Publication of Annual Report etc

Annual Report 2008

                       Publication of the Annual report

Bodycote plc announces that its Annual report for the year ended 31
December 2008, the Notice of Annual General Meeting and form of proxy are now
available on the Company's website at www.bodycote.com/?OB=33&POB=6.

Printed copies of these documents will be posted to shareholders on
or around 25 March 2009 and they will shortly be available for inspection at
the UK Listing Authority's document viewing facility at 25 The North
Colonnade, Canary Wharf, London E14 5HS.

In accordance with paragraph 6.3.5 of the Disclosure and
Transparency Rules we set out below a management report extracted from the
Annual report in unedited full text. Accordingly, page references in the text
below refer to page numbers in the Annual report. A condensed set of financial
statements was included in our final results announcement issued on February
25, 2009.

The Annual report contains a responsibility statement in compliance
with DTR 4.1.12 signed on behalf of the Board by Stephen Harris, Chief
Executive and David Landless, Finance Director. This confirms that to the best
of their knowledge:

1. The financial statements, prepared for the purposes of the
consolidation in accordance with International Financial Reporting Standards
as adopted by the EU and for the purposes of the parents' separate financial
statements in accordance with UK Generally Accepted Accounting Practice, give
a true and fair view of the assets, liabilities, financial position and profit
or loss of the Company and the undertakings included in the consolidation
taken as a whole; and

2. The Group Business Review, which is incorporated into the
Directors' Report, includes a fair review of the development and performance
of the business and the position of the Company and the undertakings included
in the consolidation taken as a whole, together with a description of the
principal risks and uncertainties they face.

The Annual General Meeting of the Company will take place at 2:00pm
on Monday, 27 April 2009 at Springwood Court, Springwood Close, Tytherington
Business Park, Macclesfield, Cheshire, SK10 2XF.

          Cautionary statement regarding forward-looking statements

This announcement contains certain forward-looking statements.
These forward-looking statements can be identified by the fact that they do
not relate only to historical or current facts. In particular, all statements
that express forecasts, expectations and projections with respect to future
matters, including trends in results of operations, margins, growth rates,
overall market trends, the impact of interest or exchange rates, the
availability of financing for the Company, anticipated cost savings or
synergies and the completion of the Company's strategies, are forward-looking
statements. By their nature, these statements and forecasts involve risk and
uncertainty because they relate to events and depend on circumstances that may
or may not occur in the future. There are a number of factors that could cause
actual results or developments to differ materially from those expressed or
implied by these forward-looking statements and forecasts. The forward-looking
statements reflect the knowledge and information available at February 25,
2009, the date of signing of the Annual report, and will not be updated during
the year. Nothing in this announcement should be construed as a profit
forecast.

                          2008 GROUP BUSINESS REVIEW

Overview

Bodycote provides thermal processing services to manufacturers in virtually
every sector of the world manufacturing economy. Up until 17 October 2008 the
company also provided testing services. Following the sale of the Testing
business, more than 7,000 employees continue to provide high quality services
from over 190 locations in 27 countries, serving several tens of thousands of
customers. In 2008 the Thermal Processing business delivered 77% of Group
sales compared to 73% in 2007 and saw its sales increase by 18.6%. The Group
operates in two principal business areas: Heat Treatment and Hot Isostatic
Pressing (HIP). During 2008 Bodycote has continued to execute its strategy of
developing its presence in emerging markets and increasing the proportion of
high added value services in developed economies. The disposal of Testing for
a consideration of £419.7m brought net cash proceeds, after expenses and tax,
of £378.2m and an exceptional profit after tax of £177.4m. In order to
accelerate the move away from lower added value work and to reduce the Group's
cost base in light of the global macro economic downturn, the Board also
initiated a significant restructuring of the continuing Thermal Processing
business. Headline operating profit of the continuing business was £71.2m, but
after allowing for exceptional costs of restructuring and asset impairment
there was a statutory operating loss for continuing operations of £51.7m. More
information and a reconciliation are provided below.

Competitive environment

In the western hemisphere Bodycote is the clear leader in the provision of
commercial thermal processing services. Bodycote mainly competes with local,
privately owned companies and manufacturers' own in-house facilities.
Competition and the customer base are both very fragmented with hundreds of
providers servicing thousands of customers. The Group has developed a
sustainable, competitive advantage over local entrepreneurs through the
superior quality of systems, extensive knowledge base, breadth of technology,
flexible capacity and a broad range of services. Bodycote's proven track
record of supplying thermal processing services to many of the world's most
respected manufacturers is a testament to the Group's success in outsourcing
and subcontracting for manufacturers who need to reduce costs, whilst at the
same time being confident that their critical components are processed to
demanding specifications. The HIP business operates in a much smaller market
and Bodycote's facilities account for more than 60% of the total capacity in
the western hemisphere. Few manufacturers invest in this technology because of
the high capital cost and the substantial proprietary know-how required.
Competitors to Bodycote's HIP business vary from smaller private companies to
a small number of large corporations.

Regulatory environment

As a service provider to virtually all manufacturing sectors and as a business
operating in many countries, Bodycote is subject to a multitude of quality,
safety, environmental and regulatory requirements. Management continuously
monitors changes in laws, regulations and standards by adopting systems and
policies to retain best-in-class compliance. Although this effort is costly in
the short term, being a good corporate citizen clearly differentiates us in
the market place. Customers have confidence in Bodycote's quality and the
sustainability of the Group's services.

Macro-economic environment

Most of the countries in which Bodycote operates started to experience
significant reductions in demand in the second half of 2008 and, although not
specific to Bodycote, the Group has not been immune to falling production
rates. In anticipation of the downturn in demand, cost reduction programmes
aimed at matching costs with revenues are being implemented. Bodycote's
greatest cost is people and a Group wide reduction in the number of temporary
and short-term workers is ongoing. Further far reaching restructuring actions
are underway, which are expected to result in annualised cost savings of
approximately £18m, some of which accrued in 2008, about half will be a
benefit in 2009 and the full impact will be felt in 2010. Pay rates tend to be
settled in the early part of the year and in 2008 the pay awards averaged
3.5%. This is expected to be significantly lower in 2009. Headcount in Thermal
Processing peaked in 2008 at 7,736. By year-end this figure had fallen to
7,001. Energy prices have remained near record highs during the year with
different countries experiencing varying levels of movement in unit costs.
Overall, energy costs increased by one percent of sales, year on year. As a
service provider Bodycote is ultimately subject to changes in production
throughputs and market demand for its products. The sectors that the Group
serves which have been particularly challenging in 2008 are automotive, heavy
truck, construction and automotive related tooling. Aerospace, power
generation and oil & gas demand have remained steady.

Long term strategy and business objectives

The Group is now focused on Thermal Processing. The objective of the Group is
to provide superior shareholder returns through the provision of thermal
processing services, on a global basis, that are highly valued by the Group's
customers. Bodycote aims to achieve this in safe working conditions and with
minimal environmental impact.

Bodycote measures its performance in this regard using financial and
non-financial indicators (shown in the table of Key Performance Indicators
below).

Key Performance Indicators for           2008     2007*
Thermal Processing
 
Financial
Return on capital employed (1)          10.2%     10.9%
Return on sales (2)                     12.9%     15.1%
 
Non financial
ISO 14001 registered facilities           137       131
Accident frequency (3)                    2.0       2.4
Definitions

(1) Headline operating profit** as a percentage of average capital employed
from continuing operations. Capital employed includes tangible and intangible
assets including all previously amortised or impaired historic goodwill and
all non-interest bearing assets and liabilities.

(2) Headline operating profit** as a percentage of revenue from continuing
operations.

(3) Accident frequency - the number of accidents x 200,000 (approximating 100
man years), divided by the total hours worked.

* As restated for Thermal Processing only.

** Headline operating profit, as referred to in this Group Business Review, is
defined and reconciled in the Financial Results for 2008 section.

Return on capital employed and return on sales were both negatively impacted
by the downturn in demand in the second half of the year. As a result, a major
restructuring of the Thermal Processing business has begun and will continue
throughout 2009. In addition to improving efficiency through the closure and
consolidation of a number of the Group's facilities, a key focus is the
management of people costs.

Bodycote continues to progress towards the target of ensuring that all of the
Group's facilities meet the environmental standard ISO 14001. Significant
improvements in work related accident rates are being achieved by a
combination of training, systems and cultural change. Bodycote remains
committed to achieving the highest standards of safety for its people and
having zero accidents remains the goal.

Acquisitions completed since the interim results

Since the interim announcement, the Group has completed the bolt-on
acquisition of Bertelmann GmbH in Leverkusen, Germany, at a cost of £2.5m.
Bertelmann is a long-standing provider of heat treatment services with a
capability that is geared towards the wind energy market.

Financial Results for 2008

                         Revenue           Headline          Margin
                                       operating profit

                      2008      2007     2008       2007   2008    2007
 
                        £m        £m       £m         £m      %       %
Heat Treatment       499.9     421.7     60.0       61.6   12.0    14.6
HIP                   51.9      43.5     15.3       15.4   29.5    35.4
Thermal Processing   551.8     465.2     75.3       77.0   13.6    16.6
Head office costs        -         -    (4.1)      (6.7)      -       -
Continuing           551.8     465.2     71.2       70.3   12.9    15.1
operations
 
Discontinued         164.9     175.3     20.5       21.0   12.4    12.0
operations
Group Total          716.7     640.5     91.7       91.3   12.8    14.3




Headline operating profit is calculated as follows:         2008   2007
 
                                                              £m     £m

Headline operating profit from continuing operations        71.2   70.3
Amortisation of acquired intangible fixed assets           (1.3)  (0.8)
Impairment of goodwill                                    (31.9)  (3.5)
Major facility closure costs                              (77.6)  (3.4)
Impairment of loan due from associate                     (12.1)      -
Change to pension scheme rules                                 -    2.6
Bid response costs                                             -  (2.1)
 
Operating (loss)/profit from continuing operations        (51.7)   63.1


The continuing Thermal Processing business and the discontinued Testing
business saw solid organic growth until September of 4.6% and 6.4%
respectively. Reduced demand from automotive and general engineering customers
in the second half resulted in organic growth for Thermal Processing being
restricted to 0.5% for the year as a whole, with a reduction of 0.1% in Heat
Treatment and growth of 6.2% in HIP. Acquisitions added 5.9% to Thermal
Processing revenues. The weakness of sterling against most currencies enhanced
revenues of the continuing business by 12.2%.

Demand has remained steady in aerospace, power generation and oil & gas but
has weakened markedly in the final quarter of the year in automotive and heavy
truck, particularly in France, Germany and Sweden. North America has been soft
all year in these sectors. Nevertheless outsourcing opportunities remain
considerable in all territories and accounted for approximately 20% of Group
sales.

Headline operating profit for continuing operations increased by 1.3% to
£71.2m in 2008, with the impact of exchange rates on the translation of
overseas profits accounting for £6.5m (9.3% favourable).

Headline operating margins in the continuing business declined from 15.1% to
12.9% due to the impact of weaker demand in the second half.

During the year the Group acquired three new businesses in the continuing
Thermal Processing business at a cost of £16.5m, out of a total of £29.3m
spent on acquisitions for the Group as a whole. The Thermal Processing
acquisitions in the UK and Germany increase the Group's presence in thermal
spray coatings for aerospace and oil & gas customers and in heat treatment for
large wind turbine components.

Review of continuing operations - Thermal Processing

Thermal Processing reported sales of £551.8m, an increase of 18.6%. This
comprised 0.5% organic, 5.9% acquired and 12.2% in respect of favourable
foreign exchange translation impact.

Heat Treatment

Heat Treatment saw a growth of 18.5% in revenues to £499.9m representing 90.6%
of the continuing group (2007: 90.6%). Margins were impacted by the economic
slowdown and higher energy costs and eased to 12.0% (2007: 14.6%).

With its emphasis on aerospace and power generation, the UK business again saw
solid organic growth of 3.6% in 2008. Results from the Nordic region were
varied, with the Swedish business impacted by slowing truck and general
engineering demand, while Finland was buoyed by continuing strength,
particularly for wind energy. The Nordic region in total recorded an organic
decline of 1.4%.

Despite the significant downturn in automotive demand in the second half, the
Central European countries were still able to post modest organic growth of
0.4%. Eastern Europe was also impacted by slowing automotive demand towards
the end of the year, but the region reported organic growth of 7.4% for the
year as a whole. Conversely, France and Belgium have been severely impacted
with organic sales down 4.6%.

North America saw the effect of the global slowdown earlier than Europe. In
the US, organic sales were marginally ahead year on year although this was
offset by a reduction in the heavily automotive-oriented Canadian business.
North American sales, in total, finished the year 15.8% ahead. As with other
automotive focused markets, the Group's South American business saw a year on
year decline in organic sales of 4.0%.

The Group continued to make progress with its developing Asia business. Sales
in 2008 doubled in China and trebled in India, the latter assisted by the
opening of a new greenfield location near Pune.

HIP

With demand continuing to be solid for aerospace, power generation and powder
metallurgy (for heavy engineering near-net shapes), organic growth in the
European HIP business was satisfactory at 7.9%. Sales increased to £27.3m
(2007: £21.7m) including the benefit of the acquisition of TCS in France.
Organic growth in North America was 4.4% despite the modest negative effect
from the Boeing strike during the second half.

Margins were reduced from 35.4% to 29.5%, however following notable capacity
increases in North America and Europe (the latter via acquisition of TCS in
France) and for which the sales ramp-up is expected to take a least two years.

Restructuring

In light of the global economic downturn, weak demand in the automotive, heavy
truck and construction sectors and uncertainty as to the duration of these
market conditions, a wide ranging review of the Group's Thermal Processing
business has been undertaken. As a result, the Group has decided to
consolidate or close 31 locations (13 in the Americas, 17 in Europe and one in
Asia) and to permanently close departments in a number of other facilities.
Actions in North America, which entered the downturn sooner, are well underway
and are expected to be largely completed in the first half of 2009. In the UK,
changes are modest and will be completed during the first quarter of 2009. In
mainland Europe some actions will be completed very quickly but in some
jurisdictions regulatory requirements mean that the restructuring will not be
completed until the end of 2009. The total cost of the reorganisation is
expected to be approximately £85m, of which £77.6m has been charged in 2008
and the balance will be charged in 2009 in compliance with IFRS. Of the amount
charged in 2008, £42.7m relates to non-cash asset write downs, whilst cash
costs are expected to be £34.9m split approximately equally between redundancy
payments, site closure costs and environmental remediation. Environmental
remediation is expected to be incurred over approximately five years. The
restructuring programme will generate annualised cost savings of approximately
£18m once it is completed and headcount will have been reduced by at least
10%.

Goodwill

Each year the Group conducts an assessment of the carrying value of goodwill.
With demand currently lower than previously anticipated, the timing of any
upturn uncertain and as a consequence of the plan to close or consolidate 31
locations, the Board has concluded that an impairment of £31.9m in the value
of the Group's goodwill is appropriate.

Associated company - SSCP Coatings Sarl (SSCP)

SSCP is a highly leveraged private equity controlled business. In view of the
relative ranking of Bodycote's shareholder loans to SSCP and the reduced
saleability of such businesses in today's market, a 100% impairment provision
of £12.1m has been made in 2008 against the unsecured element of these loans.
Bodycote currently owns 24.4% of the share capital of SSCP.

Review of discontinued operations - Testing

During the 42 weeks to 17 October 2008 (date of sale) Testing recorded sales
of £164.9m representing an increase from 2007 on a comparable basis of 12.7%.
Of this, 0.5% was organic, 5.4% was due to acquisitions and 6.8% as a result
of favourable exchange movements. Up to the point of sale Testing represented
26.8% of total Group revenues and 23.0% for the full year. Headline operating
profit was £20.5m for the period to 17 October 2008 (2007: full year £21.0m)
and operating profit for the period was £19.9m (2007: full year £15.7m).
Headline operating margins increased to 12.4% (2007: 12.0%).

Sale of Testing business

On 28 August 2008 Bodycote announced that it had entered into a conditional
sale of its Testing business to CDR Tabasco Limited for a cash consideration
of £419.7m on a cash free debt free basis and a vendor loan note in respect of
the future sale proceeds of approximately 65 acres of land in Mississauga,
Canada. The transaction was completed in accordance with the conditional sale
agreement on 17 October 2008.

The net proceeds of the sale after taxation amounted to £378.2m. Of the sale
proceeds £21.0m has been contributed to the Bodycote final salary pension
plan, of which £19m was a statutory requirement and £228.4m has been utilised
to reduce Group net debt. The remaining £129.5m was returned to shareholders
by way of a special distribution of 40 pence per ordinary share on 16 December
2008 of which £128.8m was paid in December 2008 and the remainder will be paid
in April 2009.

The after tax gain on sale of £177.4m is reflected in the Group Consolidated
Income Statement along with £11.4m profit after tax resulting from trading
during the year until the completion of the sale under discontinued
operations.

Financial review

Revenue

Group revenue from continuing operations was £551.8m, an increase of £86.6m
(18.6%) on 2007 (£465.2m). Revenue growth for Heat Treatment was £78.2m (up
18.5%) and for HIP £8.4m (up 19.3%). Organic growth accounted for £2.4m (0.5%
of 2007 revenue) of total sales growth before the impact of closed sites which
had annualised sales in 2007 amounting to £3.9m (0.8% of 2007 revenue).
Acquisitions added £27.5m (5.9% of 2007 revenue). Foreign currency movements,
resulting from the general weakening of sterling, had a favourable impact on
revenues of £56.7m.

Operating profit and margins for continuing operations

Headline operating profit for the continuing operations of the Group, as
defined in the Key Performance Indicators section above, was £71.2m, an
increase of £0.9m (up 1.3% on 2007). Headline operating profit from continuing
operations showed an organic decline of £10.9m (down 15.5%), while
acquisitions added £5.3m (up 7.5%) and favourable exchange movements £6.5m (up
9.3%). Headline operating profit margins from continuing operations fell from
15.1% to 12.9%.

Headline operating profit for Heat Treatment decreased by £1.6m (down 2.6%).
Organic profit declined by £12.4m (down 20.1%) but acquisitions added £5.2m
(up 8.4%) and currency movements £5.6m (up 9.1%). Margins slipped from 14.6%
to 12.0%.

HIP saw its headline operating profit decrease by £0.1m (down 0.6%) with
organic profit declining by £1.2m (down 7.8%). The TCS acquisition added £0.1m
(up 0.6%) and currency movements added £1.0m (up 6.5%). Margins fell from
35.4% to 29.5%.

Operating loss for continuing operations, after deducting
exceptional items of £122.9m (2007: £7.2m) was £51.7m (2007: profit £63.1m).

Finance charge

The net finance charge from the continuing operations of the Group
was £3.6m compared to £2.5m in 2007.

Profit before tax from continuing operations

Headline profit before tax for the continuing operations was £67.6m compared
to £67.8m in 2007. Loss before tax for the continuing operations was £55.3m
compared to a profit of £60.6m.


Headline Profit Before Tax is calculated as follows:

                                                     2008        2007
 
                                                       £m          £m

Headline Operating Profit                            71.2        70.3
Net Finance Charge                                  (3.6)       (2.5)
Headline Profit Before Tax                           67.6        67.8
Amortisation of acquired intangible fixed assets    (1.3)       (0.8)
Impairment of goodwill                             (31.9)       (3.5)
Major facility closure costs                       (77.6)       (3.4)
Impairment of loan to associate                    (12.1)           -
Change to pension scheme rules                          -         2.6
Bid response costs                                      -       (2.1)
(Loss)/profit Before Tax                           (55.3)        60.6


Taxation

Total taxation was £6.8m for the year compared to £14.7m for 2007. The
effective tax rate for the Group was 4.3% (2007: 21.5%).

The sale of the Testing business gave rise to taxation of £21.9m, an effective
rate of taxation of 11.0%. The low rate of tax on the sale arises from the
availability of participation exemptions in many of the countries in which the
shares of the Testing business were disposed.

Excluding discontinued operations, taxation was £(17.2)m, representing an
effective tax rate on continuing operations of 31.1%. The Group's underlying
rate of tax on continuing operations, which represents the tax rate before
impairment of goodwill and amortisation of acquired intangibles (both of which
are generally not allowable for tax purposes) and excluding exceptional items
was 18.3% (2007: 20.6%).

The effective tax rates reflect a blend of rates in the numerous worldwide
locations where Bodycote is present, many of which have a lower tax rate than
the UK standard rate of 28.5%.

Earnings per share

Basic headline earnings per share (as defined in note 10) increased by 5.4% to
17.5p from 16.6p. Earnings/(loss) per share for the year are provided in the
table below:

                                             2008          2007
 
                                            Pence         Pence
Basic earnings/(loss) per share from:
Continuing and discontinued operations       48.2          16.6
Discontinued operations                      60.7           2.1
Continuing operations                      (12.5)          14.5
 
Dividend

The Board has recommended a final dividend of 5.35p bringing the total
dividend to 8.3p per share, an increase of 3.8%. In addition, a special
distribution of 40p per ordinary share was paid in December 2008.

The dividend is covered 2.1 times (2007: 2.1 times) by basic headline earnings
per share (as defined in note 10).

If approved by shareholders, the final dividend of 5.35p per share for 2008
will be paid on 8 May 2009 to all shareholders on the register at close of
business on 3 April 2009.

Capital structure

The Group's balance sheet at 31 December 2008 can be summarised as
set out in the table below:

                                  Assets Liabilities Net Assets
 
                                      £m          £m         £m
 
Property, plant & equipment        533.3           -      533.3
Goodwill and intangibles           154.4           -      154.4
Current assets and liabilities     148.2     (215.4)     (67.2)
Other non-current assets and        11.9      (30.1)     (18.2)
liabilities
Retirement benefit obligations         -      (14.9)     (14.9)
Deferred tax                        52.5      (78.3)     (25.8)
Total before net debt              900.3     (338.7)      561.6
 
Net debt                           258.4     (323.1)     (64.7)
 
Total as at 31 December 2008     1,158.7     (661.8)      496.9
 
Total as at 31 December 2007       999.9     (503.3)      496.6


Net assets increased by 0.1% to £496.9m (2007: £496.6m) and net assets per
share (weighted average) were up by 2.6% to £1.60 (2007: £1.56). The main
changes in the balance sheet arose from the sale of the Testing business,
which led to a decrease in net assets (excluding net debt) of £133.2m to
£561.6m and a decrease in net debt of £133.5m to £64.7m.

Net Debt

Group net debt was £64.7m (2007: £198.2m). Had the exchange rates prevailing
at 31 December 2007 been applied, the amount would have been net cash of
£10.0m. During the year, additional loans of £86.9m were drawn down under
committed facilities and gross cash increased by £220.7m to £258.4m. The Group
continues to be able to borrow at competitive rates and therefore currently
deems this to be the most effective means of funding.

Cash flow

The net increase in cash and cash equivalents was £209.4m (2007: net decrease
of £1.1m). This large increase is due to proceeds from the sale of the Testing
business of £400.1m, less the increased dividends paid during 2008 of £154.3m
(2007: £22.6m) and the lump sum contribution to the pension plan of £21.0m.

Cash generated by operations increased by 10.2% to £135.9m (2007: £123.3m).
After allowing for net capital expenditure of £74.9m (2007: £66.9m) the Group
generated an operating cash flow of £61.0m (2007: £56.4m), an increase of
8.2%. Acquisitions in subsidiaries and investment in an associate resulted in
expenditure of £34.9m (2007: £32.9m).

There has been a continued focus on cash collection and debtor days have been
maintained at 68.

Net interest payments for the year were £8.0m (2007: £9.1m) and tax payments
were £20.5m (2007: £16.0m).

Capital expenditure

Net capital expenditure for the year was £74.9m compared to £66.9m in 2007.
The multiple of net capital expenditure to depreciation was 1.3 times (2007:
1.3 times), primarily reflecting the Group's investment in greenfield sites in
emerging markets and the expansion of HIP capacity. Given current
macro-economic conditions, expenditure in 2009 is expected to be below
depreciation. Notable projects in emerging markets with expenditure in 2008
included the construction of heat treatment plants in Silao (Mexico), Bangkok
(Thailand) and Rangangaon (India). In addition, a new heat treatment plant in
Tampere (Finland) and a new large HIP unit in Surahammar (Sweden) are being
built.

Borrowing facilities

At 31 December 2008, Bodycote had three committed bank facilities: £225m
(2007: £225m), expiring August 2010; €125m (2007: €125m), expiring July 2013;
and US$20m (2007: US$20m) expiring July 2010, totalling £359.8m (2007:
£326.9m). At the same date, the three facilities were drawn £194.8m (2007:
£175.3m), £107.3m (2007: £44.1m) and £10.5m (2007: £4.6m) respectively,
totalling £312.6m (2007: £224.0m).

Capital management

The Group manages its capital to ensure that entities in the Group will be
able to continue as a going concern, while maximising the return to
shareholders. The capital structure of the Group consists of debt which
includes borrowings, cash and cash equivalents and equity attributable to
equity holders of the parent, comprising capital, reserves and retained
earnings.

The capital structure is reviewed regularly by the Group's Board of Directors.
The Group's policy is to maintain gearing, determined as the proportion of net
debt to total capital, within defined parameters, allowing movement in the
capital structure appropriate to the business cycle and corporate activity.
The gearing ratio at 31 December 2008 was 13% (2007: 40%).

The Group's debt funding policy is to borrow centrally, using a mixture of
short-term borrowings, longer-term loans and finance leases. These borrowings,
together with cash generated from operations, are lent or contributed as
equity to certain subsidiaries. The aim of the Group's funding policy is to
ensure continuity of finance at reasonable cost, based on committed facilities
from several sources, arranged for a spread of maturities.

Defined benefit pension arrangements

The Group has defined benefit pension obligations in the UK, Germany,
Switzerland, Liechtenstein, Sweden, USA and Brazil and cash lump sum
obligations in France, Italy and Turkey, the entire liabilities for which are
reflected in the Group balance sheet. In the UK, the Group has a final salary
scheme which was closed to new members in April 2001, but continues to accrue
benefits for the 165 current employee members. Following the sale of the
Testing business, a contribution of £21.0m was made into the UK scheme to meet
legal requirements and following consultation with the Trustees. The deficit,
as calculated by the scheme actuary at 31 December 2008 using the principles
of IAS 19, is £0.7m. The Group's Heat Treatment business in Germany has
inherited several defined benefit arrangements. They are all unfunded and are
closed to new members but existing members continue to accrue benefits. The
IAS 19 liability at 31 December 2008 was £3.3m. In Liechtenstein the IAS 19
liability at 31 December 2008 was £0.3m and in Switzerland the IAS 19
liability at 31 December 2008 was £0.1m, both of which are funded. In Sweden,
the Group has a funded defined benefit arrangement in its HIP business which
is open to new members. The IAS 19 liability at 31 December 2008 was £1.8m. In
France, the Group operates a plan which pays a cash lump sum on retirement and
also for long service. The plan is open to new employees but by its nature is
not mortality dependent. It is unfunded and the IAS 19 liability at 31
December 2008 was £6.8m. Italy and Turkey also have cash lump sum obligations
which are open to new members. The IAS 19 liability is £0.8m for Italy and
£0.1m for Turkey. The company sponsors two defined benefit pension
arrangements in the USA which were inherited with the acquisition of Lindberg
and had a total IAS 19 deficit at 31 December 2008 of £1.2m. There are no
further accruals on either of these plans. In Brazil, Bodycote operates a
defined benefit plan for three senior members of staff. It is fully funded and
the members continue to accrue benefits. At 31 December 2008 it had a surplus
of £0.2m.

Post balance sheet events

There have been no post balance sheet events.


Change in accounting policies

During the year there were no changes to accounting policies.


Going concern

The Group's business activities, together with the factors likely to affect
its future development, performance and position are set out in this Group
Business Review. The review includes an overview of the Group's financial
position, its cash flows, liquidity position and borrowing facilities. In
addition there is a description of the Group's objectives, policies and
processes for managing its capital; its financial risk management objectives;
details of its financial instruments and hedging activities; and its exposures
to credit and liquidity risk.

As highlighted in the Capital Structure section, the Group meets its working
capital requirements through a combination of committed and uncommitted
facilities and overdrafts. The overdrafts and uncommitted facilities are
repayable on demand but the committed facilities are due for renewal as shown
below. There is significant headroom in the committed facility covenants to
assume that these facilities can be operated as contracted for the foreseeable
future.

- US$20m Revolving Credit Facility maturing 29 July 2010

- £225m Revolving Credit Facility maturing 22 August 2010

- €125m Revolving Credit Facility maturing 31 July 2013

The current economic conditions create uncertainty, particularly over the
levels of demand for the Group's services and the availability of bank and
capital market finance in the future. However, the Group's forecasts and
projections, taking account of reasonable potential changes in trading
performance, show that the Group should be able to operate within the level of
its current committed facilities. The Directors expect to renew facilities in
due course and are not aware of any reason why renewal would not be
forthcoming on acceptable market terms.

After making enquiries, the Directors have formed a judgement, at the time of
approving the financial statements, that there is a reasonable expectation
that the Group has adequate resources to continue in operational existence for
the foreseeable future. For this reason the Directors continue to adopt the
going concern basis in preparing the financial statements.

Principal risks and uncertainties

Operational

Markets

The key risk faced by the Group is a reduction in end market demand.
Forecasting this demand, given short visibility and the macro uncertainty
faced by much of Bodycote's customer base, is difficult and means the Group
must remain constantly ready to adapt to the changing environment. However,
Bodycote has excellent long-term relationships with its major customers and
the Group's network of strategically located facilities ensures that it is the
supplier of choice to these major manufacturers.

Commercial relationships

The Group benefits from many long term and partnership agreements with key
customers. Damage to or loss of any of these relationships may be detrimental
to Group results, although management believe this is highly unlikely. Given
that Bodycote's top ten customers account for less than 12% of sales, with the
balance made up by many thousands of customers, revenue concentration risk is
low and therefore there is no significant customer dependency.

Competitors

With the exception of HIP, Bodycote's markets are fragmented and this means
that the actions of competitors are typically felt locally rather than across
the Group. The small market and concentrated supply of HIP means that there is
a greater risk of material impact on this division should competitors add
significant capacity, although Bodycote has the extensive knowledge and
experience needed to preserve its competitive advantage.

Human resources

People are Bodycote's greatest asset and also form its largest cost. The Group
works hard at maintaining a respectful and trusting relationship with all
employees. However, Bodycote is mindful that there must be strong control on
people costs, which can be adjusted more easily in North America, the UK and
some emerging economies, but much less so in Western Europe where the Group
strives to keep a portion of its workforce flexible against a background of
more restrictive employment laws.

Defined benefit pension arrangements

The Group provides retirement benefits for its former and current employees
through a number of pension schemes in the UK and overseas. Future actuarial
valuations and annual funding checks for these arrangements may require
increased employer contributions, the level of which will depend on investment
performance, mortality rates, annuity rates and changes in other actuarial
assumptions.

Safety and health

The Group's work environment has numerous and varied risks. Bodycote strives
to mitigate these by providing systems, equipment, training and supervision.
Risk is evaluated by internal and external resources so that it is
continuously managed and mitigated.

Brand and reputation

Bodycote is a valuable and well-known business to business brand. Any damage
to the brand because of the breakdown of commercial relationships,
non-compliance with laws and regulations, misuse of human or other resources
in breach of the Group's corporate ethos could have an adverse impact on the
business as a whole. For these reasons Bodycote has instituted an effective
programme under which employees can and do use the Group's open door policy to
report legitimate concerns about business conduct to the most senior
executives and non-executive directors.

Energy

An increase in energy cost is a risk which the Group has been able to largely
mitigate so far, although with some time lag, through price adjustments or
surcharges and Bodycote expects to be able to continue this practice.

Operations

The Group's stringent quality systems, along with internal and external
auditing as well as customers' verification of results, minimise the risk of
releasing faulty parts or test results into use, which could arise as a result
of system or human failure.

Environment

Bodycote is mindful of the need to reduce its impact on the environment to a
minimum. Some of the Group's heat treatment plants use solvents and other
hazardous chemicals in small quantities and, where such substances are used,
there is the potential for ground contamination. Past exposures are remediated
as and when required. The likelihood of future problems is mitigated by
stringent procedures, typically under the requirement of ISO 14001
environmental systems.

Foreign exchange

Although 88% of the Group's sales are generated outside the UK, the
overwhelming majority of those sales are supplied locally to customers buying
in the same currency as input costs. Consequently transaction risk is low.
Bodycote is, however, exposed to fluctuation in exchange rates in respect of
the translation of non-sterling denominated results. In common with the
majority of UK listed companies Bodycote does not hedge this exposure.
However, the Group does partially hedge its balance sheet assets and
liabilities through a mixture of local currency loans and cross currency
swaps.

Financial

The Group's treasury function provides a centralised service to the Group for
funding, foreign exchange, interest rate management and counterparty risk.
Treasury activities have the objective of minimising risk and Treasury
operations are conducted within a framework of policies and guidelines
authorised and reviewed by the company's Board of Directors.

The Group uses a number of derivative instruments that are transacted, for
risk management purposes only, by specialist Treasury personnel. The use of
financial instruments including derivatives is permitted when approved by the
Board, where the effect is to minimise risk for the Group. Speculative trading
of derivatives or other financial instruments is not permitted. There has been
no significant change during the financial year, or since the end of the year,
to the types or scope of financial risks faced by the Group or the Group's
approach to the management of those risks.

Liquidity Risk

Liquidity risk is defined as the risk that the Group might not be able to
settle or meet its obligations on time or at a reasonable price. Liquidity
risk arises as a result of mismatches between cash inflows and outflows from
the business. This risk is monitored on a centralised basis through regular
cash flow forecasting: a 5 year rolling strategic plan, an annual budget
agreed by the Board each December and a quarterly re-forecast undertaken
during the financial year. The resulting forecast net debt is measured against
a liquidity headroom policy which, at the current net debt levels, requires
committed facilities (plus term loans in excess of one year) to exceed net
debt by 50%.

As at 31 December 2008, the Group had committed facilities of £359.8m (2007:
£326.9m) which exceed net debt of £64.7m (2007: £198.2m) by 456% (2007: 65%).
The Group also uses uncommitted short-term bank facilities to manage
short-term liquidity but these facilities are excluded from the liquidity
headroom policy. The Group manages longer-term liquidity through committed
bank facilities and will, if appropriate, raise funds on capital markets. The
Group's principal committed bank facility of £225m has a maturity of 1.6
years. The €125m committed bank facility has a maturity of 4.6 years. In
addition, cash management pooling, netting and concentration techniques are
used to minimise borrowings.

As at 31 December 2008, the Group had gross cash of £258.4m (2007: £37.7m), of
which £231.3m was held centrally on term deposits or money market funds.

Market risk

Interest rate risk

Interest rate risk arises on borrowings and cash balances (and derivative
liabilities and assets) being at floating interest rates. Changes in interest
rates could have the effect of either increasing or decreasing the Group's net
result. Under the Group's interest rate management policy, the interest rates
on each of the Group's major currency monetary assets and liabilities are
managed to achieve the desired mix of fixed and variable rates for each major
net currency exposure. These major currencies currently include the US Dollar,
Euro, Sterling and Swedish Krona. Measurement of this interest rate risk and
its potential volatility to the Group's reported financial performance is
undertaken on a monthly basis.

As at 31 December 2008, 23% of net financial liabilities were at fixed rates
for an average period of 3.7 years.

Currency risk

Bodycote has operations in 27 countries and is therefore exposed to foreign
exchange translation risk when the profits and net assets of these entities
are consolidated into the Group accounts. Assets are hedged, where
appropriate, by matching the currency of borrowings to the net assets. The
Group principally borrows in the US Dollar, Euro and Swedish Krona, consistent
with the location of the Group's non-sterling assets. The Group also creates
further currency financial liabilities and assets using cross currency swaps
in order to better match currency assets with currency liabilities. The Group
recognises foreign exchange movements in equity for the translation of these
net investment hedging instruments and balances. As at 31 December 2008,
£321.6m of gross debt and £90.5m of foreign exchange and cross currency swap
liabilities were in currencies other than sterling and gross cash of £229.8m
and cross currency swap assets of £60.2m were in sterling.

It is Group policy not to hedge exposure for the translation of reported
profits in line with the majority of UK listed companies.

Transaction foreign exchange exposures arise when entities within the Group
enter into contracts to pay or receive funds in a currency different from the
functional currency of the entity concerned. It is Group policy to hedge
exposure to cash transactions in foreign currencies when a commitment arises,
usually through the use of foreign exchange forward contracts. However, the
nature of the business is such that cross border sales and purchases are
limited and, other than currency interest, such exposures are immaterial for
the Group.

Market risk sensitivity analysis

The Group has measured the estimated charge to the income statement and equity
of either an instantaneous increase or decrease of 1% (100 basis points) in
market interest rates or a 10% strengthening or weakening in sterling against
all other currencies from the applicable rates, as at 31 December 2008, for
all financial instruments with all other variables remaining constant. This
analysis is for illustrative purposes only. The sensitivity analysis excludes
the impact of market risks on net post employment benefit obligations.

Interest rate sensitivity

The interest rate sensitivity analysis is based on the following assumptions:

- changes in market interest rates affect the interest income or expense of
variable interest financial instruments;

- changes in market interest rates only affect the income statement in
relation to financial instruments with fixed interest if these are recognised
at their fair value; and

- changes in market interest rates affect the fair value of derivative
financial instruments designated as hedging instruments.

Under these assumptions, a one percentage point fall or rise in market
interest rates for all currencies in which the Group has variable net cash
(and derivative assets) or net borrowings (and derivative liabilities) at 31
December 2008 would reduce or increase profit before tax by approximately
£0.7m. There is no material impact on equity.

Currency sensitivity

The currency risk sensitivity analysis is based on the assumption that changes
in exchange rates affect the non-sterling financial assets and liabilities and
the interest relating to those financial assets and liabilities.

Under this assumption, a 10% strengthening or weakening of sterling against
all exchange rates at 31 December 2008 for non-sterling financial assets and
liabilities would have reduced or increased profit before tax and equity
(before tax effects) as follows:


£m                             CHF Euro SEK  USD Other Total
 
Impact on equity        + / -  1.9 22.1 3.5 10.3   0.6  38.4

Impact on profit before + / -  0.0  1.0 0.2  0.5   0.1   1.8
tax


Non-sterling financial liabilities offset the exchange rate impact on
non-sterling net assets.

Counterparty risk

Counterparty risk encompasses settlement risk on derivative financial
instruments and money market contracts and credit risk on cash, time deposits
and money market funds. The Group monitors its credit exposure to its
counterparties via their credit ratings (where applicable) and through its
policy, thereby limiting its exposure to any one party to ensure there is no
significant concentration of credit risk. Group policy is to enter into such
transactions only with counterparties with a long-term credit rating of A-/A3
or better. However, acquired businesses occasionally have dealings with banks
with lower credit ratings. Business with such banks is moved as soon as
practicable. The counterparties to the financial instruments transacted by the
Group are major international financial institutions and, whilst these
counterparties may expose the Group to credit losses in the event of
non-performance, it considers the risk of material loss to be acceptable. The
notional amounts of financial instruments used in interest rate and foreign
exchange management do not represent the credit risk arising through the use
of these instruments. The immediate credit risk of these instruments is
generally estimated by the fair value of contracts with a positive value. The
maximum exposure to credit risk for time deposits and other financial assets
is represented by their carrying amount.

Credit risk

Credit risk arises from the possibility that customers may not be able to
settle their obligations as agreed. To manage this risk the Group periodically
assesses the financial reliability of customers. The majority of the Group's
trade receivables are due for maturity within 60 days.

Concentrations of credit risk with respect to trade receivables are limited.
The Group has a diverse customer base of many tens of thousands of customers
and is not reliant on any one business sector, end market, or client. The
largest customer represents approximately 3.2% of total Group revenue and the
top ten customers account for less than 12%. Bodycote's diverse client base
provides the Group with balanced demand from a number of sectors. Management
is mindful of current difficult trading conditions being experienced in a
number of sectors in which Bodycote trades and has reviewed the provisions for
bad and doubtful debts accordingly.

Corporate Responsibility

The Group takes its responsibilities as a good citizen seriously. The policies
below explain how the Group has successfully implemented these:

People

The strength of the Group primarily rests in its people and one of the key
challenges for management is to ensure availability of appropriately qualified
people to support its continued growth. Bodycote is fortunate to have a
competent and committed international team that is well respected in technical
and business circles. Most acquisitions are based on historical relationships
with Bodycote personnel which is a testament to the integrity of the Group's
people. The Board has established a remuneration policy which rewards
performance while offering competitive base packages. In line with the Group's
policy of continuous improvement, training programmes have been established to
improve the succession pipeline for future business leadership. Bodycote's
employment policies are non-discriminatory, complying with all current
legislation to engender equal opportunity irrespective of race, gender,
religion, disability, sexual orientation or nationality. Harassment is not
tolerated.

Education

The Group sponsors The Bodycote Educational Foundation, a registered charity,
whose aim is to fund relevant educational and training opportunities. These
aims are fulfilled by supporting short-term student placements at Bodycote
facilities to work on specific projects of benefit to the Group. Since 1996,
the Foundation has sponsored over 280 students from 10 countries. The
Foundation also supports the annual Prize Paper Competition. Now in its
fourteenth year, the Prize Paper has become one of the most highly regarded
competitions in its field. Numerous entries from universities and materials
science institutes worldwide follow a rigorous selection process, with five
entrants reaching the final presentation judged by management and engineering
academics. Winners receive a cash prize, publication in a peer reviewed
journal and potential for career development within the Group.

Ethical standards

All Bodycote personnel are expected to apply a high ethical standard,
consistent with an international UK-listed company.

Compliance with laws

Bodycote has systems in place designed to ensure compliance with all
applicable laws and regulations and conformity with all relevant codes of
business practice.

Competition

Bodycote aims to win business in a differentiated high value manner. Bodycote
does not employ unfair trading methods and it competes vigorously but fairly
within the requirements of the applicable laws. Employees are prohibited from
either giving or receiving any inducements.

Conflicts of interest

Directors and employees are expected to ensure that their personal interests
do not at any time conflict with those of Bodycote. Shareholder employees are
advised of and comply with share trading codes.

Politics

Bodycote does not make political donations.

Safety & health

Appropriate safety and health policies and procedures are in force in the
Group. In 2004 the Group commenced reporting its performance internally in
terms of lost time, frequency and severity of accidents in a uniform manner.
As a result, each facility is now able to benchmark its safety and health
performance and formulate strategies for improvements. Bodycote is committed
to the highest practicable standards of safety and health management. Bonus
payments to Directors and senior executives are in part dependent on
achievement of these targets, which are now key performance indicators.

Environment

Bodycote operates modern, efficient equipment around the clock. The Group
aggregates demand from a wide range of customers to maximise efficiency and
minimise energy costs. By replacing under-utilised, in-house thermal
processing operations with Bodycote's state-of-the art equipment, the overall
amount of energy used by industry can be dramatically reduced.

The replacement, where possible, of harmful materials has reduced the need for
disposal of waste products. At the same time the adoption of recuperative
heating and closed water cooling systems has reduced energy consumption and
reduced emissions.

The success of Bodycote's processes in addressing these issues is key to its
environmental credentials. The Group does not simply aim to minimise its own
energy consumption, but also to effect substantial reductions in its
customers' energy use.

Current Trading and Prospects

Following the sale of the Testing activities Bodycote is a focused
business with a strong balance sheet. While automotive markets have softened,
demand from aerospace, power generation and oil & gas markets remain steady.

In response to the difficult economic and trading environment, the
business is being restructured to ensure it remains strong throughout the
downturn and is well positioned to benefit when trading conditions improve.
The focus of the restructuring is to both drive down the cost base of the
business while at the same time reshaping it to concentrate on those areas
that present strong growth opportunities for the future.

Despite the uncertain economic environment, we remain confident in
the medium and long term prospects for the Group.

S C Harris                                D F Landless
Chief Executive                           Finance Director
25 February 2009                          25 February 2009


                          CHAIRMAN'S STATEMENT 2008

2008 was a year of transformation for Bodycote, both in terms of
the business and also the Board of Directors.

The Group revenue from continuing operations increased by 18.6% to
£551.8m and headline operating profit from continuing operations was up 1.3%
to £71.2m. Headline profit before tax for the Group was £67.6m compared to
£67.8m in 2007.

In anticipation of a prolonged economic downturn, the Board has
initiated a major re-organisation of the remaining Thermal Processing
activities to achieve a slimmer fixed cost base and focus on higher value
added services. This has resulted in exceptional charges of £122.9m and
consequently there was an operating loss for the year of £51.7m compared to an
operating profit of £63.1m in 2007.

As a result of an in-depth strategic review early in 2008, the
Board decided to focus the Group on its core Thermal Processing operations and
dispose of the Testing business, which was originally acquired in 1990 and
expanded considerably in recent years. The ensuing auction process was highly
competitive and resulted in a cash sale of the Testing business for a price of
£419.7m, giving rise to a pre-tax exceptional profit of £199.3m. The Board
considered carefully the appropriate use of proceeds in light of the
deteriorating economic climate. As a result we returned £128.8m of the
proceeds to shareholders in December 2008 through a return of capital and
concurrent share capital reorganisation, made an additional contribution to
the UK pension scheme of £21.0m and significantly strengthened the Group's
balance sheet. The value realised from the sale of the Testing business (which
accounted for 30% of annualised Group headline profit at the time of the sale)
approximated the market value of the whole of Bodycote at the point of
completion.

I became Chairman of Bodycote in April 2008 and would like to
express the Board's appreciation to my predecessor James Wallace, who joined
the Board in 1994 and served the company selflessly as Chairman of the Audit
and Remuneration committees and latterly from the Chairman's position, which
he had filled since 2002. His wise counsel will be missed.

Laurent Bermejo also stepped down after five years on the Board.
His contribution to the Board's deliberations particularly on European issues
was invaluable.

At this year's AGM in April we will also recognise the retirement
from the Board of two executive directors, John Hubbard, Chief Executive from
January 2002 until January 2009 and Derek Sleight, Corporate Development
Director since 2003.

John Hubbard joined the Group in 1996 following the acquisition of
his business by Bodycote. John has spent his entire career in the heat
treatment industry and since taking over as Chief Executive in 2002 has worked
tirelessly to create a cohesive group with common strategic and operational
goals.

Derek Sleight joined Bodycote in 1990 with the acquisition of the
Testing business and joined the Board in 1996. He led the Testing business
until 2002, when he assumed the role of Corporate Development Director. In
this role he was the architect behind the successful sale of the Testing
business in 2008.

We wish both John and Derek well in the future in the knowledge
that their expertise will be available to the Group after they step down from
the Board.

The Group has already said farewell to the employees of our former
Testing business and on behalf of the Board I would like to thank them and all
continuing managers and staff at Bodycote for their commitment, dedication and
support.

In September we welcomed Raj Rajagopal to the Board as a
non-executive director. Raj served as an executive director on the Board of
BOC for many years and his expertise in managing an international portfolio is
proving to be invaluable.

After a global recruitment search, Stephen Harris joined the Board
in November 2008 as Chief Executive designate and stepped up to the full role
in January 2009. Stephen joins the Group after a career which has included
Board appointments at Spectris plc and Powell Duffryn plc. Stephen is a
qualified electrical engineer with wide international business experience.
Since joining the company Stephen has carried out a full appraisal of the
Group's structure, its operating activities and management strength. I am
confident that he will successfully implement the major restructuring
programme and accelerate the Group's financial returns thus creating
significant value for shareholders.

The Board indicated at the time of the Testing disposal and the
return of proceeds to shareholders that we intended to implement a progressive
dividend policy which rewarded shareholders broadly in line with the Group's
operating results. The Directors are, therefore, recommending to shareholders
a final dividend of 5.35p which brings the total dividend to 8.3p, an increase
of 3.8% over 2007. The final dividend will be paid to shareholders in May
following approval at the AGM.

Outlook

We are reshaping the Group to meet the challenges presented by the
difficult economic and trading conditions across the globe and to reduce the
proportion of low value-added work undertaken in our Heat Treatment
businesses. Although automotive markets weakened considerably in the second
half of 2008, our aerospace, oil and gas and energy activities remain steady.

With a business focused on Thermal Processing, a restructured cost
base and maintenance of a strong balance sheet, the Group is in a favourable
position to maximise value to shareholders when trading conditions improve.

A M Thomson

25 February 2009