Agreement

BAE SYSTEMS PLC
27 January 2005



27 January 2005

BAE Systems and Finmeccanica sign EuroSystems transaction agreement


Further to the announcement on 20 October 2004, BAE Systems plc ('BAE Systems')
announces that it has signed a definitive transaction agreement with
Finmeccanica SpA ('Finmeccanica') in relation to the EuroSystems transaction.

Under the EuroSystems transaction:

          •   BAE Systems and Finmeccanica will merge BAE Systems Avionics 
              Limited and Galileo Avionica SpA to form a new Avionics business 
              valued at approximately £1.08 billion.  BAE Systems will own 
              25 per cent. of this business and will also receive net cash 
              consideration upon completion of £379 million.  Finmeccanica will 
              own 75 per cent. of the business.  In accordance with the option 
              arrangements described more fully below, BAE Systems will be 
              entitled to receive a further £269 million in cash for its 
              remaining 25 per cent. interest;

          •   AMS, currently a 50/50 joint venture of BAE Systems with 
              Finmeccanica, will be dissolved.  BAE Systems will acquire AMS's 
              UK operations, which are valued at approximately £360 million, 
              and Finmeccanica will acquire all of the Italian operations of 
              AMS, which are valued at approximately £260 million.  BAE Systems 
              will pay Finmeccanica an equalising amount of £50.5 million in 
              cash.  In addition, Finmeccanica will acquire the UK Air Traffic 
              Management business of AMS for £10 million (£6.5 million in cash 
              and £3.5 million in assumed debt); and

          •   Selenia Communications Limited, a wholly owned subsidiary of 
              Finmeccanica, will acquire BAE Systems' UK Communications business 
              for £25.4 million in cash.

The total effective net cash consideration, including the UK Air Traffic
Management assumed debt, to be received by BAE Systems is £633 million, of which
£364 million will be received upon completion of these three constituent
transactions and a further £269 million will be received under option
arrangements.  Completion is subject to obtaining all applicable regulatory and
governmental consents.

The agreement enables BAE Systems to create a significant Systems Integration
and C4ISR business by integrating the capabilities of AMS's UK operations and
BAE Systems' C4ISR Networked Systems and Solutions business. The transaction
also achieves BAE Systems' and Finmeccanica's mutual goals of securing control
and clear management responsibility for significant businesses of the European
defence industry. Finmeccanica will have majority ownership of BAE Systems' UK
Avionics business and Galileo Avionica in Italy; and will have full ownership of
BAE Systems' UK Communications business and Finmeccanica's existing strategic
communications business.


      Avionics

      The new Avionics business will comprise BAE Systems Avionics Limited, BAE
      Systems' UK avionics businesses operating in the fields of electro-optics,
      airborne radar and electronic warfare ('BAE Systems UK Avionics'), 
      together with Galileo Avionica SpA, Finmeccanica's Avionics business.  As 
      previously indicated, the US and Australian Avionics businesses as well as 
      the UK business of the Platform Solutions Sector of BAE Systems North 
      America, based at Rochester and Plymouth are not included in the 
      EuroSystems transaction.

      The EuroSystems transaction agreement incorporates certain option 
      arrangements whereby Finmeccanica may require BAE Systems to sell its 
      25 per cent. interest in the new Avionics business to Finmeccanica at any 
      time following completion and BAE Systems may require Finmeccanica to 
      purchase its 25 per cent. interest after 25 months following completion.  
      The consideration for BAE Systems' 25 per cent. interest payable on 
      exercise of either option will be £269 million in cash.

      The net cash payable to BAE Systems and the option exercise price are 
      subject to reduction, depending, in relation to BAE Systems UK Avionics, 
      upon the profit achieved for the year ended 31 December 2004, the 
      achievement of targets for certain contracts within a period of two years 
      from completion and in respect of any amounts payable by BAE Systems UK 
      Avionics to the BAE Systems pension schemes as a result of the 
      transaction.

      BAE Systems intends to account for its interest in the new Avionics 
      business as an investment.

      During the year to 31 December 2003, BAE Systems UK Avionics generated 
      £677.9 million of turnover and £17.4 million of profit before interest, 
      tax, amortisation and exceptional items.  At 31 December 2003, BAE Systems 
      UK Avionics had net assets which are the subject of this transaction of 
      £99.4 million.

      During the year to 31 December 2003, Galileo Avionica generated Euro 517.5
      million of turnover and Euro 49.8 million of profit before interest, tax,
      amortisation and exceptional items.  At 31 December 2003, Galileo Avionica 
      had net assets which are the subject of this transaction of Euro 401.2 
      million.


      AMS

      The AMS joint venture will be dissolved, with BAE Systems and Finmeccanica
      acquiring the UK and Italian operations of AMS respectively.

      BAE Systems will merge the UK operations of AMS and BAE Systems' C4ISR 
      Networked Systems and Solutions business to form a wholly owned systems 
      integration business.

      During the year to 31 December 2003, AMS generated £806.2 million of 
      turnover (of which its UK operations accounted for £481.6 million and its 
      Italian operations accounted for £324.6 million) and £63.8 million profit 
      before interest, tax, amortisation and exceptional items (of which its UK 
      operations accounted for £51.3 million and its Italian operations 
      accounted for £12.5 million).  At 31 December 2003, AMS had net assets 
      which are the subject of this transaction of £756.7 million (of which its 
      UK operations accounted for £444.2 million and its Italian operations 
      accounted for £312.5 million).


      Communications

      During the year to 31 December 2003, the BAE Systems' UK Communications
      business, which was disclosed in the BAE Systems 2003 Report and Accounts 
      as part of the Avionics division, generated £46.7 million of turnover and 
      a loss before interest, tax, amortisation and exceptional items of 
      £5.2 million.  At 31 December 2003, the BAE Systems' UK Communications 
      business, had net liabilities which are the subject of this transaction 
      of £1.1 million.


The proceeds from the transaction will be used to reduce BAE Systems debt.  The
transaction is expected to be slightly dilutive to earnings per share in 2005.

Mike Turner, Chief Executive of BAE Systems, said: 'BAE Systems is delighted to
have reached agreement with Finmeccanica on such a major transaction. This
transaction will generate substantial cash proceeds for BAE Systems and will
result in management control and improved business opportunities in the
strategically important area of Network Enabled Capability.'

Dresdner Kleinwort Wasserstein Limited is acting as lead financial adviser and
broker to BAE Systems on the EuroSystems transaction.  Rothschild is acting as
co-financial adviser.


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