MANAGING DIRECTOR JOHN LANGSTON

THROUGH SMITHS DETECTION WE ARE MAKING A SIGNIFICANT IMPACT ON THE FAST-CHANGING MARKET FOR EQUIPMENT TO DETECT WEAPONS, EXPLOSIVES, CONTRABAND OR OTHER HARMFUL SUBSTANCES SUCH AS CHEMICAL OR BIOLOGICAL AGENTS. WE ARE ACQUIRING AND DEVELOPING A RANGE OF TECHNOLOGIES TO MEET BOTH CURRENT AND FUTURE THREATS. IN TRACE DETECTION AND X-RAY IMAGING WE HAVE LEADERSHIP IN A UNIQUE COMBINATION OF TECHNOLOGIES.

The market for detection equipment is expanding rapidly, as governments around the world seek to protect troops, the public and property from largely hidden threats at strategic and vulnerable locations. These include airports, ports, public and government buildings, power generation, and water and fuel supplies. The drive to defend US air travel against terrorist threats was a key catalyst of growth during 2003, but there was also steady growth in demand from other sectors.

Following the transformational acquisition of Heimann Systems GmbH, Smiths Detection doubled in size in terms of sales. The division's sales for 2003 stood at £273m, compared with £119m for 2002, and operating profit expanded to £71m (up 145%). There was exceptional organic growth, chiefly due to the sale of more than 3,000 Ionscan units to the US Transportation Security Administration (TSA) for the examination of carry-on and check-in luggage for explosives at airports across the United States.

Heimann, the world-leader in x-ray inspection of mail, baggage and cargo, exceeded our budget projections for sales and profits in the eight months between acquisition and our financial year-end. In the United States, the TSA awarded Heimann a follow-on contract for baggage x-ray systems to be installed at security checkpoints. Countries including the United Kingdom, China and Spain placed significant orders for the automatic explosives detection x-ray system, Hi-Scan EDS, which checks up to 1,500 bags per hour. There were also large orders for container inspection equipment, particularly from Japan. The inspection of bulk freight containers during trans-shipment is recognised as an effective means of preventing threats to national security. As an example, all road freight travelling on Channel Tunnel trains is now examined using Heimann equipment located at the French and UK entry points.

The new EDtS system for automatic explosives detection is currently undergoing pre-tests before seeking TSA certification in the United States, where it has great potential. The system has overcome the shortcomings of existing technologies in competitive products, offering a combination of high throughput, low false alarms and increased detection capability.

Considerable progress was made in sales of trace detection equipment, with important breakthroughs in recently launched products. These included the Sentinel II walk-through portal that screens passengers for explosives and is currently installed at a number of international airports for evaluation. Outside transportation, the UK Ministry of Defence, NATO and US federal and state authorities ordered chemical warfare detection equipment. Additionally, Smiths Detection is a key member of the industrial team that will equip the United States Postal Service with a biohazard detection system.

NEW DIVISION
In order to capture the full potential of the rapidly growing market for detection equipment, we created Smiths Detection as a stand-alone division, effective from 1 August 2003. The new division allows us to gain maximum benefit both from the favourable market conditions and our acquisition of Heimann.

Smiths Detection now has a more comprehensive global marketing, research and development, and servicing presence than the competition. Additionally, it has a division-wide approach to lean manufacturing.

To maintain the momentum, we are increasing the budget for developing detection technologies. In particular, we are developing systems that integrate our trace and x-ray detection technologies within a single device.

OUTLOOK
Smiths Detection is well positioned to capitalise on its opportunity for growth. Demand for detection systems is broadening, with initiatives to increase the screening of sea cargo, air freight and airline baggage. There is also expanding demand worldwide for equipment to safeguard military forces and strategic installations, and to protect the public from threats traditionally directed only at the military.