This report analyses the Annual Report and Accounts 2006-07 of the Ministry of Defence (MoD) (published as HC 697, session 2006-07, ISBN 9780102946369). The MoD's assessment of its expected achievements against its six Public Service Agreement (PSA) targets, which run until the end of March 2008, has deteriorated since the previous year's Annual Report and Accounts. At the end of 2007, the MoD did not expect to meet the target relating to generating forces and expects "only partly" to meet targets relating to recruitment and retention, and defence equipment procurement. The failure to meet the target for generating forces is a consequence of the continuing high levels of deployment of the Armed Forces. The Committee is concerned that the Armed Forces have been operating at or above the level of concurrent operations they are resourced and structured to deliver for seven of the last eight years, and for every year since 2002. Achieving manning balance in all three Service continues to be a challenge. Shortages remain within many specialist trades in all three Armed Services, but especially in the Army Medical Service. The report notes the failure to meet harmony guidelines in the Army and the Royal Air Force - another indicator of the pressure on the Armed Forces from the continuing high level of operations - and another target missed by all three services is for ethnic minority recruitment. The MoD continues to experience substantial forecast cost increases on equipment programmes, and the report notes delays in delivering equipment programmes to the planned in-service dates. The MoD faces difficult choices in the face of expected cuts in the defence programme and the management of a streamlining exercise to reduce civilian posts in the headquarters.