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Annual20 ////////////////////////////////////////////////////////// report 07 Financial report Business review Shareholder information 2007 Annual report

Thales 45 rue de Villiers 92200 Neuilly-sur-Seine – Tél.: + 33 (0)1 57 77 80 00

www.thalesgroup.com www.thalesgroup.com WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 The Corporate brochure is available at www.thalesgroup.com WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT

Contents

Overview...... 2

Timeline...... 4

Key figures...... 6

Governance and auditors...... 8

1 . 2007 FINANCIAL REPORT

1. Directors’ report...... 12

2. Consolidated financial statements...... 30

2 . BUSINESS REVIEW

1. Business description...... 88

2. International presence...... 124

3. Research & innovation...... 129

3 . SHAREHOLDER INFORMATION

1. Company and share capital...... 134

2. Corporate governance...... 155

3. stock market information and financial ...... 184

4. Annual General Meeting of 15 May 2008...... 194

Table of contents...... 196 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales OVERVIEW

Thales designs, develops and deploys integrated solu- provides public administrations with the systems and tions and equipment to meet security requirements in equipment they need to maintain surveillance, gather in- the , defence and security markets. telligence and control the flow of people, goods and data (Earth observation from space, Internet surveillance, in- Globalisation is making the world more open, enabling telligence, airspace control and ID systems to control greater personal mobility and allowing capital, goods, serv- population flows), ices and data to flow more freely. A more open world, how- - enhance the dependability and security of critical civil ever, is also more vulnerable to threats and risks. Con- infrastructure. Thales is a major player in safe- temporary societies are vulnerable in particular to failures ty and a global leader in both rail transport security and in large-scale critical infrastructure such as transport net- civil air traffic management. The company also offers works, energy grids and information systems. They are also security solutions for interbank transactions, corporate exposed to new threats including trafficking, terrorism, cy- and government information systems, energy networks bercrime, failed states and asymmetric armed conflict. and sensitive sites. To meet rising demand for security and seize growth oppor- To meet these requirements in its three markets, Thales tunities across all its markets, Thales combines expertise delivers complete solutions combining some or all of its in mission-critical information systems, secure communi- extensive range of capabilities: system-of-systems design cations, supervision systems and sensors. The company and integration, satellite systems, supervision centres, se- offers a complete range of solutions and technologies to cure communication and information systems, sensors (ra- address the specific requirements of government and in- dar, sonar, optical), encryption and . stitutional customers, considering long-term relationships This common core of technologies underpins Thales’s ca- based on trust and local presence as key success factors in pabilities in every segment of its business. The company’s the complex security projects it undertakes. As well as mili- research and development programmes, implemented tary and civil , customers include other pub- through a network of 22,500 engineers and technical lic administrations, large-scale operators of critical infra- staff operating in all Thales subsidiaries around the world, structure and major commercial aircraft manufacturers. constantly enhance this platform of technologies. Thales’s Thales solutions and equipment meet key security requirements: tradition of technological excellence gained further recogni- - defend and protect nations and populations. Thales tion with the award of the 2007 Nobel Prize in Physics to Al- provides and civil defence forces with communi- bert Fert, scientific director of a joint research unit operated cation, command, protection and threat detection capa- by Thales and France’s national research institute CNRS. bilities. The company also designs and delivers combat Importantly, Thales spans the entire value chain, from systems for all types of air, land and naval platforms, programme prime contracting and integration of complex - maintain surveillance and control to prevent breaches systems to the provision of high-tech equipment and value- of national security and threats to human safety. Thales added support services. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2 2007 ANNUAL REPORT – Thales Thales generates half of its revenues in defence mar- multidomestic presence is one of the pillars of Thales’s kets, one-quarter in aerospace markets and one-quarter strategy and the blueprint for the company’s continued ex- in civil security markets, particularly rail infrastructure pansion, in particular in fast-growing economies such as safety and security. , and Russia. Half of the company’s production and three-quarters of Thales today is poised to strengthen its position in each of its revenues are generated outside France: Thales has its major sectors of activity and to consolidate its prospects commercial operations and industrial facilities on five con- for continued growth. With the successful integration of the tinents to maintain close relations with domestic custom- businesses acquired in 2007 and the disposal of a number of ers in each country. The is the company’s non-strategic assets, the company has a balanced portfolio second-largest country of operation after France. This of businesses serving a wide range of expanding markets.

Thales offers a complete range of integrated solutions which fulfill the following missions:

Make reliable and secure Monitor and control Protect and defend

Transport safety Space-based surveillance Information, communication - air - observation (, optical) and command systems - rail - electromagnetic detection Threat detection systems - urban - weather and environment monitoring on all platform types - radar - road Air space - optronics Communication - air traffic control - sonar and transaction safety - air space surveillance - satellite Air, land and naval combat systems Land and maritime border control - government and corporate Forces and populations protection information systems Movement of people systems - banking transactions - ID documents and systems - ATBM and Air defence for Identification Critical infrastructure safety - NRBC protection - airports Cyberspace control - area protection - energy - critical sites WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 Annual report – Thales 3 TIMELINE

Origins Building a multidomestic company: from Thomson-CSF to Thales 1968: the professional businesses of Thomson- Brandt (previously CFTH) merge with Compagnie Générale 1987-96: as early as 1987, Thomson-CSF anticipates the in- de Télégraphie Sans Fil (CSF) to form Thomson-CSF. The evitable cutbacks in defence spending and, as its major ongo- two companies already have a long history. Compagnie ing export contracts draw to a close, starts to radically restruc- Française Thomson-Houston (CFTH) was formed in 1893 ture its businesses in order to maintain margins. A proactive to operate the patents of the US Thomson-Houston Elec- policy of external growth is adopted, mainly in Europe, with tric Corp. in the emerging market for power generation and the acquisition of the defence electronics businesses of the transmission. CSF was founded in 1918 and became a pio- group in 1989. The other major operation is the acqui- neer in broadcasting. With its subsidiary Société Française sition of a controlling interest in Sextant Avionique (formed Radioélectrique (SFR), acquired in 1957, CSF was a key through the merger of the businesses of Thomson- player in the 1930s development of broadcasting, short- CSF and Aerospatiale). Many other acquisitions, large and wave radio, electro-acoustics and the very first radar and small, significantly expand the Group’s industrial base out- television. side France, mainly in Europe. The non-French subsidiaries’ 1970-80: the company receives its first major export con- share of consolidated revenues rises from 5% to 25%. tracts in the Middle East, after the 1973 and 1979 oil crises. 1996-97: holdings in Crédit Lyonnais and SGS-Thomson It diversifies into telephone switchgear, silicon semiconduc- (now STMicroelectronics) are divested. The capital gains tors and medical imaging (CGR). are used to finance further international growth. 1998: reduction of the French State’s interest in Thomson- Strategic refocusing CSF from 58% to 40%, resulting from a contribution of on professional and defence assets by Alcatel and Dassault Industries, which become electronics shareholders in the company. The assets contributed, name- ly Dassault Electronique and the professional and defence 1982: the parent company Thomson SA is nationalised. Its electronics businesses of Alcatel, strengthen Thomson- financial situation is very weak, its portfolio of businesses CSF’s scope of business and consolidate its market posi- highly diversified and its market share in many areas too small tions in defence and industrial electronics. They also expand to be profitable. Despite the inflow of revenues from the first its industrial operations in Europe, particularly in , major contracts with the Gulf States, debt remains high. and . In addition, the operation results in the formation of Alcatel Space, which brings together the space 1983-87: the financial situation is turned round by refocus- businesses of Alcatel, Aerospatiale and Thomson-CSF and ing on professional and defence electronics. The company is jointly owned by Thomson-CSF (49%) and Alcatel (51%). divests heavily in civil in 1983 (agree- ment with CGE, which later became Alcatel) and the medi- 1998-00: after privatisation, the Group’s multidomestic strat- cal sector (sold to General Electric in 1987). The semicon- egy in defence markets is pursued throughout the 1990s in ductor businesses are merged with those of the Italian group Europe, and then extended to , , South IRI Finmeccanica in 1987 to form SGS-Thomson. Financial Korea and . After the friendly takeover in June 2000 performance also benefits from the finance activities devel- of the British company Electronics, the United Kingdom oped in-house from 1984 to manage cash flows from major becomes the Group’s second-largest domestic industrial base. export contracts. This finance business is progressively taken At the end of December 2000, Thomson-CSF, recently re- over by Crédit Lyonnais from 1990 to 1993, in exchange for named Thales, forms the first transatlantic joint venture in a stake in the bank. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 4 2007 ANNUAL REPORT – Thales the defence sector and the world leader in air defence with the Following the divestment of these non-strategic businesses American company Raytheon, Thales Raytheon Systems. and the completion of several major defence contracts in In the space of just over 10 years, the number of employees export markets, consolidated revenues, which had virtually based outside France increased from less than 30% of the doubled between 1997 and 2002, remain stable from 2003 workforce to almost half. to 2006 at around €10 billion. 2005: against this backdrop of weak growth combined with the impact of the low dollar, Thales launches an ambitious Thales, world leader in critical two-year programme to improve its competitive perform- information systems for security ance, booking higher provisions for restructuring costs. A new stage in Thales’s development begins in 2006: the These acquisitions as well as internal growth radically al- Group achieves its external growth ambitions with two ma- ter the Group’s portfolio of businesses, with an increased jor agreements that significantly reshape the company’s focus on civil markets. A new organisation with three busi- business portfolio, increase its focus on security in the ness areas – Defence, Aerospace and Information Technol- broadest sense, i.e., for both military and civil markets, and ogy & Services (IT&S) – is introduced in 2000 to leverage strengthen its leadership and capabilities in critical infor- the Group’s dual technology expertise. The Group embarks mation systems for these markets. These agreements also on a programme of divestment of non-strategic assets that significantly increase the Group’s organic growth potential: do not have real synergies with its defence and aerospace activities. This divestment policy is also intended to reduce - the agreement finalised at the end of March 2007 with the debt contracted to finance external growth operations. the naval shipbuilder DCNS and the French government The programme is practically completed in 2007. makes Thales the main private shareholder and industry partner of one of the largest and most capable players in From 2001: responding to the geopolitical and economic the worldwide naval defence sector, upheavals following 11 September 2001, Thales strength- ens its focus on the most technology-intensive segments of - the agreement with Alcatel-Lucent, implemented in the first the defence market, particularly network-centric warfare half of 2007, brings Thales a global leadership position in and force interoperability. At the same time, it expands its security systems for ground transportation, and in satel- role as prime contractor and service provider to meet the lites. These new businesses represent more than €2 billion needs of client countries faced with the growing complexity in annual revenues (equivalent to 20% of Thales’s consoli- of programmes and the increasing sophistication of defence dated revenues in 2006) and serve high-growth markets. systems and equipment. These two major agreements bring a more equal balance In the next few years, Thales pursues its multidomestic de- to the security markets that Thales serves, with half of its velopment policy and acquires full control of several defence business in defence and the rest fairly equally divided be- and aerospace subsidiaries originally held through joint ven- tween aerospace and civil security, where the largest mar- tures. Thales UK, now Britain’s second-largest defence con- ket is rail transport infrastructure. They also further expand tractor, is selected for a number of major Ministry of De- the scope of the Group’s international operations. While fence programmes, including the CVF future aircraft carrier France remains the company’s largest client country, ac- programme in 2003. Thales is appointed in 2005 as prime counting for 25% of consolidated revenues in 2007, French contractor for the UK’s Watchkeeper UAV system, Europe’s subsidiaries for the first time generate less than half (47%) largest tactical surveillance programme. And in early 2008, of Group revenues. the Group is selected as system-of-systems integrator for the Following these external growth operations, part of which FRES future infantry vehicle programme, alongside Boeing. involved the transfer of Alcatel-Lucent businesses in ex- Back in 2001, Thales divested its interests in Alcatel Space, change for an increase in Thales’s capital reserved for whose largest market was in satellites for civil telecommu- Alcatel-Lucent, the Group’s shareholding structure is sig- nications, Alcatel’s core business. The Group continues to nificantly altered, with a reduction in the Public Sector’s divest its non-strategic civil businesses, while at the same interest from 31% to 27%, an increase in Alcatel-Lucent’s time consolidating and structuring its more specific involve- stake from 9.5% to 21% and a slight reduction in the free ment in the growing civil security sector. float from 53.5% to 52%. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 Annual report – Thales 5 KEY FIGURES

in € million 2007 2006 2005 2004 2003 Order book at year-end 22,675 20,676 20,223 17,578 18,743 Order intake 12,856 10,818 12,781 9,375 10,887 Consolidated workforce at year-end 61,195 52,160 53,047 55,705 57,439 France 31,911 29,180 29,835 30,872 32,219 United Kingdom 8,141 8,524 8,920 9,810 10,521 Other Europe 12,381 7,100 7,202 7,663 7,630 Rest of world 8,762 7,356 7,090 7,360 7,069

FINANCIAL DATA SINCE 2004, in accordance with IFRS

in € million 2007 2006 2005 2004 Revenues (a) 12,296 10,264 10,263 10,283 France 3,108 3,064 2,995 2,982 United Kingdom 1,584 1,342 1,242 1,337 Other Europe 3,276 2,079 2,167 1,954 Rest of world 4,328 3,779 3,859 4,010 Income from operations 936)(b) 755 722 700 Income from operations after restructuring costs (“EBIT”) 858)(b) 562 509 591 Income of operating activities 1,020 576 549 571 Net income “Group share” 887 388 334 326 Earnings per share (in ) 4.56 2.30 2.00 2.00 Total R&D (2,200) (2,000) (1,900) (1,850) Company-funded R&D (c) (584) (518) (512) (444) Operating cash flows before working capital changes 1,101 947 901 888 Capital expenditures (506) (373) (352) (273) Net (acquisitions) disposals (697) 304 164 99 Net debt (net cash) position at year-end 291 (91) 398 860 Shareholders’ equity at year-end 3,881 2,287 2,062 1,710

(a) Revenues by destination. (b) Before PPA “Purchase Price Allocation”. (c) Including capitalised R&D. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 6 2007 ANNUAL REPORT – Thales FINANCIAL DATA FOR 2003 AND 2004, in accordance with French Accounting Standards

in € million 2004 2003 Sales (a) 10,288 10,569 France 2,984 2,748 United Kingdom 1,337 1,268 Other Europe 1,955 2,114 Rest of world 4,012 4,439 Operating income 729 698 Income of operating activities 619 497 Net income “Group share” 198 112 Earnings per share (in euros) 1.22 0.69 Total R&D (1,850) (1,850) Company-funded R&D (b) (436) (419) Operating cash flows before working capital changes 848 770 Capital expenditures (321) (350) Net (acquisitions) disposals 101 124 Net debt at year-end 841 906 Shareholders’ equity at year-end 2,097 2,014

(a) Sales by destination. (b) Including capitalised R&D. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 Annual report – Thales 7 Governance and Auditors at 31 March 2008

Board of Directors

Denis Ranque Robert Brunck Philippe Lépinay Chaiman and Chief Executive Officer François Bujon de l’Estang Didier Lombard Alcatel-Lucent Participations Olivier Costa de Beauregard Klaus Naumann represented by: Serge Tchuruk Hubert de Pesquidoux Marie-Paule Delpierre TSA Jean-Paul Barth represented by: Dominique Floch Bruno Bézard Marcel Roulet Director representing Roger Freeman the French State

Strategy Committee Audit Committee Nomination and Remuneration Charles de Croisset Committee Chairman Chairman Marie-Paule Delpierre Jean-Paul Barth Robert Brunck Chairman Philippe Lepinay Roger Freeman François Bujon de l’Estang Didier Lombard Klaus Naumann Marcel Roulet Serge Tchuruk Serge Tchuruk

EXECUTIVE COMMITTEE

Denis Ranque (1) Yves Barou Alexandre de Juniac Chairman & CEO SVP, Human Resources SVP, Air Systems Alex Dorrian Sylvie Dumaine Jean-Paul Lepeytre EVP, International Operations, SVP, Corporate Communications Deputy SVP, Security CEO, Thales UK Solutions & Services Jean-Paul Perrier Patrice Durand Jean-Georges Malcor EVP, International Operations, SVP, Finance & Administration SVP, Naval Chairman, Thales International Jean-Loup Picard François Quentin Olivier Houssin SVP, Strategy, Research & Technology SVP, Aerospace EVP, Commercial & Security Operations, SVP, Security Reynald Seznec Bruno Rambaud Solutions & Services SVP, Operations SVP, Land & Joint Systems Pascale Sourisse (1) Sole “mandataire social” (Company representative), SVP, Space as defined by the French Commercial Code.

Statutory auditors

Ernst & Young Audit Mazars & Guérard represented by Christian Chiarasini represented by Jean-Louis Simon and Nour-Eddine Zanouda WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 8 2007 ANNUAL REPORT – Thales changes in Governance in May 2008

members of Thales Executive Committee As of 1st May 2008

Denis Ranque Richard Deakin Yves Barou Chairman and CEO SVP, Air Systems SVP, Human Resources Jean-Paul Perrier Jean-Georges Malcor Sylvie Dumaine Vice Chairman SVP, Naval SVP, Corporate Communications Alex Dorrian François Quentin Patrice Durand EVP, UK, USA, and SVP, Aerospace SVP, Finances Australia and Administration CEO Thales UK Reynald Seznec SVP, Space Jean-Paul Lepeytre Olivier Houssin SVP, Operations EVP, Security & Services Pascale Sourisse SVP, Land & Joint Systems Jean-Loup Picard Alexandre de Juniac SVP, Strategy, EVP, Asia, Africa, Middle East, Research and Technology Latin America Bruno Rambaud EVP, Continental Europe, , Russia, Central Asia

Extract from the press release issued on 16 April 2008, available on Thales’ website at www.thalesgroup.com “On 16 April 2008, Denis Ranque, Chairman and CEO of Thales, has announced the reorganisation of his team to rein- force the international organisation and foster transversality in the Group. The key objectives are to adjust the international organisation of the Group to increase export sales, to develop its activities and visibility in existing “multi-domestic countries”, to significantly reinforce its presence in emerging countries, to strength- en its key European partnerships and to optimise its relationship with large international institutions (EU, European Space Agency, NATO). Furthermore, it is important to optimise its Security and Services activities across the Group. Following these changes, Jean-Paul Perrier, Executive Vice President, International Organisation, and Chairman of Thales International, is appointed Vice Chairman of the Group. He will deputize for Denis Ranque, in particular in representing the Group vis à vis key customers. Three geographical areas are created: - The first area includes the United Kingdom, the USA, Canada and Australia. - The second area consolidates Continental Europe including France, Turkey, Russia and Central Asia. - The third are will include Asia, Africa, Middle East, Latin America.”

Board of directors as of 16th may 2008

Pursuant to the Annual General Meeting of Shareholders held on 15th May 2008, the composition of the Board of Directors has changed as follows: - expiration of the term of Olivier Costa de Beauregard, - appointment of Jozef Cornu as Director. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 9 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 FINANCIAL REPORT

1 . Directors’ report

A. Management discussion and analysis of 2007 financial statements...... 12

B. Risk factors...... 22

C. events since year-end...... 28

2 . Consolidated financial statements

A. Consolidated profit & loss account...... 30

B. Consolidated balance sheet...... 31

C. Consolidated statement of cash flows...... 32 D. Consolidated statement of changes in shareholders’ equity and minority interests...... 33

E. notes to the consolidated financial statements...... 34

F. List of main consolidated companies...... 83

G. statutory auditors’ report on the consolidated financial statements...... 84 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 11 FINANCIAL REPORT

1 . DIRECTORS’ REPORT

A. MANAGEMENT DISCUSSION AND ANALYSIS OF 2007 FINANCIAL STATEMENTS

HIGHLIGHTS AND MAJOR TRENDS IN 2007

The completed a large-scale reconfiguration of its business portfolio in 2007 with the finalisation of the major strategic operations initiated the previous year. These included the acquisition of Alcatel-Lucent’s transportation and security businesses and space businesses (consolidated as from 1 January and 1 April 2007 respectively) and the sale to DCNS of Thales’s surface naval businesses in France (deconsolidated as from end-March). Also in 2007, Thales, a long- standing partner with DCNS, became its industrial shareholder with a 25% interest in the naval defence company (NB: With respect to this second operation, Thales’s 25% interest in DCNS is accounted for under the equity method and is therefore not included in Thales revenue figures). The Thales Group’s scope of consolidation was also affected by the divestment of its interests in the propulsion businesses of Protac and Bayern Chemie (deconsolidated as from 1 July 2007), the divestment of its interest in Faceo (deconsolidated as from 1 October 2007) and the full-year impact of the sale of its GPS positioning and navigation equipment activities in mid-2006. In terms of business trends and results, 2007 was a pivotal year, with a significant change of scale following the expan- sion of Thales’s business portfolio (the first full year to reflect the impact will be 2008) combined with the very satisfactory performance of the Group’s historical core businesses, which recorded a marked improvement in revenues and financial performance compared with the previous year. The major trends in 2007 were: - strong business growth, driven by acquisitions and solid organic performance: • revenues increased by 20% overall (and by 6.4% on a like-for-like basis), • new orders increased by 19%, with further growth in the diversified base of recurring orders; - financial performance improved significantly (1): • income from operations increased by 24% to €936m, boosting operating margin to 7.6% of revenues compared with 7.3% in 2006, • EBIT (income from operations after restructuring costs) increased by 53% to €858m, driving EBIT margin substantially higher to 7.0% compared with 5.5% in 2006 due to a sharp decrease in restructuring costs, • net income, Group share, stood at €1,009m compared with €388m in 2006, an increase of 160%, as a result of improved financial performance as well as net capital gains of €432m; - net debt at year-end limited to €291m by higher internal resources: • operating cash flows rose by 16% to €1,101m, • free operating cash flow rose by 23% to €549m.

1. 20% business growth

2006 2007 Overall Organic in € million change change

Revenues 10,264 12,296 +20% +6.4% Order intake 10,818 12,856 +19% +1% Order book at year-end 20,676 22,675 +10% +2%

(1) For better analysis of the 2007 results and easier comparison with the previous year, the figures commented below have been restated to exclude the accounting of the fair value of the assets and liabilities acquired from Alcatel-Lucent, and of the 25% acquired in DCNS. The impact of PPA (purchase price allocation) is detailed in the table on p. 20. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 12 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

1.1. Consolidated revenues In 2007, Thales Group revenues totalled €12,296m, compared with €10,264m in 2006 (an overall increase of 20%). The changes in the scope of consolidation described above correspond to a net increase in revenues of €1.6bn in the fi- nancial statements for 2007. The newly consolidated businesses from Alcatel-Lucent generated revenues totalling €2.1bn (€2,072m) in 2007: - €1bn from the transportation and security businesses consolidated as from 1 January 2007, - €1.1bn from the space businesses (consolidated proportionally to Thales’s interest as from 1 April 2007). The 2006 revenues of the divested businesses were slightly less than €500m (€489m) and primarily concern the naval busi- nesses sold to DCNS at the end of March 2007 (€321m corresponding to their revenues for the last nine months of 2006) and the GPS navigation and positioning equipment business sold in the summer of 2006 (€105m). In addition, exchange rate fluctuations, mainly due to the weakening US dollar, had a negative impact, reducing revenues by €162m. Taking these various factors into account, the Group’s historical core businesses contributed €611m to overall revenue growth in 2007. This equates to organic growth of 6.4%, a markedly faster growth rate than had been recorded in recent years. For information, the businesses acquired from Alcatel-Lucent achieved overall growth of almost 10% in 2007. a. Consolidated revenues by segment

2006 2007 Overall Organic 2007 % in € million change change

Aerospace / Space 2,492 3,597 +44.3% +4.5% 29% Defence 5,320 5,222 -1.8% +6.0% 42% Security 2,278 3,415 +49.9% +8.8% 28% Other and divested businesses 174 62 ns ns 1% Consolidated revenues 10,264 12,296 +19.8% +6.4% 100%

In Aerospace / Space, revenues increased by 44% compared with 2006, due largely to the integration of Alcatel-Lucent’s space businesses (consolidated as from 1 April 2007). Annual sales by the Aerospace division increased by 4.5% at constant exchange rates, thanks to continued growth in civil business (+8% overall and +11% with the effect of the dollar stripped out). The strongest growth was in in-flight entertainment (IFE), avionics (driven by steady deliveries to ) and the rap- idly recovering segment of systems for regional aircraft, as well as in services. By contrast, sales to military customers fell by 4% over the year. The satisfactory growth in ISTAR (intelligence, surveillance, target acquisition and reconnaissance) and services did not fully offset the continued reduction in sales of systems for combat aircraft. The new space businesses were consolidated for the last nine months of the year and recorded brisk growth, with revenues rising by 10% compared with the same period in 2006. Momentum was particularly strong in satellites. In the Defence segment (which includes the Air Systems, Land & Joint Systems and Naval divisions), revenues rose by 6% on a like-for-like basis: - growth of 8% in Naval sales, reflecting a renewal of the order book in this area, - growth of 6% in Land & Joint Systems, mainly driven by network, satellite communication and service activities, particularly in France (Syracuse III) and for NATO forces (ISAF contract), as well as by increased sales of communication equipment and optronics to customers in Asia-Pacific and the Middle East, - growth of 3% in Air Systems, with a marked increase in all segments of air traffic control (control centres, navigational aids, , services) and in services for military customers (particularly support for air defence systems in and France). WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 13 financial report

In Security, which includes the former Thales Security and Services divisions combined with the transportation and security businesses acquired from Alcatel-Lucent, revenues increased sharply, rising by 50% due to these acquisitions but also to strong performance by Thales’s historical core businesses (+8.8% at constant exchange rates). This strong performance was achieved in most areas of the Security segment. Ground transportation, which accounted for approximately 45% of total revenues in this segment in 2007, generated growth in pro forma sales of more than 10% compared with 2006 (including the rail signalling business). The most significant fac- tors contributing to this strong revenue growth were higher levels of activity on a number of ongoing contracts to upgrade signalling systems and support control & supervision systems for the . Security systems for critical infrastructures benefited in particular from several large new orders booked in 2006 and early 2007, including the security contract for Saudi Aramco’s East-West pipeline. Security systems and services for industry and finance recorded steady growth in sales, with the strongest increases in the United Kingdom, , France and Australia.

b. Consolidated revenues by destination

Destination 2006 2007 Change 2007 % in € million France 3,064 3,108 +1% 25% United Kingdom 1,342 1,584 +18% 13% Other European countries 2,079 3,276 +58% 27% Total Europe 6,485 7,968 +23% 65% Asia-Pacific 1,577 1,679 +6% 14% North America 1,192 1,226 +3% 10% Near & Middle East 617 878 +42% 7% Rest of world 393 545 +39% 4% Total outside Europe 3,779 4,328 +15% 35% Consolidated revenues 10,264 12,296 +20% 100%

Sales for France and North America remained virtually stable as a result of changes in the scope of consolidation (the sale of surface naval businesses to DCNS in France and deconsolidation of GPS navigation activities in the ). Revenue growth in the United Kingdom was driven by sustained business in military ISTAR systems and in control systems for the London Underground. The sharp rise in sales in other European countries is primarily attributable to the consolidation of the Alcatel-Lucent busi- nesses. The rail signalling business has major industrial and commercial operations in this region, particularly in Germany, Spain and . Thales also achieved sustained growth in sales to the Near and Middle East, primarily in defence markets (support for air defence systems, communications) and security markets (communication networks). WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 14 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

1.2. Orders New orders totalled €12,856m in 2007, representing a book-to-bill ratio of 1.05, an overall increase of 19% and an increase of 1% within the Group’s historical scope of consolidation. This growth was mainly driven by strong momentum in the intake of small and medium-sized orders. Only six contracts with unit values greater than €100m were booked in 2007. Together, these six contracts are worth €1,092m. This compares with eight contracts in this category booked in 2006 for a total value of €1,268m.

2006 2007 Overall Organic in € million change change

Aerospace / Space 2,389 4,026 +69% +14% Defence 5,573 5,402 -3% +1% Security 2,684 3,372 +26% -12% Other and divested businesses 172 56 ns ns Total order bookings 10,818 12,856 +19% +1%

The biggest contract booked in 2007 is worth €430m and involves the manufacture of a dual satellite telecommunication sys- tem for Yahsat in the . This contract, worth a total of €1.2bn, is being conducted by a joint team of and , in partnership with Thales Land & Joint Systems for part of the ground station infrastructure. Other major orders booked in 2007 include the supply of electronic integrated masts to equip ocean patrol vessels for the Royal , installation of an electronic protection system for air defence batteries in Saudi Arabia, the first Sycobs sonar systems for France’s Barracuda-class nuclear-powered submarines and the prime contract for protected tacti- cal reconnaissance vehicles for . In Aerospace / Space, the sharp increase in orders (+69%) is due to the combined effect of the new space businesses (con- solidated for nine months of 2007) and the excellent performance of the Aerospace division, whose intake of new orders grew by 14%. This growth was achieved in all areas of civil business, with a 27% overall increase in order intake, while new orders from military customers fell by 3%. In IFE, the volume of new orders rose by 60% compared with 2006. Avionics or- ders for Airbus increased by 35%. In equipment and systems for regional aircraft, orders rose by 40%, with a large contract from ATR for its new ATR 600 series and a marked upturn in orders from Bombardier. Orders were 20% higher than the year before in electrical power generation, and 9% higher in customer support. The 3% decrease in orders from military customers over the full year is entirely attributable to the significant drop in orders for combat and special-mission aircraft. In ISTAR systems, however, Thales made satisfactory progress on the Watchkeeper programme and booked a new order for the rapid deployment of a variant of this system by the British in two theatres of operations. Orders for military helicopter avionics and customer support also increased significantly. The new space businesses, consolidated for the last nine months of the year, recorded a 25% increase in orders compared with the same period in 2006, with particularly vigorous growth in the military satellite communication (milsatcom) market. In 2007, Thales Alenia Space booked orders for six telecommunication satellites, and one Earth observation satellite under the Global Monitoring for Environment and Security (GMES) programme. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 15 financial report

In Defence, order intake was virtually stable (+1% when corrected for the impact of the sale of surface naval businesses to DCNS). They were affected by the deferral to 2008 of certain contract awards, but were nonetheless higher than revenues, in line with the book-to-bill ratio of greater than 1 recorded by the Group as a whole. These contract deferrals affected the Naval and Air Systems divisions in particular, with new orders falling by 6% and 8% respectively, while orders booked by the Land & Joint Systems division were 8% higher than in 2006. - The Naval division, which received several large orders in 2006, booked only one order worth more than €100m, to equip France’s fleet ofBarracuda submarines. The division made good progress in a number of export markets, notably in the Gulf States with a contract for ocean patrol vessels in Oman, and in Asia for corvettes in . - In Air Systems, contrasting figures underlie the overall decline in orders, with a significant increase in missile electronics as well as in air defence radars, where the placed a large order worth €135m to supply integrated masts for four patrol vessels. Air traffic control orders were lower, chiefly as a result of a decrease in new orders for cus- tomer services and approach radars, whereas orders for control centres and navigational aids were slightly higher. - Land & Joint Systems orders grew on the back of sustained growth in mainland Europe, Australia and the Middle East, more than offsetting the decline in tactical communications orders in the United States and in naval communication net- works in the United Kingdom. In Security, order intake by most of the historical businesses was lower than in 2006. This year-on-year decrease is mainly due to the high level of orders booked on several large contracts in 2006. A similar trend was recorded in the newly acquired businesses, whose 2006 order intake included three contracts worth more than €100m (for the London Underground, the High Speed Line in Spain and a maintenance contract with Network Rail in the United Kingdom). This solid basis of new orders booked in 2006, and a book-to-bill ratio of 0.99 in 2007, will sustain future growth in the security segment. At 31 December 2007, the consolidated order book was worth €22.7bn, representing close to 22 months of revenues.

2. SIGNIFICANT IMPROVEMENT IN FINANCIAL PERFORMANCE

NB: for better analysis of the 2007 results and easier comparison with the previous year, the figures commented below have been restated to exclude the accounting of the fair value of the assets and liabilities acquired from Alcatel-Lucent and of the 25% acquired in DCNS. The impact of PPA restatements (purchase price allocation) is detailed in the table on p. 20.

The sharp increase in net income in 2007 is due to the following favourable trends: - a 24% improvement in income from operations, from €755m to €936m, with a further rise in operating margin to 7.6% of revenues, compared with 7.3% in 2006. EBIT (income from operations after restructuring costs) increased by 53% to €858m, driving EBIT margin substantially higher to 7.0% compared with 5.5% in 2006, due to a sharp decrease in restructuring costs, - a very sharp increase (+107%) in income from operating activities, which rose to €1,194m from €576m in 2006 as a result of these improvements and substantial capital gains on disposals (€432m). Thales showed a restated net profit, Group share, of €1,009m for the 2007 financial year, 160% higher than the previous year’s figure of €388m. The declared net profit, Group share, including the impact of accounting of the fair value of assets and liabilities acquired, amounted to €887m, 129% higher. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 16 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

Summarised profit and loss account

in € million 2006 2007 restated (a)

Consolidated revenues 10,264 12,296 Income from operations 755 936 Restructuring costs (193) (78) EBIT (income from operations after restructuring costs) 562 858 Gain (loss) on disposal of assets and other exceptional items 14 336 Income from operating activities 576 1,194 Other financial income (expense) (73) (79) Other components of pension charge (19) 65 Income tax (101) (217) Equity in income of unconsolidated affiliates 8 47 Net income (loss) 391 1,010 - share of minority interests (3) (1) Net income (loss), Group share 388 1,009

(a) Before impact of PPA.

2.1. Further significant improvement in operating results a. Income from operations The 24% increase in income from operations, which rose to €936m compared with €755m in 2006, led to a further improve- ment in operating margin to more than 7.6% of consolidated revenues (7.3% in 2006). This reflects the positive overall effect of the reconfiguration of Thales’s portfolio of businesses, combined with a general improvement in performance by the historical core businesses, and comes despite the negative impact of exchange rate fluctuations, estimated at €30m and largely linked to the weakening of the dollar. This negative impact is relatively moderate considering the size of the Thales Group. It affects the results of units located in the dollar zone (whose figures are translated into euros in the consolidated financial statements) and the results of units that conduct sales in dollars but are located outside the dollar zone and therefore assume costs in another currency (primarily euros). These dollar-denominated sales are covered by specially adapted exchange rate hedges, which have helped to limit the unfavourable effect of the weakening dollar on overall financial performance in recent years (see Risk factors, below). In addition, the Group is continuing to take steps to improve operational efficiency, in particular through the implementation of competitiveness measures and proac- tive supply chain management. At constant exchange rates, the Group’s historical core businesses achieved an 8% increase in income from operations.

Restated income from operations by segment

2006 As % 2007 (a) As % in € million of revenues of revenues

Aerospace / Space 203 8.1% 255 7.1% Defence 424 8.0% 459 8.8% Security 168 7.4% 237 6.9% Other and divested businesses (40) ns (15) ns Income from operations 755 7.3% 936 7.6%

(a) Before impact of PPA. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 17 financial report

In Aerospace / Space, income from operations stood at €255m, equating to an operating margin of 7.1% of revenues. This figure is 26% higher than income from operations recorded in 2006 for the Aerospace division (€203m) and now includes a contribution of €56m by the Space businesses integrated as from 1 April 2007, which represents an operating margin of 5.3% of these businesses’ revenues. Income from operations for the Aerospace division stood at €199m, which is slightly lower than the year before because of cost overruns on one of the division’s defence programmes. Excluding this impact, which caused a slight decrease in operating margin, from 8.1% in 2006 to 7.9% in 2007, the division recorded a marked improvement in operating performance in both its civil and military businesses. In Defence, income from operations improved strongly, rising by 8% to €459m compared with €424m the previous year, with a further improvement in operating margin to 8.8% of revenues in 2007 from 8% in 2006. The surface naval businesses sold to DCNS contributed to the 2007 operating results of the Defence businesses only for the first quarter of the year. On a like-for-like basis, income from operations for the Defence segment increased by 19%. All three divisions in this segment contributed to this improvement in operating performance. In the Security segment, income from operations increased by 41% overall to €237m compared with €168m in 2006. This increase was driven by the substantial contribution of the transportation and security businesses acquired from Alcatel- Lucent. The operating margin of the Security segment nonetheless decreased from 7.4% in 2006 to 6.9% in 2007 as a result of non-recurrent problems on certain complex projects. Lastly, “non-division” operating losses amounted to €(15)m in 2007 compared with €(40)m in 2006. In 2007, these op- erating losses were mainly attributable to costs related to real estate vacated by operating entities, whose rent is paid by the parent company pending reallocation or expiration of lease. In 2006, in addition to real estate costs of €(20)m, “non- division” operating losses included losses of €(20)m recorded by the GPS navigation and positioning business sold in the summer of that year.

Components of income from operations Analysis of the components of income from operations shows that the 24% increase, which exceeded the increase in revenues (+20%), was due to careful control of indirect costs. Indirect costs rose by just 13%, while gross margin was 0.6% lower than in 2006 as a proportion of revenues. This slight decrease, from 23.2% to 22.6%, was partly due to the unfavourable effect of the weak dollar and the negative impact of cost overruns on a number of aerospace and security programmes. Total Research and development expenditures, which still accounts for close to 20% of revenues, increased by around 10% in 2007 to €2.2bn (equivalent to 18% of revenues) compared with €2bn in 2006, €1.9bn in 2005 and €1.85bn in 2004. Company-funded R&D amounted to €584m, up 13% compared with 2006, and represented just over one-quarter of the total. This breaks down into €141m capitalised under IAS 38 (compared with €157m in 2006) and €443m charged as an expense (€361m in 2006). Almost 20% of the total R&D budget (€380m in 2007) is dedicated to advanced pre-product research, most of which is conducted by Thales Research & Technology (TRT), which employs around 500 people at the Group’s central laboratories. This work includes concept studies, technology demonstrators and technological research. Development work accounts for four-fifths of the total R&D budget and is divided fairly equally between equipment devel- opment and system development. Most R&D work is conducted by the operating units. The 22,000 staff concerned (over 70% of whom are engineers and researchers) are based at more than 80 units in the Group’s top ten countries of operation: 6,400 people in Aerospace / Space, 12,000 in Defence and 3,600 in Security. Company-funded R&D concerns both fundamental research and technological development studies conducted by TRT and work on the Group’s strategic large-scale programmes, which include avionics equipment, airborne systems, UAV systems and in-flight entertainment in Aerospace; the Battlespace Transformation Centre, tactical networks and software-defined radio in Defence; and e-government and large-scale administrative portals in Security. Marketing and sales expenses (€841m compared with €805m in 2006) fell by 1% as a proportion of revenues, due to a slight reduction within the Group’s historical scope of consolidation and their lower relative weight within the newly acquired businesses. General and administrative expenses included the cost of integrating the new businesses and increased by 22%. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 18 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

b. EBIT (defined as income from operations after restructuring costs) After two years with particularly high provisions for restructuring costs, these costs decreased significantly in 2007 and stood at €78m, the equivalent of 0.6% of revenues, compared with €193m and 1.9% of revenues in 2006. As a result of this reduction, EBIT stood at €858m, which is 53% higher than in 2006 (€562m). EBIT represented 7.0% of revenues in 2007, a significant improvement over the 5.5% in EBIT margin reflected in the 2006 financial statements.

Restated EBIT by segment

in € million 2006 As % of revenues 2007 (a) As % of revenues

Aerospace / Space 161 6.5% 240 6.7% Defence 370 7.0% 424 8.1% Security 129 5.7% 224 6.6% Other and divested businesses (98) ns (30) ns EBIT 562 5.5% 858 7.0%

(a) Before impact of PPA. c. Income from operating activities Thales recorded a very sharp increase (107%) in income from operating activities, which rose to €1,194m from €576m in 2006. This figure includes substantial capital gains (€432m), of which €316m on the sale to DCNS of the French surface naval busi- nesses and €119m on the sale of Faceo, the facility management subsidiary jointly held with Cegelec. The overall figure for income from operating activities also includes €(96)m in impairment on non-current operating assets, two-thirds of which involved avi- onics businesses and corresponds to the impact of the weaker dollar on the profitability of several ongoing research programmes and on goodwill. Related impairment tests were run on the basis of a recurring exchange rate of $1.50 to the .

2.2. Other results - Net financial expense was comparable to the previous year, at €(79)m compared with €(73)m in 2006, despite the in- crease in average net debt for the full year. - Other components of pension charge were a positive figure of €65m, compared with a negative figure of €(19)m in 2006, after inclusion of €93m further to successful negotiations in the United Kingdom and France. In addition, the unfunded status on pension commitments in the United Kingdom and the Netherlands (where pension plans are externally funded) was significantly lower at the end of 2007 (€187m) than at the end of 2006 (€706m). This very substantial reduction is largely due to higher interest rates in these two countries, changes to pension schemes negotiated in the United Kingdom and cash payments made by the Group to reduce the funding shortfall.

2.3. Net income a. Restated net income Restated net income, Group share, for 2007 stood at €1,009m, an increase of 160% over 2006 (€388m), after restated income tax expense of €(217)m compared with €(100)m in 2006, corresponding to an effective tax rate of 18% compared with 21% the previous year. This rate is substantially lower than the “theoretical” average rate of 31.6% in 2007, essentially because of the fiscally positive impact of capital gains during the year. Net income for 2007 also includes the Group’s share in the net income of equity affiliates. This amounted to €47m. In particular, the contribution of DCNS, in which Thales has held a 25% interest from 31 March 2007, was €29m (before PPA adjustment of -€6m). WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 19 financial report

b. Consolidated net income

After a deduction of €121.5m corresponding to the accounting of the fair value of total assets and liabilities acquired from Alcatel­ Lucent, and of the 25% acquired in DCNS, Thales showed a net profit, Group share, of €887m for the 2007 financial year.

in € million 2007 restated PPA impact 2007 consolidated

Consolidated revenues 12,296 -- 12,296 Income from operations 936 (174) 762 Restructuring costs (78) -- (78) EBIT (income from operations after restructuring costs) 858 (174) 684 Gain (loss) on disposal of assets and other exceptional items 336 -- 336 Income from operating activities 1,194 (174) 1,020 Other financial income (expense) (79) -- (79) Other components of pension charge 65 -- 65 Income tax (217) 59 (158) Equity in income of unconsolidated affiliates 47 (6) 41 Net income (loss) 1,010 (121) 888 - share of minority interests (1) -- (1) Net income (loss), Group share 1,009 (121) 887

3. FINANCIAL POSITION AT YEAR-END: NET DEBT LIMITED TO €291M

3.1. Cash flows In 2007, Thales generated free operating cash flow of €549m, an increase of 23% over 2006 (€448m) and the equivalent of 64% of EBIT.

Summarised statement of cash flows

in € million 2006 2007

Operating cash flows before working capital changes 947 1,101 Change in working capital requirements (24) 107 Payment of pension benefits (a) (73) (98) Income tax (paid) received (29) (56) Net cash flow from operating activities 821 1,054 Net operating investments (373) (505) of which capitalised R&D (156) (141) Free operating cash flow 448 549 (Acquisitions) / disposals 284 (660) Contribution to UK pension schemes unfunded status (68) (70) Dividends paid (140) (169) Net cash flows for the year 524 (350)

(a) Excluding contribution to UK pension schemes unfunded status. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 20 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

Two main factors led to this increase in free cash flow:operating cash flowsrose by 16% to €1,101m despite high restructur- ing outflows (€162m), which were comparable to the 2006 figure of €170m and correspond to the implementation of the Optimum competitiveness plan provisioned in 2005 and 2006; and working capital requirements fell as a result of major payments received from customers at the end of the year. Net operating investments increased substantially (by €132m overall) despite a slight reduction (€15m) in capitalised R&D. This increase in net operating investments reflects the expansion in the scope of business, with a large-scale upgrade to Thales Alenia Space’s historical Cannes facility in particular, as well as non-recurring investments for renovation and reor- ganisation of facilities in France and the United Kingdom as part of moves to reduce the overall number of sites. Cash flows for 2007 also include part of the movements related to the reconfiguration of the portfolio of businesses, i.e., a net financial investment of €660m corresponding to €1,122m in acquisitions less €462m in capital gains from disposals. The main acquisitions were the space businesses acquired from Alcatel-Lucent (67% of Thales Alenia Space and 33% of ) for a total amount of €670m, and the 25% stake in DCNS acquired from the French State for €569m. The main disposals were the surface naval businesses sold to DCNS for €514m, and the sale of Faceo, the facility management subsidi- ary jointly held with Cegelec, for €132m. After an exceptional payment of €70m related to the pension deficit in the United Kingdom (compared with a payment of €68m in 2006), and dividend payments of €169m in respect of 2006, net cash flow for the year was €(350)m.

3.2. Financial position at year-end In addition to the financial flows discussed above, the Group’s financial position at 31 December 2007 was impacted by the external growth operation finalised at the beginning of the year with the contribution of Alcatel-Lucent’s rail signalling and security businesses. This operation gave rise to a capital increase of €1 billion reserved for Alcatel-Lucent, which was approved by the shareholders at the extraordinary general meeting of 5 January 2007. As a result, shareholders’ equity at 31 December 2007 stood at €3,881m, an increase of €1,594m from 31 December 2006 (€2,287m). The above-mentioned capital increase accounted for €1 billion of this increase, with net income of €887m, less dividend payments of €169m, accounting for the remainder. In addition, despite the high cumulative cost of acquisitions during the year (€2,122m), net financial debt remained limited, at €291m, compared with a net cash position of €91m at 31 December 2006.

4. PROPOSED DIVIDEND

In view of the strong results for 2007, a confirmed outlook of business growth and further improvement in financial per- formance in the expanded scope of business, the Board of Directors will propose that the Annual General Meeting of 15 May 2008 approve a dividend of €1.00 per share, an increase of 15% on the €0.87 paid in respect of 2006. If approved, the dividend will be paid on 2 June 2008 (ex-dividend day: 28 May 2008).

5. OUTLOOK FOR THE CURRENT YEAR

The Group confirms its 2008 objectives, namely organic growth of approximately 6% within the new scope of business, and a further improvement in operating performance to achieve EBIT margin (income from operations after restructuring costs) of at least 7.25%, compared with 7% in 2007, based on income from operations of approximately 8% of revenues. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 21 financial report

B. RISK FACTORS

1. FINANCIAL RISK

1.1. Liquidity risk

The Group’s short- and long-term financial resources consist of: - shareholders’ equity, listed by heading in Note 18 to the consolidated financial statements, - gross debt, listed by date of maturity in Note 23 to the consolidated financial statements, - undrawn confirmed credit facilities granted by banks as backup for the commercial paper programme and representing, as such, a financing reserve (the characteristics of these facilities are presented in Note 23 to the consolidated financial statements). At 31 December 2007, the cash recorded under consolidated assets was €1,464m (compared with €2,333m at end-2006), including: - €904m held by the parent company and available for immediate use, - €352m in the bank credit balances of subsidiaries, most of them outside France (this figure includes payments received in the last few days of the financial year and subsequently transferred to the corporate treasury account), - €208m in cash invested directly by joint ventures (prorated by Thales’s interest in each joint venture), since cash pooling is not applicable to joint ventures. At the date of publication, Thales’s credit risk ratings were as follows:

Moody’s Standard & Poor’s

Medium- and long-term loans A1 A- Outlook outlook stable outlook negative Commercial paper & short-term loans Prime-1 A2

1.2. Interest rate risk The corporate treasury department consolidates data on the Group’s exposure to interest rate and foreign exchange risk, and uses the appropriate financial instruments to hedge those risks. Group policy is to optimise its funding and banking operations and to control exchange rate and counterparty risks by con- solidating and pooling all units’ cash surpluses and requirements. This makes it possible to: - simplify cash management and match all units’ cash positions to produce a single consolidated position that is easier to manage, - gain prime access to non-bank markets through Thales (parent company) financing programmes rated by Standard & Poor’s and Moody’s, as above. This principle of centralising units’ short-term surpluses and requirements (cash pooling) is applied to units in the same cur- rency zone, with a euro zone, a sterling zone, a dollar zone and an Australian dollar zone, and, in some cases, in the same country, as in France. The Group’s exposure to interest rate fluctuations is covered by swaps. The breakdown of the Group’s debt by type of interest rate is described in Note 23 to the consolidated financial statements. The following table summarises the Group’s exposure to interest rate risk before and after hedging. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 22 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

O/N to 1 year 1 to 5 years Longer Total

Fixed Variable Fixed Variable Fixed Variable Fixed Variable

Financial liabilities -37.8 -282.3 -605.4 -730.6 -146.1 -39.8 -789.3 -1,052.7 Financial assets -- 1,550.7 ------1,550.7 Net position before hedging -37.8 1,268.4 -605.4 -730.6 -146.1 -39.8 -789.3 498.0 Off-balance-sheet -3.6 3.6 282.4 -282.4 -36.7 36.7 242.1 -242.1 Net position after hedging -41.4 1,272.0 -323.0 -1,013.0 -182.8 -3.1 -547.2 255.9

A 1% rise in interest rates, applied to the financial assets and liabilities after hedging, at 31 December 2007, would reduce financial expense in 2007 by €2.5m (€11 million in 2006).

1.3. Foreign exchange risk a. Interest rate and exchange rate risk management for business activity Business-related currency risk occurs when some business is billed in a currency other than that of the costs incurred. One-half of Thales’s revenues are generated in the euro zone, which is also where the largest proportion of its industrial op- erations are located. In addition, Thales’s multidomestic development policy, which aims to locate operating units as close as possible to end customers in Europe and other regions of the world (United States, Australia, South Korea, South Africa, etc.), particularly in defence markets, has the added advantage of allowing the Group to manufacture and bill in local cur- rency, thereby eliminating exchange rate risk. However, for some of the Group’s business activities (civil avionics, tubes, civil space), the US dollar is the reference currency for transactions. For business activities outside the dollar zone (in-flight entertainment business is based essentially in the US and is therefore largely immune to this risk), a specific exchange risk hedging policy is implemented: - for equipment transactions (avionics, tubes), this policy is defined on the basis of sales forecasts in USD, after accounting for corresponding purchases in USD – around 2.5% of total revenues, - for longer-term programmes (in the space segment and, possibly, in any other segment if a customer requires a contract denomi- nated in USD) – also around 2.5% of total revenues after accounting for corresponding purchases in USD – each bid or proposal is examined for profitability in the light of the effect of currency fluctuations and, if necessary, is hedged either through market trans- actions (forward exchange-rate contracts and options) or by reinsurance with private insurance companies, in particular Coface. As well as this direct dollar risk, which concerns around 5% of consolidated revenues in total, the Group is also exposed to indirect dollar risk, including on contracts denominated in currencies other than the dollar. This occurs when the Group is bidding against companies that benefit from a cost base in dollars. Analysis by product lines and geographic areas shows that an estimated 12% of total revenues may be exposed to this indirect dollar risk. Dollar risk is thus the main currency risk the Group needs to hedge, either as the currency in which most export contracts are denominated whatever their destination, or as the reference currency for certain businesses such as civil aerospace. The figures corresponding to the hedging of business-related dollar risk at 31 December 2007 are as follows: - USD 1,625m to hedge net firm commitments (USD risk against EUR, CAD and GBP), - USD 739m to hedge future revenues. Operating receivables and payables denominated in foreign currencies are covered by exchange rate hedges and are not therefore exposed to foreign currency risk. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 23 financial report

The change in value of financial instruments used as cash flow hedges is recognised in shareholders’ equity. A fall (rise) of 5% in the value of the dollar with respect to the Euro, GBP and CAD would increase (decrease) shareholders’ equity by ap- proximately €60m. The change in value of the financial instruments, matched with portfolios of sales offers, which are not eligible for hedge ac- counting is recognised in profit and loss. A fall (rise) of 5% in the value of the dollar with respect to the Euro, GBP and CAD would increase (decrease) profit by approximately €11m. Foreign currency denominated financial debt does not generate any exposure in profit and loss, as it is either denominated in the functional currency of the entity in which it is recognised, or it is used as a net foreign investment hedge.

b. Management of risk relating to foreign currency-denominated assets

The Group hedges a limited part of its foreign currency-denominated assets, mainly those assets likely to be disposed of at some future date. The main criteria for determining whether or not a given foreign currency-denominated asset should be hedged are as follows: - the nature of the business involved (the Group’s core business assets are generally excluded), - the structure of the Group’s commitment with respect to jointly held companies, in particular the specific features of the shareholders’ agreement in each joint venture. In general, hedging is achieved by loans or currency swaps in the same currency as the assets to be hedged. The actual ap- plication of this policy, however, also depends on: - the objective of optimising hedges in the light of market conditions (availability of foreign currency, interest rates, cost of hedges, etc.), - the risks inherent in the future value of the assets being hedged and the nature of the corresponding subsidiaries’ business.

Summary of risks relating to foreign currency-denominated assets at 31 December 2007 (in € m)

GBP USD AUD

Net equity 897.6 439.6 265.0 Off-balance-sheet positions -44.8 -- -- Net position after hedging 852.8 439.6 265.0

1.4. Credit risk Thales’s exposure to credit risk is low because, on the one hand, it largely serves institutional clients, particularly govern- ments, with first-rate credit, and, on the other hand, because of the policy pursued for customers with other credit ratings: - insurance coverage, - supplier’s credit contracted outside the banking system.

1.5. Stock market risk After divesting its only stake in a listed company in 2006, namely , Thales is no longer exposed to any stock market risk. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 24 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

1.6. Off-balance sheet risk a. Pension commitments Defined-benefit pension schemes are in place for certain Thales employees, mainly in the United Kingdom and the Nether- lands, and are externally funded by the company under the provisions of the corresponding national legislation. New employees no longer have access to these pension plans. However, commitments with respect to current, former and retired Thales employees in these two countries stood at €3,171m at 31 December 2007, of which €2,985m was covered by plan assets. This represents an unfunded status of €187m. At 31 December 2007, plan assets were invested as follows: - 53% in equities, - 42% in fixed-rate bonds, - 3% in property, - 1% in inflation-indexed funds, - 1% in liquidities. Changing market parameters can affect the unfunded status and the annual costs of defined-benefit plans. In order of im- portance, at 31 December 2007, the main variables are as follows: - a reduction or increase in the discount rate applied to liabilities, which can increase or reduce the unfunded status; this variable is partly offset by changes in the value of fixed-rate bonds held as plan assets, - changes in the total return on investments held in equities and property, - changes in the forecast inflation rate. The Group has introduced quarterly reporting on its pension plan positions and makes regular deterministic and stochastic projections measuring the sensitivity of the unfunded status to possible changes in market parameters and incorporating correlation factors. b. Parent company guarantees Thales, as the parent company, issues guarantees on commitments undertaken by its subsidiaries on commercial contracts. These guarantees are centralised by the Corporate Financing and Treasury department. The guarantees are limited to an overall amount of €2 billion under authority granted on a half-yearly basis to the Chairman by the Board of Directors. The Chief Financial Officer informs the Board of Directors of the use of this authority, which is monitored by the Corporate Financing and Treasury department, before the authority is renewed. At 31 December 2007, guarantees stood at €5,891m (not including €360m of contingent undertakings related to Thales Alenia Space 67% owned by the Company since April 2007). Thales manages risk connected to these parent company guarantees and optimises the financial conditions of the transac- tions guaranteed. The main objectives of this risk management policy are as follows: - to limit risks to those corresponding to normal commitments on commercial contracts in terms of volume and duration, - to guarantee commitments made by wholly owned subsidiaries only, with guarantees on commitments by consortia or joint ventures made in proportion to Thales’s interests in those consortia or joint ventures, - to enable its subsidiaries to benefit, when appropriate, from the credit quality of the parent company by monitoring the financial conditions of the operations guaranteed. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 25 financial report

2. LITIGATION

Due to the nature of its business activities, the Group is exposed to the risk of technical and commercial litigation. Litigation mentioned in last year’s annual report has progressed as follows: The request for arbitration submitted by the Republic of Navy () for an amount of USD 599m in damages, arising out of the execution of a contract, signed in 1991, for the supply of equipment and systems executed in conjunction with an industrial partner, continued in 2007. In June 2005, the adverse party, in the context of this procedure, increased its request to USD 1,119m, to which interest for late payment would be added. It reduced its request to USD 882m in April 2006 (interest for late payment excluded). If an unfavourable judgment were to be issued, Thales’s share of any amounts due would be limited to approximately 30%, being a proportion corresponding to its share in the equipment supply contract. Thales, in conjunction with its industrial partner, has constantly opposed this request. On the basis of the information at its disposal at the balance sheet date for 2007, Thales has carried out a review of the financial risks to which the Group could be exposed as a result of this procedure. In the absence of any new significant infor- mation, Thales has, in consequence, decided to maintain at 31 December 2007 a reserve for this litigation identical to that recognised in its 2006 financial statements. In application of paragraph 92 of IAS 37, no detailed disclosure is provided for this amount. No other significant litigation arose since the start of 2007. To the best of the Thales Group’s knowledge, there is no other exceptional circumstance or dispute that has had or is likely to have a significant influence on the Group’s results, financial position or prospects.

3. ENVIRONMENTAL RISK

The Thales Group’s activities generally do not have any significant environmental impact. The management of environmental risks involves: - compliance of plants and products with applicable regulations and control of any environmental impact they may have, - implementation of an environmental management system adapted to each site (more than 70 sites have obtained ISO 14001 certification), - mapping of environmental risks in more than ten countries in which the Group operates in order to verify that employees and local residents are not exposed to health or environmental risks, - management of any identified risks (changes to plants, decontamination and monitoring). At 31 December 2007, the amount of reserves for environmental contingencies amounts to €3.5m.

4. INSURANCE

Thales operates a policy of active risk management in order to achieve optimal protection of its employees, customers, pro- fessional assets and businesses, and to protect its property in the interest of shareholders. This policy is based on the following principles: - risk identification, with risk-mapping for major businesses, - prevention and protection policy for industrial sites, to reduce the extent and frequency of the risk of accidental fire or explosion. In 2007, 86% of insured assets were audited for fire safety by an outside body, - group-wide risk financing, using both self-insured retention and transfer to insurers. For risks relating to damage to proper- ty and consequent operating loss, transport, general civil liability, assembly and testing, and space, the Group underwrites WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 26 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

incidents by means of insurance and reinsurance captives. Its maximum net liability is limited to €25m. Cover relating to major claims and losses is transferred to insurers, - an organisational structure and crisis management tools designed to deal as efficiently as possible with the immediate consequences of a catastrophic event and take the necessary emergency measures, - provision of resources to ensure business continuity in the event of a major disaster. The programme to improve information system recovery plans was pursued in 2007. The Internal Audit Department continued its IT security audit plan at major Group units. The business continuity plans continued to be deployed throughout 2007. The main accident risks – damage to property and general civil liability – are covered by programmes with first-tier interna- tional insurance and reinsurance companies. In 2007, total premiums paid for global cover (excluding specific and local policies) amounted to 0.39% of consolidated revenues. The maximum guarantee for damage to property and subsequent operating losses was set at €1.3bn in 2007. This figure is great- er than the estimated largest claim the Group might make for direct damage and operating losses caused to an industrial site. Civil liability cover depends on the quantification of reasonable risk for the Group, as identified by risk-mapping, and guar- antee capacity available on the insurance market. The insurance guarantee for civil liability of its aerospace businesses, which is covered by a separate programme, stands at USD 2bn. The exclusions common to the market as a whole (asbestos, etc.) also apply to Thales. The Group also subscribes specific and/or local policies where necessary to comply with local regulations or meet particular requirements of specific projects or activities.

5. DEPENDENCE

5.1. Upstream: key supplies and technologies For more than ten years now, Thales has designed and implemented a policy to control critical technologies and outsourc- ing. This policy is updated each year on the basis of analyses carried out in each unit as part of its Technical Strategic Plan (TSP). It identifies any risk related to access to critical components, particularly in the micro-electronics, optics and optron- ics fields, and infers any necessary internal action or partnerships. Due to the nature of its activities and the specific features of its products, Thales conducts most of its research and develop- ment work in-house (€2.2bn invested in 2007, compared with €2bn in 2006) and controls the patents that are of critical importance to its businesses. The specific microelectronics components used in its equipment are also developed and, in some cases, manufactured in-house. However, the Group outsources standard components and commodity products. Risks of technological dependence have been identified and are covered by reserves for special contingencies. Thales also identifies and analyses its risks of technological dependence on third party patents, either as part of the pro- cedures for filing its own patents, or when launching technical studies or product developments. A dedicated department, Thales Intellectual Property (TPI), works with the legal department’s litigation team, and where necessary with Group part- ners specialised in IP law, to handle third-party claims of infringement of intellectual property rights by a Group company.

5.2. Downstream: main customers Thales’s activities in its three business areas are aimed primarily at institutional customers: governments, administrations, infrastructure operators, major corporations, etc. However, the Group’s dependence on its major customers is nonetheless limited, due notably to its proactive multidomestic development policy, which over the last 15 years has reduced the relative weight of its original customer base. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 27 financial report

In defence markets, which represent more than half of its revenues, the Group is now much less reliant on orders from any one country or defence budget. In 2007, the French Ministry of Defence, still the Group’s largest single customer, accounted for slightly less than 17% of consolidated revenues. Thales’s second-largest customer, accounting for approximately €1bn, was the UK Ministry of Defence. Civil aerospace customers are aircraft manufacturers, airlines and public agencies (primarily airport authorities). Direct sales to Airbus or to airlines for their Airbus fleets (avionics and power generation, simulators and pilot training), excluding in-flight entertainment equipment, which is mainly sold to airlines as options, amounted to USD 525m in 2007, comparable with the previous year. In the space sector, which Thales entered in 2007 (consolidated Group sales of €1.1bn in 2007), no single customer accounts for more than 20% of revenues. In security, where market and customer diversity are greater, Thales has refocused its business portfolio in recent years. As a result of this reconfiguration, the Group now addresses a more limited number of markets and has increased the relative proportion of institutional customers. In addition, the acquisition of Alcatel-Lucent’s transportation and security businesses in 2007 has given Thales a stronger positioning in the ground transportation infrastructure market, particularly in rail trans- portation, where most customers are civil authorities or major transportation operators, with nevertheless no particular reliance on any particular customer or country.

C. EVENTS SINCE YEAR-END

In February 2008, Thales reached an agreement with the US group Hypercom relating to the acquisition of Thales’s electron- ic payment solutions business. Under the terms of the agreement, which should be finalised by the end of March 2008 (1), Thales expects to receive a cash payment of $120m, with an additional amount of up to $30m based on the performance of the divested business in 2008. Thales expects to book a capital gain of approximately €50m from this operation in the first half of 2008.

(1) This divestment has been finalised on Aprilnd 2 , 2008. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 28 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

APPENDIX

SUMMARY STATEMENT ON COMPANY SHARE TRANSACTIONS CARRIED OUT IN 2007 BY DIRECTORS, NON-VOTING DIRECTORS AND CONNECTED PERSONS in accordance with article 223-26 of the General Regulations of the French Financial Markets Authority (AMF)

Pursuant to article L.621-18-2 a) of the Monetary and Financial Code, members of the Board of Directors are obliged to make this disclosure. In application of article L.621-18-2 b) of the Monetary and Financial Code, the company has informed the AMF that all members of the Executive Committee are in the category of non-voting directors for the purposes of the disclosure on com- pany share transactions. Connected persons in the sense of article L.621-18-2 c) of the Monetary and Financial Code are persons with close personal con- nections, as defined by decree of the Conseil d’Etat, with the persons mentioned in article L.621-18-2 a and b mentioned above.

Buy (a) Sell (a)

Name / Office No. of shares Euros No. of shares Euros

D. RANQUE 63,629 2,073,669.00 57,629 2,650,934.00 Chairman & CEO Y. BAROU 21,210 800,041.20 21,210 944,057.10 Member of the Executive Committee J.-G. MALCOR 21,243 575,179.37 14,080 573,624.00 Member of the Executive Committee J.-L. PICARD 26,513 864,058.67 26,513 1,178,767.90 Member of the Executive Committee F. QUENTIN 10,606 345,649.54 10,606 470,588.22 Member of the Executive Committee B. RAMBAUD 51,513 1,506,558.67 51,513 2,207,168.30 Member of the Executive Committee R. SEZNEC 20,000 514,000.00 6,666 269,039.56 Member of the Executive Committee GIMD (b) 450,000 18,886,813.40)(c) -- --

(a) Company share transactions carried out in 2007 include operations conducted by connected persons, where applicable. (b) Declarations made by Groupement Industriel Marcel Dassault (GIMD), person connected to O. Costa de Beauregard, Managing Director, GIMD. (c) Thales shares, excluding derivatives declared on AMF website (http://www.amf-france.org). WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 29 financial report

2 . CONSOLIDATED FINANCIAL STATEMENTS

A. Consolidated profit & loss account

in € million Notes 2007 2006 (a) 2005 (a)

Revenues note 4 12,295.6 10,264.3 10,263.2 Cost of sales (b) (9,560.9) (7,883.6) (7,900.1) Research and development expenses (443.4) (360.8) (366.0) Marketing and selling expenses (841.0) (805.7) (818.8) General and administrative expenses (560.4) (459.6) (456.5) Amortisation of intangible assets recognised at fair value on business combination note 10 (127.9) -- -- Income from operations 762.0 754.6 721.8 Restructuring costs (77.9) (193.1) (212.5) Other operating income (expense) note 22-a -- -- (84.3) Impairment of non current operating assets notes 9 b et 10 (96.5) (8.5) (34.2) Gain (loss) on disposal of assets note 5 432.1 22.9 158.3 Income of operating activities note 4 1,019.7 575.9 549.1 Financial interest on gross debt (100.3) (83.9) (116.2) Financial income from cash at bank and equivalents 55.2 42.1 33.4 Cost of net financial debt note 6 (45.1) (41.8) (82.8) Other financial income (expense) note 6 (34.0) (31.5) (10.2) Other components of pension charge note 20 65.2 (19.0) (33.6) Income tax note 7 (157.7) (100.4) (87.3) Share in net income (loss) of equity affiliates (c) note 11 40.6 7.9 7.9 Net income (loss) 888.7 391.1 343.1 Of which: Net income, Group share 887.4 388.0 333.9 Minority interests 1.3 3.1 9.2 Basic earnings per share (in euros) note 8 4.56 2.30 2.00 Diluted earnings per share (in euros) note 8 4.52 2.26 1.97

(a) Including, €50.0 million in 2006 and €49.0 million in 2005, reclassifications from cost of sales to marketing and selling expenses to take into account changes in the organisation. (b) Including, in 2007, -€45.9 million inventory step-up effect linked to business combination (note 2). Income from operations, adjusted from purchase price allocation (PPA) entries, amounts to €935.8 million. (c) Including, in 2007, -€6,1 million of amortisation of intangible assets assessed in the context of the PPA DCNS (note 11). WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 30 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

B. CONSOLIDATED BALANCE SHEET ASSETS

in € million Notes 31/12/07 31/12/06 31/12/05

Goodwill, net note 9 2,870.0 1,825.4 1,859.1 Other intangible assets, net note 10 1,201.4 432.4 348.2 Tangible assets, net note 10 1,141.7 1,007.4 1,027.9 Total non current operating assets 5,213.1 3,265.2 3,235.2 Share in net assets of equity affiliates note 11 664.7 157.9 161.8 Other investments note 12 99.1 98.8 196.0 Other financial assets note 12 304.9 159.3 137.5 Total non current financial assets 1,068.7 416.0 495.3 Fair value of derivatives: interest rate risk management note 23 -- 1.9 15.5 Fair value of put and call options between Thales and Transfield / ADI -- -- 31.8 Pension and other employee benefits note 20 74.8 40.3 39.5 Deferred tax assets note 7 461.0 440.8 454.1 Non current assets 6,817.6 4,164.2 4,271.4 Inventories and work in progress note 13 2,142.6 1,737.3 1,619.5 Construction contracts: assets note 14 2,422.1 2,096.7 2,042.8 Advances to suppliers 614.6 1,201.3 1,030.1 Accounts, notes and other current receivables note 15 3,937.0 3,214.4 3,199.8 Fair value of derivatives: currency risk management 147.6 60.7 33.5 Total current operating assets 9,263.9 8,310.4 7,925.7 Current tax receivables 64.2 68.7 64.9 Current accounts with affiliated companies notes 17 et 23 57.9 122.6 157.5 Marketable securities note 23 28.7 22.7 14.4 Receivable on disposal of Broadcast & Multimedia to Thomson -- -- 133.6 Cash at bank and equivalents note 23 1,464.1 2,333.1 1,319.9 Total current financial assets 1,550.7 2,478.4 1,625.4 Current assets 10,878.8 10,857.5 9,616.0 Total assets 17,696.4 15,021.7 13,887.4 Comptes consolidés Liabilities and shareholders’ equity

in € million Notes 31/12/07 31/12/06 31/12/05 Capital, paid-in surplus and other reserves 4,149.9 2,407.5 2,150.6 Cumulative translation adjustment (139.4) 19.6 53.5 Treasury shares (129.6) (140.4) (142.3) Shareholders’ equity 3,880.9 2,286.7 2,061.8 Minority interests note 19 3.3 7.5 41.0 Total shareholders’ equity and minority interests 3,884.2 2,294.2 2,102.8 Financial debt – long term note 23 1,519.8 1,610.2 1,449.4 Fair value of derivatives: interest rate risk management note 23 2.1 -- -- Pension and other employee benefits note 20 1,019.9 1,070.5 1,103.5 Deferred tax liabilities note 7 325.1 39.1 30.1 Non-current liabilities 2,866.9 2,719.8 2,583.0 Advances received from customers on contracts 3,566.6 2,918.8 2,755.8 Refundable grants 178.6 171.1 174.0 Construction contracts: liabilities note 14 523.9 359.4 341.5 Reserves for contingencies note 21 1,026.0 834.3 787.2 Accounts, notes and other current payables note 15 5,163.7 4,866.0 4,601.4 Fair value of derivatives: currency risk management 92.6 34.8 60.0 Total current operating liabilities 10,551.4 9,184.4 8,719.9 Current tax payables 73.8 44.0 26.2 Financial debt – short term note 23 212.4 638.5 299.3 Current accounts with affiliated companies notes 17 et 23 107.7 140.8 156.2 Total current financial liabilities 320.1 779.3 455.5 Current liabilities 10,945.3 10,007.7 9,201.6 Total liabilities and shareholders’ equity 17,696.4 15,021.7 13,887.4 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 31 financial report

C. CONSOLIDATED STATEMENT OF CASH FLOWS

in € million Notes 2007 2006 2005

Net income (loss) 888.7 391.1 343.1 Add (deduct): Income tax expense (gain) 157.7 100.4 87.3 Share in net (income) loss of equity affiliates (net of dividends received) (16.3) 4.1 6.7 Depreciation and amortisation of tangible and intangible assets note 10 423.9 295.1 274.0 Provisions for pensions and other employee benefits note 20 27.6 113.8 117.1 Impairment of non current operating assets notes 9 et 10 96.5 8.5 34.2 Loss (gain) on disposals of assets note 5 (432.1) (22.9) (158.3) Net allowances to restructuring provisions note 21 (84.1) 22.8 94.9 Other items 39.5 33.6 101.7 Operating cash flows before working capital changes 1,101.4 946.5 900.7 Change in working capital requirements and in reserves for contingencies (a) 107.0 (24.0) (133.7) Payment of pension benefits (defined benefit plans) (b) note 20 (168.0) (140.2) (110.9) Income tax (paid) received (55.5) (28.7) (46.5) Net cash flows from operating activities - I - 984.9 753.6 609.6 Capital expenditure note 24-a (528.2) (412.1) (390.8) Proceeds from disposal of tangible and intangible assets 22.7 39.3 38.5 Net operating investments (505.5) (372.8) (352.3) Acquisitions note 24-b (1,121.9) (61.5) (84.3) Disposals note 24-b 461.5 345.0 276.6 Change in loans (22.3) (0.4) 2.9 Change in current accounts with affiliated companies (8.0) 29.5 (23.0) Decrease (increase) in marketable securities (6.2) (8.2) (7.8) Net financial investment (696.9) 304.4 164.4 Net cash flows from investing activities - II - (1,202.4) (68.4) (187.9) Increase (decrease) in shareholders’ equity and minority interests note 24-c 43.3 5.2 118.6 Dividends paid (169.0) (140.4) (133.7) Increase in debt 129.1 738.5 278.6 Repayment of debt (605.5) (268.4) (584.5) Net cash flows from financing activities - III - (602.1) 334.9 (321.0) Effect of exchange rate variations - IV - (49.4) (6.9) 37.6 Total increase (decrease) in cash at banks and equivalents - I+II+III+IV - (869.0) 1,013.2 138.3 Cash at banks and equivalents at beginning of period 2,333.1 1,319.9 1,181.6 Cash at banks and equivalents at end of period 1,464.1 2,333.1 1,319.9

(a) Including changes in proceeds from sale of government non-recourse receivables (-€45.5 million in 2007, -€106.6 million in 2006 and -€19.1 million in 2005). The amount of trans- ferred receivable, including notably mature receivables bearing interest on overdue payments, amounted to €230.2 million at 31 December 2007 after effect of changes in scope (+€43.3 million), 232.4 million at 31 December 2006 and €339.0 million at 31 December 2005 (note 1-v). (b) Includes respectively -€69.8 million, -€67.5 million and -€36.6 million in 2007, 2006 and 2005 related to the deficit payment of pensions in the United Kingdom.

Financial interest paid was €119.9 million, €83.1 million and €118.0 million in 2007, 2006 and 2005. Financial interest received was €57.9 million, €48.8 million and €50.6 million in 2007, 2006 and 2005. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 32 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

D. Consolidated statement of changes in shareholders’ equity and minority interests

Number Share Paid-in Retained Changes Cumula- Treasury Share- Minority Total of shares capital surplus earnings in fair tive shares holders’ interests out- values transla- equity standing tion (thou- adjust- in € million sands) ment

At 1 January 2005 165,370 515.6 2,673.1 (1,283.6) 123.2 (26.0) (292.4) 1,709.9 30.6 1,740.5 Capital increase (note 24-c) 41 0.1 0.9 ------1.0 -- 1.0 Dividends (a) ------(133.7) ------(133.7) (0.9) (134.6) Share-based payments (note 18-c) ------18.9 ------18.9 -- 18.9 Change in treasury shares 3,335 -- -- (37.5) -- -- 150.1 112.6 -- 112.6 Total transactions with shareholders’ 3,376 0.1 0.9 (152.3) -- -- 150.1 (1.2) (0.9) (2.1) Translation adjustment ------79.5 -- 79.5 2.3 81.8 Financial instruments (note 18-d) ------(64.1) -- -- (64.1) (0.6) (64.7) Other ------3.8 ------3.8 -- 3.8 Total income and expense recognised directly through ------3.8 (64.1) 79.5 -- 19.2 1.7 20.9 shareholders’ equity in the year Net income 2005 ------333.9 ------333.9 9.2 343.1 Changes in scope of consolidation ------0.4 0.4 At 31 December 2005 168,746 515.7 2,674.0 (1,098.2) 59.1 53.5 (142.3) 2,061.8 41.0 2,102.8 Capital increase (note 24-c) 97 0.3 2.3 ------2.6 -- 2.6 Dividends (a) ------(140.0) ------(140.0) (0.4) (140.4) Share-based payments (note 18-c) ------16.8 ------16.8 -- 16.8 Change in treasury shares 29 -- -- (0.1) -- -- 1.9 1.8 -- 1.8 Total transactions with shareholders’ 126 0.3 2.3 (123.3) -- -- 1.9 (118.8) (0.4) (119.2) Translation adjustment ------(33.9) -- (33.9) (2.6) (36.5) Financial instruments (note 18-d) ------(9.9) -- -- (9.9) -- (9.9) Other ------(0.5) ------(0.5) -- (0.5) Total income and expense recognised directly through ------(0.5) (9.9) (33.9) -- (44.3) (2.6) (46.9) shareholders’ equity in the year Net income 2006 ------388.0 ------388.0 3.1 391.1 Changes in scope of consolidation ------(33.6) (33.6) At 31 December 2006 168,872 516.0 2,676.3 (834.0) 49.2 19.6 (140.4) 2,286.7 7.5 2,294.2 Capital increase / Alcatel Lucent transfer (b) 25,000 75.0 924.7 (59.3) ------940.4 -- 940.4 Capital increase / exercise of stock options 1,327 4.0 37.2 ------41.2 -- 41.2 Dividends (a) ------(169.0) ------(169.0) (0.9) (169.9) Share-based payments (note 18-c) ------22.2 ------22.2 -- 22.2 Change in treasury shares 202 -- -- (9.4) -- -- 10.8 1.4 -- 1.4 Total transactions with shareholders’ 26,529 79.0 961.9 (215.5) -- -- 10.8 836.2 (0.9) 835.3 Translation adjustment ------(159.0) -- (159.0) (0.2) (159.2) Financial instruments (note 18-d) ------41.3 -- -- 41.3 -- 41.3 Other ------(11.7) ------(11.7) -- (11.7) Total income and expense recognised directly ------(11.7) 41.3 (159.0) -- (129.4) (0.2) (129.6) through shareholders’ equity in the year Net income 2007 ------887.4 ------887.4 1.3 888.7 Changes in scope of consolidation ------(4.4) (4.4) At 31 December 2007 195,401 595.0 3,638.2 (173.8) 90.5 (139.4) (129.6) 3,880.9 3.3 3,884.2

(a) Dividends per share amounted to €0.87 in 2007 and €0.83 in 2006. The Board of Directors will propose that the Annual General Meeting of 15 May 2008 approve a dividend of €1.00 per share. (b) 25 million new shares issued at 5 January 2007 with a par value of €3 and a per share amount of €40. In the consolidated accounts, capital increase has been recognised at stock market price at the operation date, i.e. €37.63 per share. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 33 financial report

E. Notes to the consolidated financial statements All amounts included in these notes are expressed in € million except for per share data

On 6 March 2008, the Board of Directors approved, and authorised for issue, Thales’ consolidated financial statements for the year ended December 31, 2007. In accordance with French legislation, the financial statements will be final once ap- proved by the shareholders of Thales Parent Company at the Annual General Meeting convened for 15 May 2008. Thales Parent Company is a listed French société anonyme, registered with the Nanterre registrar of companies (Registre du Commerce et des Sociétés de Nanterre) under the number 552 059 024.

1. ACCOUNTING POLICIES

In application of European regulation N° 1606/2002 of 19 July 2002, the consolidated financial statements of the Thales Group are prepared since 2005 in accordance with IAS / IFRS standards (International Financial Reporting Standards) as approved by the . As a first time adopter of IFRS for the financial year ended 31 December 2005, Thales applied the specific rules for first time adoption defined in IFRS 1. Any specific options retained are set out in the following notes. The new IFRS 7 “Financial Instruments: Disclosures” standard and the amendment to IAS 1 “Presentation of Financial State- ments” have been applied since 1 January 2007. At 31 December 2007, IFRS standard or interpretation approved (or in the process of being approved) by the European Un- ion and for which application is not yet mandatory have not been early adopted. The standards in question are as follows: - IFRS 8 (Operating segments), effective for financial periods beginning on or after 1 January 2009. This new standard should not affect the contours of the Cash Generating Units’ used by the Group to perform goodwill impairment tests, - amendment to IAS 23 (Borrowing costs), with no impact expected for the Group since borrowing costs incurred on the acquisition or construction of assets are already included in the cost of such assets, - amendment to IAS 1 (Presentation of financial statements), effective for financial periods beginning on or after 1 Janu- ary 2009. This amendment will change the structure of the financial statements, mostly by limiting items that can be present- ed in the statement of changes in shareholders’ equity to transactions with shareholders. Other items currently presented in this statement will need to be included within a more comprehensive profit and loss account, - IFRIC 11 (Group and treasury share transactions), IFRIC 12 (Service concession arrangements), IFRIC 13 (Customer loyal- ty programmes) and IFRIC 14 (The limit on a defined benefit asset, minimum funding requirements and their interaction): Thales is currently preparing an estimate of the potential impacts of these interpretations. However no material impact is expected on Thales Group consolidated financial statements.

a. Consolidation The financial statements of significant subsidiaries directly or indirectly controlled by Thales have been fully consolidated. Companies in which Thales does not have a controlling interest but over which it exercises significant influence, directly or indirectly, are accounted for under the equity method. Companies under joint control are accounted for under the propor- tionate method. Financial statements of consolidated companies, prepared in accordance with accounting standards applicable in the countries in which the companies are incorporated, have been restated for the purposes of the consolidation in order to comply with IFRS. Transactions between fully consolidated or proportionately consolidated companies are eliminated, as well as internal gains and losses related to consolidated companies. Transactions between a fully consolidated company and a proportionately consolidated company, whether or not they affect consolidated profit and loss, are eliminated to the extent of the Group’s ownership interest in the proportionately consolidated company. As an exception to this principle, transactions between a fully consolidated company and a proportionately consolidated company are fully eliminated when the jointly control- led company acts simply as an intermediary or performs profit-neutral services on behalf of, or as a direct extension of the activities of, its different shareholders. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 34 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

b. Business combinations Business combinations are accounted using the purchase accounting method. Under this method, the identifiable assets, liabilities and contingent liabilities acquired are measured at their fair value at the date at which control is obtained. The difference between the cost of acquisition of the shares and the Group’s share in the fair value of net assets constitutes goodwill. Goodwill can be adjusted in the twelve months following the acquisition date to take account of definitive estimates of the acquired assets and liabilities recognised. After this period, adjustments to fair value are recognised through profit and loss. Negative goodwill is immediately recognised in “other operating income (expense)”. Goodwill related to controlled enterprises is recognised in balance sheet assets under the “intangible assets” caption. Goodwill related to companies accounted for un- der the equity method is recognised under the “share in net assets of equity affiliates” caption. Goodwill is not amortised but is subject, each year, to impairment (see note 1-f). Goodwill impairment is recognised as an expense in “income of operating activities”, except for impairment of goodwill related to equity affiliates, which is accounted for in “share in net income (loss) of equity affiliates”. Goodwill impairment cannot be reversed.

Reminder of policy applied on first time adoption of IFRS: The Group decided not to restate business combinations that occurred before 1 January 2004. c. Translation of the financial statements of foreign subsidiaries The financial statements of companies whose functional currency is different from the Group’s functional currency are translated using the following methods: - balance sheet items are translated at the exchange rates prevailing at balance sheet dates, - profit and loss items and the statement of cash flows are translated at the average exchange rates for the year, - translation adjustments are directly recognised in shareholders’ equity within the “cumulative translation adjustment” account. The main closing and average exchange rates used for translation purposes in recent years are summarised below:

31 December 07 31 December 06 31 December 05 Euros Closing rate Average rate Closing rate Average rate Closing rate Average rate Australian Dollar 1.6757 1.6366 1.6691 1.6685 1.6109 1.6269 Pound Sterling 0.7334 0.6873 0.6715 0.6819 0.6853 0.6830 U.S. Dollar 1.4721 1.3797 1.3170 1.2630 1.1797 1.2380

Reminder of policy applied on first time adoption of IFRS: The Group took the option, provided by IFRS 1, of not retrospectively reconstituting cumulative translation adjustments in shareholders’ equity at 1 January 2004. Translation adjustments that arose prior to the IFRS transition date will therefore not be taken into account in calculating gains or losses on future disposals of consolidated subsidiaries or equity affiliates. d. Accounting for foreign currency transactions Transactions in foreign currencies are translated at the rate of exchange prevailing at the transaction date. Foreign currency denominated assets and liabilities are translated into euros at closing exchange rates. Translation gains and losses are re- corded in profit and loss as “Foreign exchange gains (losses)”. Foreign currency exposure is managed by the finance department of Thales, which uses foreign currency derivatives to protect against changes in the value of future cash flows related to commercial flows in foreign currencies. In order for a derivative to be eligible for hedge accounting, it is necessary to define and document the hedging relationship and to demonstrate its effectiveness as from origination and throughout its duration. When a hedge is shown to be effective, hedge accounting is applied in the following manner: WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 35 financial report

- the change in the fair value of the hedging instrument is recognised directly in shareholders’ equity for the effective portion of the hedge until such time as the hedged flows affect profit and loss. The ineffective portion is recognised in profit and loss, - the amount of the foreign currency denominated transaction is subsequently translated at the exchange rate prevailing at the date of the hedge. Changes in the fair value of premiums or discounts related to forward foreign currency contracts, as well as the time value of for- eign currency options, are recognised in “other financial income (expense)” as they are excluded from the hedging relationship. In addition, the Group puts in place hedges of its net investment in foreign subsidiaries. Foreign exchange gains or losses on foreign currency denominated financial instruments corresponding to such hedges are recognised through equity under the “cumulative translation adjustment” caption until the date of disposal of these investments. At this date, these foreign exchange gains or losses are recognised in profit and loss.

e. Tangible and intangible fixed assets

Tangible assets Property, plant and equipment are carried at their acquisition cost, as reduced by accumulated depreciation and impairment losses recognised. Depreciation of tangible fixed assets is generally calculated on the basis of the following typical useful lives: - 20 years for buildings, - 1 to 10 years for plant and equipment, - 5 to 10 years for other tangible fixed assets (vehicles, fixtures, etc.). The depreciable amount takes account of the residual value of the asset. The different components of tangible fixed assets are recognised separately when their estimated useful lives or patterns of use, and thus the period over which they are depre- ciated or the depreciation methods applicable to them, are materially different. Borrowing costs that are directly attributable to the acquisition or construction of an asset are capitalised as part of the cost of that asset. Assets acquired through finance lease arrangements that transfer substantially all the risks and rewards associated with ownership of the asset are recognised in the balance sheet at their fair value or, if lower, at the present value of the minimum lease payments. Such assets are depreciated in accordance with the methodology described above. The corresponding debt is recognised in liabilities.

Intangible assets The Group’s intangible assets mainly include: - goodwill (note 1-b), - capitalised development costs (note 1-j), - assets acquired in business combinations, primarily acquired technologies, customer relationships and the order backlog. These assets are recognised at fair value and amortised over their useful lives. In the profit and loss account, the amortisa- tion is classified as “Amortisation of intangible assets recognised at fair value on business combinations”. The fair value of the assets is based on the market value. If no active market exists, the Group uses methods based on forecasts of the present value of the expected future operating cash flows (excess earnings method, royalty method…). Intangible assets are submitted to impairment tests (see note 1-f).

f. Impairment of non-current assets Each time that events or circumstances indicate that a tangible or an intangible asset may be impaired, and systematically at each annual balance sheet date for goodwill and intangible assets with indefinite useful lives, impairment tests are performed. To perform impairment tests, goodwill resulting from business combinations as well as assets that do not generate independent cash flows are allocated to cash generating units (CGU). The scope of a CGU cannot be broader than that of an operational division. These tests consist of ensuring that the recoverable amount of each of the Group’s CGU is at least equal to the correspond- ing net assets (including goodwill). The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. Value in use is determined on the basis of discounted future operating cash flows over a three-year period and WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 36 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

a terminal value. This calculation is based on data from the strategic plans prepared in accordance with Group procedures. The discount rate used is calculated on the basis of the Group’s weighted average cost of capital (9.2% in 2007, 8.0% in 2006 and 7.9% in 2005) adjusted if necessary for the specific risks attributable to each business sector. Assumptions used concerning growth in revenues and terminal values are based on a reasonable approach in line with specific data available for each business sector. Impairment tests of capitalised development costs (note 1-j) are performed, project-by-project, on the basis of discounted future operating cash flows related to the project. g. Investment and marketable securities / financial loans and receivables Investment and marketable securities are designated as “available-for-sale” assets and measured at fair value. For listed securities, this value corresponds to their stock market price at the balance sheet date. For unlisted securities, valuation models are used. If fair value cannot be reliably determined, such securities are recognised at cost. Changes in fair value are recognised directly in shareholders’ equity. If an impairment indicator of long-term loss of value is identified, a provision for impairment is recognised in “other financial income (expense)”. Such provisions for impairment are only written back to profit and loss at the date of disposal of the security in question. Financial loans and receivables are recognised at amortised cost. They are subject to provisions for impairment if an impair- ment indicator of long-term loss of value is identified. Such provisions for impairment, recognised in the “other financial income (expense)” caption, can subsequently be reversed through profit and loss if the conditions, which led to the impair- ment loss being recognised, cease to exist. h. Inventories and work-in-progress Inventories and work-in-progress are carried at the lower of their production cost (determined using the FIFO or weighted- average cost method) or their net realisable value. Work-in-progress, semi-finished and finished goods are stated at direct cost of raw materials, production labour and subcontract costs incurred during production, plus an appropriate portion of production overhead costs and of any other costs that can be directly allocated to contracts. In the consolidated balance sheet, work-in-progress related to construction contracts is included in the “Construction con- tracts: assets” caption or the “Construction contracts: liabilities” caption (note 1-i). i. Revenues The Group’s revenues can be divided into two main accounting categories: sales of goods and services and construction contracts.

Sales of goods and services Revenue from the sales of goods and services together with royalty and licence income is recognised when it is probable that the future economic benefits will flow to the Group and when the amount of revenue can be measured reliably. The following specific criteria must also be satisfied in order for revenue to be recognised: - revenues from the sale of goods are recognised when the enterprise has transferred the principal risks and rewards inherent to ownership of the goods to the purchaser, - revenues related to the rendering of services are recognised on the basis of the percentage-of-completion of the transaction. Revenues are measured at the fair value of the consideration received or receivable. In the case where the deferral of payment has a material effect on the determination of such fair value, the amount at which revenues are recognised is adjusted to take the financial impact of the deferral of payment into account. The costs relating to the service provided (sale of goods or services rendered) are recognised in the statement of income at the same time as the corresponding revenues.

Construction contracts A construction contract is a contract specifically negotiated for the construction of an asset or of a group of assets, which are interrelated in terms of their design, technology, function, purpose or use. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 37 financial report

According to its characteristics, a notified construction contract can either be accounted for separately, be segmented into several components which are each accounted for separately, or be combined with another construction contract in progress in order to form a single construction contract for accounting purposes in respect of which revenues and expenses will be recognised. Revenues and expenses on construction contracts are recognised in accordance with the technical percentage of completion method. However, where there is no significant timing difference between technical percentage of completion and contractual dates of transfer of ownership, the percentage of completion is determined according to the contractual transfer of ownership. Revenues are measured at the fair value of the consideration received or receivable. In the case where the deferral of payment has a material effect on the determination of such fair value, the amount at which revenues are recognised is adjusted to take the financial impact of the deferral of payment into account. Penalties for late payment or relating to improper performance of a contract are recognised as a deduction from revenues. In the balance sheet, provisions for penalties are deducted from assets related to the contract. Expected losses on contracts, in progress or in the order backlog, are fully recognised as soon as they are identified. Selling, administrative and interest expenses are directly charged to the profit and loss account in the financial year in which they are incurred. Estimates of work remaining to be completed on loss-making contracts do not include revenues from claims made by the Group, except when it is highly probable that such claims will be accepted by the customer. Progress payments received on construction contracts are deducted from contract assets as the contract is completed. Progress payments received before the corresponding work has been performed are classified in “Advances received from customers on contracts” in balance sheet liabilities. The cumulative amount of costs incurred and profit recognised, reduced by recognised losses and progress billings, is deter- mined on a contract-by-contract basis. If this amount is positive it is classified as “Construction contracts: assets” in balance sheet assets. If it is negative it is classified as “Construction contracts: liabilities” in balance sheet liabilities.

j. Research and development expenses Customers and government agencies fund a significant portion of research and development expenses. Internally funded research and development expenses are charged to the profit and loss account as incurred as “Research and development expenses”, except for project development costs that meet the following criteria: - the product or process is clearly defined, and costs are separately identified and reliably measured, - the technical feasibility of the project is demonstrated, - adequate resources are available to complete the project successfully, - a potential market for the products exists or their usefulness, in case of internal use is demonstrated, - the product will bring future economic benefits to the Group by its sale or by its internal use. Development costs are capitalised once the above criteria are met. They are then amortised over the useful life of the prod- uct. The method of amortisation is determined by reference to expected future quantities or revenues over the period in which future economic benefits will be earned. The period of amortisation depends on the nature of the activity. If the asset becomes impaired, an impairment loss is recognised. The Group receives public financing, in the form of reimbursable advances, for the development of certain projects. Reim- bursement of these advances is generally based on the expected future revenues to be generated by the development. The Group recognises such advances in liabilities taking account of the likelihood that they will be reimbursed. Costs incurred in respect of these projects are recognised in the work-in progress-caption. The Group benefits from tax credits related to research carried out by its subsidiaries. Such tax credits are deemed to be equivalent to operating grants and are thus included in income from operations. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 38 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

k. Income from operations Income from operations corresponds to income of operating activities before taking account of: - restructuring costs and costs in respect of headcount adaptation measures, - gains and losses on disposal of intangible or tangible assets, businesses or operational investments, - impairment of non current operating assets, - other operating income (expense) resulting from events that are unusual because of their frequency, their nature and their amount. l. Deferred taxation Thales recognises deferred taxes when the tax value of an asset or liability differs from its book value. The effects of changes in the corporation tax rate are recorded in the profit and loss account for the financial year in which the change was decided, unless the underlying transactions were recognised directly through shareholders’ equity. Deferred tax assets and liabilities are not discounted. Deferred tax assets are not recognised in the balance sheet if the company concerned does not reasonably expect to recover the tax asset. To assess its ability to recover deferred tax assets, the Group takes into account forecasts of future taxable re- sults of the tax entities concerned, non-recurring past events and tax strategies specific to each country. m. Restructuring Provisions for restructuring costs are made when restructuring programs have been finalised and approved by Group man- agement and have been announced before the balance sheet date, resulting in an obligating event of the Group to the third parties in question, as long as the Group does not expect consideration for these costs. Such costs primarily relate to severance payments, costs for notice periods not worked and other costs linked to the closure of facilities such as write-offs of fixed assets. These costs and the costs directly linked to restructuring measures (removal costs, training costs of transferred employees, etc.) are recognised under the “restructuring costs” caption in the profit and loss account. n. Pension and other employee benefits In accordance with local legislation and practice in the countries in which it operates, the Group grants its employees post- employment benefits (pensions, retirement awards, medical care, etc.) and other long-term benefits (long-service benefits, long-service awards on departure, etc.). The Group measures and recognises pension and similar benefits as follows: - for defined contribution schemes and state plans, contributions paid by the Group are expensed in the financial year, - for defined benefit schemes, the actuarial method used is the “Projected Unit Credit method” on the basis of estimated salaries at the date of retirement. For post-employment benefits, actuarial gains and losses are recognised in income or expense when cumulative unrecog- nised actuarial gains and losses for the scheme at the end of the previous financial year exceed the greater of 10% of the de- fined benefit obligation or of the fair value of plan assets at that date. These gains and losses are amortised over the expected average remaining working life of employees benefiting from the scheme (being the “corridor” method). The expense representing the change in net commitments is recognised in income from operations for the current service cost component and in the “other components of pension charge” caption for other components.

Reminder of policy applied on first time adoption of IFRS The Group decided to take the option, provided by IFRS 1, of recording its unamortised actuarial gains and losses at 1 Janu- ary 2004 in shareholders’ equity at that date. As from 1 January 2004, the corridor method has been applied. The new option provided by IAS 19, as revised, of recognising actuarial gains and losses directly in shareholders’ equity has not been taken. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 39 financial report

o. Share based payments Thales grants shares, share options and free shares to its employees. The Group uses a binomial model to measure the amount of the benefit to employees receiving the shares or/and share options granted. The corresponding fair value is determined at the grant date. The amounts thus obtained are taken to profit and loss over the vesting period of the rights. Recognition in profit and loss is not linear but, rather, is based on the specific conditions under which rights vest under each scheme. This expense is included in income from operations and a corresponding credit is recognised increasing retained earnings. It thus has no effect on the overall amount of shareholders’ equity.

Reminder of policy applied on first time adoption of IFRS The Group took the option, provided by IFRS 1; of not restating share option plans whose grant date was prior to 7 No- vember 2002.

p. Earnings per share Basic earnings per share is calculated by dividing profit attributable to shareholders by the weighted average number of shares outstanding during the financial year, excluding treasury shares. Diluted earnings per share (DEPS) take into account instruments that have a dilutive effect on earnings per share. No ac- count is taken of anti-dilutive instruments. Diluted earnings per share is calculated on the basis of the weighted average number of shares and equity-equivalent bonds outstanding during the financial year, less treasury shares. Net income is adjusted for the after-tax interest expense of related convertible bonds. The dilutive effect of share options is calculated using the treasury stock method, taking into account the average market price for the share in the period in question.

q. Financial debt – compound instruments Financial debt is initially recognised at the fair value of the amount received, less directly attributable transaction costs. Fi- nancial debt is subsequently measured at amortized cost, in accordance with the effective interest method. Certain financial instruments include both a financial debt component and a shareholders’ equity component. This was the case of the OCEANE issued by the Group in 2001 which matured in January 2007. These two components are separately recognised and have been determined as follows: - the “debt component” corresponds to the value of future contractual cash-flows (including both interest coupons and capital repayments) discounted at the market rate (taking account of credit risk at date of issue) for a similar instrument with the same conditions (maturity, cash flows) but without a conversion option, - the “shareholders’ equity component” represents the value of the option to convert the bonds into shares. Its value is equal to the difference between the amount of the proceeds of issue of the bond and the amount of the debt component calcu- lated in the manner described above.

r. Borrowing costs Borrowing costs incurred during the construction of a qualifying tangible or intangible (development costs) asset are treated as part of the cost of that asset. The interest rate used is that of the specific loan related to the asset or, if no specific financ- ing exists, the Group’s marginal financing rate.

s. Cash at bank and equivalents Cash at bank and equivalents includes cash on hand, demand deposits and cash equivalents (short-term, liquid investments which can easily be converted into a known amount of cash and which are subject to an insignificant risk of change in value). It excludes bank overdrafts, which are considered to be financing. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 40 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

t. Structure of the consolidated balance sheet A significant portion of the Group’s activities in its different business segments have long-term operating cycles. Accordingly, assets (liabilities) that are usually realised (settled) within the entities’ operating cycles (inventory, accounts receivable and payable, advances, reserves, etc.) are classified in the consolidated balance sheet as current assets and liabilities, without distinction between the amounts due within one year and those due after one year. On the other hand, financial assets and liabilities are presented as current items if their maturity date is within one year after the balance sheet date and as non-current after one year. u. Derivatives The Group uses financial instruments to manage and reduce its exposure to risks of changes in interest rates and foreign exchange rates. Derivatives are stated at their fair value in the balance sheet. In order to be eligible for hedge accounting, financial instruments must have the two following characteristics: - at the date of origination of the financial instrument, the existence of a hedging relationship must be formal and documented, - the hedge must be expected to be effective. Effectiveness must be capable of being measured in a reliable manner, and must be able to be demonstrated, over the entire period of the hedge relationship as initially determined. Accounting policies in respect of foreign exchange derivatives are presented above in note 1-d. Financial instruments relating to interest rate hedges are hedge-accounted as either fair value hedges or cash flow hedges: - a fair value hedge is a hedge of the exposure to changes in the value of assets and liabilities, - a cash flow hedge is a hedge of the exposure to changes in the value of future cash flows (unknown future interest flows payable on existing variable rate borrowings or on highly probable future borrowing issues, for example). In the case of fair value hedge relationships, the financial liabilities hedged by the interest rate derivatives are remeasured to the extent of risk hedged. Changes in value of hedged item are recognised in profit and loss of the period and are offset by symmetrical changes of the interest rate derivatives. In the case of cash flow hedge relationships, changes in fair value of interest rate derivatives shown in the balance sheet are recognised directly through shareholders’ equity, for the effective portion thereof, until such time as the hedged flows affect profit and loss. v. Derecognition of trade receivables The Group transfers trade receivables, mainly from the French Direction Générale de l’Armement (Directorate General of Arma- ments), notably overdue amounts that bear financial interest on arrears. As these transfers, which are without recourse in case of payment default by the debtor, involve the transfer of substantially all risks and rewards of ownership, the corresponding receivables are derecognised. w. Main sources of estimates Preparation of the Group’s consolidated financial statements involves making estimates and assumptions, which have an impact on the valuation of income, expenses, assets and liabilities. These estimates could need to be revised if the circum- stances on which they were based were to change or if new information or additional experience were to be obtained. The main financial statement captions subject to material accounting estimates are as follows:

Construction contracts Recognition of income and expenses relating to construction contracts is based on estimates of overall profit or loss on completion of such contracts (see note 1-i). These estimates are performed by project managers, under the supervision of General Management, in accordance with Group procedures. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 41 financial report

Goodwill Goodwill is subject to impairment tests (see note 1 f). The recoverable amount of goodwill by cash generating unit is as- sessed on the basis of forecast data from the strategic plans prepared, in accordance with Group procedures, for each of the Group’s businesses or divisions.

Development costs Development costs that meet the criteria for capitalisation (note 1-j) are recognised as intangible assets and amortised over their useful lives. Assessments of compliance with the criteria and of the recoverable amount of these assets are carried out on the basis of the forecast revenue and profitability of the corresponding projects.

Pension and other employee benefits Benefit obligations in respect of pensions and other employee benefits are estimated on statistical and actuarial bases in ac- cordance with the policies outlined in note 1-n. Actuarial assumptions made by the Group (discount rates, expected return on plan assets, future compensation increases, rates of employee turnover, mortality tables, etc.) are reviewed each year with the Group’s actuaries.

Deferred taxes Deferred tax assets result from the existence of tax loss carry forwards and of deductible temporary differences between the book value and the tax value of assets and liabilities. Recovery of these assets is assessed on the basis of forecast data con- tained in the strategic plans of each of the tax groups in question.

Risks and litigation The Group regularly identifies and reviews litigation in progress and recognizes, depending on the circumstances, accounting provisions that it considers to be reasonable. Any uncertainties concerning litigation in progress are described in note 22.

Purchase price allocation in respect of business combinations Business combinations are accounted for in accordance with the “purchase accounting” method: thus, on the date that control is obtained over a company, the acquiree’s identifiable assets, liabilities and contingent liabilities are measured at their fair value. These valuations are performed by independent experts who base their work on assumptions and estimate the effects of uncertain future events at the acquisition date. The fair values of the acquiree’s assets and liabilities can be adjusted during the twelve-month period that follows the acqui- sition date. Beyond this time limit, adjustments to fair values are recognised through profit and loss.

2. Changes in scope of consolidation

a. In 2007 The main changes in the scope of consolidation in 2007 were as follows: - at the beginning of October 2007, disposal of Thales’ shares in the Faceo group, a European specialist in facility manage- ment, to Apax Partners for an amount of €140 million (of which €7.5 million in the form of a loan). The Faceo group, which was previously jointly owned with Cegelec, was deconsolidated at the end of September 2007, - at the end of August 2007, disposal of Thales’ shares in the German company Bayern-Chemie / Protac to MBDA for €2.5 mil- lion. Bayern-Chemie, which was previously jointly owned with EADS, was deconsolidated at the end of the first half of 2007, -at the end of July 2007, Thales sold its British subsidiary Thales MESL Ltd. for GBP 6.8 million. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 42 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

- Transfer of Alcatel-Lucent’s transportation and security assets to Thales On 5 January 2007, an extraordinary general shareholders’ meeting approved the transfer of Alcatel-Lucent’s transportation and security assets. The related consideration consisted in the issuance of 25 million new Thales shares in favour of Alcatel- Lucent, which received in addition a cash payment of €40 million. Following this shareholders’ meeting, Alcatel-Lucent’s interest in Thales increased from 9.46% to 20.95%, whereas the French State’s stake decreased from 31.26% to 27.29%. Intangible assets were identified and recognised for €674.3 million and work-in-progress was revalued by an amount of €26.3 million. After deduction of deferred tax liabilities (€238.2 million), the residual goodwill resulting from the operation amounts to €857.2 million. It can be analysed as follows:

Cost of acquisition:

Number of ordinary shares issued by Thales on 5 January 2007 25 million Multiplied by the stock market price of Thales shares (in euros) at the date of issue €37.63 Total €940.7m Cash payment (a) €40.0m Transaction costs €10.9m Total cost of acquisition €991.6m

(a) Provisional amount, paid at the transaction date. This amount will be adjusted on the basis of the definitive balance sheet position of the businesses in question, on completion of an expert evaluation procedure.

Fair value of assets and liabilities acquired:

Customer relationships (amortised on a straight-line basis over 14 years) 289.0 Acquired technologies (amortised on a straight-line basis over 9 years) 208.0 Order backlog (amortised in accordance with the envisaged pattern of consumption) 177.3 674.3 Other non-current assets 56.6 Pension and other employee benefits (49.0) Deferred tax asset 17.9 Deferred tax liabilty / purchase accounting (238.2) Current operating assets (liabilities) (450.3) Financial assets (liabilities) (7.8) Cash at bank and equivalents 130.9 Fair value of net assets acquired €134.4m

Goodwill:

Cost of acquisition €991.6m Less, fair value of net assets acquired €(134.4)m Goodwill €857.2m WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 43 financial report

- Purchase of Alcatel-Lucent’s space businesses On 6 April 2007, after obtaining approval, Alcatel Participations sold to Thales, against a cash pay- ment of €671.7 million (1), its shares in two companies which operate in space activities, being 67% of Alcatel Alenia Space (a satellite constructor), and 33% of Telespazio Holding (a satellite operator), both companies being jointly owned with Finmeccanica. These two companies are consolidated under proportionate method since 1 April 2007. Intangible assets were identified and recognised for €172.5 million and work-in-progress was revalued by €6.7 million. After deduction of deferred tax liabilities (€60.9 million), the residual goodwill resulting from the operation amounts to €358.3 million. It can be analysed as follows:

Cost of acquisition:

Cash payment €671.7 m Transaction costs €7.1 m Total cost of acquisition €678.8 m

Group share in fair value of assets and liabilities acquired (provisional assessment (a)) :

Customer relationships (amortised on a straight-line basis over 22 years) 100.6 Acquired technologies (amortised on a straight-line basis over 7 years) 38.1 Order backlog (amortised in accordance with the envisaged pattern of consumption) 33.8 172.5 Non-current assets 157.7 Financial assets 52.0 Deferred tax asset 80.7 Deferred tax liabilty / purchase accounting (60.9) Pension and other employee benefits (81.4) Current operating assets (liabilities) (77.9) Cash at bank and equivalents 77.8 Fair value of net assets acquired €320.5 m

(a) These amounts can be adjusted within twelve months of the acquisition date, in accordance with IFRS 3.

Goodwill

Cost of acquisition €678.8 m Less, fair value of net assets acquired €(320.5) m Goodwill €358.3 m

- Impact on the consolidated profit and loss account of recognition at fair value of the assets and liabilities acquired from Alcatel-Lucent On the basis of the figures presented above, the allocation of the acquisition price to intangible assets amounts to a total of €846.8 million (€674.3 million relating to transportation and security assets and €172.5 million to Space businesses). In addition, work-in-progress was revalued by €33.0 million (€26.3 million relating to transportation and security assets and €6.7 million to Space businesses). Finally, the effect of PPA on hedge relationships (contracts recognised at the exchange rate of the date of acquisition) leads to a reduction in the gross margin of the 2007, 2008 and 2009 financial years of a total amount of €42.6 million.

(1) The acquisition price of the shares in Alcatel Alenia Space will be reappraised by an independent expert at the beginning of 2009, which could lead to an upward revision of the initially agreed amount. At this stage the Group does not have elements that would enable this adjustment to be measured. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 44 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

On the basis of the plan prepared to date, these assets will amortised as follows:

in € million 2007 2008 2009 2010 > 2010 Total Revaluation of work in progress (33.0) ------(33.0) Impact of PPA on hedge relationships (12.9) (14.9) (14.8) -- -- (42.6) Gross margin (45.9) (14.9) (14.8) -- -- (75.6) Amortisation of intangible assets acquired (127.9) (110.1) (81.1) (79.0) (448.7) (846.8) Income from operations (173.8) (125.0) (95.9) (79.0) (448.7) (922.4) Deferred tax 59.1 42.5 32.6 26.9 152.6 313.7 Net Income (loss) (114.7) (82.5) (63.3) (52.1) (296.1) (608.7)

- Combination of French naval activities of Thales and DCNS On 29 March 2007, Thales sold to DCNS, for an amount of €514 million, all its French surface naval activities (exclud- ing equipment to be used in naval programmes), DCNS becoming the sole shareholder of joint ventures between the two groups, being mainly Armaris and MOPA2. Simultaneously, Thales took a 25% stake in DCNS for an acquisition price of €569.1 million with the remaining 75% continuing to be held by the French State. In addition to the rights attached to its shareholding, the French State will benefit from a preferred dividend of a maximum amount of €376.0 million, which will be paid depending on future distributable results. In the consolidated accounts of the Group, this operation leads to recognition, on the one hand, of a gain on disposal of €316.0 million and. on the other hand, goodwill of €358.4 million, allocated to intangible assets for an amount of €142.5 million net of tax (note 11). The new entity is included in Thales’ consolidated financial statements under the equity method as of 31 March 2007. The agreement also contains contingent remuneration clauses related to certain contracts being obtained and to certain conditions of operational performance. In addition, at the end of a two-year period, Thales will have the option of increasing its interest to 35%. At this stage the Group does not have the elements to assess this option.

- Transactions in progress at year end In February 2008, Thales signed an agreement with Hypercom relating to the purchase by this American group of its elec- tronic payment solutions businesses. Under this agreement, which is expected to be finalised by the end of March 2008, Thales should receive $120 million in cash. Additional payments, up to a maximum of $30 million, may subsequently be received depending on the 2008 results of the businesses sold. b. In 2006 The main changes in the scope of consolidation in 2006 were as follows: - in October 2006, acquisition of the remaining 50% shares of ADI, the Australian subsidiary previously owned jointly with Transfield Holdings, following the exercise of existing options. As stipulated in the agreements the Group paid AUD 5.8 mil- lion. As the fair value of existing options had been recognised in the Group’s financial statements for 2005, no goodwill was booked in respect of this transaction in 2006, - at the end of August 2006, disposal of navigation systems activities to an investment fund for $170 million (including a $60 million loan repayable in 2011 and 2012), - in May 2006, acquisition from Diehl VA Systeme Siftung & Co. KG of a 49% stake in Diehl Luftfahrt Elektronik GmbH for €24.5 million. This company is consolidated under the proportionate method. c. In 2005 The main changes in the scope of consolidation in 2005 were as follows: - at the beginning of May 2005, Thales sold its 22% shareholding in Satellite Information Services Ltd. to an investment fund for £18 million Sterling. As from that date, this company is no longer accounted for under the equity method, - as from the last quarter of 2005, TDA Armements has been fully consolidated, following the acquisition for €51.5 million of shares previously owned by EADS (50%), - as from December 2005, Thales high tech optics activities were deconsolidated following their disposal for €205.8 million to an investment fund, - as from December 2005, Thales Broadcast & Multimedia activities were deconsolidated following their disposal for €133.6 million to Thomson. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 45 financial report

3. Information on the basis of comparable consolidation scope and foreign exchange rates

a. Effect of changes in both scope of consolidation and foreign exchange rates on consolidated income from operations

2007 Less PPA 2007 2006 Less Foreign 2006 published companies impact restated published companies currency restated acquired (note 1-b) sold adjust- (a) (b) ment (c) Revenues 12,295.6 (2,071.6) -- 10,224.0 10,264.3 (488.6) (113.8) 9,661.9 Cost of sales (9,560.9) 1,628.4 45.9 (7,886.6) (7,883.6) 412.7 85.8 (7,385.1) Research and development expenses (443.4) 83.5 -- (359.9) (360.8) 9.6 3.2 (348.0) Marketing and selling expenses (841.0) 90.6 -- (750.4) (805.7) 36.0 9.2 (760.5) General and administrative expenses (560.4) 96.7 -- (463.7) (459.6) 13.0 5.3 (441.3) Amortisation of intangible assets (127.9) -- 127.9 ------Income from operations 762.0 (172.4) 173.8 763.4 754.6 (17.3) (10.3) 727.0

(a) Companies acquired in 2007 are excluded from the restated 2007 profit and loss account and the accounts of companies acquired during 2006 have been restated in order to affect 2007 profit or loss over an identical period to that over which such companies were consolidated in 2006. (b) Companies sold in 2006 are excluded from 2006 restated results. The accounts of companies sold during 2007 have been restated in order to impact profit and loss for an identi- cal period in 2006 and in 2007. (c) 2006 results are translated at 2007 average exchange rates.

b. Effect of changes in both scope of consolidation and foreign exchange rates on the consolidated balance sheet The schedule below presents reconciliation between the balance sheet at 31 December 2005 and the balance sheet at 31 De- cember 2007, disclosing the effects of changes in scope of consolidation, changes in foreign exchange rates, reclassifications between balance sheet line items and the effect of cash flows.

Share- Pensions Current Non Non Net Net finan- Cash holders’ and other and current current current cial debt at banks equity employee deferred operating financial operating (excluding and benefits taxes assets assets liabilities / cash) equiva- assets lents At 31 Dec. 2005 2,102.8 1,064.0 (462.7) (3,235.2) (495.3) 762.4 1,583.9 1,319.9 Financial flows Cash flows from operating activities 385.0 (26.4) (20.7) 303.6 (3.3) 115.4 -- 753.6 Cash flows from investing activities 22.9 -- -- (378.9) 132.7 -- 154.9 (68.4) Cash flows from financing activities (135.2) ------470.1 334.9 Non-financial flows Changes in scope of consolidation (33.6) 0.7 36.9 17.8 (122.1) 81.3 19.0 -- Changes in foreign exchange rates (36.5) 4.5 5.1 18.4 16.8 (9.4) (5.8) (6.9) Financial instruments (9.9) -- 15.0 -- 34.8 (60.1) 20.2 -- Reclassifications and other (1.3) (12.6) -- 9.1 20.4 (15.6) -- -- At 31 Dec. 2006 2,294.2 1,030.2 (426.4) (3,265.2) (416.0) 874.0 2,242.3 2,333.1 Financial flows Cash flows from operating activities 478.8 (140.4) 26.0 520.4 (27.7) 127.8 -- 984.9 Cash flows from investing activities 432.1 (16.0) -- (502.6) (1,079.4) -- (36.5) (1,202.4) Cash flows from financing activities (125.7) ------(476.4) (602.1) Non-financial flows Changes in scope of consolidation 936.0 94.5 233.4 (2,156.4) 532.3 296.3 63.9 -- Changes in foreign exchange rates (159.2) (15.7) 13.8 52.0 19.7 88.5 (48.5) (49.4) Financial instruments 41.3 -- 5.3 -- (2.3) (44.3) -- -- Reclassifications and other (13.3) (7.5) 21.6 138.7 (95.3) (54.8) 10.6 -- At 31 Dec. 2007 3,884.2 945.1 (126.3) (5,213.1) (1,068.7) 1,287.5 1,755.4 1,464.1 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 46 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

4. INFORMATION BY SEGMENT a. Information by business segment After the disposal of non-strategic businesses over recent years, and following the completion of major operations with Alcatel-Lucent and DCNS in the first half of 2007, Thales’s portfolio of activities has been refocused on the company’s core competencies. Dedicated to critical information systems, Thales’s businesses are now organised in three main domains: Aerospace, Defence and Security: - the Aerospace domain includes the former Aerospace division and the new created Space division, - the Defence domain includes the Air Systems, Land & Joint Systems and Naval divisions, - the Security domain includes the former Security division and Services division, as well as the ex-Alcatel-Lucent Transport and Security businesses.

Aerospace / Defence Security Other Thales 2007 Space (a) and elim. (b) Consolidated order backlog at 31/12 7,228.0 10,333.0 5,097.8 16.6 22,675.4 Consolidated new orders 4,025.8 5,402.3 3,372.1 55.4 12,855.6 Consolidated revenues 3,597.3 5,221.9 3,415.2 61.2 12,295.6 Inter-segment revenues 67.9 134.0 391.9 (593.8) -- Total Revenues 3,665.2 5,355.9 3,807.1 (532.6) 12,295.6 Income from operations before PPA 255.3 458.4 237.4 (15.3) 935.8 PPA impact (30.3) -- (143.5) -- (173.8) Income from operations 225.0 458.4 93.9 (15.3) 762.0 Income of operating activities 149.8 424.3 48.8 396.8 1,019.7 Current operating assets 2,884.1 2,927.2 2,565.5 887.1 9,263.9 Current operating liabilities (2,803.7) (3,776.4) (2,689.9) (1,281.4) (10,551.4) Net 80.4 (849.2) (124.4) (394.3) (1,287.5) Non current operating assets 1,598.1 1,278.5 2,066.9 269.6 5,213.1 Capital expenditure 241.0 122.0 110.4 54.8 528.2 Depreciation and amortisation of tangible and intangible assets 130.5 75.5 183.8 34.1 423.9 Consolidated number of employees (end of period) (c) 17,916 21,685 19,323 2,271 61,195

(a) TheS pace business was created in April 2007 after the acquisition by Thales of Alcatel-Lucent’s space businesses. This segment includes the activity of the companies Thales Alenia Space, held at 67% by Thales, and Telespazio, held at 33% by Thales. These companies, jointly controlled with Finmeccanica, are consolidated under the proportionate method since the 1st April 2007. The Space business contributed as follows to the consolidated accounts 2007:

Consolidated order backlog at 31/12 2,094.6 Consolidated new orders 1,354.8 Consolidated revenues 1,065.8 Inter-segment revenues 19.2 Total Revenues 1,085.0 Income from operations before PPA 56.1 PPA impact (30.3) Income from operations 25.8 Income of operating activities 17.0 Consolidated number of employees (end of period) 5,258

(b) The “Other and eliminations” column corresponds to the elimination of transactions between the three business segments and includes figures relating to corporate activities: Group R&D centres, facilities management, holding companies and activities sold the previous year. Corporate income from operations has been allocated to the business segments, with the exceptions of: - facilities management income from operations corresponding to the cost of vacant premises (respectively -€15.3 million, -€19.8 million and -€36.7 million in 2007, 2006 and 2005), - income from operations relating to activities sold before: Navigation activities (-€17.5 million) and Telematics (-€3,5 million) in 2006; Navigation activities (-€1,2 million), Telemat- ics (-€7.8 million), Optics HTO (+€16.1 million) and Broadcast & Multimedia activities (-€2,6 million) in 2005. (c) The consolidated number of employees includes all employees of fully consolidated companies and the proportionate share of employees of companies consolidated under the proportionate method. It does not include the employees of companies accounted for under the equity method or of unconsolidated affiliates. Corresponding personnel expenses amount to €4,376.0 million, €3,717.7 million and €3,703.2 million respectively in 2007, 2006 and 2005. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 47 financial report

2006 Aerospace Defence Security Other and elim (a) Thales Consolidated order backlog at 31/12 5,064.0 12,512.0 3,078.4 21.9 20,676.3 Consolidated new orders 2,388.5 5,572.9 2,684.0 172.2 10,817.6 Consolidated revenues 2,492.3 5,320.1 2,278.3 173.6 10,264.3 Inter-segment revenues 62.4 120.3 423.2 (605.9) -- Total Revenues 2,554.7 5,440.4 2,701.5 (432.3) 10,264.3 Income from operations 203.1 424.4 167.9 (40.8) 754.6 Income of operating activities 160.9 370.2 120.2 (75.4) 575.9 Current operating assets 2,338.3 3,502.9 1,604.7 864.5 8,310.4 Current operating liabilities (2,089.6) (4,576.7) (1,392.6) (1,125.5) (9,184.4) Net 248.7 (1,073.8) 212.1 (261.0) (874.0) Non current operating assets 869.8 1,364.8 664.4 366.2 3,265.2 Capital expenditure 192.8 77.5 90.7 51.1 412.1 Depreciation and amortisation of tang. and intang. assets 79.3 77.6 73.2 65.0 295.1 Consolidated number of employees (end of period) (b) 12,783 21,947 15,273 2,157 52,160

2005 Aerospace Defence Security Other and elim (a) Thales Consolidated order backlog at 31/12 5,182.9 12,317.7 2,701.2 21.0 20,222.8 Consolidated new orders 3,174.0 6,803.5 2,282.8 521.1 12,781.4 Consolidated revenues 2,349.2 5,257.8 2,121.5 534.7 10,263.2 Inter-segment revenues 83.6 101.3 336.1 (521.0) -- Total Revenues 2,432.8 5,359.1 2,457.6 13.7 10,263.2 Income from operations 208.6 399.8 145.5 (32.1) 721.8 Income of operating activities 130.5 304.2 99.5 14.9 549.1 Current operating assets 2,147.0 3,531.5 1,466.3 780.9 7,925.7 Current operating liabilities (2,026.1) (4,436.9) (1,253.3) (1,003.6) (8,719.9) Net 120.9 (905.4) 213.0 (222.7) (794.2) Non current operating assets 735.7 1,399.5 712.0 388.0 3,235.2 Capital expenditure 150.6 82.9 85.4 71.9 390.8 Depreciation and amortisation of tang. and intang. assets 82.8 76.5 58.5 56.2 274.0 Consolidated number of employees (end of period) (b) 12,583 22,646 15,108 2,710 53,047

(a) The “Other and eliminations” column corresponds to the elimination of transactions between the three business segments and includes figures relating to corporate activities: Group R&D centres, facilities management, holding companies and activities sold the previous year. Corporate income from operations has been allocated to the business segments, with the exceptions of: - facilities management income from operations corresponding to the cost of vacant premises (respectively -€15.3 million, -€19.8 million and -€36.7 million in 2007, 2006 and 2005), - income from operations relating to activities sold before: Navigation activities (-€17.5 million) and Telematics (-€3,5 million) in 2006; Navigation activities (-€1,2 million), Telemat- ics (-€7.8 million), Optics HTO (+€16.1 million) and Broadcast & Multimedia activities (-€2,6 million) in 2005. (b) The consolidated number of employees includes all employees of fully consolidated companies and the proportionate share of employees of companies consolidated under the proportionate method. It does not include the employees of companies accounted for under the equity method or of unconsolidated affiliates. Corresponding personnel expenses amount to €4,376.0 million, €3,717.7 million and €3,703.2 million respectively in 2007, 2006 and 2005. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 48 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

b. Information by geographic area

By country / region of destination

Revenues (direct and indirect) 2007 2006 2005 France 3,108.5 3,064.1 2,994.9 United Kingdom 1,583.7 1,341.5 1,241.8 Rest of Europe 3,275.8 2,079.4 2,167.1 North America 1,225.6 1,192.4 1,067.5 Middle East 878.0 616.8 884.2 Asia and Pacific 1,678.7 1,576.8 1,537.2 Africa and Latin America 545.3 393.3 370.5 Total 12,295.6 10,264.3 10,263.2

By country / region of origin

Revenues 2007 2006 2005 France 5,798.5 5,365.0 5,540.9 United Kingdom 1,863.0 1,619.8 1,567.4 Other European countries 2,487.8 1,231.3 1,238.5 Rest of the world 2,146.3 2,048.2 1,916.5 Total 12,295.6 10,264.3 10,263.2

Operating assets (current and non current) 2007 2006 2005 France 7,848.3 7,458.1 7,214.0 United Kingdom 1,323.7 1,305.2 1,264.1 Other European countries 3,438.0 1,252.8 1,206.6 Rest of the world 1,867.0 1,559.5 1,476.2 Total 14,477.0 11,575.6 11,160.9

Capital expenditure 2007 2006 2005 France 300.7 210.9 219.7 United Kingdom 70.9 64.9 54.2 Other European countries 66.1 36.8 38.1 Rest of the world 90.5 99.5 78.8 Total 528.2 412.1 390.8 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 49 financial report

c. Information by type of contracts

Revenues 2007 2006 2005 Construction contracts 6,249.8 4,569.6 4,995.1 Sales of good 3,324.7 3,389.6 3,269.3 Services 2,684.5 2,286.8 1,981.0 Other 36.6 18.3 17.8 Total 12,295.6 10,264.3 10,263.2

5. GAIN (LOSS) ON DISPOSAL OF ASSETS

2007 2006 2005 Disposal of investments: 435.0 16.7 152.0 Thales Naval France / Armaris 316.0 -- -- Faceo 119.3 -- -- Thales MESL Ltd. 14.1 -- -- Bayern-Chemie / Protac (4.2) -- -- Embraer -- 41.1 -- Thales Navigation (1.2) (24.7) -- Thales Broadcast & Multimedia -- -- 94.3 High Tech Optics activities (HTO) (7.6) (4.7) 27.9 Satellite Information Services -- -- 8.3 Thales Nice Systems -- -- 25.5 Other (1.4) 5.0 (4.0) Disposal of other assets: (2.9) 6.2 6.3 Real estate assets (0.6) 12.2 7.1 Equipment (2.3) (6.0) (0.8) Total 432.1 22.9 158.3

6. Financial income (expense)

a. Cost of net financial debt

2007 2006 2005 Interest expense: - on gross debt (106.1) (89.6) (120.5) - on interest rate swaps 5.8 5.7 4.3 (100.3) (83.9) (116.2) Interest income / cash and equivalents 55.2 42.1 33.4 Total (45.1) (41.8) (82.8) WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 50 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

b. Other financial income (expense)

2007 2006 2005 Foreign exchange gains (losses) (3.8) (8.8) (1.6) Change in fair value of derivative exchange instruments (18.8) (14.8) (6.9) Cash flow hedge inefficiency / foreign exchange instruments 0.8 5.5 (2.7) Net foreign exchange gain (loss) (21.8) (18.1) (11.2) Net interest income (expense) on non-financial receivables and payables 1.0 3.5 3.5 Dividends received 2.3 2.6 1.0 Impairment of investments in shares (Available-for-sale) (9.1) (4.2) (5.6) Depreciation of loans and other financial debtors (0.4) (3.6) (3.7) Change in fair value of put and call options between Thales and Transfield -- (2.1) 8.9 Other (6.0) (9.6) (3.1) Total (34.0) (31.5) (10.2)

7. INCOME TAX

Determination of the income tax expense takes into account the specific local rules applied by Thales, including the tax consolidation system in France, Group Relief in the United Kingdom, tax consolidation in the USA, and the “Organschaft” rules in Germany. a. Analysis of tax charge

2007 2006 2005 Current tax (154.9) (101.8) (55.0) Deferred tax (2.8) 1.4 (32.3) Total (157.7) (100.4) (87.3) b. Effective tax rate

2007 2006 2005 Net income (loss) 888.7 391.1 343.1 Less: income tax 157.7 100.4 87.3 Less: share in net income (loss) of equity affiliates (40.6) (7.9) (7.9) Profit before tax 1,005.8 483.6 422.5 Average tax rate 31.6% 31.1% 31.3% Theoretical tax profit (expense) (318.2) (150.6) (132.6) Reconciliation: - non taxable gains and losses on disposals 144.1 14.8 50.9 - other non taxable items (3.7) 30.1 (9.5) - creation of tax loss carry-forwards not recorded in assets 10.4 (2.7) (18.7) - recognition in assets of tax losses not recognised in previous periods 6.3 27.5 17.3 - adjustments on prior years 8.0 (7.0) 7.4 - effect of enacted future tax rate changes (a) (12.4) (2.5) (1.0) - other (b) 7.8 (10.0) (1.1) Actual net tax charge (157.7) (100.4) (87.3) Effective tax rate 15.7% 20.8% 20.7%

(a) The effect of enacted future tax rate changes in the consolidated accounts is relative to the United Kingdom and Germany in 2007, to the Netherlands in 2006 and to France and the Netherlands in 2005. (b) Primarily specific foreign taxation. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 51 financial report

c. Deferred tax assets and liabilities

31 Dec. 07 31 Dec. 06 31 Dec. 05 - Deferred tax assets 461.0 440.8 454.1 - Deferred tax liabilities (325.1) (39.1) (30.1) Deferred tax assets, net 135.9 401.7 424.0

d. Changes in net deferred tax assets

01 Jan. 07 (Expense) Recognised Exch. rate 31 Dec. 07 income through share- var. changes in in period holders’ equity scope and other Temporary differences: 327.9 6.7 (33.0) (242.1) 59.5 - pensions and other employee benefits 251.6 (48.5) -- 7.4 210.5 - intangible assets (8.7) 49.7 -- (291.6) (250.6) - other 85.0 5.5 (33.0) 42.1 99.6 Tax loss carry-forwards 320.8 (48.4) -- 114.0 386.4 Total 648.7 (41.7) (33.0) (128.1) 445.9 Of which non recognised in the balance sheet: (247.0) 38.9 6.1 (108.0) (310.0) Total net deferred tax assets 401.7 (2.8) (26.9) (236.1) 135.9

01 Jan. 06 (Expense) Recognised Exch. rate 31 Dec. 06 income through share- var. changes in in period holders’ equity scope and other Temporary differences: 348.3 (3.9) (14.0) (2.5) 327.9 - pensions and other employee benefits 267.2 (16.8) -- 1.2 251.6 - other 81.1 12.9 (14.0) (3.7) 76.3 Tax loss carry-forwards 373.4 (40.6) -- (12.0) 320.8 Total 721.7 (44.5) (14.0) (14.5) 648.7 Of which non recognised in the balance sheet: (297.7) 45.9 (1.0) 5.8 (247.0) Total net deferred tax assets 424.0 1.4 (15.0) (8.7) 401.7

01 Jan. 05 (Expense) Recognised Exch. rate 31 Dec. 05 income through share- var. changes in in period holders’ equity scope and other Temporary differences: 325.8 (16.6) 38.9 0.2 348.3 - pensions and other employee benefits 281.6 (14.7) -- 0.3 267.2 - other 44.2 (1.9) 38.9 (0.1) 81.1 Tax loss carry-forwards 398.3 (1.0) -- (23.9) 373.4 Total 724.1 (17.6) 38.9 (23.7) 721.7 Of which non recognised in the balance sheet: (317.0) (14.7) (5.3) 39.3 (297.7) Total net deferred tax assets 407.1 (32.3) 33.6 15.6 424.0 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 52 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

e. Tax loss carry-forwards

Total tax loss carry-forwards represent a potential tax saving of €386.4 million at 31 December 2007. Corresponding expiry dates are:

31 Dec. 07 2008 -- 2009-2012 40.8 > 2012 (a) 345.6 Total 386.4

(a) Of which €316.4 million without any time limit.

8. Earnings per share

2007 2006 2005 Numerator (in millions of euros): Income (loss), Group share 887.4 388.0 333.9 Less interest expense, net of tax, on OCEANE bonds -- 18.6 17.9 Diluted income (loss), Group share 887.4 406.6 351.8 Denominator (in thousands): Average number of shares outstanding 194,537 168,772 167,246 OCEANE bonds (note 18-b) -- 10,261 10,261 Share options 1,911 1,065 991 Diluted average number of shares outstanding 196,448 180,098 178,498 Earnings per share (in euros) 4.56 2.30 2.00 Diluted earnings per share (in euros) 4.52 2.26 1.97

9. GOODWILL a. Goodwill by division

31 Dec. 07 31 Dec. 06 31 Dec. 05

Gross Impairment Net Net Net Aerospace 385.5 (9.2) 376.3 387.2 365.6 Space 358.3 -- 358.3 -- -- Aerospace business 743.8 (9.2) 734.6 387.2 365.6 Land and Joint systems 497.8 (7.4) 490.4 510.2 514.6 Naval 346.1 -- 346.1 441.5 443.6 Airsystems 123.8 -- 123.8 125.8 126.5 Defence business 967.7 (7.4) 960.3 1,077.5 1,084.7 Security business 1,226.1 (53.4) 1,172.7 358.3 406.4 Other 2.4 -- 2.4 2.4 2.4 Total 2,940.0 (70.0) 2,870.0 1,825.4 1,859.1 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 53 financial report

b. Changes in net goodwill

2007 2006 2005 Net book value at 1 January 1,825.4 1,859.1 1,925.6 Acquisitions: 1,215.5 29.4 28.3 - acquisition of Alcatel-Lucent’s space businesses 358.3 -- -- - acquisition of Alcatel-Lucent’s transportation and security businesses 857.2 -- -- - acquisition of Diehl Luftfart Elektronik GmbH -- 23.7 -- - additional acquisition (60%) of Wynid Technologies -- 5.7 -- - additional acquisition (50%) of TDA Armements -- -- 28.3 Disposals: (103.9) (44.8) (92.8) - french surface naval activities (93.7) -- -- - Faceo (10.2) -- -- - Thales Navigation -- (41.0) -- - High Tech Optics activities (HTO) -- -- (92.8) - other -- (3.8) -- Impairment (a) (40.7) (8.5) (26.1) Exchange rate variations and other (26.3) (9.8) 24.1 Net book value at 31 December 2,870.0 1,825.4 1,859.1

(a) Includes: - in 2007, -€31.5 million in the Security business and -€9.2 million in the Aerospace business, - in 2006, -€8.5 million in the Security business, - in 2005, -€18.7 million in the Security business and -€7.4 million in the Land and Joint systems.

10. TANGIBLE AND INTANGIBLE ASSETS

a. Details of balance sheet items

31 Dec. 07 31 Dec. 06 31 Dec. 05

Gross Depreciation Impairment Net Net Net Customer relationships: long term 389.7 (25.3) -- 364.4 -- -- Customer relationships: backlog 211.1 (74.1) -- 137.0 -- -- Acquired technologies 246.1 (28.5) -- 217.6 -- -- Intangible assets acquired in the context of business combination (note 2) 846.9 (127.9) -- 719.0 -- -- Development costs 651.2 (214.1) (51.0) 386.1 338.1 253.3 Other 441.0 (340.1) (4.6) 96.3 94.3 94.9 Intangible assets (without goodwill) 1,939.1 (682.1) (55.6) 1,201.4 432.4 348.2 Lands 52.0 -- -- 52.0 41.5 44.4 Buildings 781.8 (418.6) (6.9) 356.3 284.9 303.1 Plant and equipment 1,881.0 (1,438.6) -- 442.4 482.5 477.7 Other 690.4 (399.4) -- 291.0 198.5 202.7 Tangible assets 3,405.2 (2,256.6) (6.9) 1,141.7 1,007.4 1,027.9 Total 5,344.3 (2,938.7) (62.5) 2,343.1 1,439.8 1,376.1 Of which: Fixed assets held under lease agreements 75.5 (31.4) -- 44.1 40.9 46.6 Fixed assets under construction 82.8 -- -- 82.8 28.1 31.3 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 54 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

b. Changes in net tangible and intangible assets

Intangible assets Development Other Tangible assets Total acquired costs intangible in business assets combination Net value at 1 January 2005 -- 152.4 84.4 1,077.9 1,314.7 Acquisitions / capitalisations 137.6 26.4 226.8 390.8 Disposals ------(38.5) (38.5) Depreciation and amortisation -- (37.9) (30.2) (205.9) (274.0) Impairment -- (1.5) (4.6) (2.0) (8.1) Scope, foreign exchange rates and other -- 2.7 18.9 (30.4) (8.8) Net value at 31 December 2005 -- 253.3 94.9 1,027.9 1,376.1 Acquisitions / capitalisations 156.2 28.4 227.5 412.1 Disposals ------(39.3) (39.3) Depreciation and amortisation -- (49.3) (37.6) (208.2) (295.1) Impairment ------Scope, foreign exchange rates and other -- (22.1) 8.6 (0.5) (14.0) Net value at 31 December 2006 -- 338.1 94.3 1,007.4 1,439.8 Acquisitions / capitalisations 140.6 42.6 345.0 528.2 Disposals ------(22.7) (22.7) Depreciation and amortisation (127.9) (45.9) (32.1) (218.0) (423.9) Impairment (a) (50.9) -- (4.9) (55.8) Scope, foreign exchange rates and other 846.9 4.2 (8.5) 34.9 877.5 Net value at 31 December 2007 719.0 386.1 96.3 1,141.7 2,343.1

(a) Impairment of development costs concerns Aerospace business and is mainly related to the evolution of US dollar / Euro parity.

11. equity affiliates a. Group share in the net assets and net income of equity affiliates

Ownership % Share in net assets Share in income (loss)

31 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 2007 2006 2005 2007 2006 2005 2007 2006 2005 Aviation Communications & Surveillance Systems 30 30 30 54.2 60.6 64.8 5.1 2.8 1.4 Camelot Plc 20 20 20 55.0 49.8 58.2 4.1 -- -- DCNS (b) 25 -- -- 484.0 -- -- 22.7 -- -- DpiX 20 20 -- 12.8 7.2 -- (0.4) (0.3) -- Elettronica 33 33 33 25.8 22.4 21.7 5.9 2.0 2.2 Indra Espacio (a) 33 -- -- 15.1 -- -- 1.6 -- -- Other ------17.8 17.9 17.1 1.6 3.4 4.3 Total 664.7 157.9 161.8 40.6 7.9 7.9

(a) Indra Espacio investment, 49%-owned subsidiary of Thales Alenia Space, is consolidated under the equity method since 1st April 2007. (b) DCNS is consolidated under the equity method since 31 March 2007. A goodwill of €358.4 million is included in the value of the related investment. This difference has been allocated to assets and liabilities of DCNS as follows (provisional assessment):

Residual goodwill 215.9 Customer relationships: long term (amortised over 21 years) 110.2 Acquired technologies (amortised over 27 years) 70.5 Customer relationships: backlog and other (amortised over 8 years) 36.7 Deferred tax liabilities (74.9) Total allocation 142.5 Goodwill before PPA 358.4 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 55 financial report

b. Changes in “Net assets of equity affiliates” Goodwill in respect of entities accounted for under the equity method is included in the value of the related investments. Impairment of goodwill in respect of those entities is accounted for in “share in net income (loss) of equity affiliates”.

2007 2006 2005 Share in net assets of equity affiliates at 1 January 157.9 161.8 176.5 Share in income (loss) of equity affiliates 40.6 7.9 7.9 Dividends paid (24.4) (12.0) (14.6) Effect of changes in scope of consolidation (Satellite Information Services Ltd. in 2005, DpiX in 2006, DCNS and Indra Espacio in 2007) 480.6 1.1 (17.7) Capital increase 21.8 6.7 -- Effect of changes in exchange rates and other (11.8) (7.6) 9.7 Share in net assets of equity affiliates at 31 December 664.7 157.9 161.8

c. Summary of DCNS’s financial statements

Balance sheet at 31/12/07 French IFRS Total Total Thales PPA Held by accounting restate- restated restated restate- Thales Thales standards ments at 100% at 25% ments (a) at 25%

Assets 11,624.8 (4,771.8) 6,853.0 Liabilities (10,867.4) 4,823.9 (6,043.5) Shareholders’ equity 757.4 52.1 809.5 202.4 (70.7) 352.3 484.0

(a) To take account, for the Group’s share, of the existence of the preferred dividend reserved for the French State (note 2).

Statement of income 2007 French IFRS Total Total Thales PPA Held by accounting restate- restated restated restate- Thales Thales standards ments at 100% at 25% ments (a) at 25%

Revenues 2007 2,820.8 (1.2) 2,819.6 Net income 2007 146.1 (5.0) 141.1 Net Income April to December 2007 102.2 0.5 102.7 25.6 3.2 (6.1) 22.7

(a) To take account, for the Group’s share, of the existence of the preferred dividend reserved for the French State (note 2).

12. Other non-current financial assets

a. Other investments Investments in shares termed as “available-for-sale” are measured at fair value. Changes in fair value are directly recognised through shareholders’ equity. If an impairment indicator of long-term loss of value is identified, a provision of impairment is recognised in “Other financial assets”. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 56 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

Fair value of investment in shares at 31 December

31 Dec. 07 31 Dec. 06 31 Dec. 05 Embraer (a) -- -- 106.6 Investments held by Thales Corporate Ventures (b) 19.2 25.4 24.3 Investments held by Thales International Offsets (c) 27.0 20.9 2.8 Other 52.9 52.5 62.3 Total 99.1 98.8 196.0

(a) Sold on the stock market in 2006. (b) The Group’s venture capital vehicle. (c) The Group’s offset vehicle.

Changes in the period

2007 2006 2005 Investments in shares at 1st January 98.8 196.0 163.7 Embraer disposal -- (106.6) -- Other acquisitions / disposals 8.4 13.7 (2.1) Gains or losses booked through the statement of income (note 6-b) (9.1) (4.2) (5.6) Changes in fair value booked through shareholders’ equity (note 18-d) 1.3 (0.1) 39.7 Exchange rate variations and other -- 0.3 Investments in shares at 31 December 99.1 98.8 196.0 b. Other financial assets

31 Dec. 07 31 Dec. 06 31 Dec. 05 Loans to partners 46.0 52.6 48.7 Finance-lease 95.4 -- -- Receivables relating to disposals (a) 52.9 56.0 30.3 Other 126.8 63.5 82.5 Other financial assets, gross 321.1 172.1 161.5 Provisions for impairment (16.2) (12.8) (24.0) Other financial assets, net 304.9 159.3 137.5

(a) Among of which €44.2 million at 31 December 2007 relating to disposal of Thales Navigation.

13. INVENTORIES AND WORK-IN-PROGRESS

31 Dec. 07 31 Dec. 06 31 Dec. 05 Raw materials 483.8 387.5 432.9 Work-in-progress (excluding construction contracts – note 14) 1,192.0 978.5 878.5 Semi-finished and finished products 826.8 675.5 622.9 Finished goods for resale 119.8 127.5 131.0 Total, gross 2,622.4 2,169.0 2,065.3 Provisions (479.8) (431.7) (445.8) Total, net 2,142.6 1,737.3 1,619.5 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 57 financial report

14. Construction contracts

The amounts shown in the balance sheet correspond, for each construction contract, to the aggregate amount of costs incurred plus recognised profits (less recognised losses), less progress billings.

31 Dec. 07 31 Dec. 06 31 Dec. 05 Construction contracts: assets (a) 2,422.1 2,096.7 2,042.8 Construction contracts: liabilities 523.9 359.4 341.5 Construction contracts, net assets 1,898.2 1,737.3 1,701.3

This amount corresponds to:

Aggregate amount of costs incurred plus recognised profits (less recognised losses) 28,667.2 26,969.5 29,868.0 Less, progress billings (26,769.0) (25,232.2) (28,166.7)

(a) Includes work-in-progress for an amount of €1,029.2 million at 31 December 2007, €873.2 million at 31 December 2006 and €1,067.1 million at 31 December 2005.

Advances received from customers on construction contracts related to work not yet performed amount to €2,392.1 million at 31 December 2007 (€2,050.5 million at 31 December 2006 and €2,255.4 million at 31 December 2005). They partly cover work-in-progress relating to certain contracts. Retentions on construction contracts amount to €25.3 million at 31 December 2007 (€21.9 million at 31 December 2006 and €18.2 million at 31 December 2005).

15. Current receivables and payables

a. Current receivables

31 Dec. 07 31 Dec. 06 31 Dec. 05

Total < 1 year > 1 year Accounts and notes receivable, gross 3,224.8 2,991.1 233.7 2,512.9 2,615.8 Provisions on accounts & notes receivable (a) (112.3) (66.0) (46.3) (109.2) (127.9) Accounts and notes receivable, net 3,112.5 2,925.1 187.4 2,403.7 2,487.9 Other tax receivables (excluding income tax) 492.1 473.2 18.9 532.6 466.9 Other debtors and prepaid expenses, gross 369.4 347.7 21.7 321.2 287.8 Related provisions (a) (37.0) (37.0) -- (43.1) (42.8) Net 824.5 783.9 40.6 810.7 711.9 Accounts, notes and other current receivables 3,937.0 3,709.0 228.0 3,214.4 3,199.8

(a) Changes in provisions for depreciation can be analysed as follow:

Opening Net depreciation (reversal) Scope, exch. rates and other Closing 31 Dec. 07 Depreciation on accounts & 109.2 (2.2) 5.3 112.3 notes receivable Depreciation on other related provisions 43.1 (6.4) 0.3 37.0 31 Dec. 06 Depreciation on accounts & 127.9 (6.2) (12.5) 109.2 notes receivable Depreciation on other related provisions 42.8 0.3 -- 43.1 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 58 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

b. Current payables

31 Dec. 07 31 Dec. 06 31 Dec. 05

Total < 1 year > 1 year Accounts and notes payable 2,607.4 2,535.7 71.7 2,591.8 2,179.1 Accrued holiday pay and social contribu- tionssecuricontributions 1,057.0 1,050.9 6.1 860.6 840.0 Other tax payables (excluding income tax) 583.7 572.8 10.9 651.3 575.3 Other creditors and accrued liabilities 915.6 853.4 62.2 762.3 1,007.0 Accounts, notes and other current payables 5,163.7 5,012.8 150.9 4,866.0 4,601.4

16. COMPANIES UNDER JOINT CONTROL

The contribution to Thales consolidated financial statements of companies accounted under the proportionate method is presented below:

Profit and loss account: 2007 2006 2005 Revenues 2,108.0 1,293.0 1,145.1 Income of operating activities 145.7 96.9 81.7 Net income 112.8 65.8 52.7

Balance sheet: 31 Dec. 07 31 Dec. 06 31 Dec. 05 Current assets 2,007.9 2,350.2 2,178.9 Non current assets 979.4 210.4 210.8 Total assets 2,987.3 2,560.6 2,389.7 Shareholders’ equity 880.6 66.4 143.2 Non current liabilities 387.2 309.0 318.6 Current liabilities 1,719.5 2,185.2 1,927.9 Total liabilities and shareholders’ equity 2,987.3 2,560.6 2,389.7

Cash flow statement: 2007 2006 2005 Cash-flow from operating activities 198.5 44.0 125.7 Cash-flow from investing activities (160.8) (11.4) (51.2) Cash-flow from financing activities (14.8) (22.3) (24.5) Exchange rate var. and changes in perimeter (74.1) 0.1 0.7 Increase in cash at banks and equivalents (51.2) 10.4 50.7 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 59 financial report

17. Related party transactions

In accordance with IAS 24, the Group has identified the following related parties: shareholders of Thales Parent Company (including the French state), companies controlled by these same shareholders, share of transactions of joint-ventures at- tributable to ventures, companies under significant influence, directors and senior corporate officers.

a. Revenues and purchases from and to related parties

2007 2006 2005 Revenues: Non controlled share of joint-ventures 143.1 138.5 125.2 Shareholders and companies controlled by shareholders (a) 3,214.1 3,376.9 3,013.1 Other 47.4 42.4 50.7 Purchases: Non controlled share of joint-ventures 337.5 265.9 210.1 Shareholders and companies controlled by shareholders 161.8 262.7 334.7 Other 11.6 2.9 146.7

(a) Including sales to the French ministry of Defence.

b. Receivables and payables with related parties

31 Dec. 07 31 Dec. 06 31 Dec. 05 Current operating assets: Non controlled share of joint-ventures 145.5 99.2 100.2 Shareholders and companies controlled by shareholders 908.8 1,330.8 1,275.8 Other 46.3 105.3 206.0 Financial current accounts receivable: Joint-ventures 53.8 113.7 146.1 Other 4.1 8.9 11.4 Current operating liabilities: Non controlled share of joint-ventures 93.9 127.2 84.4 Shareholders and companies controlled by shareholders 935.0 1,154.4 1,137.3 Other 15.6 8.7 94.0 Financial current accounts payable: Joint-ventures 87.8 118.6 134.8 Other 19.9 22.2 21.4

c. Agreements signed at the end of 2006 with Thales’ shareholders On 1 December 2006, Alcatel-Lucent, Alcatel Participations and Thales signed a Master Agreement. This agreement defines the conditions and the manner of completion of the contribution and disposal transactions described in note 2. It organizes the transition period for the subsidiaries acquired, as they will continue to benefit from services provided by Alcatel-Lucent ( services, property leases) in 2007. In addition to this Master Agreement, a certain number of contracts were signed to: - create a new “Space Alliance” between Finmeccanica and Thales (Agreement with Finmeccanica), - strengthen cooperation between Alcatel-Lucent and Thales. This latter agreement, replacing the former cooperation agreement signed on 18 November 1999 between Alcatel, Thales, TSA and GIMD, aims at strengthening cooperation between Alcatel-Lucent and Thales by using the synergies that result WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 60 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

from the complementary nature of their respective areas of expertise in technologies and systems, as well as of their indus- trial and commercial locations worldwide, - govern the rights of the French State and/or Alcatel-Lucent within Thales (Shareholders Agreement and Specific Agreement). d. Agreements signed at the end of January 2007 with DCNS At the end of January 2007, within the framework of the combination of French naval activities of Thales and DCNS, the shareholders’ agreement between the French State and Thales changed: Thales became “the industrial partner shareholder” of DCNS, the terms of governance gave to Thales the rights to play an active role in the Board of Directors of DCNS. Thales will also have the opportunity, after two years, to increase its stake in DCNS from 25% to 35%. Thales and DCNS also signed an industrial and trade cooperation agreement, whose objective is to optimise the organisa- tion of the activity of both groups in naval operations (market access, research and development, purchasing). e. Commitments received In January 1999, Thales acquired Sogelerg Ingenierie, a subsidiary of Alcatel, and obtained a maximum liability warranty of €19 million, it being understood that if the actual loss incurred by Thales exceeded this amount the companies would negotiate additional compensation in good faith. f. Compensation of directors and senior corporate officers Expenses recognised in respect of compensation, benefits and social security contributions attributable to Directors and members of the Executive Committee are as follows:

Expenses 2007 2006 2005 Short-term benefits: - fixed compensation 5.6 5.0 5.5 - variable compensation 4.0 3.3 3.3 - employer’s social security contribution 2.8 2.4 2.5 - unusual compensation (a) 0.4 -- 0.9 - compensation for attendance at Board meetings 0.4 0.4 0.4 Other benefits: - post employment benefits 0.6 0.7 0.7 - share-based payments (IFRS 2) 3.5 2.5 2.6

(a) Can be termination benefits, retirement indemnities… The Group measures the amount of the benefit granted to employees receiving options. The fair value of such options is deter- mined at the grant date. The amounts thus obtained are recognised to profit and loss over the vesting period of the rights.

18. Shareholders’ equity a. Share capital The share capital of Thales amounts to €595,000,998 and is comprised of 198,333,666 shares with a par value of €3.0 (compared to 172,006,808 shares with a par value of €3.0 at 31 December 2006 and 171,909,863 shares with a par value of €3.0 at 31 December 2005). On 5 January 2007, a capital increase of 25 millions shares was made in remuneration of transportation and security assets contributed by Alcatel-Lucent to Thales. b. Debt securities entitling holders to equity in the parent company at a future date In December 2001, the parent company issued 9,809,691 notes redeemable into new or existing Thales shares (OCEANE – see note 23). These notes matured on 1 January 2007. Except for 16 of them, all notes were redeemed at par value at this date. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 61 financial report

c. Share-based payments

1. Description of the different plans granted by the Group Thales regularly grants its employees and members of Comex purchase and subscription options, within the framework of its usual policy of management performance of the Group’s employees. In July 2007, the Group also set a plan of free options to its employees. These different plans are described below:

Purchase options

Date of Board decision 04 July 07 13 Nov. 01 02 April 01 10 May 00 14 Sept 99

Discount none none none none none Exercise period (a) from 4 July from 13 Nov. From 2 April from 10 May from 14 Sept 2011 2005 2005 2004 2004 to 3 July to 12 Nov. to 1 April to 9 May to 13 Sept. 2017 2011 2011 (b) 2010 (b) 2009 Exercise price €44.77 €42.18 (c) €42.37 (c) €37.72 (c) €32.59 (c) Number of options exercised since grant date none 8,183 none 94,144 878,756 Number of options outstanding at 31 Dec. 2005 -- 217,915 79,544 239,268 947,234 Options exercised in 2006 ------2,123 95,789 Options cancelled in 2006 -- 65,079 21,212 5,306 2,035 Number of options outstanding at 31 Dec. 2006 -- 152,836 58,332 231,839 849,410 Options granted 80,000 ------Options exercised in 2007 -- 8,183 -- 87,778 486,850 Options cancelled in 2007 -- 21,215 -- 3,091 11,457 Number of options outstanding at 31 Dec. 2007, net of options cancelled (d) and exercised 80,000 123,438 58,332 140,970 351,103 of which exercisable options at 31 Dec. 2007 -- 123,438 58,332 140,970 351,103 of which outstanding options at 31 Dec. 2007 held by: - Chairman 80,000 ------the other members of Comex (Executive Committee) none none none -- 121,962 Number of grantees of outstanding options 1 334 5 49 52 Including Comex members (except the Chairman) at 31 Dec. 2007 none none none none 6 Total top ten grantees (at plan date) 80,000 20,000 70,000 101,500 290,000

(a) In France. Details in “Conditions of exercise” below. (b) At the Board Meeting of 12 July 2001, the starting date of the exercise period was brought forward from the fifth to the fourth anniversary of the grant date. (c) Exercise price and numbers have been adjusted according to the conditions provided for in the applicable regulations (Articles D. 174-12 and 174-13), as a result of the distribution of dividends by charging reserves after the option grant date. (d) Notably due to termination of the contract between the grantee and the Group since the grant date. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 62 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

Subscription options

Date of Board decision 04 July 07 09 Nov. 06 30 June 05 01 July 04 01 July 03 02 July 02 12 July 01

Discount none none none none none none none Exercise period (a) from 4 July from 9 Nov. from 30 June from 1 July from 1 July from 2 July from 12 July 2011 2010 2009 2008 2007 2006 2005 to 3 July to 8 Nov. to 29 June to 30 June to 30 June to 1 July to 11 July 2017 2016 2015 2014 2013 2012 2011 Exercise price €44.77 €36.47 €34.01 €29.50 €25.70 €40.97 (b) €42.18 (b) Number of options exercised since grant date none none 45,945 110,545 853,691 221,039 182,240 Number of options outstanding at 31 Dec. 2005 -- -- 2,190,800 2,536,350 2,829,847 3,264,462 3,490,554 Options granted -- 2,223,950 ------Options exercised in 2006 -- -- 1,500 24,780 70,648 -- -- Options cancelled in 2006 -- -- 43,900 47,816 40,566 252,105 277,365 Number of options outstanding at 31 Dec. 2006 -- 2,223,950 2,145,400 2,463,754 2,718,633 3,012,357 3,213,189 Options granted 1,574,530 ------Options exercised in 2007 -- -- 44,445 85,765 738,020 221,039 182,240 Options cancelled in 2007 -- 28,950 49,139 31,600 95,167 85,821 104,929 Number of options outstanding at 31 Dec. 2007, net of options 1,574,530 2,195,000 2,051,816 2,346,389 1,885,446 2,705,497 2,926,020 cancelled (c) and exercised of which exercisable options at 31 Dec. 2007 -- 2,850 263,868 420,400 1,885,446 2,705,497 2,926,020 of which outstanding options at 31 Dec. 2007 held by: - Chairman -- 80,000 80,000 100,000 100,000 102,954 83,718 - the other members of Comex (Executive Committee) 305,000 265,000 220,000 224,500 185,000 213,119 226,044 Number of grantees of outstanding options 1,293 1,962 1,919 3,153 2,743 4,619 4,579 Including Comex members (except the Chairman) 14 12 12 11 8 10 11 at 31 Dec. 2007 Total top ten grantees (at plan date) 240,000 235,000 275,000 285,000 280,000 263,000 329,500

(a) In France. Details in “Conditions of exercise” below. (b) Exercise price and numbers have been adjusted according to the conditions provided for in the applicable regulations (Articles D. 174-12 and 174-13), as a result of the distribution of dividends by charging reserves after the option grant date. (c) Notably due to termination of the contract between the grantee and the Group since the grant date. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 63 financial report

Conditions of exercise All options are granted for a ten-year period, at no discount to the market price. Stock purchase and subscription stock options granted on 14 September 1999, 10 May 2000, 2 April 2001, 13 November 2001, 12 July 2001, 2 July 2002 and 1st July 2003 can be exercised. Options are progressively vested over four years and may be exercised as follows: - Subscription options granted on 1 July 2004 In all countries except the Netherlands and France, up to 37.5% of the number granted eighteen months after the grant date, then up to 6.25% of the number granted at the end of each subsequent quarter, reaching a total of 100% four years after the grant date. In the Netherlands, up to 75% of the number granted three years after the grant date, reaching a total of 100% after four years. - Subscription options granted on 30 June 2005, 9 November 2006 and 4 July 2007 In all countries except France, up to 37.5% of the number granted eighteen months after the grant date, then up to 6.25% of the number granted at the end of each subsequent quarter, reaching a total of 100% four years after the grant date. In France, in application of specific legislative requirements, employees benefiting from stock options who are French tax residents and/or subject to French social security cannot exercise any option before the 4th anniversary of the date of grant.

Options granted and exercised in 2007

Number of op- Exercise price Maturity date Grant date tions granted / of shares subscribed or purchased

1 – Directors Options granted in 2007 - Denis Ranque 80,000 €44.77 03/07/2017 04/07/2007 Options exercised in 2007 63,629 2 – Ten (a) largest grants to employees (b) Options granted in 2007 240,000 €44.77 03/07/2017 04/07/2007 3 – Ten largest exercises by employees (b) Options exercised in 2007 32,200 €32.59 14/09/1999 31,429 €32.59 14/09/1999 26,513 €32.59 14/09/1999 26,513 €32.59 14/09/1999 25,000 €25.70 01/07/2003 21,210 €37.72 10/05/2000 20,000 €42.18 12/07/2001 20,000 €25.70 01/07/2003 19,980 €25.70 01/07/2003 17,000 €25.70 01/07/2003

(a) During the 2007 financial year, the ten largest individual grants to employees of the Company or the Company’s subsidiaries were between 35,000 and 20,000 options each: one grantee received 35,000 options, five grantees received 25,000 options an five grantees received 20,000 options. (b) All Group companies taken together. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 64 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

Plan of free options On 4 July 2007, the Board Meeting with the General Meeting’s agreement, decided to set a plan of free options. The society decided to exclude from the benefit of this plan: the Chairman, the sole “mandataire social” (Company representative) as defined by the French Commercial Code, the Executive Committee and the 390 main executives. The main characteristics of this plan are as follows: - options will be granted to all the employees benefiting from the plan at the conclusion of a 4-year period of acquisition subject to the respect of the conditions stated in the plan rules, - employees benefiting from free options, who are French tax residents or subject to French social security have to keep their options for a two-year period during which the shares cannot be sold. Non-French tax residents don’t have to respect this two-year period.

Date of Board decision 04 July 2007 Number of grantees 3,545 Number of shares granted 312,435 Grants cancelled during the year (a) -- Early exercises during the year (b) -- Number of free shares, net of cancellations and early exercises, at 31/12/07 312,435 Vesting period From 04 July 2007 to 04 July 2011 Date of transfer of shares 05 July 2011 Retention period for French Tax Residents From 05 July 2011 to 06 July 2013

(a) Due to the grantee’s leave. (b) Due to the grantee’s death during the vesting period.

2. Analysis of the expense related to share-based payments The Group measures the amount of the benefit granted to employees receiving purchase and subscription stock-options and free shares. The fair value of such instruments, measured using a binomial model, is determined at the grant date. The amounts thus obtained are taken to profit and loss over the vesting period of the rights and the corresponding expense is included in the income from operations. Changes in the fair value of plans granted after 7 November 2002 (date of first application of the standard) are presented below:

Grant date Initial Fair value Grants Expense Value at Grants Expense Value at Grants Expense Value at number at grant under 2005 in 2005 31/12/05 under 2006 in 2006 31/12/06 under 2007 in 2007 31/12/07 of options date plan plan plan 01/07/03 3,034,200 (21.3) -- 4.0 (2.1) -- 1.8 (0.3) -- 0.3 -- 01/07/04 2,638,750 (21.4) -- 10.2 (6.1) -- 4.0 (2.1) -- 1.8 (0.3) 30/06/05 2,201,500 (19.5) (19.5) 4.7 (14.8) -- 9.4 (5.4) -- 3.6 (1.8) 09/11/06 2,223,950 (23.5) ------(23.5) 1.6 (21.9) -- 11.3 (10.6) 04/07/07 1,654,530 (15.6) ------(15.6) 3.7 (11.9) Total options 11,752,930 (101.3) (19.5) 18.9 (23.0) (23.5) 16.8 (29.7) (15.6) 20.7 (24.6) 04/07/07 312,435 (11.5) ------(11.5) 1.5 (10.0) Total free 312,435 shares shares (11.5) ------(11.5) 1.5 (10.0) Total (112.8) (19.5) 18.9 (23.0) (23.5) 16.8 (29.7) (27.1) 22.2 (34.6) WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 65 financial report

The assumptions used are presented below:

Grant date Share price Expected Risk-free rate Distribution Expected rate Expected rate Early exercise at grant date volatility (a) rate on future of cancellation of departure multiple income of options post-vesting pre-vesting Options: 01/07/03 €25.85 34% 3.8% 3.5% 2% 3% 1.50 01/07/04 €30.07 32% 4.4% 3.5% 2% 3% 1.50 30/06/05 €33.90 30% 3.0% 2.5% 2% 3% 1.50 09/11/06 €37.32 30% 3.8% 2.5% 2% 3% 1.50 04/07/07 €44.77 20% 4.5% 2.5% 2% 3% 1.30 Free shares: 04/07/07 €45.13 N/A 4.5% 2.5% 2% N/A N/A

(a) Measured on the basis of a mix between historical and implicit volatility.

d. Changes in fair value of financial instruments directly recognised in shareholders’equity Foreign currency and interest rate derivatives eligible to be accounted for as cash flow hedges are recognised at fair value in the balance sheet, with variations in fair value being recognised directly through shareholders’ equity until such time as the hedged flows impact profit and loss. Non-consolidated investments, termed “available-for-sale”, are measured at fair value, with variations in fair value being recognised directly through shareholders’ equity until the time of disposal. Changes in the fair values of these items are presented below:

Cash flow hedges Available- Deferred Tax Total for-sale assets

Foreign Interest currency rate At 1 January 2005 169.6 (4.9) 12.1 (53.6) 123.2 - changes in fair value (64.9) -- 39.7 19.7 (5.5) - taken to profit and loss (67.8) 4.9 -- 19.1 (43.8) - disposals (Nice Systems) -- -- (14.8) -- (14.8) Change in the period (132.7) 4.9 24.9 38.8 (64.1) At 31 December 2005 36.9 -- 37.0 (14.8) 59.1 - changes in fair value 57.5 (0.1) (0.1) (21.5) 35.8 - taken to profit and loss (17.5) -- -- 6.5 (11.0) - entry into scope of consolidation (Wynid tech.) -- -- (3.7) -- (3.7) - disposals (Embraer) -- -- (31.0) -- (31.0) Change in the period 40.0 (0.1) (34.8) (15.0) (9.9) At 31 December 2006 76.9 (0.1) 2.2 (29.8) 49.2 - changes in fair value 87.4 (4.2) 1.3 (8.6) 75.9 - taken to profit and loss (38.9) -- 1.0 3.3 (34.6) Change in the period 48.5 (4.2) 2.3 (5.3) 41.3 At 31 December 2007 125.4 (4.3) 4.5 (35.1) 90.5

e. Cumulative translation adjustment This line item reflects differences arising from the translation of the financial statements of foreign subsidiaries on the basis of both closing and average exchange rates. The principal rates used are summarised in note 1-c. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 66 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

f. Treasury shares Thales Parent Company held 2,932,229 of its own shares at 31 December 2007 (3,134,701 at 31 December 2006). In the consolidated financial statements, treasury shares are subtracted from consolidated shareholder’s equity for an amount of €129.6 million at 31 December 2007 (€140.4 million at 31 December 2006). g. Capital management The Group manages its capital, based on authorizations given by general meetings, with the following objectives: optimi- sation of profitability and risk of the capital invested by its shareholders, adequacy and control of the financial resources necessary for the Group’s medium term development. Capital management also takes account of the structure of the Group’s shareholder base, and particularly of the French Government shareholding which is above the threshold of 15%, which implies that any dilution or reduction of this share- holding requires a specific authorisation regarding its financial conditions from the French “Commission des participations et des transferts” (Commission for Government shareholdings and transfers). The main requirement of this management is to maintain a good level of credit quality, enabling the Group to undertake commercial commitments in competitive conditions, to have access to financial markets at an optimised cost and to have a sufficient financial flexibility to maintain its development. In this respect, the Group pays particular attention to the credit ratios published by the main ratings agencies or retained by the banks that are used, or could be used, by the Group. Moreover, the Group evaluates the appropriateness of its acquisition or investment projects not only on the basis of their strategic potential but also of their financial profile and organises their financing taking into account the factors referred to above and potential opportunities and threats on debt and equity markets. On an indicative basis, the consolidated gearing ratio (1), as calculated below, is as follows:

31 Dec. 07 31 Dec.06 31 Dec. 05 Shareholders’ equity 3,884.2 2,294.2 2,102.8 Net financial debt (note 23) 291.3 (90.8) 397.6 Net financial debt / (Shareholders’ equity + Net financial debt) 7% nc (a) 16%

(a) Cannot be calculated at the end of 2006 as the Group had a positive cash position at that date.

19. MINORITY INTERESTS

31 Dec. 07 31 Dec. 06 31 Dec. 05 Australian Defence Industries (a) -- -- 34.6 Other 3.3 7.5 6.4 Total 3.3 7.5 41.0

(a) Following the purchase by Thales of Transfield holding’s shares in October 2006 (note 2).

20. PENSIONS AND OTHER EMPLOYEE BENEFITS

The Group grants its employees post-employment benefits (pensions, retirement awards, medical care, etc.) and other long- term benefits (long-service benefits, long-service awards on departure, etc.). Apart from state plans, the plans that are set up to cover these benefits are either defined contribution plans or defined benefit plans. a. State plans In certain countries, and particularly in France, the Group subscribes to state plans (Social Security State plans, compulsory additional plans such as ARRCO, AGIRC, etc.) for which the pension expense for the financial year is equal to the contribu- tions called by, and thus payable to, such plans. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 67 financial report

b. Defined contribution plans These plans guarantee employees benefits that are directly related to aggregate contributions paid, as increased by the yield on investments made. The enterprise’s pension expense is thus limited to contributions paid. In 2007, the corresponding pension expense was €19.5 million (€14.9 million in 2006 and €12.4 million in 2005).

c. Defined benefit plans There are two categories of country within the Thales Group: - countries in which retirement and other benefits are mainly funded externally: the UK and the Netherlands, - countries in which the funding of retirement is mainly based on defined contribution plans and where certain other benefits (retirement awards, long service awards) are of a defined benefit nature and for which external funding is not systematically put in place. France and Germany are notably included in this category. Provisions recognised in the balance sheet are broken down as follows:

31 December 07 31 December 06 31 December 05

Externally Internally Externally Internally Externally Internally funded funded funded funded funded funded countries countries Total countries countries Total countries countries Total Defined benefit obligations (3,171.2) (771.0) (3,783.9) (744.3) (3,595.6) (730.0) Plan assets 2,984.6 162.0 3,078.2 134.5 2,725.0 142.7 Unfunded status (186.6) (609.0) (705.7) (609.8) (870.6) (587.3) Unrecognised actuarial (gain) / loss (132.6) (83.9) 207.3 11.7 334.9 18.2 Unrecognised past service cost 38.3 28.7 41.8 24.5 42.5 (1.7) Net provisions (280.9) (664.2) (945.1) (456.6) (573.6) (1,030.2) (493.2) (570.8) (1,064.0) Of which: Shown in assets 73.2 1.6 74.8 39.3 1.0 40.3 39.5 -- 39.5 Shown in liabilities (354.1) (665.8) (1,019.9) (495.9) (574.6) (1,070.5) (532.7) (570.8) (1,103.5) Of which: Post employment benefits (277.9) (533.2) (811.1) (453.1) (435.2) (888.3) (489.2) (433.0) (922.2) Other long-term benefits (3.0) (131.0) (134.0) (3.5) (138.4) (141.9) (4.0) (137.8) (141.8) WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 68 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

By category of country, changes in defined benefit obligations and plan assets, if any, are analysed below:

Externally funded countries

2007 2006 2005

United Nether- Total United Nether- Total United Nether- Total Kingdom lands Kingdom lands Kingdom lands Obligations at 1 January (3,025.1) (758.8) (3,783.9) (2,751.6) (844.0) (3,595.6) (2,185.0) (698.5) (2,883.5) Current service cost (50.8) (12.0) (62.8) (45.3) (17.6) (62.9) (35.6) (17.6) (53.2) Interest cost (153.6) (36.6) (190.2) (139.2) (37.5) (176.7) (122.4) (34.0) (156.4) Plan participants’ contributions (13.7) (6.6) (20.3) (14.7) (6.2) (20.9) (16.4) (5.8) (22.2) Scheme amendments 76.5 -- 76.5 (3.5) -- (3.5) (0.1) (32.9) (33.0) Curtailment / settlements 30.4 0.4 30.8 1.9 7.4 9.3 3.7 -- 3.7 New actuarial gains / losses (c) 327.2 96.9 424.1 (100.9) 122.3 21.4 (421.6) (69.7) (491.3) Benefits paid by plan assets 113.1 18.2 131.3 96.6 16.1 112.7 84.6 14.5 99.1 Benefit paid by employer (a) 17.3 0.5 17.8 -- 0.4 0.4 -- Exchange rate variations and other 217.2 (11.7) 205.5 (68.4) 0.3 (68.1) (58.8) -- (58.8) Obligations at 31 December (2,461.5) (709.7) (3,171.2) (3,025.1) (758.8) (3,783.9) (2,751.6) (844.0) (3,595.6)

Plan assets at 1 January 2,387.5 690.7 3,078.2 2,088.1 636.9 2,725.0 1,704.9 539.9 2,244.8 Expected return on plan assets 146.4 35.2 181.6 129.6 33.6 163.2 115.9 35.2 151.1 Employer’s contribution (a) 103.9 10.9 114.8 101.5 13.8 115.3 75.4 13.9 89.3 Plan participants’ contributions 13.7 6.6 20.3 14.7 6.2 20.9 16.4 5.8 22.2 Benefits paid by plan assets (113.1) (18.2) (131.3) (96.6) (16.1) (112.7) (84.6) (14.5) (99.1) New actuarial gains / losses (c) (7.7) (66.6) (74.3) 103.5 16.3 119.8 211.8 56.6 268.4 Exchange rate variations and other (204.7) -- (204.7) 46.7 -- 46.7 48.3 -- 48.3 Plan assets at 31 December (b) 2,326.0 658.6 2,984.6 2,387.5 690.7 3,078.2 2,088.1 636.9 2,725.0

Unfunded status at 31 December (135.5) (51.1) (186.6) (637.6) (68.1) (705.7) (663.5) (207.1) (870.6) Unrecognised actuarial (gain) / loss 11.5 (144.1) (132.6) 335.8 (128.5) 207.3 325.8 9.1 334.9 Unrecognised past service cost -- 38.3 38.3 -- 41.8 41.8 (3.5) 46.0 42.5 Net provisions at 31 December (124.0) (156.9) (280.9) (301.8) (154.8) (456.6) (341.2) (152.0) (493.2)

(a) Employer’s contribution and benefits paid by employer amounted to €168.0 million in 2007, €140.2 million in 2006 and €110.9 million in 2005. In 2008, these contributions should decrease from 20%, because of actions of renegotiation of social agreements led in 2007. (b) At 31 December 2007, 52% of plan assets are invested in equities (55% in 2006), 44% in bonds (41% in 2006), 2% in property (3% in 2006) and 2% in other assets (1% in 2006). Actual return on plan assets in 2007 is 5.2%. (c) Net experience gains created in 2007 on obligations amounts to €109.2 million (€61.0 million in 2006). Net experience adjustments created in 2007 on plan assets amounts to a loss of €73.0 million (against a gain of €125.0 million in 2006). WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 69 financial report

Countries mainly internally funded

2007 2006 2005

France Other Total France Other Total France Other Total Obligations at 1 January (530.3) (214.0) (744.3) (504.7) (225.3) (730.0) (469.2) (205.5) (674.7) Current service cost (23.0) (9.2) (32.2) (26.0) (5.9) (31.9) (23.7) (6.6) (30.3) Interest cost (22.9) (13.1) (36.0) (21.1) (9.3) (30.4) (20.1) (8.6) (28.7) Scheme amendments 15.9 0.1 16.0 (32.9) (0.3) (33.2) (5.9) 0.3 (5.6) Curtailment / settlements (5.5) 0.7 (4.8) 7.2 22.3 29.5 1.6 5.4 7.0 New actuarial gains / losses (c) 88.0 18.9 106.9 22.2 (6.7) 15.5 (7.8) (9.7) (17.5) Benefits paid by plan assets 0.7 2.5 3.2 0.9 2.9 3.8 0.5 2.5 3.0 Benefits paid by employer (a) 23.8 6.3 30.1 13.5 5.2 18.7 11.4 4.515.9 Exchange rate variations and other (23.6) (86.3) (109.9) 10.6 3.1 13.7 8.5 (7.6) 0.9 Obligations at 31 December (476.9) (294.1) (771.0) (530.3) (214.0) (744.3) (504.7) (225.3) (730.0)

Plan assets at 1 January 90.4 44.1 134.5 82.8 59.9 142.7 78.0 48.5 126.5 Expected return on plan assets 3.7 3.9 7.6 4.0 3.6 7.6 3.9 4.1 8.0 Employer’s contribution (a) 1.2 4.1 5.3 1.9 3.9 5.8 1.2 4.5 5.7 Benefits paid by plan assets (0.7) (2.5) (3.2) (0.9) (2.9) (3.8) (0.5) (2.5) (3.0) New actuarial gains / losses (c) 0.4 0.8 1.2 4.1 1.1 5.2 0.3 (0.7) (0.4) Exchange rate variations and other 6.4 10.2 16.6 (1.5) (21.5) (23.0) (0.1) 6.0 5.9 Plan assets at 31 December (b) 101.4 60.6 162.0 90.4 44.1 134.5 82.8 59.9 142.7

Unfunded status at 31 December (375.5) (233.5) (609.0) (439.9) (169.9) (609.8) (421.9) (165.4) (587.3) Unrecognised actuarial (gain) / loss (80.3) (3.6) (83.9) (6.1) 17.8 11.7 12.9 5.3 18.2 Unrecognised past service cost 28.7 -- 28.7 24.8 (0.3) 24.5 (6.4) 4.7 (1.7) Net provisions at 31 December (427.1) (237.1) (664.2) (421.2) (152.4) (573.6) (415.4) (155.4) (570.8)

(a) Employer’s contribution and benefits paid by employer amounted to €168.0 million in 2007, €140.2 million in 2006 and €110.9 million in 2005. In 2008, these contributions should decrease from 20%, because of actions of renegotiation of social agreements led in 2007. (b) At 31 December 2007, 52% of plan assets are invested in equities (55% in 2006), 44% in bonds (41% in 2006), 2% in property (3% in 2006) and 2% in other assets (1% in 2006). Actual return on plan assets in 2007 is 5.2%. (c) Net experience gains created in 2007 on obligations amounts to €109.2 million (€61.0 million in 2006). Net experience adjustments created in 2007 on plan assets amounts to a loss of €73.0 million (against a gain of €125.0 million in 2006). WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 70 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

Actuaries in accordance with the specific circumstances of each country and each scheme determine actuarial assumptions used:

2007 United Kingdom Netherlands France Rest of the world Inflation rate 3.40% 2.00% 1.80% 2.00% to 3.00% Discount rate 6.30% 5.70% 5.50% 4.35% to 6.25% Expected long term return on plan assets 6.70% 5.60% 3.50% 5.40% to 8.25% Future compensation increase 4.40% 3.00% 3.00% 2.60% to 4.50% Expected average residual service life (years) 10 13.3 17.1 9 to 19 years

2006 United Kingdom Netherlands France Rest of the world Inflation rate 3.00% 2.00% 1.80% 2.25% to 4.00% Discount rate 5.30% 4.70% 4.50% 4.35% to 5.66% Expected long term return on plan assets 6.30% 5.10% 4.50% 3.75% to 8.25% Future compensation increase 4.00% 3.00% 3.00% 2.50% to 4.50% Expected average residual service life (years) 10 13.3 16.9 9 to 14 years

2005 United Kingdom Netherlands France Rest of the world Inflation rate 2.80% 2.00% 1.80% 1.75% to 4.00% Discount rate 5.10% 4.30% 4.10% 4.50% to 5.75% Expected long term return on plan assets 6.20% 5.25% 5.00% 6.00% to 8.25% Future compensation increase 3.80% 3.00% 3.00% 3.00% to 4.00% Expected average residual service life (years) 10 12 17.5 9.6 to 14 years

The discount rates are obtained by reference to market yields on high quality bonds in each country having maturity dates equivalent to those of the plans. The returns on plan assets are determined plan by plan and depend upon the asset allocation of the investment portfolio and the expected future performance. Periodic cost for defined benefit schemes is analysed below:

2007 2006 2005 Current service cost (95.0) (94.8) (83.5) Interest cost (226.2) (207.1) (185.1) Expected return on plan assets 189.2 170.8 159.1 Schemes amendments, curtailments and settlements (a) 92.8 21.2 (4.8) Amortisation of actuarial gains / losses 9.4 (3.9) (2.8) Other components of pension charge 65.2 (19.0) (33.6) Disposals 2.2 -- -- Defined benefit: total periodic cost (27.6) (113.8) (117.1)

(a) Of which €73.8 million related to the renegotiation of certain pension plans in the United Kingdom. These changes, which concern working, retired and exited plan beneficiaries, will also have a positive impact on this caption in 2008, and will moreover decrease the current service cost of financial years as from 2008. During these negotiations, Thales Parent Company granted the funds a counter-guarantee in respect of three years contributions for a maximum amount of £150 million. Thales Holding UK has also granted a guarantee of £445 million in the case of possible under financing. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 71 financial report

21. Reserves for contingencies

31/12/07 Opening Changes Increase Reversal Closing in exchange rate (a) (b) and other Restructuring 254.3 31.1 64.4 (148.5) 201.3 Provisions on contracts: 411.4 98.9 207.9 (137.0) 581.2 - guarantees 152.3 14.9 85.2 (44.1) 208.3 - litigation 176.2 18.6 25.3 (35.1) 185.0 - estimated losses on long-term contracts 49.2 4.0 21.0 (27.1) 47.1 - other 33.7 61.4 76.4 (30.7) 140.8 Other reserves for contingencies 168.6 51.4 113.1 (89.6) 243.5 Total 834.3 181.4 385.4 (375.1) 1,026.0

31/12/06 Opening Changes Increase Reversal Closing in exchange rate (a) (b) and other Restructuring 232.2 (0.7) 151.6 (128.8) 254.3 Provisions on contracts: 386.8 40.0 111.5 (126.9) 411.4 - guarantees 154.1 (2.7) 33.5 (32.6) 152.3 - litigation 133.3 41.8 15.9 (14.8) 176.2 - estimated losses on long-term contracts 69.8 (15.6) 40.4 (45.4) 49.2 - other 29.6 16.5 21.7 (34.1) 33.7 Other reserves for contingencies 168.2 22.7 36.0 (58.3) 168.6 Total 787.2 62.0 299.1 (314.0) 834.3

31/12/05 Opening Changes Increase Reversal Closing in exchange rate (a) (b) and other Restructuring 134.1 3.2 197.0 (102.1) 232.2 Provisions on contracts: 285.4 (2.2) 212.5 (108.9) 386.8 - guarantees 138.7 (0.6) 56.9 (40.9) 154.1 - litigation 65.2 (0.1) 95.5 (27.3) 133.3 - estimated losses on long-term contracts 51.2 3.2 42.4 (27.0) 69.8 - other 30.3 (4.7) 17.7 (13.7) 29.6 Other reserves for contingencies 166.0 1.4 75.5 (74.7) 168.2 Total 585.5 2.4 485.0 (285.7) 787.2

(a) Of which, in 2007, €299.1 million recognised in income from operations, €64.4 in restructuring costs, €18.5 million in gain (loss) on disposal of assets and €3.4 million in financial income (expense). (b) Of which, in 2007, €13.4 million of reversals of unused provisions (of which €3.5 million included in income from operations and €9.9 million included in restructuring costs).

Restructuring costs can be analysed as follows:

2007 2006 2005 Increase in reserve (64.4) (151.6) (197.0) Reversal in reserve 148.5 128.8 102.1 Expenses (162.0) (170.3) (117.6) Restructuring costs (77.9) (193.1) (212.5) WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 72 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

22. Litigation and environment a. Litigation Due to the nature of its business activities, the Group is exposed to the risk of technical and commercial litigation. Litigation mentioned in last year’s annual report has progressed as follows: The request for arbitration submitted by Republic of China Navy (Taiwan) for an amount of USD 599 million in damages, arising out of the execution of a contract, signed in 1991, for the supply of equipment and systems executed in conjunction with an industrial partner continued in 2007. In June 2005 the adverse party, in the context of this procedure, increased its request to USD 1,119 million, to which inter- est for late payment would be added. It reduced its request to USD 882 million in April 2006 (interest for late payment excluded). If an unfavourable judgment were to be issued, Thales’ share of any amounts due would be limited to approxi- mately 30%, being a proportion corresponding to its share in the equipment supply contract. Thales, in conjunction with its industrial partner, has constantly opposed this request. On the basis of the information at its disposal at the balance sheet date for 2007, Thales has carried out a review of the financial risks to which the Group could be exposed as a result of this procedure. In the absence of any new significant infor- mation, Thales has, in consequence, decided to maintain at 31 December 2007 a reserve for this litigation identical to that recognised in its 2006 financial statements. In application of paragraph 92 of IAS 37, no detailed disclosure is provided for this amount. No other significant litigation arose since the start of 2007. To the best of the Thales Group’s knowledge, there is no other exceptional circumstance or dispute that has had or is likely to have a significant influence on the Group’s results, financial position or prospects. b. Environment The Thales Group’s activities generally do not have any significant environmental impact. The management of environmental risks involves: - compliance of plants and products with applicable regulations and control of any environmental impact they may have, - implementation of an environmental management system adapted to each site (more than 70 sites obtained ISO 14001 certification), - mapping of environmental risks in more than ten countries in which the Group operates. The aim of this exercise is to verify that employees and local residents are not exposed to health and environmental risks, - management of identified risks: changes to plants, decontamination, and monitoring. At 31 December 2007, the amount of reserves for environmental contingencies amounts to €3.5 million.

23. Net financial debt

31/12/07 31/12/06 31/12/05 Long-term financial debt 1,519.8 1,610.2 1,449.4 Short-term financial debt 212.4 638.5 299.3 Current accounts payable with affiliated companies 107.7 140.8 156.2 Fair value of derivatives: interest rate risk management 2.1 (1.9) (15.5) Total gross financial debt (I) 1,842.0 2,387.6 1,889.4 Current accounts receivable with affiliated companies 57.9 122.6 157.5 Marketable securities 28.7 22.7 14.4 Cash at bank and equivalents (a) 1,464.1 2,333.1 1,319.9 Cash and other short-term financial assets (II) 1,550.7 2,478.4 1,491.8 Net financial debt (I-II) 291.3 (90.8) 397.6

(a) Includes tradable debt securities and unit trusts with maturities of less than 3 months of €832.7 million in 2007, €1,738.6 million in 2006 and €715.9 million in 2005. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 73 financial report

Breakdown of gross financial debt

31/12/07 31/12/06 31/12/05 Borrowings from financial institutions (a) 100.0 100.0 100.0 Other borrowings from financial institutions 18.7 23.5 30.0 Convertible notes (OCEANE) (b) -- 484.0 468.9 Bonds issued in July 2004 (c) 496.0 499.9 512.6 Euro Medium Term Notes (E.M.T.N) - tradable (d) -- -- 17.5 Euro Medium Term Notes (E.M.T.N) - tradable (e) 699.1 698.7 -- Commercial paper -- -- 160.7 Capital lease obligations 29.8 37.7 46.5 Project financing debt (f) 306.2 284.8 301.0 Other borrowings 26.6 24.4 49.5 Current accounts with affiliated companies 107.7 140.8 156.2 Bank overdrafts 44.1 57.4 27.6 Accrued interest 11.7 38.3 34.4 Fair value of derivatives: interest rate risk management (g) 2.1 (1.9) (15.5) Gross financial debt 1,842.0 2,387.6 1,889.4

(a) Floating rate loan with a €100 million par value maturing in June 2008. (b) Notes redeemable into new or existing shares (OCEANE), issued at a 2.5% fixed rate with a par value of €500 million maturing in January 2007. These notes matured on 1 January 2007. 9,809,675 notes were redeemed at par at this date, for a total amount of €500 million, and 16 bonds were converted into 17 Thales shares. (c) Bond with a par value of €500 million, maturing in July 2011, issued at a 4.375% fixed rate. Includes €300 million swapped to floating rate using interest rate swaps. As from 1 January 2005, the bond is valued at amortised cost at an effective rate of 4.4776% excluding the effect of hedging. The value of the bond is then adjusted to take into account changes in the fair value of the interest rate hedge. (d) Floating rate notes, maturing in February 2006. (e) Bond with a par value of €700 million floating rate (Euribor 3 months +0.125%), issued in December 2006, maturing in December 2009. The notes are valued at amortised cost at an effective rate of Euribor 3 months +0.1864%. (f) Non-recourse, or limited recourse, debt whose interest costs and repayment is covered by the share of project revenues, which is guaranteed contractually by customers. The debt is comprised of fixed rate loans (or floating rate loans swapped to fixed rate loans) maturing in years up to 2020. (g) In accordance with IAS 39, the value of borrowings takes into account changes in the fair value of hedged risk. This change in value of the debt is offset by changes in the value of swaps used as hedges, which are recognised on the “fair value of derivatives: interest rate risk management” line.

Breakdown of gross financial debt by currency (1) The breakdown by currency includes related hedging instruments. At the end of December 2007, financial instruments were used to hedge net investments in foreign companies.

31 Dec. 07 31 Dec. 06 31 Dec. 05 Euro 1,363.9 1,812.5 1,347.8 Pound sterling 281.2 269.1 276.4 US Dollar 16.6 110.9 123.4 Singapour Dollar 97.0 102.0 -- Australien Dollar 74.4 81.4 114.9 Other 8.9 11.7 26.9 Total 1,842.0 2,387.6 1,889.4

(1) After incidence of the corresponding derivative instruments. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 74 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

Breakdown of gross financial debt by type of rate (1) The breakdown presented hereafter includes the effect of interest rate swaps.

31 Dec. 07 31 Dec. 06 31 Dec. 05 Fixed rate 547.2 1,036.2 1,069.0 Floating rate 1,294.8 1,351.4 820.4 Total 1,842.0 2,387.6 1,889.4

Breakdown of gross financial debt by maturity

31 Dec. 07 31 Dec. 06 31 Dec. 05 2006 455.5 2007 779.3 514.7 2008 320.1 127.1 135.8 2009 729.2 727.3 28.1 2010 29.6 39.8 28.0 2011 537.6 531.3 727.3)(a) 2012 39.6 182.8)(b) -- 2013 and beyond 185.9 -- -- Total at more than one year 1,521.9 1,608.3 1,433.9 Total 1,842.0 2,387.6 1,889.4

(a) 2011 and beyond. (b) 2012 and beyond.

Contractual cash-flows of financial debt (1)

Gross financial Contractual cash flows scheduled in: debt at 31/12/07 2008 2009 2010 2011 2012 and beyond 1,842.0 390.1 802.2 66.7 568.0 278.8

At 31 December 2007, no financing of material amount used by the Group is subject to clauses requiring accelerated repay- ment based on the Group’s rating or on financial ratios. At 31 December 2007, undrawn confirmed credit facilities granted by banks amounted to €1,500 million, maturing in 2011. These credit facilities are used to back commercial paper and as a financial reserve. Pursuant to the credit facility documents, in the event that the State no longer held its golden share and, simultaneously, the ratio of consolidated net financial debt to EBITDA (2) were to exceed 3, clauses providing for accelerated repayment would apply.

Fair value of debt The fair value of Thales’s debt is determined for each loan by discounting the future cash flows using a discount rate Euribor cor- responding to bond yields at the end of the year, adjusted by the Group’s credit risk. The fair value of debt and bank overdrafts at floating interest rates approximates their net carrying amounts. At 31 December 2007, the fair value of debt amounted to €1,835.9 million (€2,405.3 million in 2006 and €1,965.2 million at 31 December 2005).

(1) After incidence of the corresponding derivative instruments. (2) EBITDA, as defined in financing agreements, is the sum of the income of operating activities plus all depreciation, amortisation and impairment of tangible and intangible assets less the depreciation of goodwill. This item is determined by reference to French accounting standards. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 75 financial report

24. STATEMENT OF CASH FLOWS

a. Capital expenditure Only purchases financed by a cash flow are presented in the statement of cash flows. Capitalisations of development costs are included for €140.6 million in 2007 (€156.2 million in 2006 and €137.6 million in 2005).

b. Net financial investment

Acquisitions

2007 2006 2005 Alcatel-Lucent ‘s space businesses (671.7) -- -- Alcatel-Lucent ‘s transportation and security activities: cash payment (40.0) -- -- Acquisition of 25% of DCNS’ share capital (569.1) -- -- Subscription to the capital of Camelot (14.6) -- -- Purchase of ADS minority interests (20%) (4.2) -- -- Acquisition of Diehl Luftfahrt Elektronik GmbH -- (24.5) -- Investments of Thales International Offsets (6.4) (18.2) -- Subscription to the capital of DpiX (7.2) (6.7) -- Purchase of ADI minority interests -- (3.4) -- Acquisition of additional interest (50%) in TDA Armements -- -- (51.5) Acquisition of additional interest (60%) in Wynid Technologies -- -- (11.1) Investments of Thales Corporate Ventures (1.3) (3.6) (4.1) Other (16.2) (12.8) (20.9) Acquisitions (1,330.7) (69.2) (87.6) Cash position of companies acquired 208.8 7.7 3.3 Acquisitions, net (1,121.9) (61.5) (84.3)

Disposals

2007 2006 2005 French Thales Naval France / Armaris 514.0 -- -- Faceo 132.5 -- -- Thales MESL Ltd. 5.7 -- -- Bayern-Chemie / Protac 2.5 -- -- Thales Navigation (7.2) 86.9)(a) -- Embraer -- 119.4 -- Broadcast and Multimedia (3.3) 133.6 -- Optics activities (HTO) (22.0) (1.9) 205.8 Satellite Information Services -- -- 26.4 Thales Geosolutions (additional price) (6.6) -- 9.0 Nice Systems shares -- -- 36.9 Others (2.3) 7.0 11.7 Disposals 613.3 345.0 289.8 Cash position of companies sold (151.8) -- (13.2) Disposals, net 461.5 345.0 276.6

(a) This amount excluded the $60 million loan payable in 2011 and 2012. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 76 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

c. Increase (decrease) in shareholders’ equity and minority interests

2007 2006 2005 Increase in capital / exercise of stock options 39.3 2.4 1.0 Proceeds from sale of treasury shares 4.0 2.8 117.6 Other ------Total 43.3 5.2 118.6

25. Commitments and contingencies a. Bonds and warranties linked to commercial contracts Within the context of its activity, the Group regularly responds to invitations to bid. When requested by the customer, bid bonds are delivered in order to demonstrate the definitive nature of the bid and to provide for indemnification to the cus- tomer if the Group fails to meet its commitments. At 31 December 2007, bid bonds issued amounted to €148.2 million (€52.2 million at 31 December 2006 and €31.0 million at 31 December 2005). From the signature of a contract up until its completion, the Group may deliver performance bonds to its customers, using a bank as an intermediary, in order to guarantee the due and proper completion of the contract (and if not, to provide for pay- ment of damages to the customer). At 31 December 2007, performance bonds amounted to €1,465.9 million (€935.0 mil- lion at 31 December 2006 and €1,015.8 million at 31 December 2005). Technical, operational and financial costs incurred by the Group in order to meet its obligations are valued, on a contract- by-contract basis, and are included in the cost to completion of the contract. Otherwise, any potential risk is estimated, on a contract-by-contract basis, and provided for in the Group financial statements if necessary. In order to finance contract completion, the Group receives advances from its customers, based on contractual terms that are booked as a liability in the balance sheet. In order to guarantee reimbursement of these advance payments if the contractual obligations are not met, the Group may deliver, at the customer’s request, an advance payment bond. At 31 December 2007, advance payment bonds amounted to €1,619.3 million (€1,837.9 million at 31 December 2006 and €1,781.5 million at 31 December 2005). During the contractual warranty period, the Group evaluates and accrues for warranty costs in order to guarantee the conform- ity of goods sold to the customer. In most cases, the provisional retention of payment contractually applied during this period can be replaced by setting up, using a bank as intermediary, a warranty retention bond. At 31 December 2007, warranty reten- tion bonds amounted to €209.7 million (€99.8 million at 31 December 2006 and €100.8 million at 31 December 2005). The maturity dates of these commitments are:

< 1 year 1 to 5 years > 5 years Total Bid bonds 75.2 11.8 61.2 148.2 Performance bonds 571.6 686.5 207.8 1,465.9 Advance payment bonds 656.6 744.2 218.5 1,619.3 Warranty retention bonds 147.0 41.2 21.5 209.7 Other bank bonds 92.8 21.5 166.1 280.4 Total 1,543.2 1,505.2 675.1 3,723.5 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 77 financial report

b. Other commitments At the end of 2002, a group of French manufacturers, including Thales and one of its subsidiaries, collectively received a request for arbitration relating to the execution of old contracts. In proportion to each industrial partner’s involved, Thales would have been liable for around 20% of the total claim of $260 million. Under an agreement signed in 2003, the client withdrew its request for arbitration. In return Thales and the other groups agreed not to have recourse to statute of limitations provisions, which could have been invoked against the client.

c. Lease commitments and firm commitments to purchase tangible fixed assets

Lease contracts Thales Group companies lease land, buildings, plant and equipment. The rents payable under these leases are subject to renegotiation at various intervals specified in the lease contracts. Binding lease and rental commitments at 31 December 2007 are analysed below:

Rent payable Total < 1 Year 1 to 5 Years > 5 Years Finance leases (a) 30.4 6.9 5.9 17.6 Operating leases 1,030.3 175.3 487.0 368.0

(a) Including interest (€0.6 million). The corresponding debt is recognised in the consolidated balance sheet for an amount excluding interest (note 23).

Purchase of tangible fixed assets At 31 December 2007, firm commitments to purchase tangible fixed assets amounted to €42.1 million (€17.0 million at 31 December 2006 and €18.7 million at 31 December 2005).

d. Guarantees given / received related to disposals / acquisitions of companies The contracts governing acquisitions (disposals) of companies by Thales may contain clauses committing the seller to in- demnify the buyer for liabilities in excess of those recorded in the books of the companies sold. These guarantees are gener- ally limited in terms of value and duration. They notably cover environmental risks. Certain contracts concerning the acquisition (disposal) of companies may include earn-out or price adjustment clauses, which are generally related to performance criteria for the entity in question. At the acquisition / disposal date, the Group records in payables or receivables its best estimate of the expected price adjustment. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 78 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

e. Social commitments

French statutory training entitlement In accordance with the requirements of the French Act of 4 May 2004 relating to professional training, French companies in the Group grant their employees a training entitlement of at least 20 hours per calendar year, which can be accumulated over a maximum period of six years. At the end of this period, if the training entitlement has not been used, each employee’s total training rights will be subject to a ceiling of 120 hours. Thales has signed an agreement regarding anticipation of changes in employment, professional development and training that is applicable to all its French subsidiaries. This agreement stipulates the manner in which the statutory training entitle- ment can be exercised within the enterprise. It recalls that this entitlement guarantees employees access to training for their maintenance in employment or changes therein or for the development of their skills. In this respect, training initiatives con- tributing to the professional development of employees envisaged in the training programme are counted as part of the stat- utory training entitlement. In consequence, as the costs incurred benefit the enterprise, no provision has been recognised. The current number of not used amounts to 1.8 million hours against 1.3 million hours at 31 December 2006 at the balance sheet date with the same scope of consolidation.

26. Financial instruments

Thales uses various financial instruments for the purpose of reducing currency and interest rate risks. a. Currency risk management

Thales hedges currency risks arising in connection with the negotiation of contracts denominated in currencies other than the main production currency, currency risks generated by normal commercial operations, and risks relating to its net invest- ments in foreign currencies. Operating receivables and payables denominated in foreign currencies are not exposed to foreign currency risk as they are covered by exchange rate hedges. The change in value of financial instruments used as cash flow hedges is recognised in shareholders’ equity. A change of 5% on the main currency pairs (USD/€, USD/GBP, USD/CAD) would have an impact on shareholders’ equity of approximately €60 million. The change in value of the financial instruments, matched with portfolios of sales offers, that are not eligible for hedge ac- counting is recognised in profit and loss. A change of 5% in the rate of the dollar against the euro would have an impact of approximately €11 million on profit and loss. Foreign currency denominated financial debt does not generate any exposure in profit and loss as it is either denominated in the functional currency of the entity in which it is recognised or it is used as a net foreign investment hedge. Thales mainly held forward foreign exchange contracts at 31 December 2007, 2006 and 2005. Nominal forward buy and sell contract amounts, converted into euros at closing rates, are detailed below by currency. Where options are concerned, the amounts indicated correspond to nominal values for underlying currency transactions and are mentioned in the “buy / lend” or “sell / borrow” columns depending on the nature of the operation at maturity. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 79 financial report

2007 2006 2005

Buy / Lend Sell / Borrow Buy / Lend Sell / Borrow Buy / Lend Sell / Borrow Forward exchange contracts USD 377.8 818.9 285.2 700.5 300.8 851.2 GBP 250.1 284.0 195.1 240.7 291.5 224.8 CHF 33.9 46.1 121.4 105.6 54.9 45.2 Other 308.9 250.2 160.7 204.2 127.7 142.5 970.7 1,399.2 762.4 1,251.0 774.9 1,263.7 Foreign exchange swaps To hedge investments USD ------102.5 -- 114.4 GBP -- 44.8 -- 48.9 -- 47.9 CHF ------12.9 SGD -- 97.4 -- 102.0 -- -- Other -- 0.5 -- 0.6 -- 0.7 -- 142.7 -- 254.0 -- 175.9

To hedge commercial commitments USD 431.4 1,033.3 780.6 1,063.1 502.7 731.4 GBP 706.0 334.1 575.7 106.6 492.6 98.4 CHF 67.1 19.4 34.9 29.7 20.6 26.2 Other 595.1 402.7 279.9 180.2 178.5 149.1 1,799.6 1,789.5 1,671.1 1,379.6 1,194.4 1,005.1 Total 2,770.3 3,331.4 2,433.5 2,884.6 1,969.3 2,444.7

Foreign exchange options PUT 74.6 547.2 8.0 39.7 59.1 323.3 USD 4.5 535.8 -- 38.0 9.1 279.7 GBP 30.6 5.5 8.0 -- 15.8 -- CAD 30.3 5.9 ------PLN 9.2 ------AUD ------32.4 1.8 COP ------1.7 -- -- HKD ------1.8 -- TWD ------41.8

CALL 295.6 657.9 4.7 28.5 4.9 177.9 GBP -- 70.0 -- 20.3 -- -- AUD 17.9 8.0 4.7 3.5 -- 1.4 CAD -- 7.8 ------COP ------0.8 HKD 6.2 ------3.5 -- JPY -- 1.4 ------NOK ------2.6 PLN -- 9.2 ------RUB 2.0 ------SEK -- 26.7 ------USD 269.5 534.8 -- 4.7 1.4 173.1 Total 370.2 1,205.1 12.7 68.2 64.0 501.2 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 80 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

Corresponding market values are analysed as follows:

2007 2006 2005

Buy / Lend Sell / Borrow Buy / Lend Sell / Borrow Buy / Lend Sell / Borrow Forward exchange contracts (11.9) 44.7 (9.6) 26.5 4.9 (15.6) Foreign exchange swaps - to hedge investments -- 2.7 -- (2.0) -- (1.6) - to hedge commercial commitments (17.9) 28.6 6.1 3.1 (3.4) (3.2) Foreign exchange options - PUT 27.0 -- -- 1.3 -- (13.0) - CALL 4.2 (1.1) -- (0.1) -- --

Maturity dates are as follows:

2007 2006 2005 < 1 year 1 to 5 years > 5 years < 1 year 1 to 5 years > 5 years < 1 year 1 to 5 years > 5 years Lend Borrow Lend Borrow Lend Borrow Lend Borrow Lend Borrow Lend Borrow Lend Borrow Lend Borrow Lend Borrow Forward exchange 725.0 1,115.5 244.6 282.7 1.1 1.0 568.8 925.8 191.5 322.9 2.1 2.3 571.1 908.8 199.1 350.5 4.7 4.4 contracts Foreign exchange swaps: - to hedge investments -- 142.7 ------254.0 ------175.9 ------to hedge commercial 1,759.0 1,508.3 40.6 279.5 -- 1.7 1,627.7 1,343.0 43.4 35.0 -- 1.6 1,191.0 991.1 3.4 14.0 -- -- commitments Foreign exchange options - PUT 74.6 547.2 ------8.0 39.7 ------59.1 323.3 ------CALL 295.6 657.9 ------4.7 28.5 ------4.9 177.9 ------b. Interest rate risk management Most of the interest rate swap contracts held by Thales at year-end 2007, 2006 and 2005 were intended to reduce the Group’s sensitiv- ity to interest rate movements. These financial instruments serve to hedge the net cash (debt) position of the Group as well as net cash flows generated on certain large contracts, either already signed or under negotiation; foreign exchange risks on those contracts are also hedged as mentioned above. Current nominal values, by type of interest rate instrument, and corresponding to the fixed part of the swaps, are analysed below:

2007 2006 2005

Buy / Lend Sell / Borrow Buy / Lend Sell / Borrow Buy / Lend Sell / Borrow Interest rate swaps 510.0 117.1 520.0 135.0 940.7 164.7 Currency swap 54.8 ------17.5 -- WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 81 financial report

Corresponding market values are analysed as follows:

2007 2006 2005

Buy / Sell / Closed Buy / Sell / Closed Buy / Sell / Closed Lend Borrow positions Lend Borrow positions Lend Borrow positions Interest rate swaps (1.9) 0.1 0.2 2.3 0.4 0.3 19.8 (3.6) 0.5 Currency Swaps (0.4) ------(1.5) -- --

Maturity dates range as follows:

2007 2006 2005 < 1 year 1 to 5 years > 5 years < 1 year 1 to 5 years > 5 years < 1 year 1 to 5 years > 5 years Lend Borrow Lend Borrow Lend Borrow Lend Borrow Lend Borrow Lend Borrow Lend Borrow Lend Borrow Lend Borrow Interest rate swaps 210.0 110.0 300.0 -- -- 7.1 10.0 17.0 510.0 110.0 -- 8.0 420.7 27.7 220.0 128.0 300.0 9.0 Currency swaps 54.8 ------17.5 ------

A 1% rise in interest rates, applied to the financial assets and liabilities after hedging at 31 December 2007, would reduce financial expense by €2.5 million in 2007 (€11.0 million in 2006). c. Counterpart risk management Trading operations are conducted exclusively with banks or top-rated institutions, and within the authorisation limits set by General Management for each counterpart. Interest rate swap transactions matched with the same counterpart:

2007 2006 2005 Total nominal amount (a) 110.0 120.0 120.0 Including matched transactions with the same counterpart 110.0 120.0 120.0

(a) Nominal amount corresponding to fix branch of swaps. d. Credit risk management The Group’s Finance department consolidates all the information relating to the Group’s exposure to credit risk, notably by identifying and analysing the ageing of overdue accounts & notes receivable that have not been written down as impaired. At 31 December 2007, the ageing of these accounts & notes receivable is as follows:

Total Accounts and notes receivables overdue:

Less than 3 months From 3 to 6 months More than 6 months Overdue accounts & notes receivable that have not been written down as impaired 418.0 253.4 61.5 103.1

The Group considers at present that these delays do not present any particular risk. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 82 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

F. List of main consolidated companies (Not including Thales Parent Company)

% Control % Control % Control % Stake % Stake % Stake 31/12/07 31/12/06 31/12/05 31/12/07 31/12/06 31/12/05 1. CONSOLIDATED SUBSIDIARIES African Defence Systems (South Africa) 80% 80% 80% 80% 60% 60% Australian Defence Industries (Australia) 100% 100% 100% 100% 100% 50% Avimo (UK, Singapore, USA) 100% 100% 100% 100% 100% 100% TDA Armements SAS (France) 100% 100% 100% 100% 100% 100% Thales Air Systems SA (France) 100% 100% 100% 100% 100% 100% Thales Angénieux SA (France) 100% 100% 100% 100% 100% 100% Thales ATM (Europe, USA, Australia) 100% 100% 100% 100% 100% 100% Thales Avionics (France, USA, Singapore, UK) 100% 100% 100% 100% 100% 100% Thales Avionics Electrical Systems SA (France) 100% 100% 100% 100% 100% 100% Thales Canada Inc. (Canada) 100% 100% 100% 100% 100% 100% Thales Communication (Europe, USA) 100% 100% 100% 100% 100% 100% Thales (France, USA) 100% 100% 100% 100% 100% 100% Thales Defence Deutschland (Germany) 100% 100% 100% 100% 99% 99% Thales UK Ltd. (UK) 100% 100% 100% 100% 100% 100% Thales Electron Devices (France, Germany) 100% 100% 100% 100% 100% 100% Thales Engineering and Consulting SA (France) 100% 100% 100% 100% 100% 100% Thales e-Security (UK, USA, China) 100% 100% 100% 100% 100% 100% Thales e-Transactions (Europe, USA, ) 100% 100% 100% 100% 100% 100% Thales Information Systems (Europe, Russia, Singapore) 100% 100% 100% 100% 100% 100% Thales International (France) 100% 100% 100% 100% 100% 100% Thales International in Saudi Arabia (Saudi Arabia) 100% 100% 100% 100% 100% 100% Thales Italy (Italy) 100% 100% 100% 100% 100% 100% Thales MESL Ltd. (UK) -- 100% 100% -- 100% 100% Thales Missile Electronics Ltd. (UK) 100% 100% 100% 100% 100% 100% Thales Naval (France) -- 100% 100% -- 100% 100% Thales Naval (UK) 100% 100% 100% 100% 100% 100% B.V. (Netherlands) 99% 99% 99% 99% 99% 99% (France, UK, Netherlands) 100% 100% 100% 100% 100% 100% Thales Rail Signalling Solutions (Europe, Canada) 100% -- -- 100% -- -- Thales Security Systems SAS (France) 100% 100% 100% 100% 100% 100% Thales Services SAS (France) 100% 100% 100% 100% 100% 100% Thales Suisse SA () 100% 100% 100% 100% 100% 100% Thales Systèmes Aéroportés SA (France) 100% 100% 100% 100% 100% 100% Thales Transport & Security Ltd., ex Telecommunication Services Ltd. (UK) 100% 100% 100% 100% 100% 100% Thales Telematics (France, UK) -- 100% 100% -- 100% 100% Thales Training & Simulation (France, UK, USA, Australia) 100% 100% 100% 100% 100% 100% Thales Underwater Systems (France, UK, Netherlands, Australia) 100% 100% 100% 100% 100% 100% Thomson Components Tubes (USA) 100% 100% 100% 100% 100% 100% 2. ACCOUNTED FOR UNDER THE PROPORTIONATE METHOD Aircommand Systems International SAS (ACSI) (France) 50% 50% 50% 50% 50% 50% Amper Programas SA (Spain) 49% 49% 49% 49% 49% 49% Armaris (France) -- 50% 50% -- 50% 50% Citylink Ltd. (UK) 33% 33% 33% 33% 33% 33% Diehl Avionik Systeme GmbH (Germany) 49% 49% 49% 49% 49% 49% Faceo (France, UK, Spain, Italy, ) -- 50% 50% -- 50% 50% Thales Company (Korea) 50% 50% 50% 50% 50% 50% Stesa (Saudi Arabia) 49% 49% 49% 49% 49% 49% Navigation Solutions (USA) 22% 22% 35% 22% 22% 35% Thales Alenia Space (France, Italiy, Belgium, Spain) 67% -- -- 67% -- -- Telespazio (Italy) 33% -- -- 33% -- -- Thales Raytheon Systems (France, Ireland, USA) 50% 50% 50% 50% 50% 50% United Monolithic Semiconductors (France, Germany) 50% 50% 50% 50% 50% 50% 3. ACCOUNTED FOR UNDER THE EQUITY METHOD Aviation Communications & Surveillance Systems (USA) 30% 30% 30% 30% 30% 30% Camelot (UK) 20% 20% 20% 20% 20% 20% DCNS (France) 25% -- -- 25% -- -- Dpix (USA) 20% 20% -- 20% 20% -- Elettronica S.p.A. (Italy) 33% 33% 33% 33% 33% 33% Indra Espacio (Spain) 33% -- -- 33% -- -- WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 83 financial report

This is a free translation into English of the statutory auditors’ report issued in the and is provided solely for the convenience of English speaking readers. This report includes information specifically required by French law in all audit reports, whether qualified or not, and this is presented below the opinion on the financial statements. This information includes explanatory paragraph discussing the auditors’ assessments of certain significant accounting matters. These assessments were made for the purpose of issuing an opinion on the financial state- ments taken as a whole and not to provide separate assurance on individual account captions or on information taken outside of the consolidated financial statements. The report also includes information relating to the specific verification of information in the group management report. This report should be read in conjunction with, and is construed in accordance with French law and professional auditing standards applicable in France.

G. Statutory Auditors’ Report on the consolidated financial statements Year ended December 31, 2007

To the shareholders of Thales, In compliance with the assignment entrusted to us by your annual general meeting, we have audited the accompanying consolidated financial statements of Thales for the year ended December 31, 2007. These consolidated financial statements have been approved by the Board of Directors. Our role is to express an opinion on these financial statements based on our audit.

I. Opinion on the financial statements

We conducted our audit in accordance with the professional standards applicable in France; those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 the manage- ment, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements give a true and fair view of the assets, liabilities, financial position and results of the consolidated group in accordance with IFRS standards, as adopted in the European Union. Without qualifying our opinion, we draw your attention to the matter discussed in note 22 « Litigation and environment » to the financial statements, which details the provision relating to the arbitration request submitted by a client of the Group and to the matter discussed in note 4 « Information by segment » to the financial statements, which presents the new busi- ness segments, refocused on the Group’s core competencies.

II. Justification of assessments

In accordance with the requirements of article L. 823-9 of French Company Law (Code de commerce) relating to the justifica- tion of our assessments, we bring to your attention the following matters: As stated in note 1.w « Main sources of estimates » to the financial statements, Thales’ management is required to make estimates and assumptions that affect certain amounts included in the financial statements of the Group and the accompa- nying notes to these financial statements. These assumptions are by nature uncertain and the actual figures may vary from these estimates under the circumstances anticipated in note 1.w to the financial statements. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 84 2007 ANNUAL REPORT – Thales Directors’ report Consolidated financial statements

We consider that the items that have been subject to significant accounting estimates, and which are likely to require justi- fication of our assessments, include construction contracts, acquisition goodwill, research and development costs, restruc- turing costs, deferred tax assets, provisions for pension plans and related contingency, loss provisions and, purchase price allocation in respect of business combination realized by the Group as follows:

Construction contracts Thales recognizes income on construction contracts in accordance with the methods set out in note 1.i « Revenues » to the financial statements. Such income is based on estimates of income on completion made by the project managers, according to the Group’s procedures and under the control of the Management. Based on the information provided to us at the time of our audit, our work consisted in assessing the data and assumptions used to estimate the income on completion for these contracts, reviewing the calculations made by the company, comparing the amounts of income on completion from previous financial periods with the corresponding actual figures, and examining the procedures used by the Management to approve such estimates.

Acquisition goodwill Acquisition goodwill, which appears in the balance sheet as at December 31, 2007 for a net amount of EUR 2,870.0 mil- lion, was subject to impairment tests in accordance with the methods set out in notes 1.b « Business combination » to the financial statements. We reviewed the methods for carrying out these tests, based on discounted cash flows of the business activities and divisions, and verified the consistency of the assumptions used with the forecast data taken from the strategic plans drawn up for each of the business activities and divisions under the Group’s control.

Research and development costs As stated in note 1.j « Research and development expenses » to the financial statements, research and development costs are accounted for as intangible assets when they meet the criteria of IFRS standards, as adopted in the European Union (net amount capitalized of EUR 386.1 million as at December 31, 2007). We reviewed the sales and profitability forecasts underlying the appropriate nature of this accounting treatment, as well as the consistency of the assumptions used for their amortization and impairment tests.

Deferred tax assets Net deferred tax assets in the balance sheet as at December 31, 2007 amounted to EUR 461.0 million. As stated in notes 1.l and 1.w to the financial statements, the recoverability of these amounts was assessed by Thales on the basis of forecast data taken from the strategic plans drawn up for each of the consolidated tax groups concerned, under the Group’s control. As for acquisition goodwill, we reviewed the recoverability tests performed on these deferred tax assets by Thales.

Provisions for pension plans and related commitments Certain headings in both the assets and liabilities sides of the balance sheet drawn up for consolidated financial statements, as well as off-balance sheet commitments, are estimated on a statistical and actuarial basis, in particular, the provisions for pension plans and related commitments. The methods for calculating these headings are set out in notes 1.n and 20 to the financial statements. Our work consisted in assessing the data and assumptions used in the models for valuing these headings, as well as the overall con- sistency of these assumptions, with due regard, in particular, to Thales’ experience, its regulatory and economic environment. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 85 financial report

Loss and contingency provisions As regards loss and contingency provisions, we ensured that the procedures in force in your Group made it possible to iden- tify, evaluate and recognize such provisions from an accounting standpoint in satisfactory conditions. We also ensured that the disputes identified during the implementation of these procedures were described in appropriate terms in the notes to the financial statements, and, in particular, in notes 22 « Litigation and environment » and 25 « Com- mitments and contingencies ».

Purchase price allocation in respect of business combinations As stated in notes 1.b and 2 to the financial statements, in the framework of business combination realized by the Group, Thales is brought to measure the acquiree’s identifiable assets, liabilities and contingent liabilities at their fair value, includ- ing intangible assets. These valuations, mainly entrusted to independent experts, are based on assumptions (forecasts) and parameters characterizing the acquired activities. Our work consisted of assessing the methodology used, the assumptions used in models of valuation for the concerned identifiable assets and liabilities as well as the reasonableness of the parameters used. Within the framework of the justification of our assessments, we ensured of the reasonableness of these estimates. The assessments were thus made in the context of the performance of our audit of the consolidated financial statements taken as a whole and therefore contributed to the formation of our audit opinion expressed in the first part of this report.

III. Specific verification

In accordance with professional standards applicable in France, we have also verified the information given in the group management report. We have no matters to report regarding its fair presentation and conformity with the consolidated financial statements.

Paris-La Défense, March 26, 2008 The Statutory Auditors

ERNST & YOUNG AUDIT MAZARS & GUÉRARD Christian Chiarasini Nour-Eddine Zanouda Jean-Louis Simon WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 86 2007 ANNUAL REPORT – Thales BUSINESS REVIEW

1 . Business description

A. Business in figures...... 88

B. Aerospace / Space...... 90

C. Defence...... 102

D. security...... 118

2 . International presence

A. International presence in figures...... 125

B. International financing...... 126

C. Major international subsidiaries and major sites...... 127

3 . Research & innovation

A. The key to competitiveness and growth...... 129

B. Five key technology domains...... 130

C. Interaction with the scientific community...... 130

D. Building innovation ecosystems...... 131

E. A dynamic approach to intellectual property management...... 132 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 87 BUSINESS REVIEW Rapport financier

1 . Business description

A. Business in figures

Aerospace / Defence Security Other Total in € million Space

2007 Order book at year-end 7,228 10,333 5,098 16 22,675 Order intake 4,026 5,402 3,372 56 12,856 Consolidated revenues 3,597 5,222 3,415 62 12,296 Income from operations before PPA 255 458 237 (15) 936 Income from operations after restructuring costs (“EBIT”) 240 424 224 (30) 858 Consolidated workforce 17,916 21,685 19,323 2,271 61,195 2006 Order book at year-end 5,064 12,512 3,078 22 20,676 Order intake 2,389 5,573 2,684 172 10,818 Consolidated revenues 2,492 5,320 2,278 174 10,264 Income from operations 203 424 168 (41) 754 Income from operations after restructuring costs (« EBIT ») 161 370 129 (98) 562 Consolidated workforce 12,783 21,947 15,273 2,157 52160

Order book and order intake: in defence markets, an order is generally booked when the Group has received a down pay- ment from the customer. When contract financing requires parliamentary approval, the order book only records that frac- tion included in the government’s budget, typically the proportion corresponding to the following year (especially in Europe and North America). Multi-year orders are still relatively rare, but are becoming more common. Consolidated workforce: the consolidated number of employees includes all employees of fully consolidated companies and the proportionate share of employees of companies consolidated under the proportionate method. It does not include the employees of companies accounted for under the equity method or of unconsolidated companies. Total workforce: a total of 67,028 people were working under Group management at the end of December 2007, compared with 56,847 people at end-2006. This figure is higher than the consolidated workforce because it includes all employees of joint ventures and of companies that are controlled but below consolidation thresholds. The breakdown by division at end-2005, end-2006 and end-2007 is given below:

Total workforce at year-end Aerospace / Defence Security Other Total Space

2007 20,588 23,112 20,425 2,903 67,028 2006 13,588 23,720 17,229 2,310 56,847 2005 13,222 25,158 17,296 2,134 57,810 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 88 2007 ANNUAL REPORT – Thales Business description International presence Research & innovation

Major programmes in order book at end December 2007

Programmes whose amount in the order book at 31 December 2007 is above €150 million.

Programmes Country Amount in order book at of destination 31 December 2007 (in €m)

FSAF Phase 3 (Missile systems) France / Italy 887 Watchkeeper (UAV-based tactical surveillance system) United Kingdom 642 FREMM (Multi-mission ) France / Italy 620 Rafale (Avionics and combat systems) France 566 Metro of London (Signalling) United Kingdom 452 In Flight Entertainment Programmes Miscellaneous 449 Yahsat system (Dual satcom) United Arab Emirates 430 Syracuse III (Military satcom) France 341 NH90 helicopter (Avionics & training) France / Germany 227 Metro of Dubaï (Signalling and systems) United Arab Emirates 201 Sonar logistic United Kingdom 195 Weapon systems Middle East 195 Helicopter Tigre (Avionics & training) France / Germany 185 Corvettes & offshore patrol vessels(Electronics systems) Navantia 185 Galileo ( system) Europe 182 Meltem (Maritime patrol) Turkey 168 A400M (Avionics) Europe 161 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 89 BUSINESS REVIEW Rapport financier

B. Aerospace / Space

Key figures for Aerospace / Space

in € million 2007 2006

Order book at year-end 7,228 5,064 Order intake 4,026 2,389 Consolidated revenues 3,597 2,492 Income from operations 255 (a) 203 Income from operations after restructuring costs (“EBIT”) 240 (a) 161 Consolidated workforce at year-end 17,916 12,783 Total workforce at year-end 20,588 13,588

(a) Before purchase price allocation.

The Aerospace segment includes the Aerospace division (equipment, systems and services for civil and military aircraft) and the Space division, set up in April 2007 following Thales’s acquisition of Alcatel-Lucent’s holdings in the two joint ventures with Finmeccanica, satellite solutions provider Thales Alenia Space (67%) and satellite operator Telespazio (33%). These two companies, established in 2005 to combine the space businesses of Alcatel and Finmeccanica, are proportionately consoli- dated in the Group’s financial statements, and in the key figures given above (the key figures for the Space division, for the period from April to December 2007, are given on page 47, in the Notes to the consolidated financial statements).

1. AEROSPACE

Overview The Aerospace division operates in four major areas: - equipment, products and functions for civil and military aircraft, - onboard systems and equipment for combat aircraft, - ISTAR (Intelligence, Surveillance, Target Acquisition and Reconnaissance) systems, - services for civil and military customers.

Strategic vision In markets characterised by very long cycles, Thales’s strategic goal is to establish sustainable, profitable global leadership positions, in the sectors with the strongest prospects for growth, as a first-tier supplier to aircraft manufacturers, airlines and armed forces. The key drivers for delivering this strategic vision are as follows: - a dual-technology approach at all levels of the company, encompassing functions and products that are common to both civil and military aircraft, and the technology expertise and capabilities required to develop and support them. For exam- ple, experience in large-scale software systems, initially gained in military programmes, is directly relevant to navigation and in-flight entertainment systems for civil aircraft, - full control of the skill sets, processes and resources needed to develop, produce and support product / systems solutions, backed by a supply chain that makes a positive contribution to the quality and competitiveness of Thales deliverables, - customer-centric innovation in all areas (technical, services, processes). The division devotes 23% of its revenues to innova- tion through capital investments and research & development focused on new products, and has one of the world’s largest portfolios of patents in the aerospace field, - a strong international presence, particularly in France, the United Kingdom, the United States, Canada, Asia, Russia and Germany (via Diehl Aerospace, the joint venture with Diehl). With its hubs and centres of excellence around the world, Thales works closely with its customers as a local partner as well as maintaining its status as a global player. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 90 2007 ANNUAL REPORT – Thales Business description International presence Research & innovation

Aerospace tomorrow The Aerospace division is closely involved in the work of industry associations at European and worldwide level, bringing its expertise to bear in the definition of tomorrow’s air transport standards and solutions: cleaner, quieter and more efficient aircraft designed to fly safely and securely in ever-more crowded skies. In particular, the division is taking part extensively in the CleanSky JTI (Joint Technical Initiative), which was ratified by the European Union in 2007 as Europe’s largest-ever aerospace research and technological development project. Thales, as a whole, plays a key role in European programmes because its capabilities span the entire air traffic chain, from critical onboard functions such as flight control and navigation to ground-based air traffic control and management systems. The certification of the Microwave Landing System (MLS) in 2007 illustrates Thales’s end-to-end involvement in the air traf- fic chain. This “system of systems” offers Category IIIB capabilities, allowing approaches and landings in very poor visibility. Combining state-of-the-art microwave systems on the ground and on board aircraft, Thales’s MLS system was approved by the European Aviation Safety Agency (EASA) in 2007. Ground-based MLS equipment supplied by Thales has now been deployed on both runways at London’s Heathrow airport. is the first airline to adopt the technology and has already installed MLS equipment on around sixty of its aircraft, cutting delays for passengers while also reducing carbon dioxide emissions. In military aerospace markets, Thales has a long-standing involvement in the development of combat and surveillance systems. Today the company is playing an active role in planning and preparing the network-centric combat systems of the future. These systems will draw extensively on the company’s expertise in sensors, signal and data processing, com- mand, control and communication, weapon delivery and defensive aids, within new architectures combining various types of manned and unmanned platforms.

Business review

1.1. Equipment, products and functions for civil and military aircraft The Aerospace division supplies the full spectrum of onboard electronic equipment and solutions for civil and military air- craft, including avionics, cabin systems (in-flight entertainment, connectivity) and electrical power systems. Thales has established itself at world level as a first-tier supplier for aircraft manufacturers including Airbus and Boeing, as well as for airlines and armed forces. Its product solutions are increasingly integrated as subsystems and complete func- tions, helping customers to meet their competitiveness, environmental protection and performance goals. Thales is the European leader in avionics and ranks third worldwide, behind Honeywell and of the United States. Most of the major manufacturers of civil aircraft, including Airbus, Boeing, Bombardier Aerospace, Embraer and Sukhoi, are Thales customers. The Group also supplies avionics for ’s Mirage and Rafale combat aircraft, as well as for Russian Sukhoi and MiG combat aircraft, and it serves both the civil and military segments of the helicopter avionics market. The civil aerospace market offers strong long-term growth prospects, although the development of the sector is cyclical. After the major crisis that began in 2001, air traffic volumes have grown by 5% year-on-year since 2005. This growth was sustained in 2007, translating into a new record year for orders from planemakers, with 2,700 aircraft on order from Airbus and Boeing. In this global market, Thales is a first-tier supplier and partner for both Airbus and Boeing, the world’s leading planemak- ers. Companies like Thales have assumed responsibility for significantly broader scopes of activity as the number of first-tier suppliers has fallen. As part of Airbus’s New Systems Policy, Thales has demonstrated its ability to function effectively higher up the value chain for the A350 XWB (Extra Wide Body) programme, for example, investing in more comprehensive integra- tion capabilities such as the iDeck cockpit prototyping and simulation platform. As a result, Thales was selected to supply avionics solutions for the interactive cockpit display system, onboard computers and inertial navigation system on the XWB, scheduled to enter service in 2013. This significant business win further endorses the close and enduring relationship between Thales and Airbus, which marked a highlight in 2007 with the entry into commercial service of the first A380 with Singapore Airlines. Thales is supplying a raft of technological solutions for the new wide-body aircraft, including avionics, navigation and flight control systems (in association with Diehl Aerospace), the pilot interface and electrical power generation system (in association with Goodrich), and in-flight entertainment systems. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 91 BUSINESS REVIEW Rapport financier

In addition to consolidating its Tier 1 status with Airbus and Boeing, the Group strengthened its relationships with other aircraft manufacturers in 2007. For example, Thales was chosen by the European regional turboprop aircraft manufacturer ATR to supply the avionics suite for the new ATR 42-600 and ATR 72-600. Thales has also benefited from the resurgence of the Russian aerospace sector, having been selected to play a key role in the Sukhoi Superjet 100 programme. The Group will be supplying core avionics equipment, integrated maintenance systems, standby instrumentation, flight guidance, manage- ment and recording systems, communications and navigation systems, and flight deck display and control equipment for the regional aircraft, the first civil aircraft to be designed in Russia for more than 20 years. The unveiling of the aircraft at Komsomolsk-on-Amur in Eastern Russia in September 2007 was a major programme milestone. Thales is now among the leading players in the fast-growing civil aircraft cabin systems segment: - Thales’s TopSeries family of in-flight entertainment systems (IFE) brings innovation right to the passenger’s seat, through in- tegrated entertainment and communication solutions and connectivity with personal electronic devices. Thales IFE systems have widely proven their performance and are now a feature of the passenger cabins of commercial airlines worldwide. The Group booked a slew of new orders in 2007: the TopSeries IFE system was selected by Korean Airlines to equip 10 B787, 23 B777 and 19 A330 aircraft; Air China chose TopSeries for its B787 fleet; and further contracts have been signed with Ethiopian Airlines, Afriqiyah Airways, Saudi Arabian Airlines and LOT Polish Airlines. A powerful endorsement of the Group’s position in the market came with the selection by Airlines of Thales’s IFE system in preference to the solution offered by a Japanese competitor. Between 2004 and 2007, Thales achieved a 20-fold increase in its order intake for IFE systems, and now enjoys a 45% share of the world market, as well as almost 80% penetration of the Boeing 787 programme. Thales is also continuing to develop related services such as content management solutions that enable airlines to securely select and download films, music, etc. directly to aircraft from the production studios, - Thales has developed a new connectivity offering, which will keep aircraft permanently connected to ground-based systems via satellite. Passengers will use the internet, make mobile phone calls and send text messages, and crew members will ac- cess services networks and data link communication capabilities. Thales’s TopFlight Satcom high-speed satellite commu- nication solution is currently in operational testing with , and low-cost carriers like and -based AirAsia X have already purchased the system. In late 2007, Thales was selected to equip AirAsia X’s fleet of A330-300 air- craft with TopFlight Satcom, the TopSeries IFE system, and critical avionic components such as the latest-generation Flight Management System, and the Terrain and Traffic Collision Avoidance System (T2CAS). In addition, Thales will provide after-sales, repair and maintenance support for 15 years via a repair-by-the-hour (RBTH) maintenance package, - today, cabin lighting is a factor of passenger comfort and a differentiatator for airlines. Diehl Aerospace, a joint venture of Diehl and Thales, is the market leader in this sector and a first-tier supplier of cabin lighting for new very large aircraft mod- els. Traditional fluorescent lighting systems are being replaced by all-LED ambient lighting solutions with new capabilities for colour rendering and continuous adjustment of light intensity, making it possible to tailor cabin lighting more closely to customers’ requirements. Thales’s expertise in electrical power generation and conversion systems also brings significant potential for synergies. For example, Thales and Goodrich are supplying the variable-frequency electrical power generation system for the . In addition, Boeing has selected Thales’s electrical power conversion system, which features innovative lithium-ion batteries, for the 787 Dreamliner programme. This is the first time this technology, currently in the process of qualification, has been deployed on board a commercial aircraft. Lithium-ion offers a 50% weight advantage over conventional battery technolo- gies, with no loss in performance. The military aerospace market is less cyclical overall, with growth driven primarily by the steady increase in electronics as a proportion of total platform value, and by retrofits of existing aircraft. In 2007, Thales won the contract to upgrade the avionics on the French ’s C-130 Hercules military transport aircraft, and on its Alphajet trainer aircraft based at the French-Belgian flight training school. Airbus’s European A400M programme, meanwhile, is progressing in line with the customer’s schedule. Thales will supply the new-generation Flight Management System (FMS), screen and head-up display systems, and the modular avionics suite (developed in partnership with Diehl Aerospace). Another key growth driver is the development of special-mission aircraft based on existing civil platforms from Airbus and Boeing, such as the A330-200 Air- to-Air Refuelling and Air Transport aircraft chosen by the AirTanker consortium (of which Thales is a member) for the UK’s Future Strategic Tanker Aircraft (FSTA) programme. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 92 2007 ANNUAL REPORT – Thales Business description International presence Research & innovation

Thales also proposes the TopOwl helmet-mounted sight / display, which places all essential flight control information right before pilots’ eyes, obviating the need to look down at the instrument panel and thus enhancing flight safety. Thales contin- ued deliveries of the TopOwl helmet-mounted sight for the Cobra combat helicopter in the United States during 2007. Also during the year, Eurocopter España ordered 48 TopOwl systems for use by Spanish Tiger HAD-E helicopter crews. TopOwl was also selected, alongside Lockheed Martin’s Arrowhead optronics platform, to participate in the demonstration of Lock- heed Martin’s Pathfinder modernised pilot night vision system to different US military organisations. As the leading supplier of avionics to Eurocopter, the Group has been involved from the outset in the European NH90 and Tiger military helicopter programmes. Under an agreement signed in late 2007, Thales will continue to supply the Meghas avionics suite for Eurocopter’s existing programmes. Equipping more than 5,000 helicopters, Meghas is now the most wide- spread helicopter avionics suite in the world. The Group is diversifying its customer base in this segment to meet new needs: Thales is now a supplier to AgustaWestland for the A109 LUH, and is providing the TopDeck integrated avionics suite for Sikorsky’s new S-76D helicopter.

1.2. Combat systems Thales designs cockpit avionics and – in close collaboration with Dassault Aviation – electronic combat systems for highly complex combat aircraft: - nose-mounted radars for surveillance and fire control, - electronic warfare and defensive aids subsystems, - computers for navigation and attack systems. Other Thales divisions also supply onboard optronic equipment (OSF forward-sector optronic suite, reconnaissance pods, laser targeting pods, etc.) and radio systems. Electronic equipment and systems account for as much as 25% of the total value of a combat aircraft like the Rafale. Combat aircraft typically account for a significant proportion of a country’s defence budget. The combat aircraft market – which includes both the aircraft and the equipment they deploy – functions largely on an individual nation basis and is dependent on the sovereignty policies of the governments concerned. Thales is now the European leader in aircraft combat systems, in terms of both market share and new technologies, and ranks third worldwide, behind the American companies Raytheon and Northrop-Grumman. The Group’s position is built largely on its involvement in the Mirage and Rafale programmes in France and on export, particularly the Mirage export programmes. Thales intends to maintain and consolidate its technological leadership, and to continue to improve its export performance, in particular through opportunities with the Rafale in collaboration with Dassault Aviation and , and to provide national customers with solutions that meet their long-term sovereignty needs. Thales is also consolidating its position as a trusted and valued partner on aircraft manufacturers’ new programme developments. Thales is also the European leader in electronic warfare systems (defensive aids and intelligence), a segment that demands many of the same technical capabilities as combat systems, and one in which the Group leverages powerful synergies in applying its expertise to land, air and naval applications. Thales’s leadership in this highly sensitive area is particularly pro- nounced in the UK and France. In both countries, the company has major operations in this area and has recorded a string of export successes.

Key Thales projects In radars, Thales delivered the Rafale’s RBE2, which offers important new operational functions and is Europe’s first opera- tional electronically scanned onboard radar on the market. Under the “Rafale roadmap” contract awarded by the French defence procurement agency (DGA), Thales also pursued industrial development of the next-generation active phased array antenna, which will equip Rafale fighters for the French Air Force and Navy in 2012. It will offer exceptional operational performance, and has completed initial flight testing with conclusive results. In electronic warfare systems, Thales has developed the SPECTRA countermeasures suite equipping Mirage and Rafale aircraft in service with the French Air Force and export customers. Advanced studies are already underway to develop future generations of electronic warfare systems. The Mirage 2000-9 fighters deployed by the United Arab Emirates in 2007 are WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 93 BUSINESS REVIEW Rapport financier

equipped with electronic warfare systems supplied by Thales, including the Integrated Multi-mission Electronic Warfare Sys- tem (IMEWS). The customer is particularly pleased with the performance of this highly sophisticated equipment, which relies on a system of air-to-ground and air-to-air datalinks. The 15 new Mirage 2000-5 aircraft delivered to the Greek Air Force in 2007 are also equipped with Thales technology. The agreement with the Greek Air Force additionally encompasses the up- grading of radar, electronic warfare and avionics equipment for ten existing Mirage 2000 aircraft. Also in 2007, the United Arab Emirates formally accepted the upgrade of 30 Mirage 2000-9 aircraft, and took delivery of 32 new Mirage 2000-9s. Thales is the European leader in naval electronic warfare, which protects warships and their fleets by exploiting electromag- netic signals generated by aircraft, missiles and other ships, and contributes to the common operational picture of the bat- tlespace. Notable successes were scored in France with the Horizon and FREMM (multi-mission ) programmes, while in the UK, the fourth system for the Type 45 Radar Electronic Support Measures (RESM) programme achieved a Satisfactory Progress milestone. Thales also won the contract to upgrade electronic support measures (ESM) systems currently in service with the British submarine fleet under the SMART (SubMarine Advanced RESM Technology) programme. Synergies between the Aerospace division and other Thales entities are particularly evident in the electronic warfare systems market. In partnership with the Air Systems division, for example, the Aerospace division won a contract in 2007 to install an electronic protection system (EPS) for anti-aircraft batteries in Saudi Arabia. The programme, known as Al Madhallah (“the Umbrella”), calls for the installation of a national electronic warfare centre in Riyadh, plus six regional hubs. Thales will deliver training in electronic warfare for missile battery personnel, and provide Saudi Arabia with an electronic warfare capability that allows it to protect its , Shahine, Patriot and Hawk air defence batteries by jamming incoming threats such as missiles and aircraft.

1.3. ISTAR systems ISTAR (Intelligence, Surveillance, Target Acquisition and Reconnaissance) systems meet a broad spectrum of operational requirements for armed forces. They feed information into the observe, orient, decide, act (OODA) loop, constituting a vital link in the military chain of command. They are also increasingly relevant to the requirements of civil defence agencies (police, customs, coastguard, etc.). The availability of various platform types (fixed-wing, helicopters, UAVs) with different range, precision and payload capacities calls for optimised solutions to meet a broad range of operational needs, mainly in maritime, airspace and ground surveillance (battlefields, borders, etc.). The Group acts as system supplier and prime contractor, designing mission systems with capability for mission planning and management. Thales also supplies equipment for integration at subsystem level, and its offering also includes the provision of surveillance services. This broad range of requirements and operational concepts has led to an equally diverse array of possible architectures and solutions. For example, a given requirement might be met with a manned aircraft carrying surveillance equipment or with several UAVs linked to a ground-based control centre. Key innovations concern sensor, communication and processing technologies as well as higher-level system integration. Demand is increasing for complete, integrated system architectures – a core specialism for Thales – that are largely platform- independent and offer the flexibility and responsiveness that new force systems require. This sector is expected to grow more significantly than conventional weapon systems, for example, in view of rising demand for deployable command & control solutions, maritime surveillance and other civil security applications. Current market conditions also reflect the new capability-based approach adopted by customers seeking an optimised response to their needs. Strengthening demand has led Thales to develop tools for simulation and testing of potential ar- chitecture solutions, which are deployed in collaboration with end users in order to define specifications in advance. This methodological breakthrough, best illustrated by the Group’s Battlespace Transformation Centre, has been instrumental in Thales’s ability to secure programmes like the Watchkeeper contract in the UK.

Key Thales projects Thales enjoys established leadership positions in airborne systems for electronic intelligence and maritime surveillance and patrol in France and the United Kingdom, as well as in export markets. Its offering is built around expertise in Forward Looking Infrared (FLIR) sensors (working with the Land & Joint Systems division), airborne radar, communication systems, WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 94 2007 ANNUAL REPORT – Thales Business description International presence Research & innovation

satcom and systems integration. The Group is now recognised as a pathfinder in ISTAR systems, as evidenced by selection as prime contractor for the UK Watchkeeper programme in 2005. This highly complex programme, Europe’s largest UAV-based battlefield surveillance contract, involves all of the UK’s armed forces and is making steady progress, with a number of key milestones achieved in 2007. The System Critical Design Review was successfully completed, and the aerial platform was completely remodelled in advance of initial flight testing. Also during the year, to enable the to meet an urgent operational need, Thales proposed the WK450 UAV, the centrepiece of the Watchkeeper system, in combination with a data processing system housed in a mobile station. The equipment has been deployed into the British Army’s two current theatres of operations, providing a round-the-clock surveillance capability that helps boost operational effectiveness as well as enhancing safety for troops on the ground. The contract was executed with remarkable speed, with barely six months elapsing between the customer’s decision and operational deployment in-theatre. Under an innovative arrangement, Thales is operating the system against payment on a flight hour basis. The first flight tests for Turkey’s large-scale maritime patrol and surveillance programme, Meltem, also took place in 2007. Under this contract, Thales is equipping nine existing CN-235s and ten new ATR 72-500s with full mission systems. Three of the CN-235s will be converted into maritime for the Turkish Coastguard, while the remaining craft will be deployed by the Turkish Navy for maritime patrol purposes. The Thales solution is based on Amascos (Airborne Maritime Situation and COntrol System). It is designed around a tactical command subsystem with a full range of Thales sensors and communication systems. Finally, in France, the defence procurement agency (DGA) selected Thales to conduct a study for a vertical takeoff and landing (VTOL) Unmanned Aerial Vehicle (UAV) system to meet the tactical requirements of France’s land and naval forces. Thales also continued to be a leading player in the project to develop a MALE (Medium Altitude Long Endurance) UAV, in collaboration with Dassault Aviation. The capabilities developed for the UK Watchkeeper programme will be leveraged to help Thales and its partner propose an integrated UAV platform / functions offering.

1.4. Services for civil and military customers The strategic importance of through-life support services for civil and military aircraft is becoming increasingly evident, opening up attractive new prospects for Thales. For a number of years, Thales has focused on growing its through-life sup- port business by deploying infrastructures and resources to meet customers’ specific needs. As a result among others of this successful strategy, in 2007 Thales was ranked among Airbus’s top ten service suppliers and presented with an Airbus Supplier Rating Award. In civil aviation, the increase in the number of commercial airliners in operation worldwide offers potential for steady growth. In addition, as airlines work to improve their competitive performance, they are outsourcing an increasing number of tasks to suppliers. Thales already operates a powerful global support network for airlines, and continues to enrich its existing offering of equipment and systems maintenance contracts by leveraging in-house resources, and by developing part- nerships with other suppliers to simplify the customer interface. This strategy was developed in particular as part of prepara- tions for the A380’s entry into commercial service. The key objective is to provide on-the-spot support for airline operations to get aircraft back in the air within the shortest possible timeframe. Thales’s network of support locations has been rolled out with this goal in mind. The Group has also developed innovative contractual arrangements tailored to customer needs, such as “avionics by the hour” (ABTH) and “repair by the hour” (RBTH). Another important avenue for growth is the devel- opment of brokering services, whereby Thales offers its customers reconditioned parts, sometimes in combination with new products. Airlines have responded very positively to this initiative. In the defence sector, Thales provides through-life support for equipment on board combat and other military aircraft under major contracts with the , and is winning an increasing number of contracts in other countries. Ambitious plans by armed forces to cut aircraft maintenance costs while boosting operational readiness also open up inter- esting prospects with the progressive entry into service of a number of new aircraft types to which Thales has been an impor- tant contributor (Rafale combat aircraft, Tiger and NH90 helicopters, A400M transport aircraft). Defence customers are increasingly outsourcing systems maintenance to the contractor community, with armed forces personnel retaining overall control of support operations. Thales is able to leverage its experience in the civil sector, and its Europe-wide reach, to offer military customers a comprehensive approach to services and support based on a combination of in-house capabilities and partnerships with other specialists. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 95 BUSINESS REVIEW Rapport financier

Key Thales projects The creation of OEMServices, a joint venture with Diehl Aerospace, Liebherr-Aerospace and Zodiac, is a good illustration of Thales’s ability to move up the value chain in service provision. OEMServices provides airlines with a single logistics interface shared by the four partners, and the company’s commercial performance in 2007 indicates strong demand from airlines for this new kind of service approach. The company was selected by Singapore Airlines to provide complete support services for more than six hundred part numbers for its A380-800 fleet under a 14-year agreement, and by Emirates to supply spare parts and maintenance services encompassing over 650 different components for its A380s under a 15-year contract. In support and services for military aircraft, major through-life support contracts for the new Mirage 2000 fleets delivered to Brazil and the United Arab Emirates came into force in 2007. A major service contract was also signed with Taiwan’s Ministry of Defence to ensure high operational availability for its fleet of Mirage 2000-5s. Orders for support services for the Indian Air Force grew by 20%. In France, after winning a contract to provide an additional tranche of flight hour support for equipment on board the Ra- fale combat aircraft, Thales successfully supported the entry into service of the French Air Force’s first Rafale squadron. In the UK, under a new phase of the SKIOS (Sea King Integrated Operational Services) maintenance contract launched in 2007, the breakdown of roles and responsibilities between government and industry was further optimised. The contract extension, which will boost operational readiness while cutting costs, further confirms the value of Thales support solutions for military customers. By rounding out its service offering and optimising its entire supply chain, the Group intends to offer integrated support solutions to all of its customers and to benefit to the full from the upcoming entry into service of new fleets of Tiger and NH90 helicopters and A400M transport aircraft.

2. SPACE

Overview Thales significantly strengthened its space operations in April, acquiring Alcatel-Lucent’s interest in Alcatel Alenia Space – subsequently renamed Thales Alenia Space (owned 67% by Thales and 33% by Finmeccanica) – and Telespazio (67% Finmeccanica, 33% Thales). This acquisition made Thales the European number one in satellite solutions for civil and military applications, and a major player in orbital infrastructures. Thales now offers the end-to-end portfolio of space and ground-based technologies that is a major advantage in the development of systems of systems. In acquiring Alcatel-Lucent’s space businesses, Thales reached a major milestone in its development. The operation made good commercial and industrial sense, enhancing Thales’s large-scale systems integration and dual technology capabilities for the telecommunications, navigation, Earth observation and science markets, and strengthening Thales’s presence in its core markets. This strategic partnership between Thales and Finmeccanica leverages the complementary capabilities of Europe’s leading supplier of satellite solutions, Thales Alenia Space, and one of the world’s leading service providers, Telespazio. With 7,200 employees, nearly 70% of them engineers, and 11 industrial facilities in France, Belgium, Italy and Spain, Thales Alenia Space is a world-class supplier of space technologies. The company leads programmes for institutional civil and military customers and for private customers alike, offering turnkey solutions encompassing ground and space segments, satellite and launcher equipment, mission control services for telecommunications, optical and radar Earth observation, navigation and science, as well as elements for orbital infrastructures and space transport systems. Telespazio is among the world’s leading suppliers of satellite services and plays a key role in major public and private sec- tor projects, covering satellite operations and services for Earth observation, satellite navigation, integrated networks for multimedia telecommunications and integrated connectivity, and many more value-added services. The company has some 1,400 employees at 22 facilities throughout the world and operates a network of four space centres. Its space centre in Fu- cino, with more than 90 operational antennas, is the largest teleport in the world for civilian use. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 96 2007 ANNUAL REPORT – Thales Business description International presence Research & innovation

Today, Thales is a pivotal player in major civil space programmes including Europe’s Global Monitoring for Environment and Secu- rity (GMES) programme and the Galileo satellite navigation system and its precursor EGNOS, and in military space programmes such as the French Syracuse and the Italian SICRAL systems, and the Italian COSMO-SkyMed Earth-observation programme.

Market growth After several years of flat growth, the space sector is showing clear signs of recovery. In recent years, the commercial telecommunication satellite market has been ordering between 15 and 20 satellites a year on average. In 2007, 28 satellites were ordered, 19 by competitive tender. In the years ahead, Thales Alenia Space expects modest growth in this market, with 23 to 25 competitively sourced satellites a year. Renewed investment is explained chiefly by fleet renewals and by the development of new applications like Mobile TV, high-definition TV and geolocation services. In civil and military institutional markets, Thales Alenia Space expects yearly growth of 4 to 5 percent, but growth is closely tied to policy and budget decisions. These markets are hard to penetrate and European firms are only really able to obtain business in Europe. Some very large civil programmes – Galileo, ExoMars and GMES – are now ramping up. In the military sector, recent French-Italian agreements concerning the joint Sicral-2 and Athena-Fidus telecommunications programmes should confirm Thales Alenia Space’s European leadership in the military space market. In services, not including TV broadcasting which is driven by highly specific market dynamics, Telespazio expects to achieve average yearly growth of around 4 percent over 2007-2016, chiefly in North America, Western Europe and Asia-Pacific, which together represent three-quarters of a world market worth an estimated €18 billion. The most promising segments are inno- vative networking solutions using mobile terrestrial platforms and dual civil and military systems, Earth observation and, in the longer term, navigation and infomobility applications, notably for safety-of-life systems for air, land and sea transport.

Offensive strategy To take full advantage of these growth prospects, and with the support of its shareholders Thales and Finmeccanica, Thales Alenia Space has crafted a strategic vision for its future growth based on: - increasing its share of institutional civil and military markets in Europe and in national domestic markets, leveraging its presence in France, Belgium, Italy and Spain, where ESA geographic return rules ensure a level of business equivalent to member states’ budget contributions, - developing its defence business in export markets outside Europe, - developing end-to-end solutions incorporating Thales Alenia Space systems and Telespazio services, - promoting systems-of-systems solutions jointly with Thales combining terrestrial and space technologies, - positioning itself to serve new applications such as mobile television.

European leadership Thales Alenia Space is: - European number one in satellite systems, - world number one in telecommunications payloads, - European number one in military satellite systems, - European number one in navigation systems, - world leader in satellite altimetry, meteorology and oceanography, - a key player in Earth-observation programmes with high-resolution optical and radar sensing instruments. The global satellite market is served by numerous players. Only four of them – Boeing, Lockheed Martin, EADS Astrium and Thales Alenia Space – offer the full range of satellites. Thales Alenia Space is pursuing a partnership strategy developed on a project-by-project basis. For example, it is working with EADS Astrium on institutional projects and with Russian (NPO-PM) and American (OSC) firms in the commercial sector. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 97 BUSINESS REVIEW Rapport financier

Launches in 2007

- 15 satellites • Telecom: Galaxy 17 (USA), Chinasat 6B (China), Star One C1 (Brazil), RASCOM-QAF1 (Africa), 8 first-generation Globalstar satellites • Observation & Science: COSMO-SkyMed 1&2 (Italy), Radarsat-2 (Italy) - 3 payloads and instruments • Observation: SAR Lupe 2&3 • Science: AGILE - International Space Station • Node 2

Business review After an excellent year in 2006, Thales Alenia Space confirmed its leadership position in 2007, winning five contracts to build seven satellites (six telecommunication satellites and one Earth-observation satellite) and cementing a strategic industrial partnership with Russian firm NPO-PM.

A good year for telecom satellites In a highly competitive market made even more difficult by the unfavourable euro / dollar exchange rate, Thales Alenia Space signed four contracts to build six telecommunication satellites. These are strategic contracts for the company, since three of them were signed with new customers: Telenor (THOR 6 in Norway), Indosat (PALAPA-D in Indonesia) and Yahsat (Yahsat-1A and 1B in the United Arab Emirates). The latter award is worth a total of €$1.6 billion, 50% for Thales Alenia Space and 50% for EADS Astrium, which is co-prime contractor. The contract with Arabsat to build the Arabsat-5A and BADR-5 satellites in partnership with EADS Astrium will also strengthen Thales Alenia Space’s position in the Middle East. Thales Alenia Space signed a contract with Hispasat to supply the AmerHis-2 payload for the Amazonas-2 satellite. It will also supply two payloads for NPO-PM’s Loutch 5A and 5B satellites, and the payload for Kazakhstan’s KazSat satellite, thus achieving a 35% market share. Thales Alenia Space also signed a deal with Globalstar in the United States to extend the ground segment of its constellation of 48 satellites. Globalstar provides mobile satellite services. In the market for very-high-power satellites, the first Alphabus spacecraft bus developed by Thales Alenia Space with EADS As- trium was recently selected by the European Space Agency (ESA) and for their joint Alphasat programme. This new bus is designed to support 12-to-18-kW payloads and is aimed at major satellite operators seeking to renew their fleets. It will spur development of new applications for mobile services, broadband, digital and high-definition TV. Lastly, the partnership signed late in the year between Thales Alenia Space and Russian firm NPO-PM will enable the two companies to jointly develop and design a high-power multimission spacecraft bus called Express-4000, thereby establish- ing a stronger base in Russia. Built around Thales Alenia Space’s 4000 technology, the new bus will incorporate a broad range of Russian equipment and subsystems, and will carry a payload supplied by Thales Alenia Space. Thales Alenia Space and NPO-PM will also jointly procure equipment for the Spacebus 4000 and Express-4000 series from Russian sup- pliers to boost Spacebus 4000’s global competitive performance.

Comprehensive turnkey solutions for all communication applications Terrestrial and space technologies complement one another very closely, and satellite broadband services now offer cost- effective solutions for institutional customers, operators, private firms and professional communities. Thales Alenia Space is moving strongly into new application markets with solutions for mobile and high-definition TV, digital audio broadcasting and location-based services. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 98 2007 ANNUAL REPORT – Thales Business description International presence Research & innovation

A key player in major European civil and military programmes Thales is playing a central role in Europe’s major space programmes dedicated to environmental monitoring (GMES, MSG and oceanography), science and space exploration (COROT, Herschel/Planck, ExoMars and Cassini-Huygens), and naviga- tion (EGNOS and Galileo). As the systems architect for satellite navigation programmes in Europe, Thales Alenia Space is prime contractor for EGNOS and a leading contractor on the Galileo programme.

A pivotal role in GMES The Global Monitoring for Environment and Security programme (GMES), launched in 2002 by the European Commission and ESA, will generate and exploit reliable environmental data for mapping, analysis and prediction models. GMES will provide an effective decision-support tool for managing natural and man-made hazards and for managing water resources. It will also support monitoring of urban development, the oceans and atmosphere, three areas that Europe has identified as its main environmental priorities. GMES is Europe’s contribution to the Global Earth Observation System of Systems (GEOSS), which encompasses most of the Earth-observation capabilities of 60 countries and 40 organisations around the world. Thales Alenia Space has secured two contracts to supply the first satellites in the future constellation: Sentinel 1 (all-weather radar imaging) and Sentinel 3 (ocean altimetry, colour and temperature). Thales Alenia Space is closely involved in a number of projects for GMES. For example, it is leading ESA’s MarCoast project to study the marine and coastal environment, and is contributing to Mersea (operational oceanography), Astro+ and Limes (security), and MARISS (maritime security). Thales Alenia Space is also very active alongside the French space agency CNES on the Emergesat humanitarian initiative. Emergesat is an emergency container equipped with satellite communication, observation and navigation equipment, and terrestrial Wi-Fi and GSM systems that can be rapidly deployed in response to humanitarian crises and natural disasters. The first Emergesat container was deployed by the Casques Rouges foundation in Darfur late in 2007. Thales Alenia Space is also a recognised technology provider for the radar and optical imaging systems used in meteorology (prime contractor for Meteosat’s first- and second-generation MSG satellites), oceanography (joint NASA/ESA TOPEX/ Poseidon and Jason-1 et Jason-2 programmes), polar ice cap monitoring (with CryoSat/Siral to be launched in 2009) and Earth observation (COSMO-SkyMed, Pleiades, SPOT and other programmes).

European navigation systems architect The recent agreements reached by EU heads of States in December 2007 finalised the funding and industrial organisation for the Galileo programme, which will now be led by ESA. Galileo will give Europe its own, independent satellite navigation system serving a range of applications for air, rail, sea and road transport, location-based telecommunications services and security. A constellation of 30 satellites in non-synchronous orbit at an altitude of around 24,000 km will provide continuous global coverage and high-quality service even at the highest latitudes. Ground stations will manage the programme mission. When contracts were awarded end 2006 for the initial in-orbit validation (IOV) phase to develop the first four satellites and the ground segment, Thales Alenia Space was selected as ground segment prime contractor with responsibility for integrat- ing the satellites and the overall Galileo system. Thales Alenia Space was in charge of integrating the GIOVE B demonstra- tion satellite (launch date: 27 April 2008). Thales is also prime contractor for the security segment of the Test User Service, assuring signal quality and integrity as well as overall system security during the development phase. The Thales organisation, and Thales Alenia Space in particular, is playing a pivotal role in Galileo’s development, having de- fined the system’s overall architecture for the European Union between 2000 and 2003, as well as the satellite architecture for ESA. Thales Alenia Space was active in particular in defining and securing the frequencies required to implement the system. Besides the mature technologies that Thales has to offer, the success of the European Geostationary Overlay Navigation Sys- tem (EGNOS) was naturally a big factor in the choice of Thales as Galileo system architect. EGNOS is the most effective infra- WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 99 BUSINESS REVIEW Rapport financier

structure of its kind in the world, capable of augmenting GPS signals to provide more accurate and more reliable positional information. EGNOS entered service in late July 2005 and is currently undergoing certification. Thales Alenia Space was prime contractor for the EGNOS programme, the precursor to Galileo, coordinating more than 50 firms in 11 countries.

Military space systems at the heart of network-centric operations In the modern world, satellites play a crucial role in gaining and maintaining information superiority through their ability to see, listen, communicate and position anywhere, anytime. They are central to decision-making processes all along the chain of command, whether for analysing and evaluating threats or for planning strategic operations. Space assets have come to play a role in defending our nations and protecting forces into the field. Thales is a world leader in mission critical information systems, network-centric warfare systems (NCW) and land, naval and airborne C4ISR (1) systems, as well as Europe’s premier supplier of satellite systems for security and defence. These systems (2) are today the key links in C4ISR solutions, providing long-distance communications capabilities between out-of-area opera- tions and the military command infrastructure. This new dimension to Thales’s space offering – combined with its legacy of expertise in ground segments for space systems – is a key asset for the company, unleashing a systems-of-systems capability to meet the requirements of European and NATO forces. Such end-to-end solutions combine and exploit synergies between broadband satellite and terrestrial technologies to build systems of systems that are flexible, secure and interoperable. On the Syracuse military telecommunications satellite programme, for example, Thales Alenia Space is overall system prime contractor and in charge of the space segment, while Thales is prime contractor for the ground component. As the European leader in military satellite systems, Thales Alenia Space is also prime contractor for the Italian SICRAL tel- ecommunications system chosen by NATO and the COSMO-SkyMed dual-use radar imaging system. Telespazio is involved in the satellite launch and early orbit phase (LEOP) and is supplying communications services to NATO and European de- fence customers. The SICRAL 1B satellite is scheduled for launch in the second half of 2008. Telespazio is also developing the ground segment for the COSMO-SkyMed programme and the constellation will be controlled from its Fucino centre. Thales Alenia Space is also supplying both satellites for Satcom BW, Germany’s first telecommunications system, and the high-resolution instruments on the German SAR-Lupe radar imaging satellite and the French Helios and Pleiades optical imaging satellites.

Dual-use technologies vital for Europe Europe has many space assets despite a stagnating budgets and levels of spending often well below those of the United States, Russia, China or India. The funding gap between Europe and the United States, for example, continues to widen: the US spends 15 times more on military programmes and 4 times more on other government programmes. It is therefore vital for Europe to leverage technological and industrial developments to optimise investments in this sector. This concerted effort can be focused on two objectives: - using technologies developed by civil programmes for military purposes and vice versa, - developing civil / military satellite programmes. Space systems can collect and distribute data on a global scale, a capability that is useful to military and civil users with areas of interests all over the world. Joint acquisition and operation of such assets therefore makes good sense. The Italian COSMO-SkyMed system, for example, is operated jointly by the Italian space agency ASI and the Italian ministry of defence.

(1) Command, Control, Communications, Computer, Intelligence, Surveillance, Reconnaissance. (2) See also page 109 and 111 in the Land & Joint section. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 100 2007 ANNUAL REPORT – Thales Business description International presence Research & innovation

Setting the standards in European space exploration

Thales Alenia Space is playing a key role in space science and exploration. Among the many successes to its credit are the exceptional results obtained by the Infrared Space Observatory (ISO), designed to discover traces of water on planets in our solar system, and the landing of the Huygens probe on Saturn’s largest moon, Titan, after a seven-year journey. Thales Alenia Space is closely involved in ESA space exploration programmes such as the Rosetta mission to study comet 67P/Churyumov-Gerasimenko in search of the origins of life; the Mars Express probes to study the Martian atmosphere and Venus Express to study the atmosphere of Earth’s twin Venus; and Herschel-Planck to study star and galaxy formation and the cosmic microwave background (CMB), for which it is prime contractor. Thales Alenia Space is also prime contractor for the ExoMars mission, part of ESA’s Aurora programme. One of the most important upcoming space exploration missions, ExoMars intends to send a spacecraft and rover to explore Mars in 2011 in search of traces of past and present life. Lastly, the company is supplying more than half of the pressurised modules for the International Space Station (ISS), the latest (Node 2) having launched successfully in November 2007.

Thales Alenia Space innovating for future space exploration missions Thales Alenia Space is developing innovative technologies to fly three or four satellites deploying telescopes in formation to collect light from stars and planets and operating with a central “hub” satellite that will gather data and subject them to fine picometre-accurate spectral analysis. These nulling interferometry technologies work by isolating and then “blocking out” starlight in order to detect and ob- serve planets that would otherwise be hidden by a star’s glare. Formation flying calls for new guidance and navigation technologies to meet anti-collision and precise relative positioning specifications.

2007 revenues 2007 revenues by type of customer by activity

Infrastructures & Equipment & transport 4% others 9% Institutional Defence 17% 36% Science 6%

Observation 19%

Navigation 7%

Commercial 47% Telecom 55% WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 101 BUSINESS REVIEW Rapport financier

C. Defence

Key figures for Defence

in € million 2007 2006

Order book at year-end 10,333 12,512 Order intake 5,402 5,573 Consolidated revenues 5,222 5,320 Income from operations 458 (a) 424 Income from operations after restructuring costs (“EBIT”) 424 (a) 370 Consolidated workforce at year-end 21,685 21,947 Total workforce at year-end 23,112 23,720

(a) Before purchase price allocation.

Defence is the historical core business of the Thales Group. As a leading European defence systems contractor, Thales de- signs, develops and deploys mission critical information systems, command, control and communication systems, weapon systems and force protection systems. The highly specific nature of military requirements has shaped the Group’s development: the technological excellence and cutting edge capabilities in complex systems engineering that Thales has cultivated to serve the armed forces is now also available to non-defence customers in the civil aerospace and security markets. This dual approach is a mainstay of the Thales strategy. Thales designs systems for all types of aircraft, naval vessels and land platforms. They sense threats, distribute data, support command decisions and control engagements in time-constrained contexts and with maximum reliability. Thales systems and solutions help to optimise the efficiency of military operations by simplifying the coordination of assets deployed by joint or coalition forces. The three Thales divisions in the defence segment (Land & Joint Systems, Air Systems, Naval) offer four main capabilities: - communications and intelligence for all armed forces (air, land, naval, joint), - information and command systems, - weapon systems and mission systems for all types of platforms (combat aircraft, ships, land vehicles, infantry soldiers), - air defence missile systems. The global defence market is growing overall, with significant differences in growth rates in different regions of the world. In Asia, the Middle East and Latin America, for example, steady increases in military spending are expected over the coming years. In the United States, however, brisk growth in procurement budgets since the beginning of the decade, particularly with exceptional spending on operations in and Iraq, is now slowing. Defence spending by European nations is expected to remain stable or rise only slightly. The United Kingdom and France, the two main contributors to the European defence effort, are reviewing their defence and national security policies prior to the announcement of multi-year equipment procurement budgets (the Defence Planning Round (PR08) in the United Kingdom for the period 2008-2011 and the 2009-2013 military spending plan in France). One of the objectives of the spending reviews is to better position national defence capabilities for future transnational cooperation. In France, the white paper on defence and national security is expected to be published in May 2008. The paper will restate defence policy objectives, likely placing particular emphasis on linkages between defence policy and general security policy, and stabilising the defence effort at around 2% of GDP. The schedule revisions expected on certain major French procurement programmes should have only a moderate impact on the Group’s defence businesses, which will maintain its momentum through export markets and the structural increase in spending on electronic systems as a proportion of overall defence procurement. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 102 2007 ANNUAL REPORT – Thales Business description International presence Research & innovation

1. Air Systems

Overview Thales’s systems and equipment help to make airspace safer and more secure. In the defence sector, Thales airspace surveil- lance systems, command and control centres and complete threat evaluation and response solutions protect armed forces and high-value assets. In civil aviation, Thales’s solutions cover satellite navigation, airport security and all phases of air traffic control.

Solutions tailored to emerging requirements Thales keeps track of customerexpectations and their evolving operational environment, optimising its value proposition in terms of availability, reliability, performance, security and cost control. The company pursued this strategy in 2007, adapt- ing products and solutions to requirements while streamlining industrial operations. In the defence sector, the company offers highly effective solutions in an environment where borders are disappearing and armed forces and high-value assets are facing new threats. Thales’s portfolio of solutions encompasses a full spectrum of surface radars, airspace surveillance systems and command and control centres. The air traffic management (ATM) market continues to expand at a rate of around 5% a year. For the civil aviation sector, Thales provides tailored responses for all phases of air traffic management as well as satellite navigation systems and airport security solutions. Customerperceptions are also changing as a result of the surge in civil air traffic, which is expected to double by 2025, driven in particular by strong growth in Asia. Operators are looking to keep down costs while maintaining a high level of quality in their systems. Thales is working with its European customers, the air navigation service providers, to converge their systems and ultimately achieve a unified system. Joining forces in this way makes it possible to share the cost of upgrading systems to keep pace with the latest technology developments. Thales offers civil and military customers long-term refurbishment and maintenance, training and technical support. With its multidomestic footprint, the company provides close logistic support to client organisations all over the world.

Business review

1.1. Detection and surveillance

Growth opportunities in a stable market Thales provides ATM and airport solutions for the civil sector and air, land and naval products for defence customers. With a complete range of counterbattery, tracking and multifunction search and surveillance radars, Thales occupies a unique position in a highly competitive and stable market. Thales is also the only manufacturer in the world offering systems with the capability to control both the main US (ESSM, etc.) and European (, VT1, etc.) missiles. Customers today demand availability, transportability, “plug-play-and-forget” functionality, simplified maintenance through re- mote maintenance and dynamic reconfiguration, as well as firm commitments on total cost of ownership and obsolescence man- agement. Technical solutions must also meet the latest international regulatory requirements and European Union directives. Thales’s military customers want standard solutions that offer value for money and protect national sovereignty. To meet these demanding requirements and strengthen its position in a crowded market, Thales decided in 2005 to invest massively in a new range of multimission air defence radars designed for protecting high-value assets, national sovereignty and forces projected to out-of-area theatres of operation. The launch in 2007 of the Ground Master and Shikra radars was a major milestone in this strategy. To achieve it, Thales began with a root-and-branch review of design and production to make the transition from a single-product development process to one geared toward product families. The company designed and built a shared platform to leverage the best technologies from previous-generation radars devel- oped for both the land and naval sectors. Exploiting the complementary features of naval and ground radars and designing common building blocks, Thales successfully extended its range of surface radars in just 30 months. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 103 BUSINESS REVIEW Rapport financier

As well as delivering better quality, this approach is cost-effective because components used on different products are devel- oped only once, optimising manufacturing, integration and testing, and delivering new products twice as fast as processes not built around a shared platform. In close-range defence and passive surveillance, 2007 saw the qualification in September of the Homeland Alerter 100 (HA 100) passive radar during NATO’s Bold Avenger exercise in Norway, in the presence of our customer the Norwegian Defence Research Establishment and the French air force’s military flight test centre in southwest France. Orders for primary and secondary civil radars increased significantly in 2007. The company took further steps in recent months to keep these systems competitive in export markets despite the unfavourable euro / dollar exchange rate. The industrial rationalisation strategy, based on local partnerships that complement existing operations, consolidated Thales’s position in burgeoning markets. For example, the company formed a French-Chinese radar joint venture with TEDC and sold L-band radars to China via Omnisys, a Brazilian firm (majority-owned by Thales since 2006) in charge of manufac- turing and marketing these products.

1.2. Air defence and missile systems

European leadership Modern air defence strategies are having to adapt to a shifting geopolitical landscape. Armed forces are facing new, asym- metric threats as borders disappear and international terrorist networks mix with civil populations. Faced with this new paradigm, mission success partly depends on the speed and agility with which forces can reconfigure their assets and resources. To provide effective protection for forces in the field and defend high-value assets, air defence systems must incorporate all the components in the capability chain – sensors and early-warning systems, launchers and other effectors – as part of an extended real-time network. That is why individual nations and international military alliances including France and NATO are preparing to expand their capabilities, particularly in anti-missile defence. Irrespective of the type of theatre or operation (joint, allied, coalition or international), air defence systems must be fully interoperable and able to share all types of information in real time. These operational requirements pose a number of industrial challenges that call for advanced system-of-systems studies to achieve tighter cooperation between weapon systems and deliver services for global air defence missions. Thales is the only company in Europe capable of providing armed forces with a full range of solutions from early warning to threat neutralisation, including: - integrated air command and control systems, - detection and identification systems, - very short, short and medium range air defence systems, - missile electronics. In 2007, Thales consolidated its position as a major player in the market for integrated air defence systems to counter con- ventional threats, tactical ballistic missiles and cruise missiles. Dedicated to the protection of airspace and high-value assets, these systems actively contribute to mission planning and tasking, force engagement and threat neutralisation in the event of an attack.

1.2.1. Air defence systems ThalesRaytheonSystems (TRS), a joint venture equally owned by Thales and Raytheon, is a major player in integrated air command and control, battlefield surveillance and coordination systems. TRS acts as prime contractor for large-scale NATO programmes and offers integrated solutions to meet the requirements of network-centric environments. The company is playing an active role in studies to define future tactical ballistic missile defence systems and develop ALTBMD (1) architectures. It also supplies air defence, battlefield surveillance and weapon- locating radars. In air command and control systems, TRS added to its world-class references in 2007, working notably on: - BCS-F (Battle Control System-Fixed) for the United States; with the other BCS sites in Alaska, Hawaii and Canada, this system is today North America’s first line of defence against external and internal air threats. In February 2007, the Battle Control System (BCS) officially entered service with the U.S. Air Force, thus lifting restrictions on land operations for the East and West air defence sectors (EADS and WADS),

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- SCCOA (Système de Commandement et de Conduite des Opérations Aériennes) for France. The SCCOA programme is coordinated by MOSS (a joint company set up by Thales and EADS), with TRS performing the majority of the work. Each of these programmes calls for development of interoperable systems for planning, assigning and executing offensive and defensive aerial missions. Also in 2007, TRS concluded phase V of the Florako programme in Switzerland. This key programme, now in phase VII, is providing the Swiss Confederation with one of the most sophisticated air defence systems in the world, deployed in a par- ticularly difficult geography. TRS also won a number of contracts in 2007 to modernise command and control systems, notably in Asia and the Middle East. TRS has a solid portfolio of customers for weapon-locating and air surveillance radars. In 2007, it signed several major deals including a contract in the United States to supply Firefinder TPQ-36 and TPQ-37 radars. Contracts were also signed with other countries, including France, to support systems and maintain their operational availability.

1.2.2. Surface-to-air weapon systems and missile systems Thales confirmed its position in 2007 as a world leader in land-based and naval air defence systems, with core competencies spanning design, development and integration of very short, short and medium range systems. Investments in 2007 focused on effectors and systems. New land-based and naval versions were developed for weapon sys- tem tracking radars and for the Crotale Mk3 and Crotale Naval VT1 vertical launch short range weapon systems. In very-short range systems, the missile currently in service with the was modernised for new threats such as low-altitude UAVs or attack helicopters and light armoured vehicles. With a range beyond 7 kilometres, better coverage and altitude capabilities and more precise guidance, Starstreak II offers a real leap forward in performance. The versatile Starstreak II missile can be launched from land, naval or light aircraft platforms using automated fire-control systems such as Thales’s MultiMission System (MMS) or Light Multiple Launcher (LML). In the burgeoning short range market, new systems include the Crotale Naval VT1 Vertical Launch for convoy and ship pro- tection. This system is produced in partnership with DCNS, which is responsible for developing the Sylver vertical launcher. Thales also introduced its Multishield short range solution in 2007. Geared towards site protection and theatre defence, Multishield affords a significant capability boost through more effective fire coordination. In February 2007, the firing campaign at the ’s Les Landes test centre validated the cooperative fire control concept and the extension of the VT1 hypervelocity missile’s range to 15 kilometres. This campaign was conducted with a Crotale system in extended-range configuration. The missile was validated to an altitude of 9,000 metres in June 2006. In the medium range market, Thales is taking part as a member of the partnership with MBDA in the major Euro- pean SAMP/T (1) and PAAMS (2) anti-missile missile system programmes. These large-scale programmes form the backbone of the air defence capabilities of the participating countries and will use the same equipment for key point, strategic site and wide-area defence. Thales is developing the fire-control system software, the Arabel radar and missile seekers for both the land and naval versions. The SAMP/T system has been undergoing technical and operational acceptance trials with French and Italian forces since spring 2007. French and instructors were trained in the first quarter of 2007 and SAMP/T will enter service at the end of this year. To protect deployed forces against ballistic missiles with ranges of 600 kilometres and beyond, France has also selected the SAMP/T system combined with the M3R early-warning radar and the deployable component of the SCCOA air command and control system. These developments are a first decisive step towards France’s future anti-ballistic missile capability, scheduled to be operational from 2015. At the same time, NATO pursued the ALTBMD programme, which will combine the anti-theatre ballistic missile assets of several European nations, including France and the Netherlands.

1.2.3. Missile electronics and propulsion Thales is Europe’s leading supplier of electronic subsystems for missiles and precision-guided munitions, and provides equip- ment and services to customers throughout the world. The company’s core competencies cover design, development and production of high-performance seekers and proximity fuzes. The advanced technologies involved have applications in every segment of the market, from air defence to medium range missile systems, and are suited to all types of missiles, including air-to-air, air-to-surface, cruise missiles and anti-ship missiles.

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Leveraging its multidomestic operations in France and the United Kingdom, Thales continues to pursue cutting-edge re- search and develop world-class technologies. Examples include the semi-active laser (SAL) seeker for multiple applications (precision-guided rockets, mortars, artillery shells, smart bombs and missiles), for which the subassemblies of the first pro- totype were accepted by the French defence procurement agency DGA in October 2007. The first ground tests are scheduled for the end of the year. In 2007, Thales pursued deliveries of seekers and proximity fuzes for the Exocet and Mica missile contracts. The company was also selected by Raytheon Missile Systems to supply 5,000 target detection systems for the TOW 2B anti-tank missile system. Lastly, following the green light from the French and German governments and from the European Union, the agreement between Thales, EADS and MBDA concerning the sale of Bayern Chimie / Protac became effective 31 August 2007. This company develops and builds tactical missile propulsion systems. Its main customers are MBDA and the German federal office of defence technology and procurement (BWB).

Competition The major players in the detection market are Lockheed Martin and Northrop Grumman in the United States, the Elta group in Israel and EADS, Indra, Saab and Selex in Europe. In command and control systems, the market leaders are Lockheed Martin and Northrop Grumman in the United States and EADS in Europe. In surface-to-air missile systems, the leaders are Raytheon in the United States, Almaz-Antey and KBM in Russia and Diehl, MBDA and Saab in Europe.

1.3. Air traffic management

Setting global standards The International Civil Aviation Organization (ICAO) forecasts growth in air traffic – expressed in passenger miles – to continue at an average rate of 4.6% per year until 2025. Total departures and trip distances on regular domestic and inter- national flights operated by airlines will more than double over the 2005-2025 period. Airlines in the Middle East and Asia Pacific are expected to be the main drivers of growth in passengers and freight. In response to this strong growth in global traffic and to ever-tighter security and environmental standards, Thales is invest- ing in a number of consortiums to build the systems of the future. As a global leader in air traffic management (ATM), the company is playing an active role in the definition of new standards and is helping to draft and validate new operational procedures, particularly those relating to integration of ground-based and onboard systems, and to satellite navigation through the SESAR programme launched at the initiative of the Air Traffic Alliance, and the NexGen research programmes in the United States. Thales is one of the only suppliers in the world with the know-how and experience to provide complete turnkey solutions. The company designs, integrates, installs and maintains a full range of equipment and systems for air traffic control centres, control tower and surveillance systems, conventional and satellite navigational aids, landing systems and communication, navigation and surveillance (CNS) systems. Today, Thales systems are recognised as the industry standard. The Eurocat ATM system is one such example, with more than 260 centres in service throughout the world, equivalent to 4,000 controller positions. Alongside Thales, the other main players in ATM are Raytheon, Lockheed Martin and Indra for ATM and control centres, and Selex and Lockheed Martin for radars.

1.3.1. Surveillance and control centres Thales’s capabilities span the entire flight plan surveillance and security chain, from departure gate through en-route control to the arrival gate, in complex and saturated environments. It is one of the few companies in the world with the know-how and experience to provide complete and effective support for air traffic controllers. In Europe, the COOPANS agreement (COOPeration between Air Navigation Service providers) signed in 2006 by the Irish Aviation Authority, the LFV Group of and Naviair of marked the start of a joint effort with Thales to up- grade the Eurocat system. In November 2007, COOPANS members embarked on even closer cooperation with a new agree- ment covering software upgrades to Eurocat and the supply of a controler-pilot data link communication (CPDLC) system. The synergies achieved through cooperation between three civil aviation authorities and Thales show the advantages of this new business model that is working steadily toward implementation of a Single European Sky. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 106 2007 ANNUAL REPORT – Thales Business description International presence Research & innovation

Thales was selected by Belgocontrol in 2007 to equip Brussels International Airport with a latest-generation Eurocat centre. With nearly 80 controller positions, this centre manages all en-route and approach traffic for Brussels, Anvers, Charleroi, Liège and Ostend airports – at the heart of the most complex region of Europe’s airspace. In 2007, Thales also strengthened its position in the Middle East with major contracts to supply civil radars, notably for the new Jebel Ali airport in Dubai, Medina airport in Saudi Arabia and Basra airport in Iraq, where Thales is supplying an air traffic control centre. In Latin America, Thales is now working in close partnership with national civil aviation authorities. In Mexico, the company was chosen by SENEAM (Servicio a la Navegación en el Espacio Aereo Mexicano) to lead the fourth phase of its ATM system modernisation programme and to supply two new radars for Tijuana airport, taking the number of Thales radars operating in the country to 18. And in Chile, Thales was selected by the Dirección General de Aeronautica Civil (DGAC) to equip its new control centre in Santiago. Thales achieved some significant successes with the African civil aviation agency ASECNA (Agence pour la Sécurité de la Navigation Aérienne), winning a contract to supply a Eurocat control centre and a radar for Brazzaville in the Republic of the Congo. This fifth acquisition puts ASECNA among the world’s biggest Eurocat users. 2007 also saw a world first in South Africa, where ATNS (Air Traffic and Navigation Services) chose Thales’s CAMU system (Central Airspace Management Unit) to manage air traffic flows during the FIFA World Cup in 2010. In Nigeria, Thales will supply a new centre for Abuja as well as two primary and secondary radars. And in , two major contracts were signed in 2007 with air navigation services pro- vider NANSC to supply a system for Cairo’s third control tower in cooperation with leading Egyptian construction company ORASCOM, and to modernise radar stations including the supply of two new radars. A third contract was also signed with Egypt’s National Civil Aviation Training Organisation (NCATO) to refurbish the controller school that will open in 2009.

1.3.2. Navaids and satellite navigation Thales offers a complete range of navaids for take-off and landing, en-route and tactical navigation systems and satellite navigation systems. Today, the company equips more than 180 countries and has captured over 60% of the world market, including 90% of the ILS (1) and DVOR (2) market in the United States. Many contracts were won in 2007, notably in China and Norway, confirming Thales’s world leadership in this sector. 2007 also marked Thales’s return to the regional airport market in the United Kingdom, where it signed a contract to supply and install approach and landing systems. Following the successes already achieved in Australia, France and Korea, and with in the ADS-B (Automatic Depend- ent System-Broadcast) market, in 2007 Thales secured the contract to supply the ADS-B system for the United States as part of the winning ITT team. On 30 August, the US Federal Aviation Administration (FAA) chose the team led by ITT to supply, deploy and operate ADS-B stations. Under this contract, Thales will provide 1,600 ground stations to be deployed across the US.

1.3.3. Air Traffic Alliance Air traffic volumes in Europe are expected to double by 2025. To manage this growth, developing and harmonising air traffic management systems and reducing the environmental impacts of aviation are top priorities for the years ahead. These are challenges that must be tackled at European level and call for sustained technological innovation. The institutional response is the Single Sky initiative launched by the European Union and approved in 2004. An EU directive has now established the new institutional and organisational framework for air traffic management in Europe. To support this goal, Thales, Airbus and EADS have pooled their know-how and experience within the Air Traffic Alliance (ATA), formed in 2002. The SESAR programme launched at the initiative of ATA with the backing of the European Commission and Eurocontrol is the operational and technical implementation of the EU directive. In March 2006, ATA launched the definition phase of the programme, which it is leading. This phase is set to conclude in March 2008 with the drafting of an ATM master plan for 2020 on the basis of the consortium’s initial conclusions. This first phase will be followed by a development phase to be led by the SESAR Joint Undertaking (SJU), formed in Febru- ary 2007 at the behest of the European Commission. The SJU will coordinate research, development and validation activities from 2008 to 2013 to implement the new ATM master plan. Thales will be making a vital contribution in key areas of this phase, including the drafting and validation of new operational procedures governing integration of ground and aircraft systems, as well as implementation of new communication and satellite navigation technologies. This contribution will help to validate new operating concepts required by the ATM master plan.

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1.4 . Customer service

Global support Customer priorities are to preserve strategic options, protect forces and passengers, and guarantee continuity of service. Guaranteeing the availability and performance of systems and functions is therefore a central concern. Since 2007, Thales has introduced a new range of extended services providing all levels of equipment maintenance through to comprehensive system support over increasingly long periods. Through its multidomestic operations, Thales has the capability to maintain close ties with customers to provide them with timely, tailored through-life support all over the world. Thales’s customer service operations continued to expand in 2007 with the opening of a new support centre in Dubai. The company has a large installed base of weapon systems, land-based and naval radars and civil air traffic control centres in this region. The new sup- port centre will boost Thales’s presence in this highly strategic part of the world. The company is already present in the Gulf States, Egypt and . At the end of 2007, another Thales product support centre for centres, radars and navaids opened in Beijing, China. Thales secured a string of commercial successes in 2007. In the civil aviation sector, Brazil awarded a four-year contract for Thales to support the aviation ministry’s installed based of en-route and approach radars. Thales was able to meet the cus- tomer’s 48-hour maximum reponse time requirement for support teams thanks to its Brazilian subsidiary Omnisys, which supports a range of South American customers. A number of new customer service contracts were also signed with military customers. Thales won a contract from OCCAR to support the Cobra counterbattery radar system for three user nations as lead contractor of a team of manufacturers. This type of multinational service contract arrangement is expected to become increasingly common. Another noteworthy success was the EPS contract to supply an electronic protection system for the Royal Saudi Air Force.

2. LAND & JOINT SYSTEMS

Overview As a world leader in defence communications and military optronics, Thales offers interoperable, modular and secure C4ISR (1) solutions for joint and allied forces and civil security forces. Fast-evolving information and communication technologies and the emergence of new threats have had a huge impact on military procedures: the ability to gather, process and distribute information effectively is more than ever before the key to gaining and maintaining operational superiority. These changes have driven the development of C4ISR systems, which interconnect ISR systems (intelligence, surveillance, reconnaissance) with C2 (command and control), communication, decision support and weapon systems in real time. Information can thus be shared on a routine basis to facilitate collaborative engagements under joint or allied command. Indeed, this is the principle underpinning network-centric warfare and network-enabled capabilities. As a major player in operational information systems, communications, optronics and weapon systems, Thales provides its customers – air, land and naval forces, joint structures, special forces and security services – with interoperable, modular and secure solutions in two main areas: - C4ISR systems to achieve information dominance in the digitised battlespace, - Land systems to support the transformation of airland warfare. These systems are typically deployed in the context of multinational, joint and allied operations. Thales also offers a com- plete range of high value-added support services.

Competition Today, the competitive environment is becoming more dynamic than ever as traditional competitors in the United States, Europe and Israel are joined by new entrants, particularly in emerging growth markets such as services. The increasing use of commercial technologies for military applications is enabling civil-sector companies to bid for defence contracts. With a dynamic strategy of partnerships and high-level expertise in the integration of commercial technologies to meet specific military requirements, Thales is in a strong position to anticipate and adapt to emerging market trends.

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In this environment, Thales draws on unique strengths that have made it a world leader in these markets: - extensive experience, enabling the company to implement innovative approaches quickly and flexibly to meet the specific needs of each customer, whether urgent operational requirements, COTS-based or fully dedicated solutions, or delivery of complete capabilities and systems, - local presence close to customers to fully understand their requirements: facilities in more than 20 countries providing cus- tomer support from the early programme stages with concept definition and experimentation support tools and transfer of critical knowledge and technologies through joint ventures and local partnerships, - presence all along the value chain, from system-of-systems architecture to equipment and services and comprehensive integration expertise, resulting in improved scalability, customisation, interoperability and competitive performance, - leadership in critical civil and military technologies and standardisation to leverage the benefits of both and develop in- novative solutions cost-effectively.

Development strategy Building on these strengths, Thales is particularly well positioned for continued growth in the land forces sector and in systems common to military and security forces, and to consolidate its extended services offering, as it steadily expands its operations at international level: - for land forces, Thales develops end-to-end capability solutions with a particular focus on force protection and vehicle systems. The company acts as critical equipment supplier and system prime contractor to offer comprehensive solutions, as illustrated by the PRV Lux reconnaissance vehicle system contract in Luxembourg and the FRES (Future Rapid Effect Sys- tem) infantry vehicle programme in the United Kingdom, for which Thales was selected in early 2008 as system-of-systems integrator alongside Boeing, - Thales is also focused on the development of common and interoperable solutions for joint military and civil security operations as services working in increasingly in close collaboration in operations, humanitarian crisis man- agement and the fight against terrorism. With world-class expertise in information and communication technologies and standards, the company is well placed to meet the challenges of interoperability in these new operational environments, - as a value-added service provider, Thales has deployed satellite communication services for the NATO International Se- curity Assistance Force (ISAF) stationed in Afghanistan. To help its customers define their operational requirements in the early stages of the process, Thales implemented a complete set of system architecture simulation and engineering scenarios through the Battlespace Transformation Centre (BTC), - international development also remains a strategic priority in both military markets and other areas. In 2007, the com- pany’s multidomestic presence led to major contract awards in Europe including tactical communications in Spain and the Netherlands, and system-of-systems integration on the FRES programme in the United Kingdom as mentioned above. Partnerships also help Thales to penetrate strategic export markets, such as Russia in optronics in 2007 and India in C4ISR through the Rolta India Ltd. joint venture founded in 2006.

Business review

2.1. C4ISR solutions for joint operations C4ISR systems manage the entire intelligence and operational command chain, from data acquisition and processing to transmission of data to command centres, operational decision support, command communications and monitoring.

2.1.1. Secure end-to-end communications Present in all segments from tactical- to strategic-level communication systems, Thales is positioned as an architect and inte- grator of comprehensive solutions, providing armed forces with the interoperability they need for secure end-to-end commu- nications. The company offers modular solutions based on recognised standards, open architectures and dual technologies.

- Infrastructure networks, military satellite communications and network security In 2007, Thales won several major orders in this expanding segment. Following its success with the French Army’s Socrate secure infrastructure network and access networks, Thales was selected to conduct the preliminary study for the future Socrate NG military telecommunication network. The company was also selected in Sweden for the communication system for the country’s military air traffic control centers. In satellite commu- nications (satcoms), Thales Alenia Space together with Astrium won a major contract to manufacture a dual civil / military satellite communication system for Yahsat of the United Arab Emirates. Thales will act as prime contractor for the ground WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 109 BUSINESS REVIEW Rapport financier

segment. Thales won a significant new order under France’s Syracuse III military satellite communication (milsatcom) pro- gramme to supply protected modems for tactical stations. It was also awarded a strategic advanced study contract in the field of mobile satellite communications for the French defence ministry.

- Terrestrial tactical communications As Thales’s multidomestic subsidiaries continued to expand their systems capabilities, the company achieved notable suc- cesses in communication systems integrated with tactical vehicles in Belgium, Germany, Spain and the Netherlands. After a competitive selection process under the JTRS programme in United States, Thales was selected to deliver almost 40,000 JEM software-defined radios for the US Army. The European Secure Software Radio (ESSOR) project brings together six European nations (France, Spain, Italy, Finland, and Sweden) to develop common standards for software-defined radio. At the same time, Thales was selected in France for the initial development of these technologies and their integration with command information systems. Thales also achieved new export successes with HF and VHF tactical radio suites and with communication systems for SOTAS vehicles, bringing the number of client countries to more than 40. These successes include a record order for PR4G F@stnet radios for Spain and two major orders for tactical internet solutions in the Middle East.

- Air and naval communication, navigation and identification As a global supplier of air and naval communication, navigation and identification (CNI) solutions, Thales equips and networks command centres and all types of platforms, including combat and special mission aircraft, helicopters, UAVs, surface vessels and submarines. For airborne forces, Thales won several major contracts in 2007, including the development of the new IFF Mode 5 standard (identification friend or foe) for NATO, communication systems for Apache helicopters in the United Arab Emirates and Saturn radios for installation on Tornado aircraft in Germany. For naval forces, Thales was selected to supply the communication system for the ocean patrol vessels on order for the Royal Navy of Oman and will also upgrade HF and V/UHF communications for the RNO’s fleet and shore-based centres. In France, initial trials with the communication system for the Horizon frigates were successfully completed. In identification, Thales concluded several key cooperation agreements with companies in United States. The first is with ACSS for the development of IFF Mode 5 transponders for tanker aircraft. The second is with BAE Systems in the US for the development of vehicle identification capabilities to meet a future US Army and US Marine Corps requirement. Alongside these developments in IFF for joint forces, Thales is also investing in tactical datalinks in order to renew its product ranges.

- Information system security Thales is recognised for its expertise in information system security – a vital component of any military system. The company is involved in French and NATO programmes to upgrade future-generation IP encryption components and also won several new contracts in 2007. These include the VESUV key management and distribution system in Germany and the programme to develop, build and deploy INTRACED, the first classified intranet for the French defence ministry and forces. For the IN- TRACED contract, Thales proposed an innovative solution that combines the most sophisticated COTS technologies with the highest levels of security. Thales won the contract after a competition with civil-sector companies.

2.1.2. Intelligence, surveillance and reconnaissance systems There is growing demand from military customers for intelligence, surveillance and reconnaissance (ISR) systems, which are used to acquire and process data in the upstream phases of the information chain. Thales provides optronic sensors, electronic warfare and communication systems, intelligence processing systems and secure systems solutions offering end- to-end interoperability.

- Sensors: communication electronic warfare and optronics Under a strategic partnership agreement signed in 2007 with Ltd. of India, Thales will supply equipment for integration with electronic warfare systems. Thales’s optronic system activities for air, land and naval applications achieved robust growth in international markets in 2007. In portable and vehicle-mounted cameras for land forces, Thales booked significant orders in the United Kingdom, Canada, Russia, Algeria and India. In airborne optronics, Thales was selected by an export customer to integrate the laser pod on a new combat aircraft type. Integration of the Damocles system on Royal Malaysian Air Force Sukhoi Su-30 fighters continued as planned, with the successful first flight of the first aircraft equipped with the laser targeting system. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 110 2007 ANNUAL REPORT – Thales Business description International presence Research & innovation

In the naval segment, Thales won a contract to supply the Japanese Maritime Self Defence Force with optronic mast technol- ogy for submarines.

- Information and intelligence processing systems France’s Gendarmerie Nationale chose Thales to supply its new Athen@ information system, which will tie together the or- ganisation’s call centres, operational control processes and intelligence chain. This is the first time in France that a security force information system will integrate intelligence management with core command and control functions. The contract for the nationwide system was awarded in August 2007, and Athen@ will be operational in certain parts of the country from late 2008. This success underscores Thales’s strength in security markets and its leadership in mission-critical information systems for civil and military applications. Thales also won a first contract with the (EDA) as part of the TIES (Tactical Imagery Exploitation Sys- tem) programme to test common imagery intelligence capabilities in the operational context of European force deployment.

2.1.3. Command and control Intelligence, surveillance and reconnaissance (ISR) systems pass information to command and control systems, which in turn use this data to support the planning and execution of operations at all levels of the command chain. Thales develops modu- lar, interoperable and secure solutions based on common architectures and services for land, air, naval and joint forces.

- Strategic command and control Thales is in charge of an overall upgrade of the information and communication systems operated by French High Command (Joint Staff of the French armed forces and French military intelligence directorate / DRM) at the PSP strategic command centre in . This new system will enhance communication efficiency throughout the organisation, thanks in particular to its ability to process information at multiple security levels (up to confidential level). It will also introduce a new approach to collaborative processes and information sharing managed through a unified command centre. In addition, Thales won a key contract to converge operational information and communication systems and transition to the future operational information system of the French armed forces. Under this contract, the company will define the architecture for the next generation of information and communication systems to optimise use of available technologies. The contract is part of a broader programme to optimise information and communication systems, and to tie together the various initiatives in progress, on the basis of a common technical platform and standards. Thales is also conducting an experimentation campaign to analyse operational requirements and defence capabilities in a joint and allied forces context. These tests are being performed within the LANAD national defence laboratory, which inter- connects government and industry battlelab facilities.

- Theatre-level and tactical command and control The Comm@nder integrated C4I system offering draws on all of Thales’s experience in command and control solutions to provide a complete prime contracting capability for armed forces in the digitised battlespace. In 2007, Thales delivered and qualified the first version of the common platform for the French Army’s command informa- tion and communication systems under the OE SIC Terre upgrade programme, as well as the command & control informa- tion system for the Allied Rapid Reaction Corps (ARRC) in the United Kingdom. The NATO Consultation, Command & Con- trol Agency (NC3A) has also selected Thales to supply its Land Command Control Information System (LC2IS) to support land staffs. The company also delivered the SIC 21 command communication system for the .

2.2. The transformation of the airland battlespace

2.2.1. Multi-platform collaborative engagements To raise the operational tempo, boost efficiency, improve troop protection and enable commanders to retain the initiative in all circumstances, the ability to connect and coordinate all assets in the battlespace has become a top priority for land forces today. In France, Thales in partnership with Nexter and Sagem Sécurité Défense is pursuing the strategic BOA cooperative fighting system programme to provide French forces with new capabilities for engagements at the forward edge of the battle area. Sev- eral key milestones were reached in 2007, including completion of the first cycle in the development and assessment of future architectures and launch of an advanced version of the LTO integrated battlelab. In the United Kingdom, Thales was appointed as system-of-systems integrator (SOSI) for the FRES (Future Rapid Effect System) infantry fighting vehicle programme in partnership with Boeing. This role is crucial for the success of the FRES WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 111 BUSINESS REVIEW Rapport financier

programme, which will provide the British Army with an interoperable family of 16 types of rapidly deployable armoured vehicles. To support customers in the early programme phases, Thales has developed the @simov system demonstrator for defining, prototyping and testing land vehicle system capabilities in close combat environments.

2.2.2. Mission systems, vehicle and soldier systems Thales develops vehicle solutions for a broad range of missions including RSTA (reconnaissance, surveillance and target acquisition), C2 (command and control), combat and logistic support. Its solutions are based on an innovative open elec- tronic architecture. In 2007 the NATO Maintenance & Supply Agency (NAMSA) appointed Thales as prime contractor for the PRV Lux recon- naissance vehicle programme for the . In this capacity, Thales will deliver an integrated 48-vehicle tactical reconnaissance capability. As a key player in force protection systems, Thales delivered the Spectre system demonstrator dedicated to the protection of forces in remote theatres of operation. This system successfully completed a six-month operational evaluation by teams from the French defence procurement agency (DGA) and Land Force General Staff (EMAT). In active vehicle protection, Thales won the Shark 2 contract in France to develop a field demonstrator for integration on an armoured vehicle and com- plete evaluation in 2008.

2.2.3. Weapons and munitions Through its operations in Europe and Australia, Thales offers a complete range of weapon systems and munitions, including mortar systems, rocket systems for helicopters, precision-guided munitions and munitronics. In 2007, Thales won orders for its 2R2M vehicle-mounted mortar system from two export customers. To provide high-precision strike capabilities, Thales has developed a range of laser-guided munitions and last year won a key technology demonstrator contract in the field of laser-guided rockets. Thales also successfully completed the qualification of its new Frappe range of multifunction muni- tronic fuzes for 155-mm artillery, its FBM21 fuze for bombs and the AASM modular air-launched weapon system (1).

2.3. Mission support and services Thales provides through-life support for the C4ISR solutions and land systems it delivers. The company is also developing in- novative service solutions to provide forces in remote theatres with the capabilities they need to accomplish their missions. Since 2007, Thales has guaranteed the availability of critical strategic communications capabilities in France with the ex- tended Matilde (2) system and the RUBIS radio infrastructure deployed for the Gendarmerie Nationale. In international mar- kets, Thales won the five-year maintenance concession for radio spectrum management stations in . For theatre support services, Thales won a new five-year contract in the United Kingdom to provide logistic support for peri- scopes and optronic masts in service with the Royal Navy’s fleet of nuclear-powered and strategic submarines. Developments in user services include the delivery of a technology demonstrator to validate a concept of in-vehicle HUMS (Health & Usage Monitoring System) for the future FRES armoured vehicles. The concept will maximise operational capabili- ties, increasing hardware availability and reducing maintenance costs.

3. NAVAL

Overview Thales is one of the world’s leading naval defence contractors, with capabilities spanning the entire value chain from sensors (radars, sonars and optronic equipment), communication and electronic warfare systems to combat system design and development and warship prime contracting. The Group is also active in maritime safety & security (MSS) and naval services and is supporting the ongoing transformation of naval forces and their operational requirements. With industrial operations in 13 countries – including Australia, France, Germany, the Netherlands, the Republic of Korea and the United Kingdom – Thales’s naval businesses have equipped the naval forces of over 50 nations.

(1)  Thales conducts all its weapon and munition activities in the strictest compliance with national legislation and international regulations and conventions as a permanent matter of principle. This policy is part of the company’s broader commitment to ethics and corporate responsibility in line with the most stringent professional standards. As regards the manufacture of controversial weapons in general and cluster bombs in particular, Thales no longer has any involvement in these activities. The company has withdrawn these products from its catalogue and has no plans to market them in the future. (2)  Modernisation et Amélioration des Transmissions Interarmées Longue Distance (upgrade and enhancement of long-range transmissions for joint forces). WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 112 2007 ANNUAL REPORT – Thales Business description International presence Research & innovation

Thales is also active in naval markets as industrial partner and shareholder of DCNS, owning a 25% interest alongside the French State, which was previously DCNS’s sole shareholder. This interest was acquired in late March 2007 as part of a cooperation agreement under which Thales sold its France-based naval prime contracting, systems and service businesses to DCNS. With its new scope of business, DCNS generated revenues of €2.8 billion in 2007 and ended the year with an order book worth €8.3 billion, the equivalent of 35 months of activity. The transformation of the role of naval forces since the end of the Cold War and the emergence of asymmetric threats is continuing, particularly as assume broader responsibilities in the civil sector. The focus of naval operations has shifted from blue-water combat to power projection, force deployment and support in remote theatres (including recent opera- tions in the Gulf, Afghanistan, Ivory Coast and Lebanon), and littoral surveillance (including coastal, offshore and harbour surveillance), which has gained importance in recent years. These missions are increasingly conducted jointly by several countries or by coalitions, resulting in a growing emphasis on the interoperability of players and systems alike. The value of a warship’s electronic systems as a proportion of total cost has ris- en steadily, and electronic systems for some warships now cost more than the platform and propulsion system combined. The changing needs of client navies plus ever-tighter budgets are giving rise to new contracting arrangements. Increas- ingly, contractors must offer guaranteed levels of availability for their equipment and systems, and expand international cooperation to spread development costs over more ships. Tight budgets have led to an increase in European partnerships, particularly bilateral cooperation for specific programmes, as well as industry consolidation in several European countries, including France with the convergence between DCNS and Thales. Although most of these operations have been nationally based, they are seen as the first steps towards broader transnational consolidation.

Competition In the United States, the front-runners in naval contracting after a series of mergers and acquisitions are Lockheed Martin, predominantly an electronic systems provider, followed by Northrop Grumman and General Dynamics, both of which are active in shipbuilding as well as electronic systems, the defence electronics and missile manufacturer Raytheon, and the sonar specialist L3COM. In recent years, US contractors have adopted significantly more offensive export sales strategies in markets including Australia, Canada, Latin America and Asia, specifically the Republic of Korea and Japan. In Europe, the naval industry is still nationally based, with each domestic industry heavily dependent on orders placed by the respective national governments. As in the United States, industry players in Europe present a variety of different profiles: - combined shipbuilder-integrators, such as DCNS in France, Fincantieri in Italy, Navantia in Spain and the VT Group in the United Kingdom (also a service provider to the Royal Navy), - contractors with a sharp focus on electronic systems, such as Thales and Finmeccanica, - vertically integrated groups spanning both shipbuilding and electronic systems, such as BAE Systems in the United King- dom and the German shipbuilder TKMS since its 2006 acquisition of submarine electronics specialist . Polish and Romanian shipyards should also be mentioned. After many years of contracting exclusively for countries of the former Commonwealth of Independent States, these companies are now playing a substantive role in the European naval in- dustry as leading shipbuilders continue the trend of subcontracting major warship blocks and sections to smaller shipyards. In a region-wide context of constrained spending, the sheer number of naval defence contractors in Europe is a strong argu- ment in favour of consolidation. Several operations were completed or launched in 2007, including: - in Germany, TKMS continued its vertical integration taking over the submarine electronics businesses of Atlas Elektronik in partnership with EADS, - in France, the convergence agreement to combine the naval businesses of DCNS and Thales was finalised in late March 2007. As a result, the Thales Group’s France-based naval prime contracting and systems activities, but not its naval equipment businesses, were incorporated into DCNS (see box), WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 113 BUSINESS REVIEW Rapport financier

Convergence of Thales and dcns naval businesses The alliance between DCNS and Thales is helping the French naval defence industry, and hence the European industry, to achieve critical mass and compete more effectively on an increasingly open world market. For example, DCNS has full access to Thales’s international marketing and sales network. The partners also signed a cooperation agreement to avoid duplication of effort and identify opportunities for shared development. At the same time, DCNS may offer its customers equipment and systems from other sources and Thales is free to propose its equipment and systems to other prime contractors. The agreement also paves the way for cooperation and exchanges in operations, human resources and other business processes. Thales and DCNS have agreed to promote professional mobility between the two groups, and several senior Thales managers have already joined DCNS in addition to the personnel transferred as part of the Convergence process.

- in the United Kingdom, BAE Systems and VT plan to merge their surface shipbuilding activities, partly in preparation for the construction of the CVF aircraft carriers. A number of decisions taken in recent years will shape future cooperation programmes in Europe. First, the launch in late 2005 of the first tranche of the Franco-Italian FREMM programme (firm orders placed for eight frigates for France and one for Italy). The programme – continental Europe’s largest ever – calls for 27 multimission frigates (17 for France and 10 for Italy). Second, the decision by the French and British defence ministries in 2006 to jointly study opportunities for tailoring the de- sign of the Royal Navy’s CVF aircraft carriers to the needs of France’s proposed PA2 programme. With industrial operations on both sides of the Channel, Thales has played a major role in ensuring the highest possible degree of design commonality, paving the way for sharing equipment costs if required. Third, two cooperation decisions at European level were taken at the Franco-Italian summit held in Nice on 30 November 2007: - Thales, DCNS and Finmeccanica announced a plan to merge their underwater weapon system businesses to form a new world leader in this area, - Thales and Finmeccanica signed a Memorandum of Understanding on a maritime safety & security (MSS) project. The Sea- same initiative behind this agreement calls for a comprehensive surveillance system covering all European maritime areas. While bilateral cooperation programmes and partnerships have led to alliances on specific projects, the continuing existence of parallel national programmes has also intensified competition between European players on export markets. Importantly, transnational restructuring will need to transcend national boundaries and has yet to begin. Other players on the world market for naval contracting include Russian shipbuilders dealing through the defence export agency Rosoboronexport, which signed a letter of intent with Thales in 2007 focusing on naval cooperation. Yet other players include Chinese shipbuilders as well as Korean, Singaporean and Australian industrial groups and shipbuilders. Finally, the latest new entrants include shipyards in India and Turkey.

Growth strategy

Geographically, Thales aims to further consolidate its position on European markets where demand remains strong, while at the same time pursuing growth on key international markets, notably in the United States where the Group in 2007 set up DRS Sonar Systems, a joint subsidiary with US partner DRS. In France, the Thales-DCNS alliance should strengthen both companies’ prospects on export markets. In Russia, the letter of intent with Rosoboronexport also opens up new op- portunities for export growth. In naval services, Thales is continuing to promote in-country operations and cooperation with local customers. More broadly, the company is pursuing partnership opportunities with major players in naval defence worldwide. In terms of products, Thales continues to develop sophisticated situational awareness and decision-support solutions to help administrations to coordinate operations in real time through improved information sharing, analysis and display. In product innovation, Thales designed and developed the first integrated mast, simultaneously resolving a range of sensor integration and electromagnetic compatibility issues while offering improved access and ease of maintenance, particularly in bad weather. With a view to further enhancing long-term interoperability, Thales is also developing open systems architec- tures that simplify both new equipment integration and system-level upgrades. In response to emerging needs in maritime safety & security (MSS), Thales is committed to a system-of-systems approach offering decision-makers a common opera- tional picture while complying fully with national sovereignty requirements. Thales also continues to develop small plat- forms, which are more agile and less expensive, and new-generation sensors and effector systems, including coastal radars, unmanned surface or underwater vehicles, and optronic, sonar and IFF systems. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 114 2007 ANNUAL REPORT – Thales Business description International presence Research & innovation

Business review Thales’s naval capabilities are organised around four strategic areas: - warship prime contracting covering complete development and programme management for all types of warships, - Above-water systems: • information systems, command systems and combat management systems, integration of sensors (radars, sonars, etc.), op- tronic equipment, communications and electronic warfare systems and weapon systems (gun and missile systems, etc.), • maritime security, including maritime traffic control, security solutions for restricted areas, maritime surveillance and operations coordination; • simulators and network-centric engineering and development; - underwater systems, including sonar systems for submarines, surface combatants and aircraft, whether for surveillance, underwater warfare, mine countermeasures or civil defence and security, - naval services, including fleet support, through-life support and other outsourced services.

3.1. Warship prime contracting The transfer of programme responsibilities from procurement agencies to defence contractors with proven expertise in prime contracting and systems integration – a clear trend in naval procurement in recent years – was further confirmed in 2007. In their efforts to reconcile budgetary constraints and operational requirements, customers also expect industry partners to commit to operational performance, delivery dates, programme costs and risk management. One approach adopted by procurement agencies is to appoint a Lead System Integrator for all shipboard system integration. As one of the world’s leading players in warship prime contracting and naval system and equipment integration, Thales man- ages entire naval programmes and the associated contractor logistic support. To date, the Group has managed this type of business from its main operations in France, the United Kingdom and Australia. In France, the Group transferred its prime contracting capabilities to DCNS under the Convergence agreement signed in March 2007. Working in close partnership with DCNS, Thales remains a major supplier and integrator of a wide range of electronic equipment for FREMM frigates and the PA2 aircraft carrier project, among other programmes. In the United Kingdom, Thales is a co-prime contractor in the Aircraft Carriers Alliance (ACA), the overall prime contrac- tor for the CVF carrier programme. ACA comprises the British MoD, BAE Systems (1), VT, Babcock and Thales UK. Thales is directly responsible for the design of the platform, the power and propulsion systems and flight deck operations. The Group also provides through-life support (TLS) and maintenance services for warships. In 2007, Thales completed several study contracts involving the French PA2 and British CVF aircraft carriers, one focusing on areas of potential cooperation between the two programmes. On both sides of the Channel, the production contracts scheduled for signature in 2007 were delayed due to budgetary and political constraints. It is now anticipated that these contracts will be signed in 2008. In Australia, the Group made good progress on the modernisation of four Adelaide-class frigates in 2007 and delivered the first two, with the third scheduled for delivery in early 2008. The Defence Materiel Organisation (DMO), the country’s de- fence procurement agency, confirmed its confidence in Thales by awarding it a new contract for phase 2 of the modernisa- tion of auxiliary oiler replenishment (AOR) vessel HMAS Success.

3.2. Above-water systems and equipment Demand for above-water systems and equipment for operational missions remains strong. Thales above-water combat systems meet a wide range of operational requirements and are designed to support the ongo- ing process of battlespace digitisation. These powerful, highly optimised, open architecture systems solutions perform sur- veillance, command and combat functions and support weapon systems from both US and European manufacturers. The Tacticos family of combat management systems in service on warships all over the world is now undergoing modernisation. Hence, Thales has adopted a new international business model to leverage in-country expertise and resources more fully. In December 2007, Samsung Thales Corporation (STC) won a contract to supply an initial batch of three locally developed combat management systems for Republic of Korea Navy PKX-type fast patrol boats.

(1) In 2007, BAE Systems and VT signed an agreement to merge their surface shipbuilding and support businesses. The new entity will be a member of ACA. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 115 BUSINESS REVIEW Rapport financier

In naval sensors, Thales is focusing on the Smart-S Mk 2 volume search radar specially redesigned for littoral environments, the first of which was successfully installed on Danish combat support ship HDMS Absalon in 2007. Other key products in this range include the APAR multifunction active phased-array radar, the new Herakles multifunction radar selected for the FREMM frigate programme among others, the new-generation MRR (Multi-Role Radar) 3D NG medium-range radar for missile system fire control and the Smart-L LRR (Long-Range Radar) family selected for all new-generation European air defence frigates with a first-layer Theatre Ballistic Missile Defence (TBMD) capability. The Thales product portfolio also includes airborne and joint forces equipment and competitive naval communications, optronic and electronic warfare systems. In 2007, Thales signed a contract with the British MoD to outfit SSBNVanguard and SSNs Astute and Trafalgar with the latest-generation RESM (Radar Electronic Support Measures) suite. This open architecture programme meets all conditions laid down for the efficient management of all naval electronic warfare suites in service with the Royal Navy. In 2007, Thales also won a contract with VT Shipbuilding International of the United Kingdom to supply equipment and systems for three Khareef-class ocean patrol vessels (OPVs) for the Royal Navy of Oman. In addition, the Turkish Navy placed orders for Smart-S Mk2 and Sting EO Mk 2 radars and a combat system for its first Milgem-class corvette. The flagship product innovation of 2007 was the launch of the integrated modular mast, an example of integrated topside design for naval vessels. This concept simplifies multi-sensor configurations (radar, communications and optronic sensors and antennas), optimises performance and controls integration and maintenance costs. The Royal Netherlands Navy, the launch customer, has selected the mast for four offshore patrol vessels (OPVs) now on order. In maritime safety & security (MSS), Thales in 2007 focused on expanding its range of comprehensive coastal, offshore and harbour surveillance solutions for the fast-growing maritime surveillance sector. In December 2007, Thales and Finmeccani- ca agreed to work together to propose, develop and implement the European Union’s Seasame project. A first programme, Operamar, is already underway to define the operational needs of the countries concerned.

3.3. Underwater systems and equipment Demand for underwater systems and equipment remains strong, not only for the FREMM programme and other surface fleet projects, but also for the Barracuda new-generation nuclear-powered attack submarine programme for the French Navy and the Scorpene conventional submarines sold to international customers including Chile, Malaysia and India. There is also strong demand for underwater systems and equipment for aircraft, particularly helicopters deployed on anti- submarine warfare (ASW) missions by North American and European customers. For the underwater battlespace, Thales offers a range of sonars for conventional and nuclear-powered submarines, surface combatants, mine countermeasures vessels and torpedoes as well as dipping sonars for ASW aircraft. One highly effective ASW combination uses the Sonar 2087 towed array in tandem with the Flash dipping sonar. Using the latest-generation linear array technologies, Thales has added the innovative and compact Captas Nano to the Captas range of towed sonars. With the continuing success of its Flash dipping sonars, Thales opened a new volume-production facility in Brest in 2007. Thales is also a major supplier of submarine periscopes and the non-penetrating optronic masts that are beginning to replace them. In particular, Thales developed and now produces the visual system for the United Kingdom’s new Astute-class attack submarines. Mine warfare, sonars and mine countermeasures continue to make greater use of robotics. Thales is further developing its capabilities in the emerging unmanned underwater vehicle (UUV) segment in partnership with several European and Asian platform manufacturers. First-generation UUVs are already available. These are typically carried to the target area by boat or helicopter, launched, remotely controlled during the mission, then recovered. Mission data is analysed either on board the host vessel or by a shore centre. The aim now is to deploy fully autonomous underwater vehicles (AUVs) within ten years. AUVs will carry expert systems to conduct complete missions and respond to situations as they arise. Without putting human lives at risk, these force multipli- ers will use a single platform to deploy networked sonars, whether towed, remotely controlled or autonomous, to significantly improve the efficiency, speed and safety of mine countermeasures operations. Smart next-generation UUVs and AUVs will rely on standardised platforms offering cost-effective multimission capabilities. As part of this broad effort, Thales is developing the DUBM44 sonar which completed its first sea trials and recorded its first images in 2007. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 116 2007 ANNUAL REPORT – Thales Business description International presence Research & innovation

In 2007, the Group signed several large contracts on French underwater systems programmes, including the next-generation Sycobs integrated sonar system for the Barracuda submarine programme. A Sycobs system will also replace sonars carried by one of France’s ballistic missile submarines. Thales also won a major study contract with the French defence procure- ment agency (DGA) to improve the performance of current-generation sonars carried by French frigates and submarines and to define technologies for next-generation active arrays. Finally, the company also signed an agreement with the General Directorate for Enterprises (DGE) to develop a surveillance AUV dedicated to maritime surveillance and security under the Asemar project set up by the Brittany maritime competitiveness cluster. In the United Kingdom, following Thales’s selection to modernise the sonars carried by the Royal Navy’s Trafalgar- and Astute-class submarines, Sonar 2076 Stage 5 successfully completed its design review. This milestone marked the delivery of the Group’s first open architecture sonar system. The Royal Navy also declared its Sonar 2087 systems operational, pay- ing tribute to their excellent performance. The Royal Norwegian Navy chose Thales to modernise the hull-mounted sonars deployed by its Oksoy-class minehunters. Significantly better penetration of the United States market is anticipated following the setting up of DRS Sonar Systems, a joint venture between Thales and DRS. The new entity signed the contract for batch 5 of ALFS dipping sonars for the US Navy’s MH60R multimission helicopters. DRS Sonar Systems also won a contract for a thin flank array for a submarine project and the SSQ 32 contract for a mine warfare project. In the Republic of Korea, Thales signed two contracts with STX, one to supply hull-mounted sonars for the new FFX frigates, the other to supply sonar suites for NG KSS III submarines. In India, Thales will supply Australian-designed minesweeping systems to modernise four Karwar-class minesweepers. In early 2008, the Indian Navy also awarded Thales a major contract for the supply and integration of complete minehunting systems for the Karwar class. EuroTorp delivered the first batch of 25 MU90 lightweight torpedoes to the French defence procurement agency. EuroTorp is a joint venture (European Economic Interest Grouping) set up by Thales, DCNS and the Finmeccanica subsidiary Wass. Taking the venture further, Thales, DCNS and Finmeccanica formed a strategic alliance in late 2007 to create a world leader in underwater weapon systems.

3.4. Naval services Demand for services has grown in recent years as navies have followed the example of other branches of the armed forces in outsourcing such tasks as through-life support, technical assistance, equipment modernisation, repairs and training. Two main types of outsourcing arrangements are emerging: maintenance of a complete family of equipment or subsystems (radars, sonars, etc.), and maintenance of all the equipment on a given platform type (aircraft carrier, frigate, SIGINT vessel, etc.). In either case, the contractor guarantees a given level of equipment availability or platform readiness. After focusing on the maintenance of electronic equipment installed by Thales, the company now offers full through-life sup- port solutions for systems, complete platforms and even entire fleets. In the case of fleet support contracts, Thales acts as the prime contractor in partnership with a specialised industrial partner. In the United Kingdom, contractor logistic support contracts already in place for sonar systems were extended to include communication masts. In 2007, Thales achieved key targets under its support contract commitments in the United Kingdom, Australia and France, particularly for submarine equipment, with contracts including a five-year extension of the support contracts for the Royal Navy’s Sonar 2076 systems and the modernisation of Sonar 2093 systems in service with the Royal Saudi Naval Forces and the . In 2007, Thales also won a contract to provide through-life support services for five Sonics dipping so- nars in service on NH90 helicopters operated by the . In France, the Thales-DCNS alliance resulted in a number of through-life support contracts in close collaboration with DCNS, including an overall operational level agreement for 13 Éridan-class CMT minehunters, new FREMM projects includ- ing integrated logistic support for the ’s vessels, a contract to support Barracuda submarines during their first six years of service, and the far-reaching Cap 2008 programme to renew through-life support contracts for the French Navy. In Australia, Thales signed a contract to provide through-life support services for Royal Australian Navy minehunters. The naval services business has acquired a truly international dimension, drawing on the expertise of all Thales subsidiaries to exploit new opportunities and optimise synergies. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 117 BUSINESS REVIEW Rapport financier

D. Security

Key figures

in € million 2007 2006

Order book at year-end 5,098 3,078 Order intake 3,372 2,684 Consolidated revenues 3,415 2,278 Income from operations 237 (a) 168 Income from operations after restructuring costs (« EBIT ») 224 (a) 129 Consolidated workforce at year-end 19,323 15,273 Total workforce at year-end 20,425 17,229

(a) Before purchase price allocation.

Overview

Thales’s Security activities combine the Group’s former Security and Services divisions with the rail signalling and security sys- tems businesses acquired from Alcatel-Lucent in January 2007. Following the operation, Thales adjusted its positioning and objectives for the civil security market, drawing on the Group’s mission critical systems know-how and recognised experience in the defence and aerospace markets, both of which adhere to particularly exacting security and reliability standards. Civil security markets are currently experiencing fast growth. As they are more fragmented and heterogeneous than the de- fence and aerospace sectors, Thales’s development strategy focuses on four major vertical markets where it already has or is capable of forging a leading position: - ground transportation, - critical infrastructure, - government, - industry & Finance. In addition, Thales has tailored its offerings primarily to meet the needs of large security systems for mission critical infra- structures, targeting major government, institutional and enterprise customers who face security issues similar to those of large military and aerospace customers.

Expanding markets A globalised, open world has increased the mobility of people, commodities, capital, services and information. But a more open world is necessarily a more vulnerable world. Organisations are particularly vulnerable to failures that occur on large critical infrastructure, such as transport networks, energy supply networks and information systems. They are also exposed to new threats, such as trafficking, terrorism and cyber attacks, which cannot be countered by conventional means of defence. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 118 2007 ANNUAL REPORT – Thales Business description International presence Research & innovation

This has fuelled strong demand for ways to enhance the safety and security of people and property. Safer, more secure solutions are needed for the transportation of people and goods. Tighter security is also required for the transport and distribution of energy, and better data security is needed in numerous applications, especially bank transactions and com- munication systems. Governments and international authorities have responded to these social, economic and technological changes by imple- menting tougher security rules and regulations. All these factors combined have driven strong growth in emerging safety and security (1) markets. The major market research and economic analysis agencies forecast these markets to grow by between 5 and 10% a year between now and 2012. Thales estimates its accessible market in the civil security sector to be worth around €35 billion euros.

Strategic vision and positioning Thales intends to become one of the world’s leading providers of integrated mission critical solutions and services to meet the safety and security requirements of its civil customers. To achieve this objective, the Group is drawing on world-class technological expertise in complex systems integration and its time-honoured involvement and strategic positioning in de- fence and aerospace markets. Thales generally serves the safety and security markets through an integrated, end-to-end approach: - security solutions address the need to protect people, data and critical infrastructure from malicious ‘external’ threats, us- ing for example surveillance, analysis and alarm systems, - safety solutions contribute to public safety, ensuring the dependability of critical infrastructure and systems to enable service continuity in the event of an ‘internal’ malfunction (such as a technical incident, failure or accident). These systems also minimise the risk of injury to operators and users and reduce the risk of damage to infrastructure and the surrounding environment. Thales’s development strategy focuses on four major vertical markets: - ground transportation: serving an accessible market of around 10 billion euros, Thales provides secure rail signalling, control and protection solutions for mainline railways, urban transport, toll roads and motorways, as well as fare collection and access control systems, - critical infrastructure: Thales mainly supplies infrastructure supervision and protection systems for energy applications (oil & gas), airports and sensitive sites. Critical infrastructure represents an accessible market worth around 5 billion euros, - government: in this market, which is worth around 9 billion euros, Thales’s offering is tailored in particular to the require- ments of civil administrations for security systems (biometric ID cards, electronic passports and command centres for the police and fire services) and trusted e-government platforms. Thales is also one of the world’s leading suppliers of encryption and security solutions for information and communica- tions systems. In addition the Group offers institutional customers value-added training solutions based on an extensive range of simulators and synthetic environment application software, - industry & finance: in an accessible market worth in the region of 11 billion euros, Thales’s activities include IT outsourcing for critical information systems (for customers in the high-tech, aerospace, banking and finance sectors) and training (such as pilot training simulators). Thales is also recognised as one of the foremost providers of encryption and security solutions for communication and information systems employed by major corporations and financial institutions.

(1) “Security” involves protecting people and property against malicious ‘external’ threats; “safety” refers to measures to ensure the dependability of critical infrastructure and systems that enhance public and personal safety. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 119 BUSINESS REVIEW Rapport financier

Key differentiators Customers in these four major markets and institutional segments benefit from Thales’s portfolio of key enabling technolo- gies and extensive systems integration capabilities, which are delivered through local teams around the globe: - Thales’s key enabling technologies for the civil security market encompass secure information and communication systems (encryption), process supervision and control for critical infrastructure, sophisticated sensor systems (radars, infrared camer- as, intrusion detection), simulation and synthetic environments and dedicated applications for specific business segments. In line with the company’s dual-technology strategy, this portfolio draws extensively on Thales’s recognised technological strengths in the defence sector. These technologies have brought Thales an in-depth understanding of safety and security issues, making it possible to deliver the solutions that meet customers’ needs most closely, - the ability to integrate its key enabling technologies positions Thales as a value-added integrator of mission critical sys- tems for safety and security and differentiates the company from less specialised systems integrators. Thales thus has the capabilities to design, deploy and support end-to-end security solutions. This systems integration expertise reaches across all target markets and benefits directly from Thales’s experience in com- plex defence systems designed to operate in a hostile environment. Furthermore, Thales leverages its international dimen- sion to deploy the global approach to security solutions required to address challenges such as terrorism and cybercrime. Additionally, to work closely with its customers and gain a deeper understanding of their needs, Thales has established a worldwide network of integration centres. The role of these integration centres is to converge the Group’s systems integra- tion competencies in the countries experiencing rapid growth in demand for security solutions. Integration centres have been set up in Dubai, Florence, Lisbon, London, Madrid, Mexico City, Shanghai and Sydney. New centres are planned soon for , Saudi Arabia and . The Dubai Integration Centre, for example, brings together 130 Thales employees working on major programmes worth a combined total of more than 350 million euros. One of the centre’s responsibilities is to coordinate the Thales teams in- volved in the contract to supply safety and communication systems for Terminal 3 and Satellite Terminal 2 at Dubai’s new international airport.

BUSINESS REVIEW

1. Ground transportation Thales provides security solutions for ground transportation infrastructure (mainline railways, urban transport, toll roads and motorways) in three main segments: - railway control and signalling solutions, - fare collection and access control systems, - back-office systems that enable operators to improve operational efficiency and passenger services. In June 2007, Thales successfully delivered the Lötschberg Base Tunnel programme in Switzerland to operator BLS Löt- schbergbahn. Built to the latest European signalling and interoperability standards, the 37-km tunnel is intended to shift transalpine transit traffic from road to rail. Thales supplied electronic solutions and an ETCS (European Train Control System), which is based on the digital wireless GSM-R standard, the railway variant of GSM. As well as increasing rail traffic capacity, the ETCS enhances the punctuality, security and interoperability of trains run by different operators that use the tunnel. In December 2007, the Shanghai Municipal authority and Shanghai Shentong Metro Group celebrated the simultaneous start of revenue service for lines 6, 8 and 9 of the , helping to meet the transport needs of the 20 million WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 120 2007 ANNUAL REPORT – Thales Business description International presence Research & innovation

people who live in the megalopolis. This was a historic first for the metro industry and for the Chinese consortium of Thales, Alcatel Shanghai Bell and Shanghai Automation Instrumentation. All three lines are equipped with Thales’s SelTrac MS modular signalling solution, which use radio waves to transmit data between trains and trackside equipment. The CBTC (Communications-Based Train Control) at the heart of the SelTrac MS system enables operators to progressively ramp up their operational capabilities, with the ultimate aim of achieving fully automatic operation. As part of the Transeo alliance with EWS, Thales designed and now runs the UK’s National Rail Enquiries online train in- formation service. The website provides train times and fare information allowing passengers to plan their journeys, links to online ticket purchasing services, live arrival and departure information for 2,500 stations across Britain, up-to-the-minute service disruption information, details of station facilities, special offers by region and a host of other related links. The website regularly receives over one million hits a day. In November 2007, Thales and its local partner SIMS were chosen by the Bombela Electrical & Mechanical Works (PTY) Ltd. consortium to supply a contactless e-ticketing solution for the new high-speed Gautrain Link between Johannes- burg and Pretoria in South Africa. The highly innovative Thales-designed system will exclusively use disposable and reusable contactless smartcards. The solution will also be interoperable so that commuters can use the same contactless smartcard for different services: the Gautrain, Gautrain station car parks and the Gautrain bus network. Thales will bring state-of-the-art technologies and the latest available hardware and software innovations to the Gautrain. For example, each station will have access gates in a three entry / three exit configuration, allowing flows of 60 passengers per minute in peak periods.

2. Critical infrastructure (oil, gas, airports and sensitive sites) The European Commission defines critical infrastructure as “physical and information technology facilities, networks, serv- ices and assets which, if disrupted or destroyed, would have a serious impact on the health, safety, security or economic well- being of citizens or the effective functioning of governments in the member states.” In the critical infrastructure market, Thales focuses in particular on providing security solutions for the control and supervi- sion of oil & gas facilities, airport terminals and sensitive sites. Thales has supplied integrated control & supervision systems for Gazprom, the world’s largest natural gas producer. These systems measure the pressure, flow and temperature of products transmitted by the gas pipeline and collect data from the compressor stations and underground storage facilities. This data is returned to the SCADA platform, which monitors more than 50,000 kilometres of gas pipeline across Russia. This is an extremely mission critical system since even the shortest shutdown would result in major losses. In another area of the critical infrastructure market, Thales has signed a €22 million contract with Alcatel-Lucent to engineer and integrate the communication and information systems as well as the safety and supervisions systems for the new King Shaka International Airport, north of Durban, South Africa. The goal is to have the airport ready in time for the 2010 FIFA World Cup.

3. Government Thales offers three main types of expertise in the civil administration market: - security systems (biometric ID cards, electronic passports, command centres for the police and fire services) and trusted e-government platforms, - encryption and security solutions for information and communications systems, - synthetic environments used for training and crisis management systems (control room simulators, training suites for pilots and civil security forces). WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 121 BUSINESS REVIEW Rapport financier

Thales leverages its key enabling technologies (including smartcards, biometrics and public key infrastructures) to provide a range of modular, scaleable systems for producing all types of ID documents (passports, visas, national ID cards, resi- dency permits, driving licenses, etc.). The Group has unrivalled experience in turnkey ID solutions, with several million ID documents already produced using Thales solutions in more than 20 countries. France awarded Thales the contract for the electronic passport and selected the Group to produce the world’s first-ever contactless biometric ID cards on a nationwide scale. For the Copernic programme implemented by the French Ministry for the Economy, Finance and Industry, Thales contrib- uted to the development of the secure tax portal, www.impots.gouv.fr, which allows taxpayers to manage their tax accounts online. In early 2007 Thales was once again chosen by the French tax administration to develop “Acqui Pro”, a new module in the Copernic programme that allows businesses to manage their corporate taxes online.

4. Industry and Finance Thales provides expertise in four segments: - mission critical information systems, - IT outsourcing (including hosting) for mission critical systems, - encryption and security solutions for communication & information systems deployed in the banking, financial and tel- ecommunications sectors, - full flight simulators and synthetic training environments, primarily for aircraft pilots. Thales offers an extensive and constantly expanding array of high value-added services, from user training to outsourced management of infrastructure, IT systems and mission critical applications. As well as maintaining ongoing contacts with customers, these services enable Thales to strengthen its long-term business relationships in this sector. For example, when customers invest in mission critical systems, they also purchase Thales services for training users to ensure that they get the most out of their investments. Simulation systems, which reproduce high-risk situations in a synthetic envi- ronment, are particularly valuable tools for training pilots, drivers or critical infrastructure operators, depending on the case. In 2007 KLM selected Thales to supply a full-flight simulator (FFS) to train crews on its Boeing 777-300ER aircraft. This will be the third Thales FFS acquired by the Dutch airline. The FFS will be fully qualified to FAA Level D, the highest internationally rec- ognised level of flight simulation, and will be installed in the KLM dedicated training centre at Amsterdam’s Schiphol airport. Also in 2007 Thales and the Saudi Arabian Civil Aviation Authority agreed to establish a regional centre of excellence to train local aviation staff to instructor level so they can pass on their skills to locally based recruits at sites across Saudi Arabia. In view of the inherent complexity of mission critical systems, customers increasingly call on Thales for hosting and software upgrade services under multi-year contracts. Rather than simply purchasing a system, customers invest in a turnkey service, freeing in-house resources to focus on their core business. Mission critical system outsourcing calls for know-how that is hard to find. As a result, large organisations are increasingly turning to Thales to fulfil this role. REXEL, a leader in the distribution of electrical parts and supplies, awarded Thales a contract for the hosting, supervision, operation, administration and support (29 countries) of an application for their global financial consolidation. Thales al- ready provides outsourcing of similar applications for SNCF (French Railways), RATP (Paris city transport) and Pages Jaunes (French yellow pages). WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 122 2007 ANNUAL REPORT – Thales Business description International presence Research & innovation

5. Components and subsystems

Thales’s Security business includes a components and subsystems offering designed primarily to meet the needs of two high-tech industries: medical imaging and power amplification. Thales is the world leader in this field, offering two main product lines: - electron tubes and transmitters, which amplify radiofrequency and microwave power for advanced applications in such areas as space, telecommunications, defence, radio and TV broadcasting, scientific research, radiotherapy and industrial processes, - X-ray detectors for integration into state-of-the-art medical imaging equipment, to enhance high-precision diagnostic. In 2007, the Group maintained its solid leadership in these segments in the European, American and Asian markets, despite competition from US and Japanese manufacturers benefiting from weaker currencies. In the space sector, Thales’s high-performance, robust travelling wave tubes and amplifiers have long set the standard in the global marketplace and are employed by numerous major telecom operators and radio and TV broadcasters. The Group is actively contributing to the development of telecom, digital radio and television broadcasting, broadband internet and navigation solutions. Thales amplification solutions are deployed on satellites covering all regions of the globe. The company also supplies tubes to equip ground station uplink transmitters. The launch of new products in this segment has allowed the Group to expand its market share in TV broadcasting. The Group has benefited from the up-cycle in the space market that began in 2006 and achieved an excellent order intake in 2007, most notably for space programmes including Sirius 6, Echo 14, JCSat 12, Palapa-D, Amazonas, IRS 5/6, NSS8R, ArabSat, YahSat, Ka Sat, W2A, CBERS 2 and SinoSat. The consolidation of the Group’s high-power transmitters, components and subsystems businesses in 2006 has given it a strong worldwide base for marketing its products, with the first significant contract wins achieved in 2007, mainly in Asia. In the defence market, Thales provides a comprehensive range of travelling wave tubes which are used extensively in radar, countermeasure and telecommunication applications. The Group also contributes directly to advanced scientific research based on large instruments and in 2007 was selected to supply power amplification solutions in such areas as thermonuclear fusion and particle accelerators. Thales is currently contributing to most of the preparatory programmes for the international ITER fusion reactor project, while in China the Group has supplied turnkey high-power transmitters for the third-generation synchrotron installed in Shanghai in 2007. In 2007 Thales consolidated its world leadership in medical radiology, particularly in digital X-ray detectors, through the de- velopment of software solutions which provide complete function sets that can be readily incorporated in medical imaging equipment. In addition, at the end of the year, Thales announced the launch of several innovative new products, including the world’s first-ever portable wireless digital X-ray solution. Trixell, a joint venture between Thales (51%), Philips (24.5%) and Siemens (24.5%), also performed well in 2007, fuelled by the success of its new-generation digital X-ray detectors, which have set the standard worldwide. Responding to growing global demand for medical imaging solutions, Trixell almost doubled its production capacity in 2007, with additional ramp- ups planned between now and 2010. Furthermore, the company is planning to invest in the United States, in partnership with other industry players, to secure the supply of one of the key components in its new digital detectors. The Group’s joint venture in China with Shanghai Medical Instruments confirmed its position as the country’s leading sup- plier of X-ray components and complete function sets for medical imaging. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 123 BUSINESS REVIEW Rapport financier

2 . International presence

Revenues by destination Revenues by origin Consolidated workforce

€12.3 bn €12.3 bn 61,195 €10.3 bn 4% €10.3 bn 52,160 7% 8% 6% 4% 7% 6% 10% 7% 5% 10% 8% 12% 7% 14% 15% 47% 52% 25% 56% 52% Rest of world 30% Near & Middle East 13% North America 15% 13% Asia, Pacific 13% 16% 16% France United Kingdom 20% 27% 12% 20% 13% 20% Other Europe 2006 2007 2006 2007 2006 2007

Exports have historically played a major role in the business of Thales, which for many years has operated one of the most extensive sales networks in the world in its traditional defence and aerospace markets. With the considerable expansion of its multidomestic operations since the 1990s, however, the company has taken its international dimension to a new level, as the figures below illustrate. Thales’s multidomestic development strategy serves a specific objective: the deliberate location of key operations in close proximity to customers, as opposed to the simple relocation of French industrial activities. Most industrial operations out- side France begin as part of external growth operations in target client countries, typically through local partnerships and joint ventures, and go on to achieve significant organic growth. Thales had expanded only marginally outside France until 1990, when it acquired the Dutch company Hollandse Signaalappa- raten (Signaal, now Thales Nederland), a world leader in naval combat systems, from Philips. Since then, the company has ex- tended its presence through acquisitions and equity investments in other European countries, primarily in the United Kingdom. The biggest of these operations was the friendly takeover of the British company Racal Electronics in 2000. In the late 1990s, Thales also expanded operations outside Europe, in Australia, the United States, South Korea, South Africa and Singapore.

The arrival of the businesses acquired from Alcatel-Lucent in 2007 gave new impetus to this process of internationalisation and further expanded Thales’s footprint in continental Europe: the rail signalling businesses are based primarily in Germany, Canada and Spain (1) while the space businesses are located in France and Italy. As a result of these external growth operations, Thales’s international subsidiaries for the first time generated more than half of the company’s consolidated revenues in 2007 (53% compared with 48% in 2006), with Thales UK in first place (15% of revenues in 2007), followed by Thales North America Inc. and Thales Germany (7% each).

(1) Around 3,500 people employed outside France: 78% in continental Europe (1,400 people in Germany, 520 in Spain) and 22% in North America (780 people). WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 124 2007 ANNUAL REPORT – Thales Business description International presence Research & innovation

France remains the largest country of operation, however, with just over half of consolidated employees at 31 December 2007 (52% compared with 56% at 31 Dec. 2006 and 72% a decade ago). It is also the largest country of destination, with between 25% and 30% of revenues invoiced to France-based customers during the last 10 years. This figure has remained relatively stable: 25% in 2007 compared with 30% in 2006 and 29% in 1997. The United Kingdom is Thales’s second-largest country of destination (13% in 2007 and in 2006). The relative importance of Europe as a proportion of the total increased slightly as a result of these operations in 2007: 83% of consolidated revenues were generated by European subsidiaries (compared with 80% in 2006) and 65% of revenues were invoiced to Europe-based customers (compared with 63% in 2006). North America and Asia-Pacific (primarily Australia) accounted for similar proportions, with 8% and 7% (respectively) of revenues by origin in 2007 and 10% and 14% of revenues by destination. These percentages remained relatively stable with respect to 2006.

A. International presence in figures

1. Trend over the last five years

France United Other North Asia- Near & Rest Total Kingdom Europe America Pacific Middle of world Revenues in € m East 2007 Revenues by destination 3,108 1,584 3,276 1,226 1,679 878 545 12,296 Revenues by origin 5,799 1,863 2,488 1,023 807 244 73 12,296 Consolidated workforce at year-end 31,911 8,141 12,381 3,484 4,536 371 371 61,195

2006 Revenues by destination 3,064 1,342 2,079 1,192 1,577 617 393 10,264 Revenues by origin 5,365 1,620 1,231 1,044 768 161 75 10,264 Consolidated workforce at year-end 29,180 8,524 7,100 2,503 4,261 285 306 52,160

2005 Revenues by destination 2,995 1,242 2,167 1,068 1,537 884 371 10,263 Revenues by origin 5,541 1,567 1,239 929 806 115 67 10,263 Consolidated workforce at year-end 29,835 8,921 7,202 2,492 4,099 196 302 53,047

2004 Revenues by destination 2,958 1,338 2,129 896 1,392 1,183 386 10,283 Revenues by origin 5,744 1,640 1,245 705 768 93 87 10,283 Consolidated workforce at year-end 30,872 9,810 7,662 2,199 4,639 186 338 55,705

2003 Revenues by destination 2,774 1,242 2,213 926 1,543 1,446 426 10,569 Revenues by origin 5,841 1,708 1,278 678 803 127 135 10,569 Consolidated workforce at year-end 32,219 10,519 7,634 2,128 4,533 37 368 57,439

Nota: - revenues for 2004, 2005, 2006 and 2007 are reported according to IFRS, - revenues for 2003 are reported according to French accounting standards. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 125 BUSINESS REVIEW Rapport financier

2. Detailed trend over the last three years

2.1. In Europe

France United Germany Italy Nether- Spain Other Total Kingdom lands Europe Europe Revenues in € m 2007 Revenues by destination 3,108 1,584 882 413 363 352 1,266 7,968 Revenues by origin 5,799 1,863 833 528 427 345 353 10,149 Consolidated workforce at year-end 31,911 8,141 3,846 2,434 2,041 2,170 1,890 52,433

2006 Revenues by destination 3,064 1,342 579 145 274 152 929 6,485 Revenues by origin 5,365 1,620 499 63 401 100 168 8,216 Consolidated workforce at year-end 29,180 8,524 2,529 333 2,020 1,389 829 44,804

2005 Revenues by destination 2,995 1,242 630 161 230 146 1,001 6,404 Revenues by origin 5,541 1,567 494 71 384 91 198 8,347 Consolidated workforce at year-end 29,835 8,921 2,397 329 2,294 1,242 940 45,958

2.2. Out of Europe

United Canada Australia South Other Total out Revenues in € m States Korea countries of europe 2007 Revenues by destination 997 228 468 285 2,349 4,328 Revenues by origin 850 174 538 188 397 2,146 Consolidated workforce at year-end 2,339 1,145 3,493 685 1,100 8,762

2006 Revenues by destination 952 240 459 300 1,829 3,779 Revenues by origin 934 110 501 192 311 2,048 Consolidated workforce at year-end 2,241 262 3,335 649 869 7,356

2005 Revenues by destination 934 133 486 296 2,010 3,860 Revenues by origin 824 105 513 179 296 1,916 Consolidated workforce at year-end 2,228 264 3,226 622 751 7,090

B. International financing

1. EXPORT FINANCING

According to the local context and type of operation, the international financing department selects the most appropriate and competitive payment instruments and financing (cash, letter of credit, buyer’s credit, supplier’s credit, soft loans, private financing, structured finance, discounted commercial loans, leasing, barter, etc.). WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 126 2007 ANNUAL REPORT – Thales Business description International presence Research & innovation

This department arranges such financing with selected public or private financial partners. It liases with banks, export credit agencies, government agencies, international financial organisations, private insurers and the investors who assist in financing operations. It negotiates financing conditions with these partners and takes out the appropriate insurance to cover country risk. The international financing department negotiates bid guarantees and bank guarantees for bids and contracts, and, where required, works with the Group’s Finance Department to provide appropriate corporate guarantees.

2. PROJECT FINANCING

The Private Finance Initiative (PFI) department works with Thales operating units and the Group’s Legal Department to address the legal and financial aspects of the project financing, concessions and outsourcing arrangements increasingly favoured by the Group’s customers. This department works for all Thales Divisions on such projects as Private Finance Initiatives (PFIs), Public-Private Partner- ships (PPPs), Contrat de Partenariat avec l’Etat (CPE) in France, Government Owned Contractor Operated (GOCO), Build Operate Transfer (BOT), and delegated public service programmes.

3. INTERNATIONAL OFFSETS

Thales International Offsets (TIO) is the company’s specialised subsidiary for international offsets programmes. TIO negoti- ates and implements indirect offset requirements for the Group and for external customers. To fulfil these obligations, TIO promotes inward investment or invests directly in client countries in areas outside the scope of the company’s core busi- nesses, and promotes exports of industrial equipment or high-tech products from these countries.

C. M ajor operational subsidiaries and major manufacturing sites

1. Major operational subsidiaries

The companies listed below are wholly owned subsidiaries, direct or indirect, of the Thales parent company and have been selected on the basis of the following criteria: - their net assets represent at least 10% of the Group’s consolidated net assets, - they generate at least 10% of the Group’s consolidated net income (restated to exclude €432m in capital gains from disposals in 2007).

Company’s name Registered office Country Division % of capital held by Thales

Thales Underwater Systems SAS Valbonne (Provence) France Naval 100.00% Neuilly-sur Seine Thales Avionics SA (Île-de-France) France Aerospace 99.99% Thales Air Systems SA Rungis (Île-de-France) France Air systems 99.99% SA Colombes (Île-de-France) France Land & Joint Systems 99.99% Thales Communications Inc. Clarksburg (Maryland) United States Land & Joint Systems 100.00% Weybridge (Elmbridge District, United Thales Electronics Plc South-west of London) Kingdom Corporate UK 100.00% Stuttgart Security Solutions & 99.99% Thales Rail Signalling Solutions GmbH (Bade-Wurtemberg) Germany Services WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 127 BUSINESS REVIEW Rapport financier

2. Major manufacturing sites

The details below refer to employees under Group management (a total of 67,028 people at 31 Dec. 2007, see p. 88), including all employees of proportionately consolidated companies. At 31 December 2007, 52% of managed staff in France worked at sites in the Paris region (1), well ahead of the Southwest (18% of the total), Provence-Alpes-Côte-d’Azur and Rhône-Alpes (9% and 7% respectively) and Centre, Pays de Loire and Brittany (between 4% and 6% each). At 31 December 2007, 15 sites had more than 1,000 employees, accounting for 42% of the total managed staff worldwide.

At 31 December 2007 Employees Domain 22,188 In France (65% of worforce in France) (South-west) 2,097 Aerospace Brest (Brittany) 1,449 Aerospace / Defence Cannes (Provence) 1,835 Space Colombes (Île-de-France) 3,488 Defence / Space Elancourt (Île-de-France) 2,399 Aerospace / Defence Malakoff / Montrouge(Île-de-France) 1,320 Security Massy / Palaiseau (Île-de-France) 1,532 Defence / Security Meudon la Forêt / Vélizy (Île-de-France) 2,164 Aerospace / Security Moirans (Rhône-Alpes) 1,040 Aerospace / Security Rungis (Île-de-France) 1,264 Defence Toulouse (South-west) 3,600 Aerospace / Space In the United Kingdom 2,173. (27% of workforce in the UK) Crawley 2,173 Security In Australia Sydney 1,454 Defence / Security In the Netherlands 1,725 Defence In Spain Madrid 1,399 Space / Security Total employees at named sites 28,939. (42% of employees under Group management)

(1) The regions mentioned in this paragraph correspond to the French legal definition of a ‘bassin d’emploi’ (employment area). WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 128 2007 ANNUAL REPORT – Thales Business description International presence Research & innovation

3 . Research and innovation

Thales operates in highly specialised fields such as air traffic management, avionics, secure military communications and large-scale information networks for governments and administrations. Designing and developing the mission-critical infor- mation systems that underpin the company’s leadership in aerospace, defence and security markets calls for comprehensive expertise in increasingly sophisticated technologies and the ability to integrate these technologies with large-scale software- driven systems. As a result, Thales commits a very significant proportion of its revenues to research and development (R&D), recruiting engi- neers and researchers from the world’s most highly regarded scientific communities and working closely with public research laboratories and specialist companies at the cutting edge of science and technology. Thales’s R&D strategy is based on the conviction that a successful high-technology company needs teams of high-level experts with the ability to understand and evaluate the findings of the world’s best researchers. The key to this ability is a structural, hands-on involvement in leading- edge research programmes. This time-honoured strategy recently gained further recognition with the award of the 2007 Nobel Prize in Physics to , Professor at the University of Paris-Sud 11 and scientific director of the Thales / CNRS Joint Physics Unit, for the discov- ery of giant magnetoresistance. This award – arguably the world’s most prestigious scientific accolade – is an endorsement of the quality of the fundamental research conducted at Thales laboratories and the strength of the company’s relations with the broader scientific community. Most Thales R&D programmes are nonetheless shaped by the direct requirements of the company’s six operating divisions and aim to give them the keys they need to set themselves apart from the competition and further improve their performance in increasingly aggressive markets. A full 80% of research programmes conducted by the Thales Research & Technology (TRT) central laboratories are based on specific requirements expressed by the divisions. The remaining 20% are driven by a bottom-up approach to maximise potential for disruptive innovation.

A. The key to competitiveness and growth

R&D is key to Thales’s competitive performance. In 2007, the company committed €2.2 billion to research and develop- ment, equivalent to 18% of total revenues. The effectiveness of Thales’s R&D effort hinges largely on the decentralised nature of its operations and close coordination on strategic topics: the 22,500 staff concerned (over 70% of whom are engineers and researchers) are based at more than 80 units in the company’s top ten countries of operation, where they are acutely aware of the real-world requirements of the marketplace. In 2007, self-funded R&D expenditure rose by 13%, accounting for 5% of consolidated revenues and more than 26% of total R&D.

From doctoral thesis to employment contract One of Thales’s priorities is to ensure that each operating unit benefits directly from the latest scientific expertise gained through the company’s collaboration with the world’s most prestigious universities. Two hundred graduate students are currently preparing their PhD theses within Thales research and development teams. To make these opportunities even more attractive and leverage maximum benefit from the human, material and finan- cial investment in these students, Thales in late 2006 pledged a significant increase in the number of doctoral students recruited on completion of their theses. As a result, nearly half of the students who studied and trained with a Thales R&D team were subsequently hired by TRT or a company division in 2007. Doctoral students are typically recruited in six main specialist areas: - microwave, optoelectronics and optronics, - information processing and data fusion, - complex system engineering, - IT architectures, - technologies for security and applications, - space technologies. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 129 BUSINESS REVIEW Rapport financier

2007 2006 2005 2004 2003 (French in € million standards)

Total R&D expenditure 2,200 2,000 1,900 1,850 1,850 Company-funded R&D expenditure 584 518 504 444 419 of which recorded as expenses 443 361 366 368 381 of which capitalised (a) 141 157 138 68 38 Company-funded R&D as % of total 26% 26% 27% 24% 23%

(a) See note 1.j in the appendix to the consolidated financial statements, defining the criteria for recording development expenditure as assets.

A significant proportion of the self-funded R&D budget is dedicated to upstream research and technology (R&T), conducted in part at TRT laboratories, which employ around 500 people. These R&T programmes seek to develop: - new technologies in five key domains (see below), - new system and product concepts, such as the network-centric systems that are driving a far-reaching transformation in both the civil sector (e-government) and the world of defence (network-centric warfare), - new engineering tools and methods for critical information systems.

B. Five key technology domains

Retaining control of certain technologies is crucial for Thales. These technologies come under five main headings: optics and microwave; secure communications; software; processing, control and cognition; and security. These technologies are needed to ensure sovereignty, economic independence and the effective development of dual civil / military applications. In all cases, the company’s overriding objective is the same: to rapidly achieve the necessary levels of maturity to incorporate the latest technology into Thales products and systems.

The ThereSIS security research laboratory The ThereSIS applied research laboratory is dedicated to security technologies and is located at the new Thales Re- search & Technology facility on the campus of the École Polytechnique in Palaiseau, near Paris. Its mission is to provide Thales with key discriminating technologies to further strengthen the company’s leadership in security and services. Thales is a European leader in e-government solutions and has gained unparalleled experience through several large-scale modernisation programmes for the French Government, including the Ministry of Finance’s internet portal. Through Ther- eSIS, Thales aims to consolidate and expand this capacity to manage complex web-based systems used by millions or tens of millions of citizens. With one of the most innovative collaborative environments combined with rapid prototyping tools, ThereSIS has the capability to model, test and visualise groundbreaking solutions and services in direct collaboration with the company’s customers and partners. The laboratory’s research programmes are based on a dynamic policy of partnerships in France and internationally. In the field of personal and property security (air traffic management, rail transport, critical infrastructure security, border control, etc.), ThereSIS provides Thales units with support for the design of proactive end-to-end systems that not only detect incidents, but also predict them before they occur. Another key research area is crisis management sup- port. Work in this area is focused on enhancing the effectiveness of current tools by making them more comprehensive, predictive and interoperable.

C. Interaction with the scientific community

As it strengthens its ties with the academic world, Thales has developed an international network of research laboratories in France, the United Kingdom, the Netherlands and Singapore. These laboratories are managed directly by the Research & Technology corporate directorate. This network serves a broad range of missions. It monitors the latest scientific advances, develops disruptive technologies and contributes to Thales’s intellectual property portfolio at the same time as extending the company’s relationships with WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 130 2007 ANNUAL REPORT – Thales Business description International presence Research & innovation

the scientific / technical community. It provides a platform for innovation and knowledge sharing across the organisation and helps to attract talented science graduates and further develop the company’s expertise. As a result, most TRT laboratories are located on university campuses in immediate proximity to Thales’s research partners. The new corporate research laboratory in France, for example, is located on the campus of the École Polytechnique – one of the country’s most prestigious engineering schools – and forms part of a complex of world-class research establishments just south of Paris. In the same way, Thales research centres in the Netherlands and Singapore are now located respectively at Delft University and Nanyang Technological University (NTU). In the United Kingdom, the Reading laboratories have close ties with major British universities, including Cambridge, Surrey and Imperial College London. As well as employing some 500 personnel, TRT laboratories host 80 doctoral students and more than 100 scientists from partner research institutes in each country. The Alcatel Thales III-V Lab dedicated to III-V semiconductor technologies is also part of this network.

The Thales / CNRS Joint Physics Unit

The Thales / CNRS Joint Physics Unit was set up with the University of Paris-Sud 11 in 1995. Its Scientific Director is Albert Fert, winner of the 2007 Nobel Prize in Physics. Its primary research areas are: - spintronics (*) and nanomagnetism, - superconductors and signal processing, - functional oxides. The unit employs around 50 engineers and researchers, and is one of 20 CNRS laboratories that operate in association with an industrial partner. The Thales / CNRS research unit is at the forefront of physics research and publishes between 20 and 30 papers each year in the world’s most respected scientific journals. As a direct result of its work with the unit, Thales (or Thomson-CSF) has filed some 82 patents, 39 of which are still in force. These patents create significant value for the company in numerous key areas.

(*) Spintronics, or spin-based electronics, is the study of the properties associated with electron spin, manifested as low-level magnetic energy associated with each electron. The most common application of this effect is giant magnetoresistance (GMR), as discovered by Albert Fert. GMR has made it possible to develop extremely sensitive magnetic read / write heads and computer hard drives that can store massive amounts of high-density data. Spintronics also has applications in a variety of other areas. One example is a promising new technology for frequency synthesis, allowing several communication standards to be addressed at the same time.

D. Building innovation ecosystems

In each country where the company has significant operations, Thales pursues a strategy of solid partnership within the local industrial and scientific ecosystem. Consolidating these local links, the company maintains a high profile in transnational networks, particularly at European level. Thales is positioned as a major player in numerous high-tech clusters in France (including System@tic and Cap Digital in the Paris region, Aerospace Valley in the southwest, the maritime clusters in Brittany and Provence-Alpes-Côte d’Azur) and in the Nether- lands, as well as on various European technology platforms (Acare, Artemis, Eniac, Nessi, etc.). Thales is also playing an active role in the Eureka initiative (ITEA, Medea, etc.) and has a significant involvement in the Mobile Virtual Centre of Excellence programme in the United Kingdom, which is designed to promote world class collaborative research between the country’s leading academic institutions in mobile communications, with a programme defined by the leading high tech industries, to the benefit of all. The prime objective for players in each of these networks is to make better use of the synergies between major industrial groups, smaller specialist technology providers and training / research bodies. Thales Research & Technology teams in France are taking part in more than 200 collaborations with 140 partners in 20 countries.

Thales and the SESAR programme Funded by the European Commission and Eurocontrol, SESAR aims to develop and implement a next-generation air traffic management (ATM) system by 2020/25. This state-of-the-art system will have the necessary capacity to manage future air traffic volumes while significantly improving safety and environmental performance and reducing operating costs. SESAR also aims to secure Europe’s continued leadership in the global ATM marketplace. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 131 BUSINESS REVIEW Rapport financier

Under the SESAR programme, European ATM will undergo a far-reaching but progressive transformation. Europe’s air navigation systems will be harmonised, overcoming the shortcomings of the current arrangement, which is fragmented and costly, with around 50 separate systems in operation. SESAR aims to achieve full system interconnectivity and interoperability through a network-centric approach, characterised in particular by functional integration of ground, aircraft and satellite systems. Gate-to-gate flight path optimisation will replace the current piecemeal system of air traffic management by sector. In addition, new technologies will be deployed systematically, and overall efficiency will improve as dynamic management of airspace and routes becomes feasible and air traffic controllers benefit from new decision support tools. After an initial definition phase, the SESAR development phase is about to launch. With a budget of €2.1 billion, this phase is funded by the European Commission, Eurocontrol and industry in equal proportions. As a partner in the Air Traffic Alliance with EADS and Airbus, Thales is one of the founding members of SESAR and is set to play a major role in the programme’s development phase. Thales is the world’s number one supplier of ATM systems and a global leader in avionics systems, satellite systems and large-scale mission-critical systems. Thales brings to the table unparalleled expertise in numerous technologies that will be instrumental in the development of Europe’s future ATM system and is thus a key player in this sector.

E. A dynamic approach to intellectual property management

Thales supports its research and development activities with a particularly dynamic policy of intellectual property manage- ment and proactively protects its innovations, primarily by patents, trademarks and copyright. In terms of the number of patents granted for innovations (362 new inventions in 2007), Thales is on a par or ahead of most of its competitors. The steady rise in the number of patent applications filed each year (up 50% in two years) is a clear indica- tor of the company’s commitment to innovation and its ability to convert research results into competitive advantage. The Thales portfolio included 13,000 patents and patent applications at 31 December 2007 and is constantly adjusted in line with operational requirements. The portfolio protects Thales’s positions in its markets and serves as a bargaining chip in disputes with third parties. It can also generate additional revenue in cases where the most effective way to exploit an intellectual asset is through a licensing agreement with another company. Intellectual property is managed by the Research & Technology corporate directorate, which coordinates a network of corre- spondents at each operating unit. A number of administrative functions such as patent applications, portfolio management and liaison with patent offices have recently been outsourced. A financial incentive system has been introduced to encourage Thales engineers to innovate: a bonus is awarded for each invention registered, followed by a second bonus if the innovation is successfully patented. Awareness sessions on the impor- tance of protecting the company’s technological assets are regularly held for engineering and operational management staff.

Thales behind new software standard As partners in a joint software research programme, Thales, the French atomic energy commission CEA and INRIA, the French national institute for research in computer science and control, were the main protagonists of a new software stand- ard adopted by the Object Management Group in late 2007. The new MARTE standard (Modelling Analysis of Real-Time and Embedded systems) extends the UML2 modelling lan- guage to support model-driven engineering and analysis of real-time and embedded systems (*). MARTE opens up a much broader market for real-time and embedded system design tools through a more diversified offering of generic products as an alternative to today’s tools, most of which are highly specific in terms of performance constraints and response times. Thales and its two public-sector partners were the driving force behind this initiative and were closely involved in the stand- ardisation process.

(*) Real-time and embedded systems are designed to operate in highly constrained physical environments such as aircraft cockpits and satellites, where response times are critical to mission success. The performance and dependability requirements of these systems are increasingly stringent. As a result, they make extensive use of miniatur- ised electronic components and increasingly complex computer code. Expertise in real-time and embedded systems is a key differentiator in many of Thales’s businesses, including avionics and rail signalling. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 132 2007 ANNUAL REPORT – Thales SHAREHOLDER INFORMATION

1 . Company and share capital

A. statutory information on the Company...... 134

B. General meetings...... 135

C. share capital...... 136

D. Potential capital...... 140

E. shareholding structure...... 144

F. Regulated agreements...... 152

2 . Corporate governance

A. Composition of the Board of directors...... 155 B. Chairman’s report to the general meeting of 15 May 2008 on corporate governance and internal control...... 164

C. Corporate management...... 178

D. Compensation paid to board members...... 181

E. Incentive scheme and mandatory profit-sharing scheme...... 182

F. external auditors...... 182

3 . STO CK MARKET INFORMATION AND FINANCIAL COMMUNICATION

A. Thales share...... 184

B. Financial information policy...... 191

C. other Thales securities listed...... 193

4 . Annual General Meeting of 15 May 2008

A. Agenda...... 194

B. q uorum and results of the votes...... 195 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 133 SHAREHOLDER INFORMATION

1 . COMPANY AND SHARE CAPITAL

A. STATUTORY INFORMATION on the company

Corporate name: THALES

Form of Incorporation Thales is a “société anonyme” (a joint-stock company) with a board of directors governed by French law, and in particular the Commercial Code and certain provisions of the law on privatisation of 6 August 1986, as amended, since the French State owns more than twenty per cent (20%) of the capital.

Registered Office 45, rue de Villiers, 92200 Neuilly-sur-Seine – France Telephone: +33 (1) 57 77 80 00

Registration No. 552 059 024 in the Nanterre Register of Trade and Companies; APE business identifier code: 332 A.

Term The company was formed on 11 February 1918 for a period of 99 years, with expiration set for 11 February 2017, unless it is extended or wound up before time.

Corporate aims (article 2 of the Articles of Association) Engineering, design, manufacture, sale and hire of all components, hardware, equipment and systems implementing all applications of electronics, from radio, optics, optronics and information technologies to telecommunications, detection, identification, navigation and all other industrial and commercial activities; the holding of all securities in companies en- gaged in these activities.

Financial Year The financial year of the company covers a period of twelve calendar months from 1 January to 31 December. Corporate documents and information may be consulted at the offices of the secretary to the Board of directors, at the registered head office.

Distribution of profits as per the Articles of Association Profits are shared in compliance with current legislation. Under the Articles of Association, the General Meeting called to approve the financial statements for the previous financial year is empowered to grant each shareholder the option to receive payment of all or part of the dividend in cash or in shares.

Company’s position in the Group Thales, the parent company, operates as a holding company for the Group: - it holds shares in the Group’s major subsidiaries, - it manages central functions: devises Group strategy, trading policy, legal and financial policy, operation monitoring, human resources policy, communication, - it provides subsidiaries with specialised assistance: legal, fiscal and financial expertise, for which the subsidiaries pay fees, - it provides financing and cash, and, as required, provides guarantees. In addition to these functions, the Thales parent company conducts its own research, described on page 131 of this report. Financial flows between Thales parent company and its subsidiaries are the result of: - the payment of dividends, - cash pooling, - fees received for the provision of shared services. The main operating subsidiaries are presented on page 127 of this document. A table showing the main consolidated companies may be found on page 83. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 134 2007 ANNUAL REPORT – Thales Stock market Agenda of the Annual Company Corporate information General Meeting and share capital governance and financial of 15 May 2008 communication

B. GENERAL MEETINGS

1. NOTICE OF MEETINGS AND CONDITIONS FOR ATTENDANCE

All shareholders, regardless of the number of shares they own, are entitled to take part in the general meetings of sharehold- ers. A notice of meeting is sent to them, and they consider the issues under the conditions specified by law; the date and the place, the agenda and the draft resolutions of the meeting are published under the conditions set out by regulation at least 35 days prior to the date of the meeting (48 days prior to the 15 May 2008 meeting), since the final notice of meeting takes place at the latest two calendar weeks prior to the meeting (22 days prior to the 15 May 2008 meeting). Participation in the general meetings, in any form whatsoever, is conditioned upon registration of the shares under the con- ditions and within the time frames set out by the applicable regulation. Any shareholder who has already voted by post or proxy or requested an admittance card or share ownership certificate may at any time sell all or part of their shares. However, pursuant to regulations, should the intermediary account-holder notify to the Company a sale occurring before midnight preceding the third trading day before the general meeting, the Company will invalidate or modify the vote ex- pressed, proxy, admittance card or share ownership certificate, as the case may be. No sale or other operation carried out after midnight (Paris time) preceding the third trading day before the meeting, by whatever means, is registered by the approved intermediary or taken into consideration by the Company, notwithstanding any agreement to the contrary. The right to attend and vote in ordinary General Meetings belongs to the beneficial owner, and to the bare owner in extraor- dinary General Meetings. Owners of pledged shares retain their voting rights. Co-owners of shares are represented in General Meetings by one of the co-owners or by a joint proxy, the latter being appointed by the court at the earliest request of any co-owner in case of disagreement among the co-owners. Each member of the General Meeting has one vote for each share owned or represented (except for double votes mentioned below) and subject to the exceptions provided by law.

2. DOUBLE VOTING RIGHTS AND EXERCISING VOTING RIGHTS

Shareholders who can show proof that their shares have been registered in their name in the company’s share register for a minimum of two years without interruption are entitled to double voting rights for each share held. Registered shares that have been granted to their beneficiary as bonus shares in respect of shares they already hold with double voting rights at- tached are also entitled to double voting rights as soon as the shares are granted. Double voting rights will terminate automatically for any share converted into the bearer form or transferred (except as a result of inheritance, whether testate or intestate, division of property between spouses or gifts inter vivos between spouses or in favour of a relative). Double voting rights may be abolished by an extraordinary General Meeting, following approval voted by a special General Meeting of shareholders entitled to double voting rights. There is no threshold limiting voting rights under the Articles. According to the law, shares owned by the company are not entitled to voting rights.

3. REPRESENTATIONS PERTAINING TO EXCEEDING THRESHOLDS UNDER THE ARTICLES

Any natural person or legal entity, owning 1% (or any multiple of 1%) of the total number of shares representing the share capital of the company, is required to inform the company of the total number of shares held, within five trading days fol- lowing the date on which this threshold or any threshold specified by law is exceeded. This obligation to inform the company applies, under the same conditions, as and when the holding falls below one of the thresholds mentioned in the previous paragraph. In the event of failure to observe the obligation to disclose the number of shares held, as stipulated in this article, the shareholder shall be deprived of the voting rights attached to any shares exceeding the threshold in question, subject to the conditions and limits defined by law. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 135 SHAREHOLDER INFORMATION

C. Share CAPITAL

At 31 December 2007, the share capital amounted to €595,000,998 divided into 198,333,666 shares of €3 par value each. Pursuant to the applicable regulations, each month the Company publishes on its web site (www.thalesgroup.com, under the heading “Regulated Information”) the information pertaining to the total number of voting rights and the number of shares making up the registered capital. Changes in the share capital and rights of shareholders are governed by the relevant legislation. Shares may be held in either registered or bearer form, at the shareholder’s discretion. The share register is kept on behalf of the company by Société Générale (Département Titres & Bourse – 32 Rue du Champ de Tir – BP 81 236 – 44 612 Nantes cedex 3 – France). The registered capital is fully paid up. It includes a golden share resulting from the conversion of an ordinary share held by the French State, as decided by Decree 97-190 of 4 March 1997 in application of the August 6, 1986, Privatisation Law (see page 147).

1. CHANGE IN THE share CAPITAL OVER THE LAST FIVE FINANCIAL YEARS (in euros)

Date Type of transaction Issue Premiums, Number Nominal amount Total Share Aggregate Merger / of shares created of the changes Capital number of shares Contribution in capital making up Premiums the capital

31 Dec. 2001 2,724,320,105 503,194,539 167,731,513 20 Dec. 2002 Capital increase 75,386,943 4,132,779 12,398,337 restricted to employees

31 Dec. 2002 2,799,707,048 515,592,876 171,864,292 31 Dec. 2003 2,673,002,421 515,592,876 171,864,292 Financial Exercise of Share 102,150 4,500 13,500 Year 2004 Options Exercise of Share 4,171 176 528 warrants 31 Dec. 2004 2,673,108,742 515,606,904 171,868,968 Financial Exercise of Share 40,523 121,569 Year 2005 Options Exercise of Share 372 1,116 warrants 31 Dec. 2005 2,674,037,324 515,729,589 171,909,863 Financial Exercise of share options 96,945 290,835 Year 2006 or conversion of OCEANE bonds 31 Dec. 2006 2,676,344,983 516,020,424 172,006,808 5 Jan. 2007 Capital increase 925,000,000 25,000,000 75,000,000 reserved for Alcatel Participations 5 Jan. 2007 3,601,344,983 591,020,424 197,006,808 Financial Exercise of Share 35,943,890 1,271,809 3,815,427 Year 2007 Options Exercise of Share 1,275,173 55,049 165,147 warrants 31 Dec. 2007 3,638,564,046 595,000,998 198,333,666 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 136 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

2. CHANGE IN THE shareholding structure OVER THE LAST FIVE FINANCIAL YEARS

2.1. In number of shares

As at 31 December 2007 2006 2005 2004 2003 TSA (a) and its subsidiary Sofivision 52,670,906 52,670,906 52,670,906 52,670,906 52,670,906 Sogepa (a) -- 1,081,256 1,081,256 1,081,256 1,081,256 French State (b) 2,022 2,022 2,022 2,022 2,022 Public Sector 52,672,928 53,754,184 53,754,184 53,754,184 53,754,184 Alcatel-Lucent Participations 41,262,481 16,262,481 16,262,481 16,262,481 16,262,481 Groupe Industriel Marcel Dassault (GIMD) (c) -- 9,827,043 9,827,043 9,827,043 9,827,043 Industrial Partner 41,262,481 26,089,524 26,089,524 26,089,524 26,089,524 Shareholders acting in concert 93,935,409 79,843,708 79,843,708 79,843,708 79,843,708 Float 104,398,257 92,163,100 (d) 92,066,155 (d) 92,025,260 (d) 92,020,584 (d) of which Employees (e) 4,024,102 7,597,504 7,960,572 8,756,461 8,690,141 of which Thales 2,932,229 3,134,701 3,163,613 6,585,651 9,600,528 of which Sogepa (a) 1,081,256 ------of which GIMD (c) 10,277,043 ------Total 198,333,666 172,006,808 171,909,863 171,868,968 171,864,292

2.2. As a percentage

As at 31 December 2007 2006 2005 2004 2003 TSA (a) and its subsidiary Sofivision 26.56% 30.62% 30.64% 30.65% 30.65% Sogepa (a) -- 0.63% 0.63% 0.63% 0.63% French State (b) ------Public Sector 26.56% 31.25% 31.27% 31.28% 31.28% Alcatel-Lucent Participations 20.80% 9.46% 9.46% 9.46% 9.46% Groupe Industriel Marcel Dassault (GIMD) (c) -- 5.71% 5.72% 5.72% 5.72% Industrial Partner 20.80% 15.17% 15.18% 15.18% 15.18% Shareholders acting in concert 47.36% 46.42% 46.45% 46.46% 46.46% Float 52.64% 53.58% (d) 53.55% (d) 53.54% (d) 53.54% (d) of which Employees (e) 2.03% 4.42% 4.63% 5.09% 5.06% of which Thales 1.48% 1.82% 1.84% 3.83% 5.59% of which Sogepa (a) 0.55% ------of which GIMD (c) 5.18% ------Total 100% 100% 100% 100% 100%

(a) Companies wholly owned by the French State (Sogepa is not a signatory to the shareholders’ agreement, entered into on 5 January 2007, between TSA and Alcatel-Lucent, which replaced the previous agreements entered into in 1998). (b) Including one golden share (see page 147). (c) GIMD is not a signatory to the shareholders’ agreement, entered into on 5 January 2007, between TSA and Alcatel-Lucent, which replaced the previous agreements entered into in 1998. (d) In accordance with the definition of free float used since 1 December 2003 by the Euronext-Paris Indices Steering Committee to calculate the Euronext-Paris Indices. Free float is taken to mean total share capital after deduction of shares held by Group companies, held directly or indirectly by the founders or the State, by controlling interests, and of shares within the scope of a shareholders agreement not already covered, and interests considered stable. (e) Shares held by employees in a company savings plan (“PEE”) or company investment fund (“FCPE”). WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 137 SHAREHOLDER INFORMATION

2.3. Major changes in share ownership over the last five years In 2003, the free float continued to increase, albeit less than in 2001 and 2002, from 47.4% to 48.0%, with the transfer to employee shareholders of shares previously held by the Public Sector: the increase in employee shareholding of 982,652 shares (0.31% of capital) corresponds mainly to bonus shares allocated to those who subscribed to the 2000 capital increase reserved for employees, as stipulated. In late 2004, the number of company-held shares fell as a result of the following operations: - in November and December, direct or proxy sales of 1.2 million shares, - in December, the net sale of 1.3 million shares under a liquidity contract, - in December, sale or transfer of approximately 520,000 shares to company investment funds, including free shares, under an employee shareholder operation. The proportion of company-held shares consequently fell to 3.83% at 31 December 2004 compared with 5.59% at 31 De- cember 2003. In 2005, the share of the free float held by the public continued to increase as a result of the following disposals of company- held shares: - approximately 2 million shares were sold by proxy, - approximately 1 million shares were sold under a liquidity contract, - approximately 300,000 shares were sold to employees as options vested, and to a lesser extent, as part of the employee shareholder scheme. Company-held shares amounted to 1.84% of capital at 31 December 2005. In 2006, the number of company-held shares varied little, since the excess of shares bought over shares sold was only ap- proximately 29,000: - approximately 457,000 million shares were sold under a liquidity contract, - approximately 388,000 million shares were sold under a liquidity contract, - approximately 98,000 shares were sold to employees as options vested. Company-held shares amounted to 1.82% of capital at 31 December 2006. On 11 August 2006, Capital Group International Inc. disclosed that it had exceeded the legal threshold of 5% of the share capital and owned 8,813,389 bearer shares with the same number of voting rights. This amounted to 5.13% of the share capital and 3.52% of voting rights in the Company on the date of disclosure. By 31 December 2006, Capital Group International Inc. had not disclosed that its holding had fallen below the legal threshold. On 1 January 2007, the “OCEANE” notes (i.e., bonds convertible into or exchangeable for new or existing shares) issued in December 2001 to a nominal value of €500 million matured. Most of them were redeemed in cash. Consequently the opera- tion impacted almost solely the potential capital. On 5 January 2007, the Extraordinary General Meeting of Shareholders called to approve the contributions of Alcatel-Lu- cent’s transport and security businesses voted an increase in capital of 25 million shares (amounting to 15% of share capital at end 2006), reserved for the contributing company, Alcatel-Lucent Participations. Alcatel-Lucent Participations’ holding in the Group’s share capital rose from 9.46% on 31 December 2006 to 20.94% on 5 January 2007. The Public Sector’s holding, meanwhile, fell from 31.25% to 26.74%. Last, the company-owned capital was also reduced to 1.56%, compared with 1.85% as at 31 December 2006. During 2007, the number of company-owned shares was reduced due to the following operations: - 582,811 shares were sold to employees as they exercised options, - 369,065 shares were purchased directly on the market in August, September and December, - 11,274 shares were sold under a liquidity contract. Company-held shares amounted to 1.48% of the capital at 31 December 2007. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 138 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

3. CHANGE IN THE DISTRIBUTION OF THE VOTING RIGHTS OVER THE LAST FIVE FINANCIAL YEARS

As at 31 December 2007, the total amount of voting rights came to 273,249,924. This number takes into account the dou- ble voting rights associated with the shares that had been registered for more than two years under the conditions set out by the Articles of Association (cf. above, page 135). As stated above, the number of shares and of voting rights is published monthly on the company’s web site (www.thales- group.com, in the “Regulated Information” section).

3.1. Voting rights in number of votes

As at 31 December 2007 2006 2005 2004 2003 TSA (a) and its subsidiary Sofivision 105,341,812 105,341,812 105,341,812 105,334,464 105,334,464 Sogepa (a) -- 2,162,512 2,162,512 2,162,512 2,162,512 French State 4,044 4,044 4,044 4,044 4,044 Public Sector 105,345,856 107,508,368 107,508,368 107,501,020 107,501,020 Alcatel-Lucent Participations 57,524,962 32,524,962 32,524,962 32,524,962 32,524,962 Groupe Industriel Marcel Dassault (GIMD) (b) -- 13,504,086 13,504,086 19,654,086 9,827,043 Industrial Partner 57,524,962 46,029,048 46,029,048 52,179,048 42,352,005 Shareholders acting in concert 162,870,818 153,537,416 153,537,416 159,680,068 149,853,025 Float 110,379,106 96,739,429 96,962,043 93,658,933 86,590,356 of which employees 7,687,592 14,752,876 15,432,533 16,319,640 12,133,768 of which Sogepa (a) 2,162,512 ------of which GIMD (b) 13,954,086 ------Total 273,249,924 (c) 250,276,845 250,499,459 253,339,001 236,443,381 Theoretical Voting Rights 276,182,153

3.2. Voting rights as a percentage

As at 31 December 2007 2006 2005 2004 2003 TSA (a) and its subsidiary Sofivision 38.55% 42.09% 42.05% 41.58% 44.55% Sogepa (a) -- 0.86% 0.86% 0.85% 0.91% French State ------Public Sector 38.55% 42.96% 42.92% 42.43% 45.47% Alcatel-Lucent Participations 21.05% 13.00% 12.98% 12.84% 13.76% Groupe Industriel Marcel Dassault (GIMD) (b) -- 5.39% 5.39% 7.76% 4.16% Industrial Partner 21.05% 18.39% 18.37% 20.60% 17.91% Shareholders acting in concert 59.60% 61.34% 61.29% 63.03% 63.38% Float 40.40% 38.65% 38.71% 36.97% 36.62% of which employees 2.81% 5.89% 6.16% 6.44% 5.13% of which Sogepa (a) 0.79% ------of which GIMD (b) 5.11% ------Total 100% 100% 100% 100% 100%

(a) Companies wholly owned by the French State (Sogepa is not a signatory to the shareholders’ agreement, entered into on 5 January 2007, between TSA and Alcatel-Lucent, which replaced the previous agreements entered into in 1998). (b) GIMD is not a signatory to the shareholders’ agreement, entered into on 5 January 2007, between TSA and Alcatel-Lucent, which replaced the previous agreements entered into in 1998. (c) This number takes into account the double voting rights associated with the shares that had been registered for more than two years under the conditions set out by the Articles of Association (cf. above, page 135). WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 139 SHAREHOLDER INFORMATION

4. CASES OF THE LEGAL THRESHOLDS BEING EXCEEDED DECLARED IN 2007 (1) In 2007, the Company was informed of the following cases of legal thresholds being exceeded: - Alcatel-Lucent exceeded the 15% and 20% voting rights thresholds the Company, on 5 January 2007, with a holding of 41,262,481 shares. Alcatel-Lucent also disclosed that it had exceeded the 10%, 15% and 20% share capital thresholds, ending up with 57,524,962 voting rights. This amounted to 20.94% of the share capital and 20.90% of voting rights in the Company on the date of disclosure, - GIMD’s individual holding fell below the 5% voting rights threshold on 11 January 2007, to 9,852,043 shares with 13,529,086 voting rights. This amounted to 5.0% of the share capital and 4.9% of voting rights in the Company on the date of disclosure. The holding of GIMD, on an individual basis, remained in excess of 5% (2), - Capital Group International Inc.’s holding fell below the 5% voting rights threshold on 12 January 2007, as did its share- holding, to 9,624,400 shares with as many voting rights. This amounted to 4.9% of the share capital and 3.5% of voting rights in the Company on the date of disclosure, - GIMD’s individual holding rose above the 5% voting rights threshold on 11 May 2007, to 10,117,043 shares representing 13,794,086 voting rights. This amounted to 5.13% of the share capital and 5.01% of voting rights in the Company on the date of disclosure.

D. POTENTIAL CAPITAL

1. MAXIMUM POTENTIAL CAPITAL ON 31 DECEMBER 2007

In number of €3 par value shares Registered Capital at 31/12/2007 198,333,666 Stock option plans in effect 15,684,698 - The 12 July 2001 plan: 2,926,020 options at €42.18 - The 02 July 2002 plan: 2,705,497 options at €40.97 - The 1 July 2003 plan: 1,885,446 options at €25.70 - The 1 July 2004 plan: 2,346,389 options at €29.50 - The 30 June 2005 plan: 2,051,816 options at €34.01 - The 09 November 2006 plan: 2,195,000 options at €36.47 - The 04 July 2007 plan: 1,574,530 options at €44.77 Maximum potential capital (+7.91%) 214,018,364

2. SECURITIES IN CIRCULATION THAT PROVIDE ACCESS TO THE CAPITAL (BONDS, WARRANTS AND OPTIONS) As at 31 December 2007, apart from potential vesting of share options, there are no other securities in circulation that pro- vide access to the registered capital, wether immediately or eventually.

2.1. Securities in circulation providing access to the capital and maturing in 2007

2.1.1. OCEANE bonds In December 2001, Thales issued 9,809,691 bonds convertible into and/or exchangeable for new or existing Thales shares (“OCEANE”). These bonds matured on 1 January 2007. On that date, 9,809,675 bonds were redeemed at par for a total nominal value of €500 million (€499,998,309.70) plus a coupon of €12.5 million (€12,458,266.93). And 16 bonds were converted into 17 Thales shares.

2.1.2. Share warrants The increase in capital reserved for employees in December 2002 involved the allocation to subscribers in Germany of 53,980 unlisted share warrants to replace the 20% discount on the share subscription price. On 2 April 2007, at the maturity of the 2002 employee shareholding plan, all of the 52,113 remaining share warrants were exercised. This resulted in the subscription of 55,049 shares in 2007 at the price of €26.70 each.

(1) Until the closing date of this document. (2) Since 5 January 2007, GIMD is no longer a party to the shareholders’ agreement entered into with Alcatel, and forming the Industrial Partner, nor to the “general agreement” entered into by and between TSA and the Industrial Partner on that same date. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 140 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

2.2. Stock options For convenience, although share purchase options have no impact on potential capital, since they concern existing shares, they are presented in this section together with share subscription options. At 31 December 2007, the following options were outstanding: - 753,843 purchase options with a weighted average exercise price of €37.17, - 15,684,698 share subscription options at a weighted average exercise price of €36.49 and exercisable, as a general rule, four years after their allocation date (the date of the Plan), for a period of six years as of that date.

2.2.1. Share purchase options

Date of Board decision 04 July 07 13 Nov. 01 02 April 01 10 May 00 14 Sept 99

Discount none none none none none Exercise period (a) from 4 July from 13 Nov. From 2 April from 10 May from 14 Sept 2011 2005 2005 2004 2004 to 3 July to 12 Nov. to 1 April to 9 May to 13 Sept. 2017 2011 2011 (b) 2010 (b) 2009 Exercise price €44.77 €42.18 (c) €42.37 (c) €37.72 (c) €32.59 (c) Number of options exercised since grant date none 8,183 none 94,144 878,756 Number of options outstanding at 31 Dec. 2006 -- 152,836 58,332 231,839 849,410 Options granted 80,000 ------Options exercised in 2007 -- 8,183 -- 87,778 486,850 Options cancelled in 2007 -- 21,215 -- 3,091 11,457 Number of options outstanding at 31 Dec. 2007, net of options cancelled (d) and exercised 80,000 123,438 58,332 140,970 351,103 of which exercisable options at 31 Dec. 2007 -- 123,438 58,332 140,970 351,103 of which outstanding options at 31 Dec. 2007 held by: - the Chairman 80,000 ------the other members of Comex (Executive Committee) none none none -- 121,962 Number of grantees of outstanding options 1 334 5 49 52 Including members of Comex (except the Chairman) at 31 Dec. 2007 none none none none 6 Total top ten grantees (at plan date) 80,000 20,000 70,000 101,500 290,000

(a) In France. Details in “Conditions of exercise” below. (b) At the Board Meeting of 12 July 2001, the starting date of the exercise period was brought forward from the fifth to the fourth anniversary of the grant date. (c) Exercise price and numbers have been adjusted according to the conditions provided for in the applicable regulations (Articles D. 174-12 and 174-13), as a result of the distribution of dividends by charging reserves after the option grant date. (d) Notably due to termination of the contract between the grantee and the Group since the grant date. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 141 SHAREHOLDER INFORMATION

2.2.2. Subscription options

Date of Board decision 04 July 07 09 Nov. 06 30 June 05 01 July 04 01 July 03 02 July 02 12 July 01

Discount none none none none none none none Exercise period (a) from 4 July from 9 Nov. from 30 June from 1 July from 1 July from 2 July from 12 July 2011 2010 2009 2008 2007 2006 2005 to 3 July to 8 Nov. to 29 June to 30 June to 30 June to 1 July to 11 July 2017 2016 2015 2014 2013 2012 2011 Exercise price €44.77 €36.47 €34.01 €29.50 €25.70 €40.97 (b) €42.18 (b) Number of options exercised since grant date none none 45,945 110,545 853,691 221,039 182,240 Number of options outstanding at 31 Dec. 2006 -- 2,223,950 2,145,400 2,463,754 2,718,633 3,012,357 3,213,189 Options granted 1,574,530 ------Options exercised in 2007 -- -- 44,445 85,765 738,020 221,039 182,240 Options cancelled in 2007 -- 28,950 49,139 31,600 95,167 85,821 104,929 Number of options outstanding at 31 Dec. 2007, net of options 1,574,530 2,195,000 2,051,816 2,346,389 1,885,446 2,705,497 2,926,020 cancelled (c) and exercised of which exercisable options at 31 Dec. 2007 -- 2,850 263,868 420,400 1,885,446 2,705,497 2,926,020 of which outstanding options at 31 Dec. 2007 held by: - the Chairman -- 80,000 80,000 100,000 100,000 102,954 83,718 - the other members of Comex (Executive Committee) 305,000 265,000 220,000 224,500 185,000 213,119 226,044 Number of grantees of outstanding options 1,293 1,962 1,919 3,153 2,743 4,619 4,579 Including members of Comex (except the Chairman) 14 12 12 11 8 10 11 at 31 Dec. 2007 Total top ten grantees (at plan date) 240,000 235,000 275,000 285,000 280,000 263,000 329,500

(a) In France. Details in “Conditions of exercise” below. (b) Exercise price and numbers have been adjusted according to the conditions provided for in the applicable regulations (Articles D. 174-12 and 174-13), as a result of the distribution of dividends by charging reserves after the option grant date. (c) Notably due to termination of the contract between the grantee and the Group since the grant date.

2.2.3. Procedures for exercising the options

All Thales options have been granted for a ten-year period, with an exercise price without any discount to the market price. All options granted on 14 September 1999, 10 May 2000, 2 April 2001, 13 November 2001, 12 July 2001 and 2 July 2002 and 1 July 2003 are now fully exercisable. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 142 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

Options are progressively vested over four years and may be exercised as follows: - Subscription options granted on 1 July 2004: In all countries except the Netherlands, up to 37.5% of the number granted eighteen months after their grant date, then up to 6.25% of the number granted at the end of each subsequent quarter, reaching a total of 100% four years after the grant date. In the Netherlands, up to 75% of the number granted three years after the grant date, reaching a total of 100% after four years. - Subscription options granted on 30 June 2005, 9 November 2006 and 4 July 2007: In all countries, up to 37.5% of the number granted eighteen months after their grant date, then up to 6.25% of the number granted at the end of each subsequent quarter, reaching a total of 100% four years after the grant date. In France, for legal reasons, employee beneficiaries who are French residents for taxation purposes and/or who are subject to the French social security system cannot exercise any option before the fourth anniversary of the grant date.

2.2.4. Grants and exercises of options as at 31 December 2007

Number of Exercise price Expiration date Plan date options granted / of shares subscribed or purchased

1 – Directors Denis Ranque Options granted in 2007 80,000 €44.77 03/07/2017 04/07/2007 Options exercised in 2007 63,629 2 – Ten (a) largest grants of options to employees (b) Options granted in 2007 240,000 €44.77 03/07/2017 04/07/2007 3 – Ten largest exercises of options by employees (b) Options exercised in 2007 32,200 €32.59 14/09/1999 31,429 €32.59 14/09/1999 26,513 €32.59 14/09/1999 26,513 €32.59 14/09/1999 25,000 €25.70 01/07/2003 21,210 €37.72 10/05/2000 20,000 €42.18 12/07/2001 20,000 €25.70 01/07/2003 19,980 €25.70 01/07/2003 17,000 €25.70 01/07/2003

(a) During the 2007 financial year, the ten largest individual grants to employees of the Company or the Company’s subsidiaries who are not company representatives (“mandataires sociaux”) of Thales were between 35,000 and 20,000 options each: one beneficiary received 35,000 options; five received 25,000 options; and five each received 20,000 options. (b) Including all affiliated companies. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 143 SHAREHOLDER INFORMATION

E. SHAREHOLDING STRUCTURE

1. DISTRIBUTION OF THE SHAREHOLDERS AS AT 31 DECEMBER 2007

of which GIMD of which employees 5.18% 2.03% Alcatel-Lucent 20.80%

Public Sector (1) Float 52.09% 27.11%

198.3 million shares

(1) Including 0.55% owned by Sogepa (100% State) which is not a signatory to the shareholders’ agreement.

As far as the Company is aware, there is no shareholder – other than those mentioned in this chapter – who / which owns five per cent or more of the capital or the voting rights (cf. pp. 137 and 139, the distribution of the capital and voting rights over the last five years).

2. SHAREHOLDERS ACTING IN CONCERT SINCE 5 JANUARY 2007

2.1. Public Sector (TSA and Sofivision) TSA is a holding company whose capital is held entirely by the French State. It owns 44,562,623 Thales shares directly. Its wholly-owned subsidiary, Sofivision, owns 8,108,283 Thales shares. The French State directly owns 2,022 shares, including a “Golden share,” which confers upon it the principal rights (1) described on page 147. N.B.: The French State also owns 0.55% of the capital of Thales, i.e., 1,081,256 shares, through its wholly-owned subsidiary Sogepa. This holding is not included in the shareholders’ agreement entered into between the Public Sector and Alcatel- Lucent, which came into effect on 5 January 2007.

2.2. Industrial Partner Alcatel-Lucent is a joint stock company whose shares are listed on a number of regulated stock markets, the chief one being , and which, as of 31 December 2007, owns 41,262,481 Thales shares through its subsidiary Alcatel Participa- tions, representing 20.8% of Thales’ share capital. Its shares are also listed on the Stock Exchange (NYSE) in the form of American Depository Shares (ADS).

(1) In application of Article 3 of Decree 97-190 of 4 March 1997. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 144 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

Moreover, by a letter dated 12 January 2007, Alcatel-Lucent notified the Company of its following intention, pursuant to Article L.233-7-VII of the French Commercial Code: - Alcatel-Lucent acts in concert with TSA, - Under the new shareholders’ agreement entered into between Alcatel-Lucent and TSA, the Company’s Board of Directors includes four per- sons proposed by Alcatel-Lucent, - Alcatel-Lucent has no intention of increasing or reducing its equity stake in the Company in the next twelve months, - Alcatel-Lucent, in concert with TSA, controls the Company within the meaning of Article L.233-3 of the Commercial Code.

3. SHAREHOLDERS’ AGREEMENT AND AGREEMENT ON THE PROTECTION OF NATIONAL STRATEGIC INTERESTS

3.1. Shareholders’ Agreement TSA and Alcatel-Lucent entered into a new shareholders’ agreement to govern relations between Alcatel-Lucent and TSA within Thales, which came into force on 5 January 2007, the date of contribution of Alcatel Participations’ assets. This agreement was signed pursuant to a cooperation agreement entered into on 1 December 2006 between Thales, Alcatel- Lucent and TSA, which replace the previous cooperation agreement entered into on 18 November 1999 between Alcatel, Thales and GIMD (1). Pursuant to Law no. 86-912 of 6 August 1986 pertaining to the procedures for privatisations: - the objectives of that agreement were published in a notice from the Ministry of the Economy, Finance and Industry (2), - a favourable opinion was issued by the Holdings & Transfers Committee, the “CPT” (3), - a decree was issued by Ministry of the Economy, Finance and Industry (4) to authorise the capital increase rewarding the contributions of Alcatel-Lucent Participations. This agreement contains the main provisions of the shareholders’ agreement signed on 14 April 1998 (5) which it replaces. GIMD is not a signatory to the new agreement. The agreement is reproduced in the appendix to the Thales Board of Directors’ report to the Extraordinary General Meeting of Shareholders of 5 January 2007, recorded by the AMF on 9 December 2006 as E.06-194 (http://www.thalesgroup.com). The AMF considered (6) that the changes to the shareholders’ agreement and the contractual provisions relating to the planned operations did not unbalance the shareholdings in that agreement within the meaning of Article 234-7 of the AMF’s General Regulations, compared with the situation observed at the time of the decision made by its predecessor the CMF on 20 April 1998 (7), and that consequently there was no need to file a public tender offer. The main provisions of the agreement are as follows: a. The Thales Board of Directors comprises 16 members as follows: - 5 members proposed by the Public Sector (defined as TSA and Sofivision), - 4 members proposed by Alcatel-Lucent, - 2 employee representatives, - 1 employee shareholder representative, - 4 outside individuals, selected jointly between the Public Sector and Alcatel-Lucent. The Chairman & Chief Executive Officer (or the Chairman and the Chief Executive Officer if the posts are separate) shall be chosen on the joint proposition of the Public Sector and Alcatel-Lucent. When the Board of Directors is renewed, the Public Sector and Alcatel-Lucent may adjust their representation on the Board in proportion to the number of Thales shares each of them holds on the date of the Board renewal.

(1) (Accessible on the AMF’s website: http://www.amf-france.org). (2) Published in the official gazette of the Republic of France (“Journal Officiel”) of 12 December 2006 (cf. the website of the official gazette: http://www.journal-officiel.gouv.fr/jahia/ Jahia/pid/1) taken pursuant to the provisions of Article 1(1) of Decree 93-1041 issued on 3 September 1993 and pursuant to Law no. 86-912 of 6 August 1986, as cited above. (3) Under number 2006-aC-6 dated 28 December 2006 (cf. the website of the official gazette: http://www.journal-officiel.gouv.fr/jahia/Jahia/pid/1). (4) Dated 2 January 2007, published in the official gazette of the Republic of France (“Journal Officiel”) of 4 January (cf. the website of the official gazette: http://www.journal-officiel. gouv.fr/jahia/Jahia/pid/1). (5) (Accessible on the AMF’s website: http://www.amf-france.org). (6) Decision no. 207C0013 of 2 January 2007, published in the Bulletin des Annonces Légales Obligatoires of 5 January 2007. (7) (See decision D&I 198C0370 of 21 April 1998). WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 145 SHAREHOLDER INFORMATION

b. The following decisions shall be submitted to the Thales Board of Directors and are not valid unless the majority of direc- tors representing Alcatel-Lucent, present or represented at the Board meeting, vote in favour of the relevant motions: elec- tion and dismissal of the Chairman & Chief Executive Officer (or the Chairman and the Chief Executive Officer if the posts are separate) and any separation of the posts of Chairman and Chief Executive Officer; adoption of the Thales Group’s annual budget and rolling multi-year strategic plan; a decision that may adversely impact cooperation between Alcatel- Lucent and Thales; all significant acquisitions and divestments (1) of holdings or assets, and all strategic agreements on alliances and technological and industrial cooperation. c. In the case of persistent disagreement between Alcatel-Lucent and the Public Sector concerning major strategic decisions likely, according to the French State, to adversely impact its strategic interests or concerning the appointment of the Chair- man & Chief Executive Officer, to the extent that Alcatel-Lucent exercises its veto on the Thales Board of Directors, either the Public Sector or Alcatel-Lucent may unilaterally terminate the shareholders’ agreement. d. The Public Sector undertakes to enable Alcatel-Lucent to hold at least 15% of share capital and voting rights in Thales and to remain the largest private shareholder in Thales, while the Public Sector also undertakes not to exceed 49.9% (including the Sogepa holding) of share capital and voting rights in Thales. e. Similarly, a mutual right of pre-emption is recognised for the Public Sector and the Alcatel-Lucent, should either hold less than 15% of Thales share capital, to acquire the remaining holding of the party that falls below the 15% threshold. Furthermore, should either partner fall below the threshold, they shall no longer enjoy the provisions of the shareholders’ agreement. f. Should any of the following arise: - serious unremedied breach by Alcatel-Lucent of its obligations under the Agreement on the protection of national strate- gic interests in Thales concluded between Alcatel-Lucent and the State (see below), likely to compromise the protection of the strategic interests of the French State, - a finding that Alcatel-Lucent’s performance of a foreign law creates constraints for Thales that substantially compromise the protection of the strategic interests of the French State, - the 20%, one-third, 40% or 50% thresholds of share capital or voting rights in Alcatel-Lucent being directly or indirectly exceeded by a person acting alone or in concert who is deemed to be incompatible with the State’s strategic interests, the Public Sector may end the entitlements that Alcatel-Lucent enjoys under the shareholders’ agreement and, if it sees fit, request Alcatel-Lucent either to immediately suspend its exercise of voting rights in Thales in excess of 10% or to reduce its holding to below 10% of Thales’ share capital. Should Alcatel-Lucent not comply with this request, the State shall enjoy a purchase option on all Thales shares held by Alcatel-Lucent at a price equal to the Volume Weighted Average Price (VWAP) of the Thales share over a period of sixty (60) trading days. g. TSA and Alcatel-Lucent declare that they act in concert with respect to Thales. This agreement shall remain in force until 31 December 2011. It is tacitly renewable by five-year periods unless notice to revoke is given by one of the parties six months before the termination date.

3.2. Agreement on the protection of national strategic interests Alcatel-Lucent and the French State, with TSA in attendance, have signed an agreement on the protection of national stra- tegic interests in Thales. The main commitments made by Alcatel-Lucent under this Agreement are as follows: a. candidates for the Thales Board of Directors proposed by Alcatel-Lucent shall be nationals of a European Union country (except for the explicit agreement of the State given on a case-by-case basis), b. access to information relating to the businesses and governance of Thales shall be strictly controlled within Alcatel-Lucent, c. Alcatel-Lucent shall use its best endeavours to avoid any action or influence in the governance and businesses of Thales by foreign national interests.

(1) “Significant” meaning all operations either (i) equal to or higher than €150 million in revenues, or (ii) involving a commitment equal to or higher than €150 million. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 146 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

4. SPECIFIC AGREEMENT (1)

The golden share owned by the French State (2) gives it the following main rights: - “Any increase in the direct or indirect holding of securities, of whatever nature or legal form, beyond a threshold of one- tenth, or multiple of one-tenth, of the capital or voting rights of the company, by any natural person or legal entity, whether acting singly or in concert, must be approved in advance by the Minister in charge of the Economy (...)”, - “At the proposal of the Minister of Defence, a representative of the State sits on the Board as a non-voting director”, - “(...) Decisions to assign or allocate by way of guarantee the assets specified in the appendix to this Decree may be opposed”. These assets include majority interests in the capital of eleven Thales direct subsidiaries: Thales Systèmes Aéroportés SA, Thales Microwave SA, Thales Optronique SA, Thales (Wigmore Street) Ltd., Thales Com- munications SA, Thales Air Systems SA, Thales Nederland B.V., Thales Naval SA, Thales Avionics SA, Thales Services SAS, Thales Underwater Systems NV. Since the contribution of assets brought Alcatel-Lucent above the 10% and 20% thresholds of share capital and voting rights in Thales, it was consequently submitted for prior approval to the Minister of the Economy, Finance and Industry, and ap- proval was received by Alcatel-Lucent on 3 January 2007. However, the State wished to have adequate contractual guaran- tees for the protection of national strategic interests. The State and Thales signed an Agreement to provide the State with control over not only the transfer of assets already described in the appendix of Decree 97-190 of 4 March 1997, as cited above, but also the shares in Thales Alenia Space SAS (hereinafter, the “strategic assets”). a. Where the Strategic Asset is a company (“strategic company”): - any proposed transfer of shares in the strategic company to a third party such that the third party exceeds the 33.3% threshold in the share capital, - any proposed transfer of shares in the company that directly or indirectly controls the strategic company to a third party such that the third party exceeds the 33.3% threshold in the share capital. b. Where the strategic asset is an isolated asset, unincorporated division or business branch (“strategic division”): - any proposed transfer of shares in the company that possesses that strategic division to a third party such that the third party exceeds the 33.3% threshold in the share capital, - any proposed transfer of shares in the company that directly or indirectly controls the company mentioned in the above paragraph to a third party such that the third party exceeds the 33.3% threshold in the share capital. c. Any proposed transfer of sensitive sssets to a third party. d. And any proposal intended or having as its effect to confer particular rights on a third party. For this purpose, any transfer plan described in (a), (b), (c) and (d) above shall be notified to the State, which undertakes to communicate its approval or refusal within thirty (30) business days from receipt of the notification; if no reply is received from the State during this period, this shall be considered equal to approval.

5. COMPANY-OWNED SHARES

At 31 December 2007, Thales held 2,932,229 treasury shares (1.48% of the capital) after successive purchases and sales on the market or otherwise under the authority granted to the Board of Directors by the General Meeting of shareholders. These shares are subject to no restrictions and may be freely traded.

(1) This Agreement is reproduced in the appendix to the Thales Board of Directors’ report to the Extraordinary General Meeting of Shareholders of 5 January 2007, recorded by the AMF on 9 December 2006 as E.06-194 (http://www.thalesgroup.com). (2) In application of Article 3 of Decree 97-190 of 4 March 1997. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 147 SHAREHOLDER INFORMATION

5.1. Authority to trade in its own shares The Annual General Meeting of 10 March 1999, pursuant to the memorandum of 18 February 1999 (COB approval no. 99-142), authorised the Board to implement a buy-back programme as it thought fit. The General Meeting of 29 June 1999 authorised an extension to the objectives of this programme (memorandum of 18 May 1999, COB approval no. 99-621). The General Meetings of 23 May 2000 (memorandum of 7 May 2000, COB approval no. 00-703), 16 May 2001 (memorandum of 24 April 2001, COB approval no. 01-432), 16 May 2002 (memorandum of 24 April 2002, COB approval no. 02-440), 15 May 2003 (memorandum of 24 April 2003, COB approval no. 03-312), 11 May 2004 (memorandum of 20 April 2004, AMF approval no. 04-295) and 17 May 2005 (memorandum of 29 April 2005, AMF approval no. 05-330) authorised the continuance of this programme. Under the authorities granted to the Board by the General Meeting, the Company carried out the following operations: - in 1999, 1.9 million shares were bought back, - in 2001, Thales sold to Alcatel its stake in Alcatel Space: the price of the transaction (€795 million) was paid half in cash and half in Thales shares, corresponding to 8.8 million shares, - in 2002, 1.1 million shares were sold on the market, - in 2004, 1.2 million shares were sold on the market, directly and by proxy, 1.3 million were sold under a liquidity contract, and approximately 520,000 were transferred to employees in an employee stock offer, - in 2005, 2 million shares were sold on the market, directly and by proxy, 1 million were sold under a liquidity contract, and approximately 300,000 were transferred to employees as options vested. 87,000 shares were transferred to Group employ- ees in the United Kingdom who had subscribed to the employee shareholding offer in December 2004, - in 2006, some 457,000 shares were bought and 388,000 sold under a liquidity contract and some 98,000 were transferred to employees as options vested, - in 2007, 793,295 shares were bought and 782,021 shares sold under the liquidity contract. 582,811 shares were sold as options vested, and 369,065 shares were bought on the market to be allocated to employee shareholding operations. The General Meeting of 15 May 2008 is asked to extend this authority for eighteen months, with a maximum purchase price of €50 per share. A minimum sale price of €25 per share was set by the Board meeting of 06 March 2008. Details of the other conditions are given in Resolution 11 and the description of the share buy-back programme drafted in line with AMF general regulations (Articles 241-1 ff) below. At 31 December 2007, the company was engaged in no trading in derivatives of its own shares.

5.2. Authority to cancel the company’s shares The 24-month authority granted to the Board of directors by the Annual General Meeting of 17 May 2005 to cancel shares – once or more than once – owned by the company, within the limit of 10% of the company’s capital, that were purchased under an authority to buy back its own shares, expired on 16 May 2007 without having been used. The Annual General Meeting held on 16 May 2007 renewed this authority for a term of 24 months under the same conditions.

5.3. Free allotment of shares On 4 July 2007, the Board of Directors, upon the authority of the Annual General Meeting, decided to implement a plan to allot free shares. The Company decided to exclude from the benefit of the free allotment of shares plan the Chairman & Chief Executive Officer (the sole company representative), the members of the Executive Committee and the leading 390 senior executives. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 148 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

The main characteristics of the plan are: All the designated beneficiaries of the plan will be granted the shares at the conclusion of a vesting period of four years sub- ject to compliance with the conditions set out in the plan’s rules. The beneficiaries who are residents of France for tax purposes or members of French government social security scheme will then have to comply with a two-year term during which the shares may not be sold. This holding period does not apply to beneficiaries who are not French residents for tax purposes.

Date of the board meeting that decided upon the allocation 04/07/2007 Number of beneficiaries at the grant date 3,545 Number of free shares allocated at the grant date 312,435 Cancellation of allocation during financial year (a) -- Early allocation during financial year (b) -- Balance of free shares net of cancellations and early allocations as at 31/12/07 312,435 Number of beneficiaries remaining as at 31/12/07 3,545 Vesting period From 04/07/2007 to 04/07/2011 Share transfer date 05/07/2011 Retention period for French tax residents From 05/07/2011 to 06/07/2013

(a) Due to the separation of the beneficiary. (b) Due to the death of the beneficiary during the vesting period (cf. the plan’s rules).

5.4. Description of the share buy-back programme subject to the approval of the Annual General Meeting to be held on 15 May 2008 and Report on the completion of the previously authorised programmes

5.4.1. Description of the programme

Maximum proportion of capital subject to buy-back: 10%, on buy-back date. Maximum amount of programme: €991,668,300 (19,833,366 shares at €50 each). Maximum unit purchase price: €50. Minimum unit selling price: €25 (set by the Board of Directors at their 6 March 2008 meeting) except for operations previ- ously approved by the Board of Directors, requiring the sale or free grant of existing shares. Objectives ranked in descending order: - sell or allocate shares to Group employees and senior officers as stipulated by law, particularly when stock options are ex- ercised or existing shares are granted free or when shares are sold and/or supplemented by the company, in the framework of an employee shareholding operation, - retain shares for later use in external growth, - allow trading in the share by a liquidity contract prepared in accordance with the conduct of business charter approved by the AMF, - cancel shares in accordance with a resolution passed by the General Meeting. Duration of programme: eighteen months as of approval of the resolution to be presented to the General Meeting of 15 May 2008, or 15 November 2009 at the latest. Liquidity contract: in November 2004, Thales signed a liquidity contract with Exane BNP-Paribas, in accordance with the AFEI conduct of business charter, to regulate trading in the share. The contract was modified to comply with the AFEI con- duct of business charter appended to the AMF decision of 22 March 2005. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 149 SHAREHOLDER INFORMATION

5.4.2. Results of previous approved programmes

Programmes before 16 May 2007 Under these programmes, the company bought 1,921,730 shares at an average unit price of €29.24. On 9 July 2001, the company received 8,821,894 shares as payment for its holding in Alcatel Space, at a unit price of €45.06. The company also sold 9,219,695 shares at an average unit price of €35.54 and bought 1,414,321 at an average price of €34.99. At 31 March 2007, the final reporting date for these programmes, the company held 2,895,059 of its own shares.

Programme of 16 May 2007 The company’s trading in its own shares from 1 April 2007 (date of previous report) to 31 January 2008 are summa- rised in the tables below: Percentage of company-held capital: 1.52% Number of shares cancelled in previous 24 months: nil Number of shares sold from 1 April 2007 to 31 January 2008: 988,311, at an average price of €38.52 Number of shares purchased from 1 April 2006 [sic.] to 31 January 2008: 1,078,552, at an average price of €40.70 Number of Thales shares held in portfolio as at 31 January 2008: 3,022,470 (Gross) book value of portfolio: €133,593,174, corresponding to an average cost price of €44.20

Market value of the portfolio as at 31 January 2008: €116,818,465, at closing price on 31 January 2008 of €38.65.

Gross flows aggregated Positions open on the date of description of the programme from 1 April 2007 to 31 January 2008 Purchases Sales Positions open at purchase Positions open at sale Calls Puts Forward Calls Puts Forward Number of securities 1,078,552 988,311 purchased sold purchases sold purchased sales Average maximum maturity none none none none none none Average price of the transaction 40.70 38.52 Average exercise price none none none none none none none none Amounts (€) 43,897,066 38,069,740

Thales engaged in no trading in derivatives (forward sale contracts) as part of this buy-back programme.

Trading in company shares during 2007 As at 1 January 2007, Thales owned 3,134,701 of its own shares, i.e., 1.82% of the capital, compared with 2,932,229 of its own shares on 31 December 2007. The net balance of 2007 trading was a sale of 202,472 shares, broken down by objective as follows: a. sale or allocation of shares to Group employees and senior officers as stipulated by law, particularly when options vest or existing shares are granted free of charge 582,811 b. regulation of the market price by a liquidity contract prepared in accordance with the AFEI conduct of business charter -11,274 c. purchases made from time to time allocated to employee shareholding operations -369,065 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 150 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

Breakdown of company-held shares by objective at 31 December 2007 The total number of shares held at that date was 2,932,229, equivalent to 1.48% of Thales’ registered capital. The break- down by objective was as follows: a. sale or allocation of shares to Group employees and senior officers as stipulated by law, particularly when options vest or existing shares are granted free of charge 2,253,843 b. exchange of shares under external growth operations 579,112 c. regulation of the market price by a liquidity contract prepared in accordance with the AFEI conduct of business charter 99,274

6. SHARES OWNED BY THE PUBLIC

The company is entitled at all times, and as provided by law, to ascertain the identity of, and number of shares held by, hold- ers of bearer shares that now or in the future amount to a specified fraction of its ordinary shares (“TPI Identifiable Bearer Security procedure”). Based on the most recent inquiry on identifiable holders of bearer shares carried out by Euroclear France, and the company’s information about employee shareholders, private ownership of company shares is estimated as follows.

in thousands of shares 01/01/2008 05/01/2007 31/12/2006 31/12/2005 31/12/2004

French institutional investors and investment funds (a) 48,540 46,242 35,308 45,734 37,064 Non-resident institutional investors 41,419 37,456 37,456 22,276 29,255 Employee share ownership 4,024 7,584 7,584 7,961 8,756 Individual shareholders and associations (b) 6,236 8,394 8,394 8,959 9,309 Not identified 1,247 331 287 3,972 1,055 Entire Public 101,466 100,007 89,029 88,903 85,440 Total number of shares 198,334 197,007 172,007 171,910 171,869

(a) As of 5 January 2007, Sogepa and GIMD exited the shareholders’ agreement and their stakes were accounted for as “French insititutional investors and investment funds.” As at 31 December 2006, they are parties to the shareholders’ agreement, so their shares do not appear in the table. (b) French residents.

As a % of the total capital As a % of the float (not incl. treasury shares)

01/01/2008 05/01/2007 31/12/2006 31/12/2005 01/01/2008 05/01/2007 31/12/2006 31/12/2005 French institutional investors and investment funds 24.5% 23.5% 20.5% 26.6% 47.8% 46.2% 39.7% 51.3% Non-resident institutional investors 20.9% 19.0% 21.8% 13.0% 40.8% 37.5% 42.1% 25.1% Employee share ownership 2.0% 3.8% 4.4% 4.6% 4.0% 7.6% 8.5% 9.0% Individual shareholders and associations 3.1% 4.3% 4.9% 5.2% 6.1% 8.4% 9.4% 10.1% Not identified 0.7% 0.2% 0.2% 2.3% 1.3% 0.4% 0.3% 4.5% Entire Public 51.2% 50.8% 51.8% 51.7% 100% 100% 100% 100%

To the best knowledge of the Company and on the basis of the TPI query done on 31 December 2007 and of the number of shares registered as at that date, the number of shareholders in the Company can be estimated at around 60,700 as at end of 2007. This figure represents 99.37% of the total capital identified, among which 55,250 bearer shareholders are counted and 5,450 registered shareholders. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 151 SHAREHOLDER INFORMATION

Moreover, an additional study was carried out at the start of 2008 with the leading institutional investors, both French and foreign, who operate on the Paris market. This information, more recent than the TPI survey and more detailed as to the nationality of the institutional investors, is given in the table below.

Number of shares As a % Number owned (thousands) of the total capital of investors France 48,540 24.5% 105 United Kingdom & Ireland 20,165 10.2% 53 North America 17,493 8.8% 79 Continental Europe (outside France) 2,261 1.3% 108 Rest of world 1,140 0.6% 28 Total 89,959 45.4% 478

7. EMPLOYEE SHARE OWNERSHIP

At 31 December 2007, employees within the meaning of Article L225-102 of the Commercial Code held 4,024,102 Thales shares, 2.03% of the share capital (and 2.81% of the voting rights, given the shares registered in the corporate investment fund [cf. above]), via the Group savings plan (PEG), either directly or via a company investment fund (FCPE) or equivalent in the United Kingdom. The equity stake of the employees, which came to 4.42% of the capital as at 1 January 2007, was reduced to 2.13% of the capital by 30 June 2007, due to the unwinding in the first half of the year of the leverage formula implemented in connection with the 2002 capital increase that was reserved for employees. At 31 December 2007, 85% of the Thales shares held by employees were freely tradable (compared with 73% at 31 Decem- ber 2006). Shares acquired by the Group’s existing and previous employees as part of the December 2004 capital increase reserved for employees will become freely tradable on 1 April 2009.

F. REGULATED AGREEMENTS

During financial year 2007, no agreement was submitted to the Board of Directors that would come under the scope of Article L.225-38 of the French Commercial Code.

1. AGREEMENTS AUTHORISED DURING PREVIOUS FINANCIAL YEARS WHICH CONTINUED TO BE PERFORMED IN 2007

GIE (consortium) with Alcatel (Board of Directors’ meeting of 1 July 2004) This GIE (consortium) was created on 5 July 2004 under the name Alcatel Thales III-V Lab in order to: - manage a joint laboratory centralising the members’ industrial research on optoelectronic and microelectronic III-V semi- conductor component technology, specifically the design, manufacture and characterisation of these components, - arrange forms of cooperation and partnership appropriate for this work, - transfer the technologies developed to the members’ component manufacture units or agreed industrial partners, - manufacture and sell in a limited volume the components described above, - supply services in the field of industrial research into the technology of the components described above. In 2007: - Alcatel Thales III-V Lab generated revenues of €19.7 million, - Thales invoiced €6.9 million to the consortium, mainly for the salaries of seconded staff, support activities and rent of the premises. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 152 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

The consortium is funded equally by Alcatel-Lucent and Thales, except for research projects specific to one of them. Sales and marketing action to ensure and increase external funding for the consortium is directed towards the Ministry of Research, local authorities in the Paris region, and the European Commission under the IST programmes of the Sixth Framework Pro- gramme for Research and Technological Development.

Agreement with TSA on the provision of financial, legal and administrative services (Board of Directors’ meeting of 30 June 2005) Under this agreement, Thales provides TSA with assistance from the Group’s specialist financial, legal and administrative services, since TSA no longer has the internal resources to operate alone. Royalties received by Thales in 2007 amounted to €350,000 excluding tax.

Cooperation agreement with Alcatel-Lucent and TSA on 1 December 2006 (came into force on 5 January 2007) (Board of Directors’ meeting of 9 November 2006) This cooperation agreement, which came into effect on 5 January 2007, contains the following major provisions: - it establishes the continuation of the strategic partnership commenced in 1998 between the companies Alcatel-Lucent and Thales with, among other things, the implementation of a broad cooperation plan for research and development, particu- larly as concerns telecommunications, critical information systems, optical components and software engineering, - it provides also for a broad plan of cooperation concerning commercial matters through the respective expert networks of the two companies, - it encourages the mobility of staff members between Alcatel-Lucent and Thales, and provides for cooperation on support functions (IT, procurement), - lastly, it specifies a number of commitments pertaining to non-recovery and non-competition taken out by Alcatel-Lucent, in connection with the transfer to Thales of the activities concerned, in the fields of communication systems for military clients, space, systems, and critical systems for security. Similarly, it sets out the conditions under which Thales undertakes not to take part in the development of activities that compete with those of Alcatel-Lucent in the field of communication solutions for civilian customers.

2. AGR EEMENT AUTHORISED DURING A PRIOR FINANCIAL YEAR AND NOT APPLIED IN 2007

Amendment to Denis Ranque’s (suspended) employment contract (Board of Directors’ meeting of 11 March 2003) The General Meeting of 15 May 2003 approved the addition of an amendment to the 1986 employment contract between the company and Denis Ranque, deferred in January 1998 when Mr Ranque was appointed Chairman and CEO. The provisions of this amendment did not need to be applied during 2007. The amendment contains the following provisions: - at the date on which the employment contract becomes applicable once more, his basic compensation shall be at least equal to the average basic compensation of the members of the Executive Committee (other than the Chairman and CEO), - Mr Denis Ranque shall be eligible for the Group’s current variable compensation plan and the seniority he acquired while the employment contract was deferred shall be applied, - when his employment contract becomes applicable once more, Denis Ranque, if he so agrees, shall be subject to any modifications to the employment contract of members of the Executive Committee that may have been made between the signature of this amendment and the date his contract becomes applicable once more. However, should any of these modifications amount to significant changes in Denis Ranque’s employment contract subject under the Commercial Code to authorisation by the company’s Board of Directors, they may only be incorporated in his employment contract after being duly authorised by the Board, WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 153 SHAREHOLDER INFORMATION

- within two months of his employment contract becoming applicable once more, Denis Ranque must be offered a position appropriate for his competencies, including membership of the Executive Committee, and corresponding to his aspira- tions. Failing such an offer within that period, the company must dismiss Mr Ranque and make a severance payment equal to twenty-four months’ salary (gross basic salary plus the average variable compensation paid the previous year to the members of the Executive Committee, other than the Chairman and CEO), - should the employment contract continue to be applicable, Mr Denis Ranque shall continue to be eligible in case of dis- missal, except for serious cause, to a payment equal to twenty-four months’ salary (including the statutory dismissal pay- ment and any other current contractual provisions, but not including any sums in lieu of notice).

3. COMMITMENT AUTHORISED BY THE BOARD OF DIRECTORS ON 6 MARCH 2008

This framework was replaced by an agreement authorised by the meeting of the Board of Directors on 6 March 2008 under the terms below, pertaining to the compensation payments likely to be payable to Mr Denis Ranque, Chairman & Chief Ex- ecutive Officer, upon discontinuation of his duties as representative of the company(“mandataire social”), in accordance with the provisions of Article 17 of the “TEPA” law (law on labour, employment and purchasing power) dated 21 August 2007 (Regulated Agreement - director concerned: Mr Denis Ranque). Subject to the fulfilment of the performance condition set out by the Board of Directors and upon the Board’s decision, a compensation payment may be made to Mr Denis Ranque, if his term of office should be discontinued, in the following cases, except for serious misconduct or gross negligence and not counting an economic accident that should seriously im- peril the company’s future: - dismissal while still serving his term, - discontinuation of his term of office imposed upon the Chairman in 2010 (the expiration date of his current term of office as a director) if he should not on that date comply with the conditions enabling him to claim his pension entitlements fully, - merger or change in control leading to the separation of the Chairman. The compensation payment would be equal to twice the annual average of the amounts received by the Chairman & Chief Executive Officer in respect of compensation over the last three full financial years. The performance conditions would be deemed to have been fulfilled if the average rate of achievement of the annual opera- tional profitability objectives set by the Board for the Chairman & Chief Executive Officer are equal to or in excess of 80% over the last three full financial years. If that is not the case, no compensation payment will be due. This provision replaces the one that had been authorised by the Board in its 11 March 2003 decision and approved by the Gen- eral Meeting held on 15 May 2003, and that is not in accordance with the provisions of the TEPA law of 21 August 2007. This agreement is subject to a special resolution at the General Meeting to be held on 15 May 2008 (cf. below). The special report of the auditors is included in the annual report, which provides detail on the regulated agreements that were approved in previous financial years and whose performance continued in 2007 (cf. below). WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 154 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

2 . CORPORATE GOVERNANCE

A. C OMPOSITION OF THE BOARD OF DIRECTORS

Denis RANQUE Alcatel-Lucent Participations, with as permanent representative: Hubert de PESQUIDOUX Chairman & Chief Executive Officer of Thales Hubert de PESQUIDOUX Career: Finance Director of Alcatel-Lucent and chairman of the corporate Born on 7 January 1952, a French citizen, Denis Ranque graduated from activities of the Alcatel-Lucent Group the École Polytechnique and as an Engineer of the . After a career start at the Ministry of Industry, where he occupied a Career: variety of jobs in the energy sector, he joined the Thomson Group in Born on 3 December 1965, a French citizen, Hubert de Pesquidoux 1983 as Plan Director. The following year, he was appointed Director of is a graduate of Paris (Economics and Finance section), Space Affairs in the Electronic Tubes Division. holder of a Masters in Corporate Law and a DESS degree in finance In 1986, he became Director of the Hyperfrequency Tubes Department from Paris Dauphine. in the division that was converted into a subsidiary with the name of Hubert de Pesquidoux is Finance Director of Alcatel-Lucent and Thomson Tubes Electroniques (TTE). In 1989, he was appointed Chief Chairman of the Group’s Enterprise activities. Before taking on the Executive Office of TTE, then in 1991 Chairman & Chief Executive Officer. position of Chairman of Enterprise activities, Hubert de Pesquidoux In April 1992, Denis Ranque became Chairman & Chief Executive was Executive Vice-President, President of activities of the North Officer of Thomson Sintra submarine businesses. Four years later, American region and member of the Executive Committee. Thomson-CSF and GEC-Marconi appointed him to the management Hubert de Pesquidoux was Chief Executive Officer of Alcatel in North team of the joint venture that they created in the field of sonar systems, America from December 2002 to April 2006, a job he held jointly with . that of Chairman & Chief Executive Officer of Alcatel Canada, since Since January 1998, Denis Ranque has been Chairman & Chief Executive 2000. In 1998, he was appointed Finance Director of Alcatel in the Officer of Thomson-CSF, which in December 2000 became Thales. United States. He joined Alcatel in 1991 and was Treasurer there for four years. First appointment: Before joining Alcatel, Hubert de Pesquidoux spent four years in 20 January 1998 investment bank, including two years in New York.

Current term expires: Date of first appointment by Alcatel-Lucent Participations: OGM 2010 6 April 2007

Number of shares owned: Current term expires: 11,242 Thales shares (including shares in the Thales OGM 2012 employee shareholding company investment fund [“FCPE”]) Number of shares owned: Positions held: Alcatel-Lucent Participations owns 41,262,481 Thales shares > Chairman of the Board of Directors: École nationale supérieure des mines de Paris Positions held by Alcatel-Lucent Participations: > Director: Saint-Gobain, Fondation de l’École Polytechnique, AFEP > Director: Alcatel Business Systems > Chairman: Cercle de l’Industrie (Association under the law of 1901) > Member of Advisory Council: Banque de France Positions held by Mr de Pesquidoux: > First Vice-President: GIFAS > Chairman & Chief Executive Officer: Electro Banque > Chairman: Alcatel-Lucent Enterprise > Senior Vice-President and COO: Alcatel Del Caribe, Inc. > Director: Alcatel USA, Inc., Lucent Technologies Inc., Genesys Telecom. Laboratories Inc., LGS Innovations LLC

Other positions held by Alcatel-Lucent Participations over the last five years: > Various terms as director of Alcatel group companies WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 155 SHAREHOLDER INFORMATION

Jean-Paul BARTH Bruno BÉZARD

Advisor to the Chairman of Alcatel-Lucent Chief Executive Officer of the French Government Shareholding Agency (Agence des Participations de l’État) Career: Born on 10 April 1942, a French citizen. Career: Bachelor of Economics, chartered accountant, Jean-Paul Barth began Born on 19 May 1963, a French citizen, Bruno Bézard graduated from his career in the Rhône-Poulenc Group before becoming Chief the École Polytechnique and ENA. Executive Officer of Rhône-Poulenc Chimie. Appointed in July 2002 as head of the Government Shareholding He was then Director of General Administration at Orkem and Vice- Department at the Treasury, Bruno Bézard is currently Chief Executive President of Norsolor. Officer of the French Government Shareholding Agency, the Agence des Participations d’Etat. After four years spent at the Inspection In 1990, Jean-Paul Bart became Director of General Administration of Générale des Finances, he has held a variety of positions in the French the Total Group and President of Hutchinson (1990-1996). Treasury Directorate, both in the international field and in the banking In 1996, he joined Alcatel to be Director of General Administration of and insurance sector. He was also Deputy Director of the office of the the Alcatel Group (1996-2006), Chief Executive Officer of Alcatel CIT Minister of the Economy, Finance and Industry, and economic advisor (1998-2000), and then Chief Executive Office of Alcatel CIT (2000-2006). to the Prime Minister (June 2001-April 2002). Since 2007, Jean-Paul Barth has been Advisor to the Chairman of Alcatel-Lucent. First appointment: 6 April 2007 First appointment: 22 June 1998 Current term expires: OGM 2010 Current term expires: OGM 2012 Number of shares owned: Does not own any Thales shares (Art. 139 of the “NRE” law) Number of shares owned: 500 Thales shares Positions held: > Director (representing the State): EDF, La Poste, Areva, France Positions held: Telecom, Air France KLM > Chairman: Château Malescasse, Electro-Ré (Luxembourg) > Director: Alcatel CIT (and Honorary Chairman), Other positions held by Mr Bézard over the last five years: Electro Assurances, Famax > Director: , France Télévisions, SNCF > Non-voting member [“Censeur”]: Rockwell-Collins France

Other positions held by Mr Barth over the last five years: > Director: Diot SA, Locatel, Electro Banque > Chairman & Chief Executive Officer: Alcatel Participations > Chairman: Générale Occidentale > Member of the Supervisory Board: Faceo WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 156 2007 ANNUAL REPORT – Thales Stock market Agenda of the Annual Company Corporate information General Meeting and share capital governance and financial of 15 May 2008 communication

Robert BRUNCK François BUJON de l’ESTANG

Chairman & Chief Executive Officer of CGG Veritas Chairman of Citigroup France

Independent director Career: A French citizen, born on 21 August 1940, Mr François Bujon de Career: l’Estang is a French Ambassador. Born on 11 June 1949, a French citizen, Robert Brunck is a former student He is a graduate of the Institut d’Études Politiques in Paris and a former of the École Polytechnique and a graduate of the École des Mines. He student of the École Nationale d’Administration (Montesquieu year, began his career in the Ministry of Industry as a project officer assigned 1966). Mr Bujon de l’Estang joined the French Ministry of Foreign to the Regional Préfet at the regional division of industry and research Affairs in 1966 and served as Project Officer at the Secretariat General (DRIR) in Alsace, between 1975 and 1979. of the President from 1966 to 1969, before being appointed First From 1979 to 1985, he was part of EDF as Director of the Equipment Secretary at the French Embassy in Washington (1969-1973) and as Centre of the Transmission network (“CERT”). Since 1985, he has held a Counsellor at the Embassy of France in London (1973-1975). variety of managerial posts in the Compagnie Générale de Géophysique, After being advisor for international affairs at the Délégation which in 2007 became CGG Veritas, before being appointed Chairman & Générale à l’Énergie from 1976 to 1978, he joined the Commissariat Chief Executive Officer of CGG Veritas in 1999, a position he holds today. à l’Énergie Atomique as Director of International Relations and Robert Brunck also holds a number of positions with various served as Representative of France at the Council of Governors of the academic and professional institutions, such as the Institut Français International Atomic Energy Agency (1978-1980). He was then Chief of du Pétrole, the École Nationale Supérieure de Géologie and the Staff for the Minister of Industry, in 1980-81. Groupement des Entreprises Parapétrolières et Paragazières (“GEP”). In 1982, after completing the Harvard Business School’s Advanced On the international level, he is an active contributor to the Society Management Programme, he founded Cogema Inc. in Washington, of Exploration Geophysicists and the European Association of the US subsidiary of Cogema, the largest company in the world in the Geoscientists and Engineers. nuclear fuel cycle, of which he was Chairman until April 1986. First appointment: He then joined the Office of the Prime Minister, becoming Counsellor 27 November 2007, effective as of 28 November 2007 for diplomatic affairs, defence and cooperation until May 1988, after which he served as Ambassador to Canada (1989-1991). Current term expires: Advisor to the Chairman of the Compagnie de Navigation Mixte and OGM 2010 of Via-Banque while at the same time being Chairman of the SFIM (1992), in 1992 François Bujon de l’Estang founded FBE International Number of shares owned: Consultants, an international strategy consulting firm specialising 500 Thales shares in geostrategic consulting and political risk analysis, a company he Positions held: managed until he left for Washington in summer 1995. > Chairman & Chief Executive Officer: CGG Veritas François Bujon de l’Estang was appointed French Ambassador to the > Director and Chairman of the Board of Directors: CGG Americas Inc. United States in July 1995, a position he held until December 2002. He > Chairman: Armines was endowed with the honorary lifetime distinction of “Ambassadeur > Director: École Nationale de Géologie (Nancy), Bureau de de France” in 1999. Recherches Géologiques et Minières (BRGM), Groupement des Since January 2003, François Bujon de l’Estang has been the Chairman Entreprises Parapétrolières et paragazières (GEP), Institut Français of Citigroup France. du Pétrole, Conservatoire National des Arts et Métiers (CNAM) > Member of the Supervisory Board: Sercel Holding First appointment: 11 May 2004 Other positions held by Mr Brunck over the last five years: > Chairman of the Supervisory Board: Sercel, Sercel Holding Current term expires: > Director: Sercel Holding, Consortium Français de Localisation OGM 2008

Number of shares owned: 500 Thales shares

Positions held: > Chairman: Citigroup France > Director: CNES (Ets Public), Institut Français des Relations Internationales > Member of the International Advisory Board: Citigroup, Total

Other positions held by Mr Bujon de l’Estang over the last five years: > French Ambassador to the United States > Vice-President of Institut Pasteur > Director of Tembec, Inc. (Canada) WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 157 SHAREHOLDER INFORMATION

Olivier COSTA de BEAUREGARD Charles de CROISSET

Deputy Managing Director of Groupe Industriel Marcel Dassault International Advisor of International

Career: Independent director Born on 17 March 1960, a French citizen, a former student of the École Normale Supérieure and of ENA, Olivier Costa de Beauregard is an Career: Honorary Inspecteur des Finances. A Technical Advisor in the Office Born on 28 September 1943, a French citizen, Charles de Croisset of the Prime Minister from 1993 to 1995, he then held management graduated from the Paris Institut d’Études Politiques, with a degree in positions at and then HSBC France, before joining the Groupe law, and is a former student of ENA. Industriel Marcel Dassault, of which he has been Deputy General He was appointed “Inspecteur des Finances” in 1988. Manager since December 2005. After a career in Public Service, in 1980 he joined Crédit Commercial de France. He became its Secretary-General at the end of the same year. First appointment: 6 February 2007 In 1983, he was put in charge of the international department and appointed Deputy Managing Director. Current term expires: In 1986, he was put in charge of all of CCF’s banking activities. OGM 2008 In 1987, he became director and CEO of the CCF. Number of shares owned: After a sabbatical year, during which he returned to the French Ministry 500 Thales shares of the Economy and Finances as a Chief of Staff of the Minister, he returned to CCF to occupy the same positions as before. Positions held: In 1993, he was appointed Chairman-CEO of CCF, and in 2000, director > Deputy General Manager: Groupe Industriel Marcel Dassault (GIMD) and CEO of HSBC Holding plc and Director of HSBC Bank plc. > Director: Socpresse, SA du Figaro > Deputy Director: Dassault Belgique Aviation (Belgium) Since April 2004, he has been International Advisor at Goldman Sachs > Permanent representative of GIMD on the Board of: Artcurial SAS, International. Dassault Développement > Chairman of the Executive Board: Immobilière Dassault First appointment: > Member of the Supervisory Board: Adenclassifieds, Journal des 11 May 2004 Finances, Groupe Industriel Marcel Dassault SAS Current term expires: > Chairman & Chief Executive Officer: Dassault Multimédia SAS OGM 2010

Other positions held by Mr Costa de Beauregard over the last Number of shares owned: five years: 500 Thales shares > Manager: Crédit Commercial de France > Chairman & Chief Executive Officer: Netvalor SA, Delaroche SA Positions held: > Member of the Supervisory Board: Banque Dupuy, de Parseval > Chairman: Fondation du patrimoine > Director: Banque Accord, Loxxia, A.G.I.R., Groupe Progres SA, > Director: , Renault Le Bien Public, Les Journaux de Saône Et Loire, Publiprint Province n° 1 > Member of the Supervisory Board: Euler & Hermes > Manager: S.C.P.I. > Non-voting member [“Censeur”]: SA des Galeries Lafayette > Permanent representative of Socpresse on the Board: Le Dauphiné Libéré > Permanent representative of Delaroche on the Board: Lyon Matin Other positions held by Mr Costa de Croisset over the last five years: > Chairman & Chief Executive Officer: CCF > Director: HSBC Bank Plc, HSBC Holdings Plc, HSBC CCF Asset Management Group > Board member: HSBC Guyerzeller Bank AG, HSBC Private Holding (Suisse) SA WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 158 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

Marie-Paule DELPIERRE Roger FREEMAN

Manager in the Aeronautic and Naval Communications units Consultant at PriceWaterhouseCoopers of Thales Communications Career: Director elected by the employees Born on 27 May 1942, a British citizen, Roger Freeman read politics, philosophy and economics at Balliol College of Oxford University. Career: In 1968, he graduated as a chartered accountant in a London firm. A French citizen, born on 20 December 1948, once Marie-Paule Between 1969 and 1985, he was a manager at Lehman Brothers. He Delpierre had passed her technical baccalaureate (high school worked in the company’s New York offices from 1969 to 1972. certificate), she joined Néophone as an electronics technician. He presented courses and chaired courses at the Institute of Chartered In 1971, Marie-Paule Delpierre joined the vision study laboratory of Accountants. He was one of the founding members of the Hundred Sintra, and in 1981, changed streams and became business manager. Group of UK Chartered Accountant Finance Directors. Through in-house training, Marie-Paule Delpierre was promoted to executive level in 1991, and in 1992 took charge of the Sales In June 1983, he was elected Member of Parliament for Kettering, a Administration Department of the IT tools division. seat he retained until 1997. He then held various government posts, including that of Under-Secretary of State for the Armed Forces at Since 1996, Marie-Paule Delpierre has been Manager in the Aeronautic the Ministry of Defence, from 1986 to 1988, before being appointed and Naval Communications unit of Thales Communications. Under-Secretary of State at the Ministry of Health. First appointment: He was then appointed Secretary of State for Public Transport from 30 May 1989 1990 to 1994, where he was responsible for the British railways, London transport and the channel tunnel. Current term expires: He was then appointed Secretary of State for defence contracts, a 8 December 2010 position he held from 1994 to 1995. In 1995 he became a member of the Cabinet as Minister for Public Services and Chancellor of the Number of shares owned: Duchy of Lancaster. He was tasked with the government’s privatisation 500 Thales shares programme until 1997, at which date he was appointed to the House of Lords. In 1993, he became a private advisor to the Queen. In December 1997, he joined PriceWaterhouseCoopers as partner, before becoming a consultant, a position he still holds currently.

First appointment: 24 July 1998, effective as of 1 January 1999

Current term expires: OGM 2012

Number of shares owned: 660 Thales shares (including via the Thales employee shareholding company investment fund [“FCPE”])

Positions held: > Chairman: Thales Holdings UK Plc, Thales UK Ltd., Thales Pension Trustees Ltd., Metalysis Ltd., Radiation Watch Ltd., Cambridge Enterprise Ltd., Parity Group Plc > Consultant & Chairman of the Advisory Panel: PriceWaterhouseCoopers, London (UK) > Director: Plc, Global Energy Development Plc > Consultant: IDDAS, RP&C Ltd.

Other positions held by Mr Freeman over the last five years: > Chairman: Racal Senior Management Trustee Ltd., Racal Staff Trustee Ltd., Racal-Decca Pension Trustee Ltd., Racal Executive Trustee Ltd., Imprimatur Capital Ltd., Cambridge Enterprises, Skill Force Development Ltd. > Chairman: British International Freight Association (1999-2002) > Director: Thales UK Pension schemes CIF Trustee Ltd., Thales Pension Trustees (Section 1) Ltd. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 159 SHAREHOLDER INFORMATION

Didier GLADIEU Philippe LÉPINAY

Business Manager at Thales Air Systems Vice-President Business Development at Thales International

Director elected by the employees Director representing employee shareholders

Career: Career: A French citizen, born on 19 January 1958, holder of the F4 (civil Born on 3 December 1953, a French citizen, Philippe Lépinay is a engineering) baccalaureate in initial training, Mr Gladieu began graduate engineer from the Institut de Marketing International, his professional life in the building industry, then was hired by the Université Paris VII. Thomson-CSF group in 1983 as data-input operator. Between 1977 and 1986, he held a variety of sales jobs for the Groups In 1992, Didier Gladieu joined the financial division of the naval section Appalette & Tourtellier Systèmes, Radiall and Sopema. In 1986, he joined of the SDC Division (Detection & Control Systems) as business manager Thales Electron Devices as an Export Sales Engineer, and then in 2000, before completing a degree in occupational training. he became Development Manager at Thales Engineering & Consulting. At the same time, Didier Gladieu performed a variety of duties Since 2003, he has been Vice-President Business Development at representing staff. Appointed as an employee director in 1997, he was Thales International. elected to this position in 1998 and in 2004. He also became a labour tribunal member at Boulogne-Billancourt in 2000. First appointment: 8 March 2007, effective as of 1 April 2007 First appointment: 26 September 1997 Current term expires: OGM 2011 Resignation: 18 January 2008 Number of shares owned: 577 Thales shares Number of shares owned: (including via the Thales employee shareholding company 500 Thales shares investment fund [“FCPE”])

Other positions held by Mr Gladieu over the last five years: Positions held: > Director: Thales Naval SA > Chairman: Association du Personnel Actionnaire de Thales (APAT) until end of February 2008 > Vice-President: Fédération des Associations d’actionnaires Salariés de Thales (FAST), Fédération française des Associations d’actionnaires Salariés (FAS) > Member: Supervisory Committee of the Thales employee shareholding company investment fund [“FCPE”] WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 160 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

Didier LOMBARD Klaus NAUMANN

Chairman & Chief Executive Officer of the France Telecom Group Independent director

Career: Career: Born on 27 February 1942, a French citizen, Didier Lombard graduated Born on 25 May 1939, a German citizen, Klaus Naumann joined the from the École Polytechnique and the École Nationale Supérieure des in October 1958. After training as an artillery officer, he was Télécommunications. accepted to the staff service course in the Bundeswehr’s War School. He began his career in 1967, at CNET in France Telecom (now the Promoted to Army General on 1 October 1991, General Naumann Research and Development Division), taking part in the development served as Chief of Staff of the Bundeswehr until February 1996. He was of many products for France Telecom in the fields of satellites, electronic President elect of the NATO Military Committee from February 1996 components and mobile systems. to May 1999. Between 1988 and 2003, he worked at the Ministry of Research and Technology, was General Manager of industrial strategies at the Ministry First appointment: 11 May 2004 for the Economy, Finance and Industry (1991-1998), and then was founding Chairman of the Agence Française pour les Investissements Current term expires: Internationaux. OGM 2012 In 2003, Didier Lombard joined France Telecom as Senior Executive Vice President, Technologies, Strategic Partnerships and New Usages Number of shares owned: Mission of France Telecom. 500 Thales shares Since 27 February 2005, Didier Lombard has been Chairman & Chief Positions held: Executive Officer of the France Telecom Group. > Chairman of the Supervisory Board: First appointment: OWR (Odenwald Werke Rittersbach) 30 June 2005

Current term expires: OGM 2008

Number of shares owned: 500 Thales shares

Positions held: > Chairman & Chief Executive Officer: France Telecom > Director: Thomson > Member of the Supervisory Board: Radiall, ST Microelectronics

Other positions held by Mr Lombard over the last five years: > Senior Executive VP: France Telecom > Ambassador: Delegate ambassador for international investment > Chairman of the Board of Directors: Orange > Member of the Supervisory Board: A2I (Agence de l’Innovation Industrielle) WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 161 SHAREHOLDER INFORMATION

Serge TCHURUK TSA represented by: Marcel ROULET Chairman of the Board of Directors of Alcatel-Lucent Career: Career: Born on 22 January 1933, a French citizen, Marcel Roulet graduated Born on 13 November 1937, a French citizen, Serge Tchuruk is a from the École Polytechnique and the École Nationale Supérieure des graduate of the École Polytechnique. Télécommunications. Serge Tchuruk began his career in the Mobil Oil Group, where, from Marcel Roulet was Chairman of France Telecom from 1991 to 1995. After 1964 to 1979, he held a variety of managerial positions in France and that, he served as Chairman & Chief Executive Officer for Thomson SA the USA. In 1979, he became President of Mobil Oil in the . (which became TSA) between February 1996 and March 1997, and From 1980 to 1986, he worked at Rhône Poulenc, where he held of Thomson-CSF (which became Thales) between February 1996 and several positions in the Basic Chemistry Division before become Chief January 1998. Marcel Roulet has been a retired Telecommunications Executive Officer of the company in 1983. Engineer-General since 1 January 1999, and is now involved in business consulting. In 1986, Serge Tchuruk joined Orkem (previously known as CDF- Chimie), a company specialising in special and oil chemistry, and First appointment of TSA: served as its Chairman & Chief Executive Officer until 1990. 22 June 1998 From 1990 to 1995, he was Chairman & Chief Executive Officer of Total. In 1995, Serge Tchuruk joined Alcatel Alsthom (which became Alcatel Current term expires: and then Alcatel-Lucent) as Chairman & Chief Executive Officer. OGM 2012 In November 2006, Serge Tchuruk was appointed Chairman of the Number of shares owned: Board of Directors of Alcatel-Lucent. TSA owns 44,562,623 Thales shares Marcel Roulet owns 506 Thales shares First appointment: 22 June 1998 Positions held by Mr Roulet: > Director: HSBC France, Thomson, France Telecom Current term expires: > Member of the Supervisory Board: Eurazeo OGM 2008 > Chairman of the Supervisory Board: Gimar Finance SCA > Non-voting member [“Censeur”]: Cap Gemini Number of shares owned: 500 Thales shares Other positions held by Mr Roulet over the last five years: > Non-voting member [“Censeur”]: Pages Jaunes Positions held: > Chairman of the Board of Directors: Alcatel-Lucent > Member of the Supervisory Board: Alcatel Deutschland GmbH > Director: Total > Member of the Board of Directors: École Polytechnique

Other positions held by Mr Tchuruk over the last five years: > Chairman & Chief Executive Officer: Alcatel > Chairman: Alcatel USA Holdings Corp. > Director: , Universal, Société Générale, Institut Pasteur DIRECTOR APPOINTED AFTER 31 DECEMBER 2007:

Dominique FLOCH to replace Didier Gladieu, who resigned

Industrial Segment Buyer at Thales Systèmes Aéroportés SA

Director elected by the employees

Career: A French citizen, born on 10 August 1958, Dominique Floch began his career in 1978, in a subsidiary of the Group in Brest (Thales Systèmes Aéroportés), where he occupied a variety of positions, including milling machine operator and then mechanical controller before being promoted to Industrial Segment Buyer in March 2004.

First appointment: 19 January 2008

Current term expires: 8 December 2010

Number of shares owned: 500 Thales shares WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 162 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

DIRECTORS WHOSE APPOINTMENT IS SUBJECT TO THE VOTE BY THE SHAREHOLDERS AT THE GENERAL MEETING TO BE HELD ON 15 MAY 2008:

Bernard RÉTAT Jozef CORNU

Chairman of the Defence Committee of the AeroSpace Chairman and Chief Executive Officer of Agfa-Gevaert and Defence Industries Association of Europe (ASD) Career: Career: Born on 15 November 1944, a Belgian citizen. Born on 7 April 1939, a French citizen, Bernard Rétat graduated from A graduate as a Doctor of Electrical and Mechanical Engineering from the École Polytechnique and the École Nationale Supérieure des the Université de Louvain (Belgium) and as a Doctor of Electronics Télécommunications. from the University of Carleton (Canada), Jozef Cornu has successively As an “Ingénieur Général de l’Armement”, Bernard Rétat spent a large been an engineer at the research centre of Brown Boveri (which has part of his career working in the armament procurement department, since become ABB) in Baden (Switzerland) (1970-1973), manager the Délégation Générale pour l’Armement. of the Microelectronics Department of Bell Telephone in Antwerp From 1968 to 1973, he was deputy chief of the Systems and Simulation (Belgium) from 1973 to 1982. Evaluation Department at the Armaments Electronics Centre (“Centre He then became Chairman and Chief Executive Officer of Mietec (part d’Électronique de l’Armement”), before commencing an international of the Bell Telephone Group) (1982-1984), and then Chief Executive career with the Mission Technique de l’Armement, first in Washington Officer of Bell Telephone (ITT Group) until 1987. in the United States (1973-78), and then in Bonn in the Federal Republic In 1988, he was appointed a member of the Executive Committee of of Germany, where he was Chief of Mission (1978-81). Alcatel NV (1988-1995), and then Chief Executive Officer of Alcatel In 1982 he joined the International Affairs Directorate (“Direction des Telecom (1995-1999). He then became Advisor to the Chairman of Affaires Internationales”) and was International Relations Delegate from Alcatel from 2000 to 2004. 1987 to 1990; then, after having been International Chief Executive Since 1 December 2007, Jozef Cornu has been the Chairman & Chief Officer of Dassault Aviation for three years, he joined the Thales group Executive officer of Agfa-Gevaert. (formerly Thomson-CSF) in 1993 as Chief Executive Officer, and then as Vice-President from 1998 to June 2005. First appointment: Bernard Rétat is presently Chairman of the Defence Committee of the 15 May 2007 Aerospace and Defence Industries Association of Europe (ASD). Current term expires: First appointment: OGM 2014 15 May 2007 Number of shares owned: Date of resignation: Does not own any Thales shares as at the date of notice of meeting 27 November 2007 of 15 May 2008

Number of shares owned: Positions held: 977 Thales shares > Chairman & Chief Executive Officer: Agfa-Gevaert (including via the Thales employee shareholding company > Director: Alcatel-Lucent, Alcatel-Lucent France, KBC investment fund [“FCPE”]) > Chairman: Alcatel-Lucent Bell > Member of the Supervisory Board: Alcatel-Lucent Deutschland Positions held: > Director: DCNS, Solarforce, Elettronica S.p.A. (Italy), Other positions held by Mr Cornu over the last five years: Thales Italia S.p.A. (Italy) > Director: Barco, Arinso International, Essensium, Uitgeversbedrijf Tijd > Member of the Supervisory Board: > Chairman: ISTAG (Information Society Technologies Advisory Group), Thales Defence Deutschland GmbH (Germany) Medea

Other positions held by Mr Rétat over the last five years: > Director: Thales International, Thales (Weybridge) Plc, Thales (Wigmore Street) Limited, Thales North America, Inc. > Member of the Supervisory Board: Armaris WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 163 SHAREHOLDER INFORMATION

B. CHAIRMAN’S REPORT TO THE GENERAL MEETING OF 15 MAY 2008 on CORPORATE GOVERNANCE AND INTERNAL CONTROL

At the Board meeting held on 6 March 2008, the Board of Directors adopted, on the recommendation of the two commit- tees concerned (1), the Chairman’s report on corporate governance and internal control, and asked the Chairman to brief the General Meeting of 15 May 2008 on its decision. Thales subscribes to the principles contained in the AFEP / MEDEF paper on the governance of listed companies, published in October 2003. The Group applies these principles in full, with the exception of the recommendation relating to one third of independent directors, since the shareholders’ agreement between the Public Sector and the Industrial Partner (Alcatel- Lucent) does not enable the Board to reach this threshold, due to the strict criteria adopted by the company as regards to the independence of directors (cf. “Independence of Directors”, below).

1. BOARD OF DIRECTORS: COMPOSITION ON THE DATE OF NOTICE FOR THE GENERAL MEETING TO BE HELD ON 15 MAY 2008

On the date of notification for the General Meeting of 15 May 2008, the Board comprised 16 members, 14 of whom were appointed by the General Meeting and two elected by employees. Their average age is 59.5. During financial year 2007, the Board co-opted as directors Alcatel-Lucent Participations, Messrs Olivier Costa de Beaure- gard, Bruno Bézard and Philippe Lépinay – whose appointment was ratified by the general meeting held on 16 May 2007, and then Messrs Bernard Rétat and Robert Brunck – ratification of whose co-optation is being put to the meeting to be held on 15 May 2008. In January 2008, Mr Dominique Floch replaced Mr Didier Gladieu, who resigned, as employee-elected director, in accord- ance with the Labour Code. An amendment to the Articles of Association, enabling the Board to appoint one or two non-voting members, or “censeurs,” due to their expertise in one of the company’s fields of business and who will participate in Board meetings without a vote, however, is to be submitted for the approval of the General Meeting to be held on 15 May 2008.

1.1. Directors appointed by the General Meeting of Shareholders

Four outside personalities Robert Brunck, independent director Charles de Croisset, independent director Roger Freeman Klaus Naumann, independent director

One representative of employee shareholders Philippe Lépinay

Five persons proposed by the Public Sector Denis Ranque Bruno Bézard François Bujon de l’Estang Didier Lombard TSA, represented by Marcel Roulet

(1) The Nomination and Compensation Committee for the corporate governance part and the Audit Committee for the internal control part. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 164 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

Four persons proposed by the Industrial Partner (Alcatel-Lucent from 5 January 2007) Alcatel-Lucent Participations, represented by Hubert de Pesquidoux Jean-Paul Barth Olivier Costa de Beauregard, until the General Meeting to be held on 15 May 2008 Serge Tchuruk

1.2. Directors elected by employees Marie-Paule Delpierre Didier Gladieu (replaced by Dominique Floch in January 2008)

1.3. Other persons attending Board meetings (with no voting rights) In addition to the members of Corporate Management who may be invited by the Chairman to attend Board meetings, de- pending on the agenda, and in addition to Dominique Périer, in his capacity as Secretary to the Board, the following persons are invited to attend and do attend Board meetings in a consultative capacity:

Representing the French State’s golden share Patrick Auroy, age 53, senior armaments engineer. Appointed by decree of the Minister of the Economy, Finance and Industry on 23 November 2006. Representing the French State on the Board of Directors of Thales, in application of Decree 97-190 of 4 March 1997 con- cerning the French State’s golden share (see page 147) and as provided for in Article 10 of the articles of association.

Government Commissioner Denis Plane, age 60, General Army Inspector (Contrôleur Général des Armées) on special assignment. Appointed Government Commissioner to Thales and its subsidiaries by decision of the Minister of Defence dated 25 July 2003, under the legal provisions and regulations concerning defence contractors and companies engaged in the manufacture and sale of defence equipment.

Representing the Company Central Works Council Alain Desvignes, age 62, Trade Union Delegate or Sylvain Delaître, age 49, Secretary of the Company Central Works Council. Appointed by the Central Works Council to represent it on the Board of Directors of Thales, pursuant to Article L.432-6 of the French Labour Code.

The Statutory Auditors As laid down in Board internal rules, also attending all Board meetings: - Ernst & Young Audit represented by Christian Chiarasini, partner, - Mazars & Guérard represented by Jean-Louis Simon, partner.

To the best of the Thales Group’s knowledge: - there are no family ties between the members of the Board of Directors, - no Board member has been found guilty of fraud over the past five years, - no Board member has been involved over the past five years as a senior manager in a bankruptcy, receivership or liqui- dation, or has been incriminated or penalised publicly and officially by the statutory or regulatory authorities, - no Board member has been forbidden by a court over the past five years to act as a member of a body dedicated to the administration, management and surveillance of a company, or to be involved in the management or running of such a company’s affairs, - no conflict of interests exists between the Board members’ private interests and their duties to Thales. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 165 SHAREHOLDER INFORMATION

2. CONDITIONS UNDER WHICH WORK IS PREPARED AND ORGANISED

2.1. Board organisation and administration

Note on the rules of the Shareholders’ Agreement and composition of the Board Under the terms of the shareholders’ agreement, the Board comprises sixteen directors, of whom fourteen are appointed by the General Meeting and two are elected by the employees of the Group’s French companies according to the law (Article L. 225-27 ff. of the Commercial Code) and the articles of association (Article 10). Of the fourteen directors appointed by the General Meeting, four are “outside directors”, one represents employee sharehold- ers, and the others are submitted to the vote of the General Meeting by the Public Sector (five) and by Alcatel-Lucent (four). The reappointment of the directors has, since the Meeting of 11 May 2004, largely been done (except for the employees) by one third every two years, since the term of office under the Articles of Association has been kept at six years, which makes it unnecessary to replace the entire Board at once, which is deemed prejudicial for its proper operation. In all cases, the em- ployee Board members are elected or appointed for a six-year term.

Independence of Directors Upon the recommendation of the nomination and remuneration committee, the Board of Directors has decided to retain the strict approach used in recent years, namely: - the directors appointed by the General Meeting on the proposal of a shareholder (“Public Sector” or “Industrial Partner”) or category of shareholders (employees) could not be considered to be independent under the AFEP / MEDEF principles of corporate governance mentioned issued in October 2003, - the same applies to the two directors elected by the employees. With respect to the corporate bank officers or advisors, the Board also wished to state the rules of conduct that apply to them in the Thales Board of Directors: - no participation by the persons concerned with the preparation or solicitation of bids for banking services with the Company, - no participation by these same persons in the banking work in the case of performance of a mandate, - lastly (1), no participation in the vote on any resolution concerning a project in which the bank concerned may be involved as a consultant. After making a detailed examination of the situation of the four “outside directors” under the Shareholders’ Agreement (the only ones able to be deemed independent in this context), and at the proposal of the nomination and remuneration committee, the Board decided to declare as independent directors Messrs Robert Brunck, Klaus Naumann and Charles de Croisset, since, in the case of the last one, there was no significant relationship between Goldman Sachs and the Thales Group, and since his commit- ment to abide by the principles set out above – Mr Roger Freeman continuing not to be deemed independent due to the positions he holds in the Group in the United Kingdom and the compensation he receives there.

Internal rules The Board’s internal rules adopted in July 2004 and regularly revised since that time do not supersede the legal provisions and those laid down in the Company’s Articles of Association applying to the Board and its committees, or the provisions of the Thales Group’s Code of Ethics and Code of Conduct on Insider Information and Securities Trading, some provisions of which apply to directors. In addition to the specific provisions of the Shareholders’ Agreement (discussed on page 145 of the annual report), the Board’s internal rules include corporate governance best practices. The Board’s internal rules comprise five sections: - Board members (Board membership, independence, availability, prime duty, transparency, confidentiality, compensation), - Board responsibilities (company representation and best interests, specific responsibilities, shareholders’ agreement). The annual budget, under the rolling three-year strategic plan, and any acquisitions or divestments of a value exceeding €150 mil- lion are automatically submitted for Board approval, on the understanding that the Shareholders’ Agreement stipulates that such decisions must also be made by a majority of the directors who represent the Industrial Partner (Alcatel-Lucent).

(1) After noting that under the Board’s internal rules, the members of the Board of Directors must notify the Chairman of any situation that presents – or may present – a conflict of interest with the Company. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 166 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

Any operations of a value exceeding €50 million are also submitted to the Board if they involved a change in the Group’s strategy as previously approved by the Board, - Board information (communication, training), - Board committees (constitution and responsibilities, organisation, information, audit committee, director nomination and compensation committee, strategy committee). It is noted that each committee is entitled to ask the Corporate Management for any additional information that it deems necessary to fulfil its assignment, and to ask the Board of Directors for access to an outside expert study, on an exceptional basis, though this option was not exercised in 2007, - Board administration (meetings, attendance and representation, assessment, revision of the internal rules).

Compensation and perquisites paid to Board members

Attendance fees The General Meeting of 16 May 2007 set the total amount of attendance fees to be divided among directors for their service to the Board and its committees at a maximum of €550,000 a year. The Board decided that the directors would receive: - in respect of the Board, fixed compensation of €14,000 per year (on a proportional basis in the event that the director was appointed or resigned during the year) and variable compensation associated with attendance at meetings amounting to €2,500 per meeting, - in respect of committees, a wholly variable compensation, contingent upon attendance, of €1,250 per meeting, with the chairman of each committee being compensated by an additional €2,000 per year (allocated proportionally, according to the number of meetings chaired, if not all). In respect of 2007, the attendance fees payable came to €541,683 (gross). Since the Chairman waived his entitlement to attendance fees, the (gross) amount actually paid in respect of 2007 was €500,683. For indicative purposes, the (gross) amount paid in 2007 was €453,807. Given the possibility of one or two non-voting members (or “censeurs”; see above) being appointed, it is proposed to the Annual General Meeting to be held on 15 May 2008 to increase the annual envelope of attendance fees to €600,000 as of financial year 2008.

Compensation paid to the Chairman & Chief Executive Officer The compensation paid to the Chairman and Chief Executive Officer is set each year by the Board of Directors at the sugges- tion of the Nomination and Compensation Committee. The components of the compensation paid to Mr Denis Ranque are the same as those used by Thales for its senior executives. Its positioning is analysed and revised each year and takes account of performance over the previous financial year and salary surveys or market data. The annual report provides all explanations as to the compensation of the directors and the Chairman & Chief Executive Officer (see page 178).

2.2. Report on Board activity in 2007

Number and length of meetings and attendance record The Board of Directors met eight times in 2007, two of the meetings being held by telephone conference. Each meeting lasted an average of two and a quarter hours, and average participation of directors was 87%. As specified by the Board’s internal rules, the auditors were invited to all the Board meetings, not just those relating to the review of accounts. In such cases, the auditors were provided with the same documents as the directors, either before or during the meeting. The Finance Director attends all the Board meetings, and the Strategy Director practically all of them. The Human Resources Director is invited to meetings when the agenda so requires.

Main Topics Covered In addition to recurring topics for Board meetings (annual budget and update of forecasts, annual and half-year financial statements, determination of the Chairman and Chief Executive Officer’s compensation, notice of General Meeting and WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 167 SHAREHOLDER INFORMATION

proposed dividend, dates of non-trading periods, approval of regulated agreements, the various responsibilities of the Chair- man, etc.), the agendas in 2007 included the following points, in some cases with reports from the relevant Board commit- tee (see below): - the cooptation of directors, the selection of an independent director and the composition of the committees, - the finalisation of the agreements with Alcatel-Lucent and with DCNS, - the strategy of the Security Solutions and Services and Space divisions, and of Thales UK, - the granting of stock options and free shares, - the preparation of an employee shareholding offer to be implemented in 2008, - the research and development policy, - the Group’s human resource issues, - evaluation of Board administration, - as well as sundry merger and acquisition plans. In addition, the Board made a one-day visit to one of the Group’s industrial sites in England to meet British operational managers and gain a closer understanding of the Group’s activities in the United Kingdom.

2.3. Preparatory work for Board meetings

Information for directors

Board papers Directors generally receive the notice for Board meetings between five and ten days before the date of the meeting (ten days is the notice required by the shareholders’ agreement for certain topics, including the transmission of the annual budget draft). A provisional timetable of meetings is adopted at the end of each year for the following year. The Board’s internal rules set the minimum period for the notice of meeting and delivery of documents at three working days, except in emergencies. With each notice are enclosed the meeting agenda, preparatory material (or at least the main points if not complete in time) and the minutes of the previous meeting. In some cases, further material is sent to directors later, or handed to them during the meeting, if the matter is urgent. The directors are also sent a press review and a selection of financial analyses relating to the Company. Furthermore, Thales national press releases, other than those discussed at Board meetings, are e-mailed to them when they are issued.

Training Senior corporate officers make a presentation about the Group for the benefit of directors appointed during theyear. In 2007, one director also took an external course, at his own request.

Structure and administration of Board committees The Annual Report gives details of the responsibilities of each of the committees, formally expressed in Board’s internal rules, as well as their membership on the date of notification for the General Meeting (page 8 and below).

Audit Committee The committee met four times in 2007, with an 80% attendance rate, for an average of two and a half hours per meeting. The auditors, invited to each committee meeting, took part in all the discussions, except where conflicts of interest occurred (e.g., the review of the appointment or renewal of terms of office of auditors). The Finance Director and the Internal Audit Director attend all the meetings. In 2007, in addition to the annual and half-yearly financial statement, the committee also looked at the developments in the ma- jor litigation cases, the execution of the annual budget, problems related to externally funded pension schemes, especially in the United Kingdom, purchase accounting in relation with the acquisitions made that year, and the budget for the auditors’ fees. During the two annual meetings specifically devoted to internal auditing and control, the committee reviewed the reports of the Internal Audit Department, for which it had previously approved the annual work programme. It laid out its recom- mendations on the continuation of the assignments. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 168 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

The committee also recognised the changes in the internal organisation as concerns risk management, and paid particular attention to the actions performed in connection with compliance. At the meeting devoted to the annual financial statements, the committee read the memorandum from the Finance Director on the Group’s exposure to risks and on the major off-balance-sheet commitments. In that same meeting, the committee’s members were able to discuss their report with the auditors, without the Finance Director being present. The committee also helped draft the financial press releases and prepared the Board’s decision on the proposed dividend to the General Meeting. A written report of each meeting was given to the following Board meeting.

Strategy committee This committee met four times in 2007, most particularly to review the 2007 Budget in relation to the three-year plan, the strategy of the Security Solutions and Services and Space divisions, and of DCNS. With the committee’s consent, participation in a meeting for the year was enlarged to three directors who are not commit- tee members. The Strategy Director and the Finance Director attend all the Strategy Committee meetings. Each meeting lasted in average a little more than three hours, with participation at 92%.

Nomination and Compensation Committee The committee met five times in 2007, including one meeting done via telephone conference, with an average 88% attend- ance rate. The average meeting time was around one hour and a half. The Human Resources Director and the Finance Director attend all the committee meetings. The Chairman is invited when the discussion might be enriched by his presence, for instance, when assessing the functioning of the board or when direc- tors are being appointed. Topics examined by the committee in 2007 included: the compensation of the Chairman & Chief Executive Officer (with re- view and advise on the criteria for setting the variable compensation), the stock options policy (including the special scheme for the Chairman for keeping securities) and the policy for granting free shares, preparation of an employee shareholding scheme to be run in 2008, and the process of selecting an independent director with the help of an outside consultant. The committee also oversaw the annual assessment of the functioning of the board. In addition, it examined the independence of directors, as laid down in the Board internal rules, and submitted its recommendations to the Board (see above). A written report of each meeting was given to the following Board meeting.

2.4. Evaluation of Board administration As recommended by the AFEP / MEDEF report cited above, and pursuant to the Board’s internal rules, an assessment of the functioning of the board was undertaken at the end of 2006 with the help of an outside consultant. Late in 2007, the Board decided that the annual assessment would be performed by using a questionnaire sent to all the directors, under the oversight of the Nomination and Compensation Committee. In looking at the results of that survey, the Board observed that, in general, the results are positive (especially the level of in- formation provided to directors, the way in which the Board operates, the choice, examination and discussion of the subjects dealt with, the functioning of the audit and accounts committee, the information and the discussions with regard to the finan- cial situation or the financial disclosure situation, as well as, on a secondary basis, the minutes of meetings of the Board). The only points deserving of particular attention relate to: - managerial succession, - the functioning of the Strategy Committee, all the more so since this committee’s enlarged composition is likely to reduce the criticisms, - the constant oversight of the Board’s decisions concerning acquisitions or sales, after 18 months or two years. In general terms, the Board considers that the number of independent directors, which it deems insufficient, is an inherent weak point in the provisions of the Shareholders’ Agreement, but it does nonetheless consider that the governance of Thales is good, even under construction in some regards, and in any case, satisfactory when compared with similar companies. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 169 SHAREHOLDER INFORMATION

2.5. Possible restrictions on the Chief Executive Officer’s powers Pursuant to the provisions of the French Corporate Governance Act (“NRE” act), the possibility of separating the duties of Chairman of the Board of Directors from those of the Chief Executive Officer was introduced into the Company’s Articles of Association at the General Meeting held on 16 May 2002. Since that time, the Thales Board of Directors has deemed that the formula in effect was the most effective and that there was, therefore, no need to make such a separation, with Mr Denis Ranque exercising his duties as Chairman and Chief Execu- tive Officer without any limitation of powers, such as those specified by the applicable legislation, with respect to the specific powers of the Board of Directors or the General Meeting of shareholders. As stipulated in §1.1 of the Board’s internal rules, any acquisitions or divestments of a value exceeding €150 million are au- tomatically submitted for Board approval, as are any operations of a value exceeding €50 million if they involve a change in the Group’s strategy. This practice effectively constitutes a limitation to the Chief Executive Officer’s powers.

3. INTERNAL CONTROL PROCEDURES SET UP BY THE COMPANY

3.1. Introduction This section was presented to the audit and accounts committee, which met on 28 February 2008, with the auditors present. This section has been prepared on the basis of the main conclusions arising from work carried out by the Group in 2007 in the area of internal auditing and risk management. The results of this work have been reviewed at the various meetings of the Risks and Inter- nal Control Committee during the year, and also in the meetings of the Audit and Accounts Committee which were held in 2007.

Definition and scope of internal control at Thales The Thales Group applies the internal control principles laid down in the American COSO framework (Committee of Spon- soring Organizations of the Treadway Commission), and the professional standards of IIA (Institute of Internal Auditors) and its French affiliate IFACI (Institut Français de l’Audit et du Contrôle Interne). The definition of internal control used by Thales is: internal control is a process effected by the the organisation designed to provide reasonable assurance regarding the achievement of the Group’s objectives, thanks to: - the effectiveness and efficiency of internal processes, - accounting and financial internal control, which aims to ensure the reliability of the information distributed and used inter- nally for decision making and monitoring purposes, to the extent that they contribute to establishing financial statements, - compliance with regulatory requirements (legal compliance). The internal control framework contributes to the achievement of the Group’s objectives, while not providing an absolute guarantee, due to the limitation inherent in any internal control system, particularly caused by the need to take into account the cost / benefit relationship leading to a certain level of risk being accepted, and by the uncertainties of the outside world. Thales implements this internal control in all its controlled companies.

3.2. Control environment In most of the Group’s businesses, Thales must comply with a permanent control environment required by its main cus- tomers and regulatory authorities (Ministers of Defence, of Industry, civil aviation authorities, etc.), including increasingly stringent certification and financial control. These specific constraints come in addition to the legal obligations and are an integral part of the Group’s control environment.

The main agents responsible for internal control The Group has opted for a matrix-type organisation, relying on (a) six divisions which are themselves structured in consistent and homogenous product lines, and (b) an international organisation that stimulates country structures. The divisions are WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 170 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

made responsible for the product / market axis and are responsible for optimising their earnings over the long term and the development of the different product lines. The countries are made responsible for the relationship with the governmental and national clients and, depending on specific agreements with the divisions, with the private customers. They are also meant to optimise their structures so as to make it easier for the local units to achieve their goals. Delegation rules specify the respective responsibilities of the divisions and the countries. They have been implemented in the major countries (Australia, Canada, Germany, Italy, the Netherlands, Singapore, Spain, Switzerland, the United Kingdom, the United States of America) through the signature in 2007 of an agreement between the management of the division, its manager in the country, and the Group Director in the country. This tripartite agreement identifies the scopes of responsi- bilities and sets out the framework and the rules of performance of these responsibilities, covering observance of the Group rules, observance of the compliance rules (Group and legal regulations), disclosure and reporting to the division and the country. In the countries that are not covered by these provisions, the delegation rules in favour of the local entities are drawn up under the control of the divisions. Thales plans to extend the tripartite agreement to other countries under the Group’s multidomestic development framework.

The Executive Committee This committee, which has representation from the divisions, the countries and the functional directions, is ultimately responsible for the entire internal control setup. The Executive Committee (or “comex”) relies on the Risks and Internal Control Committee. This Risks and Internal Control Committee is chaired by the SVP, Finance and Administration, and brings together representatives of the divisions and of functional directions, as well as from the internal audit, which acts as committee secretary secretariat. The role of this committee is to: - facilitate the deployment of internal control by providing support to transverse improvements plans and actions, - stimulate risk mapping initiatives and resulting action plans that aim to reduce the Group’s exposure, - review audit reports whose conclusions are deemed significant at Group level, and draw the operational conclusions from them.

The Company representatives At the behest of the Audit and Accounts Committee and the under the oversight of the Risks and Internal Control Commit- tee, the Group rolled out a compliance program addressing the following fields: - company law and delegations, - competition law, - labour law, - occupational health and safety, - environment, - business ethics, - anti-bribery, - export control, - tax & finance, - national security. The first phase consisted in identifying a “compliance officer” in each of the Group’s legal entities, whose role is to assist his Chief Executive Officer with the following issues: - reinforcing the compliance framework, acting as a relay for the Group’s initiatives, - assessing the effectiveness and efficiency of the compliance programme, - identifying and monitoring of improvement plans, including but not limited to defining and implementing a training plan. In a second phase, a list of good practices per field has been drawn up to facilitate the assessment of the maturity of the means in place and to avoid legal breaches. This repository was used to substantiate an attestation letter issued by each CEO, sent to the division SVP and country director. This letter describes the actual status and improvement plans for each of the fields of compliance. Division SVP and country directors have reported to the Chairman as to the proper collect of the affirmation letters in their scope. An analysis per domain and per geographical area will allow defining transverse improvement actions in 2008. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 171 SHAREHOLDER INFORMATION

Accounting and financial function Accounting and financial operations are overseen by the Group Finance Department. The Group’s central organisation comprises: - an accounting and consolidation function, responsible for preparing and presenting the Group’s consolidated financial statements, - a financial and budget control function, which provides analysis of the Group’s financial data, and produces comments on variances with the budget and comparable periods of the previous year. These analyses are performed every month. At that time, the team reviews and comments on the financial forecasts for the current half-year and financial year, so as to guide the business to achieve objectives set, - a taxation function that provides support for operational entities on legislation and during tax audits. It also monitors tax consolidations within the group and ensures their overall coherence, - a cash management and financing function that coordinates and optimises at Group level the management of the financial resources and the exchange rate risk. The Group’s Finance Department is represented in each of the divisions and major countries by a Finance Director with a dotted line tie. The implementation of adequate accounting and finance internal controls is allocated to these finance direc- tors, who manage local teams or teams decentralised in the operational units, to ensure that the financial information is developed with adherence to the internal control rules. At the half-year and year-end closings, division SVP and their finance directors release an affirmation letter sent to the Group’s SVP for Finance and Administration, confirming that the financial data submitted for consolidation are accurate and complete.

The Legal Affairs function The Group legal affairs department and country structures provide the local units of all the divisions with support on local and international legislation, in order to best manage risk exposures in the various fields of the law. The human resources Department also relies on a network of legal advisors specialised in labour law, who supply support to the Group’s units, either in-house or in association with law firms.

The Quality function The Group’s Quality and Progress department proposes the quality policy and objectives, and is driving improvements for more customer satisfaction. Process owners approve the definition of the processes, associated rules and objectives, and ensure that they are effectively and efficiently implemented. In particular, the purchasing manager implements Thales’s supplier quality policy, separated into two major segments: supplier selection and supplier performance management. Quality assurance for programmes, products and services is delegated to operational units. The quality function is thus in- tegrated into each activity, which ensures that developped systems, products and services all meet customers’ requirements and also ensures a better responsiveness.

How Thales operates – principles and resources They are an integral part of the foundations for the Group’s internal control. This set of organisational rules, policies and procedures, which includes rules governing ethical conduct and corporate responsibility, is available on the Group Intranet and is distributed to all new employees as a welcome handbook.

The Board’s internal rules In July 2004, the Board of Directors adopted internal rules for the administration of the Board and its committees. The sec- tions “1. Board of Directors: composition as at the date on which the general meeting of 15 May 2008 is called,” and “2. Con- ditions of preparation and organisation of the work” supply more details about the Board of Directors and how it functions. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 172 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

The reference system Thales has set up a reference system, structured by process, which defines the organisation, rules, practices and methods to be implemented. Thanks to its modular design, it can be adjusted to the specific context of an activity and can be enhanced, at the level of each division, country or entity, by local rules and practices. Entities that joined the Group during the first half of the year have developed their convergence plans, so that they will soon be able to leverage on this reference system.

Codes and guides on good conduct The Code of Ethics, updated in 2007, has been translated into eight languages, published on the intranet and distributed throughout the Group, including to the entities that joined the Group during the first half of the year. Major amendments concern the new ethical organisation and the addition of the description of the ethics alert process. This Code describes the behaviour rules and the values that the Group wishes to encourage. It covers relationships with clients and suppliers, co-workers, shareholders and financial markets, as well as sensitivity to the natural environment. The Code of Ethics is supported by a Code of Conduct concerning insider information with a specific section containing the Group’s rules on ethical business practices. The reference guide on Export Control discusses issues and implications arising from the Group’s export activities and outlines current international regulations on the export of defence equipment and dual-use goods. It describes the split of responsi- bilities and the monitoring and control processes to set-up to ensure that Thales’s operations meet all these requirements. In connection with its policy on preventing insider trading, the Group has adopted a Code pertaining to insider information and securities trading for managers, and constantly updates its lists of “insiders.”

Internal Audit Charter The Group’s Internal Audit Charter, approved by the Board of Directors, sets out the basic principles of internal control, the internal audit mission, the scope and limits of its responsibilities and its types of action in units. Under the terms of this Charter, the Internal Audit may intervene in any company process to assess the level of residual risks and quality internal controls, if necessary determining the need for intervention itself.

Internal communication As a tool to support the Group’s internal control system and ensure overall coherence, internal communication aims to promote employee buy-in and increase motivation through relevant information on Group strategy and events. Different channels are used to promote Thales’s values: - information media provide a means to communicate with all the Group’s employees, in particular through the Group’s Intranet (updated every day), Login to Thales publications (in-house magazines produced by the different divisions and countries) and news flashes circulated by e-mail, - welcome seminars held by the management team for new executives in order to share the Group’s vision, strategy, corpo- rate culture and values, - shared knowledge databases that are freely accessible online, or protected depending on their content, and designed to facilitate the circulation of principles adopted and implementation of internal control best practices.

3.3. Identifying and analysing the major risks The nature of the main external risk factors (financial, legal, environmental, dependence) and the Group’s policy on insur- ance are detailed in Section B of the Group’s Management Report. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 173 SHAREHOLDER INFORMATION

Major risks related to internal processes In Thales’s sphere of business, which is centred on critical information systems for infrastructures, the major risks associated with the internal processes pertain to: - the bid process that aims at developping proposals that satisfy the client’s technical requirements in terms, delays and budget, while still meeting the Group’s profitability objectives and keeping risks under control, - management of long-term contracts (programmes), both technically (product / service quality, timeliness) and financially (compliance with financial objectives for revenues, production costs, cash flow and quality of forecasting). Consequently, the Group has implemented procedures and tools to identify and manage risks during the bid phase and con- tract performance phase. To date, there has never been an overrun so large as to endanger the Group’s financial position. Nonetheless, vigilance will be continually maintained and strengthened in this area, in particular by the actions and tools described in this report.

Risk mapping Some of the Group’s divisions have been mapping their risks since 2002. The Executive Committee reaffirmed the objective of mapping risks at Group level in 2007. Such a project was launched late in 2007.

Internal control self-assessment system During 2007, additional analyses were undertaken jointly by the units and internal audit to assess risks induced by the con- trol activities reported as non-operational in self-assessments, and to identify the corresponding action plans. A new self-assessment questionnaire was developed, which relied strongly on the recommendation of the French financial markets authority, the AMF, concerning the “internal control framework: reference,” published at the start of 2007. This new questionnaire, targeting the reliability of the financial reporting, was deployed in entities that joined the Group during the first half of the year.

3.4. Major risk management and internal control activities

Continuous improvement of operational processes Thales introduced internal and external assessment, based on international standards, enabling the Group to identify any needs its may have for continuous improvement, to prioritise them and monitor related action plans.

Development activities Thales selected the Capability Maturity Model Integrated (CMMI®), an international model vthat is well suited for its activi- ties and recognised by many clients, as a tool for improving and evaluating the maturity of its operational processes: man- agement of bids and programmes, systems engineering, hardware and software, administration of suppliers and support activities. For developments in the information technology field, Thales relies on the dedicated model maintained by the Information Technology Infrastructure Library (ITIL).

Production activities Thales has adopted the international Supply Chain Operations Reference (SCOR) model to measure the efficiency of its serv- ices pertaining to the delivery of finished products. This measure relates to all activities that make up the supply chain, includ- ing the construction of the industrial plans, the production master plan, the provisioning, production and delivery phases, but also associated assistance services that may be provided for integrating and processing returns from customers.

Management of the processes To better make use of the ISO 9001 certifications, Thales – in coordination with the certification bodies – has included a scoring system, called the Process Management Indicator (PMI). This is a quantified assessment of the maturity of the ca- pacities of management through qualitys, established when certification audits are performed. The PMI ensures increased visibility of actions to implement for improvement and a quantification of improvements already made. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 174 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

The centralised activities Some complex or risky operations are solely performed by central departments, which ensurewith the consistency and coordination among Group’s practices. Specifc internal controls have been put in place to mitigate risks associated with these operations.

Investment and divestment Acquisitions or disposals of activities, in whole or in part, are the exclusive jurisdiction of the Group’s corporate manage- ment, which examines suggestions submitted by divisions at the regular meetings of the Mergers and Acquisitions Commit- tee. This committee is made up of the main corporate departments.

Financing, cash management and currency exchange risk The Group’s financial resources are managed centrally by the Group Cash Management and Financing Department. The Group’s subsidiaries are not authorised to undertake financing operations themselves, apart from any specific tax-related exceptions, due to regulatory constraints and for overdraft operations required for proper accounts management. Every day, the bank accounts of the local units in main countries are balanced by transfers to the corporate treasury account (cash pooling – zero balancing system). Financial agreements have been arranged with all Group companies that manage these relations in compliance with the relevant local regulations. The Group Cash Management and Financing Department also manages the overall currency exchange risk, while opera- tional units monitor the exchange risk in detail. Foreign currency transactions are analysed before any financial commitment is made and are hedged at Group level against foreign exchange risks as soon as winning the sales contract and/or signing a purchase order looks likely, except in special cases.

Financing of export operations Export finance operations (guarantees, buyer credit, documentary credit, as well as more complex financing operations) are prepared by local specialists reporting to local financial departments. These specialists also report to the corporate interna- tional financing department. Transactions for amounts in excess of ten million euros or of a certain level of complexity are handled solely by this department at Group level.

Real Estate Management All real estate transactions come under the sole competency of the Group’s Real Estate department. However, it may del- egate certain operations, especially outside France, to a country structure, where there is one, or to a local company, even though it continues to oversee the operations.

Disputes, litigation and legal compliance With the exception of disputes relating to relationships with employees and unions, which are dealt with by the Human Resources department, other disputes are managed by the Group’s Legal department.

Insurance and claims All insurance policies of all the Group’s companies are managed by Thales Insurance and Risk Management, a specialist subsidiary that optimises the cost of insurance for the Group and ensures that the subsidiaries are properly insured against all insurable risks that they run. This entity oversees large damages.

Contract intermediation The commercial environment for the Group’s international operations is handled by a specialist structure, Thales Interna- tional. This company possesses the expertise and appropriate procedures for overseeing these operations in compliance with the applicable laws and regulations. Only Thales International and its subsidiaries, therefore, are entitled to sign commercial intermediation contracts with external service providers for export operations. For domestic operations, in those countries where the Group has major manufacturing and sales businesses, procedures are laid down to improve customer relations and the security and legality of commercial operations. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 175 SHAREHOLDER INFORMATION

Gathering and processing of the published financial and accounting information

Accounting and financial procedures The Group has produced a set of manuals of procedures that are mandatory for all Group units. Unit Financial Officers are accountable to the Group Finance Department for compliance with these procedures. - Accounting Procedures Manual This manual details the accounting rules and principles to be applied in producing consolidated accounts under IFRS. - Budgetary control procedures manual This manual describes the budget process that divisions and units must follow. It defines in particular the content and format of the regular reports and contains a glossary to help standardise financial aggregates. - Cash-flow manual This manual describes the respective roles of the central teams and unit teams relating to cash flow and financing opera- tions. It also details the procedures for short term cash flow management, operation of the exchange risk hedging system and the related reporting rules. - Guide to financial arrangements This document defines the respective roles of the central teams and unit teams, as well as the procedures for the prepara- tion and monitoring of the financial arrangements that accompany commercial bids. The objective is to optimise the cost of financial arrangements and ensure the best possible hedging against financial risks.

Budget process Annual budget objectives are set each year in three stages: - the Group’s divisions draw up a ten-year strategic plan, which is presented to and approved by the Group’s Executive committee, - each division then submits a more detailed three-year budget plan to the Group’s Executive committee. This plan is based on commercial forecasts prepared jointly by the divisions and the marketing and sales departments at Group and Country level, - finally, the Group’s Executive committee sets the objectives for each division, ensuring the overall consistency. The first year of the plan is then broken down into a monthly plan, which serves as a reference for monitoring actual figures.

Financial Reporting The framework includes some key elements described above in this report, such as the accounting and financial procedures and a centralised consolidation process supported by a single departement. Monthly results are analysed in order to identify any deviation with budget and to update annual forecasts of order intake, revenues, results and cash flow. This procedure is carried out by each unit and provides a consolidated vision at Division and Group level. It also makes it possible to identify any action plans needed to achieve yearly targets.

Consolidation of financial statements Thales uses a single consolidation programme, selected among the market standards, which enables it to upload the ac- counting information of the Group’s various units, undertaking consistency checks at source. Transfers of accounting entries to Head Office are authorised only after validation. Training sessions on the tool and specific expertise in the Corporate consolidation team ensure people master the programme.

3.5. Oversight of the internal control framework

Monitoring and control bodies The Board of Directors exercises permanent control over the way the Group is managed, either directly or through its com- mittees. Section 2 on page 166 of this report – “Conditions under which work is prepared and organised” – provides detailed information about the Board of Directors, the organisation of the Board’s work and its committees more generally. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 176 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

The Audit and Accounts Committee During the year-end closing process, the SVP, Finance and Administration presents to the audit and accounts committee a memorandum on the procedures implemented to identify and control the major risks and on off-balance-sheet commitments. Each year, the Internal Audit Department presents the Audit Committee with an audit plan covering the different aspects of com- pliance with legislation and regulations, assessment of internal control and identification and management of risks. During these meetings, this Board committee reviewed resources allocated and actions taken to strengthen internal control, and to identify and monitor the risks.

Risk and Internal Control Committee In 2007, the committee oversaw the definition and roll-out of the compliance programme, of the delegations of power and the associated management rules, the export control procedures as well as of the self-assessment of internal control and the risk mapping.

The ethics and corporate responsibility committee Thales has set up an ethics and corporate responsibility committee, under the chairmanship of the Honorary Deputy Chair- man of the Group, made up of members of the Executive Committee, of the functional directions and of the major countries in which the Group has operations. This committee is responsible for guaranteeing compliance with the ethics code; it con- tributes to the definition and implementation of the Thales ethics and corporate responsibility policy. This committee met three times in 2007. A convention was organised to bring together ethics officers from the various countries and divisions.

The Internal Audit Division Reporting to the Chairman & Chief Executive Officer, the Internal Audit Division works with the audit and accounts com- mittee, the risk and internal control committee, the Group’s Senior management, and with statutory auditors. It provides support to all operational and functional managers to help them identify the risk exposures of their activities and implement the means to manage or reduce these risks. In particular, it ensures proper risk management and adequate internal controls are maintained in the Group, by carrying out audit assignments and by providing tools with units for them to evaluate their internal control level. For 2007, in complement to the actions described above relating to the follow-up of self-assessment questionnaires with units and the development of a new questionnaire focusing on the reliability of the financial reporting, Internal Audit conducted audit assignments that cover both compliance, financial information reliability aspects and – to a lesser extent – effectiveness of operations. In addition to this work, Internal Audit monitored the recommendations of the external auditors.

Control over financial information Each year, Internal Audit reviews the financial audit manual with the statutory auditors. This manual describes the phases of the statutory auditors’ work and specifies the particular topics to be audited. The consolidated companies are assigned to three categories according to their size and the risks to which they may expose the Group. They may receive an in-depth review, a limited review or a flash review. In the first two types of review, as well as assessing the unit’s financial statements, the statutory auditors recommend im- provements to its internal control. These recommendations are described in a dedicated section of the annual interim sum- mary report issued to the unit and Group management in November each year. Internal Audit ensures that units have taken into account these recommendations and have incorporated them in their ac- tion plans. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 177 SHAREHOLDER INFORMATION

C. Corporate Management

1. Composition of the Executive Committee (“Comex”)

The Executive Committee of the Company and Group is a collegiate body chaired by the Chairman & Chief Executive Officer, comprising 14 members in charge of the main operational and corporate functions. At 31 December 2007, the members of the Executive Committee were: Denis Ranque (1), Chairman & Chief Executive Officer Alex Dorrian, EVP (2), International Operations, CEO of Thales UK Jean-Paul Perrier, EVP, International Operations, Chairman of Thales International Olivier Houssin, EVP, Commercial Operations and Security, SVP Security Solutions and Services Yves Barou, SVP (3), Human Resources Sylvie Dumaine, SVP, Corporate Communication Patrice Durand, SVP, Finance and Administration Jean-Loup Picard, SVP, Strategy, Research & Technology Reynald Seznec, SVP, Operations Alexandre de Juniac, SVP, Air Systems Jean-Paul Lepeytre, Deputy SVP, Security Solutions and Services Jean-Georges Malcor, SVP, Naval François Quentin, SVP, Aerospace Bruno Rambaud, SVP, Land & Joint Systems Pascale Sourisse, SVP, Space

2. COMPENSATION OF SENIOR MANAGERS

2.1. Compensation paid to the Chairman & Chief Executive Officer The components of the compensation paid to Mr Denis Ranque are the same as those used by Thales for its senior execu- tives. Its positioning is analysed and revised each year and takes account of performance over the previous financial year and salary surveys or market data.

Financial Year 2007

a. Compensation On 8 March 2007, at the suggestion of the Nomination and Remuneration Committee, the Board of Directors decided to: - keep at €640,000 (gross) the fixed compensation of Mr Denis Ranque, Chairman & Chief Executive Officer, for 2007, - set the target variable part at 100% of the fixed part, with a maximum of 150% if the objectives are exceeded, and use three quantitative criteria as references for this variable part (in decreasing order of importance: income from ordinary opera- tions, operational cash flow, and order volumes for the year) as well as a more qualitative assessment of the Chairman’s action in carrying out various assignments assigned to him by the Board. On 6 March 2008, the Board of Directors (a) reviewed the results achieved in respect of the quantitative criteria set in ad- vance, i.e.: - the income from operations, - cash flow from operations, and - order volumes for the year. and (b) judged the performance of the various assignments assigned to the Chairman.

(1) Sole “mandataire social” (company representative), as defined by the French Commercial Code. (2) EVP: Executive Vice President. (3) SVP: Senior Vice President. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 178 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

This review caused the Board of Directors to decide, upon the proposal of the committee on selection of directors and compensation, that the variable compensation to be paid in 2008 to the Chairman & Chief Executive Officer in respect of financial year 2007 will be €774,800 (gross), i.e., 121% of the fixed compensation. The total amount of the Chairman’s compensation thus amounts to €1,414,800 in respect of 2007, 8.65% less than the previous year (total compensation in respect of 2006: €1,548,800).

Details of the compensation packages payable in respect of financial years 2006 and 2007 and the compensation paid during those years to the Chairman & Chief Executive Officer

2007 2006

Payable in Paid during Payable in Paid during respect of the the financial year respect of the the financial year in thousands of euros financial year financial year Fixed compensation 640.0 640.0 640 640 Variable compensation 774.8 908.8 (a) 908.8 765 (a) Extraordinary compensation ------Total before contributions 1,414.8 1,548.8 1,548.8 1,405 Employer contributions 378.7 410 410 374 Total charged 1,793.5 1,958.8 1,958.8 1,779 Attendance fees Waived Waived Waived Waived

(a) Paid in respect of the previous year.

As mentioned above, the Chairman & Chief Executive Officer has waived payment of his attendance fees.

b. Stock options During financial year 2007, Mr Denis Ranque was granted 80,000 stock options. Pursuant to the provisions ofArticle L.225-185 of the Commercial Code, the Board of Directors decided that the Chairman & Chief Executive Officer should retain, in the form of shares, at each exercise of the options granted in 2007 and for his entire term of office, 40% of the capital gain on acquisition, net of tax. After this grant and after exercises of options in 2007, Mr Denis Ranque, as at 31 December 2007, was in possession of 626,672 stock options. Details and characteristics of the grants per plan and the exercises carried out by the Chairman & Chief Executive Officer are provided on pages 141 and 142.

c. Other Benefits Mr Denis Ranque also has the benefit of a company car and the services of a chauffeur. In addition, by a decision of the Board of Directors, Mr Denis Ranque is a beneficiary of the pension plan set up with effect from 1 January 1999 for Group executives whose compensation exceeds the Agirc contribution ceiling. The points, calcu- lated as for Agirc, acquired for the compensation paid from 1999 to 2007, amount for Mr Ranque to an annual income of 7.68% of his fixed compensation for 2007. The amendments to Mr Denis Ranque’s employment agreement, currently suspended, introduced by a rider previously authorised by the Board of Directors on 11 March 2003 and approved by the General Meeting held on 15 May 2003, are mentioned on page 155 of this annual report. In its meeting held on 6 March 2008, the Board of Directors authorised the Company to cancel and replace this commit- ment that was not in compliance with the new “TEPA” law (the Act to Promote Work, Employment and Purchasing Power) dated 21 August 2007. The new commitment will be put to the vote of the General Meeting to be held on 15 May 2008. It is described in the Board’s report on the draft resolutions to be put to the Meeting (stated in the notice of meeting). WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 179 SHAREHOLDER INFORMATION

Financial Year 2008 During the Board meeting held on 6 March 2008, the Board decided for the 2008 financial year: - to raise from €640,000 to €700,000 (gross) the fixed compensation of Mr Denis Ranque, Chairman & Chief Executive Of- ficer, which had remained unchanged since 2004, - to keep the amount of the target variable compensation at 100% of the fixed compensation, with a maximum of 150% in the event that the objectives are exceeded, - that the criteria for setting the variable compensation would, according to a weighting decided by the Board of Directors, amount to 75% overall (in decreasing order of importance: the EBIT, the cash flow from operations and the order volumes of the year). For the balance, i.e., 25% of the variable compensation, the Board decided to retain one, more qualitative criterion based on the completion of the various missions assigned to the Chairman by the Board, the list remaining open at this stage.

2.2. Compensation of other officers Following the integration of the business activities of Alcatel-Lucent, the Group executive committee now has two additional members, which raises the number of committee members, not counting the Chairman & Chief Executive, to fourteen. Total compensation paid to Executive Committee members during 2007, with the exception of the Chairman & Chief Execu- tive Officer, amounted to €8,407,000, including a variable part of 36.7% in respect of 2006 (1). As in the case of the Group Chairman & CEO, the variable part is based on quantitative and qualitative performance criteria.

Details of the salaries paid to the Executive Committee (not counting the Chairman & Chief Executive Officer) during 2006 and 2007

2007 2006 paid during the financial year paid during the financial year in thousands of euros (14 members) (12 members) Executive Committee (except for C-CEO) Fixed compensation 4,901 4,299 Variable compensation 3,086 2,592 Extraordinary compensation 420 Total before contributions 8,407 6,891 Employer contributions 2,409 2,059 Total charged 10,816 8,950

Additionally, the members of the Executive Committee, other than the Chairman, have in the aggregate a total of 1,760,625 stock options. The breakdown by grant date and detailed characteristics as well as the exercises made are shown above, in the tables on pages 141 and 142, and on page 29 in the summary of operations performed by managers, staff equivalent to managers and related persons.

(1) Variable compensation in respect of 2007 being paid in 2008. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 180 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

D. C OMPENSATION PAID TO BOARD MEMBERs

The following table gives the total net compensation (including all perquisites) paid by the Company or Group companies to each board member during 2007 (in compliance with the recommendations of the AMF in January 2007, salaries paid to directors elected by Group employees or representing employee shareholders are not included).

in € 2007 2006 Denis Ranque cf. page 185 Alcatel-Lucent 14,965)(a) -- Alcatel-Lucent Participations 2,500 -- Jean-Paul Barth 34,007 29,000 Bruno Bézard (b) none -- François Bujon de l’Estang 37,757 31,083 Olivier Costa de Beauregard 7,500 -- Charles de Croisset (f) 27,380 29,000 Serge Dassault 8,243 16,667 Roger Norman Freeman (g) 114,125 133,958 Pierre Lafourcade 30,257 31,083 Philippe Lépinay (c) 6,250 -- Didier Lombard 34,188 16,667 Klaus Naumann (f) 20,068 21,001 27,757 27,667 Marcel Roulet, permanent representative of TSA 36,938 31,083 Benoît Tellier (resigned on 10 December 2006) 20,939 27,083 Serge Tchuruk 16,250)(d) none Marie-Paule Delpierre (e) none none Didier Gladieu (e) none none Denis Samuel-Lajeunesse (resigned on 4 September 2006) (b) none none

(a) Mr Serge Tchuruk’s directors’ fees for 2006 paid to Alcatel-Lucent. (b) The attendance fees due to DenisS amuel-Lajeunesse (€12,721) and to Bruno Bézard (€2,500) in 2007 have been paid to the French Treasury (General State budget) under Article 139 of the corporate governance act (“NRE”). (c) Mr Philippe Lépinay has stated to the company that he is paying around half of his directors’ fees (after tax) to the Association du Personnel Actionnaire de Thales (APAT). (d) Payment to Mr Serve Tchuruk in respect of 2007. (e) The directors’ fees due to Mrs Marie-Paule Delpierre and Mr Didier Gladieu (respectively, €36,507 and €30,757 in 2007) have been paid to the Inter CFDT Thales. (f) Net of withholding. (g) In 2007: 91,245 (net compensation in the United Kingdom) +22,880 (net compensation in France) = €114,125.

Except with respect to Lord Freeman, the amounts mentioned above represent only Board committee attendance fees re- ceived in 2007 (part of which represents fees in respect of 2006). Mr Ranque has waived payment of these fees. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 181 SHAREHOLDER INFORMATION

E. INCENTIVE SCHEME AND MANDATORY PROFIT-SHARING SCHEME

1. MANDATORY PROFIT-SHARING SCHEME

The Group agreement on pooled profit-sharing for employees in the earnings of the Thales Group companies(“Participation”), executed on 23 December 2004 by all the trade union organisations represented at Group level, will amount to €31.68 mil- lion, in respect of the entitlements allocated to it on 31 December 2007. This agreement strengthens solidarity within Thales, since all the Group’s employees in France are now beneficiaries of the mandatory profit-sharing scheme.

2. INCENTIVE SCHEME

Each company is able to negotiate an incentive agreement (“Intéressement”) on the basis of indicators linked to its key objec- tives. The terms of the Group profit-sharing agreement include a rule that sets an upper limit on payroll (total of incentives plus profit-share). Adherence to this rule is mandatory. The statement of payments shows that sixteen companies within the Thales Group scope made incentive payments amount- ing to a total of €15.54 million.

Total sums paid out in incentives and profit-sharing in recent years

in € million 2007 2006 2005 2004 2003 In the Group (a) in France Profit-share paid 31.68 32.51 42.78 37.64 26.08 Incentives paid 15.54 19.15 7.92 9.51 15.84 By Thales parent company Incentives paid 2.67 2.57 2.56 2.51 2.69

(a) Scope of consolidation of companies in France, including joint ventures.

F. External AUDITORS

For the period covered by the historical financial data, the Thales Group’s official auditors were the following:

STATUTORY AUDITORS

Ernst & Young Audit Faubourg de l’Arche, 11 allée de l’Arche 92037 Paris-La Défense represented by Christian Chiarasini and Nour-Eddine Zanouda Current auditors appointed by the General Meeting of 15 May 2003, expiring at the end of the General Meeting called to approve the financial statements for 2008.

Mazars & Guérard 61 rue Henri Regnault, Tour Exaltis 92400 Courbevoie represented by Jean-Louis Simon Current auditors appointed by the General Meeting of 16 May 2007, expiring at the end of the General Meeting called to approve the financial statements for 2012. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 182 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

Alternate AUDITORS

Pascal Macioce 41 rue Ybry 92576 Neuilly-sur-Seine cedex Current auditor appointed by the General Meeting of 15 May 2003, expiring at the end of the General Meeting called to ap- prove the financial statements for 2008.

Patrick de Cambourg 61 rue Henri Regnault, Tour Exaltis 92400 Courbevoie Current auditors appointed by the General Meeting of 16 May 2007, expiring at the end of the General Meeting called to approve the financial statements for 2012.

Fees paid to auditors in 2006 and 2007 (a)

Mazars & Guérard Ernst & Young

Amount (pre-tax) % Amount (pre-tax) % 2007 2006 2007 2006 2007 2006 2007 2006 Audit Auditing, certification, examination of individual and consolidated accounts (b) - Issuer 681 855 11% 11% 544 465 9% 8% - Subsidiaries consolidated line by line 4,814 4,372 76% 57% 4,736 4,719 78% 83% Other efforts and services directly associated with the assignment of the auditor (c) - Issuer 528 1,607 8% 21% 620 126 10% 2% - Subsidiaries consolidated line by line 291 841 5% 11% 117 377 2% 7% Sub-total 6,314 7,675 100% 100% 6,017 5,687 99% 100% Other services rendered by the networks subsidiaries consolidated line by line (d) Legal, tax-related, social security-related -- -- 54 -- 1% Other (if > 10% of audit fees) ------Sub-total 0 0 0% 0% 54 0 1% 0% Total 6,314 7,675 100% 100% 6,071 5,687 100% 100%

a. With regard to the period under consideration, these are services performed in respect of a financial year charged to the Income Statement. b. Including the services of independent experts or members of the auditors’ network which the auditor uses in connection with certifying the financial statements. c. This heading includes diligences and services directly associated that are rendered to the issuer or its subsidiaries: - by the auditor in compliance with the provisions of Article 10 of the French Code of Conduct for Statutory Auditors, - by a member of the network in compliance with the provisions of Articles 23 and 24 of the French Code of Conduct for Statutory Auditors. d. These are services not relating to certification rendered, in compliance with the provisions of Article 24 of the French Code of Conduct for Statutory Auditors, by a member of the network to the subsidiaries of the issuer whose financial statement are being certified. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 183 SHAREHOLDER INFORMATION

3 . STOCK MARKET INFORMATION AND FINANCIAL COMMUNICATION

A. THALES SHARE

1. Listing

The Thales share is listed on the regulated market Euronext Paris (Compartiment A) of NYSE-Euronext. It is eligible for the SRD deferred settlement system. ISIN Code (1): FR0000121329 Reuters: TCFP.PA Bloomberg: HO FP The share is an underlying share for options traded on the Paris Traded Options Market (MONEP).

2. SHARE INDICES

The Thales share is included in the following market indices: - Euronext Paris: CAC Next20 (since 1 August 2006), CAC40 (since the index was created on 31 December 1987 and until 31 July 2006), SBF120 (since 31 December 1990), SBF250 and CAC AllShares. Since 1 December 2003, the market capitalisation used to select Euronext-Paris companies has been calculated on the basis of the free float only (2) and not the total number of issued shares. It was previously calculated on the basis of total share capital. For information, at year-end 2007, Thales’s total market capitalisation was €8,082m, or 6.03% of total CAC Next20 capi- talisation. Thales’s free float market capitalisation, as defined by the Indices Steering Committee, was €4,210m. - International: DJ Eurostoxx, FTSE Eurotop 300.

(1) International Securities Identification Numbers. (2) Under the definition used by the Euronext-Paris Indices Steering Committee, free float is taken to mean total share capital after deduction of shares held by Group companies, directly or indirectly by the founders or the State, controlling interests, shares within the scope of a shareholders’ agreement not already covered, and interests considered stable. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 184 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

3. SHARE PRICE AND TRADING VOLUMES ON EURONEXT-PARIS

a. Monthly figures from January 2004 to December 2007 (share prices in euros)

No. of No. of shares Total value Average Weighted High Low Period-end trading days traded traded (€m) daily trading average volume price 2007 January 22 11,873,016 466.10 539,683 39.26 40.78 37.52 40.39 February 20 8,645,014 346.73 432,251 40.11 41.33 38.50 38.94 March 22 19,908,407 799.94 904,928 40.18 43.77 36.10 43.46 Q1 2007 64 40,426,437 1,612.77 631,663 39.89 43.77 36.10 43.46 April 19 10,242,450 452.12 539,076 44.14 44.91 43.02 44.75 May 22 19,669,290 880.02 894,059 44.74 46.07 42.82 45.48 June 21 14,075,416 632.88 670,258 44.96 47.15 42.60 45.32 Q2 2007 62 43,987,156 1,965.02 709,470 44.67 47.15 42.60 45.32 July 22 10,210,542 445.56 464,116 43.64 45.43 41.35 42.24 August 23 15,545,609 632.17 675,896 40.67 43.39 37.72 41.65 September 20 9,114,601 367.18 455,730 40.28 41.90 38.76 41.11 Q3 2007 65 34,870,752 1,444.91 536,473 41.44 45.43 37.72 41.11 October 23 7,955,600 343.48 345,896 43.17 44.49 40.66 43.02 November 22 10,896,426 436.13 495,292 40.03 43.28 37.52 40.89 December 19 7,256,479 294.52 381,920 40.59 41.69 39.50 40.75 Q4 2007 64 26,108,505 1,074.13 407,945 41.14 44.49 37.52 40.75 Cumulative 255 145,392,850 6,096.83 570,168 41.93 47.15 36.10 40.75 total 2007

2006 January 22 11,196,113 438.94 508,914 39.20 40.50 38.20 39.81 February 20 13,997,846 542.94 699,892 38.79 39.90 37.53 38.23 March 23 25,289,378 938.80 1,099,538 37.12 39.30 35.65 36.69 Q1 2006 65 50,483,337 1,920.68 776,667 38.05 40.50 35.65 36.69 April 18 17,590,025 621.90 977,224 35.36 37.95 33.75 34.06 May 22 22,736,900 727.40 1,033,495 31.99 34.44 29.00 30.03 June 22 22,040,058 656.01 1,001,821 29.76 31.25 26.72 30.54 Q2 2006 62 62,366,983 2,005.32 1,005,919 32.15 37.95 26.72 30.54 July 21 17,157,523 521.86 817,025 30.42 31.64 29.03 31.14 August 23 15,300,270 492.50 665,229 32.19 34.82 30.60 33.92 September 21 11,630,809 396.37 553,848 34.08 35.30 33.05 34.99 Q3 2006 65 44,088,602 1,410.74 678,286 32.00 35.30 29.03 34.99 October 22 11,297,330 404.97 513,515 35.85 37.28 34.26 36.21 November 22 9,639,884 355.30 438,177 36.86 37.96 35.33 36.07 December 19 9,008,802 330.10 474,147 36.64 37.95 35.76 37.78 Q4 2006 63 29,946,016 1,090.36 475,334 36.41 37.96 34.26 37.78 Cumulative 255 186,884,938 6,427.09 732,882 34.39 40.50 26.72 37.78 total 2006 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 185 SHAREHOLDER INFORMATION

No. of No. of shares Total value Average Weighted High Low Period-end trading days traded traded (€m) daily trading average volume price 2005 January 21 11,695,317 409.80 556,920 35.04 35.95 34.23 34.98 February 20 12,886,730 443.78 644,337 34.44 35.25 33.72 34.20 March 21 22,014,710 721.52 1,048,320 32.77 34.80 31.76 32.17 Q1 2005 62 46,596,757 1,575.10 751,561 33.80 35.25 31.76 32.17 April 21 15,198,486 493.60 723,737 32.48 33.89 30.99 31.38 May 22 9,944,738 323.46 452,034 32.53 33.95 31.40 32.45 June 22 15,635,321 531.07 710,696 33.97 34.99 32.34 33.59 Q2 2005 65 40,778,545 1,348.13 627,362 33.06 34.99 30.99 33.59 July 21 11,904,446 398.28 566,878 33.46 34.78 32.42 33.50 August 23 16,394,316 580.41 712,796 35.40 36.74 33.60 36.71 September 22 20,307,139 759.92 923,052 37.42 39.01 36.13 38.63 Q3 2005 66 48,605,901 1,738.61 736,453 35.77 39.01 32.42 38.63 October 21 12,350,674 455.73 588,127 36.90 39.22 34.50 35.94 November 22 11,176,154 411.41 508,007 36.81 38.14 35.34 37.85 December 21 12,308,675 468.06 586,127 38.03 39.34 37.09 38.30 Q4 2005 64 35,835,503 1,335.20 559,930 37.26 39.34 34.50 38.30 Cumulative 257 171,816,706 5,997.04 668,547 34.90 39.34 30.99 38.30 total 2005

2004 January 21 14,561,028 409.79 693,382 28.14 29.90 26.17 29.21 February 20 16,004,486 485.23 800,224 30.32 31.92 28.67 30.62 March 23 15,805,644 482.63 687,202 30.54 32.00 28.57 31.14 Q1 2004 64 46,371,158 1,377.65 724,549 29.71 32.00 26.17 31.14 April 20 12,634,790 401.54 631,740 31.78 32.97 30.64 30.99 May 21 11,307,663 330.44 538,460 29.22 31.41 27.65 27.98 June 22 12,569,388 370.33 571,336 29.46 30.90 27.69 30.07 Q2 2004 63 36,511,841 1,102.31 579,553 30.19 32.97 27.65 30.07 July 22 8,770,002 254.90 398,636 29.06 30.66 28.00 28.93 August 22 8,935,555 247.89 406,162 27.74 28.98 26.63 27.75 September 22 11,137,535 309.43 506,252 27.78 29.02 26.61 26.80 Q3 2004 66 28,843,092 812.21 437,017 28.16 30.66 26.61 26.80 October 21 13,169,370 360.51 627,113 27.37 28.85 26.10 28.27 November 22 51,359,971 1,647.86 2,334,544 32.08 34.14 28.20 32.21 December 23 25,700,370 865.41 1,117,407 33.67 35.75 32.06 35.32 Q4 2004 66 90,229,711 2,873.79 1,367,117 31.85 35.75 26.10 35.32 Cumulative 259 201,955,802 6,165.95 779,752 30.53 35.75 26.10 35.32 total 2004 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 186 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

b. Annual figures from 2003 to 2007 (price in euros)

Price and performance

2007 2006 2005 2004 2003 Closing price 40.75 37.78 38.3 35.32 26.65 Session high 47.15 40.50 39.34 35.75 28.53 Session low 36.10 26.72 30.99 26.10 18.12 Weighted average price 41.93 34.39 34.90 30.53 24.93 Net dividend in respect of the previous year (€) 0.87 0.83 0.80 0.75 0.70 Total Shareholder Return (a) +10.2% +0.8% +10.7% +35.4% +9.0% Change in closing price from previous year +7.9% -1.4% +8.4% +32.5% +5.6% CAC40 performance over the period +1.3% +17.5% +23.4% +7.4% +16% CACNext20 performance over the period -5.5% +32.0% ------Thales’s position in index (b) 5 15 31 2 28

(a) Total Shareholder Return: differential between closing prices on 31 December of each year, plus dividend before tax credit paid during year in respect of previous year, relative to opening price. (b) CAC40 for 2002-2005, CACNext 20 since 2006. Thales share is part of the CACNext 20 index since 1 August 2006.

Volatility and liquidity

2007 2006 2005 2004 2003 Average session high / low volatility (%) Thales share / index (a) 1.95 / 0.61 1.85 / 0.54 1.63 / 0.81 2.27 / 1.03 3.47 / 1.98 Average number of shares traded per session (thousands) 570 733 669 780 635 Number of shares traded over the period (millions) 145 187 172 202 162 Total value traded over the period (€m) 6,097 6,427 5,997 6,166 4,039 Average number of shares traded per month (thousands) 12,116 15,574 14,318 16,830 13,502 Average value traded per month (€m) 508.07 535.59 499.75 513.83 336.55 Total number of shares in capital (period-end) 198.3 172.0 171.9 171.9 171.9 Total number of shares in free float at period-end (b) 103.3 92.2 92.1 92.0 92.0

(a) CAC40 from 2002 to 2005, SBF 250 in 2006 (source Nyse Euronext). (b) In accordance with the definition of free float used by the Euronext-Paris IndicesS teering Committee to calculate indices. ThoughS ogepa is not a signatory to the Shareholders’ agreement entered into on 5 January 2007, shares held by Sogepa are not included in the free float, the company being 100% held by the French State. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 187 SHAREHOLDER INFORMATION

c. Graphs and commentary on price and traded volume data from 31 December 2002 to 31 March 2008

Share price and traded volumes from 31 December 2002 to 31 March 2008

Price Daily share volumes in Closing price: in million 80 €25.23 on 31 December 2002 €40.75 on 31 December 2007 70 €40.50 on 31 March 2008 CAC Next 20 Thales relative 60

50 10

40 8

30 6

CAC 40 Thales Thales relative 20 4

10 2

0 0 Dec. June Dec. June Dec. June Dec. June Dec. June Dec. 02 03 03 04 04 05 05 06 06 07 07

Comments on share price - In 2002, the Thales share lost 35% of its value, in line with stock prices in general, which had been depressed since late 2001 (the CAC40 fell 34% in 2002). In late 2003, the share price began to rise again, closing the year up 6% compared with end-2002, although this recovery lagged behind the index (+16%). In 2004, the Thales share price rose 32.5% over the year, significantly outperforming the CAC40 (+7.4%), and ranked sec- ond in the index. This trend was given a further boost at year-end, when the share price bounced upwards amid speculation surrounding the alliance between Snecma and Sagem, both present in the aerospace and defence sectors, and rumours in the media about possible changes in Thales’s shareholder base and scope of activities. The share price continued to rise in 2005, despite a slight downturn in the first half, and reacted favourably amid an- nouncements of major orders in the naval sector towards the end of the year. In December, the market responded well to the agreement on Thales’s acquisition of an interest in DCNS. The share rose 8.4% over the year, but still performed below the market (CAC40 +23.4%). - The slight drop in the share price in 2006, down 1.4% despite an upward trend in stock markets in general, was the net result of a sharp fall in the share price in the first half, followed by a particularly robust rise in the second half. This perform- ance was largely due to events specific to the Company and only marginally reflected general stock market trends in 2006: • from January to mid-June 2006, the Thales share was affected by the gradual waning of previous speculation about pos- sible aerospace restructuring in Europe. The announcement in April 2006 of the planned operation with Alcatel-Lucent largely put an end to this speculation. As a result, the share fell more sharply, to €26.72 on 14 June, its lowest point since October 2004. During this first part of 2006, its closing price decline was 26%, against a fall of just 2% for the CAC40, WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 188 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

• the increase after mid-June 2006 and throughout the rest of the year was significant and fairly steady, reflecting an inter- est in the Company’s new strategic options on the part of investors, especially in the English-speaking world, as well as the favourable perception of the good half-year results. As a result, the share did not suffer any correction when it left the CAC40 on 31 July 2006. - This upward movement continued through much of 2007, strengthened by the successful finalisation of the 2006 agree- ments, full-year results and revenue and income growth objectives, all of which were positively received by investors. On 19 June 2007, the share price reached €47.15, its highest level since 2001. From mid-2007, with stock markets weakened by the first effects of the American real estate crisis, the share price was more volatile and was affected to some extent by ru- mours about a possible alliance between Thales and Safran, a company considered by the market to be very exposed to dollar risk. Overall, the Thales share rose by 7.9% in 2007, compared with +1.3% for the CAC40 and -5.5% for the CACNext20. - The downward trend in financial markets continued in the first quarter of 2008, with the CAC40 and CAC Next20 losing 16.2% and 16.6% respectively, while the Thales share closed at €41.01 on 31 March, up 0.6% from 31 December 2007. In- vestors responded favourably to a number of factors: the positive results achieved in 2007, confirmation of the Company’s objectives for improved operating performance in 2008, satisfactory visibility (illustrated by an order book representing al- most two years of revenues), the relatively linear nature of the Group’s business activities (primarily linked to infrastructure equipment for institutional customers) and its relatively limited exposure to dollar risk.

Share price from 31 December 2006 to 31 March 2008

Price Daily share volumes in in million 50

Thales

45

40

35

CAC Next 20 Thales relative 30

CAC 40 Thales relative

25 2

20 0 Dec. Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec. Jan. Feb. March 06 07 07 07 07 07 07 07 07 07 07 07 07 08 08 08

Comments on traded volumes From end-2002 to January 2007, the number of shares in the free float remained virtually stable, at around 92 million shares. Since GIMD and Sogepa are not signatories to the new shareholders agreement concluded between TSA and Alcatel- Lucent and implemented on 5 January 2007, the 11 million shares held by GIMD and Sogepa have been included in the free float, which increased from 92 million to approximately 103 million shares from this date. In 2007, the free float increased by a further 1.3 million shares as a result of stock options exercised during the year. At 31 December 2007, the free float had reached almost 104 million shares. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 189 SHAREHOLDER INFORMATION

- After two years of relative stability in 2002 and 2003, traded volumes rose significantly in2004, totalling more than twice the free float (2.2 times) for the year as a whole. Volumes were particularly high in the last two months of the year, due to the impact of speculation as mentioned above, averaging 1.6 million shares per session, compared with roughly 500,000 per session over the first 10 months. - In 2005, traded volumes fell only slightly as stock market speculation continued, representing 1.9 times the free float over the year as a whole and corresponding to a relatively steady daily average of approximately 670,000 shares. - In 2006, traded volumes rose to an average of 733,000 shares per session, representing two times the free float over the year as a whole. Volumes were higher in the first half than in the second, with a transition period of extremely high volumes when the share was leaving the CAC40: more than 800,000 a day from 26 June when the announcement was made to 31 July when the share actually left the index. Subsequently, average daily volumes for the rest of the year returned to the levels of previous years, and leaving the CAC40 had no more effect on traded volumes than it did on the share price. Events specific to the Group, particularly the announcement in April 2006 of the agreement with Alcatel, were reflected in higher volumes: from April to June, an average of 1 million shares were traded per day as the speculation described above wound down. - In 2007, traded volumes were down significantly, at 1.4 times the free float compared with 2 times the free float in 2006. Volumes were also more stable over the year, in the absence of speculation. These trends continued into the first quarter of 2008, with an average of around 550,000 shares traded per day.

4. DIVIDEND POLICY

Dividends are paid to the holder of the share according to law and the articles of association. The Company uses the Euro- clear direct payment procedure, which allows each shareholder to receive the dividend on the payment date. The dividend payment date, as decided by the Board of Directors, is 31 May of each year, or the next business day. The 2007 dividend will be payable on 2 June 2008. Any dividend unclaimed after five years lapses by law and is paid to the French tax authorities. As required by law, the following is a summary of the per-share dividend information for the preceding three years. In accord- ance with the French tax code, the dividends paid in respect of 2004, 2005 and 2006 qualified for a possible tax reduction of 50%, 40% and 40% respectively.

Dividends paid in respect of the last five years

in € 2007 (a) 2006 2005 2004 2003 Dividend before tax credit 1.00 0.87 0.83 0.80 0.75 Tax credit (b) ------0.375

(a) Subject to the vote of the General Assembly of 15 May 2008 called to approve the financial statements for 2007. The payment date for the dividend is 2 June 2008. (b) No longer applies to dividends paid in respect of 2004 and subsequent years (Article 158-3-2 of the French tax code). WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 190 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

B. FINANCIAL INFORMATION POLICY

1. GENERAL

It is Company policy to communicate clear and accurate information to the markets concerning its financial condition, strategy and management policies, in compliance with regulations, its Code of Ethics, generally accepted practice and the provision of the AMF’s general regulations as revised to comply with European directives regarding financial communication by companies listed on regulated markets, in particular the European Union’s Prospectus Directive in force since 1 July 2005 and the Transparency Directive that came into force on 20 January 2007. This policy of financial disclosure entails publication of periodic and continuous statutory information as submitted to the AMF in accordance with applicable rules and practices, as well as more qualitative information, for example through press and telephone conferences when the annual and interim financial statements and quarterly reports are published or major strategic operations announced. The Chairman and/or Chief Financial Officer use these opportunities to comment as ap- propriate on business developments, strategy, market trends and Group objectives. Since 2003, the Board of Directors has published a report on the Group’s risk exposure, in compliance with the French New Economic Regulations Act (NRE) of 15 May 2001. Since 2004, the Chairman has conducted an annual review of Board administration, internal control procedures and possible restrictions to the Chief Executive Officer’s powers, in compliance with the French Financial Security Act of 1 August 2003. These reports are presented in full in the Directors’ Report and Corporate Governance sections of this annual report. They may also be obtained on request from the head office: Direction des Sociétés – 45, Rue de Villiers – 92526 Neuilly-sur-Seine cedex – France.

2. FINANCIAL DISCLOSURE DIARY FOR 2008

12 February Consolidated revenues for 2007 7 March Consolidated results for 2007 17 April Reference document (2) filed with the Autorité des Marchés Financiers (AMF) 13 May First-quarter 2008 financial information 15 May Ordinary and Extraordinary General Meeting of Shareholders 28 May Ex-dividend day 2 June Payment of dividend on earnings for fiscal 2007 30 July Interim consolidated results for 2008 14 November Third-quarter 2008 financial information

3. CONFERENCE ON 2007 RESULTS

The conference on the 2007 results was held on 7 March 2008. The slides presented and commented on at that conference have been available on the Thales website since that date. Chairman Denis Ranque and Chief Financial Officer Patrice Durand commented on the Group’s consolidated results and the situation in the markets in which Thales operates. Denis Ranque indicated the Group’s objectives for the current finan- cial year, confirming the objectives already presented to the market: organic revenue growth in the order of 6% and an EBIT margin (defined as income from operations after restructuring costs) of at least 7.25%, based on an operating margin in the order of 8%.

(1) Publication via a professional news / disclosure network and on the Company’s corporate website. (2) The reference document (annual report in French, compliant with the AMF regulations) is available since 18 April 2008, on the Thales corporate website (www.thalesgroup.com). WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 191 SHAREHOLDER INFORMATION

4. ANNUAL INFORMATION DOCUMENT: SHAREHOLDER INFORMATION AVAILABLE

This section lists all information published in the 12 months preceding the filing of the reference document, pursuant to the provisions of Article 221-1-1 of the AMF general regulations. The Thales website makes available to the general public the Group’s articles of association and financial information about the Group.

Revenues 2006 - press release of 14 February 2007: http://www.thalesgroup.com/Investors/Financial-releases-Archives-2007.html - announcement in the BALO of 16 February 2007: https://balo.journal-officiel.gouv.fr/pdf/2007/0216/200702160701651.pdf

Full-year results 2006 - press release of 8 March 2007: http://www.thalesgroup.com/Investors/Financial-releases-Archives-2007.html - slide presentation of 8 March 2007: http://www.thalesgroup.com/Investors/Financial-releases-Archives-2007.html - announcement in the BALO of 23 April 2007: https://balo.journal-officiel.gouv.fr/pdf/2007/0423/200704230703896.pdf

Entry into force of the agreement between DCNS and Thales on 29 March 2007 - press release of 29 March 2007: http://www.thalesgroup.com/Investors/Financial-releases-Archives-2007.html

Creation of new satellite alliance between Thales and Finmeccanica - press release of 10 April 2007: http://www.thalesgroup.com/Investors/Financial-releases-Archives-2007.html

Consolidated revenues Q1 2007 - press release of 14 May 2007: http://www.thalesgroup.com/Investors/Financial-releases-Archives-2007.html - announcement in the BALO of 23 May 2007: https://balo.journal-officiel.gouv.fr/pdf/2007/0523/200705230707166.pdf

Ordinary and Extraordinary General Meeting of Shareholders 2007 The following documents are available on the corporate website at http://www.thalesgroup.com/Investors/Annual-General-Meeting.html: - preliminary notice of meeting and proposed resolutions published in the BALO of 30 March 2007, - official notice of meeting published in the BALO of 27 April 2007, - notice of documents available, - shareholders’ meeting brochure pursuant to Article 133 of the Decree of 23 March 1967, - shareholders’ meeting document pursuant to Article R.225-83 of the French Commercial Code, - reference document 2006, - slide presentation to the shareholders’ meeting of 16 May 2007, - quorum, - result of ballots. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 192 2007 ANNUAL REPORT – Thales Stock market Company Corporate information Annual General Meeting and share capital governance and financial of 15 May 2008 communication

Interim revenues and results 2007 - press release of 26 July 2007: http://www.thalesgroup.com/Investors/Financial-releases-Archives-2007.html - slide presentation of 26 July 2007: http://www.thalesgroup.com/Investors/Financial-releases-Archives-2007.html - announcement in the BALO of 1 August 2007: https://balo.journal-officiel.gouv.fr/pdf/2007/0801/200708010711828.pdf - consolidated interim accounts published in the BALO of 21 September 2007: https://balo.journal-officiel.gouv.fr/pdf/2007/0921/200709210714376.pdf

Q3 information at 30 September 2007 - press release of 12 November 2007: http://www.thalesgroup.com/Investors/Financial-releases-Archives-2007.html - slide presentation of 12 November 2007: http://www.thalesgroup.com/Investors/Financial-releases-Archives-2007.html - announcement in the BALO of 14 November 2007: https://balo.journal-officiel.gouv.fr/pdf/2007/1114/200711140717279.pdf

Consolidated revenues 2007 - press release of 12 February 2008: http://www.thalesgroup.com/Investors/Financial-releases.html - slide presentation of 12 February 2008: http://www.thalesgroup.com/Investors/Financial-releases.html - announcement in the BALO of 13 February 2008: https://balo.journal-officiel.gouv.fr/pdf/2008/0213/200802130801258.pdf

Full-year results 2007 - press release of 7 March 2008: http://www.thalesgroup.com/Investors/Financial-releases.html - slide presentation of 7 March 2008: http://www.thalesgroup.com/Investors/Financial-releases.html - brochure of consolidated full-year results 2007: http://www.thalesgroup.com/Investors/Financial-releases.html

C. OTHER THALES SECURITIES LISTED

1. EMTN BOND PROGRAMME

On 30 November 2006, Thales made a new issue of bonds to the value of €700 million, listed on the Luxembourg market. These variable-rate bonds (3-month Euribor +0.125%) are redeemable in December 2009. The issue was part of the renewed EMTN (Euro Medium Term Notes) programme, first implemented in September 2000.

2. CONVERTIBLE AND/OR EXCHANGEABLE BONDS (OCEANE)

In December 2001, Thales issued 9,809,691 convertible notes redeemable into new or existing Thales shares (OCEANE) for a total nominal value of €500 million. These notes matured on 1 January 2007. On that date, 9,809,675 bonds were redeemed at par for a total nominal value of €500 million (€499,998,309.70) plus a coupon of €12.5 million (€12,458,266.93). And 16 bonds were converted into 17 Thales shares. WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 193 SHAREHOLDER INFORMATION

4 . ANNUAL GENERAL MEETING OF 15 MAY 2008

A. Agenda

Resolutions within the authority of an Ordinary General Meeting

1. To approve the consolidated financial statements for fiscal year ended 31 December 2007 2. To approve the parent company financial statements for fiscal year ended 31 December 2007 3. Allocation of the net income of the parent company and setting of the dividend 4. To approve a regulated agreement concerning Mr Denis Ranque, Chairman and Chief Executive Officer 5. To ratify the cooption of Mr Bernard Rétat as “Outside Director” 6. To ratify the cooption of Mr Robert Brunck as “Outside Director” 7. To reappoint Mr François Bujon de l’Estang as Director, as proposed by the “State Sector” 8. To reappoint Mr Didier Lombard as Director, as proposed by the “State Sector” 9. To appoint Mr Jozef Cornu as Director, as proposed by the “Industrial Partner” 10. To reappoint Mr Serge Tchuruk as Director, as proposed by the “Industrial Partner” 11. To authorise the Board of Directors to enable the Company to buy and sell its own shares as part of a share buy-back program with a maximum purchase price of 50 euros per share

Resolutions within the authority of an Extraordinary General Meeting

12. To authorise the Board of Directors to grant stock options without discount with a ceiling of 5 million shares of 3 euros each 13. To delegate to the Board of Directors the capacity of issuing shares of the company and any securities giving access to the capital, with maintenance of preferential subscription rights, for a duration of 26 months, with a ceiling of 30 million shares of 3 euros each and a ceiling regarding securities of €1.5 billion 14. To delegate to the Board of Directors the capacity of issuing shares of the company and any securities giving access to the capital, with removal of preferential subscription rights and with a priority delay possibility, for a duration of 26 months, with a ceiling of 30 million shares of 3 euros each and a ceiling regarding securities of €1.5 billion 15. “Green shoe” up to 15% of the issues made by application of resolutions 13 and 14 respectively and within the ceilings stated respectively therein 16. To delegate to the Board of Directors the capacity to issue shares in remuneration of other companies’ shares or securi- ties giving access to the capital for a duration of 26 months and under the legal limit of 10% of the issued share capital of the company 17. To limit the global amount of issues authorized by resolutions 13 to 16 to 50 million new shares, i.e. 2 billion euro new bonds 18. To authorise the Board to issue shares reserved to the members of the Group Saving Plan under the legal requirements, with a ceiling of 6 million shares of 3 euros each 19. To amend the articles of association – creation of a “College of censors”

Resolutions within the authority of an Ordinary General Meeting

20. To increase the annual amount of attendance fees in order to include the possibility to remunerate the potential censors 21. Powers to perform legal formalities WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 194 2007 ANNUAL REPORT – Thales Stock market Agenda of the Annual Company Corporate information General Meeting and share capital governance and financial of 15 May 2008 communication

B. Quorum and results of the votes

Quorum

Total number of shares outstanding as of 15 May 2008 198,500,241 of which company-held shares with no voting rights attached 3,138,627 Net, outstanding shares with voting rights 195,361,614 Number of shares held by shareholders attending or represented at the AGM, voting by mail or having appointed the Chairman to vote in their name 155,823,186 Quorum (legal minimum: 25%) 79.761%

Number of voting rights expressed at this AGM

Number of shares Number of voting rights Attending the AGM 102,144,881 170,159,033 Voting by mail 44,249,565 44,271,348 Having appointed the chairman to vote in their name 9,428,740 18,718,933 TOTAL at this AGM 155,823,186 233,149,314

Results of the votes, in percent of voting rights expressed

Total voting rights Resolution number % Yes % No % Abstention expressed Ordinary 1 99.70 0,29 0,01 233,149,314 2 99.70 0,29 0,01 233,149,314 3 99,98 0,01 0,01 233,149,314 4 99,93 0,06 0,01 233,137,936 5 89,91 10,08 0,01 233,149,314 6 99,99 0,00 0,01 233,149,314 7 87,56 12,43 0,01 233,149,314 8 87,25 12,74 0,01 233,149,314 9 87,54 12,45 0,01 233,149,314 10 87,73 12,26 0,01 233,149,314 11 97,16 2,83 0,01 233,149,314 20 98,42 1,57 0,01 233,149,314 21 99,99 0,00 0,01 233,149,314 Extraordinary 12 83,99 16,00 0,01 233,149,314 13 99,85 0,14 0,01 233,149,314 14 91,38 8,61 0,01 233,149,314 15 92,96 7,03 0,01 233,149,314 16 95,03 4,96 0,01 233,149,314 17 99,85 0,14 0,01 233,149,314 18 99,26 0,73 0,01 233,149,314 19 96,98 3,01 0,01 233,149,314 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 195 Table of contents

General contents...... 1 2. Litigation...... 26 Overview...... 2 3. Environmental risk...... 26 Timeline...... 4 4. Insurance...... 26 Key figures...... 6 5. Dependence...... 27 Governance and Auditors...... 8 5.1. Upstream: key supplies and technologies...... 27 5.2. Downstream: main customers...... 27 2007 FINANCIAL REPORT...... 11 C. Events since year-end...... 28 APPENDIX...... 29

1. Directors’ report...... 12 2. Consolidated A. Management discussion and analysis financial statements...... 30 of 2007 financial statements...... 12 A. Consolidated profit & loss account...... 30 1. 20% business growth...... 12 B. Consolidated balance sheet...... 31 1.1. Consolidated revenues...... 13 a. Consolidated revenues by segment...... 13 C. Consolidated statement of cash flows...... 32 b. Consolidated revenues by destination...... 14 D. Consolidated statement 1.2. Orders...... 15 of changes in shareholders’ 2. Significant improvement equity and minority interests...... 33 in financial performance...... 16 E. Notes to the consolidated 2.1. Further significant improvement financial statements...... 34 in operating results...... 17 1. Accounting policies...... 34 2.2. Other results...... 19 2. Changes in scope of consolidation...... 42 2.3. Net income...... 19 3. Information on the basis 3. Financial position at year-end: of comparable consolidation net debt limited to €291m...... 20 scope and foreign exchange rates...... 46 3.1. Cash flows...... 20 4. Information by segment...... 47 3.2. Financial position at year-end...... 21 5. Gain (loss) on disposal of assets...... 50 4. Proposed dividend...... 21 6. Financial income (expense)...... 50 5. Outlook for the current year ...... 21 7. Income tax...... 51 B. Risk factors...... 22 8. Earnings per share...... 53 1. Financial risk...... 22 9. Goodwill...... 53 1.1. Liquidity risk...... 22 10. Tangible and intangible assets...... 54 1.2. Interest rate risk...... 22 11. Equity affiliates...... 55 1.3. Foreign exchange risk...... 23 12. Other non-current financial assets...... 56 a. Interest rate and exchange rate risk management 13. Inventories and work-in-progress...... 57 for business activity...... 23 14. Construction contracts...... 58 b. Management of risk relating to foreign currency-denominated assets...... 24 15. Current receivables and payables...... 58 1.4. Credit risk...... 24 16. Companies under joint control...... 59 1.5. Stock market risk...... 24 17. Related party transactions...... 60 1.6. Off-balance sheet risk...... 25 18. Shareholders’ equity...... 61 a. Pension commitments...... 25 19. Minority interests...... 67 b. Parent company guarantees...... 25 20. Pensions and other employee benefits...... 67 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 196 2007 ANNUAL REPORT – Thales Annual General Meeting of 15 May 2008

21. Reserves for contingencies...... 72 C. Interaction with 22. Litigation and environment...... 73 the scientific community...... 130 23. Net financial debt...... 73 D. Building innovation ecosystems...... 131 24. Statement of cash flows...... 76 E. A dynamic approach to intellectual 25. Commitments and contingencies...... 77 property management...... 132 26. Financial instruments...... 79 F. List of main consolidated companies...... 83 SHAREHOLDER INFORMATION...... 133 G. Statutory auditors’ report on the consolidated financial statements...... 84 1. company and share capital...... 134 A. Statutory information BUSINESS REVIEW...... 87 on the company...... 134 B. General meetings ...... 135 1. Notice of meetings 1. Business description...... 88 and conditions for attendance...... 135 A. Business in figures...... 88 2. Double voting rights B. Aerospace / Space...... 90 and exercising voting rights...... 135 C. Defence...... 102 3. Representations pertaining to exceeding thresholds under the articles...... 135 D. Security...... 118 C. Share capital...... 136 2. International presence...... 124 1. Change in the registered capital over the last five financial years...... 136 A. International presence in figures...... 125 2. Change in the shareholding structure 1. Trend over the last five years...... 125 over the last five financial years...... 137 2. Detailed trend over the last three years...... 126 3. Change in the distribution of the voting 2.1. In Europe...... 126 rights over the last five financial years...... 139 2.2. Out of Europe...... 126 4. Cases of the legal thresholds B. International financing...... 126 being exceeded declared in 2007...... 140 1. Export financing...... 126 D. Potential capital...... 140 2. Project financing...... 127 1. Maximum potential capital 3. International offsets...... 127 on 31 December 2007...... 140 C. Major operational subsidiaries 2. Securities in circulation that provide and major manufacturing sites...... 127 access to the capital...... 140 1. Major operational subsidiaires...... 127 E. shareholding structure...... 144 2. Major manufacturing sites...... 128 1. Distribution of the shareholders ...... 144 3. Research and innovation...... 129 as at 31 December 2007 2. Shareholders acting in concert A. The key to competitiveness since 5 January 2007...... 144 and growth...... 129 3. Shareholders’ agreement B. Five key technology domains...... 130 and agreement on the protection of national strategic interests...... 145 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 2007 ANNUAL REPORT – Thales 197 4. Specific agreement...... 147 C. Corporate management...... 178 5. Company-owned shares...... 147 1. Composition 6. Shares owned by the public...... 151 of the Executive Committee (“COMEX”)...... 178 7. Employee share ownership...... 152 2. Compensation of senior managers...... 178 F. regulated agreements...... 152 2.1. Compensation paid 1. Agreements authorised during to the Chairman and Chief Executive Officer...... 178 previous financial years which 2.2. Compensation of other officers...... 180 continued to be performed in 2007...... 152 D. compensation paid to board members...... 181 2. Agreement authorised during E. Incentive scheme and mandatory a prior financial year and which profit-sharing scheme...... 182 was not applied in 2007...... 153 1. Mandatory profit-sharing scheme...... 182 3. Commitment authorised 2. Incentive scheme...... 182 by the board of directors on 6 March 2008...... 154 F. EXTERNAL Auditors...... 182

2. Corporate governance...... 155 3. Stock market information A. Composition and financial communication...... 184 of the board of directors...... 155 A. Thales share...... 184 B. Chairman’s report to the general 1. Listing...... 184 meeting of 15 May 2008 on corporate 2. Share indices...... 184 governance and internal control...... 164 3. Share price and trading 1. Board of directors: composition volumes on Euronext-Paris...... 185 on the date of notice for the General 4. Dividend policy...... 190 Meeting of 15 May 2008...... 164 B. Financial information policy...... 191 1.1. Directors appointed by the General 1. General...... 191 Meeting of Shareholders...... 164 2. Financial disclosure diary for 2008...... 191 1.2. Directors elected by employees...... 165 1.3. Other persons attending Board meetings 3. Conference on 2007 results...... 191 (with no voting rights)...... 165 4. Annual information document: 2. Conditions under which work Shareholder information available...... 192 is prepared and organised...... 166 C. Other Thales securities listed...... 193 2.1. Board organisation and administration...... 166 1. EMTN bond programme...... 193 2.2. Report on Board activity in 2007...... 167 2. Convertible and/or exchangeable bonds 2.3. Preparatory work for Board meetings...... 168 (OCEANE)...... 193 2.4. Evaluation of Board administration...... 169 2.5. Possible restrictions 4. Annual General Meeting on the Chief Executive Officer’s powers...... 170 of 15 May 2008...... 194 3. Internal control procedures A. Agenda...... 194 set up by the company...... 170 3.1. Introduction...... 170 B. Quorum and results of the votes...... 195 3.2. Control environment...... 170 3.3. Identifying and analysing the major risks...... 173 3.4. Major risk management and internal control activities...... 174 3.5. Oversight of the internal control framework...... 176 Table of contents...... 196 WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 198 2007 ANNUAL REPORT – Thales PERSONS RESPONSIBLE FOR FINANCIAL INFORMATION

Patrice Durand Senior Vice President, Finance and Administration

Sylvie Lucot Vice President, Investor Relations

Thales 45, rue de Villiers 92526 Neuilly-sur-Seine Cedex – France Tel: 33 (0) 1 57 77 89 02 Fax: 33 (0) 1 57 77 86 59 e-mail: [email protected] WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 Réalisé par créapix - Agence conseil en édition d’entreprise - Paris WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 The Corporate brochure is available at www.thalesgroup.com WorldReginfo - 31f96d7b-6321-44dc-9b56-5ddcb02cd173 Annual20 ////////////////////////////////////////////////////////// report 07 Financial report Business review Shareholder information 2007 Annual report

Thales 45 rue de Villiers 92200 Neuilly-sur-Seine – FRANCE Tél.: + 33 (0)1 57 77 80 00

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