Smiths


–	integrated aerospace systems, including electronic and actuation systems and precision components, for civil and military aircraft. Also equipment for land, naval and marine and other defence applications, including detection and protection against chemical and biological agents;
–	mechanical and polymer seals used in industries ranging from petrochemical processing to aerospace, plus complete marine propulsion systems;
–	medical devices and critical care equipment aligned to specific therapies, principally airway, pain and temperature management and infusion. Also needle protection, critical care monitoring, women's healthcare, and vascular access;
–	interconnect products to connect and protect safety-critical electrical and electronic equipment, and air movement systems and components.

The main manufacturing operations are in the UK, the Americas and Continental Europe. A review of the development of the company and its subsidiary undertakings during the 2000-2001 financial year is contained in the Business Review and the Financial Review.

The results for the year to 31 July 2001 are set out in the Consolidated Profit
and Loss Account. Sales for the year amounted to £4,958m, against £4,653m last year. The loss for the year after taxation, minority interests and goodwill amortisation amounted to £206.0m (2000 profit of £324.0m).

An interim dividend of 8.75p per ordinary share of 25p was paid on 18 May 2001. The directors recommend for payment on 16 November 2001 a final cash dividend on each ordinary share of 16.25p, making a total dividend of 25p for the year.

£188m was spent on research and development for continuing activities during the year, of which £91m was funded by the company and the balance by customers. Each business carries out research and development programmes to suit its own particular market and product needs. Interchange of technology and technical information between businesses in the manufacturing sector is centrally co-ordinated.

On 4 December 2000 the company merged with TI Group plc. Under the terms of the merger there were issued to TI shareholders 233,604,697 new Smiths Group plc shares and 507,836,299 units under letters of contingent entitlement. TI shareholders on the register of shareholders on 1 December 2000 also received a special dividend of 12p per TI share. During the period 4 December 2000 to 6 June 2001, a further 945,358 new shares and 2,055,328 units under letters of contingent entitlement were issued in exchange for 2,055,328 new TI shares issued on the exercise of employee share options.

On 3 July 2001 the businesses and assets of the Automotive Systems division were demerged into a new, private company, named TI Automotive Limited. The holders of units under letters of contingent entitlement exchanged their units for A Ordinary shares in TI Automotive Limited on a one-for-one basis. Smiths Group plc received £615m in cash, 325,000,000 preference shares and 185,288,740 B Ordinary shares in TI Automotive Limited.

On 10 September 2001 EIS Group PLC sold its fluid handling business, Plenty Group, comprising the assets of GSF Europe BV; Plenty Products, Inc.; Plenty India Limited; Plenty Uniquip Pty Limited and the majority of Plenty Limited, to
SPX Lightnin for £11m in cash.

On 14 September 2001 Smiths Industries B.V. sold all the issued share capitals of Induplas SpA and Flexiplas S.A. and Smiths Industries Industrial Group Limited sold the EuroHose business to A.G. Petzetakis S.A. for €12.55m in cash.

During the year the company made donations of £730,000 for charitable purposes including payments totalling £297,000 for the Portex Chair of Paediatric Anaesthesia. No political donations were made.

On 31 July 2000 Mr N V Barber retired as an executive director. Mr G M Kennedy retired as an executive director on 4 August 2000. Mr A I H Pink resigned as a non-executive director on 26 September 2000. Mr Pink's subsequent death was mentioned in the interim report. Mr R F Leverton retired as a non-executive director at the Annual General Meeting on 14 November 2000; and Mr P T Hollins resigned as a non-executive director on 3 December 2000.

Sir Colin Chandler, Sir Nigel Broomfield and Mr J M Hignett were appointed as non-executive directors and Messrs J Langston and D P Lillycrop were appointed as executive directors as part of the merger with TI Group plc. Their appointments took effect on 4 December 2000.

Mr E Lindh and Mr A M Thomson will retire by rotation, in accordance with Articles 73 and 74 and, being eligible, will seek re-appointment at the Annual General Meeting. Sir Colin Chandler, Sir Nigel Broomfield, Mr Hignett, Mr Langston and Mr Lillycrop will retire at the Annual General Meeting, following their appointment during the year, and, being eligible, seek re-appointment.

Details of executive directors' service contracts are as disclosed in the Contract Terms section of the report of the Nominations and Remuneration Committee. Details of the interests of the executive directors in the company's share option schemes are shown in the Directors' share option table.

Sir Colin Chandler, Sir Nigel Broomfield and Messrs Hignett, Langston and Lillycrop were directors of and shareholders in and, in the case of Messrs Langston and Lillycrop, holders of options over the shares of, TI Group plc at the time of the merger of TI Group with the company. They were also interested, as holders of units under letters of contingent entitlement, in the demerger of the Automotive Systems division.

With the exceptions referred to above, no director had an interest in any contract
to which the company or its subsidiaries was a party during the year.

As at 25 September 2001 the company had been notified, pursuant to the Companies Act 1985, of the following material or notifiable interests in its issued share capital:


	No. of shares	Percentage^†of issued capital

The Capital Group Companies, Inc*	66.6m	12.0%

*includes the interests of Capital Guardian Trust Company in 7.2% of the issued share capital
^†percentage of share capital in issue on 25 September 2001.

The company complies with the Combined Code, as defined in the Listing Rules of the UK Listing Authority, (the 'Code'), except that no senior independent director is recognised as required by A.2.1 of the Code.

The Board of Directors normally meets formally eight times a year to make and review major business decisions and monitor current trading against budgets which it has approved. It additionally exercises control by determining matters specifically reserved to it in a formal schedule which only the Board may change: these matters include the acquisition of companies and major capital expenditure. Once a year the Board meets in conference to consider long-term strategy and industrial developments affecting the company. Additional meetings are arranged as necessary to deal with urgent items.

There is an agreed procedure for all directors to take independent professional advice at the company's expense in connection with their duties. They also have access to the advice and assistance of the Company Secretary whose appointment is in accordance with the Code. Arrangements are in place for all directors to receive appropriate training, whether on their appointment or periodically, as necessary.

Mr K Orrell-Jones, who is the senior non-executive director, is the Chairman and also chairs the Nominations and Remuneration Committee. Sir Colin Chandler is the Deputy Chairman and also Chairman of the Audit Committee. No other non-executive director has been appointed as 'a recognised senior member' for the purposes of A.2.1 of the Code because matters of concern can readily be brought to the attention of either Mr Orrell-Jones or Sir Colin Chandler who have clear areas of responsibility. Mr Butler-Wheelhouse is the Chief Executive. There are now six independent non-executive directors and seven executive directors on the Board.

The Board is provided with detailed information on matters to be considered at its meetings and non-executive directors have ready access to the executive directors. Regular site visits are arranged and non-executive directors are encouraged to visit
sites. During site visits, briefings are arranged and the Board is free to discuss aspects of the business with employees at all levels.

There is a formal procedure for appointment of all new directors. The Nominations and Remuneration Committee, which comprises all the non-executive directors, makes recommendations to the Board on appointments. Appointments approved by the Board are subject to confirmation by the shareholders at the next Annual General Meeting.

All directors are subject to retirement by rotation and submit themselves for re-election at intervals of no more than three years: any director who attains the age of 70 is subject to annual re-election. The initial appointment of non-executive directors is for three years: they do not participate in company bonus, share option or pension schemes.

The Nominations and Remuneration Committee meets at least three times a year. Mr Butler-Wheelhouse attends meetings of the Committee by invitation but does not participate in discussions of his own interests. The Committee monitors the performance of the Chief Executive and other executive directors and has access to all information required for that purpose. The report of the Board on executive remuneration is set out in Directors' Emoluments and Interests.

The company maintains a dialogue with institutional shareholders through regular meetings and presentations. At the Annual General Meeting shareholders are encouraged to ask questions and after the meeting have access to directors and other senior executives. The company has complied with the Code provisions related to principles C.1 and C.2.

The Board believes that the Report and Accounts present a balanced and understandable assessment of the company's position and prospects: the Board has complied with the Code Provisions D.1.1 to D.1.3. A statement by the Auditors appears here.

The Audit Committee's terms of reference accord with the Code. The Committee comprises all the non-executive directors and meets at least three times a year with the Chief Executive, Financial Director, General Counsel, Director of Internal Audit and the auditors normally attending meetings.

Internal control. Smiths Industries plc and TI Group plc operated as separate companies under the management of their Boards of Directors until completion of the merger on 4 December 2000. Both companies operated broadly similar processes of internal control, based on an assessment of risk and framework of control procedures to manage risks and to monitor compliance with procedures. In the case of both companies the process accorded with the guidance on internal control issued by the Turnbull Committee. Smiths Group has brought together and adopted the procedures previously operated by Smiths Industries and TI Group. The procedures of accountability and control for Smiths Group, which are consistent with those followed by Smiths Industries and TI Group, are outlined below.

The Board accepts its responsibility for maintaining and reviewing the effectiveness of the company's system of internal controls. The internal control systems are designed to meet the company's particular needs and the risks to which it is exposed, and by their nature can provide only reasonable, not absolute, assurance against material loss to the company or material misstatement in the financial accounts.

The group has an embedded process for the identification, evaluation and management of significant business risks. The process is reviewed through the Audit Committee and monitored by the group Internal Audit Department. The four operating divisions and Corporate HQ have, during the year, identified and evaluated the key risks under three categories – strategic; operational; and information – and have ensured that effective controls and procedures are in place to manage these risks.

In the highly regulated environment of the aerospace and medical industries, procedures are codified in detailed operating procedures manuals and are reinforced by regular educational programmes. This is designed to ensure not only compliance with the regulatory requirements but also with the general principles of business integrity.

A key element in any system is communication and a number of committees exist which enable the executive directors and senior corporate staff to address financial, human resource, risk management and other control issues. Experience is shared by subsidiaries through company-wide seminars.

Throughout the year the Board has reviewed the effectiveness of internal control and the management of risks at its regular board meetings. In addition to financial and business reports, the Board has reviewed medium and longer-term strategic plans; capital expenditure and development programmes; reports on key operational issues; tax; treasury; risk management; insurance; legal matters and Audit Committee reports, including internal and external auditor reports.

Going concern. The Board's review of the accounts, budgets and forward plans, together with the internal control system, lead the directors to believe that the company has ample resources to continue in operation for the foreseeable future. The accounts are therefore prepared on a going concern basis.

Auditors. PricewaterhouseCoopers have reviewed the company's statements as to compliance with the Code to the extent required by the Listing Rules of the UK Listing Authority. The results of their review are set out in the Independant Auditors' Report to the Members of Smiths Group plc.

The company's policy and practice is to pay creditors promptly in accordance with agreed terms of business. The average time taken to pay an invoice was 36 days for the parent company and 55 days for the group as a whole (calculated in compliance with the Companies Act 1985 (Directors' Report)(Statement of Payment Practice) Regulations 1997).

The company seeks to ensure that, as far as is reasonably practicable, any detrimental effects to the environment of its operations and products are minimised. A senior corporate staff director has responsibility for safety, health and environmental matters: three full-time managers report to that director and co-ordinate and monitor the safety, health and environmental activities of the company. A more detailed statement appears in Investing in Global Talent.

It is the company's policy to provide equal opportunities for employment and to give the fullest consideration to employment prospects for the disabled. The company continues to be actively involved in all aspects of the training and development of young persons, including government sponsored schemes and unit initiatives designed to ease the transition from school to work.

Share option schemes enable employees to acquire an interest in the company's shares and to align their interests more closely with those of the shareholders generally. Employees are regularly provided with a wide range of information concerning the performance and prospects of the business in which they are involved by means of Employee Councils and other similar consultative bodies which allow the views and opinions of personnel to be taken into account.

All matters concerning the environment, health and safety continue to be regulated by preventative, investigatory and consultative systems; issues relevant to the company pension scheme are likewise covered by means of structured committees, including representation from recognised trade unions. A more detailed statement appears in Investing in Global Talent.

At the Annual General Meeting shareholders will be asked to revise the authority, given to the directors at the Extraordinary General Meeting in November 2000, to allot relevant securities for the purposes of section 80 of the Companies Act 1985, so as to reflect the increase in the company's issued share capital since the Extraordinary General Meeting. The authority proposed will expire on the fifth anniversary of the Meeting unless otherwise renewed. The amount of relevant securities to which this authority relates represents one third of the share capital in issue on 25 September 2001. The directors have no present intention of exercising this authority. The ordinary resolution is set out in the Notice of Annual General Meeting.

Also in the Notice is the special resolution to renew the power granted to directors under section 95 of the Companies Act 1985. The new authority sought will be on substantially similar terms to those attaching to the existing authority and will expire on the fifth anniversary of the Meeting, unless otherwise renewed. It will permit the


–	in connection with a rights issue pro rata to the rights of the existing shareholders;
–	pursuant to the terms of any share scheme approved by the shareholders in General Meeting; and
–	for any other purpose provided that the aggregate nominal value of such allotments does not exceed £6,948,618 (approximately 5% of the share capital in issue on 25 September 2001).

The directors intend seeking renewal of these authorities annually.

During the year ended 31 July 2001 the following ordinary shares in Smiths Group plc were issued:


–	234,550,055 shares to former shareholders of TI Group plc;
–	956,028 shares pursuant to the terms of the company's shareholder-approved share option schemes;
–	298,809 shares pursuant to the terms of TI Group share option schemes; and
–	2,624,134 shares under the scrip dividend share alternative scheme.

At the Annual General Meeting the company will seek to renew the authority, granted in general meeting on 17 November 2000 to the directors to purchase the company's shares in the market. The authority will be limited to 10% of the share capital in issue on 25 September 2001 and will be renewed annually. The maximum price that may be paid under the authority will be limited to 105% of the average of the middle market quotations of the company's shares, as derived from the London Stock Exchange Daily Official List, for the five business days prior to any purchase. On 25 September 2001 options over approximately 23.9m shares were outstanding under the company's share option schemes, representing approximately 4.3% of the then issued share capital. If the authority to purchase shares being sought at the Annual General Meeting were to be used in full, then the outstanding options would represent approximately 4.8% of the reduced issued share capital.

The directors will exercise the authority only if they are satisfied that any purchase will increase the earnings per share of the ordinary share capital in issue and will be in the interests of the shareholders. The directors will also give careful consideration to the gearing levels of the company and its general financial position.

A resolution will be proposed at the Annual General Meeting to revise the company's Executive Share Option Scheme. Details of the revisions are contained in a letter from the Chairman to shareholders, dated 12 October 2001.

Electronic copies of these reports and accounts, the notice of Annual General Meeting and the Chairman's letter to shareholders will be posted on the company's website, www.smiths-group.com Future announcements to the Stock Exchange and press releases will be made available online through the website. Shareholding details and practical help on share transfers and changes of address can be found at www.shareview.co.uk