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As filed with the Securities and Exchange Commission on June 30, 2004



SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

     
o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
    (g) OF THE SECURITIES EXCHANGE ACT OF 1934
    OR
x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Fiscal Year Ended: December 31, 2003
    OR
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934

1-10108
(Commission file number)
FIAT S.p.A.
(Exact name of registrant as specified in its charter)
FIAT S.p.A.
(Translation of registrant’s name into English)
Italy
(Jurisdiction of incorporation or organization)
Via Nizza 250, Turin, Italy
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

     
    Name of each exchange
Title of each class   on which registered
     
Ordinary American Depositary Shares   New York Stock Exchange
Ordinary shares with a par value of 5 each*   New York Stock Exchange
Preference American Depositary Shares   New York Stock Exchange
Preference shares with a par value of 5 each*   New York Stock Exchange
Savings American Depositary Shares   New York Stock Exchange
Savings shares with a par value of 5 each*   New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None
(Title of Class)

     Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

800,417,598 ordinary shares, 103,292,310
preference shares and 79,912,800 savings shares

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

             
Yes   þ   No   o

     Indicate by check mark which financial statement item the registrant has elected to follow.

             
Item 17   o   Item 18   þ


•      Not for trading, but only in connection with the registration of the American Depositary Shares.



 


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    1  
 Exhibit 1.1
 Exhibit 8.1
 Exhibit 12.1
 Exhibit 12.2
 Exhibit 13.1

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Accounting Principles and Reporting Currency

     Beginning with the fiscal year ended December 31, 1999, we publish our Consolidated Financial Statements in euros (“”), the official common currency of twelve Member States of the European Union (the “EU”), including Italy. In this annual report, references to “dollars,” “U.S.$” or “$” are to United States dollars. Amounts stated in dollars, unless otherwise indicated, have been translated from euros at an assumed rate solely for convenience and should not be construed as representations that the euro amounts actually represent such dollar amounts or could be converted into dollars at the rate indicated. Unless otherwise indicated, such dollar amounts have been translated from euros at the noon buying rate in The City of New York for cable transfers in foreign currencies as announced by the Federal Reserve Bank of New York for customs purposes (the “Noon Buying Rate”) on December 31, 2003 (the last business day of 2003) of $1.2597 per 1.00. Such rate may differ from the actual rates we used in preparing our Consolidated Financial Statements included in Item 18 and dollar amounts used in this annual report may differ from the actual dollar amounts that were translated into euros in the preparation of our financial statements. For information regarding recent rates of exchange between euros and dollars, see Item 3. “Key Information — Selected Financial Data — Exchange Rates”.

     The financial statements in this annual report are based on financial information prepared in accordance with the requirements of Italian Legislative Decree 127/91, as interpreted and supplemented by the Italian accounting principles issued by the National Board of Dottori Commercialisti and of Ragioneri (Chartered Accountants) and, to the extent such requirements or principles are silent on particular issues and not at variance, by those standards laid down by the International Accounting Standards Board (I.A.S.B.) (such requirements, as so interpreted and supplemented, “Italian GAAP”). Such principles are described in “Form and content of the consolidated financial statements” and “Principles of consolidation and significant accounting policies” in the Notes to the Consolidated Financial Statements included in Item 18. These principles differ in certain respects from generally accepted accounting principles in the United States (“U.S. GAAP”). See Note 24 to the Consolidated Financial Statements included in Item 18.

     Certain of the financial measures we use to evaluate our financial and operating performance are considered to be non-GAAP measures, including our net financial position and gross indebtedness as calculated for purposes, among other things, of financial targets agreed with our lenders, as well as measures such as our net indebtedness and other measures our management uses to isolate and evaluate various components of our financial management activities, which we refer to as “results of financial management activities” and “results of equity investments”. Where we discuss these measures, we also first discuss the most nearly comparable Italian GAAP financial measures and present a reconciliation of the relevant non-GAAP measure to the most directly comparable Italian GAAP financial measure. See Item 5. “Operating and Financial Review and Prospects” for additional information on these measures and the required reconciliation of each of them to the most comparable Italian GAAP measure.

     We are a corporation organized under the laws of the Republic of Italy. As used in this Annual Report, unless the context otherwise requires, the terms “Fiat”, “Fiat S.p.A.” and the “Company” refer to Fiat S.p.A., and the terms “we”, “us” and “our” refer to the Company, and, as applicable, the Company and its consolidated subsidiaries.

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Cautionary Statement Regarding Forward-Looking Information

     Except for the historical statements and discussions contained herein, statements contained in this annual report constitute “forward-looking statements” within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements may include words such as “expect”, “estimate”, “project”, “anticipate”, “should”, “intend”, “may”, “believe” and similar expressions or variations on such expressions.

     Any filing we make with the U.S. Securities and Exchange Commission may include forward-looking statements. In addition, other written or oral statements which constitute forward-looking statements have been made and may in the future be made by us or on our behalf, including statements concerning our future operating and financial performance, our share of new and existing markets, general industry and economic trends and our performance relative thereto, and our expectations as to requirements for capital expenditures and regulatory matters. Our outlook is predominantly based on our interpretation of what we consider to be the key economic factors affecting our businesses. Forward-looking statements regarding our businesses rely on a number of assumptions concerning future events and are subject to a number of uncertainties and other factors (many of which are outside our control) that could cause actual results to differ materially from such statements, including:

    the many interrelated factors that affect consumer confidence and worldwide demand for automotive and automotive-related products;
 
    factors affecting the agricultural machinery business, including commodities prices, weather patterns and governmental policies;
 
    general economic conditions in each of our markets, as well as changes in the level of interest rates and exchange rates;
 
    legal and regulatory developments, particularly those relating to automotive-related issues, agriculture, the environment, international trade and commerce and infrastructure development;
 
    actions of competitors in the various industries and markets in which we operate; and
 
    production difficulties, which may arise from capacity and supply constraints, excess inventory levels, labor stoppages or slowdowns, political or civil unrest, military or terrorist action and other risks and uncertainties.

     We disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I

Item 1. Identity of Directors, Senior Management and Advisors

     Not applicable.

Item 2. Offer Statistics and Expected Timetable

     Not applicable.

Item 3. Key Information

THE FIAT GROUP

     We are one of the largest industrial groups in Italy. We also have extensive operations in the rest of Europe and in other parts of the world.

     We are engaged principally in the manufacture and sale of automobiles, agricultural and construction equipment and commercial vehicles. We also manufacture other products and systems, principally automotive-related components, metallurgical products and production systems. In addition, we are involved in other sectors, including publishing and communications and service operations. A detailed description of our business can be found in Item 4. “Information on the Company”.

     Our significant subsidiaries as of December 31, 2003, were:

    Fiat Auto Holdings B.V. (“Fiat Auto”), a Dutch corporation that is the lead company of our automobiles sector, of which we hold approximately 90.0% of the voting shares;
 
    CNH Global N.V. (“CNH”), a Dutch corporation that is the lead company of our agricultural and construction equipment sector, of which we hold 84.2% of the voting shares;
 
    Iveco S.p.A. (“Iveco”), a wholly owned Italian corporation that is the lead company of our commercial vehicles sector;
 
    Ferrari S.p.A. (“Ferrari”), an Italian corporation that produces luxury sports cars, including those produced by Maserati S.p.A. (“Maserati”), which is wholly owned by Ferrari; we own 56.0% of the voting shares of Ferrari, which we identified as a separate sector in 2002;
 
    Magneti Marelli Holding S.p.A. (“Magneti Marelli”), a wholly owned Italian corporation that is the lead company of our automotive components sector;
 
    Comau S.p.A. (“Comau”), a wholly owned Italian corporation that is the lead company of our production systems sector;
 
    Teksid S.p.A. (“Teksid”), an Italian corporation that is the lead company of our metallurgical products sector, of which we hold 80.5% of the voting shares;
 
    Itedi-Italiana Edizioni S.p.A. (“Itedi”), a wholly owned Italian corporation that is the lead company of our publishing and communications sector; and
 
    Business Solutions S.p.A. (“Business Solutions”), a wholly owned Italian corporation that is the lead company of our services sector.

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SELECTED FINANCIAL DATA

     We derived the following selected consolidated financial data at December 31, 2003 and 2002, and for each of the years in the three-year period ended December 31, 2003, from the audited Consolidated Financial Statements included in Item 18. Financial data at December 31, 2001, 2000 and 1999, and for each of the years in the two-year period ended December 31, 2000, have been derived from our published Consolidated Financial Statements not included herein.

     The financial data at December 31, 2003 and 2002, and for each of the years in the three-year period ended December 31, 2003, should be read in conjunction with Item 5. “Operating and Financial Review and Prospects”, and are qualified in their entirety by reference to the audited Consolidated Financial Statements and Notes thereto included in Item 18.

     The Consolidated Financial Statements and the Notes thereto included in Item 18 have been prepared in accordance with the requirements of Italian GAAP. A further discussion of the accounting policies applied is included in the Notes to the Consolidated Financial Statements in Item 18. These principles differ in certain respects from U.S. GAAP. For an explanation and quantification of such differences, see Note 24 to the Consolidated Financial Statements included in Item 18.

     The following selected consolidated financial data also reflect certain changes in our structure during the years presented. See “Principles of consolidation and significant accounting policies” in the Notes to the Consolidated Financial Statements included in Item 18. In particular, the data for 2003 reflect the disposal and deconsolidation of the results of each of the following:

    the activities of the Fraikin Group (“Fraikin”), a leading French provider of long-term leasing services for commercial vehicles, which Iveco sold to Eurazeo in the first quarter of 2003. The results of these activities were deconsolidated as of January 1, 2003.
 
    IPI S.p.A., an Italian real estate company in which Business Solutions sold a 56% interest to Risanamento S.p.A. during the first quarter of 2003; these activities were deconsolidated as of January 1, 2003. We retained a 10% equity interest in IPI S.p.A., which is accounted for at its equity value as of the date of the sale of the controlling interest.
 
    Fiat Auto’s retail financing activities in Brazil, which were sold to the Itaù banking group at the end of March 2003; its results were deconsolidated from March 31, 2003.
 
    Toro Assicurazioni, the former lead company of our insurance sector, which together with its subsidiaries was sold to the DeAgostini Group effective as of May 2003. In 2003, the sector’s results of operations were consolidated only for the four-month period ended April 30, 2003.
 
    Fidis Retail Italia, the company that controlled the European activities of Fiat Auto in the field of retail consumer financing for automobile purchases, following its sale to a company owned by the Italian banks Capitalia, Banca Intesa, SanPaoloIMI and Unicredito, as part of an agreement we signed on March 11, 2003. The results of Fiat Auto’s retail financing operations in Italy and certain other European countries were deconsolidated effective as of the end of May 2003, after the sale of 51% of Fidis Retail Italia in the first step of the transaction. Upon receipt of regulatory approvals, other automobiles sector financial companies were sold to Fidis Retail Italia in September and October 2003 as the second step of this transaction. The results of each of these companies were deconsolidated with effect from the date of our disposal of control over each such company.

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    Our aviation sector, formerly led by FiatAvio S.p.A., was sold to Avio Holding S.p.A., a company 70% owned by The Carlyle Group and 30% by Finmeccanica S.p.A.. In 2003, we consolidated FiatAvio’s results only for the six months ended June 30, 2003.

    In addition, effective as of January 1, 2003, Iveco has accounted for the activities of Naveco, its 50-50 joint venture with the Yueijin Group for the production of light commercial vehicles and light buses, according to the equity method. These activities were previously accounted for using the proportional method.
 
    As of January 1, 2002, CNH consolidated the construction equipment operations of Kobelco Construction Machinery America LLC, following CNH’s acquisition of 65% of this company as part of its strategic alliance with Kobelco.
 
    Iveco fully consolidated Irisbus, its former joint venture with the Renault Group, on a line-by-line basis effective January 1, 2002, following Iveco’s purchase of an additional 15% interest, thereby increasing its interest to 65%. Iveco acquired the remaining 35% of Irisbus from Renault in December 2002.
 
    The data for 2002 also reflect the deconsolidation of the results of each of our following former units:

    Teksid’s aluminum business unit, which we sold in September 2002 to a pool of investors comprising the Questor Management Company, JPMorgan Partners and another private equity group, and deconsolidated as of September 30, 2002;
 
    Magneti Marelli’s aftermarket operations, which distributed spare parts for the components sector, which we sold in March 2002 to Concordia Finance S.A., a company owned 45% by RGZ Magneti Marelli S.p.A. (“RGZ”), 25% by Interbanca and 30% by us, and deconsolidated as of January 1, 2002; and
 
    Magneti Marelli Sistemi Elettronici S.p.A., the former automotive electronic systems unit of our components sector, which we sold to Mekfin in May 2002 and deconsolidated as of January 1, 2002.

    In 2001, our then-insurance sector consolidated Lloyd Italico Assicurazioni S.p.A. and Lloyd Italico Vita S.p.A. following their acquisition by Toro Assicurazioni in April 2001, and also consolidated Augusta Assicurazioni S.p.A., effective as of January 1, 2002, which had previously been reported as one of our “Other Companies”.
 
    Effective July 2001, together with other industrial and financial partners (including three Italian banks), we formed Italenergia S.p.A. (“Italenergia”), a company that acquired control of the Italian energy companies Montedison S.p.A. and Edison S.p.A. through tender offers. Our investment, representing a 38.6% stake in Italenergia, was accounted for under the equity method. In June 2002, we reduced our stake in Italenergia Bis S.p.A. (“Italenergia Bis”) (the new parent of Italenergia formed by Italenergia’s stockholders) to 24.6% in a transaction that is described in more detail in Item 4. “Information on the Company — Introduction — Strategies and Programs”. Italenergia was merged into Edison in September 2002. Italenergia Bis currently controls approximately 64% of Edison, which is an Italian listed company and Italy’s second-largest electricity company. We continue to account for our reduced stake in Italenergia Bis under the equity method.
 
    The data for 2001 also reflect the deconsolidation of the results of each of:

    Fenice S.p.A., formerly an environmental and energy service company in our services sector, which was deconsolidated effective July 1, 2001, as part of the transaction leading to the formation of Italenergia;
 
    Certain of Fiat Auto’s activities that were transferred to Fiat-GM Powertrain B.V., a 50-50 joint venture with General Motors Corporation (“General Motors”) operating in the powertrain and transmission sector, in June 2001; and

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    Magneti Marelli’s former climate control division, following its divestiture as of January 1, 2001.

    As of January 1, 2000, Case Corporation (“Case”), which we acquired in November 1999, was consolidated on a line-by-line basis. We also consolidated on a line-by-line basis the full year 2000 results of the Fraikin Group, a leading French provider of long-term leasing services for commercial vehicles, which was acquired by Iveco in October 1999, and those of certain other entities acquired during the period. As of August 1, 2000, we deconsolidated our former rolling stock and railway system sector, following the sale of 51% of Fiat Ferroviaria S.p.A. to the Alstom Group of France. We also deconsolidated Magneti Marelli’s former lubricants, mechanical components, and fuel systems divisions, for the period following their divestiture as of January 1, 2000, and Magneti Marelli’s former rearview mirror division, as of July 1, 2000.
 
    On May 10, 1999, we completed the acquisition of the PICO (Progressive Tools & Industries Co.) Group (“PICO”), a leading U.S. manufacturer of body assembly systems for the automotive industry. The results of PICO have been consolidated on a line-by-line basis for all periods following the date of its acquisition.

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STATEMENT OF OPERATIONS DATA

                                                 
    Year ended December 31,
    2003
  2003
  2002
  2001
  2000
  1999
    (in millions of    
    dollars except per    
    share data)
  (in millions of euros except per share data)
Amounts in conformity with Italian GAAP:
                                               
Value of Production
                                               
Revenues from sales and services
  $ 60,900     48,346     55,427     57,575     57,603     48,402  
Change in work in progress, semi-finished and finished product inventories
    882       700       (816 )     7       27       275  
Change in contract work in progress
    (1,354 )     (1,075 )     222       431       (48 )     (279 )
Additions to internally produced fixed assets
    867       688       1,107       1,069       1,242       1,107  
Other income and revenues
    2,128       1,689       2,152       2,245       2,419       1,839  
 
   
     
     
     
     
     
 
Total value of production
  $ 63,423     50,348     58,092     61,327     61,243     51,344  
 
   
     
     
     
     
     
 
Operating income (loss)
    (642 )     (510 )     (762 )     318       855       788  
 
   
     
     
     
     
     
 
Net income (loss)
  $ (2,393 )   (1,900 )   (3,948 )   (445 )   664     353  
 
   
     
     
     
     
     
 
Net income (loss) per share (basic and diluted) (1)
  $ (3.04 )   (2.41 )   (6.66 )   (0.84 )   1.19     0.62  
Amounts in accordance with U.S. GAAP:
                                               
Net income (loss)
  $ (3,614 )   (2,869 )   (3,832 )   (837 )   880     31  
 
   
     
     
     
     
     
 
Net income (loss) from continuing operations*
  $ (4,380 )   (3,477 )   (3,798 )   (1,125 )   689     (95 )
 
   
     
     
     
     
     
 
Income (loss) per ordinary and preference share and ordinary and preference ADR (basic and diluted)(1)(2)
  $ (4.80 )   (3.81 )   (6.52 )   (1.49 )   1.55     0.06  
 
   
     
     
     
     
     
 
Income (loss) per savings share and savings ADR (basic and diluted)(1)(2)
                                             
 
  $ (4.80 )   (3.81 )   (6.52 )   (1.34 )   1.71     0.22  
 
   
     
     
     
     
     
Income (loss) from continuing operations* per ordinary and preference share and ordinary and preference ADR (basic and diluted)(1)(2)
  $ (5.82 )   (4.62 )   (5.46 )   (2.00 )   1.21     (0.17 )
 
   
     
     
     
     
     
 
Income (loss) from continuing operations* per savings share and savings ADR (basic and diluted)(1)(2)
                                               
 
  $ (5.82 )   (4.62 )   (5.46 )   (1.85 )   1.37     (0.01 )
 
   
     
     
     
     
     


See notes on the following page.

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BALANCE SHEET DATA

                                                 
    At December 31,
    2003
  2003
  2002
  2001
  2000
  1999
    (in millions of    
    dollars except per   (in millions of euros except per share data)
    share data)
  (shares outstanding in thousands)
Amounts in conformity with Italian GAAP:
                                                 
Total assets
  $ 78,997     62,711     92,521     100,749     95,755     79,873  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total stockholders’ equity(3)
  $ 8,557     6,793     7,641     12,170     13,320     12,874  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Capital stock
    6,195       4,918       3,082       2,753       2,753       2,753  
Dividends declared per share
                                               
Ordinary and preference
                      0.310       0.620       0.620  
Savings
                      0.465       0.775       0.775  
Shares outstanding (par value of 5 per share)(4)
                                               
Ordinary
            800,418       433,220       367,400       367,400       367,400  
Preference
            103,292       103,292       103,292       103,292       103,292  
Savings
            79,913       79,913       79,913       79,913       79,913  
Amounts in accordance with U.S. GAAP:
                                               
Stockholders’ equity
    7,087       5,626       6,694       11,223       13,514       13,323  


*   Under Italian GAAP, we are not required to restate or reclassify financial information presented in previous years to reflect significant divestitures. For purposes of U.S. GAAP, however, in accordance with SFAS No. 144, we are required to eliminate the results of operations and cash flows of certain divested operations from those of our continuing operations in presenting our U.S. GAAP results. For a detailed explanation, see Note 24(f.i) to the Consolidated Financial Statements included in Item 18.
 
(1)   Income (loss) per ordinary and preference share (and per ordinary and preference ADR) calculated in accordance with Italian GAAP and U.S. GAAP and income (loss) from continuing operations per ordinary and preference share (and per ordinary and preference ADR) have been calculated for U.S. GAAP purposes only in accordance with the provisions of IAS 33, “Earnings per Share” (“IAS 33”), and SFAS No. 128, “Earnings per Share” (“SFAS No. 128”), respectively, using the method for two-class ordinary shares and participating securities and are based on the weighted average number of ordinary, preference and savings shares outstanding during each year. Both SFAS No. 128 and IAS 33 require the presentation of both basic and diluted earnings per share. Due to the limited number of stock options outstanding and to the level of the stock market price of our shares during the year ended December 31, 2000 and 1999, the dilutive effect of stock options calculated using the treasury stock method has resulted in the amount of diluted earnings per share in that year equaling the amount of basic earnings per share. As a result of the net losses from continuing operations for the years ended December 31, 2003, 2002 and 2001, any calculation of diluted earnings per share would reduce the per-share loss. Therefore, for those years, diluted earnings per share is reported as equal to basic earnings per share.
 
(2)   Because our 2003 capital increase was conducted through a rights offering in which the subscription price to purchase one ordinary share was less than the market price of the share, SFAS No. 128 requires us to adjust retroactively the weighted average number of shares outstanding in calculating U.S. GAAP basic and diluted earnings per share for each period included, in order to reflect what for purposes of SFAS No. 128 is considered to have been an implicit stock dividend arising from the capital increase, equivalent to the difference between the subscription price and the market price at the time of the capital increase.
 
(3)   Stockholders’ equity, calculated in conformity with Italian GAAP, is net of minority interest.
 
(4)   Adjusted to reflect the reverse stock split effected in 1999. See Item 7. “Major Stockholders and Related Party Transactions —Description of Capital Stock”.

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     Exchange Rates. Fluctuations in the exchange rate between euros and dollars will affect the dollar equivalent of euro prices of shares listed on the Italian Stock Exchange and, as a result, are likely to affect the market price of our American Depositary Receipts (“ADRs”) in the United States. Exchange rate fluctuations will also affect the dollar amounts received by holders of ADRs on the conversion into dollars by the depositary for the ADRs of any cash dividends declared and paid in lire or euros on the shares represented by the ADRs.

     The following table sets forth the Noon Buying Rate for euros expressed in dollars per euro rounded to the nearest one hundredth of a U.S. cent for the periods indicated.

                                 
                            At
                            Period
Year:
  High
  Low
  Average(1)
  End
1999
                    1.0588       1.0070  
2000
                    0.9207       0.9388  
2001
                    0.8909       0.8901  
2002
                    0.9495       1.0485  
2003
                    1.1411       1.2597  
Month ending:
                               
December 31, 2003
    1.2597       1.1956                  
January 31, 2004
    1.2853       1.2389                  
February 29, 2004
    1.2848       1.2426                  
March 31, 2004
    1.2431       1.2088                  
April 30, 2004
    1.2358       1.1830                  
May 31, 2004
    1.2274       1.1801                  


(1)   Average of the Noon Buying Rate for euros for the last business day of each month in the period.

     The Noon Buying Rate for euros on June 23, 2004, was $1.2090 = 1.00 or $1.00 = 0.8271.

RISK FACTORS

We have recorded significant losses in recent periods. Our future profitability and financial condition depend on the successful implementation of our relaunch initiatives

     Our future operating and financial performance will depend in large part on the success of a number of initiatives undertaken to address our decline in sales, increased competition and loss of market share in the automotive market. In particular, the success of these initiatives is a key element of our future profitability, which would be adversely affected if we are unable to complete them successfully. We recorded net losses of 1,900 million and 3,948 million in 2003 and 2002, respectively, as well as a net loss of 194 million in the first quarter of 2004. In response to these challenging conditions, our Board of Directors has approved a series of relaunch initiatives to be executed by management. These initiatives are focused on achieving significant improvements in our results over the period through 2006 through major investments in new products, research and development and the distribution network, as well as certain restructuring actions. They also provide for significant cost savings to be generated through reductions in materials and selling costs, further synergies from our industrial alliances and inter-sector cooperation, and the streamlining of our production facilities and overhead. See Item 4. “Information on the Company — Introduction — Relaunch Initiatives” for additional information. Any failure to implement a significant portion of these initiatives successfully, or to realize the anticipated benefits, could have a material adverse effect on our financial condition, results of operations and business prospects.

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Our businesses are affected by cyclical economic conditions

     Our businesses depend upon general activity levels in our key industries, which historically have been highly cyclical. In addition, we generate a substantial portion of our revenues in Europe, and more particularly in Italy. Any event adversely affecting activity in the automotive industry, such as an economic downturn in a key market, an increase in energy prices, fluctuations in the prices of other commodities or raw materials or adverse shifts in sector-specific factors such as weather, interest rates, government policies (including environmental regulation) or infrastructure spending, could negatively affect our profitability and business prospects. The automobile market in Italy and the rest of Western Europe continued to weaken in 2003, and Fiat Auto suffered further losses in its market share. Our financial services businesses involve risks relating to changes in interest and inflation rates, consumer and dealer insolvency rates and the overall strength of the economies in which such businesses operate.

We operate in highly competitive industries

     Approximately 90% of our net sales are made in the highly competitive worldwide automotive industry, which includes automobiles, commercial vehicles, agricultural and construction equipment and automotive-related products. We face strong competition in Europe and Latin America from other international automobile and commercial vehicle manufacturers, and in Europe, North America and Latin America from global, regional and local agricultural and construction equipment manufacturers and suppliers of automotive-related products. We compete in these markets in terms of product quality and features, innovation and development time, pricing, reliability, safety, fuel economy, customer service and financing terms. We also face strong competition in our other businesses.

We face intense price competition in the automobile and other sectors

     Competition, particularly with regard to price, has increased in recent years in response to the weak global economy, with a negative impact on sales and margins in several of our operating sectors. In addition, overall manufacturing capacity in the global automotive industry exceeds current demand. This overcapacity, combined with already intense competition in the automotive industry and persistent weakness in the global economy, may intensify pricing pressures. Our ability to maintain or improve the quality of our products, increase market share and improve profitability in the face of strong competitive pricing pressures will be fundamental to our future success.

Our future performance depends on our ability to innovate and on market acceptance of new or existing products

     Our ability to improve our position within our product and market segments through research to improve current products and the development of innovative new products and services will have a significant impact on our future performance. Failure to develop and offer products that compare favorably to those of our competitors, particularly in more profitable segments, in terms of price, quality, styling, reliability, safety, functionality or otherwise, may result in lower market share, lower sales volumes and margins, and may substantially adversely affect our operational and financial results. In particular, the lack of market acceptance of new automotive models, potential delays in bringing new vehicles to market or the inability to achieve efficiency targets without suffering quality losses would adversely affect our overall profitability.

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Our stockholders may face substantial dilution if our major lending banks exercise their right to convert existing financing into equity in July 2004

     In 2002, we agreed with a group of major banks on a comprehensive strategic financing package that included a 3 billion “mandatory convertible” loan, maturing in 2005, which will be converted into equity unless certain conditions are met. We will be required to repay the loan in shares at maturity unless both our debt is rated “investment grade” by at least one major rating agency and we retain such rating immediately after repayment, in which case we will have the option of repaying the loan in cash or shares. These shares would be issued to the banks for subsequent offer to our stockholders in proportion to their respective holdings, in accordance with such stockholders’ preemptive rights under Italian law, for a price per share that, calculated according to the formula set in the loan agreement, would be higher than current market prices. For additional information on this loan, see Note 12 to the Consolidated Financial Statements included in Item 18.

     In addition, the lenders currently have the option to convert up to a maximum of 2 billion of this financing into equity beginning from July 26, 2004, as a result of the downgrading of our debt ratings by Moody’s in 2002 and Standard & Poor’s in 2003. Our lenders will also have such an option if we fail to meet certain financial targets set forth in the credit facility agreement. Should the banks exercise such an option and the related capital increase take place, the interest in Fiat of any stockholders who choose not to exercise their preemptive rights would be diluted.

Our ability to reduce indebtedness and fund our core business depends on the success of our relaunch initiatives

     Our ability to reduce our indebtedness while at the same time continuing to invest in new products, research and development and our distribution network, will depend on the success of our relaunch initiatives, as well as on general economic and business conditions and the performance of our companies. We were able to reduce our indebtedness in 2003, mainly as a result of asset disposals, divestitures and a capital increase effected during the year. See Item 5. “Operating and Financial Review and Prospects — Liquidity and Capital Resources”. In particular, in 2003, we sold our insurance sector, led by Toro Assicurazioni, and our aviation sector, led by FiatAvio, as well as a majority interest in Fidis Retail Italia, the company that provides retail financing to Fiat Auto customers in Europe. We also successfully completed a capital increase that raised approximately 1.8 billion in 2003 and divested certain non-core assets in the first half of 2004. See Item 4. “Information on the Company — Introduction — Recent Developments”. However, further asset sales, divestitures and capital injections may be necessary to provide us with the funds to successfully implement our relaunch initiatives.

     Moreover, the management and development of the core automotive and automotive-related businesses in which we operate may require large capital investments. Consequently, we may find it necessary to secure additional financing or to refinance our outstanding debt.

     We cannot give any assurances about whether further disposals or divestitures will be required or of our ability to consummate any such transactions, whether we will be able to complete other capital raising exercises, whether we will be able to secure additional or refinance existing indebtedness or whether we will be able to carry out any or all of any such transactions at all or on favorable terms. Therefore, we can give no assurances about our ability to continue to reduce our indebtedness and to fund our relaunch initiatives and our core businesses.

Our historical consolidated financial and operating results may not be indicative of future performance

     We divested our insurance sector in May 2003, and our aviation sector in July 2003. These operations provided 8.2% and 2.6%, respectively, of our net sales and revenues (prior to eliminations and consolidating adjustments) in the year ended December 31, 2002, and generated 147 million and 210 million, respectively, in operating income during the same period. During the course of 2003, we also divested 51% of Fidis Retail Italia, a Fiat Group company that provides credit to consumers in

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Europe for the purchase of motor vehicles, the results of which were deconsolidated starting as of the end of May 2003; our Brazilian retail auto financing operations, the results of which were deconsolidated as of the end of March 2003, and certain other financial and operating subsidiaries (see Item 4. “Information on the Company — Introduction — Strategies and Programs” for additional details on these transactions). The sale of these businesses will also result in the loss of the positive contributions many of them, including the insurance and aviation sectors, made to our profitability. In addition, we may continue to divest non-strategic assets as a part of our ongoing efforts to strengthen our balance sheet and focus our activities on our core automobile, agricultural and construction equipment, commercial vehicle and automotive-related businesses. As a result, our historical consolidated financial and operational performance during or as of the end of periods ending on or prior to the consummation of these transactions may not be indicative of our future operating and financial performance.

New downgrades of our credit ratings would raise our cost of capital and negatively affect our business

     In December 2002, Moody’s lowered its rating on our senior unsecured debt by one notch to “Ba1,” a non-investment grade rating, from “Baa3,” an investment grade rating, and our short-term debt rating to “Not Prime” from “Prime-3.” In March 2003, Standard & Poor’s cut its issuer rating on us to BB+ with a negative outlook from BBB-. In the same month, Fitch Ratings lowered its rating on our medium-term debt from BBB- to BB+ and on our short-term debt from F3 to B. Following additional downgrades in 2003, we are currently rated Ba3 with a negative outlook by Moody’s, BB- with a stable outlook by Standard & Poor’s and BB with a negative outlook by Fitch Ratings. Our ability to access capital markets, and the cost of borrowing in those markets, is highly dependent on our credit ratings. The rating agencies may review their ratings for possible further downgrades if, for example, the global economy falls into recession and expectations for vehicle sales decline or if we fail to successfully implement our relaunch initiatives. Any new downgrades by the rating agencies would increase our cost of capital and could negatively affect our businesses, especially our vehicle lease and sales financing businesses, which are typically financed with a high proportion of debt. For a more detailed discussion of our credit ratings, please see Item 5. “Operating and Financial Review and Prospects — Liquidity and Capital Resources”.

We may not achieve the expected benefits of mergers, acquisitions, joint ventures or other similar corporate transactions

     We have engaged in the past and may engage in the future in significant corporate transactions, such as mergers, acquisitions, joint ventures and restructurings, the success of which is difficult to predict. There can be no assurance that we will be able to enter into such transactions without encountering administrative, technical, political, financial or other difficulties. There can also be no assurance that we will be able to carry out any such transactions in accordance with our current plans, or that we will succeed in realizing any potential synergies, cost savings or other expected benefits.

     In particular, Fiat Auto’s purchasing and powertrain operations are conducted through our purchasing and powertrain joint ventures with General Motors, which are jointly controlled. See Item 4. “Information on the Company — Sectors — Automobiles”. These and our other joint ventures involve special risks associated with the possibility that the joint venture partners may:

    have economic or business interests or goals that are inconsistent with ours;
 
    take action contrary to our instructions or requests or contrary to our policies or objectives with respect to operations;
 
    be unable or unwilling to fulfill their obligations under the joint venture agreement; or
 
    experience financial or other difficulties.

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We and General Motors disagree on whether we have breached the Master Agreement

     General Motors has alleged that certain transactions we carried out in 2003 constitute breaches of the Master Agreement governing our industrial alliance that entitle General Motors to terminate the agreement and, with it, the put option we have with regard to the 90% interest in Fiat Auto Holdings that we still own. We contend that none of these transactions violated the agreement and therefore consider the put option and other provisions of the agreement to be effective and enforceable in accordance with their terms. As a result, in October 2003, we and General Motors agreed to amend the Master Agreement to postpone the put period by one year, so that it begins on January 24, 2005, and ends on July 24, 2010. We also entered into a standstill agreement precluding either of us or General Motors from initiating legal proceedings with regard to any disagreements then existing relating to the Master Agreement prior to December 15, 2004, without prejudicing our respective rights under the Master Agreement. We expect to continue discussions with General Motors regarding further industrial collaboration and the structure of our strategic alliance. We cannot, however, provide any assurances as to what the results of these discussions will be or if we will reach any agreement with General Motors regarding these or other matters. See Item 4. “Information on the Company — Sectors — Automobiles” for detailed information on our relationship with General Motors.

We are subject to risks relating to international sales and exposure to changing local conditions

     A significant portion of our current operations is conducted and located outside of Italy, and we expect that revenues from sales outside of Italy, and more generally outside of the European Union, will continue to account for a material portion of our total revenue for the foreseeable future. We are subject to risks inherent in operating on a global basis, including risks related to:

    exposure to local economic and political conditions;
 
    export and import restrictions;
 
    currency exchange rate fluctuations;
 
    multiple tax regimes, including regulations relating to transfer pricing and withholding and other taxes on remittances and other payments by subsidiaries;
 
    foreign investment restrictions or requirements, foreign exchange controls and restrictions on repatriation of funds; and
 
    local content laws.

     The degree of risk and the potential magnitude of effects of unfavorable developments in any one of these areas vary from country to country, and, depending on the circumstances, could have a significant adverse effect on our business prospects, results of operations and financial condition.

Developments in emerging market countries may adversely affect our business

     We operate in a number of emerging market countries, including Brazil, Turkey and China. As a result, economic and political developments in these countries, including future economic crises and political instability, could have a material adverse effect on our business and results of operations. For example, in response to the economic crisis in Argentina in 2001 and 2002, we significantly reduced our operations there in 2002, with our sales and certain of our manufacturing activities beginning to pick up again only in 2003. See Item 4. “Information on the Company — Operating Environment — Emerging Markets”. Political and economic developments in emerging markets have had, and may in the future have, a material adverse impact on our economic and financial results.

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We are subject to extensive environmental and other governmental regulation

     Our products and operations are subject to increasingly stringent environmental laws and regulations in many of the countries in which we operate. Such regulations govern, among other things, vehicle emissions, fuel economy, vehicle safety and the type and level of pollutants generated by industrial production facilities. We expend significant resources to comply with such regulations, and expect to continue to incur substantial compliance and remediation costs in the future.

     In addition, government initiatives that affect consumer demand for our products, such as changes in tax policy or the grant or repeal of subsidies to provide incentives for the purchase of vehicles, can substantially influence the timing and level of our revenues. For example, an incentive put in place by the Italian government to encourage people to trade in their old cars for more modern, environmentally friendly models depressed demand in Italy in the first half of 2002 ahead of the July 8 effective date of the incentives, while demand in the second half of 2002 and the first quarter of 2003 was boosted by the incentives, which expired on March 31, 2003. Such government actions are unpredictable and beyond our control, and any adverse changes in government policy could have a significantly negative impact on our business prospects, financial condition and results of operations.

Labor matters could impair our flexibility to reposition our businesses

     Most of our production and maintenance employees worldwide are represented by labor unions. Our ability to implement workforce reductions and temporary layoffs as part of our relaunch initiatives is dependent on authorization from the government and the consent of our unions. Union dissatisfaction with our relaunch initiatives and certain measures enacted by the government permitting increased labor flexibility led to a significant increase in labor unrest in Italy in 2002. While the level of labor unrest was significantly lower in 2003, there were still occasional wildcat and other strikes. In the spring of 2004, work stoppages by employees at the Melfi complex in Southern Italy, which houses a Fiat Auto plant as well as production operations of several suppliers, resulted in a shortage of components that caused progressive production shutdowns at Fiat Auto’s other Italian plants, resulting in an overall output loss of more the 35,000 vehicles. See Item 6. “Directors, Senior Management and Employees — Employees and Labor Relations — Industrial reorganization.” Further work stoppages or labor unrest could have a material adverse effect on our operations, results of business and financial condition.

     In Europe, our employees are protected by various laws giving them, through local and central works councils, rights of consultation with respect to specific matters regarding their employers’ business and operations, including the downsizing or closure of facilities and employment terminations. These laws and the collective bargaining agreements to which we are subject could impair our flexibility as we continue our efforts to restructure and strategically reposition our businesses.

We are subject to risks associated with exchange rate fluctuations, interest rate changes and other market risks

     We are subject to currency exchange rate risk in the ordinary course of our business to the extent that our costs are denominated in currencies other than those in which we earn revenues. Exchange rate fluctuations also affect our operating results because we recognize revenues in currencies other than euros but publish our financial statements in euros. Similarly, changes in interest rates affect our results by increasing or decreasing borrowing costs and financial income.

     We are also exposed to other financial risks. For example, we hold certain stock investments which may expose us to the risk of stock market declines. For information on our sale at a loss of shares of common stock of General Motors we held and the derivative contracts we subsequently entered into in connection therewith, see Item 4. “Information on the Company — Introduction — Strategies and Programs” and Note 3 to the Consolidated Financial Statements included in Item 18.

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While financial markets’ performance generally improved in 2003, markets may in the future decline and are expected to continue to experience volatility.

     We seek to manage these risks through the use of financial hedging instruments. However, despite these hedging transactions, exchange rate or interest rate fluctuations may continue to adversely affect our financial condition or results of operations. See Item 11. “Quantitative and Qualitative Disclosures about Market Risk.”

Our success depends on the ability of our new management team to operate and manage effectively

     Most of our current senior management were appointed to their current positions during the last 12 months. Our chairman, Luca Cordero di Montezemolo, and our chief executive officer, Sergio Marchionne, were appointed in June 2004, following the death of former chairman Umberto Agnelli and the resignation of former chief executive officer Giuseppe Morchio. Messrs. Agnelli and Morchio had themselves had been appointed to their respective positions in February 2003. In addition, José Maria Alapont became Chief Executive Officer of Iveco on October 1, 2003, Herbert Demel became Chief Executive Officer of Fiat Auto on November 15, 2003, and Luigi Gubitosi was appointed Chief Financial Officer effective as of January 1, 2004. Our success depends in large part on the ability of these executive officers and other members of senior management to operate and manage effectively, both independently and as a group. The loss of the services of any executive officer, senior manager or other key employee without adequate replacement or the inability to attract and retain new qualified personnel could have a material adverse effect upon our business, operating results and financial condition.

Item 4. Information on the Company

INTRODUCTION

     We are one of the largest industrial groups in Italy. We also have extensive operations in the rest of Europe and in other parts of the world. In 1999, we celebrated our centenary, having been founded in Turin in 1899 as a manufacturer of automobiles.

     We are a società per azioni, or corporation limited by shares, organized under the laws of the Republic of Italy. Under our current Statuto, or By-Laws, Fiat S.p.A. has a duration expiring on December 31, 2100. Our registered office and principal place of business is located at Via Nizza 250, Turin, Italy (telephone number 39-011-006-1111).

     We are engaged principally in the manufacture and sale of automobiles, commercial vehicles and agricultural and construction equipment. We also manufacture, for use by our automotive sectors and for sale to third parties, other automotive-related products and systems, principally components, metallurgical products and production systems. In addition, we are currently involved in other sectors, including publishing and communications and service operations.

     Strategies and Programs. We continue to focus on the organizational and industrial initiatives we have been implementing to bring the Group back to profitability and reduce our indebtedness following the net losses we recorded in the past three years. As part of this process, we have refocused on our core automobile, agricultural and construction equipment, commercial vehicles, components, production systems and metallurgical products businesses, and have been pursuing divestitures of several non-core businesses, including those of our aviation and insurance sectors.

     During 2003, we continued our effort to strengthen our operating structure and financial position through various initiatives, including through:

    Asset disposals, including:

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    Iveco in February sold 100% of the share capital of the Fraikin Group, which specializes in the long-term vehicle leasing business, to the French financial company Eurazeo for net proceeds of approximately 307 million. Upon completion of this sale, we recorded a loss of 24 million. We had already written down the value of Fraikin by 210 million at the end of 2002 in anticipation of this sale.

    Business Solutions in March 2003 sold an interest of approximately 56% in IPI S.p.A., a real estate company, to Risanamento S.p.A. for net proceeds of 107 million. We retained a 10% equity interest in IPI S.p.A., which is accounted for under the equity method.

    In March, we finalized the sale of Banco Fiat SA, the retail financing business of Fiat Auto in Brazil, to the Itaú Group, a leading Brazilian financial institution, for net proceeds of approximately 247 million.

    On May 27, 2003, Fiat Auto S.p.A. sold to Synesis Finanziaria S.p.A., a company owned in equal shares by four of our major lending banks, Capitalia, Banca Intesa, San Paolo-IMI and Unicredito, a controlling 51% interest in Fidis Retail Italia S.p.A. and in its subsidiaries providing consumer credit for the purchase of automobiles by retail customers in Italy, Denmark, Greece, the Netherlands and Switzerland; subsequently, in September and October 2003, after formal approval by the national authorities in each country, we also sold to Fidis Retail Italia S.p.A. our investments in subsidiaries carrying on similar activities in most of our other main European markets, including Germany and France. See Note 3 to the Consolidated Financial Statements included in Item 18 for a discussion of that agreement.
 
      In connection with this sale, we entered into a stockholders’ agreement with Synesis Finanziaria and the four banks that are its stockholders, providing, among other things, as follows:

    We have the right to repurchase the 51% of Fidis Retail Italia sold to Synesis Finanziaria, exercisable in January and July of each year through January 31, 2006, at a price that will increase over time and be calculated based on the initial sale price plus any additional investments made by Synesis Finanziaria less any interim distributions. This right is freely transferable within the Fiat Group.

    Synesis Finanziaria has the right to require us to repurchase its stake in Fidis Retail Italia in the event that, prior to January 31, 2006, there is a change in control of Fiat S.p.A. or Fiat Auto, or that a sale of all or substantially all of Fiat Auto’s assets or of any of the Fiat, Alfa Romeo or Lancia brands occurs;

    In the event of such a change of control or asset sale after January 31, 2006, Synesis Finanziaria has the right to require the acquiring party to purchase its 51% stake in Fidis Retail Italia; and

    In the event that after January 31, 2006, Fiat Auto sells its 49% stake in Fidis Retail Italia, it has the right to require Synesis Finanziaria to sell to the acquiring party its 51% stake in Fidis Retail Italia as well.

    On May 2, 2003, we agreed to sell 100% of Toro Assicurazioni, our former insurance sector, to Italy’s De Agostini Group. The transaction generated net proceeds for us of approximately 2.4 billion. See Item 5. “Operating and Financial Review and Prospects — Changes in the Scope of Consolidation”.

    In July 2003, we sold our aviation sector, formerly led by FiatAvio, to a company owned by The Carlyle Group, a U.S. private equity fund, and Italy’s Finmeccanica, for a purchase price of approximately 1.5 billion.

    Financing transactions, including:

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    In August 2003, we successfully completed a capital increase of more than 1.8 billion that was effected through a rights offering granting stockholders the right to purchase three new ordinary shares at a price of 5 each for every five ordinary, preference or savings shares they held. This offering did not include a public offering in the U.S., and therefore generally excluded U.S. stockholders and ADR holders. See Item 7. “Major Stockholders and Related Party Transactions — Description of Capital Stock”.

    On August 1, 2003 and September 16, 2003, Case New Holland, Inc., a direct wholly-owned subsidiary of CNH, issued a total of $1.05 billion of 9 1/4% Senior Notes due 2011 which are fully and unconditionally guaranteed by CNH and certain of its direct and indirect subsidiaries. Case New Holland, indirectly through its subsidiaries, owns substantially all of the U.S. assets of CNH and certain of its non-U.S. assets.

     These transactions followed and built upon those undertaken in 2002, which included:

    Our successful completion of a capital increase of approximately 1 billion that was effected through a rights offering to existing stockholders outside the United States;

    The issuance by Fiat Finance Luxembourg Société Anonyme of more than $2.2 billion of five-year 3.25% bonds guaranteed by us and exchangeable into General Motors shares, or, at the issuer’s option, an equivalent amount of cash;

    Our May 2002 agreement in principle with a group of major banks on a comprehensive financing package, pursuant to which we in July 2002 entered into a 3 billion mandatory convertible loan described in Item 3. “Key Information — Risk Factors” above.

    In the second half of 2002, we concluded a series of agreements with various parties regarding Italenergia Bis, the energy holding company controlling Edison (Italy’s second-largest electricity company) in which we held a 38.6% interest. The transactions enabled us to gain access to new financial resources, including through:

    Our sale of a 14.0% stake in Italenergia Bis to certain other stockholders of the company (Intesa BCI, SanPaoloIMI Investimenti and Capitalia) for net proceeds of 548 million;

    A related agreement between us and Electricité de France (“EDF”) pursuant to which, among other things, EDF granted us the right, in March and April 2005, to sell to EDF our remaining 24.6% interest in Italenergia Bis at a price of not less than 1,147 million (after deducting a premium of up to 127 million, payable only in the event the option is exercised). Certain exit rights were also granted to the three banks that purchased the 14% interest in Italenergia Bis from us, including among other things, the right to require us to repurchase that interest in March and April 2005 should we not exercise the right to sell the 24.6% interest to EDF. We also have an option to sell this 14% interest to EDF, which we may exercise if we also elect to exercise our put option to EDF with respect to our remaining 24.6% interest. See Note 3 to the Consolidated Financial Statements included in Item 18;

    Another related agreement between us and a small group of banks led by Citigroup granting a 1.15 billion credit facility to one of our affiliates secured by the put option to EDF and our remaining interest in Italenergia Bis. See Note 12 to the Consolidated Financial Statements included in Item 18 for more information regarding this transaction.

    Asset disposals, including:

    Our sale in June 2002 to Mediobanca and a consortium of banks of 34.0% of Ferrari’s capital stock for net proceeds of 758 million. Under the agreement, Mediobanca

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      may not sell its Ferrari shares to another group in the automobile industry as long as we maintain a 51% controlling interest in Ferrari, and there are restrictions are on our ability to reduce our interest below 51% until June 2006. Under the original sales contract, we also had a call option to repurchase the Ferrari shares at a price equal to the 2002 sale price plus interest at any time through June 2005, subject to certain limited exceptions. During 2003, Mediobanca extended this option through June 2006, in exchange for consideration paid by us of 16 million. Please see Note 14 to the Consolidated Financial Statements included in Item 18 for more information on this contract.

    Our sale in December 2002 to an investment bank of the 32,053,422 shares of General Motors’s $1-2/3 par value common stock we had acquired in 2000 in connection with the establishment of the Fiat-General Motors industrial alliance (see Item 4. “Information on the Company — Sectors — Automobiles”), generating net proceeds of 1,076 million, representing a net loss of 1,049 million on the pre-sale carrying value, in U.S. dollars, of the shares in our consolidated financial statements. See Note 3 to the Consolidated Financial Statements included in Item 18 for a detailed description of this transaction.

    Our sale of Teksid’s aluminum business unit for net proceeds of 309 million in September 2002.

    Our sale of a 40% interest in Europ Assistance Holding, a roadside assistance company, for net proceeds of 124 million.

    Our sale in March of Magneti Marelli’s aftermarket operations to a company in which we have a 30% equity interest, for net proceeds of 46 million.

    Our sale in May of Magneti Marelli’s former electronic systems unit, Magneti Marelli Sistemi Elettronici S.p.A., and its related activities, to the Mekfin Group of Italy, for an agreed price of 90 million, of which only a portion was paid. See Item 4. “Information on the Company — Sectors — Components” and Note 19 to the Consolidated Financial Statements included in Item 18.

     Relaunch Initiatives. In response to the challenging conditions faced by the Group, our Board of Directors has adopted a series of relaunch initiatives. These initiatives, which are based on the Group’s new scope of operations following recent and planned divestitures are designed to permit the implementation of decisive measures to address problem areas and provide fresh momentum as we aim to move towards restoring the Group to profitability.

     Our initiatives have the following main objectives:

    Improving cash flow generation and profitability is the top priority;
 
    A major effort must be made in the areas of product development, innovation and marketing by launching new models, investing heavily in technology and strengthening the distribution network; and
 
    The cost structure must be made highly competitive by rationalizing the Group’s product design and engineering operations, streamlining its manufacturing organization and increasing efficiency.

     We are now focusing on the following major initiatives:

    Streamlining our Scope of Operations. A major effort made to streamline the Group’s structure, including the disposals completed during the year, reduced the number of our companies from over 900 in 2002 to approximately 780 at the end of 2003, and we expect to reduce the number of legal entities further, to 600, by the end of 2004. In addition, we established new cross-sector teams that have already been active for several months with

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      the aim of increasing Group synergies and accelerating the achievement of our goals in the purchasing, productivity, quality, overhead, and commercial areas.

    Introducing New Products. As described in more detail below, all of our core sectors are introducing new product lines, many featuring new engines. For Fiat Auto, the percentage of total revenues generated by products that have been launched or revamped since 2002 is projected to rise from 25% in 2003 to 51% by the end of 2004. The same measure is expected to increase to 81% for CNH’s agricultural and construction equipment and to 70% for Iveco. We expect to significantly increase Fiat Auto’s coverage of all segments of the European markets, with a special on focus on those segments that are growing most rapidly and bring the average age of Fiat Auto’s models into line with those of its primary competitors.
 
    Enhancing Technology and Innovation. The Group already possesses highly sophisticated technology in the fields of diesel engines, high-performance gasoline engines and advanced automatic transmissions and electronics, as well as in certain areas of production systems. However, we believe that there is still room for improvement in developing the innovations needed to attain a competitive position that can be sustained over the long-term. In pursuit of this goal, we are devoting special attention to developing synergies between our operating sectors and our research facilities, eliminating the fragmentation of resources in key areas of technology and focusing our technology strategy on strengthening brand identity. In particular, we are devoting major efforts to developing new environmentally friendly vehicles, an area in which the Group has already recorded success.
 
    Improving Efficiency in Distribution. In developing a more effective distribution network, we plan to reduce the aggregate number of dealers for all of our sectors to approximately 8,000 worldwide, especially through the combining of our existing forces in order to maintain a strong presence in our geographic markets. As of June 2004, we had reduced our aggregate number of dealers from approximately 9,850 at the end of 2002 to approximately 9,400. We are also seeking to optimize market coverage and implement programs designed to increase the profitability of our dealers.
 
    Realizing Cost Savings. Our initiatives envision an in-depth overhaul of our cost structure, with the goal of reducing operating expenses significantly. The most notable element of the program is targeted at reducing the cost of direct production materials, which we expect to achieve through a number of means, including design-to-cost engineering programs that can develop more efficient solutions through the use of common platforms and components and allowing suppliers to realize economies of scale.
 
    Focusing Production Resources. The streamlining of production facilities and a reduction of overhead and selling costs are also expected to make a significant contribution to improving our operating results. An industrial reorganization program, which will primarily affect CNH, Iveco and the automotive components operations, is designed to increase plant utilization, with further improvements possible in the future. As of June 2004, 10 of 12 plants slated for closure have already been shut down or are in the process of being shut down, and staff levels have decreased in line with our targets. At December 31, 2003, the Group had 162,237 employees, compared with 186,492 at the end of 2002, for a net reduction of almost 24,300. See Item 6. “Directors, Senior Management and Employees — Employees and Labor Relations” for additional information.

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     Product innovation. In 2003, our automotive sectors introduced a number of innovative new models as part of continued efforts to renew their product lines. Highlights include:

     Fiat Auto. In 2003, Fiat Auto accelerated its efforts to extend and strengthen its product range, especially in the second half of the year, with the introduction of four new models from September 2003 through January 2004: a new Fiat Panda city car (September 2003); the high-end compact Lancia Ypsilon (September 2003); the Fiat Idea compact minivan (January 2004); and the five-seat Alfa GT sport coupe (January 2004).

     Although they differ in conception and use, these new models all bring technical and stylistic innovation to their respective categories. The models introduced in 2003 had immediate commercial success, as evidenced by the fact that the Fiat Panda and Lancia Ypsilon became, respectively, the second and third top-selling cars in Italy during the first quarter of 2004, as reported by the Association of Italian Motor Vehicles Manufacturers. It was also evidenced by the numerous awards won by the Panda (8), the Ypsilon (3) and the New Alfa 156 (2); among other awards, the Fiat Panda was named “Car of the Year,” a prestigious award granted each year by a panel of European automotive journalists.

     One of the keys to Fiat Auto’s strategy for strengthening the Fiat, Lancia and Alfa Romeo brands is technological innovation. In 2003, this focus led to the introduction of the 1.3-liter Multijet 16-valve engine, a small, compact turbodiesel engine produced by Fiat-GM Powertrain that represents the second generation of common rail engines and makes the benefits of this technology available to the broad public of compact car purchasers.

     CNH. Development and implementation of common platforms for agricultural and construction equipment continued in 2003 with the introduction of the Case IH MXU and New Holland TS-A high-powered multifunction tractors.

     In the agricultural equipment segment, the continued renewal of the product line in 2003 led to the introduction of innovative products, including:

    the mid-horsepower New Holland TSA tractor, equipped with Fast Steer technology designed to facilitate making turns;
 
    the TNF-A tractor series, providing a new concept in orchard tractors, applying hydraulic, electrical and mechanical systems typical of larger, more high-powered machines to these smaller tractors;
 
    the VM and VL grape harvesters, a new generation of highly flexible machines able to handle a wide variety of terrain and that offer extensive operational scope, as they can be used not only for harvesting but also for other vineyard operations; and
 
    the Case IH AFX combine harvester, which introduced a single-rotor system for both threshing and separation.

     These products brought CNH a number of awards in Europe and America in 2003, including, among others, the “Agricultural Machine of the Year 2004” prize for the TSA tractor and the “Machine of the Year” award in the combine category for the Case IH AFX combine harvester, both at the AgriTechnica International Exhibition in Hanover, Germany, while New Holland’s VM/VL grape harvesters won a gold medal at the Sitevi fair in Montpellier, France.

     In the construction equipment segment, CNH launched more that 40 new products in 2003. Fiat Kobelco, the joint venture with Japan’s Kobelco Construction Machinery Co. and Sumitomo Corporation formed in 2002 to help strengthen CNH’s position in the global construction equipment market, introduced a range of excavators with renewed cabins, hydraulics and engines. In addition, the Case brand extended its product portfolio with the introduction of the TX series of telescopic handlers as well as with new excavators and wheel loaders.

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     Iveco. In the heavy vehicles segment, Iveco introduced the Stralis Active Day and Active Time cabs for customers operating on short- and medium-distance routes, respectively. These models complemented the Stralis Active Space cab, launched in 2002, which offered a better working environment, increased safety, improved on-board living conditions and a modular design. The Stralis was awarded the “Truck of the Year 2003” award by an international panel in January 2003.

     In the intermediate range, Iveco strengthened its lineup with the introduction of the new Eurocargo, which was launched in February, with the Tector engine, which provides lower emissions and greater fuel efficiency than the previous model. The Eurocargo has been the European leader in the intermediate-range segment since 2002.

     Irisbus also introduced a wide variety of new models in 2003, including the Evadys touring busses and the smaller Midys. In the intercity bus sector, the company introduced a 10.6 meter version of its Ares model, which is now available in a broad variety of lengths up to a maximum of 15 meters.

     Ferrari-Maserati. In 2003, Ferrari confirmed its position of excellence on the racetrack, where its Formula 1 team won the Drivers’ and Constructors’ world championships for the fourth and fifth consecutive years, respectively. The year 2003 saw the presentation of the Ferrari 360 Challenge Stradale model, a new sports version of the F360 Coupé, for which the order book was full by the end of 2003. At the beginning of 2004, the Ferrari 612 Scaglietti, which will replace the 456 in the Grand Tourer segment, made its debut at the Detroit Motor Show. Maserati in 2003 introduced the Quattroporte, its flagship sedan with a 400-horsepower V8 engine, combining the qualities of a luxury automobile with a “grand touring” spirit.

     Operating Environment. We continued to operate in a difficult international environment in 2003, characterized by weak economic growth and intensified competition, exacerbated by stagnation in automotive markets and the appreciation of the euro. In Europe in particular, a prolonged period of low GDP growth has led to the progressive contraction of the car market. This, together with the strength of the European currency, has put further pressure on prices, and has created a situation in which European original equipment manufacturers, or OEMs, are unable to pass higher input costs on to the market. Despite these challenges, we were able to improve our operating and financial performance, reflecting the implementation of cost savings measures, as well as gains on the disposal of our insurance and aviation sectors and other non-core Group assets, even though the positive impact of our new models on profit margins was limited as these models were introduced only in the latter part of the year. While we recorded operating and net losses for the third year in a row in 2003, these losses were significantly narrower than those recorded in 2002.

     The economic performance of our major markets as is reflected in gross domestic product (“GDP”) statistics for 2003 was mixed. GDP grew by approximately 3.1% in the United States, by approximately 3.8% in Poland and declined by 0.2% in Brazil. In Italy, GDP increased by only 0.4%, while in the EU as a whole, GDP increased by 0.7%, while inflation was at 2.0%. In China, GDP grew by 9.1%. For additional details on the economic environment in which we operate, see the section “— Operating Environment” below.

     Seasonality. We operate in a number of different business sectors, each of which, and particularly the agricultural and construction equipment sector, is subject to certain seasonal fluctuations. However, management believes that, as a whole, seasonal fluctuations are not significant to the Fiat Group or our results of operations.

     Operating and Financial Results for 2003. Our worldwide net sales and revenues,* reported as including changes in contract work in progress, decreased by 15.1%, from 55,649 million in 2002


*   In accordance with Italian GAAP, our net sales and revenues are equal to “Revenues from sales and services,” adjusted for the “Change in contract work in progress” as reported in the Statements of Operations included in the Consolidated Financial Statements included in Item 18.

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    to 47,271 million in 2003. In 2003, we recorded an operating loss of 510 million, as compared with an operating loss of 762 million in 2002. Were one to exclude the results of the significant operating activities we divested or deconsolidated during the year, our revenues for 2003 would have been 44,498 million and our operating loss equal to 714 million. Please see Item 5. “Operating and Financial Review and Prospects — Changes in the Scope of Consolidation” for additional information on the impact of these divestitures and a reconciliation of these non-GAAP figures to our net sales and revenues and operating loss under Italian GAAP. Our total financial income and expenses amounted to net expenses of 963 million, as compared to net expenses of 671 million in 2002 (inclusive of investment income of 22 million in 2003 and 156 million in 2002). For information on other measures used by Fiat’s management to evaluate our financial performance see Item 5. “Operating and Financial Review and Prospects — Results of Operations — 2003 Compared with 2002”. Total adjustments to financial assets, which include our equity in the results of operations of unconsolidated affiliates and writedowns in the value of financial receivables and securities, amounted to a loss of 172 million in 2003, as compared to a loss of 881 million in 2002. Total extraordinary income and expenses amounted to net income of 347 million, as compared with net expenses of 2,503 million recorded in 2002. The amount for 2003 included gains on asset disposals of 1,747 million recorded in our statement of operations, compared to losses of 502 million in 2002. As a result, a net loss before minority interest of 1,948 million recorded in 2003, as compared to a net loss of 4,263 million in 2002. Research and development expenses, as in the past fully charged to income, amounted to 1,747 million in 2003, as compared to 1,748 million in 2002. Capital expenditures totaled 2,011 million in 2003, as compared to 2,771 million in 2002, including investments in long-term leasing services for automobiles, commercial vehicles, and agricultural and construction equipment. See Item 5. “Operating and Financial Review and Prospects — Liquidity and Capital Resources”.

     In recognition of the net loss we incurred, the Board of Directors proposed that no dividends be declared or paid in respect of any category of our shares for the fiscal year ended December 31, 2003. This recommendation was approved by our stockholders at the annual general meeting on May 11, 2004.

     Recent Developments. Significant transactions in the first half of 2004 included the following:

    In February, we sold 100% of our interest in Fiat Engineering S.p.A. to Maire Investimenti S.p.A., a privately held Italian company, for consideration of 115 million, generating a net gain of approximately 60 million. At the same time, Fiat Partecipazioni S.p.A., our wholly owned subsidiary, subscribed to a capital increase in Maire Investimenti S.p.A. in an amount of 35 million, and now owns 30% of its capital. Each party holds call and put options, respectively, with respect to this 30% interest, exercisable within three years at a predetermined price.
 
    Also in February, we sold to Morgan Stanley and Co. International Limited 65 million ordinary shares of Edison S.p.A., Italy’s second-largest electricity company, in which Italenergia Bis owns a 64% stake. We had acquired these shares as a non-strategic financial investment in conjunction with a rights issue by Edison at the beginning of 2003. Morgan Stanley subsequently sold the shares in a private placement to institutional investors. The total consideration for this transaction was approximately 100 million, with a pre-tax gain of 32 million. The shares sold represented our direct stake in Edison. We retain our 24.6% interest in Italenergia Bis, the entity that controls Edison, and the transaction did not change any of our future strategic options.
 
    During the first four months of 2004, we exercised our right to terminate the equity swap we had entered into following our sale of the General Motors stock we had acquired in connection with the establishment of the Fiat-General Motors industrial alliance (see Item 4 “Information on the Company — Sectors — Automobiles”). In a related transaction, we repurchased on the market $540 million in principal amount of the $2.2 billion exchangeable bond issue for cancellation. The equity swap had allowed us to hedge our obligations in connection with the exchangeable bonds. To hedge our exposure under the

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      approximately $1.7 billion in exchangeable bonds that remained outstanding following these transactions, we purchased call options on General Motors shares. Together, these 2004 transactions resulted in a pre-tax gain for us of approximately $380 million. See Note 14 to the Consolidated Financial Statements included in Item 18 for more information on these transactions. In June 2004, investors holding $1,672 million in principal amount of the outstanding exchangeable bonds exercised their right to require us to redeem their bonds for cash at face value in July 2004. See Item 5. “Operating and Financial Review and Prospects — Liquidity and Capital Resources”. As a result, only $17.2 million of the exchangeable bonds are currently outstanding.

     In addition, we introduced the following new products during the first quarter of 2004:

    At the 74th International Geneva Motor Show in March 2004, Fiat Auto presented several Fiat-brand models, including on-road and off-road versions of the gasoline- and diesel-powered Panda 4x4, a new Fiat Multipla with updated styling, and the Trepiùno, a small car intended to serves as a styling and technological laboratory for the development of future microcars.

    Also at the Geneva Motor Show, Alfa Romeo staged the worldwide launch of the Alfa Crosswagon, a sporty and elegant all-wheel-drive car capable of handling off-road driving conditions, and Lancia introduced the Musa, a new compact multipurpose vehicle, or MPV, for motorists who want high style but are unwilling to give up convenience.

     First Quarter Results. Our consolidated net sales and revenues totaled 11,176 million in the first quarter of 2004, compared to 12,314 million in the first three months of 2003. The principal factor causing the decline in our revenues were the changes in the scope of consolidation that occurred during the course of 2003; in the first quarter of 2003, these divested operations (Banco Fiat SA, Toro Assicurazioni, Fidis Retail Italia and FiatAvio) generated revenues of approximately 1,800 million. The negative effect of these changes was offset only in part by an expansion in sales at all sectors other than Comau and Business Solutions, the latter of which saw revenues decline principally because of its disposal of Fiat Engineering. CNH’s results continued to be affected by the negative foreign exchange effect caused by the translation of its revenues in dollars and other currencies into euros, which largely offset the positive effect of higher unit sales.

     We posted an operating loss of 158 million and a net loss of 194 million in the first quarter of 2004, compared with an operating loss of 342 million and a net loss of 681 million in the first three months of 2003. In the first quarter of 2003, the operations divested during the course of 2003 generated operating income of approximately 101 million. The narrowing of our operating loss in the first quarter of 2004 reflected improved operating results at Fiat Auto, CNH, Iveco, Magneti Marelli, Comau and Teksid. Our net losses narrowed as a result of both the improved operating result and the positive effect of the closing of the equity swap with respect to General Motors shares, which generated a pre-tax gain of 283 million in the first quarter of 2004. Among the most significant trends in our revenues and operating results during the first quarter of 2004 were:

    Fiat Auto closed the first quarter of 2004 with revenues of 5,265 million, against 4,928 million in the first quarter of 2003. The sector’s revenues in the first quarter of 2003 included approximately 215 million in revenues generated by Fidis Retail Italia and Banco Fiat SA, which were sold during the course of 2003. The growth in revenues in the first quarter of the year was primarily due to growth in unit sales.

      Overall, the automobile market expanded slightly (+3%) in Western Europe during the

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      first three months of 2004. Contractions in France (-2.9%), Italy (-2.1%) and Germany (-1.7%) were more than offset by gains in other markets, including the United Kingdom (+5.9%) and Spain (+18.9%). Demand was up in all of Fiat Auto’s other main markets, including Poland, where the economic recovery begun in 2003 drove registrations up 22.4% compared with the first three months of 2003. Demand also rose in Brazil, where the market reversed the negative trend of 2003 to increase 5%, as well as in Turkey and Argentina, which continued to recover following the economic crisis in that country in 2001 and 2002.

      Fiat Auto’s worldwide sales in the first quarter totaled 472,500 units (+12.7%), as shipments increased in Spain (+30.9%), Italy (+11.4%), the United Kingdom (+5.6%) and the rest of Western Europe (+20.8%), with the exception of Germany, where sales decreased, and France, where sales remained steady. Compared with the first three months of 2003, Fiat Auto’s share of the automobile market held steady at 8.1% in Europe, but improved by 1.2 percentage points in Italy, from 28.2% to 29.4%.

      At 192 million, Fiat Auto’s operating loss was significantly lower than the 334 million loss recorded in the first three months of 2003, even though Fiat Auto’s net result in the first quarter of 2003 included approximately 41 million in operating income generated by Fidis Retail Italia and Banco Fiat SA, which were sold during the course of 2003. The improvement in the first quarter of 2004 reflected sales of new models with higher margins, as well as a more restrictive discount policy and cost-reduction measures taken in connection with our relaunch initiatives.

    CNH had revenues of 2.2 million, virtually unchanged (+0.6%) from the first quarter of 2003, as an increase in unit sales at CNH’s agricultural equipment operations (+8.2%) and, to a lesser extent, at its construction equipment operations (+2.3%) were largely offset by the negative impact of the depreciation of the dollar against the euro. CNH recorded operating income of 55 million, which marked a sharp improvement from the loss of 8 million in the first quarter of 2003, reflecting the impact of improved margins on new products, as well as an increase in volumes and higher sale prices obtained in both the agricultural and construction equipment segments, as well as cost savings and improved results by CNH’s financial activities.
 
    Iveco closed the first quarter of 2004 with revenues of 2,130 million, posting growth of 6.3% with respect to revenues of 2,004 million in the first quarter of 2003, largely as a result of higher sales of medium- and heavy-range vehicles and engines. Iveco’s operating income rose from 2 million in the first quarter of 2003 to 45 million in the first three months of 2004, largely as a result of the favorable impact of increased unit sales, an improved product mix and higher sales prices, as well as efficiency gains, particularly in the area of production costs. These positive factors were partially offset by an increase in research and development expenditures.
 
    Ferrari-Maserati had revenues of 336 million in the first quarter of 2004, up 18.3% compared with the first quarter of 2003. This growth stemmed from higher sales of both Ferrari models — particularly the new 360 Challenge Stradale presented in 2003 and the “Enzo” limited edition model — and Maserati models, reflecting strong sales of the new Quattroporte.
 
    Magneti Marelli posted revenues of 865 million, an increase of 11.9% as compared with the first quarter of 2003. This improvement was reflected at all Magneti Marelli’s business lines, and in particular at its engine control unit, where revenues benefited from sales of a diesel system introduced during 2003.
 
    Comau posted revenues of 341 million during the first quarter of 2004, down by 32.1% with respect to the same period of 2003. This significant decline reflected both the sale of the sector’s industrial plant maintenance activities to Fiat Auto and Fiat-GM Powertrain at their plants in Italy and Poland, as well as a lower level of contract work in North

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      America. This decline in contract work reflected a contraction in orders during 2003 as a result of cutbacks in carmakers’ capital investment programs and competitive pressure on prices.

    Teksid had revenues of 224 million in the first quarter of 2004, a slight increase with respect to the 221 million reported in the first quarter of 2003, as the negative effect of the appreciation of the euro against the dollar and other currencies almost completely offset the positive effect of higher sales volumes. Teksid’s cast iron business unit reported higher sales volumes to both third-party and other Fiat Group customers, with higher demand in particular in North America and Brazil. Teksid’s magnesium business unit also reported higher sales volumes, reflecting expanding demand in Europe and a steady demand for SUVs in North America.

     Outlook. Overall, the global economy is expected to grow in 2004, driven mainly by expansion in the United States and Asia. In the United States, there are a number of signs indicating that the current recovery is turning into a sustained expansion. As in 2003, the U.S. economy is expected to post the strongest growth among the industrial countries, helped by continued strength in private consumption and strong investment activity. Unlike last year, though, Japan is also expected to post strong growth, closely challenging the U.S. for the top spot. Emerging markets are also expected to see strong growth in 2004, although there are some concerns regarding the impact any monetary tightening in the U.S. and continued high oil prices might have on these economies. Poland is expected to continue to grow at a healthy pace, and the Brazilian economy is expected to continue to improve, while growth in Argentina is expected to remain robust, albeit at a lower rate than in 2003, and with some uncertainties regarding the impact higher energy prices will have on the economy. In China, administrative measures taken by the government to keep the economy from overheating are expected to start kicking in; growth is nonetheless expected to remain strong. In Western Europe, however, while growth is expected to pick up speed amid improving domestic demand and the strong outlook outside of Europe, there are expected to be significant differences among individual countries in terms of economic performance. Overall growth is expected to remain relatively modest, particularly in Italy.

     Consequently, management expects that in 2004, while we may see market demand expand slightly in the United States, demand will overall be relatively steady in our major European markets, which will continue to be characterized by aggressive competition from other carmakers.

     In this environment, all of our sectors will strive to build on the achievements of 2003, continuing to restructure and streamline their manufacturing operations and to make major investments in renewing their product ranges and improving their distribution networks. In addition, we will continue to strengthen our management organization by pursuing a strategy of bringing in top professionals from the outside and leveraging the competencies available inside.

     As we work to implement these relaunch initiatives, and taking into account the current business outlook, management’s goal in 2004 remains to achieve operating break-even at Group level, a further reduction in Fiat Auto’s losses and better operating results from the other sectors.

HISTORICAL OVERVIEW

     We were founded in Turin in 1899 and incorporated in 1906 as a manufacturer of automobiles, but quickly expanded into the production of buses and motor coaches, commercial vehicles and aviation and marine engines. By 1920, our product lines included metallurgical products, railway cars, automotive and industrial components and tractors, and we expanded into civil engineering in 1929. In the 1950s, we began to manufacture construction equipment, developed the first Italian jet-powered aviation engine and introduced the first mass-produced Italian automobile. In the 1960s, we acquired several other major automobile manufacturers in Italy. The early 1970s witnessed the expansion of our commercial vehicles, construction equipment and production systems operations. Throughout this period, our operations developed an increasingly international character;

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we marketed our products outside Italy and formed manufacturing subsidiaries, participated in joint ventures and engaged in other forms of industrial co-operation in several countries.

     In the late 1970s, we began a reorganization with a specific focus on our operations in Italy, selected countries in Europe and Brazil. The 1980s and the beginning of the 1990s were characterized by expansion through acquisitions, joint ventures and marketing agreements. Beginning in 1990, the economies of the industrialized world were faced with a serious economic downturn, leading to a sharp drop in demand in key markets and heightened competitive pressures. We responded to the crisis by initiating a program to renew and modernize our facilities and products with the objective of increasing its competitiveness and further lowering its break-even point. These efforts, along with a significant improvement in economic conditions in many of our principal markets, resulted in our profitability in each of the years between 1993, when we had recorded historic losses, and 1999. However, in recent years, increased competition and the deterioration of the economic environment in many of our markets were reflected in our declining profitability. In 2003, we recorded a net loss for the third year in a row, although losses were narrowed as we continued to implement our relaunch initiatives.

     At December 31, 2003, we operated in 57 countries through 777 subsidiaries and affiliates; 199 of these subsidiaries and affiliates were located in Italy. As of such date, we had a total of 162,237 employees, including 73,553 in Italy. The tables which follow set forth for the years indicated: (i) net sales and revenues presented by the geographic market in which the sales were made and (ii) revenues, operating income (loss) and the number of employees for each of our sectors and our other companies.

     The Consolidated Financial Statements included in Item 18 for the years ended December 31, 2003, 2002 and 2001 have been prepared in accordance with the requirements of Italian GAAP and also reflect the changes in the scope of consolidation discussed above in Item 3. “Key Information — Selected Financial Data”.

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Net Sales and Revenues By Destination

                 
    Net sales   Percentage
    and   of net sales and
    revenues
  revenues
    (in millions of euros)        
2003
               
Italy
  16,381       34.7 %
Europe (excluding Italy)
    18,884       39.9  
 
   
 
     
 
 
Total Europe
    35,265       74.6  
North America
    5,920       12.5  
Mercosur Region(1)
    2,595       5.5  
Rest of the World
    3,491       7.4  
 
   
 
     
 
 
Total
  47,271       100.0 %
 
   
 
     
 
 
2002
               
Italy
  20,120       36.2 %
Europe (excluding Italy)
    21,072       37.8  
 
   
 
     
 
 
Total Europe
    41,192       74.0  
North America
    7,411       13.3  
Mercosur Region(1)
    3,268       5.9  
Rest of the World
    3,778       6.8  
 
   
 
     
 
 
Total
  55,649       100.0 %
 
   
 
     
 
 
2001
               
Italy
  19,954       34.4 %
Europe (excluding Italy)
    22,541       38.8  
 
   
 
     
 
 
Total Europe
    42,495       73.2  
North America
    7,531       13.0  
Mercosur Region(1)
    4,221       7.3  
Rest of the World
    3,759       6.5  
 
   
 
     
 
 
Total
  58,006       100.0 %
 
   
 
     
 
 


Note:   For a presentation of net sales and revenues and income from operations by place of origin, see Note 24 to the Consolidated Financial Statements included in Item 18.
 
(1)   Comprising Argentina, Brazil, Paraguay and Uruguay.

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Operating Results by Sector

                                         
                            Percentage of    
            Percentage of   Operating income   operating income   Number of employees
    Revenues
  revenues(1)
  (loss)(2)
  (loss)(1)
  at year end
    (in millions of           (in millions of                
    euros)           euros)                
2003:
                                       
Automobiles
  20,010       39.5 %   (979 )           44,563  
Agricultural & Construction Equipment(3)
    9,418       18.6       229             26,825  
Commercial Vehicles
    8,440       16.7       81             31,511  
Ferrari-Maserati
    1,261       2.5       32             2,968  
Components
    3,206       6.3       32             19,879  
Production Systems
    2,293       4.5       2             17,375  
Metallurgical Products
    844       1.7       12             7,556  
Aviation(4)
    625       1.2       53              
Insurance(5)
    1,654       3.3       44              
Services
    1,816       3.6       45             7,113  
Publishing and Communications
    383       0.8       10             874  
Other Companies(6)
    679       1.3       (138 )           3,573  
Total before Eliminations and Consolidating Adjustments
  50,629       100.0     (577 )                
 
   
 
     
 
     
 
                 
Eliminations and Consolidating Adjustments.
    (3,358 )             67                  
Consolidated Net Sales and Revenues
  47,271             (510 )             162,237  
 
   
 
             
 
             
 
 
2002:
                                       
Automobiles
  22,147       37.2 %   (1,343 )           49,544  
Agricultural & Construction Equipment(3)
    10,513       17.6       163             28,528  
Commercial Vehicles
    9,136       15.3       102             38,113  
Ferrari-Maserati
    1,208       2.0       70             2,896  
Components
    3,288       5.5       (16 )           20,716  
Production Systems
    2,320       3.9       (101 )           18,186  
Metallurgical Products
    1,539       2.6       27             7,368  
Aviation
    1,534       2.6       210             5,049  
Insurance
    4,916       8.2       147             3,098  
Services
    1,965       3.3       67             7,900  
Publishing and Communications
    360       0.6       3             932  
Other Companies(6)
    731       1.2       (104 )           4,171  
Total before Eliminations and Consolidating Adjustments
  59,657       100.0 %   (775 )                
 
   
 
     
 
     
 
                 
Eliminations and Consolidating Adjustments.
    (4,008 )             13                  
Consolidated Net Sales and Revenues
  55,649             (762 )             186,492  
 
   
 
             
 
             
 
 
2001:
                                       
Automobiles
  24,440       38.6 %   (549 )     (246.2 )%     55,174  
Agricultural & Construction Equipment (3)
    10,777       17.0       209       93.7       28,127  
Commercial Vehicles
    8,650       13.7       271       121.5       35,340  
Components
    4,073       6.4       (74 )     (33.2 )     24,228  
Production Systems
    2,218       3.5       60       26.9       17,243  
Metallurgical Products
    1,752       2.8       15       6.7       13,827  
Aviation
    1,636       2.6       186       83.5       5,243  
Insurance
    5,461       8.6       68       30.5       3,213  
Services
    1,805       2.9       73       32.7       7,171  
Publishing and Communications
    347       0.5       (2 )     (0.9 )     934  
Other Companies (6)
    2,158       3.4       (34 )     (15.2 )     8,264  
Total before Eliminations and Consolidating Adjustments
  63,317       100.0 %   223       100.0 %        
 
   
 
     
 
     
 
     
 
         
Eliminations and Consolidating Adjustments.
    (5,311 )             95                  
Consolidated Net Sales and Revenues
  58,006             318               198,764  
 
   
 
             
 
             
 
 


Note:   Note 21(iv) to the Consolidated Financial Statements included in Item 18 sets forth the amounts of revenues attributable to intersegment transactions for each of our sectors, but not for our “Other Companies.” The aggregate of these amounts for all sectors is shown under “Eliminations and Consolidating Adjustments” in the above table.
 
(1)   Represents the revenues or operating income, as the case may be, of each sector, prior to eliminations and consolidating adjustments, as a percentage of total consolidated net sales and revenues or operating income, as the case may be, prior to eliminations and

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    consolidating adjustments. No such percentages are given with respect to the operating result for 2003 and 2002, as we recorded a consolidated operating loss.
 
(2)   Operating income (loss) reflected in eliminations and consolidating adjustments arises primarily from the consolidation process.
 
(3)   The revenues of CNH (as reported by us under Italian GAAP) in dollars, CNH’s reporting currency, were $10,654 million in 2003, $9,928 million in 2002 and, $9,653 million in 2001. Similarly, operating income for CNH (as reported by us under Italian GAAP) in dollars totaled $259 million in 2003, $154 million in 2002 and $188 million in 2001.
 
(4)   Data for the aviation sector are through July 1, 2003, the date of its deconsolidation.
 
(5)   Data for the insurance sector are through May 2, 2003, the date of its deconsolidation.
 
(6)   “Other Companies” include holding companies and other companies directly owned by Fiat S.p.A. Until December 31, 2001, Ferrari—Maserati was included and reported in “Other Companies,” accounting for 1,058 million of revenues, 62 million of operating income and 2,566 employees in 2001.

SECTORS

     Our companies in 2003 were organized into nine operating sectors, following the divestitures of our former insurance and aviation sectors in the first half of the year. Each of our sectors operates with broad management authority exercised within a strategic framework determined jointly by the sectors and Group management.

Automobiles

     Our automobile operations are conducted primarily through Fiat Auto and its subsidiaries. The automobiles sector operates internationally with three major brands — Fiat, Lancia and Alfa Romeo — and manufactures and markets automobiles and related products primarily in Italy, in the rest of Europe and in South America.

     At December 31, 2003, the sector employed 44,563 workers, including 28,413 in Italy. The sector recorded a net decrease of approximately 5,000 employees during 2003, both in Italy and abroad, reflecting reductions due to the changes in the scope of consolidation and cuts in production capacity as part of the sector’s restructuring initiatives and the implementation of efficiency programs. Some of the workforce reductions in Italy took place as part of an early retirement program (“mobilità di accompagnamento alla pensione”). See Item 6. “Directors, Senior Management and Employees — Employees and Labor Relations — Industrial reorganization.”

     The year 2003 saw Fiat Auto deeply engaged in the implementation of relaunch initiatives aimed at improving the sector’s performance. In the latter part of the year, Fiat Auto recorded the first positive results of these initiatives, despite an international economic scenario characterized by negative trends in the principal markets where it operates. In Europe, a prolonged period of low GDP growth has led to the progressive contraction of the car market. Over the last four years, demand in Europe has declined by more than 800,000 units. This, together with the strength of the European currency, which favors the competitiveness of non-European OEM’s, has put further pressure on prices, and has created a situation in which European OEM’s are unable to pass higher input costs on to consumers. Furthermore, in recent years, the auto sector has experienced a reduction in auto sales prices. Together, all of these factors have generally had negative consequences for the profitability of the European auto industry.

     Despite this environment, and a general drop in the sector’s volumes and revenues and an increase in research and development expenditures, Fiat Auto succeeded in reducing its operating losses to 979 million in 2003, which, while still significant, were 27% lower than the losses it recorded in 2002, largely as a result of strict compliance with cost-reduction objectives set in connection with our relaunch initiatives and the positive effects of new models launched in the latter part of the year.

     The year 2003 saw Fiat Auto continuing to implement restructuring and management reorganization programs aimed at bringing its industrial and commercial structure in line with internationally competitive standards. As part of this process, Fiat Auto reorganized its business unit

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structure from five units into four: Fiat/Lancia, Alfa Romeo, Light Commercial Vehicles and Aftersales.

     In addition, in accordance with the Program Agreement reached between the Group and the Italian government in December 2002, Fiat Auto took measures to reduce its headcount in Italy and also sought to reduce labor costs through the use of the cassa integrazione guadagni straordinaria (a longer-term temporary layoff benefits fund) and reduced use of temporary staff, while at the same time seeking to minimize the social impact of its organizational and industrial restructuring. The taking of these measures greatly contributed to Fiat Auto’s ability to emerge on December 8, 2003, from the “business-in-crisis” status it had been granted by the Italian government in 2002. In addition, the implementation of measures to rationalize manufacturing processes, combined with the launch of new models in the second half of 2003 permitted approximately 60% of the workers who had been temporarily laid off to return to work, in some cases ahead of schedule. See Item 6. “Directors, Senior Management and Employees — Employees and Labor Relations”.

     Fiat Auto also launched significant initiatives aimed at preparing for the challenges of the years ahead, including:

    an accelerated renewal of the sector’s core product range, including not fewer than 14 renovated or completely new vehicles from 2004 through 2006. These products, and particularly the new vehicles, are aimed at responding to market trends (in terms of style, size, performance, and mission), while at the same time underlining the distinctive characteristics of Fiat Auto’s brands. Moreover, as part of this renewal, the sector will place an increased emphasis on sales in higher margin segments of the automobile market;
 
    a series of cost-reduction measures, including plant optimization and inventory reduction, as well as further workforce reductions. In this context, the sector has transferred production of the Alfa 166 and Lancia Thesis models in Italy from its Rivalta plant to its Mirafiori plant, and has ceased most manufacturing activities in Argentina, where Fiat Auto now produces only a small quantity of diesel engines, and plans to consolidate future production of the Fiat Punto only at its Melfi plant and of the Lancia Ypsilon only at its plant in Termini Imerese in Sicily;
 
    growth in the major European markets outside of Italy, in order to reduce its dependence on the domestic market, and development of the opportunities arising from the enlargement of the European Union to 25 countries, building on its well-established presence in Poland, and experience in those markets;
 
    the strengthening of its market position in the major world markets in which Fiat Auto is already present (Brazil, Turkey and China, in particular);
 
    a rationalization and requalification of its dealer network and revamping of its fleet sales organization;
 
    an increased focus on the rationalization of platforms and components in order to reduce the complexity of procurement and manufacturing as well as costs, while at the same time both increasing the level of quality and strictly maintaining each brand’s distinctive character; and
 
    quality improvement initiatives, including the re-engineering of core processes and the appointment of “change management” teams.

     In addition, as of January 1, 2004, as part of its initiatives to increase efficiency and reduce costs, Fiat Auto re-acquired the industrial plant maintenance activities that had been outsourced to Comau S.p.A. and its subsidiary Comau Poland, at its plants in Italy and Poland in order to bring in-house the performance of certain maintenance activities on industrial machinery and equipment.

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     Models introduced in 2003 were well-received by the international press and include the new Fiat Panda, a city car honored with the prestigious 2004 Car of the Year award; the Fiat Idea compact minivan; the elegant Lancia Ypsilon compact; and the Alfa Romeo GT, a five-seat coupé. Other noteworthy product concepts presented in 2003 include the Kamal, an SUV “concept” car, and the 8C Competizione, a luxury high-performance sports car.

     Innovations in the area of engines included: the introduction of the 1.3-liter Multijet 16-valve diesel engine, which complies with the Euro 4 emission standards that take effect starting in 2006, for the Punto, the Idea and the Ypsilon; development of Doblò and Panda models equipped with 1.3-liter Multijet 16-valve diesel engines, which models were then launched commercially in January and May 2004, respectively; launch of the Punto bi-power (powered by methane and gasoline); upgrades to make the engines in the Doblò Panorama, Multipla and Punto passenger transports compliant with European on-board diagnostic (EOBD) standards; introduction of a 1.4-liter 16-valve engine for the Ypsilon, Idea and Punto and of 1.9-liter 16-valve diesel 140 brake horse power (bhp) and 1.4-liter 16-valve “Fire,” or “fully integrated robotized engine,” and 90 bhp engines for the Stilo, for which the 2004 model year was launched in the last quarter of 2003. FIRE engines are completely manufactured by robot technology, on fully automated production lines.

     Major upgrades were also done by Alfa Romeo on its current product line, particularly on the GTV/Spider (2.0 JTS and 240-bhp 3.2-liter V6 24-valve gasoline engines), the 156 and 166 (a 175-bhp 2.4-liter JTD 20-valve Multijet engine). A new 100-bhp 1.9-liter JTD engine was also introduced on the Alfa 147. In addition, Alfa Romeo now offers new automatic Sportronic (166 diesel) and robotized Selespeed (147 and 156 GTA) transmissions.

     During 2003, Fiat Auto continued to refocus and strengthen its international industrial and commercial presence, placing special emphasis on such major markets as Latin America, China and Turkey. In particular:

    In Brazil, despite a business climate characterized by increasing competitiveness and a further decrease in demand, Fiat Auto retained market leadership for the third consecutive year with a share of 25.3% for cars and light commercial vehicles combined. During the year, the sector launched the new Palio, which received the prestigious Carro do año (Car of the Year) award, introduced the Adventure version of the Doblò.

    In Argentina, the deep slump of 2002 was followed by steady signs of improvement in 2003, with demand in the automobile market up 40.5% from 2002 levels. In this environment, the sector renewed its auto sales in Argentina, mainly of models imported from Fiat Auto’s subsidiary in Brazil, following the severe reduction in its activities in Argentina in 2002. In 2003, Fiat Auto’s manufacturing activity in Argentina remained limited to production of a small quantity of 1.7-liter diesel engines for export.

    In China, Fiat Auto’s joint venture with the Yueijin Motor Group increased sales to 37,200 units from 23,700 units in 2002. During 2003, the product line, which comprised the Fiat Palio and Siena, was expanded with the introduction of the Palio Weekend, with the sector’s Speedgear automatic transmission introduced in all three models.

    In Turkey, Tofas, a joint venture of Fiat Auto and Koc Holding A.S., strengthened its position as Turkey’s leading carmaker in 2003 and significantly broadened its product line, introducing a 1.3-liter Multijet engine for the locally produced models Palio and Albea, which is a version of the Siena restyled for the Turkish market. The sector also launched the Fiat Stilo and Punto on the Turkish market in 2003.

    In Mexico, Fiat Auto entered into an agreement with General Motors Mexico in 2003 to distribute Fiat-brand cars through the Pontiac distribution network, including the Palio and Siena, as well as the Adventure and other models. Sales of these models commenced in August 2003. Fiat Auto also entered into an agreement with General Motors to distribute Alfa Romeo-brand cars through the Cadillac-Saab

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      distribution network in Mexico starting in the second half of 2003, including models such as the Alfa 147 and 156 sedan.

     Fiat Auto also seeks to increase its profitability and competitiveness through the implementation of strategic industrial alliances with other auto manufacturers, which the sector sees as fundamental to achieving the economies of scale required to operate competitively.

     Fiat Auto’s network of alliances includes alliances entered into with the PSA Peugeot Citroen Group in 1978 for the production of light commercial vehicles, carried out through Sevel S.p.A., and for the production of multi purpose vehicles and utility vans, carried out through Sevel Nord S.A.

     In March 2000, we entered into an alliance with General Motors in certain automobile-related businesses. The alliance includes Fiat-GM Powertrain, B.V., a 50-50 joint venture combining Fiat Auto’s operations in the areas of design, manufacture and sale of automobile powertrains with General Motors’ European and South American powertrain operations. Fiat Auto and General Motors also established GM-Fiat Worldwide Purchasing, a 50-50 joint venture for the purchase of parts and supplies for the manufacturing of automobiles.

     In 2003 and 2004, this alliance led to two agreements between Fiat Auto and Suzuki Motor Corporation, a subsidiary of General Motors. Under one of these agreements, announced in April 2003, Fiat Auto and Suzuki will produce a new sport utility vehicle (SUV) segment at a Suzuki plant in Hungary that will be marketed under the Fiat brand; the other, announced in May 2004, provides for the production of Fiat’s Multijet 1.3-liter 16 valve diesel engine at Suzuki’s facility in India.

     Fiat Auto also continued to reap benefits from our industrial alliance with General Motors in 2003, particularly as a result of the joint procurement operations carried out by the GM-Fiat Worldwide Purchasing joint venture.

     However, differences between General Motors and us as to the interpretation of certain terms of our original alliance agreements led us and General Motors to amend those agreements during the year. The salient points of the alliance are outlined below:

    In 2000, we and General Motors entered into a master agreement (as amended or supplemented, the “Master Agreement”) initiating the industrial alliance between Fiat Auto and General Motors. In accordance with the Master Agreement, General Motors purchased a 20% interest in Fiat Auto Holdings, and we purchased approximately 5.4% of General Motors $1-2/3 par value common stock. We subsequently sold these shares in December 2002.

    Under the original terms of the Master Agreement, during the period from January 2004 to July 2009, we were entitled to put our shares of Fiat Auto Holdings to General Motors at a price to be negotiated between us or determined by independent investment banks. We had the same right with respect to 100% of the shares of Fiat Auto S.p.A., Fiat Auto Holdings’ main operating subsidiary.
 
      However, General Motors has alleged that our sale of certain assets of the financing business of Fiat Auto and a capital increase at Fiat Auto Holdings we carried out in 2003 constitute breaches of the Master Agreement entitling General Motors to terminate the Master Agreement, and, with it, the put option. We contend that both of these transactions were proper and did not violate the Master Agreement or any of GM’s rights. We regard the put option as effective and exercisable in accordance with the provisions of the original Master Agreement.

    As a result, in October 2003, we and General Motors agreed to amend the Master Agreement to postpone the put period by one year, so that it begins on January 24, 2005, and ends on July 24, 2010. We also entered into a standstill agreement precluding either of us or General Motors from initiating legal proceedings with regard to any

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      disagreements then existing relating to the Master Agreement prior to December 15, 2004, without prejudicing our respective rights under the Master Agreement. We and General Motors have stated that these agreements were executed in the context of ongoing discussions between us and General Motors regarding the re-defining of the structure of our strategic alliance in order to permit our industrial cooperation to continue constructively and resolve both parties’ concerns.

    The Master Agreement also gives General Motors a right of first offer (but not a call option) through July 2010 entitling it to buy all of our shares of Fiat Auto Holdings at a price set by us (or to offer to buy such shares at a lower price, which we may accept or reject) in the event that we propose to sell the shares to a third party at that price. General Motors has the same right in respect of the shares of Fiat Auto S.p.A. should Fiat Auto Holdings decide to sell Fiat Auto S.p.A.’s shares to a third party.

    Subject to certain limitations, we and General Motors have agreed not to acquire or offer to acquire the assets or securities of each other or of any of our respective subsidiaries without the other party’s consent for as long as each of us holds stock of Fiat Auto Holdings and for a period of ten years thereafter. In addition, we have agreed not to allow Fiat Auto S.p.A. or Fiat Auto Holdings to take certain significant corporate actions without the consent of General Motors so long as it holds stock of Fiat Auto Holdings.

     For additional information on our relationship with General Motors and the related agreements, see Note 14(ii) to the Consolidated Financial Statements included in Item 18.

     In its Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, General Motors stated that it currently does not intend to subscribe for its pro rata portion of the capital increase we carried out at Fiat Auto Holdings in 2003. Under the terms of this approximately 5 billion capital increase, which we approved at a Fiat Auto Holdings stockholders’ meeting on April 23, 2003, we and General Motors have the right to elect to subscribe for amounts up to our respective full pro rata portions of the capital increase from time to time through October 2004. As of the date of this annual report, we have subscribed for approximately 3 billion in additional Fiat Auto Holdings shares, and General Motors has not subscribed for any additional Fiat Auto Holdings shares. As a result, General Motors’ equity interest in Fiat Auto Holdings has been diluted to approximately 10%.

     As noted above, we expect to continue discussions with General Motors regarding further industrial collaboration and the structure of our strategic alliance. We cannot, however, provide any assurances as to what the results of these discussions will be or if we will reach any agreement with General Motors regarding these or other matters.

     Markets and Competition.* In 2003, the Western European automobile market (measured in terms of new registrations) decreased to 14.2 million units, or 1.2% fewer units than in 2002, reflecting the continued weakness in the overall European economy, as declines were registered in most of Fiat Auto’s major markets.

     In Italy, new registrations totaled 2,251,000, a decrease of 1.2% from 2002, reflecting the general weakness in the economy and the expiration of environmental incentives introduced by the government to favor the replacement of non-catalytic converter-equipped vehicles that were in effect from July 2002 through March 2003. Demand was also down in all other major Western European


*   Throughout this report, unless otherwise specified, market share and vehicle registration data for 2003 represent the best estimates available from the sources indicated as of the date hereof. We calculate our market share as being equal to the percentage of the total number of vehicles registered in the relevant market during the relevant period that is attributable to our vehicles. In certain cases, market share and vehicle registration data for 2002 and 2001 have been revised from that presented in our Annual Report on Form 20-F for the year ended December 31, 2002 to reflect changes in such sources appearing after the date thereof. Unit sales represent sales of vehicles to our distribution network, importers and other large direct customers during the relevant period.

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countries other than the United Kingdom and Spain, where registrations increased by 0.5% to 2,586,000 vehicles and 4.3% to 1,380,000 vehicles, respectively. New registrations decreased in France by 6.4% to 2,003,000, and in Germany by 0.4% to 3,174,000, continuing the negative trend of previous years.

     Elsewhere in Europe, shipments increased in the Polish market, rising 16.3% to 353,000 vehicles, reflecting strong economic growth in that country. The Turkish market improved sharply in 2003, as new vehicle registrations more than doubled to over 227,000 units, reflecting stronger economic growth during the year, as well as government incentives favoring the purchase of new cars. In the Mercosur countries, demand declined in Brazil by 3.2% to 1,195,000 vehicles in 2003, while in the Argentine market the demand increased by 40.5% from the extremely low levels recorded in 2002, to 96,000 units.

     New registrations of light commercial vehicles also declined in Western Europe as a whole, totaling slightly more than 1.7 million units, or 2.0% fewer than in 2003. Demand was down 17.4% in Italy, partly as a result of the expiration of government incentives to encourage capital investment, but showed healthy increases in the United Kingdom (+15.3%) and Spain (+8.8%). Large gains were also recorded in Poland (+20.5%).

     Fiat Auto sold a total of 1,695,000 vehicles to its dealer network, importers and other large direct customers in 2003 (1,779,000 if sales by unconsolidated affiliates are added), as compared with 1,860,000 in 2002 (1,910,000 including unconsolidated affiliates). The decrease of 8.8%, or 165,000 vehicles, in the sector’s global unit sales (excluding unconsolidated affiliates) was mainly attributable to declines of 123,000 units in Western Europe and 40,000 units in Brazil.

     In Western Europe as a whole, the sector’s share of the automobile market declined to 7.4%, falling 0.8 percentage points from 2002 levels. Fiat Auto’s unit sales in Western Europe excluding Italy totaled 508,000 units, a decline of 6.4%, as its share of the automobile market decreased from 4.0% in 2002 to 3.5% in 2003. The sector’s unit sales in Italy declined by 11.5% to 671,000, as its market share in Italy fell from 30.2% to 28.0%. In Brazil, market share declined slightly to 25.2% in 2003 from 25.8% in 2002, while market share in Poland held steady at 17.8%. The declines in Fiat Auto’s market share in Western Europe and Italy reflect a strategic decision by the sector to reduce sales through less profitable distribution channels, extremely aggressive competition and the fact that commercial launch of several new models did not take place until the second half of the year.

     In the market for light commercial vehicles, Fiat Auto’s share of the Western European market reflected the same downward trend that shaped overall demand, falling by 1.4 percentage points to 11.2%, reflecting the contraction of the Italian market, where Fiat Auto has a strong presence, as well as a loss in market share in Italy, partly reflecting the fact that Italian market share in 2002 was boosted by a significant fleet order from a large corporate customer.

     The following table sets forth for the years indicated unit sales of the sector’s automobiles and light commercial vehicles in its principal markets, the percentage of the sector’s unit sales represented by each market and the sector’s automobile market shares (excluding light commercial vehicles).

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    2003
  2002
  2001
            Percentage   Auto market           Percentage   Auto market           Percentage   Auto market
    All units   of units   share   All units   of units   share   All units   of units   share
    sold
  sold
  (%)
  sold
  sold
  (%)
  sold
  sold
  (%)
    (Units in thousands)
Italy
    671       39.6 %     28.0 %     759       40.8 %     30.2 %     825       39.4 %     34.6 %
Western Europe (excluding Italy)
    508       30.0       3.5       543       29.2       4.0       631       30.2       4.6  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total W. Europe
    1,179       69.6       7.4       1,302       70.0       8.2       1,456       69.6       9.5  
Brazil
    318       18.8       25.2       358       19.2       25.8       416       19.9       28.5  
Poland
    70       4.1       17.8       61       3.3       17.7       76       3.6       23.2  
Rest of the world
    128       7.5               139       7.5               144       6.9          
 
   
 
     
 
             
 
     
 
             
 
     
 
         
TOTAL
    1,695       100.0 %             1,860       100.0 %             2,092       100.0 %        
 
   
 
     
 
             
 
     
 
             
 
     
 
         


Sources:   Derived from a variety of official and non-official sources believed to be reliable, including the following agencies in the indicated countries: Italy — Ministero dei Trasporti; Brazil — Associação Nacional dos Fabricantes de Veiculos Automotores; France — Chambre Syndicale; Germany — Krafter Bundesamt; Spain — Direccion General de Trafico (D.G.T.); United Kingdom — Society of Motor Manufacturers and Traders (S.M.M.T.).

     In Western Europe, Fiat Auto sold a total of 1,179,000 vehicles in 2003, a 9.4% decrease compared with 2002. The decrease in sales reflected the continuing and pervasive weakness that characterized market demand and the fact that several new models (Fiat Panda, Fiat Idea, Lancia Ypsilon and Alfa GT) were not introduced commercially until late in 2003. Sales were lower in all of Fiat Auto’s principal markets, with the exception of Spain (+14.8%), where they increased due to robust sales of the new Fiat Panda and the Lancia Ypsilon in the latter part of the year and a strong performance by the Alfa Romeo brand, and the United Kingdom (+1.4%).

     The sector had mixed results in Poland and Brazil, its two most important markets outside Western Europe. In Poland, Fiat Auto sold a total of 70,000 vehicles in 2003, an increase of 15.9% compared with 2002, reflecting the strong growth of the market. The sector’s automobile market share in Poland was steady at 17.8%. In Brazil, sales continued to decline, falling 11.3% to 318,000, and the sector’s automobile market share declined to 25.2% in 2003 from 25.8% in 2002, reflecting the general weakness in the market and aggressive competition.

     In Argentina, where sales and manufacturing activities were reduced sharply during 2002 as a result of the economic crisis in that country, sales in 2003 increased as the market started to recover, with the sector selling approximately 14,700 vehicles, compared to approximately 6,800 in 2002.

     The Western European market for automobiles, in which approximately 70% of the sector’s unit sales were made during 2003, is generally divided into a number of different major model segments or classes. The sector’s three major automobile brands are generally represented in each of these segments, with individual models designed to meet a broad range of consumer tastes:

    The Fiat brand includes models ranging from the city subcompact Seicento and the new Panda to the subcompact Punto, the intermediate/compact Stilo (including its station wagon version), the Doblò multipurpose vehicle and light commercial vehicle. The Fiat range also includes other multipurpose vehicles (the Ulysse and Multipla). The sector also produces the subcompact Siena and Palio in Brazil and in China, as well as in other emerging markets. In 2004, Fiat Auto also entered the compact multipurpose vehicle segment with a new model, the Idea.

    The sector’s light commercial vehicles (those with gross vehicle weights, or “GVW”, of 3.5 tons or less) are also sold under the Fiat brand, including the Ducato (of which a new version was introduced in 2003), Doblò Cargo, Scudo and the Strada pickup. Our Ducato utility vans are produced in Italy through the Sevel S.p.A. joint venture with Peugeot S.A., with a second joint venture with Peugeot S.A., Sevel Nord S.A., manufacturing

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      multi purpose vehicles and utility vans in France for sale in the European market under the Fiat, Lancia, Peugeot and Citroën brands. The Ducato line is also manufactured at a facility in Sete Lagoas, Brazil, which Fiat Auto operates in a joint venture with Iveco.

    The Lancia brand, traditionally associated with elegance and comfort, includes the new version of the Ypsilon model, which has performed well on the market since its launch. In 2003, we also enhanced the Lancia Thesis and Phedra, in the luxury and multipurpose ranges, respectively, installing new, higher-performing engines. In March 2004, the compact MPV Musa had its world premiere at the Geneva International Motor Show, and was presented to the international media in the second half of June 2004.

    The Alfa Romeo brand, with its strong tradition of high performance, includes the award-winning intermediate/compact Alfa 147, the Alfa 156 and the Alfa Sportwagon in the intermediate segment, as well as the full-size Alfa 166. In 2003, Fiat Auto launched the Alfa GT sport coupé, and introduced styling improvements to the Alfa 156, 166 and GTV/Spider. It also installed improved motor-engineering in the entire range of Alfa Romeo models. In early 2004, it presented the Alfa Crosswagon, which represents the return of the brand to the four-wheel drive segment.

                                                 
    2003
  2002
  2001
            Percentage           Percentage           Percentage
    Units   of Units   Units   of Units   Units   of Units
    Sold
  Sold
  Sold
  Sold
  Sold
  Sold
    (Units in thousands)
City subcompacts
    238       14.0 %     227       12.2 %     257       12.3 %
Subcompacts
    704       41.6       793       42.6       950       45.4  
Intermediate/compact
    332       19.6       373       20.0       346       16.6  
Intermediate
    76       4.5       107       5.8       165       7.9  
Full-sized
    11       0.6       11       0.6       11       0.5  
Sports cars
    5       0.3       4       0.2       9       0.4  
Multipurpose vehicles
    82       4.8       77       4.2       92       4.4  
Light commercial vehicles
    247       14.6       268       14.4       262       12.5  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
TOTAL
    1,695       100.0 %     1,860       100.0 %     2,092       100.0 %
 
   
 
     
 
     
 
     
 
     
 
     
 
 

     The increase in Fiat Auto’s unit sales of city subcompact vehicles was mainly due to the positive impact of sales of the new Panda, while the decline in sales of subcompact vehicles was primarily attributable to lower sales of the Fiat Punto in Europe. The sector’s sales of intermediate/compact vehicles decreased, reflecting a decline in sales of the Fiat Stilo. The decrease in Fiat Auto’s unit sales of intermediate vehicles was due to further decline in sales of the Fiat Marea, as its sales dropped as a result of the phase-out of this model that started in September 2002, and the Alfa 156. The sector’s sales of multipurpose vehicles increased, as result of the increase in the sales of the new Ulysse and the Lancia Phedra. The sector’s sales of light commercial vehicles showed a general decrease in all model segments.

     The following table sets forth for the years indicated the market shares of the Fiat Group and its major competitors in each of the automobile markets indicated.

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    Italy
  Germany
  France
  United Kingdom
  Total Western Europe
    2003
  2002
  2001
  2003
  2002
  2001
  2003
  2002
  2001
  2003
  2002
  2001
  2003
  2002
  2001
Fiat Group
    28.0       30.2       34.6       2.7       3.2       3.7       3.6       4.1       4.9       3.3       3.7       4.7       7.4       8.2       9.6  
VW Group
    11.4       12.4       12.3       30.0       29.6       29.7       10.1       10.7       11.3       12.4       12.1       11.8       18.2       18.2       18.6  
General Motors/ Opel
    7.3       8.4       8.9       10.5       10.8       12.4       6.3       5.9       6.3       12.6       12.9       13.2       9.8       10.0       10.8  
PSA Group
    11.1       9.9       8.1       5.9       5.4       4.8       32.4       33.5       33.7       11.6       13.2       13.6       14.8       15.1       14.5  
Ford
    8.8       9.6       9.0       7.3       9.8       9.8       5.4       5.5       5.6       14.6       20.2       20.8       11.0       11.4       11.2  
Renault
    7.4       6.9       7.0       6.3       6.4       6.1       27.2       26.9       26.6       7.3       7.6       7.4       10.6       10.7       10.6  
Japanese
    11.4       10.1       9.0       11.5       10.7       9.9       5.6       6.2       5.3       15.8       15.0       14.0       12.7       11.6       10.6  
Others
    14.6       12.5       11.1       25.8       24.1       23.6       9.4       7.2       6.3       22.4       15.3       14.5       15.5       14.8       14.1  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
TOTAL
    100.0       100.0       100.0       100.0       100.0       100.0       100.0       100.0       100.0       100.0       100.0       100.0       100.0       100.0       100.0  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 


    Sources: Derived from a variety of official and non-official sources believed to be reliable, including the following agencies in the indicated countries: Italy — Ministero dei Trasporti; France — Chambre Syndicale; Germany — Krafter Bundesamt; Spain — Direccion General de Trafico (D.G.T.); United Kingdom — Society of Motor Manufacturers and Traders (S.M.M.T.).

     Distribution. Fiat Auto distributes automobiles in its principal markets throughout the world through networks of dealers in each market that are organized on the basis of their coverage of specific geographic areas. At December 31, 2003, its European network consisted of approximately 1,830 dealers, of which 516 were located in Italy. Fiat Auto also maintains significant dealer networks in Brazil and in Poland.

     Fiat Auto entered into new contracts with its dealer network on October 1, 2003, in compliance with the new European “block exemption” regulation. See “— Operating Environment — European Union” below. The new contracts eliminate the exclusivity clauses that were included in the previous dealer agreement, permitting dealers to sell a variety of auto brands in the same showroom, provided they are separated into brand-specific areas. The new contracts also eliminate as of September 2005 the so-called “location clause,” which gave Fiat Auto the right to determine where their dealers were located geographically, and permit auto dealers instead to sell vehicles to consumers throughout the EU. The contracts also no longer oblige dealers to provide after-sales servicing in addition to their auto sales activities.

     Fiat Auto’s distribution strategy is based on enhancing the direct link with customers so as to increase customer satisfaction and brand loyalty, lowering distribution costs and adapting the European dealer network to take advantage of the increasing process of integration within the EU. With the goal of lowering its distribution costs so as to bring them more into line with those of U.S. automakers, Fiat Auto continues to monitor its dealer network, using a selection process aimed at identifying productive dealers that are capable of producing higher revenues from services, parts and used cars and supporting those dealers through a variety of marketing initiatives and programs.

     Production. Fiat Auto currently owns and operates nine plants in the automobiles sector, including five in Italy, and one in each of Poland, Brazil, Argentina and India.

     Approximately 88% of the sector’s capital expenditures, which totaled 1,100 million in 2003, as compared with 1,115 million in 2002, were devoted to strategic development. More particularly, approximately 63% of capital investment was spent to complete the retooling of production lines for the new models launched during 2003, and for production equipment relating to future models. Approximately 26% was spent on capital investment in cars purchased for the sector’s long-term leasing programs, while 2% of total capital expenditures was spent on manufacturing

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plants. Research and development outlays for the sector amounted to 939 million in 2003, up from 861 million in 2002.

     Financial Services. In 2003, Fiat Auto’s financing and mobility services were reorganized as a result of the transfers of 51% of Fidis Retail Italia to Synesis Finanziaria S.p.A. and of 100% of Banco Fiat SA, its Brazilian retail financing operations, to the Brazilian banking group Itaù. The 20,450 million of financing offered to the distribution network and the sector’s suppliers was approximately 13.7% less than in 2002, reflecting portfolio analysis focused on increasing loan quality and profitability, and as a result of lower production volumes.

     In 2003, the main focus of Fiat Auto’s rental operations was increasing the profitability of new contracts. These rental operations were conducted through Leasys and Savarent. Leasys is a company jointly controlled by Fiat Auto (through Fidis Renting Italia S.p.A.) and Enel S.p.A., and is engaged mainly in long-term rentals for large, multibrand fleets. Savarent manages small and medium-size fleets through the Fiat Auto sales network. As of December 31, 2003, the sector’s rental fleet numbered 134,000 vehicles, or approximately 9% more than in 2002.

Agricultural and Construction Equipment

     Our agricultural and construction equipment sector is led by CNH Global N.V. As of March 31, 2004, our wholly owned subsidiary Fiat Netherlands Holding N.V. held voting power equal to approximately 84.2% of CNH’s outstanding common stock. CNH is a leading manufacturer of agricultural and construction equipment and has one of the industry’s largest equipment finance companies. CNH capitalizes on its globally recognized brand names, Case, Case IH, New Holland, New Holland Construction, Steyr, Fiat Kobelco, FiatAllis (a joint venture between Fiat’s construction equipment business and Allis Chalmers), Kobelco and Orenstein & Koppel Aktiengesellschaft (“O&K”), which represent its dual brand families, Case and New Holland. CNH distributes its brands in approximately 160 countries through an extensive network of over 12,000 dealers and distributors. CNH also offers retail financing for the purchase or lease of agricultural and construction equipment.

     In April 2003, CNH issued a total of 8 million new Series A preference shares to us and another of our affiliates, in exchange for the retirement of $2 billion in indebtedness owed to other Fiat Group companies. Each of the Series A preference shares has a liquidation preference of $250 per share and each share is entitled to one vote on all matters submitted to CNH’s stockholders. The Series A preference shares will automatically convert into 100 million CNH common shares at a conversion price of $20 per share if the market price of CNH’s common shares, defined as the average of the closing price per share for 30 consecutive trading days, is greater than $24 at anytime through and including December 31, 2006, or $21 at any time on or after January 1, 2007, subject to anti-dilution adjustments. Issuance of the preference shares would increase our ownership interest in CNH to approximately 91% on an as-converted basis.

     On August 1, 2003 and September 16, 2003, Case New Holland, Inc., a direct wholly-owned subsidiary of CNH, issued a total of $1.05 billion of 9 1/4% Senior Notes due 2011 which are fully and unconditionally guaranteed by CNH and certain of its direct and indirect subsidiaries. Case New Holland, indirectly through its subsidiaries, owns substantially all of the U.S. assets of CNH and certain of its non-U.S. assets. In May 2004, CNH’s wholly owned subsidiary Case New Holland Inc. completed an offering that was not registered under the Securities Act of $500 million of 6% senior notes due June 1, 2009.

     CNH is the only global, full-line company in both the agricultural and construction equipment industries, with activities in every significant geographic and product category in each business. In 2003, approximately 42% of CNH’s net sales were generated in North America, approximately 37% in Western Europe, approximately 7% in Latin America and approximately 14% in the Rest of the World. CNH’s broad manufacturing base includes facilities in Europe, Latin America, North America, Australia, China, India and Uzbekistan. Its global scope and scale integrates engineering, manufacturing, marketing and distribution of equipment on five continents.

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     At December 31, 2003, the sector employed 26,825 workers, including 4,247 in Italy.

     Agricultural Equipment. CNH believes it is one of the leading global manufacturers of agricultural tractors and combines, based on units sold, and believes it has leading positions in hay and forage equipment and specialty harvesting equipment. Its primary product lines of agricultural equipment, sold under the Case IH and New Holland brands, include tractors, combine harvesters, hay and forage equipment, seeding and planting equipment, tillage equipment, sprayers, and grape, cotton and sugar cane harvesters. In construction equipment, CNH believes it has leading positions in backhoe loaders and in skid steer loaders in North American and a leading position in crawler excavators in Western Europe. In addition, CNH sells a large number of construction equipment products, such as telehandlers, skid steer loaders and backhoe loaders, to agricultural equipment customers.

     In order to capitalize on customer loyalty to dealers and CNH’s historical brand identities, CNH continues to use the Case IH, Steyr (tractors only) and New Holland brand names, and to manufacture equipment using each brand’s historical colors. Management believes that these brands enjoy high levels of brand identification and loyalty among both customers and dealers. Although new generation tractors across CNH’s brands have a higher percentage of common mechanical components, each brand and product remains significantly differentiated by color, interior and exterior styling, internal operator features and model designation. In addition, flagship products, such as row crop tractors and large combine harvesters, have a significantly greater degree of model differentiation. CNH has retained distinctive features that are specific to a particular brand as part of each brand’s identity, including the Supersteer® axle for New Holland, the Case IH tracked four-wheel drive tractor, Quadtrac®, and the front axle mounted hitch for Steyr.

     Construction Equipment. CNH manufactures and distributes a full line of construction equipment, including crawler excavators, wheeled excavators, wheel loaders, backhoe loaders, skid steer loaders and mini-excavators. The present brand and product portfolio is the heritage of many companies that have been merged into the global Case and New Holland brand families. Case Construction provides a full line of products on a global scale. The New Holland family has a regionalized focus capitalizing on historical brand names and customer relationships. For example, the Fiat Kobelco joint venture focuses on the Japanese-technology segment of the European market, O&K focuses on the segment of the Western European market that prefers German-developed technology and FiatAllis has a strong full-line offering, which serves the Latin American market.

     CNH’s new generation of construction equipment products, currently being developed and introduced, share common components to achieve economies of scale in research and development and manufacturing. CNH will differentiate these products based on the relative product value and volume in areas such as precision of handling, productivity, operator controllability, product serviceability, color and styling to preserve the unique identity of each brand.

     Financial Services. CNH Capital is the captive financing arm of CNH, providing financial services to dealers and customers in North America, Australia, Brazil and (through its joint venture with BNP Paribas Lease Group) in Western Europe. CNH Capital’s operations are focused on the core business of supporting agricultural and construction equipment sales to its base of equipment dealers and retail customers throughout the world. CNH has exited the commercial lending and retail financing activities it had conducted outside of its own dealer networks and reduced the scope of its operating lease business, and is concentrating on maintaining and enhancing the quality of its core portfolio through a focus on fundamental underwriting, processing and monitoring capabilities, augmented by intensive follow-up and remarketing efforts in troubled situations. At December 31, 2003, CNH Capital had a serviced portfolio of approximately $12 billion, including its joint venture arrangement in Western Europe. Of this total, the U.S. accounted for approximately 55% of the serviced portfolio, Western Europe 22%, Canada 11%, Brazil 7% and Australia 5%.

     CNH plans to expand its support to dealers and customers in as many areas of the world as is feasible using minimal amounts of invested capital. Partnerships similar to the arrangement entered

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into in 2002 with BNP Paribas Leasing Group, which broadened product offerings throughout Europe and significantly reduced current and future capital requirements, will continue to be evaluated in other regions.

     Restructuring and Divestitures. CNH is the result of our November 1999 acquisition of Case Corporation and combines Case’s operations with those of New Holland N.V., the former lead company of our agricultural and construction equipment sector. Following the acquisition, New Holland changed its name to CNH Global N.V. CNH formulated a plan to integrate the operations of the Case and New Holland businesses at the time of the merger. The goal was to divest or close more than 30% of manufacturing locations, including those required to be divested by the regulatory authorities, and integrate manufacturing systems, reduce capacity and increase capacity utilization. In addition, CNH’s plans contemplated closing approximately 14 of its 45 parts depots while migrating to one global parts system and common parts packaging for parts that could be utilized by multiple brands or distribution networks. As of December 31, 2003, CNH has closed 17 plants and 11 parts depots. Through the consolidation of all functional areas, CNH’s employment levels are down from approximately 36,000 at the time of the merger to approximately 26,800 at December 31, 2003, a reduction of approximately 26%.

     A key strategic objective of the merger was the realization of profit improvement initiatives. CNH expects these profit improvements to arise from margin improvements from new products; the global sourcing of materials from fewer suppliers; reducing administrative costs by combining functions, reducing employment levels, outsourcing non-core functions and improving processes; rationalizing manufacturing plants and parts depots; converting to more focused manufacturing facilities; research and development efficiencies; and maintaining and improving quality.

     For example, in 2003, CNH completed a plan to reduce selling, general and administrative costs to less than 8.5% of net sales of equipment operations (as reported by CNH under U.S. GAAP). This compares to 10.8% in the first year of operations after the merger, and was achieved by eliminating duplicative functions and streamlining processes.

     As a global full-line competitor in both the agricultural and construction equipment markets, CNH plans to grow its business through market expansion and increasing its product offerings. CNH’s management expects that the commitment to cost controls and more efficient use of resources will create value through improved profitability and an enhanced financial position.

     CNH’s current strategic objectives are to:

    generate cash through improved earnings, reduced working capital and improved asset utilization, and use that cash to reduce debt and strengthen the balance sheet;

    deliver profitability throughout CNH’s business cycle and achieve higher margins than either Case or New Holland earned prior to the merger by realizing profit improvements, continuing sales growth and increasing customer satisfaction; and

    continue to position CNH to take advantage of future opportunities for product and market expansion, both in the short to medium-term in areas such as Latin America and Eastern Europe and through the global alliance with Kobelco Japan and, in the longer term, in areas such as China and India.

     New Products. CNH has developed and is continuing to develop global product lines to support its dual brand families. By using common design elements and sharing capital-intensive components, CNH is reducing the total number of tractor, combine and construction equipment platforms while maintaining strong brand identities based on precision of handling, productivity, operation controllability, product serviceability, color and styling. Agricultural equipment platforms are being reduced from 66 to 35, and construction equipment platforms are being reduced from 77 to 39, without reducing the number of final product lines. For the year ended December 31, 2003, approximately 64% of revenues from the sale of agricultural equipment products and 66% of revenues from the sale of construction equipment products were derived from new products developed with

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common components since the merger. By 2005, CNH anticipates that substantially all of its product revenue, excluding parts, will be from products introduced since the merger. With the launch of the first all new products based on common platform strategy, CNH anticipates realizing further profit improvements in the form of higher margins. In addition, common product platforms have enabled CNH to offer, through all of its dealer networks, certain products previously available only through certain dealers.

     Markets and Competition.* Worldwide market demand for major agricultural equipment product lines in 2003 was approximately 7% higher than in 2002. Worldwide demand for tractors, on a unit basis, increased by about 7%, as increases of approximately 20% in North America and 14% in Rest of World markets were partially offset by declines of approximately 14% in Latin America and 5% in Western Europe. Worldwide demand for combines was approximately equal to 2002. Demand in North America declined by about 3%, while demand in Western Europe declined by about 7% and in Rest of World markets demand declined by about 20%. Combine demand in Latin America, however, was up approximately 25%. On a unit basis, CNH’s agricultural equipment sales penetration declined slightly, as overall tractor market share declined by about one-half of a percentage point from 2002, despite an increase in combine market share of approximately one and one-half percentage points. At the same time, CNH took measures to reduce company and dealer inventories, so that by year-end, total company and dealer inventories had declined by slightly more than one-half of one month’s supply.

     Overall worldwide market demand for major construction equipment product lines in which CNH competes increased by about 11% in 2003 compared with 2002. Market demand increased in both North America and in Rest of World markets in all of CNH’s major product categories. These increases were partially offset by declines in demand in both Western European and Latin American markets in all of CNH’s major product lines. World market demand for backhoe loaders, on a units basis, increased by about 6%, while demand for skid steer loaders increased by about 1%. Worldwide demand for CNH’s heavy construction equipment product lines increased by approximately 19%. On a unit basis, CNH’s construction equipment market penetration on a worldwide basis declined by approximately three percentage points, with declines in all of its major product categories in nearly every market.

     In 2003, CNH’s net sales of agricultural equipment as reported by CNH under U.S. GAAP in U.S. dollar terms were approximately 11% higher than in 2002. Approximately 8 percentage points of this increase resulted from the effects of currency translation, as the euro and the Australian dollar were approximately 20% stronger against the U.S. dollar in 2003 than in 2002; the Canadian dollar was approximately 12% stronger, the British pound about 9% stronger while the yen was about 7% stronger. Additional revenue from new products launched during the year and higher pricing, especially in Brazil, contributed approximately $250 million, which contribution was partially offset by declining volumes and an overall less favorable product mix.

     CNH’s net sales of construction equipment in 2003 as reported by CNH under U.S. GAAP in U.S. dollar terms increased by approximately 1%, reflecting sales generated by the Fiat Kobelco joint venture in Europe formed in the third quarter of 2002, and the positive effect of the translation of revenues denominated in the euro and other currencies into dollars, offset in part by lower wholesale unit volumes.


*   Market and share information for CNH presented as “worldwide” includes all countries in which it operates except India and China. Estimates of market share information for CNH are generally based on registrations of equipment in most of Europe and on retail data collected by a central information bureau from equipment manufacturers in North America, as well as on shipment data collected by an independent service bureau. Not all agricultural and construction equipment is registered, and registration data may thus underestimate actual retail demand. In many countries, there may also be a period of time between the delivery, sale and registration of a vehicle; as a result, delivery or registration data for a particular period may not correspond directly to retail sales in such a period.

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     The agricultural equipment industry remains highly competitive, particularly in North America, Europe, Australia and Latin America. CNH competes primarily with large global full-line suppliers, including Deere & Company and AGCO/VALTRA; manufacturers focused on particular industry segments, including Kubota Corporation and various implement manufacturers; regional manufacturers in mature markets, including Claas KgaA/Renault, ARGO Group and SAME Duetz-Fahr Group, that are expanding worldwide to build a global presence; and local, low cost manufacturers in individual markets, particularly in emerging markets such as Eastern Europe, India and China.

     The construction equipment industry is also highly competitive worldwide. CNH competes primarily with global full-line suppliers with a presence in every market and a broad range of products that cover most customer needs, including Caterpillar, Komatsu Construction Equipment, TEREX and Volvo Construction Equipment Corporation; regional full-line manufacturers, including Deere & Company, J.C. Bamford Excavators Ltd. and Liebherr-Holding GmbH and product specialists operating on either a global or a regional basis, including Ingersoll-Rand Company (Bobcat), Hitachi Ltd., Sumitomo Construction, Manitou B.F., Merlo UK Ltd., Gehl Company, Mustang Manufacturing Company, Inc., Yanmar Agricultural Equipment Co. Ltd. and Kubota Corporation.

     CNH’s financial services operations compete primarily with banks, finance companies and other financial institutions. Typically, this competition is based on customer service and finance rates charged. The long-term profitability of CNH’s financial services operations is largely dependent on the cyclical nature of the agricultural and construction equipment industries and on the prevailing interest rates at which they can borrow.

     Distribution. A strong dealer network with wide geographic coverage is a critical element in the success of any manufacturer of agricultural and construction equipment. CNH possesses one of the industry’s broadest dealer networks, consisting of more than 12,000 dealers and distributors in approximately 160 countries worldwide.

     CNH enhances growth opportunities by entering new market segments and filling out the product lines offered within each brand family. A key element of this strategy is to strengthen the CNH dealer network, moving towards dealers that are more focused on particular brands. CNH believes that more focused dealers tend to be more dedicated to enhancing their brand’s market position and building their own customer service capabilities in order to increase customer loyalty and earn a larger share of their customers’ equipment and service expenditures. CNH is working to further enhance the network through the expansion of its lines of products and customer services (including enhanced financial services) and an increased focus on dealer support.

     Dealers typically sell either agricultural equipment or construction equipment, although some dealers sell both types of equipment. Construction equipment dealers tend to be fewer in number, larger in size, better capitalized and located in more urban areas. Agricultural dealers tend to be greater in number, but smaller in size and located in rural areas.

     In the United States, Canada, Mexico and most of Western Europe, as well as Brazil and Australia, the distribution of CNH’s products is generally accomplished directly through the dealer network. In other parts of the world, its products are sold initially to distributors who then resell them to dealers in an effort to take advantage of such distributors’ expertise and to minimize marketing costs. Generally, each of CNH’s distributors has responsibility for an entire country.

     In parts distribution, CNH is reducing complexity and costs by reducing the number of global parts depots from 45 to 24 and instituting a new global common parts system. Also, under a new global parts packaging system, some high-volume common parts have been distinctly packaged for each brand or brand family, while most other parts are beginning to utilize common CNH packaging. This is further reducing the cost of servicing new products by capitalizing on the common spare parts requirements of the common components in the new products.

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     Production. CNH manufactures equipment and components in 45 manufacturing facilities, including those operated through joint ventures and alliances. Its broad manufacturing base includes facilities in North America, Europe, Latin America, China, Australia, India and Uzbekistan. Similar manufacturing techniques are employed in the production of agricultural and construction equipment, resulting in certain economies and efficiencies.

     By consolidating and rationalizing manufacturing activities, CNH is reducing excess capacity, redistributing production of various products among its remaining plants to focus each facility on either the production of components or the assembly of one product category across brand families. This approach is aimed at achieving economies of scale and improved quality. Manufacturing capacity utilization is projected to increase from approximately 62% utilization at the end of 2003 to approximately 73% by the end of 2006. Throughout the manufacturing capacity rationalization process, CNH’s primary focus has been on maintaining and improving product quality by embedding key quality improvement activities into the process, such as global product development and current product management processes. In addition, CNH continues to utilize regional manufacturing locations that are strategically located close to its primary markets. This geographic proximity impacts all areas of the supply chain and enhances responsiveness to changing market demands.

     CNH has also sought to achieve cost savings on materials in a number of ways. CNH’s global sourcing strategy calls for a reduction in the number of global suppliers and the use of common components on product platforms to continue to reduce purchasing costs. CNH has initiated a plan to reduce the number of its suppliers from 6,000 at the time of the merger to 3,000 by the end of 2004. As of December 31, 2003, CNH has reduced the number of suppliers to approximately 3,500. Manufacturing reengineering initiatives have further reduced materials costs through the more efficient design of some components.

Commercial Vehicles

     Our commercial vehicles operations are conducted through Iveco and its subsidiaries and include the manufacture and sale, primarily to customers in Western Europe, of (i) commercial vehicles (Iveco and Seddon Atkinson brands); (ii) buses (Iveco and Irisbus brands); (iii) firefighting vehicles and other types of vehicles for civil and military use (Camiva, Iveco and Magirus brands); and (iv) diesel engines (Iveco Motors brand).

     Iveco S.p.A. became the lead company of the sector in 2003, following former lead company Iveco N.V.’s contribution to it of its equity interests in the sector’s operating companies. Iveco N.V. subsequently merged with certain of our other holding companies (with the resulting entity taking the name of Fiat Netherlands Holding N.V.) as part of our efforts to streamline our corporate structure and optimize financial efficiency and cost reduction. See Item 7. “Major Stockholders and Related Party Transactions — Related Party Transactions”. At December 31, 2003, Iveco employed 31,511 workers, including 14,066 in Italy.

     Iveco has in recent years renovated and rationalized its manufacturing facilities, giving each of its plants a specific mission in the production of its product line. During 2003, heavy vehicles were manufactured in Germany, Spain and Argentina; medium vehicles in Italy and Argentina; light vehicles in Italy, Spain and Brazil; and specialized vehicles in Italy, Germany and France. Buses are manufactured by the sector’s Irisbus division in France, Italy, Spain, Hungary and the Czech Republic.

     The sector’s manufacturing activity also includes the production of diesel engines (in Italy, France and in Brazil), other mechanical components, such as gearboxes and axles (in Italy, Spain and Ukraine), and the production of body components such as cabs, frames and pressed parts (in Italy). In China, the sector’s Naveco joint venture (50% Iveco and 50% Yuejin Group) is active in both the light vehicles and light bus segments, while the Haveco joint venture (owned in equal shares by Iveco, the Yuejin Group and the Hanghzou Group) is active in gearbox production. Iveco also has a 50-50 joint venture with the Changzhou Bus Company (“CBC”) for the production and sale of buses. CBC

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is one of the largest producers of mass transit vehicles in China and a leader in the domestic urban transportation market.

     In 2003, Iveco completed a restructuring program launched in the second half of 2001 with the closure of its plant in Matarò (Spain) and an Ikarus plant in Hungary. Iveco also in 2003 launched a program to rationalize its corporate structure, reducing the number of corporate entities by 29, from 145 to 116, through a process of sales, mergers, liquidations and similar transactions.

     Markets and Competition. Although Iveco conducts operations throughout the world, Western Europe is its principal market, accounting for approximately 82% of its 2003 unit sales.

     In order to bring its market share analysis in line with the sector’s production and sales activities, which include sales of vehicles with a curb weight between 2.8 tons to 3.5 tons, Iveco in 2003 started measuring its market performance in the light commercial vehicle segment to include commercial vehicles having a gross vehicle weight of between 2.8 tons and 6.0 tons, rather than between 3.5 tons and 6.0 tons, as in previous years. In 2003, demand in Western Europe for commercial vehicles with a curb weight of 2.8 tons or more, as measured by new registrations, declined slightly to 952,100, or 0.6% fewer than in 2002. The decline reflected a 15.6% decrease in Italy caused partly by the expiration at the end of 2002 of government incentives to encourage capital investment and declines of 6.0% in France that were largely offset by gains in other markets, including Germany (+1.8%), the United Kingdom (+7.8%) and Spain (+8.9%).

     Iveco sells its commercial vehicles in three market segments: light vehicles (GVW of 2.8 to 6.0 tons), medium vehicles (6.1 to 15.9 tons) and heavy-range vehicles (16 tons and higher). The light commercial vehicles segment recorded 661,600 new registrations in Western Europe in 2003, compared to approximately 662,000 in 2002. The decrease of 0.1% was the net result of sizable declines in demand in Italy (-17.5%) and France (-3.6%), which were partially offset by growth in all other main markets, especially Spain (+12.8%) and the United Kingdom (+8.5%). Demand for medium vehicles continued to decline, falling to 74,300 units (-9.2% compared with 2002). Shipments were down in all European markets, with the strongest decreases in France (-20.1%) and Italy (-16.7%). However, demand in the heavy vehicle market increased 1.2% compared to 2002 to 216,200 units, with gains occurring in the United Kingdom (+11.4%), Germany (+6.1%) and Spain (+4.4%), which more than offset significantly lower demand in France (-9.5%) and Italy (-8.0%).

     Iveco’s principal competitors are other European manufacturers of the full range of commercial vehicles, such as Mercedes Benz and Renault Vehicules Industriels, and manufacturers of specialized vehicles for certain segments, such as M.A.N. and Volvo (medium and heavy-range segments), Scania (heavy-range segment) and Ford Europe, Volkswagen and Fiat Auto (light vehicles segment).

     The following table sets forth for the years indicated unit sales of Iveco vehicles in the sector’s principal markets, the percentage of the sector’s unit sales represented by each market and Iveco’s market share.

                                                                         
    2003
  2002
  2001
        Percentage               Percentage               Percentage    
    Units   of units   Market   Units   of units   Market   Units   of units   Market
    sold
  sold
  share
  sold
  sold
  share
  sold
  sold
  share
    (Units in thousands)
Italy
    38.3       26.2 %     30.5 %     44.3       27.4 %     31 %     39.3       24.5 %     32 %
Western Europe (excluding Italy)
    81.0       55.3 %     8.8 %     84.5       52.2 %     9.7 %     89.1       55.5 %     9.6 %
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total Western Europe
    119.3       81.5 %     11.5 %     128.8       79.6 %     12.8 %     128.4       80.0 %     12.4 %
Rest of the world
    27.1       18.5 %             33.1       20.4 %             32.0       20.0 %        
 
   
 
     
 
             
 
     
 
             
 
     
 
         
Total
    146.4       100.0 %             161.9       100.0 %             160.4       100.0 %        
 
   
 
     
 
             
 
     
 
             
 
     
 
         

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Sources:   Derived from a variety of official and non-official sources believed to be reliable, including the following agencies in the indicated countries: Italy — Ministero dei Trasporti-Motorizzazione Civile Trasporti in Concessione (M.C.T.C.); France — Association Auxiliaire de l’Automobile (A.A.A.); Germany — Kraftfahrt Bundesamt; Spain — Direccion General de Trafico (D.G.T.); United Kingdom — Society of Motor Manufacturers and Traders (S.M.M.T.); Brazil — Associação Nacional dos Fabricantes de Veiculos Automores (A.N.FA.VE.A).

     In 2003, Iveco sold 146,437 vehicles worldwide (-9.6%, or -6.8% net of the impact of the change in 2003 in the method used to account for the results of Naveco from the proportional to the equity method). Iveco’s sales including those by associated licensees, which amounted to approximately 49,600 units (37,500 in 2002), totaled approximately 196,000 units (199,380 units in 2002). In Western Europe, Iveco sold approximately 119,300 vehicles, or 7.4% fewer than in 2002. Unit sales were down in Italy (-13.6%), Germany (-6.7%) and the United Kingdom (-14.9%), where Iveco was unable to benefit from overall gains in market demand as a result of the insufficient competitiveness of its after sales services, but increased in France (+1.1%) and Spain (+0.8%). Iveco increased its sales in France despite the effects of an overall contraction in the market as a result of more aggressive marketing of single rear-wheel vans.

     Iveco’s share of the Western European market for vehicles with a curb weight of more than 2.8 tons declined to 11.5% (1.3 percentage points less than in 2002), due mainly to weak demand in Italy, where, however, Iveco’s market share declined only slightly to 30.5%. The sector’s market share also decreased in each of the heavy-vehicle segment (from 12.3% to 11.3%), the medium-vehicle segment (from 30.1% to 27.4%) and the light-vehicle segment (from 10.8% to 9.8%). Despite these declines, Iveco was able to retain the leadership of the European medium-vehicle market segment, partly as a result of the launch of the New Eurocargo, which garnered more than 61% of the Italian market.

     Iveco’s sales to Eastern European countries rose to 9,700 units, a 1.6% increase compared to 2002. In non-European markets, Iveco sold approximately 17,500 vehicles, a 26% decline from 23,600 vehicles in 2002, primarily as a result of the deconsolidation in 2003 of the results of Naveco. In China, the sector’s Naveco 50-50 joint venture with the Yuejin Group produced and sold approximately 14,700 light vehicles, up approximately 1% from 2002. In India, Iveco’s Ashok Leyland affiliate, in which the sector holds a 15.3% interest, built and sold a total of approximately 45,150 vehicles (33,450 sold in 2002), mainly as a result of growth in demand in the domestic market. In Turkey, Otoyol, a joint venture with the Koç Group in which Iveco holds a 27% interest, sold approximately 4,400 units, or approximately 6.9% more than in 2002.

     In Argentina, Iveco’s sales and manufacturing activities increased, particularly in the heavy vehicle segment, as the Argentine market started recovering from the deep slump in 2001 and 2002. Iveco sold a total of approximately 1,100 vehicles in Argentina in 2003, compared to 735 in 2002.

     Irisbus sold a total of 8,307 units (8,431 in 2002), for a market share in Western Europe of more than 25%, down from 27.3% in 2002. The decline of 1.5% in sales was primarily attributable to reduced market demand from the public sector in France and Italy, Iribus’s primary markets. The decline in market share was largely attributable to Irisbus’s overall decline in unit sales, as well as to the fact that market demand grew primarily in countries such as the United Kingdom where Irisbus has a relatively small presence.

     Iveco manufactured a total of 379,000 diesel engines in 2003, an increase of approximately 4.9% from 2002, reflecting increased sales of a new line of engines to CNH for construction machinery and agricultural applications, and to sales of light engines to Sevel S.p.A., a joint venture between Fiat Auto and PSA Peugeot. Sales to non-captive customers and other Fiat Group sectors accounted for approximately 61% of total engine output, up three percentage points from the previous year.

     Activities in the fields of innovation and product development continued in 2003 with the commercial launches of new products in the heavy-vehicle segment and medium-vehicle segment. In the heavy-vehicle segment, the sector launched the Stralis Active Time and Stralis Active Day

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vehicles, extending the Stralis line of vehicles with cabs designed to be comfortable on medium- and short-haul journeys, respectively. The Stralis line was launched in 2002 with the Stralis Active Space for long-haul journeys, which was named “Truck of the Year” by an international panel in January 2003. In the medium-vehicle segment the sector in May 2003 launched its new Eurocargo, which represents a styling and technical evolution over the previous model with its new, more fuel efficient, lower-emissions Tector engine. These new products accounted for the lion’s share of the sector’s revenues generated in the second half of 2003.

     In 2003, Iveco’s product development work focused on the design of a new Stralis Active Construction vehicle, which will complete Iveco’s Stralis line of heavy vehicles by extending the concept to quarry and construction-site vehicles. These are slated for market introduction in September 2004, as well as on product-line optimization projects. Iveco also began work to identify the technical solutions that it will need to adopt to comply with the Euro 4 emissions standards, which take effect in 2006. Iveco also continued to develop new families of engines configured for various applications, including automotive, agriculture, power generation, marine and railroads. Iveco has nearly completed its investment program for the new “NEF” line of engines for application on medium vehicles and is continuing to fund the expansion of production capacity for 2.3-liter F1 engines for application on light vehicles.

     Distribution. Iveco has adopted a global strategy of distributing its products through networks of independent, professional dealers, as well as through Iveco-owned dealers and branches, who seek to provide high-quality service with a widespread geographic presence. At December 31, 2003, Iveco had 591 dealers in all parts of the world, including 240 in Western Europe, 70 in Eastern Europe, 85 in Africa and the Middle East, 65 in Central and South America and 131 in the Asia Pacific region, employing in the aggregate more than 50,000 people at 1,200 points of sale and 3,000 service centers.

     During 2003, Iveco’s management continued to review the sector’s sales operations, resulting in the further consolidation of the dealer network as part of Iveco’s efforts to improve the quality of customer service, increase profitability and reduce the overall cost of distribution. For example, in Western Europe, Iveco reduced the number of dealers to 240 in 2003 from 250 in 2002.

     Iveco in 2003 also entered into new contracts with its dealers in the European Union to comply with the new EU “block exemption” regulation that took effect on October 1, 2003. See “— Operating Environment — European Union” below. The new contracts eliminate the exclusivity clauses that were included in the previous dealer contract, permitting dealers to sell a variety of commercial vehicle brands in the same showroom, provided they are separated into brand-specific areas. The new contracts also eliminate restrictions on the geographic area in which dealers may sell, specifying where they will maintain their premises but permitting sales to consumers throughout the EU regardless of their location. Iveco also has now separate contracts for vehicle sales and for service and spare parts.

     Furthermore, in 2003 Iveco took steps to consolidate its dealer networks in Australia and South Africa, and plans to reorganize its dealer networks in North Africa to align operational standards to those in place in its Western European dealer network. Moreover, in light of renewed economic growth in South America, Iveco started a process aimed at strengthening the distribution network in order to maximize market potential, in particular in Brazil and Argentina. Network development initiatives in Eastern Europe in 2003 were focused on the countries that were scheduled to join the European Union in May 2004.

     Production. As at December 31, 2003, the commercial vehicles sector had 41 manufacturing facilities, including 13 in Italy, eight in France, five in Spain, four in Germany, two in each of Ukraine and Hungary, and one in each of Austria, the Czech Republic, Brazil, Argentina, Australia, Ethiopia and Venezuela. Together, these factories produced a total of approximately 143,500 vehicles and 379,000 diesel engines in 2003 (147,700 vehicles and 361,200 diesel engines in 2002).

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     The international expansion of Iveco in recent years has focused on joint ventures (such as those active in China, Turkey and India) and licensing agreements in markets where management believes that good growth opportunities exist. Commercial vehicles are currently produced by companies outside the Group in Asia, the Middle East and Africa, in each case pursuant to licensing arrangements with Iveco.

     In 2003, Iveco also continued to expand its portfolio of maintenance and repair contracts, with a total of contracts in force of 40,000 at December 31, 2003, compared to 43,500 at the end of 2002.

     Capital expenditures for the year amounted to 210 million, of which 182 million related to industrial investments, as compared with a total of 587 million in 2002, with the decline largely attributable to the completion in 2002 of a major program of investment in engine production lines and the restyling of the medium-heavy product line. Investments in vehicles for fleet leasing activities accounted for the remaining 28 million of the 2003 total (having totaled 331 million in 2002), with the decline largely attributable to the divestiture of Fraikin.

     Financial Services. Iveco offers financial and leasing services related to the sale of its vehicles through Iveco Finance Group, which in 2003 included Transolver Finance and Transolver Services, following the sector’s sale of the Fraikin Group in the first quarter of 2003. In 2003, the Iveco Finance Group signed 22,533 contracts to finance the sales of new vehicles, down from 34,000 in 2002, with the decline largely attributable to Iveco’s overall decline in sales, as well as to strong competitive pressure from other financial services providers. The Iveco Finance Group also signed financing contracts for approximately 7,587 used commercial vehicles, buses, trailers and semitrailers, up approximately 26% from 6,000 in 2002, reflecting strong demand for used vehicles in Italy, Spain and Switzerland. Overall, the sector provided financing for approximately 22% of the vehicles sold by Iveco in 2003, down from 29.4% in 2002. The sector’s total portfolio of financing contracts outstanding at December 31, 2003, amounted to approximately 103,345 (105,700 units at December 31, 2002), with a total net value of approximately 2,312 million (2,600 million at the end of 2002).

     In its leasing operations, managed primarily by the Transolver Services companies following the divestiture of Fraikin, the fleet of rental vehicles numbered approximately 4,600 at the end of 2003 compared to approximately 37,000 at the end of 2002, with 1,530 new contracts signed during the year. The significant decrease in business volume and the contraction of the vehicle pool reflect the sale of the Fraikin Group at the beginning of the year.

Ferrari-Maserati

     We also control Ferrari and Maserati, the luxury sports car manufacturers. Ferrari has primary operational responsibility for our Maserati brand, having purchased a 50% interest in Maserati during the second half of 1997 and acquired the remaining 50% interest in 1999 from Fiat Auto. The highly specialized nature of the Ferrari-Maserati sector’s products, design processes, manufacturing techniques and distribution channels necessitates management that is itself specialized and different from that of our core automotive business, which is the manufacture and sale of automobiles to mass market consumers. For these reasons, the management of Fiat S.p.A., rather than that of Fiat Auto, directly oversees Ferrari-Maserati and, accordingly, Ferrari-Maserati’s results are excluded from those of the automobiles sector, and, since 2002 have been reported as a separate sector.

     Ferrari- Maserati contributed 2.5% of our total 2003 net sales and revenues, prior to eliminations and consolidating adjustments.

     In 2003, Ferrari remained at the top of the world’s most popular automobile racing series, retaining the Formula One World Constructor’s Championship for the fifth consecutive year and winning the Driver’s Championship for the fourth consecutive year. Ferrari-Maserati’s consolidated revenues totaled 1,261 million in 2003, an increase of 4.4% from the 1,208 million reported in

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2002, reflecting higher unit sales of Ferrari models that were offset only in part by the negative effect of the appreciation of the euro and by lower sales of Maserati Spider models in the United States market, where the brand was reintroduced in 2002. The Ferrari brand’s main markets are Western Europe, the United States and Japan (included in “Rest of the World”).

     The following table shows for the years indicated the sector’s vehicle shipments to dealers in its principal markets:

                                                                         
    2003
  2002
  2001
    Ferrari
  Maserati
  Total
  Ferrari
  Maserati
  Total
  Ferrari
  Maserati
  Total
Italy
    520       361       881       518       403       921       490       272       762  
W.Europe excl. Italy
    1,881       1249       3,130       1,924       1,664       3,588       1,940       1,241       3,181  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total W.Europe
    2,401       1,610       4,011       2,442       2,067       4,509       2,430       1,513       3,943  
United States
    1,400       876       2,276       1,206       1,172       2,378       1,206             1,206  
Rest of the World
    639       414       1,053       616       328       944       635       274       909  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total
    4,440       2,900       7,340       4,264       3,567       7,831       4,271       1,787       6,058  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 

     During the year, Ferrari introduced the 360 Challenge Stradale model, a new sports version of the F360 coupé, for which the order book, which amounted to 771 vehicles, was full by the end of 2003. In early 2004, the Ferrari 612 Scaglietti, which will replace the 456 in the Grand Tourer segment, made its debut at the Detroit Motor Show.

     Maserati presented its Quattroporte model at the Frankfurt International Motor Show in September 2003, as well as in other major European cities, the United States and Japan. This model has been available commercially since March 2004. The year 2003 also saw Maserati’s return to the racetrack with the Vodafone-Maserati single marque trophy. Maserati will round out its return to competition by introducing the MC12 Competizione, a racing version of the special MC12 Stradale series car developed during the course of 2003. The racing version will begin competing at the FIA-GT Grand Tourer championship in September 2004, while the MC12 Stradale will be available commercially starting in October 2004.

     Vehicle shipments for the Ferrari brand totaled 4,440 units in 2003, up 4.1% from 4,264 in 2002, primarily as a result of an increase of approximately 16% in shipments to the United States, which remained the brand’s largest single market. As a result of this increase in shipments to satisfy built up demand in the United States, the number of units sold to the network in Western Europe declined 1.7% to 2,401 units, compared to 2,442 in 2002. In Western Europe, Germany remained the largest national market, and second in absolute terms for worldwide sales, with 661 units, down 3% from 2002. Sales to the Italian dealer network totaled 520 units, in line with 518 in 2002.

     Sales to the Maserati network totaled 2,900 in 2003, compared with 3,567 in 2002, a drop of 19%. The most important markets were the United States (876 units, -25%), where the brand was reintroduced in 2002 following an absence of more than 10 years; Germany
(467 units, -21%); the United Kingdom (300 units, -30%); and Italy (361 units, -10%). Sales of Maserati models were affected mainly by a significant decline in market demand in the Spider and the Coupé segments, particularly in the U.S. market.

     In 2003, the sector sold a total of 7,077 units to end customers, a decline of 6.1% from 7,536 in 2002. Of these, Ferrari accounted for 4,238, in line with 2002, while Maserati accounted for 2,839, down 14.0% from 3,300 in 2002.

     In recent years, the number of models competing in Ferrari’s market segment has been increasing, to 22,800 units worldwide in 2003 from 7,600 in 1999, primarily as a result of new entries in the category, such as the Lamborghini Gallardo and Bentley Continental GT and the development by other competitors, such as Porsche and Mercedes, of their product ranges.

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     The market segment in which the Maserati Coupè and Spider compete reached 45,600 units worldwide in the year 2003, with the main competitors being the BMW Series 6, the Jaguar XK, the Mercedes SL, CL and CLK and the Porsche 911 Carrera. In the luxury sedan segment, which reached 77,000 units worldwide, the Quattroporte’s main competitors are models including the Audi A8 4.2 — 6.0, the BMW 745-760, the Jaguar XJR and the Mercedes S Class.

     In 2003, Ferrari-Maserati revised its distribution system in order to comply with the new EU block exemption regulation. See “— European Union” below. The Ferrari-Maserati sector has separate contracts for its vehicle distributors and for after sales repair services. In addition, dealers in the EU no longer are granted exclusivity rights with respect to a particular territory.

     At December 31, 2003, the sector employed 2,968 workers, including 2,825 in Italy.

     During 2002, Fiat sold 34% of Ferrari S.p.A. to a Mediobanca-led consortium of banks, receiving net proceeds of 758 million. See Item 4. “Information on the Company — Introduction — Strategies and Programs” and Note 14 to the Consolidated Financial Statements included in Item 18 for additional information on this transaction.

     Ferrari-Maserati currently owns and operates three production facilities, all of which are located in Italy.

Components

     Our components sector is led by our wholly-owned subsidiary Magneti Marelli Holding S.p.A. The components sector contributed 6.3% of our 2003 net sales and revenues, prior to eliminations and consolidating adjustments.

     Magneti Marelli supplies components to nearly all of the world’s major car manufacturers, including Peugeot PSA, Renault, Volkswagen, DaimlerChrysler, BMW, Ford and Opel (General Motors’s European subsidiary), as well as the other companies of the Fiat Group (Fiat Auto and Iveco). Magneti Marelli is among the largest European producers of lighting systems in the world. The General Motors group is becoming an increasingly important customer of the sector for products such as lighting and exhaust systems.

     Magneti Marelli focuses on developing complete modules and systems in its main product lines, which include lighting systems using innovative technologies, engine and gearbox controls, and exhaust and suspension systems. In a business environment that is becoming increasingly global and competitive, the main trend characterizing the components industry continues to be the demand for increasingly sophisticated products at lower costs. At the same time, carmakers are pursuing solutions that simplify manufacturing processes and are requiring components manufacturers to supply systems and modules that are designed in cooperation with their own design staff. In response to these trends, Magneti Marelli has developed a strategy based on innovating, focusing on businesses that supply complete systems with high technology content.

     In 2003, the global production of cars and light commercial vehicles increased 1.2%, reaching 57.8 million units, although performance varied across countries and geographic regions, and increases were concentrated mainly in Asia and Eastern Europe, with China and Turkey in particular exceeding 2002 output levels by approximately 30%. Output in other areas of the world was generally lower, in line with the decline in sales in those markets. The Western European market for cars and light commercial vehicles as measured by number of vehicles manufactured registered an overall decline of 1.4%, to 16.2 million vehicles. In this environment, most of the major European markets saw their production levels decline, including Italy, where production fell 9.4%. Only Spain bucked the trend, registering an increase in production of 4.6%.

     After a recent product portfolio restructuring, including the divestiture of several business lines, Magneti Marelli in 2003 refocused on actively pursuing initiatives to strengthen and develop its

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business. In this regard, the sector’s priorities are: focusing all of its activities on customer satisfaction, placing a strong emphasis on reinforcing the brand and getting the most value out of the products on the market. In pursuing these objectives, the sector will also emphasize reaffirming the collaborative spirit within the Group.

     Main new production initiatives in 2003 included the AFS “adaptive front light system” module, the first of its kind in the world, and the Flex Fuel system (a combined gasoline or alcohol combustion system), both of which were internally developed for use by BMW, Fiat Auto, Ford and Volkswagen.

     In 2003, Magneti Marelli reported revenues of 3,206 million, a decrease of 2.5% from 2002, mainly caused by the negative effects of exchange rate movements, particularly the appreciation of the euro. This negative effect was only partially offset by increased sales despite weak market conditions by both the sector’s engine control unit following the introduction of a new direct injection system for diesel engines, and the lighting area as a result of new applications. In 2003, approximately 35% of the sector’s revenues were derived from sales within the Group, as compared with approximately 37% in 2002.

     In 2003, a significant portion of the sector’s budget was devoted to investments in research and development and capital expenditures. Expenditures for these initiatives during the year amounted to 306 million, or 9.5% of Magneti Marelli’s revenues (compared to 310 million, or 9.5% of sales, in 2002). This amount included 148 million of investments in tangible fixed assets and 158 million in research and development projects that were focused on product innovation.

     The sector operates through 49 production plants located worldwide, including 18 in Italy, eight in Brazil, four in France, three in Poland, two in each of the United States, Spain, Germany, China and Mexico and one in each of Russia, Argentina, the United Kingdom, the Czech Republic, Malaysia and South Africa. At December 31, 2003, the sector employed 19,879 workers, including 6,636 in Italy.

     In May 2002, the sector sold its former electronic systems unit, Magneti Marelli Sistemi Elettronici S.p.A., and related activities to the Mekfin Group of Italy, for an agreed price of 90 million, of which only a portion was paid. At the end of 2002, the Mekfin Group sold to the Ixfin Group the unit and its activities (now Ixfin Magneti Marelli Sistemi Elettronici). Ixfin Magneti Marelli Sistemi Elettronici is considered as a strategic supplier of both Fiat Auto and other automotive groups that were formerly customers of Magneti Marelli. At the end of 2003, the Fiat Group signed an agreement with the Ixfin Group in order that Ixfin Magneti Marelli Sistemi Elettronici could continue to regularly meet the commitments undertaken with its customers and pursue development strategies for its business. In the context of this agreement:

    Magneti Marelli Holding S.p.A. signed a contract to acquire a beneficial interest in the shares of Ixfin Magneti Marelli Sistemi Elettronici, valid until December 31, 2004, entitling it to the voting rights and all the other administrative rights associated with the shares;
 
    Fiat Netherlands Holding (at one time a Magneti Marelli Sistemi Elettronici stockholder) acquired a call option (which is transferable) from the Ixfin Group that is exercisable at any time up to December 31, 2004, giving it the right to purchase Ixfin Automotive, the direct parent company of Ixfin Magneti Marelli Sistemi Elettronici, or, alternatively, Ixfin Magneti Marelli Sistemi Elettronici itself. The purchase price payable upon exercise of the option is 45 million. Furthermore, in the event it exercises the call option, Fiat Netherlands Holding will also assume debt of certain other entities of the Ixfin Group to Ixfin Magneti Marelli Sistemi Elettronici and its subsidiaries in an amount of 53 million, bringing the total amount payable in connection with exercise of the call option to 98 million; and

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    Fiat Netherlands Holding obtained a pledge of the shares representing the entire share capital of Ixfin Magneti Marelli Sistemi Elettronici and of Ixfin Automotive to guarantee performance of the Ixfin Group under the agreement. See Notes 14 (ii) and 19 to the Consolidated Financial Statements included in Item 18.

Production Systems

     Our wholly owned subsidiary, Comau S.p.A., became the lead company of the production systems sector in 2003, following former lead company Comau B.V.’s contribution to it of its equity interests in the sector’s operating companies. Comau N.V. subsequently merged with certain of our other holding companies (with the resulting entity taking the name of Fiat Netherlands Holding N.V.) as part of our efforts to streamline our operations and lower administrative costs.

     Production systems contributed 4.5% of our total 2003 net sales and revenues, prior to eliminations and consolidating adjustments. Comau recorded revenues of 2,293 million in 2003, substantially in line with the 2,320 million recorded in 2002. Overall revenues from contract work were broadly in line with those of the previous year, both in Europe and in North America, as the negative impact of the depreciation of the dollar was largely offset by an acceleration in work carried out under existing contracts. Revenues from maintenance services were also largely unchanged with respect to 2002. The production systems sector posted operating income of 2 million, compared to a 101 million operating loss recorded in 2002, with the losses in 2002 reflecting significant cost overruns on several large contracts in Europe.

     Comau’s core business is the engineering and manufacturing of industrial automation systems and related products, mainly for the automotive industry. Its principal products include metalworking systems, mechanical assembly systems, body welding and assembly systems, sheet metal dies and injection molds, injection molding presses, handling systems, robotics, product and process engineering, software engineering and systems, and specialized maintenance services. The sector’s principal customers are international automotive manufacturers, including the automotive sectors of the Fiat Group. In 2003, approximately 23% of Comau’s revenues were derived from sales within the Group, compared to approximately 24% in 2002.

     Competition in this sector mainly consists of large diversified international groups operating in the field of production systems for the mechanical and automotive industry. The competitive environment, which reflects a structural excess of production capacity in the traditional industrialized countries, benefits producers of innovative solutions that can offer a wide range of production systems on an international basis and are capable of engineering flexible manufacturing solutions.

     In 2003, Comau’s activities in the main markets in which it operates continued to be adversely affected by a climate of uncertainty and by the financial difficulties experienced by most automotive manufacturers, both of which curbed capital investment. New investments by automotive manufacturers focused on rationalization of existing plants with a view to increasing reutilization, flexibility and capacity utilization. In Europe, the situation remained stable, with all automotive manufacturers applying strong pressure on prices. In the United States, the overall downward trend in capital spending continued for most of 2003, and the strengthening of the euro against the dollar gave Japanese and Korean suppliers an advantage over their European counterparts. The contraction in demand and the financial situation of the major automotive manufacturers also gave rise to a downward pressure on prices, which is expected to continue in the near future. In South America, where Brazil experienced difficult economic conditions for much of the year, the slowdown in new investment was accentuated. The performance of other emerging markets, however, was more positive, with Russia showing significant signs of economic recovery and China continuing to show strong growth.

     In 2003, new orders for contract work booked by the sector totaled 1.4 billion, a decrease of approximately 22% from 2002, as a result of a 43% decline in the value of new orders in the NAFTA area and a decrease in new orders on the European market, which was only partly offset by orders booked in emerging markets, including South Africa and China. Overall, approximately 66% of the

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orders for contract work were acquired in Europe and approximately 26% in the NAFTA area, with the remaining 8% coming from Brazil and other emerging markets (South Africa and China). In 2003, approximately 19% of orders for contract work were from Fiat Group companies (approximately 17% in 2002) and approximately 81% from other automotive manufacturers (83% in 2002).

     The results of Comau’s maintenance service operations, carried out by Comau Service, were substantially in line with the previous year, with revenues of about 630 million, approximately 54% of which from companies in the Fiat Group and approximately 46% from non-captive customers (compared to approximately 35% to non-captive customers in 2002). Effective January 1, 2004, Comau sold its industrial plant maintenance activities to Fiat Auto and Fiat-GM Powertrain at their plants in Italy and Poland. See Item 5. “Operating and Financial Review and Prospects — Results of Operations — 2003 compared to 2002”.

     Comau also sold its sheet-metal dies activities at Fiat Auto’s Mirafiori plant to Fiat Auto during the first quarter of 2004.

     Comau also continued to streamline its organizational structure in various countries and seeking to enhance cost efficiencies through cooperation in the industrial and commercial fields. See also Item 5. “Operating and Financial Review and Prospects — Industrial Reorganization Initiatives”.

     At December 31, 2003, Comau’s activities were conducted through 35 manufacturing facilities, including 12 in the United States, six in each of the United Kingdom and Italy, four in France, three in South Africa, and one in each of Mexico, Poland, Spain and Turkey. At December 31, 2003, the sector employed 17,375 workers, including 7,299 in Italy.

Metallurgical Products

     Our metallurgical products sector is led by Teksid S.p.A., of which we own 80.5% of the share capital following a capital increase at Teksid at the end of 2003 subscribed to entirely by us, increasing our stake from 66.5%. The remaining 19.5% of Teksid is owned by Renault S.A.

     Teksid, which now comprises a cast iron business unit and a magnesium business unit, contributed 1.7% of our total 2003 net sales and revenues, prior to eliminations and consolidating adjustments. In 2003, Teksid reported revenues of 844 million, as compared with a total of 1,539 million in 2002. The decline of 45.2% reflects mainly the deconsolidation of Teksid’s aluminum business unit on September 30, 2002. During the nine months of 2002 prior to its deconsolidation, the aluminum business unit generated revenues of 660 million. The decline in the sector’s revenues in 2003 also reflected the adverse effects of the appreciation of the euro. In 2003, approximately 13% of Teksid’s revenues were derived from sales within the Group, as compared with 10% in 2002.

     In 2003, demand contracted in the main automotive markets where the sector operates, and in particular in the Western European, North American and South American markets for light vehicles and the North American heavy vehicles market.

     Teksid responded to the problems associated with the limited growth in volumes and unfavorable exchange rate developments by continuing with an aggressive restructuring plan. The plan, which was launched in 2002, involves both of the sector’s remaining business units, cast iron and magnesium, and is aimed at bringing production structures and profitability into line at all the unit’s production plants, even amid difficult market conditions, through measures including reallocating production to more profitable plants and improving operational efficiencies. As part of the restructuring plan, Teksid will refocus production activities at its Crescentino plant (Italy) on the manufacture of components for light vehicles by the end of 2004. Teksid is also undertaking significant restructuring measures at the plants of its subsidiaries Société Bretonne de Fonderie et de Mecanique and Funfrap-Fundicao Portuguesa S.A. in France and Portugal, respectively.

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     In 2003, Teksid’s cast iron business unit, which produces cast iron auto parts, saw a reduction of 4.4% in revenues despite a 2.2% increase in production volumes over the previous year, primarily as a result of exchange rate movements, in particular of the appreciation of the euro. Teksid nevertheless maintained a significant sales effort, acquiring contracts for Japanese and Korean manufacturers in China, for General Motors in Brazil and for Caterpillar in Mexico, and consolidating its relations with Renault and PSA in Europe and Italy.

     Teksid’s magnesium business activities are carried out through Meridian Technologies Inc., a 51%-owned joint venture with Norsk Hydro ASA. The predominant market for the magnesium business unit, which produces magnesium auto parts and operates under the Meridian brand, is in North America, which in 2003 accounted for approximately 81% of revenues (in line with 83.2% in 2002). The unit also maintained its focus on serving customers outside the Fiat Group, with the Group accounting for just 6.4% of the total in 2003 (6.1% in 2002). The unit’s revenues declined by 4.1% in 2003 in spite of an 8.1% increase in unit sales, largely as a result of adverse exchange rate movements, and in particular the appreciation of the euro against the dollar. In 2003, the magnesium business unit prepared to start production at a new plant in the United Kingdom, and formed Shanghai Meridian Magnesium Products Co. Ltd., a 60%-owned joint venture of Meridian Technologies with Shanghai An Ting Industrial Development Co. Ltd. and Shanghai Cosmopolitan Automobile Accessory Co. Ltd. to produce magnesium auto parts for the Chinese market.

     The sector’s principal competitors are divisions of other automobile manufacturers, as well as other manufacturers of metallurgical products operating in different markets. Competition is based primarily on price and the reliability of the products, which in turn is dependent upon the technology used to produce them.

     At December 31, 2003, the metallurgical products sector had 10 manufacturing facilities, including two in each of Italy and France, and one in each of the United States, Brazil, Poland, Mexico, Canada and Portugal. At year-end, Teksid employed 7,556 workers, including 1,436 in Italy.

     Renault, Teksid’s minority stockholder with an interest of approximately 19.5%, has the right to require us to purchase its holdings in Teksid in certain circumstances, as follows:

    if we fail to comply with the terms of the joint venture agreement or Teksid is subjected to a receivership or any other insolvency procedure;

    if Renault’s interest in Teksid falls below 15%;

    if Teksid decides to make a strategic investment outside the foundry sector; or

    should another auto manufacturer acquire control of Fiat.

     In addition, Teksid has entered into an agreement with Norsk Hydro with respect to their Meridian Technologies Inc. joint venture providing the parties with certain rights in the event the board of directors cannot agree unanimously with respect to certain specified strategic decisions. In such event,

    Norsk Hydro has the right to require Teksid to purchase its 49% holding in Meridian Technologies Inc.; and

    if Norsk Hydro declines to exercise this option, Teksid may require Norsk Hydro to sell its 49% holding to Teksid.

     We consider the possibility that such a deadlock between Teksid and Norsk Hydro will arise to be quite remote.

     See Note 14(ii) to the Consolidated Financial Statements included in Item 18 for a discussion of these transactions.

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Aviation

     In July 2003, we sold our aviation sector, formerly led by FiatAvio S.p.A., to Avio Holding S.p.A., a company owned 70% by The Carlyle Group and 30% by Finmeccanica S.p.A., for consideration of 1,509 million. See Item 5. “Operating and Financial Review and Prospects — Changes in the Scope of Consolidation” for additional details on this transaction. This sector had been engaged in the areas of aircraft engine components and aerospace systems. We consolidated the aviation sector’s results for the first six months of 2003, during which period it recorded revenues of 625 million. The sector recorded revenues of 1,534 million in 2002 and contributed 2.6% of our total 2002 net sales and revenues prior to eliminations and consolidating adjustments.

Insurance

     On May 2, 2003, we divested our insurance sector, which had operated primarily through Toro Assicurazioni S.p.A., an Italian life and non life insurance company that we wholly owned, as well as through other insurance companies controlled by Toro Assicurazioni. The revenues of our insurance sector (equal to premiums earned) in the first four months of 2003 amounted to 1,654 million. The sector’s revenues in 2002 amounted to 4,916 million, contributing 8.2% of our total net sales and revenues in 2002 prior to eliminations and consolidating adjustments.

     We sold the Toro Assicurazioni Group to the DeAgostini Group of Italy on May 2, 2003, for consideration of 2,378 million. See Item 5. “Operating and Financial Review and Prospects — Changes in the Scope of Consolidation” for additional details on this transaction.

Services

     This sector, which marked its third year of activity in 2003, is led by Business Solutions and provides integrated corporate services and outsourcing of business processes.

     In 2003, the business services market in Italy experienced a significant slowdown, in line with market, economic and financial difficulties in the sector’s operating environment that had a widespread impact on all the main fields of the sector’s activity. Uncertainty over the economic outlook prompted companies to reduce investment in information technology, in which overall spending fell for the first time in several years. The sector’s more traditional services, such as training and temporary employment services, recorded only modest growth, considerably lower than in previous years. In this context, and consistent with our strategy of refocusing the Group around our core businesses, Business Solutions started refocusing its activities in 2003 on providing services to other Group companies to support our efforts to improve efficiency.

     Business Solutions reported revenues of 1,816 million for 2003, a decrease of 7.6% from the 1,965 million recorded in 2002. This decrease was attributable to the sale in 2003 of a majority interest in IPI S.p.A. (which had 31 million of revenues in 2002) and other minor operations, as well as an overall contraction in the services market and a strategic decision taken during the course of the year to refocus the sector’s activities on serving other Group companies. In 2003, sales to other Group companies accounted for approximately 44% of the sector’s total sales, compared to approximately 49% in 2002. Business Solutions contributed 3.6% of our total 2003 net sales and revenues, prior to eliminations and consolidating adjustments.

     Business Solutions operates in the four main areas of activity described below.

    Human Resources. Human Resources provides payroll management, training, temporary employment and other human resources services. Following its acquisition in early 2002 of Italian temporary employment agency Cronos S.p.A., the sector is one of the top four such companies in the Italian market. Revenues totaled 231 million in 2003, of which approximately 73% were from customers outside the Group, especially for training and

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      temporary employment services. This compares to revenues of 235 million in 2002, when non-Group customers accounted for approximately 70% of revenues.

    Engineering & Facility Management. This unit underwent significant restructuring in 2003, divesting its real estate management services. This was followed in early 2004 by the sale of 100% of Fiat Engineering S.p.A to Maire Investimenti S.p.A. At the same time, Fiat Partecipazioni S.p.A. subscribed to a capital increase in Maire Investimenti S.p.A. and now owns 30% of its capital. Our net proceeds from the Fiat Engineering transactions were approximately 80 million. The unit’s activities were refocused mainly around the facility management operations and maintenance activities carried out through Ingest Facility at civil and industrial sites. The unit’s revenues in 2003 (including those of Fiat Engineering) totaled 624 million, compared to 657 million in 2002, with customers from outside the Fiat Group accounting for approximately 73% of revenues, compared to approximately 75% in 2002.

    Administrative Services and Procurement. Through Fiat Gesco S.p.A., this unit provides management and back office services, mainly within the Fiat Group. The services provided include SADI (customs services), Fast Buyer (traditional and online purchasing) and risk management of insurable Group risks. Revenues for 2003 totaled 333 million, 73% of which were generated within the Group, compared to revenues in 2002 of approximately 340 million, 82% of which were generated within the Group.

    I.C.T. — Information and Communication Technology. This unit, operating through a 50-50 joint venture with IBM Italia called Global Value, provides technology infrastructure management and software application development services. The unit also operates e-Spin, a competence center active in a number of areas, including in the online application and management of business processes. The unit posted revenues of approximately 600 million in 2003, with Fiat Group companies accounting for approximately 62% of them, compared to 672 million in 2002, of which Fiat Group companies accounted for approximately 68%.

     In October 2003, we increased our stake in Atlanet S.p.A., a provider of telephony services in Italy, to 100% from 30%. We acquired full control of this company, which provides us with the platform for our entire telecommunications system, to ensure our access to high-quality, low-cost service continuity. As of January 1, 2004, the Information and Communication Technology unit consolidated Atlanet on a line-by-line basis.

     The services sector also includes Sestrieres S.p.A., which operates the lift facilities at the Via Lattea ski area, a future site for the 2006 Winter Olympics. This company generated revenues of 21 million in 2003.

     At December 31, 2003, Business Solutions employed 7,113 workers, including 4,622 in Italy.

Publishing and Communications

     This sector’s operations consist principally in the publication and distribution of the Turin-based daily newspaper La Stampa, as well as the sale of advertising space in print, television and Internet media through Publikompass S.p.A.

     In 2003, sales of Italian newspapers totaled approximately 5,800,000 copies per day, a substantially in line with from the 5,900,000 copies per day sold in 2002. Editrice La Stampa S.p.A. reported an average daily circulation of 358,000 copies, decreasing from 384,000 copies in 2002, reflecting lower newsstand sales, a reduction in subscriptions and the fact that several joint marketing arrangements with other papers were discontinued during the year. From the promotional standpoint, Editrice La Stampa sharpened its strategic focus on “brand-stretching” measures, designed to increase newsstand sales of supplemental products by leveraging La Stampa’s nationally recognized brand name. Products sold in 2003 included history, geography and literature publications, music CDs and sports DVDs. Efforts to boost the newspaper readership base through distribution to students also

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continued. In September, La Stampa redesigned its weekly Specchio supplement with a new graphic layout, a new, innovative format and coverage of a wider range of events and trends, and now sells the supplement together with the paper at 0.30 over the newsstand price.

     Revenues from the sale of newspapers and other publishing products totaled approximately 76 million in 2003, an increase of 1 million over 2002, as sales of Specchio and successful brand-stretching efforts offset the drop in overall sales volumes.

     The advertising market in Italy increased by approximately 3.3% in 2003, reversing the negative trend of the previous two years. Demand for print advertising improved by a marginal 0.2% after two difficult years that saw volumes shrink by 2.9% in 2001 and 7.1% in 2002. Performance by the various media within this segment was far from uniform, with newspapers losing 0.5% (or 1.3%, if free newspapers are excluded) while periodicals saw their advertising increase by 1.5%. The sector’s subsidiary Publikompass S.p.A. booked advertising billings in excess of 307 million, an increase of 7.4% over 2002, partly as a result of new licensing agreements. Trends in advertising sales by Publikompass varied according to business segments: Sales of advertising space to Publikompass’s newspaper clientele rose by 3.7%, an increase fueled by billings to new customers acquired during the year. Periodical ad sales increased approximately 5%. Billings from radio and television advertising rose by approximately 40%, primarily as a result of business from new broadcast clients added in 2003.

     In this context, the publishing and communications sector posted a 6.4% increase in net sales and revenues in 2003 to 383 million, compared to the 360 million reported in 2002.

     At December 31, 2003, Itedi had two printing plants in Italy, and employed 874 workers, all of whom are in Italy.

Other Companies

     In addition to our operating sectors, we also have holding companies, service companies and other operations under our direct control. In 2003, these other companies contributed 1.3% of our net sales and revenues, prior to eliminations and consolidating adjustments. At December 31, 2003, these companies employed 3,573 workers, including 3,135 in Italy.

     The most significant of our other companies included in these results are Fiat Research Center (FRC) and Elasis, which occupy an important place in our strategies and development plans (see “— Research and Development” below).

SUPPLY OF RAW MATERIALS AND COMPONENTS

     Our increased focus on quality improvement, cost reduction, product innovation and production flexibility has required a change in our historical relationship with our suppliers. To this end, we have relied upon suppliers with a focus on quality and the ability to provide cost reductions. We view our relationships with our suppliers as partnerships, and in recent years we have established closer ties with a significantly reduced number of suppliers, selecting those that enjoy a leading position in the relevant market. To these suppliers, we offer long-term, stable relationships and high volume supply contracts, cooperation in the development of new products and joint research on cost reduction methods. In order to obtain optimal results from our supplier relationships, we have implemented advanced design techniques (such as co-designing and simultaneous engineering) so as to ensure that the products supplied are reliable, produced efficiently and delivered on time. The most significant aspect of cost savings initiatives the Group has been implementing is targeted at reducing the cost of direct production materials, which we expect to achieve through a number of means, including design-to-cost engineering programs that can develop more efficient solutions through the use of common platforms and components, allowing suppliers to realize economies of scale.

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     Management believes that adequate supplies and alternate sources of the Group’s principal raw materials are available and does not believe that the prices of these raw materials are especially volatile.

     Following the alliance signed between Fiat Auto and General Motors in July 2000, the purchasing activities of Fiat Auto and General Motors in Europe and in Latin America are jointly operated through the GM-Fiat Worldwide Purchasing B.V. joint venture, with operational offices in Ruesseslheim, Germany. This purchasing joint venture has allowed Fiat Auto to rapidly realize significant synergies through leveraging higher purchasing volumes.

OPERATING ENVIRONMENT

     As one of the largest industrial groups in Italy, the Fiat Group is affected by social, economic and political developments in Italy. At the same time, by virtue of our significant operations outside of Italy, we are subject to the risks normally associated with cross-border transactions, principally those relating to exchange rate fluctuations and delayed payments from customers in certain countries. Finally, because our operations are based in Europe, both the intensifying integration of the European market and the recent economic and political developments in Eastern Europe will create new opportunities and challenges for our management.

The Republic of Italy

     The Republic of Italy is composed of 20 regions covering an area of approximately 301,000 square kilometers on a peninsula in the middle of Southern Europe, with a population of approximately 56 million. The most important industrial and commercial activity is situated in the north-central part of Italy.

     Government. The Republic of Italy was proclaimed in 1946 and a President was elected in the same year. The present Constitution, which took effect in 1948, provides for the powers of a democratic state to be divided among the Parliament, the Executive and the Judiciary. The head of state is the President, who is elected by Parliament and holds office for a period of seven years. The President has the power to designate the President of the Council of Ministers, who is then confirmed (and may be removed only) by Parliament. The President of the Council of Ministers heads the executive branch. Parliament consists of the Senate and the Chamber of Deputies. Parliamentary elections must be held every five years, although they have often been held more frequently.

     From the end of World War II until 1994, the Christian Democratic Party was the largest political party in Italy, although no single party has had an overall majority in Parliament since 1953. Until 1994, Italian politics was dominated by four- and five-party coalitions consisting of Christian Democrats, Socialists, Social Democrats, Liberals and Republicans. Traditionally, the main opposition parties included the former Communist Party and the right-wing Italian Social Movement.

     In 1993, Parliament approved a new law based on the results of the referendum on electoral reform held in April 1993. The general elections of March 1994 were the first to be held under the new voting system, which introduced “first past the post” voting rules for three-quarters of the seats in Parliament and proportional representation for the remaining quarter. Until 2001, a series of center-left, center-right and non-partisan “technocratic” coalitions have controlled Parliament. One of the major achievements of this period was Italy’s qualification as a founding member of the third stage of European Monetary Union on January 1, 1999, having met the convergence criteria set forth in the Maastricht Treaty with respect to the public sector deficit, inflation, interest rates and exchange rate stability. During 2000, a government led by Mr. Giuliano Amato, a former President of the Council of Ministers and Minister of the Treasury, and supported by the center-left majority in Parliament, attempted to implement a number of measures in order to enhance Italy’s economic and political stability in advance of the 2001 general election, while an attempt to replace proportional voting with a majority system that was intended to create a stable bipolar system failed. In the general election on May 13, 2001, the current center-right coalition led by Mr. Silvio Berlusconi won outright majorities

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in both houses of Parliament, with Mr. Berlusconi forming his government in the first week of June. Notwithstanding the privatization of a considerable number of state industries and lower rates of inflation, Italy still lags behind most of its European partners, with higher unemployment than the EU average and a lower rate of economic growth than many of the other major European economies. The current majority has been seeking to implement a number of structural reforms to enhance Italy’s international competitiveness and lower the unemployment rate. Among these reforms are tax-cutting measures, an increase in social pensions, funding for large public works projects, increased labor flexibility and the devolution of power to local authorities in a number of areas, including education, health services and public safety. Measures in a number of these areas, have been introduced by the government during the past three years; however, wide-ranging reforms have yet to be implemented.

     Foreign Relations. Italy is a founding member of the EU and the third stage of European Monetary Union, a member of NATO and a member of many other regional and international organizations, including the United Nations and many of its affiliated agencies. Italy is also a member of the OECD, the International Monetary Fund, the International Bank for Reconstruction and Development, the European Investment Bank, the European Bank for Reconstruction and Development, the Asian Development Bank and the Inter-American Development Bank and a charter member of the World Trade Organization.

     Economy. In 2003, the Italian economy recorded the second consecutive year of sluggish growth, growing by only 0.4% (unchanged from 2002). At current prices, GDP reached 1.3 trillion in 2003, confirming Italy as the sixth-largest OECD country in terms of GDP. Growth in private consumption accelerated to 1.3% from 0.5% in 2002, despite initial fears of a possible collapse after the expiry of government incentives. The relatively strong headline number masks, however, the steady erosion that occurred throughout the year, with consumption actually contracting in the fourth quarter of 2003 as compared to the same period in 2002. Unlike consumption, gross capital formation contracted 2.1% as a result of the fact that companies brought forward their investment activity in order to take advantage of government fiscal incentives that expired at the end of 2002.

     The principal components of value added for 2003, at current prices, were as follows: services (67.4%); manufacturing, mining and utilities (23.3%); construction (4.9%) and agriculture, forestry and fishing (2.2%). The rising euro and sluggish economic activity in Italy’s main trading partners affected the export of goods and services, which contracted by 3.9% from 2002 levels, while low economic activity at home and lower energy costs helped by the rising euro led to a decline in imports of 0.6%. This decline in imports was more than offset by an even greater decline in exports, which resulted in a widening of the Italian current account deficit; based on initial estimates, it roughly doubled in 2003, reaching 19.9 billion. The government budget deficit as a percentage of GDP was equal to 2.4% in 2003, a slight deterioration when compared with the 2.3% recorded in 2002. The relative stability was, however, helped by one-off measures that boosted the revenues side.

     The following table sets forth statistical information on the Italian economy for each of the years indicated:

                                         
    2003
  2002
  2001
  2000
  1999
GDP at current prices (in billions of euros)
  1,300.93     1,260.43     1,218.53     1,166.55     1,108.0  
Real GDP growth
    0.4 %     0.4 %     1.7 %     3.3 %     1.7 %
Current account balance (in billions of euros)
  -19.93     -10.11     -0.74     -6.31     7.69  
Total employment (in thousands)
    22,054       21,829       21,514       21,080       20,692  
Harmonized consumer price index (% change)*
    2.8 %     2.6 %     2.7 %     2.6 %     1.7 %
International reserves (not including gold) (in billions of euros)
  24.05     27.30     27.70     27.27     22.32  
Public administration deficit as a percentage of GDP
    2.4 %     2.3 %     2.6 %     0.6 %     1.7 %

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*   Beginning in 2002, the “harmonized consumer price index” measure has been calculated in accordance with a Eurostat methodology which lessens sensitivity to transient changes in prices.
 
Sources:   Istat, National Accounts, Banca d’Italia, Economic Bulletin and Statistical Bulletin, including revisions of data reported earlier.

     Fiat in Italy. The size and international status of the Fiat Group have significant economic implications for the Italian economy. Our net sales and revenues on a worldwide basis in 2003 were equivalent to approximately 3.6% of Italy’s GDP; our Italian employees represented approximately 1.4% of Italy’s industrial work force; and our worldwide expenditures for research and development were equivalent to approximately 24.6% of the estimated national total of expenditures by the private sector (both in Italy and abroad). Exports of the Fiat Group constituted approximately 4.2% of all manufactured goods exported from Italy in 2003.

European Union

     One of the European Union’s top priorities in 2003 was the completion of enlargement. In this connection the Treaty of Athens, signed on April 16, marked the culmination of the successful accession negotiations with the 10 countries that subsequently joined the EU on May 1, 2004.

     With regard to the European Union’s internal policies, many of the achievements in 2003 are the result of positive developments initiated in 2002 in the area of competition policy. Modernization of the regulatory framework continued, with detailed provisions being put in place for the control of mergers and concentrations; in the area of fiscal policy, the European Council adopted the “tax package” designed to combat harmful tax measures more effectively and to reduce distortions in the internal market, notably with regard to the taxation of savings. In parallel with these achievements, the year 2003 saw the launching of new initiatives across a wide range of sectors. In particular, the EU launched the “European initiative for growth” in an attempt to achieve a long-term structural improvement in European competitiveness. The aim is two-fold : first, to stimulate investment in key projects, notably by means of a “package” of almost 60 major trans-European transport network, energy, telecommunications and research projects involving global financing, in conjunction with the European Investment Bank and the private sector, estimated at 10 billion per year between now and 2010 and second, to create conditions conducive to growth and employment through increased competitiveness and development of the social and environmental dimensions of growth. The European Commission, for its part, recommended a series of urgent major measures to meet the objective advocated by the European Council of defining an integrated strategy for European competitiveness.

     On October 1, 2003, the new “block exemption” regulation took effect, significantly modifying the regulatory regime governing distribution and servicing agreements for motor vehicles (passenger cars and commercial vehicles) in the European Union. Under the old regime, automakers were permitted to restrict new car sales to exclusively franchised dealers over which they exercise strict control. The new block exemption regulation, among other things:

    prohibits brand exclusivity clauses in distribution contracts between automakers and dealers, permitting dealers to sell a variety of auto brands in the same showroom, although separated into brand specific areas;
 
    eliminates, as of September 2005, the so-called “location clause,” which gave manufacturers the right to determine where their dealers were located geographically, permitting auto dealers instead to sell vehicles throughout the EU, including through the Internet; and
 
    enables independent repair shops meeting a manufacturer’s qualitative standards to become authorized service locations if the manufacturer has a market share exceeding 30%, and provides that car dealers may not be obliged to directly provide after-sales servicing.

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     As a result of the new regulation, Fiat Auto and Iveco terminated their existing dealer agreements and entered into new agreements that are in compliance with the new block exemption rules on October 1, 2003. See above, “— Automobiles — Distribution —” and “— Commercial Vehicles — Distribution”, for additional information.

Emerging Markets

     Brazil, Poland, Turkey and China are the most significant of the many emerging markets in which we operate.

     For Brazil, 2003 proved to be a difficult year. The combination of a restrictive monetary policy and a largely neutral fiscal policy that was used to stabilize the economy after the confidence crisis that hit the country in the second half of 2002 managed to calm the markets, allowing a strengthening of the real and the reining in of inflation. The stabilization came at a steep price, however: in the first half of 2003, the economy entered into recession, with GDP growth posting a slight decline for the year as a whole (-0.2%). The strong contraction of domestic demand, badly hit by high real interest rates, was the main cause behind this performance. Fortunately, strong growth in exports, fuelled by a still competitive real, high commodities’ prices and robust external demand, helped contain the fall in GDP. In 2004, GDP is expected to return to robust growth, helped by continued strength in exports and a recovery of domestic demand, fuelled by the significant monetary easing that occurred over the past 12 months.

     The Polish economy finally managed to come out of the lull in which it had been stuck since 2001. In 2003, GDP grew by 3.8%, fuelled primarily by private consumption and exports, while investment managed to stabilize somewhat after two years of strong declines. According to early estimates, economic activity accelerated further in the first quarter of 2004, despite continued political turmoil caused by corruption scandals and the uncertainties regarding the fiscal outlook. The economy is expected to continue to expand at a strong rate in the rest of the year, helped also by the recent entry of Poland into the EU.

     In 2003, Turkey experienced a second consecutive year of strong growth. GDP expanded by 5.8%, fuelled primarily by strong growth in private consumption and a rebound in investment activity, while external demand, despite the impressive expansion of exports, contributed negatively to growth. Two consecutive years of growth, the sharp drop in inflation and the strengthening of the lira all seem to indicate that the Turkish economy may finally be stabilizing. In 2004, the economy is expected to continue to expand at a brisk pace.

     Despite the SARS-induced slowdown in the second quarter, Chinese GDP posted a 9.1% growth rate in 2003. However, the nature of growth (concentrated heavily in investment) and a still inadequate statistical system (widely seen as understating growth in the current cycle) have caused an increasing amount of concern about the possibility that the economy is overheating. The government, aware of the danger, tried to rein in investment growth through various measures (including increased reserve requirements for banks and bans on lending to certain sectors). The strong increases in GDP and fixed asset investment in the first quarter of 2004 (increases of 9.7% and 43% from 2003, respectively) indicate that its initial efforts have not yet had a significant impact, in part because of insufficient enforcement of the measures. Despite this initial failure, it is still expected that the government will manage to engineer a soft landing of the economy during 2004.

     In Argentina, where we had significantly reduced our activities in 2002 in response to the severe economic crisis, the economy rebounded strongly in 2003. GDP grew by 8.8% from the depressed levels of the previous year, largely driven by domestic demand, with a 38.2% increase in gross fixed investment and an 8.2% rise in private consumption. In 2004, Argentina’s economy is expected to continue to grow robustly, although there are some uncertainties that may cloud this outlook, including the impact of higher energy prices on economic activity. The sustainability of the current expansion will also depend on additional investment in order to prevent the economy from

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running into capacity constraints; however, such investment may not materialize given the current climate of uncertainty.

     We also have a history of significant business transactions in several Central European, Eastern European and former Soviet Union countries, which, in addition to our significant operations in Poland, include licensing, industrial cooperation agreements and acquisitions in the Czech Republic, Hungary, Romania, Ukraine, Russia and Uzbekistan. The macroeconomic environment has stabilized in a number of the principal countries in the region; for some Eastern European countries the prospects of joining the EU in the near future are now concrete. We continue to follow developments in Russia and a number of the other countries of the former Soviet Union. We remain committed to the further consolidation and expansion of our operations in Central and Eastern Europe as conditions allow.

ENVIRONMENTAL AND OTHER REGULATORY MATTERS

     Our manufacturing facilities are spread over numerous countries, and are therefore subject to the relevant laws and regulations designed to protect the environment, particularly with respect to plant solid and liquid waste and air emissions. In addition, vehicles we manufacture must comply with extensive EU, national and local laws and regulations, including those which regulate vehicle safety, emissions and noise. Management believes that further reductions in the environmental impact of our manufacturing processes and products are of strategic importance if we are to increase our competitiveness and meet the statutory and social requirements that exist in the countries in which we have expanded as a result of our globalization strategy.

     The measures taken by our operating sectors and the results they achieved are described in detail in our Environmental Report, which has been published together with the Consolidated and Statutory Financial Statements for the past 12 years.

     The most noteworthy achievements realized during the year are reviewed below:

    Traditional Engines. Product engineering work was completed on the 1.3-liter 16-valve Multijet diesel engine, which already meets the EU’s future emissions limits. The new engine has been installed on new models such as the Ypsilon, Idea and Panda. Iveco started testing of its new V-6, V-12 and V-16 diesel engines, as well as its new Cursor engine for the U.S. market, which also complies with the proposed Euro 4 emission standards. The new medium Eurocargo truck, also introduced in 2003, has a new Tector engine boasting low emissions and fuel consumption, and which was developed in 3-, 4- and 6-cylinder configurations for application on agricultural and construction equipment applications, and with the aim of meeting the new standard requirements for the U.S. market.
 
    Natural Gas-Powered Vehicles (“NGVs”). Our NGV range, which we believe offers buyers the most complete lineup of NGVs on the market today, was further extended in 2003 with the introduction of the Punto Natural Power, and production began of the ultra-low emissions 6-cylinder Tector and Cursor engines designed for busses and city-use trucks.
 
    Agricultural and Construction Equipment. New Holland and Case used common platforms to renew almost half of the models in their ranges of agricultural and construction equipment. All of the new machines are significantly more compatible with the environment than their predecessors. Renewal of both ranges will be completed in 2004.
 
    Electric and Hybrid Propulsion Systems. In 2003, earlier prototype vehicles were joined by the new Panda “Hydrogen.” Further advances were also made in public transit applications, where trials are now being carried out on two new fuel cell-powered busses in Turin and Madrid.

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    Production processes. The Fiat Research Center continued to work with our sectors on dry-machining processes that will reduce fluid usage, thus bringing down costs and improving environmental performance. For its part, the Fiat Research Center increased its testing of alternative fibers in order to help reduce overall vehicle weight.

    Ongoing process improvements. As a result of an extension of our environmental management systems and the continuous improvement programs implemented at its production sites, 2003 witnessed further increases in our waste recycling activities at our Italian industrial facilities, with the percentage of waste sent to controlled landfills dropping to 7.4% from 7.6% in 2002, and the percentage of waste recycled increasing to 82.8% from 77.8% in 2002. Volatile organic compound (VOC) solvent emissions from Fiat Auto, CNH and Iveco paint shops were also reduced, to 72.4 grams per square meter, from 77.4 grams per square meter in 2002.

    The F.A.Re. (Fiat Auto Recycling) System, which we launched in 1992, has gained increasing visibility. Currently, the F.A.Re System can recycle about 82% of each vehicle in weight. We are developing the F.A.Re. System to be consistent with Italian regulations enacted in June 2003 implementing EU Directive 2000/53/CE on the processing and recycling of vehicles at the end of their useful life. The directive has also been implemented in other major Western European markets, including Germany, the Netherlands, Belgium, France, Spain, the United Kingdom and Austria. Fiat Auto is pursuing a strategy aimed at reducing the cost of this program to zero by promoting networks for the disposal of the vehicles or taking part in networks set up by competitors. These networks are, in the majority of cases, economically self-supporting as a result of the recovery value of spare parts obtained through the recycling process. See Note 14(ii) to the Consolidated Financial Statements included in Item 18.

     Management believes that we are in substantial compliance with regulatory requirements affecting our facilities and our products in the relevant markets and is continuously engaged in monitoring such requirements and adjusting affected operations. Our management believes that environmental regulatory requirements have not had a material adverse effect on our operations.

RESEARCH AND DEVELOPMENT

     In a competitive environment characterized by continuous and rapid change, research activities are a vital component of our strategy and expansion programs. Our commitment in this area is clearly demonstrated by the financial resources and the number of researchers and technicians involved. Approximately 13,000 people at 109 centers in Italy and abroad worked on our research and development projects in 2003. Total research and development expenditures in 2003 were 1,747 million, or approximately 4% of our net sales and revenues. We are devoting special attention to developing synergies between our operating sectors and our research facilities, and in particular on increasing the cooperation between the Fiat Research Center (“FRC”) and our Elasis research project, in order to eliminate the fragmentation of resources in key areas of technology and focusing our technology strategy on strengthening brand identity.

     The research and development activities of the individual sectors are supplemented by highly innovative cross-functional research carried out by the FRC, which with its staff of over 950 employees, achieved results in 2003 that had a significant impact on product and process innovation, helping improve the industrial competitiveness of our companies. During the year, the FRC transferred over 250 of the products of its research to clients and received various awards, including:

    an award received at the 32nd Barcelona International Motor Show for the FRC’s highly innovative UNIAIR electronic valve control technology; and

    The “Oscar Masi” award for industrial innovation, granted by the Italian Association for Industrial Research, assigned to the “Gasdriver” vehicle. This vehicle, which combines a robotized transmission, natural gas-powered engine and an electric motor/generator, was voted best product in the “Energy technologies for sustainable development” category.

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     In 2003, the FRC’s scientific output was particularly prolific, as witnessed by the 97 patents filed during the year (72 patents filed in 2002). With these additions, the number of active patents held by the FRC rose to 891.

     Other major achievements of 2003 are reviewed below:

    90 horsepower 1.3-liter 16-valve diesel engine. The FRC contributed to the development of a new version of the small Multijet diesel engine that was specifically designed to increase maximum torque by 17% and power output by 28%, all while complying with the future Euro 4 emissions limits. The new engine will be considered for future applications on our mid-size and small cars.

    Fiat Seicento Hydrogen. A second version of the hydrogen-powered Seicento was developed with funding from the Italian Ministry of the Environment. Vehicle road tests confirmed the efficiency of the new fuel cell propulsion system.

    Infonebbia fog warning system. FRC and ANAS, the Italian national highway administration, worked together on an “Integrated Traffic Safety” project based on cooperation between “smart” vehicles and highways. This project will involve two development test sites equipped with Intelligent Transportation Systems (ITS) and a mini-fleet of vehicles. The objective: help the driver, prevent traffic accidents resulting from fog and, if they occur, minimize their consequences. The project envisages that in critical situations, “Safety Cars” equipped with innovative systems would guide other vehicles through fog at safe speeds.

    LED taillamp technology. The FRC demonstrated the feasibility of its patented LED (Light Emitting Diode) technology by developing a 7-milimeter thick taillamp unit that is expected to offer a number of advantages over conventional components, including minimum thickness, low cost for both the device and for the relevant lighting system as a whole, and greater design freedom.

    Diesel particulate filter. Using DPFs, or Diesel Particulate Filters, brings particulate emissions of diesel engines to levels similar to those of their spark-ignition counterparts. Together with Fiat-GM Powertrain, the FRC has developed a filter system that, unlike the designs currently in use, requires no maintenance or additives, and makes full use of the MultiJet engine’s potential.

     Our Elasis research project, with more than 800 employees, is the largest research and development company in Southern Italy and one of the most complete and well-equipped advanced engineering companies in the European automobiles sector. Where possible, Elasis takes part in projects with national or EU funding (with 16 EU grant applications representing a total value of 83 million submitted in 2003). In 2003, Elasis joined with the Italian Ministry of Education, Universities and Research and the administration of the Campania region in setting up a Materials Science Center in Naples.

     In 2003, Elasis continued designing new vehicles for Group companies, while also addressing the many mobility and traffic safety issues that revolve around the automobile. Specific projects included:

    For vehicles, Elasis is researching innovative architectures to serve as the building blocks for new products with versatile interior layouts, all-wheel drive systems, modular chassis frames and highly accessible body shells.

    In engine design, Elasis continued to expand the know-how it can bring to bear on small-displacement spark ignition engines, reducing their fuel consumption and exhaust emissions. In particular, introducing innovations such as a two-ring piston and a new valve actuation control on several versions of its FIRE, or fully integrated robotized engine, significantly reduced on-vehicle fuel consumption.

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    Significant progress was also made in optimizing vehicle NVH (Noise, Vibration and Harshness) and in developing new manual and robotized transmissions.

     Elasis also continued to invest in the electronic control systems that are playing an increasingly vital role in today’s cars. During the year, Elasis developed a one-of-a-kind simulation bench — a true “virtual car” — that slashes the time needed to fine-tune control systems and debug on-board electronics.

     In 2003, we expanded our collaboration with public agencies to improve highway safety, continuing our partnership with the Province of Milan for an integrated system for management of accident data obtained from the 188 municipalities in the province and monitoring of traffic conditions on major arteries, as well as for similar systems for the Province of Perugia and the City of Salerno. We also continued our collaboration with the Società Autostrade Meridionali on active management of safety on the A3 motorway (Naples — Pompei — Salerno).

     The following table summarizes our research and development costs during each of the past three years by sector:

                         
    2003
  2002
  2001
    (in millions of euros)
Automobiles
  939     861     870  
Agricultural and Construction Equipment
    229       300       341  
Commercial Vehicles
    212       239       215  
Ferrari-Maserati
    130       94       81  
Components
    158       162       227  
Production Systems
    17       17       22  
Metallurgical Products
    7       21       27  
Aviation(*)
    23       54       58  
Insurance
                 
Services
                1  
Publishing and Communications
                 
Other Companies and eliminations
    32             (25 )
 
   
 
     
 
     
 
 
TOTAL
  1,747     1,748     1,817  
 
   
 
     
 
     
 
 


(*)   Data for the aviation sector are shown until the date of its sale (July 1, 2003).

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DESCRIPTION OF PROPERTY

     At December 31, 2003, we owned 192 manufacturing facilities, of which 56 were located in Italy. Our remaining facilities are located principally in the United States, France, Brazil, the United Kingdom, Spain, Poland and Germany. For further information with respect to the types and locations of our manufacturing facilities, see “ — Sectors” above. We also own other significant properties, mainly in Italy, including spare parts centers, research laboratories, test tracks, warehouses and office buildings.

     A number of our manufacturing facilities are subject to mortgages and other security interests granted to secure indebtedness to certain financial institutions. This indebtedness equaled approximately 87 million at December 31, 2003, as compared to 300 million at the end of 2002.

     Management believes that our manufacturing facilities and other significant properties are in good condition and that they are adequate to meet our needs.

     In connection with our relaunch initiatives, we have been working to streamline production facilities as part of our efforts to reduce overhead and improve efficiency. As part of these efforts, in 2003, Fiat Auto transferred production of the Alfa 166 and Lancia Thesis models in Italy from its Rivalta plant to its Mirafiori plant and ceased most manufacturing activities in Argentina, where Fiat Auto now produces only a small quantity of diesel engines. The sector also plans to consolidate future production of the Fiat Punto at its Melfi plant and of the Lancia Ypsilon only at its plant in Termini Imerese in Sicily. Other sectors are also taking steps to restructure their manufacturing operations. Among other initiatives, CNH has restructured its Berlin facility and in 2004 closed its plant in Crepy, France; also in 2004, Magneti Marelli expects to close the Magneti Marelli Lighting plant in Cannock, United Kingdom; and Comau expects to close a plant in France as part of a reorganization of Comau Systèmes.

     In 2003, Iveco completed a restructuring program launched in 2001 targeted at the closure of several plants outside Italy with the shutdown of its plant in Mataró (Spain) and an Ikarus plant in Hungary.

Item 5. Operating and Financial Review and Prospects

     Overview. Our worldwide net sales and revenues, reported as including changes in contract work in progress, decreased by 15.1%, from 55,649 million in 2002 to 47,271 million in 2003. Excluding the results of the significant operating activities we divested during 2003, our revenues declined 7.3%, from 48,026 million in 2002 to 44,498 million in 2003. In 2003, we recorded an operating loss of 510 million, as compared with an operating loss of 762 million in 2002. Excluding the results of the significant operating activities we divested during the year, our operating loss for 2003 would have decreased by 638 million, to an operating loss of 714 million in 2003 from an operating loss of 1,348 million in 2002. Please see “— Changes in the Scope of Consolidation” below for additional information on the impact of these divestitures and a reconciliation of these non-GAAP figures to the corresponding Italian GAAP results. Our total financial income and expenses amounted to net expenses of 963 million, as compared to net expenses of 671 million in 2002 (inclusive of investment income of 22 million in 2003 and 156 million in 2002). For information on other measures used by Fiat’s management to evaluate our financial performance, see “— Results of Operations — 2003 Compared with 2002” below. Total adjustments to financial assets, which include our equity in the results of operations of unconsolidated affiliates and writedowns in the value

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of financial receivables and securities, amounted to a loss of 172 million in 2003, as compared to a loss of 881 million in 2002. Total extraordinary income and expenses amounted to net income of 347 million, as compared with net expenses of 2,503 million recorded in 2002. This included gains on asset disposals of 1,747 million in our statement of operations for the fiscal year ended December 31, 2003, compared to losses of 502 million in 2002. As a result, a net loss before minority interest of 1,948 million was recorded for 2003, as compared to a net loss of 4,263 million in 2002.

     Changes in the Scope of Consolidation. During 2003, we continued to divest non-core operations. These transactions had the effect of changing the scope of consolidation of the Group as a whole. You should consider the impact of these changes on the composition of the Group when reviewing the performance of the individual sectors and of the Group as a whole, as changes in the scope of consolidation had a material impact on our financial and operating results in 2003.

     Significant transactions that resulted in a change in the scope of consolidation during 2003 included:

    Iveco sold the activities of Fraikin, a company specializing in long-term vehicle leasing, to Eurazeo in the first quarter of 2003, for a price of 307 million, realizing a net loss of 24 million. We had already written down the value of Fraikin by 210 million at the end of 2002 in anticipation of this sale. The results of these activities were deconsolidated as of January 1, 2003.

    Also in the first quarter of 2003, Business Solutions sold to the Zunino group a stake of approximately 56% in the real estate management company IPI S.p.A. for a sale price of 107 million, realizing a net gain of 15 million; IPI S.p.A. was also deconsolidated as of January 1, 2003. We retained a 10% equity interest in IPI S.p.A., which is accounted for at its equity value as of the date of our sale of the controlling interest.

    In March 2003, Fiat Auto sold 100% of Banco Fiat SA, through which it conducted retail auto financing activities in Brazil, to the Itaù banking group for a sale price of 247 million, realizing a net gain of 103 million; these activities were deconsolidated as of March 31, 2003.

    We deconsolidated the results of our former insurance sector as of May 2, 2003, following the sale of Toro Assicurazioni and its subsidiaries to the DeAgostini Group for a price of 2,378 million, realizing a net gain of 390 million. Receipt of the sale proceeds and the official transfer of the Toro Assicurazioni shares did not take place until July 30, 2003, following receipt of all required regulatory approvals.

    We deconsolidated the results of Fidis Retail Italia, which had carried out retail consumer financing activities for automobile purchases for Fiat Auto, following our sale of a 51% interest in the company to Synesis Finanziaria S.p.A., an Italian company owned equally by Capitalia, Banca Intesa, San Paolo-IMI and Unicredito, for a sale price of 370 million, realizing a net loss of 15 million. At the date of sale of our controlling interest in Fidis Retail Italia on May 27, 2003, this company controlled our automobile retail financing operations in Italy and certain other European countries. In September and October 2003, following receipt of the necessary regulatory approvals, we transferred to Fidis Retail Italia most of our remaining European auto financing operations, including those in Germany and France. The results of operations of all of these companies were fully consolidated up to their respective dates of sale. We account for the 49% shareholding we retained in Fidis Retail Italia on the equity basis. For additional information on this transaction, please see Note 3 to the Consolidated Financial Statements included in Item 18.

    We deconsolidated the results of our former aviation sector, which was led by FiatAvio S.p.A., as of July 1, 2003, following the sale of its activities to Avio Holding S.p.A., a company 70% owned by The Carlyle Group and 30% by Finmeccanica S.p.A. We sold these activities for a price of 1,509 million, realizing a net gain of 1,258 million.

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     Because of the significant contribution these operations made to our results prior to their deconsolidation, in order to facilitate an understanding of the performance of our remaining operations during the past two year, we present in this report both the results of our operations as reported by us on a consolidated basis under Italian GAAP, as well as the results of our operations in 2003 and, for comparative purposes, in 2002, on a “comparable consolidation” basis, excluding the results of the deconsolidated operations. In order to calculate the “comparable consolidation” results, we have deconsolidated from our consolidated results the amounts contributed to each line item by the deconsolidated operations, for the full year in 2002 and for the period through the date of deconsolidation for 2003.

     The following tables illustrate, respectively, the calculation of our net sales and revenues and operating profit on a comparable consolidation basis for the years ended December 31, 2003 and 2002. The table identifies each of the relevant activities and the date its results were deconsolidated, and the results of each for the relevant periods. We have subtracted the total for each year from our consolidated result for that year in order to arrive at the result on a comparable consolidation basis. For purposes of these calculations, we have also added back eliminations and consolidation adjustments that are made in calculating our Group-wide net sales and revenues, in line with our practice of analyzing revenues and operating income for the individual sectors based on such measures prior to eliminations for intra-Group transactions. See the table “Operating Results by Sector” in Item 4 above. We have used the same method to calculate the other line items we discuss on both a consolidated and a comparable consolidation basis.

     Results calculated on a “comparable consolidation” basis for purposes of Italian GAAP differ from results of continuing and discontinued operations as calculated for purposes of U.S. GAAP. See Note 24(f.i) to the Consolidated Financial Statements included in Item 18.

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Net Sales and Revenues
(in millions of euro)

                 
    2003
  2002
Fraikin (January 1, 2003)
      517  
IPI S.p.A. (January 1, 2003)
          31  
Banco Fiat SA (March 31, 2003)
    55       349  
Toro Assicurazioni (May 2, 2003)
    1,654       4,916  
Fidis Retail Italia (May 27, 2003)
    110       282  
FiatAvio (July 1, 2003)
    623       1,499  
Fidis Retail Italia (September/October 2003)
    507       457  
 
   
 
     
 
 
Total
  2,949     8,051  
Consolidated
    47,271       55,649  
Total deconsolidated
  (2,949 )   (8,051 )
Eliminations and consolidating adjustments
    176       428  
 
   
 
     
 
 
Comparable consolidation
  44,498     48,026  

Operating Income
(in millions of euro)

                 
    2003
  2002
Fraikin (January 1, 2003)
      20  
IPI S.p.A. (January 1, 2003)
          21  
Banco Fiat SA (March 31, 2003)
    7       77  
Toro Assicurazioni (May 2, 2003)
    35       108  
Fidis Retail Italia (May 27, 2003)
    39       38  
Fiat Avio (July 1, 2003)
    54       218  
Fidis Retail Italia (September/October, 2003)
    69       104  
 
   
 
     
 
 
Total
  204     586  
Consolidated
    (510 )     (762 )
Total deconsolidated
  (204 )   (586 )
 
   
 
     
 
 
Comparable consolidation
  (714 )   (1,348 )

Critical Accounting Policies

     The Consolidated Financial Statements included in Item 18 are prepared in conformity with Italian GAAP; a summary of the significant differences between Italian GAAP and U.S. GAAP and their effect on consolidated net income and stockholders’ equity is provided in Note 24 thereto. See also “ — U.S. GAAP Reconciliation” below. The preparation of these financial statements requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Fiat believes that its most critical accounting policies, which are those that require management’s most difficult, subjective and complex judgments, are as follows:

     Allowance for Doubtful Accounts. The allowance for doubtful accounts reflects our estimate of losses inherent in our wholesale and retail credit portfolio. We have reserved for the expected credit losses based on past experience with similar receivables, including current and historical past due amounts, dealer termination rates, write-offs and collections, the careful monitoring of portfolio credit quality and current and projected economic and market conditions. Management believes that reserves are adequate; however, different assumptions or changes in economic circumstances could result in changes to the allowance for doubtful accounts.

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     Recoverability of Long-lived Assets (including Goodwill). Long-lived assets include tangible assets, intangible assets (including goodwill) and financial fixed assets. As described in “Principles of consolidation and significant accounting policies” in the Notes to the Consolidated Financial Statements included in Item 18, we periodically review the carrying value of our long-lived assets held and used and that of assets to be disposed of when events and circumstances warrant such a review. We perform this review using estimates of future cash flows from use or disposal of the asset. If the carrying value of a long-lived asset is considered impaired, we record an impairment charge for the amount by which the carrying value of the long-lived asset exceeds its estimated recoverable amount from use or disposal determined by reference to our most recent corporate plans. Management believes that the estimates of these recoverable amounts are reasonable; however, estimates of future cash flows may differ from actual cash flows due to many factors, and changes in such estimates would impact the amount of the impairment charges recorded.

     Since January 1, 2002, for U.S. GAAP purposes, we determine any need to record an impairment of long-lived assets, including goodwill, by applying the methodologies set forth in Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and other intangible assets” or SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, as appropriate. For information on the effect of our adoption of these standards, see “— U.S. GAAP Reconciliation” below.

     Equipment on Operating Lease Residual Values. We report as tangible assets vehicles and equipment rented or leased to customers under operating leases. We recognize income from such operating leases over the term of the lease. Our investment in operating leases is determined on the basis of the estimated residual values of the leased vehicles and equipment, which we calculate at the lease inception date on the basis of published industry information and historical experience. In particular, we record depreciation expense for vehicles subject to operating leases on a straight-line basis over the term of the lease in amounts necessary to reduce the vehicle to its estimated residual value at the end of the lease term. The total value of equipment on operating leases, net of accumulated depreciation, was 914 million at December 31, 2003 (1,585 million at December 31, 2002). Realization of the residual values is dependent on our future ability to market the vehicles and equipment under the then-prevailing market conditions. We continually evaluate whether events and circumstances have occurred which impact the estimated residual values of the vehicles and equipment on operating leases. Management therefore believes that its current estimates are reasonable, however, changes in the underlying residual values or other external factors impacting our future ability to market these assets under prevailing market conditions may impact the realization of currently-estimated residual values.

     Product Warranties. We make provisions for estimated expenses related to product warranties at the time products are sold. We establish these estimates based on historical information on the nature, frequency and average cost of warranty claims. We seek to improve vehicle quality and minimize warranty claims, but we have also extended contractual warranty periods for certain classes of vehicles. Management believes that the warranty reserve is adequate; however, actual claims could differ from the original estimates and therefore necessitate an adjustment to the warranty reserve requirement.

     Vehicle Residual Value Guarantees. We have made financial commitments to certain customers that guarantee the residual values of vehicles purchased from us in certain circumstances. We have set aside a specific reserve for future risks and charges based on the difference between the guaranteed residual amount and the estimated realizable value of the used asset, taking into account the probability that such option will be exercised; this reserve is set up at the time of the initial sale and adjusted periodically over the period of the contract. In making our accounting estimate, we consider the expected rate of vehicle returns subject to this form of guarantee, current vehicle market value data and actual and expected loss experience. Management therefore believes that its current estimates are reasonable; however, actual future rates of vehicle returns and loss experience may differ significantly from our current assumptions. In particular, a decline in the economy in general and in the vehicle market specifically could significantly increase our risk resulting from these

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commitments to guarantee vehicle residual values, thereby adversely affecting our future operating results.

     Pension and Other Post-Retirement Benefits. Our companies sponsor pension and other retirement plans in various countries. In the U.S., the United Kingdom and Germany, we have major defined benefit plans. We use several statistical and judgmental factors which attempt to anticipate future events in calculating the expense and liability related to the plans. These factors include assumptions about the discount rate, expected return on plan assets, rate of future compensation increases and health care cost trend rates, each as determined by us within certain guidelines. In addition, our actuarial consultants also use subjective factors such as withdrawal and mortality rates in making relevant estimates. Management believes that the estimates it is currently using are reasonable; however, the actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, longer or shorter life spans of participants and changes in the actual costs of health care. Any such differences may have a significant impact on the amount of pension and other post-retirement benefit expenses we record.

     Realization of Deferred Tax Assets on Tax Loss Carryforwards. As of December 31, 2003, we had gross deferred tax assets arising on tax loss carryforwards of 4,313 million and valuation reserves against these assets of 3,054 million. The corresponding totals as of year end 2002, were 3,646 million and 2,168 million, respectively. We have recorded these valuation reserves to reduce our deferred tax assets to the amount that we are reasonably certain will be recovered. While we have considered future taxable income and used ongoing prudent tax planning strategies in assessing the need for valuation allowances, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.

     Retained Interests in Securitized Receivables. We retain a residual interest in the receivables we sell in connection with our securitizations. The value of the retained interest depends on the estimated fair value of future cash flows from the sold receivables after the investors in the securitization trusts have received the return for which they contracted and other expenses of the trust are paid. Our retained interest is subordinate to the investors’ interests. The gain or loss on sale of the receivables depends in part on the fair value of the retained interests at the date of transfer; additionally, we evaluate retained interests after transfer for impairment based on the fair value of the retained interests at the evaluation date. We estimate such fair values based on the present value of future expected cash flows using our estimate of key assumptions, such as credit losses, prepayment spreads and discount rates commensurate with the risks involved. Management believes that the estimates we use are considered appropriate based on information currently available, however, differences between those estimates and actual results could be significant.

     Please see “— Process of Transition to International Accounting Standards” below for a discussion of the new accounting standards we are required to adopt in preparing our 2005 financial statements and certain respects in which they differ from Italian GAAP.

Industrial Reorganization Initiatives

     In recent years, we have adopted a series of relaunch initiatives in response to the deteriorating economic environment and the negative results recorded by certain of our sectors, particularly Fiat Auto, including initiatives to reorganize and restructure our industrial operations. These initiatives, which have impacted our operations in Italy and abroad, have included plans for reductions in production capacity and related costs through the closure of certain manufacturing plants, cutbacks in production at other facilities and permanent and temporary reductions in the workforce, as well as programs to reduce owned and dealers’ inventories. In 2003, in the context of these initiatives, we also adopted a strategy to refocus on our core automotive activities as part of the effort to bring the Group back to financial and operational health. See Item 4.

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“Information on the Company — Introduction — Relaunch Initiatives” for a detailed discussion of our relaunch initiatives.

     Steps taken in connection with our relaunch initiatives had a significant impact on our financial and operational results in 2003, reflecting both gains realized upon the disposal of activities and cost savings through new initiatives, as well as the negative effect of restructuring expenses and writedowns and other extraordinary expenses and provisions. In particular, these items include:

    Net pre-tax gains on asset disposals of 1,747 million in our statement of operations for the fiscal year ended December 31, 2003 (as compared to net losses of 502 million in 2002), composed primarily of gains from the disposals of:

    our former aviation sector (1,258 million net of transaction costs),
 
    the Toro Assicurazioni Group (390 million net of transaction costs),
 
    Banco Fiat SA in Brazil (103 million net of transaction costs), and
 
    a 56% interest in IPI S.p.A. (15 million net of transaction costs).

      Losses on asset disposals in 2003 totaled 50 million, related mainly to the loss of 24 million incurred in fiscal 2003 with regard to our divestiture of Fraikin, which followed the writedown of 210 million that had been recorded in anticipation of the sale at the end of 2002. We had already set aside a specific reserve in connection with the 15 million net loss realized on the sale of a majority interest in Fidis Retail Italia in the consolidated financial statements for the year ended December 31, 2002, on the basis of binding agreements we had entered into with the purchasers during that year. See Note 3 to the Consolidated Financial Statements included in Item 18.

    Restructuring expenses and provisions of 658 million in our statement of operations for the fiscal year ended December 31, 2003 (1,026 million for 2002), relating primarily to the costs incurred or provisions determined in accordance with our relaunch initiatives for personnel laid off with long-term unemployment benefits, severance incentives, and writedowns of property, plant and equipment and intangible fixed assets, can be broken down as follows:

    A total of 259 million at Fiat Auto, of which 141 million related to reductions in production capacity at facilities outside Europe and in Italy, 52 million to the provisions and costs of the mobilitá early retirement program and other workforce reduction-related incentives, and the remaining 66 million to various other restructuring activities, including writedowns in the value of inventories at restructured operations.

    142 million at CNH, including severance and other employee-related costs, writedowns of assets, losses on the sale of assets and businesses, as well as costs related to the closing, selling and downsizing of existing facilities arising from divestitures, excess capacity and duplicate facilities, mainly in the United States and France;

    98 million at Comau, of which 76 million related to significant restructuring and redundancy programs in a number of countries (“cassa integrazione” in Italy, the “plan social” in France, and the reorganization of certain operations in the United Kingdom), and 22 million related to the an impairment charge relating to the service and dies activities which were reacquired from Comau by Fiat Auto and Fiat-GM Powertrain as of January 1, 2004;

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    an additional 159 million, attributable to Magneti Marelli (50 million, primarily due to restructuring initiatives in the automotive lighting division), Iveco (43 million, primarily for the closing of its Ikarusbus plant in Hungary), Teksid (43 million, primarily for the impairment of fixed assets at its Italian operations and workforce reduction-related incentives), Business Solutions (12 million, primarily for costs related to workforce reduction and the impairment of intangible assets), and Fiat S.p.A. and other Group companies (11 million).

      See Note 14 to the Consolidated Financial Statements included in Item 18 for additional information on these expenses.

    Consolidated restructuring reserves, as reported in our balance sheet, totaling 471 million at December 31, 2003 (731 million at December 31, 2002), attributable to restructuring activities at Fiat Auto (160 million), CNH (83 million), Iveco (75 million), Magneti Marelli (64 million), Comau (54 million), Teksid (24 million), Business Solutions (8 million) and other sectors (3 million). At December 31, 2003, these restructuring reserves included amounts related primarily to employee severance incentives and other headcount reduction measures, write-offs or production cutbacks at underutilized facilities, as well as other restructuring actions. See Notes 14 and 24(n) to the Consolidated Financial Statements included in Item 18.

Results of Operations

     The following discussion is based on financial information prepared in conformity with the accounting principles discussed in “Form and content of the consolidated financial statements” and “Principles of consolidation and significant accounting policies” in the Notes to the Consolidated Financial Statements included in Item 18, which have been prepared in accordance with Italian GAAP. These principles differ in certain respects from U.S. GAAP. The effects of such differences on consolidated net income and stockholders’ equity, as well as other disclosures required by U.S. GAAP, are included in Note 24 to the Consolidated Financial Statements included in Item 18. See also “Selected Financial Data” in Item 3 and “— Changes in the Scope of Consolidation” above.

2003 Compared with 2002

     Our net sales and revenues, including changes in contract work in progress, totaled 47,271 million, with the 15.1% decrease from 2002 being primarily attributable to changes in the scope of consolidation. As detailed in “— Changes in the Scope of Consolidation” above, on a comparable consolidation basis, our 2003 net sales and revenues were 44,498 million, a decrease of 7.3% from 48,026 million in 2002, with the decline being largely attributable to a decline in sales at Fiat Auto and the appreciation of the euro, which resulted in a reduction in the value of revenues in other currencies, primarily the U.S. dollar.

     Fiat Auto recorded revenues of 20,010 million for 2003, with the decline of 9.6% from the 22,147 million reported in 2002 reflecting an 8.8% decrease in unit sales, which fell to approximately 1,695,000 automobiles and light commercial vehicles,* as well as the deconsolidation of the results of Fidis Retail Italia and Banco Fiat SA, which carried out the sector’s European and Brazilian retail financing activities, respectively. CNH recorded revenues of 9,418 million in 2003, with the decrease of 10.4% from 2002 being primarily attributable to the appreciation of the euro against the dollar. Iveco recorded revenues of 8,440 million in 2003, with the decrease of 7.6% from 2002 being primarily attributable to the disposal of Fraikin and the sector’s switch from accounting


*   Unless otherwise indicated, all references to revenues and operating income for the individual sectors in this section are based on such measures prior to eliminations for intra-Group transactions. See the table of “Operating Results by Sector” in Item 4.

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for its 50-50 joint venture Naveco according to the proportional method to the equity method, as well as a 9.6% decrease in unit sales. Ferrari-Maserati, which was reported as a separate sector for the first time in 2002, recorded revenues of 1,261 million in 2003, with the 4.4% increase over 2002 being primarily attributable to higher sales of Ferrari models, which more than offset a decline in sales of Maserati and the negative effect of the appreciation of the euro.

     In 2003, we posted an operating loss of 510 million, as compared with an operating loss of 762 million recorded in 2002. As described in more detail above, the improvement is even more evident if the result is considered on a comparable consolidation basis: On this basis, we recorded losses of 1,348 million in 2002, compared to a loss of 714 million in 2003. The reduction in the magnitude of our operating loss, which accelerated over the course of 2003, mainly reflected efficiency gains realized through activities carried out during the year in connection with our relaunch initiatives.

     The revenues and operating income recorded by each of our sectors prior to eliminations are summarized in the table of “Operating Results by Sector” in Item 4 and analyzed in the more detailed sector-by-sector discussion appearing below.

     We reported net financial expenses of 963 million in 2003, as compared to 671 million in 2002. This increase in net financial expenses was largely attributable to the deconsolidation of Toro Assicurazioni, which generated financial income, as well as a decline in investment income. We recorded investment income in 2003 of 22 million, compared to income of 156 million in 2002, primarily as a result of the deconsolidation of Toro Assicurazioni and lower dividends received from equity investments. The results of our financial management activities, which we calculate based on net financial expenses but excluding any income or expenses derived from equity investments, amounted to expenses of 979 million in 2003, as compared to 862 million in 2002. Our management uses this non-GAAP measure because it believes it is able to more meaningfully evaluate the results of its financial management activities, which include interest expenses and income, foreign exchange gains and losses and revaluations and writedowns of non-equity securities and financial receivables, when income or loss on equity investments are excluded. The following table reconciles this non-GAAP measure to financial income and expenses, the most nearly comparable Italian GAAP measure. The parenthetical references to Notes following particular line items in the table are to the specific Notes to the Consolidated Financial Statements included in Item 18 where these line items are presented in greater detail.

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Results of financial management activities
          2003
  2002
            (in million of euros)
Financial income and expenses
  Note 17   (963 )   (671 )
Investment income
  Note 17     (22 )     (156 )
Losses on sale of securities not held as fixed assets (*)
  Note 17     6       24  
Revaluations of securities held in current assets other than equity investments
  Note 18     14       7  
Writedowns of:
  Note 18                
- financial fixed assets other than equity investments
            (1 )     (3) (**)
- securities held in current assets other than equity investments
            (8 )     (45 )
- financial receivables
            (5 )     (18 )
 
           
 
     
 
 
Results of financial management activities
          (979 )   (862 )
 
           
 
     
 
 


(*)   Included within losses on sale of securities in Note 17.
 
(**)   For 2002, the amount shown is net of a writedown of 81 million relating to permanent impairment of treasury stock held by Toro Assicurazioni (78 million) (note 3) and other Group companies.

     On a comparable consolidation basis, our results of financial management activities improved by less than 1%, with the slightly lower net expenses reflecting our lower average indebtedness for the period and a reduction in the level of interest rates in Europe and the United States, which were largely offset by the greater impact in 2003 of foreign exchange losses, and higher spreads on our corporate borrowings and higher fees payable to lenders. In addition, the result in 2002 benefited from the positive effects of certain interest rate risk management transactions.

     Total adjustments to financial assets amounted to a loss of 172 million in 2003, compared to a loss of 881 million in 2002, with the decrease due primarily to the deconsolidation of Toro Assicurazioni, with the 2002 figure reflecting losses incurred through the year-end marking to market of the insurance sector’s equity securities portfolios, as well as a narrowing of losses at companies accounted for using the equity method. These same factors were also reflected in the results of our equity investments, a measure our management uses to isolate the performance of our strategic and portfolio equity investments in unconsolidated entities (including adjustments to our financial assets and gains and losses on equity investments not held as fixed assets). Our results of equity investments in 2003 showed a loss of 156 million, as compared to a loss of 690 million in 2002. The following table reconciles this non-GAAP measure to investment income, the most nearly comparable Italian GAAP measure. The parenthetical references to Notes following particular line items in the table are to the specific Notes to the Consolidated Financial Statements included in Item 18 where these line items are presented in greater detail.

                         
Results of equity investments
          2003
  2002
            (in million of euros)
Adjustments to financial assets
  Note 18   (172 )   (881 )
Revaluations of securities held in current assets other than equity investments
  Note 18     (14 )     (7 )
Writedowns of:
  Note 18                
— financial fixed assets other than equity investments
            1       3 (**)
— securities held in current assets other than equity investments
            8       45  
— financial receivables
            5       18  
Investment income
  Note 17     22       156  
Losses on sale of securities not held as fixed assets (*)
  Note 17     (6 )     (24 )
 
           
 
     
 
 
Results of equity investments
          (156 )   (690 )
 
           
 
     
 
 

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(*)   Included within losses on sale of securities in Note 17.
 
(**)   For 2002, the amount shown is net of a writedown of 81 million relating to permanent impairment of treasury stock held by Toro Assicurazioni ( 78 million) (note 3) and by other Group companies.

     Our expenses related to the results of equity investments experienced a decline of a similar magnitude in percentage terms on a comparable consolidation basis, reflecting mainly the improvement in the performance of certain companies we value according to equity method, such as Italenergia Bis, as described above.

     We reported total extraordinary income and expenses equal to net income of 347 million in 2003, as compared with net expenses of 2,503 million in 2002. Extraordinary income totaled 2,017 million in 2003, of which 1,826 million was attributable to gains on disposals of investments and other fixed assets. The most significant of these were the gains realized on the sale of FiatAvio, our former aviation sector (1,266 million, or 1,258 million net of the expenses associated with the transaction, classified as other extraordinary expenses), Toro Assicurazioni Group (427 million, or 390 million net of the expenses and provisions connected with the transaction, classified as other extraordinary expenses), Fiat Auto’s retail financing activities in Brazil (103 million net of transaction costs), and sales of other investments (30 million).

     In 2002, when our aggregate capital gains on divestitures totaled 1,081 million, the most significant of these were the gains realized on the sale of 34% of Ferrari S.p.A. (714 million, or 671 million net of the costs associated with the transaction, which were classified as non-operating expenses), the sale of 14% of Italenergia Bis S.p.A. (189 million), the sale of our interest in Europ Assistance Holding S.A. (83 million), the sale of a 50% interest in our Targasys S.r.l. mobility service unit (36 million) and the sale of the aftermarket operations of Magneti Marelli (26 million).

     Other extraordinary income of 159 million in 2003 (146 million in 2002) was primarily attributable to the release of reserves maintained by individual companies of the Group that proved to be in excess of requirements.

     Our extraordinary expenses totaled 1,670 million in 2003 (as compared to 3,738 million in 2002). The primary components of the total for 2003 were:

    721 million in extraordinary expenses and provisions, of which the most significant individual items were: incidental costs and other provisions connected with certain divestitures that took place in 2003 and in prior years (139 million), including 37 million connected with the sale of the Toro Assicurazioni; damages caused by flooding at the Termoli factory in January 2003 (71 million); expenses and provisions recorded in connection with our sale of Magneti Marelli’s former electronic systems operations, including those related to the initial purchaser’s failure to pay the full agreed purchase price (53 million); provisions for commitments related to IPSE 2000, a telecommunications company in which Fiat S.p.A. purchased a 4% equity interest from Atlanet in connection with Fiat’s acquisition of 100% of Atlanet in 2003 (47 million); charges associated with cutbacks in the range of vehicles available at Iveco’s Civis bus operations in France (24 million); and commissions paid to Mediobanca for the extension of the commitments undertaken by Mediobanca under the Ferrari sale contract described in Note 14 (16 million). Other extraordinary expenses also included prior period expenses of 40 million.

    658 million in restructuring expenses and provisions, as analyzed in more detail under “—Industrial Reorganization Initiatives” above.

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    215 million of writedowns in the value of other assets to reflect revised estimates of future cash flows in light of changes in market prospects and new business plans (216 million in 2002). The total was primarily attributable to impairment charges at Fiat Auto of 177 million (production lines due to a planned reduction in production volumes) and Iveco of 10 million (production lines at its Civis bus facilities in France).

    50 million in losses on disposals of investments and other fixed assets; primarily reflecting the losses incurred on the sale of Fraikin, as well as costs related to capital increases at CNH connected with its employee stock option program and losses on other minor equity investments and asset sales, compared to losses of 1,239 million in 2002. The losses in 2002 included losses on the sale at current market prices of the General Motors shares we had acquired in connection with the formation of our industrial alliance (1,049 million), the sale of the electronic systems business unit of Magneti Marelli (150 million) and the sale of the aluminum business unit of Teksid (24 million).

    Taxes related to prior years, including amounts paid with respect to previously open years, amounted to 26 million in 2003 (79 million in 2002).

     The net income tax effect on our statement of operations for the year was a charge of 650 million, as compared with a credit of 554 million in 2002. Current income taxes for fiscal 2003 included 125 million for IRAP, the regional tax on production activities in Italy (141 million in 2002) and 31 million for other current taxes (192 million in 2002). The change from deferred tax assets of 887 million in 2002 to deferred tax liabilities of 494 million in 2003 reflected the reversal of previously established deferred tax assets connected with the realization of gains on divestitures that took place in 2003. For additional information, see Note 20 to the Consolidated Financial Statements included in Item 18.

     As a result, our net result before minority interest was a loss of 1,948 million in 2003, as compared with a loss before minority interest of 4,263 million in 2002. Our net loss amounted to 1,900 million, as compared with net loss of 3,948 million in the previous year. As a result, earnings per ordinary share on an Italian GAAP basis were equal to a net loss per share of 2.412 in 2003, as compared with net loss per share of 6.66 in 2002.

     Automobiles. Fiat Auto’s global unit sales to the dealer network, importers and other large direct customers during 2003 totaled approximately 1,695,000 vehicles, a decrease of 8.8% from the 1,860,000 sold in 2002. The decrease reflected weak market demand and a decline in market share in a number of the sector’s principal markets, as well as to the limited impact on the full year figures of the new models (the Lancia Ypsilon, the Fiat Panda and Idea and the Alfa GT) launched during the second half of 2003. When the contribution of unconsolidated affiliates is included, Fiat Auto’s sales totaled approximately 1,779,000 units, a decrease of 6.9% over the previous year’s total of 1,910,000 units sold.

     Western European customers bought 1,179,000 vehicles, a decrease of 9.4%, as Fiat Auto’s automobile market share in Western Europe as a whole fell by 0.8 percentage points to 7.4%. The sector’s unit sales were down in all of its principal European markets with the exception of the United Kingdom and Spain, where they increased by 1.4% and 14.8%, respectively. In Italy, the sector’s unit sales declined by 11.5% to 671,000 units. Fiat Auto’s share of the Italian automobile market fell from 30.2% to 28.0%. New registrations were down 1.2% for the year as a whole. Fiat Auto’s share of the automobile market in Western Europe excluding Italy decreased from 4.0% to 3.5%.

     In Poland, Fiat Auto sold a total of 70,000 vehicles in 2003, or 15.9% more than in the previous year. The increase in sales in Poland was attributable to a 16.3% increase in new registrations. Fiat Auto’s automobile market share in Poland held steady at 17.8%. In Brazil, the sector sold a total of 318,000 vehicles, an 11.3% decrease from the 358,000 units sold a year earlier as

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demand in Brazil decreased by 3.2%. Despite the greater reduction in unit sales, Fiat Auto’s share of the automobile market declined only slightly, from 25.8% in 2002 to 25.2% in 2003. In Argentina, where sales and manufacturing activities were reduced sharply during 2002 as a result of the economic crisis in that country, sales in 2003 increased as the market started to recover, with the sector selling approximately 14,700 vehicles, compared to approximately 6,800 in 2002.

     Fiat Auto’s revenues totaled 20,010 million, a decrease of 2,137 million, or 9.6%, compared with 2002, with the decrease attributable primarily to the contraction in sales volumes and the deconsolidation of the sector’s retail financing activities in Europe and Brazil. In 2003, Fiat Auto reported an operating loss of 979 million, as compared to an operating loss of 1,343 million in 2002. Excluding the results of the financial companies deconsolidated in 2003, the sector’s operating loss would have been 1,094 million in 2003, compared to 1,562 million in 2002. The principal reasons for the narrower operating losses, achieved despite the declines in revenues and unit sales, as well as a 9% increase in research and development outlays to 939 million, were significant cost reductions and savings on overhead as a result of our relaunch initiatives and the industrial alliance with General Motors, as well as the positive effect of the new models introduced in the last few months of the year.

     Fiat Auto reported a net loss of 2,058 million in 2003, compared to a net loss of 2,739 million in 2002. The narrower losses reflected the reduction in the magnitude of the sector’s operating losses, as well as lower net extraordinary expenses (531 million in 2003, compared with 796 million in 2002), which included approximately 259 million in restructuring charges, down from 549 million in 2002. For details of these charges, see “— Industrial Reorganization Initiatives” above.

     Research and development expenditures amounted to 939 million (4.7% of net sales) in 2003, an increase from the 861 million (3.9% of net sales) recorded in 2002. The sector’s capital expenditures, which totaled 1,100 million in 2003, as compared with 1,115 million in 2002, were devoted to the development of new products and technological innovation, as well as to the purchase of vehicles used in the sector’s increasingly popular medium- and long-term leasing operations, which accounted for approximately 286 million, or 26% of the total.

     Agricultural and Construction Equipment. CNH’s revenues in 2003 totaled 9,418 million, with the decrease of 10.4% from the 10,513 million recorded in 2002 being primarily attributable to the appreciation of the euro against the dollar. Expressed in U.S. dollars, CNH’s reporting currency, revenues increased by approximately 7% over the total for 2002, principally as a result of the depreciation of the dollar, which resulted in an increase in the value of revenues in other currencies, primarily the euro. Excluding the effect of changes in foreign exchange rates, CNH’s 2003 revenues expressed in dollars were substantially in line with those recorded in 2002.

     The following table sets forth CNH’s revenues from sales of agricultural and construction equipment, as reported by CNH under U.S. GAAP, for the periods included in both U.S. dollars and euros.

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Net Sales of Equipment
  2003
  2002
(U.S. GAAP)   (in millions of euros)
Agricultural Equipment
  6,300     6,782  
Construction Equipment
    2,603       3,098  
 
   
 
     
 
 
TOTAL
  8,903     9,880  
    (in millions of dollars)
Agricultural Equipment
  $ 7,125     $ 6,405  
Construction Equipment
    2,944       2,926  
 
   
 
     
 
 
TOTAL
  $ 10,069     $ 9,331  

     CNH’s revenues from sales of equipment decreased by 9.9% to 8,903 million, from 9,880 million in 2002, primarily reflecting the appreciation of the euro against the dollar. In dollar terms, revenues from sales of equipment increased by $738 million, or approximately 8%. Of the 2003 revenues, approximately $800 million were attributable to the effect of foreign exchange rate movements, in particular the depreciation of the dollar against the euro and other currencies, so that excluding the effects of exchange rate changes during the year, revenues from sales of equipment would have been slightly lower compared to 2002.

     Overall in 2003, world market demand for major agricultural equipment product lines was approximately 7% higher than in 2002, as increased worldwide demand for tractors and overall stronger demand in North America more than offset lower demand for tractor in Latin America and Western Europe. Worldwide demand for combine harvesters was steady in 2003, with declines in North America and Western Europe offset by stronger demand in Latin America. CNH’s overall tractor market share declined slightly compared with 2002, while its combine market share increased 1.5 percentage points. World market demand for construction equipment product lines increased by approximately 11%, as growth in North America and Asia were only partially offset by lower demand in Latin America and Western Europe. World market demand for backhoe loaders increased by about 6% and demand for heavy construction equipment increased by approximately 19% On a unit basis, CNH’s construction equipment market share declined by approximately three percentage points, with declines in all of its major product categories in nearly every market.

     Expressed in U.S. dollars, CNH’s sales of agricultural equipment increased to $7,125 million, up approximately 11% from the prior year. Of this increase, approximately 8 percentage points were attributable to favorable effects of the depreciation of the dollar against the euro, the Australian dollar, the Canadian dollar, the British pound and other currencies, as well as increases in wholesale unit sales of combine harvesters and higher pricing, especially in Brazil. These positive factors were offset only partially by declines in tractor sales.

     Sales of construction equipment increased by 1% to $2,944 million. Excluding the effects of the formation of the Fiat Kobelco Construction Machinery S.p.A. joint venture (“Fiat Kobelco”) in the third quarter of 2002, net sales declined by 1%, as the positive effect of the translation of revenues denominated in the euro and other currencies into dollars was offset by lower wholesale unit volumes. In Western Europe, initial problems in the integration of the Fiat-Hitachi and Fiat-Kobelco sales networks following the formation of Fiat Kobelco, which consists of the operations of CNH’s former Fiat-Hitachi Excavator joint venture and the European operations of Kobelco, also contributed to the contraction. The decline in unit sales was marked by lower sales of backhoe loaders and skid steer loaders in the North American market that were offset only in part by higher unit sales of heavy construction equipment in the North America.

     The following table sets forth certain data on CNH’s revenues from sales of equipment, as reported by CNH under U.S. GAAP, by geographic region for the periods indicated.

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Net Sales of Equipment
  2003
  2002
(U.S. GAAP)   (in millions of euros)
North America
  3,719     4,383  
Western Europe
    3,306       3,512  
Latin America
    630       676  
Rest of the World
    1,248       1,309  
 
   
 
     
 
 
TOTAL
  8,903     9,880  
    (in millions of dollars)
North America
  $ 4,206     $ 4,140  
Western Europe
    3,739       3,317  
Latin America
    712       638  
Rest of the World
    1,412       1,236  
 
   
 
     
 
 
TOTAL
  $ 10,069     $ 9,331  

     Expressed in U.S. dollars, CNH’s revenues from sales of equipment in North America increased by 1.6%, from $4,140 million in 2002 to $4,206 million in 2003, reflecting slightly lower sales of tractors and of construction equipment, the effects of which were partially offset by higher combine unit sales. Sales of equipment in Western Europe increased by 12.7% from $3,317 million in 2002 to $3,739 million in 2003, reflecting higher agricultural equipment unit sales and the increase in the value of the euro and British pound as compared to the U.S. dollar, these positive effects were partially offset by a decline in unit sales of construction equipment. Sales of equipment in Latin America increased by 11.6% from $638 million in 2002 to $712 million in 2003, principally as a result of higher combine unit sales and a more favorable mix and pricing, the positive effects of which were only partially offset by a decline in the average value of Brazilian real in dollar terms and a decline in unit sales of tractors and construction equipment. In the Rest of World, sales of equipment were up 14.2%, from $1,236 million in 2002 to $1,412 million in 2003, mainly as a result of higher unit sales of construction equipment and the increase in the value of the Australian dollar, while unit sales of combines and tractors declined.

     When stated in euros, our reporting currency, revenues from sales of equipment decreased by 15.2% in North America, by 5.9% in Western Europe, by 6.8% in Latin America and by 4.6% in the Rest of World.

     CNH reported operating income of 229 million (2.4% of sales) in 2003, compared to 163 million (1.6% of sales) in 2002. The increase was primarily attributable to higher prices, improved margins on new products, the realization of cost savings arising from integration with Case and sector-related relaunch initiatives. These factors more than offset the negative impact of lower unit sales, the costs associated with the introduction of new products, and higher pension and post-retirement benefit costs for current and former CNH employees.

     The sector’s net result for the year was a net loss of 192 million, as compared with a net loss of 211 million in 2002, reflecting the improvement in operating results and a reduction in financial expenses as a result of lower external borrowings; these positive factors were only partially offset by an increase in extraordinary restructuring charges to 142 million (18 million in 2002), as described in more detail in “— Industrial Reorganization Initiatives” above. The amounts of such changes recognized under the Fiat Group’s accounting principles differ from those accounted for under U.S. GAAP as adopted by CNH to present its consolidated financial results in the United States. See Note 24 to the Consolidated Financial Statements included in Item 18.

     CNH’s research and development expenses in 2003 were 229 million (2.4% of net sales), down from 300 million (2.9% of net sales) in 2002, with the decrease attributable in part to currency translation effects.

     Commercial vehicles. In 2003, Iveco’s revenues totaled 8,440 million, a decrease of 7.6% from the 9,136 million recorded in 2002. The decrease was almost entirely attributable to Iveco’s

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divestiture of Fraikin at the beginning of 2003 and the change in method of accounting for the Naveco 50-50 joint venture from the proportional method to the equity method.

     During 2003, Iveco sold 146,000 vehicles worldwide, or approximately 9.6% less than in 2002. If the approximately 50,000 vehicles sold by unconsolidated licensees are added, total sales reach 196,000 vehicles (199,380 units in 2002).

     In Western Europe, Iveco shipped 119,300 vehicles, or 7.4% fewer than in 2002, as lower unit sales recorded in Italy, Germany and the United Kingdom were only partially offset by higher unit sales in France and Spain. The most significant declines in unit sales occurred in Italy (-13.6%), due to strong contraction in demand following the expiration of certain tax incentives that had been introduced in 2002, as well as in Germany (-6.7%) and in the United Kingdom (-14.9%), where Iveco was unable to benefit from overall gains in market demand as a result of insufficient competitiveness of the after-sales services package Iveco offers. Iveco’s unit sales were up slightly in France and Spain. In Eastern Europe, Iveco sold approximately 9,700 units, or approximately 1.6% more than in 2002. Outside of Europe, Iveco’s unit sales decreased by approximately 26%, from 23,600 vehicles in 2002 to 17,500 in 2003, with the decline largely attributable to the change in accounting method for Naveco, the sector’s 50-50 joint venture with the Yuejin Group in China. Unit sales at Naveco increased by approximately 1% from 2002 to approximately 14,700 in 2003. Sales by unconsolidated licensees in India and Turkey increased (by approximately 38% in India and 6.9% in Turkey), reflecting the trend of vehicle demand in the two countries and an increase in market share in India in all market segments. Irisbus sold a total of 8,307 buses during the year, a decline of 1.5% that was primarily attributable to reduced market demand from the public sector in France and Italy. Its market share in Western Europe decreased two percentage points to approximately 25%, primarily as a result of the lower sales and the fact that market demand grew primarily in countries such as the United Kingdom where Irisbus has a relatively small presence. Iveco produced 379,000 diesel engines, or approximately 4.9% more than in 2002, reflecting an increase in sales of a new line of engines to CNH for construction and agricultural machine applications and an increase in sales to Sevel. Engine sales to customers outside the Iveco sector, including to other sectors of the Group, accounted for approximately 61% of Iveco’s sales of engines, or 3 percentage points more than in 2002.

     Iveco recorded operating income of 81 million in 2003, a decline of approximately 21% from the 102 million recorded in 2002, primarily as a result of the deconsolidation of Fraikin. Excluding the effect of these changes in the scope of consolidation, Iveco’s operating income would have declined by approximately 5%. Iveco’s operating profitability was also negatively affected by lower sales as a result of aggressive competition in Europe as well as by the appreciation of the euro, particularly against the British pound. These negative factors were only partially offset by reductions in manufacturing costs and overhead.

     Iveco’s research and development expenditures of 212 million (2.5% of net sales) decreased by 11.3% from the 239 million (2.6% of net sales) recorded in 2002. Capital expenditures decreased from 587 million in 2002 to 210 million in 2003, of which 182 million was devoted to industrial investments and 28 million related to investments in vehicle fleets for contract hire activities. The significant decrease in capital expenditures primarily reflected a decrease in investments in vehicle fleets from 331 million in 2002 to 28 million in 2003, as a result of the sale of Fraikin and its leasing activities.

     Ferrari-Maserati. Ferrari-Maserati, which we established as a separate sector for the first time in 2002 (having been previously reported as one of our “Other Companies”), recorded revenues of 1,261 million, an increase of 4.4% from the 1,208 million recorded in 2002, reflecting higher sales of Ferrari models, which were only partially offset by a reduction in sales of Maserati models and the negative effect of the appreciation of the euro. However, the sector’s operating income declined by approximately 54% from 70 million in 2002 to 32 million in 2003, largely as a result of high research and development costs for new products and the appreciation of the euro, which move than offset an improvement in the mix of Ferrari models sold. Ferrari-Maserati’s research and development

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expenditures of 130 million (10.3% of net sales) increased by approximately 38% from the 94 million (7.8% of net sales) recorded in 2002. Capital expenditures increased by 9.6% to 193 million in 2003.

     Components. Magneti Marelli’s revenues amounted to 3,206 million, or 2.5% less than the 3,288 million recorded in 2002. The decrease was primarily attributable to the appreciation of the euro, which was only partially offset by increased sales by the sector’s engine control unit following the introduction of a new direct injection system for diesel engines, as well as by its lighting unit, also as a result of the introduction of new products. Magneti Marelli recorded operating income of 32 million in 2003, compared to an operating loss of 16 million in 2002, with the improvement being largely attributable to cost containment measures focused on raw materials costs and overhead.

     Production Systems. Comau recorded revenues of 2,293 million in 2003, substantially in line with the 2,320 million recorded in 2002. Overall revenues from contract work were broadly in line with those of the previous year, both in Europe and in North America, as the negative impact of the depreciation of the dollar was largely offset by an acceleration in work carried out under existing contracts. Revenues from maintenance services were also largely unchanged with respect to 2002. The production systems sector posted operating income of 2 million, compared to a 101 million operating loss recorded in 2002, with the losses in 2002 reflecting significant cost overruns on several large contracts in Europe.

     Metallurgical Products. Teksid reported revenues of 844 million, or 45.2% less than the 1,539 million recorded in 2002, largely as a result of the sale in September 2002 of Teksid’s aluminum business, for which the sector recorded revenues in 2002 of 660 million prior to the sale. In addition, Teksid’s revenues in 2003 were negatively affected by adverse exchange rate developments, including the appreciation of the euro against the dollar; these negative factors were offset only partially by higher sales volumes at both the magnesium business unit, which benefited from stronger demand from the SUV segment in the United States market, and the cast iron business unit. The metallurgical products sector recorded operating income of 12 million in 2003, compared to 27 million in 2002. The decline reflected the deconsolidation in September 2002 of the aluminum business unit, which accounted for 17 million of Teksid’s 2002 operating income, as well as the adverse effects of exchange rate movements and a less favorable product mix, which were offset only in part by higher sales volumes and cost-cutting measures.

     Aviation. We divested FiatAvio as of July 1, 2003. FiatAvio’s revenues in the period prior to its sale amounted to 625 million, compared to the 1,534 million recorded in 2002. FiatAvio recorded operating income in the 2003 period of 53 million, compared to 210 million in 2002.

     Insurance. We divested Toro Assicurazioni as of May 2, 2003. Toro Assicurazioni’s revenues (equal to premiums earned) in the period prior to its sale amounted to 1,654 million, compared to the 4,916 million recorded in 2002. Toro Assicurazioni recorded income before taxes in the 2003 period of 85 million, compared to 14 million in 2002.

     Services. Business Solutions reported revenues of 1,816 million for 2003, a decrease of 7.6% from the 1,965 million recorded in 2002. This decrease was primarily attributable to the divestiture in 2003 of a majority interest in IPI S.p.A. (which had 31 million of revenues in 2002) and other minor operations, as well as an overall contraction in the services market and a strategic decision to refocus the sector’s activities on serving other Group companies. Operating income amounted to 45 million, a decrease of 32.8% from 67 million in 2002, mainly as a result of the divestitures of a majority interest in IPI S.p.A. (which generated 21 million in operating income in 2002) and other minor operations. These divestitures were offset only partially by cost-cutting measures implemented during the year.

     Publishing and Communications. Itedi’s net sales and revenues amounted to 383 million in 2003, an increase of 6.4% from the 360 million reported in 2002. The increase reflected higher advertising revenues, “brand-stretching” initiatives and sales of the weekly “Specchio,” which more than offset a decline in daily newspaper sales. The publishing and communications sector reported

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operating income of 10 million, as compared with an operating income of 3 million in 2002. This improvement was a result of measures to improve efficiency and rationalize costs in all business areas, margins on sales to new newspaper customers and a decline in the cost of newsprint.

     2002 Compared with 2001

     Our net sales and revenues, including changes in contract work in progress, totaled 55,649 million in 2002, with the 4.1% decrease from 2001 being primarily attributable to the automobiles sector.

     The automobiles sector recorded revenues of 22,147 million for 2002, with the decline of 9.4% from the 24,440 million reported in 2001 reflecting a 11.1% decrease in unit sales, which fell to total of 1,860,000 automobiles and light commercial vehicles. CNH recorded revenues of 10,513 million in 2002, with the decrease of 2.4% from 2001 being primarily attributable to the appreciation of the euro against the dollar. Iveco recorded revenues of 9,136 million in 2002, with the increase of 5.6% over 2001 being primarily attributable to the sector’s consolidation of Irisbus. Excluding the effect of Irisbus, Iveco’s revenues would have declined slightly, notwithstanding a 0.9% increase in unit sales. Ferrari, which is being reported as a separate sector for the first time in 2002, recorded revenues of 1,208 million in 2002, with the 14.2% increase over 2001 being primarily attributable to higher sales of its Maserati models following the re-introduction of the brand in North America during the year.

     The revenues and operating income recorded by each of our sectors prior to eliminations are summarized in the table of “Operating Results by Sector” in Item 4 and analyzed in the more detailed sector-by-sector discussion appearing below.

     In 2002, we posted an operating loss of 762 million, as compared with operating income of 318 million recorded in 2001. The difference was primarily attributable to Fiat Auto, which reported an operating loss of 1,343 million, more than double that recorded in 2001. The production systems and components sectors also recorded negative operating results for the year, as did our “Other Companies”. The negative impact of these losses on our results was partially offset by positive operating results at each of our other sectors.

     We reported net financial expenses of 671 million in 2002, as compared to 680 million in 2001. The decrease of 1.3% reflected lower market interest rates, of which the positive effects on our borrowing costs were largely offset by higher spreads that reflected recent downgrades and market concerns over our financial performance. The total also reflected a decrease in our investment income from 264 million in 2001 to 156 million in 2002, which was primarily attributable to lower tax credits on dividends from unconsolidated investments.

     Total adjustments to our financial assets amounted to a loss of 881 million in 2002, as compared to a loss of 494 million in 2001. The increase of 78.3% was largely attributable to increased losses incurred by companies in which we have a minority interest, including Italenergia Bis S.p.A., where our share of the loss amounted to 211 million (34 million in 2001 for Italenergia S.p.A.), and Capitalia S.p.A., where our share of the loss amounted to 124 million (income of 21 million in 2001). The overall results also included 140 million in writedowns of financial receivables and securities (121 million in 2001), reflecting lower stock market prices.

     We reported total extraordinary income and expenses equal to net expenses of 2,503 million in 2002, as compared with net income of 359 million in 2001. Extraordinary income totaled 1,235 million in 2002, of which 1,081 million was attributable to gains on disposals of investments and other fixed assets. The most significant of these were the gains realized on the sale of 34% of Ferrari S.p.A. (714 million, or 671 million net of the costs associated with the transaction, which were classified as non-operating expenses), the sale of 14% of Italenergia Bis S.p.A. (189 million), the sale of our interest in Europ Assistance Holding S.A. (83 million), the sale of a 50% interest in our

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Targasys S.r.l. mobility service unit (36 million) and the sale of the aftermarket operations of Magneti Marelli (26 million).

     In 2001, when our aggregate capital gains on divestitures totaled 1,515 million, the most significant transactions were the sale of Fenice S.p.A. (481 million), the sale of the climate control systems division of Magneti Marelli (329 million), the contribution of Fiat Energia S.p.A. to Italenergia (255 million), the contribution of ITS and GSA in connection with the establishment of the Global Value Services joint venture (165 million), the sale of the remaining 49% stake in Alstom Ferroviaria (formerly Fiat Ferroviaria) (107 million), and the contribution of the Savarent business to Leasys S.p.A. (71 million). They also included gains recorded on the sale of shares of Banca di Roma S.p.A. (20 million), and of the Italian holding company H.d.P. S.p.A. (16 million).

     Other extraordinary income of 146 million (79 million in 2001) was primarily attributable to the release of reserves maintained by individual companies of the Group that proved to be in excess of requirements.

     Our extraordinary expenses totaled 3,738 million in 2002 (as compared to 1,286 million in 2001). The primary components of the total for 2002 were:

    1,239 million in losses on disposals of investments and other fixed assets of which the most significant losses were incurred on: the sale at current market prices of the General Motors shares the Group had acquired in connection with the formation of the industrial alliance (1,049 million), the sale of the electronic systems business unit of Magneti Marelli (150 million, of which 36 million arose at the time of sale and 114 million from post-sale price adjustments and other settlement payments), the sale of the aluminum business unit of Teksid (24 million, or a total of 100 million including the net provisions and expenses associated with the sale, which were classified as other extraordinary expenses).

    1,026 million in restructuring expenses and provisions, analyzed in more detail above.

    968 million in extraordinary expenses and provisions, of which 317 million related to Fiat Auto (primarily for charges recorded by the sector in connection with the spare parts distribution structure, commercial disputes and claims with suppliers and dealers, hail and flood-damage costs and provisions for other charges relating mainly to the impairment of certain assets and investments); 199 million related to Iveco (primarily reserves created with regard to changes in the sector’s commercial policies and pension programs), 99 million related to Teksid (primarily in respect of charges arising in connection with the sale of its aluminum business unit), 135 million related to Business Solutions (primarily in respect of an impairment charge on investments in the telecommunications area and real estate), and 111 million related to Fiat S.p.A. and our “Other Companies” (primarily incidental charges associated with the sale of 34% of Ferrari S.p.A. and those related to environmental clean up activities with regard to disposed of facilities).

    426 million of writedowns in the value of other assets to reflect revised estimates of future cash flows in light of changes in market prospects and new business plans; of this total, 235 million related to Iveco (primarily the writedown in the goodwill attributed to Iveco’s Fraikin leasing unit, as calculated on the basis of the agreement for the sale of that unit), 82 million related to Comau (primarily a writedown in the goodwill attributed to the PICO operations), and the remaining 46 million related to Teksid (primarily a writedown in the value of a Mexican facility).

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    Taxes related to prior years amounted to 79 million in 2002 (18 million in 2001) and included 56 million for tax amnesty costs estimated by the companies operating in Italy.

     The net income tax effect on the results of operations for the year was a credit of 554 million, as compared with a charge of 294 million in 2001. Current income taxes for fiscal 2002 included 141 million for IRAP, the regional tax on production activities in Italy (156 million in 2001) and 192 million for other corporate income taxes (652 million in 2001). The net credit of 554 million is attributable to positive deferred tax effects of 887 million (514 million in 2001). Potential future benefits resulting from tax losses reported for the fiscal year were not accrued unless there was a reasonable certainty that they would be recovered.

     As a result, our net result before minority interest was a loss of 4,263 million in 2002, as compared with loss before minority interest of 791 million in 2001. Our net loss amounted to 3,948 million, as compared with net loss of 445 million in the previous year. As a result, earnings per ordinary share on an Italian GAAP basis were equal to a net loss per share of 6.66 in 2002, as compared with net loss per share of 0.84 in 2001.

     Automobiles. Fiat Auto’s global unit sales to the dealer network, importers and other large direct customers during 2002 totaled 1,860,000 vehicles, a decrease of 11.1% from the 2,092,000 sold in 2001. The decrease reflected weak market demand and a decline in market share in a number of the sector’s principal markets, as well as a further reduction in inventories held by the distribution network. The inventory reduction program, which began during 2001 as part of the reengineering of the sector’s logistical and marketing organization, was reflected in a reduction in the volume of vehicles delivered to dealers. The unit sales decline also reflected the sector’s strategic decision to de-emphasize sales in less profitable distribution channels and to the limited impact on the full year figures of the fact that several important models were launched only during the second half of 2002 (the Lancia Thesis and Phedra, the Fiat Ulysse and, most importantly, the Fiat Stilo Multi Wagon, as well as the Alfa Romeo 147 GTA). When the contribution of unconsolidated affiliates is included, Fiat Auto’s sales totaled 1,910,000 units, a decrease of 10.2% over the previous year’s total of 2,126,000 units sold.

     Western European customers bought 1,302,000 cars, a decrease of 10.5%, as Fiat Auto’s market share in Western Europe as a whole fell by 1.3 percentage points to 8.2%. The sector’s unit sales were down in all of its principal European markets with the exception of Spain, where they increased by 5.9%. In Italy, the sector’s unit sales declined by 8.0% to 759,000 units, in part due to the sector’s implementation of aggressive measures to reduce dealer inventories. Fiat Auto’s share of the Italian market fell from 34.6% to 30.2%. The situation in Italy was particularly difficult during the first half of the year, as the introduction of government-sponsored environmental incentives in July boosted demand in the second half. Nevertheless, new registrations were down 5.9% for the year as a whole. Fiat Auto’s market share in Western Europe excluding Italy decreased from 4.6% to 4.0%.

     In Poland, Fiat Auto sold a total of 61,000 cars in 2002, or 20.4% fewer than in the previous year. The sharp drop in sales in Poland was attributable to aggressive marketing policies implemented by competitors, as well as a 5.3% decline in new registrations. In this negative climate, Fiat Auto’s market share declined sharply from 23.2% to 17.7%, with the sector losing its leading position in the market to Volkswagen. In Brazil, the sector sold a total of 358,000 vehicles, a 13.9% decrease from the 416,000 units sold a year earlier. Demand in Brazil decreased by 4.6%, and the greater reduction in unit sales was reflected in a decline of 2.7 percentage points in Fiat Auto’s market share, which is now equal to that of Volkswagen. In Argentina, Fiat Auto responded to further sharp declines in demand from the already low levels of 2001 by reducing its manufacturing activities to the minimum level consistent with retaining the ability to relaunch these operations if conditions in the Mercosur region improve.

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     Fiat Auto’s revenues totaled 22,147 million, a decrease of 2,293 million, or 9.4%, compared with 2001, with the decrease being primarily attributable to the 11.1% decline in unit sales discussed above. In 2002 , Fiat Auto reported an operating loss of 1,343 million, as compared to an operating loss of 549 million in 2001. The principal reasons for the further deterioration in operating results were the contraction of unit sales, as well as more aggressive discount policies adopted in order to meet competitive challenges and reduce dealers’ stocks of both new and used cars. The extension of the sector’s basic warranty from one year to two resulted in an increase in related provisions, which also had a negative impact on operating results. The realization of cost savings from the sector’s restructuring programs and synergies realized from its alliance with General Motors partially offset the impact of these negative factors.

     The automobiles sector reported a net loss of 2,739 million in 2002, compared to a net loss of 1,442 million in 2001. The negative performance reflected the further decline in the sector’s operating profitability, as well as the considerable amount of extraordinary expenses described in more detail above.

     Research and development expenditures amounted to 861 million (3.9% of net sales) in 2002, a slight decline from the 870 million (3.6% of net sales) recorded in 2001. The sector’s capital expenditures, which totaled 1,115 million in 2002, as compared with 1,331 million in 2001, were devoted to the development of new products and technological innovation, as well as to the purchase of vehicles used in the sector’s increasingly popular medium- and long-term leasing operations, which accounted for approximately 337 million, or 30% of the total.

     Agricultural and Construction Equipment. CNH’s revenues in 2002 totaled 10,513 million, with the decrease of 2.4% from the 10,777 million recorded in 2001 being primarily attributable to the appreciation of the euro against the dollar. Expressed in dollars, the sector’s reporting currency, revenues increased by approximately 2.8% over the total for 2001, principally as a result of the contribution of acquired companies. The following table sets forth CNH’s revenues from sales of agricultural and construction equipment, as reported by CNH under U.S. GAAP, for the periods included in both dollars and euros.

                 
Revenues from Sales of Equipment
  2002
  2001
(U.S. GAAP)   (in millions of euros)
Agricultural Equipment
  6,782     6,780  
Construction Equipment
    3,098       3,300  
     
     
 
TOTAL
  9,880     10,082  
    (in millions of dollars)
Agricultural Equipment
  $ 6,405     $ 6,073  
Construction Equipment
    2,926       2,957  
     
     
 
TOTAL
  $ 9,331     $ 9,030  

     The sector’s revenues from sales of equipment decreased by 2.0% to 9,880 million, from 10,082 million in 2001, reflecting the negative currency translation effects, which were not offset by an increased contribution by newly acquired companies. In dollar terms, revenues from sales of equipment increased by 3.3%, but were essentially unchanged from 2001 levels on a comparable consolidation basis.

     Overall in 2002, world market demand for major agricultural equipment product lines was approximately 5% higher than in 2001, as increased worldwide demand for tractors and increased demand for combines in Western Europe and Latin America more than offset declines in North America and the Rest of the World. CNH’s mix of agricultural equipment sales remained relatively constant: the sector’s overall tractor market share was unchanged from that in 2001, while its combine market share increased slightly. World market demand for construction equipment product

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lines decreased, as declines in North America and Western Europe were only partially offset by increases in demand in Latin America and the Rest of the World. World market demand for backhoe loaders and skid steer loaders declined, while demand for heavy construction equipment increased. The sector’s mix of sales weakened slightly, as its overall market share declined, notwithstanding an improvement in its heavy construction equipment market share.

     Expressed in U.S. dollars, CNH’s sales of agricultural equipment increased to $6,405 million, up approximately 5% from the prior year, reflecting increases in wholesale unit sales of tractors and combines, as well as the favorable effects of the translation of euro-denominated revenues, price increases for certain products and revenues from CNH’s new 60%-owned joint venture in China, Shanghai New Holland Agricultural Machinery Corp., Ltd. Sales of construction equipment declined by 1.0% to $2,926 million. The contribution of Kobelco America nearly offset the effect of an overall decline in unit sales of approximately 10%, as sales in dollar terms on a comparable consolidation basis declined by approximately 9.5%. The decline in unit sales was marked by lower sales of backhoe loaders and skid loaders in the North America and Western European markets that were not offset by higher unit sales of heavy construction equipment in the North America and Rest of World markets. The following table sets forth certain data on CNH’s revenues from sales of equipment, as reported by CNH under U.S. GAAP, by geographic region for the periods indicated.

                 
Revenues from Sales of Equipment
  2002
  2001
(U.S. GAAP)   (in millions of euros)
North America
  4,383     4,686  
Western Europe
    3,512       3,537  
Latin America
    676       655  
Rest of the World
    1,309       1,204  
 
   
 
     
 
 
TOTAL
  9,880     10,082  
    (in millions of euros)
North America
  $ 4,140     $ 4,197  
Western Europe
    3,317       3,168  
Latin America
    638       587  
Rest of the World
    1,236       1,078  
 
   
 
     
 
 
TOTAL
  $ 9,331     $ 9,030  

     Expressed in U.S. dollars, the sector’s revenues from sales of equipment in North America decreased by 1.4%, from $4,197 million in 2001 to $4,140 million in 2002, reflecting lower tractor and combine unit sales, the effects of which were partially offset by slightly higher sales of construction equipment due to the acquisition of Kobelco America. Sales of equipment in Western Europe increased by 4.7% from $3,168 million in 2001 to $3,317 million in 2002, reflecting higher combine unit sales and the increase in the value of the euro and British pound as compared to the U.S. dollar, these positive effects were partially offset by a decline in unit sales of construction equipment. Sales of equipment in Latin America increased by 8.7% from $587 million in 2001 to $638 million in 2002, principally as a result of higher agricultural equipment unit sales and a more favorable mix and pricing, the positive effects of which were only partially offset by a decline in the average value of Brazilian real in dollar terms and a decline in unit sales of construction equipment. In the Rest of World, sales of equipment were up 14.7%, from $1,078 million in 2001 to $1,236 million in 2002, mainly as a result of higher unit sales of tractors and the increase in the value of the Australian dollar, while unit sales of combine and construction equipment declined.

     When stated in euros, the reporting currency of the Fiat Group, revenues from sales of equipment decreased by 6.4% in North America, decreased by 0.7% in Western Europe, increased by 3.1% in Latin America and increased by 8.7% in the Rest of World.

     The sector reported operating income of 163 million (1.6% of sales) in 2002, a decrease of 22.0% from the previous year’s result (209 million; 1.9% of sales). The decrease was primarily attributable to higher pension and medical costs for CNH’s employees, especially in the United States,

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which more than offset the positive impact on overall operating margins of improved margins for new products, higher prices for certain agricultural equipment and the realization of cost savings arising from further integration with Case and process enhancement measures.

     The sector’s net result for the year was a net loss of 211 million, as compared with a net loss of 291 million in 2001. The results include extraordinary restructuring charges of 18 million which related to the implementation of CNH’s merger integration plan (79 million in 2001). The amounts of such changes recognized under the Fiat Group’s accounting principles differ from those accounted for under U.S. GAAP as adopted by CNH to present its consolidated financial results in the United States. See Note 24 to the Consolidated Financial Statements included in Item 18.

     CNH’s research and development expenses in 2002 were 300 million (2.9% of net sales), down from 341 million (3.2% of net sales) in 2001, with currency translation effects being responsible for some of the decrease.

     Commercial vehicles. In 2002, Iveco’s revenues totaled 9,136 million, an increase of 5.6% from the 8,650 million recorded in 2001. The increase was entirely attributable to the to the sector’s increased interest in Irisbus, as revenues declined slightly on a comparative consolidation basis.

     During 2002, Iveco sold 161,880 vehicles worldwide, or approximately 0.9% more than in 2001. If the approximately 37,500 vehicles sold by unconsolidated licensees are added, total sales reach 199,380 vehicles (194,700 units in 2001).

     In Western Europe, Iveco shipped 128,800 vehicles, or 0.3% more than in 2001, as lower unit sales recorded in most European markets were offset by the increase in unit sales attributable to the sector’s increased interest in Irisbus. The most significant declines in unit sales occurred in France (-23.1%), due to the adoption of more selective policies regarding the extension of new contracts with buy-back clauses, in Germany (-8.0%) and in Spain (-3.3%), reflecting general market weakness in those countries, while unit sales were up in Italy (+12.7%) and in the United Kingdom (+5.2%). In Eastern Europe, Iveco sold a total of 9,500 units, or 2.1% less than 2001. Outside of Europe, Iveco’s unit sales increased by 5.8%, from 22,300 vehicles in 2001 to 23,600 in 2002. Unit sales at Naveco, the sector’s 50-50 joint venture with the Yuejin Group in China, increased by approximately 10%, from 2001 to more than 14,500 in 2002. Sales by unconsolidated licensees in India and Turkey increased (by approximately 9% in India and 13% in Turkey), reflecting the trend of vehicle demand in the two countries. Irisbus sold a total of 8,431 buses during the year, a decline of 11.2% that was primarily attributable to reduced market demand from the public sector, as its market share in Western Europe increased to 27.3%, equal to that of co-market leader Evobus Group. Iveco produced 361,200 diesel engines, or approximately 13.0% fewer than in 2001, reflecting a drop in production of light engines for non-Group customers and weak demand in the power generation market. Sales to customers outside the Group accounted for approximately 58% of Iveco’s sales of engines, or 3 percentage points less than in 2001.

     Operating income for the sector declined by 62.4% to 102 million from 271 million in 2001. This decrease reflected the impact on margins of strong competitive pressures caused by the slump in demand. Iveco’s operating profitability was also negatively affected by higher provisions for warranties, a more stringent reserve policy implemented in the second half of the year in response to a product recall and an increase in writedowns of the value of used vehicles.

     Iveco’s research and development expenditures of 239 million (2.6% of net sales) increased by 11.2% from the 215 million (2.5% of net sales) recorded in 2001. Capital expenditures decreased by 18.2% to 587 million in 2002, of which 256 million was devoted to industrial investments and 331 million related to investments in vehicle fleets for contract hire activities.

     Ferrari. Ferrari, which was established as a separate sector for the first time in 2002 (having been previously reported as one of our “Other Companies”), recorded revenues of 1,208 million, an increase of 14.2% from the 1,058 million recorded in 2001. The sector’s operating income also

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improved by 12.9% from 62 million in 2001 to 70 million in 2002. The increases in both measures were primarily attributable to a doubling of shipments by Maserati following its reintroduction into the North American market, as well as to improved price positioning for Ferrari models.

     Components. Magneti Marelli’s revenues amounted to 3,288 million, or 19.3% less than the 4,073 million recorded in 2001. The decrease reflected weak demand for the sector’s products from original equipment manufacturers, particularly those in Europe and Latin America (and including Fiat Auto and other Group companies), as well as the impact of the disposal of the sector’s electronic systems business unit and aftermarket operations during the year. The sector’s operating loss decreased sharply, from 74 million in 2001 to 16 million in 2002, with the improvement being largely attributable to dispositions. Efficiency gains realized in manufacturing processes and the favorable trend in the cost of materials also contributed to the reduction in losses, notwithstanding the decline in sales.

     Production Systems. In 2002, Comau reported revenues of 2,320 million, or 4.6% more than the 2,218 million recorded in 2001. The increase reflected an increase in volumes for contract projects in the NAFTA area, as well as growth in the sector’s revenues from maintenance services, which more than offset a drop in contract work in Europe and Latin America linked to the decline in automotive demand. The production systems sector recorded an operating loss of 101 million in 2002, as compared with operating income of 60 million in 2001. The reversal in operating results in the context of increased sales was primarily attributable to significant losses arising from cost overruns incurred on a major contract in Europe.

     Metallurgical Products. Teksid reported revenues of 1,539 million, or 12.2% less the 1,752 million recorded in 2001. The decrease reflected a downturn in sales at the cast iron business unit linked to weak automotive market demand and the impact of the sale of the aluminum business unit on September 30, 2002, the effects of which were not offset by improved results at the magnesium business unit, which benefited from the continued demand for sport utility vehicles in North America. The metallurgical products sector recorded operating income of 27 million in 2002, almost doubling the 15 million recorded in 2001. The positive result reflected the realization of cost savings and increased productivity by the cast iron business unit, which more than offset the impact of the decline in sales.

     Aviation. In 2002, FiatAvio’s revenues amounted to 1,534 million, or 6.2% less than the 1,636 million recorded in 2001. The decline was primarily attributable to the significant slowdown in the commercial aircraft market. The aviation sector’s operating income increased by 12.9%, from 186 million in 2001 to 210 million in 2002, reflecting the sector’s success in improving productivity and containing operating expenses.

     Insurance. The revenues of our insurance sector (equal to premiums earned) declined by 10.0%, from 5,461 million in 2001 to 4,916 million in 2002. Non-life insurance premiums increased by more than 5.0%, while life insurance premiums decreased by approximately 21.0%. The sector’s income before taxes of 14 million in 2002 was down sharply from the 220 million recorded in 2001, as Toro’s results were negatively effected by the unsettled conditions in the financial markets. Declines in market value reduced the value of the sector’s equity and investment portfolio by approximately 220 million, while permanent writedowns in an aggregate amount of approximately 200 million were taken on the sector’s strategic investments in Fiat S.p.A. and Capitalia S.p.A. The negative effect of these factors on the sector’s income were more than offset by the positive impact of a marked improvement in the claims-to-premiums ratio made possible by ongoing programs launched in recent years to improve the quality of and rebalance the underwriting portfolio, a decline in the rate of claims that was greater than the overall decrease experienced by the Italian market, improvements in investment income and gains of approximately 120 million earned on the sale of real estate assets.

     Services. Business Solutions reported revenues of 1,965 million for 2002, an increase of 8.9% from the 1,805 million recorded in 2001. This increase was primarily attributable to the

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sector’s development of business from customers outside the Group, which generated 51% of the sector’s revenues, compared to 42% in 2001. The increase in non-captive customers was concentrated in the areas of information technology, where the sector provides services through Global Value, its joint venture with IBM Italia, and also reflected an expansion of its temporary employment agency services, partly as a result of the acquisition of Cronos. The services sector’s operating income declined by 8.2% to 67 million in 2002, reflecting the impact on the comparable figures for 2002 of the sector’s disposal of Fenice in the second half of 2001 and to the partial transfer to customers of certain operating efficiencies realized during the year, while the level of operating income generated by the sector’s property management activities increased.

     Publishing and Communications. Itedi’s net sales and revenues amounted to 360 million in 2002, an increase of 4.0% from the 347 million reported in 2001. The increase reflected the positive contribution of new print advertising contracts, an increase in the price of La Stampa and “brand stretching” initiatives, which more than offset the decline in La Stampa’s circulation. The publishing and communications sector reported operating income of 3 million, as compared with an operating loss of 2 million in 2001. This improvement was made possible by the above-mentioned increase in the newspaper’s price, the implementation of programs designed to increase efficiency and optimize costs and the successful renegotiation of supply contracts.

Effect of Inflation

     Management believes that the impact of inflation was not material to our net sales and revenues, operating result or consolidated net income (loss) in the years ended December 31, 2003, 2002 and 2001.

U.S. GAAP Reconciliation

     Our consolidated net losses determined in accordance with U.S. GAAP would have been 2,869 million, 3,832 million and 837 million for the years ended December 31, 2003, 2002 and 2001, respectively, as compared with net losses of 1,900 million, 3,948 million and 445 million, respectively, for the same periods, as determined under Italian GAAP. For a more detailed discussion of the principal differences between Italian GAAP and U.S. GAAP as they relate to our consolidated net income (loss) and stockholders’ equity, see Note 24 to the Consolidated Financial Statements included in Item 18.

     The net loss for the year ended December 31, 2003, under U.S. GAAP was 969 million higher than the loss reported under Italian GAAP due to the net effects of:

    lower U.S. GAAP capital gains on disposals of 580 million, caused by differences between the U.S. GAAP value of the assets disposed of and the corresponding Italian GAAP amounts; such differences were due primarily to differences in accounting for goodwill and, for Toro Assicurazioni, insurance reserves;

    higher U.S. GAAP income from derivative instruments of 457 million; the largest single component of this difference being attributable to the valuation at market of the total return equity swap on General Motors shares, which is treated as an off-balance sheet item under Italian GAAP;

    higher U.S. GAAP operating costs for 217 million related to certain start-up, capital increase and development costs which are deferred and amortized for Italian GAAP but expensed when incurred for U.S. GAAP;

    the elimination of goodwill amortization recorded under Italian GAAP but not required under U.S. GAAP of 178 million;

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    higher U.S. GAAP restructuring charges of 139 million, representing amounts which had been recorded in prior periods for Italian GAAP;

    higher deferred income tax expense of 438 million, due primarily to higher valuation allowances provided against deferred tax assets under U.S. GAAP;

    deferred revenue recognition under U.S. GAAP of 133 million, related primarily to sales recorded under Italian GAAP for which certain risks and rewards are retained by the seller, such as vehicle sales where the customer has options to return the vehicle at a future date for a guaranteed repurchase price;

    other differences which increased the U.S. GAAP net loss by a net amount of 97 million, due primarily to differences in accounting for depreciation of revalued tangible fixed assets, pensions and post-retirement benefits and other minor differences, net of the tax effects of reconciling items.

     The net loss for the year ended December 31, 2002, under U.S. GAAP was 116 million lower than the loss reported under Italian GAAP, after a charge for a change in accounting principle of 586 million arising on first time application of SFAS No. 142. In the aggregate, the remaining differences had a positive effect on the U.S. GAAP net loss of 470 million due to the net effects of:

    a lower U.S. GAAP loss on disposal of investments of 358 million, related to a difference in the carrying value of the General Motors shares sold at the end of that year which originated in the year of acquisition (2000);

    elimination of goodwill amortization recorded under Italian GAAP but not required under U.S. GAAP (254 million) and other differences in goodwill impairment charges arising from adoption of SFAS 142 (124 million).

    higher U.S. GAAP losses of 197 million due to the differences in accounting for the transfer of a 14% shareholding in Italenergia to other shareholders;

    elimination of write-downs of treasury stock of 107 million, which are charged to income under Italian GAAP but to a stockholders’ equity account under U.S. GAAP;

    other differences which increased the U.S. GAAP loss by a net amount of 176 million, due primarily to differences similar in nature to those described above for 2003.

     The net loss for the year ended December 31, 2001, under U.S. GAAP was 392 million higher than the loss reported under Italian GAAP, due to the net effects of:

    higher U.S. GAAP losses of 164 million due to the deferral of margins on certain transactions which were recognized as sales under Italian GAAP on the passage of legal title but accounted for as financing transactions or as operating leases under U.S. GAAP until the risks and rewards of ownership are effectively transferred;

    higher U.S. GAAP restructuring charges of 172 million, representing amounts which had been recorded in prior periods for Italian GAAP;

    other differences that increased the U.S. GAAP loss by a net amount of 56 million, due primarily to items similar in nature to the other items identified above for 2003 and 2002.

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     Stockholders’ equity determined in accordance with U.S. GAAP would have been 5,626 million and 6,694 million at December 31, 2003 and 2002, respectively, as compared with 6,793 million and 7,641 million, respectively, under Italian GAAP.

     The reduction in stockholders’ equity under U.S. GAAP as compared with Italian GAAP as of December 31, 2003 amounted to 1,167 million (947 million as of December 31, 2002) and was the result of:

    lower U.S. GAAP fixed asset values of 252 million (251 million as of December 31, 2002) due to the elimination of fixed asset revaluations recorded under Italian GAAP;

    higher U.S. GAAP goodwill amounts for 498 million (644 million as of December 31, 2002) related to differences in accounting for goodwill recognition, amortization and impairment;

    higher U.S. GAAP pension and post-retirement benefit liabilities of 420 million (487 million as of December 31, 2002) due primarily to recognition of minimum pension liabilities as a deduction from U.S. GAAP equity;

    lower U.S. GAAP equity of 633 million (558 million as of December 31, 2002) due to differences in the timing of margin and gain recognition under U.S. GAAP as compared with Italian GAAP;

    higher U.S. GAAP equity of 514 million due to differences in the valuation criteria for derivative instruments (432 million) and available-for-sale and other financial instruments (82 million); as of December 31, 2002, such valuation differences resulted in lower equity for a total of 378 million, of which 133 million related to derivative instruments and 245 million to other financial instruments;

    lower U.S. GAAP intangible fixed assets of 492 million (218 million as of December 31, 2002) due to differences in accounting for start-up and other costs (including capital increase expenses) which are deferred and amortized under Italian GAAP;

    lower U.S. GAAP deferred tax assets of 376 million (5 million as of December 31, 2002) due primarily to differences in the criteria for determination of valuation allowances and the tax effects of the taxable U.S. GAAP adjustments;

    lower U.S. GAAP restructuring reserves of 176 million (345 million as of December 31, 2002) due to differences in the timing of recognition of restructuring costs; and

    lower U.S. GAAP equity of 182 million due to other less significant differences; at December 31, 2002, such other differences included the net effects of lower U.S. GAAP insurance reserves of 320 million and reductions of equity for treasury stock of 253 million and other minor items of 106 million.

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Liquidity and Capital Resources

     Cash and marketable securities are our most liquid assets. As indicated in the table below, at December 31, 2003, we had cash of 3,211 million, roughly in line with the 3,489 million recorded on our balance sheet at the end of 2002. See “ — Cash Flow Analysis” below for a detailed discussion of our cash flows in 2003. However, at December 31, 2003, we had marketable securities (financial assets not held as fixed assets, comprising mainly short-term bonds and commercial paper and highly rated bank liquidity funds, net of securities held by Group-owned insurance companies to cover policy liabilities and accruals) of 3,789 million, compared to a total 1,507 million at the end of 2002. Accordingly, the total amount of our most liquid assets increased by approximately 2 billion, reaching approximately 7 billion at December 31, 2003. This positive trend was also reflected in the improvement of our net financial position (cash, marketable securities and finance receivables, less financial payables comprising short-, medium- and long-term debt), a non-GAAP measure of liquidity that our lending banks use to monitor our performance and for which targets are set under our main loan agreements, as its negative net balance was reduced by 752 million, from 3,780 million at December 31, 2002 to 3,028 million at year-end 2003.

     The following table details our net financial position as at the end of each of the three most recent years and provides a reconciliation of this non-GAAP measure to “cash,” the most directly comparable GAAP measure appearing in our consolidated statements of cash flows. It also details our calculation of marketable securities. The parenthetical references to Notes following particular line items in the table are to the specific Notes to our Consolidated Financial Statements included in Item 18, where these line items are presented in greater detail.

                         
    At December 31,
    2003
  2002
  2001
    (in millions of euros)
Cash (Note 7)
  3,211     3,489     2,133  
Financial assets not held as fixed assets — Other securities (Note 6)
    3,845       6,769       6,355  
Securities held by insurance to cover policy liabilities and accruals (*)
    (56 )     (5,262 )     (4,355 )
 
   
 
     
 
     
 
 
Marketable securities
    3,789       1,507       2,000  
Amounts due from stockholders for shares subscribed but not called
          1       1  
Financial fixed assets — Receivables (Note 3)
    29       47       55  
Financial fixed assets — Assets leased (Note 3)
    1,797       2,947       3,367  
Financial assets not held as fixed assets — Financial receivables (Note 6)
    10,750       18,411       21,263  
 
   
 
     
 
     
 
 
Financial receivables and investments in leases
    12,576       21,406       24,686  
Financial accrued income (Note 8)
    301       543       560  
Financial deferred income (Note 13)
    (363 )     (1,135 )     (2,057 )
 
   
 
     
 
     
 
 
Total financial assets
    19,514       25,810       27,322  
Short-term debt (Note 12) (**)
    (6,616 )     (8,310 )     (14,408 )
Medium-and long-term debt (Note 12) (**)
    (15,418 )     (20,613 )     (18,289 )
Financial accrued expenses (Note 13)
    (593 )     (785 )     (797 )
Financial prepaid expenses (Note 8)
    85       118       137  
 
   
 
     
 
     
 
 
Total financial liabilities (Gross indebtedness) (**)
    (22,542 )     (29,590 )     (33,357 )
Group’s net financial position
  (3,028 )   (3,780 )   (6,035 )
 
   
 
     
 
     
 
 


(*)   For the year 2002 and 2001, the amounts shown are derived from the consolidated financial statements of Toro Assicurazioni and Neptunia Assicurazioni Marittime S.A. For 2003, the amount shown is related to Neptunia Assicurazioni Marittime S.A. and reported in our Consolidated Financial Statements under “Other companies”.
 
(**)   The “Total financial liabilities” presented in this table are equivalent to our “gross indebtedness,” a non-GAAP measure which we discuss below in "— Capital Resources”, and for which a separate reconciliation to “Total financial payables,” the most nearly comparable Italian GAAP measure, is provided. For purposes of this table, we have broken “Total financial payables” down into separate short-term and medium- and long-term components to provide additional information about the nature of our liabilities.

     At December 31, 2003, we were in compliance with the target for net financial position set under our 3 billion mandatory convertible loan, which requires that our negative net financial position not exceed 3.6 billion (3 billion plus an allowed margin of 20%). For purposes of the convertible loan agreement, the calculation of net financial position excludes our 1.15 billion loan arranged by Citigroup described in “—Capital Resources” below; this loan is included in the medium- and long-term debt presented in the table above.

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Cash Flow Analysis

     In 2003, our cash flows, as set forth in our consolidated statement of cash flows, were as follows:

     Net Cash Used in Operating Activities. Cash used in operating activities in 2003 totaled 1,947 million (compared with net cash provided by operating activities of 1,053 million provided in fiscal 2002). The single largest factor affecting cash flow from operations was our 1,948 million net loss. Other factors affecting our operating cash flows included:

    amortization and depreciation totaling 2,269 million (2,614 million in 2002);

    net gains from divestitures of 1,873 million (net losses of 124 million in 2002), which were deducted from operating cash flows to reflect the fact that they are accounted for as cash provided by investing activities;

    net writedowns of equity investments and expenses for impairment that did not involve cash outlays of 177 million and 424 million, respectively (525 million and 991 million in 2002);

    changes in deferred income taxes, funds, reserves, and others that resulted in a use of cash in the amount of 124 million (766 million in cash used in 2002); and

    an increase in working capital (the sum of trade receivables, net inventories, trade payables, and other payables, receivables, accruals and deferrals), that resulted in a use of cash in an amount of 872 million (a decrease in working capital that provided cash in the amount of 1,828 million in 2002).

     The increase in working capital primarily reflected higher inventories (which used cash of 389 million in 2003, compared to cash provided of 1,325 million in 2002), resulting from an increase in Fiat Auto’s stock connected with the introduction of new models in the second half of the year, and a lower negative balance of other receivables/payables (which used cash of 614 million in 2003, compared to cash provided of 184 million in 2002). This change is mainly attributable to higher receivables from the tax authorities and to our reimbursement to the CAV.TO.MI Consortium of cash collateral of 250 million paid to us in 2002 in anticipation of contractual suretyships issued in 2003 in connection with our role as general contractor for the Treno Alta Velocità project.

     Net Cash Provided by Investing Activities. Cash flow generated by investing activities was 2,897 million in 2003, compared with 2,096 million generated in fiscal 2002. Investment flows during the year were driven primarily by gains on disposals of assets and equity investments that, net of acquisitions of equity investments, totaled 3,955 million (net of the cash of companies that were sold or acquired), compared with a positive balance of 2,668 million in 2002. A net reduction in financial receivables, which reflected a decrease in financings granted to associated companies as well as a reduction in our portfolio of activities as a result of divestitures, generated 1,146 million in available funds, as compared with 2,456 million in available funds generated in 2002. Other changes, equal to 3,226 million in fiscal 2003, mainly reflect the repayment of financings disbursed by our centralized cash management function to companies that are no longer included in the scope of consolidation (principally Fidis Retail Italia). The principal applications of funds during the year consisted of:

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    2,011 million in fixed assets (2,771 million in 2002), including investments in vehicles to be leased on a long-term basis for 358 million (844 million in 2002). A significant portion of the decrease is attributable to the sale of Fraikin (long-term commercial vehicle leasing business) and our aviation sector.

    3,065 million in securities acquired as temporary and liquid investments of cash available mainly as a result of the significant divestitures made during the course of 2003.

     The following table summarizes our capital expenditures by geographical area for each of the years indicated:

                         
    Year ended December 31,
    2003
  2002
  2001
    (in millions of euros)
Europe
  1,723     2,225     2,545  
North America
    138       313       555  
Mercosur
    120       150       249  
Other areas
    30       83       89  
 
   
 
     
 
     
 
 
Total
  2,011     2,771     3,438  

     We incurred these capital expenditures to acquire property, plant and equipment necessary to introduce and manufacture new products, enhance manufacturing efficiency and further environmental and safety programs, as well as for long-term leasing services for automobiles, commercial vehicles, and agricultural and construction equipment.

     Net Cash Used in Financing Activities. Cash flow used in financing activities was 1,228 million in 2003, as compared with 1,793 million provided by such activities in 2002. The use of cash flows was mainly attributable to the repayment of borrowings, net of new borrowings, that amounted to 4,189 million, as compared to net new borrowings of 2,655 million in 2002, and includes as a result of a reclassification of payables an amount of 1,765 million with respect to the exchangeable bonds, which we reclassified as payables due within one year because of the put option exercisable in July 2004, three years ahead of scheduled maturity. In June 2004, investors holding nearly all of the outstanding exchangeable bonds exercised this put option. See “— Capital Resources” below. The repayment in net borrowings in 2003 was partially offset by an increase in our short-term borrowings of 1,134 million, following a reduction of 5,358 million in 2002, with the increase in 2003 reflecting the reclassification of the exchangeable bond as short-term debt. The decrease in short-term borrowings in 2002 reflected a number of measures we took to extend the maturity profile of our indebtedness, including the execution of the 3 billion convertible loan in May 2002. The capital increase at Fiat S.p.A. in August 2003 generated an aggregate increase of 1,860 million in cash provided by financing activities in 2003, compared to the 1,215 million generated by capital increases at Fiat S.p.A. and at CNH in 2002.

  Capital Resources

     The cash flows, funding requirements and liquidity of Group companies are managed on a standard and centralized basis, under the control of the Central Treasury. This centralized system is aimed at optimizing the efficiency and effectiveness of our management of capital resources. It also guarantees the efficiency and security of treasury management processes.

     Fiat Group companies participate in a group-wide cash management system, which we operate in a number of jurisdictions. Under this system, the cash balances of all Group companies are aggregated at the end of each business day to central pooling accounts.

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     The Central Treasury guarantees to the Group high levels of professional financial and systems expertise, and in the performance of its activities, it provides both services and consulting to our business sectors.

     The following table details our calculation of gross indebtedness and net indebtedness as at the end of each of the three most recent years and provides a reconciliation of these non-GAAP measures to “Total financial payables,” a component of total payables as set forth in our consolidated balance sheet (see Note 12 to our Consolidated Financial Statements included in Item 18), the most directly comparable Italian GAAP measure. The parenthetical references to Notes following particular line items in the table are to the specific Notes to our Consolidated Financial Statements included in Item 18, where these line items are presented in greater detail.

                         
    At December 31,
    2003
  2002
  2001
    (in millions of euros)
Total financial payables (Note 12)
  (22,034 )   (28,923 )   (32,697 )
Financial accrued expenses (Note 13)
    (593 )     (785 )     (797 )
Financial prepaid expenses (Note 8)
    85       118       137  
 
   
 
     
 
     
 
 
Gross indebtedness
  (22,542 )   (29,590 )   (33,357 )
Cash (Note 7)
  3,211     3,489     2,133  
Marketable securities(*)
    3,789       1,507       2,000  
Net indebtedness
  (15,542 )   (24,594 )   (29,224 )
 
   
 
     
 
     
 
 


(*)   Please see “—Liquidity and Capital Resources” above for more information on our marketable securities.

     At December 31, 2003, we had total financial payables of 22,034 million, compared to 28,923 million at year end 2002, with the decline of 6,889 million being attributable primarily to the effect of the deconsolidation of certain businesses, primarily Fidis Retail Italia, which accounted for 3,836 million of the change. The mandatory convertible loan also requires that our “gross indebtedness”, as calculated pursuant to the agreement, be no greater than 28.3 billion (23.6 billion plus an allowed margin of 20%). For these purposes, “gross indebtedness” is equal to our total financial payables minus financial accrued and financial prepaid expenses.

     Our net indebtedness (calculated as our total financial payables minus financial accrued expenses and financial prepaid expenses, less cash and marketable securities) at December 31, 2003, amounted to 15,542 million, compared to 24,549 million at the end of 2002, showing a reduction of 9.1 billion, primarily reflecting the effect of the deconsolidation of Fidis Retail Italia and other businesses, as well as the increase in cash and marketable securities during the year discussed above. Management believes net indebtedness is an effective measure for analyzing the Group’s debt and managing its liquidity, as it reflects the residual indebtedness we would have should all of our available liquid assets be applied to the repayment of debt.

     At December 31, 2003, we had more than 2,000 million in unused committed lines of credit available, primarily in U.S. dollars. The equivalent figure at December 31, 2002 was approximately 3,700 million, with the reduction primarily reflecting the maturity of a $1 billion syndicated credit line, as well as the appreciation of the euro against the dollar and other currencies in which certain of the lines are denominated. We also had aggregate borrowings from banks of 9,384 million at December 31, 2003. This amount includes, among other borrowings, the 3 billion mandatory convertible facility and the approximately 1.15 billion loan arranged by Citigroup and secured by our agreements with EDF as part of the Italenergia Bis transaction. See Item 4. “Information on the Company — Introduction — Strategies and Programs” and Note 12 to the Consolidated Financial Statements included in Item 18 for additional information on these loans.

     We have short-term borrowing and commercial paper programs in certain countries in which we operate. As of December 31, 2003 and 2002, the total amount outstanding under these programs was approximately 216 million and 177 million, respectively. Our short-term rating from Moody’s is currently “Not Prime”, and is “B” from each of Standard & Poor’s and Fitch Ratings.

     The commercial paper program of New Holland Credit Company ($1.5 billion) and our Canadian commercial paper program (C$750 million) were cancelled in October 2003 and February 2004, respectively.

     We also have a global medium-term note program, which had a total authorized amount of 15 billion at December 31, 2003, of which approximately 7 billion and 8.5 billion was outstanding at December 31, 2003 and 2002, respectively. The issuers under the program are Fiat Finance & Trade Ltd. S.A. (for an amount outstanding, at December 31, 2003, of 6,824 million), Fiat Finance North America Inc. (148 million) and Fiat Finance Canada Ltd. (81 million). All of these issuances are guaranteed by Fiat S.p.A., which is currently rated Ba3 by Moody’s , BB- by Standard & Poor’s and BB by Fitch Ratings.

     In addition, we had other debt securities outstanding in an aggregate amount of 4,322 million at December 31, 2003, including:

    3.75% notes due March 31, 2004, issued by Fiat Finance & Trade Ltd. S.A. and guaranteed by Fiat S.p.A. in amount outstanding of 936 million; these notes were repaid in full on the maturity date.

    40 billion yen principal amount (equivalent to 296 million) of 1.5% notes due June 27, 2005, issued by Fiat Finance & Trade Ltd. S.A. and guaranteed by Fiat S.p.A.

    $1,050 million principal amount (equivalent to 831 million) 9.25% notes due August 1, 2011, issued by CNH during the third quarter of 2003, under an indenture containing certain standard restrictive covenants for high-yield securities.

    Other notes issued by CNH’s subsidiaries Case LLC. and Case Credit Corp. with an aggregate amount outstanding of $624 million (equivalent to 494 million).

    $2,229 million (equivalent to 1,765 million) 3.25% notes due January 9, 2007, exchangeable into shares of General Motors issued by Fiat Finance and Trade Luxembourg S.A. and guaranteed by Fiat S.p.A. As of May 26, 2004, there were $1,689 million of these notes outstanding following our repurchase on the market and cancellation of $540 million in principal amount of notes in early 2004. From May 26, 2004, through June 17, 2004, noteholders had the right to request that we redeem their securities for cash at face value, for payment on July 9, 2004. During that period investors requested repayment of $1,672 million

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      in principal amount of outstanding notes, which we expect to fund using available cash. As a result, only $17.2 million of the exchangeable bonds will remain outstanding.

     In May 2004, CNH’s wholly owned subsidiary Case New Holland Inc. completed an offering of $500 million of 6% senior notes due June 1, 2009. The offering was not registered under the Securities Act. Net proceeds to the issuer were approximately $474 million.

     As discussed in more detail in Note 12 to the Consolidated Financial Statements included in Item 18, the majority of the Group’s indebtedness contains standard commitments on the part of the issuer and, in some cases, by Fiat, as the guarantor, including in certain instances negative pledges or cross-default clauses, but not ratings triggers or financial ratio targets. In addition, the high-yield bonds issued by Case New Holland Inc. contain financial covenants restricting, among other things, the ability of the issuer and certain companies of the CNH group to secure new debt, conclude sale and leaseback transactions, sell certain fixed assets. The indenture governing this indebtedness also includes financial covenants imposing a maximum limit on further indebtedness by the CNH group companies which can not exceed a specific ratio of cash flows to dividend payments and financial expenses. These covenants are subject to various exceptions and limitations, and certain of these restrictions fall away in the event the bonds, currently rated below investment grade, are assigned an investment-grade rating by Standard & Poor’s Rating Services and/or Moody’s Investors Service.

     For more information on our outstanding indebtedness, see Note 12 and Note 24 to the Consolidated Financial Statements included in Item 18.

     We also sell certain of our finance, trade and tax receivables to third parties in order to improve liquidity, to take advantage of market opportunities and, in certain circumstances, to reduce credit and concentration risk in accordance with our risk management objectives. See “—Concentrations of Credit Risk” below. At December 31, 2003 and 2002, outstanding receivables sold with recourse were 2,203 million and 2,518 million, respectively, including 2,144 million of trade receivables and other receivables (2,505 million at December 31, 2002) and 59 million of financial receivables (13 million at December 31, 2002). The total volume of receivables sold with recourse during the course of 2003 amounted to 15,341 million, as compared with a total of 20,743 million in 2002. We also securitize and sell certain trade and financial receivables without recourse. In 2003 and 2002, the amount of receivables sold or securitized without recourse with maturity dates beyond year-end was 9,852 million and 13,794 million, respectively. Receivables sold or securitized without recourse at December 31, 2003, include 4,638 million of trade receivables and other receivables (4,537 million at December 31, 2002) and 5,214 million of financial receivables (9,257 million at December 31, 2002). The sale of financial receivables is executed primarily through securitization transactions and involves mainly accounts receivables from the final (retail) customers and from the network of dealers of our financial services companies. The total volume of receivables sold or securitized without recourse was 33,298 million in 2003 (30,502 million in 2002). For additional details on our securitization programs, see Note 24(l) to the Consolidated Financial Statements included in Item 18.

  Future Liquidity

     We have adopted formal policies and decision-making processes aimed at optimizing our overall financial situation and the allocation of financial funds, cash management processes and financial risk management. In 2003, we continued to take opportunities where they arose to engage in financing transactions aimed at extending the average maturity of our debt and strengthening our overall financial structure.

     The most significant new financing carried out by a Group company in 2003 was the issuance during the third quarter by Case New Holland Inc., a wholly owned subsidiary in the agricultural and construction equipment sector, of $1.05 billion of 9.25% senior notes due 2011. Our other main sources of financing in 2003 were the 1,860 billion capital increase of Fiat S.p.A. in August, and the divestitures carried out during the year.

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     Our liquidity needs could increase in the event of an extended economic slowdown or recession that would reduce cash flow from operations and would impair the ability of our dealers and retail customers to meet their payment obligations. Increased supplies of used cars, trucks and equipment may affect resale prices and result in decreased cash flows. Any further reduction of our credit ratings would increase the cost of funding and potentially limit our access to these and other sources of financing.

     Notwithstanding the current difficult market conditions, management believes that funds available under our current liquidity facilities (including loan agreements and lines of credit), those realized under existing and planned asset-backed securitization programs and those expected from the disposal of assets and investments will allow the Group to satisfy its working capital and debt service requirements through the end of 2004.

     Off-Balance Sheet Arrangements

     We use certain off-balance sheet arrangements with unconsolidated third parties in the ordinary course of business, including financial guarantees, indemnification agreements, the sale of receivables and other arrangements under which we have or may have continuing obligations. Our arrangements in each of these categories are described in more detail below. For additional information, see Note 24(l) to the Consolidated Financial Statements included in Item 18.

     Financial guarantees. Our financial guarantees require us to make contingent payments upon the occurrence of certain events [or changes in an underlying instrument that is related to an asset, a liability or the equity of the guaranteed party]. These guarantees include arrangements that are direct obligations, giving the party receiving the guarantee a direct claim against us, as well as indirect obligations, under which we have agreed to provide the funds necessary for another party to satisfy an obligation.

     At December 31, 2003, we had granted guarantees totaling 6,430 million (5,642 million at December 31, 2002), including:

    suretyships totaling 3,060 million (1,638 million at December 31, 2002). Of these suretyships, 1,175 million related to supplemental guarantees provided in connection with notes issued by a former finance subsidiary of Fiat Auto to finance its retail financing activities, which subsidiary was contributed to Fidis Retail Italia. These guarantees had previously been eliminated from our consolidated financial statements as intragroup transactions. Fiat considers its potential exposure under these supplemental guarantees to be remote, as payments on the underlying receivables is covered by insurance or the right to repossess the financed vehicles. Our other suretyships at year end are mainly related to guarantees granted by our operating companies as performance bonds in connection with contract work in progress, guarantees to tax authorities associated with value-added tax, customs duty and other tax-related liabilities and suretyships granted in connection with financial obligations of associated companies.

    Other unsecured guarantees of 3,075 million (3,373 million at December 31, 2002), including commitments of approximately 2,203 million with respect to receivables sold with recourse, as described under “— Liquidity and Capital Resources” above. Our remaining obligations in this category included guarantees to fiscal authorities of the types discussed above and other financial obligations.

     Indemnities. Fiat S.p.A. and other Group companies have provided indemnities to purchasers in connection with the asset divestitures carried out in 2003 and prior years, with the maximum amount of potential liability under these contracts generally capped at a percentage of the purchase price. These indemnities primarily relate to potential liabilities arising from contingent liabilities in existence at the time of the sale, as well as breach of representations and warranties provided in the contracts and, in certain instances, environmental or tax matters, generally for a limited period of

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time. As of December 31, 2003, our potential obligations with respect to these indemnities were approximately 850 million, compared to approximately 100 million at December 31, 2002. We have provided certain other indemnifications that do not limit potential payment; we are unable to estimate a maximum amount of potential future payments that could result from claims made under these indemnities. See Note 24(t.vi) to the Consolidated Financial Statements included in Item 18.

     Retained or contingent interests. As described in “— Critical Accounting Policies” above, we have a retained interest in certain of our finance, trade and tax receivables that we have sold to third parties without recourse in order to improve liquidity, to take advantage of market opportunities and, in certain circumstances, to reduce credit and concentration risk in accordance with our risk management objectives. See “— Capital Resources” above and Note 24(l) to the Consolidated Financial Statements included in Item 18 for a detailed description of these transactions.

     Sale-leaseback transactions. The Group has in the past entered into certain real estate sale and leaseback transactions, relating primarily to commercial and certain non-strategic industrial properties. These leases expire between 2006 and 2020. We made aggregate rental payments in connection with these contracts in 2003 of approximately 23 million. See Note 24(i) to the Consolidated Financial Statements included in Item 18.

     Derivative instruments. We do not hold or issue derivative financial instruments for trading purposes. However, in 2003, certain of the derivatives we held were not eligible for hedge accounting under Italian GAAP or other applicable accounting principles. In particular, in December 2002, we entered into a “total return equity swap” with Merrill Lynch with respect to General Motors shares in order to hedge risk associated with our $2.2 billion bond issue exchangeable into General Motors shares. See Notes 14 and 24(k.iii) to the Consolidated Financial Statements in Item 18 for additional information on the characteristics and accounting treatment of this equity swap. During the first four months of 2004, we exercised our right to terminate this equity swap. In a related transaction, we repurchased on the market $540 million in principal amount of the exchangeable bonds, which we then cancelled. To hedge our exposure under the approximately $1.7 billion in exchangeable bonds still outstanding following these transactions, we purchased call options on General Motors shares. Together, these 2004 transactions resulted in a pre-tax gain for us of approximately $380 million. See Item 4. “Information on the Company — Introduction — Recent Developments”. In June 2004, investors holding $1,672 million in principal amount of the outstanding exchangeable bonds exercised their right to require us to redeem their bonds for cash at face value in July 2004. See “— Capital Resources” above.

     In addition, in 2003, we also entered into an equity swap with Société Générale with respect to Fiat ordinary shares in connection with 10 million of approximately 13.4 million stock options (exercisable for one ordinary share each) awarded to Giuseppe Morchio, then our chief executive officer, in 2003, to hedge the risk of a significant increase in the price of the shares over the exercise price of the options of 5.623 per share. The cash-settled equity swap, which expires on August 31, 2004, has a reference price of 6.173 per share. See Note 14 to the Consolidated Financial Statements included in Item 18. Most of the stock options awarded to Mr. Morchio expired upon his resignation in May 2004. See Item 6. “Directors, Senior Management and Employees — Compensation of Directors and Senior Management.”

     Variable Interests. In 2001, we participated with a specialist logistics operator and other financial investors in the formation of Società di Comercializzazione e Distribuzione Ricambi S.p.A. (“SCDR”), a company whose principal activity is the purchase of spare parts from Fiat Auto for sale to end customers. Our investment in SCDR represents 19% of SCDR’s capital and is accounted for in our Italian GAAP financial statements under the equity method. In its balance sheet as of December 31, 2003, SCDR recorded inventories for 820 million purchased from Fiat Auto and bank loans for 407 million, the latter of which are secured by SCDR’s inventories and receivables. Fiat Auto has committed to indemnify SCDR against any losses that could occur in the event that inventory purchased through December 31, 2003, is scrapped in the future, and has made provision in its financial statements for risks arising from that commitment.

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     In performing the reconciliation from Italian GAAP to U.S. GAAP presented in Note 24 of the Consolidated Financial Statements in Item 18 below, we have determined that, due to the nature of the contractual arrangements in place, the sale of inventories from Fiat Auto to SCDR does not transfer all of the risks and rewards of ownership of the assets to SCDR, and therefore does not allow recognition of the related revenue by Fiat Auto for U.S. GAAP reporting purposes; instead, the transfer of inventories is considered a financing transaction and related revenues recorded in the Italian GAAP financial statements are deferred for U.S. GAAP purposes until the assets are sold to the end customers. See Note 24 (h.ii) to the Consolidated Financial Statements in Item 18.

Contractual Obligations

     The following table sets forth our contractual obligations and commercial commitments with definitive payment terms which will require significant cash outlays in the future, as of December 31, 2003:

                                         
    Payments due by period
            Less than            
    Total
  1 year
  1-3 years
  3-5 years
  After 5 years
    (in millions of euro)
Contractual Obligations
                                       
Long-Term Debt Obligations
  18,175     2,757     10,398     1,067     3,953  
Capital (Finance) Lease Obligations*
                             
Operating Lease Obligations
    346       81       91       61       113  
Purchase Obligations
    1,816       937       525       84       270  
Other Long-Term Obligations under Italian GAAP
    8,516       303       4,575       3,368        
 
   
 
     
 
     
 
     
 
     
 
 
Total
  28,853     4,078     15,589     4,850     4,336  


*   In accordance with Italian GAAP, we do not account separately for capital (finance) lease obligations, but rather include such obligations as part of our indebtedness. As a result, these commitments are included in the item “Long-term debt obligations.”

     Long-term debt obligations. For information on our long-term debt obligations, see “— Capital Resources” above and Note 12 to the Consolidated Financial Statements included in Item 18.

     Operating leases. Our operating leases consist mainly of leases for commercial and industrial properties used in carrying out our businesses. The amounts reported above under “Operating lease Obligations” include the minimal rental and payment commitments due under such leases.

     Purchase obligations. Our purchase obligations at December 31, 2003, included the following:

    financial commitments to certain customers guaranteeing specified residual values of vehicles purchased from us in certain circumstances (“buy back” commitments), in an aggregate amount of approximately 1,300 million;

    commitments to purchase tangible fixed assets, largely in connection with planned capital expenditures of various Group companies, in an aggregate amount of approximately 329 million of the total;

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    obligations with respect to equity interests, generally in connection with put and call arrangements with respect to equity stakes in joint ventures, real estate companies and other entities, in an aggregate amount of 179 million; and

    obligations to purchase various other fixed assets, in an aggregate amount of approximately 8 million.

     Other long-term obligations. Our other long-term obligations at December 31, 2003, primarily comprised commitments of 8,011 million under the contracts between Fiat S.p.A. (as general contractor) and Treno Alta Velocità T.A.V. S.p.A. for the design and construction of high-speed railway lines between Bologna and Florence and between Turin and Milan. See Note 14 to the Consolidated Financial Statements included in Item 18.

Research and Development

     For a discussion of our research and development policies and related expenditures, see “Research and Development” in Item 4.

Trend Information

     For a discussion of the most significant recent trends affecting our businesses, see “Introduction — Recent Developments” and “Introduction — Outlook” in Item 4.

Concentrations of Credit Risk

     In connection with our various operating and investment subsidiaries, we maintain investments in trade and finance receivables and marketable securities. With respect to these investments, management believes that our financial policies and the distribution of our investments tend to mitigate significantly its exposure to credit risk. Among the factors reducing such risk is the widely distributed nature of our trade and finance receivables among the many of our automotive, commercial vehicle and agricultural and construction equipment customers that are located in Italy, the rest of Europe and North and South America. Management believes that concentration of credit risk is also minimized with respect to our investments in marketable securities, given that such investments consist primarily of Italian government securities and other widely traded securities issued by highly rated institutions located in our various markets.

     Although European countries other than Italy are the principal markets for our exports, we also sell products in other regions where political, economic and financial risk can render the collection of receivables difficult. We take a number of steps on a regular basis to reduce this risk, including maintaining political risk insurance, liquidating a portion of its receivables on a non-recourse basis at a discount through the banking system, arranging buyer’s credits in favor of the importers, which allows for regular payments, as well as utilizing other techniques, including countertrade agreements, that are aimed at protecting us from financial losses in our trade relations with countries that have suspended payments abroad.

Process of Transition to International Financial Reporting Standards

     Following the coming into force of European Regulation No. 1606 dated July 2002, we and other EU companies whose securities are traded on regulated markets in the EU are required to adopt international financial reporting standards (“IFRS”) (known as international accounting standards, or IAS, until May 2002) in the preparation of our 2005 consolidated financial statements. Standards introduced prior to the renaming of IAS as IFRS are still referred to as IAS; we refer to the combined body of IAS and IFRS standards as IFRS.

     Commencing in the first half of 2003, we established an IFRS implementation program with working groups that operated first at the parent company level and then at the level of our principal operating companies. We reviewed the IFRS principles in force, as well as the significant changes

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contained in then-current proposals for the revision of those standards, which have since been finalized.

     By the end of 2003:

    We identified the significant differences between the Italian GAAP accounting principles that we currently follow, in compliance with the laws relating to financial statements interpreted and integrated in accordance with Italian accounting principles, and the applicable provisions of IFRS;

    We formulated an action plan that was aimed at identifying the steps required to adapt our corporate processes and information systems so as to render them capable of supplying the information necessary for the preparation of our 2005 consolidated financial statements in accordance with IFRS, and to permit us to process the information related to 2004 to be presented for comparative purposes.

     Based on the results of the work performed, which, in accordance with guidance from the Commission of European Securities Regulators, focused on effects of the change in accounting principles on consolidated stockholders’ equity, we have determined that the following are the principal differences that will have an effect on that measure as restated in accordance with IFRS as of January 1, 2004, and on our future financial results.

     General principles. The adoption of the new body of accounting standards will involve a reassessment not only of the accounting valuation criteria we use, but also of the format of our financial statements and the contents of the related notes. As regards the principles of recognition and measurement of financial statement components, the most significant changes relate to the following:

    replacement of the principle for the transfer of risks and benefits with respect to the recording and reversal of certain transactions at the time of transfer of ownership, IFRS, giving prevalence to the substance of the transaction over its legal form; and

    the use under IFRS of alternative valuation criteria to historical cost (where expressly required), such as fair value (particularly for financial instruments) and present value (for medium-long term reserves).

     Capitalization of development costs. Under IAS 38, we will have to capitalize development costs that meet certain conditions, where at present we for the most part recognize them in the statement of operations when they are incurred. Other research and development costs will continue to be recorded in the statement of operations when they are incurred.

     Other intangible fixed assets. In contrast to practice under Italian GAAP, IAS 38 requires that the majority of start-up and expansion costs are recorded in the statement of operations when they are incurred. Start-up and expansion costs related to increases in capital stock, financing transactions and similar transactions are recorded under IAS 38 as a reduction of either the related reserves in stockholders’ equity or of the financing issued.

     Changes to IAS 38 have introduced the concept of intangible fixed assets with an indefinite useful life which, accordingly, will no longer be subject to amortization. This principle also extends to goodwill deriving from business combinations. These intangible fixed assets are to be subjected to annual impairment tests on the smallest group of assets that generates cash inflows that are largely independent of other cash inflows (a “cash generating unit”), comparing the carrying amount to the related market value or “value in use.”

     Writedown of assets. If not otherwise stated in a given accounting standard, IFRS will require an assessment of whether assets are impaired when indications that lead to the belief that this problem may exist are present. The methods provided for determining recoverability of the carrying amount are more specific than those currently in force in Italy, where only the concept of permanent

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impairment in value is observed. On the contrary, under IFRS, an impairment in value (not necessarily permanent) is determined by comparing the carrying amount to the higher of the net selling price and the value in use of the asset (or a group of assets or cash generating units).

     Revenue recognition. In relation to the new general principles regarding the transfer of risks and benefits, we analyzed various examples of contracts that involve the recognition of revenue. The most significant difference under the new principles relates to revenues deriving from vehicle sales with a buyback option, which are currently recognized in full at the time of formal transfer of ownership of the vehicle. In accordance with IFRS, these sales would be recorded as operating leases.

     Financial instruments. IAS 32 and 39 require companies to classify financial instruments, as a function of their destination, in different categories than those used under Italian GAAP. The basis of recognition, measurement and valuation of financial instruments will derive from these classifications and, accordingly, in certain cases could differ substantially from that under the current regime.

     In addition, under these standards, derivative financial instruments are also treated as financial assets and liabilities that must be recorded in the balance sheet, whereas Italian accounting principles provide that they be recorded in the memorandum accounts, with only certain specified circumstances in which they are to be recorded in the balance sheet.

     The overall effect of the adoption of these standards could vary depending on the way in which they are introduced into European law and the likelihood the International Accounting Standards Board, or IASB, will make additional changes to the standards. However, at present we expect that different accounting treatment of receivables and bills discounting transactions could have potentially significant effects on our calculation of total financial liabilities.

     Employee benefits. IAS 19 sets out the method of accounting for employee benefits and, accordingly, we dedicated a specific working group to the analysis of labor legislation, in Italy and abroad, in order to identify any differences from the principles we currently follow. In particular, with regard to post-employment defined benefit programs, IAS 19 requires that the obligation accrued to the balance sheet date be projected into the future, in order to estimate the amount to be paid upon termination of employment, and subsequent determination of the present value in accordance with a specific actuarial method (called the “Project Unit Credit Method”). As a consequence of the adoption of this accounting standard, the employee severance indemnity (TFR) recorded in the financial statements of Italian subsidiaries will have to be recalculated.

     Reserves for risks and charges. In accordance with IAS 37, reserves for risks and charges are recorded only when there is a present obligation, as a result of a past event, which may be legal, contractual or derive from a company’s declarations or actions that result in valid expectations by the parties involved (constructive obligations). Certain reserves that we currently record, in accordance with the Italian GAAP, may not be recognized under the conditions set forth under IAS. Furthermore, in accordance with IAS 37, accruals are recorded at the value represented by the best estimate of the amount that a company would pay to settle the obligation and, where the effect of the time value of money is material, the estimated cost is to be discounted to present value, a technique not contemplated by current Italian GAAP.

     Consolidated financial statements. In our first financial statements prepared in accordance with IFRS, at the transition date, the principles of consolidation set forth in IAS 27 will be applied. These principles differ from those currently mandated by Italian law, particularly in respect of the consolidation of subsidiaries that carry out dissimilar activities.

Item 6. Directors, Senior Management and Employees

DIRECTORS

     The directors of Fiat on June 23, 2004, were as follows:

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Name
  Age
  Position
Luca Cordero di Montezemolo
    56     Chairman of the Board
Andrea Agnelli
    29     Director
Angelo Benessia(2)
    63     Director
Tiberto Brandolini d’Adda
    56     Director
Flavio Cotti(1)
    64     Director
John Philip Elkann(1)
    28     Vice Chairman of the Board
Luca Garavoglia(2)
    35     Director
Hermann-Josef Lamberti(1)
    48     Director
Sergio Marchionne(1)
    52     Director, Chief Executive Officer
Daniel John Winteler(1)
    41     Director


(1)   Member of the Nominating and Compensation Committee
(2)   Member of the Internal Control Committee

     On February 28, 2003, Umberto Agnelli was appointed Chairman of the Board following the resignation of Paolo Fresco from that post, which Mr. Fresco had held since 1998. On the same date, the Board appointed Giuseppe Morchio as Chief Executive Officer.

     On May 27, 2004, Umberto Agnelli died in Turin. On May 30, 2004, the Board of Directors appointed director Luca Cordero di Montezemolo Chairman of the Board and director John Philip Elkann, Umberto Agnelli’s grand-nephew, as Vice Chairman. The Board also appointed Andrea Agnelli, the son of Umberto Agnelli, and Tiberto Brandolini d’Adda, a nephew of Mr. Umberto Agnelli, as new directors.

     Mr. Morchio resigned on May 30, 2004. On June 1, 2004, the Board named director Sergio Marchionne as Chief Executive Officer of Fiat.

     The Board also intends to appoint a replacement for Franzo Grande Stevens, who on April 26, 2004, resigned as a director of Fiat after more than 20 years’ service on the Board following his appointment by the City of Turin as a member of the Consiglio Generale (General Council) of Compagnia di San Paolo, a stockholder of Banca Sanpaolo-IMI, which in turn is a stockholder of Fiat. Mr. Grande Stevens continues to serve as the non-voting Secretary of the Fiat Board of Directors.

     The Board of Directors gave Mr. Cordero di Montezemolo, as Chairman, and Mr. Marchionne, as Chief Executive Officer, broad operating powers and authorized them to perform all acts that are consistent with the Company’s purpose. Notwithstanding the ample powers granted to them, the Chairman and the Chief Executive Officer must submit to the Board of Directors for approval all transactions that may have a material impact on our profitability, balance sheet or financial position, and must adequately inform the directors and statutory auditors about any transactions that are of an atypical or unusual nature or that involve related parties.

     Biographies of each of the current members of our Board of Directors follow:

     
Name
  Position (dates)
Andrea Agnelli
  Director (May 30, 2004 — present)
 
   
  Born in Turin (Italy) on December 6, 1975. Mr. Agnelli has held various positions at several companies, both in Italy and abroad, including at Iveco, Piaggio S.p.A., Auchan S.A., Juventus F.C. S.p.A., Ferrari S.p.A. and Philip Morris International Inc.

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Name
  Position (dates)
Tiberto Brandolini d’Adda
  Director (May 30, 2004 — present)
 
   
  Born in Lausanne (Switzerland) on March 8, 1948. Mr. Brandolini d’Adda graduated in commercial law from the University of Parma in 1971. From 1972 to 1974, he worked for Fiat S.p.A’s international activities department, and for Lazard Bank. In 1975, he was appointed assistant to the Director General for Enterprise Policy at the European Economic Commission in Brussels. He joined Ifint Company in 1976, as General Manager of Ifint France, and became General Manager of Ifint Europe in 1985. In 1993, Mr. Brandolini d’Adda became Managing Director of the Exor Group (formerly Ifint) and was appointed Vice Chairman and Managing Director in 2003. He is a Vice Chairman of the Conseil de Surveillance of Worms & Cie and a member of the Conseil de Surveillance. He is also Chairman of the Strategic Committee of the Club Mediterranèe S.A. and a general partner of the Giovanni Agnelli & C. S.A.p.A.
 
   
Angelo Benessia
  Director (2001 — present)
 
   
  Born in Turin (Italy) on October 18, 1941. Mr. Benessia graduated in law from Turin University in 1965 and is a certified public accountant. He is a partner of the law firm Studio Benessia, Maccagno in Turin. From 1991 to 1999, he was chairman of Unigest, and in 1999 became a director of Saiag S.p.A. He resigned in 2001 from the Board of Directors of Telecom Italia S.p.A., where he represented several mutual fund companies. He has been a statutory auditor of Turin Polytechnic and a director of the Piedmont Association of Economic and Social Sciences “Antonio Gramsci” since 1991. Since 2001, he has been a member of the Board of Directors of Italenergia and a member of the Board and Vice Chairman of R.C.S. Quotidiani S.p.A.
 
   
Luca Cordero di Montezemolo
  Chairman of the Board (May 30, 2004 — present) Director (February 28, 2003 — present)
 
   
  Born in Bologna (Italy) on August 31, 1947. Mr. Cordero di Montezemolo joined Ferrari in 1973 as a Team Manager. From 1977 to 1981 he was Head of External Relations for Fiat. Mr. Cordero di Montezemolo was Chief Executive Officer of Itedi from 1981 to 1983 and Managing Director of Cinzano S.p.A. from 1984 to 1985. From 1986 to 1990, he chaired the organizing committee for the Italia ‘90 Soccer World Cup. He has been Chairman and Chief Executive Officer of Ferrari S.p.A. since 1991. Mr. Cordero di Montezemolo is also a member of the board of directors of Bologna Calcio soccer team, and a director of La Stampa, Pinault-Printemps-Redoute S.A., Tod’s, Merloni Elettrodomestici S.p.A. and Unicredit Banca d’Impresa S.p.A. In May 2004, he also became President of Confindustria, the association of Italian Industrialists.

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Name
  Position (dates)
 
   
Flavio Cotti
  Director (2000 — present)
 
   
  Born in Muralto (Switzerland) on October 18, 1939. Mr. Cotti graduated in law from the University of Fribourg in 1964. He practiced law and was a notary public until 1975. Mr. Cotti was President of the administration of the Swiss canton of Tessin from 1977 to 1981, held several institutional offices in the Swiss Confederation until 1996 and was President of the Swiss Confederation in 1990 and in 1998. In 1996, he was appointed President of the Organization for Security and Cooperation in Europe. He is currently Chairman of the Advisory Board of the Credit Suisse Group.
 
   
John Philip Elkann
  Vice Chairman (May 30, 2004 — present)
Director (1997 — present)
 
   
  Born in New York, New York (USA) on April 1, 1976. Mr. Elkann graduated in engineering from Turin Polytechnic in 2000. He has been a member of the Board of Directors of Fiat since 1997. He is a member of the Board of Directors of the Giovanni Agnelli & C. S.A.p.A. and of the Exor Group.
 
   
Luca Garavoglia
  Director (May 13, 2003 — present)
 
   
  Born in Milan (Italy) on February 27, 1969. Mr. Garavoglia graduated in economics from the Università Commerciale Luigi Bocconi in Milan in 1994. He has been Chairman of Davide Campari-Milano S.p.A., the parent company of the Campari Group, since September 1994.
 
   
Hermann-Josef Lamberti
  Director (2002 — present)
 
   
  Born in Boppard (Germany) on February 5, 1956. Mr. Lamberti studied business administration in Cologne and Dublin and received a master’s degree in Business Administration in 1981. From 1985 to 1998, Mr. Lamberti held various management positions at IBM in Germany, France and the United States. He joined Deutsche Bank A.G. in 1998 as an executive vice president and became Chief Operating Officer and a member of the Board of Managing Directors in 1999. He is currently also a director of Schering AG, Carl Zeiss Stiftung, e-millennium 1 GmbH & Co. KG (where he is also Chairman), Euroclear plc and Euroclear Bank S.A.
 
   
Sergio Marchionne
  Director (May 13, 2003 — present)
 
   
 
   
  Born in Chieti (Italy) on June 17, 1952. Mr. Marchionne received a master’s degree in Business Administration

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Name
  Position (dates)
  from the University of Windsor, Canada in 1980 and graduated in law from the Osgoode Hall Law School of York University of Toronto in 1983. He is a licensed barrister and solicitor and a chartered accountant. From 1997 to 2000, Mr. Marchionne was Managing Director and Chief Executive Officer of Alusuisse Lonza Group Ltd., Zurich (“algroup”), until its merger with Alcan. He remained Managing Director and Chief Executive of Lonza Group Ltd., Basel, the chemical entity carved out of algroup in 1999. He has been Chairman of Lonza’s Board of Directors since 2002. He is also currently a director of Serono Ltd., Geneva, and Société Générale de Surveillance Holding SA, Geneva, of which he has also been Managing Director and Chief Executive Officer since January 2002. On June 1, 2004, he was appointed Chief Executive Officer of Fiat S.p.A.
 
   
Daniel John Winteler
  Director (2002 — present)
 
   
  Born in Pittsburgh (USA) on May 15, 1963. Mr. Winteler joined Novartis AG in 1996 as Vice President of Mergers and Acquisitions. In 1999, he became Chief Operating Officer of Ciba Specialty Chemicals AG — Water Treatment Division, and he joined IFIL S.p.A. as Senior Vice President-Strategy and Business Development. Since June 2002, he has been Chief Operating Officer of IFIL. He is a member of the Conseil de Surveillance of Arjo Wiggins S.A. and Antalis S.p.A. and a member of the Advisory Board of Euro Media Ventures Fund. He is currently also a director of IFIL, Worms & Cie, Club Mediterranèe and Juventus.

     The Board has identified the following four directors as independent in accordance with the criteria set forth in the Corporate Governance Code for Italian Listed Companies: Angelo Benessia, Flavio Cotti, Luca Garavoglia and Hermann-Josef Lamberti.

     The criteria for director independence under the Corporate Governance Code differ in certain respects from those applicable to U.S. domestic issuers under the U.S. federal securities laws and the listing rules of the New York Stock Exchange. See Item 10. “Additional Information—By-Laws—Significant Differences with Corporate Governance Practices under NYSE Rules” for a summary of the most significant of these differences.

     The Board of Directors has established two internal committees: the Comitato per il Controllo Interno, or the Internal Control Committee, which currently comprises two independent directors (Mr. Benessia, who chairs the Committee, and Mr. Garavoglia); and the Comitato per le Nomine ed i Compensi, or the Nominating and Compensation Committee, which comprises five directors, two of whom have executive authority (Mr. Elkann, who chairs the Committee, and Mr. Marchionne, as well as Messrs. Cotti, Lamberti, and Winteler).

     The Internal Control Committee is primarily charged with verifying that our administrative accounting system, organizational structure and internal controls system are adequate. The committee receives periodic reports on these matters from the Group’s operating companies, and reports to the full Board of Directors at least every six months. We in the past have translated the name of this committee, which we established in accordance with the Corporate Governance Code, into English as “Audit Committee,” but no longer do so to avoid confusion, as the Internal Control Committee does not fulfill the roles of the “audit committee” for purposes of U.S. securities laws and NYSE listing standards in all respects.

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     The Nominating and Compensation Committee develops proposals for approval by the full Board of Directors, mainly with regard to general compensation plans for senior employees and appointments to senior positions within the Group. The committee’s non-executive director members meet without any members who have executive authority within the Group to determine the compensation for executive directors (including stock option plans).

SENIOR MANAGEMENT

     Our senior managers other than those who also serve as directors are currently as follows:

     
Name (Age)
  Position (since)
José Maria Alapont (53)
  President and Chief Executive Officer Iveco S.p.A. (2003)
 
   
  Mr. Alapont joined Ford Motor Co. (Spain) in 1974 as engineer in charge of machine tools and processes. He subsequently held management positions in Manufacturing, Testing, Quality, Purchasing and Management areas at Ford from 1974 to 1990; and at Valeo from 1990 to 1997. He was President of International Operations and Vice President of Sales and Marketing at Delphi Corporation from 1997 to 2003. He was appointed President and Chief Executive Officer of Iveco in 2003.
 
   
Maurizio Beretta (49)
  Senior Vice President Government Affairs & International Relations Fiat S.p.A. (2001)
 
   
  Mr. Beretta joined RAI (Italian state television) in 1980 as a reporter. From 1982 to 1998 he held various positions, including those of special correspondent, head of the Editorial Office, Business News Editor, Deputy Editor-in-Chief, and head of Public Affairs. In 2000, Mr. Beretta served as director of “Uno” Programs Division, at RAI. He became Senior Vice President Government Affairs & International Relations at Fiat S.p.A., in 2001.
 
   
Herbert Demel (50)
  President and Chief Executive Officer Fiat Auto S.p.A. (2003)
 
   
  Mr. Demel became head of ABS applications for Robert Bosch GmbH in 1984. From 1990 to 1994, he was head of Product Development at Audi. He was appointed Chief Executive Officer of Audi in 1994 and served in that position until 1997. From 1997 to 2002, Mr. Demel was Chief Executive Officer of Volkswagen do Brasil. Mr. Demel was then President and Chief Executive Officer of Magna Steyr from 2002 to

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Name (Age)
  Position (since)
  2003, before becoming Chief Executive Officer of Fiat Auto on November 15, 2003.
 
   
Mauro Di Gennaro (42)
  Chief Audit Executive and Compliance Officer Fiat S.p.A. (2004) Mr. Di Gennaro joined Price Waterhouse in 1987 as Assistant Auditor and was subsequently promoted to Senior Manager. In 1994, he became Head of Internal Audit at Stet S.p.A. In 1997, he joined Telecom Italia, where he held several positions, including Head of International Operations and Head of International Internal Auditing. In 2002, he was appointed Head of Internal Audit at the RAS Group. On January 1, 2004, he joined Fiat S.p.A. as Chief Audit Executive and Compliance Officer.
 
   
Pier Luigi Fattori (56)
  Corporate Senior Vice President Human Resources Fiat S.p.A. (1999).
 
   
  Mr. Fattori joined Fiat in 1974 as a member of the Industrial Relations Department. From 1978 to 1980 he served as manager of Media Relations in the External Relations Department. In 1980, Mr. Fattori became head of Industrial Relations at Teksid and served in that position until 1985. From 1985 to 1990, he was manager of the H.R. Commercial Area at Iveco, following which he became head of Personnel and Organization at Magneti Marelli. From 1995 to 1999, he returned to Iveco, first as Vice President of Human Resources and from 1998 onward as President of Commercial Operations. In 1999, he became Corporate Senior Vice President of Human Resources at Fiat S.p.A.
 
   
Luigi Gubitosi (43)
  Chief Financial Officer Fiat S.p.A. (2004)
 
   
  Mr. Gubitosi joined the Fiat Group’s International Finance department in 1986. From 1989 to 1994 he served as head of Fiat Finance USA. He then served as international treasurer of Fiat GeVa from 1994 to 2000 and on October 1,2000 became Head of Finance at Fiat S.p.A. and Chief Executive Officer of Fiat GeVa, He held those positions through 2003, and became Chief Financial Officer of Fiat S.p.A. in 2004.
 
   
Paolo Monferino (57)
  President and Chief Executive Officer CNH Global N.V. (2000)
 
   
  Mr. Monferino joined Fiat in 1973 as a design engineer. In 1977, he became head of Purchasing and Procurement at Teksid, where he remained until 1980. From 1981 to 1983 he was

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Name (Age)
  Position (since)
  head of Worldwide Purchasing and Procurement at FiatAllis and from 1983 to 1987 he served as managing director of FiatAllis Latin America. Mr. Monferino became Chief Operating Officer of FiatAgri in 1987 and served in that position until 1991. From 1991 to 1996, he was Executive Vice President of Strategies and Business Development for New Holland, and from 1996 to 2000, was Executive Vice President of Automotive Components and Industrial Diversified Sectors at Fiat. He became President and Chief Executive Officer of CNH Global N.V. in 2000.
 
   
Lodovico Passerin d’Entrevès (59)
  Executive Assistant to the Chairman of Fiat S.p.A. and Senior Vice President External Relations and Communication (2003)
 
   
  Mr. Passerin d’Entrevès joined Toro Assicurazioni S.p.A. in 1972 . From 1975 to 1977, he served as head of Image and Communications and was head of External Relations from 1977 to 1986. From 1986 to 1993, he was head of Communications for the IFI-IFIL Group. Mr. Passerin d’Entrevès next served as assistant to the Chief Executive Officer of Toro Assicurazioni S.p.A. from 1993 to 1995. He was head of External Relations and Communications of the IFI-IFIL Group from 1995 to 2003, when he became Executive Assistant to the Chairman of Fiat S.p.A.
 
   
Roberto Pisa (42)
  Senior Vice President Corporate Initiatives
(2003)
 
   
  Mr. Pisa served as assistant treasurer of the European Vinyl Corporation from 1986 to 1990. From 1990 to 1993, he was a consultant for McKinsey & Co. Mr. Pisa was then manager of Corporate Business Development at General Electric Co. from 1993 to 1995 and from 1995 to 1997 he was Products General Manager at Nuovo Pignone. Mr. Pisa was Managing Director at GE Lighting Italy from 1997 to 1999 and was President and Chief Executive Officer of GE Lighting Systems Inc. from 1999 to 2000. From 2000 to 2003, he was Chief Executive Officer of Pirelli Cables & Systems Italy, before becoming Senior Vice President of Corporate Initiatives at Fiat S.p.A. in 2003.
 
   
Eugenio Razelli (54)
  Senior Vice President Business Development and Strategies (2003)
 
   
  Mr. Razelli joined Fiat Auto in 1977 as materials manager at the Mirafiori Plant. In 1979, he became Vice President of Manufacturing for the

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Name (Age)
  Position (since)
  dishwasher division of Industrie Zanussi, a position which he held until 1982. Mr. Razelli was Chief Executive Officer of Gilardini Industriale from 1983 to 1984 and became General Manager of Stars and Politecna — Fiat Comind in 1985. From 1986 to 1993, he held various management positions with Magneti Marelli. Mr. Razelli became Vice President of Manufacturing at Pirelli Cavi in 1993 and President and Chief Executive Officer of Pirelli Cable North America in 1995. In 1996, he became Senior Executive Vice President at Pirelli Cavi, where he served until 2000. Mr. Razelli was President and Chief Executive Officer of Fiamm S.p.A. from 2001 to 2003. He became Senior Vice President of Business Development and Strategies at Fiat S.p.A. in 2003.
 
   
Luciano Soldi (56)
  Senior Vice President General Affairs and General Counsel (2003)
 
   
  Mr. Soldi joined ENI in 1973, and held several positions there prior to becoming ENI Saipem’s Head of Legal Affairs in 1988. In 1991, he joined Pirelli S.p.A., where he held several positions, including Head of International Legal Affairs, and Head of Cables and Finance Legal Affairs; in 1999, he was appointed Director of Legal Affairs at Pirelli S.p.A. and Chief Legal Officer of Pirelli & C. On November 1, 2003, he joined Fiat S.p.A. as Senior Vice President General Affairs and General Counsel.

     Our senior managers do not have a formal term of office.

     Michel de Lambert, the former chief executive officer of Iveco, resigned from the Fiat Group, and was replaced by José Maria Alapont as of October 1, 2003. GianCarlo Boschetti, the former chief executive officer of Fiat Auto, resigned from the Fiat Group in November 2003, and was replaced by Herbert Demel. Also in November, Luciano Soldi became our Senior Vice President General Affairs and General Counsel, replacing Bruno Cova. In addition, Luigi Gubitosi was named Chief Financial Officer effective January 1, 2004, replacing Ferruccio Luppi, who became Chief Executive Officer of Business Solutions in place of Carlo Gatto, and Pietro Fornier, formerly our Head of Internal Audit, retired, to be replaced as of January 1, 2004, with Mauro Di Gennaro.

     In addition, a number of changes to Fiat’s corporate management structure were implemented in 2003, including: the naming of Mr. Passerin d’Entrevès to the new post of executive assistant to the Chairman, with the task of coordinating activities aimed at enhancing the image of the Fiat Group; the appointment of Eugenio Razelli to head our new business development and strategies department; and the naming of Roberto Pisa to head our new corporate initiatives department.

     Board of Statutory Auditors

     Under Italian law, in addition to electing the Board of Directors, Fiat’s ordinary stockholders also elect a Board of Statutory Auditors (Collegio Sindacale). The statutory auditors are elected for a

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term of three years, may be re-elected for successive terms and may be removed only for cause and with the approval of a competent court. Each member of the Board of Statutory Auditors must provide certain evidence that he is in good standing and meets certain professional standards. The Board of Statutory Auditors is required to verify that the Company (i) complies with applicable law and its By-laws, (ii) respects the principles of correct administration, (iii) maintains adequate organizational structure, internal controls and administrative and accounting systems, and (iv) adequately instructs its subsidiaries to transmit information relevant to its disclosure obligations. In addition, the Board of Statutory Auditors is required to assess the technical adequacy and independence of our external auditors.

     The following table sets forth the names of the three members of the current Board of Statutory Auditors and its alternate members and their respective positions. The current Board of Statutory Auditors was elected for a three-year term at the annual meeting of stockholders on May 13, 2003 to serve for the period from 2003 through 2006.

     
Name
  Title
Cesare Ferrero
Giorgio Ferrino
Giuseppe Camosci
Piero Locatelli
Giorgio Giorgi
Natale Ignazio Girolamo
  Chairman
Statutory Auditor
Statutory Auditor
Alternate Statutory Auditor
Alternate Statutory Auditor
Alternate Statutory Auditor

COMPENSATION OF DIRECTORS AND SENIOR MANAGEMENT

     In accordance with applicable Italian regulations (Article 78 of CONSOB Regulation No. 11971, issued on May 14, 1999), we disclosed in our published financial statements the following information regarding compensation paid in 2003 to each of our directors, statutory auditors and senior management, listed with the title and as holding the position each held during the year ended December 31, 2003. Note that while the official expiration of the term of each of the directors listed would have been 2006, several of these directors have since left the Board of Directors. See “— Directors.”

                                             
Fees paid to Directors, Statutory Auditors and Chief Operating Officers
(in thousands of euros)
(Article 78 of Consob Resolution No. 11971/99)

First name and last   Office held during   Term   Expiration   Compensation for   Noncash   Bonuses and   Other
name
  2003
  of office
  (*)
  office held
  benefits (**)
  other incentives
  compensation
Umberto Agnelli
  Chairman   2/28 – 12/31     2006       1,528.3 (1)     51.3              
Giuseppe Morchio
  Chief Executive Officer   2/28 – 12/31     2006       1,062.7 (2)     83.6              
Angelo Benessia
  Director   1/1 – 12/31     2006       99.1       52.3              
Luca Cordero di Montezemolo
  Director   2/28 – 12/31     2006       65.4       34.6           6,626.2 (3)
Flavio Cotti
  Director   1/1 – 12/31     2006       96.1       52.3              
John Philip Elkann
  Director   1/1 – 12/31     2006       84.1       52.3              
Luca Garavoglia
  Director   5/13 – 12/31     2006       70.8       34.0              
Franzo Grande
Stevens
  Vice Chairman
Director and
Secretary of the Board
  1/1 – 2/28
2/28 – 12/31
    2006       343.1 (4)     52.3              
Hermann Josef
Lamberti
  Director   1/1 – 12/31     2006       78.1       52.3              
Sergio Marchionne
  Director   5/13 – 12/31     2006       64.8       34.0              
Daniel John Winteler
  Director   1/1 – 12/31     2006       78.1       52.3              

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Fees paid to Directors, Statutory Auditors and Chief Operating Officers
(in thousands of euros)
(Article 78 of Consob Resolution No. 11971/99)

First name and last   Office held during   Term   Expiration   Compensation for   Noncash   Bonuses and   Other
name
  2003
  of office
  (*)
  office held
  benefits (**)
  other incentives
  compensation
Alessandro Barberis
  Chief Executive and Operating Officer
Vice Chairman
  1/1 – 2/28
2/28 – 5/13
            322.9 (5)     10.3           277.4 (6)
Paolo Fresco
  Chairman   1/1 – 2/28             194.1       20.3              
Gabriele Galateri di Genola
  Director   1/1 – 4/12             17.7       13.8              
Virgilio Marrone
  Director   1/1 – 5/13             19.3       18.4              
Felix George Rohatyn
  Director   1/1 – 2/28             3.7       8.0              
John Francis Welch
  Director   1/1 – 2/28             3.7       8.0              
Cesare Ferrero
  Chairman of the Board of Statutory Auditors   1/1 – 12/31     2006       63.0                   20.0  
Giuseppe Camosci
  Statutory Auditor   5/14 – 12/31     2006       26.6                      
Giorgio Ferrino
  Statutory Auditor   1/1 – 12/31     2006       42.0                      
Lamberto Jona Celesia
  Statutory Auditor   3/1 – 5/31             15.3                   104.7  


(*)   Year in which the Stockholders’ Meeting is convened for approval of the Annual Report, coinciding with expiration of the term of office.
(**)   This includes the pro-rata and pro-quota share of the insurance policy approved by the Stockholders’ Meeting in 2003 and the use of means of transport for personal purposes.
(1)   The gross annual fee for the office of Chairman amounted to 1,750,000.
(2)   The annual gross fixed fee of the chief executive officer in 2003 was 1,200,000. His only variable compensation is represented by the stock options illustrated in the following table. The non-cash benefits include the annual premium for a professional and extra-professional health insurance policy.
(3)   The fees for the offices held in the subsidiaries Itedi (258,000) and Ferrari (6,368,000), the latter inclusive of an extraordinary bonus related to the results achieved.
(4)   The gross annual fee for the post of Secretary amounted to 250,000.
(5)   The fee for the office of Vice Chairman amounted to 301,000. No compensation was paid for his services as Chief Executive Officer.
(6)   Gross fee for employment as Chief Operating Officer (167,000) and compensation for a post held at Comau (110,000).
                                                                                                 
Stock options granted to Directors and Chief Operating Officers
            Options held   Options granted   Options held
Grantee
  at the beginning of the year
  during the year
  at the end of the year
                                                                    Number            
                                                                    of            
    Office                                                   Options   options            
    held at   Number   Average   Exercise   Number   Average   Exercise   exercised   expired   Number   Average   Exercise
    date of   of   exercise   period   of   exercise   period   during   during   of   exercise   period
Name
  grant
  options
  price
  (mm/yy)
  options
  price
  (mm/yy)
  2003
  2003
  options
  price
  (mm/yy)
Paolo Fresco
  Chairman     2,250,000     20.614       7/01 – 1/10                                               2,250,000     20.614       7/01 – 1/10  
Alessandro Barberis
  COO     150,000     12.96       6/03 – 6/10                                       150,000 (*)                        
Gabriele Galateri di Genola(3)
  CEO     400,000     12.96       6/03 – 6/10                                       400,000 (*)                        
Giuseppe Morchio
  CEO                             13,338,076     5.623       3/04 – 3/10 (**)                     13,338,076     5.623       3/04 – 3/10  


(*) Options expired upon termination of office.
(**) These options would have been partially exercisable only upon satisfaction of certain pre-defined profitability targets. Most of these options expired upon Mr. Morchio’s resignation in May 2004.

     On March 27, 2003, the Board adopted a resolution to grant to Mr. Morchio 11,822,195 options to purchase Fiat ordinary shares at a price of 6.344 per share; on July 31, 2003, in connection with the capital increase approved in June 2003, the Board of Directors revoked this resolution and resolved instead to grant to Mr. Morchio 13,338,076 options to purchase Fiat ordinary shares at the price of 5.623 per share. Following Mr. Morchio’s resignation, 10,670,461 of these options expired. The remaining options have all vested and are exercisable until May 30, 2005.

     Each member of the Board of Directors in 2003 received compensation comprising the following in respect of their service for that year:

    50,000 to be paid pro-rata within the end of the fiscal year;

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    an additional sum based on a fee of 3,000 for every board or committee meeting attended by the director, with the exception of directors with executive authority; and
 
    the proportional amount of the insurance premium for a maximum coverage limit of approximately 50 million to cover civil liability deriving from legal and contractual obligations connected with directors’ duties.

     As these insurance policies expired in June 2004, the annual general meeting held on May 11, 2004, approved a motion authorizing the Company to provide directors continued coverage and surety for this potential civil liability, as well as to explore alternative means of ensuring adequate coverage, which could include not only insurance policies but also methods such as Company risk-sharing and self-insurance strategies.

     With respect to the senior managers listed in this Item 6 who are not directors, the aggregate expense we accrued during 2003 for their compensation during the year was approximately 19.2 million inclusive of the following:

    the provision charged by the Group in respect of mandatory severance payments, amounting to 1,089,038 in 2003; these severance payments are a statutory obligation under Italian law, with the amount of each year’s accrual based on the employee’s remuneration for the year in question and the length of his or her service;
 
    the amount contributed by the Fiat Group, equal to 389,298 in 2003, to an independent pension fund that has been created for our senior and mid-level officers, the assets of which are invested in insurance policies;
 
    the amount contributed by the Fiat Group to a special defined contribution plan for the benefit of all executive officers, approved by the Board of Directors on June 2, 1995; in 2003, this contribution amounted to 853,840; and
 
    the amount contributed by the Fiat Group to a special plan for senior executives (Individual Top Hat Scheme), approved by the Board of Directors on December 7, 2000, that provides a lump sum to be paid in installments if an executive leaves the Group before the age of 65; in 2003, such contribution amounted to 2.1 million.

     As of December 31, 2003, the directors and senior managers listed in this Item 6 as a group owned an immaterial number of shares of Fiat S.p.A. (constituted solely of ordinary shares, in an aggregate amount of 19,173 ordinary shares, representing significantly less than 1% of the ordinary shares outstanding). As of December 31, 2003, these individuals have also been granted an aggregate of 1,603,243 options in respect of an equivalent number of Fiat’s ordinary shares. See the table on the previous page and Item 10. “Additional Information — Options to Purchase Securities From Registrant or Subsidiaries.”

     In accordance with applicable Italian regulations (Article 79 of CONSOB Regulation No. 11971, issued on May 14, 1999), Fiat disclosed in its published financial statements the following information regarding shares held in 2003 by directors and statutory auditors.

                                         
Interest held by Directors and Statutory Auditors
            Number of Shares
    Class of   Held at   Acquired           Held at
Name
  Shares
  12/31/02
  during 2003
  Sold in 2003
  12/31/03
Luca Cordero di Montezemolo
  Ordinary     11,984 (1)     7,188             19,172  
John Philip Elkann
  Ordinary     300             300        
Cesare Ferrero
  Ordinary     1                   1  
Paolo Fresco
  Ordinary     211,452       5,650             217,102 (2)
Gabriele Galateri di Genola
  Ordinary     2,750                   2,750 (3)
 
  Preference     440                   440 (3)
Felix Rohaytn
  Ordinary     1,000                   1,000 (2)


(1)   Number of shares held at February 28, 2003, the date of his appointment as director.
(2)   Number of shares held at February 28, 2003, when he left the office.
(3)   Number of shares held indirectly through his spouse at April 12, 2003, when he left the office.

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EMPLOYEES AND LABOR RELATIONS

     At December 31, 2003, we employed 162,237 employees, compared with 186,492 at the end of 2002. During the year, we hired approximately 11,500 new employees (approximately 3,400 in Italy), including those hired on temporary basis. Over the same period, approximately 22,700 people left the Group (approximately 10,200 in Italy). Acquisitions and divestitures we completed during the year resulted in a net decrease of 13,100 employees. We take advantage of flexible employment options where they are available in order to adjust our level of output to changes in market demand.

         
Number of Fiat Group Employees at 12/31/01
    198,764  
Additions
    17,600  
Reductions
    (25,572 )
Outsourcing
    (400 )
Changes in the scope of consolidation
    (3,900 )
 
   
 
 
Number of Fiat Group Employees at 12/31/02
    186,492  
Additions
    11,500  
Reductions
    (22,655 )
Outsourcing
     
Changes in the scope of consolidation
    (13,100 )
 
   
 
 
Number of Fiat Group Employees at 12/31/03
    162,237  

     For more information on the number of employees in each of the Group’s sectors, see the table “Operating Results by Sector” in Item 4. “Information on the Company — Historical Overview”.

     Our total personnel expenses in 2003, including wages and salaries, employee benefits and special reserves for severance indemnities, totaled 6,688 million, which represented 14.1% of net sales and revenues, as compared with 7,554 million (13.6% of net sales and revenues) in 2002. At December 31, 2003, 73,553 employees (45% of the total number of our employees worldwide) were based in Italy, representing approximately 1.4% of the Italian industrial workforce.

     Labor agreements. At the end of 2003, approximately 36% of our employees in Italy were members of labor unions. None of our facilities in Italy is operated on a closed-shop basis. The Italian industrial relations system establishes that labor agreements are negotiated at two separate and distinct levels — a national agreement negotiated collectively between the national employers’ association of a particular industry and the respective national unions that provides a basic framework on working conditions, including pay and hour provisions, and a separate agreement negotiated at the company level between management and the union representatives of its employees that addresses issues of special importance to the particular firm and may act to supplement the basic provisions of the national framework contract.

     The national agreement for metalworkers, which covers most of our employees (including both white-collar and blue-collar workers), expired on December 31, 2002. The terms of a new contract, which was effective retroactively as of the expiration of the prior agreement, were agreed in May 2003 with all but one of our four unions, FIOM-Cgil. The new agreement has a term of four years for the work rule provisions and two years for the compensation package. As a whole, management expects the new agreement to increase labor costs by a cumulative total of approximately 5% through the first half of 2005 (approximately 2% in 2003 and 2.4% in 2004).

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     With regard to negotiations at the company level, even though the Group-wide agreement formally expired on September 30, 1999, we and our unions agreed that an annual bonus calculated on the basis of the old contract should be paid to covered employees with respect to 2003. The average bonus totaled 1,391 per employee before withholding, an amount similar to the bonus paid for 2002.

     Industrial reorganization. During 2003, our labor relations were mainly focused on managing the restructuring programs taken in connection with our relaunch initiatives, and continuing to minimize the social impact of the staff reductions carried out as part of the plan, mainly through the social “shock absorber” programs available under existing laws in the various countries.

     In Italy, as part of our relaunch initiatives, we have been reducing our active workforce, primarily through the use of certain programs available under Italian law with government authorization, such as the cassa integrazione guadagni straordinaria (“extraordinary layoff fund”), a special temporary layoff benefit fund, and mobilità di accompagnamento alla pensione (“mobility allowances”), an early retirement program applicable to employees who would otherwise be eligible to receive a pension within a maximum of three to four years. All of these programs are managed by Italy’s national social security agency and funded by payroll contributions from companies and workers. We bear a portion of the cost of payments made under these programs, with the national social security agency paying the remainder.

     Fiat Auto took measures to reduce its headcount in Italy and also sought to reduce labor costs through the use of the cassa integrazione guadagni straordinaria (a longer-term temporary layoff benefits fund) and reduced use of temporary staff, while at the same time seeking to minimize the social impact of its organizational and industrial restructuring. The taking of these measures greatly contributed to Fiat Auto’s ability to emerge on December 8, 2003, from the “business-in-crisis” status it had been granted by the Italian government in 2002.

     In Italy, in accordance with the Program Agreement reached between the Group and the Italian government in December 2002, Fiat Auto and certain Magneti Marelli and Comau factories used the cassa integrazione straordinaria, which was authorized for a maximum of 7,600 employees. Approximately half of these workers returned to work in accordance with our production requirements over the course of the year; for another approximately 500 employees from the Fiat Auto plant in Arese, the Ministry of Labor granted authorization to continue using cassa integrazione straordinaria until December 31, 2004. The remaining redundancies were effected through the mobility allowance program, including the longer-term mobility allowances made available under a law enacted in April 2003, affecting a total of 2,400 employees of Fiat Auto, Magneti Marelli and Comau and certain companies of the services sector, as well as 181 Teksid employees.

     In 2003, the level of labor unrest was significantly lower than in 2002, when the unions declared several general strikes, and work stoppages during the year averaged more than 100 hours for the Group as a whole, with the support on average of approximately 15% to 20% of employees. In 2003, Italian unions declared only a few general strikes to protest proposed government pension reform measures and the war in Iraq, and the number of workers supporting these strikes remained limited, averaging approximately 10% to 30%. Other work stoppages during the year consisted of certain isolated wildcat strikes and other minor strikes organized by one union, the FIOM-Cgil, which did not sign the national collective agreement and also opposed redundancy measures that were generally agreed to by our other unions.

     In the spring of 2004, unrest among employees of auto parts suppliers (approximately 3,000 workers) located at the Melfi complex in Southern Italy, which houses a Fiat Auto plant as well as production operations of several suppliers, spread to encompass the Fiat Auto workers at the site (5,000 employees out of the 30,000 Italian employees of the automobiles sector), and led to labor unrest that lasted approximately three weeks. The stoppages at the plant and the resulting shortage of components caused progressive production shutdowns at Fiat Auto’s other Italian plants, resulting in

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an overall output loss of more the 35,000 vehicles. On May 9, we entered into an agreement with the Melfi unions and the plant workers’ council that put an end to the unrest. The agreement modified shift rotations and provided for a gradual wage increase over three years to bring the wages paid at the Melfi plant in line with those paid at other Fiat Auto plants in Italy.

     At Fiat Group companies operating outside Italy, staff redundancies were handled primarily through programs developed with the agreement of local trade unions. The companies involved were: Irisbus (closure of a plant in Mataró, near Barcelona, Spain, and of an Ikarus factory in Hungary); CNH (restructuring of its Berlin facility and definition of a social impact program with respect to the closure of its factory at Crepy in France in 2004); Magneti Marelli (staff reductions at the Magneti Marelli Lighting plant in Cannock in the United Kingdom, to be closed by the end of 2004); and Comau (completion of the redundancy procedure for Comau Estil in the United Kingdom). Negotiations with workers regarding restructuring plans continued in 2004, leading among other things to an agreement for the closure of one plant as part of a reorganization of Comau Systèmes in France, as well as the closure of CNH’s Neustadt plant in Germany.

     Compensation. In Italy, average labor costs, including mandatory benefit payments and pension-plan contributions, grew roughly in line with the inflation rate. In the other countries where we operate, we focused on keeping compensation levels in line with cost-of-living increases and introduced variable compensation packages similar to those in effect in Italy.

     In 2003, on average, approximately 10% of the overall compensation of our executives and middle managers worldwide was paid pursuant to our performance-based variable compensation system (approximately 4% in 2002). For details of grants under our stock option plans, see Item 10. “Additional Information — Options to Purchase Securities from Registrant or its Subsidiaries.”

     Training and Scholarships. In 2003, Fiat Group companies throughout the world invested a total of 95 million, or 2% of total payroll costs, in professional development and training programs designed to support their operations. Approximately 71,000 employees participated in these programs in 2003

     Isvor Fiat, which acts as the corporate university of the Fiat Group and also sells its services to non-Group clients, in 2003 provided training, consulting and professional support programs representing a total of 29,200 classroom days. An additional 37,800 employees received a total of 798,000 hours of distance- and open-learning support.

     The Fiat Grants and Scholarships Program, which was created in 1996 and is reserved for the children of Group employees both in Italy and abroad, continued to enjoy considerable success. Since 2001, grants and scholarships have been awarded directly by individual Group sectors and companies, in order to give local managers a greater degree of involvement in programs affecting their employees.

     In 2003, we awarded 545 grants, including 183 to students in Italy and 362 to students in other countries (Brazil, France, Poland, Spain and the United States), in an aggregate amount of 978,000.

Item 7. Major Stockholders and Related Party Transactions

DESCRIPTION OF CAPITAL STOCK

     Fiat’s capital stock consists of ordinary shares, preference shares and savings shares with a par value of 5.00 each. As of May 31, 2004, the number of such shares outstanding was as follows: 800,417,598 ordinary shares, 103,292,310 preference shares and 79,912,800 savings shares.

     The increase in the number of ordinary shares from the 433,220,490 ordinary shares outstanding at December 31, 2002, is attributable to the capital increase completed by means of a rights offering in July 2003 (the “2003 Capital Increase”). In effecting the 2003 Capital Increase,

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which did not include a public offering in the U.S. and therefore generally excluded U.S. stockholders and ADR holders, Fiat offered eligible stockholders the right to purchase three new ordinary shares at a price of 5 each for every five ordinary, preference or savings shares they held. Existing stockholders exercised more than 98% of these rights, and remaining rights were auctioned on the Italian stock exchange and subsequently exercised. A total of 368,457,108 new ordinary shares were issued in connection with the 2003 Capital Increase, resulting in aggregate proceeds to the Company of approximately 1.8 billion.

     The 2003 Capital Increase followed a capital increase in February 2002, similarly completed by means of a rights offering (the “2002 Capital Increase”). In that offering, which was conducted entirely outside of the United States in accordance with Regulation S under the Securities Act and therefore excluded U.S. stockholders and ADR holders, existing holders of Fiat shares subscribed for a total of 65,820,600 new ordinary shares at a price of 15.5 each, for an aggregate amount of approximately 1.0 billion. Each eligible existing holder was entitled to purchase three new ordinary shares for every 25 ordinary, preference or savings shares held, and holders exercising their rights also received warrants entitling them to subscribe for an aggregate of 16,455,150 new ordinary shares authorized for issuance in January 2007 at a fixed price of 30 per share, or, at the issuer’s option, an equivalent amount of cash. In connection with the 2003 Capital Increase, in order to ensure the Company remains within its maximum authorized share capital of 8 billion at the time these warrants become exercisable, the Company acquired for cancellation 311,432 warrants, so that the maximum aggregate number of shares warrant holders are entitled to subscribe for was reduced to 16,377,292. See Note 9 to the Consolidated Financial Statements included in Item 18.

     At the annual general meeting of stockholders held on June 23, 1999, the stockholders of Fiat S.p.A. approved a proposal by the Board of Directors with regard to the redenomination of Fiat’s ordinary, preference and savings shares in euros and a related reverse stock split by which each group of ten former ordinary, preference and savings shares with a par value of 0.5 each were converted into a single new ordinary, preference or savings share with a par value of 5.0 each. Simultaneously, a parallel one-for-two reverse split was effected of Fiat’s ordinary, preference and savings American Depositary Shares (“ADSs”), which are traded on the New York Stock Exchange, so that each new ordinary, preference and savings ADS represents one new ordinary, preference or savings share instead of the previous five ordinary, preference or savings shares. The redenomination and reverse splits were effected on August 23, 1999.

MAJOR STOCKHOLDERS

     Fiat is directly controlled by its largest single stockholder, IFIL S.p.A., which in turn is controlled by Istituto Finanziario Industriale S.p.A. (“IFI”). As part of a reorganization of IFI and IFIL effected in April 2003, IFI contributed its approximately 18% stake in Fiat to IFIL. As of May 31, 2004, IFIL owned 240,583,447 ordinary shares and 31,082,500 preference shares, representing 30.06% and 30.09%, respectively, of Fiat’s ordinary and preference shares outstanding as of such date.

     The following tables present information on each of those stockholders who owned more than 2% of Fiat’s ordinary shares and preference shares as of May 31, 2004, 2003, and 2002, based on information available to us as of such dates. “N/A” signifies that to our knowledge, as of the relevant date, the stockholder in question no longer owned 2% or more of our ordinary or preference shares, as applicable. Because the savings shares are in bearer form and are entered in the shareholders’ registry only at the request of the shareholder, our records do not indicate the extent to which savings shares are directly held by any single stockholder, and no stockholder has notified us that it owns more than 2% of our savings shares.

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    As of May 31,
    2004
  2003
  2002
    No. of           No. of           No. of    
    Ordinary   % of   Ordinary   % of   Ordinary   % of
    Shares
  class
  Shares
  class
  Shares
  class
IFIL
    240,583,447       30.06       131,661,820       30.39       131,661,810       30.39  
Assicurazioni Generali S.p.A. (and affiliates)
    26,001,817       2.76       13,544,071       3.13       13,571,634       3.13  
Libyan Arab Foreign Investment Co.
    21,670,817       2.70       13,151,215       3.04       N/A       N/A  
Mediobanca — Banca di Credito Finanziario S.p.A.
    19,112,590       2.39       13,220,368       3.05       13,220,368       3.05  
SanPaolo-Imi (and affiliates)
    16,535,954       2.07       10,084,575       2.33       12,602,408       2.91  
Deutsche Bank AG (and affiliates)
    N/A       N/A       12,157,409       2.81       12,157,409       2.81  
Dodge & Cox
    N/A       N/A       16,430,876       3.79       N/A       N/A  
Pictet & Cie.
    N/A       N/A       12,437,900       2.87       N/A       N/A  
Southeastern Asset Management
    N/A       N/A       11,466,150       2.65       11,466,150       2.65  
                                                 
    As of May 31,
    2004
  2003
  2002
    No. of           No. of           No. of    
    Preference   % of   Preference   % of   Preference   % of
    Shares
  class
  Shares
  class
  Shares
  class
IFIL
    31,082,500       30.09       31,082,500       30.09       31,082,500       30.09  
Capital Group International Inc.
    N/A       N/A       N/A       N/A       4,370,910       4.20  

     None of the shares held by the above stockholders provides any special voting rights.

     In June 1999, IFI, IFIL, Assicurazioni Generali S.p.A. and Deutsche Bank AG agreed to consult with each other (and with the Board of Directors of Fiat S.p.A.) prior to any sale of their respective shares in Fiat and to meet from time to discuss possible strategies to be undertaken by the Group. This arrangement expressly does not create any legal obligations among the parties and is not binding under Italian law. In September 2000, Imi Investimenti (then called Nuova Holding SanPaolo-IMI), an affiliate of SanPaolo-Imi, joined this arrangement.

     As noted above, Fiat is indirectly controlled by IFI, which in turn is controlled by Giovanni Agnelli & C. S.A.p.A. (“GA”), an Italian limited partnership, which, as of May 31, 2004, owned 100% of the voting power and 50% of the equity of IFI. John Philip Elkann, the Vice Chairman of the Board of Fiat S.p.A., is a general partner of GA and, together with other members of the Agnelli family, owns substantially all of the ownership interest in GA. Tiberto Brandolini d’Adda, a director of Fiat since May 30, 2004, is one of the other general partners of GA, and is also a member of the Agnelli family.

     Trading by the Group in Fiat Shares. Under Italian law, Italian companies are not permitted to purchase their own shares unless authorized to do so by their stockholders, and then only in accordance with certain legal requirements. The annual general meeting of Fiat stockholders held on May 13, 2003, renewed an existing authorization to purchase up to an aggregate amount of 61,642,560 of Fiat’s shares of all three classes for a period of 18 months, adding the requirement that the purchased shares, when added to the shares already held by Fiat and its subsidiaries, may not exceed a maximum of 10% of the total capital stock issued. The stockholders’ resolution also set the respective minimum and maximum purchase prices for any such repurchases at 10% below and 10% above the closing price of the relevant type of shares on the Italian Stock Exchange on the day preceding the relevant repurchase, and authorized the allocation of 1 billion of available reserves to a reserve for the repurchase of shares to be held as treasury stock, including the sums already used to make purchases in accordance with the existing authorization. However, these reserves were reduced by the annual general meeting of Fiat’s stockholders held on May 11, 2004, as part of the motion to

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cover the net losses incurred by the Group for fiscal 2003, to 28,044,570, equal to the treasury stock valuation reserve, which amount relates to shares already purchased and being held as treasury stock.

     As of June 23, 2004, Fiat S.p.A. held 4,384,019 ordinary shares in treasury.

     Subsidiaries of Italian companies may, subject to stringent restrictions under Italian law, purchase outstanding shares of their parent companies.

RELATED PARTY TRANSACTIONS

     Many of the Group’s operating companies provide services to other members of the Group. Transactions among Group companies, whether they are made to support vertical manufacturing integration or to provide services, are carried out at terms that, considering the quality of the goods or services involved, are competitive with those available in the marketplace.

     Within this framework, the main transactions between the parent company, Fiat S.p.A., and its subsidiaries and associated companies are summarized below:

    Licensing of the right to use the Fiat trademark, for consideration based on a percentage of sales (0.5%), to Fiat Auto S.p.A.
 
    Services provided by Fiat management personnel to Fiat Auto S.p.A., Iveco S.p.A., Teksid S.p.A., Magneti Marelli Holding S.p.A., Fiat Engineering S.p.A., Comau S.p.A., and other Group companies.
 
    Grant of suretyships and guarantees in connection with the issuance of billets de trésorerie (Fiat France S.A.), bonds and lines of credit (Fiat Finance and Trade Ltd, Fiat Finance Luxembourg S.A., Fiat Auto Financial Services Limited, and New Holland Credit Company LLC); and to secure bank loans (Fiat Auto S.p.A., Teksid S.p.A., Fiat Partecipazioni S.p.A. (formerly Sicind S.p.A.), Fiat Automoveis S.A., Banco CNH Capital S.A., Case LLC, and other Group companies), and payment obligations under building rental contracts (Ingest Facility S.p.A., Fiat Auto S.p.A., Isvor Fiat S.c.p.A., Editrice La Stampa S.p.A., Fiat Automobil Vertriebs GmbH, International Metropolitan Automotive Promotion (France) S.A., Fiat Motor Sales Ltd, and other Group companies).
 
    Rental of buildings to Ingest Facility S.p.A. and Fiat I&CS S.r.l.
 
    Loans granted to and received from Fiat Ge.Va. S.p.A.
 
    Purchases of support and consulting services provided by Fiat Gesco S.p.A. (taxation and administration), Fiat Ge.Va. S.p.A. (financial services) and Fiat International S.p.A. (international relations).
 
    Purchases of inspection and internal auditing services from Fiat Revi S.c.r.l.
 
    Purchases of information technology services provided by Global Value S.p.A.
 
    Purchases of external relations services provided by Fiat I&CS S.r.l.
 
    Purchases of office space and personal and real property maintenance services provided by Ingest Facility S.p.A., and other general services provided by Fiat Servizi per l’Industria S.c.p.a.
 
    Purchases of personnel training services provided by Isvor Fiat S.c.p.A.
 
    Purchases of automobiles from Fiat Auto S.p.A.

     We also effected the following transactions with other related parties:

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    Franzo Grande Stevens, a member of the Board of Directors until April 2004, received compensation in 2003 of 317,000 for legal services rendered to Fiat S.p.A., and 599,000 for such services rendered to Fiat Partecipazioni S.p.A.
 
    Luigi Arnaudo, a former member of the Board of Directors of IFIL, received compensation of 40,000 for consultancy services provided to Fiat S.p.A.
 
    Studio Benessia Maccagno, a law firm in which director Angelo Benessia is a partner, received compensation of 2.5 million for professional services rendered in connection with our equity investment in Italenergia Bis.

     Transactions involving intra-Group deliveries of goods and services that are part of the regular operations of the companies involved are discussed in Note 21(iv) “Other segment information” to the Consolidated Financial Statements included in Item 18.

     Other significant transactions among Group companies or with related parties that occurred during the year are reviewed below:

    In April 2003, CNH carried out a capital increase of $2 billion by issuing 8,000,000 Convertible Series A Preference Shares at the price of $250 per share, which were all acquired by Fiat Group companies through the conversion of financial payables owed to them by CNH. The Series A preference shares, which are vested with ordinary voting rights, provide for dividends payable with respect to the 2005 and subsequent fiscal years at a rate based on the dividend yield of CNH’s common shares and CNH’s financial performance, and are convertible into 100,000,000 CNH common shares. If all the shares are converted, the percentage of voting shares held by Fiat S.p.A. in CNH through its subsidiary Fiat Netherlands Holding N.V. will increase from 84.2% to approxim