REMUNERATION POLICY
The Nominations and Remuneration Committee (the 'Committee') believes that the individual contributions made by the executive directors are fundamental to the successful performance of the company.

The Committee has adopted a remuneration policy (which will continue to apply during 2003-2004) with the following objectives:

(a)	performance-related remuneration should seek to align the interests of executive directors with those of shareholders;
(b)	a significant proportion of remuneration should be based on operational and financial performance both in the short and long term together with the individual contributions made by the executive directors; and
(c)	the remuneration packages for executive directors should be competitive in terms of market practice.

Although the Committee has no current plans to change this policy, changes are possible because the company's remuneration policy needs to be sufficiently flexible to take account of changes in the company's business environment and in remuneration practice.

The following graph shows the company's 'total shareholder return' (TSR) performance over the past five years. As required by the Directors' Remuneration Report Regulations 2002 (the 'Regulations'), the company's TSR is compared to a broad equity market index. The index chosen here is the FTSE 100 Index which provides an effective indication of the TSR performance of other leading UK-listed companies.

ELEMENTS OF REMUNERATION
Executive directors' remuneration comprises: basic salary, benefits in kind, annual bonus and pension benefits. In addition, executive directors and senior executives participate in certain share based incentive schemes, comprising the Smiths Industries 1982 SAYE Share Option Scheme (the '1982 SAYE Scheme'), the Smiths Industries 1995 Executive Share Option Scheme (the '1995 Scheme') and the Smiths Industries Senior Executive Deferred Share Scheme (the 'DSS'). The annual bonus element and participation in the DSS, which provides for a share match (see below), and in the 1995 Scheme, are linked to performance, and the Committee regards them as key elements in the executive directors' remuneration package.

Options granted under the 1995 Scheme may be exercised after three years subject to achievement of performance targets. For the last grant of options, on 2 October 2002, and for anticipated future grants the performance requirement is that the growth in the company's normalised earnings per share over the three financial years beginning immediately prior to the option grant must exceed the increase in the UK Retail Prices Index over the same period by 3% p.a. (for options up to one times base salary) and by 4% p.a. (for the excess up to two times base salary). The Committee selected this performance condition for the 1995 Scheme because it serves to align directors' interests with those of shareholders by linking the reward available to participants with the achievement of significant earnings growth by the company.

If a performance requirement is not satisfied at the end of the third year, the performance period may be extended for up to two further years so that performance is tested over a four year period at the end of the fourth year and a five year period at the end of the fifth year.

Share options granted under the 1982 SAYE Scheme are linked to a savings contract and are not subject to performance targets.

The value of the matching share element under the DSS is derived from annual bonus, and other corporate financial, criteria and is therefore performance-related. The vesting of matching shares is not dependent on satisfaction of a further performance condition.

SALARY AND BENEFITS IN KIND
Salaries are reviewed annually for each director. The Committee takes into account individual performance and experience, the size and nature of the role, the relative performance of the company, pay policy within the company and the salaries in comparable industrial companies. Benefits include a fully expensed company car (or an allowance in lieu), health insurance and, where appropriate, relocation and education expenses.

BONUSES
Executive directors are eligible to participate in an annual bonus scheme which is based upon a combination of corporate financial goals and individual objectives which are geared to the achievement of the group's strategic goals. The majority of the annual bonus opportunity, which is capped, is based upon the corporate financial element.

Under the DSS, executive directors may elect to use their after-tax bonus to acquire the company's shares at the prevailing market price. Provided that a director retains them for three years he may exercise an option to acquire a number of matching shares for a nominal sum at the end of the three year period.

The number of matching shares that may be awarded is determined by the Committee at the end of the year in which the bonus is earned by reference to annual bonus, and other corporate financial, criteria. The number of matching shares awarded may be up to, but no more than, 100% of the number of shares the executive director acquires with his after-tax bonus. In respect of bonus earned in the year to 31 July 2003 the full amount of the shares so acquired is available for matching.

PENSIONS
The company operates a number of different pension arrangements for executive directors, generally reflecting the individual's pension arrangements at the time he was appointed to the Board. In some cases, the company pays monthly salary supplements to enable the director to make his own pension provision. For other directors, final salary schemes provide a pension of up to two-thirds of final pensionable salary. Where Inland Revenue limits apply, the difference between the pension payable on the cap and the target pension is, after taking into account any retained benefits from previous employment, provided by the company. Directors' annual bonus payments and any gains under share option schemes are not pensionable.

REMUNERATION The total remuneration of directors, excluding the value of shares to which certain directors may become entitled under the DSS and also defined benefit pension arrangements, was as follows:
	2003 £000	2002 £000
Fees, salaries and benefits	3,639	3,360
Performance-related bonuses	1,545	943
Gain from exercise of share options	7	74
Incremental gain/(loss) from deferred share scheme exercises	(63)	(40)
Payments in lieu of pension contribution	591	556
	5,719	4,893

The emoluments of the directors are set out below:
	Fees/salary		Benefits	Bonus	Payments in lieu of pension contri– bution	Total emoluments		Deferred share scheme contri– butions	Total
	2003 £000	2002 £000	2003 £000	2003 £000	2003 £000	2003 £000	2002 £000	2003 £000	2003 £000	2002 £000
Chairman
K Orrell-Jones	210	180	27			237	199		237	199
Chief executive
K O Butler-Wheelhouse	735	700	51	528	368	1,682	1,444	214	1,896	1,707
Executive directors
J Ferrie	355	320	65	222	142	784	642	76	860	794
L H N Kinet	325	310	208	91	81	705	584	16	721	584
J Langston	325	310	32	211		568	447	66	634	447
D P Lillycrop	310	300	54	166		530	453	64	594	594
E Lindh	325	300	24	144		493	392	36	529	471
A M Thomson	395	360	33	183		611	513	77	688	626
Non-executive directors
Sir Nigel Broomfield	30	30				30	30		30	30
Sir Colin Chandler	65	65				65	65		65	65
J M Hignett (retired 12/11/02)	10	30				10	30		10	30
J M Horn-Smith	30	30				30	30		30	30
R W O'Leary	30	30				30	30		30	30
	3,145	2,965	494	1,545	591	5,775	4,859	549	6,324	5,607
1. The deferred share scheme amounts represent shares to which certain directors may become entitled and relate to the previous year's bonus. These have been shown separately from 'Total emoluments' in order to comply with the Regulations. 2. Benefits for Dr Ferrie and Mr Kinet include payments related to their relocation to the United Kingdom from the United States.

PENSIONS
	Age at 31 July 2003	Accrued entitle– ment at 31 July 2002 £000	Directors' contri– butions during the year £000	Additional pension earned during the year (excluding any increase for inflation) £000	Transfer value of accrued benefits at 31 July 2003 (A) £000	Transfer value of accrued benefits at 31 July 2002 (B) £000	The amount of (A – B) less contri– butions made by the director in 2003 £000	Accrued entitle– ment at 31 July 2003 £000
J Langston	53	108	5	15	1,802	1,248	549	125
D P Lillycrop	47	95	5	9	1,155	784	366	105
E Lindh	58	201	16	13	3,853	3,104	733	218
A M Thomson	56	118	20	32	2,542	1,669	853	152
An executive director's normal retirement age is 60. An early retirement pension, based on actual service completed, may be paid after age 50 and may be subject to a reduction on account of early payment. On death a spouse's pension of two-thirds of the director's pension (or for death-in-service his prospective pension at age 60) is payable. All pensions in excess of the Guaranteed Minimum Pension (GMP) are guaranteed to increase at the lesser of (i) in the case of Messrs Lindh and Thomson, 5% p.a. compound and, in the case of Messrs Langston and Lillycrop, 7% p.a. compound and (ii) the annual increase in the Retail Prices Index. There has, however, been a long-standing practice of granting additional discretionary increases on pensions in excess of the GMP to bring them into line with price inflation.

SERVICE CONTRACTS
The company's policy is that executive directors are employed on terms which include a one year rolling period of notice and provision for the payment of predetermined damages in the event of termination of employment in certain circumstances.

NON-EXECUTIVE DIRECTORS
Non-executive directors were paid a total of £402,000 (including £375,000 in fees) in the year to 31 July 2003. Their remuneration is determined by the Board in accordance with the Articles of Association. They are not eligible for bonuses or participation in share schemes and no pension contributions are made on their behalf. The non-executive directors, including Mr Horn-Smith who is to be proposed for re-election at the Annual General Meeting, serve the company under letters of appointment and do not have contracts of service or contracts for service.