1. compliance with national laws and regulations;
2. fair and vigorous competition in the marketplace;
3. integrity and ethical conduct as the standard of individual and corporate business behaviour;
4. fair and honest treatment of suppliers and customers;
5. proper and respectful treatment of employees;
6. high standards for health and safety in the workplace;
7. respect for the environment;
8. contributions to the communities in which we live and work;
9. straightforward public information and activities;
10. respect for human rights;
11. prudent and transparent public accounting and reporting; and
12. a culture of compliance throughout the entire Smiths organisation – from the Chief Executive to the newest employee.

Translated into 13 languages, the Code applies to all Smiths businesses and employees worldwide and provides the framework for policies, programmes and procedures for a range of corporate responsibility issues. It is endorsed and fully supported by the Board.

Controls on defence sales
All sales of defence equipment are undertaken in accordance with government export and approval procedures and regulations, such as the International Traffic in Arms Regulation and the Export Administration Regulation in the USA. These laws prohibit export of certain items to specific countries. Smiths adheres to all relevant government guidelines designed to ensure that products are not incorporated into weapons or other equipment used for the purposes of terrorism, internal repression or abuse of human rights, with internal controls to ensure compliance with these guidelines. Compliance support to Smiths businesses worldwide is provided through a Business Ethics and Compliance team, which provides advice, export control policies, education, training, guidance materials and risk assessment tools.

In addition, Smiths Aerospace, together with the UK's leading defence companies and defence sector trade associations, joined the UK Defence Industry Anti-Corruption Forum, established earlier this year to promote the prevention of bribery and corruption in the international defence business.

Developments in reporting
For the first time Smiths is producing a Corporate responsibility report this year, building on the environment, health and safety reports published in previous years. Bringing the discipline of reporting and measuring progress to other Company responsibilities – employees, suppliers, communities – will help Smiths ensure that, in the long term, the principles of the Code are implemented consistently across the business.

You can find the full report on the Smiths website, www.smiths.com. Following is a summary of the main activities and progress for 2006.

Summary of Corporate responsibility report
Managing corporate responsibility
The Code is set by the Board and monitored by the Code Compliance Council, chaired by the General Counsel, which reports at least twice a year to the Audit Committee of the Board. Responsibility for managing specific issues, however, lies at different levels within the Company, depending on the nature of the issue and how it can most effectively be managed:

• environmental issues are managed though a Group-wide steering committee and organisation;
• health and safety issues are managed likewise;
• employee issues are managed through the human resources function and by line management;
• supplier/customer programmes are managed divisionally; and
• community programmes are principally managed locally, although there is also some Group-level activity.

For the coming year, Smiths has set three main goals for managing corporate responsibility:

• to understand better the Company's corporate responsibilities as they apply to global operations;
• to capture the views and opinions of key stakeholders; and
• to continue to drive the Company's environment, health and safety programmes.

The Company's policy is to provide equal opportunities for employment. Smiths recruits, selects and promotes employees on the basis of their qualifications, skills, aptitude and attitude. In employment-related decisions, Smiths complies with anti-discrimination requirements in the relevant jurisdictions concerning matters of race, colour, national origin, gender, marital status, sexual orientation, religious belief, age, or physical or mental disability. Disabled people are given full consideration for employment and subsequent training, career development and promotion on the basis of their aptitudes and abilities.

All Smiths employees are treated with respect and dignity. Accordingly, any harassment or bullying is unacceptable. Smiths respects the right of each employee to join or not to join a trade union or other bona fide employee representative organisation. Smiths believes in good communications with employees and in promoting consultation, co-operation and teamwork on matters of mutual concern.

Smiths offers share schemes that enable employees to acquire an interest in the Company's shares and to align their interests more closely with those of shareholders.

Reaching full potential
Smiths invests in employees' skills and capabilities to help them reach their own full potential, which in turn helps the Company and its businesses to do likewise. Current priorities for Smiths to achieve full potential across the Group are talent development, succession planning and employee engagement.

Talent development
Smiths Group and the individual businesses continue to invest in identifying and developing the talents of employees. Smiths provides employees with challenging work that stretches their capabilities, backing that up with training and development activities tailored to individual needs. In 2006, Smiths introduced a new process for the most senior people, integrating the performance review with the overall 'full potential' goals of the business.

Smiths continues to be actively involved in all aspects of training and developing young people, including initiatives designed to ease the transition from school to work. Horizons is a two-year programme for newly and recently appointed graduates and those early in their career which provides an understanding of the Company and the business world in general, and develops personal and teamworking skills.

Succession planning
Smiths has a systematic succession management process for senior leadership roles. The Company identifies leadership talent and development needs, and follows this up with individual development plans that are monitored by senior management.

Employee engagement
Smiths provides information to and communicates with employees as an important part of doing business. 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, information and consultation forums, and other consultative bodies that allow their views to be taken into account.

Suppliers
The Company's policy and practice is to pay suppliers promptly in accordance with agreed terms of business. The average time taken to pay an invoice was 35 days (2005: 35) for the parent Company and 48 days (2005: 48) for the Group as a whole (calculated in compliance with the Companies Act 1985 (Directors' Report) (Statement of Payment Practice) Regulations 1997).

Smiths believes in working in partnership with its suppliers, so as to meet the expectations of customers, and to ensure quality, value and timeliness throughout the supply chain. The extent to which the Company works in partnership with suppliers varies across the Group, however, and this is therefore an area Smiths will be focusing on in the coming year in terms of understanding better the Company's corporate responsibilities as they apply to global operations.

Communities
As well as providing employment opportunities and training and development activities, Smiths seeks to contribute to the communities in which it operates by participating in and supporting community and charitable initiatives.

With long-established roots in local communities where Smiths is often a major employer, Smiths businesses take an active role in the community, in schools, universities, and hospitals. These are often small but significant initiatives involving people's time, rather than large corporate donations. Individual businesses also support charity projects, for example funding the Smiths Medical Chair of Anaesthesia and Critical Care at University College London.

Additionally, Smiths supports national and international charitable organisations from a central budget administered by the Charity and Donations Committee, for example donations to St Mungo's, a London-based charity that provides practical support for thousands of homeless and vulnerable people.

The purpose of this Annual Report is to provide information to the members of the Company. The Annual Report contains certain forward-looking statements with respect to the operations, performance and financial condition of the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this Annual Report and the Company undertakes no obligation to update these forward-looking statements. Nothing in this Annual Report should be construed as a profit forecast.