Introduction

This report to shareholders covers:

• the policy under which the executive directors, the Chairman and the non-executive directors are remunerated; and
• details of the remuneration, fees and share interests of the directors.

It provides the information required by the Directors' Remuneration Report Regulations 2002 (the Regulations) and describes how the Company applies the principles of the Combined Code in relation to executive directors' remuneration. The Company confirms that it complies with the requirements of the Combined Code.

The report was approved by the remuneration committee (the committee) on February 6, 2007 and was signed on the Board's behalf by Carl Symon as the Chairman of the committee. A resolution will be put to shareholders at the Annual General Meeting on May 2, 2007 inviting them to approve this report.

The remuneration committee

The committee has responsibility for making recommendations to the Board on the Group's policy regarding executive remuneration. The committee determines, on the Board's behalf, the specific remuneration packages of the executive directors and a number of senior executives. It also makes recommendations to the Board on the remuneration of the Chairman. A copy of the committee's terms of reference is available in the Investors section on the Group's website at www.rolls-royce.com

The committee consists exclusively of independent, non-executive directors. During 2006, it was chaired by Carl Symon and its other members were Peter Byrom and Sir John Taylor. Hon Amy Bondurant and Carl-Peter Forster served as members of the committee until their retirement from the Board on September 14, 2006.

In 2006, Simon Robertson, Chairman, Sir John Rose, Chief Executive, John Rivers, Director – Human Resources and Charles Blundell, Company Secretary, attended meetings by invitation of the committee but were not present during any discussion of their own emoluments.

The committee met on five occasions in 2006 and details of members' attendance are set out in the table on the Corporate governance section.

Advice to the remuneration committee

The committee may call for information and advice from advisers inside and outside the Group. In 2006, Simon Robertson and Sir John Rose made recommendations to the committee relating to the performance of their direct reports. Internal support was provided primarily by John Rivers, advised by Deloitte & Touche LLP. Additional advice was provided by senior employees from human resources and finance.

The committee received advice on remuneration matters from Deloitte & Touche LLP and the Company's lawyers, Freshfields Bruckhaus Deringer. During 2006, Deloitte & Touche LLP also advised the Group on tax, assurance, pensions and corporate finance and Deloitte MCS Limited provided consulting services in the areas of human resources, finance and services.

Remuneration policy

The policy framework

The Group operates in a highly competitive, international market. Its business is complex, technologically advanced and has long time horizons. The Group is committed to achieving sustained improvements in performance and this depends crucially on the individual contributions made by the executive team and by employees at all levels. The Board therefore believes that an effective remuneration strategy plays an essential part in the future success of the Group.

Accordingly the Board has adopted, on the recommendation of the committee, a remuneration policy reflecting the following broad principles which it will continue to apply in 2007:

• the remuneration of executive directors and other senior executives should reflect their responsibilities and contain incentives to deliver the Group's performance objectives; it must also be capable of attracting and retaining the individuals necessary for business success;
• a significant proportion of total remuneration should be based on Group and individual performance, both in the short and long term; and
• the system of remuneration should establish a close identity of interest between senior executives and shareholders through measures such as encouraging the acquisition of a significant shareholding in the Company.

When determining remuneration, the committee takes into account pay and employment conditions elsewhere in the Group.

The committee regularly reviews both the competitiveness of the Group's remuneration structure and its effectiveness in incentivising executives to enhance value for shareholders over the longer term. It considers that a successful remuneration policy needs to be sufficiently flexible to take account of future changes in the Group's business environment and in remuneration practice. Accordingly the committee commissioned a study from Deloitte & Touche LLP during 2006 to assess the competitiveness of the remuneration for senior executives, and to ensure the performance measures and target setting within the annual and long-term incentive plans effectively incentivise senior executives to achieve the Group's strategic objectives.

The main components of remuneration

The main components of remuneration comprise base salary, annual incentive arrangements, long-term share-based incentives and pension and life assurance benefits. Executive directors and senior executives are also entitled to a company car or car allowance, private medical insurance, financial counselling and, in the case of James Guyette, a housing allowance.

The committee considers that there should be a continuing emphasis on those elements of remuneration, such as annual and long-term incentives, which directly influence the performance of senior executives.

Base salaries

In determining the relative importance of these elements of remuneration, the committee believes that base salaries should be set at levels required to recruit and retain high quality senior executives.

The committee believes that base salaries should be set with reference to the levels in the relevant marketplace for companies of a similar size and complexity. All salary increases must be justified on the basis of performance and are not automatic.

Other benefits are generally at the median of market practice.

Annual incentives

Executive directors and selected senior executives participate in the Annual Performance Related Award plan (APRA). For UK participants, APRA awards do not form part of pensionable earnings.

Target and maximum APRA bonus opportunity

Under APRA as operated in 2006, executive directors were eligible for awards in accordance with the table below:

Target bonus (as a % of salary) 1		Maximum bonus (as a % of salary) 1
1 It is possible for a bonus award to be increased by a further 20 per cent to reflect exceptional personal performance.
John Cheffins	48	80
James Guyette	48	80
Sir John Rose	60	100
Andrew Shilston	48	80
Colin Smith	48	80

Performance measures

The APRA performance measures set by the committee are based on the Group's annual operating plans. For 2006, the measures for executive directors included underlying profit, average cash balance, cash flow and personal performance against specific personal objectives. Forty per cent of any APRA bonus depends on personal performance against these specific objectives.

The performance of the business sector in which an executive is employed is also a factor in that it determines the extent to which an executive has access to the bonus pool generated by corporate performance.

All executive directors have a high proportion of their annual remuneration at risk. For the Chief Executive, his 120 per cent maximum bonus opportunity means that 55 per cent of his combined basic pay and bonus opportunity is directly related to annual financial and personal performance. In 2006, the level of achievement against the financial measures was sufficient to generate up to 100 per cent of the maximum bonus for individual participants subject to the achievement of their personal objectives.

Deferred APRA award

One third of the value of APRA is delivered in the form of a deferred award in the Company's shares. A participant who is granted a deferred share award under APRA must normally continue to remain an employee of the Group for two years from the date of the award in order to retain the full number of shares, although shares will be released early in certain circumstances including retirement or redundancy.

The value of any deferred share awards is derived from the annual bonus criteria and is therefore dependent on personal and business financial performance; the release of deferred share awards is not dependent on the achievement of any further performance conditions. The deferred share element operated for 2006 will result in share awards as described in the directors' emoluments table below. The committee intends to maintain the deferred share element in respect of 2007. This arrangement provides a strong link between performance and remuneration, promotes a culture of share ownership amongst the Group's senior management and encourages decisions in the long-term interest of shareholders.

Other annual incentives

The same targets set for APRA are used for the All-Employee Bonus Scheme, which typically enables all employees worldwide to receive a bonus of up to two weeks' pay, based on corporate and business performance. Those executives participating in APRA are excluded from the All-Employee Bonus Scheme.

A Deferred Share Incentive Plan (DSIP) was operated for 2002, which was restricted to a small number of key executives, including executive directors. No awards under the DSIP were made in 2006 and it is not intended that the plan will be operated again. DSIP grants made in 2003 vested in April 2006.

Rolls-Royce Group plc Performance Share Plan

The Rolls-Royce Group plc Performance Share Plan (PSP) is designed to reward and incentivise selected senior executives who can influence the long-term performance of the Group.

Under the rules of the PSP selected executives are granted conditional share awards entitling them to a number of shares determined by reference to corporate performance over a three-year performance period. The measures of corporate performance are cash generation, earnings and total shareholder return. These measures are considered particularly important in generating shareholder value and are explained in more detail below. There is no retesting of the performance criteria and no automatic vesting in the event of a takeover. In the three-year period to December 31, 2006 the Company's financial and Total Shareholder Return (TSR) performance generated the maximum number of shares under the rules of the plan.

PSP award levels

The sizes of the awards under the PSP are aimed at the median of the marketplace for UK companies of a similar size and complexity to the Group. In 2006, Sir John Rose received a conditional award of shares with a market value at the time of grant of 110 per cent of his annual salary. For other executive directors and business heads the grant was 80 per cent, and 65 per cent for other members of the Group Executive. The rules of the PSP permit grants of up to 200 per cent of annual salary. As described below, it is possible for the number of shares under an award to be increased by a further 25 per cent based on performance.

Performance measures

No shares will be released from the PSP unless the growth in the Company's Earnings Per Ordinary Share (EPS) exceeds the UK retail price index by three per cent per year over the performance period.

The number of shares released (if any) will be determined in accordance with Cash Flow Per Share (CPS) targets, which will not be adjusted for inflation. CPS is calculated as cash flow after interest, taxation and capital expenditure, but before cost of business acquisitions or proceeds of disposals and payments to shareholders, divided by the weighted average number of shares in issue. Intermediate levels of performance attract pro rata releases. The Company's TSR over the performance period will be compared with the TSR of the companies constituting the FTSE 100 index on the date of grant. This comparison will be carried out by an external independent agency. If the Company's TSR exceeds the median of that group of companies, the number of shares due to be released to an executive following achievement of the EPS and CPS targets will be increased by 25 per cent.

Shareholders have authorised the committee to set CPS performance targets for future grants provided that, in the committee's reasonable judgement, the targets are no less challenging in the light of the Group's business circumstances and its internal forecasts than the targets for the initial grant in 2004 as approved by shareholders.

The following CPS targets will apply to the grants to be made in 2007:

Aggregate CPS over three-year performance period	Percentage of maximum award released
57p	30
75p	100

The committee believes that these CPS targets are challenging and that the performance necessary to achieve awards towards the upper end of the range is stretching. They should not, therefore, be interpreted as providing guidance on the Group's performance over the relevant period.

Share retention policy

The committee requires participants in the PSP to retain at least one half of the number of after tax shares released from the PSP until their retirement, except that shares may be sold within one year before the normal or agreed retirement date or on leaving for any other reason once a committed date has been agreed. This exception is intended to ensure that participants are not disadvantaged under capital gains tax rules on leaving employment.

Executive share option plan

Following the introduction of the PSP, share options have not been granted.

The exercise of existing options is subject to a performance condition that the Company's growth in underlying EPS must exceed the UK retail price index (RPI) by an average of three per cent per year over a rolling three-year period. In the three-year period to December 31, 2005 this performance condition was satisfied in respect of all options except Supplementary options.

In 2001, in order to help meet a series of demanding challenges, key members of the executive team, including the executive directors, received an additional grant of supplementary share options. Vesting of these options is subject to the attainment of personal share holding targets and the requirement that the growth in EPS exceeds an annual average of six per cent as well as exceeding the UK RPI by three per cent per year over a rolling three-year period. Increases are measured from the year 2000 or the base year of the rolling three-year period whichever is the more stringent. The corporate performance criteria were met on December 31, 2006.

All-employee share plans

The committee believes that share-based plans make a significant contribution to the close involvement and interest of all employees in the Group's performance. Executive directors are eligible to participate in the Group's all-employee share plans on the same terms as other employees. There are three main elements to these arrangements:

1. the ShareSave Plan – a savings-related share option plan available to all employees. In the UK this plan operates within UK tax legislation (including a requirement to finance the exercise of the option using the proceeds of a monthly savings contract) but the key principles are applied globally. The exercise of the option is not subject to the achievement of a performance target;
2. the 'Free Share' element of the Share Incentive Plan, under which UK employees receive shares of up to the equivalent of one week's pay as part of the Company component of any bonus paid for 2006; and
3. the 'Partnership Share' element of the Share Incentive Plan under which UK employees may make regular purchases of shares from pre-tax income.

Service contracts

The committee's policy is that executive directors appointed to the Board are offered notice periods of 12 months. The committee recognises that in the case of appointments to the Board from outside the Group, it may be necessary to offer a longer initial notice period, which would subsequently reduce to 12 months after that initial period.

The committee has a defined policy on compensation and mitigation to be applied in the event of a UK director's contract being prematurely terminated. In these circumstances, steps are taken to ensure that poor performance is not rewarded. When calculating termination payments, the committee takes into account a range of factors including the director's obligation to mitigate his or her own loss.

The following table summarises the terms of the executive directors' service contracts:

	Date of contract	Unexpired term	Notice period Company	Notice period individual
John Cheffins	4 May 2001	12 months	12 months	6 months
James Guyette	29 September 1997	Indefinite	30 days1	30 days
Sir John Rose	4 December 1992	12 months	12 months2	6 months
Andrew Shilston	5 November 2002	12 months	12 months	6 months
Colin Smith	1 July 2005	12 months	12 months	6 months

¹James Guyette has a contract with Rolls-Royce North America Inc, drawn up under the laws of the State of Virginia. It provides that, on termination without cause, he is entitled to 12 months' severance pay without mitigation and, in addition, appropriate relocation costs.

²In the event of the service contract being terminated by the Company, other than in accordance with the contract's terms, Sir John Rose is entitled to receive a liquidated sum of 12 months' salary and benefits. Performance related payments are not covered under this arrangement, although an annual bonus may be paid if he is in post at the end of the performance year.

Executive directors' directorships of other companies

James Guyette was a director of the Private Bank and Trust Company of Chicago, Illinois and of priceline.com Inc. and Andrew Shilston was a non-executive director of Cairn Energy PLC.

In each case, the director retained the relevant fees from serving on the boards of these companies, as shown in the table below:

External directorship fees

Payment received £000
James Guyette1,2	43
Andrew Shilston	50

¹James Guyette was paid in US dollars translated at $1.844 = £1.

²In addition to an annual fee, James Guyette received 2,000 restricted shares in priceline.com. He also received 500 restricted shares, originally granted in 2004, that vested at a price of US$32 per share. He received 3,000 stock options in Private Bank at an option price of US$46.51 per share.

Non-executive directors

The Chairman and the non-executive directors have letters of appointment rather than service contracts. No compensation is payable to the Chairman or to any non-executive director if the appointment is terminated early.

Non-executive directors' fees

The Board takes account of independent market surveys in determining the fees payable to the Chairman and the non-executive directors. The committee makes recommendations to the Board on the remuneration of the Chairman. The fees paid to the Chairman and non-executive directors are shown in the emoluments table.

In 2006, each non-executive director received an annual fee of £50,000 covering his or her membership of the Board and of Board committees. The audit committee chairman and the remuneration committee chairman received additional fees of £15,000 and £12,000 per annum respectively. The Senior Indpendent Director received an additional fee of £5,000 per annum for carrying out this role.

In February 2007, the Board reviewed the fees payable to the non-executive directors. In carrying out this review, the Board took account of the result of a specially commissioned, independent market survey. In the light of this review the Board concluded that with effect from March 1, 2007, the fee payable to each non-executive director should increase from £50,000 to £55,000 and the additional fee payable to the Senior Independent Director from £5,000 to £10,000. The fees payable to the chairmen of the audit and remuneration committees will remain unchanged.

The Chairman and the non-executive directors are not eligible to participate in any of the Group's share schemes, incentive arrangements or pension schemes. A facility is in place which enables non-executive directors to use some or all of their fees, after the appropriate statutory deductions, to make market purchases of shares in the Company on a monthly basis.

Performance graph

The Company's Total Shareholder Return performance over the previous five years compared to a broad equity market index is shown in the graph below. The FTSE 100 has been chosen as the comparator index because it contains a broad range of other leading UK listed companies.

Individual directors' emoluments and compensation
The individual directors' emoluments are analysed as follows:

	2006									2005
			Annual Performance Related Award plan (APRA)
	Basic salaries £000	Board and committee fees £000	Cash bonus £000	Deferred shares1 £000	Total APRA £000	SRS/ Pension payments2 £000	Taxable benefits3 £000	Aggregate emoluments excluding pensions contributions4 £000		Aggregate emoluments excluding pensions contributions4 £000
John Cheffins	477	—	195	97	292	90	24	883		766
Colin Green 5	119	—	—	—	—	—	8	127		639
James Guyette 6	389	—	201	101	302	—	36	727		722
Sir John Rose	711	—	422	211	633	—	18	1,362		1,276
Andrew Shilston	455	—	233	117	350	13	14	832		803
Colin Smith	292	—	164	82	246	56	11	605		233
Hon Amy Bondurant 7	—	37	—	—	—	—	—	37		45
Peter Byrom	—	70	—	—	—	—	—	70		65
Iain Conn	—	50	—	—	—	—	—	50		43
Carl-Peter Forster 8	—	37	—	—	—	—	—	37		47
Simon Robertson	—	330	—	—	—	—	—	330		330
Ian Strachan	—	50	—	—	—	—	—	50		47
Carl Symon	—	62	—	—	—	—	—	62		57
Sir John Taylor	—	50	—	—	—	—	—	50		43
Former directors who did not serve during the 2006 financial year	—	—	—	—	—	—	—	—		296
	2,443	686	1,215	608	1,823	159	111	5,222		5,412

• ¹ Shares forming part of the bonus under APRA have been valued at the date of award. An investment is expected to be made by March 31, 2007 when the trustee will acquire the required number of shares at the prevailing market price.
• ² Payments made to Andrew Shilston were in connection with his participation in the Rolls-Royce Supplementary Retirement Scheme (SRS) (see Pensions below) enabling him to discharge the income tax liability incurred by him on the contributions made by the Group into the SRS. John Cheffins and Colin Smith received cash allowances in lieu of pension provision.
• ³ Taxable benefits include the following: company car or car allowance, private medical insurance and financial counselling, and in the case of James Guyette, a housing allowance and appropriate club membership fees.
• ⁴ Details of the directors' pensions are set below.
• ⁵ Colin Green retired as a director with effect from April 4, 2006.
• ⁶ James Guyette was paid in US dollars translated at $1.844 = £1.
• ⁷ Hon Amy Bondurant retired as a non-executive director with effect from September 14, 2006.
• ⁸ Carl-Peter Forster retired as a non-executive director with effect from September 14, 2006.

Payments made to former directors of the Company

Colin Green retired from the Board on April 4, 2006. Following his retirement, he was retained by the Company to provide advice and support to the President – Defence Aerospace for a maximum of 1.5 days per week. Between the date of his retirement and the financial year end, he received total fees of £29,880.

Dr Mike Howse retired from the Board on June 30, 2005. Following his retirement, he has continued to be employed by the Company for his expertise in engineering. During the financial year he was paid a total salary of £98,400 and benefits totalling £24,674.

Lord Moore of Lower Marsh retired as interim Chairman on December 31, 2004. He has continued to chair the Trustees of the Rolls-Royce Pension Fund and the Investment Sub-Committee of the Trustees and attends meetings of the Trustees' audit committee. Lord Moore received an annual fee of £40,000.

Sir Robin Nicholson retired as a non-executive director on May 4, 2005. He was retained by Rolls-Royce Fuel Cell Systems Limited for his management and technical expertise, and to provide advice on business related matters. Sir Robin was paid total fees of £22,500.

Phil Ruffles retired from the Board on October 18, 2001. He was retained by Rolls-Royce Fuel Cell Systems Limited to give general advice on the best contacts and direction for the business. Phil Ruffles received total fees of £3,500. It is expected that he will spend approximately five working days on this activity per year. He also gave general advice to Rolls-Royce plc and received a fee of £3,810.

Pensions

Sir John Rose and Andrew Shilston are members of the Group's UK pension schemes. John Cheffins and Colin Smith have opted out of future pension accrual with effect from April 1, 2006, see note 7 below. The Group's UK pensions schemes are funded, registered schemes and were approved under the regime applying until April 6, 2006. They are defined benefit pension schemes providing, at retirement, a pension of up to two thirds of final remuneration, subject to HM Revenue & Customs limits.

Details of the pension benefits, which accrued over the year in the Group's approved UK defined benefit pension schemes, are given in note 1 below. The pension position for Colin Green, who retired from the Board on April 4, 2006, is described in note 2 below.

	Increase in accrued pension during the year ended Dec 31, 20063 £000pa		Total accrued pension entitlement at the year ended Dec 31, 20064 £000pa	Transfer value of accrued pension as at Dec 31, 20065 £000	Transfer value as at Dec 31, 2005 of accrued pension at that date5 £000	Increase in transfer value over 2006 net of the member’s own contributions6 £000
John Cheffins 7	35	(24)	422	6,699	6,378	314	(388)
Sir John Rose	57	(45)	493	8,849	7,916	891	(893)
Andrew Shilston 8	2	(2)	7	179	134	161	(158)
Colin Smith 7	40	(37)	137	2,549	1,840	705	(671)

James Guyette participates in pension plans sponsored by Rolls-Royce North America Inc.

Details of the retirement benefits, which accrued over the year in the defined benefit plans sponsored by Rolls-Royce North America Inc., are given below:

	Increase in accrued retirement lump sum during the year ended Dec 31, 20063 £000pa		Total accrued retirement lump sum entitlement at the year ended Dec 31, 20069 £000pa	Transfer value of accrued retirement lump sum as at Dec 31, 200610 £000	Transfer value as at Dec 31, 2005 of accrued retirement lump sum at that date10 £000	Increase in transfer value over 2006 net of the member’s own contributions6 £000
James Guyette 11, 12	65	(53)	377	377	312	341	(329)

• ¹ Members of the schemes have the option to pay Additional Voluntary Contributions. Neither the contributions nor the resulting benefits are included in the above table.
• ² Colin Green opted-out of the pension arrangement with effect from March 9, 2006 and subsequently transferred his benefits out. The accrued pension increased by £9k (£7k excluding the effect of inflation) between December 31, 2005 and March 9, 2006 to £351k. The transfer value as at December 31, 2005 was £5,749k. This increased by £144k (£118k excluding the effect of inflation) to £5,893k at the date of transfer.
• ³ The figure in brackets is the increase in pension/retirement lump sum during the year ended December 31, 2006 but in this case excluding the effect of inflation.
• ⁴ The pension entitlement shown is that which would be paid annually on retirement, based on service to the end of the year, or to April 1, 2006 for members with enhanced protection from 'A' day.
• ⁵ The transfer values stated represent liabilities of the Rolls-Royce sponsored pension schemes and not sums paid to the individuals. The transfer values have been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11 (GN11). GN11 covers individual transfer calculations and the above figures have been calculated using assumptions certified by the Actuaries as being consistent with GN11.
• ⁶ The figure in brackets is the transfer value of the increase in pension/retirement lump sum during the year ended December 31, 2006 excluding the effect of inflation, and net of the member's own contributions.
• ⁷ John Cheffins and Colin Smith have opted out of future pension accrual with effect from April 1, 2006. They each receive a cash allowance in lieu of future pension accrual. Had they elected to continue to accrue pension the estimated cost of that accrual would be higher than the cash allowance to be paid in lieu.
• ⁸ The Group operates the Rolls-Royce Supplementary Retirement Scheme. The purpose of the Scheme is to fund pension provision above the pensionable earnings cap which was imposed on approved pension schemes under the 1989 Finance Act. Membership of the Scheme is restricted to executive directors and to a limited number of senior executives. The members of the Scheme include Andrew Shilston. He joined the Group after the introduction of the earnings cap and his terms and conditions on joining the Group included a commitment to provide pension and life cover based on total salary, in line with other directors and senior executives. Employer contributions to the Scheme during 2006 have been added to the increase in transfer value over 2006 for the approved defined benefit plans, and are therefore included in the figures shown in the right hand column of the first table. In addition, the employer has paid £13k to Andrew Shilston directly in order to meet the income tax liability that he will incur on these employer contributions prior to 'A'day to this unapproved scheme.
• ⁹ The lump sum entitlement shown is that which would be paid on immediate retirement based on service to the end of the year.
• ¹⁰ The transfer values have been calculated on the basis of actuarial advice.
• ¹¹ Benefits are translated at US$1.965 = £1.
• ¹² James Guyette is a member of two defined benefit plans in the US, one qualified and one non-qualified. He accrues a retirement lump sum benefit in both of these plans. The aggregate value of the retirement lump sums accrued in these two plans, and the transfer values of these benefits, are shown in the second table. In addition, James Guyette is a member of two 401(K) Savings Plans in the US, one qualified and one non-qualified, to which both he and his employer, Rolls-Royce North America Inc., contribute. James Guyette is also a member of an unfunded non-qualified deferred compensation plan in the US, to which his employer makes notional contributions. Employer contributions to these three plans during 2006 have been added to the increase in transfer value over 2006 for the defined benefit plans, and are therefore included in the figures shown in the right hand column of the second table.

Directors' share interests
At December 31, 2006, the directors and their immediate families had beneficial interests in the ordinary shares and B Shares ¹ of the Company, as shown in the following table:

	Ordinary shares				B Shares
	January 1, 2006*	Changes in 2006	December 31, 2006§		January 1, 2006*	Changes in 2006	December 31, 2006§
* or date of appointment if later. § or date of retirement if earlier.
John Cheffins	230,616	142,845	373,461		—	—	—
Colin Green 2	252,995	2,515	255,510		—	—	—
James Guyette	241,950	133,671	375,621		—	—	—
Sir John Rose	398,151	214,269	612,420		—	—	—
Andrew Shilston	132,135	25,780	157,915		—	—	—
Colin Smith 3	13,333	32,576	45,909		417,800	(417,800)	—
Hon Amy Bondurant 4	3,536	33	3,569		—	—	—
Peter Byrom	147,000	3,179	150,179		—	—	—
Iain Conn	3,184	2,747	5,931		18,800	1,887	20,687
Carl-Peter Forster 5	5,731	125	5,856		—	—	—
Simon Robertson	20,395	6,306	26,701		—	—	—
Ian Strachan	11,500	—	11,500		—	—	—
Carl Symon	6,766	145	6,911		—	—	—
Sir John Taylor	5,098	110	5,208		—	—	—

• ¹ Non-cumulative redeemable convertible preference shares of 0.1p each.
• ² Colin Green retired as a director with effect from April 4, 2006.
• ³ On January 4, 2006 Colin Smith converted his B Share holding into 117 ordinary shares.
• ⁴ Hon Amy Bondurant retired as a non-executive director with effect from September 14, 2006.
• ⁵ Carl-Peter Forster retired as a non-executive director with effect from September 14, 2006.

On January 2, 2007 Iain Conn received 7,817 B Shares. On January 3, 2007, pursuant to elections submitted, the following directors received ordinary shares in respect of the conversion of B Shares: John Cheffins 2,874; James Guyette 2,880; Andrew Shilston 1,215; Colin Smith 353; Peter Byrom 1,154; Iain Conn 40; Simon Robertson 205; Carl Symon 54 and Sir John Taylor 40. Iain Conn purchased 220 shares on January 8, 2007 and 200 on February 7, 2007 under arrangements made for non-executive directors to purchase shares on a monthly basis using a percentage of their after tax fees. On February 7, 2007 Sir John Rose exercised his ShareSave option and received 7,662 ordinary shares.

Otherwise there have been no changes in the directors' interests between December 31, 2006 and February 7, 2007.

In addition the directors are, for Companies Act 1985 purposes, interested in the 16,654,181 Rolls-Royce Group plc shares held by the Rolls-Royce 2003 Employee Share Trust.

Partnership Shares' held in trust under the Share Incentive Plan ¹

	Ordinary shares
	January 1, 2006*	Changes in 2006	December 31, 2006§
Colin Green 2	2,668	108	2,776
Sir John Rose3, 4	2,668	398	3,066
Andrew Shilston3, 4	2,209	389	2,598
Colin Smith3, 4	2,668	398	3,066

Free Shares' held in trust under the Share Incentive Plan ⁵

	Ordinary shares
	January 1, 2006*	Changes in 2006	December 31, 2006§
* or date of appointment if later. § or date of retirement if earlier.
John Cheffins 6	6,313	785	7,098
Colin Green 2	6,328	59	6,387
Sir John Rose 6	6,328	137	6,465
Andrew Shilston 6	3,578	725	4,303
Colin Smith 6	1,046	672	1,718

• ¹ Under the 'Partnership Share' element of the Share Incentive Plan, shares vest on the fifth anniversary of each monthly purchase.
• ² Colin Green retired as a director with effect from April 4, 2006.
• ³ On January 3, 2007, pursuant to elections submitted Sir John Rose, Andrew Shilston and Colin Smith received 23, 19 and 23 ordinary shares respectively following the conversion of B Shares.
• ⁴ Sir John Rose, Andrew Shilston and Colin Smith purchased 27 shares each respectively on January 8, 2007 and purchased 26 shares each respectively on February 7, 2007 under the HM Revenue & Customs approved Share Incentive Plan.
• ⁵ Under the 'Free Share' element of the Share Incentive Plan, shares vest after five years.
• ⁶ 6 On January 3, 2007, John Cheffins, Sir John Rose, Andrew Shilston and Colin Smith received 54, 49, 33 and 13 ordinary shares respectively following the conversion of B Shares.

Share options

The directors, at December 31, 2006, held the following options under the Rolls-Royce 1999 Executive Share Option Plan, all of which have vested and are capable of exercise unless otherwise indicated, and the Rolls-Royce International ShareSave Plan.

All employees were eligible for options under the International ShareSave plan, and the 2003 (3 year) plan matured on December 1, 2006.

	January 1, 2006*	Granted in 2006	Lapsed in 2006	Exercised in 2006§	December 31, 20061§	Exercise price	Market price at date exercised	Aggregate gains 2006 £000§	Aggregate gains 2005 £000	Exercisable dates
*or date of appointment if later. § or date of retirement if earlier.
John Cheffins	15,444				15,444	194p				2007-2010
	118,405			118,405		194p	449.00p	302
	173,612			173,612		216p	449.00p	405
	398,936			398,936		188p	449.00p	1,041
	499,189			499,189		77p	443.25p	1,828
	694,445				694,445	216p2				2007-2011
	1,900,031			1,190,142	709,889	216p3		3,576	138
Colin Green 4, 5	154,441			154,441		194p	431.50p	366
	162,038			162,038		216p	431.50p	349
	279,255			279,255		188p	431.50p	680
	465,910				465,910	77p5
	3,103				3,103	141p5,6
	648,149		648,149		—	216p2,4
	4,053				4,053	194p5,6
	551				551	108p5,6
	1,717,500		648,149	595,734	473,617	78p3		1,395	3
James Guyette	114,581			114,581		269p	431.50p	186
	167,799			167,799		194p	431.50p	398
	179,161			179,161		216p	431.50p	386
	450,140			450,140		188p	431.50p	1,096
	506,084			506,084		77p	440.75p	1,841
	3,122			3,122		141p6	427.75p	9
	716,641				716,641	216p2				2007-2011
	1,397				1,397	298p6				2009
	2,138,925			1,420,887	718,038	216p3		3,916	7
Sir John Rose	283,141			283,141		194p	431.00p	670
	254,630			254,630		216p	431.00p	547
	638,298			638,298		188p	431.00p	1,551
	798,702			798,702		77p	431.00p	2,827
	2,894			2,894		141p6	427.75p	8
	1,018,519				1,018,519	216p2				2007-2011
	7,662				7,662	108p6				2007
	3,003,846			1,977,665	1,026,181	215p3		5,603	213
Andrew Shilston	633,117				633,117	77p				2007-2013
	633,117				633,117	77p
Colin Smith	3,862			3,862		194p	431.50p	9
	15,444				15,444	194p				2007-2010
	19,676			19,676		216p	431.50p	42
	99,734			99,734		188p	431.50p	243
	166,364			56,364		77p	431.50p	200
				110,000		77p	442.00p	401
	78,704				78,704	216p2				2007-2011
	1,780				1,780	194p6				2007
	6,362				6,362	141p6				2008-2009
	2,396				2,396	108p6				2009
	1,233				1,233	298p6				2011
	395,555			289,636	105,919	206p3		895

• ¹ Unless otherwise indicated all the above options were granted under the Rolls-Royce 1999 Executive Share Option Plan and are subject to the achievement of performance targets (see Executive share option plan). All options were granted at the market value on the date of issue and no discount was applied. No options were varied during the year and no consideration was paid for the grant of options. The market price of the Company's ordinary shares ranged between 379.50p and 490p during 2006. The closing price on December 31, 2006 was 447.75p.
• ² Supplementary options – vesting of these options is subject to attainment of significant personal share holding targets and the requirement that the growth in EPS exceeds an average of six per cent year on year as well as exceeding the UK RPI by three per cent per year over a rolling three-year period. The increases are measured from the year 2000 or the base year of the rolling three-year period, whichever is the more stringent.
• ³ Weighted average exercise price of December 31, 2006 balance or date of retirement if earlier.
• ⁴ Colin Green retired as a director with effect from April 4, 2006. The supplementary options lapsed on the date of his retirement.
• ⁵ Colin Green's executive and ShareSave options were preserved for a period of six months from the date of his retirement. He has subsequently exercised these options.
• ⁶ ShareSave plans.

Long-term incentive awards

The directors as at December 31, 2006 had the following share awards in the Annual Performance Related Award plan:

	Shares held in trust under the Annual Performance Related Award plan1					Shares held in trust under the Deferred Share Incentive plan2
	January 1, 2006*	Vested during 2006	Granted during 2006	December 31, 2006§		January 1, 2006*	Vested during 2006	Granted during 2006	December 31, 2006§
*or date of appointment if later. §or date of retirement if earlier.
John Cheffins	85,359	42,252	21,055	64,162		171,928	171,928	—	—
Colin Green3	71,099	—	17,234	88,333		160,467	—	—	160,467
James Guyette	61,017	28,253	22,271	55,035		174,303	174,303	—	—
Sir John Rose	143,445	62,632	42,777	123,590		275,086	275,086	—	—
Andrew Shilston	83,457	36,824	23,634	70,267		—	—	—	—
Colin Smith	14,712	6,802	11,041	18,951		43,058	43,058	—	—

• ¹ Under the Annual Performance Related Award plan, shares vest after two years. Shares went into trust in 2004, 2005 and 2006 at prices of 220.00p, 260.19p and 447.60p. At December 31, 2006, the amounts stated in the emoluments table representing the 2006 APRA deferred shares had not yet been applied by the Trustee to purchase shares. An investment is expected to be made by March 31, 2007 when the trustee will acquire the required number of shares at the prevailing market price. The market value per share which vested under the Annual Performance Related Award plan during 2006 was 451.75p.
• ² The market value per share which vested under the Deferred Share Incentive plan during 2006 was 451.75p.
• ³ Colin Green retired as a director with effect from April 4, 2006.

Conditional awards, granted under the Rolls-Royce Group plc Performance Share Plan (PSP) to executive directors are set out below. The number of shares released will be dependent upon certain performance criteria being achieved over a three-year performance period.

	PSP
	January 1, 2006*	Granted during 2006	Vested during 2006	December 31, 2006§	Performance period	Market price at date of grant
*or date of appointment if later. §or date of retirement if earlier.
John Cheffins	112,777	—	—	112,777	Jan 1, 2004 to Dec 31, 2006	232.92p
	118,517	—	—	118,517	Jan 1, 2005 to Dec 31, 2007	261.58p
	—	86,536	—	86,536	Jan 1, 2006 to Dec 31, 2008	443.75p
	231,294	86,536	—	317,830
Colin Green 1	105,255	—	—	105,255	Jan 1, 2004 to Dec 31, 2006	232.92p
	97,006	—	—	97,006	Jan 1, 2005 to Dec 31, 2007	261.58p
	202,261	—	—	202,261
James Guyette	101,654	—	—	101,654	Jan 1, 2004 to Dec 31, 2006	232.92p
	93,871	—	—	93,871	Jan 1, 2005 to Dec 31, 2007	261.58p
	—	72,670	—	72,670	Jan 1, 2006 to Dec 31, 2008	443.75p
	195,525	72,670	—	268,195
Sir John Rose	270,640	—	—	270,640	Jan 1, 2004 to Dec 31, 2006	232.92p
	263,782	—	—	263,782	Jan 1, 2005 to Dec 31, 2007	261.58p
	—	177,240	—	177,240	Jan 1, 2006 to Dec 31, 2008	443.75p
	534,422	177,240	—	711,662
Andrew Shilston	95,352	—	—	95,352	Jan 1, 2004 to Dec 31, 2006	232.92p
	109,596	—	—	109,596	Jan 1, 2005 to Dec 31, 2007	261.58p
	—	82,930	—	82,930	Jan 1, 2006 to Dec 31, 2008	443.75p
	204,948	82,930	—	287,878
Colin Smith	24,043	—	—	24,043	Jan 1, 2004 to Dec 31, 2006	232.92p
	22,403	—	—	22,403	Jan 1, 2005 to Dec 31, 2007	261.58p
	—	54,085	—	54,085	Jan 1, 2006 to Dec 31, 2008	443.75p
	46,446	54,085	—	100,531

• ¹ Colin Green retired as a director with effect from April 4, 2006. The PSP awards are preserved pro rata for service during the performance periods.

The number of shares released on the achievement of the EPS and CPS targets will be increased by 25 per cent if the Total Shareholder Return exceeds the median for the FTSE 100 companies over the three-year performance period.

Approval of the Directors' remuneration report

The Directors' remuneration report above was approved by the Board of directors on February 7, 2007.