Defence aerospace continues to be a profitable and growing business. We have a wide range of defence engine programmes at all stages of the product life cycle, supported by a rapidly growing services business.

In 2006, Rolls-Royce made steady progress with its combat programmes. Both the F136 engine and LiftSystem® for the Joint Strike Fighter successfully continued their development testing. Rolls-Royce also completed deliveries of EJ200 engines for Tranche 1 of the Eurofighter Typhoon and has now commenced Tranche 2 EJ200 engine deliveries.

In the transport market, the first tests of the collaborative TP400 turboprop engine, for the Airbus A400M aircraft, were successfully undertaken. The AE 2100 passed the one million hour milestone in powering the C-130J transport aircraft. Rolls-Royce also signed an agreement with Alenia Aeronautica to supply 84 engines for the C-27J transport aircraft.

Elsewhere, in the common core AE engine family, the AE 3007-powered Global Hawk unmanned aerial vehicle (UAV) past the 10,000 service hour mark and the 200th AE 1107C-Liberty engine was delivered for installation in the V-22 Osprey tiltrotor.

In June, the Rolls-Royce and Honeywell joint venture, LHTEC, won a £75 million contract to supply the T800 helicopter engine for the UK's Future Lynx. The helicopter team also supported the successful first flights of the next generation Fire Scout unmanned helicopter, powered by the Model 250, and delivered nearly 300 Model 250 engines for a wide range of light helicopters.

The collaborative Adour engine powered the first two Hawk trainer aircraft delivered to Bahrain and the UK Ministry of Defence (MoD) placed an order for 28 Adour Mk951-powered Hawk trainers.

Rolls-Royce was selected to participate in Taranis, a new £124 million unmanned combat aerial vehicle (UCAV) technology demonstrator programme, and in the ASTRAEA programme to enable the routine use of UAVs in UK airspace.

Underlying service revenues represented 53 per cent of defence sales for 2006. We continued to increase the scope of services offered by the business to its customers and in November, we entered into an alliance with Serco, the leading services provider, to extend our service offerings and access new markets. More of the Group's long-term service arrangements in the form of Mission Ready Management Solutions (MRMS®) are now handled through the Operations Centre. This hub for in-service support is now open 24 hours a day, seven days a week.

More than 2,800 engines and 4,150 modules are now covered by MRMS support contracts and a number of these were added in 2006. New or renewed services contracts were signed with all branches of the US military, covering the AE 2100, the F405 (Adour), AE 1107C-Liberty and the Model 250 engines. In the UK, the £110 million contract for the support of the UK MoD's Hercules engines was expanded to cover T56 engines in addition to AE 2100s. The MoD also signed a £40 million services agreement to cover the Gem engines installed in the Lynx helicopter.