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Thales45 rue de Villiers

92526 Neuilly-sur-SeineFrance

Tél. : + 33 (0)1 57 77 80 00www.thalesgroup.com

Ann

ual re

port

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Annual report2009Financial informationBusiness reviewShareholders information

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The English language version of this report is a free translation from the original, which was prepared and filed with the Autorité des Marchés Financiers in French language. All possible care has been taken to ensure that the translation is an accurate presentation of the original. However, in all matters of interpretation, views or opinion expressed in the original language version of the document in French take precedence over the translation.

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Annual report 2009>>

3. Shareholders information1. The Company and the share capital ............................................................................................................... 1622. Corporate governance ....................................................................................................................................................... 1863. Stock market information and financial communication .................................................... 221

1. Management report ...................................................................................................................................................................102. Consolidated financial statements .........................................................................................................................293. Parent company management report and financial statements .................................88

1. 2009 financial information

Person responsible ......................................................................................................................................................................... 3Overview ........................................................................................................................................................................................................ 4Timeline ........................................................................................................................................................................................................... 6Key figures ................................................................................................................................................................................................. 7

Table of contents .......................................................................................................................................................................227European cross-reference list .................................................................................................................................231Reconciliation table for annual financial report ..............................................................................235

2. Business review1. Overview ................................................................................................................................................................................................. 1322. Aerospace / Space ................................................................................................................................................................ 1443. Defence ................................................................................................................................................................................................... 1494. Security ................................................................................................................................................................................................... 158

annual report 2009 – Thales

Person responsible>>

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DECLARATION BY PERSON RESPONSIBLE FOR THE REFERENCE DOCUMENT

I certify, after having taken all reasonable measures to this effect, that, to the best of my knowledge, the information contained in this reference document is accurate and does not omit any material fact.

I certify, to the best of my knowledge, that the statutory and consolidated financial statements have been prepared in accordance with applicable accounting standards and give a fair view of the assets, liabilities, financial position and results of the company and of all the entities taken as a whole included in the consolidation, and that the management report included on page 10 of this document presents a fair view of the development and performance of the business and financial position of the company and of all the entities taken as a whole included in the consolidation, as well as a description of the main risks and uncertainties to which they are exposed.

I have received a letter from the statutory auditors confirming that they have completed the work they undertook to audit the information related to the financial situation and the financial statements included in this document, as well as a review of this document in its entirety.

The statutory auditors have issued reports, without qualification and with observations, on the 2009 consolidated financial state-ments (pages 86 and 87 of this document), the 2007 and 2008 financial statements included for reference purposes, and the 2009 financial statements of the parent company (pages 129 and 130 of this document).

Neuilly-sur-seine, 26 March 2010

French original signed byLuc Vigneron

Chairman and Chief executive Officer


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Overview>>

Thales provides integrated solutions and equipment to meet security requirements of government, in-stitutional and private customers in the aerospace, defence and security markets.

Globalisation is making the world more open, enabling peo-ple to move around more freely and easing flows of capital, goods, services and data. a more open world, however, is also more vulnerable. Contemporary societies are vulnerable in particular to the failure of large-scale critical infrastruc-ture such as transport networks, energy grids and informa-tion systems. They are also exposed to new threats such as trafficking, terrorism, cybercrime, failed states and localised but high-intensity conflict.

Thales draws on world-class expertise in information sys-tems and electronics to meet rising demand for security and to seize growth opportunities across all its markets. The company’s key strengths include proven skills in complex system design and integration and the ability to contribute to projects in any capacity – as prime contractor, lead systems integrator or provider of high-value equipment and services – depending on the requirements of each customer.

Thales establishes sustainable relationships with government and institutional customers, maintaining a local presence in each of its countries of operation and building the mutual trust required to conduct complex, long-term projects.

Thales solutions meet the three key security requirements of its customers:

• defend and protect nations and populations. Thales provides military forces and civil defence organisations with communication, command, force protection and threat detection capabilities. The company also designs and delivers combat systems for all types of air, land and naval platforms,

• maintain surveillance and control to prevent breaches of national security and threats to pub-lic safety. Thales provides public administrations with the systems and equipment they need to maintain surveil-lance, gather intelligence and control the flow of people, goods and data (earth observation from space, Internet surveillance, intelligence, airspace control and population flows control),

• enhance the dependability and security of critical civil infrastructure. Thales is a major player in trans-port safety and a global actor in both rail transport secu-rity and civil air traffic management. The company also provides security solutions for interbank transactions, enterprise and government information systems, energy networks and sensitive sites.

The dual civil/military nature of these technologies and ap-plications is central to the Thales strategy:

• with a balanced mix of businesses (57% defence, 43% civil), Thales is recognised for its expertise in all the technologies that are key to effective defence and security capabilities in the 21st century: large-scale software sys-tems, onboard electronics for all types of platforms, secure communications and transactions, sensors (radar, sonar, optical), supervision and control, and satellite technologies,

• this comprehensive coverage of the defence-securi-ty continuum has brought Thales a high-quality portfolio of customers, including operators of mission-critical infra-structure (air traffic control, rail signalling, etc.), govern-ments and administrations (identity systems, information systems security, satellite observation, etc.), civil defence and military forces (surveillance and intelligence, command information systems, communication systems, combat systems, etc.).

as a result, Thales maximises the synergies between military and civil applications and technologies, drawing on a compa-ny-wide R&D capability with the critical mass to develop and preserve the skills that are critical to national security. The company’s research and development programmes, imple-mented through a network of 22,500 engineers and techni-cal staff operating in all Thales subsidiaries around the world, constantly enhance this platform of technologies. Thales’s tradition of technological excellence gained further recogni-tion with the award of the 2007 Nobel Prize in Physics to al-bert Fert, scientific director of a joint research unit operated by Thales and France’s national research institute CNRs.

In 2009, Thales was organised into three segments:

• aerospace & space,• Defence,• security.


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around half of the company’s production and three-quarters of its revenues are generated outside France: staff from Thales commercial and industrial operations on five conti-

nents maintain close relations with domestic customers in each country. The United Kingdom is the company’s second-largest country of operation after France.

New Thales organisation for 2010

In early 2010, Thales put in place a new organisation to simplify its working methods, develop synergies across the

Group, make commercial decisions more quickly and improve performance. Under the new organisation, the Group will

conduct its business through three large geographical areas and seven divisions.

each geographical area has responsibility for its profit and loss statement.

as from the 2010 financial year, first-level sector information will therefore be consolidated by geographical area.

The divisions have worldwide responsibility for research and development, product policy and industrial policy.

Geographical areas

Area A: United Kingdom, australia and New Zealand, United states, Canada, the Netherlands, Central and Northern

europe, Central and Northern asia, NaTO and the United Nations.

Area B: Germany, spain, Italy, other european countries, south and southeast asia, Middle east, latin america

and africa.

France is considered an area in its own right.

The seven divisions are as follows:

• Defence & security C4I systems

• air Operations

• Defence Mission systems

• land Defence

• avionics

• space

• Transportation systems

a new executive Committee (see details on page 211) was appointed when the new organisation was implemented.


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Timeline>>

1893 Compagnie Française Thomson-houston (CFTh) es-

tablished to exploit the patents of the Us company

Thomson-houston electric Corp. in France, in the

field of electrical power generation and transport.

1918 Compagnie Générale de Télégraphie sans Fil

(CsF), a pioneer in broadcasting, electro-acous-

tics and radar technology, set up in France.

1968 CsF and the professional electronics businesses

of Thomson-Brandt merge to form Thomson-CsF.

1982 Thomson-CsF nationalised.

1983 Civil telecommunications businesses sold to Com-

pagnie Générale d’Électricité (now alcatel-lucent).

1987 Medical imaging business (CGR) sold to General

electric; semiconductor business merged with

those of the Italian company sGs (IRI group) to

form sGs-Thomson.

1989 Thomson-CsF acquires the defence electronics

businesses of the Philips group.

1997 Interest in sGs-Thomson (now sTMicroelectronics)

divested.

1998 Thomson-CsF privatised; alcatel and Groupe In-

dustriel Marcel Dassault (GIMD) contribute as-

sets and become shareholders.

satellite businesses of alcatel, aerospatiale and

Thomson-CsF merge to form alcatel space, jointly

owned by Thomson-CsF (49%) and alcatel (51%).

1999 Thomson-CsF acquires 100% control of sextant

avionique, the avionics joint venture between

Thomson-CsF and aerospatiale (now eaDs).

2000 Thomson-CsF completes takeover of Racal elec-

tronics in the United Kingdom.

Thomson-CsF changes its name to Thales.

Thales and Raytheon form ThalesRaytheonsys-

tems in air defence.

2001 Thales sells interest in alcatel space, then mainly

serving the market for civil telecommunication

satellites.

2007 Thales acquires the transport, security and space

businesses of alcatel-lucent; sells French naval

surface business to DCNs and acquires a 25%

equity interest in DCNs from the French state.

2009 acquisition by Dassault aviation of Thales shares held

by alcatel-lucent and GIMD. Dassault aviation be-

comes a Thales shareholder with an interest of 26%.


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FINANCIAL DATA

Key figures>>

(€ million) 2009 2008 2007

Order book at year-end 24,731 22,938 22,675

Order intake 13,927 14,298 12,856

Consolidated workforce at year-end 64,285 63,248 61,195

(€ million) 2009 (a) 2008 (a) 2007 (a)

Revenues (b) 12,881 12,665 12,296

France 3,019 3,165 3,108

United Kingdom 1,467 1,556 1,584

Other Europe 3,464 3,302 3,276

Rest of world 4,931 4,642 4,328

EBIT 151 877 858

Net income “Group share” (128) 650 1,008

Operating cash flows before working capital changes 485 1,135 1,101

Capital expenditures (including capitalised R&D) (413) (523) (506)

Net (acquisitions) disposals (152) (119) (697)

Company-funded R&D (including capitalised R&D) (664) (569) (584)

Net debt (net cash position) 91 456 291

Shareholders’ fund (excluding minority interests) 3,744 3,949 3,881

(a) Before “Purchase Price allocation” (PPa) (see box page 10).(b) Revenues by destination.


8 annual report 2009 – Thales

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2009 financial information>>

3. Parent company management report and financial statementsA. Management report on the parent company financial statements .........................88B. Parent company financial statements ..............................................................................................................95C. Statutory Auditors’ Report on the annual financial statements ............................. 129

A. Management discussion and analysis of 2009 financial statements ...................10B. Risk factors ............................................................................................................................................................................................17C. Events since year-end ..............................................................................................................................................................27

1. Management report

2. Consolidated financial statementsA. Consolidated profit and loss account .................................................................................................................29B. Consolidated statements of comprehensive income ....................................................................29C. Consolidated balance sheet ...........................................................................................................................................30D. Consolidated statement of cash flows .............................................................................................................31E. Consolidated statement of changes in shareholders’ equity

and minority interests ............................................................................................................................................................32F. Notes to the consolidated financial statements .................................................................................33G. List of main consolidated companies ..................................................................................................................85H. Statutory Auditors’ Report on the consolidated financial statements ................86



2009 Financial information>>

1. MANAGEMENT REPORT

A. MANAGEMENT DISCUSSION AND ANALYSIS OF 2009 FINANCIAL STATEMENTS

In a persistently depressed global economic environment, rev-enue growth and robust order intake are testimony to the solid foundations of the Group’s customer base, primarily govern-ments and infrastructure operators. however, results were

affected by significant difficulties on a number of contracts and by the crisis in the air transport sector. In response, Thales launched an ambitious performance improvement plan at the end of the year, with a new management team in place.

Key figures 2009 (€ million) 2009 2008 Total change Organic change

Order intake 13,927 14,298 -3% -2%

Order book at 31 Dec. 2009 24,731 22,938 +8% +5%

Revenues 12,881 12,665 +2% +2%

EBIT (a) 151 877 -83% -84%

As % of revenues 1.2% 6.9%

Net income, Group share (128) 650 -120%

Net debt at 31 Dec. 2009 91 456

(a) Before adjustment for PPa (cf. box below).

In order to monitor and compare the Group’s economic performance, the consolidated profit and loss account is restated from the adjustment entries related to the Purchase Price allocation (PPa) recognised through significant business combinations. These mainly relate to the acquisition of the space, transportation and security businesses of alcatel-lucent in 2007 and the 25% equity interest in DCNs.

All figures in this report are before adjustment for PPA. PPa reduced eBIT by €(99)m and reduced net income by €(74)m. In view of these adjustments, net income, Group share, stood at -€202m at end-2009, compared with €560m at end-2008.

CHANGES TO ACCOUNTING INFORMATION

PRESENTATION OF ACCOUNTS

From 1 January 2009, warranty costs, whether related to long-term contracts or not, are presented in the consoli-dated profit and loss account under cost of sales. They were previously included in marketing and selling expenses except when directly allocated to contracts.

NEw APPLICABLE STANDARDS AND INTERPRETATIONS

The consolidated financial statements of the Thales Group are prepared in accordance with IFRs (International Finan-

cial Reporting standards) as approved by the european Un-ion at 31 December 2009. The accounting policies applied by the Group are consistent with those followed in the prep-aration of the Group’s annual IFRs consolidated financial statements for the year ended 31 December 2008, except for the adoption of certain new standards and interpreta-tions: IFRs 8 (operating segments), amendment to Ias 23 (borrowing costs), amendment to Ias 1 (presentation of fi-nancial statements) and amendment to IFRs 7 (financial in-struments). These new standards and interpretations have no impact for the Group and have led, where applicable, to the disclosure of certain additional information.

annual report 2009 – Thales 11

Management report Consolidated financial statementsParent company management report and financial statements

>> �Management discussion and analysis of 2009 financial statements

1. BUSINESS ACTIvITY

Revenues increased by 2% on a like-for-like basis and with constant exchange rates, with sharp rises in Defence and security, which offset lower sales in aerospace.

Order intake at €13,927m remained very high in 2009 – just 2% below the record level achieved in 2008 (in organic terms, i.e. on a like-for-like basis and with constant exchange rates). several major contracts were booked in France and on export.

eBIT stood at €151m, affected by significant exceptional ex-penses on programmes and a difficult economic environment in aerospace and security.

Net income, Group share, was -€128m, after significant im-pairment of intangible assets.

The Group’s financial position remains solid, however, with a marked increase in free operating cash flow to €800m,

allowing a further reduction in net debt, limited to €91m (compared with €456m at end-2008).

1.1. Consolidated revenues

a. Consolidated revenues by segment

Consolidated revenues amounted to €12,881m at 31 December 2009, compared with €12,665m in 2008, an organic increase of +2%. Exchange rate fluctua-tions reduced revenues by €134m, almost entirely as a result of the conversion into euros of sales by subsidiaries based outside the euro zone. The main fluctuations involved the weakening of the pound sterling (–€168m) against the euro, which was partially offset by the stronger Us dollar (+€59m). Changes in the scope of consolidation 1 corre-spond to a net increase in revenues of +€161m.

Aerospace & Space

The aerospace & space businesses recorded revenues of €4,071m, a decrease of 5% from 2008.

Aerospace revenues decreased by 7% to €2,638m, both in the civil sector and in military markets (military avionics, helicopter systems). The downturn was particu-larly significant in regional aviation, reflecting the drop in aircraft production rates at Bombardier, and in IFe, reflect-

ing lower investments by airlines as well as delays on the Boeing B787 programme.

lower sales by the space businesses (€1,433m, down -2%), despite their substantial underlying strengths, re-flects the impact of the earthquake at l’aquila in Italy in early april, which damaged Thales alenia space’s facilities and affected billing cycles, as well as the temporary suspension of the Globalstar programme and a slowdown in services activities (Telespazio).

Revenues (€ million) 2009 2008 Total change Organic change

Aerospace & Space 4,071 4,140 -2% -5%

Defence 5,763 5,502 +5% +6%

Security 2,977 2,893 +3% +4%

Others and divested businesses 70 130 ns ns

Consolidated revenues 12,881 12,665 +2% +2%

1. Primarily the sale of IT services activities in Germany in January 2009 and the consolidation of nCipher, Diehl aircabin (both since 1 January 2009) and CMT Medical Technolo-gies (since 1 July 2009).



Defence

Defence revenues stood at €5,763m, up +6% on 2008, with growth recorded in all the main segments of this mar-ket. The sharp increase in naval revenues is mainly due to in-creased activity on the CVF aircraft carrier programme in the United Kingdom as well as contracts to equip patrol boats for Denmark and FREMM frigates for France, Italy and Morocco. air systems sales were also higher, particularly in air traf-fic management (Nigeria, Coopans programme for sweden, Denmark and Ireland). The increase in land & Joint systems revenues was driven by growth in optronics and networks.

b. Consolidated revenues by destination

Security

Security revenues were up +4% to €2,977m, compared with €2,893m in 2008. Rail signalling revenues continued to grow, driven in particular by the spanish high-speed rail and Dubai metro projects. however, the global economic crisis affected sales across the rest of the sector. In par-ticular, the sharp decrease in revenues in critical informa-tion systems and special components (for industrial and medical applications) and the more moderate decrease in security systems reflect lower demand in these short- cycle segments.

Revenues (€ million) 2009 2008 Organic change 2009 (%)

France 3,019 3,165 -6% 23%

United Kingdom 1,467 1,556 +3% 11%

Other European countries 3,464 3,301 +3% 28%

Total Europe 7,950 8,022 -1% 62%

North America 1,158 1,190 -7% 9%

Australia 525 571 -7% 4%

Asia 1,158 1,139 +2% 9%

Near & Middle East 1,319 1,135 +17% 10%

Rest of world 771 608 +26% 6%

Total outside Europe 4,931 4,643 +5% 38%

Consolidated revenues at 31 December 12,881 12,665 +2% 100%

europe accounted for close to two-thirds of revenues in 2009, with particularly strong growth in the United King-dom, as a result of significant orders in recent years. In the Near & Middle east, revenues were markedly higher, not only in Defence but also in civil markets (space, Transportation), particularly in saudi arabia and the United arab emirates.

1.2. order intake

New orders booked in the 2009 financial year amounted to €13,927m, a slight decrease of 2% on an organic ba-

sis compared with 2008, when order intake was particularly brisk. The book-to-bill ratio 1 stood at 1.08.

The order intake figure reflects several major orders worth a total of €3,513m, including Tranche 4 of the Rafale pro-gramme and FReMM frigates in France, the Sentinel pro-gramme for the european space agency, the North-South rail link in saudi arabia, the Mexico City urban security programme and air defence radars in Finland. however, the volume of orders with a unit value of less than €100m fell, particularly in aerospace / space and security.

1. Total value of orders booked divided by total revenues for the year.




Order intake (€ million) 2009 2008 Total change Organic change Book-to-bill

Aerospace & Space 4,332 4,184 +4% +1% 1.06

Defence 6,093 6,547 -7% -5% 1.06

Security 3,390 3,461 -2% -1% 1.14

Others and divested businesses 112 106 ns ns ns

Consolidated order intake 13,927 14,298 -3% -2% 1.08

Aerospace & Space

In the Aerospace & Space segment, order intake amount-ed to €4,332m, up by 1%, with a book-to-bill ratio of 1.06.

Aerospace orders fell by 7% to €2,736m, but the book-to-bill ratio remained higher than 1 (at 1.04). Order intake by the civil aerospace businesses fell by -34% compared with 2008 and continued to reflect the crisis in air trans-port, with significantly lower orders for avionics for regional and business aircraft (Dash, CRJ, Global Express), in-flight entertainment (IFe) systems and, to a lesser extent, sup-port services. Conversely, orders in military aerospace were higher, thanks in particular to the contract for Tranche 4 of the Rafale programme in France and sustained sales of support services (Rafale, ATL2 upgrade).

Order intake by the space businesses increased sharply (+17%) to €1,596m, with several major orders for obser-vation satellites (Sentinel 3 for the european space agency) and telecommunication satellites (Eutelsat W3B, Global-star) as well as pressurised modules for the International space station (Cygnus). The book-to-bill ratio was 1.11.

Defence

Defence orders decreased by 5% to €6,093m, compared with €6,547m in 2008. The book-to-bill ratio remained higher than 1 (at 1.06), even though the naval business benefited from a volume of major contracts in 2008 (CVF aircraft car-rier programme in the United Kingdom, corvettes for Morocco and FREMM frigates for Italy) that was not repeated this year, despite several significant successes, including the minehunt-er upgrade programme in singapore and equipment for the

three additional FREMM frigates in France. Order intake by the air systems business was also lower, with the replication orders of the ACCS LOC1 air command and control system contract for NaTO and the GM400 radar contract for Fin-land failing to offset the decrease in orders for civil air traffic control systems, weapon systems and missile electronics (the air traffic control business had booked the Lorads III contract in singapore in early 2008). By contrast, new orders booked by the land & Joint systems business increased significantly, with growth driven in particular by major contracts in domestic markets (Rafale optronics in France, FIST future soldier sys-tem contract in the United Kingdom) as well as tactical com-munication and vehicle system contracts in export markets.

Security

Security orders were virtually stable compared with 2008, at €3,390m (-1% on an organic basis). The book-to-bill ratio remained high, however, at 1.14. Order intake from institutional customers was strong. several key orders were booked in rail signalling and rail traffic management, both for urban transportation projects (Mecca, Dubai, Cairo, etc.) and main line projects (North-South rail link in saudi ara-bia, Barcelona-Figueras high-speed line in spain). In security systems, Thales won the major Ciudad Segura urban secu-rity contract in Mexico City. however, order intake showed a sharp downturn in areas directly affected by the economic environment, with a decrease of up to 25% in industry and services (critical information systems, special components) and exceeding 50% in simulation.

at 31 December 2009, the consolidated order book stood at €24,731m, or approximately 23 months of revenues (compared with 22 months at end-2008).



EBIT (€ million) 2009 2008 Total change Organic change

Aerospace & Space (310) 207 -250% -261%

Defence 544 540 +1% +3%

Security (11) 157 -107% -112%

Others and divested businesses (73) (27) ns ns

EBIT 151 877 -83% -84%

2. RESULTS

2.1. eBit

EBIT stood at €151m and represented 1.2% of revenues, compared with 6.9% in 2008, as the strong performance of the Defence segment failed to offset significant difficulties in the aerospace and security segments.

Restructuring costs amounted to €116m, the equivalent of 0.9% of revenues, compared with €33m (0.3% of revenues) in 2008.

a. EBIT by segment

Aerospace & Space

The aerospace & space segment recorded eBIT of -€310m, compared with a positive figure of €207m in 2008.

In addition to further deterioration in the civil aerospace mar-ket, with a reduction in airline business, further delays on the B787 programme and a marked increase in restructuring costs (€43m compared with €10m), several unfavourable factors eroded the eBIT of the aerospace businesses, which amounted to -€389m (compared with a positive fig-ure of €127m in 2008):

• cost overruns on several avionics software developments, which were charged as expenses,

• an increase in estimated costs at completion for a naval electronic warfare programme,

• uncertainties concerning the outcome of discussions with the customer on the Meltem programme (maritime patrol and surveillance aircraft for Turkey), with the risk of further delays to delivery schedules as well as additional expenses 1,

• higher estimated development costs for the a400M flight management system, leading to a further exceptional charge of €102m from the first half of 2009 to account for the greater technical complexity of the solution and contingencies related to delays and general uncertainties on the programme In addi-tion, uncertainties about the outcome of discussions between the various stakeholders and about the future stability of the programme’s functional and financial parameters could have a significant positive or negative impact on the overall profit or loss on completion of this programme over the coming years 1.

The space businesses recorded eBIT of €79m, an or-ganic increase of 7%, but the earthquake that damaged the l’aquila facility in Italy in april 2009 had a negative impact on several programmes.

1. For more details about the a400M and Meltem programmes, see note 16 to the consolidated financial statements.




Defence

The Defence businesses again performed very satisfacto-rily, with eBIT amounting to €544m, representing 9.4% of revenues, a level close to that achieved in 2008. Continued good performance by the three divisions in this segment is attributable to further growth in activity, smooth programme delivery and effective control of indirect costs.

Security

The Security businesses recorded eBIT of -€11m, com-pared with a positive figure of €157m in 2008. This de-crease is due to two similarly significant factors:

• the global economic crisis and the impact of lower rev-enues (with the exception of rail transport) on profitability,

• continued difficulties on a number of programmes, particu-larly for ticketing solutions, where, despite ongoing correc-tive measures, the Group booked further and significant exceptional charges to ensure smooth contract delivery and completion also, in simulation, the development of the new product range generated cost overruns.

b. Components of EBIT

Despite the very satisfactory performance in the Defence segment, negative variances on a number of programmes, particularly in aerospace, significantly reduced gross mar-gin, which contracted to 17.6% of revenues, compared with 21.4% in 2008.

Research and development (R&D) investment was maintained at close to 20% of revenues: total expenditure reached ap-proximately €2,500m in 2009, compared with €2,400m in 2008. self-funded R&D stood at €664m, or around one-quarter of total expenditure. This breaks down into €113m capitalised under Ias 38 and €551m charged as an expense. Capitalised R&D was lower than the previous year, particularly in aerospace. In addition, Thales decided at the end of 2009 to introduce stricter criteria for recognising research and de-velopment expenses as assets (higher internal rate of return required and more stringent evaluation of project feasibility).

2.2. other results

as part of its systematic review of the value of assets on the balance sheet, the Group recorded €240m of impairment charges on capitalised development costs, almost en-tirely for aerospace-related businesses. The fall in value has no impact on cash flows and is attributable to a combina-tion of unfavourable factors (crisis in the air transport sector leading to a sharp fall in expected business volumes, the persistently weak dollar, development cost overruns and new aircraft programme delays) affecting the business plans of the programmes concerned 1.

Net financial expense amounted to -€111m, which is a higher expense than in 2008, due in particular to the cost of hedging strategies in persistently volatile foreign exchange markets and expenses related to the bond issues conducted early in the year to secure the company’s liquidity. The other components of pension charges amounted to -€105m, compared with -€11m in 2008, as a result of a significant reduction in investment income forecasts and certain non-recurring costs, whereas this figure at 31 December 2008 still included part of the exceptional impact of the pension scheme renegotiations concluded in 2007 and 2008. In-come of equity affiliates amounted to €56m, compared with €66m in 2008.

2.3. net inCome

Net income, Group share, for 2009 stood at -€128m (compared with a positive figure of €650m in 2008), after an income tax expense of €142m compared with -€145m in 2008.

3. FINANCIAL SITUATION AT 31 DECEMBER 2009

In 2009, free operating cash flow 2 stood at €800m, a very significant improvement over 2008 (€377m). This improvement is the result of significant cash inflows from customers at the end of the year and unrelenting efforts to manage working capital requirements throughout the year.

1. For more details, see note 6 to the consolidated financial statements.2. Operating cash flow plus changes in working capital requirement (WCR) and reserves for contingencies less payment of pension benefits (excluding deficit payments on pensions

in the UK, considered as payments of a financial nature) less tax less net operating investments.



summarised statement of Cash flows

(€ million)2009 2008

Operating cash flow 485 1,135

Change in WCR and contingency reserves 925 (44)

Payment of pension benefits and scheme settlements (99) (111)

Income tax paid (98) (80)

Net operating cash flow 1,213 900

Net operating investments (413) (523)

of which capitalised R&D (113) (129)

Free operating cash flow 800 377

Net (acquisitions) / disposals (148) (84)

Deficit payments on pensions in the UK (58) (79)

Dividends (205) (195)

Net cash flow 389 19

Operating cash flow was substantially lower at €485m com-pared with €1,135m in 2008. however, a favourable trend in working capital requirements (after provisions) and lower investments enabled the Group to reach an excellent level of Free operating cash flow. after recognising an earn-out pay-ment of €130m to alcatel-lucent for the space businesses acquired in 2007, and a payment of €58m towards the un-funded status of pension obligations in the United Kingdom, net cash flow stood at €389m.

Given this level of net cash flow, net debt at 31 December 2009 was significantly lower than a year before, at €91m 1, compared with €456m at end-2008. Shareholders’ eq-uity (excluding minority interests) amounted to €3,744m, compared with €3,949m at end-2008. Thales has access to confirmed, undrawn bank credit lines for an amount of €1,500m, maturing at end-2011, with no prepayment provi-sions linked to ratings or financial covenants. standard & Poor’s and Moody’s also recently confirmed Thales’s long-term rating of a- /a1.

4. PROPOSED DIvIDEND

In view of the loss reported for the 2009 financial year and the business outlook in the Group’s main markets, which have led to the launch of an ambitious performance improvement plan, the Board of Directors will propose that the General Meeting of shareholders of 20 May 2010 approve a reduced divi-

dend of €0.50 per share. If approved, the dividend will be paid on 31 May 2010 (ex-dividend day: 26 May 2010).

5. vIEwS FOR 2010

For 2010, Thales expects revenues to remain stable, with the significant volume of new orders recorded over the last two years from institutional customers (government and in-frastructure operators) offsetting the unfavourable impact of the economic climate and the crisis in the air transport sector.

Growing pressure on budgets in Thales’s main domestic markets could lead to lower order intake in 2010 and a book-to-bill ratio substantially lower than 1.

While the 2009 financial year was marked by considerable difficulties on a number of complex programmes, Thales has taken substantive measures to incrementally improve eBIT margin, including the launch of the Probasis plan, which is expected to generate €1.3bn in full-year savings in 2014. against this backdrop, Thales expects to achieve an eBIT margin of between 3% and 4% in 2010, taking into account a persistently unfavourable situation in the air transport sec-tor and certain other civil businesses, restructuring costs as high as 1.5% of revenues, lower capitalisation of research and development expenses and the dilutive effect on eBIT of the provisions on contracts booked in 2009.

1. a detailed breakdown of gross financial debt is given in note 24 to the consolidated financial statements.

17

>> �Risk factors


Consolidated financial statementsParent company management report and financial statementsManagement report

B. RISK FACTORS

Thales is exposed to a number of risks and uncertainties that could have a significant effect on its business activity, finan-cial position or results. The risks described below are not the only ones that Thales faces. Other risks of which Thales is not aware, or which are not believed to be significant at this time, could also have an unfavourable impact on the com-pany’s revenues, profitability or financial position.

as a general rule, some of these risks are external in nature (relating for example to developments in financial markets or the political environment) whereas others are internal in nature (relating to programme management or compliance with legal or regulatory frameworks, etc.).

1. FINANCIAL RISKS

1.1. liquidity

Thales’s liquidity risk corresponds to its level of exposure to changes in the main market indicators that could lead to an increase in the cost of credit or even to a temporary limita-tion of access to external sources of financing.

Thales manages this risk by anticipating its liquidity require-ments and by maintaining committed, undrawn credit facili-ties granted by banks as backup for the commercial paper programme and representing, as such, a financing reserve.

This risk is hedged by Thales’s short- and long-term financial resources:

• shareholders’ equity, listed by heading in Note 20 to the consolidated financial statements,

• gross debt, listed by date of maturity in Note 24 to the consolidated financial statements,

• committed, undrawn credit facilities granted by banks as backup for the commercial paper programme and repre-senting, as such, a financing reserve (the characteristics of these facilities are presented in Note 24 to the consoli-dated financial statements).

This principle of consolidating and centralising the short-term surpluses and requirements of units (cash pooling) is

applied to units in the same currency zone – euro zone (with separate cash pooling for French units), sterling zone, dollar zone and australian dollar zone, etc. – and, in some cases, in the same country.

Through the consolidation and centralisation of cash require-ments and surpluses of its units, the Group is in a position to:

• simplify cash management and match the cash positions of units to produce a single consolidated position that is easier to manage,

• gain prime access to financial markets through the par-ent company’s financing programmes, rated by standard & Poor’s and Moody’s (see below).

at 31 December 2009, cash recorded under consolidated assets amounted to €1,960m (compared with €1,500m at end-2008), including:

• €1,401m held by the parent company and available for immediate use,

• €357m in the bank credit balances of subsidiaries, most of them outside France (this figure includes payments re-ceived in the last few days of the financial year and sub-sequently transferred to the corporate treasury account),

• €202m in cash invested directly by joint ventures (pro-rated by Thales’s interest in each joint venture), since cash pooling is not applicable to joint ventures.

Cash at bank and equivalents at year-end is solely invested in either bank deposits or in very short-term bank certificates of deposit with first-tier banks, and is therefore not sub-ject to mark-to-market valuation. at the date of publication, Thales’s credit risk ratings were as follows:

Moody’s Standard & Poor’s

Medium- & long-term loans A1 A-

Outlook Outlook stable Outlook stable

Commercial paper & short-term loans Prime-1 A2



Thales’s ratings remained unchanged in 2009.

a decrease of Thales’s credit risk ratings would have no im-pact on the terms and conditions of committed financings, since they are not linked to financial covenants included in fi-nancing contracts. Pursuant to the credit facility documents, clauses providing for accelerated repayment would only apply in the event that the state no longer held its golden share and, simultaneously, the ratio of consolidated net financial debt to eBITDa (earnings before interest, taxes, deprecia-tion and amortisation) were to exceed 3.

1.2. interest rates

Thales is exposed to interest rate volatility and in particular its impact on the conditions associated with variable-rate financing. To limit this risk, Thales operates an active policy of interest rate hedging.

1.3. foreign exChange rates

Due to the globalised nature of its business activities, Thales is exposed to the risk of exchange rate fluctuations.

1.3.1. Business-related currency risk

Business-related currency risk occurs when some business is billed in a currency other than that of the costs incurred.

a. as a general rule, Thales is structurally immune to ex-change rate fluctuations for a significant part of its business activity. almost half of Thales’s revenues are generated in the euro zone, which is also where the larg-est proportion of its industrial operations are located. In addition, Thales’s international development policy, both in europe and in other regions of the world (the United states, australia, south Korea, south africa, etc.), has

The Corporate Financing & Treasury department con-solidates data on Thales’s exposure to interest rate risk and uses the appropriate financial instruments to hedge those risks.

Thales policy is to control interest rate and counterparty risks and to optimise its funding and banking operations by consolidating and pooling the cash surpluses and require-ments of all its units.

The breakdown of Thales’s debt by type of interest rate is de-scribed in Note 24 to the consolidated financial statements. The table below summarises the company’s exposure to in-terest rate risk before and after hedging.

Based on the average debt for 2009, a 1% rise in interest rates would increase financial expense by €3 million.

the added advantage of allowing the company to manu-facture and bill in local currency, thereby eliminating ex-change rate risk.

b. The accounts of Thales subsidiaries located in countries with functional currencies other than the euro are trans-lated into euros in the company’s consolidated accounts. The fall in the value of these currencies against the euro is likely to have a negative impact on accounts. Its impact on profitability is limited, however, since the cost base of these subsidiaries is essentially in the same currency as their revenues.

c. For some of Thales’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 United states and is therefore largely immune to this risk), a specific exchange risk hedging policy is implemented.

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

fixed variable fixed variable fixed variable fixed variable

Financial liabilities -69.6 -453.6 -1,502.4 -38.6 -59.5 -26.4 -1,631.5 -518.6

Financial assets 2,059.3 2,059.3

Net position before hedging -69.6 1,605.7 -1,502.4 -38.6 -59.5 -26.4 -1,631.5 1,540.7

Off-balance-sheet -1.4 1.4 758.2 -758.2 -21.2 21.2 735.6 -735.6

Net position after hedging -71.0 1,607.1 -744.2 -796.8 -80.7 -5.2 -895.9 805.1

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>> �Risk factors



• For equipment transactions (avionics, tubes), this policy is defined on the basis of sales forecasts in UsD, after accounting for corresponding purchases in UsD. For these transactions, net exposure to dollar risk repre-sents around 3% of total revenues.

• For longer-term programmes in markets traditionally denominated in UsD (primarily in civil space and simula-tors), each bid or proposal is examined for profitability in the light of the effect of currency fluctuations, after accounting for corresponding purchases in UsD, and, if necessary, is hedged either through market transac-tions (forward exchange-rate contracts and options) or by reinsurance with private insurance companies, in particular Coface.a similar approach is applied when necessary in any other market segment if a customer requires a contract denominated in UsD.Overall, net exposure for these programmes at end-2009 represented around 3.5% of total revenues.

• as well as this direct dollar risk, which concerned around 6.5% of consolidated revenues in total at end-2009, Thales is also exposed to indirect dollar risk, on some contracts denominated in currencies other than the dollar. This occurs when the company is bid-ding against companies that benefit from a cost base in dollars. analysis by product lines and geographic areas shows that an estimated 15% to 20% of total revenues may be exposed to this indirect dollar risk.

Dollar risk is thus the main currency risk that Thales needs to hedge. The figures corresponding to the hedging of busi-ness-related dollar risk are as follows:

• Us$2,140m to hedge net firm commitments (UsD risk against eUR, CaD and GBP) at 31 December 2009, com-pared with Us$2,158m at 31 December 2008,

• Us$299m to hedge bids and proposals at 31 December 2009, compared with Us$1,480m at 31 December 2008.

Operating receivables and payables denominated in foreign currencies are covered by exchange rate hedges and are not therefore exposed to foreign currency risk.

The change in value of financial instruments used as cash flow hedges is recognised in shareholders’ equity. a de-crease (respectively, an increase) of 5% in the rate of the dollar against the main currencies (eUR, GBP and CaD) would positively (respectively, negatively) impact sharehold-ers’ equity by approximately €70m at 31 December 2009, compared with €95m at 31 December 2008.

The change in value of the financial instruments, matched with portfolios of sales offers, which are not eligible for hedge accounting, is recognised in profit and loss. a decrease (respectively, an increase) of 5% in the rate of the dollar against the main currencies (eUR, GBP and CaD) would positively (respectively, negatively) impact profit and loss by approximately €2m at 31 December 2009, compared with €9m at 31 December 2008.

Foreign currency-denominated financial debt does not gener-ate any exposure in profit and loss, as it is either denomi-nated in the functional currency of the entity in which it is recognised, or is used as a net foreign investment hedge.

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

Thales hedges a limited part of its foreign currency-denomi-nated 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 structure of Thales’s commitment with respect to joint-

ly 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 application 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 business of the correspond-ing subsidiaries.

GBP USD AUD

Assets 2,512.0 965.3 721.1

Liabilities 1,663.1 449.7 401.4

Net position before hedging 848.9 515.6 319.7

Off-balance-sheet - 37.0

Net position after hedging 811.9 515.6 319.7

Summary of risks relating to foreign currency-denominated assets at 31 December 2009 (in €m)



1.4. stoCk market risk

Thales is not exposed to any significant stock market risk at end-2009.

1.5. off-BalanCe-sheet Commitments

1.5.1. Pension commitments

Defined-benefit pension schemes are in place for certain Thales employees, mainly in the United Kingdom and the Netherlands, and are externally funded by the company un-der the provisions of the applicable national legislation.

New employees in the United Kingdom no longer have access to these pension plans. however, obligations with respect to current, former and retired Thales employees in these two countries stood at €2,860.8m at 31 December 2009, of which €2,447.1m was covered by plan assets. This rep-resents an unfunded status of €413.7m. at 31 December 2009, plan assets were invested as follows:• 40.6% in equities,• 42.2% in fixed-rate bonds,• 2% in property,• 9.1% in inflation-indexed funds,• 0.2% in cash,• 5.9% in alternative funds.

Changing market parameters can affect the unfunded status and the annual costs of defined-benefit plans. In order of importance, at 31 December 2009, the main variables are as follows:

• a reduction or increase in the discount rate applied to li-abilities, which can increase or reduce the unfunded sta-tus; this variable is partly offset by changes in the value of fixed-rate bonds held as plan assets and interest rate swap transactions,

• changes in the total return on investments held in equities and property,

• changes in the forecast inflation rate,• a substantial change in mortality tables,• exchange rate fluctuations (mainly the pound sterling

against the euro).

Thales 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 incorporat-ing correlation factors. In countries like the United Kingdom and the Netherlands, Thales is committed to defined-benefit pension schemes, but plan assets are managed by trustees, in accordance with applicable regulations and in consultation with the company. Plan assets are allocated with regard to the long-term nature of the commitments they cover.

1.5.2. Parent company guarantees

Thales, as the parent company, issues guarantees on com-mitments undertaken by its subsidiaries on commercial con-tracts. These guarantees are centralised by the Corporate Financing & Treasury department.

Guarantees are limited to an overall amount of €3bn 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 & Treasury depart-ment, before the authority is renewed.

at 31 December 2009, guarantees issued by the parent company in support of its subsidiaries stood at €8,771m. This figure includes all commitments in relation to Thales ale-nia space (matched by a counter-guarantee from Finmeccani-ca in proportion to its 33% interest in Thales alenia space).

Thales manages risk connected to these parent company guarantees and optimises the financial conditions of the transactions guaranteed. The main objectives of this risk management policy are as follows:

• to limit risks to those corresponding to normal commit-ments on commercial contracts in terms of volume and duration,

• to guarantee commitments made by wholly owned subsidi-aries 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 monitor-ing the financial conditions of the operations guaranteed.

1.6. Customer Credit

Credit risk relates to the risk that a party to a contract will default on its commitments or fail to pay what it owes.

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>> �Risk factors



1.6.1. Risk relating to failure of a private-sector customer

Civil customers (business and industry, civil aerospace and private infrastructure operators) account for approximately 25% of Thales’s revenues. These customers may encounter major and/or prolonged financial difficulties that could lead to payment defaults or order cancellations. such occurrences could have a negative impact on Thales’s revenues, profit-ability and financial position.

To mitigate these risks, Thales conducts regular analysis of the ability of customers to meet their obligations. When nec-essary, Thales may request bank guarantees or corporate guarantees, or may alternatively use credit insurers.

1.6.2. Credit risk relating to public-sector customers

Government and institutional customers account for around 75% of Thales’s revenues. Thales works with a large number of countries. some of these could present a significant credit risk, particularly the emerging nations. a country could, for example, suspend an order in production, or be unable to make payment on delivery, as agreed under the terms of the contract. To limit its exposure to these risks, Thales can take out insurance with export credit agencies (such as Coface in France) or private insurers.

at 31 December 2009, only two customers accounted for an-nual revenues in excess of €500m: the French government (approx. €2bn) and the UK government (approx. €1bn). at that date, both states were rated aaa by standard & Poor’s.

2. LEGAL RISKS

2.1. ComplianCe with legislation and regulations

Many of Thales’s business activities, particularly in the de-fence, security and space sectors, are exercised in a com-plex and stringent legal and regulatory environment, which is constantly evolving both at national and international level.

The legal and regulatory framework in which Thales operates covers a broad range of areas, relating in particular to com-pany law, labour law, export control and measures to combat corruption and money laundering.

Thales monitors developments within this legal and regulato-ry framework through its international network. The company is not always able to anticipate them in advance, however, and in this respect its business activities can be affected.

Despite the steps taken by Thales as a company to comply with all applicable legislation, risks nonetheless exist due to their inherent nature, the interpretative powers of regulatory agents and changes in legal/judicial precedent and sanction-ing powers.

In most cases, regulators in conjunction with the judicial au-thorities have the right to pursue legal proceedings, which could lead to civil, administrative or even criminal rulings. such a ruling could, if applicable, involve a temporary order to cease activity, which would in turn have an adverse impact on Thales’s profitability and financial position.

To manage this complexity, Thales has set up a Risks & In-ternal Control Committee, which uses legal and regulatory risk-mapping to evaluate and monitor the implementation and continuous improvement of compliance action plans at each unit. actions to ensure compliance are supported by networks of compliance officers, which include specialists in such areas as export control, as well as a dedicated organisation for is-sues connected with international trade (see below).

The Risks & Internal Control Committee assists with regular controls in the area of compliance, conducted by the Internal au-dit Department, and monitors the conclusions of these controls.

Regular reports are submitted to the audit and accounts Committee of the Thales Board of Directors, which may in turn issue compliance control directives applicable to the or-ganisation as a whole.

2.1.1. Management of commercial activities

Due to its many geographic operations and the diversity of its markets and sectors of activity, Thales is subject to a broad array of national and international laws and regulations governing commercial activities (OeCD Convention and its national implementation laws, Foreign Corrupt Practices act in the United states, etc.).

Infringement of these laws can lead to severe legal conse-quences for the individuals or entities concerned. It can also have a serious impact on the image and reputation of the company as a whole.



Thales had a specific organisation in place for many years and has developed a cohesive set of directives, which are written into the company’s reference system, as well as in-dependent monitoring and control procedures.

In support of this organisation, Thales attaches particular importance to employee awareness and the provision of rel-evant training for new employees, including specific training for those who will be directly involved with these issues in their line of work. Three e-learning modules were launched in 2009 to raise awareness of ethics-related issues and en-sure that all employees understand the Thales ethical com-pliance system and how it works.

In addition, Thales strictly controls its use of business ad-visors or service providers through a detailed procedure, which includes comprehensive due diligence checks as well as appropriate representations and commitments from such advisors or providers.

Thales also continues to disseminate and promote best practices among its suppliers and subcontractors, and re-quires them in particular to subscribe to the terms of its Purchasing & Corporate Responsibility Charter. This initia-tive was commended by the United Nations in the UN Global Compact 2008 annual Review. Thales formally renewed its commitment to the Global Compact in 2009.

Finally, Thales is closely involved in the relevant professional bodies at national level (MeDeF, BeRR, aIa, etc.) and inter-national level (asD, ICC, etc.) as well as in various working groups of intergovernmental organisations (OeCD, etc.). The company actively contributes in various ways to efforts to prevent corruption, in particular through the transatlantic initiative in the aerospace and defence sector to establish and ratify the Global Principles of Business ethics.

2.1.2. Export control

exports account for a significant proportion of Thales’s busi-ness. Many of the company’s products and systems are de-signed for military or dual-use applications. Consequently, the export of these products or systems to customers locat-ed outside Thales’s domestic markets where they are manu-factured, particularly in the defence sector, may be subject to limitations, export licences or specific export controls (im-posed by the countries in which Thales operates as well as by other countries where the suppliers of component products or technologies are based, most notably the United states).

There are no guarantees that (i) the export controls to which Thales is subject will not be tightened, (ii) subsequent gen-erations of Thales products or systems will not be subject to similar or more rigorous controls, and (iii) geopolitical fac-tors will not make it impossible to obtain export licences for certain customers or make it more difficult for Thales to execute previously signed contracts. Further limitations on access to military markets would thus have a negative im-pact on Thales’s revenues, profitability and financial position.

Thales has put in place systems and formal procedures to ensure compliance with applicable regulations and controls, and reinforces these measures through information and awareness programmes. In addition, operating units have access to a network of specialists who provide assistance with the application of compliance rules determined at Group level as well as with the necessary authorisations.

2.1.3. Competition

Thales’s business activities are subject to a wide range of national and international regulations to combat anti-com-petitive practice.

Infringement of these rules can lead to severe sanctions, such as fines, payment of damages, sales restrictions and legally binding prohibitions. They can also have a serious im-pact on corporate image and reputation.

To avoid any such infringements, Thales has initiated an infor-mation and awareness programme to ensure employees are properly informed about these rules, in particular through the rollout of a dedicated e-learning programme.

2.1.4. Intellectual property

Thales is exposed to two main types of intellectual property risks: dependence on third-party technologies, and third-party actions against the company for alleged infringement of their intellectual property rights.

To reduce the risk of reliance on third-party technologies, Thales has designed and implemented an ambitious policy to control critical technologies and outsourcing. This policy is updated each year.

Given the nature of its activities and the specific features of its products, Thales conducts most of its research and develop-

23

>> �Risk factors



ment work in-house and controls the technologies that are criti-cally important to its businesses. Thales’s extensive intellectual property portfolio (14,000 patents, as well as software and know-how) and its position throughout the value chain (equip-ment, systems, systems of systems) reduce reliance on third-party technology licenses. as a result, Thales’s dependence on licences granted by third parties can be considered as very low.

To reduce the risk of third-party actions for alleged infringe-ment of intellectual property rights by Thales entities, the company identifies and analyses its risks of technological de-pendence on third-party patents, as part of the procedures for filing its own patents and/or when launching technical studies or product developments.

In the event of a third-party infringement claim against a Thales company, the legal and technical analysis of the prod-ucts concerned and associated intellectual property rights is conducted centrally by Thales experts, with the assistance of specialist external consultants where needed.

2.2. litigation

Due to the nature of its business activities, Thales is ex-posed to the risk of technical and commercial litigation.

To prevent disputes or limit their impact, Thales policy is to increase recourse to alternative methods of dispute resolu-tion. These recommendations are reviewed on a regular ba-sis to take account of changes in the company’s core areas of business and are backed by training programmes.

In addition, Thales implemented a procedure several years ago to centralise all civil, commercial and criminal litigation and claims. These are handled by the Group legal depart-ment, with the support of the divisions concerned.

The request for arbitration submitted by the Republic of China Navy (Taiwan) for an amount of Us$599m in damages, arising out of the execution of a contract, signed in 1991, for the supply of equipment and systems in conjunction with an industrial partner, continued in 2009 and the arbitration Panel declared the arbitration procedure complete on 10 No-vember 2009. at the date of publication of the present docu-ment, no award had been handed down. Thales considers that an award could be handed down in the first half of 2010.

In June 2005, the adverse party, in the context of this proce-dure, increased its request to Us$1,119m, to which inter-

est for late payment would be added. It reduced its request to Us$882m in april 2006 (interest for late payment ex-cluded). If an unfavourable award 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 con-stantly opposed this request.

On the basis of the information at its disposal at the end of 2009, Thales has carried out a review of the financial risks to which the company could be exposed as a result of this proce-dure. In the absence of any new significant information, Thales has, in consequence, decided to maintain at 31 December 2009 a reserve for this litigation identical to that recognised in its 2008 financial statements. In application of paragraph 92 of Ias 37, no detailed disclosure is provided for this amount.

No other governmental, legal or arbitration proceedings (in-cluding any such proceedings which are pending or threat-ened of which the company is aware) have had significant effects on the company and/or group’s financial position or profitability in the last 12 months.

3. RISKS RELATING TO THALES ACTIvITIES

3.1. unfavouraBle trends in the Civil aerospaCe market

The commercial aviation market has proved to be inherently cyclical over recent decades. air transport demand appears to correlate closely with general economic trends, but is also subject to certain specific factors, such as the character-istics of aircraft fleets in service, regulatory developments (new environmental standards, deregulation, etc.) and the ability of airlines to access bank or market financing. In addi-tion to its cyclical nature, however, the commercial aviation market is also susceptible to the effects of an intensification (real or perceived) of terrorist activity as well as the out-break of armed conflicts or epidemics.

The difficult economic conditions, particularly in North amer-ica and europe, may persist in 2010. To maintain liquidity in this unfavourable market environment, combined with limited access to financing, airlines may be forced to cancel or de-fer orders, which would lead aircraft manufacturers to scale



down production rates. This in turn could have a negative impact on Thales’s profitability and financial position.

To limit the impact of this risk, Thales is pursuing action on two fronts: (i) continuous improvement of its competitive performance and industrial flexibility in order to better man-age variations in the level of business over the course of the cycle, and (ii) a comprehensive strategy to achieve a more closely balanced portfolio of businesses (with exposure to the civil aviation market reduced to around 10% of revenues).

3.2. programme management

a major proportion of Thales products and systems present a significant degree of complexity, due to their high technology content, the harsh environments in which they operate, which demand a high level of reliability, and also because of the con-tractual arrangements involved in the sale of these products and systems (comprehensive prime contractorships for large-scale systems, public-private partnerships and equivalents, etc.).

The actual cost of design, development and manufacture may therefore exceed initial cost estimates, which in turn may adversely impact Thales’s results and financial position, es-pecially considering that the associated contracts are gener-ally based on a fixed selling price. In addition, many contracts include demanding performance and/or delivery schedule provisions. If Thales is not in a position to deliver the prod-ucts or systems in line with the contractual performance and/or schedule provisions, customers can demand penalty payments or even decide to terminate the contract. These lines of action can have a considerable impact on Thales’s results and financial position.

In 2009, Thales booked significant exceptional expenses re-lated to difficulties in the execution of several aerospace pro-grammes (a400M, Meltem maritime patrol aircraft and civil avionics most notably) and security programmes (ticketing, simulation). although Thales believes that the cost and rev-enue estimates included in the financial statements are a fair reflection of the Group’s current situation, the complexity of the programmes and uncertainties surrounding the outcome of discussions that are currently ongoing could have a signifi-cant positive or negative impact on the overall profit or loss on completion of these programmes over the coming years (see Note 16 to the consolidated financial statements).

Bid and programme management is therefore subject to a detailed risk management and assessment process.

since bids include technical, schedule and cost performance commitments, contractual risk assessment is part of the bid preparation procedure. Depending on the complexity of the bid, this procedure comprises a number of steps to progressively specify the expected level of profitability and evaluate associ-ated risk. The authorisation to validate the bid prior to submis-sion to the customer is determined on the basis of criteria re-lating to project scale, profitability, cash requirement and risk.

Particular attention is paid to long-term sales contracts that include fixed prices valid for the duration of the agreement.

Certain contracts can run for several years and involve prod-ucts and services with a high degree of complexity. Conse-quently, regular reviews are organised in order to monitor technical and financial status. Risk reviews are conducted at the same time and serve as the basis, when necessary, for the booking of the management reserves. These are subse-quently included in the calculation of programme margins for the company’s financial statements.

Given the difficulties encountered on several programmes, Thales stepped up in 2009 the action plan initiated in late 2008 to drive improvements in bid and programme manage-ment as well as in engineering and the supply chain.

actions aim in particular to:

• ensure tighter control of commitments at the bid phase, which are the cause of many subsequent difficulties, par-ticularly if technical complexity and associated develop-ment costs and risks are underestimated. Measures in-clude systematic recourse to independent peer reviews as well as bid reviews to justify technical choices and associ-ated risks, closer involvement of the purchasing, produc-tion, legal and quality assurance functions, combined with a transition review prior to programme launch in order to implement risk reduction plans,

• implement proven practices in programme management and integrate the supply chain more closely with programme management processes. Measures include more system-atic implementation of alert reviews at launch, indicators to monitor the correct application of procedures in pro-gramme management, engineering and purchasing, rapid deployment of the Primavera programme management tool and increased training, with the objective of joint accredita-tion with the International Project Management association.

In addition, critical bids and programmes are subject to more stringent review at corporate level.

25

>> �Risk factors



3.3. politiCal unCertainties

Thales generates a significant proportion of its revenues in emerging markets and countries that can be politically or economically unstable. These markets can therefore present risks, with the potential to adversely affect the company’s profitability and financial position.

In particular, a change of government, major political event, armed conflict, act of terrorism, social movement, strike or protest could lead to various types of risks. These include:

• more restrictive currency controls, with limitations or ex-clusions on the transfer of currency from a client country, preventing it from honouring its financial commitments with respect to Thales,

• expropriation (by confiscation, nationalisation, requisition, etc.) or forced sale of Thales’s interest in a local company, or discriminatory measures more broadly that compro-mise Thales’s operations in that country,

• a security situation that makes it difficult or impossible for Thales to deliver on its contractual obligations, or that re-stricts or prohibits the use of its local industrial facilities,

• an unexpected breach of a contract or commitment,• a unfair call on a bond or a guarantee,• the non-certification of documents eligible for payment or

the failure to make payments as and when due under a contract, preventing contract execution as anticipated.

To limit the financial impact of these risks, Thales uses gov-ernment and/or private-sector insurers when necessary to provide the appropriate cover. It may also transfer non-re-course receivables to financial institutions.

3.4. relianCe on puBliC spending

Thales conducts most of its business with government cus-tomers, particularly in its defence markets and in France (around 25% of total revenues) and the United Kingdom. In these markets, public spending is dependent on politi-cal and economic factors and is therefore susceptible to fluctuations from one year to the next. a significant medi-um-term reduction in French or UK defence budgets, how-ever, particularly as part of a more restrictive budgetary policy, could adversely affect the company’s future business and revenues.

Thales bases its strategy on a balanced mix of businesses between defence (approx. 55% to 60% of revenues) and civil

(approx. 40% to 45% of revenues). The overall solidity of the company’s portfolio is underpinned by a diversified base of orders with a unit value of less than €100m. In addition, the broad geographic spread of Thales’s business activities, par-ticularly through its international operations, ensures further diversification of its customer base.

3.5. management of supplier risk

With a business model based on both equipment and in-tegration of large systems, Thales’s activities incorporate a growing proportion of purchases in the industrial sector, technical and support services and equipment. Thales is therefore exposed to the risk of industrial, technical or finan-cial default by any one of its suppliers, which in turn could affect the company’s profitability and performance.

a key factor in competitiveness and innovation, Thales pur-chasing policy is backed by a risk management process, based on careful control of its supplier portfolio and individu-alized monitoring of critical suppliers.

Careful control of supplier portfolio

For many years, Thales has implemented measures through its divisions to streamline its supplier portfolio in order to bet-ter match the actual requirements of its units with the market offering while at the same time avoiding any overdependence.

In conjunction with a supplier relationship management proc-ess, this commitment to rationalisation has concentrated ef-forts to improve supply chain security on a limited number of target and strategic suppliers.

From initial selection and qualification through to recurrent use of each supplier, Thales identifies and maps all types of associated risks (industrial, financial, etc.). This information is shared with all personnel involved in the sourcing/purchas-ing process.

Individualised monitoring of critical suppliers

In addition to risk mapping, suppliers are regularly audited and evaluated with the assistance of operational specialists, in terms of their level of operational performance (punctu-ality, compliance, etc.), technical performance, quality as-surance processes and sensitivity to the external environ-



ment (export regulations, environmental standards, financial health, etc.).

In particular, financial risks that could lead to cash or invest-ment constraints or even the disappearance of a company or its takeover by investors with different interests to Thales, are regularly monitored.

Given the increased risk that the position of certain sup-pliers may be weakened in the current economic climate, Thales has introduced a specific measure in conjunction with its purchasing and finance functions in order to identify any critical suppliers that are particularly exposed to the crisis, define appropriate actions and, when necessary, monitor the progress of those actions.

In addition to this initial and recurrent monitoring, Thales also implements strategies to secure the supply chain through regularly maintained dual sources or alternative sources as well as safety stock plans to cover requirements through to completion of contracts in progress.

These various purchasing policy and risk management ac-tions also contribute to risk reduction at the bid preparation phase as well as throughout programme execution.

3.6. raw-materials risk

Given the nature of its activities, Thales uses few raw materi-als. Its exposure to raw-materials risk is therefore negligible.

4. ENvIRONMENTAL RISK

Due to the nature of Thales’s activities, environmental risks are related to potential adverse environmental and health effects of these activities, impact of the environment on its operations and non-compliance with new regulations applica-ble to products.

For many years, Thales has conducted regular analysis and update of environmental risks in accordance with its busi-ness activities, scientific and technical developments and the broader environmental challenges.

This analysis is used to produce a risks mapping, linked pri-marily to regulatory non-compliance, pollution, asbestos, substances (ROhs, ReaCh, Weee, etc.) and radiation. The aim of this exercise is to:

• ensure that employees and surrounding residents are not exposed to health and environmental risks,

• ensure the compliance of activities and products,• analyze the impact of new regulations, including on product

design,• specify an appropriate organisation and associated action

plans, either at Group level or locally, according to the risk mapping results.

In addition to this risk mapping, an environmental manage-ment system has been deployed at all sites in order to en-sure the control and limitation of the environmental impacts in accordance with Thales’s commitments. By the end of 2009, over 90 sites had obtained IsO 14001 certification.

at 31 December 2009, the amount of reserves for environ-mental contingencies amounted to €6.5 million.

5. RISKS RELATING TO STRATEGIC ACQUISITIONS AND INvESTMENTS

Thales regularly undertakes operations to acquire new com-panies (as well as make strategic investments and combine business activities through joint ventures, etc.) in order to round out its technological portfolio and strengthen its presence in certain markets. Integrating these businesses within Thales can prove more difficult and take longer than envisaged, requiring a more significant involvement by senior managers and the teams concerned and, in turn, negatively impacting the company’s results and financial position.

In addition, there are no guarantees that the newly acquired companies will perform as well as expected in accordance with the initial business plans, which form the basis of the investment decision. This type of variance can lead to ac-counting for impairments arising on goodwill and other intan-gible assets, thereby negatively impacting Thales’s results and financial position.

Before any planned acquisitions, Thales conducts audits and due diligence evaluations, with the assistance of external consultants when necessary, in order to verify the situation of the target company as closely as possible. a review is also conducted at each important stage in the acquisition proc-ess to confirm Thales’s interest and specify the necessary conditions and parameters to ensure a successful conclu-sion. The newly acquired company is then integrated into Thales’s financial reporting system so that its performance can be monitored.

27

>> �Events since year-end



6. INSURANCE

Thales operates a policy to cover accidental risks – damage to property and civil liability – based on two main principles:

• for risks relating to damage to property and consequential business interruption, transport, general liability, assem-bly/testing and space, Thales is self insured by means of insurance and reinsurance captives for up to a maximum net undertaking of €13.5m,

• cover relating to major / catastrophic losses has been transferred to insurers.

an organisational structure and crisis-management tools are in place to deal as efficiently as possible with the im-mediate consequences of a catastrophic event and take the necessary emergency measures.

Resources are also provided to ensure business continuity in the event of a major disaster.

The programme to improve information system recovery plans was continued in 2009. The Internal audit Department continued its IT security audit plan at major Thales units. In addition, business continuity plans continued to be deployed throughout the year.

The main accident risks are covered by programmes with high-rated international insurance and reinsurance companies.

In 2009, total premiums paid for global cover (excluding spe-cific policies) amounted to 0.35% of consolidated revenues.

The maximum cover limit for damage to property and conse-quential business interruption was set at €1.3bn in 2009.

This amount is greater than the estimated largest loss Thales might incur for direct damage and business interrup-tion to an industrial site.

an active prevention and protection policy for industrial sites aims to reduce the extent and frequency of the Group’s expo-sure to accidental fire or explosion: in 2009, 80% of insured assets were audited for fire safety by an outside body.

levels of liability covers depend on the quantification of a reasonable claim expectancy for Thales, as identified by risk-mapping of the main business activities and at Group level, and on cover capacity available on the insurance market. The insurance cover for aviation liability exposure is provided by a separate programme, which stands at Us$2bn.

Thales has reported claims:

• to the aviation programme insurers, who cover, without de-ductible, the financial consequences of Thales aviation liabil-ity in connection with the air France aF447 accident. legal proceedings have been launched in the United states against the airline company, the aircraft manufacturer and associ-ated equipment suppliers, which include Thales avionics,

• to the property damage and consequential business inter-ruption insurers, in connection with the earthquake that seriously damaged Thales’s facilities in l’aquila, Italy.

The exclusions common to the whole insurance market (as-bestos, etc.) also apply to Thales.

In addition, Thales also subscribes to specific and/or local policies where necessary to comply with local regulations or meet particular requirements of specific activities or projects.

C. EvENTS SINCE YEAR-END

No event liable to modify Thales’ financial position has occurred since year-end.



APPENDIX TO MANAGEMENT REPORT

SUMMARY STATEMENT OF COMPANY SHARE TRANSACTIONS CARRIED OUT IN 2009 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)

Under article l.621-18-2 a of France’s Monetary and Financial Code, the members of the Board of Directors are subject to this disclosure requirement.

Pursuant to article l. 621-18-2 b of France’s Monetary and Financial Code, the Company has declared to the aMF (autorité des Marchés Financiers) that all members of the executive Committee are in the category of non-voting directors in respect of obliga-tions to declare share transactions.

Under article l. 621-18-2 c of France’s Monetary and Financial Code, connected persons are persons who have close personal ties, as defined in a decree by the Conseil d’etat, with those referred to in article l. 621-18-2 a and b, as explained above.

To the best of the company’s knowledge, the following disclosures have been made to the aMF for publication on its website (http://www.amf-france.org):

Purchases / subscriptions (a) Sales (b)

Name and position Number of shares

euros Number of shares

euros

L. VIGNERON / Chairman & Chief Executive Officer 500 17,865.00

Ch. EDELSTENNE / Director 500 17,000.00

Y. d’ESCATHA / Director 500 16,712.25

S. GENTILI / Director 500 16,005.00

P. MUTZ / Director 500 16,062.50

L. SEGALEN / Director 500 17,000.00

E. TRAPPIER / Director 500 17,037.50

A. DORRIAN / Executive Committee member 26,513 864,058.67 26,513 878,905.95

J-P. PERRIER / Executive Committee member 31,815 1,036,850.85 31,815 1,083,981.59

R. DEAKIN / Executive Committee member 12,000 394,590.00 12,000 408,120.00

J.-P. LEPEYTRE / Executive Committee member 40,606 1,116,649.54 40,606 1,423,363.47

R. SEZNEC / Executive Committee member 10,606 345,649.54 10,606 362,513.08

(a) share transactions in 2009 may include transactions made by related parties.(b) share transactions in 2009 may include transactions made by related parties.

29

Management reportConsolidated financial

statements

>> �Consolidated profit and loss account / Consolidated statements of comprehensive income


Parent company management report and financial statements

2. CONSOLIDATED FINANCIAL STATEMENTS

A. CONSOLIDATED PROFIT AND LOSS ACCOUNT

(€ million) Notes 2009 2008Revenues (note 5) 12,881.5 12,664.8Cost of sales (a) (10,633.4) (9,964.5)Research and development expenses (550.5) (440.2)Marketing and selling expenses (a) (901.9) (806.7)General and administrative expenses (543.4) (558.7)Restructuring costs (note 22) (116.1) (32.5)Amortisation of intangible assets recognised at fair value on business combination (note 12) (84.4) (109.8)

Income from operations / EBIT (note 5) 51.8 752.4Impairment of non current operating assets (note 6) (260.1) (69.1)Gain (loss) on disposal of assets and other (note 7) (1.0) 35.2Income of operating activities (209.3) 718.5Financial interest on gross debt (91.6) (101.4)Financial income from cash at bank and equivalents 26.0 49.6Cost of net financial debt (note 8) (65.6) (51.8)Other financial income (expense) (note 8) (44.9) (49.8)Other components of pension charge (note 21) (105.1) (11.1)Income tax (note 9) 175.3 (103.0)Share in net income (loss) of equity affiliates (note 13) 48.0 57.6Net income (loss) (201.6) 560.4Of which:Net income, Group share (201.8) 559.9Minority interests 0.2 0.5Basic earnings per share (in euros) (note 10) (1.03) 2.87Diluted earnings per share (in euros) (note 10) (1.03) 2.85

(a) since January 1, 2009, warranty costs, related to construction contracts or not, are included within cost of sales. They were previously included in selling expenses except when directly allocated to contracts.For a more accurate comparison, € (44.5) million in 2008 have been reclassified from selling expenses to cost of sales.

B. CONSOLIDATED STATEMENTS OF COMPREHENSIvE INCOME

(€ million) Notes 2009 2008

Group Share Minority interests

Group share Minority interests

Net income (loss) (201.8) 0.2 559.9 0.5Translation of the financial statements of foreign subsidiaries (note 20-e) 119.1 0.6 (263.3) (0.5)

Net foreign investments’ hedge (note 20-e) (3.8) -- 4.4 --Deferred tax 1.3 -- (1.5) --

116.6 0.6 (260.4) (0.5)Cash flow hedge (note 20-d) 70.8 -- (26.5) --Deferred tax (19.4) -- (3.2) --

51.4 -- (29.7) --Financial assets available for sale (note 20-d) 1.5 -- (0.5) --Deferred tax -- -- -- --

1.5 -- (0.5) --Total other comprehensive income (loss), net of tax 169.5 0.6 (290.6) (0.5)

Total comprehensive income (loss) for the period (32.3) 0.8 269.3 --



C. CONSOLIDATED BALANCE SHEET

ASSETS

(€ million) Notes 31/12/09 31/12/08

Goodwill, net (note 11) 2,986.9 2,793.2Other intangible assets, net (note 12) 925.3 1,129.3Tangible assets, net (note 12) 1,338.3 1,262.9Total non current operating assets 5,250.5 5,185.4Share in net assets of equity affiliates (note 13) 711.0 692.4Available-for-sale investments (note 14) 101.9 175.4Loans and other financial assets (note 14) 171.9 258.8Total non current financial assets 984.8 1,126.6Fair value of derivatives: interest rate risk management (note 24) 24.8 13.1Pension and other employee benefits (note 21) 66.0 44.0Deferred tax assets (note 9) 678.0 433.5Non current assets 7,004.1 6,802.6Inventories and work in progress (note 15) 2,210.8 2,227.4Construction contracts: assets (note 16) 2,243.2 2,400.6Advances to suppliers 342.4 548.2Accounts, notes and other current receivables (note 17) 3,934.8 4,064.1Fair value of derivatives: currency risk management 172.6 292.4Total current operating assets 8,903.8 9,532.7Current tax receivables 40.4 13.1Current accounts with affiliated companies (notes 19 et 24) 94.8 65.1Marketable securities (note 24) 4.4 22.4Cash at bank and equivalents (note 24) 1,960.1 1,499.8Total current financial assets 2,059.3 1,587.3Current assets 11,003.5 11,133.1Total assets 18,007.6 17,935.7

(€ million) Notes 31/12/09 31/12/08

Capital, paid-in surplus and other reserves 4,168.3 4,498.9Cumulative translation adjustment (283.2) (399.8)Treasury shares (141.5) (150.2)Shareholders’ equity (note 20) 3,743.6 3,948.9Minority interests 10.2 2.9Total shareholders’ equity and minority interests 3,753.8 3,951.8Financial debt: long-term (note 24) 1,651.6 761.3Pension and other employee benefits (note 21) 856.7 847.5Deferred tax liabilities (note 9) 258.6 268.6Non-current liabilities 2,766.9 1,877.4Advances received from customers on contracts 3,849.4 3,687.4Refundable grants 172.8 169.5Construction contracts: liabilities (note 16) 882.7 578.4Reserves for contingencies (note 22) 1,129.8 961.5Accounts, notes and other current payables (note 17) 4,736.0 5,045.9Fair value of derivatives: currency risk management 100.7 279.5Total current operating liabilities 10,871.4 10,722.2Current tax payables 92.2 88.9Financial debt: short- term (note 24) 326.4 1,136.3Current accounts with affiliated companies (notes 19 et 24) 196.9 159.1Total current financial liabilities 523.3 1,295.4Current liabilities 11,486.9 12,106.5Total liabilities and shareholders’ equity 18,007.6 17,935.7

LIABILITIES AND SHAREHOLDERS’ EQUITY

31

>> ��Consolidated balance sheet / Consolidated statement of cash flows



statementsParent company management report and financial statements

D. CONSOLIDATED STATEMENT OF CASH FLOwS


Net income (loss) (201.6) 560.4

Add (deduct):

Income tax expense (gain) (175.3) 103.0

Share in net (income) loss of equity affiliates (net of dividends received) (21.5) (29.6)

Depreciation and amortisation of tangible and intangible assets (note 12-b) 420.8 433.0

Provisions for pensions and other employee benefits (note 21) 162.6 70.9

Impairment of non current operating assets (note 6) 260.1 69.1

Gain (loss) on disposals of assets (note 7) 1.0 (35.2)

Net allowances to restructuring provisions (note 22) 12.1 (85.9)

Other items 26.6 49.4

Operating cash flows before working capital changes 484.8 1,135.1

Change in working capital requirements and in reserves for contingencies (a) 924.6 (44.5)

Payment of contributions / pension benefits (defined benefit plans): (note 21) (156.2) (189.7)

- deficit payment in the UK (57.6) (78.6)

- scheme settlements in the UK -- (38.1)

- future service cash (98.6) (73.0)

Income tax (paid) received (98.2) (80.1)

Net cash flows from operating activities - I - 1,155.0 820.8

Capital expenditure (note 26-a) (418.9) (534.6)

Proceeds from disposal of tangible and intangible assets 5.8 11.7

Net operating investments (413.1) (522.9)

Acquisitions (note 26-b) (148.0) (173.2)

Disposals (note 26-b) -- 89.1

Change in loans 4.1 (24.7)

Change in current accounts with affiliated companies (32.0) (6.8)

Decrease (increase) in marketable securities 24.0 (3.3)

Net financial investment (151.9) (118.9)

Net cash flows from investing activities - II - (565.0) (641.8)

Dividends paid (204.7) (195.3)

Increase (decrease) in shareholders’ equity and minority interests (note 26-c) 21.6 (44.5)

Increase in debt 1,125.2 412.8

Repayment of debt (1,103.9) (184.4)

Net cash flows from financing activities - III - (161.8) (11.4)

Effect of exchange rate variations - IV - 32.1 (131.9)

Total increase (decrease) in cash at banks and equivalents - I + II + IIIIV - 460.3 35.7

Cash at banks and equivalents at beginning of period 1,499.8 1,464.1

Cash at banks and equivalents at end of period (b) 1,960.1 1,499.8

(a) Including changes in proceeds from sale of government non-recourse receivables (-€50.1 million in 2009 and -€24.2 million in 2008). The amount of transferred receivable, including notably mature receivables bearing interest on overdue payments, amounted to €155.9 million at 31 December 2009, (€206.0 million in 2008 – see note 1-u).

(b) Bank overdrafts are presented in the cash flow from financing activities as they represent a financing mean for the involved units.

Financial interest paid was €82.2 million in 2009 (€107.4 million in 2008). Financial interest received was €32.5 million in 2009 (€48.0 million in 2008).



Number of shares outstand-ing (thou-

sands)

Share capital

Paid-in surplus

Retained earnings

Cash flow

hedge

AFS invest-ments

Cumula-tive trans-

lation adjust-ment

Treasury shares

Share-holders’ equity

Minority interests

Total

At 1 January 2008 195,401 595.0 3,638.2 (173.8) 86.0 4.5 (139.4) (129.6) 3,880.9 3.3 3,884.2

Net income -- -- -- 559.9 -- -- -- -- 559.9 0.5 560.4

Other comprehensive loss -- -- -- -- (29.7) (0.5) (260.4) -- (290.6) (0.5) (291.1)

Total comprehensive income (loss) 2008 -- -- -- 559.9 (29.7) (0.5) (260.4) -- 269.3 -- 269.3

Capital increase 391 1.2 9.6 -- -- -- -- -- 10.8 -- 10.8

Dividends (a) -- -- -- (195.3) -- -- -- -- (195.3) -- (195.3)

Share based payments (note 20-c) -- -- -- 27.9 -- -- -- -- 27.9 -- 27.9

Changes in treasury shares (811) -- -- (20.4) -- -- -- (20.6) (41.0) -- (41.0)

Other -- -- -- (3.7) -- -- -- -- (3.7) -- (3.7)

Changes in scope of consolidation -- -- -- -- -- -- -- -- -- (0.4) (0.4)

Total transactions with shareholders (420) 1.2 9.6 (191.5) -- -- -- (20.6) (201.3) (0.4) (201.7)

At 31 December 2008 194,981 596.2 3,647.8 194.6 56.3 4.0 (399.8) (150.2) 3,948.9 2.9 3,951.8

Net income -- -- -- (201.8) -- -- -- -- (201.8) 0.2 (201.6)

Other comprehensive income -- -- -- -- 51.4 1.5 116.6 -- 169.5 0.6 170.1

Total comprehensive income (loss) 2009 -- -- -- (201.8) 51.4 1.5 116.6 -- (32.3) 0.8 (31.5)

Capital increase 299 0.9 7.5 -- -- -- -- -- 8.4 -- 8.4

Dividends (a) -- -- -- (204.7) -- -- -- -- (204.7) -- (204.7)

Share based payments (note 20-c) -- -- -- 22.5 -- -- -- -- 22.5 -- 22.5

Changes in treasury shares 187 -- -- (1.6) -- -- -- 8.7 7.1 -- 7.1

Other -- -- -- (6.3) -- -- -- -- (6.3) -- (6.3)

Changes in scope of consolidation -- -- -- -- -- -- -- -- -- 6.5 6.5

Total transactions with shareholders 486 0.9 7.5 (190.1) -- -- -- 8.7 (173.0) 6.5 (166.5)

At 31 December 2009 195,467 597.1 3,655.3 (197.3) 107.7 5.5 (283.2) (141.5) 3,743.6 10.2 3,753.8

(a) Dividends per share amounted to €1.05 in 2009 and €1.00 in 2008.The Board of Directors will propose that the annual General Meeting of 20 May 2010 approves a dividend of €0.50 per share.

E. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS

33

>> �� Consolidated statement of changes in shareholders’ equity and minority interests / Notes to the consolidated financial statements




On 18 February 2010, the Board of Directors approved, and authorised for issue, Thales’ consolidated financial state-ments for the year ended 31 December, 2009. In accordance with French legislation, the financial statements will be final once approved by the shareholders of Thales parent company at the annual General Meeting convened for 20 May 2010.

Thales parent company is a listed French société anonyme, registered with the Nanterre registrar of companies (Reg-istre du Commerce et des Sociétés de Nanterre) under the number 552 059 024.

1. ACCOUNTING POLICIES

The consolidated financial statements of Thales are prepared in accordance with IFRs (International Financial Reporting standards) as approved by the european Union (available on the following intranet address: http://ec.europa.eu/internal_market/accounting/ias_fr.htm) at 31 December 2009.

The accounting policies applied by the Group are consistent with those followed in the preparation of the Group’s annual IFRs consolidated financial statements for the year ended 31 December 2008, except for the adoption of the new fol-lowing standards and interpretations:

• IFRs 8 (Operating segments), replacing Ias 14 (segment reporting), requires the Group to report financial and de-scriptive information about its operating segments. an operating segment is a Group component for which spe-cific internal reports are available and for which operating performances are regularly reviewed by the entity’s “chief operating decision maker” in order to allocate resources to the segment and assess its performance.at 31 December 2009, Thales’s businesses are organ-ised in three main domains: aerospace / space, Defence and security. The aerospace / space segment includes two divisions: “aerospace” and “space” that both develop onboard systems and solutions for the defence market, civil government and commercial markets. The Defence segment includes “land and Joint systems”, “air sys-tems” and “Naval” divisions that offer information, com-mand and communication systems, weapon systems and mission systems for all armed forces. The “security” seg-

F. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAll amounts included in these notes are expressed in € million except for per share data.

ment develops civil security solutions for public authorities and security systems for critical infrastructures (railways, energy grids…) and also includes a wide offer of compo-nents and specific subsystems.The Chairman and Chief executive Officer assisted by the senior Vice President, Finance and administration, reviews regularly operating performances of these three domains and allocate resources on this basis. Therefore, each of these three domains corresponds to an “operating segment” according to IFRs 8,

• amendment to Ias 23 (Borrowing costs), with no impact expected for the Group since borrowing costs incurred on the acquisition or during the construction of assets are already included in the cost of such assets,

• amendment to Ias 1 (Presentation of financial statements) changes the structure of the financial statements, mostly by limiting items that can be presented in the statement of changes in shareholder’s equity to transactions with share-holders. Other items are presented in a new statement, named “consolidated statement of comprehensive income”,

• amendment to IFRs 7 (Financial Instruments: Disclo-sures), requires disclosure of methods used for fair value measurement (note 25), as well as a maturity analysis for financial instruments liabilities, showing separately deriva-tive instruments (note 24).amendment to IFRs 2 (share-based payment – vesting conditions and cancellations), to Ias 32 and Ias1 (Pres-entation of financial statements – puttable financial instru-ments and obligations arising on liquidation), to IFRs1 and Ias27 (Cost of an Investment in a subsidiary, Jointly Con-trolled entity or associate), to Ias 39 (Reclassification of Financial assets – effective date and transition), to IFRIC 9 and Ias 39 (embedded Derivatives – later reassessment permitted when reclassification of an hybrid financial asset out of the ‘fair value through profit or loss’ category), im-provements to IFRss of May 2008, so as interpretations IFRIC 11 (Group and treasury share transactions), IFRIC 13 (Customer loyalty programmes) and IFRIC 14 (The limit on a defined benefit asset, minimum funding requirements and their interaction) do not have any significant impact on the Group’s accounts at 31 December 2009.

The following IFRs new standards, revised standards, amendments and interpretations, which have been published by the IasB but whose application is not yet possible, or not



yet mandatory at 31 December 2009, have not been applied earlier than the effective date by the Group:

• revised IFRs 3 (Business Combinations) and Revised Ias 27 (Consolidated and separate financial statements). These standards will be effective for business combinations that occur on or after 1 January 2010. IFRs 3 now requires that acquisition-related costs be recognised as expenses in the periods in which the costs are incurred (they were previously included in the consideration transferred). at 31 December 2009, the amount of such costs related to in-process business combinations is not significant,

• IFRs 9 (standard progressively replacing Ias 39 – Finan-cial instruments),

• amendment to Ias 39 (Financial Instruments: Recogni-tion and Measurement – eligible hedged Items) to IFRs 2 (Group Cash-settled share-based Payment Transactions), to Ias 32 (Classification of Rights Issues), Revised IFRs 1 (First-time adoption of IFRss), Revised Ias 24 (Related Par-ties: exemption to Provide Full Details about Transactions between entities under Control, Joint Control or significant Influence of a Government – “Government-related entities”),

• IFRIC 12 (service Concession arrangements), IFRIC 14 amend-ments (Prepaid Contributions Related to Minimum Funding Requirements), IFRIC 15 (Disposal of Real estate), IFRIC 16 (hedge of a Net Investment in a Foreign Operation), IFRIC 17 (Distribution of Non Cash assets to Owners), IFRIC 18 (Trans-fers of assets from Customers), and IFRIC 19 (extinguishment of a Financial liability by the Issue of equity Instruments),

• improvement to IFRs standards published in april 2009.The process to determine possible impacts of these new standards, amendments and interpretations on consolidated accounts is in process. at this stage of the analysis process, the Group considers that the impact of these standards’ im-plementation cannot be determined with sufficient accuracy.

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.

a. Consolidation

The financial statements of significant subsidiaries directly or indirectly controlled by Thales have been fully consolidat-ed. Companies in which Thales does not have a controlling interest but over which it exercises significant influence, di-rectly or indirectly, are accounted for under the equity meth-od. Companies under joint control are accounted for under the proportionate 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 inter-nal 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 proportion-ately consolidated company. as an exception to this princi-ple, transactions between a fully consolidated company and a proportionately consolidated company are fully eliminated when the jointly controlled company acts simply as an in-termediary or performs profit-neutral services on behalf of, or as a direct extension of the activities of, its different shareholders.

B. Business ComBinations

Business combinations are accounted using the purchase accounting method. Under this method, the identifiable as-sets, liabilities and contingent liabilities acquired are meas-ured at their fair value at the date at which control is ob-tained. 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.

Negative goodwill is immediately recognised in “other oper-ating income (expense)”. Goodwill related to controlled en-terprises is recognised in balance sheet assets under the “intangible assets” caption. Goodwill related to companies accounted for under 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 im-pairment (see note 1-f). Goodwill impairment is booked as an expense in the line “impairment of non current operating assets” and cannot be reversed.

Goodwill impairment related to equity affiliates is accounted for in “share in net income (loss) of equity affiliates” and can be reversed.

35

>> ��Notes to the consolidated financial statements




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.

Main closing and average exchange rates used for translation purposes:


The Group took the option, provided by IFRs 1, of not retro-spectively reconstituting cumulative translation adjustments in shareholders’ equity at 1 January 2004. Translation ad-justments 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 recorded in profit and loss as “Foreign exchange gains (losses)”.

Foreign currency exposure is managed by the finance de-partment 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 relation-ship and to demonstrate its effectiveness as from origination and throughout its duration. When a hedge is shown to be ef-fective, hedge accounting is applied in the following manner:

• 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 transac-tion is subsequently translated at the exchange rate pre-vailing 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 foreign 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 in-vestment in foreign subsidiaries. Foreign exchange gains or losses on foreign currency denominated financial instru-ments corresponding to such hedges are recognised through

31/12/09 31/12/08

Euros Closing rate Average rate Closing rate Average rate

Australian Dollar 1.6008 1.7656 2.0274 1.7487Pound Sterling 0.8881 0.8900 0.9525 0.8026U.S. Dollar 1.4406 1.3963 1.3917 1.4726



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 acquisi-tion cost, as reduced by accumulated depreciation and im-pairment 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 as-sets are recognised separately when their estimated useful lives or patterns of use, and thus the period over which they are depreciated or the depreciation methods applicable to them, are materially different.

Borrowing costs that are directly attributable to the acquisi-tion 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 ac-

quired technologies, customer relationships and the order backlog. These assets are recognised at fair value and am-

ortised over their useful lives. In the profit and loss account, the amortisation 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 operat-ing 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 tan-gible or an intangible asset may be impaired, and systemati-cally at each annual balance sheet date for goodwill and in-tangible assets with indefinite useful lives, impairment tests are performed.

To perform impairment tests, goodwill resulting from busi-ness combinations as well as assets that do not generate in-dependent cash flows are allocated to cash generating units (CGU). The scope of a CGU cannot be broader than that of an operational division, before aggregation if any, as defined by IFRs 8.

These tests consist in ensuring that the recoverable amount of each of the Group’s CGU is at least equal to the corre-sponding 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 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 adjusted if neces-sary for the specific risks attributable to each business sec-tor. This rate is mainly based on the market risk-free rate, on risk factors inherent in the Group’s businesses, on the Group’s marginal interest rate and on specific risks for which cash flows have not been adjusted.

assumptions used concerning growth in revenues and termi-nal values are based on a reasonable approach in line with specific data available for each business sector (generally terminal value is based on the weighted average of the in-come from operations (eBIT) from the three-year strategic plans and the growth is limited to 2%).

37





Impairment tests of capitalised development costs (note 1-j) are performed, project-by-project, on the basis of discount-ed 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 mar-ket price at the balance sheet date. For unlisted securities, valuation models are used. If fair value cannot be reliably de-termined, such securities are recognised at cost. Changes in fair value are recognised directly in shareholders’ equity. If an impairment indicator is identified, impairment is recognised in “other financial income (expense)”. such impairments 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 impairment if an impairment indica-tor is identified. such impairment, recognised in the “other financial income (expense)” caption, can subsequently be re-versed through profit and loss if the conditions, which led to the impairment 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 weight-ed-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 subcon-tract 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 contracts: assets” caption or the “Construction contracts: liabilities” caption (note 1-i).

i. revenues

The Group’s revenues can be divided into two main account-ing categories: sales of goods and services and construction contracts.

Revenues are measured at the fair value of the consideration re-ceived 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.

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 recog-nised on the basis of the percentage-of-completion of the transaction.

The costs related 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.

according to its characteristics, a notified construction con-tract can either be accounted for separately, be segmented into several components which are each accounted for sepa-rately, 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 rec-ognised in accordance with the technical percentage of com-pletion method. however, when 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 considera-tion 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 pay-ment into account.

Penalties for late payment or relating to improper perform-ance of a contract are recognised as a deduction from rev-enues. In the balance sheet, provisions for penalties are de-ducted 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 recog-nised, reduced by recognised losses and progress billings, is determined 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 “Con-struction 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, 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 useful-ness, in case of internal use is demonstrated,

• the company intends to produce and market, or use the new product or process, and can demonstrate its profitability.

Development costs are capitalised once the above cri-teria are met. The majority of capitalised development costs are related to aerospace and security activities, for which the products developed are relatively generic and can be sold to a larger number of potential customers. By contrast, development costs linked to Defence activi-ties are for more specific and restricted markets with a more limited number of players: the specific features of the products developed make it more difficult to share development work and therefore harder to capitalise the associated costs.

In view of recent trends in aerospace activities and the impact of the current crisis on civil activities in particular, stricter criteria for capitalising development costs were in-troduced at the end of 2009:

• higher internal rate of return required to capitalise the development costs of a project deemed risky (new com-petitor on the targeted market segment and/or new sector of activity),

• strengthening of the experience curve required to evaluate project feasibility.

Development costs are then amortised over the useful life of the product. 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. If the method cannot be determined reliably, linear amortisation is adopted. The period of amortisation depends on the type of activity. assets are also subjected to impairment loss tests. The terms and assumptions taken into account to conduct these tests are described in note 6.

The Group receives public financing, in the form of reimburs-able advances, for the development of certain projects. Re-imbursement of these advances is generally based on the expected future revenues to be generated by the develop-ment. The Group recognises such advances in liabilities tak-ing account of the likelihood that they will be reimbursed. Costs incurred in respect of these projects are recognised in the work-in progress-caption.

39





The Group benefits from tax credits related to research car-ried out by its subsidiaries. such tax credits are deemed to be equivalent to operating grants and are thus included in income from operations.

k. inCome from operations / eBit

Income from operations (eBIT) corresponds to income of op-erating activities before taking account of:

• gains and losses on disposal of intangible or tangible as-sets, 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 record-ed 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 re-cover the tax asset. To assess its ability to recover deferred tax assets, the Group takes into account future taxable re-sults of the tax entities concerned on a generally five-year forecast, non-recurring past events and tax strategies spe-cific to each country.

If the potential benefit of the acquiree’s income tax loss car-ry-forwards or other deferred tax assets does not satisfy the criteria for separate recognition when a business combina-tion is initially accounted for, but is subsequently realized, the acquirer will recognize the resulting deferred tax income in profit or loss. In addition:

• the carrying amount of goodwill is reduced to the amount that would have been recognized if the deferred tax asset had been recognized as an identifiable asset from the ac-quisition date; and

• the reduction in the carrying amount of goodwill is recog-nized as an expense. In the consolidated financial state-ments, the expense is accounted for in a specific line under the “income tax” caption.

m. restruCturing

Provisions for restructuring costs are made when restruc-turing programs have been finalised and approved by Group management 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 em-ployees, 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 coun-tries in which it operates, the Group grants its employees post-employment benefits (pensions, retirement awards, medical care, etc.) and other long-term benefits (long-serv-ice 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, contribu-tions 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 esti-mated salaries at the date of retirement.

For post-employment benefits, actuarial gains and losses are recognised in income or expense when cumulative unrec-ognised actuarial gains and losses for the scheme at the end of the previous financial year exceed the greater of 10% of the defined benefit obligation or of the fair value of plan as-sets 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.


The Group decided to take the option, provided by IFRs 1, of re-cording its unamortised actuarial gains and losses at 1 January 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.

o. share Based payments

Share options and free shares

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. such amount is recognised in profit and loss over the vesting period of the rights, not based on a straight-line basis but rather on the specific con-ditions under which rights vest under each scheme.

Company savings plans

employee share offerings with a discount to the market price proposed within Company savings plans do not include any vest-ing period of the rights but they are subjected to a legal five-years lock-up period. Valuation of the advantage granted to the employ-ees takes into account the cost of the five-year lock-up period.

The expense related to share based payments is included in income from operations and a corresponding credit is recog-nised increasing retained earnings. It thus has no effect on the overall amount of shareholders’ equity.


The Group took the option, provided by IFRs 1, of not re-stating share option plans whose grant date was prior to 7 November 2002.

p. earnings per share

Basic earnings per share are calculated by dividing profit at-tributable 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 instru-ments that have a dilutive effect on earnings per share and exclude 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 adjust-ed 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. Borrowing Costs

Borrowing costs incurred during the construction of a quali-fying 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 financing exists, the Group’s marginal financing rate.

r. 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).

s. struCture of the Consolidated BalanCe sheet

a significant portion of the Group’s activities in its different business segments has long-term operating cycles. accord-ingly, assets (liabilities) that are usually realised (settled) within the entities’ operating cycles (inventory, accounts re-ceivable and payable, advances, reserves, etc.) are classified in the consolidated balance sheet as current assets and li-abilities, without distinction between the amounts due within one year and those due after one year.

t. derivatives

The Group uses financial instruments to manage and reduce its exposure to risks of changes in interest rates and foreign

41





exchange rates. Derivatives are stated at their fair value in the balance sheet.

In order to be eligible for hedge accounting, financial instru-ments 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 pe-riod of the hedge relationship as initially determined.

accounting policies in respect of foreign exchange deriva-tives are presented above in note 1-d. Financial instruments relating to interest rate hedges are hedge-accounted as ei-ther 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 li-abilities hedged by the interest rate derivatives are remeas-ured 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.

u. dereCognition of trade reCeivaBles

The Group transfers trade receivables, mainly from the French Direction Générale de l’Armement (Directorate General of armaments), 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 sub-stantially all risks and rewards of ownership, the correspond-ing receivables are derecognised. Under these conditions, transferred trade receivables should be “derecognised” from the balance sheet.

v. main sourCes of estimates

Preparation of the Group’s consolidated financial state-ments 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 circumstances 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 construc-tion 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.

Goodwill

Goodwill is subject to impairment tests (see note 1 f). The recoverable amount of goodwill by cash generating unit is assessed 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 profit-ability of the corresponding projects.

Pension and other employee benefits

Benefit obligations in respect of pensions and other employ-ee benefits are estimated on statistical and actuarial bases in accordance 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 be-tween the book value and the tax value of assets and liabili-ties. Recovery of these assets is assessed on the basis of forecast data contained 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 23.

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 identifi-able assets, liabilities and contingent liabilities are meas-ured 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.

2. MAIN EvENTS

a. main events of 2009

Year 2009 was deeply marked by the continuous deteriora-tion of economic environment and the persistence during the second semester of difficulties on some programs, particu-larly in aerospace and security fields.

In that specific context, and consistent with the strategy defined by the Group’s General Management concerning its main businesses, Thales has updated the estimation of cer-tain risks on some on-going programs as well as the per-formance evaluation of some assets, for the purposes of the annual closing. The Group was then led to proceed to:

• record significant losses on some programs in the aero-space division and, to a lesser extent, in the security division (note 16),

• impair intangible assets related to some development programs, particularly in the aerospace field (note 6).

B. Changes in sCope of Consolidation

In 2009:

In February 2009, Thales bought for €20.3 million, via a tender offer, a 94.6% stake in CMT Medical Technologies ltd, an Israeli company specialised in medical imaging. This company is consolidated as from 1st July 2009 1.

In accordance with the contractual agreements, the pur-chase price of alcatel alenia space shares was reassessed in 2009 in the context of a procedure involving all the par-ties. This procedure led Thales to pay an additional pur-chase consideration of €129.6 2 million to alcatel-lucent in May 2009. This additional payment is recorded as a goodwill increase in the financial consolidated statements (see note 11).

The shareholders’ agreement dated 30 January 2007 be-tween the French state and Thales gives Thales the pos-sibility to increase its stake in DCNs from 25% to 35%, through the exercise of a call option. This option can be exercised during a three-year period as from 29 March 2009. at 31 December 2009, the value of this option is not significant. The agreement also contains contingent remuneration clauses related to certain contracts being

1. By simplification, and because not significant on financial consolidated statements.2. This additional purchase consideration was determined on the basis of a valuation of 67% of Thales alenia space shareholders’ equity of €724.5 million, which represents an

additional amount of €124.5 million in excess of the €600 million initial fixed price, plus €5.1 million financial interests.

43





obtained and to certain conditions of operational perform-ance, which are not applicable at 31 December 2009.

In 2008:

In March 2008, Thales sold its electronic payment solutions businesses to the american Group hypercom for €93.7 million.

In March 2008, Thales sold its subsidiary Thales Computers to Kontron Modular Computers Gmbh for €11 million.

In October 2008, Thales finalised the agreement to buy nCi-pher Plc, a UK company specialised in delivering solutions in the fields of enterprise key management and cryptographic hardware for £50.7 million. This company is consolidated as from 1 January 2009 1.

In October 2008, Thales bought, through its Diehl aircabin Gmbh investment, a 49% stake in airbus’ site of laupheim, in Germany for €24.5 million and financed the acquisition of industrial assets by a loan of €29.9 million. The new company, Diehl aircabin Gmbh, jointly owned with Diehl, is consolidated under proportionate method as from 1 Janu-ary 2009 1.

3. ADjUSTED CONSOLIDATED PROFIT AND LOSS ACCOUNT

In order to monitor and compare the Group’s economic per-formances, the consolidated profit and loss accounts is re-stated from the adjustment entries related to the Purchase Price allocation (PPa) recognised through significant busi-ness combinations.

These adjustment entries are mainly related to the 2007 acquisition/contribution transactions: space, transportation and security activities of alcatel-lucent, and acquisition of a 25% stake in DCNs.

The effect of PPa over the two disclosed periods is analysed as follows:

The adjusted profit and loss account can be analysed as follows:

1. By simplification, and because not significant on financial consolidated statements.

(€ million) 2009 2008

Cost of sales (14.8) (14.8)Amortisation of intangible assets acquired (84.4) (109.8)

Income from operations (99.2) (124.6)Deferred tax 33.6 42.4Share in net income (loss) of equity affiliates (8.2) (8.2)

Net Income (loss) (73.8) (90.4)

(€ million) 2009 2008

Revenues 12,881.5 12,664.8

Cost of sales (10,618.6) (9,949.7)

Research and development expenses (550.5) (440.2)

Marketing and selling expenses (901.9) (806.7)

General and administrative expenses (543.4) (558.7)

Restructuring costs (116.1) (32.5)

Income from operations / EBIT 151.0 877.0Impairment of non current operating assets (260.1) (69.1)

Gain (loss) on disposal of assets and other (1.0) 35.2

Income from operating activities (110.1) 843.1

Financial interest on gross debt (91.6) (101.4)

Financial income from cash at bank and equivalents 26.0 49.6

Cost of net financial debt (65.6) (51.8)

Other financial income (expense) (44.9) (49.8)

Other components of pension charge (105.1) (11.1)

Income tax 141.7 (145.4)

Share in net income (loss) of equity affiliates 56.2 65.8


Of which:

Net income, Group share (128.0) 650.3

Minority interests 0.2 0.5



4. INFORMATION ON THE BASIS OF COMPARABLE CONSOLIDATION SCOPE AND FOREIGN EXCHANGE RATES

a. effeCt of Changes in sCope of Consolidation and foreign exChange rates on Consolidated inCome from operations

On the basis of the adjusted profit and loss account, results in both scope of consolidation and foreign exchange rates can be analysed as follows:

B. effeCt of Changes in sCope of Consolidation and foreign exChange rates on the Consolidated BalanCe sheet

The schedule below presents a reconciliation between the balance sheet at 31 December 2008 and the balance sheet at 31 De-cember 2009, 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.

2008 adjusted

Change in scope of con-solidation (a)

Exchange rate change (b)

Organic growth

2009 adjusted

Revenues 12,664.8 161.2 (134.4) 189.9 12,881.5

Cost of sales (9,949.7) (94.5) 101.8 (676.2) (10,618.6)

Research and development expenses (440.2) (22.5) 2.8 (90.6) (550.5)

Marketing and selling expenses (806.7) (26.2) 9.1 (78.1) (901.9)

General and administrative expenses (558.7) (6.3) 5.3 16.3 (543.4)

Restructuring costs (32.5) -- 0.3 (83.9) (116.1)

Income from operations / EBIT 877.0 11.7 (15.1) (722.6) 151.0

(a) Companies acquired in 2009 are excluded from the restated 2009 profit and loss account and the accounts of companies acquired during 2008 have been restated in order to affect 2009 profit or loss over an identical period to that over which such companies were consolidated in 2008.Companies sold in 2008 are excluded from 2008 restated results. The accounts of companies sold during 2009 have been restated in order to impact profit and loss for an identical period in 2009 and in 2008.

(b) The exchange rate change is determined as follows: 2008 results of foreign subsidiaries are translated at 2009 average exchange rates. The exchange difference thus obtained is adjusted to take into account the effect of changes in currency rates on transactions denominated in a different currency from the subsidiary’s functional currency.

Share-holders’ equity

Pensions and other employee benefits

Current and

deferred taxes

Non current

operating assets

Non current

financial assets

Net current operating liabilities /

assets

Net finan-cial debt

(excluding cash)

Cash at banks and

equiva-lents

At 31 December 2008 3,951.8 803.5 (89.1) (5,185.4) (1,126.6) 1,189.5 1,956.1 1,499.8

Financial flows:

Cash flows from operating activities (178.1) 6.3 (273.5) 680.9 (21.4) 940.8 -- 1,155.0

Cash flows from investing activities (1.0) -- -- (400.0) (156.0) -- (8.0) (565.0)

Cash flows from financing activities (183.1) -- -- -- -- -- 21.3 (161.8)

Non-financial flows:

Changes in scope of consolidation 6.5 5.5 (0.6) (268.0) 272.8 (40.0) 23.8 --

Changes in foreign exchange rates 117.1 5.9 (3.1) (90.2) 0.5 (39.6) 41.5 32.1

Financial instruments 52.9 -- 19.4 -- (1.5) (70.8) -- --

Reclassifications and other (12.3) (30.5) (20.7) 12.2 47.4 (12.3) 16.2 --

At 31 December 2009 3,753.8 790.7 (367.6) (5,250.5) (984.8) 1,967.6 2,050.9 1,960.1

45





5. INFORMATION BY SEGMENT

a. information By Business segment

In 2009, the Group has adopted IFRs 8 (Operating seg-ments) that replaces Ias 14 (segment Reporting). This new standard requires the Group to report financial and descrip-tive information about its operating segments. an operating segment is a Group component for which specific internal reports are available and for which operating performances are regularly reviewed by the entity’s “chief operating deci-sion maker” in order to allocate resources to the segment and assess its performance.

as described in note 1, Thales’s businesses are organised in three main domains: aerospace / space, Defence, and secu-

rity. These domains correspond to three operating segments according to IFRs 8. The Chairman and Chief executive Of-ficer, assisted by the senior Vice President, Finance and administration, reviews regularly operating performances of these three domains and allocate resources on this basis. at 31 December 2009, these segments are therefore identical to those presented under Ias 14.

Information by operating segment reviewed by the Chairman and Chief executive Officer follow the same accounting stand-ards as those used in the financial consolidated statements. Only adjustment entries related to the Purchase Price allo-cation (PPa) recognised through significant business combi-nations are excluded from income from operations reviewed.

Operating income consequently corresponds to the adjusted consolidated income from operations, as described in note 3.

2009 Aero-space /

Space (b)

Defence Security Other, elim. and non

allocated amounts

(c)

Total of business segments and other

PPA (note 3)

Thales

Consolidated order backlog at 31/12 7,529.2 11,543.9 5,557.9 99.8 24,730.8 -- 24.730.8Consolidated new orders 4,331.8 6,092.9 3,390.3 112.1 13,927.1 -- 13,927.1Consolidated revenues 4,071.3 5,763.4 2,977.0 69.8 12,881.5 -- 12,881.5Inter-segment revenues 93.1 169.3 326.4 (588.8) -- -- --Total Revenues 4,164.4 5,932.7 3,303.4 (519.0) 12,881.5 -- 12,881.5Income from operations / EBIT (a) (309.6) 544.4 (11.1) (72.7) 151.0 (99.2) 51.8Non current operating assets 1,607.6 1,405.8 1,844.7 392.4 5,250.5 -- 5,250.5Current operating assets 3,026.5 3,372.0 2,474.2 31.1 8,903.8 -- 8,903.8Current operating liabilities (3,297.4) (4,595.6) (2,526.6) (451.8) (10,871.4) -- (10,871.4)Net (270.9) (1,223.6) (52.4) (420.7) (1,967.6) -- (1,967.6)Capital expenditure 182.4 83.0 80.5 73.0 418.9 -- 418.9Depreciation and amortisation of tangible and intangible assets 157.3 88.7 131.9 42.9 420.8 -- 420.8

Consolidated number of employees (end of period) (d) 18,197 23,887 18,901 3,300 64,285 -- 64,285

(a) Group income from operations includes tax credits related to research expenses amounting to €150.3 million in 2009 and to €169.3 million in 2008.(b) The space business, created in april 2007 after the acquisition by Thales of alcatel-lucent’s space businesses contributed as follows to the consolidated accounts:

2009 2008

Consolidated order backlog at 31/12 2,143.8 1,980.9Consolidated new orders 1,595.6 1,358.4Consolidated revenues 1,433.5 1,472.6Inter-segment revenues 33.7 35.2Total revenues 1,467.2 1,507.8Income from operations / eBIT 78.7 78.1Non current operating assets 810.6 691.4Current operating assets 800.7 996.3Current operating liabilities (914.6) (1,121.4)Net (113.9) (125.1)Consolidated number of employees (end of period) 5,478 5,471

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 Finmec-canica, are consolidated under the proportionate method since the 1 april 2007.

(c) 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 during the prior year.The non-allocated income from operations / eBIT includes the corporate income from operations / eBIT (including the restructuring costs of headquarters) which is not billed to segments (-€12.9 million in 2009 and +€18.6 million in 2008), the cost of vacant premises (-€38.0 million in 2009 and -€16.7 million in 2008) and the expense related to share-based payments (-€22.5 million in 2009 and -€27.9 million in 2008).2008 data have been restated to reflect internal Group reporting figures: in particular, income from operations / eBIT relating to holding companies and Group R&D activities are no more allocated to operating segments.

(d) The consolidated number of employees includes all employees of fully consolidated companies and the proportionate share of employees of companies consolidated under the propor-tionate method. It does not include the employees of companies accounted for under the equity method or of unconsolidated affiliates. Corresponding personnel expenses amount to €4,745.7 million in 2009 and €4,761.2 million in 2008.



2008 restated Aero-space /

Space (b)

Defence Security Other, elim. and non

allocated amounts

(c)

Total of business segments and other

PPA (note 3)

Thales

Consolidated order backlog at 31/12 7,019.8 10,879.6 4,982.6 55.8 22,937.8 -- 22,937.8

Consolidated new orders 4,184.1 6,546.7 3,461.1 106.2 14,298.1 -- 14,298.1

Consolidated revenues 4,140.4 5,501.7 2,892.6 130.1 12,664.8 -- 12,664.8

Inter-segment revenues 78.3 167.8 325.7 (571.8) -- -- --

Total Revenues 4,218.7 5,669.5 3,218.3 (441.7) 12,664.8 -- 12,664.8

Income from operations / EBIT (a) 206.5 539.5 157.0 (26.0) 877.0 (124.6) 752.4

Non current operating assets 1,608.3 1,342.4 1,896.6 338.1 5,185.4 -- 5,185.4

Current operating assets 3,456.8 3,282.5 2,520.0 273.4 9,532.7 -- 9,532.7

Current operating liabilities (3,323.5) (4,393.8) (2,444.3) (560.6) (10,722.2) -- (10,722.2)

Net 133.3 (1,111.3) 75.7 (287.2) (1,189.5) -- (1,189.5)

Capital expenditure 197.7 117.1 98.5 121.3 534.6 -- 534.6

Depreciation and amortisation of tangible and intangible assets 155.5 80.3 161.0 36.2 433.0 -- 433.0

Consolidated number of employees (end of period) (d) 17,904 23,093 19,127 3,124 63,248 -- 63,248

(a) Group income from operations includes tax credits related to research expenses amounting to €150.3 million in 2009 and to €169.3 million in 2008.(b) The space business, created in april 2007 after the acquisition by Thales of alcatel-lucent’s space businesses contributed as follows to the consolidated accounts:

2009 2008

Consolidated order backlog at 31/12 2,143.8 1,980.9Consolidated new orders 1,595.6 1,358.4Consolidated revenues 1,433.5 1,472.6Inter-segment revenues 33.7 35.2Total revenues 1,467.2 1,507.8Income from operations / eBIT 78.7 78.1Non current operating assets 810.6 691.4Current operating assets 800.7 996.3Current operating liabilities (914.6) (1,121.4)Net (113.9) (125.1)Consolidated number of employees (end of period) 5,478 5,471

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 Finmec-canica, are consolidated under the proportionate method since the 1 april 2007.

(c) 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 during the prior year.The non-allocated income from operations / eBIT includes the corporate income from operations / eBIT (including the restructuring costs of headquarters) which is not billed to segments (-€12.9 million in 2009 and +€18.6 million in 2008), the cost of vacant premises (-€38.0 million in 2009 and -€16.7 million in 2008) and the expense related to share-based payments (-€22.5 million in 2009 and -€27.9 million in 2008).2008 data have been restated to reflect internal Group reporting figures: in particular, income from operations / eBIT relating to holding companies and Group R&D activities are no more allocated to operating segments.

(d) The consolidated number of employees includes all employees of fully consolidated companies and the proportionate share of employees of companies consolidated under the propor-tionate method. It does not include the employees of companies accounted for under the equity method or of unconsolidated affiliates. Corresponding personnel expenses amount to €4,745.7 million in 2009 and €4,761.2 million in 2008.

47





B. information By geographiC area

By country / region of destination

By country / region of origin

C. information By type of ContraCts

Revenues (direct and indirect) 2009 2008

France (a) 3,018.6 3,165.1

United Kingdom 1,467.6 1,555.6

Rest of Europe 3,463.8 3,301.8

North America 1,158.2 1,189.7

Middle East 1,318.5 1,134.6

Asia and Pacific 1,683.3 1,710.0

Africa and Latin America 771.5 608.0

Total 12,881.5 12,664.8

(a) Of which, French state (mainly French Ministry of Defence): €2,006.4 million in 2009 and €2,172.6 million in 2008.

Revenues 2009 2008

France 6,155.9 6,101.1

United Kingdom 1,669.9 1,704.8

Other European countries 2,681.4 2,567.3

Rest of the world 2,374.3 2,291.6

Total 12,881.5 12,664.8

Revenues 2009 2008

Construction contracts (a) 7,053.8 6,440.2

Sales of good 3,232.4 3,479.8

Services 2,536.2 2,683.6

Other 59.1 61.2

Total 12,881.5 12,664.8

(a) More than half of the Group’s revenues come from contracts specifically negotiated with the customer, who establishes specifications concerning the contract. These contracts meet different needs depending on the customer, and are generally long-term contracts.

Operating assets (non current) 2009 2008

France 2,847.4 2,926.1

United Kingdom 383.4 320.9

Other European countries 1,528.0 1,474.7

Rest of the world 491.7 463.7

Total 5,250.5 5,185.4



development Costs

at the end of 2009, the combination of the following factors led the Group to substantially revise the business plans of its aerospace programmes:

• the economic crisis in the aerospace sector, which is lead-ing to a sharp decrease in expected volumes and delays in the commercial launch of some programmes,

• development cost overruns on some programmes linked to technical difficulties and/or to a lack of appropriate resources,

• the persistence of the dollar’s structural weakness, leading to a marked decrease of the profitability of certain develop-ment projects, on which expected revenues are in dollars while costs are incurred in euros.

Impairment charges for 2009 mainly include:

• €158.3 million related to avionics for civil aircraft and the a400M. In view of the uncertainties on the a400M programme and the outlook for its commercial launch (note 16), all development costs related to this pro-gramme were impaired,

• €43.6 million related to in-flight entertainment activities,• €25.5 million related to simulation activities.

Impairment tests were conducted under the following as-sumptions:

• business plans were determined in line with the strategic plan on periods of up to 15 years in view of the specific characteristics of the sector (long-term profitability),

• discount rates were determined using the weighted aver-age cost of the Group’s capital, adjusted if necessary for the specific risks attributable to programmes.

goodwill

Impairment concerns:

• in 2009, miscellaneous activities among the security business,• in 2008:

- in the security business, goodwill related to the ticket-ing and passenger access control activities as a result of difficulties encountered on certain complex contracts, (€42.8 million), and goodwill related to activities of serv-ices in switzerland (€8.7 million),

- in the aerospace business, goodwill related to the In-Flight entertainment activities, due to the delivery timing difference on the program B787 (€13.6 million).

In 2009, impairment tests are performed with the initial assumption of a 8.0% discount rate (8.5% in 2008) for every CGU (Cash Generating Unit), knowing that these CGU present a risk level more or less equivalent and that the spe-cific risks of CGU are included in the projections, except for a few non-significant activities which were considered riskier and to which was therefore applied a 10.0% rate (10.5% in 2008). a 2% increase of the discount rate would not have led the Group to book significant additional impairments.

The long-term increase rate used to determine terminal value is 2%. This rate, close to the long-term inflation rate estimated at closing, represents a reasonable estimation by Thales of the future growth of the activity. a 1% decrease of this rate would not lead the Group to book significant ad-ditional impairments.

6. IMPAIRMENT OF NON CURRENT OPERATING ASSETS

2009 2008

Development costs (240.0) (1.2)

Goodwill (17.4) (67.2)

Other tangible and intangible assets (2.7) (0.7)

Total (260.1) (69.1)

49





7. GAIN (LOSS) ON DISPOSAL OF ASSETS AND OTHER

8. FINANCIAL INCOME (EXPENSE)

a. Cost of net finanCial deBt

B. other finanCial inCome (expense)

2009 2008

Disposal of investments: 12.1 46.0Minority investments of Telespazio 7.1 --Thales e-Transactions 2.5 53.6Thales Computers -- (3.7)Other 2.5 (3.9)Disposal of other assets: (3.0) (10.8)Real estate assets -- (1.7)Equipment (3.0) (9.1)Loss on the L’Aquila earthquake, net (a) (10.1) --Total (1.0) 35.2

(a) Thales alenia space’s production site at l’aquila (Italy) was seriously damaged by the earthquake of 7 april 2009. a temporary solution was implemented to progressively rebuild produc-tion capacities and to pursue work on programmes mainly in l’aquila, but also in Rome and Milan. The Group share of the total net loss related to the disaster was recognised in 2009 and amounted to -€10.1 million, after taking into account insurance claims.

2009 2008

Interest expense:- on gross debt (104.4) (104.7)- on interest rate swaps 12.8 3.3

(91.6) (101.4)Interest income / cash and equivalents 26.0 49.6Total (65.6) (51.8)

2009 2008

Foreign exchange gains (losses) (10.5) (8.7)Change in fair value of derivative exchange instruments (37.3) (23.6)Cash flow hedge inefficiency / foreign exchange instruments (5.3) (5.2)Net foreign exchange gain (loss) (53.1) (37.5)Net interest income (expense) on non-financial receivables and payables 6.0 3.3Dividends received 6.1 6.5Impairment of investments in shares (available-for-sale) -- (4.8)Depreciation of loans and other financial debtors 0.9 (18.7)Other (4.8) 1.4Total (44.9) (49.8)



9. INCOME TAX

Determination of the income tax expense takes into account the specific local rules applied by Thales, including the tax consolida-tion 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

B. effeCtive tax rate

C. deferred tax assets and liaBilities

2009 2008

Current tax (66.0) (123.0)

Deferred tax 267.7 33.4

Reduction of goodwill due to the recognition of deferred tax assets (1-l) (26.4) (13.4)

Total 175.3 (103.0)

2009 2008


Less: income tax (175.3) 103.0

Less: share in net income (loss) of equity affiliates (48.0) (57.6)

Profit before tax (424.9) 605.8

Average tax rate 38.1% 29.0%

Theoretical tax profit (expense) 161.9 (175.5)

Reconciliation:

- Non taxable items 49.4 40.9

- Creation of tax loss carry-forwards not recorded in assets (19.2) 8.3

- Recognition in assets of tax losses not recognised in previous periods (3.5) 50.0

- Reduction of goodwill due to the recognition of deferred tax assets (26.4) (13.4)

- Adjustments on prior years 16.0 (10.1)

- Effect of enacted future tax rate changes (1.0) 6.3

- Other (1.9) (9.5)

Actual net tax charge 175.3 (103.0)

31/12/09 31/12/08

Deferred tax assets 678.0 433.5

Deferred tax liabilities (258.6) (268.6)

Deferred tax assets, net 419.4 164.9

51





d. Changes in net deferred tax assets

e. tax loss Carry-forwards

Total tax loss carry-forwards represent a potential tax saving of €416.0 million at 31 December 2009. Corresponding expiry dates are:

01/01/09 (Expense) income in

period

Recognised through

sharehold-ers’ equity

Exch. rate var. chang-es in scope and other

31/12/09

Temporary differences: 42.6 242.9 (18.2) (24.2) 243.1

- pensions and other employee benefits 171.6 (5.5) -- 1.5 167.6

- intangible assets (282.2) 66.1 -- (6.3) (222.4)

- other 153.2 182.3 (18.2) (19.4) 297.9

Tax loss carry-forwards 352.9 66.8 -- (3.7) 416.0

Total 395.5 309.7 (18.2) (27.9) 659.1

Of which non recognised in the balance sheet (230.6) (42.0) 2.5 30.4 (239.7)

Total net deferred tax assets 164.9 267.7 (15.7) (a) 2.5 419.4

31/12/09

2010 0.2

2011-2014 18.9

> 2014 (a) 396.9

Total 416.0

(a) Of which €346.1 million without any time limit.

01/01/08 (Expense) income in

period

Recognised through

sharehold-ers’ equity

Exch. rate var. chang-es in scope and other

31/12/08

Temporary differences: 59.5 (9.4) 13.5 (21.0) 42.6

- pensions and other employee benefits 210.5 (32.7) -- (6.2) 171.6

- intangible assets (297.4) 14.1 -- 1.1 (282.2)

- other 146.4 9.2 13.5 (15.9) 153.2

Tax loss carry-forwards 386.4 (15.5) -- (18.0) 352.9

Total 445.9 (24.9) 13.5 (39.0) 395.5

Of which non recognised in the balance sheet (310.0) 58.3 (11.2) 32.3 (230.6)

Total net deferred tax assets 135.9 33.4 2.3 (a) (6.7) 164.9

(a) Including 2009 2008

Cash flow hedge (19.4) (3.2)

Net foreign investments’ hedge 1.3 (1.5)

Total deferred tax/ other comprehensive income (18.1) (4.7)

Deferred tax/ payment in shares 2.5 3.5

Other (0.1) 3.5

Total deferred tax allocated to shareholders’ equity (15.7) 2.3



10. EARNINGS PER SHARE

11. GOODwILL

a. goodwill By division

2009 2008

Numerator (in millions of euros):

Income (loss), Group share (A) (201.8) 559.9

Denominator (in thousands):

Average number of shares outstanding (B) 195,054 195,139

Share options 434 1,107

Diluted average number of shares outstanding (C) 195,488 196,246

Earnings per share (in euros) (A) / (B) (1.03) 2.87

Diluted earnings per share (in euros) (A) / (C) (1.03) 2.85

31/12/09 31/12/08

Gross Impairment Net Net

Aerospace 385.0 (23.2) 361.8 359.2

Space 467.2 -- 467.2 344.1

Aerospace business 852.2 (23.2) 829.0 703.3

Land and Joint systems 563.1 (7.4) 555.7 492.2

Naval 346.0 -- 346.0 335.3

Air systems 120.9 -- 120.9 119.6

Defence business 1,030.0 (7.4) 1,022.6 947.1

Transportation and Security (ex Alcatel-Lucent) 871.2 -- 871.2 890.4

Other 357.4 (98.6) 258.8 247.8

Security business 1,228.6 (98.6) 1,130.0 1,138.2

Other 5.3 -- 5.3 4.6

Total 3,116.1 (129.2) 2,986.9 2,793.2

53





B. Changes in net goodwill

12. TANGIBLE AND INTANGIBLE ASSETS

a. details of BalanCe sheet items

2009 2008

Net book value at 1 January 2,793.2 2,870.0

Acquisitions: 192.2 56.7

- price adjustment relating to Alcatel-Lucent’s space businesses (note 2) 129.6 --

- acquisition of nCipher 29.3 --

- acquisition of CMT Medical Technologies Ltd 12.6 --

- acquisition of Alcatel-Lucent’s transportation and security businesses -- 35.9

- other 20.7 20.8

Disposals: -- (19.4)

- Thales e-Transactions -- (9.6)

- other -- (9.8)

Reduction of goodwill due to the recognition of deferred tax assets (note 9) (26.4) (13.4)

Impairment (note 6) (17.4) (67.2)

Exchange rate variations and other 45.3 (33.5)

Net book value at 31 December 2,986.9 2,793.2

31/12/09 31/12/08

Gross Depreciation and impairment

Net Net

Customer relationships: long-term 397.4 (76.5) 320.9 339.1

Customer relationships: backlog 212.2 (159.2) 53.0 81.0

Acquired technologies 249.7 (86.3) 163.4 189.1

Other 15.2 (1.9) 13.3 --

Intangible assets acquired in the context of business combination 874.5 (323.9) 550.6 609.2

Development costs 861.6 (607.9) 253.7 427.9

Other 516.4 (395.4) 121.0 92.2

Intangible assets (excluding goodwill) 2,252.5 (1,327.2) 925.3 1,129.3

Lands 54.2 -- 54.2 46.8

Buildings 1,039.3 (531.7) 507.6 469.4

Plant and equipment 2,029.7 (1,518.7) 511.0 491.4

Other 710.6 (445.1) 265.5 255.3

Tangible assets 3,833.8 (2,495.5) 1,338.3 1,262.9

Total 6,086.3 (3,822.7) 2,263.6 2,392.2

Of which:

Fixed assets held under lease agreements 53.3 (26.2) 27.1 37.8

Fixed assets under construction 48.8 -- 48.8 30.5



B. Changes in net tangiBle and intangiBle assets

13. EQUITY AFFILIATES

a. group share in the net assets and net inCome of equity affiliates

Intangible assets acquired

in business combination

Development costs

Other intangible

assets

Tangible assets Total

Net value at 1 January 2008 719.0 386.1 96.3 1,141.7 2,343.1

Acquisitions / capitalisations -- 129.0 27.2 378.4 534.6

Disposals -- -- (2.2) (9.5) (11.7)

Depreciation and amortisation (109.8) (56.1) (35.0) (232.1) (433.0)

Impairment (note 6) -- (1.2) (0.7) -- (1.9)

Scope, foreign exchange rates and other -- (29.9) 6.6 (15.6) (38.9)

Net value at 31 December 2008 609.2 427.9 92.2 1,262.9 2,392.2

Acquisitions / capitalisations -- 113.2 37.1 268.6 418.9

Disposals -- -- (2.8) (3.0) (5.8)

Depreciation and amortisation (84.4) (51.5) (27.6) (257.3) (420.8)

Impairment (note 6) -- (240.0) (2.7) -- (242.7)

Scope, foreign exchange rates and other 25.8 4.1 24.8 67.1 121.8

Net value at 31 December 2009 550.6 253.7 121.0 1,338.3 2,263.6

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

31/12/09 31/12/08 31/12/09 31/12/08 2009 2008

Aviation Communications & Surveillance Systems 30 30 54.9 57.3 4.6 4.9

Camelot Plc 20 20 50.0 48.9 6.4 13.4

DCNS (a) 25 25 520.2 505.5 23.5 25.1

DpiX 20 20 16.4 15.7 1.3 2.0

Elettronica 33 33 30.4 28.1 6.1 5.3

Indra Espacio 33 33 16.3 16.3 1.2 2.6

Other -- -- 22.8 20.6 4.9 4.3

Total 711.0 692.4 48.0 57.6

(a) The net income of equity affiliates is based on DCNs’ IFRs profit, including amortisation of Thales PPa.The share in net assets of equity affiliates is based on the Group share in DCNs’ equity adjusted with the following elements:• intangible assets linked to PPa (net value of €131.8 million at 31 December 2009 and €136.4 million at 31 December 2008).• additional goodwill (€224.7 million at 31 December 2009 and 2008)• additional debt of -€67.5 million (-€73.1 million at 31 December 2008), as Thales excludes DCNs cash payable to the French state.

55





B. Changes in “net assets of equity affiliates”

C. summary of dCns’s finanCial statements

14. OTHER NON-CURRENT FINANCIAL ASSETS

a. availaBle-for-sale investments

available-for-sale investments are measured at fair value when reliable. Changes in fair value are directly recognised through shareholders’ equity. If an impairment indicator is identified, impairment is recognised in “Other financial expense”.

Fair value of investment in shares at 31 December

2009 2008

Share in net assets of equity affiliates at 1 January 692.4 664.7Share in income (loss) of equity affiliates 48.0 57.6Dividends paid (26.9) (28.0)Effect of changes in exchange rates and other (2.5) (1.9)Share in net assets of equity affiliates at 31 December 711.0 692.4

Statement of Income 2009 2008

Revenues 2,406.0 2,522.3Net income 128.4 138.6

31/12/09 31/12/08

Investments held by Thales Corporate Ventures (a) 17.0 17.5Investments held by Thales International Offsets (b) 28.3 27.0Ncipher (£ 50.7 million) (c) -- 53.3Diehl Aircabin (c) -- 24.5Other 56.6 53.1Total 101.9 175.4

(a) The Group’s venture capital vehicle.(b) The Group’s subsidiary in charge to negotiate and implement indirect offset requirements.(c) Consolidated since 1 January 2009.

Balance sheet 31/12/09 31/12/08

Assets 6,438.0 7,002.3Liabilities (5,513.3) (6,131.5)Shareholders’ equity 924.7 870.8



Changes in the period

B. loans and other finanCial assets

Financial loans and receivables are recognised at amortised cost. They are subject to provisions for impairment if an impairment indicator of long-term loss of value is identified.

15. INvENTORIES AND wORK-IN-PROGRESS

2009 2008

Investments in shares at 1 January 175.4 99.1

NCipher acquisition (£ 50.7 million) (a) (63.2) 63.2

Diehl Aircabin acquisition (a) (24.5) 24.5

Other acquisitions / disposals 1.1 5.7

Impairment of investments in shares (note 8-b) -- (4.8)

Changes in fair value booked through shareholders’ equity (note 20-d) 1.5 (0.2)

Exchange rate variations and other 11.6 (12.1)

Investments in shares at 31 December 101.9 175.4

(a) Companies acquired in 2008 and consolidated since 1st January 2009.

31/12/09 31/12/08

Loans to partners 51.4 88.1

Receivables relating to disposals 35.7 60.1

Other 97.1 138.1

Other financial assets, gross 184.2 286.3

Provisions for impairment (12.3) (27.5)

Other financial assets, net 171.9 258.8

31/12/09 31/12/08

Raw materials 530.5 504.1

Work-in-progress (excluding construction contracts – note 16) 1,195.7 1,191.1

Semi-finished and finished products 859.6 859.7

Finished goods for resale 125.1 145.1

Total, gross 2,710.9 2,700.2

Provisions (500.1) (472.8)

Total, net 2,210.8 2,227.4

57





16. CONSTRUCTION CONTRACTS

31/12/09 31/12/08

Construction contracts: assets 2,243.2 2,400.6

Construction contracts: liabilities (882.7) (578.4)

Total 1,360.5 1,822.2

Work in progress on construction contracts 1,305.8 1,096.1

Unbilled receivable on construction contracts 1,080.4 1,375.7

Reserves for future losses (614.1) (279.3)

Other reserves on construction contracts (411.6) (370.3)

Total 1,360.5 1,822.2

Advances received from customers on construction contracts 2,708.3 2,577.8

The increase in reserves for future losses is mainly related to the aerospace division, and, to a lesser extent, to the security division. The main aerospace division programmes involved in this increase are as follows:

a400m

Thales is a supplier to airbus Military sl (“aMsl”), the eaDs subsidiary in charge of the a400M programme, and is pro-viding various types of onboard equipment and systems in-cluding the Flight Management system, cockpit systems and electronic warfare systems.

In september 2008, eaDs announced an indefinite delay to the first flight of the a400M. The first flight eventually took place on 11 December 2009, although no revised technical schedule has been confirmed by eaDs.

Financial and technical discussions with the OCCaR, initiated at the end of 2008 by aMsl and its parent company eaDs, are still ongoing. at the same time, Thales is holding discus-sions with aMsl in an effort to fix the schedule, detailed scope and financial terms and conditions of the contract.

The estimated costs and revenues currently incorporated in the financial statements reflect the Thales Group’s best estimates under the current circumstances. In the 2009 fi-nancial statements at 31 December 2009, therefore, it is assumed that the a400M programme will be going forward. Based on the progress made in the discussions initiated by

aMsl, Thales has booked a charge of €102 million to ac-count for the greater complexity of the technical solution and contingencies related to delays and general uncertainties on the programme. In addition, uncertainties about the con-sequences of the current discussions between the various stakeholders and about the stabilisation of the programme’s functional and financial parameters could have a significant positive or negative impact on the overall profit or loss at completion of this programme over the coming years.

meltem

This contract with the Turkish Ministry of Defence was award-ed in July 2003 and involves the supply of six maritime patrol aircraft for the country’s Navy, and three maritime surveil-lance aircraft for the Coast Guards based on Casa CN235 platforms provided by the customer. a contract amendment was signed in July 2005 for the supply of 10 batches of equipment and mission system software for aTR 72 aircraft.

Thales is currently in discussions with the customer with regard to the numerous technical difficulties and schedule delays that have affected this programme since its inception. The technical complexity of the Meltem programme and the uncertainties surrounding the outcome of ongoing discus-sions are liable to lead to significant additional delays in the delivery schedule, over and above the delays already taken into account, or additional costs related to contract execu-tion. In addition, the possible termination of the contract by the customer cannot be ruled out and could oblige Thales,



under the terms of the contract and depending on the level of liability fixed, to reimburse sums already received and pay a termination penalty equivalent to 30% of the contract value. In the 2009 financial statements at 31 December 2009, it is assumed that the Meltem programme will be going forward. The estimated costs and revenues currently incor-

porated in the financial statements using the specific ac-counting method for long-term contracts reflect the Thales Group’s best estimates under the current circumstances. For reasons of confidentiality and protection of Group’s inter-ests, in compliance with accounting standards, no detailed information about this amount is being disclosed.

17. CURRENT RECEIvABLES AND PAYABLES

a. Current reCeivaBles

B. Current payaBles

31/12/09 31/12/08

Total < 1 year > 1 year

Accounts and notes receivable, gross 3,097.5 3,005.0 92.5 3,142.3

Provisions on accounts & notes receivable (a) (111.3) (62.9) (48.4) (101.0)

Accounts and notes receivable, net 2,986.2 2,942.1 44.1 3,041.3

Other tax receivables (excluding income tax) 591.1 589.0 2.1 692.6

Other debtors and prepaid expenses, gross 411.1 355.9 55.2 372.0

Related provisions (a) (53.6) (53.6) -- (41.8)

Net 948.6 891.3 57.3 1,022.8

Accounts, notes and other current receivables 3,934.8 3,833.4 101.4 4,064.1

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

Opening Net depreciation (reversal)

Scope, exch. rates and other

Closing

31/12/09,:

Depreciation on accounts & notes receivable 101.0 10.1 0.2 111.3

Depreciation on other related provisions 41.8 11.8 -- 53.6

31/12/08,:

Depreciation on accounts & notes receivable 112.3 (9.9) (1.4) 101.0

Depreciation on other related provisions 37.0 4.8 -- 41.8

31/12/09 31/12/08

Total < 1 year > 1 year

Accounts and notes payable 2,263.3 2,231.0 32.3 2,622.0

Accrued holiday pay and social 1,075.8 1,074.3 1.5 1,059.7

Other tax payables (excluding income tax) 588.0 586.0 2.0 617.3

Other creditors and accrued liabilities 808.9 763.9 45.0 746.9

Accounts, notes and other current 4,736.0 4,655.2 80.8 5,045.9

59





18. COMPANIES UNDER jOINT CONTROL

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

19. RELATED PARTY TRANSACTIONS

In accordance with Ias 24, the Group has identified the following related parties: shareholders of Thales parent company (includ-ing the French state), companies controlled by these same shareholders, share of transactions of joint-ventures attributable to ventures, companies under significant influence, directors and senior corporate officers.

a. revenues and purChases from and to related parties

Profit and loss account 2009 2008

Revenues 2,551.4 2,458.1Income of operating activities 188.6 165.1Net income 125.7 122.2

2009 2008

RevenuesFrench State 2,006.4 2,172.6Non controlled share of joint-ventures 181.5 176.4Other 996.8 932.8PurchasesNon controlled share of joint-ventures 308.0 321.6Other 122.3 127.3

Cash flow statement 2009 2008

Cash-flow from operating activities 213.7 149.1Cash-flow from investing activities (149.5) (154.8)Cash-flow from financing activities (43.1) (5.7)Exchange rate var. and changes in perimeter 5.0 (20.4)Increase (decrease) in cash at banks and equivalents 26.1 (31.8)

Balance sheet 31/12/09 31/12/08

Non current assets 1,149.8 977.7Current assets 1,924.8 2,101.8Total assets 3,074.6 3,079.5Shareholders’ equity 793.0 744.0Non current liabilities 384.7 350.2Current liabilities 1,896.9 1,985.3Total liabilities and shareholders’ equity 3,074.6 3,079.5



C. agreements signed with thales’ shareholders

On 19 May 2009, Dassault aviation finalised the acquisition of 20.8% of Thales’ capital previously owned by alcatel-lucent for an amount of €1.57 billion (€38 per share). This same day, Dassault aviation joined the shareholders’ agreement signed on 28 December 2006 between alcatel-lucent and the French state. amendments have been made to this agree-ment to adapt the provisions concerning alcatel-lucent that were not relevant to Dassault aviation (www.amf-france.org: decisions and information n°209C0770 of 29 May 2009).

On 20 May 2009, Dassault aviation bought shares in Thales initially held by GIMD for €0.39 billion (€38 by share).

The main rights granted to the French state and/or Dassault aviation concerning Thales are described on page 170 of the annual report (shareholders’ agreement, convention on pro-tection of strategic national interests and specific convention).

e. Compensation of direCtors and senior Corporate offiCers

expenses recognised in respect of compensation, benefits and social security contributions attributable to Directors and mem-bers of the executive Committee are as follows:

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 part-ner 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 also has the opportunity, from 29 March 2009 and, for three years, to increase its stake to 35%.

Thales and DCNs also signed an industrial and trade coop-eration agreement, whose objective is to optimise the or-ganisation of the activity of both groups in naval operations (market access, research and development, purchasing).

B. reCeivaBles and payaBles with related parties

31/12/09 31/12/08

Current operating assets 783.6 1,006.2Financial current accounts receivable 94.8 65.1Of which: joint-ventures 67.9 62.1Current operating liabilities 1,198.4 985.0Financial current accounts payable 196.9 159.1Of which: joint-ventures 178.2 137.5

Expenses 2009 2008

Short-term benefits- Fixed compensation 6.6 6.2- Variable compensation 3.7 4.1- Employer’s social security contribution 3.3 3.2- Contract termination benefits resulting from contract commitments 16.5 --

Including former CEO 3.0 --- Employer’s social security contribution / contract termination benefits 3.8 --- Compensation for attendance at Board meetings 0.6 0.4Other benefits- Post employment benefits 3.3 0.6

Including former CEO 2.1 --- Share-based payments (a) 4.1 3.9

(a) The Group measures the amount of the benefit granted to employees receiving options according to IFRs 2. The fair value of such options is determined at the grant date. The amounts thus obtained are recognised to profit and loss over the vesting period of the rights.

61





20. SHAREHOLDERS’ EQUITY

a. share Capital

The share capital of Thales amounts to 597,071,796 € and is comprised of 199,023,932 shares with a par value of €3 (compared to 198,724,809 shares with a par value of €3 at 31 December 2008).

B. deBt seCurities entitling holders to equity in the parent Company at a future date

at 31 December 2009, there are no securities entitling holders to equity in the parent company at a future date.

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 frame-work of its usual policy of management performance of the Group’s employees. since July 2007, the Group also set plans of free options to its employees. These different plans are described below:

Purchase options

Date of Board decision 25/11/08 04/07/07 13/11/01 02/04/01 10/05/00 14/09/99

Discount none none none none none none

Exercise period (a) from 25 Nov. 2012 to

24 Nov. 2018

from 4 July 2011 to

3 July 2017

from 13 Nov. 2005 to

12 Nov. 2011

from 2 April 2005 to

1 April 2011 (b)

from 10 May 2004 to

9 May 2010 (b)

from 14 Sept. 2004 to

13 Sept. 2009

Exercise price €38.50 €44.77 €42.18 (c) €42.37 (c) €37.72 (c) €32.59 (c)

Number of options exercised since grant date none none 8,183 none 103,696 1,156,490

Number of options outstanding at 31 Dec. 2008 (d) 48,900 80,000 119,744 42,424 120,717 268,684

Options granted in 2009 -- -- -- -- -- --

Options exercised in 2009 -- -- -- -- -- 191,283

Options cancelled in 2009 -- -- 7,655 31,816 9,549 77,401

Number of options outstanding at 31 Dec. 2009, net of options cancelled (e) and exercised

48,900 80,000 (f) 112,089 10,608 111,168 --

of which exercisable options at 31 Dec. 2009 -- -- 112,089 10,608 111,168 --

of which outstanding options at 31 Dec. 2009 held by:

- Chairman Luc Vigneron -- -- -- -- -- --

- the other members of Executive Committee (g) none none none none 2,123

Number of grantees of outstanding options 12 1 312 2 38 --

Including members of Executive Committee (except the Chairman) at 31 Dec. 2009 (g)

none none none none 1 --

Total top ten grantees (at plan date) 72,200 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) Figures from plan 2008 modified following adjustments identified after closing date.(e) Notably due to termination of the contract between the grantee and the Group since the grant date.(f) Because the former Chairman’s options are maintained.(g) as defined in the table page 210 for the period between 11 and 31 December 2009.



Date of Board decision 25/06/09 01/07/08 04/07/07 09/11/06 30/06/05 01/07/04 01/07/03 02/07/02 12/07/01

Discount none none none none none none none none none

Exercise period (a) from 26 June 2013 to

25 June 2019

from 1 July 2012 to 30 June 2018

from 4 July 2011 to 3 July 2017

from 9 Nov. 2010 to 8 Nov. 2016

from 30 June 2009 to

29 June 2015




from 12 July 2005

to 11 July 2011

Exercise price €32.88 €38.50 €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 none 2,709 106,875 338,843 1,252,320 221,039 182,240

Number of options outstanding at 31 Dec. 2008

-- 1,680,530(c)

1,571,870 2,173,991 2,026,349 2,103,211 1,652,517 2,710,872 2,911,719

Options granted in 2009 1,680,340 -- -- -- -- -- -- -- --

Options exercised in 2009 -- -- -- -- 48,796 76,431 173,896 -- --

Options cancelled in 2009 99,430 11,280 16,218 29,642 91,740 43,118 41,707 96,339 113,592

Number of options outstanding at 31 Dec. 2009, net of options cancelled (d) and exercised

1,580,910 1,669,250 1,555,652 2,144,349 1,885,813 1,983,662 1,436,914 2,614,533 2,798,127

of which exercisable options at 31 Dec. 2009 -- 2,970 201,243 336,840 1,885,813 1,983,662 1,436,914 2,614,533 2,798,127


- Chairman Luc Vigneron 0 (e) -- -- -- -- -- -- -- --

- the other members of Comex (Executive Committee) (f) 180,250 173,550 167,550 131,300 115,400 106,900 89,000 96,779 99,419

Number of grantees of outstanding options 1,362 1,275 1,259 1,903 1,715 2,665 2,302 4,404 4,325

Including members of Comex (except the Chairman) at 31 Dec. 2009 (f) 12 12 12 8 8 7 5 6 6

Total top ten grantees (at plan date) 222,000 230,000 240,000 235,000 275,000 285,000 280,000 263,000 329,500

(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) Figures from plan 2008 modified following adjustments identified after closing date.(d) Notably due to termination of the contract between the grantee and the Group since the grant date(e) Because the new chairman, Mr luc Vigneron, decided to waive the 80,000 options granted to him.(f) as defined in the table page 210 for the period between 11 and 31 December 2009.

Subscription options

Conditions of exercise of stock-options

all Thales share purchase options and subscription options are granted for a ten-year period, at no discount to the market price.

Options granted between 14 september 1999 and 30 June 2005 can be already exercised in full.

share purchase options or subscription options granted since 9 November 2006 are progressively vested over four years and may be exercised as follows:

• in all countries except France, up to 37.5% of the number granted 18 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 fourth anniversary of the date of grant.

63





Options granted and exercised in 2009

Number of op-tions granted / of shares subscribed

or purchased

Exercise price Maturity date Grant date

1 – DirectorsOptions granted in 2009 (a)- Luc Vigneron none €32.88 25/06/2019 26/06/2009

2 – Ten (b) largest grants to employees (c)

Options granted in 2009 222,000 €32.88 25/06/2019 26/06/2009

3 – Ten largest exercises by employees (c)

Options exercised in 2009 31,815 €32.59 -- 14/09/199930,000 €25.70 -- 01/07/200326,513 €32.59 -- 14/09/199920,000 €25.70 -- 01/07/200317,000 €25.70 -- 01/07/200310,606 €32.59 -- 14/09/199910,606 €32.59 -- 14/09/199910,606 €32.59 -- 14/09/199910,606 €32.59 -- 14/09/1999

9,000 €34.01 -- 30/06/2005

(a) Mr luc Vigneron has, at the meeting of the Board of Directors of 10 December 2009, waived the 80,000 options granted to him by the Board of Directors of 25 June 2009.(b) During the year 2009, the top ten individual grants of options to employees of the company or of its subsidiaries who are not company representatives (“mandataires sociaux”) of Thales, were

between 30,000 and 20,000 options: one beneficiary received 30,000 options, two received 25,000 options, one received 22,000 options and six received 20,000 options.(c) Including all companies of the Group.

Plan of free sharesThe Board of Directors, acting on the authorisation of the annual General Meeting, decided to put in place a third free share al-lotment plan. The company decided to exclude from the benefit of this plan: the Chairman (the only “mandataire social”: legally responsible as defined by the French Commercial Code), the ex-ecutive Committee and the 361 main executives.The main characteristics of the plan are as follows:

• shares will be granted to all the employees benefiting from the plan at the conclusion of a four-year period of acquisition subject to the respect of the conditions stated in the plan rules,

• employees benefiting from free shares, who are French tax residents or subject to French social security have to keep their shares for a two-year period during which the shares cannot be sold. Non-French tax residents are not required to respect this two-year period.

Date of Board decision 25/06/2009 01/07/2008 04/07/2007

Number of grantees 3,848 3,624 3,545Share price at grant date €31.93 €35.72 €45.13Number of shares granted 334,980 317,705 312,435Number of free shares at 31/12/08 -- 316,115 306,510 (c)Grants cancelled during the year (a) 2,160 4,000 5,010Early exercises during the year (b) none none 90Number of free shares, net of cancellations and early exercises, at 31/12/09 332,820 312,115 301,410

Number of employees benefiting from the plan at 31/12/09 3,822 3,569 3,418

Vesting period from 25/06/2009 to 25/06/2013

from 01/07/2008 to 01/07/2012

from 04/07/2007 to 04/07/2011

Date of transfer of shares 26/06/2013 02/07/2012 05/07/2011Retention period for French Tax Residents from 26/06/2013

to 26/06/2015from 02/07/2012

to 02/07/2014from 05/07/2011

to 05/07/2013

(a) Due to the grantee’s leave.(b) Due to the grantee’s death during the vesting period.(c) Figure modified following adjustments identified after closing date.



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.

Expenses related to share-based payments (a):

Assumptions used:

• share options and free shares plans

Grant date Initial number of options

Fair value at grant date

Fair value at 31/12/09

2009 Expense 2008 Expense

01/07/03 3,034,200 (21.3) -- -- --

01/07/04 2,638,750 (21.4) -- -- 0.1

30/06/05 2,201,500 (19.5) -- 0.2 1.3

09/11/06 2,223,950 (23.5) (0.6) 2.8 6.9

04/07/07 1,654,530 (15.6) (1.4) 3.3 7.7

01/07/08 1,688,076 (11.2) (2.8) 6.1 2.7

25/11/08 71,700 (0.3) (0.1) 0.2 --

25/06/09 1,600,340 (11.2) (8.0) 3.3 --

Total options (12.9) 15.9 18.704/07/07 312,435 (11.5) (4.5) 3.1 3.0

01/07/08 317,705 (9.3) (5.9) 2.4 1.2

25/06/09 334,980 (8.7) (7.6) 1.1 --

Total free shares (18.0) 6.6 4.224/04/08 2,519,280 (5.0) -- -- 5.0

Company savings -- -- 5.0Total (30.9) 22.5 27.9

(a) Plans granted after 7 November 2002 (date of first application of the standard).

Grant date Share price at grant date

Expected volatility (a)

Risk-free rate Distribution rate on future

income

Expected rate of

cancellation of options pre-vesting

Expected rate of

departure post-vesting

Early exercise multiple

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 €33.59 30% 2.5% 2.5% 2% 3% 1.50

09/11/06 €37.32 30% 3.8% 2.5% 2% 3% 1.50

04/07/07 €45.13 20% 4.5% 2.5% 2% 3% 1.30

01/07/08 €35.72 20% 4.5% 2.5% 2% 3% 1.30

25/11/08 €31.96 20% 3.5% 2.5% 2% 3% 1.30

25/06/09 €31.93 25% 3.9% 2.5% 2% 3% 1.30

Free shares:04/07/07 €45.13 N/A 4.5% 2.5% 2% N/A N/A

01/07/08 €35.72 N/A 4.5% 2.5% 2% N/A N/A

25/06/09 €31.93 N/A 3.9% 2.5% 2% N/A N/A

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

65





• Company savings plans

In first half 2008, the Group made an employee share purchase offering with a discount to the market price. This plan includes:

- a traditional option,- a leveraged option. In this option, an independent bank supplements the employees’ investment so that the total investment is

a multiple of the contribution made by the employees. after a period of five years, employees receive a percentage of any gains made on the investment, with a guaranteed minimum equal to the amount of their initial investment.

These plans are presented below:

The assumptions used to determine the benefit granted, are presented below:

Traditional plan Leveraged plan (a)

Launch date 24 April 2008Plan maturity 5 yearsNumber of shares subscribed 607,818 1,911,462Reference price €41.75Discount to face value 20% 15%Subscription price €33.40 €35.49Amount subscribed by employees €20.3 million €17.0 millionTotal amount subscribed €20.3 million €67.8 million

(a) The cost of this plan is valued taking into account the five-year lock-up period, as recommended by the CNC (Conseil National de la Comptabilité). The CNC approach values the restricted shares through a replication strategy whereby the employee would sell the restricted shares forward at the end of the five year lock-up period, borrow enough money to buy unrestricted shares immediately, and use the proceeds of the forward sale together with dividends paid during the lock-up period to finance the loan. For the leveraged plan, the cost also includes the opportunity gain implicitly provided by Thales by enabling its employees to benefit from an institutional price for derivatives as opposed to a retail price.

Traditional plan Leveraged plan

Interest rate on market participant loan (in fine) 6.3%Five-years risk-free rate 4.48%Retail / institutional volatility spread N/A 8%Interest rate for borrowing securities (repo) 1.5%Structuring fees N/A 1%Cost of the lock-up 15.89% N/AOpportunity gain N/A 4.96%Total cost for the Group (% shares) 4.11% 4.96%Total cost for the Group (% discount) (a) 20.54% 33.09%

Total cost for the Group (million €)1.0 4.0

5.0

(a) The discount in value amounted respectively to €4.0 million and €8.0 million.



d. Changes in fair value of finanCial instruments direCtly reCognised in shareholders’equity

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.

f. treasury shares

Thales Parent Company held 3,556,693 of its own shares at 31 December 2009 (3,743,382 at 31 December 2008). In the consolidated financial statements, treasury shares are subtracted from consolidated shareholder’s equity for an amount of -€141.5 million at 31 December 2009 (€ -150.2 million at 31 December 2008).

g. Capital management

The Group manages its capital, based on authorizations given by general meetings, with the following objectives: op-timisation of profitability and risk of the capital invested by its shareholders, adequacy and control of the financial resourc-es 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 shareholding requires a specific authorisation regarding its financial conditions from the French “Commission des par-ticipations 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 cred-it 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 re-ferred to above and potential opportunities and threats on debt and equity markets.

On an indicative basis, the consolidated gearing ratio, as cal-culated below, is as follows:

2009 2008

Cash flow hedges 70.8 (26.5)- Changes in fair value 90.6 17.3- Taken to profit and loss (19.5) (42.8)- Change into scope of consolidation and exchange rate variations (0.3) (1.0)Available-for-sale assets 1.5 (0.5)- Changes in fair value 1.5 (0.2)- Taken to profit and loss -- --- Change into scope of consolidation and exchange rate variations -- (0.3)

2009 2008

Translation of the financial statements of foreign subsidiaries: 119.7 (263.8)- Changes in fair value 116.9 (263.1)- Taken to profit and loss 2.8 (0.7)Hedges of net investments in foreign subsidiaries: (3.8) 4.4- Changes in fair value (0.6) 4.7- Taken to profit and loss (3.2) (0.3)

31/12/09 31/12/08

Shareholders’ equity 3,753.8 3,951.8Net financial debt (note 24) 90.8 456.3

Net financial debt / (Shareholders’ equity + Net financial debt)

2% 10%

67





The Group grants its employees post-employment benefits (pensions, retirement awards, medical care, etc.) and oth-er 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 de-fined 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, com-pulsory additional plans such as aRRCO, aGIRC, etc.) for which the pension expense for the financial year is equal to the contributions called by, and thus payable to, such plans.

B. defined ContriBution plans

These plans guarantee employees benefits that are directly re-lated to aggregate contributions paid, as increased by the yield

21. PENSIONS AND OTHER EMPLOYEE BENEFITS

Provisions recognised in the balance sheet:

on investments made. The enterprise’s pension expense is thus limited to contributions paid. In 2009, the corresponding pension expense was €19.2 million (€18.7 million in 2008).

C. defined Benefit plans

There are two categories of countries 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 oth-er 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.

2009 2008

Externally funded

countries

Internally funded

countries

Total Externally funded

countries

Internally funded

countries

Total

Net provisions at 1 January (130.5) (673.0) (803.5) (280.9) (664.2) (945.1)Current service cost (19.8) (37.7) (57.5) (28.6) (31.2) (59.8)Interest cost (158.1) (46.5) (204.6) (179.1) (40.8) (219.9)Expected return on plan assets 132.7 7.8 140.5 178.7 9.1 187.8Schemes amendments, curtailments and settlements (12.8) 0.8 (12.0) 0.4 1.8 2.2

Amortisation of scheme amendments (3.4) (13.6) (17.0) (0.6) (4.8) (5.4)Amortisation of actuarial gains (losses) (13.1) 1.1 (12.0) 6.2 18.0 24.2Other component of pension charge (54.7) (50.4) (105.1) 5.6 (16.7) (11.1)Defined benefit plans: total cost (74.5) (88.1) (162.6) (23.0) (47.9) (70.9)Benefits and contributions 90.4 65.8 156.2 151.4 38.3 189.7- deficit payment in the UK 57.6 -- 57.6 78.6 -- 78.6- scheme settlements in the UK -- -- -- 38.1 -- 38.1- future service cash 32.8 65.8 98.6 34.7 38.3 73.0Exchange rate variation 1.1 (7.0) (5.9) 7.5 6.6 14.1Change in scope of consolidation and other (0.3) 25.4 25.1 14.5 (5.8) 8.7Net provisions at 31 December (113.8) (676.9) (790.7) (130.5) (673.0) (803.5)Of which: Assets 60.9 5.1 66.0 38.3 5.7 44.0

Liabilities (174.7) (682.0) (856.7) (168.8) (678.7) (847.5)Of which: Post-employment benefits (111.6) (564.0) (675.6) (127.9) (565.4) (693.3)

Other long-term benefits (2.2) (112.9) (115.1) (2.6) (107.6) (110.2)



Thales is subjected to financing obligations due to defined benefit pension commitments (mainly in the UK and in the Netherlands). In the UK, in accordance with the regulation in force, the financing level of pension commitments is meas-ured every three years. Following this measurement, the op-portunity of a new financing plan and/or the enforcement of guarantees in favour of the plan is decided, in coordination with the trustees. In this context, at 31 December 2009, discussions with the trustees are in-process.

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

In 2008, Thales holding UK granted a £ 445 million guaran-tee in case of possible under-financing of pension obligations. This commitment is underwritten by Thales (parent compa-ny) for a maximum amount of £ 150 million, corresponding to three years of additional contributions.

Externally funded countries 2009 2008

United Kingdom

Nether-lands

Total United Kingdom

Nether-lands

Total

Obligations at 1 January (1,801.2) (618.8) (2,420.0) (2,461.5) (709.7) (3,171.2)

Current service cost (14.8) (5.0) (19.8) (21.9) (6.7) (28.6)

Interest cost (122.1) (36.0) (158.1) (138.6) (40.5) (179.1)

Plan participants' contributions (10.6) (7.5) (18.1) (11.7) (8.0) (19.7)

Scheme amendments -- -- -- -- -- --

Curtailment/settlements 33.0 1.6 34.6 84.1 -- 84.1

New actuarial gains/losses (a) (224.3) (26.2) (250.5) 98.4 107.6 206.0

Benefits paid by plan assets 79.4 22.4 101.8 100.9 21.0 121.9

Benefits paid by employer (b) -- 0.3 0.3 -- 0.3 0.3

Scope, exchange rate var. and other (131.2) 0.2 (131.0) 549.1 17.2 566.3

Obligations at 31 December (2,191.8) (669.0) (2,860.8) (1,801.2) (618.8) (2,420.0)

Plan assets at 1 January 1,504.6 595.8 2,100.4 2,326.0 658.6 2,984.6

Expected return on plan assets 96.3 36.4 132.7 143.0 35.7 178.7

Employer's contribution (b) 79.9 10.2 90.1 138.5 12.6 151.1

Plan participants' contributions 10.6 7.5 18.1 11.7 8.0 19.7

Curtailment/settlements (33.6) -- (33.6) (77.1) -- (77.1)

Benefits paid by plan assets (79.4) (22.4) (101.8) (100.9) (21.0) (121.9)

New actuarial gains/losses 99.3 33.9 133.2 (455.1) (86.1) (541.2)

Scope, exchange rate var. and other 109.4 (1.4) 108.0 (481.5) (12.0) (493.5)

Plan assets at 31 December 1,787.1 660.0 2,447.1 1,504.6 595.8 2,100.4

Unfunded status at 31 December (404.7) (9.0) (413.7) (296.6) (23.0) (319.6)

Unrecognised actuarial (gain)/loss 424.3 (154.7) 269.6 311.0 (155.7) 155.3

Unrecognised past service cost -- 30.3 30.3 -- 33.8 33.8

Net provisions at 31 December 19.6 (133.4) (113.8) 14.4 (144.9) (130.5)

(a) Net experience gains/losses created in 2009 on obligations amounts to +€88.6 million (-€48.8 million in 2008, +€109.2 million in 2007 and +€61.0 million in 2006).(b) employer’s contribution and benefits paid by employer should, in 2010, remain stable.

69





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

Countries mainly internally funded 2009 2008

France Other Total France Other Total

Obligations at 1 January (543.4) (303.8) (847.2) (476.9) (294.1) (771.0)Current service cost (23.5) (14.2) (37.7) (19.1) (12.1) (31.2)Interest cost (31.5) (15.0) (46.5) (27.2) (13.6) (40.8)Scheme amendments (6.0) (1.7) (7.7) (98.0) -- (98.0)Curtailment/settlements 5.8 -- 5.8 0.3 (0.1) 0.2New actuarial gains/losses (a) (32.6) 1.2 (31.4) 43.2 7.5 50.7Benefits paid by plan assets 1.4 2.0 3.4 1.2 2.4 3.6Benefits paid by employer (b) 50.0 13.6 63.6 23.8 9.9 33.7Scope, exchange rate var. and other 2.6 (21.4) (18.8) 9.3 (3.7) 5.6Obligations at 31 December (577.2) (339.3) (916.5) (543.4) (303.8) (847.2) Plan assets at 1 January 87.1 49.3 136.4 101.4 60.6 162.0Expected return on plan assets 4.2 3.6 7.8 5.3 3.8 9.1Employer's contribution (b) (0.7) 2.9 2.2 1.0 3.6 4.6Benefits paid by plan assets (1.4) (2.0) (3.4) (1.2) (2.4) (3.6)New actuarial gains/losses 2.0 4.4 6.4 (16.3) (14.7) (31.0)Scope, exchange rate var. and other (0.2) 33.9 33.7 (3.1) (1.6) (4.7)Plan assets at 31 December 91.0 92.1 183.1 87.1 49.3 136.4

Unfunded status at 31 December (486.2) (247.2) (733.4) (456.3) (254.5) (710.8)Unrecognised actuarial (gain)/loss (58.9) (3.2) (62.1) (88.4) 2.6 (85.8)Unrecognised past service cost 118.6 -- 118.6 123.6 -- 123.6Net provisions at 31 December (426.5) (250.4) (676.9) (421.1) (251.9) (673.0)

(a) Net experience gains/losses created in 2009 on obligations amounts to +€88.6 million (-€48.8 million in 2008, +€109.2 million in 2007 and +€61.0 million in 2006).(b) employer’s contribution and benefits paid by employer should, in 2010, remain stable.

2009 United Kingdom

Netherlands France Rest of the world

Inflation rate 3.30% 2.00% 2.00% 2.00% to 3.50%Revaluation rate of pensions 2.30% - 3.10% 1.20% -- --Discount rate 5.85% 5.58% 5.18% 3.49% to 5.75%Expected long-term return on plan assets 6.00% 5.30% 4.70% 3.39% to 8.25%Future compensation increase 4.30% 3.00% 3.00% 3.00% to 4.00%Expected average residual service life (years) 9 11.1 16.4 9 to 17 years

2008 United Kingdom

Netherlands France Rest of the world

Inflation rate 2.90% 2.00% 2.00% 2.00% to 3.50%Revaluation rate of pensions 2.20% - 2.70% 1.20% -- --Discount rate 6.50% 5.81% 5.61% 3.46% to 6.00%Expected long-term return on plan assets 6.70% 6.00% 5.30% 3.75% to 8.25%Future compensation increase 3.90% 3.00% 3.00% 3.50% to 4.25%Expected average residual service life (years) 10 11.4 17.6 10 to 18 years



The discount rates are obtained by reference to market yields on high quality bonds in each country (Government bonds and high quality corporate bonds with maturity dates equivalent to those of the plans being measured). In this context, Group refers to the Iboxx index.

at 31 December 2009, Thales Group retained:

• in the euro zone, the new Iboxx € Corporate aa + 10 year index adjusted in accordance with the duration of the com-mitments in the countries in question,

• in the United Kingdom, the Iboxx £ a + 15 year index at 31/12/07, adjusted since then for the increase of the Iboxx £ aa + 15 year index of non-financial companies, in

at 31 December 2009, the sensitivity of the unfunded liabilities to a change in the discount rate is as follows:

22. RESERvES FOR CONTINGENCIES

The returns on plan assets are determined plan by plan and depend upon the asset allocation of the investment portfo-lio expected future performance. at 31 December 2009, 40.5% of plan assets are invested in equities (38.0% in 2008), 51.1% are invested in bonds (52.0% in 2008),

5.6% are invested in alternative funds (6.0% in 2008), 1.9% is invested in property (3.0% in 2008) and 0.9% is invested in other assets (1.0% in 2008). The actual return on plan assets in 2009 is estimated at +€276.3 million (-€389.2 million in 2008).

order to correct the market anomalies related to the on-going financial crisis.

at 31 December 2008 in order to correct the market anom-alies related to the financial crisis, Thales Group retained:

• in the euro zone, the new Iboxx € Corporate aa + 10 year index at 02/01/09, whose adjusted market composition at that date faithfully represents yields on high quality bonds at the end of 2008. The index is adjusted in accordance with the duration of the commitments in the countries in question,

• in the United Kingdom, the Iboxx £ a + 15 year index at 31/12/07, adjusted for the increase in 2008 of the Iboxx £ aa + 15 year index of non-financial companies.

Sensitivity in basis points +0.10% -0.10% +0.25% -0.25% +0.50% -0.50%

Decrease (increase) in unfunded liabilities at 31 December 2009 56.5 (53.8) 138.1 (145.8) 268.3 (299.7)

31/12/09 Opening Changes in exchange rate

and other

Increase Reversal Closing

Restructuring 107.5 (1.0) 76.6 (64.5) 118.6

Provisions on contracts: 566.4 22.3 303.0 (187.3) 704.4

- guarantees 223.0 (0.5) 98.7 (73.1) 248.1

- litigation 189.1 0.3 47.7 (26.3) 210.8

- estimated losses on long-term contracts 40.3 4.1 83.2 (a) (29.3) 98.3

- other 114.0 18.4 73.4 (58.6) 147.2

Other reserves for contin-gencies 287.6 2.3 111.0 (94.1) 306.8

Total 961.5 23.6 490.6 (345.9) 1,129.8

a) Mainly related to series contracts in aerospace.

71





31/12/08 Opening Changes in exchange rate

and other

Increase Reversal Closing

Restructuring 201.3 (7.9) 30.0 (115.9) 107.5

Provisions on contracts: 581.2 9.2 167.4 (191.4) 566.4

- guarantees 208.3 (10.8) 80.3 (54.8) 223.0

- litigation 185.0 16.2 21.6 (33.7) 189.1

- estimated losses on long-term contracts 47.1 1.3 19.9 (28.0) 40.3

- other 140.8 2.5 45.6 (74.9) 114.0

Other reserves for contingencies 243.5 20.8 87.4 (64.1) 287.6

Total 1,026.0 22.1 284.8 (371.4) 961.5

Restructuring costs can be analysed as follows:

23. LITIGATION AND ENvIRONMENT

a. litigation

Due to the nature of its business activities, Thales is ex-posed to the risk of technical and commercial litigation.

To prevent disputes or limit their impact, Thales policy is to increase recourse to alternative methods of dispute resolu-tion. These recommendations are reviewed on a regular ba-sis to take account of changes in the company’s core areas of business and are backed by training programmes.

In addition, Thales implemented a procedure several years ago to centralise all civil, commercial and criminal litigation and claims. These are handled by the Group legal depart-ment, with the support of the divisions concerned.

The request for arbitration submitted by the Republic of China Navy (Taiwan) for an amount of Us$ 599 million in

damages, arising out of the execution of a contract, signed in 1991, for the supply of equipment and systems in conjunc-tion with an industrial partner, continued in 2009 and the arbitration Panel declared the arbitration procedure com-plete on 10 November 2009. at the date of publication of the present document, no award had been handed down. Thales considers that an award could be handed down in the first half of 2010.

In June 2005, the adverse party, in the context of this procedure, increased its request to Us$ 1,119 million, to which interest for late payment would be added. It reduced its request to Us$ 882 million in april 2006 (interest for late payment excluded). If an unfavourable award 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.


On the basis of the information at its disposal at the end of 2009, Thales has carried out a review of the financial risks to which the company could be exposed as a result of this procedure. In the absence of any new significant information, Thales has, in consequence, decided to maintain at 31 De-cember 2009 a reserve for this litigation identical to that recognised in its 2008 financial statements. In application of paragraph 92 of Ias 37, no detailed disclosure is provided for this amount.

No other governmental, legal or arbitration proceedings (in-cluding any such proceedings which are pending or threat-

2009 2008

Increase in reserve during the period (76.6) (30.0)

Reversal in reserve during the period 64.5 115.9

Expenses during the period (104.0) (118.4)




ened of which the company is aware) have had significant effects on the company and/or group’s financial position or profitability in the last 12 months.

B. environment

Due to the nature of Thales’s activities, environmental risks are related to potential adverse environmental and health effects of these activities, impact of the environment on its operations and non-compliance with new regulations applica-ble to products.

For many years, Thales has conducted regular analysis and update of environmental risks in accordance with its busi-ness activities, scientific and technical developments and the broader environmental challenges.

This analysis is used to produce a map of risks, linked prima-rily to regulatory non-compliance, pollution, asbestos, sub-

24. NET FINANCIAL DEBT

stances (ROhs, ReaCh, Weee, etc.) and radiation. The aim of this exercise is to:

• ensure that employees and surrounding residents are not exposed to health and environmental risks,

• ensure the compliance of activities and products,• analyze the impact of new regulations, including on product


plans, either at Group level or locally, according to the risk mapping results.

In addition to this risk mapping, an environmental manage-ment system has been deployed at all sites in order to en-sure the control and limitation of the environmental impacts in accordance with Thales’s commitments. By the end of 2009, over 90 sites had obtained IsO 14001 certification.

at 31 December 2009, the amount of reserves for environ-mental contingencies amounted to €6.5 million.

31/12/09 31/12/08

Long-term financial debt 1,651.6 761.3

Short-term financial debt 326.4 1,136.3

Current accounts payable with affiliated companies 196.9 159.1

Fair value of derivatives: interest rate risk management (24.8) (13.1)

Total gross financial debt (I) 2,150.1 2,043.6

Current accounts receivable with affiliated companies 94.8 65.1

Marketable securities 4.4 22.4

Cash at bank and equivalents (a) 1,960.1 1,499.8

Cash and other short-term financial assets (II) 2,059.3 1,587.3

Net financial debt (I-II) 90.8 456.3

(a) Includes tradable debt securities with maturities of less than 3 months of €1,299.0 million in 2009 and €902.5 million in 2008.

73





Breakdown of gross finanCial deBt

Breakdown of gross finanCial deBt By CurrenCy 1

31/12/09 31/12/08

Bond, maturity 2013 601.9 --Bond, maturity 2011 785.6 510.3Euro Medium Term Notes (E.M.T.N) - tradable -- 699.5Commercial paper 149.9 329.5Project financing debt 199.5 211.5Borrowings from financial institutions 115.0 38.1Other borrowings 49.1 30.4Capital lease obligations 20.5 22.4Current accounts with affiliated companies 196.9 159.1Bank overdrafts 22.7 41.0Accrued interest 33.8 14.9Fair value of derivatives: interest rate risk management (a) (24.8) (13.1)Gross financial debt 2,150.1 2,043.6

(a) 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.

31/12/09 31/12/08

Euro 1,912.3 1,672.0Pound Sterling 139.3 194.4US Dollar 22.2 10.7Singapore Dollar -- 102.9Australian Dollar 62.2 55.7Other 14.1 7.9Total 2,150.1 2,043.6

Nature of borrowings Nominal value Maturity date Rate

nature nominal effective

(excluding effect of hedging)

Bond, maturity date 2013 €600m April 2013 fixed Including €200m

swapped to floating rate

4.375% 4.5757%

Bond, maturity date 2011€500m

July 2011 fixed

Including €575m

swapped to floating rate

4.375%4.4776%

€275m (cplt Jan. 09) 5.75%

EMTN €700m December 2009 floating Eur 3M + 0.125%

Eur 3M + 0.1864%

Commercial paper Fixed rate loans including €149.9m (€75.7m at 31 December 2008) swapped to floating rate using interest rate swaps. Because of their short-term maturity, these loans are completely assimilated to floating rate loans.

Project financing debt 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 comprises fixed-rate loans (or floating-rate loans swapped to fixed-rate loans) maturing in years up to 2020.

1. after incidence of the corresponding derivative instruments.



at 31 December 2009, no financing of material amount used by the Group is subject to clauses requiring acceler-ated repayment based on the Group’s rating or on financial ratios.

at 31 December 2009, 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 facil-ity 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 corresponding 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 2009, the fair value of debt amounted to €2,227.6 million and €2,056.9 million in 2008.

Breakdown of gross finanCial deBt By type of rate 1

Breakdown of gross finanCial deBt By maturity

ContraCtual Cash-flows of finanCial deBt

31/12/09 31/12/08

Fixed rate 896.1 466.6Floating rate 1,254.0 1,577.0Total 2,150.1 2,043.6

31/12/09 31/12/08

2009 1,295.42010 (a) 523.3 28.02011 (b) 807.9 529.52012 67.9 34.92013 (c) 628.0 32.02014 37.2

} 123.82015 and beyond 85.8Total at more than one year 1,626.8 748.2Total 2,150.1 2,043.6

(a) Maturity cash flows under 1 year mainly include commercial paper and current accounts payable with affiliated companies.(b) Of which -€18.6 million at 31 December 2009 and -€13.1 million at 31 December 2008 of fair value of interest rate derivative instruments.(c) Of which, -€6.2 million of interest rate derivative instruments at 31 December 2009.

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.

Gross finan-cial debt at 31/12/09

Interests payable

Total at 31/12/09

Contractual cash flows scheduled in:

2010 2011 2012 2013 2014 and beyond

2,150.1 224.4 2,374.5 599.6 867.2 98.0 661.1 148.6

75





Methods used to measure fair value:


Other investments are mainly valued at cost (note 1-g).

At 31 December 2009 Loans and receivables

At fair value Total

Financial assets Derivatives

Through P&L Available for Sale

Hedge accounting

Not qualified for hedge

accounting

Non current assets:Other investments -- -- 101.9 -- -- 101.9Other financial assets 171.9 -- -- -- -- 171.9Fair value of derivatives -- -- -- 24.8 -- 24.8Current assets:Accounts, notes and other current receiv. 3,934.8 -- -- -- -- 3,934.8Fair value of derivatives -- -- -- 162.4 10.2 172.6Current accounts with affiliates companies 94.8 -- -- -- -- 94.8Marketable securities -- -- 4.4 -- -- 4.4Total assets 4,201.5 -- 106.3 187.2 10.2 4,505.2

At 31 December 2008 Loans and receivables

At fair value Total

Financial assets Derivatives

Through P&L Available for Sale

Hedge accounting


accounting

Non current assets:Other investments -- -- 175.4 -- -- 175.4Other financial assets 258.8 -- -- -- -- 258.8Fair value of derivatives -- -- -- 13.1 -- 13.1Current assets:Accounts, notes and other current receiv. 4,064.1 -- -- -- -- 4,064.1Fair value of derivatives -- -- -- 238.3 54.1 292.4Current accounts with affiliates companies 65.1 -- -- -- -- 65.1Marketable securities -- -- 22.4 -- -- 22.4Total assets 4,388.0 -- 197.8 251.4 54.1 4,891.3

Quoted prices in active markets (level 1) -- 4.4 -- -- 4.4Valuation techniques based on observable market data (level 2) -- -- 187.2 10.2 197.4

Valuation techniques not based on observable market data (level 3) -- 101.9 -- -- 101.9

Quoted prices in active markets (level 1) -- 22.4 -- -- 22.4Valuation techniques based on observable market data (level 2) -- -- 251.4 54.1 305.5

Valuation techniques not based on observable market data (level 3) -- 175.4 -- -- 175.4

25. SUMMARY OF FINANCIAL INSTRUMENTS

finanCial instruments assets





At 31 December 2009 At amortised cost

At fair value Total

Financial liabilities

Derivatives

Hedge accounting


accounting

Non current liabilities:

Financial debt - long term 1,626.8 24.8 -- -- 1,651.6

Current liabilities:

Accounts, notes and other current payables 4,736.0 -- -- -- 4,736.0

Fair value of derivatives -- -- 99.1 1.6 100.7

Financial debt - short term 326.4 -- -- -- 326.4

Current accounts with affiliates companies 196.9 -- -- -- 196.9

Total liabilities 6,886.1 24.8 99.1 1.6 7,011.6

At 31 December 2008 At amortised cost

At fair value Total

Financial liabilities

Derivatives

Hedge accounting


accounting

Non current liabilities:

Financial debt - long term 748.2 13.1 -- -- 761.3

Current liabilities:

Accounts, notes and other current payables 5,045.9 -- -- -- 5,045.9

Fair value of derivatives -- -- 235.6 43.9 279.5

Financial debt - short term 1,136.3 -- -- -- 1,136.3

Current accounts with affiliates companies 159.1 -- -- -- 159.1

Total liabilities 7,089.5 13.1 235.6 43.9 7,382.1

Quoted prices in active markets (level 1) -- -- -- --Valuation techniques based on observable market data (level 2) 24.8 99.1 1.6 125.5

Valuation techniques not based on observable market data (level 3) -- -- -- --

Quoted prices in active markets (level 1) -- -- -- --Valuation techniques based on observable market data (level 2) 13.1 235.6 43.9 292.6

Valuation techniques not based on observable market data (level 3) -- -- -- --

finanCial instruments liaBilities

77





26. 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 €113.2 million in 2009 and €129.0 million in 2008.

B. net finanCial investment

Acquisitions:

Disposals:

C. inCrease (deCrease) in shareholders’ equity and minority interests

2009 2008

Additional purchase consideration / Alcatel Alenia Space (note 2) (129.6) --CMT Medical Technologies Ltd (20.3) --NCipher Plc -- (63.2)Diehl Aircabin GmbH -- (54.4)Stesa (acquisition of co-shareholders’ shares) -- (8.6)Acquisition of Thales Holding GmbH minority interests -- (3.1)Transportation and security activities of Alcatel-Lucent: additional purchase consideration -- (25.7)Other (5.5) (19.5)Acquisitions (155.4) (174.5)Cash position of companies acquired 7.4 1.3Acquisitions, net (148.0) (173.2)

2009 2008

Thales e-Transactions -- 93.7Thales Computers -- 11.0Others 5.3 (4.8)Disposals 5.3 99.9Cash position of companies sold (5.3) (10.8)Disposals, net -- 89.1

2009 2008

Increase in capital / exercise of stock options 4.6 12.3Proceeds from sale of treasury shares 17.0 (56.8)Total 21.6 (44.5)



27. COMMITMENTS AND CONTINGENCIES

a. Bonds and warranties linked to CommerCial ContraCts

Within the context of its activity, the Group regularly re-sponds to invitations to bid. When requested by the cus-tomer, bid bonds are delivered in order to demonstrate the definitive nature of the bid and to provide for indemnifica-tion to the customer if the Group fails to meet its commit-ments. at 31 December 2009, bid bonds issued amounted to €58.7 million (€133.8 million at 31 December 2008).

From the signature of a contract up until its completion, the Group may deliver performance bonds to its customers, us-ing a bank as an intermediary, in order to guarantee the due and proper completion of the contract (and if not, to provide for payment of damages to the customer). at 31 December 2009, performance bonds amounted to €1,405.7 million (€1,344.5 million at 31 December 2008).

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 2009, advance payment bonds amounted to €1,973.2 million (€1,708.1 million at 31 December 2008).

During the contractual warranty period, the Group evaluates and accrues for warranty costs in order to guarantee the conformity 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 2009, warranty retention bonds amounted to €244.1 mil-lion (€332.8 million at 31 December 2008).

The maturity dates of these commitments are:

In addition, Thales may, on behalf of its subsidiaries, grant so-called “parent company guarantees” to third parties with-out using a bank as an intermediary. at 31 December 2009, these “corporate” guarantees amount to €8,771.5 million and €8,295.1 million at 31 December 2008.

B. other Commitments

at the end of 2002, a group of French manufacturers, in-cluding Thales and one of its subsidiaries, collectively re-

ceived 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 re-course to statute of limitations provisions, which could have been invoked against the client.

< 1 year 1 to 5 years > 5 years Total

Bid bonds 56.7 2.0 -- 58.7Performance bonds 631.4 667.9 106.4 1,405.7Advance payment bonds 1,010.4 782.4 180.4 1,973.2Warranty retention bonds 182.0 57.0 5.1 244.1Other bank bonds 59.7 38.0 1.5 99.2Total 1,940.2 1,547.3 293.4 3,780.9

79





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 rene-gotiation at various intervals specified in the lease contracts. Binding lease and rental commitments at 31 December 2009 are analysed below:

Purchase of tangible fixed assets

at 31 December 2009, firm commitments to purchase tan-gible fixed assets amounted to €68.6 million (€20.7 million at 31 December 2008).

d. guarantees given / reCeived related to disposals / aCquisitions of Companies

The contracts governing acquisitions (disposals) of compa-nies by Thales may contain clauses committing the seller to indemnify the buyer for liabilities in excess of those recorded in the books of the companies sold. These guarantees are generally 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 claus-es, 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.

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 com-

panies in the Group grant their employees a training entitle-ment 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 ceil-ing of 120 hours.

Thales has signed an agreement regarding anticipation of changes in employment, professional development and train-ing that is applicable to all its French subsidiaries. This agreement stipulates the manner in which the statutory training entitlement 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 contributing to the professional develop-ment of employees envisaged in the training programme are counted as part of the statutory training entitlement. In con-sequence, as the costs incurred benefit the enterprise, no provision has been recognised.

28. FINANCIAL 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 investments in foreign currencies.

Rent payable

Total < 1 year 1 to 5 years > 5 years

Finance leases (a) 23.2 0.9 2.2 20.1Operating leases 870.7 170.0 431.6 269.1

(a) Including interest (-€2.7 million). The corresponding debt is recognised in the consolidated balance sheet for an amount excluding interest (note 24).



The change in value of financial instruments used as cash flow hedges is recognised in shareholders’ equity. a de-crease (respectively, an increase) of 5% in the rate of the dollar against the main currencies (eUR, GBP and CaD) would positively (respectively, negatively) impact sharehold-ers’ equity by approximately €70 million at 31 December 2009, compared with €95 million at 31 December 2008.

The change in value of the financial instruments, matched with portfolios of sales offers, which are not eligible for hedge accounting, is recognised in profit and loss. a de-crease (respectively, an increase) of 5% in the rate of the dollar against the main currencies (eUR, GBP and CaD) would positively (respectively, negatively) impact profit and loss by approximately €2 million at 31 December 2009, compared with €9 million at 31 December 2008.

Operating receivables and payables denominated in foreign currencies are covered by exchange rate hedges and are not therefore exposed to foreign currency risk.

Foreign currency-denominated financial debt does not gener-ate any exposure in profit and loss, as it is either denomi-nated in the functional currency of the entity in which it is recognised, or is used as a net foreign investment hedge.

Thales mainly held forward foreign exchange contracts at 31 De-cember 2009 and 2008. Nominal forward buy and sell contract amounts, converted into euros at closing rates, are detailed be-low by currency. Where options are concerned, the amounts indi-cated correspond to nominal values for underlying currency trans-actions and are mentioned in the “buy / lend” or “sell / borrow” columns depending on the nature of the operation at maturity.

Purchases of foreign currencies 2009 2008

USD GBP Other Total Market value

Total Market value

Forward exchange contracts 485.8 347.2 624.6 1,457.6 1.0 1,371.0 51.6

Foreign exchange swaps:

- to hedge investments -- -- -- -- -- -- --

- to hedge commercial commitments 528.5 621.4 613.0 1,762.9 12.5 1,648.4 (32.8)

Foreign exchange options:

- purchase of options 2.4 50.9 28.9 82.2 0.5 314.6 (13.1)

- sale of options -- 10.2 1.5 11.7 -- 262.3 (10.1)

Sales of foreign currencies 2009 2008

USD GBP Other Total Market value

Total Market value

Forward exchange contracts 1,065.9 378.3 814.6 2,258.8 45.2 1,979.2 (68.0)

Foreign exchange swaps:

- to hedge investments -- 37.0 -- 37.0 (0.6) 137.3 4.0

- to hedge commercial commitments 1,552.7 322.3 477.8 2,352.8 25.1 2,183.0 26.7

Foreign exchange options:

- purchase of options 148.6 10.2 0.5 159.3 0.9 1,352.1 56.5

- sale of options 1.4 -- -- 1.4 -- 372.6 7.8

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2009 2008

< 1 year 1 to 5 years

> 5 years Total Market value

Total Market value

Interest rate swap - lend 1,109.9 (a) 775.0 -- 1,884.9 24.8 650.7 13.3- borrow -- -- -- -- -- -- --

(a) Of which €149.9 million hedging commercial papers (note 24) and €960.0 million maturing in February 2010.

Maturity dates are as follows:

B. interest rate risk management

Thales is exposed to interest rate volatility and in particular its impact on the conditions associated with variable-rate financing. To limit this risk, Thales operates an active policy of interest rate hedging.

The Corporate Financing & Treasury department consolidates data on Thales’s exposure to interest rate risk and uses the appropriate financial instruments to hedge those risks.

Thales policy is to control interest rate and counterparty risks and to optimise its funding and banking operations by consolidating and pooling the cash surpluses and require-ments of all its units.

Current nominal values, by type of interest rate instrument, and corresponding to the fixed part of the swaps, are ana-lysed below:

Purchases of foreign currencies 2009


Forward exchange contracts 956.3 501.0 0.3 1,457.6Foreign exchange swaps:- to hedge investments -- -- -- --- to hedge commercial commitments 1,474.8 268.0 20.1 1,762.9Foreign exchange options:- purchase of options 82.2 -- -- 82.2- sale of options 11.7 -- -- 11.7

Sales of foreign currencies 2009


Forward exchange contracts 1,472.2 776.8 9.8 2,258.8Foreign exchange swaps:- to hedge investments 37.0 -- -- 37.0- to hedge commercial commitments 1,813.6 523.7 15.5 2,352.8Foreign exchange options:- purchase of options 159.3 -- -- 159.3- sale of options 1.4 -- -- 1.4



Based on the average debt for 2009, a 1% rise in interest rates would increase financial expense by €3 million.

C. Credit risk management

Credit risk relates to the risk that a party to a contract will default on its commitments or fail to pay what it owes.

Risk relating to failure of a private-sector customer

Civil customers (business and industry, civil aerospace and pri-vate infrastructure operators) account for approximately 25% of Thales’s revenues. These customers may encounter major and/or prolonged financial difficulties that could lead to payment defaults or order cancellations. such occurrences could have a negative impact on Thales’s revenues, profitability and financial position.

To mitigate these risks, Thales conducts regular analysis of the ability of customers to meet their obligations. When nec-essary, Thales may request bank guarantees or corporate guarantees, or may alternatively use credit insurers.

Credit risk relating to public-sector customers

Government and institutional customers account for around 75% of Thales’s revenues. Thales works with a large number of countries. some of these could present a significant credit risk, particularly the emerging nations. a country could, for example, suspend an order in production, or be unable to make payment on delivery, as agreed under the terms of the contract. To limit its exposure to these risks, Thales takes out insurance with export credit agencies (such as Coface in France) or private insurers.

at 31 December 2009, only two customers accounted for annual revenues in excess of €500 million: the French gov-ernment (€2 billion) and the UK government (approx. €1 bil-lion). at that date, both countries were rated aaa by stand-ard & Poor’s.

The Group’s Finance department consolidates all the infor-mation relating to the Group’s exposure to credit risk, no-tably by identifying and analysing the ageing of overdue ac-counts & notes receivable that have not been written down as impaired. at 31 December 2009 and 2008, the ageing of these accounts & notes receivable is as follows:

d. liquidity risk

Thales’s liquidity risk corresponds to its level of exposure to changes in the main market indicators that could lead to an increase in the cost of credit or even to a temporary limita-tion of access to external sources of financing.

Thales manages this risk by anticipating its liquidity require-ments and by maintaining committed, undrawn credit facili-ties granted by banks as backup for the commercial paper programme and representing, as such, a financing reserve.

At 31 December 2009 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 492.5 331.9 61.1 99.5

At 31 December 2008 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 439.6 210.6 69.6 159.4

83





This risk is hedged by Thales’s short- and long-term financial resources:

• shareholders’ equity (note 20),• gross debt (listed by date of maturity in note 24),• committed, undrawn credit facilities granted by banks as

backup for the commercial paper programme and repre-senting, as such, a financing reserve (note 24).

This principle of consolidating and centralising the short-term surpluses and requirements of units (cash pooling) is applied to units in the same currency zone – euro zone (with separate cash pooling for French units), sterling zone, dollar zone and australian dollar zone, etc. – and, in some cases, in the same country.

Through the consolidation and centralisation of cash require-ments and surpluses of its units, the Group is in a position to:

• simplify cash management and match the cash positions of units to produce a single consolidated position that is easier to manage,

• gain prime access to financial markets through the par-ent company’s financing programmes, rated by standard & Poor’s and Moody’s (see below).

at 31 December 2009, the cash recorded under consolidat-ed assets was €1,960.1 million (compared to €1,499.8 mil-lion at end-2008), including:

• €1,400.7 million held by the parent company and available for immediate use (€1,014.6 million in 2008),

• €357.8 million in the bank credit balances of subsidiar-ies, most of them outside France. This figure includes pay-ments received in the last few days of the financial year and subsequently transferred to the corporate treasury account (€309.7 million in 2008),

• €201.6 million 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 (€175.5 mil-lion in 2008).

Cash at bank and equivalents at year-end is solely invested in either bank deposits or in very short-term bank certificates of deposit with first-tier banks.

at the date of publication, Thales’s credit risk ratings were as follows:

Thales’s ratings remained unchanged in 2009.

a decrease of Thales’s credit risk ratings would have no im-pact on the terms and conditions of committed financings, since they are not linked to financial covenants included in fi-nancing contracts. Pursuant to the credit facility documents, clauses providing for accelerated repayment would only apply in the event that the state no longer held its golden share and, simultaneously, the ratio of consolidated net financial debt to eBITDa (earnings before interest, taxes, deprecia-tion and amortisation) were to exceed 3.

29. SUBSEQUENT EvENTS

In December 2009, Thales announced a proposed new or-ganisation to simplify its operations, foster transverse syner-gies and commercial reactivity, and to increase performance.

Under the new organisation, the Group will conduct its busi-ness through three large geographical areas and seven divi-sions. each geographical area will have responsibility for its profit and loss account. as from 1st January 2010, in accord-ance with IFRs 8 (operating segments), the information by seg-ment will therefore be mainly provided by geographical areas.

Divisions will be in charge of research and development, product policy and industrial policy worldwide.

Moody’s Standard & Poor’s

Medium and long-term loans A1 A-

Outlook outlook stable outlook stable

Commercial paper & short-term loans Prime-1 A2



geographiC areas

Area A: United Kingdom, australia and New Zealand, United states of america, Canada, Netherlands, Central and North europe, Central and North asia, NaTO and United Nations.

Area B: Germany, spain, Italy, rest of europe, south and south east asia, Middle east, latin america, africa.

France is an area in itself.

30. FEES PAID TO AUDITORS

Fees paid to auditors in 2009 and 2008 are presented below (a):

2009 Area A Area B France Other, elim. and non

allocated amounts

(a)

Total of areas and

other

PPA Thales

Consolidated order backlog at 31/12 8,441.3 4,392.7 11,896.6 0.2 24,730.8 -- 24,730.8Consolidated new orders 3,797.2 3,018.9 7,109.5 1.5 13,927.1 -- 13,927.1

Consolidated revenues 4,135.1 2,590.5 6,154.1 1.8 12,881.5 -- 12,881.5

Inter-segments revenues 208.0 348.9 806.7 (1,363.6) -- -- --

Total revenues 4,343.1 2,939.4 6,960.8 (1,361.8) 12,881.5 -- 12,881.5

Income from operations 191.5 229.8 (212.6) (57.7) 151.0 (99.2) 51.8Consolidated number of employees (end of period) 18,750 13,306 31,405 824 64,285 -- 64,285

(a) The “other, eliminations and non allocated amounts” column corresponds to the elimination of transactions between the three areas and includes figures related to Thales (parent com-pany), Thales International Offset, and Thales International s.a. In addition, the income from operations which is not allocated includes the cost of share-based payment (-€22.5 million).

Mazars Ernst & YoungAmount (pre-tax) % Amount

(pre-tax) %

2009 2008 2009 2008 2009 2008 2009 2008AuditAuditing, certification, examination of individual and consolidated accounts (b)- Issuer 740 718 14% 12% 804 561 15% 10%- Subsidiaries fully consolidated 4,287 4,748 78% 83% 3,751 4,455 69% 79%Other efforts and services directly associated with the assignment of the auditor (c)- Issuer 50 50 1% 1% 62 40 1% 1%- Subsidiaries fully consolidated 331 228 6% 4% 457 491 8% 9%Sub-total 5,408 5,744 99% 100% 5,074 5,547 93% 99%Other services rendered by the networks subsidiaries fully consolidated (d)Legal, tax-related, social-security-related 63 -- 1% -- 388 49 7% 1%Other (if > 10% of audit fees) -- -- -- -- -- -- -- --Sub-total 63 0 1% 0% 388 49 7% 1%Total 5,471 5,744 100% 100% 5,462 5,596 100% 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.

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>> ��List of main consolidated companies




G. LIST OF MAIN CONSOLIDATED COMPANIES (not including Thales parent company)

% Control % Stake

31/12/09 31/12/08 31/12/09 31/12/081. CONSOLIDATED SUBSIDIARIESStesa (Saudi Arabia) 100% 100% 100% 100%Thales Defence Systems Pty Ltd (South Africa) 80% 80% 80% 80%Thales Australia Ltd (Australia) 100% 100% 100% 100%TDA Armements SAS (France) 100% 100% 100% 100%Thales Air Systems SA (France) 100% 100% 100% 100%Thales ATM GmbH (Germany) 100% 100% 100% 100%Thales Avionics SA (France) 100% 100% 100% 100%Thales Avionics Inc (United-States) 100% 100% 100% 100%Thales Avionics Ltd (United-Kingdom) 100% 100% 100% 100%Thales Avionics Electrical Systems SA (France) 100% 100% 100% 100%Thales Canada Inc (Canada) 100% 100% 100% 100%Thales Communications SA (France) 100% 100% 100% 100%Thales Communications Inc (United-States) 100% 100% 100% 100%Thales Defence Deutschland GmbH (Germany) 100% 100% 100% 100%Thales Air Defence Ltd (United-Kingdom) 100% 100% 100% 100%Thales UK Ltd (United-Kingdom) 100% 100% 100% 100%Thales Electron Devices SA (France) 100% 100% 100% 100%Thales Electron Devices GmbH (Germany) 100% 100% 100% 100%Thales International Saudi Arabia (Saudi Arabia) 100% 100% 100% 100%Thales Italia SpA (Italy) 100% 100% 100% 100%Thales Naval Ltd (United-Kingdom) 100% 100% 100% 100%Thales Nederland BV (Netherlands) 99% 99% 99% 99%Thales Optronique SA (France) 100% 100% 100% 100%Thales Optronics Ltd (United-Kingdom) 100% 100% 100% 100%Thales Rail Signalling Solutions GmbH (Germany) 100% 100% 100% 100%Thales Rail Signalling Solutions Inc (Canada) 100% 100% 100% 100%Thales Rail Signalling Solutions Ltd (United-Kingdom) 100% 100% 100% 100%Thales Security Solutions & Services SAS (France) 100% 100% 100% 100%Thales Services SAS (France) 100% 100% 100% 100%Thales Suisse SA (Switzerland) 100% 100% 100% 100%Thales Systèmes Aéroportés SA (France) 100% 100% 100% 100%Thales Transport & Security Ltd (United-Kingdom) 100% 100% 100% 100%Thales Transport Signalling & Security Solutions, SAU (Spain) 100% 100% 100% 100%Thales Training & Simulation Ltd (United-Kingdom) 100% 100% 100% 100%Thales Underwater Systems Ltd (United-Kingdom) 100% 100% 100% 100%Thales Underwater Systems SAS (France) 100% 100% 100% 100%Thales Components Corporation (United-States) 100% 100% 100% 100%2. ACCOUNTED FOR UNDER THE PROPORTIONATE METHODAir Command Systems International SAS (ACSI) (France) 50% 50% 50% 50%Amper Programas de Eletronica Y Communicaciones SA (Spain) 49% 49% 49% 49%Citylink Telecommunications Holding Ltd (United-Kingdom) 33% 33% 33% 33%Diehl Aircabin GmbH (Germany) 49% -- 49% --Diehl Aerospace GmbH (Germany) 49% 49% 49% 49%Ericsson Thales AEW Systems AB (Sweden) 50% 50% 50% 50%Navigation Solutions LLC (United-States) 35% 22% 35% 22%Samsung Thales Co. Ltd (Korea) 50% 50% 50% 50%Thales Alenia Space SA (France) 67% 67% 67% 67%Thales Alenia Space Italia SpA (Italy) 67% 67% 67% 67%Telespazio holding SRL (Italy) 33% 33% 33% 33%Thales-Raytheon Systems Company LLC (United-States) 50% 50% 50% 50%Thales-Raytheon Systems Company SAS (France) 50% 50% 50% 50%Trixell (France) 50% 50% 50% 50%3. ACCOUNTED FOR UNDER THE EQUITY METHODAviation Communications & Surveillance Systems (United-States) 30% 30% 30% 30%Camelot Group Plc (United-Kingdom) 20% 20% 20% 20%DCNS (France) 25% 25% 25% 25%DpiX LLC (United-States) 20% 20% 20% 20%Elettronica SpA (Italy) 33% 33% 33% 33%ESG GmbH (Germany) 30% 30% 30% 30%Indra Espacio SA (Spain) 33% 33% 33% 33%



H. STATUTORY AUDITORS’ REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended December 31, 2009

This is a free translation into english of the statutory auditors’ report on the consolidated financial statements issued in French and it is provided solely for the convenience of english-speaking users. This report includes information specifically required by French law in such reports, whether modified or not. This information is presented below the audit opinion on the consolidated financial statements and includes an explanatory paragraph discussing the auditors’ assessments of certain significant accounting and auditing matters. These assessments were considered for the purpose of issuing an audit opinion on the consolidated financial statements taken as a whole and not to provide separate assurance on individual account balances, transactions or disclosures

This report also includes information relating to the specific verification of information given in the group’s 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.

To the shareholders,

In compliance with the assignment entrusted to us by your an-nual general meetings, we hereby report to you, for the year ended December 31, 2009, on:

- the audit of the accompanying consolidated financial state-ments of Thales;

- the justification of our assessments;- the specific verification required by law.

These consolidated financial statements have been approved by the board of directors. Our role is to express an opinion on these consolidated financial statements based on our audit.

i. - opinion on the Consolidated finanCial statements

We conducted our audit in accordance with professional stand-ards applicable in France. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free of material mis-statement. an audit involves performing procedures, using sam-pling techniques or other methods of selection, to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. an audit also includes evaluating the appro-priateness of accounting policies used and the reasonableness of accounting estimates made, as well as the overall presenta-tion of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

In our opinion, the consolidated financial statements give a true and fair view of the assets and , liabilities and of the financial position of the Group as at December 31, 2009 and of the re-sults of its operations for the year then ended in accordance with International Financial Reporting standards as adopted by the european Union.

Without qualifying our opinion, we draw your attention to:

- note 16 “Construction contracts” to the consolidated financial statements, which details the impact on income from opera-tions of two aerospace / space division contracts,

- note 6 “Impairment of non current operating assets” to the consolidated financial statements, which details the impact on

income from operating activities of impairment tests conduct-ed on some development programs,

- note 23 “litigation and environment” to the consolidated finan-cial statements, which details the provision relating to the ar-bitration request submitted by a client of the Group,

- footnote (a) to the consolidated profit and loss account, which details the change in the presentation of the warranty costs included within cost of sales,

- note 1 “accounting policies” to the consolidated financial state-ments, which details the new standards and interpretations adopted by Thales Group beginning after January 1, 2009.

ii. - justifiCation of our assessments

In accordance with the requirements of article l. 823-9 of the French commercial code (Code de Commerce) relating to the justification of our assessments, we bring to your attention the following matters:

as stated in note 1.v “Main sources of estimates” to the financial statements, Thales’ management is required to make estimates and assumptions that affect certain amounts included in the consolidat-ed financial statements of the Group and the accompanying notes to these financial statements. These assumptions are by nature uncertain, especially in the specific context described in note 2.a, and the actual figures may vary from these estimates under the circumstances anticipated in note 1.v to the financial statements.

We considered that the items that have been subject to sig-nificant accounting estimates, and which are likely to require justification of our assessments, include construction contracts, impairment tests relating to acquisition goodwill and to research and development costs, deferred tax assets valuation, provi-sions for pension plans and related contingency, litigation and contingency provisions, and purchase price allocation in respect of business combination realized by the Group, as follows:

Construction contractsThales recognizes income on construction contracts in accordance with the methods set out in note 1.i “Revenues” to the financial state-ments. 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 Management.

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>> ��Statutory Auditors’ Report on the consolidated financial statements




Based on the information provided to us at the time of our au-dit, 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 proce-dures used by Management to approve such estimates.

Acquisition goodwillacquisition goodwill, which appears in the balance sheet as at December 31, 2009 for a net amount of eUR 2,986,9 million, was subject to impairment tests in accordance with the meth-ods set out in notes 1.f “Impairment of non-current assets” to the financial statements. We reviewed the methods for carrying out these tests, based on discounted cash-flows of the busi-ness activities and divisions, and verified the consistency of the assumptions used with the forecasted data taken from the stra-tegic plans drawn up for each of the business activities and divi-sions under the Group’s control.

Research and development costsas stated in note 1.j “Research and development expenses” to the financial statements, research and development costs are ac-counted for as intangible assets when they meet the criteria of IFRs standards, as adopted in the european Union (net amount capital-ized of eUR 253.7 million as at December 31, 2009). We reviewed the sales and profitability forecasts underlying the appropriate na-ture of this accounting treatment, as well as the consistency of the assumptions used for their amortization and impairment tests.

Deferred tax assetsas stated in notes 1.l and 1.v to the financial statements, the recoverability of net deferred tax assets amounting in the bal-ance sheet as at December 31, 2009 to eUR 678 million, 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. We reviewed the recover-ability tests performed by Thales on these deferred tax assets.

Provisions for pension plans and related commitmentsCertain headings in both the assets and liabilities sides of the bal-ance 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 head-ings are set out in notes 1.n and 21 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 consistency of these assumptions, with due regard, in particular, to Thales’ experience, its regulatory and economic environment.

Litigation and contingency provisionsas regards litigation and contingency provisions, we ensured that the procedures in force in your Group made it possible to identify, evaluate and recognize such provisions from an account-ing standpoint in satisfactory conditions.

We also ensured that the disputes identified during the implementa-tion of these procedures were described in appropriate terms in the notes to the financial statements, and, in particular, in notes 23 “lit-igation and environment” and 27 “Commitments and contingencies”.

Purchase price allocation in respect of business combinationsas stated in notes 1.b and 1.v 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, including intangible assets. These assessments, mainly entrusted to in-dependent experts, are based on assumptions (forecast) and parameters characterizing the activities acquired.

Our work consisted in assessing the methodology used, the as-sumptions used in models of valuation for the concerned identifi-able assets and liabilities as well as the reasonableness of the parameters used.

These assessments were made as part of our audit of the con-solidated financial statements taken as a whole, and therefore contributed to the opinion we formed which is expressed in the first part of this report.

iii. - speCifiC verifiCation

as required by law, we have also verified, in accordance with professional standards applicable in France, the information pre-sented in the group’s management report.

We have no matters to report as to its fair presentation and its consistency with the consolidated financial statements.

Paris-la Défense and Courbevoie, February 19, 2010 The statutory auditors

French original signed by

eRNsT & YOUNG aUDIT MaZaRs

Michel Gauthier Nour-eddine Zanouda Jean-louis simon



3. PARENT COMPANY MANAGEMENT REPORT AND FINANCIAL STATEMENTS

A. MANAGEMENT REPORT ON THE PARENT COMPANY FINANCIAL STATEMENTS

No changes were made in 2009 to the presentation of an-nual accounts and the valuation methods applied.

1. REvENUES AND EARNINGS

Total operating income amounted to €495 million com-pared with €480 million in 2008. Revenues stood at €139 mil-lion compared with €148 million in 2008.

Operations by sector are described pages 144 and following.

Revenues mainly consisted of rents re-billed to operating sub-sidiaries and sales of research, mainly conducted by the cen-tral research and technology department of the Thales Group.

Other operating income (including reversal of provisions and transferred costs) amounted to €335 million compared with €316 million the previous year. This was made up of fees paid by operating subsidiaries and rents re-billed to the same subsidiaries in practically unchanged proportions. It covers general and specific services rendered by the parent company departments to subsidiaries.

EBIT showed a loss of -€45 million compared with a loss of -€44 million in 2008.

Financial income (expense) showed an expense of -€44 million compared with income of €50 million in 2008. This deterioration is attributable to the sharp in-crease in financial expenses to -€566 million compared with -€169 million in 2008, due in particular to very substantial appropriations to provisions for impairment of securities, which stood at -€535 million and significantly exceeded reversals of -€103 million at end-2009. In 2008, appro-priations to provisions for impairment of securities stood at -€111 million.

Exceptional items represented a net charge of -€28 million, compared with -€77 million in 2008. Re-structuring costs, at -€32 million, were higher than the -€4 million recognised in 2008. These costs were offset by

slight capital gains of €4 million, compared with the capital losses on disposals of -€73 million booked in 2008 relating in particular to reorganisation of australian subsidiaries and the sale of Thales e-Transactions.

Corporate income tax represented a net gain of €88 million (compared with a net gain of €135 million in 2008), almost all of which is attributable to tax savings realised under the tax consolidation applied by Thales and its subsidiaries. In 2009, expenditure excluded from tax-deductible expenses pursuant to article 223 quarter and 39.4 of French General Tax Code amounted to €382,000 compared with €349,000 in 2008.

A net loss of -€29 million was recorded in 2009, com-pared with net income of €64 million in 2008.

2. BALANCE SHEET AT 31 DECEMBER 2009

The balance sheet total amounted to €11,201 mil-lion at the end of 2009, showing a rise of €72 million from €11,129 million at the end of 2008. Non-current assets amounting to €8,136 million compared with €8,353 mil-lion at the end of 2008, are mainly made up of non-current financial assets, which declined from €8,265 million to €8,054 million, due in particular to impairment of shares in Thales holdings UK, Thales avionics sa and avimo Group ltd. Current assets rose by €289 million to €3,065 million at the end of 2009: Group company accounts decreased by -€75 million. higher treasury accounts for Thales avionics and Thales europe sas were offset by lower treasury ac-counts for Thales Deutschland, Thales Transportation sys-tems and Thales security solutions and services. Cash and equivalents amounted to €1,401 million at the end of 2009 compared with €1,015 million at the end of 2008.

The balance of amounts due to and from Group companies was a net debt of €2,656 million at the end of 2009 com-pared with a net debt of €2,098 million at the end of 2008. The other financial debts item also includes debts in for-

89

>> ��Management report on parent company financial statements



Management report Consolidated financial statements

eign currencies and euros to subsidiaries and affiliates in an amount of €196 million, compared with €466 million at the end of 2007. Including this amount, net debt to Group companies stood at -€2,852 million at the end of 2009 com-pared with -€2,564 million at the end of 2008.

Other financial debts showed a rise from €1,534 million at the end of 2008 to €1,575 million at the end of 2009. This mainly includes:

• €500 million for the bonds issued at a fixed rate of 4.375% in July 2004 and maturing in July 2011,

• €275 million for the bonds issued at a fixed rate of 4.375% in January 2009 and maturing in July 2011,

information on supplier payment sChedules (artiCle 441-6-1 of frenCh CommerCial Code)

main shareholders

• €600 million for the bonds issued at a fixed rate of 4.375% in april 2009 and maturing in april 2013,

• €150 million for commercial paper.

at the end of 2009, the net financial debt of the Thales par-ent company, excluding debts to Group companies, amount-ed to €209 million compared with €534 million at the end of 2008.

Capital stock amounted to €597 million at the end of 2009 compared with €596 million at the end of 2008.

shareholders’ equity amounted to €4,776 million at the end of 2009 compared with €5,001 million at the end of 2008.

(€ million) Payable to suppliers at 31/12/2009 Total

Group Non-Group

FranceUnsettled invoices 21.4 35.9 57.3Less than 60 days 3.3 0.9 4.2Over 60 days 1.1 0.7 1.7

25.7 37.4 63.2Other countries 4.3 1.3 5.6Total 30.0 38.7 68.8

31/12/09 31/12/08 31/12/07

TSA 22.39% 22.43% 22.47%Sofivision 4.07% 4.08% 4.09%French State (including one “golden share”) -- -- --Sogepa 0.54% 0.54% 0.55%Public sector (a) 27.00% 27.05% 27.11%Dassault Aviation 25.90% -- --Alcatel-Lucent Participations -- 20.76% 20.80%GIMD -- 5.17% 5.18%Thales 1.79% 1.88% 1.48%Employees 3.00% 3.07% 2.03%Other shareholders 42.31% 42.07% 43.40%Total 100% 100% 100%Number of shares making up capital stock 199,023,932 198,724,809 198,333,666

a) as per the terms of the shareholders’ agreement (see aMF 27-11-08), the “Public sector” includes Tsa and its subsidiary sofivision, excluding sogepa and the state directly.



Under article l.621-18-2 a of France’s Monetary and Finan-cial Code, the members of the Board of Directors are sub-ject to this disclosure requirement.

Pursuant to article l. 621-18-2 b of France’s Monetary and Financial Code, the Company has declared to the aMF (autorité des Marchés Financiers) that all members of the executive Committee are in the category of non-voting direc-tors in respect of obligations to declare share transactions.

In accordance with article 223-26 of the General regulations of the French Financial Markets authority (AMF)

4. REvERSAL OF GENERAL EXPENSES FURTHER TO TAX AUDIT

None.

5. OUTLOOK FOR THE CURRENT YEAR

Results for 2010 should reflect the dividends paid by some subsidiaries in respect of the 2009 financial year and chang-es in provisions for impairment of investments and risks re-lating to subsidiaries as a consequence of trends in their business and performance in 2009.

3. SUMMARY STATEMENT OF COMPANY SHARE TRANSACTIONS CARRIED OUT IN 2009 BY DIRECTORS, NON-vOTING DIRECTORS AND CONNECTED PERSONS

Under article l. 621-18-2 c of France’s Monetary and Finan-cial Code, connected persons are persons who have close personal ties, as defined in a decree by the Conseil d’etat, with those referred to in article l. 621-18-2 a and b, as explained above.

To the best of the company’s knowledge, the following dis-closures have been made to the aMF for publication on its website (http://www.amf-france.org):

Purchases / subscriptions (a) Disposals (b)

Name / Position Number of shares

Euros Number of shares

Euros

L. VIGNERON / Chairman and Chief Executive Officer 500 17,865.00

Ch. EDELSTENNE / Director 500 17,000.00

Y. d’ESCATHA / Director 500 16,712.25

S. GENTILI / Director 500 16,005.00

P. MUTZ / Director 500 16,062.50

L. SEGALEN / Director 500 17,000.00

E. TRAPPIER / Director 500 17,037.50

A. DORRIAN / Executive Committee member 26,513 864,058.67 26,513 878,905.95

J-P. PERRIER / Executive Committee member 31,815 1,036,850.85 31,815 1,083,981.59

R. DEAKIN / Executive Committee member 12,000 394,590.00 12,000 408,120.00

J.-P. LEPEYTRE / Executive Committee member 40,606 1,116,649.54 40,606 1,423,363.47

R. SEZNEC / Executive Committee member 10,606 345,649.54 10,606 362,513.08

(a) share transactions in 2009 may include transactions made by connected persons.(b) share transactions in 2009 may include transactions made by connected persons.

91





6. PROPOSED APPROPRIATION OF EARNINGS (a)

7. DIvIDEND POLICY

Dividends are paid to the holder of the share according to law and the articles of association. The Company uses the euroclear 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 Direc-tors, is 31 May of each year, or the next business day. The 2009 dividend will be payable on 31 May 2010 (ex-dividend day: 26 May 2010). 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

8. EvENTS SINCE YEAR-END

at the date this document was filed with the aMF, no event liable to modify Thales’s financial position had occurred since year-end.

9. TREASURY SHARES

During 2009, the number of company-held shares was re-duced due to the following transactions:

• 916,054 shares were purchased under a liquidity contract,• 911,370 shares were sold under a liquidity contract,• 191,373 were sold as purchase options vested and allot-

ment of free shares (90).

Company-held shares (3,556,693 shares), represented 1.79% of the capital at 31 December 2009.

accordance with the French General Tax Code, the dividends paid in respect of 2006, 2007 and 2008 qualified for a pos-sible tax reduction of 40%.

The General Meeting notes that distributable profit, made up of the net book loss for the 2009 financial year

€(29,145,166)

Plus the credit balance brought forward €355,364,707

Amounts to a total of (in €) €326,219,541

The General Meeting decides to allocate this profit as follows

Distribution of a dividend of €0.50 for each of the 199,023,932 shares carrying rights at 1 January 2009

€99,511,966

Balance carried forward €226,707,575

Total equivalent to distributable profit (in €) €326,219,541

(a) subject to the vote of the annual General Meeting of 20 May 2010.

Financial year Dividend per share

2005 €0.83

2006 €0.87

2007 €1.00

2008 €1.05

2009 €0.50 (a)

(a) subject to the vote of the annual General Meeting of 20 May 2010 called to ap-prove the financial statements for 2009. The dividend will be payable on 31 May 2010 (ex-dividend day: 26 May 2010.



10. AUTHORISATIONS GRANTED AT GENERAL MEETINGS wITH DELEGATION OF POwERS TO THE BOARD OF DIRECTORS

General Meeting Action Remarks

General Meeting of 16 May 2007

Allocation of options for the purchase of shares with no discount applicable to the average price of the last 20 trading days. Limit: 3 million shares. Validity: 10 years. Authorisation: 38 months, until 15 July 2010

Board meeting on 4 July 2007Allocation of 80,000 options to the Chairman D. Ranque; exercise price: 44.77 euros

Board meeting on 25 November 2008Allocation of 73,900 options to 12 beneficiaries with an exercise price of 38.50 euros (supplement to 1st July 2008 plan)

[note: in France, discounts in ex-cess of 5% are taxable; discounts apply to the average price of the last 20 trading days or the selling price, whichever is higher]

Remaining balance: 2,846,100 options

Free allotment of existing shares to employees (no more than 1.3 million shares and a minimum vesting period of 2 years, the compulsory holding period (2 years) may be cancelled if the vesting period is longer than or equal to four years. Authori-sation: 38 months, until 15 July 2010)

Board meeting on 4 July 2007Allocation of 312,435 shares to 3,545 beneficiariesVesting period 4 yearsCompulsory holding period: 2 years in France, nil outside France

Board meeting on 1 July 2008Allocation of 317,705 shares to 3,624 beneficiariesConditions identical to those above

Board meeting on 25 June 2009Allocation of 334,980 shares to 3,848 beneficiariesConditions identical to those above

Remaining balance: 334,880 shares


Allocation of options for the purchase of shares with no discount on the average price in the last 20 trading days – (Limit: 5 million shares. Validity of options: 10 years. Authorisation: 38 months, until 14 July 2011)

Board meeting on 1 July 2008Allocation of 1,688,070 options including 80,000 to the Chairman D. RanqueExercise price: 38.50 euros

Board meeting on 25 June 2009Allocation of 1,680,340 options – including 80,000 to the Chairman L. Vigneron (cf below Board meet-ing on 10 December 2009)Exercise price: 32.88 euros

Board meeting on 10 December 200980,000 options waived by Chairman L. Vigneron

Remaining balance: 1,631,590 options

Issue of securities giving access to equity capital• Limits with preferred subscription rights: 30 million

shares and €1.5 billion tradable debt securities• Limits without preferred subscription rights (allow-

ance for priority subscription period): as above• Provisions for green shoes up to 15% of issues,

subject to above limits• Authorisation for 26 months, until 14 July 2010

-- Overall ceiling including issues under the following delegation of powers:50 million shares and €2 billion tradable debt securities

Issues of new shares (up to 19.8 million shares) in consideration of contributions of the securities of third companiesAuthorisation for 26 months, until 14 July 2010

-- Overall ceiling including issues under the preceding delegation of powers50 million shares and €2 billion tradable debt securities

Issue of new shares reserved to employees participating in employee savings planLimit: 6 million sharesMaximum discount: 20% for a 5-year employee savings plan and 30% for a10-year holding periodAuthorisation for 26 months, until 14 July 2010

--

93





The structure of share ownership and the distribution of vot-ing rights mean that Thales is unlikely to be affected by a tender offer. Moreover:

a. The two main shareholders (Dassault aviation and Tsa) have declared that they are acting in concert within the framework of a shareholders’ agreement, the main points of which are described on page 170.

11. MAIN FACTORS OF A NATURE TO AFFECT A TENDER OFFER (DISCLOSURES wITHIN THE SCOPE OF ARTICLE L.225-100-3 OF THE FRENCH COMMERCIAL CODE)

B. Thales and its two main shareholders have entered into a cooperation agreement applying until 31 December 2011 and renewable for periods of five years by tacit agreement.

C. any crossing of the thresholds of one-tenth of capital or voting rights, or any multiple of one-tenth of capital or voting rights, requires the prior consent of the French Minister for the economy.

General Meeting Action Remarks


Share buy-back programme (up to 10% of capi-tal) – Maximum purchase price: 50 euros (the Board set the minimum selling price at 20 euros per share, except for operations requiring the sale of shares or allocation of free shares) – Validity 18 months, until 18 November 2010

Board meeting on 19 May 2009: Delegation of powers to the Chairman and Chief Executive Officer

Cancellation of shares (representing up to 10% of capital stock at the date of cancellation) – Authori-sation: 24 months, until 18 May 2011

12. EMPLOYEE INTERESTS IN SHARE CAPITAL AT 31 DECEMBER 2009

Detention by country Number of shares In % of employee share ownership

L. 225-10

% of share capital Related voting rights as % of total

voting rights

France and World (3 dedicated funds) (a)) 5,723,540 95.95% 2.88% 3.64%

Netherlands (2 dedicated funds (b)) 130,947 2.20% 0.07% 0.07%Italy (2 dedicated funds (c)) 14,773 0.25% 0.01% 0.00%United Kingdom (SIP trust (d)) 62,575 1.05% 0.03% 0.02%

Shares held directly in the Group Savings Plan (2002 and 2008 offers) 33,519 0.56% 0.02% 0.02%

Total subject to article L. 225-102 of the Commercial Code 5,965,354 100.00% 3.00% 3.76%

Total held by employees 5,965,354 100.00% 3.00% 3.76%Total shares 199,023,932

(a) actions Thales, World Classic and action Plus 2008 funds.(b) Netherlands Classic and Netherlands action Plus 2008 funds.(c) Italy Classic and Italy action Plus 2008 funds.(d) share Incentive Plan.



The 1-year esOP (ex Dassault electronique, now Thales sys-tèmes aéroportés) has been merged into actions Thales. This fund was merged into actions Thales at net asset value on 8 June 2009.

13. ELEMENTS COMPRISING THE PARENT COMPANY REPORT

In compliance with articles l.225-100 and l.232-1, l.247.1 and R. 225-102 of the French commercial code, the manage-ment report of the Board of Directors comprises the following information, which is available in the Company’s 2009 Refer-ence Document:

• appended hereto with the parent company financial statements for 2009 are tables setting out:- acquisitions of interests and breaches of ownership

thresholds in French companies,- lists of subsidiaries and affiliated companies,- options outstanding at 31 December 2009,- company results in the five previous financial years,

• included in the 2009 annual report:- the financial report, including:

> an analysis of changes in the Group’s results and finan-cial position,

> a description of the main risks and uncertainties for the Group, including financial risks, interest and exchange-rate risk, and equity exposure, together with indica-tions as to their possible impact on the Thales parent company. The parent company does not have any direct commercial operations exposing it to exchange-rate risk, but it manages these risks on behalf of its sub-sidiaries. To this end, it sets up derivative instruments on financial markets in connection with business flows, these instruments being materialised by derivatives

within the Group to which subsidiaries are party, and takes out cover for commercial offers.The Thales parent company is covered by Group insur-ance programmes and the nature of its operations does not require any particular additional cover,

> information concerning the use of financial instru-ments, in particular under note 28 to the consolidated financial statements, supplementing note 16 B to the parent company financial statements and the above re-marks regarding exchange-rate risk,

> information concerning research and development activities,

- a presentation of business activities, with:> an account of subsidiaries and affiliates by area of business,> information concerning research and development

activities,- shareholder information (Part 3), which includes:

> a description of the proposed share buyback pro-grammes to be submitted to the general meeting on 20 May 2010 for approval,

> information on executive directors and corporate offic-ers (terms of office, compensation, company commit-ments, stock options granted, etc),

> information on the market performance of Thales shares over the past two years,

> information on the allocation of free shares during the year.

In addition, in compliance with the French Financial Secu-rity Act of 1 august 2003, the Chairman of the Board of Di-rectors has submitted a specific report on Board adminis-tration, the Company’s internal control procedures and possible restrictions to the Chief executive Officer’s powers. This information is presented in the annual report:• conditions under which the work of the Board of Directors

is prepared and organised,• internal control procedures.

95

>> ��Parent company financial statements


Parent company management report and financial statementsManagement report Consolidated financial statements

B. PARENT COMPANY FINANCIAL STATEMENTS

PROFIT AND LOSS ACCOUNT BY NATURE

The notes to the financial statements form an integral part of the parent company financial statements.


Operating income (note 3)

Revenues 139.0 147.9

Reversals of provisions 14.2 4.9

Transfers of expenses 6.8 10.5

Other operating income 334.9 316.2

Total 494.9 479.5

Operating expenses

Purchases and changes in inventories and WIP (20.1) (26.9)

Other external expenses (300.8) (288.3)

Taxes other than income tax (12.2) (25.1)

Personnel expenses (181.9) (159.8)

Depreciation and amortisation (14.3) (14.2)

Increases in provisions (10.6) (9.3)

Total (539.9) (523.6)

Income (loss) from operations (after restructuring costs) / EBIT (45.0) (44.1)

Financial income (expense) (note 4)

Cost of net financial debt (61.7) (127.0)

Income from investments 461.4 276.1

Other financial income 122.3 69.7

Other financial expenses (566.2) (169.2)

Total financial income (expense) (44.2) 49.6

Income (loss) before exceptional items and income tax (89.2) 5.5

Exceptional items (note 5)


Capital gains and losses on disposal and other 4.4 (73.0)

Total exceptional items (27.9) (77.0)

Income (loss) before income tax (117.0) (71.5)

Income tax (note 6) 87.9 135.1




BALANCE SHEET

assets

(€ million)Notes 31/12/2009 31/12/2008

Non-current assets:

Intangible assets, gross (note 7) 24.5 23.9

Less: amortisation (note 7) (23.8) (23.4)

Intangible assets, net 0.7 0.5

Tangible assets, gross (note 7) 171.9 170.6

Less: depreciation (note 7) (90.8) (83.0)

Tangible assets, net 81.1 87.6

Financial assets:

Investments (note 8) 7,700.7 7,834.7

Other fixed asset securities (treasury shares) (note 13) 89.4 109.2

Other financial assets (note 9) 264.3 320.8

Total financial assets 8,054.4 8,264.7

Total non-current assets 8,136.2 8,352.8

Current assets:

Inventories and work in progress 2.2 2.6

Advances to suppliers (note 3) 2.3 5.9

Accounts and notes receivable (a) (note 3) 235.1 194.4

Receivables from Group companies (note 10) 1,087.3 1,162.1

Other receivables and prepayments (note 11) 301.4 397.0

Marketable securities 36.3 --

Cash at banks and equivalents 1,400.7 1,014.6

Total current assets 3,065.3 2,776.6

Total assets 11,201.5 11,129.4

(a) accounts receivable and payable with a maturity date within one year.

97




(€ million)Notes 31/12/2009 31/12/2008

Shareholders’ equity (note 12)

Share capital 597.1 596.2

Paid-in surplus and merger premiums 3,655.3 3,647.8

Reserves and retained earnings 552.4 693.5

Net income for the year (29.1) 63.6

Total shareholders’ equity 4,775.7 5,001.1

Reserves for contingencies and charges (note 14) 276.0 255.2

Financial debt:

Debt to Group companies (note 10) 3,743.5 3,259.9

Other financial debt (note 15) 1,805.7 2,014.7

Total financial debt 5,549.2 5,274.6

Operating and other liabilities:

Advances received from customers on contracts (note 3) 27.5 26.9

Accounts and notes payable (a) 68.8 60.8

Other payables and accruals (note 3) (note 11) 504.3 510.8

Total operating and other liabilities 600.6 598.5

Total liabilities and shareholders’ equity 11,201.5 11,129.4

(a) accounts receivable and payable with a maturity date within one year.

liaBilities and shareholders’ equity

Off-balance-sheet commitments (note 16).




STATEMENT OF CASH FLOwS



Cash flows from operating activities


Depreciation and amortisation of tangible and intangible assets 14.3 14.2

Net increases in provisions for impairment of non-current assets, provisions for pensions and regulated provisions 405.5 111.1

Loss (gain) on disposals of assets (5.9) 64.1

Operating cash flows before working capital changes 384.8 253.0

Change in non-operating provisions 19.1 (14.5)

Change in working capital requirements 168.0 (101.9)

Total 571.9 136.6

Cash flows from investing activities

Acquisitions of tangible and intangible assets (10.2) (32.1)

Disposals of tangible and intangible assets 2.8 1.6

Net operating investments (7.4) (30.5)

Disposal of investments (note 8) 0.7 167.5

Acquisitions of subsidiaries and investments (note 8) (299.8) (82.7)

Other net financial investment 218.2 (285.8)

Total (88.3) (231.5)

Cash flows from financing activities

Increase (decrease) in shareholders’ equity (a) (200.1) (183.0)

Sale of treasury shares (note 13) (6.3) (45.7)

Increase in debt 1,113.3 393.1

Repayment of debt (1,338.9) (852.6)

Increase (repayment) of debt to Group companies 370.8 894.1

Total (61.2) 205.9

Increase (decrease) in cash at banks and equivalents before operations on marketable securities 422.4 111.0

Decrease (increase) in marketable securities (36.3) 0.0

Total increase (decrease) in cash at banks and equivalents 386.1 111.0

Cash at banks and equivalents at beginning of year 1,014.6 903.6

Cash at banks and equivalents at end of year 1,400.7 1,014.6

(a) Mainly corresponds to the distribution of dividends: €(204.7)m for 2009 and €(195.3)m for 2008.

99




STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

Period from 01/01/07 to 31/12/09

Number of shares outstand-ing (thou-

sands)

Share capital

Paid-in surplus

Retained earnings

Net income for

the year

Revaluation reserves

Total sharehold-

ers’ equity

(€ million)

At 01 January 2007 172,007 516.0 2,676.3 215.3 313.3 0.0 3,720.9

Appropriation of 2006 net income -- -- -- 313.3 (313.3) -- 0.0

Distribution of dividends -- -- -- (169.1) -- -- (169.1)

Capital increase 26,327 79.0 961.9 -- -- -- 1,040.9

2007 net income -- -- -- -- 529.4 -- 529.4

At 31 December 2007 198,334 595.0 3,638.2 359.5 529.4 0.0 5,122.1



Capital increase 391 1.2 9.6 -- -- -- 10.8

2008 net income -- -- -- -- 63.6 -- 63.6

At 31 December 2008 198,725 596.2 3,647.8 693.5 63.6 0.0 5,001.1



Capital increase (note 12a) 299 0.9 7.5 -- -- -- 8.4

2009 net income -- -- -- -- (29.1) -- (29.1)

At 31 December 2009 199,024 597.1 3,655.3 552.4 (29.1) 0.0 4,775.7



NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTSAll amounts included in these notes are expressed in € million except for per share data.

1. aCCounting poliCies

Thales’s annual accounts are prepared in accordance with the accounting standards defined by the French General ac-counting Plan (Plan Comptable Général) attached to the Ministerial order dated 22.06.99.

a. Consolidation

The consolidated financial statements of the Group composed of Thales and its subsidiaries are presented separately.

b. Accounting for foreign currency transactions

With the exception of transactions described in the next paragraph, foreign currency denominated monetary assets and liabilities are translated into euros at closing exchange rates. The differences arising are recognised under the “Oth-er payables” or “Other receivables” captions in the balance sheet depending on the nature of the balance. Unfavourable foreign exchange differences give rise to the recognition of a reserve for contingencies for the full amount of such differ-ences in the year in which the difference has arisen. These provisions, together with realised foreign exchange gains and losses, are recognised in the profit and loss account under the “Other financial income and expenses” caption.

Foreign currency operations are managed by the Corporate Financing and Treasury Department. These operations en-able guarantees of specific exchange rates determined for each transaction to be provided to the operational units. The units’ receivables and payables are measured at the specific rates thus guaranteed.

Derivatives relating to subsidiaries and symmetrical posi-tions taken out on the market are recognised at market value.

Gains and losses on forward foreign currency transactions that do not form part of a hedge relationship are recognised directly in the profit and loss account; the amount recognised in profit and loss corresponds to the difference between the forward rate of the currencies in question at the balance sheet date and the forward rate contained in the contract.

c. Interest rate derivatives

The Group uses financial instruments to manage and reduce its exposure to risks of changes in interest rates. Where these contracts are designated as hedging instruments, the gains and losses on such contracts are recognised in the same period as the hedged item; where this is not the case, if the market value is lower than the value on inception, the potential loss is recognised in the accounts.

d. Bond issue premiums and expenses related to bonds

Bonds are recognised at their redemption amount. any issue or redemption premiums are recognised in the correspond-ing balance sheet heading and amortised on a straight-line basis under financial items.

Bond issue expenses are recognised on a straight-line basis over the period of the bond.

e. Marketable securities

Tradable debt securities with an initial maturity of less than 3 months are included in the “Cash at banks and equivalents” caption. The FIFO method is used for evaluation.

f. Non-current assets

Intangible assets:linear amortisation is applied to licences and patents. am-ortisation periods correspond to probable length of use. ac-quisition cost is recorded in the balance sheet.

Tangible assets:Property, plant and equipment are carried at their acquisi-tion cost.

Depreciation of tangible assets is calculated in accordance with either the straight-line or reducing-balance basis, ena-bling the economic loss of value of the assets to be reflected, in accordance with the useful lives specified in note 7.

101




Non-current assets held under finance leases or hire pur-chase agreements, under contracts that have the char-acteristics of an acquisition, are not capitalised. They are presented, as applicable, in off-balance-sheet commitments.

g. Investments

This caption includes the shares of subsidiaries that the company intends to retain. These shares are measured at cost price or, if lower, their value in use. The assessment of their value takes into account:

• the profitability outlook or the intrinsic asset value for con-solidated shares,

• the share of net assets owned, the profitability outlook and the market value (market price for listed securities) for non-consolidated shares,

• provisions recognised over and above the gross value of the shares are presented in balance sheet liabilities under the “subsidiary risks” caption,

• impairment tests for 2009 were performed using an ini-tial discount rate assumption of 8% (the Group’s average cost of capital at the end of 2009). a 2% increase in the discount rate (to 10%) would not result in the company recognising material additional losses on the gross value of its investment.

h. Inventories and work-in-progress

Inventories and work-in-progress are carried at the lower of 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 produc-tion, plus an appropriate portion of production overhead costs and of any other costs that can be directly allocated to contracts.

i. Revenues

Revenues can be divided into two main accounting catego-ries: sales of goods and services and long-term contracts.

Sales of goods and services:Revenues from the sale of goods, together with royalty and licence income, is recognised when the company has transferred the main risks and benefits to the buyer. Rev-enues from service contracts is recognised in proportion to progress on the contracts.

Long-term contracts:For long-term contracts, revenues and results are recog-nised in accordance with the technical percentage of com-pletion method. however, when 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.

Progress payments received on long-term contracts are recognised under “advances received from customers on contracts”.

j. Research and development expenses

Customers and government agencies fund a significant por-tion of research and development expenses. Internally fund-ed research and development expenses are charged to the profit and loss account as incurred.

Research tax credit is subtracted from corporate income tax.

k. Deferred taxation

Deferred taxes reflect the temporary differences between accounting profits and taxable profits. They are not recog-nised in the accounts but are presented in note 6.

l. Pension and similar benefits

The company grants its employees post-employment ben-efits (pensions, retirement awards, medical care, etc.) and other long-term benefits (long-service benefits, long-service awards on departure, etc.).



The company measures and recognises pension and similar benefits for defined benefit schemes in accordance with 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 unrec-ognised actuarial gains and losses for the scheme at the end of the previous financial year exceed the greater of 10% of the defined benefit obligation or of the fair value of plan as-sets 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 other financial income and expenses for the other components.

m. Cash flow statement

The “indirect method” (presenting the reconciliation between net income and cash flows from operating activities) has been retained.

Cash balances, changes in which are presented by this statement, include cash and all financial assets considered to be equivalent to cash. Changes in bank overdrafts are pre-sented in cash flows from financing activities. acquisitions (disposals) of marketable securities with initial maturities of more than three months do not, for the company, form part of investment policy but are rather cash optimisation deci-sions. They are thus excluded from cash flow from invest-ing activities and presented as a decrease (increase) in the change in cash when determining the change in cash at bank and equivalents.

n. Treasury shares

Treasury shares are inventoried at the balance sheet date. Their balance sheet value is determined on the basis of the average stock market price for the month preceding year end.

o. Restructuring

Provisions for restructuring costs are made when restruc-turing programmes have been finalised and approved by company management and have been announced before the balance sheet date, resulting in an obligating event of the company to the third parties in question, as long as the com-pany 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 meas-ures (removal costs, training costs of transferred employ-ees, etc.) are recognised under the “restructuring costs” caption in the profit and loss account.

2. Change in thales’s direCt investments

a. Main operations in 2009

In February 2009, Thales bought for €20.3 million, via a ten-der offer, a 94.6% stake in CMT Medical Technologies ltd, an Israeli company specialised in medical imaging.

In accordance with the contractual agreements, the pur-chase price of alcatel alenia space shares was reassessed in 2009 in the context of a procedure involving all the parties. This procedure led Thales to pay an additional purchase con-sideration of €129.6 million to alcatel-lucent in May 2009 1.

The shareholders’ agreement dated 30 January 2007 be-tween the French state and Thales gives Thales the possibility to increase its stake in DCNs from 25% to 35%, through the exercise of a call option. This option can be exercised during a three-year period as from 29 March 2009. at 31 Decem-ber 2009, the value of this option is not significant.

The agreement also contains contingent remuneration claus-es related to certain contracts being obtained and to cer-tain conditions of operational performance. at 31 December 2009, these conditions had not been met.

1. This additional purchase consideration was determined on the basis of a valuation of 67% of Thales alenia space shareholders’ equity of €724.5 million, which represents an additional amount of €124.5 million in excess of the €600 million initial fixed price, plus €5.1 million financial interests.

103




b. Main operations in 2008

In March 2008, Thales sold its subsidiary Thales Computers to Kontron Modular Computers Gmbh for €11 million.

3. operating inCome

a. Revenues

Thales’s total revenues are broken down as follows:

By destination

By type

b. Other operating income

2009 2008

France 134.4 138.0

Eastern and southern Europe 0.5 0.7

Middle East 4.1 9.2

Total 139.0 147.9

31/12/2009 31/12/2008

ASSETS

Advances to suppliers 1.9 5.4

Accounts receivable 7.9 10.9

Intragroup trading contracts - assets 9.8 16.3

LIABILITIES

Advances from customers 9.1 11.0

Other payables 0.7 5.3

Intragroup trading contracts - liabilities 9.8 16.3

2009 2008

Intragroup trading contracts 5.9 13.4

Rebilling of rent 116.7 118.6

Research 16.3 15.5

Other 0.1 0.4

Total 139.0 147.92009 2008

Interest income and financial income:

- on financial receivables (a) 29.6 92.4

- on interest rate swaps 32.3 27.8

61.9 120.2

Interest expense and financial expense:

- on financial debt (b) (100.1) (217.3)

- on interest rate swaps (23.5) (29.9)

(123.6) (247.2)

Total (61.7) (127.0)

(a) Including €17.4 million with related companies in 2009 vs. €65.1 million in 2008.(b) Including €25.5 million with related companies in 2009 vs. €132.3 million in 2008.

2009 2008

Royalties 158.8 156.7

Rebilling of expenses 176.1 159.5

Total 334.9 316.2

c. Intragroup trading contracts

at the time of the contributions to new subsidiaries in 1995, and in order to enable the contribution agreements to be cor-rectly executed, Thales was required to sign commission agent contracts for purchases and sales with its new subsidiaries.

The breakdown of these commission agent contracts can be analysed as follows:

4. finanCial inCome (expense)

Financial interest, income and expense:



Other financial income and expense:

2009 2008

Income from investments:

Avimo Group Ltd 103.0 --

Thales Air Systems SA - Dep Air Defence 80.1 66.0

Thales Communications SA 77.9 45.1

Thales Systèmes Aéroportés SA 68.2 20.9

Thales Underwater Systems SAS 38.1 26.1

TDA Armement SAS 37.7 9.4

Thales International - Services Communs 18.6 11.7

DCNS 8.9 3.8

Telespazio Holdings SRL 6.5 6.6

Elettronica SpA 4.0 3.1

Thales Electron Devices SA 3.3 18.9

Amper Programmas SA 3.2 2.6

Thales Assurances et Gestion des Risques 2.4 2.3

Thales Safare SA 2.0 1.0

Sofradir 1.0 1.0

Thales Geodis Freight & Logistics SA 0.8 0.9

Sifelec 0.7 --

Thales Europe SAS 0.6 --

SAS Ferté 0.4 0.4

Thales Property Services SA 0.3 --

Thales Corporate Services SAS 0.2 --

ThalesRaytheonSystems Company Limited 0.2 --

Thales Avionics SA -- 11.5

Thales e-Transactions SA -- 13.3

Thales Underwater Systems Pty Ltd -- 26.2

Other 3.2 5.3

Total 461.4 276.1

Other financial income:

Foreign exchange gains 3.6 7.8

Reversals of financial provisions (a) 116.8 51.6

Amounts recovered on return of entities to financial health (b) 1.5 7.4

Other 0.4 2.9

Total 122.3 69.7

Other financial expenses:

Foreign exchange losses (17.1) (0.2)

Increases in financial provisions (c) (546.2) (154.8)

Forgiveness of loans to subsidiaries (d) -- (11.4)

Other (2.9) (2.8)

Total (566.2) (169.2)

(a) Including, in 2009, reversal of provisions on investments (€102.8 million) (note 8), reversal of provisions for risks on subsidiaries (€0.5 million) (note 14) and reversal of provisions on treasury shares (€13.4 million).Including, in 2008, reversal of provisions on investments (€40.5 million) and reversal of provisions for risks on subsidiaries (€10.1 million).

(b) Including, in 2009, Thales Communications Belgium (+€1.0 million).Including, in 2008, Thales Communications Belgium (+€7.3 million).

(c) Including, in 2009, provisions on investments (€535.3 million) (note 8) and provisions for risks on subsidiaries (€3.5 million) (note 14).Including, in 2008, provisions on investments (€110.7 million), provisions for risks on subsidiaries (€0.9 million) and provisions on treasury shares (€40.2 million).

(d) Including, in 2008, sas sartrouville (–€4.3 million), sas Pessac (–€3.7 million) and sas Châtellerault (–€3.4 million).

105




5. exCeptional items the amount of tax determined at the standard tax rate of 33.33% on the portion of taxable profits exceeding €2.3 million.

The effect of this contribution was taken into account in the calculation of the current tax charge for 2009 and 2008 and of deferred taxes.

Income tax for 2009 and 2008 can be analysed as follows:

With the exception of deferred taxes related to the eIGs, de-ferred tax is not recognised. The main temporary differences are however as follows:

The result for tax consolidation at the standard rate for Thales (parent company), which will be determined in april, will not give rise to a tax liability for 2009.

expenditure excluded from tax-deductible expenses (pursuant to articles 223 quater and 39.4 of the French general tax code).

This expenditure amounted to €382,000 in 2009 compared with €349,000 in 2008.

6. inCome tax

since 1 January 1992, Thales includes in its tax consolida-tion a large proportion of its French subsidiaries in the con-text of the regulation provided for by article 223a of the French general tax code (Code Général des Impôts).

Companies included in the tax consolidation incur the tax charge that they would have borne if they had been taxed separately. The tax savings realised by the Group through use of the losses incurred are kept by the parent company and recognised in income. however, the parent company may incur a tax charge corresponding to the losses provided by the loss-making subsidiaries if these subsidiaries become profitable again and could deduct the losses provided as if they had not been used under tax consolidation.

Income tax for 2009 was determined on the basis of:• a standard tax rate of 33.33%,• the social contribution of 3.30%, provided for in arti-

cle 235 ter ZC of the French general tax code, based on

2009 2008


Capital gains and losses on disposal:

Sale of Thales Laser 0.6 --

Sale of Thales e-Transactions 2.6 (12.1)

Sale of FACEO 3.4 --

Sale of treasury shares 3.5 (15.8)

Sale of Thales ATM Pty -- (14.1)

Sale of THEC -- (7.5)

Sale of Thales Navigation -- 0.2

Sale of Thales Computers -- 0.6

Sale of Thales e-Transactions Espagne -- 1.7

Sale of TUS -- 4.4

Exceptional costs on Sale of HTO (0.2) (8.0)

Environmental risks (a) (4.6) --

Other (1.0) (22.4)

Total 4.3 (73.0)

Total (27.9) (77.0)

(a) Corresponds to the estimated cost of decontamination of a former Thales site at Puiseaux.

2009 2008

Income from tax consolidation 88.2 119.4

Deferred taxes on the results of EIGs (La Pérouse, Hobart) 2.9 2.6

Income tax expense -- (4.5)

Other taxes (a) (3.2) 17.6

Total 87.9 135.1

(a) Including, in 2009, +€1.9 million of adjustments in respect of 2008 income taxes, -€11.5 million of tax reversals and +€6.5 million of the research tax credit.Including, in 2008, +€12 million of adjustments in respect of 2007 income taxes and +€6.3 million of the research tax credit.

Net asset temporary differences:

31/12/2009 31/12/2008

Provisions for holiday pay 17.7 16.2

Provisions for restructuring 10.5 1.3

Provision for foreign exchange losses 4.5 4.7

Provisions for contingencies and charges 17.9 30.9

Other 21.2 15.5

Net asset balance (a) 71.8 68.6

(a) This balance would lead to the recognition of a net deferred tax asset of €24.7 mil-lion at 31 December 2009 if it were booked.



7. tangiBle and intangiBle assets

For calculating depreciation and amortisation, the following useful lives are generally retained:

• 20 years for buildings,• 3 to 10 years for industrial plant and equipment,• 3 or 4 years for software,• 5 to 10 years for other tangible assets (vehicles, furniture, etc.).

8. investments

31/12/2008 Acquisi-tions

Depre-ciations

Disposals 31/12/2009

Gross Depreci-ation & amorti-sation

Net Gross Depreci-ation & amorti-sation

Gross Depreci-ation & amorti-sation

Net

Intangible assets

Software 21.0 (20.5) 0.5 0.6 (0.4) (0.0) 0.0 21.6 (20.9) 0.7

Concessions, patents, trademarks 2.6 (2.6) 0.0 0.0 0.0 0.0 0.0 2.6 (2.6) 0.0

Other intangible assets 0.2 (0.2) 0.0 0.0 0.0 0.0 0.0 0.2 (0.2) 0.0

Total 23.9 (23.4) 0.5 0.6 (0.4) (0.0) 0.0 24.5 (23.8) 0.7

Tangible assets

Buildings 109.1 (39.4) 69.7 4.8 (10.2) (4.4) 2.4 109.5 (47.2) 62.3

Industrial plant and equipment 39.3 (32.2) 7.1 2.6 (1.9) (0.6) 0.6 41.3 (33.5) 7.8

Other tangible assets 22.2 (11.4) 10.8 2.1 (1.7) (3.2) 3.0 21.1 (10.1) 11.0

Total 170.6 (83.0) 87.6 9.5 (13.8) (8.2) 6.0 171.9 (90.8) 81.1

Amounts at

31/12/08

Acquis-itions

Disposals Net increase in provi-

sions

Other movements

Amounts at

31/12/09

of which

Gross value

Provision

Amper Programas SA 11.1 -- -- -- -- 11.1 11.1 --

Thales Underwater Systems NV (Netherlands) 8.2 -- -- -- -- 8.2 129.2 121.0

Thales Underwater Systems SAS (France) 96.5 -- -- -- -- 96.5 96.5 --

Thales Transportation Sytems SA 5.5 120.0 -- (125.5) 0.0 -- --

Avimo Group Ltd 132.6 -- -- (78.6) -- 54.0 250.7 196.7

Thales Raytheon Systems Company Ltd 56.3 -- -- -- -- 56.3 56.3 --

Thales Canada Inc 19.7 -- -- -- -- 19.7 19.7 --

Aerothales Technology 0.2 -- -- -- -- 0.2 2.0 1.8

Thales Suisse SA 23.1 32.9 -- -- 0.1 56.1 56.1 --

UMS Holding 16.2 -- -- -- -- 16.2 24.3 8.1

Thales Security Solutions & Services Gmbh 0.0 -- -- -- -- 0.0 -- --

107




Amounts at

31/12/08

Acquis-itions

Disposals Net increase in provi-

sions

Other movements

Amounts at

31/12/09

of which

Gross value

Provision

Thales Security Solutions & Services SAS -- -- -- (135.4) 135.4 0.0 135.4 135.4

Thales Europe SAS 43.2 -- -- -- -- 43.2 43.2 --

Thales Alenia Space SAS 599.8 124.3 -- -- -- 724.1 724.1 --

Telespazio Holding SRL 70.7 -- -- -- -- 70.7 70.7 --

DCNS 569.1 -- -- -- -- 569.1 569.1 --

Elettronica SpA 26.7 -- -- -- -- 26.7 26.7 --

CMT Medical Technologies Ltd -- 20.3 -- -- -- 20.3 20.3 --

SAS Saint-Héand 2.7 -- -- -- -- 2.7 2.7 --

SAS Chatellerault Brelandiere 0.4 -- -- 3.2 -- 3.6 8.0 4.4

Thales Corporate Ventures SA 16.0 -- -- -- -- 16.0 71.7 55.7

SEERI 6.0 -- -- -- -- 6.0 10.2 4.2

TDA Armements SAS 51.6 -- -- -- -- 51.6 51.6 --

Thales Information System Belgium 0.0 -- -- -- -- 0.0 14.0 14.0

Thales Microelectronics SA 4.9 -- -- (1.4) -- 3.5 51.6 48.1

Sifelec 41.4 -- -- (1.1) -- 40.4 111.8 71.5

Thales International SA - Titres 398.5 -- -- -- -- 398.5 398.5 --

Thales Avionics SA 442.1 -- -- (112.0) -- 330.1 442.1 112.0

Thales Communications Belgium SA 34.6 -- -- (26.8) -- 7.8 34.6 26.8

Thales Nederland BV 235.2 -- -- -- -- 235.2 235.2 --

Thales Air System SA 314.1 -- -- -- -- 314.1 314.1 --

Thales Electron Devices SA 39.2 -- -- -- -- 39.2 39.2 --

Thales Communications SA 311.9 -- -- -- -- 311.9 311.9 --

Thales Holding Norway AS 20.1 -- -- 15.2 -- 35.3 77.2 42.0

Thales Deutschland Holding GmbH 642.3 -- -- -- -- 642.3 642.3 --

Thales North America Inc 519.9 -- -- 83.2 -- 603.1 603.2

Thales Optronique SA 84.8 -- -- -- -- 84.8 106.3 21.5

Thales Avionics Electrical Systems SA 18.6 -- -- -- -- 18.6 18.6 --

Thales Security Systems SAS 10.0 -- -- -- (10.0) 0.0 -- --

Thales Safare SA 7.9 -- -- -- -- 7.9 7.9 --

Thales Services SAS 126.3 -- -- (29.6) -- 96.7 126.3 29.6

Thales Services Industrie SA 0.0 -- -- -- -- 0.0 79.3 79.3

Thales Systèmes Aéroportés SA 706.1 -- -- -- -- 706.1 706.1 --

Thales Laser SA 0.0 -- (0.1) -- 0.1 (0.0) -- --

SAS Bagneux 4.6 -- -- -- -- 4.6 4.6 --

Thales Holdings UK Plc 2,070.0 -- -- (150.0) -- 1,920.0 2,571.7 651.7

Other property companies 10.9 -- -- -- -- 10.9 21.2 10.3

Other 35.7 2.3 (0.6) 0.7 (0.8) 37.3 53.0 15.7

Total 7,834.7 299.8 (0.7) (432.5)* (0.7) 7,700.7 9,350.4 1,649.7

* Of which: Increases (535.3) (note 4) Reversals 102.8 (432.5)



9. other finanCial assets

These non-current assets are broken down as follows:

By category

31/12/2009 31/12/2008

Receivables related to subsidiaries and investments:Stesa 40.5 3.9Thales Espana Grp SA 40.0 42.4Thales Australia Holdings Pty Ltd 27.4 21.6Thalisa 21.7 60.4Thales Security Solutions & Services SpA 20.3 4.0Thales Italia SpA - Dep Communications 13.0 13.0ADS 9.4 3.4Thales Information Systems SA/NV 6.5 6.5Omnisys Engenharia LdtA 6.5 --Thales e-Transactions Italia SpA 6.4 1.5Global Telematics SA (Pty) Ltd 2.8 2.7Thales Information Systems Austria 1.9 1.9Thales Italia SpA - Dept Corporate 1.1 1.1Thales Rail Signalling Solutions s.p.z.o.o. 1.0 1.0Thales Limited 0.2 0.3Alcatel Security Safety Command Controls Mexico -- 0.8Thales Canada Inc -- 6.3Thales Electronics Plc -- 15.8Thales North America Inc -- 66.1Thales Norway AS -- 4.8Others 16.6 8.5Total 215.3 266.0GIE La Pérouse 3.7 3.7GIE Hobart 23.1 25.7Employee share ownership -- 8.9Others 22.2 16.5Total 49.0 54.8Total 264.3 320.8

109




By maturity

By currency

31/12/2009 31/12/2008

Less than one year 217.9 271.5One to five years 19.8 22.7More than five years 26.6 26.6Total 264.3 320.8

31/12/2009 31/12/2008

Euro 159.7 149.6Saudi riyal 62.1 64.3Australian dollar 27.4 21.6South African rand 14.0 6.3Pound sterling 0.2 0.8US dollar -- 66.9Canadian dollar -- 6.3Norwegian krone -- 4.8Other currencies 0.8 0.2Total 264.3 320.8



10. reCeivaBles from, and deBt to, group Companies

31/12/09 31/12/08

Assets Liabilities Assets Liabilities

Thales Underwater Systems - SAWARI II -- -- -- 44.2Thales Services SAS - Dep. Training & Simulation -- 89.7 -- --Thales Underwater Systems SAS France -- 217.5 -- 171.3Trixell SAS -- 5.0 -- --Thales Engineering and Consulting SA -- -- -- 0.3SAS Immeuble pour l'avionique 18.6 -- -- 1.1SAS Pessac 5.5 -- 4.0 --SAS Seeri -- 6.1 -- 6.0UMS SAS -- 12.9 -- 11.2Thales Assurances et Gestion des Risques -- 7.2 -- 8.0TDA Armements SAS -- 4.0 -- 13.7Thales Norway AS - Dep. LJ -- 12.3 -- --Thales Angenieux SA 1.6 -- 7.8 --Sifelec -- 25.4 -- 26.4Thales International SA - Titres 164.3 -- 167.4 --Thales Close Air Defence -- -- -- 8.3Thales Avionics SA 256.4 2.4 124.9 --Thales Communications Belgium SA -- 11.5 -- 24.0Thales International Offsets SA 13.9 0.7 16.1 --Thales International Western Countries -- 28.3 -- 22.2Thales Air Systems SA - Dep. AIR DEFENSE -- 629.1 -- 642.9Thales Electron Devices SA 35.6 0.3 25.0 --Thales Communications SA -- 723.6 -- 636.9Thales International Middle East Sal -- 34.9 0.4 18.9Thales Deutschland Holding Gmbh 43.8 -- 180.9 --Thales International - Services communs -- 16.2 -- 13.5Thales USA Inc 31.8 -- -- --Thales Avionics LCD SA 7.8 -- 22.8 --Thales Optronique SA 1.9 -- 67.8 --Moss SAS -- 22.2 -- 19.8Thales Corporate Services SAS -- 5.8 0.1 --Thales Avionics Electrical Systems SA 11.7 0.1 5.7 --Thales Security Systems SAS 43.5 -- 45.4 --Thales Safare SA -- 6.7 -- 9.1Thales Services SAS 79.0 0.2 13.1 --Thales Systèmes Aéroportés SA -- 350.7 -- 331.4Thales Laser SA -- -- 5.8 --SAS Bagneux -- 2.6 -- 7.1Thales Holding UK Plc -- 467.7 -- 387.5Thales Transportation Systems SA 68.2 14.5 147.7 --Thales Raytheon Systems Company SAS -- 86.2 -- 62.2Thales Nederland BV -- 266.9 -- 234.7Thales Microelectronics SA 16.8 -- 11.9 --Tharc -- 37.4 -- 28.5Thales international Latin America BV -- 6.3 -- 6.0Thalisa -- 6.5 -- 5.3Thales Australia - Dep. Thint 2.0 163.3 -- --

111




11. other reCeivaBles and other payaBles

31/12/09 31/12/08


Thales International Africa Sal (Offshore) -- 11.8 -- 1.8Thales Underwater Systems - Dep. FREMM -- -- -- 5.3Thales Asia Holding Pte Ltd 13.6 59.0 13.2 41.3Junghans T2M SAS -- 7.6 -- 6.9Thales Rail Signalling Solutions Inc 3.0 35.0 23.3 3.4Thales Rail Signalling Solutions SLU -- -- -- 142.5Thales Rail Signalling Solutions SA 55.8 -- -- --Thales Security Solutions & Services SAS 66.3 -- 222.2 --Thales Europe SAS 83.7 -- 24.1 --Thales Alenia Space France SAS 0.9 242.5 2.6 173.4Thales Alenia Space Antwerp SA -- -- -- 5.1Thales Alenia Space Espana SA 7.0 -- 7.0 --Thales Alenia Space Italia SpA -- 82.1 1.7 69.1Thales Air Systèmes SA -- -- -- 25.7Other 54.7 41.3 21.2 44.9Total 1,087.3 3,743.5 1,162.1 3,259.9

31/12/09 31/12/08


Tax and employee-related receivables and payables 14.7 78.4 10.2 70.0Government, income tax 147.3 13.0 196.9 4.2Deferred tax on results of EIGs -- 21.2 -- 24.1Receivables and payables on non-current assets -- 0.5 -- 1.1Accrued interest 18.2 7.1 8.2 4.9Foreign exchange translation adjustments 1.9 1.1 1.8 1.3Premiums on foreign exchange option / swaptions 4.6 0.6 61.9 47.5Revaluation of foreign exchange 90.8 217.6 85.5 191.0Tax receivables and payables on tax consolidated companies 2.1 144.5 1.3 142.3

Other 21.7 20.4 31.2 24.4Total 301.4 504.3 397.0 510.8

12. shareholders equity

a. Capital

The share capital of Thales amounts to €597,071,796 at 31 December 2009, and is composed of 199,023,932 shares with a par value of €3.

The share capital increase of €0.9 million corresponds to the exercise of subscription options (299,123 options exer-cised in 2009) (see note 13 subscription options).

On 19 May 2009, Dassault aviation finalised the acquisition of 20.8% of Thales’s capital previously owned by alcatel-lucent for an amount of €1.57 billion (€38 per share).



b. Securities in circulation giving access to the company’s share capital

Breakdown of share capital

Reserves and retained earnings

13. treasury shares

at 31 December 2009, Thales owns 2,610,348 treasury shares (1.31% of the share capital), which may be freely sold. 946,345 treasury shares are allocated to the employee free share grant plans.

The breakdown by plan is as follows:• 4 July 2007 plan: 301,410 shares (share price at the date of grant €45.13),• 1 July 2008 plan: 312,115 shares (share price at the date of grant €35.72),• 25 July 2009 plan: 332,820 shares (share price at the date of grant €31.93).

31/12/09 31/12/08

In number of shares

As % In number of shares

As %

Public (a) 90,173,531 45.31 89,687,719 45.14French State (b) 53,754,184 27.00 53,754,184 27.05Thales (c) 3,556,693 1.79 3,743,382 1.88Alcatel-Lucent Participations -- -- 41,262,481 20.76Dassault Aviation 51,539,524 25.90 10,277,043 5.17Total 199,023,932 100.00 198,724,809 100.00

(a) Including shares held by employees, directly or through mutual funds.(b) Indirectly, through companies fully-owned by the French state (Tsa, sofivision and sogepa and directly through a golden share).(c) Treasury shares (note 13).

31/12/2008 Appropriation of 2008 net income

Distribution of dividends

31/12/2009

Legal reserve 59.5 0.1 -- 59.6Blocked reserve 8.3 -- -- 8.3Ordinary reserve 128.9 -- -- 128.9Other reserves 0.3 -- -- 0.3Retained earnings 496.5 63.5 -204.7 355.3Total 693.5 63.6 -204.7 552.4

31/12/2008 Purchases Sales Other movements (a)

31/12/2009

Number of shares 3,743,382 916,054 (1,102,653) (946,275) 2,610,508Value 109.2 29.8 (36.1) (13.5) 89.4

(a) Realised capital gain on the sale of the shares 3.5Impairment of shares on the basis of the average rate retained* 8.8Reclassification of treasury shares as marketable securities with a view to their allotment to employees (36.3)Reclassification of treasury shares as provisions with a view to their allotment to employees 10.5Total (13.5)

* The average rate of the month of December 2009 was 34.23.The average rate of the month of December 2008 was 29.17.

113




Schedule of outstanding options at 31 December 2009

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 up a plan of free shares to its employees.

Outstanding options at 31 December 2009

at 31 December 2009, the following options are outstanding:• 362,765 purchase options at a weighted average exercise price of €40.89,• 17,669,210 subscription options at a weighted average exercise price of €36.72.

Purchase options




24 Nov. 2018

from 4 July 2011 to

3 July 2017


12 Nov. 2011


1 April 2011 (b)

from 10 May 2004 to

9 May 2010 (b)


13 Sept. 2009








48,900 80,000 (f) 112,089 10,608 111,168 --












2009 Financial information>>Subscription options

Conditions of exercise of stock-options









25 June 2019



from 9 Nov. 2010 to 8 Nov. 2016


29 June 2015




from 12 July 2005

to 11 July 2011

Exercise price €32.88 €38.50 €44.77 €36.47 €34.01 €29.50 €25.70 €40.97(b)

€42.18(b)



-- 1,680,530(c)

1,571,870 2,173,991 2,026,349 2,103,211 1,652,517 2,710,872 2,911,719





1,580,910 1,669,250 1,555,652 2,144,349 1,885,813 1,983,662 1,436,914 2,614,533 2,798,127










115




Options granted and exercised in 2009


or purchased







9,000 €34.01 -- 30/06/2005



Date of Board decision 25/06/2009 01/07/2008 04/07/2007

Number of grantees 3,848 3,624 3,545Share price at grant date €31.93 €35.72 €45.13Number of shares granted 334,980 317,705 312,435Number of free shares at 31/12/08 -- 316,115 306,510 (c)Grants cancelled during the year (a) 2,160 4,000 5,010Early exercises during the year (b) none none 90Number of free shares, net of cancellations and early exercises, at 31/12/09 332,820 312,115 301,410

Number of employees benefiting from the plan at 31/12/09 3,822 3,569 3,418


from 01/07/2008 to 01/07/2012

from 04/07/2007 to 04/07/2011

Date of transfer of shares 26/06/2013 02/07/2012 05/07/2011Retention period for French Tax Residents from 26/06/2013

to 26/06/2015from 02/07/2012

to 02/07/2014from 05/07/2011

to 05/07/2013

(a) Due to the grantee’s leave.(b) Due to the grantee’s death during the vesting period.(c) Figure modified following adjustments identified after closing date.

Plan of free sharesThe Board of Directors, acting on the authorisation of the annual General Meeting, decided to put in place a third free share al-lotment plan. The company decided to exclude from the benefit of this plan: the Chairman (the only “mandataire social”: legally responsible as defined by the French Commercial Code), the ex-ecutive Committee and the 361 main executives.The main characteristics of the plan are as follows:

• shares will be granted to all the employees benefiting from the plan at the conclusion of a four-year period of acquisition subject to the respect of the conditions stated in the plan rules,

• employees benefiting from free shares, who are French tax residents or subject to French social security have to keep their shares for a two-year period during which the shares cannot be sold. Non-French tax residents are not required to respect this two-year period.


2009 Financial information>>14. provisions for ContingenCies and Charges

Breakdown of retirement payments and other:

amounts due would be limited to approximately 30%, being a proportion corresponding to its share in the equipment supply contract.


On the basis of the information at its disposal at the end of 2009, Thales has carried out a review of the financial risks to which the Company could be exposed as a result of this procedure. In the absence of any new significant information, Thales has, in consequence, decided to maintain at 31 De-cember 2009 a reserve for this litigation identical to that recognised in its 2008 financial statements.

No other governmental, legal or arbitration proceedings (in-cluding any such proceedings which are pending or threat-ened of which the company is aware) have had significant effects on the company’s financial position or profitability in the last 12 months.

a. Litigation

Due to the nature of its business activities, the Company is exposed to the risk of technical and commercial litigation.

The request for arbitration submitted by the Republic of Chi-na Navy (Taiwan) for an amount of Us$599 million in damag-es, arising out of the execution of a contract, signed in 1991, for the supply of equipment and systems in conjunction with an industrial partner, continued in 2009 and the arbitration Panel declared the arbitration procedure complete on 10 No-vember 2009. at the date of publication of the present docu-ment, no award had been handed down. Thales considers that an award could be handed down in the first half of 2010.

In June 2005, the adverse party increased its request to Us$1,119 million, to which interest for late payment would be added. It reduced its request to Us$882 million in april 2006 (interest for late payment excluded). If an un-favourable award were to be issued, Thales’s share of any

Amounts at 31/12/08

Increases Reversals Other movements

Amounts at 31/12/09

Restructuring 3.7 21.1 (2.0) -- 22.8Subsidiary risks (note 4) 3.3 3.5 (0.5) (0.5) 5.8Retirement payments and other (note 16) 57.5 6.7 (8.5) -- 55.7

Other 190.7 48.7 (48.0) 0.3 191.7Total 255.2 80.0 (59.0) (0.2) 276.0

Retirement payments

Other Total

Balance sheet position at end of 2008 54.7 2.8 57.5Service cost 2.3 0.1 2.4Interest expense 4.3 0.1 4.4Expected return on plan assets (0.9) -- (0.9)Amortisation of actuarial gains and losses (0.1) -- (0.1)Amortisation of plan amendments 3.6 -- 3.6Liquidations and curtailments (0.8) -- (0.8)Total financial component 6.1 0.1 6.2Impact on profit and loss 8.5 (0.2) 8.3Other (restructuring) (1.6) -- (1.6)Benefits paid by employer (7.6) (0.3) (7.8)Employer contributions (3.0) -- (3.0)Transfers 0.5 -- 0.5Balance sheet position at end of 2009 53.0 2.7 55.7Actuarial gains and losses remaining to be amortised 4.8

117




15. other finanCial deBt

This debt is broken down as follows:

By category

b. Environment

Due to the nature of Thales’s activities, environmental risks relate to the possible environmental and health impacts of its operations, the impact of the environment on its opera-tions and new regulations applicable to its processes and products.

For many years, Thales has conducted regular analysis and up-date of environmental risks in accordance with its business ac-tivities, scientific and technical developments and the broader environmental challenges.

This analysis is used to produce a map of risks, linked primarily to regulatory non-compliance, pollution, asbestos, substances (ROhs, ReaCh, Weee, etc.) and radiation. The aim of this exercise is to:

• verify that employees and local residents are not exposed to health and environmental risks,

• ensure the conformity of operations and products,• evaluate the impact of new regulations, including on product


plans, either at Group level or locally, on the basis of the results of this analysis.

In addition to this risk mapping, an environmental management system has been deployed at all sites in order to manage and limit environmental impacts in line with Thales’s environmental commitments. By the end of 2009, over 90 sites had obtained IsO 14001 certification.

at 31 December 2009, the reserves for environmental contin-gencies amounts to €4.6 million.

31/12/2009 31/12/2008

Bonds issued in July 2004 (a) 500.0 500.0Bonds issued in January 2009 (a) 275.0 --Bonds issued in April 2009 (b) 600.0 --Euro Medium Term Notes (EMTN) - tradable (c) -- 700.0Bonds issued in December 2009 (d) 50.0 --Commercial paper 150.0 333.8Thales Electronics Europe BV 104.3 102.6Thales Rail Signalling Solutions AG 25.6 23.9Avimo Group Ltd 18.6 4.2Thales Suisse SA 14.2 22.9Avimo Asia Pte Ltd 10.8 128.2Thales Underwater Systems NV 8.4 8.4Thales Security Solutions & Services SA 5.4 5.3Stesa 4.6 --Forges de Zeebrugge SA 2.1 7.6Thales International Africa Ltd 0.8 0.7Thales Australia -- 108.4Thales Rail Signalling Solutions Austria GmbH -- 20.4Thalisa -- 14.2Thales Europe SAS -- 12.8Thales International Western Countries -- 4.3Thales Components Corporation -- 2.0Bank overdrafts 0.4 0.2Other borrowings 0.7 0.4Total 1,770.9 2,000.3Sundry financial debt:Accrued interest on financial debt 34.8 14.4Total 34.8 14.4Total 1,805.7 2,014.7

(a) 4.375% fixed-rate bond with a nominal value of €500 million and €275 million maturing in July 2011.(b) 4.375% fixed-rate bond with a nominal value of €600 million maturing in april 2013.(c) Variable-rate (euribor 3 months + 0.125%) bond with a nominal value of €700 million maturing in December 2009.(d) Variable-rate bond with a nominal value of €50 million maturing in January 2010.



at 31 December 2009, no financing of material amount used by the Group is subject to clauses requiring accelerated repayment based on the Group’s rating or on financial ratios.

at 31 December 2009, undrawn confirmed credit facilities granted by banks amounted to €1,500 million, maturing in

By maturity

16. off-BalanCe-sheet Commitments

a. Commitments granted and received

By currency

2011. These credit facilities are used to back commercial paper and as a financial reserve. Pursuant to the credit facil-ity documents, in the event that the state no longer held its golden share and, simultaneously, the ratio of consolidated net financial debt to eBITDa 1 were to exceed 3, clauses providing for accelerated repayment would apply.

1. eBITDa is the sum of income from operations (after restructuring costs) / eBIT plus all depreciation, amortisation and impairment of tangible and intangible assets excluding goodwill impairment. This item is determined by reference to French accounting standards.

31/12/2009 31/12/2008

2009 -- 1,500.3

2010 395.9 --

2011 775.0 500.0

2012 -- --

2013 600.0 --

Total more than one year 1,375.0 500.0

Total 1,770.9 2,000.3

31/12/2009 31/12/2008

Euro 1,697.1 1,707.6

Swiss franc 39.8 46.8

Singapore dollar 29.4 132.4

Saudi Riyal 4.6 14.2

Australian dollar -- 86.0

US dollar -- 13.3

Total 1,770.9 2,000.3

Rental commitments Rent payable:

Total < 1 year 1 to 5 years > 5 years

Operating leases 451.2 98.6 247.6 105.0

119




31/12/2009 31/12/2008

Commitments (actuarial gains & losses) relating to pensions (note 14) 4.8 8.9Commitments givenWarranty of liabilities given to Thomson in the context of the sale of Broadcast Multimedia -- 110Guarantees and pledges 8,771.5 8,185.1Of which to related companies (a) 8,659.8 7,864.2

(a) The main companies concerned are:Thales Alenia Space France 876.7 1,331.3Stesa 721.6 538.6Thales Rail Signalling Solutions Inc 675.5 628.0Thales Nederland BV 631.6 669.0Thales Avionics Inc Dep. IFE 461.1 --ADI Thales Australia 377.9 298.4Thalisa 373.6 530.0Thales UK Ltd - Dep. SAS 353.1 329.2Thales Transportation Systems SA 336.9 113.2Thales Rail Signalling Solutions Ag 283.9 283.7Thales Rail Signalling Solutions Ltd 266.8 284.3Thales Training & Simulation Ltd 225.7 223.4Thales Underwater Systems UK Ltd 207.4 193.4Thales UK Ltd - Dep. Corporate 196.4 182.0Thales ATM Pty Ltd 178.0 140.6Thales Rail Signalling Solutions GmbH 177.7 164.6Thales Alenia Space SAS 177.2 --Thales Security Solutions & Services SAS 161.7 60.0Thales Transport & Security (Hong Kong) Ltd 161.2 --DCNS 154.6 154.6Thales Missile Electronics Ltd 147.5 179.5Thales Underwaters Systems SAS 120.9 121.5Thales Rail Signalling Solutions SLU 119.0 105.0Thales Services SAS - Dep. Training & Simulation 110.0 --ACSI SAS 98.1 98.3Thales Security Systems SAS 90.0 90.0Thales Raytheon System Company SAS 77.5 47.5Thales Systèmes Aéroportés SA 75.5 98.0Thales Naval Ltd 70.3 --Thales Norway AS 70.0 70.0Thales Transport and Security Ltd 67.0 --Thales Canada Inc 62.1 57.7Thales Alenia Space Italia SpA 51.9 51.9Thales UK Dep. Communications Ltd 45.2 41.8Thales Transportation Automation US Inc 43.4 39.1Thales Information Systems Ltd 42.7 --Thales Optronics Ltd 42.1 38.9Helicopter Training Media International GmbH 38.0 38.0Thales Canada Inc 37.0 32.9Helisim 30.9 --Thales Rail Signalling Solutions SA 26.7 26.7SAS Pessac 26.0 26.0Thales North America Inc 20.8 --Thales Security Solutions & Services SpA 17.1 24.0Thales e-Transactions -- 314.2Thales Holding UK Plc -- 78.7Thales Suisse SA -- 49.5

Commitments received:Debt forgiveness granted to related companies with clauses enabling recovery if the entities return to financial health 259.1 260.6



at the end of 2002, a group of French manufacturers, in-cluding Thales and one of its subsidiaries, collectively re-ceived a request for arbitration relating to the execution of old contracts.

In proportion to each industrial partner’s involvement in each contract, Thales would have been liable for 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.

b. Financial instruments

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

Gains and losses on market transactions carried out in the context of trading contracts are taking to profit and loss in accordance with the general principles set out in note 1.

hedging of contracts signed by subsidiaries leads to market operations that are matched by symmetrical operations en-tered into with the subsidiary.

Interest rate risk management

at 31 December 2009 and 2008, Thales mainly holds interest rate swap contracts intended to reduce the Group’s sensitivity to interest rate movements. Nominal values, by type of interest rate instrument, and corresponding to the fixed part of the swaps, are analysed below:

The corresponding market values are as follows:

The lengths of the contracts are as follows:

2009 2008

Buyer / lender Seller / borrower


Rate swaps 1,884.9 -- 650.7 --

2009 2008



Rate swaps 24.8 -- 13.3 --

2009 2008

< 1 year 1 to 5 years < 1 year 1 to 5 years

Lender Borr. Lender Borr. Lender Borr. Lender Borr.

Rate swaps 1,109.9 -- 775.0 -- 75.7 -- 575.0 --

121




Currency risk management

Thales sa hedges currency risks arising in connection with the negotiation by its subsidiaries of contracts denominated in currencies other than the main production currency, cur-rency risks generated by normal commercial operations and risks relating to its net investments in foreign currencies.

at 31 December 2009 and 2008, Thales mainly holds for-ward foreign exchange contracts.

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 cor-respond to nominal values for underlying currency transac-tions and are mentioned in the “buyer / lender” or “seller / borrower” columns depending on the nature of the operation at maturity.

2009 2008



Forward exchange contractsUSD 485.79 1,064.46 614.64 1,340.18GBP 347.22 378.29 353.98 254.61CHF 74.88 91.89 62.72 105.44Other 586.18 770.04 350.01 283.98

1,494.07 2,304.68 1,381.35 1,984.21Foreign exchange swapsHedging investmentsGBP 36.99 34.49SGD 102.83Other

0.00 36.99 0.00 137.32Hedging salesCommitmentsUSD 528.54 1,552.72 589.85 1,417.53GBP 621.40 322.25 439.11 300.69CHF 80.75 23.10 67.65 22.65Other 532.20 454.77 551.75 452.08

1,762.89 2,352.84 1,648.36 2,192.95Total 3,256.96 4,694.51 3,029.71 4,314.48

Foreign exchange optionsPUTAUD 9.31CAD 24.54 71.90GBP 50.86 82.25ILS 1.37 1.37NOK 18.64USD 6.76 145.59 1,108.00 1,355.90

CALLAUD 0.40 0.42CNY 3.05 3.05GBP 10.21 10.21 8.42 16.67ILS 1.44 1.44MYR 12.25 12.25USD 6.79 6.75 505.05 668.81

105.42 168.83 1,815.88 2,053.63



The corresponding market values are as follows:

The maturity schedule is as follows:

Foreign exchange transactions entered into with subsidiaries in order to hedge the foreign exchange risks related to their signed foreign currency contracts are as follows:

2009 2008



Forward foreign exchange contracts 1.12 41.64 51.85 -68.75Foreign exchange swaps:- hedging investments -- -0.64 -- 3.93- hedging sales commitments 12.47 25.12 -32.77 27.31Foreign exchange options- PUT 1.45 0.38 66.15 -66.15- CALL -- -- 37.57 -37.57

2009 2008

Minimum Maximum Minimum MaximumForward foreign exchange contracts Jan. 10 March 19 Jan. 09 March 09Foreign exchange swaps:- hedging investments June 10 June 10 Jan. 09 June 09- hedging sales commitments Jan. 10 Sept. 16 Jan. 09 Oct. 13Foreign exchange options- CALL Jan. 10 Feb. 10 Jan. 09 Sept. 09- PUT Jan. 10 Dec. 10 Jan. 09 Sept. 09

2009 2008

Sales Purchases Sales PurchasesUS dollar 676.4 2,188.9 840.3 2,421.3Canadian dollar 281.1 192.7 341.7 106.9Pound sterling 472.6 510.4 359.6 387.7Saudi riyal 73.5 225.3 52.3 91.2Bahraini dinar 0.5 4.9 -- --Hungarian forint -- 8.6 -- --Moroccan dirham 2.6 -- -- --Mexican peso 22.9 -- -- --Romanian leu 29.4 26.7 -- --Swiss franc 76.5 77.7 50.4 95.2Australian dollar 27.9 46.8 37.3 34.4Danish krone 13.9 73.9 28.8 81.1UAE dirham 39.7 102.7 44.6 61.8Singapore dollar 34.5 26.9 29.0 25.4Norwegian krone 38.8 5.8 12.6 5.7Swedish krona 10.2 8.2 1.8 0.2Yen 15.0 6.6 10.5 9.4Hong Kong dollar 2.5 0.7 1.5 5.8South African rand 4.2 1.4 0.3 1.5Qatar riyal 4.5 71.7 0.2 37.8Ruble 0.1 1.3 -- 1.8Polish zloty -- 6.4 0.1 0.3Other currencies 0.9 0.2 0.4 --Total 1,827.7 3,587.8 1,811.4 3,367.5

123




17. other disClosures

Headcount

Compensation of directors and senior corporate officers

expenses recognised in respect of compensation, benefits and social security contributions attributable to Directors and mem-bers of the executive Committee are as follows:

The Group measures the amount of the benefit granted to employees receiving options. The fair value of such options is determined at the grant date. The amounts thus obtained are recognised to profit and loss over the vesting period of the rights.

18. related party transaCtions

a. Agreements signed with Thales’s shareholders

On 19 May 2009, Dassault aviation finalised the acquisition of 20.8% of Thales’s capital previously owned by alcatel-

lucent for an amount of €1.57 billion (€38 per share). This same day, Dassault aviation joined the shareholders’ agree-ment signed on 28 December 2006 between alcatel-lucent and the French state. amendments have been made to this agreement to adapt the provisions concerning alcatel-lucent that were not relevant to Dassault aviation (www.amf-france.org: decisions and information no. 209C0770 of 29 May 2009).

On 20 May 2009, Dassault aviation acquired the Thales share previously held by GIMD for €390m (€38 per share).

The main rights granted to the French state and/or Dassault aviation concerning Thales are described on page 170 of the

Average headcount 2009 2008

Engineers and managers 803 775

Technicians and qualified staff 206 215

Total 1,009 990

Amount before rebilling to subsidiaries 2009 2008 2007

Short-term benefits:

Fixed compensation 6.6 6.2 5.6

Variable compensation 3.7 4.1 4.0

Employer’s social security contribution 3.3 3.2 2.8

Contract termination benefits resulting from contract commitments 16.5 --

Including former corporate officers 3.0 --

Employer’s social security contribution / contract termination benefits 3.8

Unusual compensation -- 0.4

Compensation for attendance at Board meetings 0.6 0.4 0.4

Other benefits:

Post-employment benefits 3.3 0.6 0.6

Including former corporate officer 2.1

Share-based payments (IFRS 2) 4.1 3.9 3.5



annual report (shareholders’ agreement, convention on pro-tection of strategic national interests and specific convention).

b. Agreements signed at the end of january 2007 with DCNS

at the end of January 2007, within the framework of the com-bination of the French naval activities of Thales and DCNs, the shareholders’ agreement between the French state and

results of the Company over the last five finanCial years

Thales changed: Thales became “the industrial partner share-holder” of DCNs; the terms of governance gave to Thales the rights to play an active role in the Board of Directors of DCNs. Thales also has the opportunity, from 29 March 2009, and for three years, to increase its stake to 35%.

Thales and DCNs also signed an industrial and trade coop-eration agreement, whose objective is to optimise the or-ganisation of the activity of both groups in naval operations (market access, research and development, purchasing).

(€ million) 2005 2006 2007 2008 2009

1. Share capital at end of year

Share capital 515.7 516.0 595.0 596.2 597.1

Number of ordinary shares in issue 171,909,863 172,006,808 198,333,666 198,724,809 199,023,932

Number of preference shares (without voting rights) in issue

Maximum number of future shares to be created:

By conversion of bonds 10,260,937 10,260,937 -- -- --

Equity warrants (not quoted) 55,049 55,049 -- -- --

By exercise of subscription options 14,312,013 15,777,283 15,684,698 16,838,349 17,669,210

2. Operations and results for the year

Revenues (excl. VAT) 476.9 180.9 148.1 147.9 139.0

Income (loss) before taxes, employee profit sharing, depreciation, amortisation and provisions 201.9 173.2 537.2 56.1 123.1

Income tax 103.5 84.3 49.5 135.1 87.9

Employee profit sharing for the year -- -- -- -- --

Income (loss) after taxes, employee profit shar-ing, depreciation, amortisation and provisions 140.8 313.3 529.4 63.6 -29.1

Income distributed 140.0 169.1 195.4 204.7 --

3. Earnings per share

Earnings per share after taxes and employee profit sharing, but before depreciation, amorti-sation and provisions

1.78 1.5 2.96 0.96 1.06

Earnings per share after taxes, employee profit sharing, depreciation, amortisation and provisions 0.81 1.82 2.67 0.32 -0.15

Dividend paid per share 0.83 0.87 1.00 1.05 --

4. Headcount

Average employee headcount during the year 993 863 915 990 1,009

Gross payroll expense for the year 108.8 102.4 114.1 115.0 132.4

Social charges and benefits paid in the year

(Social security and similar benefits) 42.7 40.1 42.6 44.7 51.8

2005: share capital increased from €515,606,904.0 to €515,729,589.0 following a capital increase.2006: share capital increased from €515,729,589.0 to €516,020,424.0 following a capital increase.2007: share capital increased from €516,020,424.0 to €595,000,998.0 following a capital increase.2008: share capital increased from €595,000,998.0 to €596,174,427.0 following a capital increase.2009: share capital increased from €596,174,427.0 to €597,071,796.0 following a capital increase.

125




TaBle of suBsidiaries and investments position at 31 deCemBer 2009

Share capital (local cur-

rency)

Share-holders equity other than share

capital (local cur-

rency)

% equity stake

Carrying amount of shares owned

Loans and ad-vances

made by Thales not yet repaid (EUR)

Amount of guar-antees

and pledges given by Thales (EUR)

Revenues (excl.

VAT) for most

recent year (lo-cal cur-rency)

Income (loss)

for most recent

year (lo-cal cur-rency)

Divi-dends

received by Thales

during the year

(EUR)

Gross (EUR)

Net (EUR)

A. Detailed disclosures concerning subsidiaries and investments whose gross value exceeds 1% of the company’s share capital

1. Subsidiaries

THALES HOLDINGS UK Plc GBP 726,848 860,139 100.00% 2,571,704 1,920,000 8,149

THALES ALENIA SPACE SAS EUR 1,530,035 3,477 67.00% 724,106 724,106 177,176 (844)

THALES SYSTÈMES AÉROPORTÉS SA EUR 184,445 53,852 100.00% 706,107 706,107 75,516 792,088 (69,926) 68,245

THALES HOLDING GmbH EUR 27,124 712,861 99.58% 642,280 642,280 65,659

THALES NORTH AMERICA Inc USD 118,103 519,415 100.00% 603,196 603,196 20,825 4,631 30,604

THALES AVIONICS SA EUR 230,539 226,884 100.00% 442,089 330,089 870,604 (236,598)

THALES INTERNATIONAL SA EUR 313,000 17,530 100.00% 398,542 398,542 13,490 18,571

THALES AIR SYSTEMS SA EUR 126,348 202,969 88.88% 314,100 314,100 16,745 873,417 83,447 80,136

THALES COMMUNICATIONS SA EUR 153,750 34,784 100.00% 311,951 311,951 12,588 1,373,546 106,265 77,900

AVIMO GROUP Ltd SGD 22,104 34,566 100.00% 250,690 53,990 203 102,961

THALES NEDERLAND BV EUR 29,510 9,437 99.00% 235,174 235,174 631,617 636,701 40,169

THALES SECURITY SOLUTIONS & SERVICES SAS EUR 22,719 127,521 53.30% 135,415 0 453,625 362,088 (160,757)

THALES UNDERWATER SYSTEMS NV (NETHERLANDS) EUR 4,538 3,908 100.00% 129,206 8,153 39

THALES SERVICES SAS EUR 1,479 76,653 100.00% 126,368 96,768 567,025 (2,233)

SIFELEC EUR 38,304 1,881 100.00% 111,755 40,271 (613) 726

THALES OPTRONIQUE SA EUR 43,440 22,496 100.00% 106,287 84,787 307,173 12,993

THALES UNDERWATER SYSTEM SAS EUR 15,253 (10,808) 100.00% 96,473 96,473 120,913 337,548 21,737 38,133

THALES SERVICES INDUSTRIE SA EUR 10,500 (10,783) 100.00% 79,339 0 (1)

THALES HOLDING NORWAY AS NOK 419,845 (189,134) 100.00% 77,157 35,200 (10)

THALES CORPORATE VENTURES SA EUR 15,000 11,471 100.00% 71,697 16,025 869

THALES SUISSE SA CHF 57,200 (1,995) 100.00% 56,092 56,092 153,038 1,633

TDA ARMEMENTS SAS EUR 306 18,035 100.00% 51,678 51,678 80,896 16,269 37,690

THALES MICROELECTRONICS SA EUR 2,188 2,603 100.00% 51,633 3,500 51,477 (4,559)

THALES EUROPE SAS EUR 43,182 172 100.00% 43,182 43,182 (208) 567

THALES ELECTRON DEVICES SA EUR 30,999 37,216 100.00% 39,227 39,227 673 225,436 (7,178) 3,265

THALES COMMUNICATIONS BELGIUM SA EUR 8,701 (803) 100.00% 34,616 7,816 3,958 58,692 34

UNITED MONOLITHIC SEMICONDUCTORS HOLDING SAS EUR 33,898 (886) 50.00% 24,268 16,150 4,486

CMT MEDICAL TECHNOLOGIES Ltd USD 1,103 28,911 94.51% 20,338 20,338 11,554 4,472

THALES Canada Inc CAD 6,802 63,951 55.46% 19,670 19,670 45,611 269,176 (16,332)

THALES AVIONICS ELECTRICAL SYSTEMS SA EUR 6,851 18,661 100.00% 18,599 18,599 76,682 (21,235)

THALES INFORMATION SYSTEMS SA / NV (BELGIUM) EUR 1,062 (614) 100.00% 14,000 0 6,521 9,138 70

SAS D'ÉTUDES D'EVAL.& DE RESTAUR.IMMOB. (SEERI) EUR 7,520 (1,461) 100.00% 10,199 6,060 12

THALES ANGENIEUX EUR 2,717 3,445 100.00% 8,136 8,136 206 40,714 1,363

SAS CHATELLERAULT BRELANDIERE EUR 5,600 (6,178) 100.00% 8,013 3,641 1,494 166

THALES SAFARE SA EUR 37 (620) 99.72% 7,910 7,910 15,850 1,412 1,997

THALES COMMUNICATIONS LtdA BRL 1,080 100.00% 7,799 811 694 2,352 (1,552)

Total of subsidiaries 8,548,996 6,920,022 430,191



Share capital (local cur-

rency)

Share-holders equity other than share

capital (local cur-

rency)

% equity stake

Carrying amount of shares owned

Loans and ad-vances

made by Thales not yet repaid (EUR)

Amount of guar-antees

and pledges given by Thales (EUR)

Revenues (excl.

VAT) for most

recent year (lo-cal cur-rency)

Income (loss)

for most recent

year (lo-cal cur-rency)

Divi-dends

received by Thales

during the year

(EUR)

Gross (EUR)

Net (EUR)

2. Investments

DCNS EUR 563,000 15,243 25.00% 569,100 569,100 154,568 126,572 8,867

TELESPAZIO HOLDING SRL EUR 10,380 235,435 33.00% 70,677 70,677 371,380 26,881 6,501

THALES SYSTEMS IRLANDE LTD EUR 1 251,177 22.50% 56,330 56,330 (4,984) 225

ELETTRONICA SpA EUR 35,651 33.33% 26,724 26,724 18,270 4,000

AMPER PROGRAMAS SA EUR 3,005 14,049 49.00% 11,190 11,190 66,363 4,957 3,225

Total of investments 734,022 734,022 22,818

B. Overall disclosures regarding other subsidiaries and investments

1. Subsidiaries not listed in paragraph A.

French subsidiaries 42,084 27,243 26,000 3,956

Foreign subsidiaries 3,995 130

Total 46,079 27,373 3,956

2. Investments not listed in paragraph A.

in French companies 13,261 13,176 2,680 4,388

in foreign companies 6,076 4,141 729,212

Total 19,338 17,317 4,388

Overall total 9,348,434 7,698,734 461,353

Figures taken from the accounts prepared in accordance with Thales Group standards, as taken into account in the consolidation.

summary of seCurities portfolio position at 31 deCemBer 2009 (thousands of euros)

1. Investments and marketable securities whose net balance sheet value is equal to or greater than €15,244

Number of securities Company % interest Net value at year end

41,005,675 THALES ALENIA SPACE SAS 67.00% 724,106

11,527,812 THALES SYSTÈMES AÉROPORTÉS SA 100.00% 706,107

14,075,000 DCNS 25.00% 569,100

20,866,664 THALES INTERNATIONAL SA 100.00% 398,542

4,610,765 THALES AVIONICS SA 100.00% 330,089

10,208,356 THALES AIR SYSTEMS SA 88.88% 314,100

10,249,992 THALES COMMUNICATIONS SA 100.00% 311,951

147,889 THALES SERVICES SAS 100.00% 96,768

1,089,516 THALES UNDERWATER SYSTEMS SAS (FRANCE) 100.00% 96,473

2,714,992 THALES OPTRONIQUE SA 100.00% 84,787

2,000 TDA ARMEMENT SAS 100.00% 51,678

2,698,875 THALES EUROPE SAS 100.00% 43,182

127




1. Investments and marketable securities whose net balance sheet value is equal to or greater than €15,244

Number of securities Company % interest Net value at year end

2,503,544 SIFELEC 100.00% 40,271

2,066,589 THALES ELECTRON DEVICES SA 100.00% 39,227

449,394 THALES AVIONICS ELECTRICAL SYSTEMS SA 100.00% 18,599

1,129,920 UNITED MONOLITHIC SEMICONDUCTORS HOLDING SAS 50.00% 16,150

937,494 THALES CORPORATE VENTURES SA 100.00% 16,025

181,151 THALES ANGENIEUX SA 100.00% 8,136

2,171 THALES SAFARE SA 99.72% 7,910

145,833 THALES MICROELECTRONICS SA 100.00% 3,500

21,625 EUROTRADIA INTL 16.53% 3,099

299,998 ODAS 10.00% 3,000

99,994 THALES CRYOGENIE SA 99.99% 2,516

160,000 SOFRADIR 40.00% 2,439

166,025 THALES GEODIS FREIGHT & LOGISTICS SA 50.00% 2,172

2,714 THALES CORPORATE SERVICES 25.06% 2,061

20,000 GIE ALCATEL 50.00% 2,000

2,494 THALES ASSURANCES ET GESTION DES RISQUES 99.76% 1,566

11,017 SOFRESA 11.02% 1,338

99 THALES VP 99.00% 1,306

35,250 THALES UNIVERSITE SA 100.00% 1,100

7,181 SOFEMA 9.57% 897

100,000 PARIS PUBLISHING 25.00% 100

4,994 GERAC 99.88% 77

1,300 VIGEO 0.73% 74

429 IRDI 0.21% 71

4,194 170CENTELEC 99.86% 37

3,700 186CENTELEC 100.00% 37

3,700 185CENTELEC 100.00% 37

3,700 184CENTELEC 100.00% 37

3,700 183CENTELEC 100.00% 37

3,700 182CENTELEC 100.00% 37

3,700 181CENTELEC 100.00% 37

2,700 SMB POUR ELECTRONIQUE 100.00% 36

3,994 176CENTELEC 99.85% 35

3,994 177CENTELEC 99.85% 35

4,000 THALES GROUP SAS 100.00% 35

3,994 175CENTELEC 99.85% 35

3,834 168CENTELEC 99.84% 33

3,834 167CENTELEC 99.84% 32

2,494 GERIS CONSULTANTS 99.76% 25

2. Investments and marketable securities whose net balance sheet value is less than €15,244 2

3. Investments in property companies 27,776

4. Investments in foreign companies 3,771,913

Total 7,700,734



Amount of the in-vestment

(thou-sands of

euro)

Percentage ownership

At 31/12/2008 At 31/12/2009

>5% >20% >33% >50% >66% >5% >20% >33% >50% >66%

1. Increases

Paris Publishing 100 -- -- -- -- -- -- 25.00 -- -- --

Thales Security Solutions & Services SA 135,415 -- -- -- -- -- -- -- -- -- --

183centelec 37 -- -- -- -- -- -- -- -- -- 100

184centelec 37 -- -- -- -- -- -- -- -- -- 100

185centelec 37 -- -- -- -- -- -- -- -- -- 100

186centelec 37 -- -- -- -- -- -- -- -- -- 100

2. Decreases

Architecture Systemes Avances ASA -- -- -- -- 99.99 -- -- -- -- --

Thales Security Systems SAS -- -- -- -- 100 -- -- -- -- --

Thales Transportation Systems SA -- -- -- -- 66.27 -- -- -- -- --

Thales Laser -- -- -- -- 99.99 -- -- -- -- --

Habitat 06 10.30 -- -- -- -- -- -- -- -- --

TRS Prime -- -- -- -- 100 -- -- -- -- --

investments made and thresholds Crossed in frenCh Companies in 2009

129

>> ��Statutory Auditors’ report on the annual financial statements



C. STATUTORY AUDITORS’ REPORT ON THE ANNUAL FINANCIAL STATEMENTSFor the year ended December 31, 2009


In compliance with the assignment entrusted to us by your an-nual general meetings, we hereby report to you, for the year ended December 31, 2009, on:

- the audit of the accompanying financial statements of Thales,- the justification of our assessments,- the specific verifications and information required by law.

These 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 professional stand-ards applicable in France. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement. an audit involves performing procedures, using sampling tech-niques or other methods of selection, to obtain audit evidence about the amounts and disclosures in the annual financial state-ments. an audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made, as well as the overall presentation of the fi-nancial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

In our opinion, the annual financial statements give a true and fair view of the assets and liabilities and of the financial position of the company as at December 31, 2009 and of the results of its operations for the year then ended, in accordance with French accounting principles.

Without qualifying our opinion, we draw your attention to the matter set out in note 14 “Provisions for contingencies and charges” to the financial statements, which details the provi-

sion relating to the arbitration request submitted by a client of the Group.

ii. - justifiCation of our assessments

In accordance with the requirements of article l. 823-9 of the French commercial code (Code de Commerce) relating to the justification of our assessments, we bring to your attention the following matters:

Investments

Investments which appear in the balance sheet as at Decem-ber 31, 2009 for a net amount of eUR 7,700.7 millions are assessed at their cost price and subject to impairment tests in accordance with the methods set out in note 1.g to the financial statements.

Based on the information provided to us at the time of our audit, our work consisted in assessing the data used to estimate the net realizable value, in particular, we reviewed the update of forecasted profitability of the subsidiaries and investments, and verified the consistency of the assumptions used with the fore-cast data taken from the strategic plans drawn up for each of these subsidiaries or investments under Management’s control.

Litigation and contingency provisions

as regards contingency provisions and litigation, we ensured that the procedures in force in your Group made it possible to identify, evaluate and recognize such provisions from an accounting standpoint in satisfactory conditions. We also en-sured that the disputes identified during the implementation of these procedures were described in appropriate terms in notes to the financial statements, and, in particular, in notes 14 and 16.

This is a free translation into english of the statutory auditors’ report on the financial statements issued in French and it is provided solely for the convenience of english-speaking users. This report includes information specifically required by French law in such reports, whether modified or not. This information is presented below the audit opinion on the financial statements and includes an explanatory paragraph discussing the auditors’ as-sessments of certain significant accounting and auditing matters. These assessments were considered for the purpose of issuing an audit opinion on the financial statements taken as a whole and not to provide separate assurance on individual account balances, transactions or disclosures.

This report also includes information relating to the specific verification of information given in the management’s report and in the document ad-dressed to shareholders.

This report should be read in conjunction with and construed in accordance with French law and professional auditing standards applicable in France.

The assessments were made as part of our audit of the financial statements taken as a whole and therefore contrib-uted to the opinion we formed which is expressed in the first part of this report.

iii. - speCifiC verifiCations and information

We have also performed, in accordance with professional stand-ards applicable in France, the specific verifications required by French law.

We have no matters to report as to the fair presentation and the consistency with the financial statements of the information given in the directors’ report and in the documents addressed to the shareholders with respect to the financial position and the financial statements.

Concerning the information given in accordance with the re-quirements of article l. 225-102-1 of the French commer-cial code (Code de Commerce) relating to remunerations and benefits received by the directors and any other commitments made in their favour, we have verified its consistency with the financial statements, or with the underlying information used to prepare these financial statements and, where applicable, with the information obtained by your company from companies controlling your company or controlled by it. Based on this work, we attest the accuracy and fair presentation of this information.

In accordance with French law, we have verified that the re-quired information concerning the purchase of investments and controlling interests and the identity of the shareholders (and holders of voting rights) has been properly disclosed in the di-rectors’ report.






131

Business review>>

3. DefenceA. Air Systems....................................................................................................................................................................................... 149B. Land & joint Systems ........................................................................................................................................................ 153C. Naval ........................................................................................................................................................................................................... 155

4. Security .................................................................................................................................................................................158

A. Business in figures .................................................................................................................................................................. 132B. International presence ....................................................................................................................................................... 133C. Research and innovation ................................................................................................................................................. 136D. Thales and its subsidiaries........................................................................................................................................... 140E. Major operational subsidiaries and manufacturing sites .................................................. 141

1. Overview

2. Aerospace / SpaceA. Aerospace ........................................................................................................................................................................................... 144B. Space ......................................................................................................................................................................................................... 147


132

Business review>>


A. BUSINESS IN FIGURES

Consolidated workforce: the consolidated number of em-ployees includes all employees of fully consolidated compa-nies and the proportionate share of employees of companies consolidated under the proportionate method. It does not include staff working for companies carried under the equity method or for non-consolidated.

Total workforce: a total of 67,590 people were work-ing under Thales management at 31 December 2009. This figure includes all employees working for fully consolidated and proportionately consolidated companies (with the excep-tion of Diehl aerospace Gmbh, Diehl air Cabin Gmbh and

Junghans Microtec Gmbh in Germany, Telespazio in Italy and Thales Raytheon systems in the United states, whose em-ployees are not under Thales management).

“employees under Thales management” does not include staff working for companies carried under the equity method but does include employees of companies that are controlled but below consolidation thresholds.

The breakdown by domain at end-2007, end-2008 and end-2009 is given below:

1. OvERvIEw

Aerospace / Space

Defence Security Other Total

2009 Order book at 31 December 7,529 11,544 5,558 100 24,731

Order intake 4,332 6,093 3,390 112 13,927

Consolidated revenues 4,071 5,763 2,977 70 12,881

EBIT (310) 544 (11) (73) 151

Consolidated workforce 18,197 23,887 18,901 3,300 64,285

2008 Order book at 31 December 7,020 10,880 4,983 55 22,938

Order intake 4,184 6,547 3,461 106 14,298

Consolidated revenues 4,140 5,502 2,893 130 12,665

EBIT 207 540 157 (26) 877

Consolidated workforce 17,904 23,093 19,127 3,124 63,248

Total workforce at 31 December Aerospace / Space

Defence Security Other Total

2009 18,865 25,078 19,827 3,820 67,590

2008 20,635 (a) 24,114 20,878 3,536 69,163

2007 20,588 (b) 23,112 20,425 2,903 67,028

(a) Including Diehl aerospace Gmbh (1,198).(b) Including Diehl aerospace Gmbh (1,122).

133

>> ��Business in figures / International presence

Overview Aerospace / Space Defence Security


B. INTERNATIONAL PRESENCE

1. wORKFORCE AND REvENUES BY REGION

Consolidated workforCe

2009 2008

64,285 employees 63,248 employees

50% 51%

13% 13%

20% 20%

6% 6%

8% 8%2% 1%1% 1%

Rest of world

Near&Middle East

Asia-Paci�c

North America

Other Europe

United Kingdom

France

MAIN PROGRAMMES IN ORDER BOOK AT 31 DECEMBER 2009

Value Programme

Over €600m Rafale aircraft (France)Fremm frigates (France / Italy)

Between €400m and €600m London Underground signalling (UK)FSAF air defence systems (France / Italy)

Between €200m and €400m CVF aircraft carrier (UK)Watchkeeper UAV system (UK)Yahsat satellite system (UAE)NH90 helicopterSentinel 3 satellite (France)Syracuse III satellite (France)Rail North bypass (Algeria)ADAPT air defence systems (UK)

134

Business review>>


revenues By destination

2009 2008

€12,881m €12,665m

23% 25%

11% 12%

28% 26%

9% 9%

13% 14%

10% 9%6% 5%

Rest of world

Near&Middle East

Asia-Paci�c

North America

Other Europe

United Kingdom

France

revenues By origin

2009 2008

€12,881m €12,665m

48% 48%

13% 13%

21% 20%

9% 9%

7% 7%2% 2% 1%

Rest of world

Near&Middle East

Asia-Paci�c

North America

Other Europe

United Kingdom

France

135

>> ��International presence



2. INTERNATIONAL PRESENCE IN FIGURES

1. trend over the last two years

2. detailed trend over the last two years

2.1. In Europe

Revenues in €m France United Kingdom

Other Europe

North America

Asia-Pacific

Near & Middle

East

Rest of world

Total

2009 Revenues by destination 3,019 1,468 3,464 1,158 1,683 1,318 771 12,881

Revenues by origin 6,156 1,670 2,681 1,141 891 301 41 12,881

Consolidated workforce at 31 Dec. 32,229 8,205 12,821 3,719 5,149 1,183 979 64,285

2008 Revenues by destination 3,165 1,556 3,302 1,190 1,710 1,134 608 12,665

Revenues by origin 6,101 1,705 2,567 1,079 907 251 55 12,665

Consolidated workforce at 31 Dec. 32,233 8,473 12,631 3,597 5,081 826 407 63,248

Revenues in €m France United Kingdom

Ger-many

Italy Nether-lands

Spain Other Europe

Total Europe

2009 Revenues by destination 3,019 1,468 860 382 199 378 1,646 7,952

Revenues by origin 6,156 1,670 838 614 456 368 406 10,508

Consolidated workforce at 31 Dec. 32,229 8,205 4,318 2,673 1,949 1,813 2,068 53,255

2008 Revenues by destination 3,165 1,556 805 375 193 348 1,581 8,023

Revenues by origin 6,101 1,705 734 629 421 337 446 10,373

Consolidated workforce at 31 Dec. 32,233 8,473 3,913 2,620 1,919 2,178 2,001 53,337

2.2. Outside Europe

Revenues in €m USA Canada Australia South Korea Other countries

Total out-side Europe

2009 Revenues by destination 922 236 525 292 2,954 4,929

Revenues by origin 845 295 600 176 457 2,373

Consolidated workforce at 31 Dec. 2,308 1,411 3,406 830 3,075 11,030

2008 Revenues by destination 983 207 571 287 2,594 4,642

Revenues by origin 846 233 638 177 398 2,292

Consolidated workforce at 31 Dec. 2,317 1,280 3,506 742 2,066 9,911


Business review>>

C. RESEARCH AND INNOvATION

Thales needs comprehensive expertise in increasingly sophis-ticated technologies – particularly detection, analysis and de-cision support – to design and develop the critical information systems underpinning innovative solutions for customers in the fields of secure military communications, space systems, air traffic management, avionics and large-scale information networks for governments and administrations.

The Group commits approximately 20% of its revenues to research and development (R&D). 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 award of the 2007 Nobel Prize in Physics to albert Fert, scientific director of the Thales/CNRs Joint Physics Unit and Professor at the University of Paris-sud 11, testifies to the quality and value of the research conducted by Thales laboratories.

Most Thales R&D programmes are nonetheless shaped by the direct requirements of the company’s operating units, and aim to give them the competitive edge they need to en-sure sustainable growth.

1. RESEARCH AND DEvELOPMENT: THE KEY TO COMPETITIvENESS AND GROwTH

some 22,500 Thales employees, over 70% of whom are en-gineers, are involved in research and technology. R&D is a key driver of the company’s competitive performance, and this area alone accounted for a total consideration of approximate-ly €2,500m in 2009. Company-funded R&D expenditure stood at €664m, the equivalent of 26% of total R&D investments.

The effectiveness of Thales’s R&D effort hinges largely on the decentralised nature of its operations and close coordination on

strategic topics: the personnel concerned are based at more than 80 units in the company’s main countries of operation.

a significant proportion of this budget is dedicated to up-stream research and technology (R&T), conducted in part at Thales Research and Technology (TRT) laboratories. These R&T programmes seek to develop:

• new technologies,• new system and product concepts,• new engineering tools and methods for critical information

systems.

2. THREE KEY TECHNOLOGY DOMAINS

Retaining control of certain technologies is crucial for Thales. These technologies come under three main headings:

• electronics, electromagnetism, optronics (nanotechnolo-gies, acoustics, RF, imaging, thermal, signal processing, manufacturing techniques),

• mission critical software and information systems (signal and information processing computers, real-time embed-ded software-dominant systems, distributed systems, web technologies and service-oriented architectures, model-driven, method-driven and tools-driven engineering, information systems safety and security),

• information and cognitive sciences (data fusion, data min-ing, autonomous/robot systems, synthetic environments, user-centred design, human factors).

These technologies are needed to ensure sovereignty, eco-nomic independence and the effective development of dual civil/military applications. Thales’s overriding objective is the same in all cases: to rapidly achieve the necessary levels of maturity to incorporate the latest technologies into the Group’s product and systems offering.

137

>> ��Research and innovation



3. CLOSE INTERACTION BETwEEN THALES R&D TEAMS AND THE ACADEMIC AND RESEARCH COMMUNITIES

To develop the technologies it needs, Thales relies heavily on cooperation between its research teams and the academic

world. TRT – an international network of corporate research laboratories in France, the United Kingdom, the Netherlands and singapore – is responsible for building relationships with academic partners.

Most TRT laboratories are located on university campuses. The Palaiseau corporate research laboratory in France, for example, is located on the campus of the École polytech-nique, one of the country’s most prestigious engineering schools. The laboratory is part of a unique ecosystem of world-class research facilities in the Paris region, including the Digiteo information science and technology park and the “Triangle de la Physique” (Physics Triangle) of Palaiseau, Or-say and saclay.

FOCUS 1 - Collaborative innovation in software

More than 10,000 engineers are working on software and critical information systems.

Many of the issues faced in this field are similar from one operating unit to another. One of the main challeng-es for Thales is to manage the risks associated with the implementation of critical information systems while at the same time offering innovative solutions.

a Technical strategic Plan (TsP) is drawn up jointly by operating units and corporate research teams. The plan sets medium-term research priorities and is a way of managing the process of translating research outcomes into product and system innovations.

To support its efforts in this area, Thales set up a shared company-wide technology platform in 2008 based at the central research facility in Palaiseau, near Paris. When a Thales unit intends to introduce new software tech-nologies into a programme, while controlling the impact on architectures and minimising associated risks, a dedicated team is put in place, comprising researchers with specialist knowledge of the most relevant technolo-gies and personnel from the unit itself, who understand the area of application. These teams generally work to-gether for a period of six to eighteen months. On com-pletion, unit engineers are responsible for incorporating the development work into the programme concerned.

FOCUS 2 - Cognition and human factors research platform

The cognition and human factors research platform set up at the research centre in Delft in 2009 is the culmi-nation of many years of work in the field of multimodal in-teractions, in particular for aerospace applications. The platform is the Group’s centre of excellence for cognition and human factors research.

like the Palaiseau technology platform for software, the Delft research platform develops innovative solutions to practical challenges faced by operating units. In 2009, for example, in the field of short-range air defence sys-tems, the research team worked with engineers from Thales air systems to validate multimodal solutions ap-plied to fire control operator consoles.

This project has helped to foster stronger links between Thales and its partners, as evidenced by the successful cooperation with the european Defence agency in two projects launched in 2009.


Business review>>

Thales’s research centre in the Netherlands is located at Delft University, while the singapore centre has ties with Nanyang Technological University, and with France’s national research institute CNRs as part of its only joint international research unit with an industrial partner.

In the United Kingdom, the Reading laboratories work closely with major British universities, including Cambridge and Bristol.

as well as employing some 500 personnel, TRT laboratories host 80 doctoral students and more than 100 scientists from partner research institutes.

although their primary aim is to foster links between the company and the research and academic communities, part-nership initiatives like these also enhance the Group’s attrac-tiveness as an employer among science graduates.

4. THALES AT THE HEART OF INNOvATION ECOSYSTEMS

In each country where the company has significant opera-tions, Thales pursues a strategy of developing strong part-nerships within the local industrial and scientific ecosystem.

Thales is positioned as a major player in numerous high-tech clusters in France (including system@tic Paris-Région and Cap Digital Paris-Région, aerospace Valley in the southwest, the Maritime clusters in Brittany and Provence-alpes-Côte d’azur, and the Images et Réseaux (images and networks) telecommunications cluster in the Brittany region), as well as on various european technology platforms (acare, ar-temis, eniac, Nessi, etc.), projects for the european RTD framework programme, and eureka projects.

In the United Kingdom, the Group conducts a policy of ac-tive cooperation with innovation ecosystems, partnering the Mobile Virtual Centre of excellence (MVCe) collaborative re-search programme on mobile communications (as a founder member), the Centre for secure Information Technologies at Queen’s University Belfast, and the Integrated Vehicle health Management (IVhM) Centre at Cranfield University (where other partners include Bae systems, Boeing and Rolls Royce).

The prime objective for players in each of these networks is to optimise synergies between major industrial companies, smaller innovation-driven technology providers and training/research bodies.

of research related to the Group’s own domains. In the United Kingdom, for example, Thales has instituted a chair in Intelligent Radar systems at University College london, and is represented on the management boards of more than 20 universities.

FOCUS 3 - Scientific partnerships with the academic community

Illustrating the Thales Group’s commitment to develop-ing partnerships with the academic community, agree-ments were signed in 2009 with leading French engi-neering schools and universities including IseN lille and the University of Paris (Pierre et Marie Curie). agree-ments like these are designed to foster cooperation be-tween academic research communities and industry in the pursuit of concrete, long-term goals.

Two new teaching and research chairs were created in 2009, in Theories and Methods of Innovative Design at the École des Mines, Paris, and in systems at the École supérieure d’Électricité (supélec).

Thales leverages its international dimension to develop similar partnerships with universities in all its countries of operation that possess recognised expertise in areas

as in other technology segments, Thales also teams with high-profile public-sector players. The framework agreement with the French armed forces health service in the field of cognitive sciences and human factors is a perfect example of this policy.

139

>> ��Research and innovation



The Thales portfolio included more than 11,000 patents and patent applications at 31 December 2009 and is actively maintained as operational requirements evolve. The portfolio protects Thales’s positions in its markets and serves as a bargaining chip in disputes with third parties.

5. A DYNAMIC APPROACH TO INTELLECTUAL PROPERTY MANAGEMENT

Thales supports its R&D activities with a dynamic policy of intellectual property management.

In terms of the number of patents granted for innovations (more than 400 new applications in 2009), Thales is on a par with most of its competitors. The steady rise in the number of patent applications filed each year (up 90% be-tween 2005 and 2009) is an indication of the company’s commitment to innovation and its ability to translate re-search results into competitive advantage.

FOCUS 4 - Algorithms to optimise “fish” trajectories

In submarine warfare, a “fish” is a towed or autonomous sonar system used for detecting underwater objects such as mines.

Optimising sonar trajectories is a prerequisite for se-curing maritime areas as quickly as possible despite the constraints associated with the marine environment. To address this issue, teams from Thales Research & Technology and Thales Underwater systems are working together to develop a mission planning support tool for unmanned underwater vehicles deployed on mine coun-termeasures missions.

Initial development work has made it possible to deter-mine the most effective method for sweeping a mari-time zone for underwater threats. an algorithm was needed to determine the location and spacing of vehicle trajectories on the basis of sonar range and current flow rate and direction. a particularly effective algorithm was used in a test vehicle which was successfully trialled off Brest in late 2009.

FOCUS 5 - GOCE satellite: unique expertise in support of scientific goals

The Gravity field and steady-state Ocean Circulation ex-plorer (GOCe) spacecraft, developed and built by Thales alenia space for the european space agency (esa), has been operational since mid-september 2009.

The spacecraft’s mission is to provide the first 3D map-ping of the earth’s gravitational field, with an unprec-edented level of accuracy of 0.0001%.

The satellite’s high-precision instrument is designed to provide precious data for scientific communities study-ing the planet. The data gathered and transmitted by GOCe will be used to help understand and model ocean currents, as well as differences in the density and dy-namics of the earth’s crust, and their effects on climate.

Both the mission concept and the spacecraft’s core instru-ment (the gradiometer) represent major innovations. The satellite flies in a very low orbit to achieve the optimum compromise between onboard equipment sensitivity, the need to compensate for atmospheric drag, and mission duration. The gradiometer comprises an extremely precise arrangement of six accelerometers, developed by ONeRa.

The GOCe project represents a tough scientific and technical challenge that Thales was able to meet thanks to its solid experience of scientific and earth observa-tion satellites. Continuous innovation to push back the limits of measurement remains the key to success in this market segment.


Business review>>

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D. THALES AND ITS SUBSIDIARIES

1. SIMPLIFIED ORGANISATION CHART AT 31 DECEMBER 2009

This simplified organisation chart includes fully consolidated and proportionately consolidated companies that account for more than 0.5% of consolidated revenues and are based in countries accounting for more than 2% of consolidated revenues. Compa-nies consolidated under the equity method (with the exception of DCNs) are not included in this chart.

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>> ��Thales and its subsidiaries / Major operational subsidiaries and manufacturing sites



2. ROLE OF THE PARENT COMPANY wITHIN THE GROUP

Thales parent company operates as a holding company for the Group:

• it holds shares in the Group’s major subsidiaries,• it manages central functions: Group strategy, trading policy, le-

gal and financial policy, operation monitoring, human resources policy, communications,

• it provides subsidiaries with specialised assistance: legal, fis-cal and financial expertise, for which the subsidiaries pay fees,

• it provides financing, cash pooling and, where necessary, guarantees.

In addition to these functions, the parent company conducts its own research, described on page 136 and following.

a table showing the main consolidated companies is set forth hereafter.

3. FINANCIAL FLOwS BETwEEN THE PARENT COMPANY AND ITS SUBSIDIARIES

The parent company receives dividends paid by its subsidiaries, as approved by their respective general meetings of sharehold-ers and in accordance with applicable legislation and regulations in their countries of operation.

In addition to these dividends and the payment of fees for shared services, the main financial flows between Thales parent com-pany and its subsidiaries are the result of cash pooling.

as a general rule, the cash surpluses of subsidiaries are transferred to the parent company under a centralisation system known as cash pooling. In turn, the parent company meets the cash require-ments of subsidiaries, operating in financial markets to arrange the necessary investments and loans to meet its own requirements and those of the subsidiaries. except in special cases, this system is applied to all subsidiaries under majority Thales control.

E. MAjOR OPERATIONAL SUBSIDIARIES AND MANUFACTURING SITES

1. LIST OF MAIN CONSOLIDATED COMPANIES

The significance criteria used to prepare these tables also apply to the list of main consolidated companies on page 85 of the consolidated financial statements.

1.1. fully Consolidated Companies

The companies in this list each contributed over 0.5% to the 2009 consolidated revenues.

Name Registered office / City

Nationality Division Segment % of capital held by Thales

% of vot-ing rights held by Thales

Stesa Riyadh Saudi Arabia Security Solutions & Services Security 100% 100%Thales Defence Systems Pty Ltd Midrand South Africa International operations Defence 80% 80%Thales Australia Ltd Potts Point Australia International operations Aerospace / Space, Defence,

Security100% 100%

TDA Armements SAS La Ferté Saint-Aubin France Land & Joint Systems Defence 100% 100%Thales Air Systems SA Rungis France Air Systems Defence 100% 100%Thales ATM GmbH Korntal-Münchingen Germany Air Systems Defence 100% 100%Thales Avionics SA Neuilly-sur-Seine France Aerospace Aerospace / Space 100% 100%Thales Avionics Inc Edison United States Aerospace Aerospace / Space 100% 100%Thales Avionics Ltd Weybridge United Kingdom Aerospace Aerospace / Space 100% 100%Thales Avionics Electrical Systems SA Chatou France Aerospace Aerospace / Space 100% 100%Thales Canada Inc Saint-Laurent Canada International operations Aerospace / Space, Defence 100% 100%

142

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1.2. Companies Consolidated under the proportionate method

The companies in this list each contributed over 0.5% to the 2009 consolidated revenues, on prorata basis.




Air Command Systems International SAS (ACSI)

Massy France Air Systems Defence 50% 50%

Amper Programas de Eletronica Y Com-municaciones SA

Getafe Spain Land & Joint Systems Defence 49% 49%

Citylink Telecommunications Holding Ltd London United Kingdom Security Solutions & Services Security 33% 33%

Diehl Aircabin GmbH Uberlingen Germany Aerospace Aerospace / Space 49% 49%Diehl Aerospace GmbH Uberlingen Germany Aerospace Aerospace / Space 49% 49%Ericsson Thales AEW Systems AB Mölndal Sweden Aerospace Aerospace / Space 50% 50%Navigation Solutions LLC Plano United States Security Solutions & Services Security 35% 35%Samsung Thales Co. Ltd Seoul South Korea International operations Aerospace / Space,

Defence, Security50% 50%

Thales Alenia Space SAS Toulouse France Space Aerospace / Space 67% 67%Thales Alenia Space Italia SpA Roma Italy Space Aerospace / Space 67% 67%Telespazio holding SRL Roma Italy Space Aerospace / Space 33% 33%Thales-Raytheon Systems Company LLC Fullerton United States Air Systems Defence 50% 50%Thales-Raytheon Systems Company SAS Massy France Air Systems Defence 50% 50%

Trixell Moirans France Security Solutions & Services Security 50% 50%




Thales Communications SA Colombes France Land & Joint Systems Defence 100% 100%Thales Communications Inc Clarksburg United States Land & Joint Systems Defence 100% 100%Thales Defence Deutschland GmbH Stuttgart Germany International operations Defence, Security 100% 100%Thales Air Defence Ltd Belfast United Kingdom Air Systems Defence 100% 100%Thales UK Ltd Weybridge United Kingdom Corporate UK Aerospace / Space,


Thales Electron Devices SA Vélizy France Corporate Security 100% 100%Thales Electron Devices GmbH Ulm Germany Corporate Security 100% 100%Thales International Saudi Arabia Riyadh Saudi Arabia International operations Aerospace / Space,


Thales Italia SpA Milano Italy International operations Aerospace / Space, Defence, Security

100% 100%

Thales Naval Ltd Weybridge United Kingdom Naval Defence 100% 100%Thales Nederland BV Hengelo Netherlands Naval Defence 99% 99%Thales Optronique SA Élancourt France Land&Joint Defence 100% 100%Thales Optronics Ltd Glasgow United Kingdom Land&Joint Defence 100% 100%Thales Rail Signalling Solutions GmbH Stuttgart Germany Security Solutions & Services Security 100% 100%Thales Rail Signalling Solutions Inc Weston - Ontario Canada Security Solutions & Services Security 100% 100%Thales Rail Signalling Solutions Ltd London United Kingdom Security Solutions & Services Security 100% 100%Thales Security Solutions & Services SAS

Vélizy-Villacoublay France Security Solutions & Services Security 100% 100%

Thales Services SAS Vélizy-Villacoublay France Security Solutions & Services Security 100% 100%Thales Suisse SA Zurich Switzerland International operations Defence, Security 100% 100%Thales Systèmes Aéroportés SA Élancourt France Aerospace Aerospace / Space 100% 100%Thales Transport & Security Ltd Weybridge United Kingdom Security Solutions & Services Security 100% 100%Thales Transport Signalling & Security Solutions. SAU

Madrid Spain Security Solutions & Services Security 100% 100%

Thales Training & Simulation Ltd Weybridge United Kingdom Security Solutions & Services Security 100% 100%Thales Underwater Systems Ltd Weybridge United Kingdom Naval Defence 100% 100%Thales Underwater Systems SAS Valbonne France Naval Defence 100% 100%Thales Components Corporation Totowa United States Corporate US Security 100% 100%

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>> ��Major operational subsidiaries and manufacturing sites



1.3. Companies aCCounted for under the equity method

Complete list of companies accounted for under the equity method.

2. MAjOR MANUFACTURING SITES

The figures presented below correspond to employees under Thales management (a total of 67,590 people at end-2009, see page 132), including all employees working for fully consolidated and proportionately consolidated companies (with the excep-tion of Diehl Aerospace GmbH, Diehl Air Cabin GmbH and Junghans Microtec GmbH in Germany, Telespazio in Italy and Thales Raytheon Systems in the United States, whose employees are not under Thales management). “Employees under Thales man-agement” also includes employees of companies that are controlled by Thales but are below consolidation thresholds.

at 31 December 2009, 13 sites with more than 1,000 employees accounted for more than 40% of the worldwide workforce under Thales management.




Aviation Communications & Surveillance Systems

Wilmington United States Aerospace Aerospace / Space 30% 30%

Camelot Group Plc Watford United Kingdom Corporate UK N/A 20% 20%DCNS Paris France Naval Defence 25% 25%DpiX LLC Palo Alto United States Corporate US Security 20% 20%Elettronica SpA Roma Italy Aerospace Aerospace / Space 33% 33%ESG GmbH Fürstenfeldbruck Germany Land & Joint Systems Defence 30% 30%Indra Espacio SA Madrid Spain Space Aerospace / Space 33% 33%

At 31 December 2009 Employees Segment Owned or leased Surface area (sq.m)

In FranceBordeaux (South-west) 2,118 Aerospace / Space Leased (Le Haillan)

and Owned (Pessac)59,000

Brest (Brittany) 1,477 Aerospace / Space, Defence Leased 56,000Cannes (Provence) 1,873 Aerospace / Space Owned-Leased 86,000Colombes (Île-de-France) 3,539 Defence, Aerospace / Space Leased 95,000Élancourt (Île-de-France) 2,190 Aerospace / Space, Defence Leased 107,000Massy (Île-de-France) 1,445 Defence / Security Leased 31,000Meudon la Forêt / Vélizy (Île-de-France) 3,868 Aerospace / Space, Security Leased 112,000Rungis (Île-de-France) 1,280 Defence Leased 32,000Toulouse (South-west) 3,813 Aerospace / Space, Defence Owned-Leased 147,000In United KingdomCrawley 1,581 Security Leased 28,000In AustraliaSydney 1,189 Defence, Security Leased 60,000In NetherlandsHengelo 1,572 Defence Owned 100,000In SpainMadrid 1,330 Aerospace / Space, Security Leased 12,000


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2. AEROSPACE / SPACE

The aerospace / space segment includes two divisions: aer-ospace (equipment, systems and services for civil and mili-tary aircraft) and space (satellite solutions through Thales alenia space and satellite services through Telespazio).

A. AEROSPACE

1. OvERvIEw

The aerospace division supplies civil and military electronic systems and equipment for aircraft manufacturers, airlines and government customers (defence ministries and security services). The division spans the entire value chain, supply-ing onboard systems and equipment, support services and – as prime contractor for defence programmes – complete capability solutions including equipped platforms, associated ground segments and operating services.

2. BUSINESS REvIEw

2.1. aerospaCe equipment (avioniCs, eleCtriCity)

Products and markets

Thales supplies avionics systems and equipment for flight con-trol that cover a range of onboard electronic systems used for navigating and piloting the aircraft, as well as for commanding and controlling aircraft systems. Key avionics systems include the onboard computer, cockpit man-machine interface, as well as tools for navigation, flight control, transmission, surveillance and flight safety. These functions and equipment can be de-ployed on all types of civil and military aircraft.

Positioning and competition

Thales is a major player in avionics globally, alongside the american firms honeywell and Rockwell Collins:

• in the civil sector, Thales supplies systems and equipment to manufacturers of civil aircraft, including airliners (par-

ticularly on airbus programmes), regional and business aircraft, and civil helicopters,

• in the military sector, for combat, surveillance and trans-port aircraft and helicopters, the market is dominated by major procurement programmes, mainly in the United states but also in europe (such as Rafale, eurofighter, a400M, Tiger, Nh90, etc.), where Thales enjoys a signifi-cant share of the market.

Thales also supplies electrical power generation equip-ment for aircraft, as well as power conversion equipment to adapt energy supplies to the needs of different onboard systems.

Highlights

Development of products and functions for the airbus a350 programme continued in 2009. Thales has been selected to supply, among other things, avionics solutions for the inter-active cockpit display system, onboard computers and the inertial navigation system. as such, Thales is the second-largest airbus partner for this programme after the engine manufacturer.

The Boeing B787, onboard which Thales is supplying elec-trical power conversion, in-flight entertainment and light-ing systems (via Diehl aerospace, a joint venture between Thales and Diehl), successfully completed its first flight on 15 December.

In the regional aircraft segment, the sukhoi superjet 100 regional jet, for which Thales is supplying most of the avion-ics equipment, was officially unveiled at the 2009 Paris air show. The aTR-600, equipped with a new full-glass cockpit from Thales, completed its first flight, as did the Gulfstream G650 business jet, onboard which Thales supplies the fly-by-wire flight control system.

The a330-200, currently in development under the United Kingdom’s FsTa (Future strategic Tanker aircraft) pro-gramme, completed its first flight in June 2009. Thales is a member of the airTanker consortium alongside Cobham, eaDs, Rolls Royce and VT Group, and will also supply a number of avionics systems for the aircraft.

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>> ��Aerospace

OverviewAerospace /

Space


Defence Security

In the helicopter market, the sikorsky s-76D, equipped with the Thales TopDeck avionics suite, successfully completed its first flight in February 2009.

2.2. CaBin systems

Thales supplies cabin systems and equipment – mainly in-flight entertainment (IFe) systems – for passenger air-liners (airbus, Boeing) and regional aircraft (Bombardier, embraer). The Group now ranks among the world’s leading players in this market, behind Panasonic avionics. Thales’s offering also encompasses cabin lighting, interior linings and crew rest compartments, supplied by means of the Thales-Diehl joint ventures Diehl aircabin and Diehl aerospace.

Highlights

Thales was awarded numerous contracts to supply in-flight entertainment (IFe) systems to leading airlines in 2009, in-cluding deals with China southern, saudi arabian airlines, Japan airlines, Korean air and Qatar airways. Thales’s Top-Flight satcom connectivity solution, which allows aircraft to be continuously linked to the ground via a satellite link so that passengers can use the internet, make mobile phone calls and send text messages, entered service with Ryanair.

2.3. ComBat systems


Thales supplies electronic systems for combat aircraft and its activities are closely linked to the government policies associated with these programmes. In France, Thales is working in close partnership with Dassault aviation to sup-ply nose-mounted radars for surveillance and fire control, electronic warfare, threat detection and defensive aids sys-tems, and computers for navigation and attack systems for the Rafale programme and the Mirage 2000 upgrade cam-paign. Thales also supplies onboard optronic equipment (OsF forward-sector optronic suites, reconnaissance pods, laser targeting pods, etc.) as well as communication and identifi-cation systems.

Thales also supplies naval and land electronic warfare sys-tems, which protect warships and their fleets, for example, by exploiting electromagnetic signals generated by aircraft, missiles and other ships, and also provide data to establish a common, networked operational picture of the battlespace.


Thales, alongside Finmeccanica, is a leading european player in combat and surveillance radars and electronic warfare systems, in a global market in which Raytheon and Northrop Grumann enjoy a powerful position thanks to the sheer scale of american programmes.

Highlights

In late 2009, the French Defence Ministry signed a contract to purchase an additional 60 Rafale fighters for the French air Force and Navy, boosting the total number of Rafales ordered to 180. The aircraft will be equipped with Thales’s new RBe2 radar system, the first aesa (active electroni-cally scanned array) radar to be developed in europe. In the export market, the Brazilian government announced its deci-sion in september 2009 to open negotiations for the pur-chase of 36 Rafale fighters.

In electronic warfare, Thales continued the development and integration of various systems for the first FReMM multi-mission frigate. The Group was also awarded the contract to replace the French Navy’s sePel electronic warfare data analysis system, aimed at providing France’s future naval support centre with a next-generation system.

2.4. istar and uav systems


The effectiveness of strategic and tactical military opera-tions depends on forces’ ability to gather intelligence on enemy forces and to rapidly identify threats in-theatre. The use of an aerial platform to perform surveillance operations offers considerable flexibility of deployment as well as the


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penetration and wide-area observation capabilities needed for maritime surveillance, battlefield surveillance and stra-tegic intelligence missions. a range of intelligence-gathering sensors (radar systems, optical and infrared cameras, RF sensors, etc.) can be installed on different platform types (fixed-wing aircraft, helicopters or UaVs).


Thales’s capabilities range from the supply of onboard sys-tems and equipment to prime contracting for full-service so-lutions encompassing equipped platforms, ground stations and technical support services. Competition in the equip-ment supply market comes from american, european and Israeli specialists, as well as from the same competitors that Thales faces in the combat aircraft segment. In the full-service solutions segment, Thales works in partnership with transport aircraft and UaV manufacturers (who are emerg-ing as a new force in the IsTaR market, and are mainly based in the United states and Israel).

Highlights

In the United Kingdom, Thales is the prime contractor for Watchkeeper, europe’s largest UaV-based battlefield sur-veillance programme, interconnecting the various branches of the United Kingdom’s armed forces. This programme reached key milestones as the flight test programme contin-ued. The contract to provide a tactical UaV capability based on the hermes 450, deployed in afghanistan and Iraq since mid-2007, was extended to 2011 by the United Kingdom Ministry of Defence.

In France, the French defence procurement agency (DGa) awarded DCNs and Thales phase two of the advanced study contract for an automatic take-off, landing and deck landing system for rotorcraft (helicopter-type) UaVs. Thales is also a major contributor to the MIDCas (Mid-air Collision avoid-ance system) contract with the european Defence agency (eDa). MIDCas aims to develop an anti-collision system demonstrator for “sense and avoid” type drones, allowing their eventual integration into civil airspace. The Group is also a leading player, in partnership with Dassault aviation and Indra, in the sDM project to develop a Male (Medium altitude long endurance) UaV for the French Ministry of De-fence.

In maritime patrol and surveillance, Thales and the Canadian

firm Provincial aerospace ltd were selected by the United arab emirates (Uae) air Force to upgrade two of its aircraft with Thales’s sophisticated aMasCOs system (airborne Maritime situation and COntrol system).

2.5. serviCes for Civil and military Customers


The civil support services market is characterised by the intensity of aircraft operations. The ability to maximise the operational availability of aircraft and control the associated costs is critical to airlines’ financial performance. as such, aircraft maintenance is carried out by internal departments, specialist maintenance providers, or equipment manufactur-ers like Thales. equipment manufacturers conducting main-tenance operations require genuinely global capabilities and dedicated processes in order to meet airlines’ availability and competitiveness requirements. In the military support mar-ket, the use of sophisticated technologies and the drive to improve performance while cutting costs, combined with the international dimension of some military programmes, make outsourcing to industry an increasingly attractive option.


Thales’s civil support services network has taken on a truly global dimension, enabling the Group to meet customers’ needs effectively through a combination of powerful resourc-es, global reach, proximity to customers and the sheer range of available service packages. Commercial alliances with other market players allow more comprehensive packages to be offered to airlines. Thales’s military support network, extensively developed in France and the United Kingdom, has long provided conventional maintenance services for those countries’ armed forces, as well as in export markets. The network is now taking on a greater role in equipment mainte-nance as governments restructure the procurement of mili-tary support services.

Highlights

Thales signed a contract with Dassault aviation in 2009 to provide maintenance support for avionics equipment on board Rafale combat aircraft in service with the French armed forces. The ten-year fixed-price contract includes a range of extended services.

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OverviewAerospace /

Space Defence Security

OeM Defence services, created by Diehl aerospace, lieb-herr-aerospace, saFRaN, Thales and Zodiac aerospace as the military counterpart to the civil support joint venture OeM services, became fully operational in mid-2009. The compa-ny will provide armed forces with integrated, custom-tailored through-life support solutions for a wide range of equipment on board new-generation aircraft such as the Nh90, Tiger and a400M, as well as on other currently operational fleets.

3. DEvELOPMENT STRATEGY

Thales considers that the civil aerospace market offers good prospects for long-term growth, although business in this sector is cyclical. In the short term, the current global crisis and its impact on worldwide air traffic have caused considerable uncertainty in the air transport market.

The military aerospace market is generally less cyclical, with growth driven primarily by the steady increase in elec-tronics as a proportion of total platform value, and by up-grades and retrofits of existing aircraft fleets.

B. SPACE

1. OvERvIEw

a joint venture between Thales (67%) and Finmeccanica (33%), Thales alenia space is a key supplier of satellite and orbital infrastructure solutions. With 11 facilities in France, Italy, spain and Belgium, the company develops the very lat-est space and ground segment technologies for scientific, commercial, military and security applications. It is a glo-bal market leader in telecommunications, navigation, space exploration and earth observation, particularly for weather forecasting, altimetry, oceanography and environmental management applications. Thales alenia space is part of the space alliance alongside Telespazio, which is also a joint ven-ture of Thales (33%) and Finmeccanica (67%) and is dedi-cated to developing space services.

2. BUSINESS REvIEw

2.1. produCts and equipment

Thales alenia space has been supplying its spacebus satellite platform for geostationary telecommunications satellites of up

to 6 tonnes, and their payloads, for nearly 30 years. With com-mercial customers all around the world, Thales alenia space is the main supplier for the european operator eutelsat – with 17 satellites ordered and a new contract signed in 2009 – for which the W2a and W7 satellites were launched this year.

as a leading european supplier of satellite solutions for security and defence applications, Thales alenia space is strongly posi-tioned in the satellite market and in space and ground segments for earth observation and telecommunications systems (COs-MO-skyMed, sICRal, saR-lupe, ComsatBw, helios, syracuse, Pleiades). Dual-use civil/military systems, like the COsMO sys-tem for Italy, are one of the company’s core competencies.

Thales alenia space is also a key player in earth observation, particularly in high-resolution optical and radar instruments for environmental monitoring and weather forecasting (Me-teosat) and satellite altimetry (sIRal on Cryosat and Posei-don on Jason).

In science, Thales alenia space built the herschel and Planck satellites, launched in May 2009 for the european space agency’s flagship astronomy programme, and the GOCe sat-ellite designed to measure earth’s gravity field.

In the multimission minisatellite class (500 to 700 kg), Thales alenia space jointly developed with the French space agency CNes the Proteus platform that is used for earth ob-servation and space science missions. With the successful launch of the sMOs satellite, there are now 5 Proteus-based spacecraft in orbit.

Thales alenia space is a pivotal player in satellite constel-lations, notably the first- and second-generation Globalstar and O3b telecommunications constellations. as prime con-tractor for eGNOs, the precursor to Galileo, the company is driving forward satellite navigation in europe and is also closely involved in work to build and launch the first four In-Orbit Validation (IOV) satellites of the constellation.

lastly, Thales alenia space is a major contributor to the In-ternational space station, providing more than half of the orbital outpost’s pressurised volume. as prime contractor for Nodes 2 and 3, as well as the Multipurpose logistics Module (MPlM) and the Cupola, Thales alenia space is also the main contributor to the automatic Transfer Vehicle (aTV) and a key player in the Columbus orbital laboratory.

In launch vehicles, Thales alenia space has also been provid-ing onboard electronic systems for the ariane launcher for over 30 years.


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2.2. Competition and positioning

Thales alenia space’s main rivals in the fiercely competitive sat-ellite market are space systems loral, eaDs astrium, Orbital sciences and Boeing. Other international suppliers – in Rus-sia, China, India and Japan – are now entering the commercial market with competitive small geostationary satellite solutions.

The leading competitor in the institutional market in europe is eaDs astrium. In institutional export markets, the com-petition also includes companies based in North america, Russia, China and Israel.

2.3. main ContraCts

In 2009, Thales alenia space won contracts for 7 satellites and 3 telecommunications payloads, 2 earth observation satellites, 9 pressurised cargo modules for the Iss and 2 ex-perimental atmospheric re-entry demonstrator vehicles. The company was also involved in 14 launches with 16 satellites.

Thales alenia space scored a number of successes in the commercial telecommunications satellite market, with eutel-sat (W3C), arabsat (arabsat 5C and 6B, as co-contractor with eaDs astrium) and Chinese operator aPT (aPsTaR 7), as well as new customers like Gazprom (Yamal-401 and -402) and Overhorizon.

In earth observation and space exploration, Thales alenia space is building the sentinel 1a and 3a environmental mon-itoring satellites for esa under the GMes programme, and has signed contracts to supply sentinel 1B and 3B.

In orbital infrastructure, Thales alenia space signed a con-tract with its commercial partner Orbital sciences to supply 9 pressurised resupply modules for the Iss. It also signed a contract with esa for the european experimental Re-entry Testbed (eXPeRT) and an agreement with the agency to pro-ceed with development of the Intermediate eXperimental Ve-hicle (IXV) atmospheric reentry demonstrator.

lastly, Thales alenia space was selected to supply about half of the electronic systems for 35 ariane eCa launchers planned to fly between 2011 and 2015.

2.4. impaCt on Business of the l’aquila earthquake in italy

Thales alenia space is rebuilding the facility in l’aquila, which was badly hit by the earthquake in april 2009. The company

is focused on continuing to satisfy its customers and mini-mising the economic impact of the loss of production capac-ity by reinvesting quickly in the facility. Programmes previ-ously in development at l’aquila have been transferred to Rome to ensure continuity and reduce the delivery schedule and financial impacts of the earthquake as far as possible.


market trends

The civil institutional, military institutional and commercial segments of the space market – Thales alenia space’s main three markets – remained stable in 2009.

Firstly, this stability was the result of civil telecommunica-tions operators looking to replenish their satellite fleets. In 2009, the financial crisis obviously impacted project financ-ing, especially for some small telecom operators, but these difficulties were eased through the support of export credit agencies like Coface (for Globalstar and O3b in particular).

secondly, the market was buoyed by a stronger political com-mitment in europe and worldwide to meet new scientific ex-ploration challenges, deploy new navigation and earth obser-vation infrastructures, and develop new, independent military intelligence, surveillance and communications capabilities in response to emerging global threats. Taken together, these factors should at least partly offset the effects of the current financial and economic turmoil. however, the level of debt in certain european nations could mean that some major instu-titional programmes may be deferred.

strategiC priorities / expeCted growth faCtors

Productivity / Competitiveness

In recent years, Thales alenia space has maintained a con-stant effort to improve productivity and competitiveness in response to increasing competition and an unfavourable euro/dollar exchange rate. The company is pursuing its pro-ductivity policy to improve operating margins by further de-veloping synergies between capabilities and facilities, and by leveraging its presence all the way through the value chain in both its commercial and institutional businesses. It is main-taining a sharp focus on sustaining the company’s ability to innovate and on extending its product and service capabili-ties to develop new markets such as mobile TV, multispot broadcasting and high-definition television.

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Boosting Thales Alenia Space’s presence in institutional markets

achieving a stronger presence in institutional markets is a key element of Thales alenia space’s strategy. The company is therefore leveraging its experience in satellite systems and dual-use applications, and is ready to pursue partnership op-portunities in europe and worldwide to respond effectively to tenders and develop new projects, particularly in the prom-ising civil, military and dual-use earth observation, weather forecasting, oceanography and telecommunications sectors.

Growing export business

To meet increasing demand from a growing number of na-tions for independent observation and communications capa-bilities, Thales alenia space intends to expand its presence in export markets and offer effective solutions to combat emerging threats in increasingly numerous geopolitically sensitive areas around the world.

Developing the joint Thales Alenia Space /Telespazio offering

The space alliance between Thales and Finmeccanica is an opportunity to develop comprehensive offerings including both satellite systems and services. Together, Thales alenia space and Telespazio are in a strong position to meet ever-growing needs for infrastructures with integrated services. Today, the space alliance is already playing a central role in major european civil and military programmes like Galileo and GMes.

3. DEFENCE

Defence is the company’s historical core business. For the armed forces, Thales designs, develops and deploys mission critical information systems, command, control and communi-cation systems, weapon systems and force protection systems.

The highly specific nature of military requirements has shaped the company’s development in the defence sector: the technological excellence and cutting-edge capabilities in complex systems engineering that Thales has cultivated to serve the armed forces is also available to non-defence cus-

tomers in the civil aerospace and security markets. This dual approach is a mainstay of the Thales strategy.

The company designs systems for all types of aircraft, na-val vessels and land platforms to sense threats, distribute data, support command decisions and control engagements in time-constrained contexts and with optimum reliability. Thales systems and solutions help to improve the efficiency of military operations by simplifying the coordination of as-sets 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.

A. AIR SYSTEMS

1. OvERvIEw

Thales systems and equipment help to make airspace safer and more secure. In civil aviation, Thales solutions cover air-craft navigation and guidance, airport security and all phases of air traffic management and control. In the defence sector, Thales’s airspace surveillance systems, command and con-trol centres and complete threat evaluation and response solutions protect armed forces and high-value assets. Thales offers a local presence for its customers around the globe, providing innovative through-life support, repair and overhaul, training and technical support for all of its products and activities.

2. BUSINESS REvIEw

2.1. positioning and Competition

Thales’s expertise in air traffic management automa-tion, navigation, surveillance, satellite communications and simulation is widely recognised by the world’s civil aviation authorities, and place the company in a central position as a systems architect and integrator for aTM modernisation ini-


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tiatives. The company is playing a leading role in defining the future of air traffic management through the sesaR (single european sky aTM Research) programme in europe and the NextGen programme in the United states. In June 2009, Thales joined the sesaR Joint Undertaking (JU), becoming the initiative’s main industrial partner and its second-largest contributor, just behind eurocontrol.

The other major players in air traffic management and con-trol centres are Raytheon and lockheed Martin in the United states, and selex/Finmeccanica and Indra in europe. In ra-dars, the main competitors to Thales are selex/Finmeccani-ca, lockheed Martin, Raytheon, Indra, eldis and Ramet. For navigation aids, sensis and selex/Finmeccanica are the two other major contractors competing with Thales.

In air operations, C2 1 and radars:

• ThalesRaytheonsystems, a joint venture between Raytheon Company and Thales, specialises in air defence systems comprising fixed and deployable air C4I 2 systems, joint and land C4I systems. Nine years after its creation, the compa-ny has a solid, high-profile customer base, giving it a com-petitive footing against long-standing players in the defence industry such as lockheed Martin, Northrop Grumman and eaDs,

• based in the UK, the Thales air operations centre is one the British army’s main suppliers for air C2 and inte-grated mission support systems. In particular, it is devel-oping the Thales Network Management system (NMs), a management system for tactical data links used by NaTO members,

• in the field of radars, ThalesRaytheonsystems also spe-cialises in 3D air defence, battlefield and counter-battery radars. Outside the scope of ThalesRaytheonsystems, Thales is continuing to extend its ground and naval surface radar portfolio, already one of the widest on the market. In the air defence field, Thales has developed the Ground smarter 100 mobile radar; in the coastal surveillance field, Thales has launched the new CoastWatcher radar family, comprising the CoastWatcher 10 (developed with Furuno) and the CoastWatcher 100.

In weapon systems, Thales supplies a full array of medi-um-range, short-range and very-short-range (shORaD and VshORaD) systems, playing an active role in force protec-tion and vital assets protection. The company is currently

developing the lightweight Multirole Missile (lMM) for the British Future anti-surface Guided Weapon-light program (FasGW-l), as part of the Team Complex Weapons 3 indus-trial consortium. Thales is also developing the Multi-Mission system (MMs) integrated platform, a lightweight vehicle-based automated firing system.

lastly, in missile electronics, Thales is a major european supplier with a full range of active, semi-active and passive seekers and proximity fuzes.

The other major players in detection systems are eaDs, In-dra, saab, Bae systems and selex/Finmeccanica in europe; lockheed Martin, Raytheon and Northrop Grumman in the United states; and elbit in Israel. Other key players in air op-erations C2 are lockheed Martin (Usa), Northrop Grumman (Usa) and Tadiran (Israel). In air defence missile systems, the key actors are Raytheon of the United states, almaz-antey of Russia, Israel’s Rafael and the following european companies: MBDa, Diehl and saab.

2.2. main developments in 2009

Air traffic management

NaTO chose Thales’s turnkey solution to provide the Kanda-har air Force Base in afghanistan with a complete air traffic management system, including a latest generation eurocat control centre, one co-mounted sTaR 2000 / RsM970 Mode s radar, a precision approach radar provided by ITT Corporation, and a series of complementary communica-tions, navigation and surveillance equipment.

In europe, austrocontrol, the austrian air navigation service provider, joined the COOPaNs programme, which has been harmonising the aTC systems of Denmark, Ireland and sweden since 2006. Work progressed on this programme and several important milestones were reached, including the deployment of the eurocat COOPaNs software for all the control sites of the Iaa (Ireland), lFV (sweden) and Naviair (Denmark).

The serbia and Montenegro common air Traffic services agency (sMaTsa) chose eurocat to renew its control cen-tres in Podgorica and Belgrade. hungary also chose eurocat for the renewal of Budapest’s control centre.

1. Command and control.2. Command, Control, Communications, Computer, Intelligence.3. Team Complex Weapons is an innovative partnering between MBDa, Thales UK, Roxel, QinetiQ and the UK Ministry of Defence to develop the complex weapon systems needed

to meet the future requirements of the UK armed forces.

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In France, Thales and CGx aeRO in sYs were awarded a con-tract by the French aeronautical Information service (sIa) for the supply of NOPIa, the first fully integrated aeronau-tical Information Management (aIM) system. In Germany, DFs, the German air navigation service provider, awarded Thales a contract for the delivery of its first operational Wide area Multilateration (WaM) system, as well as six aCas (air Collision avoidance system) monitoring stations.

Finally, in Georgia, Thales has provided a new RsM 970 ra-dar for Poti airport.

In the Middle east, Thales consolidated its already strong presence with several important contracts. Thales will part-ner with aDaC (abu Dhabi airports Company) to modernise abu Dhabi airport and will provide the Bahrain Civil aviation af-fairs with a eurocat system for Bahrain International airport.

In africa, Thales’s contract for the renewal of Namibia’s air traffic management system, which comprises a eurocat cen-tre and a complete primary and secondary surveillance solu-tion, confirms the company’s involvement in the renewal of aTM systems across the continent. Today, as a partner to 24 countries including the 18 members of aseCNa (agence pour la sécurité de la Navigation aérienne en afrique et à Madagascar), Thales is a key contributor to the security of african airspace, which is expected to experience traffic growth with the 2010 Football World Cup in south africa.

In south america, Chile’s new aTC centre in santiago was in-augurated, becoming the continent’s most modern air traffic control system. The system comprises a eurocat system, a Voice Communication system (VCs) and an air traffic sys-tem Message handling system (aMhs).

Air operations - C2 - Radars

In the air operations field, Thales consolidated its euro-pean leadership position in tactical data links with sweden’s order for the NMs (Network Management system) solution.

ThalesRaytheonsystems bolstered its market position and credentials by winning several air C4I contracts and passing milestones on several major air C4I programmes, notably the approval to roll out replication at 11 new sites for the NaTO aCCs lOC 1 system.

In the radar field, Thales has taken its first step into the tough Indian market, winning an important contract with the Indian air Force to provide 19 low-level Transportable Ra-

dar (llTR) systems. each llTR system comprises a Ground smarter 100 mobile radar, several associated subsystems (operational shelter, communications shelter, energy shelter) and living quarters for 50 people. Thales also registered the first success for its CoastWatcher 10, with a contract to equip the oil tanker terminal of the Port of Marseille as part of the seCMaR programme for the protection of sensitive ship-ping areas. In naval radars, Thales confirmed the success of the smart s Mk2 medium- to long- range defence radar, which was retained to equip the Canadian halifax class frig-ates under lockheed Martin prime contractorship, and cho-sen by Colombia to equip the almirante Padilla class frigates.

The ThalesRaytheonsystems Ground Master Radar family continued to attract strong interest, winning a contract with Finland and estonia for 14 Ground Master 403 radar sys-tems. ThalesRaytheonsystems also won a contract to sup-ply 12 sentinel radars for Finland’s future medium-range air defence missile system.

The ThalesRaytheonsystems aN/TPQ-37 Firefinder Reliabil-ity Maintainability Improvement (RMI) programme for the Us army entered its final testing stage. The upgrade integrates new technology, reduces lifecycle costs and will extend the radar service life to 2030.

weapon systems

The lightweight Multi-role Missile (lMM) currently under de-velopment has numerous applications and will expand into a family of weapons. To date the system has been trialled from both ground and air platforms, notably UaVs including the Bae systems Fury and the schiebel s100 Camcopter.

The Multi-Mission system (MMs), a lightweight vehicle-based automated firing system, is under going several dem-onstrations to potential overseas customers.

Finally, Thales has launched GlOW (Green light Optical Warner), a lightweight eye-safe system designed to aid ground forces in determining the intent of a potential aggres-sor before they become a threat. It is the first of a range of laser-based non-lethal electro-optical countermeasure sys-tems. With orders of more than 700 systems to date, the product has great potential, especially in the Us market.

In missile electronics, Thales booked a major new order for seekers for MBDa’s aster missile. large-scale development contracts, including the programme to develop a semi-active laser seeker, are continuing to consolidate Thales’s position


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in the european missile electronics market. In proximity fuzes, the successful testing of the hard Target Void sensing Fuze (hTVsF) on the Us air Force’s Joint Concept Techni-cal Demonstrator (JCTD) programme is confirming Thales’s expertise in this area under a direct contract with the Us Department of Defense.


In air traffic management, better coordination of national airspaces calls for closer customer-supplier relationships to harmonise technology, engineering and development efforts. From 2006, Thales pursued this strategy through the COO-PaNs programme, which is a model for multilateral air traf-fic management and represents a key milestone for the com-pany with regard to future sesaR developments. Confirming the strategic importance of the programme, austrocontrol joined COOPaNs in 2009.

In the defence sector, Thales continues to adapt to the changing operational requirements of armed forces facing new threats, with a focus on force protection, missile defence and versatile multi-mission, multi-platform, networked systems.

Thales is also developing full customer services and sup-port solutions for its civil and military customers. Relying on its worldwide presence and teams of dedicated experts, Thales has evolved its customer support offer from a tradi-tional support solution (maintenance/upgrade/life-extension), to an extended services solution, matching customers’ high-est requirements with predefined and guaranteed levels of operational availability, encompassing through-life support and operational maintenance. as an example, the GM 400 radar contract for Kourou in French Guiana includes a com-mitment to 98% operational availability and a guarantee of modular and evolving services for 18 years.

In 2009, major support contracts were signed in africa in the field of air traffic management: a five-year support con-tract for the Nigerian Tracon systems (Total Radar COver-age of Nigeria), including 4 centres, 13 radars and commu-nication systems linked through a V-saT network, with a local technical support ensured by Thales south africa; a five-year support contract for all Thales systems owned by the south african air navigation services provider aTNs (eurocat X, ra-dars, navaids, an air Traffic Flow Management system and an aeronautical Information service system).

In the military field, Thales was awarded the Oasis 7 con-tract for the support of all saudi arabia’s Crotale systems

(68 units). For ThaleRaytheonsystems in France, the CGC5 upgrade will resolve the obsolescence issues of the French air C2 system and the ClM 22XX/2215 mid-life upgrade contract will maintain the high and medium-altitude radars until 2025-2030.

main growth faCtors

Despite the economic downturn, the International air Trans-port association (IaTa) is maintaining its forecast that civil air traffic will double by 2025. The surge in passenger traffic is expected to be particularly acute in BRIC (Brazil, Russia, India, China) and Middle eastern nations, where huge airport infrastructures are being built to cope with demand. Thales is currently involved in several airport construction and mod-ernisation projects in this region.

In europe and the United states, Thales is a key contributor to the sesaR and NextGen programmes and their efforts to achieve a more closely integrated and optimised airspace model in order to address the growth in passenger traffic.

In force protection, the evolving threat environment is the principal growth driver. Combatants need technologies to detect and neutralise new asymmetric threats posed by rudimentary weapons such as rockets and mortars. Growth in this area is expected to come principally from Western countries.

For the traditional ground-to-air missile systems, the short-range segment remains limited to the renewal of exist-ing systems, especially in the Middle east. The market is evolving towards medium-range missile systems such as saMP/T, which are better suited to the growing range of po-tential threats. In response to new proliferation threats such as tactical ballistic missiles, efforts concentrate on theatre ballistic missile defence, a field in which Thales and Thales-Raytheonsystems have an important role to play as a system architect, managing all stages of the system – from C2 to seekers and including surveillance, acquisition and targeting radars as well as real-time engagement software to evaluate interceptions and protect allied targets.

main international faCilities

The main civil operations outside France are in australia, the United Kingdom, the United states, Italy, Germany, China, Brazil and singapore; the main defence operations are in the United Kingdom, the Netherlands, Korea and Brazil.

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B. LAND & jOINT SYSTEMS

1. OvERvIEw

as a major player in defence communication and information systems, optronics and weapon systems, the land & Joint systems Division designs, develops and produces secure in-formation and communication systems, surveillance solutions and force protection solutions for armed and security forces.

Thales supports customers to improve the operational ef-ficiency and effectiveness in all Defence domains – chiefly land but also air, Naval and Joint forces.

The Thales portfolio of solutions and products spans the en-tire value chain from equipment to systems of systems, in-cluding complete platforms, systems, support and services.

The company’s goal is to be a world leader in information dominance and network-enabling solutions, as well as in land forces transformation.

2. BUSINESS REvIEw

2.1. seCure CommuniCation and information systems

Thales deploys command and information systems and se-cure communication systems in order to conduct operations from the highest level of command down to infantry troops, as well answering the needs of government security services and forces. These systems interconnect networks, sensors, tacti-cal communications and command and control (C2) systems.

In the network security domain, Thales was awarded a con-tract to renew the French Government’s range of network se-curity equipment in 2009, guaranteeing national sovereignty in the years ahead. Over the coming years, Thales will deploy a first batch of 12,000 encryptors and provide through-life support services.

In France, Thales is pursuing the syracuse III satellite com-munications programme, securing fresh orders and delivering a system version and more than 120 user ground stations.

Thales was also appointed in France by the DGa as prime contractor for the VeNUs programme to equip armoured vehicles with mobile satcom solutions. This new “satcom

On-The-Move” communication capability will provide perma-nent tactical links for mobile units deployed on operational theaters.

In Canada, Thales won the contract to supply battlespace management systems for the Canadian army. Worth C$185 million over five years, this contract is one of the largest-ever Command and Control systems undertaken by the Canadian Department of National Defence.

In the mobile radio networks domain, Thales signed a ma-jor contract with the angolan armed forces to supply PR4G F@stnet tactical radios and the DigiM@x network, the latest TeTRa-over-IP solution, to be deployed in 2010.

In 2009, the 1000th Tsa 1400 IFF interrogator (Identifica-tion Friend & Foe) rolled off the production line. Thales has delivered more than 16,000 IFF units to date and these sys-tems are operating on more than 1,000 platforms around the world.

In the software-defined radio domain, Thales won a contract in Germany for the supply of radio modules and software for the sVFua programme to develop new-generation radios for the German armed forces.

Thales consolidated its position in this domain in the United states with an order for 11,000 radios for Us Marine Corps vehicles. In addition, Thales worked with General Dynamics to deliver the first soldier software-defined radio and won a contract in partnership with ITT for the Us army’s next-generation sINCGaRs radios.

2.2. intelligenCe, surveillanCe and reConnaissanCe systems

Thales develops optronic and electronic intelligence, surveil-lance and reconnaissance (IsR) systems.

To meet evolving security and surveillance requirements, the company launched two new handheld thermal imag-ers: sophie Zs and sophie XF. Both imagers are designed for long-range surveillance, even in adverse weather con-ditions. Today, 10,000 sophie imagers are in service in 55 countries.


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In reconnaissance and identification for air and naval aviation forces, 2009 saw the qualification of the aReOs airborne reconnaissance system and the sale of tactical reconnais-sance pods to the south african air Force (saaF). Thales also began development of its new Damocles XF multifunc-tion laser targeting pod. This future airborne pod will feature high-resolution infrared imaging, a new daylight camera and expanded data and video transmission capacities.

lastly, Thales was selected in 2009 to supply more than 100 OsF forward-sector optronic suites for the 3rd and 4th Rafale batches.

The French defence procurement agency (DGa) awarded Thales a contract to supply some 1,500 helIe night-vision goggles for French army helicopter pilots.

approximately 13,000 Minie D night-vision goggles were ordered at the end of 2009 for the French future soldier system programme. In spain, the Ministry of Defence also selected Minie D night-vision goggles for its ComFut soldier system.

In Russia, Thales reached a new milestone in its coopera-tion with the optronics industry, signing a production trans-fer agreement for Catherine FC thermal imaging cameras to equip Russian armoured vehicles.

2.3. land proteCtion and ComBat systems

Thales offers a range of protection solutions for soldiers in the field, vehicles, convoys and out-of-area military bases.

In France, Thales won the “Phoenix 2010” contract in part-nership with sagem to conduct new experimental technical and operational trials designed to enhance the effectiveness of the French army’s future combat systems.

In the United Kingdom, Thales scored a number of successes in 2009.

In soldier systems, the company was selected for the first phase of the FIsT (Future Integrated soldier Technology) contract. Valued at £150m, this contract covers the deliv-ery and through-life support of a comprehensive, lightweight system intended to enhance combatants’ detection, target acquisition and information sharing capabilities.

Thales was awarded a £25m contract under the TalIsMaN programme to manage the design, procurement and instal-

lation of mission systems for British military vehicles to im-prove soldier security and protection. The equipment to be installed includes sensors, weapon stations and a suite of protection and communication equipment.

Thales also signed a contract worth £20m with sT Kinet-ics to outfit Warthog all-terrain tracked armoured vehicles with reinforced armour, electronic countermeasures and communication systems to protect UK forces operating in afghanistan.

The success of Thales’s Bushmaster protected mobility vehi-cle was confirmed with the delivery of a new anti-IeD version for the Dutch Ministry of Defence. With this new version, crews can detect, inspect and analyse suspect items such as improvised explosive devices (IeDs) from the safety of the vehicle.

Thales also recently began design work on a new-generation protected mobility vehicle called hawkei. The 4x4, 6-crew, 7-tonne hawkei offers mobility and a high level of blast and balistic protection to its 6-member crew.

lastly, Thales confirmed the success of its 2R2M vehicle-mounted mortar system with the signature of a contract in asia. and in France, Thales was selected for an advanced study to design and build a demonstrator for Metric-Preci-sion Munitions for artillery systems (MPM).

2.4. mission support and serviCes

Thales offers innovative service solutions to provide forces with the capabilities they need to accomplish their missions, as well as through-life support for its equipment and solutions.

In France, the French defence procurement agency (DGa) chose Thales to upgrade 60 Fennec helicopters to ICaO standards. This €34m contract covers the modernisation of communication, navigation and identification equipment.

In saudi arabia, Thales opened a local technical support centre for its BOR-a and squire ground surveillance radars, which have been selected for several applications.

In the United Kingdom, Thales won the contract to support the Fully Integrated Communications system (FICs) for the Royal Navy’s Type 45 destroyers. Thales’s UK and French subsidiaries are working together on this seven-year con-tract to support internal, external and encrypted communi-cation systems.

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also in 2009, Thales was awarded extensions to the service contract for NaTO’s International security assistance Force (IsaF) in afghanistan, first signed in December 2006. NaTO selected Thales to supply communication services for the new headquarters of Us forces in afghanistan. The main NaTO member nations have also asked Thales to provide some of their communications needs in the afghan theatre.


The world has become more unstable and unpredictable in re-cent years. New crises are emerging and armed and security forces need to respond more quickly than ever before, partic-ularly for peacekeeping operations or to fight guerilla forces.

as it adapts to these developments, Thales is strengthening its capabilities in:

• information security, with secure communication and infor-mation systems,

• multi-dimensional force protection (troops, vehicles, con-voys and camps),

• high value-added services,• homeland security, notably by developing its anti-terrorism

offering and border surveillance business.

Thales is also expanding its capacity to respond extremely quickly to the urgent operational requirements (UOR) of its clients.

Thales is reinforcing its international expansion strategy. sales on its domestic markets are still a priority, but ex-port sales are another significant growth driver. The com-pany formed three new joint ventures this year, one in Croatia to supply software and electronics solutions, one in the United arab emirates in defence communications sys-tems, and one in Kazakhstan in tactical radios and critical information systems.

C. NAvAL

1. OvERvIEw

Thales is one of the world’s leading naval defence contrac-tors, with a particularly strong presence in europe, where it supplies solutions to leading navies (France, the United Kingdom, Germany, the Netherlands, spain and Italy). The Group’s capabilities span the entire value chain, encompass-

ing complete combat systems, a wide range of sensors (radars, sonars and optronics) for above-water and under-water warfare, warship prime contracting and co-prime con-tracting (for both new-build and upgrade programmes) and a comprehensive offering of through-life support services. This range of capabilities demands comprehensive expertise in engineering, systems integration (including equipment de-sign and development) and support. The Group is also active in maritime surveillance.

2. BUSINESS REvIEw

Demand for naval systems and associated services for opera-tional missions remains strong, in both the above-water and underwater warfare segments. In 2009, however, pressure on national defence budgets increased as unfavorable eco-nomic conditions persisted globally.

2.1. integrated ComBat systems, sensors and equipment for aBove-water warfare

Thales above-water combat systems meet a wide range of needs. These systems solutions perform surveillance, com-mand and combat functions and support weapon systems from both Us and european manufacturers. The centrepiece of this offering is the Tacticos scalable combat management system (CMs), which draws on extensive experience span-ning more than 450 vessels equipped over the last 40 years, most recently including the sIGMa-class corvettes for the Moroccan Navy. Tacticos systems benefit from ongoing de-velopment to accommodate the most complex operational needs. The company is also developing a new compact range of Tacticos CMss for smaller naval platforms, a segment that is currently seeing strong growth.

Thales has also developed the innovative concept of an inte-grated modular mast (I-Mast) housing all of a ship’s radar and optronic sensors and most of the communication anten-nas in a single structure for enhanced discretion. The ver-satile, scalable design offers a 360° unobstructed view for all sensors and improves electromagnetic compatibility. Key advantages include ease of integration and reduced main-tenance requirements. The I-Mast range now includes the I-Mast 400, already selected by the Royal Netherlands Navy for its four offshore patrol vessels (OPVs) and its command vessel, and the I-Mast 100 for smaller vessels.

Thales’s radar offering is among the largest on the market, in which lockheed Martin, saab, selex/Finmeccanica, Bae


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and Raytheon are among the leading players. Key products include the smart-s Mk2 surveillance radar, 28 of which have already been ordered, including a 2009 order for the Canadian frigate modernisation programme; the herakles multifunction radar, selected for the FReMM programme in France, Italy and Morocco; and the sMaRT-l long-range radar, which equips all the new-generation european anti-air warfare (aaW) frigates, and is the only radar system to offer early-warning capability for ballistic missile defence.

The Thales product portfolio also includes naval communica-tion systems, optronic and electronic warfare systems and the Crotale vertical launch missile system. leveraging this comprehensive offering, Thales won the contract to equip the French Navy’s third force projection and command vessel (BPC3) with radar and communication systems as well as the sIC 21 command information system.

2.2. sensors and equipment for underwater warfare

For the underwater battlespace (encompassing anti-subma-rine warfare and mine countermeasures), Thales offers a full range of acoustic sensors including hull-mounted and towed sonars for surface vessels, flank arrays and towed sonar arrays for submarines, dipping sonars for asW aircraft and acoustic heads for torpedoes.

Demand remained strong in all market segments. For sur-face fleets, the sonar equipment on the FReMM frigate pro-gramme integration facility entered service in October 2009. In addition, in late 2009, Thales was selected by the French government to equip a further three FReMM vessels.

Thales continued to supply sonar equipment for the Barracu-da new-generation nuclear-powered attack submarine (ssN) programme for the French Navy. The Group also scored fur-ther follow-up successes in the export market for scorpene conventional submarines, which have been sold to Chile, In-dia and Malaysia. The Malaysian Navy signed off final accept-ance of the subtics sonar system in 2009.

The four scorpene submarines sold to Brazil under an agree-ment signed in late 2009 will be the first to be equipped with the full spectrum of Thales solutions (sonar suites as well as communication and electronic warfare systems).

Demand is also strong for sonar equipment for aircraft, particularly helicopters deployed on anti-submarine warfare (asW) missions by North american and european opera-tors. In the United states, DRs sonar systems, a joint ven-ture between Thales and DRs, continued regular deliveries of alFs dipping sonars for the Us Navy’s Mh60R multimis-sion helicopters. Finally, in august 2009, the United arab emirates purchased the latest-generation compact Captas Nano sonar, which the company recently added to its range of towed sonars.

Thales continues to expand its innovative offering in mine countermeasures. This segment is currently enjoying sus-tained growth, and a number of major international business wins in the past two years have established a strong position for the Group in this area. The main contracts secured by Thales in 2009 include the supply of eight type 2093 towed sonar systems for Italy’s Gaeta-class minehunter retrofit programme and a major minehunter upgrade in singapore, following which Thales and sTe have begun to work together.

also in the mine countermeasures segment, the French Navy awarded Thales, DCNs and eCa the advanced study contracts for the espadon autonomous underwater vehicle (aUV) solution in 2009. Unmanned underwater vehicles are a key growth area for the Group, with the first generation of autonomous systems, like the DUBM44, already in serv-ice. The latest DUBM44 system was delivered to the French Navy in 2009 as part of the aseMaR project.

Thales is also a major supplier of submarine periscopes and non-penetrating optronic masts. In particular, the company produced the visual system that now equips the Royal Navy’s astute-class submarines, and won a contract to supply flank arrays for the submarines in 2009.

Thales’s main competitors in the underwater warfare sector are lockheed Martin, atlas and Raytheon.

2.3. warship prime ContraCting and Co-prime ContraCting

Thales’s industrial facilities, in particular in the United King-dom and australia, marshal recognised naval expertise across a broad range of fields – from concept definition to naval architecture and engineering, programme manage-

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>> ��Naval



ment, system integration, commissioning and testing – to deliver fully integrated warships in partnership with naval shipyards. The UK’s future aircraft carrier (CVF) programme and the minehunter reactivation programme for lithuania have benefited from these capabilities.

as a founder member of the aircraft Carrier alliance (aCa) and the design authority for the CVF platform, Thales has assumed extensive co-prime contracting responsibilities in a number of areas of the programme, most recently booking an additional order for services in June 2009. In addition, Thales delivered the first power and propulsion systems in October 2009.

The Group also has strong positions in the australian naval market. at its Garden Island facility in sydney, Thales oper-ates the largest dry dock in the southern hemisphere on be-half of the australian Navy, as well as carrying out upgrade and maintenance programmes. In 2009, Thales successfully overcame significant technical and technological challenges to complete a complex upgrade on four FFG7-class frigates.

2.4. naval serviCes

Thales is meeting growing demand for innovative services for naval forces, from technical assistance, equipment mod-ernisation, repairs and training, to through-life support. De-mand for these services has grown in recent years as navies have begun outsourcing selected activities under support contracts stipulating guaranteed levels of operational avail-ability. after initially focusing on the maintenance of its own installed base of equipment and systems, Thales now also offers full through-life support solutions for other types of naval equipment and systems.

In 2009, Thales signed a contractor logistic support (Cls) contract with the UK Ministry of Defence to provide an in-novative support solution for electronic warfare (eW) equip-ment fitted to the Royal Navy’s warship and submarine fleets.

In France, Thales is executing a number of through-life sup-port contracts in close collaboration with DCNs, including a guaranteed-availability contract for 13 Éridan-class CMT minehunters, new integrated logistic support programmes for FReMM frigates, a contract to support the first Bar-racuda submarine during its first six years of active service,

and the major Cap 2008 programme to review and update all through-life support contracts for the French Navy as a subcontractor to DCNs. Finally, in 2009 Thales won a con-tract for the new training programme for saudi arabia’s sawari-class frigates.

The Naval services business draws on the combined exper-tise of all Thales subsidiaries to exploit new opportunities and optimise synergies.


The focus of naval missions is gradually shifting away from the offshore environment towards coastal waters, where operations fall into two distinct types: protection of nation-al interests and shipping lanes, which requires increased deployment of surveillance and response capabilities, and force and power projection for peacekeeping, security and evacuation operations, which require a large payload capac-ity and excellent seakeeping. Missions like these are often conducted by naval forces on a collaborative basis with coastguards and security services, or as part of a coalition (led by the eU, NaTO or UN), and therefore demand a very high level of interoperability.

Thales is developing its product policy to meet current and future needs while optimising cost, performance and risk management. The compact version of the company’s inte-grated mast system (I-Mast) exemplifies this approach. The company is leveraging the Group’s core capabilities with the ongoing development of complex systems for decision support, information sharing through optimised user inter-faces, and real-time coordination of situational awareness, analysis and response.

Drawing on the Group’s main industrial operations in the Netherlands, France, australia, the United Kingdom, Germa-ny and Korea, Thales’s naval businesses have equipped the naval forces of over 50 nations. Thales continues to promote in-country operations and cooperation with local customers on all continents. The emergence of competitive shipyards and manufacturers in Brazil, Russia, India and China (BRIC), as well as in Turkey and Central europe, should lead to more diverse partnership opportunities, such as the partnership with Omnisys in Brazil, created as part of the effort to grow Thales’s naval business in that country.


Business review>>

4. SECURITY

1. OvERvIEw

Thales is leveraging its technological and commercial back-ground in defence and aerospace to develop its civil security business, focusing efforts on two main objectives:

• meeting the requirements of public authorities by develop-ing surveillance, intelligence and digital identity solutions,

• contributing to the dependability and security of large-scale critical infrastructure such as rail networks, energy grids, sensitive sites and the information systems of large corporations and banks.

Thales is a system integrator with all the key enabling tech-nologies and competencies needed for information and communication systems security, digital identity, electronic physical security, surveillance and synthetic environments.

In order to better meet demand for safer and more intel-ligent transportation networks, dependable energy supplies, privacy and protection from terrorism, crime and identity theft, Thales has structured its product, solution and serv-ice offering to address five major market segments: ground transportation, critical infrastructure protection, secure critical information systems, training and simulation, com-ponents and subsystems.

2. BUSINESS REvIEw

2.1. ground transportation

Thales’s ground transportation offering (for mainline rail, ur-ban rail, road and motorway networks) includes signalling solutions to ensure the efficiency and security of transport networks, supervision and communication systems to moni-tor and control applications (spanning traffic and power sup-ply management, passenger information and security) and multimodal, multi-operator contactless ticketing systems.

More than twenty rail contract wins in europe and the Middle east, as well as in the high-growth markets of africa, further strengthened Thales’s international profile in this sector in 2009.

Highlights of 2009:

High-speed linesIn spain, Thales won the Barcelona-Figueras high-speed rail contract, following on from the contracts awarded to the company in 2008 for the Cordoba-Malaga and Madrid-segovia-Vallaloid lines and the Madrid-Valence/albacete aVe contract.

In Germany, Thales signed a commercial high-speed con-tract, for the new Intercity-express (ICe) line, linking Nurem-berg to Munich via Ingolstadt.

In switzerland, following the lötschberg Tunnel contract, Thales was awarded the contract to deliver, install and test a turnkey rail signalling system as part of the Transtec Gotthard consortium for the new Gotthard Tunnel. This is expected to be the longest rail tunnel in the world (57 kilo-metres) upon its entry into service scheduled in 2017.

In saudi arabia, Thales won a contract to supply a turnkey signalling, telecommunications, supervision, security and payment system for the new North-south Railway. This will be the first implementation of the european eTCs level 2 sys-tem in the Middle east and the longest eTCs line in the world.

Urban transportationIn the Middle east, Thales was selected to supply, integrate and deploy its driverless train control and telecommunication systems for Mecca’s al Mashaaer al Mugaddassah Metro, the first in the Mecca region.

In europe, contracts were signed with several operators to upgrade metro networks. These include signalling solutions in Porto and Berlin, a supervision system in Bilbao and a main-tenance contract for the Oslo contactless ticketing system.

In egypt, Thales won two contracts to supply contactless tick-eting and integrated communication and supervision solutions as part of the project to expand line 3 of the Cairo Metro.

several systems designed and supplied by Thales also en-tered service in 2009, including line 4 of the Beijing Metro, the Dubai Metro and Vancouver’s Canada line.

Road transportIn australia, Thales successfully deployed its free-flow tolling system in July on the logan Motorway, Gateway extension and Gateway Bridge roads in the Brisbane area. In Decem-ber 2009, the company was awarded a contract to supply

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Security


Overview Aerospace / Space Defence

a smart tolling system in auckland, New Zealand, includ-ing maintenance over five years and system administration over ten years. The new system, which is being overseen by Thales’s australia-New Zealand integration centre, is based on solutions recently delivered in Dubai and Portugal. For the first time, the people of auckland will be able to travel on the city’s transport network using a single integrated ticket.

2.2. CritiCal infrastruCture proteCtion

Thales focuses mainly on the provision of supervision, com-mand and control and protection systems of infrastructure for urban security (large urban areas), energy (oil & gas), airports and other sensitive sites.

Thales’s global presence and high-level expertise in all the key enabling technologies are crucial advantages that set the company apart from other integrators. a perfect illustra-tion of this is the Thales Hypervisor, a new supervision and control platform that enhances the security of large-scale critical infrastructure and major urban areas. Combining an innovative service-oriented architecture (sOa) and intuitive user interface, the Hypervisor provides a powerful, intel-ligent supervision system without the complexity usually as-sociated with such integrated solutions.

In the urban security sector, in partnership with Telmex, Thales won the “Ciudad segura” (‘secure City’) contract awarded by the Government of Mexico City. The first of its kind, Ciudad segura is a vast video-surveillance project aimed at better protecting citizens from a wide spectrum of risks including crime, terrorism, attacks on strategic sites and natural catastrophes.

Thales uses the most advanced technologies available to provide video-surveillance, analyse images and other infor-mation, process emergency calls, manage events and simu-late emergency situations.

In the energy sector, Thales solutions were implemented at numerous sites in the Middle east, Russia, Central asia, europe and africa for national and international operators and specialised engineering companies.

In the airport security sector, Thales continued to expand its business, especially in the Middle east where a contract was signed in Qatar for security solutions for the second phase of expansion at the new Doha International airport currently under construction.

Thales further strengthened its position in the secure iden-tification system market with the delivery of the CWIC (Civil Workers Identity Cards) contract in the United Kingdom. The first cards produced using the system have been issued. In Morocco, the National Identity scheme based on contactless smart ID cards was deployed nationwide.

2.3. seCure CritiCal information systems

Information systems have become critical resources for the development of businesses and administrations. as technol-ogies grow increasingly complex, more and more organisa-tions are outsourcing the management of these systems to focus on their core business.

Thales offers a full range of outsourcing solutions for criti-cal information systems, serving customers in the high-tech, aerospace, banking and finance sectors.

The company operates five data centres for hosting, admin-istering and supervising customers’ critical data and applica-tions (four in France and one in the United Kingdom). These facilities ensure 99 percent service availability (amounting to one hour of downtime per year).

Thales is also one of the most technologically advanced play-ers in the information and communication systems security market. at the end of 2008, Thales acquired the UK company nCipher, bringing it a complete portfolio of encryption solutions to meet the needs of administrations, major corporations and financial institutions. These solutions ensure transaction con-fidentiality, integrity, authentication and non-repudiation at every level from “sensitive but unclassified” up to “top secret”.

In addition, Thales is a trusted partner for organisations engaged in the fight against cybercrime. The company’s Cy-bersecurity Centre works around the clock to prevent and respond to cyberattacks on the information systems of ma-jor corporations.

2.4. training and simulation

Thales offers training and simulation solutions for custom-ers in the defence and civil markets. simulation is a critical component of security in the air and land transportation sec-tors and plays a key role in the instruction and training of airline pilots and heavy goods vehicle drivers. The company


also provides synthetic environments that allow customers to model complex systems when preparing bids or prior to a production launch.

In 2009, Thales rolled out its Realityseven range, offering a new approach to training and simulation in the civil avia-tion market and helping customers improve their business performance. Following the supply of Realityseven full flight simulators (“FFs”) to airbus training centres in France and the United states, Thales won a contract to provide two of its new simulators to Turkish airlines. This brings the total number of Realityseven FFs sold to date to fourteen.

Thales competes in this market with a large number of companies, including defence contractors lockheed Martin, eaDs and Northrop Grumman, IT service companies in the civil sector, such as Ksa, logica and safenet, as well as niche suppliers, including Cae for simulators.

2.5. Components and suBsystems

Thales’s components and subsystems offering is designed primarily for medical imaging and power amplification ap-plications and comprises two main product lines:

• electron tubes and transmitters, which amplify power for advanced applications in such areas as space, telecom-munications, defence, scientific research, security and industrial processes,

• X-ray detectors and associated imaging solutions for state-of-the-art medical imaging equipment.

In 2009, Thales maintained its global leadership in these segments, despite the impact of the economic crisis on cer-tain sectors, mainly in industry.

In the space sector, the world’s leading satellite operators and manufacturers value Thales’s high-performance, robust tubes and amplifiers. In 2009, order intake remained brisk, including contracts on several major space programmes for Intelsat, eutelsat, ses Global and esa. It was also a record year for Ka band tube deliveries.

Orders for Thales’s travelling wave tube transmitters from defence customers remained stable.

In the scientific research sector, Thales delivered and in-stalled the first 3.7 Ghz tubes, the most powerful in their field, to the French atomic energy Commission (Cea).

Thales’s medical radiology business suffered from the world-wide decline in equipment sales, especially for its x-ray de-tectors. however, the success of the new digital x-ray de-tectors manufactured by Trixell, the joint venture between Thales (51%), Philips (24.5%) and siemens (24.5%), helped offset this impact. URF, the world’s first detector designed for both diagnostic radiology and low-dose fluoroscopy, and Portable, the world’s first-ever portable wireless digital X-ray solution, achieved significant sales.

The acquisition of CMT Medical Technologies ltd. in early 2009 further expanded Thales’s offering, which now meets the full spectrum of OeM requirements, from x-ray detection to imaging in all radiology applications.


Globalisation has led to a more mobile society, enabling peo-ple to move around more freely and easing flows of capital, goods, services and data. In this more open world, however, contemporary societies are more vulnerable to failures in large-scale critical infrastructure such as transport net-works, energy grids and information systems. They are also exposed to new threats such as trafficking, terrorism, cy-bercrime, etc., which cannot be countered by conventional means of defence.

This has fuelled strong demand for ways to enhance the se-curity and safety of people, property and infrastructure. saf-er, more secure solutions are needed for the transportation of people and goods, the distribution of energy, and better data security is needed in numerous applications, especially bank transactions and communication systems.

Thales intends to become one of the world’s leading provid-ers of integrated mission-critical solutions and services to meet the growing security and safety requirements of its civil customers.

To achieve this objective, the company is drawing on its core competitive strengths, namely:

• the capacity to expand its security business by implement-ing Key enabling Technologies, some of which were devel-oped by Thales for the defence sector,

• extensive experience in the area of mission-critical sys-tems integration in complex and hostile environments,

• active development of its international presence through a network of integration centres throughout the world.

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Shareholders information>>

3. Stock market information and financial communicationA. Thales share .................................................................................................................................................................................... 221B. Financial communication policy .............................................................................................................................. 225C. Other Thales securities listed .................................................................................................................................. 226

A. Statutory information on the company ....................................................................................................... 162B. General meetings ...................................................................................................................................................................... 162C. Information on issued share capital and its distribution .................................................... 164D. Potential capital .......................................................................................................................................................................... 166E. Information on the shareholding structure .......................................................................................... 169F. Information on regulated agreements ......................................................................................................... 179G. Statutory Auditors special report on regulated agreements

and commitments .................................................................................................................................................................... 182

1. The company and the share capital

2. Corporate governanceA. Composition of the Board of directors ....................................................................................................... 186B. Chairman’s report to the General Meeting to be held

on 20 May 2010 on corporate governance, internal control and risk management ......................................................................................................................................................... 194

C. Statutory Auditors’ Report prepared in accordance with article L. 225-235 of the French commercial code (Code de Commerce) on the report prepared by the Chairman of the Board of Thales ......................... 209

D. Corporate management .................................................................................................................................................. 210E. Profit sharing and participation ............................................................................................................................ 219F. Auditors .................................................................................................................................................................................................. 219



Shareholders information >>

1. THE COMPANY AND THE SHARE CAPITAL

A. STATUTORY INFORMATION ON THE COMPANY

Corporate name: Thales

Form of incorporationThales is a “société anonyme” (public limited company), with a Board of Directors, governed by French law, in par-ticular the French Commercial Code and certain provisions of the amended law on privatisation of 6 august 1986, since the French state owns more than 20% of the share capital.

Registered office45, rue de Villiers, 92200 Neuilly-sur-seine – FranceTelephone: +33 (1) 57 77 80 00

RegistrationNo. 552 059 024 in the Nanterre Register of Trade and Companies; aPe business identifier code: 332 a.

TermThe company was formed on 11 February 1918 for a period of 99 years. The date of expiry is set for 11 February 2017, excluding extension or early dissolution.

Corporate aimsThe objects of the company, directly or indirectly, in all coun-tries, are:

1. The design, construction, installation, maintenance, run-ning, manufacture, purchase, sale, exchange, supply or hire of all equipment, tools, stations, appliances, worked or semi-worked articles, materials, components, sys-tems, devices, processes and, generally speaking, all products relating to electronic applications in all fields.

For this purpose, the registration, purchase, sale, ex-change, supply, concession or use of all business and manufacturing patents, licences and marks.

2. search, obtention, acquisition, disposal, exchange, sup-ply, hire or use of all concessions or enterprise, private or public, training of staff and the provision of all services pertaining to the aims above.

3. The creation of any company or association, or investment in any form whatsoever in any company or enterprise, hav-ing similar or related aims to those of the company.

4. and generally, all commercial, industrial, financial and movable or immovable property transactions which relate directly or indirectly to the aims outlined above.

Financial YearThe company’s financial year covers a period of twelve calen-dar months from 1 January to 31 December.

Corporate documents and information about the company can be consulted at the registered office through the secre-tary to the Board of Directors.

Distribution of profits as per the Articles of AssociationProfits are shared in compliance with current legislation. Un-der 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 distributed in cash or in shares.

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 General shareholders’ Meet-ings. They are sent a notice of meeting, and consider mat-ters under discussion according to the conditions specified by law; the date and place of the meeting, the agenda and the draft resolutions of the meeting are published in accord-ance with the conditions set out in the regulations at least 35 days prior to the date of the meeting (50 days prior to the meeting of 20 May 2010), since the final notice of meet-

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>> ��Statutory information on the company / General meetings

The company and the share capital Corporate governance

Stock market information and financial communication


ing takes place at most 15 days prior to the meeting (22 days prior to the meeting of 20 May 2010).

Participation in General Meetings, in any form whatsoever, is conditional upon registration or recording of shares in ac-cordance with the conditions and within the time limits pro-vided for by the current regulations.

any shareholder who has already voted by post or by proxy, or requested an admittance card or share ownership certifi-cate, may at any time sell all or part of his shares.

however, in accordance with the regulations, should the in-termediary account-holder notify the company of a sale oc-curring before midnight (Paris time) of the third trading day prior to the General Meeting, the company will invalidate or modify the expressed vote, proxy, admittance card or share ownership certificate, as the case may be.

No sale or other operation carried out after midnight (Paris time) on the third trading day prior to the meeting, and irre-spective of the means used, is required to be notified by the approved intermediary or taken into consideration by the company, notwithstanding any agreement to the contrary.

The right to vote, and consequently the right to attend Gen-eral Meetings, belongs to the beneficial owner, and to the bare owner in extraordinary 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 who, in the event of disagree-ment, is appointed by the court at the request of the co-owner who acts first.

each member of the General Meeting has one vote for each share owned or represented, without limit, subject to the following, concerning the right to a double vote, and to the exceptions provided for by law.

2. DOUBLE vOTING RIGHTS AND EXERCISE OF vOTING RIGHTS

shareholders who can show proof of shares which have been registered in their name in the company’s share register (kept

by the Société Générale, authorised for this purpose - see § C below) for at least two years without interruption are enti-tled to double voting rights in General Meetings for each share so held. Registered shares which have been granted to a shareholder as bonus shares in respect of shares they already hold with double voting rights attached, are also entitled to double voting rights, as soon as the shares have been granted.

Double voting rights will terminate automatically for any share converted into bearer share 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 the decision of an extraordinary General Meeting, following approval voted by a special General Meeting of shareholders entitled to double voting rights.

Under the articles of association, there is no threshold limit-ing voting rights.

In accordance with the law, shares owned by the company itself do not give rise to voting rights.

3. REPRESENTATIONS PERTAINING TO EXCEEDING THRESHOLDS UNDER THE ARTICLES OF ASSOCIATION

any natural person or legal entity owning a number of shares equal or higher than 1% of the share capital of the com-pany (but no voting rights), or any multiple of this figure, is required to inform the company of the total number of shares held, within five trading days of the date on which this threshold or thresholds is/are exceeded.

This obligation to inform the company applies, under the same conditions, when the number of shares held falls below one of the thresholds mentioned in the previous paragraph.

In the event of failure to comply with this obligation, the shareholder shall be deprived of the voting rights attached to any shares exceeding the first threshold not declared, subject to the conditions and limitations defined by law.



at 31 December 2009, share capital amounted to €597,071,796 divided into 199,023,932 shares of 3 par value each.

Pursuant to the applicable regulations, each month the com-pany publishes on its website (www.thalesgroup.com, under the heading “Regulated Information”), information pertain-ing to the total number of voting rights and the number of shares making up the share capital, and forwards this com-muniqué to the professional disseminator.

Changes in share capital and in the rights of shareholders are governed by the applicable laws.

C. INFORMATION ON ISSUED SHARE CAPITAL AND ITS DISTRIBUTION

1. CHANGE IN THE SHARE CAPITAL OvER THE LAST FIvE FINANCIAL YEARS

shares in the company may be held in either registered or bearer form, at the shareholder’s discretion. The share reg-ister is kept on behalf of the company by société Générale (Département Titres & Bourse - 32 Rue du Champ de Tir - BP 81 236 - 44312 Nantes cedex 3 - France).

The registered capital is fully paid-up. It includes a golden share resulting from the conversion of an ordinary share be-longing to the French state, as decided by Decree 97-190 of 4 March 1997 in application of the Privatisation law of 6 august 1986 (see page 174).

Date Type of transaction Issue premi-ums, merger/contribution premiums

Number of shares created

Nominal amount of the

changes in capital

Total capital Aggregate number of

shares making up the capital

31 Dec. 04 2,673,108,742 515,606,904 171,868,968

Financial year 2005 Exercise of share options 40,523 121,569

Exercise of share warrants 372 1,116

31 Dec. 05 2,674,037,324 515,729,589 171,909,863

Financial year 2006

Exercise of share options or conversion of OCEANE bonds 96,945 290,835

31 Dec. 2006 2,676,344,983 516,020,424 172,006,808

5 Jan. 2007 Capital increase reserved for Alcatel Participations 925,000,000 25,000,000 75,000,000

5 Jan. 2007 3,601,344,983 591,020,424 197,006,808

Financial year 2007 Exercise of share options 35,943,890 1,271,809 3,815,427

Exercise of share warrants 1,275,173 55,049 165,147

31 Dec. 2007 3,638,564,046 595,000,998 198,333,666

Financial year 2008 Exercise of share options 9,586,050 391,143 1,173,429

31 Dec. 2008 3,648,150,096 596,174,427 198,724,809

Financial year 2009 Exercise of share options 7,486,024 299,123 897,369

31 Dec. 2009 3,655,636,120 597,071,796 199,023,932

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>> ��Information on issued share capital and its distribution




as at 31 December 2009, the total number of voting rights which could be exercised amounted to 253,257,169. This number in-cludes double voting rights associated with shares which have been registered for at least two years under the conditions set out in the articles of association (see above, page 163).

3. MAjOR CHANGES IN SHARE OwNERSHIP OvER THE LAST FIvE YEARS

In 2005, the share of the floating capital held by the public continued to increase as a result of the following disposals of company-held shares:

• approximately 2 million shares were sold on the market 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 an employee shareholding scheme.

Company-held shares amounted to 1.84% of the capital at 31 December 2005.

In 2006, the number of company-held shares remained rel-atively stable, since the number of shares bought exceeded the number of shares sold only by about 29,000:

2. CHANGE IN THE DISTRIBUTION OF CAPITAL AND OF vOTING RIGHTS OvER THE LAST 3 FINANCIAL YEARS

as mentioned above, the number of shares and of voting rights is published monthly on the company’s website (www.thalesgroup.com, under the heading “Regulated Information”).

• approximately 457,000 shares were bought under a liquid-ity contract,

• approximately 388,000 shares were sold under a liquidity contract,

• approximately 98,000 shares were sold to employees as options vested.


On 11 august 2006, Capital Group International Inc. dis-closed that it had exceeded the legal threshold of 5% of the share capital and owned 8,813,389 bearer shares, rep-resenting the same number of voting rights. These figures represented 5.13% of the capital and 3.52% of the voting rights in the company respectively, at the date of disclosure.

at 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” bonds (i.e. bonds con-vertible into or exchangeable for new or existing shares), issued

Status as at 31/12/2009 Status as at 31/12/2008 Status as at 31/12/2007

Number of shares

% capital % voting rights

Number of shares


Number of shares


TSA 44,562,623 22.39% 35.20% 44,562,623 22.43% 32.69% 44,562,623 22.47% 32.62%

Sofivision 8,108,283 4.07% 6.40% 8,108,283 4.08% 5.95% 8,108,283 4.09% 5.93%

French State (including one golden share)

2,022 -- -- 2,022 -- -- 2,022 -- --

Sogepa 1,081,256 0.54% 0.85% 1,081,256 0.54% 0.79% 1,081,256 0.55% 0.79%

Public sector (a) 53,754,184 27.00% 42.45% 53,754,184 27.05% 39.43% 53,754,184 27.11% 39.34%

Dassault Aviation 51,539,524 25.90% 20.35% -- -- -- -- -- --

Alcatel-Lucent Participations

-- -- -- 41,262,481 20.76% 21.10% 41,262,481 20.80% 21.05%

GIMD -- -- -- 10,277,043 5.17% 5.12% 10,277,043 5.18% 5.11%

Thales 3,556,693 (b) 1.79% -- 3,743,382 1.88% -- 2,932,229 1.48% --

Employees 5,965,354 3.00% 3.76% 6,094,287 3.07% 3.52% 4,024,102 2.03% 2.81%

Other shareholders 84,208,177 42.31% 33.44% 83,593,432 42.07% 30.83% 86,083,627 43.40% 31.69%

Overall total 199,023,932 (c) 100% 100% 198,724,809 100% 100% 198,333,666 100% 100%

(a) as per the terms of the shareholders’ agreement (see aMF 27-11-08), the “Public sector” includes Tsa and its subsidiary sofivision, excluding sogepa and the French state directly.(b) Of which 354,737 bearer shares (under a liquidity contract) and 3,201,956 registered shares.(c) During financial year 2009, 299,123 shares were created carrying rights at 1-01-09 through the exercise of share.



in December 2001 for a nominal value of €500 million, ma-tured. Most of them were redeemed in cash. This redemption thus impacted almost exclusively on the potential capital only.

On 5 January 2007, the extraordinary General Meet-ing of shareholders called to approve the contributions of alcatel-lucent’s transport and security businesses voted an increase in capital of 25 million shares (amounting to 15% of the share capital at the end of 2006), reserved for the contributing company, alcatel-lucent Participations.

alcatel-lucent Participations’ holding in the group’s share capital therefore rose from 9.46% as at 31 December 2006 to 20.94% as at 5 January 2007. The public sector’s hold-ing fell from 31.25% to 26.74%. lastly, company-owned capital was also reduced to 1.56%, compared to 1.82% as at 31 December 2006.

During 2007, the number of company-held shares was reduced due to the following transactions:

• 582,811 shares were sold to employees as they exercised share purchase options,

• 369,065 shares were purchased directly on the market in august, september and December,

• 11,274 shares were bought under a liquidity contract.


During the year 2008, the number of company-held shares increased due to the following transactions:

• 3,176,127 shares were purchased directly throughout the year,

• 2,519,280 shares were sold to employees under the em-ployee shareholding scheme,

• 1,271,294 shares were purchased under a liquidity contract,• 1,020,515 shares were sold under a liquidity contract,• 96,473 shares were sold as purchase options vested.


During 2009, the number of company-held shares was reduced due to the following transactions:

• 916,054 shares were purchased under a liquidity contract,• 911,370 shares were sold under a liquidity contract,

• 191,373 shares were sold as part of the exercise of share purchase and free share options (amounting to 90).

Company-held capital represented 3,556,693 shares, i.e. 1.79% of the capital, at 31 December 2009.

4. CROSSING OF STATUTORY THRESHOLDS NOTIFIED IN 2009 1

Crossing of statutory thresholds and declarations of intent notified in 2009 by alcatel-lucent Participations, Dassault aviation and Groupe Industriel Marcel Dassault are present-ed in pages 172 and 173.

D. POTENTIAL CAPITAL

1. MAXIMUM POTENTIAL CAPITAL AS AT 31 DECEMBER 2009

1. Up to the date of approval of this document.

In number of shares of par value €3

Registered capital as at 31.12.09 199,023,932

Current share option plans 17,669,210

12 July 2001 plan: 2,798,127 options at €42.18




30 June 2005 plan: 1,885,813 options at €34.01

9 November 2006 plan: 2,144,349 options at €36.47



25 June 2009 plan: 1,580,910 options at €32.88

Maximum potential capital (+8.88%) 216,693,142

167

>> ��Potential capital




2. SECURITIES IN CIRCULATION THAT PROvIDE ACCESS TO CAPITAL (BONDS, wARRANTS AND OPTIONS)

as at 31 December 2009, excluding exercise of share options, if any, there are no other securities in circulation which provide immediate or eventual access to the registered capital.

For convenience, although share purchase options have no impact on the potential capital, since they concern exist-ing shares, they are presented in this section together with share subscription options.

• Share purchase options

share purChase options and stoCk options

at 31 December 2009, the following options were outstanding:

• 362,765 share purchase options at a weighted average exercise price of €40.89,

• 17,669,210 share subscription options at a weighted av-erage exercise price of €36.72.




24 Nov. 2018

from 4 July 2011 to

3 July 2017


12 Nov. 2011


1 April 2011 (b)

from 10 May 2004 to

9 May 2010 (b)


13 Sept. 2009








48,900 80,000 (f) 112,089 10,608 111,168 --













• Share subscription options

• Conditions of exercise of stock-options









25 June 2019



from 9 Nov. 2010 to 8 Nov. 2016


29 June 2015




from 12 July 2005

to 11 July 2011

Exercise price €32.88 €38.50 €44.77 €36.47 €34.01 €29.50 €25.70 €40.97(b)

€42.18(b)



-- 1,680,530(c)

1,571,870 2,173,991 2,026,349 2,103,211 1,652,517 2,710,872 2,911,719





1,580,910 1,669,250 1,555,652 2,144,349 1,885,813 1,983,662 1,436,914 2,614,533 2,798,127










169

>> �� Information on the shareholding structure




• Grants and exercises of options during financial year 2009

E. INFORMATION ON THE SHAREHOLDING STRUCTURE

1. 1. BREAKDOwN OF SHAREHOLDING AS AT 31 DECEMBER 2009

as far as the company is aware, there is no shareholder – other than those mentioned in this chapter – holding 5% or more of the capital or of the voting rights (see page 165 the distribution of capital and voting rights over the last three years).

(a) Of which 0.54% owned by sogepa, which is not a signatory to the shareholders’ agreement.

199 million shares

Float 47.1%

French State (a)27.0%

Dassault Aviation25.9%

of which employees3.0%

of which Treasury share 1.8%


or purchased







9,000 €34.01 -- 30/06/2005





2. SHAREHOLDERS ACTING IN CONCERT

On 19 May 2009, the Board of Directors of Thales met prior to the Combined General Meeting of shareholders. Dassault-aviation acquired alcatel-lucent’s shareholding of Thales and replaced alcatel-lucent as the Industrial Partner of the Pub-lic sector in the shareholders’ agreement.

2.1. “puBliC seCtor” (tsa and sofivision)

Tsa is a holding company, the capital of which 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 owns 2,022 shares directly, including one “golden share” which confers upon it the main rights 1 de-scribed on page 174.

The French state also owns 0.54% of the share capital of Thales, i.e. 1,081,256 shares, through its wholly owned sub-sidiary sogepa. This holding is not included in the sharehold-ers’ agreement entered into between the Public sector and Dassault-aviation, which came into effect on 19 May 2009.

2.2. industrial partner

Dassault aviation, whose shares are listed on the “euronext Paris” of Nyse euronext, is a joint stock company which owns 25.9% of the share capital of Thales, i.e. 51,539,524 Thales shares as at 31 December 2009.

Dassault-aviation is controlled at 50.55% by Groupe indus-triel Marcel Dassault.

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

By virtue of its signature to an adherence agreement (“Con-vention d’adhésion”), entered into with the French state in

the presence of alcatel-lucent, Dassault aviation replaced alcatel-lucent with regards to the rights and obligations, subject to some amendments, by signing up to the agree-ments entered into on 28 December 2006 – namely the shareholders’ agreement and the agreement on the protec-tion of national strategic interests in Thales 2.

3.1. shareholders’ agreement Between the “puBliC seCtor” and the “industrial partner”

Brief historical overview

Tsa and alcatel-lucent had entered into a shareholders’ agree-ment on 28 December 2006 which governs relations between the Public sector and the Industrial Partner within Thales. This agreement which came into effect on the date of contribution of alcatel-lucent Participations’ assets on 5 January 2007.

This agreement was signed pursuant to the cooperation agreement entered into on 1 December 2006 between Thales, alcatel-lucent and Tsa, which replaced the previous cooperation agreement entered into on 18 November 1999 between alcatel, Thales and GIMD 3. This agreement con-tained the main provisions of the shareholders’ agreement signed on 14 april 1998 4, which it replaced.

Shareholders’ agreement between the “Public Sector” and Dassault Aviation

In connection with the acquisition by Dassault aviation of Thales’ shares owned by alcatel-lucent, the agreement re-lating to the signing up by Dassault aviation of the share-holders’ agreement whereby alcatel-lucent and the Public sector were partners became effective on 19 May 2009, subject to some amendments. The agreement by virtue of which Tsa and Dassault aviation act in concert with regard to Thales within the meaning of article l 233-10 of the French Commercial Code, Tsa being the majority sharehold-er within this group, provides for the following:

Composition of the corporate bodies of ThalesThe Thales Board of Directors comprises 16 members which shall be as follows:

1. Pursuant to article 3 of Decree No. 97-190 of 4 March 1997.2. Decision n°207C0013 of 2 January 2007, published in the Bulletin des annonces légales obligatoires of 5 January 2007.3. Published in the Official Journal of the French Republic on 12 December 2006 (see the journal’s official website: http://www.journal-officiel.gouv.fr) taken in accordance with article

1st– 1° of Decree 93-1041 of 3 september 1993 and pursuant to act n° 86-912 of 6 august 1986 above-mentioned.4. This agreement is included in the appendix of the Thales Board of Directors’ report to the extraordinary General Meeting of 5 January 2007, recorded by the aMF on 9 December

2006 under number e.06-1994 (www.thalesgroup.com).

171





• 5 members proposed by the Public sector,• 4 members proposed by Dassault aviation,• 2 representatives of employees,• 1 representative of employee-shareholders,• 4 outside individuals, selected jointly by the Public sector

and Dassault aviation.

The number of directors appointed upon the proposal of Das-sault aviation shall not be higher than the number of direc-tors appointed upon the proposal of the Public sector. The number of Directors shall be for each party at least equal to either of the following, whichever is the highest: (i) the number of Directors other than employee representatives and outside directors, multiplied by the percentage of Thales shares owned by Dassault aviation of the total sharehold-ing of the Public sector and Dassault aviation and (ii) the number of Directors representing employees.

should Dassault aviation’s shareholding exceed that of the Public sector, the parties to the agreement shall increase the total number of Thales directors from 16 to 17, so as to be represented by 5 directors each.

The Chairman and Chief executive Officer shall be chosen on the joint proposal of the parties.

Furthermore, the parties have agreed that, in the event of a change of Chairman & Chief executive Officer of Thales, in ac-cordance with the procedures stipulated in the shareholders’ agreement, Dassault aviation do not intend to propose as candidate any employee, manager ou senior executive belong-ing to the Dassault group or having recently left this group.

Finally, it is specified that at least one Director representing each of the parties will be a member of each of the Commit-tees of the Thales Board of Directors.

Decisions to be submitted to Thales’ Board of DirectorsThe parties undertake to submit for mandatory approval by the majority of the directors representing Dassault aviation, decisions of the Thales’ Board of Directors relating to the election and dismissal of the Chairman & Chief executive Of-ficer, the adoption of the annual budget and the multi-year strategic plan, and significant acquisitions and disposals of shareholdings or assets (in excess of €150 million) as well

as strategic alliance agreements on technological and indus-trial cooperation.

however, Dassault aviation has expressly undertaken to forego the exercise of the veto right which it has, by virtue of the agreement, over some strategic operations of Thales; this decision concerns a series of potential acquisition or dis-posal operations; in return, the Public sector has foregone its rights to terminate the agreement in the event of persist-ent disagreement regarding a strategic operation likely to adversely impact its strategic interests 1.

should Dassault aviation exercise its veto right on the ap-pointment of the Chairman & Chief executive Officer, after a consultation period of three months, either of the parties may terminate the agreement.

ShareholdingDassault aviation shall hold at least 15% of the share capi-tal and voting rights in Thales and remain the largest pri-vate shareholder in Thales. The Public sector shall take all measures enabling Dassault aviation to comply with this undertaking. Dassault aviation shall undertake not to reg-ister its registered shares before 1 January 2010, so as not to acquire any double voting rights before 1 January 2012 at the earliest, this being the normal time limit of the shareholders’ agreement.

The Public sector undertakes to restrict its shareholding to 49.9% of Thales’ share capital and of the voting rights.

Term of the shareholders’ agreementThe agreement will be effective until 31 December 2011. It is renewable by tacit agreement for 5-year periods.

The agreement shall be automatically terminated and the con-certed action between Tsa and Dassault aviation shall also automatically cease should one of the parties commit, with the prior consultation with the other party, an action which creates for the concert a public offer obligation over Thales.

Option of unilateral termination of the agreement and Agreement to sell to the Public SectorThe Public sector shall have the possibility of terminating the agreement; in addition, there it will also have the possibility of requesting Dassault aviation to suspend the exercise of

1. acquisitions or disposals identified by the French state as likely to be significant with regard to its strategic defence interests and the objective of which is to consolidate France’s industrial and technological defence base.



the voting rights that it holds in excess of 10% or to reduce its shareholding to less than 10% Thales’ share capital, in the event of:

• serious breach by Dassault aviation of its obligations likely to substantially compromise the protection of the strate-gic interests of the French state, given that the said obli-gations are subject to an “agreement on the protection of strategic national interests in Thales” (see below),

• change in control of Dassault aviation.

In this respect, Dassault aviation undertakes, irrevocably and definitely, to the Public sector, to sell all shares that Das-sault aviation will hold as soon as it is ascertained that Das-sault aviation’s shareholding of Thales has remained above 10% of Thales’ share capital six months following the Public sector’s request to reduce its shareholding.

Furthermore, the Public sector 1 has undertaken to main-tain, after the agreement reaches its normal expiry date, a shareholding in Thales which gives it at least 10% of the voting rights, until the first of one of the following dates is reached: (i) 31 December 2014; (ii) 3 years from the ter-mination of the agreement; (iii) the date at which Dassault aviation ceases to own at least 15% of Thales’ share capital.

3.2. agreement on the proteCtion of national strategiC interests

Furthermore, Dassault aviation signed up on 19 May 2009 the “agreement on the protection of strategic national inter-est in Thales” entered into on 28 December 2006 between alcatel-lucent and the French state in the presence of Tsa. signing up to this agreement gives rise to the following com-mitments from Dassault aviation:

• keeping Dassault aviation’s registered office and effective management in France,

• Thales directors proposed by Dassault aviation shall be nationals of the european Union,

• access to sensitive information concerning Thales shall be strictly controlled at the level Dassault aviation,

• the managers who are responsible for Dassault aviation’s holdings in Thales are French nationals,

• Dassault aviation shall make its best efforts to prevent any action or influence in the governance and businesses of Thales by foreign national interests. In this respect, (i)

in the event of serious and unremedied breach by Dassault aviation of its undertakings under this agreement on the protection of national strategic interests or if it is shown that the application of a foreign law by Dassault aviation creates constraints for Thales that substantially compro-mise the protection of the strategic interests of the French state, or (ii) the change in control within Dassault aviation, contrary to the strategic interests of the Public sector, the Public sector may:- put an end to the rights that Dassault aviation enjoys

under the shareholders’ agreement and, if it sees fit,- request Dassault aviation either to suspend the exercise

of any voting rights it holds in excess of 10%, or- request it to reduce its shareholding to less than 10%

of Thales’ share capital through the disposal of shares on the market (in accordance with conditions which are consistent with its financial interests and market con-straints). at the end of a 6-month period as from the date it is requested to reduce its shareholding, if the shareholding of Dassault aviation is still in excess of 10% of Thales’ share capital, the French state may exer-cise the promise to sell defined above.

3.3. thresholds Crossing and deClaration of intent

alcatel-lucent Participations, a joint stock company, has declared that, on 19 May 2009, it has individually fallen below the thresholds of 25% of voting rights, 20%, 15%, 10%, and 5% of the share capital and of the voting rights of Thales, and that it no longer owns any Thales shares.

Dassault aviation has declared that it individually exceeded the thresholds of 5%, 10% and 15% of the share capital and voting rights and of 20% of the share capital of Thales on 19 May 2009 and owned 41,262,481 Thales shares at that date.

Groupe Industriel Marcel Dassault has declared that, on 20 May 2009, it has directly fallen below the threshold of 5% of the share capital and of the voting rights of Thales and that it no longer owns any share of Thales.

Dassault aviation has declared that it individually exceeded the thresholds of 20% of the voting rights and of 25% of the share capital of Thales on 20 May 2009 and owned 51,539,524 Thales shares representing the same number

1. Tsa and sofivision in the meaning of the aMF decision no. 208C2115.

173





of voting rights. These thresholds have been crossed fol-lowing the acquisition of 10,277,043 Thales shares from Groupe Industriel Marcel Dassault.

Dassault aviation has declared the following intentions for the forthcoming twelve months as from these thresholds be-ing crossed:

• “it acts in concert with Tsa and sofivision,• the acquisition of Thales shares by Dassault aviation is in

line with the long term industrial investment policy that the company has been implementing since long. Dassault avia-tion does not intend to acquire additional Thales shares,

• Dassault aviation does not intend to acquire the control of Thales on its own,

• in accordance with the shareholders’ agreement dated 28 December 2006 to which Dassault aviation has sub-scribed, as described in aMF decision 208C2115 of 27 November 2008, four Directors proposed by Dassault aviation, and four outside directors proposed after consul-tation with the Public sector, were appointed on the Board of Directors of Thales on 19 May 2009. Dassault avia-tion does not intend to request for an amendment to the breakdown of the number of Directors as provided for in the said agreement.”

Following the substitution of alcatel-lucent Participations by Dassault aviation, in the concert formed by the Public sector vis-à-vis Thales and the disposal of Thales shares owned by GIMD to Dassault aviation, the latter exceeded, jointly with the Public sector, on 19 May 2009, the thresholds of 25% of the voting rights, 1/3 of the share capital and of the voting rights and 50% of the voting rights of Thales and, on 20 May 2009, the threshold of 50% of the share capital of Thales.

as regards the Public sector it exceeded on 20 May 2009, in concert with Dassault aviation, the threshold of 50% of the share capital of Thales.

The changes to the concert were subject to a derogation from the obligation to submit a proposal of public offer. This deci-sion is reproduced in Décisions et Informations 208C2115 dated 27 November 2008 and published in the Bulletin of-ficiel des annonces légales (BalO) of 1 December 2008.

It is available for consultation on aMF’s website:http://www.amf-france.org/inetbdif/viewdoc/affiche.aspx?id=43671&txtsch=

Or on that of BalO:http://balo.journal-officiel.gouv.fr/html/2008/1201/ 200812010814709.htm

3.4. speCifiC agreement

On 28 December 2006, the French state (Ministry of De-fence and Ministry of economy) and Thales signed an agree-ment to provide the French state with control over not only the transfer of assets already outlined in the appendix to Decree No. 97-190 of 4 March 1997, but also over shares in Thales alenia space sas (hereinafter referred to as the “strategic assets”). This agreement, to which the Industrial Partner is not a party, has therefore not been amended by the substitution of alcatel-lucent by Dassault aviation in May 2009 and thus continues to be effective.

a) where the strategic asset is a company (“strategic Company”):• any proposed transfer of shares in the strategic Com-

pany to a third party such that the third party exceeds the 33.3% threshold of the share capital,

• any proposed transfer of shares in the company that di-rectly or indirectly controls the strategic Company to a third party such that the third party exceeds the 33.3% threshold of the share capital,

b) where the strategic asset is an isolated asset, unincor-porated division or business branch (“strategic Division”):• any proposed transfer of shares in company holding the

strategic Division to a third party such that the third party exceeds the 33.3% threshold of the share capital,

• any proposed transfer of shares in the company that di-rectly or indirectly controls the strategic Company to a third party such that the third party exceeds the 33.3% threshold of the share capital,

c) any proposed transfer of sensitive assets to a third party,

d) and any proposal intended or having as its effect to confer particular rights on a third party.

Must be respectively notified to the French state, which un-dertakes to issue its acceptance or rejection decision within thirty (30) working days as from the receipt of the said notification. Failure by the French state to communicate its decision during by the said time is deemed as acceptance of the projected operation.



3.5. golden share held By the frenCh state

The golden share held by the French state 1 gives it the fol-lowing main rights:

• “any increase in the direct or indirect holding of securi-ties, irrespective of the nature or the 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 alone or in concert, must be approved in advance by the Minister in charge of the economy (…)”,

• “Upon the proposal of the Minister of Defence, a repre-sentative of the French state, named by Decree, sits on the Board of Directors of the company as a non-voting director”,

• “(…) decisions to dispose of or assign 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 Thales’s (direct) subsidiaries:Thales systèmes aéroports sa, Thales Optronique sa, Thales (Wigmore street) ltd, Thales Communications sa, Thales air systems sa, Thales Nederland BV, Thales avionics sa, Thales services sas, Thales Underwater systems NV.

4. COMPANY-HELD SHARES

at 31 December 2009, Thales held 3,556,693 treasury shares (1.79% of the capital), being the balance after shares acquired and disposed of on the market, or otherwise, in compliance with the authorisations, described hereinafter, granted to the Board of Directors by the General Meeting of shareholders.

Treasury shares are not subject to any restrictions and may be freely disposed of.

4.1. authority to trade in its own shares

The Combined General Meeting of 10 March 1999, pursu-ant to the memorandum of 18 February 1999 (COB approval No. 99-142), authorised the Board of directors to imple-ment a share buy-back programme, if necessary. The Gen-

eral 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 (memoran-dum of 24 april 2002, COB approval No. 02-440), 15 May 2003 (memorandum of 24 april 2003, COB approval 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 continuation of this programme.

In accordance with the authorisations granted to the Board of Directors by the General Meeting, the company carried out the following transactions:

• in 1999, 1.9 million shares were bought back,• in 2001, Thales sold to alcatel its stake in alcatel space:

the transaction amount, €795 million, was paid half in cash and half in Thales shares, equivalent 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 shares were trans-ferred to employees in an employee stock offer,

• in 2005, 2 million shares were sold on the market, di-rectly and by proxy, 1 million were sold under a liquidity contract, and approximately 300,000 shares were trans-ferred to employees as options vested. 87,000 shares were transferred to group employees in the United King-dom who had subscribed to an employee shareholding scheme in December 2004,

• in 2006, approximately 457,000 shares were bought and 388,000 shares sold under a liquidity contract, and ap-proximately 98,000 sold to employees as options vested,

• in 2007, 793,295 shares were bought and 782,021 shares sold under a liquidity contract. 582,811 shares were sold as options vested, and 369,065 shares were bought on the market to be allocated to employee share-holding schemes,

• in 2008, 1,271,294 shares were bought and 1,020,515 shares sold under a liquidity contract. 3,176,127 shares were bought on the market and 2,519,280 were sold to Thales employees under the 2008 employee shareholding plan. Finally, 96,473 shares were sold as options vested,

1. Pursuant to article 3 of Decree n° 97-190 of 4 March 1997.

175





• in 2009, 916,054 shares were bought and 911,370 shares sold under a liquidity contract. 191,373 shares were sold as purchase options vested and grant of free shares.

The General Meeting of 20 May 2010 will be asked to extend this authorisation. Detailed conditions will be given in the body of Resolutions. at 31 December 2009, the company was not engaged in any trading in derivatives relating to its own shares.

4.2. authorisation to CanCel the Company’s shares

The 24-month authorisation granted to the Board of Direc-tors by the General Meeting of 17 May 2005 to cancel - once or more than once - shares owned by the company, within the limit of 10% of the company’s share capital, that were pur-chased under an authorisation to buy-back its own shares, expired on 16 May 2007 without having been utilised.

This authorisation was renewed at the General Meeting held on the 16 May 2007 for a period of 24 months, under the same conditions. It has therefore expired on 15 May 2009 without having been utilised.

The General Meeting of 19 May 2009 has renewed this authorisation for a period of 24 months, under the same conditions.

4.3. free allotment of shares

The Board of Directors, upon authorisation from the General Meeting, decided to launch a third free share allotment plan. The company decided to exclude the Chairman and Chief ex-ecutive Officer (the sole company representative) from the free share allotment plan, as well as the members of the executive Committee and the main 361 senior executives.

The main characteristics of the plan are as follows:

• all designated beneficiaries of the plan will be granted shares at the end of a vesting period of 4 years subject to compli-ance with the conditions stipulated under the plan’s rules,

• beneficiaries who are residents of France for tax purposes or members of the French social security system will then have to comply with a two-year holding period during which shares may not be sold. This holding period does not apply to ben-eficiaries who are non-residents for French tax purposes.

Date of Board decision for grant 25/06/2009 01/07/2008 04/07/2007

Number of beneficiaries at the grant date 3,848 3,624 3,545

Share price at the grant date 31.93 € 35.72 € 45.13 €

Number of shares granted 334,980 317,705 312,435

Balance of free shares as at 31/12/08 -- 316,115 306,510 (c)

Cancellation of allotments during the financial year (a) 2,160 4,000 5,010

Early allotments during the financial year (b) none none 90

Balance of free shares net of cancellations and early allotments as at 31/12/09 332,820 312,115 301,410

Number of beneficiaries remaining at 31/12/09 3,822 3,569 3,418


from 01/07/2008 to 01/07/2012

from 04/07/2007 to 04/07/2011

Share transfer date 26/06/2013 02/07/2012 05/07/2011

Retention period for French tax residents from 26/06/2013 to 26/06/2015

from 02/07/2012 to 02/07/2014

from 05/07/2011 to 05/07/2013

(a) Due to the departure of the beneficiary.(b) Due to the death of the beneficiary during the acquisition period.(c) Data amended following adjustment after the closing of accounts 2008.



4.4. share Buy-BaCk programmes

1. Description of the programme subject to the ap-proval of the Annual General Meeting to be held on 20 May 2010

Maximum proportion of capital subject to buy-back: 10%, at the buy-back date

Maximum number of shares that may be purchased: 19,902,393

Maximum amount of programme: €995,119,650

Maximum unit purchase price: €50

Minimum unit selling price: €20, except for operations previously approved by the annual General Meeting, requir-ing the sale at a lower price or free grant of existing shares.

Objectives of programme in descending order of priority:• sell or allocate shares to group employees and senior ex-

ecutives in the manner stipulated by law, particularly when share purchase options are exercised, or existing shares are granted free of charge, or when shares are supplement-ed by the company under an employee shareholding scheme,

• retain shares for later use in connection with an external growth plan,

• ensure trading in the share through a liquidity contract prepared in accordance with the conduct of a business charter approved by the aMF,

• cancel shares in accordance with a resolution passed by the General Meeting.

Duration of programme: eighteen months from approval of the resolution which is to be submitted at the annual General Meeting of 20 May 2010, i.e. at latest on 18 November 2011.

Liquidity contract: in November 2004 Thales signed a li-quidity contract with exane BNP-Paribas, in accordance with the aFeI’s charter of professional ethics, in order to regulate trading in the share. The contract was modified to comply with the aFeI charter of professional ethics appended to the aMF decision of 22 March 2005.

2. Programme of 19 May 2009

at 31 March 2009, the final reporting date for these pro-grammes, the company held 3,758,382 of its own shares.

The company’s trading in its own shares from 1 april 2009 (date of the previous report) to 31 December 2009, is sum-marised in the tables below:

Percentage of company-held capital: 1.79%

Number of shares cancelled in the last 24 months: nil

Number of shares sold from 1 april 2009 to 31 De-

cember 2009: 1,102,743 at an average price of €32.7

Number of shares purchased from 1 april 2009 to

31 December 2009: 901,054 at an average price of

€32.52

Number of Thales shares held in portfolio as at 31 De-

cember 2009: 3,556,693

(Gross) book value of portfolio: €141,476,362, repre-

senting an average cost price of €39.78

177





Market value of portfolio as at 31 December 2009: €127,845,329, at closing price on 31 December 2009 of €35.94.

Thales did not engage in trading in derivatives (forward sale contracts) as part of this buy-back programme.

3. Trading in company shares during 2009

From 1 January 2009 to 31 March 2009, trading in company shares was made under the share buy-back programme authorised on 16 May 2008. From 1 april 2009 to 31 December 2009, trading was made under the share buy-back programme authorised on 19 May 2009.

The net balance of 2009 trading was the sale of 186,689 shares, broken down by objective as follows:

4. Trading in company shares from 1 January 2010 to 28 February 2010

as at 28 February 2010, Thales owned 3,655,072 of its own shares.

Breakdown of company-held shares, by objective at 31 December 2009.

The total number of shares held at that date was 3,556,693, representing 1.79% of Thales’ share capital. The breakdown by objective was as follows:

Gross flows aggregat-ed from 1 April 2009

to 31 December 2009

Positions open on the date of description of the programme

Positions open at purchase Positions open at sale

Purchases Sales Call purchased

Put sold Purchases forward

Call sold Put purchased

Sales forward

Number of securities 901,054 -1,102,743

Average max. maturity none none none none none none

Av. price of transaction 32.52 32.70

Average exercise price none none none none none none none none

Amounts (€) 29,298,707 36,059,200

a) Sale or allotment of shares to group employees and senior executives in the manner stipulated by law, particularly when share purchase options are exercised or existing shares are granted free of charge -191,373

b) Regulation of the market price by a liquidity contract drawn up in accordance with the AFEI’s charter of professional ethics 4,684

a) Sale or allotment of shares to group employees and senior executives in the manner stipulated by law, par-ticularly when share purchase options are exercised or existing shares are granted free of charge 1,878,446

b) Exchange of shares under external growth operations 1,323,510

c) Regulation of the market price by a liquidity contract drawn up in accordance with the AFEI’s charter of professional ethics 354,737



5. SHARES OwNED BY THE PUBLIC

The company is entitled at all times, and as provided by law, to ascertain the identity of, and the number of shares held by, holders of bearer shares which now or in the future represent a specified fraction of its share capital (“TPI” Identifiable Bearer security procedure).

Based on the most recent surveys on identifiable holders of bearer shares carried out by euroclear France, and the company’s information on employee shareholders, private ownership of company shares is estimated as follows.

To the best knowledge of the company and on the basis of the TPI (identifiable bearer security procedure) survey car-ried out on 31 December 2009 and of the number of shares registered at that date, the number of shareholders in the company can be estimated at approximately 55,700 at the end of 2009. This figure represents 98.7% of the total capi-tal identified, and includes 50,400 bearer shareholders and 5,300 registered shareholders.

Furthermore, an additional survey was carried out at the be-ginning of 2010 with leading French and foreign institutional investors operating on the Paris market. This information, more recent than the TPI survey and containing more details about the nationality of the institutional investors, is given in the table below.

(in thousands of shares) 01/01/2010 01/01/2009

French institutional investors and investment funds (a) 32,938 41,190Non-resident institutional investors 44,202 46,413Employee share ownership 5,965 6,094Individual shareholders and associations (b) 5,489 5,963Not identified 2,660 1,386Entire public 91,255 101,046Total number of shares 199,024 198,725

(a) Including shares held by sogepa which is not a party to the shareholders’ agreement.(b) Mainly French residents.

Number of shares owned (in thousands)

As % of the total capital

Number of investors

France 32,938 16.6% 82United Kingdom & Ireland 21,387 10.7% 64North America 16,244 8.2% 77Continental Europe (excl. France) 4,771 2.4% 101Rest of the world 1,800 0.9% 28Total 77,140 38.8% 352

As % of the total capital As % of the floating capital (excl. company-held)

01/01/2010 01/01/2009 01/01/2010 01/01/2009

French institutional investors and investment funds 16.5% 20.7% 36.1% 40.8%Non-resident institutional investors 22.2% 23.3% 48.5% 45.9%Employee share ownership 3.0% 3.1% 6.5% 6.0%Individual shareholders and associations 2.8% 3.0% 6.0% 5.9%Not identified 1.3% 0.7% 2.9% 1.4%Entire public 45.8% 50.8% 100% 100%

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6. EMPLOYEE SHAREHOLDING

at 31 December 2009, Group employees as defined in article l.225-102 of the French Commercial Code, held 5,965,354 Thales shares, representing 3.00% of the share capital (and 3.76% of voting rights), via the Group savings Plan (PeG), either directly or via a company investment fund (FCPe) or its equivalent in the United Kingdom.

at 31 December 2009, nearly 52% of Thales shares held by employees were freely tradable (compared to 50% at 31 De-cember 2008 and 85% at 31 December 2007). shares ac-quired by the group’s existing and former employees as part of the May 2008 sale of shares to employees will become freely tradable on 7 May 2013.

F. INFORMATION ON REGULATED AGREEMENTS

1. AGREEMENTS AUTHORISED DURING PREvIOUS FINANCIAL YEARS wHICH CONTINUED TO BE PERFORMED IN 2009

The concerned agreements have been disclosed to the audi-tors in accordance with the applicable regulations. They are provided in their special Report presented to the General Meeting called to approve the 2009 financial statements.

Besides those mentioned below for part of the year 2009 (agreements regarding Mr Denis Ranque up to their per-formance or agreement with Tsa up to the amendment to the assistance contract), this relates exclusively to the un-dertaking from the parent company Thales to issue its guar-antee as part of the FsTa agreement in the United Kingdom (tanker aircraft of the Royal air Force).

2. REGULATED AGREEMENTS AUTHORISED DURING THE YEAR 2009

Board of 19 may 2009

Additional retirement benefits for the Chairman & CEO and company representative

Regulated agreement, art. l 225-42-1 of the French Com-mercial Code

a supplementary retirement scheme has been adopted in favour of the Chairman & CeO and company representative by virtue of a Board decision dated 24 March 2009.

This scheme aims at providing, subject to performance condition and without the condition of presence in the company, an additional retirement to the Chairman & CeO and company representative, the amount of which is deter-mined through a point allocation method which is identical to that provided for by the supplementary group retirement scheme applicable in Thales at the date of the Board meet-ing of 24 March 2009.

The Board decided, on 19 May 2009, to amend the sup-plementary retirement scheme for the Chairman & CeO and company representative to align it on the group retirement scheme applicable in Thales, considering the amendments made to the latter scheme since 24 March 2009 and which concern the methods of calculation of the supplementary re-tirement benefits for beneficiaries with ten years of service at the level of the executive Committee.

Benefits and rights upon the termination of office of Mr Denis Ranque

Performance of regulated agreements, art l 225-42-1 of the French Commercial Code.

By virtue of a decision dated 6 March 2008, approved by the General Meeting of 15 May 2008, the Board author-ised the conclusion of a regulated agreement which pro-vides for the payment to the senior executive and company representative, subject to performance condition, of a com-pensation on account of the forced termination of his term of office.

since Mr Denis Ranque’s office as the Chairman & CeO was terminated by virtue of a Board decision on 19 May 2009, the Board ascertained, at the same date, that the perform-ance condition, established with reference to the annual op-erating profit of the last three financial years ended, was met (with an average of 101% for a minimum of 80%). The Board has therefore approved the compensation amount payable to Mr Denis Ranque as per the calculation methods approved at the Board meeting of 6 March 2008, namely, twice the annual average of amounts received during the last three financial years, i.e. €2.96m.



The Board also ascertained that, since the above-mentioned performance condition is fulfilled, Mr Denis Ranque will be entitled to the supplementary retirement scheme for the senior executive and company representative on 24 March 2009 and as amended by the Board meeting of that day.

The annual pension amount (mandatory, additional schemes and Thales supplementary retirement pension scheme) should represent altogether about 20% of the annual remu-neration of Mr Denis Ranque in his capacity as Chairman & CeO and Company representative.

Maintaining the stock-options granted to Mr Denis Ranque

The Board has also authorised Mr Denis Ranque, in accord-ance with article 8.4 of the regulations on stock option and share subscription plans, to maintain the options granted to him from 12 July 2001 and 1 July 2008 without restrictions until their expiry date.

Board of 24 july 2009

Compensation payments likely to be payable to Mr Luc vigneron, Chairman and Chief Executive Officer, upon termination of his term of office as company representative and additional retirement benefit scheme

Regulated agreement art. l. 225-42-1 and R. 225-34-1 of the French Commercial Code

On 24 July 2009, the Board of Directors authorised two regulated commitments governed by article l.225-42-1 of the French Commercial Code, relating to:

1. Compensation payments likely to be payable to Mr luc Vigneron, Chairman and Chief executive Officer, upon ter-mination of his term of office as company representative.

subject to the fulfilment of the performance condition set out by the Board of Directors and upon the Board’s deci-sion, a compensation may be paid to Mr luc Vigneron, if his term of office should be discontinued, except for serious misconduct or gross negligence.

The compensation would be equal ab initio to a gross amount of €757k, with this figure increasing on a linear basis to reach at the end of the first term of office (OGM 2014) a maximum compensation amount equal to two years of remuneration (fixed + variable) received.

The performance condition would be deemed to have been fulfilled:

• in the intermediate period, i.e. until the term of office has covered three complete financial years, if at least 80% of the targeted eBIT in terms of monthly, quarterly or half-yearly average is reached,

• beyond that, at least 80% of the targeted operating margin on a 3-year average is reached.

If that is not the case, no compensation payment will be due.

Moreover, the Board of Directors decided to sub-scribe to a private unemployment insurance scheme in favour of Mr luc Vigneron. This insurance will be capped in terms of its duration and amount, as per the same terms of the standard unemployment insurance scheme for employees. entitlement to this insurance is subject to the same performance condition as the above-mentioned compensation for termination.

2. To the “Company Representative” supplementary retire-ment scheme applicable to Mr luc Vigneron, since his ap-pointment as the Chairman & CeO (19 May 2009).

The corresponding annuity amount is based on the point allocation method identical to that used for employee entitled to the additional group retirement scheme ap-plicable within the Thales Group.

however, entitlement to the rights acquired by the Com-pany Representative is not subject to the condition of presence in the Company at the time of payment of the retirement benefits, but it is subject to:

• firstly, the condition of having fully completed the cur-rent term of office (expiry at the OGM 2014),

• secondly, fulfilling the following performance condi-tion: achievement of at least 80% on average over the last three financial years of the annual eBIT targets set by the Board to the Company Representative.

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Regulated agreement between the Company and Mr Bernard Retat, permanent representative of TSA, Director (Art. L. 225-38 of the French Commercial Code)

since 18 May 2009, Bernard Retat represents Tsa, Di-rector, on the Thales Board of Directors, the permanent representative being subject to the same conditions and obligations as if he were Director on his own behalf (art. l. 225-20 of the French Commercial Code).

The conclusion of an agreement for the provision of services be-tween the Client (Thales) and Bernard Retat, which specifies:

• the nature of tasks entrusted by Thales to Bernard Retat intuitu personae: acting on behalf of Thales as the Chair-man of the ethics Committee of the Thales Group, rep-resenting Thales on the Board of Directors of elettronica spa (Italy),

• the agreed price: €60,000 (excl. taxes) per annum for all of these tasks – refund of costs upon submission of proofs,

• the term: two years renewable by tacit agreement,• the termination by either party: Upon a 90-day notice.

was authorised by the Board of Directors on 24 July 2009, upon the recommendation of the committee of selection and re-muneration, with Mr Bernard Retat not taking part in the vote.

Board of 29 septemBer 2009

Agreement regulated by Article L. 225-38 of the French Commercial Code:Rider to the agreement on assistance between Thales and TSA

The Boards of Directors of Tsa of 13 May 2005 and of Thales of 30 June 2005 have authorised, pursuant to the provisions of article l. 225-38 of the French Commercial Code, the conclusion between the two companies of an as-sistance agreement covering the provision of services of an administrative, legal and financial nature rendered by Thales to Tsa, which no longer had the internal resources for its own functioning.

The agreement was executed on 1 July 2005; the services invoiced by Thales to Tsa amounted to a yearly amount of €350,000 excluding tax. This amount had not been changed since that date.

Tsa wished to amend the terms of the agreement in respect of two points:

• addition of services of an accounting nature: Tsa’s book-keeping is outsourced to Thales (posting of an accountant employed by Thales who dedicates 25% of his/her time to this task) in replacement of the external firm to which Tsa had outsourced this task before; Invoicing to Tsa: €31,000 excluding tax/year,

• addition of an indexation clause (not provided for in the initial agreement): INsee index of labour cost for financial activities. Increase in the annual remuneration provided for by Thales (June 2005 – July 2009) estimated at €53,000 (excl. taxes).

On 28 april 2008, pursuant to article l. 225-38 of the French Commercial Code, the Board of Directors of Tsa authorised the execution of a amendment to the assist-ance agreement under the above mentioned conditions. The amount of services invoiced by Thales to Tsa would amount to about €434,000 (excl. taxes) for a full year.

The signature of the amendment to the assistance agree-ment was subject to the prior authorisation of the Board of Directors of Thales as per the conditions of article l. 225-38 of the French Commercial Code, with Tsa not taking part in the vote.

after having taken cognizance of two amendments to the gen-eral assistance agreement of June 2005 between Thales and Tsa (addition of accounting services for €31,000 (excl. taxes) per annum, and an indexation clause for the period 2005-2009, representing an annual amount of about €53,000 (excl. taxes) – i.e. a total of €434,000 (excl. taxes) per an-num, compared to €350,000 (excl. taxes) before), the Board of Directors of Thales authorised, under the provisions of ar-ticle l. 225-38 of the French Commercial Code, the conclu-sion of an amendment to the general assistance agreement between Thales and Tsa – with Mr Bernard Retat, permanent representative of Tsa to the Board, not taking part in the vote.



G. STATUTORY AUDITORS SPECIAL REPORT ON REGULATED AGREEMENTS AND COMMITMENTSYear ended December 31, 2009


as the statutory auditors of your Company, we hereby sub-mit our report on regulated agreements and commitments.

agreements and Commitments authorised during the year

In accordance with article l.225-40 of the French Com-mercial Code, the following agreements and commitments previously authorised by the Board of Directors, have been brought to our attention.

We are not required to identify other such agreements and commitments, if any, but to communicate to you, based on the information provided to us, the main terms and conditions of those agreements brought to our attention, without express-ing an opinion on their usefulness and appropriateness. It is your responsibility, pursuant to article R.225-31 of the French Commercial Code, to assess the merits of these agreements and commitments for the purpose of approving them.

We conducted our work in accordance with professional standards applicable in France. Those standards require that we perform the procedures deemed necessary so as to ver-ify that the information provided to us is in agreement with the underlying documentation from which it was extracted.

Commitment pertaining to compensation payments that may be due to the Chairman & Chief Executive Officer upon discontinuation of his term of office as company representative

The meeting of the Board of Directors on July 24th, 2009, upon the proposal of the committee on selection of direc-tors, authorised the commitment pertaining to the compen-sation payments likely to be payable to Mr luc Vigneron, Chairman & Chief executive Officer, upon discontinuation of his duties as representative of the company (“mandataire so-cial”), in accordance with the provisions of article 17 of the TePa law (law on labour, employment and purchasing power) dated august 21, 2007.

subject to the fulfilment of the performance condition set out by the Board of Directors and upon the Board’s decision, a compensation may be paid to Mr luc Vigneron, if his term of office should be discontinued, in the following cases, except for serious misconduct or gross negligence.

The compensation payment would be equal ab nihilo to a gross amount of 757 K€, with this figure increasing on a linear basis to reach at the end of the first term of manda-tory (shareholders Meeting 2014) a maximum compensa-tion amount equal to two years of remuneration (fixed and variable) received.

The performance condition would be deemed to have been fulfilled:- in the intermediate period, i.e. until the term of office has

covered three complete financial years, if at least 80% of the targeted operation margin in terms of monthly, quar-terly or half-yearly average is reached,

- beyond that, at least 80% of the targeted operating margin on a 3-year average is reached.


This provision replaces the one that had been authorised by the Board in its March 11th, 2003 decision and approved by the Gen-eral Meeting held on May 15th, 2003, and that is not in accord-ance with the provisions of the TePa law of august 21, 2007.

Moreover, the Board of Directors decided to subscribe to a private unemployment insurance scheme in favour of Mr luc Vigneron. This insurance will be capped in terms of its duration and amount, as per the same terms of the standard unemployment insurance scheme for employees. entitlement to this insurance is subject to the same performance condi-tion as the above-mentioned compensation for termination.

The director concerned is Mr luc Vigneron.

Additional retirement benefits for the senior executive and company representative

The meeting of the Board of Directors on July 24th, 2009, upon the proposal of the committee on selection of direc-

This is a free translation into english of the statutory auditors’ report on the consolidated financial statements issued in French and it is provided solely for the convenience of english-speaking users. This report includes information specifically required by French law in such reports, whether modified or not. This information is presented below the audit opinion on the consolidated financial statements and includes an explanatory para-graph discussing the auditors’ assessments of certain significant accounting and auditing matters. These assessments were considered for the purpose of issuing an audit opinion on the consolidated financial statements taken as a whole and not to provide separate assurance on individual account balances, transactions or disclosures

This report also includes information relating to the specific verification of information given in the group’s 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.

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tors, authorised the creation of an additional retirement benefit scheme for the Chairman & CeO, Mr luc Vigneron.

The corresponding annuity amount is based on the point al-location method identical to that used for employee entitled to the additional group retirement scheme applicable within the Thales Group.

however, entitlement to the rights acquired by the Company Representative is not subject to the condition of presence in the Company at the time of payment of the retirement benefits, but it is subject to:- firstly, the condition of having fully completed the current

term of office (expiry at the 2014 shareholders meeting),- secondly, fulfilling the following performance condition:

achievement of at least 80% on average over the last three financial years of the annual operating margin targets set by the Board to the Company Representative.

The director concerned is Mr luc Vigneron.

Additional retirement benefits for the senior executive and company representative - Methods of calculation of the supplementary retirement benefits for beneficiaries with ten years of service at the level of the Executive Committee

a supplementary retirement scheme has been adopted in favour of the senior executive and company representative by virtue of a Board decision dated 24 March 2009.

This scheme aims at providing, subject to performance con-dition and without the condition of presence in the company, an additional retirement to the senior executive and company representative, the amount of which is determined through a point allocation method which is identical to that provided for by the supplementary group retirement scheme applicable in Thales at the date of the Board meeting of 24 March 2009.

The Board decided, on 19 May 2009, to amend the sup-plementary retirement scheme for the senior executive and company representative to align it on the group retirement scheme applicable in Thales, considering the amendments made to the latter scheme since 24 March 2009 and which concern the methods of calculation of the supplementary re-tirement benefits for beneficiaries with ten years of service at the level of the executive Committee.

The director concerned is Mr Denis Ranque.

Maintaining the stock-options granted to Mr Denis Ranque

The meeting of the Board of Directors on May 19th, 2009, authorized Mr Denis Ranque in accordance with article 8.4 of the regulations on stock option and share subscription plans,

to maintain the options granted to him from 12 July 2001 and 1 July 2008 without restrictions until their expiry date.

The director concerned is Mr Denis Ranque.

Rider to the agreement on assistance between THALES and TSA

The meeting of the Board of Directors on september 29th, 2009, authorised the conclusion of a rider to the agreement on assistance between Thales and Tsa.

Under this agreement, Thales invoiced Tsa an amount of about €25,800 (excl. taxes) for the period from March 2009 to December 2009 (compared to €350,000 (excl. taxes) presented hereafter).

The director concerned is Mr Bernard Retat, permanent rep-resentative of Tsa.

Regulated agreement between the Company and Mr Bernard RETAT, permanent representative of TSA, Director

The meeting of the Board of Directors on July 24th, 2009, authorised the conclusion of an agreement for the provision of services between the Client (Thales) and Bernard Retat.

Under this agreement, the amount invoiced in 2009 was about €20,000 (excl. taxes).

The director concerned is Mr Bernard Retat, permanent rep-resentative of Tsa

agreements and Commitments approved in previous years and whiCh Continued to Be performed during the year

Moreover, pursuant to the French Commercial Code, we have been informed that the following agreements and com-mitments, approved in previous years, have continued to be performed during the year ended.

Commitment pertaining to compensation payments that may be due to the Chairman & Chief Executive Officer upon discontinuation of his term of office as company representative, pursuant to the provisions of the law No. 2007-1223 dated 21 August 2007 on work, employment and purchasing power - the TEPA law (Article 17)

The meeting of the Board of Directors on March 6th, 2008, upon the proposal of the committee on selection of direc-tors and remuneration, authorised the commitment pertain-ing to the compensation payments likely to be payable to Mr Denis Ranque, Chairman & Chief executive Officer, upon discontinuation of his duties as representative of the com-


Shareholders information >>pany (“mandataire social”), in accordance with the provisions of article 17 of the TePa law (law on labour, employment and purchasing power) dated august 21, 2007.

subject to the fulfilment of the performance condition set out by the Board of Directors and upon the Board’s decision, a com-pensation may be paid 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 imperil 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 enti-tlements fully,

- merger or change in control leading to the departure of the Chairman.

The compensation payment would be equal to twice the an-nual average of the amounts received by the Chairman and Chief executive Officer in respect of remuneration over the last three full financial years.

The performance condition would be deemed to have been fulfilled if the average rate of achievement of the annual oper-ational profitability objectives set by the Board for the Chair-man and Chief executive Officer are equal to or in excess of 80% over the last three full financial years.



Additional retirement benefits for the senior executive and company representative

The Board of Directors’ meeting of 24 March 2009, upon a recommendation of the committee on the selection of direc-tors and remuneration, in compliance with the new recom-mendations published by the aFeP and the MeDeF of 6 Oc-tober 2008, included in the aFeP-MeDeF Consolidated Code of Corporate Governance, authorised the creation of an ad-ditional retirement benefit scheme for the Chairman & CeO, Mr Denis Ranque:

- subject to the fulfilment of the performance condition (iden-tical to that concerning any compensation payable in the event of discontinuation of the term of office, approved at the Board meeting of 6 March 2008, i.e. an average rate of achievement of the annual operational profitability objec-tives set by the Board for the Chairman & Chief executive Officer, either equal to or in excess of 80% over the last three full financial years),

- without the condition of presence within the company at the time of the payment of the retirement benefit.

The corresponding annuity amount will be based, without loss of rights, on a method for point allocation identical to that used for beneficiaries of the additional collective retire-ment scheme applicable within the Thales Group.

since Mr Denis Ranque’s office as the Chairman & CeO was terminated by virtue of a Board decision on 19 May 2009, the Board ascertained, at the same date, that the perform-ance condition, established with reference to the annual op-erating profit of the last three financial years ended, was met (with an average of 101% for a minimum of 80%).

The Board ascertained that, since the above-mentioned per-formance condition is fulfilled, Mr Denis Ranque will be enti-tled to the supplementary retirement scheme for the senior executive and company representative on 24 March 2009 and as amended by the Board meeting of May 19th 2009, as mentioned before. The annual pension amount (mandatory, additional schemes and Thales supplementary retirement pension scheme) should represent altogether about 20% of the annual remuneration of Mr Denis Ranque in his capacity as senior executive and Company’s representative.

FSTA: Commitments to be taken by the parent company authorised by the Board of Directors’ meeting of 6 March 2008

having noted the characteristics of the “FsTa” private-public partnership, which has a significant importance and high vis-ibility for the group, and which thus consolidates its pres-ence in the United Kingdom, the Board of Directors:- has approved the operations to be carried out by Thales

UK ltd, in its capacity as member of the consortium, and Thales avionics ltd, Thales Training & simulation ltd and Thales UK ltd (Thales air Operations) in their capacity as sub-contractors,

- has approved the issue of the three required guarantees (Resources and Materials Parent Company Guarantee, Opco Primary subcontracts Parent Company Guarantee and shareholder Deed of Indemnity and security) as per the terms submitted to it,

- has delegated to the Chairman, who may sub-delegate, all powers necessary for the fulfilment of these guarantees,

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for the signature of any deeds or documents, and in general to do what is necessary for carrying out these operations.”

Master Agreement with Alcatel-Lucent and Alcatel Participations on December 1st, 2006 (came into force on january 5th, 2007) authorised by the Board meetings of 9 and 23 November 2006

The Master agreement organises and strengthens the coop-eration between Thales and alcatel-lucent into two phases. The first is the transfer to Thales of alcatel-lucent’s trans-port and security businesses, approved at the extraordinary General Meeting of 5 January 5th, 2007. The second is the transfer to Thales of alcatel-lucent’s holdings in alcatel alenia space and Telespazio, which took place on april 4th, 2007, after this operation was approved by the european Commission, following a close examination pursuant to eU regulations on mergers.

This agreement is no more a regulated agreement since May 19th, 2009.

Cooperation agreement with Alcatel-Lucent and TSA on December 1st, 2006 (came into force on january 5th, 2007) authorised by the Board of Director’s meeting of November 9th, 2006

The cooperation agreement entered into on December 1st, 2006 between:- Thales,- alcatel-lucent,- and Tsa.

replaces the previous cooperation agreement entered into on November 18th, 1999 between alcatel, Thales, Tsa and Groupe Industriel Marcel Dassault, and is intended to strength-en the cooperation between alcatel-lucent and Thales.

This Cooperation agreement contains the following principal provisions:- continuation of the strategic partnership commenced in

1998 between the companies alcatel-lucent and Thales,- a broad cooperation plan concerning commercial matters through the respective expert networks of the two companies,

- mobility of staff members between alcatel-lucent and Thales, and cooperation on support functions (IT, procurement),

- commitments pertaining to non-competition taken by alcatel-lucent, in connection with the transfer to Thales of the activi-

ties concerned, in the fields of communication systems for military clients, space, railway signalling systems, and critical systems for security; similarly, it sets out the conditions un-der which Thales undertakes not to take part in the develop-ment of activities that compete with those of alcatel-lucent in the field of communication solutions for civilian customers.

Agreement on assistance to TSA authorised by the Board of Directors on june 30th, 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 under this agreement in 2009 amounted to €350,000 excluding taxes without the incidence of the rider authorized by the meeting of the board on 2009.

Formation of a “GIE” (consortium) with Alcatel

On July 1st, 2004, the Board of Directors authorised the creation of a consortium (GIe) with alcatel.

This consortium, founded on July 5th, 2004, had as objects:- to manage a joint laboratory centralising the members’ in-dustrial research on optoelectronic and microelectronic III-V semiconductor component technology, specifically the de-sign, manufacture and characterisation of these components,

- to arrange forms of cooperation and partnership appropri-ate for this work,

- to transfer the technologies developed to the members’ component manufacture units or agreed industrial partners.

alcatel and Thales arranged for the secondment of a hundred or so people to the consortium.

Revenue in 2009 came to €20.9 million.

In 2009 Thales invoiced €7.5 million to the consortium, mainly for the salaries of seconded staff, support activities and rental of premises.

The consortium is funded equally by alcatel and Thales, except for research projects specific to one of them. sales and mar-keting activities to ensure and increase external funding for the consortium are directed towards the Ministry of Research, local authorities in the Paris region, and the european Com-mission under the IsT programmes of the seventh Framework Programme for Research and Technological Development.







A. COMPOSITION OF THE BOARD OF DIRECTORS

1. DIRECTORS

luC vigneron (55 years old)

Chairman and Chief Executive Officer of Thales

Career:

Born on 11 October 1954, a French citizen, luc Vigneron is a former student of the École Polytechnique and an engineer from the École Nationale des Ponts et Chaussées.

he began his career in 1978 at the Ministry of Infrastructure, at the Maritime Department of the ports of Boulogne-sur-Mer and Calais. In 1982, he became Project Officer at the Budget Department of the Ministry of economy, Finance and Budget.

In 1984, he joined Compagnie Générale d’electricité (now al-catel-lucent) as Project Officer in the Finance Department. In 1986, he became Director of Operations at alcatel Telspace, then, in 1988, Director of the alcatel CIT distribution product lines. as the Director for strategy and New activities at alcatel RsD in 1990-1991, he was appointed CeO of alcatel Radi-otéléphone at the end of 1991, then in 1994, Deputy CeO & Chairman of alcatel Mobile Communication Group. The following year, he became the Director for strategy at alcatel alsthom.

In 1998, luc Vigneron joined Giat Industries as the CeO, and was then appointed Chairman and Chief executive Officer in 2001. he undertook an in-depth restructuring of the company rebranded Nexter in 2006. luc Vigneron was the Chairman of GIGaT (French land Defence Manufacturers association) from 2002 to 2006, and of CIDeF (advisory Council for French De-fence Industries) from 2004 to 2006.

luc Vigneron was appointed as Chairman and Chief executive Officerof Thales on 19 May 2009.

First appointment: 19 May 2009

Current term expires: OGM 2014

Number of shares owned: holds 500 Thales shares

Offices held:• In France: Vice-President of Gifas

Other positions held by Mr Vigneron over the last five years:• In France: CeO & Chairman of Nexter systems and of Giat

Industries, Chairman of Nexter Munitions and of sogepa, Director of Nexter electronics and of Nexter Mechanics, member of the supervisory Board of sogeade Gérance and of sogeade sCa

olivier Bourges (43 years old)

Career:

Born on 24 December 1966, a French citizen, Olivier Bourges graduated from the Institut d’etudes Politiques of Paris and from eNa.

Olivier Bourges occupied several posts of high responsibility at the Treasury Department (June 1992 - april 2000), and later on at the Finance Department of Renault (May 2000 - august 2009) and Nissan.

since september 2009, he is the Deputy CeO of the agence des Participations de l’etat (the French Government share-holding agency).

First appointment: 29 september 2009


Number of shares owned: does not hold any shares in Thales (representative of the French state within the meaning of art. 139 of the NRe law)

Offices held:• In France: Director of GDF suez and of Banque Populaire

Caisse d’epargne• Overseas: Director of Dexia (Belgium)

Other positions held by Mr Bourges over the last five years:• In France: senior Vice-President, Group Controller, Renault• Overseas: Vice-President, Corporate Planning and Program

Management Officer, Nissan North america (Usa)

2. CORPORATE GOvERNANCE

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marie-paule delpierre (61 years old)

Director elected by employees

Career:

a French citizen, born on 20 December 1948, once Marie-Paule had passed her technical baccalaureate (high school certificate), she joined Néophone as an electronics technician.

In 1971, Marie-Paule Delpierre joined the vision study labora-tory of sintra, and in 1981, changed streams and became business manager.

Through in-house training, Marie-Paule Delpierre was promot-ed to executive level in 1991, and in 1992 took charge of the sales administration Department of the IT tools division.

since 1996, Marie-Paule Delpierre has been Manager in the aeronautic and Naval Communications unit of Thales Commu-nications.


Current term expires: 8 December 2010


Offices held or other positions held by Mrs Delpierre over the last five years: nil

Charles edelstenne (72 years old)

Career:

Born on 9 January 1938, a French citizen, Charles edelstenne is a qualified Chartered accountant.

he spent his career at Dassault aviation where he started in 1960 as head of the Financial studies Department. he was appointed secretary General in 1975, then Vice-President re-sponsible for economic and Financial affairs in 1986.

he was appointed Chairman and Chief executive Officer in 2000.

he was the Founder, Managing Director then Chairman & CeO and now Chairman of the Board of Directors of Dassault systèmes.




Offices held:• In France: Chairman and Chief executive Officer of Dassault

aviation sa, Chairman of the Board of Directors of Dassault systèmes sa, Member of the supervisory Board of the In-dustrial Group Marcel Dassault sas, Director of Carrefour sa and of sogitec Industries sa, honorary Chairman of Gi-fas, Management of the following civil partnerships: arie and arie 2, Nili and Nili 2

• Overseas: Director of saBCa (Belgium), Chairman of Das-sault Falcon Jet Corporation (United states), President of Dassault International Inc. (United states)

Other positions held by Mr Edelstenne over the last five years:• In France: Chairman of Gifas and of Cidef, Director of Thales

systèmes aéroportés sa• Overseas: Chairman of asD, Director of Dassault Réassur-

ance (luxembourg)



yanniCk d’esCatha (61 years old)

Independent director

Career:

Born on 18 March 1948, a French citizen, Yannick d’escatha graduated from the École Polytechnique as an engineer of the Corps des Mines.

In 1972, he was a lecturer at the École Polytechnique, at the École des Mines de Paris and at eNsTa.

In 1973, he contributed to the design of the technical regula-tion governing water nuclear boilers, and later to its applica-tion as an expert at the Ministry of Industry.

In 1978, he was appointed head of the Control Office for nu-clear construction, where he was responsible for state techni-cal control of the application of this regulation in the French electronuclear programme.

In 1982, he is seconded to Technicatome, a subsidiary of Cea, whose main duty consists of the industrial project management of nuclear propulsion of National Navy buildings. Yannick d’escatha was a Director at Cadarache and aix en Provence, following which he was appointed Deputy CeO at Technicatome on 1 January 1987.

On 1 March 1990, he was called upon by the General Manager of the French atomic energy Commission to occupy the posi-tion of Director for advanced Technologies, which was newly created, and became the Deputy General Manager of the Cea on 14 september 1992.

he was appointed General Manager of the Cea on 1 July 1995, and Chairman of eCa-Industrie on 28 June 1999.

On 1 January 2000, he was appointed Deputy CeO of the In-dustry Cluster of eDF. as the head of the Industry Cluster of eDF, he was responsible for the company’s industrial policy.

In January 2002, he became the Deputy CeO of eDF.

In February 2003, the French Council of Ministers appointed Yannick d’escatha as the Chairman of the National Centre for space studies (CNes), and decided to re-appoint him to this fuction in February 2010.




Offices held:• In France: Chairman of the Board of Directors of the Troyes

University of Technology, Member of the Board of Directors of eDF, Member of the Board of the academy of Technologies, Permanent Representative of the CNes on the Board of Direc-tors of arianespace sa and Permanent Representative of the CNes on the Board of Directors of arianespace Participation

Other positions held by Mr d’Escatha over the last five years:• In France: Chairman of the Board of Directors of the École

Polytechnique, Member of the Board of Directors of RaTP

dominique floCh (51 years old)

Director elected by 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 me-chanical controller before being promoted to Buyer Industrial segment in March 2004.

First appointment: 19 January 2008

Current term expires: 8 December 2010

Number of shares owned: holds 541 Thales shares (in-cluding shares in the Thales employee shareholding company investment fund [“FCPe”])

Offices held or other positions held by Mr Floch over the last five years: nil

189





stève gentili (60 years old)

Independent director

Career:

Born on 5 June 1949, a French citizen, stève Gentili passed his Bachelor’s degree in IT, Management and economy, and then grad-uated from the Collège des sciences sociales et économiques.

he began his career in the Ministry of economy and Finance in 1974 following a brief period at the Ministerial Cabinet.

he then moved on to the private sector heading a major com-pany in the food industry.

since 1997, he is the Chairman of Bred Banque Populaire.

he is also International Chairman of the economic institution under the summit of French-speaking heads of state and government.




Offices held:• In France: Chairman of the Board of Directors of BReD

Banque Populaire, Banque Internationale de Commerce, Natix-is Pramex International, Natixis Institutions Jour and sPIG, Chairman of Cofibred, the financial company of the BReD, Member of the supervisory Board of BPCe and Prepar Vie, Member of the Board of Directors of Natixis, Director of Co-face, société Marseillaise de Crédit, Bercy Gestion Finances +, BReD Cofilease, the insurance company Prepar IaRD and Promepar Gestion

• Overseas: Chairman of the Board of Directors of NRJ Invest Belgique, Director of Natixis algérie, Natixis Pramex Italia sRl, Banque Commerciale Internationale (BCI Congo) and Banque Internationale pour le Commerce, l’epargne et le Crédit (BIBeC Cameroun)

Other positions held by Mr Gentili over the last five years:• In France: Chairman of the Board of Directors of sPIG, Vice-

President of Banque Fédérale des Banques Populaires, Direc-tor of Natexis Banques Populaires, BReD Gestion and lFI, Member of the supervisory Board of Banque Internationale de Commerce – (BIC BReD), Permanent Representative of BReD Gestion on the Board of directors of lFI 2 and Vialink

roger freeman (67 years old)

Career:

Born on 27 May 1942, a British citizen, Roger Freeman stud-ied politics, philosophy and economics at Balliol College of Ox-ford University.

In 1968, he graduated as a chartered accountant in a london firm. Between 1969 and 1985, he was a manager at lehman Brothers. he worked in the company’s New York offices from 1969 to 1972.

he presented courses and chaired courses at the Institute of Chartered accountants. he was one of the founding members of the hundred Group of UK Chartered accountant Finance Directors.

In June 1983, he was elected Member of Parliament for Ket-tering, a seat he retained until 1997. he then held various government posts, including that of Under-secretary of state for the armed Forces at the Ministry of Defence, from 1986 to 1988, before being appointed Under-secretary of state at the Ministry of health.

he was then appointed secretary of state for Public Transport from 1990 to 1994, where he was responsible in particular for the British railways, london transport and the channel tunnel.

he was then appointed secretary of state for defence con-tracts, a 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 Duchy of lancaster. he was tasked with the government’s privatisation 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


Number of shares owned: holds 684 Thales shares (in-cluding shares in the Thales employee shareholding company investment fund [“FCPe”])

Offices held:• Overseas: Chairman: Thales holdings UK Plc, Thales UK ltd,Big DNa ltd, Parity Group Plc; Chairman of the UK advisory Board: PriceWaterhouseCoopers, london (UK); Director: Chemring Group Plc, Global energy Development plc, savile Group Plc; Consultant: RP&C ltd

Other positions held by Mr Freeman over the last five years:• Overseas: Chairman: Thales Pension Trustees ltd, skill Force

Development ltd, National army Museum, Metalysis ltd, Cam-bridge enterprise ltd; Director: Thales UK Pension schemes CIF Trustee ltd, Thales Pension Trustees (section 1) ltd



didier lomBard (68 years old)

Career:

Born on 27 February 1942, a French citizen, Didier lombard graduated from the École polytechnique and École Nationale supérieure des Télécommunications.

he began his career in 1967, at CNeT in France Telecom (now Orange labs), taking part in the development of many products for France Telecom in the fields of satellites, electronic compo-nents and mobile system.

Between 1988 and 2003, he worked at the Ministry of Re-search and Technology, was General Manager of industrial strategies at the Ministry for the economy, Finance and In-dustry (1991-1998), and then was founding Chairman of the agence Française pour les Investissements Internationaux.

In 2003, Didier lombard joined France Telecom as executive General Manager, responsible for the Technologies, strategic Partnerships and New Uses Mission of France Telecom.

From February 2005 until February 2010, Didier lombard was Chairman & Chief executive Officer of the France Telecom Group. after the split of the functions of Chairman and Chief executive Officer on 24 February 2010, he has been appointed Chairman of the Board of Directors effective as of 1 March 2010.

First appointment: 30 June 2005



Offices held:• In France: Chairman of the Board of Directors of France

Telecom, Director of Technicolor, Member of the supervisory Board of Radiall and of sT Microelectronics

Other positions held by Mr Lombard over the last five years:• In France: Chairman & Chief executive Officer of France Tel-

ecom, senior executive VP of France Telecom, Delegate am-bassador for international investment, Chairman of the Board of Directors of Orange, Member of the supervisory Board of a2I (agence de l’Innovation Industrielle)

philippe lepinay (56 years old)

Director representing employee-shareholders

Career:

Born on 3 December 1953, a French citizen, Philippe lépinay is a graduate engineer from the Institut de Marketing Interna-tional, Université Paris VII.

Between 1977 and 1986, he held a variety of sales and mar-keting jobs for the Groups appalette & Tourtellier systèmes, Radiall and sopema.

In 1986, he joined Thales electron Devices as an export sales engineer, and then in 2000, he became Development Manager at Thales engineering & Consulting.

since 2003, he is the Vice-President Business Development at Thales International.

First appointment: 8 March 2007, effective from 1 april 2007 and ratified by the General Meeting of 16 May 2007


Number of shares owned: holds 1,026 Thales shares (in-cluding shares in the Thales employee shareholding company investment fund [“FCPe”])

Offices held:• In France: Vice-President of the Federation of associations

of employee-shareholders of Thales (FasT) and of the French Federation of associations of employee-shareholders (Fas), Member of the supervisory Committee of FCPe “employee shareholding company investment fund”

Other positions held by Mr Lépinay over the last five years:• In France: Chairman of the association du Personnel action-

naire de Thales (aPaT)

191





pierre mutZ (67 years old)

Independent Director

Career:

Pierre Mutz, a French citizen, was born on 15 November 1942.

a graduate of saint-Cyr military school, he served as an officer from 1963 to 1980, when he joined the French Prefectoral Corps.

Pierre Mutz has held the positions of Prefect of essonne, Pre-fect of the limousin region, Director General of the National Gendarmerie, Prefect of the Paris police and Prefect of the Ile de France region, Prefect of Paris.

since December 2008, he is adviser to the Chairman of the eiffage Group.




Offices held:• In France: Director of Catering International & services, of

axa France Iard, of JCDecaux sa and Chairman of the super-visory Board of the logement Français Group

Other positions held by Mr Mutz over the last five years:• In France: Director of RaTP and Chairman of the Board of

Directors of the Institut Gustave Roussy (as Prefect of the Ile de France region)

tsa, whose Permanent Representative is:Bernard rÉtat (70 years old)

Career:

Born on 7 april 1939, a French citizen, Bernard Rétat graduated from the École Polytechnique and École Nationale supérieure des Télécommunications.

as an “Ingénieur Général de l’armement”, Bernard Rétat spent a large part of his career working in the armament procurement department, the Délégation Générale pour l’Armement.

From 1968 to 1973, he was Deputy head of the systems and simulation evaluation Department at the armaments elec-tronics Centre (“centre d’électronique de l’armement”), before starting an international career with the Mission Technique de l’armement, first in Washington in the United states (1973-78), and then in Bonn in the Federal Republic of Germany, where he was Chief of Mission (1978-81).

In 1982 he joined the International affairs Directorate (“Di-rection des Affaires Internationales”) and was Interna-tional Relations Delegate from 1987 to 1990; then, after having been International Chief executive Officer of Dassault aviation for three years, he joined the Thales group (formerly Thomson-CsF) in 1993 as Chief executive Officer, and then as Vice-President from 1998 to June 2005. Bernard Rétat is presently Chairman of the ethics Commission and honorary Vice-President of the Thales group.

First appointment of TSA: 22 June 1998 (M. Rétat is Permanent Representative of Tsa since 18 May 2009)


Number of shares owned: Tsa owns 44,562,623 Thales sharesBernard Rétat owns 1,024 Thales shares (including shares in the Thales employee shareholding company investment fund [“FCPe”])

Offices held by Mr Rétat:• In France: Director of DCNs• Overseas: Director of elettronica s.p.a. (Italy), Treasury at

the Defence Commission asD (aerospace and Defence In-dustries association of europe)

Other positions held by Mr Rétat over the last five years:• In France: Director of Thales International sa and of solar-

force, Member of the supervisory Board of armaris• Overseas: Director of Thales Italia s.p.a. (Italy), of Thales

(Weybridge) Plc, of Thales (Wigmore street) limited and of Thales North america, Inc., Chairman of the Defence Com-mission of asD (aerospace and Defence Industries associa-tion of europe), Member of the supervisory Board of Thales Defence Deutschland Gmbh (Germany)

Bruno parent (56 years old)

Career:

Born on 9 august 1953, a French citizen, Bruno Parent is a former student of eNa.

since he left eNa in 1981, Bruno Parent has spent his career at the Directorate General for Taxes, where he was appointed as the General Director in 2003.

In November 2007, Bruno Parent was appointed as General Director for Fair Trading, Consumer affairs and Fraud Control, and since april 2009 he is the Inspector General of Finance.



Number of shares owned: does not hold any shares in Thales (representative of the French state within the meaning of art. 139 of the NRe law)

Offices held or other positions held over the last five years: nil



amaury de seZe (63 years old)

Career:

Born on 7 May 1946, a French citizen, amaury de sèze start-ed his career in 1968 at Bull General electric.

In 1978, he joined the Volvo Group where he occupied suc-cessively the posts of CeO, Chairman & CeO of Volvo France, Chairman of Volvo Corporate europe, member of the executive Committee of the Volvo Group and member of the strategic Committee of Renault Volvo.

he joined the Paribas Group in 1993 as Member of the execu-tive Board of Compagnie Financière de Paribas and of Paribas Bank responsible for investments and industrial affairs, and later on as Chairman of PaI Partners.

amaury de seze is Chairman of the Board of Directors of Car-refour and Vice-Chairman of Power Corporation of Canada.




Offices held:• In France: Chairman of Carrefour sa, Director of Industrial

Group Marcel Dassault sas, of Imerys and of suez environ-nement, member of the supervisory Board of Publicis Groupe

• Overseas: Vice-Chairman of Power Corporation of Canada, of BW Group, of the Bruxelles lambert Group, of erbe (B) and of Pargesa holding sa (Ch)

Other positions held by Mr de Sèze over the last five years:• In France: Chairman of the supervisory Board of PaI Part-

ners sas, Chairman of Financière PaI sas, of Financière PaI Partners sas, Vice-Chairman of the supervisory Board of Carrefour sa, Director of eiffage, of Novalis sas, of Nova-saur sas, of Vivarte sa, member of the supervisory Board of Gras savoye sCa

• Overseas: Chairman of PaI Partners UK ltd., Director of PaI europe III General Partner N.C. (GG), of PaI europe IV Gen-eral Partner N.C. (GG), of PaI europe IV UK General Partner ltd. (GB), of PaI europe V General Partner N.C. (GG), of PaI Partners srl (I), of Gepeco sa (B), of saeco spa (I)

loïk segalen (49 years old)

Career:

Born on 27 March 1960, a French citizen, loïk segalen gradu-ated from the École Centrale of lyon and esseC.

he started his career in 1986 in the Finance Department of Dassault International.

Financial adviser to the Vice-President responsible for eco-nomic and Financial affairs of Dassault aviation in 1990, he became the Deputy Director (1998-1999) then Director of the Department.

since 1 January 2009, loïk segalen is the Director for eco-nomic and Financial affairs at Dassault aviation.

he is a member of the Management Committee of Dassault aviation.




Offices held:• In France: Chairman of Dassault Réassurance and of Das-

sault assurances Courtage, Director of sIae, Managing Director of Dassault aéroservice, member of the Board of Gifas, Permanent Representative of Dassault aviation on the Board of Directors of Corse Composites aéronautiques

• Overseas: Director of Dassault Falcon Jet (Usa), Midway (Usa), sabca (Belgium) and of Dassault Belgique aviation

Other positions held by Mr Segalen over the last five years:• In France: Chairman of the administrative Commission of

Gifas, Director of Dassault systèmes

193





ÉriC trappier (49 years old)

Career:

Born on 1 June 1960, a French citizen, eric Trappier is a graduate from the Institut National Telecom.

he started his career in 1984 in the Technical Department of Dassault International.

In 1991, he became responsible for sales to asia and then to the Uae.

Director for the Middle-east & africa in 2000, Director for military exports in 2001, he became Deputy CeO (Interna-tional) in 2002.

since 2006, eric Trappier is the International Managing Di-rector of Dassault aviation.




Offices held:• In France: Vice-Chairman of Gifas and of the Defence Com-

mittee of asD, Chairman of the european Commission of Cidef/Gifas, executive Director of GIe Rafale International, executive Director of Dassault International, Director of sofresa/Odas, of sofema and of eurotradia

Other positions held by Mr Trappier over the last five years: nil

2. OTHER PERSONS ATTENDING BOARD MEETINGS (wITH NO vOTING RIGHTS)

In addition to the members of Group executive Commit-tee who may be invited by the Chairman to attend Board meetings, depending on the agenda, and besides Dominique Périer, in his capacity as Board secretary, the following per-sons are invited to attend and do attend Board meetings in a consultative capacity:

- representative of the French State’s golden sharePatrick Auroy, aged 54, senior armaments engineer.appointed by decree of the Minister of the economy, Fi-nance 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 concerning the French state’s golden share (see page 174) and as provided for in article 10 of the articles of association.

- Government RepresentativeMarc Gatin, aged 60, General army Inspector (Contrô-leur Général des armées).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.

- representative of the Central Works CouncilAlain Desvignes, aged 64, Trade Union Delegateappointed by the Central Works Council as its representa-tive on the Board of Directors of Thales, pursuant to article l. 2323-65 of the French labour Code.

- the statutory auditorsas laid down in the Board’s internal rules, are also invited to be present at all Board meetings:• Ernst & Young Audit represented by Michel Gauthier,• Mazars 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 executive in a bankruptcy, receivership or liquidation, or has been incriminated or penalised pub-licly and officially by 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 run-ning of such a company’s affairs,

• no conflict of interests exists between the Board mem-bers’ private interests and their duties to Thales.



B. CHAIRMAN’S REPORT TO THE GENERAL MEETING TO BE HELD ON 20 MAY 2010 ON CORPORATE GOvERNANCE, INTERNAL CONTROL AND RISK MANAGEMENT

at the Board meeting held on 18 February 2010, the Board of Directors adopted, upon the recommendation of the two committees concerned 1, the Chairman’s report on corpo-rate governance and internal control, set out in accordance with the provisions of article l. 225-37 of the French Com-mercial Code, and asked Mr luc Vigneron, its Chairman & CeO to brief the General Meeting on its decision.

1. CORPORATE GOvERNANCE

Pursuant to the law of 3 July 2008 transposing Directive 2006/46/Ce, the Company decided in 2008 to voluntarily refer to the Code of Corporate Governance of listed compa-nies, drawn up by the aFeP and MeDeF, for the preparation of the Chairman’s report. The consolidated version of the Code of Corporate Governance, updated with the recom-mendations of 6 October 2008 concerning remunerations, was distributed in December 2008. This Code is available on the website (www.medef.fr) or at the company’s regis-tered office.

The company complies with the recommendations contained in the aFeP-MeDeF Code of December 2008, except for those concerning:

• the ratio of independent directors on the Board of Direc-tors (one third is recommended in controlled companies) and on the different committees - in line with the effective provisions of the shareholders’ agreement between the Public sector and the Industrial Partner and with stringent criteria of independence adopted by the company (see “in-dependence” below, as well as the sections relating to the Committees),

1. The Directors’ appointments and Remunerations Committee for the part relating to corporate governance, the audit and accounts Committee for the part relating to internal control and risk management.

• the statutory term of office of Directors (6 years), which exceeds the maximum period recommended by the aFeP-MeDeF Code (4 years), since the company considers that too short a term is not advisable because of the length of the business cycle and that a reappointment of the Direc-tors by one third every two years is preferable to any provi-sion reducing the terms of office.

1.1. Composition, proCedures for the organisation and funCtioning of the Board

Restatement of the rules of the Shareholders’ agreement and of the composition of the Board

The company is a “société anonyme” (Public limited Com-pany) with a Board of Directors, and with no separation of the functions of Chairman and of Chief executive Officer, since the Board considered that the effectiveness of administra-tive and monitoring bodies was thereby reinforced and that there was no need for separation between the two functions.

Under the terms of the shareholders’ agreement between the Public sector and the Industrial Partner (Dassault avia-tion), the Board is made up of 16 directors, of whom 14 are appointed by the General Meeting and two are elected by the employees of the Group’s French companies in accordance with the law (article l. 225-27 et seq. of the French Com-mercial Code) and the articles of association (article 10).

Of the 14 directors appointed by the General Meeting, four are “outside directors” selected jointly by the Public sector and Dassault aviation, 1 represents employee-shareholders, and the others are proposed to the General Meeting by the Public sector (5) and by Dassault aviation (4).

Furthermore, the shareholders’ agreement stipulates that the Chairman & CeO shall be chosen upon the proposal of both parties and that at least one Director representing each of the parties shall sit on each of the Board committees.

195

>> ��Chairman’s report to the General Meeting to be held on 20 may 2010 on corporate governance, internal control and risk management


The company and the share capital Corporate governanceStock market information

and financial communication

The reappointment of 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 has been kept at six years. This makes it unnecessary to replace the entire Board at once, as this is deemed detrimental to its proper functioning. as mentioned below, the term of office of 4 Directors expires at the General Meeting of 20 May 2010.

In any case, employee Board members are elected or ap-pointed for a six-year term. Given the cumbersome nature of the appointment process, no reduction in the terms of office of employee Board members is under consideration.

as at 31 December 2009, the Board thus comprised 16 members, as summarised in the table below.

Current term

Directors (a) 1st appointment Start date End

Public sector

Luc Vigneron, Chairman and Chief Executive Officer 19/05/09 19/05/09 OGM 2014

Olivier Bourges 29/09/09 29/09/09 OGM 2010

Didier Lombard 30/06/05 15/05/08 OGM 2014

Bruno Parent 19/05/09 19/05/09 OGM 2010

TSA, represented by Bernard Rétat (since 18/05/09) 22/06/98 15/05/06 OGM 2012

Industrial partner

Charles Edelstenne 19/05/09 19/05/09 OGM 2014

Loïk Segalen 19/05/09 19/05/09 OGM 2012

Amaury de Sèze 19/05/09 19/05/09 OGM 2014

Eric Trappier 19/05/09 19/05/09 OGM 2012

Representative of employee-shareholders

Philippe Lépinay 01/04/07 01/04/07 OGM 2011

Elected by employees

Marie-Paule Delpierre 30/05/89 08/12/04 08/12/2010

Dominique Floch 19/01/08 19/01/08 08/12/2010

Outside directors

Yannick d'Escatha 19/05/09 19/05/09 OGM 2010

Roger Freeman 01/01/99 15/05/06 OGM 2012

Stève Gentili 19/05/09 19/05/09 OGM 2010

Pierre Mutz 19/05/09 19/05/09 OGM 2012

(a) For the composition of the Board until 19 May 2009, it will be useful to refer to the Chairman’s report submitted to the General Meeting of 19 May 2009.



is below one-third as recommended by the aFeP-MeDeF Code for controlled companies.

Internal rules

The Board’s internal rules adopted in July 2004 and regu-larly updated since then (the last update was on 29 septem-ber 2009), do not supersede the legal provisions or those laid down in the Company’s articles of association applicable to the Board and its Committees, or the provisions of the Thales Group’s Code of ethics and Code of Conduct on In-sider Information and securities Trading, some provisions of which apply to Directors.

In addition to the specific provisions of the shareholders’ agreement, the Board’s internal rules include best practices in respect of corporate governance, and particularly those contained in the abovementioned aFeP-MeDeF Code.

The Board’s internal rules are divided into five sections:

• board members (Board membership, independence, availabil-ity, prime duty, transparency, confidentiality, remuneration);

• board’s responsibilities (company representation and best in-terests, specific responsibilities, shareholders’ agreement).The annual budget, under the rolling three-year strategic plan, the appointment and the dismissal of the Chairman & CeO and any acquisitions or disposals of a value exceeding €150 million as well as strategic alliance agreements on technological and industrial cooperation are automatically submitted to the Board for approval, it being understood that the shareholders’ agreement stipulates that such de-cisions must moreover be made by the majority of Direc-tors representing the Industrial Partner.any operations exceeding €50 million are also submitted to the Board for approval if they involve a change in the Group’s strategy as previously approved by the Board,

• board information (communication, training),• board committees (constitution and responsibilities, or-

ganisation, information, audit and accounts committee, Directors’ appointments and Remunerations Committee, strategy committee).It is to be noted that each committee is entitled to ask Corporate Management for any additional information that it deems necessary to the performance of its duties, and to ask the Board of Directors, as an exceptional measure,

The average age of Directors is about 59 years old at the closing of accounts for the year 2009.

In the absence of any special statutory provision, the com-mon law is applicable to the age of Directors:

• the number of Directors above the age of 70 cannot exceed one third of the Directors in office (article l. 225-29),

• the age limit for the Chairman is 65 years (article l. 225-48).

Independence of Directors

Upon the proposal of the committee on selection of directors and remuneration, the Board of Directors has decided to maintain the strict approach used in recent years, namely: Directors appointed by the General Meeting upon the pro-posal of a shareholder (“Public sector” or “Industrial Part-ner”) or category of shareholders (employees) or elected by employees can not be considered to be independent under the above-mentioned aFeP-MeDeF Code.

With respect to corporate bank directors, the Board also wished, in March 2008, to specify the rules of conduct that apply to them in the Thales Board of Directors:

• no participation by the persons concerned with the prepa-ration 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 con-cerning a project in which the bank concerned may be in-volved as a consultant.

after making a detailed examination of the situation of the four “outside directors” under the shareholders’ agreement, and upon the proposal of the committee on the selection of directors and remunerations, the Board decided to declare as independent directors Messrs Yannick d’escatha, stève Gentili, Pierre Mutz, with Mr Roger Freeman continuing not to be deemed independent due to the positions he holds in the Group in the United Kingdom and the remunerations he receives there (see remunerations below).

Overall, the Board of Directors therefore includes 3 inde-pendent directors, i.e. 19% of members, a proportion that

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.

197





or resignation of the director during the year) and vari-able remuneration in respect of attendance at meetings amounting to €2,500 per meeting,

• in respect of committees, a remuneration (entirely vari-able), contingent upon attendance, of €1,250 per meeting, with the Chairman of each committee remunerated by an additional €2,000 per annum (allocated in proportion to the number of meetings chaired, if applicable).If, on account of the high number of meetings, the total amount of €600,000 in respect of one financial year was likely to be exceeded, it is the fixed component of Direc-tors’ remuneration which would be reduced by that amount in order to remain within the limits of the annual amount; this was the case in 2009 for the first time.

Non-voting members, if any, receive a remuneration of €2,500 per meeting of the Board, i.e. the same variable remuneration as for directors, but excluding any fixed remu-neration. since 18 May 2009, there is no non-voting mem-ber at the level of the Board of Directors.

In respect of 2009, attendance fees payable amounted to €599,800 (gross amount) (against €533,750 for 2008), they were partly paid in July 2009 and the balance in January 2010.

as an indication, the amount (net of deduction at source) paid in 2009 amounted to €595,491 (against €463,121 euros in 2008). The table of remuneration for non executive com-pany representatives (table No. 3 of the aMF recommenda-tion of December 2008, see page 213) provides details on these remunerations.

Remuneration of the Chairman & CEO

The remuneration of the Chairman & Chief executive Officer is decided each year by the Board of Directors called to ap-prove the accounts for the year, upon the proposal of the Directors’ appointments and Remunerations Committee. as was the case for his predecessor, the components of the re-muneration paid to Mr luc Vigneron are the same as those used by the company for its senior executives. Its positioning is analysed and revised on an annual basis taking into ac-count performance over the previous financial year and sal-ary surveys or market data.

The abovementioned tables summarising the aMF recom-mendation provide all the details on the remuneration paid to the Chairman & Chief executive Office.

to have recourse to external consultants. however, this option was not exercised in 2009,

• functioning of the Board of Directors (meetings, attend-ance and representation, assessment, revision of the in-ternal rules).

Notice of Shareholders’ General Meetings

shareholders’ General Meetings are convened by the Board in accordance with current legal and regulatory provisions. The Board of Directors will ensure, in the interests of all shareholders, that notification deadlines are longer than the minimum requirements. all shareholders, regardless of the number of shares they own, are entitled to take part in Gen-eral Meetings.

Main factors likely to have an impact in the event of a public offering

as provided for by article l. 225-37, amended by the law No. 2008-649 of 3 July 2008, it is restated, as part of the information mentioned in article l. 225-100-3 of the Code of Commerce, that the two main shareholders who together own more than a half of the share capital and voting rights have declared that they are acting in concert under a share-holders’ agreement and that whenever the threshold of one-tenth or a multiple of one-tenth of the company’s capital or voting rights is exceeded, it must first be approved by the Minister for the economy.

Remuneration and benefits of all types granted to Directors

Attendance fees

The General Meeting has set the total amount of attendance fees at €600,000 per year, to be divided among Directors and non-voting members, if any, for services to the Board, including remunerations payable to Directors who are Com-mittee members for their participation in these committees.

The Board decided that directors would receive:

• in respect of the Board, fixed remuneration of €14,000 per annum (on a proportional basis in case of appointment



meeting (ten days is the notice required by the shareholders’ agreement for certain topics, including the submission of the annual draft budget). a provisional timetable of meetings is adopted at the mid-year for the following year.

The Board’s internal rules set (since 29/09/05) the mini-mum period for the notice of meeting and submission of documents at five working days, unless it is impossible or an emergency case.

each notice includes the meeting’s agenda, preparatory ma-terial for the meeting (or at least the main points if not com-plete at the time of dispatch) and the minutes of the previous meeting, unless this has been formalised or more rapidly distributed. In some cases, additional material is sent to directors after the notice of meeting, or handed out to them during the meeting, if the matter is urgent.

The directors are also sent a press review and a selec-tion of financial analyses relating to the Company. Further-more, national press releases, other than those discussed at Board meetings, are e-mailed to them as soon as they are published.

Training

any Director appointed during the year is proposed, soon after his appointment, an information session on the Group, by members of the general management team (strategy/Finance/human Resources). This was the case for all Direc-tors co-opted during 2009. Moreover, an external training was approved for one Director, at his request, in 2009.

Organisation and functioning of Board committees

• audit and accounts CommitteeThe ordinance of 8 December 2008, implementing Direc-tive 2006/43/eC sets out the powers and duties of this Committee, reproduced in the Board’s internal rules (ar-ticle 16).

The audit and accounts Committee is responsible in par-ticular, without prejudice to the powers of the Board of Directors, for monitoring:a) the process for preparing financial information,b) the efficiency of internal control and risk management

systems,c) the statutory audit of the company’s financial state-

ments and of the consolidated financial statements by the auditors,

d) the independence of auditors.

1.2. report on Board aCtivity in 2009

Number / duration of meetings and attendance rate

The Board of Directors met nine times in 2009. attendance by directors was 92% on average.

as stipulated in the Board’s internal rules, the auditors were invited to all the Board meetings, besides those relating to review or approval of the financial statements, as provided for by law. auditors were provided with the same documents as the directors.

The Chief Financial Officer attends all the Board meetings. The strategy Director, the human Resources Director as well as the Operations Directors are invited to meetings when the agenda so requires.

Main Topics Covered

In addition to recurrent topics falling under the authority of the Board of Directors (annual budget and update of fore-casts, annual and half-yearly financial statements, deter-mination of the Chairman & CeO’s remuneration, dividends proposal, notice of General Meeting and determination of “negative windows” for trading in the company’s securities, approval of regulated agreements, various delegations of powers to the Chairman & CeO, etc.), the agendas of these meetings included in 2009 the following points, in some cas-es with reports from the relevant Board committee:

• the recomposition of the Board and of the advisory Committees,• an overall strategic review per Division,• grant of stock options and free shares,• research and development policy,• Group human resources issues,• as well as several external growth plans.

1.3. preparatory work for Board meetings

Information for directors

Board papers

Directors generally receive the notice for Board meetings between five and ten calendar days prior to the date of the

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- Dominique Floch,- stève Gentili, independent director,- loïk segalen.

The composition of the audit and accounts Committee complies with the provisions of the Ordinance of 8 De-cember 2008, since the Committee is only composed of administrators and since a Director, besides having the status of independent Director, has the required expertise in the accounting and financial fields (see Mr Gentili’s biog-raphy on page 189).

however, the committee is not composed of two-thirds independent directors, as required by the aFeP-MeDeF Code, for reasons already mentioned pertaining to the pro-visions of the shareholders’ agreement.

This Committee has met 6 times during the year 2009, with 83% attendance of its members on average.

The auditors, invited to each Committee meeting, took part in all discussions, except in cases of conflicts of in-terests (e.g., review of auditors’ appointment or renewal of their terms of office). Twice a year, they submit their report on the audit of the accounts (annual and half-year-ly), and specify the accounting options used and the main points of their audit of the financial statements.

The Chief Financial Director and the Internal audit Direc-tor as well as the Management audit Director attend all the meetings, and, the Director responsible for Financing and Treasury does so on an occasional basis depending on the agenda.

In 2009, in addition to the annual and half-yearly financial statements, the Committee also looked into the progress made on major litigation cases, the execution of the annual budget, externally funded pension schemes, in particular in the United Kingdom, the budget for auditors’ fees, the accounting impacts of the performance of some difficult contracts, and various issues relating to internal control, the list of which was prepared after the recomposition of the Board and of the Committee, as well as the part of the Chairman’s report relating to internal control and risk management (re. below).

During the meetings especially dedicated to internal audit and control, the committee reviewed the reports of the Internal audit Department. It laid out its recommendations for the follow-up on assignments.

It hears the auditors on the following:a) their overall working programme applied as well as the

sample tests they have carried out,b) modifications that they believe should be made to the

financial statements to be closed or to other accounting documents, by making any relevant comments on the assessment methods used to prepare these,

c) irregularities and inaccuracies that they may have identified,d) the findings following from the above-mentioned com-

ments and adjustments to the profits for the period compared to those of the previous period.

It also examines, jointly with the auditors, the risks to their independence and the safeguard measures taken to mitigate these risks. It hears the auditors on significant in-ternal control weaknesses they may have identified, as re-gards procedures relating to the preparation and process-ing of accounting and financial information, and each year receives from them:a) a statement of independence,b) an update of the information provided for their appointment,

detailing services provided by members of the network to which the auditors belong as well as services rendered in respect of works relating directly to this assignment.

For this purpose, the Board relies in particular on works of the Internal audit Department and of the Finance De-partment. It approves the annual programme of the Inter-nal audit Department and of the Finance Department and analyses the reports on its works.

It supervises the selection procedure for auditors and is-sues a recommendation on the auditors proposed for ap-pointment by the General Meeting.

It analyses statutory auditors’ work plans along with them, as well as their recommendations and the follow-up on these recommendations. It may audition the auditors in the ab-sence of Company representatives. The Committee examines the budget relating to professional fees for statutory auditors each year. It reviews and analyses professional fess paid to statutory auditors in respect of the financial year ended.

It reports regularly on its works in writing to the Board of Directors and informs it immediately of any problem en-countered.

as at 31 December 2009, this Committee is composed of:- Roger Freeman, Chairman,- Olivier Bourges,



It met 4 times in 2009, with 100% attendance of its members, notably for reviewing the 2009 Budget in rela-tion to the three-year plan, the strategy by Division and the complete overview of merger / acquisition operations feasible or under review.

The strategy Director and the Chief Financial Director at-tend all the strategy Committee meetings.

Minutes of each meeting are submitted at the next Board meeting.

• Directors’ appointment and Remunerations CommitteeIn compliance with article 17 of the Board’s Internal Rules, the Directors’ appointments and Remunerations Commit-tee’s tasks are to examine:- remuneration policy for the company’s senior executives,- remuneration of the Chairman & CeO as well as any regu-

lated commitment concerning him, and the Directors’ remuneration (attendance fees) and, if applicable, that of other company representatives,

- share subscription plans or stock-options, or the grant of free shares,

- employee share ownership schemes,- candidates for the post of Directors belonging to the catego-ry of outside Directors regarding which there were consul-tation between the two main partners pursuant to the pro-visions of the above-mentioned shareholders’ agreement,

- at least once a year, the independence of Directors.

The Committee is also responsible for preparing, if appli-cable, an assessment of the functioning of the Board by the latter (see § 1.4 below).

Moreover, the Chairman & CeO provides additional informa-tion on his choices for the appointment of members of the management team through discussions with the Committee.

as at 31 December 2009, this Committee is composed of:- Yannick d’escatha, Chairman, independent director,- Olivier Bourges,- Roger Freeman,- eric Trappier.

It met 10 times in 2009, with 90% attendance of its members on average.

The ratio of independent directors recommended by the aFeP-MeDeF code (at least half) is not complied with, due

The Committee also took cognizance of the measures adopted in respect of risk management, and paid particular attention to the actions undertaken in respect of compli-ance, which is dealt with in the second part of this report.

at the meeting devoted to the year’s consolidated finan-cial statements, the Committee read the memorandum from the Chief Financial Director on the Group’s exposure to risks and on the major off-balance-sheet commitments, according to the aFeP/MeDeF recommendation.

at that same meeting, Committee members had the op-portunity to discuss with auditors who had already submit-ted their audit report to them, in the absence of the Chief Financial Director.

The Committee also helped to draft the financial press re-leases and prepared the Board’s decision on the dividend proposal to be submitted to the General Meeting.

Following the meetings – which, in the case of the clos-ing or examination of the financial statements, are held at least two (and, as far as possible, three) days prior to the Board meeting, unless it is impossible – minutes are drawn up and submitted at the next Board meeting.

• strategic CommitteeIn compliance with article 18 of the Board’s Internal Rules, the strategic Committee’s main tasks are to assess the Group’s strategy in its main business sectors and, in particular:- to examine the Group’s strategic directions in its main

fields of business, before they are submitted to the Board of Directors,

- to analyse the framework for submission of the budget and the three-year rolling plan to the Board, and to ex-amine the proposed annual budget as part of this plan,

- to analyse major asset acquisition and disposal plans as well as proposed strategic agreements.

as at 31 December 2009, this Committee is composed of:- luc Vigneron, Chairman,- Olivier Bourges,- Marie-Paule Delpierre,- Charles edelstenne,- Philippe lépinay,- Pierre Mutz, independent director.

The aFeP-MeDeF Code does not impose any condition of independence of directors for this type of committee.

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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 then, the Thales Board of Directors has deemed that the current system was the most effective and that there was thus no need to carry out such a separation, since Mr luc Vigneron is exercising his duties as Chairman & Chief executive Officer without any other limitation of powers than those stipulated in the applicable legislation, with respect to the specific powers of the Board of Directors or the General shareholders’ meeting.

as stipulated above in § 1.1 of the “Board’s Internal Rules”, any acquisitions and disposals exceeding €150 million are automatically submitted for Board approval, as are any op-erations of a value exceeding €50 million if they involve a change in the Group’s strategy. This practice effectively con-stitutes a limitation to the Chief executive Officer’s powers.

2. INTERNAL CONTROL AND RISK MANAGEMENT

This section was submitted to the audit and accounts com-mittee, which met on 16 February 2010, in the presence of auditors. It has been prepared on the basis of the main conclu-sions from works carried out by the Group in 2009 in respect of internal audit and risk management. The results of these works have been reviewed at the various meetings of the Risks and Internal Control Committee during the year, and also at the audit and accounts Committee meetings held in 2009.

2.1. definition and sCope of internal Control at thales

The Group applies the internal control principles laid down in the american COsO (Committee of sponsoring Organizations of the Treadway Commission), and the professional standards the IFaCI (Institut Français de l’audit et du Contrôle Interne).

The definition of internal control used by Thales is: internal control is a process that the organisation implements with the intention of providing reasonable assurance as to the achievement of the Group’s objectives, via:

• the effectiveness and efficiency of internal processes,• accounting and financial internal control, which aims to

ensure the reliability of information distributed and used

to reasons mentioned above, arising from the sharehold-ers agreement.

The human Resources Director and the Finance Director attend all the committee meetings. The Chairman & CeO is invited whenever his contribution might be of particular interest to the discussion.

among the various topics examined by the committee in 2009: the remuneration paid to the Chairman & CeO (with examination and recommendations of criteria for deter-mining the variable remuneration), Mr Denis Ranque at the beginning of the year, followed by Mr luc Vigneron at mid-year, assessment of performance conditions relating to the payment to Mr Denis Ranque of a compensation on account of the termination of his term of office, regulated commitments concerning Mr luc Vigneron in respect of compensation for termination of term of office and supple-mentary retirement, the stock-options policy (including the special scheme for the Chairman & CeO) and the grant of free shares, and the thrusts of future policy in this respect – including performance criteria. In addition, the Commit-tee examined the independence of directors, as laid down in the Internal Rules, and submitted its recommendations to the Board concerning all these issues.

Following each meeting, minutes are drawn up and submit-ted at the next Board meeting.

1.4. assessment of the funCtioning of the Board

as recommended by the above-mentioned aFeP-MeDeF code and pursuant to the Board’s internal rules, one item on the agenda of the Board meeting each year is dedicated to discussions on its functioning.

Given that half of the Board changed in May 2009, and that, as a result, there was not sufficient hindsight to undertake this discussion seriously and usefully, the Board decided, upon the proposal of its selection and Remunerations Com-mittee, to defer the assessment of its functioning.

1.5. restriCtions, if any, to the Chief exeCutive offiCer’s powers

In accordance with the provisions of the French Corporate Gov-ernance act (NRe act), the possibility of separating the duties



In the main countries (australia, Canada, Germany, Italy, the Netherlands, singapore, spain, switzerland, the United King-dom, the United states of america), the delegation rules that specify the respective responsibilities of the divisions and the countries was formalised by the signature of an agree-ment between the management of the division, its manager in the country, and the Group Director in the country. This tripartite agreement identifies the scope of responsibilities and sets out the framework and the rules of exercise of these responsibilities, covering compliance with Group rules, compliance with regulations, disclosure and reporting to the division and the country. In countries not covered by these procedures, the rules for delegation to local entities are de-signed under the control of the divisions.

a. The Group’s managing bodies

They are made of the divisions, countries and functional de-partments and are ultimately responsible for the Group’s en-tire internal control system, relying in particular on the Risk and Internal Control Committee.

b. Company representatives (mandataires sociaux)

The Group enforces a compliance initiative since 2007, with the appointment of a compliance officer in each sub-sidiary, use of self-assessment questionnaires and the end of year issue of an affirmation letter from all company rep-resentatives on their subsidiary’s situation with regards to different legal aspects and to internal control in their financial processes. each affirmation letter includes an im-provement plan for each field the company considers as not sufficiently mature.

This initiative is completed by the issue of an affirmation let-ter by each division and country manager to the Chairman.

In 2009, these affirmation letters covered:

• professional ethics,• reliability of the financial processes,• legal compliance.The Country organisations and divisions have reviewed the assessments carried out in 2008 by their entities on the maturity of means employed in order to comply with laws and prevent infringements. The audit department has carried out a mid-year progress report with them to confirm their moni-toring of the effective implementation of the progress plans.

internally for management and monitoring purposes, inso-far as they contribute to the preparation of the published accounting and financial information, and

• legal compliance, which aims at complying with regulatory requirements.

The internal control system contributes to the achievement of the Group’s objectives, without providing an absolute guar-antee, due to the limitations inherent to any internal control system, particularly due to the need to take into account the costs/benefits ratio leading to a certain level of risk being accepted, and due to the uncertainties of the outside world.

Thales applies this internal control in all its controlled companies.

2.2. the audit environment

In most of its businesses, the Group is subject to a perma-nent audit environment required by its main customers and regulatory authorities (Ministry of Defence or Industry, civil aviation authorities, etc.), including increasingly stringent certification and financial control.

These specific constraints are in addition to legal obligations and form an integral part of the Group’s audit environment.

2.2.1. The main parties responsible for internal control

This report describes the structure and the measures in force during the financial year ended 31 December 2009, without considering any impacts resulting from the creation of the new structure announced on 11 December 2009.

The matrix-type structure applicable to the 2009 financial year relies on (a) six divisions which are themselves struc-tured in consistent and homogenous product lines, and (b) an international organisation that coordinates country struc-tures. Divisions are responsible for the product / market axis and are responsible for optimising their earnings over the long term and for development of the different product lines. Countries are responsible for the relationship with govern-mental and national clients and, depending on agreements with the divisions, with private customers. They also aim to optimise their structures so as to make it easier for the local units to achieve their goals.

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counting and finance internal control is carried out by these finance directors, who have within their scope of responsibil-ity local or decentralised teams in the operational units to ensure that the financial information is developed in compli-ance with the rules of internal control.

at the half-year and annual closing of accounts, the Division’s Deputy CeOs and their Finance Directors issue an affirma-tion letter to the senior Vice President Finance and adminis-tration, certifying the truthfulness and completeness of the financial data submitted for consolidation.

d. The Legal Affairs function

The Group legal affairs department as well as “country struc-tures” support the local units of all the divisions with regard to local and international laws, in order to manage any pos-sible risk exposure that may be incurred in the various fields of the law.

The human resources department also has a network of legal advisors who specialise in labour law and who provide sup-port to the Group’s units, either in-house or in collaboration with law firms.

e. The quality function

The Group’s Quality and Progress Department proposes the quality policy and objectives, and provides the neces-sary impulse to the dynamic improvement of customer satisfaction.

Process managers approve the definition of the related processes, rules and objectives, and ensure that they are implemented and are efficient. In particular, the Purchasing Manager implements Thales’ supplier quality policy, which hinges on two major lines: supplier selection and supplier performance management.

Quality assurance for programmes, products and services are delegated to operational units. The quality function is thus integrated into each activity, and this ensures that sys-tems, products and services all meet customers’ require-ments and improve responsiveness.

2.2.2. Thales’ functioning principles and methods

They form an integral part of the basic foundations of the Group’s internal control. This set of organisational rules,

There is now an e-learning platform which is used to sensi-tise employees in a targeted manner about the prevention of insider trading, competition rights, risks of infringement of intellectual property rights and control of exports.

The legal compliance areas retained by the Group are:

• company law,• delegation of powers,• competition law,• labour law,• health and safety,• environment,• anti-corruption,• exports control,• national secrecy,• prevention of infringement of intellectual property rights

by Thales.

as for the previous financial year, an analysis per domain and per geographical area will enable the launching of cross-divisional improvement actions and the close monitoring of entities that reported a low degree of maturity.

c. Accounting and financial function

The Group’s Finance Division is the entity that drives the Company’s accounting and financial operations. The Divi-sion’s central organisation comprises:

• an accounting and consolidation function, responsible for preparing and presenting the Group’s consolidated finan-cial statements,

• a management and budget control function, which analy-ses the Group’s financial data, and produces monthly com-ments on variances with respect to the budget and compa-rable periods of the previous year. These analyses are done every month. On this occasion, financial forecasts for the current half-year and the financial year are reviewed so as to steer the business in order to achieve the objectives set,

• a taxation function that provides support to operational entities on legislation and during tax audits. It also moni-tors tax consolidations within the group and ensures their overall coherence,

• a cash management and financing function that coordi-nates and optimises the management of financial resourc-es and exchange rate risk at Group level.

The Group’s Finance Department is represented in each of the divisions and main countries by a finance director who is functionally assigned to it. The implementation of the ac-



Under the terms of this Charter, the Internal audit may inter-vene in all the company’s processes to assess the quality of risk management and of internal control, and may independ-ently decide on the need for intervention if necessary.

2.2.3. Internal communication

Internal communication, as a tool for coordinating and en-suring the consistency of the Group’s overall internal control system, aims to promote employees’ sense of belonging and motivation by providing them with the necessary information on the Group’s strategy and events. It is relies on different channels that uphold Thales’ values:

• information resources provide a means to communicate with all the Group’s employees, such as the Group’s Intranet (updated every day), the “login to Thales” publications (in-house magazines) 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, corporate culture and values.

shared knowledge bases that are freely accessible online, or protected depending on their content, and designed to facilitate dissemination of the principles adopted and the im-plementation of good practices in respect of internal control.

2.3. identifiCation and analysis of major risks

In 2008, the Group prepared a mapping of its main risks, based on a risk model that distinguishes between exogenous risks (arising from the environment in which the Group’s businesses are conducted) and endogenous risks (arising from internal processes).

These risks had been ranked on the basis of three analysis criteria (the financial impact, the probability of occurrence and the perception of the level of risk controlled by existing procedures).

The list of these risks is detailed in section B. Risks factors of the management report.

In 2009, the six divisions in the Group have further detailed this mapping in respect of the risks that relate more specifi-cally to them. They have fine-tuned the scenarios that can lead to the occurrence of these risks and have assessed them using the three criteria: impacts, probability, and per-

policies and procedures, which includes rules concerning ethical conduct and corporate responsibility, is available on the Group Intranet and is distributed to all new employees as a handbook.

a. The Board’s internal rules

section 1.1 of the corporate governance report provides more details on the Board of Directors, its internal rules and its functioning.

b. The reference system

Thales created 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 adapted to the busi-ness’ situation and can be enhanced, at the level of each divi-sion, entity or country, by means of local rules and practices.

c. Codes and guides on good conduct

The Code of ethics (code d’éthique), drafted in eight languag-es, describes the behavioural rules and the values that the Group wishes to uphold. It covers relationships with clients and suppliers, co-workers, shareholders and financial mar-kets, as well as protection of the environment. The Code of ethics is complemented by a specific section which groups together the Group’s rules on ethical business practices.

The reference guide on export Control sets outs the issues and implications arising from the Group’s export activities and outlines current international regulations on controlling the export of war weapons and dual-use goods. It describes employees’ responsibilities and the monitoring and control process in place to ensure that Thales’ operations comply with all these requirements.

as part of its policy on preventing insider trading, the Group has adopted a Code pertaining to insider information and se-curities trading for senior executives, and regularly updates the list of insiders.

d. Internal Audit Charter

The Group’s Internal audit Charter, approved by the Board of Directors, sets out the basic principles for internal control, the duties of internal audit, the scope and limits of its re-sponsibilities and the types of work it conducts in the units.

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identify any needs it may have for continuous improvement, to prioritise them and to monitor the related action plans.

a. Development activities

Thales selected the international Capability Maturity Model Integrated (CMMI®) model, which is well suited for its activi-ties and recognised by many clients, as a tool for improving and assessing the maturity of operational processes: man-agement of bids and programmes, systems engineering, hardware and software, supplier control and support activi-ties. For developments in the field of information systems, Thales relies on the dedicated model maintained by the Infor-mation Technology Infrastructure library (ITIl).

b. Production activities

Thales has adopted the international supply Chain Opera-tions Reference (sCOR) model to measure the efficiency of its services pertaining to the delivery of the finished prod-ucts. This measure relates to all the activities that make up the supply chain, including the construction of industrial plans, the production master plan, the provisioning, pro-duction and delivery phases, as well as the related support services that may be provided for integrating and processing customer feedback.

c. Management of processes

To make better use of IsO 9001 certifications, Thales – in coordination with certification bodies – has incorporated a scoring system, called the Process Management Indicator. This is a quantified assessment of the management system’s maturity via the quality of the entities, established when cer-tification audits are done. The Process Management Indica-tor ensures increased visibility of the progress actions to implement and quantification of the improvements made.

2.4.2. Centralised activities

some complex or risky operations are carried out solely by central departments, which ensure the consistency and co-ordination of the Group’s practices. a specific internal con-trol framework has been put in place to control the risks associated with these operations.

a. Investment and disinvestment

acquisitions or disposals of activities, in whole or in part, are the exclusive jurisdiction of the Group’s corporate manage-

ceived level of control. For most divisions, this assessment was completed by the identification of existing prevention and protection means, and was further extended by the defi-nition of plans aimed at improving actual risk management.

Internal control self-assessment system

since 2008, entities use an internal control questionnaire made up of internal control objectives linked to the Group’s processes and accounting cycles (clients / suppliers / as-sets, etc.) to identify their areas of weakness, whether they are due to control objectives not properly achieved, deficient control or procedures that need to be improved.

This questionnaire, which focuses on the reliability of finan-cial processes, was designed relying in particular on the recommendation of the French financial markets authority, the aMF, on “internal control system: reference framework”.

entities update their replies on an annual basis and include a summary of the self-assessment and the resulting progress plans in the affirmation letter signed by their company repre-sentative at the end of the year .

In 2009, internal audit carried out assignments on a third of the Group to facilitate understanding of the system and improve the reliability of results obtained. The Group intends to pursue its reliability reviews in 2010. The same applies to the verification of the implementation of action plans.

2.4. major risk management and internal Control aCtivities

The section “Risk factors” of the management report details the measures taken by the Group in respect of financial, le-gal and environmental risks and risks relating to acquisitions and strategic investments or relating to Thales’ activities. In particular, the Group has in 2009 consolidated its bids and programmes management system, through the implemen-tation of additional reviews and alert systems and through the accelerated roll-out of a programme management soft-ware package.

2.4.1. Continuous improvement of operational processes

Thales has introduced internal and external assessment, based on international standards, enabling the Group to



e. 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 Division, other disputes are monitored by the Group’s legal affairs Department.

f. Insurance and claims

all insurance policies of all Group companies are managed by Thales Insurance and Risk Management, a specialist subsidi-ary that optimises the cost of insurance for the Group and sees to it that the subsidiaries are properly insured against all the insurable risks that they are exposed to. This entity oversees large claims.

g. Contract intermediation

The commercial environment for the Group’s international operations is managed by a specialised company, Thales In-ternational. This company possesses the expertise and ap-propriate procedures to drive these operations in compliance with the applicable laws and regulations. Thus, only Thales In-ternational or its subsidiaries are authorised to sign commer-cial intermediation contracts with external service providers for export operations. For domestic operations, in countries where the Group has major manufacturing and sales busi-nesses, procedures are laid down to improve customer rela-tions and the security and legality of commercial operations.

2.4.3. Development and processing of published financial and accounting information

a. Accounting and financial procedures

The Group has produced several procedures manuals that are mandatory for all Group units. Unit Financial Officers are accountable to the Group Finance Department for compli-ance with these procedures.

• accounting Procedures ManualThis manual provides a detailed description of the account-ing rules and principles to be applied in drawing up consoli-dated accounts in accordance with IFRs.

ment. Divisions propose projects at regular meetings of the Mergers and acquisitions Committee, made up of the main central departments.

b. Financing, treasury and currency exchange risk

The Group’s financial resources are managed centrally by the Group Treasury and Financing Department. The Group’s subsidiaries are not authorised to undertake financing opera-tions themselves, apart from any exceptions due to special tax-related or other regulatory constraints and for opera-tions involving authorisation for overdraft as required for the good functioning of accounts.

every day, the bank accounts of the local units in the main countries are balanced by transfers to the corporate treas-ury account (cash pooling – zero balancing system). Financial agreements have been arranged with all Group companies which manage these relations in compliance with the rel-evant local regulations.

The Group Treasury and Financing Department also man-ages the overall currency exchange risk, while the opera-tional units carry out a detailed monitoring of the exchange risk. Foreign currency transactions are analysed prior to any financial commitment and are hedged at Group level against foreign exchange risks as soon as the probability of being awarded the sales contract and/or signing a purchase order becomes significant, excluding special cases.

c. Financing of export operations

export finance operations (guarantees, buyer credit, docu-mentary credit, as well as more complex financing operations) are prepared by local specialists reporting to local financial departments. These specialists also report to the interna-tional financing department. Transactions involving amounts in excess of €10 million or of a certain level of complexity are handled solely by this department at the Group level.

d. Real Estate Management

all real estate transactions come under the exclusive powers of the Group’s Real estate Division. It may delegate certain operations, especially outside France, to a country organisa-tion, or to a local company, while ensuring proper supervision.

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Monthly results are analysed in order to identify any budget deviation and update annual forecasts concerning orders, revenues, profits and cash flow. This procedure is carried out by each unit and provides a consolidated view at Division and Group level. It also makes it possible to identify any ac-tion plans necessary to achieve the set objectives.

d. Consolidation of financial statements

Thales uses a single consolidation software, selected among the market standards, which enables it to upload the account-ing information of the Group’s various units, with consistency checks carried out at source. Transfers of accounting entries to head Office are authorised only after validation. Training sessions and personalised support on the tool in the Group’s consolidation teams ensure that users master the software.

2.5. overseeing the internal Control system

2.5.1. Monitoring and control bodies

The Board of Directors exercises control over the manage-ment of the Group, either directly or through its committees. Detailed information on the organisation of the Board’s work and, more generally, the functioning of the Board and of its committees is given in section 1 of the report on corporate governance.

a. The Audit and Accounts Committee

at the annual closing of accounts, the senior Vice President Fi-nance and administration submits a memorandum to the au-dit and accounts Committee on procedures applied to identify and control major risks and off-balance sheet commitments.

each year, the Internal audit Department proposes to the audit and accounts Committee an audit plan covering differ-ent aspects relating to the Group in respect of compliance with legislation and regulations, assessment of internal con-trol and identification and management of risk.

at the meetings of this Board committee, resources em-ployed, actions taken to reinforce internal control, and iden-tification and monitoring of risk are reviewed.

• Budgetary control procedures manualThis manual describes the budget process that divisions and units must follow. It defines in particular the content and format of regular reports and contains a glossary to help standardise financial aggregates.

• Cash-flow manualThis manual describes the respective roles of the central teams and unit teams in respect of cash flow and financing operations.It also details the procedures for short term cash flow management, operation of the exchange risk hedging sys-tem and the related reporting rules.

• Guide to financial structuringThis document defines the respective roles of central teams and unit teams, as well as the procedures for the preparation and monitoring of financial structures pro-posed for commercial bids. The objective is to optimise the cost of financial structures and ensure the best possible hedging against financial risks.

b. Budget process

There are three stages in setting the annual budget objectives:

• the Group’s divisions draw up a ten-year strategic plan, which is presented to and approved by the Group’s corpo-rate management,

• each division then submits a more detailed three-year budget plan to the Group’s corporate management. This plan is based on the commercial forecasts prepared jointly by the divisions and the marketing and sales departments at Group and Country level,

• finally, Group corporate management sets the objectives for each division and ensures overall consistency. The first year of the plan is then broken down into a monthly plan, which serves as a reference for monitoring the ac-counting realities.

c. Financial reporting

The system includes some key factors described above in this report, such as accounting and financial procedures and a centralised consolidation process supported by a sin-gle tool.



support to all operational and functional managers to help them to identify risks that their activities are exposed to and to mobilise the means to manage or reduce these risks. It takes particular care to ensure proper risk management and the maintenance of adequate internal control within the Group, by carrying out audit assignments and developing internal control evaluation tools which are put at the disposal of the entities.

at the end of 2009, the Internal audit department enlisted additional expertise which in particular strengthened its ca-pacity to review the management of programmes.

2.5.2. Audit of financial information

each year, the Internal audit Division reviews the financial audit manual with the statutory auditors. This manual de-scribes the phases for conduct of work by the statutory audi-tors and defines the topics to be audited.

Consolidated companies are classified into three categories according to their size and the risks they may be exposed to. They may subject to an in-depth review, a limited review or a flash review.

In the first two types of reviews, as well as assessing the department’s financial statements, the statutory auditors recommend improvements in respect of internal control. These recommendations are contained in a section of the an-nual interim summary report issued to the departments and corporate management of the group in November each year.

b. The Risk and Internal Control Committee

This committee, chaired by the senior Vice President Fi-nance and administration, brings together representatives of functional and operational departments as well as the In-ternal audit Department, which is also responsible for the secretarial function.

In 2009, the Committee in particular supervised the risk mapping exercise by divisions and the monitoring of action plans resulting from the 2008 self-assessments of financial internal control and of legal compliance.

c. Ethics and Corporate Responsibility Committee

Thales has an ethics and Corporate Responsibility Commit-tee, under the chairmanship of the honorary Vice-President of the Group. This Committee is made up of members of the executive Committee, the functional departments and the main countries in which the Group has operations. It is responsible for guaranteeing compliance with the Code of ethics: it contributes to the definition and application of the Thales ethics and corporate responsibility policy. In 2009, this committee met 3 times.

d. The Internal Audit Division

Reporting to the Chairman & Chief executive Officer, the Inter-nal audit Department works with the audit and accounts Com-mittee, the Risk and Internal Control Committee, the Group’s corporate management and the statutory auditors. It provides

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>> ��Statutory Auditors’ report on the report prepared by the Chairman of the Board of Directors of Thales




provided in the Chairman’s report in respect of the inter-nal control and risk management procedures relating to the preparation and processing of the accounting and financial information. These procedures consist mainly in:

- obtaining an understanding of the internal control and risk management procedures relating to the preparation and processing of the accounting and financial information on which the information presented in the Chairman’s report is based and of the existing documentation;

- obtaining an understanding of the work involved in the prep-aration of this information and of the existing documenta-tion;

- determining if any material weaknesses in the internal con-trol procedures relating to the preparation and processing of the accounting and financial information that we would have noted in the course of our work are properly disclosed in the Chairman’s report.

On the basis of our work, we have nothing to report on the information relating to the company’s internal control and risk management procedures relating to the preparation and processing of the accounting and financial information con-tained in the report prepared by the Chairman of the Board of Directors in accordance with article l. 225-37 of the French commercial code (Code de Commerce).

Other informationWe confirm that the report prepared by the Chairman of the Board of Directors also contains the other information required by article l. 225-37 of the French commercial code (Code de Commerce).


In our capacity as statutory auditors of Thales, and in ac-cordance with article l. 225-235 of the French commercial code (Code de Commerce), we hereby report on the report prepared by the Chairman of your company in accordance with article l. 225-37 of the French commercial code (Code de Commerce) for the year ended December 31, 2009.

It is the Chairman’s responsibility to prepare and submit for the Board of Directors’ approval a report on internal control and risk management procedures implemented by the com-pany and to provide the other information required by article l. 225-37 of the French commercial code (Code de Com-merce) relating to matters such as corporate governance.

Our role is to:

- report on any matters as to the information contained in the Chairman’s report in respect of the internal control and risk management procedures relating to the preparation and processing of the accounting and financial information,

- confirm that the report also includes the other information required by article l. 225-37 of the French commercial code (Code de Commerce). It should be noted that our role is not to verify the fairness of this other information.

We conducted our work in accordance with professional standards applicable in France.

Information on internal control and risk management procedures relating to the preparation and processing of accounting and financial informationThe professional standards require that we perform the nec-essary procedures to assess the fairness of the information

C. STATUTORY AUDITORS’ REPORT PREPARED IN ACCORDANCE wITH ARTICLE L. 225-235 OF THE FRENCH COMMERCIAL CODE (CODE DE COMMERCE) ON THE REPORT PREPARED BY THE CHAIRMAN OF THE BOARD OF DIRECTORS OF THALESFor the year ended December 31, 2009

This is a free translation into english of a report issued in French and it is provided solely for the convenience of english-speaking users. This report should be read in conjunction with and construed in accordance with French law and professional auditing standards applicable in France.







D. CORPORATE MANAGEMENT

1. CHANGES IN THE COMPOSITION OF THE MANAGEMENT TEAM DURING THE YEAR 2009

from 01/01/2009 to 13/01/2009

from 13/01/2009 to 19/05/2009

from 19/05/2009 to 08/06/2009

from 08/06/2009 to 19/06/2009

from 19/06/2009 to 11/12/2009

from 11/12/2009 to 31/12/2009

Chairman & CEO (a) Denis Ranque Denis Ranque Luc Vigneron Luc Vigneron Luc Vigneron Luc Vigneron

Vice-Chairman (b) Jean-Paul Perrier Jean-Paul Perrier Jean-Paul Perrier Jean-Paul Perrier Jean-Paul Perrier Jean-Paul Perrier

Zone A (c) Alex Dorrian Alex Dorrian Alex Dorrian Alex Dorrian Alex Dorrian Alex Dorrian

Zone B (d) Bruno Rambaud Bruno Rambaud Bruno Rambaud Bruno Rambaud Jean-Georges Malcor Blaise Jaeger

Zone C (e) Alexandre de Juniac Alexandre de Juniac Alexandre de Juniac Alexandre de Juniac Jean-Georges Malcor Blaise Jaeger

Aeronautics François Quentin Jean-Georges Malcor Jean-Georges Malcor Jean-Georges Malcor Pierre-Eric Pommellet Pierre-Eric Pommellet

Space Reynald Seznec Reynald Seznec Reynald Seznec Reynald Seznec Reynald Seznec Reynald Seznec

Air systems Richard Deakin Richard Deakin Richard Deakin Richard Deakin Richard Deakin Jean-Loïc Galle

Land and joint systems Pascale Sourisse Pascale Sourisse Pascale Sourisse Pascale Sourisse Pascale Sourisse Pascale Sourisse

Marine Jean-Georges Malcor Marc Darmon Marc Darmon Marc Darmon Marc Darmon Pierre-Eric Pommellet

Services and security solutions Olivier Houssin Olivier Houssin Olivier Houssin Olivier Houssin Olivier Houssin Pascale Sourisse

Finance and administration Patrice Durand Patrice Durand Patrice Durand Patrice Durand Patrice Durand Patrice Durand

Human resources Yves Barou Yves Barou Yves Barou Yves Barou Yves Barou Yves Barou

Communication Sylvie Dumaine Sylvie Dumaine Sylvie Dumaine Sylvie Dumaine Sylvie Dumaine Yves Barou

Operations (f) Jean-Paul Lepeytre Jean-Paul Lepeytre Jean-Paul Lepeytre François Quentin François Quentin Patrick Fournié

Strategy Jean-Loup Picard Jean-Loup Picard Jean-Loup Picard Jean-Loup Picard Jean-Loup Picard Jean-Loup Picard

Research and technology Jean-Loup Picard Jean-Loup Picard Jean-Loup Picard Jean-Loup Picard Jean-Loup Picard Marko Erman

(a) sole Company Representative.(b) as from 19 June 2009, the position of Vice-Chairman was abolished and Jean-Paul Perrier became adviser to the Chairman.(c) Zone a: United states, Canada, australia, United Kingdom. alex Dorrian is also CeO of Thales UK.(d) Zone B: europe, Turkey, Russia, Central asia.(e) Zone C: asia, africa, Middle-east, latin america.(f) Operations Transformation Department from 8 June to 11 December 2009.

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>> ��Corporate management




3. DIRECTORS’ REMUNERATION

The Board of Directors of 19 May 2009 prior to the annual General Meeting appointed Mr luc Vigneron as the Com-pany Representative in replacement of Mr Denis Ranque, dismissed at the same Board meeting.

The respective situations of Mr Denis Ranque whose term of office ceased on 19 May 2009 and of Mr luc Vigneron, the current Chairman & CeO and sole company representative whose term of office started on the same date, are provided below in chronological order.

a. remuneration of Company representatives / Chairman & Ceo

The components of the remuneration paid to the Company Representative are identical to those applied by the company to its senior executives. The Board of Directors of Thales decided on the components forming the overall remuneration of the Chairman after taking into account salary surveys and market information.

Decisions were taken chronologically during the Board of Director meetings held on 24 March 2009 for Mr Denis Ranque and on the 24th July 2009 for Mr luc Vigneron.

2. COMPOSITION OF THE EXECUTIvE COMMITTEE (“COMEX”) AT 1ST MARCH 2010

Corporate management of the company and the Group is car-ried out by a collegiate body chaired by the Chairman & Chief Executive Officer, comprising fourteen members in charge of the main operational and corporate functions.

at 1 March 2010, the members of the “Comex” were as follows:

Alex Dorrian, eVP 1, area a 2, CeO of Thales UK

Blaise Jaeger, sVP 3, area B 4

Yves Barou, sVP, human Resources & Communications

Patrice Durand, sVP, Finance & legal

Marko Erman, sVP, Research & Technology

Patrick Fournié, sVP, Operations

Jean-Loup Picard, sVP, strategy

Alex Cresswell, sVP, land Defence

Jean-Pierre Forestier, sVP, Transportation systems

Jean-Loïc Galle, sVP, air Operations

Michel Mathieu, sVP, avionics

Pierre-Eric Pommellet, sVP, Defence Mission systems

Pascale Sourisse, sVP, Defence & security C4I systems

Reynald Seznec, sVP, space

1. eVP: executive Vice President.2. area a: United Kingdom, australia and New Zealand, United states, Canada, the Netherlands, Central and Northern europe, Central and Northern asia, NaTO and the United Nations.3. sVP: senior Vice President.4. area B: Germany, spain, Italy, other european countries, south and southeast asia, Middle east, latin america and africa.



Table 1: Summary of remunerations and of stock options and shares granted to senior executives and company representatives

Table 2: Summary of remunerations of senior executives and company representatives

(€ thousands) 2009 2008

Denis Ranque – Chairman & CEO from 1 January to 19 May 2009Remuneration due for the financial year (detailed in table 2) 3,314.7 1,283.1Valuation of options granted during the year (detailed in table 4) -- 569Valuation of performance shares granted during the year (detailed in table 6) -- --Luc Vigneron – Chairman & CEO since 19 May 2009Remuneration due for the financial year (detailed in table 2) 741.2 --Valuation of options granted during the year. Mr Luc Vigneron decided to waive them (detailed in table 4) 600.8 (a) --

Valuation of performance shares granted during the year (detailed in table 6) -- --Total before Mr Luc Vigneron decided to waive his options 4,656.7Total after Mr Luc Vigneron decided to waive his options (a) 4,055.9 1,852.1

(a) at the meeting of the Board of Directors of 10 December 2009, Mr luc Vigneron has decided to waive the 80,000 options granted to him by the Board of Directors at its meeting of 25 June 2009.

(€ thousands) 2009 2008

Payable in respect of

the financial year

Paid during the financial

year

Payable in respect of

the financial year

Paid during the financial

year

Denis Ranque – Chairman & CEO from 1 January to 19 May 2009

Fixed remuneration 351.4 409.8 700.0 695

Variable remuneration (a) -- 578.5 578.5 774.8 (b)

Extraordinary remuneration 2,961.5 2,961.5 -- --

Attendance fees waived waived waived waived

Benefits in kind (d) 1.78 2.16 4.6 4.6

Luc Vigneron – Chairman & CEO since 19 May 2009 -- --

Fixed remuneration 432.5 374.2 -- --

Variable remuneration (c) 284.1 -- -- --

Extraordinary remuneration -- -- -- --

Attendance fees 23.5 6.2 -- --

Benefits in kind (d) 1.1 1.1 -- --

Total 4,056.2 4,333.4 1,283.1 1,474.4

(a) For the former Company Representative, Mr Denis Ranque, the target variable remuneration was 100% of the fixed remuneration, with a maximum of 150% when targets are exceededThe criteria for determining the variable remuneration were, based on a weighting decided by the Board of Directors, quantitative and up to an overall level of 75% (in descending order: the eBIT, the operating cash flow, and orders taken in the financial year). For the balance, i.e. 25% of the variable remuneration, the Board decided to maintain a more qualitative criterion, based on the fulfilment of various duties assigned to the Chairman by the Board.

(b) Payable in respect of the previous financial year.(c) For the new Company Representative, Mr luc Vigneron, the Board of Directors of 24 July 2009 decided that the target variable remuneration would be 100% of the fixed remuneration,

with a maximum of 137.50% when targets are exceeded. The criteria for determining the variable remuneration are, based on a weighting decided by the Board of Directors, quantitative and up to an overall level of 75% (in descending order: the eBIT, the operating cash flow, and orders taken, and these three criteria are applicable to the 2nd semester of 2009). For the balance, i.e. 25% of variable remuneration, the Board decided to maintain qualitative criteria.On 18 February 2010, the Board reviewed the results achieved, based, on the one hand, on the quantitative criteria set previously, i.e.:• the eBIT of the 2nd semester of 2009,• the operating cash flow of the 2nd semester of 2009• and orders taken in the 2nd semester of 2009and also assessed the fulfilment of the various duties assigned to the Chairman.This review led the Board of Directors to decide, upon the proposal of the appointments and compensation committee, that the variable remuneration to be paid in 2010 to the Chair-man & CeO in respect of the year 2009 (2nd semester) on a prorata temporis basis as from 19 May 2009 will be €284,104(gross), i.e.40,58% of the target annual fixed remuneration.

(d) The Company Representative is entitled to a company car: the amount shown in the table represents the value subject to taxes and social contributions during the year.The Company Representative is also entitled to the services of a driver.

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Table 3: Attendance fees and other remunerations received by non executive company representatives 2009/2008 (in euros)

Recipient Paid in 2009 Paid in 2008 Notes

J.-P. BARTH 35,250 35,250

R. BRUNCK 38,500 8,804

F. BUJON de l’ESTANG 39,000 39,350

J. CORNU (net of deduction at source) 22,537 --

O. COSTA de BEAUREGARD 5,202 30,119

S. DASSAULT -- 1,381

Ch. de CROISSET (net of deduction at source) 31,688 29,813

R. FREEMAN (net of deduction at source) 105,098 108,366 (a)

P. LAFOURCADE -- 3,452

P. LEPINAY 37,750 33,048 (b)

D. LOMBARD 34,000 29,000

K. NAUMANN (net of deduction at source) 25,501 36,000 (c)

H. PROGLIO -- 2,011

M. ROULET (delegated by TSA, Director) 40,250 37,750

S. TCHURUK 31,500 32,750

Alcatel-Lucent Participations 24,000 22,856

Inter CFDT (M-P DELPIERRE + D. FLOCH) 85,500 66,750

Accountant from Treasury – art 139 NRE (B. BEZARD + B PARENT in 2009) 46,500 20,356

Ch. EDELSTENNE 6,250 --

S. GENTILI 5,000 --

P. MUTZ 6,250 --

L. SEGALEN 6,250 --

A. de SEZE 5,000 --

E. TRAPPIER 6,250 --

TSA 7,500 --

B. RETAT (Non-voting member / Director) 17,500 17,556

Total paid (net of deduction at source) 662,276 554,612

Including attendance fees (excl. Senior executive & company representative (d)) 589,241 463,121

Notes:(a) Of which £65,000 for functions exercised in the Group in the United Kingdom (en euros: 73,035 in 2009; 80,991 in 2008), the balance equivalent to Thales attendance fees paid in

France, net of 25% of deduction at source.(b) Philippe lépinay told the company that he paid, in 2008 and 2009, to the association du personnel actionnaire de Thales (aPaT) the sum of €6,000, specifying that it represents about

half of his attendance fees after taxes and costs inherent to the function;(c) The amount received in 2008 includes payments for the conduct of meetings of a group of military advisers (€10,500).(d) M. Denis RaNQUe, Chairman & CeO until 19 May 2009, had relinquished his attendance fees. attendance fees paid in 2009 (€6,250) to Mr. luc VIGNeRON, appointed Chairman &

CeO on 19 May 2009, are shown in table aMF n°2 (summary of remuneration paid to the senior executive & company representative).



Table 4: Stock options or share subscription options granted during the year to senior executives and company representatives by the issuer or any Group company

Table 6: Performance shares granted during the year to each company representative

Table 5: Stock options or share subscription options exercised during the year by senior executives and company representatives

This represents 0.8% of total options (stock options and share subscription options) and of free shares authorised by the General Meeting and 4.7% of the number of options granted in the plan of June 2009.

Pursuant to the provisions of article l.225-185 of the French Code, the Board of Directors has decided that the Chairman & CeO should retain, in the form of shares, at

each exercise of options granted in 2009 and for the entire duration of his term of office, 40% of the acquisition gain, net of tax.

since Mr luc Vigneron decided to waive entitlement to this grant, the 80,000 options were cancelled on 31 December 2009, and the company representative is not entitled to any option from that date.

Name of Senior Executive

Date of Plan Type of options

Option value based

on method used for

consolidated accounts

Number of performance

options granted

during the financial year

Valuation of the grant to

the company representative

based on method

used for consolidated

accounts

Exercise price Exercise period

Denis Ranque None

Luc Vigneron 25 June 2009 Share subscription

options

€7.51 80,000 Mr Luc Vigneron

decided to waive his options on

10/12/2009

600,800 €32.88 From 25 June 2009

to 24 June 2019

Name of senior executive

Date of Plan Number of shares granted

Valuation of shares based

on method used for

consolidated accounts

Acquisition date

Date available Performance condition

Denis Ranque (from 1 Janu-ary to 19 May 2009) none

Luc Vigneron (from 19 May to 31 December 2009)

none

Name of senior executive & company representative

Plan date Number of options exercised during the year as the Compa-ny Representative

Exercise price

Denis Ranque (from 1 January to 19 May 2009) none

Luc Vigneron (from 19 May to 31 December 2009) none

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The company decided, since it started such grants (since 2007), to exclude the Chairman & CeO (the sole company representa-tive), as well as members of the executive Committee and the main 361 senior executives from free share plans.

Table 7: Performance shares having become available during the financial year for each company representative

Table 8: Historical record of stock options or share subscription options granted to senior executives and company representatives

a. Situation of the former Company Representative, Mr Denis Ranque

The Board of Directors decided on 19 May 2009, in accordance with article 8.4 of the regulations on stock options and share subscription plans, to derogate from these regulations by giving to Mr Denis Ranque the right to maintain the options granted to him from 12 July 2001 to 1 July 2008 as if Denis Ranque had retired. The latter will therefore keep his options (as shown in the following table) without restriction until their expiry, i.e. 10 years after their grant. The other provisions of the regulations remain applicable.

Name of senior executive Date of Plan Number of shares having become

available

Acquisition conditions

Denis Ranque (from 1 January to 19 May 2009) none

Luc Vigneron (from 19 May to 31 December 2009) none

Date of authorisation by AGM 15/05/2003 15/05/2003 16/05/2001 16/05/2001

Date of Board decision 01/07/2004 01/07/2003 02/07/2002 12/07/2001Discount at grant none none none noneType of options subscription subscription subscription subscriptionExercise period (a) from 1 July 2008

to 30 June 2014from 1 July 2007 to 30 June 2013



Exercise price €29.50 €25.70 €40.97 (b) €42.18 (b)Total number of options in current plan at 31/12/09 1,983,662 1,436,914 2,614,533 2,798,127Of which current options held at 31/12/09 by:- the former Company Representative Denis Ranque 100,000 80,000 102,954 83,718- of which options exercisable by the former Company

Representative at 31/12/2009 100,000 80,000 102,954 83,718

Date of authorisation by AGM 15/05/2008 16/05/2007 17/05/2005 17/05/2005

Date of Board decision 01/07/2008 04/07/2007 09/11/2006 30/06/2005Discount at grant none none none noneType of options subscription share purchase subscription subscriptionExercise period (a) from 1 July 2012

to 30 June 2018from 4 July 2011

to 3 July2017from 9 Nov. 2010

to 8 Nov. 2016 from 30 June 2009 to 29 June 2015

Exercise price €38.50 €44.77 €36.47 €34.01Total number of options in current plan at 31/12/09 1,669,250 80,000 2,144,349 1,885,813Of which current options held at 31/12/09 by:- the former Company Representative Denis Ranque 80,000 80,000 80,000 80,000of which options exercisable by the former Company Representative at 31/12/2009 -- -- -- --

(a) Case of France. Detailed information in “Conditions of exercise” page 168.(b) exercise price and quantities adjusted according to the conditions provided for by the current regulations (art. 174-12 and 13 of Decree No. 67-236 of 23 March 1967), as a result

of the distribution of dividends by charging reserves, after the option grant date.



b. Situation of Mr Luc Vigneron, Chairman & CEO in office

at the Board meeting of 10 December 2009, Mr luc Vigneron decided to waive the 80,000 options granted to him by the Board of Directors at its meeting of 25 June 2009.

Table 9: Stock options or share subscription options granted to the top ten employees who are not company representatives, and options exercised by the ten employees having the highest number of share purchase options or stock options during the year

Table 10: General information on the senior executive & company representative

Date of authorisation by AGM 15/05/2008

Date of Board decision 25/06/2009

Discount at grant none

Type of options subscription

Exercise period (a) from 25 June 2013 to 24 June 2019

Exercise price €32.88

Total number of options in current plan at 31/12/09 1,580,910

Of which current options held at 31/12/09 by:- the Company Representative Luc Vigneron 0Of which, options exercisable by the company representative at 31/12/09 0

(a) applicable for France. Detailed information is provided in paragraph “Conditions of exercice” page 168.

Total number of options

Weighted average price

Options granted, during the year, by the issuer and any company within the scope of grant of options, to the ten employees of the issuer and any company within that scope, having the highest number of options thus granted

222,000 €32.88

Options held from the issuer and the companies referred to above, and exercised during the financial year by the ten employees of the issuer and of these companies, having the highest number of options thus purchased or subscribed to

176,752 €30.05

Senior executive & company representative

Employment contract

Supplementary retirement scheme

Compensation or benefits payable or likely to be-

come payable at termina-tion or change of functions

Compensation relating to a non-

competition clause

Yes No Yes No Yes No Yes No

Luc Vigneron X X X X

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Supplementary retirement scheme:

Upon a decision of the Board of Directors dated 24 March 2009, Thales’ Company Representative is entitled to a sup-plementary retirement scheme, the amount of which is de-termined using a point allocation method which is identical to that provided for by the group supplementary retirement scheme applicable at Thales at the date of the Board meet-ing for Group executives whose remuneration exceeds the agirc contribution ceiling.

The Company Representative’s rights, calculated in points like the agirc scheme, are not subject to presence in the company at the time of payment of the retirement benefit but they are subject firstly to the condition of having fully completed a term of office and secondly to the fulfilment of the following per-formance condition: achievement of at least 80% on average over the last three financial years of the annual operating mar-gin targets set by the Board to the Company Representative.


The Board ascertained on 19 May 2009 that since Mr Denis Ranque has fulfilled the performance condition and the condi-tion of completion of a full term of office, he will benefit from the supplementary retirement scheme established for the senior executive and Company representative on 24 March 2009 as well as the increase decided on 19 May 2009 in order to align it on the terms and conditions of the current group scheme.

The annual amount of Thales’ supplementary retirement should represent about 10% of the last annual remunera-tion of Mr Denis Ranque in his capacity as the Company Representative.

This provision is published in the company’s website, in ac-cordance with the applicable regulations.


The Board of 24 July 2009 confirmed that Mr luc Vigneron was entitled to the supplementary retirement scheme.

The rights established on the basis of capped remuneration paid during the year, would represent for Mr luc Vigneron an annual potential income of 0.97% of the fixed remuneration paid in 2009.

Mr luc Vigneron would have fulfilled the condition of exercise of a complete term of office at the end of the OGM of 2014.


Benefits and rights upon the termination of office of the Company Representative


By virtue of a decision dated 6 March 2008, approved by the General Meeting of 15 May 2008, the Board authorised the conclusion of a regulated agreement which provides for payment to the senior executive and company representa-tive, subject to performance condition, of a compensation on account of the forced termination of his term of office.




subject to the fulfilment of the performance condition set by the Board of Directors, a compensation may be paid to Mr luc Vigneron on account of the termination of his office as the Company Representative, except for serious or gross misconduct.

The compensation would be equal ab initio to a gross amount of €757,000, with this figure increasing on a linear basis to reach at the end of the first term of office (OGM 2014) a maximum compensation amount equal to two years of remu-neration (fixed + variable) received.



Moreover, it was decided to subscribe to an unemployment insurance scheme based on the same performance criterion as for compensation for termination.


These regulated commitments (retirement and compensa-tion) will be submitted to the General Meeting for approval on 20 May 2010 (re. legal publication on the Company’s website).

Financial year 2010:

On 18 February 2010, the Board of Directors also decided the following for financial year 2010, upon the recommenda-tion of the appointments and compensation committee:

• to maintain at €700,000 (gross) the fixed remuneration of Mr luc Vigneron, Chairman & CeO,

• to maintain the targeted variable remuneration at 100% of the fixed remuneration, with a maximum of 137.50% when objectives are exceeded,

that the criteria for determining the 2010 variable remu-neration will be based on a weighting decided by the Board of Directors, quantitative and up to an overall level of 75% (in descending order: the eBIT, the operating cash flow, and

orders taken in the financial year). For the balance, that is 25% of variable remuneration, the board decided to main-tain qualitative criteria for 2010. These criteria will include, but not limited to, the following: management of change (in-cluding continued development of employee competence and employability, and internal communication), delivery of major programmes, deployment of the Probasis performance pro-gramme and the quality of governance.

B. remuneration of other group senior exeCutives

The composition of the general management team has changed several times during the year 2009. Details are provided in the table on page 210.

The information provided below is the total remuneration of the 17 persons who formed part of the general management team up to 10 December 2009 excluding company representatives.

Total remuneration paid during 2009, excluding the two suc-cessive company representatives, amount to a total of 12, 585K€ including 26.1% of variable component in respect of 2008 1 for those still working or a variable component in respect of 2009 for those who have left the Group as well as 27.5% of non-recurrent extraordinary remuneration. as is the case for the Chairman & CeO, the variable component is based on quantitative and qualitative performance criteria.

Details of remuneration paid to the Executive Committee (excluding the Chairman & CEO) in 2008 and 2009

(€ thousands) 2009 Paid during the financial

year (17 members)

2008 Paid during the financial

year (15 members)

Executive Committee (excl. Chairman & CEO)

Fixed remuneration 5,768 5,154

Variable remuneration 3,283 2,940

Extraordinary remuneration 3,468 --

Benefits in kind 66 75

Total before contributions 12,585 8,169

Employer contributions 3,893 2,618

Total charged 16,478 10,787

Furthermore, members of the new executive Committee as defined in the table on page 210 for the last period start-ing on 11 December 2009, other than the Chairman, have a total of 1,162,271 stock options or share subscription options. The breakdown by date of grant and the detailed

characteristics as well as exercises are presented above in the tables on pages 61 and 62 of the summary of operations carried out by senior executives, staff equivalent to execu-tives and related persons (page 28).

1. Variable remuneration in respect of 2009 is payable in 2010.

219

>> ��Profit sharing and participation / Statutory Auditors




PROFIT SHARING

each company may also negotiate an incentive agreement (“Intéressement”) on the basis of indicators which represent its key objectives. as per the terms of the Group profit-shar-ing agreement, it is mandatory to comply with the rule which sets an upper limit on the premium amount (total of incen-tives + profit share) in relation to the payroll.

Nineteen Group companies have thus paid incentives in 2009 in respect of the year 2008 for a total amount of €16.92m.

ernst & young audit

Faubourg de l’arche, 11 allée de l’arche92400 Courbevoierepresented by Mr Michel Gauthier and Mr Nour-eddine Zanouda

Current term approved by the General Meeting of 19 May 2009 expiring with the review of accounts of the financial year 2014.

PARTICIPATION

The Group agreement on pooled profit-sharing (“Participa-tion”) for employees of Thales Group companies, signed on 23 December 2004 by all the trade union organisations represented at Group level, gave rise in 2009, in respect of 2008, to the payment of participation rights amounting to €51.3m. This agreement illustrates the solidarity resolve among Group companies, since all employees are entitled to the same agreement and to a unique special participation reserve distributed on the basis of common criteria.

maZars

61 rue henri Regnault, Tour exaltis92400 Courbevoierepresented by Mr Jean-louis simon


gross sums paid out in inCentives and profit-sharing sChemes in reCent years

E. PROFIT SHARING AND PARTICIPATION

F. AUDITORS

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

STATUTORY AUDITORS

(€ million) 2009 2008 2007 2006 2005

In the Group (a) in France

Profit-share paid 51.30 35.86 31.68 32.51 42.78

Incentives paid 16.92 15.30 15.54 19.15 7.92

By Thales, parent company

Incentives paid 2.77 3.18 2.67 2.57 2.56

(a) scope of consolidation in France, including all 100% joint ventures.



patriCk de CamBourg

61 rue henri Regnault, Tour exaltis92400 Courbevoie


ALTERNATE AUDITORS

AUDITOR FEES

Fees paid to auditors in 2009, and 2008 are presented below (a):

auditex

11 allée de l’arche92400 Courbevoie


Mazars Ernst & Young

Amount (ex-cluding tax)

% Amount (ex-cluding tax)

%

2009 2008 2009 2008 2009 2008 2009 2008

Audit

Auditing, certification, examination of individual and consolidated accounts (b)

- Issuer 740 718 14% 12% 804 561 15% 10%

- Globally consolidated subsidiaries 4,287 4,748 78% 83% 3,751 4,455 69% 79%

Other supports and services directly associated with the assignment of the auditor (c)

- Issuer 50 50 1% 1% 62 40 1% 1%

- Globally consolidated subsidiaries 331 228 6% 4% 457 491 8% 9%

Subtotal 5,408 5,744 99% 100% 5,074 5,547 93% 99%

Other services provided by the network to globally consolidated subsidiaries (d)

Legal, taxation, social 63 -- 1% -- 388 49 7% 1%

Others (if > 10% of auditor fees) -- -- -- -- -- -- -- --

Subtotal 63 0 1% 0% 388 49 7% 1%

Total 5,471 5,744 100% 100% 5,462 5,596 100% 100%

(a) With regard to the period under consideration, these are services provided 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 network uses for the certification of financial statements.(c) This heading includes directly related work and services that are rendered to the issuer or to its subsidiaries:

• by the auditor in compliance with the provisions of article 10 of the Code of Conduct,• by a member of the network in compliance with the provisions of articles 23 and 24 of the Code of Conduct.

d) These are non-audit related services rendered, in compliance with the provisions of article 24 of the Code of Conduct, by a member of the network to subsidiaries of the issuer whose financial statements are being certified.

221

>> ��Thales share




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 Thales 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:

• NYse euronext Paris: CAC Next20 (since 1 august 2006), SBF120 (since 31 December 1990), SBF250 and CAC AllShares.

Note that the market capitalisation used to select NYse euronext Paris companies is calculated on the basis of the free float only 2 and not the total number of issued shares.

For information, at year-end 2009, Thales’s total mar-ket capitalisation was €7,154m, or 6.69% of total CAC Next20 capitalisation. Thales’s free float market capitali-sation, as defined by the Indices steering Committee, was €3,369m.

• International: DJ Eurostoxx, FTSE Eurotop 300.

3. STOCK MARKET INFORMATION AND FINANCIAL COMMUNICATION

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.



3. SHARE PRICE AND TRADING vOLUMES ON NYSE EURONEXT PARIS

a. monthly figures from january 2008 to deCemBer 2009 (share priCes in euros)

No. of trading

days

No. of shares traded

Total value traded (€m)

Average daily

trading

Weighted average

price

High Low Period-end

2009

January 21 13,970,776 453.78 665,275 32.481 34.980 30.230 34.755

February 20 12,115,945 394.11 605,797 32.528 34.705 29.825 32.055

March 22 11,928,587 351.40 542,209 29.458 31.925 27.220 28.540

Q1 2009 63 38,015,308 1,199.29 603,417 31.547 34.980 27.220 28.540

April 20 12,453,876 371.26 622,694 29.81 31.870 27.840 31.550

May 20 17,046,314 541.50 852,316 31.77 34.145 30.725 33.160

June 22 13,215,389 432.70 600,700 32.74 34.370 31.410 31.875

Q2 2009 62 42,715,579 1,345.46 688,961 31.50 34.370 27.840 31.875

July 23 14,821,853 441.07 644,428 29.76 31.875 27.390 29.660

August 21 10,623,575 320.17 505,885 30.14 32.315 28.865 32.000

September 22 11,977,919 398.45 544,451 33.27 34.500 31.360 33.900

Q3 2009 66 37,423,347 1,159.69 567,020 30.99 34.500 27.390 33.900

October 22 8,968,589 308.53 407,663 34.40 36.000 32.380 33.020

November 21 10,441,746 342.26 497,226 32.78 33.845 31.430 32.660

December 22 11,229,097 384.42 510,413 34.23 35.945 32.550 35.945

Q4 2009 65 30,639,432 1,035.21 471,376 33.79 36.000 31.430 35.945

Cumulative total 2009 256 148,793,666 4,739.65 581,225 31.85 36.000 27.220 35.945

2008

January 22 13,179,694 501.44 599,077 38.05 40.91 34.33 38.65

February 21 10,539,379 413.46 501,875 39.23 41.80 36.94 40.59

March 19 11,914,701 481.33 627,090 40.40 42.68 38.32 41.01

Q1 2008 62 35,633,774 1,396.23 574,738 39.18 42.68 34.33 41.01

April 22 11,858,645 495.49 539,029 41.78 43.62 40.39 42.00

May 21 11,972,930 482.33 570,140 40.28 43.25 37.66 40.12

June 21 10,857,375 415.36 517,018 38.26 40.45 35.38 36.20

Q2 2008 64 34,688,950 1,393.17 542,015 40.16 43.62 35.38 36.20

July 23 14,417,505 521.43 626,848 36.17 39.50 33.70 36.42

August 21 7,872,872 297.34 374,899 37.77 40.00 35.51 38.60

September 22 13,207,723 500.15 600,351 37.87 40.34 34.11 35.43

Q3 2008 66 35,498,100 1,318.91 537,850 37.15 40.34 33.70 35.43

October 23 16,861,240 543.76 733,097 32.25 37.35 28.85 31.30

November 20 11,531,013 359.32 576,551 31.16 33.99 28.26 29.39

December 21 9,644,085 281.34 459,242 29.17 30.33 27.52 29.83

Q4 2008 64 38,036,338 1,184.42 594,318 31.14 37.35 27.52 29.83

Cumulative total 2008 256 143,857,162 5,292.72 561,942 36.79 43.62 27.52 29.83

223

>> ��Thales share




B. annual figures from 2008 to 2009 (share priCes in euros)

Price and performance

volatility and liquidity

2009 2008

Closing price 35.945 29.83

Session high 36.000 43.62

Session low 27.220 27.52

Weighted average price 31.85 36.79

Net dividend in respect of the previous year (€) 1.05 1.00

Total shareholder return (a) +24.02% -24.34%

Change in closing price from previous year (%) +20.50% -26.80%

CAC40 performance over the period (%) +22.32% -42.68%

CACNext20 performance over the period (%) (b) +25.36% -47.10%

Thales’s position in reference index (CAC Next20) 14th 5th

(a) Total shareholder return: differential between annual closing prices, plus dividend before tax credit paid during year in respect of previous year, relative to opening price.(b) The CaCNext20 is the reference index since 1 august 2006.

2009 2008

Average session high / low volatility (%) Thales share / reference index (SBF250) 1.32 / 1.58 3.75 / 2.55

Average number of shares traded per session (thousands) 581 562

Number of shares traded over the period (millions) 149 144

Total value traded over the period (€m) 4,740 5,293

Average number of shares traded per month (thousands) 12,399 11,988

Average value traded per month (€m) 394.97 441.06

Total number of shares in capital (period-end) 199.0 198.7

Total number of shares in free float (period-end) (a) 93.7 103.7

(a) In accordance with the definition of free float used by the euronext-Paris Indices steering Committee to calculate the CaC 40 index.



C. graphs and Commentary on share priCe and traded volume data from 1 january 2009 to 31 deCemBer 2009

Share price and traded volumes from 1 january 2009 to 31 December 2009

Comments on share price in 2008 and 2009

In 2008, the Thales share price dropped significantly, down 27% over the year, compared with the CaC40 and CaC Next20, which lost 43% and 47% of their value respectively in 2008, in line with the general decline in stock market val-ues around the world.

In 2009, the Thales share price rose by 20.5%. This in-crease closely compares with the CaC40 and CaC Next20, which gained 22% and 25% respectively, after the declines recorded in 2008.

Comments on traded volumes in 2008 and 2009

In 2008, traded volumes were down slightly on 2007, at 1.4 times the free float, as in the previous year. Volumes were stable over the year, with a slight increase in the fourth quarter.

In 2009, traded volumes reached a daily average of 581,225, an increase compared with 2008. Volumes were

highest in the second quarter and peaked at 852,316 shares traded on average per day in May, the month in which Das-sault aviation became a major shareholder in Thales and re-placed alcatel-lucent as the industrial partner.

4. DIvIDEND POLICY

Dividends are paid to the holder of the share according to law and the articles of association. The Company uses the euroclear 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 Direc-tors, is 31 May of each year, or the next business day. The 2009 dividend will be payable on 31 May 2010 (ex-dividend day: 26 May 2010). 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 accordance with the French tax code, the dividends paid in respect of 2006, 2007 and 2008 qualified for a possible tax reduction of 40%.

Daily share volumes in millions

CAC Next 20 Thales relative

Thales

CAC 40 Thales relative

Jan. 09 Feb. 09 Mar. 09 Apr. 09 May 09 Jun. 09 Jul. 09 Aug. 09 Sep. 09 Oct. 09 Nov. 09 Dec. 09 Jan. 10

5,000,000

4,000,000

3,000,000

2,000,000

1,000,000

0

Closing price:2 January 2009: €30.4931 December 2009:€35.945

high 2009: €36.000low 2009: €27.220

225

>> ��Financial communication policy


Stock market information and financial communicationThe company and the share capital Corporate governance

B. FINANCIAL COMMUNICATION POLICY

1. GENERAL

Thales policy is to provide its shareholders with regular, clear and transparent information, in compliance with the rules and practices applicable to listed companies.

In addition to this reference document, submitted to the French financial markets authority aMF (and which includes the detail of all consolidated accounts and associated analy-sis, business activities and results by segment and the main statutory information about the company), Thales also pub-lishes an interim report as well as regular financial press releases and statements. Other publications include an illus-trated corporate brochure with all the main information about the company and a corporate social responsibility report, outlining its commitments and achievements in this area.

all Thales information documents, presentations and finan-cial press releases are available on the corporate website: www.thalesgroup.com.

Thales holds briefings for the financial community, where nec-essary by audio conference, particularly in relation to the publi-cation of results (full-year accounts, interim accounts, quarter-ly information) or important strategic or financial operations.

Regular meetings between Thales executives and institution-al investors are held in europe and North america, typically as part of roadshows or investor days. These include more detailed information about the company’s business activities and performance as well as guided tours of operational sites.

lastly, Thales maintains permanent dialogue with interna-tional financial analysts and institutional investors to provide them with information about the company’s business activi-ties and strategy.

2. PROvISIONAL FINANCIAL DISCLOSURE DIARY FOR 2010

18 February Consolidated results for 2009

11 May First-quarter 2010 financial information

20 May Ordinary and extraordinary General Meeting of shareholders

26 May ex-dividend day

31 May Payment of dividend on earnings for fiscal 2009

29 July Interim consolidated results for 2010

9 November Third-quarter 2010 financial information

3. CONTACTS

investor relations department

45, rue de Villiers92526 Neuilly-sur-seine cedex - FranceTel.: 33 (0) 1 57 77 89 02Fax: 33 (0) 1 57 77 86 59e-mail: [email protected]

4. ANNUAL INFORMATION DOCUMENT: SHAREHOLDER INFORMATION AvAILABLE

This section lists all information published in the 12 months preceding the filing of this reference document, pursuant to the provisions of article 221-1-1 of the aMF general regulations.

The Thales website (www.thalesgroup.com) makes available to the general public the Group’s articles of association and financial information about the Group.

(in €) 2009 (a) 2008 2007 2006 2005

Dividend before tax credit 0.50 1.05 1.00 0.87 0.83

(a) subject to the vote of the annual General Meeting of 20 May 2010 called to approve the financial statements for 2009. The dividend will be payable on 31 May 2010 (ex-dividend day: 26 May 2010).

Dividends paid in respect of the last five years



full-year results 2008

Investors section > Releases & Publications:• press release of 26 February 2009,• slide presentation of 26 February 2009,• brochure of consolidated full-year results 2008.

Consolidated revenues q1 2009

Investors section > Releases & Publications:• press release of 14 May 2009,• slide presentation of 14 May 2009.

ordinary and extraordinary general meeting of shareholders 2009

Investors section > annual General Meeting:• aGM of 19 May 2009, proposed resolutions,• aGM of 19 May 2009, brochure pursuant to article

R.225-83,• official notice of aGM of 19 May 2009,• preliminary notice of aGM of 19 May 2009,• slide presentation to aGM of 19 May 2009,• press release aGM of 19 May 2009,• quorum and result of ballots aGM of 19 May 2009,• brochure aGM of 19 May 2009.

interim revenues and results 2009

Investors section > Releases & Publications:• press release of 27 July 2009,• slide presentation of 27 July 2009,• consolidated financial statements.

q3 information at 30 septemBer 2009

Investors section > Releases & Publications:• press release of 10 November 2009,• slide presentation of 10 November 2009.

strategiC outlook and planned new organisation, 11 deCemBer 2009

Investors section > Releases & Publications:• press release of 11 December 2009,• slide presentation of 11 December 2009.

full-year results 2009

Investors section > Releases & Publications:• press release of 18 February 2010,• slide presentation of 18 February 2010,• consolidated financial statements.

C. OTHER THALES SECURITIES LISTED

1. EMTN BOND PROGRAMME REDEEMABLE IN 2009

The bonds issued by Thales in November 2006, with a nomi-nal value of €700m, matured in December 2009. These variable-rate bonds (3-month euribor +0.125%) were re-deemed in their entirety.

2. BOND REDEEMABLE IN 2011

In July 2004, Thales made an issue of bonds to the value of €500m, listed on the luxembourg market, at a fixed rate of 4.375% (includes €300m swapped to variable rate) and redeemable in July 2011.

On 9 January 2009, the Group issued a new fungible tranche of this loan to the value of €275m. This €275m tranche has been swapped in its entirety to variable rate.

3. BOND REDEEMABLE IN 2013

In april 2009, Thales made a further issue of bonds to the value of €600m, at a fixed rate of 4.375% (includes €200m swapped to variable rate). The redemption date is april 2013.

General contents................................................................................. 1

Person responsible ............................................................................. 3

Overview .............................................................................................. 4

Timeline ................................................................................................ 6

Key figures ........................................................................................... 7

2009 FINANCIAL INFORMATION .................... 9

1. MANAGEMENT REPORT .......................................... 10

a. management disCussion and analysis of 2009 finanCial statements ................................ 10

1. Business activity ........................................................... 11

1.1. Consolidated revenues .......................................... 11

1.2. Order intake ............................................................. 12

2. Results .............................................................................. 14

2.1. EBIT............................................................................. 14

2.2. Other results............................................................ 15

2.3. Net income ............................................................... 15

3. Financial situation at 31 December 2009 ..... 15

4. Proposed dividend ........................................................ 16

5. views for 2010 ............................................................ 16

B. risk faCtors......................................................................... 17

1. Financial risks ................................................................ 17

1.1. Liquidity ...................................................................... 17

1.2. Interest rates .......................................................... 18

1.3. Foreign exchange rates ........................................ 18

1.4. Stock market risk ................................................... 20

1.5. Off-balance-sheet commitments ......................... 20

1.6. Customer credit ...................................................... 20

2. Legal risks ........................................................................ 21

2.1. Compliance with legislation and regulations .....21

2.2. Litigation .................................................................... 23

3. Risks relating to Thales activities ........................ 23

3.1. Unfavourable trendsin the civil aerospace market .............................. 23

3.2. Programme management .................................... 24

3.3. Political uncertainties ............................................ 25

3.4. Reliance on public spending ................................. 25

3.5. Management of supplier risk .............................. 25

3.6. Raw-materials risk ................................................. 26

4. Environmental risk ....................................................... 26

5. Risks relating to strategicacquisitions and investments ................................. 26

6. Insurance.......................................................................... 27

C. events sinCe year-end .................................................... 27

appendix to management report .................................... 28

Summary statement of company sharetransactions carried out in 2009by directors, non-voting directorsand connected persons................................................... 28

2. CONSOLIDATED FINANCIAL STATEMENTS .................................................................... 29

a. Consolidated profit & loss aCCount ..................... 29

B. Consolidated statements of Comprehensive inCome .............................................. 29

C. Consolidated BalanCe sheet ....................................... 30

d. Consolidated statement of Cash flows ............... 31

e. Consolidated statement of Changes in shareholders’ equity and minority interests .................................................................................. 32

f. notes to the Consolidated finanCial statements ......................................................... 33

1. Accounting policies ...................................................... 33

2. Main events .................................................................... 42

3. Adjusted consolidated profitand loss account .......................................................... 43

4. Information on the basis of comparableconsolidation scopeand foreign exchange rates .................................... 44

5. Information by segment ............................................ 45

6. Impairment of non currentoperating assets........................................................... 48

7. Gain (loss) on disposal of assets and other.......49

8. Financial income (expense) ...................................... 49

9. Income tax ....................................................................... 50

10. Earnings per share .................................................. 52

11. Goodwill .......................................................................... 52

12. Tangible and intangible assets ........................... 53

13. Equity affiliates ........................................................... 54

14. Other non-current financial assets .................. 55

15. Inventories and work-in-progress ...................... 56

16. Construction contracts.......................................... 57

17. Current receivables and payables .................... 58

18. Companies under joint control ........................... 59

19. Related party transactions .................................. 59

20. Shareholders’ equity ................................................ 61

21. Pensions and other employee benefits .......... 67

22. Reserves for contingencies ................................. 70

23. Litigation and environment ................................... 71

24. Net financial debt ..................................................... 72

25. Summary of financial instruments ................... 75

26. Statement of cash flows ....................................... 77

27. Commitments and contingencies ..................... 78

28. Financial risks ............................................................. 79

29. Subsequent events ................................................... 83

30. Fees paid to auditors .............................................. 84

g. list of main Consolidated Companies ......................... 85

h. statutory auditors’ report on the Consolidated finanCial statements ......................... 86

Table of contents>>

227annual report 2009 – Thales

3. PARENT COMPANY MANAGEMENT REPORT AND FINANCIAL STATEMENTS ......... 88

a. management report on the parent Company finanCial statements .................................. 88

1. Revenues and earnings ............................................. 88

2. Balance sheet at 31 December 2009 ............. 88

3. Summary statement of company sharetransactions carried out in 2009by directors, non-voting directorsand connected persons ............................................ 90

4. Reversal of general expensesfurther to tax audit ..................................................... 90

5. Outlook for the current year .................................. 90

6. Proposed appropriation of earnings................... 91

7. Dividend policy ................................................................ 91

8. Events since year-end ................................................ 91

9. Treasury shares ............................................................ 91

10. Authorisations granted at generalmeetings with delegation of powersto the Board of Directors ..................................... 92

11. Main factors of a natureto affect a tender offer .......................................... 93

12. Employee interests in share capitalat 31 December 2009 .......................................... 93

13. Elements comprisingthe parent company report ................................. 94

B. parent Company finanCial statements ................. 95

C. statutory auditors’ report on the annual finanCial statements ..................................... 129

BUSINESS REvIEw .................................................... 131

1. OvERvIEw ........................................................................ 132

a. Business in figures ........................................................ 132

B. international presenCe ................................................ 133

1. workforce and revenues by region .................. 133

2. International presence in figures ....................... 135

C. researCh and innovation ........................................... 136

1. Research an development:the key to competitiveness and growth ......... 136

2. Three key technology domains ............................ 136

3. Close interaction between Thales R&Dteams and the academicand research communities ................................... 137

4. Thales at the heart of innovationecosystems ................................................................... 138

5. A dynamic approach to intellectualproperty management ............................................. 139

d. thales and its suBsidiaries ........................................ 140

1. Simplified organisation chartat 31 December 2009 ........................................... 140

2. Role of the parent companywithin the Group ......................................................... 141

3. Financial flows between the parentcompany and its subsidiaries ............................... 141

e. major operational suBsidiaries and manufaCturing sites ............................................. 141

1. List of main consolidated companies ............... 141

2. Major manufacturing sites .................................... 143

2. AEROSPACE / SPACE .............................................. 144

a. aerospaCe ........................................................................... 144

1. Overview ......................................................................... 144

2. Business review .......................................................... 144

3. Development strategy ............................................. 147

B. spaCe ..................................................................................... 147

1. Overview ......................................................................... 147

2. Business review .......................................................... 147


3. DEFENCE ............................................................................ 149

a. air systems ....................................................................... 149

1. Overview ......................................................................... 149

2. Business review .......................................................... 149


B. land & joint systems ................................................. 153

1. Overview ......................................................................... 153

2. Business review .......................................................... 153


C. naval ..................................................................................... 155

1. Overview ......................................................................... 155

2. Business review .......................................................... 155


4. SECURITY .......................................................................... 158

1. Overview .............................................................................. 158

2. Business review .............................................................. 158

3. Development strategy ................................................ 160



SHAREHOLDERS INFORMATION ................. 161

1. THE COMPANY AND THE SHARE CAPITAL ................................... 162

a. statutory information on the Company ............ 162

B. general meetings ............................................................ 162

1. Notice of meetingsand conditions for attendance ............................ 162

2. Double voting rightsand exercice of voting rights ................................ 163

3. Representations pertainingto exceeding thresholds underthe articles of association ..................................... 163

C. information on issued share Capital and its distriBution ........................................................ 164

1. Change in the share capitalover the last five financial years ......................... 164

2. Change in the distribution of capitaland of voting rightsover the last 3 financial years ............................. 165

3. Major changes in share ownershipover the last five years ............................................ 165

4. Crossing of statutory thresholdsnotified in 2009 .......................................................... 166

d. potential Capital ............................................................. 166

1. Maximum potential capitalas at 31 December 2009 .................................... 166

2. Securities in circulation that provideaccess to capital ........................................................ 167

e. information on the shareholding struCture ......169

1. Breakdown of shareholdingas at 31 December 2009 .................................... 169

2. Shareholders acting in concert .......................... 170

3. Shareholders’ agreement, agreementon the protection of national strategicinterests and specific convention ...................... 170

4. Company-held shares ............................................... 174

4.1. Authority to trade in its own shares ..................174

4.2. Authorisation to cancelthe company’s shares ......................................... 175

4.3. Free allotment of shares .................................... 175

4.4. Share buy-back programmes ............................ 176

5. Shares owned by the public .................................. 178

6. Employee share ownership ................................... 179

f. information on regulated agreements ................ 179

1. Agreements authorised duringprevious financial years whichcontinued to be performed in 2009 ................ 179

2. Regulated agreements authorisedduring the year 2009 .............................................. 179

g. statutory auditors speCial report on regulated agreements and Commitments ........................................................... 182

2. CORPORATE GOvERNANCE ................................ 186

a. Composition of the Board of direCtors............ 186

1. Directors ........................................................................ 186

2. Other persons attendingBoard Meetings (with no voting rights) .......... 193

B. Chairman’s report to the general meeting to Be held on 20 may 2010 on Corporate governanCe, internal Control and risk management ................................ 194

1. Corporate governance ............................................. 194

1.1. Composition, proceduresfor the organisationand functioning of the Board ............................. 194

1.2. Report on Board activity in 2009 ................... 198

1.3. Preparatory work for Board meetings .............198

1.4. Assessment of the functioningof the Board ........................................................... 201

1.5. Restrictions, if any, to the ChiefExecutive Officer’s powers ................................. 201

2. Internal control and risk management ........... 201

2.1. Definition and scope of internalcontrol at Thales ................................................... 201

2.2. The audit environment ........................................ 202

2.3. Identification and analysis of major risks ...... 204

2.4. Major risk managementand internal control activities ............................ 205

2.5. Overseeing the internal control system............. 207

C. statutory auditors’ report prepared in aCCordanCe with artiCle l. 225-235 of the frenCh CommerCial Code (Code de CommerCe) on the report prepared By the Chairman of the Board of direCtors of thales .................................................. 209


d. Corporate management .............................................. 210

1. Changes in the compositionof the management team duringthe year 2009 ............................................................. 210

2. Composition of the Executive Committeeat 1st March 2010 .................................................... 211

3. Director’s remuneration ....................................... 211

e. profit sharing and partiCipation ............................ 219

f. auditors ................................................................................ 219

3. STOCK MARKET INFORMATION AND FINANCIAL COMMUNICATION ............. 221

a. thales share ..................................................................... 221

1. Listing ............................................................................... 221

2. Share indices ................................................................ 221

3. Share price and tradingvolumes on NYSE Euronext Paris...................... 222

4. Dividend policy .............................................................. 224

B. finanCial CommuniCation poliCy .............................. 225

1. General ............................................................................ 225

2. Provisional financial disclosurediary for 2010 ............................................................. 225

3. Contacts ......................................................................... 225

4. Annual information document:shareholder information available...................... 225

C. other thales seCurities listed ................................ 226

1. EMTN bond programme redeemablein 2009 ........................................................................... 226

2. Bond redeemable in 2011 .................................... 226

3. Bond redeemable in 2013 .................................... 226

Table of contents ............................................................................. 227

european cross-reference list ....................................................... 231

Reconciliation table for annual financial report ............................ 235

European cross reference list>>

INFORMATION REQUIRED BY ANNEX I OF REGULATION (EC) NO. 809/2004

No Title Page(s)

1. Persons responsible

1.1. Persons responsible for the information given in the reference document 3

1.2. Declaration by persons responsible for the reference document 3

2. Statutory auditors

2.1. Names and addresses of the company’s auditors 219-220

2.2. Auditors having resigned, been removed and not having been re-appointed during the period covered N/A

3. Selected financial information

3.1. Selected historical financial information 7 and 132

3.2. Comparative data from prior financial years N/A

4. Risk factors 17 to 27

5. Information about the company

5.1. History and development of the company 6

5.1.1. Legal and commercial name of the company 162

5.1.2. Place of registration of the company and its registration number 162

5.1.3. Date of incorporation and the length of life of the company 162

5.1.4. Domicile and legal form of the company, the legislation under which the company operates, its country of incorporation, and the address and telephone number of its registered office 162

5.1.5. Important events in the development of the company’s business 6

5.2. Investments

5.2.1. Principal investments for each financial year for the period covered by the historical financial information up to the date of the reference document 15, 16, 31, 77

5.2.2. Principal investments in progress N/A

5.2.3. Principal future investments on which the company’s management bodies have already made firm commitments N/A

6. Business overview

6.1. Principal activities 132 to 161

6.1.1. Nature of the company’s operations and its principal activities 144 to 160

6.1.2. Significant new products and/or services that have been introduced 144 to 160

6.2. Principal markets 144 to 149, 153, 155, 158

6.3. Exceptional factors influencing the information given pursuant to items 6.1. and 6.2. N/A

6.4. Summary information regarding the extent to which the company is dependent, on patents or licences, industrial, commercial or financial contracts or new manufacturing processes

p. 22, §2.1.4

6.5. Basis for statements made by the company regarding its competitive position 144, 145, 146, 148, 149

7. Organisational structure 140

7.1. Description of the Group and the company’s position within the Group 4, 141

7.2. List of the company’s significant subsidiaries 141 to 143

8. Property, plants and equipment

8.1. Existing or planned material tangible fixed assets 53, 54, 143

8.2. Environmental issues that may affect the company’s utilisation of the tangible fixed assets 72

9. Operating and financial review

9.1. Financial condition, changes in financial condition and results of operations for each year and interim period, for which historical financial information is required 10 to 29

9.2 Operating results 10 to 16

9.2.1. Significant factors, including unusual or infrequent events or new developments, materially affecting the company’s income from operations 10 to 16


No Title Page(s)

9.2.2. Discussion of reasons for material changes in net sales or revenues disclosed in financial statements 10 to 16

9.2.3. Governmental, economic, fiscal, monetary or political policies or factors that have materially affected, or could materially affect, directly or indirectly, the company’s operations from 10 to 15 then 25

10. Capital resources

10.1. Information concerning the company’s capital resources (both short and long term) 16, 61, 72 to 74 and 164

10.2. Sources and amounts and description of the company’s cash flows 16, 31 and 77

10.3. Borrowing requirements and funding structure of the company 72 to 74 and 226

10.4. Information regarding any restrictions on the use of capital resources that have materially affected, or could materially affect, directly or indirectly, the company’s operations

17 to 21

10.5. Information regarding the anticipated sources of funds needed to fulfil commitments referred to in items 5.2.3. and 8.1. 16, 61, 72 to 74 and 164

11. Research and development, patents and licences 22, 136 to 139

12. Trend information

12.1. Recent trends in production, sales and inventory, and costs and selling prices since the end of the last financial year to the date of the reference document N/A

12.2. Known trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on the company’s prospects for at least the current financial year 27

13. Profit forecasts or estimates N/A

13.1. Statement of principal assumptions upon which the company has based its forecast or estimate N/A

13.2. Report prepared by independent accountants or auditors N/A

13.3. Profit forecast or estimate prepared on a basis comparable with the historical financial information N/A

13.4. Statement setting out whether or not the forecast of estimate is still correct as at the time of the reference document, and an explanation of why such forecast is no longer valid if that is the case N/A

14. Administrative, management, and supervisory bodies and senior management

14.1. Names, business addresses and functions in the company of the following persons and an indication of the principal activities performed by them outside that company where these are significant with respect to that company: a) members of the administrative, management or supervisory bodies; b) partners with unlimited liability, in the case of a limited partnership with a share capital; c) founders, if the company has been established for fewer than five years; and d) any senior manager who is relevant to establishing that the company has the appropriate expertise and experience for the management of the company’s business. The nature of any family relationship between any of those persons. In the case of each member of the administrative, management or supervisory bodies of the company and of each person mentioned in points (b) and (d) of the first subparagraph, details of that person’s relevant management expertise and experience and the following information: (a) the names of all companies and partnerships of which such person has been a member of the administrative, management or supervisory bodies or partner at any time in the previous five years; (b) any convictions in relation to fraudulent offences for at least the previous five years; (c) details of any bankruptcies, receiverships or liquidations for at least the previous five years; (d) details of any official public incrimination and/or sanctions of such person by statutory or regulatory authorities and whether such person has ever been disqualified by a court from acting as a member of the administrative, management or supervisory bodies of an company or from acting in the management or conduct of the affairs of any company for at least the previous five years.Statement to the effect that there is no such information to be disclosed.

186 to 193

14.2. Administrative, management, and supervisory bodies and senior management conflicts of interests, and understandings reached 179 to 181

15. Remuneration and benefits

15.1. Amount of remuneration paid and benefits in kind granted by the company and its subsidiaries 211 to 218

15.2. Total amounts set aside or accrued by the company or its subsidiaries to provide pension, retirement or similar benefits 217 and 218

16. Board practices


No Title Page(s)

16.1. Date of expiration of the current term of office and period during which the person has served in that office 186 to 193

16.2. Information about members of the administrative, management or supervisory bodies’ service contracts with the company or any of its subsidiaries providing for benefits upon termination of employment, or an appropriate negative statement

196

16.3. Information about the company’s audit committee and remuneration committee 198 to 201

16.4. Statement as to whether or not the company complies with its country of incorporation’s corporate governance regime 196

17. Employees

17.1. Number of employees at the end of the period or the average for each financial year for the period covered by the historical financial information, and breakdown of persons employed by main category of activity and geographic location

45, 46, 132, 135

17.2. Shareholdings and stock options. Information as to share ownership and options of company directors

61, 62, 215 and 216 for Denis Ranque and Luc Vigneron

17.3. Arrangements for involving the employees in the capital of the company 219

18. Major shareholders

18.1. Name of any person other than a member of the administrative, management or supervisory bodies who, directly or indirectly, has an interest in the company’s capital or voting rights which is notifiable under the company’s national law, together with the amount of each such person’s interest or, if there are no such persons, an appropriate negative statement

169

18.2. Statement as to whether the company’s major shareholders have different voting rights, or an appropriate negative statement 163

18.3. Direct or indirect ownership or control of the company 169 to 174

18.4. Arrangements, known to the company, the operation of which may at a subsequent date result in a change in control of the company N/A

19. Related party transactions 59 and 60

20. Financial information concerning the company’s assets and liabilities, financial position and profits and losses

20.1. Historical financial information 7, 29 to 85, 95 to 128

20.2. Pro forma financial information N/A

20.3. Financial statements 29 to 85

20.4. Auditing of historical annual financial information

20.4.1. Statement that the historical financial information has been audited 86, 87, 129 and 130

20.4.2. Other information in the reference document which has been audited by the auditors 182 to 185 and 209

20.4.3. Indication and source of financial data in the reference document that is not extracted from the company’s audited financial statements N/A

20.5. Age of latest financial information 33

20.6. Interim and other financial information

20.6.1. Quarterly or half yearly financial information published since the date of last audited financial statements, with audit or review report if applicable N/A

20.6.2. Interim financial information, which may be unaudited, covering at least the first six months of the financial year if the reference document is dated more than nine months after the end of the last audited financial year

N/A

20.7. Dividend policy 224

20.7.1. Dividend per share 224

20.8. Legal and arbitration proceedings 23

20.9. Significant change in the company’s financial or trading position N/A

21. Additional information

21.1. Share capital

21.1.1. Amount of issued capital, number of shares authorised, number of shares issued and fully paid and issued but not fully paid, par value per share, and reconciliation of the number of shares outstanding at the beginning and end of the year

164 and 165


No Title Page(s)

21.1.2. Shares not representing capital N/A

21.1.3. Number, book value and face value of shares in the company held by or on behalf of the company itself or by subsidiaries of the company 174 to 177

21.1.4. Amount of convertible securities, exchangeable securities or securities with warrants N/A

21.1.5. Information about and terms of any acquisition rights and or obligations over authorised but unissued capital or an undertaking to increase the capital 166 to 169

21.1.6. Information about any capital of any member of the Group which is under option or agreed conditionally or unconditionally to be put under option N/A

21.1.7. History of share capital for the period covered by the historical financial information 164 and 165

21.2. Memorandum and articles of association

21.2.1. Company’s objects and purposes 162

21.2.2. Members of the administrative, management and supervisory bodies 186 to 193 and 210 to 211

21.2.3. Rights, preferences and restrictions attaching to each class of the existing shares 163

21.2.4. Action necessary to change the rights of holders of the shares 162, 163

21.2.5. Conditions governing the manner in which annual general meetings and extraordinary general meetings of shareholders are called including the conditions of admission 162, 163

21.2.6. Provision(s) of the company’s articles of association, statutes, charter or bylaws that would have an effect of delaying, deferring or preventing a change in control of the company 93 and 170 to 174

21.2.7. Indication of the articles of association, statutes, charter or bylaw provisions, if any, governing the ownership threshold above which shareholder ownership must be disclosed 162, 163

21.2.8. Conditions imposed by the memorandum and articles of association statutes, charter or bylaw governing changes in the capital, where such conditions are more stringent than is required by law

170 to 174

22. Material contracts (other than contracts entered into in the ordinary course of business) N/A

23. Third party information, statements by experts and declarations of interest

23.1. Information about persons establishing statements or reports N/A

23.2. Confirmation that information has been accurately reproduced and that no facts have been omitted which would render the reproduced information inaccurate or misleading N/A

24. Documents on display 225 and 226

25. Information on holdings 141 to 143


Parent company financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

Consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Parent company management report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

Management report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Statutory auditors’ report on the annual financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

Statutory auditors’ report on the consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

Declaration by person responsible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Chairman’s report to the General Meeting to be held on 20 May 2010 on Corporate governance, internal control and risk management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194

Statutory auditors’ report on Chairman’s report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

Fees paid to auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220

Annual information document: Shareholder information available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225

Reconciliation table for annual financial report>>


Design / production: créapix - Paris

Paper: 60% recycled - 40% FsC - Imprimerie auffret-Plessix -

The English language version of this report is a free translation from the original, which was prepared and filed with the Autorité des Marchés Financiers in French language. All possible care has been taken to ensure that the translation is accurate presentation of the original. However, in all matters of interpretation, views or opinion expressed in the original language version of the document in French take precedence over the translation.

www.thalesgroup.com

Thales45 rue de Villiers

92526 Neuilly-sur-SeineFrance

Tél. : + 33 (0)1 57 77 80 00www.thalesgroup.com

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