The past year - my first with Invensys - has been demanding but rewarding. Demanding, because the Group has faced a wide range of problems requiring urgent attention. Rewarding, because we have received substantial goodwill and support from employees, customers, suppliers and shareholders as we tackle these issues and set Invensys on the road to recovery.

The research I conducted before joining the Group revealed a fundamentally sound company with a number of good brands, products and market positions, but a track record of persistent under-performance. I saw a Group embattled by a severe cyclical and economic downturn. This was masking not only its considerable potential but also deflecting management attention from the fundamental barriers which stood between Invensys and its very real growth opportunities. These impressions have been more than confirmed in my first eight months.

Strategy review
Immediately following my appointment to the Board in July 2001, we launched a comprehensive strategy review to determine the best option for creating shareholder value and achieving returns that compare favourably with those of our global peers. The review was rigorous and deliberately radical: with no preconceptions about the future size or shape of Invensys, we set out to challenge accepted wisdom both inside and outside the Group. We listened at length to our customers, business partners, employees and industry experts. We collected and analysed data on our markets, competitors, business opportunities and historic performance. Above all, we involved as many of our people as possible in the review process. We then tested a number of strategic alternatives for their fit with customers' demands, their potential for rapid recovery and their ability to deliver the overriding requirement of enhanced shareholder value.

The primary message from customers was startlingly clear and consistent. They have an urgent need to get ever more performance from their businesses. Under-utilisation of assets, systems failure, waste, rising energy costs — these are all increasingly unacceptable. In addition, the pace of change is such that customers need help outside their own skills base, to address these challenges. Those companies able to provide greater reliability and capacity —and measurable improvements in productivity— can become indispensable partners in their customers' future.

Second, we found that we already possess many of the attributes which customers are seeking. We have a unique combination of technologies, loyal and experienced employees and specific expertise in a number of industries. What we have consistently failed to do is use these strengths to take us from the status of 'preferred supplier' to 'lifetime strategic partner'. Fortunately, the review showed that none of our competitors has done this either — thus offering us the space to match our skills to the solutions that customers need and want.

Third, our review confirmed the imperative for focus. We must concentrate our efforts on those sectors with the best growth potential and where our strengths can be built into competitive leadership. Two areas —closely related— stood out from our market analysis as having not only excellent opportunities, but also a strong match with our existing customer base, knowledge and technology. Both are about our ability to relieve pressure points for our customers. The first concerns the fact that rising investor expectations constantly ratchet up our customers. need to maximise their returns on capital investment and the efficiency of their supply chains. The second arises from their need to handle rising energy costs, worldwide de-regulation of energy markets and the growing impact of environmental legislation. These two areas open up a range of new and attractive market opportunities where we are particularly well placed to develop innovative solutions. Both require us to develop excellence in similar skill sets and both share the objective of increasing customers' resource productivity.

From a financial standpoint, the review clarified the Group's position and underlined the importance of tackling our indebtedness and improving cash generation.

Finally, the review revealed major internal issues requiring immediate attention. The size and complexity of the Group and its continual restructuring since the merger had lowered morale and created an inward-looking mindset that prevented the sharing of expertise. Poor execution and lack of sound processes had harmed certain customer relationships. It was clear that new leadership was needed to address these issues.

In February 2002, we announced the conclusions of the review. We committed to transform Invensys by:

• focusing on resource productivity;
• simplifying our structure around the delivery of benefits to customers;
• selling businesses which do not contribute to our strategy to fund investment and reduce our debt; and
• ensuring that we have the people, technology and processes to achieve a step change in the quality of our performance.

New organisation
To enable us to implement the strategy, we announced a new organisation structure, which took effect on 1 May 2002. The Production Management division comprises the former Software Systems businesses . including APV, Baan, Foxboro, Triconex and Wonderware . together with APV Baker and Eurotherm from Automation Systems. This division provides services and solutions to maximise customers' returns on asset investments and to optimise performance across their entire supply chains. With more than 50,000 installations worldwide, Production Management serves the sectors of oil, gas, chemicals and power generation; food, beverage and personal healthcare; pulp and paper; mining and cement; and discrete manufacturing.

The Energy Management division combines Energy Solutions, Metering Systems, Appliance Controls, Climate Controls and Home Controls from the former Control Systems division, and Powerware from the former Power Systems division. The new division works with customers engaged in the supply, measurement and demand for energy and water to reduce costs, conserve resources, comply with environmental regulations and to improve the quality, reliability and continuity of their energy supply. Key sectors include commercial, industrial and residential buildings, healthcare, data communications and utilities.

In addition to these core divisions, our Development division comprises three businesses —Rail Systems, Wind Power and Power Components— that enjoy strong positions in high growth markets but currently fall outside our strategic focus. Each of these businesses faces strategic milestones in the immediate future and we will continue to support them while judging their ability to become part of our core.

Finally, the Industrial Components and Systems division comprises businesses identified as non-core which we are actively seeking to sell in order to reduce our debt and fund our new strategy.

[The CHIEF EXECUTIVE'S REVIEW continues on the next page: page 1 of 2]