The market continues to drive the need for robust, cost-effective and world-class technology.

In 2006, Rolls-Royce invested a total of £747 million in research and development, of which £395 million was funded from Group resources. The net charge to the income statement was £370 million.

We are addressing the environmental challenge, building upon our achievements of previous years as we continue to improve the performance of our products. In addition to our existing demonstrator engine programmes, we launched a new £95 million technology demonstrator programme, the Environmentally Friendly Engine (EFE), which will deliver further improvements in turbine efficiency and combustion emissions. EFE involves a range of industrial and university partners and will validate technologies for pull-through from 2008 into all of our gas turbine products.

Rolls-Royce is a lead partner in the development of the European 'Clean Sky' Joint Technology Initiative. Alongside our industrial partners, we hope to gain European Commission approval to launch this seven-year programme in mid 2007. In combining this programme with the EFE programme, we will continue with our progress towards achieving the Advisory Council for Aeronautics Research in Europe (ACARE) goals for environmental improvements by 2020.

Through the UK Energy Technologies Institute (ETI) and other mechanisms we will be increasing our research and technology programmes on low carbon energy systems. This will include such topics as the potential for the use of bio-derived fuels in gas turbines, high performance and distributed generation electrical power systems, renewable energy sources such as tidal power and carbon sequestration.

Over the past year, we increased the size of our research network of University Technology Centres (UTCs) by opening two new centres in Germany, taking the total number of UTCs to 27. In Dresden, we opened a UTC which specialises in lightweight structures and materials and in Darmstadt, our latest UTC was opened to research turbine and combustion aerothermal interactions.

Building upon our research successes of previous years, we filed a record 330 patent applications in 2006. The high efficiency solid oxide fuel cell programme for the energy business has continued to make significant progress with the successful demonstration of a 60kW power system.

In 2006, our advanced technology development centre in North America, known as LibertyWorks™, continued to make progress with Lockheed Martin on the US Navy's RATTLRS (Revolutionary Approach To Time-Critical Long Range Strike) programme.

In the defence sector, we completed the initial Flight Clearance Review of the LiftFan®, for use in the Joint Strike Fighter. The multi-partner TP400 engine, for the Airbus A400M, successfully completed the first engine and propeller test. We also gained a key role on the recently launched Taranis UCAV (Unmanned Combat Aerial Vehicle) demonstrator programme.

The Trent 1000 engine, which will power the Boeing 787, followed the successful trend of previous engine projects in achieving, on schedule, the planned milestone of the first engine run. The Trent 900 for the Airbus A380 has continued to gain maturity through engine and aircraft test activity.

The US Navy accepted delivery of the Sea Jet demonstrator vessel, powered by lower noise, underwater AWJ21 waterjets. The successful test programme was completed and reported to the Office of Naval Research (ONR) and led to the contract award for a high power density waterjet development programme.

The first Type 45 class destroyer, HMS Daring, was launched, powered by the advanced WR21 engine, which achieved the major milestone of first engine light in December. Rolls-Royce delivered the first gas-fuelled reciprocating engines for a passenger ferry application, in the form of Bergen K-type engines, which received classification society approval in December.