Audited Consolidated Financial Statements for NLB Group under Slovenian Accounting Standards

AUDITOR'S REPORT

TO THE SHAREHOLDERS OF NOVA LJUBLJANSKA BANKA d.d., LJUBLJANA

We have audited the accompanying consolidated financial statements of Nova Ljubljanska banka d.d., Ljubljana and its subsidiaries (NLB Group), consisting of the consolidated balance sheet as of 31 December 2002, the consolidated income statement, the consolidated cash flow statement, the consolidated statement of changes in equity and the notes to the consolidated financial statements for the year then ended. We have read the management's report on operations. These financial statements and the notes are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing issued by International Federation of Accountants and other auditing regulations issued by Slovenian Institute of Auditors. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. It also includes an assessment of the compliance of the management's report on operations with the financial statements, which form a constituent part of the annual report. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above give a true and fair view of the consolidated financial position of the NLB Group as of 31 December 2002, the results of its operations, its cash flows and the changes in equity for the year then ended in conformity with Slovenian Accounting Standards issued by Slovenian Institute of Auditors.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Nova Ljubljanska banka d.d., Ljubljana ("the Bank" or "NLB") is incorporated in Slovenia as a joint stock company providing universal banking services. The majority shareholders of Nova Ljubljanska banka d.d. are the Republic of Slovenia holding 35.71% of the shares and KBC Bank N.V., Brussels ("KBC Bank") holding 34% of the shares.

The address of its registered office is: Nova Ljubljanska banka d.d., Ljubljana, Trg republike 2, Ljubljana.

The increase in the general price index for the year 2002 was 7.2% (2001: 7%). The exchange rate changed from 221.4 tolars to the euro at 31 December 2001, to 230.3 tolars to the euro at 31 December 2002, and from 250.9 tolars to the US dollar at 31 December 2001, to 221.1 tolars to the US dollar at 31 December 2002.

1. SIGNIFICANT ACCOUNTING POLICIES

The Nova Ljubljanska banka d.d., Ljubljana Group ("the Group") consolidated financial statements have been prepared in accordance with the Slovenian Accounting Standards (SAS), and the Bank of Slovenia's regulations, represented by the Decree on the Classification of Balance Sheet and Off-Balance Sheet Asset Items of Banks and Savings Banks, the Decree on Establishing Specific Provisions of Banks and Savings Banks, the Decree on Supervision of Banks and Savings Banks on Consolidated Basis, and other Bank of Slovenia's regulations.

The principal accounting policies applied by the Group for the preparation of the consolidated financial statements are set out below.

a) Consolidation

The consolidated financial statements include the financial statements of Nova Ljubljanska banka d.d., Ljubljana and its subsidiaries, which are set out in Note 42. Subsidiary undertakings, which are those companies in which NLB, directly or indirectly, has an interest of more than half of the voting rights, or otherwise has the power to exercise control over the operations, have been fully consolidated. Subsidiaries are consolidated from the date on which effective control is transferred to NLB and are no longer consolidated from the date of disposal. Intercompany transactions, balances and unrealised surpluses and deficits on transactions between group companies have been eliminated. Separate disclosure is made of minority interests.

On acquisition of a subsidiary, NLB calculates the difference between the fair value of the assets and liabilities acquired given exceeds the net assets acquired, goodwill arises, this is amortised to the income statement over a period of five years.

Investments in associated undertakings are accounted for using the equity method of accounting. These are undertakings in which the Group has between 20% and 50% of the voting rights, and over which the Group exercises significant influence, but which it does not control.

Equity accounting involves recognising in the income statement the Group's share of the associates' profit or loss for the year. The Group's interest in the associate is carried in the balance sheet at an amount that reflects its share of the net assets of the associate and includes goodwill on acquisition.

Regarding associates, negative goodwill is included in the carrying amount of an investment in an associate over a period of five years.

Jointly controlled entities are companies established by contractual agreement. The consolidated financial statements include the Group's proportionate share of the jointly controlled entity's assets, liabilities, income and expenses with items of a similar nature on a line-by-line basis.

b) Translation of the financial statements of foreign subsidiaries

Assets and liabilities of foreign subsidiaries are translated to tolar at mid - market exchange rate of the Bank of Slovenia ruling at the balance sheet date. The income and expenses of foreign subsidiaries are translated to tolar at average exchange rate of the Bank of Slovenia for the reporting period. Differences between mid - market, ruling at the balance sheet date, and average exchange rate of the Bank of Slovenia are reported under equity as consolidation capital adjustment.

c) Assets and liabilities in foreign currency

Assets and liabilities in foreign currency are converted into the tolar equivalent at the mid-market exchange rate of the Bank of Slovenia as at the last day of the accounting period. Foreign exchange gains and losses are included in the income statement.

d) Interest, fees and commissions

Interest, fees and commissions expenses are included in the income statement as soon as they are accrued, while interest, fees and commissions income is included in the income statement depending on the grading of the client. According to the Bank of Slovenia's regulations the income from performing assets (A and B grading groups) is included in the income statement as soon as it occurs, except for interest income from mortgage loans to clients classified in B grading group. Income from these loans and income from non-performing loans (C, D and E grading groups) is excluded until paid, and reported as allowances for bad and doubtful interest under other assets. In the cash flow statement interest is presented as cash flows from operating activities.

e) Investments in securities

Investments in securities held for trading and investments in debt securities available for sale are initially recorded at cost. Subsequently they are stated at lower of the cost or fair value. The fair value is based on a quoted market price at the balance sheet date. If a quoted market price is not available, the fair value of the securities is estimated using discounted cash flow techniques or it is assessed in accordance with the grading group of the issuer. Where discounted cash flow techniques are used, estimated future cash flows are based on management's best estimates and the discount rate is a market related rate at the balance sheet date for a financial instrument with similar terms and conditions.

Held to maturity securities are initially measured at cost. After initial recognition they are stated in the balance sheet at the amount of the principal outstanding less any impairment.

The Group uses FIFO method for determination of the profit or loss on derecognition of securities.

f) Own shares

Own shares constitute a part of the company's share capital, presented as assets in the balance sheet. Gains and losses on sale of own shares are credited or charged to reserves.

g) Investments in other companies

Investments in other companies are initially measured at cost, being the amount of cash paid or the fair value of consideration given. Subsequently they are accounted for using the cost method. Profits are recognised in the income statement only to the extent of dividends received.

If there is an indication that investments may be impaired each individual investments is assessed. Any impairment is recognised immediately in the income statement.

h) Derivative financial instruments

For the accounting purposes derivative financial instruments are designated for hedging or for trading purpose. The contract and notional amount of derivative financial instruments is recorded in the off - balance sheet, while their fair values are presented as other assets when favourable to the Group or other liabilities when unfavourable to the Group.

Fair values are obtained from quoted market prices, discounted cash flow models and pricing models as appropriate.

Loss on derivative financial instruments, treated as held for trading, is recognised in the income statement immediately. Gains are recognised in the income statement when they are realized.

Changes in the fair value of derivative financial instruments that are designated as the fair value hedge are recognised in the income statement on the same basis as the corresponding change in the fair value of the hedged item.

Changes in the fair value of derivative financial instruments that are designated as cash flow hedges and that prove to be highly effective in relation to the hedged risk, are presented in the equity as specific capital revaluation adjustment, while the ineffective portion is immediately reported in the income statement.

Certain derivative financial instruments, while providing effective economic hedges, do not qualify for hedge accounting under the specific accounting rules and are therefore treated as derivatives held for trading.

i) Finance lease

Assets leased out under a finance lease are presented in the balance sheet as receivables at the amount equal to the net investments in the lease, less any impairment.

j) Loans and borrowings

Loans and borrowings are initially recognised at the amount of the cash given or received.

Loans are stated in the balance sheet at the amount of the principal outstanding, increased by interest capitalised where appropriate, less any provision for unrecoverable amounts.

Borrowings are presented in the balance sheet at the amount of the principal outstanding, increased by interest capitalised where appropriate.

k) Provisions

In accordance with the Bank of Slovenia's regulation the Group is required to establish specific risk provisions and provisions for general banking risks.

Specific provisions are established on loans, advances and off-balance sheet items in respect of credit risk on the basis of provisioning rates specified by the Bank of Slovenia's Decree on the Classification of Balance Sheet end Off- Balance sheet Items of Banks and Saving Banks. Specific credit risk provisions on loans and advances to customers classified in the rating group B, C, D or E are stated on the asset side of the balance sheet as allowances for bad and doubtful loans, while specific credit risk provisions for A rating group are presented on the liability side. Specific credit risk provisions established on off-balance sheet items and specific country risk provisions are also stated on the liability side of the balance sheet.

Specific provisions for other foreseeable risks, stated on the liability side of the balance sheet, are established in respect of interest rate risk and foreign exchange risk.

General banking risk provisions, stated on the liability side of the balance sheet, are established for the purpose of protecting against risks arising from the Group's overall operations.

According to the Decree on the Supervision of Banks and Savings Banks on Consolidated Basis and the Decree on Establishing Specific Provisions of Banks and Savings Banks the NLB as a parent company is required to set aside additional amounts for specific provisions in the consolidated financial statements for assets and off-balance sheet items of its subsidiaries.

l) Uncollectable loans and advances

Uncollectable loans and advances are written off, according to internal written procedures of the Group, after all necessary procedures for recovery have been completed. Any eventual subsequent repayments of loans and advances previously written off are recognised as income.

m) Provisions for liabilities and charges

Provisions for obligations that are expected to occur in the period exceeding one year are recognised in the financial statements when:

- there is a present obligation (legal or constructive) as a result of a past event,
- it is probable that an outflow of resources embodying economic benefits will be required to
  settle the obligation,
- a reliable estimate can be made of the amount of the obligation.

n) Accruals and deferred income and expenses

Income and expenses are recognised when they occur and not as cash is received or paid. They are presented as accruals in a separate balance sheet position.

o) Property and equipment

All property and equipment is initially recorded at cost. The cost of property and equipment comprises purchase price including import duties, initial delivery and installation costs.

At each balance sheet date the Group assesses whether there is any indication that assets may be impaired. If any such indication exists the recoverable amount is estimated. Recoverable amount is the higher of net selling price and value in use. When value in use exceeds assets carrying amount that indicates that assets are not impaired. The Group examines whether to revalue the property in case of significant increase in market values.

Depreciation of property and equipment is provided on a straight-line basis at rates designed to write off cost or valuation of buildings and equipment over their estimated useful lives.

Land and works of art are not depreciated.

Property and equipment is depreciated from the first day of next month after it was brought into use.

Subsequent expenditures result in an increase of an asset's carrying amount when it is probable that future economic benefits will exceed the originally assessed benefits or in an extension of the useful life of an asset.

The same accounting policies are applied for assets held by the Group under a finance lease.

p) Investment property

Investment property includes land and buildings owned by the Group and leased out under operating lease. Investment property is accounted for using the same accounting policies adopted by the Group for property and equipment.

According to the Bank of Slovenia's methodology investment property is presented as other assets in the balance sheet.

q) Intangible assets

Intangible assets are initially recognised at cost including any directly attributable costs. Intangible assets are subsequently impaired if their carrying amount exceeds their value in use. Amortisation is provided on a straight-line basis at rates designed to write off the cost of intangible assets over their estimated useful lives. The current system software, and the new information technology system are amortised over a period of ten years and other software over a period of four years. Intangible assets are not amortised until they are brought into use.

r) Inventories

Inventories include costs of construction projects where the Group is an investor and property held for sale in the ordinary course of business. Inventories are written down when their carrying amount exceeds their net realisable value.

s) Cash and cash equivalents

For the purpose of the cash flow statement, cash and cash equivalents comprise cash and balances with central bank, securities held for trading, loans to banks and debt securities not held for trading with maturity up to 90 days.

t) Tax on profit and balance sheet tax

Slovenian corporate tax is provided on taxable profits at the rate of 25%. Foreign taxes are provided for in accordance with local tax laws and accounting principles.

In 2002 the Slovenian balance sheet tax is calculated as a 3 % levy on certain balance sheet items. According to Slovenian legislation the maximum balance sheet tax is limited to 50% of pre-tax profit. Where the 3% levy exceeds 50% of profits, the lower tax charge is payable.

u) Funds managed on behalf of third parties

Assets and liabilities managed on behalf of third parties are stated on net basis.

2. CHANGE IN THE SCOPE OF CONSOLIDATION

Union Invest Capital a.s., Ostrava, Czech Republic which provides factoring and forfeiting services, became a subsidiary of NLB in April 2002 when NLB acquired a 100% share of the company. In May 2002 the company was renamed as LB Factoring CZ, a.s., Ostrava, Czech Republic and included in consolidated financial statements during the year 2002. On the consolidation goodwill amounting to the 4,210 thousand tolars was accounted for.

At the end of April 2002 LB Propria d.o.o., Ljubljana, the subsidiary of LB Hipo d.o.o., Ljubljana acquired the majority interest in company Golf Arboretum d.o.o., Volčji Potok, which became a new subsidiary of the NLB Group. For the year 2001 Golf Arboretum d.o.o, Voljčji Potok was included in consolidated financial statements as an associate. In November 2002 Slovenska izvozna družba d.d., Ljubljana additionally paid in capital of LB Factors d.d., Ljubljana a subsidiary of the NLB Group. Due to the contractually agreed sharing of control over economic activities of the company, LB Factors became a jointly controlled company. In the consolidated income statement for the year 2002 LB Factors is treated as a wholly owned subsidiary, while in consolidated balance sheet it is regarded as a jointly controlled company.

LHB Internationale Handelsbank AG, Frankfurt Group and Tutunska banka AD, Skopje were consolidated for the first time at the end of the year 2001. As fully consolidated subsidiaries they were included in the balance sheet for the year 2001, while they were included in the income statement as associates accounted for using the equity method. The consolidated income statement for the year 2002 for the first time includes LHB Internationale Handelsbank AG, Frankfurt Group and Tutunska banka AD, Skopje as fully consolidated subsidiaries.

In 2002 NLB sold the subsidiary LBS Bank-New York, New York (LBS) to KBC Bank N.V. (KBC). LBS is included in the consolidated income statement for the period from 1 January to 31 August 2002. LBS bank with the net assets of 4,916,819 thousand tolars was sold for 4,930,082 thousand tolars.

Due to contractual agreement the Bank assumed the obligation to cover expenses related to liquidation process of LBS Bank. Expenses of the subsidiary liquidation process in the amount of 663,212 thousand tolars are presented as accrued expenses. The Group also redeemed investments in the amount of 65,121 thousand US dollars from LBS Bank.

ICJ d.o.o., Domžale, founded on 10 October 1999 for providing real estate operation, engineering and consulting, was included in the consolidated income statement as an associated company by using the equity method of accounting for the first time for the year 2002.

3. NEW SLOVENIAN ACCOUNTING STANDARDS

New Slovenian Accounting Standards became operative for financial statements covering periods beginning after 1 January 2002. The main changes resulting from adoption of the new Slovenian Accounting Standards and amended regulations of the Bank of Slovenia are:

- the revised Slovenian Accounting Standards abandoned the system of maintaining the
  capital in constant purchasing power units if exchange rate euro/tolar doesn't exceed the
  growth of 5.5 % in previous year,
- the previous requirements of the Bank of Slovenia to establish provisions on investments in   securities and investments in other companies have been replaced with principles and rules
  for measurement and valuation in accordance with the new Slovenian Accounting
  Standards.

New methodology rules for the preparation of financial statements resulted in the following changes in the balance sheet:

- provisions established on overdrafts are presented on the assets side,
- suspended income is presented as allowances for bad and doubtful interest under other
  assets,
- fair values of derivative financial instruments are presented as other assets or other
   liabilities,
- investment property and property acquired for debt repayment is presented as other
  assets.

Changes in presentation of the income statement are:

- revaluation interest is presented as interest income or expenses,
- foreign exchange differences are presented as gains or losses from financial transactions,
- interest income from debt securities held for trading is presented as income from capital
  and other investments.

In accordance with official conclusion of The Slovenian Institute of Auditors items of the balance sheet and the income statement for the year 2001 are not restated but are adjusted to new methodology of presentation of the financial statements. Items of the revaluation income statement are presented as part of income or expenses to which they relate, except for revaluation of capital, property and equipment and capital investments, which is presented in the income statement as extraordinary expense due to capital revaluation.

Cash flow statement is, due to conceptually new methodology, restated for the year 2001.

4. POST BALANCE SHEET EVENTS

From the balance sheet date until the completion of this report, no such event has occurred that would require the restatement of the completed consolidated financial statements or any additional disclosure.

Fees and commissions income for the year 2002 includes the amount of 3,028,993 thousand tolars received from a major multinational company for providing tolars for the purchase of shares of a major Slovenian company.

In accordance with the changes to the Slovenian Accounting Standards and amended regulations of the Bank of Slovenia, the Group changed the presentation of impairment losses on investments in securities and investments in other companies in the year 2002. Prior to adoption of the renewed accounting standards the Group was, according to the Bank of Slovenia's regulations, required to establish provisions in respect of losses on financial investments. In the income statement for the year 2002 impairment losses on financial investments are presented as losses from financial transaction. Provisions established in previous periods were released and presented as income in the year 2002 (see notes 20, 21, 22, 23 and 29).

The increase in income and expenses from trading in derivative financial instruments is results mainly from the increase in currency swaps with Bank of Slovenia (see note 40b).

In the year 2002 the Group decreased depreciation rates from 25 % to 14,3 % for automated teller machines and from 20 % to 10 % for communication equipment due to extension of their estimated useful lives. The adoption of the new deprecation rates resulted in a decrease in depreciation expenses by 264,955 thousand tolars.

In 2002 the Group made additional provisions for employment-restructuring program of 500,000 thousand tolars and additional provisions for pensions of 229,259 thousand tolars.

Specific provisions for country risk were in 2001 established as part of specific provisions and were stated on the asset side of the balance sheet.

For a detailed maturity analysis of Placements with, and loans to other banks refer to note 46 - Balance sheet maturity analysis.

d) Loans to associated and other related banks

Loans extended to associated and other related banks as at 31 December 2002 amounted to 9,795,087 thousand tolars (13,139,552 thousand tolars as at 31 December 2001).

The total amount of non-performing loans (C, D and E grading groups) amounted to 68,310,239 thousand tolars as at 31 December 2002, while loans overdue amounted to 33,040,641 thousand tolars. Interest income from non-performing loans, not recognised as income, amounted to 6,238,931 thousand tolars as at 31 December 2002.

e) Loans to associated and other related parties

Loans extended to associated and other related parties as at 31 December 2002 amounted to 8,995,259 thousand tolars (9,850,389 thousand tolars as at 31 December 2001).

The carrying amount of debt securities not held for trading as at 31 December 2002 is lower than the market value by 2,428,353 thousand tolars.

Other securities include bonds of Factor banka d.d. in the total amount of 150,000 thousand tolars which represent a subordinated debt.

The total amount of debt securities not held for trading as at 31 December 2002 includes listed securities in the amount of 90,294,193 thousand tolars.

The total amount of securities held for trading as at 31 December 2002 includes listed securities in the amount of 97,476,814 thousand tolars (109,946,939 thousand tolars as at 31 December 2001).

The portfolio of securities held for trading as at 31 December 2002 includes 2,336 thousand tolars (0 tolars as at 31 December 2001) of securities issued by associated and other related companies. Other securities include NLB own bonds in the amount of 3,401 thousand tolars.

Other securities include bonds of Zavarovalnica Maribor d.d., Maribor in the amount of 560,670 thousand tolars which represent a subordinated debt.

The carrying amount of securities held for trading as at 31 December 2002 is lower than the market value by 5,445,360 thousand tolars.

The total amount of investments in other companies as at 31 December 2002 includes listed securities in the amount of 2,064,549 thousand tolars.

Under intangible assets the Group's new information system is presented with the carrying value of 8,323,062 thousand tolars.

The Group states 70,585 thousand tolars as at 31 December 2002 in computers acquired on finance lease.

Due to adoption of new Slovenian Accounting Standards the Bank tested the property's value in use by the independent qualified valuer in the year 2002. The value in use exercise was based on estimating present value of the future cash flows from continuing use and disposal. The exercise results proved that property is not impaired.

26. OWN SHARES

The Group holds own shares totalling 490,828 thousand tolars being 34,926 own shares in the nominal amount of 69,852 thousand tolars. LB Trading d.o.o., Ljubljana and LB Hipo d.o.o., Ljubljana hold each one share meanwhile Korođka banka d.d., Slovenj Gradec holds 34,924 NLB shares being 0.45% of the subscribed capital.

In the year 2002, according to the provisions of the Companies Act, the Group disposed of 19,662 own shares in the nominal amount of 39,324 thousand tolars. The gain on the sale amounting to 284,542 thousand tolars was included in equity reserves of the Group.

The Group holds 91,199 own shares received as collateral as at 31 December 2002 with the nominal value of 182,398 thousand tolars being 1.2% of subscribed capital.

According to Bank of Slovenia's methodology investment property and property acquired for debt repayment have been transferred to other assets.

c) Analysis of deposits and borrowings from associated and other related banks

Deposits and borrowing received from associated and other related banks amounted to 7,628,195 thousand tolars as at 31 December 2002 (17,576,325 thousand tolars as at 31 December 2001).

c) Analysis of deposits and borrowings from associated and other related companies

Deposits and borrowing received from associated and other related companies amounted to tolars 18,568,205 thousand as at 31 December 2002 (tolars 17,196,997 thousand as at 31 December 2001).

For a detailed maturity analysis of bonds refer to note 46 - Balance sheet maturity analysis.

b) Analysis of issued debt securities to associated and other related companies

Liabilities to associated and other related companies arising from debt securities amounted to 10,125,558 thousand tolars as at 31 December 2002 (2,483,998 thousand tolars as at 31 December 2001).

Other provisions include provisions utilised by LHB Bank for tax payments totalling 1,236,657 thousand tolars. Additional provisions totalling 951,385 thousand tolars were utilised for an out-of-court settlement with the Tržaška Kreditna Banka in liquidation (see note 34b in NLB financial statements).

Subordinated liabilities arising from subordinated loans are commented in detail in note 36 of NLB financial statements.

Subordinated liabilities include a subordinated long-term deposit from Zavarovalnica Triglav totalling 400,000 thousand tolars. The maturity of the deposit was extended until 1 April 2005 with an annex to the 29 April 2000 contract. The fixed interest rate is GPI + 6%. Interest expenses of the Group arising from this contract in the year 2002 amounted to 53,731 thousand tolars.

Securities as subordinated liabilities have a fixed interest rate of 7.5%. Interest is paid every 6 months in tolars at the Bank of Slovenia mid-market tolar to euro exchange rate as at 31 December 2002.

At 31 December 2002, NLB subscribed capital was represented by 7,682,015 ordinary shares, each with the nominal value of 2,000 tolars. The shares are issued in a non-materialised form and are registred in the Centralna klirinško depotna družba d.d. register. All shares are ordinary shares of the same class.

At the end of the year 2002 the there were 959 shareholders of whom 265 were legal entities, 691 private individuals and 3 nonresidents. In September 2002 in the NLB privatisation process, the Republic of Slovenia sold 34% of all shares to KBC and 5% of all shares to EBRD. After the sale the Republic of Slovenia remains the majority shareholder as at 31 December 2002, holding 2,743,284 NLB shares, representing 35.71% of subscribed capital.

The weighted average number of ordinary shares outstanding in the year 2002 is 7,638,662. Basic earnings per share as at 31 December 2002 amounted to 750.10 tolars.

According to new Slovenian Accounting Standards in the year 2002 the Group has not revalued its capital. In case the Group revalued its capital using the general price index the profit before tax would amount to 7,906,864 thousand tolars, and in case of capital revaluation based on tolar to euro exchange rate the profit before tax would amount to 11,452,603 thousand tolars.

According to the Bank of Slovenia's methodology the Group's total off-balance sheet items amounted to 1,474,886,849 thousand tolars. In accordance with the Decree on the classification of Balance Sheet and Off-Balance Sheet items of Banks and Saving Banks, the Group established provisions only for contingent liabilities and commitments amounting to 332,939,129 thousand tolars.

At 31 December 2002 off-balance sheet items included liabilities related to contracts with associates and other related companies totalling 221,347 thousand tolars.

In addition to the above mentioned contingent liabilities amounting to 318,912,771 thousands tolars, a contingent liability arising from a law-suit filed by Banca Populare Veneta against LB InterFinanz for DEM 10 million (= 5.113 million euros) and respective 5% interest since December 1996 exists. The plaintiff contests the authenticity of a document that granted LB InterFinanz to utilize a guarantee. LB InterFinanz‘s lawyers do not assess the plaintiff's rationale as compelling and expect the District Court to rule in favour of LB InterFinanz in the year 2003, otherwise LB InterFinanz will appeal the decision at the Supreme Court. The Bank has, due to favourable expectations of LB InterFinanz's lawyers, issued a guarantee on behalf of LB InterFinanz.

Certain derivative financial instruments, while providing effective economic hedges under the risk management strategy of the Group, do not qualify for hedge accounting under the specific accounting rules and are therefore treated as derivatives held for trading.

41. FUNDS MANAGED ON BEHALF OF THIRD PARTIES

The Group manages assets totalling 117,761,367 thousand tolars (115,938,273 thousand tolars as at 31 December 2001) on behalf of third parties. Managed funds are accounted for separately from those of the Group. Income and expenses of these funds are for the account of the respective fund and no liability falls on the Group in connection with these transactions. The Group is compensated for its services by fees chargeable to the funds.

Consolidated financial statements include Koroška banka d.d., Slovenj Gradec, Banka Zasavje d.d., Trbovlje and Banka Domžale d.d., Domžale on the basis of the contract on business cooperation and group risk management.

Items of profit for the period and subscribed capital of the above listed companies are adjusted according to Slovenian Accounting Standards and Group accounting policy.

The Group is organised into three main business segments:

1. Financial markets, including: treasury activities, investment banking, investing in capital.
2. Corporate business, including: relation to major companies and state owned entities
    ("public sector").
3. Retail banking, includes through affiliates all loans to, and deposits from private
    individuals, their transaction accounts, credit and payment cards.

Other operations of the Group comprise support activities to the first three business segments, information technology and other administrative activities not classified in the above three segments, beside that it also comprises activities of Group companies that are not banks.

Transactions between the business segments occur on generally accepted commercial terms. Segment assets and liabilities comprise operating assets and liabilities.

* Interest rates based on interest income and expenses increased by credit commissions.

Interest rates are calculated on the basis of cumulative interest income and expenses, and on daily average of NLB balances and quarterly average of the rest of the Group companies balances of interest-bearing assets and liabilities. Interest income related to the items Placement with, and loans to other banks and Loans and advances to customers are increased by respective commissions for granting those loans.