2002 WAS A CHALLENGING YEAR FOR SMITHS. AS WELL AS THE WIDELY PUBLICISED DOWNTURN IN CIVIL AEROSPACE, DEMAND FOR MANY OTHER ENGINEERING PRODUCTS WAS REDUCED. THESE ADVERSE FACTORS WERE PARTIALLY OFFSET BY RISING DEFENCE BUDGETS, THE CONTINUING EXPANSION OF HEALTHCARE DEMAND AND THE DRIVE TO IMPROVE THE SECURITY OF TRANSPORTATION AND PUBLIC BUILDINGS, PARTICULARLY IN THE UNITED STATES. IT IS ENCOURAGING THAT, WHILE THE FACTORS THAT HURT THE BUSINESS THIS YEAR WERE LARGELY SHORT TERM, THOSE THAT WERE OF BENEFIT ARE LIKELY TO LAST FOR THE LONGER TERM.

In the group's results the most important number to focus on for 2002 is the £452m of operating profits on continuing activities, since this allows the most direct comparison when looking forward to next year and at last year. The Chief Executive reports on the performance of these continuing activities in his review.

However, I shall first comment on the consolidated results of Smiths Group plc, which includes the discontinued activities, principally the now divested John Crane-Lips marine seals business. On sales of £3,223m, including £153m from the discontinued activities, Smiths earned profits before tax, amortisation and exceptionals of £405m. After amortisation and exceptionals, the pre-tax profit was £286m, representing earnings per share of 34.4p, compared with a loss per share of 37.3p last year (largely due to merger-related exceptionals).

The Board is recommending a final dividend of 16.75p, bringing the total for the year to 25.5p, an increase of 2%, and a level of payment that is twice covered by earnings from the continuing activities before goodwill amortisation and exceptionals.

One indication of Smiths' financial good health is the current low level of debt. Very strong cash-flow and the proceeds of disposals have allowed us to reduce net debt to a comfortable level for a company of our size. Net debt is now just 2.3 times free cash-flow.

But our strength is not just financial. We have a real commitment to responsible social and environmental behaviour. We shall publish our first corporate social responsibility report in 2003. In the meantime, details of our current progress can be found later in this book. Above all, we recognise that the quality of our employees underpins our capabilities. I would like to take the opportunity to thank them for their contribution during this challenging year.

The role of non-executive directors is more topical than ever. We have a well balanced Board, with six of the 13 directors being non-executive. I can confidently say that we non-executives are diligent in the pursuit of shareholders' interests. I chair the Nominations & Remuneration Committee. As a team, the non-executives and the executives work effectively together to ensure the success of the company.

The Chief Executive outlines Smiths' prospects in his review. As he explains, the underlying strength of our businesses gives us confidence that we can sustain the long-term growth of the company.