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Annual Report 2002

TABLE OF CONTENTS – ANNUAL REPORT 2002

1. COMPANY INFORMATION

ANNUAL REPORT 2002

Corporate name, seat and legal form of the Company

KAROSA a.s., Dobrovského 74/II, Vysoké MýtoID No. (IČ): 48177131The Company was incorporated on July 1, 1993 and is registered in the Commercial Register maintained by the District Court in Hradec Králové, Section B, Insert Number 936.

Shareholder structure:97.52% - Société d'assistance technique automobile2.48% - others

Board of directors Supervisory board

Chairman Rudolf Černý Chairman Elios PascualVice Chairman Jacques Averbuch Members Miroslav BečičkaMembers Petr Rusek Ervin Perthen

Pavel Pachovský Jaroslav VenigerJiří Novák Jacques-André RebeyrolMilan Rejsa Francisco J.C. MartinezDaniel Patka Stephane ViezJan Rulec François Portelet

Pier F. Corcione

ANNUAL REPORT 2002 – COMPANY INFORMATION 4

Organizational chart:

ANNUAL REPORT 2002 – COMPANY INFORMATION 5

1. General ManagerIng.RUDOLF ČERNÝ

5. Director of Industry and Technology JAN RULEC

8. Financial DirectorJACQUES AVERBUCH

9. Director of Organization and ITPHILLIPE PAPPILLIER

11. Aftersales Services¨ DOMINIQUE JANY

3. Director of Total QualityMILAN REJSA

2. Director of Human ResourcesJIŘÍ NOVÁK

4. Director of New ProductsFRANTIŠEK ŠERÁNEK

6. Director of PurchasingPAVEL PACHOVSKÝ

7. Director of Construction and DevelopmentDANIEL PATKA

10. Director of SalesPETR RUSEK

2. MANAGEMENT AND FINANCIAL RESULTS OF THE COMPANY

ANNUAL REPORT 2002

2.1. Business activities

The year 2002 confirmed the continuing increase in demand for Karosa's products. The total sales volume reached 1,554 units, which represents a 22.4% increase in comparison with the plan (1,270 units) and an increase of 235 buses (i.e. 17.8%) in comparison with 2001. The total revenue from sales reached CZK 5,538 billion in 2002, up by CZK 704 million (12.7%) on 2001.

A total of 499 buses were sold in the Czech Republic, which corresponds to the plan (500 buses), but represents a 12.3% drop in numbers in comparison with the year 2001 (570 buses) (473 buses were sold in the Czech Republic in 2000).

Although this development indicates the difficult problems faced by public budgets, made worse by the consequences of the disastrous floods, carriers demonstrated increased interest in the category of lower capacity buses with a length of 9.5 to 10.5 m and lower fuel consumption.

City transit authorities bought 161 buses (in comparison with 195 buses in 2001), a drop of 34 buses (17.4%) (170 buses were purchased by city transit authorities in 2000). There was a sharp increase in the sales of low-floor articulated buses (19 buses were sold in comparison with 1 bus in 2001), which meant that sales volumes remained the same as in 2001. The financial situation of most cities after the floods did not permit them to purchase the same number of buses as in 2001.

A total of 338 buses, 37 buses (9.9%) more than in 2001, were sold to companies other than city transit authorities. A total of 303 buses were sold to these companies in 2000.

A total of 92 buses were sold in the Slovak Republic through the subsidiary KAROSA, s.r.o. Bratislava. The sales volume in the Slovak Republic reached 144 buses in 2001 and 121 buses were sold there in 2000.

Under the plan, 594 buses were to be exported to IRISBUS markets. However, a significant shift occurred in the course of the year and the final sales figure, i.e. 891 buses, represents an increase of 297 buses (50%) in comparison with the plan. In all 530 buses were sold on those markets in 2001 and 581 buses in 2000. The increase in the sales volume may be explained by the following facts:

an increase in the sale of school buses (704 buses in comparison with the planned sale of 400 buses)

an increase in the sales of the Axer (173 buses in comparison with the planned sale of 151 buses)

the release of a new product, the Axer 15M, onto the market.

From the above figures it is evident that this market is the largest and that, thanks to sales on this market, the level of exports in 2002 was 67.9% of total sales.

Exports to other (namely eastern) markets reached 73 buses, i.e. remained on the same level as in 2001 when 75 buses were sold on these markets (2000: 48 buses).

ANNUAL REPORT 2002 – COMPANY MANAGEMENT AND FINANCIAL RESULTS 7

The total volume of sales of spare parts amounted to CZK 401.1 million, which is 3,6% more than the planned CZK 387 million.

2. Production, quality, development

The above figures indicate that it was necessary to enhance the manufacturing capacities of the plant in order to ensure sales. The total volume of production reached 1,520 buses in 2002 (in comparison with the 1,226 planned buses), a 24% increase on the plan. In 2001, total production reached 1,303 buses and in 2000 1,238 buses.

Monthly production volumes fluctuated considerably, coinciding with delivery dates to customers, and average daily production ranged from 5 to 8 buses. Production continued under the difficult conditions of the total renovation of the plant. Despite this, new products were launched on the mixed assembly line and the plant was able to achieve a record production volume for the last 10 years and to comply at the same time with the deadlines set for the commissioning of new workshops.

Total investments reached CZK 300.1 million in 2002, in comparison with CZK 531.4 million in 2001 and with CZK 287.4 million in 2000. Investments into new products came to CZK 35.5 million. Emphasis was laid on investment in improved working conditions, the removal of environmental defects, the reduction of emissions, and improved health and safety at work. Amongst the important investments made we would point in particular to the mixed assembly line, including the storage of purchased parts. Thanks to the level of flexibility applied to this solution, the assembly line can now manufacture all types of buses produced by Karosa.

The total number of purchased items was approximately 9,000 in 2002, while the number of budgeted OEM suppliers reached 428. This was caused, in particular, by the rollout of the new bus Ares 15M. Some changes occurred in the structure of the origin of the goods. Supplies from the Czech Republic amounted to 42.15%. Other countries with a share in supplies exceeding 10% included France (24.4%) and Italy (18.7%). The volume of purchases reached CZK 3.4 billion.

Purchasing activities were also carried on by means of outsourcing projects (especially the frames of the 700 range, chassis members and body strips and the work canteen). The number of suppliers certified under quality management systems reached 273.

The quality of manufacturing procedures was measured by the demerit and audit systems. The year 2002 was characterized by major changes in the organization of workshops, because the completion of the refurbishment affected all workshops except for the paint and finishing shops. Dual-shift production, which was introduced before the commissioning of the new assembly line, and the hiring of more than 300 ancillary workers and 100 temporary workers also had a negative effect on the quality of the products, and the average values achieved do not show an overall improvement.


The production of the City Bus and the city vehicles of the 900 range improved from 524 to 374 points, which represents a significant shift. However, no changes to the manufacturing line of those vehicles were made. The production of the C 954 and the Récréo, which represent the major part of the total production volume, attained an average result of 780 points (in comparison with 712 points in 2001). The annual result was affected by five demerits given in the critical period, because the average of the other ones (20 demerits) was 670 points. This data relates to the quality of production and all defects were removed before the sale of the products. The granting of the ISO 9001 certificate represents an important achievement. All prescribed requirements were met and the certificates were awarded in January 2003.

Total construction and development costs reached CZK 204.4 million in 2002.

As part of the projects of the 900 range, in 2002 the company completed a project involving the extension of the school bus Récréo and of the line bus Axer to 12.8 m. Another important project was the implementation of the new front axle rod with a disk brake in the 12.8 m long models. The use of this axle rod in all 900-range models will be completed some time in 2003. Several versions of the Axer were prepared for Italy, Benelux and other countries with the aim of offering this product on other markets.

As part of the City Bus projects, the company prepared versions of the articulated 18m City Bus for our principal customers. As part of the Ares project, the company prepared documentation for the rollout of the 15-metre version of the Ares into series production for the Czech, German, French and Italian markets. At the same time, the company initiated a change of procedure to the joint construction documentation and completed the documentation of the Ares 12M and 12.8 m with the engine VCursos F2b. The Ares 10.6M project took an important step forward with the completion of the prototype in December 2002.

3. Personnel policies

In 2002, the total number of employees reached 1,768, an increase of 62 on the previous year (2000: 1,653 employees). The workforce was affected in 2002 by major monthly fluctuations in the number of workers involved in production, which was due to the daily production volume and also to the transfers made in connection with the installation of the new assembly line. The total number of production workers employed by Karosa ranged from 738 to 870 (July 2002), and the final number of those workers in December reached 835. The company continued reducing the number of service workers, which reached 296 workers by the end of 2002 in comparison with 361 workers in 2001. The major reduction resulted from the outsourcing of the work canteen services in August 2002.

A major success was achieved in the reduction of absenteeism from 8.1% in 2001 to 6.36% in 2002. Occupational diseases and work injuries fell from 6.61% in 2001 to 5.19% in 2002. CZK 8.58 million was invested in employee education. The total


number of employees who participated in this education was 1,762, and a total of 43,210 lessons were taught (i.e. an average of 25 lessons per employee).

Average earnings reached CZK 17,414, a 5.9% increase in comparison with CZK 16,444 in 2001 (2000: CZK 14,605).


2. KAROSA BUSINESS PLAN 2003-2004

ANNUAL REPORT 2002

This business plan is based on the previous projection for the year 2002 and on the results achieved in 2002.

3.1 Production plan

The production plan has been prepared to satisfy, in particular, the following needs:

- an ongoing increase in the quality and reliability of vehicles, the removal of shortcomings and of the most frequent defects with the aim of continuously increasing the coefficient of operability for our users;

- a reduction of warranty costs and operating expenses;

- extending the service life of the vehicles;

- the further development of products designed for specific markets and complying with the requirements of our customers;

- coping with growing requirements for tailor-made products adapted to the specific usages of individual countries and carriers, which have been on the increase as a result of growing exports;

- quick and high-quality response capacity.

3.1.1 Current products

The principal task is to maintain and further improve quality, to quickly respond to customer requirements, and to meet international technical and safety regulations.

In 2003 the existing products of the 900 AXER and Recréo ranges will be extended to 12.8 m, which means, at the same time, a transfer to disc brakes and the roll-out of their series production. The E design of the 900 range will be modernised, not only by an increase of the seating capacity of the line and school buses, but also by the use of compound glass in all models. An air-conditioning unit will be installed in the Recréo and all line and tourist models will use the RI75 front axle, which will be equipped, like the rear axle of Meritor, with disc brakes. This range, which was supplemented in 2002 with the Axer (a line bus for more sophisticated markets), will remain the principal export article. Funds invested into further improvements to utility value and quality will be focused on the needs of our customers and on the requirement of new regulations.

The 900E range offers a selection of classical, robust buses, designed for harsher conditions at an affordable price, with adequate quality and the necessary utility properties. A significant improvement in the quality of the surface finish, ensured by the new paint shop and cataphoresis, will contribute to a considerable extension of the service life of our products. Investments into further development of the 900E range and the maximum utilization of industry potential enables us to increase our competitiveness while achieving adequate profitability.

Karosa’s overall product range has been further expanded by the low-floor city transit bus CITY BUS Karosa, which has withstood the test of time. The increased customisation of this bus and the participation of Czech suppliers have enabled us to offer it to our customers at affordable prices. In addition to this product, we also sell a low-floor articulated version.

ANNUAL REPORT 2002 – Business Plan of Karosa for the Years 2003-2004 12

As regards the top tourist coach category, we will continue to offer the holding's products, such as the modernized Iliade coach. The current product range offered by both Karosa and IRISBUS Holding and its current year's additions will enable us to satisfy all the potential requirements of our customers.

3.1.2 New products

The renovation of our plant also encompasses the rollout of a new range of Ares brand products. The first 15 m long vehicles were presented to customers and sales of this bus began in 2002. Besides this, construction works and the preparation of the 10.6 m long version of the Ares are underway. Its manufacturing base enables Karosa to manufacture 12 m and 12.7 m versions of these buses.

Thanks to their increased quality and utility properties, these products will increase our competitiveness. The new products will expand the range of intercity and line transport buses intended particularly for export. Unlike the Recréo, this range of products needs first to be adjusted to the requirements of individual market segments, and we intend paying great attention to this problem. Strategic decisions will be also taken during 2003 on the EURO 4 products which are to be produced by our company.

3.2 Business plan

The basic strategy of Karosa may be summarized as follows:

1. To generate profit and to maintain the competitiveness of our costs and products, to ensure the financing of investment from our own funds.

2. To maintain our position on the Czech and the Slovak markets and to develop traditional (Eastern European) markets. In cooperation with our partners in the IRISBUS Group to search, for new markets which would be suitable for our product categories and for products of the entire IRISBUS Group.

3. To offer within the IRISBUS Group a range of products that is based on the product plan of the holding and is also adapted to the specific requirements of our customers (see Recréo, Axer and ARES 15M).

4. To develop the use of the standard mechanical bodies and technical solutions of IRISBUS in order to further increase the competitiveness of the final product.

5. To contribute to the development of activities and to the overall effectiveness of the production and sale of buses within the IRISBUS Group by using our capacities for joint projects. To get involved in activities inside the holding, which are decided by major shareholders.

6. To continuously improve quality with the aim of becoming the top company amongst our competitors.

7. To increase the level of after-sale services, including the supply of spare parts, in order to ensure long-term operability of our products for the customers. This also includes expanding the range of services on offer and developing further the network of dealers and warranty repair shops and


increasing their effectiveness so that they can meet the increasing requirements of our customers.

Czech Republic

The results of contracts concluded for the year 2003 have confirmed our dominant position on the market. As regards sales, the stable need for intercity buses, supported by a 30% state subsidy for their purchase, is limited by the financial resources which carriers have at their disposal and by an increase in operating costs (due to the increase in wages and diesel oil prices). Another factor that has become increasingly evident in this respect is the competition in the supply of 10.5 m long buses, which Karosa does not produce.

A slight decline in the sales of tourist buses is expected as a result of increased sales in 2002. The competition in this segment is the toughest of all. Moreover, a decline can be expected in this segment due to the negative development of the international situation, which is reflected in the reduction of tourist transport volumes.

As regards city transit, there has been a clear shift in demand toward better-equipped buses with higher levels of technology and comfort. The same applies to tourist transport. However, the opposite is the case as far as intercity transport (i.e. commuting to work, school, etc.) is concerned, where vehicles with lower fuel consumption and lower operating costs are prioritised. The carriers are pinning their hopes on the modernized 12 m and 15 m long buses equipped with the new IVECO EURO 3 engines manufactured by the Irisbus Holding, along with their new surface finish system, including cataphoresis.

Slovak Republic

It seems that the weak demand will not change significantly even in 2003. We expect purchases by companies that have already completed the privatisation process, i.e. the new owners of which have already become known and which will start implementing privatisation projects, including the purchase of hundreds of buses. Government-subsidised purchases will come to an end in 2003 (the last ones were concluded in 2001). Sales are forecast at the level of 2002.

CIS exports

Karosa's aim is to proceed with its exports to the traditional Russian territories, particularly to Western Siberia, and to expand into new regions. To support our exports, we offer an opportunity to finance the purchase of our buses in regions where they are well established and the necessary backup is in place. The financial situation in this region is still difficult, but with signs of slight recovery, particularly in oil and gas companies.


IRISBUS exports

The highest priority orders are the deliveries to the IRISBUS sales network, particularly as regards their volume, which will reach more than 900 buses in 2003. The basic strategy implemented by Karosa within IRISBUS is to offer products complementary to the product line manufactured by the holding, with the possibility of using all of the services established by IRISBUS in its markets.

The development of the category of AXER line buses offers further possibilities for the use of our products in these territories. The number of orders as compared with the plan has increased by approximately 14%, particularly as regards school buses. Prospects in this category indicate that we will maintain the market share we achieved in 2002. Launching of the sale of longer buses, i.e., 12.8 – 15 m, was postponed to allow for the legislation which will come into force in 2003.

In conclusion, developments in the year 2003 have confirmed the increased demand for our products. We want to enhance the positive developments occurring in after-sales services, business and technical documentation, and the provision of spare parts for all territories, and to continuously improve the basic prerequisite of customer satisfaction.

3.3. Industrial potential and human resources

The years 2000 – 2003 have witnessed fundamental changes in production methods. The largest part (approximately 70%) of total company investments was spent on new technology, particularly on the surface finish, processing of the primary material, and on an effective means of production which enables us not only to ensure the required quality but to also increase work productivity.

We have managed to find a completely new resolution to the problem of material flows and have discontinued, in particular, the production cycle of buses in one of our plants. This has resulted in an increase of the material turnover and an apparent reduction in liquid capital requirements.

The completion of the transformation of the company in 2003 will represent the achievement of its strategic objectives. The industrial base is modern, effective and flexible. Thus, the increase in production volume and in the productivity of employees participating indirectly in the production process can eliminate the impact of depreciation of new investments and can maintain a high return on invested funds. The tasks for the coming two years include the gradual rollout of production of the Ares 10.6 m and 12 m, Récréo 12.8 m and Axer 12.8 m, which will be tailored to the requirements of individual markets and the transfer of the production of CITY Bus and ARES 15 m to the mixed assembly line.

Increasing production quality also requires a continuous increase in the quality of the human potential and a highly motivated working team. As regards human resources, necessary funds will be invested in further training and the recruitment of new employees, particularly graduates of technical universities and skilled workers.


4. REPORT ON RELATIONS

ANNUAL REPORT 2002

4. REPORT ON RELATIONS

between the controlling and the controlled party and between the controlled parties and other parties controlled by the same party, prepared in accordance with Section 66a(9) et seq. of the Commercial Code.

Having carefully gathered and assessed, within the time limit required by the law, all facts that are relevant for an objective ascertainment and evaluation of all information on the relations in the holding that is necessary for this report, the board of directors of KAROSA a.s., registered office Vysoké Mýto, Dobrovského 74/II., Postal Code No. (PSČ) 566 03, ID No. (IČ): 48171131, registered in the Commercial Register maintained by the Regional Court in Hradec Králové, Section B, Insert 936,

1) referred to

- the unconditional binding effect of the provisions of the law that regulate the issue of business groupings in accordance with Section 66a et seq. of the Commercial Code for the companies referred to below;

- the absence of a controlling agreement (referred to in Section 190b of the Commercial Code) concluded with the controlling or with any other party;

- the absence of a contract on profit transfer (referred to in Section 190a of the Commercial Code) concluded with the controlling party or with any other party;

- the existence of an actual relationship between the controlled and the controlling party based on the laws applying to the implicit holding-type groups, particularly on Section 66a(8) to (16) of the Commercial Code;

- the necessity to fulfil all duties of the implicit holding-type group arising from applicable law, particularly to fulfil this reporting duty by the preparation of this report;

- the existence of individual entities within the holding-type group, each of which has the following legal status:

The controlling party (defined in Section 66a(2), (3) and (5) of the Commercial Code)FIAT S.p.A., Via Nizza 250, 101 26 Turin, Italy

The controlled party (defined in Section 66a(2) of the Commercial Code)KAROSA a.s., Vysoké Mýto, Dobrovského 74/II., PSČ 566 03, Czech Republic, IČ: 48171131Registered in the Commercial Register of the Regional Court in Hradec Králové, Section B, Insert 936;

Other parties controlled by the same controlling party (defined in Section 66a(9) of the Commercial Code)FIAT FIN TRADE, Turin, ItalyISVOR FIAT, Turin, ItalyIVECO S.p.A., Via Puglia 35, 101 56 Turin, ItalyIVECO FRANCE S.A., Rue Nicolas Copernic 6, Trappes, France

ANNUAL REPORT 2002 – Report on Relations 17

IVECO MAGIRIUS AG, Nicolas Otto Strasse 27, Ulm, GermanyIVECO (UK) Ltd, Station Road, Watford, UKIVECO AIFO S.p.A., Piazza S. Ambrogio 6, Milan, ItalyIRISBUS HOLDING, S.L., Avda. de Aragón, 402, 28022 Madrid, SpainIRISBUS IBERICA, S.L., Avda. de Aragón, 402, 28022 Madrid, SpainIRISBUS ITALIA, S.p.A., Via Puglia 35, 10156 Turin, ItalyIRISBUS UK LIMITED, Iveco-Ford House, Station Road, Watford, WD1 1SR Hertfordshire, UKIRISBUS FRANCE, S.A., Porte E – Rue des Combats du 24 Aout 1944, 69200 Venissieux, FranceSATAU, Porte E – Rue des Combats du 24 Aout 1944, 69200 Venissieux, FranceS.CHAROLAISE DE PARTICIPATIONS, Porte E – Rue des Combats du 24 Aout 1944, 69200 Venissieux, FranceKAROSA s.r.o., Lamačská cesta 3, 841 04 Bratislava, SlovakiaIRISBUS NORTH AMERICA LLC, 299 Market Street, Saddle Brook, New Jersey 07663, USAHEULIEZBUS, “La Crenuere”, Rorthais – 79700 Mauleon, FranceIRISBUS DEUTSCHLAND GmbH, Hauptstrasse, 18, 55120 Mainz-Mombach, GermanyIRISBUS AUSTRALIA, 616 Boundary Road, Richlands, Brisbane, Queensland, AustraliaIKARUSBUS, R.t., 800 Székesfehérvár, Repultér hrsz. 7609/2, HungaryIKARUS SPECIAL COACHES, Margit u. 114, 1165 Budapest, Hungary

2) based on the outline stipulated in Section 66a(9) of the Commercial Code, prepared and approved the following description of specific relations within the holding, which were established in the fiscal period of 2002

Performance rendered by Karosa a.s. to the controlling party and to the other parties controlled by the same party:

Company nameType

of performanceValue

of performance('000 CZK)

Outstanding balance

('000 CZK)Note

IRISBUS HOLDING, S.L. loan interest 7,720 0 Loan agreement of 2001 for EUR 15 million

IRISBUS FRANCE, S.A. busesspare parts

services

2,385,53913,936

437

177,7483,217

71

Contract for gratuitous use of an Ares bus

IKARUSBUS R.T. services 883353234

883353128

re-invoicing of trade fair booth coststraining of PKD AGORAother services

IRISBUS DEUTSCHLAND GmbH

busesservices

21,320108

042

IRISBUS ITALIA S.p.A. buses 43,272 0FIAT FIN TRADE financial service 1,000,000 1,000,000 making a short-term deposit


Performance provided to Karosa a.s. by the controlling party and by the other parties controlled by the same party:

Company nameType

of performanceValue

of performance('000 CZK)

Outstanding balance

('000 CZK)Note

IRISBUS HOLDING, S.L. service 1,2148,586

73,553

1,2140

34,396

SAP licence agreementproperty insurance contractgeneral service contract

IRISBUS ITALIA S.p.A. material 2,216 0 bus skeletonHEULIES, S.A. service 8 0IRISBUS FRANCE, S.A. material

services355,726141,856106,880

14,508

26,415141,856106,880

14,508

contract on product development servicescosts of sale of vehicles to Lebanoncontract for provision of work services

IRISBUS DEUTSCHLAND GmbH

services 1 0

IVECO AIFO, S.p.A. material 6,216 1,492IVECO S.p.A. services 14 14ISVOF FIAT services 448 417 trainingIVECO FRANCE S.A. material 544,531 64,429

The controlling party provided the corresponding counter-performance for all of the foregoing performances provided by the controlled party and the controlled party did not suffer any known detriment in this respect.

Other performances provided in 2002 by the controlling and the controlled party (beside the contracts referred to above) was provided under ordinary business circumstances, its value was immaterial and is not known to have caused any detriment to the controlled party.

3) None of the following measures was taken among KAROSA a.s. as the controlled party, FIAT S.p.A. as the controlling party and the other parties controlled by the same controlling party:

- no other legal acts were taken in favour of the related persons;

- no other measures were taken in favour of or at the suggestion of the related parties;

- no other performance was provided in addition to the foregoing, which would be in favour of the related parties and which could be detrimental to the controlled party.

Finally, members of the board of directors declare that they are aware of the liability that would arise to each member of the board of directors pursuant to Section 66a(15) of the Commercial Code if this report does not include any contracts or measures resulting in detriment to the company that have not been settled or with respect to which no settlement agreement has been concluded in accordance with Section 66a(8) of the Commercial Code.

At Vysoké Mýto on 25 March 2003

[Signature] [Signature]Ing. Rudolf Černý Jacques Averbuch

Chairman of the Board of Directors Deputy Chairman of the Board of Directors


5. AUDITOR'S REPORT

ANNUAL REPORT 2002

[Logo and letterhead of Deloitte & Touche spol. s r.o.]

Auditor's Report for Shareholdersof KAROSA a.s.

Based on our audit, we issued on 31 January 2003 the following report on the financial statements that are attached as Chapter 3 to this Annual Report:

“We have audited the accompanying financial statements of KAROSA a.s. as of 31 December 2002. The responsibility for the preparation of the financial statements rests with the Company's Board of Directors. Our task is to express an opinion on the financial statements as a whole, based on our audit. The financial statements of the Company prepared as of 31 December 2001 were audited by another auditor, who issued on 14 January 2002 an auditor's report regarding these financial statements, which included an unqualified opinion.

We conducted our audit in accordance with the Act on Auditors and the auditing standards issued by the Chamber of Auditors of the Czech Republic. Those standards require that we plan and conduct the audit so as to obtain reasonable assurance that the financial statements are free of material misstatements. The audit includes examining, on a test basis, whether the amounts and information contained in the financial statement are complete and conclusive. The audit further includes an assessment of whether the accounting principles used and the significant estimates made by the Company in the preparation of the financial statements are correct and suitable, and the evaluation of the overall financial statement presentation. We are convinced that our audit provides a reasonable basis for making our statement.

In our opinion, the financial statements present in all material aspects a fair picture of the assets, liabilities and equity of KAROSA a.s. as at 31 December 2002, and of the results of its business activities for the year 2002 in accordance with the Act on Accounting and the relevant accounting regulations of the Czech Republic.”

Chapter 7 of this Annual Report includes the financial statements for the year 2001, a report on which was issued on 14 January 2002 by another auditor, including an opinion without qualifications.

We have audited the material accuracy of the information included in the Report on Relations between Interconnected Persons in Chapter 4 of this Annual Report. The responsibility for the completeness and correctness of the Report on Relations rests with the Company's Board of Directors. Based on our audit, were did not find any material misstatements in this report.

At the same time, we have audited the consistency of the other financial information included in this Annual Report with the above financial statements. The responsibility for the correctness of this information rests with the Company's Board of Directors. In our opinion, all this information is consistent in all material aspects with the relevant financial statements.

At Prague on 1 June 2003

[Deloitte & Touche] [Signature]

Auditors: Auditor responsible for accuracy hereof:Deloitte & Touche spol. s r.o. Michal BrandejsLicense No. 79 License No. 1675

ANNUAL REPORT 2002- Auditor's Report 21

(Signature)

No. ASSETS ¤Line Current Past

Gross Correction Net Net

a b c 1 2 3 4

TOTAL ASSETS 1 5,947,829 -1,417,497 4,530,332 4,325,837

A. Stock subscriptions receivable 2

B. Fixed assets 3 2,787,156 -1,314,054 1,473,102 1,338,249

I. Intangible assets 4 211,133 -167,442 43,691 58,776

1. Organizational costs 5

2. Research and development 6 128 -55 73 89

3. Software 7 142,793 -127,115 15,678 19,339

4. Valuable rights 8 57,747 -29,807 27,940 34,779

5. Other intangible fixed assets 9 10,465 -10,465

6. Intangible assets in progress 10 4,569

7. Advances for intangible assets - paid 11

II. Tangible assets 12 2,575,789 -1,146,612 1,429,177 1,278,789

1. Land 13 18,206 18,206 18,378

2. Buildings 14 852,807 -274,504 578,303 440,687

3. Separate movable things and sets of movable things 15 1,446,951 -649,208 797,743 711,148

4. Perennial crops 16

5. Herd and draught animals 17

6. Other tangible fixed assets 18 223,010 -222,787 223 223

7. Tangible assets under construction 19 32,111 -113 31,998 86,215

8. Advances for tangible assets - paid 20 2,704 2,704 22,138

9. Provision for acquired assets 21

III. Financial assets 22 234 234 684

1. Investments in subsidiaries (with controlling interest) 23 184 184 184

2. Investments in entities with significant influence 24

3. Investments (with passive interest) 25

4. Intercompany loans 26

5. Other financial investments 27 50 50 500

6. Financial assets in progress 28

7. Advances for financial assets - paid 29

ANNUAL REPORT 2002 22

BALANCE SHEETfull version

as at 31 December 2002(in whole '000 CZK)

Name and seat of the accounting entity:

KAROSA a.s.Dobrovského 74/II566 03 Vysoké Mýto

Line no. IKF Year Month ID No. (IČ)01 801095 2002 12 48171131

No. ASSETS ¤Line Current Past

Gross Correction Net Net

a b c 1 2 3 4

C. Current assets 30 3,045,119 -103,443 2,941,676 2,931,760

I. Inventory 31 702,347 -58,630 643,717 599,449

1. Material 32 280,255 -17,700 262,555 211,680

2. Work in progress and semi-finished products 33 213,730 -12,300 201,430 239,429

3. Finished products 34 40,307 -630 39,677 47,801

4. Animals 35

5. Merchandise 36 168,055 -28,000 140,055 100,460

6. Advances for inventory - paid 37 79

II. Long-term receivables 38 137 137

1. Accounts receivable 39 137 137

2. Receivables from related parties 40

3. Receivables from entities with controlling influence 41

4. Receivables from entities with substantial influence 42

5. Other receivables 43

III. Short-term receivables 44 1,642,151 -44,813 1,597,338 1,012,201

1. Accounts receivable 45 545,544 -44,813 500,731 530,713

2. Receivables from related parties 46

3. Social security 47

4.. Tax assets 48 95,632 95,632

5. Receivables from entities with controlling influence 49 1,000,000 1,000,000 479,700

6. Receivables from entities with substantial influence 50

7. Other receivables 51 975 975 1,788

IV. Current liquid assets 52 700,484 700,484 1,320,110

1. Cash in hand 53 121 121 940

2. Bank deposits 54 120,363 120,363 2,639

3. Marketable securities 55 580,000 580,000 1,316,531

4. Current liquid assets in progress 56

D. Other assets – temporary debit accounts 57 115,554 115,554 55,828

I. Accruals 58 100,920 100,920 49,013

1. Pre-paid expenses 59 99,558 99,558 317

2. Unbilled revenue 60 1,362 1,362 4,683

3. Exchange rate gains 61 44 013

II. Contingencies and estimated pre-paid items (debit balance) 62 14,634 14,634 6,815

Control number 999 23,776,682 -5,669,988 18,106,694 17,296,533


No.a

LIABILITIES AND EQUITYb

Line c

Current5

Past6

TOTAL LIABILITIES AND EQUITY 63 4,530,332 4,325,837

A. Equity 64 3,421,654 3,101,330

I. Registered capital 65 1,065,559 1,065,559

1. Registered capital 66 1,065,559 1,065,559

2. Treasury stock 67

3. Changes in equity 68

II. Capital funds 69 122,235 122,685

1. Share premium 70 122,685 122,685

2. Other capital funds 71

3. Adjustments in assets and liabilities 72 -450

4. Transformation adjustments 73

III. Restricted retained earnings 74 149,664 125,417

1. Statutory reserve fund 75 147,408 123,487

2. Statutory reserve fund (cooperatives) 76

3. Other funds 77 2,256 1,930

IV. Retained earnings 78 1,803,442 1,309,243

1. Retained earnings 79 1,803,442 1,309,243

2. Accumulated loss 80

V. Net income 81 280,754 478,426

B. Liabilities 82 981,043 1,049,522

I. Reserves 83 181,015 230,458

1. Statutory reserves 84 88,640 95,353

2. Income tax reserve 85

3. Reserve for exchange rate losses 86 44,014

4. Other reserves 87 65,320 91,091

5. Deferred tax liability (asset) 88 27,055

II. Long-term liabilities 89

1. Liabilities to companies with controlling influence 90

2. Liabilities to companies with substantial influence 91

3. Long-term advance payments received 92

4. Bonds payable 93

5. Long-term notes payable 94

6. Other long-term liabilities 95


No.a

LIABILITIES AND EQUITYb

Line c

Current5

Past6

III. Current liabilities 96 779,028 793,064

1. Accounts payable 97 738,523 648,883

2. Payables to related parties 98

3. Payroll payable 99 24,979 22,248

4. Social security payable 100 14,121 12,154

5. Taxes payable 101 42 906

6. Deferred tax liability (asset) 59 793

7. Payable to companies with controlling influence 102

8. Payable to companies with significant influence 103

9. Other payables 104 1,405 7,080

IV. Bank loans and borrowings 105 21,000 26,000

1. Long-term bank loans 106 16,000 26,000

2. Current ban loans 107 5,000

3. Notes payable 108

C. Other liabilities and equity – closing accounts 109 127,635 174,985

I. Accrual accounts 110 40,896 28,385

1. Accrued expenses 111 40,896 19,237

2. Deferred revenue 112

3. Exchange rate differences – credit balance 113 9,148

II. Contingencies and estimated accrued items (credit balance)

114 86,739 146,600

Control number 999 17,753,835 16,678,322

Signature of the statutory body or of the individual who is the accounting entity

Person responsible for accounting

Person responsible for the financial statements:

(name and signature): (name and signature):

Mailed Ing. Táňa Pavlišová Ing. Táňa Pavlišová

on: 31 January 2003 (Signature) (Signature) (Signature)


No. a

TEXTb

Line

c

Actual Current

1Past

2

I. Revenue from sale of goods 1 322,755 277,390

A. Cost of goods sold 2 226,906 227,462

+ Gross profit on goods sold 3 95,849 49,928

II. Production 4 5,220,928 4,705,115

1. Revenue from sale of internally developed products

5 5,214,863 4,556,380

2. Change in the balance of internally developed inventory

6 -50,406 100,611

3. Capitalization 7 56,471 48,124

B. Cost of materials used in production 8 4,244,977 3,385,521

1. Raw materials and utilities used 9 3,420,816 2,866,779

2. Services used 10 824,161 518,742

+ Gross profit on sales 11 1,071,800 1,369,522

C. Personnel expenses 12 518,459 450,566

1. Wages and salaries 13 384,709 332,021

2. Remuneration to members of statutory bodies 14

3. Social security expenses 15 131,059 116,109

4. Fringe benefits 16 2,691 2,436

D. Taxes and fees 17 2,547 53,189

E. Amortization of intangible and depreciation of tangible fixed assets

18 163,259 167,048

III. Revenue from sale of fixed assets and raw materials

19 36,434 35,472

F. Net book value of disposed fixed assets and raw materials

20 30,645 35,126

IV. Clearing of reserves and accrued revenue 21 144,960 149,949

G. Creation of reserves and accrued expenses

22 112,476 131,639

V. Clearing of provisions to operating revenue 23 37,945 49,630

H. Clearing of provisions to operating expenses

24 60,297 34,214

VI. Other operating revenue 25 8,464 9,273

I. Other operating expenses 26 37,832 14,473

VII. Transfer of operating revenue 27

J. Transfer of operating expenses 28

* Operating income 29 374,088 727,591


Income Statementfull version

as at 31 December 2002(in whole '000 CZK)

Line no. IKF Year Month ID No. (IČ) 01 801095 2002 12 48171131

Name and seat of the accounting entity:

KAROSA a.s.Dobrovského 74/II566 03 Vysoké Mýto

No. a

TEXTb

Line

c

Actual Current

1Past

2

VIII. Revenue from sale of securities or direct investments

30

K. Cost of securities and investments sold 31

IX. Gains on investments 32

1. Gains on securities and investments in subsidiaries

33

2. Gains on other securities and direct investments

34

3. Gains on other investments 35

X. Gains on marketable securities 36 15,585 14,815

L. Losses on securities and investments 37

XI. Revenue from adjustments of equity securities

38

M. Cost of adjustments of equity securities

39

XII. Clearing of reserves to gains on investments

40 44,013 191,877

N. Creation of reserves for losses on investments

41 212,138

XIII. Clearing of provisions to financial gains 42

O. Clearing of provisions to financial losses

43

XIV. Interest income 44 23,173 44,289

P. Interest expense 45 174 312

XV. Other gains on investments 46 133,425 91,955

Q. Other losses on investments 47 217,897 151,392

XVI. Transfer of gains on investments 48

R. Transfer of losses on investments 49

* Profit/loss from financial operations 50 -1,875 -20,906

S. Tax on income from operations 51 97,307 212,986

1. – due 52 82,021 197,446

2. – deferred 53 15,286 15,540

** Income from operations 54 274,906 493,699

XVII. Extraordinary revenue 55 13,860 13,223

T. Extraordinary expenses 56 4,800 31,536

U. Income tax on extraordinary income 57 3,212 -3,040

1. – due 58 3,212 -3,040

2. – deferred 59

* Extraordinary profit/loss 60 5,848 -15,273

W. Distribution of income to partners(+/-)

61

*** Net income/loss for the fiscal period (+/-)

62 280,754 478,426

Income/loss before taxes (+/-) 63 381,273 688,372

Control number 99 24,289,856 23,210,057


Signature of the statutory body or of the individual who is the accounting entity

Person responsible for accounting

Person responsible for the financial statements:

(name and signature): (name and signature):

Mailed Ing. Táňa Pavlišová Ing. Táňa Pavlišová

on: 31

January 2003

(Signature) (Signature) (Signature)


Annual report 2002.doc

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