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FINANCIAL STATEMENTS
AND CORPORATE
GOVERNANCE

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Financial Policy

A message from the Chief Operating Ofﬁcer for Finance

Dear
Shareholders,Customers andEmployees,

Hans Peter Ring
COO for Finance

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Financial Policy

2005 was the best year ever in EADS history. Financial
discipline, vigorous business development, a strong
management team and a dedicated workforce- theseremain the success factors for delivering excellent
financial performance for the sixth consecutive year!
Airbus leadership continued in 2005, the best year everin terms of deliveries, order intake and profitability. The€93 billion order intake achieved in 2005 validates our belief
that the aviation market remains in a vigorous up-cycle. Most
impressively, our order backlog of over €250 billion is at
historic levels – offering five years of forward visibility.
The civil helicopter, freighter conversion and turboprop
businesses performed exceptionally well. Our defence
businesses also contributed stronger results and Space
continued its recovery by posting further improved results.
This is fresh evidence that EADS is becoming a successfullybalanced concern in almost every relevant aerospace segment.
Another favourable development was the partial recovery of
the U.S. Dollar in 2005. Cautiousness is still required however.
We, therefore, strengthened our hedge book appropriately, inline with business conservatism and sound profitability targets.
Existing cost-savings programs such as Airbus Route 06
continued to be actively pursued. And we see further
cost-savings potential across our other businesses.
During 2005, we maintained significant cash reserves of over
€5 billion. We have deliberately conserved cash in orderto give us the financial flexibility to: fund new internal
initiatives; invest in innovation; and take advantage ofbusiness development and M&A opportunities as they arise.
Moreover, a conservative approach to cash is a key element of
our single A rating – a real competitive asset in our industry.
EADS now has a strong basis for future growth.
All the fundamentals are in place. The next phasein our history of ambitious achievement will becharacterized by three paths or enablers of growth:internationalisation, innovation, and improvement.
Internationalisation means enhancing our position in thegrowth markets of the world. We are implementing thisprocess through a targeted combination of direct investment,
strategic partnerships, and M&A, backed by a global
procurement network. The mix will be specifically adapted
to the local or regional context, as we look toward Asiaand the Americas for new sources of high margin sales.

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Innovation is already a hallmark of EADS – As our A380
illustrates. Yet the task we have set before the company is tobring to market breakthrough products at a more accelerated
pace. Behind the scenes, we are focusing intensely on
making our industrial and management processes morecreative, more cutting edge. We want to ensure thatmanagement is looking ahead, targeting the necessary
resources on the types of innovation that deliver the best
overall value for our military and commercial customers.
Improvement in performance must be a constanttask of management. We are determined to deliver
impressive results for our shareholders in 2006 andbeyond. Indeed, our aspiration is to achieve performancestandards which are benchmark for our industry.
Improvement also means being best-in-class when it comesto business intelligibility. In 2005, we implemented our
integrated state-of-the-art Risk Management and Internal
Control system. This system augments an already impressivearray of tools which enable high transparency in ourreporting. Given the long-term nature of our businesses
and required investments we consider that the further
development of the Risk Management processes are crucial
for actively steering towards a predictable, sustainably
excellent and constantly improving organisation.
Finally, we are seeing a further maturation in the EADS
shareholder structure. On 9th April 2006, two of our founding
shareholders, DaimlerChrysler and Lagardère SCA, announced
their intention to reduce their holdings while still remaining
committed to being long-term shareholders of EADS. This
increases the free float, both now and over the next three years,
enhancing the attractiveness of EADS as a global investment.
We are looking forward to an exciting 2006, and todelivering the results you have come to expect of EADS.
Yours truly,

Hans Peter Ring
Chief Operating Officer for Finance

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EADS Registration Document
Part 1(Financial Statements and Corporate Governance)
European Aeronautic Defence and Space Company EADS N.V. (the “Company” or “EADS”) is a Dutch company, which
is listed in France, Germany and Spain. Given this fact, the applicable regulations with respect to public information andprotection of investors, as well as the commitments made by the Company to securities and market authorities, are describedin this Registration Document (the “Registration Document”).
This Registration Document was prepared in accordance with Annexe 1 of the EC Regulation 809 / 2004,
filed in English with, and approved by, the Autoriteit Financiële Markten (the “AFM”) on 26th April
2006 in its capacity as competent authority under the Wet toezicht effectenverkeer 1995 (as amended)pursuant to the Directive 2003 / 71 / EC. When used as a Registration Document, this document
entitled Financial Statements and Corporate Governance - (Registration Document Part 1) must
be read in conjunction with the document entitled Business, Legal and Corporate Responsibility (Registration Document Part 2). This Registration Document may be used in support of a financialtransaction as a document forming part of a prospectus in accordance with Directive 2003 / 71 / EC
only if it is supplemented by a securities note and a summary approved by the AFM.

EADS Financial Statements and Corporate Governance

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Financial Statements
and Corporate GovernanceRegistration Document - Part 1

Risk Factors

1

Net Assets,
Financial Position,
Results2

Corporate
Governance3

Outlook

EADS Financial Statements and Corporate Governance

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1

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General Table of Contents / Registration Document — Parts 1 and 2

Financial Statements
and Corporate GovernanceRegistration Document – Part 1
Risk Factors

p. 7

1.

Financial Market Risks

p. 8

2.

Business-Related Risks

p. 10

3.

Legal Risks

p. 13

4.

Industrial and Environmental Risks

p. 14

Chapter 1 - Net Assets
Financial Position Results
1.1

1.1.1

Management’s Discussion
and Analysis of Financial Condition
and Results of Operations

p. 15

1.1.5

EADS Results of Operations
Consolidated Revenues
Consolidated Cost of Sales
Consolidated Selling and Administrative Expenses
Consolidated Research and Development Expenses
Consolidated Other Income and Other Expense
Consolidated Amortisation of Goodwill
Consolidated Share of Profit from Associates and Other Income(Expense) from Investments
Consolidated Interest Result
Consolidated Other Financial Result
Consolidated Income Taxes
Consolidated Minority Interests
Consolidated Net Income (Profit for the Period Attributable
to Equity Holders of the Parent)
Earnings per Share (EPS)

1.1.6

Statement of Changes in Consolidated
Total Equity (including Minority Interests)
IAS 39 Related Impact on AOCI
Currency Translation Adjustment Impact on AOCI

p. 16

Certain Information
Exchange Rate Information
Ratings

p. 16
17
17

1.1.2

Overview

p. 17

1.1.3

Critical Accounting Considerations,
Policies and Estimates

p. 18
p. 18
p. 19
p. 19
p. 20

1.1.4

p. 22

1.1.4.1 Order Backlog
1.1.4.2 Use of EBIT*
1.1.4.3 EBIT* Performance by Division

32
33
33
33
34
34
34
p. 35
35
36

Liquidity and Capital Resources

p. 36

1.1.7.1 Cash Flow
1.1.7.2 Consolidated Cash and Cash Equivalents
1.1.7.3 Consolidated Financial Liabilities
1.1.7.4 Sales Financing

p. 37
p. 39
p. 40
p. 40

1.1.8

1.1.3.1 Scope of and Changes in Consolidation Perimeter
1.1.3.2 Fair Value Adjustments
1.1.3.3 Impairment of Assets
1.1.3.4 Research and Development Expenses
1.1.3.5 Accounting for Hedged Foreign Exchange
Transactions in the Financial Statements
1.1.3.6 Accounting for Foreign Currency DenominatedOperations in the Financial Statements
1.1.3.7 Accounting for Sales Financing Transactionsin the Financial Statements

Measurement of Management’s Performance

1.1.7

p. 28
29
31
32
32
32
32

Hedging Activities

1.1.8.1 Foreign Exchange Rates
1.1.8.2 Interest Rates

1.2

Financial Statements

1.2.1

Consolidated Financial Statements (IFRS)

p. 20

Appendix: Information on principal
investments - Consolidation Scope

p. 21

p. 44
p. 44
p. 46

p. 47
p. 48

p. 1051.2.2

Company Financial Statements

p. 112

1.3

Statutory Auditors’ Fees

p. 124

1.4

Information Regarding
the Statutory Auditors

p. 125

p. 21

p. 22
p. 24
p. 25

2 I EADS Financial Statements and Corporate Governance

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General Table of Contents / Registration Document — Parts 1 and 2

Chapter 2 Corporate Governancep. 127

2.1

Management and Control

2.1.1

Board of Directors, Chairmen and Chief Executive
Officers
p. 1282.1.2

Audit Committee

p. 1382.1.3

Remuneration and Nomination Committee

p. 1392.1.4

Executive Committee

p. 1392.1.5

Internal Control and Risk Management Systems

p. 1412.1.5.1 Overview
2.1.5.2 Risk Management System
2.1.5.3 Internal Control Framework
2.1.5.4 Business Processes Covered
by Internal Control Framework
2.1.5.5 Outlook for Evolution of EADS’ IC and RM Systems

p. 141
p. 142
p. 1432.2
2.2.1

Interests of Directors
and Principal Executive Officers

p. 128

Options Granted to the Two
Chief Executive Officers

p. 1502.2.3

Related Party Transactions

p. 1502.2.4

Loans and Guarantees Granted to Directors

p. 151

2.3

Employee Profit Sharing
and Incentive Plans

p. 152

2.3.2

Employee Share Offeringp. 152

2.3.3

Options Granted to Employees

p. 155

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2006 Financial Outlook

p. 1603.2

2006 Calendar of Financial
Communication

p. 161

p. 152

Employee Profit Sharing
and Incentive Agreements

EADS Financial Statements and Corporate Governance

3.1

p. 149p. 1492.3.1

159

p. 144
p. 148Compensation Granted to Directors
and Principal Executive Officers

2.2.2

Chapter 3 - Outlook

3

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General Table of Contents / Registration Document — Parts 1 and 2

EADS Business, Legaland Corporate Responsibility
Registration Document – Part 2
Chapter 1 - Information
on EADS Activities
1.1

Presentation of the EADS Group

1.1.1

Overview

2.2

Sustainable Growth

p. 7

2.2.1

Product Quality and Customer Satisfaction

p. 69

p. 8

2.2.2

Sustaining and Protecting Innovation

p. 71

2.2.3

Supplier Management: Fosteringa Mutually Beneficial Relationshipwith EADS’ Suppliers

p. 74

2005 Highlights
Strategy
Organisation of EADS Businesses
Summary Financial and Operating Data
Relationship Between EADS N.V. and the Group

p. 8
8
8
10
12
13

1.1.2

Airbus

p. 14

1.1.3

Military Transport Aircraft

p. 23

1.1.4

Eurocopter

p. 28

1.1.5

Defence & Security Systems

p. 32

1.1.6

Space

p. 42

1.1.7

Other Businesses

p. 50

1.1.8

Investments

p. 52

1.1.9

Insurance

p. 53

1.1.10 Legal and Arbitration Proceedings

p. 54

1.1.11 Incorporation by Reference

p. 55

1.2

Recent Developments

Chapter 2 - Corporate Social
Responsibility

p. 56

p. 59

2.1

Business Ethics

2.1.1

Proper Business Practices

2.1.2

Compliance with Law Regarding
all EADS’ Activities

p. 65

Corporate Governance Standards

p. 67

2.1.3

p. 63

2.1.3.1 Policy
2.1.3.2 Organisation

2.3

Environmental Care

2.3.1

Policy

p. 78

2.3.2

Organisation

p. 78

2.3.3

Performance and Best Practices

p. 79

2.4

Human Resources: Employer –Employee Relationship

2.4.1

p. 78

p. 82

Workforce Information
and Organisation of Work

p. 82

2.4.2

Human Resources Organisation

p. 83

2.4.3

Human Resources Policies and performances

p. 84

2.4.3.1 Health and Safety: Providing a Safe
Workplace for EADS Employees and Subcontractors
2.4.3.2 Caring for EADS Employees
and EADS Know How Policy
2.4.3.3 Diversity: Commitment to Ensure
Equal Opportunity for all EADS Employees
2.4.3.4 Career Development: Efficient Managementof Skills and Know-How
2.4.3.5 Employee Relations: A Proactive Dialogue

2.5

Corporate Citizenship2.5.1

Maintaining an Open Dialogue
with EADS’ Stakeholders

p. 63

p. 68
p. 68

p. 69

2.5.1.1 Policy
2.5.1.2 Organisation
2.5.1.3 Performance and Best Practices

2.5.2

Encompassing Community Interests
in EADS’ Global Strategy

2.5.2.1 Policy
2.5.2.2 Organisation
2.5.2.3 Performance and Best Practices

p. 84
p. 84
p. 85
p. 87
p. 90

p. 92
p. 92
p. 92
p. 92
p. 92
p. 93
p. 93
p. 93
p. 93

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General Table of Contents / Registration Document — Parts 1 and 2

Chapter 3 - General Descriptionof the Company and its Share
Capitalp. 95

3.3

Shareholdings and Voting Rights

3.3.1

Shareholding Structurep. 111

3.3.2

Relationships with Principal Shareholders

p. 113

3.1

General Description of the Company

3.3.3

Form of Sharesp. 1193.1.1

Commercial and Corporate Names,
Seat and Registered Office

3.3.4
p. 96

Changes in the Shareholdingof the Company Since its Incorporation

p. 1193.1.2

Legal Form

p. 96

3.3.5

Persons Exercising Control over the Company

p. 1213.1.3

Governing Law — Dutch Regulations

p. 96
97
99

3.3.6

Simplified Group Structure Chart

p. 1213.1.3.1 Ongoing Disclosure Obligations
3.1.3.2 Disclosure of Specific Information

3.3.7

Purchase by the Company of its Own Sharesp. 123

Date of Incorporation and Durationof the Company

p. 101

3.1.5

Objects of the Company

p. 101

3.1.6

Commercial and Companies Registryp. 101

3.1.7

Inspection of Corporate Documents

p. 101

3.1.8

Financial Year

p. 101

3.1.9

Allocation and Distribution of Income

p. 102

3.1.4

p. 96

p. 111

3.3.7.1 Dutch Law and Information
on Share Buy-Back Programmes
3.3.7.2 French Regulations
3.3.7.3 German Regulations
3.3.7.4 Spanish Regulations
3.3.7.5 Description of the Share Buy-Back Programme
to be Authorised by the Annual General Shareholders’Meeting to be held on 4th May 2006

p. 123
p. 123
p. 124
p. 124

p. 124

3.4

Dividends

p. 1283.4.1

Dividends and Cash Distributions Paid
Since the Incorporation of the Company

p. 1283.1.9.1 Dividends
3.1.9.2 Liquidation

p. 102
p. 102

3.1.10 General Meetingsp. 102

3.4.2

Dividend Policy of EADS

p. 1283.1.10.1 Calling of Meetings
3.1.10.2 Right to Attend Meetings
3.1.10.3 Majority and Quorum
3.1.10.4 Conditions of Exercise of Right to Vote

p. 102
p. 102
p. 103
p. 1043.4.3

Unclaimed Dividends

p. 1283.4.4

Taxationp. 129

3.5

Annual Securities Disclosure Report

3.1.11 Disclosure of Holdings

p. 1043.1.12 Mandatory Tender Offers

p. 1063.2
3.2.1

General Descriptionof the Share Capital

p. 108

Modification of Share Capitalor Rights Attaching to the Sharesp. 1083.2.2

Issued Share Capital

p. 1083.2.3

Authorised Share Capital

p. 1093.2.4

Securities Granting Accessto the Company’s Capital

p. 109Changes in the Issued Share Capital
Since Incorporation of the Company

p. 1103.2.5

EADS Financial Statements and Corporate Governance

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p. 131

Chapter 4 - Entity Responsible
for the Registration Document 133
4.1

Entity Responsible
for the Registration Document

p. 134

Statement of the Entity Responsible
for the Registration Document

p. 134

4.3

Information Policyp. 135

4.4

Undertakings of the Company
Regarding Information

p. 1354.2

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6 I EADS Financial Statements and Corporate Governance

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Risk Factors
1.

Financial Market Risks

p. 12

2.

Business-Related Risks

p. 14

3.

Legal Risks

p. 17

4.

Industrial and Environmental Risks

p. 18

EADS Financial Statements and Corporate Governance

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Risk Factors
1. Financial Market Risks

EADS and its subsidiaries (the “Group”) are subject to many risks and uncertainties that may affect its financial performance.
The business, financial condition or results of operations of EADS could be materially adversely affected by the risks described
below. These risks are not the only ones facing EADS. Additional risks not presently known to EADS or that it currently
deems immaterial may also impair its business operations.

1. Financial Market Risks
Exposure to Foreign Currencies
EADS’ revenues are mainly denominated in U.S. Dollars,
while a substantial portion of its costs is incurred in Euroand Pounds Sterling. Consequently, to the extent EADS
were not to use financial instruments to cover its exposure
resulting from this foreign currency mismatch, its profits
would be affected by changes in the Euro-U.S. Dollar andPound Sterling- U.S. Dollar exchange rates. EADS has,
therefore, implemented an exchange rate strategy in orderto manage and minimize such exposure. In order to secure
the rates at which U.S. Dollar revenues (arising primarily
at Airbus and in the commercial satellite business) areconverted into Euro or Pounds Sterling, EADS manages along-term hedging portfolio. There are complexities inherent
in determining whether and when foreign exchange rate
exposure of EADS will materialize, in particular given thepossibility of unpredictable revenue variations arising fromorder cancellations and postponements. Furthermore, as asignificant portion of EADS’ foreign currency exposure ishedged through contractual arrangements with third parties,
EADS is exposed to the risk of non-performance by its
approximately 40 hedging counterparties. No assurances may
be given that EADS’ exchange rate hedging strategy willprotect it fully from significant changes in the exchange rateof the U.S. Dollar to the Euro and the Pound Sterling andthat such changes will not affect its results of operation andfinancial condition.
EADS’ consolidated revenues, costs, assets and liabilities
denominated in currencies other than the Euro are translated
into the Euro for the purposes of compiling its financial
statements. As EADS’ exchange rate hedging strategy aims
to cover its cash flows, and, to a large extent, EBIT*, changes
in the value of these currencies relative to the Euro will havean effect on the Euro value of EADS’ reported revenues,
costs, assets and liabilities and, to a lesser extent, EBIT*.
Currency exchange rate fluctuations in those currencies
other than the U.S. Dollar in which EADS incurs its
principal manufacturing expenses (mainly the Euro) may
have the effect of distorting competition between EADS
and competitors whose costs are incurred in other currencies.
This is particularly true with respect to fluctuations relative
to the U.S. Dollar, as many of EADS’ products and thoseof its competitors (e.g., in the defence export market) are
priced in U.S. Dollars. EADS’ ability to compete withcompetitors may be eroded to the extent that any of EADS’
principal currencies appreciates in value against the principal
currencies of such competitors.
See “1.1.4.3 EBIT* Performance by Division — Hedging
Impact on EBIT*” for a discussion of EADS’ foreign currency
hedging policy. See “1.1.3.5 Accounting for Hedged Foreign
Exchange Transactions in the Financial Statements” fora summary of EADS’ accounting treatment of foreign
currency hedging transactions.

Exposure to Sales Financing Risk
In support of sales, EADS (primarily through Airbus
and ATR with respect to commercial aircraft) may agree
to participate in the financing of customers. As a result,
EADS has a significant portfolio of leases and otherfinancing arrangements with airlines. The risks arising from
EADS’ sales financing activities may be classified into two
categories: (i) credit risk, which concerns the customer’sability to perform its obligations under a financing
arrangement and (ii) aircraft value risk, which primarily
relates to unexpected decreases in the future value of aircraft.
Measures taken by EADS to mitigate these risks include

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Risk Factors
1. Financial Market Risks

optimised financing and legal structures, diversification
over a number of aircraft and customers, credit analysis offinancing counterparties, provisioning for the credit and asset
value exposure, and transfers of exposure to third parties.
No assurances may be given that these measures will protect
EADS fully from defaults by its customers or significant
decreases in the value of the financed aircraft in the resalemarket.
EADS’ sales financing arrangements expose it to aircraft
value risk, because it retains collateral interests in aircraft
for the purpose of securing customers’ performance of theirfinancial obligations to EADS, and because it guarantees
part of the market value of certain aircraft during limited
periods after their delivery to customers. Under adverse
market conditions, the market for used aircraft could
become illiquid and the market value of used aircraft could
significantly decrease below projected amounts. In the eventof a financing customer default at a time when the market
value for a used aircraft has unexpectedly decreased, EADS
would be exposed to the difference between the outstanding
loan amount and the market value of the aircraft. Similarly,
if an unexpected decrease in the market value of a given
aircraft coincided with the exercise window of an asset
value guarantee (“AVG”) with respect to that aircraft,
EADS would be exposed to losing as much as the difference
between the market value of such aircraft and the AVG
amount. No assurances may be given that the provisions
taken by EADS will be sufficient to cover these potential
shortfalls.
Through the Airbus Asset Management Division or as aresult of past financing transactions, EADS is the ownerof used aircraft, exposing it directly to fluctuations in themarket value of these used aircraft.

Counterparty Credit Risk
EADS is exposed to credit risk to the extent of nonperformance by its financial instrument counterparties.
However, the Group has policies in place to avoid
concentrations of credit risk and to ensure that credit risk islimited.

exposure. This limit system assigns maximum exposurelines to counterparties of financial transactions, based
at a minimum on their credit ratings as published byStandard & Poor’s, Moody’s and Fitch IBCA. The respective
limits are regularly monitored and updated.
As counterparty credit risk also arises in the context of sales
financing transactions, EADS’ general policy is to provide
financing to customers and through structures with anappropriate credit standing. See “1.1.7.4 Sales Financing”.

Exposure on Equity Investment Portfolio
EADS holds several equity investments for industrial
reasons. None of the equity investments are held for
speculative or trading purposes. Equity investments areeither accounted for using the equity method (associatedcompanies), if EADS has the ability to exercise significant
influence, or at fair value. If fair value is not readily
determinable, the investment is measured at cost.
Changes in the value of equity investments mainly dependon their performance. EADS’ principal investment inassociates is Dassault Aviation. The net asset value of thisinvestment was €1.9 billion at 31st December 2005. EADS
considers its risk to unexpected changes in the value of
Dassault Aviation as well as to all other associated companies
as remote.
For equity investments other than associates, which make up
only a fraction of EADS’ total assets, EADS regards the riskof negative changes in fair value or impairments on theseinvestments as non-significant.
Treasury shares held by EADS are not considered to beequity investments. Additionally, treasury shares are notregarded as being exposed to risk, as any change in valueof treasury shares is recognised directly in equity only
when sold to the market and never affects net income.
Treasury shares are held to hedge the dilution risk arisingfrom employee stock ownership plans and the exercise by
employees of stock options.

Cash transactions and derivative counterparties are limited tohigh credit quality financial institutions. EADS has set up acredit limit system to actively manage and limit its credit risk

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Risk Factors
2. Business-Related Risks

2. Business-Related Risks
Aircraft Market Cyclicality
In 2005, the combined revenues generated from Airbus
and ATR represented approximately two thirds of EADS’
consolidated revenues. Historically, the commercial
passenger aircraft market has shown cyclical trends due inpart to the sensitivity of passenger demand in the air travel
market to growth in gross domestic product (“GDP”).
The growth in EADS’ commercial aircraft activities hasconsequently been correlated to growth in GDP. Other
factors, however, play an important role, such as (i) the
average age and technical obsolescence of the fleet relative
to new aircraft, (ii) the number and characteristics of aircraft
taken out of service and parked pending potential return into
service, (iii) passenger load factors, (iv) airline pricing policies,(v) airline financial health and (vi) deregulation.
EADS and the Airbus Division have implemented a flexible
manufacturing organisation that is intended to help them
adapt to cyclical market changes in demand. See “Part 2 /1.1.2 Airbus — Market”. Nevertheless, EADS expects thatthe market for passenger aircraft will continue to be cyclicaland downturns in broad economic trends, such as thosecurrently being experienced, may have a negative effect on
its future results of operation and financial condition.

Impact of Terrorism, Epidemics andCatastrophic Events On Aircraft Market
As the terrorist attacks in New York and Madrid, and the
spread of the Severe Acute Respiratory Syndrome (“SARS”)
virus have demonstrated, terrorism and epidemics may
negatively affect public perception of air travel safety andcomfort and the demand for air travel and commercial
aircraft. Furthermore, major airplane crashes may have anegative effect on the public’s or regulators’ perceptionsof the safety of a given class of aircraft, form of design,or airline. As a consequence of terrorism, epidemics andother catastrophic events, an airline may be confronted withsudden reduced demand for air travel and be compelled
to take costly security and safety measures. In response tosuch events, and the resulting negative impact on the airline

industry or particular airlines, EADS may suffer from adecline in demand for all or certain types of its aircraft and
EADS’ customers may postpone delivery of new aircraft orcancel orders.

Dependence on Defence Spending
In 2005, approximately 23% of EADS’ consolidated revenues
was derived from defence spending. In any single market,
defence spending depends on a complex mix of geopoliticalconsiderations, budgetary constraints and the ability of thearmed forces to meet specific threats and perform certain
missions. Defence spending may be subject to significant
fluctuations from year to year and country to country.
Adverse economic and political conditions, as well as
downturns in broad economic trends in EADS’ defence
markets, may have a negative effect on EADS’ future resultsof operations and financial condition.
In the case where several countries undertake to enter
together into defence procurement contracts, economic,
political and / or budgetary constraints in any one of thesecountries may have a negative effect on the ability of EADS
to enter into or perform such contracts.

Emergence of Public-Private Partnerships
and Private Finance Initiatives
Defence customers, particularly in the U.K., increasingly
request proposals and grant contracts under schemes known
as public-private partnerships (“PPPs”) or private financeinitiatives (“PFIs”). PPPs and PFIs differ substantially fromtraditional defence equipment sales, as they often incorporate
elements such as:• the provision of extensive operational services over the lifeof the equipment;• continued ownership and financing of the equipment by
a party other than the customer, such as the equipment
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Risk Factors
2. Business-Related Risks• mandatory compliance with specific customer
requirements pertaining to public accounting or
government procurement regulations; andimportance and political sensitivity attached to the aerospaceand defence industries means that political considerations
will persist for many products for the foreseeable future.

• provisions allowing for the service provider to seek out
additional customers for unused capacity.

Availability of Government Financing

EADS is party to PPP and PFI contracts, for example
through Paradigm with Skynet 5 and related
telecommunications services, and involved in additional PFI
proposals, such as the Airtanker (FSTA) project. One of thecomplexities presented by PFIs lies in the allocation of risks
and the timing thereof among different parties over the
lifetime of the project.
There can be no assurances of the extent to which EADS
will efficiently and effectively (i) compete for future PFI or
PPP programmes, (ii) administer the services contemplated
under the contracts, (iii) finance the acquisition of theequipment and the ongoing provision of services related
thereto, or (iv) access the markets for the commercialisationof excess capacity. Nor can EADS be certain that it will
not encounter unexpected political, budgetary, regulatory
or competitive risks over the long duration of PPP and PFI
programmes.

Competition and Market Access
Most of EADS’ businesses are subject to significant
competition, in particular in the commercial aircraft market,
where Airbus has been affected by downward price pressure
resulting from such competition. EADS believes that someof the underlying causes of such price competition havebeen mitigated by restructuring in the aerospace and defence
industry. However, the recent weakening of demand has
led to greater leverage for certain customers to encourage
competition in respect of a variety of issues, including
price and payment terms. No assurance can be given thatcompetition may not intensify, particularly in the context ofa prolonged downturn.
In addition, the contracts for many aerospace and defence
products are awarded, implicitly or explicitly, on the basisof home country preference. Although EADS constitutes
a multinational combination broadening a domestic market
constituency, it may remain at a competitive disadvantage
in certain countries, especially outside of Europe, relative
to local contractors for certain products. The strategic

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In prior years, EADS and its principal competitors havebenefited from government financing of product researchand development. EADS has recently received financing
from certain governments in relation to the A380
commercial aircraft program, and certain E.U. countries havealready committed to fund the development of the A350
commercial aircraft program. No assurances can be giventhat financing will continue to be made available for future
projects. Since 1992, the E.U. and the U.S. have operated
under an agreement that sets the terms and conditions offinancial support that governments may provide to civil
aircraft manufacturers. The unilateral withdrawal fromthe 1992 agreement by the U.S. government in late 2004
eventually led to formal claims and counterclaims being
made by the U.S. and the E.U. respectively with the World
Trade Organisation (“WTO”). The E.U. and the U.S. havealso entered into negotiations to seek a resolution to theissues being disputed in the formal WTO process, withthe goal of agreeing a new system that provides for a levelplaying field when funding future aircraft developments.
The terms and conditions of any new agreement, or theoutcome of the formal WTO proceedings, may limit accessby Airbus to risk-sharing-funds for large projects or establish
an unfavourable balance of access to government funds by
EADS as compared to its U.S. competitors.

Technologically Advanced
Products and Services
EADS develops and manufactures products and programs
that are, for the most part, technologically advanced and,sometimes, novel. Most of EADS’ products must function
under demanding operating conditions. Even though EADS
believes it employs sophisticated design, manufacturing
and testing practices, there can be no assurance that EADS’
products or programs will be successfully developed or
operated or that they will be developed or will perform as
intended.

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Risk Factors
2. Business-Related Risks

Certain of EADS’ contracts require it to forfeit part of its
expected profit, to receive reduced payments, to provide
a replacement launch or other product or service, or to
reduce the price of subsequent sales to the same customer
if its products fail to be delivered on time or to perform
adequately. For example, EADS has commitments undertelecommunication satellite manufacturing contracts thatwere signed during a period when tight delivery schedules
were provided in these contracts, but market practiceallowed extension of schedules to meet ever more complex
technological requirements. No assurances can be given that
performance penalties or contract cancellations will not be
imposed should EADS fail to meet delivery schedules orother measures of contract performance.
EADS, like other organisations, has experienced occasional
product failures and other problems. There can be noassurances that such problems will not occur in the future.
In addition to any costs resulting from product warranties,
contract performance or required remedial action, such
failures may result in increased costs or loss of revenues andmay also have a significant adverse effect on the competitive
reputation of EADS’ products. See “3. Legal Risks —Product Liability and Warranty Claims”.

Major Research andDevelopment Programmes
The business environment in many of EADS’ principal
operating business segments is characterised by extensive
research and development costs requiring significant upfront investment. Business plans underlying such investment
contemplate a long payback period before this investment isrecouped. There can be no assurances that the commercial,technical and market assumptions underlying such businessplans will be met, and consequently, the payback period or
returns contemplated therein achieved.

BAE Systems defined benefit obligations have to be fundedwith post retirement pension assets. As of 1st January 2005,
BAE Systems is applying International Financial ReportingStandards (“IFRS”). International Accounting Standard(“IAS”) 19 “Employee Benefits” requires an entity torecognise a pension provision whenever its defined benefits
plans are not sufficiently covered by corresponding asset
and consequently underfunded. Applying IAS 19, BAE
Systems calculated for its U.K. and U.S. pensions schemesa total underfunding amounting to £3,870 million foryear end 2004. Through its investments Airbus andMBDA, EADS is potentially affected by the shortfall in
BAE Systems pension schemes. However, the agreements
between EADS and BAE Systems have the effect of capping
the contributions that the investment has to make to thepension scheme for a certain period of time (e.g., until July
2011 for Airbus and until December 2007 for MBDA). Any
additional contribution would be paid by BAE Systems.
EADS is therefore not exposed to increased contribution
payments resulting from the pension underfunding during
the period of the contribution caps. Based on information
currently available, EADS judges this information not to be
sufficient to determine a reliable basis to calculate its sharein the pension deficit. Consequently, EADS expenses thecontributions made to the pension scheme as if the plans
were defined contribution plans.
On 1st November 2003, EADS established a new pension
scheme for Astrium U.K. The defined benefit obligation of
the new plan, calculated as of 31st December 2005, amounts
to £168 million. Plan assets are recorded at £114 million,
resulting in a net liability of £54 million, which covers the
maximum risk associated with the creation of the new plan.
See “Notes to the Consolidated Financial Statements (IFRS)- Note 21(b): Provisions for Retirement Plans”.

U.K. Pension Commitments
EADS has several common investments with BAE Systems,of which the most significant in terms of employees are
Airbus and MBDA. In respect of each investment, for solong as BAE Systems remains a shareholder, U.K. employees
may stay in the BAE Systems pensions schemes, whichcurrently qualify as multi-employer defined benefit plans.

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Risk Factors
3. Legal Risks

3. Legal Risks
Dependence On Joint Ventures
and Minority Holdings
EADS generates a substantial proportion of its revenues
through various consortia, joint ventures and equity holdings
and believes that its alliances and partnerships are a sourceof competitive advantage. These arrangements include
primarily:• the Eurofighter consortium;• two principal joint ventures: MBDA and ATR;
• majority interests: (a) Airbus, and (b) Dornier GmbH; andProduct Liability and Warranty Claims
EADS designs, develops and produces a number of highprofile products of large individual value, particularly civil
and military aircraft and space equipment. EADS is subject
to the risk of product liability and warranty claims in theevent that any of its products fail to perform as designed.
While EADS believes that its insurance programs areadequate to protect it from such liabilities and that nomaterial claims have been made against it, no assurances canbe given that claims will not arise in the future or that suchinsurance cover will be adequate.

• investment in associates: Dassault Aviation.
The formation of partnerships and alliances with othermarket players is an integral strategy of EADS and the
proportion of sales generated from consortia, joint venturesand equity holdings may rise in future years. This strategy
may from time to time lead to changes in the organisational
structure, or realignment in the control, of EADS’ existing
joint ventures.
EADS exercises varying and evolving degrees of control in
the consortia, joint ventures and equity holdings in which
it participates. While EADS seeks to participate only inventures in which its interests are aligned with those of its
partners, the risk of disagreement or deadlock is inherent ina jointly controlled entity, particularly in those entities that
require the unanimous consent of all members with regard
to major decisions and specify limited exit rights. The otherparties in these entities may also be competitors of EADS,
and thus may have interests which differ from those of
EADS.
In addition, in those holdings in which EADS is a minority
partner or shareholder, EADS’ access to the entity’s books
and records, and as a consequence, EADS’ knowledge ofthe entity’s operations and results, is generally limited ascompared to entities in which EADS is a majority holder oris involved in the day-to-day management.

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Export Controls and Other Regulations
The export market is a significant market for EADS.
In addition, many of the products EADS designs andmanufactures for military use are considered to be ofnational strategic interest. Consequently, the export ofsuch products outside of EADS’ domestic markets may
be restricted or subject to licensing and export controls,
notably by the U.K., France, Germany and Spain, where
EADS carries out its principal military activities as well as
by other countries where suppliers come from, notably,
the U.S. There can be no assurance (i) that the export
controls to which EADS is subject will not become more
restrictive, (ii) that new generations of EADS products will
not also be subject to similar or more stringent controls or(iii) that geopolitical factors will not make it impossible toobtain export licenses for one or more clients or constrain
EADS’ ability to perform under previously signed contracts.
Reduced access to military export markets may have amaterial adverse effect on EADS’ business, financial
condition and results of operations.
EADS is also subject to a variety of other governmental
regulations that may adversely affect its business andfinancial condition, including among others, regulations
relating to the protection of the environment, the use of its
products, labour practices and dealings with foreign officials.
In addition, EADS’ ability to market new products and enter
new markets may be dependent on obtaining government
certifications and approvals in a timely manner.
13

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Risk Factors
4. Industrial and Environmental Risks

4. Industrial and Environmental Risks
Together with other companies in the principal industries
in which it operates, EADS is subject to numerous E.U.,
national, regional and local environmental laws andregulations concerning emissions into the environment,
discharges to surface and subsurface water and the disposal
and treatment of waste materials. EADS believes that its
current operations are in substantial compliance with allapplicable environmental regulations. EADS believes that it
is currently capable of satisfying the stricter environmental
standards for the future contemplated by current laws or

regulations, including increasingly stringent environmental
product quality standards that will be implemented overthe next few years, without incurring significant capital
expenditure. However, there can be no assurance that
increased capital expenditure and operating costs resulting
from future environmental regulations will not adversely
affect the results of EADS’ operations and its financial
condition.
For more information, please see “Part 2 / 2.3 Environmental
Care”.

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1

CHAPTER 1 Net Assets
Financial Position
Results

1.1 Management’s Discussion
and Analysis of Financial Condition
and Results of Operations
p. 16
1.1.1

Certain Information

p. 16

1.1.2

Overview

p. 17

1.1.3

Critical Accounting Considerations, Policies andEstimates

p. 18

1.1.4

Measurement of Management’s Performance

p. 22

1.1.5

EADS Results of Operations

p. 28

1.1.6

Statement of Changes in Consolidated Total Equity(including Minority Interests)
p. 35

1.1.7

Liquidity and Capital Resources

p. 36

1.1.8

Hedging Activities

p. 44

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1.2 Financial Statements

p. 47

1.2.1

p. 48

Consolidated Financial Statements (IFRS)Appendix: Information
on principal investments Consolidation Scope

p. 105Company Financial Statements

p. 112

1.3 Statutory Auditors’ Fees

p. 124

1.4 Information Regarding
the Statutory Auditors

p. 1251.2.2

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3

1.1 Management’s Discussion
and Analysis of Financial Condition
and Results of Operations
1.1.1 Certain Information
In addition to historical information, this document includes
forward-looking statements. The forward-looking statements
are generally identified by the use of forward-looking
words, such as “anticipate”, “expect”, “estimate”, “intend”,“plan”, “predict”, “project”, “will”, “believe”, “should”,“may” or other variations of such terms, or by discussion ofstrategy. These statements relate to EADS’ future prospects,
developments and business strategies and are based on
analyses or forecasts of future results and estimates ofamounts not yet determinable. These forward-looking
statements represent the view of EADS only as of the dates
they are made, and EADS disclaims any obligation to update
forward-looking statements, except as may be otherwise
required by law. The forward-looking statements in thisdocument involve known and unknown risks, uncertainties
and other factors that could cause EADS’ actual future
results, performance and achievements to differ materiallyfrom those forecasted or suggested herein. These include
changes in general economic and business conditions, as wellas the factors described in “Risk Factors”.
The following discussion is based upon the audited
consolidated financial statements of EADS for 2005,
2004 and 2003, prepared in accordance with International
Financial Reporting Standards (“IFRS”) adopted by theInternational Accounting Standards Board as endorsedby the European Union (together, the “Financial
Statements”). Since 1st January 2005, EADS has
retrospectively applied revised International AccountingStandard (“IAS”) 32 “Financial Instruments: Disclosureand Presentation”, with the effect of accounting for BAE
Systems’ 20% stake in Airbus as a financial liability inthe consolidated balance sheet rather than as a minority
interest. In addition, the first-time application of IFRS 2“Share-based Payments” in 2005 (applied retrospectively

to 2004), resulted in the expensing of stock option plans.
See “Notes to Consolidated Financial Statement (IFRS)— Note 2: Summary of significant accounting policies”,“Note 12: Intangible assets”, “Note 20: Total equity”,“Note 23: Liability for puttable instruments”, “Note 31:
Share-based Payment” and “Note 35: Earnings per share”.
The following documents shall be deemed to beincorporated in and form part of this Registration
Document:• “Part 1 / 1.1 Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” of theDocument de Référence filed in French with the Autoritédes marchés financiers on 1st April 2004 and filed in
English with the Chamber of Commerce of Amsterdam;and• “Part 1 / 1.1 Management’s Discussion and Analysisof Financial Condition and Results of Operations”
of the Document de Référence filed in French with theAutorité des marchés financiers on 19th April 2005
and filed in English with the Chamber of Commerceof Amsterdam.
Copies of the Document de Référence for the financial
years ended 31st December 2003 and 31st December
2004 are available free of charge upon request in English,
French, Spanish and German languages at the registeredoffice of the Company and on www.eads.com. Copies ofthe financial statements referred to above are also available
in English on www.eads.com and for inspection at the
Chamber of Commerce of Amsterdam.

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The financial information presented in this document isexpressed in Euro, U.S. Dollars or Pounds Sterling. The

following table sets out, for the periods indicated, certain
information concerning the exchange rate between the Euroand the U.S. Dollar and Pound Sterling, calculated using theofficial European Central Bank fixing rate:

Year ended
31st December 2003
31st December 2004
31st December 2005€-U.S. $1.13041.24381.2441

Exchange Rate Information

Average

Period End€-£
0.69190.67870.6838€-U.S. $1.26301.3621
1.1797€-£0.70480.70510.6853Ratings
EADS currently is rated A1 with a stable outlook by Moody’s, A with a stable outlook by Standard and Poor’s and A with astable outlook by Fitch IBCA.

1.1.2 Overview
With consolidated revenues of €34.2 billion for 2005,
EADS is Europe’s premier aerospace and defence company
and the second largest aerospace and defence company inthe world. In terms of market share, EADS is among the
top two manufacturers of commercial aircraft (surpassing
Boeing in terms of both deliveries and orders since 2003),
civil helicopters, commercial space launch vehicles andmissiles, and a leading supplier of military aircraft, satellites
and defence electronics. In 2005, it generated approximately
77% of its total revenues in the civil sector and 23% in the
defence sector. As of 31st December 2005, EADS’ active
headcount was 113,210.
EADS organises its businesses into the following fiveoperating divisions:• Airbus: Development, manufacturing, marketing and saleof commercial jet aircraft of more than 100 seats and thedevelopment and manufacturing of aircraft for militaryuse;• Military Transport Aircraft: Development,
manufacturing, marketing and sale of military transportand special mission aircraft;• Eurocopter: Development, manufacturing, marketingand sale of civil and military helicopters, and provision ofmaintenance services;

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REGdoc_EV_BOOK2_CH1.indd 17• Defence & Security Systems: Development,
manufacturing, marketing and sale of missile
systems; military combat aircraft and training aircraft;provision of defence electronics and defence-related
telecommunications solutions; and logistics, training,
testing, engineering and other related services; and• Space: Development, manufacturing, marketing and saleof satellites, orbital infrastructures and launchers; andprovision of space-based services.
In general, these manufacturing businesses are characterised
by long-term product cycles. Another significant
characteristic of many of these businesses is the extent of
their dependence on governmental budgets.
In 2005, the former Aeronautics Division, which included
the Eurocopter, ATR, EFW (Elbe Flugzeugwerke), Socata
and Sogerma Services business units (“BUs”), was dissolved
and a new Eurocopter Division was created. In the adapted
segment reporting, EADS allocates the four legacy
Aeronautics BUs to “Other Businesses”. Their activities
comprise the development, manufacturing, marketing andsale of regional turboprop aircraft, light commercial aircraft
and aircraft components, as well as civil and military aircraft
conversion and maintenance services.

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1.1.3 Critical Accounting Considerations, Policies and Estimatesamount to be negotiated at the time the put option is
exercised, payable in cash or an equivalent amount of EADS
shares. In light of these characteristics, IAS 32 requires theput option to be accounted for as a liability (“liability forputtable instruments”) in the consolidated balance sheet,stated at fair value in the amount of €3.5 billion. The fairvalue of this liability was derived through various sources,using different valuation techniques, based on best estimatesthen available to Management. Subsequent changes to thevaluation of the put option will be recorded as changes to“liability for puttable instruments” and to goodwill, without
any direct impact on the consolidated income statement.
BAE Systems’ annual claim to net income on the 20% sharein Airbus is now recorded as a partial repayment of the“liability for puttable instruments”, and no longer affects
minority interest. Corresponding restatements were made to
EADS’ 2004 and 2003 consolidated net income and earnings
per share to account for this change in accounting policy.

1.1.3.1 Scope of and Changes inConsolidation Perimeter
Disposals and acquisitions of interests in various businesses
can account, in part, for differences in EADS’ results ofoperations for one year as compared to another year.
Airbus: Airbus is fully consolidated by EADS in light ofthe effective control EADS has exercised, by agreementwith BAE Systems, over the assets, liabilities and operationsof Airbus since 1st January 2001. Since 1st January 2005,
EADS is retrospectively applying revised IAS 32 “Financial
Instruments: Disclosure and Presentation”. Revised IAS 32
provides modified guidance as to whether a share in an
entity should be classified as equity or as a financial liability.
Pursuant to the put option granted to BAE Systems withrespect to its 20% stake in Airbus, EADS has an obligation
to purchase the 20% stake whenever requested by BAE
Systems, during a yearly-recurring time window, for an

The impact on EADS’ 2005 consolidated balance sheet of the application of IAS 32 is illustrated below:
Actuals 2005
before BAE
put option

AssetsBAE put
Dividends
option paid to BAE
value: 2001
2001-2005

9 533

Goodwill

9 533

Total equity

00

Reclassminorities
2001 to2004

Valuation
put option
BAE in2004/2005

Total
impactActuals2005
incl. BAE
put option

0

634

634

10 167634

634

10 1670

16 768(3 654)788

0(2 866)

13 902Equity attributable to equity holders

14 366(2 537)

788

1 109

(640)

13 726

Minority interest

2 402(1 117)(1 109)(2 226)

176

0

3 654

(788)

634

3 500

3 500

0

3 654

(788)

634

3 500

3 500

Total Liabilities
Liability for puttable instruments *0(*) As a result of the accounting principles adopted by EADS in this respect, the variation in the “liabilities for puttable instruments” from 2001 (€3.7 billion) to 2005 (€3.5 billion) reflects (i) adecrease in the liability of €788 million due to cumulative dividends paid to BAE Systems over the period (2001: €501 million; 2002: €100 million; 2003: €30 million; 2004: €64 million; 2005:€93 million) and (ii) an increase in the liability of €634 million related to the cumulative reassessment of the liability at the end of each period (leading to an increase in Airbus goodwill of€541 million in 2004 and €93 million in 2005).

MBDA: EADS and BAE Systems each hold a 37.5% stakein MBDA, with Finmeccanica holding the remaining
25%. Pursuant to the shareholder agreements relating
to the MBDA group, EADS and BAE Systems together
exercise certain controlling rights over MBDA throughMBDA Holdings, including the right of MBDA Holdings
to appoint MBDA’s Chief Executive Officer (“CEO”),

Chief Operational Officer (“COO”)-Operations and Chief
Financial Officer (“CFO”).
EADS proportionally consolidates 50% of MBDA within
the DS Division, consistent with its ability to jointly control
operations, with Finmeccanica’s holding reflected as a 12.5%
minority interest.

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Acquisitions and Disposals

1.1.3.2 Fair Value Adjustments

On 2nd September 2005, EADS acquired Nokia’s
Professional Mobile Radio - PMR activities (EADS Secure
Networks Oy) from Nokia. The initial purchase accounting
for this business combination has been determined ona provisional basis. Any adjustments to the provisionalpurchase accounting will be recognized in 2006.

The merger of the operations of Aerospatiale-Matra(“ASM”), DaimlerChrysler Aerospace (“Dasa”) andConstrucciones Aeronáuticas S.A. (“CASA”), leading to
the creation of EADS in 2000, was recorded using thepurchase method of accounting with ASM as the acquirer.
Accordingly, the book value of certain assets and liabilities,
mainly property, plant and equipment and inventories,
was adjusted by an aggregate amount of €1.8 billion, netof income taxes, to allocate a portion of the respective
fair market values of Dasa and CASA at the time of themerger (the “fair value adjustments”). These aggregate
additions in value are generally being depreciated overfour to fifteen years for fixed assets and amortised overapproximately 24 months for inventories. In addition, in
2001 in connection with the formation of Airbus S.A.S.,
EADS adjusted the book value of Airbus fixed assets andinventories by an aggregate amount of €0.3 billion, netof income taxes, to reflect their fair market values. The
fair value adjustments lead to a depreciation expense in
the consolidated statements of income classified withincost of sales. For management reporting purposes, EADS
treats these depreciation charges as non-recurring items
in EBIT pre-goodwill impairment and exceptionals.
See “1.1.4 Measurement of Management’s Performance— Use of EBIT*”.

On 30th November 2005, EADS sold TDA - Armements
S.A.S. to Thales. TDA – Armements S.A.S. wasproportionally consolidated at 50% through the endof November 2005.
On 28th February 2005, EADS sold its enterprise telephonybusiness, which comprised its civil telecommunication
activities, to Aastra Technologies Limited.
On 4th October 2004, EADS acquired, from RIG Holdings
L.P., 100% of the share capital of RIG Holdings, Inc., theholding company of Racal Instruments U.S. and Racal
Instruments Group Ltd. (together, “Racal Instruments”)
for a cash amount of U.S.$130 million. From theacquisition date, and as reflected in the 31st December
2004 consolidated balance sheet, EADS fully consolidates
Racal Instruments. Racal Instrument’s 2004 net results
for the period from 4th October through 31st December
are included in the EADS 2004 consolidated statementof income.
On 18th September 2003, EADS acquired the remaining
41% interest in EADS Telecom France S.A.S. from
Nortel Networks as part of an exchange for EADS’ interests
in Nortel Networks Germany GmbH & Co. KG and
Nortel Networks France S.A.S. Following this acquisition,
EADS held 100% of EADS Telecom France S.A.S.
On 21st October 2003, EADS, through its 75% subsidiary
DADC (DADC Luft- und Raumfahrt Beteiligungs AG),acquired an additional 17.7% of the share capital of
Dornier GmbH for €62 million, bringing its total stakein Dornier GmbH to 94%. Following further acquisitionsin May 2005, EADS’ share in Dornier GmbH was 97.11%
at 31st December 2005.
See “Notes to Consolidated Financial Statements (IFRS)— Note 4: Acquisitions and disposals”.

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1.1.3.3 Impairment of Assets
When a triggering event, such as an adverse material market
event or a significant change in forecasts or assumptions,occurs, EADS performs an impairment test on the assets,group of assets, subsidiaries, joint ventures or associates
likely to be affected. Following its early adoption of revised
IAS 36, as from 1st January 2004, EADS tests goodwill
for impairment at the end of each fiscal year, whether or
not there is any indication of a triggering event. Generally,
the discounted cash flow method is used to determine
the value of the assets. The discounted cash flow method
is sensitive to the selected discount rate and estimate of
future cash flows by EADS’ management (“Management”).
Consequently, slight changes to these elements canmaterially affect the resulting asset valuation and therefore
the amount of the potential impairment charge.

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The discount rate used by EADS is derived from theGroup’s weighted average cost of capital, adjusted toreflect the riskiness of the business concerned. See “Notes
to Consolidated Financial Statements (IFRS) — Note 2:
Summary of significant accounting policies — Impairmentof assets” and “Note 12: Intangible assets”.
The impairment of goodwill has an effect on profitability, as
it is recorded in the line item “Other expenses” on EADS’
consolidated statement of income. No goodwill was impairedin 2005, 2004 or 2003.
See “1.1.5 EADS Results of Operations — Consolidated
Amortisation of Goodwill” and “Notes to Consolidated
Financial Statements (IFRS) — Note 12: Intangible assets”
and “Note 33: Investment property”.

1.1.3.4 Research and Development
Expenses
Since 2003, with the application of IAS 38 “Intangible
Assets”, the EADS group (the “Group”) has assessed
whether product-related development costs qualify forcapitalisation as internally generated intangible assets.
Criteria for capitalisation recognition are strictly applied.
Consequently, all research and development costs notmeeting the IAS 38 criteria are expensed as incurred in the
consolidated statement of income.
Current and previous research and development programs
have been reviewed to determine the extent to which
expenses in the development phase of such programs
potentially meet the recognition criteria of IAS 38. As aresult of the transition to IAS 38 in 2003, EADS capitalised€4 million of product-related development costs incurredin 2003 as internally generated intangible assets. For 2004,
an additional €165 million of product-related development
costs were capitalised in accordance with IAS 38, including€152 million relating to the Airbus A380 programme.
For 2005, an additional €293 million of product-related
development costs were capitalised in the consolidatedbalance sheet in accordance with IAS 38, including an
additional €259 million relating to the Airbus A380
programme.

1.1.3.5 Accounting for Hedged Foreign
Exchange Transactions in
the Financial Statements
Approximately two-thirds of EADS’ revenues aredenominated in U.S. Dollars, whereas a substantial portionof its costs is incurred in Euro and, to a lesser extent, Pounds
Sterling. EADS uses hedging strategies to manage andminimise the impact of exchange rate fluctuations on its
profits. See “1.1.8 Hedging Activities — Foreign Exchange
Rates” and “1. Financial Market Risks — Exposure to
Foreign Currencies”.
Cash flow hedges. When hedges form a hedging
relationship with customer orders to which they specificallyrelate, they qualify for IAS 39 hedge accounting and arereferred to as ‘cash flow hedges. Revenues from suchcustomer orders are recorded in Euro at the hedged rate andthe impact of the hedges is recognised in gross margin andoperating income at the time of revenue recognition. At theend of each accounting period, the value of each outstanding
cash flow hedge contract is marked-to-market in the balance
sheet on the basis of the then prevailing forward exchange
rate. See “1.1.6 Statement of Changes in Consolidated Total
Equity”. For products such as aircraft, EADS typicallyhedges the first forecasted highly probable future cash
inflows for a given month based upon final payments atdelivery. See “1.1.8 Hedging Activities — Foreign Exchange
Rates”.
Cash flow hedges associated with transactions that arecancelled or postponed for more than a relatively shortperiod are deemed terminated for accounting purposes. The
sum of (i) changes in the fair value of these hedges since
1st January and (ii) a reversal of the portion of accumulated
other comprehensive income (“AOCI”) corresponding
to these hedges prior to 1st January, are then recorded inrevenues and deferred tax income (loss) in the consolidated
statement of income.
Revenues in currencies other than the Euro that are nothedged through financial instruments are translated into
Euro at the spot exchange rate at the date the underlying
transaction occurs.

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1.1.3.6 Accounting for Foreign
Currency DenominatedOperations in the Financial
Statements
Following the signature of an Advance Pricing Agreementwith tax authorities in April 2004, the Airbus GIE(a U.S. Dollar-denominated entity) was merged into Airbus
SAS (a Euro-denominated entity) with retrospective effectas of 1st January 2004. Consequently, as from such date,
operations of the former Airbus GIE are treated as “foreign
currency operations” and accounted for in accordance with
EADS’ consistently applied accounting principles.
Prior to the merger, Airbus GIE operations, with the
exception of those hedged with financial instruments,
were recorded at the exchange rate prevailing at the timeof aircraft delivery, with outstanding operations being revalued in the balance sheet at each period end using theclosing exchange rate of such period. From 1st January
2004, all non-hedged U.S. Dollar-denominated operations,
including outstanding operations of the former Airbus GIE,
are recorded on the basis of exchange rates prevailing at
the date of receipt or payment of U.S. Dollars. See “Notes
to Consolidated Financial Statements (IFRS) — Note 5:
Segment Reporting”.
In particular, customer advances (and the corresponding
revenues recorded when sales recognition occurs) are
now translated at the exchange rate prevailing on the datethey were received. U.S. Dollar-denominated costs areconverted at the exchange rate prevailing on the date they
are incurred. To the extent that U.S. Dollar-denominatedcustomer advances differ, in terms of timing of receipt
or amount, from corresponding U.S. Dollar-denominatedcosts, there will be a foreign currency exchange impact on
EBIT*. Additionally, the magnitude of any such difference,and the corresponding impact on EBIT*, will be sensitive
to variations in the number of deliveries. See “1.1.4
Measurement of Management’s Performance — EBIT*
Performance by Division” for a discussion of these effects
on Airbus’ EBIT*.

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1.1.3.7 Accounting for Sales Financing
Transactions in the Financial
Statements
In order to support product sales, primarily at Airbus and
ATR, EADS may agree to participate in the financing ofcustomers, on a case-by-case basis, directly or throughguarantees provided to third parties. Certain sales contracts
may include the provision of an asset value guarantee(“AVGs”), whereby EADS guarantees a portion of themarket value of an aircraft during a limited period, startingat a specific date after its delivery (in most cases, 10 years
post-delivery). See “1.1.7 Liquidity and Capital Resources— Sales Financing” and “Notes to Consolidated Financial
Statements (IFRS) — Note 29: Commitments andcontingencies”. The accounting treatment of sales financing
transactions varies based on the nature of the financing
transaction and the resulting exposure.
On Balance Sheet. When, pursuant to a financing
transaction, the risks and rewards of ownership of thefinanced aircraft reside with the customer, the transaction
is characterised as either a loan or a finance lease. In such
instances, revenues from the sale of the aircraft are recorded
upon delivery, while financial interest is recorded over time
as financial income. The outstanding balance of principal
is recorded on the balance sheet in long-term financial
assets, net of any accumulated impairments. See “Notes
to Consolidated Financial Statements (IFRS) — Note 14:
Investments in associates, other investments and long-term
financial assets”.
By contrast, when the risks and rewards of ownership
remain with Airbus or ATR, the transaction is characterised
as an operating lease. EADS’ general policy is to avoid,
whenever possible, operating leases for new aircraft to bedelivered to customers. Therefore, new operating leases
primarily arise in connection with the re-marketing of
repurchased or repossessed aircraft. Rather than recording
100% of the revenues from the “sale” of the aircraft at thetime of delivery, rental income from such operating leases
is recorded in revenues over the term of the respective
leases. The leased aircraft are recorded at production coston the balance sheet as tangible assets (as property, plantand equipment), the corresponding depreciation andpotential impairment charges are recorded in cost of sales.

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See “Notes to Consolidated Financial Statements (IFRS)— Note 13: Property, Plant and Equipment”.
If the present value of an AVG exceeds 10% of the sales
price of the aircraft, the sale of the underlying aircraft
is accounted for as an operating lease in the Financial
Statements. In this case, upon aircraft delivery, the cash
payment received from the customer is recognised on the
consolidated balance sheet as deferred income and amortised
straight-line to the amount, and up to the last exercise date,of the AVG. The production cost of the aircraft is recorded
in tangible assets (as property, plant and equipment), andthe difference between production cost and the AVG
amount is depreciated up to the last exercise date of the
AVG. Depreciation expenses are recorded in cost of sales
in the consolidated statement of income. See “Notes toConsolidated Financial Statements (IFRS) — Note 13:
Property, Plant and Equipment” and “Note 26: Deferredincome”.
Off Balance Sheet — Contingent Commitments.
Certain sales financing commitments, such as lease in / leaseout structures and AVGs where the present value is below
the 10% threshold, are not recorded on the balance sheet.
As a result, transactions relating to such AVGs are accounted
for as sales, with the related exposure deemed to be acontingent commitment. To reduce exposure under AVGs
and to minimise the likelihood of their occurrence, Airbus
and ATR extend them with prudent guaranteed asset values
and restrictive exercise conditions, including limited exercise
window periods.

Under lease in / lease out structures, which Airbus and ATR
applied in the past to allow customers with weaker credit
to take advantage of certain jurisdictions’ leasing-related tax
benefits, the risks and rewards of ownership of the aircraft
are typically borne by a third party, usually referred to as
the head lessor. The head lessor leases the aircraft to Airbus
or ATR, which in turn sub-leases it to the customer. To theextent possible, the terms of the head lease and sub-leasematch payment streams and other financial conditions. Suchcommitments by Airbus or ATR are reported as off-balance
sheet contingent liabilities. See “Notes to Consolidated
Financial Statements (IFRS) — Note 29: Commitments andcontingencies”.
Provisions and Allowances. Under its provisioning policy
for sales financing risk, EADS records provisions to fully
cover its estimated financing and asset value net exposure.
Provisions pertaining to sales financing exposure, whether
on-balance sheet or off-balance sheet, are recorded as
impairments of the related assets or in provisions. Provisions
recorded as liabilities relate primarily to off-balance sheet
commitments. See “Notes to Consolidated Financial
Statements (IFRS) — Note 21 (d): Other provisions”.
Provisions are recorded as impairments of the related assets
when they can be directly related to the corresponding asset.
See “Notes to Consolidated Financial Statements (IFRS)— Note 13: Property, Plant and Equipment” and “Note 14:
Investments in associates, other investments and long-term
financial assets”. While Management views its estimates ofvaluations of collateral as conservative, changes in provisions
reflecting revised estimates may have a material impact on
net income in future periods.

1.1.4 Measurement of Management’s Performance
1.1.4.1 Order Backlog
Year-end order backlog represents firm future revenues fromcontracts signed up to that date. EADS uses order backlog
as a measure of commercial performance, and growth of
EADS’ order backlog is an ongoing goal of Management.
Only firm orders are included in calculating order backlog— for commercial aircraft, a firm order is defined as one forwhich EADS receives a non-refundable down payment on adefinitive contract not containing a “walk-away” provision.

Defence-related orders are included in the backlog uponsignature of the related procurement contract (and thereceipt, in most cases, of an advance payment). Commitments
under defence “umbrella” or “framework” agreements bygovernmental customers are not included in backlog until
they are officially notified to EADS.
For civil market contracts, amounts of order backlog
reflected in the table below are derived from catalogue
prices, escalated to the expected delivery date and, to the

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extent applicable, converted into Euro (at the corresponding
hedge rate for the hedged portion of expected cash flows,
and at the year-end spot rate for the non-hedged portion of

expected cash flows). The amount of defence-related orderbacklog is equal to the contract values of the corresponding
programs.

Consolidated Backlog(1) for the Year Ended 31st December 2005, 2004 and 2003

(2)

AirbusMilitary Transport Aircraft
Eurocopter (3)Defence & Security Systems
Space
Total Divisional Backlog
Other Businesses (3)Headquarters / Consolidation
Total

Year ended
31st December 2005

Year ended
31st December 2004

Year ended
31st December 2003

Amountin € bnAmountin € bnAmountin € bn

In percentage (5)

202.0
21.0
10.0
18.5
10.9
262.4
2.1
(11.3)
253.2

77%
8%
4%
7%
4%
100%

(4)

136.0
19.9
9.1
17.3
11.3
193.6
1.1
(10.4) (4)184.3

In percentage (5)

70%
10%
5%
9%
6%
100%

In percentage (5)

141.8
20.0
8.7
14.3
7.9
192.7
1.1
(14.5)
179.3

74%
10%
5%
7%
4%
100%

(1) Without options.
(2) Based on catalogue prices for commercial aircraft activities.
(3) In 2005, the former Aeronautics Division was replaced by the Eurocopter Division. The backlog of the other BUs comprising the former Aeronautics Division is now reported in the line
“Other Businesses”.

(4) In 2004, a change in the recording of Airbus work share was made to reflect the fact that the A400M engine order was recorded directly by the MTA Division, and not by Airbus.

This led to a decrease in Airbus’ work share on the A400M program, from approximately 69% in 2003 to approximately 49% in 2004. Consequently, the value of Airbus’ order backlog(and the Headquarters / Consolidation line) was reduced by approximately €4.0 billion as compared to 2003.
(5) Before “Other Businesses” and “Headquarters / Consolidation”.

The €69 billion increase in the 31st December 2005 orderbacklog reflects a record order intake at EADS in 2005
(representing a 110% increase over 2004) well in excess ofrevenues accounted for in the same year (8% increase over2004). Also contributing to the increase was the effect of
the stronger U.S. Dollar spot rate used for conversion of the
non-hedged portion of the backlog into Euro.
The amounts recorded under “Headquarters / Consolidation”
primarily reflect the elimination of Airbus’ work share in the
A400M program. The Military Transport Aircraft (“MTA”)
Division’s order backlog includes 100% of the value of the
A400M order to reflect the Division’s prime-contractor
responsibility over the program. The effect of internal
subcontracting (corresponding to the work share of other
EADS divisions in the A400M) is therefore eliminated in
EADS’ consolidated order backlog.
Airbus’ net order intake was 1,055 aircraft in 2005(€78.3 billion), including 20 new orders for the A380,
bringing the total firm order backlog for the A380 to
159 aircraft. These increases were bolstered by positive net
foreign currency adjustments to the backlog, reflecting theyear-end valuation of the non-hedged portion of Airbus’

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order backlog. At the end of 2005, Airbus’ order backlog
included 2,177 aircraft (as compared to 1,500 aircraft at theend of 2004).
The backlog of the Military Transport Aircraft Division
increased from 2004, reflecting the strong order intake in2005 (€1.8 billion) driven by the South African order ofeight A400M aircraft and the Brazilian orders of twelve
C-295s and eight upgraded P3 Orion aircraft. This orderintake more than offset 2005 revenues, which were
impacted by the shift of revenue recognition for the
A400M programme until the first quarter of 2006 (with noanticipated impact on the overall programme schedule).
Backlog at the Eurocopter Division increased from 2004,
with a €3.5 billion order intake (in excess of revenues)
reflecting 401 total new orders, including 12 new orders for
the NH90 from Australia and 6 new orders for the Tiger
from Spain. 71% of the new orders originated from outside
of EADS’ home markets of France, Germany and Spain.
The DS Division’s backlog increased by €1.2 billion from
2004, mainly reflecting an order intake of €6.7 billion driven

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by new orders for MEADS and other equipment for theEurofighter Tranche 2.

relation to the sizeable Ariane 5 launcher orders recorded in
the division’s backlog in 2004.

The Space Division’s backlog decreased by €0.4 billion in
2005, reflecting a “book to bill” ratio of less than one for
2005, following the recognition of revenues in 2005 in

The table below illustrates the proportion of commercial anddefence backlog at the end of each of the past two years.

Year ended 31st December 2005
Amountin € bn (1)Percentage

Year ended 31st December 2004
Amountin € bn (1)Percentage

Backlog:
Commercial Sector

201

79%

135

73%

Defence Sector

52

21%

49

27%

Total

253

100%

184

100%

(1) Including “Other Businesses” and “Headquarters / Consolidation”.

1.1.4.2 Use of EBIT*

by EADS as from 1st January 2004, goodwill is no longer
amortised, but is subject to regular impairment testing.
There was no goodwill impairment in 2003, 2004 or 2005.
The term “exceptionals” refers to items such as amortisation
expenses of fair value adjustments relating to the EADS
Merger, the Airbus Combination and the formation of
MBDA, as well as any goodwill impairment charges thereon.

EADS uses earnings before interest and taxes, pre-goodwill
impairment and exceptionals (“EBIT*”) as a key indicatorof its economic performance. In line with IFRS 3, applied

Set forth below is a table reconciling EADS’ profit before
finance costs and income tax (as reflected in EADS’ IFRS
consolidated statement of income) with EADS’ EBIT*.

Management remains focused on the target of achieving€10 billion of defence-related revenues in 2007. In addition
to organic growth, EADS may explore possible mergers andacquisitions in the defence sector.

Year ended
31st December
2005

Year ended
31st December
2004 (2)Year ended
31st December
2003

2,712

2,215

747

0

0

567

Exceptional depreciation (fixed assets)

136

212

214

Exceptional depreciation (inventories)

0

5

15

Others

4

0

0

EBIT*

2,852

2,432

1,543

(in €m)Profit before finance costs and income tax
Goodwill amortisation (1)(1) In accordance with IFRS 3, as from the beginning of 2004, EADS no longer amortizes goodwill on a regular basis.
(2) As a result of the retrospective application of IFRS 2 “Share-based Payment”, cost of sales (and, consequently, EBIT*) for 2004 was restated by €(12) million, representing the Group-level stock
options expense for 2004.

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1.1.4.3 EBIT* Performance by Division
Set forth below is a breakdown of EADS’ consolidated EBIT* by division for the past three years.
(in €m)Year ended
31st December
2005

Year ended
31st December
2004 (2)Year ended
31st December
2003

Airbus

2,307

1,919

1,353

48

26

30

212

201

160

Defence and Security Systems

201

226

171

Space

58

9

(400)

Total Divisional EBIT*

2,826

2,381

1,314

Other Businesses (1)

(171)

2

57

Military Transport Aircraft
Eurocopter(1)

HQ / Consolidation

(3)

EADS

197

49

172

2,852

2,432

1,543

(1) In 2005, the former Aeronautics Division was replaced by the Eurocopter Division. The EBIT* of the other BUs comprising the former Aeronautics Division is now reported in the line
“Other Businesses”.

(2) As a result of the retrospective application of IFRS 2 “Share-based Payment”, consolidated cost of sales (and, consequently, EBIT*) for 2004 was restated by €(12) million, representing
the Group-level stock options expense for 2004.

(3) HQ / Consolidation primarily includes results from headquarters, which mainly includes “share of profit from associates” from EADS’ investment in Dassault Aviation.

2005 compared to 2004. EADS’ consolidated EBIT*
increased to €2.85 billion for 2005 from €2.43 billion for
2004, primarily reflecting stronger performance at Airbus.
Airbus’ EBIT* increased to €2.3 billion for 2005 from
€1.9 billion for 2004, reflecting (i) an increase in the numberof aircraft delivered (378 in 2005, as compared to 320 in2004) and (ii) operational efficiency gains resulting from the“Route 06” cost savings programme implemented in 2002
(totalling €400 million through year-end 2005). Partially
offsetting these positive factors was a negative €(670) million
exchange rate effect of generally less favourable rates ofhedges maturing in 2005 as compared to 2004 (based on
Airbus’ 2005 compounded conversion rate of €-U.S.$1.04, ascompared to €-U.S.$0.98 in 2004).
The MTA Division’s EBIT* increased to €48 million for2005 from €26 million for 2004, reflecting a reduction in
research and development expense and the non-recurrence in2005 of early retirement costs recorded in 2004.
EBIT* at the Eurocopter Division increased to €212 million
for 2005 from €201 million for 2004, reflecting a 20%
increase in deliveries (334 in 2005, as compared to 279
in 2004) and the effects of the first-time consolidation ofAustralian Aerospace. This volume impact was partially
offset by a (i) negative effect from the U.S. Dollar,(ii) a negative mix effect, (iii) higher selling and general

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administrative expenses and (iv) increased R&D expenses for
the EC175.
The DS Division’s EBIT* decreased to €201 million for 2005
from €226 million for 2004 (which included the release ofa €106 million provision relating to a concluded litigation
with Thales). Despite improved operational performanceat the division in 2005, ongoing unmanned aerial vehicles(“UAV”) projects had a €100 million negative impact on2005 EBIT*. Restructuring expenses were €53 million lower
than in 2004, while research and development expenses were
€22 million higher.
The Space Division’s EBIT* increased to €58 million for2005 from €9 million for 2004, primarily reflecting (i) the
positive impact of operational efficiencies derived from prioryears’ restructuring efforts and (ii) the release of an allowance
for receivables recorded in 2004 relating to Starsem.
Operational and impairment losses, as well as restructuring
charges, at Sogerma in 2005 led to a €173 million decrease in
EBIT* of Other Businesses as compared to 2004. The losses
at Sogerma widened by €198 million and were partially
offset by improved positive EBIT* at ATR, Socata and EFW.
Headquarters / Consolidation EBIT* increased to€197 million for 2005 from €49 million for 2004, primarilyreflecting the increase in ‘share of profit from associates’

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from EADS’ investment in Dassault Aviation, including a
positive €64 million catch-up of Dassault Aviation’s 2004
IFRS results (as compared to a negative €(33) million catch-up
in 2004), as well as gains from real estate disposals totalling€31 million.
2004 compared to 2003. EADS’ consolidated EBIT*
increased to €2.4 billion for 2004 from €1.5 billion for 2003,
primarily reflecting (i) the turnaround at the Space Divisionfrom negative €(400) million in 2003 to positive €9 million in2004 and (ii) stronger performance at Airbus resulting mainly
from higher deliveries.
Airbus’ EBIT* increased to €1.9 billion for 2004 from
€1.4 billion for 2003, reflecting both an increase in number ofaircraft delivered (320 in 2004, as compared to 302 in 2003)
and a more favourable product mix. Also affecting EBIT* were
the initial results of the “Route 06” cost savings programme
implemented in 2002 (€50 million).
Airbus’ EBIT* also included a €232 million positive
accounting currency effect resulting from the difference
between the historical exchange rates used to convert
U.S. Dollar-denominated customer advances received
and the corresponding U.S. Dollar-denominated costs foraircraft delivered in 2004. See “1.1.3 Critical Accounting
Considerations, Policies and Estimates — Accounting
for Foreign Currency Denominated Operations in the
Financial Statements”. This was partially offset by a negative€(100) million impact of less favourable rates of cash flow
hedges maturing in 2004 as compared to 2003.
The MTA Division’s EBIT* decreased to €26 million for 2004
from €30 million for 2003, reflecting the effects of higher
early retirement costs and commercial costs associated with the
U.K. AirTanker programme.
EBIT* at the Eurocopter Division increased to €201 million
for 2004 from €160 million for 2003. The increase primarilyreflects the ramp-up of the NH90 and Tiger programmes andthe effect of a revaluation of fixed assets (€18 million).
The DS Division’s EBIT* was €226 million for 2004, ascompared to €171 million for 2003. Excluding the effect of
the release of a €106 million provision relating to a nowconcluded litigation with Thales, the DS Division’s EBIT*
would have decreased, primarily as a result of ongoing
restructuring costs (€88 million in 2004 as compared to€50 million in 2003).

The results of several years of intensive restructuring efforts
were reflected in the Space Division’s positive EBIT* of€9 million for 2004, a €409 million increase from 2003.
EBIT* of the Other Businesses decreased to €2 million for2004 from €57 million for 2003. The decrease reflects EBIT*
degradation in Sogerma’s maintenance, repair and overhaul
business, as well as the continuing downturn of the regional
aircraft market.
The decrease of Headquarters / Consolidation EBIT* to€49 million for 2004, from €172 million for 2003, reflects
the decrease in “share of profits from associates” from
EADS’ investment in Dassault Aviation, including a negative€(33) million catch-up of Dassault Aviation’s 2003 IFRS results(as compared to a positive €77 million catch-up in 2003).
Hedging Impact on EBIT*. Nearly two-thirds of EADS’
consolidated revenues in 2005 were denominated in currencies
other than the Euro. Given the long-term nature of EADS’
business cycles (evidenced by its multi-year backlog), theCompany hedges its net foreign exchange exposure to mitigate
the impact of exchange rate fluctuations on its EBIT*.
See “1.1.8 Hedging Activities — Foreign Exchange Rates”
and “1. Financial Market Risks — Exposure to Foreign
Currencies”.
During 2005, cash flow hedges covering approximately
U.S.$12.7 billion of EADS’ U.S. Dollar-denominated revenues
matured. In 2005, the compounded exchange rate at which
hedged U.S. Dollar-denominated revenues were accounted forwas €-U.S.$1.056, as compared to €-U.S.$0.987 in 2004. Thisdifference resulted in a €720 million decrease in EBIT* from2004 to 2005, of which approximately 90% was at Airbus.
During 2004, cash flow hedges covering approximately
U.S.$9.9 billion of EADS’ U.S. Dollar-denominated revenues
matured. In 2004, the compounded conversion rate at which
hedged U.S. Dollar-denominated revenues were accounted
for was €-U.S.$0.987, as compared to €-U.S.$0.971 in 2003.
This difference resulted in a €160 million decrease in EBIT*
from 2003 to 2004, of which approximately two-thirds was at
Airbus.
It is expected that the hedge book will increase in coming
years in line with the forecasted growth in demand for aircraft
and the corresponding impact on future deliveries combinedwith the active hedging policy of EADS. The conversion ratesof the new hedges will reflect the state of the U.S. Dollar
versus the Euro at the time such hedges are entered into.

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The tables below set forth the notional amount of foreign exchange hedges in place as of 31st December 2005, and the average
U.S. Dollar rates applicable to corresponding EBIT*.
2006

2007

2008

2009

2010

2011

Total

13.3

13.8

11.1

5.8

2.7

0.4

47.1

Of which €-U.S.$

11.6

12.3

9.9

4.7

2.3

0.3

41.1

Of which £-U.S.$

1.7

1.5

1.2

1.1

0.4

0.1

6.0

Total Hedges (in U.S.$ bn)

Forward Rates (in U.S.$)€-U.S.$

1.11

1.13

1.12

1.12

1.18

1.13

£-U.S.$

1.53

1.54

1.52

1.59

1.61

1.60

Restructuring. Since its formation in 2000, EADS has
implemented, and continues to implement, a number ofrestructuring plans to further enhance its competitive
position in the challenging markets in which it operates.
Total restructuring charges of €62 million were recorded in
the 2005 IFRS consolidated statement of income, decreasingfrom €129 million for 2004. For 2005, this included new

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provisions and current year charges primarily related to (i)the DS Division (€35 million, mainly MBDA) and(ii) restructuring at Sogerma (€27 million).
The related, yet to be implemented, restructuring burden isaccounted for at year-end both as a provision and as otherliabilities.

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1.1.5 EADS Results of Operations
The following table sets forth a summary of the IFRS consolidated statements of income of EADS for the years indicated.

IFRS consolidated statements of income for the year ended 31st December 2005, 2004 and 2003
(in €m, except for EPS)

Year ended
31st December
2005

Year ended
31st December
2004

Year ended
31st December
2003

Revenues

34,206

31,76130,133

Cost of sales(27,530)(25,522) (3)(24,594)

Gross margin

6,676

6,239 (3)5,539

Selling and administrative expenses(2,183)(2,119)(2,162)

Research and development expenses(2,075)(2,126)(2,189)Other income

222

314

196

Other expense (1)

(153)

(177)

(256)

Goodwill amortisation (1) (2)

0

0

(567)

225

84

186

Profit before finance costs and income taxes

2,712

2,215

747

Interest result

(155)

(275)

(203)

Share of profit from associates and other income (expense) from investments

Other financial result

(22)

(55)

148

Income taxes

(825)

(664)

(474)

Profit for the period

1,710

1,221 (3)

218

1,676

1,203 (3) (4)206 (4)18 (4)

12 (4)

Attributable to:Equity holders of the parent (Net Income)Minority interests

34(3) (4)0.26 (4)0.26 (4)Earnings per share (basic) (in €)

2.11

1.50

Earnings per share (diluted) (in €)2.09

1.50 (3) (4)(1) For purposes of this discussion, the presentation of the summary consolidated statements of income differs from the actual IFRS consolidated statements of income, in which “Goodwill
amortisation” is included within the line item “Other expense”.

(2) In accordance with IFRS 3, as from the beginning of 2004, EADS no longer amortizes goodwill on a regular basis.
(3) The €(12) million effect of the retrospective application of IFRS 2 “Share-based Payment” is included in 2004 cost of sales.
(4) As a result of the first-time application in 2005 of revised IAS 32 “Financial Instruments: Disclosure and Presentation” as it relates to the option granted to BAE Systems’ to put its 20% stake in
Airbus to EADS, and in accordance with IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”, the historical minority interests recorded in respect of such 20% stake havebeen replaced by the posting of a liability for puttable instruments and an adjustment to equity attributable to equity holders of the parent. As a consequence, EADS’ net income now includes
BAE Systems’ 20% stake in Airbus. See “Notes to Consolidated Financial Statements (IFRS) — Note 2: Summary of significant accounting policies — IAS 32 Financial Instruments: Disclosureand Presentation (revised 2004)”.

Set out below are year-to-year comparisons of results of operations, based upon EADS’ consolidated statements of income.

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3

Consolidated Revenues
Consolidated revenues for 2005 reached €34.2 billion, as compared to €31.8 for 2004. Revenues at Airbus, Eurocopter,the DS Division and the Space Division increased as compared to 2004.
Set forth below is a breakdown of EADS’ consolidated revenues by division for the past three years.
(in €m)Year ended
31st December
2005

Year ended
31st December
2004

Year ended
31st December
2003

Airbus22,17920,224

19,048

763

1,304

934

3,211

2,786

2,611

Systems

5,636

5,385

5,165

Space

2,698

2,592

2,424

34,48732,29130,182

Military Transport Aircraft
Eurocopter(1)

Defence and Security

Total Divisional Revenues
(1)

1,155

1,123

1,221

HQ / Consolidation (2)(1,436)(1,653)(1,270)EADS

34,206

31,76130,133

Other Businesses(1) In 2005, the former Aeronautics Division was replaced by the Eurocopter Division. The consolidated revenues of the other BUs comprising the former Aeronautics Division are now reported in theline “Other Businesses”.

(2) HQ / Consolidation includes, in particular, adjustments and eliminations for intercompany transactions.

AirbusSet forth below is a breakdown of Airbus’ deliveries by aircraft type for the past three years.
Year ended
31st December
2005

Year ended
31st December
2004

Year ended
31st December
2003

Single Aisle

289

233

233

Widebody

9128Long-Range

80

75

64

of which “Stretched”
Total

20
378

23
320 (1)23305 (2)

Number of aircraft(1) In 2004, revenues were recognized in the IFRS consolidated statement of income for only 316 of the 320 planes delivered.
(2) In 2003, revenues were recognized in the IFRS consolidated statement of income for only 302 of the 305 planes delivered.

2005 compared to 2004. Airbus’ 2005 consolidated
revenues increased by 9.7%, to €22.2 billion from€20.2 billion for 2004, reflecting primarily the increase inaircraft deliveries recognized in revenues (378 in 2005 ascompared to 316 in 2004). As in 2004, most of the deliveriesin 2005 were for single-aisle A319 / A320 / A321 aircraft.
Airbus delivered 56 more aircraft of this type in 2005
(289 aircraft) than in the previous year. Deliveries of longrange aircraft increased from 75 in 2004 to 80 in 2005.

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REGdoc_EV_BOOK2_CH1.indd 29

Offsetting these positive factors was an approximate€(1.65) billion negative impact resulting primarily fromthe continued decline of the hedge rates used to convert
payments upon deliveries for the portion of such payments
which was hedged. For a discussion of the impact of
exchange rate variations on EADS’ results of operations,see “— 1.1.3 Critical Accounting Considerations, Policies
and Estimates — Accounting for Hedged Foreign Exchange
Transactions in the Financial Statements”, “— 1.1.3 Critical
Accounting Considerations, Policies and Estimates —29

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3

Accounting for Foreign Currency Denominated Operationsin the Financial Statements”, “— 1.1.8 Hedging Activities— Foreign Exchange Rates” and “1. Financial Market Risks— Exposure to Foreign Currencies”.
2004 compared to 2003. Airbus’ 2004 consolidated
revenues increased by 6.2%, to €20.2 billion from €19 billion
for 2003, reflecting primarily (i) the increase in aircraft
deliveries recognized in revenues (316 in 2004 as compared
to 302 in 2003), (ii) the positive impact of a more favourable
mix of aircraft being delivered in 2004 as compared to 2003
and (iii) the revenues ramp up of the A400M program. As
in 2003, most of the deliveries in 2004 were for single-aisle
A319 / A320 / A321 aircraft. Airbus delivered the sameamount of this type of aircraft in 2004 as in 2003

(233 aircraft). Deliveries of long-range aircraft increased from64 in 2003 to 75 in 2004, including 23 of the higher-priced
A340-500 / 600 “stretched” versions.
Offsetting these positive factors was an approximate€(0.3) billion negative impact resulting from (i) thedeterioration of the U.S. Dollar exchange rates used toconvert payments upon deliveries, not only for the portion
which was not hedged by financial instruments (average
spot rate of €-U.S.$1.24 in 2004 as compared to €-U.S.$1.13
in 2003), but also for the portion which was hedged(degradation of the hedge rate); partly offset by (ii) thefavourable historical exchange rate applied to the portion ofrevenues representing customer advances received in priorperiods.

Military Transport Aircraft
Set forth below is a breakdown of the MTA Division’s new aircraft deliveries by aircraft type for the past three years.
Number of aircraft

C-212

Year ended
31st December
2005

Year ended
31st December
2004

Year ended
31st December
2003

2

2

2

CN-235

1

4

7

C-295

10

6

5

Total

13

12

14

For 2005, consolidated revenues of the MTA Division
decreased by 41%, from €1.3 billion for 2004 to €0.8 billion
for 2005. The decrease primarily reflects the negative€(0.5) billion impact of the shift of revenue recognition for
the A400M programme until the first quarter of 2006, withno anticipated impact on the overall programme schedule.

For 2004, consolidated revenues of the MTA Division
increased by 40%, from €0.9 billion for 2003 to €1.3 billion
for 2004. The increase reflects the Division’s attainment offurther development milestones for the A400M programme(€0.4 billion of incremental revenue).

Eurocopter
Set forth below is a breakdown of the Eurocopter Division’s deliveries by product type for the past three years.
Year ended
31st December
2005

Year ended
31st December
2004

Year ended
31st December
2003

Eurocopter

334

279

297

Light

183

157

170

Medium

121

102

108

Heavy

18

18

19

Tiger

12

2

0

Number of aircraft

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For 2005, consolidated revenues of the Eurocopter Division
increased by 15%, from € 2.8 billion for 2004 to €3.2 billion
for 2005, primarily reflecting shipsets for the Tiger andNH90 helicopters, and the increase in serial helicopter
deliveries. The first-time consolidation of the Australiansubsidiary also had a net positive effect on the Eurocopter
Division’s 2005 revenues.

For 2004, the Eurocopter Division generated consolidated
revenues of €2.8 billion, an increase of 7% from €2.6 billion
for 2003. Increased revenues generated by Eurocopter’scustomer support services and the increased revenues fromachievement of percentage-of-completion milestones for
the NH90 and Tiger helicopters offset the effect of fewer
helicopter deliveries in 2004.

Defence & Security Systems
Set forth below is a table showing the number of Eurofighter deliveries to Germany and Spain by EADS for the past three years.
Number of aircraftYear ended
31st December
2005

Year ended
31st December
2004

Year ended
31st December
2003

18

9

7

Eurofighter

For 2005, the DS Division generated consolidated revenuesof €5.6 billion, as compared to €5.4 billion for 2004.
The slight increase is mainly attributable to continued
Eurofighter deliveries by the Military Air Systems BU, as
well as the ramp-up of the MBDA missile business.

For 2004, the DS Division generated consolidated revenuesof €5.4 billion, as compared to €5.2 billion for 2003. The
increase was primarily due to the continued ramp-up of the
PAAMS / Aster , MICA, and ASRAAM missile programs.

Space
Set forth below is a breakdown of the Space Division’s deliveries of commercial telecommunications satellites for the past three years.

Commercial Telecommunications Satellites

For 2005, the Space Division generated consolidated
revenues of €2.7 billion, as compared to €2.6 billion
for 2004. The slight increase reflects increased
telecommunications satellite deliveries and the further
ramp-up of Ariane 5 production, as well as a modest increase
in revenues from the Paradigm business at space services.
For 2004, the Space Division generated consolidated
revenues of €2.6 billion, as compared to €2.4 billion for2003. The increase resulted mainly from a ramp-up ofSkynet 4 satellite program services and the achievement ofadditional milestones on the M51 ballistic missile program.

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REGdoc_EV_BOOK2_CH1.indd 31

Year ended
31st December
2005

Year ended
31st December
2004

Year ended
31st December
2003

4

3

1

Consolidated Cost of Sales
For 2005, consolidated cost of sales increased to €27.5 billion
from €25.5 billion for 2004. Gross margin remained
relatively unchanged as compared to 2004 at 19.5%.
For 2004, consolidated cost of sales increased to €25.5 billion
from €24.6 billion for 2003. Gross margin increased from
18.4% in 2003 to 19.6% in 2004, reflecting the effects ofhigher deliveries at Airbus and major restructuring activities
at the Space Division in 2003.

31

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3

Consolidated Selling and Administrative
Expenses

Consolidated Other Income
and Other Expense

For 2005, consolidated selling and administrative expenses
increased slightly, from €2.1 billion for 2004 to €2.2 billion
for 2005, primarily reflecting an overall increase in selling
activities across most of EADS’ businesses.

Consolidated other income and other expense represent gains
and losses on disposals of investments in fixed assets, income
from rental properties and certain provisions.

For 2004, consolidated selling and administrative expenses
decreased slightly, from €2.2 billion for 2003 to €2.1 billion
for 2004, reflecting the results of cost awareness programs
at the BUs and the ongoing effects from restructuring of
EADS’ general and administrative activities.

Consolidated Research and Development
Expenses
For 2005, EADS’ consolidated research and development
expenses remained unchanged as compared to 2004 at€2.1 billion. A380-related research and development(“R&D”) expense in the IFRS consolidated statement ofincome decreased from its peak of €1,082 million for 2003 to€813 million for 2005 (as compared to €983 million for 2004).
On the whole, Airbus R&D expense recorded in the IFRS
consolidated statement of income decreased by €75 million
from 2004 levels. Other consolidated R&D expenses outside
Airbus totalled €416 million — an increase of €24 million
from 2004 resulting mainly from the development of (i)Eurocopter’s EC175 programme in China and (ii) Military
Air Systems’ ISR business. These changes reflect in partthe application of IAS 38 at EADS, which resulted in thecapitalisation of an additional €293 million of R&D in 2005,of which €259 million related to Airbus for the A380.
See “1.1.3 Critical Accounting Considerations, Policies
and Estimates — Research and Development Expenses”.
For 2004, EADS’ consolidated research and development
expenses decreased by 3%, to €2.1 billion for 2004 from
€2.2 billion for 2003. The application of IAS 38 at EADSin 2004 resulted in the capitalisation of an additional€165 million of R&D, of which €152 million related
to Airbus for the A380. Overall, Airbus R&D expense
recorded in the IFRS consolidated statement of income
decreased by €85 million from 2003 levels. Other nonAirbus consolidated R&D expenses totalled €392 million— an increase of approximately €20 million from 2003
resulting mainly from the EADS research centre.

For 2005, the net of other income and other expense waspositive €69 million as compared to positive €137 million
for 2004, primarily reflecting the non-recurrence of the€106 million release of a provision in the DS Division
relating to the Thales Euromissiles litigation reported inconsolidated other income for 2004.
For 2004, the net of other income and other expense waspositive €137 million as compared to negative €(60) million
for 2003, reflecting primarily the impact of the €106 million
provision release in the DS Division included in consolidated
other income for 2004.

Consolidated Amortisation of Goodwill
As a result of EADS’ early adoption of IFRS 3 / IAS 36
revised, goodwill is no longer amortized on a regular basis
as from 1st January 2004, but subject to annual impairment
testing. Consolidated amortisation of goodwill for 2003 was€0.6 billion. No goodwill-related impairment charges wererecorded for 2003, 2004 or 2005.

Consolidated Share of Profit from
Associates and Other Income(Expense) from Investments
Consolidated share of profit from associates and otherincome (expense) from investments principally includes
results from companies accounted for under the equity
method and the results attributable to non-consolidated
investments.
For 2005, EADS recorded €225 million in consolidated
share of profit from associates and other income (expense)from investments as compared to €84 million for 2004.
The €141 million increase primarily reflects the results of
EADS’ equity investment in Dassault Aviation, including a€64 million positive catch-up in 2005 of 2004 income related
to EADS’ investment in Dassault Aviation, versus a negative€(33) million catch-up in 2004.

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For 2004, EADS recorded €84 million in consolidated shareof profit from associates and other income (expense) frominvestments as compared to €186 million for 2003. The€102 million decrease primarily reflects a €(33) million
negative catch-up in 2004 of 2003 income related to
EADS’ investment in Dassault Aviation, versus a positive€77 million catch-up in 2003 of 2002 income related to
EADS’ investment in Dassault Aviation in 2003.
As from 1st January 2005, Dassault Aviation is publishingits financial statements in accordance with IFRS. See “Notes
to Consolidated Financial Statement (IFRS) — Note 9: Shareof profit from associates and other income (expense) frominvestments”.

Consolidated Interest Result
Consolidated interest result reflects the net of interest
income and expenses arising from financial assets or
liabilities.
For 2005, EADS reported a consolidated net interest expenseof €155 million, as compared to €275 million of consolidated
net interest expense for 2004. The improvement inconsolidated net interest result primarily reflects the
improving net cash position of EADS as well as the increased
interest income from sales financing. See “1.1.7 Liquidity
and Capital Resources — Consolidated Financial Liabilities”.
For 2004, EADS reported a consolidated net interest expenseof €275 million, as compared to €203 million of consolidated
net interest expense for 2003. In addition to higher interest
charges for 2004 on European government refundable
advances received, interest charges on financing for the
Skynet5 / Paradigm programme in 2004 contributed tothe increase in consolidated net interest expense. See “1.1.7
Liquidity and Capital Resources — Consolidated Financial
Liabilities”.

Consolidated Other Financial Result
For 2005, consolidated other financial result increased tonegative €(22) million from negative €(55) million for 2004.
This positive €33 million change primarily results fromthe €147 million positive effect in 2005 from valuation
changes of U.S. Dollar-denominated cash balances on theEuro- or British Pound-denominated balance sheets of

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REGdoc_EV_BOOK2_CH1.indd 33

Group companies, which had generated negative otherfinancial results in 2004. This positive factor was partially
offset by a negative €(108) million effect from the mark-tomarket valuation of “embedded derivatives”. “Embedded
derivatives” are financial instruments that, for accounting
purposes, are deemed to be embedded in U.S. Dollardenominated purchase orders of equipment, where theU.S. Dollar is not conclusively the currency in which theprice of the related equipment is routinely denominated ininternational commerce and is not the functional currency ofthe parties to the transaction.
For 2004, consolidated other financial result decreased tonegative €(55) million from positive €148 million for 2003.
This change primarily results from (i) the lower effect in2004 from valuation changes of U.S. Dollar-denominatedfinancial liabilities on the Euro- or British Pounddenominated balance sheets of Group companies, which had
generated positive other financial results in prior periods;(ii) a negative €(10) million effect from the mark-to-market
valuation of embedded derivatives and (iii) interest accruedon tax audit expenses in 2004.
In 2001, postponed deliveries of commercial aircraft related
to the events of 11th September 2001 resulted in a mismatch
between hedged positions and expected cash flows. A rollover plan was carried out in 2002 and 2003 to rephase thematurities of the affected hedges with new delivery dates.
The roll-over plan was completed as of 31st December 2003.
Had this roll-over plan not been implemented, the affected
hedges would have been deemed cancelled for accounting
purposes. As the affected hedges had a negative mark-tomarket value at the end of 2001, cancellation would have
had a negative impact on consolidated other financial result.
See “1.1.3 Critical Accounting Considerations, Policies andEstimates — Accounting for Hedged Foreign Exchange
Transactions in the Financial Statements”.

Consolidated Income Taxes
The effective tax rate was 33% in 2005. See “Notes toConsolidated Financial Statements (IFRS) — Note 11:
Income taxes”.

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3

Consolidated Minority Interests
For 2005, consolidated minority interests were €34 million,
as compared to €18 million for 2004, reflecting primarily theinterests of Finmeccanica (€24 million) and DaimlerChrysler
Luft – und Raumfahrt Holding AG (“DCLRH”)(€11 million) in the results of MBDA and EADS Germany
GmbH, respectively. The 20% share of BAE Systems in
Airbus’ net income was restated in accordance with theapplication of IAS 32 “Financial Instruments: Disclosureand Presentation”, resulting in a €185 million adjustment
to minority interests in 2004. As from 1st January 2005,
consolidated minority interests no longer includes BAE
Systems’ 20% ownership in Airbus. See “1.1.3 Critical
Accounting Considerations, Policies and Estimates — Scopeof and Changes in Consolidation Perimeter” and “Notes
to Consolidated Financial Statements (IFRS) — Note 2:
Summary of significant accounting policies — IAS 32
Financial Instruments: Disclosure and Presentation”.
For 2004, consolidated minority interests were €18 million,
as compared to €12 million for 2003, reflecting primarily
the interests of Finmeccanica (€21 million) in the results of
MBDA.

Consolidated Net Income(Profit for the Period Attributable
to Equity Holders of the Parent)
As a result of the factors discussed above, EADS recorded
consolidated net income of €1,676 million for 2005 ascompared to consolidated net income of €1,203 million
for 2004 and a consolidated net income of €206 million
for 2003.
In 2005, net income for 2004 and 2003 was restated toreflect the retrospective application of IAS 32 “Financial
Instruments: Disclosure and Presentation” in respect of
BAE Systems’ put option for its 20% stake in Airbus.
Additionally, net income for 2004 was restated to reflect theretrospective application of IFRS 2 “Share-based Payments”,
which required the recognition of an expense in respect of
employee stock option plans.
The table below illustrates the adjustments made to 2003
and 2004 net income as a result of the application of theaccounting principles described in the preceding paragraph.

Year ended
31st December
2005

Year ended
31st December
2004

Year ended
31st December
2003

1,676

1,030

152

IFRS 2 Restatement

-

(12)

-

IAS 32 Restatement

-

185

54

1,676

1,203

206

(in €m)Reported Consolidated Net Income (Loss)

Restated Consolidated Net Income (1)(1) 2005 consolidated net income reflects a positive €289 million impact from the application of revised IAS 32 “Financial Instruments: Disclosure and Presentation” and a negative €(33) million
impact from the application of IFRS 2.

Earnings per Share (EPS)
Basic earnings per share increased by €0.61 per share, from€1.50 per share in 2004 (after the restatement of net income
described above) to €2.11 per share in 2005. The number ofoutstanding shares at 31st December 2005 was 797,140,426.
The denominator used to calculate EPS was 794,734,220
shares, reflecting the weighted average number of shares
outstanding during the year. In 2003, EADS reported basic
earnings per shares of €0.26 (after the restatement of net
income described above).

Diluted earnings per share increased by €0.59 per share,from €1.50 per share in 2004 (after the restatement of
net income described above) to €2.09 per share in 2005.
The denominator used to calculate diluted EPS was
800,216,353, reflecting the weighted average number ofshares outstanding during the year, adjusted to assume
the conversion of all potential ordinary shares. In 2003,
EADS reported diluted earnings per shares of €0.26 (after
the restatement of net income described above). See “Notes
to Consolidated Financial Statements (IFRS) — Note 20:
Total equity” and “Note 35: Earnings per share”.

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1.1.6 Statement of Changes in Consolidated Total Equity(including Minority Interests)
The following table sets forth a summary of the statement of changes in consolidated total equity for the period 1st January2005 through 31st December 2005.
(in €m)

16,354 (1)Balance at 31st December 2004
Capital increase

187

Share-based payments

33

Profit for the period

1,710

Cash distribution to shareholders(396)

Purchase of treasury shares(288)

Accumulated other comprehensive income(3,698)

thereof currency translation adjustments(58)

Balance at 31st December 2005

13,902(1) The balance of consolidated total equity at 31st December 2004 reflects the application of revised IAS 32 “Financial Instruments: Disclosure and Presentation” and IAS 16 “Property, plant andequipment”. See “Notes to Consolidated Financial Statements (IFRS) — Note 2: Summary of significant accounting policies”.

The decrease in consolidated total equity in 2005 primarilyreflects the effects of changes in accumulated othercomprehensive income (“AOCI”), partly offset by the year’s
higher net income. Set out below is a discussion of AOCI
and its impact on consolidated total equity. For a discussionof the other line items impacting consolidated total equity,
see “Notes to Consolidated Financial Statement (IFRS)— Note 20: Total equity”.
In 2005, AOCI decreased by €3,698 million. The change in
AOCI was due to the negative variation (after accounting fordeferred taxes) of the year-end mark-to-market valuation ofthat portion of EADS’ hedge portfolio qualifying for hedge
accounting under IAS 39.

from 31st December 2004, based on a closing rate of€-U.S.$1.18, as compared to a positive valuation change of€0.9 billion from 31st December 2003 based on a closing
rate of €-U.S.$1.36.
Positive pre-tax mark-to-market values of cash flow hedges
are included in other assets, while negative pre-tax mark-tomarket values of cash flow hedges are included in provisions
for financial instruments. Year-to-year changes in themark-to-market value of cash flow hedges are recognised as
adjustments to AOCI. These adjustments to AOCI are netof corresponding changes to deferred tax assets (for cash
flow hedges with negative mark-to-market valuations) anddeferred tax liabilities (for cash flow hedges with positive
mark-to-market valuations).

IAS 39 Related Impact on AOCI
At 31st December 2005, the notional amount of theoutstanding portfolio of hedges qualifying for IAS 39
hedge accounting treatment (“cash flow hedges”)
amounted to approximately U.S.$47.1 billion hedged
against the Euro and the Pound Sterling. The year-end
mark-to-market valuation of EADS’ portfolio of cash flow
hedges resulted in a negative valuation change of €5.7 billion

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Set out below is a graphic presentation of cash flow hedge related movements in AOCI over the past three years (in €m).
Related movements in AOCI over the past three years in €m
8,756
7,847
5,647
4,022
3,032

1,962

-1,070-2,810OCI Net Asset

31st December 2003: U.S.$1.2630-3,109Net Equity OCI(including 20% Airbus)

Deferred taxes

31st December 2004: U.S.$1.3621

As a result of the negative change in the fair market
valuation of the cash flow hedge portfolio in 2005, AOCIrelated net assets decreased to €3.0 billion for 2005 from
€8.8 billion for 2004. The corresponding €2.0 billion tax
effect decreased the AOCI-related deferred tax liability to€1.1 billion at 31st December 2005.

Currency Translation Adjustment Impact
on AOCI
The negative €(58) million currency translavtion adjustment(CTA) related impact on AOCI in 2005 reflects theconsequences (negative €(237) million) of the merger of Airbus
Groupement d’intérêt économique (“Airbus GIE”)

31st December 2005: U.S.$1.1797(a U.S. Dollar-denominated entity) into Airbus SAS(a Euro-denominated entity), which were mostly offset by the
positive effects of the strengthening U.S. Dollar. Before themerger, Airbus GIE operations were recorded at the current
exchange rate of the period except for those hedged withfinancial instruments. As from 1st January 2004, former
Airbus GIE operations are recorded on the basis of historicalexchange rates. As a result, no additional CTA is generated
by former Airbus GIE operations. The portion of outstanding
CTA as at 31st December 2003, booked in respect of nonmonetary balance sheet items relating to transactions realised
as from 1st January 2004 (i.e., mainly aircraft deliveries), is
gradually released to the consolidated statement of income, inline with such deliveries.

1.1.7 Liquidity and Capital Resources
The Group’s policy is to maintain sufficient cash and cash
equivalents at all times to meet its present and future cash
requirements. This policy objective is met through:• implementation of measures designed to generate cash;• developing and maintaining access to the capital markets; and• containment of exposure to customer financing.

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EADS benefits from a strong cash position, with €10.6 billionof consolidated gross cash (including securities of €1.0 billion)
at 31st December 2005. This cash position is further
supported by a €3.0 billion syndicated back-up facility.
Overall, financial liabilities (short and long-term) amounted to€5.1 billion at 31st December 2005.
EADS calculates its consolidated net cash position as thedifference between (i) cash, cash equivalents and securities and(ii) financial liabilities (as recorded in the consolidated balance
sheet). The net cash position at 31st December 2005 was€5.5 billion. The factors affecting EADS’ cash position, andconsequently its liquidity risk, are discussed below.

(in €m)Consolidated net cash position at 1st January
Adjustment for changed treatment of embedded leases(1)

Adjusted consolidated net cash position at 1st January

1.1.7.1 Cash FlowEADS generally finances its manufacturing activities
and product development programs, and in particular
the development of new commercial aircraft, through a
combination of flows generated by operating activities,
customers’ advance payments, risk-sharing partnerships
with sub-contractors and European government refundable
advances. In addition, EADS’ military activities benefit fromgovernment-financed research and development contracts. If
necessary, EADS may raise funds in the capital markets.
The following table sets forth the variation of EADS’
consolidated net cash position over the periods indicated.

Year ended
31st December 2005

Year ended
31st December 2004

3,961

3,105

–

(97)

3,961

3,008

Gross cash flows fromOperations (2)

3,868

2,858

Changes in other operating assets and liabilities

1,239

2,155

thereof change in European refundable advances
Cash used for investing activities (3)thereof industrial capital expenditures
thereof customer financing
thereof others

(103)

2

(2,694)(3,399)(2,818)(3,017)

174

(188)

(50)

(194)

Treasury share buy-back

(288)

(81)

Cash distribution to shareholders

(396)

(320)

Payment related to liability for puttable instruments (4)

(93)

(64)

Capital increase

187

43

Other changes in financial Position

(295)

(239)

thereof financial liabilities non-recourse to EADS

(121)

(369)

Consolidated net cash position at 31st December

5,489

3,961

Free Cash Flows (3)

2,413

1,614

2,239

1,802

thereof Free Cash Flows before customer financing(1) Embedded leases accounted for as financial liabilities.
(2) Represents cash flow from operations, excluding variations in working capital.
(3) Does not reflect (i) investments in, or disposals of, available-for-sale securities (disposal of €10 million for 2004; investment of €559 million for 2005), which are classified as cash and not as

investments solely for the purposes of this net cash presentation; (ii) changes in cash from change in consolidation (€9 million for 2004; €12 million for 2005); or (iii) increase in customer financing
when it is non-recourse to EADS (€(369) million for 2004; €(121) million for 2005).
(4) Represents dividend paid to BAE Systems in respect of its 20% stake in Airbus.

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The consolidated net cash position at 31st December 2005
was €5,489 million, a 38.6% increase from 31st December 2004.
The increase reflects (i) improved profit on a higher numberof deliveries at Airbus, (ii) an optimization of working capitalthrough the receipt of pre-delivery payments in line withgrowth in the order book and increasing near-term deliveries,(iii) the effects of an ongoing Company-wide focus on cash
management and (iv) the positive cash impact of customer
financing activities (sell-downs). These positive factors
were partly offset by (i) the €3.3 billion inventory build-up(in particular for the A380 and A400M programmes), (ii)
on-going capital expenditures at Airbus, MTAD and theSpace Division, (iii) the €396 million cash distribution toshareholders and (iv) the buyback of shares for €268 million.

Gross Cash Flows from Operations
Gross cash flows from operations increased by€1,010 million to €3,868 million for 2005, primarily asa result of the higher earnings generated during the year
(an increase over 2004 of €473 million, before minority
interests).

Changes in Other Operating Assets
and Liabilities (Working Capital)
Working capital is comprised of trade receivables, inventory,
other assets and prepaid expenses netted against trade(in € bn)liabilities, other liabilities (including customer advances) anddeferred income.
Changes in working capital resulted in a positive impact
on the net cash position for 2005 (€1.2 billion) and 2004(€2.2 billion). The main net contributor to the positive
working capital variation was the further inflow of overall
pre-delivery payments from customers (approximately€4.2 billion in 2005, as compared to €1.8 billion in2004), partially offset by the change in gross inventory(approximately €(3.3) billion in 2005 and €0.4 billion in2004), primarily reflecting the ramp-up of Airbus productionof the A380.
European Government Refundable Advances. As of
31st December 2005, total European government refundable
advances received, recorded on the balance sheet in the line
item “other liabilities”, amounted to €5.3 billion, including
accrued interest.
For 2005, new receipts of European government refundable
advances totalled €0.4 billion and reimbursements
totalled €0.5 billion. Related accrued interest for 2005 of€0.24 billion was recorded on the balance sheet in the line
item “other liabilities”.
Set out below is a breakdown of total amounts ofEuropean government refundable advances outstanding,by product / project.

2005

2004

Long Range & Wide Body

1.8

2.0

A380

2.8

2.5

Eurocopter

0.2

0.2

Others

0.5

0.4

EADS

5.3

5.1

Cash Used for Investing Activities
Management categorises cash used for investing activities
into three components: (i) industrial capital expenditures,(ii) customer financing and (iii) net investments in subsidiaries.
Industrial Capital Expenditures. Industrial capital
expenditures (investments in property, plant and equipment
and intangible assets) amounted to €2.8 billion for 2005

as compared to €3.0 billion for 2004. A380-related capital
expenditure totalled €0.8 billion for 2005, as comparedto €1.3 billion for 2004 (including capitalized researchand development costs). See “Part 2 / 1.1.2 Airbus —Products and Services”. To date, total A380-related capital
expenditures is €4.5 billion, including the capitalisation ofcertain prototypes for approximately €0.3 billion.

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The remaining portion of capital expenditures related
to other programmes at Airbus of €1.0 billion (including€0.2 million for the A400M programme) and additional
programmes in the other divisions of €1.0 billion,
including the build-up of Skynet 5 satellites at
Paradigm Secure Communication Ltd. Excluding Airbus
and Paradigm-related expenditures, EADS’ other divisions
incur approximately €0.5 billion annually in capital
expenditures related to ongoing businesses. Investments
in aircraft leases are included in customer financing, andnot in industrial capital expenditures, even though theunderlying assets are eventually recorded in property, plantand equipment.
For the period 2006 to 2007, it is estimated that most of
EADS’ capital expenditures will occur in connection with
Airbus activities — in particular, for the development of
the A380, the A350 and the A400M programmes. See “Part2 / 1.1.2 Airbus — Products and Services”.

Customer Financing. Consolidated cash flows generated
by customer financing amounted to €174 million for 2005.
EADS aims to structure financing so as to facilitate thefuture sell-down or reduction of its exposure. The cash
inflow of €174 million primarily results from the payments
received on sell-downs and repayments of outstanding
finance leases and loans over the course of the year morethan offsetting additions to customer sales financing.
See “Sales Financing”.
Others. For 2005, the negative €(50) million figure primarilyreflects net investments in subsidiaries, including theacquisition of the Nokia PMR business.

Free Cash FlowsAs a result of the factors discussed above, positive free
cash flows amounted to €2.4 billion for 2005, as comparedto €1.6 billion for 2004. Positive free cash flows before
customer financing were €2.2 billion for 2005 as comparedto €1.8 billion for 2004.

1.1.7.2 Consolidated Cashand Cash Equivalents
The cash and cash equivalents and securities portfolio of
the Group is invested mainly in non-speculative financial
instruments, mostly highly liquid, such as certificates ofdeposits, overnight deposits, commercial paper and othermoney market instruments which, for cash and cash
equivalents, generally have a maturity of less than one year.
Therefore, EADS assesses its exposure towards price risk
due to changes in interest rates and spreads as minimal. See“1.1.8 Hedging Activities — Interest Rates” and “Notes
to Consolidated Financial Statements (IFRS) — Note 30a:
Information about Financial Instruments — Financial risk
management”.
In 2003, the fully automated cross-border cash poolingsystem (covering France, Germany, Spain, the Netherlands
and the U.K.) became operational. A Group-wide
implementation of this system to cover entities locatedin other countries is ongoing. The cash pooling systemenhances Management’s ability to assess reliably andinstantaneously the cash position of each subsidiary within
the Group and enables Management to allocate cash
optimally within the Group depending upon shifting shortterm needs.
Short-term securities that are readily convertible to known
amounts of cash and which are subject to an insignificant
risk of change in value, which had previously been includedin the line item “securities” in the consolidated balance
sheet, have been reclassified to the line item “cash and cash
equivalents”.
Total cash and cash equivalents (including available-forsale securities) includes the full consolidation of cash at
Airbus in an amount of €4.0 billion. However, EADS’
stake therein is only 80%. Similarly, total cash and cash
equivalents includes €0.9 billion from the 50% consolidationof MBDA. However, EADS’ stake in MBDA is only 37.5%,
representing 75% of the consolidated amount.

Other Changes in Financial Position
In 2004 and 2005, the cash outflows of €(239) million and€(295) million, respectively, primarily reflects the impact of
non-recourse customer financing.

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1.1.7.3 Consolidated Financial Liabilities
The following table sets forth the composition of EADS’ consolidated financial liabilities, including both short-and long-term
debt, as of 31st December 2005:
Not Exceeding
1 year(in €m)Finance Leases(1)31st December 2005
Over 1 year up
More Than
to 5 years
5 years

Total

87

163

78

328

0

140

1,519

1,659

Liabilities to financial institutions

146

380

972

1,498

Liabilities to affiliated companies

112

0

0

112

Loans

207

409

528

1,144

Bonds

Other

356

0

0

356

Total

908

1,092

3,097

5,097 (2)(1) This figure reflects the €1,102 million effect of the netting of defeased bank deposits against sales financing liabilities.
(2) Financial liabilities include non-recourse Airbus debt for €1,247 million.

The outstanding balance of financial liabilities decreasedslightly from €5.2 billion at 31st December 2004 to€5.1 billion at 31st December 2005.

European Investment Bank Loan. In 2004, the European
Investment Bank granted EADS a long-term loan in theamount of U.S.$421 million at an interest rate of 5.1%.

Total financial liabilities include the full consolidationof Airbus financial debt for an amount of €2.7 billion.
However, EADS is liable for only 80% of such financial
debt incurred after 1st January 2001, in line with its stake in
Airbus. See “Sales Financing”.

As a policy matter, EADS systematically rejects acceleration
clauses which are based on a credit rating downgrade or on
any non-material measurable event not under the control of
EADS.

Overall, Management believes that the maturity profile ofthe consolidated financial liabilities is prudent and consistent
with the structure of EADS’ consolidated assets andexpected cash flows.

1.1.7.4 Sales Financing

EMTN Programme. In February 2003, EADS launched a€3 billion Euro Medium Term Note (“EMTN”) Programme,with a subsequent initial €1.0 billion issue of a seven year
4.625%, later swapped into a variable rate of three-month
LIBOR plus 1.02%, capped at 4%. In September 2003,
EADS issued an additional €0.5 billion of fifteen year 5.5%
fixed rate notes under the EMTN programme, which was
swapped during 2005 into a variable rate of three-month
EURIBOR plus 1.81%. The objectives of the two issuances
under the EMTN programme are to refinance existing debt
and to lengthen the maturity profile of the Company’s
debt. Management believes that the establishment of suchfinancing schemes will enhance its overall presence andstanding in the capital markets and increase its flexibility inresponding to fluctuating funding requirements.

EADS favours cash sales, and encourages independent
financing by customers, in order to avoid retaining credit orasset risk in relation to delivered products.
However, in order to support product sales, primarily at
Airbus and ATR, EADS may agree to participate in thefinancing of customers, on a case-by-case basis, directly or
through guarantees provided to third parties. Dedicated andexperienced teams at headquarters and at Airbus and ATR,
respectively structure such financing transactions and closely
monitor total EADS finance and asset value exposure and its
evolution in terms of quality, volume and cash requirements
intensity. EADS aims to structure all financing it provides
to customers in line with market-standard contractual terms
so as to facilitate any subsequent sale or reduction of such
exposure.
In determining the amount and terms of a financing
transaction, Airbus and ATR take into account the airline’s
credit rating as well as risk factors specific to the intended

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operating environment of the aircraft and its expected future
value. Market yields and current banking practices also serve
to benchmark the financing terms offered to customers.
Approximately 40% of the €5.1 billion of total consolidated
financial liabilities as at 31st December 2005, are derived
from the funding of EADS’ sales financing assets, which(in €m)are of a long-term nature and have predictable payment
schedules. The increase from 36% of total financial liabilities
in 2004 reflects the effects of the strengthening U.S. Dollar
on these U.S. Dollar-denominated liabilities. The following
table presents a breakdown of consolidated financial
liabilities related to sales financing:
Principal Amount
Outstanding 2005

Principal Amount
Outstanding 2004

118

270

1,074

844

882

780

2,074

1,894

Finance Leases (1)Liabilities to financial institutions
Loans
Total Sales Financing Liabilities(1) These figures reflect the effect (€1,102 million in 2005; €1,089 million in 2004) of the netting of defeased bank deposits against sales financing liabilities.

The amounts of total sales financing liabilities at
31st December 2005 and 2004 reflect the offsetting ofsales financing liabilities by €1.1 billion (for 2005) and€1.1 billion (for 2004) of defeased bank deposits securing
such liabilities. Of the remaining €2.1 billion total sales
financing liabilities at 31st December 2005, €1.2 billion isin the form of non-recourse debt, where EADS’ repayment
obligations are limited to its receipts from transaction
counterparties. A significant portion of financial assets
representing non-cancellable customer commitments
have terms closely matching those of the related financial
liabilities. See “Notes to Consolidated Financial Statements(IFRS) — Note 22: Financial liabilities”. See also “— 1.1.3
Critical Accounting Considerations, Policies and Estimates —Accounting for Sales Financing Transactions in the Financial
Statements”.
Sales financing transactions are generally collateralised by
the underlying aircraft. Additionally, Airbus and ATR
benefit from protective covenants and from security
packages tailored according to the perceived risk and the legal
environment of each transaction.
EADS classifies the exposure arising from its sales financing
activities into two categories: (i) Financing Exposure,
where the customer’s credit — its ability to perform its
obligations under a financing agreement — constitutes therisk; and (ii) Asset Value Exposure, where the risk relates todecreases in the future value of the financed aircraft. See also
“1. Financial Market Risks — Exposure to Sales Financing
Risk”.

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REGdoc_EV_BOOK2_CH1.indd 41

Customer Financing Exposure. Certain EADS and BAE
Systems group companies retain joint and several liability
for sales financing exposure incurred by Airbus prior to theformation of Airbus S.A.S. EADS’ exposure to liabilities
incurred by Airbus following 1st January 2001, is limited byits status as a shareholder in Airbus S.A.S., of which it owns
80% of the shares. EADS proportionally consolidates only
50% of ATR and shares the risk with its partner, Alenia.
Airbus Customer Financing Exposure as of 31st December
2005 is spread over approximately 150 aircraft, operated at
any time by approximately 36 airlines. In addition, otheraircraft related assets, such as spare parts, may also serve as
collateral security. 59% of Airbus Financing Gross Exposure
is distributed over five airlines in four countries, not taking
backstop commitments into account.
ATR Customer Financing Gross Exposure as of
31st December 2005 is distributed over 190 aircraft.

Gross Customer Financing Exposure: Customer Financing
Gross Exposure is computed as the sum of (i) the net bookvalue of aircraft under operating leases; (ii) the outstanding
principal amount of finance leases or loans; and (iii) the netpresent value of the maximum commitment amounts underfinancial guarantees.
Gross Financing Exposure from operating leases, financeleases and loans differs from the value of related assets
on EADS’ balance sheet and related off-balance sheet
contingent commitments for the following reasons: (i) assets
are recorded in compliance with IFRS, but may relate to41

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transactions where there is limited recourse to Airbus or
ATR; (ii) the value of the assets is impaired or depreciatedon the consolidated balance sheet; (iii) off-balance sheet gross
exposure is calculated as the net present value of future
payments, whereas the Financial Statements present the
total future payments in nominal terms; and (iv) exposure
related to AVGs recorded as operating leases in the Financial
Statements is categorised under Asset Value Exposure, notFinancing Exposure.
Airbus has reduced Gross Financing Exposure by 37%
from its 1998 peak of U.S.$6 billion, to U.S.$3.8 billion(€3.2 billion) as of 31st December 2005, while the Airbus
fleet in operation has increased from 1,838 aircraft to 3,956
over the same period. Management believes the current levelof Gross Financing Exposure enhances Airbus’ ability toassist its customers in the context of a tight aircraft financing
market. The chart below illustrates the evolution of Airbus’
Gross Financing Exposure during 2005 (in millions).
Evolution of Airbus Gross Exposure during 2005
U.S. $4,560€3,348881–1,354–291

U.S. $3,796€3,218Additions
Disposals

December 2004

Amortisation

December 2005

ATR 100% has reduced gross exposure by approximately 54%
from a peak of U.S.$1.8 billion in 1997 to U.S.$0.8 billion(€0.7 billion) as of 31st December 2005.
In response to the continued demand by its customers forfinancing, EADS expects to undertake additional outlays inconnection with customer financing of commercial aircraft,mostly through finance leases and loans. Nevertheless, it
intends to keep the amount as low as possible, and expects
the net increase of sales financing gross exposure to be very
low in 2006.

Net Exposure. Net exposure is the difference between
gross exposure and the estimated value of the collateral
security. Collateral value is assessed using a dynamic model
based on the net present value of expected future rentals
from the aircraft in the leasing market and potential costof default. This valuation model yields results that are
typically lower than residual value estimates by independentsources in order to allow for what Management believes is
its conservative assessment of market conditions, as well
as for repossession and transformation costs. See “1.1.3
Critical Accounting Considerations, Policies and Estimates —Accounting for Sales Financing Transactions in the Financial
Statements”.
The table below shows the transition from gross to net
financing exposure (which does not include AVGs) as at
31st December 2005 and 2004. It includes 100% of Airbus’
customer financing exposure and 50% of ATR’s exposure,reflecting EADS’ stake in ATR.

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3(in €m)Note*

Airbus 100%
12 / 31 / 2005

Airbus 100%
12 / 31 / 2004

ATR 50%12 / 31 / 2005

ATR 50%12 / 31 / 2004

Total EADS
12 / 31 / 2005

Total EADS
12 / 31 / 2004

Operating Lease

13

1,308

1,835

185

146

1,493

1,981

Finance leases and loans

14

1,616

2,044

25

22

1,641

2,066

96

119

1,115

119

OthersOn Balance sheet customer
financing
Off Balance sheet customer
financingNon-recourse transactions onbalance sheet

1,019

29

3,943

3,879

306

287

4,249

4,166

846

732

42

46

888

778

(1,327)(1,135)(1,327)(1,135)

(244)

(128)

(244)

(128)

Off balance sheet adjustments
Gross customer financing
exposure

29

3,218

3,348

348

333

3,566

3,681

Collateral Values

29(1,819)(1,916)

(314)

(300)

(2,133)(2,216)

1,399

1,432

34

33

1,433

1,465

Net exposure
Impairment and provisions
On Operating Lease

13

(319)

(532)

0

0

(319)

(532)

On Finance Lease & loans

14

(396)

(466)

0

0

(396)

(466)

On Inventories

15

0

(1)

0

0

0

(1)

On assets held for sale
On On balance sheet customer
financing
On Off balance sheet
commitments
Asset impairments
and Provisions

19

(196)

0

0

0

(196)

0

21

0

0

(34)

(33)

(34)

(33)

29

(488)

(433)

0

0

(488)

(433)

(1,399)(1,432)

(34)

(33)

(1,433)

-

-

-

-

-

Residual exposure-(*) The indicated numbers refer to the number of the Notes to Consolidated Financial Statements (IFRS).

The gross value of consolidated operating leases shown in
the table above (€1,493 million in 2005 and €1,981 million
in 2004) is accounted for in ‘Property, Plant and Equipment’at net book value of operating leases before impairment.
Corresponding asset impairments (€319 million in 2005
and €532 million in 2004) are charged against this net bookvalue. See “Notes to Consolidated Financial Statements(IFRS) — Note 13: Property, Plant and Equipment” and“Note 29: Commitments and contingencies”.
Also shown in the table above is the gross value forconsolidated finance leases and loans (€1,641 million in2005 and €2,066 million in 2004). Consolidated financeleases (€924 million in 2005 and €1,120 million in 2004)
are accounted for as long-term financial assets, recorded attheir net book value before impairment. Loans (€717 million
in 2005 and €946 million in 2004) are also accounted for
as long-term financial assets, recorded at their outstanding
gross amount. Corresponding overall asset impairment

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REGdoc_EV_BOOK2_CH1.indd 43(€396 million in 2005 and €466 million in 2004) is charged
against the net book value. See “Notes to Consolidated
Financial Statements (IFRS) — Note 14: Investments inassociates, other investments and long-term financial assets”.
Off-balance sheet customer financing exposure at Airbus
and 50% ATR was €888 million in 2005 and €778 million
in 2004. These amounts reflect the total nominal valueof future payments under lease in / lease out structures.
The year-to-year increase mostly reflects the impact of thestrengthening U.S. Dollar on the Euro amount of suchpayments. The corresponding net present value of future
payments (discounted and net of mitigating factors) is
included in total Gross Financing Exposure for an amountof €644 million in 2005 and €650 million in 2004.
A provision of €488 million exists in EADS’ balance sheet
as of 31st December 2005 to cover the full amount of thecorresponding net exposure. See “Notes to Consolidated

43

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Financial Statements (IFRS) — Note 29: Commitments andcontingencies”.

residual value of the aircraft. The remaining Airbus Gross
Asset Value Exposure is recorded on-balance sheet.

Asset Value Exposure. A significant portion of EADS’
asset value exposure arises from outstanding AVGs,
primarily at Airbus. Management considers the financial
risks associated with such guarantees to be manageable.
Three factors contribute to this assessment: (i) the guarantee
only covers a tranche of the estimated future value of theaircraft, and its level is considered prudent in comparison
to the estimated future value of each aircraft; (ii) the AVGrelated exposure is diversified over a large number of aircraft
and customers; and (iii) the exercise periods of outstanding
AVGs are distributed through 2019, resulting in low
levels of exposure maturing in any year. Because exercise
dates for AVGs are on average in the 10th year following
aircraft delivery, AVGs issued in 2006 will generally not be
exercisable prior to 2016, and, therefore, an increase in nearterm exposure is not expected.

Net Exposure. The present value of the risk inherent to
the given asset value guarantees, where a settlement is
considered to be probable, is fully provided for and includedin the total amount of provisions for asset value risks of€647 million. This provision covers a potential expectedshortfall between the estimated value of the aircraft ofthe date upon which the guarantee can be exercised andthe value guaranteed on a transaction basis taking counter
guarantees into account. See “Notes to Consolidated
Financial Statements (IFRS) — Note 21(d): Other
provisions”.

Gross Exposure. Gross Asset Value Exposure is definedas the sum of the maximum guaranteed tranche amounts(as opposed to the sum of the maximum guaranteedasset value amounts) under outstanding AVGs. At
31st December 2005, Airbus Gross Asset Value Exposure(discounted present value of future guaranteed tranches)
was U.S.$3.0 billion (€2.6 billion). The off-balance sheet
portion of Airbus Gross Asset Value, representing AVGs
with net present values of less than 10% of the sales priceof the corresponding aircraft, was €1,054 million, excluding€507 million where the risk is considered to be remote. In
many cases, the risk is limited to a specific portion of the

Backstop Commitments. While commitments to provide
financing related to orders on Airbus’ and ATR’s backlog
are also given, such commitments are not considered to bepart of gross exposure until the financing is in place, which
occurs when the aircraft is delivered. This is due to the factthat (i) past experience suggests it is unlikely that all suchproposed financings actually will be implemented (although
it is possible that customers not benefiting from suchcommitments may nevertheless request financing assistanceahead of aircraft delivery), (ii) until the aircraft is delivered,
Airbus or ATR retain the asset and do not incur an unusual
risk in relation thereto (other than the corresponding workin-progress), and (iii) third parties may participate in thefinancing.
See “Notes to Consolidated Financial Statements (IFRS)— Note 29: Commitments and contingencies” for further
discussion of EADS’ sales financing policies and accounting
procedures.

1.1.8 Hedging Activities
1.1.8.1 Foreign Exchange Rates
A significant portion of EADS’ revenues are denominatedin U.S. Dollars (approximately U.S.$25 billion for 2005),
with approximately half of such currency exposure ‘naturally
hedged’ by U.S. Dollar- denominated costs. The remainderof costs is incurred primarily in Euro, and to a lesser extent,
in Pounds Sterling. Consequently, to the extent that EADS
does not use financial instruments to hedge its net current

and future exchange rate exposure from the time of acustomer order to the time of delivery, its profits will beaffected by market changes in the exchange rate of the U.S.
Dollar against these currencies. Consistent with EADS’
policy of generating profits principally from its operations,
EADS uses hedging strategies to manage and minimise theimpact on its EBIT* from the volatility of the U.S. Dollar.
See “1.1.4 Measurement of Management’s Performance— EBIT* Performance by Division — Hedging Impact on

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EBIT*”. See also “1. Financial Market Risks — Exposure to
Foreign Currencies”.
As EADS uses financial instruments to hedge only its net
foreign currency exposure, the portion of its U.S. Dollardenominated revenues not hedged by financial instruments(approximately 30% of total consolidated revenues) is exposed
to changes in exchange rates. Of this non-hedged portionof revenues, a certain percentage (relating to customer predelivery payments) are converted into Euro at the spot rate
effective at the time the payment was received by EADS.
The remainder of non-hedged U.S. Dollar-denominatedrevenues (corresponding to payments upon delivery) are
subject to changes in the spot rate at the time of delivery.
See “1.1.3 Critical Accounting Considerations, Policies andEstimates — Accounting for Foreign Currency DenominatedOperations in the Financial Statements”.

Exposure on aircraft sales. For products such as aircraft,
EADS typically hedges forecasted sales in U.S. Dollars
related to firm commitments and forecasted transactions
for the following year through 2011. The hedged items
are defined as the first forecasted highly probable future
cash inflows for a given month based upon final payments
at delivery. The amount of the first flows to be hedged isdecided by a treasury committee and typically covers up to
100% of the equivalent of the net U.S. Dollar exposure. For
EADS, a forecasted transaction is regarded highly probableif the future delivery is included in the firm order book or
is very likely to materialise in view of contractual evidences(e.g., a letter of intent). The coverage ratio is adjusted to take
into account macroeconomic movements affecting the spot
and interest rates, as applicable.

Exposure on project related business. For project-related
business, EADS generally hedges 100% based on specificflows arising out of firm and individual contracts. Hedging is
implemented on an individual project basis.
Exposure on treasury operations. In connection with its
treasury operations, EADS headquarters enters into foreignexchange swaps (notional amount of €0.7 billion at year-end2005) to adjust for short-term fluctuations of non-Euro cash
balances at the BU level. Year-to-year changes in the fairmarket value of these swaps is recorded on the consolidated
statement of income in the line item “other financial result”.
These changes may have a material impact on EADS’ net
income.
Hedge Portfolio. EADS manages a long-term hedge
portfolio with a maturity of several years covering its net
exposure to U.S. Dollar sales, mainly from the activities ofAirbus (and to a lesser extent, of the Eurocopter Division,
ATR, the DS Division and the MTA Division). The net
exposure is defined as the total currency exposure(U.S. Dollar-denominated revenues), net of the part that is“naturally hedged” by U.S. Dollar-denominated costs.
The hedge portfolio covers the vast majority of the Group’s
hedging transactions. As hedging instruments, EADS
primarily uses foreign currency forwards and, to a lesser
extent, option contracts.
The contract or notional amounts of EADS’ foreign exchange
derivative financial instruments shown below do notnecessarily represent amounts exchanged by the parties and,thus, are not necessarily a measure for the exposure of theGroup through its use of derivatives.

The notional amounts of such foreign exchange derivative financial instruments are as follows, specified by year of expectedmaturity:
Year ended 31st December 2005(in €m)Remaining periodNot
1 yearexceedingup to
1 year
5 yearsMorethan
5 years

Total

365

37,094Foreign Exchange Contracts:
Net forward sales contracts

9,653

27,076Structured USD forward:
Purchased USD call options

119

573

0

692

Purchased USD put options

1,495

1,190

0

2,685

Written USD call options

1,495

1,190

0

2,685

625

0

117

742

FX swap contracts

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1.1 Management’s Discussion and Analysis of Financial Condition and Results of Operations

3

1.1.8.2 Interest Rates
EADS uses an asset and liability management approachwith the objective of limiting its interest rate risk. The
Company attempts to match the risk profile of its assets
with a corresponding liability structure. The net interest rate
exposure is managed through several types of instruments
in order to minimise risks and financial impacts. Therefore,
EADS may use interest rate derivatives for hedging
purposes.
Hedging instruments that are specifically related to debt
instruments (such as the notes issued under the EMTN
programme and those relating to the financing of Paradigm)
have at most the same nominal amounts, as well as the same
maturity dates, as the corresponding hedged item.

Year ended 31st December 2005(in €m)Interest rate swaps and caps

Since its creation, EADS has been in a positive net cash
position. As interest rate sensitivity analysis is mostly
relevant to large borrowers, EADS considers that the added
value of such analysis to an understanding of the Company’s
interest rate exposure is minimal. Such analysis has therefore

Regarding the management of its cash balance, EADS invests
mainly in short-term instruments and / or floating rate
instruments in order to further minimise any interest risk in
its cash and securities portfolio.
The contract or notional amounts of EADS’ interest rate
derivative financial instruments shown below do notnecessarily represent amounts exchanged by the parties and,thus, are not necessarily a measure for the exposure of theGroup through its use of derivatives.
The notional amounts of such interest rate derivative
financial instruments are as follows, specified by expectedmaturity.

Remaining periodNot
1 yearexceedingup to
1 year
5 years

105

2,504

More
than
5 years

Total

2,921

5,530

not been included herein, and the above table of interest
rate derivatives has not been correlated with the precedingtable of financial debt. As circumstances warrant, EADS willconsider including such an analysis in future Registration
Documents.

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1.2 Financial Statements

3

1.2 Financial Statements
The following documents shall be deemed to be incorporated
in and form part of this Registration Document:• the consolidated financial statements and the statutoryfinancial statements of EADS for the year ended
31st December 2003 as included in “Part 1 / 1.2 Financial
Statements” of the Document de Référence filed in Frenchwith the Autorité des marchés financiers on 1st April 2004
and filed in English with the Chamber of Commerce ofAmsterdam; and• the consolidated financial statements (IFRS) and thefinancial statements (Dutch GAAP) of EADS for the year
ended 31st December 2004 as included in “Part 1 / 1.2
Financial Statements” of the Document de Référence
filed in French with the Autorité des marchés financierson 19th April 2005 and filed in English with the Chamberof Commerce of Amsterdam.

EADS Financial Statements and Corporate Governance

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Copies of the Document de Référence for the financial years
ended 31st December 2003 and 31st December 2004 areavailable free of charge upon request in English, French,
Spanish and German languages at the registered office of
the Company and on www.eads.com. Copies of the financial
statements referred to above are also available in English
on www.eads.com and for inspection at the Chamber ofCommerce of Amsterdam.
EADS confirms that the reports of the auditors set forth insections 1.2.1 and 1.2.2 below (as well as those incorporated
by reference herein) have been accurately reproduced andthat as far as EADS is aware and is able to ascertain fromthe information provided by the auditors, no facts havebeen omitted which would render such reports inaccurate or
misleading.

47

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1.2 Financial Statements3

1.2.1 Consolidated Financial Statements (IFRS)
Consolidated Income Statements (IFRS) for the years 2005, 2004 and 2003
(in €m)

Note

2005

2004

Revenues

5, 6

34,206

31,761

Cost of sales

7

Gross margin
Selling expenses
Administrative expenses
Research and development expenses
Other income

8

Other expenses(27,530)(25,522)

6,676

6,239

2003

30,133(1)(24,594)
5,539

(832)

(798)

(776)

(1,351)(1,321)(1,386)(2,075)(2,126)(2,189)

222

314

196

(153)

(177)

(823)

12

0

0

(567)

Share of profit from associates

9

210

88

224

Other income (expense) from investments

9

15

(4)

(38)

Profit before finance costs and income taxes

5

thereof goodwill amortisation

2,712

2,215

747

Interest result

(155)

(275)

(203)

Other financial result

(22)

(55)

148

Total finance costs

10

(177)

(330)

(55)

Income taxes

11

(825)

(664)

(474)

1,710

1,221

218

1,676

1,203 (1) (2)206 (2)34

18 (2)

12 (2)

Profit for the period
Attributable to:Equity holders of the parent (Net Income)Minority interests

1,710
Earnings per share

1,221

218

€

€

€

Basic

35

2.11

1.50 (1) (2)0.26 (2)Diluted35

2.09

1.50 (1) (2)0.26 (2)

20

0.65

0.50

0.40

Cash distribution per share (2005: proposal)(1) For the retrospective application of IFRS 2 “Share-based Payment” please refer to “Changes in accounting policy” in Note 2.
(2) For the retrospective application of IAS 32 “Financial Instruments: Disclosure and Presentation” (revised 2004) regarding the liability for puttable instruments please refer to“Changes in accounting policy” in Note 2.

The accompanying notes are an integral part of these Consolidated Financial Statements (IFRS).

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1.2 Financial Statements

3

Consolidated Balance Sheets (IFRS)(in €m)AssetsNon-current assets
Intangible assets
Property, plant and equipment
Investment property
Investments in associates
Other investments and long-term financial assets
Non-current other assets
Deferred tax assets
Non-current securities
Current assets
Inventories
Trade receivables
Current portion of long-term financial assets
Current other assets
Current tax assets
Current securities
Cash and cash equivalents
Non-current assets classified as held for sale
Total assets

Note

Current liabilities
Current provisions
Short-term financial liabilities
Liability for puttable instruments
Trade liabilities
Current other liabilities
Current tax liabilities
Current deferred income
Liabilities directly associated with non-current assets classified as held for sale

2004

12
13
33
14
14
17
11
18

11,052
13,817
134
1,908
1,938
3,610
2,557
1,011
36,027

10,549 (1)12,797 (1)
159
1,738
2,110
7,096 (1)2,548 (1)466
37,463

15
16
14
17

15,425
4,802
237
3,201
237
29
9,546
33,477881
70,385

12,334 (1)4,406
242 (1)
4,697 (1)
303
0 (1)
8,718
30,700068,163

818
9,371
3,982
(445)
13,726
176
13,902810
7,899 (1)7,678 (1)(177)
16,210144 (1)
16,354

21
22
24
11
26

6,879
4,189
9,971
2,376
1,324
24,7396,074 (1)4,405 (1)8,777 (1)4,134
1,490 (1)24,880

21
22
23
25
24

2,727
908
3,500
6,634
17,166
174
573

2,350
818 (1)3,500 (1)5,860
13,722 (1)178
501 (1)

31,682

26,92918

19

Equity and liabilities
Equity attributable to equity holders of the parent
Capital stockReserves
Accumulated other comprehensive income
Treasury shares
Minority interests
Total equity
Non-current liabilities
Non-current provisions
Long-term financial liabilities
Non-current other liabilities
Deferred tax liabilities
Non-current deferred income

31st December
2005

20

26
19

Total liabilities
Total equity and liabilities(1) For retrospective adjustments please refer to “Changes in accounting policy” in Note 2 and the relevant section of the notes.

62

056,48370,38551,80968,163

The accompanying notes are an integral part of these Consolidated Financial Statements (IFRS).
EADS Financial Statements and Corporate Governance

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1.2 Financial Statements

3

Consolidated Statements of Cash Flows (IFRS)(in €m)Note

Profit for the period attributable to equity holders of the parent (Net income)
Profit for the period attributable to minority interests

2005

2004

2003

1,676

1,203 (1) (2)206 (2)18 (2)

12 (2)

34

Adjustments to reconcile Net income to cash provided by operating activities:
Depreciation and amortisation

1,653

1,621

2,375

261

(188) (1)263

Deferred tax expenses (income)

386

537

(138)

Results on disposal of non-current assets

(170)

(8)

(50)

Results of companies accounted for by the equity method

(210)

(88)

(224)

Change in current and non-current provisions and current tax assets / liabilities

238

(237)

246

Valuation adjustments and CTA release

Change in other operating assets and liabilities:- Inventories- Trade receivables- Trade liabilities

1,239

2,155

2,019

(3,264)366 (3)(551) (3)

(388)

(403)

168

666

756

116

4,225

1,436 (3)2,286 (3)

5,107

5,013

4,709

(2,818)(3,017)(2,672)

101

36

47

(131)

(100)

(92)

89

0

32

- Payments for investments in associates and other investments and long-term financial assets

(659)

(482)

(728)

- Proceeds from disposals of associates and other investments and long-term financial assets

485

492

346

- Dividends paid by companies valued at equity

36

36

38

- Increase in equipment of leased assets

(40)

(656)

(279)

- Proceeds from disposals of leased assets

256

74

8

- Increase in finance lease receivables

(219)

(261)

(443)

- Decrease in finance lease receivables

85

110

84

(559)

10

336

12

9

(152)

(3,362)(3,749)(3,475)

(344)

474

1,132

Cash distribution to EADS N.V. shareholders

(396)

(320)

(240)

Payments related to liability for puttable instruments

(93)

(64)

(38)

Capital increase

187

43

21

Purchase of treasury shares

(288)

(81)

(31)

0

0

8

Cash (used for) provided by financing activities
Effect of foreign exchange rate changes and other valuation adjustments
on cash and cash equivalents

(934)

52

852

17

(2)

(83)

Net increase in cash and cash equivalents

828

1,314

2,003

Cash and cash equivalents at beginning of period

8,718

7,404

5,401

Cash and cash equivalents at end of period

9,546

8,718

7,404

- Other assets and liabilities
Cash provided by operating activities
Investments:- Purchase of intangible assets, Property, plant and equipment- Proceeds from disposals of intangible assets, Property, plant and equipment- Acquisitions of subsidiaries (net of cash)

27- Proceeds from disposals of subsidiaries (net of cash)

Change of securities
Change in cash from changes in consolidation
Cash (used for) investing activities
Change in long-term and short-term financial liabilities

Others27

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1.2 Financial Statements

3

The following represents supplemental information with respect to cash flows:(in €m)

2005

2004

2003

Interest paid

(242)

(367)

(311)

Income taxes paid, net

(265)

(302)

(383)

Interest received

313

329

338

Dividends received

55

57

55

(1) For the effect of the retrospective application of IFRS 2 “Share-based Payment” please refer to “Changes in accounting policy” in Note 2.
(2) For the retrospective application of IAS 32 “Financial Instruments: Disclosure and Presentation” (revised 2004) regarding the liability for puttable instruments please refer to“Changes in accounting policy” in Note 2.

(3) Advance payments received related to inventories are reclassified to current and non-current other liabilities. Previous year figures are adjusted accordingly(see Note 15 “Inventories” and Note 24 “Other liabilities”).

The accompanying notes are an integral part of these Consolidated Financial Statements (IFRS).
For details, see Note 27, “Consolidated Statement of Cash Flows (IFRS)”.

Consolidated Statements of Changes in Equity (IFRS)(in €m)

Note

Balance at 31st December 2002

Equity attributable to equity holders of the parent
Accumulated
other
CapitalShare
Other comprehensive Treasury
stock premium reservesincomeshares811

Retrospective adjustments (1)Balance at 31st December 2002,
adjusted

9,538

20
811

9,538

2

19

Capital increase
(1)

120

2,452

(2,594)723(2,474)

3,175

(156)

(156)

Total
equity12,765

1,361

14,126(1,871)(1,212)(3,083)

10,894149

11,043

Total

21
206

Profit for the period (Net income)Cash distribution to EADS N.V.
shareholders / dividends to minority
shareholders

Minority
interests

(240)

206

12

218

(240)

(9)

(249)

Disposal of minorities(26)

Purchase of treasury shares(31)

Other comprehensive income
thereof changes in fair values of available
for sale financial instruments
thereof changes in fair values of hedging
instruments

4,299

thereof currency translation adjustments

1,022

Balance at 31st December 2003

21

(26)

(31)

(31)

4,299

4,299

154
3,123
813

9,317

(2,268)

7,474

(187)

15,149126

15,275(1) For the retrospective application of IAS 32 “Financial Instruments: Disclosure and Presentation” (revised 2004) regarding the liability for puttable instruments and application of the revised IAS
16 “Property, plant and equipment” please refer to “Changes in accounting policy” in Note 2.

EADS Financial Statements and Corporate Governance

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1.2 Financial Statements

3(in €m)

Note

Balance at 31st December 2003
Capital increase
Profit for the period (Net income)Equity attributable to equity holders of the parent
Accumulated
other
CapitalShare
Other comprehensive Treasury
stock premium reservesincomeshares

813

9,317

2

41

(1) (2)

Share-based Payment (IFRS 2) (2)Cash distribution to EADS N.V.
shareholders

31(2,268)

7,474

12

(320)

(320)

(81)

(81)

(86)

91

18

1,221

0

0

204

204

33
610

thereof currency translation adjustments

(439)
20

810

8,952

9

178

Profit for the period (Net income)
31(1,053)

7,678

(177)

20

Cancellation of treasury shares

20

(1)

16,210144

16,354

34

1,710

187

187

1,676

1,676

33

33

33

(396)

(396)

(288)

(288)

(288)

20

0

0

(396)

Purchase of treasury shares(19)(3,696)(3,696)(2)

13,726176(3,698)45
30 c(3,685)

thereof currency translation adjustments
Balance at 31st December 2005

43

12

204

Balance at 31st December 2004

Other comprehensive income
thereof changes in fair values of available
for sale financial instruments
thereof changes in fair values of hedging
instruments

15,275

1,203

Other comprehensive income
thereof changes in fair values of available
for sale financial instruments
thereof changes in fair values of hedging
instruments

Share-based Payment (IFRS 2)
Cash distribution to EADS N.V.
shareholders

15,149

12

(81)
(5)

126

Total

1,203

(320)

Cancellation of treasury shares

Total
equity43

Purchase of treasury shares

Capital increase(187)

Minority
interests

(56)
818

8,715

656

3,982

(2)
(445)

13,902(1) For the retrospective application of IAS 32 “Financial Instruments: Disclosure and Presentation” (revised 2004) regarding the liability for puttable instruments and application of the revised IAS
16 “Property, plant and equipment” please refer to “Changes in accounting policy” in Note 2.

(2) For the retrospective application of IFRS 2 “Share-based Payment” please refer to “Changes in accounting policy” in Note 2.

The accompanying notes are an integral part of these Consolidated Financial Statements (IFRS).

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1.2 Financial Statements

3

Notes to the Consolidated Financial Statements (IFRS)Basis of Presentation

p. 54

1.

The company

p. 54

2.

Summary of significant accounting policies

p. 54

New Standards
Changes in accounting policy related
to new or revised IFRS Standards and Interpretations

p. 54
p. 55

3.

Scope of consolidation

p. 64

4.

Acquisitions and disposals

p. 64a) Acquisitionsb) Disposalsc) Subsequent changes in value of assets
and liabilities acquired and cost of acquisition

p. 64
p. 64
p. 64

Notes to the Consolidated Statementsof Income (IFRS)

p. 65

5.

p. 65

Segment Reportinga) Business Segment Information
for the year ended 31st December 2005b) Business Segment Information
for the year ended 31st December 2004c) EBIT pre-goodwill impairment and exceptionalsd) Revenues by destinatione) Capital expendituresf) Property, plant and equipment by geographical area

p. 67
p. 67
p. 68
p. 68
p. 68

6.

Revenues

p. 69

7.

Functional costs

8.
9.
10.
11.

p. 66

Trade receivables

p. 80

17.

Other assets

p. 81

18.

Securities

p. 81

19.

Non-current assets classified as held for sale

p. 81

20.

Total equity

p. 82

21.

Provisions

p. 83a) Provisions for deferred compensationb) Provisions for retirement plansc) Financial instrumentsd) Other provisions

p. 83
p. 83
p. 85
p. 86

22.

Financial liabilities

p. 86

23.

Liability for puttable instruments

p. 87

24.

Other liabilities

p. 88

25.

Trade liabilities

p. 88

26.

Deferred income

p. 88

Notes to the Consolidated Statementsof Cash-Flows (IFRS)

p. 89

27.

p. 89

Consolidated Statement of Cash Flowsp. 69

Other Notes to the Consolidated
Financial Statements (IFRS)

p. 90

Other income

p. 69

28.

Litigation and claimsp. 90

Share of profit from associates
and other income (expense) from investments

29.

Commitments and contingencies

p. 91

p. 69

Commitments and contingent liabilities

p. 91

Total finance costs

p. 70

Income taxes

31.

p. 93
p. 93
p. 94
p. 96

Share-based Payment

p. 98
p. 98
p. 10232.

Related party transactions

p. 102

33.

Investment property

p. 10334.

Interest in joint ventures

p. 10335.

Earnings per sharep. 103

p. 77

36.

Number of Employees

p. 104

p. 80

37.

Events after the balance sheet datep. 104

12.

Intangible assets

p. 73

Goodwill impairment tests
Development Costs

p. 73
p. 75

13.

Property, Plant and Equipment

p. 75

14.

Investments in associates, other investments
and long-term financial assets
Inventories

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Information about financial instrumentsa) Financial risk managementb) Notional amountsc) Fair value of financial instrumentsa) Stock Option Plansb) Employee Stock Ownership Plan (ESOP)

p. 73

EADS Financial Statements and Corporate Governance

30.

p. 70

Notes to the Consolidated
Balance Sheets (IFRS)

15.

16.

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1.2 Financial Statements

3

Basis of Presentation
1. The company
The accompanying Consolidated Financial Statements
present the financial position and the result of the operationsof European Aeronautic Defence and Space Company
EADS N.V. and its subsidiaries (“EADS” or the “Group”),
a Dutch public limited liability company (Naamloze
Vennootschap) legally seated in Amsterdam(Le Carré, Beechavenue 130-132, 1119 PR, Schiphol-Rijk,
The Netherlands). EADS’ core business is the manufacturingof commercial aircraft, civil helicopters, commercial spacelaunch vehicles, missiles, military aircraft, satellites, defence
systems and defence electronics and rendering of services
related to these activities. The Consolidated Financial
Statements were authorised for issue by EADS’ Board of
Directors on 7th March 2006 and are prepared and reported
in Euro (“€”).

2. Summary of significant accounting
policies
The principal accounting policies applied in the preparationof these Consolidated Financial Statements are set out below.
These policies have been consistently applied to all years
presented, unless otherwise stated.
Basis of preparation — EADS’ Consolidated Financial
Statements are prepared in accordance with International
Financial Reporting Standards (“IFRS”), adopted by theInternational Accounting Standards Board (“IASB”), as
endorsed by the European Union (EU). They comprise(i) IFRS, (ii) International Accounting Standards (“IAS”) and(iii) Interpretations originated by the International Financial
Reporting Interpretations Committee (IFRIC) or former
Standing Interpretations Committee (“SIC”).

IFRS 3, revised IAS 36 and IAS 38 and to apply thesestandards as of 1st January 2004. Besides the revisionsof thirteen IAS in conjunction with the Improvements
Project (published in December 2003) the IASB released
in 2004 five more standards, five interpretations aswell as amendments / revisions. In 2005 the IASB
released one new Standard, two interpretations as well as
amendments / revisions as listed below. The Standards andInterpretations printed in italic have a later effective date andare not yet adopted. All other Standards and Interpretations
listed below were adopted by EADS and are applied to
the Group’s Consolidated Financial Statements for theaccounting period beginning on 1st January 2005. Except for
IFRIC 4 “Determining whether an Arrangement contains
a Lease” (released 2004) and the April 2005 Amendment(“Cash Flow Hedge Accounting of Forecast Intragroup
Transactions”) to IAS 39 “Financial Instruments: Recognition
and Measurement”, EADS has decided not to opt for early
adoption of any of the new, revised or amended standards orinterpretations before they become effective.

Improvements Project (2003):
IAS 1 Presentation of Financial Statements
IAS 2 Inventories
IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors
IAS 10 Events after Balance Sheet Date
IAS 16 Property, Plant and Equipment
IAS 17 Leases
IAS 21 The Effects of Changes in Foreign Exchange Rates
IAS 24 Related Party Disclosure
IAS 27 Consolidated and Separate Financial Statements

New Standards

IAS 28 Investments in Associates

End of March 2004, the IASB completed Phase I of its
ongoing Business Combinations Project and adopted
new IFRS 3 “Business Combinations”, superseding
IAS 22 “Business Combinations”, as well as revisedStandards IAS 36 “Impairment of Assets” and IAS
38 “Intangible Assets”. EADS decided to early adopt

IAS 31 Interests in Joint Ventures
IAS 33 Earnings per ShareIAS 40 Investment Property

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1.2 Financial Statements

3

New Interpretations:

IAS 39 Financial Instruments: Recognition
and Measurement– Revision (December 2003)– Amendment (March 2004) Fair Value Hedge
Accounting for Portfolio Hedge of Interest Rate Risk
– Amendment (December 2004) Transition and Initial
Recognition of Financial Assets and Financial
Liabilities– Amendment (April 2005) Cash Flow Hedge
Accounting of Forecast Intragroup Transactions– Amendment (June 2005) The Fair Value Option– Amendment (August 2005) Financial Guarantee
Contracts

IFRIC 1 Changes in Existing Decommissioning, Restorationand Similar Liabilities (released 2004)

SIC 12 Consolidation - Special Purpose Entities
Amendment (November 2004) Scope of SIC 12

New Standards:
IFRS 2 Share-based Payment (released 2004)
IFRS 3 Business Combinations (released 2004)
IFRS 4 Insurance Contracts (released 2004)
IFRS 5 Non-current Assets held for sale and Discontinued
Operations (released 2004)

IFRS 6 Exploration for and Evaluation of Mineral Resources(released 2004)
IFRS 7 Financial Instruments: Disclosures (released 2005)

IFRIC 2 Members’ Shares in Co-operative Entities andSimilar Instruments (released 2004)

IFRIC 3 Emission Rights (released 2004, withdrawn 2005)
IFRIC 4 Determining whether an Arrangement contains
a Lease (released 2004)

IFRIC 5 Rights to Interests arising from Decommissioning,
Restoration and Environmental Rehabilitation
Funds (released 2004)
IFRIC 6 Liabilities arising from Participating in a SpecificMarket—Waste Electrical and Electronic
Equipment (released 2005)
IFRIC 7 Applying the Restatement Approach under IAS 29(released 2005)

Amendments / Revisions:
IAS 1 Presentation of Financial Statements
Amendment (August 2005) Capital Disclosures
IAS 19 Employee Benefits
Amendment (December 2004) Actuarial Gains andLosses, Group Plans and Disclosure
IAS 32 Financial Instruments: Disclosure and Presentation
Revision (December 2003)
Amendment (March 2004)
IAS 36 Impairment of Assets (March 2004)
IAS 38 Intangible Assets (March 2004)

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Changes in accounting policy related to new orrevised IFRS Standards and Interpretations
IFRS 2 Share-based Payment — The revised accounting
policy for share-based payment transactions is described
below. The main impact of IFRS 2 on the Group’s
Consolidated Financial Statements is the recognition of an
expense and a corresponding entry within equity for senior
executive and employees’ stock options and employee stock
ownership plans. In accordance with the transition rules
EADS applied the Standard retrospectively to two equity
settled plans, which were granted after 7th November 2002
and not vested as of 1st January 2005.
For the effects of the revised policy on EADS Consolidated
Balance Sheet, Consolidated Income Statement as well as
Earnings per Share see Note 31 “Share-based Payment” andNote 35 “Earnings per Share”.
IAS 1 Presentation of Financial Statements — The
effect of the application of the amended standard is arevised presentation of the Consolidated Balance Sheet. All
assets and liabilities are now classified on the face of EADS
Consolidated Balance Sheet as either current or non-current
depending on their nature. An asset is qualified as current
when it is expected to be realised in EADS’ normal operating
cycle or when it is held primarily for the purpose of being
traded. A liability is qualified as current when it is expected
to be settled in EADS’ normal operating cycle. Financial
liabilities are classified as current if they are due withintwelve month after the balance sheet date. All other assets
and liabilities are classified as non-current.
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In addition, minority interests are presented within total
equity. Prior period’s Consolidated Balance Sheet has beenadjusted consistently.
IAS 16 Property, Plant and Equipment — As of
1st January 2005 EADS applied the component approachas set out in the revised Standard. Under this approach
foreseeable costs of major future servicing and major parts(components) to be replaced during the life-time of an itemof property, plant and equipment are depreciated separately
over their respective useful lives.
The revised guidance in IAS 16 “Property, plant andequipment” requires to include within the cost of an item ofproperty, plant and equipment, the initial estimate of costsof dismantling and removing the item and restoring thesite on which it is located. A provision presenting the asset
retirement obligation is recognised in the same amount at thesame date in accordance with IAS 37 “Provisions, Contingent
Liabilities and Contingent Assets”.
For the effect of the revised policy we refer to the Notes
13 “Property, plant and equipment”, 17 “Other assets”,
11 “Income taxes”, 20 “Total equity” and 21 d) “Other
provisions”.
IAS 32 Financial Instruments: Disclosure andPresentation (revised 2004) — Since 1st January 2005,
EADS applies revised IAS 32 “Financial Instruments:
Disclosure and Presentation”. Amongst others, revised
IAS 32 provides modified guidance whether a share in an
entity should be classified as equity or as financial liability.
Accordingly, under certain circumstances, an entity shallrecord a financial liability rather than an equity instrument
for the exercise price of a written put option on the entity’sequity.
As part of the Airbus business combination in 2001, theoption granted to BAE Systems to put its 20% stake in
Airbus is such a written put option. As such EADS has
the obligation to purchase these minority shares whenever
the minority shareholder requests it, limited to a revolving
yearly window period for an amount equal to the fairvalue of the shares at the time the option is exercised, tobe paid in cash or an equivalent amount of EADS shares.
Following revised IAS 32 and despite BAE Systems (legal)minority rights in Airbus, the related interest is now to be
regarded as financial liability in the EADS Consolidated
Financial Statements, to be stated at fair value. The liability
for the put option has been measured by applying a choiceof different valuation techniques, based on best estimatescurrently available, and is presented in a separate line of the
EADS Consolidated Balance Sheet (Liability for puttable
instruments).
Following IAS 8 “Accounting Policies, Changes in
Accounting Estimates and Errors”, the adoption of revised
IAS 32 is treated as a change in accounting policy firstly
effecting EADS’ Consolidated Financial Statements as of
31st December 2005 with corresponding adjustments to theprior periods presented. The historical minority interestsfor BAE Systems’ 20% stake in Airbus at the time of thebusiness combination in 2001 have been replaced by theposting of a liability for puttable instruments, the difference
between those two amounts being accounted for against
consolidated total equity. Prior years’ dividend payments to
BAE Systems have been treated as partial repayments, thus
consequently reducing the liability for puttable instruments.
All changes to the fair value of the liability for puttable
instruments have been treated as contingent consideration ina business combination in accordance with IFRS 3 “Business
Combinations” and led to adjustments of goodwill.
The impacts of this revised accounting policy on EADS
Consolidated Financial Statements are explained in Notes
12 “Intangible assets”, 20 “Total equity”, 23 “Liability forputtable instruments” and 35 “Earnings per Share”.
IFRIC 4 Determining whether an Arrangement
contains a Lease — Certain contracts that do not takethe legal form of a lease convey the right to use an asset.
This is often the case in connection with service contracts.
In accordance with the transitional provisions of theInterpretation, EADS identified such contracts as of
1st January 2005 and accounted for the lease element inaccordance with IAS 17 “Leases”.
For the effects of the revised policy on EADS Consolidated
Financial Statements see Notes 13 “Property, plantand equipment”, 14 “Investments in associates, otherinvestments and long term financial assets” and 22 “Financial
liabilities”.

Consolidation — The Consolidated Financial Statements
include the subsidiaries under the control of EADS.
Investments in which EADS has significant influence(“Investments in associates“) are accounted for using theequity method. For investments in joint ventures, EADS
uses the proportionate method of consolidation. The effects
of intercompany transactions are eliminated.

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Business Combinations with an agreement date on or before
31st December 2003 have been accounted for by using thepurchase accounting method in accordance with IAS 22“Business combinations”.
Since 1st January 2004, business combinations are accounted
for under the purchase accounting method as required by
IFRS 3 “Business combinations”; all identifiable assets
acquired, liabilities and contingent liabilities incurred orassumed are recorded at fair value at the date control istransferred to EADS (acquisition date), irrespective of theexistence of any minority interest. The cost of a businesscombination is measured at the fair value of assets given,
equity instruments issued and liabilities incurred or assumed
at the date of exchange, plus costs directly attributable
to the acquisition. Any excess of the cost of the businesscombination over the Group’s interest in the net fairvalue of the identifiable assets, liabilities and contingent
liabilities recognised is capitalised as goodwill and tested for
impairment at the end of each financial year and whenever
there is an indication for impairment. If the cost of an
acquisition is less than the fair value of the net assets of thesubsidiary acquired, the identification and measurement of
the identifiable assets, liabilities and contingent liabilities
is reassessed as well as the measurement of the cost of the
combination. Any remaining difference is immediately
recognised in the Consolidated Income Statement.
Special purpose entities (“SPEs”) are consolidated, when therelationship between the Group and a SPE indicates that
the SPE is in substance controlled by the Group. SPEs areentities which are created to accomplish a narrow and welldefined objective.
Foreign Currency Translation — The assets and liabilities
of foreign entities, where the reporting currency is otherthan Euro, are translated using period-end exchange rates,
while the statements of income are translated using averageexchange rates during the period, approximating the foreignexchange rate at the dates of the transactions. All resulting
translation differences are included as a separate componentof total equity (“Accumulated other comprehensive income”
or “AOCI”).
Transactions in foreign currencies are translated into Euroat the foreign exchange rate in effect at the date of thetransaction. Monetary assets and liabilities denominated inforeign currencies at the balance sheet date are translated
into Euro at the exchange rate in effect at that date. Foreign
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exchange gains and losses arising from translation arerecognised in the Consolidated Income Statement. Nonmonetary assets and liabilities denominated in foreign
currencies, which are stated at historical cost, are translated
into Euro at the foreign exchange rate in effect at the date of
the transaction.
Goodwill and fair value adjustments arising on
the acquisition of a foreign entity occurring after
31st December 2004 are treated as assets and liabilities of
the acquired company and are recorded at the exchange rate
at the date of the transaction. Regarding transactions prior tothat date, goodwill, assets and liabilities acquired are treatedas those of the acquirer.

Revenue Recognition — Revenues from the sale of goods
are recognised upon the transfer of risks and rewards ofownership to the buyer and when the amount of revenue
can be measured reliably. Revenues from services rendered
are recognised in proportion to the stage of completion of
the transaction at the balance sheet date. For construction
contracts, when the outcome can be estimated reliably,revenues are recognised by reference to the stage (percentage)of completion (“PoC”) of the contract activity. The stage ofcompletion of a contract may be determined by a variety
of ways. Depending on the nature of the contract, revenue
is recognised as contractually agreed upon milestones arereached, as units are delivered or as the work progresses.
Changes in profit rates are reflected in current earnings as
identified. Contracts are reviewed regularly and in case ofprobable losses, provisions are recorded.
Incentives applicable to performance on contracts are
considered in estimated contract profit rates and are recorded
when anticipated contract performance is probable and can bereliably measured.
Sales of aircraft that include asset value guarantee
commitments are accounted for as operating leases whenthese commitments are considered substantial compared to
the fair value of the related aircraft. Revenues then compriselease income from such operating leases.

Leasing — The determination of whether an arrangement
is or contains a lease is based on the substance of thearrangement and requires an assessment of whether thefulfilment of the arrangement is dependent on the use of a
specific asset or assets and the arrangement conveys a rightto use the asset.

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The Group is a lessor and a lessee of assets, primarily inconnection with commercial aircraft sales financing. Leasetransactions where substantially all risks and rewards
incident to ownership are transferred from the lessor to thelessee are accounted for as finance leases. All other leases areaccounted for as operating leases.
Assets held for leasing out under operating leases areincluded in property, plant and equipment at cost lessdepreciation (see Note 13 “Property, plant and equipment”).
Rental income from operating leases (e.g. aircraft) isrecorded as revenue over the term of the lease. Assets
leased out under finance leases cease to be recognised in
the Consolidated Balance Sheet after the inception of thelease. Instead, a finance lease receivable representing thediscounted future lease payments to be received from thelessee plus any discounted unguaranteed residual value
is recorded as long-term financial assets (see Note 14“Investments in associates, other investments and long-term
financial assets”). Unearned finance income is recorded overtime in “Interest result”. Revenues and the related cost of
sales are recognised at the inception of the finance lease.
Assets obtained under finance leases are included inproperty, plant and equipment at cost less depreciation(see Note 13 “Property, plant and equipment”), unlesssuch assets have been further leased out to customers. In
such a case, the respective asset is either qualified as an
operating lease or as a finance lease with EADS being thelessor (headlease-sublease-transactions) and is recorded
accordingly. For the relating liability from finance leases
see Note 22 “Financial liabilities”. When EADS is thelessee under an operating lease contract, rental payments arerecorded when they fall due (see Note 29 “Commitments
and contingencies” for future operating lease commitments).
Such leases often form part of commercial aircraft customer
financing transactions with the related sublease being an
operating lease (headlease-sublease-transactions).
EADS considers headlease-sublease-transactions which are
set up for the predominant purpose of tax advantages andwhich are secured by bank deposits (defeased deposits) that
correspond with the contractual headlease liability to belinked and accounts for such arrangements as one transactionin accordance with SIC 27 “Evaluating the Substance ofTransactions Involving the Legal Form of a Lease”. To reflect
the substance of the transaction, the Group consequently

offsets (head) finance lease obligations with the matchingamount of defeased deposits.

Impairment of assets — The Group assesses at eachreporting date whether there is an indication that an asset
may be impaired. In addition, intangible assets with anindefinite useful life, intangible assets not yet available
for use and goodwill are tested for impairment at the endof each financial year irrespective of whether there is any
indication of impairment. If the carrying amount exceeds therecoverable amount, the respective asset or the assets in the
cash-generating unit are written down to their recoverable
amounts.
The recoverable amount of an asset or a cash-generating unit
is the higher of its fair value less costs to sell and its value in
use. The value in use is the present value of the future cash
flows expected to be derived from an asset or cash-generating
unit. The discount rates used are consistent with estimatedfuture cash flows to avoid any double-counting or disregardof certain effects such as inflation or taxes. The discountrates used for determining the value of an asset are rates
that reflect current market assessment of (i) the time valueof money and (ii) the risk specific to the asset for which the
future cash flow estimates have not been adjusted. These
rates are estimated from the rate implicit in current market
transactions for similar assets or from the weighted average
cost of capital of a comparable listed entity. The rates inquestion shall reflect the return that investors would require
for an investment in the asset under review.
Impairment losses recognised for goodwill are not reversed.
Those for investments in equity instruments classified
as available-for-sale financial assets are reversed throughAOCI. For any other asset an impairment loss recognised
in prior periods is reversed through profit or loss up to its
recoverable amount provided that there has been a change
in estimates used to determine the asset’s recoverable
amount since the last impairment loss has been recognised.
The respective asset’s carrying amount is increased to its
recoverable amount taken into account any amortisation or
depreciation that would have been chargeable on the asset’s
carrying amount since the last impairment loss.

Product-Related Expenses — Expenses for advertising andsales promotion and other sales-related expenses are charged
to expense as incurred. Provisions for estimated warranty
costs are recorded at the time the related sale is recorded.

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Research and Development Expenses — Research anddevelopment activities can be (i) contracted or (ii) self-initiated.
i) Costs for contracted research and development
activities, carried out in the scope of externallyfinanced research and development contracts, areexpensed when the related revenues are recorded.
ii) Costs for self-initiated research and development
activities are assessed whether they qualify forrecognition as internally generated intangible assets.
Apart from complying with the general requirements
for and initial measurement of an intangible asset,
qualification criteria are met only when technical aswell as commercial feasibility can be demonstrated andcost can be measured reliably. It must also be probablethat the intangible asset will generate future economic
benefits and that it is clearly identifiable and allocable
to a specific product.
Further to meeting these criteria, only such costs that
relate solely to the development phase of a self-initiatedproject are capitalised. Any costs that are classified aspart of the research phase of a self-initiated project are
expensed as incurred. If the research phase cannot be clearly
distinguished from the development phase, the respective
project related costs are treated as if they were incurred in
the research phase only.
Capitalised development costs are generally amortizedover the estimated number of units produced if noother procedure reflects the consumption pattern more
appropriately and are reviewed for impairment annuallywhen the asset is not yet in use and further on whenever
events or changes in circumstances indicate that the carrying
amount may not be recoverable.

authorities. Current tax liabilities are recognised for
current tax to the extent unpaid for current and priorperiods. A current tax asset is recognised in case the tax
amount paid exceeds the amount due to current and priorperiods. The benefit of a tax loss that can be carried backto recover current tax of a previous period is recognised as
an asset provided that the related benefit is probable andcan be measured reliably.
ii) Deferred tax assets and liabilities reflect lower orhigher future tax consequences that result for certain
assets and liabilities from temporary valuationdifferences between the financial statement carrying
amounts and their respective tax bases as well as fromnet operating losses and tax credit carry forwards.
Deferred tax assets and liabilities are measured using
enacted tax rates to apply to taxable income in the years
in which those temporary differences are expected
to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates isrecognised in the period the new rates are enacted or
substantially enacted. As deferred tax assets anticipate
potential future tax benefits, they are recorded in theConsolidated Financial Statements of EADS only when
it is probable that the tax benefits will be realized. The
carrying amount of deferred tax assets is reviewed ateach financial year end.

Intangible Assets — Intangible assets comprise(i) internally generated intangible assets, i.e. internallydeveloped software and other internally generated intangible
assets (see above: Research and development expenses),(ii) acquired intangible assets, and (iii) goodwill (see above:
Consolidation).

Income Taxes — Tax expense (tax income) is the aggregate
amount included in the determination of net profit or loss forthe period in respect of (i) Current tax and (ii) Deferred tax.

Acquired intangible assets are valued at acquisition cost andare generally amortized over their respective useful lives(3 to 10 years) on a straight line basis. Intangible assets
having an indefinite useful life are not amortized but tested
for impairment at the end of each financial year as well as
whenever there is an indication that the carrying amountexceeds the recoverable amount of the respective asset.

i) Current tax is the amount of income taxes payableor recoverable in a period. Current income taxes arecalculated applying respective tax rates on the periodic
taxable profit or tax loss that is determined in accordancewith rules established by the competent taxation

Property, Plant and Equipment — Property, plant andequipment is valued at acquisition or manufacturing costs
less any accumulated depreciation and any accumulated
impairment losses. Such costs include the estimated costof replacing, servicing and restoring part of such property,

Income tax credits granted for research and development
activities are deducted from corresponding expenses orcapitalised amounts when earned.

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plant and equipment. Depreciation expense is recognised
generally using the straight-line method. The costs ofinternally produced equipment and facilities include directmaterial and labour costs and applicable manufacturing
overheads, including depreciation charges. Borrowing costs
are not capitalised. The following useful lives are assumed:buildings 6 to 50 years; site improvements 6 to 20 years;
technical equipment and machinery 3 to 20 years; and otherequipment, factory and office equipment 2 to 10 years. The
useful lives and depreciation methods applied to property,
plant and equipment are reviewed periodically and in casethey change significantly depreciation charges for current
and future periods are adjusted accordingly. If the carrying
amount of any asset exceeds its recoverable amount an
impairment loss is recognised immediately in profit or loss.
At each reporting date it is assessed whether there is any
indication that an item of property, plant and equipment
may be impaired.
When a major inspection is performed, its cost is recognisedin the carrying amount of the plant and equipment as areplacement if the recognition criteria are satisfied.
Cost of an item of property, plant and equipment initiallyrecognised comprise the initial estimate of costs of
dismantling and removing the item and restoring the site on
which it is located at the end of the useful life of the item
on a present value basis. A provision presenting the asset
retirement obligation is recognised in the same amount at thesame date in accordance with IAS 37 “Provisions, Contingent
Liabilities and Contingent Assets”.
Property, plant and equipment also includes capitalised
development costs for tangible developments of specialized
tooling for production such as jigs and tools, design,
construction and testing of prototypes and models. In
case recognition criteria are met, these costs are capitalised
and generally depreciated using the straight-line method
over 5 years or, if more appropriate, using the number of
production or similar units expected to be obtained fromthe tools (sum-of-the-units method). Especially for aircraft
production programs such as the Airbus A380 with anestimated number of aircraft to be produced using suchtools, the sum-of-the-units method effectively allocatesthe diminution of value of specialized tools to the units
produced.

Investment Property — The group accounts forinvestment property using the cost model. Investment
property is recorded on balance sheet at book value, that
is, at cost less any accumulated depreciation and any
accumulated impairment losses. The fair value of investment
property is reviewed annually by using cash-flow models orby determinations of open market prices.
Investments — The Group’s investments compriseinvestments in associates, other investments and long-term
financial assets as well as current and non current securities
and cash equivalents.
Within EADS, all investments in unconsolidated entities areclassified as non-current available-for-sale financial assets.
They are included in the line other investments and longterm financial assets in the Consolidated Balance Sheet.
The majority of the Group’s securities are debt securities
and classified as available-for-sale financial assets.
Financial assets classified as available-for-sale are accounted
for at fair value. Management determines the appropriateclassification at the time of purchase and reassesses suchdetermination at each balance sheet date. Unrealised gains
and losses on available-for-sale financial assets are recognised
directly within AOCI, a separate component of total equity,
net of applicable deferred income taxes. As soon as suchfinancial assets are sold or otherwise disposed of, or are
determined to be impaired, the cumulative gain or loss
previously recognised in equity is recorded as part of “Other
income (expense) from investments” in the Consolidated
Income Statement for the period.
Investments in Money Market Funds are designated at “fairvalue through profit or loss”.
The fair value of quoted investments is based on current
market prices. If the market for a financial asset is not active(and for unlisted securities), the Group establishes fairvalue by using generally accepted valuation techniques on
the basis of market information available at the reporting
date. Available-for-sale equity investments that do not havea quoted market price in an active market and whose fairvalue cannot be reliably estimated by alternative valuation
methods, such as discounted cash flow model, are measured
at cost, less any accumulated impairment losses. All
purchases and sales of securities are recognised on settlement
date according to market conventions.

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Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an
active market. They arise when the Group provides money,
goods or services directly to a debtor with no intention of
trading the receivable. Loans and receivables are classified as
trade receivables and other investments and long-term
financial assets.
The Group assesses at each balance sheet date whether there
is any objective evidence that a financial asset or a groupof financial assets may be impaired. Equity investments
classified as available-for-sale are considered for impairment
in case of a significant or prolonged decline of their fairvalue below their cost. Any impairment loss recognised in
the Consolidated Income Statement on equity instruments is
not reversed through the Consolidated Income Statement.

Inventories — Inventories are measured at the lower ofacquisition cost (generally the average cost) or manufacturing
cost and net realisable value. Manufacturing costs comprise
all costs that are directly attributable to the manufacturing
process, such as direct material and labour, and production
related overheads (based on normal operating capacityand normal consumption of material, labour and otherproduction costs), including depreciation charges. Borrowing
costs are not capitalised.
Trade Receivables — Trade receivables include claims
arising from revenue recognition that are not yet settled
by the debtor as well as receivables relating to construction
contracts. Trade receivables are initially recognised at fairvalue and, provided they are not expected to be realised
within one year, are subsequently measured at amortizedcost using the effective interest method. If it is probable that
the Group is not able to collect all amounts due according
to the original terms of receivables, an impairment has
occurred. The amount of the impairment loss is equal tothe difference between the asset’s carrying amount and thepresent value of estimated future cash flows, discounted at
the original effective interest rate, i.e. the rate that exactly
discounts the expected stream of future cash payments
through maturity or the next market-based repricing date to
the current net carrying amount of the financial asset. The
carrying amount of the trade receivable is reduced throughuse of an allowance account. The loss is recognised in theConsolidated Income Statement.

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Cash and cash equivalents — Cash and cash equivalents
consist of cash on hand, cash in bank, checks, fixed deposits
having a short-term maturity and short-term securities thatare readily convertible to known amounts of cash and which
are subject to an insignificant risk of changes in value.
Non-current assets held for sale — Non-current assets(or disposal groups) are classified as assets held for sale andstated at the lower of carrying amount and fair value lesscosts to sell if their carrying amount is recovered principally
through a sale transaction rather than through a continuinguse. Liabilities directly associated with non-current assets
held for sale in a disposal group are presented separately on
the face of the Consolidated Balance Sheet.
Derivative Financial Instruments — Within EADS
derivative financial instruments are (a) used for hedging
purposes in micro-hedging strategies to offset the Group’s
exposure to identifiable transactions and are (b) a componentof hybrid financial instruments that include both thederivative and host contract (“Embedded Derivatives”).
In accordance with IAS 39 “Financial Instruments:
Recognition and Measurement”, derivative financial
instruments are recognised and carried in the Consolidated
Balance Sheet at fair value. While derivative financial
instruments with positive fair values are recorded in current
and non-current other assets, such derivative financial
instruments with negative fair values are recorded as“Provisions for financial instruments”.
a) Hedging: The Group seeks to apply hedge accounting
to all its hedging activities. Hedge accounting recognises
symmetrically the offsetting effects on net profit or lossof changes in the fair values of the hedging instrument
and the related hedged item. The conditions for sucha hedging relationship to qualify for hedge accounting
include: The hedge transaction is expected to be highly
effective in achieving offsetting changes in cash flows
attributable to the hedged risk, the effectiveness of thehedge can be reliably measured and there is adequate
documentation of the hedging relationships at the
inception of the hedge.
Depending on the nature of the item being hedged, EADS
classifies hedging relationships that qualify for hedge
accounting as either (i) hedges of the fair value of recognised
assets or liabilities (“Fair Value Hedges”), (ii) hedges of the61

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3variability of cash flows attributable to recognised assets
or liabilities, highly probable forecasted transactions or
unrecognised firm commitments (“Cash Flow Hedges”) or(iii) hedges of a net investment in a foreign entity.
i) Fair Value Hedge: Fair value hedge accounting is
mainly applied to certain interest rate swaps. For
derivative financial instruments designated as fairvalue hedges, changes in fair value of both the hedging
instrument and the hedged asset or liability are
simultaneously recognised in the Consolidated Income
Statement.
ii) Cash Flow Hedge: The Group applies cash flow
hedge accounting generally to foreign currency
derivative contracts on future sales as well as to certain
interest rate swaps. Changes in fair value of thehedging instruments related to the effective part of
the hedge are reported in AOCI, a separate componentof total equity, net of applicable income taxes andrecognised in the Consolidated Income Statement inconjunction with the result of the underlying hedgedtransaction, when realised. Any hedge ineffectivenessis immediately recorded in “Profit for the period”.
If hedged transactions are cancelled or postponed formore than a relatively short period of time, gains andlosses on the hedging instrument that were previously
recorded in equity are generally recognised in “Profit
for the period”.
iii) Net investment Hedge: Hedges of net investments
in foreign entities are accounted for similarly tocash flow hedges. Any gain or loss on the hedging
instrument relating to the effective portion of thehedge is recognised in AOCI; the gain or loss relating
to the ineffective portion is recognised immediately in
the Consolidated Income Statement.
Gains and losses accumulated in AOCI are included in
the Consolidated Income Statement when the foreign
entity is disposed of.
In case certain derivative transactions, while providing
effective economic hedges under the Group’s risk
management policies, do not qualify for hedge accounting
under the specific rules of IAS 39 “Financial Instruments:
Recognition and Measurement“, changes in fair valueof such derivative financial instruments are recognised
immediately in “Profit for the period”.

b) Embedded derivatives: Derivative components
embedded in a non-derivative-host contract are separately
recognised and measured at fair value if they meet thedefinition of a derivative and their economic risks andcharacteristics are not clearly and closely related to thoseof the host contract. Changes in the fair value of these
instruments are recorded in “Other financial result”.
See Note 30 “Information about financial instruments”
for a description of the Group’s financial risk management
strategies, the fair values of the Group’s derivative financial
instruments as well as the methods used to determine suchfair values.

Provisions — Provisions are recognised when the Group
has a present obligation (legal or constructive) as a resultof a past event, it is probable that an outflow of resources
embodying economic benefits will be required to settle theobligation and a reliable estimate of the obligation’s amount
can be made.
Provisions for financial guarantees corresponding to aircraft
sales are recorded to reflect the underlying risk to the Groupin respect of guarantees given when it is probable that an
outflow of resources embodying economic benefits will be
required to settle the obligation and reliable estimates can bemade of the amount of the obligation. The amount of theseprovisions is calculated to cover the difference between theGroup’s exposure and the estimated value of the collateral.
Outstanding costs are provided for at the best estimate of
future cash outflows. Provision for other risks and charges
relate to identifiable risks representing amounts expected tobe realized.
Provisions for contract losses are recorded when it becomesprobable that total estimated contract costs will exceed total
contract revenues. Such provisions are recorded as writedowns of work-in-process for that portion of the work
which has already been completed, and as provisions for theremainder. Losses are determined on the basis of estimatedresults on completion of contracts and are updated regularly.
Provisions for litigation and claims are set in case legal
actions, governmental investigations, proceedings and otherclaims are pending or may be instituted or asserted in the
future against the Group which are a result of past events,
where it is probable that an outflow of resources embodying
economic benefits will be required for the settlement and a
reliable estimate of the obligation’s amount can be made.

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3

The valuation of pension and post-retirement benefits
classified as defined benefit plans is based upon the projected
unit credit method in accordance with IAS 19 “Employee
Benefits”. According to the corridor approach of IAS 19.92,
EADS does not recognize actuarial gains and losses as income
and expense, unless they exceed 10% of the higher of thepresent value of the defined benefit obligation and thefair value of plan assets. Such actuarial gains and losses aredeferred and recorded over the expected average remaining
working lives of the employees participating.
Termination benefits are payable whenever an employee’s
employment is terminated before the normal retirement dateor whenever an employee accepts voluntary redundancy
in exchange for these benefits. The Group recognizes
termination benefits when it is demonstrably committed
to either terminate the employment of current employees
according to a detailed formal plan without possibility ofwithdrawal or to provide termination benefits as a result of
an offer made to encourage voluntary redundancy.
When sufficient information is not available to apply
defined benefit accounting in conjunction with a defined
benefit multi-employer plan, the Group accounts for theplan as if it was a defined contribution plan.

Emission Rights and Provisions for in-excessemission — Under the EU Emission Allowance Trading
Scheme (EATS) national authorities have issued on
1st January 2005 permits (emission rights), free of charge,
that entitle participating companies to emit a certain amountof greenhouse gas over the compliance period.
The participating companies are permitted to trade thoseemission rights. To avoid a penalty a participant is required
to deliver emission rights at the end of the compliance period
equal to its emission incurred.
EADS recognizes a provision for emission in case it hascaused emissions in excess of emission rights granted. The
provision is measured at the fair value (market price) of
emission rights necessary to compensate for that shortfall ateach balance sheet date.
In absence of any specific authoritative guidance under IFRS,
emission rights held by EADS are generally accounted for as
intangible assets, whereby

EADS Financial Statements and Corporate Governance

REGdoc_EV_BOOK2_CH1.indd 63i) Emission rights allocated for free by national
authorities are accounted for as a non-monetary
government grant at its nominal value of nil.
ii) Emission rights purchased from other participants areaccounted for at cost or the lower recoverable amount;
if they are dedicated to offset a provision for in excess
emission, they are deemed to be a reimbursement rightand are accounted for at fair value.

Financial liabilities — Financial liabilities are recorded
initially at the proceeds received, net of transaction costs
incurred. Subsequently, financial liabilities are measured atamortized cost using the effective interest rate method withany difference between proceeds (net of transaction costs)
and redemption amount being recognised in “Other financial
result” over the period of the financial liability.
Refundable Advances — Refundable advances from
European Governments are provided to the Group to financeresearch and development activities for certain projects on arisk-sharing basis, i.e. they have to be repaid to the European
Governments according to the success of the project. Becauseof their risk-sharing basis, such refundable advances arerecorded as “Other Liabilities”.

Equity compensation plans
SOP — Stock options are accounted for in accordance withIFRS 2 “Share-based Payment” and qualify as equity settled
share–based payments. Associated services received aremeasured at fair value and are calculated by multiplying thenumber of options expected to vest with the fair value of
one option as of grant date. The fair value of the option isdetermined by applying the Black Scholes Option Pricing
Model.
The fair value of the services is recognised as personnel
expense and a corresponding increase in consolidated retained
earnings over the vesting period of the respective plan.
Part of the grant is conditional upon the achievement of
non-market performance objectives and will only vest
provided that the performance conditions are met. If it
becomes obvious during the vesting period that some ofthe performance objectives will not be met and, hence, thenumber of equity instruments expected to vest differs fromthat originally expected, the expense is adjusted accordingly.

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3

ESOP — EADS offers to its employees to buy under theemployee stock ownership plan (ESOP) EADS shares at a
certain discount. The difference between the exercise priceand the corresponding share price is recognised as personnel
expense in EADS Consolidated Financial Statements at grantdate.

3. Scope of consolidation

Litigation and Claims — Various legal actions,
governmental investigations, proceedings and otherclaims are pending or may be instituted or asserted in the
future against the Group. Litigation is subject to many
uncertainties, and the outcome of individual matters is
not predictable with assurance. EADS believes that it has
made adequate provisions to cover current or contemplated
litigation risks. It is reasonably possible that the final
resolution of some of these matters may require the Groupto make expenditures, in excess of established reserves,
over an extended period of time and in a range of amounts
that cannot be reasonably estimated. The term “reasonably
possible” is used herein to mean that the chance of a futuretransaction or event occurring is more than remote but
less than likely. Although the final resolution of any suchmatters could have an effect on the Group’s profit forthe period for the particular reporting period in which an
adjustment of the estimated reserve would be recorded, theGroup believes that any such potential adjustment should
not materially affect its Consolidated Financial Statements.

• 21 companies which are proportionately consolidated;

Use of Estimates — The preparation of the Group
Financial Statements in accordance with IFRS requires
management to make certain estimates and assumptions
that affect the reported amounts of assets and liabilities anddisclosure of contingent amounts at the date of the financial
statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ fromthose estimates.

Apart from those mentioned, other acquisitions by theGroup were not significant.

Key assumptions and other sources of estimation
uncertainties are disclosed in the respective Notes(see in particular Notes 12 “Intangible Assets”, Note 21“Provisions”, Note 29 “Commitments and Contingencies”
and Note 30 “Information about financial instruments”).

Perimeter of consolidation (31st December 2005) —The Consolidated Financial Statements include, in addition
to EADS N.V.:• 228 companies which are fully consolidated;• 21 companies which are investments in associates
and are accounted for using the equity method.
Significant subsidiaries, associates, and joint ventures arelisted in the appendix entitled “Information on principal
investments”.

4. Acquisitions and disposalsa) Acquisitions
In 2005, the Group acquired Nokia’s Professional Mobile
Radio – PMR activities (EADS Secure Networks Oy) from
Nokia. The initial accounting for this business combination
is determined on a provisional basis.
On 4th October 2004, the Group acquired RIG Holdings,
Inc., Delaware / USA together with its subsidiaries Racal
Instruments U.S. and Racal Instruments Group Ltd. fromRIG Holdings, LP, Delaware.

b) Disposals
On 30th November 2005, EADS sold its 50% participationin TDA – Armements S.A.S. to Thales. Furthermore, on
28th February 2005, EADS sold its Enterprise TelephonyBusiness, which comprises its civil telecommunication
activities, to Aastra Technologies Limited, Concord / Canada.
Apart from those mentioned, other disposals by the Group
were not significant.

c) Subsequent changes in value of assets andliabilities acquired and cost of acquisition
In 2005, no material subsequent changes in the value of
assets and liabilities acquired and cost of acquisition occurred.

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3

Notes to the Consolidated Statements of Income (IFRS)
5. Segment Reporting
The Group operates in five divisions (segments) whichreflect the internal organizational and management structure
according to the nature of the products and services
provided. Following recent changes in the EADS structure,
the Aeronautics Division was dissolved end of June 2005
and split into Eurocopter Division and Other Businesses.
Segment figures have been restated in accordance with thisnew structure.
• Airbus — Development, manufacturing, marketing andsale of commercial jet aircraft of more than 100 seats andthe development and manufacturing of aircraft for militaryuse.
• Military Transport Aircraft — Development,
manufacturing, marketing and sale of military transport
aircraft and special mission aircraft.
• Eurocopter — Development, manufacturing, marketingand sale of civil and military helicopters and maintenanceservices.

EADS Financial Statements and Corporate Governance

REGdoc_EV_BOOK2_CH1.indd 65• Defence & Security Systems — Development,
manufacturing, marketing and sale of missiles systems;
military combat and training aircraft; provision of defence
electronics, defence-related telecommunications solutions;logistics, training, testing, engineering and other related
services.
• Space — Development, manufacturing, marketing andsale of satellites, orbital infrastructures and launchers;
provision of space services.
The following tables present information with respect
to the Group’s business segments. Consolidation effects,
the holding function of EADS Headquarters and otheractivities not allocable to the divisions are disclosed in thecolumn “HQ / Conso.”. “Other Businesses” comprises thedevelopment, manufacturing, marketing and sale of regional
turboprop aircraft and light commercial aircraft, aircraftcomponents as well as civil and military aircraft conversion
and maintenance services.

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3a) Business Segment Information for the year ended 31st December 2005
Military
Transport
AircraftEurocopter

Defence&Security
Systems

Space

Other
Businesses

HQ /Conso.

Consolidated(in €m)AirbusTotal revenues

22,179

763

3,211

5,636

2,698

1,155

33

35,675Internal revenues

(238)

(234)

(134)

(509)

(10)

(329)

(15)

(1,469)21,941

529

3,077

5,127

2,688

826

18

34,206

0

0

0

4

0

0

206

210

2,307

48

212

201

58

(171)

197

2,852

Revenues
Income from associates
EBIT pre goodwill impairment
and exceptionals(see definition below)
Exceptionals(140)

Total finance costs(177)

Income taxes(825)

Profit for the period

1,710

Attributable to:Equity holders of the parent (Net income)

1,676

Minority interest
Other Information
Identifiable segment assets(incl. goodwill) (1)thereof goodwill
Investments in associates

34

33,226

1,642

4,076

9,287

4,911

1,320

2,543

57,005

6,987

12

111

2,469

559

0

29

10,167

0

0

0

31

0

10

1,867

1,908

Segment liabilities (2)Capital expenditures(incl. leased assets)

20,274

1,581

3,076

9,854

4,393

977

3,883

44,038

1,864

93

79

205

467

64

86

2,858

Depreciation, amortisation

1,131

41

68

146

117

55

95

1,653

Research and development expenses

1,659

18

70

207

58

6

57

2,075

(1) Segment assets exclude current and deferred tax assets as well as cash and cash equivalents and securities.
(2) Segment liabilities exclude current and deferred tax liabilities and interest bearing liabilities.

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3b) Business Segment Information for the year ended 31st December 2004
Military
Transport
Aircraft Eurocopter (4)Defence &Security
Systems

Space

Other
Businesses (4)HQ /Conso.

Consolidated(in €m)AirbusTotal revenues

20,224

1,304

2,786

5,385

2,592

1,123

31

33,445Internal revenues

(621)

(227)

(121)

(424)

(10)

(268)

(13)

(1,684)

19,603

1,077

2,665

4,961

2,582

855

18

31,761

7

0

0

3

0

0

78

88

1,919

26

201

226

9

2

49

2,432

Revenues
Income from associates
EBIT pre-goodwill impairment andexceptionals(see definition below) (1)
Exceptionals(217)

Total finance costs(330)

Income taxes(664)

Profit for the period

1,221

Attributable to:Equity holders of the parent (Net income)

1,203

Minority interest
Other information
Identifiable segment assets(incl. goodwill) (2)thereof goodwill
Investments in associates

18

35,044

1,051

3,649

9,076

3,841

1,324

2,143

56,128

6,883

12

111

2,407

559

0

29

10,001

0

0

0

24

0

9

1,705

1,738

Segment liabilities (3)17,019

881

2,701

9,253

3,471

750

3,575

37,650Capital expenditures (incl. leased assets)

2,778

49

92

174

423

85

72

3,673

Depreciation, amortisation

1,088

34

52

139

110

54

144

1,621

Research and development expenses

1,734

26

61

185

61

7

52

2,126

(1) The effect of the retrospective application of IFRS 2 “Share-based Payment” is included (see Note 7 “Functional costs”).
(2) Segment assets exclude current and deferred tax assets as well as cash and cash equivalents and securities.
(3) Segment liabilities exclude current and deferred tax liabilities and interest bearing liabilities.
(4) Previous year’s “Aeronautics” division split into “Eurocopter” and “Other businesses”.

As a rule, inter-segment transfers are carried out on anarm’s length basis. Inter-segment sales predominantly takeplace between Eurocopter, Defence & Security Systems andAirbus; as the Eurocopter and Defence & Security Systems
divisions act as suppliers for Airbus aircraft. Moreover,
Airbus acts as a main supplier for the A400M program
which is led by the Military Transport Aircraft division.
Capital expenditures represent the additions to property,
plant and equipment and to intangible assets (excluding
additions to goodwill of €168 million; for further details
see Note 5 e) “Capital expenditures”.

EADS Financial Statements and Corporate Governance

REGdoc_EV_BOOK2_CH1.indd 67c) EBIT pre-goodwill impairment
and exceptionals
EADS uses EBIT pre-goodwill impairment and exceptionals
as a key indicator of its economic performance. The term
“exceptionals” refers to such items as depreciation expensesof fair value adjustments relating to the EADS merger, theAirbus Combination and the formation of MBDA, as well as
impairment charges thereon. EBIT pre-goodwill impairment
and exceptionals is treated by management as a key indicator
to measure the segments’ economic performances.

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3(in €m)2005

2004 (1)

2003

Profit before financecosts and income tax

2,712

2,215

747

0

0

567

Goodwill amortisation
Exceptional depreciation(fixed assets)
Exceptional depreciation(inventories)
Exceptional depreciation(others)
EBIT pre-goodwill
impairment andexceptionalsd) Revenues by destination(in €m)

2005

2004

2003

France

3,511

3,326

3,521

Germany

3,235

4,322

3,651

2,682

2,653

2,121

136

212

214

United Kingdom

1,253

1,000

5

15

Spain
Other European
Countries

1,017

0

3,126

2,974

3,687

4

0

0

North America

9,026

8,715

8,056

Asia / Pacific

7,734

4,938

4,033

Middle East

1,860

2,286

2,873

Latin America

645

505

677

2,852

2,432

1,543

(1) The effect of the retrospective application of IFRS 2 “Share-based Payment” is included(see Note 7 “Functional costs”).

Due to the application of IFRS 2 “Share-based Payment”,
previous year figures had to be adjusted accordingly. For
2005, the recorded effect on EBIT pre-goodwill impairment
and exceptionals as well as profit for the period resulted
in an additional expense of €33 million (2004: €12 million).
In the context of the Project Airbus Conversion in Euro(PACE) and the relating Advance Pricing Agreement signed
in April 2004 with tax authorities (France, UK, Germany
and Spain), the Airbus GIE – a U.S.-$ denominated entity- has been merged within Airbus SAS – a Euro denominatedentity – with retrospective effect as of 1st January 2004.
As a consequence, operations of former Airbus GIE are
from 1st January 2004 considered as “foreign currency
operations” and accounted for in accordance with accounting
principles consistently adopted by EADS. Before the merger,
Airbus GIE operations used to be recorded at the current
exchange rate of the period except for those hedged withfinancial instruments. From 1st January 2004, former
Airbus GIE operations are recorded on the basis of historicalexchange rates.
As a result, no additional Currency Translation Adjustment(CTA) is generated from former Airbus GIE operations.
The portion of outstanding CTA as at 31st December
2003, booked for balance sheet items that relate to futuretransactions as from 1st January 2004, is gradually released
according to realization of such operations, namely aircraft
deliveries.

Other Countries

1,370

789

514

Consolidated

34,206

31,76130,133

Revenues are allocated to geographical areas basedon the location of the customer.

e) Capital expenditures(in €m)2005

Germany

962

France946

United Kingdom

707

Spain

150

Other Countries

53

Capital expenditures excluding leased assets

2,818

Leased assets
Capital expenditures

40
2,858

f) Property, plant and equipment
by geographical area(in €m)2005

Germany

3,852

France3,140

United Kingdom

2,682

Spain

901

Other Countries
Property, plant and equipment
by geographical area

857
11,432

Property, plant and equipment split by geographical area
excludes leased assets (€2,385 million).

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3

6. Revenues

Personnel expenses are:

Revenues in 2005 reached €34,206 million comparedto €31,761 million in 2004 and €30,133 million in 2003.
Revenues in 2005 increased in comparison to 2004 in alldivisions except in Military Transport Aircraft division.
Despite less favourable hedges compared to 2004, revenues
increased mainly at Airbus, Eurocopter and Defence.

(in €m)Revenues are mainly comprised of sales of goods and services,
as well as of revenues associated with construction contracts
accounted for under the percentage-of-completion method,
contracted research and development and customer financing
revenues. For a breakdown of revenues by business segment
and geographical region, refer to Note 5 “Segment Reporting”.

8. Other income

Detail of Revenues:(in €m)

2005

2004

2003

Total revenues
Thereof revenues
from the delivery of
goods & services

34,206

31,76130,13328,64926,20825,110

Thereof revenues
from construction
contracts (including
contracted researchand development)

4,706

4,816

4,295

The revenues from construction contracts decreased in 2005
mainly in the Military Transport Aircraft division resulting
from the A400M nearly offset by the increase in theEurocopter and Space divisions.

7. Functional costs
Included in cost of sales and other functional costs are
Cost of materials (including changes in inventories)of €20,800 million (2004: €19,734 million;
2003: €18,882 million).
Cost of sales include the amortisation expenses of fair value
adjustments of fixed assets and inventories in the amount of€136 million (2004: €217 million; 2003: €229 million); these
are relating to the EADS merger, the Airbus Combinationand the formation of MBDA.
Additionally included in 2004 is the effect of theretrospective application of IFRS 2 “Share-based Payments”
amounting to an expense of €12 million.

EADS Financial Statements and Corporate Governance

REGdoc_EV_BOOK2_CH1.indd 69

2005

2004

2003

8,108

7,617

7,238

377

327

359

8,485

7,944

7,597

(in €m)

2005

2004

2003

Other income

222

314

196

48

42

39

9

34

17

39

20

7

Wages, salaries andsocial contributions
Net periodic pension
cost (see Note 21 b)
Total

Thereof rental income
Thereof releaseof allowances
Thereof income fromsales of fixed assets

The other income in 2004 includes the release of theprovision for the VT 1 claim in the amount of €106 million.

9. Share of profit from associates and otherincome (expense) from investments(in €m)Share of profit fromassociates
Other income (expense)from investments
Total

2005

2004

2003

210

88

224

15

(4)

(38)

225

84

186

The share of profit from associates in 2005 is mainly
derived from the result of the equity investment in
Dassault Aviation of €205 million (2004: €78 million;
2003: €225 million). The Dassault Aviation Group reported
in 2005 a Net income of €305 million of which EADS
recognised an amount of €141 million according to its shareof 46.3%. The current year’s equity investment income from
Dassault Aviation also includes a positive catch up of theprior year financial performance in accordance with IFRS,
which amounts to €64 million (in 2004: €(33) million).
The other income (expense) from investments mainlycomprises dividend contributions from investments. In 2003
an impairment loss of €30 million for CAC Systèmes andHispasat was incurred.

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3

national tax rates, among others Great Britain 30% andSpain 35%.

10. Total finance costs(in €m)

2005

2004

2003

Interest result

(155)

(275)

(203)

Other financial result
Total

(22)

(55)

148

(177)

(330)

(55)

Interest result in 2005 comprises interest income of€476 million (2004: €352 million; 2003: €371 million) andinterest expense of €(631) million (2004: €(627) million;
2003: €(574) million). Included in interest income is thereturn on cash and cash equivalents, securities and financial
assets such as loans and finance leases. Interest expense
includes interest on European Government refundable
advances of €236 million (2004: €245 million) and on
financial liabilities.
Other financial result in 2005 includes among othersa negative impact from the fair value measurement ofembedded derivatives not used in hedging relationships in
the amount of €(108) million (2004: €(10) million; 2003:€70 million), as well as losses on interest rate swaps of€(13) million. Included is the positive exchange effects onmonetary items in foreign currency of €147 million.

11. Income taxes
The (expense for) benefit from income taxes is comprisedof the following:(in €m)

2005

2004

2003

Current tax expense
Deferred tax(expense) / benefit

(439)

(127)

(612)

(386)

(537)

138

Total

(825)

(664)

(474)

In France, the corporate tax rate in effect for 2004 and2003 was 33 1/3% plus surcharges of 3% (“contribution
additionelle”) and 3.3% (“contribution sociale”). In 2004, theFrench Finance Law (FFL) for 2005 was enacted resulting
in a reduction of the “contribution additionelle” to 1.5% in2005 and nil for 2006 onwards. Accordingly, the applied tax
rate for 2005 in France is 34.93%. Deferred tax assets andliabilities for the Group’s French subsidiaries were calculated
at 31st December 2005 using the enacted tax rate of 34.43%
for temporary differences.
For the Group’s German subsidiaries, income taxes arecalculated using a federal corporate tax rate of 25.0%
for 31st December 2005, plus (i) an annual solidarity
surcharge of 5.5% on the amount of federal corporate taxes
payable and (ii) the after federal tax benefit rate for trade taxof 12.125% for 2005. In aggregate, the tax rate applied toGerman income taxes amounts to 38.5% in 2005 (38.5% at
31st December 2004 and 40.0% at 31st December 2003).
The following table shows a reconciliation from thetheoretical income tax expense – using the Dutch corporate
tax rate of 31.5% as at 31st December 2005, 34.5% at
31st December 2004 and at 31st December 2003 –to the reported tax expense. The reconciling items represent,
besides the impact of tax rate differentials and changes, nontaxable benefits or non-deductible expenses arising frompermanent differences between the local tax base and thereported financial statements according to IFRS rules.

The Group’s parent company, EADS N.V., legally seatedin Amsterdam, The Netherlands, applies Dutch tax law
using an income tax rate of 31.5% for 31st December 2005
(for 2004 and 2003: 34.5%). In December 2005, a new tax
law was enacted reducing the income tax rates in 2005 to
31.5%, in 2006 to 29.6% and from 2007 onwards to 29.1%.
Accordingly, deferred tax assets and liabilities for theGroup’s Dutch entities were calculated using the respective
enacted rates. All foreign subsidiaries however apply their

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32005 in % of“Profit before
income taxes”

2004 (1)

2003

1,885

692

34.5%

34.5%

(650)

(239)

(in €m)2005

Profit before income taxes

2,535* Corporate income tax rate

31.5%

Expected (expense) for income taxes(799)

Effects from tax rate differentials and changes

(55)

2.1%

(36)

(26)

0

-

0

(191)

(14)

0.6%

(11)

(119)

Goodwill amortisation
Change in valuation allowances

31.5%

Tax credit for R&D expenses

35(1.4)%

80

69

Share of profit from associates

70(2.8)%

2276

Tax effect on investments

(8)

0.3%

4

(35)

Other

(54)

2.2%

(73)

(9)

Reported tax expense

(825)

32.5%

(664)

(474)

(1) The effect of the retrospective application of IFRS 2 “Share-based Payment” is included (see Note 7 “Functional costs”).

carry forwards are also considered in the deferred income
tax calculation. Deferred income taxes are related to thefollowing assets and liabilities:

Deferred income taxes are the result of temporary
differences between the carrying amounts of certain assets
and liabilities in the financial statements and their tax bases.
Future tax impacts from net operating losses and tax credit

Deferred tax assets(in €m)Deferred tax liabilities

Net, 31st December

2005

2004

2005

2004

2005

2004

Intangible assets

14

8

(157)

(97)

(143)

(89)

Property, plant and equipment

114

46

(1,270)(1,087)(1,156)(1,041)

Investments and long-term financial assets

56

33

(234)

(149)

(178)

(116)

Inventories

470

357

(445)

(191)

25

166

Receivables and other assets

54

58(1,733)(3,561)(1,679)(3,503)

Prepaid expenses

2

1

(30)

(26)

(28)

(25)

Provision for retirement plans

678

700

0

0

678

700

Other provisions

974

607

(70)

(41)

904

566

Liabilities

977

821

(288)

(305)

689

516

Deferred income

504

579

(24)

(29)

480

550

Net operating loss and tax credit carry forwards

1,122

1,260

-

-

1,122

1,260

Deferred tax assets / (liabilities) before netting

4,965

4,470

(4,251)(5,486)714(1,016)

Valuation allowances on deferred tax assets
Set-off
(1)

(533)

(570)

-

-

(533)

(570)

(1,875)(1,352)

1,875

1,352

-

-

2,557

2,548

(2,376)(4,134)

181(1,586)

Thereof less than one year

864

858

(432)

(1,379)

432

(521)

Thereof more than one year

1,693

1,690

(1,944)(2,755)(251)(1,065)

Net Deferred tax assets / (liabilities)(1) Prior year adjusted due to the application of revised IAS 16 “Property, plant and equipment” (component approach) amounting to €5 million; please refer to “Changes in accounting policy”
in Note 2 “Summary of significant accounting policies”.

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subsequent years recorded a total deferred tax balanceof €83 million. Assessments show that these deferred tax
assets will be recovered in future through either (i) own
projected profits, or profits of other companies (ii) integrated
in the same fiscal group (“regime integration fiscal” inFrance, “steuerliche Organschaft” in Germany) or (iii) via the“loss surrender-agreement” in Great Britain.

The amount of the Group’s deferred tax assets’ allowances isbased upon management’s estimate of the level of deferred
tax assets that will be realized in the future. In future
periods, depending upon the Group’s financial results,
management’s estimate of the amount of the deferred tax
assets considered realisable may change, and hence thewrite down of deferred tax assets may increase or decrease.
Companies in loss making situations in two or more

Deferred taxes on Net Operating Losses and Tax Credit carry forwards:
FranceGermany

Spain

UK

Other
countries

31st Dec
2005

31st Dec
2004

398

660

4

1,622

96

2,780

3,217

Trade tax loss carry forwards

-

612

-

-

-

612

871

Tax credit carry forwards

4

-

213

-

-

217

186

(in €m)Net Operating Losses (NOL)

Tax effect

141

248

214

487

32

1,122

1,260

Valuation allowances
Deferred tax assets on NOL’s
and tax credit carry forwards

(64)

(147)

(1)

(81)

(14)

(307)

(349)

77

101

213

406

18

815

911

NOL’s, capital losses and trade tax loss carry forwards are indefinite in France, Germany and in Great Britain. In Spain NOL’s
and tax credit carry forwards expire after 15 years. The first tranche of tax credit carry forwards (€4 million) will expire in 2014.

Roll forward of deferred taxes:(in €m)Net deferred tax asset / (liability) beginning of the year (1)

2005

2004

(1,586)(935)

Deferred tax income (expense) in income statement

(386)

(537)

Deferred tax recognised directly in AOCI (IAS 39)

2,032

(300)

Others121

186

Net deferred tax asset / (liability) at year end

181(1,586)(1) Prior year adjusted due to the application of revised IAS 16 “Property, plant and equipment” (component approach) amounting to €5 million; please refer to “Changes in accounting policy”
in Note 2 “Summary of significant accounting policies”.

The deferred tax recognised directly in AOCI is as follows:(in €m)Available-for-sale investments

2005

2004

(3)

4

Cash flow hedges(1,070)(3,109)Total(1,073)(3,105)72 I EADS Financial Statements and Corporate Governance

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Notes to the Consolidated Balance Sheets (IFRS)
12. Intangible assets
A schedule detailing gross values, accumulated depreciation and net values of intangible assets is as follows:Cost(in €m)Goodwill
Capitalised development
costs

Balance atBalance at
31st Dec Change in 1st January
2004 accounting2005(as reported) policies (1)(restated)

Changes in
consolidation scope

Reclassification

Disposals

Balance at
31st Dec
2005

10,607541

11,148

1

168

(9)

0

(2)

11,306

172

0

172

1

292

0

2

(1)

466

Other intangible assets
Total

Exchangedifferences Additions

837

0

837

4

212

(3)

35

(62)

1,023

11,616541

12,157

6

672

(12)

37

(65)

12,795

Balance atBalance at
31st Dec Change in 1st January
2004 accounting2005(as reported) policies (1)(restated)

Exchangedifferences

Amortisation
chargeChanges in
consolidation scope

Reclassification

Amortisation / Impairment

Disposals

Balance at
31st Dec
2005

Goodwill
Capitalised development
costs(1,147)0(1,147)

(3)

0

9

0

2

(1,139)

(3)

0

(3)

0

(2)

0

0

1

(4)

Other intangible assets

(458)

0

(458)

(2)

(185)

2

(14)

57

(600)

(1,608)0(1,608)

(5)

(187)

11

(14)

60

(1,743)

Balance atBalance at
31st Dec Change in 1st January
2004 accounting2005(as reported) policies (1)(restated)

Exchangedifferences

Additions

Changes in
consolidation scope

Reclassification

Disposals

Balance at
31st Dec
2005(in €m)Total

Net book value(in €m)Goodwill
Capitalised development
costs

9,460

541

10,001

(2)

168

0

0

0

10,167

169

0

169

1

290

0

2

0

462

Other intangible assets

379

0

379

2

27

(1)

21

(5)

423

10,008541

10,549

1

485

(1)

23

(5)

11,052

Total(1) The change in accounting policy relates to the “Liability for puttable instruments”, please refer to “Changes in accounting policy” in Note 2 “Summary of significant accounting policies”.

Additions to goodwill in 2005 mainly concern thecontingent consideration with regard to the Airbus businesscombination in the amount of €93 million resulting fromthe application of IAS 32 “Financial Instruments: Disclosureand Presentation” (revised 2004) regarding the “Liability
for puttable instruments”. Furthermore the acquisition of
Nokia’s Professional Mobile Radio – PMR activities (EADS
Secure Networks Oy) contributes €44 million.

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Goodwill impairment tests
As in previous periods, EADS performed impairment tests
on level of Cash Generating Units (on segment level or one
level below). The goodwill is tested annually for impairment
in the fourth quarter of the financial year by using cash flow
projections based on current operative planning covering
a five-years period (in 2004: normally three-years period).
These current forecasts are based on past experience as wellas on future expected market developments.
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As of 31st December 2005 and 2004, goodwill was allocated to Cash Generating Units, which is summarized in the following
schedule on segment level:(in €m)Goodwill as of
31st December 2005
Goodwill as of
31st December 2004 (1)AirbusMilitary
Transport
AircraftEurocopter

Defence &Security
Systems

Space

Other
Businesses

HQ /Conso.

Consolidated

6,987

12

111

2,469

559

0

29

10,167

6,883

12

111

2,407

559

0

29

10,001(1) Restatement according to IAS 32 “Financial Instruments: Disclosure and Presentation” (revised 2004) regarding the liability for puttable instruments, please refer to “Changes in accounting
policy” in Note 2 “Summary of significant accounting policies”.

The current operative planning takes into account general
economic data derived from external macroeconomic andfinancial studies. The operative planning assumptions reflect
for the periods under review specific inflation rates andfuture labour expenses in the European Countries where
the major production facilities are located. Regarding the
expected future labour expenses an increase on average of 3%
was implied. In addition, future interest rates are projected
for the European Monetary Union, Great Britain and the USA.
The assumption for the growth rate used to calculate theterminal value in general amounts to unchanged 2%. Airbus
is using for new programs specific business assumptions.
Based on these current forecasts and projections of future
pre-tax cash-flows the value in use of Cash Generating Unitsis computed by applying pre-tax discount rates of 11.5%(2004 in the range of: 12.5% to 14%).
Airbus operates in a cyclical market and 2005 was a record
year for the industry. To face growing demand and basedon an order backlog of 2,177 commercial aircraft, Airbus
has planned for a production ramp up program to prepare
for a production rate of up to 32 single aisle and up to 8
long range aircraft per month. Airbus future profits should
be mainly affected by the expected growth in a competitiveenvironment, the exchange rate assumptions, the hedge bookin place and the cost saving program Route 06 as well as theentry into service of the A380 program.
For the Defence & Security Systems division an increase
in revenues is assumed in the operative planning, mainly
fuelled by the order book, as for example Eurofighter
deliveries backed by tranche two contract. Operating marginof the division is expected to increase over the operativeplanning period thanks to the expected volume growth andbenefits from launched restructuring measures in the past.

The order book of the Space division as of 31st December
2005 (including satellites, launchers, ballistic missiles andmilitary telecom services) supports the strong revenue
increase which is assumed for this division over the operativeplanning period. The current development of the Skynet V
satellites is weighing on EADS Space cash flow until thesespacecraft are launched and operated to generate a ramped
up level of revenues from the UK Ministry of Defence(MoD). The continuation of Space restructuring program
SARA successfully delivered EBIT turnaround in 2004 andconfirmed positive results in 2005 heading towards further
increase in profitability.
EADS follows an active policy of foreign exchange risk
hedging. As of 31st December 2005 the total hedge portfoliowith maturities up to 2011 amounts to 47 billion U.S.$ andcovers a major portion of the net exposure expected overthe period of the operative planning (2006 to 2010). The
average US$/€ hedge rate of the total hedge portfolio until
2011 amounts to 1.12 US$/€. For the determination of theoperative planning, management assumed future exchange
rates of 1.30 US$/€ and 0.68 GBP/€ to convert in € theportion of future US$ and GBP denominated revenues
which are not hedged. Net exposure arises mostly from
Airbus and to a lesser extent from Eurocopter, Space and the
Defence & Security Systems divisions.
The recoverable amounts based on value in use haveexceeded the carrying amounts of the Cash Generating Units
under review, indicating no goodwill impairment for 2005
and 2004.

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Development Costs
EADS has capitalised development costs in the amount of €462 million as of 31st December 2005 (€169 million as of
31st December 2004) as internally generated intangible asset mainly for the Airbus A380 program.

13. Property, Plant and Equipment
Schedules detailing gross values, accumulated depreciation and net values of property, plant and equipment show the following:Cost(in €m)Land, leasehold
improvements andbuildings including
buildings on land
owned by others
Technical equipment
and machinery
Other equipment,
factory and officeequipment
Advance payments
relating to plant andequipment as wellas construction inprogress
Total

Balance at
31st Dec
2004(as reported)

Change inBalance ataccounting 1st January(1)
policies /2005
Presentation (2)(restated)

Exchangedifferences

Change inconsolidaAdditions tion scope

Reclassification

Disposals

Balance at
31st Dec
2005

5,496

(172)

5,324

21

185

(5)

252

(38)

5,739

6,682

44

6,726

199

632

(4)

666

(41)

8,178

6,321

9

6,330

390

214

(8)

(205)

(483)

6,238

3,236

0

3,236

24

1,323

0

(1,103)

(6)

3,474

21,735(119)21,616

634

2,354

(17)

(390)

(568)

23,629Change in
Exchange Depreciation consolidadifferencescharge tion scope

Reclassification

Disposals

Balance at
31st Dec2005

Depreciation(in €m)Land, leasehold
improvements andbuildings including
buildings on land
owned by others
Technical equipment
and machinery
Other equipment,
factory and officeequipment
Advance payments
relating to plant andequipment as wellas construction inprogress
Total

Balance at
31st Dec
2004(as reported)

Change inBalance ataccounting 1st January
policies (1) /2005
Presentation (2)(restated)(1,973)87(1,886)

0

(243)

5

18

10

(2,096)(3,934)0(3,934)

(82)

(583)

4

3

24

(4,568)(2,879)(76)(2,955)

(169)

(411)

17

143

271

(3,104)

(44)

0

(44)

0

0

0

0

0

(44)

(8,830)11(8,819)(251)(1,237)

26

164

305

(9,812)EADS Financial Statements and Corporate Governance

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Net book value(in €m)Land, leasehold
improvements andbuildings including
buildings on land
owned by others
Technical equipment
and machinery
Other equipment,
factory and officeequipment
Advance payments
relating to plant andequipment as wellas construction inprogress
Total

Balance at
31st Dec
2004(as reported)

Change inBalance ataccounting 1st January
policies (1) /2005
Presentation (2)(restated)

Exchangedifferences Additions

Change inconsolidation scope

Reclassification

Balance at
31st Dec
Disposals
2005

3,523

(85)

3,438

21

(58)

0

270

(28)

3,643

2,748

44

2,792

117

49

0

669

(17)

3,610

3,442

(67)

3,375

221

(197)

9

(62)

(212)

3,134

3,192

0

3,192

24

1,323

0

(1,103)

(6)

3,430

12,905(108)

12,797

383

1,117

9

(226)

(263)

13,817(1) Through the application of the revised IAS 16 “Property, Plant and Equipment” (component approach and asset retirement obligation) the opening balance as of 31st December 2004 was adjusted

retrospectively by an amount of €(46) million. Due to the adoption of IFRIC 4 “Determining whether an Arrangement contains a Lease” (released 2004), Property, plant and equipment includes a
restatement at 31st December 2004, in the net amount of €97 million.
(2) Investment property is presented as a separate line item on the face of the Consolidated Balance Sheet (see Note 33 “Investment Property”).

In the depreciation of Property, plant and equipment
impairment charges of €8 million for Sogerma are included.
The Property, plant and equipment include at
31st December 2005 and 2004, buildings, technicalequipment and other equipment accounted for in fixed
assets under finance lease agreements for net amountsof €170 million and €200 million, net of accumulated
depreciation of €367 million and €336 million. The related
depreciation expense for 2005 was €31 million(2004: €19 million; 2003: €22 million). For investment
property please refer to Note 33 “Investment property”.
Other equipment, factory and office equipment
includes the net book value of “aircraft under operatinglease” for €2,381 million and €2,743 million as of

31st December 2005 and 2004, respectively; related
accumulated depreciation is €1,653 million and€1,604 million. Depreciation expense for 2005 amounts to€231 million (2004: €327 million; 2003: €439 million).
The “aircraft under operating lease” include:(i) Group’s sales finance activity in the form of aircraft
which have been leased out to customers and are classified
as operating leases. They are reported net of the accumulated
impairments. These sales financing transactions are generally
secured by the underlying aircraft used as collateral(see Note 29 “Commitments and contingencies” for details
on sales financing transactions).

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The corresponding non-cancellable future operating lease payments (not discounted) due from customers to be included inrevenues, at 31st December 2005 are as follows:(in €m)not later than 2006

173

later than 2006 and not later than 2010

433

later than 2010

246

Total

852

(ii) Aircraft which have been accounted as “operating lease”
because they were sold under terms that include asset
value guarantee commitments with the present value ofthe guarantee being more than 10% of the aircraft’s sales
price (assumed to be the fair value). Upon the initial saleof these aircraft to the customer, their total cost previously

recognised in inventory is transferred to “Other equipment,
factory and office equipment” and depreciated over its
estimated useful economic life, with the proceeds received
from the customer being recorded as deferred income(see Note 26 “Deferred income”).

The total net book values of aircraft under operating lease is as follows:
31st December(in €m)

2005

2004

(i) Net book value of aircraft under operating lease before impairment charge

1,493

1,981

Accumulated impairment

(319)

(532)

Net book value of aircraft under operating lease

1,174

1,449

(ii) Aircraft under operating lease with the present value of the guarantee being more than 10%

1,207

1,294

Total Net Book value of aircraft under operating leases

2,381

2,743

14. Investments in associates, other investments and long-term financial assets
The following table sets forth the composition of investments in associates, other investments and long-term financial assets:
31st December(in €m)

2005

2004

Investments in associates

1,908

1,738

541

459

Non-current other investments and long-term financial assets
Other investments
Long-term financial assets

1,397

1,651

Total

1,938

2,110

237

242

Current portion of long-term financial assets

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Investments in associates are accounted for using theequity method. As of 31st December 2005 and 2004,
investments in associates mainly contain EADS’ interest
in Dassault Aviation (46.30% at 31st December 2005 and46.22% at 31st December 2004) of €1,867 million and€1,705 million. The Dassault Aviation Group reported
in 2005 a Net income of €305 million of which EADS
recognised an amount of €141 million according to its shareof interest. The current year’s equity investment income
from Dassault Aviation also includes a positive catch up(in €m)of the prior year financial performance in accordance with
IFRS, which amounts to €64 million (in 2004: €(33) million)
and in addition €(18) million (in 2004: €38 million) wererecognised in AOCI. Within the equity of EADS reflecting
the share of Dassault’s equity, a reclassification as of
31st December 2002 / 1st January 2003 has been recorded
from retained earnings €(97) million into AOCI €97 million.
The following table illustrates summarized financial
information of the EADS investment of 46.3% in Dassault
Aviation as of 31st December 2005:

31st December 2005

Share of the associate’s balance sheet:
Non-current assets

1,231

Current assets

2,395

Non-current liabilities

165

Current liabilities

1,978

Total equity

1,483

Share of the associate’s revenues and profit:
Revenues

1,587

Net Income

141

Carrying amount of the investment

A list of major investments in associates and the proportionof ownership is included in Appendix “Information on
principal investments”.
Other investments comprise EADS’ investment invarious non-consolidated entities, the most significant
being at 31st December 2005, investments in Embraer of€106 million (2004: €72 million) and in Patria of €51 million(2004: €50 million) as well as a participation of 10% in Irkut(€54 million), acquired in 2005.

1,867

Long-term financial assets of €1,397 million (in 2004:€1,651 million) and the current portion of long-term
financial assets of €237 million (in 2004: €242 million)
encompass mainly the Group’s sales finance activities
in the form of finance lease receivables and loans fromaircraft financing. They are reported net of accumulated
impairments. These sales financing transactions are generally
secured by the underlying aircraft used as collateral(see Note 29 “Commitments and contingencies” for details
on sales financing transactions).

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Loans from aircraft financing are provided to customers to finance the sale of aircraft. These loans are long-term and normally
have a maturity which is linked to the use of the aircraft by the customer. The calculation of the net book value is:
31st December(in €m)

2005

2004

Outstanding gross amount of loans to customers

717

946

Accumulated impairment

(274)

(311)

Total net book value of loans

443

635

Finance lease receivables from aircraft financing are as follows:
31st December(in €m)

2005

2004

Minimum lease payments receivables

1,245

1,299

Unearned finance income

(321)

(179)

Accumulated impairment

(122)

(155)

Total net book value of finance lease receivables

802

965

Future minimum lease payments from investments in finance leases to be received are as follows (not discounted):(in €m)Not later than 2006

150

Later than 2006 and not later than 2010

493

Later than 2010
Total

Additionally included are €389 million and €293 million ofother loans as of 31st December 2005 and 2004, e.g. loans toemployees.

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602
1,245

Defeased bank deposits of €1,102 million and €1,089 million
as of 31st December 2005 and 2004, respectively have been
offset against financial liabilities.

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15. Inventories
Inventories at 31st December 2005 and 2004 consist of the following:
31st December(in €m)

2005

2004

Raw materials and manufacturing supplies

1,159

987

Work in progress

10,655

8,505

Finished goods and parts accounted for at lower of cost and net realisable value

1,161

1,039

Advance payments to suppliers

2,450

1,803

15,425

12,334Total

The increase in work in progress of €2,150 million was
mainly driven by Airbus programs, Eurocopter, MilitaryTransport Aircraft and Space. Finished goods and parts
increased by €122 million, mainly relating to the ramp up
of Eurocopter NH 90 and Tiger program. The increase ofadvance payments provided to suppliers mainly reflects
activities in the A400M program, Eurofighter program,Space Transportation and Airbus.

Those advance payments received, which so far werededucted from inventories are now reclassified to current andnon-current other liabilities. Previous year figure has beenadjusted accordingly with a total amount of €9,259 million(thereof non-current other liabilities in the amount of€632 million and current other liabilities in the amount of€8,627 million).
The at cost value of finished goods and parts for resaleamounts to €1,505 million in 2005 (2004: €1,354 million).

16. Trade receivables
Trade receivables at 31st December 2005 and 2004 consist of the following:
31st December(in €m)

2005

2004

Receivables from sales of goods and services

5,209

4,784

Allowance for doubtful accounts

(407)

(378)

Total

4,802

4,406

Trade receivables are classified as current assets. As of
31st December 2005 and 2004, respectively, €237 millionand €77 million of trade receivables are not expected to becollected within one year.

In application of the percentage of completion method, as of
31st December 2005 an amount of €1,489 million (in 2004:€1,313 million) for construction contracts is included in the
trade receivables net of advance payments received.

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17. Other assets
Other assets at 31st December 2005 and 2004 consist of the following:
31st December(in €m)

2005

2004

2,762

6,243

Non current other assets
Positive fair values of derivative financial instruments
Prepaid expenses

526

560

Capitalised settlement payments to German Government

231

258

Others (1)
Total

91

35

3,610

7,096

Current other assets
Positive fair values of derivative financial instruments

1,191

2,705

Value Added Tax claims

585

462

Prepaid expenses

332

391

Receivables from related companies

267

333

Receivables from affiliated companies

165

121

Loans

32

19

Others (1)

629

666

Total

3,201

4,697

(1) Triggered by the application of the revised IAS 16 “Property, Plant and Equipment” (component approach) for major inspections where the lessee bears the relating maintenance costs the balance ofother assets was adjusted retrospectively by an amount of €40 million (thereof current other assets €17 million and non-current other assets €23 million).

The capitalised settlement payments to the German Government are attributable to refundable advances which are amortizedthrough the income statement (in cost of sales) at the delivery pace of the corresponding aircraft.

18. Securities
The Group’s security portfolio amounts to €1,040 millionand €466 million as of 31st December 2005 and 2004,
respectively. The security portfolio contains a non-current
portion of available-for-sale-securities of €1,011 million(in 2004: €466 million) and a current portion of€29 million (in 2004: €0 million).
Included in the securities portfolio are corporate bonds
bearing both fixed rate coupons (€218 million nominal value)and floating rate coupons (€331 million nominal value) as
well as credit instruments bearing floating rate coupons(€291 million nominal value).

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19. Non-current assets classified
as held for sale
According to IFRS 5 “Non-current Assets held for saleand Discontinued Operations”, applied prospectively asof 1st January 2005, non-current assets classified asheld for sale in the amount of €881 million reflect assets
and disposal groups which concern mainly sales financing
activities in Airbus. The disposal group includes liabilities
directly associated with non-current assets classified asheld for sale amounting to €62 million.

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20. Total equity
The following table shows the development of the number of shares outstanding:Number of shares

2005

2004

809,579,069

812,885,182

Issued for ESOP

1,938,309

2,017,822

Issued for exercised options

7,562,110

362,747

Issued as at 1st January

Cancelled
Issued as at 31st December(1,336,358)(5,686,682)

817,743,130

809,579,069

Treasury shares as at 31st December(20,602,704)(10,028,775)

Outstanding as at 31st December

797,140,426

799,550,294

EADS’ shares are exclusively ordinary shares with a parvalue of €1.00. The authorized share capital consistsof 3,000,000,000 shares. In connection with the 2005
Employee Stock Ownership Plan (see Note 31 “Sharebased payment“), EADS issued 1,938,309 shares (in 2004:
2,017,822), representing a nominal value of €1,938,309 (in2004: €2,017,822).

issued share capital. The Group’s Board of Directors decided
on 3rd June 2005, to set up and implement plans for the
repurchase of up to 1,012,500 shares related to ESOP 2005.
On 12th December 2005 the Group’s Board of Directors
decided to set up and implement plans for the repurchaseof up to 3,990,880 shares related to the 2005 Stock Option
Plan (7th tranche).

On 6th May 2004, the Shareholders’ General Meeting of
EADS renewed the authorization given to the Board of
Directors to repurchase shares of the Company as longas, upon such repurchase, the Company will not holdmore than 5% of the Company’s issued share capital. The
Group’s Board of Directors decided on 8th October 2004,
to set up and implement plans for the repurchase of up to4,909,000 shares.

Furthermore, the Shareholders’ General Meeting authorizedboth the Board of Directors and the Chief Executive
Officers, with powers of substitution, to cancel up to a
maximum of 1,336,358 shares. On 25th July 2005, theChief Executive Officers decided to cancel 1,336,358
treasury shares.

Furthermore, the Shareholders’ General Meeting authorizedboth the Board of Directors and the Chief Executive
Officers, with power of substitution, to cancel up toa maximum of 5,727,515 shares. On 20th July 2004,
the Chief Executive Officers decided to cancel
5,686,682 treasury shares.
On 6th May 2004, the Shareholders’ General Meeting
also decided to pay a cash distribution related to the fiscal
year 2003 for a gross amount of €0.40 per share, which was
paid on 4th June 2004.
The Shareholders’ General Meeting of EADS held on
11th May 2005 renewed the authorization given to theBoard of Directors to repurchase shares of the Company,
by any means, including derivative products, on any stock
exchange or otherwise, as long as, upon such repurchase,
the Company will not hold more than 5% of the Company’s

In total EADS purchased in 2005 11,910,287 treasury shares(in 2004: 3,787,523 treasury shares) and cancelled 1,336,358
shares (in 2004: 5,686,682 shares), resulting in an amount of
20,602,704 treasury shares at 31st December 2005 (in 2004:
10,028,775 treasury shares).
The Shareholders’ General Meeting also decided to paya cash distribution related to the fiscal year 2004 fora gross amount of €0.50 per share, which was paid on
8th June 2005.
Capital stock comprises the nominal amount of shares
outstanding. The addition to capital stock represents thecontribution of €1,938,309 (in 2004: €2,017,822) byemployees under the 2005 Employee Stock Ownership Plan
and for exercised options of €7,562,110 (in 2004: €362,747)
in compliance with the implemented stock option plans.

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3

Share premium mainly results from contributions in kind in
the course of the creation of EADS, cash contributions fromthe Initial Public Offering, capital increases and reductions
due to the issuance and cancellation of shares as well as cash
distributions to EADS N.V. shareholders. Other reserves
include among others retained earnings. Accumulated othercomprehensive income consists of all amounts recognised
directly in equity resulting from changes in fair value offinancial instruments that are classified as available-for-saleor that form part of hedging relationships in effective cashflow hedges as well as from currency translation adjustmentsof foreign entities. Treasury shares represent the amount
paid for own shares held in treasury.

Total equity as of 31st December 2002 was adjusted due tothe application of IAS 32 “Financial Instruments: Disclosureand Presentation” (revised 2004) (see Note 2 “Summaryof significant accounting policies”) in the amount of€(3,053) million, IAS 16 “Property, Plant and Equipment”(see Note 2 “Summary of significant accounting policies”)
in the amount of €(30) million; €97 million within theequity of EADS were reclassified in order to reflect theshare of Dassault’s equity according to IFRS (see Note 14“Investments in associates, other investments and long-term
financial assets”).

21. Provisions
Provisions are comprised of the following:
31st December(in €m)

2005

2004

Provision for retirement plans (see Note 21 b)

4,006

3,876

114

71

4,120

3,947

921

181

Provision for deferred compensation (see Note 21 a)
Retirement plans and similar obligations
Financial instruments (see Note 21 c)
Other provisions (see Note 21 d)

4,565

4,296

Total

9,606

8,424

Thereof non-current portion

6,879

6,074

Thereof current portion

2,727

2,350

As of 31st December 2005 and 2004, respectively,€3,900 million and €3,749 million of retirement plans
and similar obligations, €472 million and €137 millionof financial instruments as well as €2,507 million and€2,188 million of other provisions mature after more than
one year.

a) Provisions for deferred compensation
This amount represents obligations that arise if employees
elect to convert all or part of their variable remuneration
or bonus into an equivalent commitment for deferredcompensation.

EADS Financial Statements and Corporate Governance

REGdoc_EV_BOOK2_CH1.indd 83b) Provisions for retirement plans
When Group employees retire, they receive indemnities
as stipulated in retirement agreements, in accordance withregulations and practices of the countries in which theGroup operates.
French law stipulates that employees are paid retirement
indemnities on the basis of the length of service.
In Germany, EADS introduced a new pension plan (P3) for
non executive employees in 2004. Under the new plan, theemployer makes contributions during the service period,
which are dependent on salary in the years of contribution
and years of service. These contributions are converted into
components which become part of the accrued pension
liability at the end of the year. Accrued benefits under theold plan are considered through an initial component. Total

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benefits are calculated as a career average over the entire periodof service. On an overall basis, the application of the new plan
had no significant effect on pension expense for 2004.
Certain employees that are not covered by the new plan
receive retirement indemnities based on salary earnedin the last year or on an average of the last three yearsof employment. For executive employees, benefits are
depending on final salary at the date of retirement and thetime period as executive.
Actuarial assessments are regularly made to determine
the amount of the Group’s commitments with regard
to retirement indemnities. This assessment includes anassumption concerning changes in salaries, retirement ages
and long-term interest rates. It comprises all the expenses theGroup will be required to pay to meet these commitments.
The weighted-average assumptions used in calculating theactuarial values of the retirement plans are as follows:

The amount recorded as provision on the balance sheet can bederived as follows:
Change in defined benefit obligations(in €m)

2005

2004

2003

Defined benefit
obligations at beginningof year

5,198

4,735

4,287

Service cost

153

125

122

Interest cost

252

243

241

8

0

14

0

(4)

0

517

281

9

7

3

237

(208)

(185)

(175)

5,927

5,198

4,735

2005

2004

2003

658

619

532

82

52

27

111

45

16

Plan amendments
Plan curtailments andsettlements
Actuarial losses
Acquisitions and otherBenefits paid
Defined benefit
obligations at endof year

Change in plan assets
31st December
Assumptions in%

Discount rate
Rate of compensation
increase
Inflation rate
Expected return on plan
assets(in €m)

2005

2004

2003

4.0

4.75 – 5.0

5.0 – 5.25

3.0

3.0

3.0

1.75 – 2.0

1.5 – 2.0

1.25 – 2.0

6.5

6.5

6.5

Fair value of plan assets
at beginning of year
Actual return on plan
assetsContributions
Acquisitions and other

Actuarial gains and losses of the current year are notrecognised in profit / loss but added to the balance of
unrecognised net actuarial gain or loss. If the accumulated
amount of unrecognised net gains and losses as of the
beginning of the year exceeds the greater of 10% of thepresent value of the defined benefit obligation and 10% of
the fair value of plan assets of each respective legal entity,
the excess is amortized through profit and loss on a straightline basis over the average remaining working lives of theemployees participating in each plan.

Benefits paid
Fair value of plan
assets at end of year

8

0

92

(60)

(58)

(48)

799

658

619

Based on past experience, EADS expects a return rate for plan
assets of 6.5%.
31st December(in €m)

2005

2004

2003

Funded status (1)Unrecognised actuarial
net (losses)
Unrecognised past
service cost
Net amountrecognised asprovision

5,128

4,540

4,116

(1,118)

(659)

(384)

(4)

(5)

(14)

4,006

3,876

3,718

(1) Difference between the defined benefit obligations and the fair value of plan assets at theend of the year.

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3

The defined benefit obligation at the end of the year is thepresent value, without deducting any plan assets, of expected
future payments required to settle the obligation resulting
from employee service in the current and prior periods. The
increase in the unrecognised actuarial losses results mainly
from the decrease in the discount rate for pension obligationsin Germany from 4.75% to 4% and in France from 5% to 4%,
partially offset by the increase in the assumed inflation ratefor Germany from 1.5% to 1.75%.

The following table sets forth the development of theprovision for pension obligations:

The fair value of plan assets at end of the year comprises
assets held by long-term employee benefit funds that exist
solely to pay or fund employee benefits. Plan assets are
not entirely exposed to fluctuations of stock markets, as
the major portion of plan assets is invested in fixed income
instruments.

Acquisitions and other
Provision for pension obligations
at end of year

The net amount of €4,006 million (2004: €3,876 million)
represents the amount recorded as provision on the balance
sheet. The provision contains the funded status, adjusted
by actuarial net gains / losses which do not have to berecognised because they do not meet the recognition
criteria. Net actuarial gains and losses include both actuarial
gains / losses on the defined benefit obligation and thedifference between the actual and expected return on plan
assets.

Change in provision for pension obligations(in €m)

2005

2004

Provision for pension obligations
at beginning of year

3,876

3,718

377

327

Net periodic pension cost
Contributions

(111)

(45)

Consumption (benefits paid)

(148)

(127)

12

3

4,006

3,876

c) Financial instruments
The provision for financial instruments amounts to€921 million as of 31st December 2005 (€181 million asof 31st December 2004) and includes in 2005 mainly thenegative fair market value of foreign currency forwards(see Note 30 c) “Fair value of financial instruments”).

The components of the net periodic pension cost, included
in “Profit before finance costs and income taxes”, are as
follows:(in €m)

2005

2004

2003

Service cost

153

125

122

Interest cost
Expected return on plan
assets

252

243

241

(42)

(41)

(33)

14

0

29

377

327

359

Net actuarial loss
Net periodic pension
cost

EADS Financial Statements and Corporate Governance

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3d) Other provisions
Movements in provisions during the year were as follows:
Balance at
1st January
2005

Openingbalancesheet
adjustments (1)Balanceat 1stJanuary2005(adjusted)

Exchangedifferences

Used

Released

Balanceat 31stDecember
2005

Aircraft financing risks

939

0

939

182

111

0

(39)

(24)

1,169

Outstanding costs

861

0

861

1

394

(15)

(329)

(86)

826

(in €m)Reclassification /Change inconsolidated
Additionsgroup

Contract losses

365

0

365

1

190

(14)

(110)

(35)

397

Tax provisions

202

(178)

24

(1)

4

0

(10)

0

17

Warranties

158

0

158

1

86

(3)

(46)

(20)

176

Litigations and claims

202

0

202

0

42

0

(14)

0

230

Personnel charges
Restructuring measures / preretirement part-time work
Obligation from services andmaintenance agreements

478

0

478

0

236

(6)

(267)

(5)

436

271

0

271

1

95

(33)

(91)

(11)

232

255

0

255

1

50

0

(51)

(1)

254

Other risks and charges

714

29

743

1

261

6

(111)

(72)

828

4,445

(149)

4,296

187

1,469

(65)

(1,068)

(254)

4,565

Total

(1) Due to revised IAS 1 “Presentation of Financial Statements”, the current income tax provision in the amount of €178 million was reclassified to tax liabilities. Due to the application of revised
IAS 16 “Property, plant and equipment”, the provision for “Other risks and charges” had to be restated by €29 million.

The provision for aircraft financing risks fully covers, inline with the Group’s policy for sales financing risk, the net
exposure to aircraft financing of €522 million (€466 million
at 31st December 2004) and asset value risks of €647 million(€473 million at 31st December 2004) related to Airbus andATR (see Note 29 “Commitments and contingencies”).
The use of the provision for restructuring measures / preretirement part-time work mainly relates to restructuring
measures in the divisions Defence & Security Systems andSpace.
The provision for litigations and claims covers various legal
actions, governmental investigations, proceedings and otherclaims, which are pending or may be instituted or asserted in
the future against the Group.

22. Financial liabilities
In 2004, the EIB (European Investment Bank) granted along-term loan to EADS in the amount of US$421 million,
bearing a fixed interest rate of 5.1%. In 2003, EADS issued
two Euro denominated bonds under its EMTN Programme(Euro Medium Term Note Programme). The first issue of€1 billion with expected final maturity in 2010 carries a
coupon of 4.625% which was swapped into variable rateof 3M-Euribor +1.02%. The second issue of €0.5 billion
maturing in 2018 carries a coupon of 5.5% which was
swapped during 2005 into variable rate of 3M-Euribor+1.81%.
Financial liabilities include liabilities connected with sales
financing transactions amounting to €2,074 million, thereof€568 million at a fixed interest rate of 9.88% and theremaining amount mainly at variable interest rates.

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Non recourse Airbus financial liabilities (risk is supported by external parties) amount to €1,247 million (in 2004: €988 million).
Defeased bank deposits for aircraft financing of €1,102 million and €1,089 million as of 31st December 2005 and 2004
respectively have been offset against financial liabilities.
31st December(in €m)

2005

2004

Bonds

1,659

1,648

1,352

1,629

937

910

241

218

4,189

4,405

thereof due in more than five years: 1,519 (31st December 2004: 1,511)
Liabilities to financial institutions
thereof due in more than five years: 972 (31st December 2004: 1,369)
Loans
thereof due in more than five years: 528 (31st December 2004: 672)
Liabilities from finance leases
thereof due in more than five years: 78 (31st December 2004: 46)
Long-term financial liabilities
Bonds

0

23

Liabilities to financial institutions

146

145

Liabilities to affiliated companies

112

110

Loans

207

143

Liabilities from finance leases

87

52

Others356

345

Short-term financial liabilities (due within one year)

908

818

5,097

5,223

Total

(1)

(1) Due to the adoption of IFRIC 4 “Determining whether an Arrangement contains a Lease” (released 2004), financial liabilities include a restatement at 31st December 2004, in the amountof €97 million.

Included in “Others” are financial liabilities against joint
venture partners.

23. Liability for puttable instruments

The aggregate amounts of financial liabilities maturing
during the next five years and thereafter are as follows:(in €m)Financialliabilities

2006

908

2007

306

2008

317

2009

259

2010

209

Thereafter

3,098

Total

5,097

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REGdoc_EV_BOOK2_CH1.indd 87

As of 1st January 2005 EADS adopted retrospectively IAS
32 “Financial Instruments: Disclosure and Presentation”(revised 2004) and accounted for a liability for the 20%
interest of BAE Systems in Airbus in the amount of€3.5 billion. For further details please refer to “Changes
in accounting policy” in Note 2 “Summary of significant
accounting policies”.

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3

24. Other liabilities
31st December(in €m)

2005

2004

Thereof customer advance payments

4,911

3,985

Thereof European Governments refundable advances

4,950

4,781

110

11

9,971

8,777

14,078

10,884

Thereof European Governments refundable advances

343

338

Thereof tax liabilities (excluding income tax)

690

612

Thereof liabilities to affiliated companies

93

35

Non-current other liabilities

Others
Total
Current other liabilities
Thereof customer advance payments

Thereof liabilities to related companies
OthersTotal

The increase in European Governments refundable advances
relates mostly to accrued interest. Regarding the interest
expense on European Governments refundable advances see
Note 10 “Total finance costs”. Due to their specific nature,
namely their risk-sharing features and the fact that such
advances are generally granted to EADS on the basis ofsignificant development projects, European Governments
refundable advances are accounted for by EADS within“Other liabilities” on the balance sheet including accrued
interest.
A part of the advance payments received has previously
been recorded as a deduction from inventories. Previous
year figure has been adjusted accordingly with an amountof €9,259 million (thereof non-current other liabilities of€632 million and current other liabilities of €8,627 million).
Included in “Other liabilities” are €15,986 million(€13,709 million as of 31st December 2004) due within
one year and €5,621 million (€3,918 million as of
31st December 2004) maturing after more than five years.

31

74

1,931

1,779

17,166

13,722

25. Trade liabilities
As of 31st December 2005, trade liabilities amounting
to €54 million (€155 million as of 31st December 2004)
mature after more than one year.

26. Deferred income
31st December(in €m)

2005

2004

Non-current deferred income

1,324

1,490

573

501

1,897

1,991

Current deferred income
Total

The main part of deferred income is related to sales ofAirbus and ATR aircraft that include asset value guarantee
commitments and that are accounted for as operatingleases (€1,467 million and €1,567 million as of
31st December 2005 and 2004, respectively).

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3

Notes to the Consolidated Statements of Cash-Flows (IFRS)
27. Consolidated Statement of Cash Flows
As of 31st December 2005, EADS’ cash position(stated as cash and cash equivalents in the Consolidated
Statement of Cash-Flows) includes €1,202 million(€687 million, €273 million as of 31st December 2004
and 2003) representing the amount Airbus has depositedat BAE Systems. Additionally included are €579 million,€602 million and €613 million as of 31st December 2005,
2004 and 2003, respectively, which represent EADS’ sharein MBDA’s cash and cash equivalents, deposited at BAE
Systems and Finmeccanica and are available upon demand.
The change in financial liabilities in 2005 resultsfrom additions to financial liabilities in the amount of€456 million (in 2004: €1,302 million) and repaymentsof €(800) million (in 2004: €(828) million).
The following charts provide details on acquisitions(resulting in additional assets and liabilities acquired)of subsidiaries:(in €m)31st December 2005

Total purchase price(131)

thereof paid in cash and cash equivalents
Cash and cash equivalents includedin the acquired subsidiaries(131)

Cash Flow for acquisitions, net of cash

(131)

0

Included in the aggregate net purchase price in 2005of €(131) million is mainly the acquisition of Nokia’s
Professional Mobile Radio – PMR activities (EADS Secure
Networks Oy). In addition, there have been cash investments
mainly in Dornier GmbH which had been already fully
consolidated.

EADS Financial Statements and Corporate Governance

REGdoc_EV_BOOK2_CH1.indd 89(in €m)31st December 2005

Property, plant and equipment

21

Financial assets

0

Inventories

4

Trade receivables

11

Other assets

27

Cash and cash equivalents

0

Assets63

Provisions(4)

Trade liabilities

0

Financial liabilities

0

Other liabilities(1)

Liabilities(5)

Net assets

58

Goodwill arising on acquisitions
Less own cash and cash equivalentsof acquired subsidiaries

73

Cash Flow for acquisitions, net of cash

131

0

The following charts provide details on disposals (resulting
in assets and liabilities disposed) of subsidiaries:(in €m)31st December 2005

Total selling pricethereof received by cash and cash
equivalents
Cash and cash equivalents includedin the (disposed) subsidiaries

110

(21)

Cash Flow from disposals, net of cash

89

110

Included in the aggregate net selling price in 2005 of€89 million are the sale of the 50% participation in TDA– Armements S.A.S. to Thales and the sale of the Enterprise
Telephony Business to Aastra.

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3(in €m)31st December 2005

Property, plant and equipment(12)

Financial assets

0

Inventories(34)

Trade receivables(64)

Other assets(34)

Cash and cash equivalents(21)

Assets(165)

Provisions

16

Trade liabilities

18

Financial liabilities

13

Other liabilities

45

Liabilities

92

Net assets(73)

Goodwill arising from disposals(6)

Result from disposal of subsidiaries(31)

Less own cash and cash equivalents of disposed subsidiaries

21

Cash Flow from disposals, net of cash

(89)

Other Notes to the Consolidated Financial Statements (IFRS)
28. Litigation and claims
EADS is involved in a number of claims and arbitrations
that have arisen in the ordinary course of business. EADS
believes that it has made adequate provisions to cover current
or contemplated general and specific litigation risks.
At the end of 2002, a request for arbitration was filed
against a subsidiary of EADS involved in the supply ofequipment under a commercial contract that was completed
several years ago. EADS believes it has strong defences, bothprocedural and of substance, to oppose the claim. At thisstage of the procedure the financial risk cannot be assessedsince, in June 2003, EADS was notified that the arbitration
procedure was suspended at the request of the claimant. At
the date of this document, such arbitration procedure is stillsuspended.

EADS is not aware of any exceptional items or pending or
threatened legal or arbitration proceedings that may have, or
may have had in a recent period, a material adverse effect on
the financial position, the activities or the results of its grouptaken as a whole, except as stated above.
EADS recognizes provisions for litigation and claims
when (i) it has a present obligation from legal actions,
governmental investigations, proceedings and other claims
resulting from past events that are pending or may beinstituted or asserted in the future against the Group, (ii) it isprobable that an outflow of resources embodying economic
benefits will be required to settle such obligation and (iii)a reliable estimate of the amount of such obligation can be
made. For the amount provided for risk due to litigations andclaims, see Note 21 d.) “Other provisions”.

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3

29. Commitments and contingencies
Commitments and contingent liabilities
Sales financing – In relation to its Airbus and ATR
activities, EADS is committing itself in sales financing
transactions with selected customers. Sales financing
transactions are generally collateralized by the underlying
aircraft. Additionally, Airbus and ATR benefit fromprotective covenants and from security packages tailoredaccording to the perceived risk and the legal environment.
EADS believes that the estimated fair value of the aircraft
securing such commitments will substantially offset any
potential losses from the commitments. Any remaining
difference between the amount of financing commitments
given and the collateral value of the aircraft financed isprovided for as an impairment to the relating asset, if
assignable, or as a provision for aircraft financial risk. The
basis for this write-down is a risk-pricing-model, which isapplied at every closing to closely monitor the remaining
value of the aircraft.
Depending on which party assumes the risks and rewardsof ownership of a financed aircraft, the assets relating tosales financing are accounted for on the balance sheet
either as (i) an operating lease (see Note 13 “Property, plantand equipment”) or (ii) a loan from aircraft financing or(iii) a finance lease receivable (see Note 14 “Investments
in associates, other investments and long-term financial
assets”) or (iv) non-current assets classified as held for sale.
As of 31st December 2005, related accumulated impairment
amounts to €319 million (2004: €532 million) for operatinglease, €396 million (2004: €466 million) for loans andfinance lease and €196 million for non-current assets
classified as held for sale. As part of provisions for aircraft
financial risks €34 million (2004: €33 million) are recorded(see Note 21 d.) “Other provisions”).
Certain sales financing transactions include the sale and leaseback of the aircraft with a third party lessor under operatinglease. Unless the Group has sold down the relating operatinglease commitments to third parties, which assume liability
for the payments, it is exposed to future lease payments.

EADS Financial Statements and Corporate Governance

REGdoc_EV_BOOK2_CH1.indd 91

Future nominal operating lease payments that result fromaircraft sales financing transactions are recorded off balance
sheet and are scheduled to be paid as follows:(in €m)not later than 2006

208

later than 2006 and not later than 2010

989

later than 2010

721

Total
Of which commitments where the transaction has
been sold to third parties
Total aircraft lease commitments where EADS
bears the risk (not discounted)

1,918(1,092)
826

Total aircraft lease commitments of €1,918 million as of
31st December 2005, arise from aircraft head-leases andare typically backed by corresponding sublease income
from customers with an amount of €1,364 million. A
large part of these lease commitments (€1,092 million asof 31st December 2005) arises from transactions that weresold down to third parties, which assume liability for thepayments. EADS determines its gross exposure to suchoperating leases as the present value of the related payment
streams. The difference between gross exposure and theestimated value of underlying aircraft used as collateral,the net exposure, is provided for in full with an amountof €488 million as of 31st December 2005, as part ofthe provision for aircraft financing risk (see Note 21 d.)“Other provisions”).
As of 31st December 2005 and 2004, the total consolidated– on and off balance sheet – Commercial Aviation Sales
Financing Exposure is as follows (Airbus 100% and ATR
50%):
31st December(in €m)

2005

2004

Total gross exposure
Estimated fair value of collateral(aircraft)

3,566

3,681

(2,133)(2,216)Net exposure (fully provided for)

1,433

1,465

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3

Detail of provisions / accumulated impairments are as follows:
31st December(in €m)

2005

2004

Accumulated impairment on operating leases (see Note 13 “Property, plant and equipment”)
Accumulated impairment on loans from aircraft financing and finance leases (see Note 14 “Investments inassociates, other investments and long-term financial assets”)

319

532

396

466

0

1

Accumulated impairment on inventories
Non-current assets classified as held for sale

196

0

Provisions for aircraft financing risk (on balance sheet) (see Note 21 d.) “Other provisions”)

34

33

Provisions for aircraft financing risk (commitment off balance sheet) (see Note 21 d.) “Other provisions”)
Total provisions / accumulated impairments for sales financing exposure

Asset value guarantees – Certain sales contracts may
include the obligation of an asset value guarantee whereby
Airbus or ATR guarantee a portion of the value of an aircraft
at a specific date after its delivery. Management considers
the financial risks associated with such guarantees to be
manageable. Three factors contribute to this assessment:(i) the guarantee only covers a tranche of the estimatedfuture value of the aircraft, and its level is considered
prudent in comparison to the estimated future value ofeach aircraft; (ii) the asset value guarantee related exposure
is diversified over a large number of aircraft and customers;and (iii) the exercise dates of outstanding asset value
guarantees are distributed through 2019. If the present valueof the guarantee given exceeds 10% of the sales price of
the aircraft, the sale of the underlying aircraft is accounted
for as an operating lease (see Note 13 “Property, plant andequipment” and Note 26 “Deferred income”). In addition,
EADS is contingently liable in case asset value guarantees
with less than 10% are provided to customers as part ofaircraft sales. Counter guarantees are negotiated with third
parties and reduce the risk to which the group is exposed.
As of 31st December 2005 the nominal value of asset value
guarantees provided to airlines, that do not exceed the 10%
criteria, amount to €1,054 million, excluding €507 million
where the risk is considered to be remote. In many cases therisk is limited to a specific portion of the residual value ofthe aircraft. The present value of the risk inherent to thegiven asset value guarantees where a settlement is being
considered as probable is fully provided for and includedin the total amount of provisions for asset value risks of€647 million (see Note 21 d.) “Other provisions”). This
provision covers a potential expected shortfall between theestimated value of the aircraft of the date upon which the

488

433

1,433

1,465

guarantee can be exercised and the value guaranteed on atransaction basis taking counter guarantees into account.
Because exercise dates for asset value guarantees are on
average in the 10th year following aircraft delivery, asset
value guarantees issued in 2005 will generally not be
exercisable prior to 2015, and, therefore, an increase in nearterm exposure is not expected.
Despite the underlying collateral, if Airbus should be unable
to honour its obligations under sales financing transactions
and asset value guarantees, certain EADS and BAE
Systems group companies retain joint and several liability
for sales financing exposure incurred by Airbus prior to
1st January 2001. EADS’ exposure to liabilities incurred by
Airbus following 1st January 2001 is limited by its status asa shareholder in Airbus S.A.S. With respect to ATR, eachshareholder is jointly and severally liable to third parties
without limitation. Amongst the shareholders, the liability islimited to each partner’s proportionate share.
While backstop commitments to provide financing
related to orders on Airbus’ and ATR’s backlog are also
given, such commitments are not considered to be partof gross exposure until the financing is in place, which
occurs when the aircraft is delivered. This is due to the factthat (i) past experience suggests it is unlikely that all suchproposed financings actually will be implemented (although
it is possible that customers not benefiting from suchcommitments may nevertheless request financing assistanceahead of aircraft delivery), (ii) until the aircraft is delivered,
Airbus or ATR retain the asset and do not incur an unusual
risk in relation thereto, and (iii) third parties may participate
in the financing. In order to mitigate Airbus and ATR
credit risks, such commitments typically contain financial

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conditions which guaranteed parties must satisfy in order tobenefit therefrom.

Maturities are as follows:

Pension commitments – EADS has several common
investments with BAE Systems, of which the mostsignificant in terms of employees are Airbus and MBDA.
In respect of each investment, for so long as BAE Systems
remains a shareholder, UK employees may stay in the
BAE Systems pensions schemes, which currently qualify
as multi-employer defined benefit plans. BAE Systems isapplying IFRS as of 1st January 2005. In accordance with
IAS 19, BAE Systems has disclosed for its UK defined
pension schemes a net (pre tax) pension liability as of
31st December 2005 in a total amount of GBP 4,659 million.
As participants in the BAE Systems schemes, EADS
investments are potentially affected by any shortfall of
BAE Systems schemes. However, the agreements between
EADS and BAE Systems have the effect of capping thecontributions that the investment has to make to thepension scheme for a certain period of time (until July 2011
for Airbus and until December 2007 for MBDA). Any
additional contribution would be paid by BAE Systems.
EADS is therefore not exposed to increased contribution
payments resulting from the pension underfunding during
the period of the contribution caps. In the course of 2005,
EADS has requested detailed information about thesepension schemes. Based on limited information madeavailable, EADS has judged this information not to be
sufficient to properly allocate the pension plans’ deficit andis therefore not able to reliably determine its participation inany potential future deficit once the period of contribution
caps will have expired. Consequently, EADS continues to
expense the contributions made to the pension schemes as if
the plans were defined contribution plans.

Not later than 2006

109

Later than 2006 and not later than 2010

342

Later than 2010

587

Other commitments – Other commitments comprisecontractual guarantees and performance bonds to certain
customers as well as commitments for future capital
expenditures.
Future nominal operating lease payments (for EADS
as a lessee) for rental and lease agreements (not relating
to aircraft sales financing) amount to €1,038 million as of
31st December 2005, and relate mainly to procurement
operations (e.g., facility leases, car rentals).

EADS Financial Statements and Corporate Governance

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Total

1,038

30. Information about financial
instrumentsa) Financial risk management
By the nature of the activities carried out, EADS is exposed
to a variety of financial risks, especially foreign currency
exchange rate risks and interest rate risks, as explained
below. The management and limitation of the foreignexchange currency risks at EADS is generally carried out
by a central treasury department at EADS Headquarters
under policies approved by the Board of Directors. The
identification, evaluation and hedging of the financial risks isin the responsibility of established treasury committees andthe Group’s Divisions and Business Units.

Market risk
Currency risk – EADS manages a long-term hedge
portfolio with a maturity of several years covering its net
exposure to U.S. Dollar sales, mainly from the activities
of Airbus. This hedge portfolio covers the majority of theGroup’s highly probable transactions.
Significant parts of EADS’ revenues are denominated in
U.S. Dollars, whereas a major portion of its costs is incurredin Euros and to a smaller extent in GBP. Consequently, tothe extent that EADS does not use financial instruments tocover its net current and future foreign currency exchange
rate exposure, its profits are affected by changes in the EuroU.S. Dollar exchange rate. As the Group intends to generate
profits only from its operations and not through speculation
on foreign currency exchange rate movements, EADS uses
hedging strategies to manage and minimize the impact of
exchange rate fluctuations on these profits.
For financial reporting purposes, EADS designates a portion of
the total firm future cash flows as the hedged position to coverits net foreign currency exposure, as described in the following
paragraph. As hedging instruments, EADS primarily uses
foreign currency forwards and option contracts.

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EADS endeavours to hedge the majority of its exposure
based on firm commitments and forecasted transactions. For
products such as aircraft, EADS typically hedges forecasted
sales in U.S. Dollar for the following year up to 2011. The
hedged items are defined as first forecasted highly probablefuture cash inflows for a given month based upon final
payments at delivery. The amount of the flows to be hedged
is decided by a treasury committee and can cover up to 100%of the equivalent of the net U.S. Dollar exposure. For EADS,
a forecasted transaction is regarded as highly probable if the
future delivery is included in the internally audited orderbook or is very likely to materialize in view of contractual
evidence. The coverage ratio is adjusted to take into accountmacroeconomic movements affecting the spot rates andinterest rates, as applicable.
The company also has foreign currency derivative
instruments which are embedded in certain purchase andlease contracts denominated in a currency other than thefunctional currency of the significant parties to the contract,
principally USD and GBP. Gains or losses relating to such
embedded foreign currency derivatives are reported in otherfinancial result.

Interest rate risk – The Group uses an asset and liability
management approach with the objective to limit its interest
rate risk. The Group undertakes to match the risk profile
of its assets with a corresponding liability structure. The
remaining net interest rate exposure is managed throughseveral types of interest rate derivatives in order to minimizerisks and financial impacts.
Hedging instruments that are specifically designated to
debt instruments have at the maximum the same nominal
amounts as well as the same maturity dates compared to thehedged item. Regarding cash, EADS is mainly investing inshort-term instruments and / or instruments that are related
to a floating interest index in order to further minimize any
interest risk in its cash and securities portfolio.

Price risk – The cash and cash equivalents and securities
portfolio of the Group is invested mainly in non-speculative
financial instruments, mostly highly liquid, such as
certificates of deposits, overnight deposits, commercial
papers and other money market instruments which generally
are short term and subject to only an insignificant price risk.
Therefore, the Group assesses its exposure towards price risk
as minor.

Liquidity risk
The Group’s policy is to maintain sufficient cash andcash equivalents at any time to meet its present andfuture commitments. This is safeguarded by the reported
total amount of the Group’s cash and cash equivalents,
which is further supported by a substantial amountof unused committed credit facility (€3.0 billion as of
31st December 2005). On a daily basis, EADS invests
any surplus cash mainly in non-speculative highly liquid
financial instruments, such as certificates of deposits,
overnight deposits, commercial papers and other money
market instruments which are generally short term.

Credit risk
EADS is exposed to credit risk to the extent of nonperformance by either its customers (e.g., airlines) or its
counterparts with regards to financial instruments. However,the Group has policies in place to avoid concentrations ofcredit risk and to ensure that credit risk is limited.
Cash transactions and derivative counterparts are limited tohigh credit quality financial institutions. For such financialtransactions EADS has set up a credit limit system to actively
manage and limit its credit risk exposure. This limit systemassigns maximum exposure lines to counterparts of financialtransactions, based at a minimum on their credit ratings as
published by Standard & Poors, Moody’s and Fitch IBCA. The
respective limits are regularly monitored and updated.
Sales of products and services are made to customers
after having conducted an appropriate internal credit risk
assessment. In order to support product sales, primarily at
Airbus and ATR, EADS may agree to participate in thefinancing of customers, on a case-by-case basis, directly or
through guarantees provided to third parties. In determining
the amount and terms of the financing transaction, Airbus
and ATR take into account the airline’s credit rating as wellas risk factors specific to the intended operating environmentof the aircraft and its expected future value. Market yields
and current banking practices also serve to benchmark thefinancing terms offered to customers, including price.

b) Notional amounts
The contract or notional amounts of derivative financial
instruments shown below do not necessarily represent amounts
exchanged by the parties and, thus, are not necessarily a measurefor the exposure of the Group through its use of derivatives.

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The notional amounts of foreign exchange derivative financial instruments are as follows, specified by year of expectedmaturity:
Year ended 31st December 2005(in €m)not exceeding
1 yearRemaining period
1 year up
more than
to 5 years
5 years

Total

Foreign Exchange Contracts:
Net forward sales contracts

9,653

27,076365

37,094Structured USD forward:
Purchased USD call options

119

573

0

692

Purchased USD put options

1,495

1,190

0

2,685

Written USD call options

1,495

1,190

0

2,685

625

0

117

742

Remaining period
1 year up
more than
to 5 years
5 years

Total

FX swap contracts

Year ended 31st December 2004(in €m)not exceeding
1 yearForeign Exchange Contracts:
Net forward sales contracts

7,780

19,8291,277

28,886Structured USD forward:
Purchased USD call options

180

452

0

632

Purchased USD put options

180

452

0

632

Written USD call options

180

452

0

632

189

102

0

291

FX swap contracts

The notional amounts of interest rate contracts are as follows, specified by year of expected maturity:
Year ended 31st December 2005(in €m)Interest Rate Contracts
Caps

not exceeding
1 year

Total

105

1,504

2,921

4,530

0

1,000

0

1,000

Remaining period
1 year up
more than
to 5 years
5 years

Total

Year ended 31st December 2004(in €m)Remaining period
1 year up
more than
to 5 years
5 years

not exceeding
1 yearInterest Rate Contracts

30

298

2,818

3,146

Caps

0

1,000

0

1,000

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3c) Fair value of financial instruments
The fair value of a financial instrument is the price atwhich one party would assume the rights and / or duties ofanother party. Fair values of financial instruments have been
determined with reference to available market information
at the balance sheet date and the valuation methodologies
discussed below. Considering the variability of their value-

determining factors and the volume of financial instruments,
the fair values presented herein may not be indicative of theamounts that the Group could realize in a current market
environment.
The following interest rate curves are used in thedetermination of the fair value in respect of the financial
instruments as of 31st December 2005 and 2004:

31st December 2005
(Interest rate in %)

EUR

USD

GBP

6 months

2.61

4.68

4.54

1 year

2.84

4.83

4.53

5 years

3.21

4.87

4.53

10 years

3.45

4.96

4.46

(Interest rate in %)

EUR

USD

GBP

6 months

2.25

2.78

4.78

1 year

2.45

3.12

4.79

5 years

3.16

4.00

4.86

10 years

3.75

4.64

4.86

31st December 2004

The carrying amounts and fair values of the Group’s major financial instruments are as follows:
31st December(in €m)2005
Carrying
amountFair value

2004
Carrying
amountFair value

Non-derivative Financial Instruments
Assets:Non-current securities
Current portion of long-term financial assets
Current securities

1,011

1,011

466

466

237

237

242

242

29

29

0

0

9,546

9,546

8,718

8,718

5,097

5,381

5,223

5,508

Currency contracts with positive fair values

3,913

3,913

8,925

8,925

Currency contracts with negative fair values

(749)

(749)

(95)

(95)

Interest rate contracts with positive fair values

40

40

23

23

Interest rate contracts with negative fair values

(151)

(151)

(86)

(86)

Embedded foreign currency derivatives with (negative) positive fair values

(21)

(21)

86

86

Cash and cash equivalents
Liabilities:
Financial liabilities (long-term and short-term)
Derivative Financial Instruments

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The fair value of financial liabilities as of 31st December 2005
has been estimated including all future interest payments
and also reflects the interest rate as stated in the tables above.
The European governments refundable advances of€5,293 million (in 2004: €5,119 million) are measured atamortized cost; a fair value can not be measured reliably

due to their risk sharing nature and uncertainty about therepayment dates.
The development of the foreign exchange rate hedging
instruments recognised in AOCI is as of 31st December 2005
and 2004 as follows (for previous year figures adjustments
please refer to Note 2 “Summary of significant accounting
policies” – IAS 32 “Financial Instruments”):

Equity attributable to the equity
holders of the parent(in €m)1st January 2004

5,037

Unrealized gains and losses from valuations, net of tax

1,986

Transferred to profit or loss for the period, net of tax(1,376)

Changes in fair values of hedging instruments recorded in AOCI, net of tax
31st December 2004 / 1st January 2005

610
5,647

Unrealized gains and losses from valuations, net of tax(2,476)

Transferred to profit or loss for the period, net of tax(1,209)Changes in fair values of hedging instruments recorded in AOCI, net of tax(3,685)31st December 2005

1,962

Financial Assets and Liabilities – Fair values are basedon estimates using various valuations techniques, such aspresent value of future cash flows. However, methods andassumptions followed to disclose data presented herein are
inherently judgmental and involve various limitations likeestimates as of 31st December 2005 and 2004, which are
not necessarily indicative of the amounts that the Company
would record upon further disposal / termination of thefinancial instruments.
The methodologies used are as follows:

Short-term investments, cash, short-term loans,
suppliers – The carrying amounts reflected in the annual
accounts are reasonable estimates of fair value because of therelatively short period of time between the origination of the
instruments and its expected realization.

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Long-term debt; short-term debt – Neither long term nor
short term debt is classified as liabilities held for trading andas such accounted for at amortised cost.
Securities – The fair value of securities included inavailable-for-sale investments is estimated by reference
to their quoted market price at the balance sheet date. If aquoted market price is not available, fair value is determinedon the basis of generally accepted valuation methods on thebasis of market information available at the reporting date.
Currency and Interest Rate Contracts – The fair value ofthese instruments is the estimated amount that the Company
would receive or pay to settle the related agreements as of
31st December 2005 and 2004.

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31. Share-based Paymenta) Stock Option Plans
Based on the authorization given to it by the shareholders’meetings (see dates below), the Group’s Board of Directors
approved (see dates below) stock option plans in 2005,
2004, 2003, 2002, 2001 and 2000. These plans provide to
the members of the Executive Committee as well as to theGroup’s senior management the grant of options for thepurchase of EADS shares.

For the 2005 stock option plan, analogous to all of EADS’
previous existing stock option plans, the granted exercise
price was exceeding the share price at grant date.
In 2005, compensation expense for Stock Option
Plans was recognised with an amount of €24 million(2004: €12 million). The Fair Value of one Option granted
under the plan was €7.27 as of grant date.
The following major input parameters where used in orderto calculate the fair value of the stock options granted:

Input parameters for the Black Scholes Option Pricing Model
SOP 2005

SOP 2004

SOP 2003

Share price (€)

32.79

22.83

14.75

Exercise price (€)

33.91

24.32

15.65

Risk-free interest rate (%)

3.24

3.35

3.58

Expected volatility (%)

24.8

27.0

27.0

Estimated option life (years)

5.5

5.5

5.5

EADS uses the historical volatilities of its share price as
an indicator to estimate the volatility of its stock options
granted. To test whether those historical volatilities
sufficiently approximate expected future volatilities, they
are compared to the implied volatilities of EADS options,which are traded at the market as of grant date. Such options
typically have a shorter life of up to two years. In case of
only minor differences between the historical volatilities andthe implied volatilities, EADS uses historical volatilities as
input parameters to the Black Scholes Option Pricing Model(please refer to Note 2 “Summary of significant accounting
policies”). For valuation purposes performance criteria areconsidered to be met.
The estimated option life of 5.5 years is based on historicalexperience and incorporates the effect of expected early
exercises.

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The principal characteristics of these options are summarized in the tables below:
First Tranche

Second Tranche

Third Tranche

Date of shareholders’ Meeting

24th May 2000

24th May 2000

10th May 2001

Date of Board of Directors meeting (grant date)

26th May 2000

26th October 2000

12th July 2001

Number of options granted

5,324,884

240,000

8,524,250

Number of options outstanding

2,440,381

104,350

5,288,723

Total number of eligible employees
Exercise date

850
34
1,650
50% of options may be exercised after a period of two years and four weeks fromthe date of grant of the options; 50% of options may be exercised as of the third
anniversary of the date of grant of the options; moreover, the options may not be
exercised during a period of 3 weeks preceding each Annual General Meeting of
Shareholders or the date of announcement of annual or semi-annual results or quarterly
figures.

Expiry date

Tenth anniversary of the date of the grant of the option

Conversion right

One option for one share

Vested

100%

100%

100%

Exercise Price
Exercise Price Conditions€20.90110% of fair market
value of the sharesat the date of grant€20.90110% of fair market
value of the sharesat the date of grant€24.66110% of fair market
value of the sharesat the date of grant

Number of exercised options

2,179,019

119,650

2,069,027

Fourth Tranche

Fifth Tranche

Sixth Tranche

Date of shareholders’ Meeting

10th May 2001

6th May 2003

6th May 2003

Date of Board of Directors meeting (grant date)

9th August 2002

10th October 2003

8th October 2004

Number of options granted

7,276,700

7,563,980

7,777,280

Number of options outstanding

4,359,189

6,493,005

7,699,060

Total number of eligible employees
Exercise date

1,562
1,491
1,495
50% of options may be exercised after a period of two years and four weeks fromthe date of grant of the options; 50% of options may be exercised as of the third
anniversary of the date of grant of the options; moreover, the options may not be
exercised during a period of 3 weeks preceding each Annual General Meeting of
Shareholders or the date of announcement of annual or semi-annual results or quarterly
figures.
As regards to the sixth tranche, part of the options granted to the top EADS Executives
are performance related.

Expiry date

Tenth anniversary of the date of the grant of the option

Conversion right

One option for one share

Vested

100%

50%

0%

Exercise price
Exercise price conditions€16.96110% of fair market
value of the sharesat the date of grant€15.65110% of fair market
value of the sharesat the date of grant€24.32
110% of fair market
value of the sharesat the date of grant

Number of exercised options

2,672,036

885,125

0

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Seventh Tranche

Date of shareholders’ Meeting

11th May 2005

Date of Board of Directors meeting (grant date)

9th December 2005

Number of options granted

7,981,760

Number of options outstanding

7,981,760

Total number of eligible employees
Exercise date

1,608
50% of options may be exercised after a period of two years and four weeks fromthe date of grant of the options; 50% of options may be exercised as of the third
anniversary of the date of grant of the options; moreover, the options may not
be exercised during a period of 3 weeks preceding each Annual General Meetingof Shareholders or the date of announcement of annual or semi-annual results orquarterly figures.
As regards to the seventh tranche, part of the options granted to the top EADS
Executives are performance related.

Expiry date

Tenth anniversary of the date of the grant of the option

Conversion right

One option for one share

Vested0%

Exercise price
Exercise price conditions€33.91

Number of exercised options

0110% of fair market value of the shares at the date of grant

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The following table summarizes the development of the number of stock options:First & Second Tranches

Number of Options
Options granted

Balance at
1st January

Exercised

Forfeited

Balance at
31st December

2000

5,564,884--(189,484)

5,375,400

2001-

5,375,400--

5,375,400

2002-

5,375,400--

5,375,400

2003-

5,375,400-(75,000)

5,300,400

2004-

5,300,400(90,500)(336,000)

4,873,900

2005-

4,873,900(2,208,169)(121,000)

2,544,731

Options granted

Balance at
1st January

Exercised

Forfeited

Balance at
31st December

2001

8,524,250--(597,825)

7,926,425

2002-

7,926,425--

7,926,425

2003-

7,926,425-(107,700)

7,818,725

2004-

7,818,725-(328,500)

7,490,225

2005-

7,490,225(2,069,027)(132,475)

5,288,723

Options granted

Balance at
1st January

Forfeited

Balance at
31st December

Third Tranche

Number of Options

Fourth Tranche

Number of Options
Exercised

2002

7,276,700

-

-

(600)

7,276,100

2003-

7,276,100-(70,125)

7,205,975

2004-

7,205,975(262,647)(165,500)

6,777,828

2005-

6,777,828(2,409,389)(9,250)4,359,189

Options granted

Balance at
1st January

Forfeited

Balance at
31st December

Fifth Tranche

Number of Options
Exercised2003

7,563,980---

7,563,980

2004-

7,563,980(9,600)(97,940)

7,456,440

2005-

7,456,440(875,525)(87,910)

6,493,005

Options granted

Balance at
1st January

Exercised

Forfeited

Balance at
31st December

2004

7,777,280---

7,777,280

2005-

7,777,280-(78,220)

7,699,060

Options granted

Balance at
1st January

Exercised

Forfeited

Balance at
31st December

2005

7,981,760---

7,981,760

Total

44,688,854-(7,924,857)(2,397,529)

34,366,468

Sixth Tranche

Number of Options

Seventh Tranche

Number of Options

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1.2 Financial Statements

3b) Employee Stock Ownership Plan (ESOP)In 2005, the Board of Directors approved an additional
ESOP following five ESOPs established in 2004, 2003,
2002, 2001 and in 2000. For the 2005 ESOP, eligible
employees were able to purchase a maximum of 500 shares
per employee of previously unissued shares. The offer was
broken down into two tranches which were available for all
employees to choose. The subscription price for tranche A
was €18.86. The subscription price for tranche B was thehigher of the subscription price for tranche A or 80% of
the average opening market price for EADS shares on the
Paris stock exchange over the twenty trading days preceding
3rd June 2005 resulting in a subscription price of €18.86.
During a lockup period of at least one year under tranche
A or five years under tranche B, employees are restrictedfrom selling the shares, but have the right to receive all
dividends paid as well as have the ability to vote at theannual shareholder meetings. EADS sold 1,938,309 ordinary
shares with a nominal value of €1.00 under both tranches.
Compensation expense was recognised in connection with
the ESOP 2005 of €9 million.

32. Related party transactions
Related parties – The Group has entered into varioustransactions with related companies in 2005, 2004 and2003 that have all been carried out in the normal courseof business. As is the Group’s policy, all related party
transactions have to be carried out at arm’s length.
Transactions with related parties include the French State,
DaimlerChrysler, Lagardère, and SEPI (Spanish State). Except
for the transactions with the French State the transactions
are not considered material to the Group either individuallyor in the aggregate. The transactions with the French State
include mainly sales from the Eurocopter, Defence &Security Systems, and Space divisions.

Remuneration – Remuneration and related compensation
costs of all of the members of the Board of Directors andformer Directors amounted to €10 million for the period
ended 31st December 2005 (in 2004: €9 million). Theseamounts do not comprise the amounts allocated in 2005
to the former CEOs under the terms of their employment
contracts as termination packages (€2.55 million each,i.e. 18 months of total target income) as well as the estimatedcost of stock-based compensation of Directors.
EADS has not provided any loans to / advances
to / guarantees on behalf of Directors or former Directors.
In 2005, total remuneration of EADS Executive Committee
members in office as at 31st December 2005 (therefore
excluding former Executive Committee members, but
including those Executive Board Directors who are also
Executive Committee members) amounted to €13 million.
Additionally, stock options granted in 2005 for this group of
managers represented 960,000 options.
The Executive Committee members have pension promises
as part of their employment agreements. The general policy
is to give them annual pension of 50% of their annual basesalary after five years in the Executive Committee of EADSat the age of 60 to 65. In case of the CEOs, the retirement
age is 60. This obligation increases to 60% after ten years ofservice in the EADS Executive Committee.
For the Executive Committee members, the cumulative
amount of current service cost and interest cost related totheir benefit obligation accounted for during fiscal year 2005
represented an expense of €3 million.
The Executive Committee members are furthermore entitledto a termination package when they leave the Company asa result of a decision of the Company. The employment
contracts for the Executive Committee members areconcluded for an indefinite term with an indemnity of up
to a maximum of 24 months of their target income. The
maximum 24 months indemnity can be reduced prorata
depending on the age of departure.
Executive Committee members are also entitled to acompany car.

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3

33. Investment property
Buildings held as investment property are depreciated on alinear basis over their useful life up to 20 years. The values
assigned to investment property are as follows:

The Group owns investment property, that is leased to third
parties. For the purposes of IAS 40 “Investment property”
the fair values have been determined by using market based
multipliers for estimated rental income or using available
market prices.

(in €m)Book value of Investment
property

Historicalcost

Accumulated
depreciation Book value
31st
31st
December December
2004
2004

251

(92)

159

Transfer
Historical Depreciation
cost Amortisation

2

Transfer
Accumulated
depreciation

Accumulated
depreciation
31st
December
2005

Net at
31st
December
2005

(9)

(119)

134

(18)

As of 31st December 2005, the fair value of the Group’s investment property amounts to €134 million. Related rental income
in 2005 is €15 million with direct operating expenses amounting to €8 million.
Included in the depreciation is an impairment charge of €8 million recognised in Cost of Sales.

34. Interest in joint ventures

35. Earnings per share

The Group’s principal investments in joint ventures andthe proportion of ownership are included in Appendix“Information on principal investments”. Joint ventures areconsolidated for using the proportionate method.

The profit for the period attributable to equity holders of
the parent (Net income) for 2004 and 2003 was adjusted due
to retrospective application of IFRS 2 “Share-based Payment”
amounting to €(12) million in 2004 (in 2003: €0 million) and
IAS 32 “Financial Instruments: Disclosure and Presentation”(revised 2004) in 2004 with an amount of €185 million(in 2003: €54 million).

The following amounts represent the Group’s aggregate
share of the assets and liabilities and income and expenses ofthe significant joint ventures (MBDA and ATR):(in €m)Non current assets

2005

2004

680

653

3,379

3,768

361

353

Current liabilities

3,162

3,651

Revenues

1,828

1,732

121

99

Current assets
Non current liabilities

Profit for the period

EADS Financial Statements and Corporate Governance

REGdoc_EV_BOOK2_CH1.indd 103

Basic earnings per share – Basic earnings per share arecalculated by dividing profit for the period attributable toequity holders of the parent (Net income) by the weighted
average number of issued ordinary shares during the year,
excluding ordinary shares purchased by the Group and held
as treasury shares.

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3

2005

Profit for the period attributable to equity holders of the parent (Net income)Weighted average number of ordinary shares
Basic earnings per share
Thereof effect from the initial application of IAS 32 (revised) “Liability for puttable
instruments”
Thereof effect from the initial application of IFRS 2 “Share-based payment”

Diluted earnings per share – For the calculation of thediluted earnings per share, the weighted average numberof ordinary shares is adjusted to assume conversion of all
potential ordinary shares. The Group’s only category of
dilutive potential ordinary shares is stock options. In 2005,
the average share price of EADS exceeded the exercise priceof the stock options under the 1st, 2nd, 3rd, 4th, 5th, and

2004

2003

€1,676 million €1,203 million€206 million

794,734,220

801,035,035

800,957,248

€2.11

€1.50

€0.26

€0.36

€0.23

€0.07

€(0.04)€(0.02)€0

6th stock option plan (in 2004: 4th and 5th stock optionplan). Hence, 5,482,133 shares (2004: 3,047,837 shares) wereconsidered in the calculation of diluted earnings per share.
In 2003, there was no dilution impact of shares under all
existing stock option plans. As a consequence, the weighted
average number of shares outstanding was the same for bothbasic and diluted earnings per share.

2005

Profit for the period attributable to equity holders of the parent (Net income)Weighted average number of ordinary shares
Diluted earnings per share
Thereof effect from the initial application of IAS 32 (revised) “Liability for puttable
instruments”
Thereof effect from the initial application of IFRS 2 “Share-based payment”

36. Number of Employees
The number of employees at 31st December 2005 is 113,210
as compared to 110,662 at 31st December 2004.

37. Events after the balance sheet date

2004

2003

€1,676 million €1,203 million€206 million

800,216,353

804,082,872

800,957,248

€2.09

€1.50

€0.26

€0.36

€0.23

€0.07

€(0.04)€(0.01)€0

Ministry of Economics and Technology. The legal formalities
allowing this operation have been successfully completed.
LFK achieves together with its subsidiary companies withapproximately 1,100 employees an annual turnover ofapproximately €400 million. MBDA is jointly owned by
BAE Systems (37.5%), EADS (37.5%) and Finmeccanica (25%).

On 7th March 2006 Airbus published the decision toprogressively phase out the final assembly line of the wide
body program (A300 / A310). It is intended that the last
A300-600 aircraft on order will be handed over in July 2007.
In 2005 Airbus delivered nine A300 aircraft to customers.
Employees involved in the production of wide body aircraft
will be transferred to other Airbus aircraft programs. EADS
estimates the impact on its financial position and result to be
not material.

On 30th December 2005, ThyssenKrupp Technologies and
EADS have signed an agreement with BAE Systems on the
joint acquisition of Atlas Elektronik, Bremen. In accordancewith the agreement, ThyssenKrupp Technologies will hold60 percent of Atlas and EADS 40 percent. The acquisition
will be completed in 2006 as soon as the relevant supervisoryboards and the relevant antitrust authorities have given theirgo-aheads. With a workforce of 1,750, Atlas Elektronik is
a company for electronics and systems and specializes inequipment and systems for naval forces.

On 28th February 2006 the integration of LFK GmbH into
the European missile systems group MBDA has received
clearance from the European Commission and the German

The financial statements have been authorized for issuanceby the Board of Directors on 7th March 2006.

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3

Appendix: Information on principal
investments - Consolidation Scope
2005

%

2004

%

Company

Head office

F

80.00

F

F

80.00

F

80.00

128829 Canada Inc.

Canada80.00

A 320 Financing limited

Ireland

F

80.00

F

80.00

AA Credit Aircraft Leasing Limited

Isle of Man

F

80.00

AFS (Cayman) Ltd

Ireland

F

80.00

F

F

80.00

F

80.00

AFS Cayman 11 Limited

Cayman Isle

80.00

AFS Cayman Aerospace Limited

Ireland

F

80.00

F

80.00

AFS USA 1 inc

USA

F
F

80.00

F

80.00

AI leasing Inc.

USA

80.00

F

80.00

AI Participations S.A.R.L.

Blagnac (France)

F

80.00

F

80.00

AIFI LLC

Isle of Man

F

80.00

F

80.00

AIFS (Cayman) ltd.

Cayman Isle

F

80.00

F

80.00

AIFS Cayman Liquidity ltd.

Cayman Isle

F

80.00

F

80.00

AIFS Leasing Company Limited

Ireland

F

80.00

F

80.00

AINA Inc.

USA

F

80.00

F

80.00

Airbus China limited

Hong Kong

F

80.00

F

80.00

Airbus Deutschland GmbH

Hamburg (Germany)

F

80.00

F

80.00

Airbus Espana SL

Madrid (Spain)

F

80.00

F

80.00

Airbus Finance Company Ltd

Dublin (Ireland)

F

80.00

F

80.00

Airbus Financial Service Holdings B.V.

Netherlands

F

80.00

F

80.00

Airbus Financial Service Holdings ltd.

Ireland

F

80.00

F

80.00

Airbus Financial Service ltd.

Ireland

F

80.00

F

80.00

Airbus France S.A.S

Toulouse (France)

F

80.00

F

80.00

Airbus Holding S.A.

France

F

80.00

F

80.00

Toulouse (France)

Airbus

F

80.00

F

80.00

Airbus Invest
Airbus North America engineering (former
Wichita)

F

80.00

F

80.00

Airbus North American Holdings Inc. (AINA)

USA

F

80.00

F

80.00

Airbus S.A.S

Toulouse (France)

F

80.00

F

80.00

Airbus Service Company Inc. (ASCO)

USA

F

80.00

F

80.00

Airbus Transport International S.N.C. (ATI)

Blagnac (France)

F

80.00

Airbus Treasury Company

Ireland

F

80.00

USA

F

80.00

Airbus UK Limited

UK

F

80.00

Aircabin GmbH

Laupheim (Germany)

E

16.00

E

16.00

Alexandra Bail G.I.E

France

F

80.00

F

80.00

Avaio Aerospace Limited

Ireland

F

80.00

F

80.00

Avaio Aviation Limited

Ireland

F

80.00

F

80.00

Avaio International Limited

Ireland

F

80.00

F

80.00

Avaio Leasing Limited

Ireland

F

80.00

F

80.00

Avaio Limited

Isle of Man

F
80.00
F
80.00
Aviateur Aerospace Limited
F: Fully consolidated P: Proportionate E: Equity method
The stated percentage of ownership is related to the respective parent company.

Ireland

EADS Financial Statements and Corporate Governance

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3

2005

%

2004

%

Company

Head office

F

80.00

F

F

80.00

F

80.00

Aviateur Eastern Limited

Ireland

80.00

Aviateur Finance Limited

Ireland

F

80.00

F

80.00

F

80.00

Aviateur International Limited

IrelandF

80.00

Aviateur Leasing Limited

Ireland

F

80.00

F

80.00

Aviateur Limited

Ireland

E

26.40

E

26.40

Avion Capital Limited

Ireland

F

80.00

F

80.00

Avion Finance Limited

IrelandF

80.00

AVSA Canada Inc.

Canada

F

80.00

F

80.00

AVSA SARL

Blagnac (France)

F

80.00

KID-Systeme GmbH

Buxtehude (Germany)

Norbus

USA

F

80.00

F

80.00

F

80.00

F

80.00

Star Real Estate SAS

Boulogne (France)

F

80.00

F

80.00

Total Airline Service Company

United Arab Emirates

Airbus Military S.L.

Madrid (Spain)
Chantilly / Virginia (USA)

Additionally consolidated are 46 SPEs.
Military Transport Aircraft
F

76.12

F

76.12

F

100.00F

100.00F

100.00F

EADS CASA North America Inc
EADS CASA S.A. (Unit: EADS CASA Military
100.00Transport Aircraft)

F

76.41

F

75.00

EADS PZL “WARSZAWA-OKECIE” S.A.

Warsaw (Poland)

F

100.00F

100.00American Eurocopter Corp.

Dallas, Texas (USA)

F

60.00

F

60.00

American Eurocopter LLC

Dallas, Texas (USA)

F

75.00

F

75.00

Eurocopter South East Asia Pte. Ltd.

Singapore (Singapore)F

100.00F

100.00Eurocopter Canada Ltd.

Ontario (Canada)F

100.00F

100.00Eurocopter Deutschland GmbH

Donauwörth (Germany)F

100.00F

100.00Eurocopter España S.A.

Madrid (Spain)F

100.00F

100.00Eurocopter Holding S.A.

Paris (France)F

100.00F

100.00Eurocopter S.A.S.

Marignane (France)

F

76.52

F

76.52

Helibras - Helicopteros do Brasil S.A.

Itajuba (Brazil)

F

100.00Australian Aerospace Ltd.

Bankstown (Australia)

F

100.00EIP Holding Pty. Ltd.

Bankstown (Australia)

F

100.00AA New Zealand Pty. Ltd.

Bankstown (Australia)

F

100.00AA military maintenance Pty. Ltd.

Brisbane (Australia)

Madrid (Spain)

Eurocopter

Defence & Security Systems
F

100.00F

100.00Aircraft Services Lemwerder GmbH

Lemwerder (Germany)

P

37.50

P

37.50

ALKAN

Valenton (France)F

100.00F

100.00

Apsys

France

F

55.00

F

55.00

Saint-Gilles (France)

P

50.00

P

50.00

F

100.00F

100.00Aviation Defense Service S.A.
Bayern-Chemie Gesellschaft für flugchemische
Antriebe mbH
Defense Security Systems Solutions Inc.
(in 2004: ARC)

F
100.00Dornier Consulting GmbH
F: Fully consolidated P: Proportionate E: Equity method
The stated percentage of ownership is related to the respective parent company.

Aschau / Inn (Germany)
San Antonio, Texas (USA)Friedrichshafen (Germany)

106 I EADS Financial Statements and Corporate Governance

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3

2005

%

2004

%

Company

Head officeF

100.00FF

100.00F

100.00Dornier Flugzeugwerft GmbHFriedrichshafen (Germany)

100.00EADS CASA S.A. (Unit: Military Aircraft)

Madrid (Spain)F

100.00F

100.00Madrid (Spain)F

EADS CASA S.A. (Unit: Operations Service)
EADS Defence & Security Systems Limited 100.00
Holding (in 2004: EADS Telecom UK Ltd.)EADS Defence & Security Systems Limited
100.00 (in 2004: Cogent Defence & Security Networks)

F

100.00FF

100.00FF

100.00F

100.00EADS Defence & Security Systems S.A.

Velizy (France)

100.00F

100.00Friedrichshafen (Germany)F

100.00F

100.00F

100.00F

100.00F

100.00F

100.00F

100.00F

100.00F

100.00EADS Deutschland GmbH - Dornier Services
EADS Deutschland GmbH - DornierVerteidigung und Zivile Systeme
EADS Deutschland GmbH - Military Aircraft
TB 51
EADS Deutschland GmbH – VA
(Restaktivitäten)EADS Deutschland GmbH –Verteidigung und Zivile Systeme
EADS Deutschland GmbH
(Unit: Operations Services)F

100.00F

100.00F

100.00F

100.00F

100.00F

100.00F

100.00F

100.00F

100.00F

100.00F
F

Newport, Wales (UK)Friedrichshafen (Germany)
Munich (Germany)
Unterschleißheim (Germany)
Ulm (Germany)
Unterschleißheim (Germany)

EADS North America Defense Company

Wilmington, Delaware (USA)EADS Operations & Services UK
EADS Secure Networks SAS(in 2004: EADS Telecom SAS)

Yeovil, Somerset (UK)EADS Secure Networks Oy

Helsinki (Finland)

EADS Services

Boulogne (France)

100.00EADS System & Defence Electronics Belgium

Oostkamp (Belgium)

100.00EADS Telecom Benelux

Bruxelles (Belgium)

F

100.00EADS Telecom Danmark

Copenhague (Denmark)Bois-d’Arcy (France)F

100.00F

100.00EADS Telecom Deutschland GmbHUlm (Germany)F

100.00F

100.00EADS Telecom Deutschland GmbH

Unterschleißheim (Germany)F

100.00F

100.00EADS Telecom Espana

Madrid (Spain)F

100.00EADS Telecom Federal Systems Division

San Antonio, Texas (USA)F

100.00F

100.00EADS Telecom Inc

Dallas, Texas (USA)F

100.00EADS Telecom Mexico S.A. de CV

Mexico DF (Mexico)

F

98.95

EADS Telecom North America Inc

Dallas, Texas (USA)F

100.00EADS Telecom Spa

Milan (Italy)

E

30.00

ESG Elektroniksystem- und Logistikgesellschaft

Munich (Germany)F

100.00F

100.00EUROBRIDGE Mobile Brücken GmbHFriedrichshafen (Germany)F

100.00F

100.00Ewation GmbHUlm (Germany)F

100.00F

100.00Frederick, Maryland (USA)F

100.00F

100.00Fairchild Controls Corporation
FmElo Elektronikund Luftfahrtgeräte GmbH

P

50.00

Forges de Zeebrugge S.A.

Herstal-Liege (Belgium)

Ulm (Germany)F

100.00F

100.00Germantown Holding Company

Frederick, Maryland (USA)F

100.00F

100.00Gesellschaft für Flugzieldarstellung mbH

Hohn (Germany)F

100.00F

100.00Hagenuk Marinekommunikation GmbH

Flintbek (Germany)F
98.95
F: Fully consolidated P: Proportionate E: Equity method
The stated percentage of ownership is related to the respective parent company.

EADS Financial Statements and Corporate Governance

REGdoc_EV_BOOK2_CH1.indd 107

Newport, Wales (UK)

Intecom Holding ULC

Dallas, Texas (USA)107

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1.2 Financial Statements

3

2005

%

F

100.00

F

81.25

2004

%

Company

Head officeIntegrated Defense Systems NA

Wilmington, Delaware (USA)

F

81.25

LFK – Lenkflugkörpersysteme GmbH

Unterschleißheim (Germany)F

100.00LFK Objekt Nabern GmbH & Co.KG

Unterschleißheim (Germany)F

100.00

M.C.N. SAT HOLDING

Velizy (France)F

100.00F

100.00

M.P. 13

Paris (France)

P

50.00

P

50.00

Maîtrise d’Oeuvre SyStème

Issy-les-Moulineaux (France)F

100.00F

100.00Manhattan Beach Holdings Co.

Frederick, Maryland (USA)

P

37.50

P

37.50

Marconi Overside Ldt.

Chelmsford (UK)F

100.00F

100.00

Matra Aerospace Inc.

Frederick, Maryland (USA)F

100.00F

100.00

Matra Défense

Velizy (France)

P

37.50

P

37.50

Matra Electronique

La Croix-Saint-Ouen (France)F

100.00F

100.00

Matra Holding GmbH

Frankfurt (Germany)

P

37.50

P

37.50

MBDA France

Velizy (France)

P

37.50

P

37.50

MBDA Holding

Velizy (France)

P

37.50

P

37.50

MBDA Inc

Westlake, CA (USA)

P

37.50

P

37.50

MBDA Italy SpA

Roma (Italy)

P

37.50

P

37.50

MBDA M S.A.

Chatillon-sur-Bagneux (France)

P

37.50

P

37.50

MBDA SAS

Velizy (France)

P

37.50

P

37.50

MBDA Services

Velizy (France)

P

37.50

P

37.50

MBDA Treasury

Jersey (UK)

P

37.50

P

37.50

MBDA UK Ltd.

Stevenage, Herts (UK)

F

80.00

F

80.00

Pentastar Holding

Paris (France)F

100.00F

100.00

Proj2

Paris (France)

P

50.00

P

50.00

Propulsion Tactique S.A.

La Ferté-Saint-Aubin (France)

F

98.95

Pyderion Contact Technologies Inc.

Dallas, Texas (USA)F

100.00F

100.00

Racal Instruments U.S.

San Antonio, Texas (USA)F

100.00F

100.00

Racal Instruments UK

Wimborne, Dorset (UK)

E

33.00

E

33.00

Reutech Radar Systems (Pty) Ltd.

Stellenbosch (South Africa)

E

18.75

E

18.75

Roxel

Saint-Médard-en-Jalles (France)F

100.00F

100.00Sycomore S.A.

Boulogne-Billancourt (France)F

100.00

Talon Instruments

San Dimas, CA (USA)

F

67.00

F

67.00

TAURUS Systems GmbH

Schrobenhausen (Germany)

P

50.00

La Ferté-Saint-Aubin (France)

F

98.00

F

98.00

E

25.00

E

25.00

F

100.00F

100.00

TDA – Armements S.A.S.
TDW- Ges. für verteidigungstechnische
Wirksysteme GmbH
Telefunken Radio Communication Systems
GmbH & Co. KG
Test & Services France(in 2004: International Test & Services)

F

99.99

F

99.99

Test & Services North America

Wilmington, Delaware (USA)

Schrobenhausen (Germany)
Ulm (Germany)
Velizy (France)F

100.00F

100.00TYX Corp.

Reston, VA (USA)

E

50.00

E

50.00

United Monolithic Semiconductors France SAS

Orsay (France)

E

50.00

E

50.00

United Monolithic Semiconductors Holding

Orsay (France)

E
50.00
E
50.00
United Monolithics Semiconductor GmbH
F: Fully consolidated P: Proportionate E: Equity method
The stated percentage of ownership is related to the respective parent company.

Ulm (Germany)

108 I EADS Financial Statements and Corporate Governance

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3

2005

%

2004

%

Company

Head office

F

90.00

F

90.00

UTE CASA A.I.S.A.

Madrid (Spain)F

100.00F

100.00 Computadoras, Redes e Ingenieria S.A. (CRISA)

F

100.00F

100.00EADS Astrium GmbHF

100.00F

100.00EADS Astrium Jersey Ltd.

Jersey (UK)F

100.00F

100.00EADS Astrium Ltd.

Stevenage (UK)F

100.00F

100.00EADS Astrium N.V.

The Hague (Netherlands)

F

100.00F

100.00EADS Astrium SAS

Toulouse (France)F

100.00F

100.00EADS CASA Espacio S.L.

Madrid (Spain)F

100.00F

100.00EADS Deutschland GmbH – Space Services

Munich (Germany)

F

68.40

EADS Dornier Raumfahrt Holding GmbH

Munich (Germany)Space
Madrid (Spain)
Munich (Germany)F

100.00F

100.00EADS Space B.V.

Amsterdam (Netherlands)

F

100.00F

100.00EADS Space Management & Services SAS

Paris (France)F

100.00F

100.00EADS Space Transportation (Holding) SAS

Paris (France)F

100.00F

100.00EADS Space Transportation GmbH

Munich (Germany)F

100.00F

100.00EADS Space Transportation N.V.

Amsterdam (Netherlands)

F

100.00F

100.00EADS Space Transportation SAS

Les Mureaux (France)F

100.00Global DASA LLC

New York (USA)F

100.00F

100.00

Infoterra GmbHFriedrichshafen (Germany)F

100.00F

100.00

Infoterra Ltd.

Southwood (UK)F

100.00F

100.00

Matra Marconi Space UK Ltd.

Stevenage (UK)F

100.00F

100.00MMS Systems Ltd

Stevenage (UK)

E

47.40

E

47.40

Nahuelsat S.A.

Buenos Aires (Argentina)

F

100.00F

100.00 Paradigm Secure Communications (Holding) Ltd.

Stevenage (UK)F

100.00F

100.00

Paradigm Secure Communications Ltd.

Stevenage (UK)F

100.00F

100.00

Paradigm Services Ltd.

Stevenage (UK)F

100.00F

100.00TESAT-Spacecom Geschäftsführung GmbH

Backnang (Germany)F

100.00F

100.00TESAT-Spacecom GmbH & Co. KG

Backnang (Germany)

F

80.00

F

80.00

Aerobail GIE

Paris (France)

P

50.00

P

50.00

ATR Eastern Support

Singapore (Singapore)

P

50.00

P

50.00

ATR GIE

Toulouse (France)

P

50.00

P

50.00

ATR International SARL

Toulouse (France)

P

50.00

P

50.00

ATR North America Inc.

Washington D.C. (USA)

P

50.00

P

50.00

ATR Training Center SARL

Toulouse (France)

P

50.00

P

50.00

ATRiam Capital Ltd.

Dublin (Irland)

F

50.10

F

50.10

Composites Aquitaine S.A.

Salaunes (France)

F

50.00

F

50.00

Composites Atlantic Ltd.

Halifax (Canada)

F

88.00

F

88.00

EADS Aeroframe services LLC

Lake Charles, Louisiana (USA)F

100.00F

100.00Toulouse (France)F

100.00EADS ATR S.A.
EADS EFW Beteiligungsund Verwaltungsgesellschaft GmbH

Other Businesses

E
49.99
E
49.99
EADS Revima APU S.A.
F: Fully consolidated P: Proportionate E: Equity method
The stated percentage of ownership is related to the respective parent company.

EADS Financial Statements and Corporate Governance

REGdoc_EV_BOOK2_CH1.indd 109

Munich (Germany)
Caudebec-en-Caux (France)

109

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1.2 Financial Statements

3

2005

%

2004

%

Company

Head officeF

100.00F

100.00EADS Revima S.A.

Tremblay-en-France (France)F

100.00F

100.00EADS Seca S.A.

Le Bourget (France)F

100.00F

100.00EADS Socata S.A.

Le Bourget (France)F

100.00F

100.00EADS Sogerma S.A.

Mérignac (France)

F

50.10

F

50.10

EADS Sogerma Tunisie

Monastir (Tunisia)F

100.00F

100.00Elbe Flugzeugwerke GmbH

Dresden (Germany)F

100.00F

100.00

Maroc Aviation S.A.

Casablanca (Morocco)F

100.00F

100.00Noise Reduction Engineering B.C.

Washington D.C. (USA)F

100.00F

100.00

Socata Aircraft Inc.

Miami, Florida (USA)F

100.00F

100.00

Sogerma America Barfield B.C.

Miami, Florida (USA)F

100.00F

100.00

Sogerma Drawings S.A.

Mérignac (France)

Additionally consolidated are 23 SPCs.
Headquarters
F

100.00F

100.00Airbus Financial Company Holding B.V.

Dublin (Ireland)

F

75.00

F

75.00

DADC Luft- und Raumfahrt Beteiligungs AG

Munich (Germany)

E

46.30

E

46.22

Dassault Aero Service(France)

E

46.30

E

46.22

Dassault Assurances Courtage(France)

E

46.30

E

46.22

Dassault Aviation

Paris (France)

E

46.30

E

46.22

Dassault Falcon Jet

Teterboro N.J. (USA)

E

46.30

E

46.22

Dassault Falcon Service

Bonneuil-en-France

E

46.30

E

46.22

Dassault lnternational (USA) lnc.

Paramus N.J. (USA)

E

46.30

E

46.22

Dassault Procurement Services lnc.

Paramus N.J. (USA)

E

46.30

E

46.22

Dassault-Reassurance(France)

E

46.30

E

46.22

Dassault Sagem Tactical U A V(France)

F

97.11

F

93.58

Dornier Zentrale

Friedrichshafen (Germany)F

100.00F

100.00EADS CASA France

Paris (France)F

100.00F

100.00EADS CASA S.A. (Headquarters)

Madrid (Spain)F

100.00F

100.00EADS Deutschland GmbH – Zentrale

Munich (Germany)F

100.00F

100.00

Munich (Germany)F

100.00F

100.00EADS Deutschland GmbH, FO – Forschung
EADS Deutschland GmbH, LO –Liegenschaften OTN

F100.00F

100.00EADS Finance B.V.

Amsterdam (Netherlands)

F

100.00F

100.00EADS France

Paris (France)F

100.00F

100.00EADS North America Inc.

Washington (USA)F

100.00EADS Raumfahrt Beteiligungs GmbH

Ottobrunn (Germany)
Ottobrunn (Germany)F

EADS Dornier Raumfahrt Holding GmbHEADS Real Estate Dornier Grundstücke GmbH93.58
& Co. KG
EADS Real Estate Objekt Nabern GmbH & Co. KG(in 2004: LFK Objekt Nabern GmbH & Co. KG)

F

100.00

F

97.11

F

100.00

E
46.30
E
46.22
F: Fully consolidated P: Proportionate E: Equity method
The stated percentage of ownership is related to the respective parent company.

Sogitec Industries

Munich (Germany)

Taufkirchen (Germany)
Taufkirchen (Germany)
Suresnes (France)

110 I EADS Financial Statements and Corporate Governance

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3

Auditors’ Report on the Consolidated Financial Statements (IFRS)Introduction
We have audited the accompanying consolidated financial statements which are part of the financial statements of European
Aeronautic Defence and Space Company EADS N.V., Amsterdam, for the year 2005. These consolidated financial statements
are the responsibility of the company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.

Scope
We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit
provides a reasonable basis for our opinion.

OpinionIn our opinion, the consolidated financial statements give a true and fair view of the financial position of the company
as at 31st December 2005 and of the result and the cash flows for the year then ended in accordance with International
Financial Reporting Standards as adopted by the EU and also comply with the financial reporting requirements included inPart 9 of Book 2 of the Netherlands Civil Code as far as applicable.
Furthermore we have established to the extent of our competence that the report of the Board of Directors is consistent withthe consolidated financial statements.

Rotterdam, March 7, 2006
KPMG Accountants N.V.
L.A. BlokEADS Financial Statements and Corporate Governance

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Amsterdam, March 7, 2006
Ernst & Young Accountants
M. van Dam

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1.2.2 Company Financial Statements
Balance Sheet of the Company Financial Statements(in €m)31st December

Note

2005

2004

AssetsGoodwill

2

4,354

4,354

Financial assets

2

11,638

13,944Loans

2

Fixed assets

1,740

695

17,732

18,993

Receivables and other assets

3

3,959

2,248

Securities

4

846

304

Cash and cash equivalents

4

7,252

6,985

Non-fixed assets

12,057

9,537

Total assets

29,78928,530818

810

Liabilities and stockholders’ equity
Capital stock

5

General reserves

5

Stockholders’ equity
Financial liabilities
Liability for puttable instruments

6

Other liabilities

7

12,90815,40013,726

16,210

357

309

3,500

3,500

12,206

8,511

Liabilities

16,063

12,320Total liabilities and stockholders’ equity

29,78928,530(in €m)

2005

2004

Income from investments

Income Statement of the Company Financial Statements
1,692

1,216

Other results

(16)

(13)

Net result

1,676

1,203

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3

Notes to the Company Financial Statements
1.1 General
EADS N.V., having its legal seat in Amsterdam,
the Netherlands, is engaged in the holding, coordinating
and managing of participations or other interests in and tofinance and assume liabilities, provide for security and / orguarantee debts of legal entities, partnerships, businessassociations and undertakings that are involved in the
aeronautic, defence, space and / or communication industry
or activities that are complementary, supportive or ancillary
thereto.
The company financial statements are part of the 2005
financial statements of EADS N.V.
The description of the company’s activities and the groupstructure, as included in the notes to the consolidated
financial statements, also apply to the company financial
statements. In accordance with article 402 Book 2 of the
Dutch Civil Code the statement of income is presented inabbreviated form.

1.2 Principles for the measurementof assets and liabilities and thedetermination of the result
For setting the principles for the recognition andmeasurement of assets and liabilities and determination of
the result for its company financial statements, EADS N.V.
makes use of the option provided in section 2:362 (8) of theNetherlands Civil Code. As from 2005, the Netherlands
Civil Code allows that the principles for the recognition
and measurement of assets and liabilities and determinationof the result (hereinafter referred to as principles forrecognition and measurement) of the company financial
statements of EADS N.V. are the same as those applied
for the consolidated EU-IFRS financial statements. These
consolidated EU-IFRS financial statements are preparedaccording to the standards laid down by the International
Accounting Standards Board and adopted by the European
Union (hereinafter referred to as EU-IFRS). Please see note
2 of the consolidated financial statements for a descriptionof these principles. Participating interests, over whichsignificant influence is exercised, are stated on the basis of
the equity method.
EADS Financial Statements and Corporate Governance

REGdoc_EV_BOOK2_CH1.indd 113

The share in the result of participating interests consists ofthe share of EADS N.V. in the result of these participatinginterests. Results on transactions, where the transfer
of assets and liabilities between EADS N.V. and its
participating interests and mutually between participatinginterests themselves, are not incorporated insofar as they canbe deemed to be unrealised.

1.3 Changes in accounting policies
As a result of the application of the accounting principles
used in the consolidated financial statements to the company
financial statements, EADS N.V. has implemented changes
in accounting policies. These changes in accounting policies
are the result of using the option in section 2:362 (8) of
the Netherlands Civil Code: By making use of this option
consistency is maintained between the consolidated and thecompany shareholders’ equity.
The company financial statements were previously preparedin compliance with the principles for recognition andmeasurement of assets and liabilities and determination of
the result referred to in Part 9, Book 2 of the Netherlands
Civil Code (BW2). The changes in accounting policies,
which are treated retrospectively, have had an effect on
the shareholders’ equity and the result. The impact on theshareholders’ equity as at 31st December 2004 and on the
net result 2004 is an increase of €543 million.
For the purposes of comparison, the comparative figures
have been adjusted on the basis of the changed accounting
principles.
The reconciliation summaries for the company balance sheet
and profit and loss account, in which the effects of thechanges in accounting policies are stated for each item of thefinancial statements, are included under sections 1.4 and 1.5.

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3

1.4 Summary of the effect of changes in accounting policies on the balance sheet
The effect of the changed accounting policies in the company balance sheet is shown in the summary below.
31st December 2003

(in €m)Financial Assets

Principles forrecognition andmeasurement ofpart 9, BW 2IFRS 39,647

Effect of changes
to principles of recognition
and measurement to IFRSIAS 16(30)

Liability for puttable instruments
Stockholders’ Equity

16,149(30)

IAS 32

Principles forrecognition andmeasurementof IFRS

2,530

12,147

3,500

3,500

(970)

15,149IAS 32

Principles forrecognition andmeasurementof IFRS

2,767

13,94431st December 2004(in €m)Principles forrecognition andmeasurement ofpart 9, BW 2IFRS 3

Effect of changes
to principles of recognition
and measurement to IFRSIAS 16

Goodwill

4,091

263

Financial Assets

10,927

280

(30)

4,354

16,430543(30)Liability for puttable instruments
Stockholders’ Equity

1.4.1 Notes to the changes in accounting policies
on the balance sheet
The reconciliation of the stockholders’ equity is specified asfollows:
EADS adopted IFRS 3 “Business Combination”, revised;
IAS 36 “Impairment of Assets” and IAS 38 “Intangible
Assets” and applied these standards as of 1st January
2004 in the consolidated IFRS financial statements. As
a consequence, goodwill was no longer amortized ona straight-line basis in the consolidated IFRS financial
statements. Under Dutch law, goodwill was amortized on astraight-line basis over a period not exceeding 20 years. The
impact of the reversal of the goodwill amortisation in 2004
on stockholders’ equity as of December 2004 is an increaseof €543 million.
As of 1st January, EADS applied the component approachas set out in the revised IAS 16. Under this approach
foreseeable costs of major future servicing and major

3,500

3,500

(733)

16,210components to be replaced during the life-time of an
item of property, plant and equipment are depreciatedseparately over their respective useful lives. Due to theapplication of IAS 16, the stockholders’ equity decreased
as of 31st December 2004 and 31st December 2003 by€30 million. For further information, please see Note 2of the consolidated financial statements.
With the application of IAS 32 as of 1st January 2005 EADS
recognizes under certain circumstances the exercise priceof a written put option as liability rather than an equity
instrument. Following IAS 8, the adoption of revised IAS 32
is treated as a change in accounting policy firstly effecting
31st December 2005 with corresponding adjustments tothe prior periods presented. The application of IAS 32 had anegative impact on stockholders’ equity as of December 2004of €733 million and €970 million in the previous year. For
further information, please see Note 2 of the consolidated
financial statements.

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3

1.5 Summary of the effect of changes in accounting policies on the income statement
The effect of the changed accounting principles on the company income statement for the 2004 financial year is shown in thefollowing summary:(in €m)Principles forrecognition andmeasurement ofpart 9, BW 2

Income from investment

763

Other results(276)

Net result487

1.5.1 Notes to the changes in accounting policies
on the income statement
The reconciliation of the net result for the financial year
2004 is specified as follows:
The impact of the revised accounting policy for share based
payments in accordance with IFRS 2 is the recognition of an
expense and a corresponding entry to equity for stock option
plans and employee stockownership plans. In accordancewith the transition rules EADS applied the Standard
retrospectively. The corresponding amount in the year 2004
was €12 million. For further information please see note 2 ofthe consolidated financial statements.

EADS Financial Statements and Corporate Governance

REGdoc_EV_BOOK2_CH1.indd 115

IFRS 2(12)Effect of changes
to principles of recognition
and measurement to IFRSIFRS 3
IAS 16

280

IAS 32

Principles forrecognition andmeasurementof IFRS

185

1,216

263
(12)

543

(13)
185

1,203

The increase in the net result of €543 million due to theapplication of IFRS 3 relates to the reversal of the goodwill
amortisation under Dutch GAAP in the 2004 company
financial statements.
The adoption of the component approach as set out inrevised IAS 16 had no impact on the net result in the 2004
company financial statements.
The net result 2004 increased by €185 million due to aprior year adjustment corresponding with the recognitionof a written put option as a liability in accordance with theapplication of IAS 32.

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1.2 Financial Statements

3

2. Fixed assets
The movements in fixed assets are detailed as follows:(in €m)Balance at 31st December 2004

Financial
AssetsParticipating
GoodwillInterests

4,354

13,944

Additions
SOP / ESOP

Loans

Total

695

18,993

1,045

1,045

33

33

Net income from investments

1,692

1,692

Fair value adjustments financial instruments / others(3,594)(3,594)

(437)

(437)

Dividends received
Balance at 31st December 2005

4,354

11,638

1,740

17,732

The fair value adjustments on financial instruments / others reflect mainly the impact in the other comprehensive income in theparticipating interests related to the application of IAS 39.
The loans are provided to affiliated companies.

3. Receivables and other assets(in €m)

2005

2004

Receivables from affiliated companies

3,841

2,104

Receivables from related companies

26

42

Other assets
Total receivables and other assets

92

102

3,959

2,248

The receivables from affiliated companies include mainly receivables in connection with the cash pooling in EADS N.V.
All receivables and other assets mature within one year.

4. Securities, cash and cash equivalents
The securities comprise mainly available-for-sale securities.
Short term securities which are subject to an insignificant risk of changes in value are classified to line item “Cash and cash
equivalents”.

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3

5. Stockholders’ equity(in €m)Balance at 31st December
2003
Capital increase

Capital
stock

Share
premium
fromcontributions

813

8,459

Accumulated
Share
other
premium comprehensivefrom cash
income

2

858

7,474

TreasurysharesLegalreserves

Retainedearnings

Total
equity(187)

373(2,641)

15,149

1,203

1,203

41

43

Net income
ESOP / SOP IFRS 2

12Cash distribution(320)

Transfer to legal reserve

181

Repurchase treasury shares
Cancellation shares
Other comprehensive income
Balance at 31st December
2004
Capital increase

(5)

(86)

8,459

9

493

7,678

91

0
204

(177)

554

1,676

1,676

33

33

(396)

(396)

Transfer to legal reserve

488

Repurchase treasury shares

(488)

(288)
(1)

(19)

8,459

For further information to the Stockholders’ equity, pleasesee note 20 of the consolidated financial statements.
The cumulative foreign exchange translation adjustments arepart of the accumulated other comprehensive income.
The accumulated other comprehensive income relates mainly
to the fair value adjustments of financial instruments inrelation to participating interests.

256

20

3,982

0
(288)
0

(3,696)818

16,210187

ESOP / SOP IFRS 2

Other comprehensive income
Balance at 31st December
2005(1,607)178

Cash distribution

0(81)

Net income

Cancellation shares

(181)

(81)
204
810

12
(320)

(3,696)
(445)

1,042

(386)

13,726

6. Liability for puttable instruments
The liability for puttable instruments relates to the written
put option granted to BAE Systems to put its 20% stake in
Airbus. For further information please see note 23 of theconsolidated financial statements.

The legal reserves as required by Dutch law are related to
EADS’ share in the undistributed results from investmentsfor €580 million (2004: €385 million) and the internallygenerated capitalized development costs of €462 million(2004: €169 million).

EADS Financial Statements and Corporate Governance

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3

7. Other liabilities(in €m)

2005

2004

Liabilities to affiliated companies

11,4007,745

Liabilities to related companies

703

680

Other liabilities

103

86

12,206

8,511

Total

The liabilities to affiliated companies include mainly liabilities in connection with the cash pooling in EADS N.V.

8. Commitments and contingent liabilities
EADS N.V. issues guarantees on behalf of consolidated companies. The commitments of these companies to third parties
mainly relate to their operating business as included in Note 29 to the Consolidated Financial Statements.

9. Remuneration
The total remuneration and related compensation costs of the Members of the Board of Directors and former directors in 2005
and 2004 can be specified as follows:(in €)

2005

2004

Fixum

4,908,190

3,949,425

Bonus (related to reporting period)

4,850,449

4,549,050

Fees

260,000

290,000

Total

10,018,639

8,788,475

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3

The cash remuneration of the members of the Board of Directors was as follows:
Fixum

Bonus
relatedto 2005

Fees

Total

Manfred Bischoff

60,000184,250

90,000334,250

Arnaud Lagardère

60,000184,250

80,000324,2502005(in €)

Directors

Thomas Enders (**)

737,560

820,556-

1,558,116Noël Forgeard

1,136,928

1,201,408-

2,338,336

Jean-Paul Gut (**)

777,568

769,583-

1,547,151

Hans Peter Ring

780,062789,762-

1,569,824

Francois David

20,00092,12530,000142,125

Rüdiger Grube

20,00092,125(***)

112,125

Michael Rogowski

30,00092,12535,000157,125-

57,57825,00082,578

Philippe Camus

624,911

227,685-

852,596

Rainer Hertrich

624,911

227,685-

852,596

Juan Manuel Equiagaray Ucelay
Former directors (*)

Eckhard Cordes

10,00030,708-40,708Pedro Ferreras

16,25049,901-

66,151

Jean-René Fourtou
Total

10,00030,708-40,7084,908,190

4,850,449

260,000

10,018,639

Fixum

Bonus
relatedto 2004

Fees

Total

60,000200,000

110,000

370,000(*) Prorata in accordance with their membership as Board of Directors.
(**)Full year remuneration.
(***) To be regularized in 2006.

2004(in €)

Directors
Manfred Bischoff
Arnaud Lagardère

40,000200,000

80,000320,000

Philippe Camus

1,093,942

1,096,345-

2,190,287

Rainer Hertrich

1,093,942

1,096,345-

2,190,287

Noël Forgeard

1,079,153

1,119,751-

2,198,904

Hans Peter Ring

462,388482,440-

944,828

Francois David-

66,66720,00086,667

Rüdiger Grube-

66,66735,000101,667

30,000100,000

20,000150,000

Michael Rogowski
Former directors
Eckhard Cordes

30,00033,33410,00073,334

Pedro Ferreras

30,00054,167

15,00099,167

Jean-René Fourtou
Total

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REGdoc_EV_BOOK2_CH1.indd 119

30,00033,334-

63,334

3,949,425

4,549,050

290,000

8,788,475

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3

The table below gives an overview of the interests of the members of the Board of Directors under the various stock options
plans of EADS:
as of
1st Jan. 2005

Thomas EndersNoël Forgeard

Jean-Paul Gut

Hans Peter Ring

Total

Number of Options
grantedduring 2005

exercisedduring 2005

as of
31st Dec. 2005

exercise
price in €expiry date-

50,00020.90

8th July 2010

50,000-50,000--50,000

24.66

12th July 2011

25,000-25,000-

16.96

8th August 2012

50,000-25,00025,00015.65

9th October 2013

50,000--50,00024.32

7th October 2014-

135,000-

135,000

33.91

8th Dec. 2015

110,000-

67,00043,00020.90

8th July 2010

88,000--88,000

24.66

12th July 2011

108,000--

108,000

16.96

8th August 2012

108,000--

108,000

15.65

9th October 2013

108,000--

108,000

24.32

7th October 2014-

135,000-

135,000

33.91

8th Dec. 2015

50,000-50,000-20.90

8th July 2010

50,000-50,000-

24.66

12th July 2011

50,000--50,000

16.96

8th August 2012

50,000--50,00015.65

9th October 2013

50,000--50,00024.32

7th October 2014-

100,000-

100,000

33.91

8th Dec. 2015

10,000--10,00020.90

8th July 2010

28,000--28,000

24.66

12th July 2011

37,000--37,000

16.96

8th August 2012

50,000--50,00015.65

9th October 2013

50,000--50,00024.32

7th October 201433.91

8th Dec. 2015-

100,000-

100,000

1,172,000

470,000

217,000

1,425,000

In 2005 no stock options were granted to the former
directors Mr. Philippe Camus and Mr. Rainer Hertrich.
However, under the terms of their employment contracts atermination package was allocated to them (€2.550 million
each, i.e. 18 months of total target income).
As detailed above, the number of outstanding stock options
granted to the Executive Board Directors was 1.425 million
as at 31st December 2005. To the other members of the
Executive Committee, to the Group’s senior management
and to former members of the Board of Directors, thenumber of the outstanding stock options amounted to
32.941 million at the same date. For further information,please see note 31 of the consolidated IFRS financial
statements.

The pension benefit obligation for the Executive Board
Directors is as follows:
The Executive Board Directors have pension promises as partof their employment agreements. The general policy is to
give them annual pension of 50% of their annual base salary
after five years in the Executive Committee of EADS at theage of 60 to 65. In case of the CEOs, the retirement age is
60. This obligation increases to 60% after ten years of service
in the EADS Executive Committee.
These pension schemes have been implemented and financed
through collective executive pension plans in France andGermany. These pension promises have also separate rules
e.g. for minimum length of service and other conditions tocomply with national regulations.

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3

For the Executive Board Directors, the amount of thepension defined benefit obligation, net of accumulated
actuarial losses, amounted to €18 million as of
31st December 2005. This obligation has been partly funded
and accrued for in the consolidated financial statements for
its unfunded portion.
The amounts reported above for the Executive Board
Directors are free of benefits in kind they are entitled to, as
well as all national social and income tax impacts.

Such executives are entitled to a company car. The valueof the company cars of newly appointed Executive Board
Directors is as follows:
For Thomas Enders €81,772, for Noël Forgeard €74,085, for
Jean-Paul Gut €69,483 and for Hans Peter Ring €100,906.
Mr. Thomas Enders benefits also from a free accommodationin France. The monthly lease amounts to €3,627.
EADS has not provided any loans to / advances to / guarantees
on behalf of Directors.
For further information to the remuneration, please see note
32 of the consolidated financial statements.

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3

Supplementary Information
1. Auditors’ Report on the Company Financial Statements
Introduction
We have audited the accompanying Company financial statements which are part of the financial statements of European
Aeronautic Defence and Space Company EADS N.V., Amsterdam, for the year 2005. These company financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these Company financial
statements based on our audit.

Scope
We conducted our audit in accordance with International Standards on Auditing. Those standards require that we planand perform the audit to obtain reasonable assurance about whether the company financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Company
financial statements. An audit also includes assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall presentation of the company financial statements. We believe that our audit
provides a reasonable basis for our opinion.

OpinionIn our opinion, the Company financial statements give a true and fair view of the financial position of the Company as at
31st December 2005 and of the result for the year then ended in accordance with accounting principles generally accepted in
the Netherlands and also comply with the financial reporting requirements included in Part 9 of Book 2 of the Netherlands
Civil Code.
Furthermore we have established to the extent of our competence that the report of the Board of Directors is consistent with
the Company financial statements.

Rotterdam, March 7, 2006

Amsterdam, March 7, 2006

KPMG Accountants N.V.

Ernst & Young Accountants

L.A. Blok

M. van Dam

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3

2. Other Supplementary Information
1. Appropriation of result
Articles 30 and 31 of the Articles of Association provide that the Board of Directors shall determine which part of the result
shall be attributed to the reserves. The General Meeting of Shareholders may dispose of a reserve only upon a proposal of theBoard of Directors and to the extent it is permitted by law and the Articles of Association. Dividends may only be paid after
adoption of the annual accounts from which it appears that the shareholders’ equity of the Company is more than the amountof the issued and paid-in part of the capital increased by the reserves that must be maintained by law.
It will be proposed at the Annual General Meeting of Shareholders that the net profit of €1,676 million as shown in the profit
and loss statement for the financial year 2005 is to be added to retained earnings and that a payment of a gross amount of€0.65 per share shall be made to the shareholders from distributable reserves.

2. Subsequent events
For further information please see Note 37 of the consolidated financial statements.

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2

1.3 Statutory Auditors’ Fees3

1.3 Statutory Auditors’ Fees
Services of Statutory Auditors and Members of their Network rendered to the Group for the financial years 2005, 2004 and 2003
KPMG Accountants N.V.
2005
Amount
in €K
%

Audit
Audit process, certification,
examination of individualand consolidated accounts
Additional tasks
Sub-total

5,533

2004
Amount
in €K
%

68.3

5,073

Ernst & Young Accountants

2003
Amount
in €K
%

57.3

4,514

2005
Amount
in €K
%

65.1

4,923

2003

2004
Amount
in €K
%

77.3

4,795

70.0

Amount
in €K

%

4,263

64.2

1,416

17.5

3,048

34.5

2,133

30.7

1,163

18.3

1,747

25.5

1,108

16.7

6,949

85.8

8,121

91.8

6,647

95.8

6,086

95,6

6,542

95.5

5,371

80.9

958

11.8

729

8.2

294

4.2

281

4.4

294

4.3

1,105

16.7

-

-

-

-

-

-

-

-

-

-

28

0.4

Other services as relevant
Legal, tax, employment
Internal audit
Other (to be specified
if > 10% of the fees for theaudit)

194

2.4

-

-

-

-

-

-

13

0.2

132

2.0

Sub-total

1,152

14.2

729

8.2

294

4.2

281

4.4

307

4.5

1,265

19.1

Total

8,101

100.0

8,850

100.0

6,941

100.0

6,367

100.0

6,849

100.0

6,636

100.0

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1.4 Information Regarding the Statuory Auditors

3

1.4 Information Regarding
the Statutory Auditors
KPMG Accountants N.V.
K.P. Van der Mandelelaan 41-43
3062 MB Rotterdam – The Netherlands
Represented by Mr. Leo Blok
Ernst & Young Accountants
Drentestraat 20,
1083 HK Amsterdam – The Netherlands
Represented by Mr. Martin van Dam

Date of First Appointment

Term of Current Office

10th May 2000

4th May 2006*

24th July 2002

4th May 2006*(*) A resolution will be submitted to the shareholders’ General Meeting of EADS called for 4th May 2006, in order to resolve that the Company’s auditors for the accounting period being thefinancial year 2006 shall be Ernst &Young Accountants and KPMG Accountants N.V.

KPMG Accountants N.V., Ernst & Young Accountants and its respective representatives are registered with the Royal NIVRA(Nederlands Instituut van Register Accountants).

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2

2

3

Corporate Governance

2.1 Management and Control
2.1.1

p. 128

Board of Directors, Chairmen
and Chief Executive Officers

p. 1282.1.2

Audit Committee

p. 1382.1.3

Remuneration and Nomination Committee

p. 1392.1.4

Executive Committee

p. 1392.1.5

Internal Control and Risk Management Systems

p. 141

2.2 Interests of Directors
and Principal Executive Officers
Compensation Granted to Directors
and Principal Executive Officers

p. 1492.2.2

Options Granted to the Two
Chief Executive Officers

p. 1502.2.3

Related Party Transactions

p. 1502.2.4

Loans and Guarantees Granted to Directors

p. 151

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2.3.1

p. 152

Employee Profit Sharing
and Incentive Agreements

p. 152

2.3.2

Employee Share Offeringp. 152

2.3.3

Options Granted to Employees

p. 155

p. 1492.2.1

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2.3 Employee Profit Sharing
and Incentive Plans

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3

EADS is a company registered in the Netherlands andlisted in France, Germany and Spain. Given the myriad ofCorporate Governance regimes applicable to it, EADS applies
a set of common Corporate Governance principles andrecommendations in order to be in line with the Corporate
Governance best practices applicable in these jurisdictions.
In particular and in accordance with Dutch law, theCompany applies the provisions of the Dutch Corporate
Governance Code (the “Dutch Code”), or, if applicable,
explains in its annual Board of Directors Report the reasonsfor non-application of such provisions in accordance withthe “apply or explain” principle. Accordingly, in paragraph
4.2 “Dutch Corporate Governance Code” of its Board Reportfor the 2004 financial year, which was approved by the
Annual General Meeting held on 11th May 2005, EADS
provided detailed explanations for the non-application ofprovisions III.2.1, III.3.6, III.4.1(f), III.5.1, III.5.6, III.5.11,
III.5.12, III.8.3, III.5.13(a), III.5.13(d) (essentially as a resultof EADS being a controlled Company and, therefore,
most of the Members of the Board, Audit Committee
and Remuneration and Nomination Committee could bedesignated and possibly be removed by its controllingshareholders), II.2.6, III.7.3, III.7.2, II.1.1, III.3.5, IV.3,
IV.2 and IV.1.7 (essentially as a result of EADS being
listed on the Frankfurt, Paris and Spanish stock exchanges
and endeavouring to strictly comply with the relevant
regulations and following the general practices on thesemarkets protecting all its stakeholders). In 2005, EADS’
2004 statement has been modified with respect to provisions
II.2.1, II.2.2, II.2.7 (remuneration granted to members of
the Board of Directors), II.1.4 (internal control and risk
management frameworks) and II.1.6 (ethics alert systems).
EADS’ Board of Directors Report is included in the
Annual General Meeting Documentation (available on
EADS’ website at www.eads.com in the section “Corporate
Governance”), and the statements therein relating toCorporate Governance (Section 4.2 “Dutch Corporate
Governance Code”) for the financial years 2004 and 2005
shall be deemed to be incorporated in and form part of this
Registration Document.
EADS consequently complies with the Dutch Code since
the Company’s annual shareholders’ meeting approved thesection relating to Corporate Governance included in the
Board of Directors Report since 2003.

2.1 Management and Control
2.1.1 Board of Directors, Chairmen and Chief Executive Officers
Pursuant to the Articles of Association of the Company, theBoard of Directors is responsible for the management andthe affairs of the Company.
The Board of Directors consists of a maximum of elevenmembers appointed and removed by the shareholders’meeting. The Board of Directors adopted rules governing
its internal affairs (the “Rules”) at a Board of Directors’
meeting held on 7th July 2000. The Rules were amended ata Board of Directors’ meeting held on 5th December 2003
to take into account recommendations for changes to
Corporate Governance. The Rules specify the composition,
the role and the key responsibilities of the Board of

Directors, and also determine the manner of appointment
and the responsibilities of the Chairmen and the Chief
Executive Officers. The Rules also specify the creationof two committees (the Audit and the Remuneration and
Nomination Committees) and specify their composition, roleand operating rules.
The Board of Directors has also adopted specific Insider
Trading Rules, which restrict its members from trading in
EADS shares in certain circumstances (for more information,please see “Part 2 / 3.1.3 Governing Law — Dutch
Regulations”).

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The parties to the Participation Agreement have agreed thatthe voting rights attached to the Indirect EADS Shares shallbe exercised by EADS Participations B.V. to ensure thatthe Board of Directors of EADS comprises the Directors of
EADS Participations B.V. and two additional independent
Directors who are not officers, directors, employees oragents of or otherwise have no significant commercial or
professional connection either with the DaimlerChrysler,
Société de Gestion de Participations Aéronautiques(“SOGEPA”) or Lagardère Groups or the French State.
Pursuant to the Participation Agreement, the Board of
Directors comprises ten members of whom:• four nominated by DaimlerChrysler;• four nominated by Société de Gestion de l’Aéronautique,de la Défense et de l’Espace (“SOGEADE”); and• two independent Directors, one nominated byDaimlerChrysler and one nominated by SOGEADE.
In addition, although from 8th July 2003, Sociedad Estatal
de Participaciones Industriales (“SEPI”) no longer has aright to nominate a Director, based upon the proposal ofDaimlerChrysler and SOGEADE, the shareholders’ meetingof EADS held on 11th May 2005 appointed an additional
Spanish Director bringing the total number of Directors toeleven.
Pursuant to the Articles of Association, each member ofthe Board of Directors held office for a term expiring at
the Annual General Meeting of the Company held on
11th May 2005. Such Annual General Meeting reconstituted
the Board of Directors for a term of five years ending at theclose of the Annual General Meeting which will be held in
the year 2010. Members of the Board of Directors will beelected at each fifth Annual General Meeting thereafter.
The shareholders’ meeting may at all times suspend or
dismiss any member of the Board of Directors. There is nolimitation on the number of terms that a Director may serve.
The Board of Directors appointed two Chairmen, one chosenfrom the DaimlerChrysler-nominated Directors and one
chosen from the SOGEADE-nominated Directors.
The Chairmen ensure the smooth functioning of the Boardof Directors in particular with respect to its relations with
the Chief Executive Officers whose efforts they support
with regard to top level strategic discussions with outside
partners.

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The Board of Directors also appointed two Chief Executive
Officers to be responsible for the day-to-day managementof the Company, one chosen from the DaimlerChryslernominated Directors and one chosen from the SOGEADEnominated Directors.
The Company is represented by the Board of Directors or by
the Chief Executive Officers acting jointly. Furthermore, theCompany has granted general powers to each of the Chief
Executive Officers, authorizing them to each individually
represent the Company.
In the event of a deadlock between the two Chief Executive
Officers, the matter shall be referred to the two Chairmen.
The Chief Executive Officers shall not enter intotransactions which form part of the key responsibilities of
the Board of Directors unless these transactions have been
approved by the Board of Directors.
The key responsibilities of the Board of Directors include
amongst others:• approving any change in the nature and scope of theactivities of the Group;• approving the overall strategy and the strategic plan of theGroup;• approving the business plan and the yearly budget of theGroup;• setting the major performance targets of the Group;• appointing the members of the Executive Committee(see below) and the Corporate Secretary;• approving proposals for appointments of members of
Airbus Shareholders’ Committee and Executive Committee
and chairmen of the Supervisory Board (or similar bodies)and the chief executive officers (or equivalent position)of important Group companies and BUs;
• approving material changes to the organisational structureof the Group;• approving major investments, projects or product decisions
or divestments of the Group contemplated in the businessplan with a value exceeding €200 million;• approving major strategic alliances and cooperations of theGroup;

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3• approving any material decision affecting the ballistic
missiles activity of the Group;• approving matters of shareholder policy, major actions or
major announcements to the capital markets; and• approving other measures and business of fundamental
significance for the Group or which involve an abnormal
level of risk.
The Board of Directors met seven times during 2005 andwas regularly informed of developments through business
reports from the Chief Executive Officers, including rolling
forecasts as well as strategic and operational plans. The
average attendance rate at such meetings was 91%. Topics
intensively discussed and operations authorised at thesemeetings included EADS’ strategy, reorganisation topics(such as the reshaping of EADS divisional structure andheadquarter organisation), major business issues (suchas the A350 industrial launch decision, Airbus future
product policy, EADS strategy in defense including
European industry consolidation and the acquisition ofAtlas Elektronik together with ThyssenKrupp Technologies,
the review of the EADS UAV programmes, the codevelopment of the EC 175 helicopter with China andthe review of Sogerma future strategy), the approval of
operational plans, budgets, remuneration (including a stock
option plan and an employee share ownership plan) and theGroup’s financial results and forecasts, as well as financial
optimisations and the process of risk management andinternal controls. The Board of Directors also dealt with
topics regarding personnel and human resources, such as
management qualification as well as attracting, retaining
and developing high potentials in order to ensure thefuture quality of EADS’ management and the multinational
leadership structure. In its meeting held on 11th May 2005,
Manfred Bischoff and Arnaud Lagardère were re-elected
Chairmen and the two Board Committees were reconstituted
with the same members as previously. The Board of
Directors has also appointed on 25th June 2005 the Chief
Executives Officers, Thomas Enders and Noël Forgeard as
the two Chief Executive Officers, the President and CEO
of Airbus, the Head of the Division Defense and Security
Systems, and the Head of Eurocopter as member of the
Executive Committee, while confirming the other membersof the Executive Committee.

Following the changes to EADS’ Corporate Governancedecided in 2003 in light of the Corporate Governance bestpractices developed in the jurisdictions relevant to EADS,
the Board of Directors supervised the implementation of suchdecisions during the year 2005. Among other matters, theinduction package remitted to new Board members after their
appointment through the annual General Meeting (“AGM”).
In addition to the Rules, the work of the Board of
Directors is governed by internal directors’ guidelines(the “Directors’ Guidelines”) adopted, in a meeting dated
10th December 2004, in light of Corporate Governancebest practices. The Directors Guidelines are composed of a
Directors’ charter (the “Directors’ Charter”) detailing therights and duties of the members of the Board of Directors,
an Audit Committee charter (the “Audit Committee
Charter”) and a Remuneration and Nomination Committee
charter (the “Remuneration and Nomination Charter”)
each such charter setting forth the respective committees’
enhanced roles.
The Directors’ Charter sets out core principles, which bindeach and every Director, such as acting in the best interest of
the Company and its stakeholders, devoting necessary timeand attention to the carrying out of their duties and avoiding
any and all conflicts of interest.
Mandates of all the members of the Board of Directors
expired at the general shareholders’ meeting of the Company
held on 11th May 2005. Based upon the nominations of themain EADS shareholders DaimlerChrysler and SOGEADE(Lagardère and French State), the Board of Directors decided
on 8th March 2005 to propose at such general shareholders’meeting to reconstitute the Board of Directors by appointing
Manfred Bischoff and Arnaud Lagardère (designated as
Chairmen), Thomas Enders and Noël Forgeard (designatedas Chief Executive Officers), Jean-Paul Gut and Hans
Peter Ring as Executive Directors, Juan Manuel Eguiagaray
Ucelay, Louis Gallois and Rüdiger Grube as Non-Executive
Directors and Francois David and Michael Rogowski as
Independent Directors, each of them for a term of five years
ending at the close of the general shareholders’ meeting to beheld in the year 2010.
Each Director shall have one vote, provided that if there
is a vacancy on the Board of Directors’ in respect of a
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3

Directors being present or represented at the meetingcan jointly exercise the same number of votes that the
SOGEADE-nominated Directors who are present or
represented at the meeting can exercise and vice versa. Alldecisions of the Board of Directors require a vote in favor byat least seven Directors voting in person or by proxy.
The quorum for the transaction of business at meetingsof the Board of Directors requires the presence of at least
one of the SOGEADE-nominated Directors and one of theDaimlerChrysler-nominated Directors.

question, including a deadlock giving DaimlerChrysler theright to exercise the put option (but in this case with theagreement of SOGEPA and DaimlerChrysler) is a matterwithin the competence of the General Meeting of EADS, aresolution on the issue shall be put to the General Meeting,with the voting rights of SOGEADE, DaimlerChrysler and
SEPI being negated.
Pursuant to the Rules, the Board of Directors is empowered
to form committees from its members. In addition
to the Audit Committee and the Remuneration and
Nomination Committee, the Board of Directors may form
other committees to which it may transfer certain minoror ancillary decision-making functions although suchassignment does not negate the joint responsibility of all
Directors. The quorum for the transaction of business at
any meeting of a committee shall be at least one Director
appointed by SOGEADE and at least one Director appointed
by DaimlerChrysler. All decisions of a committee require
the simple majority of the members.

In the event of a deadlock in the Board of Directors, otherthan a deadlock giving DaimlerChrysler the right to exercise
the put option granted to it by SOGEADE (see “Part2 / 3.3.2 Relationships with Principal Shareholders — Put
Option”), the matter shall be referred to Arnaud Lagardère(or such person as shall be nominated by Lagardère) as
representative of SOGEADE and to the chief executive
officer of DaimlerChrysler. In the event that the matter in

Composition of the Board of Directors
Name

Age

Term started

Term expires

Principal function in the Group

Manfred Bischoff

63

2005

2010

Chairman of EADS

Arnaud Lagardère

45

2005

2010

Chairman of EADS

Thomas Enders

47

2005

2010

Noël Forgeard

59

2005

2010

Jean-Paul Gut

44

2005

2010

Chief Executive Officer of
EADS
Chief Executive Officer of
EADS
Chief Operating Officer forMarketing, Strategy and Global
Development of EADS

Hans Peter Ring

55

2005

2010

Chief Operating Officer
for Finance of EADSJuan Manuel Eguiagaray
Ucelay

60

2005

2010

Louis Gallois

62

2005

2010

Rüdiger Grube

54

2005

2010

François David

64

2005

2010

Michael Rogowski

67

2005

2010

Member of the Boardof Directors of EADSMember of the Boardof Directors of EADSMember of the Boardof Directors of EADSMember of the Boardof Directors of EADSMember of the Boardof Directors of EADS

Principal role outside the Group

DaimlerChrysler Delegate
for Aerospace
General Partner and Chief
Executive Officer of Lagardère
President of the German
Association of the Aerospace
Industries-BDLI
Member of the Board of
Directors of Arcelor
Member of the Boardof Directors of Arjil
Commanditée-Arco
Member of the Supervisory
Board (Aufsichtsrat) and
Shareholder Committee of
M+W Zander — D.I.B Facility
Management GmbH
Director of the Service ofStudies of the Fundacion
Alternativas
President of SNCF
Member of the Management
Board of DaimlerChrysler
Chairman and Chief Executive
Officer of Coface
Chairman of the Supervisory
Board of J.M Voith AG.

Nota: The professional address of all Directors for any matter relating to EADS is Le Carré, Beechavenue 130-132, 1119 PR, Schiphol-Rijk, The Netherlands.

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3

Curriculum Vitae and other Mandates
and Duties Performed in any Company
by the Members of the Board of Directors• Chairman of the Supervisory Board of Motoren-undTurbinen Union (“MTU”) Aero Engines GmbH (resigned
1st January 2004);

Manfred Bischoff• Member of the Supervisory Board of Lagardère (resigned
10th May 2005); andDr. Manfred Bischoff joined Daimler-Benz AG in 1976.
He was a member of the Board of Management ofDaimlerChrysler from 1995 until 15th December 2003,
responsible for Aerospace & Industrial Businesses. Prior tohis present position with EADS, Dr. Bischoff was first
Chief Financial Officer from 1989 and then President
and Chief Executive Officer from 1995 to March 2000
of Dasa AG, one of the three EADS founding companies.
He holds a master’s degree and a PhD (Dr. rer. Pol.) in
Economics from the University of Heidelberg. Current
mandates in addition to those listed in the chart above areset forth below:
Current mandates in addition to those listed in the chart above
are set forth below:• Member of the Supervisory Board of DaimlerChrysler AG(“DaimlerChrysler”);• Chairman of the Supervisory Board of Dasa AG;• Chairman of the Supervisory Board of DCLRH;• Member of the Supervisory Board of Fraport AG;• Member of the Supervisory Board of Gerling-Konzern
Versicherungs-Beteiligungs-AG;• Member of the Supervisory Board of Bayerische
Hypo- und Vereinsbank AG (resigned 27th July 2005).

Arnaud Lagardère
Mr. Arnaud Lagardère has been General Partner and Chief
Executive Officer of Lagardère since 2003. He began his
career in 1986 as General Manager of MMB, the holding
company of Hachette and Europe 1. In 1987, he wasappointed Vice President of the Supervisory Board ofArjil bank followed by his appointment as Head of
emerging activities and electronic media for Matra.
In 1994 he became Chief Executive Officer of Grolier Inc.
in the U.S. He has been Managing Partner of Lagardère
since 1998. In 1999, he was appointed Chief Executive
Officer of both Lagardère Media and Lagardère Active.
Arnaud Lagardère graduated in Economics from the
University of Paris Dauphine.
Current mandates in addition to those listed in the chart above
are set forth below:• Chairman of the Board of Directors of EADSParticipations B.V.;• Member of the Supervisory Board of Royal KPN N.V.;• Chairman and Chief Executive Officer of Lagardère
Active;• Member of the Board of Directors of Nortel Networks
Corp. and Nortel Networks Ltd;• Chairman and Chief Executive Officer of Lagardère
Active Broadcast;• Member of the Board of Directors of Unicredit; and• Chairman and Chief Executive Officer of Lagardère
Active Broadband;• Member of the Supervisory Board of Voith AG.
Former mandates for the last five years:• Chairman of the Supervisory Board of EADS DeutschlandGmbH (resigned 7th July 2003);• Member of the Board of Directors of Mitsubishi Motors
Corporation (resigned 15th December 2003);• Member of the Management Board of DaimlerChrysler(resigned 15th December 2003);• Chairman and Chief Executive Officer of Lagardère S.A.S;• Chairman and Chief Executive Officer of Lagardère Media(Hachette S.A.);• Chairman and Chief Executive Officer of Lagardère
Capital & Management;• Chairman of Fondation Jean-Luc Lagardère;• Chairman and Chief Executive Officer of Arjil
Commanditée-ARCO;

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3• Permanent Representative of Lagardère Active Publicité
to the Board of Directors of Lagardère Active RadioInternational;• Representative of Hachette S.A. to the Management
Committee of SEDI TV-TEVA;• Member of the Board of Directors of Lagardère
Ressources;• Member of the Board of Directors of LVMH;• Member of the Board of Directors of France Télécom;• Member of the Board of Directors of Hachette Livre;• Member of the Board of Directors of Hachette
Distribution Services;• Member of the Board of Directors ofHachette Filipacchi Médias;• Member of the Supervisory Board of Virgin Stores;• Member of the Supervisory Board of DaimlerChrysler;• Member of the Supervisory Board of Le Monde;• President of the “Association des Amis de Paris Jean Bouin
Club Athlétique de la Société Générale
(“C.A.S.G.”); and• Member of the Board of Directors of the Societyd’Agences et de Diffusion S.A. (resigned June 2003);• Manager of the Nouvelles Messagerie de la Presse
Parisienne - N.M.P.P. SARL (resigned July 2003);• Member of the Board of Directors of Canalsatellite S.A.
(resigned December 2003);• Member of the Board of Directors of Lagardère-Sociétés
S.A.S (resigned December 2003);• Member of the Board of Directors of the Editions
P. Amaury S.A. (resigned December 2003);• Chairman and Chief Executive Officer of
Lagardère Images S.A.S (resigned October 2004);• Chairman and Chief Executive Officer of
Lagardère Thematiques S.A. (resigned November 2004);• Manager of Lagardère Elevage (resigned March 2005);• Deputy-Chairman of the Supervisory Board of
Banque Arjil & Cie (resigned April 2005);• President of the “Club des enterprises Paris 2012”(resigned January 2006); and• Member of the Board of Directors of Fimalac(resigned January 2006).

• Member of France China Honorary Committee.
Former mandates for the last five years:

Thomas Enders• Member of the Supervisory Board of T. Online
International AG;

Mr. Enders joined MBB (“Messerschmitt-BoelkowBlohm”) / Dasa AG in 1991, after various posts ininternational research institutes, the German Parliament
and the Planning Staff of the German Minister of Defense.
After several years in the company’s marketing sector, hebecame Corporate Secretary of Dasa AG in 1995. From1996 he was in charge of Corporate Strategy & Technology
and from 2000, he was the Head of Defence and Security
Systems Division. In June 2005 he was appointed Chief
Executive Officer of EADS. Mr. Enders holds degrees fromthe University of Bonn and UCLA, California.

• Member of the Supervisory Board of LCM(“Lagardère Capital & Management”) Partenaires S.A.
(resigned December 2001);• Chairman of Lagardère Active Broadband Finances S.A.S(resigned December 2001);• Member of the Board of Directors of LCM Expression
S.A. (resigned June 2002);• Member of the Board of Directors of Multithematiques
S.A. (resigned December 2002);• Co-Manager of I.S.-9 (resigned May 2003);• Manager of Lagardère Active Publicité (SNC)(resigned May 2003);

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Current mandates in addition to those listed in the chart above
are set forth below:• Member of the Board of Directors of EADS Participations
B.V. and Chief Executive Officer of EADS Participations
B.V.;

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3• Chairman of the Supervisory Board of EADS Deutschland
GmbH;

Current mandates in addition to those listed in the chart above
are set forth below:• Member of the Shareholders Committee of Airbus S.A.S;• Member of the Board of Directors of EADS Participations
B.V. and Chief Executive Officer of EADS Participations
B.V;• Chairman of the Supervisory Committee of Eurocopter
S.A.S;• Member of the Board of Directors of EADS
North America Inc.;• Chairman of the Supervisory Board of Dornier GmbH;• President of AeroSpace and Defence Industries Associationof Europe (“ASD”);• Member of the Board of Directors of Bundesverband derDeutschen Industrie (“BDI”);• President of Atlantikbrücke;• Member of the Supervisory Board of Deutsche BP;• Member of the Board of Directors of Deutsche
Gesellschaft für Auswärtige Politik (“DGAP”); and• Member of the Board of Directors of Stichting
Administratiekantoor EADS (the “Foundation”).
Former mandates for the last five years:• Chairman of the Supervisory Board of DADC Luft undRaumfahrt Beteiligungs AG (“DADC”) (resigned October2005); and• Member of the Supervisory Board of IndustrieanlagenBetriebsgesellschaft mbH (“IABG”) (resigned
December 2005).

Noël Forgeard
Mr. Forgeard joined Matra in 1987 as Senior Vice Presidentof the Defense and Space activities. In 1992, he wasappointed Managing Director of Lagardère and Chief
Executive Officer of Matra Hautes Technologies. He joined
Airbus Industrie as Managing Director in 1998 and became
the first President and Chief Executive Officer of the
Airbus integrated company in 2001. In June 2005 he wasappointed Chief Executive Officer of EADS. He graduatedfrom the École Polytechnique and the École des Mines in
Paris.

• Chairman of the Shareholders Committee of Airbus S.A.S;• President and Member of the Board of Directors of EADSFrance;• Member of the Board of Directors of Schneider Electric;• Member of the Board of Directors of Dassault Aviation;• Member of the Board of Directors of Arcelor;• Member of the Board of Directors of France Galop; and• Member of the Board of Directors of École Polytechnique.
Former mandates for the last five years:• Member of the Board of Directors of International Metal
Service (“IMS”) S.A. (resigned in 2003);• Chairman and Chief Executive Officer of Airbus Holding
S.A. (resigned in 2005);• Chairman of the Board of Directors of Airbus France(resigned in 2005);• Chairman of the Board of Directors of Airbus España, SL(resigned in 2005);• Chairman of the Supervisory Board of Airbus DeutschlandGmbH (resigned in 2005);• Chairman of the Board of Directors of Airbus Military, SL(resigned in 2005);• Member of the Board of Directors of Airbus U.K. Ltd(resigned in 2005); and• Member of the Board of Directors of EADS CASA
(resigned in 2005).

Jean-Paul Gut
Since 1983, Mr. Gut has held various executive positionsin the field of export and international operations for
Matra Defense, Matra Defense Espace and the LagardèreGroup. In 1998, Mr. Gut integrated the Lagardère GroupManagement Board as responsible for International
Operations and the High Technology sector. At the creation

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of EADS, in 2000, he was appointed Head of EADSInternational and in 2005 Chief Operating Officer forMarketing, Strategy and International. He graduated fromthe Institut d’Études Politiques de Paris with a Master’s
degree in Economics.
Current mandates in addition to those listed in the chart above
are set forth below:• Member of the Board of Directors of EADS North
America Inc.;• EADS’ Representative at the ATR assembly of members;• Member of the Advisory Board of Deutsche Bank (Region
Munich); and• Member of the “Wirtschaftsbeirat” of the BayernLB.

• Member of the Shareholders Committee of Airbus S.A.S;

Former mandates for the last five years:• Member of the Board of Directors of Dassault Aviation;

None.

• Member of the Board of Directors of EADS CASA;• Member of the Board of Directors of EADS North
America Inc;
• Director of GIE AMLI;• Representative of MBDA France as Member of the Boardof Directors of Eurotradia International (S.A.); and• Member of the Supervisory Board of Eurocopter (S.A.S).
Former mandates for the last five years:
None.

Hans Peter Ring
Mr. Hans Peter Ring began his career at MBB in 1977.
In 1987 he was appointed Head of Controlling of
the company’s Missiles business and subsequently of
the Aviation and Defense Division of Dasa AG. From
1992-1995, he was Chief Financial Officer and memberof the board of Dornier Luftfahrt. In 1996, he wasappointed Senior Vice President of Controlling of Dasa andsubsequently of EADS. Hans Peter Ring was appointed
Chief Financial Officer of EADS in 2002 and Chief
Operating Officer for Finance in 2005. Mr. Hans Peter Ring
has a degree in business administration.
Current mandates in addition to those listed in the chart above
are set forth below:• Member of the Shareholders Committee of Airbus S.A.S;• Member of the Board of Directors of EADS Space B.V.;• Member of the Supervisory Board of Eurocopter S.A.S;• Member of the Supervisory Board ofEurocopter Holding S.A.S;

Juan Manuel Eguiagaray Ucelay
Mr. Juan Manuel Eguiagaray Ucelay is Associate
Professor at Carlos III University in Madrid, teaching
Macroeconomics and Applied Economics and he isalso Director of Studies at the think tank Fundación
Alternativas. Between 1970 and 1982 he taught economics
at Deusto University in Bilbao. Since the 1970’s he held
various political mandates in Spain; amongst others he
was Minister for Public Administration (1991-1993) and
Minister for Industry and Energy (1993-1996). He resigned
from Parliament in 2001. Mr. Eguiagaray Ucelay holds a
degree in Economics as well as in Law by Deusto University
and a Ph.D. degree by the same University.
Current mandates in addition to those listed in the chart above
are set forth below:• Associate Professor of Macroeconomics at the Universityof Carlos III in Madrid;• President of Solidaridad Internacional (NGO);• Economic Adviser of Arco Valoraciones S.A.;• Member of the Council Adviser of Creation, Advising andDevelopment (Creade), S.L.; and• Member of the Council Adviser of
the Foundation Group EP.
Former mandates for the last five years:• Member of the Board of Directors of Promek S.L.
(resigned 6th June 2000); and• Member of the Advisory Board of Futurspace S.A.
(resigned 05th July 2004).

• Member of the Board of Directors of EADS CASA;EADS Financial Statements and Corporate Governance

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Louis Gallois
Mr. Louis Gallois has been Chairman of Société Nationale
des Chemins de Fer (“SNCF”) since 1996. From 1972 heworked in various posts for the Ministry of Economy and
Finance, the Ministry of Research and Industry and theMinistry of Defense. In 1989 he was nominated Chairman
and Chief Executive Officer of Société Nationale d’Études
et de Constructions de Moteurs d’Avions (“SNECMA”)
and subsequently, in 1992 Chairman and Chief Executive
Officer of Aerospatiale. He graduated from the École desHautes Études Commerciales in Economic sciences and is analumnus of the École Nationale d’Administration.
Current mandates in addition to those listed in the chart above
are set forth below:• Chairman of the Board of Directors of DaimlerChrysler
China limited, Beijing;• Vice Chairman of the Board of Directors of Beijing Benz
DaimlerChrysler Automotive (BBDC-A);• Member of the Board of Directors of McLaren Group Ltd;• Member of the Supervisory Board of DaimlerChrysler
Financial Services AG;• Member of the Advisory Board of DaimlerChrysler
Fleetboard;• Member of the Advisory Board of DaimlerChrysler
Aviation; and• Member of the Supervisory Board of “Hamburg Port
Authority” (“HPA GmbH”).

• Member of the Board of Directors of École Centrale desArts et Manufactures; andFormer mandates for the last five years:• President of the Fondation Villette-Entreprises.

• Member of the Board of Directors of the Hyundai Motor
Company (resigned 13th May 2004); andFormer mandates for the last five years:• Member of the Board of Directors of Thales (resigned
30th June 2005).

• Member of the Board of Directors of the Mitsubishi
Motors Company (resigned 24th November 2005).

François David
Rüdiger Grube
Dr. Rüdiger Grube is member of the Board of Managementof DaimlerChrysler in charge of corporate development
since 2002 and additionally profit and loss responsible forNorth East Asia (incl. Greater China Business) since 2004.
He started his career in 1989 at MBB. In 1995, he became
Director of Corporate Planning and Technology of Deutsche
Aerospace AG. In 1996, he was appointed Senior Vice
President and Head of Corporate Strategy at Daimler-Benz
AG and subsequently of DaimlerChrysler. In 2000, he
became Senior Vice President for Corporate Development.
Mr. Grube holds an engineers’ degree in aircraft constructionand engineering from the University of Hamburg and adoctorate in industrial science.

Mr. François David is Chairman and Chief Executive Officerof Coface, an international credit insurance and credit
management service provider since 1994. He started his
career in 1969 in the French Ministry of Finance as Civil
Administrator at the foreign economic relations department
in which he held various responsibilities. In 1986, he wasnamed Director of the Cabinet of the Minister of Foreign
Trade. In 1987, he was appointed Director of external
economic relations within the Ministry of Economy, Financeand Budget. In 1990, he was named International Managing
Director of the Aerospatiale company. Mr. David is analumnus of the École Nationale d’Administration, a graduateof the Institut d’Études Politiques de Paris, and he holds a
degree in sociology.

Current mandates in addition to those listed in the chart above
are set forth below:

Current mandates in addition to those listed in the chart above
are set forth below:• Chairman of the Supervisory Board of MTU
Friedrichshafen GmbH and DaimlerChrysler Off-highway
GmbH;• Member of the Board of Directors of Stichting
Administratiekantoor EADS (the “Foundation”);• Chairman and Chief Executive Officer of Coface Scrl;

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3• Chairman of the Board of Directors of Viscontea Coface(Italy);• Member of Shareholder’s Committee of Freudenberg &Co.; and• Chairman of the Board of Directors of Coface Services;• Member of the Supervisory Board of Carl Zeiss AG• Chairman of the Supervisory Board of AK Coface(Allgemeine Kreditversicherung Aktiengesellschaft Coface)(Germany);

Former mandates for the last five years:• Member of the Board of Directors of Vinci;• Member of the Board of Directors of the association
Coface Trade Aid;
• Chairman of Coface ORT;
• Chairman of La Librairie Electronique (LLE);• Chairman of Centre d’études financières;• Chairman of Or Informatique; and• Censor in Rexel.

• President of the Federation of German Industries, BDI(resigned 31st December 2004);• Member of the Supervisory Board of KSB AG (resigned
30th April 2005);• Member of the Supervisory Board of KfW Kreditanstalt
für Wiederaufbau (resigned 31st May 2005);• Member of the Supervisory Board of Deutsche Messe AG(resigned 30th June 2005); and• Vice President of the Federation of German Industries,
BDI (resigned 31st December 2005).

• Member of the Board of Directors of Rexel (resigned in2005).

The Company has not appointed observers to the Board of
Directors. Pursuant to applicable Dutch law, the employees
are not entitled to elect a Director. There is no minimum
number of shares that must be held by a Director.

Michael Rogowski

Independent Directors

Dr. Michael Rogowski has been Chairman of theSupervisory Board of Voith AG since 2000 and was also
the President of the Association of German Industry from2000 to 2004. Dr. Michael Rogowski joined Voith GmbH in
1974, where he was responsible for human resources as wellas materials management. In 1982 he took over responsibility
for the power transmission engineering Division and wasnamed Chairman of the Management Board of Voith GmbHin 1986 and then Voith AG in 1997. He studied economicalengineering and earned a doctorate at the University of
Karslruhe in 1969.

The two independent directors appointed pursuant to thecriteria of independence set out above are François David andMichael Rogowski.

Former mandates for the last five years:

Current mandates in addition to those listed in the chart above
are set forth below:• Member of the Board of Directors of Stichting
Administratiekantoor EADS (the “Foundation”);• Member of the Supervisory Board of Talanx AG / HDI
Versicherung;

Prior Offences and Family Ties
To the Company’s knowledge, none of the Directors(in either their individual capacity or as director or senior
manager of any of the entities listed above) has been
convicted in relation to fraudulent offences, been the subjectof any bankruptcy, receivership or liquidation, nor been thesubject of any official public incrimination and / or sanction
by a statutory or regulatory authority, nor been disqualified
by a court from acting as a member of the administrative,
management or supervisory bodies of any issuer or conductof affairs of any company, during at least the last five years.
As of the date of this document, there are no family ties
among any of the Directors.

• Member of the Supervisory Board of IKB Deutsche
Industrie-Bank AG;

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Assessment of the Performanceof the Board of Directors
Last year’s self-evaluation was conducted asfrom December 2005 by the Chairmen of the Board of
Directors, based upon responses of members of the Board of
Directors to a questionnaire. The Chairmen jointly evaluatedthe feedback of the members of Board of Directors and led a
discussion on the results at the following Board of Directors
meetings.
The self-evaluation comprised a general assessment of themeetings and processes of the Board of Directors and areview of the activities of the Board of Directors and its
Committees in the past year. The questionnaire addressed
matters such as the frequency of meetings, the content of
discussions and the thoroughness of meeting preparation.
The members of the Board of Directors were also asked toconsider the functioning and the composition of the Boardof Directors, the quality and openness of discussion, theindependence of expressed opinions, the ability to build on
differing positions and the access to necessary information
for the members of the Board of Directors.
The findings of the self-assessment concluded that theoverall performance of the Board of Directors is verysatisfactory.
Since the last self-assessment in 2004, which had shown
positive results already, further progress has been madein the meantime by implementing the previously decided
improvement measures, such as improved transparency on
EADS Corporate Governance for shareholders. Also, themeeting attendance for Board of Directors and Remuneration& Nomination Committee meetings has further increased in2005 compared to the previous year.
Continuous improvement and effectiveness of governanceand management of the Group will remain a prime focus andkey success factor of EADS.

2.1.2 Audit Committee
Pursuant to the Rules, the Audit Committee makes
recommendations to the Board of Directors on theappointment of auditors and the determination of theirremuneration, the approval of the annual financial
statements and the interim accounts, discusses with theauditors their audit programme and the results of their auditof the accounts and monitors the adequacy of the Group’s
internal controls, accounting policies and financial reporting.
The Audit Committee has responsibility for ensuringthat the internal and external audit activities are correctly
directed and that the audit matters are given due importanceat meetings of the Board of Directors. The rules andresponsibilities of the Audit Committee have been set out inmore detail in the Audit Committee Charter.
The Audit Committee reviews the quarterly, half and fullyear accounts on the basis of the documents distributed inadvance and discussions with the auditors. The Head ofaccounting and the Chief Financial Officer are invited tomeetings of the Audit Committee to answer any question.
The Audit Committee is chaired by Manfred Bischoff andArnaud Lagardère and also includes Rüdiger Grube andLouis Gallois.
The Audit Committee meets twice a year, or more
frequently according to requirements. It met three times
during 2005 and had one written consultation, with a 94%
attendance rate, to review the 2004 results as well as the firsthalf-year results for 2005 of the Company. As decided by
the Board of Directors on 5th December 2003, the role of
the Audit Committee was increased with new tasks such as,
in particular, the review of the quarterly financial reports.

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2.1.3 Remuneration and Nomination Committee
Pursuant to the Rules, the Remuneration and Nomination
Committee makes recommendations to the Board of
Directors regarding appointments of the Executive
Committee members, the chairmen of the Supervisory
Board (or similar bodies), the chief executive officers (orequivalent positions) of main Group companies and BUs andthe Corporate Secretary, human resources and remuneration
related strategy and long-term remuneration plans (including
playing a central role in determining and reviewing thevariable portion of the remuneration of the members of
the Board of Directors and the Executive Committee) anddecides the service contracts and other contractual matters in
relation to the Board of Directors and Executive Committee
members. The rules and responsibilities of the Remuneration
and Nomination Committee have been set out in moredetail in the Remuneration and Nomination Charter. The
Remuneration and Nomination Committee is chaired by
Manfred Bischoff and Arnaud Lagardère and also includes
Thomas Enders, Noël Forgeard, Rüdiger Grube and Louis
Gallois.
The Remuneration and Nomination Committee meets twicea year, or more frequently according to requirements. It
met five times during 2005, with a 92% average attendance
rate. On top of making recommendations to the Board of
Directors for major appointments within the Group, theRemuneration and Nomination Committee reviewed thecompensation policy (including pension schemes), the bonus
payments for 2004, the stock option plan and the employee
share ownership plan for 2005.

2.1.4 Executive Committee
The Chief Executive Officers, supported by an Executive
Committee (the “Executive Committee”), are responsible
for managing the day-to-day operations of the Company.
The Executive Committee, chaired by the Chief Executive
Officers, also comprises the Heads of the major Functions
and Divisions of the Group. The Executive Committee met
nine times during 2005.
The following matters are discussed, amongst others, at the
Executive Committee meetings:• Setting up and control of the implementation of thestrategy for EADS businesses;• Management, organisational and legal structure of theGroup;• Performance level of the Group’s businesses and support
functions; and• All business issues, including the operational plan of theGroup and its Divisions and BUs.

each member of the Executive Committee is individually
responsible for the management of his portfolio and mustabide by decisions taken by the Chief Executive Officers andthe Executive Committee, as the case may be.
The Chief Executive Officers endeavour to reach consensus
among the members of the Executive Committee on thematters discussed at the Executive Committee meetings.
In the event of consensus not being reached, the Chief
Executive Officers are entitled to decide the matter. If there
is a fundamental or significant disagreement with respect toany undecided matter, the dissenting Executive Committee
member may request that the Chief Executive Officers
submit such matter to the Chairmen for their opinion.
The term of office for the Executive Committee members isfive years.
On 25th June 2005, the Board of Directors appointed the
new Executive Committee which is led by the two Chief
Executive Officers.

The internal organisation of the Executive Committee isdefined by the business allocation among the members
under the supervision of the Chief Executive Officers.
Notwithstanding the joint responsibilities as defined above,

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Composition of the Executive Committee
Name

Age

Term started

Term expires

Principal Occupation

Thomas Enders

47

2005

2010

Chief Executive OfficerNoël Forgeard

59

2005

2010

Jean-Paul Gut

44

2005

Chief Executive Officer
Chief Operating Officer for Marketing, Strategy and2010
Global Development

Hans Peter Ring

55

2002

2007

Chief Operating Officer for Finance

François Auque

49

2005

2010

Chief Executive Officer of Space Division

Fabrice Brégier

44

2005

2010

Ralph D Crosby Jr.

58

2002

2007

Head of EADS Eurocopter Division
Chairman and Chief Executive Officer of EADS
North America

Francisco Fernández Sáinz

60

2002

2007

Head of Military Transport Aircraft Division

Gustav Humbert

56

2005

2010

President and Chief Executive Officer of Airbus

Jussi Itävuori

50

2002

2007

Head of Human Resources

Stefan Zoller

48

2005

2010

Head of Defence and Security Systems Division

Nota: The professional address of all members of the Executive Committee for any matter relating to EADS is Le Carré, Beechavenue 130-132, 1119 PR, Schiphol-Rijk, The Netherlands.

Thomas Enders, Chief Executive
Officer of EADS

Duties Performed in any Company by the Members of theBoard of Directors”.

See “2.1.1 Board of Directors, Chairmen and Chief Executive
Officers — Curriculum Vitae and other Mandates andDuties Performed in any Company by the Members of theBoard of Directors”.

François Auque, Chief Executive
Officer of Space DivisionNoël Forgeard, Chief Executive
Officer of EADS
See “2.1.1 Board of Directors, Chairmen and Chief Executive
Officers — Curriculum Vitae and other Mandates andDuties Performed in any Company by the Members of theBoard of Directors”.

Jean-Paul Gut, Chief Operating Officer forMarketing, Strategy and Global Development
See “2.1.1 Board of Directors, Chairmen and Chief Executive
Officers — Curriculum Vitae and other Mandates andDuties Performed in any Company by the Members of theBoard of Directors”.

Hans Peter Ring, Chief Operating
Officer for Finance

Mr. Auque joined Aerospatiale as Chief Financial Officer
in 1991, after a career with the Suez Group and theFrench Cour des Comptes. He held various top management
functions within Aerospatiale Matra. Since 2000, he is Chief
Executive Officer of the EADS Space Division. Mr. Auque
graduated from the École des Hautes Études Commerciales,from the École Nationale d’Administration, and from theInstitut d’Études Politiques de Paris.

Fabrice Brégier, Head of EADS
Eurocopter Division
Mr. Brégier joined Matra Défense in 1993 as Chairman of
the Apache MAW and Eurodrone GIEs. In 1996, he wasappointed Director for the Stand-Off activities of Matra
BAe Dynamics before becoming CEO of MBD in 1998 andCEO of MBDA in 2001. He became President and CEO of
Eurocopter in April 2003. In June 2005 he was appointed
Head of the Eurocopter Division and member of the
Executive Committee.

See “2.1.1 Board of Directors, Chairmen and Chief Executive
Officers — Curriculum Vitae and other Mandates and

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Ralph D. Crosby Jr., Chairman and Chief
Executive Officer of EADS North America
Mr. Crosby has been Chairman and CEO of EADS North
America since 2002. Previously, he established and was
President of the Integrated Systems Sector at Northrop
Grumman Corporation after having been Corporate
Vice President and General Manager of the company’s
Commercial Aircraft Division and of the B-2 Division.
Mr. Crosby holds degrees from the U.S. Military Academy,
from the Graduate Institute of International Studies in
Geneva, and from the Harvard University.

Francisco Fernández Sáinz, Head of
Military Transport Aircraft Division
Mr. Fernández Sáinz joined CASA in 1971 as a StressEngineer. Between 1975 and 2002 he held various positions
such as Product Engineering Manager, Project Manager,
Engineering Development Director of the Technical
Directorate, Vice President of Engineering and Executive
Vice President Programs, and finally as Airbus España
General Manager. Since 2002, he is Head of MilitaryTransport Aircraft. Mr. Fernández Sáinz holds an MBA fromICADE and is a Senior Aeronautical Engineer.

Gustav Humbert, President and Chief
Executive Officer of Airbus
Mr. Humbert joined MBB in 1980. Before becoming
President and Chief Executive Officer of Daimler Benz

Aerospace Airbus GmbH in 1994, he was member ofthe Dasa AG Management Board responsible for theCommercial Aircraft Division. He was nominated Airbus
Chief Operating Officer in 2000 and President and Chief
Executive Officer of Airbus in 2005. Mr. Humbert holds anengineering degree and a PhD from the Hanover Technical
University.

Jussi Itävuori, Head of Human Resources
Mr. Itävuori joined EADS in September 2001. Previously,
he worked for KONE Corporation since 1982 and was
appointed in 1989 as Head of Human Resources and memberof the Executive Committee of KONE Elevators. In 1995,
he was appointed member of the Executive Committeeand Head of Human Resources of KONE Corporation.
Mr. Itävuori graduated from the Vaasa School of Economics,
Finland and served in the Airforce as pilot.

Stefan Zoller, Head of Defence andSecurity Systems Division
Dr. Zoller joined Dasa in 1996 as Chief of Staff of the
President and CEO of the company. Previously, he held
various management positions within DaimlerChrysler,
Dornier and Senstar / Canada. Since 2000, he has held top
management positions within EADS’ defence business andwas appointed Head of the Defence & Security Systems
Division in 2005. Dr. Zoller graduated from the University
Tübingen and holds a PhD in company law.

2.1.5 Internal Control and Risk Management Systems
2.1.5.1 Overview
One of Management’s fundamental missions is to foster apositive internal control (“IC”) and risk management (“RM”)
environment at EADS, in line with Corporate Governancebest practices from the Netherlands, France, Germany
and Spain. Recognizing that developments in the multijurisdictional legal and regulatory provisions relevant to
EADS required a strategic approach to IC and RM, EADS
launched an IC / RM project at the beginning of 2004. The
project, coordinated by the EADS finance department, andEADS Financial Statements and Corporate Governance

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supported by other headquarters functions and external
consultants, is intended to:• ensure the Group’s compliance with current and expected
future regulations;• identify weaknesses in the Group’s existing IC and RM
procedures and propose improvements thereto; and• enable EADS to manage and minimize business andcontrol risks throughout the Group.

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Achievements in 2005
Building on the results of the comprehensive IC and RM
review and evaluation process commenced in 2004, EADS
critically assessed during 2005 the implementation status andquality of the integrated Group-wide IC and RM systems.
An independent review process was launched to provide
reasonable assurance regarding the effectiveness of the IC
and RM systems in place. Additional quality and efficiency
gains have been achieved.
In order to further enhance the quality of the IC and RM
systems, a number of actions have been launched. Specifictraining sessions according to the “train the trainer” principle
have been carried out to further train the IC coordinators
who, in a second step, transferred their knowledge to theprocess owners in the BUs and headquarters functions.
In addition, “lessons learned” process workshops took
place, utilising the independent review information. These
workshops provided process owners / coordinators witha platform for information on the independent review
findings in other BUs as well as for the exchange of their
specific experiences. The training sessions and the “lessons
learned” workshop information were instruments to further
coach and support the process owners and to secure the highquality standard of the yearly recurring self-assessment.
The self-assessment and the independent review results
were subsequently the subject of EADS’ top management’s
discussions. Based on the bottom-up principle, the BU
management boards reported the status quo of their IC andRM systems to the chief executive officers and the chief
financial officers of the respective Divisions (Airbus, DS,
MTA, Eurocopter, Space), who again reported to the EADS
chief executive officers (the “CEOs”) and the EADS chief
financial officer (the “CFO”).
Additionally, in order to maximize efficiency in the areaof control design assessment, the “key control” principle
was designed. A “key control” is a control that is criticalto a specific control objective covering the related risk.
Key controls can often be identified in areas such as
authorization controls, exception reports, configuration
controls, segregation of duties, system access, conversion
controls, key performance indicators, management reviews
and reconciliations.

Set out further below is a description of the integrated
Group-wide IC and RM systems, comprising thedevelopments during 2005.

Limitation
No matter how well designed, IC and RM systems haveinherent limitations, such as vulnerability to circumvention
or management overrides of the controls in place.
Consequently, no absolute assurance can be given that
EADS’ IC and RM procedures are, despite all care and effort,
entirely effective.

Interaction with the EADSManagement Process
The Board of Directors has overall responsibility for theGroup’s IC and RM environment. EADS’ CEOs and EADS’
CFO are responsible for ensuring that IC and RM procedures
are implemented throughout the Group. In addition, theAudit Committee oversees the Group-wide functioning of
IC and RM procedures.
A general management principle of EADS is the delegationof entrepreneurial responsibility and powers to theoperational units. Consequently, the day-to-day IC and
RM functions are delegated to EADS’ Divisions and theirrespective BUs, whose management is responsible for
operating and monitoring the IC and RM systems.
This principle of subsidiarity entails a clear separationof responsibilities between EADS headquarters and theDivisions or BUs. EADS headquarters sets the overall
strategic and operational targets for EADS and assumes theultimate responsibility for EADS’ guidance. The Divisions
and BUs retain responsibility for all operational matters andactivities within their scope, subject to audit.

2.1.5.2 Risk Management System
Risk is an inherent aspect of all entrepreneurial activity.
To fulfil the expectations of its shareholders, EADS mustpursue opportunities that involve the acceptance of a certain
degree of risk. See “Risk Factors” for information on certain
risks to which the Group is exposed.
Early identification and professional management of theserisks is fundamental to business success. EADS recognises

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this fact and has always managed risks at all levels within theorganisation.
In response to developments in Corporate Governancelegislation, EADS harmonized its existing RM processes at
the Group level further to ensure that risks are continuously
and consistently (i) identified, (ii) analysed, (iii) controlled,(iv) monitored and (v) reported.
Through the RM procedures, risks are identified and theirlikelihood of occurrence and possible extent of damage
is assessed, usually measured in terms of their effect on
operating profit.
Division and BU management are responsible for developing
and initiating appropriate measures to avoid, reduce, or hedge
the probability and / or impact of the identified risks.
Information on risks is gathered and updated regularly toprovide Division and BU management with an up-to-date
analysis of the significant risks within the Group, as wellas with information on the activities initiated to mitigate
or avoid such risks. This information is used for decision
making throughout the relevant EADS management
processes.
In addition, the evolution of major risks and thedevelopment of the countermeasures taken in response
are monitored on a regular basis by Division and BU
management, who in turn report to the CEOs and CFO.
The RM system encompasses all risks to which EADS is
exposed, including risks inherent in the day-to-day businessprocesses of the Group. EADS’ IC system, described below,
is designed to manage these process-inherent risks.
The relevant risks are subject to a management discussion
process on Group level.

2.1.5.3 Internal Control Framework
EADS maintains an integrated Group-wide IC
framework with the purpose of providing reasonableassurance to the Board of Directors, the CEOs and the CFO
that process-inherent risks arising from the Group’s activities
are being effectively managed, based on a variety of IC
procedures. The framework embodies the systems of policies
and procedures within EADS designed to:• enable the Group to identify and respond to significant
operational, financial and compliance risks throughout
EADS; and• ensure the quality of financial reporting, including design
and implementation of processes to generate a flow oftimely, relevant and reliable information.
Certain subsidiaries, such as Airbus, and joint ventures, suchas MBDA, operate IC procedures that are customized to their
specific businesses – these procedures conform to the overall
EADS IC framework. Conformity with the IC framework
is ensured, inter alia, through EADS’ presence on such
affiliates’ supervisory and management bodies (e.g., Airbus
Shareholders’ Committee, MBDA Board of Directors,
respective audit committees).

Sources and Standards for IC
Procedures and Framework
The core policies, procedures and thresholds that define
EADS’ IC environment are communicated throughout theGroup through:• codes of conduct (e.g., EADS Code of Ethics, Corporate
Social Responsibility policies (see “Part 2 / Chapter 2
Corporate Social Responsibility”));• handbooks (e.g., “EADS Corporate Management Principles
and Responsibilities”, the “Financial Control Handbook”);• manuals (e.g., Treasury Procedures, “Accounting Manual”,“Reporting Manual”); and• guidelines (e.g., “Funding Policy”).
Written internal rules govern the operations of key
elements of the EADS IC framework; that is the Board of
Directors and its Audit Committee. IC procedures at certain
subsidiaries and joint ventures are derived from the relevant
shareholders’ agreements applicable thereto.
External standards influencing the EADS IC framework
include the “Internal Control - Integrated Framework”
defined by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO), as well as industryspecific standards as defined by the International Standards
Organization (ISO).

• ensure compliance with laws and regulations applicable to
the Group, as well as with internal Group policies;

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Monitoring of Internal Controls
Responsibility for the operation of the IC system lies withthe management of the Divisions and the BUs, as wellas with the relevant EADS headquarters functions. They
ensure that the appropriate controls to meet the control
objectives defined in the IC templates are in place andoperate effectively on an ongoing basis.
As part of the development of the IC framework, EADS
has instituted formalized risk and control self-assessment
mechanisms, to be applied by each business process owneron a regular basis. Based on these mechanisms, managementof each Division, BU and headquarters function preparesformal statements as to the adequacy and effectiveness of the
IC systems within their scope of responsibility.
The analysis and statements made by Divisions, BUs, andheadquarters functions are discussed in depth between
EADS CEOs and CFO and the respective Division and BUCEOs and CFOs or the headquarters functions heads. These
discussions serve to prioritize potential issues at EADS level,
define and commit appropriate actions if needed, and draw
conclusions for the overall EADS IC and RM report.
The initial risk-based review of the effectiveness of theGroup’s IC system started in 2005 and will continue
throughout 2006 with the support of external auditors.
EADS’ ongoing monitoring activities include the following:• Scoping: The scoping process delivers the foundation
for all following IC process steps by identifying thesignificant business processes and sub-processes at Legal
Entity (“LE”) level.
• Self-assessment: On the basis of the business processes inscope, the IC templates have to be completed by assessing
the design (are the existing controls sufficient for meetingthe control objective?) and operating effectiveness (are thecontrols working as intended?) of the controls in place.
• Evaluation and prioritization: Control deficiencies
identified during the self-assessment process need tobe evaluated and prioritized into minor deficiencies,
significant deficiencies and material weaknesses.
• Remediation and monitoring: For each identified
deficiency, a remediation action needs to be defined andimplemented. The progress is monitored by the BUs andreported to EADS headquarters.

• Re-testing: To verify the successful implementation of theremediation actions, the remediated controls needs to be
re-assessed.
• Sub-representation and management discussion: Once
every year, identified significant deficiencies and material
weaknesses have to be reported in sub-representation
letters, providing assurance of management assessment of
the quality of the IC systems and of the IC risk exposure.
• Independent review: Each year, corporate audit provides
an independent review of the status of the IC systems inselected Divisions and BUs.
• Training: Relevant personnel (e.g., IC Coordinators,
Process Owners) receive training in order to be informedof new / changed laws and regulations regarding IC and
to be updated on relevant process steps and corresponding
binding activities within the IC systems.

Management Sign-Off Process
Since the 2004 reporting cycle, a formalized sign-off process
is in place whereby EADS’ CEOs and CFO will confirm to
the Board of Directors that, to the best of their knowledge:• the IC system is adequately structured to ensure thereliability of financial reporting within EADS;• the control activities in place are completely and accurately
described in the IC templates and / or other relevant
process documentation and guidelines;• the owner of each control activity is clearly identified; and• the controls in place are appropriate for EADS’ businessand meet the defined control objectives.
The CEOs’ and the CFO’s IC statements, submitted to theBoard of Directors through the Audit Committee, will bebased on the self-assessment and review processes describedabove, and will be founded upon similar statements provided
to the CEOs and CFO by Division and BU management aswell as the management discussions mentioned above.

2.1.5.4 Business Processes Covered
by Internal Control Framework
Based on EADS’ activities, seventeen high-level businessprocesses have been identified within EADS. They are

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categorized into core processes (research and development,
production, sales, after sales and program management),
support processes (procurement, human resources,
accounting, fixed assets, treasury, information technology,
mergers & acquisitions, legal and insurance) and management
processes (internal audit, controlling and management
controls). Set out below is a description of certain of thesebusiness processes, and the correlating IC procedures,covering risks that have a significant potential of affecting
the Group’s financial condition and results of operations (1).

manual, which is agreed with the Company’s external
auditors. Changes to the EADS accounting manual requireapproval by the CAO, and, where significant changes are
involved, the CFO or the Board of Directors (based upon theadvice of the Audit Committee).

Accounting

BU accounting departments record information using the
EADS accounting consolidation software, following centrally
defined EADS accounting policies which comply with IFRS,
the Group-wide applied accounting principle. Accountants at
EADS headquarters, who are responsible for each Division,monitor and verify the work of the relevant BU accounting
departments. The Division accountants also provide direct
support to the BUs to ensure the correct application of the
EADS accounting policies.

At the core of EADS’ IC framework are accounting
processes and controls designed to ensure the reliability of
the financial statements and other financial information
used by management and disclosed to EADS’ investors andother stakeholders. These processes and controls are partof an overall financial control model integrating strategicplanning, operative planning, measurement and reporting,decisions / actions and financial market communication.
This integrated approach to planning and reporting aims to
improve internal communication and transparency acrossdepartments and organizational units within EADS, which
are essential to the preparation of accurate and reliablefinancial statements.

Consolidation Procedures —External Financial Reporting
The EADS financial control model defines the planningand reporting procedures that apply to all operational
units of the Group, as well as the responsibilities of the
CFO, who is charged with developing, implementing andmonitoring these procedures. Among the CFO’s primarytasks is overseeing the generation of consolidated financial
statements for EADS, which are prepared under the directsupervision of the Chief Accounting Officer (“CAO”).
The CAO is responsible for the operation of the Group’s
consolidation systems and rules and for the definitionof Group-wide accounting policies, reporting rules andfinancial guidelines that ensure the consistency and qualityof financial information reported by the BUs and Divisions.
EADS’ accounting policies are set out in a written accounting

Control of the financial reporting process is effected not
only through the elaboration of Group-wide accounting
systems and policies, but also through an organized process
for extracting quality information from the reporting units
on a timely basis. The EADS reporting process is briefly
summarized below:

During the course of each reporting cycle, BU CFOs
frequently meet with the EADS CAO to discuss thefinancial information generated by the BUs.
Prior to being disclosed to the public and subsequently
submitted for approval to the shareholders, the consolidated
financial statements are audited by the Company’s external
auditors, reviewed by the Audit Committee and submitted
for approval by the Board of Directors.

Controlling
The controlling function has developed a value-driven
economic and financial corporate measurement system andmethodology on an industry benchmark level. The coreplanning, tracking and reporting tasks of the controlling
department provide it with a global overview of the Group.
As a result, the controlling department is also called on
to interact with other headquarters functions to ensurethat corporate activities, such as mergers and acquisitions(“M&A”) and sourcing, are carried out in accordance with
the Group-level policies and strategies. This global overview
also makes controlling an integral element of the risk
assessment process.

(1) This report is therfore not an exhaustive description of all the Group’s IC procedures.
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The EADS financial reporting policies and procedures,
described above, are also designed to provide Managementwith updated (at least monthly) decision-oriented
management information to control the operational
performance of the Group. This information includes
regular cash and treasury reports, as well as other financial
information used for future strategic and operative planningand control and supervision of economic risks arising fromthe Group’s operations.

Treasury
Treasury management procedures, defined by EADS’central treasury department at Group headquarters,
enhance management’s ability to identify and assess risks
relating to liquidity, foreign exchange rates and interest
rates. Controlled subsidiaries fall within the scope of thecentralized treasury management procedures. For instance,
besides daily operational interface, Airbus Treasury
Committee meetings, comprising the EADS Group treasurer,
the Airbus CFO or treasurer, and BAE’s treasurer (and / orits nominee), are held on a regular basis to oversee Airbus’
foreign exchange and interest rate exposures and hedging
activities, funding, and sales and project finance activities.
Similar monitoring procedures exist for jointly-controlled
affiliates, such as MBDA.

Cash Management
Maintenance of liquidity to support operations is one of the
primary missions of the EADS central treasury department.
Monthly cash planning and reporting by the central treasury
department, in conjunction with the controlling department,
provides management with the information required tooversee the Group’s cash profile and to initiate necessary
corrective action in order to ensure overall liquidity.
To maintain targeted liquidity levels, and to safeguard cash,
EADS has implemented a cash pooling system with daily
cash sweeps from the controlled subsidiaries to centrally
managed accounts. Payment fraud prevention procedures
have been standardized throughout the Group.

Hedge Management
Commercial operations generate material foreign exchange
and interest rate exposures. A Group hedging policy isdefined and updated regularly by the Board of Directors.
In order to ensure that all hedging activity is undertaken
in line with the Group hedging policy, the central treasury
department executes all hedging transactions. The central
treasury department conducts ongoing risk analysis andproposes appropriate measures to the Divisions and BUs
with respect to foreign exchange and interest rate risk.
Subsidiaries are required to calculate, update and monitor
their foreign exchange and interest rate exposure with the
EADS central treasury department on a monthly basis, inaccordance with defined treasury procedures. See “1.1.8
Hedging Activities”.
A significant portion of the Group’s foreign exchange
exposure relates to the activities of Airbus, theimplementation of whose hedging policy is overseen by
the Airbus Shareholders’ Committee. The Airbus Treasury
Committee, consisting of Airbus and EADS central treasury
department representatives, monitors foreign currency
exposure and decides on the detailed implementation of
the Airbus hedging policy. Actual hedging transactions
are executed by the EADS central treasury department.
See “1.1.7.4 Sales Financing” and “Notes to Consolidated
Financial Statements (IFRS) — Note 22: Financial Liabilities”.

Sales Financing
In connection with certain commercial contracts, EADS may
agree to enter into sales financing arrangements. In respect ofsales financing at Airbus, an annual sales financing budget,
defined in the EADS operative planning process, is agreed by
the Airbus Shareholders’ Committee. The Airbus Treasury
Committee approves sales financing transactions on a caseby-case basis, in line with its risk assessment guidelines.

Procedures for Monitoring OffBalance Sheet Liabilities
Within EADS, off-balance sheet liabilities mainly arise
in connection with lease arrangements, extensions ofguarantees and pending or threatened litigation. Divisions
and BUs are required to record, or to provide information
on, all financial guarantees in a tracking system. Guarantees
for amounts in excess of a certain threshold must be
approved by the CFO, the CEOs or the Board of Directors,
as the case may be.

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3Management has instituted procedures to monitor the levelof certain off-balance sheet liabilities throughout the Group.
In particular, a specialized guarantee tracking system has
been rolled out to monitor exposure arising from guarantees
throughout the Group.
For Airbus and jointly controlled affiliates, such as MBDA,
summary information on guarantee-related off-balance
sheet exposure is captured by EADS Headquarters based on
regular reports of this exposure and discussed in the Airbus
and MBDA treasury committee.

Sales
Commercial contracts entered into by EADS’ operating
subsidiaries have the potential to expose the Group tosignificant financial, operational and legal risks. To control
these risks, Management has implemented contract
proposal review procedures to ensure that EADS does
not enter into material commercial contracts that expose
it to unacceptable risk or are not in line with the Group’s
overall objectives. These procedures include (i) Board of
Directors-approved thresholds and criteria for determining
the risk and profitability profile of proposed contracts and(ii) a mandated pre-approval process for contracts defined as“high-risk”.
Contracts falling within the defined threshold categories
require approval by the CFO. Contracts that are deemed“high-risk” must be submitted to a standing Commercial
Committee (with the COO for Finance and the COO ofMarketing, Strategy and Global Development serving
as permanent members). This committee is responsible
for reviewing the proposal and submitting a decisionleading recommendation to the CEOs. Its specific role andresponsibilities are defined in a set of internal rules adopted
by the EADS Executive Committee.
In the case of Airbus, contracts are approved in accordancewith Airbus’ own Corporate Governance policy, which isbased on EADS guidelines and the Airbus Shareholders’
Agreement. In general, where EADS shares control of a
subsidiary with a third party, the Commercial Committee
is responsible for forming the EADS position on proposedcommercial contracts.

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Mergers and Acquisitions
With respect to merger, acquisition and divestiture
activities of the Group, Management has implemented
transaction review and approval procedures centralized at
EADS headquarters. The IC procedures require all M&A
transactions to be reviewed by an M&A Committee. The
M&A Committee is chaired by the head of Strategic
Coordination, and includes the CFO and the directorsof Group headquarters level M&A and controlling
departments. Legal Affairs is permanently represented
on the M&A Committee, and representatives of otherdepartments are also invited to attend meetings.
Projects that are considered non-strategic and fall undera defined value threshold are reviewed and approved by
the M&A Committee. Strategic and high-value projects
require additional approval by the CEOs or the Board of
Directors. This review and approval procedure is carried out
at four critical stages of the M&A process, beginning withan analysis of the strategic fit and definition of the legal
framework and concluding with a final review of the overall
transaction.

Legal
EADS is subject to a myriad of legal regimes in eachjurisdiction in which it conducts business. The EADS Legal
Affairs directorate, in coordination with the Division and
BU legal departments, is responsible for implementing andoverseeing the procedures designed to ensure that EADS’
activities comply with all applicable laws, regulations
and requirements. It is also responsible for overseeing
all litigation affecting the Group, as well as for the legal
safeguarding of the Group’s assets, including intellectual
property.
Legal Affairs, together with the Corporate Secretary, also
plays an essential role in the design and administration of(i) the EADS Corporate Governance procedures and (ii) the
legal documentation underlying the delegation of powers
and responsibilities and defining the EADS management
and IC environment.

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3Internal Audit
The EADS Internal Audit department, under the directionof the Corporate Secretary, provides Management with arisk-based evaluation of the effectiveness of the Group’s
IC procedures. Based upon an approved annual audit plan
and a global risk assessment of the Group’s activities, theInternal Audit department (i) reviews operational processes
for risk management and operating efficiency improvement
opportunities and (ii) monitors compliance with legal
requirements and internal policies, process guidelines
and procedures (e.g., compliance with EADS’ accounting
policies). Internal Audit also involves ad hoc reviews,
performed at the request of management, focusing on
current (e.g., suspected fraudulent activities) and future (e.g.,contract management) risks.

2.1.5.5 Outlook for Evolution of EADS’IC and RM Systems
Building on the results of the comprehensive IC and RM
review and evaluation process carried out in 2005, EADS
will critically assess the results over the course of 2006. As
a result of the ongoing monitoring activities of the IC andRM systems’ effectiveness, such as the self-assessments
and the Internal Audit’s review, further enhancements
and modifications to the IC and RM systems are expected
throughout 2006. These enhancements and modifications
are intended to ensure that EADS continues to operate inaccordance with global best IC and RM practices.

Procurement
A group with the size and complexity of EADS requires
a common sourcing policy to maximize market effort
and minimize inefficiencies in the procurement process.
To ensure that corporate sourcing is carried out in an
efficient and ethical manner, a set of common purchasing
processes, in line with a common sourcing strategy, isdefined and implemented by the head of Corporate Sourcing
and the Procurement Directors Board.

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2.2 Interests of Directors
and Principal Executive Officers
2.2.1 Compensation Granted to Directors and Principal Executive Officers
EADS’ remuneration policy aims at attracting and retaining
talents that will contribute to the Group’s business success.
The compensation policy is therefore designed to focus
efforts on what the Group wants to value and reward.
The Board of Directors is composed of Non-Executive
Directors and Executive Directors (who are also membersof the Executive Committee).

Compensation of the Directors
The Non-Executive Directors are entitled to receive an
accumulated total target compensation as a group of NonExecutive Directors on a full year basis of €900,000. Thistarget compensation includes (i) a fixed part of €30,000 per
director and €60,000 per chairman, (ii) a fee for participationin Board of Directors’ meetings and Committee meetings(if such Committee meetings take place on a different
date than the Board of Directors’ meetings) of €5,000 per
director and €10,000 per chairman, per meeting and (iii) avariable part composed of a profit sharing calculated, on thebasis of EBIT* (75%) and cash (25%) results of the Group,of €50,000 per director and €100,000 per chairman at
100% target achievement. The rules for the profit sharing
calculation on the basis of EBIT* (75%) and cash (25%) resultsof the Group for the Non-Executive Directors are thesame as for the members of the Executive Committee (seebelow “— Compensation of the Members of the Executive
Committee”). The Non-Executive Directors do not havetermination packages.
The Executive Directors receive neither fees for participationin Board of Directors’ meetings nor any dedicatedcompensation as members of the Board of Directors in
addition to their compensation as members of the Executive
Committee (see below “— Compensation of the Membersof the Executive Committee”). The Executive Directors are

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eligible for benefits under stock option plans (see “2.3.3
Options Granted to Employees”) and under employee shareownership plans in their capacity as qualifying employees(see also “2.3.2 Employee Share Offering”). Additionally, theExecutive Directors are entitled to pension benefits.
The amounts of the various components constituting thecompensation granted to Executive Directors and NonExecutive Directors during 2005 together with additional
information such as the number of stock options and detailsof the pension benefits entitlements of the Executive
Directors are set out in “Notes to the Company Financial
Statements — Note 9: Remuneration”.
The Executive Directors are also entitled to a termination
package when they leave the Company as a result of adecision of the Company. The employment contracts for
Executive Directors are concluded for an indefinite termwith an indemnity of up to a maximum of 24 months of
their target income. The maximum 24 months indemnity canbe reduced prorata depending on the age of retirement.

Compensation of the Membersof the Executive Committee
The members of the Executive Committee, including
Executive Directors but also members of the Executive
Committee who are not members of the Board of Directors,
are entitled to receive for the year 2005 an accumulated total
target compensation on a full year basis of €10,654,987. Thistarget compensation is calculated pro rata for the Executive
Directors present in the Company on 31 December 2005.
This compensation is divided for the Chief Executive
Officers into a 45% fixed part and a 55% variable part and forthe other Executive Directors into a 50% fixed part and a 50%
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3targets). The variable part is calculated on the basis of two
equal components: (i) a profit sharing calculated on the basisof EBIT* (75%) and cash (25%) results of the Group and(ii) a bonus corresponding to individual achievements.
The total compensation paid by EADS and all its Group
companies to the two former Chief Executive Officers of
the Company, Mr. Philippe Camus and Mr. Rainer Hertrich,during the year 2005 was €1,948,941 each. Under the termsof their employment contracts, the former CEOs were also
entitled to a termination package of €2,550,000 each (i.e., 18
months of total target income).
The total compensation paid by EADS and all its Group
companies to the two new Chief Executive Officers of theCompany, Mr. Thomas Enders and Mr. Noël Forgeard,
during the year 2005 was €450,000 each.

2.2.2 Options Granted to the Two Chief Executive Officers
See “2.3.3 Options Granted to Employees”.

2.2.3 Related Party Transactions
EADS being a company incorporated under Dutch law,
Articles L.225-38 to L.225-43 and L.225-86 to L.225-91 of
the French Code de Commerce on related party transactions
are not applicable to it.
Article 2:146 of the Dutch Civil Code provides as follows:“Unless the articles of association provide otherwise, acompany (naamloze vennootschap) shall be represented byits board of supervisory directors in all matters in which it
has a conflict of interest with one or more of the membersof its Board of Directors. The shareholders’ meeting shallat all times have powers to designate one or more persons
for this purpose”. In the case of EADS, the Articles of
Association do provide otherwise since they enable the Boardof Directors to have power to represent the Company inmatters where the Company has a conflict of interest with
one or more members of the Board of Directors.
During the year 2005, no agreement was entered into by theCompany with one of its directors or principal officers ora shareholder holding more than 5% of the voting rights of
the Company outside the ordinary course of business and in
conditions other than arm’s length conditions.

For a description of the relationships between the
Company and its principal shareholders, see “Part 2 / 3.3.2
Relationships with Principal Shareholders”. Other than
the relationships between the Company and its principal
shareholders described in Part 2 / 3.3.2, to the Company’s
knowledge, there are no potential conflicts of interest
relative to the Company between the duties of the Directors
and their respective private interests or other duties.
As indicated in “Part 2 / 3.1.3.1 Ongoing Disclosure
Obligations”, according to Article 35 of the Spanish
Securities Market Act 24 / 1988, of 28th July 1988, as
amended (the “Spanish Securities Act”) and Order
EHA / 3050 / 2004 of 15th September, the Company must
provide detailed information, including, without limitation,
the number and amount of the transactions, in relation to
every transaction carried out with any related party in thehalf-yearly information which the Company is required tofile with the Comisión Nacional del Mercado de Valores(the “CNMV”) and the Spanish Stock Exchanges, without
prejudice to information to be included in the annual
Corporate Governance report to be filed with the CNMV
on an annual basis (the “Annual Corporate Governancereport” pursuant to the Ministry of Economy Order

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2.2 Interests of Directors and Principal Executive Officers

33722 / 2003 dated 26th December 2003 (the “Ministerial
Order”)).
Pursuant to the Spanish Securities Act, the Company has toprovide detailed information about transactions carried out

with (i) directors which are outside the ordinary activity of
the Company or which are not in market conditions; and(ii) any related party which are material due to their amountor for an adequate understanding of the public economic
information.

2.2.4 Loans and Guarantees Granted to Directors
EADS has not granted any loans to its Directors or members of the Executive Committee.

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3

2.3 Employee Profit Sharing and Incentive Plans
2.3.1 Employee Profit Sharing and Incentive Agreements
EADS’ remuneration policy is strongly linked to theachievement of individual and Company objectives, bothfor each Division and for the overall Group. A stock option
plan has been established for the senior management of
the Group (see “2.3.3 Options Granted to Employees”) andemployees were offered shares at favourable conditions at
the time of the public offering and listing of EADS
(see “2.3.2 Employee Share Offering”).
EADS France has profit sharing plans (accords departicipation), in accordance with French law, and specificincentive plans (accords d’intéressement), which provide

bonuses to employees based on the achievement of
productivity, technical or administrative milestones.
EADS Deutschland GmbH’s remuneration policy is, to alarge extent, flexible and strongly linked to the EBIT* ofthe company, the increase in value of the company and theachievement of individual objectives.
EADS CASA, which does not have a profit sharing policy,
allows technicians and management to receive profit-related
pay, subject to the achievement of the general company
objectives and individual performance.

2.3.2 Employee Share Offering
As part of its initial public offering, EADS offered toqualifying employees approximately 1.5% of its total sharecapital after the global offering. This employee offeringof up to 12,222,385 shares included an option allowing
qualifying employees to leverage their investment in theshares they purchased. Under this option, the investment
consisted of the amount paid plus an amount resulting froma swap agreement of the investment management company
for this option, that equalled nine times such amount paid.
Qualifying employees were offered shares at a price of€15.30, being the price for the retail offering, less a discountof 15%.
The employee offering was open only to employees who:
• had at least three months’ seniority;• had French, German or Spanish employment contracts; and• were employed by companies incorporated under French,
German or Spanish law in which EADS held (i) the
majority of the share capital or (ii) at least 10% of the sharecapital, provided such minority-owned companies were
designated as eligible by EADS.

Depending on whether the employee purchased sharesthrough a French, German or Spanish plan, directly or via
a mutual fund, the employee is restricted from selling theshares for one of the following lock-up periods: 18 months,
three years, five years or six years.
A total number of 11,769,259 shares were subscribedfor in the employee offering. Shares were delivered on
21st September 2000.
In October 2001, EADS offered to qualifying employees amaximum of 0.25% of its total issued share capital before theoffering. This employee offering was for up to 2,017,894
shares of a nominal value of €1 each.
The employee offering (note d’opération préliminaire
approved by the COB (former name of the Autorité desmarchés financiers (the “AMF”)) on 8th October 2001
under number 01-1200 and note d’opération définitive
approved by the COB on 13th October 2001 under number
01-1209) was open only to employees who:
• had at least three months’ seniority;

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3• were employed by (i) EADS or (ii) one of its subsidiaries
or (iii) a company in which EADS holds at least 10%of the share capital and over whose management it has
a determining influence and whose registered office islocated in South Africa, Germany, Brazil, Canada, Spain,
the United States, the United Kingdom, France, Italy,
Morocco, Mexico and Singapore.
The employee offering was divided into two tranches:• shares subscribed for by qualifying employees in Group
employee savings plan were offered for a price of€10.70 per share;• shares subscribed for by qualifying employees directly
were offered for a price of €10.70 per share.
The employees are generally restricted from selling theshares offered in this employee offering for one year andsometimes more in certain countries.
A total number of 2,017,894 shares were subscribedfor in the employee offering. Shares were delivered on
5th December 2001.
In October 2002, EADS offered to qualifying employees amaximum of 0.25% of its total issued share capital before theoffering. This employee offering was for up to 2,022,939
shares of a nominal value of €1 each.
The employee offering (note d’opération préliminaire
approved by the COB on 30th September 2002 under
number 02-1062 and note d’opération définitive approved by
the COB on 11th October 2002 under number 02-1081) was
open only to employees who:
• had at least three months’ seniority;• were employed by (i) EADS or (ii) one of its subsidiaries
or (iii) a company in which EADS holds at least 10%of the share capital and over whose management it has
a determining influence and whose registered office islocated in Germany, Brazil, Canada, Spain, the UnitedStates, the United Kingdom, France, Italy, Mexico andSingapore.
The employee offering was divided into two tranches:• shares subscribed for by qualifying employees in Group
employee savings plan were offered for a price of€8.86 per share;

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were offered for a price of €7.93 per share.
The employees are generally restricted from selling theshares offered in this employee offering for one year andsometimes more in certain countries.
A total number of 2,022,939 shares were subscribedfor in the employee offering. Shares were delivered on
4th December 2002.
In October 2003, EADS offered to qualifying employees amaximum of 0.25% of its total issued share capital before theoffering. This employee offering was for up to 2,027,996
shares of a nominal value of €1 each.
The employee offering (note d’opération approved by the
COB on 25th September 2003 under number 03-836) was
given only to employees who:
• had at least three months’ seniority;• were employed by (i) EADS or (ii) one of its subsidiaries or(iii) a company in which EADS holds at least 10%of the share capital and over whose management it has
a determining influence and whose registered office
is located in Germany, Belgium, Canada, Spain,
the United States, the United Kingdom, France, Ireland,
Mexico, the Netherlands and Singapore.
The employee offering was divided into two tranches:• shares subscribed for by qualifying employees in Group
employee savings plan were offered for a price of€12.48 per share;• shares subscribed for by qualifying employees directly
were offered for a price of €12.48 per share.
The employees are generally restricted from selling theshares offered in this employee offering for one year andsometimes more in certain countries.
A total number of 1,686,682 shares were subscribedfor in the employee offering. Shares were delivered on
5th December 2003.
In October 2004, EADS offered to qualifying employees amaximum of 0.25% of its total issued share capital before theoffering. This employee offering was for up to 2,018,000
shares of a nominal value of €1 each.

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3

The employee offering (note d’opération approved by the
AMF on 10th September 2004 under number 04-755) was
given only to employees who:
• had at least three months’ seniority;• were employed by (i) EADS or (ii) one of its subsidiaries
or (iii) a company in which EADS holds at least 10%of the share capital and over whose management it has
a determining influence and whose registered office islocated in Germany, Belgium, Canada, Spain, the UnitedStates, the United Kingdom, France, Ireland, Mexico,
the Netherlands, Singapore, Australia and Finland.
The employee offering was divided into two tranches:• shares subscribed for by qualifying employees in Group
employee savings plan were offered for a price of€18 per share;• shares subscribed for by qualifying employees directly
were offered for a price of €18 per share.
The employees are generally restricted from selling theshares offered in this employee offering for one year andsometimes more in certain countries.
A total number of 2,017,822 shares were subscribedfor in the employee offering. Shares were delivered on
3rd December 2004.
In June 2005, EADS offered to qualifying employees amaximum of 0.25% of its total issued share capital before theoffering. This employee offering was for up to 2,025,000
shares of a nominal value of €1 each.
The employee offering (note d’opération approved by the
AMF on 4th May 2005 under number 05-353) was given
only to employees who:
• had at least three months’ seniority;• were employed by (i) EADS or (ii) one of its subsidiaries
or (iii) companies in which EADS holds at least 10% of
the share capital and over whose management it has adetermining influence and whose registered offices arelocated in Germany, Australia, Belgium, Canada, Spain,
the United States, Finland, France, the United Kingdom,
Ireland, Mexico, the Netherlands, Poland and Singapore.
The employee offering was divided into two tranches:• shares subscribed for by qualifying employees in Group
employee savings plan were offered for a price of €18.86
per share;• shares subscribed for by qualifying employees directly
were offered for a price of €18.86 per share.
The employees are generally restricted from selling theshares offered in this employee offering for one year andsometimes more in certain countries.
A total number of 1,938,309 shares were subscribedfor in the employee offering. Shares were delivered on
29th July 2005.

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3

2.3.3 Options Granted to Employees
At its 26th May 2000, 20th October 2000, 12th July 2001,
9th August 2002, 10th October 2003, 8th October 2004
and 9th December 2005 meetings, the Board of Directorsof the Company, using the authorisation given to it by theshareholders’ meetings of 24th May 2000, 10th May 2001,

6th May 2003 and 11th May 2005 approved the grantingof stock options for subscription of shares in the Company.
The principal characteristics of these options as at
31st December 2005 are summarised in the table below:

First tranche

Second tranche

Date of General Meeting

24th May 2000

24th May 2000

Date of Board meeting
Number of options that were
granted26th May 2000

20th October 2000

5,324,884

240,000

Number of options outstanding
2,440,381
104,350
Of which: shares that may be
subscribed by directors andofficers
720,000
60,000Total number of eligible
employees
Approximately 850
34
50% of options may be exercised after a period of two years 50% of options may be exercised after a period of two years
Date from which the options
and four weeks from the date of grant of the options; 50% and four weeks from the date of grant of the options; 50%
may be exercised

Date of expirationof options may be exercised as of the third anniversaryof the date of grant of the options (subject to specificprovisions contained in the Insider Trading Rules —see “Part 2 / 3.1.3 Governing Law — Dutch Regulations”).

of options may be exercised as of the third anniversaryof the date of grant of the options (subject to specificprovisions contained in the Insider Trading Rules —see “Part 2 / 3.1.3 Governing Law — Dutch Regulations”).

Tenth anniversary of the date of grant of the options

Tenth anniversary of the date of grant of the options€20.90€20.902,179,019

119,650

Third tranche

Fourth tranche

Exercise price
Number of options exercised

Date of General Meeting

10th May 2001

10th May 2001

Date of Board meeting
Number of options that were
granted12th July 2001

9th August 2002

8,524,250

7,276,700

5,288,723

4,359,189– Mr. Philippe Camus*

135,000

135,000– Mr. Rainer Hertrich*– the 10 employees having
being granted the highest
number of options during theyear 2001 (third tranche) and2002 (fourth tranche)
Total number of eligible
beneficiaries
Date from which the options
may be exercised

135,000

135,000

738,000

808,000

Approximately 1,650

Approximately 1,562

Number of options outstanding
Of which: shares that may be
subscribed by:Date of expiration

50% of options may be exercised after a period of two years 50% of options may be exercised after a period of two years
and four weeks from the date of grant of the options; 50% and four weeks from the date of grant of the options; 50%of options may be exercised as of the third anniversaryof options may be exercised as of the third anniversaryof the date of grant of the options (subject to specificof the date of grant of the options (subject to specificprovisions contained in the Insider Trading Rules —provisions contained in the Insider Trading Rules —see “Part 2 / 3.1.3 Governing Law — Dutch Regulations”). see “Part 2 / 3.1.3 Governing Law — Dutch Regulations”).

Tenth anniversary of the date of grant of the options

Tenth anniversary of the date of grant of the options€24.66€16.96

2,069,027

2,672,036

Exercise price
Number of options exercised
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3

Fifth tranche

Date of General Meeting

Sixth tranche

6th May 2003

6th May 2003

Date of Board meeting
Number of options that may be
subscribed

10th October 2003

8th October 2004

7,563,980

7,777,280

Number of options outstanding
Of which: shares that may be
subscribed by:

6,493,005

7,699,060– Mr. Philippe Camus*

135,000

135,000– Mr. Rainer Hertrich*– the 10 employees having
being granted the highest
number of options during theyear 2003 (fifth tranche) and2004 (sixth tranche)
Total number of eligible
beneficiaries

135,000

135,000

808,000

808,000

Approximately 1,491

Approximately 1,495

Date from which the options
may be exercised

50% of options may be exercised after a period of two years 50% of options may be exercised after a period of two years
and four weeks from the date of grant of the options; 50% and four weeks from the date of grant of the options; 50%of options may be exercised as of the third anniversaryof options may be exercised as of the third anniversaryof the date of grant of the options (subject to specificof the date of grant of the options and when applicable,
provisions contained in the Insider Trading Rules — subject to certain performance conditions (subject to specificsee “Part 2 / 3.1.3 Governing Law — Dutch Regulations”).
provisions contained in the Insider Trading Rules —see “Part 2 / 3.1.3 Governing Law — Dutch Regulations”).

Date of expiration

Tenth anniversary of the date of grant of the options Tenth anniversary of the date of grant of the options

Exercise price€15.65€24.32

Number of options exercised

885,125

0Seventh tranche

Date of General Meeting

11th May 2005

Date of Board meeting
Number of options that were
granted

9th December 2005
7,981,760

Number of options outstanding
Of which: shares that may be
subscribed by:

7,981,760– Mr. Thomas Enders*

135,000– Mr. Noël Forgeard*– the 10 employees having
being granted the highest
number of options during theyear 2005 (seventh tranche)
Total number of eligible
beneficiaries
Date from which the options
may be exercised

135,000

Date of expiration

940,000
Approximately 1,608
50% of options may be exercised after a period of two years
and four weeks from the date of grant of the options; 50%of options may be exercised as of the third anniversaryof the date of grant of the options and when applicable,
subject to certain performance conditions (subject to specificprovisions contained in the Insider Trading Rules —see “Part 2 / 3.1.3 Governing Law — Dutch Regulations”)

Tenth anniversary of the date of grant of the options

Exercise price
Number of options exercised€33.910(*) For more information in respect of options granted to the Executive Directors,
see “Notes to the Company Financial Statements — Note 9: Remuneration”.

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3

For information in respect of options cancelled and exercised
during the year, see “Notes to the Consolidated Financial
Statements (IFRS) — Note 31: Share-based Payment”.

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For information on the transactions carried out by themembers of the Board of Directors and the Executive
Committee see EADS’s website and / or the relevant stock
exchange authorities’ website.

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3

Outlook

3.1 2006 Financial Outlook

p. 1603.2 2006 Calendar of Financial
Communication

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1Outlook2

3.1 2006 Financial Outlook

3

3.1 2006 Financial Outlook
Revenues
The anticipated progression of Airbus deliveries in 2006, and higher volume from its combined defence businesses, areexpected to result in increased 2006 revenues as compared to 2005.

EBIT*
EADS anticipates that in 2006 it will experience higher Airbus sales volume and that improvements will be made in operational
efficiencies across all of its business divisions, despite expected higher research and development costs and the continuing U.S.
Dollar headwind arising from the maturity of less attractive hedges. Consequently, EADS expects that its EBIT* in the 2006
financial year will increase as compared to its EBIT* in 2005.

Cash
EADS’ cash flow generation was strong in 2005. Despite the planned build up of inventories related to the aircraft delivery
ramp-up (particularly for the A380) in 2006, EADS’ believes that Free Cash Flow before Customer Financing will remainrobust in 2006.

EPS
Based on an anticipated average of shares for 2006 and on a U.S. Dollar 2006 year-end closing rate similar to the closing rate in2005, EADS believes that its EPS in the 2006 financial year will increase as compared to 2005.

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1Outlook2

3.2 2006 Calendar of Financial Communication3

3.2 2006 Calendar of Financial Communication2005 Annual Results Release: 8th March 2006
Annual General Meeting: 4th May 2006
First Quarter 2006 Results Release: 16th May 2006
First Half 2006 Results Release: 27th July 2006
Global Investor Forum: 21st and 22nd September 2006
Third Quarter 2006 Results Release: 8th November 2006

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Designed & Produced by:

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