OUR PRIORITY DURING THE PAST YEAR HAS BEEN TO IMPROVE SMITHS' GROWTH POTENTIAL, WHILE INCREASING EFFICIENCY. I AM PLEASED TO REPORT CONSIDERABLE PROGRESS. SEVERAL GROWTH IMPROVING ACQUISITIONS HAVE BEEN MADE, DEVELOPMENT OF NEW TECHNOLOGIES CONTINUES TO INCREASE AND COSTS ARE BEING REDUCED THROUGH RESTRUCTURING.

While it is too early for the full benefits to be seen in our performance, the impact of similar actions taken in previous years, alongside recovering economic activity, is becoming evident. Comparing sales on an underlying basis is an appropriate way to measure progress because it strips out the impact of currency fluctuations, acquisitions and disposals. On an underlying basis, three of the four divisions increased sales during the financial year to 31 July 2004. During the second half of the year, Group performance was particularly strong.

The programme to achieve Smiths' full potential that I initially referred to in last year's Annual Review intensified in 2004. Selective acquisitions, combined with increased research and development spending, are building a range of advanced technologies. Restructuring is transforming autonomous businesses into integrated, larger scale operations.

All credit must go to the management team, and I am pleased that John Langston, formerly group managing director Detection, agreed to succeed Einar Lindh as group managing director Specialty Engineering effective from 1 August 2004.

Stephen Phipson, managing director of Smiths Interconnect, the high technology communications arm of Specialty Engineering, succeeded John Langston as group managing director Detection.

For the year ended 31 July 2004, sales from continuing activities increased by 2% to £2,678m. Operating profit before exceptional items and amortisation of goodwill was 3% lower than last year at £360m, reflecting a £20m adverse currency translation effect this year from the weaker dollar and the benefit in 2003 of a large order for detection equipment. Pre-tax profit was in line with 2003 at £350m, following a reduction in interest costs. Earnings per share on the same basis of 45.9p were also in line with last year. Reflecting the critical and innovative nature of our products, and tight control over costs, the operating profit margin remained high at 13%.

The Group maintained its record for converting the majority of its profit into cash. Some 91% of operating profit was converted into cash, after net capital expenditure. Free cash-flow, after interest, tax and restructuring costs, was 45.5p per share. Year-end net debt of £273m was lower than 2003, as a consequence of strong operating cash-flow, and proceeds from the disposal of the Polymer business, less the £215m acquisition spend.

We continue to invest heavily in developing new technologies. Company funded research and development increased to 5% of sales. Technology leadership is generating important sales wins across the divisions, such as the high profile win of the Common Core Computing System for the new Boeing 7E7, the continued success of the Cozmo™ diabetic pump as it launches into new territories, and sales of the Sentinel II and EDtS detection equipment to airports and other customers worldwide.

A series of acquisitions has filled gaps in our range of technologies. It is anticipated that all these acquisitions will achieve our target rate of return on capital and enhance earnings within a relatively short period of time.

Key to Smiths' push for greater operational efficiency is a restructuring programme. This is improving the competitiveness of Aerospace, reorganising distribution and manufacturing in Medical, and completing Detection's integration of Heimann and the trace detection activities. The programme will be spread over 2004 and 2005. There will be a partial benefit to performance in 2005, and expected annual savings of £25m from 2006. Exceptional items o f£11m reflect the net impact of the restructuring and property and business disposals.

Across all divisions, we are seeking to become still more competitive while maintaining Smiths' customary financial discipline.