Thales — Interim / Quarterly Report 2010

Jul 29, 2010

Half-yearly financial report >

2010

Report on business activity Consolidated financial statements

www.thalesgroup.com

Half-yearly financial report - - June 2010

Half-yearly financial report June 2010

TABLE OF CONTENTS

	Report on 2010 first-half business activity and results ……………….5
	o Order intake ……………………………………….………………………	6
	o Revenues …………………………………………………………………	8
	o Results ………………………………………………………………………	10
	o Financial situation at 30 June 2010 ……………………………………	13
	o Recent events ……………………………………	13
	o Related party transactions ……………………………………………	14
	o Major risk and uncertainties in the second half of 2010 fiscal year … 14
	o Views for the year …………………………………………………………….	14
	o Appendix ……………………………………………………………… 15
	Consolidated financial statements at 30 June 2010 …………	19
	o Consolidated profit and loss account ……………………………………… 20
	o Consolidated statement of comprehensive income …………………	21
	o Consolidated balance sheet ……………………………………	22
	o Consolidated statement of cash flows …………………………………	23
	o Consolidated statement of change in equity ……………………………	24
	o Notes to the consolidated financial statements ………………………… 25
	o Statutory auditors' report …………………………………………………	41

Half-yearly financial report - - June 2010

Declaration by person responsible for the halfyearly financial report

"I certify that, to the best of my knowledge, the summarised financial statements at 30 June 2010 have been prepared in accordance with applicable accounting standards and give a fair view of the assets, liabilities, financial position and results of the company and of all the entities taken as a whole included in the consolidation, and that the attached half-yearly business report presents a fair view of the significant events that occurred during the first six months of the financial year, their impact on the financial statements, the main related party transactions as well as a description of the main risks and uncertainties for the remaining six months of the financial year."

Neuilly-sur-Seine, 29 July 2010

Luc Vigneron Chairman & Chief Executive Officer

Report on 2010 first-half business activity and results

• Revenues: €5.96 billion, an increase of +4% (+1% organic increase¹ )
• Order intake: €5.14 billion, a decrease of -12% (-14% organic decrease¹ ), after two very good years in 2008 and 2009, benefiting from a strong intake of orders of unit value over €100 million
• EBIT² : €204 million (3.4% of revenues) compared with €68 million in first half of 2009
• Net income, Group share: €138 million compared with €12 million in first half of 2009

The Board of Directors of Thales met on 28 July 2010 to review the results for the first half of 2010. The Group's Chairman and Chief Executive Officer, Luc Vigneron, said: "With growing pressure on public spending in Europe and North America, our first-half results are fully in line with what we expected at the beginning of the year. Thales has begun to turn around its results and continues to be focused on improving performance and deploying a dynamic growth strategy in emerging countries' economies."

Key figures at 30 June 2010 (in millions of euros)	H1 2010	H1 2009	Total change	Organic change
Order intake	5,144	5,860	-12%	-14%
Order book	24,903	24,7313	+1%	-3%
Revenues	5,955	5,744	+4%	+1%
EBIT (after restructuring)	204	68	+199%	+134%
% of revenues	3.4%	1.2%
Net income, Group share	138	12
Net debt	595	886

¹ In this report, "organic" means "on a like-for-like basis and with constant exchange rates".

² Before impact of purchase price allocation (PPA) (see details in appendix).

³ At 31 December 2009.

Order intake

New order intake for the first half of 2010 amounted to €5,144 million, down 12% (-14% organically) compared with the same period of 2009, which benefited from large orders, in particular on export markets. The book-to-bill ratio stood at 0.86 at 30 June 2010. Exchange rate variations had a positive impact of €119 million on order intake, €67 million of which was related to changes in the value of the Australian dollar.

The order intake figures include three orders with a unit value of more than €100 million: two satellites for an affiliate of Gazprom in Russia, a logistic support contract for the Watchkeeper UAV programme in the United Kingdom, and a major order for in-flight entertainment systems. Orders with a unit value of less than €100 million, which had been the most affected by the economic environment in 2009, recorded a slight upturn in the first half of 2010.

At 30 June 2010, the consolidated order book stood at €24,903 million, which is practically the same as at 31 December 2009 and continues to represent approximately 23 months of revenues.

2010 first-half order intake (in millions of euros)	H1 2010	H1 2009	Total change	Organic change	Book to-bill
Defence & Security	2,605	3,104	-16%	-19%	0.76
Aerospace & Transport	2,514	2,731	-8%	-9%	1.00
Other and divested businesses	25	25	N/A	N/A
Order intake	5,144	5,860	-12%	-14%	0.86

Order intake by business¹

Defence & Security order intake amounted to €2,605 million, 16% lower than in the first half of 2009 (-19% organically). Overall, after the very strong order intake in 2009 (partly as a result of national stimulus plans), the expected pressure on defence orders was confirmed in the first half of 2010. Air Operations recorded a substantial reduction in order intake at 30 June, with the Asian orders for civil radars that were booked in the first quarter only partly offsetting the absence of major military orders (in the first half of 2009, the Air Operations business had booked the replication contracts on the LOC1 programme with NATO and the GM400 contracts with Finland). New orders for C4I Systems were also substantially lower than in the first half of 2009, when order intake had been particularly high (with the Mexico City urban security project and several communication system contracts in export markets). Nevertheless, order intake by the critical

¹ refer to appendix for the definition of the business segments

information systems business stabilised in the first half of 2010. By contrast, growth in order intake was particularly strong in Defence Mission Systems, with the Watchkeeper integrated logistic support contract and the Rafale modernisation and support contracts. Land Defence order intake was also higher, with several new optronics orders.

Aerospace & Transport orders amounted to €2,514 million, a 8% decrease (-9% organically) compared with the same period of 2009, but the book-to-bill ratio nevertheless remains at 1. Despite orders for four new satellites, including two for Gazprom, space orders declined markedly compared with the first half of 2009, when several major contracts (Globalstar, Cygnus) had been awarded. The contract with Iridium in the United States for an 81-satellite constellation is not included in the orders of this first-half, as it is expected to be effective only in the second half of 2010 once financing arrangements have been finalised. Transportation System orders were also markedly lower than in the first half of 2009, when this business had booked major contracts (North-South Railway contract in Saudi Arabia, high-speed train lines in Spain), and despite the award of a contract to upgrade signalling systems on New York's Flushing Line. In contrast, the Avionics business saw a strong increase in order intake, with good momentum in in-flight entertainment systems (B787 for Qatar Airways, B777 for Saudi Arabian Airlines), higher orders for helicopter avionics, and an improvement in tubes and medical imaging systems.

2010 first-half order intake (in millions of euros)	H1 2010	H1 2009	Total change	Organic change	Book to-bill
Area A	1,766	1,311	+35%	+24%	0.85
Area B	1,067	1,522	-30%	-31%	0.90
France	2,308	3,024	-24%	-24%	0.86
Other and divested businesses	3	3	N/A	N/A
Order intake	5,144	5,860	-12%	-14%	0.86

Order intake by geographical area of origin¹

In Area A, order intake stood at €1,766 million at 30 June 2010, an increase of 35% (24% organically) over the first half of 2009. A particularly significant increase in new orders was recorded in the United States, with the contracts for in-flight entertainment systems and upgrades to the New York subway mentioned above. Order intake in the Netherlands rose sharply, with the signing of several new naval support contracts. By contrast, order intake in the United Kingdom was slightly lower than in the first half of 2009, despite the support contract for the Watchkeeper UAV system.

¹ refer to appendix for the definition of the geographical areas

In Area B, order intake stood at €1,067 million at 30 June 2010, a decrease of 30% (-31% organically) over the first half of 2009, when Saudi Arabia and Spain had booked several major orders for signalling systems (North-South Railway and Mecca metro in Saudi Arabia, high-speed rail lines in Spain), which were only partly offset by the Porto metro contract in Portugal and the Bangalore metro contract in India booked in 2010. By contrast, naval and air traffic management contracts pushed order intake higher in Germany. New orders booked in Italy were significantly lower because of a relative decrease in space orders (the Cygnus contract for the International Space Station had been booked in 2009).

New orders in France fell, as expected, with first-half order intake amounting to €2,308 million, a decrease of -24% compared with the same period of 2009, when French units had booked a number of major orders (several satellites, the Mexico City urban security contract, GM400 radars for Finland, and the LOC1 replications). Nevertheless, in addition to several satellite orders, a significant flow of smaller contracts was recorded in the first half. These include systems for combat aircraft, optronics, defence communications, avionics for military helicopters, civil radars, and tubes and medical imaging systems.

Revenues

Consolidated revenues amounted to €5,955 million at 30 June 2010, compared with €5,744 million at 30 June 2009, an organic increase of +4% (+1% organically). Exchange rate fluctuations impacted revenues by +€158 million, primarily as a result of the conversion into euros of the revenues of subsidiaries based outside the euro zone. The main fluctuations involved the strengthening of the Australian dollar (+€71 million), the Canadian dollar (+€25 million), the US dollar and sterling against the euro. Changes in the scope of consolidation¹ impacted revenues by +€16 million.

Revenues by business

H1 2010 revenues (in millions of euros)	H1 2010	H1 2009	Total change	Organic change
Defence & Security	3,401	3,338	+2%	-1%
Aerospace & Transport	2,520	2,369	+6%	+4%
Other and divested businesses	34	37	N/A	N/A
Revenues	5,955	5,744	+4%	+1%

¹ Consolidation of CMT Medical Technologies from 1 July 2009, and of 50% of Sapura Thales Electronics from 1 June 2010

Defence & Security revenues amounted to €3,401 million compared with €3,338 million for the first half of 2009, representing a 2% increase (-1% in organic terms). Land Defence systems revenues remained stable, despite lower sales by the missiles business. C4I Systems revenues were also stable, despite lower business volumes in tactical radios in the United States and a persistently difficult climate in critical information systems. Defence Mission Systems revenues also fell slightly, with lower billings on the Rafale programme and despite growth in sonar revenues (FREMM and NH90 in France, ALFS in the United States). By contrast, the Air Operations business recorded strongly higher revenues following the orders booked last year (GM400 radars, LOC1 replication contracts).

Aerospace & Transport revenues amounted to €2,520 million, up 6% (4% organically) compared with the first half of last year. Overall space revenues were stable. The Transportation Systems business recorded higher revenues, in particular as a result of billings on the rail contracts booked last year in Saudi Arabia. Avionics revenues were also higher as the result of an uptick in billings for in-flight entertainment systems, which offset lower sales for regional aircraft (and to a lesser extent for Airbus, with a combined contract mix and pricing effect), and continuing softness in support markets. Increased revenues of tubes and imaging systems, reflecting the recent upturn in orders in these short-cycle activities, contributed to the revenue growth in avionics.

H1 2010 revenues (in millions of euros)	H1 2010	H1 2009	Total change	Organic change
Area A	2,073	1,869	+11%	+3%
Area B	1,184	1,097	+8%	+6%
France	2,695	2,773	-3%	-3%
Other and divested businesses	3	5	N/A	N/A
Revenues	5,955	5,744	+4%	+1%

Revenues by geographical area of origin

In Area A , revenues amounted to €2,073 million, up 11% (3% organically) compared with the first half of 2009. Growth was particularly strong in the United Kingdom, the United States and the Netherlands. The increase in revenues in the United Kingdom was driven by higher billings on the FSTA tanker aircraft contract, among others. In the United States, where revenues were markedly higher, increases in in-flight entertainment and air traffic management offset the decrease in tactical radios. Finally, the Netherlands recorded a strong increase in revenues as a result of higher billings on naval contracts with Morocco and Denmark.

In Area B, revenues amounted to €1,184 million, up 8% (6% organically) compared with the first half of 2009. The improvement was driven by Italy and Saudi Arabia, while revenues in Germany were stable. Revenues also grew in Italy, driven by billings on the Dubai metro programme. In Saudi Arabia, the increase in revenues reflects billings on the transport contracts signed the year before. These positive developments offset lower revenues in Spain, where Transportation Systems billings had been particularly high in 2009 as a result of the high-speed rail contracts.

In France, revenues decreased slightly (-3%) to €2,695 million. Revenues from airborne systems, optronics and avionics units fell significantly, largely because of contract milestones on defence programmes and the persistently poor climate in commercial aviation. Space revenues were practically identical as work continued on the Yahsat programme in the United Arab Emirates and the Globalstar constellation project. By contrast, solid revenue growth was recorded by French units active in sonar (with projects in France and the United States), surface radar (NATO projects, COOPANS air traffic management project in Europe), military simulation, and tubes and imaging systems.

Results

EBIT¹ stood at €204 million, or 3.4% of revenues, compared with 68 M€ (1.2% of revenues) for the same period of last year. This three-fold increase in EBIT mainly reflects lower negative cost variances on contracts compared with the same period of 2009, particularly in Aerospace & Transport.

The introduction of more stringent criteria for capitalising research and development expenses reduces EBIT margin by approximately 0.5 percentage points. Restructuring costs amounted to €47 million, or 0.8% of revenues, compared with €42 million (0.7% of revenues) for the first half of 2009.

EBIT by business

EBIT H1 2010 (in millions of euros)	H1 2010	H1 2009	Total change	Organic change
Defence & Security	207	192	+8%	+5%
in % of revenues	6.1%	5.8%
Aerospace & Transport	7	-106	ns	ns
in % of revenues	0.3%	-4.5%
Other and divested businesses	-10	-18	N/A	N/A
EBIT	204	68	+199%	+134%
en % of revenues	3.4%	1.2%

¹ Before impact of purchase price allocation (PPA)

Defence & Security recorded EBIT of €207 million, which represents 6.1% of revenues and a 8% increase (5% organically) over the first half of 2009. This slight overall increase is a result of varied performances by the individual segments making up the Defence & Security business. In C4I Systems, profitability was affected by lower volumes in tactical communications in the United States, the difficult climate in critical information systems, the progressive ramp-up of the civil security activities and higher research and development costs. Land Defence systems also recorded lower profitability for the first half of 2010 as a result of the lower sales by the missiles business mentioned above, as well as high marketing and sales expenses and research and development costs recorded during this period. By contrast, Air Operations improved profitability as a result of higher volumes, particularly in air traffic control. Profitability also strongly improved at Defence Mission Systems compared with the first half of 2009, when large provisions had been booked for naval electronic warfare contracts and the Meltem maritime patrol and surveillance programme for Turkey.

Aerospace & Transport recorded positive EBIT of €7 million (0.3% of revenues), compared with a loss of €-106 million for the first half of 2009. This return to profitability essentially results from the significant reduction of losses in Avionics thanks to a sharp drop in negative cost variances on contracts (a charge of €-102 million had been booked at 30 June 2009 for the A400M programme). Lower negative cost variances on ticketing contracts also led to a significant improvement in the profitability of the Transportation Systems businesses, despite restructuring costs in France and lower profitability from signalling activities. Finally, the profitability of the space businesses continued to improve, reflecting a better contract mix.

EBIT H1 2010 (in millions of euros)	H1 2010	H1 2009	Total change	Organic change
Area A	95	75	+28%	+18%
in % of revenues	4.6%	4.0%
Area B	49	70	-30%	-35%
in % of revenues	4.1%	6.4%
France	62	-61	ns	ns
in % of revenues	2.3%	-2.2%
Other and divested businesses	-2	-16
EBIT	204	68	+199%	+134%
in % of revenues	3.4%	1.2%

EBIT by geographical area of origin

Area A recorded EBIT of €95 million (4.6% of revenues), an increase of 28% (18% organically). This improvement was driven by the United States, the Netherlands and Canada. In the United States and the Netherlands, the improvement in EBIT was primarily the result of higher business volumes (in-flight entertainment, naval), while ebbing development costs in civil aeronautics boosted profitability in Canada.

Area B recorded EBIT of €49 million (4.1% of revenues), a decrease of 30% (35% in organic terms) compared with the first half of 2009, with good performance in Italy only partly offsetting lower profitability in Spain and Germany and an increase of €11 million in restructuring charges.

France recorded EBIT of €62 million (2.3% of revenues), compared with a loss of €-61 million in the first half of 2009. Most of this improvement is the result of a sharp reduction in negative cost variances on contracts compared with the first half of 2009. In addition, profitability was markedly higher in the space business and, to a lesser extent, in the tubes and medical imaging systems business. These improvements were nonetheless offset by the persistently unfavourable business climate in civil aeronautics, and by the reduction, as expected, of business volumes in several segments of the defence market (military avionics and onboard systems, optronics, support, missile electronics).

Income of operating activities includes a €35 million charge for the award handed down on 3 May 2010 in the arbitration against the Republic of China Navy (Taiwan)¹ , as well as a capital gain of €33 million related to the sale of the 20% stake held by Thales in Camelot Group plc¹ , the operator of the UK national lottery

***

Net financial expense amounted to €-34 million, which is significantly lower than in the first half of 2009 (€-60 million), particularly as a result of exchange rate fluctuations in highly volatile currency markets. Other components of pension charges amounted to €-38 million, compared with €-59 million for the first half of 2009, when a non-recurring expense of €17 million had been recognised for the United Kingdom. Equity in income of unconsolidated affiliates² remained practically unchanged at €30 million, compared with €29 million at 30 June 2009.

Net income, Group share³ for the first half of 2010 increased substantially to €138 million (compared with €12 million for the first half of 2009), after a tax expense¹ of €12 million (compared with tax income² of €33 million for the first half of 2009).

¹ See below, "Recent events"

² Before impact of purchase price allocation (PPA)

³ Before impact of purchase price allocation (PPA)

Financial situation at 30 June 2010

Free operating cash flow¹ for the first half of the year stood at €-457 million, compared with €-20 million for the first half of 2009. This evolution results from the impact of a €-187 million net increase of late payments by the French Ministry of Defence (after sale of receivables) compared with the first half of 2009 and of early inflows of cash of about €200 million, initially scheduled for early 2010 but received at the end of 2009.

At 30 June 2010, net debt stood at €595 million, compared with €91 million at the end of December 2009, but was still lower than at 30 June 2009 (€886 million), and shareholders' equity (excluding minority interests) amounted to €3,807 million, compared with €3,895 million at 30 June 2009. Thales has access to confirmed, undrawn bank credit lines for an amount of €1,500 million maturing at end-2011 with no prepayment provisions linked to ratings or financial covenants. Despite being downgraded recently by one notch by Standard & Poors and Moody's, the long-term ratings of Thales (BBB+/A2, outlook stable) continue to reflect a high-quality financial profile and put the Group on a footing that is similar to or higher than its peers.

Recent events

Arbitration against the Republic of China Navy (Taiwan)

Thales has been notified of the award handed down on 3 May 2010 in the arbitration against the Republic of China Navy (Taiwan). This award was made as a result of an alleged breach of the terms pertaining to the use of intermediaries contained in a contract entered into in 1991 by Thomson-CSF (now Thales) for the supply of six Lafayette frigates to Taiwan.

The total amount of the award is set at US\$482 million and €82 million bearing interest as from August 2001, as well as around €15 million bearing interest as from 3 May 2010, i.e. a total of around €630 million (including interest).

The company has filed a petition for nullity with the Paris Court of Appeal.

The Thales share in this litigation represents 27.463% of the total, and corresponds to its industrial share in the supply contract. In view of the provisions booked earlier, an additional amount of €35 million (before tax) has been recorded in the financial statements at 30 June 2010.

¹ Operating cash flow plus changes in working capital requirement (WCR) and reserves for contingencies, less payment of pension benefits (excluding deficit payments on pensions in the UK), less tax, less net operating investments: see details in annex

Sale of interest in Camelot Group plc (United Kingdom)

At the end of June 2010, the United Kingdom's National Lottery Commission approved the sale of Thales's 20% interest in Camelot Group plc, the operator of the UK national lottery, to the Canadian pension fund Ontario Teachers Pension Plan. A capital gain of €33 million has been recognised in the accounts at 30 June 2010.

Related party transactions

Main related party transactions are disclosed in the notes to 2009 consolidated financial statements (note 19) included in the annual report.

Revenues with French Government amounted to € 870 million in the first half of 2010 (€ 900 million in the first half of 2009).

At 30 June 2010, overdue receivables bearing interests from the French defense procurement agency amounted to € 450 million (€ 45 million at 31 December 2009).

Major risk and uncertainties in the second half of 2009 fiscal year

Compared with the risks and uncertainties described in the Directors ' report on year 2008 (« B. Risk factors», page 15 and following), no relevant evolution has been recorded except in relation with the arbitration procedure mentioned above.

Views for the current financial year

With continuing uncertainty in the global economy, growing pressure on public spending and a still fragile commercial aeronautics sector, Thales's performance is fully in line with the full-year guidance given at the start of the year.

EBIT has markedly recovered, largely due to a sizeable reduction in negative cost variances on contracts, which had significantly affected the Group's profitability in 2009. However, uncertainties remain on a number of complex aeronautical and ticketing programmes and, in particular, as to the outcome of ongoing discussions with the Turkish defence ministry on the Meltem project, and with Airbus on the A400M programme. These could have a material impact on the results of these programmes during the current financial year.

Overall, Thales confirms its expectations for the full year: stable revenues, lower order intake compared with the very high level achieved in 2009, and an EBIT margin of between 3% and 4%.

APPENDIX

> Segment definitions

Businesses

Defence& Security:	Defence & Security C4I systems, Defence Mission Systems, Land
	Defence, Air Operations
Aerospace & Transport:	Avionics, Transportation Systems, Space

Geographical areas

Area A:	USA, Canada, UK, Netherlands, Norway, South Korea, Australia, Northern and Central
	Europe, Northern Asia
Area B	Germany, Austria, Switzerland, Italy, Spain, Singapore, Latin America, Rest of Europe,
	Middle East & Africa, West Asia, South Asia
France

> Order intake – H1 2010 by destination

(in millions of euros)	H1 2010	H1 2009	Total change	Organic change	H1 2010 in %
France	1,074	1,154	-7%	-7%	21%
UK	536	555	-3%	-6%	10%
Other European countries	1,436	1,754	-18%	-19%	28%
Total Europe	3,046	3,463	-12%	-13%	59%
North America	610	566	+8%	+4%	12%
Asia Pacific	693	678	+2%	-8%	13%
Near and Middle East	570	618	-8%	-8%	11%
Rest of world	225	535	-58%	-58%	5%
Total outside Europe	2,098	2,397	-12%	-16%	41%
Order intake	5,144	5,860	-12%	-14%	100%

> Consolidated revenues – H1 2010 by destination

(in millions of euros)	H1 2010	H1 2009	Total change	Organic change	H1 2010 en %
France	1,309	1,399	-6%	-7%	22%
UK	767	662	+16%	+13%	13%
Other European countries	1,530	1,556	-2%	-2%	26%
Total Europe	3,606	3,617	-0%	-1%	61%
North America	590	546	+8%	+4%	10%
Asia Pacific	820	734	+12%	-2%	14%
Near and Middle East	600	532	+13%	+11%	10%
Rest of world	339	315	+8%	+6%	5%
Total outside Europe	2,349	2,127	+10%	+4%	39%
Consolidated revenues	5,955	5,744	+4%	+1%	100%

> Order book by destination – at 30 June 2010

in millions of euros	30 June 2010	31 Dec 2009	%
France	6,388	6,608	26%
UK	4,200	4,065	17%
Other European countries	5,952	5,990	23%
Total Europe	16,540	16,663	66%
North America	1,434	1,281	6%
Asia Pacific	3,203	3,072	13%
Near and Middle East	2,188	2,154	9%
Rest of world	1,538	1,561	6%
Total outside Europe	8,363	8,068	34%
Order book	24,903	24,731	100%

> Order book by business – at 30 June 2010

in millions of euros	30 June 2010	31 Dec 2009	Total change	Organic change
Defence & Security	15,032	15,223	-1%	-5%
Aerospace & Transport	9,801	9,408	+4%	+0%
Other and divested businesses	70	100	-30%	-36%
Total	24,903	24,731	+1%	-3%

> Impact of purchase price allocation (PPA)

in millions of euros	H1 2010 before PPA	PPA impact	H1 2010 published
Cost of sales	-4,706	--	-4,706
Amortisation of intangible assets acquired	--	-41	-41
EBIT	204	-41	164

Income tax	-12	14	1
Equity in income of unconsolidated affiliates	29	-4	25
Net income, Group share	138	-31	106

> Net cash flow – H1 2010

in millions of euros	H1 2010	H1 2009
Operating cash flow	390	197
Change in WCR and contingency reserves	-633	42
Payment of pension benefits and scheme settlements	-35	-35
Income tax paid	-38	-46
Net operating cash flow	-316	158
Net operating investments	-141	-178
of which capitalised R&D	18	48
Free operating cash flow	-457	-20
Net (acquisitions)/disposals	-5	-149
Deficit payments on pensions in the UK	-32	-28
Dividends	-98	-205
Net cash flow	-592	-402

Half-yearly financial report - - June 2010

CONSOLIDATED FINANCIAL STATEMENTS AT 30 JUNE 2010

CONSOLIDATED PROFIT AND LOSS ACCOUNT

(€ Million)

		2010	2009	2009
	Notes	First half	First half	Full year
Revenues	note 5	5,955.5	5,743.6	12,881.5
Cost of sales		(4,705.6)	(4,692.4)	(10,633.4)
Research and development expenses		(274.3)	(254.9)	(550.5)
Marketing and selling expenses		(459.6)	(439.7)	(901.9)
General and administrative expenses		(265.0)	(253.6)	(543.4)
Restructuring costs		(46.6)	(42.2)	(116.1)
Amortisation of intangible assets recognised at fair value on
business combination	note 13	(40.8)	(42.2)	(84.4)
Income from operations/EBIT	note 5	163.6	18.6	51.8
Impairment of non current operating assets	note 6	(4.1)	(5.3)	(260.1)
Gain (loss) on disposal of assets and other	note 7	(7.4)	5.6	(1.0)
Income of operating activities		152.1	18.9	(209.3)
Financial interest on gross debt		(40.9)	(47.9)	(91.6)
Financial income from cash at bank and equivalents		10.6	14.8	26.0
Cost of net financial debt		(30.3)	(33.1)	(65.6)
Other financial income (expense)	note 8	(4.0)	(27.4)	(44.9)
Other components of pension charge	note 9	(38.2)	(58.5)	(105.1)
Income tax	note 10	1.4	50.0	175.3
Share in net income (loss) of equity affiliates	note 14	25.4	24.7	48.0
Net income (loss)		106.4	(25.4)	(201.6)
Of which :
Net income (loss), Group share		106.4	(25.3)	(201.8)
Non controlling interests		--	(0.1)	0.2
Basic earnings per share (in euros)	note 11	0.54	(0.13)	(1.03)
Diluted earnings per share (in euros)	note 11	0.54	(0.13)	(1.03)

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(€ Million)
-------------	--

		2010 First half	2009 First half			2009 Full year
	Group Share	Non controlling interests	Group Share	Non controlling interests	Group Share	Non controlling interests
Net income (loss)	106.4	--	(25.3)	(0.1)	(201.8)	0.2
Cumulated translation adjustment, excluding hedge impact Net foreign investments' hedge	226.0 (3.2)	0.7 --	129.9 (4.9)	0.5 --	119.1 (3.8)	0.6 --
Deferred tax	1.1 223.9	-- 0.7	1.5 126.5	-- 0.5	1.3 116.6	-- 0.6
Cash flow hedge Deferred tax	(273.2) 89.9 (183.3)	(0.1) -- (0.1)	61.1 (18.3) 42.8	-- -- --	70.8 (19.4) 51.4	-- -- --
Financial assets available for sale Deferred tax	(5.3) --	-- --	-- --	-- --	1.5 --	-- --
Total other comprehensive income (loss), net of tax	(5.3) 35.3	-- 0.6	-- 169.3	-- 0.5	1.5 169.5	-- 0.6
Total comprehensive income (loss) for the period	141.7	0.6	144.0	0.4	(32.3)	0.8

CONSOLIDATED BALANCE SHEET

(€ Million)

ASSETS	Notes	30/06/10	31/12/09
Goodwill, net	note 12	3,017.0	2,986.9
Other intangible assets, net	note 13	893.7	925.3
Tangible assets, net	note 13	1,369.0	1,338.3
Total non current operating assets		5,279.7	5,250.5
Share in net assets of equity affiliates	note 14	687.9	711.0
Available-for-sale investments		95.2	101.9
Loans and other financial assets		184.1	171.9
Total non current financial assets		967.2	984.8
Fair value of derivatives: interest rate risk management	note 17	36.2	24.8
Pension and other employee benefits	note 9	68.2	66.0
Deferred tax assets		812.6	678.0
Non current assets		7,163.9	7,004.1
Inventories and work in progress		2,490.8	2,210.8
Construction contracts: assets		2,427.6	2,243.2
Advances to suppliers		438.4	342.4
Accounts, notes and other current receivables		4,027.2	3,934.8
Fair value of derivatives: currency risk management		188.4	172.6
Total current operating assets		9,572.4	8,903.8
Current tax receivables		35.1	40.4
Receivable on disposal of Camelot Group plc	note 2	92.0	--
Current accounts with affiliated companies	note 17	118.3	94.8
Marketable securities	note 17	8.5	4.4
Cash at bank and equivalents	note 17	2,021.6	1,960.1
Total current financial assets		2,240.4	2,059.3
Current assets		11,847.9	11,003.5
TOTAL ASSETS		19,011.8	18,007.6
LIABILITIES AND SHAREHOLDERS' EQUITY	Notes	30/06/10	31/12/09
Capital, paid-in surplus and other reserves		4,011.0	4,168.3
Cumulative translation adjustment		(59.3)	(283.2)
Treasury shares		(144.8)	(141.5)
Shareholders' equity		3,806.9	3,743.6
Non controlling interests		10.8	10.2
Total shareholders' equity and non controlling interests	note 15	3,817.7	3,753.8
Financial debt: long-term	note 17	1,655.8	1,651.6
Pension and other employee benefits	note 9	862.2	856.7
Deferred tax liabilities		244.1	258.6
Non-current liabilities		2,762.1	2,766.9
Advances received from customers on contracts		3,748.6	3,849.4
Refundable grants		170.5	172.8
Construction contracts: liabilities		961.0	882.7
Reserves for contingencies	note 16	1,225.3	1,129.8
Accounts, notes and other current payables		4,826.7	4,736.0
Fair value of derivatives: currency risk management		324.8	100.7
Total current operating liabilities		11,256.9	10,871.4
Current tax payables		50.9	92.2
Financial debt: short- term	note 17	943.3	326.4
Current accounts with affiliated companies	note 17	180.9	196.9
Total current financial liabilities		1,124.2	523.3
Current liabilities		12,432.0	11,486.9
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		19,011.8	18,007.6

CONSOLIDATED STATEMENT OF CASH FLOWS

(€ Million)

		2010	2009	2009
	Notes	First half	First half	Full year
Net income (loss)		106.4	(25.4)	(201.6)
Add (deduct):
Income tax expense (gain)		(1.4)	(50.0)	(175.3)
Share in net (income) loss of equity affiliates (net of dividends received)		(12.9)	(13.3)	(21.5)
Depreciation and amortisation of tangible and intangible assets	note 13	207.4	195.1	420.8
Provisions for pensions and other employee benefits	note 9	69.4	87.1	162.6
Impairment of non current operating assets	note 6	4.1	5.3	260.1
Gain (loss) on disposals of assets and other	note 7	7.4	(5.6)	1.0
Net allowances to restructuring provisions		(3.5)	(7.1)	12.1
Other items		13.5	10.8	26.6
Operating cash flows before working capital changes		390.4	196.9	484.8
Change in working capital requirements and in reserves for
contingencies (a)		(633.5)	42.1	924.6
Payment of contributions / pension benefits (defined benefit plans):	note 9	(66.3)	(62.1)	(156.2)
- deficit payment in the UK		(31.4)	(27.6)	(57.6)
- future service cash		(34.9)	(34.5)	(98.6)
Income tax (paid) received		(38.0)	(45.9)	(98.2)
Net cash flows from operating activities	- I -	(347.4)	131.0	1,155.0
Capital expenditure	note 18-a	(144.4)	(180.4)	(418.9)
Proceeds from disposal of tangible and intangible assets		3.4	2.1	5.8
Net operating investments		(141.0)	(178.3)	(413.1)
Acquisitions	note 18-b	(6.1)	(141.9)	(148.0)
Disposals	note 18-b	0.9	(6.9)	--
Change in loans		(12.3)	13.9	4.1
Change in current accounts with affiliated companies		(11.1)	(3.6)	(32.0)
Decrease (increase) in marketable securities		(3.3)	10.2	24.0
Net financial investment		(31.9)	(128.3)	(151.9)
Net cash flows from investing activities	- II -	(172.9)	(306.6)	(565.0)
Dividends paid Increase (decrease) in shareholders' equity and non controlling interests	note 18-c	(97.7) 0.3	(204.7) 10.3	(204.7) 21.6
Increase in debt		852.8	922.4	1,125.2
Repayment of debt		(274.4)	(423.9)	(1,103.9)
Net cash flows from financing activities	- III -	481.0	304.1	(161.8)
Effect of exchange rate variations	- IV -	100.8	52.2	32.1
Total increase (decrease) in cash at banks and equivalents	I+II+III+IV	61.5	180.7	460.3
Cash at banks and equivalents at beginning of period Cash at banks and equivalents at end of period		1,960.1 2,021.6	1,499.8 1,680.5	1,499.8 1,960.1

(a) Including changes in proceeds from sale of government non-recourse receivables (€ +157.9 million in the first half of 2010, € -58.1 million in the first half of 2009 and € -50.1 million in 2009). The 2010 first half increase is directly linked to late payments by the French defence procurement agency (note 20).

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

AND NON CONTROLLING INTERESTS

First half 2010 :

	Number of shares outstanding	Share capital	Paid-in surplus	Retained earnings	Cash Flow hedge	AFS invest -ments	Cumulative Treasury translation adjustment	shares	Share- holders' equity	Non controlling interests	Total
At 1 January 2010	(thousands) 195,467	597.1	3,655.3	(197.3)	107.7	5.5	(283.2)	(141.5)	3,743.6		10.2 3,753.8
Net income (loss)	--	--	--	106.4	--	--	--	--	106.4	--	106.4
Other comprehensive income (loss)	--	--	--		-- (183.3)	(5.3)	223.9	--	35.3	0.6	35.9
Total comprehensive income (loss) first half 2010	--	--	--		106.4 (183.3)	(5.3)	223.9	--	141.7	0.6	142.3
Capital increase	50	0.1	1.3	--	--	--	--	--	1.4	--	1.4
Dividends (a)	--	--	--	(97.7)	--	--	--	--	(97.7)	--	(97.7)
Share based payments (note 15-b)	--	--	--	8.7	--	--	--	--	8.7	--	8.7
Changes in treasury shares	(177)	--	--	(1.9)	--	--	--	(3.3)	(5.2)	--	(5.2)
Other	--	--	--	6.3	--	--	--	--	6.3	(0.2)	6.1
Changes in scope of consolidation	--	--	--	6.7	1.4	--	--	--	8.1	0.2	8.3
Total transactions with shareholders	(127)	0.1	1.3	(77.9)	1.4	--	--	(3.3)	(78.4)	--	(78.4)
At 30 June 2010	195,340	597.2	3,656.6	(168.8)	(74.2)	0.2	(59.3)	(144.8)	3,806.9		10.8 3,817.7

First half 2009 :

	Number of shares outstanding	Share capital	Paid-in surplus	Retained earnings	Cash Flow hedge	AFS invest -ments	Cumulative translation adjustment	Treasury shares	Share- equity	Non holders' controlling interests	Total
At 1 January 2009	(thousands) 194,981	596.2	3,647.8	194.6	56.3	4.0	(399.8)	(150.2)	3,948.9		2.9 3,951.8
Net income (loss)	--	--	--	(25.3)	--	--	--	--	(25.3)	(0.1)	(25.4)
Other comprehensive income (loss)	--	--	--	--	42.8	--	126.5	--	169.3	0.5	169.8
Total comprehensive income (loss) first half 2009	--	--	--	(25.3)	42.8	--	126.5	--	144.0	0.4	144.4
Capital increase	36	0.1	0.9	--	--	--	--	--	1.0	--	1.0
Dividends (a)	--	--	--	(204.7)	--	--	--	--	(204.7)		-- (204.7)
Share based payments (note 15-b)	--	--	--	9.6	--	--	--	--	9.6	--	9.6
Changes in treasury shares	(14)	--	--	(0.4)	--	--	--	--	(0.4)	--	(0.4)
Other	--	--	--	(3.2)	--	--	--	--	(3.2)	0.2	(3.0)
Changes in scope of consolidation	--	--	--	--	--	--	--	--	--	0.8	0.8
Total transactions with shareholders	22	0.1	0.9	(198.7)	--	--	--	--	(197.7)		1.0 (196.7)
At 30 June 2009	195,003	596.3	3,648.7	(29.4)	99.1	4.0	(273.3)	(150.2)	3,895.2		4.3 3,899.5

(a) Dividends per share amounted to € 0.50 in 2010 and € 1.05 in 2009.

(€ Million)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

All amounts included in these notes are expressed in € million except for per share data.

On 28 July 2010 the Board of Directors approved, and authorised for issue, Thales' condensed interim consolidated financial statements for the period ended 30 June 2010. Thales is a listed French société anonyme, registered with the Nanterre registrar of companies (Registre du Commerce et des Sociétés de Nanterre) under the number 552,059,024.

1. ACCOUNTING POLICIES

1.1) Condensed interim consolidated financial statements

The condensed interim consolidated financial statements at 30 June 2010 have been prepared in accordance with IAS 34 "Interim financial reporting" and with IFRS standards as approved by the European Union at 30 June 2010 (available on the following intranet address: http://ec.europa.eu/internal_market/accounting/ias_fr.htm).

The condensed interim consolidated financial statements are prepared using accounting policies which are identical to those used to prepare the full-year financial statements at 31 December 2009 exept for the changes described in 1.2

The measurement procedures used for the condensed interim consolidated financial statements are the followings:

• Pension provisions

The figures used to determine the pension provisions are based on an extrapolation at 30 June 2010 of the actuarial valuation performed at 31 December 2009 without any change in the actuarial assumptions.

• Income taxes

For interim accounts, the tax charge (current and deferred) is calculated by applying, company by company, the annual estimated average tax rate for the current tax year.

• Impairment of goodwill

For interim accounts, impairment tests performed at the end of the previous year are updated to take into account changes in recoverable amounts and in net assets at the end of the period. Impairment that may be recognised in the first half of the year is not reversible.

1.2) New IFRS standards and interpretations

• Application of the revised standards IFRS 3 et IAS 27 from 1 January 2010:

The IFRS 3 – Business Combinations – and IAS 27 – Consolidated and Separate Financial Statements – revised standards as adopted by European Union on June 3, 2009 are effective from 1 January 2010.

The standards IFRS 3 and IAS 27 revised are applied prospectively. Deals completed prior to 1 January 2010 are not restated. Business combinations completed prior to 1 January 2010, were accounted for in accordance with the principles described in note 1-b – Business combinations included in the notes to the Group consolidated financial statements (2009 Annual Report page 34).

Accounting principles applicable from now on for transactions within the scope of these standards are described hereafter:

Acquisition method (purchase accounting) :

• Business combinations are accounted for using the acquisition method. Under this method:
• the identifiable assets acquired and liabilities assumed are measured at fair value at the acquisition date,
• the non-controlling interests are measured either at fair value or at the non-controlling interests' proportionate share in the acquiree's net identifiable assets. This option is available on a transaction bytransaction basis.
• Acquisition-related costs are recognised in profit and loss as incurred (and no more included in goodwill).
• Any contingent consideration assumed in a new business combination is measured at fair value at the acquisition date even if it is not probable. Subsequent changes to the fair value of the contingent

consideration beyond twelve months from the acquisition date will be recognised in the profit and loss account (and no longer included in the Goodwill) if the contingent consideration is a financial liability.

Goodwill :

• At the acquisition date, the goodwill is measured as the difference between:
• the fair value of the consideration transferred, plus the amount of any non-controlling interests in the acquiree; and
• the net fair value of the identifiable assets acquired and the liabilities assumed on the acquisition date.
• Goodwill can be adjusted within the twelve months following the acquisition date to take into account the final estimate of the acquired assets and liabilities recognised.
• Negative goodwill is immediately recognised in "other operating income (expense)". Goodwill related to controlled enterprises is recognised in balance sheet assets under the "intangible assets" caption. Goodwill related to companies accounted for under the equity method is recognised under the "share in net assets of equity affiliates" caption.
• Goodwill is not amortised but is subject, each year, to impairment test. Goodwill impairment is booked as an expense in the line "impairment of non current operating assets" and cannot be reversed.
• Goodwill impairment related to equity affiliates is accounted for in "share in net income (loss) of equity affiliates" and can be reversed.

Deferred tax :

• If the potential benefit of the acquiree's income tax loss carry-forwards or other deferred tax assets does not satisfy the criteria for separate recognition when a business combination is initially accounted for, but is subsequently realized, the acquirer will recognise the resulting deferred tax income in profit or loss. Goodwill is no more adjusted consequently. This new rule applies from 1 January 2010 to all business combinations (including those prior to 2010).

Changes in a parent's ownership interest in a subsidiary:

• An acquirer must remeasure any equity interest it holds in the acquiree immediately before achieving control at its acquisition-date fair value and recognise the resulting gain or loss, if any, in profit or loss.
• Loss of control is accounted for in gain or loss on disposal which is calculated on the whole stake at the operation date. The residual stake is kept and revalued at its fair value through the profit and loss account when the loss of control occurred.
• Changes in a parent's ownership interest in a subsidiary that do not result in a change of control is accounted for as changes in equity, with no impact on profit or loss account.

• Other IFRS standards and IFRIC interpretations applicable from 1 January 2010:

The new IFRS and interpretations effective from 1 January 2010, listed in note 1 – Accounting policies of the Group consolidated financial statements (2009 Annual Report pages 33 and 34), had no material impact on the Group condensed interim consolidated financial statements at 30 June 2010.

• Early application of standards:

The Group has not early adopted standards and interpretations that are not yet mandatory effective at 1 January 2010.

1.3) Seasonality of business

In accordance with accounting policies, revenues are recognised, as at year end, over the period of their realisation.

In previous years the level of business has been highest in the last quarter, particularly in the month of December. The seasonality of the business has led to revenues and income from operations being generally lower in the first half of the year. The company has noted that this phenomenon is of a recurring nature, even if its extent varies from year to year.

2. MAIN EVENTS

a) Main events of 2010 first half

In December 2009, Thales announced a new organisation to simplify its operations, foster transverse synergies and commercial reactivity, and to increase performance.

The Group's organisation structure is now a two-dimensional matrix by Division and by Area. Divisions are in charge of defining business strategies and priorities of research and development, product policy and industrial policy worldwide, in line with the long-term profitability objectives set by Corporate. The two main businesses are as follows:

• Defence and Security (Defence & Security C4I systems, Defence Mission Systems, Land Defence and Air Operations);
• Aerospace and Transport (Avionics, Space and Transportation Systems).

Areas are responsible for implementing these global strategies and policies in line with the Group's shortterm profitability objectives. Their remit also includes the management of the commercial relationship with local customers and order intakes, revenues and results for these activities. Three Geographic Areas have been delimited:

• Area A: USA, Canada, UK, Netherlands, Norway, South Korea, Australia, Northern and Central Europe and Northern Asia
• Area B: Germany, Austria, Switzerland, Italy, Spain, Singapore, Latin America, Southern Europe, Middle East & Africa, West & South Asia
• France

Segment information is provided in note 5.

b) Changes in scope of consolidation

In First Half 2010:

At the end of June 2010, the United Kingdom's National Lottery Commission approved the sale of Thales's 20% stake in Camelot Group Plc, the operator of the Brithish lottery, to the Canadian pension fund Ontario Teachers' Pension Plan. In its 2010 half-year financial consolidated statements, Thales accounted for a € 33.3 million gain on disposal and a € 92 millions receivable paid in cash early in July 2010.

No other significant change occurred during the first half of 2010.

In 2009:

In February 2009, Thales bought for € 20.3 million, via a tender offer, a 94.6% stake in CMT Medical Technologies Ltd, an Israeli company specialised in medical imaging. This company is consolidated as from 1st July 2009¹ .

In accordance with the contractual agreements, the purchase price of Alcatel Alenia Space shares was reassessed in 2009 in the context of a procedure involving all the parties. This procedure led Thales to pay an additional purchase consideration of € 129.6² million to Alcatel-Lucent in May 2009. This additional payment is recorded as a goodwill increase in the financial consolidated statements.

The shareholders' agreement dated 30 January 2007 between the French State and Thales gives Thales the possibility to increase its stake in DCNS from 25% to 35%, through the exercise of a call option. This option can be exercised during a three-year period as from 29 March 2009. At 30 June 2010, the value of this option is not significant.

The agreement also contains contingent remuneration clauses related to certain contracts being obtained and to certain conditions of operational performance, which are not applicable at 30 June 2010.

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

² This additional purchase consideration was determined on the basis of a valuation of 67% of Thales Alenia Space shareholders' equity of € 724.5 million, which represents an additional amount of € 124.5 million in excess of the € 600 million initial fixed price, plus € 5.1 million financial interests.

3. ADJUSTED CONSOLIDATED PROFIT AND LOSS ACCOUNT

In order to monitor and compare the Group's economic performances, the consolidated profit and loss accounts is restated from the adjustment entries related to the Purchase Price Allocation (PPA) recognised through significant business combinations.

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

The effect of PPA over the three disclosed periods is analysed as follows:

	2010	2009	2009
	First half	First half	Full year
Cost of sales	--	(7.4)	(14.8)
Amortisation of intangible assets acquired	(40.8)	(42.2)	(84.4)
Income from operations	(40.8)	(49.6)	(99.2)
Deferred tax	13.8	16.8	33.6
Share in net income (loss) of equity affiliates	(4.1)	(4.1)	(8.2)
Net Income (Loss)	(31.1)	(36.9)	(73.8)

The adjusted profit and loss account over the three disclosed periods can be analysed as follows:

	2010 First half	2009 First half	2009 Full year
Revenues	5,955.5	5,743.6	12 881,5
Cost of sales	(4,705.6)	(4,685.0)	(10,618.6)
Research and development expenses	(274.3)	(254.9)	(550.5)
Marketing and selling expenses	(459.6)	(439.7)	(901.9)
General and administrative expenses	(265.0)	(253.6)	(543.4)
Restructuring costs	(46.6)	(42.2)	(116.1)
Income from operations	204.4	68.2	151.0
Impairment of non current operating assets	(4.1)	(5.3)	(260.1)
Gain (loss) on disposal of assets and other	(7.4)	5.6	(1.0)
Income of operating activities	192.9	68.5	(110.1)
Financial interest on gross debt	(40.9)	(47.9)	(91.6)
Financial income from cash and equivalents	10.6	14.8	26.0
Cost of net financial debt	(30.3)	(33.1)	(65.6)
Other financial income (expense)	(4.0)	(27.4)	(44.9)
Other components of pension charge	(38.2)	(58.5)	(105.1)
Income tax	(12.4)	33.2	141.7
Share in net income (loss) of equity affiliates	29.5	28.8	56.2
Net income (loss)	137.5	11.5	(127.8)
Of which :
Net income (loss), Group share	137.5	11.6	(128.0)
Non controlling interests	--	(0.1)	0.2

4. INFORMATION ON A LIKE-FOR-LIKE BASIS WITH CONSTANT EXCHANGES RATES

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

	2009 First Half adjusted	Change in scope of consolidation (a)	Exchange rate variation (b)	Organic growth	2010 First Half adjusted
Revenues Cost of sales	5,743.6 (4,685.0)	15.6 (7.9)	157.5 (119.1)	38.8 106.4	5,955.5 (4,705.6)
Research and development expenses Marketing and selling expenses General and administrative expenses Restructuring costs	) (254.9) (439.7) (253.6) (42.2)	(2.1) -- (0.7) --	(4.3) (8.0) (8.4) (0.7)	(13.0) (11.9) (2.3) (3.7)	(274.3) (459.6) (265.0) (46.6)
Income from operations	68.2	4.9	17.0	114.3	204.4

(a) Companies acquired in 2010 first half and 2009 second half are excluded from the restated 2010 profit and loss account.

Companies sold in 2009 are excluded from 2009 restated results. The accounts of companies sold in 2010 first half have been restated in order to impact profit and loss for an identical period in 2010 and in 2009.

(b) The exchange rate change is determined as follows: 2009 first half results of foreign subsidiaries are translated at 2010 first half average exchange rates. The exchange difference thus obtained is adjusted to take into account the effect of changes in currency rates on transactions denominated in a different currency from the subsidiary's functional currency.

5. SEGMENT INFORMATION

As described in note 2, from the beginning of 2010, the Group's organisation structure is a twodimensional matrix by Division and by Area. The chief operating decision maker reviews regularly their operating performances.

In accordance with IFRS 8, the Group has decided to report segment financial information by operating divisions because they are the basis of the Group strategy.

These divisions are combined in two main businesses:

• Defence & Security, whose customer base is primarily governments (States, public agencies…), includes Defence & Security C4I systems, Defence Mission Systems, Land Defence and Air Operations divisions.

• Aerospace & Transport, whose customers are mainly civilian (infrastructure operators, aircraft manufacturers), includes Avionics, Space and Transportation Systems divisions.

Information presented hereafter follow the same accounting standards as those used in the financial consolidated statements. Only adjustment entries related to the Purchase Price Allocation (PPA) recognised through significant business combinations are excluded from income from operations reviewed. Operating income consequently corresponds to the adjusted consolidated income from operations, as described in note 3.

a) Information by business sectors

2010 First Half	Aerospace and Transport	Defence and Security	Other, elim and non allocated (a)	Total Segment and other	PPA	Thales
Consolidated order backlog at 30 June Consolidated new order	9,800.5 2,513.5	15,031.6 2,605.4	71.1 24.8	24,903.2 5,143.7	-- --	24,903.2 5,143.7
Consolidated revenues Inter-segment revenues	2,519.7 34,3	3,400.6 130,3	35.2 (164,6)	5,955.5 --	-- --	5,955.5 --
Total revenues	2,554.0	3,530.9	(129.4)	5,955.5	--	5,955.5
Income from operations (b)	7.1	207.4	(10.1)	204.4	(40.8)	163.6

2009 First Half restated	Aerospace and Transport	Defence and Security	Other, elim and non allocated (a)	Total Segment and other	PPA	Thales
Consolidated order backlog at 30 June Consolidated new order	9,523.7 2,730.9	14,257.3 3,104.4	40.0 25.0	23,821.0 5,860.3	-- --	23,821.0 5,860.3
Consolidated revenues Inter-segment revenues	2,369.0 45,9	3,338.1 161,6	36.5 (207,5)	5,743.6 --	-- --	5,743.6 --
Total revenues	2,414.9	3,499.7	(171.0)	5,743.6	--	5,743.6
Income from operations (b)	(106.3)	192.4	(17.9)	68.2	(49.6)	18.6

• (a) The "Other, eliminations and non allocated amounts" column corresponds to the elimination of transactions between the two operating segments and includes figures relating to corporate activities: Group R&D activities, facilities management, holding companies and businesses sold during the prior year. The income from operations non-allocated includes the corporate income from operations which is not billed to segments, the cost of vacant premises and the expense related to share-based payments.
• (b) Group income from operations includes tax credits related to research expenses amounting to € 71.9 million in the first half of 2010 and € 70.1 million in the first half of 2009.

On the first half 2009, the income from operations has been mainly impacted by higher estimated development costs for the A400M flight management system, leading to a further provision of €102m.

In the financial statements of 2009, Thales made a specific communication on that point and about the Meltem programme on maritime patrol and surveillance aircrafts with the Turkish Ministry of Defence, in the note 16 of the consolidated financial statements

At the end of June 2010, uncertainties remain on a number of complex aeronautical and ticketing programmes and, in particular, as to the outcome of ongoing discussions with the Turkish defence ministry on the Meltem project, and with Airbus on the A400M programme. These uncertainties could have a material impact on the results of these programmes during the current financial year.

b) Information by geographical areas

2010 First Half	Area A	Area B	France	Other, elim and non allocated (a)	Total areas and other	PPA	Thales
Consolidated order backlog at 30 June	8,960.4	4,399.1	11,543.6	0.1	24,903.2	--	24,903.2
Consolidated new order	1,766.1	1,066.8	2,308.4	2.4	5,143.7	--	5,143.7
Consolidated revenues Inter-areas revenues	2,073.0 131.8	1,184.0 158.5	2,695.4 358.3	3.1 (648.6)	5,955.5 --	-- --	5,955.5 --
Total revenues	2,204.8	1,342.5	3,053.7	(645.5)	5,955.5	--	5,955.5
Income from operations	95.5	49.2	62.0	(2.3)	204.4	(40.8)	163.6

2009 First Half restated	Area A	Area B	France	Other, elim and non allocated (a)	Total areas and other	PPA	Thales
Consolidated order backlog at 30 June	8,257.1	4,371.5	11,190.7	1.7	23,821.0	--	23,821.0
Consolidated new order	1,311.2	1,521.7	3,023.5	3.9	5,860.3	--	5,860.3
Consolidated revenues	1,868.6	1,097.1	2,772.6	5,3	5,743.6	--	5,743.6
Inter-areas revenues	92.6	157.3	362.3	(612.2)	--	--	--
Total revenues	1,961.2	1,254.4	3,134.9	(606.9)	5,743.6	--	5,743.6
Income from operations	74.5	70.4	(61.2)	(15.5)	68.2	(49.6)	18.6

(a) The "other, eliminations and non allocated amounts" column corresponds to the elimination of transactions between the three areas and includes figures related to Thales (parent company), Thales International Offset, and Thales International S.A. In addition, the income from operations which is not allocated includes the cost of sharebased payment.

Geographic Areas are as follows:

• Area A: USA, Canada, UK, Netherlands, Norway, South Korea, Australia, Northern and Central Europe and Northern Asia
• Area B: Germany, Austria, Switzerland, Italy, Spain, Singapore, Latin America, Southern Europe, Middle East & Africa, West & South Asia
• France

•

c) Revenues (direct and indirect) by country / region of destination :

	2010 First Half	2009 First Half
France	1,308.6	1,399.2
United Kingdom	767.4	661.5
Rest of Europe	1,529.7	1,555.8
North America	590.2	545.8
Middle East	599.7	531.8
Asia and Pacific	820.1	734.4
Africa and Latin America	339.8	315.1
Total	5,955.5	5,743.6

6. IMPAIRMENT ON ASSETS

	2010	2009	2009
	First Half	First Half	Full Year
Development costs (a)	--	--	(240.0)
Goodwill	(4.1)	(5.3)	(17.4)
Other tangible and intangible assets	--	--	(2.7)
Total	(4.1)	(5.3)	(260.1)

(a) Impairment losses for 2009 mainly included:

• € 158.3 million related to avionics for civil aircraft and the A400M.
• € 43.6 million related to in-flight entertainment activities.
• € 25.5 million related to simulation activities.

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

	2010 First Half	2009 First Half	2009 Full Year
Disposal of investments :	35.2	4.3	12.1
Minority investments of Telespazio	--	2.0	7.1
Camelot Group Plc (20% stake)	33.3	--	--
Other	1.9	2.3	5.0
Disposal of tangible and intangible assets : Real estate assets Other	(4.0) 1.1 (5.1)	1.3 -- 1.3	(3.0) -- (3.0)
Loss on the L'Aquila earthquake, net (a)	(3.6)	--	(10.1)
Additional provision on litigation (note 19)	(35.0)
Total	(7.4)	5.6	(1.0)

• (a) Thales Alenia Space's production site at L'Aquila (Italy) was seriously damaged by the earthquake of 7 April 2009. A temporary solution was implemented to progressively rebuild production capacities and to pursue work on programmes mainly in L'Aquila, but also in Rome and Milan. The Group share of the total net loss related to the disaster was recognised in 2009 and amounted to € -10.1 million, after taking into account insurance claims. An additional cost of € -3.6 million has been booked on the first half 2010.
• (b) Addtionnal provision relating to the award handed down on 3 May 2010, in the arbitration against the Republic of China Navy (Taiwan), as detailed in note 19.

8. OTHER FINANCIAL INCOME (EXPENSE)

	2010	2009	2009
	First Half	First Half	Full Year
Foreign exchange gains (losses)	(1.6)	(2.6)	(10 .5)
Change in fair value of foreign currency derivative instruments	--	(24.7)	(37.3)
Cash flow hedge inefficiency / foreign exchange instruments	(3.9)	(2.1)	(5.3)
Net foreign exchange gain (loss)	(5.5)	(29.4)	(53.1)
Net interest income (expense) on non-financial receivables and payables	5.5	3.5	6.0
Dividends received	3.7	3.4	6.1
Impairment of available-for-sale investments	(4.6)	(0.3)	--
Impairment of loans	(1.7)	--	0.9
Other	(1.4)	(4.6)	(4.8)
Total	(4.0)	(27.4)	(44.9)

9. PENSIONS AND OTHER EMPLOYEE BENEFITS

	2010 First Half	2009 First Half	2009 Full Year
Current service cost	(31.2)	(28.6)	(57.5)
Interest cost	(107.1)	(101.6)	(204.6)
Expected return on plan assets	80.2	72.2	140.5
Curtailments and settlements	--	(16.6)	(12.0)
Past service cost	(5.9)	(5.6)	(17.0)
Amortisation of actuarial gains(losses)	(5.4)	(6.9)	(12.0)
Other components of pension charge	(38.2)	(58.5)	(105.1)
Defined benefit plans: total cost	(69.4)	(87.1)	(162.6)

	2010 First Half	2009 First Half	2009 Full Year
Net provisions at 1 January	(790.7)	(803.5)	(803.5)
Defined benefit plans: total cost	(69.4)	(87.1)	(162.6)
Benefits and contributions	66.3	62.1	156.2
- Deficit payment in the UK - Future service cash	31.4 34.9	27.6 34.5	57.6 98.6
Exchange rate variation	(3.4)	(2.9)	(5.9)
Change in scope of consolidation and other	3.2	23.0	25.1
Net provisions at closing date	(794.0)	(808.4)	(790.7)
Of which: Assets	68.2	46.5	66.0
Liabilities	(862.2)	(854.9)	(856.7)

10. INCOME TAX

	2010	2009	2009
	First Half	First Half	Full Year
Net income (loss)	106.4	(25.4)	(201.6)
Less: income tax	(1.4)	(50.0)	(175.3)
Less: equity in income of unconsolidated affiliates	(25.4)	(24.7)	(48.0)
Profit before tax and unconsolidated affiliates	79.6	(100.1)	(424.9)
Average tax rate	27.0%	36.5%	38.1%
Theoretical tax income (expense)	(21.5)	36.5	161.9
Permanent differences	33.9	25.3	49.4
Variation of deferred tax assets non-recognised in the	(11.5)	(8.7)	(22.7)
balance sheet
Reduction of goodwill due to the recognition of deferred tax assets	--	(1.5)	(26.4)
Other	0.5	(1.6)	13.1
Income tax	1.4	50.0	175.3

11. EARNINGS PER SHARE

		2010 First Half	2009 Firs Half	2009 Full Year
Numerator (in millions of euros) : Net income (loss), group share Diluted net income (loss), group share	(a) (b)	106.4 106.4	(25.3) (25.3)	(201.8) (201.8)
Denominator (in thousands) : Average number of shares outstanding Share options Diluted average number of shares outstanding	(c) (d)	195,422 181 195,603	194,970 429 195,399	195,054 434 195,488
Earnings per share (in euros) Diluted earnings per share (in euros)	(a) / (c) (b) / (d)	0.54 0.54	(0.13) (0.13)	(1.03) (1.03)

12. GOODWILL

Following Thales new organisation, goodwills have been reallocated to new operating divisions. This reallocation has been performed on the basis of transferred activities or, if needed, using the related value method. This reallocation has no impact on impairment tests at 31 December 2009.

	31/12/09 Net	Acquisitions	Disposal	Impairment	Exch rate var. & other	30/06/10 Net
Avionics	352.9	--	--	--	3.4	356.3
Transportation Systems	871.0	--	--	--	0.1	871.1
Space	467.2	--	--	--	--	467.2
Aerospace and Transport	1,691.1	--	--	--	3.5	1,694.6
Defence & Security C4I Systems	566.7	--	--	(4.1)	18.8	581.4
Defence Mission Systems	411.4	--	--	--	6.3	417.7
Land Defence	269.1	--	--	--	4.0	273.1
Air Operations	40.6	--	--	--	1.2	41.8
Defence and Security	1,287.8	--	--	(4.1)	30.3	1,314.0
Other	8.0	--	--	--	0.4	8.4
Total	2,986.9	--	--	(4.1)	34.2	3,017.0

13. TANGIBLE AND INTANGIBLE ASSETS

	31/12/09 Net	Changes in scope	Acquisition	Disposal	Deprec.	Exch rate var. & other	30/06/10 Net
Customer relationships: long-term	320,9	--	--	--	(13.0)	0.6	308.5
Customer relationships : backlog	53.0	--	--	--	(12.4)	--	40.6
Acquired technologies	163.4	--	--	--	(14.6)	0.2	149.0
Other	13.3	--	--	--	(0.8)	1.1	13.6
Intangible assets acquired in the context of business combination	550.6	--	--	--	(40.8)	1.9	511.7
Development costs	253.7		18.3		(20.9)	11.9	263.0
Other	121.0	0.2	5.7	(0.4)	(15.0)	7.5	119.0
Intangible assets (excl. goodwill)	925.3	0.2	24.0	(0.4)	(76.7)	21.3	893.7
Tangible assets	1,338.3	0.8	120.4	(3.0)	(130.7)	43.2	1,369.0
Total	2,263.6	1.0	144.4	(3.4)	(207.4)	64.5	2,262.7

14. EQUITY IN UNCONSOLIDATED AFFILIATES

		Ownership %		Net equity		Income (loss)
	30 June	31 Dec.	30 June	31 Dec.	2010	2009	2009
	2010	2009	2010	2009	First Half	First	Full
						Half	Year
Aviation Communications & Surveillance Syst.	30	30	63.9	54.9	1.5	1.6	4.6
Camelot (sold in 2010 – note 2 )	--	20	--	50.0	3.4	4.3	6.4
DCNS	25	25	521.9	520.2	10.5	11.2	23.5
DpiX	20	20	19.5	16.4	0.2	1.1	1.3
Elettronica	33	33	34.3	30.4	4.0	3.4	6.1
Indra Espacio	33	33	16.8	16.3	0.5	1.0	1.2
Other	--	--	31.5	22.8	5.3	2.1	4.9
Total			687.9	711.0	25,4	24.7	48.0

15. SHAREHOLDERS' EQUITY

a) Share capital

At 30 June 2010, the share capital of Thales is comprised of shares with a par value of € 3. The share capital is presented below:

	30/06/10			31/12/09
	Number	%	% voting	Number	%	% voting
	of shares	capital	rights	of shares	capital	rights
T.S.A. and its subsidiary Sofivision	52,670,906	26.46%	41.25%	52,670,906	26.46%	41.60%
French State (including one golden share)	2,022	--	--	2,022	--	--
Sogepa	1,081,256	0.54 %	0.85 %	1,081,256	0.54 %	0.85 %
Public sector	53,754,184	27.00 %	42.10 %	53,754,184	27.00 %	42.45 %
Dassault Aviation	51,539,524	25.89%	20.18%	51,539,524	25.90%	20.35%
Thales	3,734,537	1.88 %	--	3,556,693	1.79 %	--
Employees	5,923,210	2.97%	4.59%	5,965,354	3.00 %	3.76 %
Other shareholders	84,122,772	42.26%	33.13%	84,208,177	42.31 %	33.44 %
Total number of Thales shares	199,074,227	100.00 %	100.00 %	199,023,932	100.00 %	100.00 %

b) Share-based payments

The Group measures the amount of the benefit granted to employees receiving purchase and subscription stock options and free shares. The fair value of such instruments, measured using a binomial model, is determined at the grant date. The amounts thus obtained are taken to profit and loss over the vesting period of the rights and the corresponding expense is included in the income from operations.

Expenses related to share-based payments ¹ :

Grant date	Initial number of options / shares	Fair value at grant date	Fair value at 30/06/10	2010 First Half expense	2009 First Half expense	2009 Full Year expense
01/07/03	3,034,200	(21.3)	--	--	--	--
01/07/04	2,638,750	(21.4)	--	--	--	--
30/06/05	2,201,500	(19.5)	--	--	0.2	0.2
09/11/06	2,223,950	(23.5)	(0.1)	0.5	1.6	2.8
04/07/07	1,654,530	(15.6)	(0.6)	0.7	1.9	3.3
01/07/08	1,688,076	(11.2)	(1.7)	1.0	2.9	6.1
25/11/08	71,700	(0.3)	(0.1)	0.1	0.1	0.2
25/06/09	1,600,340	(11.2)	(5.5)	2.6	0.1	3.3
Total options		(124.0)	(8.0)	4.9	6.8	15.9
04/07/07	312,435	(11.5)	(3.0)	1.5	1.6	3.1
01/07/08	317,705	(9.3)	(4.7)	1.2	1.2	2.4
25/06/09	334,980	(8.7)	(6.5)	1.1	--	1.1
Free shares		(29.5)	(14.2)	3.8	2.8	6.6
24/04/08	2,519,280	(5.0)	--	--	--	--
Company savings		(5.0)	--	--	--	--
Total		(158.5)	(22.2)	8.7	9.6	22.5

¹ Plans granted after 7 November 2002 (date of first application of the standard).

c) Treasury shares

Thales Parent Company held 3,734,537 of its own shares at 30 June 2010 (3,556,693 at 31 December 2009). In the consolidated financial statements, treasury shares are subtracted from consolidated shareholder's equity for an amount of € -144.8 million at 30 June 2010 (€ -141.5 million at 31 December 2009).

16. RESERVES FOR CONTINGENCIES

	31/12/09	Changes in exchange rates and other	Increase	Reversal	30/06/10
Restructuring	118.6	2.1	39.9	(43.4)	117.2
Provisions on contracts:	704.4	67.0	144.6	(132.4)	783.6
- Guarantees	248.1	10.5	39.5	(34.5)	263.6
- Litigation	210.8	23.7	43.8	(19.1)	259.2
- Estimated losses on long-term contracts	98.3	3.3	27.2	(45.2)	83.6
- Other	147.2	29.5	34.1	(33.6)	177.2
Other reserves for contingencies	306.8	5.1	47.0	(34.4)	324.5
Total	1,129.8	74.2	231.5	(210.2)	1, 225.3

17. NET FINANCIAL DEBT

	30/06/2010	31/12/09
Long-term financial debt	1,655.8	1,651.6
Short-term financial debt	943.3	326.4
Current accounts payable with affiliated companies	180.9	196.9
Fair value of derivatives: interest rate risk management	(36.2)	(24.8)
Total gross financial debt (I)	2,743.8	2,150.1
Current accounts receivable with affiliated companies	118.3	94.8
Marketable securities	8.5	4.4
Cash at bank and equivalents	2,021.6	1,960.1
Cash and other short-term financial assets (II)	2,148.4	2,059.3
Net financial debt (I-II)	595.4	90.8

- Gross financial debt

	30/06/10	31/12/09
Bond, maturity 2013	602.7	601.9
Bond, maturity 2011	797.2	785.6
Commercial paper	812.8	149.9
Project financing debt	205.6	199.5
Borrowings from financial institutions	59.7	115.0
Other borrowings	36.6	49.1
Capital lease obligations	19.1	20.5
Current accounts with affiliated companies	180.9	196.9
Bank overdrafts	36.4	22.7
Accrued interest	29.0	33.8
Fair value of derivatives: interest rate risk management (a)	(36.2)	(24.8)
Gross financial debt	2,743.8	2,150.1

(a) In accordance with IAS 39, the value of borrowings takes into account changes in the fair value of hedged risk. This change in value of the debt is offset by changes in the value of swaps used as hedges, which are recognised on the "fair value of derivatives: interest rate risk management" line.

				Rate
Nature of borrowings:	Nominal value	Maturity date	Nature		Nominal / Effective (excluding effect of hedging)
Bond, maturity date 2013	€ 600 M	April 2013	Fixed	Including € 200 M swapped to floating rate	4.375%	4.5757%
Bond, maturity date 2011	€ 500 M € 275 M (cplt Jan 09)	July 2011	Fixed	Including € 575 M swapped to floating rate	4.375%	4.4776% 5.75%
Project financing debt	maturing in years up to 2020.			Non-recourse, or limited recourse, debt whose interest costs and repayment is covered by the share of project revenues which is guaranteed contractually by customers. The debt comprises fixed-rate loans (or floating-rate loans swapped to fixed-rate loans)

At the date of publication, Thales's credit risk ratings were as follows:

	Moody's	Standard & Poor's
Medium and long-term loans	A2	BBB+
Outlook	Outlook stable	Outlook stable
Commercial paper & short-term loans	Prime-1	A2

At the end of 2009, Moody's long-term rating was A1 and Standard & Poor's Thales's long-term rating was A-.

A decrease of Thales's credit risk ratings has no impact on the terms and conditions of committed financings, since they are not linked to financial covenants included in financing contracts. Pursuant to the credit facility documents, clauses providing for accelerated repayment only apply in the event that the State no longer held its golden share and, simultaneously, the ratio of consolidated net financial debt to EBITDA (earnings before interest, taxes, depreciation and amortisation) were to exceed 3.

18. STATEMENT OF CASH FLOWS

a) Capital expenditure

Only capital expenditure paid during the period is presented in the statement of cash flows. It includes capitalised development costs for an amount of € 18.3 million in the first half of 2010, € 48.3 million in the first half of 2009 and € 113.2 million in 2009.

b) Net financial investment

Acquisitions:	2010 First half	2009 First half	2009 Full year
Additional purchase consideration / Alcatel Alenia Space (note 2) CMT Medical technologies Ltd Other	-- -- (6.1)	(129.6) (20.3) 3.1	(129.6) (20.3) (5.5)
Acquisitions	(6.1)	(146.8)	(155.4)
- Cash position of companies acquired	--	4.9	7.4
Acqusitions, net	(6.1)	(141.9)	(148.0)

Disposals:	2010 First half	2009 First half	2009 Full year
Other	0.9	(1.7)	5.3
Disposals	0.9	(1.7)	5.3
- Cash position of companies sold	--	(5.2)	(5.3)
Disposals, net	0.9	(6.9)	--

c) Increase (decrease) in shareholders' equity and minority interests

	2010 First half	2009 First half	2009 Full year
Increase in capital / exercise of stock options	5.5	0.4	4.6
Sale (purchase) of treasury shares	(5.2)	9.9	17.0
Total	0.3	10.3	21.6

19. LITIGATION

Due to the nature of its business activities, Thales is exposed to the risk of technical and commercial litigation. Litigations mentioned in last year's annual report have evolved as follows:

Thales has been notified of the award handed down on 3 May 2010, in the arbitration against the Republic of China Navy (Taiwan). This award was made as a result of an alleged breach of the terms pertaining to the use of intermediaries contained in a contract entered into in 1991 by Thomson-CSF (now Thales) for the supply of six Lafayette frigates to Taiwan.The total amount of the award is set to US\$ 482 million and € 82 million, bearing interest as from August 2001; as well as around € 15 million, bearing interest as from 3 May 2010, i.e. a total of around € 630 million (including interest).

The company has filed petition for nullity in front of the Paris Court of Appeal.

The Thales share in this litigation represents 27.463% of the total, and corresponds to its industrial share in the supply contract. In view of the provisions booked earlier, an additional amount of € 35 million (before tax) has been recorded in the financial statements at 30 June 2010.

No other governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the company is aware) have had significant effects on the company and/or group's financial position or profitability since the start of 2010.

20. RELATED PARTY TRANSACTIONS

Main related party transactions are disclosed in the notes to 2009 consolidated financial statements (note 19) included in the annual report.

Revenues with French Government amounted to € 870 million in the first half of 2010 (€ 900 million in the first half of 2009).

At 30 June 2010, overdue receivables bearing interests from the French defense procurement agency amounted to € 450 million (€ 45 million at 31 December 2009).

Half-yearly financial report - - June 2010

- ?- - -

- - - -
- -

Thales Head office : 45, rue de Villiers 92200 Neuilly-sur-Seine Public Company with capital of €597,219,681 Siret n°: 552 059 024

Period from January 1 to June 30, 2010

Statutory auditors' review report on the first half-yearly financial information

MAZARS

Tour Exaltis 61, rue Henri-Regnault 92075 La Défense Cedex S.A. au capital de € 8.320.000

Commissaire aux Comptes Membre de la compagnie régionale de Versailles

ERNST & YOUNG Audit

Faubourg de l'Arche 11, allée de l'Arche 92037 Paris-La Défense Cedex S.A.S. à capital variable

Commissaire aux Comptes Membre de la compagnie régionale de Versailles

Thales Period from January 1 to June 30, 2010

Statutory auditors' review report on the first half-yearly financial information

To the Shareholders,

In compliance with the assignment entrusted to us by your annual general meetings and in accordance with article L. 451-1-2 III of the French monetary and financial code (Code Monétaire et Financier), we hereby report to you on:

• our review of the accompanying condensed half-yearly consolidated financial statements of Thales, for the period from January 1 to June 30, 2010, and
• the verification of the information contained in the interim management report.

These condensed half-yearly consolidated financial statements are the responsibility of the board of directors. Our role is to express a conclusion on these financial statements based on our review.

1. Conclusion on the financial statements

We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists in making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that the financial statements, taken as a whole, are free from material misstatements, as we would not become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Based on our review, nothing has come to our attention that causes us to believe that these condensed half-yearly consolidated financial statements are not prepared in all material respects in accordance with IAS 34 – IFRS as adopted by the European Union applicable to interim financial information.

Without modifying the conclusion expressed above, we draw your attention to the matters set out in:

• note 1. "Accounting policies" to the condensed half-yearly consolidated financial statements, which details the new standards and interpretations adopted by Thales Group beginning after January 1, 2010;
• notes 2.a) "Main events of 2010 first half", 5. "Segment information" and 12. "Goodwill" to the condensed halfyearly consolidated financial statements which detail the change of presentation of the information by segment and the goodwills reallocation, following the new organization of the group. The group has decided to report segment financial information by operating divisions aggregated into two business sectors: "Defence & Security" and "Aerospace & Transport";
• note 5 (a) "Information by business sectors" to the condensed half-yearly consolidated financial statements which details the uncertainties surrounding two contracts of the business sectors Defence & Security and Aerospace & Transportation ;
• note 19 "Litigation" to the condensed half-yearly consolidated financial statements, which details the provision relating to the arbitration request submitted by a client of the group.

2. Specific verification

We have also verified the information provided in the interim management report in respect of the condensed halfyearly consolidated financial statements that were the object of our review.

We have no matters to report on the fairness and consistency of this information with the condensed half-yearly consolidated financial statements.

Courbevoie and Paris-La Défense, July 29, 2010

The statutory auditors French original signed by

MAZARS ERNST & YOUNG Audit

Jean-Louis Simon Michel Gauthier Nour-Eddine Zanouda