SMITH & NEPHEW PLC (Form: 20-F, Received: 04/25/2003 12:00:56)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-19003

Smith & Nephew plc

(Exact name of Registrant as specified in its charter)

England and Wales

(Jurisdiction of incorporation or organization)

15 Adam Street, London WC2N 6LA

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class		Name on each exchange on which registered
American Depositary Shares		New York Stock Exchange
Ordinary Shares of 12 ² / 9 p each		New York Stock Exchange*

Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act: None.

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None.

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

928,759,544		Ordinary Shares of 12 ² / 9 p each
268,500		Cumulative Preference Shares of £1 each

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨

Indicate by check mark which financial statement item the registrant has elected to follow: Item 17 ¨ Item 18 x

Table of Contents

Introduction		1
Special Note Regarding Forward-Looking Statements		2
Certain Specialist Terms		2

PART I

Item 1-	Identity of Directors, Senior Management and Advisers	3
Item 2-	Offer Statistics and Expected Timetable	3
Item 3-	Key Information	3
Item 4-	Information on the Company	10
Item 5-	Operating and Financial Review and Prospects	22
Item 6-	Directors, Senior Management and Employees	33
Item 7-	Major Shareholders and Related Party Transactions	43
Item 8-	Financial Information	44
Item 9-	The Offer and Listing	45
Item 10-	Additional Information	46
Item 11-	Quantitative and Qualitative Disclosures about Market Risk	52
Item 12-	Description of Securities Other than Equity Securities	54

PART II

Item 13-	Defaults, Dividend Arrearages and Delinquencies	55
Item 14-	Material Modifications to the Rights of Security Holders and Use of Proceeds	55
Item 15-	Controls and Procedures	55
Item 16A-	Audit Committee Financial Expert	55
Item 16B-	Code of Ethics	55
Item 16C-	Principal Accountant Fees and Services	55

PART III

Item 17-	Financial Statements	56
Item 18-	Financial Statements	56
Item 19-	Exhibits	57

Signatures		59
Certifications		60

INTRODUCTION

As used in this Annual Report, the term “Company” refers to Smith & Nephew plc or, where appropriate, the Company’s Board of Directors, unless the context otherwise requires. The terms “Smith & Nephew” and “Group” are used for convenience to refer to the Company and its consolidated subsidiaries, unless the context otherwise requires.

The Consolidated Financial Statements of the Company in this Annual Report are presented in United Kingdom (“UK”) pounds sterling. In this document, references to “US dollars” or “US$” or “cents” are to United States (“US”) currency, references to “euros” or “€” are to the currency used in certain member states of the European Union, references to “Swiss francs” or “CHF” are to the currency used in Switzerland and references to “pounds sterling”, “sterling” or “£”, “pence” or “p” are to UK currency. 1p is equivalent to one hundredth of £1.

Solely for the convenience of the reader, certain parts of this Annual Report contain translations of amounts in sterling into US dollars at specified rates. These translations should not be construed as representations that the sterling amounts actually represent such US dollar amounts or could be converted into US dollars at the rate indicated. The translation of pounds sterling and pence to US dollars and cents appearing in this Annual Report have been made at the noon buying rate in The City of New York for cable transfers in sterling as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) on the date of the information so translated. On April 7, 2003, the Noon Buying Rate was US$ 1.550 per £1.

A substantial portion of the Group’s assets, liabilities, revenues and expenses is denominated in currencies other than sterling. Accordingly, fluctuations in the value of sterling relative to other currencies can have a significant effect on the translation into sterling of non-sterling assets, liabilities, revenues and expenses. For information regarding rates of exchange between sterling and US dollars and the effects of changes in exchange rates, see Item 3—“Key Information—Exchange Rates” and Item 11—“Quantitative and Qualitative Disclosures About Market Risk”.

On November 16, 1999, the Ordinary Shares of the Company were listed on the New York Stock Exchange, trading in the form of American Depositary Shares (“ADSs”) evidenced by American Depositary Receipts (“ADRs”). Each ADS represents ten Ordinary Shares.

The Company furnishes the Bank of New York, as Depositary, with annual reports containing Consolidated Financial Statements and an opinion thereon by its independent auditors. Such financial statements are prepared on the basis of accounting principles generally accepted in the United Kingdom (“UK GAAP”). The annual reports contain reconciliations of net income, cash flow and shareholders’ equity stated under UK GAAP to those as stated under accounting principles generally accepted in the United States (“US GAAP”). The Company also furnishes the Depositary with semi-annual reports prepared in conformity with UK GAAP, which contain unaudited interim consolidated financial information. Upon receipt thereof, the Depositary mails all such reports to recorded holders. The Company also furnishes to the Depositary all notices of shareholders’ meetings and other reports and communications that are made generally available to shareholders of the Company. The Depositary makes such notices, reports and communications available for inspection by recorded holders of ADRs and mails to all recorded holders of ADRs notices of shareholders’ meetings received by the Depositary. The Company is not required to report quarterly financial information.

The Company’s fiscal year ends on December 31 of each year. References in this Annual Report to a particular year are to the fiscal year unless otherwise indicated. Except as the context otherwise requires, “Ordinary Share” or “share” refer to the ordinary shares of Smith & Nephew of 12 ² / ₉ p each. References in this Annual Report to the “Companies Act” are to the Companies Act 1985, as amended, of Great Britain. References to the “FDA” are to the US Food and Drug Administration.

This Annual Report contains the Consolidated Financial Statements and Financial Statement Schedules of Smith & Nephew and an opinion thereon by its independent auditors. Such financial statements are prepared under accounting principles generally accepted in the United Kingdom (“UK GAAP”). UK GAAP differ in certain respects from US generally accepted accounting principles (“US GAAP”). Differences between UK GAAP and US GAAP relevant to the Group are explained in Note 35 of the Notes to the Financial Statements.

Special Note Regarding Forward-Looking Statements

Certain statements contained in this Annual Report under the headings Item 4—“Information on the Company”, Item 5—“Operating and Financial Review and Prospects”, Item 8—“Financial Information” and Item 11—“Quantitative and Qualitative Disclosures About Market Risk” and elsewhere constitute “forward-looking statements” within the meaning of the US Private Securities Litigation Reform Act of 1995. When used in this Annual Report, the words “anticipate”, “believe”, “estimate”, “expect”, “consider” and similar expressions are generally intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of Smith & Nephew, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Specific risks faced by the Company are described under Item 3—“ Key Information—Risk Factors”.

Smith & Nephew expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Smith & Nephew’s expectation with regard thereto or any change in events, conditions or circumstances on which any such statement is based. All subsequent written and oral forward-looking statements attributable to Smith & Nephew or persons acting on behalf of Smith & Nephew are expressly qualified in their entirety by the foregoing.

Certain Specialist Terms

Unless the context indicates otherwise, the following terms have the meanings shown below:

•

“Advanced wound management” products are those associated with the treatment of skin wounds, ranging from products that provide moist wound healing using breathable films and polymers to products providing active wound healing by biochemical or cellular action.

•

“Arthroscopic repair” products are specialized devices, fixation systems and bioabsorbable materials to repair damaged tissue.

•

“Bandaging” products comprise traditional adhesive and support bandaging, “Casting” products are used externally to immobilize a fracture or damaged joint structures, usually made of plaster of paris or synthetic materials and “Traditional woundcare” products are those which comprise medical textile products that include adhesive tapes and fixture sheets used to secure wound management products to the body.

•

“Chronic and acute wounds”. Chronic wounds are those with long or unknown healing times including leg ulcers, pressure sores and diabetic foot ulcers. Acute wounds are those for which healing times can be reasonably predicted such as surgical and post-operative wounds.

•

“Endoscopy” products are specialized viewing devices, instruments and powered equipment used in minimally invasive surgical procedures. Through a small incision, surgeons are able to see inside the body via a monitor and identify and repair defects. Endoscopy of the joints is termed “arthroscopy”, with the principal applications being the knee and shoulder.

•

“Image guided surgery” is the use of computer-tracking and imaging technological tools that give surgeons real-time, precise feedback on the relationship between surgical instruments and the patient’s anatomy.

•

“Orthopaedic” products comprise implants, devices and systems to replace diseased or injured hip, knee and shoulder joints, and trauma products, devices such as rods, pins, screws and plates used to treat bone fractures.

•

“Resection” products comprise radiofrequency wands, electromechanical and mechanical blades, and hand instruments for resecting tissue. “Access” products are fluid management and insufflation instruments for better surgical access.

•

“Rehabilitation” products are individual items, pieces of equipment or product systems that are used to increase, maintain or improve functional capabilities after surgery or of individuals with disabilities.

•

“Visualization” products are digital cameras, digital image capture, central control, multimedia broadcasting, scopes, light sources and monitors to assist with visualization.

Product names referred to in this Annual Report are identified by the use of capital letters and are trademarks owned by or licensed to members of the Group or its associated undertakings and other interests.

PART I

ITEM 1—IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable

ITEM 2—OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable

ITEM 3—KEY INFORMATION

SELECTED FINANCIAL DATA

Summary

This information has been extracted or derived from the audited financial statements of the Group presented elsewhere in this Annual Report and in prior year Annual Reports on Form 20-F.

Smith & Nephew prepares its financial statements in accordance with UK GAAP which differ in certain respects from US GAAP. Reconciliations of net income and shareholders’ equity are set forth in Note 35 of the Notes to the Financial Statements.

Consolidated Income Statement Data

	Years ended December 31
	2002		2001		2000		1999		1998
	(£ million, except per Ordinary Share and per ADS amounts)
Amounts in accordance with UK GAAP:
Turnover:
Continuing operations	1,083.7		978.3		911.5		799.9		713.6
Discontinued operations	26.2		103.4		223.2		320.0		339.8

Group turnover	1,109.9		1,081.7		1,134.7		1,119.9		1,053.4
Share of joint venture	155.0		123.6		—		—		—

	1,264.9		1,205.3		1,134.7		1,119.9		1,053.4

Operating profit:
Continuing operations:
Before goodwill amortization and exceptional items	196.0		174.4		156.9		122.7		106.5
Goodwill amortization *	(17.5	)	(10.4	)	(6.9	)	(1.8	)	(0.3	)
Exceptional items *	(29.9	)	(21.1	)	(12.4	)	(40.1	)	(15.9	)
Discontinued operations:
Before exceptional items	2.1		11.1		29.0		46.6		47.9
Exceptional items *	—		—		(3.9	)	(11.6	)	(2.0	)

	150.7		154.0		162.7		115.8		136.2
Share of operating profit of the joint venture:
Before exceptional items	19.6		12.8		—		—		—
Exceptional items *	(2.6	)	(5.0	)	—		—		—

	167.7		161.8		162.7		115.8		136.2
Share of operating profit of the associated undertaking	4.9		—		—		—		—

	172.6		161.8		162.7		115.8		136.2
Profit on disposal of businesses *	18.0		49.2		109.5		62.9		—

Profit before interest	190.6		211.0		272.2		178.7		136.2
Interest income	6.6		2.5		4.4		10.3		8.1
Interest expense	(19.3	)	(19.9	)	(11.4	)	(6.9	)	(9.8	)

Profit before taxation	177.9		193.6		265.2		182.1		134.5
Taxation	(65.8	)	(64.0	)	(57.7	)	(77.3	)	(40.8	)

Profit for the financial year	112.1		129.6		207.5		104.8		93.7

Per Ordinary Share:
Basic earnings per Ordinary Share	12.11	p	14.07	p	20.07	p	9.39	p	8.42	p
Diluted earnings per Ordinary Share(i)	12.02	p	13.95	p	19.95	p	9.37	p	8.40	p
Results before goodwill amortization and exceptional items (marked * above):
Profit before taxation	209.9		180.9		178.9		172.7		152.7
Adjusted basic earnings per Ordinary Share	16.02	p	13.96	p	12.19	p	10.88	p	9.61	p
Adjusted diluted earnings per Ordinary Share	15.89	p	13.84	p	12.12	p	10.85	p	9.60	p
Ordinary Dividends per Ordinary Share	4.80	p	4.65	p	4.50	p	6.50	p	6.20	p
Special Dividend per Ordinary Share	—		—		37.14	p	—		—
Amounts in accordance with US GAAP:
Income from continuing operations	128.4		74.9		85.3		66.6		39.9
Income from discontinued operations	—		32.0		116.9		22.3		25.8

Net income	128.4		106.9		202.2		88.9		65.7

Basic earnings per Ordinary Share:
Continuing operations	13.87	p	8.13	p	8.25	p	5.97	p	3.58	p
Discontinued operations	—		3.47	p	11.31	p	2.00	p	2.32	p

Total	13.87	p	11.60	p	19.56	p	7.97	p	5.90	p

Ordinary dividends per Ordinary Share	4.70	p	4.55	p	5.70	p	6.30	p	6.20	p
Special dividend per Ordinary Share	—		—		37.14	p	—		—

Consolidated Income Statement Data—continued

	Years ended December 31
	2002		2001		2000		1999		1998
	(£ million, except per Ordinary Share and per ADS amounts)
Diluted earnings per Ordinary Share(i):
Continuing operations	13.75	p	8.05	p	8.19	p	5.94	p	3.57	p
Discontinued operations	—		3.44	p	11.23	p	1.99	p	2.32	p

Total	13.75	p	11.49	p	19.42	p	7.93	p	5.89	p

Basic earnings per ADS(ii):
Continuing operations	138.7	p	81.3	p	82.5	p	59.7	p	35.8	p
Discontinued operations	—		34.7	p	113.1	p	20.0	p	23.2	p

Total	138.7	p	116.0	p	195.6	p	79.7	p	59.0	p

Diluted earnings per ADS(ii):
Continuing operations	137.5	p	80.5	p	81.9	p	59.4	p	35.7	p
Discontinued operations	—		34.4	p	112.3	p	19.9	p	23.2	p

Total	137.5	p	114.9	p	194.2	p	79.3	p	58.9	p

Consolidated Balance Sheet Data

	December 31
	2002		2001		2000		1999		1998
	(£ million)
Amounts in accordance with UK GAAP:
Total current assets	532.7		525.4		533.8		616.2		570.9
Intangible fixed assets	317.2		187.8		153.8		66.0		28.3
Property, plant and equipment	255.8		245.0		251.1		270.5		291.7
Investment in associated undertaking	8.5		—		—		—		—
Investment in joint venture	115.0		114.0		—		—		—
Fixed asset investments	8.2		25.7		24.0		16.6		14.4

Total assets	1,237.4		1,097.9		962.7		969.3		905.3
Total current liabilities	(461.5	)	(428.5	)	(404.0	)	(370.4	)	(375.6	)
Loans (due after more than one year)	(164.2	)	(161.2	)	(165.1	)	(15.9	)	(8.5	)
Liabilities (due after more than one year)	(6.3	)	(8.3	)	(22.1	)	(4.3	)	(4.3	)
Provisions for liabilities and charges	(88.1	)	(95.3	)	(103.5	)	(87.9	)	(31.4	)

Ordinary shareholders’ equity(iv)	517.3		404.6		268.0		490.8		485.5

Share capital(iii)	113.5		113.1		112.4		111.8		111.4
Amounts in accordance with US GAAP:
Goodwill, net of amortization	317.6		247.0		236.5		168.2		193.0
Other intangible fixed assets	150.1		56.2		55.8		64.3		35.7
Total assets	1,356.9		1,170.4		1,087.4		1,127.7		1,094.4
Total shareholders’ equity	579.5		533.2		457.9		733.4		705.3

(i)

Diluted earnings per Ordinary Share is calculated on the weighted average of 934 million shares (2001—930 million shares, 2000—1,041 million shares, 1999—1,121 million shares, 1998—1,117 million shares) after allowing for the allotment of shares under option schemes, with a corresponding adjustment to income for the after tax effect of interest.

(ii)

Each ADS represents ten Ordinary Shares.

(iii)

Included in Ordinary shareholders’ equity.

(iv)

Ordinary shareholders’ equity includes non-equity capital of £0.3 million in all five years presented.

Dividends

Smith & Nephew has paid dividends on its Ordinary Shares in each year since 1937. An interim dividend in respect of each fiscal year is normally declared in August and from 2002 onwards paid in November, and the final dividend for each year is normally recommended by the Board of Directors in the following February and paid in May after approval in April by shareholders at the Company’s Annual General Meeting.

The Company has issued 268,500 5.50% Cumulative Preference Shares of £1 each, whose right to a dividend of 5.50% per annum is preferred over the rights to dividends of the holders of Ordinary Shares.

Future dividends of Smith & Nephew will be dependent upon future earnings, the future financial condition of the Group, the Board’s dividend policy and the additional factors that might affect the business of the Group set forth in “Special Note Regarding Forward-Looking Statements” above and “Risk Factors” below.

The following table shows the ordinary dividends on each Ordinary Share (as increased by the associated UK tax credit, but before deduction of withholding taxes) for the fiscal years 1998 through 2002. The associated UK tax credit was reduced from 20% to 10% for dividends paid on or after April 6, 1999. Approval by shareholders of the 2002 final dividend will be sought at the Annual General Meeting to be held on April 29, 2003. If approved by shareholders, this dividend will be payable on May 16, 2003 and will be paid as an ordinary dividend. The ordinary dividends, which are declared in pence per share in respect of each fiscal year, have been translated into US cents per share at the Noon Buying Rate at each respective payment date.

	Years ended December 31
	2002		2001	2000	1999	1998
Pence per share:
Interim	2.000		1.944	1.889	2.778	3.000
Final	3.330		3.222	3.111	4.444	4.222

Total	5.330		5.166	5.000	7.222	7.222

US cents per share:
Interim	3.155		2.753	2.714	4.516	4.974
Final	5.162	(i)	4.611	4.459	7.048	6.786

Total	8.317		7.364	7.173	11.564	11.760

(i)

Translated at the Noon Buying Rate on April 7, 2003 of US$ 1.550 = £1. This is equivalent to US$ 0.516 per ADS.

On August 11, 2000, a special dividend of £415.6 million (41.27p per old ordinary 10p share, including tax credit, equivalent to US$6.21 per ADS) was paid.

In 1998, the Company implemented a dividend re-investment plan that offers shareholders the opportunity to invest cash dividends in Ordinary Shares purchased in the market.

Exchange Rates

The following table sets forth, for the periods and dates indicated, the Noon Buying Rates expressed in US dollars per £1:

	High	Low
Month:
April 2003 (through April 7)(i)	1.58	1.55
March 2003	1.61	1.56
February 2003	1.65	1.57
January 2003	1.65	1.60
December 2002	1.61	1.56
November 2002	1.59	1.54
October 2002	1.57	1.54

(i)

As of April 7, 2003, the latest practicable date, the Noon Buying Rate was 1.550.

	Year end	Average(ii)	High	Low
Fiscal year:
1998	1.66	1.66	1.87	1.33
1999	1.61	1.62	1.67	1.60
2000	1.49	1.51	1.65	1.40
2001	1.45	1.44	1.50	1.37
2002	1.61	1.51	1.61	1.41

(ii)

The average of the Noon Buying Rates on the last day of each month during the fiscal year.

RISK FACTORS

This section describes some of the risks that could affect the Group’s businesses. The factors below should be considered in connection with any forward-looking statements in this Form 20-F and the cautionary statements contained in the “Introduction” on page 2.

Smith & Nephew’s products are not in life support activities and in general are unlikely to threaten life. But, if they malfunctioned, they could damage or impair the repair of body functions. Management believes that the Group’s quality, regulatory and medical controls and insurance activities are adequate and appropriate for this class of products. The Company’s reputation is crucially dependent on strong performance in this area and on appropriate crisis management if a serious medical incident or product recall should occur.

The Board of Directors of Smith & Nephew is responsible for the maintenance of the Group’s systems of risk management and internal control and for reviewing their effectiveness. An ongoing process has been in place for the full year identifying, evaluating and managing key risks through a Risk Committee, that comprises GEC members, which reports to the Board of Directors annually, and by a system of functional reports to the Board of Directors and the review of internal financial controls by the Audit Committee. These procedures are designed to identify and manage those risks that could adversely impact the achievement of the Group’s objectives. While they do not provide absolute assurance against material misstatements or loss, the Directors, following a review of the systems described, are of the opinion that proper systems of risk management and internal control are in place within the Group.

The Group is insured against product, employers’ and directors’ and officers’ liabilities and physical and consequential loss, subject to limits and deductibles. The Group maintains liability reserves to cover known uninsured risks.

The risks below are not the only ones that the Group faces. Some risks are not yet known to the Group and some risks that the Group does not currently believe to be material could later turn out to be material. All of these risks could materially affect the Group’s business, its revenues, operating income, net assets, liquidity and resources.

The Group is reliant on the effective implementation of its strategy

The Group may encounter market conditions or other challenges to the implementation of its strategy that could result in the Group not meeting its shareholders’ expectations of income or growth.

The Group is reliant on new technology

The Group operates in the medical device industry, which has a rapid introduction rate of new products. There is a risk to sales growth unless sufficient new products are introduced to the market place in a timely manner. There is also a risk of product (and in certain cases associated facilities) obsolescence.

New products developed and marketed by competitors may affect price levels in the Group’s markets and may result in products being replaced over time. The Group’s ability to develop and market new products acceptable to the market place is a key factor in maintaining its competitive position.

The Group is dependent on trends in healthcare expenditure

Changes in healthcare policy by governments or reimbursement authorities in major countries around the world can result in changes to the revenues of one or more of the Group’s product lines. The Group is also dependent on the continued growth in surgical procedures.

The Group is exposed to product liability and patent infringement claims

Because of the nature of the Group’s business, it is subject to a relatively high risk of product liability claims. The Group maintains product liability insurance, but this insurance is subject to limits and deductibles. In addition, insurance premiums are relatively high, particularly for US coverage, and there is a risk, at the industry level, of coverage becoming increasingly costly. The Group is also exposed to the potential for patent infringement claims, particularly because of the technological nature of medical devices.

The Group is exposed to risk of competitor consolidation

The markets in which the Group operates each contain a number of different major international competitors. The merger or consolidation of two or more of these competitors could impact the Group’s strategic position.

The Group is exposed to regulatory approvals and controls

The medical device industry is highly regulated. Regulatory requirements are a major factor in determining whether substances and materials can be developed into marketable products and the amount of time and expense that should be allotted to such development. At any time the Group is awaiting a number of regulatory approvals, which if not received, could adversely affect results of operations.

The Group is exposed to political, economic and currency fluctuations

Because the Group has operations in many countries, political and economic developments in those countries or in the regions surrounding those countries may impact the Group’s results of operation. Terrorist activities and ongoing global political uncertainties, including conflict in the Middle East, could adversely impact the Group. In addition, political changes in a country could prevent the Group from receiving remittances of profit from a member of the Group located in that country or from selling its investments in that country. Fluctuations in interest rates and currency exchange rates particularly between sterling and the US dollar and between the currencies in which its international operations or investments operate, could adversely affect the Group’s earnings and the value of these businesses. Also, see the discussion of exchange and interest rate risk in “Item 5—Operating and Financial Review and Prospects”.

The Group is exposed to credit risk arising from financial instruments

The Group is subject to credit risk on cash, deposits and derivative instruments in the event of the non-performance of its counterparties.

The Group is dependent upon recruiting and retaining key personnel

In order to develop, support and market the products offered by the Group, it is necessary to hire and retain highly skilled employees with particular expertise. The implementation of the Group’s strategic business plans could be undermined by failure to recruit or retain key personnel.

The Group is reliant on its reputation

An event that materially damaged the reputation of the Group or one or more of the its brands could have an adverse impact on subsequent revenues.

The Group is reliant on certain suppliers

The Group is reliant on certain key suppliers of raw materials; forgings and stampings for orthopaedics, optical and electronic subcomponents for endoscopy and active ingredients and products for advanced wound management. If these suppliers were unable to supply, there could be an adverse effect on the Group’s results.

The Group is reliant on eight main manufacturing facilities

The Group has manufacturing production concentrated at eight main facilities in Memphis, Tennessee, Andover and Mansfield, Massachusetts, Oklahoma City, Oklahoma, Palo Alto and La Jolla, California and Largo, Florida in the United States and Hull in the United Kingdom for its businesses of orthopaedics, endoscopy and advanced wound management. If major physical disruption took place at any of these sites, it would adversely affect the results of operations. Physical loss and consequential loss insurance is carried to cover such risks subject to limits and deductibles.

The Group is dependent upon successfully integrating any businesses that it acquires

The Group has in the past and expects to pursue in the future acquisitions or alliances to complement its existing businesses. These types of transactions involve numerous risks, including successfully integrating acquired businesses, any of which could adversely affect the Group’s results.

The Group is exposed to the risk that the investment values of its pension plans may not eventually be sufficient to meet pension obligations

The Group has two major defined benefit pension plans that are funded by investment assets. To the extent that pension liabilities and investment returns accrue at rates different to those presently assumed, unplanned funding obligations could occur.

ITEM 4—INFORMATION ON THE COMPANY

HISTORY AND DEVELOPMENT OF THE COMPANY

Group Overview

Smith & Nephew is a global company that concentrates on the development and marketing of medical devices in the three growth sectors of orthopaedics, endoscopy and advanced wound management. These three businesses comprise the Group’s “Ongoing Operations” segment.

The Group’s activities have a history dating back 147 years to the family enterprise of Thomas James Smith who opened a small drugstore in Hull, England in 1856. On his death in 1896, his nephew Horatio Nelson Smith took over the management of the business. The Company is a public limited company incorporated in Great Britain registered in, and operating under the laws of, England and Wales. Operations undertaken in countries other than the United Kingdom are under the laws of those countries in which they reside. The Company was incorporated and listed on the London Stock Exchange in 1937. In November 1999, the Company was listed on the New York Stock Exchange. The corporate headquarters is in the United Kingdom and the registered address is:

Smith & Nephew plc

15 Adam Street

London

WC2N 6LA

Tel: +44 (0) 20 7401 7646

Internet address: www.smith-nephew.com

Information contained on our website is not intended to be, and should not be regarded as being, part of this annual report on Form 20-F.

In June 2001, Smith & Nephew became a constituent part of the FTSE 100 index in the United Kingdom. This means that the Group is included in the top 100 companies traded on the London Stock Exchange measured in terms of market capitalization.

Recent Developments

In January 2000, Smith & Nephew acquired the collagenase advanced woundcare business from BASF Pharma for £74 million. Results of this acquisition are reflected in Ongoing Operations from the date of acquisition.

In June 2000, Smith & Nephew sold its consumer healthcare business for a net cash consideration of £210 million.

In April 2001, Smith & Nephew transferred its casting and bandaging and traditional woundcare businesses to a 50/50 joint venture with Beiersdorf AG, known as BSN Medical. Results of the businesses contributed to the joint venture by Smith & Nephew prior to April 1, 2001 are reflected in “Operations contributed to the joint venture” within “Continuing operations”. Beginning April 1, 2001, Smith & Nephew accounted for the results of the joint venture using the gross equity method.

In April 2001, Smith & Nephew acquired the advanced woundcare business of Beiersdorf AG for £30 million. Results of this business are reflected in Ongoing Operations commencing from the date of acquisition.

In May 2001, Smith & Nephew acquired the anti-microbial woundcare business of Westaim BioMedical Corporation for an initial consideration of £12 million. Results of this acquisition are reflected in Ongoing Operations from the date of acquisition.

In June 2001, Smith & Nephew sold its ear, nose and throat business for a net cash consideration of £62 million to Gyrus plc. This business is classified in the Group’s profit and loss accounts as Discontinued.

In March 2002, Smith & Nephew disposed of its rehabilitation business to AbilityOne Corporation (“AbilityOne”), a leading supplier in the US of rehabilitation products to hospitals, nursing homes and clinics, doing business as SammonsPreston. Smith & Nephew received £71 million in cash and a 21.5% equity interest in the combined company. Results of this business are classified as Discontinued. Beginning April 1, 2002, Smith & Nephew’s equity interest in AbilityOne was accounted for using the net equity method.

In March 2002, Smith & Nephew expanded its endoscopy business by acquiring ORATEC Interventions, Inc., (“ORATEC”), a medical device innovator in the use of controlled radio frequency energy to treat joint and spine disorders, for net £191 million. Results of this acquisition are reflected in Ongoing Operations from the date of acquisition.

In November 2002, Smith & Nephew acquired the interests it did not already own in the joint arrangements it had with Advanced Tissue Sciences Inc., (“ATS”) for net £8 million. The principal arrangement relates to intellectual property rights to technology to develop products for the treatment of diabetic foot ulcers and the other wound indications.

On March 20, 2003, Smith & Nephew entered into an agreement with Centerpulse AG (the “Combination Agreement”), a public company incorporated under the laws of Switzerland (“Centerpulse”), and an agreement with InCentive Capital AG (the “InCentive Agreement”), a public company incorporated under the laws of Switzerland (“InCentive”) which holds, or has the right to acquire, approximately 19% of the issued share capital of Centerpulse. It is contemplated by the Combination Agreement and the InCentive Agreement that Smith & Nephew Group plc (“Smith & Nephew Group”), a new holding company for Smith & Nephew, will seek to acquire all outstanding shares of Centerpulse, a leading medical technology group, which serves the reconstructive joint, spinal and dental implant markets, in the following manner:

•

Smith & Nephew shareholders will exchange their Smith & Nephew shares for shares in Smith & Nephew Group on a one-for-one basis by means of a Court-approved scheme of reorganization.

•

Smith & Nephew Group will make a recommended offer to acquire each share of Centerpulse in exchange for 25.15 new Smith & Nephew Group shares and CHF 73.42 in cash.

•

Smith & Nephew Group will make a recommended offer to acquire each share of InCentive in exchange for new Smith & Nephew Group shares and cash that will mirror InCentive’s holdings of Centerpulse shares, as adjusted for the adjusted net asset value of InCentive (excluding the Centerpulse shares held by it). Incentive will not accept the offer to Centerpulse Shareholders for the holding of its Centerpulse shares.

Successful completion of the offers for Centerpulse and InCentive is expected to result in the issuance of approximately 298 million new Smith & Nephew Group shares and the payment of approximately a net £400 million (CHF 870 million) in cash, after taking account of InCentive’s expected cash balances. Shareholders of Centerpulse and InCentive will own approximately 24% of the outstanding shares of Smith & Nephew Group. Shares of Smith & Nephew Group are expected to be traded on the London Stock Exchange and ADSs representing Smith & Nephew Group shares are expected to be traded on the New York Stock Exchange. Smith & Nephew Group will also seek a secondary listing of its shares on the SWX Swiss Stock Exchange.

As part of the transaction, Smith & Nephew Group will assume Centerpulse’s outstanding net debt which stood at CHF 358 million (£161 million) at December 31, 2002.

Both the Centerpulse and InCentive offers are conditional, inter alia, on the approval of Smith & Nephew’s shareholders, on the court-approved scheme having become effective, the shares of Smith & Nephew Group plc being listed on the London Stock Exchange and on regulatory clearances. The transactions are expected to be completed in July 2003.

Group Structure

Smith & Nephew operates on a worldwide basis. This has been achieved through a series of acquisitions, predominantly in the United States but also in Europe, and through continued emphasis on the development and introduction of new products in the Group’s principal markets.

Smith & Nephew is organized into the three global business units of orthopaedics, endoscopy and advanced wound management and the Indirect Market Unit. Each global business unit manages its sales directly in ten international markets—the United States, Canada, the United Kingdom, Germany, Japan, Australia, France, Italy, New Zealand and Ireland—and takes full responsibility for strategy, research and development (“R&D”), manufacturing, marketing, sales and financial performance. The remaining 20 principal markets in which the Group has selling companies are managed by country managers, with business responsibility for the whole of the Group’s product range, and comprise the Indirect Market Unit.

BUSINESS OVERVIEW

Activities and Geographical Markets

The tables below show the Group’s total revenues for its fiscal years 2002, 2001 and 2000 analyzed by activity and by geographical origin:

	Years ended December 31
	2002		2001		2000
	(£ million)
Sales

By activity
Orthopaedics	470.2		404.6		335.0
Endoscopy	291.8		252.8		216.4
Advanced wound management	321.7		285.6		221.5

Ongoing operations	1,083.7		943.0		772.9
Operations contributed to the joint venture	—		35.3		138.6

Continuing operations	1,083.7		978.3		911.5
Discontinued operations	26.2		103.4		223.2

Group turnover	1,109.9		1,081.7		1,134.7

Group sales by geographical origin
United Kingdom	179.6		162.9		148.9
Continental Europe	250.7		199.6		159.7
United States	702.1		641.3		515.9
Other America	28.6		31.8		25.8
Africa, Asia and Australasia	144.3		133.5		125.3

	1,305.3		1,169.1		975.6
Operations contributed to the joint venture	—		35.3		138.6

Continuing operations	1,305.3		1,204.4		1,114.2
Discontinued operations	26.2		103.4		223.2

	1,331.5		1,307.8		1,337.4
Less intragroup sales	(221.6	)	(226.1	)	(202.7	)

	1,109.9		1,081.7		1,134.7


	Years ended December 31
	2002		2001		2000
	(£ million)
Operating Profit

By activity
Orthopaedics	98.2		87.9		69.1
Endoscopy	53.8		46.8		38.2
Advanced wound management	44.0		36.1		33.4

Ongoing operations before goodwill amortization and exceptional items	196.0		170.8		140.7
Amortization of goodwill	(17.5	)	(10.4	)	(6.9	)
Exceptional items	(29.9	)	(19.3	)	(3.8	)

Ongoing operations	148.6		141.1		130.0
Operations contributed to the joint venture: operating profit	—		3.6		16.2
Operations contributed to the joint venture: exceptional items	—		(1.8	)	(8.6	)

Continuing operations	148.6		142.9		137.6
Discontinued operations: operating profit	2.1		11.1		29.0
Discontinued operations: exceptional items	—		—		(3.9	)

	150.7		154.0		162.7

	Years ended December 31
	2002		2001		2000
	(£ million)
Operating profit by geographical origin
United Kingdom	21.7		19.6		24.4
Continental Europe	21.1		18.0		12.5
United States	129.8		113.3		82.2
Other America	(0.7	)	0.9		3.3
Africa, Asia and Australasia	24.1		19.0		18.3
Amortization of goodwill	(17.5	)	(10.4	)	(6.9	)
Exceptional items	(29.9	)	(19.3	)	(3.8	)

Ongoing operations	148.6		141.1		130.0
Operations contributed to the joint venture: operating profit	—		3.6		16.2
Operations contributed to the joint venture: exceptional items	—		(1.8	)	(8.6	)

Continuing operations	148.6		142.9		137.6
Discontinued operations: operating profit	2.1		11.1		29.0
Discontinued operations: exceptional items	—		—		(3.9	)

	150.7		154.0		162.7

Ongoing Operations—Overview

In 2002, ongoing operations contributed 100% of sales and operating profits from continuing operations. Revenues for the last three fiscal years were:

Years ended December 31				Years ended December 31
2002	2001	2000		2002	2001	2000
(Percent)				(£ million)
43	43	43	Orthopaedics	470.2	404.6	335.0
27	27	28	Endoscopy	291.8	252.8	216.4
30	30	29	Advanced wound management	321.7	285.6	221.5

100	100	100		1,083.7	943.0	772.9

Ongoing Operations—Orthopaedics

Overview

Orthopaedic products comprise reconstructive implants, trauma products and clinical therapies. Reconstructive implants include hip, knee and shoulder joints as well as accessory products such as bone cement and mixing systems used in cemented joint replacement surgery. Trauma products consist of internal and external fixation devices, used in the stabilization of severe fractures. Clinical therapies consist of products applied in an orthopaedic office/clinic setting and currently include bone growth stimulators and a joint fluid therapy product.

The orthopaedics business is managed worldwide from Memphis, Tennessee, where the Group has its main manufacturing facility. Orthopaedic implants and trauma products are also manufactured at a small facility in Tuttlingen, Germany.

The Group’s knee replacement business is built on two major knee systems: GENESIS II designed to facilitate the accuracy and efficiency of the operating procedure and provide improved long-term clinical results; and PROFIX, a knee replacement system featuring simpler instruments and surgical technique. The Group has recently developed and manufactures knee implant components made from oxidized zirconium (OXINIUM) which management believes have improved wear properties which will be of significant benefit to younger, more active patients. Within the total hip product line, SPECTRON cemented hip system and the REFLECTION acetabular cup system have documented positive long term clinical performance. More recently, the success of SYNERGY, a tapered titanium stem system, and ECHELON, a revision stem system, have established Smith & Nephew as a strong player in this product segment.

Products such as the RUSSELL-TAYLOR, IMHS and TRIGEN intramedullary nail systems and the AMBI and CLASSIC compression hip screws provide trauma surgeons with a comprehensive management system for a wide variety of fractures. The ILIZAROV and the TAYLOR SPATIAL FRAME external fixator systems provide limb strengthening and deformity correction.

The EXOGEN ultrasonic bone healing stimulator and SUPARTZ hyaluronic acid joint injections are the main products in the clinical therapies sector.

To compete effectively in the growing global orthopaedic market, management believes that it is important to have a skilled sales force that can build strong relationships with surgeons and to have a leading edge product range. Smith & Nephew has thus expanded its sales force by 12% in 2002, attracting skilled orthopaedic sales people with deep understanding of their products.

Strategy

Smith & Nephew’s strategy is for future growth through product development in its existing core business and expansion into the fast-growing market for less invasive therapies. Management believes that the orthopaedic market will continue to grow for the foreseeable future. This is largely attributable to the increase in the “over age 65” population and the increasing need for total joint replacement products and other orthopaedic therapies in younger more active patients.

Smith & Nephew also intends to further penetrate the joint reconstruction market by leveraging its portfolio of products and services, and by introducing less invasive and alternative therapies, products and technologies. Management is working to accelerate the Group’s growth in the trauma market and reconstructive markets by making effective use of new products such as its Image Guided Surgery applications. The Group is also contributing to patient education and empowerment through its websites.

New Products

In 2002, the orthopaedics business continued to introduce OXINIUM technology across the knee product line, including the introduction of macrotextured components in the GENESIS II and PROFIX knee systems. The Group also introduced the ACCURIS minimally invasive unicompartmental knee system. In February 2003, the OXINIUM femoral head was launched in the hip market. OXINIUM technology expands the range of hip and knee implants with a low wear material that a surgeon can select.

In 2002, the Group launched ORTHOGUARD anti-microbial pin sleeves designed to address pin tract infection which management believes is a significant complication in external fixation. The EXOGEN 3000 unit was also introduced in 2002 as a more compact unit with a fixed treatment cycle. This ultrasound healing device targets the “fracture at risk” category.

Regulatory Approvals

In February 2002, the Company received the first 510K clearance by the FDA for Floroscopic Image Guided knee surgery instrumentation. This was followed by clearance for trauma instrumentation in October 2002 and hip instrumentation in December 2002. Image guided instrumentation (branded ACHIEVE) is a key part of management’s strategy towards less invasive orthopaedic surgery.

In May 2002, the FDA issued 510K clearance for instrumentation associated with the ACCURIS system. ACCURIS instrumentation and technique are used in minimally invasive unicompartmental knee surgery.

In July 2002, the FDA issued 510K clearance for ORTHOGUARD anti-microbial pin sleeves. This is the first FDA clearance of an antibiotic impregnated adjunctive orthopaedic device. This device is intended to inhibit bacterial colonization around orthopaedic pins and wires.

Competition

Management estimates that the worldwide orthopaedic market served by the Group grew by 13% in 2002 and is currently worth more than £5.2 billion per annum. Management believes that Smith & Nephew holds an 8% share of this market. Market share gains were achieved in the hip, knee and trauma categories in 2002 due to a comprehensive product portfolio and 12% increase in the sales force.

There are a number of competitors in the orthopaedic market, principally Stryker/Howmedica, DePuy/Johnson & Johnson, Zimmer, Biomet, Synthes-Stratec and Centerpulse.

Ongoing Operations—Endoscopy

Overview

Smith & Nephew’s endoscopy business, headquartered in Andover, Massachusetts, develops and commercializes a range of endoscopic (minimally invasive surgery) techniques, educational programs and value- added services for surgeons to treat and repair soft tissue, articulating joints, vascular structures and spinal discs.

The Endoscopy business offers surgeons endoscopic technologies for surgery, including: fluid management and insufflation instruments for surgical access; digital cameras, digital image capture, central control, multimedia broadcasting, scopes, light sources and monitors to assist with visualization; radiofrequency wands, electromechanical and mechanical blades, and hand instruments for resecting tissue; and specialized devices, fixation systems and bioabsorbable materials to repair damaged tissue.

Manufacturing facilities are located in Andover and Mansfield, Massachusetts; Oklahoma City, Oklahoma; and Palo Alto, California. Major service centers are located in the United States, the United Kingdom, Germany, Japan and Australia.

Strategy

With the strategic intent of being a global leader for surgical techniques that reduce trauma and pain to the patient, reduce cost to the healthcare system and provide better outcomes for surgeons, management believes the endoscopy business capitalizes on the growing acceptance of endoscopy as a preferred surgical choice among physicians and patients.

To sustain growth and maintain its market position, the endoscopy business supports its strategy with surgeon education programs, financing solutions, global fellowship support, partnerships with professional associations and surgeon advisory boards. The Group is also enhancing its reputation for surgeon-focused innovation with its proprietary InVentures Bioskills Lab program, which enables surgeons to work directly with a Smith & Nephew multi-disciplined team to develop concepts and explore the commercialization of their techniques or instrumentation. The Group also works closely with leading institutions to design and develop Digital Operating Rooms, which help to improve productivity and efficiency in surgery. In addition, Smith & Nephew also works with surgeons and the media on local, regional and global levels to provide information on new products and techniques directly to consumers.

In March 2002, Smith & Nephew expanded its endoscopy business by acquiring ORATEC Interventions, Inc., a medical device innovator in the use of radiofrequency thermal energy to treat joint and spine disorders through the cutting, removal, ablation or modification of damaged or stretched tissue. Management believes that this will establish the Group as a leader in radiofrequency technology for minimally invasive surgery and provide other endoscopic opportunities in a market segment that management believes is globally worth £75 million and growing at 10% annually.

New Products

In 2002, Smith & Nephew introduced the DYONICS ELECTROBLADE RESECTOR which provides simultaneous resection and coagulation of soft tissue. The Group also introduced TWINFIX SUTURE ANCHORS, a specialized shoulder repair system for rotator cuff injuries available in both bioabsorbable and metal anchor versions.

In 2002, Smith & Nephew introduced a decompression catheter for lower back and leg pain associated with bulging or contained herniated discs. The Group also introduced a bipolar cutting and ablation system for the VULCAN system radiofrequency generator and the SAPHYRE BIPOLAR ABLATION PROBE for thermal modification of soft tissue.

Smith & Nephew also introduced its Digital OR program, an integrated and fully functional operating room suite utilizing central control, information and image management, multi-media broadcast and other endoscopic equipment that management believes enables hospitals and surgical centers to maximize performance.

Regulatory Approvals

During 2002, the endoscopy business obtained clearance/approval for the following products in all major markets, with the exception of Japan, where the approval cycle is traditionally slower: the DYONICS ELECTROBLADE RESECTOR combining mechanical and radio frequency resection technologies; a bioabsorbable version of the TWINFIX shoulder anchor and a new operative Hysteroscopy; and central control capability for the 635 Digital Image Management System.

Competition

Management estimates that the global endoscopy market is worth £3.0 billion a year and is growing at 6% annually, driven by increasing numbers of sports injuries, longer and more active lifestyles, a desire for minimally invasive procedures, innovative technological developments and a need for cost effective procedures. Management believes that Smith & Nephew has a 35% share in the arthroscopy sector.

Smith & Nephew’s main competitors, which vary according to the endoscopic specialties, include Arthrex, Arthrocare, Johnson & Johnson, Linvatec/Conmed and Stryker.

Ongoing Operations—Advanced Wound Management

Overview

Smith & Nephew’s advanced wound management business is headquartered in Hull, England. It supplies a range of products and clinical support services for the treatment of chronic and acute skin wounds. It offers a range of products from initial wound bed preparation through to full wound closure. These products are targeted particularly at chronic wounds connected with the elderly, such as pressure sores, venous leg and diabetic foot ulcers, and also serious burns.

Advanced wound management products are manufactured in facilities in Hull and Gilberdyke, England; Largo, Florida and La Jolla, California and by certain third party manufacturers.

The Group has continued to build its sales and marketing infrastructure in the world’s major markets with increased investment in sales teams, particularly in Japan and France in 2002, and behind global brand development. These initiatives have led to increased levels of demand on the Group’s manufacturing and global supply chain, which are being addressed with increased investment in the facilities in Hull, Gilberdyke and Largo.

Strategy

The Group’s strategy for future wound management products and sales growth focuses on three treatment areas: wound assessment, wound bed preparation and active healing. Smith & Nephew’s joint venture with Beiersdorf AG, BSN Medical, acquired the Group’s traditional woundcare business effective April 1, 2001, allowing the advanced wound management business to focus its attention on higher added value advanced woundcare products.

In November 2002, the Group acquired 100% of its former joint arrangements with ATS to apply human tissue technology to the treatment of all skin wounds. The transaction has brought the full costs and benefits of two significant products, DERMAGRAFT and TRANSCYTE, into the Group. DERMAGRAFT is a human dermal replacement designed as a treatment for diabetic foot ulcers. TRANSCYTE is a temporary wound covering for the treatment of burns.

The Group has continued to build its sales and marketing infrastructure in the world’s major markets, both through the investment in the Group’s existing network and through the additional sales teams the Group has gained through its acquired businesses in recent years. The integration of the acquired sales forces has increased the Group’s capability throughout the world, particularly in the key markets of the United States and Germany.

New Products

Management believes that the future lies in advanced products with their ability to accelerate healing rates, reduce hospital stay times and cut the cost of nursing time and aftercare in the home. Research and development has been organized to address this opportunity and expenditure is over 5% of advanced wound management product sales.

During 2002, the business has utilized its network of selling companies to launch ACTICOAT worldwide. ACTICOAT, acquired from Westaim of Canada in May 2001, is an antimicrobial barrier dressing incorporating nanocrystalline silver used in the treatment of burns or wounds. The silver reduces the risk of bacterial colonization and acts to kill micro-organisms that can cause infection and prevent or retard healing.

During 2002, the Group launched an improved ALLEVYN adhesive hydrocellular dressing. Management believes that ALLEVYN is the largest selling dressing in its category in the world and that new shapes and designs will aid Smith & Nephew in maintaining this position. Also during the year, an improved design of the OPSITE POST-OP range was launched. OPSITE POST-OP is a water-resistant, post-operative dressing that management believes is the global market leader.

In 2002, the Group launched DERMAGRAFT in the United States. Management believes that 88% of the outpatient population have been approved for Medicare reimbursement coverage.

Regulatory Approvals

In October 2001, the FDA approved the application for a Pre-Marketing Approval (PMA) for DERMAGRAFT to be sold in the United States. DERMAGRAFT has already been launched in a number of markets, including Australia, South Africa and Canada. In April 2002, US national reimbursement codes were issued by the centers for Medicare and Medicaid Services enabling individual states to set reimbursement guidelines.

In December 2002, a European certificate for Class III medical device approval was issued for ACTICOAT. This will enable faster sales penetration of European markets.

Competition

Management estimates that the sales value of the advanced wound management market worldwide is £1.5 billion a year, growing at 12% annually, and that Smith & Nephew has a 21% market share. Growth is driven by an aging population and by a steady trade up to higher technology, higher margin products that are more clinically efficient and cost effective than their conventional counterparts. Management believes that, with over 50% of all wounds still treated with conventional dressings, there is a strong growth potential for advanced products.

Worldwide competitors in advanced wound management include Johnson & Johnson, the Convatec division of Bristol-Myers Squibb, 3M and Kinetic Concepts Inc.

Operations contributed to the joint venture

Operations contributed to the joint venture consist of the casting and bandaging and traditional woundcare businesses up until they were contributed to the joint venture with Beiersdorf AG on April 1, 2001. Beiersdorf AG contributed its casting and bandaging business and a complementary compression hosiery business. The joint venture is called BSN Medical. This is owned 50% by each parent company and is independently managed. BSN Medical is headquartered in Hamburg, Germany and has manufacturing facilities in the United States, the United Kingdom, Germany, France, the Republic of Ireland, South Africa, Mexico and Pakistan. BSN Medical is accounted for by Smith & Nephew under the gross equity method. In certain markets, Smith & Nephew’s sales forces sell BSN Medical’s products on an agency basis in return for an agency commission and in some markets, particularly in Asia, Smith & Nephew distributes products for BSN Medical.

Discontinued Operations

Discontinued operations in 2002 comprise three months of results of the rehabilitation business disposed of in March 2002. The rehabilitation business headquartered in Germantown, Wisconsin manufactured and marketed a wide range of devices and services to physiotherapists and occupational therapists to help patients recover from surgery or from a stroke.

Discontinued operations in 2001 comprise five months of results of the ear, nose and throat business disposed of in June 2001 and a full year of rehabilitation results. The ear, nose and throat business headquartered in Bartlett, Tennessee comprised a wide range of products for sinus surgery, as well as products focused on surgical procedures of the head and neck.

Discontinued operations in 2000 comprise six months of results of the consumer healthcare business disposed of in June 2000 and a full year of ear, nose and throat and rehabilitation results. The consumer healthcare business was aimed at the personal care market and owned a portfolio of leading brand names. Consumer healthcare products were marketed and sold by the Group, principally in the United Kingdom, but also in the Republic of Ireland, Canada, South Africa, Australasia and parts of Asia.

Joint Ventures, Associated Undertakings, Joint Arrangements and Other Interests

Associated undertakings are those in which the Group has a beneficial interest of 50% or less in the equity capital and where the Group exercises significant influence over commercial and financial policy decisions. In March 2002, the Group acquired 21.5% of AbilityOne Corporation as part of the transaction in which it disposed of its rehabilitation business to AbilityOne Corporation. Since April 1, 2002, this interest has been included in the Group’s consolidated results as an associated undertaking and accounted for under the net equity method.

Smith & Nephew owns 50% of the BSN Medical joint venture, which became operational on April 1, 2001. In connection therewith, the Group contributed its associated undertaking in Venezuela (which acted as a licensee/manufacturer and distributor for Smith & Nephew products) to BSN Medical.

The Group has had an interest in two joint arrangements with ATS, relating to products for the treatment of diabetic foot ulcers (DERMAGRAFT) since 1996, and cartilage replacement (NEOCYTE) since 1994. On October 11, 2002, ATS filed a voluntary petition for reorganization under Chapter 11 of the US Bankruptcy Code. Immediately following this filing Smith & Nephew announced that it was petitioning the court concerned to allow it to acquire ATS’s 50% share of the joint arrangements conducted with Smith & Nephew. On November 25, 2002, the Group purchased the interests it did not already own in the joint arrangements from ATS for net £7.8 million.

Raw Materials

Raw material purchases comprise principally optical and electronic sub-components, elastomeric products and metal forgings and stampings in respect of the ongoing businesses. Management believes that prices of principal raw materials purchased are not volatile. Finished goods purchased for resale are primarily collagenase and ACTICOAT in the advanced wound management business, cameras, monitors and electrical devices in the endoscopy business and SUPARTZ joint lubricant in the orthopaedic business.

Seasonality

Smith & Nephew’s sales are generally at their highest in quarter four of any year and at their lowest in quarter three. This is caused by the relatively high number of accidents and sports injuries which occur in the North American and European winters which increases sales of orthopaedic and endoscopy products and by the deferral of elective surgery during the peak summer holiday periods in North America and Europe.

Marketing Channels

Smith & Nephew’s customers are the various providers of medical and surgical services worldwide. In certain parts of the world, including the United Kingdom, much of Continental Europe, Australia, Canada and South Africa, these are largely governmental organizations funded by tax revenues. In the United States, the Group’s major customers are public and private hospitals, many of which have combined to form large purchasing groups and receive revenue from private health insurance and governmental reimbursement programs. In the United States, Medicare is a major source of reimbursement for knee and hip procedures and for wound healing treatment regimes.

Competition exists among healthcare providers to gain patients on the basis of quality, service and price. In many countries, and particularly in the United States, providers are under pressure to reduce the total cost of healthcare delivery. There has been some consolidation in the Group’s customer base, as well as among the Group’s competitors, and these trends are expected to continue long term. Smith & Nephew competes against both specialized and multinational corporations, including those with greater financial, marketing and other resources.

The Group’s customers reflect the wide range of distribution channels, purchasing agents and buying entities in over 90 countries worldwide. The largest single customer worldwide is the National Health Service in the United Kingdom. Sales to this customer in 2002 represented approximately 3% of the Group’s worldwide total sales.

Regulatory Controls

The international medical device industry is highly regulated. Regulatory requirements are a major factor in determining whether substances and materials can be developed into marketable products and the amount of time and expense that should be allotted to such development.

National regulatory authorities administer and enforce a complex series of laws and regulations that govern the testing, approval, manufacturing, labelling, marketing and sale of healthcare and pharmaceutical products. They also review data supporting the safety and efficacy of such products. Of particular importance is the requirement in many countries that products be authorized or registered prior to manufacture, marketing or sale and that such authorization or registration be subsequently maintained.

The trend in recent years has been towards greater regulation and higher standards of technical appraisal, which generally entail lengthy inspections for compliance with appropriate standards, including environmental laws and regulations such as good manufacturing practices. Smith & Nephew believes that these recent changes will not have a material adverse effect on the Group’s financial condition and the results of operations. All significant facilities within the Group are subject to regular internal audit for compliance with national and Group standards and policies.

Additional information regarding the impact of environmental and other regulatory laws is included under the appropriate sections in “Ongoing Operations” above and “Environmental Factors” below.

Environmental Factors

The Group’s manufacturing operations are subject to various environmental laws and regulations. Smith & Nephew believes that the Group’s operations currently comply in all material respects with applicable environmental laws and regulations. Although the Group continues to make capital expenditures for environmental compliance, it does not anticipate any significant expenditures as a result of such laws and regulations that would have a material adverse impact upon the Group’s financial condition.

The Group has an established environmental policy and operating committee reporting to a member of the Group’s Executive Committee. The Group is committed to the protection of the environment wherever possible by using renewable resources and developing manufacturing processes and products to reduce any adverse effects on the environment.

Product Liability

The Group monitors the safety of its products from initial product development through to product use or application. In addition, the Group analyzes on a worldwide basis reports of adverse reactions and complaints relating to its products.

Product liability is a commercial risk for the industry of which the Group is a part, particularly in the United States where there are increasing numbers of claims involving medical devices. Smith & Nephew has implemented systems it believes are appropriate in respect of loss control techniques. These include reporting mechanisms to ensure early notification of complaints, a legal department which manages product liability claims and lawsuits and a committee, chaired by and containing clinicians independent of the Group, that advises on the safety of raw materials and products, and clinical standards and ethics.

To date, there have been no material instances of loss to the Group arising from product liability claims, nor has the development of “strict liability” within the European Community resulted in the Group receiving increased notifications of adverse incidents or claims. There are currently no individual product liability claims that are expected to have a material adverse effect on the Group’s financial position. The Group believes that its product liability exposure is covered by insurance as far as practicable.

There can be no assurance that consumers, particularly in the United States, will not bring product liability or related claims that would have a material adverse effect on the Group’s financial position in the future or that the Group will continue to resolve such claims within insurance limits as in the past in view of changing legal doctrines and attitudes regarding such matters.

ORGANIZATIONAL STRUCTURE

Overview

The Group has a structure under which global business units have responsibility for strategy, R&D, manufacturing, marketing, sales and financial performance in the ten markets of the United States, Canada, the United Kingdom, Germany, Japan, Italy, France, Australia, New Zealand and Ireland. With short and clear lines of communication, the structure makes each business responsive to its marketplace and able to grow. The remaining 20 principal markets in which the Group has selling companies are in Continental Europe, Asia, South Africa and Latin America and are managed by country managers and co-ordinated by a central team in London, England that reports to the Group Director for Indirect Markets.

A head office team in London, England supports the global business units, primarily in the areas of business development, company secretarial, finance, human resources and investor relations, with a legal department based in Memphis, Tennessee. A central research center in York, England is charged with the development of enabling technologies in both materials science and biology, particularly cell biology.

Principal Subsidiary Undertakings

The Group’s principal operating subsidiary undertakings are as follows:

Company Name	Activity	Country of operation and incorporation	% owned
United Kingdom:
Smith & Nephew Healthcare Limited	Medical Devices	United Kingdom	100%
Smith & Nephew Medical Limited	Medical Devices	United Kingdom	100%
T J Smith & Nephew Limited	Medical Devices	United Kingdom	100%

Continental Europe:
Smith & Nephew GmbH	Medical Devices	Austria	100%
Smith & Nephew SA-NV	Medical Devices	Belgium	100%
Smith & Nephew A/S	Medical Devices	Denmark	100%
Smith & Nephew OY	Medical Devices	Finland	100%
Smith & Nephew SA	Medical Devices	France	100%
Smith & Nephew GmbH	Medical Devices	Germany	100%
Smith & Nephew Limited	Medical Devices	Ireland	100%
Smith & Nephew Srl	Medical Devices	Italy	100%
Smith & Nephew BV	Medical Devices	Netherlands	100%
Smith & Nephew A/S	Medical Devices	Norway	100%
Smith & Nephew Lda	Medical Devices	Portugal	100%
Smith & Nephew SA	Medical Devices	Spain	100%
Smith & Nephew AB	Medical Devices	Sweden	100%
Smith & Nephew AG	Medical Devices	Switzerland	100%

America:
Smith & Nephew Inc	Medical Devices	Canada	100%
Smith & Nephew SA de CV	Medical Devices	Mexico	100%
Smith & Nephew Inc	Medical Devices	Puerto Rico	100%
Smith & Nephew Inc	Medical Devices	United States	100%

Africa, Asia and Australasia:
Smith & Nephew Pty Limited	Medical Devices	Australia	100%
Smith & Nephew Limited	Medical Devices	Hong Kong	100%
Smith & Nephew Healthcare Limited	Medical Devices	India	100%
Smith & Nephew KK	Medical Devices	Japan	100%
Smith & Nephew Limited	Medical Devices	Korea	100%
Smith & Nephew Healthcare Sdn Berhad	Medical Devices	Malaysia	100%
Smith & Nephew Limited	Medical Devices	New Zealand	100%
Smith & Nephew Pte Limited	Medical Devices	Singapore	100%
Smith & Nephew Limited	Medical Devices	South Africa	100%
Smith & Nephew Limited	Medical Devices	Thailand	100%
Smith & Nephew FZE	Medical Devices	United Arab Emirates	100%

PROPERTY, PLANTS AND EQUIPMENT

The Group’s principal locations are as follows:

•

Group Head Office in London, England;

•

Orthopaedics HQ and manufacturing facility in Memphis, Tennessee;

•

Endoscopy HQ and separate manufacturing facility in Andover, Massachusetts. Other manufacturing locations are in Mansfield, Massachusetts, Oklahoma City, Oklahoma and Palo Alto, California; and

•

Advanced wound management HQ and manufacturing facility in Hull, England and manufacturing facilities in Largo, Florida and La Jolla, California.

In 2002, the Endoscopy HQ facility was leased and the Palo Alto facility was added through the ORATEC acquisition. Additional manufacturing capacity was added to the existing facilities in Memphis and Mansfield.

The manufacturing facilities in Memphis, Andover, Hull and Largo are freehold while all other principal manufacturing locations and the Group Head Office are leasehold. The Group also has freehold and leasehold interests in real estate in many countries throughout the world, but none is significant individually to the Group as a whole.

The Group considers its existing facilities, combined with the planned expansion of these facilities, to be adequate to meet anticipated demands for its products. Where required, the appropriate governmental authorities have approved the existing facilities.

ITEM 5—OPERATING AND FINANCIAL REVIEW AND PROSPECTS

OPERATING RESULTS

Accounting Principles

The following discussion and analysis is based upon, and should be read in conjunction with, the consolidated financial statements of Smith & Nephew included elsewhere in this Annual Report. The Group’s Financial Statements are prepared in accordance with UK GAAP, which differ in certain respects from US GAAP. Reconciliations reflecting the effect of the significant differences between UK GAAP and US GAAP are set forth in Note 35 of the Notes to the Financial Statements.

New Accounting Policies in 2002

The Group discloses the additional information required under Financial Reporting Standard 17 (FRS 17) regarding defined benefit pension plans; this is to be found in “Item 18—Financial Statements” in Note 29 of the Notes to the Financial Statements. The significant difference to existing practice is that pension liabilities are discounted at risk free interest rates as against long run investment return rates.

Critical Accounting Policies

The following policies are considered to be critical to the reporting of the Group’s results:

Intangible fixed assets

Goodwill, representing the excess of purchase consideration over fair value of net assets acquired prior to December 31, 1997, was set off against reserves in the year of acquisition. Goodwill acquired since January 1, 1998 is capitalized and amortized on a straight line basis over its estimated useful economic life, up to a presumed maximum of 20 years, except for goodwill arising on the formation of the BSN Medical joint venture and acquisition of the Group’s share of the AbilityOne associated undertaking, which is not amortized but is subject to an annual impairment review. This treatment, which is a departure from the requirement of the Companies Act to amortize goodwill, is adopted in order to show a true and fair view. Goodwill previously written off to reserves is added back for inclusion in the calculation of gains and losses on disposals. Under US GAAP, goodwill and other intangible fixed assets purchased prior to 2002 would have been capitalized and amortized over their expected useful lives. Commencing in 2002, goodwill would not be amortized and would be subject to an annual impairment review, whereas other intangible assets would continue to be capitalized and amortized over their useful lives.

The carrying value of goodwill and acquired intangibles is reviewed for impairment at the end of the first full financial year following acquisition and in other periods if significant events or changes in circumstances indicate the carrying value may be impaired.

Purchased patents, know-how, trade markets, licenses and distribution rights are capitalized as intangibles and amortized over a period not exceeding 20 years.

The carrying values of intangibles are reviewed for impairment when events or changes in circumstances indicate the carrying value may be impaired.

Tangible fixed assets

Plant and equipment are depreciated over lives ranging between three and twenty years by equal annual installments to write down the assets to their estimated disposal value at the end of their working lives.

Financial Derivatives

Currency swaps to match foreign currency net assets with foreign currency liabilities are translated into sterling at year end exchange rates. Changes in the principal values of currency swaps are matched in reserves against changes in the values of the related assets. Interest rate swaps to protect interest costs and income are

accounted for as hedges. Changes in the values of interest rate swaps are recognized against interest in the period relating to the hedge.

Inflation

The Group operates internationally and in many different economic climates, but, in general, inflation has not had a material effect on the Group’s results. The Group does not have material subsidiaries in any economies subject to hyperinflation.

Foreign Currencies

The Group protects its shareholders’ funds by matching foreign currency assets, including acquisition goodwill, with foreign currency liabilities where practicable. These liabilities take the form of either borrowings or currency swaps. At December 31, 2002, the Group had gross borrowings of £316.1 million, mainly in foreign currency, and cash and bank balances of £22.5 million. Currency swaps amounted to £563.2 million payable, of which 73% were to redenominate internal borrowings into US dollars. Currency swaps of £579.9 million receivable have been netted off against the currency swaps payable, and the net balance of £16.7 million is included in the financial statements as £21.3 million in debit balances on currency swaps within debtors and £4.6 million in credit balances on currency swaps within other creditors. Translation movements on the Group’s unmatched foreign currency net assets increased shareholders’ funds by £9.1 million in 2002.

Fiscal 2002 compared with fiscal 2001

Group sales during fiscal 2002 amounted to £1,109.9 million, an increase of 3% when compared to fiscal 2001. After excluding sales of operations contributed to the joint venture and of discontinued operations, sales growth of ongoing operations was 15%. Of this growth, 14% points arose from underlying sales growth and 4% points arose from businesses acquired in 2002 and 2001 while currency translation had a 3% points negative effect. Selling price increases accounted for approximately 1% of sales growth.

Operating profit of ongoing operations before goodwill amortization and exceptional items was £196.0 million in 2002, a 15% increase over 2001. Operating profit of ongoing operations in 2002 was £25.2 million higher due to higher sales volumes and profits from businesses acquired. Profits arising from the acquisition of ORATEC contributed 2% points of the profit increase. Operating margin was unchanged at 18% with 0.5% of divestment dissynergies offset broadly by cost savings and leverage benefits.

The Group’s share of joint venture sales at £155.0 million was £31.4 million higher than 2001 reflecting a full year’s ownership compared with nine months in 2001 offset by the effect of product disposals made in January 2002. The Group’s share of operating profit of BSN Medical increased from £12.8 million to £19.6 million, reflecting a full year of ownership and improved margins. The joint venture operating profit margin for 2002 was 12.6%, a 2% point increase from 2001 as a result of integration and rationalization benefits. The Group’s share of rationalization costs of BSN Medical was £2.6 million.

The Group’s share of the operating profit of the AbilityOne associated undertaking, that it acquired in March 2002, was £4.9 million. Operating profits arising from discontinued operations were £2.1 million in 2002 and operating profits of operations contributed to BSN Medical were £3.6 million in 2001.

Profit before taxation, goodwill amortization and exceptional items of ongoing operations was £209.9 million in 2002, £29.0 million higher than 2001. Net interest expense was lower by £4.7 million due to lower interest rates.

Goodwill amortization increased by £7.1 million compared with 2001, £5.8 million of which is due to the ORATEC acquisition.

Operating exceptional items within ongoing operations of £29.9 million comprise £17.5 million for the write-down of the Group’s trade investment in the common stock of ATS following its filing for bankruptcy; £4.0 million for further rationalization due to the contribution of businesses to BSN Medical; and £8.4 million for integration in connection with the acquisition of ORATEC and the Dermagraft joint arrangement.

Profit before taxation was £177.9 million, compared with £193.6 million in 2001. In 2002, profit before taxation included a gain on the disposal of the rehabilitation business of £18.0 million compared with a gain on the disposal of the ear, nose and throat business of £49.2 in 2001.

The underlying tax charge of £61.6 million represents 29% of profit before goodwill amortization and exceptional items, the same percentage as in fiscal 2001. The tax charge on net exceptional items was £4.2 million because there is no tax benefit on £30.0 million of goodwill deducted in the calculation of the gain on disposal of the rehabilitation business.

Basic earnings per share were 12.11p, a decrease on 2001 of 14%. Adjusted earnings per share before goodwill amortization and exceptional items were 16.02p, an increase on 2001 of 15%. Adjusting for the loss of profits caused by the disposal of the ear, nose and throat business in 2001 and the rehabilitation business in 2002 and the formation of the BSN Medical joint venture in 2001, earnings per share before goodwill amortization and exceptional items were 19% higher than 2001.

Management is not aware of any governmental, economic, fiscal, monetary or political policies or factors that have materially affected, directly or indirectly, the Group’s operations or investments by shareholders.

Orthopaedics

Sales

Sales in the orthopaedics business increased by £65.6 million (16%) from £404.6 million in 2001 to £470.2 million in 2002. The negative effect of currency translation into sterling was 4% points and underlying sales grew by 20% points.

Sales in the United States increased by 23%. 7% points of this sales growth was due to the full year effect of the OXINIUM knee component and SUPARTZ hyaluronic acid, both new products launched during 2001. Sales of trauma products grew by 10%, hip implants by 13% and knee implants by 23%.

Outside the United States, the highest sales growth was in Australia and New Zealand at 23% caused by a government initiative to incentivize healthcare insurance in Australia and the appointment of a new agent in New Zealand. Sales in Italy grew 22% due to market share gains, particularly in knee implants, and sales in Germany grew by 15%, again due to gains in knee implants. Sales growth in Japan, the orthopaedics business’s second largest market by sales value, was 6%.

On a worldwide basis, sales of hip implants grew by 17%, knee implants by 33% and trauma products by 10%.

Operating profit

Operating profit from the orthopaedics business before goodwill amortization and exceptional items increased by £10.3 million (12%) from £87.9 million in 2001 to £98.2 million in 2002.

The increase in operating profit arose principally in the United States market as a result of sales growth, offset partly by further investment in the development of image guided surgery products and the OXINIUM range of knee and hip components and increased insurance costs.

Operating profits also increased in Australia/New Zealand and Japan as a result of increased sales. However, operating losses were incurred in France and profits were lower than prior year in Germany and Italy due to investment in selling and marketing resources and the adverse effect of transactional currency. An operating loss was also incurred in Canada due to the effect of cost dis-synergies arising from the divestment of the rehabilitation and ear, nose and throat businesses.

Endoscopy

Sales

Sales in the endoscopy business increased by £39.0 million (15%) from £252.8 million in 2001 to £291.8 million in 2002. The acquisition of ORATEC contributed 9% points of this growth, the negative effect of currency translation into sterling was 4% points and underlying sales grew by 10% points.

Sales in the United States grew by 21%, of which the acquisition of ORATEC arthroscopy products contributed 9% points and ORATEC spine products 5% points, and underlying sales growth contributed 7% points. The principal reason for the underlying sales growth was the introduction of a number of new products, particularly TRIVEX, FAST-FIX and BIO-RCI. The ORATEC acquisition did not impact sales growth outside the United States.

Sales in the United Kingdom/Ireland, the endoscopy business’s second largest market by sales value, increased by 13% due to new products and gains in market share. Sales in France and Italy grew in excess of 20%, principally due to new products in the Repair sector. Sales in Japan grew by 16% and in Australia/New Zealand by 21% as a result of increased sales force strength. Sales in Canada declined due to government healthcare funding constraints.

On a product segment basis, Resection sales grew by 28% as a result of the ORATEC acquisition, Repair sales grew by 21% largely as a result of new products and sales of Visualization, Access and Service increased by 6%.

Operating profit

Operating profit from the endoscopy business before goodwill amortization and exceptional items increased by £7.0 million (15%) from £46.8 million in 2001 to £53.8 million in 2002.

Operating profits rose in the United States market due to the increase in sales and the benefit of the ORATEC acquisition, which contributed operating profits of £3.8 million in 2002.

Operating profits in the United Kingdom/Ireland, Italy, Australia/New Zealand and France increased as a result of sales growth more than offsetting adverse transactional currency movements. Operating profits in Japan increased by less than the growth in sales due to adverse currency movements and investment in additional selling and marketing resources.

Canada incurred a loss compared with a small profit in 2001 due to a decline in sales.

Advanced wound management

Sales

Sales in the advanced wound management business increased by £36.1 million (13%) from £285.6 million in 2001 to £321.7 million in 2002. The acquisitions made in 2001 contributed 4%, the negative effect of currency translation into sterling was 2% points and underlying sales grew by 11%.

Sales in the United States grew by 11%, of which 4% points was due to the full year effect of the ACTICOAT silver dressing acquired in May 2001. Sales of tissue-engineered wound dressings more than doubled to £6.1 million following the launch of DERMAGRAFT, in the United States, in April 2002.

Sales in the United Kingdom/Ireland grew by 10% due to market share gains and the effect of a full year of sales of products acquired from Beiersdorf AG in April 2001.

Additional investment in sales force led to sales increases of 35% in Japan and 28% in France. Sales in Germany grew by 31% over the prior year largely due to the impact of the acquisitions referred to above. Sales in Canada were flat compared to the prior year due to government funding constraints.

Of the principal products, sales of the ALLEVYN adhesive hydrocellular dressing increased by 21% and sales of ACTICOAT increased by 59%, while sales of collagenase wound bed preparation products declined by 9% in the United States due to supply problems but increased by 3% outside of the United States.

Operating profit

Operating profit from the advanced wound management business before goodwill amortization and exceptional items increased by £7.9 million (22%) from £36.1 million in 2001 to £44.0 million in 2002.

Losses arising from the DERMAGRAFT joint arrangement increased from £7.0 million in 2001 to £8.0 million in 2002 as a result of additional sales force expense following the launch of DERMAGRAFT in the United States in April 2002 and the consolidation of 100% of losses from November 25, 2002 following the acquisition of the remainder of the ATS arrangements.

Operating profits in the United Kingdom/Ireland and the United States increased by 20% and 17%, respectively, due to additional sales volumes.

Operating profits in Japan increased strongly as a result of higher sales which more than offset the effect of reimbursement price reductions in certain products. France increased its loss with margin on higher sales being insufficient to offset increased sales force investment and dis-synergies arising from the separation of the business from BSN Medical. Germany profits increased as a result of the acquisitions in 2001.

Discontinued Operations

Sales of £26.2 million from discontinued operations in 2002 comprise three months of sales of the rehabilitation business. Profit thereon was £2.1 million.

Interest Income and Expense

Interest income increased by £4.1 million from £2.5 million in 2001 to £6.6 million in 2002. Interest expense decreased by £2.2 million from £19.0 million in 2001 to £16.8 million in 2002. The Group’s share of the joint venture’s and associated undertaking’s net interest expense was £1.6 million and £0.9 million, respectively. Interest payable on currency swaps amounting to £23.3 million has been set off against interest receivable on swaps. Net interest expense decreased by £4.7 million to £12.7 million due to falling US Dollar and Euro interest rates on interest expense offset by falling Sterling rates on interest income.

Fiscal 2001 compared with fiscal 2000

Group sales during fiscal 2001 amounted to £1,081.7 million, a decline of 5% when compared to fiscal 2000. After excluding sales of operations contributed to the joint venture and of discontinued operations, sales growth of ongoing operations was 22%. Of this, 14% was underlying sales growth, 6% was from businesses acquired in 2001 and 2000 and 2% from currency translation. Selling price increases accounted for approximately 1% point of sales growth.

Operating profit of ongoing operations before goodwill amortization and exceptional items was £170.8 million in 2001, a 21% increase over 2000, with operating margin declining from 18.2% in 2000 to 18.1%. Efficiency improvements were in excess of 1% of sales but were offset by divestment dis-synergies and adverse transactional currency.

Sales of operations contributed to the joint venture of £35.3 million in 2001 relate to the three months of sales operations of the casting and bandaging and traditional woundcare businesses and compares with £138.6 million in 2000 which reflects a full year’s trading. Operating profit thereon was £3.6 million and exceptional costs of £1.8 million were incurred that represent manufacturing rationalization costs of operations subsequently contributed to BSN Medical.

Sales of £103.4 million from discontinued operations in 2001 comprise a full year of sales operations of the rehabilitation business and five months of sales operations of the ear, nose and throat business. Profit thereon was £11.1 million. Sales and operating profits were £223.2 million and £29.0 million respectively in 2000, which reflects a full year of sales operations of the rehabilitation and ear, nose and throat businesses and six months of trading of the consumer healthcare business. Exceptional items of £3.9 million were incurred in 2000 that represent manufacturing rationalization costs.

Group share of joint venture sales for nine months was £123.6 million and of operating profit before exceptional items was £12.8 million. The Group’s share of rationalization costs of BSN Medical was £5.0 million.

Goodwill amortization increased by £3.5 million compared with 2000 principally due to the ACTICOAT and advanced woundcare acquisitions and a full year of collagenase.

The principal exceptional item in 2001 was a £49.2 million net gain on the disposal of the ear, nose and throat business. Operating exceptional items within ongoing operations of £19.3 million comprise £2.9 million on the manufacturing rationalization program, £7.5 million on the rationalization consequent on the contribution of businesses to BSN Medical and £8.9 million on integration in connection with the advanced woundcare business acquired from Beiersdorf AG.

Profit before taxation, goodwill amortization and exceptional items amounted to £180.9 million, £2.0 million higher than 2000, because of improved operating profits offset by the loss of profits from the disposal of the consumer business in 2000, the full year effect of financing the payment of the special dividend in 2000 and divestment dis-synergies.

Profit before taxation was £193.6 million, compared with £265.2 million in 2000, which included a gain on the disposal of the consumer healthcare business of £109.5 million.

The underlying tax charge of £52.3 million represents 29% of profit before goodwill amortization and exceptional items, a decrease of 1% when compared with fiscal 2000. The tax charge on net exceptional items was £11.7 million.

Basic earnings per share were 14.07p, a decrease of 30% over 2000. Adjusted earnings per share before goodwill amortization and exceptional items were 13.96p, an increase over 2000 of 15%. Adjusting for the loss of profits caused by the disposal of the consumer healthcare business in 2000 and the ear, nose and throat business and the formation of BSN Medical joint venture in 2001, earnings per share before exceptional items rose 16% over 2000.

Orthopaedics

Sales

Sales in the orthopaedics business increased by £69.6 million (21%) from £335.0 million in 2000 to £404.6 million in 2001. After adjusting for acquisitions and the effect of currency translation into sterling, sales grew by 18% in underlying terms.

Sales of orthopaedic products in the United States grew 22%, as a result of the performance of the new hip joint replacement products introduced in 2000, sustained growth in both existing and new knee implants and the launch of new trauma products particularly the TRIGEN nailing system. The new OXINIUM knee contributed four percentage points of sales growth.

Orthopaedics sales in the United Kingdom grew 26%, reflecting sustained growth from trauma products and the impact of new hip joint products. Sales in Germany, France and Italy grew by 10%, 11% and 9%, respectively, largely due to market share gains in knee implants.

Underlying sales growths of orthopaedic products were 3% in Japan mainly in trauma products and 31% in Australia/New Zealand following the launch of new products and the appointment of a new sales agent in New South Wales.

Operating profit

Operating profit from the orthopaedics business before goodwill amortization and exceptional items increased by £18.8 million (27%) from £69.1 million in 2000 to £87.9 million in 2001.

The profit increase occurred principally in the United States as a result of additional sales. Operating results were lower than in the prior year in both Germany and France as a result of continuing high levels of investment in selling resources. In Japan, profits increased 4%, in line with the sales increase. Profits in Australia/New Zealand increased substantially due to higher sales.

Endoscopy

Sales

Sales in the endoscopy business increased by £36.4 million (17%) from £216.4 million in 2000 to £252.8 million in 2001. After adjusting for acquisitions and the effect of currency translation into sterling, sales in the market grew by 11% in underlying terms.

Sales of endoscopy products in the United States grew 7% before acquisitions, with shavers and blades sustaining growth and joint repair products increasing sales by 11% due to the introduction of new products and market share gains. The Orthopaedic Biosystems business acquired in 2000 contributed £6 million (equivalent to 4% points of growth) in 2001.

Sales of endoscopy products grew 34% in the United Kingdom/Ireland with growth across all segments of the product range, but particularly in repair and resection. Market share gains in the repair segment produced sales increases of 15%, 17% and 10%, respectively, in Germany, France and Italy. There was 18% growth in Australia/New Zealand as a result of stronger sales in shaver and blade products and the benefit from a new sales agent in New South Wales. Repair products in Japan gained further market share resulting in sales growth of 28%.

Operating profit

Operating profit from the endoscopy business before goodwill amortization and exceptional items increased by £8.6 million (23%) from £38.2 million in 2000 to £46.8 million in 2001.

Operating profits increased by more than the rate of sales growth due to the synergy benefits of the Orthopaedic Biosystems acquisition and cost savings achieved in manufacturing. Significant profit increases were achieved in the United Kingdom and Japan arising from leverage benefits of additional sales.

Advanced wound management

Sales

Sales in the advanced wound management business increased by £64.1 million (29%) from £221.5 million in 2000 to £285.6 million in 2001. After adjusting for acquisitions and the effect of currency translation into sterling, sales grew by 11% in underlying terms.

Underlying sales growth of advanced wound management products in the United States was 9%. The acquisition of the advanced woundcare business from Beiersdorf AG in April 2001 contributed a further 4% points of sales growth and the ACTICOAT dressing, acquired in May 2001, contributed a further 5% points of sales growth. Sales of collagenase, acquired in 2000, grew by 13%.

Advanced wound management product sales grew 8% in the United Kingdom/Ireland due primarily to sales growth in hydrocellular dressing products. Sales in Germany more than doubled as a result of the advanced woundcare acquisition and sales in Italy more than doubled due to the collagenase acquisition by the Group in 2000.

Advanced wound management sales grew 34% in Australia/New Zealand, of which 12% was underlying growth led by the hydrocellular dressings product range and 22% was from sales resulting from the acquisition of the advanced wound management business in April 2001.

Operating profit

Operating profit from the advanced wound management business before goodwill amortization and exceptional items increased by £2.7 million (8%) from £33.4 million in 2000 to £36.1 million in 2001.

The profit increase was below the rate of sales growth due to the impact of residual costs remaining after separating and contributing to BSN Medical the casting and bandaging and traditional woundcare product lines which in most countries were sold and distributed by the advanced wound management business. These dis-synergies were offset partly by the benefits of profits and recoveries arising from acquisitions.

The DERMAGRAFT development program involved revenue investment of £7.0 million—in 2000 the revenue investment was £6.0 million.

Operations Contributed to the Joint Venture

Group turnover and operating profit include the results of the casting and bandaging and traditional woundcare businesses up to the date of transfer on April 1, 2001, to BSN Medical. These are captioned Operations Contributed to the Joint Venture. Sales of £35.3 million in 2001 relate to the three months of sales operations of the casting and bandaging and traditional woundcare businesses. Profit thereon was £3.6 million before £1.8 million of exceptional manufacturing rationalization costs.

Discontinued Operations

Interest Income and Expense

Interest income decreased by £1.9 million from £4.4 million in 2000 to £2.5 million in 2001. Interest expense increased by £7.6 million from £11.4 million in 2000 to £19.0 million in 2001. The Group’s share of the joint venture’s net interest expense was £0.9 million. Interest payable on currency swaps amounting to £22.2 million has been set off against interest receivable on swaps. Net interest expense therefore increased by £10.4 million to £17.4 million, essentially due to the cost of financing the excess of the special dividend paid in August 2000 over the amounts realized on business disposals in 2000 and 2001.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

The Group’s policy is to ensure that it has sufficient funding and facilities in place to meet foreseeable borrowing requirements.

At December 31, 2002, the Group held £22.5 million in cash and balances at bank. The Group had committed and uncommitted bank facilities of £493 million and £255 million, respectively. Unused bank facilities amounted to £432 million, of which £199 million were committed. Of the undrawn committed facilities, £3 million expire within one year and £196 million after two but within five years.

The principal variations in the Group’s borrowing requirements result from the timing of the bi-annual dividend payments and acquisitions and disposals of businesses.

The funding of the Group’s ongoing capital expenditure and working capital requirements has been financed through cash flow generated by business operations and, where necessary, through short-term committed and uncommitted bank facilities.

Smith & Nephew believes that its capital expenditure needs and its working capital funding for 2003, as well as its other known or expected commitments or liabilities, can be met from its existing resources and facilities.

The falls in the stock market values of the last three years have adversely affected the funding levels of both major defined benefit pension plans. Existing pension provisions and planned contribution increases in the future are considered adequate to cover the current under funding position.

In the three year period ended December 31, 2002, £326.7 million was spent on acquisitions:

		(£ million)
2000:
Collagenase		30.9
Orthopaedic Biosystems		17.3
Other		2.9

		51.1

2001:
Advanced Woundcare		30.0
Acticoat		11.7
Deferred consideration paid for collagenase		20.0
Other		7.6

		69.3

2002:
Oratec (net of cash acquired)		191.2
Dermagraft		7.8
Deferred consideration paid for collagenase		5.5
Other		1.8

		206.3

		326.7

In the three year period ended December 31, 2002, £343.3 million was raised from the sale of businesses. This comprised £209.8 million from the sale of the consumer healthcare business in June 2000, £61.7 million from the sale of the ear, nose and throat business in June 2001 and £71.8 million, from the sale of the rehabilitation business in March 2002.

On March 20, 2003, the Company and Smith & Nephew Group entered into a new credit agreement (the “Credit Agreement”) with Lloyds TSB Capital Markets and The Royal Bank of Scotland plc as arrangers, the financial institutions listed therein as original lenders (the “Original Lenders”) and The Royal Bank of Scotland as facility agent. Pursuant to the Credit Agreement, the Original Lenders have agreed to make available multi-currency term loan facilities in an aggregate principal amount of US$2.1 billion to finance the acquisition of Centerpulse and InCentive, to refinance existing debt (including the debt of Centerpulse) and for general corporate purposes, including working capital requirements. It is a requirement of the Credit Agreement that the Company’s existing facilities of £250,000,000 and US$225,000,000 dated June 28, 2000 and US$300,000,000 dated February 14, 2002 are repaid in full and cancelled. The facility will be guaranteed by Smith & Nephew Group, Smith & Nephew plc, Smith & Nephew, Inc., T.J. Smith & Nephew Limited and Smith & Nephew JV (Holdings) GmbH.

Operating cash flow before outgoings on rationalization, divestment and acquisition integration was £142.5 million, a 72% conversion of operating profit before goodwill amortization and exceptional items. Net cash flow and movement in net borrowings during 2002 were:

	(£ million)
Operating cash flow	142.5
Rationalization, divestment and integration	(19.3	)
Joint venture	9.6
Interest, tax and dividends	(106.0	)
Disposals	71.8
Acquisitions	(206.3	)
Issues of share capital	6.1

Net cash flow	(101.6	)
Exchange adjustments	68.2
Opening net borrowings	(243.5	)

Closing net borrowings	(276.9	)

The Group’s net borrowings increased by £299.2 million from net cash of £22.3 million at the beginning of 2000 to £276.9 million at the end of 2002. Translation of foreign currency net borrowings into sterling has decreased net borrowings by £29.5 million in the three year period ended December 31, 2002.

Further information regarding borrowings at December 31, 2002 is set out in Note 19 of the Notes to the Financial Statements. The Group complies with all of its borrowing covenants. The Group believes that none of these covenants represents a restriction on funding or investment policy for the foreseeable future.

At December 31, 2002, £4.3 million of capital expenditure had been contracted for. The purposes of the capital expenditure are the replacement of old equipment and the acquisition of additional new buildings and equipment.

EXCHANGE AND INTEREST RATE RISK, AND FINANCIAL INSTRUMENTS

The Board of Directors of the Company has established a set of policies to manage funding, currency and interest rate risks. The Group only uses derivative financial instruments to manage the financial risks associated with underlying business activities and their financing.

Interest Rate Risk

The Group uses simple floating to fixed rate contract interest rate swaps to meet its objective of protecting borrowing costs and differentials between borrowing and deposit rates within parameters set by the Board. Interest rate swaps are accounted for as hedges, as such changes in fair values resulting from changes to market rates are not recognized in the Group balance sheet and do not affect reported profits. The cash flow effects of interest rate swaps match cash flows on the underlying instruments such that there is no net cash flow effect from movements in market interest rates.

If the Group had not transacted interest rate swaps to hedge its interest rate risk, based upon the net debt position at December 31, 2002, an increase in short-term interest rates across all currencies by one percentage point would increase the Group’s annual net interest payable by £2.7 million. The Group’s financial assets and liabilities are principally at floating interest rates and thus their fair values are not directly affected by movements in market rates of interest.

Foreign Exchange Exposure

The Group’s policy is to protect shareholders’ funds by matching foreign currency assets, including acquisition goodwill, with foreign currency liabilities wherever practicable. These liabilities take the form of either borrowings or currency swaps.

Foreign exchange variations affect trading results in two ways. First on translation of overseas sales and profits into sterling and secondly, the currency cost of purchases by Group companies of finished products and raw materials. The principal flows of currency are purchases of US dollars and UK sterling from euros, Japanese yen and Canadian and Australian dollars, as well as cross purchases between the United States and the United Kingdom.

The Group partly mitigates the translational impact on profits through the interest arising on foreign currency borrowings or swaps. The impact of currency movements on the cost of purchases is partly mitigated by the use of forward foreign exchange contracts.

Had the Group not transacted forward foreign exchange contracts to hedge transactional exposure and if sterling were to have weakened on average over the year by 10% against all other currencies, Smith & Nephew’s profit before taxation in 2002 would have increased by £23 million. If the US dollar were to have weakened on average over the year by 10% against all other currencies, profit before taxation in 2002 would not have changed materially.

Financial Instruments

The Group’s financial instruments are subject to changes in fair values as reported in the Group balance sheet as a result of changes in market rates of exchange. All financial instruments denominated in currencies other than sterling hedge foreign currency assets. As a result, changes in fair values of financial instruments do not affect the Group’s profit before taxation.

The Group limits exposure to credit risk on counterparties used for financial instruments through a system of internal credit limits which, with certain minor exceptions due to local market conditions, require counterparties to have a minimum “A” rating from the major ratings agencies. The financial exposure of a counterparty is determined as the total of cash and deposits, plus the risk on derivative instruments, assessed as the fair value of the instrument plus a risk element based on the nominal value and the historic volatility of the market value of the instrument. Smith & Nephew does not anticipate non-performance of counterparties and believes it is not subject to material concentration of credit risk.

Group borrowings take advantage of short-term interest rates. The Group uses interest rate swaps to protect borrowing costs and the differentials between borrowing and deposit rates.

At December 31, 2002, the Group held sterling interest bearing assets of £581 million on which interest has been fixed on £503 million at 5.1% for 2003 and £103 million at 4.8% for 2004, a weighted average of 5.1% for a weighted average period of one year. The remainder of its sterling interest bearing assets were cash balances held on short-term deposits at floating rates. The Group also held £22 million of foreign currency interest bearing assets as cash or on short-term deposit at floating rates.

The Group’s interest bearing liabilities at December 31, 2002 included £657 million of US dollars and £137 million of euros on which interest has been fixed for one year on £563 million of US dollars and £100 million of euros at weighted average rates of 3.8% and 3.4%, respectively. Interest has also been fixed on £112 million of US Dollars for 2004 at 3.0% and on £26 million of euros for 2004 at 4.5%. The remaining interest bearing liabilities totalled £85 million of various currencies and are at floating rates.

Foreign Exchange Transaction Exposure

The Group trades in over 90 countries and as a consequence manages £270 million of foreign currency transactions by using forward foreign exchange contracts, of which the major transaction flow is euros into US dollars. The Group’s policy is for firm commitments to be fully covered and forecasts to be covered between 50% and 90% for up to one year, and for operating units not to hold unhedged monetary assets or liabilities other than in their functional operating currencies.

RESEARCH AND DEVELOPMENT; INTELLECTUAL PROPERTY

Research and Development

The Group’s R&D is directed towards orthopaedics, endoscopy and advanced wound management. The Group’s expenditures on R&D amounted to £61 million in 2002 (2001—£51 million, 2000—£46 million), representing 5.5% of sales revenues.

The Group’s principal research facility is located in York, England. The Group’s research program seeks to underpin the longer term technology requirements for its businesses and to provide a flow of innovative product concepts.

Product development programs are carried out at the Group’s principal manufacturing locations, notably in Memphis, Tennessee (orthopaedics), Andover and Mansfield, Massachusetts (endoscopy) and Hull, England

and La Jolla, California (advanced wound management). In-house research is supplemented by work performed by academic institutions and other external research organizations principally in the United Kingdom and the United States.

Intellectual Property

Management believes that the Group’s active policy concerning intellectual property rights promotes innovation in its businesses. Smith & Nephew has a policy of protecting, with patents, the results of the R&D carried out throughout the Group. Patents have been obtained for a wide range of products, including those in the fields of advanced wound management, orthopedic and endoscopic technologies. Patent protection for Group products is routinely sought in the Group’s principal markets. Currently, the Group’s patent portfolio stands at over 2,450 existing patents and patent applications.

Smith & Nephew also has a policy of protecting the Group’s products in the markets in which they are sold by registering trade marks as soon as possible under local laws. The Group vigorously protects its trade marks against infringement and currently is not aware of any significant infringement of its trade mark registrations. The present trade mark portfolio of the Group consists of over 4,200 trade marks and design rights.

In addition to maintaining a policy of protecting its market position by the filing and enforcement of patents and trademarks, Smith & Nephew has a policy of opposing third party patents and trademarks in those areas that might conflict with the Group’s business interests.

In the ordinary course of its business, the Group enters into a number of licensing arrangements with respect to its products. None of these arrangements individually is considered material to the operations and the financial results of the Group.

TREND INFORMATION

Additional sales of approximately £10 million are expected to arise from the effect of the ownership of ORATEC for 12 months in 2003 compared with 9 months in 2002.

The effect in 2003, of the divestiture of the rehabilitation business will be a reduction in sales of £26 million and a reduction in operating profit of £2 million when compared with 2002.

The effect of the acquisition of DERMAGRAFT in November 2002, will be to consolidate 100% of operating profits/losses in 2003 compared with 50% of losses for 11 months and 100% of losses for one month in 2002.

A significant external influence on Group sales and profits in 2003 will be the translational effects of currency to the extent that rates of exchange differ from those in year 2002.

A further influence on profit and margin trends in 2003 will be the transactional effects of currency to the extent that rates of exchange differ from those in 2002.

The falls in stock market values of the last three years have adversely affected the funding levels of the Group’s major defined benefit pension plans giving rise to combined net deficits estimated at £80 million. The deficit is to be funded over future working lives which will adversely impact pension expense and operating cash flow over that period.

As described above under “Item 4—Information on the Company—History and Development of the Company—Recent Developments”, on March 20, 2003, the Company and Smith & Nephew Group entered into the Combination Agreement and the InCentive Agreement in connection with the planned acquisition of all the outstanding shares of Centerpulse. For the year ended December 31, 2002, Centerpulse reported sales of CHF 1,241 million and operating profit before goodwill amortization and exceptional items of CHF 228 million for continuing operations.

Completion of the planned transaction will result in Smith & Nephew Group being the global number three, by market share, in the orthopaedics sector. Management believes that completion of the transaction will bring together complementary geographic fit and product ranges and develop more rapidly the technological capabilities of the two businesses.

Management believes that completion of the transaction will generate significant long-term value through the combined product base of both companies, customer network and scale-related benefits.

ITEM 6—DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

DIRECTORS AND SENIOR MANAGEMENT

The Board of Directors of Smith & Nephew is responsible for the strategic direction, policies and overall management of the Group. The Board of Smith & Nephew currently comprises nine Directors of whom two are Executive Directors and seven of whom are independent Non-Executive Directors. There is provision for a quorum of not fewer than two in number.

The Board of Directors of Smith & Nephew as at April 7, 2003 comprised:

	Position	Initially elected or appointed	Date of next reappointment
Dudley G. Eustace	Non-Executive Chairman	November 10, 1999	2003
Christopher J. O’Donnell	Executive Director, Chief Executive	September 1, 1992	2004
Peter Hooley	Executive Director (responsible for Finance and Information Technology)	April 2, 1991	2003
Sir Timothy Lankester	Non-Executive Director	June 1, 1996	—
Dr. Rolf W. H. Stomberg	Non-Executive Director	January 1, 1998	2004
Warren D. Knowlton	Non-Executive Director	November 1, 2000	2004
Richard De Schutter	Non-Executive Director	January 1, 2001	2004
Brian Larcombe	Non-Executive Director	March 1, 2002	2005
Dr. Pamela J. Kirby	Non-Executive Director	March 1, 2002	2005

The Chief Executive of Smith & Nephew and other senior executives are responsible for the day-to-day management of the Group. The Group’s Executive Committee (“GEC”), which comprises the Executive Directors and certain other senior executives of Smith & Nephew (the “Executive Officers”), assists the Chief Executive in the management of the business. The following are Executive Officers of Smith & Nephew and all, apart from the Company Secretary, are members of the GEC:

	Position	Date of appointment
James L. Dick	President, Advanced Wound Management	January 1, 1999
Peter W. Huntley	Group Director, Strategy and Business Development	April 1, 1998
David Illingworth	President, Orthopaedics	May 1, 2002
James A. Ralston	Chief Legal Officer	February 1, 2002
Ronald M. Sparks	President, Endoscopy	January 1, 1999
Dr. Alan Suggett	Group Director, Technology	January 1, 1986
James Taylor	Group Director, Indirect Markets	June 1, 2000
Paul M. Williams	Group Director, Human Resources	December 1, 1998
Paul R. Chambers	Company Secretary	April 8, 2002

Under Smith & Nephew’s Articles of Association, any Director who has been appointed by the Board of Directors since the previous Annual General Meeting of shareholders, either to fill a casual vacancy or as an additional Director, holds office only until the next Annual General Meeting and then shall be eligible for election by the shareholders. The other Directors shall retire and be eligible for re-appointment at the third annual general meeting after the meeting at which they were last re-appointed. The Directors are subject to removal with or without cause by the Board of Directors or the shareholders. Executive Officers serve at the discretion of the Board of Directors.

All directors are subject to re-election every three years and, in accordance with the Articles of Association, Dudley Eustace and Peter Hooley retire by rotation and, being eligible offer themselves for re-election at the Annual General Meeting to be held on April 29, 2003. Sir Timothy Lankester will be retiring at the Annual General Meeting but will not be offering himself for re-election.

None of the Directors or Executive Officers has a family relationship with any other Director or Executive Officer.

Ages of and Appointments held by Directors and Executive Officers

Directors

Dudley G. Eustace, Chairman, age 66, was appointed Deputy Chairman in 1999 and Chairman in January 2000. Chairman of the Nominations Committee. He is the non-executive Chairman of Sendo Holdings plc and a non-executive director of KLM Royal Dutch Airlines NV, Aegon NV, Hagenmeyer NV, Royal KPN NV and Sonae.Com SGPS.

Christopher J. O’Donnell, Chief Executive, age 56. He joined the Group in 1988 and was appointed a director in 1992. He was appointed Chief Executive in 1997. He is a non-executive director of BOC Group Plc.

Peter Hooley, Finance Director, age 56, joined the Group and was appointed a director in 1991. He is a non-executive director of Cobham plc.

Dr. Pamela J. Kirby, age 49, appointed a director in March 2002. She is Chief Executive Officer of Quintiles Transnational Corporation.

Warren D. Knowlton, age 56, appointed a director in November 2000. Chairman of the Audit Committee. He is Group Chief Executive of Morgan Crucible Plc.

Sir Timothy Lankester, age 60, a director since June 1996. He is president of Corpus Christi College, Oxford. He is also an independent director of the London Metal Exchange and Deputy Chairman of the British Council.

Brian Larcombe, age 49, appointed a director in March 2002. He is Chief Executive of 3i Group plc.

Richard De Schutter, age 62, appointed a director in January 2001. He is a non-executive director of General Binding Corporation, ING Americas, Varian Inc, Incyte Genomics and Med/Pointe Pharmaceuticals.

Dr. Rolf W. H. Stomberg, age 62, a director since 1998. He is senior independent director and Chairman of the Remuneration Committee. He is Chairman of Management Consulting Group plc and a non-executive director of Scania AB, Stinnes AG, Reed Elsevier plc, Cordiant Communications plc, TPG Group Plc, Hoyer GmbH and Deutsche BP AG.

Executive Officers

James L. Dick, age 50, President—Advanced Wound Management. He joined the Group in 1977 and was appointed to the GEC in 1999.

Peter W. Huntley, age 42, Group Director Strategy and Business Development. He joined the Group and was appointed to the GEC in 1998.

David Illingworth, age 49, President—Orthopaedics. He joined the Group and was appointed to the GEC in 2002.

James A. Ralston, age 56, Chief Legal Officer. He joined the Group in 1999 and was appointed to the GEC in 2002.

James Taylor, age 46, Group Director Indirect Markets. He joined the Group and was appointed to the GEC in 2000.

Ronald M. Sparks, age 47, President—Endoscopy. He joined the Group in 1983 and was appointed to the GEC in 1999.

Dr. Alan Suggett, age 59, Group Director of Technology. He joined the Group in 1982 and was appointed to the GEC in 1986.

Paul M. Williams, age 56, Group Director Human Resources. He joined the Group and was appointed to the GEC in 1998.

Company Secretary

Paul R. Chambers, age 58. He joined the Group in 1994 and was appointed Company Secretary in 2002.

COMPENSATION

Directors’ Emoluments and Pensions

	Salaries and fees	Benefits	Bonus	Total emoluments excluding pension entitlements	Pension entitlements	Total including pension entitlements 2002	Total excluding pension entitlements 2001	Total including pension entitlements 2001
	(£ thousands)
Chairman (non-executive):
Dudley G. Eustace	170	—	—	170	—	170	170	170

Executive Directors:
Christopher J. O’Donnell	472	22	362	856	34	890	770	790
Peter Hooley	280	19	212	511	72	583	484	545

Non-executive Directors:
Sir Timothy Lankester	30	—	—	30	—	30	30	30
Dr. Rolf W. H. Stomberg	30	—	—	30	—	30	30	30
Warren D. Knowlton	30	—	—	30	—	30	30	30
Richard De Schutter	30	—	—	30	—	30	30	30
Dr. Pamela J. Kirby (from March 1, 2002)	25	—	—	25	—	25	—	—
Brian Larcombe (from March 1, 2002)	25	—	—	25	—	25	—	—
Sir Anthony Cleaver (to Feb. 28, 2002)	5	—	—	5	—	5	30	30
Sir Brian Pearse (to Feb. 28, 2002)	5	—	—	5	—	5	30	30

	1,102	41	574	1,717	106	1,823	1,604	1,685

Dudley G. Eustace’s annual fee of £170,000 includes a non-executive director’s fee of £30,000. For Christopher J. O’Donnell, 58% of total remuneration excluding pension entitlement was base salary and benefits and 42% related to Company performance. For Peter Hooley, 59% was base salary and benefits and 41% related to Company performance.

Directors’ Share Options

	Options Jan 1, 2002		Granted (during the year)		Exercised	Exercise price	Market price at date of exercise	Profit on exercise	Options Dec 31, 2002	Average exercise price	Range of exercisable dates of options held at Dec 31, 2002
	(Number)		(Number)		(Number)	(p)	(p)	(£)	(Number)	(p)	(Date)
Christopher J. O’Donnell	170,000	(1)	—		—	—	—	—	170,000	187.0	8/97 - 9/06
	—	(2)	3,192	*	—	—	—	—	3,192	296.0	11/05 - 4/06
	161,263	(3)	183,040		—	—	—	—	344,303	—	2/01 - 4/09

	331,263		186,232		—	—	—	—	517,495	—	8/1997 - 4/2009

Peter Hooley	317,500	(1)	—		90,000	168.0	403.5	211,950	227,500	158.0	8/96 - 9/06
	3,349	(2)	—		—	—	—	—	3,349	289.0	11/04 - 4/05
	102,874	(3)	116,959		—	—	—	—	219,833	—	2/01 - 4/09

	423,723		116,959		90,000	168.0	403.5	211,950	450,682	—	8/1996 - 4/2009

options granted on Sept 25, 2002 at 296p

(1)

Options granted under Executive Share Option Plans.

(2)

Sharesave options.

(3)

Nil-cost options acquired through the vesting of LTIP awards.

The range in the market price of the Company’s Ordinary Shares during the year was 305p to 430p and the market price at December 31, 2002 was 380.5p. Exercise prices of outstanding options at December 31, 2002 were below 380.5p. The total profit on exercise of options during the year was £211,950 as set out above (2001—£197,542: Christopher J. O’Donnell £22,171, Peter Hooley £175,371).

Directors’ Interests

Beneficial interests of the Directors in the Ordinary Shares of the Company are as follows:

	December 31, 2002		January 1, 2002
	Shares	Options	Shares	Options
	(Number)
Dudley G. Eustace	49,679	—	40,909	—
Christopher J. O’Donnell	122,136	517,495	120,703	331,263
Peter Hooley	111,571	450,682	58,789	423,723
Sir Timothy Lankester	6,096	—	6,035	—
Brian Larcombe	—	—	—	—
Dr. Pamela J. Kirby	—	—	—	—
Dr. Rolf W. H. Stomberg	6,945	—	6,864	—
Warren D. Knowlton	12,501	—	7,501	—
Richard De Schutter	200,000	—	100,000	—

On February 7, 2003, Christopher J. O’Donnell became entitled to 155,065 Ordinary Shares and Peter Hooley 96,916 Ordinary Shares in respect of the 100% vesting of the 2000 long-term incentive plan. On April 4, 2003 these Shares were acquired in the form of nil-cost share options. There were no other changes in the interests of Directors between December 31, 2002 and April 7, 2003.

The register of directors’ interests, which is open to inspection at the Company’s registered office, contains full details of Directors’ shareholdings and share options.

Remuneration Policy

The Remuneration Committee policy for this and future years is to ensure that remuneration is sufficiently competitive to attract, retain and motivate Executive Directors and GEC members of a caliber that meets the Group’s needs to achieve its performance against financial objectives and relevant competitors’ practice. Remuneration throughout the Group is designed to be competitive in the country of employment.

The principal components of remuneration, which will remain in operation for the next financial year and thereafter, for Executive Directors and the GEC members are: basic salary and benefits, performance related bonus, long term incentives and pensions.

Basic Salary and Benefits

Basic salary reflects the responsibility of the job and individual performance. The Company also provides private healthcare coverage and a company car or allowance.

Performance-Related Bonus

For Executive Directors, the Company operates an annual bonus scheme, 75% of which is based on annual growth in adjusted basic earnings per share after deducting goodwill amortization and 25% of which is based on return on operating capital employed. The scheme is designed to encourage performance which the Remuneration Committee considers would contribute most to increasing shareholder value. Achievement of targets should produce a bonus of 30% of annual salary with a maximum of 100% for over achievement that demonstrates a step change in Group performance. Bonuses are not pensionable.

For members of the GEC with corporate responsibilities, the annual bonus plan is linked to earnings per share, return on capital employed and personal objectives. For those members with specific business unit responsibilities, targets are linked to earnings per share, sales, profit and return on capital employed of their respective business unit.

Long-term incentives

The Company operates a long-term incentive plan (“LTIP”) for Executive Directors and members of the GEC to motivate and reward these key executives to significantly enhance the value of the Company. Under this shares are transferred to participants depending on the Company’s performance in relation to a group of 41 UK listed manufacturing companies with substantial international activities, using total shareholder return (TSR) over a three-year period as the prime measure. The performance conditions were identified as those which represented a fair measure of the Company’s performance and would reflect increase in shareholder value. The maximum value of shares awarded for Executive Directors will not exceed the participants’ current annual rate of basic salary at the

date the award is granted, and for members of the GEC it will not exceed 75% of their current rate of basic salary. Shares will only be transferred to the participants if the Company’s TSR performance is at or above the median performance of the comparator companies, and growth in the Company’s adjusted earnings per share after deducting goodwill amortization exceeds growth in the United Kingdom Retail Price Index (“RPI”) in the same three-year period. At the median level, 25% of the award shares will vest. If the Company’s performance is in the top quartile, all the shares will vest. For performance between the median and the top quartile, the proportion of shares vesting will vary on a straight-line basis. The Company’s TSR performance and its performance relative to the comparator group is independently monitored by Monks Partnership (PwC).

The comparator group comprises the following companies:

Aga Foodservice Group	Coats	Johnson Matthey	Rolls-Royce
AstraZeneca Group	Cookson Group	Laird Group	Scapa Group
BAE Systems	Croda International	Low & Bonar	Spirax-Sarco Engineering
Balfour Beatty	De La Rue	Marconi	Spirent
BBA Group	Delta	Morgan Crucible Company	Tate & Lyle
BOC Group	Elementis	Novar	Tomkins
BPB Industries	FKI	Pilkington	TT Electronics
British Vita	GKN	Reckitt Benckiser	Unilever (UK)
Bunzl	Halma	REXAM	Weir Group
Cadbury Schweppes	ICI	RMC Group
Charter	IMI

The maximum number of shares to be allocated to each Executive Director and members of GEC under the LTIP, all for nil consideration, are:

	Maximum number of shares awarded at Jan 1, 2002	Awards during the year	Market price	Vested award	Market price at date of award March 8, 1999	Market price at date of vesting	Number of shares awarded at Dec 31, 2002	Latest performance period
	(number)		(p)	(number)	(p)	(p)
Christopher J. O’Donnell	448,649	120,879	409.5	183,040	171.0	403.5	386,488	12.31.2004
Peter Hooley	282,965	70,818	409.5	116,959	171.0	403.5	236,824	12.31.2004
Peter W. Huntley	143,529	32,051	409.5	60,526	171.0	403.5	115,054	12.31.2004
Dr. Alan Suggett	122,927	27,197	409.5	50,438	171.0	403.5	99,686	12.31.2004
James L. Dick	83,279	32,051	409.5	—	—	—	115,330	12.31.2004
Ronald M. Sparks	116,043	45,050	409.5	—	—	—	161,093	12.31.2004
Paul M. Williams	74,702	28,205	409.5	—	—	—	102,907	12.31.2004
James A. Ralston	—	38,495	409.5	—	—	—	38,495	12.31.2004
James Taylor	—	31,135	409.5	—	—	—	31,135	12.31.2004

For the three year plan period commencing 2000, the Company’s TSR of 147.36% was ranked first in the comparator group and the earnings per share performance criterion was met, enabling the plan participants to be eligible for 100% of the shares conditionally awarded in 2000.

Share options

Executive Directors were last granted options under executive share option schemes in 1996, which were not subject to performance conditions of exercise. The exercise of options granted to members of the GEC between 1997 and 2000 is subject to growth in adjusted basic earnings per share after deducting goodwill amortization of not less than RPI plus 2% per annum in any period of three consecutive years. Since 2001, under the Smith & Nephew 2001 UK Approved Share Option Plan and the Smith & Nephew 2001 UK Unapproved Share Option Plan (“UK Plans”), the exercise of options is subject to adjusted basic earnings per share growth after deducting goodwill amortization of not less than RPI plus 3% per annum, on average, in a performance period of three consecutive years. In the event the performance target is not met by the end of the third year, the performance period is extended to four years. If it has not been met after four years, the performance period is extended to five years, but if it has still not been met at the end of the fifth year, the options will lapse. Performance conditions were selected to be in line with market practice at the time. Options granted under the Smith & Nephew 2001 US Share Plan (“US Plan”), in line with market practice, are not subject to performance targets but are exercisable cumulatively up to a maximum of 10% after one year, 30% after two years, 60% after three years and the remaining balance after four years. Since 2002, members of the GEC are not granted share options except on

appointment. Share options are not offered at a discount. UK Executive Directors are eligible to participate in the Smith & Nephew Employee Share Option Scheme.

Pensions

Executive Directors have a normal retirement age of 62 and participate in the defined benefit Smith & Nephew UK Pension Fund and UK Executive Pension Scheme, under which pension has been accrued in the year at an annual rate of one-thirtieth of final pensionable salary, up to a limit of two-thirds of final pensionable salary. Pensions in payment are guaranteed to increase by 5% per annum or inflation, if lower. The Company and the pension plan trustees have in the past granted discretionary increases, particularly at times of high inflation. Death in service cover of four times salary and spouse’s pension at the rate of two-thirds of the member’s pension are provided on death. A supplementary unfunded defined contribution arrangement partially compensates for the Inland Revenue earnings cap on final pensionable salary.

The US based Executive Officers participate in the defined benefit Smith & Nephew US Pension Plan under which their pensions have accrued at an annual rate of approximately one-sixty second of final pensionable salary, up to a limit, based on service taken into account which has not allowed Executive Officers to accrue a pension of more than 60% of final pensionable salary. The plan also provides for a spouse’s pension on death of one-half of the pension that would be received by the Executive Officer under a joint annuity with his or her spouse. Normal retirement age under the plan is 65. A supplementary defined contribution plan was used to compensate for the earnings cap imposed by the US Internal Revenue Code and to provide additional retirement benefits up to one-fiftieth of final pensonable salary and to allow for normal retirement age of 62.

	Accrued pension as at Jan 1, 2002	Increase in accrued pension excluding inflation	Accrued pension at Dec 31, 2002	Transfer value of accrued pension Jan 1, 2002	Directors’ contributions during 2002	Increase in transfer value over year less directors’ contributions	Transfer value of accrued pension at Dec 31, 2002
	(£ per annum)			(£)	(£)	(£)	(£)
Christopher J. O’Donnell	119,000	32,000	153,000	1,521,000	23,000	336,000	1,880,000
Peter Hooley	26,000	2,000	29,000	333,000	4,000	22,000	359,000

An amount of £69,000 was provided for under the supplementary unfunded defined contribution arrangement for Peter Hooley, bringing his total benefit under the plan to £319,000.

Compensation of Executive Officers

The amount of remuneration (excluding pension entitlements) paid by the Group during 2002 to Executive Officers was £3,663,000 (2001—£2,808,000). This figure includes payments under the performance related bonus plan. The increase in accrued pension benefits for Executive Officers was £338,000 (2001—£289,000).

BOARD PRACTICES

Service Contracts

Executive Directors, in line with Group policy, are appointed on contracts terminable by the Company on not more than 12 months’ notice. All new appointments are intended to have 12 month notice periods, but it is recognized that for some appointments a longer period may initially be necessary for competitive reasons, reducing to 12 months thereafter. Christopher O’Donnell, appointed to the Board of Directors in September 1992, and Peter Hooley, appointed in April 1991, have contracts terminable by the Company on not more than 12 months notice and by the Executive Director on six months’ notice. Termination of the contract by the Company would entitle the Executive Directors to 12 months’ basic salary, bonus at target of 30%, a contribution of 30% of salary to reflect the loss of pension benefits, an amount to cover other benefits and a time apportionment of the LTIP entitlement.

Non-Executive Directors do not have service contracts and are normally appointed for terms of three years terminable at will, without notice by either the Company or the director and without compensation. Their remuneration is determined by the Nominations Committee.

Audit Committee

The Audit Committee, chaired by Warren D. Knowlton, consists of independent non-executive directors Sir Timothy Lankester, Brian Larcombe, Richard De Schutter and Dr. Rolf Stomberg.

The Audit Committee monitors the operation and effectiveness of internal financial controls and ensures that the accounts meet statutory and other requirements. It selects, determines the fees and reviews the performance, independence and objectivity of the auditors. Since January 2003, all non-audit work performed by the auditors has been pre-approved by the Committee.

Code of Ethics for Senior Financial Officers

The Board of Directors has adopted a Code of Ethics for its Senior Financial Officers. There have been no waivers to any of the Code’s provisions.

Remuneration Committee

The compensation of Executive Directors and members of the GEC is determined by the Remuneration Committee. The Remuneration Committee comprises Dr. Rolf Stomberg (Chairman), Sir Timothy Lankester, Richard De Schutter and Dr. Pamela J. Kirby. Sir Brian Pearse and Sir Anthony Cleaver retired as members of the Committee on February 28, 2002. On behalf of the Board of Directors, it determines the broad policy for executive remuneration. It reviews annually the remuneration, including pension entitlements, for Executive Directors and members of the GEC, and determines the operation of and the participants in the long-term incentive plan, share option schemes and the executive bonus plan. It reviews the relationship between the remuneration of Executive Directors and that of other employees and the competitiveness of executive remuneration, using data from independent consultants on companies of similar size, technologies and international complexity. It also reviews management succession planning. The Committee is assisted by Christopher O’Donnell, the Chief Executive and Paul Williams, the Group HR Director, both of whom have advised on all aspects of the Group’s reward structures and policies. In 2002, it received information from Watson Wyatt on a broad range of remuneration issues, Towers Perrin and Hay Group on salary data and Monks Partnership on long-term incentive plan comparative group performance. All the independent consultants were appointed by the Company. Watson Wyatt also act as one of the retirement benefit consultants to the Company.

Nominations Committee

The Nominations Committee, chaired by Dudley Eustace, consists of Christopher O’Donnell and Dr. Rolf Stomberg. It oversees plans for Board of Directors succession and recommends appointments to the Board of Directors.

Disclosures Committee

The Disclosures Committee, chaired by Christopher O’Donnell, consists of Peter Hooley, Finance Director, and Angie Craig, Director of Corporate Affairs. It approves the releases of all communications to investors and to the London and New York Stock Exchanges.

Full details of the terms of reference of the Audit, Remuneration, Nominations and Disclosures Committees may be found at www.smith-nephew.com.

EMPLOYEES

Smith & Nephew had an average of 7,506 full-time equivalent employees in 2002, of whom 1,740 were located in the United Kingdom, 3,090 were located in the United States and 2,676 were located in other countries. The Group does not employ a significant number of temporary employees.

The average number of employees for the past three years broken down by activity and geographic location was:

	Years ended December 31
	2002	2001	2000
	(Number)
Orthopaedics	2,649	2,494	2,392
Endoscopy	1,677	1,449	1,419
Advanced wound management	2,951	2,621	2,479

Ongoing operations	7,277	6,564	6,290
Operations contributed to the joint venture	—	846	2,500

Continuing operations	7,277	7,410	8,790
Discontinued operations	229	516	1,645

	7,506	7,926	10,435

	Years ended December 31
	2002	2001	2000
	(Number)
United Kingdom	1,740	1,810	2,589
Continental Europe	1,279	1,281	1,549
United States	3,090	3,057	2,974
Other America	201	253	413
Africa, Asia and Australasia	1,196	1,525	2,910

	7,506	7,926	10,435

Smith & Nephew conducts a companywide employee opinion survey every two years to track and monitor employee attitudes at all locations. Response rates are very high and the general level of employee satisfaction is good. Where the Company has collective bargaining arrangements in place with labor unions, these reflect local market circumstances. The Company believes that the relationship between its operating subsidiaries and unions is satisfactory.

SHARE OWNERSHIP

The following table sets forth certain information as of April 7 2003 concerning the ownership by the Directors of the Ordinary Shares.

		Ordinary Shares of 12 ² / 9 p(i)
Dudley G. Eustace		49,679
Christopher J. O’Donnell		122,136
Peter Hooley		111,571
Sir Timothy Lankester		6,096
Dr. Rolf W. H. Stomberg		6,945
Warren D. Knowlton		12,501
Richard De Schutter		200,000
Brian Larcombe		—
Dr. Pamela J. Kirby		—

(i)

Holdings of the directors together represent less than 1% of the Ordinary Share capital of the Company.

As of April 7, 2003, Executive Officers together hold a total of 366,250 Ordinary Shares, representing less than 1% of the Ordinary Share capital of the Company.

The following table sets forth certain information regarding Ordinary Shares the subject of options. Outstanding options to subscribe for such Ordinary Shares as of April 7, 2003 by share option plan were:

	Exercisable in stages between	Exercise prices per Ordinary Share range between	Ordinary Shares the subject of options
	(Dates)	(Pence)	(Number)
Smith & Nephew 1985 Share Option Scheme(i)	2003 and 2010	143.0p and 265.0p	1,029,846
Smith & Nephew 1990 International Executive Share Option Scheme(i)	2003 and 2010	143.0p and 270.0p	7,973,260
Smith & Nephew Long Term Incentive Plan(i)	2003 and 2010	n/a (iii)	973,720
Smith & Nephew 2001 UK Approved Executive Share Option Plan(i)	2003 and 2009	360.0p and 409.5p	329,214
Smith & Nephew 2001 UK Unapproved Executive Share Option Plan(i)	2003 and 2009	326.0p and 409.5p	1,765,386
Smith & Nephew 2001 US Share Plan(i)	2003 and 2009	US$5.28 and US$5.94	3,891,600
Smith & Nephew Employee Share Option Scheme(ii)	2003 and 2007	140.4p and 289.2p	2,239,116
Smith & Nephew 1991 Overseas Employee Share Option Plan(ii)	2003 and 2007	140.4p and 289.2p	183,853
Smith & Nephew Sharesave Plan (2002)(ii)	2005 and 2008	296.0p	905,931
Smith & Nephew International Sharesave Plan (2002)(ii)	2005 and 2008	296.0p and 304.0p	677,638
Smith & Nephew Belgian Sharesave Plan (2002)(ii)	2006	357.0p	41,944
Smith & Nephew Dutch Sharesave Plan (2002)(ii)	2005 and 2008	296.0p	57,421
Smith & Nephew French Sharesave Plan (2002)(ii)	2006 and 2007	354.1p	28,025
Smith & Nephew Italian Sharesave Plan (2002)(ii)	2005 and 2008	372.7p	28,833

(i)

Together these plans are termed “Executive Schemes”.

(ii)

Together these plans are termed “Employee Schemes”.

(iii)

The right to acquire such shares is in the form of nil-cost options.

The Company operates Sharesave plans for all employees in the United Kingdom, Australia, New Zealand, South Africa, Canada, Dubai, Germany, Sweden, Spain, Portugal, Switzerland, Austria, Norway, Belgium, Italy, the Netherlands and France. Under these plans, employees are able to save up to £250 per month for between three and five years, and are given an option to acquire a set number of shares based on the amount they commit to save. The option price is set at a maximum of a 20% discount to the market price of the shares at the time the options are granted.

Employees in the United States are able to participate in the Employee Stock Purchase Plan, which gives them the opportunity to acquire shares, in the form of ADSs, at a discount of 15% (or more if the shares appreciate in value during the plan’s quarterly purchase period) to the market price, through a regular savings plan.

As at April 7, 2003, the Executive Directors and Executive Officers of Smith & Nephew held options to subscribe for the following numbers of Ordinary Shares, all of which options were granted pursuant to the above option plans (including the Smith & Nephew Long Term Incentive Plan):

	Executive Schemes	Employee Schemes
Christopher J. O’Donnell	669,368	3,192
Peter Hooley	544,249	3,349
James L. Dick	163,619	5,634
Peter W. Huntley	238,984	—
Ronald M. Sparks	167,500	—
Dr. Alan Suggett	45,000	3,159
Paul M. Williams	190,000	4,379
James Taylor	111,600	5,835
David Illingworth	100,000	—
James A. Ralston	95,000	—
Paul R. Chambers	34,500	5,738

ITEM 7 – MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

MAJOR SHAREHOLDERS

As far as is known to Smith & Nephew, the Company is not directly or indirectly owned or controlled by another corporation or by any government.

As of April 7, 2003, no people are known to Smith & Nephew to have any interest (as defined in the Companies Act 1985) in 3% or more of the Ordinary Shares, other than AXA Investment Managers (4.94%, 45,955,558 Ordinary Shares), FMR Corp & Fidelity (7.09%, 65,928,785 Ordinary Shares) and Legal & General Investment Management (3.43%, 31,890,815 Ordinary Shares).

The following table shows changes over the last three years in the percentage of the issued share capital for the Company held by major shareholders, as notified to the Company under the Companies Act 1985:

	As at December 31
	2002	2001	2000
	(%)
AXA Investment Management	4.96	5.75	6.00
FMR Corp & Fidelity	6.79	8.10	—
Sanford C Bernstein	—	—	5.52
Hermes	—	—	4.18
Scudder Threadneedle Investments Ltd	—	—	3.18

RELATED PARTY TRANSACTIONS

None of the Directors or Officers (or any relative or spouse of such person, or any relative of such spouse, who has the same address as the Director or Officer, or who is a Director or Officer of any subsidiary of Smith & Nephew) has a material interest in any contract to which the Company or any of its subsidiaries are or were a party from the beginning of fiscal year 2000 to April 7, 2003.

HOST COUNTRY SHAREHOLDERS

Details of the portion of each class of securities held in the host country (the United States) and the number of record holders in the host country are given in “Item 9—The Offer and Listing”.

ITEM 8—FINANCIAL INFORMATION

CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

Financial Statements

See “Item 18—Financial Statements”.

Legal Proceedings

Group companies are parties to various legal proceedings, which are considered to constitute ordinary and routine litigation incidental to the business conducted by the relevant subsidiary, in some of which claims for damages in substantial amounts have been asserted. The outcome of such proceedings cannot readily be foreseen, but management believes that they will not result in any material adverse effect on the financial position of the Group.

Dividends

In 2000, management changed its dividend policy as part of its strategic emphasis on making Smith & Nephew a recognized growth business. It is the Board’s intention that shareholders’ future returns will come increasingly from growth in the value of their shares and so will depend less on the dividend. The Board accordingly raised the dividend cover (the ratio of profit to dividends) to around 2.5 times in respect of ordinary dividends for 2000. In 2001, this was raised to 2.7 times and in 2002 this was 3.3 times. Management believes that this dividend will leave more cash in the business for future investment in acquisitions and organic growth, to support further improvement in shareholder value. For more information see Item 3—“Key Information—Selected Financial Data—Dividends”.

SIGNIFICANT CHANGES

Other than the events discussed in Item 5—“Operating and Financial Review and Prospects—Trend Information”, there have been no significant changes since December 31, 2002.

ITEM 9—THE OFFER AND LISTING

The principal trading market for the Ordinary Shares is the London Stock Exchange. The Ordinary Shares were listed on the New York Stock Exchange on November 16, 1999, trading in the form of ADSs evidenced by ADRs. Each ADS represents ten Ordinary Shares. The Company has a sponsored ADR facility with the Bank of New York as Depositary.

As of April 7, 2003, 1,611,874 ADSs equivalent to 16,118,740 Ordinary Shares or approximately 1.73% of the total Ordinary Shares in issue, were outstanding and were held by 20 registered holders.

As of April 7, 2003, to the knowledge of the Company, there were 27,472 registered holders of Ordinary Shares, of whom 86 had registered addresses in the United States and held a total of 350,664 Ordinary Shares (0.04% of the total issued). Because certain Ordinary Shares are registered in the names of nominees, the number of shareholders with registered addresses in the United States is not representative of the number of beneficial owners of Ordinary Shares resident in the United States.

The following table sets forth for the periods indicated the highest and lowest middle market quotations for the Ordinary Shares, as derived from the Daily Official List of the UK Listing Authority and the highest and lowest sales prices of ADSs as reported on the New York Stock Exchange composite tape.

Fiscal Year ended December 31:

	Ordinary Shares			ADSs
	High		Low	High	Low
	£		£	US$	US$
1998	1.87		1.32	—	—
1999	2.18		1.50	34.63	32.88
2000	3.30	(i)	1.57	46.13	25.13
2001	4.20		2.91	60.91	41.80
2002	4.30		3.05	64.60	47.00

Quarters in the Fiscal Year ended December 31:

	Ordinary Shares		ADSs
	High	Low	High	Low
	£	£	US$	US$
2001:
1 ^st Quarter	3.33	2.91	48.50	41.80
2 ^nd Quarter	3.69	3.15	45.00	52.90
3 ^rd Quarter	3.72	3.08	53.65	44.40
4 ^th Quarter	4.20	3.39	60.91	48.25
2002:
1 ^st Quarter	4.30	3.84	62.40	55.12
2 ^nd Quarter	4.12	3.36	60.10	50.85
3 ^rd Quarter	3.85	3.05	60.78	47.00
4 ^th Quarter	4.05	3.52	64.60	56.40
2003:
1 ^st Quarter	4.00	3.32	63.09	52.90

End of the Month:

	Ordinary Shares		ADSs
	High	Low	High	Low
	£	£	US$	US$
October 2002	4.05	3.70	64.60	58.70
November 2002	3.86	3.52	61.30	56.40
December 2002	3.98	3.66	63.50	58.15
January 2003	3.88	3.32	62.40	52.90
February 2003	3.55	3.38	58.24	55.18
March 2003	4.00	3.41	63.09	54.25
April 2003 (through April 7, 2003)	4.15	3.95	64.49	62.31

(i)

This does not include the anomalous closing share price of 386p on July 31, 2000 on the London Stock Exchange.

ITEM 10—ADDITIONAL INFORMATION

MEMORANDUM AND ARTICLES OF ASSOCIATION

The following summarizes certain material rights of holders of the Company’s ordinary shares under the material provisions of the Company’s memorandum and articles of association and English law. This summary is qualified in its entirety by reference to the Companies Act 1985 of Great Britain (the “Companies Act”) and the Company’s memorandum and articles of association. Copies of the Company’s memorandum and articles of association have been filed as exhibits to this Annual Report on Form 20-F. The 5½% cumulative preference shares have no voting rights but convey preferential rights to dividends and distribution on winding up.

The Company’s shares may be held in certificated or uncertificated form. No holder of the Company’s shares will be required to make additional contributions of capital in respect of the Company’s shares in the future.

In the following description, a “shareholder” is the person registered in the Company’s register of members as the holder of an ordinary share.

The Company is incorporated under the name “Smith & Nephew plc” and is registered in England and Wales with registered number 324357. The fourth clause of the Company’s memorandum of association provides that its objects include to carry on business as an investment holding company, to carry on all or any of the businesses of dealers in and manufacturers of surgical dressings and instruments, pharmaceutical preparations or articles, proprietary articles of all kinds, surgical and scientific apparatus and materials of all kinds and buyers and sellers of goods of all kinds. The memorandum grants to the Company a range of corporate capabilities to effect these objects.

Directors

Under the Company’s articles of association, a Director may not vote in respect of any contract, arrangement, transaction or proposal in which he, or any person connected with him, has any material interest other than by virtue of his interests in securities of, or otherwise in or through, the Company. This is subject to certain exceptions relating to proposals (a) indemnifying him in respect of obligations incurred on behalf of the Company, (b) indemnifying a third party in respect of obligations of the Company for which the Director has assumed responsibility under an indemnity or guarantee, (c) relating to an offer of securities in which he will be interested as an underwriter, (d) concerning another body corporate in which the Director is beneficially interested in less than one percent of the issued shares of any class of shares of such a body corporate, (e) relating to an employee benefit in which the director will share equally with other employees and (f) relating to any insurance that the Company is empowered to purchase for the benefit of Directors of the Company in respect of actions undertaken as Directors (or officers) of the Company.

A Director shall not vote or be counted in any quorum concerning his own appointment or terms of his appointment.

The Directors are empowered to exercise all the powers of the Company to borrow money, subject to the limitation that the aggregate amount of all monies borrowed after deducting cash and current asset investments by the Company and its subsidiaries shall not exceed an amount equal to two and one half times the Company’s consolidated share capital and aggregate reserves, but after: adjustments for the variation to share capital and aggregate reserves since the latest audited consolidated balance sheet; and deducting distributed and proposed distributions not previously provided out of profits earned prior to the date of the latest audited consolidated balance sheet, any amount attributable to non-Group shareholders in subsidiaries of the Company and any debit balance on the combined or Group profit and loss account, unless sanctioned by an ordinary resolution of the Company.

Any Director who has been appointed by the Directors since the previous Annual General Meeting of shareholders, either to fill a casual vacancy or as an additional Director, holds office only until the next Annual General Meeting and then shall be eligible for election by the shareholders. The other Directors shall retire and be eligible for re-appointment at the third annual general meeting after the meeting at which they were last re-appointed. The Directors are subject to removal with or without cause by the Board or the Shareholders. Any director attaining 70 years of age shall retire at the next Annual General Meeting. Such a Director may be re-appointed but shall retire (and be eligible for reappointment) at the next Annual General Meeting.

Directors are not required to hold any shares of the Company by way of qualification.

Rights Attaching to Shares

Under English law, dividends are payable on the Company’s ordinary shares only out of profits available for distribution, as determined in accordance with accounting principles generally accepted in the United Kingdom and by the Companies Act. Holders of the Company’s ordinary shares are entitled to receive such dividends as may be declared by the shareholders in general meeting, rateable according to the amounts paid up on such shares, provided that the dividend cannot exceed the amount recommended by the Directors.

The Company’s Board of Directors may pay shareholders such interim dividends as appear to them to be justified by the Company’s financial position. If authorized by an ordinary resolution of the shareholders, the Board may also direct payment of a dividend in whole or in part by the distribution of specific assets (and in particular of paid up shares or debentures of the Company).

Any dividend unclaimed after 12 years from the date the dividend was declared, or became due for payment, will be forfeited and will revert to the Company.

Voting Rights

Voting at any general meeting of shareholders is by a show of hands unless a poll, which is a written vote, is duly demanded. On a show of hands, every shareholder who is present in person or by proxy at a general meeting has one vote regardless of the number of shares held. On a poll, every shareholder who is present in person or by proxy has one vote for every 12 ² / ₉ pence in nominal amount of the shares held by that shareholder. A poll may be demanded by any of the following:

•

the chairman of the meeting;

•

at least five shareholders entitled to vote at the meeting;

•

any shareholder or shareholders representing in the aggregate not less than one-tenth of the total voting rights of all shareholders entitled to vote at the meeting; or

•

any shareholder or shareholders holding shares conferring a right to vote at the meeting on which there have been paid-up sums in aggregate equal to not less than one-tenth of the total sum paid up on all the shares conferring that right.

A proxy form will be treated as giving the proxy the authority to demand a poll, or to join others in demanding one.

The necessary quorum for a general meeting is two shareholders present in person carrying a right to vote upon the business to be transacted.

Matters are transacted at general meetings of the Company by the processing and passing of resolutions of which there are three kinds:

•

an ordinary resolution, which includes resolutions for the election of Directors, the approval of financial statements, the cumulative annual payment of dividends, the appointment of auditors, the increase of authorized share capital or the grant of authority to allot shares;

•

a special resolution, which includes resolutions amending the Company’s memorandum and articles of association, disapplying statutory pre-emption rights or changing the Company’s name; and

•

an extraordinary resolution, which includes resolutions modifying the rights of any class of the Company’s shares at a meeting of the holders of such class or relating to certain matters concerning the Company’s winding up.

An ordinary resolution requires the affirmative vote of a majority of the votes of those persons voting at a meeting at which there is a quorum.

Special and extraordinary resolutions require the affirmative vote of not less than three-fourths of the persons voting at a meeting at which there is a quorum.

In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meeting is entitled to cast the deciding vote in addition to any other vote he may have.

Annual General Meetings must be convened upon advance written notice of 21 days. Other meetings must be convened upon advance written notice of 21 days for the passing of a special resolution and 14 days for any other resolution, depending on the nature of the business to be transacted. The days of delivery or receipt of notice are not included. The notice must specify the nature of the business to be transacted. Meetings are convened by the Board of Directors. Members with 10% of the Ordinary Share capital of the Company may requisition the Board to convene a meeting.

Variation of Rights

If, at any time, the Company’s share capital is divided into different classes of shares, the rights attached to any class may be varied, subject to the provisions of the Companies Act, with the consent in writing of holders of three-fourths in value of the shares of that class or upon the adoption of an extraordinary resolution passed at a separate meeting of the holders of the shares of that class. At every such separate meeting, all of the provisions of the articles of association relating to proceedings at an Extraordinary General Meeting apply, except that the quorum is to be the number of persons (which must be two or more) who hold or represent by proxy not less than one-third in nominal value of the issued shares of the class and at any such meeting a poll may be demanded in writing by any five persons who hold or represent by proxy not less than one fortieth of the nominal value of the shares of that class.

Rights in a Winding-up

Except as the Company’s shareholders have agreed or may otherwise agree, upon the Company’s winding up, the balance of assets available for distribution:

•

after the payment of all creditors including certain preferential creditors, whether statutorily preferred creditors or normal creditors; and

•

subject to any special rights attaching to any other class of shares;

is to be distributed among the holders of ordinary shares according to the amounts paid-up on the shares held by them. This distribution is generally to be made in cash. A liquidator may, however, upon the adoption of any extraordinary resolution of the shareholders and any other sanction required by law, divide among the shareholders the whole or any part of the Company’s assets in kind.

Limitations on Voting and Shareholding

There are no limitations imposed by English law or the Company’s memorandum or articles of association on the right of non-residents or foreign persons to hold or vote the Company’s ordinary shares or ADSs, other than the limitations that would generally apply to all of the Company’s shareholders.

MATERIAL CONTRACTS

As detailed in “Item 4—Information on the Company—History and Development of the Company—Recent Developments”, Smith & Nephew acquired ORATEC Interventions, Inc. in March 2002 pursuant to a merger agreement (see exhibits to this Form 20-F).

As described above under “Item 4—Information on the Company—History and Development of the Company—Recent Developments”, the Company and Smith & Nephew Group entered into the Combination Agreement and the InCentive Agreement in connection with the planned acquisition of all the outstanding shares of Centerpulse. As described above under “Item 5—Operating and Financial Review and Prospects-Liquidity,” the Company and Smith & Nephew Group also entered into the Credit Agreement. Copies of the Combination Agreement, the InCentive Agreement and the Credit Agreement are filed as exhibits to this Form 20-F.

EXCHANGE CONTROLS

There are no UK governmental laws, decrees or regulations that restrict the export or import of capital or that affect the payment of dividends, interest or other payments to non-resident holders of Smith & Nephew’s securities, except for certain restrictions imposed from time to time by Her Majesty’s Treasury of the United Kingdom pursuant to legislation, such as the United Nations Act 1946 and the Emergency Laws Act 1964, against the government or residents of certain countries.

There are no limitations, either under the laws of the United Kingdom or under the Articles of Association of Smith & Nephew, restricting the right of non-UK residents to hold or to exercise voting rights in respect of Ordinary Shares, except that where any overseas shareholder has not provided to the Company a UK address for the service of notices, the Company is under no obligation to send any notice or other document to an overseas address. It is, however, the current practice of the Company to send every notice or other document to all shareholders regardless of the country recorded in the register of members, with the exception of details of the Company’s dividend re-investment plan, which are not sent to shareholders with recorded addresses in Canada.

TAXATION

The comments below are of a general and summary nature and are based on the Company’s understanding of certain aspects of current UK and US federal law and practice relevant to the ADSs and Ordinary Shares not in ADS form. The comments address certain US and UK tax consequences to a person who is the beneficial owner of ADSs or Ordinary Shares and who, for US federal income tax purposes, is a US citizen or resident, a corporation or partnership created or organized in or under the laws of the United States, or an estate or trust treated as a United States person under Section 7701(a)(30) of the US Internal Revenue Code (a “US Holder”). The comments set out below do not purport to address all material tax consequences of the ownership of ADSs or Ordinary Shares and in particular do not deal with the position of shareholders who directly or indirectly own 10% or more of the issued Ordinary Shares. Special rules apply to persons operating clearance and/or depository services and those whose holding of ADSs or Ordinary Shares is effectively connected with or pertains to either (i) a permanent establishment in the United Kingdom through which the US Holder carries on a business in the United Kingdom, or (ii) a fixed base from which the US Holder performs independent personal services in the United Kingdom. Special rules also apply to certain investors such as tax-exempt entities, insurance companies, broker-dealers, traders in securities that elect to mark to market, US Holders holding ADSs or Ordinary Shares as part of a hedging or conversion transaction or whose functional currency is other than the US dollar and investors liable for alternative minimum tax. In addition, the comments below do not relate to state, local or non-US (other than UK) taxes. The summary deals only with US Holders who hold ADSs or Ordinary Shares as capital assets. The summary is based on the Company’s understanding of current US and UK law and practice and advice received from the Company’s UK and US tax advisors. US Holders are recommended to consult their own tax advisors as to the particular consequences to them of the ownership of ADSs or Ordinary Shares.

For the purpose of the US/UK Double Taxation Treaty and US domestic tax law US Holders of ADSs will be treated as beneficial holders of the Ordinary Shares represented by the ADSs.

Taxation Of Dividends In The United Kingdom

Smith & Nephew is not obliged to pay UK advance corporation tax (“ACT”) on dividends paid on or after April 6, 1999. An individual UK shareholder is treated as receiving taxable income equal to the dividend plus a tax credit of one-ninth of the cash dividend received. This tax credit may be set against the individual’s overall UK income tax liability, but in general the tax credit will not be repaid. Under the provisions of the US/UK Double Taxation Treaty, while a UK individual is entitled to a tax credit in respect of dividends paid by a UK company, a US Holder will be entitled to a repayment from the UK Inland Revenue of the tax credit less an amount not exceeding 15% of the aggregate of the cash dividend and the tax credit. As 15% of the aggregate of the cash dividend and the tax credit would exceed the tax credit due, no repayment of the tax credit will be available from the UK Inland Revenue for dividends paid on or after April 6, 1999.

Taxation Of Dividends In The United States

Dividends will be treated as ordinary income to a US Holder when the dividend is received to the extent paid out of earnings and profits as determined for US federal income tax purposes. Dividends will not be eligible for the dividends-received deduction generally allowed to US corporations in respect of dividends received from other US corporations. The amount of the dividend included in taxable income is the US dollar value of the dividend, converted using the exchange rate on the date of receipt. Distributions in excess of earnings and profits, as determined for US federal income tax purposes, are generally treated as a return of capital (and a reduction of tax

basis for US federal income tax purposes) to the extent of the US Holder’s investment in the ADSs and Ordinary Shares and thereafter realized as a capital gain. Conversion by a US Holder of sterling received as a distribution from Smith & Nephew into US dollars may result in ordinary income to the US Holder to the extent attributable to fluctuations in foreign currency exchange rates between the date of receipt and the date of conversion.

A US Holder may elect to be treated as receiving the UK tax credit in respect of dividends paid by a UK company without affirmatively making a claim to the United Kingdom by so indicating on Line 5 of Form 8833 (Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)) and filing the completed Form 8833 with the US Holder’s income tax return for the relevant year. A US Holder making this election will be treated as having received an additional dividend equal to the gross amount of the tax credit (unreduced by amounts withheld), and as having paid the withholding tax due. Thus, the investor must include in income the gross payment deemed received, and may claim a foreign tax credit for the withholding tax treated as paid to the United Kingdom (which tax will be considered due and paid only to the extent of the tax credit).

For US foreign tax credit limitation purposes, dividends generally will be “passive income” from sources outside the United States. Any exchange gain or loss arising from sterling receipts in respect of dividends paid by Smith & Nephew will generally be treated as ordinary income or loss which is US source income for foreign tax credit limitation purposes.

Taxation of Capital Gains

US Holders, who are not resident or ordinarily resident for tax purposes in the United Kingdom, will not generally be liable for UK capital gains tax on any capital gain realized upon the sale or other disposition of ADSs and Ordinary Shares unless held in connection with a trade carried on in the United Kingdom through a branch or agency. Furthermore, UK resident individuals who acquire ADSs or Ordinary Shares before becoming temporarily non-UK resident, may remain subject to UK taxation of capital gains on gains realized while non-resident.

For US tax purposes, gains realized upon the sale or disposition of ADSs and Ordinary Shares by US Holders generally will be capital gains and will be long-term capital gains if the ADSs or Ordinary Shares were held for more than one year. For non-corporate US Holders, net long-term capital gain is subject to a maximum rate of 20%. Gains realised on sale generally will not be regarded as foreign source income for federal income tax purposes.

Inheritance and Estate Taxes

The UK Inland Revenue imposes inheritance tax on capital transfers which occur on death, and in the seven years preceding death. The UK Inland Revenue considers that the US/UK Double Taxation Convention on Estate and Gift Tax applies to inheritance tax. Consequently, a US citizen who is domiciled in the United States and is not a UK national or domiciled in the United Kingdom will not be subject to UK inheritance tax in respect of ADSs and Ordinary Shares. A UK national who is domiciled in the United States will be subject to both UK inheritance tax and US Federal Estate Tax but will be entitled to a credit for US Federal Estate Tax charged in respect of ADSs and Ordinary Shares in computing the liability to UK inheritance tax. Conversely, a US citizen who is domiciled or deemed domiciled in the United Kingdom will be entitled to a credit for UK inheritance tax charged in respect of ADSs and Ordinary Shares in computing the liability to US Federal Estate Tax. Special rules apply where ADSs and Ordinary Shares are business property of a permanent establishment of an enterprise situated in the United Kingdom.

US Backup Withholding Tax

A US Holder may be subject to US backup withholding tax at the rate of 30% (which rate is scheduled to be reduced periodically through 2006) on dividends paid within the United States in respect of ADSs and Ordinary Shares or on the payment of the proceeds from the sale of ADSs or Ordinary Shares, unless the shareholder is a corporation or other exempt recipient, or provides a US taxpayer identification number. US backup withholding tax may also apply if there has been a notification from the Internal Revenue Service of a failure to report all interest or dividends. US information reporting and backup withholding generally will not apply to a payment made outside the United States through an office outside the United States of a non-US broker.

Backup withholding tax deducted may be credited against the US Holder’s US income tax liability, and, where the withholding tax exceeds the actual liability, the US Holder may obtain a refund by filing the appropriate refund claim with the Internal Revenue Service.

UK Stamp Duty and Stamp Duty Reserve Tax

UK stamp duty is charged on documents and in particular instruments for the transfer of registered ownership of Ordinary Shares. Transfers of Ordinary Shares will generally be subject to UK stamp duty at the rate of ½% of the consideration given for the transfer with the duty rounded up to the nearest £5 if necessary.

UK stamp duty reserve tax (“SDRT”) arises when there is an agreement to transfer shares in UK companies “for consideration in money or money’s worth”, and so an agreement to transfer Ordinary Shares for money or other consideration may give rise to a charge to SDRT at the rate of ½% (rounded up to the nearest penny). If an instrument of transfer of the Ordinary Shares is subsequently executed the instrument of transfer will generally be subject to stamp duty. The charge of SDRT will be cancelled, and any SDRT already paid will be refunded, if within 6 years of the agreement an instrument of transfer is produced to the United Kingdom Inland Revenue and the appropriate stamp duty paid.

Transfers of Ordinary Shares into CREST (an electronic transfer system) are exempt from stamp duty so long as the transferee is a member of CREST who will hold the Ordinary Shares as a nominee for the transferor and the transfer is in a form that will ensure that the securities become held in uncertificated form within CREST. Paperless transfers of Ordinary Shares within CREST for consideration in money or money’s worth are liable to SDRT rather than stamp duty. SDRT on relevant transactions will be collected by CREST at ½%, and this will apply whether or not the transfer is effected in the United Kingdom and whether or not the parties to it are resident or situated in the United Kingdom.

A charge of stamp duty or SDRT at the rates of 1½% of the consideration (or, in some circumstances, the value of the shares concerned) will arise on a transfer or issue of Ordinary Shares to the Depositary or to certain persons providing a clearance service (or their nominees or agents) and will generally be payable by the Depositary or person providing clearance service. In accordance with the terms of the Deposit Agreement, any tax or duty payable by the Depositary on deposits of Ordinary Shares will be charged by the Depositary to the party to whom ADRs are delivered against such deposits. No liability for SDRT will arise on any agreement to transfer an ADS or beneficial interest in an ADS.

No liability for stamp duty will arise on any transfer of, or agreement to transfer, an ADS or beneficial ownership of an ADS, provided that the ADS and any instrument of transfer or written agreement to transfer remains at all times outside the United Kingdom, and provided further that any instrument of transfer or written agreement to transfer is not executed in the United Kingdom and the transfer does not relate to any matter or thing done or to be done in the United Kingdom (the location of the custodian as a holder of Ordinary Shares not being relevant in this context). In any other case, any transfer of, or agreement to transfer, an ADS or beneficial ownership of an ADS could, depending on all the circumstances of the transfer, give rise to a charge to stamp duty.

US/UK Double Taxation Treaty

On March 31, 2003, the United States and the United Kingdom ratified a new income tax treaty to replace the currently effective US/UK Double Taxation Treaty. Among other things, the new income tax treaty eliminates the tax credit available to US Holders described above under “Taxation of Dividends in the United Kingdom” and “Taxation of Dividends in the United States”. The new income tax treaty generally becomes effective with respect to withholding taxes on May 1, 2003, UK corporation tax on April 1, 2003, UK income and capital gains tax on April 6, 2003, UK corporation tax on April 1, 2003, UK income and capital gains tax on April 6, 2003 and US income tax on January 1, 2004. Taxpayers may elect to have the old treaty apply for a twelve-month period from which the new treaty would otherwise apply. In addition, the US/UK Double Taxation Convention on Estate and Gift Tax is currently subject to re-negotiation.

DOCUMENTS ON DISPLAY

It is possible to read and copy documents referred to in this Annual Report on Form 20-F that have been filed with the SEC at the SEC’s public reference room located at 450 Fifth Street, NW, Washington DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. The SEC also maintains a web site at http://www.sec.gov that contains reports and other information regarding registrants that file electronically with the SEC. This Form 20-F report and some of the other information submitted by the Company to the SEC may be accessed through this website.

ITEM 11—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Qualitative information on treasury management and exchange rate and interest rate risk is disclosed in “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources”.

Quantitative Information About Market Risk

The market value of the Group’s financial instruments is affected by movements in both interest rates and exchange rates. The sensitivity of profits and cash flows to selective movements in interest rates and exchange rates are discussed below. The sensitivity analysis is based on a range of movements in market rates which could be reasonably expected over the period of a year.

Interest rate sensitivity

The majority of the Group’s financial assets and liabilities, including currency swaps, are at floating interest rates. The Group uses simple floating to fixed rate contract interest rate swaps to meet its objective of protecting borrowing costs and differentials between borrowing and deposit rates within parameters set by the Board. 75% of the interest costs and 83% of the interest income are protected through December 2003, with some protection carrying over into 2004. The following table sets forth notional amounts and weighted average interest rates by expected maturity dates. Variable rates are based on rates at December 31, 2002. The information is presented in sterling and the actual currency of the interest rate swaps is indicated in parentheses.

	Expected to mature in years ending December 31
	2003		2004		Fair value(i)
	(£ million, except interest rates)				(£ million)
At December 31, 2002:
Principal (sterling)	503		103		6.5
Fixed rate receivable	5.1	%	4.8	%
Variable rate payable	3.9	%	4.2	%

Principal (US dollars)	563		112		(14.2	)
Fixed rate payable	3.8	%	3.0	%
Variable rate receivable	1.4	%	2.4	%

Principal (euros)	100		26		(1.1	)
Fixed rate payable	3.4	%	4.5	%
Variable rate receivable	2.7	%	3.0	%

(i)

The fair values for interest rate swaps are calculated as the net present value of the future cash flows as at December 31, 2002, discounted at market rates of interest at that date.

	Expected to mature in years ending December 31
	2002		2003		2004		Fair value(ii)
	(£ million, except interest rates)						(£ million)
At December 31, 2001:
Principal (sterling)	396		140		25		4.0
Fixed rate receivable	5.5	%	5.5	%	5.6	%
Variable rate payable	4.4	%	4.4	%	4.4	%

Principal (US dollars)	483		113		—		(10.2	)
Fixed rate payable	4.6	%	4.4	%	—
Variable rate receivable	2.4	%	2.4	%	—

Principal (euros)	103		60		25		(0.5	)
Fixed rate payable	4.1	%	3.6	%	4.5	%
Variable rate receivable	3.3	%	3.3	%	3.3	%

(ii)

The fair values for interest rate swaps are calculated as the net present value of the future cash flows as at December 31, 2001, discounted at market rates of interest at that date.

In 2002, an increase of one percentage point in sterling and US dollar interest rates would have reduced the fair value of sterling interest rate swaps by £6 million and increased the fair value of US dollar interest rate swaps by £7 million. In the case of decreases in interest rates of one percentage point, the changes to the fair values of the interest rate swaps would have been an increase of £6 million relating to sterling and a reduction of £7 million relating to US dollars.

Exchange rate sensitivity

All financial instruments denominated in currencies other than sterling hedge foreign currency assets. As a result, changes in fair values of financial instruments do not affect the Group’s profit before taxation. The value of foreign currency financial liabilities is expected to be matched by foreign currency cash flows arising from the hedged assets in the longer term. Currency swaps are at floating rates of interest. Foreign currency liabilities outstanding at December 31, 2002 are listed by maturity and currency as follows:

	Amount receivable	Amount payable
	(£ million)	(Currency million)
At December 31, 2002:
Within one year:
US dollars	151.2	US$230.6
Australian dollars	15.2	Aus$42.7
Euros	90.1	€142.9
Japanese yen	13.3	Yen2,571
New Zealand dollars	2.5	NZ$8.0
Canadian dollars	7.1	C$17.5

	279.4
After one year and within two years:
US dollars	179.8	US$273.2
Euros	37.8	€60.0

	217.6

After two years and within three years (US dollars)	53.4	US$83.2
After three years and within four years (US dollars)	29.5	US$46.0

	579.9

At December 31, 2001:
Within one year:
US dollars	228.1	US$356.7
Australian dollars	11.6	Aus$31.7
Euros	75.7	€121.7
Japanese yen	5.6	Yen970.0
South African rand	5.9	R84.0
New Zealand dollars	2.3	NZ$8.0
Canadian dollars	1.5	C$3.5
Swiss francs	0.1	ChF0.2

	330.8
After one year and within two years (US dollars)	52.7	US$78.2
After two years and within three years:
US dollars	56.5	US$83.2
Euros	37.8	€60.0

	94.3
After three years and within four years (US dollars)	5.2	US$8.2

	483.0

In 2002, if sterling were to weaken against the US dollar by 10% on average over the year, the reduction in the Group’s liquidity in 2003 and later years would be £44 million. If sterling were to weaken on average over the year against all currencies excluding the US dollar by 10%, the Group’s liquidity would be reduced by £19 million in 2003. That is, if sterling were to weaken on average over the year against all currencies by 10%, net debt would increase by £63 million due to currency swaps.

At December 31, 2002, the Group had contracted to exchange within one year the equivalent of £166 million. £91 million related to sterling against various currencies and £108 million related to US dollars against various currencies. Unrealized gains and losses relating to forward currency contracts amounted to £2.1 million and £7.9 million, respectively. If sterling were to weaken against all other currencies by 10% on average over the year, the fair value of forward foreign exchange contracts would decrease by £6 million. If the US dollar were to strengthen by the same amount, the fair value of contracts would increase by £6 million.

ITEM 12—DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM 13—DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM 14—MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

ITEM 15—CONTROLS AND PROCEDURES

During the 90-day period prior to the filing date of this report, the Company’s Chief Executive Officer and Finance Director, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon, and as of the date of that evaluation, the Chief Executive Officer and Finance Director concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.

There have been no significant changes in the Company’s internal financial controls or in other factors which could significantly affect internal financial controls subsequent to the date the Company carried out its evaluation. There were no significant deficiencies or material weaknesses identified in the evaluation and, therefore, no corrective actions were taken.

ITEM 16A—AUDIT COMMITTEE FINANCIAL EXPERT

Not applicable.

ITEM 16B—CODE OF ETHICS

Not applicable.

ITEM 16C—PRINCIPAL ACCOUNTANT FEES AND SERVICES

Not applicable.

PART III

ITEM 17—FINANCIAL STATEMENTS

Not Applicable

ITEM 18—FINANCIAL STATEMENTS

The following audited Financial Statements and related Schedule, together with the report of Ernst & Young LLP thereon, are filed as part of the Annual Report:

		Page

Report of Independent Auditors		F-1

Consent of Independent Auditors		F-1

Consolidated Profit and Loss Account for the fiscal years 2002, 2001 and 2000		F-2

Consolidated Balance Sheet at fiscal year ends 2002 and 2001		F-3

Consolidated Statement of Cash Flow for the fiscal years 2002, 2001 and 2000		F-4

Consolidated Statement of Movements in Share Capital for the fiscal years 2002, 2001 and 2000		F-5

Consolidated Statement of Movements in Reserves for the fiscal years 2002, 2001 and 2000		F-6

Consolidated Statement of Total Recognized Gains and Losses for the fiscal years 2002, 2001 and 2000		F-7

Notes to the Financial Statements		F-8

Schedule for the fiscal years 2002, 2001 and 2000: Schedule II—Valuation and Qualifying Accounts		S-1

All other schedules have been omitted as they are not required under the applicable instructions or the substance of the required information is shown in the Financial Statements.

ITEM 19—EXHIBITS

Exhibit No.		Description of Document	Incorporated Herein by Reference To	Filed Herewith
1	(a)	Memorandum of Association	Form 20-F for the year ended December 31, 2000

	(b)	Articles of Association	Form 20-F for the year ended December 31, 2001

2	(a)	Agreement dated March 20, 2003 among Meadowclean Limited (to be renamed Smith & Nephew Group plc), Smith & Nephew plc, Lloyds TSB Capital Markets and The Royal Bank of Scotland as arrangers.		X

	(b)	Copies of instruments defining the rights of holders of long-term debt not required to be filed herewith or incorporated herein by reference will be furnished to the Commission upon request.

4	(a) (i)	Material contract: Agreement and Plan of Merger dated as of February 13, 2002, by and among Smith & Nephew, Inc., Orchid Merger Corp. and ORATEC Interventions, Inc.	Exhibit 2.2 to the Form 8-K of ORATEC Interventions, Inc. filed with Securities and Exchange Commission on February 19, 2002 (File No. 000-26745)

	(ii)	Material contract: Agreement dated March 20, 2003 among Smith & Nephew plc, Meadowclean Limited and Centerpulse Ltd.		X

	(iii)	Material contract: Transaction Agreement dated March 20, 2003 among InCentive Capital AG, Smith & Nephew plc and Meadowclean Limited.		X

	(iv)	Material contract: Amendment Agreement No. 1 dated March 25, 2003 among InCentive Capital AG, Smith & Nephew plc and Meadowclean Limited.		X

4	(c) (i)	The Smith & Nephew 1985 Share Option Scheme	Registration Statement on Form S-8 No. 33-39802

	(ii)	The Smith & Nephew 1990 International Executive Share Option Scheme	Registration Statement on Form S-8 No. 33-39814

	(iii)	The Smith & Nephew Long Term Incentive Plan	Form 20-F for the year ended December 31, 2000

	(iv)	The Smith & Nephew 2001 UK Approved Share Option Plan	Form 20-F for the year ended December 31, 2001

	(v)	The Smith & Nephew 2001 UK Unapproved Share Option Plan	Form 20-F for the year ended December 31, 2001

	(vi)	The Smith & Nephew 2001 US Share Plan	Registration Statement on Form S-8 No. 333-13694

	(vii)	The Smith & Nephew Sharesave Plan (2002)		X

	(viii)	The Smith & Nephew International Sharesave Plan (2002)		X

	(ix)	The Smith & Nephew Italian Sharesave Plan (2002)		X

Exhibit No.		Description of Document	Incorporated Herein by Reference To	Filed Herewith
4	(c) (x)	The Smith & Nephew Dutch Sharesave Plan (2002)		X

	(xi)	The Smith & Nephew Belgian Sharesave Plan (2002)		X

	(xii)	The Smith & Nephew French Sharesave Plan (2002)		X

8		Principal Subsidiaries		X

12	(a)	Certificate Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code by the Chief Executive of Smith & Nephew plc		X

	(b)	Certificate Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code by the Finance Director of Smith & Nephew plc		X

SIGNATURES

The Registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sign this Annual Report on its behalf.

SMITH & NEPHEW plc (Registrant)

By:		P AUL R. C HAMBERS
		Paul R. Chambers Company Secretary

April 25, 2003

CERTIFICATION

I, Christopher J. O’Donnell, certify that:

I have reviewed this annual report on Form 20-F of Smith & Nephew plc;

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: April 25, 2003

C HRISTOPHER J. O’D ONNELL

Christopher J. O’Donnell

Chief Executive Officer

CERTIFICATION

I, Peter Hooley, certify that:

I have reviewed this annual report on Form 20-F of Smith & Nephew plc;

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: April 25, 2003		P ETER H OOLEY
		Peter Hooley
		Finance Director

SMITH & NEPHEW plc

REPORT OF INDEPENDENT AUDITORS

To: The Board of Directors

Smith & Nephew plc

We have audited the accompanying consolidated balance sheets of Smith & Nephew plc as of December 31, 2002 and 2001, and the related consolidated profit and loss accounts and consolidated statements of cash flows, movements in shareholders’ funds and total recognized gains and losses for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 18. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with United Kingdom auditing standards and United States generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Smith & Nephew plc at December 31, 2002 and 2001, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United Kingdom, which differ in certain respects from those followed in the United States (see Note 35 of Notes to the Financial Statements). Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

London, England		E RNST & Y OUNG LLP
February 7, 2003, except for
Note 36—Subsequent Events
as to which date is April 16, 2003

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-39802, 33-39814, 333-12052 and 333-13694) pertaining to the Smith & Nephew plc employee benefit plans listed on the facing sheets thereof of our report dated February 7, 2003, except for Note 36—Subsequent Events, as to which the date is April 16, 2003 with respect to the consolidated financial statements and schedule of Smith & Nephew plc included in this Annual Report (Form 20-F) for the year ended December 31, 2002.

London, England		E RNST & Y OUNG LLP
April 25, 2003

F-1

SMITH & NEPHEW plc

CONSOLIDATED PROFIT AND LOSS ACCOUNT

	Years ended December 31
	2002		2001		2000
	(£ million, except per Ordinary Share amounts)
Turnover —(Note 2)
Ongoing operations	1,083.7		943.0		772.9
Operations contributed to the joint venture	—		35.3		138.6

Continuing operations	1,083.7		978.3		911.5
Discontinued operations	26.2		103.4		223.2

Group turnover	1,109.9		1,081.7		1,134.7
Share of joint venture	155.0		123.6		—

	1,264.9		1,205.3		1,134.7

Operating profit —(Notes 2 and 3)
Ongoing operations:
Before goodwill amortization and exceptional items	196.0		170.8		140.7
Goodwill amortization	(17.5	)	(10.4	)	(6.9	)
Exceptional items (Note 4)	(29.9	)	(19.3	)	(3.8	)

	148.6		141.1		130.0
Operations contributed to the joint venture:
Before exceptional items	—		3.6		16.2
Exceptional items (Note 4)	—		(1.8	)	(8.6	)

Continuing operations	148.6		142.9		137.6
Discontinued operations before exceptional items (Note 3)	2.1		11.1		29.0
Discontinued operations exceptional items (Note 4)	—		—		(3.9	)

Group operating profit	150.7		154.0		162.7
Share of operating profit of joint venture before exceptional items	19.6		12.8		—
Share of operating profit of joint venture exceptional items—(Note 4)	(2.6	)	(5.0	)	—
Share of operating profit of associated undertaking	4.9		—		—

Operating profit	172.6		161.8		162.7
Discontinued operations—net profit on disposals—(Note 5)	18.0		49.2		109.5

Profit on ordinary activities before interest	190.6		211.0		272.2
Interest income—(Note 6)	6.6		2.5		4.4
Interest expense—(Note 6)	(19.3	)	(19.9	)	(11.4	)

Profit on ordinary activities before taxation	177.9		193.6		265.2
Taxation—(Note 8)	(65.8	)	(64.0	)	(57.7	)

Attributable profit for the financial year (i)	112.1		129.6		207.5
Ordinary dividends—(Note 9)	(44.6	)	(42.9	)	(41.3	)
Special dividend—(Note 9)	—		—		(415.6	)

Retained profit/(deficit) for the year	67.5		86.7		(249.4	)

Average number of Ordinary Shares outstanding (million)	926		921		1,034
Basic earnings per Ordinary Share—(Note 11)	12.11	p	14.07	p	20.07	p
Diluted earnings per Ordinary Share—(Note 11)	12.02	p	13.95	p	19.95	p
Profit before taxation, goodwill amortization and exceptional items	209.9		180.9		178.9
Adjusted basic earnings per Ordinary Share—(Note 11)	16.02	p	13.96	p	12.19	p
Adjusted diluted basic earnings per Ordinary Share—(Note 11)	15.89	p	13.84	p	12.12	p

(i)

A summary of the adjustments to attributable profit for the financial year that would be required had accounting principles generally accepted in the United States been applied rather than those generally accepted in the United Kingdom is set forth in Note 35 of the Notes to the Financial Statements.

The Notes to the Financial Statements are an integral part of these Financial Statements

F-2

SMITH & NEPHEW plc

CONSOLIDATED BALANCE SHEET

	December 31
	2002			2001
	(£ million)
Fixed assets:
Intangible assets—(Note 14)	317.2			187.8
Tangible assets—(Note 15)	255.8			245.0
Investments—(Note 16)	8.2			25.7
Investment in joint venture—(Note 17)	115.0			114.0

Goodwill	70.3			70.6
Share of gross assets	106.2			109.0
Share of gross liabilities	(61.5	)		(65.6	)

Investment in associated undertaking—(Note 18)	8.5			—

			704.7			572.5
Current assets:
Stocks—(Note 13)	229.5			232.2
Debtors—(Note 12)	280.7			266.8
Cash and bank	22.5			26.4

	532.7			525.4
Creditors: amounts falling due within one year:
Borrowings—(Note 19)	151.9			94.0
Other creditors—(Note 21)	309.6			334.5

	461.5			428.5

Net current assets			71.2			96.9

Total assets less current liabilities			775.9			669.4

Creditors: falling due after more than one year:
Borrowings—(Note 19)	164.2			161.2
Other creditors—(Note 21)	6.3			8.3
Provisions for liabilities and charges—(Note 22)	88.1			95.3

			258.6			264.8

			517.3			404.6

Capital and reserves
Equity shareholders’ funds:
Called up equity share capital			113.5			113.1
Share premium account			143.8			135.8
Profit and loss account			259.7			155.4

			517.0			404.3
Non-equity shareholders’ funds:
Called up non-equity share capital			0.3			0.3

			517.3			404.6

(i)

A summary of the adjustments to shareholders’ funds that would be required had accounting principles generally accepted in the United States been applied rather than those generally accepted in the United Kingdom is set forth in Note 35 of the Notes to the Financial Statements.

The Notes to the Financial Statements are an integral part of these Financial Statements

F-3

SMITH & NEPHEW plc

CONSOLIDATED STATEMENT OF CASH FLOW

	Years ended December 31
	2002(ii)		2001(ii)		2000(ii)
	(£ million)
Net cash inflow from operating activities (i)—(Note 24)	209.3		191.9		204.0
Dividends received from joint venture	3.9		—		—
Returns on investments and servicing of finance:
Interest received	6.6		2.5		4.4
Interest paid	(16.8	)	(19.0	)	(11.4	)

Net cash outflow from returns on investments and servicing of finance	(10.2	)	(16.5	)	(7.0	)
Taxation paid	(52.3	)	(76.2	)	(46.5	)

	150.7		99.2		150.5

Capital expenditure and financial investment:
Capital expenditure	(85.2	)	(74.7	)	(63.9	)
Disposal of fixed assets	1.1		4.1		6.1
Trade investments	(1.3	)	(2.4	)	(6.0	)
Own shares (purchased)/vested	(0.7	)	0.4		(2.9	)

	(86.1	)	(72.6	)	(66.7	)

Acquisitions and disposals:
Acquisitions	(245.4	)	(69.3	)	(51.1	)
Cash acquired on acquisition of ORATEC	39.1		—		—
Disposals	71.8		61.7		209.8
Debt repaid by the joint venture	5.7		24.6		—
Joint venture formation costs	—		(12.0	)	—

	(128.8	)	5.0		158.7

Equity dividends paid	(43.5	)	(42.0	)	(475.9	)

Cash outflow before use of liquid resources and financing	(107.7	)	(10.4	)	(233.4	)
Management of liquid resources—(Note 24)	—		—		72.3
Financing:
Issue of ordinary share capital	6.1		9.0		7.7
Net increase in borrowings due within one year	70.6		30.2		14.5
Increase/(decrease) in borrowings due after one year	18.1		(7.4	)	146.1
Settlement of currency swaps	—		(14.0	)	(9.6	)

Net cash inflow from financing	94.8		17.8		158.7

(Decrease)/increase in cash —(Note 24)	(12.9	)	7.4		(2.4	)

(i)

After £19.3 million of outgoings on rationalization program, acquisition integration and divestment costs (2001—£23.5 million, 2000—£23.1 million).

(ii)

The significant differences between the cash flow statement presented above and that required under accounting principles generally accepted in the United States are set forth in Note 35 of the Notes to the Financial Statements.

The Notes to the Financial Statements are an integral part of these Financial Statements

F-4

SMITH & NEPHEW plc

CONSOLIDATED STATEMENT OF MOVEMENTS IN SHAREHOLDERS’ FUNDS

SHARE CAPITAL

	Non-equity capital(i)	Equity capital(ii)		Non-equity capital(i)	Equity capital(ii)	Total
	5.50% Cumulative Preference Shares of £1 each	Ordinary Shares of 12 ² / 9 p (Jan 2000 10p each)		5.50% Cumulative Preference Shares of £1 each	Ordinary Shares of 12 ² / 9 p (Jan 2000 10p each)	Total
	(Number thousand)			(£ million)
Authorized:
At January 1, 2000	450	1,495,500		0.5	149.5	150.0
Effect of share consolidation(ii)	—	(271,909	)	—	—	—

At December 31, 2000, 2001 and 2002	450	1,223,591		0.5	149.5	150.0

Allotted; issued and fairly paid:
At January 1, 2000	269	1,117,545		0.3	111.8	112.1
Conversion of bonds	—	14		—	—	—
Exercise of share options	—	1,370		—	0.1	0.1
Long service awards	—	24		—	—	—

At August 6, 2000	269	1,118,953		0.3	111.9	112.2
Effect of share consolidation(ii)	—	(203,446	)	—	—	—

	269	915,507		0.3	111.9	112.2
Conversion of bonds	—	145		—	—	—
Exercise of share options	—	3,527		—	0.5	0.5
Long service awards	—	10		—	—	—

At December 31, 2000	269	919,189		0.3	112.4	112.7
Conversion of bonds	—	26		—	—	—
Exercise of share options	—	5,588		—	0.7	0.7
Long service awards	—	9		—	—	—

At December 31, 2001	269	924,812		0.3	113.1	113.4
Conversion of bonds	—	10		—	—	—
Exercise of share options	—	3,937		—	0.4	0.4
Long service awards	—	1		—	—	—

At December 31, 2002	269	928,760		0.3	113.5	113.8

(i)

The 5.50% Cumulative Preference Shares are non-voting and carry preferential rights to dividends and distribution on winding up.

(ii)

On August 7, 2000, the Ordinary Share Capital was consolidated by the issue of 9 new ordinary shares of 12 ² / ₉ p for every 11 ordinary shares of 10p held.

The Notes to the Financial Statements are an integral part of these Financial Statements

F-5

SMITH & NEPHEW plc

CONSOLIDATED STATEMENT OF MOVEMENTS IN SHAREHOLDERS’ FUNDS

SHARE CAPITAL AND RESERVES

	Share capital	Share premium account(i)	Profit and loss account(ii)		Total shareholders funds(iii)
At January 1, 2000 as previously reported	112.1	118.3	260.4		490.8
Prior year adjustment(iv)	—	—	2.3		2.3

At January 1, 2000 as restated	112.1	118.3	262.7		493.1
Share options and long service awards	0.6	6.9	—		7.5
Convertible bonds	—	0.2	—		0.2
Exchange adjustments	—	—	(12.9	)	(12.9	)
Profit for the financial year	—	—	205.2		205.2
Dividends	—	—	(456.9	)	(456.9	)
Goodwill on disposals	—	—	31.8		31.8

At December 31, 2000	112.7	125.4	29.9		268.0
Share options and long service awards	0.7	10.4	—		11.1
Exchange adjustments	—	—	(8.8	)	(8.8	)
Profit for the financial year	—	—	129.6		129.6
Dividends	—	—	(42.9	)	(42.9	)
Movements relating to the QUEST—(Note 23)	—	—	(2.1	)	(2.1	)
Unrealised gain on formation of joint venture	—	—	31.8		31.8
Goodwill on operations contributed to the joint venture	—	—	17.9		17.9

At December 31, 2001	113.4	135.8	155.4		404.6
Share options and long service awards	0.4	8.0	—		8.4
Exchange adjustments	—	—	9.1		9.1
Profit for the financial year	—	—	112.1		112.1
Dividends	—	—	(44.6	)	(44.6	)
Movements relating to the QUEST—(Note 23)	—	—	(2.3	)	(2.3	)
Goodwill on disposals	—	—	30.0		30.0

At December 31, 2002	113.8	143.8	259.7		517.3

(i)

Share premium is not distributable.

(ii)

The cumulative amount of goodwill charged to reserves is £292.3 million (2001—£329.5 million, 2000—£344.4 million). The decrease in goodwill in the year represents amounts written back to reserves on the disposal of the rehabilitation business of £30.0 million and exchange adjustments of £7.2 million (2001—decrease of £14.9 million, 2000—decrease of £24.4 million).

(iii)

Included in shareholders’ funds are cumulative translation adjustment losses of £39.8 million (2001—£48.9 million, 2000—£40.1 million).

(iv)

Adjustment following the adoption of Financial Reporting Standard 19 in 2001.

The Notes to the Financial Statements are an integral part of these Financial Statements

F-6

SMITH & NEPHEW plc

CONSOLIDATED STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES

	Years ended December 31
	2002	2001		2000
	(£ million)
Profit for the financial year(i)	112.1	129.6		205.2
Prior year adjustment(ii)	—	—		2.3

	112.1	129.6		207.5
Unrealized gain on formation of joint venture	—	31.8		—
Currency translation differences on foreign currency net investments	9.1	(8.8	)	(12.9	)

Total recognized gains and losses relating to the year	121.2	152.6		194.6

(i)

Included in the profit for the financial year is £10.3 million (2001—£4.4 million, 2000—nil) profit relating to the joint venture and £3.0 million (2001—nil, 2000—nil) profit relating to the associated undertaking.

(ii)

Adjustment following the adoption of Financial Reporting Standard 19 in 2001.

(iii)

The statement of comprehensive income required under accounting principles generally accepted in the United States is set forth in Note 35 of Notes to the Financial Statements.

The Notes to the Financial Statements are an integral part of these Financial Statements

F-7

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS

Accounting Policies

The financial statements have been prepared under the historical cost convention and in accordance with applicable UK accounting standards and include the disclosures required by Financial Reporting Standard 17 (“FRS 17”).

Consolidation

The consolidated financial statements include the financial statements of Smith & Nephew plc (the “Company”) and the financial statements of all the subsidiary and associated undertakings during the year ended December 31, 2002 for the periods which they were members of the Group. In these financial statements, “Group” means the Company and all its subsidiaries. All material intercompany transactions are eliminated.

Entities in which the Group holds an interest on a long-term basis and are controlled by the Group and one other entity under a contractual agreement are joint ventures. Joint ventures are included in the consolidated financial statements under the gross equity method.

Entities in which the Group has a beneficial interest of 50% or less in the equity capital and where the Group exercises significant influence over commercial and financial policy decisions are associated undertakings. Associates are included in the consolidated financial statements under the net equity method.

Joint arrangements are those where the Group participates with a third party in an arrangement to carry on the Group’s trade or business. Joint arrangements are included in the consolidated financial statements in proportion to the Group’s interest in their assets, liabilities and cash flows.

Turnover

Turnover comprises sales of products and services to third parties at amounts invoiced net of trade discounts and rebates, excluding turnover taxes.

Foreign currencies

Balance sheet items of overseas companies and foreign currency borrowings are translated into sterling at the year end rates of exchange. Profit and loss items and the cash flows of overseas subsidiaries and associated undertakings are translated at the average rates for the year.

Forward currency contracts in respect of contracted and anticipated amounts payable on purchase transactions are accounted for as hedges with the hedge transaction recorded at the rate implicit in the contract. Changes in the fair value of these forward contracts are recognized in the profit and loss account on the ultimate sale of the item purchased.

The following are recorded as movements in reserves: exchange differences on the translation at closing rates of exchange of overseas opening net assets, including acquisition goodwill; the difference on translation of foreign currency borrowings or swaps that are used to finance or hedge intragroup equity investments; and the differences arising between the translation of profits at average and closing rates of exchange. All other exchange differences are dealt with in arriving at profit before taxation.

Intangible fixed assets

Goodwill, representing the excess of purchase consideration over fair value of net assets acquired prior to December 31, 1997, was set-off against reserves in the year of acquisition. Goodwill acquired since January 1, 1998 is capitalized and amortized on a straight line basis over its estimated useful economic life, up to a presumed maximum of 20 years, except for goodwill arising on the formation of the BSN Medical joint venture and acquisition of the Group’s share of the AbilityOne associated undertaking, which is not amortized but is subject to an annual impairment review. This treatment, which is a departure from the requirement of the Companies Act 1985 of Great Britain (the “Companies Act”) to amortize goodwill, is adopted in order to show a true and fair view (See Note 17 and Note 18). Goodwill previously written off to reserves is included in the calculation of gains and losses on disposals.

F-8

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

Accounting Policies—(continued)

Purchased patents, know-how, trade marks, licenses and distribution rights are capitalized and amortized over a period not exceeding 20 years.

The carrying values of intangibles are reviewed for impairment when events or changes in circumstances indicate the carrying value may be impaired.

Tangible fixed assets

Tangible fixed assets are stated at cost and, except for freehold land, are depreciated as wasting assets. Freehold and long leasehold buildings are depreciated on a straight-line basis at between 1% and 5% per annum. Short leasehold land and buildings (leases of under 50 years) are depreciated by equal annual installments over the term of the lease. Plant and equipment are depreciated over lives ranging between three and 20 years by equal annual installments to write down the assets to their estimated disposal value at the end of their working lives.

Leasing commitments

Assets held under finance leases are capitalized as tangible fixed assets and depreciated accordingly. The capital element of future lease payments is included in loans and interest is charged to profit before taxation on a reducing balance basis over the term of the lease.

Rentals payable under operating leases are charged to the profit and loss account as incurred.

Investments

Trade investments are stated at cost less provision for any permanent diminution in value.

Stocks and work-in-progress

Finished goods and work-in-progress are valued at factory cost, including appropriate overheads, on a first-in first-out basis. Raw materials are valued at purchase price and all stocks are reduced to net realizable value where lower.

Deferred taxation

Deferred taxation is recognized in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events have occurred at that date that will result in an obligation to pay more, or a right to pay less or to receive more, tax.

No provision is made for deferred tax that would arise on the remittance of the retained earnings of overseas subsidiaries, associates and joint ventures except to the extent that, at the balance sheet date, dividends have been accrued as receivable.

Deferred tax assets are recognized only to the extent that the directors consider that it is likely that taxable income will be available against which future reversals of the underlying timing differences can be made.

Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which timing differences are expected to reverse. These are based on tax rates and laws substantively enacted at the balance sheet date.

Derivative instruments

Currency swaps to match foreign currency net assets with foreign currency liabilities are translated into sterling at the year end exchange rates. Changes in the principal values of currency swaps are matched in reserves against changes in the values of the related assets. Interest rate swaps to protect interest costs and income are accounted for as hedges. Changes in the values of interest rate swaps are recognized against interest in the period relating to the hedge.

F-9

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

Accounting Policies—(continued)

Research and development

Revenue expenditure on research and development is written off as incurred.

Postretirement benefits

The Group’s major pension plans are currently of the defined benefit type. For these plans, costs are charged to operating profit so as to spread the expense of providing future pensions to employees over their working lives with the Group. For defined contribution plans, contributions are charged to operating profit as they become payable. Where the Group provides healthcare benefits after retirement, the expected cost of these is charged to operating profit over the employees’ working lives with the Group.

Use of estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

F-10

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

Segmental Analysis

	Years ended December 31
	2002	2001	2000
	(£ million)
Group sales by activity
Orthopaedics	470.2	404.6	335.0
Endoscopy	291.8	252.8	216.4
Advanced wound management	321.7	285.6	221.5

Ongoing operations	1,083.7	943.0	772.9
Operations contributed to the joint venture	—	35.3	138.6

Continuing operations	1,083.7	978.3	911.5
Discontinued operations	26.2	103.4	223.2

	1,109.9	1,081.7	1,134.7

Following completion of the Group’s restructuring the Group’s segmental analysis is now based on its three core businesses and comparatives have been restated accordingly.

On April 1, 2001, the Group’s casting and bandaging and traditional woundcare businesses were contributed to a joint venture with Beiersdorf AG called BSN Medical in return for a 50% equity interest. The results of these businesses prior to contribution represent operations contributed to the joint venture.

Discontinued operations comprise the results of the rehabilitation business and in 2001 the first half year results of the ear, nose and throat business. In 2000, discontinued operations comprise the results of the ear, nose and throat and rehabilitation businesses and six months of trading relating to the consumer business.

	Years ended December 31
	2002		2001		2000
	(£ million)
Group sales by geographic origin
United Kingdom	179.6		162.9		148.9
Continental Europe	250.7		199.6		159.7
United States	702.1		641.3		515.9
Other America	28.6		31.8		25.8
Africa, Asia and Australasia	144.3		133.5		125.3

	1,305.3		1,169.1		975.6
Operations contributed to the joint venture	—		35.3		138.6

Continuing operations	1,305.3		1,204.4		1,114.2
Discontinued operations	26.2		103.4		223.2

	1,331.5		1,307.8		1,337.4
Less intragroup sales	(221.6	)	(226.1	)	(202.7	)

	1,109.9		1,081.7		1,134.7

	Years ended December 31
	2002		2001		2000
	(£ million)
Group sales by geographic market
United Kingdom	87.3		77.5		61.0
Continental Europe	231.4		190.9		150.1
United States	579.4		502.1		395.5
Other America	31.1		32.8		24.0
Africa, Asia and Australasia	154.5		139.7		142.3

	1,083.7		943.0		772.9
Operations contributed to the joint venture	—		35.3		138.6

Continuing operations	1,083.7		978.3		911.5
Discontinued operations	26.2		103.4		223.2

	1,109.9		1,081.7		1,134.7

F-11

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

Segmental Analysis—(continued)

	Years ended December 31
	2002		2001		2000
	(£ million)
Operating profit by activity
Orthopaedics	98.2		87.9		69.1
Endoscopy	53.8		46.8		38.2
Advanced wound management	44.0		36.1		33.4
Amortization of goodwill	(17.5	)	(10.4	)	(6.9	)
Exceptional items	(29.9	)	(19.3	)	(3.8	)

Ongoing operations	148.6		141.1		130.0
Operations contributed to the joint venture: operating profit	—		3.6		16.2
Operations contributed to the joint venture: exceptional items	—		(1.8	)	(8.6	)

Continuing operations	148.6		142.9		137.6
Discontinued operations: operating profit	2.1		11.1		29.0
Discontinued operations: exceptional items	—		—		(3.9	)

	150.7		154.0		162.7

Items between operating profit of £150.7 million (2001—£154.0 million, 2000—£162.7 million) and profit before taxation of £177.9 million (2001—£193.6 million, 2000—£265.2 million) comprise share of operating profit of the joint venture £17.0 million (2001—£7.8 million, 2000—nil), share of operating profit of the associated undertaking of £4.9 million (2001—nil, 2000—nil), net profit on disposals of £18.0 million (2001—£49.2 million, 2000—£109.5 million) and net interest expense of £12.7 million (2001—£17.4 million, 2000—£7.0 million) which are not allocated segmentally.

Exceptional costs of £29.9 million have been charged in 2002 (2001—£21.1 million, 2000—£16.3 million) as follows: Ongoing operations £29.9 million (2001—£19.3 million, 2000—£3.8 million) and Operations contributed to the joint venture nil (2001—£1.8 million, 2000—£8.6 million) and Discontinued operations nil (2001—nil, 2000—£3.9 million). Exceptional costs within Ongoing operations are allocated as follows: Orthopaedics £0.8 million (2001—£0.6 million, 2000—£0.3 million), Endoscopy £7.6 million (2001—£0.3 million, 2000—£1.3 million) and Advanced wound management £21.5 million ( 2001—£18.4 million, 2000—£2.2 million).

Amortization of goodwill of £17.5 million (2001—£10.4 million, 2000—£6.9 million) within Ongoing operations arose as follows: Orthopaedics £4.7 million (2001—£4.1 million, 2000—£3.2 million), Endoscopy £7.1 million (2001—£1.0 million, 2000—nil) and Advanced wound management £5.7 million (2001—£5.3 million, 2000—£3.7 million).

F-12

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

Segmental Analysis—(continued)

	Years ended December 31
	2002		2001		2000
	(£ million)
Operating profit by geographic origin
United Kingdom	21.7		19.6		24.4
Continental Europe	21.1		18.0		12.5
United States	129.8		113.3		82.2
Other America	(0.7	)	0.9		3.3
Africa, Asia and Australasia	24.1		19.0		18.3
Amortization of goodwill	(17.5	)	(10.4	)	(6.9	)
Exceptional items	(29.9	)	(19.3	)	(3.8	)

Ongoing operations	148.6		141.1		130.0
Operations contributed to the joint venture: operating profit	—		3.6		16.2
Operations contributed to the joint venture: exceptional items	—		(1.8	)	(8.6	)

Continuing operations	148.6		142.9		137.6
Discontinued operations: operating profit	2.1		11.1		29.0
Discontinued operations: exceptional items	—		—		(3.9	)

	150.7		154.0		162.7

Ongoing operations exceptional costs of £1.5 million were incurred in the United Kingdom, £2.4 million in Continental Europe, £25.8 million in the United States, £0.1 million in Other America and £0.1 million in Africa, Asia and Australasia in 2002 (2001— £19.3 million: United Kingdom £11.7 million, Continental Europe £5.1 million, United States £1.5 million and Africa, Asia and Australasia £1.0 million, 2000—£3.8 million: United Kingdom £0.4 million, Continental Europe £0.9 million, United States £2.7 million, Other America £0.2 million and Africa, Asia and Australasia gain of £0.4 million). Nil was charged to Operations contributed to the joint venture in 2002 (2001—£1.8 million, 2000—£8.6 million). Nil was charged to discontinued operations in 2002 (2001—nil, 2000—£3.9 million).

Amortization of goodwill of £17.5 million (2001—£10.4 million, 2000—£6.9 million) within Ongoing operations arose as follows: £1.2 million (2001—£0.9 million, 2000—nil) in the United Kingdom, £2.1 million (2001—£2.1 million, 2000—£2.0 million) in Continental Europe, £13.7 million (2001—£6.9 million, 2000—£4.5 million) in the United States and £0.5 million (2001—£0.5 million, 2000—£0.4 million) in Africa, Asia and Australasia.

Operating assets by activity
Orthopaedics	309.8	304.6	254.2
Endoscopy	275.1	130.8	132.6
Advanced wound management	222.6	223.1	163.8

Ongoing operations	807.5	658.5	550.6
Operations contributed to the joint venture	—	—	67.7

Continuing operations	807.5	658.5	618.3
Discontinued operations	—	22.0	47.6

	807.5	680.5	665.9

Operating assets by geographic origin
United Kingdom	153.4	134.6	79.5
Continental Europe	70.6	69.4	65.8
United States	511.5	383.0	350.7
Other America	13.0	15.0	11.0
Africa, Asia and Australasia	59.0	56.5	43.6

Ongoing operations	807.5	658.5	550.6
Operations contributed to the joint venture	—	—	67.7

Continuing operations	807.5	658.5	618.3
Discontinued operations	—	22.0	47.6

	807.5	680.5	665.9

Operating assets comprise fixed assets, stocks and debtors less creditors and provisions other than investment in the joint venture, investment in the associated undertaking, net debt, taxation and dividends.

F-13

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

Segmental Analysis—(continued)

	Years ended December 31
	2002	2001	2000
	(£ million)
Capital expenditure by activity
Orthopaedics	47.4	42.6	28.6
Endoscopy	17.2	16.2	13.0
Advanced wound management	20.4	12.9	9.4

Ongoing operations	85.0	71.7	51.0
Operations contributed to the joint venture	—	1.0	10.0

Continuing operations	85.0	72.7	61.0
Discontinued operations	0.2	2.0	2.9

	85.2	74.7	63.9

Capital expenditure comprises additions of tangible and intangible fixed assets. In addition, in 2002, £1.3 million of additions to trade investments related to orthopaedics (2001—£2.4 million, 2000—£2.0 million) and nil related to advanced wound management (2001—nil, 2000—£4.0 million); and £2.4 million additions to own shares (2001—£1.2 million, £2000—£2.9 million).

Depreciation by activity
Orthopaedics	35.5	29.8	27.2
Endoscopy	19.8	11.3	11.1
Advanced wound management	18.3	16.0	14.3

Ongoing operations	73.6	57.1	52.6
Operations contributed to the joint venture	—	1.0	4.1

Continuing operations	73.6	58.1	56.7
Discontinued operations	0.6	2.2	5.6

	74.2	60.3	62.3

Amounts comprise depreciation of tangible fixed assets and amortization of intangible fixed assets.

Operating cash flow by activity
Orthopaedics	67.3		43.7	40.6
Endoscopy	40.9		43.7	30.9
Advanced wound management	24.4		16.5	25.1

Ongoing operations	132.6		103.9	96.6
Operations contributed to the joint venture	—		4.1	8.4

Continuing operations	132.6		108.0	105.0
Discontinued operations	(9.4	)	11.3	32.3

	123.2		119.3	137.3

Operating cash flow by geographic origin
United Kingdom	5.3		21.3		9.4
Continental Europe	16.8		8.5		13.0
United States	92.7		68.7		58.0
Other America	(1.6	)	(1.7	)	(1.3	)
Africa, Asia and Australasia	19.4		7.1		17.5

Ongoing operations	132.6		103.9		96.6
Operations contributed to the joint venture	—		4.1		8.4
Discontinued operations	(9.4	)	11.3		32.3

	123.2		119.3		137.3

Operating cash flow comprises net cash inflow from operations of £209.3 million (2001—£191.9 million, 2000—£204.0 million), less capital expenditure net of fixed asset disposals of £86.1 million (2001—£72.6 million, 2000—£66.7 million).

F-14

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

Operating Profit

	Year ended December 31, 2002
	Continuing operations		Discontinued operations		Total
	(£ million)
Turnover	1,083.7		26.2		1,109.9
Cost of sales	(313.6	)	(16.3	)	(329.9	)

Gross profit	770.1		9.9		780.0
Marketing, selling and distribution	(408.5	)	(5.6	)	(414.1	)
Administration	(125.0	)	(2.1	)	(127.1	)
Research and development	(61.2	)	(0.1	)	(61.3	)
BSN agency and management fees	20.6		—		20.6
Amortization of acquisition goodwill	(17.5	)	—		(17.5	)
Exceptional items	(29.9	)	—		(29.9	)

Group operating profit	148.6		2.1		150.7

Results of continuing operations in 2002 have been stated after charging exceptional costs of £29.9 million, which were incurred as follows: cost of sales £2.8 million, marketing, selling and distribution £2.5 million, administration £22.6 million and research and development £2.0 million.

	Year ended December 31, 2001
	Continuing operations		Discontinued operations		Total
	(£ million)
Turnover	978.3		103.4		1,081.7
Cost of sales	(294.9	)	(55.3	)	(350.2	)

Gross profit	683.4		48.1		731.5
Marketing, selling and distribution	(365.4	)	(26.7	)	(392.1	)
Administration	(114.3	)	(8.7	)	(123.0	)
Research and development	(49.3	)	(1.6	)	(50.9	)
BSN agency and management fees	20.0		—		20.0
Amortization of acquisition goodwill	(10.4	)	—		(10.4	)
Exceptional items	(21.1	)	—		(21.1	)

Group operating profit	142.9		11.1		154.0

Results of continuing operations in 2001 have been stated after charging exceptional costs of £21.1 million, which were incurred as follows: cost of sales £9.5 million, marketing, selling and distribution £6.6 million, administration £4.6 million and research and development £0.4 million.

F-15

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

Operating Profit—(continued)

	Year ended December 31, 2000
	Continuing operations		Discontinued operations		Total
	(£ million)
Turnover	911.5		223.2		1,134.7
Cost of sales	(312.9	)	(130.7	)	(443.6	)

Gross profit	598.6		92.5		691.1
Marketing, selling and distribution	(307.0	)	(48.0	)	(355.0	)
Administration	(92.2	)	(14.1	)	(106.3	)
Research and development	(44.5	)	(1.9	)	(46.4	)
Other income net of expenses	2.0		0.5		2.5
Amortization of acquisition goodwill	(6.9	)	—		(6.9	)
Exceptional items	(12.4	)	(3.9	)	(16.3	)

Group operating profit	137.6		25.1		162.7

Results of continuing operations in 2000 were stated after charging exceptional costs of £12.4 million, which were incurred as follows: cost of sales £9.3 million, marketing, selling and distribution £1.2 million, administration £1.9 million. Results of discontinued operations in 2000 were stated after charging exceptional costs of £3.9 million which were incurred as follows: cost of sales £3.9 million.

Operating profit is stated after charging/(crediting) the following items:

	Years ended December 31
	2002	2001		2000
	(£ million)
Amortization of intangibles	5.1	1.8		2.4
Depreciation	51.6	48.1		53.0
Loss/(profit) on sale of fixed assets	2.7	(0.7	)	3.2
Operating lease rentals for land and buildings	11.0	8.3		8.8
Operating lease rentals for other assets	9.8	9.7		10.0
Auditors’ remuneration	0.9	0.8		1.0
Advertising costs	15.1	15.6		22.3

Payments made to the Group’s auditors for non-audit services amounted to £1.2 million (2001—£1.5 million, 2000—£1.2 million) in the United Kingdom and £1.9 million (2001—£1.0 million, 2000—£0.9 million) outside the United Kingdom. Of these payments, £1.8 million (2001—£1.7 million, 2000—£1.6 million) related to taxation services and £1.3 million (2001—£0.8 million, 2000—£0.5 million) to statutory and other certifications and services. Of the total payments for non-audit services, £1.2 million (2001—£1.3 million, 2000—£0.9 million) related to capital transactions.

Exceptional items

Operating exceptional items within Ongoing operations of £29.9 million comprise £17.5 million for the write-down of the Group’s trade investment in the common stock of Advanced Tissue Sciences, Inc., £8.4 million for the acquisition integration of ORATEC and Dermagraft and £4.0 million for further rationalization consequent on the contribution of businesses to BSN Medical in 2001. The Group’s share of exceptional items of the joint venture relates to its share of manufacturing rationalization costs.

In 2001, operating exceptional items within Ongoing operations of £19.3 million comprised £2.9 million manufacturing rationalization, £7.5 million rationalization consequent on the contribution of the businesses to BSN Medical and £8.9 million integration in connection with the acquisition of the Advanced Woundcare business from Beiersdorf AG. Operating exceptional items within Operations contributed to the joint venture represented manufacturing rationalization costs of operations subsequently contributed to BSN Medical. The Group’s share of exceptional items of the joint venture related to its share of manufacturing rationalization costs.

F-16

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

Exceptional items—(continued)

In 2000, operating exceptional items within Ongoing operations of £3.8 million comprised the cost of the manufacturing rationalization program begun in 1999 of £0.4 million and acquisition integration costs of £3.4 million, principally in connection with the Collagenase business acquired in January 2000 and the Orthopaedic Biosystems business acquired in November 2000. Operating exceptional items within Operations contributed to the joint venture represented manufacturing rationalization costs of operations subsequently contributed to BSN Medical. Operating exceptional items within Discontinued operations of £3.9 million comprised the cost of manufacturing rationalization of operations subsequently disposed of in 2002.

Net Profit and Loss on Disposals

A net profit of £17.2 million arose on the disposal in March 2002 of the rehabilitation business for a net cash consideration of £71.3 million and a 21.5% equity interest in AbilityOne Corporation (AbilityOne). The net profit comprises a gain of £47.2 million on net assets realized, less £30.0 million of acquisition goodwill previously written off to reserves. In addition, a net gain of £0.8 million arose on adjustments in respect of previous disposals.

The net profit on disposal in 2001 of £49.2 million related to the sale of the ear, nose and throat business in June 2001 for a net cash consideration of £61.7 million. This profit represented the gain on net assets realized.

The net profit on disposal in 2000 of £109.5 million related to the sale of the consumer healthcare business in June 2000 for cash consideration of £209.8 million. The net profit comprised a gain of £141.3 million on net assets realized, less £31.8 million of acquisition goodwill previously written off to reserves.

Interest

	Years ended December 31
	2002	2001	2000
	(£ million)
Interest income	6.6	2.5	4.4

Interest expense:
On bank borrowings	16.2	17.5	8.7
Other borrowings	0.6	1.5	2.7

	16.8	19.0	11.4
Share of joint venture’s net interest payable	1.6	0.9	—
Share of associated undertaking’s net interest payable	0.9	—	—

	19.3	19.9	11.4

Interest payable on currency swaps amounting to £23.3 million (2001—£22.2 million, 2000—£23.5 million) has been set off against interest receivable.

F-17

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

Employees and Directors

The average number of employees was:

	Years ended December 31
	2002	2001	2000
	(Number)
United Kingdom	1,740	1,810	2,589
Continental Europe	1,279	1,281	1,549
United States	3,090	3,057	2,974
Other America	201	253	413
Africa, Asia and Australasia	1,196	1,525	2,910

	7,506	7,926	10,435

Staff costs amounted to:

	Years ended December 31
	2002	2001	2000
	(£ million)
Wages and salaries	261.1	245.0	249.1
Social security costs	25.1	25.7	25.4
Other pension costs—(Note 28)	14.3	10.4	10.6

	300.5	281.1	285.1

Aggregate emoluments of the directors, including pension entitlements of £106,000 (2001—£81,000, 2000—£98,000), were £1,823,000 (2001—£1,685,000, 2000—£2,107,000). The emoluments of the highest paid director excluding pension entitlement were £856,000 (2001—£770,000, 2000—£684,000). The accrued pension of the highest paid director at the end of the year was £153,000 (2001—£119,000, 2000—£95,000).

Taxation

	Years ended December 31
	2002		2001		2000
	(£ million)
Current taxation:
UK corporation tax at 30% (2001—30%, 2000—30%)	8.9		9.5		28.8
UK adjustments in respect of prior years	(2.3	)	(1.5	)	(2.6	)

	6.6		8.0		26.2
Overseas tax	38.5		51.4		28.1
Overseas adjustments in respect of prior years	(3.0	)	3.6		(5.0	)

	35.5		55.0		23.1
Share of joint venture’s tax charge	4.5		3.3		—
Share of associated undertaking’s tax charge	1.0		—		—

Total current taxation	47.6		66.3		49.3
Deferred taxation:
Origination and reversal of timing differences	14.6		(0.3	)	4.2
Adjustments to estimated amounts arising in prior periods in respect of assets	3.0		(1.2	)	4.2
Share of joint venture’s deferred taxation	0.6		(0.8	)	—

Total deferred taxation	18.2		(2.3	)	8.4

	65.8		64.0		57.7

F-18

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

Taxation—(continued)

The tax charge has been reduced by £12.7 million, of which £0.6 million arose in the joint venture, as a consequence of the exceptional costs of the write-off of the Advanced Tissue Sciences, Inc., investment, the rationalization program and acquisition integration costs and increased by £16.9 million as a result of the exceptional profit on disposal, leaving the tax charge on profits before exceptional items at £61.6 million.

The tax charge was reduced by £6.0 million in 2001, of which £1.4 million arose in the joint venture, as a consequence of the exceptional costs of the rationalization program and acquisition integration costs and increased by £17.7 million as a result of the exceptional profit on disposal, leaving the tax charge on profits before exceptional items at £52.3 million.

The tax charge was reduced by £3.2 million in 2000 as a consequence of the exceptional costs of the rationalization program and acquisition integration costs and increased by £8.0 million as a result of the exceptional profit on disposal, leaving the tax charge in profits before exceptional items at £52.9 million.

The standard rate of tax for the year is based on the United Kingdom standard rate of corporation tax of 30% (2001—30%, 2000—30%). The total tax charge differs from the standard rate as follows:

	Years ended December 31
	2002		2001		2000
	(%)
UK standard rate	30.0		30.0		30.0
Non-deductible/non-taxable items	3.0		(3.9	)	(9.1	)
Prior year items	(3.0	)	1.1		(2.8	)
Overseas income taxed at other than UK standard rate	6.9		5.8		3.6
Fixed asset timing differences	(3.3	)	0.2		—
Other timing differences	(6.9	)	1.0		(3.2	)

Effective total current tax rate	26.7		34.2		18.5
Fixed asset timing differences	3.3		(0.2	)	—
Other timing differences	6.9		(1.0	)	3.2

Total tax rate	36.9		33.0		21.7

Factors that may affect future tax charges

Tax rates on the Group’s overseas profits are generally higher than the UK corporation tax rate so changes in the proportion of profits earned overseas will affect the Group’s effective tax rate over time. Tax rates may also be affected by differences between tax allowances and book depreciation.

No deferred tax is recognized on unremitted earnings of overseas subsidiaries, associates and joint ventures. However, no significant additional tax charges are expected to arise on amounts that are planned to be remitted in the foreseeable future.

Dividends

	Years ended December 31
	2002	2001	2000
	(£ million)
Ordinary interim of 1.8p (2001—1.75p, 2000—1.7p)	16.7	16.1	15.6
Ordinary final of 3.0p (2001—2.9p, 2000—2.8p)	27.9	26.8	25.7

	44.6	42.9	41.3

A special dividend of £415.6 million (37.14p per old ordinary 10p share) was paid on August 11, 2000. Non-equity preference dividends amounting to £15,000 were paid in 2002 (2001—£15,000, 2000—£15,000).

F-19

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

10.

Results Before Goodwill Amortization and Exceptional Items

In order to provide a trend measure of underlying performance, profit before taxation is adjusted below to exclude goodwill amortization and exceptional items, and earnings per share has been recalculated as set out in Note 11.

	Years ended December 31
	2002		2001		2000
	(£ million)
Profit before taxation	177.9		193.6		265.2

Adjustments:
Continuing operations: goodwill amortization	17.5		10.4		6.9
Continuing operations: exceptional items	29.9		21.1		12.4
Discontinued operations: exceptional items	—		—		3.9
Share of operating profit of the joint venture: exceptional items	2.6		5.0		—
Discontinued operations: net gain on disposals	(18.0	)	(49.2	)	(109.5	)

	32.0		(12.7	)	(86.3	)

Profit before taxation, goodwill amortization and exceptional items	209.9		180.9		178.9

Taxation on profit before goodwill amortization and exceptional items	61.6		52.3		52.9

Earnings before goodwill amortization and exceptional items	148.3		128.6		126.0

11.

Earnings per Ordinary Share

The calculation of basic earnings per Ordinary Share of 12.11p (2001—14.07p, 2000 - 20.07p) is based on profit on ordinary activities after taxation and preference dividends of £112.1 million (2001—£129.6 million, 2000—£207.5 million) and on 926 million Ordinary Shares, being the weighted average number of shares in issue during the year (2001—921 million, 2000—1,034 million). No adjustment has been made to comparative data in respect of the share consolidation in 2000 as together with the special dividend payment in 2000 the overall effect was that of share repurchase at fair value.

The calculation of diluted earnings per Ordinary Share is based on basic earnings, as defined above, and on 933 million Ordinary Shares (2001—929 million, 2000—1,040 million) calculated as follows:

	Years ended December 31
	2002		2001		2000
	(Shares million, except per Ordinary Share amounts)
Basic weighted average number of shares	926		921		1,034
Weighted average number of shares under option	19		20		22
Number of shares that would have been issued at fair value	(12	)	(12	)	(16	)

Diluted weighted average number of shares	933		929		1,040

Diluted earnings per Ordinary Shares	12.02p		13.95p		19.95p

F-20

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

11.

Earnings per Ordinary Share—(continued)

The calculation of adjusted basic earnings per Ordinary Share is as follows:

	Years ended December 31
	2002		2001		2000
	(£ million, except per Ordinary Share amounts)
Basic earnings	112.1		129.6		207.5
Continuing operations: goodwill amortization	17.5		10.4		6.9
Continuing operations: exceptional items	29.9		21.1		12.4
Discontinued operations: exceptional items	—		—		3.9
Share of operating profit of the joint venture: exceptional items	2.6		5.0		—
Discontinued operations: profit on disposals	(18.0	)	(49.2	)	(109.5	)
Exceptional taxation	4.2		11.7		4.8

Adjusted basic earnings	148.3		128.6		126.0

Adjusted basic earnings per Ordinary Share	16.02	p	13.96	p	12.19	p

Adjusted diluted basic earnings per Ordinary Share	15.89	p	13.84	p	12.12	p

12.

Debtors

	December 31
	2002	2001
	(£ million)
Amounts falling due within one year:
Trade and other debtors	222.6	224.4
Amounts owed by joint venture	2.3	7.4
Amounts owed by associated undertaking	0.5	—
Prepayments and accrued income	22.4	20.1
Debit balances on currency swaps	8.5	2.8

	256.3	254.7
Amounts falling due after more than one year:
Deferred taxation—(Note 22)	4.0	3.5
Pension prepayments	5.3	5.6
Other debtors	2.3	2.2
Debit balances on currency swaps	12.8	0.8

	280.7	266.8

Trade and other debtors are stated after deducting provisions for uncollectable or doubtful debts of £7.0 million (2001—£7.3 million).

In previous years, debit balances on currency swaps were reported within cash. The prior year amount has been reclassified. Deferred tax assets of £4.0 million (2001—£3.5 million) represent short-term timing differences and are considered to be recoverable.

Other debtors falling due after more than one year are non-interest bearing and denominated in various currencies. The fair value of these debtors is the same as book value.

F-21

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

13.

Stocks

	December 31
	2002	2001
	(£ million)
Raw materials and consumables	42.0	47.6
Work-in-progress	12.9	12.2
Finished goods and goods for resale	174.6	172.4

	229.5	232.2

14.

Intangible Fixed Assets

	Goodwill		Other intangibles		Total
	(£ million)
Cost
At January 1, 2001	136.4		43.3		179.7
Exchange adjustment	1.4		1.0		2.4
Additions	—		4.3		4.3
Acquisitions	39.4		3.5		42.9
Disposals	—		(1.4	)	(1.4	)
Contributed to the joint venture	—		(3.1	)	(3.1	)
Discontinued operations	—		(2.3	)	(2.3	)

At December 31, 2001	177.2		45.3		222.5
Exchange adjustment	(27.0	)	(4.5	)	(31.5	)
Additions	—		4.2		4.2
Acquisitions	167.7		9.7		177.4
Disposals	—		—		—
Discontinued operations	—		(2.4	)	(2.4	)

At December 31, 2002	317.9		52.3		370.2

Amortization
At January 1, 2001	9.1		16.8		25.9
Exchange adjustment	—		0.4		0.4
Charge for the year	10.4		1.8		12.2
Disposals	—		(1.2	)	(1.2	)
Contributed to the joint venture	—		(2.1	)	(2.1	)
Discontinued operations	—		(0.5	)	(0.5	)

At December 31, 2001	19.5		15.2		34.7
Exchange adjustment	(1.6	)	(1.7	)	(3.3	)
Charge for the year	17.5		5.1		22.6
Disposals	—		—		—
Discontinued operations	—		(1.0	)	(1.0	)

At December 31, 2002	35.4		17.6		53.0

Net book amounts
At December 31, 2002	282.5		34.7		317.2

At December 31, 2001	157.7		30.1		187.8

F-22

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

15.

Tangible fixed assets

	Land and buildings				Plant and equipment		In course of construction		Total
	Freehold		Leasehold		Plant and equipment		In course of construction		Total
	(£ million)
Cost
At January 1, 2001	75.6		11.9		463.3		18.7		569.5
Exchange adjustment	0.7		(0.2	)	0.8		0.3		1.6
Acquisitions	—		—		3.1		—		3.1
Additions	0.3		0.3		38.2		31.6		70.4
Disposals	(1.9	)	(0.5	)	(33.6	)	—		(36.0	)
Transfers	0.3		0.6		21.3		(19.6	)	2.6
Contributed to the joint venture	(8.3	)	(0.2	)	(37.7	)	(6.2	)	(52.4	)
Discontinued operations	(4.6	)	—		(5.4	)	(0.2	)	(10.2	)

At December 31, 2001	62.1		11.9		450.0		24.6		548.6
Exchange adjustment	(3.6	)	(0.2	)	(20.9	)	(2.1	)	(26.8	)
Acquisitions	—		0.1		4.8		0.4		5.3
Additions	0.1		0.1		38.1		42.7		81.0
Disposals	(1.8	)	(0.2	)	(21.1	)	(0.1	)	(23.2	)
Transfers	5.3		2.3		27.5		(35.1	)	—
Discontinued operations	(1.3	)	(4.0	)	(15.5	)	(0.1	)	(20.9	)

At December 31, 2002	60.8		10.0		462.9		30.3		564.0

Depreciation
At January 1, 2001	16.9		4.1		297.4		—		318.4
Exchange adjustment	0.2		—		0.3		—		0.5
Charge for the year	1.4		0.6		46.1		—		48.1
Disposals	(0.8	)	(0.4	)	(31.4	)	—		(32.6	)
Contributed to the joint venture	(1.6	)	—		(24.5	)	—		(26.1	)
Discontinued operations	(1.4	)	—		(3.3	)	—		(4.7	)

At December 31, 2001	14.7		4.3		284.6		—		303.6
Exchange adjustment	(0.9	)	(0.2	)	(13.3	)	—		(14.4	)
Charge for the year	1.3		0.3		50.0		—		51.6
Disposals	(1.7	)	(0.2	)	(17.5	)	—		(19.4	)
Transfers	(1.6	)	0.5		1.1		—		—
Discontinued operations	(0.2	)	(0.8	)	(12.2	)	—		(13.2	)

At December 31, 2002	11.6		3.9		292.7		—		308.2

Net book amounts
At December 31, 2002	49.2		6.1		170.2		30.3		255.8

At December 31, 2001	47.4		7.6		165.4		24.6		245.0

Fixed assets include land with a cost of £4.7 million that is not subject to depreciation (2001—£4.6 million).

The net book value of leases with less than 50 years to run amounted to £6.1 million (2001—£5.3 million). Included in the amounts above are assets held under finance leases with a net book amount of £2.3 million (2001—£2.4 million). There is a property for resale in the Group with a net book value of £1.1 million (2001—£1.3 million).

F-23

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

16.

Investments

	Own Shares		Associated undertakings		Trade investments		Total
	(£ million)
At January 1, 2001	2.9		0.8		20.3		24.0
Exchange adjustment	—		—		0.5		0.5
Additions	1.2		—		2.4		3.6
Shares vested	(1.6	)	—		—		(1.6	)
Contributed to the joint venture	—		(0.8	)	—		(0.8	)

At December 31, 2001	2.5		—		23.2		25.7
Exchange adjustment	—		—		(1.5	)	(1.5	)
Additions	2.4		—		1.3		3.7
Impairment	—		—		(18.0	)	(18.0	)
Shares vested	(1.7	)	—		—		(1.7	)

At December 31, 2002	3.2		—		5.0		8.2

Trade investments are US dollar denominated. They include an equity investment in Advanced Tissue Sciences, Inc., previously quoted on the Nasdaq exchange in the US against which a provision has been made taking the book value down to its market value of nil (2001—book value £18.6 million and market value £15.3 million) following a voluntary petition for reorganization under Chapter 11 of the US Bankruptcy Code. There is no material difference between the fair value and the carrying value of the other trade investments.

Own shares represent the holding of the Company’s own shares in respect of the Smith & Nephew Employee’s Share Trust (see Note 31).

17.

Investment in joint venture (BSN Medical)

	(£ million)
At January 1, 2001	—
Initial investment in joint venture including initial debt assumed	136.7
Retained profit for the fiscal year	4.4
Debt repaid by the joint venture	(24.6	)
Exchange adjustment	(2.5	)

At December 31, 2001	114.0
Retained profit for the fiscal year	6.4
Debt repaid by the joint venture	(5.7	)
Exchange adjustment	0.3

At December 31, 2002	115.0

Group investment in joint venture is represented by:

	December 31
	2002		2001
	(£ million)
Share of gross assets:
Fixed	28.2		27.9
Current	78.0		76.0
Share of gross liabilities:
Due within one year	(52.6	)	(57.0	)
Due after one year	(8.9	)	(8.6	)

	44.7		38.3
Goodwill	70.3		70.6
Loans to joint venture	—		5.1

	115.0		114.0

F-24

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

17.

Investment in joint venture (BSN Medical)—(continued)

Goodwill arising on the formation of the joint venture is considered to have an indefinite useful economic life and is capable of separate measurement since the joint venture operates independently of the Group. It operates in a mature sector of the medical devices industry, has high market shares, and long product life cycles. Significant barriers to entry exist in terms of technology, manufacturing know-how, regulatory compliance, market reputation and customer relationships. If the goodwill had been amortized over 20 years, operating profit would have been lower by £3.2 million (2001—£2.6 million) and investment in joint venture would have been lower by £5.8 million (2001—£2.6 million).

18.

Investment in associated undertaking (AbilityOne)

	(£ million)
At January 1, 2002	—
Initial investment in associated undertaking	7.5
Retained profit for the fiscal year	3.0
Exchange adjustment	(2.0	)

At December 31, 2002	8.5

Group investment in associated undertaking of £8.5 million (2001—nil) comprises goodwill of £15.4 million less share of net liabilities of £6.9 million.

Goodwill on acquisition of the associated undertaking of £17.5 million comprised the difference between the fair value of the consideration of £5.7 million given, together with transaction costs of £1.8 million, and the book value of net liabilities acquired of £10.0 million.

Goodwill in the associated undertaking is considered to have an indefinite useful economic life and is capable of separate measurement since the associated undertaking operates independently of the Group. It operates in the rehabilitation industry, has high market shares, and long product life cycles. Significant barriers to entry exist in terms of breadth of the product range, sales force size, physical distribution capabilities, key customer and professional relationships and market reputation. If the goodwill had been amortized over 20 years, operating profit and investment in associated undertaking each would have been lower by £0.6 million.

19.

Borrowings

	December 31
	2002		2001
	(£ million)
Gross borrowings:
Due within one year	151.9		94.0
Due after one year	164.2		161.2

	316.1		255.2
Cash and bank	(22.5	)	(26.4	)
Debit balances on currency swaps	(21.3	)	(3.6	)
Credit balances on currency swaps	4.6		18.3

Net borrowings	276.9		243.5

In previous years, debit balances on currency swaps were reported within cash and credit balances within borrowings. The prior year amounts have been reclassified.

F-25

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

19.

Borrowings—(continued)

Borrowings are analyzed as follows:

	December 31
	2002	2001
	(£ million)
Bank loans and overdrafts	315.1	253.8
Other loans wholly repayable within five years	1.0	1.4

	316.1	255.2

Borrowings are repayable as follows:

	December 31
	2002	2001
	(£ million)
Within one year:
Bank loans and overdrafts	151.5	93.5
Other loans	0.4	0.5

Total within one year	151.9	94.0
After one year:
Bank loans and overdrafts
after one and within two years	57.2	67.0
after two and within three years	86.4	63.2
after three and within four years	—	30.1
after four and within five years	20.0	—

	163.6	160.3
Other loans:
after one and within two years	0.3	0.3
after two and within three years	0.3	0.3
after three and within four years	—	0.3
after four and within five years	—	—

	0.6	0.9
Total after one year	164.2	161.2

	316.1	255.2

In addition to the above borrowings, other financial liabilities are £0.3 million, being 5½% cumulative preference shares without a fixed maturity.

The Board of Directors of the Company has established a set of policies to manage funding and currency risks. The Group only uses derivative financial instruments to manage the financial risks associated with underlying business activities and their financing. The Group’s policy is to ensure that there is sufficient funding and facilities in place to meet foreseeable borrowing requirements.

Bank loans and overdrafts represent drawings under committed and uncommitted facilities of £493 million and £255 million, respectively. Of the undrawn committed facilities of £199 million, £3 million expire within one year and £196 million after two but within five years (2001—undrawn committed facilities—£99 million of which £2 million expire within one year and £97 million after two but within five years). Borrowings secured on fixed and current assets were £0.9 million (2001—£1.1 million). Cash, debit and credit balances on currency swaps and borrowings are shown at book value which is the same as fair value.

The Group’s policy is to protect shareholders’ funds by matching foreign currency assets, including acquisition goodwill, with foreign currency liabilities where practicable. These liabilities take the form of either borrowings or currency swaps.

F-26

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

19.

Borrowings—(continued)

The Group has currency swaps which are retranslated at year-end exchange rates and have maturities with dates ranging from 2003 to 2006. For the Group, gross sterling equivalents of £579.9 million (2001—£483.0 million) receivable and £563.2 million (2001—£497.7 million) payable have been netted. The net debit balance at £16.7 million (2001—net credit balance of £14.7 million) is included as £21.3 million in debit balances on currency swaps and as £4.6 million credit balances on currency swaps (2001—£3.6 million in debit balances on currency swaps and £18.3 million in credit balances on currency swaps). Balances on currency swaps are floating interest rate contracts and forward foreign exchange contracts and are used for hedging foreign investments.

Currency swaps mature as follows:

	Amount receivable	Amount payable
	(£ million)	(Currency million)
At December 31, 2002:
Within one year:
US dollars	151.2		US$230.6
Australian dollars	15.2		Aus$42.7
Euros	90.1		€142.9
Japanese yen	13.3		Yen2,571
New Zealand dollars	2.5		NZ$8.0
Canadian dollars	7.1		C$17.5

	279.4
After one year and within two years:
US dollars	179.8		US$273.2
Euros	37.8		€60.0

	217.6
After two years and within three years (US dollars)	53.4		US$83.2
After three years and within four years (US dollars)	29.5		US$46.0

	579.9

At December 31, 2001:
Within one year:
US dollars	228.1		US$356.7
Australian dollars	11.6		Aus$31.7
Euros	75.7		€121.7
Japanese yen	5.6		Yen970.0
South African rand	5.9		R84.0
New Zealand dollars	2.3		NZ$8.0
Canadian dollars	1.5		C$3.5
Swiss francs	0.1		ChF0.2

	330.8
After one year and within two years (US dollars)	52.7		US$78.2
After two years and within three years:
US dollars	56.5		US$83.2
Euros	37.8		€60.0

	94.3
After three years and within four years (US dollars)	5.2		US$8.2

	483.0

The majority of the Group’s financial assets and liabilities, including currency swaps, are at floating interest rates relating to the currencies concerned. The Group uses simple floating to fixed rate contract interest rate swaps to protect borrowing costs and the differentials between borrowing and deposit rates. 75% of the interest costs and 83% of the interest income are protected through December 31, 2003, with some protection carrying over into 2004.

F-27

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

20.

Financial instruments

Short-term debtors and creditors are excluded from the following disclosures:

Currency and interest rate profile of interest bearing liabilities:

						Fixed rate liabilities
	Gross borrowings	Currency swaps	Total liabilities	Floating rate liabilities	Fixed rate liabilities	Weighted average interest rate	Weighted average time for which rate is fixed
	(£ million)					%	Years
At December 31, 2002:
US Dollar	263.8	393.1	656.9	93.5	563.4	3.7	1
Euro	4.8	132.3	137.1	37.4	99.7	3.7	1
Other	47.5	37.8	85.3	85.3	—	—	—

Total interest bearing liabilities	316.1	563.2	879.3	216.2	663.1

At December 31, 2001:
US Dollar	188.3	361.6	549.9	67.4	482.5	4.6	1
Euro	2.2	111.1	113.3	9.9	103.4	4.0	2
Other	64.7	25.0	89.7	80.8	8.9	1.8	1

Total interest bearing liabilities	255.2	497.7	752.9	158.1	594.8

In addition to the above, the Group has a liability due after one year for deferred acquisition consideration (denominated in Euros) totalling £5.0 million (2001—£6.5 million) on which no interest is paid (see Note 21).

Currency and interest rate profile of interest bearing assets:

						Fixed rate assets
	Cash and bank	Currency swaps	Total assets	Floating rate assets	Fixed rate assets	Weighted average interest rate	Weighted average time for which rate is fixed
	(£ million)					%	Years
At December 31 2002:
Sterling	0.9	579.9	580.8	77.8	503.0	5.1	1
Other	21.6	—	21.6	21.6	—	—	—

Total interest bearing assets	22.5	579.9	602.4	99.4	503.0

At December 31, 2001:
Sterling	2.1	483.0	485.1	89.1	396.0	5.5	1
Other	24.3	—	24.3	24.3	—	—	—

Total interest bearing assets	26.4	483.0	509.4	113.4	396.0

The above interest rate analysis includes the effect of interest rate swaps.

Floating rates on both assets and liabilities are typically based on the three month LIBOR interest rate relevant to the currency concerned.

F-28

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

20.

Financial instruments—(continued)

At December 31, 2002, notional principal balances by currency and related interest rates under interest rate swap agreements were:

	Expected to mature in years ending December 31
	2003		2004		Fair value (i)
	(Currency million, except interest rates)				(£ million)
At December 31, 2002:
Principle (sterling)	£503		£103		6.5
Fixed rate receivable	5.1	%	4.8	%
Variable rate payable	3.9	%	4.2	%

Principle (US dollars)	US$907		US$180		(14.2	)
Fixed rate payable	3.8	%	3.0	%
Variable rate receivable	1.4	%	2.4	%

Principle (euros)	€153		€40		(1.1	)
Fixed rate payable	3.4	%	4.5	%
Variable rate receivable	2.7	%	3.0	%

(i)

The fair values for interest rate swaps are calculated as the net present value of the future cash flows as at December 31, 2002, discounted at market rates of interest at that date.

At December 31, 2001, notional principal balances by currency and related interest rates under interest rate swap agreements were:

	Expected to mature in years ending December 31
	2002		2003		2004		Fair value (i)
	(Currency million, except interest rates)						(£ million)
At December 31, 2001
Principle (sterling)	£396		£140		£25		4.0
Fixed rate receivable	5.5	%	5.5	%	5.6	%
Variable rate payable	4.4	%	4.4	%	4.4	%

Principle (US dollars)	US$702		US$164		—		(10.2	)
Fixed rate payable	4.6	%	4.4	%	—
Variable rate receivable	2.4	%	2.4	%	—

Principle (euros)	€169		€98		€40		(0.5	)
Fixed rate payable	4.1	%	3.6	%	4.5	%
Variable rate receivable	3.3	%	3.3	%	3.3	%

(i)

The fair values for interest rate swaps are calculated as the net present value of the future cash flows as at December 31, 2001, discounted at market rates of interest at that date.

F-29

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

20.

Financial instruments—(continued)

Foreign exchange and interest rate exposure

The Group uses forward foreign exchange contracts to hedge amounts payable and anticipated trade cash flows against potential foreign exchange movements. The principal currencies hedged by forward foreign exchange contracts are sterling and US dollars. At December 31, 2002, the Group had contracted to exchange within one year the equivalent of £166 million, of which £91 million related to sterling against various currencies and £108 million related to US dollars against various currencies.

The Group’s operating units hold no material unhedged monetary assets or liabilities other than in their functional operating currency. Therefore, there are no currency exposures on monetary assets and liabilities that could give rise to material gains or losses in the income statement. The Group also hedges forward its interest rate risk for up to two years using interest rate swap contracts.

Fair value of financial assets and liabilities

Forward foreign exchange contracts and interest rate swap contracts, taken out as hedges, are not marked to market. Gains and losses thereon are recognized only when the exposure that is being hedged is itself recognized. The following table sets out the book and fair values of the Group’s derivative financial instruments. Market rates have been used to determine the fair values of interest rate swaps, currency swaps and forward contracts.

Derivative financial instruments held to manage interest rate and currency risk:

	December 31, 2002			December 31, 2001
	Book value	Fair value		Book value		Fair value
	(£ million)
Net interest rate swaps	—	(8.8	)	—		(6.7	)
Net forward contracts	—	(5.8	)	—		2.1

Unrecognized gains and losses on hedges	—	(14.6	)	—		(4.6	)

Net currency swaps	16.7	16.7		(14.7	)	(14.7	)

The Group’s primary financial instruments are set out in Note 19. The fair value of these instruments is the same as book value.

The following table shows the amount of unrecognized gains and losses which have been included in the profit and loss account for the year and those gains and losses which are expected to be included in next year’s or later profit and loss accounts.

	Unrecognized gains		Unrecognized losses		Total net unrecognized gains/(losses)
	(£ million)
Unrecognized gains and losses on hedges at December 31, 2000	3.6		(1.8	)	1.8
Less: gains and losses arising in previous years that were recognized in 2001	(2.8	)	1.7		(1.1	)

Gains and losses arising before December 31, 2000 that were not recognized in 2001	0.8		(0.1	)	0.7
Gains and losses arising in 2001 that were not recognized in 2001	8.1		(13.4	)	(5.3	)

Unrecognized gains and losses on hedges at December 31, 2001	8.9		(13.5	)	(4.6	)
Less: gains and losses arising in previous years that were recognized in 2002	(8.2	)	13.2		5.0

Gains and losses arising before December 31, 2001 that were not recognized in 2002	0.7		(0.3	)	0.4
Gains and losses arising in 2002 that were not recognized in 2002	7.9		(22.9	)	(15.0	)

Unrecognized gains and losses on hedges at December 31, 2002	8.6		(23.2	)	(14.6	)

Of which:
Gains and losses expected to be recognized in 2003	8.1		(22.1	)	(14.0	)
Gains and losses expected to be recognized in 2004 or later	0.5		(1.1	)	(0.6	)

	8.6		(23.2	)	(14.6	)

F-30

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

21.

Other Creditors

	December 31
	2002	2001
	(£ million)
Amounts falling due within one year:
Trade creditors	141.4	145.1
Social security costs and other taxes	11.1	11.7
Amounts owed to joint venture	4.2	3.9
Accruals and deferred income	54.0	47.6
Acquisition consideration	10.8	15.2
Current taxation	56.9	67.7
Ordinary share dividends	27.9	26.8
Credit balances on currency swaps	3.3	16.5

	309.6	334.5

In previous years, credit balances on currency swaps were reported within borrowings. The prior year amount has been reclassified.

	December 31
	2002	2001
	(£ million)
Amounts falling due after one year:
Acquisition consideration	5.0	6.5
Credit balances on currency swaps	1.3	1.8

	6.3	8.3

Amounts falling due after more than one year are payable as follows: £2.8 million in 2004, £1.7 million in 2005 and £1.8 million 2006 (2001—£2.4 million in 2003, £2.0 million in 2004, £2.1 million in 2005 and £1.8 million in 2006).

22.

Provisions for Liabilities and Charges

	Deferred taxation		Rationalization and integration		Retirement healthcare		Other		Total
	(£ million)
At January 1, 2001	55.6		26.0		9.3		12.6		103.5
Exchange adjustment	1.5		(0.4	)	0.1		—		1.2
Profit and loss account—current year	(0.3	)	20.8		0.1		(0.2	)	20.4
Profit and loss account re prior years	(1.2	)	—		—		—		(1.2	)
Movement in deferred tax asset	(0.2	)	—		—		—		(0.2	)
Contributed to the joint venture	—		(1.6	)	—		—		(1.6	)
Utilization	—		(23.5	)	(0.3	)	(3.0	)	(26.8	)

At December 31, 2001	55.4		21.3		9.2		9.4		95.3
Exchange adjustment	(2.3	)	(0.3	)	(0.5	)	(0.5	)	(3.6	)
Profit and loss account—current year	14.6		13.4		0.8		2.2		31.0
Profit and loss account re prior years	3.0		—		—		—		3.0
Acquisitions	(15.2	)	—		—		3.9		(11.3	)
Movement in deferred tax asset	0.5		—		—		—		0.5
Utilization	—		(22.8	)	(0.1	)	(3.9	)	(26.8	)

At December 31, 2002	56.0		11.6		9.4		11.1		88.1

At December 31, 2002, rationalization and integration provisions include acquisition integration of £3.9 million (2001—£5.4 million). The deferred taxation and retirement healthcare provisions are long term in nature, as is the timing of their utilization. Rationalization and integration and other provisions are expected to be utilized within two years. There are no provisions for contractual amounts and hence none are treated as financial instruments.

F-31

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

22.

Provisions for Liabilities and Charges—(continued)

The provision for deferred taxation consists of the following amounts:

	December 31
	2002		2001
	(£ million)
Goodwill timing differences	45.8		48.7
Other fixed asset timing differences	34.8		27.9
Other timing differences	(24.6	)	(21.2	)

	56.0		55.4

See Note 8 for information on deferred tax assets and liabilities for which no provision has been made.

23.

Share Option Plans

The Smith & Nephew Sharesave Plan (2002) (adopted by shareholders on April 3, 2002) is available to all employees in the United Kingdom employed by participating Group companies, subject to three months service. The scheme provides for employees to save up to £250 per month and are given an option to acquire a set number of shares based on the committed amount to be saved. The option price is the higher of the nominal value and not less than 80% of the middle market quotation of the Ordinary Shares on the three dealing days preceding the date of invitation. The Smith & Nephew International Sharesave Plan (2002) is offered to employees in Australia, New Zealand, South Africa, Canada, Dubai, Germany, Sweden, Spain, Portugal, Switzerland, Austria and Norway. Employees in Belgium, Italy, the Netherlands and France are able to participate respectively in the Smith & Nephew Belgian Sharesave Plan (2002), the Smith & Nephew Italian Sharesave Plan (2002), the Smith & Nephew Dutch Sharesave Plan (2002) and the Smith & Nephew France Sharesave Plan (2002). These plans operate on a substantially similar basis to the Smith & Nephew Sharesave Plan (2002). Options are no longer issued under the Smith & Nephew Employee Share Option Scheme (adopted by shareholders on May 14, 1981) and the Smith & Nephew 1991 Overseas Employee Share Option Scheme (adopted by shareholders on May 15, 1990) but options remain to be exercised under these two schemes. Together all of the plans referred to above are termed the “Employee Schemes”.

The Smith & Nephew 1985 Share Option Scheme (adopted by shareholders on May 9, 1985), the Smith & Nephew 1990 International Executive Share Option Scheme (adopted by shareholders on May 15, 1990), the Smith & Nephew 2001 UK Approved Share Option Plan, the Smith & Nephew 2001 UK Unapproved Share Option Plan and the Smith & Nephew 2001 US Share Plan (adopted by shareholders on April 4, 2001), termed the “Executive Schemes” are operated at the discretion of the Board of Directors.

Under the terms of the Executive Schemes, the Remuneration Committee, consisting of Non-Executive Directors, may select full-time employees of the Group for the grant of options to acquire Ordinary Shares in the Company. Options granted under the Smith & Nephew 2001 US Share Plan (the “US Plan”) are to acquire ADS’s. The option price will not be less than the market value of an Ordinary Share, or the nominal value if higher. The market value will be the quoted price on the business day preceding the date of grant or the quoted price on the date of grant. For Executive Schemes adopted in 2001, the market value will be the average quoted price for the three business days preceding the date of grant or, for the US Plan, the average quoted price for the three business days preceeding the date of grant or the quoted price on the date of grant. With the exception of options granted under the 2001 US Plan, the exercise of options granted from 1997 are subject to achievement of a performance condition. Options granted under the 2001 US Plan are not subject to performance conditions but become exercisable as to 10% after one year, 30% after two years, 60% after three years and the remaining balance after four years. The 1990 International Executive Share Option Scheme and the 2001 UK Unapproved Share Option Plan are open to senior managers outside the United Kingdom and the 1990 International Executive Share Option Scheme and the US Plan are open to senior managers in the US and Canada.

F-32

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

23.

Share Option Plans—(continued)

Under the Executive Schemes, the number of Ordinary Shares over which options may be granted is limited so that the number of shares issued or that may be issued under the Executive Schemes during the ten years preceding the date of grant shall not exceed 5% of the Ordinary Share capital at the date of grant. The total number of Ordinary Shares which may be issuable in any ten-year period under all employee share schemes operated by the Company may not exceed 10% of the Ordinary Share capital at the date of grant.

The movement on outstanding options is as follows:

	Employee Schemes			Executive Schemes
	Number of shares		Range of option prices	Number of shares		Range of option prices
	(Thousand)		(Pence)	(Thousand)		(Pence)
Outstanding at January 1, 2000	7,421		123.2 – 156.0	18,042		93.5 – 195.5
Granted	855		221.2	2,053		265.0 – 270.0
Exercised	(1,868	)	123.2 – 156.0	(3,029	)	93.5 – 195.5
Lapsed or cancelled	(1,109	)	123.2 – 221.2	(503	)	93.5 – 195.5

Outstanding at December 31, 2000	5,299		124.0 – 221.2	16,563		133.0 –270.0
Granted	836		289.2	2,846		326.0 –375.0
Exercised	(1,567	)	124.0 – 156.0	(3,944	)	133.0 –195.5
Lapsed or cancelled	(798	)	124.0 – 289.2	—		—

Outstanding at December 31, 2001	3,770		124.0 – 289.2	15,465		133.0 – 375.0
Granted	1,760		296.0 – 372.7	3,266		359.0 – 409.5
Exercised	(1,017	)	124.0 – 304.0	(2,841	)	143.0 – 327.7
Lapsed or cancelled	(267	)	124.0 – 304.0	(317	)	133.0 – 409.5

Outstanding at December 31, 2002	4,246		124.0 – 372.7	15,573		143.0 – 409.5

Options exercisable at December 31, 2002	113		140.4 – 146.8	7,548		143.0 – 195.5

Weighted average fair value of options granted:
During 2000			101.7			94.7
During 2001			117.7			105.6
During 2002			109.1			106.2

The weighted average fair values of options granted in 2002, 2001 and 2000 were estimated using the Black-Scholes option pricing model for traded options with the following assumptions: dividend yield of 1.3% (2001—1.1%), expected volatility of 19.6% (2001—19.4%) and risk free interest rates of 4.5% (2001—5.0%) for the Employee Schemes which have expected lives of 3.6 years (2001—5.0 years) and 5.2% (2001—4.9%) for the Executive Schemes which have expected lives of 5.6 years (2001—10.0 years). Because options vest over several years and there are restrictions as to exercise and additional options grants are expected, the effects of these hypothetical calculations are not likely to be representative of similar future calculations.

F-33

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

23.

Share Option Plans—(continued)

Movements in the options outstanding under the Employee Schemes and the Executive Schemes and the weighted average option price of these movements are as follows:

	Employee Schemes			Executive Schemes
	Number of shares		Weighted average option price	Number of shares		Weighted average option price
	(Thousand)		(Pence)	(Thousand)		(Pence)
Options outstanding at January 1, 2000	7,421		140.0	18,042		164.1
Granted	855		221.2	2,053		264.8
Exercised	(1,868	)	144.9	(3,029	)	156.4
Lapsed or cancelled	(1,109	)	138.2	(503	)	168.2

Options outstanding at December 31, 2000	5,299		151.8	16,563		152.1
Granted	836		289.2	2,846		361.6
Exercised	(1,567	)	141.4	(3,944	)	165.0
Lapsed or cancelled	(798	)	160.8	—		—

Options outstanding at December 31, 2001	3,770		184.7	15,465		214.9
Granted	1,760		300.0	3,266		380.4
Exercised	(1,017	)	144.2	(2,841	)	161.6
Lapsed or cancelled	(267	)	208.1	(317	)	197.1

Options outstanding at December 31, 2002	4,246		240.7	15,573		255.9

Options exercisable at December 31, 2002	113		143.9	7,548		168.0

Summarized information about options outstanding under the share option schemes at December 31, 2002 is as follows:

	Options outstanding			Options exercisable
	Number outstanding	Weighted average remaining contract life	Weighted average option price	Number exercisable	Weighted average option price
	(Thousand)	(Years)	(Pence)	(Thousand)	(Pence)
Employee Schemes:
124.0p to 221.2p	1,763	1.9	162.0	113	143.9
289.2p to 372.7p	2,483	3.7	297.0	—	—

	4,246			113

Executive Schemes:
143.0p to 270.0p	9,572	5.7	189.0	7,548	168.9
326.0p to 409.5p	6,001	6.5	362.0	—	—

	15,573			7,548

As the employee scheme is a UK Inland Revenue approved Save As You Earn scheme, the Company is exempt from accounting for the difference between the share option price and the market value at the grant date.

The Company has a qualifying employee share ownership trust (“QUEST”) to acquire Smith & Nephew plc Ordinary Shares for the transfer to employees exercising options under the Smith & Nephew Employee Share Option Scheme. The trustee of the QUEST is Smith & Nephew Employees Trustees Limited, a wholly-owned subsidiary of the Company. During the year, the QUEST subscribed for 950,317 shares (2001—837,129 shares) at a cost of £2.3 million (2001—£2.1 million) and transferred a total of 950,317 shares (2001—837,129 shares) to employees on the exercise of options for a consideration of £1.4 million (2001—£1.2 million). All employees of Group subsidiary companies in the United Kingdom, including Executive Directors of the Company, are potential beneficiaries under the QUEST.

F-34

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

24.

Cash Flow Statement

Reconciliation of operating profit to net cash flow from operating activities

	Years ended December 31
	2002		2001		2000
	(£ million)
Operating profit	150.7		154.0		162.7
Depreciation and amortization	74.2		60.3		62.3
Loss/(profit) on sale of tangible fixed assets	2.7		(0.7	)	3.2
Write-off of Advanced Tissue Sciences, Inc., investment	17.5		—		—
Increase in stocks	(11.5	)	(40.0	)	(7.1	)
(Increase)/decrease in debtors	(21.1	)	(17.9	)	4.5
(Decrease)/increase in creditors and provisions	(3.2	)	36.2		(21.6	)

Cash inflow from operating activities	209.3		191.9		204.0

Analysis of net debt

	Cash		Overdrafts		Borrowings due within one year		Borrowings due after one year		Net currency swaps		Liquid resources (i)		Total
	(£ million)
At January 1, 2000	23.8		(5.1	)	(46.0	)	(16.0	)	(6.7	)	72.3		22.3
Net cash flow	—		(2.4	)	(14.5	)	(146.1	)	9.6		(72.3	)	(225.7	)
Exchange adjustment	(0.2	)	0.3		(1.1	)	(3.0	)	(28.9	)	—		(32.9	)

At December 31, 2000	23.6		(7.2	)	(61.6	)	(165.1	)	(26.0	)	—		(236.3	)
Net cash flow	4.1		3.3		(30.2	)	7.4		14.0		—		(1.4	)
Exchange adjustment	(1.3	)	0.2		1.5		(3.5	)	(2.7	)	—		(5.8	)

At December 31, 2001	26.4		(3.7	)	(90.3	)	(161.2	)	(14.7	)	—		(243.5	)
Net cash flow	(4.0	)	(8.9	)	(70.6	)	(18.1	)	—		—		(101.6	)
Exchange adjustment	0.1		0.3		21.3		15.1		31.4		—		68.2

At December 31, 2002	22.5		(12.3	)	(139.6	)	(164.2	)	16.7		—		(276.9	)

(i)

Liquid resources comprise cash deposits.

Reconciliation of net cash flow to movement in net (borrowings)/cash

	Years ended December 31
	2002		2001		2000
	(£ million)
Change in cash in the year	(12.9	)	7.4		(2.4	)
Change in liquid resources	—		—		(72.3	)
Change in net currency swaps	—		14.0		9.6
Change in borrowings	(88.7	)	(22.8	)	(160.6	)

Change in net borrowings from net cash flow	(101.6	)	(1.4	)	(225.7	)
Exchange adjustments	68.2		(5.8	)	(32.9	)

Change in net borrowings in the year	(33.4	)	(7.2	)	(258.6	)
Opening net (borrowings)/cash	(243.5	)	(236.3	)	22.3

Closing net borrowings	(276.9	)	(243.5	)	(236.3	)

Disposals

The net assets of the rehabilitation business disposed of in 2002 comprised fixed assets £9.1 million, inventories £10.1 million, receivables £13.0 million and payables £9.1 million.

F-35

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

25.

Currency Translation

The exchange rates used for the translation of currencies into pounds sterling that have the most significant impact on the Group results were:

	Average rates
	2002	2001	2000
US dollar	1.51	1.44	1.51
Euro	1.59	1.61	1.64

	Year end rates
	2002	2001	2000
US dollar	1.61	1.46	1.49
Euro	1.53	1.64	1.59

26.

Financial Commitments

Capital expenditure contracted but not provided for in the financial statements amounted to £4.3 million (2001—£4.5 million).

Following the acquisition of Advanced Tissue Sciences, Inc.’s, 50% share in the Dermagraft joint arrangement, all obligations of the Group to make contingent milestone payments ceased (2001—£3.4 million payable).

Under the Group’s acquisition and joint development agreements with NUCRYST Pharmaceuticals Corp., (formerly Westaim Biomedical Corp.), amounts of up to £4.7 million (2001—£7.2 million) could become payable on achievement of certain milestones related to regulatory and reimbursement approvals with a further £28.0 million (2001—£30.9 million) contingent on achievement of sales milestones.

At December 31, 2002, the Group was committed to making the following payments during the next year in respect of operating leases:

	Land and buildings		Other assets
	2002	2001	2002	2001
	(£ million)
Operating leases which expire:
Within one year	1.6	1.8	1.8	1.9
After one and within five years	3.6	1.9	7.2	6.5
After five years	3.6	3.3	—	—

	8.8	7.0	9.0	8.4

There were no material commitments in respect of finance leases.

Total commitments under noncancelable operating leases at December 31, 2002 were as follows:

		(£ million)
Within one year		17.8
After one and within two years		14.1
After two and within three years		10.2
After three and within four years		7.6
After four and within five years		6.0
After five years		45.4

		101.1

F-36

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

27.

Contingent Liabilities

There were no guarantees not provided for at December 31, 2002 (2001—£2.3 million).

The Group is party to legal proceedings, in the normal course of business, which it is considered will not result in any material adverse effect on the Group’s results of operations or financial position.

28.

Postretirement Benefits

The Group sponsors pension plans for its employees in most of the countries in which it has major operating companies. The plans are funded by the payment of contributions to separately administered trust funds or insurance companies. Pension plans are established under the laws of the relevant country, with their assets held in separate trust funds or by insurance companies. In those countries where there is no company-sponsored pension plan, the state benefits are considered adequate. Employees’ retirement benefits are the subject of regular management review.

For many years, the Group’s major pension plans in the United Kingdom and the United States have been of the defined benefit type. However, from 2003 all new employees in the United Kingdom and the United States will be provided with a defined contribution pension plan. Existing employees in the United Kingdom and the United States will be given the opportunity to choose whether to remain in their existing plan or change to the new arrangements. Under the projected unit method, the current service cost as a percentage of pensionable earnings will increase over the long term as the members of the defined benefit plans approach retirement.

The pension cost for the Group’s major defined benefit plans in the United Kingdom and the United States has been determined by independent qualified actuaries, using the projected unit method to give a substantially level percentage cost on the current and expected future pensionable payroll. The deficit of plan assets to plan liabilities is amortized, using the percentage of payroll method, over the weighted average of expected pensionable payroll and remaining service lives of current employees in the plan. The actuarial assumptions used for 2002 are as follows:

	United Kingdom	United States
	(% per annum, except service lives)
Increase in pensionable earnings	4.6	5.0
Increase in pensions	2.6	Nil
Inflation	2.6	3.0
Return on investments	7.0	8.0
Average remaining service lives	10 years	13 years

Pension costs were incurred as follows:

	Years ended December 31
	2002		2001		2000
	(£ million)
Principal plans in the United Kingdom and the United States:
Regular cost	9.8		8.6		7.9
Variations from regular cost(i)	(1.9	)	(2.9	)	(2.1	)
Cost of former employees	—		(1.0	)	—
Notional interest on prepayment	(0.1	)	(0.2	)	(0.3	)

	7.8		4.5		5.5
Other plans	6.5		5.9		5.1

	14.3		10.4		10.6

(i)

Variations from regular costs arise from the surplus/deficit in the two principal plans and are amortized using the percentage of payroll method over the weighted average of expected pensionable payroll and remaining service lives of current employees in the plans.

F-37

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

28.

Postretirement Benefits—(continued)

At the dates of the most recent actuarial valuations (in September 2001 and December 2001), the aggregate market value of the assets of the Group’s main defined benefit plans in the United Kingdom and the United States was £268 million (2001—£283 million: valuations in September 2000 and January 2001) representing 93% of plan liabilities for accrued benefits, including allowance for projected future increases in salaries, resulting in a net deficit of £19.8 million (2001—104% and a net surplus of £10.0 million). The estimated deficit of these plans at December 31, 2002 was £80 million.

The unamortized balance of the plan deficits was £22.7 million (2001—surplus £8.9 million).

The contributions made in the United Kingdom and the United States in the accounting period were £2.6 million (2001—£2.2 million) and £5.2 million (2001—£6.5 million), respectively. The contribution rates for 2003 are expected to be 11% of pensionable earnings plus a supplementary payment of £4 million in the United Kingdom and 4% of pensionable earnings plus a supplementary payment of £5 million in the United States.

Included in debtors due after more than one year is a prepayment of £5.3 million (2001—£5.6 million) and included in creditors is an accrual of £6.4 million (2001—£7.3 million) relating to the funding of certain Group pension plans.

The Group charges the United Kingdom pension plan with the costs of administration and independent advisers which the Group incurs. The amount charged in the year was £0.4 million (2001—£0.7 million, 2000—£0.4 million). The amount receivable at December 31, 2002 was £0.1 million (2001—£0.6 million).

The costs of providing healthcare benefits after retirement of £0.8 million (2001—£0.1 million, 2000—£0.7 million) are determined by independent qualified actuaries. The unfunded liability of £9.4 million (2001—£9.2 million) in respect of the accrued healthcare benefits is included in provisions. The principal actuarial assumptions in determining the cost of providing healthcare benefits are those in the United Kingdom and the United States:

	United Kingdom	United States
	(% per annum)
Interest rate	5.6	7.0
Medical cost inflation	6.6	8.0

29.

Postretirement Benefits (FRS 17)

The disclosures below show the effect on the Group’s financial statements had FRS 17 (see Note 34) been adopted and relate to the major defined benefit retirement plans in the United Kingdom and the United States. Other plans are not material.

The principal assumptions used by the independent qualified actuaries in valuing the United Kingdom and United States plans at December 31 for FRS 17 purposes were:

	2002		2001
	United Kingdom	United States	United Kingdom	United States
	(% per annum)
Increase in pensionable earnings	4.3	5.0	4.0	5.0
Increase in pensions	2.3	Nil	2.5	Nil
Inflation	2.3	3.0	2.5	3.0
Discount rate	5.6	7.0	6.0	7.1

F-38

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

29.

Postretirement benefits (FRS 17)—(continued)

The assets and liabilities in the plans and the expected rates of return on investments were:

	December 31, 2002
	United Kingdom Plan			United States Plan
	Rate of Return	Value		Rate of Return	Value
	(%)	(£ million)		(%)	(£ million)
Equities	7.8	114.3		8.7	34.4
Government bonds	4.5	34.0		5.8	8.0
Corporate bonds	5.6	—		7.0	7.0
Property	6.2	9.6		—	—
Other	5.0	7.0		4.2	1.1

Market value of assets		164.9			50.5
Present value of liabilities		(221.4	)		(105.2	)

Deficit		(56.5	)		(54.7	)
Postretirement healthcare		(3.3	)		(7.0	)

		(59.8	)		(61.7	)
Related deferred tax asset		17.9			23.4

Net retirement benefit liability		(41.9	)		(38.3	)

	December 31, 2001
	United Kingdom Plan			United States Plan
	Rate of Return	Value		Rate of Return	Value
	(%)	(£ million)		(%)	(£ million)
Equities	9.0	149.1		10.0	42.8
Government bonds	4.9	36.0		5.5	8.4
Corporate bonds	6.0	—		7.1	6.8
Property	6.9	9.4		—	—
Other	5.8	6.6		2.5	4.8

Market value of assets		201.1			62.8
Present value of liabilities		(190.2	)		(103.8	)

Surplus/(deficit)		10.9			(41.0	)
Postretirement healthcare		(3.1	)		(7.4	)

		7.8			(48.4	)
Related deferred tax (liability)/asset		(2.3	)		18.4

Net retirement benefit asset/(liability)		5.5			(30.0	)

The Group’s shareholders’ funds and profit and loss account at December 31, would have been as follows:

	December 31,
	2002				2001
	Shareholders’ Funds		Profit and loss account		Shareholders’ Funds		Profit and loss account
	(£ million)
As reported	517.3		259.7		404.6		155.4
Provided under SSAP 24	7.8		7.8		8.1		8.1
Less: related deferred tax	(3.0	)	(3.0	)	(3.2	)	(3.2	)

	522.1		264.5		409.5		160.3
FRS 17 net retirement liability above	(80.2	)	(80.2	)	(24.5	)	(24.5	)

As adjusted for FRS 17	441.9		184.3		385.0		135.8

F-39

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

29.

Postretirement benefits (FRS 17)—(continued)

The following amounts would have been charged to operating profit in 2002:

	United Kingdom Plan	United States Plan	Total
	(£ million)
Current service cost—employer’s portion	5.9	5.2	11.1
Past service cost	0.1	—	0.1

Total operating charge	6.0	5.2	11.2

The following amounts would have been charged/(credited) to other finance costs in 2002:

	United Kingdom Plan		United States Plan		Total
	(£ million)
Interest cost	11.4		7.1		18.5
Expected return on assets in the plan	(16.2	)	(5.3	)	(21.5	)

Net (credit)/cost	(4.8	)	1.8		(3.0	)

The net amounts that would have been charged under FRS 17 of £8.2 million compares with the cost under SSAP 24 of £7.8 million (Note 28).

The following amounts would have been included in the statement of total recognized gains and losses in 2002:

	United Kingdom Plan		United States Plan
Difference between expected and actual return on assets
Amount (£ million)	(47.9	)	(13.9	)
Percentage of plan assets	29.0	%	27.5	%

Experience gains and losses arising on the plan liabilities
Amount (£ million)	(2.5	)	(1.1	)
Percentage of plan liabilities	1.1	%	1.0	%

Effects of changes in demographic and financial assumptions underlying the present value of the plan liabilities
Amount (£ million)	(18.6	)	(1.9	)
Actuarial loss recognized in the statement of total recognized gains and losses

Amount (£ million)	(69.0	)	(16.9	)

Percentage of plan liabilities	31.2	%	16.1	%

F-40

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

29.

Postretirement benefits (FRS 17)—(continued)

The following table reconciles the movement in the plan surplus/(deficit) during 2002:

	United Kingdom Plan		United States Plan
	(£ million)
Surplus/(deficit) in the plan at January 1, 2002	10.9		(41.0	)
Movement in the year:
Current service cost—total	(8.6	)	(5.2	)
Past service cost	(0.1	)	—
Other finance income/(cost)	4.8		(1.8	)
Actuarial loss	(69.0	)	(16.9	)
Contributions paid (including by employees)	5.5		5.2
Currency adjustment	—		5.0

Deficit in the plan at December 31, 2002	(56.5	)	(54.7	)

The cost of providing healthcare benefits after retirement of £0.8 million is determined by independent actuaries and would be charged to operating profit in 2002. The principal actuarial assumptions in determining the cost of providing healthcare benefits are those in the United Kingdom and the United States and would be as follows:

	2002		2001
	United Kingdom	United States	United Kingdom	United States
	(% per annum)
Interest rate	5.6	7.0	6.0	7.1
Medical cost inflation	6.6	8.0	7.0	9.0

F-41

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

30.

Acquisitions and Disposals

Acquisitions in 2002

On March 28, 2002, the Group acquired ORATEC Interventions, Inc., (“ORATEC”), at a net cost of £191.2 million in cash. Under acquisition accounting, its assets are included in the Group’s balance sheet at fair value at the date of acquisition as follows:

	Net book value		Fair value adjustments		Fair value to Group
	(£ million)
Net assets at date of acquisition:

Fixed assets	6.5		(1.8	)	4.7
Intangibles	2.4		—		2.4
Stock	4.5		0.3		4.8
Debtors	6.1		(0.2	)	5.9
Creditors due within one year	(4.2	)	0.6		(3.6	)
Provisions	(3.9	)	—		(3.9	)
Deferred taxation	—		15.2		15.2

Net assets	11.4		14.1		25.5
Goodwill arising on acquisition					165.7

					191.2

Discharged by:
Cash consideration					222.5
Cash acquired in ORATEC					(39.1	)
Costs associated with acquisition					7.8

					191.2

The fair value adjustments reflect the adoption of Group accounting policies and deferred taxation arising due to trading losses in the acquired entity which are available for offset.

In 2001, under UK GAAP ORATEC earned a profit after tax of £0.6 million. For the period January 1, 2002 to March 28, 2002, which was the effective date of acquisition, turnover was £7.9 million and the loss after tax of £0.5 million comprised £0.8 million of operating loss and £0.3 million of interest received. There were no other recognized gains and losses in the three months ended March 28, 2002.

Since acquisition by the Group in 2002, ORATEC contributed £21.6 million to the Group’s turnover, and £3.8 million to profit before goodwill amortization and exceptional items and incurred a net operating cash outflow of £6.1 million, including capital expenditures of £0.7 million.

Under acquisition accounting, the impact on the consolidated balance sheet of other acquisitions, including deferred consideration in respect of prior year’s acquisitions in the year, was:

	Net book value
	(£ million)
Tangible fixed assets	0.6
Intangible assets	7.3
Current assets	3.7
Current liabilities	(3.8	)

	7.8
Goodwill	2.0

Consideration	9.8
Associated undertaking formation costs	1.8
Deferred consideration in respect of previous acquisitions paid in the year	5.5

Total consideration	17.1

£2.0 million consideration is accrued and payable in cash in 2003. There was no material difference between the fair value and book value of net assets acquired.

F-42

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

30.

Acquisitions and Disposals—(continued)

Disposals in 2002

The disposal during the year was the rehabilitation business in March 2002, for which net cash consideration was £71.3 million. The net profit on disposal is the gain of £47.2 million on net assets realized, less £30.0 million of acquisition goodwill previously written off to reserves.

Acquisitions in 2001

The principal acquisitions during the year were the advanced woundcare business acquired in April 2001 and the Acticoat business acquired in May 2001. Under acquisition accounting the impact on the consolidated balance sheet of the acquisitions in the year was:

		Net book value
		(£ million)
Tangible fixed assets		3.1
Intangible assets		3.5
Current assets		3.3

		9.9
Goodwill		39.4

Consideration		49.3
Deferred consideration in respect of previous acquisitions		20.0

Total consideration		69.3

There was no material difference between the fair value and book value of net assets acquired.

Disposals in 2001

The disposal during the year was the ear, nose and throat business in June 2001, for which net cash consideration was £61.7 million. The net profit on disposal is the gain on net assets realized.

Acquisitions in 2000

The principal acquisitions during the year were the collagenase business acquired in January 2000 and the Orthopaedic Biosystems business acquired in November 2000. Under acquisition accounting, the impact on the consolidated balance sheet of the acquisitions in the year was:

	Net book value
	(£ million)
Tangible fixed assets	0.1
Current assets	1.9
Current liabilities	(1.1	)

	0.9
Goodwill	89.9

Total consideration	90.8

Of the consideration £39.7 million is deferred consideration (payable in cash) and £51.1 million was cash consideration. There was no material difference between the fair value and book value of net assets acquired.

Disposals in 2000

The disposal during the year was the Consumer healthcare business in June 2000, for which net cash consideration was £209.8 million. The net profit on disposal comprises a gain of £141.3 million on net assets realized, less £31.8 million of acquisition goodwill previously written off to reserves.

F-43

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

31.

Smith & Nephew Employees’ Share Trust

	(£ million)
At January 1, 2001	2.9
Shares acquired	1.2
Shares vested	(1.6	)

At December 31, 2001	2.5
Shares acquired	2.4
Shares vested	(1.7	)

At December 31, 2002	3.2

The Smith & Nephew Employees’ Share Trust (the “Trust”) was established to hold shares relating to the long-term incentive plan referred to in Item 6—“Directors, Senior Management and Employees”. The Trust is administered by an independent professional trust company resident in Jersey and is funded by a loan from the Company. The costs of the Trust are charged to the income statement as they accrue. A dividend waiver is in place in respect of those shares held under the long-term incentive plan that are yet to vest. The waiver represents less than 1% of the total dividends paid.

At December 31, 2002, the Trust held 1.5 million (2001—1.1 million) Ordinary Shares at an aggregate cost of £5.2 million, (2001—£3.5 million). 0.9 million shares, at an aggregate cost of £3.2 million, are included within fixed asset investments on the Group balance sheet. The market value of these shares at December 31, 2002 was £3.4 million (2001—£3.3 million). 0.6 million (2001—0.3 million) shares, with an original cost of £2.0 million (2001—£1.0 million), have vested and are held under option for the benefit of directors and employees.

32.

Related party transactions with joint venture and associated undertaking

In the course of normal operations, the Group traded on an arm’s-length basis with its joint venture BSN Medical from April 1, 2001 and associated undertaking AbilityOne from March 27, 2002. The aggregated transactions which have not been disclosed elsewhere in the financial statements, are summarized below:

	With BSN Medical 2002		With BSN Medical 2001		With AbilityOne 2002
	(£ million)
Sales to the joint venture/associated undertaking	6.9		6.5		0.4
(Loss)/profit made on sales	(0.3	)	(0.4	)	0.1
Agency fees received	19.0		19.2		—
Management charges received	1.6		0.8		—
Purchases from the joint venture/associated undertaking	13.2		11.2		5.3
Profit made by the joint venture on purchases	0.1		0.5		—
Interest payable to the joint venture	—		(0.7	)	—
Interest receivable from the joint venture	0.4		1.7		—

33.

Companies Act 1985

These financial statements do not comprise the Company’s statutory accounts within the meaning of section 240 of the Companies Act.

Statutory accounts for the fiscal year ended December 31, 2002 on which the auditors have given an unqualified audit report will be delivered to the Registrar of Companies for England and Wales (the “Registrar”) in May 2003.

Statutory accounts for the years ended December 31, 2001 and 2000 on which the auditors gave unqualified audit reports have been delivered to the Registrar.

F-44

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

34.

New Accounting Standards

United States:

FAS 143—Accounting for Asset Retirement Obligations, issued in August 2001, is effective for accounting periods beginning after June 15, 2002. This requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs would be capitalized as part of the carrying amount of the long lived asset. Management does not believe that this standard will result in an effect on net income on adoption.

FAS 146—Accounting for Costs Associated with Exit or Disposal Activities, issued in August 2001. This requires recognition of a liability for a cost when the liability is incurred. FAS 146 supersedes EITF Issue No 94-3 Liability Recognition for Certain Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in restructuring) which required a liability for an exit cost to be recognized at the date of an entity’s commitment to plan. The provisions of FAS 146 will be effective for any exit and disposal activities initiated after December 31, 2002. The impact on the Group, if any, will depend upon the circumstances existing at that time.

United Kingdom:

FRS 17—Retirement benefits was issued in November 2000. Full implementation has been deferred until January 1, 2005. Some disclosure requirements are effective for periods prior to this deadline. Additional disclosures for the 2002 Annual Report relate to the charges which have been made to the profit and loss account and statement of total recognized gains and losses. The standard requires that financial statements reflect at fair value the assets and liabilities arising from an employer’s retirement benefit obligations and related funding. The operating costs of providing retirement benefits are recognized in the period in which they are earned together with any related finance costs and changes in the value of the related assets and liabilities. Had FRS 17 been implemented at December 31, 2002, the Group would have reported a retirement liability, net of related deferred tax, of £80.2 million, which compares with £4.8 million recorded in the balance sheet under the existing rules. The impact of FRS 17 on retained earnings for 2002 would have been to reduce retained earnings by £75.4 million (Note 29).

35.

Differences Between Accounting Principles Generally Accepted in the United Kingdom and United States

Summary of differences

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United Kingdom (“UK GAAP”) which differ in certain respects from United States generally accepted accounting principles (“US GAAP”). Those differences which have a significant effect on the Group’s net income and shareholders’ equity are as follows:

Goodwill and other intangible assets

Prior to 1998, goodwill arising on acquisitions was set off against reserves. On disposal of such businesses, goodwill previously set off against reserves is charged to profit or loss on disposal. Since 1998, goodwill and other intangible fixed assets purchased by way of acquisition have been capitalized and written off over a period not exceeding 20 years. Under US GAAP, goodwill and other intangible fixed assets purchased prior to 2002 would have been capitalized and amortized over their expected useful lives. Commencing 2002, goodwill would not be amortized and would be subject to an annual impairment review, whereas other intangible assets would continue to be capitalized and amortized over their useful lives. The amortization of intangibles for each of the five succeeding years is expected to be £3.8 million per annum.

Goodwill arising on the formation of the joint venture is not amortized but is subject to annual impairment review. Under US GAAP, prior to 2002 this goodwill would be amortized. Commencing 2002, this goodwill would not be amortized.

F-45

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

35.

Differences Between Accounting Principles Generally Accepted in the United Kingdom and United States—(continued)

Joint venture

One of the components of the goodwill in the joint venture is the difference between the fair value of consideration given and the book value of net assets acquired in the joint venture by the Group. Under US GAAP, this gain would be unrealized and would not be recognized.

The results of the joint venture are included within share of operating profit of the joint venture, interest expense and taxation. Under US GAAP, the results would all be reported within results of the joint venture.

Postretirement benefits

Projected benefit liabilities are discounted using long term investment returns and surpluses and deficits are amortized over the employees’ service lives. Under US GAAP, pension liabilities would be discounted using corporate bond rates and surpluses and deficits within 10% limits would not be amortized and would thus have no immediate impact on pension costs. In addition, under US GAAP where the value of plan assets is below the value of the liabilities valued on an accumulated benefit obligation basis, the deficit on this basis would be recognized immediately through other comprehensive income.

Derivative instruments and hedging activities

All derivative instruments (including those imbedded in other contracts) are recognized as either assets or liabilities in the consolidated balance sheet at their fair values. US GAAP prescribes requirements for designation and documentation of hedging relationships and ongoing assessments of effectiveness in order to qualify for hedge accounting. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated and qualifies as part of a hedge transaction and, if so, the type of hedge transaction.

Forward foreign exchange contracts

Forward foreign exchange contracts in respect of anticipated future transactions are treated as hedges and gains and losses on valuing such contracts at the forward rates at the balance sheet date are not recognized in profit for the year. Under US GAAP, the gains and losses at the balance sheet date would be included in net income and on maturity of the contract the gain/loss not recognized to date would be recognized in net income.

Interest rate swaps

Interest rate swaps are used to fix interest rates on the Group’s major exposures and are treated as hedges. Gains and losses on valuing such contracts at market rates at the balance sheet date are not recognized in income for the year. Due to the additional documentational requirements of US GAAP, the Group would no longer be able to treat these swaps as hedges for US GAAP reporting so gains and losses at the balance sheet date would be included in net income. Such gains and losses would be accounted for as adjustments in net income in 2001 and 2002 following implementation of FAS 133—Accounting for Derivative Instruments and Hedging Activities.

Currency rate swaps

Currency swaps are used to hedge intra group equity investments. Realized and unrealized gains/losses are not recognized in profit for the year. Receivables and payables on currency swaps are included within debtors and creditors respectively. Under US GAAP, these would be separately classified into current asset derivatives and current liabilities derivatives.

Trade investments

Trade investments are stated in the balance sheet at cost less provision for any permanent diminution in value and any movements are taken to the profit and loss account for the year. Under US GAAP, trade investments would be stated at market value and all movements would be taken to shareholders’ equity via comprehensive income for the year.

F-46

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

35.

Differences Between Accounting Principles Generally Accepted in the United Kingdom and United States—(continued)

Investment in own shares

Investment in the Company’s shares held by the Smith & Nephew Employees’ Share Trust are shown in the consolidated balance sheet as fixed asset investments. Under US GAAP, these shares would be treated as treasury stock and deducted from shareholders’ equity.

Dividends

Dividends are provided for in the financial statements for the period to which they relate and, in the case of proposed final dividends, on the basis of proposals by the Directors. Under US GAAP, dividends would be provided for in the financial statements for the period in which they are declared.

Taxation

Deferred taxation is recognized on most timing differences. This is generally consistent with US GAAP, except that deferred taxation is provided on goodwill acquired prior to 1998, which has been set off against reserves and on which taxation benefits have been received. Under US GAAP, as goodwill acquired prior to 1998 would not have been set off against reserves, the deferred taxation provided under UK GAAP would not be required. Furthermore, under US GAAP, a deferred tax liability would be provided on intangible assets acquired subject to book amortization where no tax relief is available.

Acquired in-process research and development

Acquired in-process research and development is not separately identified and therefore forms part of the goodwill arising on acquisition. Under US GAAP, acquired in-process research and development would be identified separately from goodwill and charged to net income on the date of acquisition.

Leases

The criteria for capitalizing leases under UK GAAP differ from those under US GAAP. As a result, certain leases which are classified as operating leases under UK GAAP would have been capitalized under US GAAP.

Discontinued activities

Under UK GAAP, the sales and operating profits of businesses that have been sold by the Group have been reported as arising from discontinued operations. The disposal of the rehabilitation business in 2002 would not have qualified to be so treated under US GAAP as an equity stake was retained.

Under UK GAAP, the results of operations arising from discontinued operations are presented in the profit and loss account under the relevant captions and the profit/(loss) on their disposal is reported as a separate line item after operating income and before interest. Under US GAAP, the results of operations form discontinued operations and the profit/(loss) on their disposal are reported as separate line items immediately before net income.

Associated undertaking

The results of the associated undertaking are included within share of operating profit of the associated undertaking, interest expense and taxation. Under US GAAP, the results would all be reported within results of the associated undertaking.

Staff Costs

Prior to 2002, the Group accounted for stock based compensation under the intrinsic value accounting provisions set out in APB 25—Accounting for Stock Issued to Employees and related interpretations.

For the purposes of the reconciliations below, the Group has adopted the fair value recognition provisions of FAS 123—Accounting for Stock Based Compensation, with effect from January 1, 2002. All prior periods presented have been restated to reflect the compensation cost that would have been recognized had the recognition provisions of FAS 123 been applied to all awards granted to employees after January 1, 1995. The adoption of FAS 123 has resulted in a reduction in income from continuing operations and net income under US GAAP of £3.4 million (2001—£1.6 million, 2000—nil). Basic income from continuing operations and net income per share under US GAAP reduced by 0.37p (2001—0.17p, 2000—nil).

F-47

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

35.

Differences Between Accounting Principles Generally Accepted in the United Kingdom and United States—(continued)

Effect of differences and additional information

The effect of the adjustments to net income and to shareholders’ equity that would be required if US GAAP were to be applied instead of UK GAAP is summarized as follows:

Net income

	Years ended December 31,
	2002		2001 Restated		2000 Restated
	(£ million, except per Ordinary Share and ADS amounts and Ordinary Shares)
Profit for the financial year as reported in the consolidated profit and loss account	112.1		129.6		207.5
Adjustments:
Amortization of goodwill	17.5		(10.5	)	(12.2	)
Amortization of other intangible assets	(9.0	)	(3.9	)	(3.2	)
Amortization of goodwill on joint venture	—		(1.2	)	—
Gain on disposal of businesses: goodwill and other intangible assets previously written off	15.2		—		11.4
Pension expense	(3.7	)	(1.7	)	(3.1	)
Staff costs	(3.4	)	(1.6	)	—
Unrecognized forward foreign exchange (losses)/gains	(7.9	)	1.4		(1.0	)
Unrecognized losses on interest rate swaps	(1.4	)	(7.4	)	—
Acquired in-process research and development	(4.2	)	—		—
Other adjustments	(0.3	)	—		(1.8	)
Deferred taxation	13.5		2.2		4.6

Net income as adjusted to accord with US GAAP	128.4		106.9		202.2

Comprising:
Income from continuing operations	128.4		74.9		85.3
Income from discontinued operations	—		0.5		18.6
Gain from disposal of discontinued operations	—		31.5		98.3

	128.4		106.9		202.2

Basic earnings as so adjusted—Per Ordinary Share:
Continuing operations	13.87	p	8.13	p	8.25	p
Discontinued operations	—		3.47	p	11.31	p

Total	13.87	p	11.60	p	19.56	p

Diluted earnings as so adjusted—Per Ordinary Share:
Continuing operations	13.75	p	8.05	p	8.19	p
Discontinued operations	—		3.44	p	11.23	p

Total	13.75	p	11.49	p	19.42	p

Basic earnings as so adjusted—Per ADS:
Continuing operations	138.7	p	81.3	p	82.5	p
Discontinued operations	—		34.7	p	113.1	p

Total	138.7	p	116.0	p	195.6	p

Diluted earnings as so adjusted—Per ADS:
Continuing operations	137.5	p	80.5	p	81.9	p
Discontinued operations	—		34.4	p	112.3	p

Total	137.5	p	114.9	p	194.2	p

Weighted average number of Ordinary Shares in issue (million):
Basic	926		921		1,034
Diluted	934		930		1,041

F-48

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

35.

Differences Between Accounting Principles Generally Accepted in the United Kingdom and United States—(continued)

Comprehensive income

The consolidated statement of comprehensive income under US GAAP is as follows:

	Years ended December 31,
	2002		2001 Restated		2000 Restated
	(£ million)
Net income as adjusted to accord with US GAAP	128.4		106.9		202.2
Other comprehensive income:
Pension costs	(69.4	)	—		—
Tax on pension costs	22.3		—		—
Other comprehensive income (net of related tax of nil):
Cumulative effect on prior year on adoption of FAS 133	—		(0.7	)	—
Derivative financial instruments	—		0.7		—
Revaluation of investments	3.2		4.3		(1.5	)
Translation adjustment arising on consolidation	(3.5	)	(5.1	)	(5.1	)

Comprehensive income	81.0		106.1		195.6

Movements in other comprehensive income amounts (net of related tax) are as follows:

	Pension Costs		Derivative Financial Instruments		Revaluation of Investments		Currency Translation Differences		Total
	(£ million)
At January 1, 2000	—		—		(6.0	)	(33.3	)	(39.3	)
Movement in the year	—		—		(1.5	)	(5.1	)	(6.6	)

At December 31, 2000	—		—		(7.5	)	(38.4	)	(45.9	)
Effect on adoption of FAS 133	—		(0.7	)	—		—		(0.7	)
Movement in the year	—		0.7		4.3		(5.1	)	(0.1	)

At December 31, 2001	—		—		(3.2	)	(43.5	)	(46.7	)
Movement in the year	(47.1	)	—		3.2		(3.5	)	(47.4	)

At December 31, 2002	(47.1	)	—		—		(47.0	)	(94.1	)

F-49

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

35.

Differences Between Accounting Principles Generally Accepted in the United Kingdom and United States—(continued)

Shareholders’ funds

	December 31,
	2002		2001
	(£ million)
Shareholders’ funds as reported in the consolidated balance sheet	517.3		404.6
Adjustments:
Goodwill
Cost	(0.3	)	209.8
Amortization	35.4		(120.5	)

	35.1		89.3
Other intangible fixed assets
Cost	220.7		136.1
Amortization	(105.3	)	(110.0	)

	115.4		26.1
Investment in joint venture
Cost	(38.1	)	(38.2	)
Amortization	(1.2	)	(1.2	)

	(39.3	)	(39.4	)
Fixed assets—capital lease
Cost	11.5		—
Depreciation	(0.5	)	—

	11.0		—
Fixed asset investments: own shares	(3.2	)	(2.5	)
Investments: revaluation of investments	—		(3.2	)
Debtors: debit balances on currency swaps	(21.3	)	(3.6	)
Debtors: pension assets	(4.1	)	(2.4	)
Current asset derivatives	29.9		11.7

	1.3		—
Trade and other payables
Holiday pay	(2.2	)	(1.8	)
Proposed final dividend	27.9		26.8
Pension costs	(79.7	)	(8.8	)
Credit balances on currency swaps	4.6		18.3
Borrowings due within one year: capital lease payments	(0.2	)	—
Current liabilities derivatives	(27.8	)	(31.7	)

	(77.4	)	2.8
Borrowings due after one year: capital lease payments	(10.7	)	—
Deferred taxation	26.8		49.8

Shareholders’ equity as adjusted to accord with US GAAP	579.5		533.2

F-50

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

35.

Differences Between Accounting Principles Generally Accepted in the United Kingdom and United States—(continued)

Reconciliation of changes in shareholders’ equity under US GAAP

	Years ended December 31,
	2002		2001 Restated		2000 Restated
	(£ million)
Profit for the financial year under US GAAP	128.4		106.9		202.2
Dividends paid	(43.5	)	(41.8	)	(475.9	)
Currency translation	(3.5	)	(5.1	)	(5.1	)
Issue of shares	6.1		9.0		7.7
Stock based compensation	3.4		1.6		—
Investment in own shares (purchased)/vested	(0.7	)	0.4		(2.9	)
Revaluation of investments	3.2		4.3		(1.5	)
Pension costs	(47.1	)	—		—

Net addition to/(reduction in) shareholders’ equity	46.3		75.3		(275.5	)
Opening shareholders’ equity	533.2		457.9		733.4

Closing shareholders’ equity	579.5		533.2		457.9

Consolidated statement of cash flows

The US GAAP cash flow statement reports changes in cash and cash equivalents, which includes short-term highly liquid investments. Under UK GAAP, cash flows are presented separately for operating activities, dividends from joint ventures, returns on investments and servicing of finance, taxation, investing activities and financing activities. US GAAP requires only three categories of cash flow activity to be reported: operating, investing and financing. Cash flows from taxation and returns on investments and servicing of finance shown under UK GAAP would be included as operating activities under US GAAP. The payment of dividends would be included as a financing activity under US GAAP.

The categories of cash flow activity under US GAAP are summarized as follows:

	Years ended December 31,
	2002		2001		2000
	(£ million)
Cash flows from operating activities	150.7		99.2		150.5
Cash flows from investing activities	(214.9	)	(67.6	)	92.0
Cash flows from financing activities	60.2		(27.5	)	(314.8	)

(Decrease)/increase in cash and cash equivalents	(4.0	)	4.1		(72.3	)
Exchange adjustments	0.1		(1.3	)	(0.2	)
Cash and cash equivalents at beginning of year	26.4		23.6		96.1

Cash and cash equivalents at end of year	22.5		26.4		23.6

F-51

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

35.

Differences Between Accounting Principles Generally Accepted in the United Kingdom and United States—(continued)

Additional information required by US GAAP in respect of earnings per share

The following table sets forth the computation of basic and diluted earnings per share from continuing operations under US GAAP:

	Years ended December 31,
	2002		2001		2000
	(£ million)
Numerator:
Net income in accordance with US GAAP	128.4		106.9		202.2

Numerator for diluted earnings per Ordinary Share	128.4		106.9		202.2


	Years ended December 31,
	2002		2001		2000
	(Shares million)
Denominator:
Denominator for basic earnings per Ordinary Share	926		921		1,034
Effect of dilutive securities:
Share option schemes	8		9		7

Denominator for diluted earnings per Ordinary Share	934		930		1,041

Basic earnings per Ordinary Share from continuing operations	13.87	p	8.13	p	8.25	p

Basic earnings per Ordinary Share from discontinued operations	—		3.47	p	11.31	p

Diluted earnings per Ordinary Share from continuing operations	13.75	p	8.05	p	8.19	p

Diluted earnings per Ordinary Share from discontinued operations	—		3.44	p	11.23	p

Additional information required by US GAAP in respect of deferred taxation

The analysis of the deferred taxation (liability)/asset required by US GAAP is summarized as follows:

	December 31,
	2002		2001
	(£ million)
Deferred taxation liabilities:
Excess of book value over taxation value of fixed assets	(29.3	)	(28.0	)
Other temporary differences	(45.8	)	(4.4	)

	(75.1	)	(32.4	)
Deferred taxation assets:
Taxation effect of losses carried forward	18.4		11.1
Other temporary differences	31.5		19.2

	49.9		30.3
	(25.2	)	(2.1	)

Of which:
Current	18.0		0.8
Noncurrent	(43.2	)	(2.9	)

	(25.2	)	(2.1	)

F-52

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

35.

Differences Between Accounting Principles Generally Accepted in the United Kingdom and United States—(continued)

Additional information required by US GAAP in respect of the Group’s two principal pension plans

The two principal pension plans are those in the United Kingdom and the United States. The pension cost for these plans computed in accordance with the requirements of US GAAP comprises:

	Years ended December 31,
	2002		2001		2000
	(£ million)
Service cost	10.9		9.6		11.2
Interest cost	19.1		18.1		17.9
Actual return on plan assets	(21.2	)	(21.9	)	(22.9	)
Amortization of transition obligation	—		(0.1	)	(0.1	)
Amortization of prior service cost	2.3		2.6		3.2
Amortization of net actuarial loss/(gain)	0.6		(0.8	)	(0.8	)
Curtailment gain	—		(1.0	)	—

Net periodic pension cost	11.7		6.5		8.5

The major assumptions used in computing the pension cost under US GAAP for the two principal plans are:

	Years ended December 31,
	2002	2001	2000
	(Percent)
United Kingdom:
Expected long-term rate of return on plan assets	6.9	8.1	8.0
Discount rate for costs/gains	5.6	6.0	6.0
Discount rate for year end benefit obligations	5.6	6.0	6.0
Expected long-term rate of earnings increases	4.3	4.0	4.0
United States:
Expected long-term rate of return on plan assets	8.8	9.3	9.3
Discount rate for costs/gains	7.0	8.0	8.0
Discount rate for year end benefit obligations	7.0	7.0	8.0
Expected long-term rate of earnings increases	5.0	5.0	5.0

The following table sets forth the funded status and amounts that would be recognized under US GAAP in the balance sheet at December 31, 2002 and 2001 for the Group’s two principal plans:

	December 31,
	2002				2001
	United Kingdom		United States		United Kingdom		United States
	(£ million)
Fair value of plan assets	164.1		50.5		200.1		74.1
Projected benefit obligation	(231.7	)	(105.2	)	(202.1	)	(105.6	)

Projected benefit obligation in excess of plan assets	(67.6	)	(54.7	)	(2.0	)	(31.5	)
Unrecognized prior service cost	1.4		0.3		3.6		0.4
Unrecognized net gain	65.6		42.0		1.0		17.9

	(0.6	)	(12.4	)	2.6		(13.2	)
Deficit on accumulated benefit obligation basis	(52.0	)	(17.9	)	—		—

(Accrued)/prepaid pension cost	(52.6	)	(30.3	)	2.6		(13.2	)

In the UK plan, the assets principally comprise UK and other listed equities, bank deposits and UK Government index-linked stocks. In the US plan, the assets principally comprise US equities, other listed equities and fixed income securities.

F-53

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

35.

Differences Between Accounting Principles Generally Accepted in the United Kingdom and United States—(continued)

A reconciliation of the projected benefit obligation and the fair value of plan assets is shown in the following tables:

	Years ended December 31,
	2002				2001
	United Kingdom		United States		United Kingdom		United States
	(£ million)
Projected benefit obligation at beginning of year	202.1		105.6		194.9		78.8
Service cost	6.1		4.8		6.3		3.8
Interest cost	12.1		7.0		12.7		6.4
Plan participant contributions	2.7		—		2.6		—
Change in discount rate assumptions	—		—		0.4		16.5
Curtailment	—		—		—		(1.1	)
Actuarial loss/(gain)	18.7		2.3		(2.8	)	2.4
Benefits and expenses paid	(10.0	)	(3.8	)	(12.0	)	(3.0	)
Exchange adjustment	—		(10.7	)	—		1.8

Projected benefit obligation at end of year	231.7		105.2		202.1		105.6

Fair value of plan assets at beginning of year	200.1		74.1		208.5		63.9
Actual return on assets	(31.5	)	(18.9	)	(1.7	)	5.4
Company contributions	2.8		5.2		2.7		6.2
Plan participant contributions	2.7		—		2.6		—
Benefits paid	(10.0	)	(3.8	)	(12.0	)	(3.0	)
Exchange adjustment	—		(6.1	)	—		1.6

Fair value of plan assets at end of year	164.1		50.5		200.1		74.1

Additional information required by US GAAP in respect of the Group’s healthcare benefits after retirement in the United Kingdom and the United States

The movement in the accumulated benefit obligation under the Group’s postretirement healthcare schemes is as follows:

	Years ended December 31,
	2002				2001
	United Kingdom		United States		United Kingdom		United States
	(£ million)
At beginning of year	3.2		6.2		3.3		6.0
Service cost	0.1		0.1		0.1		0.1
Interest cost	0.2		0.5		0.2		0.5
Change in assumptions	—		1.0		—		—
Curtailment	—		—		(0.1	)	—
Actuarial loss/(gain)	0.1		0.4		(0.1	)	0.1
Benefits paid	(0.2	)	(0.6	)	(0.2	)	(0.6	)
Exchange adjustment	—		(0.6	)	—		0.1

At end of year	3.4		7.0		3.2		6.2

F-54

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

35.

Differences Between Accounting Principles Generally Accepted in the United Kingdom and United States—(continued)

	Years ended December 31,
	2002			2001
	United Kingdom	United States		United Kingdom	United States
	(£ million)
Accumulated benefit obligation	3.4	7.0		3.2	6.2
Unrecognized net loss/(gain)	0.2	(1.7	)	0.4	(0.8	)
Prior service loss/(gain)	—	0.1		—	(0.1	)

Accrued healthcare cost	3.6	5.4		3.6	5.3

The effect of a one percentage point change in the rate of medical cost inflation would increase/(decrease) the accumulated postretirement benefit obligation as follows:

	December 31,
	2002				2001
	United Kingdom		United States		United Kingdom		United States
	(£ million)
1% increase	0.1		0.6		0.1		0.5
1% decrease	(0.1	)	(1.0	)	(0.1	)	(0.5	)

Additional information required US GAAP relating to leases

Future lease payments under US GAAP at December 31, 2002 are as follows:

	Operating Leases		Capital Leases
	Land and Buildings	Other Assets	Land and Buildings		Other Assets
	(£ million)
Within one year	7.8	9.0	1.1		0.2
After one and within two years	6.9	6.2	1.1		0.1
After two and within three years	6.2	3.0	1.1		—
After three and within four years	5.8	0.8	1.0		—
After four and within five years	4.9	—	1.1		—
After five years	30.7	—	14.7		—

	62.3	19.0	20.1		0.3

Less: imputed interest			(8.8	)	—

Present value of future lease payments			11.3		0.3

F-55

SMITH & NEPHEW plc

NOTES TO THE FINANCIAL STATEMENTS—(Continued)

36.

Subsequent Events

The Board of Directors intends for the Company to become a subsidiary company of Smith & Nephew Group plc under a Scheme of Arrangement (the “Scheme”) to be put for sanctioning before the High Court of England and Wales. Smith & Nephew Group plc also intends to acquire, by means of public tender offers, Centerpulse AG and InCentive AG, two Swiss companies registered on the Swiss Stock Exchange.

In order to acquire Centerpulse AG and InCentive AG, Smith & Nephew plc and Smith & Nephew Group plc entered into several agreements on March 20, 2003 as follows:

The Company and Smith & Nephew Group plc entered into a Tender Agreement with Rene Braginsky, Hans Kaiser, Zurich Versicherungs-Gesellschaft and III Institutional Investors International Corp which regulates certain aspects of the public tender offer to shareholders of InCentive AG;

The Company and Smith & Nephew Group plc entered into a Transaction Agreement with InCentive AG which regulates certain aspects of the public tender offer to shareholders of InCentive AG; and

the Company and Smith & Nephew Group plc entered into a Combination Agreement with Centerpulse AG relating to the combination of Smith & Nephew Group plc or Smith & Nephew plc with Centerpulse AG.

The public tender offers for Centerpulse AG and InCentive AG which these agreements regulate are both conditional upon the Scheme being sanctioned by the Court, the shares of Smith & Nephew Group plc being listed on the London Stock Exchange and on regulatory clearances. The transactions are expected to be completed in July 2003.

In addition, the Company and Smith & Nephew Group plc entered into a Credit Agreement with Lloyds TSB Capital Markets and The Royal Bank of Scotland plc as arrangers, the financial institutions listed therein as original lenders and The Royal Bank of Scotland plc as facility agent, pursuant to which the original lenders have agreed to make available multi-currency term loan facilities in an aggregate principal amount of US$2.1 billion to finance the acquisition of Centerpulse AG and InCentive AG, refinance the existing debt of Smith & Nephew plc, Centerpulse AG and their respective subsidiaries and general corporate purposes. The conditions precedent to drawdown of these facilities includes a condition that the Scheme has been sanctioned by the Court.

F-56

SCHEDULE II

SMITH & NEPHEW plc AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

	Balance at beginning of year	Additions charged to costs and expenses	Exchange differences		Deductions(i)		Balance at end of year
	(£ million)
Year ended December 31, 2002
Provisions for bad and doubtful debts	7.3	0.5	(0.4	)	(0.4	)	7.0
Year ended December 31, 2001
Provisions for bad and doubtful debts	7.0	1.9	—		(1.6	)	7.3
Year ended December 31, 2000
Provisions for bad and doubtful debts	3.9	3.5	0.1		(0.5	)	7.0

(i)

Represents the excess of amounts written off over recoveries.

EXHIBIT INDEX

Exhibit No.		Description of Document	Incorporated Herein by Reference To	Filed Herewith
1	(a)	Memorandum of Association	Form 20-F for the year ended December 31, 2000

	(b)	Articles of Association	Form 20-F for the year ended December 31, 2001

2	(a)	Agreement dated March 20, 2003 among Meadowclean Limited (to be renamed Smith & Nephew Group plc), Smith & Nephew plc, Lloyds TSB Capital Markets and The Royal Bank of Scotland as arrangers.		X

	(b)	Copies of instruments defining the rights of holders of long-term debt not required to be filed herewith or incorporated herein by reference will be furnished to the Commission upon request.

4	(a) (i)	Material contract: Agreement and Plan of Merger dated as of February 13, 2002, by and among Smith & Nephew, Inc., Orchid Merger Corp. and ORATEC Interventions, Inc.	Exhibit 2.2 to the Form 8-K of ORATEC Interventions, Inc. filed with Securities and Exchange Commission on February 19, 2002 (File No. 000-26745)

	(ii)	Material contract: Agreement dated March 20, 2003 among Smith & Nephew plc, Meadowclean Limited and Centerpulse Ltd.		X

	(iii)	Material contract: Transaction Agreement dated March 20, 2003 among InCentive Capital AG, Smith & Nephew plc and Meadowclean Limited.		X

	(iv)	Material contract: Amendment Agreement No. 1 dated March 25, 2003 among InCentive Capital AG, Smith & Nephew plc and Meadowclean Limited.		X

4	(c) (i)	The Smith & Nephew 1985 Share Option Scheme	Registration Statement on Form S-8 No. 33-39802

	(ii)	The Smith & Nephew 1990 International Executive Share Option Scheme	Registration Statement on Form S-8 No. 33-39814

	(iii)	The Smith & Nephew Long Term Incentive Plan	Form 20-F for the year ended December 31, 2000

	(iv)	The Smith & Nephew 2001 UK Approved Share Option Plan	Form 20-F for the year ended December 31, 2001

	(v)	The Smith & Nephew 2001 UK Unapproved Share Option Plan	Form 20-F for the year ended December 31, 2001

	(vi)	The Smith & Nephew 2001 US Share Plan	Registration Statement on Form S-8 No. 333-13694

	(vii)	The Smith & Nephew Sharesave Plan (2002)		X

	(viii)	The Smith & Nephew International Sharesave Plan (2002)		X

	(ix)	The Smith & Nephew Italian Sharesave Plan (2002)		X

Exhibit No.		Description of Document	Incorporated Herein by Reference To	Filed Herewith

4	(c) (x)	The Smith & Nephew Dutch Sharesave Plan (2002)		X

	(xi)	The Smith & Nephew Belgian Sharesave Plan (2002)		X

	(xii)	The Smith & Nephew French Sharesave Plan (2002)		X

8		Principal Subsidiaries		X

12	(a)	Certificate Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code by the Chief Executive of Smith & Nephew plc		X

	(b)	Certificate Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code by the Finance Director of Smith & Nephew plc		X

Exhibit 2(a)

CONFORMED COPY

AGREEMENT

DATED 20th MARCH, 2003

U.S.$2,100,000,000

CREDIT FACILITY

for

MEADOWCLEAN LIMITED (to be renamed SMITH & NEPHEW GROUP PLC)

Arranged by

LLOYDS TSB CAPITAL MARKETS
THE ROYAL BANK OF SCOTLAND

With

THE ROYAL BANK OF SCOTLAND plc
as Facility Agent

CONTENTS

Clause                                                                     Page
1.    Interpretation .....................................................    1
2.    Facilities .........................................................   13
3.    Purpose ............................................................   15
4.    The Offers .........................................................   16
5.    Conditions Precedent ...............................................   21
6.    Utilisation - Loans ................................................   22
7.    Utilisation - Bills ................................................   23
8.    Bills ..............................................................   25
9.    Optional Currencies ................................................   26
10.   Repayment ..........................................................   30
11.   Prepayment And Cancellation ........................................   31
12.   Interest ...........................................................   34
13.   Terms ..............................................................   36
14.   Market Disruption ..................................................   37
15.   Taxes ..............................................................   38
16.   Increased Costs ....................................................   41
17.   Mitigation .........................................................   42
18.   Payments ...........................................................   43
19.   Guarantee and Indemnity ............................................   45
20.   Representations ....................................................   49
21.   Information Covenants ..............................................   52
22.   Financial Covenants ................................................   54
23.   General Covenants ..................................................   56
24.   Default ............................................................   62
25.   The Administrative Parties .........................................   66
26.   Evidence And Calculations ..........................................   70
27.   Fees ...............................................................   70
28.   Indemnities And Break Costs ........................................   71
29.   Expenses ...........................................................   72
30.   Amendments And Waivers .............................................   73
31.   Changes To The Parties .............................................   74
32.   Disclosure Of Information ..........................................   81
33.   Set-Off ............................................................   82
34.   Pro Rata Sharing ...................................................   82
35.   Severability .......................................................   83
36.   Counterparts .......................................................   83
37.   Notices ............................................................   83
38.   Language ...........................................................   85
39.   Governing Law ......................................................   85
40.   Enforcement ........................................................   85

Schedule                                                                   Page
1.    Original Parties....................................................   87
2.    Conditions Precedent Documents......................................   88
3.    Form of Request.....................................................   92
4.    Calculation of the Mandatory Cost...................................   93
5.    Form of Transfer Certificate........................................   95
6.    Form of Accession Agreement.........................................   96
7.    Form of Resignation Request.........................................   97
8.    Form of Compliance Certificate......................................   98
9.    Form of Bill........................................................   99
10.   Form of Syndication Agreement.......................................  100
11.   Form of Power of Attorney for Bills.................................  110
12.   Form of Legal Opinion of Allen & Overy..............................  112


Signatory.................................................................  116

THIS AGREEMENT is dated 20th March, 2003

BETWEEN:

(1) MEADOWCLEAN LIMITED (to be renamed SMITH & NEPHEW GROUP PLC) (registered number 4348753) (Bidco);

(2) SMITH & NEPHEW PLC (registered number 324357) (the Company);

(3) THE SUBSIDIARIES OF THE COMPANY listed in Schedule 1 (Original Parties) as original borrowers (in this capacity the Original Borrowers);

(4) THE SUBSIDIARY OF THE COMPANY listed in Schedule 1 (Original Parties) as original guarantor (in this capacity the Original Guarantor);

(5) LLOYDS TSB CAPITAL MARKETS and THE ROYAL BANK OF SCOTLAND as arrangers (in this capacity the Arrangers);

(6) THE FINANCIAL INSTITUTIONS listed in Schedule 1 (Original Parties) as original lender (the Original Lenders); and

(7) THE ROYAL BANK OF SCOTLAND plc as facility agent (in this capacity the Facility Agent).

IT IS AGREED as follows:

1. INTERPRETATION

1.1 Definitions

In this Agreement:

Accession Agreement means a letter, substantially in the form of Schedule 6 (Form of Accession Agreement), with such amendments as the Facility Agent and the Parent may agree.

Additional Borrower means a member of the Group which becomes a Borrower after the date of this Agreement.

Additional Guarantor means a member of the Group which becomes a Guarantor after the date of this Agreement.

Additional Obligor means an Additional Borrower or an Additional Guarantor.

Administrative Party means the Arranger or the Facility Agent.

Affiliate means a Subsidiary or a Holding Company of a person or any other Subsidiary of that Holding Company.

Availability Period means:

(a) in the case of any InCentive Offer Loan or a Centerpulse Offer Loan, the period from and including the date of this Agreement to and including the date falling nine months after the date of this Agreement; and

(b) in the case of any Loan other than an InCentive Offer Loan or Centerpulse Offer Loan, the period from and including the date of this Agreement to and including:

(i) in the case of Facility A, the date falling 364 days after the date of this Agreement;

(ii) in the case of Facility B, the date falling one month before the Facility B Final Maturity Date; and

(iii) in the case of Facility C, the date falling one month before the Facility C Final Maturity Date.

Bill means a Sterling bill of exchange substantially in the form of Schedule 9 (Form of Bill).

Borrower means Bidco, the Company, an Original Borrower or an Additional Borrower.

Break Costs means the amount (if any) which a Lender is entitled to receive under this Agreement as compensation if any part of a Loan or overdue amount is prepaid.

Business Day means a day (other than a Saturday or a Sunday) on which banks are open for general business in London and:

(a) if on that day a payment in or a purchase of a currency (other than euro) is to be made, the principal financial centre of the country of that currency; or

(b) if on that day a payment in or a purchase of euro is to be made, which is also a TARGET Day.

Centerpulse means Centerpulse AG, a company incorporated in Switzerland with registered number CH-170.3.004.253-7.

Centerpulse Clean-up Period means the period commencing on the date on which Centerpulse becomes a Subsidiary of the Parent and ending on the date which is 120 days after that date.

Centerpulse Group means Centerpulse and its Subsidiaries.

Centerpulse Offer means the offer for the Centerpulse Shares made by Bidco (or on its behalf) to shareholders of Centerpulse, as that offer may be amended in a manner allowed under this Agreement.

Centerpulse Offer Document means the offer document issued or to be issued by Bidco to shareholders of Centerpulse in respect of the Centerpulse Offer.

Centerpulse Offer Loan means any Loan the purpose of which is to finance directly or indirectly the acquisition of Centerpulse Shares.

Centerpulse Shares means all the issued shares in the capital of Centerpulse (including any shares of Centerpulse issued or to be issued while the Centerpulse Offer remains open for acceptance.

Centerpulse Unconditional Date means the date on which the Centerpulse Offer is declared by Bidco unconditional in all respects.

Certain Funds Loan means:

(a) an InCentive Offer Loan;

(b) a Centerpulse Offer Loan; or

Circular means the circular relating, amongst other things, to the Scheme to be distributed to the shareholders of the Company.

Commitment means a Commitment, as so designated, of a Lender under a particular Facility.

Compliance Certificate has the meaning given to it in Clause 21.2 (Compliance Certificate).

Credit means a Loan or a Bill.

Default means:

(a) an Event of Default; or

(b) an event referred to in Clause 24 (Default) which would be (with the expiry of a grace period or the giving of notice under the Finance Documents or any combination of them) an Event of Default.

euro means the single currency of the Participating Member States.

EURIBOR means for a Term of any Loan or overdue amount in euro:

(a) the applicable Screen Rate; or

(b) if no Screen Rate is available for that Term of that Loan or overdue amount, the arithmetic mean (rounded upward to four decimal places) of the rates as supplied to the Facility Agent at its request quoted by the Reference Banks to leading banks in the European Interbank market,

as of 11.00 a.m. (Brussels time) on the Rate Fixing Day for the offering of deposits in euro for a period comparable to that Term.

Event of Default means an event specified as such in this Agreement.

Existing Facility means each of the:

(a) (GBP)250,000,000 and U.S.$225,000 facility dated 28th June, 2000; and

(b) U.S.$300,000,000 facility dated 14th February, 2002.

Facilities means Facility A, Facility B and Facility C.

Facility A means the multi-currency revolving credit facility referred to in Clause 2.1 (Facility A).

Facility A Commitment means:

(a) for an Original Lender, the amount set opposite its name in Schedule 1 (Original Parties) under the heading Facility A Commitment and the amount of any other Facility A Commitment it acquires; and

(b) for any other Lender, the amount of any other Facility A Commitment it acquires,

to the extent not cancelled, transferred or reduced under this Agreement.

Facility A Margin means, subject to Clause 12.3 (Margin adjustments), 0.425 per cent. per annum.

Facility B means the multi-currency revolving credit and Sterling acceptance facility referred to in Clause 2.2 (Facility B).

Facility B Commitment means:

(a) for an Original Lender, the amount set opposite its name in Schedule 1 (Original Parties) under the heading Facility B Commitment and the amount of any other Facility B Commitment it acquires; and

(b) for any other Lender, the amount of any other Facility B Commitment it acquires,

to the extent not cancelled, transferred or reduced under this Agreement.

Facility B Margin means, subject to Clause 12.3 (Margin adjustments), 0.475 per cent. per annum.

Facility C means the multi-currency revolving credit and Sterling acceptance facility referred to in Clause 2.3 (Facility C).

Facility C Commitment means:

(a) for an Original Lender, the amount set opposite its name in Schedule 1 (Original Parties) under the heading Facility C Commitment and the amount of any other Facility C Commitment it acquires; and

(b) for any other Lender, the amount of any other Facility C Commitment it acquires,

to the extent not cancelled, transferred or reduced under this Agreement.

Facility C Margin means, subject to Clause 12.3 (Margin adjustments), 0.525 per cent. per annum.

Facility Office means the office(s) notified by a Lender to the Facility Agent:

(a) on or before the date it becomes a Lender; or

(b) by not less than five Business Days' notice,

as the office(s) through which it will perform its obligations under this Agreement.

Fee Letter means any letter entered into by reference to this Agreement between one or more Administrative Parties and the Company setting out the amount of certain fees referred to in this Agreement.

Final Maturity Date means:

(a) in the case of Facility A, and subject to Clause 2.5 (Term-out Option), the date falling 364 days after the date of this Agreement;

(b) in the case of Facility B, the third anniversary of the date of this Agreement; and

Finance Document means:

(a) this Agreement;

(b) a Fee Letter;

(d) a Transfer Certificate;

(e) an Accession Agreement;

(f) the Syndication Agreement;

(g) the Syndication Letter; and

(h) any other document designated as such by the Facility Agent and the Company.

Finance Party means a Lender or an Administrative Party.

Financial Indebtedness means any indebtedness (without double counting) for or in respect of:

(a) moneys borrowed;

(b) any acceptance credit;

(d) any finance or capital lease as defined in accordance with the accounting principles applied in connection with the Original Financial Statements;

(e) receivables sold or discounted (otherwise than on a non-recourse basis);

(f) the acquisition cost of any asset to the extent payable after its acquisition or possession by the party liable where the deferred payment is arranged primarily as a method of raising finance or financing the acquisition of that asset;

(g) any derivative transaction protecting against or benefiting from fluctuations in any rate or price (and at any time the then marked to market value of the derivative transaction will be used to calculate its amount, such marked to market value being determined by reference to the documentation of that transaction or, if there is no such provision in the documentation, determined by the Company acting reasonably and on the basis of quotations from the relevant counterparty);

(h) any other transaction (including any forward sale or purchase agreement) which has the commercial effect of a borrowing;

(i) any counter-indemnity obligation in respect of any guarantee, indemnity, bond, letter of credit or any other instrument issued by a bank or financial institution; or

(j) any guarantee, indemnity or similar assurance against financial loss of any person in respect of any item referred to in paragraphs (a) to
(i) above,

provided that the definition of Financial Indebtedness does not include any indebtedness owing from a member of the Group to another member of the Group.

Group means:

(a) before the Scheme Effective Date, the Company and its Subsidiaries; and

(b) on and after the Scheme Effective Date, Bidco and its Subsidiaries.

Guarantor means Bidco, the Original Guarantor or an Additional Guarantor.

Holding Company means a holding company within the meaning of section 736 of the Companies Act 1985.

IBOR means LIBOR or EURIBOR.

InCentive means InCentive Capital AG, a company incorporated in Switzerland with registered number CH-170.3.019.472-9.

InCentive Group means InCentive and its Subsidiaries.

InCentive Offer means the offer for the InCentive Shares made by Bidco (or on its behalf) to shareholders of InCentive, as that offer may be amended in a manner allowed under this Agreement.

InCentive Offer Document means the offer document issued or to be issued by Bidco to shareholders of InCentive in relation to the InCentive Offer.

InCentive Offer Loan means any Loan the purpose of which is to finance directly or indirectly the acquisition of InCentive Shares.

InCentive Shares means all the issued shares in the capital of InCentive (including any shares of InCentive issued or to be issued while the InCentive Offer remains open for acceptance).

InCentive Unconditional Date means the date on which the InCentive Offer is declared unconditional by Bidco in all respects.

Increased Cost means:

(a) an additional or increased cost;

(b) a reduction in the rate of return under a Finance Document or on the overall capital of a Finance Party or any of its Affiliates; or

which is incurred or suffered by a Finance Party or any of its Affiliates but only to the extent attributable to that Finance Party having entered into any Finance Document or funding or performing its obligations under any Finance Document.

Lender means:

(a) an Original Lender; or

(b) any person which becomes a Lender after the date of this Agreement.

LIBOR means for any Loan or overdue amount:

(a) the applicable Screen Rate; or

(b) if no Screen Rate is available for the relevant currency or Term of that Loan or overdue amount, the arithmetic mean (rounded upward to four decimal places) of the rates, as supplied to the Facility Agent at its request, quoted by the Reference Banks to leading banks in the London interbank market,

as of 11.00 a.m. on the Rate Fixing Day for the offering of deposits in the currency of that Loan or overdue amount for a period comparable to its Term.

Loan means, unless otherwise stated in this Agreement, the principal amount of each borrowing under this Agreement or the principal amount outstanding of that borrowing.

Majority Lenders means, at any time, Lenders:

(a) whose share in the outstanding Credits and whose undrawn Commitments then aggregate 66 2/3 per cent. or more of the aggregate of all the Credits and the undrawn Commitments of all the Lenders;

(b) if there is no Credit then outstanding, whose undrawn Commitments then aggregate 66 2/3 per cent. or more of the Total Commitments; or

(c) if there is no Credit then outstanding and the Total Commitments have been reduced to zero, whose Commitments aggregated 66 2/3 per cent. or more of the Total Commitments immediately before the reduction.

Mandatory Cost means the cost of complying with certain regulatory requirements, expressed as a percentage rate per annum and calculated by the Facility Agent under Schedule 4 (Calculation of the Mandatory Cost).

Margin means the Facility A Margin, the Facility B Margin or the Facility C Margin, as the case may be.

Material Adverse Effect means a material adverse effect on the ability of an Obligor to comply with its payment obligations under this Agreement or the ability of the Parent to comply with its obligations under Clause 22.3 (Gearing) or Clause 22.4 (Interest cover/Cashflow).

Material Subsidiary means, at any time, a Subsidiary of the Parent:

(a) whose gross assets (excluding intra-Group items) then equal or exceed 10 per cent. of the gross assets (excluding goodwill on acquisitions) of the Group; or

(b) whose earnings before interest and tax (excluding intra-Group items) then equal or exceed 10 per cent. of the earnings before interest and tax of the Group.

For this purpose:

(i) the gross assets or earnings before interest and tax of a Subsidiary of the Parent will be determined from its financial statements (unconsolidated if it has Subsidiaries) upon which the latest audited financial statements of the Group have been based;

(ii) if a Subsidiary of the Parent becomes a member of the Group after the date on which the latest audited financial statements of the Group have been prepared, the gross assets or earnings before interest and tax of that Subsidiary will be determined from its latest financial statements;

(iii) the gross assets or earnings before interest and tax of the Group (excluding intra-Group items) will be determined from its latest audited financial statements, adjusted (where appropriate) to reflect the gross assets or earnings before interest and tax of any company or business subsequently acquired or disposed of; and

(iv) if a Material Subsidiary disposes of all or substantially all of its assets to another Subsidiary of the Parent, it will immediately cease to be a Material Subsidiary and the other Subsidiary (if it is not already) will immediately become a Material Subsidiary; the subsequent financial statements of those Subsidiaries and the Group will be used to determine whether those Subsidiaries are Material Subsidiaries or not.

If there is a dispute as to whether or not a company is a Material Subsidiary, a certificate of the auditors of the Parent will be, in the absence of manifest error, conclusive.

Maturity Date means, for a Credit (other than a Term Loan), the last day of its Term.

Obligor means a Borrower or a Guarantor.

Offer means:

(a) the Centerpulse Offer; or

(b) the InCentive Offer,

as applicable, and Offers means both of them.

Offer Expiry Date means, in relation to an Offer, the date upon which that Offer lapses, terminates or is withdrawn.

Original Financial Statements means the audited consolidated financial statements of the Company for the year ended 31st December, 2002.

Original Obligor means Bidco, the Company, an Original Borrower or the Original Guarantor.

Parent means:

(a) before the Scheme Effective Date, the Company; and

(b) on and after the Scheme Effective Date, Bidco.

Participating Member State means a member state of the European Communities that adopts the euro as its lawful currency under the legislation of the European Union for European Monetary Union.

Party means a party to this Agreement.

Power of Attorney means a power of attorney, substantially in the form of Schedule 11 (Form of Power of Attorney) or in any other form agreed by the Parent and the Facility Agent.

Press Release means the press release to be made by or on behalf of the Company or Bidco announcing the Offers and the Scheme.

Pro Rata Share means on a particular date:

(a) the proportion which a Lender's share of the Credits (if any) bears to all the Credits;

(b) if there is no Credit outstanding on that date, the proportion which its Commitment bears to the Total Commitments on that date;

(c) if the Total Commitments have been cancelled, the proportion which its Commitments bore to the Total Commitments immediately before being cancelled; or

(d) when the term is used in relation to a Facility, the above proportions but applied only to the Credits and Commitments for that Facility.

For the purpose of paragraph (d) above, the Facility Agent will determine whether the term in any case relates to a particular Facility.

Rate Fixing Day means:

(a) the first day of a Term for a Loan denominated in Sterling;

(b) the second Business Day before the first day of a Term for a Loan denominated in any other currency (other than euros); or

or such other day as the Facility Agent determines is generally treated as the rate fixing day by market practice in the relevant interbank market.

Reference Banks means Lloyds TSB Bank plc, The Royal Bank of Scotland plc and any other bank or financial institution agreed by the Facility Agent and the Parent under this Agreement.

Refinancing Loan means a Loan the purpose of which is to repay or prepay amounts drawn under an Existing Facility.

Repeating Representations means the representations which are deemed to be repeated under this Agreement.

Request means a request for a Credit, substantially in the form of Schedule
3 (Form of Request).

Rollover Loan means one or more Loans:

(a) to be made on the same day that a maturing Loan is due to be repaid;

(b) the aggregate amount of which is equal to or less than the maturing Loan;

(d) to be made to the same Borrower for the purpose of refinancing a maturing Loan.

Scheme means the Scheme of arrangement proposed to be made between the Company and the holders of the Scheme Shares (as defined in the Scheme) pursuant to section 425 of the Companies Act 1985, as described in the Circular.

Scheme Effective Date means the date on which an office copy of the order of the High Court of Justice sanctioning the Scheme under section 425 of the Companies Act 1985 (Section 425) is filed with the Registrar of Companies for registration pursuant to sub-section 3 of Section 425.

Screen Rate means:

(a) for LIBOR, the British Bankers Association Interest Settlement Rate (if any); and

(b) for EURIBOR, the percentage rate per annum determined by the Banking Federation of the European Union,

for the relevant currency and Term displayed on the appropriate page of the Telerate screen selected by the Facility Agent. If the relevant page is replaced or the service ceases to be available, the Facility Agent (after consultation with the Parent and the Lenders) may specify another page or service displaying the appropriate rate.

Sterling or (GBP) means the lawful currency for the time being of the United Kingdom.

Subsidiary means:

(a) a subsidiary within the meaning of section 736 of the Companies Act 1985; and

(b) for the purposes of Clause 22 (Financial covenants), unless the context otherwise requires, a subsidiary undertaking within the meaning of section 258 of the Companies Act 1985.

Syndication means the primary syndication by the Arrangers of the Facilities.

Syndication Agreement means an agreement between, among others, the Original Obligors and the Finance Parties for the purpose of incorporating New Lenders (as defined in Clause 31.3 (Assignments and transfers by Lenders)) in Syndication substantially in the form set out in Schedule 10.

Syndication Letter means a letter dated on or about the date of this Agreement from the Arrangers to the Company in respect of the primary syndication of the Facilities and other related matters.

TARGET Day means a day on which the Trans-European Automated Real-time Gross Settlement Express Transfer payment system is open for the settlement of payments in euro.

Tax means any tax, levy, impost, duty or other charge or withholding of a similar nature (including any related penalty or interest).

Tax Deduction means a deduction or withholding for or on account of Tax from a payment under a Finance Document.

Tax Payment means a payment made by an Obligor to a Finance Party in any way relating to a Tax Deduction or under any indemnity given by that Obligor in respect of Tax under any Finance Document.

Term means each period determined under this Agreement:

(a) by reference to which interest on a Loan or an overdue amount is calculated; or

(b) for which a Bill is to be outstanding.

Term Loan means a Loan under Facility A after exercise of the Term-out Option.

Term-out Option means the option to term-out Facility A available to the Parent under Clause 2.5 (Term-out Option).

Total A Commitments means the aggregate of the Facility A Commitments of all the Lenders, being the total amount specified as such in Schedule 1 (Original Parties) at the date of this Agreement.

Total B Commitments means the aggregate of the Facility B Commitments of all the Lenders, being the total amount specified as such in Schedule 1 (Original Parties) at the date of this Agreement.

Total C Commitments means the aggregate of the Facility C Commitments of all the Lenders, being the total amount specified as such in Schedule 1 (Original Parties) at the date of this Agreement.

Total Commitments means the aggregate of the Commitments of all the Lenders.

Transaction Documents means the Finance Documents, the InCentive Offer Document, the Centerpulse Offer Document and the Circular.

Transfer Certificate means a certificate in the form of Schedule 5 (Form of Transfer Certificate) with such amendments as the Facility Agent may approve or reasonably require or any other form agreed between the Facility Agent and the Parent.

U.K. means the United Kingdom.

U.S. Dollars or U.S.$ means the lawful currency for the time being of the United States of America.

U.S. Obligor means an Obligor incorporated or organised under the laws of the United States of America or any state of the United States of America (including the District of Columbia).

Utilisation Date means the date on which any Facility is utilised.

1.2 Construction

(a) The following definitions have the meanings given to them in Clause 22 (Financial covenants):

(i) Consolidated Total Net Borrowings; and

(ii) Consolidated EBITDA.

(b) In this Agreement, unless the contrary intention appears, a reference to:

(i) an amendment includes a supplement, novation, restatement or re-enactment and amended is to be construed accordingly;

assets includes present and future properties, revenues and rights of every description;

an authorisation includes an authorisation, consent, approval, resolution, licence, exemption, filing, registration or notarisation;

indebtedness includes any obligation (whether incurred as principal or as surety) for the payment or repayment of money;

a person includes any individual, company, corporation, unincorporated association or body (including a partnership, trust, joint venture or consortium), government, state, agency, organisation or other entity whether or not having separate legal personality;

a regulation includes any regulation, rule, official directive, request or guideline (whether or not having the force of law but, if not having the force of law, being of a type with which any person to which it applies is accustomed to comply) of any governmental, inter-governmental or supranational body, agency, department or regulatory, self-regulatory or other authority or organisation;

(ii) a currency is a reference to the lawful currency for the time being of the relevant country;

(iii) a Default being outstanding means that it has not been remedied or waived;

(iv) a provision of law is a reference to that provision as extended, applied, amended or re-enacted and includes any subordinate legislation;

(v) a Clause, a Subclause or a Schedule is a reference to a clause or subclause of, or a schedule to, this Agreement;

(vi) a person includes its successors in title, permitted assigns and permitted transferees;

(vii) a Transaction Document or another document is a reference to that Transaction Document or other document as amended; and

(viii) a time of day is a reference to London time.

(c) Unless the contrary intention appears, a reference to a month or months is a reference to a period starting on one day in a calendar month and ending on the numerically corresponding day in the next calendar month or the calendar month in which it is to end, except that:

(i) if the numerically corresponding day is not a Business Day, the period will end on the next Business Day in that month (if there is one) or the preceding Business Day (if there is not);

(ii) if there is no numerically corresponding day in that month, that period will end on the last Business Day in that month; and

(iii) notwithstanding sub-paragraph (i) above, a period which commences on the last Business Day of a month will end on the last Business Day in the calendar month in which it is to end.

(d) (i) Unless expressly provided to the contrary in a Finance Document, a person who is not a party to a Finance Document may not enforce any of its terms under the Contracts (Rights of Third Parties) Act 1999.

(ii) Notwithstanding any term of any Finance Document, the consent of any third party is not required for any variation (including any release or compromise of any liability under) or termination of that Finance Document.

(e) A reference to a Party will not include that Party if it has ceased to be a Party under this Agreement.

(f) Unless the contrary intention appears:

(i) a term used in any other Finance Document or in any notice given in connection with any Finance Document has the same meaning in that Finance Document or notice as in this Agreement;

(ii) any non-payment obligation of an Obligor under the Finance Documents remains in force for so long as any payment obligation is or may be outstanding under the Finance Documents;

(iii) the headings in this Agreement do not affect its interpretation; and

(iv) if there is an inconsistency between this Agreement and any other Finance Document, the other Finance Document will prevail.

2. FACILITIES

2.1 Facility A

Subject to the terms of this Agreement, the Lenders make available to the Borrowers a multi-currency revolving credit facility in an aggregate amount equal to the Total A Commitments.

2.2 Facility B

(a) Subject to the terms of this Agreement, the Lenders make available to the Borrowers a multi-currency revolving credit facility in an aggregate amount equal to the Total B Commitments.

(b) Facility B may also be utilised by way of Bills.

2.3 Facility C

(a) Subject to the terms of this Agreement, the Lenders make available to the Borrowers a multi-currency revolving credit facility in an aggregate amount equal to the Total C Commitments.

(b) Facility C may also be utilised by way of Bills.

2.4 Nature of a Finance Party's rights and obligations

Unless otherwise agreed by all the Finance Parties:

(a) the obligations of a Finance Party under the Finance Documents are several. Failure by a Finance Party to perform its obligations does not affect the obligations of any other Party under the Finance Documents; no Finance Party is responsible for the obligations of any other Finance Party under the Finance Documents; and

(b) the rights of a Finance Party under the Finance Documents are separate and independent rights, and a debt arising under the Finance Documents to a Finance Party is a separate and independent debt; a Finance Party may, except as otherwise stated in the Finance Documents, separately enforce those rights.

2.5 Term-out Option

(a) The Parent may by notice to the Facility Agent at any time opt to convert Facility A into a term loan facility. The giving of this notice constitutes the exercise of the Term-out Option by the Company. The notice must state:

(i) the amount of the Facility A Commitments being termed-out by the Company (the Term-out Amount); and

(ii) the new Final Maturity Date for Facility A, which must be on or before the date falling 24 months after the date of this Agreement.

(b) With effect from the date of the exercise of the term-out option:

(i) a maximum of five Loans may be borrowed under Facility A during the remainder of its Availability Period;

(ii) each such Loan will be treated as a Term Loan;

(iii) the first Interest Period for such a Loan may overrun the last day of the Availability Period for Facility A;

(iv) any Loan borrowed under Facility A outstanding on the date of the exercise of the term-out option must be repaid on its Maturity Date but may be re-borrowed, subject to the terms of this Agreement, as a Term Loan;

(v) the unutilised amount of the Total A Commitments will be automatically cancelled at close of business on the last day of the Availability Period for Facility A; and

(vi) the Final Maturity Date for Facility A will be the date specified in the notice given to the Facility Agent under paragraph (a) above.

(c) On the date of exercise of the Term-out Option, the Parent must pay to the Facility Agent for the Lenders a fee of 0.05 per cent. of the Term-out Amount. The Facility Agent will distribute to each Lender its Pro Rata Share of this fee.

3. PURPOSE

3.1 Credits

(a) Each Credit under Facility A may only be used in or towards:

(i) the financing or refinancing of:

(A) the acquisition by Bidco of the Centerpulse Shares pursuant to the Centerpulse Offer;

(B) the purchase of any share options over the Centerpulse Shares purchased in connection with the Centerpulse Offer; or

(ii) the financing or refinancing of the fees, costs and expenses associated with the Centerpulse Offer.

(b) Each Credit under Facility B or Facility C may only be used in or towards:

(i) the financing or refinancing of the acquisition by Bidco of the InCentive Shares pursuant to the InCentive Offer;

(ii) the financing or refinancing of the purchase of any share options over the InCentive Shares purchased in connection with the InCentive Offer;

(iii) the financing or refinancing of the fees, costs and expenses associated with the InCentive Offer;

(iv) refinancing existing debt of:

(A) the Group;

(B) after the InCentive Unconditional Date, the InCentive Group; or

(v) the general corporate purposes of the Group, including (without limitation) working capital requirements or financing the acquisition of assets or businesses, share buy-backs or special dividend payments.

3.2 No obligation to monitor

No Finance Party is bound to monitor or verify the utilisation of any Facility.

4. THE OFFERS

4.1 Defined terms

In this Subclause:

Additional Acceptance Period has the meaning given to it in SESTA.

Certain Funds Period means the period beginning on the date of this Agreement and ending on the earliest of:

(a) the latest Offer Expiry Date;

(b) the date falling 120 Swiss stock exchange trading days after the later of:

(i) the announcement of the InCentive Offer; and

(ii) the announcement of the Centerpulse Offer;

(iii) the Additional Acceptance Period for the InCentive Offer; and

(iv) the Additional Acceptance Period for the Centerpulse Offer,

has closed, and

(d) the date falling 7 days after the date of this Agreement unless the Company or Bidco has issued the Press Release,

but if Bidco is able to implement under Swiss law the squeeze-out procedure for the remaining minority shares in Centerpulse or InCentive, the Certain Funds Period will be extended up to the date falling nine months after the date of this Agreement.

InCentive Clean-Up Period means the period commencing on the date on which InCentive becomes a Subsidiary of the Company and ending on the date which is 120 days after that date.

Major Breach means a breach of:

(a) Clause 23.4 (Pari passu ranking);

(b) Clause 23.5 (Negative pledge);

(d) Clause 23.7 (Financial Indebtedness);

(e) Clause 23.9 (Mergers);

(f) Clause 23.10 (Acquisitions); or

(g) Clause 4 (The Offers).

Major Default means any of the following Events of Default:

(a) Clause 24.2 (Non-payment);

(b) Clause 24.3 (Breach of other obligations) but only insofar as it relates to a Major Breach;

(d) Clauses 24.6 (Insolvency) and 24.7 (Insolvency proceedings); or

(e) Clause 24.11 (Effectiveness of Finance Documents).

Major Representation means any of the following representations contained in this Agreement:

(a) 20.2 (Status);

(b) 20.3 (Powers and authority);

(d) 20.5 (Non conflict).

SESTA means the Swiss Federal Act on Stock Exchanges and Securities Trading and includes any implementing ordinances promulgated under that Act.

Take-over Board means the Swiss Takeover Board.

4.2 Press Release

Unless required by any law or regulation or to give effect to an Offer, neither Bidco nor the Company may make any statement or announcement (other than the Press Release) containing any information or statement concerning the Finance Documents or the Finance Parties without the prior approval of the Arrangers. The approval of the Arrangers must not be unreasonably withheld or delayed.

4.3 Additional conditions precedent - InCentive Offer Loan

(a) A Request for an InCentive Offer Loan may not be given until the Facility Agent has notified Bidco and the Lenders that it has received all of the documents and evidence set out in paragraph (b) below. The Facility Agent must give this notification as soon as reasonably practicable.

(b) The documents and evidence referred to in paragraph (a) above are as follows:

(i) the Press Release substantially in the form agreed by the Facility Agent on or prior to the date of this Agreement;

(ii) the InCentive Offer Document, in a form which substantially reflects the Press Release;

(iii) a copy of any subsequent amendment to the InCentive Offer Document;

(iv) if required under the Listing Rules of the UK Listing Authority, a copy of each circular sent to the shareholders of Bidco or the Company in relation to the InCentive Offer;

(v) if required under the Listing Rules of the UK Listing Authority, a copy of a resolution of the shareholders of each of Bidco and the Company approving the InCentive Offer.

(vi) a certificate from Bidco confirming that:

(A) the InCentive Unconditional Date has occurred; and

(B) no material term or condition of the InCentive Offer has been waived or amended in any respect other than as may be permitted in accordance with this Agreement;

(vii) evidence that all necessary filings have been made, clearances have been obtained, or relevant waiting or other time periods under any applicable law or regulation of any jurisdiction have expired, lapsed or terminated; and

(viii) evidence that all other necessary authorisations or requirements in connection with the InCentive Offer have been obtained.

4.4 Additional conditions precedent - Centerpulse Offer Loan

(a) A Request for a Centerpulse Offer Loan may not be given until the Facility Agent has notified the Company and the Lenders that it has received all of the documents and evidence set out in paragraph (b) below. The Facility Agent must give this notification as soon as reasonably practicable.

(b) The documents and evidence referred to in paragraph (a) above are as follows:

(i) the Press Release, substantially in the form agreed by the Facility Agent on or prior to the date of this Agreement;

(ii) the Centerpulse Offer Document, in a form which substantially reflects the Press Release;

(iii) a copy of any subsequent amendment to the Centerpulse Offer Document;

(iv) if required under the Listing Rules of the UK Listing Authority, a copy of each circular sent to shareholders of Bidco or the Company in relation to the Centerpulse Offer;

(v) if required under the Listing Rules of the UK Listing Authority, a copy of a resolution of the shareholders each of Bidco and the Company, approving the Centerpulse Offer;

(vi) a certificate from Bidco confirming that:

(A) the Centerpulse Unconditional Date has occurred; and

(B) no material term or condition of the Centerpulse Offer has been waived or amended in any respect other than as may be permitted in accordance with this Agreement;

(viii) evidence that all other necessary authorisations or requirements in connection with the Centerpulse Offer have been obtained.

4.5 Certain Funds

(a) Notwithstanding any term of this Agreement, during the Certain Funds Period for an Offer no Lender is entitled to:

(i) refuse to participate in or make available any Offer Loan relating to that Offer;

(ii) cancel its Commitment;

(iii) exercise any right of rescission or similar right or remedy which it may have in relation to any Offer Loan relating to that Offer; or

(iv) accelerate or cause repayment of any Offer Loan relating to that Offer,

except as provided below in this Subclause.

(b) Notwithstanding any term of this Agreement, during the Certain Funds Period no Lender is entitled to:

(i) refuse to participate in or make available any Refinancing Loan;

(ii) cancel its Commitment;

(iii) exercise any right of recission or similar right or remedy which it may have in relation to any Refinancing Loan; or

(iv) accelerate or cause repayment of any Refinancing Loan.

(i) The Company has not delivered all of the documents required under this Clause relating to that Offer or Part 1 of Schedule 2
(Conditions precedent documents)

(ii) a Major Representation is not correct or will not be correct immediately after the Certain Funds Loan is made;

(iii) a Major Default is outstanding or will result from the making of the Certain Funds Loan; or

(iv) it is unlawful for the Lender to perform any of its obligations under the Finance Documents.

(d) Nothing in this Subclause will affect the rights of any Finance Party in respect of any outstanding Default upon expiry of the Certain Funds Period irrespective of whether that Default occurred during the Certain Funds Period or not.

4.6 InCentive Clean-Up Period

Notwithstanding any term of this Agreement, during the InCentive Clean-Up Period references to the Group or any member of the Group in the following Subclauses will not include any company which is a member of the InCentive Group as at the date on which InCentive becomes a Subsidiary of the Company:

(a) Clause 4 (The Offers);

(b) Clause 20.10 (Litigation);

(d) Clause 23.6 (Disposals);

(e) Clause 23.7 (Financial Indebtedness);

(f) Clause 23.11 (Environmental matters);

(g) Clause 23.12 (Insurance);

(h) Clause 24.5 (Cross-default).

4.7 Centerpulse Clean-up Period

Notwithstanding any term of this Agreement, during the Centerpulse Clean-Up Period references to the Group or any member of the Group in the following Subclauses will not include any company which is a member of the Centerpulse Group as at the date on which Centerpulse becomes a Subsidiary of the Company:

(a) Clause 4 (The Offers);

(b) Clause 20.10 (Litigation);

(d) Clause 23.6 (Disposals);

(e) Clause 23.7 (Financial Indebtedness);

(f) Clause 23.11 (Environmental matters);

(g) Clause 23.12 (Insurance);

(h) Clause 24.5 (Cross-default).

4.8 Compliance

(a) Bidco must comply, in all material respects with all rules and regulations of the Take-over Board applicable to each Offer and all other laws and regulations applicable to the Offers.

(b) Bidco must exercise all its rights in respect of any squeeze-out procedure under Swiss law to buy any remaining shares in Centerpulse or InCentive.

4.9 Information

Bidco must promptly supply to the Facility Agent:

(a) copies of all material documents, notices or announcements received or issued by it in relation to an Offer after the date of this Agreement; and

(b) any other information regarding an Offer as the Facility Agent may reasonably request.

4.10 Increase in an Offer

(a) Except as provided below, except with the prior consent of the Arrangers Bidco must not increase the cash alternative of an Offer by more than 25 per cent. of the amount specified in the relevant Press Release.

(b) Paragraph (a) above does not restrict Bidco increasing the equity element of either Offer.

4.11 Amendments and waivers of the Offer

(a) Except as provided below, Bidco must not waive or amend any material condition of an Offer without the consent of the Majority Lenders.

(b) Paragraph (a) above does not apply to:

(i) any amendment permitted under Clause 4.10 (Increase in an Offer);

(ii) any extension of the time period within which an Offer may be accepted provided that such time period does not extend beyond the date falling 120 Swiss stock exchange trading days after the date of this Agreement; or

(iii) declaring an Offer unconditional as to acceptances provided Bidco holds irrevocable acceptances in relation to at least 66-2/3 per cent. of the share capital of InCentive or Centerpulse, as applicable.

5. CONDITIONS PRECEDENT

5.1 Conditions precedent documents

A Request may not be given until the Facility Agent has notified the Parent and the Lenders that it has received (or, acting on the instructions of the Majority Lenders, waived receipt of) all of the documents and evidence set out in Part 1 of Schedule 2 (Conditions precedent documents) in form and substance satisfactory to the Facility Agent. The Facility Agent must give this notification as soon as reasonably practicable.

5.2 Further conditions precedent

The obligations of each Lender to participate in any Credit are subject to the further conditions precedent that on both the date of the Request and the Utilisation Date for that Credit:

(a) the Repeating Representations are correct in all material respects; and

(b) no Event of Default and, in the case of a Loan other than a Rollover Loan, no Default, is outstanding or would result from the Credit.

5.3 Maximum number

Unless the Facility Agent agrees, a Request may not be given if, as a result, there would be more than 30 Credits outstanding.

6. UTILISATION - LOANS

6.1 Giving of Requests

(a) A Borrower may borrow a Loan by giving to the Facility Agent a duly completed Request.

(b) Unless the Facility Agent otherwise agrees and subject to Clause 7.6(a) (Revocation), the latest time for receipt by the Facility Agent of a duly completed Request is 11.00 a.m. one Business Day before the Rate Fixing Day for the proposed borrowing.

6.2 Completion of Requests

A Request will not be regarded as having been duly completed unless:

(a) it identifies the Borrower;

(b) it identifies the Facility the Loan applies to;

(d) the proposed currency, amount and Term comply with this Agreement.

Only one Loan may be requested in a Request unless the Request is requesting Certain Funds Loans.

6.3 Amount of Loan

(a) Except as provided below, the amount of the Loan must be a minimum of U.S.$5,000,000 and an integral multiple of U.S.$1,000,000, or their equivalents in accordance with Clause 9 (Optional Currencies).

(b) The amount of the Loan may also be the balance of the relevant undrawn Total Facility Commitments or such other amount as the Facility Agent or the Lenders may agree.

(c) For this purpose, Total Facility Commitments means the aggregate of the Commitments of all the Lenders under a Facility.

(d) The amount of each Lender's share of the Loan will be its Pro Rata Share on the proposed Utilisation Date.

6.4 Advance of Loan

(a) The Facility Agent must promptly notify each Lender of the details of the requested Loan and the amount of its share in that Loan.

(b) No Lender is obliged to participate in a Loan if as a result:

(i) its share in the Credits under a Facility would exceed its Commitment for that Facility; or

(ii) the Credits would exceed the Total Commitments.

(c) If the conditions set out in this Agreement have been met, each Lender must make its share in the Loan available to the Facility Agent for the relevant Borrower on the Utilisation Date.

7. UTILISATION - BILLS

7.1 Giving of Requests

(a) A Borrower may draw Bills by giving to the Facility Agent a duly completed Request.

(b) Unless the Facility Agent otherwise agrees, the latest time for receipt by the Facility Agent of a duly completed Request is 11.00 a.m. one Business Day before the proposed Utilisation Date.

7.2 Completion of Requests

A Request for Bills will not be regarded as being duly completed unless:

(a) it identifies the Borrower;

(b) it specifies that it is for Bills;

(d) the Utilisation Date is a Business Day falling within the relevant Availability Period;

(e) the amount requested is:

(i) a minimum of (GBP)3,000,000;

(ii) in respect of Facility B, the balance of the undrawn Total B Commitments;

(iii) in respect of Facility C, the balance of the undrawn Total C Commitments; or

(iv) such other amount as the Facility Agent or the Lenders may agree; and

(f) only one Term is specified which:

(i) does not overrun the last day of the applicable Availability Period; and

(ii) is a period of between 7 and 187 days.

7.3 Amount of Bills

The aggregate principal amount of the Bills to be accepted by a Lender will be its Pro Rata Share of those Bills on the proposed Utilisation Date.

7.4 Acceptance of Bills

(a) The Facility Agent must promptly:

(i) notify each Lender of the details of the requested Bills and the aggregate principal amount of the Bills to be accepted by it; and

(ii) send to each Lender Bills completed in accordance with this Agreement.

(b) No Lender is obliged to accept any Bill if, as a result:

(i) its share in the Credits under a Facility would exceed its Commitment for that Facility; or

(ii) the Credits would exceed the Total Commitments.

(c) Subject to Clause 7.7 (Loans as an alternative), if the conditions set out in this Agreement have been met, each Lender must accept the Bills sent to it under paragraph (a) above.

7.5 Payment of proceeds

(a) The Facility Agent must, not later than 11.30 a.m. on the applicable Utilisation Date, notify the relevant Borrower and each Lender of the applicable EBDR.

(b) EBDR means the arithmetic mean (rounded upwards to four decimal places) of the rates supplied by the Reference Banks to the Facility Agent as its request at or about 10.30 a.m. on the applicable Utilisation Date) at which Sterling bills eligible for rediscounting at the Bank of England of an equivalent tenor can be discounted in the London discount market at or about that time.

(c) Subject to the terms of this Agreement, each Lender must pay to the Facility Agent for the Company an amount equal to:

(i) the amount which the Lender would have received as the proceeds of discounting if it had discounted the Bills accepted by it at the applicable EBDR; less

(ii) acceptance commission calculated, at any time, at a rate equal to the then applicable Margin and on the aggregate principal amount of those Bills.

(d) Acceptance commission is calculated on the basis of the number of days in the relevant Term and a year of 365 days.

7.6 Revocation

If:

(a) no or only one Reference Bank supplies a rate in accordance with Clause 7.5 (Payment of proceeds) by 11.30 a.m. on the Utilisation Date; or

(b) if the Facility Agent determines that any Bills do not comply with the then current Bank of England regulations for Sterling bankers' acceptances,

then:

(i) the Facility Agent must promptly notify the relevant Borrower; and

(ii) the relevant Bills will not be accepted.

(c) If either of the events referred to in paragraph (a) or (b) above occurs, the relevant Borrower shall be entitled to deliver a Request for a Loan in Sterling in a principal amount equal to the aggregate principal amount of the Bills which it would otherwise have been obliged to accept under this Clause and for a Term equal to the Term of those Bills. Such Request shall be delivered by no later than 5.00
p.m. on the day on which the Facility Agent has given the notification to the relevant Borrower under sub-paragraph (i) above and shall specify a Utilisation Date for that Loan which is no earlier than the Business Day following the date on which that Request is delivered (or if such notification is received by the relevant Borrower after 4.30 p.m. on that day, the Request may be delivered by no later 9.15 a.m. on the next succeeding Business Day and the Utilisation Date can be the same date as that Request).

7.7 Loans as an alternative

(a) If as a result of any law or regulation, a Lender (acting reasonably) determines that it may not be able to accept any Bills or to discount Bills at EBDR, then it may notify the Facility Agent by no later than 4.00 p.m. on the Business Day before the proposed Utilisation Date that, subject to paragraph (b) below, it elects not to accept any Bills.

(b) If a Lender notifies the Facility Agent under paragraph (a) above, then, subject to the terms of this Agreement, the Lender must instead make a Loan in Sterling on the relevant Utilisation Date in a principal amount equal to the aggregate principal amount of the Bills which it would otherwise have been obliged to accept under this Clause and for a Term equal to the Term of those Bills.

8. BILLS

8.1 Repayment/prepayment

(a) A Borrower repays or prepays a Bill drawn by it by paying an amount equal to the principal amount of that Bill to the Facility Agent for the Lender that accepted that Bill.

(b) Notwithstanding any other term of this Agreement, any voluntary prepayment of Bills made by a Borrower must be in a minimum amount equal to the aggregate amount of the Bills accepted by the Lenders under a Request, so that all Lenders are prepaid on a pro rata basis.

(i) a principal amount of a Bill will be construed as a reference to its face amount;

(ii) to a Lender's share in the Credits includes all outstanding Bills accepted by that Lender; and

(iii) amounts outstanding under this Agreement includes the face amount of any outstanding Bill.

8.2 Holding and completion of Bills

(a) A Borrower must ensure that the Facility Agent has a Power of Attorney which is in full force and effect, before delivering a Request for Bills.

(b) If the Power of Attorney is then still in force, the Facility Agent must, subject to the terms of this Agreement:

(i) on behalf of that Borrower, draw and endorse sufficient Bills to fulfil each Request for Bills;

(ii) date each such Bill with its Utilisation Date;

(iii) insert in each such Bill the name of the Lender on which it is drawn, its face amount and its Maturity Date; and

(iv) send the requisite number of completed Bills to the Lenders for acceptance under this Agreement.

8.3 Rounding

The Facility Agent may round the principal amount of the Bills to be accepted by each Lender to ensure that each Bill has a principal amount of an integral multiple of (Pounds)10,000, being not less than (GBP)250,000 nor more than (GBP)5,000,000.

8.4 Discounting

Each Lender may arrange for a Bill accepted by it to be discounted on its behalf in the London discount market or elsewhere or discount the Bill itself.

8.5 Eligible Bills

Each Borrower must ensure that each Bill drawn by it and accepted by a Lender is, assuming that the accepting Lender is a bank whose acceptances are then being treated as eligible acceptances by the Bank of England, eligible for rediscounting at the Bank of England.

9. OPTIONAL CURRENCIES

9.1 General

In this Clause:

(a) Agent's Dollar Rate of Exchange means the Facility Agent's spot rate of exchange for the purchase of the relevant currency in the London foreign exchange market with U.S. Dollars at or about 11.00 a.m. on a particular day.

(b) Committed Currency means Sterling, euro, Yen and Swiss Francs.

(c) Optional Currency means any currency (other than U.S. Dollars) in which a Loan may be denominated under this Agreement.

9.2 Selection

(a) A Borrower must select the currency of a Loan in its Request.

(b) The amount of a Loan requested in an Optional Currency other than a Committed Currency must be in a minimum amount of the equivalent of U.S.$5,000,000 and an integral multiple of 1,000,000 units of that currency.

(i) in the case of Sterling, (Pounds)3,000,000 and an integral multiple of (Pounds)1,000,000;

(ii) in the case of euro, (Euro)5,000,000 and an integral multiple of (Euro)1,000,000;

(iii) in the case of Yen, (Yen)500,000,000 and an integral multiple of (Yen)100,000,000; and

(iv) in the case of Swiss Francs, CHF5,000,000 and an integral multiple of CHF1,000,000.

(d) Unless the Facility Agent otherwise agrees, the Loans may not be denominated at any one time in more than 10 currencies.

9.3 Conditions relating to Optional Currencies

(a) A Loan may be denominated in an Optional Currency for a Term if:

(i) that Optional Currency is readily available in the amount required and freely convertible into U.S. Dollars in the relevant interbank market on the Rate Fixing Day and the first day of that Term; and

(ii) that Optional Currency is a Committed Currency or has been previously approved by the Facility Agent (acting on the instructions of all the Lenders).

(b) If the Facility Agent has received a request from the Parent for a currency to be approved as an Optional Currency, the Facility Agent must, within five Business Days, confirm to the Company:

(i) whether or not the Lenders have given their approval; and

(ii) if approval has been given, the minimum amount (and, if required, integral multiples) for any Loan in that currency.

(c) If the euro is an Optional Currency at any time, a Loan in that Optional Currency will only be made available in the euro unit.

(d) When a Term Loan is first drawn down in an Optional Currency, the amount of the Loan in that Optional Currency will be its Dollar Amount notionally converted into that Optional Currency at the Agent's Spot Rate of Exchange one Business Day before the Rate Fixing Day for the first Term of that Term Loan.

9.4 Revocation of currency

(a) Notwithstanding any other term of this Agreement, if before 9.30 a.m. on any Rate Fixing Day the Facility Agent receives notice from a Lender that:

(i) the Optional Currency (other than a Committed Currency) requested is not readily available to it in the relevant interbank market in the amount and for the period required; or

(ii) participating in a Loan in the proposed Optional Currency might contravene any law or regulation applicable to it,

the Facility Agent must give notice to the Parent to that effect promptly and in any event before 11.00 a.m. on that day.

(b) In this event:

(i) that Lender must participate in a Loan in U.S. Dollars; and

(ii) the share of that Lender in the Loan and any other similarly affected Lender(s) will be treated as a separate Loan denominated in U.S. Dollars during that Term.

(c) Any part of a Loan treated as a separate Loan under this Subclause will not be taken into account for the purposes of any limit on the number of Loans or currencies outstanding at any one time.

(d) A Loan will still be treated as a Rollover Loan if it is not denominated in the same currency as the maturing Loan by reason only of the operation of this Subclause.

9.5 Optional Currency equivalents

(a) The equivalent in U.S. Dollars of a Loan or part of a Loan in an Optional Currency for the purposes of calculating:

(i) whether any limit under this Agreement has been exceeded;

(ii) the amount of a Loan;

(iii) the share of a Lender in a Loan;

(iv) the amount of any repayment of a Loan; or

(v) the undrawn amount of a Lender's Commitment,

is its Dollar Amount.

(b) The Dollar Amount of a Loan or part of a Loan means:

(i) if the Loan is denominated in U.S. Dollars, its amount;

(ii) if the Loan is a Term Loan denominated in an Optional Currency, its equivalent in U.S. Dollars (calculated on the basis of the Agent's Dollar Rate of Exchange one Business Day before the Rate Fixing Day for the first Term of that Term Loan) if it had first been drawn down and had remained denominated in U.S. Dollars, adjusted to reflect any repayment or prepayment of that Term Loan; or

(iii) in the case of any other Loan denominated in an Optional Currency, its equivalent in U.S. Dollars calculated on the basis of the Agent's Dollar Rate of Exchange one Business Day before the Rate Fixing Day for that Term.

(c) The rate of exchange to be used for calculating the amount in U.S. Dollars of any repayment or prepayment of a Term Loan in an Optional Currency is that last used for determining the current amount of that Term Loan in that Optional Currency.

9.6 Term Loan - change of currency

(a) A Term Loan will remain denominated in the same currency through successive Terms, unless the currency is changed under paragraph (c) below.

(b) A Borrower may change the currency of a Term Loan with effect from the start of a Term by giving notice to the Facility Agent by 9.00 a.m. three Business Days before the first day of that Term. That Term Loan will remain denominated in that currency until it is changed again under this Subclause.

(i) a Borrower must repay that Term Loan on the last day of its current Term in the currency in which it is then denominated (the old currency); and

(ii) the Lenders must, subject to the terms of this Agreement, re-advance the Term Loan in the currency in which the relevant Borrower requires the Term Loan to be denominated for the next Term (the new currency).

The amount of the Loan in the new currency will be calculated by reference to its Dollar Amount.

(d) Alternatively, if the Facility Agent and the relevant Borrower agree:

(i) the Facility Agent may apply the amount (or so much of that amount as is necessary) of the Term Loan in the new currency to purchase an amount of the old currency sufficient to discharge the obligation of the relevant Borrower to repay the Term Loan in the old currency;

(ii) the Facility Agent must apply any amount of the old currency purchased under sub-paragraph (i) above towards repaying the Term Loan in the old currency;

(iii) the Facility Agent will promptly notify the relevant Borrower if there is a shortfall or an excess;

(iv) if there is a shortfall, the relevant Borrower must pay to the Facility Agent on the date the Term Loan is due to be repaid in the old currency an amount in the old currency equal to the shortfall; and

(v) if there is an excess, the Facility Agent must pay to the relevant Borrower on the date the Term Loan is due to be repaid in the old currency an amount in the new currency equal to the excess.

(e) If the day on which the old currency is due to be repaid is not also a Business Day for the new currency:

(i) the Facility Agent must notify the relevant Borrower and the Lenders promptly;

(ii) the Term Loan will remain in the old currency until the next day which is a Business Day for both the old and the new currencies; and

(iii) during this period, the Term Loan will have Terms running from one Business Day to the next Business Day.

(f) The Company must indemnify the Facility Agent against any loss or liability incurred by the Facility Agent as a result of any foreign exchange contract entered into for the purpose of this Clause.

9.7 Term Loan - continuing in same Optional Currency

(a) If a Term Loan is to be denominated in the same Optional Currency during two successive Terms, the Facility Agent must calculate the amount of the Term Loan in the Optional Currency for the second of those Terms.

(b) The amount of the Term Loan in the Optional Currency for the second Term will be the amount determined by notionally converting into that Optional Currency the Dollar Amount of the Term Loan on the basis of the Agent's Spot Rate of Exchange one Business Day before the Rate Fixing Day for that Term.

(c) If the amount calculated is less than the existing amount of that Term Loan in the Optional Currency during the first Term, the relevant Borrower must pay, subject to paragraph (e) below, on the last day of the first Term an amount equal to the difference.

(d) If the amount calculated is more than the existing amount of that Term Loan in the Optional Currency during the first Term, each Lender must pay, subject to paragraph (e) below, on the last day of the first Term its Pro Rata Share of the difference.

(e) If the calculation made by the Facility Agent under paragraph (a) above shows that the amount of the Term Loan in the Optional Currency has increased or decreased by less than five per cent. since it was borrowed or (if later) the most recent adjustment under paragraph (c) or (d) above, no payment is required under paragraph (c) or (d) above.

9.8 Conditions precedent

The obligation of each Lender under this Clause to re-advance its share of a Term Loan in a new currency or make any payment increasing the amount of a Term Loan in an Optional Currency is subject to the condition precedent that on the date of the relevant payment:

(a) the Repeating Representations are correct in all material respects; and

(b) no Default is outstanding or would result from that payment.

9.9 Notification

The Facility Agent must notify the Lenders and the Parent of the relevant Dollar Amount (and the applicable Agent's Dollar Rate of Exchange) promptly after they are ascertained.

10. REPAYMENT

10.1 Repayment of Loans

(a) Each Borrower must repay each Loan made to it (other than a Term Loan) in full on its Maturity Date.

(b) Each Borrower must repay each Term Loan made to it in full on the Final Maturity Date for Facility A.

(c) Subject to the other terms of this Agreement, any amounts repaid under paragraph (a) above may be re-borrowed or redrawn (whether as a Loan or a Bill or both).

10.2 Payment of Bills

(a) Each Borrower must pay an amount equal to the principal amount of each Bill drawn by it on its Maturity Date.

(b) Subject to the other terms of this Agreement, any amounts repaid under paragraph (a) above may be re-borrowed or redrawn (whether as a Loan or a Bill or both).

11. PREPAYMENT AND CANCELLATION

11.1 Mandatory prepayment - illegality

(a) A Lender must notify the Parent promptly if it becomes aware that it is unlawful in any jurisdiction for that Lender to perform any of its obligations under a Finance Document or to fund or maintain its share in any Credit.

(b) After notification under paragraph (a) above:

(i) each Borrower must repay or prepay the share of that Lender in each Credit utilised by it on the date specified in paragraph (c) below; and

(ii) the Commitments of that Lender will be immediately cancelled.

(i) within three Business Days following receipt by the Company of notice from the Facility Agent; or

(ii) if allowed by the relevant law, the last day of the current Term of that Credit.

11.2 Mandatory prepayment - change of control

(a) The Parent must promptly notify the Facility Agent if it becomes aware of any person or group of persons acting in concert which acquires control of the Parent (other than pursuant to the Scheme).

(b) The Facility Agent must promptly notify each Lender of any notification under paragraph (a) above. Each Lender may, within 10 Business Days, by notice to the Parent:

(i) cancel its Commitments; and

(ii) demand that its participation in all outstanding Credits, together with accrued interest and all other amounts accrued under the Finance Documents be due and payable within 30 days.

Any such notice will, subject to paragraph (c) below, take effect in accordance with its terms.

(c) If Lenders, whose shares in the outstanding Credits and whose undrawn Commitments aggregate 66 2/3 per cent. or more of the aggregate of all the Credits and the undrawn Commitments of all the Lenders, give notice to the Parent under paragraph (b) above, the Facility Agent must, by notice to the Parent:

(i) cancel the Total Commitments within 30 days;

(ii) declare all outstanding Credits, together with accrued interest and all other amounts accrued under the Finance Documents to be due and payable within 30 days.

Any such notice will supersede any notice under paragraph (b) above and take effect in accordance with its terms.

(d) After any notice under paragraph (b) above:

(i) only Rollover Loans may be made; and

(ii) the Terms of those Loans must not overrun the day on which the Loans are due to be paid under paragraph (c) above.

(e) In paragraph (a) above:

control has the meaning given to it in section 416 of the Income and Corporation Taxes Act 1988; and

acting in concert has the meaning given to it in the City Code on Takeovers and Mergers.

11.3 Mandatory prepayment - disposals

(a) In this Subclause:

net proceeds means any amount received in cash by a member of the Group as consideration for a relevant disposal to a person which is not a member of the Group, including.

(i) the amount of any intercompany loan repaid or prepaid to continuing members of the Group;

(ii) any amount received or recovered under any insurance policy for loss or damage to its assets or business unless those proceeds have to be applied in replacement or reinstatement of damaged assets,

less:

(A) all income, capital gains, sales or other taxes to be paid by the recipient of such proceeds as a result of the relevant disposal;

(B) all commission, costs, fees and expenses (including professional fees) directly incurred on and fairly attributable to the relevant disposal; and

(C) any amount required to be paid by any member of the Group to the proprietor of any intellectual property rights related to the assets disposed of where that payment is required to enable the relevant intellectual property rights to be transferred with the assets disposed of to the extent necessary to facilitate that relevant disposal;

relevant disposal means a disposal other than:

(i) a disposal made in the ordinary course of trading;

(ii) a disposal of cash;

(iii) a disposal which constitutes the creation of a Security Interest allowed by this Agreement;

(iv) a disposal of an asset to the extent it is to be replaced by another asset of substantially equivalent value within 6 months of the date of the disposal;

(v) a disposal of an obsolete asset; or

(vi) a disposal of an asset with a value of less than U.S.$5,000,000 (or its equivalent).

(b) Until Facility A has been repaid and cancelled in full, if the aggregate amount of net proceeds from relevant disposals (other than the disposal referred to in paragraph (c) below) is more than U.S.$75,000,000 since the date of this Agreement, the Parent must apply (or ensure that another Borrower applies) an amount equal to the excess towards prepaying the Loans drawn under Facility A.

(c) Unless Facility A has been repaid and cancelled in full at the relevant time, the Parent must apply (or ensure that another Borrower applies) the net proceeds of disposal of the dental business of Centerpulse towards prepaying the Loans drawn under Facility A.

(d) Any prepayment under this Subclause must be made on or before the later of:

(i) ten Business Days after the net proceeds are received by the relevant member of the Group; and

(ii) the last day of the Term of the Loan to be prepaid in which the relevant disposal, receipt or recovery occurred.

(e) If the amount to be applied in prepaying the Loans is more than the amount of Loans (if any) then outstanding under Facility A, the Parent must immediately cancel the Facility A Commitments in an amount equal to the excess.

11.4 Voluntary prepayment

(a) The Parent may, by giving not less than 5 Business Days' prior notice to the Facility Agent, prepay (or ensure that another Borrower prepays) any Credit at any time in whole or in part.

(b) A prepayment of part of a Credit must be in a minimum amount of U.S.$5,000,000 (or its equivalent) and an integral multiple of U.S.$1,000,000 (or its equivalent).

11.5 Automatic cancellation

The Commitment of each Lender will be automatically cancelled at the close of business on the last day of the relevant Availability Period.

11.6 Voluntary cancellation

(a) The Parent may, by giving not less than 5 Business Days' prior notice to the Facility Agent, cancel the unutilised amount of the Commitments in respect of a specified Facility in whole or in part.

(b) Partial cancellation of the Commitments under a specified Facility must be in a minimum amount of U.S.$5,000,000 and an integral multiple of U.S.$1,000,000.

11.7 Involuntary prepayment and cancellation

(a) If the Company is, or will be, required to pay to a Lender a Tax Payment or an Increased Cost, the Company may, while the requirement continues, give notice to the Facility Agent requesting prepayment and cancellation in respect of that Lender.

(b) After notification under paragraph (a) above:

(i) each Borrower must repay or prepay that Lender's share in each Credit utilised by it on the date specified in paragraph (c) below; and

(ii) the Commitments of that Lender will be immediately cancelled.

(c) The date for repayment or prepayment of a Lender's share in a Credit will be the last day of the current Term for that Credit or, if earlier, the date specified by the Company in its notification.

11.8 Re-borrowing of Loans and Bills

(a) Any voluntary prepayment of a Loan (other than a Term Loan) or Bill may be re-borrowed on the terms of this Agreement. Any mandatory or involuntary prepayment of a Loan or Bill may not be re-borrowed.

(b) No amount of a Term Loan prepaid under this Agreement may subsequently be re-borrowed.

11.9 Miscellaneous provisions

(a) Any notice of prepayment and/or cancellation under this Agreement is irrevocable and must specify the relevant date(s) and the affected Credits and Commitments. The Facility Agent must notify the Lenders promptly of receipt of any such notice.

(b) All prepayments under this Agreement must be made with accrued interest on the amount prepaid. No premium or penalty is payable in respect of any prepayment except for Break Costs.

(d) No prepayment or cancellation is permitted except in accordance with the express terms of this Agreement.

(e) No amount of the Total Commitments cancelled under this Agreement may subsequently be reinstated.

12. INTEREST

12.1 Calculation of interest

The rate of interest on each Loan for each Term is the percentage rate per annum equal to the aggregate of the applicable:

(a) Margin;

(b) LIBOR or (in the case of a Loan denominated in euro) EURIBOR; and

12.2 Payment of interest

Except where it is provided to the contrary in this Agreement, each Borrower must pay accrued interest on each Loan made to it on the last day of each Term and also, if the Term is longer than six months, on the dates falling at six-monthly intervals after the first day of that Term.

12.3 Margin adjustments

(a) Subject to paragraph (b) below, beginning with the Compliance Certificate provided in relation to the financial year ending on 31st December, 2003, the Margin will be calculated by reference to the table below and the information set out in the most recent Compliance Certificate provided under Clause 21.2(a) (Compliance Certificate):

--------------------------------------------------------------------------------------------------
                 Column 1                                           Column 2
     Ratio of Consolidated Total Net                                 Margin
    Borrowings to Consolidated EBITDA                        (per cent. per annum)

                                            ------------------------------------------------------
                                                Facility A        Facility B        Facility C

--------------------------------------------------------------------------------------------------
 Less than or equal to 3:1 but greater              0.55              0.55             0.575
 than 2.5:1
--------------------------------------------------------------------------------------------------
 Less than or equal to 2.5:1 but greater           0.475             0.475             0.525
 than 2:1
--------------------------------------------------------------------------------------------------
 Less than or equal to 2:1 but greater              0.45              0.45             0.475
 than 1.5:1
--------------------------------------------------------------------------------------------------
 Less than or equal to 1:5:1 but greater           0.425             0.425              0.45
 than 1:1
--------------------------------------------------------------------------------------------------
 Less than or equal to 1:1                          0.40              0.40             0.425
--------------------------------------------------------------------------------------------------

(b) (i) For so long as:

(A) the Company is in default of its obligation under this Agreement to provide a Compliance Certificate; or

(B) an Event of Default is outstanding,

the Margin will be the highest applicable rate.

(ii) In the case of Facility A, the Margin will only be calculated in accordance with paragraph (a) above after exercise of the Term-out Option.

(c) Any change to the Margin under this Subclause will take effect in relation to a Loan on the second Business Day after delivery of the relevant Compliance Certificate.

12.4 Interest on overdue amounts

(a) If an Obligor fails to pay any amount payable by it under the Finance Documents, it must immediately on demand by the Facility Agent pay interest on the overdue amount from its due date up to the date of actual payment, both before, and after judgment.

(b) Interest on an overdue amount is payable at a rate determined by the Facility Agent to be one per cent. per annum above the rate which would have been payable if the overdue amount

had, during the period of non-payment, constituted a Loan under the Facility to which the overdue amount relates in the currency of the overdue amount. For this purpose, the Facility Agent may (acting reasonably):

(i) select successive Terms of any duration of up to three months; and

(ii) determine the appropriate Rate Fixing Day for that Term.

(c) Notwithstanding paragraph (b) above, if the overdue amount is a principal amount of a Loan and becomes due and payable prior to the last day of its current Term, then:

(i) the first Term for that overdue amount will be the unexpired portion of that Term; and

(ii) the rate of interest on the overdue amount for that first Term will be 1 per cent. per annum above the rate then payable on that Loan.

After the expiry of the first Term for that overdue amount, the rate on the overdue amount will be calculated in accordance with paragraph (b) above.

(d) Interest (if unpaid) on an overdue amount will be compounded with that overdue amount at the end of each of its Terms but will remain immediately due and payable.

12.5 Notification of rates of interest

The Facility Agent must promptly notify each relevant Party of the determination of a rate of interest under this Agreement.

13. TERMS

13.1 Selection - Term Loan

(a) Each Term Loan has successive Terms.

(b) The Parent must select the first Term for each Term Loan in the notice given to the Facility Agent under Clause 2.5 (Term-out Option) and the relevant Borrower must select each subsequent Term in an irrevocable notice received by the Facility agent not later than 11.00 a.m. one Business Day before the Rate Fixing Day for that Term. Each Term for a Term Loan will start on its Utilisation Date or on the expiry of its preceding Term.

(c) If the Parent or a Borrower fails to select a Term for a Term Loan under paragraph (b) above, that Term will, subject to the other provisions of this Clause, be three months.

(d) Subject to the following provisions of this Clause, each Term for a Term Loan will be one, two, three or six months or any other period agreed by the Parent and the Lenders.

13.2 Selection

(a) Each Loan (other than the Term Loan) has one Term only.

(b) A Borrower will select the Term for a Loan (other than the Term Loan) in the relevant Request.

(c) Subject to the following provisions of this Clause, each Term for a Loan (other than the Term Loan) will be one, two, three or six months or any other period agreed by the Parent and the Lenders.

13.3 Consolidation - Term Loans

Unless a Borrower otherwise requests, a Term for a Term Loan will end on the same day as the current Term for any other Term Loan denominated in the same currency as that Term Loan and borrowed by that Borrower. On the last day of those Terms, those Term Loans will be consolidated and treated as one Term Loan.

13.4 No overrunning the Final Maturity Date

If a Term would otherwise overrun the Final Maturity Date, it will be shortened so that it ends on the Final Maturity Date.

13.5 Other adjustments

The Facility Agent and the Parent may enter into such other arrangements as they may agree for the adjustment of Terms and the consolidation and/or splitting of Loans.

13.6 Notification

The Facility Agent must notify the relevant Borrower and the Lenders of the duration of each Term promptly after ascertaining its duration.

14. MARKET DISRUPTION

14.1 Failure of a Reference Bank to supply a rate

If IBOR is to be calculated by reference to the Reference Banks but a Reference Bank does not supply a rate by 12.00 noon (local time) on a Rate Fixing Day, the applicable IBOR will, subject as provided below, be calculated on the basis of the rates of the remaining Reference Banks.

14.2 Market disruption

(a) In this Clause, each of the following events is a market disruption event:

(i) IBOR is to be calculated by reference to the Reference Banks but no, or only one, Reference Bank supplies a rate by 12.00 noon (local time) on the Rate Fixing Day; or

(ii) the Facility Agent receives by close of business on the Rate Fixing Day notification from Lenders whose shares in the relevant Loan exceed 50 per cent. of that Loan that the cost to them of obtaining matching deposits in the relevant interbank market is in excess of IBOR for the relevant Term.

(b) The Facility Agent must promptly notify the Parent and the Lenders of a market disruption event.

(c) After notification under paragraph (b) above, the rate of interest on each Lender's share in the affected Loan for the relevant Term will be the aggregate of the applicable:

(i) Margin;

(ii) rate notified to the Facility Agent by that Lender as soon as practicable to be that which expresses as a percentage rate per annum the cost to that Lender of funding its share in that Loan from whatever source it may reasonably select; and

(iii) Mandatory Cost.

14.3 Alternative basis of interest or funding

(a) If a market disruption event occurs and the Facility Agent or the Parent so requires, the Parent and the Facility Agent must enter into negotiations in good faith for a period of not more than thirty (30) days with a view to agreeing an alternative basis for determining the rate of interest and/or funding for the affected Loan and any future Loan.

(b) Any alternative basis agreed will be, with the prior consent of all the Lenders, binding on all the Parties.

15. TAXES

15.1 General

In this Clause:

Qualifying Lender means a Lender which is:

(a) a U.K. Lender; or

(b) a Treaty Lender.

Tax Credit means a credit against any Tax or any relief or remission for Tax (or its repayment).

Tax Deduction means a deduction or withholding for or on account of Tax from a payment under a Finance Document.

Treaty Lender means a Lender which, on the date a payment of interest falls due under this Agreement:

(a) is resident (as defined in the appropriate double taxation agreement) in a country with which the U.K. has a double taxation agreement giving residents of that country exemption from U.K. taxation on interest; and

(b) does not carry on a business in the U.K. through a permanent establishment with which the payment is effectively connected.

U.K. Lender means a Lender which is within the charge to U.K. corporation tax in respect of, and beneficially entitled to, a payment of interest on a Loan made by a person that was a bank for the purpose of section 349 of the Income and Corporation Taxes Act 1988 (as currently defined in section 840A of the Income and Corporation Taxes Act) at the time the Loan was made.

U.K. Obligor means an Obligor resident for tax purposes in the U.K..

15.2 Tax gross-up

(a) Each Obligor must make all payments to be made by it under the Finance Documents without any Tax Deduction, unless a Tax Deduction is required by law.

(b) If:

(i) a Lender is not, or ceases to be, a Qualifying Lender; or

(ii) an Obligor or a Lender is aware that an Obligor must make a Tax Deduction (or that there is a change in the rate or the basis of a Tax Deduction),

it must promptly notify the Facility Agent. The Facility Agent must then promptly notify the affected Parties.

(c) Except as provided below, if a Tax Deduction is required by law to be made by an Obligor or the Facility Agent, the amount of the payment due from the Obligor will be increased to an amount which (after making the Tax Deduction) leaves an amount equal to the payment which would have been due if no Tax Deduction had been required.

(d) An Obligor is not required to make an increased payment under paragraph (c) above to a Lender for a Tax Deduction imposed by a U.K. taxing authority from a payment of interest, if:

(i) that Lender is not or has ceased to be a Qualifying Lender in respect of that payment, unless the altered status results from any change after the date of this Agreement in (or in the interpretation, administration, or application of) any law or double taxation agreement or any published practice or concession of any relevant taxing authority; or

(ii) that Lender is a Treaty Lender and the Obligor is able to demonstrate that the Tax Deduction would not have been made if the Lender had complied with its obligations under paragraph (g) below.

(e) If an Obligor is required to make a Tax Deduction, it must make the minimum Tax Deduction and must make any payment required in connection with that Tax Deduction within the time allowed by law.

(f) Within thirty (30) days of making either a Tax Deduction or a payment required in connection with a Tax Deduction, the Obligor must deliver to the Facility Agent for the relevant Finance Party evidence satisfactory to that Finance Party (acting reasonably) that the Tax Deduction has been made or (as applicable) the appropriate payment has been paid to the relevant taxing authority.

(g) A Treaty Lender must co-operate with each Obligor in completing any procedural formalities necessary for that Obligor to obtain authorisation to make that payment without a Tax Deduction imposed by a U.K. taxing authority.

15.3 U.S. Tax forms

(a) In this Subclause:

U.S. person has the meaning given to it in Section 7701(a)(30) of the United States Internal Revenue Code of 1986.

(b) (i) Except as provided below, each Lender which is not a U.S. person must supply to the Facility Agent and each U.S. Obligor:

(A) two duly executed U.S. Internal Revenue Service Forms W-8-BEN or W-8ECI (as appropriate); or

(B) if applicable, two duly executed U.S. Internal Revenue Service Forms W-8IMY together with the applicable accompanying duly executed copies of U.S. Internal Revenue Service Forms W-8 or W-9 (as appropriate),

as the case may be, in each case to enable that U.S. Obligor to make payments to that Lender under the Finance Documents without any deduction or withholding in respect of any Tax in the United States of America.

(ii) Except as provided below, each Lender that is a U.S. Person (other than a Lender that is treated as an exempt recipient based on the indicators described in U.S. Treas. Reg. (S) 1.6049-4(c)(1)(ii) must supply to the Facility Agent and to each U.S. Obligor, two duly executed U.S. Internal Revenue Service Forms W-9 certifying that the relevant Lender is exempt from United States backup withholding tax on payments made under the Finance Documents.

(c) A Lender must comply with its obligations under paragraph (b) above as soon as practicable after the date it becomes a Party or (if later) the date the U.S. Obligor becomes a Party.

(d) A Lender is not obliged to supply any form under paragraph (b) above if it is unable to do so by reason of any change after the date of this Agreement in (or in the interpretation, administration or application of) any law or regulation or any published practice or concession of any relevant taxing authority.

(e) A U.S. Obligor is not obliged to pay any Tax Payment to a Lender to the extent that the Tax Payment would not have been payable if that Lender had complied with its obligations under this Subclause.

15.4 Tax indemnity

(a) Except as provided below, the Parent must indemnify a Finance Party against any loss or liability which that Finance Party (in its absolute discretion) determines will be or has been suffered (directly or indirectly) by that Finance Party for or on account of Tax in relation to a payment received or receivable (or any payment deemed to be received or receivable) under a Finance Document.

(b) Paragraph (a) above does not apply to any Tax assessed on a Finance Party under the laws of the jurisdiction in which:

(i) that Finance Party is incorporated or, if different, the jurisdiction (or jurisdictions) in which that Finance Party is treated as resident for tax purposes; or

(ii) that Finance Party's Facility Office is located in respect of amounts received or receivable in that jurisdiction,

if that Tax is imposed on or calculated by reference to the net income received or receivable by that Finance Party. However, any payment deemed to be received or receivable, including any amount treated as income but not actually received by the Finance Party, such as a Tax Deduction, will not be treated as net income received or receivable for this purpose.

(c)      Paragraph (a) above does not apply to any amount compensated for under
         Subclause 15.2 (Tax gross-up) above, or which would have been
         compensated for under Subclause 15.2 (Tax gross-up) above but for an
         exception to that Subclause.

(d)      A Finance Party making, or intending to make, a claim under paragraph
         (b) above must promptly notify the Company of the event which will
         give, or has given, rise to the claim.

15.5     Tax Credit

         If an Obligor makes a Tax Payment and the relevant Finance Party (in
         its absolute discretion) determines that:

         (a) a Tax Credit is attributable to that Tax Payment; and

         (b) it has used that Tax Credit,

         the Finance Party must pay an amount to the Obligor which that Finance
         Party determines (in its absolute discretion) will leave it (after that
         payment) in the same after-tax position as it would have been in if the
         Tax Payment had not been made by the Obligor.

15.6     Stamp taxes

         The Parent must pay and indemnify each Finance Party against any stamp
         duty, registration or other similar Tax payable in connection with the
         entry into, performance or enforcement of any Finance Document, except
         for any such Tax payable in connection with the entry into of a
         Transfer Certificate.

15.7     Value added taxes

(a)      Any amount (including costs and expenses) payable under a Finance
         Document by an Obligor is exclusive of any Tax (including value added
         tax) which might be chargeable in connection with that amount. If any
         such Tax is chargeable, the Obligor must pay to the Finance Party (in
         addition to and at the same time as paying that amount) an amount equal
         to the amount of that Tax.

(b)      The obligation of the Obligor under paragraph (a) above will be reduced
         to the extent that the Finance Party is entitled to repayment or a
         credit in respect of the relevant Tax.

16.      INCREASED COSTS

16.1     Increased Costs

         Except as provided below in this Clause, the Parent must pay to a
         Finance Party the amount of any Increased Cost incurred by that Finance
         Party or any of its Affiliates as a result of:

         (a) the introduction of, or any change in, or any change in the
             interpretation or application of, any law or regulation; or

         (b) compliance with any law or regulation made after the date of this
             Agreement.

16.2     Exceptions

         The Parent need not make any payment for an Increased Cost to the
         extent that the Increased Cost is:

                                       41

         (a)  compensated for under another Clause, or would have been but for
              an exception to that Clause;

         (b)  a tax on the overall net income of a Finance Party or any of its
              Affiliates; or

         (c)  attributable to a Finance Party or its Affiliate wilfully or
              grossly negligently failing to comply with any law or regulation.

16.3     Claims

         A Finance Party intending to make a claim for an Increased Cost must
         notify the Parent promptly of the circumstances giving rise to, and the
         amount of, the claim.

17.      MITIGATION

17.1     Mitigation

(a)      Each Finance Party must, in agreement with the Parent, take all
         reasonable steps to mitigate any circumstances which arise and which
         result or would result in:

         (i)  any Tax Payment, any claim under Clause 15.4 (Tax indemnity) or
              Clause 16.1 (Increased Costs) being payable to that Finance Party;
              or

         (ii) that Finance Party being able to exercise any right of prepayment
              and/or cancellation under this Agreement by reason of any
              illegality,

         including transferring its rights and obligations under the Finance
         Documents to an Affiliate or changing its Facility Office.

(b)      The Parent must indemnify each Finance Party for all costs and expenses
         reasonably incurred by that Finance Party as a result of any step taken
         by it under this Subclause.

(c)      A Finance Party is not obliged to take any step under this Subclause
         if, in the opinion of that Finance Party (acting reasonably), to do so
         might be prejudicial to it.

17.2     Conduct of business by a Finance Party

         No term of this Agreement will:

         (a)  interfere with the right of any Finance Party to arrange its
              affairs (Tax or otherwise) in whatever manner it thinks fit;

         (b)  oblige any Finance Party to investigate or claim any credit,
              relief, remission or repayment available to it in respect of Tax
              or the extent, order and manner of any claim; or

         (c)  oblige any Finance Party to disclose any information relating to
              its affairs (Tax or otherwise) or any computation in respect of
              Tax.

                                       42

18.      PAYMENTS

18.1     Place

         Unless a Finance Document specifies that payments under it are to be
         made in another manner, all payments by a Party (other than the
         Facility Agent) under the Finance Documents must be made to the
         Facility Agent to its account at such office or bank:

         (a)  in the principal financial centre of the country of the relevant
              currency; or

         (b)  in the case of euro, in the principal financial centre of a
              Participating Member State or London,

         as it may notify to that Party for this purpose by not less than five
         Business Days' prior notice.

18.2     Funds

         Payments under the Finance Documents to the Facility Agent must be made
         for value on the due date at such times and in such funds as the
         Facility Agent may specify to the Party concerned as being customary at
         the time for the settlement of transactions in the relevant currency in
         the place for payment.

18.3     Currency

(a)      Unless a Finance Document specifies that payments under it are to be
         made in a different manner, the currency of each amount payable under
         the Finance Documents is determined under this Clause.

(b)      Interest is payable in the currency in which the relevant amount in
         respect of which it is payable is denominated.

(c)      A repayment or prepayment of any principal amount is payable in the
         currency in which that principal amount is denominated on its due date.

(d)      Amounts payable in respect of costs and expenses are payable in the
         currency in which they are incurred.

(e)      Each other amount payable under the Finance Documents is payable in
         Sterling.

18.4     Distribution

(a)      Each payment received by the Facility Agent under the Finance Documents
         for another Party must, except

         as provided below, be made available by the Facility Agent to that
         Party by payment (as soon as practicable after receipt) to its account
         with such office or bank:

         (i)  in the principal financial centre of the country of the relevant
              currency; or

         (ii) in the case of euro, in the principal financial centre of a
              Participating Member State or London,

         as it may notify to the Facility Agent for this purpose by not less
         than five Business Days' prior notice.

                                       43

(b)      The Facility Agent may (with the consent and at the expense of the
         relevant Obligor) apply any amount received by it for an Obligor in or
         towards payment (as soon as practicable after receipt) of any amount
         due from that Obligor under the Finance Documents or in or towards the
         purchase of any amount of any currency to be so applied.

(c)      Where a sum is paid to the Facility Agent under this Agreement for
         another Party, the Facility Agent is not obliged to pay that sum to
         that Party until it has established that it has actually received it.
         However, the Facility Agent may assume that the sum has been paid to
         it, and, in reliance on that assumption, make available to that Party a
         corresponding amount. If it transpires that the sum had not been made
         available, that Party must immediately on demand by the Facility Agent
         refund any corresponding amount made available to it together with
         interest on that amount from the date of payment to the date of receipt
         by the Facility Agent at a rate calculated by the Facility Agent to
         reflect its cost of funds.

18.5     No set-off or counterclaim

         All payments made by an Obligor under the Finance Documents must be
         made without set-off or counterclaim.

18.6     Business Days

(a)      If a payment under the Finance Documents is due on a day which is not a
         Business Day, the due date for that payment will instead be the next
         Business Day in the same calendar month (if there is one) or the
         preceding Business Day (if there is not).

(b)      During any extension of the due date for payment of any principal under
         this Agreement interest is payable on that principal at the rate
         payable on the original due date.

18.7     Partial payments

(a)      If the Facility Agent receives a payment insufficient to discharge all
         the amounts then due and payable by the Obligors under the Finance
         Documents, the Facility Agent must apply that payment towards the
         obligations of the Obligors under the Finance Documents in the
         following order:

         (i)     first, in or towards payment pro rata of any unpaid fees, costs
                 and expenses of the Facility Agent under the Finance Documents;

         (ii)    secondly, in or towards payment pro rata of any accrued
                 interest or fee due but unpaid under this Agreement;

         (iii)   thirdly, in or towards payment pro rata of any principal amount
                 due but unpaid under this Agreement; and

         (iv)    fourthly, in or towards payment pro rata of any other sum due
                 but unpaid under the Finance Documents.

(b)      The Facility Agent must, if so directed by all the Lenders, vary the
         order set out in sub-paragraphs (a)(ii) to (iv) above.

(c)      This Subclause will override any appropriation made by an Obligor.

                                       44

18.8     Timing of payments

         If a Finance Document does not provide for when a particular payment is
         due, that payment will be due within three Business Days of demand by
         the relevant Finance Party.

19.      GUARANTEE AND INDEMNITY

19.1     Guarantee and indemnity

         Each Guarantor jointly and severally and irrevocably and
         unconditionally:

         (a) guarantees to each Finance Party punctual performance by each
             Borrower of all its payment obligations under the Finance
             Documents;

         (b) undertakes with each Finance Party that, whenever a Borrower does
             not pay any amount when due under any Finance Document, that
             Guarantor must immediately on demand by the Facility Agent pay that
             amount as if it were the principal obligor;

         (c) indemnifies each Finance Party immediately on demand against any
             loss or liability suffered by that Finance Party if any payment
             obligation guaranteed by it is or becomes unenforceable, invalid or
             illegal; the amount of the loss or liability under this indemnity
             will be equal to the amount the Finance Party would otherwise have
             been entitled to recover; and

         (d) agrees that:

             (i)    this is a guarantee of payment and not a guarantee of
                    collection;

             (ii)   its obligations under this guarantee are independent of the
                    validity or enforceability of any or all of the obligations
                    of any or all of the Borrowers; and

             (iii)  a separate action may be brought and prosecuted against that
                    Guarantor whether or not any action is brought against any
                    or all of the Borrowers.

19.2     Continuing guarantee

         This guarantee is a continuing guarantee and will extend to the
         ultimate balance of all sums payable by any Obligor under the Finance
         Documents, regardless of any intermediate payment or discharge in whole
         or in part. This guarantee will enure to the benefit of any New Lender
         (as defined in Clause 31 (Changes to the Parties)) to which has been
         assigned or transferred (including by way of novation) any or all of
         the rights and/or obligation of a Lender under this Agreement.

19.3     Reinstatement

(a)      If any discharge (whether in respect of the obligations of any Obligor
         or any security for those obligations or otherwise) or arrangement is
         made in whole or in part on the faith of any payment, security or other
         disposition which is avoided or must be restored on insolvency,
         liquidation or otherwise without limitation, the liability of each
         Guarantor under this Clause will continue as if the discharge or
         arrangement had not occurred.

(b)      Each Finance Party may concede or compromise any claim that any
         payment, security or other disposition is liable to avoidance or
         restoration.

                                       45

19.4     Waiver of defences

         The obligations of each Guarantor under this Clause will not be
         affected by any act, omission or thing which, but for this provision,
         would reduce, release or prejudice any of its obligations under this
         Clause (whether or not known to it or any Finance Party). This
         includes:

         (a) any time or waiver granted to, or composition with, any person;

         (b) any release of any person under the terms of any composition or
             arrangement;

         (c) the taking, variation, compromise, exchange, renewal or release of,
             or refusal or neglect to perfect, take up or enforce, any rights
             against, or security over assets of, any person;

         (d) any non-presentation or non-observance of any formality or other
             requirement in respect of any instrument or any failure to realise
             the full value of any security;

         (e) any incapacity or lack of power, authority or legal personality of
             or dissolution or change in the members or status of any person;

         (f) any amendment (however fundamental) of a Finance Document or any
             other document or security; or

         (g) any unenforceability, illegality, invalidity or non-provability of
             any obligation of any person under any Finance Document or any
             other document or security.

19.5     Immediate recourse

         Each Guarantor waives any right it may have of first requiring any
         Finance Party (or any trustee or agent on its behalf) to proceed
         against or enforce any other right or security or claim payment from
         any person before claiming from that Guarantor under this Clause.

19.6     Appropriations

         Until all amounts which may be or become payable by the Obligors under
         the Finance Documents have been irrevocably paid in full, each Finance
         Party (or any trustee or agent on its behalf) may without affecting the
         liability of any Guarantor under this Clause:

         (a) refrain from applying or enforcing any other moneys, security or
             rights held or received by that Finance Party (or any trustee or
             agent on its behalf) in respect of those amounts; or

         (b) apply and enforce them in such manner and order as it sees fit
             (whether against those amounts or otherwise); and

         (c) hold in an interest-bearing suspense account any moneys received
             from any Guarantor or on account of that Guarantor's liability
             under this Clause.

19.7     Non-competition

         Unless:

         (a) all amounts which may be or become payable by the Obligors under
             the Finance Documents have been irrevocably paid in full; or

                                       46

         (b) the Facility Agent otherwise directs,

         no Guarantor will, after a claim has been made or by virtue of any
         payment or performance by it under this Clause:

         (i)     be subrogated to any rights, security or moneys held, received
                 or receivable by any Finance Party (or any trustee or agent on
                 its behalf);

         (ii)    be entitled to any right of contribution or indemnity in
                 respect of any payment made or moneys received on account of
                 that Guarantor's liability under this Clause;

         (iii)   claim, rank, prove or vote as a creditor of any Obligor or its
                 estate in competition with any Finance Party (or any trustee or
                 agent on its behalf); or

         (iv)    receive, claim or have the benefit of any payment, distribution
                 or security from or on account of any Obligor, or exercise any
                 right of set-off as against any Obligor.

         Each Guarantor must hold in trust for and immediately pay or transfer
         to the Facility Agent for the Finance Parties any payment or
         distribution or benefit of security received by it contrary to this
         Clause or in accordance with any directions given by the Facility Agent
         under this Clause.

19.8     Additional security

         This guarantee is in addition to and is not in any way prejudiced by
         any other security now or subsequently held by any Finance Party.

19.9     Limitations - U.K.

         This guarantee does not apply to any liability to the extent it would
         result in this guarantee constituting unlawful financial assistance
         within the meaning of Section 151 of the Companies Act 1985.

19.10    U.S. Guarantors

(a)      In this Subclause:

         fraudulent transfer law means any applicable United States bankruptcy
         and State fraudulent transfer and conveyance statute and any related
         case law;

         U.S. Guarantor means any Guarantor incorporated or organised under the
         laws of the United States of America or any state of the United States
         of America (including the District of Columbia); and

         terms used in this Subclause are to be construed in accordance with the
         fraudulent transfer laws

(b)      Each U.S. Guarantor acknowledges that:

         (i)     it will receive valuable direct or indirect benefits as a
                 result of the transactions financed by the Finance Documents;

         (ii)    those benefits will constitute reasonably equivalent value and
                 fair consideration for the purpose of any fraudulent transfer
                 law; and

(iii) each Finance Party has acted in good faith in connection with the guarantee given by that U.S. Guarantor and the transactions contemplated by the Finance Documents.

(c) Each Finance Party agrees that each U.S. Guarantor's liability under this Clause is limited so that no obligation of, or transfer by, any U.S. Guarantor under this Clause is subject to avoidance and turnover under any fraudulent transfer law.

(d) Each U.S. Guarantor must ensure that at all times:

(i) the aggregate amount of each U. S. Guarantor's debts (including its obligations under the Finance Documents) is less than the aggregate value (being the lesser of fair valuation and present fair saleable value) of its assets;

(ii) its capital must not be unreasonably small to carry on its business as it is being conducted;

(iii) it may not incur and does not intend to incur debts beyond its ability to pay as they mature;

(iv) it has not made a transfer or incurred any obligation under any

                 Finance Document with the intent to hinder, delay or defraud
                 any of its present or future creditors.

19.11    Swiss Guarantors

(a)      In this Subclause:

         Swiss Guarantor means each Guarantor incorporated in Switzerland; and

         Swiss Surplus means, in relation to a Swiss Guarantor, the amount of
         that Swiss Guarantor's freely disposable shareholder's equity in

accordance with Swiss law, being:

(i) that Swiss Guarantor's total shareholder's equity; less

(ii) the aggregate of:

(A) it's aggregate share capital; and

(B) its statutory reserves (including, without limitation, reserves for its own shares and revaluation reserves, and reserves for paid-in capital surplus (Agio)),

as at the date of enforcement of the obligations of that Swiss Guarantor under this Clause.

(b) The amount of the Swiss Surplus of any Swiss Guarantor is to be determined on the basis of the most recent audited balance sheet of that Swiss Guarantor and, if required by the Majority Lenders, must be approved as a distributable amount by the auditors of that Swiss Guarantor.

(i) the liability of each Swiss Guarantor under this Clause is limited to the amount (or its equivalent in any other currency or currencies) of the Swiss Surplus; and

         (ii) if a payment by a Swiss Guarantor under this Clause in respect of
              the obligations of an Obligor is subject to Swiss withholding tax,
              the relevant Swiss Guarantor is not obliged to comply with its
              obligations under Subclause 15.2 (Tax gross-up) to the extent that
              compliance with those obligations would result in the relevant
              Swiss Guarantor being obliged to pay an amount in excess of its
              Swiss Surplus.

19.12    Limitations - general

         Notwithstanding Subclauses 19.10 (U.S. Guarantors) and 19.11 (Swiss
         Guarantors):

         (a)  the liability of a Guarantor under this Clause must not exceed the
              maximum amount able to be provided by that Guarantor having regard
              to generally applicable laws in its jurisdiction of incorporation;
              and

         (b)  if the liability of a Guarantor under this Clause is capable of
              being subsequently increased as a result of any change in law or
              interpretation, it shall be increased to the maximum amount able
              to be provided by that Guarantor under the generally applicable
              laws in its jurisdiction of incorporation.

20.      REPRESENTATIONS

20.1     Representations

         The representations set out in this Clause are made by each Obligor or
         (if it so states) the Parent to each Finance Party.

20.2     Status

(a)      It is a limited liability company, duly incorporated and validly
         existing under the laws of its jurisdiction of incorporation.

(b)      It and each of its Subsidiaries has the power to own its assets and
         carry on its business as it is being conducted.

20.3     Powers and authority

         It has the power to enter into and perform, and has taken all necessary
         corporate action to authorise the entry into and performance of, the
         Transaction Documents to which it is or will be a party and the
         transactions contemplated by those Transaction Documents.

20.4     Legal validity

         Subject to any general principles of law limiting its obligations and
         referred to in any legal opinion required under this Agreement, each
         Finance Document to which it is a party is its legally binding, valid
         and enforceable obligation.

20.5     Non-conflict

         The entry into and performance by it, and the transactions contemplated
         by, the Transaction Documents do not conflict with:

         (a)  any law or regulation applicable to it; or

         (b)  its constitutional documents; or

                                       49

         (c)  at the date of this Agreement, any document which is binding upon
              it or any of its Material Subsidiaries or any of its or its
              Material Subsidiaries' assets.

20.6     No default

(a)      (i)  Subject to paragraph (b) below, no Default is outstanding or will
              result from the execution of, or the performance of any
              transaction contemplated by, any Finance Document; and

         (ii) no other event is outstanding which constitutes a default under
              any document which is binding on it or any of its Subsidiaries or
              any of its or its Subsidiaries' assets to an extent or in a manner
              which is reasonably likely to have a Material Adverse Effect.

(b)      If the representation in sub-paragraph (a)(i) above is deemed to be
         repeated under Subclause 20.13 (Times for making representations) on:

         (i)  the date of a Request, or the Utilisation Date, for a Rollover
              Loan; or

         (ii) the first day of a Term (other than the first Term) for a Term
              Loan,

         the reference in that representation to Default will be deemed to be a
         reference to Event of Default.

20.7     Authorisations

         All authorisations required by it in connection with the entry into,
         performance, validity and enforceability of, and the transactions
         contemplated by, the Finance Documents have been, or in the case of the
         other Transaction Documents will have been by the first Utilisation
         Date, obtained or effected (as appropriate) and are, or will be by the
         first Utilisation Date in full force and effect.

20.8     Financial statements

         In the case of the Parent only, its audited consolidated financial
         statements most recently delivered to the Facility Agent (which, at the
         date of this Agreement, are the Original Financial Statements):

         (a)  have been prepared in accordance with accounting principles and
              practices generally accepted in its jurisdiction of incorporation,
              consistently applied; and

         (b)  give a true and fair view of its consolidated financial condition
              as at the date to which they were drawn up,

         except, in each case, as disclosed to the contrary in those financial
         statements.

20.9     No material adverse change

         In the case of the Company only, as at the date of this Agreement,
         there has been no material adverse change in its consolidated financial
         condition since the date to which the Original Financial Statements
         were drawn up.

                                       50

20.10    Litigation

         No litigation, arbitration or administrative proceedings are current
         or, to its knowledge, pending or threatened in writing, which are
         reasonably likely to have a Material Adverse Effect.

20.11    Information

(a)      All material factual information supplied by an Obligor to any Finance
         Party in writing was accurate in all material respects as at the date
         to which it was prepared;

(b)      as at its date and to the best of its knowledge, the opinions,
         projections and forecasts supplied by an Obligor to any Finance Party
         and the assumptions on which they were based were arrived at after due
         and careful consideration and genuinely represented its views; and

(c)      to the best of its knowledge there are no material facts or
         circumstances which have not been disclosed to the parties to this
         Agreement by an Obligor prior to the date of this Agreement and which
         would make any of the information, opinions, projections, forecasts or
         assumptions supplied by an Obligor inaccurate or misleading in any
         material respect.

20.12    United States laws

(a)      In this Subclause:

         holding company, affiliate and subsidiary company have the meanings
         given to them in the United States Public Utility Holding Company Act
         of 1935.

         investment company and controlled have the meanings given to them in
         the United States Investment Company Act of 1940.

         public utility has the meaning given to it in the United States Federal
         Power Act of 1920.

(b)      It is not:

         (i)   a holding company, an affiliate of a holding company or a
               subsidiary company of a holding company, or subject to
               regulation, under the United States Public Utility Holding
               Company Act of 1935;

         (ii)  a public utility, or subject to regulation, under the United
               States Federal Power Act of 1920;

         (iii) an investment company or a company controlled by an investment
               company; or

         (iv)  subject to regulation under any United States Federal or State
               law or regulation that limits its ability to incur or guarantee
               indebtedness.

20.13    Times for making representations

(a)      The representations set out in this Clause are made by each Original
         Obligor on the date of this Agreement.

(b)      The representations in Subclauses 20.2 (Status) to 20.5(b)
         (Non-conflict), 20.6 (No default) to 20.8 (Financial Statements), 20.10
         (Litigation) and 20.12 (United States laws) are deemed to be repeated

by:

(i) each Additional Obligor and the Parent on the date that Additional Obligor becomes an Obligor; and

(ii) each Obligor on the date of each Request and the first day of each Term.

21. INFORMATION COVENANTS

21.1     Financial statements

(a)      The Parent must supply to the Facility Agent in sufficient copies for
         all the Lenders:

         (i)   its audited consolidated financial statements for each of its
               financial years;

         (ii)  the audited financial statements or, if audited financial
               statements are not available, the unaudited financial statements
               of each Obligor for each of its financial years; and

         (iii) its interim financial statements for the first half-year of each
               of its financial years.

(b)      All financial statements must be supplied as soon as they are available
         and:

         (i)   in the case of the Parent's audited consolidated financial
               statements, within 180 days;

         (ii)  in the case of each Obligor's audited or unaudited financial
               statements, within 180 days; and

         (iii) in the case of the Parent's interim financial statements, within
               120 days,

         of the end of the relevant financial period.

21.2     Compliance Certificate

(a)      The Company must supply to the Facility Agent a Compliance Certificate
         with each set of its financial statements sent to the Facility Agent
         under this Agreement.

(b)      A Compliance  Certificate is a certificate  substantially in the form
         of Part 2 of Schedule 8 setting out, among other things, calculations
         of the financial covenants.

(c)      A Compliance Certificate must be signed by two authorised signatories
         of the Company.

21.3     Form of financial statements

(a)      The Company must ensure that each set of financial statements supplied
         under this Agreement fairly represents its financial condition
         (consolidated or otherwise) as at the date to which those financial
         statements were drawn up.

(b)      The Company must notify the Facility Agent of any change to the basis
         on which its audited consolidated financial statements are prepared.

(c)      If requested by the Facility Agent, the Company must supply to the
         Facility Agent:

         (i)  a full description of any change notified under paragraph (b)
              above; and

                                       52

         (ii)  sufficient information to enable the Finance Parties to make a
               proper comparison between the financial position shown by the set
               of financial statements prepared on the changed basis and its
               most recent audited consolidated financial statements delivered
               to the Facility Agent under this Agreement.

(d)      If requested by the Facility Agent, the Company must enter into
         discussions for a period of not more than 30 days with a view to
         agreeing any amendments required to be made to this Agreement to place
         the Company and the Lenders in the same position as they would have
         been in if the change had not happened. Any agreement between the
         Company and the Facility Agent will be, with the prior consent of the
         Majority Lenders, binding on all the Parties.

(e)      If no agreement is reached under paragraph (d) above on the required
         amendments to this Agreement, the Company must supply with each set of
         its financial statements another set of its financial statements
         prepared on the same basis as the Original Financial Statements.

21.4     Information - miscellaneous

         The Parent must supply to the Facility Agent:

         (a)   copies of all documents despatched by the Parent to its
               shareholders (or any class of them) or its creditors generally at
               the same time as they are despatched;

         (b)   promptly upon becoming aware of them, details of any litigation,
               arbitration or administrative proceedings which:

               (i)   are current, threatened in writing or pending;

               (ii)  are reasonably likely to be adversely determined; and

               (iii) would, if adversely determined, have a Material Adverse
                     Effect;

         (c)   promptly on reasonable request, a list of the then current
               Material Subsidiaries; and

         (d)   promptly on request, such further information regarding the
               financial condition and operations of the Group as any Finance
               Party through the Facility Agent may reasonably request.

21.5     Notification of Default

(a)      Unless the Facility Agent has already been so notified by another
         Obligor, each Obligor must notify the Facility Agent of any Event of
         Default (and the steps, if any, being taken to remedy it) promptly upon
         becoming aware of its occurrence.

(b)      Promptly on reasonable request by the Facility Agent, the Parent must
         supply to the Facility Agent a certificate, signed by two of its
         authorised signatories on its behalf, certifying that no Default is
         outstanding or, if a Default is outstanding, specifying the Default and
         the steps, if any, being taken to remedy it.

21.6     Year end

         The Parent must not change its financial year end without the prior
         written consent of the Majority Lenders such consent not to be
         unreasonably withheld or delayed.

                                       53

22.      FINANCIAL COVENANTS

22.1     Definitions

         In this Clause:

         Consolidated Cash and Cash Equivalents means, at any time:

         (a)   cash in hand or on deposit with any acceptable bank, which, in
               either case, is not subject to any security interest and is
               readily remittable to the U.K;

         (b)   certificates of deposit, maturing within one year after the
               relevant date of calculation, issued by an acceptable bank;

         (c)   any investment in marketable obligations issued or guaranteed by
               the government of the United States of America or the U.K. or by
               an instrumentality or agency of the government of the United
               States of America or the U.K. having an equivalent credit rating;

         (d)   any investment in debt instruments permitting cash withdrawals on
               not more than one month's notice and which have a rating of AA or
               higher by Standard and Poor's or Aa2 or higher by Moody's;

(e) open market commercial paper:

(i) for which a recognised trading market exists;

(ii) issued in the United States of America or the U.K.;

(iii) which matures within one year after the relevant date of calculation; and

(iv) which has a credit rating of either A-1 by Standard & Poor's or IBCA or P-1 by Moody's, or, if no rating is available in respect of the commercial paper or indebtedness, the issuer of which has, in respect of its long-term debt obligations, an equivalent rating;

(f) sterling bills of exchange eligible for rediscount at the Bank of England and accepted by an acceptable bank; or

(g) any other instrument, security or investment approved by the Majority Lenders,

in each case, to which any member of the Group is beneficially entitled at that time and which is capable of being applied against Consolidated Total Borrowings. An acceptable bank for this purpose is a commercial bank or trust company which has a rating of A or higher by Standard & Poor's or IBCA or A-2 or higher by Moody's or a comparable rating from a nationally recognised credit rating agency for its long-term debt obligations.

Consolidated EBITA means Consolidated EBITDA for a Measurement Period adjusted by deducting depreciation.

Consolidated EBITDA means the consolidated net pre-taxation profits of the Group for a Measurement Period, but:

(a) including the net pre-taxation profits of a member of the Group (other than InCentive) acquired during that Measurement Period for the part of that Measurement Period when it was not a member of the Group; and

(b) excluding the net pre-taxation profit attributable to any business sold during that Measurement Period,

and adjusted by:

(i) adding back Consolidated Interest Payable;

(ii) taking no account of any exceptional or extraordinary item;

(iii) excluding any amount attributable to minority interests;

(iv) adding back depreciation and amortisation;

Consolidated Interest Payable means all interest and periodic financing charges including acceptance commission, commitment fee and the interest element of rental payments or finance or capital leases (whether, in each case, paid, payable or capitalised), incurred by the Group in effecting, servicing or maintaining Total Consolidated Borrowings during a Measurement Period.

Consolidated Net Interest Payable means Consolidated Interest Payable less all financing charges received or receivable by the Group during the relevant Measurement Period.

Consolidated Total Borrowings means, in respect of the Group, at any time the aggregate of the following:

(a) the outstanding principal amount of any moneys borrowed;

(b) the outstanding principal amount of any acceptance under any acceptance credit;

(d) the capitalised element of indebtedness under a finance or capital lease;

(e) the outstanding principal amount of all moneys owing in connection with the sale or discounting of receivables (otherwise than on a non-recourse basis);

(f) the outstanding principal amount of any indebtedness arising from any deferred payment agreements arranged primarily as a method of raising finance or financing the acquisition of an asset;

(g) the outstanding principal amount of any indebtedness arising in connection with any other transaction (including any forward sale or purchase agreement) which has the commercial effect of a borrowing; and

(h) the outstanding principal amount of any indebtedness of any person of a type referred to in paragraphs (a)-(h) above which is the subject of a guarantee, indemnity or similar assurances against financial loss.

Any amount outstanding in a currency other than Sterling is to be taken into account at its Sterling equivalent calculated on the basis of:

(i) the Facility Agent's spot rate of exchange for the purchase of

               the relevant currency in the London foreign exchange market with
               Sterling at or about 11.00 a.m. on the day the relevant amount
               falls to be calculated; or

         (ii)  if the amount is to be calculated on the last day of a financial
               period of the Company, the rate of exchange used by the Company
               in its financial statements for that period.

         Consolidated Total Net Borrowings means at any time Consolidated Total
         Borrowings less Consolidated Cash and Cash Equivalents.

         Measurement Period means a period of 12 months ending on the last day
         of a financial year or financial half-year of the Parent.

22.2     Interpretation

(a)      Except as provided to the contrary in this Agreement, an accounting
         term used in this Clause is to be construed in accordance with the
         principles applied in connection with the Original Financial
         Statements.

(b)      No item must be credited or deducted more than once in any calculation
         under this Clause.

22.3     Gearing

         The Parent must ensure that Consolidated Total Net Borrowings are not,
         at the end of each Measurement Period, more than 3.0 times Consolidated
         EBITDA.

22.4     Interest cover

         The Parent must ensure that the ratio of Consolidated EBITA to
         Consolidated Net Interest Payable is not, for each Measurement Period,
         less than 3.0 to 1.

23.      GENERAL COVENANTS

23.1     General

         Each Obligor agrees to be bound by the covenants set out in this Clause
         relating to it and, where the covenant is expressed to apply to each
         member or to specified members of the Group, each Obligor must ensure
         that each of its Subsidiaries to which the covenant relates performs
         that covenant.

23.2     Authorisations

         Each Obligor must promptly obtain, maintain and comply with the terms
         of any authorisation required under any law or regulation to enable it
         to perform its obligations under, or for the validity or (subject to
         any general principles of law limiting its obligations and referred to
         in any legal opinion required under this Agreement) enforceability of,
         any Finance Document.

23.3     Compliance with laws

         Each member of the Group must comply in all respects with all
         regulations to which it is subject where failure to do so is reasonably
         likely to have a Material Adverse Effect.

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23.4     Pari passu ranking

         Each Obligor must ensure that its payment obligations under the Finance
         Documents rank at least pari passu with all its other present and
         future unsecured payment obligations, except for obligations
         mandatorily preferred by law applying to companies generally.

23.5     Negative pledge

(a)      In this Subclause, Security Interest means any mortgage, pledge, lien,
         charge, assignment, hypothecation or security interest.

(b)      Except as provided below, no member of the Group may create or allow to
         exist any Security Interest on any of its assets.

(c)      Paragraph (b) does not apply to:

         (i)    any Security Interest comprising a netting, set-off or lien
                arrangement entered into by a member of the Group in the
                ordinary course of its banking arrangements for the purpose of
                netting debit and credit balances;

         (ii)   any lien arising by operation of law and in the ordinary course
                of business;

         (iii)  any Security Interest on an asset, or an asset of any person,
                acquired by a member of the Group after the date of this
                Agreement to the extent that the principal amount secured by
                that Security Interest has not been incurred or increased in
                contemplation of, or since, the acquisition;

         (iv)   any Security Interest arising under any contract for the
                purchase of goods entered into in the normal course of trading
                pursuant to a supplier's normal terms and conditions;

         (v)    any Security Interest over goods and products or over the
                documents of title or insurance policies relating to such goods
                and products, arising in the ordinary course of trading in
                connection with letters of credit and similar transactions,
                provided such Security Interest secures only so much of the
                acquisition cost or selling price (and amounts incidental
                thereto) of these goods and products which is required to be
                paid within 6 months after the date upon which the same was
                first incurred;

         (vi)   set-off rights on market standard terms contained in any hedging
                agreement;

         (vii)  set-off rights in the ordinary course of trading;

         (viii) any Security Interest created in substitution for any of the
                above Security Interests but only:

                (A)  if the Security Interest is over the same asset;

                (B)  if the principal amount secured by that Security Interest
                     does not exceed the principal amount secured by the
                     Security Interest which is replaced; and

                (C)  if the Security Interest which is replaced was only
                     permitted to be outstanding for a certain period of time,
                     to the extent the new Security Interest is not outstanding
                     for any greater period; and

                                       57

         (ix)  any Security Interest securing indebtedness the amount of which
               (when aggregated with the amount of assets or receivables sold,
               transferred or disposed of under paragraph (d) below) does not
               exceed 10 per cent. of the consolidated gross assets of the Group
               as shown in the most recent audited consolidated financial
               statements of the Parent delivered to the Facility Agent pursuant
               to Clause 21.1 (Financial statements) (being as at the date of
               this Agreement the Original Financial Statements).

(d)      No member of the Group may:

         (i)   sell, transfer or otherwise dispose of any of its assets on terms
               where it is or may be leased to or re-acquired or acquired by a
               member of the Group or any of its related entities; or

         (ii)  sell, transfer or otherwise dispose of any of its receivables on
               recourse terms,

         in circumstances where the transaction is entered into primarily as a
         method of raising Financial Indebtedness or of financing the
         acquisition of an asset unless the amount of assets or receivables
         sold, transferred or disposed of under this paragraph (including any
         assets the subject of any such arrangement on the date of this
         Agreement) (when aggregated with the amount of indebtedness secured
         under Subclause 23.5(c)(ix) above) does not exceed 10 per cent. of the
         consolidated gross assets of the Group as shown in the most recent
         audited consolidated financial statements of the Parent delivered to
         the Facility Agent pursuant to Clause 21.1 (Financial statements)
         (being as at the date of this Agreement the Original Financial
         Statements).

23.6     Disposals

(a)      In this Subclause, disposal means a sale, transfer, grant, lease or
         other disposal, whether voluntary or involuntary, and dispose will be
         construed accordingly.

(b)      Except as provided below, the Company will not, and will procure that
         no Subsidiary will, either in a single transaction or in a series of
         transactions and whether related or not, dispose of all or any part of
         its assets.

(i) made in the ordinary course of trading of the disposing entity;

(ii) of assets which are exchanged within 180 days for other assets comparable or superior as to type, value and quality;

(iii) by one company in the Group to another company in the Group; or

(iv) of machinery or plant at or nearly at the end of their useful life or period of depreciation;

(v) of obsolete equipment owned by a member of the Group no longer required for the purposes of the business carried on by that member of the Group;

(vi) which would not be deemed to be a class 1 transaction under the Listing Rules of the Financial Services Authority or which would not require the approval of the shareholders of the Company in general meeting; or

(vii) the net proceeds of which are applied in permanent prepayment and cancellation of Credits.

23.7     Financial Indebtedness

(a)      Except as provided below no member of the Group (other than a
         Guarantor) may incur any Financial Indebtedness.

(b)      Paragraph (a) does not apply to:

         (i)     any Financial Indebtedness of any person acquired by a member
                 of the Group which is incurred under arrangements in existence
                 at the date of acquisition, but only for a period of 6 months
                 from the date of acquisition;

         (ii)    any derivative transaction protecting against or benefiting
                 from fluctuations in any rate or price entered into in the
                 ordinary course of business;

         (iii)   the capital element of any liability under finance or capital
                 leases up to a maximum amount not exceeding U.S.$25,000,000 (or
                 the equivalent in any other currency) or any higher amount
                 which is approved in writing by the Facility Agent acting on
                 the instructions of the Majority Lenders;

         (iv)    foreign exchange, interest rate or similar hedging arrangements
                 entered into only for the purposes of managing the interest
                 rate and foreign exchange rates of the Group and not for any
                 speculative purpose or pursuant to any financial trading;

         (v)     Financial Indebtedness incurred in favour of a bank or other
                 financial institution as a result of netting or set off
                 arrangements entered into by a member of the Group in the
                 ordinary course of its banking arrangements for the purpose of
                 netting debit and credit balances on accounts maintained with
                 such bank or financial institution;

         (vi)    any Financial Indebtedness of a Borrower under this Agreement;
                 or

         (vii)   any other Financial Indebtedness which in aggregate does not
                 exceed US$200,000,000 or its equivalent at any time.

23.8     Change of business

         The Parent must ensure that no material change is made to the general
         nature of the business of the Company or the Group from that carried on
         at the date of this Agreement.

23.9     Mergers

         No Obligor may enter into any amalgamation, demerger, merger or
         reconstruction otherwise than under an intra-Group re-organisation on a
         solvent basis or other transaction agreed by the Majority Lenders.

23.10    Acquisitions

(a)      Except as provided below, no member of the Group may make any
         acquisition or investment (other than pursuant to the Offers or the
         Scheme) which:

         (i)     during the period ending on the date falling 12 months after
                 the date of this Agreement, is for a consideration in excess of
                 U.S.$500,000,000; or

(ii) at any time, would be deemed to be a class 1 transaction under

                 the Listing Rules of the Financial Services Authority.

(b)      Paragraph (a)(ii) does not apply if, at the time of the relevant
         acquisition or investment, the ratio of Consolidated Total Net
         Borrowings to Consolidated EBITDA, as set out in the most recent
         Compliance Certificate delivered by the Parent to the Facility Agent
         under Clause 21.2 (Compliance Certificate) was less than 2.0:1.

23.11    Environmental matters

(a)      In this Subclause:

         Environmental Approval means any authorisation required by an
         Environmental Law.

Environmental Claim means any claim by any person in connection with:

(i) a breach, or alleged breach, of an Environmental Law;

(ii) any accident, fire, explosion or other event of any type involving an emission or substance which is capable of causing harm to any living organism or the environment; or

(iii) any other environmental contamination,

which could reasonably be expected to result in any liability on any Party.

Environmental Law means any law or regulation concerning:

(i) the protection of health and safety;

(ii) the environment; or

(iii) any emission or substance which is capable of causing harm to any living organism or the environment.

(b) Each member of the Group must comply with all Environmental Law and Environmental Approvals applicable to it if failure to do so is reasonably likely to have a Material Adverse Effect.

(i) any Environmental Claim current or to its knowledge, pending or threatened in writing; or

(ii) any circumstances reasonably likely to result in an

                 Environmental Claim,

         which, if substantiated, is reasonably likely either to have a Material
         Adverse Effect or result in any liability for a Finance Party.

23.12    Insurance

         Each member of the Group must (subject to market availability on
         reasonably commercial terms) insure its business and assets with
         insurance companies to such an extent and against such risks as
         companies engaged in a similar business normally insure.

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23.13    United States laws

(a)      In this Subclause:

         Code means the United States Internal Revenue Code of 1986.

         ERISA means the United States Employee Retirement Income Security Act
         of 1974.

         ERISA Affiliate means any person treated as a single employer with any
         Obligor for the purpose of section 414 of the Code.

         Margin Stock has the meaning given to it in Regulations U and X issued
         by the Board of Governors of the United States Federal Reserve System.

         Plan means an employee benefit plan as defined in section 3(3) of

ERISA:

(a) maintained by any Obligor or any ERISA Affiliate; or

(b) to which any Obligor or any ERISA Affiliate is required to make any payment or contribution.

Reportable Event means:

(a) an event specified as such in section 4043 of ERISA or any related regulation, other than an event in relation to which the requirement to give notice of that event is waived by any regulation; or

(b) a failure to meet the minimum funding standard under section 412 of the Code or section 302 of ERISA, whether or not there has been any waiver of notice or waiver of the minimum funding standard under section 412 of the Code.

(b) No Obligor may:

(i) extend credit for the purpose, directly or indirectly, of buying or carrying Margin Stock; or

(ii) use any Loan, directly or indirectly, to buy or carry Margin Stock or to extend credit to others for the purpose of buying or carrying Margin Stock.

(c) Each Obligor must comply with the United States Securities Exchange Act of 1934 in relation to the Centerpulse Offer.

(d) Each Obligor must promptly upon becoming aware of it notify the Facility Agent of:

(i) any Reportable Event;

(ii) the termination of or withdrawal from, or any circumstances reasonably likely to result in the termination of or withdrawal from, any Plan subject to Title IV of ERISA; and

(iii) a claim or other communication alleging material non-compliance with any law or regulation relating to any Plan,

which is reasonably likely to have a Material Adverse Effect.

(e) Each Obligor and its ERISA Affiliates must be, and remain, in compliance in all respects with all laws and regulations relating to each of its Plans, where failure to do so is reasonably likely to have a Material Adverse Effect.

(f) Each of the Obligors and its ERISA Affiliates must ensure that no event or condition exists at any time in relation to a Plan which is reasonably likely to result in the imposition of a Security Interest on any of its assets or which is reasonably likely to have a Material Adverse Effect.

23.14 Scheme

The Company:

(a) must not materially vary the terms of the Scheme as described in the Press Release and the Circular;

(b) must, in all material respects relevant in the context of the Scheme, comply with the City Code on Takeovers and Mergers, the Companies Act 1985 and all other applicable laws and regulations; and

from time to time and promptly on request give to the Facility Agent reasonable details of such matters relevant to the Scheme as the Facility Agent may reasonably request.

24. DEFAULT

24.1     Events of Default

(a)      Each of the events set out in this Clause is an Event of Default.

(b)      In this Clause:

         Material Group Member means an Obligor or a Material Subsidiary; and

         Permitted Transaction means:

         (i)   an intra-Group re-organisation of a Material Subsidiary on a
               solvent basis; or

         (ii)  any other transaction agreed by the Majority Lenders.

24.2     Non-payment

         An Obligor does not pay on the due date any amount payable by it under
         the Finance Documents in the manner required under the Finance

Documents, unless the non-payment:

(a) is caused by administrative or technical error; and

(b) is remedied within three Business Days (in the case of principal

               amounts due under this Agreement) and within five Business Days
               (in the case of any other amount due under this Agreement) of its
               due date.

24.3     Breach of other obligations

(a)      The Parent does not comply with any term of Clause 22 (Financial
         covenants); or

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(b)      an Obligor does not comply with any other term of the Finance Documents
         not already referred to in this Clause, unless the non-compliance:

         (i)   is capable of remedy; and

         (ii)  is remedied within twenty Business Days of the earlier of the
               Facility Agent giving notice and the Obligor becoming aware of
               the non-compliance.

24.4     Misrepresentation

         A representation made or repeated by an Obligor in any Finance Document
         or in any document delivered by or on behalf of an Obligor under any
         Finance Document is incorrect in any material respect when made or
         deemed to be repeated unless the circumstances giving rise to the

misrepresentation:

(a) are capable of remedy; and

(b) are remedied within twenty Business Days of the earlier of the

               Facility Agent giving notice and the relevant Obligor becoming
               aware of the misrepresentation.

24.5     Cross-default

         Any of the following occurs in respect of a member of the Group:

         (a)   any of its Financial Indebtedness is not paid when due (after the
               expiry of any originally applicable grace period);

         (b)   any of its Financial Indebtedness:

               (i)  becomes prematurely due and payable; or

               (ii) is placed on demand,

               in each case, as a result of an event of default (howsoever
               described); or

         (c)   any commitment for its Financial Indebtedness is cancelled or
               suspended as a result of an event of default (howsoever
               described),

         unless the aggregate amount of Financial Indebtedness falling within
         paragraphs (a)- (c) above is less than U.S.$20,000,000 or its
         equivalent.

24.6     Insolvency

         Any of the following occurs in respect of a Material Group Member:

         (a)   it is or is deemed for the purposes of Section 123 of the
               Insolvency Act 1986 (but as if the figure of (pound)750 in
               paragraph (a) was replaced with the figure of (pound)1,000,000)
               to be unable to pay its debts as they fall due;

(b) it admits its inability to pay its debts as they fall due;

(d) by reason of actual or anticipated financial difficulties, it begins negotiations with creditors generally or any class of them for the rescheduling of any of its indebtedness; or

(e) a moratorium is declared in respect of its indebtedness generally.

24.7 Insolvency proceedings

(a) Except as provided below, any of the following occurs in respect of a Material Group Member:

(i) any step is taken with a view to a moratorium or a composition, assignment or similar arrangement with its creditors generally;

(ii) a meeting of its shareholders, directors or other officers is convened for the purpose of considering any resolution for, to petition for, or to file documents with a court for, its winding-up, administration or dissolution or any such resolution i passed;

(iii) any person presents a petition for its winding-up, administration or dissolution; (iv) an order for its winding-up, administration or dissolution is made; (v) any liquidator, trustee in bankruptcy, judicial custodian, compulsory manager, receiver, administrative receiver, administrator or similar officer is appointed in respect of it;

(vi) its directors, shareholders or other officers request the appointment of, or give notice of their intention to appoint, a liquidator, trustee in bankruptcy, judicial custodian, compulsory manager, receiver, administrative receiver, administrator or similar officer; or

(vii) any other analogous step or procedure is taken in any jurisdiction.

(b) Paragraph (a) does not apply to:

(i) any step or procedure which is part of a Permitted Transaction;

               or

         (ii)  a petition for winding-up presented by a creditor which is being
               contested in good faith and with due diligence and is discharged
               or struck out within fourteen days.

24.8     Creditors' process

         Any attachment, sequestration, distress, execution or analogous event
         affects any asset(s) of a Material Group Member, having an aggregate
         value of (Pounds)5,000,000, and is not discharged within fourteen days
         or is being contested in good faith to the satisfaction of the Facility
         Agent acting reasonably.

24.9     United States Bankruptcy Laws

(a)      In this Subclause:

         U.S. Bankruptcy Law means the United States Bankruptcy Code 1978 or any
         other United States Federal or State bankruptcy, insolvency or similar
         law.

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         U.S. Material Group Member means any Material Group Member incorporated
         or organised under the laws of the United States of America or any
         state of the United States of America (including the District of
         Columbia).

(b)      Any of the following occurs in respect of a U.S. Material Group Member:

         (i)   it makes a general assignment for the benefit of creditors;

         (ii)  it commences a voluntary case or proceeding under any U.S.
               Bankruptcy Law; or

         (iii) an involuntary case under any U.S. Bankruptcy Law is commenced
               against it and is not controverted within 30 days or is not
               dismissed or stayed within 90 days after commencement of the
               case.

24.10    Cessation of business

         A Material Group Member ceases, or threatens to cease, to carry on

business except:

(a) as part of a Permitted Transaction; or

(b) as a result of any disposal allowed under this Agreement.

24.11    Effectiveness of Finance Documents

(a)      It is or becomes unlawful for any Obligor to perform any of its
         obligations under the Finance Documents.

(b)      An Obligor repudiates a Finance Document or purports to repudiate a
         Finance Document.

24.12    Material adverse change

         Any event or series of events occurs which will have a Material Adverse
         Effect.

24.13    Acceleration

(a)      If an Event of Default described in Subclause 24.9 (United States
         Bankruptcy Laws) occurs, the Total Commitments will, if not already
         cancelled under this Agreement, be immediately and automatically
         cancelled.

(b)      If an Event of Default is outstanding, the Facility Agent may, and must
         if so directed by the Majority Lenders, by notice to the Company:

         (i)   If not already cancelled under paragraph (a) above, cancel the
               Total Commitments; and/or

         (ii)  declare that all or part of any amounts outstanding under the
               Finance Documents are:

               (A) immediately due and payable; and/or

               (B) payable on demand by the Facility Agent acting on the
                   instructions of the Majority Lenders.

         Any notice given under this Subclause will take effect in accordance
         with its terms.

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25.      THE ADMINISTRATIVE PARTIES

25.1     Appointment and duties of the Facility Agent

(a)      Each Finance Party (other than the Facility Agent) irrevocably appoints
         the Facility Agent to act as its agent under the Finance Documents.

(b)      Each Finance Party irrevocably authorises the Facility Agent to:

         (i)   perform the duties and to exercise the rights, powers and
               discretions that are specifically given to it under the Finance
               Documents, together with any other incidental rights, powers and
               discretions; and

         (ii)  execute each Finance Document expressed to be executed by the
               Facility Agent.

(c)      The Facility Agent has only those duties which are expressly specified
         in the Finance Documents. Those duties are solely of a mechanical and
         administrative nature.

25.2     Role of the Arranger

         Except as specifically provided in the Finance Documents, no Arranger
         has any obligations of any kind to any other Party in connection with
         any Finance Document.

25.3     No fiduciary duties

         Except as specifically provided in a Finance Document, nothing in the
         Finance Documents makes an Administrative Party a trustee or fiduciary
         for any other Party or any other person. No Administrative Party need
         hold in trust any moneys paid to it for a Party or be liable to account
         for interest on those moneys.

25.4     Individual position of an Administrative Party

(a)      If it is also a Lender, each Administrative Party has the same rights
         and powers under the Finance Documents as any other Lender and may
         exercise those rights and powers as though it were not an
         Administrative Party.

(b)      Each Administrative Party may:

         (i)   carry on any business with any Obligor or its related entities
               (including acting as an agent or a trustee for any other
               financing); and

         (ii)  retain any profits or remuneration it receives under the Finance
               Documents or in relation to any other business it carries on with
               any Obligor or its related entities.

25.5     Reliance

         The Facility Agent may:

         (a)   rely on any notice or document believed by it to be genuine and
               correct and to have been signed by, or with the authority of, the
               proper person;

         (b)   rely on any statement made by any person regarding any matters
               which may reasonably be assumed to be within his knowledge or
               within his power to verify;

(c) engage, pay for and rely on professional advisers selected by it (including those representing a Party other than the Facility Agent); and

(d) act under the Finance Documents through its personnel and agents.

25.6     Majority Lenders' instructions

(a)      The Facility Agent is fully protected if it acts on the instructions of
         the Majority Lenders in the exercise of any right, power or discretion
         or any matter not expressly provided for in the Finance Documents. Any
         such instructions given by the Majority Lenders will be binding on all
         the Lenders. In the absence of instructions, the Facility Agent may act
         as it considers to be in the best interests of all the Lenders.

(b)      The Facility Agent may assume that unless it has received notice to the
         contrary, any right, power, authority or discretion vested in any Party
         or the Majority Lenders has not been exercised.

(c)      The Facility Agent is not authorised to act on behalf of a Lender
         (without first obtaining that Lender's consent) in any legal or
         arbitration proceedings in connection with any Finance Document.

(d)      The Facility Agent may require the receipt of security satisfactory to
         it, whether by way of payment in advance or otherwise, against any
         liability or loss which it may incur in complying with the instructions
         of the Majority Lenders.

25.7     Responsibility

(a)      No Administrative Party is responsible to any other Finance Party for
         the adequacy, accuracy or completeness of:

         (i)   any Finance Document or any other document; or

         (ii)  any statement or information (whether written or oral) made in or
               supplied in connection with any Finance Document.

(b)      Without affecting the responsibility of any Obligor for information
         supplied by it or on its behalf in connection with any Finance
         Document, each Lender confirms that it:

         (i)   has made, and will continue to make, its own independent
               appraisal of all risks arising under or in connection with the
               Finance Documents (including the financial condition and affairs
               of each Obligor and its related entities and the nature and
               extent of any recourse against any Party or its assets); and

         (ii)  has not relied exclusively on any information provided to it by
               any Administrative Party in connection with any Finance Document.

25.8     Exclusion of liability

(a)      The Facility Agent is not liable to any other Finance Party for any
         action taken or not taken by it in connection with any Finance
         Document, unless directly caused by its gross negligence or wilful
         misconduct.

(b)      No Party (other than the Facility Agent) may take any proceedings
         against any officer, employee or agent of the Facility Agent in respect
         of any claim it might have against the

                                       67

         Facility Agent or in respect of any act or omission of any kind by that
         officer, employee or agent in connection with any Finance Document. Any
         officer, employee or agent of the Facility Agent may rely on this
         Subclause and enforce its terms under the Contracts (Rights of Third
         Parties) Act 1999.

25.9     Default

(a)      The Facility Agent is not obliged to monitor or enquire whether a
         Default has occurred. The Facility Agent is not deemed to have
         knowledge of the occurrence of a Default.

(b)      If the Facility Agent:

         (i)   receives notice from a Party referring to this Agreement,
               describing a Default and stating that the event is a Default; or

         (ii)  is aware of the non-payment of any principal or interest or any
               fee payable to a Lender under this Agreement,

         it must promptly notify the Lenders.

25.10    Information

(a)      The Facility Agent must promptly forward to the person concerned the
         original or a copy of any document which is delivered to the Facility
         Agent by a Party for that person.

(b)      Except where a Finance Document specifically provides otherwise, the
         Facility Agent is not obliged to review or check the adequacy, accuracy
         or completeness of any document it forwards to another Party.

(c)      Except as provided above, the Facility Agent has no duty:

         (i)   either initially or on a continuing basis to provide any Lender
               with any credit or other information concerning the risks arising
               under or in connection with the Finance Documents (including any
               information relating to the financial condition or affairs of any
               Obligor or its related entities or the nature or extent of
               recourse against any Party or its assets) whether coming into its
               possession before, on or after the date of this Agreement; or

         (ii)  unless specifically requested to do so by a Lender in accordance
               with a Finance Document, to request any certificate or other
               document from any Obligor.

(d)      In acting as the Facility Agent, the agency division of the Facility
         Agent is treated as a separate entity from its other divisions and
         departments. Any information acquired by the Facility Agent which, in
         its opinion, is acquired by it otherwise than in its capacity as the
         Facility Agent may be treated as confidential by the Facility Agent and
         will not be treated as information possessed by the Facility Agent in
         its capacity as such.

(e)      The Facility Agent is not obliged to disclose any person any
         confidential information supplied to it by or on behalf of a member of
         the Group solely for the purpose of evaluating whether any waiver or
         amendment is required in respect of any term of the Finance Documents.

(f)      Each Obligor irrevocably authorises the Facility Agent to disclose to
         the other Finance Parties any information which, in its opinion, is
         received by it in its capacity as the Facility Agent.

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25.11    Indemnities

(a)      Without limiting the liability of any Obligor under the Finance
         Documents, each Lender must indemnify the Facility Agent for that
         Lender's Pro Rata Share of any loss or liability incurred by the
         Facility Agent in acting as the Facility Agent, except to the extent
         that the loss or liability is caused by the Facility Agent's gross
         negligence or wilful misconduct.

(b)      Each Administrative Party may deduct from any amount received by it for
         a Lender any amount due to the Facility Agent from that Lender under a
         Finance Document but unpaid.

25.12    Compliance

         The Facility Agent may refrain from doing anything (including the
         disclosure of any information) which might, in its opinion, constitute
         a breach of any law or regulation or be otherwise actionable at the
         suit of any person, and may do anything which, in its opinion, is
         necessary or desirable to comply with any law or regulation.

25.13    Resignation of the Facility Agent

(a)      The Facility Agent may resign and appoint any of its Affiliates as
         successor Facility Agent by giving notice to the Lenders and the
         Parent.

(b)      Alternatively, the Facility Agent may resign by giving notice to the
         Lenders and the Company, in which case the Majority Lenders may appoint
         a successor Facility Agent.

(c)      If no successor Facility Agent has been appointed under paragraph (b)
         above within 30 days after notice of resignation was given, the
         Facility Agent may appoint a successor Facility Agent.

(d)      The person(s) appointing a successor Facility Agent must, if
         practicable, consult with the Parent prior to the appointment for a
         period of not less than 30 days. Any successor Facility Agent must have
         an office in the U.K.

(e)      The resignation of the Facility Agent and the appointment of any
         successor Facility Agent will both become effective only when the
         successor Facility Agent notifies all the Parties that it accepts its
         appointment. On giving the notification, the successor Facility Agent
         will succeed to the position of the Facility Agent and the term
         Facility Agent will mean the successor Facility Agent.

(f)      The retiring Facility Agent must, at its own cost, make available to
         the successor Facility Agent such documents and records and provide
         such assistance as the successor Facility Agent may reasonably request
         for the purposes of performing its functions as the Facility Agent
         under the Finance Documents.

(g)      Upon its resignation becoming effective, this Clause will continue to
         benefit the retiring Facility Agent in respect of any action taken or
         not taken by it in connection with the Finance Documents while it was
         the Facility Agent, and, subject to paragraph (f) above, it will have
         no further obligations under any Finance Document.

(h)      The Majority Lenders may, by notice to the Facility Agent, require it
         to resign under paragraph (b) above.

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25.14    Relationship with Lenders

(a)      The Facility Agent may treat each Lender as a Lender, entitled to
         payments under this Agreement and as acting through its Facility
         Office(s) until it has received not less than five Business Days' prior
         notice from that Lender to the contrary.

(b)      The Facility Agent may at any time, and must if requested to do so by
         the Majority Lenders, convene a meeting of the Lenders.

(c)      The Facility Agent must keep a register of all the Parties and supply
         any other Party with a copy of the register on request. The register
         will include each Lender's Facility Office(s) and contact details for
         the purposes of this Agreement.

25.15    Notice period

         Where this Agreement specifies a minimum period of notice to be given
         to the Facility Agent, the Facility Agent may, at its discretion,
         accept a shorter notice period.

26.      EVIDENCE AND CALCULATIONS

26.1     Accounts

         Accounts maintained by a Finance Party in connection with this
         Agreement are prima facie evidence of the matters to which they relate
         for the purpose of any litigation or arbitration proceedings.

26.2     Certificates and determinations

         Any certification or determination by a Finance Party of a rate or
         amount under the Finance Documents will be, in the absence of manifest
         error, conclusive evidence of the matters to which it relates.

26.3     Calculations

         Any interest or fee accruing under this Agreement accrues from day to
         day and is calculated on the basis of the actual number of days elapsed
         and a year of 360 or 365 days or otherwise, depending on what the
         Facility Agent determines is market practice.

27.      FEES

27.1     Facility Agent's fee

         The Company must pay to the Facility Agent for its own account an
         agency fee in the manner agreed in the Fee Letter between the Facility
         Agent and the Company.

27.2     Arrangement fee

         The Company must pay to the Arrangers for their own account an
         arrangement fee in the manner agreed in the Fee Letter between the
         Arrangers and the Company.

27.3     Facility A Commitment fee

(a)      The Parent must pay a commitment fee computed at the rate of 0.135 per
         cent. per annum on the undrawn, uncancelled amount of each Lender's
         Facility A Commitment.

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(b)      Accrued commitment fee is payable quarterly in arrear. Accrued
         commitment fee is also payable to the Facility Agent for a Lender on
         the date its Facility A Commitment is cancelled in full.

27.4     Facility B Commitment fee

(a)      The Parent must pay a commitment fee computed at the rate of 45 per
         cent. of the applicable Facility B Margin on the undrawn, uncancelled
         amount of each Lender's Facility B Commitment.

(b)      Accrued commitment fee is payable quarterly in arrear. Accrued
         commitment fee is also payable to the Facility Agent for a Lender on
         the date its Facility B Commitment is cancelled in full.

27.5     Facility C Commitment fee

(a)      The Parent must pay a commitment fee computed at the rate of 45 per
         cent. of the applicable Facility C Margin on the undrawn, uncancelled
         amount of each Lender's Facility C Commitment.

(b)      Accrued commitment fee is payable quarterly in arrear. Accrued
         commitment fee is also payable to the Facility Agent for a Lender on
         the date its Facility C Commitment is cancelled in full.

28.      INDEMNITIES AND BREAK COSTS

28.1     Currency indemnity

(a)      The Parent, as an independent obligation, indemnify each Finance Party
         against any loss or liability which that Finance Party incurs as a
         consequence of:

         (i)   that Finance Party receiving an amount in respect of an Obligor's
               liability under the Finance Documents; or

         (ii)  that liability being converted into a claim, proof, judgment or
               order,

         in a currency other than the currency in which the amount is expressed
         to be payable under the relevant Finance Document.

(b)      Unless otherwise required by law, each Obligor waives any right it may
         have in any jurisdiction to pay any amount under the Finance Documents
         in a currency other than that in which it is expressed to be payable.

28.2     Other indemnities

(a)      The Parent must indemnify each Finance Party against any loss or
         liability which that Finance Party incurs as a consequence of:

         (i)   the occurrence of any Event of Default;

         (ii)  any failure by an Obligor to pay any amount due under a Finance
               Document on its due date, including any resulting from any
               distribution or redistribution of any amount among the Lenders
               under this Agreement;

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         (iii) (other than by reason of negligence or default by that Finance
               Party) a Loan not being made after a Request has been delivered
               for that Loan; or

         (iv)  a Loan (or part of a Loan) not being prepaid in accordance with a
               notice of prepayment.

         The Parent's liability in each case includes any loss or expense on
         account of funds borrowed, contracted for or utilised to fund any
         amount payable under any Finance Document, any amount repaid or prepaid
         or any Loan.

(b)      The Parent must indemnify the Facility Agent against any loss or
         liability incurred by the Facility Agent as a result of:

         (i)   investigating any event which the Facility Agent reasonably
               believes to be a Default; or

         (ii)  acting or relying on any notice which it reasonably believes to
               be genuine, correct and appropriately authorised.

28.3     Break Costs

(a)      Each Borrower must pay to each Lender its Break Costs.

(b)      Break Costs are the amount (if any) determined by the relevant Lender
         by which:

         (i)   the interest which that Lender would have received for the period
               from the date of receipt of any part of its share in a Loan or an
               overdue amount to the last day of the applicable Term for that
               Loan or overdue amount if the principal or overdue amount
               received had been paid on the last day of that Term;

         exceeds

         (ii)  the amount which that Lender would be able to obtain by placing
               an amount equal to the amount received by it on deposit with a
               leading bank in the appropriate interbank market for a period
               starting on the Business Day following receipt and ending on the
               last day of the applicable Term.

(c)      Each Lender must supply to the Facility Agent for the relevant Borrower
         details of the amount of any Break Costs claimed by it under this
         Subclause.

29.      EXPENSES

29.1     Initial costs

         The Company must pay to each Administrative Party the amount of all
         costs and expenses (including reasonable legal fees) reasonably
         incurred by it in connection with the negotiation, preparation,
         printing, execution and syndication of the Finance Documents.

29.2     Subsequent costs

         The Parent must pay to the Facility Agent the amount of all costs and
         expenses (including legal fees) reasonably incurred by it in connection

with:

(a) the negotiation, preparation, printing and execution of any Finance Document (other than a Transfer Certificate) executed after the date of this Agreement; and

(b) any amendment, waiver or consent requested by or on behalf of an

                Obligor or specifically allowed by this Agreement.

29.3     Enforcement costs

         The Parent must pay to each Finance Party the amount of all costs and
         expenses (including legal fees) incurred by it in connection with the
         enforcement of, or the preservation of any rights under, any Finance
         Document.

30.      AMENDMENTS AND WAIVERS

30.1     Procedure

(a)      Except as provided in this Clause, any term of the Finance Documents
         may be amended or waived with the agreement of the Parent and the
         Majority Lenders. The Facility Agent may effect, on behalf of any
         Finance Party, an amendment or waiver allowed under this Clause.

(b)      The Facility Agent must promptly notify the other Parties of any
         amendment or waiver effected by it under paragraph (a) above. Any such
         amendment or waiver is binding on all the Parties.

30.2     Exceptions

(a)      An amendment or waiver which relates to:

         (i)    the definition of "Majority Lenders" in Clause 1.1
                (Definitions);

         (ii)   an extension of the date of payment of any amount to a Lender
                under the Finance Documents;

         (iii)  a reduction in the Margin or a reduction in the amount of any
                payment of principal, interest, fee or other amount payable to a
                Lender under the Finance Documents;

(iv) an increase in, or an extension of, a Commitment;

(v) a release of an Obligor otherwise than in accordance with Clause
31.8 (Resignation of an Obligor (other than the Parent)) or as a result of a disposal permitted under Subclause 23.6 (Disposals);

(vi) a term of a Finance Document which expressly requires the consent of each Lender;

(vii) the right of a Lender to assign or transfer its rights or obligations under the Finance Documents; or

(viii) this Clause,

may only be made with the consent of all the Lenders.

(b) An amendment or waiver which relates to the rights or obligations of an Administrative Party may only be made with the consent of that Administrative Party.

30.3     Change of currency

         If a change in any currency of a country occurs (including where there
         is more than one currency or currency unit recognised at the same time
         as the lawful currency of a country), this Agreement will be amended to
         the extent the Facility Agent (acting reasonably and after consultation
         with the Parent) determines is necessary to reflect the change.

30.4     Waivers and remedies cumulative

The rights of each Finance Party under the Finance Documents:

(a) may be exercised as often as necessary;

(b) are cumulative and not exclusive of its rights under the general law; and

Delay in exercising or non-exercise of any right is not a waiver of that right.

31. CHANGES TO THE PARTIES

31.1     General

         In this Clause:

         Approved Bank means a financial institution which qualifies as a bank
         pursuant to the laws of the jurisdiction of the place of its registered
         office, provided that it has a genuine banking activity as per
         explanatory notes no. S-02.128 (1.2000) and S-02.128 (1.2000) of the
         Swiss Federal Tax Administration;

Qualifying Transferee means:

(a) a bank or financial institution; or

(b) a trust, fund or other entity which is regularly engaged in or established for the purpose of making, purchasing or investing in loans, securities or other financial assets and which has a minimum rating of at least A by Standard & Poors or A2 by Moodys;

Prohibited Subsidiary means:

(a) a Material Subsidiary for which it would be illegal under the laws of its jurisdiction of incorporation to become a Guarantor; and

(b) until it is a wholly owned Subsidiary of the Parent, each of:

(i) Centerpulse; and

(ii) InCentive.

Restricted Subsidiary means a Material Subsidiary which is obliged to limit the amount it can guarantee under Clause 18 (Guarantee and Indemnity);

Relevant Date means, in relation to:

(a) a Material Subsidiary which is not a Prohibited Subsidiary, the date falling 30 days after it becomes a Material Subsidiary;

(b) a Prohibited Subsidiary, the date falling 30 days after the date on which it ceases to be a Prohibited Subsidiary; and

(c) Smith & Nephew JV (Holding) GmbH, T.J. Smith & Nephew Limited and Smith & Nephew plc, the first Utilisation Date under this Agreement;

Transfer Certificate means a transfer certificate in the form of Schedule 5 (Form of Transfer Certificate), in each case with such amendments as the Facility Agent may approve or reasonably require; and

Transfer Date means:

(a) for a Transfer Certificate, the later of:

(i) the proposed Transfer Date specified in that Transfer Certificate; and

(ii) the date on which the Facility Agent executes that Transfer Certificate; and

(b) for a Syndication Agreement, the Effective Date specified in that Syndication Agreement.

31.2     Assignments and transfers by Obligors

         No Obligor may assign or transfer any of its rights and obligations
         under the Finance Documents without the prior consent of all the
         Lenders.

31.3     Assignments and transfers by Lenders

(a)      A Lender (the Existing Lender) may, subject to the following provisions
         of this Subclause, at any time assign or transfer (including by way of
         novation) any of its rights and obligations under this Agreement to
         another Qualifying Transferee which is a Qualifying Lender, as defined
         in Clause 15.1 (General) (the New Lender).

(b)      A transfer of part of a Commitment must be in a minimum amount of at
         least U.S.$20,000,000 and an integral multiple of U.S.$5,000,000.

(c)      The consent of the Parent is required for any assignment or transfer

unless the New Lender is:

(i) another Lender; or

(ii) an Affiliate of a Lender, if that Affiliate is a bank within the meaning of the guidelines "Bonds" of April 1999 issued by the Swiss Tax Administration (Merkblatt "Obligationen" vom April 1999 der Eidgenossischen Steuerverwaltung).

The consent of the Parent must not be unreasonably withheld or delayed and, in the case of a transfer to an Affiliate of a Lender, may only be withheld if that consent would result in:

(iii) the number of persons who are not Approved Banks to whom a Swiss Borrower owes the aggregate of its interest-bearing borrowed money (other than bond issues which are subject to Swiss withholding tax) being more than 20; or

(iv) a Swiss Borrower not being in compliance with explanatory note S-02.122(4.99) or S-02.128 (1.2000) of the Swiss Federal Tax Administration and any change or amendment to those explanatory notes which has an impact on that Swiss Borrower's obligation in respect of Swiss withholding tax under this Agreement.

The Parent will be deemed to have given its consent ten Business Days after the Parent is given notice of the request unless it is expressly refused by the Parent within that time.

(d) No Lender may sub-participate its rights and/or obligations under this Agreement to a person who is not a bank within the meaning of the guidelines "Bonds" of April 1999 issued by the Swiss Tax Administration (Merkblatt "Obligationen" vom April 1999 der Eidgenossischen Steuerverwaltung) without the prior consent of the Parent.

The consent of the Parent must not be unreasonably withheld or delayed and may only be withheld if that consent would result in:

(i) the number of persons who are not Approved Banks to whom a Swiss Borrower owes the aggregate of its interest-bearing borrowed money (other than bond issues which are subject to Swiss withholding tax) being more than 20; or

(ii) a Swiss Borrower not being in compliance with explanatory note S-02.122(4.99) or S-02.128 (1.2000) of the Swiss Federal Tax Administration and any change or amendment to those explanatory notes which has an impact on that Swiss Borrower's obligation in respect of Swiss withholding tax under this Agreement.

(e) A transfer of obligations will be effective only if either:

(i) the obligations are novated in accordance with the following

               provisions of this Clause; or

         (ii)  the New Lender confirms to the Facility Agent and the Parent in
               form and substance satisfactory to the Facility Agent that it is
               bound by the terms of this Agreement as a Lender. On the transfer
               becoming effective in this manner the Existing Lender will be
               released from its obligations under this Agreement to the extent
               that they are transferred to the New Lender.

(f)      Unless the Facility Agent otherwise agrees, the New Lender must pay to
         the Facility Agent for its own account, on or before the date any
         assignment or transfer occurs, a fee of (GBP)1,000.

(g)      Any reference in this Agreement to a Lender includes a New Lender but
         excludes a Lender if no amount is or may be owed to or by it under this
         Agreement.

31.4     Procedure for transfer by way of novations

(a)      A novation is effected if:

         (i)   the Existing Lender and the New Lender deliver to the Facility
               Agent a duly completed Transfer Certificate and the Facility
               Agent executes it; or

         (ii)  a Syndication Agreement is executed by all the Administrative
               Parties, the Lenders and the Company.

         The Facility Agent must execute as soon as reasonably practicable a
         Transfer Certificate delivered to it and which appears on its face to
         be in order.

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(b)      Each Party (other than the Existing Lender and the New Lender)
         irrevocably authorises the Facility Agent to execute any duly completed
         Transfer Certificate on its behalf.

(c)      On the Transfer Date:

         (i)   the New Lender will assume the rights and obligations of the
               Existing Lender expressed to be the subject of the novation in
               the Transfer Certificate in substitution for the Existing Lender;
               and

         (ii)  the Existing Lender will be released from those obligations and
               cease to have those rights.

31.5     Limitation of responsibility of Existing Lender

(a)      Unless expressly agreed to the contrary, an Existing Lender is not
         responsible to a New Lender for the legality, validity, adequacy,
         accuracy, completeness or performance of:

         (i)   any Finance Document or any other document; or

         (ii)  any statement or information (whether written or oral) made in or
               supplied in connection with any Finance Document,

         and any representations or warranties implied by law are excluded.

(b)      Each New Lender confirms to the Existing Lender and the other Finance
         Parties that it:

         (i)   has made, and will continue to make, its own independent
               appraisal of the financial condition and affairs of each Obligor
               and its related entities in connection with its participation in
               this Agreement; and

         (ii)  has not relied exclusively on any information supplied to it by
               the Existing Lender in connection with any Finance Document.

(c)      Nothing in any Finance Document requires an Existing Lender to:

         (i)   accept a re-transfer from a New Lender of any of the rights and
               obligations assigned or transferred under this Clause; or

         (ii)  support any losses incurred by the New Lender by reason of the
               non-performance by any Obligor of its obligations under any
               Finance Document or otherwise.

31.6     Costs resulting from change of Lender or Facility Office

         If:

         (a)   a Lender assigns or transfers any of its rights and obligations
               under the Finance Documents or changes its Facility Office; and

         (b)   as a result of circumstances existing at the date the assignment,
               transfer or change occurs, an Obligor would be obliged to pay a
               Tax Payment or an Increased Cost,

         then, unless the assignment, transfer or change is made by a Lender to
         mitigate any circumstances giving rise to the Tax Payment, Increased
         Cost or right to be prepaid and/or cancelled by reason of illegality,
         the Obligor need only pay that Tax Payment or Increased

                                       77

         Cost to the same extent that it would have been obliged to if no
         assignment, transfer or change had occurred.

31.7     Additional Obligors

(a)      (i)   The Parent must ensure that each Material Subsidiary becomes a
               Guarantor by not later than the Relevant Date for that Material
               Subsidiary.

         (ii)  (A) The Parent must promptly notify the Facility Agent if:

                   I.   a Restricted Subsidiary ceases to be a Restricted
                        Subsidiary; or

                   II.  the restrictions applicable to that Restricted
                        Subsidiary become less restrictive to a material extent,

                   each a Relevant Event; and

               (B) after receiving a notice under sub-paragraph (A) above,
                   Clause 18 (Guarantee and Indemnity) will be amended to the
                   extent the Facility Agent (acting reasonably and after
                   consultation with the Parent) determines is necessary to
                   reflect the Relevant Event.

         (iii) If a Material Subsidiary is a Restricted Subsidiary as a result
               of a restriction which is not imposed by law in its jurisdiction
               of incorporation, the Parent must use its reasonable endeavours
               to remove or lessen the relevant restriction.

(b)      (i)   Subject to sub-paragraph (ii) below, the Parent may elect for
               any of its Subsidiaries to become an Additional Obligor.

         (ii)  If the Additional Obligor is an Additional Borrower and is
               incorporated in a jurisdiction other than Switzerland, the U.K.
               or the United States of America, the prior consent of all the
               Lenders is required.

(c)      If one of the Subsidiaries of the Parent is to become an Additional
         Obligor, then the Parent must (following consultation with the Facility
         Agent) deliver to the Facility Agent the relevant documents and
         evidence listed in Part II of Schedule 2 (Conditions precedent
         documents).

(d)      The relevant Subsidiary will become an Additional Obligor when the
         Facility Agent notifies the other Finance Parties and the Parent that
         it has received (or waived receipt of) all of the documents and
         evidence referred to in paragraph (a) above in form and substance
         satisfactory to it. The Facility Agent must give this notification as
         soon as reasonably practicable.

(e)      Delivery of an Accession Agreement, executed by the relevant Subsidiary
         and the Parent, to the Facility Agent constitutes confirmation by that
         Subsidiary and the Parent that the Repeating Representations are then
         correct.

(f)      Clause 18 (Guarantee and Indemnity) will be amended to the extent the
         Facility Agent (acting reasonably and after consultation with the
         Parent) determines is necessary to reflect any requirement under the
         law of the jurisdiction of any Additional Guarantor to limit the
         guarantee to be provided by that Additional Guarantor.

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31.8     Resignation of an Obligor (other than the Parent)

(a)      In this Subclause, Resignation Request means a letter in the form of
         Schedule 7 (Form of Resignation Request), with such amendments as the
         Facility Agent may approve or reasonably require.

(b)      The Parent may request that an Obligor (other than the Parent) ceases
         to be an Obligor by giving to the Facility Agent a duly completed
         Resignation Request.

(c)      The Facility Agent must accept a Resignation Request and notify the
         Parent and the Lenders of its acceptance if:

         (i)   the Majority Lenders have consented to the Resignation Request;

         (ii)  it is not aware that a Default is outstanding or would result
               from the acceptance of the Resignation Request; and

         (iii) no amount owed by that Obligor under this Agreement is still
               outstanding.

(d)      The Obligor will cease to be a Borrower and/or a Guarantor, as
         appropriate, when the Facility Agent gives the notification referred to
         in paragraph (c) above.

31.9     Affiliates of Lenders

(a)      Each Lender may fulfil its obligations in respect of any Credit through
         an Affiliate if:

         (i)   the relevant Affiliate is specified in this Agreement as a Lender
               or becomes a Lender by means of a Transfer Certificate in
               accordance with this Agreement; and

         (ii)  the Credits in which that Affiliate will participate are
               specified in this Agreement, a Transfer Certificate or in a
               notice given by that Lender to the Facility Agent and the
               Company.

         In this event, the Lender and the Affiliate will participate in Credits
         in the manner provided for in sub-paragraph (ii) above.

(b)      If paragraph (a) above applies, the Lender and its Affiliate will be
         treated as having a single Commitment and a single vote, but, for all
         other purposes, will be treated as separate Lenders.

31.10    Changes to the Reference Banks

         If a Reference Bank (or, if a Reference Bank is not a Lender, the
         Lender of which it is an Affiliate) ceases to be a Lender, the Facility
         Agent must (with the agreement of the Parent) appoint another Lender or
         an Affiliate of a Lender to replace that Reference Bank.

31.11    Replacement of a Lender

(a)      For the purposes of this Clause:

         Increased Cost Lender means a Lender to whom any Obligor becomes
         obliged to pay additional amounts described in Subclauses 15.2 (Tax
         gross-up) or 16.1 (Increased Costs) or to make payments under Subclause
         11.1 (Mandatory prepayment - illegality);

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         Non Consenting Lender means a Lender who does not agree to a consent or
         amendment where:

         (i)   the Parent or the Facility Agent has requested the Lenders to
               consent to a departure from or waiver of any provision of the
               Finance Documents or to agree to any amendment to the Finance
               Documents;

         (ii)  the relevant consent or amendment requires the agreement of all
               Lenders;

         (iii) a period of not less than 14 days has elapsed from the date the
               consent or amendment was requested;

         (iv)  the Majority Lenders have agreed to that consent or amendment;
               and

         (v)   the Parent has notified the Lender it will treat it as a Non
               Consenting Lender;

         Non-Funding Lender means:

         (i)   any Lender which has failed to make or participate in a Credit;
               or

         (ii)  any Lender which has given notice to the Borrower or the Facility
               Agent that it does not intend to make or participate in any
               Credits in accordance with the requirements of this agreement or
               has repudiated its obligations to do so.

(b)      If at any time:

         (i)   any Lender becomes an Increased Cost Lender;

         (ii)  any Lender becomes insolvent and its assets become subject to a
               receiver, liquidator, trustee, custodian or other person having
               similar powers or any winding-up, dissolution or administration;

         (iii) any Lender becomes a Non Consenting Lender, or

         (iv)  any Lender becomes a Non-Funding Lender,

         then the Parent may, on ten Business Days' prior notice to the Facility
         Agent and that Lender, replace that Lender by causing it to (and that
         Lender shall) transfer in accordance with Clause 31 (Changes to the
         Parties) all of its rights and obligations under this Agreement to a
         Lender or other person selected by the Parent and acceptable to the
         Facility Agent (acting reasonably) for a purchase price equal to the
         outstanding principal amount of that Lender's participation in the
         outstanding Loans and all accrued interest and fees and other amounts
         payable to that Lender under this Agreement.

(c)      The Parent has no right to replace an Administrative Party and no
         Administrative Party nor any Lender has any obligation to the Parent to
         find a replacement Lender or other such entity. No member of the Group
         may make any payment or assume any obligation (whether by way of fees,
         expenses or otherwise) to or on behalf of the replacement Lender as an
         inducement for the replacement Lender to become a Lender.

(d)      The Parent may only replace a Non Consenting Lender or an Increased
         Cost Lender if that replacement takes place no later than 180 days
         after:

         (i)   the date the Non Consenting Lender becomes a Non Consenting
               Lender; or

         (ii)     the date the Increased Cost Lender demands payment of the
                  relevant additional amounts.

(e)      No Lender replaced under this Clause may be required to pay or
         surrender to that replacement Lender or other entity any of the fees
         received by it.

(f)      In the case of a replacement of an Increased Cost Lender, the Parent
         must pay the relevant additional amounts to that Increased Cost Lender
         prior to it being replaced and the payment of those additional amounts
         shall be a condition to replacement.

(g)      The Parent's right to replace a Non-Funding Lender under this Clause
         is, and shall be, in addition to, and not in lieu of, all other rights
         and remedies available to the Parent against that Non-Funding Lender
         under this Agreement, at law, in equity, or by statute.

31.12    Certain obligations not to be performed from the USA

         No Lender may perform its obligations under this Agreement in relation
         to any Loan to be used to acquire Margin Stock (as defined in of
         Regulation U of the Board of Governors of the United States Federal
         Reserve System) through any office located in the U.S.A. Each Lender
         shall take all reasonable steps to ensure that any extension of credit
         to a Borrower under this Agreement in relation to a Loan to be used to
         acquire Margin Stock is made and maintained at all times "outside the
         United States" as that phrase is used in Section 221.6 (c) of
         Regulation U of the Board of Governors of the United States Federal
         Reserve System.

32.      DISCLOSURE OF INFORMATION

(a)      Each Finance Party must keep confidential any information supplied to
         it by or on behalf of any Obligor in connection with the Finance
         Documents. However, a Finance Party is entitled to disclose
         information:

         (i)      which is publicly available, other than as a result of a
                  breach by that Finance Party of this Clause;

(ii) in connection with any legal or arbitration proceedings;

(iii) if required to do so under any law or regulation;

(iv) to a governmental, banking, taxation or other regulatory authority;

(v) to its professional advisers provided that its professional advisers are made aware that that information must be kept confidential in accordance with the terms of this Clause;

(vi) to the extent allowed under paragraph (b) below; or

(vii) with the agreement of the Parent.

(b) A Finance Party may disclose to an Affiliate or any person with whom it may enter, or has entered into, any kind of transfer, participation or other agreement in relation to this Agreement (a participant):

(i) a copy of any Finance Document; and

(ii) any information which that Finance Party has acquired under any Finance Document.

However, before a participant may receive any confidential information, it must agree with the relevant Finance Party to keep that information confidential on the terms of paragraph (a) above.

(c) This Clause supersedes any previous confidentiality undertaking given by a Finance Party in connection with this Agreement prior to it becoming a Party.

33. SET-OFF

A Finance Party may set off any matured obligation owed to it by an Obligor under the Finance Documents (to the extent beneficially owned by that Finance Party) against any obligation (whether or not matured) owed by that Finance Party to that Obligor, regardless of the place of payment, booking branch or currency of either obligation. If the obligations are in different currencies, the Finance Party may convert either obligation at a market rate of exchange in its usual course of business for the purpose of the set-off.

34. PRO RATA SHARING

34.1     Redistribution

         If any amount owing by an Obligor under this Agreement to a Lender (the
         recovering Lender) is discharged by payment, set-off or any other
         manner other than through the Facility Agent under this Agreement (a
         recovery), then:

         (a)      the recovering Lender must, within three Business Days, supply
                  details of the recovery to the Facility Agent;

         (b)      the Facility Agent must calculate whether the recovery is in
                  excess of the amount which the recovering Lender would have
                  received if the recovery had been received by the Facility
                  Agent under this Agreement; and

         (c)      the recovering Lender must pay to the Facility Agent an amount
                  equal to the excess (the redistribution).

34.2     Effect of redistribution

(a)      The Facility Agent must treat a redistribution as if it were a payment
         by the relevant Obligor under this Agreement and distribute it among
         the Lenders accordingly.

(b)      When the Facility Agent makes a distribution under paragraph (a) above,
         the recovering Lender will be subrogated to the rights of the Finance
         Parties which have shared in that redistribution.

(c)      If and to the extent that the recovering Lender is not able to rely on
         any rights of subrogation under paragraph (b) above, the relevant
         Obligor will owe the recovering Lender a debt which is equal to the
         redistribution, immediately payable and of the type originally
         discharged.

(d)      If:

         (i)      a recovering Lender must subsequently return a recovery, or an
                  amount measured by reference to a recovery, to an Obligor; and

         (ii)     the recovering Lender has paid a redistribution in relation to
                  that recovery,

                                       82

         each Finance Party must reimburse the recovering Lender all or the
         appropriate portion of the redistribution paid to that Finance Party,
         together with interest for the period while it held the
         re-distribution. In this event, the subrogation in paragraph (b) above
         will operate in reverse to the extent of the reimbursement.

34.3     Exceptions

         Notwithstanding any other term of this Clause, a recovering Lender need
         not pay a redistribution to the extent that:

         (a)      it would not, after the payment, have a valid claim against
                  the relevant Obligor in the amount of the redistribution; or

         (b)      it would be sharing with another Finance Party any amount
                  which the recovering Lender has received or recovered as a
                  result of legal or arbitration proceedings, where:

                  (i)      the recovering Lender notified the Facility Agent of
                           those proceedings; and

                  (ii)     the other Finance Party had an opportunity to
                           participate in those proceedings but did not do so or
                           did not take separate legal or arbitration
                           proceedings as soon as reasonably practicable after
                           receiving notice of them.

35.      SEVERABILITY

         If a term of a Finance Document is or becomes illegal, invalid or
         unenforceable in any jurisdiction, that shall not affect:

         (a)      the validity or enforceability in that jurisdiction of any
                  other term of the Finance Documents; or

         (b)      the validity or enforceability in other jurisdictions of that
                  or any other term of the Finance Documents.

36.      COUNTERPARTS

         Each Finance Document may be executed in any number of counterparts.
         This has the same effect as if the signatures on the counterparts were
         on a single copy of the Finance Document.

37.      NOTICES

37.1     In writing

(a)      Any formal communication in connection with a Finance Document must be
         in writing and, unless otherwise stated, may be given in person, by
         post, telex or fax approved by the Facility Agent.

(b)      Unless it is agreed to the contrary, any consent or agreement required
         under a Finance Document must be given in writing.

                                       83

37.2     Contact details

(a)      Except as provided below, the contact details of each Party for all
         communications in connection with the Finance Documents are those
         notified by that Party for this purpose to the Facility Agent on or
         before the date it becomes a Party.

(b)      The contact details of the Company for this purpose are:

         Smith & Nephew plc
         15 Adam Street
         London WC2N 6LA
         Fax:                  0207 930 3353
         For the attention of: The Company Secretary

(c)      The contact details of the Facility Agent for this purpose are:

         The Royal Bank of Scotland plc
         Loans Administration
         2 1/2 Devonshire Square
         London EC2M 4BB
         Fax:                  020 7615 7673
         For the attention of: Kevin Mann, Manager

(d)      Any Party may change its contact details by giving five Business Days'
         notice to the Facility Agent or (in the case of the Facility Agent) to
         the other Parties.

(e)      Where a Party nominates a particular department or officer to receive a
         communication, a communication will not be effective if it fails to
         specify that department or officer.

37.3     Effectiveness

(a)      Except as provided below, any communication in connection with a

Finance Document will be deemed to be given as follows:

(i) if delivered in person, at the time of delivery;

(ii) if posted, five days after being deposited in the post, postage prepaid, in a correctly addressed envelope;

(iii) if by telex, when despatched, but only if, at the time of

                  transmission, the correct answerback appears at the start and
                  at the end of the sender's copy of the notice;

         (iv)     if by fax, when received in legible form.

(b)      A communication given under paragraph (a) above but received on a
         non-working day or after business hours in the place of receipt will
         only be deemed to be given on the next working day in that place.

(c)      A communication to the Facility Agent will only be effective on actual
         receipt by it.

37.4     Obligors

(a)      All communications under the Finance Documents to or from an Obligor
         must be sent through the Facility Agent.

                                       84

(b)      All communications under the Finance Documents to or from an Obligor
         (other than the Company) must be sent through the Parent.

(c)      Each Obligor (other than the Parent) irrevocably appoints the Parent to
         act as its agent:

         (i)      to give and receive all communications under the Finance
                  Documents;

         (ii)     to supply all information concerning itself to any Finance
                  Party; and

         (iii)    to sign all documents under or in connection with the Finance
                  Documents including, for the avoidance of doubt, any
                  amendments to the Finance Documents.

(d)      Any communication given to the Parent in connection with a Finance
         Document will be deemed to have been given also to the other Obligors.

(e)      The Facility Agent may assume that any communication made by the Parent
         is made with the consent of each other Obligor.

38.      LANGUAGE

(a)      Any notice given in connection with a Finance Document must be in
         English.

(b)      Any other document provided in connection with a Finance Document must

be:

(i) in English; or

(ii) (unless the Facility Agent otherwise agrees) accompanied by a certified English translation. In this case, the English translation prevails unless the document is a statutory or other official document.

39. GOVERNING LAW

This Agreement is governed by English law.

40. ENFORCEMENT

40.1     Jurisdiction

(a)      The English courts have exclusive jurisdiction to settle any dispute in
         connection with any Finance Document.

(b)      The English courts are the most appropriate and convenient courts to
         settle any such dispute and each Obligor waives objection to those
         courts on the grounds of inconvenient forum or otherwise in relation to
         proceedings in connection with any Finance Documents.

(c)      This Clause is for the benefit of the Finance Parties only. To the

extent allowed by law, a Finance Party may take:

(i) proceedings in any other court; and

(ii) concurrent proceedings in any number of jurisdictions.

40.2     Service of process

(a)      Each Obligor not incorporated in England and Wales irrevocably appoints
         the Company as its agent under the Finance Documents for service of
         process in any proceedings before the English courts.

(b)      If any person appointed as process agent is unable for any reason to
         act as agent for service of process, the Company (on behalf of all the
         Obligors) must immediately appoint another agent on terms acceptable to
         the Facility Agent. Failing this, the Facility Agent may appoint
         another agent for this purpose.

(c)      Each Obligor agrees that failure by a process agent to notify it of any
         process will not invalidate the relevant proceedings.

(d)      This Clause does not affect any other method of service allowed by law.

40.3     Waiver of immunity

         Each Obligor irrevocably and unconditionally:

         (a)      agrees not to claim any immunity from proceedings brought by a
                  Finance Party against it in relation to a Finance Document and
                  to ensure that no such claim is made on its behalf;

         (b)      consents generally to the giving of any relief or the issue of
                  any process in connection with those proceedings; and

         (c)      waives all rights of immunity in respect of it or its assets.

40.4     Waiver of trial by jury

         EACH PARTY WAIVES ANY RIGHT IT MAY HAVE TO A JURY TRIAL OF ANY CLAIM OR
         CAUSE OR ACTION IN CONNECTION WITH ANY FINANCE DOCUMENT OR ANY
         TRANSACTION CONTEMPLATED BY ANY FINANCE DOCUMENT. THIS AGREEMENT MAY BE
         FILED AS A WRITTEN CONSENT TO TRIAL BY COURT.

THIS AGREEMENT has been entered into on the date stated at the beginning of this Agreement.

SCHEDULE 1

ORIGINAL PARTIES

Name of Original Borrower                                 Registration number
                                                        (or equivalent, if any)

SMITH & NEPHEW Inc.

T.J. SMITH & NEPHEW Limited                                      93994

Name of Original Guarantor                                Registration number
                                                        (or equivalent, if any)

SMITH & NEPHEW Inc.

Name of Original Lender                                  Facility A Commitments
                                                                   US$

Lloyds TSB Bank plc                                              325,000,000
The Royal Bank of Scotland plc                                   325,000,000
                                                        ------------------------
Total A Commitments                                         U.S.$650,000,000
                                                        ------------------------

Name of Original Lender                                  Facility B Commitments
                                                                  U.S.$

Lloyds TSB Bank plc                                              325,000,000
The Royal Bank of Scotland plc                                   325,000,000
                                                        ------------------------
Total B Commitments                                         U.S.$650,000,000
                                                        ------------------------

Name of Original Lender                                  Facility C Commitments
                                                                  U.S.$

Lloyds TSB Bank plc                                              400,000,000
The Royal Bank of Scotland plc                                   400,000,000

Total C Commitments                                     ------------------------
                                                              US$800,000,000
                                                        ------------------------

SCHEDULE 2

CONDITIONS PRECEDENT DOCUMENTS

PART 1

TO BE DELIVERED BEFORE THE FIRST REQUEST

Original Obligors

1. A copy of the constitutional documents of each Original Obligor.

2. A copy of a resolution of the board of directors of each Original Obligor or (in the case of the Company) a committee of the board of directors approving the terms of, and the transactions contemplated by, this Agreement.

3. If applicable, a copy of a resolution of the board of directors of the Company establishing the committee referred to in paragraph 2 above.

4. A specimen of the signature of each person authorised on behalf of an Original Obligor to execute or witness the execution of any Finance Document or to sign or send any document or notice in connection with any Finance Document.

5. A copy of a resolution signed by all (or any lower percentage agreed by the Facility Agent) of the holders of the issued or allotted shares in the Original Guarantor approving the terms of, and the transactions contemplated by, this Agreement.

6. If applicable, a copy of a resolution of the board of directors of each corporate shareholder in the Original Guarantor approving the terms of the resolution referred to in paragraph 5 above.

7. Evidence that the Company has accepted its appointment under the Finance Documents as agent for service of process on the Original Obligors in England and Wales.

8. A certificate of an authorised signatory of the Company:

(a) confirming that utilising the Total Commitments in full would not breach any limit binding on any Original Obligor; and

(b) certifying that each copy document specified in this Schedule is correct, complete and in full force and effect as at a date no earlier than the date of this Agreement.

Legal opinions

1. A legal opinion of Allen & Overy, London legal advisers to the Arranger and the Facility Agent, substantially in the form of Schedule 12, addressed to the Finance Parties.

2. A legal opinion from Allen & Overy, New York, addressed to the Finance Parties.

Other documents and evidence

1. Evidence that all expenses due and payable from the Company under this Agreement in respect of the Accession Agreement have been paid.

2. A copy of any other authorisation or other document, opinion or assurance which the Facility Agent has notified the Company is necessary in connection with the entry into and performance of, and the transactions contemplated by, the Accession Agreement or for the validity and enforceability of any Finance Document.

SCHEDULE 3

                                 Form of Request

To:      The Royal Bank of Scotland plc as Facility Agent

From:    [BORROWER]

Date:    [   ], 200[ ]


           MEADOWCLEAN LIMITED - U.S. $2,100,000,000 Credit Agreement
                      dated [  ] March, 2003 (the Agreement)

1. We refer to the Agreement. This is a Request.

2.       We wish to [borrow an [InCentive Offer Loan]/[a Centerpulse Offer
         Loan]/[a Loan]/[draw Bills]* [under Facility A/Facility B/Facility C]*
         on the following terms:

         (a) Utilisation Date: [   ]

         (b) Amount/currency: [   ]

         (c) Term: [   ].

3.       Our payment instructions are: [   ].

4. We confirm that each condition precedent under the Agreement which must be satisfied on the date of this Request is so satisfied.

5. This Request is irrevocable.

By:

[BORROWER]

* Delete as appropriate

SCHEDULE 4

CALCULATION OF THE MANDATORY COST

1. General

The Mandatory Cost is the weighted average of the rates for each Lender calculated below by the Facility Agent on the first day of a Term. The Facility Agent must distribute each amount of Mandatory Cost among the Lenders on the basis of the rate for each Lender.

2. For a Lender lending from a Facility Office in the U.K.

(a) The relevant rate for a Lender lending from a Facility Office in the U.K. is calculated in accordance with the following formulae:

for a Loan in Sterling:

AB + C(B - D) + E x 0.01
------------------------ per cent. per annum
100 - (A + C)

for any other Loan:

E x 0.01
-------- per cent. per annum

where on the day of application of the formula:

A        is the percentage of that Lender's eligible liabilities (in
         excess of any stated minimum) which the Bank of England
         requires it to hold on a non-interest-bearing deposit account
         in accordance with its cash ratio requirements;

B        is LIBOR for that Term;

C        is the percentage of that Lender's eligible liabilities which
         the Bank of England requires it to place as a special deposit;

D        is the interest rate per annum allowed by the Bank of England
         on a special deposit; and

E        is calculated by the Facility Agent as being the average of
         the rates of charge supplied by the Reference Banks to the
         Facility Agent under paragraph (d) below and expressed in
         pounds per (Pounds)1 million.

(b) For the purposes of this paragraph 2:

(i) eligible liabilities and special deposit have the meanings given to them at the time of application of the formula by the Bank of England;

(ii) fees rules means the then current rules on periodic fees in the Supervision Manual of the FSA Handbook; and

(iii) tariff base has the meaning given to it in the fees rules.

(c) (i) In the application of the formulae, A, B, C and D are included as figures and not as percentages, e.g. if A = 0.5% and B = 15%, AB is calculated as 0.5 x 15. A negative result obtained by subtracting D from B is taken as zero.

(ii) Each rate calculated in accordance with a formula is, if necessary, rounded upward to four decimal places.

(d) (i) Each Reference Bank must supply to the Facility Agent the rate of charge payable by that Reference Bank to the Financial Services Authority under the fees rules (calculated by that Reference Bank as being the average of the rates of charge within fee-block Category A1 (Deposit acceptors) applicable to that Reference Bank but, for this purpose, applying any applicable discount and ignoring any minimum fee required under the fees rules) and expressed in pounds per (GBP)1 million of the tariff base of that Reference Bank.

(ii) Each Reference Bank must promptly notify the Facility Agent of any change to the rate of charge.

(e) (i) Each Lender and each Reference Bank must supply to the Facility Agent the information required by it to make a calculation of the rate for that Lender or Reference Bank. The Facility Agent may assume that this information is correct in all respects.

(ii) If a Lender or a Reference Bank fails to do so, the Facility Agent may assume that the Lender's or that Reference Bank's obligations in respect of cash ratio deposits, special deposits and the fees rules are the same as those of a typical bank from its jurisdiction of incorporation with a Facility Office in the U.K.

(iii) The Facility Agent has no liability to any Party if its calculation over or under compensates any Lender.

3. For a Lender lending from a Facility Office in a Participating Member State

(a) The relevant rate for a Lender lending from a Facility Office in a Participating Member State is the percentage rate per annum notified by that Lender to the Facility Agent as its cost of complying with the minimum reserve requirements of the European Central Bank.

(b) If a Lender fails to specify a rate under paragraph (a) above, the Facility Agent will assume that the Lender has not incurred any such cost.

4. Changes

The Facility Agent may, after consultation with the Company and the Lenders, notify all the Parties of any amendment to this Schedule which is required to reflect:

(a) any change in law or regulation; or

(b) any requirement imposed by the Bank of England, the Financial Services Authority or the European Central Bank (or, in any case, any successor authority).

Any notification will be, in the absence of manifest error, conclusive and binding on all the Parties.

SCHEDULE 5

FORM OF TRANSFER CERTIFICATE

To:     The Royal Bank of Scotland plc as Facility Agent

From:   [THE EXISTING LENDER] (the Existing Lender) and [THE NEW LENDER] (the
        New Lender)

Date:   [  ]

             MEADOWCLEAN LIMITED - US$2,100,000,000 Credit Agreement
                      dated [  ] March, 2003 (the Agreement)

We refer to the Agreement. This is a Transfer Certificate.

1. The Existing Lender transfers by novation to the New Lender the Existing Lender's rights and obligations referred to in the Schedule below in accordance with the terms of the Agreement.

2. The proposed Transfer Date is [ ].

3. The administrative details of the New Lender for the purposes of the Agreement are set out in the Schedule.

4. This Transfer Certificate is governed by English law.

THE SCHEDULE

Rights and obligations to be transferred by novation
[insert relevant details, including applicable Commitment (or part)]

Administrative details of the New Lender
[insert details of Facility Office, address for notices and payment details etc.]

[EXISTING LENDER] [NEW LENDER]

By: By:

The Transfer Date is confirmed by the Facility Agent as [ ].

[FACILITY AGENT]

By:

SCHEDULE 6

FORM OF ACCESSION AGREEMENT

To:     The Royal Bank of Scotland plc as Facility Agent

From:   [PARENT] and [Proposed Borrower/Proposed Guarantor]*

Date:   [   ]

               MEADOWCLEAN LIMITED U.S.$2,100,000 Credit Agreement
                        dated March, 2003 (the Agreement)

We refer to the Agreement. This is an Accession Agreement.

[Name of company] of [address/registered office] agrees to become an Additional Borrower/Guarantor* and to be bound by the terms of the Agreement as an Additional Borrower/Guarantor*.

This Accession Agreement is governed by English law.

[PARENT]

By:

[PROPOSED BORROWER/GUARANTOR]

By:

* Delete as applicable

SCHEDULE 7

FORM OF RESIGNATION REQUEST

To:     The Royal Bank of Scotland plc as Facility Agent

From:   [PARENT] and [relevant Obligor]

Date:   [   ]


             MEADOWCLEAN LIMITED U.S.$2,100,000,000 Credit Agreement
                        dated March, 2003 (the Agreement)

1. We refer to the Agreement. This is a Resignation Request.

2. We request that [resigning Obligor] be released from its obligations as
[a/an] [Obligor/Borrower/Guarantor]* under the Agreement.

3. We confirm that no Default is outstanding or would result from the acceptance of this Resignation Request.

4. We confirm that as at the date of this Resignation Request no amount owed by [resigning Obligor] under the Agreement is outstanding.

5. This Resignation Request is governed by English law.

[PARENT] [Relevant Obligor]

By: By:

The Facility Agent confirms that this resignation takes effect on [ ].

[AGENT]

By:

* Delete as applicable

SCHEDULE 8

FORM OF COMPLIANCE CERTIFICATE

To:     The Royal Bank of Scotland plc as Facility Agent

From:   [PARENT]

Date:   [  ]


             MEADOWCLEAN LIMITED - US$2,100,000,000 Credit Agreement
                      dated [  ] March, 2003 (the Agreement)

1. We refer to the Agreement. This is a Compliance Certificate.

2. We confirm that as at [relevant testing date]:

(a) Consolidated EBITDA was [ ]; and Consolidated Total Net Borrowings are [ ]; therefore, Consolidated Total Net Borrowings are [ ] x Consolidated EBITDA; and

(b) Consolidated EBITA was [ ] and Consolidated Net Interest Payable was [ ]; therefore, the ratio of Consolidated EBITA to Consolidated Net Interest Payable was [ ] to 1.

3. We set out below calculations establishing the figures in paragraph 2 above:

[ ].

4. The following are Material Subsidiaries:

5. [We confirm that no Default is outstanding as at [relevant testing date]*

[PARENT]

By:

[insert applicable certification language]

* If this statement cannot be made, the certificate should identify any Default that is outstanding and the steps, if any, being taken to remedy it.

SCHEDULE 9

FORM OF BILL

Face of Bill

No. for (GBP)_________________

_____________________________20__

On ______________20__ pay against this Bill of Exchange to our order the sum of for value received against [ ].

Accepted by:

For                                                  [BORROWER]
[ACCEPTING LENDER]


____________________________________                 ___________________________
Authorised Signatory                                 Authorised Signatory

Reverse of Bill

For
[BORROWER]

____________________
Authorised Signatory

SCHEDULE 10

Form of Syndication Agreement

SYNDICATION AGREEMENT

DATED [ ], 2003

relating to a US$2,100,000,000 Credit Facility dated [ ] March, 2003

for

MEADOWCLEAN LIMITED

arranged by

LLOYDS TSB CAPITAL MARKETS

THE ROYAL BANK OF SCOTLAND

ALLEN & OVERY
London

100

THIS AGREEMENT is dated [ ], 2003

BETWEEN:

(1) [MEADOWCLEAN LIMITED] (registered number 4348753) (Bidco);

(2) SMITH & NEPHEW PLC(registered number 324357) (the Company);

(3) THE SUBSIDIARIES OF THE COMPANY listed in Schedule 1 (Original Parties) as original borrowers (in this capacity the Original Borrowers);

(4) THE SUBSIDIARIES OF THE COMPANY listed in Schedule 1 (Original Parties) as original guarantors (in this capacity the Original Guarantors);

(5) LLOYDS TSB CAPITAL MARKETS and THE ROYAL BANK OF SCOTLAND as arrangers (in this capacity the Arrangers);

(6) THE FINANCIAL INSTITUTIONS listed in Schedule 1 (Original Parties) as the lender party to the Credit Agreement (as defined below) as at the date of this Agreement (the Existing Lender);

(7) THE FINANCIAL INSTITUTIONS listed in Schedule 1 (Original Parties) as the lenders who wish to accede to the Credit Agreement as Lenders (the New Lenders); and

(8) THE ROYAL BANK OF SCOTLAND plc as Facility Agent (the Facility Agent).

IT IS AGREED as follows:

1. INTERPRETATION

1.1 Definitions

In this Agreement:

Credit Agreement

means the credit agreement dated [ ] March, 2003 between, among others, the Company, the Arrangers and the Facility Agent.

Effective Date

means [ ].

1.2 Construction

(a) Capitalised terms defined in the Credit Agreement have, unless expressly defined in this Agreement, the same meaning in this Agreement.

(b) The provisions of Clause 1.2 (Construction) of the Credit Agreement apply to this Agreement as though they were set out in full in this Agreement except that if references to the Credit Agreement are to be construed as references to this Agreement.

101

2. CONSENT AND CONFIRMATION

The Company, the Arrangers, the Existing Lenders and the Facility Agent consent to the New Lenders becoming Lenders and confirm that, except as provided in this Agreement, the Finance Documents will continue in full force and effect.

3. REPRESENTATIONS

(a) In this Clause Information Memorandum means [ ].

(b) The Company represents and warrants to each other party to this Agreement that:

(i) as at its date the material factual information relating to the Group contained in the Information Memorandum was accurate in all material respects as at the date to which it was prepared;

(ii) as at its date and to the best of its knowledge, the opinions, projections and forecasts contained in the Information Memorandum and the assumptions on which they are based were arrived at after due and careful consideration and genuinely represented its views; and

(iii) to the best of its knowledge there are no material facts or circumstances which have not been disclosed to the parties to this Agreement by the Information Memorandum or otherwise prior to the date of this Agreement and which would make any of the information, opinions, projections, forecasts or assumptions contained in the Information Memorandum incomplete, inaccurate or misleading in any material respect.

4. TRANSFER OF COMMITMENTS

On the Effective Date (regardless of whether a Default is outstanding):

(a) each New Lender will become a Lender under the Credit Agreement with the Facility A, Facility B and Facility C Commitment set opposite its name in Schedule 2 (Lenders and Commitments);

(b) the Commitments of the Existing Lenders will be reduced to the amount set opposite their names in Schedule 2 (Lenders and Commitments); and

(c) each New Lender obtains and undertakes to perform all of the rights and obligations of a Lender in connection with the Finance Documents in respect of the rights and obligations transferred to it under this Clause.

5. [TRANSFER OF PARTICIPATIONS

5.1 Definitions

Participation means, for a Lender, the amount of its share in the Credits under a Facility, being the amount set out opposite its name in Schedule 3 for that Facility (Lenders and Participations).

5.2 Participation

On the Effective Date (regardless of whether a Default is outstanding):

102

(a) each New Lender will become a Lender under the Credit Agreement with a Participation in each Facility in the amount set opposite its name in Schedule 3 (Lenders and Participations) for that Facility;

(b) the amount of each Existing Lender's share in the Credits under a Facility Existing Lenders will be reduced to the amount set opposite its name in Schedule 3 (Lenders and Participations) for that Facility;

[(d) the Existing Lender will pay to each New Lender the amount notified to it by the Facility Agent, being the amount necessary to ensure that after the payment the amount of each Lender's Participation in a Facility is equal to the amount set opposite its name in Schedule 3 (Lenders and Participations) for that Facility;

(e) each New Lender will pay to the Facility Agent, an amount equal to its Participation in the currency specified by the Facility Agent and in immediately available and freely transferable funds, to be received for value on the Effective Date; and

(f) the Facility Agent will pay to the Existing Lender an amount equal to the amount it received from the New Lenders under paragraph (e) above up to a maximum amount equal to the difference between the Existing Lender's Participation immediately prior to the date of this Agreement and the amount of its Participation set opposite its name in Schedule 3 (Lenders and Participations).]/1/

6. EFFECTIVE DATE

6.1 Amounts due on or before the Effective Date

Any amounts payable to the Existing Lender by the Company on or prior to the Effective Date in respect of any period ending prior to the Effective Date will be for the account of the Existing Lender, and none of the New Lenders will have any interest in, or any rights in respect of, those amounts.

6.2 [Credit on the Effective Date

If any Credit falls to be utilised on the Effective Date:

(a) the Facility Agent will promptly notify each New Lender of the amount of its participation in that Credit;

(b) the Existing Lender and each New Lender must participate in that Credit (subject to the terms of the Credit Agreement) as if the transfer of the Facility B Commitments under this Agreement had taken effect prior to opening of business on the Business Day before the Effective Date; and

(c) the Company acknowledges that the Existing Lender will not be obliged to participate in that Credit to any greater extent.]

/1/ Required if transfer occurs during a Term of any Credit.

103

7. NATURE OF THIS AGREEMENT

The transfer of Commitments and rights and obligations contemplated by this Agreement will take effect as a novation and Clause 31.4 (Procedure for transfer by way of novations) of the Credit Agreement will apply to the Commitments, rights and obligations transferred, as if this Agreement were a Transfer Certificate.

8. PAYMENTS

8.1 Claw-back

The Facility Agent is not obliged to pay any amount to the Existing Lender under this Agreement until it has established that it has actually received a related amount from a New Lender. However, the Facility Agent may assume the sum has been paid to it and, in reliance on that assumption, make available to the Existing Lender a corresponding amount. If it transpires that the sum had not been made available, the Existing Lender will within five Business Days of demand by the Facility Agent refund the relevant amount together with interest on that amount from the date of payment to the date of receipt by the Facility Agent, at a rate calculated by the Facility Agent to reflect its cost of funds.

8.2 Administrative details

Each New Lender confirms that it has delivered to the Facility Agent its initial details for the purposes of Clause 37 (Notices) of the Credit Agreement.

8.3 Administrative details

The Reference Banks are, subject to Clause 31.10 (Changes to the Reference Banks) of the Credit Agreement, [ ], [ ] and [ ].

9. GOVERNING LAW

This Agreement is governed by English law.

THIS AGREEMENT has been entered into on the date stated at the beginning of this Agreement.

104

SCHEDULE 1

ORIGINAL PARTIES

ORIGINAL BORROWERS

ORIGINAL GUARANTORS

EXISTING LENDERS

NEW LENDERS

105

SCHEDULE 2

LENDERS AND COMMITMENTS

Name of Lender Facility A Commitment $

                                                 _______________________________
Total Facility A Commitments                                 $[   ]
                                                 _______________________________

                                                 _______________________________
Name of Lender                                        Facility B Commitment
                                                                $
                                                 _______________________________

                                                 _______________________________
Total Facility B Commitments                                 $[   ]
                                                 _______________________________

                                                 _______________________________
Name of Lender                                        Facility C Commitment
                                                                $
                                                 _______________________________

                                                 _______________________________
Total Facility C Commitments                                 $[   ]

106

SCHEDULE 3

LENDERS AND PARTICIPATIONS

Name of Lender                               Facility A Participation

Name of Lender                               Facility B Participation

Name of Lender                               Facility C Participation

107

SIGNATORIES

Bidco

[MEADOWCLEAN LIMITED]

By:

Company

SMITH & NEPHEW PLC

By:

Original Borrowers

[ ]

Original Guarantors

[ ]

Arrangers

LLOYDS TSB CAPITAL MARKETS

By:

THE ROYAL BANK OF SCOTLAND

By:

Existing Lender

LLOYDS TSB BANK plc

By:

108

THE ROYAL BANK OF SCOTLAND plc

By:

New Lenders

[ ]

By:

Facility Agent

THE ROYAL BANK OF SCOTLAND plc

By:

109

SCHEDULE II

FORM OF POWER OF ATTORNEY FOR BILLS

To: THE ROYAL BANK OF SCOTLAND plc as Facility Agent

From: [BORROWER]

Date: [ ]

MEADOWCLEAN LIMITED - U.S.$2,100,000,000 Credit Agreement dated [ ] March, 2003 (the Agreement)

1. We refer to the Agreement. This is a Power of Attorney.

2. Terms defined in the Agreement have the same meaning when used in this Power of Attorney.

3. We appoint you as our attorney to draw, complete, clause, endorse and deliver Bills in our name and on our behalf in accordance with the Agreement.

4. The powers conferred on you under this Power of Attorney are exercisable jointly by any two of your authorised signatories.

5. In exercising those powers, your authorised signatories will:

(a) act as your agents in your capacity as our attorney under this Power of Attorney;

(b) sign as follows:

"For [Name of Borrower] by [Name of Facility Agent] as Attorney.

Authorised Signatories"; and

(c) take any other steps they in good faith consider necessary to enable the Borrower to fulfil its obligations in respect of a Request for Bills and for the Facility Agent to fulfil its obligations under Clause 8.2 (Holding and completion of Bills) of the Agreement.

6. Any Bill drawn and delivered in accordance with this Power of Attorney will be binding upon us. We:

(a) indemnify you against any loss or liability incurred by you in acting as our attorney; and

(b) agree to ratify anything done by you on our behalf under this Power of Attorney.

7. Except as provided below, this Power of Attorney remains in force until you receive a notice in writing signed by us, addressed to [ ] and delivered to your offices at [ ] expressly revoking it (a revocation notice).

110

8. A revocation notice will not be effective for any Bills drawn pursuant to a Request made before your receipt of that revocation notice.

9. This Power of Attorney is governed by English law.

This Power of attorney has been entered into as a deed on the date stated at the beginning of this Power of Attorney.

Executed as a deed       )
On behalf of             )
[BORROWER]

By:


______________________
Director


______________________
Director/Secretary

111

SCHEDULE 12

FORM OF LEGAL OPINION OF ALLEN & OVERY

To: The Finance Parties named as
original parties to the Agreement

(as defined below)

[ ], 2003

Dear Sirs,

MEADOWCLEAN LIMITED - US$2,100,000,000 Agreement
dated [ ] March, 2003 (the Agreement)

We have received instructions from the Arrangers in connection with the Agreement.

Defined Terms

In this opinion:

English Obligor means each Original Obligor incorporated in England and Wales.

Terms defined in the Agreement have the same meaning in this opinion.

Documents and searches

For the purposes of this opinion we have examined the following documents:

(a) a signed copy of the Agreement;

(b) a certified copy of the memorandum and articles of association and certificate of incorporation of each English Obligor;

(d) a certified copy of the minutes of a meeting of the board of directors of each of: (i) the Company held on [ ]; and (ii) of each English Obligor held on [ ]; and

(e) a certificate of the Company confirming, amongst other things, that the entry into and performance of the Agreement will not contravene any borrowing limit contained in the articles of association of any Obligor.

On 19th March, 2003 we carried out a search of each English Obligor at the Companies Registry. On 19th March,2003 we made a telephone search of each English Obligor at the winding-up petitions at the Companies court.

The above are the only documents or records we have examined and the only searches and enquiries we have carried out for the purposes of this opinion.

112

Assumptions

We assume that:

(a) no English Obligor is unable to pay its debts within the meaning of section 123 of the Insolvency Act, 1986 at the time it enters into the Agreement and will not as a result of the Agreement be unable to pay its debts within the meaning of that section;

(b) no step has been taken to wind up any English Obligor or appoint a receiver in respect of it or any of its assets although the searches of the Companies Registry referred to above gave no indication that any winding-up order or appointment of a receiver has been made;

(d) all documents are and remain up-to-date;

(e) the correct procedure was carried out at all the board meetings referred to above; for example, there was a valid quorum, all relevant interests of directors were declared and the resolutions were duly passed at each meeting;

(f) any restrictions on the ability of any English Obligor to borrow contained in its Articles of Association would not be contravened by the entry into and performance by it of the Agreement;

(g) the Agreement has been duly executed on behalf of each English Obligor by the person(s) authorised by the resolutions passed at the relevant meeting referred to above;

(h) the Agreement is a legally binding, valid and enforceable obligation of each Party other than the English Obligors; and

(i) no foreign law affects the conclusions stated below.

Opinion

Subject to the qualifications set out below and to any matters not disclosed to us, it is our opinion that, so far as the present laws of England are concerned:

1. Status: Each English Obligor is a company incorporated with limited liability under the laws of England and is not in liquidation.

2. Powers and authority: Each English Obligor has the corporate power to enter into and perform the Agreement and has taken all necessary corporate action to authorise the execution, delivery and performance of the Agreement.

3. Legal validity: The Agreement constitutes a legally binding, valid and enforceable obligation of each Original Obligor.

4. Non-conflict: The entry into and performance by each English Obligor of the Agreement will not violate any provision of (i) any existing English law applicable to companies generally, or (ii) its memorandum or articles of association.

5. Consents: No authorisations of governmental, judicial or public bodies or authorities in England are required by any English Obligor in connection with the performance, validity or enforceability of its payment obligations under the Agreement.

113

6. Taxes: All payments of interest due from any Original Obligor resident for U.K. tax purposes in the U.K. under the Agreement may be made without any withholding or deduction of or on account of any U.K. Taxes, if:

(a) (i) the person that advanced the participation in the Loan to which the interest relates was a bank for the purpose of section 349 of the Income and Corporation Taxes Act 1988 (as currently defined in section 840A of the Income and Corporations Tax Act 1988) at the time the Loan was made; and

(ii) the person beneficially entitled to that interest is within the charge to U.K. corporation tax as regards that interest at the time the interest is paid; or

(b) the person beneficially entitled to the income in respect of which the interest payment is made is:

(i) a company resident in the U.K. for U.K. tax purposes;

(ii) a partnership, each member of which is a company resident in the U.K. for U.K. tax purposes or a company not resident in the U.K. for U.K. tax purposes but which carries on a trade in the U.K. through a branch or agency and brings into account in computing its chargeable profits (for the purpose of section 11(2) of the Income and Corporation Taxes Act 1988) the whole of any share of interest payable to it under the Agreement which falls to it by reason of sections 114 and 115 of the Income and Corporation Taxes Act 1988; or

(iii) a company not resident in the U.K. for U.K. tax purposes but which carries on a trade in the U.K. through a branch or agency and brings into account interest paid to it under the Agreement in computing its chargeable profits for the purpose of section 11(2) of the Income and Corporation Taxes Act 1988,

and the Original Obligor making the relevant payment of interest has reasonable grounds to believe that such a person falls into any one of paragraphs (i), (ii) or (iii) above and the Inland Revenue has not given a direction to that Original Obligor to the effect that the interest must not be paid without deduction of U.K. income tax; or

(c) the interest belongs beneficially to a Treaty Lender and the Original Obligor has received a notice served under SI 1970/488 from the Inland Revenue authorising the Original Obligor to pay the interest to that person without deducting U.K. income tax.

7. Registration requirements: It is not necessary or advisable to file, register or record the Agreement in any public place or elsewhere in England.

8. Stamp duties: No stamp, registration or similar tax or charge is payable in England in respect of the Agreement.

Qualifications

This opinion is subject to the following qualifications:

(a) This opinion is subject to all insolvency and other laws affecting the rights of creditors generally.

(b) No opinion is expressed on matters of fact.

114

(c) The term "enforceable" means that a document is of a type and form enforced by the English courts. It does not mean that each obligation will be enforced in accordance with its terms. Certain rights and obligations may be qualified by the non-conclusivity of certificates, doctrines of good faith and fair conduct, the availability of equitable remedies and other matters, but in our view these qualifications would not defeat your legitimate expectations in any material respect.

This opinion is given for your sole benefit and may not be relied upon by or disclosed to any other person.

Yours faithfully

115

SIGNATORY

Bidco

MEADOWCLEAN LIMITED

By: PIERRE CHAPATTE ANTOINE VIDTS

Company

SMITH & NEPHEW PLC

By: PETER HOOLEY CHRIS O'DONNELL

Original Borrowers

SMITH & NEPHEW INC

By: JAMES A. RALSTON

T.J. SMITH & NEPHEW LIMITED

By: CLIFF LOMAX

Original Guarantor

SMITH & NEPHEW INC

By: JAMES A. RALSTON

Arrangers

LLOYDS TSB CAPITAL MARKETS

By: IAN FITZGERALD

THE ROYAL BANK OF SCOTLAND

By: MICHAEL PORTER

116

Original Lenders

LLOYDS TSB BANK plc

By: ROBERT GREENE

THE ROYAL BANK OF SCOTLAND plc

By: ALASDAIR GARNHAM

Facility Agent

THE ROYAL BANK OF SCOTLAND plc

By: MICHAEL PORTER

117

Exhibit 4a(ii)

AGREEMENT

dated 20 March 2003

between

Smith & Nephew plc
15 Adam Street, London WC2N 6LA                               ("Smith & Nephew")


                                       and

Meadowclean Limited
(in the process of re-registering as a UK registered public company changing its name to Smith & Nephew Group plc) (the "Offeror")

and

Centerpulse Ltd
Andreasstrasse 15, 8050 Zurich                                   (the "Company")


                                   relating to

the Combination of Smith & Nephew and the Company

TABLE OF CONTENTS

I    PUBLIC OFFER ..........................................................  5
     1   Structure .........................................................  5
     2   Offer Restrictions ................................................  5
     3   Offer Price .......................................................  6
     4   Conditions ........................................................  7
     5   Offeror's and Smith & Nephew's Obligations ........................  8
     6   Company's Obligations .............................................  9
     7   Board Approvals ................................................... 10
     8   Corrections to Offer Documents .................................... 10
     9   Rights Under Stock Option Plans ................................... 10

II   COVENANTS ............................................................. 11
     1   Board Representation .............................................. 11
     2   Company's Manufacturing Facilities ................................ 11
     3   Management ........................................................ 11
     4   Listing ........................................................... 11
     5   No Solicitation ................................................... 11
     6   Co-operation; Confidentiality ..................................... 12
     7   Cost Reimbursement ................................................ 12
     8   Conduct of Business ............................................... 13
     9   Reasonable Efforts; Filings ....................................... 14
     10  Notification of Certain Matters ................................... 14

III  TERMINATION AND AMENDMENT ............................................. 14
     1   Termination ....................................................... 14
     2   Effect of Termination ............................................. 15
     3   Amendment ......................................................... 15

IV   MISCELLANEOUS ......................................................... 16
     1   Waiver of Standstill Provisions ................................... 16
     2   Entire Agreement; Assignment ...................................... 16
     3   Validity .......................................................... 16
     4   Notices ........................................................... 16
     5   Fees and Expenses ................................................. 17
     6   Public Disclosure ................................................. 17
     7   Governing Law ..................................................... 18
     8   Arbitration ....................................................... 18

Combination Agreement -3-

TABLE OF ANNEXES

Annex I.4 a):    Form of Pre-Announcement

Annex 1.7 a):    Fairness Opinion of each of UBS Warburg and Lehman Brothers to
                 the Board of Directors of the Company

Combination Agreement -4-

RECITALS

WHEREAS, the board of directors of each of Smith & Nephew and the Company has determined that in light of the potential benefits from a strategic combination of their respective businesses it is in the best interests of their respective shareholders for the Offeror, the proposed new holding company of Smith & Nephew, which will be a UK registered public company, resident in Switzerland and listed on the London Stock Exchange and on the SWX Swiss Exchange, to acquire control of the Company upon the terms and subject to the conditions set forth in this agreement (this "Agreement");

WHEREAS, the boards of directors of Smith & Nephew and the Offeror have adopted resolutions (a) approving the acquisition of the Company by the Offeror, this Agreement and the transactions contemplated hereby, and (b) (in the case of Smith & Nephew only) recommending that the shareholders of Smith & Nephew approve this Agreement and the transactions contemplated hereby;

WHEREAS, the board of directors of the Company has obtained fairness opinions and adopted resolutions (a) approving the acquisition of the Company by the Offeror, this Agreement and the transactions contemplated hereby, and (b) recommending to the Company's shareholders to tender their shares in the Offer (as defined herein);

WHEREAS, Incentive Capital AG, an investment company organized under the laws of Switzerland and listed on the SWX Swiss Exchange (the "Shareholder"), holds indirectly through its wholly-owned subsidiary Incentive Jersey Ltd, 13.14% of the Company Shares (as defined herein) and rights to acquire further 5.77% of the Company Shares, Smith & Nephew and the Shareholder have agreed, by way of a separate transaction agreement dated the date hereof, that the Offeror shall acquire all the outstanding shares of the Shareholder by way of a public offer (the "Parallel Public Offer"), which is to be launched and conducted in parallel to the Offer with respect to the Company;

WHEREAS, the Offeror, Smith & Nephew and the Company desire to make certain arrangements and covenants in relation to the Offer contemplated in this Agreement;

NOW THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the parties agree as follows:

Combination Agreement -5-

I PUBLIC OFFER

1 Structure

a) The Offeror agrees to extend a public offer to purchase all outstanding registered shares of the Company, each with a nominal value of CHF 30.00 (the "Company Shares"; including the Company Shares represented by the American Depositary Shares of the Company (the "Company ADSs"), which are currently issued and which will have been issued by the end of the additional acceptance period (the "Transaction"), against payment of a consideration consisting of shares of the Offeror (the "Offeror Shares") to be issued credited as fully paid and ranking pari passu in all respects with the Offeror Shares in issue at the date hereof, and/or cash as further described in Section I.3.

b) The Company agrees that no Company Shares held by the Company or any of its subsidiaries, if any, will be tendered pursuant to the Offer; provided, however, that prior to the date of settlement of the Offer (the "Completion Date"; Vollzugsdatum in German) Company Shares held by the Company may be allocated, issued, delivered or transferred pursuant to the Company's stock incentive plan for management and employees in accordance with the terms thereof or Section I.9.

2 Offer Restrictions

a) The offer contemplated by the Transaction will be made available to all shareholders on substantially the same terms and conditions and will take the form of a public exchange offer applicable to all shareholders (the "Offer") but for regulatory reasons will be conducted utilising two separate sets of offer documents: (i) one set to be made available to all holders of Company Shares not located in the United States and prepared in accordance with the Swiss Stock Exchanges and Securities Trading Act ("SESTA") and its implementing rules and regulations and (ii) the other set to be made available to all shareholders located in the United States and prepared in accordance with the Securities Exchange Act of 1934, as amended (the "US Exchange Act"), and the Securities Act of 1933, as amended (the "US Securities Act"), in each case, and the rules and regulations thereunder.

b) The Offer contemplated by this Agreement is not being made directly or indirectly, nor is it intended to extend to, a country or jurisdiction where such public offer would be considered unlawful or in which it would otherwise breach any applicable law or regulation or which would require the Offeror to amend any term or conditions of the Offer in any way or which would require the Offeror to make

Combination Agreement -6-

any additional filings with, or take any additional action with regards to, any governmental, regulatory or legal authority. Offering documents relating to the Offer may not be distributed in nor sent to such country or jurisdiction and may not be used for the purposes of soliciting the exchange of any securities of the Company from anyone in such country or jurisdiction.

3 Offer Price

a) The consideration will be paid in Offeror Shares and cash on the basis of (i) an exchange ratio (the "Exchange Ratio") of 25.15 Offeror Shares and CHF 73.42 in cash for each Company Share. The Exchange Ratio will be adjusted to compensate for any dilutive effects in respect of the Company Shares or ordinary shares in Smith & Nephew (the "Smith & Nephew Shares") (save for shares issued for management options issued under the Company or Smith & Nephew employee share schemes and disclosed in the Company's or Smith & Nephew's financial statements for the financial year 2002) including dividend payments (save for dividends already declared by Smith & Nephew or an interim dividend thereafter declared by Smith & Nephew in the normal course consistent with past practice), capital increases below market value, or the issuance of options (save for management options issued under Smith & Nephew employee share schemes in the normal course consistent with past practice), warrants, convertible securities and other rights of any kind to acquire Company Shares or Smith & Nephew Shares, or any other transaction (including in connection with a scheme of arrangement) having a dilutive effect on the value of the Offers unless provided otherwise herein. If between the date of this Agreement and the Completion Date, the outstanding Smith & Nephew Shares shall have been changed into a different number of shares or a different class, by reason of the occurrence or record date of any stock dividend, subdivision, reclassification, recapitalisation, split, combination, exchange of shares or similar transaction, the Exchange Ratio shall be appropriately adjusted to reflect such stock dividend, subdivision, reclassification, recapitalisation, split, combination, exchange of shares or similar transaction made until the Completion Date.

Fractions of Offeror Shares will not be issued and entitlements to Offeror Shares will be rounded down to the nearest whole Offeror Share and the cash element of the consideration will be adjusted.

b) In respect of the cash consideration, a `mix and match' facility will be made available. Accepting Company Shareholders under the Offer and accepting shareholders of the Shareholder under the Parallel Public Offer (together the "Accepting Shareholders") may elect to take fewer Offeror Shares or more Offeror Shares than their basic entitlement under the relevant Offer, but elections under both Offers (taken together) to take more Offeror Shares (together the "Excess Shares") will only be satisfied to the extent that elections have been made under the Offer

Combination Agreement                                                        -7-
--------------------------------------------------------------------------------


          and the Parallel Public Offer (taken together) by Accepting
          Shareholders to take fewer Offeror Shares (together referred to as
          "Available Shares"). The Available Shares will be allocated to the
          applicants for Excess Shares in proportion to the number of Excess
          Shares applied for. If the total number of Available Shares exceeds
          the total number of Excess Shares applied for, the Available Shares
          shall be limited to an amount equal to the Excess Shares. Once the
          share allocations have been determined, the cash element of the
          consideration will be reduced or increased (as the case may be) for
          each Accepting Shareholder who has been allocated an increased or
          reduced number of Offeror Shares. All calculations shall be made by
          reference to the number of acceptances and elections as of the last
          day of the additional acceptance period.

4 Conditions

a) The obligation of the Offeror to complete the Offer and to accept for payment and to pay for the Company Shares tendered pursuant thereto shall be subject only to those conditions (the "Conditions") set forth in the pre-announcement in the form as attached hereto in Annex I.4 a) (the "Pre-Announcement"). Each of the Offeror, Smith & Nephew and the Company shall use its reasonable efforts (alle zumutbaren Massnahmen) to satisfy the respective Conditions as soon as practicable and to recommend the steps to be taken by its shareholders in relation thereto.

b) The Conditions shall be suspensive conditions within the meaning of art. 13 para. 1 of the Ordinance of the Takeover Board on Public Takeover Offers ("TOO"). The Offeror reserves the right to waive or relax any of the Conditions (save for Conditions 1, 2, 3 as to the requirement to obtain merger clearance as such, and 4) in whole or in part. If and to the extent the regulatory Conditions are not met or waived by the end of the initial offer period and provided that the non-regulatory Conditions are satisfied or capable of being satisfied, the Offeror will be obliged to have the offer period extended on one or several occasions for such a period as will permit determination of the issue in question. Subject to the preceding sentence, if and to the extent the Conditions are not met or waived by the end of the (possibly extended) offer period, the Offeror reserves the right to terminate the Offer or to obtain the approval by the Swiss Takeover Board ("STOB") for an extension of the offer period. The Company agrees to consent to such extension requests.

The Offer will expire if the Conditions have not been fulfilled or waived upon expiry of the (possibly extended) offer period and no further extension of the offer period has been granted by the STOB.

For the avoidance of doubt, due to US legal considerations, holders of Company Shares that have tendered any of their Company Shares pursuant to the Offer

Combination Agreement -8-

shall have the right to withdraw such Company Shares until the end of the (possibly extended) offer period.

c) The parties acknowledge that the "Court Scheme" referred to in the Pre-Announcement refers to a scheme of arrangement under section 425 of the Companies Act 1985 of the United Kingdom pursuant to which:

(i) the existing ordinary shares in Smith & Nephew shall be cancelled; and

(ii) the Offeror shall issue Offeror Shares to existing shareholders of Smith & Nephew in consideration of the issue to the Offeror of ordinary shares in Smith & Nephew (on the basis of one Offeror Share for each existing ordinary share in Smith & Nephew),

as described in draft (2) of the memorandum produced by Ashurst Morris Crisp dated 15 March 2003 entitled "Project Mango Transaction Structure" (the "AMC Paper") but subject to further amendment to comply with legal, commercial and tax issues, provided that any such amendment is not, or would not reasonably likely be, prejudicial to the Company or its shareholders, or will not, or would not be reasonably likely to, substantially delay the date on which the Offer is expected to become unconditional or substantially prejudice the likelihood of the Offer becoming unconditional.

The Offeror and Smith & Nephew agree that the Court Scheme shall not be conditional upon any matter save for any condition expressly set out in the Pre-Announcement and any shareholder approval of Smith & Nephew required by law to approve the Court Scheme. In particular, but without limitation, the Court Scheme shall not be conditional upon, or include as part of its terms, the proposed repayment by way of cancellation of the preference shares referred to in the AMC Paper.

5 Offeror's and Smith & Nephew's Obligations

The Offeror and/or Smith & Nephew (as applicable) shall procure that any of the following be done and/or shall:

a) make the Pre-Announcement not later than 20 March 2003 and prepare any offer documents and instruments pursuant to which the Offer will be made (collectively with any supplements or amendments thereto, including the U.S. Offer Documents as defined below the "Offer Documents"), it being understood that the Company and its counsel shall be given a reasonable opportunity to review and comment on the Offer Documents and any other documents pertinent to the Transaction prior to filing or distribution thereof and that each party (acting reasonably) must be satisfied with the description of any matters relating to itself (including its business) in any of these documents;

Combination Agreement -9-

b) prepare and make all anti-trust or other filings necessary to carry out the transactions contemplated by this Agreement;

c) prepare and publish listing particulars in relation to the Offeror Shares in accordance with the Listing Rules of the United Kingdom Listing Authority (the "UK Listing Rules") and post such listing particulars to the Company's shareholders together with the Offer Documents;

d) prepare and post to Smith & Nephew's shareholders a circular complying with the UK Listing Rules and containing (i) a recommendation of the directors of the Offeror to vote in favour of the resolutions of Smith & Nephew referred to in the Conditions and (ii) an explanatory statement pursuant to section 426 of the Companies Act 1985 of the United Kingdom;

e) use commercially reasonable endeavours promptly to prepare, publicize, distribute, file and submit any documents, listing particulars, announcements, submissions and any other form of communication to be made; and

f) file with the SEC on or prior to the date of commencement of the Offer
(i) a Tender Offer Statement on Schedule TO (together with any amendments or supplements thereto, the "Schedule TO"), (ii) the Exchange Offer Registration Statement with respect to the Offer and
(iii) a Registration Statement on Form F-6 (the "ADS Registration Statement") registering the American Depositary Shares of the Offeror (the "Offeror ADSs") to be issued in connection with the Transaction (the Schedule TO, the Exchange Offer Registration Statement, the ADS Registration Statement and such other documents included therein pursuant to which the US Offer will be made, the "U.S. Offer Documents").

6 Company's Obligations

The Company shall:

a) provide to the Offeror such information as reasonably requested in connection with the preparation of the listing particulars and the Offer Documents;

b) ensure that the Offer Documents will contain a report of the board as per Section 29(1) SESTA recommending acceptance of the Offer, it being understood, however, that the board of the Company will be under no obligation to recommend the Offer if Smith & Nephew or the Offeror should become subject to the events referred to in Condition 7 mutatis mutandis in relation to Smith & Nephew's products, or its facilities in Hull or Memphis;

Combination Agreement -10-

c) file with the SEC contemporaneously with the commencement of the Offer and disseminate to holders of the Company Shares, in each case as and to the extent required by the US Exchange Act, a Solicitation/Recommendation Statement on Schedule 14D-9 (together with any amendments or supplements thereto) that shall reflect the recommendation of the board of directors of the Company.

7 Board Approvals

a) The Company confirms that its board of directors has (a) obtained fairness opinions issued by its financial advisors UBS Warburg and Lehman Brothers enclosed as Annex I.7.a), and (b) by way of a board resolution (i) determined that this Agreement and the transactions contemplated hereby are fair to, and in the best interests of, the Company's shareholders, (ii) approved this Agreement, and (iii) resolved to recommend to the shareholders acceptance of the Offer. The Company has been advised by its board members and executive officers (members of executive committee) that they intend to tender all Company Shares owned by them to the Offeror pursuant to the Offer.

b) Each of Smith & Nephew and the Offeror confirms that its board of directors (i) determined that this Agreement and the transactions contemplated hereby are in the best interests of itself and its shareholders as a whole, (ii) approved this Agreement, and (iii) (in the case of Smith & Nephew only) resolved unanimously to recommend to its shareholders the approval of the transactions contemplated by this Agreement.

8 Corrections to Offer Documents

Each party hereto shall notify the other parties if any of the information supplied by that party to either of the other parties for inclusion in any of the Offer Documents becomes false or misleading in any material respect and supply the information needed to correct the misstatement.

9 Rights Under Stock Option Plans

a) The holders of the Company's outstanding stock options relating to Company Shares will receive stock options relating to Offeror Shares (the "New Options") at an exchange ratio of 34 : 1 (no cash component). The New Options will vest 30 days after completion of the Offer, and the exercise period will be 18 months. The strike price of the New Options will be calculated by dividing the existing strike price of the option by 34 and converting this into GBP at the prevailing exchange rate at the Completion Date.

Combination Agreement -11-

b) Smith & Nephew and the Offeror shall take all steps necessary and procure the required approvals to roll over Smith & Nephew's share options into the Offeror to the extent such options are capable of rollover.

II COVENANTS

1 Board Representation

The Offeror will take all action necessary to ensure independent non-executive representation of the Company by two persons on the Offeror's board, it being understood that Dr. Max Link is invited to join the board of the Offeror as a Vice Chairman and Rene Braginsky is invited to join the board of the Offeror as a director.

2 Company's Manufacturing Facilities

The Offeror and Smith & Nephew each intends the Winterthur facility continuing to be an important centre of the combined group for a number of years.

3 Management

The Offeror and Smith & Nephew will each use its reasonable endeavours to offer senior operating management of the Company suitable posts in the combined group.

4 Listing

The Offeror and Smith & Nephew will each use its reasonable best efforts to obtain a secondary listing of the Offeror Shares on the SWX Swiss Exchange as of the Completion Date.

5 No Solicitation

a) The Company agrees that it shall immediately cease and cause to be terminated all existing discussions, negotiations and communications with any persons with respect to any Acquisition Transaction (as defined below). The Company agrees that it shall not solicit or initiate any discussions or negotiations with any corporation, partnership, person or other entity or group (other than Smith & Nephew or any affiliate or associate of Smith & Nephew) concerning any merger, consolidation, business combination, liquidation, reorganization, sale of substantial assets, sale of shares of capital stock or similar transactions involving the Company or any material subsidiary of the Company (each an "Acquisition Transaction"); pro-

Combination Agreement -12-

vided, however, that nothing contained in this Section II.5 shall prohibit the Company or its board of directors from taking and disclosing to the Company's shareholders, or any third parties or governmental or regulating bodies, a position with respect to an Acquisition Transaction initiated by a third party or from making such other disclosure to the Company's shareholders, or any third parties or governmental or regulating bodies, which, as advised by outside counsel, is advisable under applicable law.

b) The Company shall promptly advise Smith & Nephew of the Company's receipt of any proposal relating to an Acquisition Transaction and any request for information that may reasonably be expected to lead to or is otherwise related to any Acquisition Transaction, the identity of the person making such proposal relating to an Acquisition Transaction or request for information and, subject to applicable law and the requirements of any regulatory authorities, the terms and conditions of such proposal relating to an Acquisition Transaction.

6 Co-operation; Confidentiality

a) From the date hereof until the Completion Date, the Company agrees to cooperate with the Offeror and Smith & Nephew in their efforts to develop high-level integration plans to facilitate a rapid combination of the operations upon completion of the Transaction.

b) All information obtained by the Offeror, Smith & Nephew or their representatives pursuant to this Section 6 shall be kept confidential in accordance with the confidentiality agreement, dated 19 December 2002 (the "Confidentiality Agreement"), between Smith & Nephew and the Company.

7 Cost Reimbursement

a) The parties agree on a fixed compensation sum of CHF 20 million (the "Cost Reimbursement") as further set out in Sub-Sections II.7 b) and
c) in the event that the Transaction is pre-announced but not completed. Such fixed compensation sum shall represent a lump sum payment for the purpose of compensating the recipient for damages for internal expenditures and external costs and lost revenues incurred in connection with the preparation for and in consideration of the realization of the combination of the businesses of Smith & Nephew and the Company, and is not intended in any way whatsoever to coerce a party into completing the Transaction.

b) Smith & Nephew will pay the Cost Reimbursement to the Company if the non-completion of the Transaction is attributable to (i) the failure of Smith & Nephew

Combination Agreement -13-

or its board of directors to recommend this Agreement and the transactions contemplated by this Agreement to its shareholders or the withdrawal or the modification of such recommendation, (ii) the failure of Smith & Nephew or the Offeror (as appropriate) to publish the Pre-Announcement as agreed herein (save for modifications required by the STOB) or any other material breach of this Agreement by Smith & Nephew or the Offeror, (iii) the material contravention of Smith & Nephew or the Offeror of any material laws and regulations that apply to the Offer, or (iv) the non-satisfaction of any of the Conditions
(1), (2) or (4).

c) The Company will pay the Cost Reimbursement to Smith & Nephew if the non-completion of the Transaction is attributable to (i) the failure of the Company or its board of directors to recommend the Offer to its shareholders or the withdrawal or the modification of the Recommendation, (ii) the material contravention of the Company of any material laws and regulations that apply to the Offer, (iii) a material breach of this Agreement by the Company, or (iv) the non-satisfaction of any of the Conditions (6) or (7) or the successful completion of a competing public offer by a third party, it being understood, however, that if the Offeror or Smith & Nephew becomes subject to an event referred to in Condition 7 mutatis mutandis in relation to Smith & Nephew's products, or its facilities in Hull or Memphis, the Company will not have to pay any Cost Reimbursement.

8 Conduct of Business

Except as contemplated by this Agreement, during the period from the date of this Agreement to the Completion Date, each of the Company, Smith & Nephew and their respective subsidiaries will conduct its operations according to its ordinary and usual course of business and consistent with past practice and will use all reasonable efforts consistent with prudent business practice to preserve intact the business organization, to keep available the services of its current officers and key employees and to maintain existing relationships with those having significant business relationships with the respective party and its subsidiaries, in each case in all material respects. By way of amplification and not limitation, neither the Company nor any of its subsidiaries shall between the date hereof and the Completion Date without the prior written consent of Smith & Nephew, which is not to be unreasonably withheld, do or propose to do any of the following, except to the extent contemplated by this Agreement:

a) change the articles of association, with the exception of the changes proposed to the shareholders of the Company in the invitation to the Company's AGM of 30 April 2003;

b) make improvements to the employment contracts or other arrangements with their directors or officers;

Combination Agreement -14-

c) amend or terminate or enter into any material contracts;

d) initiate or agree on acquisitions or divestitures or financing, financial, capital market transactions of more than CHF 70 million in aggregate or dispose of, in whole or in part , its orthopedics, spine-tech or dental divisions;

e) issue any shares (save for shares issued for management options issued under the Option Plans and disclosed in the Company's financial statements for the financial year 2002), options, warrants, convertible securities or other rights of any kind to acquire Company Shares; and

f) purchase any Company Shares for the period from the publication of the public announcement until the Completion Date; and

g) distribute, either directly or indirectly (e.g. by share buy backs), any dividend or other distribution to its shareholders.

9 Reasonable Efforts; Filings

Subject to the terms and conditions herein provided for and to the fiduciary duties of the board of directors of the Company under applicable law as advised by legal counsel, each of the parties hereto agrees to use all reasonable efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations, including without limitation to make all national filings under applicable competition laws, to complete and make effective, as soon as practicable, the transactions contemplated by this Agreement.

10 Notification of Certain Matters

The Company shall give prompt notice to Smith & Nephew, and Smith & Nephew shall give prompt notice to the Company, of any failure of such party (or, in the case of Smith & Nephew, the Offeror) to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder.

III TERMINATION AND AMENDMENT

1 Termination

This Agreement may be terminated:

Combination Agreement -15-

a) At any time by mutual written consent of the boards of directors of the Company and Smith & Nephew;

b) by Smith & Nephew (i) in the event of a material breach of the Agreement (which, for the avoidance of doubt, shall include any breach of Sections II.8 d), f) and g)) or a material contravention of the applicable laws and regulations by the Company, (ii) if the Company's board of directors withdraws or otherwise modifies the Recommendation, or (iii) if the Offer is not completed due to the non-satisfaction of a Condition;

c) by the Company (i) in the event of a material breach of this Agreement or a material contravention of the applicable laws and regulations by the Offeror or Smith & Nephew, (ii) if the Offer is not completed due to the non-satisfaction of a Condition, or (iii) if the Company receives an offer with respect to an Acquisition Transaction with a party other than the Offeror or its affiliates or such other party has commenced a tender offer which, in either case, the board of directors of the Company, after having granted the Offeror the reasonable opportunity to increase the value of the Offer, believes in good faith is more favourable to the Company's shareholders than the transactions contemplated by this Agreement.

2 Effect of Termination

a) If this Agreement is terminated pursuant to Section III.1 above, this Agreement, except for the provisions of this Section and Sections
II.6(b), II.7 and IV hereof, shall forthwith become void and have no effect, without any liability on the part of any party or its directors, officers or shareholders. However, nothing in this Section
III.2 shall relieve any party to this Agreement of liability for breach of this Agreement or for a contravention of the applicable laws and regulations.

b) The Confidentiality Agreement shall remain in full force and effect following any termination of this Agreement, and all confidential material shall be either destroyed or returned promptly.

3 Amendment

This Agreement may not be amended except by an instrument in writing signed on behalf of all of the parties.

Combination Agreement -16-

IV MISCELLANEOUS

1 Waiver of Standstill Provisions

Whereas the Offeror and Smith & Nephew are entering into separate acquisition agreements in relation to the Company Shares under the Parallel Public Offer, and whereas under the terms of subparagraph 7 of the Confidentiality Agreement, the accompanying side letter agreement dated December 19, 2002 and section 4(b) of the process letter from the Company's financial advisors to Smith & Nephew's financial advisor dated January 29, 2003 (together the "Standstill Provisions"), Smith & Nephew has agreed not to acquire, directly or indirectly, any Company Shares without the prior approval of the Company, the Standstill Provisions are hereby waived (1) with respect to Company Shares indirectly acquired in connection with the exchange offer by the Offeror with respect to the Shareholder, and (2) with respect to purchases made pursuant to the Offer.

2 Entire Agreement; Assignment

Except for the Confidentiality Agreement, this Agreement (a) constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof, (b) shall not be assigned by operation of law or otherwise and (c) shall not be for the benefit of a third party.

3 Validity

The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect.

4 Notices

All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, by facsimile transmission with confirmation of receipt, or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties as follows:

Combination Agreement -17-

if to the Offeror or Smith & Nephew:

Heron House
15 Adam Street
London WC2N 6LA
For the attention of: Company Secretary

if to the Company:

Centerpulse Ltd
Andreasstrasse 15
CH-8050 Zurich
For the attention of: Company Secretary

or to such other address as the person to whom notice is given may have previously furnished to the others in writing in the manner set forth above (provided that notice of any change of address shall be effective only upon receipt thereof).

5 Fees and Expenses

Whether or not the Offer is consummated, all costs and expenses incurred in connection with the transactions contemplated by this Agreement shall be paid by the party incurring such expenses, except as provided expressly to the contrary herein.

6 Public Disclosure

The Offeror and Smith & Nephew (and their affiliates) and the Company (and its affiliates) will consult with each other and agree on the desirability, timing and substance of any press release, public announcement, publicity statement or other disclosure relating to the Transaction or the business of a party hereto (including in particular any product recall liability) and, subject to applicable laws, stock exchange rules and the requirements of any regulatory authorities, neither Smith & Nephew or the Offeror (nor their affiliates) nor the Company (or its affiliates) will make any public disclosures without the prior consent of the other party (which consent shall not be unreasonably withheld) as to the timing of such disclosure, extent of distribution and form and substance thereof.

Combination Agreement -18-

7 Governing Law

This Agreement shall be governed by and construed in accordance with the laws of Switzerland regardless of the laws that might otherwise govern under principles of conflicts of laws applicable thereto.

8 Arbitration

The parties hereto consent and agree that all disputes out of or in connection with the Agreement, including disputes on its execution, binding effect, performance, amendment and termination, shall be resolved to the exclusion of the ordinary courts by a three-person arbitral tribunal in accordance with the International Arbitration Rules of the Zurich Chamber of Commerce. If there are not more than two parties involved each party nominates an arbitrator. The decision of the arbitral tribunal shall be final, and the parties waive all challenge of the award in accordance with article 192 of the Swiss Act on Private International Law.

* * * * *

In witness whereof, each of the parties has caused this Agreement to be executed on its behalf by its officers thereunto duly authorized, all at or on the day and year first above written.

Combination Agreement -19-

Meadowclean Limited

By:     /s/ Pierre-Andre Chapatte
     ----------------------------------
Name:   Pierre-Andre Chapatte
Title:  Director


By:     /s/ Antoine Vidts
     ----------------------------------
Name:   Antoine Vidts
Title:  Director

Smith & Nephew plc

By:     /s/ Christopher J. O'Donnell
     ----------------------------------
Name:   Christopher J. O'Donnell
Title:  Chief Executive


By:     /s/ Peter Hooley
     ----------------------------------
Name:   Peter Hooley
Title:  Finance Director

Centerpulse Ltd

By:     /s/ Dr. Max Link
     -----------------------------------
Name:   Dr. Max Link
Title:  Chairman & CEO


By:     /s/ Urs Kamber
     -----------------------------------
Name:   Urs Kamber
Title:  CFO

Exhibit 4a(iii)

Execution Copy

TRANSACTION AGREEMENT

                               dated 20 March 2003

                                     between

InCentive Capital AG
c/o Bar & Karrer, Baarerstrasse 8,
CH-6301 Zug, Switzerland                                           ("InCentive")

                                       and

Smith & Nephew plc.
Heron House, 15 Adam Street,                              ("Smith & Nephew plc")
London WC2N 6LA, United Kingdom

                                       and

Meadowclean Limited
(to be renamed Smith & Nephew Group plc)            ("Smith & Nephew Group plc")
122 Moulin de la Ratte,
CH-1236 Cartigny, Geneva, Switzerland

Regarding

A Public Tender Offer to all Shareholders of InCentive

WHEREAS:

(A) Smith & Nephew plc is an English company limited by shares with principal place of business in England whose ordinary share capital amounts to GBP 113,560,138.10, divided into 929,128,403 ordinary shares of 12 2/9 pence nominal value each, listed on the London Stock Exchange and, in the form of American Depositary Receipts, on the New York Stock Exchange.

(B) Centerpulse AG ("Centerpulse") is a Swiss company limited by shares with registered seat in Zurich whose share capital amounts to CHF 354,919,350, divided into 11,830,645 registered shares with a par value of CHF 30 each (the "Centerpulse Shares"), listed on the SWX Swiss Exchange and, in the form of American Depository Receipts, on the New York Stock Exchange.

(C) Desirous to combine their respective businesses, Centerpulse and Smith & Nephew plc and Smith & Nephew Group plc have agreed that Smith & Nephew plc, or Smith & Nephew Group plc, the proposed new holding company of Smith & Nephew, which will be a UK registered public company, resident in Switzerland, and listed on the London Stock Exchange and on the SWX Swiss Exchange, shall submit a public tender offer for all publicly held Centerpulse Shares on the terms and subject to the conditions of a transaction agreement of even date (the "Centerpulse Tender Offer"). Except where specifically otherwise provided, all references to "Smith & Nephew" in this Agreement therefore include Smith & Nephew plc and Smith & Nephew Group plc, and all references to "Smith & Nephew Shares" shall include the shares of Smith & Nephew plc listed on the London Stock Exchange or as appropriate the shares of Smith & Nephew Group plc to be listed on the London Stock Exchange and the SWX Swiss Exchange.

(D) InCentive, a Swiss company limited by shares with registered seat in Zug whose share capital amounts to CHF 42,944,040, divided into 2,147,202 fully paid-up bearer shares with a par value of CHF 20 each which are listed on the SWX Swiss Exchange (the "InCentive Shares"), holds, at the Signing Date, indirectly through its wholly-owned subsidiary InCentive Jersey Ltd., 13.14% of the Centerpulse Shares and rights to acquire further 5.77% of the Centerpulse Shares, all as set forth in Schedule (D).

(E) Concurrently with the Centerpulse Tender Offer, Smith & Nephew wishes to submit a public tender offer to all shareholders of InCentive, conditional upon com-

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pletion (Zustandekommen) of the Centerpulse Tender Offer, and InCentive wishes to agree on certain covenants in respect of such public tender offer.

(F) "Zurich" Versicherungs-Gesellschaft, III Institutional Investors International Corp., Mr. Rene Braginsky and Mr. Hans Kaiser, the main shareholders of InCentive holding in the aggregate 1,650,190 InCentive Shares representing approximately 76.85% of the voting rights and capital stock of InCentive (collectively the "Shareholders"), have agreed to tender their InCentive Shares under the Public Tender Offer according to the terms and conditions of a tender agreement of even date (the "Tender Agreement").

NOW, THEREFORE, the Parties agree as follows:

1. DEFINED TERMS

As used in this Agreement, the capitalised terms shall have the meaning set forth in Schedule 1.

2. PUBLIC TENDER OFFER

2.1. The Offer

2.1.1. On the terms and subject to the conditions set forth in this Agreement, Smith & Nephew shall submit a public tender offer for all InCentive Shares which are presently issued and which may be issued from the Signing Date until the last day of the Statutory Extension Period other than any InCentive Shares held by InCentive itself or by any of its subsidiaries (the "Public Tender Offer").

2.1.2. Smith & Nephew shall publish the pre-announcement (Voranmeldung) relating to the Public Tender Offer, as contained in Schedule 2.1.2, (the "Pre-Announcement") in the electronic media on the Signing Date.

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2.2. The Offer Price

(a) The offer price per InCentive Share to be offered by Smith & Nephew in the Public Tender Offer (the "Offer Price") shall be:

a + b

where:

a    is   the total amount of Smith & Nephew Shares and amount of cash
          that would be payable to InCentive under the Centerpulse
          Tender Offer for the Centerpulse Shares held by InCentive
          (the "Centerpulse Holding");

b    is   the adjusted net asset value (positive or negative) of
          InCentive as determined in accordance with Schedule 2.2(a)
          (the "Adjusted NAV") calculated as at the last day of the
          Offer Period, but excluding the Centerpulse Holding, and
          attributing no value to any InCentive Shares held by
          InCentive or its subsidiaries (the "Treasury Shares"), as
          confirmed by InCentive's auditors;

c    is   the total number of InCentive Shares in issue on the last
          day of the Offer Period less the number of Treasury Shares
          on that date.

          The consideration for each InCentive Share will consist of
          (i) an element of Smith & Nephew shares and cash which will
          mirror the Centerpulse Holding; plus or minus (ii) the cash
          equivalent to the Adjusted NAV excluding the Centerpulse
          Holding. If the Adjusted NAV excluding the Centerpulse
          Holding is negative, then the cash element attributable to
          the Centerpulse Holding shall be reduced, pro tanto, and if
          after such reduction there is still a negative balance, the
          number of Smith & Nephew shares to be issued shall be
          reduced by a corresponding amount calculated by reference to
          the average closing prices of Smith & Nephew Shares of the
          fifth to the third Business Day prior to the Settlement
          Date.

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(b) The Offer Price shall be adjusted for any dilutive effects in respect of the InCentive Shares (to the extent they have not been reflected in the Adjusted NAV) or the Smith & Nephew Shares (save for shares issued for management options issued under the Smith & Nephew employee share schemes and disclosed in the Smith & Nephew financial statements for the financial year 2002), including dividend payments (save for dividends already declared by Smith & Nephew or an interim dividend thereafter declared by Smith & Nephew in the normal course), capital increases below market value, or the issuance of options (save for management options issued under the Smith & Nephew employee share schemes in the normal course consistent with past practice), warrants, convertible securities and other rights of any kind to acquire InCentive shares or Smith & Nephew shares as the case may be.

(c) Accepting InCentive shareholders under the Public Tender Offer and accepting Centerpulse shareholders under the Centerpulse Tender Offer (together the "Accepting Shareholders") may elect to take fewer Smith & Nephew Shares or more Smith & Nephew Shares than their basic entitlement under the relevant offer, but elections under both offers (taken together) to take more Smith & Nephew Shares (together the "Excess Shares") will only be satisfied to the extent that elections have been made under both offers (taken together) by Accepting Shareholders to take fewer Smith & Nephew Shares (together referred to as the "Available Shares"). The Available Shares will be allocated to the applicants for Excess Shares in proportion to the number of Excess Shares applied for. If the total number of Available Shares exceeds the total number of Excess Shares applied for, the Available Shares shall be limited to an amount equal to the Excess Shares. Once the share allocations have been determined, the cash element of the consideration will be reduced or increased (as the case may be) for each Accepting Shareholder who has been allocated an increased or reduced number of Smith & Nephew Shares. All calculations shall be made by reference to the number of acceptances and elections as of the last day of the additional acceptance period.

(d) Fractions of Smith & Nephew Shares shall not be allotted or issued to accepting InCentive shareholders but will be aggregated and sold in the market, and the net proceeds of sale shall be distributed on a pro rata basis to the

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InCentive shareholders who accept the Public Tender Offer and are entitled to them.

(e) The consideration payable for the Centerpulse Shares under the Centerpulse Tender Offer shall comprise for each Centerpulse Share:

(i) 25.15 new Smith & Nephew Shares; and

(ii) CHF 73.42 in cash.

2.3. Conditions of the Public Tender Offer

The Public Tender Offer shall be subject to the fulfilment or waiver by Smith & Nephew of the conditions as set forth in the Pre-Announcement.

2.4. Implementation by Smith & Nephew of the Public Tender Offer

Following the date of this Agreement, Smith & Nephew shall:

(a) use commercially reasonable efforts to prepare and, each time within the statutory period of time, publish the prospectus (the "Offer Prospectus") and such other documents relating to the Public Tender Offer as are required by law (the "Offer Documents"), each time after having consulted with InCentive and its advisers and after having given InCentive and its advisers reasonable opportunity to review and comment on the Offer Documents; and

(b) use commercially reasonable efforts that the conditions of the Public Tender Offer set forth in par. g) of the Pre-Announcement and the conditions of the Centerpulse Tender Offer set forth in the Centerpulse Pre-Announcement contained in Schedule 2.4(b) which are under control of Smith & Nephew are satisfied.

2.5. Secondary Listing of Smith & Nephew Shares

Smith & Nephew shall use all reasonable efforts to procure that the Smith & Nephew Shares obtain a secondary listing on SWX Swiss Exchange as of the Settlement Date or as soon as possible thereafter.

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3. OBLIGATIONS OF INCENTIVE IN RELATION TO THE PUBLIC TENDER OFFER

3.1. Non-solicitation

3.1.1. InCentive agrees that it shall immediately cease and cause to be terminated all existing discussions, negotiations and communications with any persons with respect to any Acquisition Transaction (as defined below). Except as otherwise contemplated by this Agreement, none of InCentive or its subsidiaries shall solicit or initiate any discussions or negotiations with any corporation, partnership, person or other entity or group (other than Smith & Nephew or any affiliate or associate of Smith & Nephew) concerning any merger, consolidation, business combination, liquidation, reorganisation, sale of substantial assets, sale of shares of capital stock or similar transaction involving InCentive or any subsidiary of InCentive or the Centerpulse Holding (each an "Acquisition Transaction"), provided that nothing contained in this
Section 3.1 shall restrict InCentive's board of directors in taking and disclosing to InCentive's shareholders or any third parties or governmental or regulatory bodies a position with respect to an Acquisition Transaction initiated by a third party, or in making such other disclosure to InCentive's shareholders or any third parties or governmental or regulatory bodies which, as advised by outside counsel, is advisable under applicable law.

3.1.2. InCentive shall promptly advise Smith & Nephew of InCentive's receipt of any substantive proposal relating to an Acquisition Transaction and any substantive request for information that may reasonably be expected to lead to or is otherwise related to any Acquisition Transaction, the identity of the person making such Acquisition Transaction or request for information and the terms and, subject to applicable law and the requirements of any regulatory authorities, conditions of such Acquisition Transaction.

3.2. No Acquisition and Disposal of Shares

Unless Smith & Nephew shall have given its prior written consent or declared that the Public Tender Offer has failed, none of InCentive or its subsidiaries shall, after the Signing Date:

(a) acquire any Centerpulse Shares or rights to acquire Centerpulse Shares other than through the exercise or termination of the Centerpulse options in accor-

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dance with Section 3.7 or, subject to Section 3.3, sell or otherwise dispose of any Centerpulse Shares or rights to acquire Centerpulse Shares, provided that InCentive shall have the right to procure that its subsidiaries transfer to it all Centerpulse Shares held by them;

(b) acquire or sell any InCentive Shares or rights to acquire or sell InCentive Shares, provided that sales of treasury shares to non-related third parties shall be permitted; or

(c) acquire any Smith & Nephew Shares or rights to acquire Smith & Nephew Shares except through the settlement of the Public Tender Offer.

3.3. Tender of Centerpulse Shares

In the event that, without the prior consent of Smith & Nephew, and to the extent that any of the following items cannot be or is not deducted in full in calculating the Adjusted NAV:

(a) InCentive or any of its subsidiaries disposes of any of its Centerpulse Shares or enters into any derivative arrangement for the disposal of Centerpulse Shares, provided that InCentive shall have the right to procure that its subsidiaries transfer to it all Centerpulse Shares held by them; or

(b) InCentive does not dispose of any of its material assets according to Section 3.9 and the Shareholders have not agreed with Smith & Nephew provisions as to an addition to the escrow referred to in the Tender Agreement and such other comfort, indemnity and hold harmless arrangements as Smith & Nephew shall reasonably request; or

(d) during the Offer Period not all of the bank guarantees (indemnity letters) and keep-well obligations issued by InCentive are terminated or InCentive has not otherwise been released of its obligations thereunder according to Section 3.10; or

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(e) the current members of the board of directors of InCentive have not resigned according to Section 3.7.1; or

(f) the general meeting of InCentive has not passed the resolutions set forth in Section 3.7.2; or

(g) during the Offer Period any of InCentive or the Shareholders or any person related with any of them pursuant to article 15 SESTO-FBC directly or indirectly purchases any Centerpulse Shares above the value of the offer price under the Centerpulse Offer at the time;

then, and only then, InCentive shall, if required by Smith & Nephew, tender or procure that the banks tender pursuant to Section 3.4(c) and
(d) the Centerpulse Shares held by it or them to Smith & Nephew pursuant to the Centerpulse Tender Offer.

3.4. Share Deposit Confirmations

3.4.1. InCentive shall use best efforts to procure that each bank where the Centerpulse Shares held by InCentive are deposited delivers to Smith & Nephew, as soon as possible but not later than ten Business Days after the Signing Date, a confirmation in writing confirming that the Centerpulse Shares are deposited with such bank and shall remain deposited with such bank until the earlier of

(a) the Settlement Date; or

(b) Smith & Nephew having declared that the Public Tender Offer has failed or lapsed; or

(c) such bank having received joint written instructions from InCentive and Smith & Nephew to release such Centerpulse Shares; or

(d) an instruction of an Expert (as defined in Section 3.4.2) having been delivered to such bank, accompanied by a copy of a letter by which such Expert is appointed either jointly by Smith & Nephew and InCentive or by the President of the Zurich Chamber of Commerce.

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3.4.2. For the purpose of Section 3.4.1(d), the Parties shall within ten Business Days from the Signing Date agree on a fast track process and an expert who shall be a professional person (the "Expert") who is willing and able to render a decision within a time frame not exceeding five Business Days commencing no later than the 30th Business Day of the Offer Period which shall be, for the purposes of this Section 3.4, binding on the Parties. In default of agreement on the fast track process and the identity of the Expert within such ten Business Days period, the President of the Zurich Chamber of Commerce may be requested by either Party to appoint the Expert who shall determine the process and render a decision which shall be, for the purpose of this
Section 3.4, binding upon the Parties.

3.5. No Tender of InCentive Treasury Shares

InCentive shall not tender any treasury InCentive Shares held by it or any of its subsidiaries under the Public Tender Offer and shall not dispose of any such shares.

3.6. Report of InCentive's Board of Directors

InCentive hereby confirms that its board of directors has, subject to the receipt of a fairness opinion, (i) determined that this Agreement and the transactions contemplated thereby are fair to, and in the best interests of, InCentive's shareholders, (ii) approved this Agreement and (iii) resolved unanimously to recommend acceptance of the Public Tender Offer in accordance with Article 29 (1) SESTA in a timely manner so that such report can be attached to the Offer Prospectus.

3.7. Resignation of Board Members; Shareholders' Meeting

3.7.1. Subject to completion (Zustandekommen) of the Public Tender Offer and effective from the Settlement Date, InCentive shall procure that all members of InCentive's board of directors resign from InCentive's board of directors.

3.7.2. InCentive shall procure that a shareholders' meeting of InCentive is held during the Offer Period for the passing of the resolutions necessary for the satisfaction of the conditions precedent set forth in the conditions section of the Pre-Announcement and a resolution approving this Agreement and the transactions contemplated

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thereby, in particular the conditional tender of Centerpulse Shares in accordance with Section 3.3 and the sale of subsidiaries.

3.8. Exercise or Termination of Centerpulse Share Options

InCentive shall exercise or terminate, as soon as reasonably possible after the Signing Date but in any event prior to the expiry of the Offer Period, the options on Centerpulse Shares set forth in Schedule (D), provided that such options may not be exercised or terminated if (i) the exercise or termination of such options would infringe, to the extent applicable, US laws and regulations, or (ii) Smith & Nephew would become required by law to increase the offer price under the Centerpulse Tender Offer or the Public Tender Offer as a result of the exercise or termination of such options.

3.9. Divestiture of Certain Assets

InCentive shall sell and transfer, effective prior to the expiry of the Offer Period, all its assets (including the shares of all its subsidiaries) other than (i) all Centerpulse Shares held by it on the Signing Date and acquired by it through the exercise or termination of the options according to Section 3.7 and (ii) cash. InCentive shall procure that:

(a) any Centerpulse Shares or options on Centerpulse Shares held by any of its direct or indirect subsidiaries are transferred to InCentive prior to the disposal of such subsidiaries;

(b) the consideration for such divestitures consists in cash and is paid, without any contingency or condition, by the respective buyer in full prior to the expiry of the Offer Period without there being any deferred component to be paid or collected after the expiry of the Offer Period; and

(d) the sale and purchase agreements in relation to InCentive's direct or indirect subsidiaries and the sale and purchase agreements in relation to InCentive's

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direct or indirect private equity interests, do not contain any representations or warranties or indemnities or other residual liabilities of InCentive.

3.10. Termination of Certain Agreements

InCentive shall terminate, or procure its release after the Signing Date from all material agreements to which it is a party, including bank guarantees (indemnities) and keep-well obligations and material agreements with, banks and asset managers. To the extent that payments have to be made under such agreements by InCentive after the expiry of the Offer Period, such future payments shall be taken into account in full in calculating the Adjusted NAV.

3.11. Determination of the Adjusted NAV and Establishment of Interim Financials

InCentive shall procure that the Adjusted NAV is determined according to
Section 2.2 and that interim financial statements of InCentive as at the last day of the Offer Period are established, consisting of a balance sheet, profit and loss statements and notes (the "Interim Financials"), and that the determination of the Adjusted NAV by InCentive and its auditors PricewaterhouseCoopers and the Interim Financials are delivered to Smith & Nephew in a timely manner, i.e. on the second Business Day, after the expiry of the Offer Period in order to allow Smith & Nephew to publish the definite Purchase Price in the notification of the interim results of the Public Tender Offer by the fourth Business Day after the expiry of the Offer Period. InCentive shall procure that Ernst & Young, acting on behalf of Smith & Nephew, are given reasonable opportunity to participate in the preparation of the Interim Financials and the determination of the Adjusted NAV by InCentive and its auditors PricewaterhouseCoopers.

3.12. Collection of Receivables

InCentive shall use reasonable best efforts to collect any receivables prior to the expiry of the Offer Period.

3.13. Further Undertakings by InCentive

Prior to the expiry of the Offer Period, InCentive shall:

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(a) not issue any new shares or equity related financial instruments; and

(b) comply with all disclosure and reporting obligations under the SESTA and the related ordinances;

(c) provide in a timely manner the information required by Smith & Nephew in relation to the preparation of the Offer Documents.

3.14. Tier I Test

InCentive does not know, or have reason to know, that more than 10% of the outstanding InCentive Shares, after deducting from the outstanding amount any InCentive Shares held by InCentive or shareholders holding in excess of 10% of the outstanding InCentive Shares, are held by U.S. holders.

4. CONDUCT OF BUSINESS BETWEEN THE SIGNING DATE AND THE SETTLEMENT DATE

Except as otherwise contemplated by this Agreement, during the period from the Signing Date until the Settlement Date, each of InCentive and its subsidiaries and Smith & Nephew and its subsidiaries shall conduct their respective operations according to their ordinary and usual course of business and consistent with past practice and use all reasonable efforts consistent with prudent business practice to preserve intact the business organisation, to keep available the services of its and their current officers and key employees and to maintain existing relationships with those having significant business relationships with the respective party and its subsidiaries, in each case in all material respects.

5. COVENANTS

5.1. Merger and Other Filings

Subject to the terms and conditions of this Agreement and to the fiduciary duties of the board of directors under applicable law as advised by legal counsel, InCen-

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tive and Smith & Nephew shall use all reasonable efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations, including without limitation to make all national filings under applicable competition laws, to complete and make effective, as soon as practicable, the transactions contemplated by this Agreement.

5.2. Notification of Certain Matters

InCentive shall give prompt notice to Smith & Nephew, and Smith & Nephew shall give prompt notice to the InCentive, of any failure of such party to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder.

5.3. Corporate Name, Trademarks and Domain Name "InCentive"

5.3.1. As from the Settlement Date, any rights to use the word or logo "InCentive" or any combination including the word or logo "InCentive" in connection with corporate names, trade names, trade and service marks, domain names, logos or otherwise shall be the sole and unrestricted property of InCentive Asset Management AG or any other company controlled by or under common control of Rene Braginsky. Any transfer by InCentive shall be effected without residual liabilities to InCentive.

5.3.2. Smith & Nephew shall procure that InCentive and its subsidiaries as soon as possible and in no event later than three months after the Settlement Date change their the corporate names, trade names, trade and service marks, domain names and logos so that they no longer include the word or logo "InCentive" or any combination containing the word or logo "InCentive" or any other word or words or logo or logos resembling the word or logo "InCentive". Subject to the first sentence of this Section 5.3.2, as from the Settlement Date, Smith & Nephew shall not use, and shall procure that InCentive and its subsidiaries cease and desist from using, the word or logo "InCentive" or any combination including the word or logo "InCentive" in any manner whatsoever in connection with corporate names, trade names, trade and service marks, domain names, logos or otherwise.

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6. INDEMNITY

In the event that InCentive or any of its subsidiaries acquires or agrees to acquire any Centerpulse Shares or any InCentive Shares or any rights to acquire Centerpulse Shares or InCentive Shares after the Signing Date and Smith & Nephew is, as a result of any such acquisition, required by law to increase the offer price under the Centerpulse Tender Offer or the Public Tender Offer, then InCentive shall indemnify Smith & Nephew for, and hold Smith & Nephew harmless from, any damages, loss, claims, cost and expenses (including reasonable attorney's fees and expenses) incurred or payable by Smith & Nephew as a result of such required offer price increase, provided that InCentive shall have the right to defend against such asserted obligation of Smith & Nephew to increase the offer price. Any such asserted obligation of Smith & Nephew shall be included as a liability in the calculation of the Adjusted NAV per InCentive Share pursuant to Section 2.2.

7. TERMINATION

7.1. By InCentive

InCentive shall have the right to terminate this Agreement by notice to Smith & Nephew with immediate effect in any of the following events:

(a) The Pre-Announcement is not made according to Section 2.1.2.

(b) In the circumstances envisaged by Section 3.2.3(c) of the Tender Agreement, after release of the InCentive Shares as set forth therein.

(c) Any of the conditions of the Public Tender Offer is not satisfied or waived by Smith & Nephew according to the Pre-Announcement and the Offer Prospectus, as the case may be, or the Public Tender Offer is not successful for any other reason.

7.2. By Smith & Nephew

Smith & Nephew shall have the right to terminate this Agreement by notice to InCentive with immediate effect if (a) any of the conditions of the Public Tender Of-

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fer is not satisfied or waived by Smith & Nephew according to the Pre-Announcement and the Offer Prospectus, (b) the Public Tender Offer fails for any other reason; or (c) there is a breach by InCentive of
Section 3.2 hereof. Smith & Nephew shall have the right to terminate this Agreement partially if an event such as is set forth in Section 3.2 has occurred and Smith & Nephew is, as a result thereof, required by law to increase the offer price under the Centerpulse Tender Offer or the Public Tender Offer, to the extent necessary to avoid an obligation to increase the Offer Price pursuant to article 10 (6) TOO.

7.3. Effect of Termination

In the event of a termination by Smith & Nephew or InCentive, the provisions of this Agreement shall cease to have any effect except for the provisions of Section 8 and Section 9 which shall continue to be in effect for an indefinite period of time. Any such termination shall be without prejudice to the liabilities of any Party for breach of this Agreement prior to termination.

8. MISCELLANEOUS

8.1. Entire Agreement; Modifications

Except for the confidentiality agreement executed in connection with and prior to this Agreement, this Agreement constitutes the entire agreement of the Parties concerning the object of this Agreement and supersedes all previous agreements or arrangements, negotiations, correspondence, undertakings and communications, oral or in writing. This Agreement including this Section shall be modified only by an agreement in writing executed by the Parties which shall explicitly refer to this Section.

8.2. No Waiver

The failure of either of the Parties to enforce any of the provisions of this Agreement or any rights with respect hereto shall in no way be considered as a waiver of such provisions or rights or in any way affect the validity of this Agreement. The

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waiver of any breach of this Agreement by either Party shall not operate to be construed as a waiver of any other prior or subsequent breach.

8.3. Severability

If any provision of this Agreement is held to be invalid or unenforceable for any reason, such provision shall, if possible, be adjusted rather than voided, in order to achieve a result which corresponds to the fullest possible extent to the intention of the Parties. The nullity or adjustment of any provision of this Agreement shall not affect the validity and enforceability of any other provision of this Agreement, unless this appears to be unreasonable for any of the Parties.

8.4. Notices

Any notice, request or instruction to be made under or in connection with this Agreement to InCentive shall be made to InCentive Asset Management AG who shall act as notification agent for InCentive under this Agreement. Any notice, request or instruction to be made under this Agreement shall be made in writing and be delivered by registered mail or courier or by facsimile (to be confirmed in writing delivered by registered mail or courier) to the following addresses (or such other addresses as may from time to time have been notified according to this
Section 8.4):

(a) If to Smith & Nephew: Smith & Nephew plc.

Attn. of Company Secretary
Heron House
15 Adam Street
London WC2N 6LA
United Kingdom
Facsimile: +44 207 930 3353

(b) If to Smith & Nephew

Group plc:               Smith & Nephew Group plc.
                         Attn. of Company Secretary
                         122 Moulin de la Ratte
                         CH-1236 Cartigny, Geneva

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Switzerland

with copies to:

Smith & Nephew plc.
Attn. of Company Secretary
Heron House
15 Adam Street
London WC2N 6LA
United Kingdom
Facsimile: +44 207 930 3353

(b) If to InCentive: InCentive Asset Management AG Todistrasse 36 8002 Zurich Switzerland Facsimile: + 41 1 205 93 05

with copies to:

Lombard Odier Darier Hentsch & Cie Zurich Branch Attn. of Mr. Romeo Cerutti Sihlstrasse 20 CH-8021 Zurich Switzerland Facsimile: +41 1 214 13 39

Lenz & Staehelin Attn. of Mr. Rudolf Tschani Bleicherweg 58 CH-8027 Zurich Switzerland Facsimile: +41 1 204 12 00

Any notice, request or instruction made under or in connection with this Agreement shall be deemed to have been delivered on the Business Day on which it has

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been dispatched or the fax confirmation been received by the Party making such notice, request or instruction.

8.5. Confidentiality and Press Releases

Without the prior written consent of the other Party, either Party shall not disclose to any third party and keep in strict confidence this Agreement and its contents and shall not publish any press release or make any public announcement in respect of the transactions contemplated by this Agreement, unless any such disclosure, press release or public announcement is required under applicable laws or stock exchange regulations or ordered by any competent judicial or regulatory authority or by any competent stock exchange (in which case the Parties shall, to the extent permissible, consult with each other prior to any such disclosure).

8.6. Assignment

None of the Parties shall assign this Agreement or any rights or obligations under this Agreement to any third party without the prior written consent of all of the other Parties.

8.7. Cost and Expenses; Taxes

Subject to Section 8.7, each Party shall bear all cost, expenses and taxes incurred by it in connection with the transactions contemplated by this Agreement, provided that (a) Smith & Nephew shall bear and pay the Swiss securities transfer tax (Umsatzabgabe) and any transfer cost and expenses resulting from the transfer of InCentive Shares and Centerpulse Shares to Smith & Nephew or Smith & Nephew Shares to the Shareholders, and (b) the transaction cost and expenses incurred by InCentive shall be subtracted in calculating the Adjusted NAV.

8.8. Break-up Fee

8.8.1. Smith & Nephew, and not, for the avoidance of doubt, in any circumstances, Smith & Nephew Group plc, shall pay to InCentive a lump sum cost reimbursement of CHF 4 million in the event that the Public Tender Offer is not successful for a reason attributable to (i) the failure of Smith & Nephew to publish the Pre-

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Announcement or any other material breach of this Agreement by Smith & Nephew, (ii) the contravention by Smith & Nephew of any applicable laws and regulations applying to the Public Tender Offer, or (iii) the non-satisfaction of the conditions listed in par. g) of the conditions section of the Pre-Announcement. The cost reimbursement is agreed for the sole purpose of compensating InCentive for frustrated actions and negotiation expenses and is not intended in any way whatsoever to coerce Smith & Nephew into completing the Public Tender Offer. Nothing contained in this Section 8.8.1 shall be deemed or construed to restrict the right of InCentive or the Shareholders to request specific performance or claim damages in excess of CHF 4 million.

8.8.2. InCentive shall pay to Smith & Nephew a lump sum cost reimbursement of CHF 4 million in the event that the Public Tender Offer is not successful for a reason attributable to (i) a material breach by InCentive of this Agreement, (ii) the contravention by InCentive of any applicable laws and regulations applying to the Public Tender Offer, or
(iii) the non-satisfaction of the conditions listed in par. c) of the conditions section of the Pre-Announcement, or (iv) the successful completion of a competing public tender offer for InCentive Shares by a third party. The cost reimbursement is agreed for the sole purpose of compensating Smith & Nephew for frustrated actions and negotiation expenses. Nothing contained in this Section 8.8.2 shall be deemed or construed to restrict the right of Smith & Nephew to request specific performance or claim damages in excess of CHF 4 million.

9. APPLICABLE LAW AND DISPUTE RESOLUTION

9.1. This Agreement is subject to and governed by Swiss substantive law.

9.2. Any disputes arising out of or in connection with this Agreement, including disputes regarding its conclusion, binding effect, amendment and termination, shall be finally resolved to the exclusion of the ordinary courts by a three-person arbitral tribunal in accordance with the International Arbitration Rules of the Zurich Chamber of Commerce. The arbitration shall be conducted in English and the place of arbitration shall be Zurich.

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IN WITNESS WHEREOF, the Parties have executed this Agreement on the date first above written.

Smith & Nephew plc

/s/ Christopher J. O'Donnell        /s/ Peter Hooley
------------------------------      ---------------------------------------

Name: Christopher J. O'Donnell      Name: Peter Hooley
     -------------------------           ----------------------------------

Title: Chief Executive              Title: Finance Director
      ------------------------            ---------------------------------


Meadowclean Limited


/s/ Antoine Vidts                   /s/ Pierre-Andre Chapatte
------------------------------      ---------------------------------------

Name: Antoine Vidts                 Name: Pierre-Andre Chapatte
     -------------------------           ----------------------------------

Title: Director                     Title: Director
      ------------------------            ---------------------------------


InCentive Capital AG


/s/ Eric Stupp                      /s/ Thomas Wyler
------------------------------      ---------------------------------------

Name: Eric Stupp                    Name: Thomas Wyler
     -------------------------           ----------------------------------

Title: Director                     Title: Member of the Management Board
      ------------------------            ---------------------------------

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Schedule (D)

CENTERPULSE SHARES AND CALL OPTIONS
ON CENTERPULSE SHARES OF INCENTIVE AT THE SIGNING DATE

As of the Signing Date, InCentive holds Centerpulse Shares and Centerpulse Share Options as follows:

Mango Shares:

-------------------------------------
  No. of Shares           %
-------------------------------------
      1,554,577            13.140
-------------------------------------

Call Options on Mango Shares:

------------------------------------------------------------------------------------------------------------
  Counter-party     No. of Options     Strike Price (CHF)      Expiry      No. of Mango Shares       %
------------------------------------------------------------------------------------------------------------
UBS                          200,000                  200.00   04/10/2003                 200,000      1.69
------------------------------------------------------------------------------------------------------------
ABN                           80,000                  195.00   04/10/2003                  80,000      0.68
------------------------------------------------------------------------------------------------------------
ABN                          160,000                  215.00   04/10/2003                 160,000      1.35
------------------------------------------------------------------------------------------------------------
Credit Suisse                100,000                  220.00   04/10/2003                 100,000      0.85
------------------------------------------------------------------------------------------------------------
LBF                           38,000                  240.00   05/15/2003                  38,000      0.32
------------------------------------------------------------------------------------------------------------
ABN                          105,000                  230.00   05/21/2003                 105,000      0.89
------------------------------------------------------------------------------------------------------------
Total                        683,000                                                      683,000      5.77
------------------------------------------------------------------------------------------------------------

Aggregate:

                  -------------------------------------------
                         No.                   %
-------------------------------------------------------------
Shares:                    1,554,577                  13.140
-------------------------------------------------------------
Options:                     683,000                   5.773
-------------------------------------------------------------
Total:                     2,237,577                  18.913
-------------------------------------------------------------

Schedule 1

DEFINED TERMS

The capitalised terms used in the Agreement shall have the meaning ascribed to them in this Schedule 1.

"Accepting Shareholders" shall have the meaning set forth in Section 2.2.

"Acquisition Transaction" shall have the meaning set forth in Section 3.1.

"Adjusted NAV" shall have the meaning set forth in Section 2.2.

"Available Shares" shall have the meaning set forth in Section 2.2.

"Agreement" shall mean this agreement including all Schedules.

"Business Day" shall mean a day on which SWX Swiss Exchange is open for normal trading.

"Centerpulse" shall have the meaning set forth in Recital (B).

"Centerpulse Holding" shall have the meaning set forth in Section 2.2.

"Centerpulse Pre-Announcement" shall mean the pre-announcement in respect of the Centerpulse Tender Offer contained in Schedule 2.4(b).

"Centerpulse Shares" shall have the meaning set forth in Recital (B).

"Centerpulse Tender Offer" shall have the meaning set forth in Recital (C).

"CHF" shall mean Swiss Francs, being the lawful currency of Switzerland.

"CO" shall mean the Swiss Code of Obligations (Obligationenrecht) of 30 March 1911, as amended.

"Excess Shares" shall have the meaning set forth in Section 2.2.

"Expert" shall have the meaning set forth in Section 3.4.2.

"GBP" shall mean British Pound Sterling, being the lawful currency of the United Kingdom.

"HK" shall mean Hans Kaiser.

"III" shall mean III Institutional Investors International Corp.

"InCentive" means InCentive Capital AG, as set out on the cover page of the Agreement and in Recital (D).

"InCentive Shares" shall have the meaning set forth in Recital (D).

"Interim Financials" shall have the meaning set forth in Section 3.11.

"Offer Documents" shall have the meaning set forth in Section 2.4(a).

"Offer Period" shall mean the period during which the Public Tender Offer is open for acceptance by the InCentive shareholders according to article
14 (3) and (4) TOO (Angebotsfrist), excluding, for the avoidance of doubts, the Statutory Extension Period (Nachfrist).

"Offer Price" shall have the meaning set forth in Section 2.2.

"Offer Prospectus" shall have the meaning set forth in Section 2.4(a).

"Party" shall mean any of, and "Parties" shall mean all of, the parties listed on the cover sheet of this Agreement.

"Pre-Announcement" shall have the meaning set forth in Section 2.1.2.

"Public Tender Offer" shall have the meaning set forth in Section 2.1.1.

"RB" shall mean Rene Braginsky.

"Representatives" shall mean RB and HK in their capacity as members of the board of directors of InCentive.

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"Schedule" shall mean each schedule attached to this Agreement.

"Section" shall mean a section of this Agreement.

"SESTA" shall mean the Stock Exchange and Securities Trading Act (Bundesgesetz uber die Borsen und den Effektenhandel) of 24 March 1995, as amended.

"SESTO-FBC" shall mean the Stock Exchange and Securities Trading Ordinance of the Federal Banking Commission (Borsenverordnung-EBK) of 25 June 1997, as amended.

"Settlement Date" shall mean the day on which the Public Tender Offer is settled (vollzogen) for the first time.

"Shareholder" shall mean any of, and "Shareholders" shall mean all of, RB, HK, Z and III.

"Signing Date" shall mean the date of this Agreement.

"Smith & Nephew" shall mean Smith & Nephew plc. or Smith & Nephew Group plc., as set out on the cover page of this Agreement and in Recitals (A) and (C).

"Smith & Nephew Shares" shall have the meaning set forth in Recital (C).

"Statutory Extension Period" shall mean the additional acceptance period of 10 Business Days following completion (Zustandekommen) of the Public Tender Offer according to article 14 (5) TOO (Nachfrist).

"Tender Agreement" shall have the meaning set forth in Recital (F).

"TOO" shall mean the Takeover Ordinance of the Takeover Commission (Verordnung der Ubernahmekommission uber offentliche Kaufangebote) of 21 July 1997, as amended.

"Treasury Shares" shall have the meaning set forth in Section 2.2.

"Z" shall mean "Zurich" Versicherungs-Gesellschaft.

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Schedule 2.1.2

PRE-ANNOUNCEMENT

See attached.

Schedule 2.1.2

Pre-annoucement of 20 March 2003
Translated from German

[SMITH & NEPHEW LOGO]

Pre-announcement of the Public Tender Offer

Smith & Nephew plc, London, UK

(Smith & Nephew plc will launch the public tender offer through a new parent company of Smith & Nephew plc to be listed on the London Stock Exchange and the SWX Swiss Exchange. Smith & Nephew plc will guarantee and be fully liable for the obligations of the offeror)

for all the publicly held

Bearer Shares of InCentive Capital AG, Zug, with a nominal value of CHF 20

Introduction

Smith & Nephew plc ("Smith & Nephew") intends to launch a public tender offer (the "InCentive Offer") on or about 16 April 2003 in accordance with art. 22 et seq. of the Federal Act on Stock Exchanges and Securities Trading for all of the publicly held bearer shares in InCentive Capital AG ("InCentive") with a nominal value of CHF 20 each ("InCentive Shares").

Current Situation

On 20 March 2003, Smith & Nephew and Centerpulse AG, Zurich, ("Centerpulse") entered into a transaction agreement (the "Centerpulse Transaction Agreement") in which they agreed to combine their businesses to create a leading global orthopaedics company. Under the Centerpulse Transaction Agreement, Smith & Nephew has undertaken to achieve this combination by way of a share and cash offer (the "Centerpulse Offer") for all publicly held registered shares in Centerpulse with a nominal value of CHF 30 each (the "Centerpulse Shares") by Smith & Nephew.

Smith & Nephew has today released a separate pre-announcement relating to the Centerpulse Offer.

InCentive is the largest shareholder of Centerpulse and holds, or has the right to hold (after the exercise of its call options and lapse of related put options), approximately 18.9% of the share capital of Centerpulse. On 20 March 2003, Smith & Nephew and InCentive entered into a transaction agreement (the "InCentive Transaction Agreement"). Under the InCentive Transaction Agreement, Smith & Nephew has undertaken to aquire, inter alia, InCentive's 18.9% interest in Centerpulse by way of a share and cash offer for InCentive through Smith & Nephew Group plc, the proposed new holding company of Smith & Nephew, which will be a UK registered public company, resident in Switzerland, and listed on the London Stock Exchange, with a secondary listing on the SWX Swiss Exchange. All references to Smith & Nephew in this pre-announcement therefore include Smith & Nephew Group plc or mean Smith & Nephew Group plc if the context so requires.

On the same date, Smith & Nephew entered into a tender agreement (the "Tender Agreement") with the principal shareholders of InCentive, namely Zurich Insurance Company, III Institutional Investors Corp., Mr. Rene Braginsky and Mr. Hans Kaiser (the "Principal Shareholders"), who together hold approximately 77% of InCentive's share capital. Under this Tender Agreement, the Principal Shareholders have irrevocably undertaken, inter alia, to tender their InCentive Shares under the InCentive Offer.

Offer Price

The offer price for each InCentive Share shall be a + b where:

the total amount of Smith & Nephew shares (the "Smith & Nephew Shares") and amount of cash that would be payable under the Centerpulse Offer for the Centerpulse Shares held by InCentive (the "Centerpulse Holding");

the adjusted net asset value (positive or negative) of InCentive (the "Adjusted NAV") calculated as at the last day of the InCentive Offer period but excluding the Centerpulse Holding and attributing no value to any InCentive Shares held by InCentive or its subsidiaries (the "Treasury Shares"), as confirmed by InCentive's auditors;

the total number of InCentive Shares in issue on the last day of the InCentive Offer period less the number of Treasury Shares on that date.

The consideration for each InCentive Share will consist of (i) an element of Smith & Nephew Shares and cash which will mirror InCentive's Centerpulse Holding; plus or minus (ii) the cash attributable to Adjusted NAV of InCentive excluding the Centerpulse Holding. If the Adjusted NAV is negative, then the cash element attributable to the Centerpulse Holding shall be reduced, pro tanto, and if after such reduction there is still a negative balance, the number of Smith & Nephew Shares to be issued shall be reduced by a corresponding amount.

The offer price will be adjusted for any dilutive effects in respect of the InCentive Shares (to the extent they have not been reflected in the Adjusted NAV) or the Smith & Nephew Shares (save for shares issued for management options issued under the Smith & Nephew employee share schemes and disclosed in the Smith & Nephew financial statements for the financial year 2002), including dividend payments (save for dividends already declared by Smith & Nephew or an interim dividend hereafter declared by Smith & Nephew in the normal course consistent with past practice), capital increases below market value, or the issuance of options (save for management options issued under the Smith & Nephew employee share schemes in the normal course consistent with past practice), warrants, convertible securities and other rights of any kind to acquire InCentive Shares or Smith & Nephew Shares as the case may be.

The consideration payable for the Centerpulse Shares under the Centerpulse Offer pre-announced today by Smith & Nephew comprises for each Centerpulse registered share with a nominal value of CHF 30:

. 25.15 Smith & Nephew Shares; and
. CHF 73.42 in cash

Mix and Match

Accepting InCentive shareholders under the InCentive Offer and accepting Centerpulse shareholders under the Centerpulse Offer (together the "Accepting Shareholders") may elect to take fewer Smith & Nephew Shares or more Smith & Nephew Shares than their basic entitlement under the relevant Offer, but elections under both Offers (taken together) to take more Smith & Nephew Shares (together the "Excess Shares") will only be satisfied to the extent that elections have been made under both Offers (taken together) by Accepting Shareholders to take fewer Smith & Nephew Shares (together referred to as the "Available Shares"). The Available Shares will be allocated to the applicants for Excess Shares in proportion to the number of Excess Shares applied for. If the total number of Available Shares exceeds the total number of Excess Shares applied for, the Available Shares shall be limited to an amount equal to the Excess Shares. Once the share allocations have been determined, the cash element of the consideration will be reduced or increased (as the case may be) for each Accepting Shareholder who has been allocated an increased or reduced number of Smith & Nephew Shares. All calculations shall be made by reference to the number of acceptances and elections as of the last day of the additional acceptance period.

Offer Period

The offer prospectus for the InCentive Offer is likely to be published on or about 16 April 2003.

It is intended that the InCentive Offer will remain open for 40 trading days,
i.e. probably from 16 April 2003 until 4pm CET on 17 June 2003. Smith & Nephew reserves the right to extend the offer period beyond 40 trading days with the prior approval of the Swiss Takeover Board.

Conditions

The InCentive Offer is expected to be subject to the following conditions:

a) All conditions of the Centerpulse Offer having been satisfied or waived by Smith & Nephew.

b) The General Meeting of InCentive shareholders having:

i) received the resignation of all current members of InCentive's board of directors or required these to resign and elected the persons proposed by Smith & Nephew as new members of the board of directors, subject to all other conditions to this offer being accepted or waived by Smith & Nephew; and

ii) to the extent required approved the InCentive Transaction Agreement and the actions contemplated thereunder.

c) Smith & Nephew having received valid acceptances for at least 80% of the InCentive Shares outstanding at the expiry of the (possibly extended) offer period.

d) No court or regulatory authority having issued a decision or an order which prohibits the InCentive Offer or its completion or renders this offer or its completion unlawful.

e) InCentive or any of its subsidiaries not having disposed, or agreed to dispose (including acceptance of any offer), of any Centerpulse Shares held by it or its subsidiaries and not having become obliged to do so, save for any such transfer within the InCentive group.

f) Until the end of the (possibly extended) offer period no litigation proceedings having been initiated against InCentive and its subsidiaries which have not been made public prior to the date hereof and which are neither insured nor provisioned for in the consolidated balance sheet of InCentive and whose amount in dispute is in excess of CHF 35 million in the aggregate.

g) The General Meetings of Smith & Nephew shareholders having passed the necessary resolutions to effect a Court Scheme under which Smith & Nephew will become a wholly owned subsidiary of Smith & Nephew Group plc, and the Court Scheme having become effective.

Smith & Nephew reserves the right to waive one or more of the conditions set out above other than condition g), either in whole or in part, and to withdraw the InCentive Offer if one or more of the above conditions is not met.

Restrictions

General

This offer will not be made in any country where such offer would be considered illegal or would otherwise violate any applicable law or regulation or where Smith & Nephew may be obliged to change the terms of the offer, to file an additional application with any authorities or other institutions or to undertake additional measures in relation to this offer. It is not foreseen to extend the offer to such jurisdictions. Documents in relation to this transaction must not be distributed in such jurisdictions or sent to such jurisdictions. Persons in such jurisdictions must not use these documents for marketing purposes for sales of shares of InCentive.

US Sales Restrictions

This offer will not be made in or into the United States of America and may only be accepted outside the United States of America. Accordingly, copies of this pre-announcement are not being made and should not be mailed or otherwise distributed or sent in or into or from the United States of America and persons receiving this pre-announcement (including custodians, nominees and trustees) must not distribute or send them into or from the United States of America.

Information

Detailed information on the InCentive Offer is expected to be published on or about 16 April 2003 in the same media.

Identification

                                        Securities No.  ISIN           Bloomberg

Bearer shares InCentive Capital AG      286089          CH0002860895   INC SW
Registered shares Smith & Nephew plc    922320          GB0009223206   SN LN
Registered shares Centerpulse AG        654485          CH0006544859   CEPN SW

For the bank entrusted with the technical execution of the offer:
Lombard Odier Darier Hentsch & Cie.

[LOGOS LAZARD AND LODH]

Schedule 2.2.(a)

DETERMINATION OF THE ADJUSTED NAV

The Adjusted NAV shall be determined according to this Schedule:

1. Except as otherwise set forth in this Schedule, the Adjusted NAV shall be determined and calculated by applying the methods and principles that were applied by InCentive in determining its net asset value prior to the Signing Date on a consistent basis.

2. The Adjusted NAV shall be net of the impact of any distributions (Ausschuttungen), if any, per InCentive Share made by InCentive from the Signing Date until the Settlement Date.

3. All and any transaction costs payable by InCentive in connection with the Agreement or the transactions contemplated by the Agreement shall be deducted from the Adjusted NAV.

4. Treasury Shares shall not be taken into account in calculating the Adjusted NAV.

5. For the avoidance of doubt, the value of Centerpulse Shares is excluded from the definition of the Adjusted NAV and is accordingly not included in the calculation of the Adjusted NAV.

6. A liability of InCentive under section 6 of the Transaction Agreement shall be included as a liability in the determination of the Adjusted NAV.

Schedule 2.4.(b)

CENTERPULSE PRE-ANNOUNCEMENT

See attached.

Schedule 2.4(b)

[SMITH & NEPHEW LOGO]

20 March 2003

Pre-announcement of the Public Tender Offer (Translation from German)

Smith & Nephew plc, London, UK

for all the publicly held

Registered Shares of Centerpulse AG, Zurich, with a nominal value of CHF 30 each

INTRODUCTION

Smith & Nephew plc ("Smith & Nephew") intends to launch a public tender offer (the "Centerpulse Offer") on or about 16 April 2003 in accordance with art. 22 et seq. of the Federal Act on Stock Exchanges and Securities Trading for all of the publicly held registered shares in Centerpulse AG ("Centerpulse") with a nominal value of CHF 30 each.

The Centerpulse Offer will be made available to all shareholders on substantially the same terms and conditions but for regulatory reasons will take the form of (a) a public public tender offer in Switzerland applicable to all holders of Centerpulse shares not located in the United States in accordance with the Swiss Stock Exchanges and Securities Trading Act ("SESTA") and its implementing rules and regulations; and (b) a public tender offer in the United States (the "US Offer") applicable only to holders of Centerpulse shares (including the Centerpulse shares represented by American Depositary Shares, "ADSs") located in the United States in accordance with the Securities Exchange Act of 1934, as amended, and the Securities Act of 1933, as amended.

CURRENT SITUATION

On 20 March 2003, Smith & Nephew and Centerpulse entered into a transaction agreement (the "Transaction Agreement") in which they agreed to combine their businesses to create a leading global orthopaedics company. Under this Transaction Agreement, Smith & Nephew has undertaken to achieve this combination by way of a share and cash offer for Centerpulse by Smith & Nephew through Smith & Nephew Group plc, the proposed new holding company of Smith & Nephew, which will be a UK registered public company, resident in Switzerland, and listed on the London Stock Exchange, with a secondary listing on the SWX Swiss Exchange. All references to Smith & Nephew in this pre-announcement therefore include Smith & Nephew Group plc or mean Smith & Nephew Group plc if the context so requires.

At the same time, Smith & Nephew entered into a separate transaction agreement with InCentive Capital AG ("InCentive"). Under this transaction agreement, Smith & Nephew has undertaken to procure that Smith & Nephew Group plc launches a public tender offer (the "InCentive Offer") on or about 16 April 2003 for all outstanding bearer shares in InCentive.

InCentive, an investment company listed on the SWX Swiss Exchange, holds, or has the right to hold (after the exercise of its call options and lapse of related put options), approximately 18.9% of the share capital of Centerpulse. Shareholders representing 77% of InCentive's issued share capital have given irrevocable undertakings to accept the InCentive Offer. InCentive's portfolio is currently being rationalised so as to comprise Centerpulse shares and cash, and the terms of the InCentive Offer will be such that in respect of its holding in Centerpulse they will reflect the terms of Smith & Nephew's offer for Centerpulse itself. InCentive shareholders will, therefore, not receive a premium for the Centerpulse shares held by InCentive in relation to the other Centerpulse shareholders.

Smith & Nephew has today released a separate pre-announcement relating to the InCentive Offer.

OFFER PRICE

The price offered for each Centerpulse registered share with a nominal value of CHF 30 comprises:

. 25.15 Smith & Nephew shares; and

. CHF 73.42 in cash

The offer price will be adjusted for any dilutive effects in respect of the Centerpulse shares or the Smith & Nephew shares (save for shares issued for management options issued under the Centerpulse or Smith & Nephew employee share schemes and disclosed in the Centerpulse or Smith & Nephew financial statements for the financial year 2002), including dividend payments (save for dividends already declared by Smith & Nephew or an interim dividend hereafter declared by Smith & Nephew in the normal course consistent with past practice), capital increases below market value, or the issuance of options (save for management options issued under the Smith & Nephew employee share schemes in the normal course consistent with past practice), warrants, convertible securities and other rights of any kind to acquire Centerpulse shares or Smith & Nephew shares as the case may be.

Mix and Match

Accepting Centerpulse shareholders under the Centerpulse Offer and accepting InCentive shareholders under the InCentive Offer (together the "Accepting Shareholders") may elect to take fewer Smith & Nephew shares or more Smith & Nephew shares than their basic entitlement under the relevant Offer, but elections under both Offers (taken together) to take more Smith & Nephew shares (together the "Excess Shares") will only be satisfied to the extent that elections have been made under both Offers (taken together) by Accepting Shareholders to take fewer Smith & Nephew shares (together referred to as the "Available Shares"). The Available Shares will be allocated to the applicants for Excess Shares in proportion to the number of Excess Shares applied for. If the total number of Available Shares exceeds the total number of Excess Shares applied for, the Available Shares shall be limited to an amount equal to the Excess Shares. Once the share allocations have been determined, the cash element of the consideration will be reduced or increased (as the case may be) for each Accepting Shareholder who has been allocated an increased or reduced number of Smith & Nephew shares. All calculations shall be made by reference to the number of acceptances and elections as of the last day of the additional acceptance period

OFFER PERIOD

The offer prospectus for the Centerpulse Offer is likely to be published on or about 16 April 2003.

It is intended that the Centerpulse Offer will remain open for 40 trading days, i.e. probably from 16 April 2003 until 4pm CET on 17 June 2003. Smith & Nephew reserves the right to extend the offer period - with the prior approval of the Swiss Takeover Board - beyond 40 trading days.

CONDITIONS

The Offer is expected to be subject to the following conditions:

1. The General Meetings of Smith & Nephew shareholders having:

a. approved the transactions contemplated by the Centerpulse Transaction Agreement; and

b. passed the necessary resolutions to effect a Court Scheme under which Smith & Nephew will become a wholly owned subsidiary of Smith & Nephew Group plc

and the Court Scheme having become effective.

2. The Smith & Nephew shares to be issued in connection with the Centerpulse Offer having been admitted to the Official List of the United Kingdom Listing Authority and to trading on the London Stock Exchange plc and the listing of the additional ADSs of Smith & Nephew on the New York Stock Exchange to be issued in connection with the US Offer having been approved.

3. All competent EU, US and other foreign authorities having approved and/or granted clearance of the acquisition of Centerpulse without a party being required to meet any condition or requirement giving rise to (a) costs and/or loss of earnings before interest, tax and amortisation ("EBITA") in excess of CHF 23 million in the aggregate; or (b) a decrease in consolidated turnover of CHF 75 million in the aggregate of the combined group. In addition, no other orders or directions by any court or other authority prohibiting the completion of the Centerpulse Offer having been issued.

4. The Registration Statement on Form F-4 to be filed by Smith & Nephew with the Securities and Exchange Commission ("SEC") in connection with the US Offer (the "Registration Statement") having become effective in accordance with the provisions of the US Securities Act; no stop order suspending the effectiveness of the Registration Statement having been issued by the SEC and no proceedings for that purpose having been initiated by the SEC and not concluded or withdrawn.

5. Smith & Nephew having received valid acceptances for at least 75% of the total number of the Centerpulse shares outstanding (including Centerpulse shares represented by ADSs and, provided the InCentive Offer has become unconditional, Centerpulse Shares held by InCentive) on a fully diluted basis at the expiry of the (possibly extended) offer period.

6. Three of Centerpulse's current board members having resigned from Centerpulse's board of directors subject to completion of the Centerpulse Offer, and the other board members having entered into a fiduciary arrangement with Smith & Nephew covering the period until a Centerpulse

General Meeting will have resolved to elect the persons proposed by Smith & Nephew to the board of directors of Centerpulse, subject to completion of the Centerpulse Offer.

7. Centerpulse until the end of the (possibly extended) offer period (save for extensions beyond the statutory 40 day trading period solely as a result of the Court Scheme not having become effective) not having:

a. become subject to a mandated recall for a product, the consolidated turnover of which product family exceeded CHF 75 million in Centerpulse's consolidated prior year results and such recall having resulted, or, according to the opinion of an investment bank or accounting firm of international repute to be appointed by Smith & Nephew with the consent of Centerpulse (the "Expert"), likely to result, in costs and/or loss of EBITA (after insurance payable to Centerpulse) in excess of CHF 23 million; or

b. suffered a disablement of its manufacturing facilities in Winterthur or Austin having resulted, or, according to the opinion of the Expert, likely to result, in costs and/or loss of EBITA (after insurance payable to Centerpulse) in excess of CHF 23 million.

Smith & Nephew reserves the right to waive one or more of the conditions set out above (other than condition 1, 2, 3 as to the requirement to obtain merger approval as such and 4) either in whole or in part, or to withdraw the Centerpulse Offer if one or more of the above conditions is not met.

SALES RESTRICTIONS

This pre-announcement is not being made, directly or indirectly, in or into, or by use of the mails or by any means or instrumentality (including, without limitation, telephonically or electronically) of interstate or foreign commerce of, or of any facility of a national securities exchange of, Canada, Australia or Japan. Accordingly, copies of this document and any related documents are not being, and must not be, directly or indirectly, mailed or otherwise forwarded, distributed or sent in or into or from, Canada, Australia or Japan and persons receiving this document and any related documents (including custodians, nominees and trustees) must not mail or otherwise forward, distribute or send it in or into or from, Canada, Australia or Japan.

Relevant clearances have not been, nor will they be, obtained from the securities commission of any province or territory of Canada; no prospectus will be lodged with, or registered by, the Australian Securities and Investments Commission or the Japanese Ministry of Finance; and the new Smith & Nephew shares will not be registered under or offered in compliance with applicable securities laws of any state, province, territory or jurisdiction of Canada, Australia or Japan. Accordingly, the new Smith & Nephew shares may not (unless an exemption under relevant securities laws is applicable) be offered, sold, resold or delivered, directly or indirectly in or into Canada, Australia or Japan or any other jurisdiction as to do so may constitute a violation of the relevant laws of, or require registration thereof in such jurisdiction or to, or for the account or benefit of, a person in or resident in Canada, Australia or Japan.

Any offer in the United States will only be made through a prospectus which is part of a registration statement on Form F-4 to be filed with the SEC. Centerpulse shareholders who are US persons or are located in the United States are urged to carefully review the registration statement on Form F-4 and the prospectus included therein, the Schedule TO and other documents relating to the Centerpulse Offer that will be filed by Smith & Nephew with the SEC because these documents will contain important information relating to the Centerpulse Offer. You are also urged to read the related solicitation/recommendation statement on Schedule 14D-9 that will be filed with the SEC by Centerpulse relating to the Centerpulse Offer. You may obtain a free copy of these documents after they have been filed with the SEC, and other documents filed by Smith & Nephew and Centerpulse with the SEC, at the SEC's Web site at www.sec.gov. Once the registration statement on Form F-4, as well as any documents incorporated by reference therein, the Schedule TO and the Schedule 14D-9 are filed with the SEC, you will also be able to inspect and copy these documents at the public reference room maintained by the SEC at 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room.
YOU SHOULD READ THE PROSPECTUS AND THE SCHEDULE 14D-9 CAREFULLY BEFORE MAKING A DECISION CONCERNING THE OFFER.

INFORMATION

Detailed information on the Centerpulse Offer is expected to be published on or about 16 April 2003 in the same media.

IDENTIFICATION

SECURITIES NO.
ISIN
BLOOMBERG

. Registered share of Centerpulse AG

654485
CH0006544859

CEPN SW

. Registered share of Smith & Nephew plc

922320
GB0009223206

SN LN

. Bearer share of InCentive Capital AG

286089
CH0002860895

INC SW

[LOGO LAZARD]

Exhibit 4a(iv)

Execution Copy

AMENDMENT AGREEMENT NO. 1

                               dated 25 March 2003

                                     between

InCentive Capital AG
c/o Bar & Karrer, Baarerstrasse 8,
CH-6301 Zug, Switzerland                                           ("InCentive")

                                       and

Smith & Nephew plc.
Heron House, 15 Adam Street,                              ("Smith & Nephew plc")
London WC2N 6LA, United Kingdom

                                       and

Smith & Nephew Group Limited
(formerly known as Meadowclean Limited,
to be renamed Smith & Nephew Group plc)             ("Smith & Nephew Group plc")
122 Moulin de la Ratte,
CH-1236 Cartigny, Geneva, Switzerland

Regarding

A Transaction Agreement dated 20 March 2003

(A) Whereas, the parties hereto (the "Parties") entered into a transaction agreement dated 20 March 2003 regarding a public tender offer to all shareholders of InCentive (the "Transaction Agreement").

(B) Whereas, Section 3.2(b) of the Transaction Agreement provides that sales by InCentive of its treasury shares to non-related third parties shall be permitted.

-2-

NOW, THEREFORE, the Parties agree as follows:

1. The capitalised terms used in this Amendment Agreement No. 1 shall have the meanings ascribed to them in the Transaction Agreement.

2. Section 3.5 of the Transaction Agreement shall be amended by adding the words "except as otherwise permitted in Section 3.2(b)" after the words "and shall not dispose of any such shares".

3. This Amendment Agreement No. 1 shall be a part of the Transaction Agreement, and, subject to paragraph 2 hereof, all terms and conditions of the Transaction Agreement shall remain in full force and effect as set forth in the Transacton Agreement.

Smith & Nephew plc

/s/ Christopher J. O'Donnell                   /s/ Peter Hooley
----------------------------------------      ----------------------------------
Name:     Christopher J. O'Donnell            Name:    Peter Hooley
       ---------------------------------             ---------------------------
Title:    Chief Executive                     Title:   Finance Director
       ---------------------------------             ---------------------------


Smith & Nephew Group Limited

/s/ Pierre-Andre Chapatte                      /s/ Antoine Vidts
----------------------------------------      ----------------------------------
Name:    Pierre-Andre Chapatte                Name:    Antoine Vidts
       ---------------------------------             ---------------------------
Title:   Director                             Title:   Director
       ---------------------------------             ---------------------------


InCentive Capital AG

/s/ Rene Braginsky                             /s/ Thomas Wyler
----------------------------------------      ----------------------------------
Name:  Rene Braginsky                         Name:    Thomas Wyler
       ---------------------------------             ---------------------------
Title: Director and Chief Executive           Title:   Member of the Management
       ---------------------------------             ---------------------------
                                                       Board
                                                     ---------------------------

EXHIBIT 4(c)(vii)

RULES OF

THE SMITH & NEPHEW SHARESAVE PLAN (2002)

This is a copy of the rules of The Smith & Nephew Sharesave Plan (2002) established by resolution of shareholders of the Company at its Annual General Meeting on 3 April 2002 and as initialled by the Chairman for the purposes of identification only

......................

Chairman

Inland Revenue Ref No SRS2729/ELW

[LOGO OF PINSENT CURTIS BIDDLE]

                                    CONTENTS

RULES                                                                       PAGE

1.         Interpretation                                                      1

2.         Invitations to apply for Options                                    6

3.         The Exercise Price                                                  8

4.         Applications for Options                                            8

5.         Acceptance and Scaling-Down of Applications                         9

6.         Grant of Options                                                   10

7.         Issue of Shares                                                    11

8.         Limits on Individual Contributions                                 11

9.         Non-Transferability and Lapse of Options                           12

10.        Relationship with Service Contract                                 12

11.        Exercise of Options                                                13

12.        Manner of Exercise of Options                                      15

13.        Reconstruction or Winding-Up of the Company                        17

14.        Take-over of the Company                                           17

15.        Variation of Share Capital                                         19

16.        Alteration of this Plan                                            20

17.        Service of Documents                                               21

18.        Miscellaneous                                                      21

19.        Jurisdiction                                                       22

20.        Data Protection                                                    22

21.        Third Party Rights                                                 22

                                    RULES OF
                    THE SMITH & NEPHEW SHARESAVE PLAN (2002)

1.        INTERPRETATION

1.1       In this Plan, the following words and expressions shall have the
          meanings respectively given below:

          "3 year Option"               an Option linked to a 3 year Savings
                                        Contract

          "5 year Option"               an Option linked to a 5 year Savings
                                        Contract and which is not a 7 year
                                        Option

          "7 year Option"               an Option linked to a 5 year Savings
                                        Contract under which the Optionholder
                                        has elected, when applying for such
                                        Savings Contract, that repayments under
                                        the Savings Contract be taken as
                                        including the maximum bonus payable

          "Acquisition Cost"            in relation to the exercise of an
                                        Option, an amount equal to the product
                                        of:

                                        (a)       the maximum number of Shares
                                                  in respect of which that
                                                  Option is then exercised in
                                                  accordance with rule 11; and

                                        (b)       the Exercise Price

          "Announcement Date"           a date of notification to the London
                                        Stock Exchange of the annual or
                                        half-year results of the Company

          "Applicant"                   a person who, in response to an
                                        Invitation, submits an Application

          "Application"                 an application for the grant of an
                                        Option made in accordance with rule 4

          "Application Date"            in relation to any Invitation, such date
                                        (being not less than 14 days after the
                                        date on which that invitation was
                                        issued) as shall be determined by the
                                        Directors to be the last day on which an
                                        application for the grant of an Option
                                        may be submitted in response to
                                        Invitations issued on any occasion

          "Approval Date"               the date on which the Company receives
                                        notice that this Plan has been approved
                                        by the Inland Revenue pursuant to
                                        Schedule 9

                                        1

          "Associated Company"          any company which, in relation to the
                                        Company, is an associated company as
                                        that term is defined for the purposes of
                                        paragraph 23 of Schedule 9 by section
                                        187(2) of the Taxes Act

          "Auditors"                    the auditors for the time being of the
                                        Company or if there are joint auditors,
                                        such one of them as the Directors may
                                        decide

          "Bonus Date"                  in relation to any Employees' Savings
                                        Contract, the earliest date on which a
                                        bonus is due or, where the Optionholder
                                        has, or has indicated that he intends to
                                        enter into, a 5 year Savings Contract
                                        and has elected that repayments under
                                        that Savings Contract be taken as
                                        including the maximum bonus payable, the
                                        earliest date on which that maximum
                                        bonus is due

          "the Company"                 Smith & Nephew plc (registered in
                                        England no 324357)

          "control"                     the meaning given in section 840 of the
                                        Taxes Act

          "Date of Grant"               in relation to any Option, the date on
                                        which that Option is granted

          "Date of Invitation"          in relation to any Option, the date on
                                        which the invitation to apply for that
                                        Option is issued

          "Dealing Day"                 a day on which the London Stock Exchange
                                        is open for business

          "Directors"                   the board of directors of the Company or
                                        a duly constituted committee of that
                                        board

          "Electronic Communications"   has the meaning given in section 15 of
                                        the Electronic Communications Act 2000
                                        (but excluding mobile telephone text
                                        messages)

                                        2

          "Eligible Employee"           any Employee (other than an Employee
                                        precluded from participating in this
                                        Plan by virtue of paragraphs 8 or 26(3)
                                        of Schedule 9) who, in relation to an
                                        Option, either:

                                        (a)       is employed by a Participating
                                                  Company and

                                        (b)       has been continuously employed
                                                  by one or more Participating
                                                  Companies throughout the
                                                  period of three months ending
                                                  with the Date of Grant (or
                                                  such other period immediately
                                                  preceding that date as the
                                                  Directors may from time to
                                                  time determine not being more
                                                  than 5 years) and

                                        (c)       is chargeable to tax in
                                                  respect of his office or
                                                  employment under Case 1 of
                                                  Schedule E or

                                        is nominated by the Directors as an
                                        Eligible Employee for the purposes of
                                        this Plan

          "Employee"                    an employee or Full-time Director of any
                                        Participating Company

          "Employees' Savings Contract" in relation to an Eligible Employee or
                                        an Optionholder, the Savings Contract
                                        entered into by that person in
                                        connection with the grant to him of an
                                        Option (and any reference to "his
                                        Savings Contract" shall be construed
                                        accordingly)

          "the Exercise Price"          in relation to Shares subject to any
                                        Option, the price per Share payable upon
                                        the exercise of that Option

          "Full-time Director"          a director of any Participating Company
                                        who is required to work at least 25
                                        hours per week (exclusive of meal
                                        breaks) disregarding holiday entitlement

          "Grantor"                     in relation to an Option, the Company or
                                        the Relevant Trustee which has granted
                                        or proposes to grant such Option

          "the Group"                   the Company and every other company
                                        which is for the time being a Subsidiary

                                        3

          "Initial Market Value"        in relation to any Share in respect of
                                        which an Option is to be, or has been,
                                        granted the market value of such a Share
                                        shall (except as otherwise agreed with
                                        the Shares Valuation of the Inland
                                        Revenue) be taken to be the average of
                                        the middle market quotations of a Share
                                        as derived from the Official List for
                                        the three consecutive Dealing Days last
                                        preceding the date of Invitation

          "Invitation"                  an invitation to apply for the grant of
                                        an Option issued in accordance with rule
                                        2

          "Jointly Owned Company"       a company (and any subsidiary as defined
                                        in section 736 of the Companies Act 1985
                                        of such a company) of which the whole of
                                        the issued ordinary share capital is
                                        jointly owned by a member of the Group
                                        and another person (not being a member
                                        of the Group) but which is not a
                                        Subsidiary and is not under the control
                                        of such other person

          "London Stock Exchange"       means London Stock Exchange plc

          "Model Code"                  the code adopted by the Company which
                                        contains provisions similar in purpose
                                        and effect to the provisions of the
                                        Model Code for Securities Transactions
                                        by Directors of Listed Companies issued
                                        by the UK Listing Authority from time to
                                        time

          "Official List"               the daily official list of the London
                                        Stock Exchange

          "Option"                      a right to acquire Shares which is
                                        granted pursuant to and is exercisable
                                        only in accordance with the rules of
                                        this Plan

          "Option Certificate"          a certificate issued by the Grantor
                                        evidencing the grant of an Option

          "Optionholder"                in relation to any Option, the person to
                                        whom that Option has been granted an
                                        Option or, if that person has died, his
                                        Personal Representatives

          "Ordinary Share Capital"      issued share capital of the Company
                                        other than fixed-rate preference shares

          "Participating Company"       a member of the Group to which the
                                        Directors have resolved that this Plan
                                        shall extend

          "Personal Data"               has the meaning it bears for the
                                        purposes of the Data Protection Act 1998

                                        4

          "Personal Representatives"    in relation to an Optionholder, the
                                        legal personal representatives of the
                                        Optionholder (being either the executors
                                        of his will to whom a valid grant of
                                        probate has been made or if he dies
                                        intestate the duly appointed
                                        administrator(s) of his estate) who have
                                        satisfied the Company of their
                                        appointment as such

          "this Plan"                   The Smith & Nephew Sharesave Plan (2002)
                                        as set out in these rules as amended
                                        from time to time

          "QUEST Trustee"               a Relevant Trustee which is the trustee
                                        of a qualifying employee share ownership
                                        trust (as defined in Schedule 5 of the
                                        Finance Act 1989) established by the
                                        Company

          "Relevant Savings Body"       in relation to an Employee's Savings
                                        Contract, the Savings Body which is a
                                        party to that Contract

          "Relevant Trustee"            the meaning given in article 71(6) of
                                        the Financial Services and Markets Act
                                        2000 (Regulated Activities) Order 2001

          "Repayment Value"             in relation to an Employee's Savings
                                        Contract, the aggregate amount of all
                                        the monthly savings contributions
                                        payable under that Savings Contract
                                        together with the amount of such bonus
                                        as would be due on the Bonus Date

          "Savings Body"                such bank or building society which
                                        operates an SAYE Scheme as is approved
                                        by the Directors for the purposes of
                                        this Plan

          "Savings Contract"            a savings contract entered into under an
                                        SAYE Scheme

          "SAYE Scheme"                 a certified contractual savings scheme
                                        within the meaning of section 326 of the
                                        Taxes Act which has been approved by the
                                        Inland Revenue for the purposes of
                                        Schedule 9

          "Schedule 9"                  Schedule 9 to the Taxes Act

          "Shares"                      fully-paid ordinary shares in the
                                        capital of the Company which satisfy the
                                        conditions set out in paragraphs 10-14
                                        (inclusive) of Schedule 9

          "Subscription Options"        Options which are rights granted by the
                                        Company to subscribe for Shares

                                        5

          "Subsidiary"                  any company which is for the time being
                                        both a subsidiary (as defined in section
                                        736 of the Companies Act 1985) of the
                                        Company and under the control of the
                                        Company

          "Taxes Act"                   the Income and Corporation Taxes Act
                                        1988

          "UK Listing Authority"        the Financial Services Authority in its
                                        capacity as the competent authority for
                                        the purposes of Part VI of the Financial
                                        Services and Markets Act 2000

          "year"                        a financial year of the Company.

1.2 Words and expressions not defined in this rule 1 have the same meanings as in section 185 of the Taxes Act and Schedule 9.

1.3 References to any statutory provisions shall be read and construed as references to such provision as amended and re-enacted from time to time and no account should be taken of the rule headings which have been inserted for ease of reference only.

1.4 If any question, dispute or disagreement arises as to the interpretation of this Plan, the decision of the Directors shall (except as regards any matter required to be determined by the Auditors hereunder) be final and binding upon all persons.

1.5 In any matter in which they are required to act hereunder, the Auditors shall be deemed to be acting as experts and not as arbitrators and the Arbitration Act of 1996 shall not apply in relation to any such matter.

1.6 Words denoting the masculine gender shall include the feminine.

1.7 Words denoting the singular shall include the plural and vice versa.

2. INVITATIONS TO APPLY FOR OPTIONS

2.1 Subject to the following provisions of this rule 2, the Company may from time to time issue, or procure the issue, to all persons who are or are expected to be Eligible Employees, invitations to apply for the grant of Options.

2.2       Invitations may be issued:

          2.2.1     in the period of 42 days after the Approval Date, and
                    thereafter,

          2.2.2     in the period of 42 days beginning with the fourth Dealing
                    Day following an Announcement Date

or, if the Company is restricted by statute, order or regulation (including any regulation, order or requirement imposed on the Company by the London Stock Exchange or any other regulatory authority) from issuing invitations in any such period, at any time in the period of 42 days beginning with the date on which such restriction is removed;

and

2.2.3     at any other time if the Directors consider the
          circumstances to be exceptional unless the Company is or
          would then be so restricted from issuing invitations at that
          time.

2.3 Invitations may be issued in writing or by Electronic Communication or in the form of notices, advertisements, circulars or otherwise for the general attention of Employees and to which the particular attention of individual Employees is drawn by notices issued with pay and salary advice slips SAVE THAT an invitation may not be issued to an Eligible Employee by Electronic Communication unless that person is known by his Employer Company to have personal access during his normal business hours to information sent to him by Electronic Communication.

2.4       Each such invitation shall:

          2.4.1     be in the same terms as all other such invitations issued on
                    the same occasion;

          2.4.2     invite the person to whom it is addressed to apply for such
                    one or more (as the Directors shall specify) 3 year Option,
                    5 year Option and/or 7 year Option;

          2.4.3     specify the form and manner in which each such person may
                    apply for any such Option;

          2.4.4     identify the Savings Body;

          2.4.5     state the minimum amount of monthly savings contribution
                    which may be made under a Savings Contract (which shall not
                    be less than (pound)5 or, if the Directors so determine,
                    such other minimum amount as is permitted under the terms of
                    the relevant Savings Contract);

          2.4.6     state the maximum amount of monthly savings contribution
                    which may be made by an Optionholder (being such sum as is
                    mentioned in rule 8.2);

          2.4.7     if the Company so determines, include a statement that, if
                    it becomes necessary to scale-back applications pursuant to
                    rule 5, such scaling-back shall, in the first instance,
                    apply to every application in relation to which the amount
                    of monthly savings contribution proposed to be made is
                    greater than such lesser amount as is specified in the
                    invitation;

          2.4.8     if the Company so determines, include a statement that, if
                    it becomes necessary to scale-back applications pursuant to
                    rule 5, all applications for 7 year Options may be accepted
                    on the basis that they are deemed to be applications for 5
                    year Options and that, in this event, every corresponding
                    application for a 5 year Savings Contract shall be deemed to
                    be made and shall be accepted by the Relevant Savings Body
                    on the basis that, in each such case, the Applicant will be
                    deemed not to have elected for repayments to be taken as
                    including the maximum bonus payable;

          2.4.9     specify the Application Date

and shall otherwise be in such form as the Company shall determine.

2.5 On any occasion on which invitations are issued, the Directors may in their discretion (and acting with the consent of the Grantor where appropriate) determine and announce the maximum number of Shares in respect of which Options will be granted in response to applications made pursuant to the invitations issued on that occasion.

2.6 No invitation may be issued after 3 April 2012.

3. THE EXERCISE PRICE

3.1 Subject to any adjustment in accordance with rule 15, the price per Share payable upon the exercise of Options granted on any occasion shall be determined by the Grantor but shall be not less than 80% (rounded up to the nearest whole penny) of the Initial Market Value of a Share.

3.2 Subject to rule 15, the Exercise Price shall be the same in relation to all Options granted on the same occasion and, in relation to Subscription Options, shall not in any event be less than the nominal value of a Share.

3.3 The Directors (acting with the consent of the QUEST Trustee) may from time to time direct and notify the Optionholder in writing that the Exercise Price shall be payable, and the Optionholder shall pay the Exercise Price to the QUEST Trustee (as mentioned in rule 12.4).

4. APPLICATIONS FOR OPTIONS

4.1 Any Eligible Employee to whom an Invitation has been issued may apply for an Option by submitting to the person specified in the Invitation an application in writing which:

4.1.1     is received at such address as is stipulated in the
          Invitation not later than the Application Date;

4.1.2     specifies the amount of the savings contributions proposed
          to be paid each month under the Employee's Savings Contract
          (or, if more than one, each such Savings Contract) and
          authorises the Applicant's employer (from time to time) to
          deduct such amount (or such lesser amount as may be
          determined pursuant to rule 5) from his pay;

4.1.3     if the terms of the Invitation so permit, indicates whether
          or not the Applicant applies for one or more 3 year Option
          and/or one or more 5 year Option and/or one or more 7 year
          Option;

4.1.4     includes or is accompanied by an application for a Savings
          Contract linked to each such Option in a form approved by
          the Relevant Savings Body;

4.1.5     otherwise complies with such terms and conditions as may
          have been specified in the Invitation;

4.1.6     is subject to the Applicant being an Eligible Employee at
          the Date of Grant;

4.1.7     provides that the Applicant agrees to accept and be bound by
          the rules of this Plan;

4.1.8     authorises the transfer and process of the Applicant's
          Personal Data for the purposes of the administration of this
          Plan;

4.1.9     is duly completed and signed by the Applicant

and is otherwise in such form as the Directors may determine.

4.2 Subject to rule 5, the total number of Shares in respect of which any application for an Option shall be made shall be the whole number of Shares for which the Acquisition Cost payable would be as nearly as may be equal to, but not exceed, the amount which would be the Repayment Value of the Employee's Savings Contract if the amount of each of the contributions payable under that Savings Contract (or under each such Savings Contract) was equal to the maximum amount specified by the Applicant in his application.

5. ACCEPTANCE AND SCALING-DOWN OF APPLICATIONS

5.1 Subject to the following provisions of this rule 5, each application for an Option shall be accepted to the extent of the total number of Shares in respect of which that application is made (as mentioned in rule 4.2).

5.2 If the total number of Shares in respect of which applications for Options have been made on that occasion would result in any of the limits in rules 2.5 or 7 being exceeded then the number of Shares in respect of which each application for an Option is accepted shall be reduced in accordance with the following provisions of this rule 5.

5.3 If the Invitation included such statement as is mentioned in rule 2.4.8, and subject to rules 5.8 and 5.9, the number of Shares in respect of which each application for an Option is made shall be determined on the basis that the amount of monthly savings contribution to be made under such Savings Contract is reduced to the amount so specified.

5.4 If, after the application of rule 5.3, the total number of shares in respect of which applications for Options are deemed to have been made on that occasion exceeds any of the limits in rules 2.5 or 7 then each application for a 7 year Option shall be deemed to be an application for a 5 year Option (and the corresponding application(s) for one or more 5 year Savings Contract linked to such Option shall be deemed to be made and shall be accepted by the Relevant Savings Body on the basis that, in each such case, the Applicant has not elected for repayments to be taken as including the maximum bonus).

5.5 If, after the application of rule 5.4, the total number of shares in respect of which applications for Options are deemed to have been made on that occasion exceeds any of the limits in rules 2.5 or 7 then the number of Shares in respect of which each application for an Option shall be accepted shall be further reduced as nearly as may be on a proportionate basis to the extent necessary to ensure that none of those limits is exceeded (and the amount of monthly savings contributions to be made under the Savings Contracts linked to each such Option shall be reduced accordingly) SAVE THAT the number of Shares in respect of which any application for an Option shall be accepted shall not be reduced below the number for which the Acquisition Cost payable would be as nearly as may be equal to, but not exceed, the Repayment Value of the Employee's Savings Contract linked to that Option if the monthly savings contributions under each such Savings Contract were (pound)5 or such other minimum amount per month specified in the Invitation (the "Minimum Number of Shares").

5.6 The provisions of rule 5.5 shall, if necessary, be applied repeatedly until either none of the limits in rules 2.5 and/or 7 will be exceeded or the number of Shares in respect of which each application for an Option would be accepted is reduced to the Minimum Number of Shares.

5.7       If, notwithstanding the provisions of rules 5.2 to 5.6 (inclusive),
          any one or more of the limits in rules 2.5 and 7 would still be
          exceeded then the selection of applications for acceptance shall be
          made by the Directors on the basis that each application (after
          adjustment as mentioned above) has an equal chance of selection for
          acceptance.

5.8       If on any occasion an Applicant has applied for more than one 3 year
          Option or for more than one 5 year Option or for more than one 7 year
          Option then, in applying the provisions of this rule 5 the number of
          Shares in respect of which applications have been received from such
          Applicant for all such 3 year Options (or, as the case may be, all
          such 5 year or 7 year Options) shall first be aggregated and treated
          as if a single application for such an Option had been received in
          respect of the aggregate number of such Shares.

5.9       Having, in the case of an Applicant who has applied for more than one
          3 year Option (or, as the case may be, more than one 5 year or 7 year
          Option) identified the maximum aggregate number of Shares in respect
          of which such applications may be accepted, such number of Shares
          shall be divided by the number of Options for which such Applicant had
          applied and the monthly contributions to be made in respect of each
          Savings Contract for which an application has been made shall be
          identified and such applications shall be deemed to have been made,
          and shall be accepted, on that basis PROVIDED THAT if in consequence
          the amount of monthly contributions to be made under any such Savings
          Contract would be less than the minimum amount specified pursuant to
          rule 2.4.5 then the number of Savings Contracts for which applications
          shall be deemed to have been made by such Applicant, and shall be
          accepted, shall be reduced so as to ensure that the monthly
          contributions to be made in each case is not less than that minimum
          amount.

5.10      As soon as reasonably practicable after the Application Date in
          relation to Invitations issued on any occasion, the Directors (acting
          with the consent of the Grantor where appropriate) shall:

          5.10.1    determine the maximum number of Shares in respect of which
                    each application may be accepted; and

          5.10.2    cause each application for a Savings Contract to be
                    submitted to the Relevant Savings Body.

6.        GRANT OF OPTIONS

6.1       An Option may be granted by the Company or, if the Company has agreed,
          a Relevant Trustee.

6.2       An Option shall not be granted to any person who is not an Eligible
          Employee at the Date of Grant.

6.3       Subject to the following provisions of this rule 6, Options for which
          Invitations are issued on any occasion shall be granted within the
          period of 30 days beginning with the first of the three days by
          reference to which the Initial Market Value is determined on that
          occasion.

6.4       The Grantor (or, if the Grantor is the Company, the Directors) shall
          pass a resolution granting to each Applicant who is an Eligible
          Employee an Option to acquire the whole number of Shares for which the
          Acquisition Cost payable would be as nearly as possible equal to, but
          not exceed, the amount which would be the Repayment Value of the
          Employee's Savings Contract, and the date of such resolution shall be
          the Date of Grant.

                                       10

6.5       If on any occasion it is necessary to reduce the number of Shares in
          respect of which any applications are accepted then rule 6.3 shall
          take effect as if the reference therein to a period of 30 days was a
          reference to 42 days.

6.6       No payment shall be required in respect of the grant of any Option.

6.7       As soon as reasonably practicable after the Date of Grant, the Grantor
          shall issue to each Optionholder an Option Certificate in such form as
          it may determine which specifies:

          6.7.1     the Grantor;

          6.7.2     the Date of Grant;

          6.7.3     the number of Shares in respect of which the Option is
                    granted; and

          6.7.4     the Exercise Price.

6.8 No Option shall be granted before the date on which this Plan is approved by the Inland Revenue pursuant to Schedule 9.

7. ISSUE OF SHARES

7.1 The Company may issue Shares to a Relevant Trustee for the purpose of enabling the Relevant Trustee to satisfy its obligation to transfer Shares to Optionholders upon the exercise of Options.

7.2 The number of Shares in respect of which Subscription Options may be granted on a given day in any year, when added to:

7.2.1     the number of Shares in respect of which Subscription
          Options have previously been granted (and which, if not
          exercised, have not ceased to be exercisable); and

7.2.2     the number of Shares issued and the number of Shares in
          respect of which any rights to subscribe for Shares have
          previously been granted (and which have neither been
          exercised nor ceased to be exercisable) under any other
          employee share option or share incentive plan

in that year and the nine preceding years may not exceed such number of Shares as represents 10 per cent of the Ordinary Share Capital on that day.

7.3 The total number of Shares in respect of which Options may be granted in response to applications made by Eligible Employees pursuant to Invitations issued on any occasion may not exceed the maximum (if any) determined and published by the Grantor on that occasion pursuant to rule 2.5.

7.4 To the extent that a Relevant Trustee has purchased Shares to be transferred to Optionholders in satisfaction of any Subscription Options, the Shares over which such Options are held shall be left out of account for the purposes of this rule 7.

8. LIMITS ON INDIVIDUAL CONTRIBUTIONS

8.1 The aggregate amount of an Employee's monthly savings contributions under his Savings Contract, when added to the aggregate amount of his monthly savings contributions under any other Savings Contracts may not at any time exceed the sum specified in rule 8.2.

8.2 The sum mentioned in rule 8.1 is (pound)250 or such other amount as is specified in the relevant Savings Contract or such other maximum amount (not exceeding such other maximum amount per month specified from time to time in paragraph 24(2)(a) of Schedule 9) as the Grantor may determine SAVE THAT if on any occasion the Grantor shall determine for these purposes a sum ("the new limit") which is less than the maximum aggregate of the monthly contributions applicable on any previous occasion then that determination shall be made without prejudice to any Option previously granted to an Optionholder or to any Employee's Savings Contract previously entered into by any Optionholder if the aggregate monthly savings contributions payable by that Optionholder under such Savings Contract would thereby exceed the new limit.

8.3 The Company may determine that, in relation to the grant of Options on any occasion, the amount of any monthly contribution which would have been made by any such Applicant in the calendar month in which falls the Date of Grant of such Options under the terms of a Savings Contract which has been cancelled or allowed by the Applicant to lapse shall be counted in applying to that Applicant the limit in rule 8.1.

9. NON-TRANSFERABILITY AND LAPSE OF OPTIONS

9.1 During his lifetime only the individual to whom an Option is granted may exercise that Option.

9.2       An Option shall immediately cease to be exercisable if:

          9.2.1     it is transferred or assigned (other than to Personal
                    Representatives of the Optionholder), mortgaged, charged or
                    otherwise disposed of by the Optionholder;

          9.2.2     the Optionholder is adjudged bankrupt or an interim order is
                    made because he intends to propose a voluntary arrangement
                    to his creditors under the Insolvency Act 1986;

          9.2.3     the Optionholder makes or proposes a voluntary arrangement
                    under the Insolvency Act 1986, or any other scheme or
                    arrangement in relation to his debts, with his creditors or
                    any section of them; or

          9.2.4     the Optionholder is not, or ceases for any other reason
                    (except his death) to be, the sole legal and beneficial
                    owner of the Option free from encumbrances or would not,
                    upon the exercise of the Option, be the sole legal and
                    beneficial owner of the Shares thereby acquired, free from
                    encumbrances.

10. RELATIONSHIP WITH SERVICE CONTRACT

10.1      The grant of an Option does not form part of the Optionholder's
          entitlement to remuneration or benefits pursuant to his contract of
          employment nor does the existence of a contract of employment between
          any person and any present or past member of the Group or Associated
          Company or Jointly Owned Company, give such person any right or
          entitlement to have an Option granted to him in respect of any number
          of Shares or any expectation that an Option might be granted to him or
          that he will be invited to apply for the grant of an Option whether
          subject to any conditions or at all.

10.2      Neither the existence of this Plan nor the fact that an individual has
          on any occasion been granted an Option (or been invited to apply for
          the grant of an Option) shall give such individual any right
          entitlement or expectation that he has or will in future have any such
          right entitlement or expectation to participate in this Plan by being
          granted an Option (or invited to apply for the grant of an Option) on
          any other occasion.

                                       12

10.3      The rights and obligations of an Optionholder under the terms of his
          contract of employment with any present or past member of the Group or
          Associated Company or Jointly Owned Company shall not be affected by
          the grant of an Option or his participation in this Plan.

10.4      An Optionholder shall not be entitled to any compensation or damages
          for any loss or potential loss which he may suffer by reason of being
          unable to exercise an Option in consequence of the loss or termination
          of his office or employment with any present or past member of the
          Group or Associated Company or Jointly Owned Company for any reason
          whatsoever (whether or not such termination is ultimately held to be
          wrongful or unfair).

11.       EXERCISE OF OPTIONS

11.1      Subject to the following provisions of this rule 11.1 and rules 13 and
          14, an Option shall only be exercisable within the period of 6 months
          after the Bonus Date and, if not then exercised, shall lapse and cease
          to be exercisable at the end of that period.

11.2      If an Optionholder dies, his Personal Representatives may exercise
          that Option:

          11.2.1    if he dies before the Bonus Date, to the extent permitted by
                    rule 11.10.2 during the period of 12 months commencing on
                    the date of his death; or

          11.2.2    if he dies within the period of 6 months after the Bonus
                    Date, to the extent permitted by rule 11.10.1 during the
                    period of 12 months commencing on the Bonus Date

          and if it is not then exercised that Option shall lapse and cease to
          be exercisable at the end of such 12-month period.

11.3      If an Optionholder ceases to be an Employee by reason of:

          11.3.1    injury or disability (evidenced to the satisfaction of the
                    Directors);

          11.3.2    dismissal by reason of redundancy (within the meaning of the
                    Employment Rights Act 1996);

          11.3.3    retirement on reaching either age 65 or any other age at
                    which he is bound to retire in accordance with the terms of
                    his contract of employment;

          11.3.4    the company with which he holds office or employment by
                    virtue of which he is eligible to participate in this Plan
                    ceasing to be a Subsidiary; or

          11.3.5    the fact that the office or employment by virtue of which he
                    is eligible to participate in this Plan relates to a
                    business or part of a business which is transferred to a
                    person which is neither an Associated Company nor a
                    Subsidiary

          then (without prejudice to any rights the Optionholder has under the
          Employees' Saving Contract to make independent arrangements with the
          Savings Body to continue to make Contributions following cessation of
          his employment) his Option may be exercised, to the extent permitted
          by rule 11.10.2 only, during the period of 6 months commencing on the
          date on which the Optionholder shall have ceased to be an Employee,
          and if it is not then exercised that Option shall lapse and cease to
          be exercisable at the end of that period.

                                       13

11.4      If, before an Option has lapsed or otherwise been exercised, the
          Optionholder attains age 65 but remains an Employee he may exercise
          the Option, to the extent permitted by rule 11.10.2, during the period
          of six months commencing on his attaining such age. If it is not then
          exercised, the Option shall lapse and cease to be exercisable at the
          end of that period.

11.5      Subject to rule 11.6, if at any time an Optionholder ceases to be an
          Employee otherwise than as mentioned in rules 11.2, 11.3 or 11.7, any
          Option which he holds shall lapse and cease to be exercisable upon
          such cessation.

11.6      No Optionholder shall be treated for the purposes of rules 11.3 or
          11.5 as ceasing to be an Employee until he no longer holds any office
          or employment in:

          11.6.1    a Participating Company;

          11.6.2    any Associated Company;

          11.6.3    any other company of which the Company has control; or

          11.6.4    a Jointly Owned Company.

11.7 If, at the Bonus Date, an Optionholder holds an office or employment in a company which is not a Participating Company but is:

          11.7.1    an Associated Company;

          11.7.2    any other company of which the Company has control; or

          11.7.3    a Jointly Owned Company

          then the Optionholder may exercise an Option within the period of six
          months after the Bonus Date and if it is not then exercised it shall
          lapse and cease to be exercisable at the end of that period.

11.8      If the Optionholder obtains repayment of the contributions under his
          Savings Contract the relevant Option shall immediately cease to be
          exercisable unless, immediately before the repayment, such Option is
          exercisable by reason of rules 11.1, 11.3, 11.4, 13 or 14.

11.9      Except as provided in rule 11.2, no Option shall be capable of being
          exercised later than six months after the Bonus Date.

11.10     An Option may only ever be exercised in respect of such number of
          Shares as is mentioned below:

          11.10.1   if the Option is exercisable pursuant to rule 11.1, 11.2.2
                    or 11.7, the maximum number of Shares in respect of which it
                    shall subsist;

          11.10.2   if the Option is exercisable pursuant to rules 11.2.1, 11.3,
                    11.4 or to rules 13 or 14, that number of Shares for which
                    the Acquisition Cost payable is most nearly equal to but
                    does not exceed the aggregate amount of contributions paid
                    under the Employee's Savings Contract (excluding the amount
                    of any monthly contribution the due date of payment of which
                    is more than one calendar month after the date on which
                    repayment is made under the Employee's Savings Contract)
                    together with the amount of any bonus or interest received
                    or due thereunder as at that date or (if less) the maximum
                    number of Shares in respect of which the Option shall
                    subsist; or

          11.10.3   in either case, such lesser number of Shares as the
                    Optionholder may specify in the notice of exercise given
                    pursuant to rule 12.1.

11.11     No Option may be exercised by (or by the Personal Representatives of)
          any Optionholder who is (or at the date of his death was):

          11.11.1   not an Employee (unless the Option is or was at the date of
                    his death exercisable pursuant to rules 11.2, 11.3 or 11.7);
                    or

          11.11.2   ineligible to participate in the Plan at that time by virtue
                    of paragraph 8 of Schedule 9.

11.12     In deciding whether and when to exercise an Option, an Optionholder
          shall have regard to the Model Code.

12.       MANNER OF EXERCISE OF OPTIONS

12.1      An Option shall be exercised only by the Optionholder giving notice in
          writing to the Company, or to such person at such address as may from
          time to time be notified to Optionholders by the Grantor, which:

          12.1.1    is given at any time when the Option is exercisable;

          12.1.2    states that the Option is being exercised in respect of all
                    the Shares in respect of which it is then capable of being
                    exercised or otherwise specifies the number of Shares in
                    respect of which the Option is being exercised in accordance
                    with rule 11.10;

          12.1.3    is accompanied by a duly completed application to the
                    Relevant Savings Body for payment of the Repayment Value of
                    the Employee's Savings Contract;

          12.1.4    unless the Directors otherwise permit, is accompanied by the
                    Option Certificate relating to that Option;

          and is otherwise in such form as the Company may determine and notify
          to the Optionholder.

12.2      Subject to rule 12.9, not later than 30 days after the date on which
          the Grantor shall have received the Acquisition Cost the Grantor shall
          either allot and issue (if the Grantor is the Company), or procure the
          transfer, to the Optionholder of the number of Shares in respect of
          which the Option is then exercised and as soon as reasonably
          practicable thereafter:

          12.2.1    if at that time Shares are listed on the Official List,
                    procure that Shares allotted to the Optionholder are
                    admitted to the Official List; and

          12.2.2    issue or procure the issue of a definitive share certificate
                    or such other acknowledgement of shareholding as is
                    prescribed from time to time in respect of the Shares so
                    allotted or transferred.

12.3      If the amount received by the Grantor is greater than the Acquisition
          Cost of the Shares in relation to which the Optionholder has served a
          notice of exercise under rule 12.1, the Grantor shall procure
          repayment of the excess amount to the Optionholder.

                                       15

12.4      If the Directors have made a direction pursuant to rule 3.3 then, when
          an Option is exercised, the QUEST Trustee may, and shall if so
          directed by the Directors:

          12.4.1    apply any amount of the Exercise Price received from the
                    Optionholder (pursuant to rule 3.3), together with such
                    other amount as the QUEST Trustee may received by way of
                    contribution from the Company (or, the Participating Company
                    with which the Optionholder holds office or employment or,
                    if he has ceased to hold office or employment with any
                    participating company, the Company or the Subsidiary with
                    which he last held office or employment), in subscribing for
                    shares at such price (being not less than the Exercise
                    Price) as the Company may determine; and

          12.4.2    within 30 days after receiving the Exercise Price, transfer
                    such Shares to Optionholders (or to such other persons as
                    are mentioned in rule 12.7) in satisfaction of their rights
                    under the terms of their Options

          and insofar as shares are subscribed and transferred to any
          Optionholder in such manner upon the exercise of an Option, the
          Company shall be discharged from all liability to issue such Shares to
          such Optionholder.

12.5      If a Subscription Option is exercised, the Directors may within 7 days
          of the date of exercise request the QUEST Trustee to transfer
          sufficient Shares to the Optionholder to satisfy the Option in full
          and if the QUEST Trustee is able and willing to satisfy such Option in
          full the Shares shall be transferred to the Optionholder within 30
          days of the date of exercise and the Company shall pay over the
          Acquisition Cost to the QUEST Trustee when the Shares are transferred
          and pay the appropriate stamp duty on behalf of the Optionholder in
          respect of the transfer. If the QUEST Trustee is unable or unwilling
          to satisfy the Option in full, rule 12.2 shall apply as if the
          Directors had not requested the Trustee to satisfy the Option.

12.6      The QUEST Trustee may exercise such of its powers and duties as are
          appropriate to give effect to the arrangements mentioned in rules 3.3,
          12.4 and 12.5.

12.7      The Grantor may, if the Optionholder so requests in writing, allot and
          issue or transfer some or all of such Shares to:

          12.7.1    a nominee of the Optionholder provided that beneficial
                    ownership of such Shares shall be vested in the
                    Optionholder; or

          12.7.2    to an account manager (or his nominee) of an individual
                    savings account on terms that such Shares shall be in the
                    beneficial ownership of the Optionholder notwithstanding
                    that title to such Shares shall be vested in the account
                    manager or his nominee or jointly in one of them and the
                    Optionholder

          and for the purposes of this rule the terms 'account manager' and
          'individual savings account' shall have the meanings they bear in the
          Individual Savings Account Regulations 1998 (SI 1998/1870).

12.8      All Shares allotted or transferred upon the exercise of any Option
          shall rank equally in all respects with the Shares for the time being
          in issue save as regards any rights attaching to such Shares by
          reference to a record date prior to the date of such allotment or
          transfer.

                                       16

12.9      The allotment or transfer of Shares pursuant to the exercise of an
          Option shall be subject to the Memorandum and Articles of Association
          of the Company and to any necessary consents of any governmental or
          other authorities (whether in the United Kingdom or elsewhere) under
          any enactments or regulations from time to time in force and it shall
          be the responsibility of the Optionholder to comply with any
          requirements to be fulfilled in order to obtain or obviate the
          necessity for any such consent.

13.       RECONSTRUCTION OR WINDING-UP OF THE COMPANY

13.1      If the court sanctions a compromise or arrangement proposed for the
          purposes of or in connection with a scheme for the reconstruction of
          the Company or its amalgamation pursuant to section 425 of the
          Companies Act 1985 the Optionholder shall be entitled to exercise his
          Option to the extent permitted by rule 11.10.2 during the period of 6
          months commencing on the date on which the court sanctions the
          compromise or arrangement, and thereafter the Option shall lapse and
          cease to be exercisable.

13.2      If notice is given to the holders of Shares of a resolution for the
          voluntary winding-up of the Company, notice of the same shall be given
          to all Optionholders and each Optionholder shall be entitled to
          exercise his Option to the extent permitted by rule 11.10.2 at any
          time within the period of six months commencing on the date on which
          the resolution is passed.

13.3      All Options shall immediately lapse and cease to be exercisable upon
          the commencement of a winding-up of the Company.

14.       TAKE-OVER OF THE COMPANY

14.1      If, as a result of either:

          14.1.1    a general offer to acquire the whole of the Ordinary Share
                    Capital which is made on a condition such that if it is
                    satisfied the person making the offer will have control of
                    the Company; or

          14.1.2    a general offer to acquire all the shares in the Company of
                    the same class as the Shares

          the Company shall come under the control of another person or persons,
          then the Grantor shall as soon as reasonably practicable thereafter
          notify every Optionholder accordingly and the Optionholder shall be
          entitled to exercise his Option to the extent permitted by rule
          11.10.2 within 6 months of the date when the person making the offer
          has obtained control of the Company and any condition subject to which
          the offer is made has been satisfied (but not in any event more than 6
          months after the Bonus Date) and to the extent the Option has not been
          exercised it shall upon the expiration of that period cease to be
          exercisable and shall only remain in existence for the purpose of
          forming the subject of an offer (if any) made pursuant to rule 14.3
          and shall lapse upon the expiry of the "appropriate period" as defined
          in rule 14.4 if such offer is made but is not accepted by the
          Optionholder.

14.2      If at any time any person becomes entitled or bound to acquire Shares
          under sections 428 to 430F of the Companies Act 1985 the Optionholder
          shall be entitled to exercise his Option to the extent permitted in
          rule 11.10.2 at any time when that person remains so entitled or bound
          (but not in any event more than 6 months after the Bonus Date) and to
          the extent the Option has not been exercised it shall upon the
          expiration of that period cease to be exercisable and shall only
          remain in existence for the purpose of forming the subject of an offer
          (if any) made pursuant to rule 14.3 and shall lapse upon the expiry of
          the "appropriate period" as defined in rule 14.4 if such offer is made
          but is not accepted by the Optionholder.

                                       17

14.3      If any company (in this rule referred to as the "acquiring company"):

          14.3.1    obtains control of the Company as a result of making a
                    general offer:

                    (a)  to acquire the whole of the Ordinary Share Capital of
                         the Company which is made on a condition such that if
                         it is satisfied the person making the offer will have
                         control of the Company; or

                    (b)  to acquire all the shares in the Company which are of
                         the same class as the Shares;

          14.3.2    obtains control of the Company in pursuance of a compromise
                    or arrangement sanctioned by the court made under section
                    425 of the Companies Act 1985; or

          14.3.3    becomes bound or entitled to acquire Shares under sections
                    428 to 430F (inclusive) of the Companies Act 1985

          an Optionholder may, at any time within the "appropriate period" as
          mentioned in rule 14.4, by agreement with the acquiring company,
          release his rights under his Option in consideration of the grant to
          him of rights to acquire shares in the acquiring company or any other
          company falling within sub-paragraphs (b) and (c) of paragraph 10 of
          Schedule 9 (read and construed as if references in those provisions to
          the Company were references to the acquiring company) PROVIDED THAT:

                    (a)  such rights will be exercisable only in accordance with
                         the provisions of this Plan as it had effect
                         immediately before the release of the rights referred
                         to above (read and construed as mentioned in rule
                         14.5);

                    (b)  the shares to which the new rights relate satisfy the
                         provisions of paragraphs 10 to 14 of Schedule 9;

                    (c)  the total market value, immediately before such
                         release, of the Shares in respect of which the Option
                         then subsists is equal to the total market value,
                         immediately after such grant, of the shares in respect
                         of which new rights are granted to the Optionholder;
                         and

                    (d)  the total amount payable by the Optionholder for the
                         acquisition of shares upon exercise of the new rights
                         is equal to the total amount that would have been
                         payable for the acquisition of Shares upon exercise of
                         the Option.

14.4      In rule 14.3 the "appropriate period" means:

          14.4.1    in a case falling within rule 14.3.1 the period of six
                    months beginning with the time when the person making the
                    offer has obtained control of the Company and any condition
                    or conditions subject to which the offer is made has or have
                    been satisfied or waived;

          14.4.2    in a case falling within rule 14.3.2 the period of six
                    months beginning with the time when the court sanctions the
                    compromise or arrangement; and

          14.4.3    in a case falling within rule 14.3.3 the period during which
                    the acquiring company remains bound or entitled as mentioned
                    in that paragraph.

14.5      For the purposes mentioned in rule (a) of the proviso to rule 14.3,

the provisions of this Plan shall be read and construed as if:

          14.5.1    references to "the Company", except for the purposes of the
                    definitions of Jointly Owned Company and Participating
                    Company and rule 16.2, were references to the company in
                    respect of whose shares the new rights are granted;

          14.5.2    references to "Shares" were references to such shares;

          14.5.3    reference to "Option" were references to such rights;

          14.5.4    references to "Optionholder" were references to the persons
                    to whom such rights are granted;

          14.5.5    references to "Ordinary Share Capital" were references to
                    the ordinary share capital (other than fixed rate preference
                    shares) of such company;

          14.5.6    references to the "Directors", except for the purposes of
                    rule 16.2, were references to the directors of such company;
                    and

          14.5.7    references to the "Exercise Price" were references to the
                    price per share payable upon the exercise of such new
                    rights.

14.6      Rights granted pursuant to rule 14.3 shall be regarded for the
          purposes of section 185 to the Taxes Act and Schedule 9 and for the
          purposes of the subsequent application of the provisions of this Plan
          as having been granted on the Date of Grant of the corresponding
          rights released as mentioned in rule 14.3.

14.7      Apart from rules 14.3 and 14.4 a person shall be deemed to have
          control of a company if he and others acting in concert with him have
          together obtained control of it.

15.       VARIATION OF SHARE CAPITAL

15.1      In the event of any alteration of the Ordinary Share Capital by way of
          a capitalisation or rights issue or by way of sub-division,
          consolidation, reduction or any other variation in the share capital
          of the Company, the Grantor may make such adjustment as it considers
          appropriate:

          15.1.1    to the aggregate number of Shares subject to any Option;

          15.1.2    to the Exercise Price; and/or

          15.1.3    if an Option has been exercised but no Shares have been
                    allotted or transferred, to the number of Shares which may
                    be so allotted or transferred and the Acquisition Cost
                    relating to such Shares

PROVIDED THAT:

(a) no such adjustment shall be made without the prior approval of the Board of Inland Revenue;

(b) except in the case of a subdivision, consolidation or capitalisation issue, any such adjustment must be confirmed in writing by the Auditors to be in their opinion fair and reasonable;

(c) the aggregate Acquisition Cost payable by an Optionholder on the exercise of all his Options shall not be materially altered;

                    (d)  except insofar as the Directors (on behalf of the
                         Company) agree to capitalise the Company's reserves and
                         apply the same at the time of exercise in paying up the
                         difference between the Exercise Price and the nominal
                         value of the Shares, the Exercise Price in relation to
                         any Subscription Option shall not be reduced below the
                         nominal value of a Share; and

                    (e)  the number of Shares as so adjusted shall be rounded
                         down to the nearest whole number and the Exercise Price
                         as so adjusted shall be rounded up to the nearest whole
                         penny.

15.2      As soon as reasonably practicable after making any adjustment pursuant
          to rule 15.1 the Grantor shall give notice in writing thereof to every
          Optionholder affected thereby.

16.       ALTERATION OF THIS PLAN

16.1      Before this Plan is first approved by the Board of Inland Revenue, the
          Directors may make any alteration or addition to these rules as may be
          necessary or appropriate to take account of comments of the UK Listing
          Authority and to ensure that this Plan is so approved.

16.2      The Directors may, at any time thereafter, alter or add to the rules
          of this Plan in any respect PROVIDED THAT:

          16.2.1    no alteration or addition to any provision of this Plan
                    shall take effect until approved by the Board of Inland
                    Revenue;

          16.2.2    no such alteration or addition shall be made to the
                    advantage of existing or new Optionholders to the provisions
                    relating to eligibility to participate, the overall
                    limitations on the issue of new Shares, the individual
                    limitations on Option grants under this Plan and the basis
                    for determining an Optionholders' rights to acquire Shares
                    and the adjustment of such rights in the event of variation
                    of the Ordinary Share Capital without the prior approval by
                    ordinary resolution of the shareholders of the Company SAVE
                    THAT the provisions of this rule 16.2.2 shall not apply to
                    the extent that such alteration or addition is in the
                    opinion of the Directors a minor amendment which is
                    necessary or appropriate:

                    (a)  to benefit the administration of this Plan;

                    (b)  to take account of any change in legislation; or

                    (c)  to maintain Inland Revenue approval of this Plan or
                         obtain or maintain favourable tax, exchange control or
                         regulatory treatment for Optionholders or for the
                         Company or for any Subsidiary; and

          16.2.3    if in relation to any Options the Grantor is not the
                    Company, no alteration or addition shall be made to the
                    terms of such Options without the approval of the Grantor.

16.3      As soon as reasonably practicable after making any such alteration or
          addition the Directors shall give notice in writing thereof to every
          Optionholder (if any) affected thereby.

                                       20

17.       SERVICE OF DOCUMENTS

17.1      Except as otherwise provided in this Plan, any notice or document to
          be given by, or on behalf of, the Company or other Grantor or the
          Administrator to any person in accordance or in connection with this
          Plan shall be duly given:

          17.1.1    by sending it through the post in a pre-paid envelope to the
                    address last known to the Company to be his address and, if
                    so sent, it shall be deemed to have been duly given on the
                    date of posting; or

          17.1.2    if he holds office or employment with any member of the
                    Group or any Associated Company, by delivering it to him at
                    his place of work or by sending to him a facsimile
                    transmission or Electronic Communication addressed to him at
                    his place of work and if so sent it shall be deemed to have
                    been duly given at the time of transmission SAVE THAT a
                    notice or document shall not be duly given by Electronic
                    Communication unless that person is known by his Employer
                    Company to have personal access during his normal business
                    hours to information sent to him by Electronic
                    Communication.

17.2      Any notice or document so sent to an Employee or Optionholder shall be
          deemed to have been duly given notwithstanding that such Optionholder
          is then deceased (and whether or not the Company or other Grantor has
          notice of his death) except where his Personal Representatives have
          established their title to the satisfaction of the Company and
          supplied to the Company an address to which documents are to be sent.

17.3      Any notice in writing or document to be submitted or given to the
          Grantor, the Company or the Administrator in accordance or in
          connection with this Plan may be delivered, sent by post, facsimile
          transmission or Electronic Communication but shall not in any event be
          duly given unless:

          17.3.1    it is actually received (or, in the case of an Electronic
                    Communication, opened) by the secretary of the Company or
                    such other individual as may from time to time be nominated
                    by the Company and whose name and address is notified to
                    Optionholders; and

          17.3.2    if given by Electronic Communication, it includes a
                    digitally encrypted signature of the Optionholder.

17.4      For the purposes of this Plan, an Electronic Communication shall be
          treated as not having been duly made or received if it contains, or is
          accompanied by a warning or caution that it could contain or be
          subject to, a virus or other computer programme which could alter
          damage or interfere with any computer software or Electronic
          Communication.

18.       MISCELLANEOUS

18.1      The Company shall at all times keep available sufficient authorised
          but unissued Shares to satisfy the exercise in full of all the
          Subscription Options for the time being remaining capable of being
          exercised under this Plan.

18.2      No Option to purchase existing Shares shall be granted by any person
          unless that person beneficially owns such Shares at the Date of Grant
          or the Directors are satisfied that sufficient Shares will be made
          available to satisfy the exercise in full of all Options granted or to
          be granted by that person.

                                       21

18.3      The Directors may from time to time make and vary such rules and
          regulations not inconsistent herewith and establish such procedures
          for the administration and implementation of this Plan as they think
          fit.

18.4      In any matter in which they are required to act hereunder, the
          Auditors shall be deemed to be acting as experts and not as
          arbitrators and the Arbitration Acts of 1996 shall not apply in
          relation to any such matter.

18.5      The Company shall not be obliged to provide Optionholders with copies
          of any notices, circular or other documents sent to holders of Shares.

18.6      The costs of the administration and implementation of this Plan shall
          be borne by the Company.

19.       JURISDICTION

19.1      This Plan shall be governed by and construed in all respects in
          accordance with English law.

19.2      In applying for the grant of an Option an Eligible Employee shall be
          deemed to submit to the exclusive jurisdiction of the English courts
          as regards any claim legal action or proceedings arising out of this
          Plan and to waive any objection to such proceedings taking place in
          the English courts on the grounds of venue or on the grounds that such
          proceedings have been brought in an inconvenient forum.

20.       DATA PROTECTION

20.1      By accepting the grant of an Option the Optionholder shall agree and
          consent to:

          20.1.1    the collection, use and processing by any member of the
                    Group, the Savings Body and any Relevant Trustee of Personal
                    Data relating to the Optionholder, for all purposes
                    reasonably connected with the administration of this Plan
                    and the subsequent registration of the Optionholder or any
                    other person as a holder of Shares acquired pursuant to the
                    exercise of an Option;

          20.1.2    any member of the Group, the Savings Body and any Relevant
                    Trustee transferring Personal Data to or between any of such
                    persons for all purposes reasonably connected with the
                    administration of this Plan;

          20.1.3    the use of such Personal Data by any such person for such
                    purposes; and

          20.1.4    the transfer to and retention of such Personal Data by any
                    third party for such purposes.

21.       THIRD PARTY RIGHTS

21.1      Except as otherwise expressly stated to the contrary, neither this
          Plan nor the grant of any Option nor the U.K. Contracts (Rights of
          Third Parties) Act 1999 shall have the effect of giving any third
          party any rights under this Plan and that Act shall not apply to this
          Plan or to the terms of any Option granted under it.

(FORM OF OPTION CERTIFICATE INITIALLY PROPOSED TO BE USED)

THE SMITH & NEPHEW SHARESAVE PLAN (2002)

("the Plan")

OPTION CERTIFICATE

THIS DOCUMENT IS IMPORTANT. A form of notice for use by the Optionholder for the exercise of the option is set out overleaf.

Name of Optionholder Number of Smith & Nephew plc ordinary shares

Address of Optionholder Exercise Price per share ______________

_________________________________ Maximum total acquisition cost ______________

_________________________________
                                   Type of Option:        3 year Option/

                                                          5 year Option/

Date of Grant _____________________                       7 year Option

THIS IS TO CERTIFY that the Optionholder named above was on the above date granted in accordance with the Plan an option [to acquire/to subscribe for]* the above number of Ordinary Shares of 12-2/9p each in the capital of Smith & Nephew plc at the above price per share. The option is personal to the Optionholder and may not be transferred, assigned, mortgaged, pledged or otherwise disposed of by him. The option is exercisable subject to and in accordance with the rules of the Plan.

for and on behalf of Smith & Nephew plc

*delete as appropriate

EXHIBIT 4(c)(viii)

RULES OF

THE SMITH & NEPHEW INTERNATIONAL SHARESAVE PLAN (2002)

This is a copy of the rules of The Smith & Nephew International Sharesave Plan (2002) established by resolution of shareholders of the Company at its Annual General Meeting on 3 April 2002 and adopted by the Company Secretary pursuant to the authority delegated upon him by the board of directors on 31 July 2002

                                    CONTENTS

RULE                                                                        PAGE

1.         Interpretation                                                      1

2.         Issue of Invitations                                                6

3.         Applications for Options                                            8

4.         Grant of Options                                                    8

5.         Monthly contributions                                               9

6.         Exercise Price                                                     10

7.         Limitation on Grant of Subscription Options                        10

8.         Exercise of an Option                                              11

9.         Manner of Exercise of an Option                                    12

10.        Non-Transferability and Lapse of Options                           13

11.        Relationship with Employment Contract                              14

12.        Demerger, Reconstruction or Winding-up of the Company              15

13.        Take-over of the Company                                           15

14.        Variation of Share Capital                                         16

15.        Alteration of this Plan                                            17

16.        Service of Documents                                               17

17.        Applicable Law                                                     18

18.        Third Party Rights                                                 18

19.        Protection of Personal Data                                        18

20.        Miscellaneous                                                      19

                                    RULES OF
             THE SMITH & NEPHEW INTERNATIONAL SHARESAVE PLAN (2002)

1.        INTERPRETATION

1.1       Words and expressions used in this Plan shall have the meanings
          respectively given below:

          "Acquisition Cost"            in relation to the exercise of an Option
                                        on any occasion, an amount in pounds
                                        sterling equal to the product of:

                                        (a)       the maximum number of Shares
                                                  in respect of which that
                                                  Option is then exercised in
                                                  accordance with rule 8.5; and

                                        (b)       the Exercise Price

          "the Administrator"           Computershare Investor Services plc or
                                        such other person who is for the time
                                        being appointed by the Company to
                                        administer this Plan

          "Announcement Date"           the date of notification to the London
                                        Stock Exchange of the annual or half
                                        year results of the Company

          "Applicant"                   a person who, in response to an
                                        Invitation, submits an Application

          "Application"                 an application for the grant of an
                                        Option made in accordance with rule 3

          "Application Date"            in relation to any Invitation such date
                                        as is specified in accordance with rule
                                        2.5.5 to be the last day on which an
                                        Application may be submitted in response
                                        to Invitations issued on any occasion

          "Approval Date"               the date of the close of the Annual
                                        General Meeting of the Company held in
                                        2002

          "Associated Company"          any company which, in relation to the
                                        Company, is an associated company as
                                        that term is defined by section 416 of
                                        the Taxes Act except that for the
                                        purposes of this Plan, subsection (1) of
                                        that section shall have effect with the
                                        omission of the words "or at any time
                                        within one year previously"

          "Auditors"                    the auditors for the time being of the
                                        Company or if there are joint auditors,
                                        such one of them as the Directors may
                                        decide

                                        1

          "Companies Act 1985"          the UK Companies Act 1985

          "the Company"                 Smith & Nephew plc (registered in
                                        England no 324357)

          "control"                     the meaning given in section 840 of the
                                        Taxes Act

          "Daily Official List"         the daily official list of the London
                                        Stock Exchange

          "Date of Grant"               in relation to any Option, the date on
                                        which such Option was granted

          "Dealing Day"                 a day on which the London Stock Exchange
                                        is open for business

          "Directors"                   the board of directors for the time
                                        being of the Company or a duly
                                        constituted committee of that board

          "Electronic Communication"    has the meaning given in section 15 of
                                        the UK Electronic Communications Act
                                        2000 (but excluding mobile telephone
                                        text messages)

          "Eligible Employee"           an Employee who either:

                                        (a)       has held employment within the
                                                  Group for such continuous
                                                  period as the Directors have
                                                  determined; or

                                        (b)       is nominated by the Directors

          "Employee"                    an employee of a Participating Company

          "Employer Company"            in relation to an Applicant or an
                                        Optionholder at any time, the member of
                                        the Group or Associated Company with
                                        which such Applicant or Optionholder
                                        then holds or, if he has ceased to hold
                                        employment within the Group or with any
                                        Associated Company, last held office or
                                        employment

          "Exchange Rate"               in relation to a conversion of currency
                                        on any day, the rate to be applied in
                                        making such conversion being such
                                        published exchange rate as the Directors
                                        shall determine for the preceding day
                                        or, if that preceding day is not a
                                        Dealing Day, the last preceding Dealing
                                        Day

                                        2

          "the Exercise Date"           in relation to an Optionholder's
                                        Savings:

                                        (a)       where the Optionholder has a
                                                  3-year Option, the third
                                                  anniversary of the date on
                                                  which his first Monthly
                                                  Contribution is received by
                                                  the Savings Body; and

                                        (b)       where the Optionholder has a
                                                  5-year Option, the fifth
                                                  anniversary of the date on
                                                  which his first Monthly
                                                  Contribution is received by
                                                  the Savings Body.

          "the Exercise Price"          in relation to Shares subject to any
                                        Option, the price per Share in pounds
                                        sterling payable for the acquisition of
                                        such Shares upon the exercise of that
                                        Option as determined in rule 6

          "Grantor"                     in relation to an Option, the Company or
                                        the Relevant Trustee which has granted
                                        or proposes to grant such Option

          "the Group"                   the Company and every other company
                                        which is for the time being a Subsidiary

          "the Individual Share Limit"  in relation to any Option, the amount of
                                        the Notional Sterling Repayment Value
                                        divided by the Exercise Price

          "Initial Market Value"        in relation to a Share subject to any
                                        Option, the average of the middle market
                                        quotations of a Share as derived from
                                        the Daily Official List for the 3
                                        consecutive Dealing Days immediately
                                        preceding the Invitation Date

          "Invitation"                  an invitation to apply for the grant of
                                        an Option issued in accordance with rule
                                        2

          "Invitation Date"             in relation to an Option, the date on
                                        which the Invitation was issued

          "Jointly Owned Company"       a company (and any subsidiary as defined
                                        in section 736 of the Companies Act 1985
                                        of such a company) of which the whole of
                                        the issued ordinary share capital is
                                        jointly owned by a member of the Group
                                        and another person (not being a member
                                        of the Group) but which is not a
                                        Subsidiary and is not under the control
                                        of such other person

          "Local Currency"              the local currency of legal tender in
                                        the relevant jurisdiction

                                        3

          "Local Currency Equivalent"   in relation to an amount in pounds
                                        sterling on a given day, the equivalent
                                        value (or as nearly as may be) in Local
                                        Currency of such sterling amount after
                                        conversion at the Exchange Rate on that
                                        day

          "the London Stock Exchange"   London Stock Exchange plc

          "Model Code"                  the code adopted by the Company which
                                        contains provisions similar in purpose
                                        and effect to the provisions of the
                                        Model Code for Securities Transactions
                                        by Directors of Listed Companies issued
                                        by the UK Listing Authority from time to
                                        time

          "Monthly Contribution"        in relation to any Eligible Employee,
                                        the fixed amount (in Local Currency) of
                                        each of the 36 (or, in the case of a
                                        5-year Option, 60) monthly savings
                                        contributions which that Employee
                                        undertakes to make in his Application

          "Net Pay"                     in relation to an Optionholder, the
                                        amount of his earnings for a given
                                        month, being earnings from the
                                        Optionholder's employment with any one
                                        or more members of the Group and any
                                        Associated Company, after any deductions
                                        have been made by the payer of or on
                                        account of any tax or social security
                                        contributions and after any other
                                        deductions (other than a deduction of a
                                        Monthly Contribution) which the payer
                                        has made under any legal obligation or
                                        pursuant to any authority duly given by
                                        the Optionholder

          "Notional Sterling Repayment  in relation to any Application, the
          Value"                        aggregate amount in pounds sterling
                                        (converted from Local Currency using the
                                        Exchange Rate on the Invitation Date)
                                        of:

                                        (a)       in the case of a 3-year
                                                  Option, 38 Monthly
                                                  Contributions; and

                                        (b)       in the case of a 5-year
                                                  Option, 66.2 Monthly
                                                  Contributions

                                        or, in either case, such other number of
                                        Monthly Contributions as the Directors
                                        may determine in relation to Options
                                        granted on any occasion so as to be
                                        consistent with the bonus rates payable
                                        on a certified contractual savings
                                        scheme within the meaning of section 326
                                        of the Taxes Act

                                        4

          "Option"                      a right to acquire Shares which:

                                        (a)       is granted pursuant to, and is
                                                  exercisable only in accordance
                                                  with, this Plan and which is a
                                                  3-year Option or a 5-year
                                                  Option; and

                                        (b)       has neither been exercised nor
                                                  ceased to be exercisable

          "Option Certificate"          a certificate issued by the Grantor
                                        evidencing the grant of an Option

          "Option Shares"               in relation to an Option, the Shares
                                        over which that Option subsists

          "Option Tax Liability"        in relation to an Optionholder, any
                                        liability of any member or former member
                                        of the Group or any Associated Company
                                        or former Associated Company or any
                                        Relevant Trustee to account to any tax
                                        authority or other body for any amount
                                        of, or representing, income tax or
                                        social security contributions or any
                                        other tax charge levy or other sum which
                                        the Optionholder is charged upon or in
                                        consequence of the grant, vesting,
                                        exercise, assignment or release of an
                                        Option or the acquisition of Shares
                                        under this Plan

          "Optionholder"                in relation to any Option, the person to
                                        whom that Option has been granted or, if
                                        that person has died, his legal personal
                                        representatives

          "Ordinary Share Capital"      issued share capital of the Company
                                        other than fixed-rate preference shares

          "Participating Company"       a member of the Group to which the
                                        Directors have determined that this Plan
                                        shall extend for the time being

          "Personal Data"               has the meaning it bears for the
                                        purposes of the UK Data Protection Act
                                        1998

          "Personal Representatives"    in relation to an Optionholder the legal
                                        personal representatives of the
                                        Optionholder who have satisfied the
                                        Company or the Administrator of their
                                        appointment as such

          "this Plan"                   The Smith & Nephew International
                                        Sharesave Plan (2002) (approved by
                                        shareholders of the Company on the
                                        Approval Date) as set out in these rules
                                        and as amended from time to time

                                        5

          "Relevant Trustee"            the meaning given in article 71(6) of
                                        the UK Financial Services and Markets
                                        Act 2000 (Regulated Activities) Order
                                        2001

          "Savings"                     in relation to an Optionholder at any
                                        time, the aggregate amount of that
                                        Optionholder's Monthly Contributions
                                        held by the Savings Body together with
                                        any accrued interest thereon

          "Savings Body"                such bank(s) and/or other savings
                                        institution(s) as may from time to time
                                        be approved by the Company for the
                                        purposes of this Plan

          "Shares"                      fully-paid ordinary shares in the
                                        capital of the Company

          "Subscription Options"        Options which are rights granted by the
                                        Company to subscribe for Shares

          "Subsidiary"                  a subsidiary (as defined in section 736
                                        of the UK Companies Act 1985) of the
                                        Company and which is under the control
                                        of the Company

          "Taxes Act"                   the UK Income and Corporation Taxes Act
                                        1988

          "UK"                          the United Kingdom

          "UK Listing Authority"        the Financial Services Authority in its
                                        capacity as the competent authority for
                                        the purposes of Part VI of the UK
                                        Financial Services and Markets Act 2000

          "year"                        a financial year of the Company.

1.2 References to any statutory provision shall be read and construed as references to such provision as amended and re-enacted from time to time and no account should be taken of the rule headings which have been inserted for ease of reference only.

1.3 If any question, dispute or disagreement arises as to the interpretation of this Plan, the decision of the Directors shall (except as regards any matter required to be determined by the Auditors hereunder) be final and binding upon all persons.

1.4 In any matter in which they are required to act hereunder, the Auditors shall be deemed to be acting as experts and not as arbitrators and the UK Arbitration Act of 1996 shall not apply in relation to any such matter.

1.5 Words denoting the masculine gender shall include the feminine.

1.6 Words denoting the singular shall include the plural and vice versa.

2. ISSUE OF INVITATIONS

2.1 Subject to the following provisions of this rule 2, the Company may from time to time issue, or procure the issue by the Administrator, to all persons who are or are expected to be Eligible Employees, invitations to apply for the grant of Options.

2.2       Invitations may be issued:

          2.2.1     in the period of 42 days after the Approval Date, and
                    thereafter,

          2.2.2     in the period of 42 days beginning with the fourth Dealing
                    Day following an Announcement Date

and

2.2.3     at any other time if the Directors consider the
          circumstances to be exceptional unless the Company is or
          would then be so restricted from issuing invitations at that
          time.

2.3 Invitations issued to Eligible Employees in a given jurisdiction shall be issued at the same time and be on the same terms.

2.4 Invitations may be issued in writing or by Electronic Communication or in the form of notices, advertisements, circulars or otherwise for the general attention of Employees and to which the particular attention of individual Employees is drawn by notices issued with pay and salary advice slips SAVE THAT an invitation may not be issued to an Eligible Employee by Electronic Communication unless that person is known by his Employer Company to have personal access during his normal business hours to information sent to him by Electronic Communication.

2.5       Each invitation shall:

          2.5.1     identify the Savings Body;

          2.5.2     state that it is a condition of the grant of an Option that
                    the Employee must first undertake to make 36 or 60
                    consecutive monthly savings contributions (by way of
                    deductions from net payments of salary or by such other
                    arrangement as may be permitted by the Directors in a
                    specific country) in Local Currency to an account with the
                    Savings Body;

          2.5.3     specify the maximum and minimum amounts of such monthly
                    savings contributions;

          2.5.4     invite the person to whom it is addressed to apply for an
                    Option in respect of such whole number of Shares as shall be
                    as nearly as may be equal to, but shall not exceed, the
                    Individual Share Limit (or such lesser number of Shares as
                    the Company may determine);

          2.5.5     specify the last day on which an Application may be made

and shall otherwise be in such form as the Grantor shall determine.

2.6 On any occasion on which invitations are issued, the Directors may in their discretion (and acting with the consent of the Grantor where appropriate) determine and announce the maximum number of Shares in respect of which Options will be granted in response to Applications made pursuant to such Invitations.

2.7 The amount of an Employee's Monthly Contribution shall be not less than the Local Currency equivalent of (GBP)5 and not greater than the Local Currency equivalent of (GBP)250 or, in either case, such other sum as the Directors may from time to time determine.

2.8 No invitation may be issued after 3 April 2012.

3. APPLICATIONS FOR OPTIONS

3.1 Any Eligible Employee to whom an Invitation has been issued may apply for an Option by submitting to the person specified in the Invitation an application in writing which:

3.1.1     is received at such address as shall be stated in the
          Invitation not later than the Application Date;

3.1.2     specifies the amount of the monthly contributions proposed
          to be paid by the Employee and authorises his Employer
          Company to deduct such amount (or such lower amount as may
          be determined by the Directors having regard to the
          limitations imposed by the Plan) from his pay;

3.1.3     if the terms of the Invitation so permit, indicates whether
          the Employee wishes to be granted a 3-year Option or a
          5-year Option;

3.1.4     includes an undertaking by the Employee to his Employer
          Company to make 36 or, in the case of a 5-year Option, 60
          consecutive monthly savings contributions (in Local
          Currency) to a Savings Body;

3.1.5     otherwise complies with such terms and conditions as may
          have been specified in the Invitation;

3.1.6     is subject to the Employee continuing to hold employment
          with a Participating Company until the Date of Grant;

3.1.7     authorises the transfer and processing of the Applicant's
          Personal Data for the purposes of the administration of this
          Plan;

3.1.8     provides that the Applicant agrees to accept and be bound by
          the rules of the Plan;

3.1.9     is duly completed and signed by the Applicant

and is otherwise in such form as the Directors may determine.

3.2 If an Applicant has indicated in his Invitation that he wishes to be granted a 5-year Option, the Directors may, if it is necessary to ensure compliance with rule 7 or any such limit as has been determined as mentioned in rule 2.6, treat such Application as if the Applicant had indicated that he wishes to be granted a 3-year Option.

3.3 No Eligible Employee shall make more than one Application nor be granted more than one Option in response to the issue of an Invitation on any occasion.

4. GRANT OF OPTIONS

4.1 An Option may be granted by the Company or, if the Company has agreed, a Relevant Trustee.

4.2 An Option shall not be granted to any person who is not an Eligible Employee at the Date of Grant.

4.3 The maximum number of Shares in respect of which an Option shall be granted in response to any Application shall not in any event exceed the Individual Share Limit.

4.4 Subject to rule 4.3, the Directors shall have an absolute discretion as to whether, and in respect of how many Shares, any Option should be granted.

4.5 Options for which Invitations have been issued on any occasion shall be granted within the period of 30 days beginning with the first of the 3 days by reference to which the Initial Market Value of a Share is determined on that occasion PROVIDED THAT if on any occasion it is necessary to reduce the number of Shares over which Options are granted (so as to avoid exceeding the limit set out in rule 7 or otherwise) in one or more countries, the Directors may grant such Options at any time within the period of 42 days beginning with such date.

4.6 As soon as reasonably practicable after the Date of Grant, the Grantor shall, or shall procure the, issue to each Optionholder of an Option Certificate which specifies:

4.6.1     the Grantor;

4.6.2     the Date of Grant;

4.6.3     the number of Shares in respect of which the Option is
          granted;

4.6.4     the Exercise Price;

4.6.5     the earliest date on which the Option will normally become
          exercisable; and

4.6.6     that it is a term of the Option that the Optionholder shall
          (to the extent permitted by law) be responsible for any
          Option Tax Liability which may arise

and shall otherwise be in such form as the Grantor shall determine from time to time.

5. MONTHLY CONTRIBUTIONS

5.1       Subject to rule 5.3, a Monthly Contribution may be made by:

          5.1.1     the Optionholder's Employer Company deducting the whole
                    amount from the Optionholder's Net Pay for the relevant
                    month and paying such amount (on the Optionholder's behalf)
                    to an account with the Savings Body; or

          5.1.2     the Optionholder entering into such other arrangement as may
                    be permitted by the Employer Company for the Monthly
                    Contribution to be paid to an account with the Savings Body.

5.2 An Optionholder's Savings shall be deposited with the Savings Body and shall at all times remain the property of the Optionholder so that none of the Company, the Optionholder's Employer, the Administrator or any Relevant Trustee shall have any interest in such Savings.

5.3 If in any month, and in consequence of an Optionholder being absent from work by reason of maternity leave, military service (or such other reason which is, in the Directors' opinion an equivalent circumstance or event resulting in a period of temporary suspension in employment), the amount of such Optionholder's Net Pay is insufficient to allow for the deduction in full of his Monthly Contribution for, or in respect of, that month, the Optionholder may make other arrangements for payment to the Savings Body of the whole, or any balance remaining, of such Monthly Contribution, provided that the full amount of such Monthly Contribution is paid to the Savings Body not later than 30 days after the end of the relevant month.

5.4 An Option shall not lapse and cease to be exercisable by reason only that the Optionholder has failed to make not more than six Monthly Contributions (whether by reason of any insufficiency of Net Pay or otherwise).

5.5 An Option shall immediately lapse and cease to be exercisable if, after six of the Optionholder's Monthly Contributions have not been made, a seventh Monthly Contribution is not made by the due date for payment.

6. EXERCISE PRICE

6.1 Subject to rule 14, the Company shall determine the price per Share payable upon the exercise of Options granted on the same day to Eligible Employees in the same jurisdiction, but this shall not be less than:

6.1.1     80% of the Initial Market Value (rounded up to the nearest
          whole penny); or, if greater

6.1.2     in the case of a Subscription Option, the nominal value of a
          Share.

7. LIMITATION ON GRANT OF SUBSCRIPTION OPTIONS

7.1 The Company may issue Shares to a Relevant Trustee for the purpose of enabling the Relevant Trustee to satisfy its obligation to transfer Shares to Optionholders upon the exercise of Options.

7.2 The number of Shares in respect of which Subscription Options may be granted in any year, when added to:

7.2.1     the number of Shares in respect of which Subscription
          Options have previously been granted (and which, if not
          exercised, have not ceased to be exercisable); and

7.2.2     the number of Shares issued or in respect of which rights to
          subscribe for Shares have previously been granted (and which
          have neither been exercised, nor ceased to be exercisable)
          pursuant to any other employee share option or share
          incentive plan

in that year and the preceding nine years shall not exceed 10 per cent of the Ordinary Share Capital.

7.3 To the extent that a Relevant Trustee has purchased Shares to be transferred to Optionholders in satisfaction of any Subscription Options, the Shares over which such Options are held shall be left out of account for the purposes of this rule 7.

8. EXERCISE OF AN OPTION

8.1 Subject to the following provisions of this rule 8 and rules 12 and 13, an Option shall only be exercisable within the period of 6 months beginning with the Exercise Date and, if not then exercised, shall lapse and cease to be exercisable at the end of that period.

8.2 If an Optionholder dies, his Personal Representatives may exercise that Option to the extent permitted by rule 8.5:

8.2.1     if he dies before the Exercise Date, during the period of 12
          months commencing on the date of his death; or

8.2.2     if he dies within the period of 6 months beginning on or
          after the Exercise Date, during the period of 12 months
          beginning on the Exercise Date

and if it is not then exercised that Option shall lapse and cease to be exercisable at the end of such 12-month period.

8.3 An Option may be exercised to the extent permitted by rule 8.5 within the period of 6 months following the date upon which the Optionholder ceases to hold employment within the Group by reason of:

8.3.1     injury, ill-health or disability (evidenced to the
          satisfaction of the directors of his Employer Company);

8.3.2     dismissal by reason of redundancy and, in South Africa only,
          dismissal by reason of the Employer Company's operational
          requirements;

8.3.3     retirement at or after his normal retirement age;

8.3.4     the company by which the Optionholder is employed becoming
          neither a member of the Group nor an Associated Company nor
          a Jointly Owned Company; or

8.3.5     the fact that the Optionholder's employment with a member of
          the Group or an Associated Company relates to a business or
          part of a business which is transferred to a person which is
          neither a member of the Group nor an Associated Company nor
          a Jointly Owned Company.

8.4 If at any time before the Exercise Date an Optionholder ceases to hold employment with a member of the Group or an Associated Company or a Jointly Owned Company for any reason other than those mentioned in rules 8.2 and 8.3, all Options granted to him shall immediately lapse and cease to be exercisable.

8.5       An Option may only ever be exercised:

          8.5.1     subject to the Optionholder not having failed to make any
                    Monthly Contributions, pursuant to rules 8.1 and 8.2.2 in
                    respect of all of the Option Shares; or

                                       11

          8.5.2     pursuant to rules 8.2.1, 8.3, 12 or 13 (or pursuant to rules
                    8.1 and 8.2.2 if the Optionholder has failed to make one or
                    more Monthly Contributions), in respect of such number of

Shares as is equal to:

(a) in the case of a 3-year Option, C X D / 36

(b) in the case of a 5-year Option, C X D / 60

where:

C is the number of Option Shares; and

D is the number of Monthly Contributions actually made by the Optionholder before the date of exercise of the Option

or, in either case, such lesser number of Option Shares as the Optionholder may specify in the notice of exercise given pursuant to rule 9.1.

8.6 For the purposes of this rule 8, an Optionholder shall not be treated as ceasing to hold employment within the Group until he no longer holds any office as a director or any employment with any member of the Group or any Associated Company or any Jointly Owned Company.

8.7 An Option may not be exercised more than once.

8.8 In deciding whether and when to exercise an Option, an Optionholder shall have regard to the Model Code.

9. MANNER OF EXERCISE OF AN OPTION

9.1 An Option shall be exercised only by the Optionholder giving notice in writing to the Grantor or, if so directed by the Company, the Administrator, which:

9.1.1     is given at any time when the Option is exercisable;

9.1.2     specifies the number of Shares in respect of which the
          Option is exercised in accordance with rule 8.5;

9.1.3     is accompanied by payment of an amount in pounds sterling
          equal to the Acquisition Cost;

9.1.4     unless the Grantor otherwise permits, is accompanied by the
          Option Certificate

and is otherwise in such form as the Grantor may from time to time determine and notify to the Optionholder.

9.2 Within 30 days after the date on which the Grantor (or the Administrator) shall have received a valid notice of exercise of an Option the Grantor shall procure that:

9.2.1     the monies accompanying that notice are applied in payment
          of the Acquisition Cost for the number of Shares in respect
          of which the Option is then exercised; and

                             12

9.2.2     subject to rules 9.3 and 9.6, the number of Shares in
          respect of which the Option is then exercised are allotted
          and issued or transferred to or to the order of the
          Optionholder.

9.3 The Grantor shall not be obliged to issue, transfer or procure the transfer of any Shares or any interest in any Shares upon the exercise of an Option unless and until the Optionholder has paid to the Grantor such sum as, in the opinion of the Company, is sufficient to indemnify any existing or former member of the Group or any existing or former Associated Company or any Relevant Trustee in full against any Option Tax Liability or has made such other arrangement as, in the opinion of the Company, will ensure that the Optionholder will satisfy his liability under such indemnity.

9.4 As soon as reasonably practicable after allotting or transferring any Shares as mentioned in rule 9.2.2, the Grantor shall procure:

9.4.1     the issue to the Optionholder of a definitive share
          certificate or such acknowledgement of shareholding as is
          prescribed from time to time in respect of the Shares so
          allotted or transferred; and

9.4.2     if at that time the Shares are listed on the Daily Official
          List, that any Shares so allotted are admitted to the Daily
          Official List.

9.5 If after an Option has been exercised, the Grantor is restricted from issuing, transferring or procuring the transfer of Shares to the Optionholder by reason of any statutory, regulatory or other legal provision, rule or the Model Code or any other requirement or guidance which is issued by the UK Listing Authority or any other body on behalf of institutional investors in the Company relating to dealings in Shares by directors or employees of any member of the Group, the Grantor shall not be obliged to issue, transfer or procure the transfer of Shares in consequence of such exercise until after all such restrictions are lifted but shall do so within the period of 30 days thereafter.

9.6 The allotment or transfer of any Shares upon the exercise of an Option shall be subject to the Memorandum and Articles of Association of the Company and to any necessary consents of any governmental or other authorities (whether in the United Kingdom or overseas) under any enactments or regulations from time to time in force and it shall be the responsibility of the Optionholder to do all such things as may be necessary to obtain or obviate the necessity of any such consent.

9.7 All Shares allotted or transferred upon the exercise of any Option shall rank equally in all respects with the Shares for the time being in issue save as regards any rights attaching to such Shares by reference to a record date prior to the date of such allotment or transfer.

9.8 The costs of stamp duty and dealing costs and commissions incurred when Shares are purchased upon the exercise of an Option shall be borne by the Company.

10. NON-TRANSFERABILITY AND LAPSE OF OPTIONS

10.1 During his lifetime only the individual to whom an Option is granted may exercise that Option.

10.2 An Option shall immediately lapse and cease to be exercisable if:

          10.2.1    it is transferred or assigned (other than to Personal
                    Representatives of the Optionholder), mortgaged, charged or
                    otherwise disposed of by the Optionholder;

          10.2.2    the Optionholder becomes bankrupt or makes, or proposes to
                    make, a voluntary arrangement with all or any of his
                    creditors in accordance with any applicable laws relating to
                    personal insolvency;

          10.2.3    the Optionholder is not or ceases for any other reason
                    (except his death) to be the sole legal and beneficial owner
                    of the Option free from encumbrances or would not, upon the
                    exercise of the Option, be the sole legal and beneficial
                    owner of the Shares thereby acquired, free from
                    encumbrances;

          10.2.4    (unless in any individual case the Company otherwise
                    determines) the Optionholder, whilst remaining in employment
                    with a member of the Group or an Associated Company or a
                    Jointly Owned Company, instructs his Employer Company to
                    cease deducting Monthly Contributions from his salary;

          10.2.5    if, after six of the Optionholder's Monthly Contributions
                    have not been made for any reason, a seventh Monthly
                    Contribution is not made on the due date for payment; or

          10.2.6    (unless in any individual case the Company otherwise
                    determines) an Optionholder obtains repayment of any of his
                    savings contributions (or interest on such contributions)
                    unless such Option is then immediately exercisable pursuant
                    to rules 8.2, 8.3, 12 or 13.

10.3      Save as mentioned in rule 8.2.2, an Option shall in any event lapse
          and cease to be exercisable at the end of the period of 6 months
          beginning with the Exercise Date.

11.       RELATIONSHIP WITH EMPLOYMENT CONTRACT

11.1      The grant of an Option shall not form part of the Optionholder's
          entitlement to remuneration or benefits pursuant to his contract of
          employment nor shall the existence of a contract of employment between
          any person and any present or past member of the Group or Associated
          Company or Jointly Owned Company, give such person any right
          entitlement or expectation to have an Option granted to him in respect
          of any number of Shares or any expectation that an Option might be
          granted to him or that he will be invited to apply for the grant of an
          Option whether subject to any conditions or at all.

11.2      Neither the existence of this Plan nor the fact that an individual has
          on any occasion been granted an Option (or been invited to apply for
          the grant of an Option) shall give such individual any right
          entitlement or expectation that he has or will in future have any such
          right entitlement or expectation to participate in this Plan by being
          granted an Option (or invited to apply for the grant of an Option) on
          any other occasion.

11.3      The rights granted to an Optionholder upon the grant of an Option
          shall not afford the Optionholder any rights or additional rights to
          compensation or damages in consequence of the loss or termination of
          his office or employment with any present or past member of the Group
          or Associated Company or Jointly Owned Company for any reason
          whatsoever (whether or not such termination is ultimately held to be
          wrongful or unfair).

                                       14

11.4      The rights and obligations of an Optionholder under the terms of his
          contract of employment with any present or past member of the Group or
          Associated Company or Jointly Owned Company shall not be affected by
          the grant of an Option or his participation in this Plan.

11.5      An Optionholder shall not be entitled to any compensation or damages
          for any loss or potential loss which he may suffer by reason of being
          unable to exercise an Option in whole or in part in consequence of the
          loss or termination of his office or employment with any present or
          past member of the Group or Associated Company or Jointly Owned
          Company for any reason whatsoever (whether or not such termination is
          ultimately held to be wrongful or unfair).

12.       DEMERGER, RECONSTRUCTION OR WINDING-UP OF THE COMPANY

12.1      If notice is given to shareholders of the Company of a proposed
          demerger of the Company or of any Subsidiary the Company may give
          notice to Optionholders that Options may then be exercised within such
          period (not exceeding 30 days) as the Company may specify in such
          notice to Optionholders SAVE THAT no such notice to Optionholders
          shall be given unless the Auditors have confirmed in writing to the
          Company that the interests of Optionholders would or might be
          substantially prejudiced if before the proposed demerger has effect
          Optionholders could not exercise their Options and be registered as
          the holders of the Shares thereupon acquired.

12.2      If the court sanctions a compromise or arrangement proposed for the
          purposes of or in connection with a scheme for the reconstruction of
          the Company or its amalgamation pursuant to section 425 of the UK
          Companies Act 1985 the Optionholder shall be entitled to exercise his
          Option during the period of 6 months commencing on the date on which
          the court sanctions the compromise or arrangement, and thereafter the
          Option shall lapse and cease to be exercisable.

12.3      If notice is given to the shareholders of the Company of a resolution
          for the voluntary winding-up of the Company, notice of the same shall
          be given to all Optionholders and each Optionholder shall be entitled
          to exercise his Option at any time within the period of 6 months
          commencing on the date on which the resolution is passed.

12.4      All Options shall immediately lapse and cease to be exercisable upon
          the commencement of a winding-up of the Company.

13.       TAKE-OVER OF THE COMPANY

13.1      If, as a result of either:

          13.1.1    a general offer to acquire the whole of the Ordinary Share
                    Capital which is made on a condition such that if it is
                    satisfied the person making the offer will have control of
                    the Company; or

          13.1.2    a general offer to acquire all the shares in the Company of
                    the same class as the Shares

          the Company shall come under the control of another person or persons,
          an Optionholder shall be entitled to exercise his Option to the extent
          permitted by rule 8.5 within the period of 6 months beginning with the
          date when the person making the offer has obtained control of the
          Company and any condition subject to which the offer is made has been
          satisfied. To the extent that the Option is not then exercised, it
          shall lapse and cease to be exercisable at the end of such period.

                                       15

13.2      If at any time any person becomes entitled or bound to acquire shares
          in the Company under sections 428 to 430F (inclusive) of the Companies
          Act 1985 an Optionholder shall be entitled to exercise his Option to
          the extent permitted by rule 8.5 at any time when that person remains
          so entitled or bound. To the extent that the Option is not then
          exercised, it shall lapse and cease to be exercisable at the end of
          such period.

13.3      For the purposes of the preceding provisions of this rule 13 a person
          shall be deemed to have control of the Company if he and others acting
          in concert with him have together obtained control of it.

14.       VARIATION OF SHARE CAPITAL

14.1      In the event of any alteration of the Ordinary Share Capital by way of
          a capitalisation or rights issue or by way of sub-division,
          consolidation, reduction or any other variation in the share capital
          of the Company the Grantor may make such adjustments as it considers

appropriate:

14.1 to the aggregate number of Shares subject to any Option;

14.2 to the Exercise Price; and/or

14.3 if an Option has been exercised but no Shares have been allotted or transferred, to the number of Shares which may be so allotted or transferred and the Acquisition Cost relating to such Shares

PROVIDED THAT:

          (a)  except in the case of a subdivision, consolidation or
               capitalisation issue any such adjustment is confirmed in writing
               by the Auditors to be in their opinion fair and reasonable;

          (b)  the aggregate Acquisition Cost payable by an Optionholder on the
               exercise of all of his Options shall not be materially altered;

          (c)  except insofar as the Directors, on behalf of the Company, may
               then agree to capitalise the Company's reserves and apply the
               same in paying up the difference between the Exercise Price and
               the nominal value of the Shares at the time of exercise, the
               Exercise Price in relation to a Subscription Option is not
               reduced below the nominal value of those Shares;

          (d)  the number of Shares as so adjusted shall be rounded down to the
               nearest whole number and the Exercise Price as so adjusted shall
               be rounded up to the nearest whole penny; and

          (e)  if the Grantor is not the Company, no such adjustment shall be
               made without the consent of the Grantor.

14.2      As soon as reasonably practicable after making any adjustment pursuant
          to rule 14.1 the Grantor shall give notice in writing thereof to every
          Optionholder affected thereby and may call in any Option Certificates
          for endorsement or replacement.

                                       16

15.       ALTERATION OF THIS PLAN

15.1      The Directors may at any time (with the prior consent of the Grantor)
          by resolution in writing alter or add to any of the provisions of this
          Plan in any respect PROVIDED THAT:

          15.1.1    no such alteration or addition shall be made to the
                    advantage of existing or new Optionholders to the provisions
                    relating to eligibility to participate, basis of determining
                    entitlement to Optionholders' rights to acquire shares,
                    exercise price, overall and individual limitations on the
                    grant of options under this Plan and the adjustment of such
                    rights in the event of a variation of Ordinary Share Capital
                    without the prior approval by ordinary resolution of the
                    shareholders of the Company in general meeting SAVE THAT
                    this provision shall not apply to the extent that such
                    alteration or addition is in the opinion of the Directors a
                    minor amendment which is necessary or appropriate:

                    (a)  to benefit the administration of this Plan;

                    (b)  to take account of a change in legislation; or

                    (c)  to obtain or maintain favourable tax, exchange control
                         or regulatory treatment for participants in the Plan or
                         for the Company or any member of the Group in any
                         jurisdiction;

          15.1.2    if in relation to any Options the Grantor is not the
                    Company, no alteration or addition shall be made to the
                    terms of such Options without the approval of the Grantor;
                    and

          15.1.3    as soon as reasonably practicable after making any such
                    alteration or addition the Directors (on behalf of the
                    Grantor) shall give notice in writing thereof to every
                    Optionholder (if any) affected thereby.

16.       SERVICE OF DOCUMENTS

16.1      Except as otherwise provided in this Plan, any notice or document to
          be given by, or on behalf of, the Company or other Grantor or the
          Administrator to any person in accordance or in connection with this
          Plan shall be duly given:

          16.1.1    by sending it through the post in a pre-paid envelope to the
                    address last known to the Company to be his address and, if
                    so sent, it shall be deemed to have been duly given on the
                    date of posting; or

          16.1.2    if he holds office or employment with any member of the
                    Group or any Associated Company, by delivering it to him at
                    his place of work or by sending to him a facsimile
                    transmission or Electronic Communication addressed to him at
                    his place of work and if so sent it shall be deemed to have
                    been duly given at the time of transmission SAVE THAT a
                    notice or document shall not be duly given by Electronic
                    Communication unless that person is known by his Employer
                    Company to have personal access during his normal business
                    hours to information sent to him by Electronic
                    Communication.

                                       17

16.2      Any notice or document so sent to an Employee or Optionholder shall be
          deemed to have been duly given notwithstanding that such Optionholder
          is then deceased (and whether or not the Company or other Grantor has
          notice of his death) except where his Personal Representatives have
          supplied to the Company an address to which documents are to be sent.

16.3      Any notice in writing or document to be submitted or given by an
          Optionholder to the Grantor, the Company or the Administrator in
          accordance or in connection with this Plan may be delivered, sent by
          post, facsimile transmission or Electronic Communication but shall not
          in any event be duly given unless:

          16.3.1    it is actually received (or, in the case of an Electronic
                    Communication, opened) by the secretary of the Company or
                    such other individual as may from time to time be nominated
                    by the Company and whose name and address is notified to
                    Optionholders; and

          16.3.2    if given by Electronic Communication (and is so required by
                    the Company), it includes a digitally encrypted signature of
                    the Optionholder.

16.4      For the purposes of this Plan, an Electronic Communication shall be
          treated as not having been duly made or received if the recipient of
          such Electronic Communication notifies the sender that it has not been
          opened because it contains, or is accompanied by a warning or caution
          that it could contain or be subject to, a virus or other computer
          programme which could alter damage or interfere with any computer
          software or Electronic Communication.

17.       APPLICABLE LAW

17.1      This Plan shall be governed by and construed in all respects in
          accordance with English law.

17.2      In applying for the grant of an Option an Eligible Employee shall be
          deemed to submit to the exclusive jurisdiction of the English courts
          as regards any claim legal action or proceedings arising out of this
          Plan and to waive any objection to such proceedings taking place in
          the English courts on the grounds of venue or on the grounds that such
          proceedings have been brought in an inconvenient forum.

18.       THIRD PARTY RIGHTS

          Except as otherwise expressly stated to the contrary, neither this
          Plan nor the grant of any Option nor the U.K. Contracts (Rights of
          Third Parties) Act 1999 shall have the effect of giving any third
          party any rights under this Plan and that Act shall not apply to this
          Plan or to the terms of any Option granted pursuant to this Plan.

19.       PROTECTION OF PERSONAL DATA

19.1      By accepting the grant of an Option the Optionholder shall agree and
          consent to:

          19.1.1    the collection, use and processing by any member of the
                    Group, the Administrator and any Relevant Trustee of
                    Personal Data relating to the Optionholder, for all purposes
                    reasonably connected with the administration of this Plan
                    and the subsequent registration of the Optionholder or any
                    other person as a holder of Shares acquired pursuant to the
                    exercise of an Option;

19.1.2    any member of the Group, the Administrator and any Relevant
          Trustee transferring Personal Data to or between any of such
          persons for all purposes reasonably connected with the
          administration of the Plan;

19.1.3    the use of such Personal Data by any such person for such
          purposes; and

19.1.4    the transfer to and retention of such Personal Data by any
          third party for such purposes.

20. MISCELLANEOUS

20.1      The Company shall at all times keep available sufficient authorised
          but unissued Shares to satisfy the exercise in full of all the
          Subscription Options for the time being remaining capable of being
          exercised under this Plan.

20.2      No Option to purchase existing Shares shall be granted by any person
          unless that person beneficially owns such Shares at the Date of Grant
          or the Directors are satisfied that sufficient Shares will be made
          available to satisfy the exercise in full of all Options granted or to
          be granted by that person.

20.3      The Directors may from time to time make and vary such rules and
          regulations not inconsistent herewith and establish such procedures
          for the administration and implementation of this Plan as they think
          fit. In the event of any dispute or disagreement as to the
          interpretation of this Plan or of any such rules, regulations or
          procedures or as to any question or right arising from or related to
          this Plan, the decision of the Directors shall (except as regards any
          matter required to be determined by the Auditors hereunder) be final
          and binding upon all persons.

20.4      The Company shall not be obliged to provide Optionholders with copies
          of any notices, circulars or other documents sent to holders of
          Shares.

20.5      The costs of the administration and implementation of this Plan shall
          be borne by the Company.

20.6      The issue of an Invitation on any occasion is made at the Company's
          discretion. No entitlement to the issue of an Invitation, the grant of
          an Option and/or the issue of Shares in the future shall thereby be
          created on the grounds that such Invitations were issued or Options
          were granted in the past nor on the grounds that Options may
          previously have been granted over a particular number of Shares at a
          certain price. Even the repeated grant of Options and/or the issue of
          Shares shall not create future entitlements to receive Options and/or
          Shares at all or to be granted Options over a specific number of
          Shares or at a specific price.

20.7      If any provision of this Plan is held invalid, illegal or
          unenforceable for any reason by any court of competent jurisdiction,
          such provision shall be severed and the remainder of the provisions of
          this Plan shall continue in full force and effect as if this Plan had
          been established with the invalid, illegal or unenforceable provision
          eliminated.

EXHIBIT 4(c)(ix)

RULES OF

THE SMITH & NEPHEW ITALIAN SHARESAVE PLAN (2002)

This is a copy of the rules of The Smith & Nephew Italian Sharesave Plan (2002) established by the board of directors of the Company on 31 July 2002 and adopted by the Company Secretary pursuant to the authority delegated upon him by the board.

                                    CONTENTS

RULE                                                                       PAGE

1.    Interpretation                                                          1

2.    Issue of Invitations                                                    7

3.    Applications for Options                                                8

4.    Grant of Options                                                        9

5.    Monthly contributions                                                   9

6.    Exercise Price                                                         10

7.    Limitation on Grant of Subscription Options                            10

8.    Exercise of an Option                                                  11

9.    Manner of Exercise of an Option                                        12

10.   Non-Transferability and Lapse of Options                               14

11.   Relationship with Employment Contract                                  14

12.   Demerger, Reconstruction or Winding-up of the Company                  15

13.   Take-over of the Company                                               15

14.   Variation of Share Capital                                             16

15.   Alteration of this Plan                                                17

16.   Service of Documents                                                   18

17.   Applicable Law                                                         18

18.   Third Party Rights                                                     19

19.   Protection of Personal Data                                            19

20.   Miscellaneous                                                          19

                                    RULES OF
                THE SMITH & NEPHEW ITALIAN SHARESAVE PLAN (2002)

1.        INTERPRETATION

1.1       Words and expressions used in this Plan shall have the meanings
          respectively given below:

          "Acquisition Cost"            in relation to the exercise of an Option
                                        on any occasion, an amount in pounds
                                        sterling equal to the product of:

                                        (a)  the maximum number of Shares in
                                             respect of which that Option is
                                             then exercised in accordance with
                                             rule 8.5; and

                                        (b)  the Exercise Price

          "the Administrator"           Computershare Investor Services plc or
                                        such other person who is for the time
                                        being appointed by the Company to
                                        administer this Plan

          "Announcement Date"           the date of notification to the London
                                        Stock Exchange of the annual or half
                                        year results of the Company

          "Applicant"                   a person who, in response to an
                                        Invitation, submits an Application

          "Application"                 an application for the grant of an
                                        Option made in accordance with rule 3

          "Application Date"            in relation to any Invitation such date
                                        as is specified in accordance with rule
                                        2.5.5 to be the last day on which an
                                        Application may be submitted in response
                                        to Invitations issued on any occasion

          "Associated Company"          any company which, in relation to the
                                        Company, is an associated company as
                                        that term is defined by section 416 of
                                        the Taxes Act except that for the
                                        purposes of this Plan, subsection (1) of
                                        that section shall have effect with the
                                        omission of the words "or at any time
                                        within one year previously"

          "Auditors"                    the auditors for the time being of the
                                        Company or if there are joint auditors,
                                        such one of them as the Directors may
                                        decide

          "Companies Act 1985"          the UK Companies Act 1985

                                        1

          "the Company"                 Smith & Nephew plc (registered in
                                        England no 324357)

          "control"                     the meaning given in section 840 of the
                                        Taxes Act

          "Daily Official List"         the daily official list of the London
                                        Stock Exchange

          "Date of Grant"               in relation to any Option, the date on
                                        which such Option was granted

          "Dealing Day"                 a day on which the London Stock Exchange
                                        is open for business

          "Directors"                   the board of directors for the time
                                        being of the Company or a duly
                                        constituted committee of that board

          "Electronic Communication"    has the meaning given in section 15 of
                                        the UK Electronic Communications Act
                                        2000 (but excluding mobile telephone
                                        text messages)

          "Eligible Employee"           an Employee who either:

                                        (a)  has held employment within the
                                             Group for such continuous period as
                                             the Directors have determined; or

                                        (b)  is nominated by the Directors

          "Employee"                    an employee of a Participating Company

          "Employer Company"            in relation to an Applicant or an
                                        Optionholder at any time, the member of
                                        the Group or Associated Company with
                                        which such Applicant or Optionholder
                                        then holds or, if he has ceased to hold
                                        employment within the Group or with any
                                        Associated Company, last held office or
                                        employment

          "Exchange Rate"               in relation to a conversion of currency
                                        on any day, the rate to be applied in
                                        making such conversion being such
                                        published exchange rate as the Directors
                                        shall determine for the preceding day
                                        or, if that preceding day is not a
                                        Dealing Day, the last preceding Dealing
                                        Day

                                        2

          "the Exercise Date"           in relation to an Optionholder's
                                        Savings:

                                        (a)  where the Optionholder has a 3-year
                                             Option, the third anniversary of
                                             the date on which his first Monthly
                                             Contribution is received by the
                                             Savings Body; and

                                        (b)  where the Optionholder has a 5-year
                                             Option, the fifth anniversary of
                                             the date on which his first Monthly
                                             Contribution is received by the
                                             Savings Body.

          "the Exercise Price"          in relation to Shares subject to any
                                        Option, the price per Share in pounds
                                        sterling payable for the acquisition of
                                        such Shares upon the exercise of that
                                        Option as determined in rule 6

          "Grantor"                     in relation to an Option, the Company or
                                        the Relevant Trustee which has granted
                                        or proposes to grant such Option

          "the Group"                   the Company and every other company
                                        which is for the time being a Subsidiary

          "the Individual Share Limit"  in relation to any Option, the amount of
                                        the Notional Sterling Repayment Value
                                        divided by the Exercise Price

          "Initial Market Value"        in relation to a Share subject to any
                                        Option, shall be equal to the average
                                        quoted closing price of a Share for
                                        the period commencing one calendar month
                                        preceding the Date of Grant and ending
                                        on the day immediately preceding the
                                        Date of Grant (but for these purposes,
                                        any day falling within such period
                                        which is not a Dealing Day shall be
                                        disregarded)

          "Invitation"                  an  invitation to apply for the grant of
                                        an Option issued in accordance with rule
                                        2

          "Invitation Date"             in relation to an Option, the date on
                                        which the Invitation was issued

          "Jointly Owned Company"       a company (and any subsidiary as defined
                                        in section 736 of the Companies Act 1985
                                        of such a company) of which the whole of
                                        the issued ordinary share capital is
                                        jointly owned by a member of the Group
                                        and another person (not being a member
                                        of the Group) but which is not a
                                        Subsidiary and is not under the control
                                        of such other person

                                        3

          "Local Currency"              the local currency of legal tender in
                                        Italy

          "Local Currency Equivalent"   in relation to an amount in pounds
                                        sterling on a given day, the equivalent
                                        value (or as nearly as may be) in Local
                                        Currency of such sterling amount after
                                        conversion at the Exchange Rate on that
                                        day

          "the London Stock Exchange"   London Stock Exchange plc

          "Model Code"                  the code adopted by the Company which
                                        contains provisions similar in purpose
                                        and effect to the provisions of the
                                        Model Code for Securities Transactions
                                        by Directors of Listed Companies issued
                                        by the UK Listing Authority from time to
                                        time

          "Monthly Contribution"        in relation to any Eligible Employee,
                                        the fixed amount (in Local Currency) of
                                        each of the 36 (or, in the case of a
                                        5-year Option, 60) monthly savings
                                        contributions which that Employee
                                        undertakes to make in his Application

          "Net Pay"                     in relation to an Optionholder, the
                                        amount of his earnings for a given
                                        month, being earnings from the
                                        Optionholder's employment with any one
                                        or more members of the Group and any
                                        Associated Company, after any deductions
                                        have been made by the payer of or on
                                        account of any tax or social security
                                        contributions and after any other
                                        deductions (other than a deduction of a
                                        Monthly Contribution) which the payer
                                        has made under any legal obligation or
                                        pursuant to any authority duly given by
                                        the Optionholder

          "Notional Sterling Repayment  in relation to any Application, the
          Value"                        aggregate amount in pounds sterling
                                        (converted from Local Currency using the
                                        Exchange Rate on the Invitation Date)
                                        of:

                                        (a)  in the case of a 3-year Option, 38
                                             Monthly Contributions; and

                                        (b)  in the case of a 5-year Option,
                                             66.2 Monthly Contributions

                                        or, in either case, such other number of
                                        Monthly Contributions as the Directors
                                        may determine in relation to Options
                                        granted on any occasion so as to be
                                        consistent with the bonus rates payable
                                        on a certified contractual savings
                                        scheme within the meaning of section 326
                                        of the Taxes Act

                                        4

          "Option"                      a right to acquire Shares which:

                                        (a)  is granted pursuant to, and is
                                             exercisable only in accordance
                                             with, this Plan and which is a
                                             3-year Option or a 5-year Option;
                                             and

                                        (b)  has neither been exercised nor
                                             ceased to be exercisable

          "Option Certificate"          a certificate issued by the Grantor
                                        evidencing the grant of an Option

          "Option Shares"               in relation to an Option, the Shares
                                        over which that Option subsists

          "Option Tax Liability"        in relation to an Optionholder, any
                                        liability of any member or former member
                                        of the Group or any Associated Company
                                        or former Associated Company or any
                                        Relevant Trustee to account to any tax
                                        authority or other body for any amount
                                        of, or representing, income tax or
                                        social security contributions or any
                                        other tax charge levy or other sum which
                                        the Optionholder is charged upon or in
                                        consequence of the grant, vesting,
                                        exercise, assignment or release of an
                                        Option or the acquisition of Shares
                                        under this Plan

          "Optionholder"                in relation to any Option, the person to
                                        whom that Option has been granted or, if
                                        that person has died, his legal personal
                                        representatives

          "Ordinary Share Capital"      issued share capital of the Company
                                        other than fixed-rate preference shares

          "Participating Company"       a member of the Group to which the
                                        Directors have determined that this Plan
                                        shall extend for the time being

          "Personal Data"               has the meaning it bears for the
                                        purposes of the UK Data Protection Act
                                        1998

          "Personal Representatives"    in relation to an Optionholder the legal
                                        personal representatives of the
                                        Optionholder who have satisfied the
                                        Company or the Administrator of their
                                        appointment as such

          "this Plan"                   The Smith & Nephew Italian Sharesave
                                        Plan (2002) (established by the
                                        Directors pursuant to the authority
                                        conferred upon them by shareholders of
                                        the Company on 3 April 2002) set out in
                                        these rules and as amended from time to
                                        time

          "Relevant Trustee"            the meaning given in article 71(6) of
                                        the UK Financial Services and Markets
                                        Act 2000 (Regulated Activities) Order
                                        2001

                                        5

          "Savings"                     in relation to an Optionholder at any
                                        time, the aggregate amount of that
                                        Optionholder's Monthly Contributions
                                        held by the Savings Body together with
                                        any accrued interest thereon

          "Savings Body"                The Royal Bank of Scotland PLC, such
                                        other bank(s) and/or savings
                                        institution(s) as may from time to time
                                        be approved by the Company for the
                                        purposes of this Plan

          "Shares"                      fully-paid ordinary shares in the
                                        capital of the Company

          "Subscription Options"        Options which are rights granted by the
                                        Company to subscribe for Shares

          "Subsidiary"                  a subsidiary (as defined in section 736
                                        of the UK Companies Act 1985) of the
                                        Company and which is under the control
                                        of the Company

          "Taxes Act"                   the UK Income and Corporation Taxes Act
                                        1988

          "UK"                          the United Kingdom

          "UK Listing Authority"        the Financial Services Authority in its
                                        capacity as the competent authority for
                                        the purposes of Part VI of the UK
                                        Financial Services and Markets Act 2000

          "year"                        a financial year of the Company.

1.5 Words denoting the masculine gender shall include the feminine.

1.6 Words denoting the singular shall include the plural and vice versa.

2. ISSUE OF INVITATIONS

2.2 Invitations may be issued:

2.2.1 in the period of 42 days beginning with the fourth Dealing Day following an Announcement Date

and

2.2.2     at any other time if the Directors consider the
          circumstances to be exceptional unless the Company is or
          would then be so restricted from issuing invitations at that
          time.

2.3 Invitations issued to Eligible Employees in Italy shall be issued at the same time and be on the same terms.

2.5       Each invitation shall:

          2.5.1     identify the Savings Body;

          2.5.2     state that it is a condition of the grant of an Option that
                    the Employee must first undertake to make 36 or 60
                    consecutive monthly savings contributions (by way of
                    deductions from net payments of salary) in Local Currency to
                    an account with the Savings Body;

          2.5.3     specify the maximum and minimum amounts of such monthly
                    savings contributions;

          2.5.4     invite the person to whom it is addressed to apply for an
                    Option in respect of such whole number of Shares as shall be
                    as nearly as may be equal to, but shall not exceed, the
                    Individual Share Limit (or such lesser number of Shares as
                    the Company may determine);

          2.5.5     specify the last day on which an Application may be made

and shall otherwise be in such form as the Grantor shall determine.

2.8 No invitation may be issued after 3 April 2012.

3. APPLICATIONS FOR OPTIONS

3.1 Any Eligible Employee to whom an Invitation has been issued may apply for an Option by submitting to the person specified in the Invitation an application in writing which:

3.1.1     is received at such address as shall be stated in the
          Invitation not later than the Application Date;

3.1.2     specifies the amount of the monthly contributions proposed
          to be paid by the Employee and authorises his Employer
          Company to deduct such amount (or such lower amount as may
          be determined by the Directors having regard to the
          limitations imposed by the Plan) from his pay;

3.1.3     if the terms of the Invitation so permit, indicates whether
          the Employee wishes to be granted a 3-year Option or a
          5-year Option;

3.1.4     includes an undertaking by the Employee to his Employer
          Company to make 36 or, in the case of a 5-year Option, 60
          consecutive monthly savings contributions (in Local
          Currency) to a Savings Body;

3.1.5     otherwise complies with such terms and conditions as may
          have been specified in the Invitation;

3.1.6     is subject to the Employee continuing to hold employment
          with a Participating Company until the Date of Grant;

3.1.7     authorises the transfer and processing of the Applicant's
          Personal Data for the purposes of the administration of this
          Plan;

3.1.8     provides that the Applicant agrees to accept and be bound by
          the rules of the Plan;

3.1.9     is duly completed and signed by the Applicant

and is otherwise in such form as the Directors may determine.

3.3 No Eligible Employee shall make more than one Application nor be granted more than one Option in response to the issue of an Invitation on any occasion.

4. GRANT OF OPTIONS

4.1 An Option may be granted by the Company or, if the Company has agreed, a Relevant Trustee.

4.2 An Option shall not be granted to any person who is not an Eligible Employee at the Date of Grant.

4.3 The maximum number of Shares in respect of which an Option shall be granted in response to any Application shall not in any event exceed the Individual Share Limit.

4.4 Subject to rule 4.3, the Directors shall have an absolute discretion as to whether, and in respect of how many Shares, any Option should be granted.

4.5 Options for which Invitations have been issued on any occasion shall be granted within the period of 30 days beginning with the Invitation Date PROVIDED THAT if on any occasion it is necessary to reduce the number of Shares over which Options are granted (so as to avoid exceeding the limit set out in rule 7 or otherwise) in one or more countries, the Directors may grant such Options at any time within the period of 42 days beginning with the Invitation Date.

4.6 As soon as reasonably practicable after the Date of Grant, the Grantor shall, or shall procure the, issue to each Optionholder of an Option Certificate which specifies:

4.6.1     the Grantor;

4.6.2     the Date of Grant;

4.6.3     the number of Shares in respect of which the Option is
          granted;

4.6.4     the Exercise Price;

4.6.5     the earliest date on which the Option will normally become
          exercisable;

4.6.6     that it is a term of the Option that the Optionholder shall
          (to the extent permitted by law) be responsible for any
          Option Tax Liability which may arise

and shall otherwise be in such form as the Grantor shall determine from time to time.

5. MONTHLY CONTRIBUTIONS

5.1       Subject to rule 5.3, a Monthly Contribution may be made by:

          5.1.1     the Optionholder's Employer Company deducting the whole
                    amount from the Optionholder's Net Pay for the relevant
                    month and paying such amount (on the Optionholder's behalf)
                    to an account with the Savings Body; or

          5.1.2     the Optionholder entering into such other arrangement as may
                    be permitted by the Employer Company for the Monthly
                    Contribution to be paid to an account with the Savings Body.

5.2 An Optionholder's Savings shall be deposited with the Savings Body and shall at all times remain the property of the Optionholder so that neither the Company, the

Optionholder's Employer, the Administrator nor any Relevant Trustee shall have any interest in such Savings.

6. EXERCISE PRICE

6.1 Subject to rule 14, the Company shall determine the price per Share payable upon the exercise of Options granted on the same day to Eligible Employees in Italy, but this shall not be less than:

6.1.1     the Initial Market Value (rounded up to the nearest whole
          penny); or, if greater

6.1.2     in the case of a Subscription Option, the nominal value of a
          Share.

7. LIMITATION ON GRANT OF SUBSCRIPTION OPTIONS

7.1 The Company may issue Shares to a Relevant Trustee for the purpose of enabling the Relevant Trustee to satisfy its obligation to transfer Shares to Optionholders upon the exercise of Options.

7.2 The number of Shares in respect of which Subscription Options may be granted in any year, when added to:

7.2.1     the number of Shares in respect of which Subscription
          Options have previously been granted (and which, if not
          exercised, have not ceased to be exercisable); and

7.2.2     the number of Shares issued or in respect of which rights to
          subscribe for Shares have previously been granted (and which
          have neither been exercised, nor ceased to be exercisable)
          pursuant to any other employee share option or share
          incentive plan

in that year and the preceding nine years shall not exceed 10 per cent of the Ordinary Share Capital.

8. EXERCISE OF AN OPTION

8.2 If an Optionholder dies, his Personal Representatives may exercise that Option to the extent permitted by rule 8.5:

8.2.1     if he dies before the Exercise Date, during the period of 12
          months commencing on the date of his death; or

8.2.2     if he dies within the period of 6 months beginning on or
          after the Exercise Date, during the period of 12 months
          beginning on the Exercise Date

and if it is not then exercised that Option shall lapse and cease to be exercisable at the end of such 12-month period.

8.3.1     injury, ill-health or disability (evidenced to the
          satisfaction of the directors of his Employer Company);

8.3.2     dismissal by reason of redundancy;

8.3.3     retirement at or after his normal retirement age;

8.3.4     the company by which the Optionholder is employed becoming
          neither a member of the Group nor an Associated Company nor
          a Jointly Owned Company; or

8.3.5     the fact that the Optionholder's employment with a member of
          the Group or an Associated Company relates to a business or
          part of a business which is transferred to a person which is
          neither a member of the Group nor an Associated Company nor
          a Jointly Owned Company.

8.5       An Option may only ever be exercised:

          8.5.1     subject to the Optionholder not having failed to make any
                    Monthly Contributions, pursuant to rules 8.1 and 8.2.2 in
                    respect of all of the Option Shares; or

          8.5.2     pursuant to rules 8.2.1, 8.3, 12 or 13 (or pursuant to rules
                    8.1 and 8.2.2 if the Optionholder has failed to make one or
                    more Monthly Contributions), in respect of such number of
                    Shares as is equal to:

                         (a)  in the case of a 3-year Option, C X D / 36

                         (b)  in the case of a 5-year Option, C X D / 60

                         where:

                         C is the number of Option Shares; and

                         D is the number of Monthly Contributions actually made
                         by the Optionholder before the date of exercise of the
                         Option

or, in either case, such lesser number of Option Shares as the Optionholder may specify in the notice of exercise given pursuant to rule 9.1.

8.7 An Option may not be exercised more than once.

8.8 In deciding whether and when to exercise an Option, an Optionholder shall have regard to the Model Code.

9. MANNER OF EXERCISE OF AN OPTION

9.1 An Option shall be exercised only by the Optionholder giving notice in writing to the Grantor or, if so directed by the Company, the Administrator, which:

9.1.1     is given at any time when the Option is exercisable;

9.1.2     specifies the number of Shares in respect of which the
          Option is exercised in accordance with rule 8.5;

9.1.3     is accompanied by payment of an amount in pounds sterling
          equal to the Acquisition Cost;

9.1.4     unless the Grantor otherwise permits, is accompanied by the
          Option Certificate

and is otherwise in such form as the Grantor may from time to time determine and notify to the Optionholder.

9.2 Within 30 days after the date on which the Grantor (or the Administrator) shall have received a valid notice of exercise of an Option the Grantor shall procure that:

9.2.1     the monies accompanying that notice are applied in payment
          of the Acquisition Cost for the number of Shares in respect
          of which the Option is then exercised; and

9.2.2     subject to rules 9.3 and 9.6, the number of Shares in
          respect of which the Option is then exercised are allotted
          and issued or transferred to or to the order of the
          Optionholder.

9.4 As soon as reasonably practicable after allotting or transferring any Shares as mentioned in rule 9.2.2, the Grantor shall procure:

9.4.1     the issue to the Optionholder of a definitive share
          certificate or such acknowledgement of shareholding as is
          prescribed from time to time in respect of the Shares so
          allotted or transferred; and

9.4.2     if at that time the Shares are listed on the Daily Official
          List, that any Shares so allotted are admitted to the Daily
          Official List.

9.8 The costs of stamp duty and dealing costs and commissions incurred when Shares are purchased upon the exercise of an Option shall be borne by the Company.

10. NON-TRANSFERABILITY AND LAPSE OF OPTIONS

10.1      During his lifetime only the individual to whom an Option is granted
          may exercise that Option.

10.2      An Option shall immediately lapse and cease to be exercisable if:

          10.2.1    it is transferred or assigned (other than to Personal
                    Representatives of the Optionholder), mortgaged, charged or
                    otherwise disposed of by the Optionholder;

          10.2.2    the Optionholder becomes bankrupt or makes, or proposes to
                    make, a voluntary arrangement with all or any of his
                    creditors in accordance with any applicable laws relating to
                    personal insolvency;

          10.2.3    the Optionholder is not or ceases for any other reason
                    (except his death) to be the sole legal and beneficial owner
                    of the Option free from encumbrances or would not, upon the
                    exercise of the Option, be the sole legal and beneficial
                    owner of the Shares thereby acquired, free from
                    encumbrances;

          10.2.4    (unless in any individual case the Company otherwise
                    determines) the Optionholder, whilst remaining in employment
                    with a member of the Group or an Associated Company or a
                    Jointly Owned Company, instructs his Employer Company to
                    cease deducting Monthly Contributions from his salary;

          10.2.5    if, after six of the Optionholder's Monthly Contributions
                    have not been made for any reason, a seventh Monthly
                    Contribution is not made on the due date for payment; or

          10.2.6    (unless in any individual case the Company otherwise
                    determines) an Optionholder obtains repayment of any of his
                    savings contributions (or interest on such contributions)
                    unless such Option is then immediately exercisable pursuant
                    to rules 8.2, 8.3, 12 or 13.

10.3      Save as mentioned in rule 8.2.2, an Option shall in any event lapse
          and cease to be exercisable at the end of the period of 6 months
          beginning with the Exercise Date.

11.       RELATIONSHIP WITH EMPLOYMENT CONTRACT

11.1      The grant of an Option shall not form part of the Optionholder's
          entitlement to remuneration or benefits pursuant to his contract of
          employment nor shall the existence of a contract of employment between
          any person and any present or past member of the Group or Associated
          Company or Jointly Owned Company, give such person any right
          entitlement or expectation to have an Option granted to him in respect
          of any number of Shares or any expectation that an Option might be
          granted to him or that he will be invited to apply for the grant of an
          Option whether subject to any conditions or at all.

                                       14

11.2      Neither the existence of this Plan nor the fact that an individual has
          on any occasion been granted an Option (or been invited to apply for
          the grant of an Option) shall give such individual any right
          entitlement or expectation that he has or will in future have any such
          right entitlement or expectation to participate in this Plan by being
          granted an Option (or invited to apply for the grant of an Option) on
          any other occasion.

11.3      The rights granted to an Optionholder upon the grant of an Option
          shall not afford the Optionholder any rights or additional rights to
          compensation or damages in consequence of the loss or termination of
          his office or employment with any present or past member of the Group
          or Associated Company or Jointly Owned Company for any reason
          whatsoever (whether or not such termination is ultimately held to be
          wrongful or unfair).

11.4      The rights and obligations of an Optionholder under the terms of his
          contract of employment with any present or past member of the Group or
          Associated Company or Jointly Owned Company shall not be affected by
          the grant of an Option or his participation in this Plan.

11.5      An Optionholder shall not be entitled to any compensation or damages
          for any loss or potential loss which he may suffer by reason of being
          unable to exercise an Option in whole or in part in consequence of the
          loss or termination of his office or employment with any present or
          past member of the Group or Associated Company or Jointly Owned
          Company for any reason whatsoever (whether or not such termination is
          ultimately held to be wrongful or unfair).

12.       DEMERGER, RECONSTRUCTION OR WINDING-UP OF THE COMPANY

12.1      If notice is given to shareholders of the Company of a proposed
          demerger of the Company or of any Subsidiary the Company may give
          notice to Optionholders that Options may then be exercised within such
          period (not exceeding 30 days) as the Company may specify in such
          notice to Optionholders SAVE THAT no such notice to Optionholders
          shall be given unless the Auditors have confirmed in writing to the
          Company that the interests of Optionholders would or might be
          substantially prejudiced if before the proposed demerger has effect
          Optionholders could not exercise their Options and be registered as
          the holders of the Shares thereupon acquired.

12.2      If the court sanctions a compromise or arrangement proposed for the
          purposes of or in connection with a scheme for the reconstruction of
          the Company or its amalgamation pursuant to section 425 of the UK
          Companies Act 1985 the Optionholder shall be entitled to exercise his
          Option during the period of 6 months commencing on the date on which
          the court sanctions the compromise or arrangement, and thereafter the
          Option shall lapse and cease to be exercisable.

12.3      If notice is given to the shareholders of the Company of a resolution
          for the voluntary winding-up of the Company, notice of the same shall
          be given to all Optionholders and each Optionholder shall be entitled
          to exercise his Option at any time within the period of 6 months
          commencing on the date on which the resolution is passed.

12.4      All Options shall immediately lapse and cease to be exercisable upon
          the commencement of a winding-up of the Company.

13.       TAKE-OVER OF THE COMPANY

13.1      If, as a result of either:

          13.1.1    a general offer to acquire the whole of the Ordinary Share
                    Capital which is made on a condition such that if it is
                    satisfied the person making the offer will have control of
                    the Company; or

13.1.2 a general offer to acquire all the shares in the Company of

                    the same class as the Shares

          the Company shall come under the control of another person or persons,
          an Optionholder shall be entitled to exercise his Option to the extent
          permitted by rule 8.5 within the period of 6 months beginning with the
          date when the person making the offer has obtained control of the
          Company and any condition subject to which the offer is made has been
          satisfied. To the extent that the Option is not then exercised, it
          shall lapse and cease to be exercisable at the end of such period.

13.2      If at any time any person becomes entitled or bound to acquire shares
          in the Company under sections 428 to 430F (inclusive) of the Companies
          Act 1985 an Optionholder shall be entitled to exercise his Option to
          the extent permitted by rule 8.5 at any time when that person remains
          so entitled or bound. To the extent that the Option is not then
          exercised, it shall lapse and cease to be exercisable at the end of
          such period.

13.3      For the purposes of the preceding provisions of this rule 13 a person
          shall be deemed to have control of the Company if he and others acting
          in concert with him have together obtained control of it.

14.       VARIATION OF SHARE CAPITAL

14.1      In the event of any alteration of the Ordinary Share Capital by way of
          a capitalisation or rights issue or by way of sub-division,
          consolidation, reduction or any other variation in the share capital
          of the Company the Grantor may make such adjustments as it considers

appropriate:

14.1 to the aggregate number of Shares subject to any Option;

14.2 to the Exercise Price; and/or

14.3 if an Option has been exercised but no Shares have been allotted or transferred, to the number of Shares which may be so allotted or transferred and the Acquisition Cost relating to such Shares

PROVIDED THAT:

(a) except in the case of a subdivision, consolidation or capitalisation issue any such adjustment is confirmed in writing by the Auditors to be in their opinion fair and reasonable;

(b) the aggregate Acquisition Cost payable by an Optionholder on the exercise of all of his Options shall not be materially altered;

          (c)  except insofar as the Directors, on behalf of the Company, may
               then agree to capitalise the Company's reserves and apply the
               same in paying up the difference between the Exercise Price and
               the nominal value of the Shares at the time of exercise, the
               Exercise Price in relation to a Subscription Option is not
               reduced below the nominal value of those Shares;

          (d)  the number of Shares as so adjusted shall be rounded down to the
               nearest whole number and the Exercise Price as so adjusted shall
               be rounded up to the nearest whole penny; and

          (e)  if the Grantor is not the Company, no such adjustment shall be
               made without the consent of the Grantor.

14.2      As soon as reasonably practicable after making any adjustment pursuant
          to rule 14.1 the Grantor shall give notice in writing thereof to every
          Optionholder affected thereby and may call in any Option Certificates
          for endorsement or replacement.

15.       ALTERATION OF THIS PLAN

15.1      The Directors may at any time (with the prior consent of the Grantor)
          by resolution in writing alter or add to any of the provisions of this
          Plan in any respect PROVIDED THAT:

          15.1.1    no such alteration or addition shall be made to the
                    advantage of existing or new Optionholders to the provisions
                    relating to eligibility to participate, basis of determining
                    entitlement to Optionholders' rights to acquire shares,
                    exercise price, overall and individual limitations on the
                    grant of options under this Plan and the adjustment of such
                    rights in the event of a variation of Ordinary Share Capital
                    without the prior approval by ordinary resolution of the
                    shareholders of the Company in general meeting SAVE THAT
                    this provision shall not apply to the extent that such
                    alteration or addition is in the opinion of the Directors a
                    minor amendment which is necessary or appropriate:

                    (a)  to benefit the administration of this Plan;

                    (b)  to take account of a change in legislation; or

                    (c)  to obtain or maintain favourable tax, exchange control
                         or regulatory treatment for participants in the Plan or
                         for the Company or any member of the Group in any
                         jurisdiction;

          15.1.2    if in relation to any Options the Grantor is not the
                    Company, no alteration or addition shall be made to the
                    terms of such Options without the approval of the Grantor;
                    and

          15.1.3    as soon as reasonably practicable after making any such
                    alteration or addition the Directors (on behalf of the
                    Grantor) shall give notice in writing thereof to every
                    Optionholder (if any) affected thereby.

                                       17

16.       SERVICE OF DOCUMENTS

16.1      Except as otherwise provided in this Plan, any notice or document to
          be given by, or on behalf of, the Company or other Grantor or the
          Administrator to any person in accordance or in connection with this
          Plan shall be duly given:

          16.1.1    by sending it through the post in a pre-paid envelope to the
                    address last known to the Company to be his address and, if
                    so sent, it shall be deemed to have been duly given on the
                    date of posting; or

          16.1.2    if he holds office or employment with any member of the
                    Group or any Associated Company, by delivering it to him at
                    his place of work or by sending to him a facsimile
                    transmission or Electronic Communication addressed to him at
                    his place of work and if so sent it shall be deemed to have
                    been duly given at the time of transmission SAVE THAT a
                    notice or document shall not be duly given by Electronic
                    Communication unless that person is known by his Employer
                    Company to have personal access during his normal business
                    hours to information sent to him by Electronic
                    Communication.

16.2      Any notice or document so sent to an Employee or Optionholder shall be
          deemed to have been duly given notwithstanding that such Optionholder
          is then deceased (and whether or not the Company or other Grantor has
          notice of his death) except where his Personal Representatives have
          supplied to the Company an address to which documents are to be sent.

16.3      Any notice in writing or document to be submitted or given by an
          Optionholder to the Grantor, the Company or the Administrator in
          accordance or in connection with this Plan may be delivered, sent by
          post, facsimile transmission or Electronic Communication but shall not
          in any event be duly given unless:

          16.3.1    it is actually received (or, in the case of an Electronic
                    Communication, opened) by the secretary of the Company or
                    such other individual as may from time to time be nominated
                    by the Company and whose name and address is notified to
                    Optionholders; and

          16.3.2    if given by Electronic Communication (and is so required by
                    the Company), it includes a digitally encrypted signature of
                    the Optionholder.

16.4      For the purposes of this Plan, an Electronic Communication shall be
          treated as not having been duly made or received if the recipient of
          such Electronic Communication notifies the sender that it has not been
          opened because it contains, or is accompanied by a warning or caution
          that it could contain or be subject to, a virus or other computer
          programme which could alter damage or interfere with any computer
          software or Electronic Communication.

17.       APPLICABLE LAW

17.1      This Plan shall be governed by and construed in all respects in
          accordance with English law.

                                       18

17.2      In applying for the grant of an Option an Eligible Employee shall be
          deemed to submit to the exclusive jurisdiction of the English courts
          as regards any claim legal action or proceedings arising out of this
          Plan and to waive any objection to such proceedings taking place in
          the English courts on the grounds of venue or on the grounds that such
          proceedings have been brought in an inconvenient forum.

18.       THIRD PARTY RIGHTS

          Except as otherwise expressly stated to the contrary, neither this
          Plan nor the grant of any Option nor the U.K. Contracts (Rights of
          Third Parties) Act 1999 shall have the effect of giving any third
          party any rights under this Plan and that Act shall not apply to this
          Plan or to the terms of any Option granted pursuant to this Plan.

19.       PROTECTION OF PERSONAL DATA

19.1      By accepting the grant of an Option the Optionholder shall agree and
          consent to:

          19.1.1    the collection, use and processing by any member of the
                    Group, the Administrator and any Relevant Trustee of
                    Personal Data relating to the Optionholder, for all purposes
                    reasonably connected with the administration of this Plan
                    and the subsequent registration of the Optionholder or any
                    other person as a holder of Shares acquired pursuant to the
                    exercise of an Option;

          19.1.2    any member of the Group, the Administrator and any Relevant
                    Trustee transferring Personal Data to or between any of such
                    persons for all purposes reasonably connected with the
                    administration of the Plan;

          19.1.3    the use of such Personal Data by any such person for such
                    purposes; and

          19.1.4    the transfer to and retention of such Personal Data by any
                    third party for such purposes.

20.       MISCELLANEOUS

20.1      The Company shall at all times keep available sufficient authorised
          but unissued Shares to satisfy the exercise in full of all the
          Subscription Options for the time being remaining capable of being
          exercised under this Plan.

20.2      No Option to purchase existing Shares shall be granted by any person
          unless that person beneficially owns such Shares at the Date of Grant
          or the Directors are satisfied that sufficient Shares will be made
          available to satisfy the exercise in full of all Options granted or to
          be granted by that person.

20.3      The Directors may from time to time make and vary such rules and
          regulations not inconsistent herewith and establish such procedures
          for the administration and implementation of this Plan as they think
          fit. In the event of any dispute or disagreement as to the
          interpretation of this Plan or of any such rules, regulations or
          procedures or as to any question or right arising from or related to
          this Plan, the decision of the Directors shall (except as regards any
          matter required to be determined by the Auditors hereunder) be final
          and binding upon all persons.

                                       19

20.4      The Company shall not be obliged to provide Optionholders with copies
          of any notices, circulars or other documents sent to holders of
          Shares.

20.5      The costs of the administration and implementation of this Plan shall
          be borne by the Company.

20.6      The issue of an Invitation on any occasion is made at the Company's
          discretion. No entitlement to the issue of an Invitation, the grant of
          an Option and/or the issue of Shares in the future shall thereby be
          created on the grounds that such Invitations were issued or Options
          were granted in the past nor on the grounds that Options may
          previously have been granted over a particular number of Shares at a
          certain price. Even the repeated grant of Options and/or the issue of
          Shares shall not create future entitlements to receive Options and/or
          Shares at all or to be granted Options over a specific number of
          Shares or at a specific price.

20.7      If any provision of this Plan is held invalid, illegal or
          unenforceable for any reason by any court of competent jurisdiction,
          such provision shall be severed and the remainder of the provisions of
          this Plan shall continue in full force and effect as if this Plan had
          been established with the invalid, illegal or unenforceable provision
          eliminated.

EXHIBIT 4(c)(x)

RULES OF

THE SMITH & NEPHEW DUTCH SHARESAVE PLAN (2002)

This is a copy of the rules of The Smith & Nephew Dutch Sharesave Plan (2002) established by the board of directors of the Company on 31 July 2002 and adopted by the Company Secretary pursuant to the authority delegated upon him by the board.

                                    CONTENTS

RULE                                                                        PAGE

1.        Interpretation                                                       1

2.        Issue of Invitations                                                 6

3.        Applications for Options                                             8

4.        Grant of Options                                                     8

5.        Monthly contributions                                                9

6.        Exercise Price                                                      10

7.        Limitation on Grant of Subscription Options                         10

8.        Exercise of an Option                                               10

9.        Manner of Exercise of an Option                                     12

10.       Non-Transferability and Lapse of Options                            13

11.       Relationship with Employment Contract                               14

12.       Demerger, Reconstruction or Winding-up of the Company               15

13.       Take-over of the Company                                            15

14.       Variation of Share Capital                                          16

15.       Alteration of this Plan                                             16

16.       Service of Documents                                                17

17.       Applicable Law                                                      18

18.       Third Party Rights                                                  18

19.       Protection of Personal Data                                         18

20.       Miscellaneous                                                       18

                                    RULES OF
                 THE SMITH & NEPHEW DUTCH SHARESAVE PLAN (2002)

1.        INTERPRETATION

1.1       Words and expressions used in this Plan shall have the meanings
          respectively given below:

          "Acquisition Cost"            in relation to the exercise of an Option
                                        on any occasion, an amount in pounds
                                        sterling equal to the product of:

                                        (a)  the maximum number of Shares in
                                             respect of which that Option is
                                             then exercised in accordance with
                                             rule 8.5; and

                                        (b)  the Exercise Price

          "the Administrator"           Computershare Investor Services plc or
                                        such other person who is for the time
                                        being appointed by the Company to
                                        administer this Plan

          "Announcement Date"           the date of notification to the London
                                        Stock Exchange of the annual or half
                                        year results of the Company

          "Applicant"                   a person who, in response to an
                                        Invitation, submits an Application

          "Application"                 an application for the grant of an
                                        Option made in accordance with rule 3

          "Application Date"            in relation to any Invitation such date
                                        as is specified in accordance with rule
                                        2.5.5 to be the last day on which an
                                        Application may be submitted in response
                                        to Invitations issued on any occasion

          "Associated Company"          any company which, in relation to the
                                        Company, is an associated company as
                                        that term is defined by section 416 of
                                        the Taxes Act except that for the
                                        purposes of this Plan, subsection (1) of
                                        that section shall have effect with the
                                        omission of the words "or at any time
                                        within one year previously"

          "Auditors"                    the auditors for the time being of the
                                        Company or if there are joint auditors,
                                        such one of them as the Directors may
                                        decide

          "Companies Act 1985"          the UK Companies Act 1985

                                        1

          "the Company"                 Smith & Nephew plc (registered in
                                        England no 324357)

          "control"                     the meaning given in section 840 of the
                                        Taxes Act

          "Daily Official List"         the daily official list of the London
                                        Stock Exchange

          "Date of Grant"               in relation to any Option, the date on
                                        which such Option was granted

          "Dealing Day"                 a day on which the London Stock Exchange
                                        is open for business

          "Directors"                   the board of directors for the time
                                        being of the Company or a duly
                                        constituted committee of that board

          "Electronic Communication"    has the meaning given in section 15 of
                                        the UK Electronic Communications Act
                                        2000 (but excluding mobile telephone
                                        text messages)

          "Eligible Employee"           an Employee who either:

                                        (a)  has held employment within the
                                             Group for such continuous period as
                                             the Directors have determined; or

                                        (b)  is nominated by the Directors

          "Employee"                    an employee of a Participating Company

          "Employer Company"            in relation to an Applicant or an
                                        Optionholder at any time, the member of
                                        the Group or Associated Company with
                                        which such Applicant or Optionholder
                                        then holds or, if he has ceased to hold
                                        employment within the Group or with any
                                        Associated Company, last held office or
                                        employment

          "Exchange Rate"               in relation to a conversion of currency
                                        on any day, the rate to be applied in
                                        making such conversion being such
                                        published exchange rate as the Directors
                                        shall determine for the preceding day
                                        or, if that preceding day is not a
                                        Dealing Day, the last preceding Dealing
                                        Day

                                        2

          "the Exercise Date"           in relation to an Optionholder's
                                        Savings:

                                        (a)  where the Optionholder has a 3-year
                                             Option, the third anniversary of
                                             the date on which his first Monthly
                                             Contribution is received by the
                                             Savings Body; and

                                        (b)  where the Optionholder has a 5-year
                                             Option, the fifth anniversary of
                                             the date on which his first Monthly
                                             Contribution is received by the
                                             Savings Body.

          "the Exercise Price"          in relation to Shares subject to any
                                        Option, the price per Share in pounds
                                        sterling payable for the acquisition of
                                        such Shares upon the exercise of that
                                        Option as determined in rule 6

          "the Group"                   the Company and every other company
                                        which is for the time being a Subsidiary

          "the Individual Share Limit"  in relation to any Option, the amount of
                                        the Notional Sterling Repayment Value
                                        divided by the Exercise Price

          "Initial Market Value"        in relation to a Share subject to any
                                        Option, the average of the middle market
                                        quotations of a Share as derived from
                                        the Daily Official List for the 3
                                        consecutive Dealing Days immediately
                                        preceding the Invitation Date

          "Invitation"                  an invitation to apply for the grant of
                                        an Option issued in accordance with rule
                                        2

          "Invitation Date"             in relation to an Option, the date on
                                        which the Invitation was issued

          "Jointly Owned Company"       a company (and any subsidiary as defined
                                        in section 736 of the Companies Act 1985
                                        of such a company) of which the whole of
                                        the issued ordinary share capital is
                                        jointly owned by a member of the Group
                                        and another person (not being a member
                                        of the Group) but which is not a
                                        Subsidiary and is not under the control
                                        of such other person

          "Local Currency"              the local currency of legal tender in
                                        The Netherlands

          "Local Currency Equivalent"   in relation to an amount in pounds
                                        sterling on a given day, the equivalent
                                        value (or as nearly as may be) in Local
                                        Currency of such sterling amount after
                                        conversion at the Exchange Rate on that
                                        day

                                        3

          "the London Stock Exchange"   London Stock Exchange plc

          "Model Code"                  the code adopted by the Company which
                                        contains provisions similar in purpose
                                        and effect to the provisions of the
                                        Model Code for Securities Transactions
                                        by Directors of Listed Companies issued
                                        by the UK Listing Authority from time to
                                        time

          "Monthly Contribution"        in relation to any Eligible Employee,
                                        the fixed amount (in Local Currency) of
                                        each of the 36 (or, in the case of a
                                        5-year Option, 60) monthly savings
                                        contributions which that Employee
                                        undertakes to make in his Application

          "Net Pay"                     in relation to an Optionholder, the
                                        amount of his earnings for a given
                                        month, being earnings from the
                                        Optionholder's employment with any one
                                        or more members of the Group and any
                                        Associated Company, after any deductions
                                        have been made by the payer of or on
                                        account of any tax or social security
                                        contributions and after any other
                                        deductions (other than a deduction of a
                                        Monthly Contribution) which the payer
                                        has made under any legal obligation or
                                        pursuant to any authority duly given by
                                        the Optionholder

          "Notional Sterling Repayment  in relation to any Application, the
          Value"                        aggregate amount in pounds sterling
                                        (converted from Local Currency using the
                                        Exchange Rate on the Invitation Date)
                                        of:

                                        (a)  in the case of a 3-year Option, 38
                                             Monthly Contributions; and

                                        (b)  in the case of a 5-year Option,
                                             66.2 Monthly Contributions

                                        or, in either case, such other number of
                                        Monthly Contributions as the Directors
                                        may determine in relation to Options
                                        granted on any occasion so as to be
                                        consistent with the bonus rates payable
                                        on a certified contractual savings
                                        scheme within the meaning of section 326
                                        of the Taxes Act

          "Option"                      a right to acquire Shares which:

                                        (a)  is granted pursuant to, and is
                                             exercisable only in accordance
                                             with, this Plan and which is a
                                             3-year Option or a 5-year Option;
                                             and

                                        (b)  has neither been exercised nor
                                             ceased to be exercisable

                                        4

          "Option Certificate"          a certificate issued by the Company
                                        evidencing the grant of an Option

          "Option Shares"               in relation to an Option, the Shares
                                        over which that Option subsists

          "Option Tax Liability"        in relation to an Optionholder, any
                                        liability of any member or former member
                                        of the Group or any Associated Company
                                        or former Associated Company to account
                                        to any tax authority or other body for
                                        any amount of, or representing, income
                                        tax or social security contributions or
                                        any other tax charge levy or other sum
                                        which the Optionholder is charged upon
                                        or in consequence of the grant, vesting,
                                        exercise, assignment or release of an
                                        Option or the acquisition of Shares
                                        under this Plan

          "Optionholder"                in relation to any Option, the person to
                                        whom that Option has been granted or, if
                                        that person has died, his legal personal
                                        representatives

          "Ordinary Share Capital"      issued share capital of the Company
                                        other than fixed-rate preference shares

          "Participating Company"       a member of the Group to which the
                                        Directors have determined that this Plan
                                        shall extend for the time being

          "Personal Data"               has the meaning it bears for the
                                        purposes of the UK Data Protection Act
                                        1998

          "Personal Representatives"    in relation to an Optionholder the legal
                                        personal representatives of the
                                        Optionholder who have satisfied the
                                        Company or the Administrator of their
                                        appointment as such

          "this Plan"                   The Smith & Nephew Dutch Sharesave Plan
                                        (2002) (established by the Directors
                                        pursuant to the authority conferred upon
                                        them by shareholders of the Company on 3
                                        April 2002) as set out in these rules
                                        and as amended from time to time

          "Relevant Trustee"            the meaning given in article 71(6) of
                                        the UK Financial Services and Markets
                                        Act 2000 (Regulated Activities) Order
                                        2001

          "Savings"                     in relation to an Optionholder at any
                                        time, the aggregate amount of that
                                        Optionholder's Monthly Contributions
                                        held by the Savings Body together with
                                        any accrued interest thereon

                                        5

          "Savings Body"                ING Bank, such bank(s) and/or other
                                        savings institution(s) as may from time
                                        to time be approved by the Company for
                                        the purposes of this Plan

          "Shares"                      fully-paid ordinary shares in the
                                        capital of the Company

          "Subscription Options"        Options which are rights granted by the
                                        Company to subscribe for Shares

          "Subsidiary"                  a subsidiary (as defined in section 736
                                        of the UK Companies Act 1985) of the
                                        Company and which is under the control
                                        of the Company

          "Taxes Act"                   the UK Income and Corporation Taxes Act
                                        1988

          "UK"                          the United Kingdom

          "UK Listing Authority"        the Financial Services Authority in its
                                        capacity as the competent authority for
                                        the purposes of Part VI of the UK
                                        Financial Services and Markets Act 2000

          "year"                        a financial year of the Company.

1.5 Words denoting the masculine gender shall include the feminine.

1.6 Words denoting the singular shall include the plural and vice versa.

2. ISSUE OF INVITATIONS

2.2 Invitations may be issued:

2.2.1 in the period of 42 days beginning with the fourth Dealing Day following an Announcement Date

and

2.2.2     at any other time if the Directors consider the
          circumstances to be exceptional unless the Company is or
          would then be so restricted from issuing invitations at that
          time.

2.3 Invitations issued to Eligible Employees in a given jurisdiction shall be issued at the same time and be on the same terms.

2.5       Each invitation shall:

          2.5.1     identify the Savings Body;

          2.5.2     state that it is a condition of the grant of an Option that
                    the Employee must first undertake to make 36 or 60
                    consecutive monthly savings contributions (by way of
                    deductions from net payments of salary) in Local Currency to
                    an account with the Savings Body;

          2.5.3     specify the maximum and minimum amounts of such monthly
                    savings contributions;

          2.5.4     invite the person to whom it is addressed to apply for an
                    Option in respect of such whole number of Shares as shall be
                    as nearly as may be equal to, but shall not exceed, the
                    Individual Share Limit (or such lesser number of Shares as
                    the Company may determine);

          2.5.5     specify the last day on which an Application may be made

and shall otherwise be in such form as the Company shall determine.

2.6 On any occasion on which invitations are issued, the Directors may in their discretion determine and announce the maximum number of Shares in respect of which Options will be granted in response to Applications made pursuant to such Invitations.

2.8 No invitation may be issued after 3 April 2012.

3. APPLICATIONS FOR OPTIONS

3.1 Any Eligible Employee to whom an Invitation has been issued may apply for an Option by submitting to the person specified in the Invitation an application in writing which:

3.1.1     is received at such address as shall be stated in the
          Invitation not later than the Application Date;

3.1.2     specifies the amount of the monthly contributions proposed
          to be paid by the Employee and authorises his Employer
          Company to deduct such amount (or such lower amount as may
          be determined by the Directors having regard to the
          limitations imposed by the Plan) from his pay;

3.1.3     if the terms of the Invitation so permit, indicates whether
          the Employee wishes to be granted a 3-year Option or a
          5-year Option;

3.1.4     includes an undertaking by the Employee to his Employer
          Company to make 36 or, in the case of a 5-year Option, 60
          consecutive monthly savings contributions (in Local
          Currency) to a Savings Body;

3.1.5     otherwise complies with such terms and conditions as may
          have been specified in the Invitation;

3.1.6     is subject to the Employee continuing to hold employment
          with a Participating Company until the Date of Grant;

3.1.7     authorises the transfer and processing of the Applicant's
          Personal Data for the purposes of the administration of this
          Plan;

3.1.8     provides that the Applicant agrees to accept and be bound by
          the rules of the Plan;

3.1.9     is duly completed and signed by the Applicant

and is otherwise in such form as the Directors may determine.

3.3 No Eligible Employee shall make more than one Application nor be granted more than one Option in response to the issue of an Invitation on any occasion.

4. GRANT OF OPTIONS

4.1 An Option may be granted by the Company.

4.2 An Option shall not be granted to any person who is not an Eligible Employee at the Date of Grant.

4.3 The maximum number of Shares in respect of which an Option shall be granted in response to any Application shall not in any event exceed the Individual Share Limit.

4.4 Subject to rule 4.3, the Directors shall have an absolute discretion as to whether, and in respect of how many Shares, any Option should be granted.

4.6 As soon as reasonably practicable after the Date of Grant, the Company shall, or shall procure the, issue to each Optionholder of an Option Certificate which specifies:

4.6.1     the Date of Grant;

4.6.2     the number of Shares in respect of which the Option is
          granted;

4.6.3     the Exercise Price;

4.6.4     the earliest date on which the Option will normally become
          exercisable; and

4.6.5     that it is a term of the Option that the Optionholder shall
          (to the extent permitted by law) be responsible for any
          Option Tax Liability which may arise

and shall otherwise be in such form as the Company shall determine from time to time.

5. MONTHLY CONTRIBUTIONS

5.1       Subject to rule 5.3, a Monthly Contribution may be made by:

          5.1.1     the Optionholder's Employer Company deducting the whole
                    amount from the Optionholder's Net Pay for the relevant
                    month and paying such amount (on the Optionholder's behalf)
                    to an account with the Savings Body; or

          5.1.2     the Optionholder entering into such other arrangement as may
                    be permitted by the Employer Company for the Monthly
                    Contribution to be paid to an account with the Savings Body.

5.2 An Optionholder's Savings shall be deposited with the Savings Body and shall at all times remain the property of the Optionholder so that neither the Company, the Optionholder's Employer nor the Administrator shall have any interest in such Savings.

5.3 If in any month, and in consequence of an Optionholder being absent from work by reason of maternity leave, military service (or such other reason which is, in the Directors' opinion an equivalent circumstance or event resulting in a period of temporary suspension in employment) the amount of such Optionholder's Net Pay is insufficient to allow for the deduction in full of his Monthly Contribution for, or in respect of, that month, the Optionholder may make other arrangements for payment to the Savings Body of the whole, or any balance remaining, of such Monthly Contribution, provided that the full amount of such Monthly Contribution is paid to the Savings Body not later than 30 days after the end of the relevant month.

6. EXERCISE PRICE

6.1.1     80% of the Initial Market Value (rounded up to the nearest
          whole penny); or, if greater

6.1.2     in the case of a Subscription Option, the nominal value of a
          Share.

7. LIMITATION ON GRANT OF SUBSCRIPTION OPTIONS

7.1 The number of Shares in respect of which Subscription Options may be granted in any year, when added to:

7.1.1     the number of Shares in respect of which Subscription
          Options have previously been granted (and which, if not
          exercised, have not ceased to be exercisable); and

7.1.2     the number of Shares issued or in respect of which rights to
          subscribe for Shares have previously been granted (and which
          have neither been exercised, nor ceased to be exercisable)
          pursuant to any other employee share option or share
          incentive plan

in that year and the preceding nine years shall not exceed 10 per cent of the Ordinary Share Capital.

8. EXERCISE OF AN OPTION

8.2 If an Optionholder dies, his Personal Representatives may exercise that Option to the extent permitted by rule 8.5:

8.2.1     if he dies before the Exercise Date, during the period of 12
          months commencing on the date of his death; or

8.2.2     if he dies within the period of 6 months beginning on or
          after the Exercise Date, during the period of 12 months
          beginning on the Exercise Date

and if it is not then exercised that Option shall lapse and cease to be exercisable at the end of such 12-month period.

8.3.1     injury, ill-health or disability (evidenced to the
          satisfaction of the directors of his Employer Company);

8.3.2     dismissal by reason of redundancy;

8.3.3     retirement at or after his normal retirement age;

8.3.4     the company by which the Optionholder is employed becoming
          neither a member of the Group nor an Associated Company nor
          a Jointly Owned Company; or

8.3.5     the fact that the Optionholder's employment with a member of
          the Group or an Associated Company relates to a business or
          part of a business which is transferred to a person which is
          neither a member of the Group nor an Associated Company nor
          a Jointly Owned Company.

8.5       An Option may only ever be exercised:

          8.5.1     subject to the Optionholder not having failed to make any
                    Monthly Contributions, pursuant to rules 8.1 and 8.2.2 in
                    respect of all of the Option Shares; or

          8.5.2     pursuant to rules 8.2.1, 8.3, 12 or 13, (or pursuant to
                    rules 8.1 and 8.2.2 if the Optionholder has failed to make
                    one or more Monthly Contributions), in respect of such
                    number of Shares as is equal to:

                    (a)  in the case of a 3-year Option, C X D / 36

                    (b)  in the case of a 5-year Option, C X D / 60

                    where:

                    C is the number of Option Shares; and

                    D is the number of Monthly Contributions actually made by
                    the Optionholder before the date of exercise of the Option

or, in either case, such lesser number of Option Shares as the Optionholder may specify in the notice of exercise given pursuant to rule 9.1.

8.7 An Option may not be exercised more than once.

8.8 In deciding whether and when to exercise an Option, an Optionholder shall have regard to the Model Code.

9. MANNER OF EXERCISE OF AN OPTION

9.1 An Option shall be exercised only by the Optionholder giving notice in writing to the Company or, if so directed by the Company, the Administrator, which:

9.1.1     is given at any time when the Option is exercisable;

9.1.2     specifies the number of Shares in respect of which the
          Option is exercised in accordance with rule 8.5;

9.1.3     is accompanied by payment of an amount in pounds sterling
          equal to the Acquisition Cost;

9.1.4     unless the Company otherwise permits, is accompanied by the
          Option Certificate

and is otherwise in such form as the Company may from time to time determine and notify to the Optionholder.

9.2 Within 30 days after the date on which the Company shall have received a valid notice of exercise of an Option the Company shall procure that:

9.2.1     the monies accompanying that notice are applied in payment
          of the Acquisition Cost for the number of Shares in respect
          of which the Option is then exercised; and

9.2.2     subject to rules 9.3 and 9.6, the number of Shares in
          respect of which the Option is then exercised are allotted
          and issued to or to the order of the Optionholder.

9.3 The Company shall not be obliged to issue any Shares or any interest in any Shares upon the exercise of an Option unless and until the Optionholder has paid to the Company such sum as, in the opinion of the Company, is sufficient to indemnify any existing or former member of the Group or any existing or former Associated Company in full against any Option Tax Liability or has made such other arrangement as, in the opinion of the Company, will ensure that the Optionholder will satisfy his liability under such indemnity.

9.4 As soon as reasonably practicable after allotting any Shares as mentioned in rule 9.2.2, the Company shall procure:

9.4.1     the issue to the Optionholder of a definitive share
          certificate or such acknowledgement of shareholding as is
          prescribed from time to time in respect of the Shares so
          allotted; and

                             12

9.4.2     if at that time the Shares are listed on the Daily Official
          List that any Shares so allotted are admitted to the Daily
          Official List.

9.5 If after an Option has been exercised, the Company is restricted from issuing Shares to the Optionholder by reason of any statutory, regulatory or other legal provision, rule or the Model Code or any other requirement or guidance which is issued by the UK Listing Authority or any other body on behalf of institutional investors in the Company relating to dealings in Shares by directors or employees of any member of the Group, the Company shall not be obliged to issue Shares in consequence of such exercise until after all such restrictions are lifted but shall do so within the period of 30 days thereafter.

9.6 The allotment of any Shares upon the exercise of any Option shall be subject to the Memorandum and Articles of Association of the Company and to any necessary consents of any governmental or other authorities (whether in the United Kingdom or overseas) under any enactments or regulations from time to time in force and it shall be the responsibility of the Optionholder to do all such things as may be necessary to obtain or obviate the necessity of any such consent.

9.7 All Shares allotted upon the exercise of any Option shall rank equally in all respects with the Shares for the time being in issue save as regards any rights attaching to such Shares by reference to a record date prior to the date of such allotment or transfer.

9.8 The costs of stamp duty and dealing costs and commissions incurred when Shares are purchased upon the exercise of an Option shall be borne by the Company.

10. NON-TRANSFERABILITY AND LAPSE OF OPTIONS

10.1      During his lifetime only the individual to whom an Option is granted
          may exercise that Option.

10.2      An Option shall immediately lapse and cease to be exercisable if:

          10.2.1    it is transferred or assigned (other than to Personal
                    Representatives of the Optionholder), mortgaged, charged or
                    otherwise disposed of by the Optionholder;

          10.2.2    the Optionholder becomes bankrupt or makes, or proposes to
                    make, a voluntary arrangement with all or any of his
                    creditors in accordance with any applicable laws relating to
                    personal insolvency or an Optionholder's partner, to whom
                    the Optionholder is married or living with on the basis of a
                    registered partnership, is declared bankrupt or if an
                    Optionholder or Optionholder's partner has petitioned for a
                    suspension of payments or has been granted a statutory
                    settling of debts (Schuldsanering);

          10.2.3    the Optionholder is not or ceases for any other reason
                    (except his death) to be the sole legal and beneficial owner
                    of the Option free from encumbrances or would not, upon the
                    exercise of the Option, be the sole legal and beneficial
                    owner of the Shares thereby acquired, free from
                    encumbrances;

          10.2.4    (unless in any individual case the Company otherwise
                    determines) the Optionholder, whilst remaining in employment
                    with a member of the Group or an Associated Company or a
                    Jointly Owned Company, instructs his Employer Company to
                    cease deducting Monthly Contributions from his salary;

          10.2.5    if, after six of the Optionholder's Monthly Contributions
                    have not been made for any reason, a seventh Monthly
                    Contribution is not made on the due date for payment; or

          10.2.6    (unless in any individual case the Company otherwise
                    determines) an Optionholder obtains repayment of any of his
                    savings contributions (or interest on such contributions)
                    unless such Option is then immediately exercisable pursuant
                    to rules 8.2, 8.3, 12 or 13.

10.3      Save as mentioned in rule 8.2.2, an Option shall in any event lapse
          and cease to be exercisable at the end of the period of 6 months
          beginning with the Exercise Date.

11.       RELATIONSHIP WITH EMPLOYMENT CONTRACT

11.1      The grant of an Option shall not form part of the Optionholder's
          entitlement to remuneration or benefits pursuant to his contract of
          employment nor shall the existence of a contract of employment between
          any person and any present or past member of the Group or Associated
          Company or Jointly Owned Company, give such person any right
          entitlement or expectation to have an Option granted to him in respect
          of any number of Shares or any expectation that an Option might be
          granted to him or that he will be invited to apply for the grant of an
          Option whether subject to any conditions or at all.

11.2      Neither the existence of this Plan nor the fact that an individual has
          on any occasion been granted an Option (or been invited to apply for
          the grant of an Option) shall give such individual any right
          entitlement or expectation that he has or will in future have any such
          right entitlement or expectation to participate in this Plan by being
          granted an Option (or invited to apply for the grant of an Option) on
          any other occasion.

11.3      The rights granted to an Optionholder upon the grant of an Option
          shall not afford the Optionholder any rights or additional rights to
          compensation or damages in consequence of the loss or termination of
          his office or employment with any present or past member of the Group
          or Associated Company or Jointly Owned Company for any reason
          whatsoever (whether or not such termination is ultimately held to be
          wrongful or unfair).

11.4      The rights and obligations of an Optionholder under the terms of his
          contract of employment with any present or past member of the Group or
          Associated Company or Jointly Owned Company shall not be affected by
          the grant of an Option or his participation in this Plan.

11.5      An Optionholder shall not be entitled to any compensation or damages
          for any loss or potential loss which he may suffer by reason of being
          unable to exercise an Option in whole or in part in consequence of the
          loss or termination of his office or employment with any present or
          past member of the Group or Associated Company or Jointly Owned
          Company for any reason whatsoever (whether or not such termination is
          ultimately held to be wrongful or unfair).

                                       14

12.       DEMERGER, RECONSTRUCTION OR WINDING-UP OF THE COMPANY

12.1      If notice is given to shareholders of the Company of a proposed
          demerger of the Company or of any Subsidiary the Company may give
          notice to Optionholders that Options may then be exercised within such
          period (not exceeding 30 days) as the Company may specify in such
          notice to Optionholders SAVE THAT no such notice to Optionholders
          shall be given unless the Auditors have confirmed in writing to the
          Company that the interests of Optionholders would or might be
          substantially prejudiced if before the proposed demerger has effect
          Optionholders could not exercise their Options and be registered as
          the holders of the Shares thereupon acquired.

12.2      If the court sanctions a compromise or arrangement proposed for the
          purposes of or in connection with a scheme for the reconstruction of
          the Company or its amalgamation pursuant to section 425 of the UK
          Companies Act 1985 the Optionholder shall be entitled to exercise his
          Option during the period of 6 months commencing on the date on which
          the court sanctions the compromise or arrangement, and thereafter the
          Option shall lapse and cease to be exercisable.

12.3      If notice is given to the shareholders of the Company of a resolution
          for the voluntary winding-up of the Company, notice of the same shall
          be given to all Optionholders and each Optionholder shall be entitled
          to exercise his Option at any time within the period of 6 months
          commencing on the date on which the resolution is passed.

12.4      All Options shall immediately lapse and cease to be exercisable upon
          the commencement of a winding-up of the Company.

13.       TAKE-OVER OF THE COMPANY

13.1      If, as a result of either:

          13.1.1    a general offer to acquire the whole of the Ordinary Share
                    Capital which is made on a condition such that if it is
                    satisfied the person making the offer will have control of
                    the Company; or

          13.1.2    a general offer to acquire all the shares in the Company of
                    the same class as the Shares

          the Company shall come under the control of another person or persons,
          an Optionholder shall be entitled to exercise his Option to the extent
          permitted by rule 8.5 within the period of 6 months beginning with the
          date when the person making the offer has obtained control of the
          Company and any condition subject to which the offer is made has been
          satisfied. To the extent that the Option is not then exercised, it
          shall lapse and cease to be exercisable at the end of such period.

13.2      If at any time any person becomes entitled or bound to acquire shares
          in the Company under sections 428 to 430F (inclusive) of the Companies
          Act 1985 an Optionholder shall be entitled to exercise his Option to
          the extent permitted by rule 8.5 at any time when that person remains
          so entitled or bound. To the extent that the Option is not then
          exercised, it shall lapse and cease to be exercisable at the end of
          such period.

13.3      For the purposes of the preceding provisions of this rule 13 a person
          shall be deemed to have control of the Company if he and others acting
          in concert with him have together obtained control of it.

                                       15

14.       VARIATION OF SHARE CAPITAL

14.1      In the event of any alteration of the Ordinary Share Capital by way of
          a capitalisation or rights issue or by way of sub-division,
          consolidation, reduction or any other variation in the share capital
          of the Company the Company may make such adjustments as it considers

appropriate:

14.1 to the aggregate number of Shares subject to any Option;

14.2 to the Exercise Price; and/or

14.3 if an Option has been exercised but no Shares have been allotted, to the number of Shares which may be so allotted and the Acquisition Cost relating to such Shares

PROVIDED THAT:

          (a)  except in the case of a subdivision, consolidation or
               capitalisation issue any such adjustment is confirmed in writing
               by the Auditors to be in their opinion fair and reasonable;

          (b)  the aggregate Acquisition Cost payable by an Optionholder on the
               exercise of all of his Options shall not be materially altered;

          (c)  except insofar as the Directors, on behalf of the Company, may
               then agree to capitalise the Company's reserves and apply the
               same in paying up the difference between the Exercise Price and
               the nominal value of the Shares at the time of exercise, the
               Exercise Price in relation to a Subscription Option is not
               reduced below the nominal value of those Shares; and

          (d)  the number of Shares as so adjusted shall be rounded down to the
               nearest whole number and the Exercise Price as so adjusted shall
               be rounded up to the nearest whole penny.

14.2      As soon as reasonably practicable after making any adjustment pursuant
          to rule 14.1 the Company shall give notice in writing thereof to every
          Optionholder affected thereby and may call in any Option Certificates
          for endorsement or replacement.

15.       ALTERATION OF THIS PLAN

15.1      The Directors may at any time by resolution in writing alter or add to
          any of the provisions of this Plan in any respect PROVIDED THAT:

          15.1.1    no such alteration or addition shall be made to the
                    advantage of existing or new Optionholders to the provisions
                    relating to eligibility to participate, basis of determining
                    entitlement to Optionholders' rights to acquire shares,
                    exercise price, overall and individual limitations on the
                    grant of options under this Plan and the adjustment of such
                    rights in the event of a variation of Ordinary Share Capital
                    without the prior approval by ordinary resolution of the
                    shareholders of the Company in general meeting SAVE THAT
                    this provision shall not apply to the extent that such
                    alteration or addition is in the opinion of the Directors a
                    minor amendment which is necessary or appropriate:

                    (a)  to benefit the administration of this Plan;

                                       16

                    (b)  to take account of a change in legislation; or

                    (c)  to obtain or maintain favourable tax, exchange control
                         or regulatory treatment for participants in the Plan or
                         for the Company or any member of the Group in any
                         jurisdiction; and

          15.1.2    as soon as reasonably practicable after making any such
                    alteration or addition the Directors shall give notice in
                    writing thereof to every Optionholder (if any) affected
                    thereby.

16.       SERVICE OF DOCUMENTS

16.1      Except as otherwise provided in this Plan, any notice or document to
          be given by, or on behalf of, the Company or the Administrator to any
          person in accordance or in connection with this Plan shall be duly
          given:

          16.1.1    by sending it through the post in a pre-paid envelope to the
                    address last known to the Company to be his address and, if
                    so sent, it shall be deemed to have been duly given on the
                    date of posting; or

          16.1.2    if he holds office or employment with any member of the
                    Group or any Associated Company, by delivering it to him at
                    his place of work or by sending to him a facsimile
                    transmission or Electronic Communication addressed to him at
                    his place of work and if so sent it shall be deemed to have
                    been duly given at the time of transmission SAVE THAT a
                    notice or document shall not be duly given by Electronic
                    Communication unless that person is known by his Employer
                    Company to have personal access during his normal business
                    hours to information sent to him by Electronic
                    Communication.

16.2      Any notice or document so sent to an Employee or Optionholder shall be
          deemed to have been duly given notwithstanding that such Optionholder
          is then deceased (and whether or not the Company has notice of his
          death) except where his Personal Representatives have supplied to the
          Company an address to which documents are to be sent.

16.3      Any notice in writing or document to be submitted or given by an
          Optionholder to the Company or the Administrator in accordance or in
          connection with this Plan may be delivered, sent by post, facsimile
          transmission or Electronic Communication but shall not in any event be
          duly given unless:

          16.3.1    it is actually received (or, in the case of an Electronic
                    Communication, opened) by the secretary of the Company or
                    such other individual as may from time to time be nominated
                    by the Company and whose name and address is notified to
                    Optionholders; and

          16.3.2    if given by Electronic Communication (and is so required by
                    the Company), it includes a digitally encrypted signature of
                    the Optionholder.

                                       17

16.4      For the purposes of this Plan, an Electronic Communication shall be
          treated as not having been duly made or received if the recipient of
          such Electronic Communication notifies the sender that it has not been
          opened because it contains, or is accompanied by a warning or caution
          that it could contain or be subject to, a virus or other computer
          programme which could alter damage or interfere with any computer
          software or Electronic Communication.

17.       APPLICABLE LAW

17.1      This Plan shall be governed by and construed in all respects in
          accordance with English law.

17.2      In applying for the grant of an Option an Eligible Employee shall be
          deemed to submit to the exclusive jurisdiction of the English courts
          as regards any claim legal action or proceedings arising out of this
          Plan and to waive any objection to such proceedings taking place in
          the English courts on the grounds of venue or on the grounds that such
          proceedings have been brought in an inconvenient forum.

18.       THIRD PARTY RIGHTS

          Except as otherwise expressly stated to the contrary, neither this
          Plan nor the grant of any Option nor the U.K. Contracts (Rights of
          Third Parties) Act 1999 shall have the effect of giving any third
          party any rights under this Plan and that Act shall not apply to this
          Plan or to the terms of any Option granted pursuant to this Plan.

19.       PROTECTION OF PERSONAL DATA

19.1      By accepting the grant of an Option the Optionholder shall agree and
          consent to:

          19.1.1    the collection, use and processing by any member of the
                    Group and the Administrator of Personal Data relating to the
                    Optionholder, for all purposes reasonably connected with the
                    administration of this Plan and the subsequent registration
                    of the Optionholder or any other person as a holder of
                    Shares acquired pursuant to the exercise of an Option;

          19.1.2    any member of the Group and the Administrator transferring
                    Personal Data to or between any of such persons for all
                    purposes reasonably connected with the administration of the
                    Plan;

          19.1.3    the use of such Personal Data by any such person for such
                    purposes; and

          19.1.4    the transfer to and retention of such Personal Data by any
                    third party for such purposes.

20.       MISCELLANEOUS

20.1      The Company shall at all times keep available sufficient authorised
          but unissued Shares to satisfy the exercise in full of all the
          Subscription Options for the time being remaining capable of being
          exercised under this Plan.

20.2      No Option to purchase existing Shares shall be granted by any person
          unless that person beneficially owns such Shares at the Date of Grant
          or the Directors are satisfied that sufficient Shares will be made
          available to satisfy the exercise in full of all Options granted or to
          be granted by that person.

                                       18

20.3      The Directors may from time to time make and vary such rules and
          regulations not inconsistent herewith and establish such procedures
          for the administration and implementation of this Plan as they think
          fit. In the event of any dispute or disagreement as to the
          interpretation of this Plan or of any such rules, regulations or
          procedures or as to any question or right arising from or related to
          this Plan, the decision of the Directors shall (except as regards any
          matter required to be determined by the Auditors hereunder) be final
          and binding upon all persons.

20.4      The Company shall not be obliged to provide Optionholders with copies
          of any notices, circulars or other documents sent to holders of
          Shares.

20.5      The costs of the administration and implementation of this Plan shall
          be borne by the Company.

20.6      The issue of an Invitation on any occasion is made at the Company's
          discretion. No entitlement to the issue of an Invitation, the grant of
          an Option and/or the issue of Shares in the future shall thereby be
          created on the grounds that such Invitations were issued or Options
          were granted in the past nor on the grounds that Options may
          previously have been granted over a particular number of Shares at a
          certain price. Even the repeated grant of Options and/or the issue of
          Shares shall not create future entitlements to receive Options and/or
          Shares at all or to be granted Options over a specific number of
          Shares or at a specific price.

20.7      If any provision of this Plan is held invalid, illegal or
          unenforceable for any reason by any court of competent jurisdiction,
          such provision shall be severed and the remainder of the provisions of
          this Plan shall continue in full force and effect as if this Plan had
          been established with the invalid, illegal or unenforceable provision
          eliminated.

EXHIBIT 4(c)(xi)

RULES OF

THE SMITH & NEPHEW BELGIAN SHARESAVE PLAN (2002)

This is a copy of the rules of The Smith & Nephew Belgian Sharesave Plan (2002) established by the board of directors of the Company on 31 July 2002 and adopted by the Company Secretary pursuant to the authority delegated upon him by the board.

[LOGO OF PINSENT CURTIS BIDDLE]

                                    CONTENTS

RULE                                                                        PAGE

1.  Interpretation                                                             1

2.  Issue of Invitations                                                       6

3.  Applications for Options                                                   8

4.  Grant of Options                                                           8

5.  Monthly contributions                                                      9

6.  Exercise Price                                                            10

7.  Limitation on Grant of Subscription Options                               10

8.  Exercise of an Option                                                     10

9.  Manner of Exercise of an Option                                           11

10. Non-Transferability and Lapse of Options                                  13

11. Relationship with Employment Contract                                     14

12. Demerger, Reconstruction or Winding-up of the Company                     14

13. Take-over of the Company                                                  15

14. Variation of Share Capital                                                15

15. Alteration of this Plan                                                   16

16. Service of Documents                                                      17

17. Applicable Law                                                            18

18. Third Party Rights                                                        18

19. Protection of Personal Data                                               18

20. Miscellaneous                                                             18

                                    RULES OF
                THE SMITH & NEPHEW BELGIAN SHARESAVE PLAN (2002)

1. INTERPRETATION

1.1 Words and expressions used in this Plan shall have the meanings respectively given below:

"Acquisition Cost"            in relation to the exercise of an Option
                              on any occasion, an amount in pounds
                              sterling equal to the product of:

                              (a)  the maximum number of Shares in
                                   respect of which that Option is
                                   then exercised in accordance with
                                   rule 8.4; and

                              (b)  the Exercise Price

"the Administrator"           Computershare Investor Services plc or
                              such other person who is for the time
                              being appointed by the Company to
                              administer this Plan

"Announcement Date"           the date of notification to the London
                              Stock Exchange of the annual or half
                              year results of the Company

"Applicant"                   a person who, in response to an
                              Invitation, submits an Application

"Application"                 an application for the grant of an
                              Option made in accordance with rule 3


"Application Date"            in relation to any Invitation such date
                              as is specified in accordance with rule
                              2.5.5 to be the last day on which an
                              Application may be submitted in response
                              to Invitations issued on any occasion

"Associated Company"          any company which, in relation to the
                              Company, is an associated company as
                              that term is defined by section 416 of
                              the Taxes Act except that for the
                              purposes of this Plan, subsection (1) of
                              that section shall have effect with the
                              omission of the words "or at any time
                              within one year previously"

"Auditors"                    the auditors for the time being of the
                              Company or if there are joint auditors,
                              such one of them as the Directors may
                              decide

"Calendar Year"               the period commencing 1 January and
                              ending on 31 December immediately
                              following

"Companies Act 1985"          the UK Companies Act 1985

                              1

"the Company"                 Smith & Nephew plc (registered in
                              England no 324357)

"control"                     the meaning given in section 840 of the
                              Taxes Act

"Daily Official List"         the daily official list of the London
                              Stock Exchange

"Date of Grant"               in relation to any Option, the date on
                              which such Option was granted

"Dealing Day"                 a day on which the London Stock Exchange
                              is open for business

"Directors"                   the board of directors for the time
                              being of the Company or a duly
                              constituted committee of that board

"Electronic Communication"    has the meaning given in section 15 of
                              the UK Electronic Communications Act
                              2000 (but excluding mobile telephone
                              text messages)

"Eligible Employee"           an Employee who either:

                              (a)  has held employment within the
                                   Group for such continuous period as
                                   the Directors have determined; or

                              (b)  is nominated by the Directors

"Employee"                    an employee of a Participating Company

"Employer Company"            in relation to an Applicant or an
                              Optionholder at any time, the member of
                              the Group or Associated Company with
                              which such Applicant or Optionholder
                              then holds or, if he has ceased to hold
                              employment within the Group or with any
                              Associated Company, last held office or
                              employment

"Exchange Rate"               in relation to a conversion of currency
                              on any day, the rate to be applied in
                              making such conversion being such
                              published exchange rate as the Directors
                              shall determine for the preceding day
                              or, if that preceding day is not a
                              Dealing Day, the last preceding Dealing
                              Day

"the Exercise Date"           1 January immediately following 3
                              Calendar Years commencing after the
                              Grant Calendar Year

                              2

"the Exercise Price"          in relation to Shares subject to any
                              Option, the price per Share in pounds
                              sterling payable for the acquisition of
                              such Shares upon the exercise of that
                              Option as determined in rule 6

"Grant Calendar Year"         in relation to any Option, the Calendar
                              Year in which that Option is granted

"Grantor"                     in relation to an Option, the Company or
                              the Relevant Trustee which has granted
                              or proposes to grant such Option

"the Group"                   the Company and every other company
                              which is for the time being a Subsidiary

"the Individual Share Limit"  in relation to any Option, the amount of
                              the Notional Sterling Repayment Value
                              divided by the Exercise Price

"Initial Market Value"        in relation to a Share subject to any
                              Option, shall be determined by the
                              Company (with the prior consent of the
                              Grantor, if appropriate) and shall be
                              equal to either:

                              (a)  the average market value of a Share
                                   for the 30 Dealing Days immediately
                                   preceding the Invitation Date;

                                   or

                              (b)  the closing price of a Share on the
                                   Dealing Day immediately preceding
                                   the Invitation Date

"Invitation"                  an invitation to apply for the grant of
                              an Option issued in accordance with rule
                              2

"Invitation Date"             in relation to an Option, the date on
                              which the Invitation was issued

"Jointly Owned Company"       a company (and any subsidiary as defined
                              in section 736 of the Companies Act 1985
                              of such a company) of which the whole of
                              the issued ordinary share capital is
                              jointly owned by a member of the Group
                              and another person (not being a member
                              of the Group) but which is not a
                              Subsidiary and is not under the control
                              of such other person

"Local Currency"              the local currency of legal tender in
                              Belgium

                              3

"Local Currency Equivalent"   in relation to an amount in pounds
                              sterling on a given day, the equivalent
                              value (or as nearly as may be) in Local
                              Currency of such sterling amount after
                              conversion at the Exchange Rate on that
                              day

"the London Stock Exchange"   London Stock Exchange plc

"Model Code"                  the code adopted by the Company which
                              contains provisions similar in purpose
                              and effect to the provisions of the
                              Model Code for Securities Transactions
                              by Directors of Listed Companies issued
                              by the UK Listing Authority from time to
                              time

"Monthly Contribution"        in relation to any Eligible Employee,
                              the fixed amount (in Local Currency) of
                              each of the 36 monthly savings
                              contributions which that Employee
                              undertakes to make in his Application

"Net Pay"                     in relation to an Optionholder, the
                              amount of his earnings for a given
                              month, being earnings from the
                              Optionholder's employment with any one
                              or more members of the Group and any
                              Associated Company, after any deductions
                              have been made by the payer (or its
                              agent) of or on account of any tax or
                              social security contributions and after
                              any other deductions (other than a
                              deduction of a Monthly Contribution)
                              which the payer (or its agent) has made
                              under any legal obligation or pursuant
                              to any authority duly given by the
                              Optionholder

"Notional Sterling Repayment  in relation to any Application, the
Value"                        aggregate amount in pounds sterling
                              (converted from Local Currency using the
                              Exchange Rate on the Invitation Date) of
                              38 Monthly Contributions or such other
                              number of Monthly Contributions as the
                              Directors may determine in relation to
                              Options granted on any occasion so as to
                              be consistent with the bonus rates
                              payable on a certified contractual
                              savings scheme within the meaning of
                              section 326 of the Taxes Act

"Option"                      a right to acquire Shares which:

                              (a)  is granted pursuant to, and is
                                   exercisable only in accordance
                                   with, this Plan and which is a
                                   3-year Option; and

                              (b)  has neither been exercised nor
                                   ceased to be exercisable

                              4

"Option Certificate"          a certificate issued by the Grantor
                              evidencing the grant of an Option

"Option Shares"               in relation to an Option, the Shares
                              over which that Option subsists

"Option Tax Liability"        in relation to an Optionholder, any
                              liability of any member or former member
                              of the Group or any Associated Company
                              or former Associated Company or any
                              Relevant Trustee to account to any tax
                              authority or other body for any amount
                              of, or representing, income tax or
                              social security contributions or any
                              other tax charge levy or other sum which
                              the Optionholder is charged upon or in
                              consequence of the grant, vesting,
                              exercise, assignment or release of an
                              Option or the acquisition of Shares
                              under this Plan

"Optionholder"                in relation to any Option, the person to
                              whom that Option has been granted or, if
                              that person has died, his legal personal
                              representatives

"Ordinary Share Capital"      issued share capital of the Company
                              other than fixed-rate preference shares


"Participating Company"       a member of the Group to which the
                              Directors have determined that this Plan
                              shall extend for the time being

"Personal Data"               has the meaning it bears for the
                              purposes of the UK Data Protection Act
                              1998

"Personal Representatives"    in relation to an Optionholder the legal
                              personal representatives of the
                              Optionholder who have satisfied the
                              Company or the Administrator of their
                              appointment as such

"this Plan"                   The Smith & Nephew Belgian Sharesave
                              Plan (2002) (established by the
                              Directors pursuant to the authority
                              conferred upon them by shareholders of
                              the Company on 3 April 2002) as set out
                              in these rules and as amended from time
                              to time

"Relevant Trustee"            the meaning given in article 71(6) of
                              the UK Financial Services and Markets
                              Act 2000 (Regulated Activities) Order
                              2001

"Savings"                     in relation to an Optionholder at any
                              time, the aggregate amount of that
                              Optionholder's Monthly Contributions
                              held by the Savings Body together with
                              any accrued interest thereon

                              5

"Savings Body"                FORTIS Bank or such other bank(s) and/or
                              other savings institution(s) as may from
                              time to time be approved by the Company
                              for the purposes of this Plan

"Shares"                      fully-paid ordinary shares in the
                              capital of the Company

"Subscription Options"        Options which are rights granted by the
                              Company to subscribe for Shares

"Subsidiary"                  a subsidiary (as defined in section 736
                              of the UK Companies Act 1985) of the
                              Company and which is under the control
                              of the Company

"Taxes Act"                   the UK Income and Corporation Taxes Act
                              1988

"UK"                          the United Kingdom

"UK Listing Authority"        the Financial Services Authority in its
                              capacity as the competent authority for
                              the purposes of Part VI of the UK
                              Financial Services and Markets Act 2000


"year"                        a financial year of the Company.

1.5 Words denoting the masculine gender shall include the feminine.

1.6 Words denoting the singular shall include the plural and vice versa.

2. ISSUE OF INVITATIONS

2.2 Invitations may be issued:

2.2.1 in the period of 42 days beginning with the fourth Dealing Day following an Announcement Date

and

2.2.2     at any other time if the Directors consider the
          circumstances to be exceptional unless the Company is or
          would then be so restricted from issuing invitations at that
          time.

2.3 Invitations issued to Eligible Employees in Belgium shall be issued at the same time and be on the same terms.

2.5       Each invitation shall:

          2.5.1     identify the Savings Body;

          2.5.2     state that it is a condition of the grant of an Option that
                    the Employee must first undertake to make 36 consecutive
                    monthly savings contributions (by instructing the Employer
                    Company's payroll agency to pay such contributions net of
                    salary) in Local Currency to an account with the Savings
                    Body;

          2.5.3     specify the maximum and minimum amounts of such monthly
                    savings contributions;

          2.5.4     invite the person to whom it is addressed to apply for an
                    Option in respect of such whole number of Shares as shall be
                    as nearly as may be equal to, but shall not exceed, the
                    Individual Share Limit (or such lesser number of Shares as
                    the Company may determine);

          2.5.5     specify the last day on which an Application may be made

and shall otherwise be in such form as the Grantor shall determine.

2.8 No invitation may be issued after 3 April 2012.

3. APPLICATIONS FOR OPTIONS

3.1 Any Eligible Employee to whom an Invitation has been issued may apply for an Option by submitting to the person specified in the Invitation an application in writing which:

3.1.1     is received at such address as shall be stated in the
          Invitation not later than the Application Date;

3.1.2     specifies the amount of the monthly contributions proposed
          to be paid by the Employee and authorises his Employer
          Company's payroll agency to transfer such amount (or such
          lower amount as may be determined by the Directors having
          regard to the limitations imposed by the Plan) from his pay;

3.1.3     includes an undertaking by the Employee to his Employer
          Company to make 36 consecutive monthly savings contributions
          (in Local Currency) to a Savings Body;

3.1.4     otherwise complies with such terms and conditions as may
          have been specified in the Invitation;

3.1.5     is subject to the Employee continuing to hold employment
          with a Participating Company until the Date of Grant;

3.1.6     authorises the transfer and processing of the Applicant's
          Personal Data for the purposes of the administration of this
          Plan;

3.1.7     provides that the Applicant agrees to accept and be bound by
          the rules of the Plan;

3.1.8     is duly completed and signed by the Applicant

and is otherwise in such form as the Directors may determine.

3.2 No Eligible Employee shall make more than one Application nor be granted more than one Option in response to the issue of an Invitation on any occasion.

4. GRANT OF OPTIONS

4.1 An Option may be granted by the Company or, if the Company has agreed, a Relevant Trustee.

4.2 An Option shall not be granted to any person who is not an Eligible Employee at the Date of Grant.

4.3 The maximum number of Shares in respect of which an Option shall be granted in response to any Application shall not in any event exceed the Individual Share Limit.

4.4 Subject to rule 4.3, the Directors shall have an absolute discretion as to whether, and in respect of how many Shares, any Option should be granted.

4.5 Options for which Invitations have been issued on any occasion shall be granted within a period of 30 days beginning with the Invitation Date PROVIDED THAT if on any occasion it is necessary to reduce the number of Shares over which Options are granted (so as to avoid exceeding the limit set out in rule 7 or otherwise) in one or more countries, the Directors may grant such Options at any time within the period of 42 days beginning with the Invitation Date.

4.6 As soon as reasonably practicable after the Date of Grant, the Grantor shall, or shall procure the, issue to each Optionholder of an Option Certificate which specifies:

4.6.1     the Grantor;

4.6.2     the Date of Grant;

4.6.3     the number of Shares in respect of which the Option is
          granted;

4.6.4     the Exercise Price;

4.6.5     the earliest date on which the Option will normally become
          exercisable;

4.6.6     that it is a term of the Option that the Optionholder shall
          (to the extent permitted by law) be responsible for any
          Option Tax Liability which may arise;

and shall otherwise be in such form as the Grantor shall determine from time to time.

5. MONTHLY CONTRIBUTIONS

5.1       Subject to rule 5.3, a Monthly Contribution may be made by:

          5.1.1     the Employer Company's payroll agency deducting the whole
                    amount from the Optionholder's Net Pay for the relevant
                    month and paying such amount (on the Optionholder's behalf)
                    to an account with the Savings Body; or

          5.1.2     the Optionholder entering into such other arrangement as may
                    be permitted by the Employer Company (and Belgian laws) for
                    the Monthly Contribution to be paid to an account with the
                    Savings Body.

5.3 If in any month, and in consequence of an Optionholder being absent from work by reason of maternity leave, military service (or such other reason which is, in the Directors' opinion, an equivalent circumstance or event resulting in a period of temporary suspension in employment), the amount of such Optionholder's Net Pay is insufficient to allow for the deduction in full of his Monthly Contribution for, or in respect of, that month, the Optionholder may make other arrangements for payment to the Savings Body of the whole, or any balance remaining, of such Monthly Contribution, provided that the full amount of such Monthly Contribution is paid to the Savings Body not later than 30 days after the end of the relevant month.

6. EXERCISE PRICE

6.1 Subject to rule 14, the Company shall determine the price per Share payable upon the exercise of Options granted on the same day to Eligible Employees in Belgium, but this shall not be less than:

6.1.1     the Initial Market Value (rounded up to the nearest whole
          penny); or, if greater

6.1.2     in the case of a Subscription Option, the nominal value of a
          Share.

7. LIMITATION ON GRANT OF SUBSCRIPTION OPTIONS

7.1 The Company may issue Shares to a Relevant Trustee for the purpose of enabling the Relevant Trustee to satisfy its obligation to transfer Shares to Optionholders upon the exercise of Options.

7.2 The number of Shares in respect of which Subscription Options may be granted in any year, when added to:

7.2.1     the number of Shares in respect of which Subscription
          Options have previously been granted (and which, if not
          exercised, have not ceased to be exercisable); and

7.2.2     the number of Shares issued or in respect of which rights to
          subscribe for Shares have previously been granted (and which
          have neither been exercised, nor ceased to be exercisable)
          pursuant to any other employee share option or share
          incentive plan

in that year and the preceding nine years shall not exceed 10 per cent of the Ordinary Share Capital.

8. EXERCISE OF AN OPTION

8.1       Subject to:

          8.1.1     the following provisions of this rule 8, rules 12 and 13;
                    and

          8.1.2     such other terms which may expressly be permitted by the
                    Directors (with the consent of the Grantor, if appropriate)
                    and notified in writing to the Optionholder

an Option shall only be exercisable within the period of 6 months beginning with the Exercise Date and, if not then exercised, shall lapse and cease to be exercisable at the end of that period.

8.2 If an Optionholder dies within the period of 6 months beginning on or after the Exercise Date, his Personal Representatives may exercise that Option to the extent permitted by rule 8.4, during the period of 12 months beginning on the Exercise Date. If it is not then exercised that Option shall lapse and cease to be exercisable at the end of such 12-month period.

8.3 If at any time before the Exercise Date an Optionholder ceases to hold employment with a member of the Group or an Associated Company or a Jointly Owned Company for any reason other than those mentioned in rules 8.1.2 and 8.2, all Options granted to him shall immediately lapse and cease to be exercisable.

8.4       An Option may only ever be exercised:

          8.4.1     subject to the Optionholder not having failed to make any
                    Monthly Contributions, pursuant to rules 8.1 and 8.2 in
                    respect of all of the Option Shares; or

          8.4.2     pursuant to rules 12 or 13 (or pursuant to rules 8.1 and 8.2
                    if the Optionholder has failed to make one or more Monthly
                    Contributions), in respect of such number of Shares as is
                    equal to:

                    C X D / 36

                    where:

                    C is the number of Option Shares; and

                    D is the number of Monthly Contributions actually made by
                    the Optionholder before the date of exercise of the Option

or, in either case, such lesser number of Option Shares as the Optionholder may specify in the notice of exercise given pursuant to rule 9.1.

8.5 For the purposes of this rule 8, an Optionholder shall not be treated as ceasing to hold employment within the Group until he no longer holds any office as a director or any employment with any member of the Group or any Associated Company or any Jointly Owned Company.

8.6 An Option may not be exercised more than once.

8.7 In deciding whether and when to exercise an Option, an Optionholder shall have regard to the Model Code.

9. MANNER OF EXERCISE OF AN OPTION

9.1 An Option shall be exercised only by the Optionholder giving notice in writing to the Grantor or, if so directed by the Company, the Administrator, which:

9.1.1 is given at any time when the Option is exercisable;

9.1.2     specifies the number of Shares in respect of which the
          Option is exercised in accordance with rule 8.4;

9.1.3     is accompanied by payment of an amount in pounds sterling
          equal to the Acquisition Cost;

9.1.4     unless the Grantor otherwise permits, is accompanied by the
          Option Certificate

and is otherwise in such form as the Grantor may from time to time determine and notify to the Optionholder.

9.2 Within 30 days after the date on which the Grantor (or the Administrator) shall have received a valid notice of exercise of an Option the Grantor shall procure that:

9.2.1     the monies accompanying that notice are applied in payment
          of the Acquisition Cost for the number of Shares in respect
          of which the Option is then exercised; and

9.2.2     subject to rules 9.3 and 9.6, the number of Shares in
          respect of which the Option is then exercised are allotted
          and issued or transferred to or to the order of the
          Optionholder.

9.4 As soon as reasonably practicable after allotting or transferring any Shares as mentioned in rule 9.2.2, the Grantor shall procure:

9.4.1     the issue to the Optionholder of a definitive share
          certificate or such acknowledgement of shareholding as is
          prescribed from time to time in respect of the Shares so
          allotted or transferred; and

9.4.2     if at that time the Shares are listed on the Daily Official
          List, that any Shares so allotted are admitted to the Daily
          Official List.

9.8 The costs of stamp duty and dealing costs and commissions incurred when Shares are purchased upon the exercise of an Option shall be borne by the Company.

10. NON-TRANSFERABILITY AND LAPSE OF OPTIONS

10.1      During his lifetime only the individual to whom an Option is granted
          may exercise that Option.

10.2      An Option shall immediately lapse and cease to be exercisable if:

          10.2.1    it is transferred or assigned (other than to Personal
                    Representatives of the Optionholder), mortgaged, charged or
                    otherwise disposed of by the Optionholder;

          10.2.2    the Optionholder becomes bankrupt or makes, or proposes to
                    make, a voluntary arrangement with all or any of his
                    creditors in accordance with any applicable laws relating to
                    personal insolvency;

          10.2.3    the Optionholder is not or ceases for any other reason
                    (except his death) to be the sole legal and beneficial owner
                    of the Option free from encumbrances or would not, upon the
                    exercise of the Option, be the sole legal and beneficial
                    owner of the Shares thereby acquired, free from
                    encumbrances;

          10.2.4    (unless in any individual case the Company otherwise
                    determines) the Optionholder, whilst remaining in employment
                    with a member of the Group or an Associated Company or a
                    Jointly Owned Company, instructs his Employer Company's
                    payroll agency to cease deducting Monthly Contributions from
                    his salary;

          10.2.5    if, after six of the Optionholder's Monthly Contributions
                    have not been made for any reason, a seventh Monthly
                    Contribution is not made on the due date for payment; or

          10.2.6    (unless in any individual case the Company otherwise
                    determines) an Optionholder obtains repayment of any of his
                    savings contributions (or interest on such contributions)
                    unless such Option is then immediately exercisable pursuant
                    to rules 8.2, 12, 13 or in any other circumstances expressly
                    permitted by the Directors (acting with the consent of the
                    Grantor).

                                       13

10.3      Save as mentioned in rule 8.2, an Option shall in any event lapse and
          cease to be exercisable at the end of the period of 6 months beginning
          with the Exercise Date.

11.       RELATIONSHIP WITH EMPLOYMENT CONTRACT

11.1      The grant of an Option shall not form part of the Optionholder's
          entitlement to remuneration or benefits pursuant to his contract of
          employment nor shall the existence of a contract of employment between
          any person and any present or past member of the Group or Associated
          Company or Jointly Owned Company, give such person any right
          entitlement or expectation to have an Option granted to him in respect
          of any number of Shares or any expectation that an Option might be
          granted to him or that he will be invited to apply for the grant of an
          Option whether subject to any conditions or at all.

11.2      Neither the existence of this Plan nor the fact that an individual has
          on any occasion been granted an Option (or been invited to apply for
          the grant of an Option) shall give such individual any right
          entitlement or expectation that he has or will in future have any such
          right entitlement or expectation to participate in this Plan by being
          granted an Option (or invited to apply for the grant of an Option) on
          any other occasion.

11.3      The rights granted to an Optionholder upon the grant of an Option
          shall not afford the Optionholder any rights or additional rights to
          compensation or damages in consequence of the loss or termination of
          his office or employment with any present or past member of the Group
          or Associated Company or Jointly Owned Company for any reason
          whatsoever (whether or not such termination is ultimately held to be
          wrongful or unfair).

11.4      The rights and obligations of an Optionholder under the terms of his
          contract of employment with any present or past member of the Group or
          Associated Company or Jointly Owned Company shall not be affected by
          the grant of an Option or his participation in this Plan.

11.5      An Optionholder shall not be entitled to any compensation or damages
          for any loss or potential loss which he may suffer by reason of being
          unable to exercise an Option in whole or in part in consequence of the
          loss or termination of his office or employment with any present or
          past member of the Group or Associated Company or Jointly Owned
          Company for any reason whatsoever (whether or not such termination is
          ultimately held to be wrongful or unfair).

12.       DEMERGER, RECONSTRUCTION OR WINDING-UP OF THE COMPANY

12.1      If notice is given to shareholders of the Company of a proposed
          demerger of the Company or of any Subsidiary the Company may give
          notice to Optionholders that Options may then be exercised within such
          period (not exceeding 30 days) as the Company may specify in such
          notice to Optionholders SAVE THAT no such notice to Optionholders
          shall be given unless the Auditors have confirmed in writing to the
          Company that the interests of Optionholders would or might be
          substantially prejudiced if before the proposed demerger has effect
          Optionholders could not exercise their Options and be registered as
          the holders of the Shares thereupon acquired.

                                       14

12.2      If the court sanctions a compromise or arrangement proposed for the
          purposes of or in connection with a scheme for the reconstruction of
          the Company or its amalgamation pursuant to section 425 of the UK
          Companies Act 1985 the Optionholder shall be entitled to exercise his
          Option during the period of 6 months commencing on the date on which
          the court sanctions the compromise or arrangement, and thereafter the
          Option shall lapse and cease to be exercisable.

12.3      If notice is given to the shareholders of the Company of a resolution
          for the voluntary winding-up of the Company, notice of the same shall
          be given to all Optionholders and each Optionholder shall be entitled
          to exercise his Option at any time within the period of 6 months
          commencing on the date on which the resolution is passed.

12.4      All Options shall immediately lapse and cease to be exercisable upon
          the commencement of a winding-up of the Company.

13.       TAKE-OVER OF THE COMPANY

13.1      If, as a result of either:

          13.1.1    a general offer to acquire the whole of the Ordinary Share
                    Capital which is made on a condition such that if it is
                    satisfied the person making the offer will have control of
                    the Company; or

          13.1.2    a general offer to acquire all the shares in the Company of
                    the same class as the Shares

          the Company shall come under the control of another person or persons,
          an Optionholder shall be entitled to exercise his Option to the extent
          permitted by rule 8.4 within the period of 6 months beginning with the
          date when the person making the offer has obtained control of the
          Company and any condition subject to which the offer is made has been
          satisfied. To the extent that the Option is not then exercised, it
          shall lapse and cease to be exercisable at the end of such period.

13.2      If at any time any person becomes entitled or bound to acquire shares
          in the Company under sections 428 to 430F (inclusive) of the Companies
          Act 1985 an Optionholder shall be entitled to exercise his Option to
          the extent permitted by rule 8.4 at any time when that person remains
          so entitled or bound. To the extent that the Option is not then
          exercised, it shall lapse and cease to be exercisable at the end of
          such period.

13.3      For the purposes of the preceding provisions of this rule 13 a person
          shall be deemed to have control of the Company if he and others acting
          in concert with him have together obtained control of it.

14.       VARIATION OF SHARE CAPITAL

14.1      In the event of any alteration of the Ordinary Share Capital by way of
          a capitalisation or rights issue or by way of sub-division,
          consolidation, reduction or any other variation in the share capital
          of the Company the Grantor may make such adjustments as it considers

appropriate:

14.1 to the aggregate number of Shares subject to any Option;

14.2 to the Exercise Price; and/or

14.3 if an Option has been exercised but no Shares have been allotted or transferred, to the number of Shares which may be so allotted or transferred and the Acquisition Cost relating to such Shares

PROVIDED THAT:

          (a)  except in the case of a subdivision, consolidation or
               capitalisation issue any such adjustment is confirmed in writing
               by the Auditors to be in their opinion fair and reasonable;

          (b)  the aggregate Acquisition Cost payable by an Optionholder on the
               exercise of all of his Options shall not be materially altered;

          (c)  except insofar as the Directors, on behalf of the Company, may
               then agree to capitalise the Company's reserves and apply the
               same in paying up the difference between the Exercise Price and
               the nominal value of the Shares at the time of exercise, the
               Exercise Price in relation to a Subscription Option is not
               reduced below the nominal value of those Shares;

          (d)  the number of Shares as so adjusted shall be rounded down to the
               nearest whole number and the Exercise Price as so adjusted shall
               be rounded up to the nearest whole penny; and

          (e)  if the Grantor is not the Company, no such adjustment shall be
               made without the consent of the Grantor.

14.2      As soon as reasonably practicable after making any adjustment pursuant
          to rule 14.1 the Grantor shall give notice in writing thereof to every
          Optionholder affected thereby and may call in any Option Certificates
          for endorsement or replacement.

15.       ALTERATION OF THIS PLAN

15.1      The Directors may at any time (with the prior consent of the Grantor)
          by resolution in writing alter or add to any of the provisions of this
          Plan in any respect PROVIDED THAT:

          15.1.1    no such alteration or addition shall be made to the
                    advantage of existing or new Optionholders to the provisions
                    relating to eligibility to participate, basis of determining
                    entitlement to Optionholders' rights to acquire shares,
                    exercise price, overall and individual limitations on the
                    grant of options under this Plan and the adjustment of such
                    rights in the event of a variation of Ordinary Share Capital
                    without the prior approval by ordinary resolution of the
                    shareholders of the Company in general meeting SAVE THAT
                    this provision shall not apply to the extent that such
                    alteration or addition is in the opinion of the Directors a
                    minor amendment which is necessary or appropriate:

                    (a)  to benefit the administration of this Plan;

                    (b)  to take account of a change in legislation; or

                                       16

                    (c)  to obtain or maintain favourable tax, exchange control
                         or regulatory treatment for participants in the Plan or
                         for the Company or any member of the Group in any
                         jurisdiction;

          15.1.2    if in relation to any Options the Grantor is not the
                    Company, no alteration or addition shall be made to the
                    terms of such Options without the approval of the Grantor;
                    and

          15.1.3    as soon as reasonably practicable after making any such
                    alteration or addition the Directors (on behalf of the
                    Grantor) shall give notice in writing thereof to every
                    Optionholder (if any) affected thereby.

16.       SERVICE OF DOCUMENTS

16.1      Except as otherwise provided in this Plan, any notice or document to
          be given by, or on behalf of, the Company or other Grantor or the
          Administrator to any person in accordance or in connection with this
          Plan shall be duly given:

          16.1.1    by sending it through the post in a pre-paid envelope to the
                    address last known to the Company to be his address and, if
                    so sent, it shall be deemed to have been duly given on the
                    date of posting; or

          16.1.2    if he holds office or employment with any member of the
                    Group or any Associated Company, by delivering it to him at
                    his place of work or by sending to him a facsimile
                    transmission or Electronic Communication addressed to him at
                    his place of work and if so sent it shall be deemed to have
                    been duly given at the time of transmission SAVE THAT a
                    notice or document shall not be duly given by Electronic
                    Communication unless that person is known by his Employer
                    Company to have personal access during his normal business
                    hours to information sent to him by Electronic
                    Communication.

16.2      Any notice or document so sent to an Employee or Optionholder shall be
          deemed to have been duly given notwithstanding that such Optionholder
          is then deceased (and whether or not the Company or other Grantor has
          notice of his death) except where his Personal Representatives have
          supplied to the Company an address to which documents are to be sent.

16.3      Any notice in writing or document to be submitted or given by an
          Optionholder to the Grantor, the Company or the Administrator in
          accordance or in connection with this Plan may be delivered, sent by
          post, facsimile transmission or Electronic Communication but shall not
          in any event be duly given unless:

          16.3.1    it is actually received (or, in the case of an Electronic
                    Communication, opened) by the secretary of the Company or
                    such other individual as may from time to time be nominated
                    by the Company and whose name and address is notified to
                    Optionholders; and

          16.3.2    if given by Electronic Communication (and is so required by
                    the Company), it includes a digitally encrypted signature of
                    the Optionholder.

                                       17

16.4      For the purposes of this Plan, an Electronic Communication shall be
          treated as not having been duly made or received if the recipient of
          such Electronic Communication notifies the sender that it has not been
          opened because it contains, or is accompanied by a warning or caution
          that it could contain or be subject to, a virus or other computer
          programme which could alter damage or interfere with any computer
          software or Electronic Communication.

17.       APPLICABLE LAW

17.1      This Plan shall be governed by and construed in all respects in
          accordance with English law.

17.2      In applying for the grant of an Option an Eligible Employee shall be
          deemed to submit to the exclusive jurisdiction of the English courts
          as regards any claim legal action or proceedings arising out of this
          Plan and to waive any objection to such proceedings taking place in
          the English courts on the grounds of venue or on the grounds that such
          proceedings have been brought in an inconvenient forum.

18.       THIRD PARTY RIGHTS

          Except as otherwise expressly stated to the contrary, neither this
          Plan nor the grant of any Option nor the U.K. Contracts (Rights of
          Third Parties) Act 1999 shall have the effect of giving any third
          party any rights under this Plan and that Act shall not apply to this
          Plan or to the terms of any Option granted pursuant to this Plan.

19.       PROTECTION OF PERSONAL DATA

19.1      By accepting the grant of an Option the Optionholder shall agree and
          consent to:

          19.1.1    the collection, use and processing by any member of the
                    Group, the Administrator and any Relevant Trustee of
                    Personal Data relating to the Optionholder, for all purposes
                    reasonably connected with the administration of this Plan
                    and the subsequent registration of the Optionholder or any
                    other person as a holder of Shares acquired pursuant to the
                    exercise of an Option;

          19.1.2    any member of the Group, the Administrator and any Relevant
                    Trustee transferring Personal Data to or between any of such
                    persons for all purposes reasonably connected with the
                    administration of the Plan;

          19.1.3    the use of such Personal Data by any such person for such
                    purposes; and

          19.1.4    the transfer to and retention of such Personal Data by any
                    third party for such purposes.

20.       MISCELLANEOUS

20.1      The Company shall at all times keep available sufficient authorised
          but unissued Shares to satisfy the exercise in full of all the
          Subscription Options for the time being remaining capable of being
          exercised under this Plan.

                                       18

20.2      No Option to purchase existing Shares shall be granted by any person
          unless that person beneficially owns such Shares at the Date of Grant
          or the Directors are satisfied that sufficient Shares will be made
          available to satisfy the exercise in full of all Options granted or to
          be granted by that person.

20.3      The Directors may from time to time make and vary such rules and
          regulations not inconsistent herewith and establish such procedures
          for the administration and implementation of this Plan as they think
          fit. In the event of any dispute or disagreement as to the
          interpretation of this Plan or of any such rules, regulations or
          procedures or as to any question or right arising from or related to
          this Plan, the decision of the Directors shall (except as regards any
          matter required to be determined by the Auditors hereunder) be final
          and binding upon all persons.

20.4      The Company shall not be obliged to provide Optionholders with copies
          of any notices, circulars or other documents sent to holders of
          Shares.

20.5      The costs of the administration and implementation of this Plan shall
          be borne by the Company.

20.6      The issue of an Invitation on any occasion is made at the Company's
          discretion. No entitlement to the issue of an Invitation, the grant of
          an Option and/or the issue of Shares in the future shall thereby be
          created on the grounds that such Invitations were issued or Options
          were granted in the past nor on the grounds that Options may
          previously have been granted over a particular number of Shares at a
          certain price. Even the repeated grant of Options and/or the issue of
          Shares shall not create future entitlements to receive Options and/or
          Shares at all or to be granted Options over a specific number of
          Shares or at a specific price.

20.7      If any provision of this Plan is held invalid, illegal or
          unenforceable for any reason by any court of competent jurisdiction,
          such provision shall be severed and the remainder of the provisions of
          this Plan shall continue in full force and effect as if this Plan had
          been established with the invalid, illegal or unenforceable provision
          eliminated.

EXHIBIT 4(c)(xii)

RULES OF

THE SMITH & NEPHEW FRENCH SHARESAVE PLAN (2002)

This is a copy of the rules of The Smith & Nephew French Sharesave Plan (2002) established by the board of directors of the Company on 31 July 2002 and adopted by the Company Secretary pursuant to the authority delegated upon him by the board.

[LOGO OF PINSENT CURTIS BIDDLE]

                                    CONTENTS

RULE                                                                     PAGE

1.    Interpretation                                                        1

2.    Issue of Invitations                                                  7

3.    Applications for Options                                              8

4.    Grant of Options                                                      9

5.    Monthly savings contributions                                        10

6.    Exercise Price                                                       11

7.    Limitation on Grant of Subscription Options                          11

8.    Exercise of an Option                                                11

9.    Manner of Exercise of an Option                                      13

10.   Non-Transferability and Lapse of Options                             14

11.   Relationship with Employment Contract                                15

12.   Demerger, Reconstruction or Winding-up of the Company                16

13.   Take-over of the Company                                             16

14.   Variation of Share Capital                                           17

15.   Alteration of this Plan                                              18

16.   Service of Documents                                                 18

17.   Applicable Law                                                       19

18.   Third Party Rights                                                   20

19.   Protection of Personal Data                                          20

20.   Miscellaneous                                                        20

                                    RULES OF
                 THE SMITH & NEPHEW FRENCH SHARESAVE PLAN (2002)

1.      INTERPRETATION

1.1     Words and expressions used in this Plan shall have the meanings
        respectively given below:

        "Acquisition Cost"                 in relation to the exercise of an
                                           Option on any occasion, an amount in
                                           pounds sterling equal to the product
                                           of:

                                           (a)  the maximum number of Shares in
                                                respect of which that Option is
                                                then exercised in accordance
                                                with rule 8.5; and

                                           (b)  the Exercise Price

        "the Administrator"                Computershare Investor Services plc
                                           or such other person who is for the
                                           time being appointed by the Company
                                           to administer this Plan. The
                                           Administrator shall only be vested
                                           with pure administrative functions,
                                           but not with management nor
                                           decision-making powers.

        "Affiliate Company"                has the meaning given in Article 225
                                           - 180 of the Commerce Code

        "Announcement Date"                a date of notification to the London
                                           Stock Exchange of the annual or half
                                           year results of the Company

        "Applicant"                        a person who, in response to an
                                           Invitation, submits an Application

        "Application"                      an application for the grant of an
                                           Option made in accordance with rule 3

        "Application Date"                 in relation to any Invitation such
                                           date as is specified in accordance
                                           with rule 2.5.5 to be the last day on
                                           which an Application may be submitted
                                           in response to Invitations issued on
                                           any occasion

        "Associated Company"               any company which, in relation to the
                                           Company, is an associated company as
                                           that term is defined by:

                                           (a)  section 416 of the Taxes Act
                                                except that for the purposes of
                                                this Plan, subsection (1) of
                                                that section shall have effect
                                                with the omission of the words
                                                "or at any time within one year
                                                previously"; and

                                           (b)  is an Affiliate Company

                                        1

        "Auditors"                         the auditors for the time being of
                                           the Company or if there are joint
                                           auditors, such one of them as the
                                           Directors may decide

        "Commerce Code"                    the French Code of Commerce, as
                                           amended and restated from time to
                                           time

        "Companies Act 1985"               the UK Companies Act 1985

        "the Company"                      Smith & Nephew plc (registered in
                                           England no 324357)

        "control"                          the meaning given in section 840 of
                                           the Taxes Act

        "Daily Official List"              the daily official list of the London
                                           Stock Exchange

        "Date of Grant"                    in relation to any Option, the date
                                           on which such Option was granted

        "Dealing Day"                      a day on which the London Stock
                                           Exchange is open for business

        "Directors"                        the board of directors  for the time
                                           being of the Company or a duly
                                           constituted committee of that board

        "Electronic Communication"         has the meaning given in section 15
                                           of the UK Electronic Communications
                                           Act 2000 (but excluding mobile
                                           telephone text messages)

        "Eligible Participant"             a French Employee or a French Officer
                                           who either:

                                           (a)  has held employment within the
                                                Group for such continuous period
                                                as the Directors have
                                                determined; or

                                           (b)  is nominated by the Directors

                                           and in either case is not precluded
                                           from participating in this Plan by
                                           virtue of Article 225-182 of the
                                           Commerce Code

        "Employer Company"                 in relation to an Applicant or an
                                           Optionholder at any time, the member
                                           of the Group or Associated Company
                                           with which such Applicant or
                                           Optionholder then holds or, if he has
                                           ceased to hold employment within the
                                           Group or with any Associated Company,
                                           last held office or employment

                                        2

        "Exchange Rate"                    in relation to a conversion of
                                           currency on any day, the rate to be
                                           applied in making such conversion
                                           being such published exchange rate as
                                           the Directors shall determine for the
                                           preceding day or, if that preceding
                                           day is not a Dealing Day, the last
                                           preceding Dealing Day

        "the Exercise Date"                in relation to an Optionholder's
                                           Savings, the fourth anniversary of
                                           the date on which his first Monthly
                                           Contribution is received by the
                                           Savings Body

        "the Exercise Price"               in relation to Shares subject to any
                                           Option, the price per Share in pounds
                                           sterling payable for the acquisition
                                           of such Shares upon the exercise of
                                           that Option as determined in rule 6

        "French Employee"                  an employee (salarie) of a
                                           Participating Company

        "French Officer"                   Chairman ("President"), chief
                                           executive officer ("directeur
                                           general" and "directeur general
                                           delegue") general manager ("gerant"
                                           in a "societe par actions
                                           simplifiee"), management board
                                           members ("membres du directoire") but
                                           not directors ("administrateurs") or
                                           supervisory board members ("membres
                                           du conseil de surveillance") except
                                           in special circumstances described in
                                           Article L. 225-185 of the Commerce
                                           Code PROVIDED THAT such person would,
                                           for the purposes of section 743 of
                                           the Companies Act 1985 be regarded as
                                           a 'bona fide employee' of the
                                           Participating Company

        "Grantor"                          in  relation to an Option,  the
                                           Company  which has granted or
                                           proposes to grant such Option

        "the Group"                        the  Company  and every  other
                                           company  which is for the time
                                           being a Subsidiary

        "the Individual Share Limit"       in  relation  to  any  Option,  the
                                           amount  of  the  Notional Sterling
                                           Repayment Value divided by the
                                           Exercise Price

        "Initial Market Value"             in relation to a Share subject to any
                                           Option, the average of the quoted
                                           closing price of Shares for the
                                           twenty Dealing Days immediately
                                           preceding the Date of Grant

        "Invitation"                       an invitation to apply for the grant
                                           of an Option issued in accordance
                                           with rule 2

                                        3

        "Invitation Date"                  in relation to an Option, the date on
                                           which the invitation to apply for the
                                           grant of such Option was issued

        "Jointly Owned Company"            a company (and any subsidiary as
                                           defined in section 736 of the
                                           Companies Act 1985 of such a company)
                                           of which the whole of the issued
                                           ordinary share capital is jointly
                                           owned by a member of the Group and
                                           another person (not being a member of
                                           the Group) but which is not a
                                           Subsidiary and is not under the
                                           control of such other person within
                                           the limits of Article L. 225-180 of
                                           the Commerce Code

        "Local Currency"                   the local currency of legal tender in
                                           France

        "Local Currency Equivalent"        in relation to an amount in pounds
                                           sterling on a given day, the
                                           equivalent value (or as nearly as may
                                           be) in Local Currency of such
                                           sterling amount after conversion at
                                           the Exchange Rate on that day

        "the London Stock Exchange"        London Stock Exchange plc

        "Model Code"                       the code adopted by the Company which
                                           contains provisions similar in
                                           purpose and effect to the provisions
                                           of the Model Code for Securities
                                           Transactions by Directors of Listed
                                           Companies issued by the UK Listing
                                           Authority from time to time

        "Monthly Contribution"             in relation to any Eligible
                                           Participant, the fixed amount (in
                                           Local Currency) of each of the 48
                                           monthly savings contributions which
                                           that individual undertakes to make in
                                           his Application

        "Net Pay"                          in relation to an Optionholder, the
                                           amount of his earnings for a given
                                           month, being earnings from the
                                           Optionholder's employment with any
                                           one or more members of the Group and
                                           any Associated Company, after any
                                           deductions have been made by the
                                           payer of or on account of any tax or
                                           social security contributions and
                                           after any other deductions (other
                                           than a deduction of a Monthly
                                           Contribution) which the payer has
                                           made under any legal obligation or
                                           pursuant to any authority duly given
                                           by the Optionholder

                                        4

        "Notional Sterling Repayment       in relation to any Application, the
        Value"                             aggregate amount in pounds sterling
                                           (converted from Local Currency using
                                           the Exchange Rate on the Invitation
                                           Date) of 52 Monthly Contributions or,
                                           such other number of Monthly
                                           Contributions as the Directors may
                                           determine in relation to Options
                                           granted on any occasion so as to be
                                           consistent with the bonus rates
                                           payable on a certified contractual
                                           savings scheme within the meaning of
                                           section 326 of the Taxes Act

        "Official List"                    the daily official list of the London
                                           Stock Exchange

        "Option"                           a right to subscribe for Shares which
                                           is granted pursuant to, and is
                                           exercisable only in accordance with,
                                           this Plan and which is a 4-year
                                           Option

        "Option Shares"                    in relation to an Option, the Shares
                                           over which that Option subsists

        "Option Certificate"               a certificate issued by the Grantor
                                           evidencing the grant of an Option

        "Option Tax Liability"             in relation to an Optionholder, any
                                           liability of any member or former
                                           member of the Group or any Associated
                                           Company or former Associated Company
                                           to account to any tax authority or
                                           other body for any amount of, or
                                           representing, income tax or social
                                           security contributions or any other
                                           tax charge levy or other sum which
                                           the Optionholder is charged upon or
                                           in consequence of the grant, vesting,
                                           exercise, assignment or release of an
                                           Option or the acquisition of Shares
                                           under this Plan

        "Optionholder"                     in relation to any Option, the person
                                           to whom that Option has been granted
                                           or, if that person has died, his
                                           legal personal representatives

        "Ordinary Share Capital"           issued share capital of the Company
                                           other than fixed-rate preference
                                           shares

        "Participating Company"            a member of the Group to which the
                                           Directors have determined that this
                                           Plan shall extend

        "Personal Data"                    has the meaning it bears for the
                                           purposes of the UK Data Protection
                                           Act 1998

        "Personal Representatives"         in relation to an Optionholder, the
                                           heirs or legatees of the Optionholder

                                        5

        "this Plan"                        The Smith & Nephew French Sharesave
                                           Plan (2002) as amended from time to
                                           time

        "Savings"                          in relation to an Optionholder at any
                                           time, the aggregate amount of that
                                           Optionholder's Monthly Contributions
                                           held by the Savings Body together
                                           with any accrued interest thereon

        "Savings Body"                     Societe Generale, such bank(s) and/or
                                           other savings institution(s) as may
                                           from time to time be approved by the
                                           Company for the purposes of this Plan

        "Shares"                           fully-paid ordinary shares in the
                                           capital of the Company registered in
                                           nominative form

        "Subscription Options"             Options which are rights granted by
                                           the Company to subscribe for Shares

        "Subsidiary"                       any company which is for the time
                                           being:

                                           (a)  a subsidiary as defined in:

                                                (i)  section 736 of the UK
                                                     Companies Act 1985 of the
                                                     Company;

                                                (ii) Article L. 233-1 of the
                                                     Commerce Code; and

                                           (b)  an Affiliate Company

        "Taxes Act"                        the UK Income and Corporation Taxes
                                           Act 1988

        "UK"                               the United Kingdom

        "UK Listing Authority"             the Financial Services Authority in
                                           its capacity as the competent
                                           authority for the purposes of Part VI
                                           of the UK Financial Services and
                                           Markets Act 2000

        "UK Scheme"                        The Smith & Nephew Sharesave Scheme
                                           (2002)

        "year"                             a financial year of the Company.

1.5 Words denoting the masculine gender shall include the feminine.

1.6 Words denoting the singular shall include the plural and vice versa.

2. ISSUE OF INVITATIONS

2.1 Subject to the following provisions of this rule 2, the Company may from time to time issue, or procure the issue by the Administrator, to all persons who are or are expected to be Eligible Participants, invitations to apply for the grant of Options.

2.2 Invitations may be issued:

2.2.1 in the period of 42 days beginning with the fourth Dealing Day following an Announcement Date

2.2.2   at any other time if the Directors consider the circumstances to
        be exceptional unless the Company is or would then be so
        restricted from issuing invitations at that time.

2.3 Invitations issued to Eligible Participants in France shall be issued at the same time and be on the same terms.

2.4 Invitations may be issued in writing or by Electronic Communication or in the form of notices, advertisements, circulars or otherwise for the general attention of employees and to which the particular attention of individual employees is drawn by notices issued with pay and salary advice slips SAVE THAT an invitation may not be issued to an Eligible Participant by Electronic Communication unless that person is known by his Employer Company to have personal access during his normal business hours to information sent to him by Electronic Communication.

2.5     Each invitation shall:

        2.5.1   identify the Savings Body;

        2.5.2   state that it is a condition of the grant of an Option that the
                Eligible Participant must first undertake to make 48 consecutive
                monthly savings contributions (by way of deductions from net
                payments of salary or by such other arrangements as may be
                permitted by the Directors in France) in Local Currency to an
                account with the Savings Body;

        2.5.3   specify the maximum and minimum amounts of such monthly savings
                contributions;

                                        7

        2.5.4   invite the person to whom it is addressed to apply for an
                Option;

        2.5.5   specify the last day on which an Application may be made

and shall otherwise be in such form as the Company shall determine.

2.7 The amount of an Eligible Participant's Monthly Contribution shall be not less than the Local Currency equivalent of (GBP)5 and not greater than the Local Currency equivalent of (GBP)250 or, in either case, such other sum as the Directors may from time to time determine.

2.8 No invitation may be issued if the Company would be restricted from granting Options by reason of rule 4.5.2(c).

3. APPLICATIONS FOR OPTIONS

3.1 Any Eligible Participant to whom an Invitation has been issued may apply for an Option by submitting to the person specified in the Invitation an application in writing which:

3.1.1   is received at such address as shall be stated in the Invitation
        not later than the Application Date;

3.1.2   specifies the amount of the monthly contributions proposed to be
        paid by the Eligible Participant and authorises his Employer
        Company to deduct such amount (or such lower amount as may be
        determined by the Directors having regard to the limitations
        imposed by the Plan) from his pay;

3.1.3   includes an undertaking by the Eligible Participant to his
        Employer Company to make 48 consecutive monthly savings
        contributions (in Local Currency) to a Savings Body;

3.1.4   otherwise complies with such terms and conditions as may have
        been specified in the Invitation;

3.1.5   is subject to the individual continuing to hold employment with
        a Participating Company until the Date of Grant;

3.1.6   authorises the transfer and processing of the Applicant's
        Personal Data for the purposes of the administration of this
        Plan;

3.1.7   provides that the Applicant agrees to accept and be bound by the
        rules of the Plan;

3.1.8   is duly completed and signed by the Applicant

and is otherwise in such form as the Directors may determine.

3.2 No Eligible Participant shall make more than one Application nor be granted more than one Option in response to the issue of an Invitation on any occasion.

4. GRANT OF OPTIONS

4.1 An Option may be granted by the Company.

4.2 An Option shall not be granted to any person who is not an Eligible Participant at the Date of Grant.

4.3 The maximum number of Shares in respect of which an Option shall be granted in response to any Application shall not in any event exceed the Individual Share Limit.

4.4 Subject to rule 4.3, the Directors shall have an absolute discretion as to whether, and in respect of how many Shares, any Option should be granted.

4.5 Options for which Invitations have been issued on any occasion shall be granted within the period of 30 days beginning with the Invitation Date PROVIDED THAT:

4.5.1   if on any occasion it is necessary to reduce the number of
        Shares over which Options are granted (so as to avoid exceeding
        the limit set out in rule 7 or otherwise) in one or more
        countries, the Directors may grant such Options at any time
        within the period of 42 days beginning with the Invitation Date;

4.5.2 Options shall not be granted within the following periods:

(a) 20 Dealing Days from the date:

(i) a dividend is distributed;

(ii) on which a resolution is passed to increase the

                        authorised share capital of the Company;

        (b)     10 Dealing Days immediately prior to and following the
                Announcement Date;

        (c)     after 2 June 2005; and

        (d)     any day when the Company is in possession of
                price-sensitive information which is not within the
                public domain, and within ten days after such
                information fell into the public domain.

4.5.3   If on any occasion Options cannot be granted as a result of the
        restriction in rules 4.5.2(a)(i), 4.5.2(a)(ii) or 4.5.2(d) the
        Directors may grant such Options at any time within the period
        of 42 days following the end of such restriction.

4.6 As soon as reasonably practicable after the Date of Grant, the Company shall, or shall procure, the issue to each Optionholder of an Option Certificate which specifies:

4.6.1 the Grantor;

4.6.2 the Date of Grant;

4.6.3   the number of Shares in respect of which the Option is granted;

4.6.4   the Exercise Price;

4.6.5   the earliest date on which the Option will normally become
        exercisable;

4.6.6   that it is a term of the Option that the Optionholder shall (to
        the extent permitted by law) be responsible for any Option Tax
        Liability which may arise;

4.6.7   that the Option shall lapse upon the occurrence of an event
        referred to in rule 8.4

and shall otherwise be in such form as the Grantor shall determine from time to time.

5. MONTHLY SAVINGS CONTRIBUTIONS

5.1     Subject to rule 5.3, a Monthly Contribution may be made by:

        5.1.1   the Optionholder's Employer Company deducting the whole amount
                from the Optionholder's Net Pay for the relevant month and
                paying such amount (on the Optionholder's behalf) to an account
                with the Savings Body; or

        5.1.2   the Optionholder entering into such other arrangement as may be
                permitted by the Employer Company for the Monthly Contribution
                to be paid to an account with the Savings Body.

5.2 An Optionholder's Savings shall be deposited with the Savings Body and shall at all times remain the property of the Optionholder so that none of the Company, the Optionholder's Employer or the Administrator shall have any interest in such Savings.

6. EXERCISE PRICE

6.1 Subject to rule 14, on the Date of Grant, the Company shall determine the price per Share payable upon the exercise of Options granted on the same day to Eligible Participants in France, but this shall not be less than:

6.1.1   95% of the Initial Market Value (rounded up to the nearest whole
        penny); or, if greater

6.1.2   in the case of a Subscription Option, the nominal value of a
        Share.

7. LIMITATION ON GRANT OF SUBSCRIPTION OPTIONS

7.1 The number of Shares in respect of which Subscription Options may be granted in any year, when added to:

7.1.1   the number of Shares in respect of which Subscription Options
        have previously been granted (and which, if not exercised, have
        not ceased to be exercisable); and

7.1.2   the number of Shares issued or in respect of which rights to
        subscribe for Shares have previously been granted (and which
        have neither been exercised, nor ceased to be exercisable)
        pursuant to any other employee share option or share incentive
        plan

in that year and the preceding nine years shall not exceed 10 per cent of the Ordinary Share Capital.

8. EXERCISE OF AN OPTION

8.2 If an Optionholder dies, his Personal Representatives may exercise that Option during the period of 6 calendar months commencing on the date of his death and if it is not then exercised that Option shall lapse and cease to be exercisable at the end of such period.

8.3 An Optionholder who ceases to hold employment within the Group for any of the following reasons may exercise his Option during the relevant specified period (or in the case of rules 8.3.2 or 8.3.3, such additional period not exceeding the period of 6 months following cessation as the Directors may determine and notify to the Optionholder):

8.3.1   injury, ill-health or disability (meaning a second or third
        category disability pursuant to Article L. 341-1 of the Code de
        la securite sociale, determined by the work physician ("medecin
        du travail") according to French law, who will issue a statement
        of disability to the satisfaction of the directors of his
        Employer Company), 6 calendar months commencing on the date of
        cessation;

                               11

8.3.2   redundancy, 3 calendar months immediately prior to the date the
        employee received such notice from his Employer Company; or

8.3.3   retirement at or after his normal retirement age, 3 calendar
        months immediately prior to cessation

and his Option may be exercised to the extent permitted by rule 8.5.2 during the applicable period. To the extent that the Option is not then exercised, it shall lapse and cease to be exercisable at the end of such applicable period.

        8.4.1   if such cessation is by reason of:

                (a)     the company by which the Optionholder is employed
                        becoming neither a member of the Group nor an Associated
                        Company nor a Jointly Owned Company; or

                (b)     the fact that the Optionholder's employment with a
                        member of the Group or an Associated Company relates to
                        a business or part of a business which is transferred to
                        a person which is neither a member of the Group nor an
                        Associated Company nor a Jointly Owned Company

                then the Directors may exercise their discretion to permit the
                Optionholder to exercise his Option within such period (not
                exceeding 6 months following cessation) as may be notified to
                him prior to cessation. To the extent that the Option is not
                then exercised, it shall lapse and cease to be exercisable at
                the end of such period; or

        8.4.2   in any other case (or if the Directors do not exercise their
                discretion pursuant to rule 8.4.1 above), his Option shall
                immediately lapse and cease to be exercisable upon cessation.

8.5     An Option may only ever be exercised:

        8.5.1   subject to the Optionholder not having failed to make any
                Monthly Contributions, pursuant to rules 8.1 and 8.2 in respect
                of all of the Option Shares; or

        8.5.2   pursuant to rules 8.2, 8.3, 12 or 13 (or pursuant to rules 8.1
                and 8.2 if the Optionholder has failed to make one or more
                Monthly Contributions), in respect of such number of Shares as
                is equal to:

                C X  D / 48

where:

C is the number of Option Shares; and

D is the number of Monthly Contributions actually made by the Optionholder before the date of exercise of the Option

or, in either case, such lesser number of Option Shares as the Optionholder may specify in the notice of exercise given pursuant to rule 9.1.

8.7 An Option may not be exercised more than once.

8.8 In deciding whether and when to exercise an Option, an Optionholder shall have regard to the Model Code

8.9     An Option may only be exercised pursuant to rules 12 or 13 if:

        8.9.1   such Option would then be exercised in circumstances in which
                favourable income tax treatment and exemptions from social
                security costs are available under Articles L. 225-180 et seq of
                the Commerce Code; or

        8.9.2   the Directors exercise their discretion to permit the
                Optionholder to exercise his Option pursuant to rules 12 or 13.

9. MANNER OF EXERCISE OF AN OPTION

9.1 An Option shall be exercised only by the Optionholder giving notice in writing to the Company or, if so directed by the Company, the Administrator, which:

9.1.1   is given at any time when the Option is exercisable;

9.1.2   specifies the number of Shares in respect of which the Option is
        exercised in accordance with rule 8.5;

9.1.3   is accompanied by payment of an amount in pounds sterling equal
        to the Acquisition Cost;

9.1.4   unless the Company otherwise permits, is accompanied by the
        Option Certificate

and is otherwise in such form as the Company may from time to time determine and notify to the Optionholder.

9.2 Within 30 days after the date on which the Company shall have received a valid notice of exercise of an Option the Company shall procure that:

9.2.1   the monies accompanying that notice are applied in payment of
        the Acquisition Cost for the number of Shares in respect of
        which the Option is then exercised; and

                               13

9.2.2   subject to rules 9.3 and 9.6, the number of Shares in respect of
        which the Option is then exercised are allotted and issued or
        transferred to or to the order of the Optionholder.

9.3 The Grantor shall not be obliged to issue, transfer or procure the transfer of any Shares or any interest in any Shares upon the exercise of an Option unless and until the Optionholder has paid to the Grantor such sum as, in the opinion of the Company, is sufficient to indemnify any existing or former member of the Group or any existing or former Associated Company in full against any Option Tax Liability or has made such other arrangement as, in the opinion of the Company, will ensure that the Optionholder will satisfy his liability under such indemnity.

9.4 As soon as reasonably practicable after allotting or transferring any Shares as mentioned in rule 9.2.2, the Company shall procure:

9.4.1   the issue to the Optionholder of a definitive share certificate
        or such acknowledgement of shareholding as is prescribed from
        time to time in respect of the Shares so allotted or
        transferred; and

9.4.2   if at that time the Shares are listed on the Daily Official
        List, any Shares so allotted are admitted to the Daily Official
        List.

9.6 The allotment or transfer of any Shares upon the exercise of an Option shall be subject to the Memorandum and Articles of Association of the Company and to any necessary consents of any governmental or other authorities (whether in the United Kingdom, the French Republic or overseas) under any enactments or regulations from time to time in force and it shall be the responsibility of the Optionholder to do all such things as may be necessary to obtain or obviate the necessity of any such consent.

9.8 The costs of stamp duty and dealing costs and commissions incurred when Shares are purchased upon the exercise of an Option shall be borne by the Company.

10. NON-TRANSFERABILITY AND LAPSE OF OPTIONS

10.1    During his lifetime only the individual to whom an Option is granted may
        exercise that Option.

10.2    An Option shall immediately lapse and cease to be exercisable if:

                                       14

        10.2.1  it is transferred or assigned (other than to Personal
                Representatives of the Optionholder), mortgaged, charged or
                otherwise disposed of by the Optionholder;

        10.2.2  the Optionholder becomes bankrupt or makes or proposes to make,
                a voluntary arrangement under the French Consumer Code (Articles
                L331-1 to L333-8 of the Law number 89-1010 dated 31 December
                1989), or any other scheme, arrangement or compromise in
                relation to his debts, with his creditors or any section of
                them;

        10.2.3  the Optionholder is not or ceases for any other reason (except
                his death) to be the sole legal and beneficial owner of the
                Option free from encumbrances or would not, upon the exercise of
                the Option, be the sole legal and beneficial owner of the Shares
                thereby acquired, free from encumbrances;

        10.2.4  (unless in any individual case the Company otherwise determines)
                the Optionholder, whilst remaining in employment with a member
                of the Group or an Associated Company or a Jointly Owned
                Company, instructs his Employer Company to cease deducting
                Monthly Contributions from his salary;

        10.2.5  if, after six of the Optionholder's Monthly Contributions have
                not been made for any reason, a seventh Monthly Contribution is
                not made on the due date for payment; or

        10.2.6  (unless in any individual case the Company otherwise determines)
                an Optionholder obtains repayment of any of his savings
                contributions (or interest on such contributions) unless such
                Option is then immediately exercisable pursuant to rules 8.2,
                8.3, 12 or 13.

10.3    Save as mentioned in rule 8.2, an Option shall in any event lapse and
        cease to be exercisable at the end of the period of 6 months beginning
        with the Exercise Date.

11.     RELATIONSHIP WITH EMPLOYMENT CONTRACT

11.1    The grant of an Option shall not form part of the Optionholder's
        entitlement to remuneration or benefits pursuant to his contract of
        employment nor shall the existence of a contract of employment between
        any person and any present or past member of the Group or Associated
        Company or Jointly Owned Company, give such person any right entitlement
        or expectation to have an Option granted to him in respect of any number
        of Shares or any expectation that an Option might be granted to him or
        that he will be invited to apply for the grant of an Option whether
        subject to any conditions or at all.

11.2    Neither the existence of this Plan nor the fact that an individual has
        on any occasion been granted an Option (or been invited to apply for the
        grant of an Option) shall give such individual any right entitlement or
        expectation that he has or will in future have any such right
        entitlement or expectation to participate in this Plan by being granted
        an Option (or invited to apply for the grant of an Option) on any other
        occasion.

                                       15

11.3    The rights granted to an Optionholder upon the grant of an Option shall
        not afford the Optionholder any rights or additional rights to
        compensation or damages in consequence of the loss or termination of his
        office or employment with any present or past member of the Group or
        Associated Company or Jointly Owned Company for any reason whatsoever
        (whether or not such termination is ultimately held to be wrongful or
        unfair).

11.4    The rights and obligations of an Optionholder under the terms of his
        contract of employment with any present or past member of the Group or
        Associated Company or Jointly Owned Company shall not be affected by the
        grant of an Option or his participation in this Plan.

11.5    An Optionholder shall not be entitled to any compensation or damages for
        any loss or potential loss which he may suffer by reason of being unable
        to exercise an Option in whole or in part in consequence of the loss or
        termination of his office or employment with any present or past member
        of the Group or Associated Company or Jointly Owned Company for any
        reason whatsoever (whether or not such termination is ultimately held to
        be wrongful or unfair).

12.     DEMERGER, RECONSTRUCTION OR WINDING-UP OF THE COMPANY

12.1    Subject to rule 8.9, if notice is given to shareholders of the Company
        of a proposed demerger of the Company or of any Subsidiary the Company
        may give notice to Optionholders that Options may then be exercised
        within such period (not exceeding 30 days) as the Company may specify in
        such notice to Optionholders SAVE THAT no such notice to Optionholders
        shall be given unless the Auditors have confirmed in writing to the
        Company that the interests of Optionholders would or might be
        substantially prejudiced if before the proposed demerger has effect
        Optionholders could not exercise their Options and be registered as the
        holders of the Shares thereupon acquired.

12.2    Subject to rule 8.9, if the court sanctions a compromise or arrangement
        proposed for the purposes of or in connection with a scheme for the
        reconstruction of the Company or its amalgamation pursuant to section
        425 of the Companies Act 1985 the Optionholder shall be entitled to
        exercise his Option during the period of 6 months commencing on the date
        on which the court sanctions the compromise or arrangement, and
        thereafter the Option shall lapse and cease to be exercisable.

12.3    Subject to rule 8.9, if notice is given to the shareholders of the
        Company of a resolution for the voluntary winding-up of the Company,
        notice of the same shall be given to all Optionholders and each
        Optionholder shall be entitled to exercise his Option at any time within
        the period of 6 months commencing on the date on which the resolution is
        passed.

12.4    All Options shall immediately lapse and cease to be exercisable upon the
        commencement of a winding-up of the Company.

13.     TAKE-OVER OF THE COMPANY

13.1    Subject to rule 8.9, if, as a result of either:

        13.1.1  a general offer to acquire the whole of the Ordinary Share
                Capital which is made on a condition such that if it is
                satisfied the person making the offer will have control of the
                Company; or

                                       16

        13.1.2  a general offer to acquire all the shares in the Company of the
                same class as the Shares

        the Company shall come under the control of another person or
        persons, an Optionholder shall be entitled to exercise his Option to
        the extent permitted by rule 8.5 within the period of 6 months
        beginning with the date when the person making the offer has obtained
        control of the Company and any condition subject to which the offer
        is made has been satisfied. To the extent that the Option is not then
        exercised, it shall lapse and cease to be exercisable at the end of
        such period.

13.2    Subject to rule 8.9, if at any time any person becomes entitled or
        bound to acquire shares in the Company under sections 428 to 430F
        (inclusive) of the Companies Act 1985 an Optionholder shall be entitled
        to exercise his Option to the extent permitted by rule 8.5 at any time
        when that person remains so entitled or bound. To the extent that the
        Option is not then exercised, it shall lapse and cease to be
        exercisable at the end of such period.

13.2    For the purposes of the preceding provisions of this rule 13 a person
        shall be deemed to have control of the Company if he and others
        acting in concert with him have together obtained control of it.

14.     VARIATION OF SHARE CAPITAL

14.1    In the event of any alteration of the Ordinary Share Capital by way
        of a capitalisation or rights issue or by way of sub-division,
        consolidation, reduction or any other variation in the share capital
        of the Company the Grantor may make such adjustments as it considers

appropriate:

14.1 to the aggregate number of Shares subject to any Option;

14.2 to the Exercise Price; and/or

14.3 if an Option has been exercised but no Shares have been allotted or transferred, to the number of Shares which may be so allotted or transferred and the Acquisition Cost relating to such Shares

PROVIDED THAT:

(a) except in the case of a subdivision, consolidation or capitalisation issue any such adjustment is confirmed in writing by the Auditors to be in their opinion fair and reasonable;

(b) the aggregate Acquisition Cost payable by an Optionholder on the exercise of all of his Options shall not be materially altered;

(c) except insofar as the Directors, on behalf of the Company, may then agree to capitalise the Company's reserves and apply the same in paying up the difference between the Exercise Price and the nominal value of the Shares at the time of exercise, the Exercise Price in relation to a Subscription Option is not reduced below the nominal value of those Shares;

        (d)  the number of Shares as so adjusted shall be rounded down to the
             nearest whole number and the Exercise Price as so adjusted shall be
             rounded up to the nearest whole penny; and

        (e)  no alteration shall be made in the Exercise Price otherwise than in
             circumstances mentioned in Article L225-181 of the Commerce Code
             and Articles 174-13 and 174-16 Section 2 of the Decree no. 67-236
             of 23 March 1967.

14.2    As soon as reasonably practicable after making any adjustment pursuant
        to rule 14.1 the Grantor shall give notice in writing thereof to every
        Optionholder affected thereby and may call in any Option Certificates
        for endorsement or replacement.

15.     ALTERATION OF THIS PLAN

15.1    The Directors may at any time (with the prior consent of the Grantor) by
        resolution in writing alter or add to any of the provisions of this Plan
        in any respect PROVIDED THAT:

        15.1.1  no such alteration or addition shall be made to the advantage of
                existing or new Optionholders to the provisions relating to
                eligibility to participate, basis of determining entitlement to
                Optionholders' rights to acquire shares, exercise price, overall
                and individual limitations on the grant of options under this
                Plan and the adjustment of such rights in the event of a
                variation of Ordinary Share Capital without the prior approval
                by ordinary resolution of the shareholders of the Company in
                general meeting SAVE THAT this provision shall not apply to the
                extent that such alteration or addition is in the opinion of the
                Directors a minor amendment which is necessary or appropriate:

        (a)  to benefit the administration of this Plan;

        (b)  to take account of a change in legislation; or

        (c)  to obtain or maintain favourable tax, exchange control or
             regulatory treatment for participants in the Plan or for the
             Company or any member of the Group in any jurisdiction; and

        15.1.2  no amendment may be made which affects the terms of Options
                granted to Optionholders if the amendment is inconsistent with
                Articles L.225-181 of Commerce Code and Articles 174.8 to 174.16
                of Decree no. 67-236 of 23 March 1967.

15.2    If in relation to any Options the Grantor is not the Company, no
        alteration or addition shall be made to the terms of such Options
        without the approval of the Grantor.

15.3    As soon as reasonably practicable after making any such alteration or
        addition the Directors (on behalf of the Grantor) shall give notice in
        writing thereof to every Optionholder (if any) affected thereby.

16.     SERVICE OF DOCUMENTS

16.1    Except as otherwise provided in this Plan, any notice or document to be
        given by, or on behalf of, the Company or other Grantor or the
        Administrator to any person in accordance or in connection with this
        Plan shall be duly given:

                                       18

        16.1.1  by sending it through the post in a pre-paid envelope to the
                address last known to the Company to be his address and, if so
                sent, it shall be deemed to have been duly given on the date of
                posting; or

        16.1.2  if he holds office or employment with any member of the Group or
                any Associated Company, by delivering it to him at his place of
                work or by sending to him a facsimile transmission or Electronic
                Communication addressed to him at his place of work and if so
                sent it shall be deemed to have been duly given at the time of
                transmission SAVE THAT a notice or document shall not be duly
                given by Electronic Communication unless that person is known by
                his Employer Company to have personal access during his normal
                business hours to information sent to him by Electronic
                Communication.

16.2    Any notice or document so sent to an employee or Optionholder shall be
        deemed to have been duly given notwithstanding that such Optionholder is
        then deceased (and whether or not the Company or other Grantor has
        notice of his death) except where his Personal Representatives have
        supplied to the Company an address to which documents are to be sent.

16.3    Any notice in writing or document to be submitted or given by an
        Optionholder to the Grantor, the Company or the Administrator in
        accordance or in connection with this Plan may be delivered, sent by
        post, facsimile transmission or Electronic Communication but shall not
        in any event be duly given unless:

        16.3.1  it is actually received (or, in the case of an Electronic
                Communication, opened) by the secretary of the Company or such
                other individual as may from time to time be nominated by the
                Company and whose name and address is notified to Optionholders;
                and

        16.3.2  if given by Electronic Communication (and is so required by the
                Company), it includes a digitally encrypted signature of the
                Optionholder.

16.4    For the purposes of this Plan, an Electronic Communication shall be
        treated as not having been duly made or received if the recipient of
        such Electronic Communication notifies the sender that it has not been
        opened because it contains, or is accompanied by a warning or caution
        that it could contain or be subject to, a virus or other computer
        programme which could alter damage or interfere with any computer
        software or Electronic Communication.

17.     APPLICABLE LAW

17.1    This Plan shall be governed by and construed in all respects in
        accordance with English law.

17.2    In applying for the grant of an Option an Eligible Participant shall be
        deemed to submit to the exclusive jurisdiction of the English courts as
        regards any claim legal action or proceedings arising out of this Plan
        and to waive any objection to such proceedings taking place in the
        English courts on the grounds of venue or on the grounds that such
        proceedings have been brought in an inconvenient forum.

                                       19

18.     THIRD PARTY RIGHTS

        Except as otherwise expressly stated to the contrary, neither this
        Plan nor the grant of any Option nor the U.K. Contracts (Rights of
        Third Parties) Act 1999 shall have the effect of giving any third
        party any rights under this Plan and that Act shall not apply to this
        Plan or to the terms of any Option granted pursuant to this Plan.

19.     PROTECTION OF PERSONAL DATA

19.1    By accepting the grant of an Option the Optionholder shall agree and
        consent to:

        19.1.1  the collection, use and processing by any member of the Group
                and the Administrator of Personal Data relating to the
                Optionholder, for all purposes reasonably connected with the
                administration of this Plan and the subsequent registration of
                the Optionholder or any other person as a holder of Shares
                acquired pursuant to the exercise of an Option;

        19.1.2  any member of the Group and the Administrator transferring
                Personal Data to or between any of such persons for all purposes
                reasonably connected with the administration of the Plan;

        19.1.3  the use of such Personal Data by any such person for such
                purposes; and

        19.1.4  the transfer to and retention of such Personal Data by any third
                party for such purposes.

20.     MISCELLANEOUS

20.1    The Company shall at all times keep available sufficient authorised but
        unissued Shares to satisfy the exercise in full of all the Subscription
        Options for the time being remaining capable of being exercised under
        this Plan.

20.2    The Directors may from time to time make and vary such rules and
        regulations not inconsistent herewith and establish such procedures for
        the administration and implementation of this Plan as they think fit. In
        the event of any dispute or disagreement as to the interpretation of
        this Plan or of any such rules, regulations or procedures or as to any
        question or right arising from or related to this Plan, the decision of
        the Directors shall (except as regards any matter required to be
        determined by the Auditors hereunder) be final and binding upon all
        persons.

20.3    The Company shall not be obliged to provide Optionholders with copies of
        any notices, circulars or other documents sent to holders of Shares.

20.4    The costs of the administration and implementation of this Plan shall be
        borne by the Company.

20.5    The issue of an Invitation on any occasion is made at the Company's
        discretion. No entitlement to the issue of an Invitation, the grant of
        an Option and/or the issue of Shares in the future shall thereby be
        created on the grounds that such Invitations were issued or Options were
        granted in the past nor on the grounds that Options may previously have
        been granted over a particular number of Shares at a certain price. Even
        the repeated grant of Options and/or the issue of Shares shall not
        create future entitlements to receive Options and/or Shares at all or to
        be granted Options over a specific number of Shares or at a specific
        price.

                                       20

20.6    If any provision of this Plan is held invalid, illegal or unenforceable
        for any reason by any court of competent jurisdiction, such provision
        shall be severed and the remainder of the provisions of this Plan shall
        continue in full force and effect as if this Plan had been established
        with the invalid, illegal or unenforceable provision eliminated.

SMITH & NEPHEW plc Exhibit 8 Principal Subsidiary Undertakings

Country of Company Incorporation

TP Limited Scotland
- Smith & Nephew Trading Group Limited England
- T.J. Smith & Nephew Limited England
- Smith & Nephew FZE United Arab Emirates
- Smith & Nephew (Overseas) Limited England
- Smith & Nephew Ortho Limited Jersey
- Smith & Nephew S.A. Spain
- Smith & Nephew (Malaysia) Sdn Bhd Malaysia
- Smith & Nephew Healthcare Sdn Bhd Malaysia
- Smith & Nephew Holdings Inc. USA
- Smith & Nephew Inc. Puerto Rico
- Smith & Nephew Inc. USA
- Smith & Nephew S.A. de CV Mexico
- Smith & Nephew International S.A. Luxembourg
- Smith & Nephew GmbH Austria
- Smith & Nephew SA-NV Belgium
- Smith & Nephew A/S Denmark
- Smith & Nephew OY Finland
- Smith & Nephew France SA France
- Smith & Nephew SA France
- Smith & Nephew Deutschland (Holdings) GmbH Germany

                 -    Smith & Nephew GmbH                   Germany
                 -    Smith & Nephew Orthopaedics GmbH      Germany
            -    Smith & Nephew Healthcare Limited          India
            -    Smith & Nephew Limited                     Ireland
            -    Smith & Nephew Srl                         Italy
            -    Smith & Nephew (Europe) BV                 Netherlands
                 -    Smith & Nephew BV                     Netherlands
            -    Smith & Nephew A/S                         Norway
            -    Smith & Nephew Lda                         Portugal
            -    Smith & Nephew AB                          Sweden
            -    Smith & Nephew AG                          Switzerland
            -    Smith & Nephew Inc.                        Canada
            -    Smith & Nephew Pty Limited                 Australia
            -    Smith & Nephew Limited                     Hong Kong
            -    Smith & Nephew KK                          Japan
            -    Smith & Nephew Limited                     Korea
            -    Smith & Nephew Limited                     New Zealand
            -    Smith & Nephew Pte Limited                 Singapore
            -    Sri Siam Medical Limited                   Thailand
                 -    Smith & Nephew Limited                Thailand
Smith & Nephew Investment Holdings Limited                  England
  -    Smith & Nephew Raisegrade Limited                    England
       -    Smith & Nephew Rareletter Limited          England
  -    Smith & Nephew Medical Limited                       England
  -    Smith & Nephew Healthcare Limited                    England
SNIH Investments Limited                                    South Africa
Smith & Nephew Finance Holdings Limited                     Cayman Islans

- Smith & Nephew Finance Oratec Limited England
- Smith & Nephew Finance Limited England

All companies trade under the name of Smith & Nephew and deal with medical device products.

EXHIBIT 12(a)

CERTIFICATE PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED
STATES CODE BY THE CHIEF EXECUTIVE OF SMITH & NEPHEW PLC

I, Christopher J. O'Donnell, the Chief Executive of Smith & Nephew plc, certify that (i) the Form 20-F for the year ended December 31, 2002 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the foregoing report on Form 20-F fairly presents, in all material respects, the financial condition and results of operations of Smith & Nephew plc.

Date:  April 25, 2003                         /s/ CHRISTOPHER J. O'DONNELL
                                            ------------------------------------
                                                        Christopher J. O'Donnell
                                                                 Chief Executive
                                                              Smith & Nephew plc

EXHIBIT 12(b)

CERTIFICATE PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED
STATES CODE BY THE FINANCE DIRECTOR OF SMITH & NEPHEW PLC

I, Peter Hooley, the Finance Director of Smith & Nephew plc, certify that
(i) the Form 20-F for the year ended December 31, 2002 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the foregoing report on Form 20-F fairly presents, in all material respects, the financial condition and results of operations of Smith & Nephew plc.

Date:  April 25, 2003                              /s/ PETER HOOLEY
                                            ------------------------------------
                                                                    Peter Hooley
                                                                Finance Director
                                                              Smith & Nephew plc