Diploma PLC — AGM Information 2010

Dec 6, 2010

THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. IF YOU ARE IN ANY DOUBT AS TO THE ACTION TO BE TAKEN YOU SHOULD CONSULT YOUR STOCKBROKER OR OTHER FINANCIAL ADVISER AUTHORISED UNDER THE FINANCIAL SERVICES AND MARKETS ACT 2000.

IF YOU HAVE SOLD OR TRANSFERRED ALL YOUR ORDINARY SHARES IN DIPLOMA PLC PLEASE SEND THIS DOCUMENT AND, WHERE RELEVANT, THE ACCOMPANYING FORM OF PROXY TO THE STOCKBROKER OR OTHER AGENT THROUGH WHOM THE SALE OR TRANSFER WAS EFFECTED FOR TRANSMISSION TO THE PURCHASER OR TRANSFEREE.

12 Charterhouse Square London EC1M 6AX

6 December 2010

DIPLOMA PLC (the ''Company'')

(Registered in England and Wales No. 3899848)

Dear Shareholder,

ANNUAL GENERAL MEETING

The Annual General Meeting will be held in the Brewers Hall, Aldermanbury Square, London, EC2V 7HR on Wednesday, 12 January 2011 at 12.00, midday. As you can see from the Notice of the Annual General Meeting which follows this letter there are, in addition to the Ordinary Business at the Annual General Meeting, seven items of Special Business.

The purpose of this letter is to explain the Business to be transacted at the Annual General Meeting.

Ordinary Business

Resolutions 1 to 7

The Ordinary Resolutions deal with the receipt and adoption of the Report of the Directors and the Financial Statements for the year ended 30 September 2010, together with the Auditors' Report, the declaration of a final dividend, the re-election of Directors, the re-appointment of Deloitte LLP as Auditors and the authorisation of the Directors to set the Auditors' remuneration.

Biographical details of the Directors seeking re-election are given on pages 12 and 13 of the Annual Report and Accounts 2010.

Special Business

Resolution 8 – Approval of Directors' Remuneration Report

In accordance with the Directors' Remuneration Report Regulations 2002, shareholders are being invited to approve the Directors' Remuneration Report for the financial year ended 30 September 2010. You can find the report on pages 35 to 40 of the Annual Report and Accounts 2010.

Resolution 9 – Authority to Allot Shares

The Directors may only allot shares or grant rights to subscribe for, or convert any security into, shares if authorised to do so by shareholders. The previous authority granted by shareholders in respect of the allotment of shares will expire on 12 January 2011. Accordingly, Resolution 9 will be proposed as an Ordinary Resolution. Paragraph (a) of Resolution 9 grants new authority to allot shares and grant rights to subscribe for, or convert any security into, shares up to an aggregate nominal amount of £1,887,326. This amount represents approximately one third of the total issued ordinary share capital of the Company as at 3 December 2010.

In accordance with the latest institutional guidelines issued by the Association of British Insurers (''ABI''), paragraph (b) of Resolution 9 will also authorise directors to allot, including the ordinary shares referred to in paragraph (a) of Resolution 9, further ordinary shares in connection with a preemptive offer by way of a rights issue to ordinary shareholders up to a maximum nominal amount of £3,774,652. This amount represents approximately two thirds (66.67 per cent.) of the Company's existing issued share capital calculated as at 3 December 2010, the latest practicable date before the publication of the Notice.

The directors have no present intention of exercising these authorities. However, if they do exercise the authority set out in Resolution 9(b), the directors intend to follow emerging best practice as regards its use (including, where appropriate, the directors standing for re-election) as recommended by the ABI.

If given, these authorities will expire at the Annual General Meeting in 2012 or 12 April 2012, whichever is the earlier.

Resolution 10 – Disapplication of Pre-Emption Rights

The Directors require a power from shareholders to allot equity securities or sell treasury shares where they propose to do so for cash and otherwise than to existing shareholders pro rata to their holdings. The previous power granted by shareholders in respect of the disapplication of pre-emption rights will expire on 12 January 2011. Accordingly, Resolution 10 will be proposed as a Special Resolution to grant such a power. Apart from offers or invitations, the authority will be limited to the allotment of equity securities and sales of treasury shares for cash up to an aggregate nominal amount of £283,099 (being five per cent. of the issued ordinary share capital at 3 December 2010). If given, this authority will expire on the earlier of 12 April 2012 and the conclusion of the Annual General Meeting in 2012. Your Directors will have due regard to institutional guidelines in relation to any exercise of this authority, in particular the requirement for advance consultation and explanation before making any non pre-emptive cash issue pursuant to this resolution which exceeds 7.5 per cent. of the Company's issued share capital in any rolling three year period. Your Directors do not have any present intention of exercising this authority, but consider it desirable to have the flexibility to use it should opportunities arise.

Resolution 11 – Authority to make Market Purchases of Ordinary Shares

This Resolution will give the Company authority to purchase its own shares in the market up to a limit of 10 per cent. of its issued ordinary share capital. The maximum and minimum prices are stated in the Resolution. The Directors believe that it is advantageous for the Company to have the flexibility to make market purchases of its own shares. In the event that Shares are purchased, they would either be cancelled (and the number of shares in issue would be reduced accordingly) or, subject to the Companies Act 2006 (the ''Act''), be retained as treasury shares. The Act enables companies to hold shares re-purchased as treasury shares with a view to possible re-sale at a future date rather than having to cancel them. The Company will consider holding re-purchased shares pursuant to the authority conferred by this Resolution as treasury shares. This would give the Company the ability to re-issue treasury shares quickly and cost effectively and would provide the Company with additional flexibility in the management of its capital base. The Directors will only exercise this authority if they are satisfied that a purchase would result in an increase in expected earnings per share and would be in the interests of shareholders generally. This Resolution is to be renewed for the period ending on the earlier of 12 April 2012 and the conclusion of the Annual General Meeting in 2012.

At the date of this letter the Company does not hold any treasury shares.

Resolutions 12 and 13 – Approval of new Long Term Incentive Plan and Share Matching Plan

These two Ordinary Resolutions seek Shareholders' approval for the replacement of the Company's existing Long Term Incentive Plan (''LTIP'') with new long term incentive plans comprising the Diploma PLC 2011 Performance Share Plan (''PSP'') and the Diploma PLC 2011 Share Matching Plan (''SMP'').

The Company's LTIP has been in place since 2004 and will expire next year. The Remuneration Committee has taken this opportunity to conduct a review of the current incentive scheme, in conjunction with its independent advisers, Kepler Associates. In terms of its effectiveness in driving performance, the Committee is satisfied that the current plan provides an appropriate incentive for performance up to the upper quartile versus peers; however, the Committee took the view that there should be some incentive to deliver performance beyond this.

The Board are therefore proposing to adopt a new PSP with a structure similar to the current LTIP. The Board also propose to introduce a Share Matching Plan which will offer additional reward in return for an investment in shares and this will provide a mechanism to reward strong performance, particularly at that above the upper quartile.

The Committee believes that the current LTIP has been effective, providing a focus on appropriate measures of long-term performance. Comparative data suggests that an annual award level of 100% of salary remains appropriate for the Executive Directors. We therefore propose to adopt a new plan with a structure broadly similar to the current arrangement. We do, however, believe there is scope for toughening the Earnings per Share (''EPS'') target contained in the plan required for full vesting.

We are proposing to introduce the SMP with two main aims. Firstly, to extend the range of performance which is incentivised, offering reward for performance above upper quartile. Secondly, the SMP will further align the interests of Executives with those of shareholders by requiring Executives to invest in Diploma shares.

The key terms of the PSP and the SMP, together with the initial performance conditions, are summarised in Appendices 1 and 2 on pages 4 to 11.

The Remuneration Committee believes the proposals described above are important to the Company being able to continue to motivate and retain its executives and are in the interests of shareholders. The targets for the PSP represent a significant strengthening of the EPS performance and the maintenance of a stretching TSR condition. Additional reward will result only from executives making a significant personal investment in Company shares and in large part for delivering performance above the upper-quartile of the market. Accordingly, the proposals have the full support of both the Remuneration Committee and the full Board.

Resolution 14 – Notice Period for General Meetings

This Resolution is required under the changes made to the Act by the Companies (Shareholders' Rights) Regulations 2009 (the ''Regulations'') which came into force on 3 August 2009 and implements the Shareholder Rights Directive. The Regulations increase the notice period for general meetings of companies such as ours to 21 days, unless certain conditions are met in which case it may be 14 clear days notice. To ensure that our general meetings (other than annual general meetings) may be held on not less than 14 clear days notice, one of the conditions needing to be met is that a shareholder resolution reducing the period of notice to not less than 14 clear days has been passed at the immediately preceding annual general meeting. It is intended that this flexibility will only be used for non-routine business where the flexibility is merited by the business of the meeting and it is thought to be in the best interests of shareholders as a whole. The approval will be effective until the Company's next Annual General Meeting, when it is intended that a similar resolution will be proposed.

Recommendation and Action to be Taken

The Board is unanimous in its view that the adoption of the Resolutions (including the new PSP and SMP), set out in the Notice of Annual General Meeting, is in the best interests of the Company and its shareholders as a whole. Accordingly, the Board recommends that you vote in favour of the Resolutions. Each Director intends to vote in favour of the Resolutions in respect of his own beneficial holding, which in aggregate amount to 1,785,370 shares at the date of this letter.

Ordinary shareholders are requested, whether or not they propose to attend the Annual General Meeting, to complete and return the enclosed form of proxy to Computershare Investor Services PLC, PO Box 1075, The Pavilions, Bridgwater Road, Bristol, BS99 3FA so as to arrive as soon as possible, but in any event by no later than 48 hours before the time of the meeting. The lodging of forms of proxy will not prevent ordinary shareholders from attending and voting in person if they so wish.

Yours faithfully

JL Rennocks Chairman

Note:

Copies of the following documents are available for inspection at the registered office of the Company, 12 Charterhouse Square, London, EC1M 6AX during normal business hours on any weekday from the date of this Notice until the close of the Annual General Meeting (Saturdays, Sundays and public holidays excepted) and will be available for inspection at the place of the Annual General Meeting convened for that day from at least 15 minutes prior to the appointed time for the meeting until the meeting is concluded or adjourned:

⁽a) copies of the Executive Directors' service agreements;

⁽b) copies of the terms and conditions of appointment of non-Executive Directors;

⁽c) a copy of the Articles of Association of the Company;

⁽d) a copy of the Rules of the proposed Diploma PLC 2011 Performance Share Plan being proposed in Resolution 12; and

⁽e) a copy of the Rules of the proposed Diploma PLC 2011 Share Matching Plan being proposed in Resolution 13.

Appendix 1

Summary of the Diploma PLC 2011 Performance Share Plan (the ''PSP'')

1. General

The operation of the PSP will be supervised by the Remuneration Committee of the Board (the ''Remuneration Committee'').

2. Eligibility

Any employee (including a Director) of the Company or any member of the Group who is required to devote substantially the whole of his working time to his employment or office shall be eligible to participate in the PSP.

3. Grant of Awards

An award may take the form of either:

• (a) an ''Allocation'', meaning a conditional award of a specified number of ordinary shares in the Company (''Shares''); or
• (b) an ''Option'' to acquire a specified number of Shares at an exercise price determined by the Remuneration Committee which may be a nil or nominal amount.

No payment is required for the grant of an award.

Awards may normally be granted within 42 days after the approval of the PSP by the Company in general meeting or within 42 days after the announcement of the Company's results for any period. Awards may also be granted at any other time at which the Remuneration Committee determines that there are exceptional circumstances which justify the grant of an award. No award may be granted later than ten years after the date on which the PSP is approved by the Company in general meeting nor at any time at which a dealing would not be permitted under the Model Code.

Subject to the limit set out in paragraph 7 below, awards may be satisfied by the issue of new Shares or by the transfer of existing Shares, either from treasury or otherwise.

4. Individual Limit

No award shall be granted to any individual if the aggregate market value of the Shares subject to that award together with the aggregate market value of any Shares committed to be issued or transferred pursuant to any other award made to him in the same financial year of the Company under the PSP would exceed a sum equal to his basic salary, or, where exceptional circumstances exist, 150 per cent. of basic salary. Comparative data suggests that an annual award level of 100 per cent. of salary remains appropriate for the Executive Directors, and the Remuneration Committee intends to continue to make grants to Executive Directors under the PSP of 100 per cent. of salary in normal circumstances.

5. Conditions on Vesting or Exercise

An award shall be granted subject to such performance condition or conditions as the Remuneration Committee in its discretion sees fit (the ''Performance Condition(s)'') which must be satisfied before an award may be exercised or vest. Performance will be normally measured over a period determined by the Remuneration Committee (the ''Performance Period''); the intention of the Remuneration Committee is for the Performance Period to be a period of three years. There will be no provision for re-testing.

The Remuneration Committee believes that the current long-term incentive plan has been effective, providing a focus on appropriate measures of long-term performance. Vesting of the award will continue to be determined 50 per cent. on EPS performance and 50 per cent. on TSR performance (both measured over three years); details of the targets which will apply to the initial awards made under the PSP are set out below.

EPS performance condition

The Remuneration Committee believes that EPS continues to be a key measure of long-term performance for the Company. Previously, the vesting schedule has operated with a threshold of RPI+3 per cent. p.a. (at which 30 per cent. of the award under that element vested) and full vesting of RPI+5 per cent. p.a. For the 2011-2013 cycle, a vesting range of RPI+3 per cent. p.a. up to RPI+12 per cent. p.a. will apply, as shown below.

3-year EPS growth	per cent. of award vesting
Below RPI+3 per cent. per annum	0 per cent.
RPI+3 per cent. per annum	30 per cent.
Between RPI+3 per cent. and RPI+12 per cent. per annum	pro rata
RPI+12 per cent. and above per annum	100 per cent.

TSR performance condition

The existing TSR performance condition provides for vesting between median and upper-quartile position against the constituents of the FTSE-250 (excluding Investment Trusts) index throughout the three year period. For awards under the PSP, the target for full vesting will be set as a percentage outperformance of the median of the constituents of the FTSE-250 (excluding Investment Trusts) index. TSR outperformance also ensures that the measurement is less sensitive to specific comparator TSRs and to the 'clustering' of companies within the index.

As previously, nothing will vest if the Company underperforms the median TSR and 30 per cent. of this element will vest for median performance.

The vesting schedule is as shown below.

3-year TSR	per cent. of award vesting
Below median	0 per cent.
Median	30 per cent.
Between median and median +12 per cent. per annum	pro rata
Median +12 per cent. per annum and above	100 per cent.

The Remuneration Committee will regularly monitor the continuing suitability of the Performance Condition(s) and may impose different conditions on awards granted in subsequent years having regard to prevailing market conditions. It is anticipated that the performance condition(s) applying to future awards would be similar in concept and similarly stretching to those which apply to the initial awards.

6. Dividend Accrual Payments

The Remuneration Committee may decide, on or before the grant of an Option, that, on exercise of that Option, the participant shall be entitled to receive, in addition to the Shares to which he then becomes entitled, a payment equal in value to the aggregate amount of the dividends (or, where the Remuneration Committee so determines, the market value of that number of Shares which could have been acquired by reinvesting the dividends) which would have been paid to the participant in respect of those Shares between the date on which the Option Period commences and the date on which the Option is first exercised if they had been beneficially owned by him over that period. The payment may be made in cash or in an equivalent number of Shares.

7. Overall Dilution Limit

No award may be granted under the PSP on any date if, as a result, either of the following limits would be exceeded:

(a) the aggregate number of Shares issued or transferred from treasury, or committed to be issued or transferred from treasury, pursuant to awards made under the PSP and pursuant to grants or appropriations made during the previous ten years under all other employee share schemes established by the Company would exceed ten per cent. of the issued ordinary share capital of the Company on that date; or

(b) the aggregate number of Shares issued or transferred from treasury, or committed to be issued or transferred from treasury, pursuant to awards made under the PSP and pursuant to grants or appropriations made during the previous ten years under all other discretionary employee share schemes established by the Company would exceed five per cent. of the issued ordinary share capital of the Company on that date.

8. Exercise of Awards

In normal circumstances, an Allocation may not vest nor an Option become exercisable unless the Performance Condition(s) have been satisfied at the end of the Performance Period and provided the participant remains employed by the Group and has not given notice of intention to resign. Having become exercisable, an Option may be exercised for a period determined by the Remuneration Committee but ending no later than the day preceding the tenth anniversary of its grant.

If a participant ceases to be employed within the Group before the expiry of the Performance Period by reason of:

• * death;
• * injury, ill-health or disability;
• * retirement;
• * the company employing the participant ceasing to be, or the business to which the participant's office or employment relates being transferred to a person who is not, a member of the Group; or
• * any other reason (apart from dishonesty, fraud, misconduct or any other circumstances justifying summary dismissal) and the Remuneration Committee in its discretion permits exercise or vesting;

an Allocation will vest and an Option will become exercisable and remain exercisable for a period of twelve months. The number of Shares which vest or over which Options are exercisable will, in these circumstances, be determined by reference to the extent to which the Performance Condition(s) have been fulfilled over the reduced Performance Period and will then, unless the Remuneration Committee determines it is appropriate in a particular case not to do so, be pro-rated according to the length of the reduced Performance Period when compared to the original Performance Period.

If a participant ceases to be employed within the Group for one of the reasons set out above on or after the expiry of the Performance Period, a subsisting Option may be exercised for a period of twelve months to the extent that the Performance Condition(s) have been fulfilled.

An award will, in any event, lapse on the tenth anniversary of its date of grant, if not previously vested or exercised.

9. Cash Alternative

The Remuneration Committee may determine that a cash alternative be paid in substitution for a right to acquire such number of vested Shares as the Remuneration Committee may decide. There may be deducted from any such payment such amounts (in respect of tax or similar liabilities) as may be required by law or as the Board may reasonably consider necessary or desirable.

10. Takeover, scheme of arrangement and liquidation

In the event of a takeover or scheme of arrangement or the voluntary winding-up of the Company occurring before the expiry of the Performance Period, an Allocation will vest and an Option will become exercisable and remain exercisable for a period of six months (or three months, in the case of a scheme of arrangement) or until the expiry of any compulsory acquisition period, if earlier. The number of Shares which vest or over which Options are exercisable will, in these circumstances, be determined by reference to the extent to which the Performance Condition(s) have been fulfilled over the reduced Performance Period and will then, unless the Remuneration Committee determines it is appropriate in a particular case not to do so, be pro-rated according to the length of the reduced Performance Period when compared to the original Performance Period.

If such an event takes place on or after the expiry of the Performance Period, a subsisting Option may be exercised for a period of six months (or three months, in the case of a scheme of arrangement) to the extent that the Performance Condition(s) have been fulfilled.

If such an event occurs, an award may also be released in exchange for an equivalent new award to be granted by any acquiring company, if the participant so wishes and the acquiring company agrees.

Where any such event occurs as part of an internal reorganisation of the Company, subsisting awards will be exchanged for new awards granted by the acquiring company unless such an offer is not forthcoming from the acquiring company in which case vesting or exercise as set out above will be permitted.

11. Variation of Share Capital

In the event of any variation in the ordinary share capital of the Company or a demerger, special dividend or other similar event which affects the market price of Shares to a material extent, such adjustments to the number of Shares subject to awards and the price at which they may be acquired may be made by the Remuneration Committee as it may determine to be appropriate.

12. Voting, Dividend and Other Rights

Until Options or Allocations are exercised or vest, participants have no voting or other rights in respect of the Shares subject to those awards.

Shares issued or transferred pursuant to the PSP will rank pari passu in all respects with Shares already in issue except that they will not rank for any dividend or other distribution paid or made by reference to a record date falling prior to the date of exercise or vesting of the relevant award.

Benefits obtained under the PSP shall not be pensionable. Awards are not assignable or transferable.

13. Administration and Amendment

The operation of the PSP will be supervised by the Remuneration Committee which may amend the PSP by resolution provided that:

• (a) prior approval of the Company in general meeting will be required for any amendment to the advantage of participants to those provisions of the PSP relating to eligibility, the limitations on the number of Shares, cash or other benefits subject to the PSP, a participant's maximum entitlement or to the basis for determining a participant's entitlement under the PSP and the adjustment thereof in the event of a variation in capital, except in the case of minor amendments to benefit the administration of the PSP and amendments to take account of changes in legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment for participants or for any member of the Group; and
• (b) no amendment may be made which would alter to the disadvantage of participants any rights already acquired by them under the PSP without the prior approval of a majority of the affected participants.

14. Overseas Plans

The Board may from time to time and without further formality establish further plans in overseas territories, any such plan to be similar to the PSP but modified to take account of local tax, exchange control or securities laws, regulation or practice. Shares made available under any such plan would count against any limits on overall or individual participation in the PSP save that only newly issued Shares or Shares transferred from treasury would count against the overall dilution limits.

15. Termination

The PSP may be terminated at any time by resolution of the Board or of the Company in general meeting and in any event no awards may be granted on or after the tenth anniversary of the date on which the PSP is approved by the Company in general meeting. Termination will not affect the outstanding rights of participants.

Appendix 2

Summary of the Diploma PLC 2011 Share Matching Plan (the ''SMP''):

1. General

The operation of the SMP will be supervised by the Remuneration Committee of the Board (the ''Remuneration Committee'').

2. Eligibility

Any employee (including a Director) of the Company or any member of the Group who is required to devote substantially the whole of his working time to his employment or office shall be eligible to participate in the SMP.

3. Grant of Awards

An award will only be granted to an employee who acquires or pledges ordinary shares (''Shares'') and may take the form of either:

• (a) a ''Allocation'', meaning a conditional award of a specified number of Shares; or
• (b) an ''Option'', to acquire a specified number of Shares at an exercise price determined by the Remuneration Committee which may be a nominal amount.

Participants will be invited to acquire or pledge Shares, which will be released at the end of the three-year performance period applying to the awards. The market value of the Shares acquired or pledged must not exceed 50 per cent. of a participant's basic salary (after tax). The maximum number of Shares over which an award may be granted is the whole number of Shares as have a market value at the date of grant equal to his gross Basic Salary.

Awards may normally be granted within 42 days after the approval of the SMP by the Company in general meeting or within 42 days after the announcement of the Company's results for any period. Awards may also be granted at any other time at which the Remuneration Committee determines that there are exceptional circumstances which justify the grant of an award. No award may be granted later than ten years after the date on which the SMP is approved by the Company in general meeting nor at any time at which a dealing would not be permitted under the Model Code.

Subject to the limit set out in paragraph 6 below, awards may be satisfied by the issue of new Shares or by the transfer of existing Shares, either from treasury or otherwise.

4. Conditions of Vesting or Exercise

An award shall be granted subject to such performance condition or conditions as the Remuneration Committee in its discretion sees fit (the ''Performance Condition(s)'') which must be satisfied before an award may be exercised or vest. Performance will be normally measured over a period determined by the Remuneration Committee (the ''Performance Period''); the intention of the Remuneration Committee is for the Performance Period to be a period of three years. There will be no provision for re-testing.

50 per cent. of an award will vest based on EPS performance, and the remaining 50 per cent. will vest based on TSR as a percentage outperformance of the median of the constituents of the FTSE-250 (excluding Investment Trusts) index.

In line with the aim to reward exceptional performance, the SMP is designed to offer moderate reward up to a level broadly equivalent to upper quartile performance (at which a 100 per cent. match will be earned on a gross basis), with maximum matching (200 per cent. on a gross basis) achieved for performance in excess of this. Assuming full participation at 50 per cent. of salary (on a net basis), the value of the maximum matching is therefore 100 per cent. of salary (on a gross basis).

EPS performance condition

The proposed vesting schedule is as follows:

3-year EPS growth	Matching award (per cent. matching)
Below RPI+3 per cent. per annum	0 per cent.
RPI+3 per cent. per annum	30 per cent.
Between RPI+3 per cent. and RPI+12 per cent. per annum	pro rata
RPI+12 per cent. per annum	100 per cent.
Between RPI+12 per cent. and RPI+15 per cent. per annum	pro rata
RPI+15 per cent. and above per annum	200 per cent.

TSR performance condition

The proposed vesting schedule is as follows:

3-year TSR	Matching award (per cent. matching)
Below median	0 per cent.
Median	30 per cent.
Between median and median+12 per cent. per annum	pro rata
Median +12 per cent. per annum	100 per cent.
Between median +12 per cent. and median +15 per cent. per annum	pro rata
Median +15 per cent. per annum	200 per cent.

The Remuneration Committee will regularly monitor the continuing suitability of the Performance Condition(s) and may impose different conditions on awards granted in subsequent years having regard to prevailing market conditions. It is anticipated that the performance condition(s) applying to future awards would be similar in concept and similarly stretching to those which apply to the initial awards.

5. Dividend Accrual Payments

The Remuneration Committee may decide, on or before the grant of an Option, that, on exercise of that Option, the participant shall be entitled to receive, in addition to the Shares to which he then becomes entitled, a payment equal in value to the aggregate amount of the dividends (or, where the Remuneration Committee so determines, the market value of that number of Shares which could have been acquired by reinvesting the dividends) which would have been paid to the participant in respect of those Shares between the date on which the Option Period commences and the date on which the Option is first exercised if they had been beneficially owned by him over that period. The payment may be made in cash or in an equivalent number of Shares.

6. Overall Dilution Limit

No award may be granted under the SMP on any date if, as a result, either of the following limits would be exceeded:

(a) the aggregate number of Shares issued or transferred from treasury, or committed to be issued or transferred from treasury, pursuant to awards made under the SMP and pursuant to grants or appropriations made during the previous ten years under all other employee share schemes established by the Company would exceed ten per cent. of the issued ordinary share capital of the Company on that date; or

(b) the aggregate number of Shares issued or transferred from treasury, or committed to be issued or transferred from treasury, pursuant to awards made under the SMP and pursuant to grants or appropriations made during the previous ten years under all other discretionary employee share schemes established by the Company would exceed five per cent. of the issued ordinary share capital of the Company on that date.

7. Exercise of Awards

In normal circumstances, an Allocation may not vest nor an Option become exercisable unless the Performance Condition(s) have been satisfied at the end of the Performance Period and provided the participant remains employed by the Group and has not given notice of intention to resign. Having become exercisable, an Option may be exercised for a period determined by the Remuneration Committee but ending no later than the day preceding the tenth anniversary of its grant.

If a participant ceases to be employed within the Group before the expiry of the Performance Period by reason of:

• * death;
• * injury, ill-health or disability;
• * retirement;
• * the company employing the participant ceasing to be, or the business to which the participant's office or employment relates being transferred to a person who is not, a member of the Group; or
• * any other reason (apart from dishonesty, fraud, misconduct or any other circumstances justifying summary dismissal) and the Remuneration Committee in its discretion permits exercise or vesting;

an Allocation will vest and an Option will become exercisable and remain exercisable for a period of twelve months. The number of Shares which vest or over which Options are exercisable will, in these circumstances, be determined by reference to the extent to which the Performance Condition(s) have been fulfilled over the reduced Performance Period and will then, unless the Remuneration Committee determines it is appropriate in a particular case no to do so, be pro-rated according to the length of the reduced Performance Period when compared to the original Performance Period.

If a participant ceases to be employed within the Group for one of the reasons set out above on or after the expiry of the Performance Period, a subsisting Option may be exercised for a period of twelve months to the extent that the Performance Condition(s) have been fulfilled.

An award will, in any event, lapse on the tenth anniversary of its date of grant, if not previously vested or exercised.

8. Cash Alternative

The Remuneration Committee may determine that a cash alternative be paid in substitution for a right to acquire such number of vested Shares as the Remuneration Committee may decide. There may be deducted from any such payment such amounts (in respect of tax or similar liabilities) as may be required by law or as the Board may reasonably consider necessary or desirable.

9. Takeover, scheme of arrangement and liquidation

In the event of a takeover or scheme of arrangement or the voluntary winding-up of the Company occurring before the expiry of the Performance Period, an Allocation will vest and an Option will become exercisable and remain exercisable for a period of one month or until the expiry of any compulsory acquisition period, if earlier. The number of Shares which vest or over which Options are exercisable will, in these circumstances, be determined by reference to the extent to which the Performance Condition(s) have been fulfilled over the reduced Performance Period and will then, unless the Remuneration Committee determines it is appropriate in a particular case not to do so, be pro-rated according to the length of the reduced Performance Period when compared to the original Performance Period.

If such an event takes place on or after the expiry of the Performance Period, a subsisting Option may be exercised for a period of one month to the extent that the Performance Condition(s) have been fulfilled.

If such an event occurs, an award may also be released in exchange for an equivalent new award to be granted by any acquiring company, if the participant so wishes and the acquiring company agrees.

Where any such event occurs as part of an internal reorganisation of the Company, subsisting awards will be exchanged for new awards granted by the acquiring company unless such an offer is not forthcoming from the acquiring company in which case vesting or exercise as set out above will be permitted.

10. Variation of Capital

In the event of any variation in the ordinary share capital of the Company or a demerger, special dividend or other similar event which affects the market price of Shares to a material extent, such adjustments to the number of Shares subject to awards and the price at which they may be acquired may be made by the Remuneration Committee as it may determine to be appropriate.

11. Voting, Dividend and Other Rights

Until Options or Allocations are exercised or vest, participants have no voting or other rights in respect of the Shares subject to those awards.

Shares issued or transferred pursuant to the SMP will rank pari passu in all respects with Shares already in issue except that they will not rank for any dividend or other distribution paid or made by reference to a record date falling prior to the date of exercise or vesting of the relevant award.

Benefits obtained under the SMP shall not be pensionable. Awards are not assignable or transferable.

12. Administration and Amendment

The operation of the SMP will be supervised by the Remuneration Committee which may amend the SMP by resolution provided that:

• (a) prior approval of the Company in general meeting will be required for any amendment to the advantage of participants to those provisions of the SMP relating to eligibility, the limitations on the number of Shares, cash or other benefits subject to the SMP, a participant's maximum entitlement or to the basis for determining a participant's entitlement under the SMP and the adjustment thereof in the event of a variation in capital, except in the case of minor amendments to benefit the administration of the SMP and amendments to take account of changes in legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment for participants or for any member of the Group; and
• (b) no amendment may be made which would alter to the disadvantage of participants any rights already acquired by them under the SMP without the prior approval of a majority of the affected participants.

13. Overseas Plans

The Board may from time to time and without further formality establish further plans in overseas territories, any such plan to be similar to the SMP but modified to take account of local tax, exchange control or securities laws, regulation or practice. Shares made available under any such plan would count against any limits on overall or individual participation in the SMP save that only newly issued Shares or Shares transferred from treasury would count against the overall dilution limits.

14. Termination

The SMP may be terminated at any time by resolution of the Board or of the Company in general meeting and in any event no awards may be granted on or after the tenth anniversary of the date on which the SMP is approved by the Company in general meeting. Termination will not affect the outstanding rights of participants.