Re Contract

BAE SYSTEMS PLC
19 February 2003


19 February, 2003


BAE SYSTEMS ANNOUNCES AGREEMENT WITH THE MOD TO RE-STRUCTURE

NIMROD AND ASTUTE CONTRACTS


BAE SYSTEMS and the UK Ministry of Defence (MoD) have today agreed changes to
the contract structure for both the Nimrod MRA4 maritime patrol aircraft
programme and the Astute attack submarine programme.

In December 2002, the company announced that additional issues had arisen in
relation to these programmes and that it had become apparent that there were
substantial schedule and cost implications.

Under the terms of today's agreement, the current contracts for design,
development, production and support on each of the two programmes will be
revised. These revisions will separate the Design and Development phase of each
programme from the Production phase. Design and Development will be completed
under new Target Cost Incentive Fee (TCIF) arrangements. Both programmes will be
placed on a firm footing for the delivery of the Astute and Nimrod capabilities
into service.

BAE SYSTEMS and the MoD have established new Target Costs and Fee levels for
both programmes, and have high levels of confidence of delivering the programmes
within these new target levels. Up to the Target Cost level, cost saving will be
shared by the customer and company as an additional Incentive Fee for the
company. Any cost overruns above the Target Cost will be shared by the customer
and the company, up to the maximum level established for the company by the
agreement. These new arrangements will place a significant economic incentive on
the company to perform. The company has reviewed its project management of these
programmes, consistent with today's best practice, and is taking actions based
on lessons learned.

Pricing of the Production phase of each programme will be concluded following
achievement of sufficient risk mitigation from the Design and Development phase
to enable production costs to be established with confidence.

ASTUTE

The difficulties in the Astute programme stemmed principally from moving the
design of the submarine to a fully electronic CAD (Computer Aided Design) design
basis - a process that neither party understood would be as difficult as it has
turned out to be.

Production work on the Astute Programme will only be resumed after design
maturity has been established. Design and Development, which includes the build
of the First of Class, HMS Astute, will be completed under new TCIF
arrangements. Pricing for the production of HMS Ambush and HMS Artful will be
established once adequate design maturity has been achieved and progress has
been made on the First of Class. In order to maintain progress on the programme,
General Dynamics Electric Boat Division (GD) will provide design assistance to
reinforce the project team. This will enable the Astute project team to take
advantage of lessons GD learned in computer-aided design on major US submarine
programmes.



NIMROD

The difficulties in the Nimrod programme stemmed principally from issues
associated with delays in design causing an increasing concurrency between
design, development, and production in the programme.

Production work on the last 15 of the 18 Nimrods in the MRA4 programme will
stop. This work will not be resumed until significant risk reduction has been
accomplished, using the first three aircraft as development aircraft. Design and
Development, including the completion of the three development aircraft
currently in build, will be completed under new TCIF arrangements. Prices for
the production of the last 15 aircraft will be established after Design and
Development stability has been achieved.

FINANCIAL

Today's agreement enables the company to recognise the cost to complete these
programmes under the new contract terms. As a consequence, exceptional costs of
£750m (£572m after tax) will be charged to the 2002 accounts comprising £500m
for Nimrod and £250m for Astute. These charges cover in full the company's
residual exposure to higher development costs up to maximum level established
for the company by this agreement.

The cash consequences of these charges, after tax, are expected to comprise
£225m in 2003 and £100m in 2004 with the balance of £250m expended in 2005 and
beyond.

These new terms mean that these programmes can be completed by the company with
financial certainty.

2002 TRADING

While much focus has understandably been on the progress of negotiations on
future terms and conditions of trade with the MoD on these and other programmes,
good progress has been made across much of the balance of BAE SYSTEMS' business
operations.

On 20 February the company will announce its Preliminary Results for the year
ended 31 December 2002. The results will reflect the generally stronger
performance, envisaged at the time of the company's 2002 Interim Results,
through the second half of the year before taking account of the exceptional
charges for the Nimrod and Astute programmes described above.

In 2002, the company's North America business group and Customer Solutions and
Support continued their good performance. The anticipated performance in the
second half of the year was delivered in the Avionics business group. As
indicated previously, the performance in the International Partnerships business
group was impacted by losses last year in the Astrium space systems activity
that the company agreed to sell to EADS in January this year. Airbus contributed
a good performance given the difficult market conditions.

Mike Turner, Chief Executive, said: 'We very much welcome this agreement and
appreciate the constructive approach that has been demonstrated in recognising a
need to obtain a better balance between risk and reward on these two complex and
technically demanding programmes. In Nimrod and Astute BAE SYSTEMS will deliver
two systems of unrivalled capability to the UK's armed forces.

'Addressing these issues has been important but it should be recognised that the
balance and majority of the company's business has continued to perform well.
With uncertainty removed, we can now look forward to the Nimrod and Astute
programmes contributing to future returns to our shareholders, and to building
on our positive relationship with the MoD.'


Issued by:

BAE SYSTEMS plc

London


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