IN A RELATIVELY STABLE ECONOMIC ENVIRONMENT, SMITHS DELIVERED PRE-TAX PROFITS FROM CONTINUING ACTIVITIES IN LINE WITH LAST YEAR (BEFORE GOODWILL AMORTISATION AND EXCEPTIONAL ITEMS). AS THE CHIEF EXECUTIVE REPORTS IN HIS REVIEW, THE GROUP ACHIEVED SIGNIFICANT UNDERLYING GROWTH, WITH SALES IMPROVEMENTS IN THREE OF THE FOUR DIVISIONS. TRADING WAS FAR STRONGER IN THE SECOND HALF OF THE YEAR.

In Aerospace, sales growth was achieved in spite of continued low volumes of civil aircraft construction. Medical had a successful year due to new product launches, while Specialty Engineering benefited from increased demand for high technology components. In Detection, incorporating the Heimann x-ray business for a full year benefited sales, but operating profit did not match the previous year, which was boosted by a large one-off order.

At constant exchange rates, operating profit on continuing activities improved, illustrating the competitiveness of our safety critical products. Operating profit on continuing activities is the most telling indicator of our trading progress from one year to the next. However, allowing for the adverse impact of dollar weakness, and the benefit of the one-off order for detection equipment in 2003, operating profit on continuing activities decreased by 3% in 2004 to £360m, as is explained more fully later in this 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 £2,733m, including £55m from the discontinued activities, the Company earned profits before tax of £300m, representing earnings per share of 38.0p, compared with 20.0p last year. Pre-tax profits from the continuing operations (before goodwill amortisation and exceptional items) were £350m representing earnings per share of 45.9p, compared to 45.6p last year.

As a result of our increasing optimism, the Board is recommending that the dividend for the full year be increased by 4% to 27p. This means the final dividend is raised to 18.25p.

In preparation for the new Code on Corporate Governance, we have published a report describing corporate governance activity. Although the new Code does not apply to Smiths until the year ending 31 July 2005, the Company currently complies with all the provisions of the new Code with the exception that the Chairman is a member of the Remuneration Committee.

We recruited additional non-executive directors to improve the balance of the Board. Donald Brydon, David Challen, Peter Jackson and Lord Robertson of Port Ellen were all appointed during the year. They have wide-ranging experience, ensuring that they can constructively challenge management on both strategy and performance. I would like to thank Sir Colin Chandler, who will be retiring at the Annual General Meeting, for his notable contribution over the past four years as non-executive Deputy Chairman. Also, on behalf of the Board, I congratulate Sir Julian Horn-Smith who was knighted and John Ferrie who was awarded the CBE in the Queen's Birthday Honours List.

On 21 September 2004, I retired as Chairman and am succeeded by Donald Brydon. Donald's excellent leadership qualities, developed in business and the City, will help Smiths through its next phase of growth.

I am pleased that Keith Butler-Wheelhouse agreed to continue in his post as Chief Executive for an additional two years, deferring his retirement until March 2008. This will allow Keith to oversee succession to the posts of the other executive directors, four of whom are due to retire by mid-2007.

We have been working hard to give environment, health and safety issues a high priority. Initiatives to reduce waste to landfill and accident rates have been particularly successful. Some 99% of our major manufacturing businesses (excluding new acquisitions) are now certified to the international environmental management standard, ISO 14001. Additionally, the Board approved a new Code of Corporate Responsibility and Business Ethics, which is currently being introduced across our businesses.

Over my six years as Chairman, Smiths has doubled in size and has consolidated its position towards the middle of the FTSE 100 as Britain's leading specialist engineering company. The Company has been through a difficult transition period, but is now embarking on a new phase of growth. I would like to express the thanks of the Board to our employees, who have made this possible.

KEITH ORRELL-JONES
FORMER CHAIRMAN