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BAE Systems plc6 Carlton GardensLondon SW1Y 5ADUnited KingdomTelephone +44 (0)1252 373232

Registered in England and Wales No. 1470151

www.baesystems.com

Corporate Responsibility Report 2006

REAL PERFORMANCE. REAL ADVANTAGE.

Forward thinking

Our Group Strategy is ‘To del

iver

sustainable growth in shareh

older value

by being the premier global d

efence

and aerospacecompany’. This

requires

us to take a leadership role

within our

industry and to perform on a par with

the leading companies in oth

er sectors.

We are developing a Corporate

Responsibility(CR)

agenda for thecompany to su

pport our business

interests and the delivery of o

ur strategy over

the next five years. This will b

e based on an

assessment of stakeholder e

xpectations, taking

into account the CR issues pa

rticular to thedefence

industry and recognising that

the company will also

be judged against peer comp

anies in othersectors.

The key aspects of our Grou

p Strategy with

implications for our CR agend

a are highlighted

below. This isdeveloped furt

her on pagessix

and seven of this report.

Integrated business plans

Group strategy

Group strategic objectives

Business portfolio actions

To deliver sustainable gro

wth in shareholder value b

y being the

premier global defence and

aerospace company

Continue to embed a high-

performanceculture acros

s the Company

Further enhance our progr

amme execution capabilit

ies

Increase sharing of expert

ise, technology and best p

ractice between our global

businesses

Develop a partnership app

roach to meet our custom

er requirements

Develop ourcapabilities i

n emerging growth market

s

Establish in the

UK sustainably

profitable through-life

businesses in

Air, Land andSea

Grow our business

in the UnitedStates

both organically

and via acquisitions

Implement the home

market strategy and

grow in the Kingdom

of Saudi Arabia

Grow our global land

systems business

Grow our export

business fromour

home markets

Grow our global

support, solutions

and services

businesses

See overleaf for an overviewof our business today

An overview of BAE Systems: The quick read

WhatBAE Systemsstands for:We are proud to be part of the defence industryand see our role as providing national securityand protection for sovereign governments whiledelivering to our investors. We recognise theserious nature of our business and know that wemust operate at the highest level of responsibility.– We recognise our responsibilities to the peoplewe employ, our customers and suppliers, ourshareholders, the wider community and theenvironment.

– We are an ethical company and willdemonstrate the highest standards of integrityand responsible management. We do nottolerate unethical behaviour or illegal conduct.

– We establish compliance with the law asa minimum and aim for higher standardswhere practical.

– We aim to act as a leader in our industry andbe a benchmark for standards and high ethicalvalues across the industry.– We aim to make sure people understand thedifference between a responsible defencecompany and the illegal arms trade.

– We take our role as a global company seriouslyand will contribute to the resolution of issuesthat impact beyond our own boundaries.

HowBAE Systemsdoes business:BAE Systems is a global defence and aerospacecompany providing a full range of products andservices for air, land and naval forces, as wellas advanced electronics, information technologysolutions and customer support services.We are working with customers to optimisecurrent and future military capability acrossland, sea and air by providing the most efficientsupport and service throughout the life ofour products.

We are owned by our shareholders. We aim tocreate sustainable shareholder value by being thepremier global defence and aerospace company.Underpinning this are our company values:High Performance – we will set targets to bethe best, continually challenging and improvingthe way we do things, both as individuals andas members of our teams.Customers – our priority to all our customers,both internal and external, is to understandtheir needs and expectations and deliveron our commitments.

People – all our people will follow our principlesof Accountability, Honesty, Integrity, Openness andRespect and will be encouraged to realise theirfull potential as valued members of our team.Partnering – we will strive to be the partner ofchoice, respected by everyone for our co-operation,integrity and openness.Innovation and technology – we will encouragethe development and implementation of newideas, new technologies and new ways ofworking, to secure sustained competitiveadvantage for our company.

BAE Systems aimsto deliver

sustainable growthin shareholder

value by being the premier global

defence and aerospace company.

WhyBAE Systems exists

:

Defence is both legal and necessary. T

he first

responsibility of anygovernment is to en

sure

national security. This provides stability

for

sustainable economic and social develo

pment.

The fundamental role of the defence in

dustry

is to support governments in providing

national

security to protect its citizens.

Human nature creates conflict, not the

defence

industry. It is naïveto think that there w

ould be

no more conflict if the defence industry

did not

exist. We all live with a constant threa

t of terrorism,

violence and war and we in the defence

industry

have to confront and tackle these issu

es. Equally,

we have to face upto the responsibiliti

es

associated with ourindustry. We fully re

cognise

the role and potential use of our produ

cts and

do our utmost to ensure that we deal w

ith all

our responsibilitiesas part of everyday

business.

FeedbackWe welcome feedback, both positive andnegative, on any aspect of our corporateresponsibility reporting and performance.Email us at [email protected]

For more information contact:Dr Deborah AllenDirector of Corporate ResponsibilityTelephone +44 (0)1252 383 388Email [email protected] [email protected]

Leigh MunroCorporate Responsibility ManagerTelephone +44 (0)1252 385 168Email [email protected] [email protected]

The paper used in this document containsa minimum of 50 per cent post consumerwaste. It also has FSC certification and issourced from well managed forestscertified in accordance with the rules of theForest Stewardship Council.















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Group strategy





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s

Establish in the

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Grow our business

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Implement the home

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of Saudi Arabia


systems business

Grow our export

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home markets

Grow our global

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www.baesystems.com 1

Contents

Introduction2 Message from Mike Turner, Chief Executive4 Key issues for our stakeholders

Our strategic direction6 Forward thinking8 Debating the future

Corporate responsibility activities 200612 Workplace13 Ethics14 Safety, health and environmental15 Education & community

Driving CR across the business16 Electronics, Intelligence & Support18 Land & Armaments19 Programmes21 Customer Solutions & Support22 Integrated Systems & Partnerships23 HQ and other businesses

Data file24 Performance summary25 Ethics26 Environment29 Health and safety32 Diversity34 Community

Information key

Cross referencewithin report20

For more information visitwww.baesystems.com

External assurance35 External assurance statement and commentary

BAE Systems Corporate Responsibility Report 20062

Message from Mike Turner, Chief Executive

Introduction

BAE Systems is first and foremost a defencecompany. It is also a large employer, witha significant presence in a number ofcommunities across our home markets, akey supplier to our customers and a majorengineering manufacturer. Whilst each ofthese aspects defines responsibilities, it isthe industry we are in and the nature of ourproducts which drives a significant part ofour CR agenda.

One of the key aspects on which we willcontinue to accept no compromise iscompliance with our ethical businessprinciples and policies. During 2006 wedeveloped, piloted and rolled out across theUK business an ethics awareness trainingcourse. We do not doubt our employees butwe want to ensure that they are aware of thefundamental importance that this issue hasfor our business. Our US business alreadyhas a similar programme in place and wewill be extending the training across Sweden,South Africa, Saudi Arabia and Australiaduring 2007.

The safety of our employees and thoseworking on our sites is of paramountimportance and we continue to driveimprovements through the setting ofobjectives, training and awareness andpartnership with key groups. In 2006we made substantial progress on raisingthe level of safety standards through anactive and voluntary partnership with theTrade Unions and the UK Health & SafetyExecutive. We are pleased to stand upand be counted on such issues and lookforward to continuing the partnership andimprovements over the coming year.

The 2007 objectives of our leadership groupinclude specific focus on ethics and safety.

Another aspect to which we are committedis the development of diversity improvementplans appropriate to each area of thebusiness. This is necessary to support theincreasingly global nature of our activitiesand deliver on the broader and changingrequirements for capability in the future.This is a long term issue but we recognisethe value and challenge that differentcultures, backgrounds and approachescan bring to our business where innovationis key.

In 2002 when we first reported externallyon our CR activities, our CR agenda reflectedexisting activity and was somewhat reactivein nature. We have progressed to a pointwhere our CR agenda is more proactive.

To realise value from our future CR agendait must support our business interests andbe aligned to our Group Strategy. The primaryobjective of our strategy is for BAE Systemsto deliver sustainable growth in shareholdervalue by being the premier global defenceand aerospace company. The implicationsof this for our CR agenda are explained onpage six of this report.

A key aspect of our aspiration to be a globalcompany is that our peer group will no longerjust be the defence sector and we will becompared to other leading companies. We willdrive our CR agenda accordingly, alwaysrecognising that the CR agenda must bealigned and be appropriate to the specificissues and nature of our business.

We recognise that ours is a controversialindustry and respect the rights of individualsto have differing opinions to our own. But weoften find that opinions are not based ona full understanding of the issues. Through

a programme of engagement with seriousstakeholders on our CR agenda and throughthis report we aim to better inform andprovide a basis for intelligent discussionand debate.

Our employees are proud to work for ourcompany, proud of our products and I amproud to lead it. We will continue to deliverhigh performance in all aspects and arecommitted to the continued developmentof a CR agenda which reflects and supportsa leading global company.

Mike TurnerChief Executive

Delivering onour objectives

We will continue to deliver high performancein all aspects and are committed to thecontinued development of a CR agendawhich reflects and supports a leadingglobal company.


Introd

uctio

n

For more information, and regular updates visit: www.baesystems.com

What we achieved2006 Objectives 2007 Objectives

Mike TurnerChief Executive

‘

’

1. Workplace– Resolve 75% of employee grievancesin the UK at local level.

– Reflect gender diversity on leadinguniversity courses in choice ofgraduate trainees through a focusedrecruitment plan.

– 97% of employee grievances in the UK wereresolved at a local level during 2006. Onlyone complaint required a corporate levelinvestigation under the Group’s Respectat Work policy.

– We met our targets to recruit at least anequal proportion of female graduates to thatseeking a career in engineering. In 200611.2% of UK and 20% of US engineeringgraduates were women. Over the year, 12%of our UK and 20% of our US engineeringgraduate recruits were women.

– 85% of employee grievances underthe UK ‘Respect at Work’ policy to beresolved through local discussion withoutproceeding to the corporate processfor formal investigation.

– In each of the home markets, move towardsestablishing a workforce reflective of thenational average in terms of gender mixand ethnic diversity, taking into accountvariations by region and industrial sector.

3. Ethics– Meet standards defined in our internalassurance statement.

– Develop, pilot and roll out ethicsawareness training to all employees inthe UK and Australia.

– By the end of 2006 80% of UK employeeshad successfully completed the training.Plans are in place to ensure the remaining20% complete the training early in 2007.

– We also intend to roll out the training toour employees in Australia, South Africa,Saudi Arabia and Sweden.

– Initial ethics awareness training to becompleted by new starters within onemonth of joining.

– Initial ethics awareness training to beimplemented within three months ofcompletion date for any acquisition.

– Survey to be undertaken to evaluateeffectiveness of 2006 UK ethicsawareness training package. Implementagreed corrective actions in 2007.

2. Safety, Health and Environment(SHE)

– Exceed safety performance commitmentsmade to the UK Health and SafetyExecutive.

– Meet our safety, health and environmenttargets (performance improvement criteriaappropriate to risk established at globalbusiness unit level.

– Targets were set against individual businessissues and all businesses included Safety,Health and Environment in their quarterlymanagement reviews. The overallperformance on safety reflects the goodperformance against these targets.

– The commitments made as part of the UKGovernment’s ‘Revitalising Health & Safety’initiative have been exceeded – that is – wehave already met targets for performanceby 2010.

2007 SHE metrics to improve relativeto 2006:– Establish, where practical, appropriateindustry benchmarks for each line ofbusiness to monitor performance andestablish targets to move towards bestin class.

– Group performance (Lost Days metric) tobe better than relevant industry average.

– Continue to achieve an improvement yearon year in injuries/lost working time.

6For further information of the implications

of our CR agenda see page 6

12For further information on how we are

meeting our objectives see pages 12 to 14

Q&AKey issues

Introduction

Key issues for our stakeholders

Do you take advantage of differentlegislative regimes to effectively sellanywhere you want to?

BAE Systems is committed to complying fullywith all the laws governing defence exportsales in every country in which we operate.We only export from our home markets i.e.UK, US, Australia, Sweden and South Africaand do not “forum shop” to transact fromcountries with lax export controls. Werecognise and respect the right of everynational government to determine thenecessary criteria for defence export sales.

What have you done to address theconcerns raised by John Wall (GeneralSecretary, CSEU) in last year’s report,that you are not doing enough toincrease diversity and blow away the myth that manufacturing is a man’s job?

BAE Systems is committed to equality ofopportunity for all employees and to creatinga workplace where everyone is treated withrespect. Gender was the key focus of ourdiversity and inclusion efforts during 2006and a full report on the progress we madecan be found on page 12.

Our current demographics reflect our heritageand industrial sector but we do not use that as an excuse and are committed to increasingthe diversity of our workforce. We recognisethat diversity of views and approach deliversthe challenge and breadth required to ensurea high performance culture.

These are some of the questions on issuesrelating to corporate responsibility that wehave received from stakeholders during 2006:

The UK newspaper ‘The Independent’recently claimed that out of the 33 UK companies who took part in the Carbon Disclosure Project,BAE Systems was the company doingleast by far to cut its CO2 emissions.Why is the company not addressingthe issue of climate change?

The article in ‘The Independent’ referred to a study by the Carbon Disclosure Project. We provided data we have publicly available,but some of this was not included in theresearch. We have been in dialogue with thecompany involved, they have repeated theiranalysis to take this information into accountand the new research carried out givesBAE Systems a score of 40 (up from 25) –which now places us 4th (previously 9th) out of a total of nine in the aerospace anddefence category. We already have energymanagement plans in place and haveengaged external stakeholders on whatBAE Systems responsibilities are with regardto climate change. This will form the basisof the development of a policy during 2007(see page eight).

What is the nature of your businesswith Saudi Arabia?

The programmes we provide for theKingdom of Saudi Arabia (KSA) are deliveredas part of an agreement between thegovernments of the UK and KSA. We arepleased to have enjoyed a long relationshipwith the KSA as a valued customer. Werecognise the critical role that KSA has with regard to stability in the Middle Eastregion and are pleased to support the UKGovernment in this regard.

Many CR reports tackle human rightsas a CR issue. Can a defence companyaddress this issue?

Human rights is an emerging CR issue for many companies and one from which we are not exempt as a defence company.We have been working with external andinternal stakeholders for some time toproperly understand the specific humanright’s issues which affect our business and to put in place a human right’s policywhich successfully addresses these.

BAE Systems respects all fundamentalhuman rights and will be guided in theconduct of its business by the provisions of the United Nations Universal Declarationof Human Rights (UNUDHR) and theInternational Labour Organisation (ILO) core labour standards.

4

Q&A


In last year’s report Robert Barringtonclaimed that BAE Systems was alaggard in corporate transparency.What have you done to address this?

BAE Systems was instrumental in establishingthe UK Defence Industry Anti-CorruptionForumin 2006. Representatives from 11companies and two Trade Associations heldan inaugural meeting of the forum in May.The creation of this forum reflects theshared determination of the key industrialpartners to promote the prevention ofbribery and corruption in the internationaldefence market. All the participants in theinaugural meeting of the forum have policiesin place that meet high ethical values,backed up with compliance proceduresto ensure that their employees observe the laws in all the countries in which theyoperate. Their aspiration is that the forumwill help build on those policies and practicesto ensure universally high standards in theglobal market.

More and more businesses are beingheld responsible for the completelifecycle of their products. Thedefence industry should be noexception so what are you doing in this regard?

We recognise the serious nature of ourproducts and the duty of care we have to ensure that they are safe for the user. We already have through life responsibilityfor many of our products and the extent ofthis will increase as we move to a ‘throughlife support’ model of working with ourcustomers. This includes both productsafety and environmental considerations.

A number of media articles during 2006ridiculed us for our work on minimising the environmental impact of munitions.Nonetheless we believe we have aresponsibility to minimise the environmentalimpact of our products and we will continueto utilise current and emerging technologiesto achieve this.

During 2006, we initiated a debate withinternal and external stakeholders on whatsustainability means to a defence company.A report on this is provided on page eight.

What was BAE Systems view on thedecision to cease the SFO enquiryinto Saudi?

We believe a timely conclusion to theinvestigation was required. It is notreasonable or just that such investigationsand associated allegations which are unsupported by evidence, shouldcontinue indefinitely.

Do you pay commissions to advisorsor consultants, to win export sales?

Companies operating in global markets, inany industry, need access to local advice,capabilities and guidance in order to pursuebusiness. It is perfectly legitimate that suchadvisors/consultants are paid for what theydo. As with all aspects of our business weaudit these arrangements to ensure that noimpropriety is taking place and that we arereceiving value for money for their specialistknowledge and capabilities.

The UK Health & Safety Executiveclaim that 6.7 million working daysare lost each year due to the effectsof workplace related stress. What areBAE Systems doing to address thisissue for its workforce?

We are committed to protecting the health,safety and wellbeing of our employees. We are a high performing company andrecognise the pressure that this can placeon individuals. Our People Policy is basedon the principles of good managementprovided by the UK Health & SafetyExecutive (HSE) which are intended tominimise the factors which can lead to work related stress. A commitment hasbeen given by our CEO and Group HRDirector to the trade unions that we willdevelop this further during 2007.

In 2006 one of your objectives was to ensure all employees were trainedon ethics. Was this because you don’tthink your employees are ethical?

The decision to train all UK employees on ethics followed an employee ethicsawareness survey carried out in 2005 whichshowed a lack of knowledge amongst ouremployees of the specific requirements ofour ethics policies and the ethics helpline.Training programmes in business principlesand integrity were already mandatory forsenior employees.

The training was introduced to tackle thisspecific awareness issue and not becausewe in any way believe our employees are unethical. This is a key aspect of our corporate responsibility agenda and one we take extremely seriously.


Have we answered your questions?These are only some of the questions we have been asked by our stakeholders during 2006. Additional questions and answers on issues including defence exports, nuclear weapons and media allegations canbe found on our website.

Introduction

We are disappointed that recent media coverage is proceeding on the assumption, unsupported by anyevidence, that allegations against BAE Systems are true and offenceshave been committed. We continue to reject these allegations.

Employees of BAE Systems are proudto work for a company which supportsthe government and men and womenof our armed forces, who work toprotect national and internationalsecurity. We take our obligationsunder the law extremely seriously andwill continue to comply with all legalrequirements around the world.

Is there any substance in the ongoing mediaallegations on bribery and corruption?


Our strategic direction

Strategic

direction

Forward thinking

CR TrendsThe overall trend in progressive corporateresponsibility is a move from being reactiveor passive to taking an increasinglyproactive approach. This implies thatcompanies, in addition to addressing theirown operating issues of safety, environment,community, ethics and people, will alsoplay a key role in driving higher standardsfor specific sector or regional issues. Ourstrategic intent requires us to implementpolicies and standards across our operatingregions and to extend these across oursupply chain and sector.

Sustainable growthProcess and policies to support managementof reputational issues, address long termcapability aspects and anticipatingdevelopment of trends

GlobalPeer group extended beyond defence &aerospace sector, common application ofstandards, expectation of leadership insectors (transparency, improving standards,product stewardship)

High PerformanceLeadership position, capability andreputational issues addressed and managed

Sharing & partnershipSupply chain management and culturaldevelopment to support different wayof working

Emerging growth marketsAppreciation (and valuing) of culturaldifference and addressing issues associatedwith different regions

Implications of our Group strategy on our CR Agenda

Increasingly business is also expectedto demonstrate responsible productstewardship and to understand and managethe impacts of the production, operationand end of life of its products. We havecommenced this debate in relation to theenvironmental sustainability of our products(see page eight) and will extend this furtherto include other broad aspects of ourcorporate responsibilities.

Our Group strategy is ‘To deliver sustainablegrowth in shareholder value by being thepremier global defence and aerospacecompany’. This requires us to take a positionat the forefront of corporate responsibilitywithin our industry and aspire to performon a par with the leading companies inother sectors.

We are developing a CR agenda forthe company to support delivery of ourGroup Strategy. This will be based on anassessment of stakeholder expectations,taking into account the CR issues particularto the defence industry and recognising thatthe company will progressively be judgedagainst peer companies in other sectors.We have also commissioned ‘Article 13’an independent consultancy to review trendsin CR, geographical differences and otherexternal influences that will have an impacton stakeholder expectations.

Achieving our goals requires that all ourbusinesses implement company policies anddeliver goals set in their own CR plan. A keyaspect of our CR agenda will be to maintaingood business practice and continualimprovement across our businesses.

Our approach to the evolution of our CRagenda is discussed above.

6


Strategicdirection

Looking ahead to 2007, the Company iscommitted to a more proactive approachto CR through the alignment of theCR agenda with the company strategy .

Peter WeinbergCorporate ResponsibilityCommittee Chairman

Members:Peter Weinberg (Chairman) Phil CarrollProfessor Sue Birley Sir Nigel Rudd

Responsibilities:– Assist the Board in overseeing the

development of strategy and policy onsocial, environmental and ethical issues.

– Monitor and review the Company’sperformance in managing environmental,social and reputation risks. Specifically, theCommittee shall review whether there areappropriate policies, systems and metricsin place to manage, monitor and reviewsocial, environmental and ethical risks to theCompany. These shall include, but shall notnecessarily be restricted to, health and safety,workplace policies, responsible supply chainmanagement, environmental impact, businessethics and compliance with law and regulation.

– Review the Corporate Responsibility reportprior to approval by the Board of Directors.

– Oversee and support key stakeholderengagement on social, environmental andethical issues.

– The Committee Chairman shall report to theBoard on the proceedings of the Committeeon a regular basis.

Message from Peter Weinberg on behalfof the CR Committee.The primary focus of the CR Committeeduring 2006 was on understanding, reviewingand monitoring the policies and processes inplace to manage social, environmental andethical issues. Key areas reviewed includedhealth and safety, appointment of advisorsand business ethics. Based on our reviewsto date we are satisfied that the Company hasestablished a good basis for its CR activityand recognises that this is an essential partof good business management.

Looking ahead to 2007, the Company iscommitted to a more proactive approach toCR through the alignment of the CR agendawith the company strategy. The CR Committee,in conjunction with the Executive Committee,will agree the development and direction ofthe CR agenda, through the setting of policiesand goals to achieve its delivery. We considerthis to be an important aspect to ensuringthe sustainability of future business activityand anticipate further progress during 2007.

Peter WeinbergCorporate Responsibility CommitteeChairman

Corporate Responsibility CommitteeExternal IssuesThere are some issues which will impact allbusinesses to some degree regardless oftheir sector. These include global warmingand differences in attitude and approachof each generation (to the world in generaland specifically the workplace). We needto understand the potential impact of suchissues on our environment and businessand develop appropriate responses.

Terrorism has changed the nature of warfareand how people regard security and conflict.Our industry must respond to the changingrequirements in technology and equipmentboth for warfare and the ever increasingrole of delivering humanitarian aid andpeacekeeping.

Geographical InfluencesCR primarily relates to the responsibilitiescompanies have with regard to the workplace,communities and environment with theemphasis on particular aspects beinginfluenced by local or national concerns andcultural differences. Our global aspirationsrequire us to understand and value thesedifferences and consider how to optimiseour operations to best effect.

Next Steps

We will continue to debate these issuesand the implications of our Group Strategy,against a rolling plan, with our ExecutiveCommittee, CR Committee and Boardof Directors.

We will continue to engage with stakeholderson the general direction and performance ofour CR agenda.

‘

’


Our strategic direction

Strategic

direction

IntroductionOur company is a global business, withoperations and customers in many countries.Stakeholders expect us to understand andrespond to global challenges such as climatechange, human rights and sustainabledevelopment. In 2005, the assurersof our CR report recommended that wepublish our position on these issues.

We are exploring these subjects in moredetail to find out what stakeholders expectfrom us and the implications for our business.

In November 2006 we held a discussionon the significance of environmentalsustainability for BAE Systems. We invitedfour opinion leaders with relevant expertiseto meet with senior managers from the CR,legal, engineering and media departmentsat BAE Systems and representatives fromthe UK Ministry of Defence.

Participants debated two subjects relatingto environmental sustainability:– Product stewardship and theenvironmental impact of our products; and

– Climate change.

Stakeholder engagement informsour corporate responsibilitystrategy and approach to managingand reporting on CR issues.

Debating the future

9

StrategicdirectionProduct stewardship

Is product stewardship a relevant issue forBAE Systems?Recent news stories have mocked productstewardship initiatives such as lead-freebullets. It has been suggested that this isan attempt to ‘greenwash’ the image ofdefence companies and distract attentionfrom their core business. However,participants agreed that product stewardshipis a relevant issue for BAE Systems forenvironmental and business reasons:– Ordnance left over from wars or militarytraining can have a significant impact onthe environment and potentially on thehealth of local communities. Disposalof old ships and aircraft can damagethe environment if hazardous substancesaren’t identified and disposed of safely.

– Environmental issues are now higher upthe agenda for governments and majorcustomers, such as the UK Ministry ofDefence, are starting to take themseriously.

– Investors increasingly expect allcompanies to be addressing environmentalissues. They consider environmentalmanagement as one indicator of overallmanagement quality.

It was accepted that many strong critics ofthe defence industry will inevitably dismissproduct stewardship as a distraction, butmost stakeholders expect BAE Systemsto be good stewards. This is becausethey see the company having the sameenvironmental responsibilities as any othermajor manufacturer.

Whose responsibility is it?There was debate on the respectiveresponsibilities of the UK Ministry ofDefence (UK MoD) and BAE Systems onwho should drive improvements in productenvironmental performance.

Opinion was that there is a sharedresponsibility between the customer andsupplier for product stewardship and bothparties should do more to tackle the issue.

It was agreed that changes to BAE Systemsbusiness model could have a beneficialimpact. Over the next ten years BAE Systems

Why aren’t you as passionate about theenvironment as you are about combatingbribery and corruption? You shouldn’t bereactive. Being a leader on environmentalperformance and shaping new regulationswill save the company money in thelong term.

Aled Jones,Cambridge Programme for Industry

expects to shift from being primarily anequipment supplier to becoming a throughlife service provider (including the disposalof end-of-life products). This will encouragethe company to improve the environmentalperformance of products, and to usematerials that can be easily recycledwhen the products are scrapped.

Way forwardParticipants want to see BAE Systemsshaping the debate on product stewardshipand influencing UK MoD requirementsand regulations. They expect productstewardship to become more importantto the UK MoD and other customers andbelieve that BAE Systems could gaincompetitive advantage by being an earlymover. This could also reduce costsand benefit the company’s reputation.

It was suggested that BAE Systemsneeds to devote as much energy tothese issues as it has to its ethicsand anti-corruption programmes.


Despite the snigger factor of ‘green bullets’,there is no reason why BAE Systems shouldbe treated differently from any other largemanufacturing company whose productshave an environmental impact.Rob Lake, Socially Responsible Investment Analyst

Wars end and you have to live with thepeace afterwards. The inefficiency of warand its environmental impact on theworld is a real issue for BAE Systems.

John Mumford, Imperial College

‘

’

Our strategic direction (continued)

Strategic

direction

The UK Ministry of Defence could driveprogress by setting environmentalperformance requirements for its suppliers.This would provide a clear steer to thecompany and provide an impetus to investin environmental technology.

It was suggested that the partnershipapproach set out in the Defence IndustrialStrategy provides a model for the UK MoDand company to collaborate to benefitthe environment.

A first step could be a joint analysis ofthe life-cycle costs of a product, includingdisposal. This would demonstrate whetherfactoring in the cost of disposal could bea cost saving measure.

Climate changeIs climate change important toBAE Systems?It was agreed that climate change is nowa serious issue for all companies as well asindividuals and governments. Participantsexpect these trends to continue to increaseas more is learnt about the science ofclimate change.

All participants expected BAE Systemsto take climate change seriously and todevelop an effective strategy to tackle it.This should include plans for reducing itsgreenhouse gas emissions and preparingfor the risks and opportunities presentedby climate change.

It was noted that this could improve thecompany’s relationships with threesignificant stakeholder groups:

We’re looking at initiatives to help reducethe environmental impact of ship disposal.We are designing out hazardous materialsat the start so there are fewer issues todeal with at the end of a vessel’s life.

Henrietta Anstey, BAE Systems

Our employees look for leadership fromus on key issues. They want to knowwhere the company is coming from andwhat it stands for. They see nothing onclimate change and it’s a real opportunityfor us to do something.

Simon Howison, BAE Systems

Strategicdirection– Some investors want to know that

companies in their investment portfoliohave a strategy for responding to therisks and opportunities of climate change.

– The UK government has placed climatechange high on its agenda followingthe Stern Review. There have beenparliamentary questions on CO2 emissionsfrom military training flights anddiscussions on the potential impact ofclimate change on national security. TheUK Ministry of Defence aims for its officeestate to achieve carbon neutrality by2012 and will expect suppliers to helpthem reduce their carbon footprint.

– Employees would appreciate BAE Systemsarticulating a clear policy on climatechange. It was felt that employeeswould respond positively to the companyadopting a leadership stance on thisissue and this could benefit moraleand productivity.

What are the risks and opportunities?Participants mentioned several potentialrisks and opportunities for BAE Systems.These included changes to products, whichwill need to function in higher temperaturesand more extreme weather will increasedemand for rescue equipment, asdemonstrated by Hurricane Katrina.

Views on BAE Systems current approachDisappointment was expressed thatBAE Systems does not yet have a climatechange strategy. Although the companyhas processes for managing its energy use,they felt it had not yet thought throughthe implications of climate change for itsbusiness or identified where risks andopportunities might arise.

ParticipantsKathryn CharnaudEnvironment Department,UK Ministry of Defence

John ColeDefence Directorate of Safety andClaims, UK Ministry of Defence

Aled JonesDevelopment Director, CambridgeProgramme for Industry

Rob LakeSocially Responsible Investment Analyst

Peter MartinDirector, CarbonSense

John MumfordProfessor of Natural ResourceManagement, Imperial College London

Deborah AllenCorporate Responsibility Director,BAE Systems

James BakerDirector of Technology & EngineeringServices, BAE Systems

Mike ElstonHead of Legal Services,BAE Systems – Land Systems

Lisa Hillary TeeMedia Relations Manager,BAE Systems

Simon HowisonGroup Engineering Director,BAE Systems – Air Systems

Leigh MunroCorporate Responsibility Manager,BAE Systems

Henrietta AnsteyEnvironment Manager,BAE Systems – CS&S Naval

BAE Systems is in a carbon unknown state.It’s managing its energy but hasn’t yetrecognised what impact climate changewill have on its business.Peter Martin, CarbonSense

What should BAE Systems do next?Four main actions were called for:

– Identify the risks and opportunities ofclimate change for BAE Systems.

– Integrate this analysis into the company’sstrategic planning and decision-making.

– Involve people from across the company –don’t try to manage this from theCR department.

– Help set the agenda on climate changethrough interactions with governments.

Next stepsThe initial stakeholder engagement sessionhas taken us forward by clearly indicatingthat both internal and external views are thatirrespective of our sector we need to addressissues of environmental sustainability andclimate change.

In response to this we will continue to evolveour position and develop a pragmatic responseappropriate to our products and operations.

‘

’

The Ministry of Defence aims for its officeestate to be carbon neutral by 2012 andwill expect suppliers to help them reducetheir carbon footprint.

John Cole, UK Ministry of Defence


Corporate responsibility activities 2006

Activities

2006

The Group employs 79,000 people (in its whollyowned businesses) across five continents, themajority being based in the UK and the US,with a significant presence in Saudi Arabia,Australia, South Africa and Sweden.

To deliver the products and services ourcustomers require we need to attract andretain a highly talented workforce. We dothis with a focus on a high performanceculture which, in addition to setting out goalsand objectives, also defines the behaviourswe expect of our employees.

ProgressDiversityWe met our targets to recruit at least anequal proportion of female graduates tothose seeking a career in engineering. Overthe year, 12% of our UK and 20% of our USengineering graduate recruits were women.

Our Group HR Director, Alastair Imrie, wasnominated as our senior Gender Championwith a remit to raise awareness of potentialbarriers to the career progress of women inthe Group and to identify ways to addressthose potential barriers.

Recognising that the Group’s senior leadershipplays a significant role in influencingbehaviours, a number of our senior female

managers represented the company at eventsin support of groups such as the InternationalWomen of Excellence and the InternationalWomen’s Forum. Junior female employeesalso attended these events as participants.An outcome of this representation was theinitiative to establish a women’s network atour Submarines site at Barrow in the UKas a pilot to assess the potential to developfurther network groups elsewhere acrossthe business.

We participated in a workshop with seniorfemale managers from the UK Ministryof Defence to discuss barriers to genderprogression within each of the respectiveorganisations and to explore mutual areasto address.

Respect at Work97% of employee grievances in the UK wereresolved at a local level during 2006. Onlyone complaint required a corporate levelinvestigation under the Group’s Respectat Work policy. This indicated improvedmanagement and resolution of issuesat a local level.

In the UK, we have continued to work closelywith the DTI and AMICUS on the Dignity AtWork partnership. This year the partnershiplaunched research into the impact ofbullying in the workplace and hosted severalhigh profile events to raise awareness ofthis important issue.

Training and DevelopmentIn the UK employees completed 38,000e-learning courses (equating to 24,000hours of online training time). Employeesand their families have access to 1,500courses, many of which are run inpartnership with colleges and universities.

In the US we have invested in employeedevelopment and recent executiveappointments from within our leadership

Progress and performanceWorkplace

In 2006 two workplace related objectiveswere set as part of the leadershipobjectives for the Group’s senior executives.– Reflect gender diversity on leading

university courses in our choice ofgraduate trainees through a focusedrecruitment plan.

– Resolve 75% of employee grievances inthe UK at local level (i.e. drive solutionsto employee issues through effectivelocal management).

2006 Objectives

Employee opinion survey (EOS)Positive Increases % Fav ChangeQuestion 2006 from 2004

I have access to the training I need to be productive on mycurrent position 68 10I have confidence in the job being done by the senior managementof BAE Systems 52 9I would recommend BAE Systems to others as a good place to work 68 6I understand how my job contributes to my Business Unit/Lineof business in achieving its business plan 84 6

Negative Increases % Fav ChangeQuestion 2006 from 2004

Poor individual performance issues are addressed effectivelywhere I work 33 -3I am supported and encouraged to make my own decisions 74 -3In my team we get regular feedback on how satisfied customers arewith the work we perform 54 -2My immediate manager/team leader lets me know how I m doingan ongoing basis 56 -2

ranks demonstrate career growthopportunities. Two new CEO sponsoredleadership programmes were introducedin 2006 and delivered to more than 600executives in the US and UK.

Employee RecognitionWe reward employee excellence andinnovation through the Chairman’sAwards Scheme. Over 3,000 nominationswere received for 2006, recognisingover 17,000 employees from around theworld. From those, six Gold, 54 Silver andover 100 Bronze awards were awardedacross the three categories of Innovation,Transferring Best Practice, and EnhancingCustomer Performance.

Employee engagementIn 2006, more than 45,000 employees(over 64% of the workforce) took partin our bi-annual global Employee OpinionSurvey (EOS). Overall the results wereencouraging with clear improvementreported against 2004 performance.

The greatest improvements were incareer development and rewards, trustin leadership and engagement. The mostnegative score related to our employees’perceptions as to how poor performersare managed. While this reflects the highstandards our employees expect of thecompany, it is an issue of concern whichthe Executive Committee has committedto improve in 2007. See table below.

3For details of our Objectivesfor 2007 see page 3.

Our ethical principles are:Accountability: We are personally answerable for our conduct and actions

Honesty: There is no substitute for the truth

Integrity: We say what we do, we do what we say

Openness: When questions are asked, we will be frank and straightforward in our answers

Respect: We value and treat each individual with dignity and thoughtfulness


Activities

2006

We are committed to meeting the highestethical standards in our dealings with others.We will not tolerate unethical behaviouror attempts to improperly influence thedecisions of customers or suppliers.Unethical behaviour is wrong, could leadto loss of business, seriously damage ourreputation and leave the Group and itsemployees open to criminal sanction.

ProgressMeeting our standardsThe Group has training and awarenessprogrammes to ensure employeesunderstand our policies and the standardsexpected of them.

We provide training on our anti-briberyprogramme to managers from commercial,procurement, finance, customer support andother functions as well as marketing staffand other senior managers. On completingthe training, employees are required to signa statement confirming they will comply withour policies and will report any issues ofconcern. This training is mandatory for allsenior employees and for those employeesinvolved in dealings with marketing advisers.All BAE Systems’ marketing advisers aresubject to rigorous due diligence under ourcompliance programme, are made aware of

our anti-bribery policy and are expectedto maintain our ethical standards.

Awareness and TrainingA survey of UK employees undertaken in2005 showed that although our employeesregard the Company as ethical, awarenessof our ethical standards and helpline waslow. In 2006 we introduced new onlinetraining for all UK employees covering:‘What is Business Ethics and Why is itImportant to Me?’, ‘Why Following theLaw is not Enough’ and ‘Examples ofEthics in the Workplace’.

Employees must complete a test at theend of the course to measure understandingof the issues raised during the training.A DVD and classroom training packagewas used for employees who did not haveready access to a computer. Both trainingpackages were introduced and endorsedby our Chief Executive, Mike Turner.

By the end of 2006 80% of UK employeeshad successfully completed the training.Plans are in place to ensure the remaining20% complete the training early in 2007.We missed our target to train all employeesin Australia during 2006 but intend toroll out the training to all employees inAustralia, South Africa, Saudi Arabia andSweden during 2007.

In the US, all employees completedrefresher training on our workplaceharassment and ethics policies, and ethicaldecision making. All employees receiveannual training on ethics related topics.This year all employees viewed a new ethicsvideo called ‘Playing With Fire: Abuse andIntimidation in the Workplace’.

We held our annual conference forBAE Systems ethics officers in Baltimore,US. More than 50 participants from the US,the UK and Sweden were joined by speakers

from the US Department of Defense andthe Ethics Resource Center. Experts ledtraining sessions on ethics investigationsand regulations on harassment and violencein the workplace.

During 2006 we also held ethics trainingfor the Board and Executive Committee,debating and agreeing the role of leadershipin ensuring high ethical standards throughoutthe Group.

Monitoring and complianceIn 2006, 62 enquiries were made to ourUK ethics helpline and worldwide e-mailaddress, compared with 31 in 2005. Thesecovered a variety of topics, but primarilyconcerned workplace issues and acceptableIT use policy. In the US, there were 348formal enquiries (including 186 requiringformal investigation) to ethics officers viaour helpline, post, email or visits to theethics office.

50 employees were dismissed for reasonsrelating to unethical behaviour during 2006.Reasons for dismissal included misuse ofcompany IT, fraud, inaccurate labour chargingand threatening behaviour.

Working with othersIn early 2006 BAE Systems and otherUK defence companies established theUK Defence Industry Anti-corruption Forum,to share good practice on ethics and anti-corruption programmes. Members of theForum met twice in 2006 and heard froma range of speakers including the Instituteof Business Ethics, ICC (UK), TransparencyInternational (UK) and law firms, Linklatersand Bryan Cave LLP.

In the US we are a signatory to the DefenseIndustrial Initiative on Ethics and BusinessConduct. We are also a sponsoringpartner of the Ethics and ComplianceOfficers Association.

Ethics

In 2006 two objectives specifically relatingto ethics were set within the leadershipobjectives.– Meet the standards defined in our internal

assurance statement (for ethical issues,the minimum acceptable score within ourassurance process is confirmation ofcompliance with all applicable laws andstandards).

– Develop, pilot and roll out ethics trainingto all employees in the UK and Australia.

2006 Objectives

We will not tolerate unethical behaviour orattempts to improperly influence the decisionsof customers or suppliers.


‘’

The health and safety of our employees,contractors and engagement with thecommunities around our facilities is ofprimary importance to BAE Systems.

We recognise the risks associated withthe variety of operations we conduct andaim to minimise these as far as possible.All sites are required to comply with ourSafety, Health and Environment policy andto demonstrate continual improvement inperformance through the setting of targets.Performance is reviewed through ourbusiness assurance processes and overseenby the Executive Committee and theCR Committee on behalf of the boardof directors.

Our environment policy and frameworkis focused on preventing or controllingenvironmental impacts and minimisingwaste (or consumption when relatedto energy and water). All our majormanufacturing sites are certified to theinternational environmental managementstandard ISO 14001.

ProgressTargets were set against individualbusinesses and all businesses includedSafety, Health and Environment in theirquarterly management reviews. The overall

performance on safety reflects the goodperformance against these targets.Compared with 2005 both the overallnumber of accidents and the number ofserious accidents decreased in 2006.The majority of our business continue todemonstrate improvements (i.e. reductions)in the days lost to work related injuriesindicating both a reduction in the numberof accidents and length of time forrehabilitation back into the workplace.The increase indicated in the table on page30 reflects the inclusion of a full year ofdata for our US ship repair business anddoes not indicate a significant deterioration.The commitments made as part of the UKGovernment’s ‘Revitalising Health & Safety’initiative have been exceeded – that is – wehave already met targets for performanceby 2010.

Partnership with the UK HSEWe continued our partnership projectwith the UK Health and Safety Executive(HSE) and other large UK manufacturers.The project, named Large OrganisationPartnership Pilot (LOPP), aims to raisesafety standards in UK manufacturing sites.

In 2006 a joint team of BAE Systemsmanagers, trade union safety representativesand the HSE developed key performanceindicators (KPIs) in six areas:– Work at height– Control of contractors– Hand-arm vibration– Work in confined spaces– Slips and trips– Manual handling

These KPIs are used by our business unitsto monitor and improve performance throughan audit programme. Eight of our UK siteswere audited against the relevant topicstandard during 2006. Only one audit failed.Improvement actions were put in place and

Safety, health and environment


Corporate responsibility activities 2006 (continued)

Activities

2006

In 2006 two objectives specifically relatingto ethics were set within the leadershipobjectives.– Meet our safety, health and environment

targets (performance improvement criteriaappropriate to risk established at globalbusiness unit level.

– Exceed the safety performancecommitments made to the UK Health andSafety Executive.

2006 Objectives

a follow up audit confirmed that correctiveactions had been implemented.

We are communicating the output of theseaudits to all our UK businesses throughnews bulletins, office and workshop talksand a training DVD. Employees can alsoaccess the information on our LOPP website. We will continue to use the auditprogramme as part of our drive for highperformance across all areas of safety,health and environment.

EnvironmentThe environment data shown on page 26reflects the numerous changes to ourbusiness and activity over the last fouryears. We monitor trends at an individualsite level and continue to see reductionsin both water and energy consumption.

The overall data now includes the formerUnited Defense businesses and theseaccount for the increases in consumption.Whilst the use of natural resources is drivenby the growth of our business we remaincommitted to delivering ongoing operationalefficiencies and improvements in this area.

Waste Electrical and Electronic Equipment(WEEE) DirectiveThe WEEE Directive became effective inJanuary 2007 requiring producers of certainelectronic equipment to account for end oflife disposal. During 2006 we conductedreviews to assess the impact of this Directiveand put in place measures to monitor andmanage the issue going forward.


Education, specifically in the fields of scienceand engineering, is extremely important tothe future sustainability of our business.

The number of students enrolling inengineering and technology courses hasfallen considerably in recent years. We areconcerned that in the future there will be toofew candidates with the skills our business,and the engineering sector in general, needs.

EducationIn Australia, Saudi Arabia, the UK and theUS we run an education programme thatencourages young people at all stagesof their education to take an interest inscience and technology.

UKOver 350 employees (known as ambassadors)visited schools to help with engineeringprojects and to give careers advice.

Our schools road show is designed toencourage children to think about a careerin engineering before making subjectchoices at 14. The 2006 road show, visited100 schools, involving 10,000 childrenaged 9-13 in performances and workshops.In 2006 our education programme wasawarded a Business in the Community‘Big Tick’ Award and was a finalist in theOpportunity Now Awards.

We participated in Enterprise Week 2006delivering a schools road show performanceat an Enterprise in Education conference.We have strategic partnerships with20 colleges and universities to supportresearch and improve graduate recruitment.

BAE Systems has made a commitment tobe one of the ‘corporate champions’ behindthe British Council’s UK India Education &Research Initiative. As part of our commitmentwe will be supporting links between schoolsin Brough in the UK and Bangalore in India,an exchange of best practice in vocational

training and an innovative research project onUnmanned Aircraft Vehicles linking LeicesterUniversity with the Indian Institute of Scienceat Bangalore.

USWe sponsor a number of programmes tosupport science and technology acrossthe US. Our scholarships to colleges anduniversities have enabled hundreds ofstudents to take technical courses. In 2006this support included: providing projectchallenges and mentors to Penn State’sLearning Factory; sponsorship of Science andTechnology Way – an open house showcaseheld at the University of Maryland; and thesponsorship of the annual Rube GoldbergMachine Contest held at Purdue University.

Saudi ArabiaBAE Systems’ long association withacademia from the Kingdom of Saudi Arabiahas continued with the funding of researchcarried out by Saudi lecturers in the UK.

Following completion of the four-yearSaudi government campaign to establishnational vocational skill standards, backedby BAE Systems, the Group sponsored aconference on the next round of challengesfacing those in the vocational trainingestablishment in meeting the needs ofthe Saudi labour market.

The Saudi-British sports co-operationprogramme, which began in 1987, hadits most active year to date in 2006. ThisBAE Systems-managed project is geared tothe raising of standards and the introductionof new sports, and takes as a main aimthe education of administrators, medicalpractitioners, coaches and others who willstimulate the development of the sector.

AustraliaIn Australia BAE Systems supports a widerange of school and university programmes.

The Group works with these institutions,offering sponsorship and mentoringprogrammes, with the aim of inspiring youngpeople to get involved in engineering. Theseprojects include sponsorship of SouthAustralia’s Engineering Week and SuperScience Sunday; involvement with the DoxaYouth Foundation mentoring programme andsupport for the Young Achievement AustraliaBusiness Skills Programme.

CommunityEmployee InvolvementIn the 18 months to September 2006,our global employee fundraising scheme,Charity Challenge, raised £8m. This wasdonated primarily to the Stroke Associationin the UK, the National Heart Foundationin Australia and the American CancerSociety. Over the same period, employeesvolunteered 10,500 days of their own time.Our partner charities for the next 18 monthcampaign will be the Macmillan CancerSupport in the UK, the Australian CancerCouncil and the Alzheimer’s Associationin the US.

Company GivingIn 2006 our total global communityinvestment was £8,223,160. This figureincludes cash and in-kind donations aswell as our direct support for education.

We are a member of the LondonBenchmarking Group (LBG) and use theiragreed methodology to evaluate our annualcommunity contributions.

Education and community


Activities

2006

In the 18 months to September 2006, ourglobal employee fundraising scheme, CharityChallenge, raised £8 million.

‘’

2006

Education and young people 16.4Social welfare 5.2Emergency relief 0.2Armed forces 25.3Health 30

Community investment – what we contribute to (%)

2006

Arts and culture 17Economic development 1.3Environment 0.2Other 1.8

This report addresses ourCorporate Responsibilityissues and priorities atgroup level.

We believe it is equallyimportant to demonstratehow our business isorganised and the specificCR issues faced at businessgroup level. The followingpages give an overviewof the key highlights andinitiatives across our sixglobal business groups.


Business Group updates

Business

Group

updates

Principal operationsProvides a variety of militarycommunications, electronic identification,navigation and guidance systems,network-centric warfare solutionsand a broad range of support solutions,including major ship repair activitiesfor the US Navy.

Major marketsUS, Global

£4,007m28%

Main operating locations

Share of 2006 Group Sales

Number of employees

31,700

Electronics & Integrated Solutions

Highlights for 2006:– Introduced closed loop cooling systems

at our Fort Wayne, Indiana; Johnson City,New York; and Greenlawn, New Jersey sites.This will reduce annual water consumptionby 100 million gallons and reduce the riskof releasing ozone depleting refrigerants(CFCs) into the environment.

– Implemented a full environmental, safety,and health (ESH) management systemat our Ontario, California site.

– Retained Occupational Safety and HealthAdministration Star status at our JohnsonCity site. ISO 14001 and the OccupationalHealth and Safety Assessment Seriesregistration maintained at selected sitesand our Cheshire, UK site became ISO14001 registered.

– Implemented an on-line Material SafetyData Sheet (MSDS) system at our Ft. Waynefacility to enable employeesto access MSDS and print chemicalcontainer labels at the point of use.

– Raised $68,000 for the Juvenile DiabetesResearch Foundation.

Building cleaner, more efficient busesElectronics & Integrated Solutions is workingwith the US Federal Transit Administration(FTA) to demonstrate fuel-cell technology forcity buses. The fuel cell will use hydrogento generate power cleanly and quietly, withwater and heat as the only by-products.

The fuel cell will be integrated into a hybriddiesel-electric bus made by DaimlerChrysler.It will power the air conditioning, aircompressors, power steering and othersystems that ordinarily run off the engine.Switching the power source to a fuel cellallows the engine to be shut off at bus stopsand at traffic lights, making the bus quieter,cleaner and more efficient compared to aconventional diesel bus.

Driving CR across the businessElectronics Intelligence & Support

Left: Electronics and IntegratedSystems is working on a 4-yeartrial to demonstrate fuel celltechnology for city buses.

Right: Platform Solutions ishelping to prepare young peoplefor life after school.


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The FTA has awarded $5.35 million forthe project to be distributed over fouryears by WestStart CALSTART, a non-profitorganisation that promotes clean, energyefficient transportation technologies.

BAE Systems is a founding member ofCALSTART and is represented on its boardof directors.

John Boesel, president and CEO of CALSTARTsaid, “We are pleased to join withBAE Systems – a company recognised forits pioneering work in hybrid drive systems –on this important project.”

Platform Solutions

Highlights for 2006– Won the BBC Radio Kent, Healthy Large

Employer Award for our monthly healthclinics and weight management programme.

– Ran an employee awareness campaignto reduce winter accidents.

– Won the Royal Society for the Preventionof Accidents Gold award for continualhealth and safety improvements for thefifth year running.

– Won the International Safety Award fromthe British Safety Council for the sixth yearin a row.

– Our Rochester site received Institute ofEngineering and Technology approvalfor its apprentice training programme.

– Helped send 80 students to theFarnborough Air Show, International YouthDay for a day of engineering activities.

– Most improved site at CharityChallenge Awards.

Working with local schoolsPlatform Solutions is helping to prepareyoung people for life after school. We arepartnering with the Medway EducationBusiness Partnership (MEBP), a charityworking to improve the links between schoolsand businesses around Medway in Kent.

– BAE Systems was recognised by the NationalSociety of Black Engineers (NSBE) AlumniExtension DC Chapter for our corporatesponsorship. The award was given at theirannual Scholarship and Chapter AwardsProgram held at Catholic University in April.

Innovative new toxics treatment processWe have developed a process to removeTributyltin (TBT), a toxic pesticide, fromwastewater at our Norfolk Ship Repairsite in Hampton Roads, Virginia. Coatingscontaining TBT are applied to vessels tostop barnacles and other marine organismsgrowing on the hull. It is also used to makerubber sonar domes for military ships.

Until now, wastewater contaminated with TBTwas transported to a disposal facility at acost of about $1 per gallon. During a recentcruise ship project, we disposed of morethan 1.25 million gallons of wastewaterin just ten days.

To help offset these financial andenvironmental costs we developed our ownonsite treatment process which removesTBT to extremely low concentrations. On-sitetreatment of the TBT-contaminated wastewatercosts about 10% of off-site disposal.

We believe we are the only industrial facilityin the US that can remove TBT to such lowlevels. The new process saved us around$4.5 million in 2005-2006.

MEBP run their campaign from an office atour Rochester site and Platform SolutionsHR Director, Mark Bowers, sits on thecharity’s board.

Our employees donate money and timeto help MEBP. This year, 11 employeesmentored students from schools aroundMedway (a further 15 are now being trainedas mentors).

Through MEBP, we support Young Enterprise,an initiative which aims to teach childrenbusiness skills. In 2006, four employeesvisited schools for two hours each weekto help children run small enterprises theyhave set up through the scheme.

We also host Work Related Learning Days toget young people interested in engineering.Pupils from local schools come to theRochester site for the day and are setengineering challenges.

In total Platform Solutions employeesdonated 500 hours in support of MEBP.

Customer Solutions

Highlights for 2006:– Our San Diego Ship Repair site was

awarded ‘Star’ status and acceptedinto the Occupational Safety and HealthAdministration’s Voluntary ProtectionProgramme – one of only two privateshipyards in the country in this programme.

– Our Norfolk Ship Repair site earned theSustained Distinguished EnvironmentalPerformance Award from The ElizabethRiver Project, a Portsmouth, VA-basedenvironmental organisation dedicatedto urban river restoration.

– Our San Diego Ship Repair and HawaiiShipyards sites participated in the Bikesfor Tykes programme, donating their timeand effort to assemble bikes for needychildren as part of the Marine Corps Toysfor Tots drive.

Right: Land Systems ran a‘Wasteline’ campaign over the2006 Christmas holiday periodto slim down energy bills andcut carbon dioxide emissions.

Land Systems

Highlights for 2006– Land Systems apprentices designed an

Arm Rehabilitation Apparatus which stopsmuscle deterioration in people who aresuffering from paralysis caused by strokes.

– We piloted flame resistant protectiveclothing designed by a team at theLand Systems Munitions business.

– We assigned a senior executive to each siteto champion safety, health and environment(SHE) and monitor improvements.

– We appointed a Head of SHE to coordinateactivities in this area across Land Systems.

– We launched the Start Safe Keep Safecampaign which raised awareness ofhealth and safety using magazine articles,posters, tool box talks and road shows.

– We implemented a new trolley systemto improve the safety of moving hullsat our South African business.

– We conducted a study to identify energysaving opportunities across our sites

– We developed a policy on drug andalcohol abuse.

Cutting costs and carbon emissionsIt takes a lot of energy to heat and powerLand Systems. Our buildings are huge (one inNewcastle is half a mile long) and there are alot of them (over 1,000 at our Glascoed site).This costs a great deal of money and alsocontributes to climate change.

Land Systems developed a ‘Wasteline’campaign over the 2005 Christmas holidayperiod to slim down energy bills and carbondioxide emissions. Using workshops andposters to raise awareness of how everyonecan contribute by taking even small actions,the campaign was a great success andsaved £6,276 during the Christmas periodacross Land Systems sites.

Land and Armaments


Business Group updates (continued)

Business

Group

updates

Building on this great campaign, LandSystems transferred their best practicemore widely across BAE Systems in the UK.By obtaining the buy in from the BAE SystemsOperations Council a small amount offunding was provided to produce newposters for the 2006 Christmas campaign.The underlying theme of the new postercampaign was that these savings shouldbe made throughout the year and not justfor Christmas, so hopefully the campaignwill live on in 2007.

The 2006 Christmas ‘Wasteline’ campaignacross BAE Systems was adopted acrossmany parts of BAE Systems and was a greatsuccess. Using the 2004 data from LandSystems sites as a baseline, £130,000was saved during the Christmas period,which equates to 571 Tonnes of CO2.

Land and Armaments

Highlights for 2006:– Three new manufacturing sites certified

to the international environmentalmanagement standard ISO 14001.

– Set up an advisory board to ensurecompliance with the Toxic SubstancesControl Act.

– Implemented an internal environment,health and safety (EHS) audit programme.

– Minneapolis site won the Minnesota SafetyCouncil’s Award of Honor for its healthand safety performance, for the ninthconsecutive year.

Principal operationsProvides design, development, productionand through-life support and upgrade ofarmoured combat vehicles, naval guns,missile launchers, artillery systems andintelligent munitions.

Major marketsUS, UK, Sweden, South Africa

£2,115m15%



Number of employees

11,600


Left: Air Systems launched a newtraining programme to teachemployees how to ‘think lean’.

Air Systems

Highlights for 2006– Agreed to contribute £10,000 over the

next two years to a local authority initiativedesigned to make Fylde the most energyefficient borough in the UK.

– Reduced the energy needed to heat andcool our F-35 Lightning II (formerly knownas the Joint Strike Fighter) facility, savingus £1,000 to £2,000 per week.

– Met regularly with local residents andother interested parties to update themon plans to develop our Samlesbury site,and address their concerns.

– Was title sponsor of a regional technologytournament for secondary schoolsthroughout Lancashire and Cumbria,involving more than 1,000 students andtechnology teachers from 100 schools.

– Sponsored a local initiative to encouragepupils and their parents/guardians to walkto school every Wednesday.

– Held four ‘Green Weekends’ to conserveenergy. Our Brough site closed fromThursday night to Monday morning, soemployees enjoyed an extra day off work.Eight ‘Green Weekends’ are plannedfor 2007.

– Was title sponsor for the Lancashireemergency services annual ‘Pride ofLancashire’ bravery awards.

– Launched the Lean Learning Academy,a three week efficiency and leadershiptraining programme.

Lean Learning AcademiesWe launched a new training programmeto teach our employees how to ‘think lean’.‘Lean’ is a process designed to increasethe efficiency of all the work done at AirSystems – from engineering to procurement.

Fourty one Air Systems employees attendedLean Learning Academies to find out how toidentify and eliminate waste. The three weekcourse teaches the principles ‘Plan, Do, Act,Check’ to make sure managers deliver the

actions they promise to their team. Othertopics on the course include ‘current andfuture state mapping’ (assessing whereyou are on a project and where you wouldlike to be) and policy deployment (makingsure all levels of the organisation aregeared towards meeting site targets).

Above all the ‘lean’ approach is aboutenabling our leaders to have tight control overtheir daily routines and the routines of theirteams. This means that different parts of thebusiness can work to the same timetable.

Another six Lean Academy Courses areplanned for 2007.

Naval Ships

Highlights for 2006– Developed an Energy Policy to measure

and reduce energy consumption.– Held Learning at Work Days at our Filton

and Govan sites where employees weregiven health advice, learned new skills andwere encouraged to take up new hobbies.

– Launched an Everyday Skills programmewhich offers courses on basic IT,communication, literacy and numeracy.

– Introduced a NVQ Level 3 Certificatetraining course in First Line Management.

– Introduced flexible working arrangementsfor non-production workers, which includea childcare voucher scheme.

– Recruited 70 new apprentices (taking ourapprentice total to 250).

– Reduced accidents by 52% over the lasttwo years.

– Accredited to Investors in People, thetraining and human resources standard.

– Raised around £108,000 for charity.

Improving safety at our sitesNaval Ships is leading Group efforts to reducerisks from working in confined spaces andfrom hand-arm vibration syndrome (HAVS). Thiswork is part of BAE Systems’ partnership withthe UK Health and Safety Executive (HSE).

Programmes

www.baesystems.com

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Principal operationsComprises the Group’s air systems, navalships and submarines activities, with theUK MoD its principal customer.

Major marketsUK

£2,927m21%



Number of employees

17,900

Left: Naval Ships is leadingGroup efforts to reduce risksfrom working in confined spacesand from hand-arm vibrationsyndrome (HAVS).

Right: Submarines employeeshelped to build Amazon Hope 2,a floating medical vessel forremote communities in thePeruvian Amazon.



Business

Group

updates

At Naval Ships we have invested in newequipment so that 98% of the tools at ourGovan site and 95% at Scotstoun now carrythe green label. Tools are inspected regularlyto make sure they comply with our standards.

Submarines

Highlights for 2006– Reduced lost time through accidents

by 21%.– Updated our health and safety policies

so all employees are required to wearan oxygen level monitor when enteringa confined space.

– Conducted a smoking cessation programmein conjunction with the NHS, which includedfree counselling and medication andtrained trade union representatives asstop smoking advisors.

– Employees raised £16,971 for 29 localcharities through our Give as You EarnScheme.

– Launched a liaison group and communitynewspaper to target and report our localcommunity investment activities.

– Launched the PRIDE campaign toencourage employees to engage with thelocal community.

– Completed a partnership with the NorthwestRegional Development Agency to re-skill ourworkforce (the partnership delivered 22,523training hours over two years).

– Gained planning permission to install a windturbine or series of wind turbines to powerlights and computers in areas such as themain reception foyer at the shipyard.

– Employees were awarded the Linda Wilkinsmemorial award for community involvementat the Charity Challenge awards ceremony.

Building a floating hospitalMany remote communities in the PeruvianAmazon have no access to medical services.Five years ago, Naval Ships’ apprenticesconverted a former Royal Navy boat into

Confined spacesIn 2006, we carried out a two day inspectionto assess standards for working in confinedspaces at our Govan site. A team of in-houseinspectors found that good training plansand rescue arrangements were in place, butidentified a need for clearer guidance aboutwhat constitutes a confined space.

A follow up audit identified all confined spacesacross Naval Ships. A central team was thenset up to co-ordinate improvements and makesure that controls such as ventilation, lighting,signage and test certificates are in place atall sites.

The standards developed at Naval Ships willapply to all BAE Systems’ employees as wellas to the contractors and suppliers workingfor us.

Protecting employees from vibrationEngineering equipment can cause hand-armvibration syndrome (HAVS) which leads toa loss of sensitivity of fingertips.

Naval Ships has developed a set ofkey performance indicators (KPIs) forBAE Systems and guidance on how toachieve these standards.

Employees at our sites undergo regularhealth screenings to identify early symptomsof HAVS before the condition can becomeserious. Individuals diagnosed with HAVSare restricted from doing certain types ofwork. Our Occupational Health Departmentand the employee’s supervisor work withthe individual to agree how to limit theirexposure to vibration.

Naval Ships have introduced a traffic lightsystem to control exposure to vibration fromtools. A red label means that the piece ofequipment can only be used for a specifiedtime period. Green signifies that a tool is safefor use over a whole shift. When an employeetakes a tool from our stores they are told ofthe risks associated with the item.

the Amazon Hope, a floating hospital whichextended a lifeline to these communities.This year, Submarines employees helpedcreate a sister medical vessel for the region,Amazon Hope 2.

First our employees and the local communityraised £158,000, exceeding the £100,000needed by the Vine Trust to make the AmazonHope 2 conversion happen.

Our apprentices could then begin refittingthe vessel at our shipyard. They createdan operating theatre, a dentistry room andaccommodation space for nurses and visitingmedical teams. Naval Ships funded architectTom Dunn to travel to Peru to bring theoriginal Amazon Hope up to the samestandard as her new sister boat.

The finished Amazon Hope 2 was exhibitedat the International Festival of the Sea inPortsmouth, where she was re-commissionedby HRH Princess Royal and visited by over25,000 people. Members of the teaminvolved in the refit then helped deliver theboat to its final destination 11,000 milesaway in Peru. The crew braved 8ft wavesand 40c temperatures to bring the AmazonHope 2 to its home port of Iquitos.

We are now collaborating with BarrowBorough Council to send 20 pupils fromlocal secondary schools to see the boatsat work in Peru, in August 2007.

Programmes (continued)

Left: CS&S chose to supportMoor Park’s bid for specialiststatus because it would makea real difference to the school.


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Customer Solutions & Support

Highlights for 2006– Completed our four year project to create

vocational standards for skilled trades inSaudi Arabia.

– Helped school students to set up and runbusiness ventures as part of the YoungEnterprise Scheme.

– Achieved the international health and safetystandard OHSAS 18001 at our CS&SInternational UK Offices and commencedthe programme for assessment in all ourremaining UK business.

– Introduced new safety, health andenvironment (SHE) ‘passport’ training forall CS&S MASS employees as well as SHEtraining specifically for senior executives.

– Introduced a distance learning health andsafety course for our international businessesincluding translating into Arabic to includeour Saudi employees and members ofthe RSAF.

– We have undertaken an Occupational Healthbaseline review led by an independentoccupational physician to identify our keyOH areas for improvement going forward.

– Held a conference with Greenpeaceto discuss the green disposal of ships.The London conference in May was thefirst major UK forum on the subject andbrought together stakeholders froma range of backgrounds.

– We have undertaken a shadow BiTCbenchmark survey and are in the process ofanalysing the output and recommendations.We plan to develop some initiatives toimprove various aspects of CR going forward.

– Sponsored ten children in impoverishedthird world countries through the WorkplaceGiving Scheme in Australia.

– CS&S Australia employees partnered withexternal businesses and suppliers to designand build a sensory garden for the disabledresidents at the Klemzig Residential CareHome in South Australia.

Helping a school reach specialist school statusMoor Park High School is located in oneof the most challenging inner city areasof Preston, UK. In 2006, the school appliedfor Business and Enterprise specialist statusin a bid to make its pupils more employable.Business and Enterprise is a UK educationstandard which helps students developemployment skills and progress to highereducation. We donated £10,000 to theschool to help its application. We choseto support Moor Park’s bid as we feltthat specialist status would make a realdifference to the school. We were alsoimpressed with its inclusive environment.

Now Moor Park has achieved specialiststatus it has secured funds to extend theschool facilities to benefit both its pupilsand the local community. In addition wehave supported the school’s businessand enterprise activities. This has includedoffering leadership training for teachers andproviding pupils with opportunities to attenda workshop to give them experience ofa business environment. We have alsogiven advice to the school on branding,communication and strategy. Our schoolsroad show has also visited the school toget the students involved in science andengineering projects.

The deputy head teacher at Moor ParkBusiness and Enterprise School, Phil Jaggers,said “we appreciate the support given byBAE Systems and look forward to developingour relationship. Specialist School status willprovide Moor Park with an opportunity todevelop the innate enterprising spirit thatmany of our pupils exhibit, providing a focusfor raising standards.”

Customer Solutions & Support

Principal operationsProvides partnered, through-life supportand capability solutions to the UK MoDand manages the businesses in SaudiArabia and Australia.

Major marketsUK/Europe, Middle East, Australia

£3,180m22%



Number of employees

14,600

Left: Insyte participated in theWISE (Women into Scienceand Engineering) scheme.

Right: Underwater Systems’Working Party for Healthhas helped employees tolead healthier lifestyles forthe last decade.



Business

Group

updates

Integrated System Technologies (Insyte)

Highlights for 2006– Creation of an Insyte TU Steering Group

to help focus on CR.– Formation of a joint working group to

co-ordinate and prioritise more effectivelobbying arrangements on behalf of Insyte.

– Continuation of active health monitoring andsurveillance programme, OH rehabilitation,back to work and specialist support.

– Participation in the WISE (Women intoScience and Engineering) scheme.

– Insyte together with its employees haveraised over £245,000 for various charitiesduring 2006.

– Participation in the ‘Take your Daughtersand Sons to Work’ day on April 27th.

– Review of site facilities to ensure thatemployee and visitor religious needsare being accommodated e.g. provisionof prayer rooms.

– Further increases in the number ofemployees taking advantage of moreflexible working arrangements as part ofInsyte’s initiative on work life balance.

Improving the workplace for all our employeesWorkforce diversity was a focus for Insyteduring 2006. In response to diversity metricsconcerning retention of key demographicgroups, we appointed an HR manager, witha specific responsibility for our graduate andtechnical apprentice programmes. Employeeretention is also expected to improve as aresult of training 16 new Respect at Workcontacts throughout the year. They will act asan alternative point of contact for employees,offering support and guidance in suspectedcases of discrimination, harassment orbullying in the workplace.

A review of our employee benefits schemeshas taken place to ensure they cater forthe complete range of needs of all ouremployees. In addition, and in responseto our ‘Ask the Board’ and other employee

feedback mechanisms, Insyte haveintroduced a new All Employee RecognitionAward Scheme designed to deliver moreequity within the nomination procedure byallowing any employee within the businessthe opportunity to recommend a fellowemployee for recognition.

Employee opinions were also key ininitiating a review of our Long ServiceAward Recognition Scheme. The feedbackreceived on existing policies indicated afailure to recognise certain key milestonesin service and consequently a morebalanced and equitable arrangementwas developed across the business.

Underwater Systems

Highlights for 2006– Launched a driving safety scheme including

practical and theory sessions for drivers.– Introduced a good spot safety campaign.– Supported the Bike to Work scheme.

UWS established its Working Party for Health(WPFH) in 1996 to encourage employeesto participate in health promotion activitiesacross the site and take responsibility fortheir health. The WPFH celebrated ten yearslast year and as part of the anniversarycelebrations, organised a Wellbeing Dayat Underwater Systems. Employees wereinvited to meet and have taster sessionswith a range of practitioners and therapists.

The WPFH has organised a range ofactivities including voluntary general healthchecks. lunchtime talks, drug and alcoholawareness sessions and smoking cessationgroups. In addition the group organisesblood donation sessions and facilitatesPilates and massage sessions each week.

Integrated Systems & Partnerships

Principal operationsA portfolio of high-technology defencesystems businesses comprising thewholly-owned Integrated SystemTechnologies and Underwater Systemsbusinesses, together with a 37.5%interest in the pan-European MBDA jointventure, a 20.5% interest in Saab ofSweden and a 50% interest in the GripenInternational joint venture.

Major marketsUK/Europe

£1,748m12%



Number of employees

10,500


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Head office

Highlights for 2006– Sponsorship of the UK MoD’s Christmas

Box scheme which provides 25,000Christmas gift boxes for all UK troopson overseas exercise.

– Sponsorship of a Christmas concert for UKtroops in Basra, Iraq featuring Welsh operastar, Katherine Jenkins.

– Sponsorship of each of the UK Armed ForcesSports Boards enables service personnel tofurther pursue sporting triumph.

– Sponsorship of the Royal InternationalAir Tattoo helps the organisers stage thisunique celebration of aviation for over150,000 members of the general publicon an annual basis.

– Support of several charities through ourRelationship Charity Programme, giving£100,000 to each over three years. Thisguaranteed sum helps the charity to planahead and commit to a specific project.The charities we supported in 2006 were:Leukaemia Research, St John Ambulance,the No Way Trust, Age Concern, and the USJuvenile Diabetes Research Foundation.

Committed to preserving our global heritageBAE Systems is keen to commemorate theactivities of its predecessor companiesthroughout the world. The company recentlysupported the Tank Museum at Bovington,Wiltshire and the Royal Naval Museum atPortsmouth in addition to the Pearl HarborMemorial Museum in Hawaii.

Our long-term support for the Imperial WarMuseum at Duxford in Cambridgeshire hashelped to build a completely new museumto tell the story of British aviation.

AirSpace will enable BAE Systems’ vast andvaluable collection of UK aviation artefacts,photographs, films and documents to besuitably preserved and displayed for visitorsto enjoy for years to come.

Regional Aircraft

Highlights for 2006– Donated £10,030 to 18 local

community groups.– Nine employees took part in the Glasgow

Women’s 10K run, raising £2,500 for theStillbirth and Neonatal Death Society.

– Donated two model training aircraftto the Air Training Corp, an activitiesorganisation for 13-18 year olds.

– Launched a modern apprentice programmeand recruited three technical and onecommercial apprentice

Supporting educationRegional Aircraft invests in educationto help develop the next generation ofengineers from primary school studentsto university postgraduates.

In June, nine Regional Aircraft employeesbrought the BAE Systems’ schools roadshowto four schools near our sites. This includedworkshops and a theatre performancedesigned to get children excited aboutscience and engineering.

Twenty-five secondary school students spenta week getting hands-on experience of anengineering career through work placementsat one of our sites.

Regional Aircraft has strong links withuniversities. Our employees lecture onthe aerospace industry at Glasgow andStrathclyde Universities and help studentswith their final year engineering projects.They also run a three-day course in AircraftIntegrated Design.

We are donating one of our avionics systemsrigs to Cranfield University. This will improvethe university’s postgraduate research andteaching capabilities. Cranfield University aimto have the rig fully installed by May 2007.

HQ and other businesses

Left: Regional Aircraft investsin education to help developthe next generation of engineersfrom primary school students,through apprentices touniversity postgraduates.

Right: Aircraft on display inAirspace, the new museumat Duxford, Cambridgeshire.

Principal operationsComprises the regional aircraft assetmanagement and support activities,head office and UK shared servicesactivity, including research centres andproperty management.

Major marketsUK

£295m2%



Number of employees

2,300


Data file

Performance summary

We collect data on ethics,diversity, environment,health and safety andcommunity investmentto help us monitor our CRperformance and identifyareas for improvement.

To view our performance on-line visit www.baesystems.com

2004 2005 2006 page

EconomicRevenue1 £8,817m £11,019m £12,333m XX

Operating profit2 £656m £761m £1,054m XX

Dividend paid in year £281m £315m £346m

Wages and salaries1 £2,469m £2,989m £3,274m XX

Pension costs1 £226m £233m £253m XX

Employee numbers1 73,300 80,000 79,000 XX

Health and safety3 (per 100,000 employees)Major accidents 61 55 47 29

Days lost to work-related injuries 9,126 8,774 10,204 31

Total injuries to all employees 7,969 6,009 4,788 30

Environment3,4

Energy use (Gwh) 1,321 1,767 1,742 27

CO2 emissions (million tonnes) 0.49 0.58 0.57 27

Waste (‘000 tonnes) 345 57 105 28

Waste recycled (‘000 tonnes) 67 37 67 28

Volatile organic compound emissions (tonnes) 241 610 742 28

Water use (million m3) 46 36 40 26

EthicsEthics enquiries 616 367 410 25

DiversityGender diversity: Male employees 80% 81% 80% 32

Female employees 20% 19% 20% 32

Ethnic diversity: White 92% 88% 87% 32

Non-white 8% 12% 13% 32

Age diversity5: under 25 5.9% 6.6% 6.6% 33

26 to 35 14.7% 18.4% 18.2% 33

36 to 49 40.8% 43.3% 42.6% 33

50 to 59 20.8% 25.3% 25.9% 33

60+ 5.2% 6.4% 6.7% 33

Community investmentWhat we have contributed (£m) 1,100,000 10,525,78 8,223,160 34

1 Excluding equity accounted investments2 Including share of equity accounted investments3 The increases shown for 2006 reflects the expansion of our business in the US in 2005 to include the former UDI and

ship repair business (2006 is the first full reporting year). This particularly affects the safety risk profile and use ofresources.We will be aiming to reduce the impact of each individual business year on year

4 Recalculated to include 2005 acquisitions5 2003 and 2004 figures do not include data for Saudi Arabia


Datafile

Ethics

TrendThe number of ethics enquiries receivedthrough our ethics officers, helplines ande-mail address was 410. This was anincrease of 43 from 2005 when wereceived 367 enquiries.

ExplanationThe increase in the number of reportsreceived in the UK and US this year isrelated to the increased awareness of thehelpline and ethical policies and standardsas a result of online and DVD training forall employees which took place in 2006.In particular the number of reports to theUK and ROW helplines doubled in 2006 –from 31 in 2005 to 62. This is as a directresult of the newly introduced onlinetraining for all employees which hasraised awareness levels of the Helpline.

2006

Accounting and charging practices 5Conflict of interest 6Employee relations and conduct 15Environmental, safety and health 2Management practices 19Security and misuse of assets 5Quality of manufacturing 2Guidance or assistance 10Company ethical policy 37

Ethics enquiries 2004 2005 2006

Formal ethics enquiries – UK and Rest of World 42 31 62

Formal ethics enquiries – US 574 336 348

Total enquiries 616 367 410

Dismissals 2004 2005 2006

Dismissals for reasons relating to unethical behaviour – UKand Rest of World 28

Dismissals for reasons relating to unethical behaviour – US 22

Total dismissals 50

Ethics

Types of calls to ethics helpline – UK and Rest of World (%)

2006

Charging practices 19COI 2Contract compliance 2Employee relations and conduct 18Management practices 7Misuse of assets 3Procurement and marketing 1Quality of manufacturing 2Guidance only no alleged misconduct 47

Types of calls to ethics helpline – US (%)


Data

file

Data file (continued)

Environment

Our environmental impact is related to the nature of our operations, the size of ourfootprint and the scale of throughput.

Given the changes to our operating profile and volume of production over the last two years,particularly in the US, we are presenting our environmental data separately for the UK andUS regions. This is intended to provide further transparency and improve the explanationof trends and factors affecting impacts.

For the current profile of our operations we have four years of data for the UK and two yearsfor the US. Our operations in other regions have relatively small environmental impacts andrepresent less than 5% of the overall total for the company.

Going forward we will provide further transparency by relating the environmental impactsto each specific business and type of operation. Our UK business continues to show overallimproved environmental management. Certain projects and stages of build will alwayshave a disproportionate effect on our environmental data. For example, the impact of theremediation of the former Chorley site in 2003 and 2004 can be seen on the amounts ofwaste generated and recycled. Major site waste clearance at Towcester and Great Baddow alsodisproportionately increased the amount of waste disposed during 2006. Water consumptionwill also increase at particular stages of ship and submarine build when the platforms arefloated in the docks.

Our production throughput in the US has increased significantly in some areas, particularlyin the production for the Bradley fighting vehicles and this affects all aspects ofenvironmental impact.

Introduction

Water use

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Total water consumed 3,192(thousand m

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Recycled water 25(thousand m

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2006

Total water consumed 37,315(thousand m

3)

Recycled water 2,249(thousand m

3)


Datafile

Energy consumption

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Electricity Gwh 376Gas Gwh 464Fuel/Oil Gwh 7

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2006

Electricity Gwh 544Gas Gwh 328Fuel/Oil Gwh 12

Total energy use

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Total energy consumption Gwh 884Total CO2 (million tonnes) 0.30


Data

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Environment (continued)

Waste

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Total waste disposed 59(thousand tonnes)Recycled waste 55(thousand tonnes)

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Total waste disposed 43(thousand tonnes)Recycled waste 12(thousand tonnes)

Volatile organic compounds

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2006

Total VOC (thousand tonnes) 236

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2006

Total VOC (thousand tonnes) 504

Datafile

Health and safety

2005 and 2006 figures include the former United Defence Industries business and the shiprepair yards which involve heavy manufacturing and increases the overall number of majoraccidents compared to 2004.

Overall the total number of injuries continues to decrease but the days lost per work relatedinjury has shown an increase. We are addressing this through a pro-active rehabilitationprogramme in partnership with our insurance providers.

Primary causes of injury continue to be manual handling, collision with objects and slips andtrips. These issues are being addressed through the development of common standardsand an audit programme supported by the safety regulators.

Introduction


2003 2004 2005 2006

UK major accidents 24 24 15 21UK rate per 100,000 employees 68 65 39 54US major accidents 9 4 27 16US rate per 100,000 employees 38 17 83 41Aus major accidents 0 2 0 1Aus rate per 100,000 employees 0 53 0 35KSA major accidents 8 3 1 2KSA rate per 100,000 employees 163 65 22 44Total major accidents 41 33 43 40Total rate per 100,000 employees 61 48 55 47

UK manufacturing industry average 2005-06: 180.3 per 100,00 employees

Major injuries as defined under the UK Reporting of Injuries, Diseases and Dangerous Occurrences Regulations (RIDDOR)

Major accidents

06050403

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Total major accidents 40Major accidents 47(per 100,000 employees)


Data

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Health and safety (continued)

2003 2004 2005 2006

UK total injuries 5,862 4,931 4,305 3,409UK rate per 100,000 employees 16,683 13,308 10,704 8,745US major injuries 263 391 751 976US rate per 100,000 employees 1,096 1,629 2,315 2,518Aus. major injuries 51 123 161 137Aus. rate per 100,000 employees 1,357 3,282 5,902 4,847Saudi major injuries 263 129 143 130Saudi rate per 100,000 employees 5,351 2,803 3,186 2,869Total major injuries 6,403 5,554 5,320 4,652Total rate per 100,000 employees 9,550 8,067 6,768 4,788

Total injuries to all employees

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Total injuries 4,652Total injuries 4,788(per 100,000 employees)

Cause of injury (%)

2006

Injured while handling, lifting or carrying 35.49Strike against something fixed or stationary 16.55Struck by moving, including flying/falling object 15.23Slips, trips or falls on same level 11.42Not in use 7.88Exposure to or contact with a harmful substance 5.18Contact with moving machinery 3.22Falls from height 3.33Struck by moving vehicle 0.66Exposure to fire 0.56Injured by an animal 0.25Contact with electricity 0.07


Datafile

2003 2004 2005 2006

UK days lost work-related injuries 6,870 4,529 3,532 3,977UK rate per 100,000 employees 19,553 12,223 8,782 10,193US days lost work-related injuries 1,603 1,130 2,952 4,434US rate per 100,000 employees 6,679 4,708 9,096 11,441Aus days lost work-related injuries 14 716 176 60Aus rate per 100,000 employees 467 19,103 6,452 2,123KSA days lost work-related injuries – 115 267 248KSA rate per 100,000 employees – 2,499 5,948 5,474Total days lost work-related injuries 8,487 6,283 6,896 8,719Total rate per 100,000 employees 12,167 9,126 8,774 10,204

Days lost to work related injuries

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Total days lost to work 8,719related injuryDays lost to work related injuries 10,204(per 100,000 employees)


Data

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*2003 and 2004 data does not include Saudi Arabia.

Diversity

TrendIn 2006 20% of employees were female.This figure is an increase of 1% on 2005

ExplanationWe are working to change the demographicswithin our business but recognise thatthis will occur slowly over time. We havea number of initiatives (see page 12) inplace to increase the number of womenacross our global businesses. In 2007this will focus on broadening the diversityof the applicant pool from which we recruitgraduates and apprentices whilst ensuringequal opportunities for all employees.

Gender diversity

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Gender diversity – UK, US, Australia and Saudi Arabia (%)

2006

Male 80Female 20

UK US AUS Saudi Total

2003 male 31,668 16,739 2,215 – 50,6222003 female 5,011 6,630 443 – 12,0842004 male 31,953 17,731 2,132 – 51,8162004 female 5,021 7,261 433 – 12,7152005 male 22,956 26,756 2,208 5,106 64,0262005 female 4,784 9,677 452 32 14,9452006 male 27,164 25,774 2,305 4,536 59,7792006 female 4,380 9,673 466 20 14,539

TrendIn the UK and US 13% of employees comefrom an ethnic minority background. Thisfigure is an increase of 1% from 2005.

ExplanationWe are working to change the demographicswithin our business but recognise thatthis will occur slowly over time. We havea number of initiatives (see page 12) inplace across our global businesses. In 2007this will focus on broadening the diversityof the applicant pool from which we recruitgraduates and apprentices whilst ensuringequal opportunities for all employees.

Ethnic diversity

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Ethnic diversity – UK, US (%)

2006

Non-white 13White 87

UK US Total

2003 white 36,296 19,162 55,4582003 non-white 383 4,207 4,5902004 white 36,560 20,470 57,0302004 non-white 412 4,522 4,9342005 white 34,391 28,282 62,6732005 non-white 349 8,151 8,5002006 white 31,183 27,400 58,5832006 non-white 361 8,047 8,409

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Not declared 8.5Asian 0.6Middle Eastern 52White European 38.7Other* 0.2


Datafile

Ethnic diversity

TrendIn Saudi Arabia the majority (52%)of employees are Middle Eastern.White Europeans make up another39% of the workforce.

ExplanationA key element of our commitment toour Saudi customers and an importantpart of the home market strategy in theKingdom of Saudi Arabia, is our Saudiisationprogramme. This delivers both transferof expertise to the Saudi people and thetransfer of technology to Saudi industries.We will continue to monitor demographicsin our Saudi Arabian business as partof this ongoing programme.

Ethnic diversity – Saudi Arabia (%)

*’Other’ includes Oriental/SE Asian, black African and black Caribbean.

UK US AUS Saudi Total

2003 under 25 10 5 26.2 – 7.5

2003 26-35 19.3 16 43.8 – 16.2

2003 36-49 45.6 45 18.5 – 37.6

2003 50-59 21.9 25 3.2 – 19

2003 60+ 2.9 9 8.3 – 4.6

2004 under 25 9.3 3 8.8 – 5.9

2004 26-35 18.6 13.4 25 – 14.7

2004 36-49 45.6 48.6 43.3 – 40.8

2004 50-59 23.1 25.2 19.1 – 20.8

2004 60+ 3.5 9.8 3.8 – 5.2

2005 under 25 9.5 3.87 10 4.4 6.6

2005 26-35 17.2 17.96 25.2 26.5 18.4

2005 36-49 44.8 41.8 44.4 43.2 43.3

2005 50-59 24.4 27.01 17.4 22.4 25.3

2005 60+ 4.1 9.36 3 3.5 6.4

2006 under 25 10.1 3.79 8.6 2.1 6.6

2006 26-35 16.3 18.45 25.9 24.2 18.2

2006 36-49 44.5 40.43 43.2 46.2 42.6

2006 50-59 24.8 27.78 18.5 24.3 25.9

2006 60+ 4.3 9.56 3.8 3.2 6.7

TrendIn 2006 the majority of our employees(42.6%) were aged between 36 and 49.The number of employees aged under 25has remained constant at 6.6%.

ExplanationWe continue to monitor age diversityacross the business to assess trendsand ensure business continuity andskills transfer.

Age diversity

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Age diversity – UK, US, Australia and Saudi Arabia (%)

2006

Under 25 6.626-35 18.236-49 42.650-59 25.960+ 6.7


Data

file


Community investment

Community

TrendIn 2006, our total community investmentwas £8,223,160 compared to £10,525,731in 2005. This figure includes cash andin-kind donations to charity as well asour direct support for communities andeducation across the world.

2006

Education and young people 16.4Social welfare 5.2Emergency relief 0.2Armed forces 25.3Health 30Arts and culture 17Economic development 1.3Environment 0.2Other 1.8

2006

Community investment 67.2Charitable donations 32.8

Focus of contribution (%)

What we contribute to (%)


Externalassurance

External assurance statement and commentary

External assurance statementgiven the company’s reorganisation over thepast year. Building on last year’s stakeholderresearch BAE Systems has opened upto more external parties, for examplethrough the roundtable discussion on itsenvironmental impacts, discussed in the“debating the future” section. BAE Systemshas also made efforts to be more forward-looking in its corporate responsibilityactivities. It has taken steps to lay out itscorporate responsibility plans and agendafor 2007 to 2012, which is to be welcomed.

Looking aheadIn our opinion the following issues should beaddressed if BAE Systems is to meet bestpractice standards for reporting materiality,completeness and responsiveness:

MaterialityPresenting the report by business grouphelps to give a better understanding of thescope and focus of BAE Systems’ differentbusiness activities. We believe readerswould benefit from the company fullyaccounting for the impacts of each group.This would allow the company to identify themost important impact each business hasrelevant to its own operations. A leadingapproach would be to publish performancetargets in relation to each.

North American business now representsapproximately one third of all sales and overone third of the workforce, yet the limitedinformation given about operations andimpacts there is not in keeping with theimportance to the company as a whole.In part, the limited information reflects therapid growth of the US business. Futurereports would be materially improved ifthis imbalance were addressed.

BAE Systems states in its core values itscommitments to its customers. However,there is little discussion of its principalcustomers, or how the company maintainsrelationships and delivers high levels ofservice to them. We believe understandingthis is material to understanding thebusiness. Future reports should explainto readers what it means to do businessin six “home markets” with exports tonumerous countries, while the sale of itsproducts is restricted by national authorities.

CompletenessLooking at the range of topics covered,this year’s report addresses social impactswell, although this would be strengthenedby stating the strategic aims of employeeand community activities. BAE Systemshas been reporting on its environmentalimpacts for over five years. We look forward

BAE Systems has commissioned TheCorporate Citizenship Company to provideit with external assurance and commentaryon its Corporate Responsibility Report 2006.BAE Systems’ management has preparedthe report and is responsible for itscontents. Our objectives were to reviewand advise on aspects of its contents andpresentation, to conduct selected checks tounderlying corporate records, and to providethis statement for which we have soleresponsibility. A full statement of our externalassurance and commentary is availableat www.baesystems.com including detailsabout The Corporate Citizenship Company,our relationship with BAE Systems and theassurance process we have adopted. Thisstatement summarises our principal findings.

Our opinionIn our opinion, the report provides a fairand balanced representation of the progressBAE Systems is making in living out itscommitments to corporate responsibility.Where we believe significant gaps exist inavailable performance data and stakeholderviews on material issues, we identify themin our commentary below. In forming ouropinion and making our comments, we havehad regard to the principles underlying theinternational assurance standard AA1000(www.accountability.org.uk) notablyconcerning materiality, completeness andresponsiveness. We have also had regardto the reporting guidance for content andthe principles for defining quality containedin GRI’s G3 sustainability reportingguidelines. (www.globalreporting.org).

CommentaryA corporate responsibility report shouldexplain how a company impacts on society,looking at all the important economic,social and environmental concerns ofits stakeholders. It should show howcrucial decisions are made, and differinginterests balanced. Honest aboutshortcomings, it should demonstrate howthe organisation is responsive, by listening,learning and improving.

Against this goal, we believe BAE Systems2006 report demonstrates continuedprogress in the company’s reporting of itscorporate responsibility practices acrossall aspects of its business. The companyremains ahead of its sector in its reportingand outperformed in all but one componentof the Dow Jones Sustainability Index.

This year’s report provides an accountof activity by each of BAE Systems’ fivebusiness groups. This is particularly valuable

to future reports building on initiativescurrently underway to show how thecompany is contributing to the UK’s nationalsustainable development objectives.

We believe the report would be morecomplete if it explained BAE Systems’economic impacts. Not only is BAE Systemsa large employer, but it is a large purchaserof goods and services in its principal markets.Detailing its direct and indirect economicimpacts would help to give a more completepicture of the company. In keeping withthis and with last year’s recommendations,future reports should give more informationabout its relationships with suppliers.

ResponsivenessAs with last year, this report addresseschallenging issues in its “key issues for ourstakeholders” section. BAE Systems brieflystates its position regarding press coverageof some allegations of misconduct.BAE Systems has stated elsewhere that itis unable to comment on this situation whileinvestigations are on-going. Nonetheless,given the extent of concern expressed,including public statements from institutionaland other investors, we believe readerswould expect to see a fuller expressionof the company’s position.

The climate change roundtable highlightedthe need for BAE Systems to develop aneffective climate change strategy. At presentit captures data about greenhouse gasemissions, but it should make set cleartargets for their reduction. Because of thenature of its products and their productioncycles, which are not always predictable,there are challenges to setting annualtargets, but it is important to move inthis direction if the company is to meetthe expectations of stakeholders.

Other issues in which readers of corporateresponsibility reports are expressinginterest include: detailing membership oftrade associations and lobbying activities;providing information about targets not met;and contributions to governments throughtax, offset agreements and partnerships.

9 March 2007

www.corporate-citizenship.com

Can’t find what you are loo

king for?

For full information on all a

spects of ourCorporate Re

sponsibility agenda,

policy statements and info

rmation on how we operat

e and our

responsibilities as a defe

nce company, see our det

ailed CR website at:

www.baesystems.com/corp

orateresponsibility

This report isonly one of m

any sourcesof informatio

n about our company.

The followinginformation is

also availableon our websi

te.

– For an account of our ye

ar’s financialperformance,

products andservices

sold and highlights on perf

ormance readour Annual R

eport and Accounts

available at www.baesystem

s.com

– For how wemanage our b

usiness andour full corpo

rate governance

statement visit www.baesys

tems.com/investors

– For dedicated informatio

n for shareholders includin

g investor presentations

and regulatory announcem

ents visit www.baesystems

.com/investors















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