IN A FLAT GLOBAL ECONOMIC ENVIRONMENT, SMITHS HAS AGAIN DELIVERED ROBUST PROFITS. BUSINESS CONDITIONS IN THE FOUR OPERATING DIVISIONS WERE HIGHLY VARIABLE, BUT OUR DIVERSIFICATION ACROSS A NUMBER OF SECTORS HAS ONCE MORE PROVED JUSTIFIED, LEADING TO CONSISTENT PROGRESS ON A COMPANY-WIDE BASIS.

Aerospace experienced difficult conditions in its civil business, which reflected the challenging environment for airlines and the low number of aircraft being built. This was counterbalanced by our other divisions, in particular Detection, which successfully captured a substantial share of the rapidly growing market for equipment to detect weapons, explosives and chemical and biological agents. Our Medical and Specialty Engineering divisions also benefited from growth in some sectors.

Within this context, operating profit on continuing activities increased by 2% in 2003 to £372m. Operating profit on continuing activities is the most telling indicator of our trading progress from one year to the next. Given the mixed economic environment, we are pleased with these results, as the Chief Executive reports in his review.

I shall first comment, however, on the consolidated results of Smiths Group plc, which include the discontinued activities, principally the Polymer Sealing Solutions business. On sales of £3,056m, including £427m from the discontinued activities, the company earned profits before tax, amortisation and exceptional items of £384m. After amortisation and exceptionals, the pre-tax profit was £217m, representing earnings per share of 20.0p, compared with 33.3p last year.

Reflecting the confidence we have in our business, but also recognising that earnings have not grown this year and that the outlook remains tough going forward, the Board is recommending that the dividend for the full year be increased only in line with inflation at 2% to 26p. This means the final dividend is raised to 17.25p.

Following publication of the revised Combined Code on Corporate Governance, I am pleased to be able to say that the company already complies in large part with these new provisions. Where we do not comply, we will be considering what action to take or, if appropriate, offer explanations as to why we do not.

We are in the process of recruiting additional non-executive directors in order to bring the balance of the Board more closely in line with recommended practice.

We have recently announced the appointment of Lord Robertson of Port Ellen, as a non-executive director, who takes up his appointment in February 2004.

John Hignett retired as a non-executive director in November 2002 and we thank him for his valuable service.

We made further progress in improving our environmental efficiency during the year and, by the end of July 2003, 96% of our major manufacturing businesses achieved certification to the international standard ISO 14001. Smiths also became a signatory to MACC2 (Make a Corporate Commitment) in 2003, supporting a UK Government initiative to help organisations improve resource efficiency and environmental performance. I am also pleased to report that our safety standards continue at a high level, with our first EHS (Environment, Health and Safety) report, for 2002, showing days lost to accidents in the United Kingdom and United States at well below the industry averages.

I would like to take this opportunity to express the thanks of the Board to employees who have performed well in a difficult economic environment. I would also like to express my confidence in the prospects for the group. As the Chief Executive explains in his review, we have made great progress in focusing on growth areas, and have a clear strategy for increasing our profits through both top line growth and further efficiencies.

KEITH ORRELL-JONES
CHAIRMAN