the date the US holder acquired such Senior Note.However, upon a sale, exchange or retirement of a Senior Note, a US holder willrealize foreign currency gain or loss with respect to principal and accruedinterest only to the extent of the total gain or loss realized on the disposition.This foreign currency gain or loss generally will not be treated as anadjustment to interest income received on the Senior Note.

 

*InformationReporting and Backup Withholding*

 

Interest payments on the SeniorNotes and proceeds from the sale, exchange or other disposition of the SeniorNotes may be subject to information reporting to the IRS and possible US backupwithholding at a current rate of 28 percent Backup withholding will not applyto a holder who furnishes a correct taxpayer identification number orcertificate of foreign status and makes any other required certification or whois otherwise exempt from backup withholding. US persons who are required toestablish their exempt status generally must provide such certification on aduly completed IRS Form W-9 (Request for Taxpayer Identification Numberand Certification). Non-US holders generally will not be subject to USinformation reporting or backup withholding. However, such holders may berequired to provide certification of non-US status (generally on IRSForm W-8BEN) in connection with payments received in the United States orthrough certain US-related financial intermediaries.

 

Backup withholding is not anadditional tax. Amounts withheld as backup withholding may be credited againsta holder’s US federal income tax liability, and a holder may obtain a refund ofany excess amounts withheld under the backup withholding rules by timely filingthe appropriate claim for refund with the IRS and furnishing any requiredinformation.

 

**10.F. Dividends andPaying Agents**

 

Not applicable.

 

**10.G. Statement byExperts**

 

Not applicable.

 

**10.H. Documents ondisplay**

 

The documents that are exhibitsto this annual report can be read at the Securities and Exchange Commission’spublic reference facilities at Room 1024, 450 Fifth Street, N.W., Washington,D.C., 20549, You can request copies of these documents, upon payment of aduplication fee, by writing to the SEC. Please call the SEC at(202) 942-8090 for further information on the operations of the SEC’spublic reference room. Copies of the documents referred to herein may also beinspected at our offices by contacting Thomas Thuresson, our chief financialofficer, on +46 4636 7240.

 

**10.I. SubsidiaryInformation**

 

Not applicable.

 

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**ITEM 11**:  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

**11.A. QuantitativeInformation about Market Risk**

 

***Interest Rate Exposure***

 

On April 29, 2002, weentered into the Existing Senior Credit Facility of €575 million with SEBMerchant Banking, a unit within Skandinaviska Enskilda Banken AB (publ)(“SEB”), SEB and Svenska Handelsbanken AB (publ) as arrangers.  The Existing Senior Credit Facility wasamended and restated on July 11, 2002. It was structured in two tranches—aTranche A €425 million 5 year multi-currency term loan facilityand a Tranche B €150 million 5 year multi-currency revolvingcredit facility. Tranche B was not utilised. The following table presentsour debt instruments sensitive to changes in interest rates based on ourExisting Senior Credit Facility.

 
|                             |   | **Maturity  dates** |   |                |   | **Carrying  value at** |   | **Fair  value at**  |   |
|----------------------------------|--------|---------------------|--------|---------------------|--------|------------------------|--------|---------------------|--------|
|                             |   | **2004**            |   | **2005**            |   | **2006**               |   | **2007**            |   | **Thereafter** |   |   |   |
|                             |   | **(SEK  millions)** |   | **(SEK  millions)** |   | **(SEK  millions)**    |   | **(SEK  millions)** |   |
|                             |   |                |   |                |   |                   |   |                |   |   |   |   |   |   |   |
| Existing Senior-Credit Facility: |   |                |   |                |   |                   |   |                |   |   |   |   |   |   |   |
| Tranche A                        |   |                |   |                |   |                   |   |                |   |   |   |   |   |   |   |
| USD                              |   | —              |   | —              |   | —                 |   | —              |   | 1,925 |   | 1,925 |   | 1,925 |   |
| GBP                              |   | —              |   | —              |   | —                 |   | —              |   | 216 |   | 216 |   | 216 |   |
| JPY                              |   | —              |   | —              |   | —                 |   | —              |   | 249 |   | 249 |   | 249 |   |
|                             |   | —              |   | —              |   | —                 |   | —              |   | 2,390 |   | 2,390 |   | 2,390 |   |
|                             |   |                |   |                |   |                   |   |                |   |   |   |   |   |   |   |
| Notes (fixed interest)           |   | —              |   | —              |   | —                 |   | —              |   | 1,065 |   | 1,065 |   | 1,283 |   |

 

Amounts outstanding under theExisting Senior Credit Facility bore annual interest at applicable interbankoffered rates plus a margin depending on the status of the Net Debt to EBITDAratio. The Senior Notes carry a 12(1)/8% fixed rate of interest andare due 10 years from the date of issue.

 

We refinanced our ExistingSenior Credit Facility with a New Senior Credit Facility on April 15, 2004.

 

***Foreign Currency Exchange Rate Exposure***

 

Our operations are conducted byentities in many countries, and accordingly the results of operations aresubject to currency translation risk and currency transaction risk. Ourhistorical results were particularly affected by exchange rate fluctuationsbetween the Swedish kronor and other currencies such as the US dollar, Britishpound, and the euro. Foreign exchange exposures are managed against variouslocal currencies, as we have a significant amount of worldwide production andsales.

 

As a result of investments, productionfacilities and other operations on a global basis, we have assets andliabilities and cash flows in currencies other than the Swedish kronor. Theequity changes caused by movements in foreign exchange rates are shown as atranslation difference in the financial statements. The primary objective ofour foreign exchange risk management will be to continue to optimise theSwedish kronor value of net assets and cash flows, keeping the adverse impactof currency movements to a minimum. The translation differencesare a central responsibility and are managed by distributing the Group’s loanson different currencies based on the net assets in each currency and throughcurrency forward contracts. Loans taken in the same currency as there are netassets in the Group, decrease these net assets and thereby decrease thetranslation exposure. Our main exposures arerelated to assets and liabilities denominated in the currencies of the UnitedStates, the United Kingdom, Denmark, Japan and European countries that haveadopted the euro.

 

•      *Currency Translation Risk*. The assets and liabilities and profit and lossof each of our operating subsidiaries are reported in the operating currency ofthe jurisdiction in which it primarily operates. Profits and losses and cashflows from each operating subsidiary, if its regular operating currency isother than the Swedish kronor, are then translated into Swedish kronor ataverage rates of exchange during the relevant financial period, and assets andliabilities from each subsidiary at the exchange rate on the balance sheetdate, in each case for inclusion in our consolidated financial statements.

 

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The effect of currencytranslation on our assets and liabilities and profit and loss arising from thedepreciation of the Swedish kronor against other currencies shows a positiveimpact on our revenues and net income, while the appreciation of the Swedishkronor against other currencies shows a negative impact. These decreases orincreases have in the past had, and may in the future have, an effect on ourreported assets and liabilities and profit and loss and also affect thecomparability of our results between financial periods.

 

•      *Currency Transaction Risk*. In addition to currency translation risk, weincur currency transaction risk whenever one of our operating subsidiariesenters into either a purchase or sales transaction using a currency other thanits regular operating currency. We aim to hedge against currency transactionrisk by matching revenues and costs in the same currency. As a result of ourgeographically diversified customer base we generate, however, a significantportion of our revenues from sales in currencies other than those in which oursubsidiaries regularly operate and incur their expenses. To the extent thatthere is a deficit between local currency funds generated by our subsidiaries’operations and their local currency payment requirements, we generally hedgethese deficits using forward exchange contracts. To a degree, we are also ableto hedge against these risks by periodically adjusting our prices to accountfor exchange rate fluctuations.

 

At December 31, 2003, wehad foreign exchange contracts outstanding in various currencies. Our primarynet foreign currency exposures at December 31, 2003 included US dollar,euros, Swedish kronor and Danish kroner. Consistent with the nature of theeconomic hedge of these foreign currency exchange contracts, decreases or increasesof the underlying instrument or transaction being hedged would offset anycorresponding unrealised gains or losses, respectively. The fair value of ourforward exchange contracts that were outstanding as of December 31, 2003resulted in a receivable of SEK 128 million.

 

The following table providesinformation about our foreign exchange forward contracts at December 31,2003.

 

**Forward ExchangeContracts as of December 31, 2003 are:**

** **
|                |   |                  |   | **Average  contractual  rate** |               |      |                   | **Notional  amount**       |    | **Fair  value  SEK** |   |
|---------------------|--------|-----------------------|--------|--------------------------------|--------------------|-----------|------------------------|----------------------------|---------|----------------------|--------|
| **Buying currency** |   | **Selling  currency** |   |                           | **Maturity  Date** |      | **Original  currency** |                       | **SEK** |                 |   |
|                |   |                  |   |                           |               |      |                   | **(amounts  in millions)** |    |
|                |   |                  |   |                           |               |      |                   |                       |    |                 |   |   |   |
| DKK                 |   | EUR                   |   | 7.433                          |               | 2004      |                   | 596                        |    | 726                  |   | (1 | ) |
| DKK                 |   | USD                   |   | 6.761                          |               | 2004      |                   | 74                         |    | 90                   |   | 11 |   |
| EUR                 |   | HKD                   |   | 8.606                          |               | 2004      |                   | 7                          |    | 59                   |   | 7 |   |
| EUR                 |   | JPY                   |   | 128.255                        |               | 2004      |                   | 18                         |    | 156                  |   | 7 |   |
| EUR                 |   | USD                   |   | 1.135                          |               | 2004      |                   | 103                        |    | 937                  |   | 86 |   |
| EUR                 |   | SEK                   |   | 9.022                          |               | 2004      |                   | 1                          |    | 7                    |   | 0 |   |
| SEK                 |   | DKK                   |   | 1.212                          |               | 2004      |                   | 1,683                      |    | 1,683                |   | (8 | ) |
| SEK                 |   | EUR                   |   | 9.116                          |               | 2004      |                   | 2,914                      |    | 2,914                |   | 16 |   |
| SEK                 |   | NOK                   |   | 1.098                          |               | 2004      |                   | 178                        |    | 178                  |   | 3 |   |
| SEK                 |   | USD                   |   | 7.687                          |               | 2004      |                   | 401                        |    | 401                  |   | 23 |   |
| USD                 |   | EUR                   |   | 1.170                          |               | 2004      |                   | 29                         |    | 212                  |   | (14 | ) |
| Various             |   | Various               |   | —                         |               | 2004-2005 |                   | —                     |    | 923                  |   | (2 | ) |
|                |   |                  |   |                           |               |      |                   |                       |    | 8,286                |   | 128 |   |

 

As a result of the Acquisitionand related financing transactions we have not significantly changed ourforeign currency hedging strategy. The composition of the senior debt serves asa natural hedge of our investments in foreign subsidiaries. We plan to continueto use foreign currency forward contracts and currency options to hedge ourforeign currency cash flows.

 

As part of our hedging strategyto minimize interest rate risk we have entered into forward rate arrangementsto effectively convert 22% of our variable rate exposure associated with thesenior debt into fixed rate debt.

 

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*Foreign CurrencyExchange Rate Exposure Sensitivity Analysis*

 

If the currency rates betweenSEK and the most important foreign currencies are changed by +/- 10%, it hasthe following effect on operating income, if no hedging measures are taken:

 
| **Exchange rate change against the SEK** |   | **+10%**            |   | **-10%** |   |
|------------------------------------------|--------|---------------------|--------|----------|--------|
|                                     |   | **(SEK  millions)** |   |
|                                     |   |                |   |     |   |
| USD                                      |   | 97.0                |   | (97.0    | )      |
| EUR                                      |   | 152.0               |   | (152.0   | )      |
| DKK                                      |   | (127.0              | )      | 127.0    |   |
| Other USD related currencies             |   | 46.0                |   | (46.0    | )      |
| Other                                    |   | 39.0                |   | (39.0    | )      |
| Total                                    |   | 207                 |   | (207     | )      |

 

**11.B. QualitativeInformation about Market Risk**

 

*Financial RiskManagement*

 

Our business operations giverise to market risk exposure due to changes in foreign exchange rates andinterest rates. To manage these risks effectively, we have establishedguidelines and a detailed financial policy relating to those financial risks weare prepared to accept and how such risks should be limited and managed. Ourfinancial policy also establishes the division of responsibility between our subsidiariesand our central finance function within Alfa Laval Treasury International AB.

 

Pursuant to our establishedguidelines and financial policy, we enter into hedging transactions andgenerally use derivative financial instruments, which enable us to mitigate theadverse effects of financial market risk. These hedging instruments areclassified in a manner consistent with the item being hedged, meaning that theassociated asset and liability items are recorded at their hedged values. Withrespect to the hedging of future cash flows, our treatment differs betweenSwedish GAAP and US GAAP. According to Swedish GAAP, we do not mark-to-marketour hedging contracts, which is the case in our US GAAP treatment. We do notenter into financial instruments for trading or speculative purposes.

 

We do not anticipate anymaterial adverse effect on our consolidated financial position, results ofoperations or cash flows resulting from the use of derivative financialinstruments. We cannot guarantee, however, that our hedging strategies will beeffective or that transaction or translation losses can be minimised orforecast accurately.

 

*Interest Rate Risk*

 

The main objective of interestrate risk management will continue to be to reduce our total funding cost andto alter the interest rate exposure to the desired risk profile. Historicallywe borrowed funds primarily in euro, US dollars, British pounds and Swedishkronor. We use interest rate swaps to accomplish this objective.

 

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**ITEM 12**:  DESCRIPTION OFSECURITIES OTHER THAN EQUITY SECURITIES

 

Not applicable.

 

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##### **PART II**

 

**ITEM 13**:  DEFAULTS,DIVIDEND ARREARAGES AND DELINQUENCIES

 

Not applicable.

 

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**ITEM 14**:  MATERIALMODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

Not applicable.

 

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**ITEM 15**:  CONTROLS ANDPROCEDURES

 

(a) *DisclosureControls and Procedures.*  OurChief Executive Officer and our Chief Financial Officer, after evaluating theeffectiveness of our disclosure controls and procedures (as defined in USExchange Act Rule 13a-15(e)) as of the end of the period covered by this Form20-F, have concluded that, as of such date, our disclosure controls andprocedures were effective.

 

(b) *Internal Control Over FinancialReporting. *There were nochanges in our internal control over financial reporting that occurred duringthe year ended December 31, 2003 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**ITEM 16:**

 

**16.A.Audit committee financial expert**

 

Section 407 of the Sarbanes-Oxley Act requires the company to disclosewhether it has a financial expert on the audit committee. The Board ofDirectors of Alfa Laval Special Finance AB has determined that Mr ThomasThuresson is an ‘audit committee financial expert’ as defined in Item 16A ofForm 20-F.

 

**16.B. Code of Ethics**

 

The Board of Alfa Laval AB has established a code ofethics for senior financial officers based on the requirements in section 406of the Sarbanes-Oxley Act. It applies to our Chief Executive Officer, ChiefFinancial Officer, and Chief Accounting Officer. This code of ethics isincluded in this Form 20-F as Exhibit 11.1.

 

**16.C. Principal Accountants’ Fees andServices**

 

*Independentauditor fees*

 

Ernst & Young have served as our independentpublic accountants for each of the financial years in the three-year periodended December 31, 2003, for which audited financial statements appear in thisannual report on Form 20-F.

 

The following table presents the aggregate fees forprofessional services and other services rendered by Ernst & Young to AlfaLaval Special Finance AB in 2003.

 
|                   |   | **2003**           |   |
|------------------------|--------|--------------------|--------|
|                   |   | **(SEK millions)** |   |
|                   |   |               |   |
| Audit Fees (1)         |   | 10.9               |   |
| Audit-related Fees (2) |   | 1.5                |   |
| Tax Fees (3)           |   | 0.9                |   |
| All Other Fees (4)     |   | 0.3                |   |
| Total                  |   | 13.6               |   |

 

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(1)   AuditFees consist of fees billed for the annual audit services engagement and otheraudit services, which are those services that only the external auditorreasonably can provide, and include the group audit; statutory audits; comfortletters and consents; attest services; and assistance with and review ofdocuments filed with the SEC.

 

(2)   Audit-relatedFees consist of fees billed for assurance and related services that arereasonably related to the performance of the audit or review of our financialstatements or that are traditionally performed by the external auditor, andinclude consultations concerning financial accounting and reporting standards;internal control reviews of new systems, programmes and projects; review ofsecurity controls and operational effectiveness of systems; review of plans andcontrols for shared service centres; due diligence related to acquisitions;accounting assistance and audits in connection with proposed or completedacquisitions; and employee benefit plan audits.

 

(3)   TaxFees include fees billed for tax compliance services, including the preparationof original and amended tax returns and claims for refund; tax consultations,such as assistance and representation in connection with tax audits andappeals, tax advice related to mergers and acquisitions, transfer pricing, andrequests for rulings or technical advice from taxing authorities; tax planningservices; and expatriate tax planning and services.

 

(4)   AllOther Fees include fees billed for training; forensic accounting; data securityreviews; treasury control reviews and process improvement and advice; andenvironmental, sustainability and corporate social responsibility advisoryservices.

 

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Audit committee pre-approvalpolicies and procedures

 

The Board hasapproved a pre-approval policy for all auditing and non-auditing servicesprovided by audit firms in accordance with Section 202 of the Sarbanes-OxleyAct. This pre-approval policy is included in this Form 20-F as exhibit 11.2.

 

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### **PART III**

 

**ITEM 17**: FINANCIAL STATEMENTS

 

The following financialstatements are filed as part of this annual report on Form 20-F:

 
| Report of Independent Auditors to Board of Directors and Shareholders  of Alfa Laval Special Finance AB                                 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Income Statements of Alfa  Laval Special Finance AB for the three years ended December 31, 2003                       |   |
| Consolidated Balance Sheet of Alfa Laval  Special Finance AB as at December 31, 2002 and 2003                                      |   |
| Consolidated Cash Flow Statements of Alfa  Laval Special Finance AB for the three years ended December 31, 2003                    |   |
| Consolidated Statement of Changes in Equity  Capital of Alfa Laval Special Finance AB for the three years ended  December 31, 2003 |   |
| Notes to Consolidated Financial Statements  of Alfa Laval Special Finance AB                                                            |   |

 

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### **INDEX TO FINANCIAL STATEMENTS**

 
| Report of Independent Auditors                                                                        |   |
|-------------------------------------------------------------------------------------------------------|--------|
| Consolidated Statements of Income for the  three years ended December 31, 2003                   |   |
| Consolidated Balance Sheets as at  December 31, 2002 and 2003                                    |   |
| Consolidated Cash-Flow Statements for the  three years ended December 31, 2003                   |   |
| Consolidated Statement of Changes in Equity  Capital for the three years ended December 31, 2003 |   |
| Notes to the Financial Statements                                                                     |   |

 

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### **REPORT**OF INDEPENDENT AUDITORS

 

To the Board of Directors and Shareholders ofAlfa Laval Special Finance AB

 

We have audited the accompanyingconsolidated balance sheets of Alfa Laval Special Finance AB as ofDecember 31, 2003 and 2002 and the related consolidated statements ofincome, changes in equity capital and cash flows for each of the three years inthe period ended December 31, 2003. These financial statements are theresponsibility of Alfa Laval Special Finance AB’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in Sweden and in theUnited States of America. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, the financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of Alfa Laval Special Finance AB atDecember 31, 2003 and 2002, and the consolidated results of its operationsand its cash flows for each of the three years in the period endedDecember 31, 2003 in conformity with accounting principles generallyaccepted in Sweden.

 

Accounting principles generallyaccepted in Sweden vary in certain significant respects from accountingprinciples generally accepted in the United States. Informationrelating to the nature and effect of such differences is presented in Note 33to the consolidated financial statements.

 

| Malmö, Sweden           |
|------------------------------|
|                         |
| March 1, 2004           |
|                         |
|                         |
| Ingvar Ganestam              |
| Authorised Public Accountant |
| Ernst & Young AB    |

 

III-3

----

 

**ALFA LAVAL SPECIAL FINANCE AB**

### **CONSOLIDATED INCOME STATEMENTS**

 
| **Amounts in SEK millions**                 |   | **Note**   |   | **Jan 1 -  Dec 31  2003** |   | **Jan 1 -  Dec 31  2002** |   | **Jan 1 -  Dec 31  2001** |   |
|---------------------------------------------|--------|------------|--------|---------------------------|--------|---------------------------|--------|---------------------------|--------|
| Net sales                                   |   | 1          |   | 13,909.3                  |   | 14,594.9                  |   | 15,829.6                  |   |
| Cost of goods sold                          |   | 7          |   | (8,976.3                  | )      | (9,262.2                  | )      | (10,348.0                 | )      |
| Gross profit                                |   | 1          |   | 4,933.0                   |   | 5,332.7                   |   | 5,481.6                   |   |
| Sales costs                                 |   | 2, 3, 5    |   | (2,245.8                  | )      | (2,115.1                  | )      | (2,442.6                  | )      |
| Administration costs                        |   | 2, 3, 4, 7 |   | (865.8                    | )      | (1,026.8                  | )      | (786.9                    | )      |
| Research and  development costs             |   |       |   | (368.1                    | )      | (355.2                    | )      | (341.4                    | )      |
| Comparison distortion items                 |   | 6          |   | 5.6                       |   | (29.2                     | )      | 5.3                       |   |
| Other  operating income                     |   |       |   | 242.4                     |   | 268.7                     |   | 389.1                     |   |
| Other operating costs                       |   | 7          |   | (366.4                    | )      | (663.6                    | )      | (893.3                    | )      |
| Amortisation of goodwill                    |   | 7, 8       |   | (191.3                    | )      | (187.7                    | )      | (178.0                    | )      |
| Operating  income                           |   |       |   | 1,143.6                   |   | 1,223.8                   |   | 1,233.8                   |   |
| Dividends                                   |   | 9          |   | 6.9                       |   | 7.8                       |   | 9.6                       |   |
| Interest income                             |   | 10         |   | 267.5                     |   | 322.7                     |   | 238.0                     |   |
| Interest expense                            |   | 10         |   | (601.3                    | )      | (803.5                    | )      | (1,108.3                  | )      |
| Comparison distortion items                 |   | 25         |   | —                    |   | (290.7                    | )      | —                    |   |
| Result after  financial items               |   |       |   | 816.7                     |   | 460.1                     |   | 373.1                     |   |
| Minority share in subsidiaries’ income |   | 11         |   | (41.6                     | )      | (33.6                     | )      | (32.0                     | )      |
| Taxes on this year’s result            |   | 12         |   | (114.7                    | )      | (185.7                    | )      | 60.9                      |   |
| Other taxes                                 |   | 12         |   | (19.8                     | )      | (32.6                     | )      | (34.6                     | )      |
| Net income  for the year                    |   |       |   | 640.6                     |   | 208.2                     |   | 367.4                     |   |
|                                        |   |       |   |                      |   |                      |   |                      |   |
| Earnings per  share (SEK)                   |   |       |   | 78.2                      |   | 39.8                      |   | 367,400.0                 |   |
|                                        |   |       |   |                      |   |                      |   |                      |   |
| Average  number of shares *                 |   |       |   | 8,191,000.0               |   | 5,229,137.0               |   | 1,000.0                   |   |

 

----

* The average number of shares has beenchanged through new issue of shares. See a specification in the statement over“Changes in consolidated equity capital”.

 

The accompanying notes form an integral part of these financialstatements.

 

III-4

----

 

**ALFA LAVAL SPECIAL FINANCE AB**

## **CONSOLIDATED BALANCE SHEETS**

 

**ASSETS**

 
| **Amounts in SEK millions**                         |   | **Note** |   | **2003** |   | **2002** |   |
|-----------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                |   |     |   |     |   |     |   |
| **Fixed assets**                                    |   |     |   |     |   |     |   |
| **Intangible assets**                               |   | 13, 14   |   |     |   |     |   |
| Concessions, patents, licenses, trademarks          |   |     |   |     |   |     |   |
| and similar rights                                  |   |     |   | 1,100.8  |   | 1,333.6  |   |
| Renting and similar rights                          |   |     |   | 0.7      |   | 0.7      |   |
| Goodwill                                            |   |     |   | 3,098.5  |   | 3,369.0  |   |
|                                                |   |     |   | 4,200.0  |   | 4,703.3  |   |
| **Property, plant and equipment**                   |   | 13, 15   |   |     |   |     |   |
| Real estate                                         |   |     |   | 1,171.2  |   | 1,309.9  |   |
| Machinery and other technical installations         |   |     |   | 858.5    |   | 990.1    |   |
| Equipment, tools and installations                  |   |     |   | 668.6    |   | 742.0    |   |
| Construction in progress and advances to  suppliers |   |     |   |     |   |     |   |
| concerning property, plant and equipment            |   |     |   | 58.2     |   | 40.8     |   |
|                                                |   |     |   | 2,756.5  |   | 3,082.7  |   |
| **Financial long-term assets**                      |   |     |   |     |   |     |   |
| Other long-term securities                          |   | 16       |   | 22.5     |   | 53.1     |   |
| Pension assets                                      |   | 23       |   | 126.7    |   | 106.8    |   |
| Capitalised financing costs, acquisition  loans     |   |     |   | 44.6     |   | 58.0     |   |
| Deferred tax asset                                  |   |     |   | 472.4    |   | 534.1    |   |
|                                                |   |     |   | 666.2    |   | 751.9    |   |
|                                                |   |     |   |     |   |     |   |
| **Total fixed assets**                              |   |     |   | 7,622.7  |   | 8,537.9  |   |
|                                                |   |     |   |     |   |     |   |
| **Current  assets**                                 |   |     |   |     |   |     |   |
| **Inventories**                                     |   | 17       |   | 2,217.8  |   | 2,279.0  |   |
|                                                |   |     |   |     |   |     |   |
| **Current receivables**                             |   |     |   |     |   |     |   |
| Accounts receivable                                 |   | 18       |   | 2,463.3  |   | 2,504.0  |   |
| Other receivables                                   |   | 19       |   | 1,070.4  |   | 973.9    |   |
| Prepaid costs and accrued income                    |   |     |   | 85.0     |   | 99.4     |   |
| Capitalised financing costs, acquisition  loans     |   |     |   | 12.2     |   | 12.2     |   |
|                                                |   |     |   | 3,630.9  |   | 3,589.5  |   |
| **Current deposits**                                |   |     |   |     |   |     |   |
| Other current deposits                              |   | 20       |   | 658.6    |   | 414.3    |   |
|                                                |   |     |   |     |   |     |   |
| **Cash and bank**                                   |   | 21       |   | 554.6    |   | 605.9    |   |
|                                                |   |     |   |     |   |     |   |
| **Total  current assets**                           |   |     |   | 7,061.9  |   | 6,888.7  |   |
|                                                |   |     |   |     |   |     |   |
| **TOTAL ASSETS**                                    |   |     |   | 14,684.6 |   | 15,426.6 |   |

 

The accompanying notes form anintegral part of these financial statements.

 

III-5

----

 

**EQUITY CAPITAL AND LIABILITIES**

 
| **Amounts in SEK millions****(except share information)** |   | **Note** |   | **2003** |   | **2002** |   |
|-----------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                      |   |     |   |     |   |     |   |
| **Equity capital**                                        |   |     |   |     |   |     |   |
| Restricted equity capital                                 |   |     |   |     |   |     |   |
| Share capital, 8,191,000 shares (par value SEK 10)        |   |     |   | 819.1    |   | 819.1    |   |
| Restricted reserves                                       |   |     |   | 119.3    |   | 114.6    |   |
|                                                      |   |     |   | 938.4    |   | 933.7    |   |
| Unrestricted equity capital                               |   |     |   |     |   |     |   |
| Unrestricted reserves                                     |   |     |   | 2,823.5  |   | 3,271.1  |   |
| Net income for the year                                   |   |     |   | 640.6    |   | 208.2    |   |
|                                                      |   |     |   | 3,464.1  |   | 3,479.3  |   |
|                                                      |   |     |   |     |   |     |   |
| Total equity                                              |   |     |   | 4,402.5  |   | 4,413.0  |   |
|                                                      |   |     |   |     |   |     |   |
| **Minority interest**                                     |   | 11       |   | 104.2    |   | 108.2    |   |
|                                                      |   |     |   |     |   |     |   |
| **Provisions**                                            |   |     |   |     |   |     |   |
| Provisions for pensions and similar commitments           |   | 23       |   | 754.8    |   | 720.6    |   |
| Provisions for taxes                                      |   | 12       |   | 817.0    |   | 990.3    |   |
| Other provisions                                          |   | 24       |   | 891.2    |   | 989.3    |   |
|                                                      |   |     |   | 2,463.0  |   | 2,700.2  |   |
| **Long-term liabilities**                                 |   | 25       |   |     |   |     |   |
| Liabilities to credit institutions                        |   |     |   | 2,427.0  |   | 3,105.8  |   |
| Bond loan                                                 |   |     |   | 1,064.8  |   | 1,127.6  |   |
|                                                      |   |     |   | 3,491.8  |   | 4,233.4  |   |
| **Current liabilities**                                   |   |     |   |     |   |     |   |
| Liabilities to credit institutions                        |   | 25       |   | 103.7    |   | 254.4    |   |
| Advances from customers                                   |   |     |   | 512.1    |   | 571.3    |   |
| Accounts payable                                          |   |     |   | 1,076.0  |   | 1,027.9  |   |
| Notes payable                                             |   |     |   | 123.4    |   | 145.3    |   |
| Liability to Alfa Laval AB (publ)                         |   |     |   | 491.6    |   | 98.5     |   |
| Tax liabilities                                           |   |     |   | 451.7    |   | 457.6    |   |
| Other liabilities                                         |   | 26       |   | 648.7    |   | 632.5    |   |
| Accrued costs and prepaid income                          |   | 27       |   | 815.9    |   | 784.3    |   |
|                                                      |   |     |   | 4,223.1  |   | 3,971.8  |   |
|                                                      |   |     |   |     |   |     |   |
| **TOTAL EQUITY CAPITAL AND LIABILITIES**                  |   |     |   | 14,684.6 |   | 15,426.6 |   |
|                                                      |   |     |   |     |   |     |   |
| **PLEDGED ASSETS AND CONTINGENT LIABILITIES**             |   |     |   |     |   |     |   |
| Pledged assets                                            |   | 28       |   | 45.4     |   | 78.3     |   |
| Contingent liabilities                                    |   | 28       |   | 1,471.1  |   | 1,698.0  |   |

 

The accompanying notes form anintegral part of these financial statements.

 

III-6

----

 

**ALFA LAVAL SPECIAL FINANCE AB**

### **CONSOLIDATED CASH-FLOWSTATEMENTS**

 
| **Amounts in SEK millions**                                |   | **Note** |   | **Jan 1 -****Dec 31****2003** |   | **Jan 1 -****Dec 31****2002** |   | **Jan 1 -****Dec 31****2001** |   |
|------------------------------------------------------------|--------|----------|--------|-------------------------------|--------|-------------------------------|--------|-------------------------------|--------|
| **Cash flow from operating activities**                    |   |     |   |                          |   |                          |   |                          |   |
| Operating income                                           |   |     |   | 1,143.6                       |   | 1,223.8                       |   | 1,233.8                       |   |
| Adjustment for depreciation                                |   |     |   | 787.2                         |   | 838.0                         |   | 912.2                         |   |
| Adjustment for other non-cash items                        |   |     |   | 22.1                          |   | 35.0                          |   | 3.9                           |   |
|                                                       |   |     |   | 1,952.9                       |   | 2,096.8                       |   | 2,149.8                       |   |
|                                                       |   |     |   |                          |   |                          |   |                          |   |
| Taxes paid                                                 |   |     |   | (268.6                        | )      | (396.2                        | )      | (462.9                        | )      |
|                                                       |   |     |   |                          |   |                          |   |                          |   |
| Cash flow from operations before working  capital          |   |     |   | 1,684.3                       |   | 1,700.6                       |   | 1,686.9                       |   |
|                                                       |   |     |   |                          |   |                          |   |                          |   |
| Changes in working capital:                                |   |     |   |                          |   |                          |   |                          |   |
| (Increase)/decrease of current receivables                 |   |     |   | (25.7                         | )      | 340.0                         |   | 209.2                         |   |
| (Increase)/decrease of inventories                         |   |     |   | (17.2                         | )      | 140.4                         |   | 263.1                         |   |
| Increase/(decrease) of liabilities                         |   |     |   | (152.9                        | )      | (134.2                        | )      | (182.8                        | )      |
|                                                       |   |     |   | (195.8                        | )      | 346.2                         |   | 289.5                         |   |
|                                                       |   |     |   |                          |   |                          |   |                          |   |
| **Cash flow from operating activities**                    |   |     |   | 1,488.5                       |   | 2,046.8                       |   | 1,976.4                       |   |
|                                                       |   |     |   |                          |   |                          |   |                          |   |
| **Cash flow from investing activities**                    |   |     |   |                          |   |                          |   |                          |   |
| Investments in fixed assets                                |   |     |   | (258.5                        | )      | (276.7                        | )      | (274.9                        | )      |
| Divestment of fixed assets                                 |   |     |   | 40.1                          |   | 120.7                         |   | 336.2                         |   |
| Additional purchase price                                  |   |     |   | —                        |   | (367.5                        | )      | —                        |   |
| Acquisition of businesses                                  |   | 22       |   | (289.5                        | )      | (135.7                        | )      | (58.5                         | )      |
| Reduction of purchase price                                |   | 22       |   | —                        |   | 81.6                          |   | 76.3                          |   |
| Divestment of businesses                                   |   | 22       |   | —                        |   | —                        |   | 281.6                         |   |
| Provisions                                                 |   |     |   | 50.5                          |   | 29.8                          |   | (249.1                        | )      |
| **Cash flow from investing activities**                    |   |     |   | (457.4                        | )      | (547.8                        | )      | 111.6                         |   |
|                                                       |   |     |   |                          |   |                          |   |                          |   |
| **Cash flow from financing activities**                    |   |     |   |                          |   |                          |   |                          |   |
| Financial net, paid                                        |   |     |   | (237.1                        | )      | (590.1                        | )      | (672.2                        | )      |
| New issue of shares                                        |   |     |   | —                        |   | 819.0                         |   | —                        |   |
| Paid group contribution                                    |   |     |   | (53.4                         | )      | —                        |   | —                        |   |
| (Increase)/decrease of other financial  assets             |   |     |   | (256.9                        | )      | (84.2                         | )      | 306.6                         |   |
| Capitalised financing costs, acquisition  loans            |   |     |   | —                        |   | (39.7                         | )      | —                        |   |
| Increase/(decrease) of liabilities to  credit institutions |   | 25       |   | (454.8                        | )      | (1,548.2                      | )      | (1,703.8                      | )      |
| **Cash flow  from financing activities**                   |   |     |   | (1,002.2                      | )      | (1,443.3                      | )      | (2,069.4                      | )      |
|                                                       |   |     |   |                          |   |                          |   |                          |   |
| **Net increase (decrease) in cash and bank**               |   |     |   | 28.9                          |   | 55.7                          |   | 18.7                          |   |
|                                                       |   |     |   |                          |   |                          |   |                          |   |
| Cash and bank at the beginning of the year                 |   |     |   | 605.9                         |   | 666.4                         |   | 634.5                         |   |
| Translation difference in cash and bank                    |   |     |   | (80.2                         | )      | (116.2                        | )      | 13.2                          |   |
|                                                       |   |     |   |                          |   |                          |   |                          |   |
| **Cash and bank at the end of the period**                 |   | 21       |   | 554.6                         |   | 605.9                         |   | 666.4                         |   |
|                                                       |   |     |   |                          |   |                          |   |                          |   |
| Cash flow per share (SEK)                                  |   |     |   | 3.5                           |   | 10.7                          |   | 18,700.0                      |   |
|                                                       |   |     |   |                          |   |                          |   |                          |   |
| Average number of shares*                                  |   |     |   | 8,191,000.0                   |   | 5,229,137.0                   |   | 1,000.0                       |   |

 

----

* The average number of shares has beenchanged through new issue of shares. See a specification in the statement over“Changes in consolidated equity capital”.

 

Theaccompanying notes form an integral part of these financial statements.

 

III-7

----

 

### **ALFA LAVAL SPECIAL FINANCE AB**

**CHANGES IN CONSOLIDATED EQUITY CAPITAL**

 
| **Amounts in SEK millions**            |   | **Share  capital** |   | **Restricted  equity** |   | **Unrestricted  equity** |   | **Total** |   |
|----------------------------------------|--------|--------------------|--------|------------------------|--------|--------------------------|--------|-----------|--------|
| **2001**                               |   |               |   |                   |   |                     |   |      |   |
| Transfer between restricted equity and |   |               |   |                   |   |                     |   |      |   |
| unrestricted equity in Group companies |   | —             |   | 36.9                   |   | (36.9                    | )      | 0.0       |   |
| Translation difference                 |   | —             |   | —                 |   | 96.7                     |   | 96.7      |   |
| Net income for 2001                    |   | —             |   | —                 |   | 367.4                    |   | 367.4     |   |
| **As of December 31, 2001**            |   | 0.1                |   | 36.9                   |   | 3,591.9                  |   | 3,628.9   |   |
| **2002**                               |   |               |   |                   |   |                     |   |      |   |
| New issue of shares                    |   | 819.0              |   | —                 |   | 819.0                    |   |      |   |
| Equity part of Group contribution      |   | —             |   | —                 |   | (38.4                    | )      | (38.4     | )      |
| Deferred tax on Group contribution     |   | —             |   | —                 |   | (15.0                    | )      | (15.0     | )      |
| Transfer between restricted equity and |   | 0.0                |   |                   |   |                     |   |      |   |
| unrestricted equity in Group companies |   | —             |   | 76.9                   |   | (76.9                    | )      | 0.0       |   |
| Translation difference                 |   | —             |   | 0.8                    |   | (190.5                   | )      | (189.7    | )      |
| Net income for 2002                    |   | —             |   | —                 |   | 208.2                    |   | 208.2     |   |
| **As of December 31, 2002**            |   | 819.1              |   | 114.6                  |   | 3,479.3                  |   | 4,413.0   |   |
| **2003**                               |   |               |   |                   |   |                     |   |      |   |
| Equity part of Group contribution      |   | —             |   | —                 |   | (441.6                   | )      | (441.6    | )      |
| Deferred tax on Group contribution     |   | —             |   | —                 |   | (171.8                   | )      | (171.8    | )      |
| Transfer between restricted equity and |   |               |   |                   |   |                     |   |      |   |
| unrestricted equity in Group companies |   | —             |   | 4.3                    |   | (4.3                     | )      | 0.0       |   |
| Translation difference                 |   | —             |   | 0.4                    |   | (38.1                    | )      | (37.7     | )      |
| Net income for 2003                    |   | —             |   | —                 |   | 640.6                    |   | 640.6     |   |
| **As of December 31, 2003**            |   | 819.1              |   | 119.3                  |   | 3,464.1                  |   | 4,402.5   |   |

 

III-8

----

 

**Comments on changesin consolidated equity capital**

 

The share capital of SEK 819,100,000 (819,100,000) is divided among8,191,000 (8,191,000) shares at par value SEK 100 (100).

 

At the ordinaryshareholders’ meeting on June 13, 2002 it was decided to increase the sharecapital by SEK 819,000,000 through a new issue of 8,190,000 shares to AlfaLaval AB (publ).

 

The proposed dispositions of earnings forthe subsidiaries suggest transfers to restricted equity capital of SEK 54.3(22.0) (60.7) million. After deduction for this, the net available fordistribution is thus SEK 3,409.8 (3,457.3) (3,531.2) million.

 

The possibilities to distribute un-appropriated profits from foreignsubsidiaries are limited in certain countries due to currency regulations andother legislation.

 

**Specificationof changes in number of shares and share capital**

 
| **Year** |   | **Event**           |   | **Date**        |   | **Change in  number  of shares** |   | **Total  number  of shares** |   | **Change in  equity  capital** |   | **Total  equity  capital** |   |
|----------|--------|---------------------|--------|-----------------|--------|----------------------------------|--------|------------------------------|--------|--------------------------------|--------|----------------------------|--------|
|     |   |                |   |            |   |                             |   |                         |   |                           |   |                       |   |
| 2000     |   | Company formation   |   | March 27,  2000 |   | 1,000                            |   | 1,000                        |   | 0.1                            |   | 0.1                        |   |
|     |   |                |   |            |   |                             |   |                         |   |                           |   |                       |   |
| 2002     |   | New issue of shares |   | June 13,  2002  |   | 8,190,000                        |   | 8,191,000                    |   | 819.0                          |   | 819.1                      |   |

 

**Specification of accumulated translationdifferences reported against equity capital**

 
| **Year**               |   | **Change** |   | **Accumulated** |   | **Explanation  to change**                                                     |   | **The change  has  been affected by  hedging measures of** |   |
|------------------------|--------|------------|--------|-----------------|--------|--------------------------------------------------------------------------------|--------|------------------------------------------------------------|--------|
| Formation of the Group |   |       |   |            |   |                                                                           |   |                                                       |   |
| 2000                   |   | (94.5      | )      | (94.5           | )      | The EUR was  appreciated by 6%, which affected the EUR based acquisition loans |   | (312.5                                                     | )      |
|                   |   |       |   |            |   |                                                                           |   |                                                       |   |
| 2001                   |   | 96.7       |   | 2.2             |   | The USD was  appreciated by 10,7%                                              |   | (105.5                                                     | )      |
| 2002                   |   | (189.7     | )      | (187.5          | )      | The USD was  depreciated by 16,7%                                              |   | 164.9                                                      |   |
| 2003                   |   | (37.7      | )      | (225.2          | )      | The USD was  depreciated by 17,5%                                              |   | 140.3                                                      |   |

 

III-9

----

 

**ALFA LAVAL SPECIAL FINANCE AB**

**NOTES TO THE FINANCIALSTATEMENTS**

**Amounts in SEK millions unless otherwise stated**

 

## **Ownership andlegal structure**

 

Alfa Laval Special Finance AB is a whollyowned subsidiary of Alfa Laval AB (publ).

 

The parent company Alfa Laval AB (publ) islisted on the Stockholm Stock Exchange since May 17, 2002. The total number ofshareholders is 7,254  (5,746)shareholders on December 31, 2003. The two largest owners are Industri Kapitaland Tetra Laval, where 17.9 (26.9) percent are owned by the partnerships thatare controlled by Industri Kapital 2000 Ltd, United Kingdom and 17.7 (17.7)percent are owned by Tetra Laval B.V., the Netherlands. On October 29, 2003Industri Kapital has decreased the ownership in Alfa Laval by 9.0 percentageunits from 26.9 percent. Next to the two largest owners there are eightinstitutional investors with ownership in the range of 4.5 to 1.7 percent.These ten largest owners own 60.1 percent of the shares.

 

## **Operations**

 

The Alfa Laval Special Finance Group isengaged in the development, production and sales of products and systems basedon three main technologies: separation/filtration, heat transfer and fluidhandling. Alfa Laval’s primary segments are the two divisions “Equipment” and“Process Technology”, where the sales and marketing activities are performed.The divisions are based on ten customer segments. The customer segments thatbelong to the Equipment division purchase products whereas the customersegments that belong to Process Technology purchase systems for the processingindustry. The Group also has a common function “Operations” for procurement,production and logistics. The Group’s secondary segments are geographicalmarkets.

 

#### **Appliedrecommendations/General**

 

Alfa Laval Special Finance follows SwedishGAAP as expressed in law, recommendations issued by accounting bodies andrelevant good accounting practice. This differs in certain respects from USGAAP, see Note 33.

 

Alfa Laval Special Finance follows therecommendations issued by the Financial Accounting Standards Council in Swedenand has strived for early implementation of the recommendations, that is priorto when they must be applied. To the extent that recommendations from theCouncil have not yet been issued corresponding to already issued InternationalAccounting Standards, the IAS statement has been applied instead. This isreferring to IAS 19 Employee Benefits for 2000 and 2001 and IAS 14 SegmentReporting for 2001. A comparison has been made with the draft recommendationsissued by the Council, which have only been available in 2001 and 2002respectively.

 

Alfa Laval SpecialFinance does not report the depreciation on goodwill distributed on thedifferent functions in the income statement since almost the entire goodwilldepreciation is referring to the goodwill that appeared in a leveraged buy outtransaction in 2000. The comparability with other companies will be severelysuffering if the goodwill depreciation is allocated to the income statementfunctions. For this reason the goodwill depreciation is isolated to aspecifically identified item. The specific financial construction used in theownership change will otherwise result in a misleading income reporting duringtwo decades. The change of ownership in 2000 in fact meant that the net assetsof Alfa Laval Special Finance were re-valued to market value, which does notapply generally for other listed companies. In anticipation of the newinternational accounting statements, where goodwill is not depreciated butinstead tested for impairment, the current treatment avoids any problem withcomparability between years.

 

#### **Implementationof International Financial Reporting Standards (IFRS)**

 

InternationalFinancial Reporting Standards (IFRS) will be the new name for all newInternational Accounting Standards. IFRS are still issued by the InternationalAccounting Standards Board (IASB) (previously Council). IFRS 1 covers thetransitional provisions for the implementation of IFRS. All companies within theEuropean Union are obliged to change to IFRS as of January 1, 2005. Already in2000 Alfa Laval started to implement the International Accounting Standards(IAS) issued by IASB and translated and adapted to Swedish legislation

 

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by the Financial Accounting Standards Councilin Sweden. Since there are some minor differences between the Swedishrecommendations and IAS, Alfa Laval Special Finance has never claimed to befollowing IAS. Technically this means that Alfa Laval Special Finance will be afirst time applicant under IFRS 1 in 2005. The adoption to IFRS is howeveralready in place since Alfa Laval Special Finance has implemented all relevantIAS standards, except IAS 39. This statement will be implemented once IASB hasissued the updated IAS 39.

 

#### **Changed/implementedaccounting principles**

 

During 2003 RR27 “Financial Instruments: Disclosure and Presentation”has been implemented. This has not introduced any major changes or amendmentsto the disclosure and presentation in 2002. Chapter 5 § 18b in Swedish AnnualReport’s Acts (ÅRL) “Gender among managers” has also been implemented. Thedefinition of members of the Board and managers is not at all as clear as inthe Industry and Commerce Stock Exchange Committee’s statement concerningexecutive officers below. For this reason, several measures have been suppliedin order to enlighten the subject.

 

During 2002 RR26 Events after the balance sheet date was implemented.The updated statement by the Industry and Commerce Stock Exchange Committee oninformation about remunerations to executive officers (approved during 2002)was also implemented during 2002.

 

During 2001 RR 15 Intangible Assets, RR 21 Borrowing Costs, RR22Presentation of Financial Statements and RR23 Related Party Disclosures wereimplemented. Segment reporting is from the same point in time reportedaccording to IAS 14 in the absence of a Swedish recommendation at the time(currently RR25 Segment Reporting - business and geographical segments).

 

The application of these new accounting standards has not resulted inany change of accounting principles and has therefore not resulted in anyeffect on income or equity capital for 2003, 2002 or 2001.

 

During 2000, considerable work was devoted to the implementation of newaccounting standards. As of the closing for 2000, deferred tax is accounted foraccording to RR 9, impairments according to RR17, revenue recognition on largeprojects according to RR10 and provisions, contingent liabilities and contingentassets according to RR16. As of the same date, employee benefits are accountedfor according to IAS 19 in the absence of a Swedish standard (currently RR29Employee Benefits). The effect on equity of the changes in accountingprinciples for income taxes and pensions amounted to an increase of SEK 225million for the predecessor the former Alfa Laval Holding Group for 1999. Sincethe effect on the equity because of changed accounting principles changes theopening equity, the net asset value that was acquired by the new Groupincreased correspondingly. Because the acquired equity is fully eliminated, theabove adjustment to equity does not appear in the new Alfa Laval Group.

 

**Implementation of the Swedish FinancialAccounting Standards Council’s recommendations before they become effective**

 

RR22 Presentation of Financial Statements, RR25 Segment Reporting -business and geographical segments and RR26 Events After the Balance Sheet Datebecome effective on January 1, 2003. RR 29 Employee Benefits become effectiveon January 1, 2004. Earlier application of all these recommendations isencouraged and the Group has also applied them earlier as described above.

 

The Swedish Financial Accounting Standards Council’s recommendations RR1:00 Business combinations, RR 15 Intangible Assets, RR16 Provisions,Contingent Liabilities and Contingent Assets, RR17 Impairment of Assets, RR21Borrowing Costs and RR23 Related Party Disclosures became effective on January1, 2002. Earlier application was encouraged and the Group has applied theserecommendations during 2001 or 2000 as described above.

 

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#### **Criticalaccounting principles**

 

The Financial Accounting Standards Board in the US has issued Statementof Financial Accounting Standards No. 142, Goodwill and Other IntangibleAssets. FAS 142 requires that goodwill, including previously existing goodwill,and intangible assets with indefinite useful lives not be amortised; theseassets should be tested for impairment annually. Goodwill and intangible assetswith indefinite useful lives will no longer be tested for impairment under FAS121, Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed Of.  The Group hasadopted the provisions of FAS 142 as of January 1, 2002 in the US GAAPreconciliation. The effect of FAS 142 can be considerable for the Group if theprofitability within the Group or parts of the Group goes down in the future,since this could trigger a substantial impairment write down of the goodwill.Such a write down will affect the net income and thereby the position of theGroup according to US GAAP.

 

According to RR 17 impairments on assets including goodwill shall becalculated if there is any indication that the value of the asset hasdecreased. This is different to FAS 142, which requires that the impairmenttest must be made annually irregardless of whether there is an indication ornot. If a FAS 142 calculation shows an impairment, this can however be seen assuch an indication that could trigger a write down even in the part of thefinancial reporting that is regulated by the recommendations from the FinancialAccounting Standards Council.

 

The Group’s reporting of provisions according to RR16 means that SEK891.2 (989.3) million is reported as other provisions. This constitutes 6.1(6.4) percent of the Group’s assets and is important for the assessment of theGroup’s financial position, not the least since provisions normally are basedon estimates of costs and risks. If the accounting principles for provisionwould be changed sometime in the future, this could have a substantial impacton the Group’s financial position.

 

**ADVERTISING COSTS**

 

Advertising costs are expensed as incurred.

 

#### **Borrowing costs**

 

Borrowing costs are accounted for according to the main principle in RR21 Borrowing costs, which means that the borrowing costs are charged to theprofit and loss in the period to which they relate. This means, among otherthings, that transaction costs that arise in connection with raising a loan arecapitalised and amortised over the maturity of the loan.

 

**Business combinations - consolidationprinciples**

**(including associates and joint ventures)**

 

The consolidated financial statements have been prepared according tothe RR1:00 recommendation issued by the Financial Accounting Standards Councilin Sweden.

 

For the period after August 24, 2000, the consolidated financialstatements include the parent company Alfa Laval Special Finance AB and thesubsidiaries in which it holds more than 50 percent during the period. For theperiod up to August 24, 2000, the consolidated financial statements include theparent company the former Alfa Laval Holding AB and the subsidiaries in whichit holds more than 50 percent during the period.

 

The consolidated balance sheet has beenprepared in accordance with the purchase method, which means that the bookvalue of shares in the subsidiaries is eliminated from the reported equitycapital in the subsidiaries at the time of their acquisition. Accordingly, theunrestricted reserves in the subsidiaries at the time of acquisition are notincluded in the consolidated unrestricted reserves. Alfa Laval owns 50 percentin three different joint ventures: Rolls Laval Heat Exchangers Ltd with RollsRoyce as partner, Hynetics Inc with Hyclone Inc as partner and Gigantissimo2444 AB with Haldex as partner. These companies are consolidated according tothe proportional consolidation method in RR 14 Joint Ventures. The Group hasonly one company that fulfils the

 

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definition of an associate in RR 13 Accounting for Investments inAssociates, that is that the ownership is between 20 and 50 percent, namelyDalian Haven Automation Co Ltd. This company is totally dormant. Since its netassets are not material, it is not consolidated.

 

The difference between the purchase price paid and the net assets ofthe acquired companies, with deduction for restructuring provisions, isallocated to the step-up values related to each type of asset, with anyremainder accounted for as goodwill.

 

The foreign subsidiaries have been translated using the current method.This means that assets and liabilities are translated at closing exchange ratesand income and expenses are translated at the year’s average exchange rate. Thetranslation difference that arises is a result of the fact that net assets inforeign companies are translated at one rate at the beginning of the year andanother at year-end and that the result is translated at average rate. Thetranslation differences are charged against equity capital.

 

**Comparisondistortion items**

 

Items that do not have any link to the normal operations of the Groupor that are of a non-recurring nature are classified as comparison distortionitems. A reporting together with other items in the income statement would havegiven a comparison distortion effect that would have made it difficult to judgethe development of the ordinary operations from an outside viewer. Comparisondistortion items affecting operating income are reported as a part of operatingincome, while comparison distortion items affecting the result after financialitems are reported as a part of the financial net. Comparison distortion itemson each level are reported net in the income statement if the items beingincluded in the netting are not material, see RR22 Presentation of FinancialStatements item 27 and 32 and the Swedish Annual Report’s Act (ÅRL) chapter 3 §4.

 

#### **Employeebenefits**

 

Employee benefits are reported according to RR29. The main differencecompared with previous reporting (1999 and earlier) has been the reporting fordefined benefit pension plans. The present value of the benefit obligations inthe defined benefit plans is decided through yearly actuarial calculations madeby independent actuaries. The plan assets are valued at market value. The netplan asset or liability is arrived at in the following way.

 
| + |   | The present value of the defined benefit obligation at December 31 |
|---|--------|--------------------------------------------------------------------|
| + |   | any actuarial gains not recognized                                 |
| - |   | any actuarial losses not recognized                                |
| - |   | any past service costs not yet recognized                          |
| - |   | the fair value of the plan assets at December 31                   |
| = |   | a net liability if positive / a net asset if negative              |

 

If thecalculation gives a net asset, the lower of this asset and the sum of anycumulative unrecognised net actuarial losses and past service costs and thepresent value of refunds or reductions in future contributions is reported asthe net plan asset.

 

If the netcumulative unrecognised actuarial gains and losses at the end of the previousyear is outside a 10 percent corridor calculated on the greater of the presentvalue of the defined benefit obligation or the fair value of the plan assets,then the excess is recognised over the remaining service period of theemployees participating in the plan.

 

#### **The Swedish ITP plan is seen as a “multi-employer plan” that is treatedas a defined contribution plan according to item 30 in RR29.**

 

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#### **Events after thebalance sheet date**

 

Events after the balance sheet date are reported according to RR26under a separate heading below.

#### ** **

#### **Financialinstruments**

 

During 2003 RR27 “Financial Instruments: Disclosure and Presentation”has been implemented. This has not introduced any major changes or amendmentsto the disclosure and presentation in 2002. RR27 is based on IAS 32 anddescribes how financial instruments are presented in the balance sheet and therequired disclosures to enable a reader of financial reports to understand howthe financial instrument is influencing the income statement, balance sheet andcash flow of a company. It does not regulate when a financial instrument isreported in or removed from the balance sheet or the valuation of financialinstruments. This will instead be covered by IAS 39.

 

Financial instruments are valued atacquisition value. If a derivative instrument has been used to fix the exchangerate to be used for settling a commercial or financial receivable or liability,the balance sheet item is valued at the forward rate. The accrued interest ratefor loans is valued including the effect of interest rate swaps. Derivativeinstruments covering projected flows are not reported until maturity and thisis where the effect of IAS 39 will be most apparent.

 

The Group uses a limited number of financialinstruments to hedge currency rates or interests. These include currencyforward contracts, currency options, interest-rate swaps and interest-forwardcontracts. To demonstrate the exposure, the outstanding contracts are presentedin the financial risk section. If possible, loans are raised in the currenciesthat match the net investment in each currency. The fair value of financialinstruments is shown in Note 32.

 

**Fixed assets (tangible and intangible)**

 

Assets have been accounted for at cost, netafter deduction of accumulated depreciation according to plan. Depreciationaccording to plan is based on the assets’ acquisition values and is calculatedaccording to estimated economic lives of the assets.

 

The following depreciation periods have beenused:

 
| Computer programs, computers |   | 3.3 years   |   | The Predecessor: Alfa Laval Holding AB       |   |
|------------------------------|--------|-------------|--------|----------------------------------------------|--------|
| Office equipment             |   | 4 years     |   | Intangible  assets                           |   | 10 years |   |
| Vehicles                     |   | 5 years     |   | Goodwill,  harmonisation                     |   | 5 years |   |
| Machinery and equipment      |   | 7-14 years  |   | Goodwill,  other                             |   | 10 years |   |
| Land improvements            |   | 20 years    |   |                                         |   |   |   |
| Buildings                    |   | 25-33 years |   | The Successor: Alfa Laval Special Finance AB |   |
|                         |   |        |   | Patents and trademarks                       |   | 20 years |   |
|                         |   |        |   | Step-up values, technology                   |   | 7.5 years |   |
|                         |   |        |   | Goodwill, strategic                          |   | 20 years |   |
|                         |   |        |   | Goodwill, other                              |   | 10 years |   |
|                              |        |             |        |                                              |        |  |  |  |

 

The acquisition of the former Alfa Laval Holding AB Group and DanishSeparation Systems A/S are considered as strategic acquisitions where theintangible assets have a lifetime of more than 20 years. The acquisition ofToftejorg and bioKinetics are complimentary to the existing business. Thereason why the depreciation period is more than five years also for theseacquisitions is that Toftejorg has a strong position in tank cleaning equipmentand bioKinetics has a powerful modular process concept, both of which areperceived to have economic life expectancies of much more than five years.

 

Any additions to the purchase price in connection with investments infixed assets or acquisitions of businesses

 

III-14

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are amortised over the same period as the original purchase price. Thismeans that the time when the asset is fully depreciated is identical regardlessof when payments are made. This is a reflection of the fact that the estimatedeconomic live of the asset is the same.

 

Upon sale or scrapping of assets, the results are calculated inrelation to the net book value after depreciation according to plan. The resulton sales is included in operating income.

 

When there are indications that the value of a fixed asset hasdecreased, there is a valuation made if it must be written down according toRR17. If the reported value is higher than the net realisable value, a writedown is made that burdens net income. When assets are up for sale, for instanceitems of real estate, a clear indication of the net realisable value isreceived that can trigger a write down.

 

#### **Income Taxes**

 

Income taxes are reported in accordance with RR9 Income Taxes.

 

Current tax is theamount of income taxes payable (recoverable) in respect of the taxable profit(tax loss) for a period. Current tax liabilities (receivables) for the currentand prior periods are measured at the amount expected to be paid to (recoveredfrom) the tax authorities, using the tax rates (and tax laws) that have beenenacted or substantively enacted by the balance sheet date. In essence, thismeans that current tax is calculated according to the rules that apply in thecountries where the profit was generated.

 

Deferred tax liabilities are the amounts ofincome taxes payable in future periods in respect of taxable temporarydifferences. Deferred tax liabilities are recognised for all taxable temporarydifferences, except for goodwill and certain other items.

 

Deferredtax assets are the amounts of income taxes recoverable in future periods inrespect of: (a) deductible temporary differences; (b) the carry-forward ofunused tax losses; and (c) the carry-forward of unused tax credits. Deferredtax assets are recognised for all deductible temporary differences to theextent that it is probable (>50 percent) that taxable profit will beavailable against which the deductible temporary difference can be utilised.Deferred tax assets are recognised for the carry-forward of unused tax lossesand unused tax credits to the extent that it is probable (>50 percent) thatfuture taxable profit will be available against which the unused tax losses andunused tax credits can be utilised.

 

Deferred tax assets and liabilities aremeasured at the tax rates that are expected to apply to the period when theasset is realised or the liability is settled, based on tax rates (and taxlaws) that have been enacted or substantively enacted by the balance sheet date.

 

If it is not any longer probable thatsufficient taxable profits will be available against which a deferred tax assetcan be utilised, then the deferred tax asset is reduced by increasing thevaluation allowance accordingly.

 

#### **Inflationaryaccounting**

 

Subsidiaries in highly inflationary countriesreport their closings in the functional hard currency that is valid in eachcountry, which in all cases is USD. Colombia, Indonesia, Mexico, Russia, Turkeyand Venezuela are regarded as highly inflationary countries.

 

#### **Inventories**

 

The Group’s inventory has been accounted forafter elimination of inter-company gains. The inventory has been valuedaccording to the “First-In-First-Out” (FIFO) method at the lowest of cost ornet realisable value, taking into account obsolescence.

 

This means that raw material and purchasedcomponents normally are valued at the acquisition cost, unless the

 

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market price has fallen. Work in progress is valued at the sum ofdirect material and direct labour costs with a mark-up for the product’s sharein capital costs in the manufacturing and other indirect manufacturing costsbased on a forecasted assumption on the capacity utilisation in the factory.Finished goods are normally valued at the delivery value (i.e. at cost) fromthe factory if the delivery is forthcoming. Spare parts that can be in theinventory during longer periods of time are normally valued at net realisablevalue. Out of the total inventory, the valuation at net realisable valuetherefore constitutes a considerable part.

 

#### **Leasing**

 

Leasing is accounted for in accordance with RR6:99 Leasing agreements.

 

When Alfa Laval is the lessor, leased assets that are regarded asfinancial leases are accounted for as a financial receivable from the lessee inthe balance sheet. The leasing fee received from the lessee is accounted for asfinancial income calculated as interest on the outstanding receivable and asamortisation of the receivable.

 

When Alfa Laval is the lessee, leased assets that are regarded asfinancial leases are accounted for as capitalised assets and a correspondingfinancial payable to the lessor in the balance sheet. The leasing fee to thelessor is accounted for as financial cost calculated as interest on theoutstanding payable and as amortisation of the payable. Depreciation accordingto plan is done in the same manner as purchased assets.

 

Leased assets regarded as operational leases are not capitalised. Theleasing fees are expensed as incurred.

 

#### **Long-termconstruction projects**

 

Revenue for projects is recognised using the percentage of completionmethod in RR10 Construction projects. This means that when the outcome of aconstruction project can be calculated reliably, the revenue and the costsrelated to the project are recognised in relation of the percentage ofcompletion at the balance sheet date. An estimated loss is recognisedimmediately. The percentage of completion for a construction project isnormally established through the relationship between incurred project costsfor work performed at the closing date and the estimated total project costs.

 

#### **Other operatingincome and other operating costs**

 

Other operating income in the income statement relates to commission,royalty and license income. Other operating costs refer mainly to restructuringcosts and to royalty costs.

 

#### **Provisions**

 

The Group is applying RR16 for the reporting of provisions, contingentliabilities and contingent assets.

 

A provision is recognised when, and only when:

 

•                  thereis a present legal or constructive obligation as a result of past events;

•                  itis probable that a cost will be incurred in settling the obligation; and

•                  areliable estimate can be made of the amount of the obligation.

 

The amount recognised as a provision is the best estimate of the costrequired to settle the present obligation at the balance sheet date.

 

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In measuring the provision:

 

•                  risksand uncertainties are taken into account;

•                  theprovisions are discounted, where the effect of the time value of money ismaterial. When discounting is used, the increase of the provision over time isrecognised as an interest cost;

•                  futureevents, such as changes in law and technology, are taken into account where thereis sufficient objective evidence that they will occur; and

•                  gainsfrom the expected disposal of assets are not taken into account, even if theexpected disposal is closely linked to the event giving rise to the provision.

 

If areimbursement of some or all of the costs to settle a provision is expected(e.g. through insurance contracts, indemnity clauses or supplier’s warranties),the reimbursement is recognised:

 

•              when,and only when, it is virtually certain that the reimbursement will be receivedif the obligation is settled. The amount recognised for the reimbursement mustnot exceed the amount of the provision; and

•              asa separate asset (gross). In the income statement, however, the income relatedto the reimbursement is netted against the cost for the provision.

 

Provisions are reviewed at each balance sheet date and adjusted toreflect the current best estimate. If it is no longer probable that a cost tosettle the obligation will be incurred, the provision is reversed.

 

A provisionmust only be used for the purpose it was originally recognised for. Provisionsare not recognised for future operating losses. An expectation of futureoperating losses is though an indication that certain assets of the operationmay be impaired. If a contract is onerous, the present obligation under thecontract is recognised and measured as a provision.

 

A provision forrestructuring costs is recognised only when the general recognition criteriaare met. A constructive obligation to restructure arises only when there is:

 

•                  adetailed formal plan for the restructuring, identifying at least:

 

a)              the business or partof a business concerned;

b)             the principallocations affected;

c)              the location,function and approximate number of employees who will be compensated for terminatingtheir services;

d)             the costs that willbe undertaken; and

e)              when the plan willbe implemented; and

 

•                  avalid expectation in those affected that the restructuring will be carried out.

 

A management orboard decision to restructure does not give rise to a constructive obligationat the balance sheet date unless the company has, before the balance sheetdate:

 

•                  startedto implement the restructuring plan ; or

•                  communicatedthe restructuring plan to those affected by it in a sufficiently specific mannerto raise a valid expectation in them that the restructuring will happen.

 

When a restructuring involves the sale of an operation, no obligationarises for the sale until the company is committed to the sale, i.e. through abinding sales agreement.

 

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A restructuring provision only includes the direct costs arising fromthe restructuring, which are those that are both:

 

•                  necessarilyentailed by the restructuring; and

•                  notassociated with the ongoing activities of the company.

 

#### **Research anddevelopment**

 

Research and development costs are charged to the income statement inthe year in which they are incurred. RR15 Intangible Assets requiresdevelopment costs to be capitalised if certain requirements are fulfilled. Thedevelopment costs within Alfa Laval do normally not meet the requirements forcapitalisation according to RR15 Intangible Assets.

#### ** **

#### **Revenuerecognition**

 

Revenue recognition is made according to RR11 Revenue. Sales revenuefor products and services is recognised at the time of delivery. Net sales arereferring to sales value less sales taxes, cancellations and discounts.Long-term construction projects are accounted for through the percentage ofcompletion method.

 

**Sick leave in Sweden**

 

The Swedish Annual Report’s Acts (ÅRL) requires the sick leave amongSwedish employees to be reported split on different specifically definedcategories. This is a way to get focus on the contemporary problem of high sickleave rates and if certain employers are having a high or a low sick ratewithin the company. The specification is found in Note 2.

 

#### **Transactions inforeign currencies**

 

Receivables and liabilities denominated in foreign currencies have beenvalued at year-end rates of exchange or at the rate fixed by forward contract.Within the parent company there were no unrealised exchange gains on long-termreceivables and liabilities that have not been possible to offset againstunrealised exchange losses within the same currency. Unrealised exchange gainson short-term receivables and liabilities are, however, included in the result.

 

Within the Group, exchange gains and losses on loans denominated inforeign currencies that finance acquisitions of foreign subsidiaries aretransferred to unrestricted equity if the loans act as a hedge to the acquirednet assets. In the parent company, the exchange differences are reported in theincome statement.

 

**Events after the balance sheet date**

 

**THEBALANCE SHEETS AND THE INCOME STATEMENTS WILL BE ADOPTED AT THE ANNUAL GENERALMEETING OF SHAREHOLDERS ON APRIL 27, 2004.**

 

In a press release onJanuary 27, 2004, the President and Chief Executive Officer Sigge Haraldssonhas communicated his intention to retire in October 2004.

 

The nomination committee proposes that GunillaBerg is elected as a member of the Board and that Sigge Haraldsson is notre-elected at the coming Annual General Meeting.

 

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**Workprocedures of the Board of Alfa Laval AB**

 

The Board of AlfaLaval AB has held ten (thirteen) (eight) meetings during 2003. The Board hasissued rules of procedures for the Board of Directors and an instructionregarding the allocation of work between the Board of Directors and theManaging Director. The rules of procedure establish, among other things, howoften the Board of Directors shall meet and how the work shall be organised.

 

During 2001 the Boardappointed a remuneration committee, consisting of the Chairman, Björn Savén andJörn Rausing, with Sigge Haraldsson as presenting. The committee shall handleremuneration matters for the members of Group Management.

 

Matters that the Boardhas been discussing during the year include liquidity and funding, share andownership developments, dividends, asbestos litigations, larger capacityinvestments and development projects, acquisition of businesses, purchase anddivestment of real estate, internal audit, external audit planning and thestrategic positioning of the Group.

 

Since the Group has abond loan that is registered with the Securities and Exchange Commission (SEC)in the US, the question of appointing an audit committee according to the“Sarbanes-Oxley Act” has been discussed. The Board has chosen not to appoint anaudit committee since the judgement is that the financial reporting and controlwithin the Alfa Laval Group, the Alfa Laval Group’s policies concerninginternal control, the external and internal audit and the reporting to theBoard in these matters are such that a special audit committee within the Boardwould not increase the Board’s insight and control over the operations. At twoBoard meetings during 2003 the Board has received reports from and met theexternal auditors of the Alfa Laval Group. At one Board meeting during 2003,the Board has received reports from and met the internal auditor of the AlfaLaval Group.

 

Section 407 of the Sarbanes-Oxley Act requires the company to disclosewhether it has a financial expert on the audit committee. The Board ofDirectors of Alfa Laval Special Finance AB has determined that Mr ThomasThuresson is an ‘audit committee financial expert’ as defined in Item 16A ofForm 20-F.

 

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#### **Financial risks**

 

**Financial instruments**

 

Financial risks are referring to financial instruments. Alfa Laval hasthe following instruments: cash, deposits, bank loans, the bond loan and alimited number of derivative instruments to hedge currency rates or interests.These include currency forward contracts, currency options, interest-rate swapsand interest-forward contracts.

 

**Financial policy**

 

In order to control and limit the financial risks, the Board of theAlfa Laval Group has established a financial policy. The Group has an aversiveattitude toward financial risks. This is expressed in the policy. Itestablishes the distribution of responsibility between the local companies andthe central finance function in Alfa Laval Treasury International AB, whatfinancial risks the Group can accept and how the risks should be limited.

 

#### **Price risk**

#### ** **

There are three different types of pricerisks: currency risk, interest risk and market risk. See below.

 

#### **Currency risk**

 

**Transactionexposure**

 

The Group is principally exposed to currency risk from potentialchanges in contracted and projected flows of payments and receipts.  The objective of foreign exchange riskmanagement is to reduce the impact of foreign exchange movements on the Group’sincome and financial position.

 

The Group normally has a natural risk coverage through the sale as wellas costs in local currencies. The financial policy states that the localcompanies are responsible for identifying and hedging exchange rate exposureson all commercial flows via Alfa Laval Treasury International. Contract basedexposures must be fully hedged. In addition, the balance of projected flows thenext 12 months must be hedged to at least 50 percent. The remaining part of theprojected flows can be partially hedged after conferring with the Group’scentral finance function. Alfa Laval Treasury International can add to orreduce the total hedging initiated by the local companies in the currenciesthat Alfa Laval has commercial exposure up to but not exceeding 100 percent ofone year’s commercial exposure for each currency.

 

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The Group’s net exposure in different currencies before and afterderivatives during 2003 has amounted to:

 

 

Currency contracts are entered into continuously during the year with12 months being the maximum duration. This means that the company experiencesthe effects from the market currency rate movements with a varying degree ofdelay.

 

If the currency rates between SEK and the most important foreigncurrencies are changed by +/- 10 % it has the following effect on operatingincome, if no hedging measures are taken:

 
| **Exchange rate change against SEK** |   | **2003**  |   | **2002**  |   | **2001**  |   |
|--------------------------------------|--------|-----------|--------|-----------|--------|-----------|--------|
| **In SEK millions**                  |   | **+ 10%** |   | **- 10%** |   | **+ 10%** |   | **- 10%** |   | **+ 10%** |   | **- 10%** |   |
| Effect on operating income           |   |      |   |      |   |      |   |   |   |   |   |   |   |
| without hedging measure              |   |      |   |      |   |      |   |   |   |   |   |   |   |
| USD                                  |   | 97        |   | -97       |   | 101       |   | -101 |   | 117 |   | -117 |   |
| EUR                                  |   | 152       |   | -152      |   | 154       |   | -154 |   | 125 |   | -125 |   |
| DKK                                  |   | -127      |   | 127       |   | -135      |   | 135 |   | -147 |   | 147 |   |
| Other USD related currencies         |   | 46        |   | -46       |   | 29        |   | -29 |   | 25 |   | -25 |   |
| Other                                |   | 39        |   | -39       |   | 58        |   | -58 |   | 80 |   | -80 |   |
| Total                                |   | 207       |   | -207      |   | 207       |   | -207 |   | 200 |   | -200 |   |

 

III-21

----

 

Outstanding currency forward contracts and currency options for theGroup amounted to the following at the end of the year:

 
| **In millions** |   | **2003**               |   | **2002**          |   | **2001**               |   |
|-----------------|--------|------------------------|--------|-------------------|--------|------------------------|--------|
| **Outflows**    |   | **Original  currency** |   | **Original  SEK** |   | **Original  currency** |   | **SEK** |   | **currency** |   | **SEK** |   |
| EUR             |   | -275.7                 |   | -2,499.0          |   | -188.8                 |   | -1,729.4 |   | -104.7 |   | -973.8 |   |
| USD             |   | -161.5                 |   | -1,171.3          |   | -190.2                 |   | -1,672.1 |   | -173.1 |   | -1,827.0 |   |
| DKK             |   | -750.3                 |   | -913.8            |   | -558.0                 |   | -688.2 |   | -6.3 |   | -7.8 |   |
| HKD             |   | —                 |   | —            |   | -173.3                 |   | -195.3 |   | -51.6 |   | -69.9 |   |
| NOK             |   | -165.8                 |   | -178.5            |   | -133.3                 |   | -167.5 |   | -146.0 |   | -170.7 |   |
| JPY             |   | -765.7                 |   | -51.9             |   | -1,713.3               |   | -126.2 |   | -2,094.3 |   | -168.8 |   |
| CAD             |   | -17.8                  |   | -98.5             |   | -7.7                   |   | -42.9 |   | -18.4 |   | -121.4 |   |
| GBP             |   | -7.6                   |   | -97.5             |   | -0.9                   |   | -13.6 |   | -6.4 |   | -98.2 |   |
| Other           |   |                   |   | -70.2             |   |                   |   | -84.2 |   |   |   | -61.6 |   |
| Total           |   |                   |   | -5,080.7          |   |                   |   | -4,719.4 |   |   |   | -3,499.2 |   |

 
| **In millions**  |   | **2003**               |   | **2002**          |   | **2001**               |   |
|------------------|--------|------------------------|--------|-------------------|--------|------------------------|--------|
| **Inflows**      |   | **Original  currency** |   | **Original  SEK** |   | **Original  currency** |   | **SEK** |   | **currency** |   | **SEK** |   |
| SEK              |   | 5,172.8                |   | 5,172.8           |   | 4,832.8                |   | 4,832.8 |   | 3,362.7 |   | 3,362.7 |   |
| SGD              |   | 7.2                    |   | 30.6              |   | 5.4                    |   | 27.3 |   | 22.0 |   | 125.5 |   |
| Other            |   |                   |   | 4.9               |   |                   |   | 10.6 |   |   |   | — |   |
| Total            |   |                   |   | 5,208.3           |   |                   |   | 4,870.7 |   |   |   | 3,488.2 |   |
|             |   |                   |   |              |   |                   |   |   |   |   |   |   |   |
| **Net exposure** |   |                   |   | 127.6             |   |                   |   | 151.3 |   |   |   | -11.0 |   |

 

**Translationexposure**

 

When the subsidiaries’ balance sheets in local currency are translatedinto SEK a translation difference arises that is due to the current year beingtranslated at a different closing rate than last year and that the incomestatement is translated at the average rate during the year whereas the balancesheet is translated at the closing rate at December 31. The translationdifferences are reported in the unrestricted equity capital. The translationexposure consists of the risk that the translation difference represents in relationto changes in the equity capital. The risk is largest for the currencies wherethe Group has the largest net assets and where the exchange rate movementsagainst SEK are largest.

 

The translation differences are a central responsibility and are managedby distributing the loans on different currencies based on the net assets ineach currency and through currency forward contracts. Loans taken in the samecurrency as there are net assets in the Group, decrease these net assets andthereby decrease the translation exposure.

 

#### **Interest risk**

 

By interest risk is meant how changes in the interest level affect thefinancial net of the Group and how the value of financial instruments vary dueto changes in market interest rates. The Group attempts to manage interest-raterisk by matching fixed interest periods of financial assets and liabilities andthrough the use of derivative financial instruments such as interest-rateswaps.

 

III-22

----

 

The financial policy states that the interest rate risk and durationare measured by each main currency. The interest duration for the loans must bebetween 0 and 3 months for 66 percent of the loans and between 6 and 36 monthsfor 33 percent of the loans.

 

The loan with the new banking syndicate accrues interest at floatingrate. The Group has chosen to hedge 22 (64) (69) percent of the loan, with aduration of 9 months. The subordinated loan from Tetra Laval Finance Ltdaccrued interest at fixed rate, but has now been repaid. The bond loan accruesinterest at fixed rate. Combined, this means that the Group has a comparablylow interest risk.

 

Calculated on an overall increase of market rates by 100 interestpoints

(1 percentage unit), the interest costs of the Group would increase byabout SEK 17 (16) (18) million. The reason why this amount has not decreaseddue to the decreased loans is that the part of the loans that is affected byfloating rates has increased after the cancellation of the interest rate swap.

 

**Market risk**

 

Market risk is defined as the risk for changes in the value of afinancial instrument due to changed market prices. For all financialinstruments, except the bond loan, the price risk only consists of currencyrisk and interest risk. For the bond loan there is a market risk, but as longas a market value that is higher than the booked value does not have to bereported in the balance sheet, this does not present a problem. IAS 39 will notchange the reporting of the bond loan since it will still be valued at itsacquisition value.

 

#### **Liquidity risk**

 

Liquidity risk isdefined as the risk that the Group would incur increased costs due to lack ofliquid funds. The loan facility with the banking syndicate consists of twoparts. The first part is an amortisation free loan of originally EUR 423.9million. This has been reduced to EUR 263.7 million through voluntaryamortisation of EUR 87.4 million and reduction through exchange rate movementsof EUR 72.8 million. The other part is a revolving working capital facility ofEUR 150 million, which was unutilised as of December 31, 2003. Alfa Laval hasinitiated negations with the banking syndicate in order to convert the wholeloan to a revolving facility potentially combined with a SEK based short-termcommercial paper programme. A commercial paper programme requires an officialcredit rating and generally means lower interest rates but without anyguarantees for sustained financing. This is then covered by the extendedrevolving facility.

 

**Cash flow risk**

 

Cash flow risk is defined as the risk that the size of future cashflows linked to financial instruments is fluctuating. This risk is mostlylinked to changed interest and currency rates. To the extent that this isperceived as a problem, different derivative instruments are used to fix rates.See description of exposure and hedging measures under interest risk.

 

#### **Refinancingrisk**

 

Refinancing risk isdefined as the risk that the refinancing of maturing loans becomes difficult orcostly. The loans of the Group are mainly long term and only mature when theagreed loan period expires. This means that the Group during the foreseeablefuture does not need to refinance maturing loans. The loan facility with thebanking syndicate consists of two parts. The first part is an amortisation freeloan of originally EUR 423.9 million. This has been reduced to EUR 263.7million through voluntary amortisation of EUR 87.4 million and reductionthrough exchange rate movements of EUR 72.8 million. The other part is arevolving working capital facility of EUR 150 million, which was unutilised asof December 31, 2003. The maturity of this combined facility is five years. Thebond loan matures only in 2010. Alfa Laval has initiated negations with thebanking syndicate in order to convert the whole loan to a revolving facilitypotentially combined with a SEK based short-term commercial paper programme. Acommercial paper programme requires an official credit rating and generallymeans lower interest rates but without any guarantees for sustained financing.This is then covered by the extended revolving facility.

 

III-23

----

 

#### **Counterpartyrisks**

 

Financial instruments that potentially subject the Group to significantconcentrations of credit risk consist principally of cash, deposits andderivatives.

 

The Group maintains cash and bank and short and long-term investmentswith various financial institutions approved by the Group. These financialinstitutions are located in major countries throughout the world and theGroup’s policy is designed to limit exposures to any one institution. The riskfor a counterparty not fulfilling its commitments is limited through theselection of financially solid counterparties and by limiting the engagementper counterparty. The Group performs periodic evaluations of the relativecredit standing of those financial institutions that are considered in itsinvestment strategy. The Group does not require collateral on these financialinstruments.

 

The Group is exposed to credit risk in the event of non-performance bycounterparties to derivative instruments. The Group limits this exposure bydiversifying among counterparties with high credit ratings and by limiting thevolume of transactions with each counter party.

 

In total it is the Group’s opinion that the counterparty risks arelimited.

 

III-24

----

 

#### **Operationalrisks**

 

#### **Risk for baddebts**

 

The risk for bad debts is referring to the risk that the customercannot pay for delivered goods due to financial difficulties. The Group sellsto a large number of customers in countries all over the world. That some ofthese customers from time to time face payment problems or go bankrupt isunfortunately part of reality in an operation of Alfa Laval’s magnitude.  All customers except Tetra Laval representless than 1 percent of net sales and thereby represent a limited risk. AlfaLaval regularly collects credit information on new customers and, if needed, onold customers. Earlier payment habits have an impact on the acceptance of neworders. On markets with political or financial risks, the Group strives toattain credit insurance solutions. The Group’s costs for bad debts are SEK 42.2(32.2) (78.6) million.

 

#### **Risk for claims**

 

The risk for claims refers to the costs Alfa Laval would incur torectify faults in products or systems and possible costs for penalties. AlfaLaval strives to minimize these costs through an ISO certified qualityassurance. The major risks for claim costs appear in connection with newtechnical solutions and new applications. The risks are limited throughextensive tests at the manufacturing site and at the customer site. The Group’sclaim costs have amounted to SEK 151.5 (204.0) (154.3) million.

 

#### **Risk connectedto technical development**

 

This risk refers to the risk that some competitor develops a newtechnical solution that makes Alfa Laval’s products technically obsolete andtherefore difficult to sell. Alfa Laval addresses this risk by a deliberateinvestment in research and development aiming at being in the absolutefrontline of technical development.

 

#### **Economic risk**

 

**Competition**

 

The Group operates in competitive markets. The implemented split indivisions based on customer segments is a further step in the efforts toaddress this competition. The restructuring programme being implemented givesthe Group a cost level that is very competitive.

 

**Businessclimate**

 

In an overall economicdownturn the Group tends to be affected with a delay of 6 to 12 monthsdepending on customer segment. The same applies with an economic upturn. Thefact that the Group is operating on a large number of geographical markets andwithin a wide range of customer segments means a diversification that limitsthe effects of fluctuations in the business climate. Historically, fluctuationsin the business climate have not generated decreases in orders received by morethan 10 percent.

** **

**Pricesof raw material**

 

The Group depends on deliveries of stainless steel, carbon steel,copper and titanium etc for the manufacture of products. The prices in some ofthese markets are volatile and the supply of titanium has occasionally beenlimited. There is a limited number of possible suppliers of titanium. The riskfor severely increased prices or limited supply constitutes serious risks forthe operations. The possibilities to pass on higher input prices to an endcustomer vary from time to time and between different markets depending on thecompetition. The Group is addressing this risk by securing long-term supplycommitments and through fixed prices from the suppliers during six to twelvemonths.

 

III-25

----

 

#### **Environmentalrisks**

 

This risk relates to the costs that the Group may incur to reduceemissions according to new or stricter environmental legislation, to restoreland at previously or currently owned industrial sites, to arrange moreeffective waist disposal, to obtain prolonged or new concessions etc. The Grouphas an ambition to be well within the boundaries that local legislation sets,which should reduce the risks. The operations of the Group are not consideredto have a significant environmental impact.

 

#### **Politicalrisk**

 

Political risk is the risk that the authorities, in the countries wherethe Group is operating, by political decisions or administration make continuedoperations difficult, expensive or impossible for the Group. The Group ismainly operating in countries where the political risk is considered to benegligible or minor. The operations that are performed in countries where thepolitical risk is deemed to be higher are not material.

 

#### **Riskfor and in connection with litigations**

 

This risk pertains to the costs the Group may incur in managinglitigations, costs in connection with settlements and costs for imposedpenalties. The Group is involved in a few litigations, mainly with customers.Any estimated loss risks are fully provided for.

 

Some of the Group’s subsidiaries are involved in two so-called DesertStorm litigations, where war veterans from the Persian Gulf war have sued alarge number of companies that are alleged to have delivered equipment to Iraq.The lawsuits, which were initiated in 1994, claim damages in excess of USD1,000 million each. In Alfa Laval’s opinion, adequate guarantees have been receivedfrom Tetra Laval, covering possible losses related to these litigations.

 

Alfa Laval’s subsidiary in the US, AlfaLaval Inc, was as of December 31, 2003 named as co-defendant in a total of 123asbestos-related lawsuits with a total of approximately 19,900 plaintiffs. Thelawsuits filed in Mississippi account for approximately 99 percent of allplaintiffs.

 

Alfa Laval strongly believes the claims against the company are withoutmerit and intends to vigorously contest each lawsuit.

 

After thorough investigations Alfa Lavalcontinues to believe that potential claims in connection with asbestos relatedlawsuits against Alfa Laval Inc will be covered by insurance policies.Furthermore, primary insurance policies issued in favour of Alfa Laval Inc.provide for coverage of its defence costs.

 

During the fourth quarter 2003 Alfa LavalInc has been named as co-defendant in an additional 9 lawsuits with a total of13 plaintiffs. During the fourth quarter 7 lawsuits involving approximately 400plaintiffs have been resolved. This gives a grand total of 70 lawsuits thathave been resolved.

 

Based on current information and Alfa Laval’s understanding of theselawsuits, Alfa Laval continues to believe that these lawsuits will not have amaterial adverse effect on the company’s financial condition or results ofoperation.

 

#### **Riskfor technically related damages**

 

This risk refers to the costs Alfa Laval may incur in connection with aproduct delivered by the Group breaking down and causing damages to life andproperty. The main risk in this context concerns high-speed separators, due tothe large forces that are involved when the bowl in the separator spins with avery high number of revolutions. In a breakdown the damages can be extensive.Alfa Laval addresses these risks through extensive testing and an ISO certifiedquality assurance. The Group has product liability insurance. The number ofdamages is low and few damages have occurred historically.

 

III-26

----

 

#### **Insurancerisks**

 

These risks refer to the costs that Alfa Laval may incur due to aninadequate insurance coverage for property, business interruption, liability,transport, life and pensions. The Group strives to maintain an insurancecoverage that keeps the risk level at an acceptable level for a Group of AlfaLaval’s size and is still cost efficient. At the same time a continuous work isgoing on to minimise the risks in the operations through proactive measures.

 

#### **Risksconnected to credit terms**

 

This risk is referring to the limited freedom of action that can beimposed on the Group through restrictions connected to credit terms in loanagreements. The loan agreement with the new banking syndicate does not containany such restrictions.

 

III-27

----

 

**NOTE 1.   SEGMENT REPORTING**

 

AlfaLaval’s primary segments are the two divisions “Equipment” and “ProcessTechnology”. The divisions are based on a split into a number of customersegments. The customer segments that belong to the Equipment division purchaseproducts whereas the customer segments that belong to Process Technologypurchase systems for the processing industry. The Equipment division consistsof six customer segments: Comfort & Refrigeration, Fluids & Utility Equipment,Marine & Diesel, OEM (Original Equipment Manufacturers), Sanitary Equipmentand the aftermarket segment Parts & Service. The Process Technologydivision consists of five customer segments: Energy & Environment, FoodTechnology, Life Science, Process Industry and the aftermarket segment Parts& Service.

 

Operations are responsible for procurement,production and logistics. Other is referring to corporate overhead and non-corebusinesses.

 

#### **Divisionalreporting**

 

**Presentation of divisions**

 
| **Consolidated**     |   | **Orders received** |   |
|----------------------|--------|---------------------|--------|
| **SEK in millions**  |   | **2003**            |   | **2002** |   | **2001** |   |
| Equipment            |   | 8,069.9             |   | 8,092.6 |   | 8,557.9 |   |
| Process Technology   |   | 5,990.6             |   | 6,488.1 |   | 7,026.9 |   |
| Operations and other |   | 84.8                |   | 94.1 |   | 96.1 |   |
| Subtotal             |   | 14,145.3            |   | 14,674.8 |   | 15,680.9 |   |
| Divested             |   | —              |   | — |   | 213.0 |   |
| Total                |   | 14,145.3            |   | 14,674.8 |   | 15,893.9 |   |

 
| **Consolidated**     |   | **Order  backlog** |   |
|----------------------|--------|--------------------|--------|
| **SEK in millions**  |   | **2003**           |   | **2002** |   | **2001** |   |
| Equipment            |   | 1,598.9            |   | 1,564.5 |   | 1,648.3 |   |
| Process Technology   |   | 2,398.0            |   | 2,752.6 |   | 2,654.7 |   |
| Operations and other |   | 24.2               |   | 23.0 |   | 9.5 |   |
| Subtotal             |   | 4,021.1            |   | 4,340.1 |   | 4,312.5 |   |
| Divested             |   | —             |   | — |   | 1.0 |   |
| Total                |   | 4,021.1            |   | 4,340.1 |   | 4,313.5 |   |

 
| **Consolidated**     |   | **Net sales** |   |
|----------------------|--------|---------------|--------|
| **SEK in millions**  |   | **2003**      |   | **2002** |   | **2001** |   |
| Equipment            |   | 7,841.8       |   | 8,129.6 |   | 8,576.2 |   |
| Process Technology   |   | 5,993.6       |   | 6,377.1 |   | 6,872.0 |   |
| Operations and other |   | 73.9          |   | 88.2 |   | 169.4 |   |
| Subtotal             |   | 13,909.3      |   | 14,594.9 |   | 15,617.6 |   |
| Divested             |   | —        |   | — |   | 212.0 |   |
| Total                |   | 13,909.3      |   | 14,594.9 |   | 15,829.6 |   |

 

III-28

----

 
| **Consolidated**            |   | **Operating  income** |   |
|-----------------------------|--------|-----------------------|--------|
|                        |   |                  |   |   |   |   |   |
| SEK in millions             |   | 2003                  |   | 2002 |   | 2001 |   |
| Equipment                   |   | 1,010.9               |   | 1,098.8 |   | 1,083.6 |   |
| Process Technology          |   | 351.5                 |   | 537.5 |   | 472.7 |   |
| Operations and other        |   | (224.4                | )      | (383.3 | ) | (318.6 | ) |
| Subtotal                    |   | 1,138.0               |   | 1,253.0 |   | 1,237.7 |   |
| Comparison distortion items |   | 5.6                   |   | (29.2 | ) | 5.3 |   |
| Divested                    |   | —                |   | — |   | (9.2 | ) |
| Total                       |   | 1,143.6               |   | 1,223.8 |   | 1,233.8 |   |

 
| **Consolidated**     |   | **Assets** |   | **Liabilities** |   |
|----------------------|--------|------------|--------|-----------------|--------|
| **SEK in millions**  |   | **2003**   |   | **2002**        |   | **2003** |   | **2002** |   |
| Equipment            |   | 4,529.7    |   | 4,392.6         |   | 1,318.3 |   | 1,085.6 |   |
| Process Technology   |   | 3,791.4    |   | 4,160.3         |   | 1,019.9 |   | 1,142.3 |   |
| Operations and other |   | 4,129.7    |   | 4,738.0         |   | 1,687.8 |   | 1,983.9 |   |
| Subtotal             |   | 12,450.8   |   | 13,290.9        |   | 4,026.0 |   | 4,211.8 |   |
| Divested             |   | —     |   | —          |   | — |   | — |   |
| Subtotal             |   | 12,450.8   |   | 13,290.9        |   | 4,026.0 |   | 4,211.8 |   |
| Corporate            |   | 2,233.8    |   | 2,135.7         |   | 6,151.9 |   | 6,693.6 |   |
| Total                |   | 14,684.6   |   | 15,426.6        |   | 10,177.9 |   | 10,905.4 |   |

 

Corporate refers to balance sheet items that are interest bearing orare related to taxes.

 
| **Consolidated**     |   | **Investments** |   |
|----------------------|--------|-----------------|--------|
| **SEK in millions**  |   | **2003**        |   | **2002** |   | **2001** |   |
| Equipment            |   | 25.1            |   | 24.8 |   | 31.5 |   |
| Process Technology   |   | 33.4            |   | 33.7 |   | 38.0 |   |
| Operations and other |   | 200.0           |   | 218.2 |   | 205.4 |   |
| Subtotal             |   | 258.5           |   | 276.7 |   | 274.9 |   |
| Divested             |   | —          |   | — |   | — |   |
| Total                |   | 258.5           |   | 276.7 |   | 274.9 |   |

 

III-29

----

 
| **Consolidated**     |   | **Depreciation** |   |
|----------------------|--------|------------------|--------|
| **SEK in millions**  |   | **2003**         |   | **2002** |   | **2001** |   |
| Equipment            |   | 236.6            |   | 250.5 |   | 261.9 |   |
| Process Technology   |   | 224.0            |   | 236.2 |   | 248.6 |   |
| Operations and other |   | 326.6            |   | 351.3 |   | 395.2 |   |
| Subtotal             |   | 787.2            |   | 838.0 |   | 905.8 |   |
| Divested             |   | —           |   | — |   | 6.4 |   |
| Total                |   | 787.2            |   | 838.0 |   | 912.2 |   |

 

**Reporting by geographical markets**

 

Alfa Laval’s secondarysegments are geographical markets. Countries with more than 10 percent of netsales, assets or investments are reported separately.

 

**Presentation of geographical markets**

**Net sales**

 
| **Consolidated**    |   | **2003  SEK in millions** |   | **%**  |   | **2002  SEK in millions** |   | **%**  |   | **2001  SEK in millions** |   | **%**  |   |
|---------------------|--------|---------------------------|--------|--------|--------|---------------------------|--------|--------|--------|---------------------------|--------|--------|--------|
| Customers in        |   |                      |   |   |   |                      |   |   |   |                      |   |   |   |
| Sweden              |   | 893.2                     |   | 6.4    | %      | 835.1                     |   | 5.7    | %      | 770.0                     |   | 4.9    | %      |
| Other EU            |   | 4,727.2                   |   | 33.9   | %      | 4,953.0                   |   | 33.9   | %      | 5,448.5                   |   | 34.4   | %      |
| Other Europe        |   | 1,567.8                   |   | 11.3   | %      | 1,497.8                   |   | 10.3   | %      | 1,426.0                   |   | 9.0    | %      |
| USA                 |   | 2,159.0                   |   | 15.5   | %      | 2,638.7                   |   | 18.1   | %      | 2,815.7                   |   | 17.8   | %      |
| Other North America |   | 315.0                     |   | 2.3    | %      | 423.5                     |   | 2.9    | %      | 347.3                     |   | 2.2    | %      |
| Latin America       |   | 553.6                     |   | 4.0    | %      | 626.7                     |   | 4.3    | %      | 728.0                     |   | 4.6    | %      |
| Africa              |   | 182.7                     |   | 1.3    | %      | 69.6                      |   | 0.5    | %      | 151.7                     |   | 1.0    | %      |
| Asia                |   | 3,252.7                   |   | 23.4   | %      | 3,296.6                   |   | 22.6   | %      | 3,835.3                   |   | 24.2   | %      |
| Oceania             |   | 258.1                     |   | 1.9    | %      | 253.8                     |   | 1.7    | %      | 307.2                     |   | 1.9    | %      |
| Total               |   | 13,909.3                  |   | 100.0  | %      | 14,594.9                  |   | 100.0  | %      | 15,829.6                  |   | 100.0  | %      |

 

**Assets**

 
| **Consolidated**    |   | **2003  SEK in millions** |   | **%**  |   | **2002  SEK in millions** |   | **%**  |   | **2001  SEK in millions** |   | **%**  |   |
|---------------------|--------|---------------------------|--------|--------|--------|---------------------------|--------|--------|--------|---------------------------|--------|--------|--------|
|                |   |                      |   |   |   |                      |   |   |   |                      |   |   |   |
| Sweden              |   | 2,251.8                   |   | 15.3   | %      | 2,202.4                   |   | 14.3   | %      | 2,303.1                   |   | 13.1   | %      |
| Denmark             |   | 1,578.8                   |   | 10.8   | %      | 1,627.0                   |   | 10.5   | %      | 1,516.4                   |   | 8.6    | %      |
| Other EU            |   | 3,931.6                   |   | 26.8   | %      | 4,209.9                   |   | 27.3   | %      | 4,764.6                   |   | 27.0   | %      |
| Other Europe        |   | 379.9                     |   | 2.6    | %      | 440.3                     |   | 2.9    | %      | 478.8                     |   | 2.7    | %      |
| USA                 |   | 1,877.2                   |   | 12.8   | %      | 2,208.7                   |   | 14.3   | %      | 2,960.9                   |   | 16.8   | %      |
| Other North America |   | 323.6                     |   | 2.2    | %      | 247.2                     |   | 1.6    | %      | 280.4                     |   | 1.6    | %      |
| Latin America       |   | 220.4                     |   | 1.5    | %      | 237.4                     |   | 1.5    | %      | 374.0                     |   | 2.1    | %      |
| Africa              |   | 14.2                      |   | 0.1    | %      | 25.8                      |   | 0.2    | %      | 14.5                      |   | 0.1    | %      |
| Asia                |   | 1,687.9                   |   | 11.5   | %      | 1,924.9                   |   | 12.5   | %      | 2,235.1                   |   | 12.7   | %      |
| Oceania             |   | 185.4                     |   | 1.3    | %      | 167.3                     |   | 1.1    | %      | 184.0                     |   | 1.0    | %      |
| Subtotal            |   | 12,450.8                  |   | 84.9   | %      | 13,290.9                  |   | 86.2   | %      | 15,111.8                  |   | 85.7   | %      |
| Corporate           |   | 2,233.8                   |   | 15.2   | %      | 2,135.7                   |   | 13.8   | %      | 2,524.9                   |   | 14.3   | %      |
| Total               |   | 14,684.6                  |   | 100.1  | %      | 15,426.6                  |   | 100.0  | %      | 17,636.7                  |   | 100.0  | %      |

 

III-30

----

 

**Investments**

 
| **Consolidated**    |   | **2003  SEK in millions** |   | **%**  |   | **2002  SEK in millions** |   | **%**  |   | **2001  SEK in millions** |   | **%**  |   |
|---------------------|--------|---------------------------|--------|--------|--------|---------------------------|--------|--------|--------|---------------------------|--------|--------|--------|
|                |   |                      |   |   |   |                      |   |   |   |                      |   |   |   |
| Sweden              |   | 85.4                      |   | 32.9   | %      | 62.8                      |   | 22.7   | %      | 76.5                      |   | 27.8   | %      |
| Denmark             |   | 39.0                      |   | 15.1   | %      | 34.0                      |   | 12.3   | %      | 35.6                      |   | 13.0   | %      |
| Other EU            |   | 57.2                      |   | 22.1   | %      | 52.0                      |   | 18.8   | %      | 58.6                      |   | 21.3   | %      |
| Other Europe        |   | 5.1                       |   | 2.0    | %      | 11.5                      |   | 4.2    | %      | 22.7                      |   | 8.3    | %      |
| USA                 |   | 36.2                      |   | 14.0   | %      | 84.8                      |   | 30.6   | %      | 37.5                      |   | 13.6   | %      |
| Other North America |   | 1.2                       |   | 0.5    | %      | 1.9                       |   | 0.7    | %      | 2.4                       |   | 0.9    | %      |
| Latin America       |   | 3.0                       |   | 1.2    | %      | 2.2                       |   | 0.8    | %      | 3.8                       |   | 1.4    | %      |
| Africa              |   | 0.7                       |   | 0.3    | %      | 0.6                       |   | 0.2    | %      | 0.6                       |   | 0.2    | %      |
| Asia                |   | 29.9                      |   | 11.6   | %      | 26.0                      |   | 9.4    | %      | 35.7                      |   | 13.0   | %      |
| Oceania             |   | 0.8                       |   | 0.3    | %      | 0.9                       |   | 0.3    | %      | 1.5                       |   | 0.5    | %      |
| Total               |   | 258.5                     |   | 100.0  | %      | 276.7                     |   | 100.0  | %      | 274.9                     |   | 100.0  | %      |

 

**Note 2.  Average number of employees - total**

 
|                       |   | **Number of  female employees** |   | **Total  number of employees** |   |
|----------------------------|--------|---------------------------------|--------|--------------------------------|--------|
| **Consolidated**           |   | **2003**                        |   | **2002**                       |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
| Parent company             |   | —                          |   | —                         |   | — |   | — |   | — |   | — |   |
| Subsidiaries in Sweden (8) |   | 392                             |   | 347                            |   | 306 |   | 1,941 |   | 1,891 |   | 1,793 |   |
| Total in Sweden (8)        |   | 392                             |   | 347                            |   | 306 |   | 1,941 |   | 1,891 |   | 1,793 |   |
| Total abroad (80)          |   | 1,434                           |   | 1,444                          |   | 1,544 |   | 7,253 |   | 7,401 |   | 7,900 |   |
| Total for the Group (88)   |   | 1,826                           |   | 1,791                          |   | 1,850 |   | 9,194 |   | 9,292 |   | 9,693 |   |

 

The figures in brackets in the text column state how many companies hademployees as well as salaries and remunerations in 2003.

 

**Note 2 Continued.   Average number of employees - in Sweden by municipality**

 
| **Employees in Sweden** |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------|--------|----------|--------|----------|--------|----------|--------|
| Botkyrka                |   | 482      |   | 483      |   | 476      |   |
| Eskilstuna              |   | 179      |   | 175      |   | 181      |   |
| Göteborg           |   | 13       |   | 2        |   | 2        |   |
| Lund                    |   | 965      |   | 951      |   | 873      |   |
| Malmö              |   | 3        |   | 3        |   | 3        |   |
| Ronneby                 |   | 234      |   | 240      |   | 215      |   |
| Stockholm               |   | 3        |   | 3        |   | 10       |   |
| Other municipalities*   |   | 62       |   | 34       |   | 33       |   |
| Total                   |   | 1,941    |   | 1,891    |   | 1,793    |   |

 

----

* Municipalities with less than 10 employees and employees at branchoffices abroad.

 

III-31

----

 

**Note 2 Continued.   Average number of employees - by country**

 
|                 |   | **Number of  female employees** |   | **Total  number of employees** |   |
|----------------------|--------|---------------------------------|--------|--------------------------------|--------|
| **Consolidated**     |   | **2003**                        |   | **2002**                       |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
| Argentina            |   | 8                               |   | 6                              |   | 20 |   | 35 |   | 31 |   | 37 |   |
| Australia            |   | 19                              |   | 21                             |   | 22 |   | 66 |   | 72 |   | 84 |   |
| Belgium              |   | 28                              |   | 23                             |   | 30 |   | 128 |   | 134 |   | 140 |   |
| Brazil               |   | 21                              |   | 23                             |   | 27 |   | 104 |   | 111 |   | 122 |   |
| Bulgaria             |   | 4                               |   | 4                              |   | 6 |   | 14 |   | 14 |   | 15 |   |
| Canada               |   | 59                              |   | 28                             |   | 27 |   | 150 |   | 111 |   | 121 |   |
| Chile                |   | 5                               |   | 4                              |   | 4 |   | 22 |   | 21 |   | 19 |   |
| Colombia             |   | 5                               |   | 2                              |   | 2 |   | 12 |   | 10 |   | 10 |   |
| Denmark              |   | 269                             |   | 253                            |   | 227 |   | 1,098 |   | 1,054 |   | 978 |   |
| Estonia              |   | 2                               |   | 2                              |   | 2 |   | 4 |   | 4 |   | 5 |   |
| Philippines          |   | 3                               |   | 3                              |   | 4 |   | 21 |   | 21 |   | 21 |   |
| Finland              |   | 28                              |   | 28                             |   | 32 |   | 111 |   | 111 |   | 117 |   |
| France               |   | 119                             |   | 120                            |   | 121 |   | 599 |   | 610 |   | 620 |   |
| United Arab Emirates |   | 7                               |   | 7                              |   | 8 |   | 50 |   | 49 |   | 48 |   |
| Greece               |   | 5                               |   | 12                             |   | 13 |   | 11 |   | 34 |   | 37 |   |
| Hong Kong            |   | 7                               |   | 15                             |   | 14 |   | 18 |   | 44 |   | 61 |   |
| India                |   | 32                              |   | 29                             |   | 29 |   | 1,031 |   | 1,042 |   | 1,101 |   |
| Indonesia            |   | 13                              |   | 13                             |   | 15 |   | 68 |   | 73 |   | 73 |   |
| Iran                 |   | 2                               |   | 2                              |   | 1 |   | 9 |   | 9 |   | 7 |   |
| Italy                |   | 69                              |   | 63                             |   | 69 |   | 484 |   | 488 |   | 506 |   |
| Japan                |   | 31                              |   | 41                             |   | 47 |   | 158 |   | 165 |   | 184 |   |
| China                |   | 88                              |   | 75                             |   | 90 |   | 411 |   | 378 |   | 353 |   |
| Korea                |   | 15                              |   | 15                             |   | 16 |   | 75 |   | 77 |   | 68 |   |
| Latvia               |   | 5                               |   | 4                              |   | 4 |   | 8 |   | 7 |   | 7 |   |
| Lithuania            |   | 4                               |   | 4                              |   | 3 |   | 4 |   | 4 |   | 4 |   |
| Malaysia             |   | 25                              |   | 24                             |   | 19 |   | 70 |   | 68 |   | 72 |   |
| Mexico               |   | 5                               |   | 9                              |   | 13 |   | 40 |   | 50 |   | 62 |   |
| Netherlands          |   | 17                              |   | 32                             |   | 19 |   | 107 |   | 108 |   | 110 |   |
| Norway               |   | 15                              |   | 16                             |   | 17 |   | 54 |   | 60 |   | 74 |   |
| New Zeeland          |   | 4                               |   | 6                              |   | 7 |   | 27 |   | 32 |   | 34 |   |
| Peru                 |   | 6                               |   | 6                              |   | 6 |   | 23 |   | 26 |   | 30 |   |
| Poland               |   | 24                              |   | 25                             |   | 29 |   | 117 |   | 123 |   | 122 |   |
| Portugal             |   | 3                               |   | 3                              |   | 3 |   | 13 |   | 14 |   | 14 |   |
| Romania              |   | 5                               |   | 5                              |   | 7 |   | 12 |   | 16 |   | 19 |   |
| Russia               |   | 98                              |   | 112                            |   | 100 |   | 235 |   | 244 |   | 244 |   |
| Switzerland          |   | 2                               |   | 2                              |   | 2 |   | 15 |   | 15 |   | 15 |   |
| Singapore            |   | 21                              |   | 21                             |   | 21 |   | 48 |   | 46 |   | 49 |   |
| Slovakia             |   | 1                               |   | 1                              |   | 1 |   | 9 |   | 11 |   | 9 |   |
| Spain                |   | 31                              |   | 33                             |   | 32 |   | 202 |   | 210 |   | 218 |   |
| UK *                 |   | 53                              |   | 55                             |   | 80 |   | 334 |   | 344 |   | 519 |   |
| Sweden               |   | 392                             |   | 347                            |   | 306 |   | 1,941 |   | 1,891 |   | 1,793 |   |
| South Africa         |   | 9                               |   | 9                              |   | 9 |   | 37 |   | 38 |   | 39 |   |
| Taiwan               |   | 12                              |   | 12                             |   | 12 |   | 32 |   | 32 |   | 32 |   |
| Thailand             |   | 13                              |   | 13                             |   | 13 |   | 38 |   | 37 |   | 36 |   |
| Czech Republic       |   | 14                              |   | 13                             |   | 14 |   | 59 |   | 58 |   | 54 |   |
| Turkey               |   | 8                               |   | 7                              |   | 8 |   | 30 |   | 28 |   | 29 |   |

 

III-32

----

 
|                |   | **Number of  female employees** |   | **Total  number of employees** |   |
|---------------------|--------|---------------------------------|--------|--------------------------------|--------|
| **Consolidated**    |   | **2003**                        |   | **2002**                       |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
| Germany             |   | 51                              |   | 56                             |   | 64 |   | 256 |   | 256 |   | 347 |   |
| Hungary             |   | 5                               |   | 5                              |   | 5 |   | 24 |   | 26 |   | 28 |   |
| USA                 |   | 154                             |   | 172                            |   | 222 |   | 742 |   | 849 |   | 966 |   |
| Venezuela           |   | 4                               |   | 4                              |   | 4 |   | 17 |   | 15 |   | 17 |   |
| Austria             |   | 6                               |   | 6                              |   | 4 |   | 21 |   | 21 |   | 23 |   |
| Total for the Group |   | 1,826                           |   | 1,791                          |   | 1,850 |   | 9,194 |   | 9,292 |   | 9,693 |   |
|                |   |                            |   |                           |   |   |   |   |   |   |   |   |   |
|                |   |                            |   |                           |   |   |   | 0 |   | 1 |   | 21 |   |

 

----

* of which employed by thejoint venture Rolls Laval

 

**Note 2.  Continued.  Sick leave amongSwedish employees**

Sick leave in percent of total normal working hours for each category

 
| **Consolidated**                                  |   | **2003** |   |
|---------------------------------------------------|--------|----------|--------|
| Sick leave for:                                   |   |     |   |
| all employees                                     |   | 4.5      | %      |
| all employees during 60 consecutive days or  more |   | 2.8      | %      |
| female employees                                  |   | 6.0      | %      |
| male employees                                    |   | 4.2      | %      |
| employees at the age of 29 or younger             |   | 2.3      | %      |
| employees between 30 and 49 years of age          |   | 4.1      | %      |
| employees at the age of 50 or more                |   | 6.0      | %      |

 

**Note 2.  Continued.  Distribution ofmen/women among managers**

 
| **Consolidated**                       |   | **Number** |   | **2003  Male** |   | **Female** |   |
|----------------------------------------|--------|------------|--------|----------------|--------|------------|--------|
| Board members (excluding deputies)     |   | 3          |   | 100.0          | %      | 0.0        | %      |
| President and other executive officers |   | 10         |   | 100.0          | %      | 0.0        | %      |
| Managers in Sweden                     |   | 226        |   | 85.8           | %      | 14.2       | %      |
| Managers outside Sweden                |   | 724        |   | 86.9           | %      | 13.1       | %      |
| Managers total                         |   | 950        |   | 86.6           | %      | 13.4       | %      |
| Employees in Sweden                    |   | 1,941      |   | 79.8           | %      | 20.2       | %      |
| Employees outside Sweden               |   | 7,253      |   | 80.2           | %      | 19.8       | %      |
| Employees total                        |   | 9,194      |   | 80.1           | %      | 19.9       | %      |

 

III-33

----

 

**Note 3.   Salaries andremunerations – total**

 
| **Consolidated  SEK in millions**                   |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Board of Directors, Presidents and Vice  Presidents |   | 120.8    |   | 133.8    |   | 141.0    |   |
| of which, bonus                                     |   | 20.7     |   | 18.3     |   | 23.8     |   |
| Other                                               |   | 2,887.3  |   | 2,815.9  |   | 3,062.7  |   |
| Total salaries and remunerations                    |   | 3,008.1  |   | 2,949.7  |   | 3,203.7  |   |
| Social security costs                               |   | 609.6    |   | 548.5    |   | 550.9    |   |
| Pension costs, defined benefit plans                |   | 157.9    |   | 161.9    |   | 85.9     |   |
| Pension costs, defined premium plans                |   | 206.1    |   | 222.8    |   | 267.7    |   |
| Total costs of personnel                            |   | 3,981.7  |   | 3,883.0  |   | 4,108.2  |   |

 

The Group’s pensioncosts and pension liabilities relating to the Board of Directors, presidentsand vice presidents amounts to SEK 33.8 (46.8) (31.2) million and SEK 339.0(346.9) (376.4) million respectively. SEK 201.3 (223.0) (246.1) million of thepension liabilities is covered by the Alfa Laval Pension Fund.

 

#### **Chief ExecutiveOfficer/Managing Director**

 

The Chief Executive Officer and Managing Director Sigge Haraldssonreceives a remuneration of SEK 5,076,417 (5,098,854) (5,352,173), of whichbonus was SEK - (-) (200,000) .The bonus refers to bonus paid during the year.

 

Sigge Haraldsson has an agreement on early retirement that gives himthe option to enter into early retirement at his request from the age of 60 orto enter into early retirement at the request of the company from the age of55. In a press release on January 27, 2004 Sigge Haraldsson communicated hisintention to retire in accordance with the agreement in connection with hissixtieth birthday in October 2004. The agreement provides a pension level of 50percent of the salary at the time of retirement if he enters into earlyretirement between the age of 55 and 58 and 70 percent of the salary if heenters into early retirement after the age of 58. At early retirement, thecompany maintains the payments of pension premiums as if the employment hadlasted until the age of 65.

 

For the part of the salary that is above the ITP plan’s 30 price baseamounts (one price base amount equals SEK 38,600), the old age pension after 65is paid with 52.5 percent of the salary up to 80 price base amounts and abovethat with 32.5 percent and family pension with 16.25 percent of the salary. Hehas a special family pension that represents a life long supplement between theold age pension and the family pension according to ITP. During the year, AlfaLaval has recorded costs for pension premiums of SEK 4.9 (7.2) (7.3) million,of which SEK 1.7 (3.4) (3.4) million relates to premiums for early retirementthat are paid during a short period of time. There is no separate agreement onseverance pay.

 

#### **Other executiveofficers**

 

Other executive officers are the nine members of Group Management inaddition to the Chief Executive Officer. Their remunerations amount to SEK 20.8(21.3) (22.1) million, of which bonuses were SEK 4.5 (4.1) (2.7) million. Thebonus refers to bonus paid during the year.

 

For these executive officers, early retirement can be offered from theage of 60. The agreement normally gives a pension level of 75 percent of thesalary at the time of retirement up to 30 price base amounts and above that 50percent of the salary. Old age pension after 65 and family pension according toITP do also include the part of the salary above the ITP plan’s 30 price baseamounts. They have a special family pension that represents a supplementbetween the old age pension and the family pension according to ITP. Inaddition to that they may exchange salary and bonus for a temporary old age andfamily pension.

 

III-34

----

 

Alfa Laval has made commitments for severance pay to a limited group ofsenior executives. The commitments are restricted to a maximum amount of twoannual salaries. The commitments define the conditions that must be fulfilledin order for them to become valid.

 

**DECISION PROCEDURES FOR REMUNERATIONS TO GROUPMANAGEMENT**

 

The remunerations to the Chief Executive Officer/Managing Director andother members of Group Management are decided in the remunerations’ committeewithin the Board of Alfa Laval AB (publ).

 

The principle used when deciding the remunerations to executiveofficers is that the remuneration is mainly based on a fixed monthly salary,with an option for a company car and in addition to that a floatingremuneration in the form of a yearly bonus up to 30 percent of the salary. Thesize of the resulting bonus depends on the outcome of a number of financialmeasurements and the result of special projects, all compared with theobjectives that have been established for the year.

 

**Note 3 Continued.   Salaries and remunerations - by country**

 
| **Consolidated**     |   | **Board of  Directors,  Presidents  and Vice Presidents** |   | **Other  employees** |   |
|----------------------|--------|-----------------------------------------------------------|--------|----------------------|--------|
| **SEK in millions**  |   | **2003**                                                  |   | **2002**             |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
| Argentina            |   | 0.6                                                       |   | 0.5                  |   | 1.1 |   | 2.8 |   | 3.6 |   | 10.1 |   |
| Australia            |   | 2.7                                                       |   | 2.6                  |   | 2.4 |   | 20.2 |   | 19.9 |   | 21.6 |   |
| Belgium              |   | 3.1                                                       |   | 3.3                  |   | 3.7 |   | 52.3 |   | 48.8 |   | 46.4 |   |
| Brazil               |   | 1.3                                                       |   | 1.1                  |   | 1.4 |   | 13.0 |   | 16.4 |   | 22.2 |   |
| Bulgaria             |   | 0.3                                                       |   | 0.2                  |   | 0.2 |   | 1.4 |   | 1.1 |   | 1.1 |   |
| Canada               |   | 3.5                                                       |   | 3.3                  |   | 4.0 |   | 59.0 |   | 41.5 |   | 43.8 |   |
| Chile                |   | 0.0                                                       |   | 0.0                  |   | 0.0 |   | 2.7 |   | 3.2 |   | 5.5 |   |
| Colombia             |   | 0.5                                                       |   | 0.4                  |   | 0.5 |   | 0.9 |   | 0.9 |   | 1.0 |   |
| Denmark              |   | 11.9                                                      |   | 9.1                  |   | 8.3 |   | 527.9 |   | 409.0 |   | 431.9 |   |
| Estonia              |   | 0.0                                                       |   | 0.0                  |   | 0.0 |   | 0.2 |   | 0.5 |   | 0.7 |   |
| Philippines          |   | 0.4                                                       |   | 0.4                  |   | 0.3 |   | 1.5 |   | 1.8 |   | 1.8 |   |
| Finland              |   | 2.5                                                       |   | 2.6                  |   | 2.2 |   | 38.7 |   | 38.8 |   | 40.0 |   |
| France               |   | 2.8                                                       |   | 3.4                  |   | 4.2 |   | 180.5 |   | 178.0 |   | 173.9 |   |
| United Arab Emirates |   | 1.2                                                       |   | 1.7                  |   | 1.4 |   | 10.5 |   | 14.5 |   | 13.6 |   |
| Greece               |   | 0.0                                                       |   | 0.0                  |   | 0.0 |   | 3.8 |   | 10.6 |   | 10.6 |   |
| Hong Kong            |   | 2.8                                                       |   | 3.4                  |   | 3.5 |   | 14.2 |   | 22.7 |   | 25.5 |   |
| India                |   | 1.5                                                       |   | 1.2                  |   | 1.2 |   | 36.4 |   | 39.7 |   | 39.7 |   |
| Indonesia            |   | 0.6                                                       |   | 0.5                  |   | 0.5 |   | 4.3 |   | 4.6 |   | 4.5 |   |
| Iran                 |   | 0.0                                                       |   | 0.0                  |   | 0.0 |   | 6.5 |   | 4.1 |   | 3.6 |   |
| Italy                |   | 3.1                                                       |   | 4.5                  |   | 4.1 |   | 133.4 |   | 125.2 |   | 134.3 |   |
| Japan                |   | 6.9                                                       |   | 8.8                  |   | 8.4 |   | 77.3 |   | 84.9 |   | 115.2 |   |
| China                |   | 0.0                                                       |   | 0.0                  |   | 0.0 |   | 28.7 |   | 21.6 |   | 19.9 |   |
| Korea                |   | 1.3                                                       |   | 1.0                  |   | 0.8 |   | 19.4 |   | 19.9 |   | 18.9 |   |
| Latvia               |   | 0.5                                                       |   | 0.4                  |   | 0.4 |   | 1.0 |   | 1.0 |   | 0.9 |   |
| Lithuania            |   | 0.0                                                       |   | 0.0                  |   | 0.0 |   | 0.7 |   | 0.7 |   | 0.7 |   |
| Malaysia             |   | 1.4                                                       |   | 1.5                  |   | 1.4 |   | 9.3 |   | 10.5 |   | 11.9 |   |
| Mexico               |   | 1.5                                                       |   | 1.7                  |   | 5.4 |   | 8.8 |   | 11.1 |   | 13.0 |   |
| Netherlands          |   | 2.6                                                       |   | 2.3                  |   | 2.1 |   | 45.9 |   | 46.4 |   | 46.0 |   |
| Norway               |   | 1.6                                                       |   | 1.3                  |   | 1.3 |   | 29.3 |   | 36.4 |   | 37.3 |   |
| New Zeeland          |   | 0.6                                                       |   | 0.4                  |   | 0.0 |   | 6.6 |   | 7.7 |   | 8.4 |   |

 

III-35

----

 
| **Consolidated**    |   | **Board of  Directors, Presidents  and Vice Presidents** |   | **Other  employees** |   |
|---------------------|--------|----------------------------------------------------------|--------|----------------------|--------|
| **SEK in millions** |   | **2003**                                                 |   | **2002**             |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
| Peru                |   | 0.6                                                      |   | 1.1                  |   | 1.1 |   | 2.9 |   | 3.7 |   | 6.1 |   |
| Poland              |   | 2.4                                                      |   | 4.0                  |   | 3.7 |   | 11.9 |   | 14.1 |   | 15.0 |   |
| Portugal            |   | 0.4                                                      |   | 1.8                  |   | 1.8 |   | 3.3 |   | 3.2 |   | 3.0 |   |
| Romania             |   | 0.0                                                      |   | 0.0                  |   | 0.0 |   | 1.6 |   | 2.3 |   | 2.5 |   |
| Russia              |   | 0.0                                                      |   | 1.4                  |   | 1.3 |   | 24.3 |   | 25.8 |   | 27.6 |   |
| Switzerland         |   | 1.5                                                      |   | 1.9                  |   | 1.7 |   | 10.3 |   | 10.5 |   | 9.9 |   |
| Singapore           |   | 1.4                                                      |   | 1.4                  |   | 1.8 |   | 10.3 |   | 11.8 |   | 11.2 |   |
| Slovakia            |   | 0.0                                                      |   | 0.1                  |   | 0.0 |   | 1.1 |   | 1.2 |   | 1.4 |   |
| Spain               |   | 1.8                                                      |   | 1.8                  |   | 1.1 |   | 67.4 |   | 64.0 |   | 69.5 |   |
| UK                  |   | 0.0                                                      |   | 4.8                  |   | 6.0 |   | 114.9 |   | 124.7 |   | 176.8 |   |
| Sweden              |   | 22.5                                                     |   | 21.6                 |   | 27.6 |   | 715.7 |   | 676.4 |   | 629.6 |   |
| South Africa        |   | 1.6                                                      |   | 0.6                  |   | 0.6 |   | 7.4 |   | 6.0 |   | 6.7 |   |
| Taiwan              |   | 0.7                                                      |   | 0.9                  |   | 0.9 |   | 6.6 |   | 7.9 |   | 8.9 |   |
| Thailand            |   | 1.1                                                      |   | 1.3                  |   | 1.1 |   | 3.9 |   | 4.4 |   | 4.5 |   |
| Czech Republic      |   | 0.7                                                      |   | 0.8                  |   | 0.7 |   | 7.1 |   | 7.0 |   | 5.9 |   |
| Turkey              |   | 1.4                                                      |   | 1.1                  |   | 0.9 |   | 6.6 |   | 5.1 |   | 4.7 |   |
| Germany             |   | 7.3                                                      |   | 13.9                 |   | 11.8 |   | 136.3 |   | 133.7 |   | 168.5 |   |
| Hungary             |   | 0.8                                                      |   | 0.7                  |   | 0.5 |   | 2.9 |   | 3.4 |   | 3.2 |   |
| USA                 |   | 20.4                                                     |   | 17.0                 |   | 17.5 |   | 404.0 |   | 475.6 |   | 591.8 |   |
| Venezuela           |   | 0.0                                                      |   | 0.0                  |   | 0.0 |   | 2.5 |   | 2.0 |   | 2.3 |   |
| Austria             |   | 1.0                                                      |   | 1.7                  |   | 1.7 |   | 9.1 |   | 8.2 |   | 9.2 |   |
| Total for the Group |   | 120.8                                                    |   | 133.8                |   | 141.0 |   | 2,887.3 |   | 2,815.9 |   | 3,062.7 |   |

 

**Note4.   Information on auditors’ fee**

 

During 2000 quotationswere taken in from four of the large international audit firms. After aselection process, Ernst & Young were given the assignment to be theGroup’s auditors as of year 2000 and four years ahead. Ernst & Young werealready the Group’s main auditors and audited the consolidated Group and mostof the subsidiaries.

 

At the beginning of2004, new quotations were taken in from four of the large international auditfirms. The purpose with the selection process is to assign the auditors for theGroup for the coming four years.

 

Fees and expense compensation

 
| **Consolidated  SEK in millions** |              | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------|-------------------|----------|--------|----------|--------|----------|--------|
|                              |              |     |   |     |   |     |   |
| Audit                             |              |     |   |     |   |     |   |   |
|                              | Ernst & Young |     | 10.9   |     | 12.7   |     | 10.2   |   |
|                              | Other audit firms |     | 1.1    |     | 1.1    |     | 2.7    |   |
|                              | Total             |     | 12.0   |     | 13.8   |     | 12.9   |   |
|                              |              |     |   |     |   |     |   |   |
| Other projects                    |              |     |   |     |   |     |   |   |
|                              | Ernst & Young |     | 2.7    |     | 2.8    |     | 7.2    |   |
|                              | Other audit firms |     | 4.8    |     | 6.6    |     | 5.3    |   |
|                              | Total             |     | 7.5    |     | 9.4    |     | 12.5   |   |

 

III-36

----

 

An auditincludes examining the financial statements, assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. It also includes anexamination in order to give an opinion on the Board’s discharge fromliability. All other assignments are defined as other projects.

 

**Note 5.   Advertising costs**

 

Advertisingcosts have amounted to SEK 47.3 (40.0) (53.9) million. These refer to costs foradvertisements in newspapers and technical press, participation in trade fairs,brochures and for year 2001 the building of the Alfa Laval trademark and the newlogotype.

 

**Note6.   Comparison distortion items**

 
| **Consolidated  SEK in millions** |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Sale of real estate               |   | 5.6      |   | (43.2    | )      | (4.7     | )      |
| Sale of Industrial Flow           |   | —   |   | 14.0     |   | 10.0     |   |
| Total                             |   | 5.6      |   | (29.2    | )      | 5.3      |   |

 

On February 26, 2003 the property in Newmarket in Canada was sold forSEK 20.0 million, with a realised gain of SEK 3.6 million. In connection withthe construction of a new headquarter building in Lund a piece of land was soldto the new landlord for SEK 3.8 million with a realised gain of  SEK 2.0 million.

 

The sale of the property in Warminster,the United States was completed in March 2002 at a price of SEK 62.1 millionand with a realised loss of SEK -43.2 million.

 

During 2001 the following properties weresold. The real estate in Johannesburg in South Africa was divested in May. Thesales price was SEK 13.6 million resulting in a realised loss of SEK -0.3million. The sale of the real estate in Glinde in Germany was completed inOctober for a price of SEK 196.4 million, with a realised loss of SEK -8.3million. In addition, some smaller properties in Spain and Sweden and onecondominium in Sweden were sold for a total of SEK 14.2 million, with arealised gain of SEK 3.9 million.

 

The divestment of the operation calledIndustrial Flow was made on April 2, 2001. The sales price was SEK 330.6million. In the annual report for 2001, a realised gain of  SEK 10.0 million was recognised. A fewactivities remained before the divestment could be completed. During September2002 a final settlement was made with the buyer, resulting in an increase ofthe realised gain by SEK 14.0 million.

 

**Note7.   Depreciation by function**

 
| **Consolidated  SEK in millions** |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Cost of goods sold                |   | (455.9   | )      | (478.0   | )      | (499.8   | )      |
| Sales                             |   | (50.8    | )      | (60.1    | )      | (68.7    | )      |
| Administration                    |   | (72.8    | )      | (97.9    | )      | (145.3   | )      |
| Research and development          |   | (7.2     | )      | (7.5     | )      | (8.6     | )      |
| Other income and costs            |   | (9.2     | )      | (6.8     | )      | (11.8    | )      |
| Goodwill                          |   | (191.3   | )      | (187.7   | )      | (178.0   | )      |
| Total                             |   | (787.2   | )      | (838.0   | )      | (912.2   | )      |

 

III-37

----

 

**Note8.   Depreciation by type of assets**

 
| **Consolidated  SEK in millions**         |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Goodwill                                  |   | (191.3   | )      | (187.7   | )      | (178.0   | )      |
| Patents, trademarks, etc.                 |   | (204.7   | )      | (208.3   | )      | (214.6   | )      |
| Machinery and equipment                   |   | (316.1   | )      | (351.4   | )      | (403.6   | )      |
| Financial leasing machinery and equipment |   | (4.7     | )      | (7.8     | )      | (10.9    | )      |
| Buildings and ground installations        |   | (70.4    | )      | (82.8    | )      | (105.1   | )      |
| Total                                     |   | (787.2   | )      | (838.0   | )      | (912.2   | )      |

 

**Note9.   Result from other securities andreceivables accounted for as fixed assets**

 
| **Consolidated  SEK in millions** |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Dividends from other              |   | 6.9      |   | 7.8      |   | 9.6      |   |
| Total                             |   | 6.9      |   | 7.8      |   | 9.6      |   |

 

**Note10.   Interest income/costs and similarresult items**

 
| **Consolidated  SEK in millions** |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Interest income                   |   |     |   |     |   |     |   |
| Financial leasing                 |   |     |   |     |   |     |   |
| External companies                |   | 0.8      |   | 0.2      |   | 0.0      |   |
| Other interest                    |   |     |   |     |   |     |   |
| External companies                |   | 132.9    |   | 139.5    |   | 108.0    |   |
| Exchange gains                    |   |     |   |     |   |     |   |
| Unrealised                        |   | 42.6     |   | 46.3     |   | 76.9     |   |
| Realised                          |   | 91.2     |   | 136.7    |   | 53.0     |   |
| Total                             |   | 267.5    |   | 322.7    |   | 238.0    |   |
|                              |   |     |   |     |   |     |   |
| Interest costs                    |   |     |   |     |   |     |   |
| Financial leasing                 |   |     |   |     |   |     |   |
| External companies                |   | (1.4     | )      | (2.7     | )      | (1.7     | )      |
| Other interest                    |   |     |   |     |   |     |   |
| External companies                |   | (404.8   | )      | (644.2   | )      | (831.4   | )      |
| Exchange loss                     |   |     |   |     |   |     |   |
| Unrealised                        |   | (101.7   | )      | (26.0    | )      | (244.8   | )      |
| Realised                          |   | (93.4    | )      | (130.6   | )      | (30.4    | )      |
| Total                             |   | (601.3   | )      | (803.5   | )      | (1,108.3 | )      |

 

In the Group, reportednet exchange differences of SEK 194.8 (164.9) (-105.5) million relating todebts in foreign currencies have been charged to unrestricted equity. Thesedebts finance the acquisition of shares in foreign subsidiaries and act as ahedge to the acquired net assets. Since 2003 the amount is charged with tax,due to the estimated absorption of tax losses in Sweden, resulting in a netafter tax equity impact of SEK 140.3 million. In the parent company, theexchange differences are taken to the income statement.

 

III-38

----

 

**Note11.   Minority interest**

 

The minority share insubsidiaries’ result and minority interests in the balance sheet relate to foursubsidiaries in India and Russia where minority owners exist.

 

**Note12.   Taxes on this year’s result andother taxes for the Group**

 
| **Consolidated  SEK in millions**                                |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                             |   |     |   |     |   |     |   |
| **The major components of the Group’s tax  costs**          |   |     |   |     |   |     |   |
| Current tax cost                                                 |   | (341.6   | )      | (336.0   | )      | (396.9   | )      |
| Adjustment for current taxes on prior  periods                   |   | 38.1     |   | 72.1     |   | 84.8     |   |
| Deferred tax costs/income on changes in  temporary differences   |   | 153.3    |   | 95.0     |   | 374.6    |   |
| Deferred tax costs/income on changes in tax  rates or new taxes  |   | (14.0    | )      | 3.4      |   | 12.0     |   |
| Tax income from previously unrecognised tax  losses or tax       |   |     |   |     |   |     |   |
| credits on temporary differences of prior  periods               |   | 40.4     |   | 6.0      |   | 1.3      |   |
| Deferred tax income from previously  unrecognised tax losses or  |   |     |   |     |   |     |   |
| tax credits on temporary differences of  prior periods           |   | 26.1     |   | 0.3      |   | 0.7      |   |
| Deferred tax cost from the write down or  reversal of a previous |   |     |   |     |   |     |   |
| write down of a deferred tax asset                               |   | (17.0    | )      | (26.5    | )      | (15.6    | )      |
| Other taxes                                                      |   | (19.8    | )      | (32.6    | )      | (34.6    | )      |
| Total tax cost                                                   |   | (134.5   | )      | (218.3   | )      | 26.3     |   |

 

The differencebetween the tax costs of the Group and the tax cost based upon applicable taxrates, can be explained as follows:

 
| **Consolidated  SEK in millions**                           |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                        |   |     |   |     |   |     |   |
| Result before minority interests and tax                    |   | 816.7    |   | 460.1    |   | 373.1    |   |
| Tax according to applicable tax rates                       |   | (194.7   | )      | (133.6   | )      | (14.6    | )      |
|                                                        |   |     |   |     |   |     |   |
| Tax effect of:                                              |   |     |   |     |   |     |   |
| Non-deductible effect of depreciation of  goodwill          |   | (63.1    | )      | (61.9    | )      | (58.7    | )      |
| Equity hedge (tax effect not booked prior  to 2003)         |   | —   |   | (46.2    | )      | 29.5     |   |
| Non-deductible costs                                        |   | (26.8    | )      | (127.1   | )      | (198.7   | )      |
| Non-taxable income                                          |   | 44.0     |   | 131.4    |   | 119.8    |   |
| Differences between reported official  depreciation         |   |     |   |     |   |     |   |
| and depreciation according to tax rules                     |   | (16.0    | )      | (7.2     | )      | (7.4     | )      |
| Differences between reported other official  appropriations |   |     |   |     |   |     |   |
| and other appropriations according to tax  rules            |   | (50.8    | )      | (40.7    | )      | 12.1     |   |
| Tax losses and tax credits                                  |   | 154.6    |   | 2.8      |   | 42.5     |   |
| Other                                                       |   | (19.8    | )      | (7.9     | )      | 17.0     |   |
| Adjustment for current tax on prior periods                 |   | 38.1     |   | 72.1     |   | 84.8     |   |
| Total tax costs                                             |   | (134.5   | )      | (218.3   | )      | 26.3     |   |

 

Since 2003 the equityhedge is charged with tax, due to the estimated absorption of tax losses inSweden. For 2002 and earlier this means that the tax effect calculated onresult before minority interests and tax has been adjusted. Non-deductible costs are referring to a largenumber of different items. Tax losses and tax credits for 2003 are referring toused tax losses in Sweden.

 

III-39

----

 

Temporarydifferences exist when there is a difference between the book value and the taxbase of assets and liabilities. The Group’s temporary differences have resultedin a deferred tax asset or a deferred tax liability relating to the followingassets and liabilities:

 
| **Consolidated**             |   | **2003  Deferred tax** |   | **2002  Deferred tax** |   |
|------------------------------|--------|------------------------|--------|------------------------|--------|
| **SEK in millions**          |   | **asset**              |   | **liability**          |   | **asset** |   | **liability** |   |
| Intangible  assets           |   | 51.3                   |   | 338.3                  |   | 71.5 |   | 422.3 |   |
| Tangible assets              |   | 45.8                   |   | 404.9                  |   | 10.0 |   | 471.1 |   |
| Inventory                    |   | 79.5                   |   | 18.0                   |   | 44.4 |   | 27.7 |   |
| Other current assets         |   | 3.7                    |   | 1.2                    |   | 11.3 |   | 2.5 |   |
| Financial assets             |   | —                 |   | —                 |   | 4.5 |   | — |   |
| Short term liabilities       |   | 332.8                  |   | 65.4                   |   | 373.9 |   | 40.8 |   |
|                         |   |                   |   |                   |   |   |   |   |   |
| Tax losses and tax credits * |   | 8.0                    |   | —                 |   | 19.3 |   | — |   |
| Other                        |   | 2.9                    |   | 40.8                   |   | 11.5 |   | 38.2 |   |
| Subtotal                     |   | 524.0                  |   | 868.6                  |   | 546.4 |   | 1,002.6 |   |
|                         |   |                   |   |                   |   |   |   |   |   |
| Possible to net              |   | (51.6                  | )      | (51.6                  | )      | (12.3 | ) | (12.3 | ) |
| Total deferred taxes         |   | 472.4                  |   | 817.0                  |   | 534.1 |   | 990.3 |   |

 

----

* The Group hasreported a deferred tax asset on unused tax losses and tax grants of SEK 25.0(61.4) million. These unused tax losses and tax grants are essentially notrestricted in time.

 

In the Group there aretemporary differences and unused tax losses and tax credits of SEK 1,317.4(2,197.1) million that have not resulted in corresponding deferred tax assets,since these are not likely to be used.

 

The Group’snormal effective tax rate is approximately 33 (33) percent based on taxableresult, and it is calculated as a weighted average based on each subsidiary’spart of the result before tax. Due to the large tax losses the actual tax ratewas 13.5 percent during 2003.

 

III-40

----

 

The nominal taxrate has changed in the following countries during 2003 to 2001.

 
|                 |   | **Tax rates  in percentage** |   |
|----------------------|--------|------------------------------|--------|
| **Consolidated**     |   | **2003**                     |   | **2002** |   | **2001** |   |
| India                |   | 37                           |   | 37 |   | 36 |   |
| Iran                 |   | 40                           |   | 40 |   | 12 |   |
| Singapore            |   | 22                           |   | 22 |   | 25 |   |
| France               |   | 35                           |   | 35 |   | 34 |   |
| Greece               |   | 35                           |   | 35 |   | 38 |   |
| Italy                |   | 38                           |   | 38 |   | 40 |   |
| Chile                |   | 16                           |   | 16 |   | 15 |   |
| China                |   | 11                           |   | 11 |   | 3 |   |
| Korea                |   | 29                           |   | 29 |   | 28 |   |
| United Arab Emirates |   | 0                            |   | 7 |   | 4 |   |
| Switzerland          |   | 24                           |   | 24 |   | 28 |   |
| Turkey               |   | 30                           |   | 28 |   | 33 |   |
| Russia               |   | 24                           |   | 24 |   | 35 |   |
| Latvia               |   | 22                           |   | 22 |   | 25 |   |
| Lithuania            |   | 15                           |   | 15 |   | 24 |   |
| Canada               |   | 37                           |   | 39 |   | 35 |   |
| Peru                 |   | 27                           |   | 25 |   | 25 |   |
| Belgium              |   | 34                           |   | 40 |   | 40 |   |
| Bulgaria             |   | 24                           |   | 20 |   | 20 |   |
| Slovakia             |   | 25                           |   | 29 |   | 29 |   |
| Czech Republic       |   | 28                           |   | 31 |   | 31 |   |
| Poland               |   | 19                           |   | 28 |   | 28 |   |

 

**Note13.   Goodwill and step-up valuesrelated to the acquisition on August 24, 2000**

 

When Industri Kapitalacquired the Alfa Laval Group from Tetra Laval on August 24, 2000, theacquisition value for the shares was SEK 8,213.8 million. Below is shown asummary of the goodwill and the group step-up or step down values that theacquisition resulted in per type of asset at August 24, 2000 and at December31, 2003. The goodwill is amortised over 20 years. The correspondingpresentation by asset type is found in Notes 14 and 15.

 

III-41

----

 
|                                   |   | **Allocated  August 24  2000** |                 | **Alfa Laval  Special Finance 2003** |         |
|----------------------------------------|--------|--------------------------------|----------------------|--------------------------------------|--------------|
| **Consolidated  SEK in millions**      |   |                           | **Opening  balance** |                                 | **Acquired** |   | **Realised** |   | **Planned****amortisation** |   | **Translation****difference** |   | **Closing****balance** |   |
| Buildings                              |   | 1,058.5                        |                 | 604.8                                |         | 0.9 |   | (0.1 | ) | (26.0 | ) | (25.8 | ) | 553.8 |   |
| Land and land improvements             |   | (228.4                         | )                    | (129.9                               | )            | — |   | (0.7 | ) | — |   | 20.4 |   | (110.2 | ) |
| Machinery                              |   | 548.3                          |                 | 443.7                                |         | — |   | — |   | (56.7 | ) | (17.2 | ) | 369.8 |   |
| Equipment                              |   | 452.1                          |                 | 361.2                                |         | — |   | — |   | (29.3 | ) | (21.0 | ) | 310.9 |   |
| Construction in progress               |   | 15.9                           |                 | —                               |         | — |   | — |   | — |   | — |   | — |   |
| Inventory                              |   | 340.2                          |                 | —                               |         | — |   | — |   | — |   | — |   | — |   |
| Patent and trademarks                  |   | 461.3                          |                 | 408.3                                |         | 22.3 |   | — |   | (22.3 | ) | (30.1 | ) | 378.2 |   |
| Technology                             |   | 1,279.8                        |                 | 891.9                                |         | — |   | — |   | (168.5 | ) | (40.3 | ) | 683.1 |   |
| Research and development               |   | 53.6                           |                 | —                               |         | — |   | — |   | — |   | — |   | — |   |
| Capital gain (Industrial Flow)         |   | 41.8                           |                 | —                               |         | — |   | — |   | — |   | — |   | — |   |
| Subtotal step-up values                |   | 4,023.1                        |                 | 2,580.0                              |         | 23.2 |   | (0.8 | ) | (302.8 | ) | (114.0 | ) | 2,185.6 |   |
| Goodwill                               |   | 3,276.6                        |                 | 3,369.0                              |         | 7.6 |   | — |   | (184.8 | ) | (234.0 | ) | 2,957.8 |   |
|                                   |   |                           |                 |                                 |         |   |   |   |   |   |   |   |   |   |   |
| Goodwill related to the acquisition of |   |                           |                 |                                 |         |   |   |   |   |   |   |   |   |   |   |
| Toftejorg                              |   |                           |                 | —                               |         | 33.0 |   | — |   | (3.3 | ) | (0.4 | ) | 29.3 |   |
| bioKinetics                            |   |                           |                 | —                               |         | 121.3 |   | — |   | (3.2 | ) | (6.7 | ) | 111.4 |   |
| Subtotal goodwill                      |   |                           |                 | 3,369.0                              |         | 161.9 |   | — |   | (191.3 | ) | (241.1 | ) | 3,098.5 |   |
| Total                                  |   | 7,299.7                        |                 | 5,949.0                              |         | 185.1 |   | (0.8 | ) | (494.1 | ) | (355.1 | ) | 5,284.1 |   |

 

For assets sold, netgains or losses are recognised on the costs basis including any related step-upvalue. Construction in process was transferred to machinery in 2001.

 

In connection with theIPO in 2002 an additional purchase price of EUR 40.0 million, corresponding toSEK 367.5 million, was paid to Tetra Laval BV for the original acquisition onAugust 24, 2000 of the former Alfa Laval Holding AB Group. This has beenreported entirely as goodwill in the Group and is amortised over the sameperiod as the original acquisition. As the acquisition of 13,1 percent of AlfaLaval (India) Ltd was contingent on the change of ownership on August 24, 2000,the resulting goodwill is presented together with the goodwill that appeared atthe acquisition on August 24, 2000.

 

The difference betweenthe purchase price paid and the net assets acquired in Toftejorg is SEK 33.9million. SEK 0.9 million of this has been allocated to a property in the US,while the residual SEK 33.0 million has been allocated to goodwill. Thegoodwill is amortised over 10 years.

 

The difference between the purchase price paid and the net assetsacquired in bioKinetics is SEK 143.6 million. SEK 22.3 million of this has beenallocated to patents and un-patented know-how, while the residual SEK 121.3million has been allocated to goodwill. The goodwill is amortised over 10 years.

 

The remaining increaseof SEK 7.6 million in goodwill is related to the acquisition of DanishSeparation Systems A/S in 2002.

 

There is no deferredtax liability calculated on the goodwill. The deferred tax liability on theother step-up values is SEK 686.3 (826.7) million.

 

III-42

----

 

**Note 14.  Intangible fixed assets**

 
| **Consolidated  SEK in millions**                                  |   | **2003** |   | **2002** |   |
|--------------------------------------------------------------------|--------|----------|--------|----------|--------|
| **Concessions, patents, licenses, trademarks  and similar rights** |   |     |   |     |   |
| Opening balance, accumulated acquisition  values                   |   | 2,132.8  |   | 1,993.8  |   |
| Purchases                                                          |   | 5.0      |   | 0.6      |   |
| Acquisition of businesses                                          |   | 22.3     |   | 0.0      |   |
| Sales/disposals                                                    |   | 0.0      |   | (2.4     | )      |
| Reclassifications                                                  |   | 0.0      |   | (13.5    | )      |
| Step-up values, patents and trademarks                             |   | 21.0     |   | —   |   |
| Translation difference for the year                                |   | (104.4   | )      | 154.3    |   |
| **Closing balance, accumulated acquisition  values**               |   | 2,076.7  |   | 2,132.8  |   |
|                                                               |   |     |   |     |   |
| Opening balance, accumulated depreciation                          |   | (799.2   | )      | (353.8   | )      |
| Sales/disposals                                                    |   | 0.0      |   | 2.4      |   |
| Reclassifications                                                  |   | 0.0      |   | 10.8     |   |
| Depreciation of step-up value, patent &  trademarks            |   | (22.3    | )      | (24.1    | )      |
| Depreciation of step-up value, technology                          |   | (168.5   | )      | (177.2   | )      |
| Depreciation for the year                                          |   | (13.8    | )      | (6.9     | )      |
| Translation difference for the year                                |   | 27.9     |   | (250.4   | )      |
| **Closing balance, accumulated depreciation**                      |   | (975.9   | )      | (799.2   | )      |
|                                                               |   |     |   |     |   |
| **Closing balance, net book value**                                |   | 1,100.8  |   | 1,333.6  |   |
| **Goodwill**                                                       |   |     |   |     |   |
| Opening balance, accumulated acquisition  values                   |   | 3,768.6  |   | 3,611.7  |   |
| Goodwill in connection with acquisition of  businesses             |   | 161.9    |   | 102.4    |   |
| Additional purchase price                                          |   | 0.0      |   | 367.5    |   |
| Translation difference for the year                                |   | (276.7   | )      | (313.0   | )      |
| **Closing balance, accumulated acquisition  values**               |   | 3,653.8  |   | 3,768.6  |   |
|                                                               |   |     |   |     |   |
| Opening balance, accumulated depreciation                          |   | (399.6   | )      | (238.8   | )      |
| Depreciation for the year                                          |   | (191.3   | )      | (187.7   | )      |
| Translation difference for the year                                |   | 35.6     |   | 26.9     |   |
| **Closing balance, accumulated depreciation**                      |   | (555.3   | )      | (399.6   | )      |
|                                                               |   |     |   |     |   |
| **Closing balance, net book value**                                |   | 3,098.5  |   | 3,369.0  |   |
| **Renting rights and similar rights**                              |   |     |   |     |   |
| Opening balance, accumulated acquisition  values                   |   | 1.1      |   | 0.6      |   |
| Purchases                                                          |   | 0.1      |   | 0.1      |   |
| Reclassifications                                                  |   | 0.0      |   | 0.4      |   |
| Translation difference for the year                                |   | 0.0      |   | 0.0      |   |
| **Closing balance, accumulated acquisition  values**               |   | 1.2      |   | 1.1      |   |
|                                                               |   |     |   |     |   |
| Opening balance, accumulated depreciation                          |   | (0.4     | )      | (0.2     | )      |
| Reclassifications                                                  |   | 0.0      |   | (0.2     | )      |
| Depreciation for the year                                          |   | (0.1     | )      | (0.1     | )      |
| Translation difference for the year                                |   | 0.0      |   | 0.1      |   |
| **Closing balance, accumulated depreciation**                      |   | (0.5     | )      | (0.4     | )      |
|                                                               |   |     |   |     |   |
| **Closing balance, net book value**                                |   | 0.7      |   | 0.7      |   |

 

III-43

----

 

**Note 15.  Property, plant and equipment**

 
| **Consolidated  SEK in millions**                    |   | **2003** |   | **2002** |   |
|------------------------------------------------------|--------|----------|--------|----------|--------|
| **Real estate**                                      |   |     |   |     |   |
| Opening balance, accumulated acquisition  values     |   | 1,971.2  |   | 2,305.0  |   |
| Purchases                                            |   | 13.6     |   | 12.0     |   |
| Acquisition of businesses                            |   | 9.0      |   | 17.9     |   |
| Sales/disposal                                       |   | (46.3    | )      | (158.5   | )      |
| Reclassifications                                    |   | 29.8     |   | 29.1     |   |
| Realisation of step-up values due to sale            |   | (0.8     | )      | 8.5      |   |
| Translation difference for the year                  |   | (147.9   | )      | (242.8   | )      |
| **Closing balance, accumulated acquisition  values** |   | 1,828.6  |   | 1,971.2  |   |
|                                                 |   |     |   |     |   |
| Opening balance, accumulated depreciation            |   | (750.7   | )      | (916.0   | )      |
| Sales/disposals                                      |   | 6.6      |   | 75.6     |   |
| Acquisition of businesses                            |   | (2.3     | )      | (1.3     | )      |
| Reclassifications                                    |   | (3.9     | )      | 47.7     |   |
| Depreciation of step-up value                        |   | (26.0    | )      | (27.5    | )      |
| Depreciation for the year                            |   | (43.6    | )      | (54.6    | )      |
| Translation difference for the year                  |   | 74.5     |   | 125.4    |   |
| **Closing balance, accumulated depreciation**        |   | (745.4   | )      | (750.7   | )      |
|                                                 |   |     |   |     |   |
| Opening balance, accumulated revaluations,  net      |   | 89.4     |   | 90.0     |   |
| Reclassifications                                    |   | (0.6     | )      | 0.0      |   |
| Revaluation for the year                             |   | 0.0      |   | 0.1      |   |
| Depreciation for the year on revaluations            |   | (0.8     | )      | (0.7     | )      |
| **Closing balance, accumulated revaluations,  net**  |   | 88.0     |   | 89.4     |   |
|                                                 |   |     |   |     |   |
| **Closing balance, net book value**                  |   | 1,171.2  |   | 1,309.9  |   |
|                                                 |   |     |   |     |   |
| **Machinery and other technical installations**      |   |     |   |     |   |
| Opening balance, accumulated acquisition  values     |   | 2,611.6  |   | 2,828.1  |   |
| Purchases                                            |   | 85.1     |   | 97.6     |   |
| Acquisition of businesses                            |   | 14.1     |   | 6.6      |   |
| Sales/disposal                                       |   | (40.4    | )      | (157.0   | )      |
| Reclassifications                                    |   | (10.4    | )      | 56.9     |   |
| Translation difference for the year                  |   | (159.2   | )      | (220.6   | )      |
| **Closing balance, accumulated acquisition  values** |   | 2,500.8  |   | 2,611.6  |   |
|                                                 |   |     |   |     |   |
| Opening balance, accumulated depreciation            |   | (1,628.5 | )      | (1,690.3 | )      |
| Sales/disposals                                      |   | 37.4     |   | 132.2    |   |
| Acquisition of businesses                            |   | 0.0      |   | (2.5     | )      |
| Reclassifications                                    |   | 8.2      |   | (27.6    | )      |
| Depreciation of step-up value                        |   | (56.7    | )      | (59.0    | )      |
| Depreciation for the year                            |   | (116.1   | )      | (130.2   | )      |
| Translation difference for the year                  |   | 110.4    |   | 148.9    |   |
| **Closing balance, accumulated depreciation**        |   | (1,645.3 | )      | (1,628.5 | )      |
|                                                 |   |     |   |     |   |
| **Closing balance, net book value**                  |   | 855.5    |   | 983.1    |   |

 

III-44

----

 
| **Consolidated  SEK in millions**                                                                |   | **2003** |   | **2002** |   |
|--------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| **Equipment, tools and installations**                                                           |   |     |   |     |   |
| Opening balance, accumulated acquisition  values                                                 |   | 2,024.6  |   | 2,288.1  |   |
| Purchases                                                                                        |   | 71.9     |   | 71.6     |   |
| Acquisition of businesses                                                                        |   | 25.2     |   | 3.9      |   |
| Sales/disposal                                                                                   |   | (71.6    | )      | (150.3   | )      |
| Reclassifications                                                                                |   | 26.2     |   | (59.6    | )      |
| Translation difference for the year                                                              |   | (107.2   | )      | (129.1   | )      |
| **Closing balance, accumulated acquisition  values**                                             |   | 1,969.1  |   | 2,024.6  |   |
|                                                                                             |   |     |   |     |   |
| Opening balance, accumulated depreciation                                                        |   | (1,317.3 | )      | (1,411.4 | )      |
| Sales/disposals                                                                                  |   | 67.2     |   | 127.4    |   |
| Acquisition of businesses                                                                        |   | (11.7    | )      | (2.1     | )      |
| Reclassifications                                                                                |   | 5.8      |   | 47.6     |   |
| Depreciation of step-up value                                                                    |   | (29.3    | )      | (31.3    | )      |
| Depreciation for the year                                                                        |   | (113.7   | )      | (130.5   | )      |
| Translation difference for the year                                                              |   | 74.0     |   | 83.0     |   |
| **Closing balance, accumulated depreciation**                                                    |   | (1,325.0 | )      | (1,317.3 | )      |
|                                                                                             |   |     |   |     |   |
| Opening balance, accumulated revaluations,  net                                                  |   | 15.9     |   | 16.9     |   |
| Sales/disposals                                                                                  |   | (1.3     | )      | (0.2     | )      |
| Reclassifications                                                                                |   | (0.2     | )      | (0.5     | )      |
| Revaluation for the year                                                                         |   | 0.1      |   | 0.1      |   |
| Depreciation for the year on revaluations                                                        |   | (0.3     | )      | (0.4     | )      |
| **Closing balance, accumulated revaluations,  net**                                              |   | 14.2     |   | 15.9     |   |
|                                                                                             |   |     |   |     |   |
| **Closing balance, net book value**                                                              |   | 658.3    |   | 723.2    |   |
|                                                                                             |   |     |   |     |   |
| **Construction in progress and advances to  suppliers concerning property, plant and equipment** |   |     |   |     |   |
| Opening balance, accumulated acquisition  values                                                 |   | 40.8     |   | 57.9     |   |
| Purchases                                                                                        |   | 76.1     |   | 93.7     |   |
| Sales/disposal                                                                                   |   | (0.2     | )      | (1.2     | )      |
| Reclassifications                                                                                |   | (52.5    | )      | (103.9   | )      |
| Translation difference for the year                                                              |   | (6.0     | )      | (5.7     | )      |
| **Closing balance, accumulated acquisition  values**                                             |   | 58.2     |   | 40.8     |   |
|                                                                                             |   |     |   |     |   |
| **Closing balance, net book value**                                                              |   | 58.2     |   | 40.8     |   |

 

III-45

----

 
| **Consolidated  SEK in millions**                    |   | **2003** |   | **2002** |   |
|------------------------------------------------------|--------|----------|--------|----------|--------|
| **Leased machinery**                                 |   |     |   |     |   |
| Opening balance, accumulated acquisition  values     |   | 14.1     |   | 13.2     |   |
| Purchases                                            |   | 0.0      |   | 0.2      |   |
| Acquisition of businesses                            |   | 0.0      |   | 7.2      |   |
| Sales/disposal                                       |   | (5.6     | )      | (6.2     | )      |
|                                                 |   |     |   |     |   |
| Translation difference for the year                  |   | (0.2     | )      | (0.3     | )      |
| **Closing balance, accumulated acquisition  values** |   | 8.3      |   | 14.1     |   |
|                                                 |   |     |   |     |   |
| Opening balance, accumulated depreciation            |   | (7.1     | )      | (4.4     | )      |
| Sales/disposals                                      |   | 3.1      |   | 3.3      |   |
| Acquisition of businesses                            |   | 0.0      |   | (3.1     | )      |
|                                                 |   |     |   |     |   |
| Depreciation for the year                            |   | (1.4     | )      | (3.0     | )      |
| Translation difference for the year                  |   | 0.1      |   | 0.1      |   |
| **Closing balance, accumulated depreciation**        |   | (5.3     | )      | (7.1     | )      |
|                                                 |   |     |   |     |   |
| **Closing balance, net book value**                  |   | 3.0      |   | 7.0      |   |
|                                                 |   |     |   |     |   |
| **Leased equipment, tools and installations**        |   |     |   |     |   |
| Opening balance, accumulated acquisition  values     |   | 44.7     |   | 58.8     |   |
| Purchases                                            |   | 6.7      |   | 0.9      |   |
| Acquisition of businesses                            |   | 0.6      |   | 0.0      |   |
| Sales/disposal                                       |   | (10.5    | )      | (11.2    | )      |
| Reclassifications                                    |   | (15.3    | )      | 0.2      |   |
| Translation difference for the year                  |   | (3.6     | )      | (4.0     | )      |
| **Closing balance, accumulated acquisition  values** |   | 22.6     |   | 44.7     |   |
|                                                 |   |     |   |     |   |
| Opening balance, accumulated depreciation            |   | (25.9    | )      | (37.1    | )      |
| Sales/disposals                                      |   | 9.1      |   | 8.8      |   |
| Acquisition of businesses                            |   | (0.2     | )      | 0.0      |   |
| Reclassifications                                    |   | 6.5      |   | 4.4      |   |
| Depreciation for the year                            |   | (3.3     | )      | (4.8     | )      |
| Translation difference for the year                  |   | 1.5      |   | 2.8      |   |
| **Closing balance, accumulated depreciation**        |   | (12.3    | )      | (25.9    | )      |
|                                                 |   |     |   |     |   |
| **Closing balance, net book value**                  |   | 10.3     |   | 18.8     |   |

 

Leasedmachinery, equipment and real estate relate to fixed assets which are leasedand where the leasing agreement has been considered to be a financial lease.These financial leases are capitalised in the balance sheet.

 

The taxassessment value of the Swedish real estate at December 31, 2003 amounted toSEK 124.5 (122.6) million, out of which SEK 47.2 (47.2) million referred toland and land improvements and SEK 77.3 (75.4) million buildings. The bookvalues of the Swedish real estate amounted to SEK 72.6 (57.2) million, out ofwhich land and land improvements were SEK 18.7 (9.1) million and buildings wereSEK 53.9 (48.1) million.

 

III-46

----

 

**Note 16.  Financial long-term assets**

 
| **Consolidated  SEK in millions** |   | **2003** |   | **2002** |   |
|-----------------------------------|--------|----------|--------|----------|--------|
| Shares in subsidiaries            |   | —   |   | —   |   |
| Shares in other companies         |   | 22.5     |   | 53.1     |   |
| Total                             |   | 22.5     |   | 53.1     |   |

 

**Specification of shares in subsidiaries**

 
| **Company name**                           |   | **Registration  number** |   | **Domicile**       |   | **Number  of  shares** |   | **Share  of  capital**% |   | **Book  value  SEK in  millions** |   |
|--------------------------------------------|--------|--------------------------|--------|--------------------|--------|------------------------|--------|-------------------------|--------|-----------------------------------|--------|
|                                       |   |                     |   |               |   |                   |   |                    |   |                              |   |
| Alfa Laval Special Finance AB              |   | 556587-8062              |   | Lund               |   |                   |   | 100                     |   | 4,460.9                           |   |
| Alfa Laval Holding AB                      |   | 556025-2792              |   | Lund               |   |                   |   | 100                     |   | 0.0                               |   |
|                                       |   |                     |   |               |   |                   |   |                    |   |                              |   |
| **Alfa Laval Holding AB**                  |   | 556025-2792              |   | Lund               |   | 12,500,000             |   | 100                     |   | 0.0                               |   |
| Alfa Laval NV                              |   |                     |   | Maarssen           |   | 227,754                |   | 100                     |   | 0.0                               |   |
| Alfa Laval Inc                             |   |                     |   | Newmarket          |   | 1,000,000              |   | 67                      |   | 0.0                               |   |
| Alfa Laval S.A. DE C.V.                    |   |                     |   | Tlalnepantla       |   | 45,057,057             |   | 100                     |   | 0.0                               |   |
| Alfa Laval S.A.                            |   |                     |   | San  Isidro        |   | 699                    |   | 100                     |   | 0.0                               |   |
| Alfa Laval Ltda                            |   |                     |   | Sao  Paulo         |   |                   |   | 100                     |   | 0.0                               |   |
| Roston do Brasil Ltda                      |   |                     |   | Sao  Paulo         |   | 5,249                  |   | 100                     |   | 0.0                               |   |
| Alfa Laval S.A.C.I.                        |   |                     |   | Santiago           |   | 2,735                  |   | 100                     |   | 0.0                               |   |
| Alfa Laval S.A.                            |   |                     |   | Bogota             |   | 12,195                 |   | 100                     |   | 0.0                               |   |
| Alfa Laval S.A.                            |   |                     |   | Lima               |   | 4,346,832              |   | 100                     |   | 0.0                               |   |
| Alfa Laval Venezolana S.A.                 |   |                     |   | Caracas            |   | 10,000                 |   | 100                     |   | 0.0                               |   |
| Alfa Laval Oilfield C.A.                   |   |                     |   | Caracas            |   | 203                    |   | 81                      |   | 0.0                               |   |
| Alfa Laval Phe Co Ltd                      |   |                     |   | Jiang  Yin         |   |                   |   | 100                     |   | 0.0                               |   |
| Alfa Laval Flow Equipment (Kunshan) Co Ltd |   |                     |   | Jiangsu            |   |                   |   | 100                     |   | 0.0                               |   |
| Alfa Laval (Shanghai) Technologies Co Ltd  |   |                     |   | Shanghai           |   |                   |   | 100                     |   | 0.0                               |   |
| Alfa Laval Taiwan Ltd                      |   |                     |   | Taipei             |   | 1,499,994              |   | 100                     |   | 0.0                               |   |
| Alfa Laval (Hong Kong) Ltd                 |   |                     |   | Hong Kong          |   | 79,999                 |   | 100                     |   | 0.0                               |   |
| Alfa Laval (China) Ltd                     |   |                     |   | Hong Kong          |   | 9,999                  |   | 100                     |   | 0.0                               |   |
| PT Alfa Laval Separatama                   |   |                     |   | Jakarta            |   | 1,000                  |   | 80                      |   | 0.0                               |   |
| Alfa Laval Iran Ltd                        |   |                     |   | Teheran            |   | 2,199                  |   | 100                     |   | 0.0                               |   |
| Alfa Laval KK                              |   |                     |   | Tokyo              |   | 1,200,000              |   | 100                     |   | 0.0                               |   |
| Alfa Laval Industry (PVT) Ltd              |   |                     |   | Lahore             |   | 119,110                |   | 100                     |   | 0.0                               |   |
| Alfa Laval Philippines Inc                 |   |                     |   | Makati             |   | 72,000                 |   | 100                     |   | 0.0                               |   |
| Alfa Laval Singapore Pte Ltd               |   |                     |   | Singapore          |   | 5,000,000              |   | 100                     |   | 0.0                               |   |
| Alfa Laval (Thailand) Ltd                  |   |                     |   | Bangkok            |   | 792,000                |   | 100                     |   | 0.0                               |   |
| Alfa Laval Middle East Ltd                 |   |                     |   | Nicosia            |   | 40,000                 |   | 100                     |   | 0.0                               |   |
| Alfa Laval Benelux NV/SA                   |   |                     |   | Brussels           |   | 33,811                 |   | 100                     |   | 0.0                               |   |
| Alfa Laval Slovakia S.R.O.                 |   |                     |   | Bratislava         |   |                   |   | 1                       |   | 0.0                               |   |
| Cetetherm SR spol S.R.O.                   |   |                     |   | Liptovsky  Mikulas |   |                   |   | 15                      |   | 0.0                               |   |
| Alfa Laval Spol S.R.O.                     |   |                     |   | Hradec  Kralove    |   |                   |   | 20                      |   | 0.0                               |   |
| Cetetherm S.R.O.                           |   |                     |   | Prague             |   |                   |   | 5                       |   | 0.0                               |   |
| Alfa Laval Denmark Holding A/S             |   |                     |   | Kolding            |   |                   |   | 100                     |   | 0.0                               |   |
| Alfa Laval Kolding A/S                     |   |                     |   | Kolding            |   | 100,000                |   | 100                     |   | 0.0                               |   |
| Alfa Laval Nordic A/S                      |   |                     |   | Rödovre       |   | 1                      |   | 100                     |   | 0.0                               |   |

 

III-47

----

 
| **Company name**                             |   | **Registration  number** |   | **Domicile**       |   | **Number  of  shares** |   | **Share  of  capital  %** |   | **Book  value  SEK in  millions** |   |
|----------------------------------------------|--------|--------------------------|--------|--------------------|--------|------------------------|--------|---------------------------|--------|-----------------------------------|--------|
|                                         |   |                     |   |               |   |                   |   |                      |   |                              |   |
| Alfa Laval Copenhagen A/S                    |   |                     |   | Söborg        |   | 1                      |   | 100                       |   | 0.0                               |   |
| Alfa Laval Nakskov A/S                       |   |                     |   | Nakskov            |   | 1                      |   | 100                       |   | 0.0                               |   |
| Alfa Laval Tank Equipment A/S                |   |                     |   | Ishoej             |   | 1                      |   | 100                       |   | 0.0                               |   |
| Alfa Laval Tank Equipment AB                 |   |                     |   | Gothenburg         |   | 100,000                |   | 100                       |   | 0.0                               |   |
| Gunclean Toftejorg Pte Ltd                   |   |                     |   | Singapore          |   | 300,000                |   | 100                       |   | 0.0                               |   |
| Alfa Laval Ltd                               |   |                     |   | Sofia              |   | 100                    |   | 100                       |   | 0.0                               |   |
| Alfa Laval Nordic OY                         |   |                     |   | Espoo              |   | 20,000                 |   | 100                       |   | 0.0                               |   |
| Cetetherm OY                                 |   |                     |   | Tuusula            |   | 5,000                  |   | 100                       |   | 0.0                               |   |
| Alfa Laval Nederland B.V.                    |   |                     |   | Maarssen           |   | 10,000                 |   | 100                       |   | 0.0                               |   |
| Alfa Laval Benelux B.V.                      |   |                     |   | Maarssen           |   | 1,475                  |   | 100                       |   | 0.0                               |   |
| Alfa Laval Merco B.V.                        |   |                     |   | Hoofddorp          |   | 1,475                  |   | 100                       |   | 0.0                               |   |
| Alfa Laval Holding A/S                       |   |                     |   | Oslo               |   | 520,000                |   | 100                       |   | 0.0                               |   |
| Alfa Laval Nordic A/S                        |   |                     |   | Oslo               |   | 10,000                 |   | 100                       |   | 0.0                               |   |
| Alfa Laval Tank Equipment AS                 |   |                     |   | Billingstad        |   | 7,500                  |   | 100                       |   | 0.0                               |   |
| CTC Ronneby AB                               |   | 556092-3194              |   | Ronneby            |   | 138,000                |   | 100                       |   | 0.0                               |   |
| Alfa Laval ExCell AB                         |   | 556306-2404              |   | Skogstorp          |   | 2,500                  |   | 100                       |   | 0.0                               |   |
| Alfa Laval Nordic AB                         |   | 556243-2061              |   | Tumba              |   | 1,000                  |   | 100                       |   | 0.0                               |   |
| Cetetherm AB                                 |   | 556058-3162              |   | Ronneby            |   | 20,000                 |   | 100                       |   | 0.0                               |   |
| Alfa Laval Corporate AB                      |   | 556007-7785              |   | Lund               |   | 13,920,000             |   | 100                       |   | 0.0                               |   |
| Alfa Laval (India) Ltd                       |   |                     |   | Poona              |   | 9,261,889              |   | 64                        |   | 0.0                               |   |
| Skansen Engineering & Consultancy Co Ltd |   |                     |   | Poona              |   | 50,000                 |   | 64                        |   | 0.0                               |   |
| Alfa Laval Korea Ltd                         |   |                     |   | Seoul              |   | 3,640,000              |   | 100                       |   | 0.0                               |   |
| Alfa Laval (Malaysia) Sdn Bhd                |   |                     |   | Shah  Alam         |   | 10,000                 |   | 100                       |   | 0.0                               |   |
| Mosgormash Alfa Laval Moloko                 |   |                     |   | Moscow             |   | 55                     |   | 0.0                       |   |                              |   |
| Alfa Laval Oilfield C.A.                     |   |                     |   | Caracas            |   | 47                     |   | 19                        |   | 0.0                               |   |
| Alfa Laval Treasury International AB         |   | 556432-2484              |   | Lund               |   | 50,000                 |   | 100                       |   | 0.0                               |   |
| Alfa Laval Europe AB                         |   | 556128-7847              |   | Lund               |   | 500                    |   | 100                       |   | 0.0                               |   |
| Alfa Laval Lund AB                           |   | 556016-8642              |   | Lund               |   | 100                    |   | 100                       |   | 0.0                               |   |
| Alfa Laval International Engineering AB      |   | 556039-8934              |   | Lund               |   | 4,500                  |   | 100                       |   | 0.0                               |   |
| Alfa Laval Tumba AB                          |   | 556021-3893              |   | Tumba              |   | 1,000                  |   | 100                       |   | 0.0                               |   |
| Bitec Enterprise AG                          |   |                     |   | Volketswil         |   | 97,900                 |   | 100                       |   | 0.0                               |   |
| Alfa Laval Dis Ticaret Ltd Sti               |   |                     |   | Istanbul           |   | 27,001,755             |   | 99                        |   | 0.0                               |   |
| OÜ Cetetherm                            |   |                     |   | Tallinn            |   | 100                    |   | 100                       |   | 0.0                               |   |
| Alfa Laval SIA                               |   |                     |   | Riga               |   | 125                    |   | 100                       |   | 0.0                               |   |
| SIA Cetetherm                                |   |                     |   | Riga               |   | 200                    |   | 100                       |   | 0.0                               |   |
| Alfa Laval UAB Ltd                           |   |                     |   | Vilnius            |   | 2,009                  |   | 100                       |   | 0.0                               |   |
| UAB Cetetherm                                |   |                     |   | Vilnius            |   | 100                    |   | 100                       |   | 0.0                               |   |
| Alfa Laval Australia Pty Ltd                 |   |                     |   | Homebush           |   | 2,088,076              |   | 100                       |   | 0.0                               |   |
| Alfa Laval Pty Ltd                           |   |                     |   | Homebush           |   | 3,500,000              |   | 100                       |   | 0.0                               |   |
| Alfa Laval New Zealand Ltd                   |   |                     |   | Hamilton           |   | 1,000                  |   | 100                       |   | 0.0                               |   |
| Alfa Laval Holding BV                        |   |                     |   | Maarssen           |   | 70,000,000             |   | 100                       |   | 0.0                               |   |
| Alfa Laval (Pty) Ltd                         |   |                     |   | Isando             |   | 2,000                  |   | 100                       |   | 0.0                               |   |
| Alfa Laval Slovakia S.R.O.                   |   |                     |   | Bratislava         |   |                   |   | 99                        |   | 0.0                               |   |
| Cetetherm SR spol S.R.O.                     |   |                     |   | Liptovsky  Mikulas |   |                   |   | 85                        |   | 0.0                               |   |
| Alfa Laval Spol S.R.O.                       |   |                     |   | Hradec  Kralove    |   |                   |   | 80                        |   | 0.0                               |   |
| Cetetherm S.R.O.                             |   |                     |   | Prague             |   |                   |   | 95                        |   | 0.0                               |   |
| Alfa Laval France SAS                        |   |                     |   | Les Clayes         |   | 920,000                |   | 100                       |   | 0.0                               |   |
| Alfa Laval SAS                               |   |                     |   | Les Clayes         |   | 560,000                |   | 100                       |   | 0.0                               |   |
| Alfa Laval Moatti SNC                        |   |                     |   | Les  Clayes        |   | 24,000                 |   | 100                       |   | 0.0                               |   |
| Alfa Laval Spiral SNC                        |   |                     |   | Nevers             |   | 79,999                 |   | 100                       |   | 0.0                               |   |

 

III-48

----

 
| **Company name**                         |   | **Registration  number** |   | **Domicile**      |   | **Number  of  shares** |   | **Share  of  capital  %** |   | **Book  value  SEK in  millions** |   |
|------------------------------------------|--------|--------------------------|--------|-------------------|--------|------------------------|--------|---------------------------|--------|-----------------------------------|--------|
|                                     |   |                     |   |              |   |                   |   |                      |   |                              |   |
| MCD SAS                                  |   |                     |   | Guny              |   | 71,300                 |   | 100                       |   | 0.0                               |   |
| Alfa Laval Vicarb SAS                    |   |                     |   | Grenoble          |   | 200,000                |   | 100                       |   | 0.0                               |   |
| Canada Inc                               |   |                     |   | Newmarket         |   | 480,000                |   | 100                       |   | 0.0                               |   |
| Alfa Laval Inc                           |   |                     |   | Newmarket         |   | 481,600                |   | 33                        |   | 0.0                               |   |
| SCI du Companil                          |   |                     |   | Grenoble          |   | 32,165                 |   | 100                       |   | 0.0                               |   |
| Cetetherm SA                             |   |                     |   | Lyon              |   | 150,000                |   | 100                       |   | 0.0                               |   |
| Alfa Laval Holding GmbH                  |   |                     |   | Glinde            |   | 100                    |   | 0.0                       |   |                              |   |
| Alfa Laval Mid Europe GmbH               |   |                     |   | Wiener  Neudorf   |   |                   |   | 100                       |   | 0.0                               |   |
| Alfa Laval Mid Europe GmbH               |   |                     |   | Glinde            |   | 1                      |   | 100                       |   | 0.0                               |   |
| Alfa Laval Tank Equipment GmbH           |   |                     |   | Glinde            |   | 1                      |   | 100                       |   | 0.0                               |   |
| Cetetherm Wärmetauschersysteme GmbH |   |                     |   | Glinde            |   | 1                      |   | 100                       |   | 0.0                               |   |
| Alfa Laval Mid Europe AG                 |   |                     |   | Dietlikon         |   | 647                    |   | 100                       |   | 0.0                               |   |
| Alfa Laval AEBE                          |   |                     |   | Holargos          |   | 10,000                 |   | 100                       |   | 0.0                               |   |
| Alfa Laval Kft                           |   |                     |   | Budapest          |   | 1                      |   | 100                       |   | 0.0                               |   |
| Cetetherm - Vicarb Hungary Kft           |   |                     |   | Budapest          |   | 100                    |   | 0.0                       |   |                              |   |
| Alfa Laval SpA                           |   |                     |   | Monza             |   | 1,930,500              |   | 99                        |   | 0.0                               |   |
| Alfa Laval Polska Sp.z.o.o.              |   |                     |   | Warsaw            |   | 6,862                  |   | 100                       |   | 0.0                               |   |
| Cetetherm Polska Sp.z.o.o.               |   |                     |   | Warsaw            |   |                   |   | 100                       |   | 0.0                               |   |
| Wytwornia Separator Krakow Sp.z.o.o.     |   |                     |   | Krakow            |   |                   |   | 100                       |   | 0.0                               |   |
| Alfa Laval (Portugal) Ltd                |   |                     |   | Linda-A-Velha     |   |                   |   | 1                         |   | 0.0                               |   |
| Alfa Laval SRL                           |   |                     |   | Bucharest         |   | 61,435                 |   | 100                       |   | 0.0                               |   |
| Alfa Laval Iberia SA                     |   |                     |   | Madrid            |   |                   |   | 100                       |   | 0.0                               |   |
| Alfa Laval (Portugal) Ltd                |   |                     |   | Linda-A-Velha     |   | 1                      |   | 99                        |   | 0.0                               |   |
| Alfa Laval Dis Ticaret Ltd Sti           |   |                     |   | Istanbul          |   | 1                      |   | 1                         |   | 0.0                               |   |
| Alfa Laval Holdings Ltd                  |   |                     |   | Camberley         |   | 28,107,000             |   | 100                       |   | 0.0                               |   |
| Alfa Laval 2000                          |   |                     |   | Camberley         |   | 28,106                 |   | 100                       |   | 0.0                               |   |
| Alfa Laval Ltd                           |   |                     |   | Camberley         |   | 12,710,000             |   | 100                       |   | 0.0                               |   |
| Alfa Laval Finance Co Ltd                |   |                     |   | Camberley         |   | 856,000                |   | 100                       |   | 0.0                               |   |
| Alfa Laval Oilfield Ltd                  |   |                     |   | Aberdeen          |   | 500,000                |   | 100                       |   | 0.0                               |   |
| Alfa Laval Flow Ltd                      |   |                     |   | Sutton  Coldfield |   | 100                    |   | 100                       |   | 0.0                               |   |
|                                     |   |                     |   |              |   |                   |   |                      |   |                              |   |
| Alfa Laval Pumps Ltd                     |   |                     |   | Eastbourne        |   | 100                    |   | 100                       |   | 0.0                               |   |
| Alfa Laval Thermal Ltd                   |   |                     |   | Camberley         |   | 1,000                  |   | 100                       |   | 0.0                               |   |
| Alfa Laval Separation Ltd                |   |                     |   | Camberley         |   | 375,000                |   | 100                       |   | 0.0                               |   |
| Rolls Laval Heat Exchangers Ltd          |   |                     |   | Wolverhampton     |   | 5,000                  |   | 50                        |   | 0.0                               |   |
| Toftejorg Ltd                            |   |                     |   | Camberley         |   | 50,000                 |   | 100                       |   | 0.0                               |   |
| Alfa Laval USA inc                       |   |                     |   | Kenosha           |   |                   |   | 100                       |   | 0.0                               |   |
| Alfa Laval US Holding Inc                |   |                     |   | Kenosha           |   | 180                    |   | 100                       |   | 0.0                               |   |
| Alfa Laval Inc                           |   |                     |   | Kenosha           |   | 44,000                 |   | 100                       |   | 0.0                               |   |
| Tri-Lad Inc                              |   |                     |   | Brantford         |   | 4,000                  |   | 100                       |   | 0.0                               |   |
| BioKinetics Inc                          |   |                     |   | Philadelphia      |   | 100                    |   | 100                       |   | 0.0                               |   |
| Kinetics Modular Systems Inc             |   |                     |   | Toronto           |   | 1,800                  |   | 100                       |   | 0.0                               |   |
| Kinetics Engineering P C                 |   |                     |   | Durham            |   | 100                    |   | 100                       |   | 0.0                               |   |
| Hynetics Inc                             |   |                     |   | Logan             |   | 50                     |   | 0.0                       |   |                              |   |
| Alfa Laval US Treasury Inc               |   |                     |   | Kenosha           |   | 1,000                  |   | 100                       |   | 0.0                               |   |
| AO Alfa Laval Potok                      |   |                     |   | Koroljov          |   | 31,057,529             |   | 100                       |   | 0.0                               |   |
| OÜ Alfa Laval                       |   |                     |   | Tallinn           |   | 1                      |   | 100                       |   | 0.0                               |   |
| Gigantissimo 2444 AB                     |   |                     |   |              |   |                   |   | 50                        |   | 0.0                               |   |
| Alfa Laval SpA                           |   |                     |   | Monza             |   |                   |   | 1                         |   | 0.0                               |   |
| Total                                    |   |                     |   |              |   |                   |   |                      |   | 4,460.9                           |   |

 

III-49

----

 

**Specification of shares in other companies**

 
| **Company name**                          |   | **Domicile** |   | **Number  of  shares** |   | **Share  of  capital  %** |   | **Book  value  SEK in  thousands** |   |
|-------------------------------------------|--------|--------------|--------|------------------------|--------|---------------------------|--------|------------------------------------|--------|
|                                      |   |         |   |                   |   |                      |   |                               |   |
| Alfa Laval (India) Ltd                    |   |         |   |                   |   |                      |   |                               |   |
| Mutual funds Investment                   |   | India        |   | 9,747,743              |   |                      |   | 16,719.3                           |   |
| Alfa Laval KK                             |   |         |   |                   |   |                      |   |                               |   |
| Namura Zosen                              |   | Japan        |   | 5,000                  |   |                      |   | 47.5                               |   |
| Cyugairo                                  |   | Japan        |   | 5,250                  |   |                      |   | 33.9                               |   |
| Orugano                                   |   | Japan        |   | 769                    |   |                      |   | 6.8                                |   |
| Sasebo Heavy Ind.                         |   | Japan        |   | 10,000                 |   |                      |   | 47.5                               |   |
| Asahi Denka                               |   | Japan        |   | 8,618                  |   |                      |   | 406.9                              |   |
| Alfa Laval Philippines Inc                |   |         |   |                   |   |                      |   |                               |   |
| Philippine Long Distance Telephone        |   | Philippines  |   | 820                    |   |                      |   | 10.7                               |   |
| Alfa Laval Copenhagen A/S                 |   |         |   |                   |   |                      |   |                               |   |
| Green City Denmark A/S                    |   | Denmark      |   | 1                      |   |                      |   | 19.5                               |   |
| Alfa Laval France SAS                     |   |         |   |                   |   |                      |   |                               |   |
| SEMACLA                                   |   | France       |   | 10                     |   |                      |   | 9.1                                |   |
| Alfa Laval Vicarb SAS                     |   |         |   |                   |   |                      |   |                               |   |
| SAEM SMD                                  |   | France       |   | 17                     |   | 0.85                      |   | 27.2                               |   |
| Cetetherm SA                              |   |         |   |                   |   |                      |   |                               |   |
| Credit Mutuel                             |   | France       |   | 2                      |   |                      |   | 9.1                                |   |
| Thermothec                                |   | France       |   | 9,130                  |   |                      |   | 1,260.1                            |   |
| Point Piscine                             |   | France       |   | 210                    |   |                      |   | 27.2                               |   |
| Alfa Laval Nordic A/S                     |   |         |   |                   |   |                      |   |                               |   |
| Storebrand                                |   | Norway       |   | 7,629                  |   |                      |   | 0.0                                |   |
| Alfa Laval NV                             |   |         |   |                   |   |                      |   |                               |   |
| DeSmet Engineering & Contractors S.A. |   | Netherlands  |   | 9,999                  |   | 10                        |   | 3,045.9                            |   |
| Dalian Haven Automation Co Ltd            |   | Hong Kong    |   | 102                    |   | 42.5                      |   | 806.9                              |   |
| Cetetherm AB                              |   |         |   |                   |   |                      |   |                               |   |
| Stiftelsen VTC Syd                        |   | Sweden       |   | —                 |   |                      |   | 10.0                               |   |
| VVS-Fabrikanternas Råd               |   | Sweden       |   | —                 |   |                      |   | 1.5                                |   |
| AO Alfa Laval Potok                       |   |         |   |                   |   |                      |   |                               |   |
| Unicombank                                |   | Russia       |   | 800                    |   | 1.6                       |   | 14.6                               |   |
| MAX                                       |   | Russia       |   | 100                    |   | 0.25                      |   | 7.3                                |   |
| Alfa Laval Corporate AB                   |   |         |   |                   |   |                      |   |                               |   |
| European Development Capital              |   |         |   |                   |   |                      |   |                               |   |
| Corporation (EDCC) N.V.                   |   | Curacao      |   | 36,129                 |   |                      |   |                               |   |
| Multiprogress                             |   | Hungary      |   | 100                    |   | 3.18                      |   |                               |   |
| Kurose Chemical Equipment Ltd             |   | Japan        |   | 180,000                |   | 11.25                     |   |                               |   |
| Poljopriveda                              |   | Yugoslavia   |   |                   |   |                      |   |                               |   |
| Tecnica Argo-Industrial S.A.              |   | Mexico       |   | 490                    |   | 49.00                     |   |                               |   |
| Adela Investment Co S.A. (preference)     |   | Luxembourg   |   | 1,911                  |   | 0.30                      |   |                               |   |
| Adela Investment Co S.A.                  |   | Luxembourg   |   | 1,911                  |   | 0.30                      |   |                               |   |
| Mas Dairies Ltd                           |   | Pakistan     |   | 125,000                |   | 5.00                      |   |                               |   |
| Total                                     |   |         |   |                   |   |                      |   | 22,511.0                           |   |

 

III-50

----

 

**Note 17.  Inventories**

 
| **Consolidated  SEK in millions**                   |   | **2003** |   | **2002** |   |
|-----------------------------------------------------|--------|----------|--------|----------|--------|
| Raw materials and consumables                       |   | 654.5    |   | 694.4    |   |
| Work in progress                                    |   | 592.3    |   | 655.2    |   |
| Finished goods & goods for resale, new  sales   |   | 622.7    |   | 570.3    |   |
| Finished goods & goods for resale,  spare parts |   | 307.5    |   | 330.7    |   |
| Advance payments to suppliers                       |   | 40.8     |   | 28.4     |   |
| Total                                               |   | 2,217.8  |   | 2,279.0  |   |

 

The provision forobsolescence amounts to and has changed as follows:

 

Obsolescence

 
| **Consolidated  SEK in millions  Year** |   | **January 1** | ** ** | **Translation  difference** | ** ** | **New  provisions  and increase  of existing  provisions** | ** ** | **Amounts  used** | ** ** | **Unused  amounts  reversed** | ** ** | **Change due  to  discounting** | ** ** | **December  31** | ** ** |
|-----------------------------------------|--------|---------------|------------|-----------------------------|------------|------------------------------------------------------------|------------|-------------------|------------|-------------------------------|------------|---------------------------------|------------|------------------|------------|
| 2002                                    |   | 570.4         |       | (56.8                       | )          | 112.0                                                      |       | (103.7            | )          | (22.9                         | )          | 0.0                             |       | 499.0            |       |
| 2003                                    |   | 499.0         |       | (36.4                       | )          | 104.3                                                      |       | (87.9             | )          | (10.1                         | )          | 0.0                             |       | 468.9            |       |

 

The Group’sinventories have been accounted for after deduction for inter-company gains ininventory due to internal sales within the Group. The inter-company profitreserve at the end of 2003 amounts to SEK 135.8 (136.7) million.

 

**Note18.   Accounts receivable**

 

Accounts receivablewith a maturity exceeding one year of SEK 120.9 (127.7) million have not beenaccounted for as fixed assets as they are not intended for permanent use.

 

Accounts receivableare reported net of provisions for bad debts. The provision for bad debtsamounts to and has changed as follows:

 

Bad Debts

 
| **Consolidated  SEK in millions  Year** |   | **January 1** | ** ** | **Translation  difference** | ** ** | **New  provisions  and increase  of existing  provisions** | ** ** | **Amounts  used** | ** ** | **Unused  amounts  reversed** | ** ** | **Change due  to  discounting** | ** ** | **December  31** | ** ** |
|-----------------------------------------|--------|---------------|------------|-----------------------------|------------|------------------------------------------------------------|------------|-------------------|------------|-------------------------------|------------|---------------------------------|------------|------------------|------------|
| 2002                                    |   | 301.6         |       | (17.3                       | )          | 71.8                                                       |       | (73.5             | )          | (39.6                         | )          | (0.7                            | )          | 242.3            |       |
| 2003                                    |   | 242.3         |       | (15.6                       | )          | 72.3                                                       |       | (72.5             | )          | (30.1                         | )          | 0.0                             |       | 196.4            |       |

 

III-51

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**Note 19.   Othershort-term receivables**

 
| **Consolidated  SEK in millions**              |   | **2003** |   | **2002** |   |
|------------------------------------------------|--------|----------|--------|----------|--------|
| Notes receivable                               |   | 263.2    |   | 283.2    |   |
| Tax receivable                                 |   | 336.8    |   | 334.9    |   |
| Financial leasing receivables                  |   | 0.0      |   | 0.0      |   |
| Other receivables                              |   | 470.4    |   | 355.8    |   |
| Total                                          |   | 1,070.4  |   | 973.9    |   |
| Of which, receivables not due within one  year |   |     |   |     |   |
| Notes receivable                               |   | 44.3     |   | 7.1      |   |
| Other receivables                              |   | 18.8     |   | 13.6     |   |
| Total                                          |   | 63.1     |   | 20.7     |   |

 

**Note20.   Other current deposits**

 
| **Consolidated  SEK in millions**          |   | **2003** |   | **2002** |   |
|--------------------------------------------|--------|----------|--------|----------|--------|
| Loan receivables                           |   | 573.9    |   | 253.4    |   |
| Bonds and other securities                 |   | 78.0     |   | 88.6     |   |
| Other deposits                             |   | 6.7      |   | 72.3     |   |
|                                       |   | 658.6    |   | 414.3    |   |
| Of which, deposits not due within one year |   |     |   |     |   |
| Loans receivable                           |   | 35.9     |   | 8.4      |   |
| Other deposits                             |   | 5.2      |   | 5.3      |   |

 

**Note21.   Cash and bank**

 

The item cash and bankin the balance sheet and in the cash-flow statement is mainly relating to bankdeposits. Cash and bank includes a bank deposit in the publicly listedsubsidiary Alfa Laval (India) Ltd of about SEK 30.8 (55.2) million. The companyis not a wholly owned subsidiary of the Alfa Laval Special Finance Group. It isowned to 64.1 percent.

 

**NOTE 22.  IMPACT ON CASH FLOW DUE TO ACQUISITION AND SALE OF BUSINESS**

 

**Additionalpurchase price**

 

In connection with theIPO in 2002 an additional purchase price of EUR 40.0 million, corresponding toSEK 367.5 million, was paid to Tetra Laval BV for the original acquisition onAugust 24, 2000 of the former Alfa Laval Holding AB Group. This has entirelybeen reported as goodwill in the Group and is amortised over the same period asthe original acquisition.

 

**Acquisitions**

 

On October 2, 2003, Alfa Laval acquired the Life Science division,bioKinetics, from Kinetics Group Inc. in the US for SEK 215 millioncorresponding to approximately six times expected EBIT for 2003. The KineticsGroup Inc. was taken private in August 2000 in an investor led buy-out fromUnited States Filter Corporation.

 

III-52

----

 

bioKinetics is a North American leader in technology-driven integrated processsolutions for the biotech and pharmaceutical industries. bioKinetics’ main products are modular designsthat mainly focus on mammalian cell cultures. These modules are predominantlybioreactor modules, but also modules for cell harvesting, purification andbio-deactivation. In the bioKinetics customer base leading pharmaceutical andbiotech companies such as Amgen, IDEC, Lonza and Merck can be found.

 

Life Science, defined as pharmaceutical andbiotech, is a market where Alfa Laval already today is active with all coreproducts. However, as the Life Science market shows a very high growth AlfaLaval has to secure that the potential is captured. The operations are reportedas a part of the Process Technology division.

 

bioKinetics is headquartered in Philadelphia,PA with additional operations in North Carolina and California in the US andToronto in Canada. The difference between the purchase price paid and the netassets acquired is SEK 143.6 million. SEK 22.3 million of this has been allocatedto patents and un-patented know-how, while the residual SEK 121.3 million hasbeen allocated to goodwill. The goodwill is amortised over 10 years.bioKinetics has approx 400 employees and net sales of approximately SEK 550million.

 

On January 31, 2003, theDanish Toftejorg A/S Group was acquired, with effect from January 1, 2003. Theoperations cover R&D, assembly and sales of advanced tank cleaningequipment, targeting the Food and Marine industries. In addition to theoperations in Denmark, the Toftejorg Group had sales companies in Sweden,Norway, Germany, the UK, France, Singapore, the United States and its ownrepresentation in South Korea. The operations are integrated into the EquipmentDivision. The difference between the purchase price paid and the net assetsacquired is SEK 33.9 million. SEK 0.9 million of this has been allocated to aproperty in the US, while the residual SEK 33.0 million has been allocated togoodwill. The goodwill is amortised over 10 years. Toftejorg has annual salesof about SEK 210 million and approximately 100 employees.

 

On September 4,2002, Alfa Laval acquired the company Danish Separation Systems A/S,specialists within membrane filtration in the biotechnology, pharmaceutical andfood industries. The difference between the purchase price paid and the netassets acquired was SEK 102.4 million. This has entirely been allocated togoodwill. The goodwill is amortised over 20 years. The company has annual salesof about SEK 90 million and 65 employees within R&D, manufacturing andsales.

 

A publicoffering for an additional 25 percent of the share capital in Alfa Laval(India) Ltd was made on July 14, 2001. The offering to the minorityshareholders was a requirement according to law as a consequence of the changeof majority owner of Alfa Laval. The offering expired on August 14, 2001 andresulted in Alfa Laval acquiring an additional 2.4 million shares correspondingto 13.1 percent of the total number of shares. After the acquisition, AlfaLaval’s shareholding is 64.1 percent. The purchase of the additional sharesresulted in a cash payment of SEK 87.3 million. The difference between thepurchase price paid and the net assets acquired was SEK 39.2 million. This hasin whole been allocated to goodwill.

 

III-53

----

 

The total value of theacquired assets and liabilities is presented in the table below, which alsoshows the cash flow impact of the acquisitions.

 
| **Consolidated  SEK in millions**        |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Property, plant and equipment            |   | 51.4     |   | 22.6     |   | 10.1     |   |
| Inventory                                |   | 49.9     |   | 21.6     |   | 21.0     |   |
| Accounts receivable                      |   | 175.3    |   | 11.9     |   | 19.5     |   |
| Other receivables                        |   | 73.2     |   | 30.2     |   | 3.8      |   |
| Liquid assets                            |   | 5.9      |   | 7.4      |   | 28.8     |   |
| Long-term liabilities                    |   | (23.3    | )      | (8.5     | )      | (2.6     | )      |
| Accounts payable                         |   | (107.9   | )      | (6.2     | )      | (10.7    | )      |
| Other liabilities                        |   | (130.7   | )      | (38.3    | )      | (22.3    | )      |
| Goodwill                                 |   | 161.9    |   | 102.4    |   | 39.7     |   |
| Other surplus values                     |   | 23.2     |   | —   |   | —   |   |
| Deferred tax                             |   | 16.5     |   | —   |   | —   |   |
| Purchase price                           |   | (295.4   | )      | (143.1   | )      | (87.3    | )      |
| Liquid assets in the acquired business   |   | 5.9      |   | 7.4      |   | 28.8     |   |
| Effect on the Group’s liquid assets |   | (289.5   | )      | (135.7   | )      | (58.5    | )      |

 

**Purchaseprice reimbursement**

 

During the year theAlfa Laval Special Finance Group has received SEK - (81.6) (76.3) from TetraLaval BV as a reduction of the purchase price for the acquisition of the formerAlfa Laval Holding AB Group. The reduction is related to the guarantees issuedby the seller in relation to taxes. The amount has not had an impact on thegoodwill for the acquisition but has instead been reported against the increasedtax cost that the Group has experienced after the acquisition. The amountreceived during 2002 constitutes a final settlement with Tetra Laval concerningthese guarantees.

 

**Divestments**

 

RemaControl, operatingwithin sawmill automation, was divested to the management of the operation perJanuary 1, 2001.

 

Industrial Flow wasdivested on April 2, 2001 to Crane Co in the US. The sales price amounted toSEK 330.6 million and was paid on the same date. The divestment included threeexisting subsidiaries in the UK, Germany and India and two, for this purpose,newly created subsidiaries in Italy and Belgium. In addition, fixed assets andpersonnel have been transferred from a few Alfa Laval companies in othercountries. A few activities have remained before the divestment could becompleted. During September 2002 a final settlement was made with the buyer,resulting in an increase of the realised gain by SEK 14.0 million. This resultitem had however no cash flow impact during 2002.

 

III-54

----

 

The total valueof the divested assets and liabilities is presented in the table below, whichalso shows the cash flow impact of the divestments.

 
| **Consolidated  SEK in millions**        |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Property, plant and equipment            |   | —   |   | —   |   | 101.4    |   |
| Inventory                                |   | —   |   | —   |   | 219.8    |   |
| Accounts receivable                      |   | —   |   | —   |   | 134.9    |   |
| Other receivables                        |   | —   |   | —   |   | 35.9     |   |
| Liquid assets                            |   | —   |   | —   |   | 49.1     |   |
| Long-term liabilities                    |   | —   |   | —   |   | (28.1    | )      |
| Accounts payable                         |   | —   |   | —   |   | (32.8    | )      |
| Other liabilities                        |   | —   |   | —   |   | (144.5   | )      |
| Realised result                          |   | —   |   | —   |   | (5.0     | )      |
| Purchase price                           |   | —   |   | —   |   | 330.7    |   |
| Liquid assets in the sold business       |   | —   |   | —   |   | (49.1    | )      |
| Effect on the Group’s liquid assets |   | —   |   | —   |   | 281.6    |   |

 

**Note 23.   Definedbenefit obligations**

 

The Group hasdefined benefit commitments to employees and former employees and theirsurvivors. The benefits are referring to old age pension, survivor’s pension,disability pension, health care and severance pay.

 

Defined benefitplans are in place in Austria, Belgium, Canada, France, Germany, Japan, Norway,South Africa, Sweden, Taiwan, the United Kingdom and the United States. Someplans have been closed for new participants and replaced by definedcontribution plans for new employees.

 

III-55

----

 
| **Consolidated  SEK in millions**                              |   | **2003** |   | **2002** |   | **2001** |   |
|----------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| **(-) liability/(+) asset**                                    |   |     |   |     |   |     |   |
| Present value of the defined benefit  obligation, unfunded     |   | (808.3   | )      | (833.2   | )      | (721.2   | )      |
| Present value of the defined benefit  obligation, funded       |   | (2,552.7 | )      | (2,196.1 | )      | (2,462.3 | )      |
| Present value of the defined benefit  obligation at year end   |   | (3,361.0 | )      | (3,029.3 | )      | (3,183.5 | )      |
| Unrecognised actuarial losses                                  |   | 971.5    |   | 567.6    |   | 204.3    |   |
| Unrecognised past service cost                                 |   | 5.1      |   | 0.9      |   | 47.9     |   |
| Fair value of plan assets                                      |   | 1,761.5  |   | 1,853.1  |   | 2,338.2  |   |
| Defined benefit liability                                      |   | (622.9   | )      | (607.7   | )      | (593.1   | )      |
| less amount disallowed                                         |   | (5.2     | )      | (6.1     | )      | (6.4     | )      |
| **Net defined benefit liability**                              |   | (628.1   | )      | (613.8   | )      | (599.5   | )      |
| **(-) cost/(+) income**                                        |   |     |   |     |   |     |   |
| Current service cost                                           |   | (31.0    | )      | (49.0    | )      | (59.6    | )      |
| Interest cost                                                  |   | (145.8   | )      | (171.0   | )      | (178.3   | )      |
| Expected return on plan assets                                 |   | 144.2    |   | 90.3     |   | 146.4    |   |
| Recognised actuarial losses                                    |   | (80.6    | )      | (82.4    | )      | (109.3   | )      |
| Recognised past service cost                                   |   | (52.0    | )      | (8.2     | )      | —   |   |
| Effect of any curtailments or settlements                      |   | (1.3     | )      | 67.7     |   | 42.1     |   |
| **Net plan cost**                                              |   | (166.5   | )      | (152.6   | )      | (158.7   | )      |
| **(-) liability/(+) asset**                                    |   |     |   |     |   |     |   |
| Change in present value of the defined  benefit liability:     |   |     |   |     |   |     |   |
| Present value of defined benefit liability  at January 1       |   | (3,029.3 | )      | (3,183.5 | )      | (2,742.7 | )      |
| Translation difference                                         |   | 410.3    |   | 226.3    |   | (290.6   | )      |
| Current service cost                                           |   | (31.0    | )      | (49.0    | )      | (59.6    | )      |
| Interest cost                                                  |   | (145.8   | )      | (171.0   | )      | (178.3   | )      |
| Employee contributions                                         |   | (8.0     | )      | (5.9     | )      | (9.0     | )      |
| Current year change in actuarial losses                        |   | (677.8   | )      | (82.4    | )      | (109.3   | )      |
| Recognised past service cost                                   |   | (52.0    | )      | (8.2     | )      | —   |   |
| Effect of any curtailments or settlements                      |   | (1.3     | )      | 67.7     |   | 42.1     |   |
| Benefit payments                                               |   | 173.9    |   | 176.7    |   | 163.9    |   |
| **Present value of defined benefit liability  at December 31** |   | (3,361.0 | )      | (3,029.3 | )      | (3,183.5 | )      |
| **(-) liability/(+) asset**                                    |   |     |   |     |   |     |   |
| Change in plan assets:                                         |   |     |   |     |   |     |   |
| Fair value of plan assets at January 1                         |   | 1,853.1  |   | 2,338.2  |   | 2,168.7  |   |
| Translation difference                                         |   | (229.3   | )      | (222.6   | )      | 259.8    |   |
| Employer contributions                                         |   | 67.6     |   | 71.4     |   | 44.7     |   |
| Employee contributions                                         |   | 8.0      |   | 5.9      |   | 9.0      |   |
| Actual return on plan assets                                   |   | 236.0    |   | (163.1   | )      | 19.9     |   |
| Benefit payments                                               |   | (173.9   | )      | (176.7   | )      | (163.9   | )      |
| **Fair value at December 31**                                  |   | 1,761.5  |   | 1,853.1  |   | 2,338.2  |   |
| **(-) liability/(+) asset**                                    |   |     |   |     |   |     |   |
| Change in defined benefit liability/asset                      |   |     |   |     |   |     |   |
| Defined benefit liability/asset at January  1                  |   | (613.8   | )      | (599.5   | )      | (493.7   | )      |
| Translation difference                                         |   | 104.5    |   | 71.9     |   | (37.4    | )      |
| Net plan cost                                                  |   | (166.5   | )      | (152.6   | )      | (158.7   | )      |
| Employer contributions                                         |   | 67.6     |   | 71.4     |   | 44.7     |   |
| Change in unrecognised actuarial  gains/losses                 |   | (18.5    | )      | (7.3     | )      | 46.2     |   |
| Change in unrecognised past service cost                       |   | 0.0      |   | 0.6      |   | 0.6      |   |
| Change in disallowed asset amount                              |   | (1.4     | )      | 1.7      |   | (1.2     | )      |
| **Defined benefit liability/asset at December  31**            |   | (628.1   | )      | (613.8   | )      | (599.5   | )      |

 

III-56

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| **Consolidated  SEK in millions**                            |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                         |   |     |   |     |   |     |   |
| **(-) liability/(+) asset**                                  |   |     |   |     |   |     |   |
|                                                         |   |     |   |     |   |     |   |
| Assets                                                       |   |     |   |     |   |     |   |
| Fair value of plan assets                                    |   | 1,761.5  |   | 1,853.1  |   | 2,338.2  |   |
| Less amount disallowed                                       |   | (5.2     | )      | (6.1     | )      | (6.4     | )      |
|                                                         |   | 1,756.3  |   | 1,847.0  |   | 2,331.8  |   |
| Netting                                                      |   | (1,629.6 | )      | (1,740.2 | )      | (2,156.4 | )      |
| **Assets in balance sheet**                                  |   | 126.7    |   | 106.8    |   | 175.4    |   |
|                                                         |   |     |   |     |   |     |   |
| Liabilities                                                  |   |     |   |     |   |     |   |
| Present value of the defined benefit  obligation at year end |   | (3,361.0 | )      | (3,029.3 | )      | (3,183.5 | )      |
| Unrecognised actuarial gains (less losses)                   |   | 971.5    |   | 567.6    |   | 204.3    |   |
| Unrecognised past service costs                              |   | 5.1      |   | 0.9      |   | 47.9     |   |
|                                                         |   | (2,384.4 | )      | (2,460.8 | )      | (2,931.3 | )      |
| Netting                                                      |   | 1,629.6  |   | 1,740.2  |   | 2,156.4  |   |
| **Provision in balance sheet**                               |   | (754.8   | )      | (720.6   | )      | (774.9   | )      |

 

The more significantactuarial assumptions that have been used at the year-end are:

 
| **Consolidated**                                      |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                  |   |     |   |     |   |     |   |
| Discount rate                                         |   | 6        | %      | 7        | %      | 7        | %      |
| Expected return on investment                         |   | 8        | %      | 8        | %      | 8        | %      |
| Expected wage increase                                |   | 4        | %      | 4        | %      | 4        | %      |
| Change in health care costs                           |   | 9        | %      | 9        | %      | 9        | %      |
| Change of index for future increase of  remunerations |   | 4        | %      | 4        | %      | 4        | %      |

 

Changes in the healthcare costs have a significant impact on the costs and the level of theobligations for defined benefit obligations. If the health care costs change byone percent, it gives the following profit and loss effect calculated on theconditions as of the end of 2003:

 
| **Consolidated  SEK in millions**                |   | **2003**         |   | **2002**            |   |
|--------------------------------------------------|--------|------------------|--------|---------------------|--------|
|                                             |   | **1%  increase** |   | **1 decrease****%** |   | **1 increase****%** |   | **1 decrease****%** |   |
| Effect on:                                       |   |             |   |                |   |   |   |   |   |
| Current service costs and interest costs         |   | (12.8            | )      | 10.6                |   | (11.9 | ) | 10.1 |   |
| Present value of the defined benefit  obligation |   | (159.0           | )      | 127.9               |   | (131.2 | ) | 108.7 |   |

 

III-57

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**Note24.   Other provisions**

 
| **Consolidated  SEK in millions** |   | **January 1** |   | **Translation  difference** |   | **New  provisions  and increase  of existing  provisions** |   | **Amounts  used** |   | **Unused  amounts  reversed** |   | **Change due  to  discounting** |   | **December  31** |   |
|-----------------------------------|--------|---------------|--------|-----------------------------|--------|------------------------------------------------------------|--------|-------------------|--------|-------------------------------|--------|---------------------------------|--------|------------------|--------|
| 2002                              |   |          |   |                        |   |                                                       |   |              |   |                          |   |                            |   |             |   |
| Claims & warranty             |   | 384.3         |   | (24.4                       | )      | 239.9                                                      |   | (144.5            | )      | (35.9                         | )      | (5.7                            | )      | 413.7            |   |
| Deferred                          |   |          |   |                        |   |                                                       |   |              |   |                          |   |                            |   |             |   |
| costs                             |   | 141.5         |   | (2.0                        | )      | 28.3                                                       |   | (41.4             | )      | (22.4                         | )      | —                          |   | 104.0            |   |
| Restructuring                     |   | 293.8         |   | (13.7                       | )      | 56.6                                                       |   | (117.3            | )      | (12.3                         | )      | —                          |   | 207.1            |   |
| Onerous contracts                 |   | 23.9          |   | (0.4                        | )      | —                                                     |   | (11.2             | )      | (2.8                          | )      | —                          |   | 9.5              |   |
| Environmental                     |   | 7.3           |   | (1.2                        | )      | —                                                     |   | (2.9              | )      | —                        |   | —                          |   | 3.2              |   |
| Litigations                       |   | 109.8         |   | (0.4                        | )      | 36.5                                                       |   | (27.9             | )      | (2.0                          | )      | —                          |   | 116.0            |   |
| Other                             |   | 102.6         |   | (6.2                        | )      | 84.3                                                       |   | (34.9             | )      | (10.0                         | )      | —                          |   | 135.8            |   |
|                              |   | 1,063.2       |   | (48.3                       | )      | 445.6                                                      |   | (380.1            | )      | (85.4                         | )      | (5.7                            | )      | 989.3            |   |
| 2003                              |   |          |   |                        |   |                                                       |   |              |   |                          |   |                            |   |             |   |
| Claims & warranty             |   | 413.7         |   | (19.8                       | )      | 181.1                                                      |   | (149.1            | )      | (29.6                         | )      | —                          |   | 396.3            |   |
| Deferred                          |   |          |   |                        |   |                                                       |   |              |   |                          |   |                            |   |             |   |
| costs                             |   | 104.0         |   | (1.3                        | )      | 22.2                                                       |   | (18.2             | )      | (15.3                         | )      | —                          |   | 91.4             |   |
| Restructuring                     |   | 207.1         |   | (5.5                        | )      | 61.1                                                       |   | (100.8            | )      | (6.2                          | )      | —                          |   | 155.7            |   |
| Onerous contracts                 |   | 9.5           |   | —                      |   | 4.0                                                        |   | (3.5              | )      | —                        |   | —                          |   | 10.0             |   |
| Environmental                     |   | 3.2           |   | (0.6                        | )      | —                                                     |   | (1.3              | )      | —                        |   | —                          |   | 1.3              |   |
| Litigations                       |   | 116.0         |   | (0.4                        | )      | 17.8                                                       |   | (17.2             | )      | (1.3                          | )      | —                          |   | 114.9            |   |
| Other                             |   | 135.8         |   | (9.5                        | )      | 63.9                                                       |   | (61.1             | )      | (7.5                          | )      | —                          |   | 121.6            |   |
|                              |   | 989.3         |   | (37.1                       | )      | 350.1                                                      |   | (351.2            | )      | (59.9                         | )      | —                          |   | 891.2            |   |

 

Unused amountsreversed refer to, among other items, sold companies, changed classificationsand reversals of provisions made on an estimated basis.

 

In connection with theacquisition on August 24, 2000, a restructuring provision of SEK 407.9 millionwas established. This pertained to such restructuring measures that weretriggered by the change of ownership and that Alfa Laval management hascommitted to implement. The costs are mainly referring to redundancies inconnection with the close down of manufacturing sites, rationalisation of thelogistics function and introduction of a customer segment based organisationwith changed order processes. At the end of 2003, SEK - (50.9) million remainsof this acquisition provision.

 

The provisions forrestructuring are affecting slightly less than 160 (175) employees.

 

III-58

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**Note25.   Loans**

 
| **Consolidated  SEK in millions**    |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                 |   |     |   |     |   |     |   |
| Credit institutions                  |   | 2,530.7  |   | 3,360.2  |   | 4,573.1  |   |
| Bond loan                            |   | 1,064.8  |   | 1,127.6  |   | 2,045.3  |   |
|                                 |   |     |   |     |   |     |   |
| Capitalised financial leases         |   | 13.6     |   | 24.7     |   | 26.9     |   |
| Interest-bearing pension liabilities |   | 5.2      |   | 6.1      |   | 6.4      |   |
|                                 |   |     |   |     |   |     |   |
| Total debt                           |   | 3,614.3  |   | 4,518.7  |   | 6,651.6  |   |
|                                 |   |     |   |     |   |     |   |
| Cash, bank and current deposits      |   | 1,213.2  |   | 1,020.2  |   | 959.7    |   |
|                                 |   |     |   |     |   |     |   |
| Net debt                             |   | 2,401.1  |   | 3,498.5  |   | 5,691.9  |   |

 

As a consequence ofthe IPO of Alfa Laval in 2002, the structure of the financial debt changedconsiderably. The costs for the change of the structure were of a non-recurringnature.

 

In connection with therepayment of the loan from Tetra Laval Finance Ltd, the replacement of theprevious syndicated loans and the amortisation of the bond loan, capitalisedfinancing costs of totally SEK - (205.5) million were reversed. This cost wasreported as a comparison distortion financial cost.

 

Total bank borrowingsamount to SEK 2,530.7 (3,360.2) (4,573.1) million at the end of the year. Thetotal financial indebtedness including leasing and interest bearing pensionliabilities amounts to SEK 3,614.3 (4,518.7) (6,651.6) million.

 

Net financial debtamounts to SEK 2,401.1 (3,498.5) (5,691.9) million at the end of the year.

 

***Loan from credit institutions***

 

On January 27 and December 30, 2003 a voluntary amortisation of SEK223.1 million and SEK 23.9 million respectively was made on the syndicatedloan.

 

On May 28, 2002, the loans from the previous banking syndicate led bySEB were replaced by loans from a new banking syndicate, arranged by SEB andSHB, at terms that better reflect the financial position of Alfa Laval after thenew issue of shares. During the period January 1 and May 28, 2002, the oldloans were amortised by SEK 323.4 million. After May 28, 2002 the new loanshave been amortised by SEK 551.3 million during 2002.

 

The loan facility withthe banking syndicate consists of two parts. The first part is an amortisationfree loan of originally EUR 423.9 million. This has been reduced to EUR 263.7million through voluntary amortisation of EUR 87.4 million and reductionthrough exchange rate movements of EUR 72.8 million. The other part is arevolving working capital facility of EUR 150 million, which was unutilised asof December 31, 2003. Alfa Laval has initiated negations with the bankingsyndicate in order to convert the whole loan to a revolving facility potentiallycombined with a SEK based short-term commercial paper programme. A commercialpaper programme requires an official credit rating and generally means lowerinterest rates but without any guarantees for sustained financing. This is thencovered by the extended revolving facility.

 

The syndicated loans amounted to SEK 2,390.2 (3,064.7) (4,064.7)million. The maturity of the new loan is five years. The average interest andcurrency duration including derivatives is 3.5 months at the end of 2003. The

 

III-59

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interest is based on applicable IBOR plus a mark up based on therelation between net debt and EBITDA. The mark up is 95 points if the quota islarger than 2.75 and 80 points if the quota is less than or equal to 2.75, buthigher than 1.75 and 65 points if the quota is less than or equal to 1.75. Themark up is currently 65 (80) interest points. At the end of 2003 the loans areaccruing interest in the range of 0.72% - 4.60% (0.86% - 4.82%) (1.59% -7.92%). The average interest rate at the end of 2003 was 1.96 (5.58) (6.49)percent. The large decrease in average interest rates between 2003 and 2002 isdue the cancellation of the previous interest rate swaps that were requested bythe previous banking syndicate.

 

When raising the syndicated loans in August 2000, Alfa Laval wasobliged to hedge at least 66 percent of the loans to a fixed interest rate.Vis-à-vis the new syndicate there is no such obligation. As per the end ofDecember 2003, 22 (64) percent is, however, hedged.

 

Transaction costs totalling SEK 27.3 (35.1) (194.4) million have beencapitalised and are being amortised over the maturity of the loan. The currentyear’s cost for the fee amortisation is SEK -7.8 (-16.8) (-29.2) million. Anadditional cost of SEK - (-182.2) (-) million is reported as comparisondistorting as a part of the SEK - (-205.5) (-) million.

 

The loan is linked to three financial covenants that must be fulfilledthroughout the life of the loan. These covenants refer to the relationshipbetween net debt and EBITDA, the interest coverage ratio and the debt ratio. Ifthe covenants are not fulfilled, the banking syndicate is entitled to demandimmediate repayment of the loans, provided that the breach is not temporary.Alfa Laval has fulfilled the covenants with a good margin ever since the loanswere raised in May 2002.

 

***Bond loan***

 

On August 24,2000, Alfa Laval Special Finance AB borrowed EUR 220 million from Donaldsson,Lufkin & Jenrette and UBS Warburg. On November 9, 2000, this loan wasreplaced by a bond loan placed with institutional investors of EUR 220 million.It was registered with the Stock Exchange in Luxembourg in December 2000. InJuly 2001, the loan was registered with the SEC (Securities and ExchangeCommission) in the US. The loan accrues interest at 12.125 percent and fallsdue 2010. Interest payments are due May 15 and November 15 each year. Since thebond is denominated in EUR all payments are made in EUR. Transaction coststotalling SEK 29.2 (35.1) (70.7) million have been capitalised and are beingamortised over the maturity of the loan. The current year’s cost for the feeamortisation is SEK -5.9 (-12.3) (-8.0) million. An additional cost of SEK -(-23.3) (-) million is reported as comparison distorting as a part of the SEK -(-205.5) (-) million.

 

During 2003, Alfa Laval has re-purchased bonds at the prevailing marketrate for a total face value of SEK 50.6 (181.5) million. The difference betweenthe higher market value and the face value was SEK 9.7 (23.3) million, whichhas been reported as an interest cost. The bond loan accrues interest at 12.125percent, which is considerably more than the Group’s current cost for otherexternal financing.

 

Before November15, 2003 up to 35 percent of the principal amount could be redeemed with theproceeds of a public equity offering. A corresponding post IPO-redemption wasmade on June 24, 2002, where 35 percent of the bond loan of EUR 220 million wasamortised. This corresponded to EUR 77.0 million or SEK 703.6 million. This wasmade at a premium of 12.125 percent corresponding to one year’s interest, whichamounted to SEK 85.2 million. The cost was reported as a comparison distortionfinancial cost.

 

Prior toNovember 15, 2005 all, but not part of, the notes may be redeemed at a premiumplus accrued and unpaid interest. At any time on or after November 15, 2005 allor part of the notes are redeemable at the following redemption prices plusaccrued and unpaid interest:

 
| **Year starting**                |   | **Percentage  (%)** |   |
|----------------------------------|--------|---------------------|--------|
| November 15, 2005                |   | 106.063             |   |
| November 15, 2006                |   | 104.042             |   |
| November 15, 2007                |   | 102.021             |   |
| November 15, 2008 and thereafter |   | 100.000             |   |

 

III-60

----

 

**The loansare distributed among currencies as follows:**

 
| **Consolidated  SEK in millions**    |   | **Short-term** |   | **Long-term** |   |
|--------------------------------------|--------|----------------|--------|---------------|--------|
| **Currency**                         |   | **2003**       |   | **2002**      |   | **2003** |   | **2002** |   |
| CAD                                  |   | 3.7            |   | 12.4          |   | — |   | — |   |
| DKK                                  |   | 2.1            |   | 69.3          |   | 13.7 |   | 398.7 |   |
| EUR                                  |   | 55.3           |   | 78.7          |   | 1,074.1 |   | 1,472.0 |   |
| GBP                                  |   | 1.8            |   | 14.3          |   | 216.3 |   | 164.9 |   |
| INR                                  |   | —         |   | —        |   | 10.5 |   | — |   |
| JPY                                  |   | 1.0            |   | 14.8          |   | 248.6 |   | 173.1 |   |
| PLN                                  |   | 17.1           |   | 30.5          |   | — |   | — |   |
| SEK                                  |   | 5.4            |   | 6.0           |   | — |   | 175.1 |   |
| USD                                  |   | 12.2           |   | 27.8          |   | 1,925.3 |   | 1,838.0 |   |
| Other                                |   | 5.1            |   | 0.6           |   | 3.3 |   | 11.6 |   |
| Total                                |   | 103.7          |   | 254.4         |   | 3,491.8 |   | 4,233.4 |   |
| Of which, not due within five years: |   |           |   |          |   | 1,064.8 |   | 1,127.7 |   |

 

**Note26.   Other liabilities**

 
| **Consolidated  SEK in millions**      |   | **2003** |   | **2002** |   |
|----------------------------------------|--------|----------|--------|----------|--------|
| Financial  lessee payable              |   | 13.6     |   | 24.7     |   |
| Other non-interest bearing liabilities |   | 635.1    |   | 607.8    |   |
| Total                                  |   | 648.7    |   | 632.5    |   |

 

**Note27.   Accrued costs and prepaid income**

 
| **Consolidated  SEK in millions**                                   |   | **2003** |   | **2002** |   |
|---------------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                                |   |     |   |     |   |
| Accruals for social security                                        |   | 146.9    |   | 130.4    |   |
| Reserve for severance pay                                           |   | 212.2    |   | 208.9    |   |
| Accrued interest expenses                                           |   | 27.7     |   | 22.2     |   |
| Other accrued expenses and prepaid income                           |   | 429.1    |   | 422.8    |   |
| Total                                                               |   | 815.9    |   | 784.3    |   |
| Of which, accrued costs and prepaid income  not due within one year |   |     |   |     |   |
| Accruals for social security                                        |   | 21.0     |   | 18.0     |   |
| Reserve for severance pay                                           |   | 119.8    |   | 119.1    |   |
| Other accrued expenses and prepaid income                           |   | 7.7      |   | 6.1      |   |
| Total                                                               |   | 148.5    |   | 143.2    |   |

 

III-61

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**Note28.   Pledged assets and contingentliabilities**

 
| **Consolidated  SEK in millions**     |   | **2003** |   | **2002** |   |
|---------------------------------------|--------|----------|--------|----------|--------|
| **Pledged assets**                    |   |     |   |     |   |
| Other pledges and similar commitments |   | 45.4     |   | 78.3     |   |
| Total                                 |   | 45.4     |   | 78.3     |   |
| **Contingent Liabilities**            |   |     |   |     |   |
| Discounted bills                      |   | 113.7    |   | 164.5    |   |
| Performance guarantees                |   | 688.4    |   | 798.0    |   |
| Other contingent liabilities          |   | 669.0    |   | 735.5    |   |
| Total                                 |   | 1,471.1  |   | 1,698.0  |   |

 

In the new syndicateloan there are no pledges or restrictions. Other contingent liabilities areamong other items referring to leased assets.

 

**Note29.   Transactions with related party**

 

Tetra Pak within theTetra Laval Group is Alfa Laval’s single largest customer with 5.7 (5.7) (4.9)percent of net sales. In June 1999, Tetra Pak entered into a purchasingagreement with Alfa Laval that governs the distribution, research anddevelopment, market sales and information, use of trademarks and intellectualproperty. The following areas shall be agreed upon from time to time betweenrepresentatives of the parties: products that are subject to the agreement, pricesand discounts of such products, geographical markets and product areas whereTetra Pak is Alfa Laval’s preferred distributor, the right of Tetra Pak toaffix its trademarks to Alfa Laval products, sales goals for Tetra Pak indefined geographical markets, products and technologies that are the focus ofjoint research and development and the ownership rights of the research anddevelopment result and use of market and sales information. The agreement aimsat the applications within liquid food where Tetra Pak has a natural marketpresence through the deliveries of packaging equipment and packaging material.

 

The agreement wasprolonged by two years from December 31, 2003. It has a 12-month period ofnotice. The prices that Tetra Pak receives are not lower than the prices thatAlfa Laval would obtain from a comparable third party. The prices are fixed ona calendar year basis.

 

Alfa Laval haspurchased services from Tetra Laval Group Transport & Travel to optimiseforwarding, freight and delivery terms and purchase forwarding, freight andperson transportation until March 31, 2003 for SEK 0.3 (2.2) (1.6) million. Inaddition, Alfa Laval purchases facilities management services relating to thereal estate in Lund in Sweden from Tetra Pak Business Support AB for SEK 3.3(3.3) (3.0) million. Alfa Laval rents premises to Tetra Pak and DeLaval inRussia and in Germany for SEK 13.6 (13.8) (4.8) million.

 

The Board of Directorsfor Alfa Laval AB has two representatives from Tetra Laval - Jörn Rausing andFinn Rausing.

 

III-62

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At year-end, AlfaLaval Special Finance has the following balance items against companies withinthe Tetra Laval Group (Tetra Pak and DeLaval).

 
| **Consolidated  SEK in millions** |   | **2003** |   | **2002** |   |
|-----------------------------------|--------|----------|--------|----------|--------|
| Assets:                           |   |     |   |     |   |
| Accounts receivable               |   | 47.3     |   | 48.8     |   |
| Other receivables                 |   | 78.9     |   | 79.1     |   |
|                              |   |     |   |     |   |
| Liabilities:                      |   |     |   |     |   |
| Accounts payable                  |   | 11.3     |   | 3.8      |   |
| Other liabilities                 |   | 2.5      |   | 0.4      |   |

 

Alfa LavalSpecial Finance has had the following transactions with companies within theTetra Laval Group (Tetra Pak and DeLaval).

 
| **Consolidated  SEK in millions**                                                    |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Income statement:                                                                    |   |     |   |     |   |     |   |
| Net sales                                                                            |   | 789.8    |   | 830.0    |   | 777.9    |   |
| Other operating income                                                               |   | 13.6     |   | 13.8     |   | 4.8      |   |
| Other operating costs                                                                |   | (3.6     | )      | (5.5     | )      | (4.6     | )      |
|                                                                                 |   |     |   |     |   |     |   |
| Additional purchase price, increasing  goodwill                                      |   | —   |   | 367.5    |   | —   |   |
| Purchase price reimbursement leading to  reduced tax costs/increased tax liabilities |   | —   |   | 81.6     |   | 76.3     |   |

 

**Note30.   Work in progress**

 
| **Consolidated  SEK in millions**                                                                     |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                                                  |   |     |   |     |   |     |   |
| Gross amount of project sales revenue  recognised in the period                                       |   | 467.6    |   | 357.4    |   | 635.8    |   |
|                                                                                                  |   |     |   |     |   |     |   |
| Aggregated amount of costs incurred and  recognised profits (including deduction for reported losses) |   | 599.0    |   | 390.5    |   | 692.0    |   |
|                                                                                                  |   |     |   |     |   |     |   |
| Advances received                                                                                     |   | 219.9    |   | 179.4    |   | 145.2    |   |
|                                                                                                  |   |     |   |     |   |     |   |
| Retentions                                                                                            |   | 42.4     |   | 11.4     |   | 10.4     |   |
|                                                                                                  |   |     |   |     |   |     |   |
| Gross amount due from customers for plant  projects                                                   |   | 175.2    |   | 80.8     |   | 77.7     |   |
|                                                                                                  |   |     |   |     |   |     |   |
| Gross amount due to customers for plant  projects                                                     |   | 0.7      |   | 0.7      |   | 0.0      |   |

 

III-63

----

 

**Note31.   Leasing**

 

Alfa Laval has enteredinto non-cancellable operating leases mainly relating to premises and financelease agreements regarding machinery and equipment with leasing periods of 1-20years. The leasing fees for non-cancellable operating leases were SEK 207.4(232.9) (258.8) million. During the year, the Group has entered into financeleases with a capitalised value of SEK 6.7 (1.1) million. See Note 15 forinformation on the capitalised value of finance leases.

 

The future minimumleasing fees concerning non-cancellable operating leases, distributed onmaturity dates, amount to:

 
| **Consolidated  SEK in millions** |   | **Operating  leases** |       |
|-----------------------------------|--------|-----------------------|------------|
| **Year**                          |   | **2003**              | ** ** | **2002** | ** ** | **2001** | ** ** |
| 2001                              |   | N/A                   |       | N/A |   | N/A |   |
| 2002                              |   | N/A                   |       | N/A |   | 82.5 |   |
| 2003                              |   | N/A                   |       | 96.0 |   | 62.1 |   |
| 2004                              |   | 77.3                  |       | 75.5 |   | 41.5 |   |
| 2005                              |   | 64.7                  |       | 58.4 |   | 29.7 |   |
| 2006                              |   | 47.0                  |       | 31.1 |   | 16.7 |   |
| 2007                              |   | 29.2                  |       | 18.7 |   | 0.0 |   |
| 2008                              |   | 20.2                  |       | 0.0 |   | 0.0 |   |
| Later                             |   | 35.8                  |       | 48.5 |   | 46.7 |   |
| Total                             |   | 274.2                 |       | 328.2 |   | 279.2 |   |

 

The future minimumleasing fees concerning financial leasing agreements and their net presentvalue, distributed on maturity dates, amount to:

 
| **Consolidated  SEK** |   | **Financial  leases** |   | **Present  value  of financial leases** |   |
|-----------------------|--------|-----------------------|--------|-----------------------------------------|--------|
| **Year**              |   | **2003**              |   | **2002**                                |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
| 2001                  |   | N/A                   |   | N/A                                     |   | N/A |   | N/A |   | N/A |   | N/A |   |
| 2002                  |   | N/A                   |   | N/A                                     |   | 17.4 |   | N/A |   | N/A |   | 16.5 |   |
| 2003                  |   | N/A                   |   | 11.3                                    |   | 6.2 |   | N/A |   | 10.6 |   | 5.2 |   |
| 2004                  |   | 7.1                   |   | 6.0                                     |   | 2.9 |   | 6.8 |   | 5.5 |   | 2.1 |   |
| 2005                  |   | 3.2                   |   | 4.0                                     |   | 0.3 |   | 3.0 |   | 3.5 |   | 0.2 |   |
| 2006                  |   | 2.0                   |   | 2.5                                     |   | 0.0 |   | 1.8 |   | 2.1 |   | — |   |
| 2007                  |   | 0.9                   |   | 0.9                                     |   | — |   | 0.8 |   | 0.8 |   | — |   |
| 2008                  |   | 0.4                   |   | —                                  |   | — |   | 0.3 |   | — |   | — |   |
| Later                 |   | —                |   | —                                  |   | — |   | — |   | — |   | — |   |
| Total                 |   | 13.6                  |   | 24.7                                    |   | 26.8 |   | 12.7 |   | 22.5 |   | 24.0 |   |

 

**Note32.   Fair value of financialinstruments**

 

For certaininstruments, including cash and bank, other current deposits, accountsreceivable, trade accounts payable and short-term debt, the carrying valuesapproximate fair values as the majority of these instruments have shortmaturity periods. Obligations under capital leases are carried at amounts approximatingtheir fair values since the discount rate applicable to lease contracts inderiving the net present value of lease payments approximates market rates.

 

III-64

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The averageinterest and currency duration including derivatives is 3.5 months for thesyndicated loans at the end of 2003. The majority of the syndicated loans wererolled with new interest rates during December. In total, this means that thecarrying value approximates the fair value. The fair value of the bond loan isarrived at by applying the market rate at the last trading date in December.

 

The estimatedfair values of the Group’s long-term debt as of December 31 are shown below:

 
|                              |   | **2003**            |   | **2002**        |   |
|-----------------------------------|--------|---------------------|--------|-----------------|--------|
| **Consolidated  SEK in millions** |   | **Carrying  value** |   | **Fair  value** |   | **Carrying  value** |   | **Fair  value** |   |
|                              |   |                |   |            |   |   |   |   |   |
| Syndicated bank loans             |   | 2,390.2             |   | 2,390.2         |   | 3,064.7 |   | 3,064.7 |   |
|                              |   |                |   |            |   |   |   |   |   |
| Bond loan                         |   | 1,064.8             |   | 1,283.2         |   | 1,127.6 |   | 1,268.6 |   |

 

The fair values of theGroup’s foreign currency contracts and interest-rate swaps are estimated basedon dealer quotes, quoted market prices of comparable contracts, adjustedthrough interpolation where necessary for maturity differences, or if there areno relevant comparable contracts, on pricing models or formulas using currentassumptions.

 

The fair values of theGroup’s derivative financial instruments as of December 31 is shown below:

 
|                              |   | **2003**            |   | **2002**        |   |
|-----------------------------------|--------|---------------------|--------|-----------------|--------|
| **Consolidated  SEK in millions** |   | **Nominal  amount** |   | **Fair  value** |   | **Nominal  amount** |   | **Fair  value** |   |
|                              |   |                |   |            |   |   |   |   |   |
| Forward exchange contracts        |   | 8,286.0             |   | 127.6           |   | 9,033.7 |   | 151.3 |   |
|                              |   |                |   |            |   |   |   |   |   |
| Currency options                  |   | 90.7                |   | 0.2             |   | — |   | — |   |
|                              |   |                |   |            |   |   |   |   |   |
| Interest-rate swaps               |   | —              |   | —          |   | 1,951.8 |   | (61.1 | ) |

 

III-65

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**Note33.   Reconciliation to US GAAP**

 
| **Consolidated  SEK in millions**                                             |   | **Note** |   | **2003**    |   | **2002**    |   | **2001**  |   |
|-------------------------------------------------------------------------------|--------|----------|--------|-------------|--------|-------------|--------|-----------|--------|
| Net  income/(loss) under Swedish GAAP                                         |   |     |   | 640.6       |   | 208.2       |   | 367.4     |   |
|                                                                          |   |     |   |        |   |        |   |      |   |
| US GAAP adjustments:                                                          |   |     |   |        |   |        |   |      |   |
|                                                                          |   |     |   |        |   |        |   |      |   |
| Goodwill and other intangibles                                                |   |     |   |        |   |        |   |      |   |
| with indefinite useful lives                                                  |   | a        |   | 191.3       |   | 187.7       |   | —    |   |
| Leveraged buy-out accounting                                                  |   | b        |   | 7.1         |   | 2.1         |   | 15.0      |   |
|                                                                          |   |     |   |        |   |        |   |      |   |
| Derivative instruments and                                                    |   |     |   |        |   |        |   |      |   |
| hedge accounting                                                              |   | c        |   | 266.7       |   | 271.2       |   | (49.5     | )      |
|                                                                          |   |     |   |        |   |        |   |      |   |
| Tooling costs                                                                 |   | d        |   | (4.4        | )      | 11.0        |   | 15.3      |   |
| Capitalised software                                                          |   | e        |   | (16.7       | )      | (20.2       | )      | (6.4      | )      |
| Provisions                                                                    |   | f        |   | —      |   | —      |   | (0.1      | )      |
|                                                                          |   |     |   |        |   |        |   |      |   |
| Other                                                                         |   | g        |   | (0.3        | )      | (0.3        | )      | (0.3      | )      |
| Deferred taxes                                                                |   |     |   |        |   |        |   |      |   |
| Tax effect of US GAAP adjustments                                             |   | h        |   | (67.6       | )      | (26.7       | )      | 14.3      |   |
|                                                                          |   |     |   |        |   |        |   |      |   |
| Sum of  adjustments                                                           |   |     |   | 376.1       |   | 424.8       |   | (11.7     | )      |
|                                                                          |   |     |   |        |   |        |   |      |   |
| Net income  under US GAAP before change in accounting principles              |   |     |   | 1,016.7     |   | 633.0       |   | 355.7     |   |
|                                                                          |   |     |   |        |   |        |   |      |   |
| Presented as:                                                                 |   |     |   |        |   |        |   |      |   |
|                                                                          |   |     |   |        |   |        |   |      |   |
| Net income from continuing operations  before change in accounting principles |   |     |   | 1,016.7     |   | 633.0       |   | 355.7     |   |
|                                                                          |   |     |   |        |   |        |   |      |   |
| Net income under US GAAP before change in  accounting principles              |   |     |   | 1,016.7     |   | 633.0       |   | 355.7     |   |
|                                                                          |   |     |   |        |   |        |   |      |   |
| Effect of change in accounting principles,  net of tax                        |   | c        |   | 0.0         |   | 0.0         |   | (61.9     | )      |
|                                                                          |   |     |   |        |   |        |   |      |   |
| Net income under US GAAP                                                      |   |     |   | 1,016.7     |   | 633.0       |   | 293.8     |   |
|                                                                          |   |     |   |        |   |        |   |      |   |
| Basic and diluted earnings per share (SEK)                                    |   |     |   | 124.1       |   | 121.1       |   | 293,780.0 |   |
|                                                                          |   |     |   |        |   |        |   |      |   |
| Average number of shares                                                      |   |     |   | 8,191,000.0 |   | 5,229,137.0 |   | 1,000.0   |   |

 

III-66

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**Note 33cont.   Reconciliation to US GAAP**

 
| **Consolidated  SEK in millions**       |   | **Note** |   | **2003** |   | **2002** |   |
|-----------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Equity capital under Swedish GAAP       |   |     |   | 4,402.5  |   | 4,413.0  |   |
|                                    |   |     |   |     |   |     |   |
| US GAAP adjustments:                    |   |     |   |     |   |     |   |
| Goodwill and other intangibles          |   |     |   |     |   |     |   |
| with indefinite useful lives            |   | a        |   | 365.3    |   | 187.7    |   |
| Leveraged buy-out accounting            |   | b        |   | 403.8    |   | 444.2    |   |
| Derivative instruments and              |   |     |   |     |   |     |   |
| hedge accounting                        |   | c        |   | 98.1     |   | 26.3     |   |
| Tooling costs                           |   | d        |   | 91.4     |   | 95.7     |   |
| Capitalised software                    |   | e        |   | 5.8      |   | 22.5     |   |
| Provisions                              |   | f        |   | —   |   | —   |   |
| Other                                   |   | g        |   | 4.8      |   | 5.1      |   |
| Deferred taxes -                        |   |     |   |     |   |     |   |
| Tax effect of US GAAP adjustments       |   | i        |   | (67.6    | )      | (26.7    | )      |
|                                    |   |     |   |     |   |     |   |
| Sum of adjustments                      |   |     |   | 901.6    |   | 754.8    |   |
|                                    |   |     |   |     |   |     |   |
| Shareholder’s equity under US GAAP |   |     |   | 5,304.1  |   | 5,167.8  |   |

 

**CHANGE INCONSOLIDATED EQUITY CAPITAL**

**ACCORDINGTO US GAAP**

 
| **Consolidated  SEK in millions**             |   |    |   |
|-----------------------------------------------|--------|---------|--------|
| **As per balance sheet on December 31, 2000** |   | 3,536.7 |   |
| **2001**                                      |   |    |   |
| Translation difference                        |   | 268.3   |   |
| Net income for 2001 according to US GAAP      |   | 293.8   |   |
| **As per balance sheet on December 31, 2001** |   | 4,098.8 |   |
| **2002**                                      |   |    |   |
| New issue of shares                           |   | 819.0   |   |
| Equity part of Group contribution             |   | (38.4   | )      |
| Deferred tax on Group contribution            |   | (15.0   | )      |
| Translation difference                        |   | (329.6  | )      |
| Net income for 2002 according to US GAAP      |   | 633.0   |   |
| **As per balance sheet on December 31, 2002** |   | 5,167.8 |   |
| **2003**                                      |   |    |   |
| Equity part of Group contribution             |   | (441.6  | )      |
| Deferred tax on Group contribution            |   | (171.8  | )      |
| Translation difference                        |   | (267.0  | )      |
| Net income for 2003 according to US GAAP      |   | 1,016.7 |   |
| **As per balance sheet on December 31, 2003** |   | 5,304.1 |   |

 

III-67

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***Comments to the US GAAP reconciliation***

 

**a) Goodwill and other intangibles**

 

**Goodwill and other intangibles with indefinite useful lives**

 

The FinancialAccounting Standards Board issued Statement of Financial Accounting StandardsNo. 142, Goodwill and Other Intangible Assets (FAS 142) in July 2001. TheStatement is effective for fiscal years beginning after December 15, 2001. FAS142 requires that goodwill, including previously existing goodwill, andintangible assets with indefinite useful lives not be amortised; these assetsshould be tested for impairment annually. Goodwill and intangible assets withindefinite useful lives are no longer tested for impairment under FAS 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets tobe Disposed Of.  The Company has adoptedthe provisions of FAS 142 as of January 1 2002.

 

Upon adoptionof the new standard, goodwill of SEK 3,217.4 million (calculated in accordancewith US GAAP as of December 31, 2001) ceased to be amortised, but is insteadtested for impairment. In addition, intangible assets totalling approximatelySEK 594 million relating to in-place workforce calculated for US GAAP purposes,as well as approximately SEK 208 million of related deferred tax liabilities,have been reclassified as goodwill.

 

An impairmenttest has been performed at the end of 2003 indicating that there is not anyneed to write down the goodwill.

 

**b) Leveraged buy-out accounting**

 

In August 2000the former Alfa Laval Holding AB and its subsidiaries (the predecessor) wasacquired by a newly formed entity, resulting in a change in control. Prior tothe transaction, the predecessor was owned 100% by Tetra Laval BV, part of theTetra Laval Group. Subsequent to the transaction, the predecessor ceased toexist and the newly formed company, Alfa Laval AB, was owned 36.8% by TetraLaval BV, 62.5% by Industri Kapital and 0.7% by management. For US GAAPpurposes, this transaction as described in the Board of Directors’ report mustbe accounted for as a leveraged buy-out transaction in accordance with EmergingIssues Task Force (EITF) Abstract 88-16 because the transaction was carried outvia a series of highly leveraged transactions through the creation of a newlyformed entity that acquired 100% of the predecessor and resulting in the formershareholder maintaining a minority interest in the newly formed entity.

 

For US GAAPpurposes, Alfa Laval’s basis in the net assets of the former Alfa Laval Holdingconsists of 83.6% fair value and 16.4% predecessor basis calculated as shownbelow:

 
| **Consolidated  SEK in millions**                                                            |   |     |   |
|----------------------------------------------------------------------------------------------|--------|----------|--------|
| Fair value of Alfa Laval Holding on August  23, 2000                                         |   | 10,087.0 |   |
| Predecessor basis of Alfa Laval Holding on  August 23, 2000                                  |   | 5,592.0  |   |
|                                                                                         |   |     |   |
| 63.2% interest in fair value of Alfa Laval  Holding of new investors in Alfa Laval AB        |   | 6,374.0  |   |
| 36.8% interest in predecessor basis of Alfa  Laval Holding of old investors in Alfa Laval AB |   | 2,058.0  |   |
|                                                                                         |   | 8,432.0  |   |
|                                                                                         |   |     |   |
| Percentage                                                                                   |   | 83.6     | %      |

 

III-68

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For US GAAPpurposes, the individual assets acquired in the transaction were stepped up by83.6% of the difference between book value and fair value. The differencebetween the fair value adjustments recorded and the purchase price was recordedas a debit directly to equity.

 

In its SwedishGAAP financial statements, Alfa Laval recorded the acquisition of the formerAlfa Laval Holding as a purchase for cash consideration of SEK 8,214 millionplus other consideration and transaction costs for an aggregate purchase priceof SEK 8,286 million in exchange for 100% of the former Alfa Laval Holding.This purchase price excludes the value of the Alfa Laval AB shares issued toTetra Laval BV because this was considered to be a transaction betweenshareholders which should not be reflected in the issuer’s consolidatedfinancial statements in accordance with Swedish GAAP. For US GAAP purposes,Tetra Laval BV’s carryover basis in the former Alfa Laval Holding through its36.8% interest in Alfa Laval AB must be considered in purchase accounting.Accordingly, the purchase price for US GAAP purposes includes the SEK 1,800million value of the Alfa Laval AB shares issued to Tetra Laval BV as part ofthe overall consideration paid in exchange for 100% of the former Alfa LavalHolding.

 

The result ofapplying leveraged buy-out accounting to the transaction in accordance with USGAAP is that the step-up in the value the net assets acquired to fair value hasbeen limited to the extent of the new owners’ interest in Alfa Laval AB. Inaddition to the differences related to leveraged buy-out accounting, the valuesof the net assets acquired differ for US GAAP purposes because certainintangible assets including workforce and customer relationships must be valuedseparately in accordance with US GAAP, but such items do not meet thedefinition of intangible assets in accordance with Swedish GAAP and such valueis thus recorded as goodwill under Swedish GAAP.

 

The combinedeffect of the SEK 1,800 million higher purchase price for US GAAP purposes andthe limitation of the fair value step-up in accordance with EITF 88-16 resultsin a net increase to equity on the acquisition date for US GAAP as compared to SwedishGAAP because the credit to equity related to the higher purchase price morethan offsets the debit to equity related to the EITF 88-16 limitations of thefair value step-up.

 

During 2001 theGroup completed the exercise of pushing down the fair value step-up adjustmentsrelated to the transaction into the local currencies of the entities to whichthe step-up adjustments relate.  Forpresentation under Swedish GAAP the recalculated balances, adjusted for the step-upvalues of the related assets and equity, have been recorded as a restatement ofthe balances previously reported at December 31, 2000.

 

For US GAAPpurposes the adjustment related to pushing down the step-up values into localcurrencies would not be presented by restating the prior year financialstatements.  Instead, the foreigncurrency change would be included in 2001 as a component of other comprehensiveincome.  The 2000 US GAAP reconciliationof income and equity include adjustments to reverse the impact of therestatement recorded for Swedish GAAP purposes.  The 2001 US GAAP reconciliation of equity includes an adjustmentfor the foreign currency translation impact recorded in 2000 for Swedish GAAPpurposes.

 

**c) Derivative instruments and hedge accounting**

 

Under SwedishGAAP, unrealised gains and losses on forward exchange and other derivativecontracts undertaken to hedge current and anticipated transactions aregenerally deferred and reported when they mature along with the underlyingtransactions or anticipated future cash flows to which they relate.

 

In January 2001Financial Accounting Standards No. 133, “Accounting for Derivative Instrumentsand Hedging Activities” (“FAS 133”) as amended by FAS 137 and FAS 138, becameeffective for the Group.  FAS 133establishes a new model for accounting for derivatives and hedging activitiesand supersedes and amends a number of previous standards.  Upon initial application, all derivativesmust be recognised in the balance sheet as either assets or liabilities andmeasured at fair value.  In addition,all hedging relationships must be reassessed and documented pursuant to theprovisions of FAS 133.

 

Prior to theeffective date of FAS 133, US GAAP accounting for foreign exchange contractswas governed by Financial Accounting Standards No. 52, “Foreign CurrencyTranslation” (FAS 52), which allows for foreign

 

III-69

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exchange contracts tobe reported as hedges only to the extent that they are specifically matched tounderlying firm commitments.  Otherwise,such contracts are marked to market and recorded on the balance sheet, withunrealised gains and losses included in the reported results of each year.

 

Under FAS 133, theaccounting for changes in the fair value (i.e. gains and losses) of a derivativefinancial instrument depends on whether it has been designated and qualifies aspart of a hedging relationship and further on the type of hedging relationship.Changes in fair value of derivatives not qualifying as hedges are reported inincome.

 

As a result ofadoption of Statement 133, the Group recognises all derivative financialinstruments, such as interest-rate swap contracts and foreign exchangecontracts, in the consolidated financial statements at fair values regardlessof the purpose or intent for holding the instrument. Upon initial adoption ofFAS 133 the Group recognised a cumulative effect of accounting change of SEK61.9 million (net of tax benefit of SEK 33.0 million) in the income statementrelated to the fair value of interest-rate swap contracts in existence as ofJanuary 1, 2001.  Gains and lossesrecognised on derivative financial instruments subsequent to initial adoptionof FAS 133 are recognised in financial income or expense for purposes of presentationunder US GAAP.

 

For periods prior toadoption of FAS 133, the Group was not able under FAS 52 to account for any ofits derivative foreign exchange contracts as hedges as these contracts did notrelate to underlying firm commitments and therefore the adoption of FAS 133 didnot result in a translation adjustment related to these instruments.

 

The Group has issuedlong-term debt in various currencies that for Swedish GAAP purposes areconsidered to be hedges of its net investment in certain foreign subsidiaries.Accordingly, the change in value of the long-term debt related to currencyfluctuations has been reported directly in equity as a foreign currencytranslation adjustment as an offset to the translation adjustments resultingfrom the consolidation of its foreign subsidiaries. During 2000 and earlier,this treatment was consistent with US GAAP under FAS 52. Upon adoption of FAS133 for US GAAP purposes in 2001, the long-term debt used to hedge the netinvestment in foreign subsidiaries must meet strict documentation and effectivenesscriteria in order to be accounted for as part of the foreign currencytranslation adjustment. Because such criteria have not been met, the change invalue of the long-term debt because of currency fluctuations is reported inearnings for US GAAP purposes.

 

The US GAAPreconciliation items can be summarized as follows.

 
| **Consolidated  SEK in millions**                            |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Hedges of net investments in foreign  subsidiaries under     |   |     |   |     |   |     |   |
| Swedish GAAP not qualifying for hedging  under FAS 133       |   | 194.8    |   | 164.9    |   | (105.5   | )      |
| Change in fair market value of  interest-rate swaps          |   |     |   |     |   |     |   |
| not recognized under Swedish GAAP                            |   | 61.1     |   | 50.0     |   | (15.8    | )      |
| Change in fair market value of foreign  exchange derivatives |   |     |   |     |   |     |   |
| not recognized under Swedish GAAP                            |   | 10.8     |   | 56.3     |   | 71.8     |   |
|                                                         |   |     |   |     |   |     |   |
| Total                                                        |   | 266.7    |   | 271.2    |   | (49.5    | )      |

 

**d)Tooling costs**

 

Under Swedish GAAP,the Group generally expenses the cost of replacement tools acquired. Under USGAAP, significant tooling costs are capitalised as incurred and amortised onthe straight-line basis over their estimated economic lives of 3 years.

 

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**e)Capitalised software**

 

Under prior SwedishGAAP, the cost to develop computer software for internal use is expensed asincurred. The Accounting Standards Executive Committee issued Statement ofPosition (“SOP”) No. 98-1, “Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use”. SOP No. 98-1 is effective forfinancial statements for fiscal years beginning after December 15, 1998;however, early adoption is encouraged. For US GAAP purposes, the Group hasadopted SOP 98-1 with effect from January 1, 1995 and has capitalised directcosts of developing software for internal use. Amortisation of these assets iscalculated on the straight-line method over their estimated economic lives of 3years.

 

**f)Provisions**

 

As of December 31,2001, the US GAAP differences for provisions relate primarily to differentmethods used to calculate reserves for inventory, receivables and compensatedabsences.

 

**g)Other**

 

Under Swedish GAAP,certain real estate assets are stated at estimated fair value. The revaluedamounts of depreciable assets are depreciated over their estimated usefullives. The revaluation of assets is not permitted under US GAAP. Upon thetransaction described in b, the fixed assets were adjusted to their fairvalues, eliminating the effect of past revaluations. For US GAAP purposes,fixed asset values that have been revalued after the transaction have beenrestated at historical cost based on the purchase accounting adjustments, netof corresponding adjustments for accumulated depreciation. Adjustments toperiodic depreciation charges have also been reflected.

 

Under Swedish GAAP,research and development expenses related to projects that are funded by agovernment affiliated body are deferred and recorded as an intangible asset.Under US GAAP, research and development costs are expensed as and whenincurred.

 

Under prior SwedishGAAP interest related to long-term construction projects was not required to becapitalised. US GAAP requires that interest incurred during long-termconstruction projects must be capitalised and included as part of the cost ofthe asset.

 

Under Swedish GAAP,short-term loans for which management has the ability to refinance areclassified as non-current liabilities. For US GAAP, such liabilities areclassified as current. This has no effect on equity, but is just a differentclassification between short term and long term among the liabilities in thebalance sheet.

 

Under Swedish GAAP,the proportionate consolidation method is an acceptable method of accountingfor joint ventures. Under US GAAP, joint ventures must be accounted for usingthe equity method. This difference in accounting does not result in anyadjustment to net shareholder’s equity or net income. The effect of using theproportionate consolidation method does not have a material impact on anyindividual income statement or balance sheet item.

 

As of December 31,2003 the Group had sold receivables with recourse totalling SEK 113.7 (164.5)million. These are disclosed as discounted bills in the footnote describingcontingent liabilities. Under US GAAP, the recourse provisions prevent thetransaction from being reported as a sale. Accordingly, the receivables wouldbe kept on the balance sheet, and a loan would be reported for the amount ofcash received. The loss on the sale was not material, and this transactionresults in no significant impact on US GAAP equity.

 

In 2000 Alfa Laval ABissued warrants to management to purchase common stock of Alfa Laval AB.Management paid fair market value in cash for the warrants based on an fairvalue calculation using the Black-Scholes option pricing model. The Group haselected to use the fair value method in accordance with Statement of FinancialAccounting Standards No. 123 “Accounting for Stock-Based Compensation” (“FAS123”) which requires the fair value of stock compensation grants to berecognized over the vesting period of the grants. Under

 

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the terms of thewarrant agreement, management was required to pay the fair value determined forthe warrants and accordingly there would be no compensation expense associatedwith the warrants for either Swedish GAAP or US GAAP.

 

In August 2001 the USFinancial Accounting Standards Board issued FAS 144. The standard supersedesFAS 121 and parts of Accounting Principles Board Opinion 30 regardingaccounting for the impairment or disposal of long-lived assets. FAS 144requires long-lived assets held for disposal to be measured at the lower ofcarrying amount or fair values less costs to sell and provides new guidanceregarding presentation of assets to be disposed. Within Alfa Laval these assetsare mainly relating to real estate and more precisely to properties in theUnited States, Spain, Brazil, Canada, Denmark, Wales and Peru are also plannedfor sale. Accounting under FAS 144 does not mean any difference compared toSwedish GAAP. US GAAP is however requiring a reporting of assets for saleaccording to the below:

 
| **Consolidated**     |   | **2003**            |   | **2002**        |   |
|----------------------|--------|---------------------|--------|-----------------|--------|
| **SEK in millions**  |   | **Carrying  value** |   | **Fair  value** |   | **Carrying  value** |   | **Fair  value** |   |
|                 |   |                |   |            |   |   |   |   |   |
| Real estate for sale |   | 169.1               |   | 403.2           |   | 78.1 |   | 125.5 |   |

 

In June 2002 the US FinancialAccounting Standards Board issued FAS 146 “Accounting for Costs Associated withExit or Disposal Activities”. It nullifies Emerging Issues Task Force (EITF)Issue 94-3 “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity”. The principal difference between FAS 146 andIssue 94-3 relates to its requirements for recognition of a liability for acost associated with an exit or disposal activity. FAS 146 requires a liabilityfor a cost associated with an exit or disposal activity be recognised when theliability is incurred. Under Issue 94-3 a liability for an exit cost wasrecognised at the date of an entity’s commitment to an exit plan. FAS 146 alsoestablishes that fair value is the objective for initial measurement of theliability. FAS 146 is effective for exit or disposal activities initiated afterDecember 31, 2002. Alfa Laval has not been involved in any exit or disposalactivities during 2003 that affects the provisions at year-end.

 

**i)Deferred taxes**

 

As of January 1, 2000the Group adopted IAS 12 with a view toward meeting both IAS and US GAAPrequirements. Accordingly, the Group has applied the liability method and hasrecorded deferred taxes in accordance with both IAS 12 and FAS 109.

 

The components ofincome (loss) before taxes under US GAAP are as follows:

 
| **Consolidated  SEK in millions** |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Swedish                           |   | 743.3    |   | 316.7    |   | 492.9    |   |
| Foreign                           |   | 474.8    |   | 564.6    |   | (291.9   | )      |
| Total                             |   | 1,218.1  |   | 881.3    |   | 201.0    |   |

 

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The tax cost under USGAAP is composed of the following:

 
| **Consolidated  SEK in millions** |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Current:                          |   |     |   |     |   |     |   |
| Swedish                           |   | (7.0     | )      | (4.2     | )      | (24.4    | )      |
| Foreign                           |   | (276.0   | )      | (282.3   | )      | (319.6   | )      |
| Deferred:                         |   |     |   |     |   |     |   |
| Swedish                           |   | 0.8      |   | (20.4    | )      | 77.4     |   |
| Foreign                           |   | 80.8     |   | 58.6     |   | 359.4    |   |
| Total                             |   | (201.4   | )      | (248.3   | )      | 92.8     |   |

 

**CashFlow Information**

 

The definitions of“cash flows” differ between Swedish GAAP and US GAAP.  Cash flow under Swedish GAAP represents increases or decreases in“cash,” which is comprised of cash on hand and in banks.  Under US GAAP, cash flow representsincreases or decreases in “cash and cash equivalents,” which includeshort-term, highly liquid investments with remaining maturities of less than 90days when acquired, and exclude overdrafts.

 

There are also certaindifferences in the classification of items within the cash flow statementbetween Swedish GAAP and US GAAP.  BothSwedish GAAP and US GAAP segregate cash flows between operating activities, investingactivities and financing activities, however, certain items are included indifferent categories for Swedish GAAP compared to US GAAP.

 

Cash flows fromservicing of finance, and returns on investments would be, with the exceptionof any interest paid but capitalized, included as cash flows from operatingactivities under US GAAP.  In addition,changes in provisions and changes in assets and liabilities because of foreigncurrency transaction gains or losses would be included as cash flows fromoperating activities under US GAAP.

 

**Othercomprehensive income (loss)**

 

FAS No. 130,“Reporting Comprehensive Income” establishes standards for reportingcomprehensive loss and its components in financial statements. Comprehensiveincome and loss as defined, includes all changes in equity (net assets) duringeach financial period from non-owner sources. On a US GAAP basis, the only itemincluded in other comprehensive income and loss that is excluded from netincome is currency translation adjustment. There are no tax effects relating tothis item. Comprehensive income is not a required disclosure under SwedishGAAP.

 

Comprehensive incomeunder US GAAP is presented as follows:

 
| **Consolidated  SEK in millions** |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------|--------|----------|--------|----------|--------|----------|--------|
| According to US GAAP:             |   |     |   |     |   |     |   |
| Net income                        |   | 1,016.7  |   | 633.0    |   | 293.8    |   |
| Foreign currency translation      |   | (267.0   | )      | (329.6   | )      | 268.3    |   |
| Comprehensive income              |   | 749.7    |   | 303.4    |   | 562.1    |   |

 

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Accumulatedcomprehensive income under US GAAP is presented as follows:

 
| **Consolidated  SEK in millions** |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------|--------|----------|--------|----------|--------|----------|--------|
| According to US GAAP:             |   |     |   |     |   |     |   |
| Accumulated net income            |   | 1,500.4  |   | 483.7    |   | (149.3   | )      |
| Foreign currency translation      |   | (583.6   | )      | (316.6   | )      | 13.0     |   |
| Accumulated comprehensive income  |   | 916.8    |   | 167.1    |   | (136.3   | )      |

 

**Recentlyissued accounting pronouncements**

 

## **EITF 00-21**

 

In November 2002, the Emerging Issues Task Force (“EITF”) reached afinal consensus on EITF 00-21, “Revenue Arrangements with MultipleDeliverables.” The scope provisions of EITF 00-21 were slightly modified in May2003. EITF 00-21 addresses certain aspects of the accounting for revenuearrangements with multiple deliverables by a vendor. EITF 00-21 outlines anapproach to determine when a revenue arrangement that contains multipledeliverables should be divided into separate units of accounting and, ifseparation is appropriate, how the arrangement consideration should beallocated to the identified accounting units. The Company is required and plansto adopt the provisions of EITF 00-21, effective for fiscal periods beginningafter June 15, 2003. To accomplish this, the Company must identify anddetermine the fair value of the component deliverables. Alfa Laval does notexpect the adoption of EITF 00-21 to have a material impact on its results ofoperations, financial position and cash flows.

 

## **FIN 46**

 

In January 2003, the FASB issued FIN 46, “Consolidation of VariableInterest Entities – an interpretation of ARB No. 51,” which clarifies theapplication of the consolidation rules to certain variable interest entities.FIN 46 established a new multi-step model for the consolidation of variableinterest entities when a Company has a controlling financial interest basedeither on voting interests or variable interests. Consolidation based onvariable interests is required by the primary beneficiary if the equityinvestors lack essential characteristics of a controlling financial interest orif the equity investment at risk is not sufficient for the entity to financeits activities without additional subordinated financial support from otherparties. FIN 46 also provides disclosure requirements related to significantinvestments in variable interest entities, whether or not those entities areconsolidated. On October 9, 2003, the FASB issued FASB Staff Position FIN 46-6(“FSP FIN 46-6”), “Effective Date of FASB Interpretation No. 46, Consolidationof Variable Interest Entities.” FSP FIN 46-6 defers the effective date forapplying the provisions of FIN 46 for interests held by public entities invariable interest entities or potential variable interest entities createdbefore February 1, 2003. Alfa Laval does not have any variable interestentities and is thus not affected by FIN 46.

 

## **FAS 149**

 

In April 2003, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 149, “Amendment of Statement133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). ThisStatement codifies certain decisions made by the FASB as part of theDerivatives Implementation Group process by amending and clarifying the scopeand implementation guidance of FASB Statement No. 133, for similar accountingtreatment of contracts with comparable characteristics. SFAS No. 149 iseffective for contracts entered into or modified after June 30, 2003, and forhedging relationships designated after June 30, 2003. The adoption of SFAS No.149 did not have a material impact on the results of operations, financialposition and cash flows.

 

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**ITEM 18**:  FINANCIALSTATEMENTS

 

Not applicable.

 

**ITEM 19**:  EXHIBITS

 
| *1.1  |   | Certificate of Registration and Articles of  Association of Alfa Laval Special Finance AB.                                                                                                                                                                                                                                                                                                                                          |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *2.1  |   | Indenture, dated November 9, 2000 by  and among Alfa Laval Special Finance AB, as issuer, Alfa Laval Holding AB  (renamed from Alfa Laval Credit Finance AB), as guarantor, and The Bank of  New York, as trustee.                                                                                                                                                                                                             |
| *4.1  |   | Purchasing Contract, dated June 24,  1999, between Alfa Laval AB and Tetra Pak International SA.                                                                                                                                                                                                                                                                                                                               |
| *4.2  |   | Purchase Agreement, dated November 2,  2000, among Alfa Laval Special Finance AB, as issuer, Alfa Laval Holding AB  (renamed from Alfa Laval Credit Finance AB), as guarantor, Donaldson, Lufkin  and Jenrette International and UBS AG, acting through its business group UBS  Warburg, as underwriters.                                                                                                                      |
| *4.3  |   | Intercompany Note, dated August 22,  2000, between Alfa Laval Holding AB (renamed from Alfa Laval Credit Finance  AB), as borrower, and Alfa Laval Special Finance, as lender.                                                                                                                                                                                                                                                 |
| *4.4  |   | Amendment Agreement to Intercompany Note,  dated November 9, 2000, between Alfa Laval Holding AB (renamed from Alfa  Laval Credit Finance AB), as borrower, and Alfa Laval Special Finance, as  lender.                                                                                                                                                                                                                        |
| **4.5 |   | Intercreditor Agreement, dated  April 29, 2002, among Alfa Laval Special Finance AB, Alfa Laval Holding  AB (renamed from Alfa Laval Credit Finance AB), SEB Merchant Banking, Debt  Capital Markets, a unit within Skandinaviska Enskilda Banken AB as facility  agent and the lenders listed in Schedule 1 thereto.                                                                                                     |
| *4.6  |   | Multicurrency Credit Facility, dated  April 29, 2002, among Alfa Laval Treasury International AB and Alfa  Laval US Treasury Inc, as borrowers, and Alfa Laval AB and certain  subsidiaries, as guarantors, SEB Merchant Banking, Debt Capital Markets and  Svenska Handelsbanken AB (publ), as arrangers, the financial lenders named as  lenders therein and SEB Merchant Banking, Debt Capital Markets, as facility  agent. |
| 4.7   |   | Multicurrency Credit Facility, dated April  15, 2004, among Alfa Laval Treasury International AB, Alfa Laval U.S.  Treasury Inc., as borrowers, and Alfa Laval AB (publ) and certain  subsidiaries, as guarantor, SEB Merchant Banking, Skandinaviska Enskilda  Banken AB (publ) as lead arranger and facility agent, and the financial  lenders named as lender therein.                                                           |
| 4.8   |   | Intercreditor Agreement, dated April 15,  2004, among Alfa Laval Special Finance AB and Alfa Laval Holding AB, each as  intra-group debtors, SEB Merchant Banking, Skandinaviska Enskilda Banken AB  (publ), as facility agent, and the lenders listed in Schedule 1 thereto.                                                                                                                                                       |
| 7.1   |   | Statements re: computation of earnings to  fixed charges.                                                                                                                                                                                                                                                                                                                                                                           |
| 8.1   |   | List of subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                               |
| 11.1  |   | Code of Ethics                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 11.2  |   | Audit and Non-Audit Services Pre-Approval Policy                                                                                                                                                                                                                                                                                                                                                                                    |
| 12.1  |   | Certification of Sigge Haraldsson, Chief  Executive Officer of Alfa Laval Special Finance AB, pursuant to section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                           |
| 12.2  |   | Certification of Thomas Thuresson, Chief  Financial Officer of Alfa Laval Special Finance AB, pursuant to section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                           |
| 13.1  |   | Certification pursuant to 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                            |

 

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*                                         Incorporated by reference to our annual report onForm 20-F for the fiscal year ended December 31, 2001, filed with theSEC on April 30, 2002.

 

**                                  Incorporated by reference to our annual report onForm 20-F for the fiscal year ended December 31, 2002, filed with theSEC on April 17, 2003.

 

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### **SIGNATURES**

 

The Registrant hereby certifies that it meetsall of the requirements for filing on Form 20-F and that it has dulycaused and authorised this Annual Report to be signed on its behalf by theundersigned.

 
| Date: April 23, 2004 |                               |   |
|----------------------|------------------------------------|--------|
|                 |                               |   |
|                 | **Alfa  Laval Special Finance AB** |   |
|                 | By:                                |   |
|                 |                               |   |
|                 | Name: Sigge Haraldsson             |   |
|                 | Title: *Chief  Executive Officer*  |   |
|                 | By:                                |   |
|                 |                               |   |
|                 | Name: Thomas Thuresson             |   |
|                 | Title: *Chief  Financial Officer*  |   |

 

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