Corporate Governance Report

Audit Committee

Members: David Thompson (Chairman), Wolfgang Berndt, Rick Braddock, Roger Carr and Rosemary Thorne.

The Committee consists solely of independent Non-Executive Directors, all of whom have extensive financial experience in large organisations. All the Committee members held office throughout the year and at the date of this report. The Board has determined that David Thompson is an audit committee financial expert as defined by the US Securities and Exchange Commission.

At the invitation of the Committee, the Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Group Secretary, Director, Financial Control, Director of Business Risk Management, Head of Internal Audit and the external auditor attend meetings. The Director of Group Secretariat attends and is Secretary to the Committee. The Committee met five times in 2005 and also meets with each of the external and internal auditors separately at least once a year, usually in July and December respectively. In addition, the Chairman holds preparatory meetings with the Group's senior management as appropriate prior to Committee meetings. All Directors have access to the minutes of all the Committee's meetings.

The Audit Committee is responsible for exercising the full powers and authority of the Board in accounting matters and financial reporting matters.

Key duties:

• to monitor the integrity of the Company's financial statements prior to their submission to the Board;
• to ensure that the interim and annual financial statements meet the relevant legislative and regulatory requirements that apply to them and are in accordance with accepted accounting standards, especially as regards major judgmental areas, significant adjustments and the going concern assumption, before the statements are considered and approved by the Board;
• to review major changes in accounting policies and practices;
• to review the Company's internal controls and their effectiveness and report on this to the Board;
• to review the Company's statements and practices on internal controls (including section 404 Sarbanes Oxley certification) and other aspects of corporate governance prior to endorsement by the Board;
• to review the effectiveness of the external audit process, the Group's relationship with the external auditors including fees, and make recommendations on the appointment and dismissal of the external auditors.

Agenda: At its meetings, the Committee considers an agenda of items including:

• minutes of the last meeting and a list of action points from previous meetings, to ensure that these are progressed;
• business monitoring and controls, covering risk management and reports from internal audit and an update on all litigation in which the Group is involved with a value exceeding US$1 million;
• accounting and statutory reporting issues, such as the adoption of IFRS;
• corporate governance, which includes developments in the US and UK; and
• discussions with the external auditors.

Workload: Its work during 2005 included consideration of the following:

• the 2004 full year results announcement, the 2004 Annual Review and Summary Financial Statements, the 2004 Report & Accounts and Form 20-F, and the report on the 2004 Report & Accounts from the external auditor;
• the 2004 full year report on internal audit and the effectiveness of internal control, reviewing the Group's internal audit process and the audit plan for 2006;
• the 2005 Interim Report;
• the restatement of the 2004 results in accordance with IFRS;
• the provision and scope of audit and non-audit work by the external auditor;
• external audit fees for 2005;
• security arrangements in respect of Information Technology Systems;
• reports from the Speaking Up programme (established to investigate complaints in confidence from employees and others);
• the annual report on Group legal matters;
• an annual review of the effectiveness of the Committee;
• corporate governance developments in the UK and US and the Group's response to these developments;
• monitoring the Group's risk management and business ethics processes; and
• preparation for the Group's compliance with the internal control provisions of section 404 of the US Sarbanes-Oxley legislation.

During the year, the Committee was briefed on developments in the adoption of IFRS, the Flint Review of the Turnbull Guidance on Internal Controls, legislation on the Operating and Financial Review (and its subsequent replacement by the requirement for a business review) and best practice on complying with section 404 of the Sarbanes-Oxley Act.

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Non-audit services: The US Sarbanes-Oxley Act of 2002 identifies certain categories of non-audit services which are no longer to be performed by the external auditor. We have incorporated that prohibition into our own policy regarding services from the external auditor. The list of prohibited non-audit services may only be varied by the Audit Committee.

The external auditor is permitted to undertake some non-audit services, for example due diligence activities associated with potential acquisitions or disposals of businesses by the Group, but these services and their associated fees, must be approved in advance by the Committee. Where such services are considered recurring in nature, approval may be sought for the full financial year at the beginning of that year. Approval for other permitted non-audit services has to be sought on an ad hoc basis. Where no Committee meeting is scheduled within an appropriate time frame, the approval is sought from the Chairman of the Committee subject to confirmation at the next meeting.

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Auditor independence: The Committee reviews the work undertaken and the fees incurred, by the external auditor at each meeting, along with a complete list for the previous financial year, to ensure that the external auditor remains independent of the Company. In addition, the Committee receives written confirmation from the external auditor as to any relationships which may be reasonably thought to influence its independence. The external auditor also confirms whether it considers itself independent within the meaning of the UK and US regulatory and professional requirements, as well as within the meaning of applicable US federal securities laws and the requirements of the Independence Standards Board in the US.

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Other issues: In appropriate circumstances, the Committee is empowered to dismiss the external auditor and appoint another suitably qualified auditor in its place. The re-appointment of the external auditor is submitted for approval annually by the shareowners at the Annual General Meeting.

Details of the fees paid to the external auditor in 2005 can be found in Note 6 in the Financial Statements.

The composition and role of the Audit Committee is annually reviewed against the recommendations made in the Smith Report published in 2003. The Audit Committee complies with all of the Smith Report recommendations.