MTU Aero Engines Holding AG places high value on good corporate governance on the basis of trustful cooperation between the Board of Management and Supervisory Board as well as with all business partners. Even before the IPO, MTU had integrated the key elements of the German Corporate Governance Code into its day-to-day business.

In its amended version of June 2, 2005, the German Corporate Governance Code (the “Code”) outlines the essential statutory regulations for the management and supervision of companies that are listed on the stock exchange, as well as nationally and internationally recognized standards for responsible corporate leadership. Core elements are trustful cooperation among all bodies of the company, as well as responsible and transparent corporate management and supervision that is guided by sustained creation of value.

On the occasion of the IPO, MTU carried out an in-depth review of the recommendations and suggestions of the Code and their implementation in day-to-day operations. In the process, MTU consistently implemented all regulations that relate explicitly to the observance and protection of the rights of a broad base of shareholders. As a result, MTU will appoint voting rights representatives for the first General Shareholders’ Meeting after the IPO, which will take place on May 12, 2006. Shareholders who are unable to attend in person may exercise their voting rights through these representatives.

Trustful cooperation among the company’s bodies

The close and trustful cooperation practiced among all bodies of MTU as a public corporation testifies to good corporate governance. The qualifications and experience of the members of the Board of Management, who lead the company as a team, complement each other. The Board of Management regularly and promptly informs the Supervisory Board of the Group’s current situation, including potential risks, and of strategic decisions and considerations.

The members of the Supervisory Board, which is comprised according to statutory regulations of six shareholder representatives and six employee representatives, possess the expertise, abilities, and technical experience required to properly fulfill their tasks. The Supervisory Board reflects the ownership structure of MTU; it includes a sufficient number of independent members. In the previous business year, there were no contracts for consulting, services or labor between MTU and any member of the Supervisory Board; in addition, no conflicts of interest subject to disclosure requirements arose among the Supervisory Board members. In the past financial year, D&O (director and officer liability) insurance coverage, with an appropriate deductible, had been taken out for the members of the Supervisory Board and Management Board.

Remuneration of the Board of Management with long-term incentive effect

Remuneration of the bodies of MTU is subject to clearly defined and transparent criteria. Remuneration of the members of the Board of Management includes fixed and variable components, and amounted in the past business year to €6,631,847, including non-cash benefits and share-based compensation. Of this amount, €3,644,575 was fixed, €2,750,000 was performance-related, and €237,272 was tied to the calculated annual value of the matching stock program that is described in detail in the following. The amount of the performance-related compensation (45% of the total remuneration) depends on the development of two performance data: the operating cashflow and the operating profit (adjusted EBITDA). These key figures reflect the business situation, the success and future prospects of the company. Both have developed very positively; the targets agreed with the Supervisory Board for the 2005 financial year were exceeded. Allocations to provisions for pension obligations to the members of the Board of Management, with the exception of the President and CEO, amounted to €2,577,664 in the year under review.

In line with the recommendations of the Code, a matching stock program (MSP) was established in 2005 as a long-term, incentive and risk-based compensation element, with a term of eight years. Under this program, the members of the Board of Management as well as a large group of top-level management staff will receive a compensation the amount of which depends on the development of the market value of the MTU shares. In accordance with the conditions of the MSP, each participant is obliged to purchase MTU shares with their own funds, up to a predefined maximum investment volume and at the current share price (MSP shares). These shares are credited to the MSP participants in a blocked security deposit for the duration of their participation in the MSP. On the date of the initial notice and thereafter 5 times in 12-month intervals, MTU Aero Engines Holding AG will allocate six virtual, so-called phantom shares for each MSP share owned. These phantom share options are considered “exercised” two years after their allocation, if certain performance goals are reached: The MTU share’s average unweighted closing price in Xetra trading on the Frankfurt Stock Exchange during the 60 trading days preceding exercise of the phantom share options must be ten percent higher than the MTU share’s average unweighted closing price in Xetra trading on the Frankfurt Stock Exchange during the 60 trading days prior to allocation of the respective tranches of the phantom shares.

When phantom share options are exercised, the difference between the stock market price of the MTU shares of the date of exercise and the stock market price of the MTU share on the date of allocation is paid by MTU Aero Engines Holding AG to the MSP participants in cash (plus a premium of 10%). The MSP participants are obliged to invest this money in turn in MTU shares, which are credited to them in a blocked security deposit with a two-year ban on sale. In total, the use of personal funds, linkage to the share price and long-term participation in the MSP offer the necessary incentive to create long-term shareholder value as called for in the Corporate Governance Code.

In the opinion of MTU, this voluntary, detailed presentation of the amount and composition of the performance-based remuneration as well as the MSP is a key element of the presentation of the Board of Management’s remuneration. There is no individualized disclosure of the remuneration as per Section 4.2.4 of the Code, however. MTU strongly believes that such disclosure violates personal privacy rights. Here, the individual decision of each member of the Board of Management must be respected. On the other hand, details regarding the structure of the remuneration are essential for determining whether such compensation is appropriate and whether it creates an incentive for the Board of Management. As the Board of Management operates as a collegiate body, the incentives provided for the Board of Management as a whole are the decisive factor, not those for each individual member. Individualized reporting of Board of Management compensation will occur when the Management Compensation Publishing Act first comes into effect.

Clear compensation structures for the Supervisory Board

According to § 12 of the Articles of Association, the members of the Supervisory Board receive a fixed annual payment of € 30,000 per year, payable at the end of the financial year. Compensation for the Chairman of the Supervisory Board is three times this amount; that of his Vice Chairman is 1.5 times this amount. Supervisory Board members who also belong to a committee are paid an additional €5,000 per year and committee chairmen €10,000 per year. In addition to their annual compensation, members receive an attendance fee of €3,000 for each board and committee meeting. MTU refrains from performance-based compensation for the Supervisory Board members, as provided for in Section 5.4.7 Paragraph 2 of the Code. It is MTU’s belief, that performance-based compensation is not a suitable instrument for enhancing the control function of the Supervisory Board.

In total, the Supervisory Board received compensation of €451,666 for the past financial year. The compensation for the Supervisory Board is not reported individually as provided for in Section 5.4.7 Paragraph 3. In view of the total amount of the compensation and the stipulations of § 12 of the Articles of Association, MTU considers reporting of the total compensation as sufficient to permit assessment of its appropriateness. The amount of shares in the company held by all members of the Board of Management and by all members of the Supervisory Board will not be reported separately, as recommended in Section 6.6 of the Code. As the Board of Management and the Supervisory Board do not consult with each other regarding the exercise of their stock purchasing and selling rights, MTU does not consider reporting as appropriate. Moreover, the legislator has not yet enacted a corresponding law, as such information is not deemed necessary. As of December 31, 2005, a total of about 5.9 % of the MTU shares were held by Blade Management Beteiligungs GmbH & Co. KG, which pools the shares of the members of the Board of Management and the Supervisory Board as well as those of executive staff.

Transparent reporting of financial statements

The Board of Management is responsible for the reporting of financial statements for the Group in accordance with International Financial Reporting Standards (IFRS). Individual accounts are compiled according to the provisions of the German Commercial Code (Handelsgesetzbuch). The internal system of controls in conjunction with uniform principles of accounting ensure that in all key areas an appropriate presentation of the assets, earnings, and financial situation, as well the cashflows of all group companies is generated. MTU also possesses a differentiated system to identify and control business and financial risks.

Timely information for all investors

Sound corporate governance of a publicly held company includes providing comprehensive, continuous, and up-to-date information for shareholders, investors, and prospective investors. MTU has comprehensive documentation and information as well as a financial calendar available on its website at http://www.mtu.de. The company provides shareholders with business development reports four times a year, in line with the financial calendar. The Board of Management provides quarterly and annual results to investors, analysts, and the media at regular intervals. Events that influence the share price are published as ad hoc announcements in accordance with statutory requirements.

On its website, MTU also provides information on the number of MTU shares and related derivatives acquired or sold by the Board of Management and the Supervisory Board. Pursuant to Section 15a of the German Securities Trading Act (WpHG), any member or close affiliate of a member must report such transactions if the value of the transactions meets or exceeds of €5,000 within any calendar year.

Published announcements of such transactions for 2005 can be found on the Internet at www.mtu.de.