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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

or

For the fiscal year ended December 31, 2009

or

or

Commission file number 1-14978

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:

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: 951,021,116 Ordinary Shares of 20¢ each

Indicate by check mark if the registrant is a well seasoned issuer, as defined in Rule 405 of the Securities Act    Yes   x     No   ¨

If this Report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934    Yes   ¨     No   x

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer:

If “Other” has been checked to the previous question indicate by check mark which financial statement item the registrant has elected to follow:    Item 17   ¨     Item 18   ¨

If this is an annual report, indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

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INTRODUCTION AND FINANCIAL SUMMARY

The Smith & Nephew Group (the “Group”) is a global medical devices business operating in the orthopaedics, endoscopy and advanced wound management markets, with revenue of approximately $3.8 billion in 2009. Smith & Nephew plc is the parent company (the “Company”) of the Group. It is an English public limited company with its shares listed on the official list of the UK Listing Authority and traded on the London Stock Exchange. It is also traded on the New York Stock Exchange in the form of American Depositary Shares (“ADSs”).

This report is the Annual Report of Smith & Nephew plc for the year ended 31 December 2009. It comprises in a single document, the Annual Report and Accounts of the company in accordance with UK requirements and the Annual Report on Form 20-F in accordance with the regulations of the United States Securities and Exchange Commission (“SEC”).

A summary report on the year, the 2009 Summary Annual Review, intended for the investor who does not require the full detail of the Annual Report, is available on Smith & Nephew’s corporate website at www.smith-nephew.com/investors along with the electronic version of this Annual Report. The Summary Annual Review includes a summary remuneration report and summary financial statements.

For the convenience of the reader, a Glossary of technical and financial terms used in this document is included on page 164. The product names referred to in this document are identified by use of capital letters and are trademarks owned by or licensed to members of the Smith & Nephew Group.

Key Performance Indicators

The Directors’ Report includes a number of measures that management use as key performance indicators. The principal key performance indicators presented in the Annual Report are:

Underlying growth in revenue

Underlying growth in revenue is used to compare the revenue in a given year to the previous year on a like-for-like basis. This is achieved by adjusting for the impact of sales of products acquired in material business combinations and for movements in exchange rates. Underlying growth in revenue is not presented in the accounts prepared in accordance with IFRS and is therefore not a Generally Accepted Accounting Principle (“non-GAAP”) measure. An explanation of how this non-GAAP measure is calculated is presented in the “Business Overview” on page 26.

The Group believes that the tabular presentation and reconciliation of revenue growth from reported to underlying assists investors in their assessment of the Group’s performance in each business segment and for the Group as a whole.

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Underlying growth in revenue is considered by the Group to be an important measure of performance in terms of local functional currency since it excludes those items considered to be outside the influence of local management. The Group’s management uses this non-GAAP measure in its internal financial reporting, budgeting and planning to assess performance on both a business segment and a consolidated Group basis. Revenue growth at constant currency is important in measuring business performance compared to competitors and compared to the growth of the market itself.

The Group considers that revenue from sales of products acquired in material business combinations results in a step-up in growth in revenue in the year of acquisition that cannot be wholly attributed to local management’s efforts with respect to the business in the year of acquisition. Depending on the timing of the acquisition, there will usually be a further step change in the following year. A measure of growth excluding the effects of business combinations also allows senior management to evaluate the performance and relative impact of growth from the existing business and growth from acquisitions. The process of making business acquisitions is directed, approved and funded from the Group corporate centre in line with strategic objectives.

The Group’s annual bonus incentive plans include an element which relates to revenue growth performance. Targets are set and performance measured in constant currency, excluding the step-change impact of acquisitions.

The material limitation of the underlying growth in revenue measure is that it excludes certain factors, described above, which ultimately have a significant impact on total revenues. The Group compensates for this limitation by taking into account relative movements in exchange rates in its investment, strategic planning and resource allocation. In addition, as the evaluation and assessment of business acquisitions is not within the control of local management, performance of acquisitions is monitored centrally until the business is integrated. The Group’s management considers that the non-GAAP measure of underlying growth in revenue and the GAAP measure of growth in revenue are complementary measures neither of which management use exclusively.

Basic adjusted earnings per ordinary share (“EPSA”), trading profit and adjusted attributable profit

Growth in EPSA and trading profit are measures which present the trend growth in the long-term profitability of the Group excluding the impact of specific transactions or events that management considers affect the Group’s short-term profitability. The Group presents these measures to assist investors in their understanding of trends. The Group’s internal financial reporting (budgets, monthly reporting, forecasts, long-term planning and incentive plans), focuses primarily on profit and earnings before these items. EPSA and trading profit are not recognised measures under IFRS.

The Group has identified the following items, where material, as those to be adjusted and identified separately: acquisition and disposal related items including amortisation of acquisition intangible assets and impairments; significant restructuring events; gains and losses arising from legal disputes and uninsured losses; and taxation thereon. A reconciliation of attributable profit to adjusted attributable profit, which represents the numerator used in the EPSA calculation, is presented in “Selected Financial Data” on page 154. An explanation of how trading profit is calculated is presented in “Business Overview” on page 26.

EPSA growth, trading profit and trading profit margin (trading profit expressed as a percentage of revenue) are also key measures used for remunerating senior management in order to align the interests of senior management with those of investors.

The material limitation of these measures is that they exclude significant income and costs that have a direct impact on current and prior years’ profit attributable to shareholders. They do not, therefore, measure the overall performance of the Group presented by the GAAP measures of earnings per share and operating profit. The Group considers that no single measure enables it to assess overall performance and therefore it compensates for the limitation of the adjusted earnings per share and trading profit measures by considering them in conjunction with their GAAP equivalents. Gains or losses which are identified separately arise from irregular events or transactions. Such events or transactions are authorised centrally and require a strategic assessment which includes consideration of financial returns and generation of shareholder value. Amortisation of acquisition intangibles will occur each year, whilst other excluded items arise irregularly depending on the events that give rise to such items.

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Presentation

The Group’s fiscal year end is 31 December. 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 plc of 20 US cents each.

The results of the Group, as reported in US Dollars, are affected by movements in exchange rates between US Dollars and other currencies. The Group applied the average exchange rates prevailing during the year to translate the results of non-US companies into US Dollars. The currencies which most influenced these translations in the years covered by this report were Sterling, Swiss Franc and the Euro.

The Group Accounts of Smith & Nephew in this Annual Report are presented in US Dollars. Solely for the convenience of the reader, certain parts of this Annual Report contain translations of amounts in US Dollars into Sterling at specified rates. These translations should not be construed as representations that the US Dollar amounts actually represent such Sterling amounts or could be converted into Sterling at the rate indicated. Except as where stated otherwise, the translation of US Dollars and cents to Sterling and pence appearing in this Annual Report has 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 indicated. On 17 March 2010, the Noon Buying Rate was US$1.53 per £1.

The Accounts of the Group in this Annual Report are presented in millions (“m”) unless otherwise indicated.

Smith & Nephew’s corporate website, www.smith-nephew.com, gives additional information on the Group. Information made available on the website is not intended to be, and should not be regarded as being, part of this Annual Report.

Special Note Regarding Forward-Looking Statements

The Group’s reports filed with, or furnished to, the US Securities and Exchange Commission (“SEC”), including this document and written information released, or oral statements made, to the public in the future by or on behalf of the Group, constitute “forward-looking statements” within the meaning of the US Private Securities Litigation Reform Act of 1995. In particular, statements regarding planned growth in the Group’s business and trading margins discussed under “Outlook and Trend Information” are forward-looking statements as are discussions of the Group’s product pipeline and discussions of the costs of future revisions of the macrotextured knee product under “Legal Proceedings”. When used in this Annual Report, the words “aim”, “anticipate”, “believe”, “consider”, “estimate”, “expect”, “intend”, “plan”, “target”, “well-placed” 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 (including, but not limited to, the outcome of litigation and regulatory approvals) 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 Group are described under “Risk Factors” on page 20 of this Annual Report.

All forward-looking statements in this Annual Report are based on information available to Smith & Nephew as of 17 March 2010. All written and oral forward-looking statements attributable to Smith & Nephew or any person acting on behalf of Smith & Nephew are expressly qualified in their entirety by the foregoing. Smith & Nephew does not undertake any obligation to update or revise 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.

Market Data

Market data and market share estimates throughout this report are derived from a variety of sources including publicly available competitors’ information, internal management information and independent market research reports.

Documents on Display

It is possible to read and copy documents referred to in this Annual Report at the Registered Office of the Company. Documents referred to in this Annual Report that have been filed with the Securities and Exchange Commission in the US may be read and copied 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 www.sec.gov that contains reports and other information regarding registrants that file electronically with the SEC. This Annual Report and some of the other information submitted by the Group to the SEC may be accessed through the SEC website.

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CONTENTS

This Annual Report including the Directors’ Report was approved by the Board of Directors on 18 March 2010.

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Discussion of the Group’s operating and financial performance, liquidity and financial resources for 2009 and 2008 is given in the “Business Review, Liquidity and Prospects” (pages 25 to 46).

Discussion of the Group’s management structure and corporate governance procedures is set out in the “Corporate Governance Statement” section (pages 47 to 59).

The “Directors’ Remuneration Report” gives details of the Group’s policies on senior management’s remuneration in 2009 (pages 61 to 74).

Details of the structure of the Company’s share capital and securities, persons with significant shareholdings in the Company and a summary of the memorandum and articles of association are incorporated into the Directors’ Report and are given in “Investor Information” (pages 145 to 153).

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THE BUSINESS

HISTORY AND DEVELOPMENT

Group Strategy

Smith & Nephew’s overall vision is to help improve people’s lives by repairing and healing the human body. To achieve this, the Group is focused on continued delivery of sustainable profitable growth, through four strategic pillars:

Group History

The Group has a history dating back over 150 years to the family enterprise of Thomas James Smith who opened a small pharmacy in Hull, England in 1856. On his death in 1896, his nephew Horatio Nelson Smith took over the management of the business.

By the late 1990s, Smith & Nephew had expanded into being a diverse healthcare conglomerate with operations across the globe, including various medical devices, personal care products and traditional and advanced woundcare treatments. In 1998, Smith & Nephew announced a major restructuring to focus management attention and investment on three business units — wound management, endoscopy and orthopaedics — which offered high growth and margin opportunities.

Smith & Nephew was incorporated and listed on the London Stock Exchange in 1937 and in 1999 the Group was also listed on the New York Stock Exchange. In 2001, Smith & Nephew became a constituent member of the FTSE-100 index in the UK. This means that Smith & Nephew is included in the top 100 companies traded on the London Stock Exchange measured in terms of market capitalisation.

Today, Smith & Nephew is a public limited company incorporated and headquartered in the UK and doing business in many countries around the world.

Recent Developments

On 22 December 2009, the Group acquired substantially all of the assets and liabilities of Nucryst Pharmaceuticals Corp., which exclusively licenses and manufactures our range of ACTICOAT products, using its nanocrystalline silver technology, SILCRYST. Under the agreement, the Group acquired the manufacturing assets from Nucryst’s operations in Canada and intellectual property rights relating to the nanocrystalline silver technology used in the manufacture of ACTICOAT product range. Nucryst had manufactured ACTICOAT products for the Group since the Group’s acquisition of certain product rights in 2001.

During March 2009, the Deferred Prosecution Agreement (“DPA”) with the United States Attorney’s Office (“USAO”) for the district of New Jersey expired. The 18-month agreement was one of five similar agreements entered into on 27 September 2007, between the USAO and the five largest companies that manufacture and sell hip and knee replacement implants. Additionally, the USAO has dismissed the complaint it filed in connection with the DPA. During the term of the DPA, Smith & Nephew operated under the oversight of a USAO appointed monitor and worked to improve the ways in which it manages its relationships with healthcare providers. Smith & Nephew will continue its compliance with the Corporate Integrity Agreement signed with the Department of Health and Human Services, which has run concurrently with the DPA and will remain in effect until September 2012.

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In January 2009, the Group reached an agreement with the vendors of Plus Orthopedics Holdings AG (“Plus”) to reduce the total original purchase price that the Group paid in 2007 for Plus by CHF159m. The original purchase price for the acquisition was CHF1,086 ($889m) in cash, including assumed debt. The acquisition was financed by bank borrowings and was integrated into the Group’s Orthopaedics business. As part of the amended agreement the parties resolved their disputes on the contractual purchase price adjustments. In addition, the Group released the vendors from substantially all of their warranties, including those relating to taxation, under the original purchase agreement and dropped all existing claims under the original warranties.

BUSINESS DESCRIPTION

Organisation

Smith & Nephew reports and is organised into three Global Business Units (“GBUs”) of Orthopaedics, Endoscopy and Advanced Wound Management. Included within the Orthopaedic segment are our biologics activities which comprise research and development projects under the direction of a Committee representing all GBUs.

Smith & Nephew operates on a worldwide basis. In 21 of the 32 countries in which the Group operates, the GBUs take direct responsibility for business operations. These are referred to as direct markets. The remaining markets in which the Group has operations are managed by country managers, who are responsible for sales and distribution of the Group’s product range and comprise the Emerging Markets unit.

A head office team in London, England directs the overall business and supports the business units, primarily in the areas of business development, legal, company secretarial, finance, human resources and investor relations.

Orthopaedics

Overview

Orthopaedics comprises reconstruction, trauma and clinical therapies products.

The Orthopaedics business is managed worldwide from Memphis, Tennessee, the site of its main development and manufacturing facility, with a European headquarters in Baar, Switzerland. Products are also manufactured at smaller facilities in Switzerland, Germany, and the UK as well as by third-party manufacturers. A new facility is being constructed in Beijing, China.

Products

Orthopaedic reconstruction implants include hip, knee and shoulder joints as well as ancillary products such as bone cement and mixing systems used in cemented reconstruction joint surgery. Orthopaedic trauma fixation products consist of internal and external devices and other products, including shoulder fixation and orthobiological materials used in the stabilisation of severe fractures and deformity correction procedures. Clinical therapies products are those that are applied in an orthopaedic office or clinical setting and include bone growth stimulation, joint fluid therapies and outpatient pain management products.

Knee Implant Systems — The Orthopaedics business offers a range of products for specialised knee procedures. The LEGION/GENESIS II Total Knee Systems is a comprehensive system designed to allow surgeons to address a wide range of knee procedures from primary to revision. The JOURNEY Active Knee Solutions, a family of advanced, customised products designed to treat early to mid-stage osteoarthritis patients, provides more normal feeling and motion through bone ligament preservation and anatomic replication. Other knee systems include the PLUS Solution Knee Family and PROFIX Knee.

Hip Implant Systems — The Orthopaedics business offers a broad range of hip replacement systems. The recently introduced R3 Acetabular System includes a modular acetabular cup that provides the widest variety of advanced bearings available with a single system. The BIRMINGHAM HIP Resurfacing System is the market leading system for hip resurfacing, a less-invasive, bone conserving approach, which utilises proven low wear metal-on-metal bearing surface technology. Other hip systems include the SYNERGY Hip System, ANTHOLOGY Hip System and the SL-PLUS Hip Family System.

Bearing surfaces — The Orthopaedics business utilises a range of bearing surfaces in its implant systems, including its proprietary OXINIUM Technology. Oxidised zirconium, branded OXINIUM, combines the enhanced wear resistance of a ceramic bearing with the superior durability of a metallic bearing. When combined with highly cross-linked polyethylene (“XLPE”) it results in our industry leading VERILAST Technology.

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Trauma and Shoulder Implant Systems — The principal internal fixation products are the TRIGEN Intramedullary Nailing system, the TRIGEN INTERTAN Intertrochanteric Antegrade nails for hip fractures and the PERI-LOC Periarticular Locked Plating system which offers a comprehensive family of upper and lower extremity plate and screw products.

For external fixation and limb restoration, Orthopaedics offers the leading TAYLOR SPATIAL FRAME Circular Fixation System and JET-X Unilateral Fixator.

The PROMOS Modular Shoulder System offers a range of solutions for shoulder arthritis and upper extremity fractures.

Clinical therapies — The principal clinical therapies products offered include the EXOGEN Ultrasound Bone Healing System which utilises low-intensity ultrasound to accelerate the healing of fresh fractures. DUROLANE Joint Fluid Therapy and SUPARTZ Joint Fluid Therapy are non-surgical, non-pharmacological pain-relieving therapy for osteoarthritis of the knee that acts like a lubricant and shock absorber in healthy joints.

Strategy

The overall vision of the Orthopaedics business is to improve people’s lives by repairing and healing the human body. The strategy to achieve this is summarised below.

Orthopaedics is committed to being customer-led by focusing on product innovation, sales support and surgeon education. The aim of the Orthopaedics business is to continue to develop innovative, world class products and technologies to meet the growing demands of patients and hospitals for tougher, longer-lasting orthopaedic implants, and trauma products that improve quality and time to heal, as well as enhancing economic value for its customers. Smith & Nephew’s leading innovations make its products suitable for younger, more active patients, a market believed to be growing at twice the overall market rate. It will provide surgeons and healthcare providers global sales excellence and comprehensive clinical education and training support. The KLEOS medical education platform, which includes the world’s top orthopaedic surgeons and thought leaders, offers a wide range of tailored educational options.

The Orthopaedics business efficiency programmes, encompass efforts to leverage infrastructure through better sharing of information technology and procurement resources, creating more efficient sales and marketing teams, developing lower-cost instrumentation, reducing the costs of sourcing and manufacturing and utilising assets, such as inventory and capital equipment, more efficiently.

The Emerging Markets, such as China, have been identified as an important area for further investment to drive long-term growth. In these Emerging Markets, the Orthopaedics business expects to continue to develop and introduce products tailored to local needs, as well as to expand its infrastructure, including manufacturing facilities, distribution hubs and training and service centres. The Orthopaedics business is also expanding into fast-growing adjacent markets, including alternative therapies and biologics for pain management and fracture healing. The Group intends to further penetrate these markets by expanding its sales force internationally.

The Orthopaedics business aligns its organisation and develops its talent for consistent execution on the Group’s plans. Compensation for executives, managers and staff are carefully aligned to the execution of their objectives.

New Products

In 2009, the Orthopaedics business continued its global commercialisation of the industry leading R3 acetabular system, which provides the surgeon with four bearing systems: OXINIUM, XLPE, metal, and ceramic in a single cup system. The BIRMINGHAM Mid-Head Resection resurfacing system was launched in international markets extending the proven advantages of the BHR system to patients with a greater degree of avascular necrosis.

The Orthopaedics business also introduced its VISIONAIRE Patient-Matched Instrumentation, a key new technology platform of patient-matched cutting blocks for total knee procedures. With VISIONAIRE, the patient’s MRI and X-rays are used to create customised cutting blocks that allow the surgeon to achieve optimal mechanical axis alignment as well as to save time and instruments in the operating room.

Trauma completed development of the TRIGEN SURESHOT Distal Targeting System for Intramedullary Nailing, designed to simplify intramedullary nailing. Targeting time is reduced by over 50%, reducing surgery time and fluoroscopic X-ray exposure.

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Regulatory Approvals

In 2009, several significant regulatory approvals were obtained around the globe. In Japan, the TRIGEN META-NAIL system and the INTERTAN Nail system were approved providing significant enhancements to our trauma portfolio. In Europe, approval was obtained for the MIS Hip stem, and the MDF revision hip stem. Additionally, up-classification approvals were obtained for our Total Knee Arthroplasty and Total Hip Arthroplasty systems.

In the US, the Orthopaedics business received 510(k) clearance from the FDA for kinematics claims for the JOURNEY BCS Knee System comparing its kinematic patterns to those of a normal knee. Additionally, 20 additional approvals and clearances were obtained around the globe, including amongst others: BHR instrument upgrades, R3 Acitabular system additions, VLP FOOT Plating Screw System and Accessories, the JOURNEY Select Knee System and LEGION Porous Plus HA primary Femoral Components.

Market and Competition

Smith & Nephew estimates that the worldwide orthopaedic market, excluding clinical therapies, served by the Group grew by approximately 5% in 2009 and is currently worth approximately $16.8 billion per annum worldwide. Management believes that the Smith & Nephew Orthopaedics business holds an 11% share of this market by value. Principal global competitors in orthopaedics are Zimmer, Stryker, DePuy/Johnson & Johnson, Synthes and Biomet.

In 2009, weaker economic conditions worldwide created several challenges for the overall orthopaedic market, including increased deferrals of joint replacement procedures, heightened pricing pressures and significant declines in capital equipment expenditures at hospitals. These factors reduced the overall growth of the worldwide orthopaedic market and may continue to impact growth in the future. Additionally, proposed healthcare reform legislation may adversely impact the US orthopaedic market, which comprises a significant portion of our sales. However, over the longer-term, several catalysts are expected to continue to drive sustainable growth in orthopaedic device sales, including the growing, ageing population, rising rates of co-morbidities such as obesity and diabetes, and technology improvements allowing surgeons to treat younger, more active patients, and the increasing strength of the demand for healthcare in Emerging Markets.

Management estimates that the worldwide market for clinical therapies increased by 7% in 2009 and is currently worth more than $1.5 billion per annum. Smith & Nephew’s primary market for clinical therapies is in the US. In the US long bone stimulation market management estimates Smith & Nephew’s share to be 40%. Principal competitors are Biomet, DJ Ortho and Orthofix. In the US joint fluid therapies market, management estimates that Smith & Nephew maintains a share of 17%. The principal competitors are Genzyme, Sanofi Aventis, DePuy/Johnson & Johnson and Ferring Pharmaceuticals.

Endoscopy

Overview

Smith & Nephew’s Endoscopy business develops and commercialises endoscopic (minimally invasive surgery) techniques, educational programmes and value-added services for surgeons to treat and repair soft tissue and articulating joints. The business focuses on the arthroscopy sector of the endoscopy market. Arthroscopy is the minimally invasive surgery of joints, in particular the knee, shoulder and hip.

Endoscopy is headquartered in Andover, Massachusetts and manufacturing facilities are currently located in Mansfield, Massachusetts, and Oklahoma City, Oklahoma. Major service centres are located in the US, the UK, Germany, Japan and Australia.

Products

The Endoscopy business offers surgeons endoscopic technologies for surgery of the joints and ligaments repair, including: specialised devices and fixation systems to repair damaged tissue; fluid management equipment for surgical access; digital cameras, digital image capture, scopes, light sources and monitors to assist with visualisation; and radiofrequency wands, electromechanical and mechanical blades, and hand instruments for resecting damaged tissue.

Key products in repair are FAST-FIX for meniscal repair, ENDOBUTTON for cruciate fixation, and the FOOTPRINT Suture Anchor for rotator cuff repair. Key products in resection are the large range of DYONICS shaver blades, ACUFEX handheld instruments, and a range of Radiofrequency probes. The key product in Visualisation is the DYONICS 560 HD camera.

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Strategy

Smith & Nephew’s strategic intent is to grow the business as the leading provider of endoscopic techniques and technologies for joint and ligament repair. Management believes that the business capitalises on the growing acceptance of endoscopy as a preferred surgical choice among physicians, patients and payers.

The business is customer led, and has a focus on operational efficiency, growth and alignment.

To sustain growth and enhance its market position, the Endoscopy business supports its strategy with surgeon education programmes, global fellowship support initiatives, partnerships with professional associations and surgeon advisory boards. The Emerging Markets, especially China, are expected to be a major driver of growth in future, and the business is investing funds to accelerate this growth.

New Products

In 2009, Smith & Nephew continued to expand its arthroscopic sports medicine portfolio with the launch of several new repair and resection products.

The BICEPTOR Tenodesis System offers versatility for biceps tenodesis repairs with the option of either a fully arthroscopic or mini-open repair. OSTEORAPTOR Suture Anchors for the shoulder are the only bioabsorbable suture anchors to incorporate a bone mineral that is naturally occurring in the body — Hydroxyapatite (“HA”) . Its differing sizes give surgeons more repair options and allow them to position repairs precisely where required. BIOSURE PK combines the advantages of the material PolyEtherEtherKetone (“PEEK”), which is strong, radiolucent, and revisable, with the novel screw shape of BIOSURE, which has a unique taper for ease of insertion into the knee.

The DYONICS RF System incorporates a compact generator with a family of probes for removing defects and smoothing soft tissue during arthroscopic surgery, and the DYONICS Power II Control System offers soft tissue resection and efficient bone resection with a powerful, high-torque handpiece that can increase procedure efficiency. The DYONICS BONECUTTER ELECTROBLADE Resector is an all-in-one device for subacromial decompression procedures. The BONECUTTER ELECTROBLADE Resector combines the functions of a shaver blade, burr and radiofrequency probe into one device. It simultaneously resects and coagulates soft tissue as well as cutting bone.

Recent Regulatory Approvals

During 2009, the Endoscopy business obtained regulatory clearances for the following products in most major markets, except Japan where the approval process is more lengthy: PEEK Interference Screw, BioSure PK Interference Screw, TwinFix Ultra PK FT Suture Anchor and Knotless Instability Anchor, all designed for the reattachment of ligaments, tendons or soft tissues to bone in knees, shoulders or other articulating joints, and all made of PEEK; and various other arthroscopy instruments, devices and sterilisation trays.

Market and Competition

Management estimates that the global arthroscopy market in which the business principally participates is worth more than $2.7 billion a year and has been growing between 8% and 12% annually. In 2009, growth was reduced due to due to broader economic conditions. In particular, these weaker economic conditions led to hospitals deferring or reducing capital equipment purchases which significantly impacted revenues from visualisation equipment such as cameras and light sources. Arthroscopy growth rates are driven by increasing numbers of sports injuries, longer and more active lifestyles, patient desire for minimally invasive procedures, innovative technological developments and a need for cost effective procedures.

Management believes that Smith & Nephew has a 24% share of the global arthroscopy market as at 31 December 2009. Smith & Nephew’s main competitors in the global arthroscopy in 2009 were Arthrex, Mitek/Johnson & Johnson, Stryker, Arthrocare and Linvatec/Conmed.

Advanced Wound Management

Overview

Smith & Nephew’s Advanced Wound Management business offers a range of products from initial wound bed preparation through to full wound closure. These products are targeted at chronic wounds associated with the older population, such as pressure sores and venous leg ulcers. There are also products for the treatment of wounds such as burns and invasive surgery that impact the wider population.

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Advanced Wound Management has its global headquarters in Hull, England and its North American headquarters in St Petersburg, Florida. The products are manufactured at facilities in Hull and Gilberdyke, England, Suzhou in China, and also by third party manufacturers around the world. In 2009, Advanced Wound Management completed the closure of manufacturing in Largo, Florida and transferred it to the new manufacturing facility in Suzhou.

Products

The main products within the Advanced Wound Management business are for exudate management, predominantly the ALLEVYN brand, infection management, including the ACTICOAT brand and negative pressure wound therapy (“NPWT”).

The ALLEVYN hydrocellular dressings range has been considerably enhanced by new versions, introduced in recent years, that management believe provide efficient fluid management and an optimal moist wound environment that promotes faster healing of the wound, reduced risk of maceration and protection from infection.

The ACTICOAT range incorporates the smallest crystallised silver used in the treatment of wounds and burns. The silver reduces the risk of bacterial colonisation and acts to kill micro-organisms that can cause infection and prevent or delay healing. A range of dressings combining ALLEVYN with the infection management capabilities of silver, ALLEVYN Ag, has also been introduced.

NPWT delivers vacuum-assisted pressure to help promote healing. NPWT consists of a wound dressing, a drainage tube, and a transparent film that is connected to a suction device. Smith & Nephew offers the RENASYS EZ and RENASYS GO pump systems together with a range of foam and gauze dressing kits.

Advanced Wound Management’s also has a range of other advanced products including films, such as OPSITE and IV3000, skin care treatments and gels.

Strategy

Advanced Wound Management’s strategy for the business is to be customer-led and invest for growth by focusing on high growth, high value segments, in particular those of exudate and infection management through improved wound bed preparation, moist and active healing and penetration of the NPWT market.

Further efficiency improvement is expected to be delivered through continued focus on operational excellence. Since 2007, efficiency improvements have been delivered through various projects including support function consolidation, outsourcing of manufacturing to low cost suppliers, distribution rationalisation projects and the commencement of manufacturing in Suzhou, China.

An aligned approach across the GBU ensures our talent is developed and working on common objectives to deliver consistent execution of the Group’s plan.

In December 2009, the Advanced Wound Management business acquired the manufacturing assets of Nucryst Pharmaceuticals which exclusively licenses and manufactures our range of ACTICOAT products, using its nanocrystalline silver technology, SILCRYST. Under this agreement, the Group acquired the manufacturing assets from Nucryst’s current operations in Canada and intellectual property rights relating to the nanocrystalline silver technology used in the manufacture of the ACTICOAT product range. Nucryst has manufactured ACTICOAT products for Smith & Nephew since the Group acquired certain product rights in 2001. We expect this acquisition to deliver operational efficiencies.

New Products

Management estimates that the NPWT market is worth $1.5 billion in annual revenue. We have launched a range of products which enhance wound healing using negative pressure.

During 2009, the ALLEVYN hydrocellular dressings range was extended further with the development of antimicrobial variants that include soft gel adhesives. This new range of dressings has the efficient fluid management of the existing ALLEVYN dressings and rapid, sustained antimicrobial action, whilst improving comfort and reducing pain on dressing removal for the patient.

The ACTICOAT range was enhanced during 2009 with the launch of additional ACTICOAT Flex dressings, a conformable range of dressings designed to treat wounds in awkward anatomical areas with improved patient comfort during use. A range of dressings specifically designed for use in Orthopaedic External Fixation procedures was also launched.

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Recent Regulatory Approvals

During 2009, Advanced Wound Management secured approvals for ACTICOAT Flex 7 and ACTICOAT Flex 3, in the EU and the USA. New versions of ALLEVYN Gentle and ALLEVYN Gentle Border were also approved in the EU and the USA, with the addition of silver to these variants and a new heel variant was also added to the ALLEVYN Gentle Border range.

In Japan, there were eight approvals including new product approvals for CADEX Dressing, ALLEVYN Gentle Border and the latest product variants for ALLEVYN Adhesive and Non-Adhesive. ALLEVYN products are sold under the HYDROSITE trade name in Japan.

Market and Competition

Management estimates that the sales value of the advanced wound management market worldwide was $5.0 billion in 2009, an underlying increase of 4% from 2008. During 2009, the market growth rate slowed slightly due to the weaker economic conditions. Growth is driven by an ageing population and by a steady advance in technology and products that are more clinically efficient and cost effective than their conventional counterparts. Management believes that the market will continue the trend towards advanced wound products with its ability to accelerate healing rates, reduce hospital stay times and cut the cost of clinician and nursing time as well as aftercare in the home.

Management estimates that Smith & Nephew had a 16% share of the advanced wound management market as at 31 December 2009. Worldwide competitors in advanced wound management in 2009 include Kinetic Concepts, who are active exclusively in the NPWT segment, Convatec, Mölnlycke and Systagenix.

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OPERATING ACTIVITIES

SALES, MARKETING AND DISTRIBUTION

Smith & Nephew’s customers are the various providers of medical and surgical services worldwide. In certain parts of the world, including the UK, much of Continental Europe, Canada and Japan, these are largely government organisations funded by tax revenues. In the US, the Group’s major customers are public and private hospitals, which receive revenue from private health insurance and government reimbursement programmes. In the US, Medicare is the major source of reimbursement for knee and hip reconstruction procedures and for wound healing treatment regimes.

Competition exists among healthcare providers to gain patients on the basis of quality, service and price. 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 amongst the Group’s competitors, and these trends are expected to continue in the long term. Smith & Nephew competes against both specialised 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 customers worldwide are the National Health Service in the UK and HealthTrust in the US. These represented 6% and 6% respectively of the Group’s worldwide revenue in 2009.

In the US, the Group’s products are marketed directly to doctors, hospitals and other healthcare facilities with each business unit operating a separate specialised sales force. The US sales forces consist of a mixture of independent commissioned sales agents and direct employees. The independent agents are contractually not permitted to sell products that compete with Smith & Nephew’s Orthopaedics and Endoscopy products are principally shipped and invoiced directly to the ultimate customer. Advanced Wound Management products are marketed directly to the ultimate customer. The products are shipped and invoiced to a number of wholesale distributors. In most other direct markets, the business units typically manage employee sales forces directly, and also ship and invoice products both directly to the ultimate customer and to wholesale distributors.

The Emerging Markets unit comprises direct selling and marketing operations directly and through distributors in India, China, Hong Kong, South Korea, Malaysia, Singapore, Thailand, the United Arab Emirates, South Africa, Mexico and Puerto Rico. In these markets, Orthopaedics and Endoscopy frequently share sales resources. The Advanced Wound Management sales force may be separate where it calls on different customers. In other countries, Smith & Nephew typically sells to third party distributors which market the Group’s products locally. These other countries are also managed by the Emerging Markets unit, with some exceptions.

The Group operates a number of central distribution facilities in the key geographical areas in which it operates. Orthopaedics and Endoscopy operate a facility in Baar, Switzerland which acts as the main holding and consolidation point for markets in Europe. Hubs serving the US are located in Memphis for Orthopaedics and Oklahoma for Endoscopy. Products are shipped to Group companies who hold small amounts of inventory locally for immediate or urgent customer requirements. Advanced Wound Management distribution hubs include Neunkirchen, Germany; Nottingham, UK; and Atlanta, US.

SEASONALITY

Smith & Nephew’s revenues are generally at their highest in the fourth quarter of any year. This is caused by the relatively high number of accidents and sports injuries which occur in the North American and European autumn and winter seasons which increase revenues of orthopaedic trauma and endoscopy products. Orthopaedic reconstruction revenues are lower in the third quarter due to fewer elective surgeries in the summer and higher in the fourth quarter as elective surgeries increase.

MANUFACTURE AND SUPPLY

The Group has a central Global Operations function which is implementing Lean manufacturing through the factories and the supply chain to sustain and improve the high levels of quality, service and efficiency. Core competencies include materials technology; high precision machining in Orthopaedics and Endoscopy; and high-volume, automated manufacturing in Advanced Wound Management.

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Each business unit purchases raw materials, components, finished products and packaging materials from certain key suppliers. These principally include metal forgings and stampings for Orthopaedics, optical and electronic sub-components and finished goods for Endoscopy, active ingredients and finished goods for Advanced Wound Management and packaging materials across all businesses. Suppliers are selected, and contracts negotiated, by a centralised Group procurement team wherever possible, to ensure value for money based on the total spending across the Group.

The Group outsources manufacturing where necessary to obtain specialised expertise or where it is possible to gain lower cost without risk to intellectual property. Suppliers of outsourced products and services are selected based on their ability to deliver products and services to specification, and establish and maintain a quality system. Suppliers are trained and are monitored through on-site assessments and performance audits that include quality, service and delivery. Finished goods purchased for resale include SUPARTZ joint and DUROLANE fluid therapy products in the Orthopaedics business and screen displays, optical and electrical devices in the Endoscopy business. During the year, Smith & Nephew purchased the supplier of ACTICOAT in Advanced Wound Management.

The Group Global Operations strategy includes ongoing assessment of the optimal facility footprint. Orthopaedics headquarters and manufacturing facilities in Memphis, the facilities in Aarau and the Advanced Wound Management facilities in Hull and Gilberdyke are freehold while other principal locations are leasehold. The Group has freehold and leasehold interests in real estate in other countries throughout the world, but no other is individually significant to the Group. Where required, the appropriate governmental authorities have approved the facilities. In 2009, Orthopaedics relocated the European headquarters from Rotkreuz to Baar, Switzerland. In addition, the old Memphis distribution facility was relocated to a new facility in Memphis, purchased in 2008. The lease on the old site subsequently expired. In December 2009, Advanced Wound Management purchased the ACTICOAT manufacturing facility in Canada (leasehold).

The Group closed the Largo manufacturing facility in 2009 and outsourced or relocated its manufacturing output. The Advanced Wound Management business purchased land in Suzhou, China and has completed the build of a new factory which is now shipping wound management products on a global basis. The Orthopaedics business

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has purchased land near Beijing, China, and construction of the new facility is expected to be complete in 2010. It will supply implants to the local market and orthopaedic instruments for export.

RESEARCH AND DEVELOPMENT

During 2009, the Group appointed a Chief Science Officer. His role is to seek new products that yield the greatest return for patients, healthcare professionals, shareholders and other stakeholders in the Group. As the senior scientific figure in the Group, he will play a critical role in building the Group’s innovation and research and development capability, developing and executing the scientific strategy and developing the Group’s relationships with key opinion leaders.

The business units each manage a portfolio of short and long-term product development projects designed to meet the future needs of their customers and continue to provide growth opportunities for their businesses. The Group’s research and development is directed towards all three operating segments. Expenditure on research and development amounted to $155m in 2009 (2008 — $152m, 2007 — $142m), representing approximately 4% of Group revenue (2008 — 4%, 2007 — 4%).

The Group continues to invest in future technology opportunities for clinical needs identified from across the Smith & Nephew businesses. During 2009, the Group opened a new facility in Durham, North Carolina, focusing on development of advanced, locally delivered biological therapies to promote healing and pain relief. The Group’s principal research facility located in York, England is now managed in conjunction with the Durham facility to provide research programmes that seek to underpin the longer-term technology requirements for its businesses and to provide a flow of innovative products. In-house research is supplemented by work performed by academic institutions and other external research organisations in Europe, America and Asia.

Product development is carried out at the Group’s principal locations, notably in Memphis, Tennessee and Aarau, Switzerland (Orthopaedics), Mansfield, Massachusetts (Endoscopy) and Hull, England (Advanced Wound Management).

INTELLECTUAL PROPERTY

Smith & Nephew has a policy of protecting, with patents, the results of research and development carried out by the Group. Patents have been obtained in a wide range of fields, including orthopaedic reconstruction and trauma, clinical therapies, endoscopy and advanced wound management. Patent protection for Group products is sought routinely in the Group’s principal markets. Currently, the Group’s patent portfolio stands at over 3,800 patents in force and patent applications pending

Smith & Nephew also has a policy of protecting the Group’s products by registering trademarks under local laws of markets in which such products are sold. The Group vigorously protects its trademarks against infringement. Currently, the Group’s trademark portfolio consists of over 3,900 trademarks, trademark applications and design rights.

Smith & Nephew’s goal is to provide a collection of intellectual property, which may include patents, trade secrets and licenses, for each major product that reduces the risk associated with failure of any individual piece of intellectual property. Most individual pieces of intellectual property protect a relatively small proportion of the Group’s annual revenue. As a result, the Group tries to ensure that its overall business is not sensitive to the loss (however caused) of any single piece of intellectual property.

In addition to protecting its market position by filing and enforcing patents and trademarks, Smith & Nephew may oppose third party patents and trademark filings where appropriate 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 current operations and the financial results of the Group.

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REGULATION

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, manufacture, labelling, marketing and sale of healthcare 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 authorised or registered prior to manufacture, marketing or sale and that such authorisation or registration be subsequently maintained. The major regulatory agencies for Smith & Nephew’s products are the Food and Drug Administration (“FDA”) in the US, the Medicines and Healthcare products Regulatory Agency in the UK, the Ministry of Health, Labour and Welfare in Japan and the State Food and Drug Administration in China. Payment for many medical device products is governed by reimbursement tariff agencies in each individual country.

The trend in recent years continues to be towards regulation and higher standards of technical appraisal. In the US, many of the Group’s products are brought to market following pre-market notification to the FDA under Section 510(k) of the Food, Drug and Cosmetic Act, with a request that FDA clear the product as being substantially equivalent in terms of safety and effectiveness to a previously approved device. The FDA is considering changes in the 510(k) clearance process that could delay or increase the cost of clearance in some circumstances, including requiring clearance for more minor modifications or requiring additional clinical studies following clearance. Regulatory requirements may also entail lengthy inspections for compliance with appropriate standards, including those relating to good manufacturing practices. All significant facilities within the Group are subject to regular internal audit for medical device regulatory compliance with national and Group standards and policies.

Management 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 is not currently aware of any significant expenditure that would be required as a result of such laws and regulations that would have a material adverse impact upon the Group’s financial condition.

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THE BUSINESS AND THE COMMUNITY

CORPORATE AND SOCIAL RESPONSIBILITY

Approach

Smith & Nephew recognises that companies have a wide responsibility to the community, the environment and the quality of life enjoyed by society at large. As a leader in its markets, Smith & Nephew believes it should also be a leader in setting and meeting standards of sustainable development. The Group monitors progress and views sustainable development as an integral part of the way the Group does business.

Smith & Nephew’s approach to sustainability is governed by the policies and principles it has developed to cover four key areas of corporate and social responsibility, namely: corporate governance and business integrity, health, safety and environment, social responsibility and economic contribution. These policies and principles are available at www.smith-nephew.com.

The Group has published a Sustainability Report, annually, since 2001. The tenth Sustainability Report, which gives detailed information on the actions and performance in the four key reporting areas during the last year, is expected to be published on the Group’s website during May 2010 at www.smith-nephew.com.

Smith & Nephew’s progress is measured by leading organisations that assess sustainable development. In 2009, the Group was again included in the Dow Jones Sustainability Index (“DJSI”) and is a member of FTSE4Good.

Corporate Governance and Business Integrity

See the ‘Corporate Governance Statement’ section on pages 47 to 59 for a discussion of Smith & Nephew’s governance structures and procedures, which include the principal duties and actions during the year of the ‘Ethics and Compliance Committee’ as well as details of the Group’s ‘Code of Conduct’ and ‘Code of Ethics for Senior Financial Officers’.

Health, Safety and Environment Management

The Group’s health, safety and environmental (“HSE”) commitment is to:

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The Group’s manufacturing processes are relatively low in environmental impact. Particular emphasis is placed on the control of energy, and waste in manufacturing and research and development. Improvement targets are set and performance is measured against these targets. The Group’s key environmental measurements over the last five years are as follows:

In the 2009 Sustainability Report, Smith & Nephew published targets for the above environmental measurements for the third year. These targets were based on figures normalised for changes in production levels (using 2009 as the base year) rather than the absolute figures. This ensures any impact arising from changes in production is taken into account. The performance against the published targets is as follows:

A full analysis of these measurements and key health and safety performance measures will be included in the 2010 Sustainability Report.

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Business Partners

Smith & Nephew is committed to establishing mutually beneficial relationships with its suppliers, customers and business partners. The Group seeks to work only with partners whom it believes adhere to principles and health, safety, social and environmental standards consistent with that of the Group. Additional work continues each year to improve the monitoring of supplier standards for service quality and activities relevant to their corporate responsibility. Additional focus on supplier standards has been implemented in the manufacturing area to ensure Smith & Nephew’s high standards are maintained throughout.

Social responsibility

Employees

The Human Resources (“HR”) Policy Framework introduced in 2006 continues to provide a framework of key HR policies, values, behaviours and management principles that provide the structure within which the business units and Global functions plan and deliver successful results. There is also an HR strategy which provides direction on how the Group intends to attract, retain and develop the right talent to meet the business needs and create a culture that is aligned to Smith & Nephew values and deliver the Group’s long term strategic plans.

The Group’s employment policies are based on equality of opportunity regardless of colour, creed, race, national origin, sex, age, marital status, sexual orientation, mental or physical disability unrelated to the ability of the person to perform the essential functions of the job.

Smith & Nephew is committed to providing a healthy and safe working environment and operates a set of policies that ensure flexible, family-friendly practices and non-discrimination. It aims to provide an open environment based on constructive relationships and regular and timely dissemination of Group information and encourages feedback and ideas. An employee global opinion survey is conducted every two years and used as a catalyst for improvements and plans with all employees and representative bodies.

The 2008 Global Opinion Survey was completed towards the end of 2008 and the results reported to employees in early 2009. Across the Group, the response rate was good with nearly 6,500 employees taking the survey. Overall, the results were positive and indicated continued high levels of employee engagement with the values and direction of the Group. The feedback identified several areas where the Group needed to improve, including the alignment and enhancement of systems and processes to enable better execution of plans and greater visibility of results. During 2009, the Group has worked diligently to address the issues raised by employees and reinforce the positive aspects of the feedback received.

Other employee engagement indicators

In 2009, the Group continued to assess indicators of employee engagement. These measurements are a useful monitoring tool and alert mechanism for action as well as giving trend indicators of improved performance.

The data below relates to the Group’s US and UK population (approximately 60% of the total employees) as these regions have the most established and robust data collection processes in place.

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The Group is committed to providing training and information so that all employees can make the best contribution possible. To ensure that the Group continues to improve in this important area, the central global organisational development team continued expanding their programmes to lead talent management, performance management and learning and development across the whole of the Group. Learning and development programmes are used to attract, retain and develop employees. These programmes are linked to formal performance appraisal and development planning. The Group operates training programmes under the banner of ‘Management Excellence’. These provide the key management skills required to be successful managers and leaders, covering the requirements of both new and experienced individuals. Further programmes were added in 2009 and the Group has developed a common and comprehensive on-line learning resource for global launch in the first quarter of 2010.

Society and Community

The Group works with national and local governments and other organisations to meet its legal and civic obligations, manage its impact on the environment, and contribute to the development of laws and regulations that affect its business. Smith & Nephew values community involvement and is an active member of its local communities and supports employees who undertake community work.

The Group’s principles for charitable giving are based on criteria relevant to its business, with priority given to medical education. Individual company sites support their local communities in a range of charitable causes giving donations of money, gifts in kind and employee time.

The Group realises that its technologies and products do not reach everyone. To address this issue, the orthopaedics business has created a relationship with a charitable and humanitarian organisation. This links up with physicians and non-profit groups engaged in medical philanthropy that receive donations of Smith & Nephew products through sponsorship and help from the Group’s employees. The Group considers that working in collaboration with these individuals and organisations increases the impact of its charitable giving.

In 2009, direct donations to charitable and community activities totalled $1,866,000, of which $396,000 was given to the Smith & Nephew Foundation. Smith & Nephew made no political contributions in 2009.

More examples of the programmes supported by the Group are given in the 2010 Sustainability Report.

Economic Contribution

The Group contributes economically in three principal ways: (i) its financial performance brings economic benefits to shareholders, employees, suppliers, governments and local authorities; (ii) it aims to deliver overall cost savings to healthcare systems by reducing the cost per episode of care, and (iii) through the provision of medical education to surgeons and nurses.

Delivering overall cost savings to healthcare systems

Smith & Nephew’s innovation is focused on designing products, instruments and techniques which provide clinical and cost benefits. Efficiency benefits include reduced frequency of dressing changes, shorter operating theatre times, reduced length of time spent in hospital, faster recovery and reduced infection rates. Examples of such innovations that the Group has recently introduced include:

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Medical education

The Group is committed to supporting surgeon, clinician and nurse training both associated directly with the Group’s products and more generally.

Examples during 2009 include: Orthopaedics continued to expand its KLEOS programme, which is a medical education platform which offers seminars, fellowships, instructional videos and literature reviews. Orthopaedics also contributed by providing grant support for research, graduate medical education fellowships and continuing medical education through the independent Orthopaedic Research and Education Foundation. Endoscopy hosted a two-day fellowship meeting, “The Wider Scope of Arthroscopy”, that involved over 100 visiting surgeons, including Fellows from some of the most prestigious programmes in North America. In Advanced Wound Management, much of the focus is on the training of nurses.

In addition, during 2009, the Group opened or commissioned surgeon training facilities in Shanghai, China; Lucerne, Switzerland; York, UK; and Memphis, US.

More examples of the programmes supported by the Group to deliver medical education are given in the 2010 Sustainability Report.

Looking Ahead

Smith & Nephew’s vision is to be the best in helping people regain their lives by improving and healing the human body. The Group believes that it can achieve this by setting and meeting ambitious performance targets, by constant innovation in products and services and by earning the trust of its stakeholders. In all its business activities, the drive towards sustainability is an ongoing process and Smith & Nephew is committed to maintaining a consistent effort to improve.

EMPLOYEES

The average number of full-time equivalent employees in 2009 was 9,764, of whom 1,639 were located in the UK, 4,131 were located in the US and 3,994 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 by business segment:

Where the Group has collective bargaining arrangements in place with labour unions, these reflect local market circumstances.

Smith & Nephew operates share option plans that are available to the majority of employees (for further information see Note 26 of the Notes to the Group Accounts). The Group has no share plans in which shares have rights with regard to control of the Company that are not exercisable directly by employees.

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RISK

RISK FACTORS

There are risks and uncertainties related to Smith & Nephew’s business. The factors listed below could cause the Group’s financial condition or results of operations to differ materially from expected and historical levels. Factors not listed here, that Smith & Nephew cannot presently identify or does not believe to be equally significant, could also adversely affect Smith & Nephew’s business.

Currency Fluctuations

The Group uses the US Dollar as its reporting currency and the US Dollar is the functional currency of Smith & Nephew plc. In 2009, 44% (2008 — 44%) of Group revenue arose in the US, 27% (2008 — 28%) in Continental Europe, 21% (2008 — 20%) in Africa, Asia, Australia, Canada, New Zealand and Latin America, and 8% (2008 — 8%) in the UK. During 2009, fluctuations in the exchange rates used to translate the financial statements of operations outside the US into US Dollars had the effect of decreasing Group revenue by 3% (2008 — increasing Group revenue by 2%).

The Group’s manufacturing cost base is situated principally in the US, the UK and Switzerland from where finished products are exported to the Group’s selling operations worldwide. Thus, the Group is exposed to fluctuations in exchange rates between the US Dollar, Sterling and Swiss Franc and the currencies of the Group’s selling operations, particularly the Euro, Australian Dollar and Japanese Yen. If the US Dollar, Sterling or Swiss Franc should strengthen against the Euro, Australian Dollar and the Japanese Yen, the Group’s trading margin would be adversely affected.

In 2009, the Group managed $1bn of foreign currency transactions by using forward foreign exchange contracts, of which the major transaction flows are from Euros into US Dollars and Sterling. The Group’s policy is for firm commitments to be fully covered and forecast transactions to be covered between 50% and 90% for up to one year.

Assuming the Group had not transacted forward foreign exchange contracts and ignoring delays in recognition of exchange rate movements due to inventory-holding periods:

Dependence on Government and Other Funding

In most markets throughout the world, expenditure on medical devices is ultimately controlled to a large extent by governments. Funds may be made available or withdrawn from healthcare budgets depending on government policy. The Group is therefore largely dependent on future governments providing increased funds commensurate with the increased demand arising from demographic trends.

Pricing of the Group’s products is governed in most major markets largely by governmental reimbursement authorities. Initiatives sponsored by government agencies, legislative bodies and the private sector to limit the growth of healthcare costs, including price regulation, excise taxes and competitive pricing, are ongoing in markets where the Group has operations. This control may be exercised by determining prices for an individual product or for an entire procedure. The Group is exposed to changes in reimbursement policy, tax policy and pricing which may have an adverse impact on sales and operating profit. Currently health care reform legislation is under consideration in the US that would impose a significant tax on medical device manufacturers. There may be an increased risk of other adverse changes to government funding policies arising from the deterioration in macro-economic conditions in some of the Group’s markets.

The Group must adhere to the rules laid down by government agencies that fund or regulate health care, including extensive and complex rules in the US. Failure to do so could result in fines or loss of future funding.

World Economic Conditions

Demand for the Group’s products is driven by demographic trends, including the ageing population and the incidence of osteoporosis and obesity. Supply of, use of and payment for the Group’s products is influenced by

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world economic conditions which could place increased pressure on demand and pricing, adversely impacting the Group’s ability to deliver revenue and margin growth. The conditions could favour larger, better capitalised groups, with higher market shares and margins. As a consequence, the Group’s prosperity is linked to general economic conditions and there is a risk of deterioration of the Group’s performance and finances during the current macro-economic events.

In 2009, deteriorating economic conditions worldwide created several challenges for the Group, including deferrals of joint replacement procedures, heightened pricing pressures and significant declines in capital equipment expenditures at hospitals. These factors tempered the overall growth of the Group’s global markets and may continue to impact growth in the future.

Stock Market Valuations

As a growth industry, medical device companies have higher stock market valuations than many other industrial companies. If market conditions change, other companies in its sector fail to perform, or if the Group is perceived to be performing less well than the sector, then the share price of the Group may be adversely affected.

Political Uncertainties

The Group has operations in 32 countries. Political upheaval in some of those countries or in surrounding regions may impact the Group’s results of operations. 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. Furthermore, legislative measures in a country could result in changes in tariffs, import quotas or taxation that could adversely affect the Group’s turnover and operating profit. Terrorist activities and ongoing global political uncertainties could adversely impact the Group.

Highly Competitive Markets

The Group’s business units compete across a diverse range of geographic and product markets. Each market in which the business units operate contain a number of different competitors, including specialised and international corporations. Significant product innovations, technical advances or the intensification of price competition by competitors could adversely affect the Group’s operating results. Some of these competitors may have greater financial, marketing and other resources than Smith & Nephew. These competitors may be able to initiate technological advances in the field, deliver products on more attractive terms, more aggressively market their products or invest larger amounts of capital and research and development into their businesses.

There is a possibility of further consolidation of companies, which could adversely affect the Group’s ability to compete with larger companies due to insufficient financial resources. If any of the Group’s businesses were to lose market share or achieve lower than expected sales growth, there could be a disproportionate adverse impact on the Group’s share price and its strategic options.

Competition exists among healthcare providers to gain patients on the basis of quality, service and price. 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. Increased competition and unanticipated unanticipated actions by competitors or customers could lead to downward pressure on prices and/or a decline in market share in any of the Group’s business areas, which would adversely affect Smith & Nephew’s results of operations and hinder its growth potential.

Product Liability Claims and Loss of Reputation

The development, manufacture and sale of medical devices entail risk of product liability claims or recalls. Design and manufacturing defects with respect to products sold by the Group or by companies it has acquired could damage, or impair the repair of, body functions. The Group may become subject to liability, which could be substantial, because of actual or alleged defects in its products. In addition, product defects could lead to the need to recall from the market existing products, which may be costly and harmful to the Group’s reputation.

There can be no assurance that customers, particularly in the US, the Group’s largest geographical market, will not bring product liability or related claims that would have a material adverse effect on the Group’s financial position or results of operations in the future, or that the Group will be able to resolve such claims within insurance limits.

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Regulatory Compliance in the Healthcare Industry

Business practices in the healthcare industry are subject to regulation and review by various government authorities. In general, the trend in many countries in which the Group does business is towards higher expectations and increased enforcement activity by governmental authorities. While the Group is committed to doing business with integrity and welcomes the trend to higher standards in the healthcare industry, the Group and other companies in the industry have been subject to investigations and other enforcement activity that have incurred and may continue to incur significant expense. See “Legal Proceedings”.

The Group has committed to ensuring the rigorous application of its Compliance Programme worldwide. In order to achieve this, management has made changes to existing corporate structures and introduced additional standards and procedures, including safeguards with respect to the sale of Group products through distributors, sales representatives and other third parties. As the Group continues to enhance its compliance programs globally, it is possible that operations in some regions may be disrupted.

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. The Group is required to comply with a wide range of regulatory controls over the manufacturing, testing, distribution, marketing and sale of its products, particularly in the US, China and Europe. Such controls have become increasingly demanding and costly to comply with and management believes that this trend will continue. At any time, the Group is awaiting a number of regulatory approvals which, if not received, could adversely affect results of operations. Regulatory approval of new products and new materials is required in most countries in which the Group operates, although a single approval may be obtained for all countries within the European Union. Regulatory approval of new products may entail a lengthy process, particularly if materials are employed which have not previously been used in similar products. In the US, the 510(k) process by which many of the Group’s products are cleared for sale may be revised in ways that could lead to delays or increased costs. See “Regulation”.

Failure to comply with these regulatory requirements could have a number of adverse consequences, including withdrawal of approval to sell a product in a country, temporary closure of a manufacturing facility, fines and potential damage to company reputation.

Proprietary Rights and Patents

Due to the technological nature of medical devices, the Group is subject to the potential for patent infringement claims. Smith & Nephew attempts to protect its intellectual property and regularly opposes third party patents and trademarks where appropriate in those areas that might conflict with the Group’s business interests. If Smith & Nephew fails to enforce its intellectual property rights successfully, its competitive position could suffer, which could harm its results of operations.

Claims asserted by third parties regarding infringement of their intellectual property rights, if successful, could require the Group to expend time and significant resources to pay damages, develop non-infringing products or to obtain licences to the products which are the subject of such litigation, thereby affecting the Group’s growth and profitability.

Continual Development and Introduction of New Products

The medical devices industry has a rapid rate of new product introduction. In order to remain competitive, each of the Group’s business units must continue to develop innovative products that satisfy customer needs and preferences or provide cost or other advantages. Developing new products is a costly, lengthy and uncertain process. A potential product may not be brought to market for any number of reasons, including failure to work optimally, failure to receive regulatory approval, failure to be cost-competitive, infringement of patents or other intellectual property rights and changes in consumer demand. The Group’s products and technologies are also subject to marketing attack by competitors. Furthermore, new products that are developed and marketed by the Group’s competitors may affect price levels in the various markets in which the Group’s business units operate. If the Group’s new products do not remain competitive with those of competitors, the Group’s sales revenue could decline.

There is a risk that a major disruptive technology could be introduced into one or more of the Group’s markets and adversely affect its ability to achieve business plans and targets.

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Manufacturing and Supply

The Group’s manufacturing production is concentrated at 11 main facilities in Memphis, Tennessee, Mansfield, Massachusetts and Oklahoma City, Oklahoma in the US, Hull, Warwick and Gilberdyke in the UK, Aarau in Switzerland, Tüttlingen in Germany, Alberta in Canada and Suzhou and Beijing in China. 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 but is subject to limits and deductibles and may not be sufficient to cover catastrophic loss.

Management of orthopaedic inventory is complex, particularly forecasting and production planning. There is a risk that failures in operational execution could lead to excess inventory or individual product shortages.

Each of the business units is reliant on certain key suppliers of raw materials, components, finished products and packaging materials. These suppliers must provide the materials and perform the activities to the Group’s standard of quality requirements. If any of these suppliers is unable to meet the Group’s needs, compromises on standards of quality or substantially increases its prices, Smith & Nephew would need to seek alternative suppliers. There can be no assurance that alternative suppliers would provide the necessary raw materials on favourable or cost-effective terms at the desired quality. Consequently, the Group may be forced to pay higher prices to obtain raw materials, which it may not be able to pass on to its customers in the form of increased prices for its finished products. In addition, some of the raw materials used may become unavailable, and there can be no assurance that the Group will be able to obtain suitable and cost-effective substitutes. Any interruption of supply caused by these or other factors could negatively impact Smith & Nephew’s revenue and operating profit.

The Group is in the process of outsourcing to third parties or relocating to lower cost countries certain of its manufacturing processes. As a result of these transfers, there is a risk of disruption to supply.

Attracting and Retaining Key Personnel

The Group’s continued development depends on its ability to hire and retain highly skilled personnel with particular expertise. This is critical, particularly in general management, research, new product development and in the sales forces. If Smith & Nephew is unable to retain key personnel in general management, research and new product development or if its largest sales forces suffer disruption or upheaval, its sales and operating profit would be adversely affected. Additionally, if the Group is unable to recruit, hire, develop and retain a talented, competitive workforce, it may not be able to meet its strategic business objectives.

Failure to Make Successful Acquisitions

A key element of the Group’s strategy for continued growth is to make strategic acquisitions or alliances to complement its existing businesses. Failure to identify appropriate acquisition targets or failure to integrate them successfully would have an adverse impact on the Group’s competitive position and profitability. In addition, the contraction of available global capital may make financing less attainable or more expensive and could result in the Group failing in its strategic aim of growth by acquisition or alliance.

Other Risk Factors

The Board considers that Smith & Nephew is subject to a number of other risks which are common to most global medical technology groups and which are reviewed as part of its risk management process.

In the financial area these include interest rate volatility, share price volatility, challenges by taxation authorities, failures in reporting and internal financial controls and uninsured losses.

Adverse events in the areas of corporate social responsibility could also adversely impact Group operating results.

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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. Derivative financial instruments are used only to manage the financial risks associated with underlying business activities and their financing. See Note 21 of the Notes to the Group accounts for further details of these risks.

The Group’s financial instruments are subject to changes in fair values as a result of changes in market rates of exchange and forward interest rates. Financial instruments entered into to hedge sales and purchase transactions in foreign currency and interest rate exposures are accounted for as hedges. Changes in fair values of these financial instruments would not affect the Group’s income statement. The movements in the fair value of financial instruments that are not accounted for as hedges offset movements in the values of assets and liabilities and are recognised through the income statement. The net impact of these changes in fair value on the Group’s income statement is not significant.

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The results for each year are compared primarily with the results for the preceding year.

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BUSINESS OVERVIEW

Smith & Nephew’s operations are organised into three primary business units that operate globally: Orthopaedics, Endoscopy and Advanced Wound Management. Smith & Nephew believes that its businesses have the opportunities for strong growth due to its markets benefiting from an ageing population, an increase in active lifestyles and trends toward less invasive medical procedures.

Revenue by business segment as a percentage of total revenue was as follows:

Revenue by geographic market as a percentage of total revenue was as follows:

Underlying Growth in Revenue

“Underlying growth in revenue” is a non-GAAP financial measure which is a key performance indicator used by the Group’s management in order to compare the revenue in a given year to that of the previous year on a like-for-like basis. This is achieved by adjusting for the impact both of sales of products acquired in material business combinations and for movements in exchange rates. The Group’s management uses this non-GAAP measure in its internal financial reporting, budgeting and planning to assess performance on both a business segment and a consolidated Group basis.

“Underlying growth in revenue” reconciles to growth in revenue reported in accordance with IFRS by making two adjustments, the “constant currency exchange effect” and the “acquisitions effect”, described below. The material limitation of the underlying growth in revenue measure is that it excludes certain factors, described above, which do ultimately have a significant impact on total revenues. The Group measures the performance of local managers using underlying growth in revenue whilst the Group’s management additionally considers GAAP revenue each quarter and further assesses the excluded items by monitoring against internal budget amounts.

The “constant currency exchange effect” is a measure of the increase/decrease in revenue resulting from currency movements on non-US Dollar sales. This is measured as the difference between the increase in revenue translated into US Dollars on a GAAP basis (i.e. current year revenue translated at the current year average rate, prior year revenue translated at the prior year average rate) and the increase measured by translating current year revenue into US Dollars using the prior year average rate.

The “acquisitions effect” is the measure of the impact on revenue from newly acquired business combinations. This is calculated by excluding the revenue from sales of products acquired as a result of a business combination consummated in the current year, with non-US Dollar sales translated at the prior year average rate. Additionally, prior year revenue is adjusted to include a full year of revenue from the sales of products acquired in those business combinations consummated in the previous year, calculated by adding back revenue from sales of products in the period prior to the Group’s ownership. These sales are separately tracked in the Group’s internal reporting systems and are readily identifiable.

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Reported growth in revenue by business segment reconciles to underlying growth in 2009 as follows:

Reported growth in revenue by business segment reconciles to underlying growth in 2008 as follows:

Trading profit

Trading profit is a trend measure which presents the long-term profitability of the Group excluding the impact of specific transactions that management considers affect the Group’s short-term profitability. The Group presents this measure to assist investors in their understanding of trends. The Group has identified the following items, where material, as those to be excluded from operating profit when arriving at trading profit: acquisition and disposal related items including amortisation of acquisition intangible assets and impairments; significant restructuring events; and gains and losses resulting from legal disputes and uninsured losses.

Operating profit reconciles to trading profit in 2009 as follows:

Operating profit reconciles to trading profit in 2008 as follows:

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Trading profit by business segment as a percentage of total trading profit was as follows:

Operating profit by business segment as a percentage of total operating profit was as follows.