Business investment in the United States and Western Europe remained weak, reflecting not only softness in underlying demand and the impact of the war in Iraq, but also a structural shift of capital investment to developing regions of the world. Emerson capitalized on this trend by continuing to expand manufacturing, engineering, and sales in key emerging markets. Sales have increased on average 12 percent per year in these regions for the last three years, reaching $2.4 billion in 2003.

For fiscal 2003, the company achieved sales of $14.0 billion and earnings per share of $2.59, compared with 2002 sales of $13.7 billion and earnings per share of $2.52, excluding the non-cash goodwill accounting charge related to the adoption of FAS 142 last year. Including the accounting change, 2002 reported earnings per share were $0.29.

Operating cash flow was $1.7 billion, or 12.4 percent of sales, versus $1.8 billion in 2002, with the difference reflecting higher pension fund contributions in 2003. Free cash flow (operating cash flow less capital expenditures of $337 million) was in line with the prior year at $1.4 billion, the third straight year that free cash flow has exceeded earnings. Our strong cash flow and further reduction in debt improved the ratio of operating cash flow to total debt from 39.9 percent a year ago to 42.0 percent for fiscal 2003. Average trade working capital improved from 22.8 percent of sales in 2002 to 21.2 percent in 2003 as lean manufacturing programs continued to deliver operational benefits.

Return on total capital increased to 12.7 percent from 12.0 percent last year, the second consecutive yearly increase and a clear measure of our progress in creating value for our shareholders. The increase is a result of improvements in profitability, fixed asset utilization, and working capital efficiency.

Emerson has responded to the global economic challenges of the past three years by repositioning the company to better align with the changing global marketplace. The result is a stronger Emerson with significant opportunities for growth and a cost structure that allows us to compete anywhere in the world.

Five strategic imperatives are driving our return to higher profitability levels and superior value creation for shareholders:

1. Rebalancing assets through continued restructuring to establish superior cost positions and faster access to local markets.
2. Creating operating and capital efficiencies that generate strong cash flow to fund dividends, strategic acquisitions, capital investment, and technology development.
3. Globalizing the company's assets to leverage our strong position in developed economies and to further penetrate emerging markets.
4. Developing industry-transforming technology to help our customers succeed in their markets and win new end-users.
5. Providing solutions and services through our business platforms, and making it easier and more rewarding for customers to do business with Emerson.

I would like to share our thoughts on each of these imperatives:

The economic downturn in 2001 made clear the need to align manufacturing with best-cost areas and with an expanding global customer base. Information technology advancements of the late 1990s opened up markets around the world, and we began to face new competitors who undercut us with lower costs. To maintain our competitive advantage, we needed to realign assets people and plants to benefit from lower-cost regions. Closing a plant is a very painful process, especially when it impacts people who have provided excellent quality and productivity for many years. This has been a difficult but critical process that has improved operational performance and brought us closer to customers.

Emerson has made significant improvements in operating capital performance in the areas of trade working capital, lean manufacturing, and outsourcing initiatives, delivering free cash flow in excess of earnings for each of the past three years. Operating capital efficiency and cash flow have become key performance measurements for all business units.

We have four areas in which to invest cash. First is to pay increased dividends to shareholders, as we have for 48 consecutive years. Second, we continue to reinvest in our businesses through capital and technology spending, extending our lead against the competition. Third, we will continue to make strategic acquisitions to strengthen current platforms and possibly add new ones. Last, we will repurchase shares when it makes sense from a shareholder return standpoint.

Over the past two decades, Emerson has established an extensive and effective worldwide presence, which has been supported by strategic investment in information technology and customer service.

International sales today provide 45 percent of Emerson's total revenue. Our goal is to grow that to 60 percent. Effectively serving a global customer base requires that we place more production in emerging markets while continuing to focus the right resources on core U.S. and Western European markets. The objective is a balance of assets around the world that provides suitable coverage for customers and maintains a best-cost position.

Technology leadership is the foundation of Emerson's success. We have built a reputation for innovation and are accelerating investments in resources needed to drive next-generation products at a record pace. The goal is simple: continuously adapt, innovate, and create new products that change the game and provide unsurpassed value for customers and competitive advantage for Emerson.

We intend to be number one in each of the markets we serve, and to provide solutions and services that transcend the traditional customer/supplier relationship. This increases the value we bring to customers and expands our markets. Using shared knowledge and expertise across businesses, Emerson is finding new and faster ways to solve customer problems. We continue to strengthen and build these capabilities through internal development and acquisitions.

There are many examples of success across Emerson. Emerson Climate Technologies is a clear leader in energy management, site monitoring and system diagnostics, which are critical elements of the next-generation solutions being created for the heating,ventilating and air conditioning and commercial refrigeration markets. Emerson Process Management's combination of leading global and technology positions with superior systems, services and solutions has created an unmatched competitive position that generated strong project activity throughout 2003. Emerson Network Power strengthened its position through the year with a continued focus on restructuring, engineering and technology investment, and international expansion. This business is using its tremendous advantages to design and manufacture the next generation of reliable power solutions for telecommunications networks, data centers, health care and industrial facilities, and will be well positioned when its markets strengthen.

We are focused on executing these strategic imperatives, and the consistent progress we have demonstrated over the last three years gives us confidence we will achieve higher sales, margins, cash flow and returns to our shareholders.

Emerson has long been recognized as a company exhibiting the highest standards of honesty and integrity, and we work hard to retain the trust of shareholders, business partners, customers, and employees every day, wherever we do business. Emerson's published policies and guidelines set clear rules of conduct for all employees, managers and officers, and it is our responsibility as leaders of this company to maintain the atmosphere of integrity worldwide. These guidelines and procedures are posted on our Web site.

We are also proud of the individual commitment of time, energy and personal funds Emerson people give as volunteers in the communities where they live and work. Last year, Emerson and its Charitable Trust supported their efforts and spirit by donating more than $20 million to initiatives in education, health and human services, arts and culture, civic organizations and youth programs.

I thank all employees and the management team, who are strengthening the company while guiding Emerson through these difficult economic times. I also want to thank Chuck Knight and the Board for their continued guidance and confidence in this team, and the strong support they have shown for our strategies. I note with sadness the passing this year of William M. Van Cleve, a director, good friend and trusted counselor to the Board and to two CEOs for 19 years.

As we enter the new fiscal year, the business environment looks more favorable with underlying trends steadily improving around the world and strong project activity in areas we have targeted for growth. We look forward to a stronger economy in 2004 and we expect increases in sales, operating margins, cash flow, and earnings over fiscal year 2003.

On behalf of the Office of Chief Executive,

David N. Farr

Chief Executive Officer