Annual Report and Accounts 2008

Transcription

1 Diploma PLC Aual Report ad Accouts 2008 Diploma PLC Aual Report ad Accouts 2008

2 Sectio 1 Group Overview Sectio 2 Busiess Review Other Regulatory Statemets Sectio 3 Fiacial Statemets

3 1 Diploma PLC Aual Report ad Accouts 2008 Group Overview Fiacial Highlights Diploma PLC is a iteratioal group of busiesses supplyig specialised techical products ad services Year eded 30 September m m Reveue % Operatig profit* % Operatig margi* 15.8% 15.7% Adjusted profit before tax* % Profit before tax % Free cash flow % Pece Pece Adjusted earigs per share* % Basic earigs per share % Total divideds per share % Free cash flow per share % * Before amortisatio of acquisitio itagible assets Before fair value remeasuremets Comparative umbers restated to adjust for the impact of the Jauary 2008 bous issue Note: Diploma PLC uses alterative performace measures as key fiacial idicators to assess the uderlyig performace of the Group. These iclude adjusted profit before tax, adjusted earigs per share ad free cash flow. The arrative o pages 2 to 45 is based o these alterative measures ad a explaatio is set out i ote 2 to the cosolidated fiacial statemets.

4 2 Diploma PLC Aual Report ad Accouts 2008 Group Overview What makes us differet Our stable reveue growth is achieved through the focus o essetial products ad services fuded by customers operatig, rather tha capital budgets Read more: page 8 Our attractive margis are sustaied through the quality of customer service, the depth of techical support ad value addig activities Read more: page 10 I the operatig busiesses, strog committed maagemet teams execute well formulated developmet strategies Read more: page 12

5 3 Diploma PLC Aual Report ad Accouts 2008 Group Overview Over five years, we have delivered profit growth of 21% p.a. through a combiatio of steady orgaic growth ad carefully selected, value ehacig acquisitios Read more: page 14 A ugeared balace sheet ad strog cash flow have fuded this growth strategy while providig healthy divideds Read more: page 16

6 4 Diploma PLC Aual Report ad Accouts 2008 Group Overview Chairma s Statemet Aother year of strog earigs growth ad strog free cash flow demostrates the resiliece of the Group The Diploma Group cotiued to make strog progress durig 2008, agaist a backgroud of a weakeig ecoomic eviromet. The acquisitios completed towards the ed of the previous year cotributed to aother year of double digit growth i earigs ad strog cash flow. Orgaic growth was also achieved i challegig markets; o a comparable ad costat currecy basis, the uderlyig growth i both reveue ad operatig profit was a creditable 3%. These positive results agai highlight the ability of the Group to achieve stable growth ad attractive margis by focusig o markets where the demad is fuded by operatig budgets which are less impacted by ecoomic cycles tha capital budgets. Results I 2008, Group reveue icreased by 22% to 172.3m (2007: 140.7m) ad operatig profit, before the amortisatio of acquisitio itagible assets, icreased by 24% to 27.3m (2007: 22.1m). Operatig margis remaied stable at 15.8% (2007: 15.7%) despite a umber of ivestmets i ew growth iitiatives durig the year. The results beefited from currecy gais to reveue ( 4.8m) ad operatig profits ( 1.0m) o traslatio of the results of the overseas busiesses, as UK sterlig cotiued to weake agaist the major currecies durig the year. Net fiace icome reduced by 1.0m to 0.2m (2007: 1.2m) followig the substatial ivestmet i acquisitios at the ed of the previous year. Adjusted profit before tax icreased by 18% to 27.5m (2007: 23.3m); IFRS profit before tax was 21.8m (2007: 22.3m) reflectig the impact of amortisatio of acquisitio itagible assets ad fair value remeasuremets of future obligatios to acquire miority iterests. Adjusted earigs per share icreased by 17% to 16.4p (2007: 14.0p) ad basic earigs per share were 11.8p (2007: 12.7p). The uderlyig stregth of the Group is demostrated by aother year of strog cash flow geeratio. Free cash flow icreased by 36% to 18.0m (2007: 13.2m) beefitig from tight cotrol of workig capital ad lower capital expediture of 1.9m (2007: 2.2m). Expediture o acquisitios durig 2008 was more modest tha last year at 7.9m (2007: 31.6m). After returig 6.9m i 2008 (2007: 5.4m) to shareholders i the form of divideds, cash fuds at 30 September 2008 icreased by 3.3m to 15.7m (2007: 12.4m). Divideds I the Iterim Report, the Board idicated that i light of the icreased scale of the Group's activities ad the cotiuig strog free cash flow it had decided to target divided cover towards 2.0, based o adjusted earigs per share. The Directors are therefore recommedig a sigificat icrease i the fial divided for 2008 of 1.4p to 5.0p (2007: 3.6p). This icreases the total divided paymet for the year by 39% to 7.5p (2007: 5.4p). The icreased fial divided will be paid o 21 Jauary 2009 to shareholders o the Register o 28 November The Board iteds to cotiue with its policy of growig divideds i lie with adjusted earigs per share, whilst applyig the balace of the cash flow to stregthe the Group's busiesses. Fiacial ad Huma Resources The Group eds the year i a strog fiacial positio ad with the resources i place to tackle the challeges ahead. We have cash fuds of 15.7m, workig capital facilities of 5.0m ad committed bak facilities of 20.0m. This strog balace sheet provides a secure platform to progress our strategy. Our huma resources are equally strog. The eergy ad commitmet of our people is a critical factor i the success of our Group ad are particularly importat i the curret ucertai eviromet. O behalf of the Board, I would like to thak our employees for their commitmet ad efforts durig

7 5 Diploma PLC Aual Report ad Accouts 2008 Group Overview this year. I am cofidet of their ability to respod to the ew challeges i the comig year, as we will ievitably have to face tougher tradig coditios. Outlook The Board remais committed to growig the Group through a combiatio of orgaic growth ad by acquisitio. The Group has a strog balace sheet, committed bak facilities ad busiesses that cosistetly geerate strog cash flows each year. I the curret ucertai market ad ecoomic coditios, the Group draws stregth from its focus o essetial products ad services, fuded by customers operatig rather tha capital budgets. Margis are sustaied by the service levels provided ad operatig costs are, to a large extet, variable. Cash flow remais strog through tight maagemet of workig capital. As price expectatios of potetial target compaies become more realistic there should be good opportuities to make value-ehacig acquisitios. With acquisitio opportuities addig to modest orgaic growth, the Board is cofidet of makig further progress i the year. Adjusted PBT ( m) Adjusted EPS (pece) Joh Reocks Chairma 17 November 2008

8 6 Diploma PLC Aual Report ad Accouts 2008 Group Overview Chief Executive s Review The Group cotiues to execute its strategy ad deliver agaist Key Performace Idicators The Group comprises a umber of high quality, specialised busiesses supplyig techical products ad services. The commo characteristics of these busiesses are: Stable reveue growth, achieved through a focus o essetial products ad services, fuded by customers' operatig rather tha capital budgets. Attractive margis, sustaied through the quality of customer service, the depth of techical support ad value addig activities. Strog committed maagemet teams i the operatig busiesses, executig well formulated developmet strategies. Over five years, the Group has grow reveues by 17% p.a. ad operatig profits, before amortisatio of acquisitio itagible assets, by 23% p.a., broadly half through orgaic growth ad half through acquisitios. A ugeared balace sheet ad strog cashflow have fuded this growth strategy, while providig healthy ad progressive divideds. Strategic Developmets The Group's strategic objective is to build more substatial, broader based busiesses i its chose sectors through a combiatio of orgaic growth ad acquisitio. Further progress was made i the year i executig this strategy i each of the three sectors. Life Scieces The strategy i this sector has bee to broade the customer ad geographic scope to reduce depedece o Life Sciece Research activities i the UK. The acquisitio last year of AMT i Caada ad its subsequet strog growth this year, has sigificatly advaced our positio i Cliical markets. The earlier acquisitio of CBISS, also provided impetus to the further growth i the year of the Evirometal busiess. I 2008, the Caadia Healthcare busiesses have grow substatially to accout for ca. 50% of reveues ad the Evirometal busiess for ca. 25% of reveues. Life Scieces research accouted for the balace of 25%, which compares with 80% five years ago. The broadeig of sector activities has also itroduced greater stability to reveues. Multi-year customer cotracts for cosumables ad service ow uderpi some 60% of sector reveues ad log term distributio agreemets are i place to secure quality maufacturer braded products. The smaller acquisitios of Hitek i February 2008 ad Meditech i Caada (acquired after the year ed) have opeed up further growth opportuities i related market segmets. Seals The core busiess i this sector is the ext day delivery of seals ad seal kits used i the repair ad maiteace of heavy mobile machiery. Through a combiatio of acquisitios ad ivestmet i broadeig the product rage ad customer base, the sector busiesses have established a leadig positio i the Seals Aftermarket i North America. The Aftermarket focus has esured relatively stable reveue growth ad the icreased scale has secured attractive margis. Sigificat growth potetial remais i the core busiess i North America, but iitiatives are also i process to exted the scope of the busiess ito idustrial OEMs ad to expad iteratioally. The acquisitio last year of M Seals cotributed i both dimesios; this year it has achieved sigificat growth i Swede ad Chia ad geerally i the wid turbie idustry. The acquisitio of Sijders Egieerig i the Netherlads i Jue 2008 was a further importat step i the developmet of a Aftermarket Seals busiess i Europe. Cotrols The strategy i the Cotrols sector is to focus o more specialised, techology drive segmets of the market that have bee more buoyat tha the broader idustrial ecoomies i which they operate. The core busiesses i this sector have established strog positios i supplyig ito idustries icludig Aerospace, Military & Marie, Motorsport, Automotive Diagostics ad Medical Equipmet. The acquisitio last year of Cabletec, has expaded the products offered by addig a rage of maufactured products icludig bodig leads which this year achieved EN4199 ad Airbus ASNE approvals. Advaces were also made this year i establishig stroger positios i the Power Geeratio ad Rail idustries. I Motorsport, a ew satellite operatio was established i North Carolia to focus o the US Nascar series ad further advaces were made i Asia markets. With 90% of sector reveues still geerated i the UK ad Germay, further opportuities to expad the geographic scope are beig pursued. Key Performace Idicators The pricipal metrics used i measurig Group performace over the loger term are growth i adjusted earigs per share ( EPS ) ad total shareholder retur ( TSR ). Adjusted EPS has grow by a average of 21% p.a. over the last five years; over the same period TSR has grow by 113% p.a. compared with growth of 64% i the FTSE 250 idex, as show o page 41 of this Report.

9 7 Diploma PLC Aual Report ad Accouts 2008 Group Overview The Group also uses four fiacial key performace idicators ( KPIs ) as measures i icetive programmes at Group ad operatig busiess levels. Performace agaist these KPIs is summarised below, with more detailed defiitios ad year by year data, set out withi the Busiess Review o page 23. Adjusted Profit Before Tax ( PBT ) I 2008, the Group's adjusted PBT icreased by 18% to 27.5m (2007: 23.3m). This cotiued the growth tred over the last five years, durig which period adjusted PBT has grow at a average rate of 21% p.a. This has bee uder-pied by a average 23% p.a. growth i operatig profit, before fiace icome. Operatig Margi Over the last five years, the Group's operatig margi has icreased steadily from ca. 12% to the curret year level of 15.8% (2007: 15.7%). Gross margis have o average remaied very stable i each of the Group's sectors. At the same time, acquisitios ad orgaic growth have added scale to each of the Group's busiesses; the resultig operatioal leverage uderpis the improvemet i operatig margis. Life Scieces Seals Cotrols Reveue by Sector ( m) Life Scieces 62.1 Seals 42.6 Cotrols 67.6 Operatig Profit by Sector ( m) Life Scieces 9.6 Seals 6.7 Cotrols 11.0 Free Cash Flow The Group is strogly cash geerative. Over the last five years, the Group has geerated a robust free cash flow averagig 12.2m p.a. represetig 87% of average adjusted profit after tax. I 2008, this tred cotiued with free cash flow icreasig by 43% to 18.0m (2007: 12.6m), represetig 92% of adjusted profit after tax. This performace is before accoutig for the oe-off proceeds from the phased sales of surplus lad i Stamford, which have geerated a additioal 20.4m sice Retur o Tradig Capital Employed Retur o Tradig Capital Employed ( ROTCE ) is a measure of the retur that the Group makes o the total resources ivested i the busiesses. It is calculated as operatig profit as a percetage of tradig capital employed, icludig all goodwill ad acquired itagible assets. A pre-tax threshold of 20% has bee set for ROTCE which is broadly cosistet with the Group's post tax IRR measure of 13% for capital project appraisal. I each of the last five years, ROTCE has remaied above 20%; i 2008, the impact of the recetly acquired busiesses has resulted i this measure reducig to 21.0% (2007: 24.2%), but still comfortably above the threshold of 20%. Reveue by destiatio Uited Kigdom 38% North America 34% Cotietal Europe 23% Rest of World 5% Bruce Thompso Chief Executive Officer 17 November 2008

10 8 Diploma PLC Aual Report ad Accouts 2008 Group Overview Stable Reveue Growth We aim to achieve stable reveue growth by focusig o markets where the demad is fuded by operatig budgets which are less impacted by ecoomic cycles tha capital budgets. A high proportio of our reveues are geerated from cosumable products ad service cotracts ad i may cases the products will be used i repair, maiteace ad refurbishmet applicatios, rather tha origial equipmet maufacture. Where public sector fudig or regulatio is ivolved, year o year chages i fudig may also be less dramatic. This has proved to be the case i recet years i Healthcare, Rail, Power Geeratio, Defece ad Evirometal idustries which have bee relatively isulated from ecoomic cycles. Our busiesses also gai protectio through offerig specialised products ad services, ofte used i techically demadig applicatios. This defeds agaist customers quickly switchig busiess to achieve better pricig whe markets tur dow. Markets such as Aerospace, Motorsport ad Medical equipmet, have proved to be more buoyat tha the geeral idustrial ecoomy. Five Year Reveue Growth Reveue ( m) % p.a. total growth Our objective is to grow orgaically at a rate higher tha GDP growth the target is ca. 5% p.a. over the ecoomic cycle. Acquisitios cotribute to the higher growth rates achieved average of 17% p.a. over five years.

11 9 Diploma PLC Aual Report ad Accouts 2008 Group Overview Our stable reveue growth is achieved through the focus o essetial products ad services fuded by customers operatig, rather tha capital budgets

12 10 Diploma PLC Aual Report ad Accouts 2008 Group Overview Attractive Margis Our attractive margis are sustaied over time by providig a rage of services to our customers which they value ad are therefore prepared to pay a premium for. Such services fall broadly ito three categories customer service, techical support ad value addig activities. Customer service ca be for example the delivery of products held i ivetory o a ext day basis. Techical support is ofte provided by helpig customers desig the products ito their specific applicatios. Value addig activities are services such as kittig or assembly, which the customers would have to pay someoe else to provide, or they would have to ivest i their ow resources. If real value is ot provided, margis will erode over time. The evidece that we are deliverig value lies i our gross margis which i specific product/market segmets are very stable over time. Movemets i gross margi pricipally arise due to chages i the mix of busiess or short term currecy movemets. Operatig Margi (%) 14.8% 15.1% 15.7% 15.8% Target Target 12.2% Operatig margi is the ratio of adjusted operatig profit to reveues. Scale ecoomies ad ivestmet have raised the sustaiable level ad the target has icreased from 12% to 15%.

13 11 Diploma PLC Aual Report ad Accouts 2008 Group Overview Our attractive margis are sustaied through the quality of customer service, the depth of techical support ad value addig activities

14 12 Diploma PLC Aual Report ad Accouts 2008 Group Overview Strog Committed Maagemet Our orgaisatioal philosophy withi Diploma, is to develop strog, self-stadig maagemet teams i the operatig busiesses, committed to ad rewarded accordig to the short ad log term success of their busiesses. Our small corporate team focuses o strategy ad fiacial cotrol. The developmet of strog maagers ad maagemet teams remais a priority for us ad is key to the successful implemetatio of our strategies. We eed to maitai ad develop a group of maagers with the potetial to maage aggressive growth strategies. Importatly they must be able to motivate their staff ad egeder i them the same commitmet. To achieve this we cocetrate o esurig a challegig work eviromet ad appropriate reward systems. Balaced compesatio packages are a combiatio of competitive salaries, aual bouses ad log term icetive plas targeted at the idividual busiess level. The total cadre of ca. 50 seior maagers i the operatig busiesses, demostrate a good bled of eergy, ambitio ad experiece. The average age of these maagers is 44 ad they have a average legth of service withi their compaies of 10 years. Key statistics for the broader workforce are summarised below. Key Employee Statistics Number of employees Males as % of total Average legth of service (yrs) Average staff turover Sick days lost per perso 30 September % % September % % 2.9

15 13 Diploma PLC Aual Report ad Accouts 2008 Group Overview I the operatig busiesses, strog committed maagemet teams execute well formulated developmet strategies

16 14 Diploma PLC Aual Report ad Accouts 2008 Group Overview Value Ehacig Acquisitios To complemet our orgaic growth strategy, we make selective acquisitios to accelerate growth ad take us ito ew but related markets. Prospective acquisitios should be sales ad marketig led with strog customer relatioships ad a secure supply of quality, differetiated products. They should have capable maagemet, ad the potetial for profitable growth ad cash geeratio. A competitive advatage we have i makig acquisitios is our flexibility i structurig trasactios. I may of our medium sized acquisitios, where we are extedig ito ew markets or geographies, we have acquired less tha 100% of the busiess. I these cases, we have left ower maagers with a miority stake i the busiess (up to 25%), with put ad call optios exercisable over 3-5 year periods. This allows vedors to remai i the busiesses with a large part of the value crystallised, but still with the potetial for future gai. For us, this reduces risk ad gives us additioal cofidece i the quality of the acquisitio. The Group s robust balace sheet, supported by strog ad cosistet operatig cash flow, give us the resources to support a active acquisitio strategy. Acquisitio Overview Life Scieces Somage CBISS AMT Hitek Meditech Seals HKX M Seals Sijders Egieerig Cotrols Cabletec

17 15 Diploma PLC Aual Report ad Accouts 2008 Group Overview Over five years, we have delivered profit growth of 21% p.a. through a combiatio of steady orgaic growth ad carefully selected, value ehacig acquisitios

18 16 Diploma PLC Aual Report ad Accouts 2008 Group Overview Strog Cash Flow Our operatig busiesses are strogly cash geerative. Oce the busiesses have achieved a certai critical mass, they ca geerally icrease reveues without a sigificat icrease i workig capital. Our busiesses are ot particularly capital itesive, with the pricipal fixed assets beig IT systems, office ad warehouse facilities. Sigificat ivestmets are made periodically i IT system up-grades ad facility expasios, but aual capital expediture would typically be lower tha the depreciatio charge over the busiess cycle. Our threshold for coversio of adjusted profit after tax ito free cash flow is 60%, but over the last five years we have achieved a average coversio rate well i excess of 80%. I recet years, this strog cash flow from the operatig busiesses has bee supplemeted by the phased sale of certai surplus lad i Stamford, geeratig additioal fuds of ca. 20m over a five year period. The total cash flow, after divided paymets ad acquisitios, has left us with a strog, ugeared balace sheet. This provides the fiacial resources to fud our growth strategy, while providig healthy ad progressive divided paymets. Free cash flow* (% of adjusted PAT) 95% 91% 92% 78% 59% *Excludes Stamford lad proceeds 60% threshold Free cash flow is after tax, but before divideds ad acquisitios. Proceeds from the sale of surplus lad i Stamford have bee excluded. The target is to covert a miimum 60% of adjusted profit after tax ( PAT ) to free cash flow.

19 17 Diploma PLC Aual Report ad Accouts 2008 Group Overview A ugeared balace sheet ad strog cash flow have fuded this growth strategy while providig healthy divideds

20 18 Diploma PLC Aual Report ad Accouts 2008 Group Overview Directors ad Advisors Our experieced Board focuses o strategy, fiacial cotrol ad risk maagemet. 1. I Hederso (52) Chief Operatig Officer Joied the Board as a Director i He was previously a Director of Glechewto plc ad ANC Holdigs Limited. 2. NP Ligwood ACA (49) Group Fiace Director ad Compay Secretary Joied the Compay i Jue 2001 ad appoited Group Fiace Director o 3 July Prior to joiig Diploma, he was Group Fiacial Cotroller of Uigate PLC, havig previously qualified with Price Waterhouse, Lodo * Member of the Remueratio Committee Member of the Audit Committee Member of the Nomiatio Committee 5 6

21 19 Diploma PLC Aual Report ad Accouts 2008 Group Overview 3. BM Thompso (53) Chief Executive Officer Joied the Board i 1994 ad appoited Chief Executive Officer i He started his career i the automotive idustry, first as a desig egieer ad the i marketig. Prior to joiig Diploma, he was Director of Arthur D Little Ic s Techology Maagemet Practice i the Uited States. 4. IM Grice (55) * No-Executive Joied the Board i Jauary He is Chairma of Pims Group Limited ad a o-executive Director of Joh Graham Holdigs Limited. He was Group Chief Executive of Alfred McAlpie plc util February JL Reocks FCA (63) * No-Executive Chairma Joied the Board i July He is Chairma of Nestor Healthcare plc ad Itelliget Eergy plc, Deputy Chairma of Imarsat plc ad a o-executive Director of Babcock Iteratioal Group plc. He has previously bee Executive Director Fiace at Corus Group Plc ad Fiace Director of PowerGe Plc ad Smith & Nephew plc. 6. JW Matthews FCA (64) * No-Executive Joied the Board i He is Chairma of Regus Group plc ad a o-executive Director of Mierva plc ad SDL plc. He has previously bee Chairma of Crest Nicholso plc ad was a Maagig Director of Couty NatWest ad Deputy Chairma/Deputy Chief Executive of Beazer plc. Ivestmet Bakers: Lazard 50 Stratto Street Lodo W1J 8LL Corporate Stockbrokers: Pamure Gordo & Co Moorgate Hall, 155 Moorgate Lodo EC2N 6XB Solicitors: Ashurst Broadwalk House 5 Appold Street Lodo EC2A 2HA Auditors: Deloitte ad Touche LLP Stoecutter Court 1 Stoecutter Street Lodo EC4A 4TR Bakers: Royal Bak of Scotlad Threadeedle Street Lodo EC2R 8LA

22 20 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets Sectio 2 Regulatory Statemets Busiess Review Strategy ad Performace 21 Sector Review: Life Scieces 24 Sector Review: Seals 26 Sector Review: Cotrols 28 Fiace Review 30 Risk ad Ucertaities 32 Corporate ad Social Resposibility 35 Other Regulatory Statemets Directors Report 36 Corporate Goverace 37 Remueratio Report 41

23 21 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets Strategy ad Performace Group Strategy The Group comprises a umber of high quality, specialised busiesses supplyig techical products ad services ad operatig i the three broad idustry sectors of Life Scieces, Seals ad Cotrols. The busiesses aim to achieve stable reveue growth through the focus o essetial products ad services fuded by customers operatig, rather tha capital budgets. Attractive margis are sustaied through the quality of customer service, depth of techical support ad value addig activities. The Group s strategic objective is to build more substatial, broader based busiesses i the chose sectors through a combiatio of orgaic growth ad acquisitio. There are a umber of core themes which uderpi the strategies of the Group ad its operatig busiesses: Focus o growth market segmets Our busiesses are ecouraged ot to settle for growth at the sector average or to be drive uquestioigly by busiess cycles. The challege is to idetify ad focus o the more attractive market segmets where more rapid or cosistet growth is achievable. This ca be achieved by either orgaic growth iitiatives, or acquisitio, or a combiatio of both. I Life Scieces, growth i the origial core Research market i the UK has slowed as the major Pharmaceutical ad Biotechology compaies have restructured their laboratory operatios ad focused o cost cotrol. I respose we have developed ew busiesses i the growig Evirometal ad Cliical markets ad have broadeed the geographic scope. I 2008, the Caadia Healthcare ad Evirometal busiesses together cotributed ca. 75% of sector reveues ad more tha 60% of reveues were geerated outside the UK. I Seals, the busiesses have bee traditioally focused o North America ad o the Aftermarket. With a series of orgaic ivestmets ad acquisitios, we have exteded the busiess ito a broader rage of iteratioal markets ad ito idustrial OEMs. The acquisitio of M Seals i 2007 ad Sijders Egieerig i 2008 ad the ivestmets i Europe ad Chia have cotiued this process. I 2008, 40% of sector reveues were geerated i iteratioal markets outside North America ad idustrial OEMs ow accout for ca. 25% of sector reveues. I Cotrols, the busiesses have achieved stroger growth tha the geeral idustrial ecoomies i which they operate, by focusig o more buoyat markets icludig Defece, Aerospace, Motorsport, Rail, Power ad Medical Equipmet. The acquisitio of Cabletec has further exteded the sector activities i the Aerospace ad Rail markets. Strog customer relatioships uderpied by full service offerig Sales ad marketig are the mai drivers for each of the busiesses. With a backgroud i specialised distributio it is atural to start with the eeds of key customers ad the to desig the busiess models to respod to these requiremets i terms of products, service offerigs ad operatioal resposiveess. A key priority for our busiesses is to build strog customer relatioships withi our selected product ad market segmets. Such customer relatioships are made more robust ad resiliet through our delivery of a full service offerig. Such services fall broadly ito three categories customer service, techical support ad value added activities. Customer service ca be, for example, the delivery of products held i ivetory o a ext day basis. Techical support is ofte provided by helpig customers desig the product ito their specific applicatios. Value addig activities are services such as kittig or assembly, which the customers would have to pay someoe else to provide, or they would have to ivest i their ow resources. Ultimately, customers will always demad competitive product performace, pricig ad resposive delivery. However, the broader service offerig builds stroger liks with the customers at may levels, makig switchig more difficult. As a example of the stregth of customer relatioships ad followig the acquisitio of AMT, ca. 60% of sector reveues i Life Scieces are geerated from multi-year customer cotracts for cosumables ad services. Core Strategic Themes Focus o growth market segmets Strog customer relatioships uderpied by full service offerig Secure supply of quality differetiated products Motivated ad committed maagemet teams Efficiet ad resposive operatios ad iformatio systems Carefully selected acquisitios to accelerate growth

24 22 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets Secure supply of quality differetiated products Give the specialised ature of the busiesses, it is critical that they have a secure supply of quality, differetiated products. There are a umber of ways that this ca be achieved ad each busiess uses a bled to develop their product portfolios: Quality maufacturer-braded products supplied o a exclusive basis, typically secured with log term distributio agreemets. Ow brad products supplied or maufactured uder cotract. Selective i-house maufacturig ad assembly. This is see as a cotiuous process rather tha a oe-off activity. Over time, products i the portfolio will become less competitive ad it is importat that the busiesses have plas for selective ew product developmet ad for the itroductio of ew suppliers. The strog performace by AMT i 2008, exemplifies the power of strog proprietary products supplied o a exclusive basis. By cotrast, the a1-group has improved competitiveess by developig its ow rage of cotaimet products which are ow maufactured by reliable sub-cotractors. Fially, Cabletec has had success by developig its ow maufactured products. Motivated ad committed maagemet teams The Diploma orgaisatioal philosophy is to develop strog, self-stadig maagemet teams i the operatig busiesses committed to, ad rewarded accordig to, the short ad log term success of their busiesses. The small corporate team focuses o strategy ad fiacial cotrol. The developmet of strog maagers ad maagemet teams remais a priority for us ad is key to the successful implemetatio of our strategies. We eed to maitai ad develop a group of maagers with the potetial to maage aggressive growth strategies. Importatly they must be able to motivate their staff ad egeder i them the same commitmet. To achieve this we cocetrate o esurig a challegig work eviromet ad appropriate reward systems. Balaced compesatio packages are a combiatio of competitive salaries, aual bouses ad log term icetive plas targeted at the idividual busiess level. The ca. 50 maagers, who together make up the seior maagemet cadre i the operatig busiesses, demostrate a good bled of eergy, ambitio ad experiece. The average age of these maagers is 44 ad they have a average legth of service withi their compaies of te years. Efficiet ad resposive operatios ad iformatio systems We cotiue to make substatial ivestmets i ifrastructure ad systems to give high levels of customer service, resposiveess ad operatioal efficiecy. This is a importat elemet of the value added by the Group whe trasformig small ower-maaged compaies ito more substatial broader based busiesses. Ogoig ivestmet programmes esure that our pricipal busiesses are operatig from purpose built or ewly expaded facilities desiged for efficiet operatios ad with the scale to support sigificat future growth. Similarly i the area of iformatio systems, regular ivestmet esures that the busiesses are supported by itegrated IT systems desiged to give strog fuctioality ad efficiecy ad capable of supportig growth. Over the past five years, a average of 0.6m p.a. has bee ivested i improvig the Group s iformatio systems; i 2008, ivestmet of 0.6m was made i IT systems. Carefully selected acquisitios to accelerate growth To complemet our orgaic growth strategy, we make selective acquisitios to accelerate growth ad take us ito ew, but related markets. The Group s ugeared balace sheet, supported by strog ad cosistet operatig cash flow, give us the resources to support a active acquisitio programme. We have clear criteria which guide our pro-active acquisitio programme ad are derived from the strategic themes above. Prospective acquisitios should be sales ad marketig led with strog customer relatioships ad a secure supply of quality, differetiated products. They should have capable maagemet, ad the potetial for profitable growth ad cash geeratio. A competitive advatage we have i makig acquisitios is our flexibility i structurig trasactios. I may of our medium sized acquisitios, where we are extedig ito ew markets or geographies, we have acquired less tha 100% of the busiess. I these cases, we have left ower maagers with a miority stake i the busiess (up to 25%), with put ad call optios exercisable over 3-5 year periods. This allows vedors to remai i the busiesses with a large part of the value crystallised, but still with the potetial for future gai. For us, this reduces risk ad gives us additioal cofidece i the quality of the acquisitio. Three acquisitios were completed i August 2007 for a total maximum cosideratio of ca. 30m ad these have all cotributed sigificatly to growth i The two acquisitios completed i 2008 for 3.9m, Hitek ad Sijders Egieerig, were smaller but both ope up ew growth opportuities withi their respective sectors.

25 23 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets Key Performace Idicators The success of the Group strategy i the loger term is measured i fiacial terms by the growth i the two key measures of adjusted earigs per share ( EPS ) ad total shareholder retur ( TSR ). These are the pricipal quatitative measures used i the icetive compesatio programmes for the Executive Directors. To assess the performace of the Group at a more detailed level, we use four fiacial key performace idicators ( KPIs ) as described below. These measures are defied i ote 2 to the cosolidated fiacial statemets. As well as beig used to measure the performace at Group level, the fiacial KPIs drill dow through the orgaisatio ad are used as the pricipal quatitative elemets i the short ad log term icetive programmes for seior maagemet of the operatig busiesses. No-fiacial KPIs are also used i each of the busiesses, but these are tailored to the particular requiremets ad characteristics of each busiess. Adjusted PBT The growth i adjusted profit before tax ( PBT ) is a key measure of the uderlyig performace of the Group over time. Adjusted PBT removes the distortig ifluece of the costs of restructurig or ratioalisatio of operatios, the profit or loss o sale of properties, the amortisatio ad impairmet of acquisitio itagible assets ad fair value remeasuremets. Withi the operatig busiesses, profit growth is measured i terms of operatig profit, before fiace icome ad amortisatio of acquisitio itagible assets. The Group s adjusted PBT has grow at a average rate of 21% p.a. over the last five years. This has bee uderpied by a average 23% p.a. growth i operatig profit, as defied above. Operatig margi Operatig margi represets operatig profit, before amortisatio of acquisitio itagible assets, divided by reveue. It is a importat measure to the Group as it moitors the success of the busiesses i achievig superior margis by offerig strogly differetiated products ad services, as well as by ruig their operatios efficietly. Over the last five years, the Group operatig margi has steadily icreased from ca.12% to 15.8% i A umber of the acquisitios made i recet years have had a positive impact o Group average margis. The most importat driver, however, has bee the operatioal leverage gaied as the busiesses have icreased i scale, leadig to icreased reveues without a proportioate icrease i operatig costs. This effect has bee most visible i the Seals sector busiesses i North America where major ivestmets have bee made i the IT ifrastructure ad the warehousig operatios to support the icreasig scale ad scope. Free cash flow Free cash flow is defied as the cash flow geerated after tax but before acquisitios ad divideds. This measures the success of the operatig busiesses ad the Group as a whole, i turig profit ito cash through the careful maagemet of workig capital ad capital ivestmets i the busiess. Over the last five years, the Group has geerated a robust free cash flow averagig 15.4m p.a.; these figures have bee boosted by a total of 20.4m received sice 2003 from the sale of three phases of the Stamford lad. Removig the Stamford lad sale proceeds, free cash flow has still bee a average of 12.2m p.a. represetig 87% of average adjusted profit after tax over the same period. Retur o tradig capital employed Retur o tradig capital employed ( ROTCE ) represets operatig profit, before amortisatio of aquisitio itagible assets, as a percetage of tradig capital employed ( TCE ), defied as et assets less et cash ad o-operatig assets ad liabilities. At the Group level, TCE, as defied i ote 2 of the cosolidated fiacial statemets, icludes the total cash ivested i acquisitios, icludig all gross goodwill ad acquired itagible assets, both capitalised ad writte off i previous years. Over the last five years, ROTCE has remaied cosistetly above 20.0%. At the operatig busiess level, goodwill ad acquired itagible assets are excluded from TCE so that maagemet is judged more arrowly o the retur achieved o capital ivested i fixed assets ad workig capital. This is because the operatig busiess maagemet may ot have bee directly ivolved i the price egotiatios for acquisitios completed withi their sectors. Key Performace Idicators Adjusted PBT ( m) 2004: : : : : 27.5 Operatig Margi 2004: 12.2% 2005: 14.8% 2006: 15.1% 2007: 15.7% 2008: 15.8% Free Cash Flow* ( m) 2004: : : : : 18.0 *excludig sale of Stamford lad ROTCE 2004: 21.0% 2005: 22.1% 2006: 23.9% 2007: 24.2% 2008: 21.0%

26 24 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets Sector Review: Life Scieces Sector Defiitio ad Scope The Life Scieces sector busiesses supply a rage of cosumables, istrumetatio ad related services to cliical, research ad evirometal applicatios. The Caadia Healthcare busiesses are Somage, based i Edmoto, Alberta, ad AMT, based i Kitcheer, Otario. Somage supplies a rage of cosumables ad istrumets used i the diagostic testig of blood, tissue ad other samples i the hospital pathology laboratories across Caada. AMT supplies specialty electrosurgery ad edoscopy equipmet ad cosumables for use i the operatig rooms ad edoscopy suites of the same Caadia hospitals. A large proportio of the reveues for both Somage ad AMT come from multi-year customer cotracts with hospitals ad buyig groups. Aachem, based i Luto, is a supplier of pipettes, tips ad laboratory automatio products to the Life Scieces Research market i the UK ad Eire. Key customers are the major Pharmaceutical ad Biotechology compaies, Research Istitutios ad Uiversities. The products are supported by a comprehesive rage of maiteace, calibratio ad validatio services. The a1-eviroscieces group ( the a1-group ) is a supplier to Evirometal testig laboratories ad to Health & Safety egieers. a1-evirotech supplies a rage of specialised istrumets for detectig ad measurig specific elemets i liquids, solids ad gases. a1-safetech supplies gas detectio devices, as well as a rage of cotaimet eclosures for potet powder hadlig. CBISS supplies equipmet ad services for the moitorig ad cotrol of evirometal emissios. The UK operatios of the a1-group are located i Luto ad Tramere. I Cotietal Europe, the group has locatios i Dusseldorf i Germay ad Basel i Switzerlad. Market Drivers Somage ad AMT supply ito the Caadia Healthcare sector, which is mostly public sector fuded. The pricipal demad driver is therefore the level of healthcare spedig by the Caadia Govermet. C$b Growth % p.a Public sector health expediture i Caada % Over may years, healthcare expediture has grow steadily i the rage 6-7% p.a. with aual variatios mostly depedat o the periodic additioal traches of fudig provided by idividual provices. Other factors which may ifluece the demad for Somage ad AMT products ad services are: Proportio of total healthcare budgets allocated to diagostic testig ad to surgical procedures. Emergece of ew tests drive by focus o specific diseases or allergies. Icreased use of electrosurgical ad edoscopic products i hospitals. The market for Aachem s Life Sciece Research products is drive pricipally by the level of private ad public sector fuds allocated to research to idetify the causes of disease ad to develop ew drugs or therapies. m Growth % p.a UK Govermet expediture o medical research (1) % Pharmaceutical R&D expediture i the UK (2) 3,239 3,379 3,949 /a 10.6% Sources: (1) HM Treasury (2) The Office of Natioal Statistics I recet years, publicly fuded research i the medical field has grow by a average of 9% p.a. boosted by a particularly large reported icrease i Growth was slower i 2007 ad is likely to moderate further i 2008 ad I pharmaceutical compaies, research activity was relatively flat over the period 2000 to 2005 as the compaies pursued cost cotrol iitiatives ad ratioalised research ad developmet activities i the UK. There was a strog reported icrease of 17% i 2006 Pharmaceutical R&D expediture i the UK. More recet data will be required to cofirm whether this level of expediture has bee sustaied. The a1-group supplies to customers i the Evirometal idustry across Europe. The market demad is largely drive by Evirometal ad Health & Safety regulatios. Growth i recet years has bee drive by the eed to be compliat with a rage of EU regulatios icludig: New legislatio or regulatory obligatios relatig to the eviromet, pollutats or potetially hazardous cotamiats. The growig importace to compaies of protectig the workforce from cotact with potetially hazardous materials. Greater use of ew techologies i process cotrol ad itegrated pollutio cotrol. The market for Evirometal Moitorig ad Istrumetatio (EMI) i the UK has bee estimated by a 2006 DTI/ CEED study to be ca. 190m with a aual growth rate through to 2015 projected at ca. 3% p.a. Sector Performace The Life Sciece busiesses icreased reveues i 2008 by 39% to 62.1m (2007: 44.7m). Sector reveues beefited from both a excellet first full year cotributio from AMT ad from the strog appreciatio of the Caadia dollar agaist UK sterlig. O a comparable ad costat currecy basis, sector reveues showed uderlyig orgaic growth of 7%. Operatig profits icreased by 45% to 9.6m (2007: 6.6m) with operatig margis icreasig to 15.5% (2007: 14.8%). The UK busiesses experieced pressure o margis from the appreciatio of the euro agaist UK sterlig, restructurig costs ad the istallatio of ew IT systems. The strog combied performace of the Caadia busiesses however, more tha offset these margi pressures. Capital expediture i the sector was 1.1m, icludig 0.6m ivested i field equipmet for placemet by the Caadia busiesses. The balace was ivested i IT upgrades i the two UK busiesses ad o refurbishig calibratio equipmet i Aachem. Free cash flow before tax of 9.7m was geerated i the sector (2007: 5.2m). Somage achieved good growth i the sale of Cosumables, Reagets ad Services ( CRS ) from the core suppliers which accout for ca. 70% of reveues. Success was achieved i covertig key customers to ewer techology istrumets such as Sebia s Capillarys system, Phadia s Immuocap 250 allergy system, Sakura s ew automatio products ad Tosoh s ew G8 istrumets. These ew istrumet placemets will secure multi-year CRS cotracts with key customers.

27 25 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets I recet years, Somage has suffered from the effects of supplier cosolidatio with the acquisitio of suppliers icludig DSL, Biosite ad Blackhawk. I curret market coditios such acquisitio activity has slowed ad Somage has bee successful i addig ew suppliers icludig Trek, Meridia, BBI-Seracare ad Biolytical. Overall however, Somage s reveues reduced slightly i the year as the growth i core product lies ad ew supplier itroductios were ot sufficiet to fully offset the supplier losses. This caused some disruptio ad higher operatig costs for a period, although the systems have ow successfully bedded dow ad actio has bee take to reduce the legacy overhead costs. The ew ERP system has sigificatly ehaced the compay s marketig capabilities, with the e-commerce sales cotet icreasig steadily i the fial quarter of the year. The compay is ow leaer ad i a stroger positio to compete, although the stregth of the euro ad the US dollar, relative to UK sterlig, will cotiue to impact margis. Reveue 62.1m 2007: 44.7m Operatig Profit* 9.6m 2007: 6.6m Operatig Margi* 15.5% 2007: 14.8% Free Cash Flow (before tax) 9.7m 2007: 5.2m Tradig Capital Employed 47.0m 2007: 41.4m ROTCE 20.6% 2007: 22.6% * Before amortisatio of acquisitio itagible assets AMT i its first full year as part of the Group, delivered a exceptioal performace with growth i excess of 30% compared with the prior year comparable period. The two pricipal busiess streams, AMT Electrosurgery ad AMT Edoscopy, both cotributed strogly to this performace. AMT Electrosurgery cotiued its peetratio of the major hospitals, sigig up multi-year cotracts for the supply of its core proprietary products icludig smoke evacuatio, reuseable groudig pads ad specialty electrodes. AMT has log term, exclusive distributio rights i Caada for these products which are strogly differetiated ad patet protected. Success was also achieved by focusig product specialists o icreasig sales of other specialty products i a broader rage of surgical applicatios. AMT Edoscopy cocetrates o sales to Gastro-Itestial ( GI ) ad Edoscopy uits which are ru separately withi hospitals, with differet product requiremets ad purchasig processes. AMT has focused o a small umber of proprietary products supplied o a exclusive basis, icludig Argo Plasma Coagulatio ( APC ) ad flexible edoscopic istrumets. Havig established strog relatioships with customers, AMT is agai sourcig ew iovative products to broade the product offerig ad take a greater share of customer cotract requiremets. Overall, there was a modest icrease i reveues for Aachem, with pipettes ad tips cotiuig to make progress ad a good first year cotributio from the Hitek calibratio services busiess, offsettig a further declie i the sales of istrumetatio products. The a1-group icreased reveues by 12%, with strog sales i Cotietal Europe compesatig for weaker performace i the UK. Sales of aalysers i Germay icreased strogly oce agai as the operatio took full advatage of strog customer demad, ew product itroductios ad competitor weakess. Sales of sulphur ad itroge aalysers to the chemical ad petrochemical sector were particularly strog ad a ew rage of idustry-leadig AOX aalysers, which measure the levels of haloges i waste water, also made sigificat gais. Further progress was made with the eclosure products, with sales movig ahead strogly i Switzerlad, Frace, Germay ad Irelad. The year saw a major chage i the desig ad maufacture of these products ad the ew geeratio of eclosures was lauched at the key idustry trade exhibitio, Aalytica. The early respose has bee very positive with two major OEMs already committed to adoptig ew desigs for the cotaimet of their istrumets ad sigificat iterest from laboratory health ad safety professioals. Switzerlad cotiued to make progress with specialist stailess steel eclosures ad the busiess was successful i achievig iitial sales ito the Frech pharmaceutical sector. Sales of emissios moitorig equipmet ad services i the UK were broadly flat, with margis geerally lower as the project mix moved to larger, more complex istallatios. Order levels slowed i the secod half of the year as less Eergy from Waste icierators etered the costructio phase. The demad for alterative electricity geeratio is high but local plaig resistace has slowed project approval. Plaig applicatios are ow beig switched to focus o Biomass icierators ad o addig capacity to already existig sites. Customers Cliical Idustrial & evirometal Life Sciece research Geography Caada Uited Kigdom ad Eire Cotietal Europe Rest of World Products Cosumables Service Istrumetatio 51% 23% 26% 49% 39% 10% 2% 59% 14% 27% Operatioally, it was a year of sigificat chage for Aachem, with the busiess beig formally separated from the a1-group at the begiig of the year ad ew IT systems beig implemeted cocurretly.

28 26 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets Sector Review: Seals Sector Defiitio ad Scope The Seals sector busiesses supply a rage of hydraulic seals, gaskets, cyliders ad attachmet kits used i heavy mobile ad idustrial machiery. The Hercules Fluid Power Group comprises Hercules Sealig Products ( Hercules ), Bulldog Hydraulic & Gaskets ( Bulldog ) ad HKX. The core Hercules busiess based i Clearwater, Florida provides a ext day delivery service throughout the US, for seals, seal kits ad cyliders used i a rage of heavy mobile machiery applicatios. Hercules i Caada offers the same rage of products from its two brach operatios located i the provices of Otario ad Quebec. Bulldog supplies a rage of gasket ad seal kits for heavy duty diesel egies, trasmissios ad hydraulic cyliders used i off road ad marie applicatios. Bulldog is based i Reo, Nevada, but more tha 75% of sales are to iteratioal customers outside the US. HKX is based ear Seattle, Washigto State ad supplies hydraulic kits used i the istallatio of attachmets o excavators. HKX s colour coded kit systems with lego-logic istructios, substatially reduce the time ad egieerig expertise required to istall attachmets. Outside North America, Hercules has cetred its Europea operatios o the ewly acquired Sijders Egieerig busiess i the Netherlads. Hercules also has a Represetative Office i Tiaji, close to Beijig i Chia. Fluid Power Equipmet ( FPE ) is based i the UK, with operatios i Darligto ad Docaster, ad supplies a rage of seals, seal kits, cylider parts ad sealats to ram repairers, mobile ad heavy plat operators, mechaical hadlig ad process cotrol compaies. M Seals is a specialised distributor of O rigs, moulded parts, PTFE products ad shaft seals. Products rage from the fiest precisio seals for hearig aids to large heavy duty seals for wid power mills. M Seals has operatios i Espergaerde i Demark ad Halmstad i Swede. Market Drivers The core busiess, represetig ca. 50% of sector reveues, is the ext day delivery of sealig products to the mobile machiery Aftermarket i North America. Hercules ad Bulldog supply ito a broad rage of applicatios i heavy costructio, loggig, miig, agriculture, material hadlig (lift trucks, fork lifts ad dump trucks) ad refuse collectio. These busiesses are focused o the Aftermarket, with the mai customers beig machiery ad cylider repair shops, egie ad trasmissio re-builders ad tractor parts distributors. Products are geerally used i the repair ad maiteace of equipmet after it has completed its iitial warraty period or lease term, or has bee sold o i the pre-used market. The pricipal market drivers are the growth i the geeral idustrial ecoomies ad i particular heavy costructio, although the Aftermarket focus meas that the busiesses are relatively isulated from the extremes of the ecoomic ad busiess cycles Growth % p.a. US real GDP growth (1) +3.6% +3.1% +2.9% +2.2% 3.0% Aual US costructio spedig $billio (2) 1,023 1,132 1,192 1, % US mobile hydraulic shipmets $millio (3) 2,223 2,724 2,766 2, % Sources: (1) Orgaisatio for Ecoomic Co-operatio ad Developmet (OECD) (2) US Cesus Bureau (3) Natioal Fluid Power Associatio Hercules ad Bulldog beefited from the strog US ecoomy from mid 2003 to mid Ito 2007 ad 2008, the residetial costructio sector declied due to overbuildig of homes ad the sub-prime mortgage crisis. Demad i the heavy costructio sector remaied more resiliet with cotiued state ad local govermet fudig for major road-buildig ad ifrastructure programmes. I Caada, ecoomic growth has bee fuelled pricipally by the expasio of the Oil ad Gas idustry i Alberta. This growth has slowed sigificatly i 2008 with drillig activity much reduced. The HKX busiess is drive more strogly by ew equipmet sales. HKX attachmet kits are sold mostly with ew excavators, where demad declied sigificatly i 2007 ad further i Sales growth for HKX i 2009 will cotiue to rely o peetratio ito ew accouts ad icreased peetratio of attachmet kits. I the UK, FPE supplies pricipally to ram (hydraulic cylider) repairers who serve a broad rage of idustrial users icludig costructio, agriculture ad material hadlig. Growth has remaied sluggish i these sectors i recet years ad this is forecast to cotiue as the UK ecoomy eters recessio. M Seals supplies to idustrial OEMs i Demark, Swede ad Chia. Sice applicatios are quite specialised (for example wid turbies), sales growth is depedet o the success of M Seals customers i both domestic ad export markets. Sector Performace The Seals busiesses made further advaces i 2008 ad icreased reveues by 18% to 42.6m (2007: 36.0m), beefitig from the first full year cotributio from M Seals. O a comparable ad costat currecy basis, sector reveues showed uderlyig orgaic growth of 3%. Operatig profits icreased by 16% to 6.7m (2007: 5.8m) with operatig margis slightly decreasig to 15.7% (2007: 16.1%). The reduced operatig margis reflected ivestmets of 0.4m made i establishig ew operatios i Europe ad Chia ad oe-off costs icurred i the closure of the Edmoto brach office. Capital expediture i the sector totalled 0.5m, icludig a iitial ivestmet i a ew warehouse automatio system i Hercules ad seal assembly machiery at M Seals. Free cash flow before tax of 6.5m was geerated i the year (2007: 5.6m. The Hercules Fluid Power Group achieved reveue growth of 2% i challegig ecoomic coditios by successfully adaptig its approach to focus o ew products, more buoyat market segmets ad iteratioal expasio. I the US domestic market, the core distributio operatios demostrated their stregth ad resiliece by maitaiig sales broadly at prior year levels.

29 27 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets The developmet of ew seals ad seal kits cotiued, with over 1,400 Hercules ad Bulldog products added durig the year. Focus was also re-directed to more buoyat segmets by developig, for example, a rage of customised kits for the miig idustry. The challegig market coditios were used to exert further pressure o competitors through selective aggressive pricig. I parallel, however, the policy to out-service competitors cotiued ad protected overall margis. Order fill rates remaied high ad o-time delivery targets were maitaied throughout the year. The recetly itroduced Seals-o-Demad service, where small rus of o-stocked seals are cut to customers requiremets withi 48 hours, also delivered strog growth i Sales of HKX s attachmet kits for excavators fell oly margially, which was a commedable result i a period whe the sales of ew heavy mobile equipmet i the US fell by a estimated 15-20%. A focussed sales pla was successful i developig both ew customers ad achievig greater peetratio i existig, but uderdeveloped accouts. Several of the targeted dealers have ow bee coverted to usig attachmet kits either as their first choice, or to supplemet their existig arragemets. The maiteace of techical leadership i attachmet kits cotiued to be a prime objective ad 50 ew kits were itroduced to the market. I Caada, sales icreased agaist the prior year, with ew products, customer-specific kits ad further peetratio of existig accouts all cotributig to the result. I Wester Caada, sales fell as drillig activity i the Alberta oil patch reduced substatially ad the sales ad operatioal resources were realiged to give a greater cocetratio o the other wester provices. I September, the Edmoto brach was closed to fit with this ew approach. Iteratioal sales outside North America grew strogly across all product categories. Sales of the core seal ad cylider rages maitaied mometum ad sigificat gais were made i may South America coutries, the Middle East ad Turkey. A ew iitiative to test the potetial of the previously utapped markets of South East Asia, Idia ad Easter Europe, produced overall growth i excess of 10%. The first steps ito iteratioal markets for the attachmet kit rage were also made i the year. The iitial focus was o South America ad the Middle East where Hercules existig aget ad dealer etworks are strogest. The early market resposes have bee positive ad iitial orders have bee received from several dealers i the Middle East. The acquisitio of Sijders Egieerig, a small seals distributor based i the Netherlads, was completed i Jue This acquisitio, although small, is a importat step i the developmet of the Hercules aftermarket seal brad i mailad Europe. A Geeral Maager of Hercules Europe has bee appoited, further key employees added ad ew premises selected. Multiligual seal ad seal kit catalogues have bee developed which will cotai over 12,000 items desiged specifically for the mobile machie models used most frequetly i cetral Europe. The iitial developmet work is close to completio ad the lauch i the Netherlads ad Belgium will begi i early I the UK, FPE achieved 14% growth with a strog first half performace which beefited from a additioal cotributio from a small seals busiess acquired i March I the secod half of the year, growth was more modest as ecoomic ad market coditios deteriorated. As i the US, a focus o alterative products (eg metal parts for cyliders), added value services (eg Seals-o-Demad) ad exports combied to deliver a creditable result. M Seals completed its first full year i the Seals group by deliverig good growth o a like-for-like basis. Sales growth was modest i the Daish idustrial customer base, but the more recetly established Swedish operatio grew strogly as customers became aware of M Seals egieerig ad service capabilities ad bega to award ew projects to the compay. Durig the year, M Seals cosolidated its positio as a sigificat supplier of specialised seals to the wid power turbie sector ad these seals ow accout for almost 10% of total sales. M Seals icludes the two leadig Europea wid power maufacturers as customers ad further prototype work is uderway for potetial customers i Chia ad Idia. Although its core stregths lie i the supply of products to OEMs, M Seals has also adopted the Hercules rage of aftermarket, hydraulic seals. A Daish catalogue has bee desiged ad a ew web-based offerig is close to completio. M Seals will lauch these products durig Reveue 42.6m 2007: 36.0m Operatig Profit* 6.7m 2007: 5.8m Operatig Margi* 15.7% 2007: 16.1% Free Cash Flow (before tax) 6.5m 2007: 5.6m Tradig Capital Employed 30.1m 2007: 26.0m ROTCE 22.2% 2007: 29.3% * Before amortisatio of acquisitio itagible assets Customers Heavy costructio Lift trucks & fork lifts Dump trucks & refuse collectio Idustrial ad other 56% 5% 6% 33% Geography North America 60% Europe 23% Rest of World 17% 17% Products Seals & seal kits 71% Gaskets 7% Cyliders & compoets 9% Attachmet kits 13%

30 28 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets Sector Review: Cotrols Sector Defiitio ad Scope The Cotrols sector busiesses supply specialised wirig, coectors, fasteers ad cotrol devices used i a rage of techically demadig applicatios. The IS-Group has its pricipal operatios i Swido, UK from where IS-Rayfast supplies high performace wirig ad itercoect products for use i a rage of techically demadig applicatios icludig Aerospace, Military & Marie, Rail ad Electroics. Cabletec, based i Westo-super-Mare, UK, distributes similar products, but i additio supplies a rage of maufactured products, icludig flexible braided products ad multi-core cables. IS-Motorsport ad Claredo supply wirig, haress compoets ad fasteers ito the Motorsport sector, supplyig most of the Formula 1 teams, as well as other series i the UK, US ad Cotietal Europe. The UK operatios are located i Swido ad Leicester, with satellite operatios i the US i Idiaapolis ad Mooresville. The IS-Group has also established a represetative office i Beijig, with a iitial focus o the Chiese commercial aerospace repair ad aftermarket sector. Sommer ad Filco supply a rage of high performace wirig ad coectors to customers i a rage of high techology idustries icludig Defece, Aerospace, Automotive Diagostics ad Medical equipmet. A rage of value addig activities ehaces the customer offerig, icludig coector assembly, markig of protective sleeves ad prototype quatities of customised multi-core cables. Sommer ad Filco have operatios i Stuttgart, Muich ad Frakfurt i Germay ad Ely i the UK. Hawco supplies a rage of istrumetatio ad cotrol devices used i the sesig, measuremet ad cotrol of temperature ad pressure. Applicatios rage from chilled cabiets for supermarkets, bars ad restaurats to fire detectio systems. Hawco has its operatios i the UK, i Guildford ad Bolto. Market Drivers With over 90% of sector sales i the UK ad Germay ad a wide rage of product applicatios, the uderlyig market drivers are the growth of the UK ad Germa idustrial ecoomies: Growth % p.a UK real GDP growth (1) +3.3% +1.8% +2.8% +3.1% 2.7% UK maufacturig idex (2) % Germa real GDP growth (1) +0.6% +1.0% +3.1% +2.6% 1.8% Sources: (1) Orgaisatio for Ecoomic Co-operatio ad Developmet (OECD) (2) The Office of Natioal Statistics Over the period , real GDP i the UK has grow at a average rate of ca. 2.7% p.a. but maufacturig has remaied relatively flat. This tred has broadly cotiued i 2008, with recessioary cocers buildig as the year progressed. Over the same period, the Germa ecoomy has grow at a average rate of 1.8% p.a. After a period of modest recovery i 2006 ad 2007, maily drive by export performace, growth has slowed i While strogly iflueced by the UK ad Germa ecoomies, the Cotrols sector busiesses have focused o more specialised, techology drive market segmets. The IS-Group, Sommer ad Filco have all beefited i particular from the more buoyat market coditios i the defece ad aerospace sectors: Growth % p.a Germa Defece capital budget ebillio (1) % UK Defece capital budget billio (2) % Commercial Aerospace market growth (3) +11.4% +5.0% +5.0% +4.9% 6.5% Sources: (1) NATO; Federal Miistry of Defece Germay. (2) UK Govermet s Expediture Plas 2007/8 (3) Boeig ad Airbus market outlook publicatios reveue passeger kilometres The combied Defece capital budgets i the UK ad Germay have grow at a average of ca. 8% p.a. Filco i particular has positioed itself well to supply major programmes. The IS-Group ad Sommer focus more o repair, refurbishmet ad upgrade programmes as well as supplyig to Tier 2 electroics suppliers. They typically oly supply to OEMs ad the Tier 1 suppliers whe ex-stock availability ad resposiveess are importat. I the commercial aerospace sector, agai IS-Group, Sommer ad Filco have beefited from the buoyacy i the overall market. The market has show strog growth sice 2003 ad this cotiued i Both Boeig ad Airbus are still projectig loger term growth of ca. 5% p.a. i reveue passeger kilometres. Other specialised, techically drive markets icludig Motorsport, Medical, Rail ad Power have remaied buoyat ad have show stroger growth tha the geeral idustrial ecoomies. Sector Performace The Cotrols busiesses icreased reveues i 2008 by 13% to 67.6m (2007: 60.0m). The first full year cotributio from Cabletec ad the stroger euro relative to UK sterlig, boosted the overall sector performace. O a comparable ad costat currecy basis, sector reveues decreased by 1%, agaist a strog prior year comparative. The focus o more buoyat, techically drive sectors i the UK ad Germay delivered good uderlyig growth for the IS-Group ad Sommer. These growth elemets oly partially offset the impact of reduced project busiess at Filco ad cotiued challegig market coditios for Hawco. Sector operatig profits icreased by 13% to 11.0m (2007: 9.7m) with operatig margis broadly uchaged at 16.3% (2007: 16.2%). A sigificat IT upgrade at Sommer ad Filco was successfully completed durig the year ad this project accouted for the majority of the 0.3m ivested i the sector durig Free cash flow before tax of 10.7m was geerated i the sector (2007: 9.9m). The IS-Group delivered aother year of very solid growth across all market sectors ad i all geographic regios; although with a stroger first half tha secod half. Sales to the Aerospace market were buoyat, with a solid level of backgroud busiess ad several good sized projects providig further icremetal busiess.

31 29 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets The Groud Defece ad Military Marie sectors also recorded sales close to prior year levels, although the frequecy of requests to supply products for Urget Operatioal Requiremets has falle back from the peaks of the past three years. I the Motorsport sector, the IS-Group icreased its peetratio of the core Formula 1 racig teams i Europe ad cosolidated its positio as the prime supplier of haress compoets ad high performace fasteers. A partership arragemet to support the Japaese teams ivolved i the top flights of motorcycle racig, brought further export gais durig the year. I the US, Motorsport sales cotiued to grow ad a ew satellite operatio was opeed i February 2008 at the heart of the NASCAR racig series i Mooresville, North Carolia. Sales to the wider idustrial market showed steady growth with sales to the Power geeratio idustry movig ahead strogly. There was also further growth i exports of the core haress compoet products, primarily to mailad Europe. Cabletec made a solid start i its first year as part of the IS-Group. Durig the year, Cabletec became oe of the first compaies to gai the ewly itroduced EN4199 aerospace approval for its maufactured bodig leads ad the prestigious Airbus approval stadard (ASNE) was also awarded. Operatioally, sales resposibilities have bee clearly defied ad the purchasig ad accoutig fuctios of Cabletec have bee merged withi the IS-Group. I Germay, Sommer delivered solid sales growth with most of its traditioal haress maufacturig customers showig cosistetly positive demad throughout the year, across a rage of sectors. Civil aerospace sales remaied buoyat with regular demad from maufacturers such as Eurocopter ad Euroavioics. Military sales were also strog ad haress compoets were supplied to a rage of Germa military programmes icludig the Leopard II tak ad the Fuhrugs Iformatio System, used i military lad vehicles. Further progress was also made i the developmet of highly specialised coectors ad backshells for use o the solar paels of satellites, with a ew desig delivered to EADS-Astrium just prior to the year ed. The Medical sector maitaied a cosistetly high level of demad ad Sommer beefited from its locatio i Bade-Wurttemberg, a regio which has oe of the highest cocetratios of medical equipmet maufacturers i the world. The compay is well positioed to supply this sector with its rage of highly specialised medical grade wires ad tubigs. Filco experieced lower sales to the major projects which had cotributed to the strog prior year performace. These icluded the Eurofighter Trache 2 project ad the first phase of the Trasrapid railway lie extesio i Shaghai, both of which peaked i the prior year. Filco will be well placed to make further sales to future project phases, although it is ulikely that the exceptioal 2007 levels will be repeated for these projects. Filco cotiued to service may other importat Germa military programmes, icludig the Torado upgrade ad the Tiger ad NH90 helicopters, as well as cosolidatig its positio as a key supplier to MTU, which supplies egies to may military vehicle programmes throughout the world. There were also successes i supplyig a customised Motorsport coector, itroduced last year ad ow supplied to BMW ad other leadig customers. Key iitiatives were also developed to icrease the level of oproject, backgroud busiess to partly moderate the peaks ad troughs created by large projects. The market coditios for Hawco i the UK remaied challegig, with competitive ad pricig pressures bearig dow o UK maufacturig. Agaist this backgroud, maagemet worked hard to mitigate these adverse factors. Sales to the key refrigeratio OEM accouts held up relatively well ad ew product itroductios icluded a rage of low eergy LED lights desiged for food couter displays. Hawco has also ratioalised its rage of thermal cotrol products ad focussed o a smaller umber of high quality maufacturig parters who are willig to support the compay ad grat exclusive sales rights, rather tha appoit multiple distributors. This strategy has show some early success ad Hawco was recetly appoited as the Europea Master Distributor for two importat US suppliers. While Hawco still faces may challeges i a uhelpful market, the compay is lea, focused o quality ad service ad is i a good positio to compete for busiess i Reveue 67.6m 2007: 60.0m Operatig Profit* 11.0m 2007: 9.7m Operatig Margi* 16.3% 2007: 16.2% Free Cash Flow (before tax) 10.7m 2007: 9.9m Tradig Capital Employed 27.3m 2007: 26.3m ROTCE 40.3% 2007: 46.0% * Before amortisatio of acquisitio itagible assets Customers Aerospace & defece Motorsport Medical & scietific Electroics & other Heatig, coolig & refrigeratio 30% 14% 4% 35% 17% Geography Uited Kigdom ad Eire 55% Cotietal Europe 41% Rest of World 4% Products Wire & cable 45% Coectors 27% Cotrol compoets 16% Refrigeratio & a/c equipmet 12%

32 30 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets Fiace Review Results for the Year Reveue ad operatig profit, before amortisatio of acquisitio itagible assets, icreased by 22% ad 24% to 172.3m ad 27.3m, respectively. Operatig margis, before amortisatio of acquisitio itagible assets, improved margially to 15.8% (2007: 15.7%). A icrease i Life Scieces margis offset a small decrease i Seals margis, while Cotrols margis remaied broadly uchaged. The results beefited from a substatial cotributio to reveue ad operatig profit from the busiesses acquired i August last year ad from currecy gais o the traslatio of the results of the overseas busiesses. O a uderlyig basis, reveues ad operatig profits, before amortisatio of acquisitio itagible assets, icreased by ca. 3%; this is after adjustig o a comparable basis for the cotributio of last year s acquisitios, this year s acquisitios ad for the currecy beefits to reveue ad operatig profit of 4.8m ad 1.0m, respectively. Adjusted profit before tax (which is a defied alterative performace measure, as discussed below) icreased 18.0% to 27.5m (2007: 23.3m), after et fiace icome, excludig fair value remeasuremets, of 0.2m (2007: 1.2m); the reductio i fiace icome reflected the sigificat ivestmet made i acquirig ew busiesses towards the ed of the previous year. Adjusted earigs per share icreased 17.1% to 16.4p compared with 14.0p last year. IFRS profit before tax, which is after amortisatio of acquisitio itagible assets of 2.7m (2007: 1.0m) ad fair value remeasuremets of 3.0m (2007: Nil), was 21.8m (2007: 22.3m) ad IFRS basic earigs per share were 11.8p (2007: 12.7p). Taxatio The Group s adjusted effective tax charge represeted 29.1% (2007: 30.4%) of adjusted profit before tax. This reductio is pricipally due to the lowerig of tax rates i the Uited Kigdom, Caada ad Germay; however this beefit was partly offset by the impact from a larger proportio of the Group s operatig profits beig eared this year i territories which have higher tax rates tha the Uited Kigdom. Free Cash Flow ad Cash Fuds The Group cotiues to be strogly cash geerative. The Group s free cash flow, which is before expediture o divideds ad busiess combiatios, icreased by 4.8m to 18.0m; this represets 92.3% of adjusted profit after tax (2007: 77.8%). Operatig cash flow icreased by 5.8m to 28.8m. O a costat currecy basis, there was a 1.3m (2007: 1.1m) icrease i workig capital to 28.6m of which 0.4m was accouted for by stock purchased i advace of kow price icreases. At 30 September 2008, Group workig capital remaied uchaged at 16.6% of aual reveue ad has cosistetly remaied below 17.0% i each of the last three years. Group tax paymets were 8.2m (2007: 8.0m) ad beefited from the recetly acquired busiesses remaiig o a aual tax paymet basis durig the year; however this will lead to higher tax paymets i 2009, as these busiesses move to quarterly paymets. The Group s Employee Beefit Trust also took advatage of a weaker share price durig the year to acquire a further 528,760 shares i the Compay at a cost of 0.9m (2007: 1.3m). Capital expediture of 1.9m (2007: 2.2m) represeted 76% of aual depreciatio. Expediture i 2008 icluded 0.7m ivestmet i toolig ad warehouse equipmet ad 0.6m o acquirig field equipmet for lease i the Life Sciece busiesses; the balace was spet o completig prior year IT projects ad o small upgrades to the geeral IT ifrastructure across the Group. After spedig 7.9m o the acquisitio of busiesses, icludig miority iterests, as described below, the Group s cash fuds icreased by 3.3m to 15.7m at 30 September 2008 (2007: 12.4m). The Group also has a 20m committed revolvig bak facility which expires i November 2010, together with 5m of workig capital facilities. Noe of these facilities were utilised at 30 September Acquisitios ad Miority Iterests Durig the year the Group acquired two small busiesses i support of broadeig its Life Sciece ad Seals busiesses for 3.9m, i aggregate; a further 3.7m was paid to the miority shareholders i Somage o exercise of optios to acquire 11.8% of the outstadig share capital i that busiess. Deferred cosideratio of 0.3m was paid to the vedors of Cabletec, which was acquired last year, ad a further 1.1m of deferred cosideratio will also be payable after the year ed (i December 2008) to the vedors of AMT, which was acquired i August At 30 September 2008 the Group has a aggregate liability, estimated at 11.2m, (2007: 11.8m) which is payable betwee 1 October 2009 ad 31 December 2012, to the vedors of AMT, Somage ad M Seals who retai miority iterests i the share capital of these busiesses. This liability arises uder put/call optios etered ito at the time of acquisitio ad is based o the Directors estimate of the likely Earigs Before Iterest ad Tax ( EBIT ) of these busiesses, which will form the basis of the valuatio of the miority shareholdig o exercise of the optio. Based o the strog performace of these busiesses durig the year, the Directors have reassessed the potetial liability at 30 September 2008 to acquire the remaiig outstadig miority iterests. This has led to a charge of 2.3m beig made i the cosolidated Icome Statemet. A aalysis of the movemet i this liability is set out i ote 19 to the cosolidated fiacial statemets. Lad at Stamford The Group cotiues to retai approximately 150 acres of farm ad former quarry lad i Stamford which relates to a former busiess which has ow closed. This lad is icluded i the cosolidated Balace Sheet at Nil ad i the opiio of the Directors, is ulikely to be worth more tha 0.5m i its preset coditio. The Directors aticipate that this lad will cotiue to be leased to a local farmer ad there is o itetio to dispose of this lad i the foreseeable future. Acquisitio Itagible Assets ad Goodwill There were o additios to acquisitio itagible assets i 2008; however goodwill icreased by 6.2m et, o a costat currecy basis, to 51.6m reflectig the amout paid for the acquisitios durig the year, i excess of the value of the et tagible assets. This goodwill largely comprises the value i each of these busiesses relatig to both the product kow-how held by the employees ad to the prospects for sales growth i the future from both ew customers ad ew products. The Directors have carried out a impairmet review of the total Group goodwill of 51.6m held at 30 September 2008 ad are satisfied that oe of this goodwill has bee impaired.

33 31 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets Pesios Pesio beefits to employees are provided through defied cotributio schemes at a aggregate cost i 2008 of 0.8m (2007: 0.7m). I additio, i the UK the Group retais a small umber of legacy defied beefit pesio schemes which are closed to future accrual. At 30 September 2008 the accoutig deficit i these defied beefit schemes had icreased margially to 1.7m (2007: 1.6m). While the market value of the uderlyig assets i the schemes had falle by 2.3m to 12.5m, the margi betwee the rate used to discout the liabilities ad the assumed iflatio rate had icreased o the previous year by 0.8% to 3.2%. This icrease, together with the Group s cash cotributios of 0.2m, led to a reductio i the gross pesio liability of 2.2m to 14.2m (2007: 16.4m) There were o ew formal actuarial valuatios of the Group s pricipal schemes carried out durig the year ad therefore the ogoig fudig level of the PLC ad Aachem legacy schemes remaied uchaged at 96% ad 91%, respectively. The aggregate deficit i the defied beefit schemes, et of deferred tax, at 30 September 2008 was 1.2m (2007: 1.1m) which equates to 1.1% of total shareholders equity. Capitalisatio ad Divideds At 30 September 2008, the umber of shares i issue were 113.2m, of which 1.3m are held by the Compay s employee share pla. Durig the year the Compay udertook a bous issue of four ew ordiary shares for each ordiary share held by shareholders; this resulted i the issue of 90.6m ew ordiary shares ad represeted the capitalisatio of 4.6m of the Compay s reserves. Shareholders fuds, which represets the Group s total capital, icreased by 17.4m to 108.1m due to the effect of exchage rate movemets, gais o cash flow hedges ad the purchase of miority iterests, as well as earigs retaied for the year. The Group s tradig capital employed, which is defied i ote 2 to the cosolidated fiacial statemets, icreased at 30 September 2008 by 13.0m to 104.5m (2007: 91.5m), of which 70.2m (2007: 62.8m) was accouted for by goodwill ad acquisitio itagible assets. The Group retur o tradig capital employed decreased to 21.0% (2007: 24.2%) at 30 September This reflects i part the impact of the acquisitios completed i late 2007 ad i part the icrease i overseas tradig capital at 30 September 2008, resultig from the weakeig i UK sterlig. Durig 2008, 6.9m (2007: 5.4m) was retured to shareholders i the form of ordiary divideds. I May 2008 the Board aouced that that it iteded to move divided cover towards 2.0 times, based o adjusted earigs per share. The Board s distributio policy ad its overall fiacial strategy is to strike a balace betwee the iterests of shareholders ad the iterests of the busiess, whilst maitaiig a strog balace sheet. Measurig Fiacial Performace The Board uses specific measures whe assessig the performace of the Group ad these are referred to throughout this Aual Report i the discussio of the performace of the busiesses. These measures are ot defied i IFRS, but are used by the Board to assess the uderlyig operatioal performace of the Group ad its busiesses. As such the Board believes these performace measures are importat ad should be cosidered alogside the IFRS measures. The alterative performace measures, which have bee used i this Aual Report, are described i ote 2 to the cosolidated fiacial statemets. Reported performace takes ito accout all the factors (icludig those which the Group caot ifluece, pricipally currecy exchage rates) that have affected the results of the Group s busiess ad are reflected i the cosolidated fiacial statemets prepared i accordace with Iteratioal Fiacial Reportig Stadards ( IFRS ). Iteratioal Fiacial Reportig Stadards (IFRS) The Group s cosolidated fiacial statemets have bee prepared i accordace with IFRS. This year the Group has adopted IFRS 7, Fiacial Istrumets: Disclosures, which requires additioal disclosures i respect of fiacial istrumets. These additioal disclosures are give withi the sectio o Risks ad Ucertaities o page 33 ad i ote 18 to the cosolidated fiacial statemets. The Group has ot bee required to adopt ay other ew accoutig stadards durig the year which have had a sigificat impact o the cosolidated fiacial statemets. Rollig Exchage Rates Sep 03 Sep 04 Sep 05 Sep 06 Sep 07 Sep 08 Euro US$ Ca$ Exchage rate (rebased to 100) Reveue ( m) Acquired Foreig Busiesses Exchage 4.4 Orgaic Growth US$ Ca$

34 32 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets Risks ad Ucertaities Risk Maagemet Process Risk assessmet ad evaluatio is a itegral part of the Group s aual plaig cycle ad market specific risks are evaluated as part of the budgetary process. Each operatig busiess is required each year to idetify ad documet the sigificat strategic, operatioal ad fiacial risks facig the busiess. For each sigificat risk, a umber of scearios are mapped out ad a assessmet is made of the likelihood ad impact of each risk sceario. Fially, plas ad processes are established, which are desiged to cotrol each risk ad miimise its potetial impact. The risk assessmets from each of the operatig busiesses are reviewed with the Executive Directors ad a cosolidated risk assessmet is reviewed by the Board. The risks ad ucertaities which are curretly judged to have the largest potetial impact o the Group s log term performace are set out below. It should be recogised that additioal risks ot curretly kow to maagemet, or risks that maagemet curretly regard as immaterial, could also have a material adverse effect o the Group s fiacial coditio or the results of operatios. Strategic Risks Dowtur i major markets Adverse chages i the major markets i which the busiesses operate ca have a sigificat impact o performace. The effects will either be see i terms of slowig reveue growth, due to reduced or delayed demad for products ad services, or pressure o margis due to icreased competitive pressures. To mitigate the effects of such adverse chages, the busiesses idetify key market drivers ad moitor the treds ad forecasts, as well as maitaiig close relatioships with key customers who may give a early warig of slowig demad. Chages to cost levels ad ivetories ca the be made i a measured way to mitigate the effects. I additio, there are a umber of characteristics of the Group s busiesses which moderate the impact of ecoomic ad busiess cycles o the Group as a whole: The Group s busiesses operate i three differet sectors with differet cyclical characteristics ad across a umber of geographic markets. The busiesses offer specialised products ad services ad this offers a degree of protectio agaist customers quickly switchig busiess to achieve better pricig. A high proportio of the Group s sales comprise cosumable products ad service cotracts which are purchased as part of customers operatig expediture, rather tha through capital budgets. I may cases the products will be used i repair, maiteace ad refurbishmet applicatios, rather tha origial equipmet maufacture. Loss of key supplier(s) The Group s busiesses esure that they have secure log term access to strog, differetiated product offerigs by combiig: Quality maufacturer-braded products, mostly sourced uder log term distributio agreemets. Ow-brad products, maufactured uder cotract. Selective i-house maufacture ad assembly. There are risks to the busiesses if a major supplier decides to cacel the distributio agreemet or if the supplier is acquired by a compay which has its ow distributio chaels i the relevat market. There is also the risk of a supplier takig away exclusivity ad either settig up direct operatios or establishig aother distributor. The potetial impact o a idividual busiess may be high where a supplier represets a sigificat proportio of the sales ad purchases of the busiess. However, the potetial impact o the Group is lower as o oe supplier represets more tha 15% of Group reveue ad oly four suppliers represet more tha 2% each of Group reveue. Relatioships with suppliers have ormally bee built up over may years ad a strog degree of iter-depedece has bee established. There are further actios plaed ad implemeted by the operatig busiesses to cotrol or to mitigate risks: Where depedece is high, log term, multi-year exclusive cotracts siged with suppliers. Where possible, chage of cotrol clauses icluded i cotracts for protectio or compesatio i the evet of acquisitio. Collaborative projects ad relatioships maitaied with idividuals at may levels of the supplier orgaisatio. Regular review meetigs ad adherece to cotractual terms. Regular reviews of ivetory levels. Budlig ad kittig of products ad provisio of added value services. Periodic research of alterative suppliers as part of cotigecy plaig. Loss of major customer(s) As with ay busiesses, the loss of oe or more major customers ca be a material risk. Specific large customers are importat to idividual operatig busiesses ad a high level of effort is expeded i esurig that these customers are retaied ad ecouraged ot to switch to aother supplier. I additio to providig high levels of customer service, close itegratio is established where possible with customers systems ad processes. The ature of the Group s busiesses, however, esures that there is ot a high level of depedece o ay idividual customers. No oe customer represets more tha 5% of sector reveue or more tha 2% of Group reveue. Techological chage The Group s busiesses operate i specialised markets offerig products which are ofte techical i ature. As a result, there is always the risk that a techological chage will make specific products less competitive or i the worst case, obsolete. I additio to the write-off of usaleable ivetory, this ca impact the sales performace of the busiess if replacemet products are ot available. The Group s exposure to this risk is reduced by the spread of busiesses ad techologies, as well as by the fact that the products, though techical, are typically ot subject to very rapid techological chage. The operatig busiesses moitor the key techologies to get early warig of chages i product competitiveess, so that plas ca be developed for chages i the supplier portfolio as required. Also, the busiesses, with sufficiet lead time, mostly have the opportuity to chage suppliers i the evet of a major techology shift. Product liability There is always a risk that products supplied by a Group busiess may fail i service, which could lead to a claim uder product liability.

35 33 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets To offset this risk, techically qualified persoel ad cotrol systems are i place to esure products meet quality requiremets. The busiesses, i their Terms ad Coditios of sale with customers, will typically mirror the Terms ad Coditios of sale from their suppliers. I this way the liability ca be limited ad subrogated to the supplier. I additio, this avoids the eed for busiesses to maitai material warraty provisios i their fiacial statemets. However, if a legal claim is made it will typically draw i our busiess as a party to the claim ad the busiess may be exposed to legal costs ad potetially damages if the claim succeeds ad the supplier fails to meet its liabilities for whatever reaso. To mitigate this risk, the Group has established Group-wide product liability isurace which provides worldwide umbrella isurace cover of 10m (ca.us$20m) i all sectors. Loss of key persoel The success of the Group is built upo strog, self-stadig maagemet teams i the operatig busiesses, committed to the success of their respective busiesses. As a result, the loss of key persoel ca have a sigificat impact o performace, at least for a time. Cotractual terms such as otice periods ad o-compete clauses ca mitigate the risk i the short term. However, the more successful iitiatives focus o esurig a challegig work eviromet with appropriate reward systems. The Group places very high importace o plaig the developmet, motivatio ad reward of key maagers i the operatig busiesses to mitigate this risk: Esurig a challegig workig eviromet where maagers feel they have cotrol over ad resposibility for their busiesses. Establishig maagemet developmet programmes to esure a broad base of taleted maagers. Offerig a balaced ad competitive compesatio package with a combiatio of salary, aual bous ad log term icetive plas targeted at the idividual busiess level. Givig the freedom, ecouragemet, fiacial resources ad strategic support for maagers to pursue ambitious growth plas. Operatioal Risks Major damage to premises The Group busiesses mostly operate from combied office/warehouse facilities which are dedicated to the busiess ad ot shared with other Group busiesses. Major damage to the facility from fire, malicious damage or atural disaster would impact the busiess for a period util the damage is repaired or alterative facilities have bee established. The busiesses have developed plas to prevet icidets icludig fire ad security alarms ad regular fire drills. Isurace policies are also i place icludig property, cotets ad busiess iterruptio cover which would mitigate the fiacial impact. However, the priority i such a evet is to become operatioal as quickly as possible to miimise disruptio to customers. Plas to esure a quick ad orderly recovery have bee developed by the busiesses ad are periodically reviewed. The busiess where the risk is greatest is Hercules i Clearwater, Florida which is most at risk from a evirometal disaster caused by a hurricae or torado. The buildig structure has bee desiged to withstad 150mph wids ad a specific disaster pla has bee draw up ad is regularly reviewed. This icludes: Back-up power geerator. Materials o had to secure the facility. Commuicatios re-route to other braches or iterim locatio. IT recovery pla usig back up server i separate locatio. Regular buildig ispectio ad weather moitorig. Plas to drop-ship product from suppliers where eeded. Loss of iformatio techology ( IT ) systems Computer systems are critical to the busiesses sice their success is built o high levels of customer service ad quick respose. A complete failure of IT systems with the loss of tradig ad other records would be more damagig to the busiesses tha major physical damage to facilities. IT system failure could have a umber of causes icludig power failure, fire ad viruses. Busiess iterruptio isurace cover is held across the Group ad cotigecy plas have bee draw up i all busiesses. The recovery plas differ by idividual busiess but will iclude some or all of the followig elemets: Full data back-ups as a matter of routie. Back-up tapes stored i fire proof safes. Back-up servers idetified. Commuicatio re-route optios idetified. Service cotracts with IT providers with access to replacemet servers. Uiterruptible power sources ad back-up geerators where required. Virus checkers ad firewalls. Disruptio by service providers All the operatig busiesses use third party carriers to physically trasport products. Disruptio to this service is most critical i busiesses such as Hercules where the busiess model requires rapid, ofte ext day delivery of products. Most busiesses will have a pricipal carrier that is used, but they will moitor ad maitai accouts with alterative carriers. Fiacial Risks The Group s activities expose it to a variety of fiacial risks; foreig currecy, liquidity, iterest rate ad credit. The Group s overall maagemet of these risks is carried out by a cetral treasury team (Group treasury) uder policies ad procedures which are reviewed ad approved by the Board. Group treasury idetifies, evaluates ad where appropriate, hedges fiacial risks i close co-operatio with the Group s operatig busiesses. The Group treasury team does ot udertake speculative foreig exchage dealigs for which there is o uderlyig exposure. The policies for maagig these fiacial risks are set out below ad further aalyses of these risks are set out i ote 18 to the cosolidated fiacial statemets. Foreig currecy risk Foreig currecy risk is the risk that chages i currecy rates will affect the Group s results. The Group operates iteratioally ad is exposed to foreig exchage risk arisig from various currecy exposures, primarily with respect to the US dollar, the euro ad the Caadia dollar (traslatioal exposure). Durig the year eded 30 September 2008, ca. 50% of the Group s sales ad operatig profits were eared i currecies other tha UK sterlig. I compariso to the prior year, the et effect of currecy traslatio was to icrease turover by 4.8m ad to icrease operatig profit by 1.0m. It is estimated that a stregtheig of UK sterlig by 10% agaist all the currecies i which the Group does busiess, would reduce operatig profit, before amortisatio of

36 34 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets Risks ad Ucertaities cotiued acquisitio itagible assets ad tax, by approximately 2.0m (7.3%) (2007: 1.4m (6.3%)) due to currecy traslatio. The Group has certai ivestmets i foreig operatios whose et assets are also exposed to foreig currecy traslatio risk. Currecy exposure arisig from the et assets of the Group s foreig operatios are ot hedged. At 30 September 2008, the Group s o- UK sterlig tradig capital employed i overseas busiesses was 75.0m, which represeted 72% of the Group s tradig capital employed. It is estimated that a stregtheig of UK sterlig of 10% agaist all the o-sterlig capital employed would reduce shareholders fuds by 6.9m (2007: 5.4m). The Group s UK busiesses are also exposed to foreig currecy risk o purchases that are deomiated i a currecy other tha their local currecy, pricipally US dollars, euro ad Japaese ye (trasactioal exposure). The Group s Caadia busiesses are also exposed to a similar risk as the majority of their purchases are deomiated i US dollars. The Europea ad Caadia busiesses hedge up to 80% of forecast US dollar ad euro foreig currecy exposures usig forward foreig exchage cotracts. The Group classifies its forward foreig exchage cotracts, hedgig forecasted trasactios, as cash flow hedges ad states them at fair value. Details of average exchage rates, used i the traslatio of overseas earigs, ad of year ed exchage rates, used i the traslatio of overseas balace sheets, for the pricipal currecies used by the Group, are show i ote 26 to the cosolidated fiacial statemets. Liquidity risk Liquidity risk is the risk that the Group will ot be able to meet its fiacial obligatios as they fall due. The Group s approach to maagig liquidity is to esure, as far as possible, that it will always have sufficiet liquidity to meet its liabilities whe due, uder both ormal ad stressed coditios, without icurrig uacceptable losses or riskig damage to the Group s reputatio. The Group is highly cash geerative ad uses mothly cash flow forecasts to moitor cash requiremets ad to optimise its retur o ivestmets. Typically the Group esures that it has sufficiet cash o had to meet foreseeable operatioal expeses, but it maitais a 5m overdraft facility o which iterest is payable at UK Base Rate plus 100 bps. The Group also has a udraw committed 20m revolvig bak facility which expires i November Iterest o this facility is payable at 80 bps over LIBOR. Iterest rate risk Iterest rate risk is the risk that chages i iterest rates will affect the Group s results. The Group s iterest rate risk arises primarily from its cash fuds. A aalysis of the currecy ad iterest rate profile of the Group s fuds is show i ote 17 to the cosolidated fiacial statemets. The Group maages its iterest-bearig fuds i a maer desiged to maximise iterest icome, while at the same time miimisig ay risk to these fuds. Surplus fuds are deposited with commercial baks that meet the credit criteria approved by the Board, for periods of betwee oe to six moths at rates that are geerally fixed by referece to the relevat UK Base Rate, or equivalet rates. The Group does ot udertake ay hedgig activity of iterest rates. It is estimated that a reductio of 1% i iterest rates would reduce the Group s profit before tax by a maximum of 0.1m (2007: 0.1m) Credit risk Credit risk is the risk of fiacial loss to the Group if a customer or couterparty to a fiacial istrumet fails to meet its cotractual obligatios; this arises pricipally from the Group s trade ad other receivables from customers ad from cash balaces (icludig deposits) held with fiacial istitutios. Trade receivable exposures are maaged locally i the operatig uits where they arise ad credit limits are set as deemed appropriate for the customer. The Group is exposed to customers ragig from govermet backed agecies ad large private wholesalers to small privately owed busiesses ad the uderlyig local ecoomic risks vary throughout the world. The Group establishes a allowace for impairmet that represets its estimate of icurred losses i respect of specific trade ad other receivables where it is deemed that a receivable may ot be recoverable. Whe the receivable is deemed irrecoverable, the allowace accout is writte off agaist the uderlyig receivable. Exposure to fiacial couterparty credit risk is cotrolled by the Group treasury team i establishig ad moitorig couterparty limits. Cetrally maaged fuds are ivested etirely with couterparties whose credit ratig is A or better. Capital risk maagemet The Group s objectives whe maagig capital are to safeguard the Group s ability to cotiue as a goig cocer i order to provide returs for shareholders ad beefits for other stakeholders ad to maitai a optimal capital structure. I order to maitai or adjust the capital structure the Group may adjust the amout of divideds paid to shareholders, retur capital to shareholders or issue ew shares. Accoutig Risks Ivetory obsolescece Workig capital maagemet is critical to success i specialised distributio busiesses as this has a major impact o cash flow. The pricipal risk to workig capital, other tha credit risk to trade receivables is i ivetory obsolecece ad write-off. Ivetory write-offs are cotrolled ad miimised by active maagemet of ivetory levels based o sales forecasts ad regular cycle couts. Where ecessary, a impairmet charge is made to cover excess stock ad potetial obsolescece. Fraud ad theft The Group s operatig busiesses are relatively straight-forward busiesses where a sigificat icidece of fraud or theft should become apparet relatively quickly. The risks are also moderated by the fact that the products are relatively specialised idustrial products ad therefore ot particularly valuable or attractive o the ope market. Fially, tagible fixed assets are ot sigificat across the Group ad geerally comprise IT ad warehouse equipmet, where ay loss would be quickly apparet. As additioal security, processes are i place to further reduce the opportuity for fraud or theft: Specified sigature levels ad resposibilities. Segregatio of resposibilities. Cotrols o shippig addresses. Weekly flash reports of cash balaces ad regular bak recociliatios. Regular review of supplier ad creditor ledgers to idetify fictitious suppliers. Group wide policy ad procedures for whistle-blowig. The Audit Committee carries out a aual assessmet of the fraud risks i the busiesses ad discusses these risks with maagemet.

37 35 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets Corporate ad Social Resposibility The Board takes serious accout of the social, evirometal ad ethical impacts of the Group s activities ad moitors them as part of the aual risk assessmet process. The risk assessmets are led by the Maagig Directors of each of the Group s operatig compaies ad are the reviewed by the Board. The Maagig Directors are resposible for complyig with the relevat employmet, social ad evirometal regulatios i the geographical areas i which they operate. Employmet Buildig ad developig the skills, competecies, motivatio ad teamwork of employees is recogised by the Board as beig key to achievig the Group s busiess objectives. The stability ad commitmet of the employees is demostrated by the average legth of service beig 5.5 years (2007: 5.3 years). I additio the umber of workig days lost to sickess cotiues to remai less tha 4% a year. These measures remai cosistet across each of the Group s sectors. The Group values the commitmet of its employees ad recogises the importace of commuicatio to good workig relatioships. The Group keeps employees iformed o matters relatig to their employmet, o busiess developmets ad o fiacial ad ecoomic factors affectig the Group. This is achieved through maagemet briefigs, iteral aoucemets, the Group s website ad by the distributio of Prelimiary ad Iterim Aoucemets ad press releases. Copies of the Aual Report are also made available i the operatig busiesses. This commuicatio programme eables employees to gai a better uderstadig of the Group s busiess objectives ad their roles i achievig them. Both employmet policy ad practice i the Group are based o o-discrimiatio ad equal opportuities. Ability ad aptitude are the determiig factors i the selectio, traiig, career developmet ad promotio of all employees. The Group remais supportive of the employmet ad advacemet of disabled persos. Applicatios for employmet by disabled persos are always fully cosidered, bearig i mid the respective aptitudes ad abilities of the applicats cocered. If a employee is, or becomes disabled durig their period of employmet, the Group will, if ecessary ad to the extet possible, adapt the work eviromet to eable the employee to cotiue i their curret positio or retrai the employee for duties suited to their abilities followig disablemet. At 30 September 2008 the Group s employees icluded te who were disabled ad three who were o log term sick leave. Employmet policies throughout the Group have bee established to comply with relevat legislatio ad codes of practice relatig to employmet, health ad safety ad equal opportuities. The Group provides good quality workig eviromets ad facilities for employees, ad traiig ad developmet appropriate to each of their roles. Health ad Safety The Group places a great deal of importace o the provisio of clea, healthy ad safe workig coditios. I additio to compliace with all local regulatios, the Group promotes workig practices which protect the health ad safety of its employees. Health ad Safety matters are kept uder regular review by local maagemet who report o such matters to the Chief Operatig Officer. Durig 2008, 41 employees (2007: 48) were reported as havig suffered mior ijuries at work; oe of these ijuries resulted i absece from work for more tha three days. Oe employee (2007: oe) suffered a serious ijury which resulted i his absece from work for three moths. Health ad Safety traiig is part of the iductio process for ew employees. Specific traiig is give where relevat, for example regardig forklift truck operatio ad chemical hadlig, as well as geeral fire safety ad first aid matters. Evirometal The Group regards compliace with relevat evirometal laws as a importat part of its resposible approach to the eviromet ad is committed to good evirometal maagemet practices throughout its operatios. The Maagig Directors appoited by the Board have resposibility for the evirometal performace of their operatig busiesses ad each subsidiary is required to implemet iitiatives to meet their resposibilities. Relatioships with suppliers, customers ad other stakeholders The Group recogises the obligatio it has towards the parties with whom it has busiess dealigs icludig customers, shareholders, employees, suppliers ad advisors. Dealigs with these groups deped upo the hoesty ad itegrity of the Group s employees ad every effort is made to esure that a high stadard of expertise ad busiess priciples is maitaied i such dealigs. Where appropriate, traiig is give to maitai ad to raise stadards. The Group s policy towards suppliers is that each operatig compay is resposible for egotiatig the terms ad coditios uder which they trade with their suppliers. The Group does ot have a formal code that it follows with regard to paymets to suppliers. Group compaies agree paymet terms with their suppliers whe they eter ito bidig purchasig cotracts for the supply of goods ad services. Suppliers are, i that way, made aware of these terms. Group compaies seek to abide by these paymet terms whe they are satisfied that the supplier has provided the goods or services i accordace with the agreed terms ad coditios. At 30 September 2008 the amout of trade creditors show i the Group balace sheet represets 48 days (2007: 47 days) of average purchases. Commuity impact ad ivolvemet The Group cotributes to local worthwhile causes ad charities ad esures that the Group s operatios cause miimal egative impact withi the commuity. I commo with all compaies, the Group has limited resources ad the amout of moey available for charitable purposes varies over time. The Group made doatios for charitable purposes durig the year which amouted to 20,452 (2007: 15,285). No political doatios were made.

38 36 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets Directors Report For the year eded 30 September 2008 The Directors preset their report ad the audited fiacial statemets for the year eded 30 September Pricipal Activities The pricipal activity of the Group is the supply of specialised techical products ad services. A descriptio ad review of the activities of the Group durig the fiacial year ad a idicatio of future developmets is set out i the Busiess Review o pages 21 to 35; the Busiess Review icorporates the requiremets of the Compaies Act. Results ad Divideds The profit for the fiacial year attributable to shareholders was 13.3m (2007: 14.3m). The Directors recommed a fial divided of 5.0p per ordiary share (2007: 3.6p), to be paid, if approved, o 21 Jauary This, together with the iterim divided of 2.5p per ordiary share paid o 18 Jue 2008, amouts to 7.5p for the year (2007: 5.4p). Share Capital O 21 Jauary 2008 the Compay udertook a bous issue of four ew ordiary shares of 5 pece each for each ordiary share held by shareholders of the Compay. The bous issue resulted i the issue of 90,591,644 ew ordiary shares, represetig the capitalisatio of 4.4m of the Compay s retaied earigs, together with 0.2m which was held i the capital redemptio reserve. The curret issued share capital comprises 113,239,555 ordiary share of 5p each with a aggregate omial value of 5.7m. As a cosequece of this bous issue, the comparative earigs ad divideds per share icluded i this Aual Report have bee restated. Substatial Shareholdigs At 14 November 2008 the Compay had bee otified, pursuat to the Fiacial Service Authority s Disclosure ad Trasparecy Rules, of the followig otifiable votig rights i its ordiary share capital: Percetage of ordiary share capital F&C Asset Maagemet plc 9.19 Isight Ivestmets Limited 5.52 Licol Vale Europea Parters Master Fud LP 5.05 Fidelity Iteratioal 5.00 Legal & Geeral Ivestmet Maagemet Limited 4.74 Newto Ivestmet Maagemet Limited 4.39 Slater Ivestmets Limited 3.57 IG Iteratioal Maagemet Limited 3.20 UBS Global Asset Maagemet Life Limited 3.00 As far as the Directors are aware there were o other otifiable iterests. Directors The persos curretly servig as Directors of the Compay are show o pages 18 ad 19. JL Reocks ad BM Thompso retire from the Board by rotatio at the Aual Geeral Meetig o 14 Jauary 2009 ad beig eligible, offer themselves for re-electio. The Directors beeficial iterests i the Compay s ordiary share capital at 30 September 2008 are set out i the Remueratio Report o page 45. Directors ad Officers Liability Isurace ad Idemity The Compay has purchased isurace to cover its directors ad officers agaist the costs of defedig themselves i legal proceedigs take agaist them i that capacity ad i respect of ay damages resultig from those proceedigs. The Compay also idemifies its Directors ad officers to the extet permitted by law. Neither the isurace or the idemity provide cover where the director or officer has acted frauduletly or dishoestly. Other Statutory Iformatio A explaatio of the Compay s policy o matters relatig to Employmet, Health ad Safety, Evirometal ad its relatioship with suppliers, customers ad other stakeholders is set out withi the Busiess Review o page 35 of the Aual Report. The Group s use of fiacial istrumets is discussed o page 33. New Articles of Associatio It is iteded that a special resolutio for adoptio of ew Articles of Associatio of the Compay, will be put to shareholders at the Aual Geeral Meetig. Compay law has udergoe substatial chage sice Jauary 2007 whe the staged implemetatio of the Compaies Act 2006 (the 2006 Act ) commeced. The Articles of Associatio of the Compay i their curret form cotai certai provisios that o loger fully reflect both legislatio ad best practice ad accordigly the Board cosiders it prudet to replace the Compay s existig Articles of Associatio with ew Articles that take accout of those developmets (the New Articles ). A summary of the material chages brought about by the proposed adoptio of the New Articles is set out i a Appedix to the Notice of Aual Geeral Meetig. Other chages, which are of a mior, techical or of a clarifyig ature have ot bee oted i the Appedix. Further amedmets to the New Articles may be required i the comig years as a result of the implemetatio of the 2006 Act. The 2006 Act represets a major reform of UK compaies legislatio ad is beig brought ito force i stages, with full implemetatio scheduled by October At this year s Aual Geeral Meetig the Compay proposes to adopt provisios which reflect chages i the law brought about by the 2006 Act i respect of, amog other thigs, electroic commuicatios, otice periods for meetigs, proxy votig ad directors coflicts of iterest. Over the course of the ext year the Compay iteds to coduct a further review of the New Articles i order to idetify ay additioal amedmets that might be ecessary followig the full implemetatio of the 2006 Act by October It is the Board s itetio that ay further amedmets will be put to shareholders at the 2010 AGM. A copy of the ew Articles of Associatio will be o display at the Registered Office of the Compay durig ormal busiess hours o ay week day, up to ad icludig the date of the Aual Geeral Meetig, ad at that meetig. Aual Geeral Meetig The Aual Geeral Meetig will be held at midday o 14 Jauary 2009 i the Brewers Hall, Aldermabury Square, Lodo EC2V 7HR. The Special Busiess of the meetig icludes a resolutio to adopt ew Articles of Associatio of the Compay, as described above, ad to seek authority to allot shares ad the disapplicatio of pre-emptio rights. The Compay will also be seekig authority to make market purchases of shares i the Compay up to a maximum of 10% of the Compay s shares. Further detail of all these proposals will be set out i the Notice of the Aual Geeral Meetig which is a separate documet which will be set to all shareholders. Idepedet Auditors The previous auditors, PricewaterhouseCoopers LLP resiged as auditors to the Compay o 22 September 2008, followig a audit teder process. Deloitte & Touche LLP were subsequetly appoited to fill the casual vacacy arisig o resigatio of the previous auditors. A resolutio to appoit Deloitte & Touche LLP as auditors ad to authorise the Directors to determie their remueratio will be proposed at the forthcomig Aual Geeral Meetig of the Compay. By order of the Board NP Ligwood Compay Secretary 17 November 2008

39 37 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets Corporate Goverace Compliace Statemet The Board recogises the importace of high stadards of corporate goverace throughout the Group. The Board is accoutable to the Compay s shareholders for good goverace ad this statemet sets out how the priciples set out i the FRC Combied Code o Corporate Goverace ( the Code ), issued i Jue 2006, are applied by the Compay. The Board cofirms that the Compay has complied with all of the Provisios set out i Sectio 1 of the Code, throughout the year. Directors The Board The Board comprises three o-executive Directors, icludig the Chairma, ad three Executive Directors, providig a wide rage of skills ad experiece. The biographical details of the Board members are set out o pages 18 ad 19. The Board has six scheduled meetigs each year ad meets more frequetly as required. It met o six occasios durig the year uder review. The followig table sets out the umber of meetigs of the Board ad its Stadig Committees durig the year ad idividual attedace by Board members at these meetigs: Audit Remueratio Nomiatio Board Committee Committee Committee Number of meetigs durig the year No-Executive Directors: JL Reocks (Chairma) JW Matthews IM Grice Executive Directors*: BM Thompso 6 I Hederso 6 NP Ligwood 6 *The Executive Directors atted all the meetigs of the Audit Committee; BM Thompso also atteded the meetigs of the Nomiatio ad Remueratio Committees durig the year. The duties of the Board ad its Committees are set out clearly i formal terms of referece which are reviewed regularly ad state the items specifically reserved for decisio by the Board. The Board establishes overall Group strategy, icludig ew acquisitios ad withdrawal from existig activities. It approves the Group s commercial strategy ad the operatig budget ad reviews performace through mothly reports ad maagemet accouts. The approval of acquisitios, for the most part, is a matter reserved for the Board, save that it delegates to the Chief Executive Officer the resposibility for such activities to a specified level of authority. Similarly, there are authority levels coverig capital expediture which ca be exercised by the Chief Executive Officer. Beyod these levels of authority, projects are referred to the Board for approval. The Board establishes the remueratio of o-executive Directors ad the Compay s framework of executive remueratio ad its cost i the light of recommedatios made by the Remueratio Committee. Other matters reserved to the Board iclude treasury policies, iteral cotrol, risk maagemet ad the appoitmet or removal of the Compay Secretary. The Compay maitais appropriate isurace cover i respect of legal actio agaist its Directors. Chairma ad Chief Executive The roles of the Chairma, who is o-executive, ad the Chief Executive Officer are separate ad clearly defied. The Chairma is also Chairma of Nestor Healthcare plc ad Itelliget Eergy plc ad has a umber of other Board appoitmets. The Board is satisfied that the Chairma s other Board appoitmets ad commitmets do ot place costraits o his ability properly to fulfil his role as Chairma of Diploma PLC. Board Balace ad Idepedece The o-executive Directors are appoited for specified terms, the details of their respective appoitmets beig as set out i the Remueratio Report o page 43. No-Executive Directors are required to iform the Board of ay chages to their other appoitmets. The o-executive Directors are determied by the Board to be idepedet i character ad judgemet ad there are o relatioships or circumstaces which could affect, or appear to affect, a Director s judgemet. JW Matthews is the seior idepedet Director. There are three stadig Committees of the Board to which various matters are delegated. Membership of the Committees is set out o page 19 ad terms of referece are available o request ad are set out o the Compay s website. I order to esure that udue reliace is ot placed o particular idividuals, the Board has decided that all its idepedet o-executive Directors should serve o all Committees. The Board regularly reviews the chairmaship of its Committees. Durig the year the Chairma has had meetigs with the o- Executive Directors, without the Executive Directors preset. Appoitmets to the Board The Board has established a Nomiatio Committee which leads the process for Board appoitmets ad makes recommedatios to the Board. The members of the Nomiatio Committee are JL Reocks, who is the Chairma, ad the two o-executive Directors.

40 38 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets Corporate Goverace cotiued The Committee would be chaired by the seior idepedet Director o ay matter cocerig the chairmaship of the Compay. The Compay Secretary is the Secretary to the Committee. The Nomiatio Committee has writte terms of referece which were reviewed ad updated durig 2005, coverig the authority delegated to it by the Board. These iclude the followig duties: To be resposible for idetifyig ad omiatig, for the approval of the Board, cadidates to fill Board vacacies as ad whe they arise. Before makig a appoitmet, the Committee will evaluate the balace of skills, kowledge ad experiece o the Board ad i the light of this evaluatio, prepare a descriptio of the role ad capabilities required for a particular appoitmet. I idetifyig suitable cadidates, the Committee shall cosider cadidates o merit ad agaist objective criteria, takig care that appoitees have eough time available to devote to the positio. The Committee may: use the services of exteral advisers to facilitate the search; ad cosider cadidates from a wide rage of backgrouds, both iterally ad exterally. O appoitmet, Directors udertake a iformal iductio process which is desiged to develop kowledge ad uderstadig of the Compay s busiess, ad icludes visits to various Group operatig sites. The Nomiatio Committee met oce durig the year uder review. Iformatio ad Professioal Developmet The mai Board papers comprisig a ageda ad formal Board reports, together with briefig papers o specific matters, are set to the Directors i advace of each Board meetig. The traiig eeds of the Directors are periodically discussed at meetigs with briefigs as ecessary o various elemets of corporate goverace ad regulatory issues. The Compay Secretary acts as a advisor to the Board o matters cocerig goverace ad regulatory issues ad he esures Board procedures are complied with. All Directors have access to his advice ad a procedure also exists for Directors to take idepedet professioal advice at the Compay s expese. No such advice was sought durig the year. The appoitmet ad removal of the Compay Secretary ad his remueratio are matters for the Board as a whole. The Board has decided that because of the relative small size of the Compay ad to limit its costs, the role of the Compay Secretary should be combied with that of the Group Fiace Director. This matter is regularly reviewed by the Board. Performace Evaluatio Durig the year the Board completed the process of evaluatig its ow performace, together with that of its Committees ad idividual Directors, icludig the Chairma. The results of the evaluatio process are summarised for presetatio to the Board ad areas for improvemet are idetified ad actio take where ecessary. Re-electio All Directors must stad for electio at the first Aual Geeral Meetig after they are appoited. The Articles provide that all Directors will stad for re-electio at least every three years. Remueratio The Board has established a Remueratio Committee cosistig exclusively of idepedet o-executive Directors. The applicatio of corporate goverace priciples i relatio to the Directors remueratio is described i the Remueratio Report o page 41. Accoutability ad Audit Fiacial Reportig It is a requiremet of the Code that the Board should preset a balaced ad uderstadable assessmet of the Compay s positio ad prospects. This requiremet exteds to iterim ad other price sesitive public reports ad to reports to regulators, as well as to iformatio required to be preseted by statutory requiremets. I this cotext, referece should be made to the Statemet of Directors Resposibilities o page 47, which icludes a statemet i compliace with the Code regardig the Group s status as a goig cocer, ad to the Reports of the Auditors o pages 77 ad 78, which icludes a statemet by the auditors about their reportig resposibilities. Iteral Cotrol The Board ackowledges that it is resposible for the Group s system of iteral cotrol ad for reviewig its effectiveess. Such a system is desiged to maage rather tha elimiate the risk of failure to achieve busiess objectives ad ca oly provide reasoable ad ot absolute assurace agaist material misstatemet or loss. Throughout the year, the Group has bee i full compliace with the Combied Code provisios o iteral cotrol. The Board has established a clear orgaisatioal structure with defied authority levels. The day to day ruig of the Group s busiess is delegated to the Executive Directors of the Compay. The Executive Directors visit each operatig uit o a regular basis ad meet with both operatioal ad fiace maagemet ad staff. Key fiacial ad operatioal measures are reported o a weekly ad/or mothly basis ad are measured agaist both budget ad iterim forecasts which have bee approved ad reviewed by the Board. Each operatig uit is required to prepare a aual self assessmet report o iteral cotrol ad these are reviewed by the Board. Durig the year the Board has carried out a review of the effectiveess of the Group s systems of iteral cotrol. This review icluded a risk assessmet process o the key fiacial, operatioal ad compliace risks to idetify, evaluate ad maage sigificat risks to the Group s busiess. The assessmets have bee effected at both Group ad idividual compay level. They icluded commo defiitios of risk ad esure, as far as practicable, that the policies ad procedures established by the Board are appropriate to maage the perceived risks to the Group. Durig the year, the risk assessmet process revealed o sigificat risks of which the Board was ot previously aware.

41 39 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets The risks ad ucertaities which are curretly judged to have the largest potetial impact o the Group s log term performace are set out i the Busiess Review o pages 21 to 35. Durig 2008 the Group maitaied its programme of iteral audit reviews at most of its busiesses usig experieced resources from withi the Group fiace departmet. The Audit Committee keeps uder review the eed for a idepedet iteral audit fuctio i the Group. The Audit Committee believes that the Group s system of iteral cotrol is appropriate for a group of the size ad ature of Diploma PLC ad the Audit Committee s curret view is that a separate idepedet iteral audit fuctio is ot ecessary. Audit Committee ad Auditors The Board has established a Audit Committee comprisig the three o-executive Directors. The Committee is Chaired by JW Matthews. The Compay Secretary is the Secretary to the Committee. The mai roles ad resposibilities of the Committee are set out i writte terms of referece, which were reviewed ad updated durig 2005 ad which geerally ecompass those set out i the Code, which are as follows: to moitor the itegrity of the fiacial statemets of the Group ad ay formal aoucemets relatig to the Group s fiacial performace, reviewig sigificat fiacial judgemets cotaied therei; to review the Group s iteral fiacial cotrols ad its iteral cotrols ad risk maagemet systems; to make recommedatios to the Board, for it to put to shareholders for approval i geeral meetig, i relatio to the appoitmet, re-appoitmet ad removal of the exteral auditors ad to approve the terms of egagemet of the exteral auditors; to review ad moitor the exteral auditors idepedece ad objectivity ad the effectiveess of the audit process takig ito cosideratio relevat UK professioal ad regulatory requiremets; to develop ad implemet policy o the egagemet of the exteral auditor to supply o-audit services, takig ito accout relevat guidace regardig the provisio of oaudit services by exteral auditors; ad to report to the Board, idetifyig ay matters i respect of which it cosiders that actio or improvemet is eeded ad makig recommedatios as to the steps to be take. I additio, the Audit Committee has a importat role to play through its resposibility for, ad oversight of, the auditor relatioship ad auditor idepedece. The Committee recogises that auditor idepedece is a essetial part of the audit framework ad the assurace it provides. The Committee ormally meets at least five times a year, but met eight times durig the year uder review i order to udertake a review of the audit egagemet (described further below). The exteral auditors ad the Executive Directors geerally atted Audit Committee meetigs. I additio, the Committee periodically meets the exteral auditors without the Executive Directors preset. The Audit Committee s resposibilities are discharged i the followig maer: at its meetigs i May ad November, the focus falls o a review of the Iterim Aoucemet/Report ad the Prelimiary Aoucemet/Aual Report respectively. O both occasios, the Committee receives reports from the Group Fiace Director ad from the exteral auditors idetifyig ay accoutig or judgemetal issues requirig its attetio; the exteral auditors preset their audit pla at the September meetig; ad the Committee meets to approve formal Iterim Maagemet Statemets which are released to the market i Jauary ad August, i accordace with the Disclosure ad Trasparecy Rules. The Committee has also formally reviewed ad approved the arragemets by which Compay employees may, i cofidece, raise cocers about possible irregularities i fiacial reportig or other matters (so called whistleblowig procedures). As oted above, oe of the primary resposibilities of the Audit Committee is to make recommedatios to the Board i relatio to the appoitmet, reappoitmet ad removal of the exteral auditors. Followig the completio of the 2007 Aual Report, the Committee decided that it was appropriate to review the audit egagemet; the icumbet firm havig bee auditors to the Group for a period i excess of te years. The Committee ivited each of the Big 4 audit firms (icludig the icumbet firm) to propose for the audit of the Group; the Committee felt that because of the may differet geographies i which the Group operates, it was appropriate to limit the process to these four audit firms. As part of the teder process, each firm was give access to two of the Group s larger busiesses, as well as to the Executive Directors ad seior fiacial maagemet at the Group s corporate head office. Each firm also met separately with the Chairma of the Audit Committee ad the Chairma of the Compay. Each firm was asked to submit a audit teder documet to the Committee which set out their proposed audit scope, methodology ad team. They were also ivited to make a presetatio to the Committee, at which the Executive Directors were also preset. A umber of factors were take ito accout by the Committee i assessig the competig audit proposals, icludig: Clarity the methodology to be used i providig the exteral audit service ad other services had to be clearly articulated i the proposal. Uderstadig the proposal had to demostrate that the issues that might be of relevace to the audit of the Compay had bee uderstood ad factored ito the proposal as appropriate. Value for moey the proposal had to represet, i overall terms, a effective ad cost efficiet exteral audit service. Based o these factors, the Committee recommeded to the Board the appoitmet of Deloitte & Touche LLP as auditors to the Compay ad the Group for the year eded 30 September 2008.

42 40 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets Corporate Goverace cotiued O a aual basis, the Committee also assesses aually the effectiveess of the exteral audit process. This assessmet covers all aspects of the audit service provided by the Compay s exteral auditors. The Committee also reviews aually a report o the exteral auditors ow quality cotrol procedures. The Committee has also established a set of guidelies coverig the type of o-audit work that ca be assiged to auditors. These relate to further assurace services where the auditors detailed kowledge of the Group s affairs meas that they may be best placed to carry out such work. This exteds to, but is ot restricted to, shareholder ad other circulars, regulatory reports, ad o occasios, work i coectio with disposals. Work i coectio with acquisitios, icludig due diligece reviews, is geerally ot provided by the auditors, but is put out to teder to other firms. Taxatio services are ot provided by the auditors; a separate firm is retaied to provide tax advice, icludig ay assistace with tax compliace matters geerally. I other circumstaces, proposed assigmets are put out to teder ad decisios to award work take o the basis of demostrable competece ad cost effectiveess. The Committee receives a aual report which provides details of ay assigmets ad related fees carried out by the auditors i additio to their ormal audit work, ad these are reviewed agaist the above guidelies. Commuicatios with Shareholders The Compay maitais regular cotact with major shareholders to commuicate clearly the Group s objectives ad moitors movemets i sigificat shareholdigs. The Compay recogises the importace of commuicatig with its shareholders ad does this through its Aual ad Iterim Reports, Iterim Maagemet Statemets ad at the Aual Geeral Meetig ad through the processes described below. Most shareholder cotact is with the Chief Executive Officer ad Group Fiace Director ad presetatios are made o the operatig ad fiacial performace of the Group ad its loger term strategy. The slide presetatios made to represetatives of the ivestmet commuity followig the aoucemet of the Prelimiary ad Iterim results are made available o the Compay s website at The o-executive Directors are give regular updates as to the views of istitutioal shareholders ad a idepedet isight is sought through research carried out twice a year by the Compay s advisors. Through these processes, the Board is kept abreast of key issues. The opportuity for shareholders to meet the Chairma or Seior Idepedet Director, separately from the Executive Directors, is available o request. Notice of the Aual Geeral Meetig is set to shareholders at least twety workig days prior to the meetig ad icludes a separate resolutio o each substatially separate issue. I the absece of a poll beig called, proxy votes cast are declared after each resolutio has bee dealt with o a show of hads. The Chief Executive Officer ad Compay Secretary geerally deal with questios from idividual shareholders. All shareholders have the opportuity to put questios at the Compay s Aual Geeral Meetig whe the Chairma ad Chief Executive Officer give a statemet o the Group s performace durig the year, together with a statemet o curret tradig coditios. The Chairma of the Board ad of the Remueratio ad Audit Committees will ormally be available to aswer questios at the meetig.

43 41 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets Remueratio Report This Report is preseted to shareholders by the Board ad provides iformatio o Directors remueratio. This Report complies with the Directors Remueratio Report Regulatios 2002 ad also sets out how the priciples of the FRC Combied Code o Corporate Goverace ( the Code ) issued i Jue 2006 relatig to Directors remueratio are applied. A resolutio will be put to shareholders at the Aual Geeral Meetig o 14 Jauary 2009, ivitig them to cosider ad approve this Report. Performace The Board recogises the importace of likig remueratio policies to the performace of the Group ad shareholder retur. The graph below shows the total shareholder retur for a holdig of the Compay s ordiary shares for the five fiacial years to 30 September This is compared to the total shareholder retur for a hypothetical holdig i the FTSE mid-250 idex (excludig ivestmet trusts). This was chose as the Remueratio Committee ( the Committee ) believes it is the most appropriate idex to which the Compay s performace ca be compared ad it is the idex which is used for the purposes of the Log Term Icetive Pla. Total shareholder retur is the growth i value of a share plus the value of divideds re-ivested i the Compay s shares o the day o which they are paid Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Sep-08 Diploma FTSE 250 (ex Ivestmet Trusts) The five year total shareholder retur figures for Diploma PLC ad the FTSE mid-250 idex were as follows: Diploma FTSE mid-250 September September % +64%

44 42 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets Remueratio Report cotiued Remueratio Committee The Committee is govered by formal terms of referece agreed by the Board ad comprises two o-executive Directors ad the Chairma. The writte terms of referece were reviewed ad updated durig 2005 ad are published o the Compay s website. The Committee comprised IM Grice who is the Chairma, JW Matthews ad JL Reocks. The Committee determies the specific remueratio packages, icludig share schemes, of the Executive Directors ad also moitors the remueratio of other seior executives who report to the Executive Directors. The Chief Executive atteds meetigs at the ivitatio of the Committee to provide guidace as appropriate o the impact of remueratio policy ad advice o the performace of Executive Directors. The Chief Executive does ot atted meetigs whe his ow positio is discussed. Ay matter affectig the Chairma is discussed by the Committee without the Chairma preset. The Committee met o four occasios durig the year. The Committee received advice from Towers Perri i July 2008 o matters relatig to Directors Remueratio. The advice was summarised i a report which was based o a aalysis of disclosed data for te comparative PLCs ad covered, for the Executive Directors: basic salaries ad aual bouses; structure of the Log Term Icetive Pla ( LTIP ); potetial itroductio of a Co-Ivestmet Pla; ad pesio cotributios. I additio, the report made observatios o the level of fees for the Chairma ad o-executive Directors. The Committee took the report s fidigs ito accout i establishig remueratio policies for the 2009 fiacial year. Followig the report from Towers Perri durig the year, the Committee is satisfied that the curret share icetive scheme, icludig grat levels ad performace coditios, remais appropriate to the Compay s curret circumstaces ad prospects. Remueratio Policy This Remueratio Report sets out the Compay s policy o Directors remueratio for 2008 ad, so far as practicable, for subsequet years. I framig this policy the Committee has give full cosideratio to the provisios of the Code. The Compay s policy for Executive Director remueratio is that total remueratio (basic remueratio plus short term ad log term remueratio) should reward both short ad log term results, deliverig competitive rewards for target performace. The Compay s policy for basic Director remueratio is to pay competitive market salaries ad associated beefits, havig regard to the Directors experiece, the size ad complexity of the job ad ay other relevat factors, such as busiess sector expertise. Share owership is ecouraged. Equity based reward programmes alig the iterests of Executive Directors with those of shareholders ad the log term success of the Group. The Committee cosiders that a successful remueratio policy eeds to be sufficietly flexible to take accout of future chages i the Compay s busiess eviromet ad i remueratio practice. Ay chages i policy for years after 2008 will be described i future Remueratio Reports. Ay statemets i this Report i relatio to remueratio policy for years after 2008 should be cosidered i this cotext. Compoets of Remueratio The curret elemets of remueratio for Executive Directors are as follows: Salary ad Beefits The Committee reviews salaries takig accout of Group ad persoal performace. Accout is also take of the levels of pay awarded elsewhere i the sector ad competitive market practice. The value of o-salary beefits for Executive Directors is icluded i the table of remueratio o page 44 ad comprises life ad health isurace ad cash paymets i lieu of a car. The value of these beefits is ot pesioable, but is assessable to tax. Short Term Icetives The Compay operates a aual performace related cash bous scheme for Executive Directors. The maximum bous paymet uder this scheme i 2008 is 100% of basic salary for the Chief Executive Officer ad 70% for other Executive Directors. O target bous is 60% for the Chief Executive Officer ad 40% for other Executive Directors. The bous for the Chief Executive Officer is wholly depedet o the fiacial performace of the Group; the bous for the other Executive Directors is 80% based o the fiacial performace of the Group with the remaiig 20% subject to achievemet of specified persoal objectives. Log Term Icetive Pla ( LTIP ) The Compay operates a Log Term Icetive Pla ( LTIP ) for Executive Directors. I lie with curret best practice, the LTIP provides for aual grats to Executive Directors. Uder the LTIP, Executive Directors are awarded rights to acquire ordiary shares. Each award made uder the LTIP is subject to performace coditios which will determie how may, if ay, of the shares uder the award the participat is etitled to receive after the three year performace period. The value of awards which ca be made i ay year to a participat will ormally be equal to 100% of basic salary. This limit ca be icreased to a maximum of 200% i the case of a participat who withi the previous 12 moths joied the Group or received a sigificat promotio. I ay te-year period, the umber of shares which may be issued or placed uder optio uder ay executive share pla established by the Compay, may ot exceed 5% of the issued ordiary share capital of the Compay from time to time. I ay te-year period the umber of shares which may be issued or placed uder optio, uder ay all-employee share pla established by the Compay, may ot exceed 10% of the issued ordiary share capital of the Compay, from time to time. Two performace coditios apply to the awards so that the vestig of 50% of the award will be liked to earigs per share ( EPS ) growth ad 50% will be liked to Total Shareholder Retur (share price growth ad reivested divideds) ( TSR ), measured by compariso with the FTSE mid-250 idex (excludig ivestmet trusts). The first performace coditio is that the average aual compoud growth i the Compay s earigs per share ( EPS ) over the three cosecutive fiacial years, followig the year prior to the grat, must exceed the aual compoud growth rate i the UK Retail Price Idex (RPI) plus 3% per aum, over the same period. At this level of performace, 30% of the award relatig to EPS performace would vest. Full vestig of the award relatig to EPS performace requires that the Compay s average aual compoud growth i EPS exceeds the compoud growth i RPI plus 5% per aum over the period. Betwee these two poits, a icreasig proportio of vestig occurs at RPI plus

45 43 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets 3.5%, RPI plus 4% ad RPI plus 4.5%. For the purposes of this coditio, EPS will comprise adjusted EPS as defied i ote 2 to the cosolidated fiacial statemets. The defiitio of adjusted EPS remais cosistet with the defiitio of EPS approved by the Remueratio Committee i previous years. EPS was chose as the appropriate measure of performace as it provides a absolute bechmark of the Compay s performace ad is therefore a suitable balace to the relative TSR performace measuremet. The secod performace coditio compares the growth of the Compay s TSR over a three year period to that of the compaies i the FTSE mid-250 idex (excludig ivestmet trusts). The Compay s rakig amogst the comparator compaies determies the percetage of shares which will vest to a participat. For the participat to receive the full umber of shares awarded, the Compay must rak i the top quartile of the comparator group. Where the Compay s performace is at the media, 30% of ay award is vested. Betwee these two poits, vestig is o a straight-lie basis. Where performace over the three year period does ot reach the media rakig, o shares are vested, the relevat award lapses ad there is o re-testig of performace. The TSR performace coditio was chose as the Committee believes that TSR is a appropriate method of comparig the performace of the Compay to that of its peers. The FTSE mid-250 idex (excludig ivestmet trusts) was chose as the comparator group as there are a limited umber of compaies which are directly comparable to the Compay ad the idex was therefore felt to be a suitable yardstick of relative performace. Subsistig awards may vest before their vestig date i the evet of a chage of cotrol of the Compay, i accordace with the rules of the LTIP. Beefits uder the LTIP are ot pesioable. Awards uder this LTIP have bee made aually by the Remueratio Committee to BM Thompso, I Hederso ad NP Ligwood, the last award beig made o 17 December Followig the ed of the relevat performace period, the umber of shares over which a award vests is determied ad a participat may the exercise the award o paymet of 1 at ay time withi te years of the date of grat. The performace period for the awards grated o 7 Jauary 2004, 29 November 2004 ad 2 December 2005 eded o 30 September 2006, 2007 ad 2008, respectively. The umber of shares over which the 2005 awards have vested at 30 September 2008 are set out o page 44. The outstadig awards will vest o 30 September 2009 ad 2010 respectively, subject to the performace coditios set out above, measured over three year performace periods edig o 30 September 2009 ad Pesio Arragemets The Executive Directors receive pesio cotributios from the Compay which are paid ito moey-purchase schemes. No Directors are members of the Group s defied beefit schemes. The pesio cotributios are 20.0% (2007: 20.0%) of base remueratio, excludig bouses. Relative Performace of Remueratio Elemets The Committee s view is that the performace related elemets of the remueratio package for Executive Directors should be a sigificat elemet of the total. This serves to alig the iterests of such Directors with shareholders. Assumig full paymet of all elemets, more tha 60% of the total remueratio of each of the Executive Directors would be performace related. Service Cotracts Executive Directors The service agreemets of the Executive Directors iclude the followig terms: Date of Cotract Notice Period BM Thompso 13 July moths I Hederso 1 August moths NP Ligwood 3 July moths The Executive Directors are subject to rollig cotracts ad offer themselves for re-electio as Directors at least every three years i accordace with the Compay s Articles of Associatio. Paymets o termiatio for Executive Directors are restricted to the value of salary ad cotractual beefits for the otice period. There is o predetermied special provisio for Executive Directors with regard to compesatio i the evet of loss of office. The Remueratio Committee would cosider the circumstaces of idividual cases of early termiatio ad determie compesatio paymets accordigly. No-Executive Directors The fees for the o-executive Directors are determied by the Board as a whole, havig regard to market practice. Busiess expeses are also reimbursed. The o-executive Directors do ot have cotracts of service, but are appoited pursuat to letters of appoitmet. Such appoitmets are for a oe year term ad the Compay s policy is for re-appoitmet to be o a aual basis. No-Executive Directors are ot eligible to participate i ay icetive pla or Compay pesio arragemet ad are ot etitled to ay paymet i compesatio for ay early termiatio of their appoitmet. They are due for re-appoitmet to the Board o the followig dates: Date of Re-appoitmet Reewal IM Grice 24 Jauary 2009 Aual JW Matthews 24 July 2009 Aual JL Reocks 11 July 2009 Aual All Directors appoitmets are subject to approval of the shareholders i Geeral Meetig sought o a three yearly basis. Durig the year eded 30 September 2008 the o-executive Directors received a base fee of 30,000 per aum (2007: 30,000). The Chairma, who is a o-executive Director, received a salary ad fees of 60,000 per aum (2007: 60,000) for his services durig the year eded 30 September 2008.

46 44 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets Remueratio Report cotiued Total Remueratio of the Directors The total remueratio of the Directors for the year eded 30 September 2008 is set out below. Fixed emolumets Performace Salary Other based & fees beefits bous Total Total IM Grice I Hederso NP Ligwood JW Matthews JL Reocks Lord Stewartby 8 BM Thompso ,408 1,385 Note 1. IM Grice was appoited to the Board o 24 Jauary 2007; Lord Stewartby retired from the Board o 10 Jauary The pesio cotributios paid o behalf of the Directors are as follows: BM Thompso I Hederso NP Ligwood Log Term Icetive Pla O 17 December 2007 Executive Directors received a share award with a face value of oe times salary as set out below. O 30 September 2008 the performace period relatig to the award made o 2 December 2005 eded ad the LTIP awards vested ad became exercisable by each of the Directors, as set out below. LTIP shares awarded LTIP shares Total LTIP shares durig the vested o LTIP shares LTIP shares held at year eded 30 Sept 2008 lapsed o Share price held at 30 Sept Sept 2008 (ote 1) 30 Sept 2008 o date of Vestig 30 Sept 2008 Number Number Number Number award date Number BM Thompso 2 December , ,099 24, p 30 Sept December , p 30 Sept , December , p 30 Sept ,225 I Hederso 2 December , ,729 14, p 30 Sept December , p 30 Sept , December , p 30 Sept ,715 NP Ligwood 2 December , ,729 14, p 30 Sept December , p 30 Sept , December , p 30 Sept ,715 Note: 1. The awards which vested o 30 September 2008 were calculated i accordace with the performace coditios described o pages 42 ad 43. The awards may be exercised at ay time before 2 December 2015 o paymet of 1. I aggregate 88.4% of the total LTIP award grated o 2 December 2005 vested ucoditioally ad became exercisable. l Uder the first performace coditio, the average aual compoud growth rate i the Compay s adjusted EPS (as defied o page 52) over the three year period eded 30 September 2008 was 15.3% pa; this compares with a aual compoud growth rate i RPI +5% over the same period of 7.9% pa. Accordigly 100% of the shares relatig to this award (represetig 50% of the total award) vested ucoditioally. l Uder the secod performace coditio, the Compay s TSR grew 29.0% over the three year period eded 30 September 2008; this growth gave the Compay a rakig of 54 i the comparator group ad put the Compay i the 67 percetile. The media TSR was 1.8% ad the lower threshold of the upper quartile was 45.3%. Accordigly 77% of the shares relatig to this part of the award vested ucoditioally.

47 45 Diploma PLC Aual Report ad Accouts 2008 Regulatory Statemets Directors Shareholdigs Ordiary shares of 5p each At At At 17 November 30 September 1 October Number Number Number IM Grice 20,000 20,000 15,000 I Hederso 421, , ,000 NP Ligwood 195, , ,000 JW Matthews JL Reocks 214, ,766 50,000 BM Thompso 1,026,940 1,026, ,810 Note: 1. The above table excludes iterests i the Compay s Log Term Icetive Pla, disclosed above. As described above, followig the vestig of the LTIP awards the Executive Directors are able to exercise their vested awards to acquire ordiary shares of 5p each i the Compay for a aggregate cosideratio of 1. The uderlyig shares are held by the Diploma Employee Beefit Trust ad are trasferred to the participat o exercise. Whilst ordiary shares are held withi the Diploma Employee Beefit Trust, the votig rights i respect of those shares are exercisable by the trustees i accordace with their fiduciary duties. At 30 September 2007 ad 2008 the umber of shares which are the subject of vested LTIP awards ad are held by each Director were as follows: Vested LTIP awards Share price Amout At 30 Sept Exercised Vested At 30 Sept At 30 Sept At 30 Sept At 30 Sept At 30 Sept 2007 durig 2008 durig Number Number Number Number BM Thompso 118,125 (118,125) 188, , p 152.5p 260, ,851 I Hederso 70,875 (70,875) 112, , p 152.5p 156, ,912 NP Ligwood 70,875 (70,875) 112, , p 152.5p 156, ,912 Note: 1. O 26 November 2007, each participat exercised their optio to acquire shares which had vested at 30 September 2007, for cosideratio of 1. The share price at the date of exercise was 176.0p. 2. The share price durig the year to 30 September 2008 raged from 136.0p to 228.0p The iformatio set out above uder the headigs Total Remueratio of the Directors ad Directors Shareholdigs has bee audited. All other iformatio provided i the Remueratio Report is ot subject to audit. This Remueratio Report has bee approved by the Board ad siged o its behalf by: IM Grice Chairma of the Remueratio Committee 17 November 2008

48 46 Diploma 46 Diploma PLC Aual PLC Aual Report Report ad Accouts ad Accouts Fiacial Fiacial Statemets Statemets For Sectio the year eded 30 September Fiacial Statemets Cosolidated Icome Statemet 48 Cosolidated Balace Sheet 49 Cosolidated Statemet of Recogised Icome ad Expese 50 Cosolidated Cash Flow Statemet 51 Notes to the Cosolidated Fiacial Statemets 52 Group Accoutig Policies 69 Paret Compay Balace Sheet 75 Notes to the Paret Compay Fiacial Statemets 76 Idepedet Auditors Reports 77 Pricipal Subsidiaries 79 Fiacial Caledar ad Shareholder Iformatio 79 Five Year Record 80

49 47 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Statemet of Directors Resposibilities for the Fiacial Statemets The Directors are resposible for preparig the Aual Report, icludig the Group ad Paret Compay fiacial statemets, i accordace with applicable law ad regulatios. Compay law requires the directors to prepare Group ad Paret Compay fiacial statemets for each fiacial year. Uder that law the Directors are required to prepare Group fiacial statemets i accordace with IFRSs as adopted by the Europea Uio ( EU ) ad have elected to prepare the Paret Compay fiacial statemets i accordace with UK Accoutig Stadards. The Group fiacial statemets are required by law ad IFRSs as adopted by the EU, to preset fairly the fiacial positio ad the performace of the Group; the Compaies Act 1985 provides i relatio to such fiacial statemets, that refereces i the relevat part of that Act to fiacial statemets givig a true ad fair view, are refereces to their achievig a fair presetatio. I preparig each of the Group ad Compay fiacial statemets, the Directors are required to: Select suitable accoutig policies ad the apply them cosistetly. Make judgemets ad estimates that are reasoable ad prudet. For the Group fiacial statemets, state whether they have bee prepared i accordace with IFRSs, as adopted by the EU. For the Paret Compay fiacial statemets, state whether applicable UK Accoutig Stadards have bee followed, subject to ay material departures disclosed ad explaied i the Paret Compay fiacial statemets. Prepare the fiacial statemets o the goig cocer basis, uless it is iappropriate to presume that the Group ad the Paret Compay will cotiue i busiess. The Directors are resposible for keepig proper accoutig records that disclose with reasoable accuracy at ay time the fiacial positio of the Paret Compay ad eable them to esure that its fiacial statemets comply with the Compaies Act They have geeral resposibility for takig such steps as are reasoably ope to them to safeguard the assets of the Group ad to prevet ad detect fraud ad other irregularities. The Directors are resposible for the maiteace ad itegrity of the corporate ad fiacial iformatio icluded o the Compay s website. Legislatio i the UK goverig the preparatio ad dissemiatio of fiacial statemets may differ from legislatio i other jurisdictios. Each of the Directors cofirms that so far as he is aware, there is o relevat audit iformatio of which the Compay s auditors are uaware ad that he has take all steps that he ought to have take as a director i order to make himself aware of ay relevat audit iformatio ad to establish that the Compay s auditors are aware of that iformatio. The Directors are satisfied that the Group has adequate resources to meet its operatioal eeds for the foreseeable future ad accordigly, they cotiue to adopt the goig cocer basis i preparig the fiacial statemets. Directors resposibility statemet The Directors cofirm that to the best of their kowledge: The Group cosolidated fiacial statemets, prepared i accordace with IFRSs as adopted by the EU, ad the Paret Compay fiacial statemets, prepared i accordace with UK Accoutig Stadards, give a true ad fair view of the assets, liabilities, fiacial positio ad profit or loss of the Group ad Paret Compay ad the udertakigs icluded i the cosolidatio take as a whole: ad the Aual Report icludes a fair review of the developmet ad performace of the busiess ad the positio of the issuer ad the udertakigs icluded i the cosolidatio take as a whole, together with a descriptio of the pricipal risks ad ucertaities faced by the Group. By order of the Board BM Thompso Chief Executive Officer 17 November 2008 NP Ligwood Group Fiace Director

50 48 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Cosolidated Icome Statemet For the year eded 30 September Note m m Reveue 3, Cost of sales (110.0) (90.1) Gross profit Distributio costs Admiistratio costs (4.8) (4.2) (32.9) (25.3) Operatig profit, before amortisatio of acquisitio itagible assets 3, Amortisatio of acquisitio itagible assets 11 (2.7) (1.0) Operatig profit Fiace (expese)/icome, et 6 (2.8) 1.2 Profit before tax Tax expese 7 (7.4) (7.5) Profit for the year Attributable to: Shareholders of the Compay Miority iterests Earigs per share Basic ad diluted earigs p 12.7p All activities, both i the curret ad previous year, relate to cotiuig operatios. Alterative Performace Measures (ote 2) Note m m Profit before tax Add: Amortisatio of acquisitio itagible assets Fair value remeasuremets Adjusted profit before tax Adjusted earigs per share p 14.0p The otes o pages 52 to 74 form part of these fiacial statemets.

51 49 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Cosolidated Balace Sheet For As at the 30 year September eded September Note m m No-curret assets Goodwill Acquisitio itagible assets Other itagible assets Property, plat ad equipmet Deferred tax assets Curret assets Ivetories Trade ad other receivables Cash ad cash equivalets Curret liabilities Trade ad other payables 16 (26.3) (27.1) Curret tax liabilities (3.3) (3.0) Other liabilities 19 (1.1) (4.8) (30.7) (34.9) Net curret assets Total assets less curret liabilities No-curret liabilities Retiremet beefit obligatios 23 (1.7) (1.6) Other liabilities 19 (11.2) (8.7) Deferred tax liabilities 13 (4.6) (5.1) Net assets Equity Share capital Capital redemptio reserve 0.2 Traslatio reserve Hedgig reserve 0.7 (0.6) Retaied earigs Total shareholders equity Miority iterests Total equity The cosolidated fiacial statemets were approved by the Board of Directors o 17 November 2008 ad siged o its behalf by: BM Thompso NP Ligwood Chief Executive Officer Group Fiace Director The otes o pages 52 to 74 form part of these fiacial statemets.

52 50 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Cosolidated Statemet of Recogised Icome ad Expese For the year eded 30 September Note m m Exchage rate adjustmets o foreig currecy et ivestmets 7.4 (0.1) Gais/(losses) o fair value of cash flow hedges 1.3 (0.6) Actuarial (losses)/gais o defied beefit pesio schemes 23 (0.5) 2.7 Deferred tax o items recogised i equity 13 (0.3) (0.6) Net icome recogised directly i equity for the year Profit for the year Total recogised icome ad expese for the year Attributable to: Shareholders of the Compay Miority iterests Other chages i shareholders equity Capital Share redemptio Traslatio Hedgig Retaied capital reserve reserve reserve earigs Total Note m m m m m m At 1 October Total recogised icome ad expese for the year attributable to shareholders (0.1) (0.6) Share-based paymets Purchase of ow shares (1.3) (1.3) Future purchases of miority iterests 19 (11.8) (11.8) Divideds 8 (5.4) (5.4) At 30 September (0.6) Total recogised icome ad expese for the year attributable to shareholders Bous issue of shares 4.6 (0.2) (4.4) Share-based paymets Purchase of ow shares (0.9) (0.9) Future purchases of miority iterests Divideds 8 (6.9) (6.9) At 30 September The otes o pages 52 to 74 form part of these fiacial statemets.

53 51 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Cosolidated Cash Flow Statemet For the year eded 30 September Note m m Cash flows from operatig activities Cash flow from operatios Fiace icome received, et 1.1 Tax paid (8.2) (8.0) Net cash from operatig activities Cash flows from ivestig activities Acquisitio of subsidiaries (et of cash acquired) 21 (7.6) (31.1) Deferred cosideratio paid 19 (0.3) (0.5) Proceeds from the sale of property, plat ad equipmet Purchase of property, plat ad equipmet 12 (1.6) (1.6) Purchase of other itagible assets 11 (0.3) (0.6) Net cash used i ivestig activities (9.6) (33.2) Cash flows from fiacig activities Divideds paid to shareholders 8 (6.9) (5.4) Divideds paid to miority iterests 20 (0.9) (0.3) Purchase of ow shares (0.9) (1.3) Net cash used i fiacig activities (8.7) (7.0) Net icrease/(decrease) i cash ad cash equivalets 2.3 (24.1) Cash ad cash equivalets at begiig of year Effect of exchage rates o cash ad cash equivalets 1.0 (0.2) Cash ad cash equivalets at ed of year Alterative Performace Measures (ote 2) m m Net icrease/(decrease) i cash ad cash equivalets 2.3 (24.1) Add: Divideds paid to shareholders Divideds paid to miority iterests Acquisitio of subsidiaries (et of cash acquired) Deferred cosideratio paid Free cash flow The otes o pages 52 to 74 form part of these fiacial statemets.

54 52 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Notes to the Cosolidated Fiacial Statemets For the year eded 30 September Geeral Iformatio Diploma PLC is a public limited compay registered ad domiciled i Eglad ad Wales ad listed o the Lodo Stock Exchage. The address of the registered office is 12 Charterhouse Square, Lodo, EC1M 6AX. The cosolidated fiacial statemets comprise the Compay ad its subsidiaries (together referred to as the Group ), ad were authorised by the Directors for publicatio o 17 November These statemets are preseted i UK sterlig, with all values rouded to the earest oe hudred thousad, except where otherwise idicated. The cosolidated fiacial statemets have bee prepared i accordace with Iteratioal Fiacial Reportig Stadards ( IFRS ), as adopted by the Europea Uio, ad i accordace with the Compaies Act 1985, as applicable to compaies reportig uder IFRS. The fiacial statemets of the Paret compay, Diploma PLC, have bee prepared i accordace with UK GAAP, ad are set out i a separate sectio of the Aual Report o pages 75 to Alterative Performace Measures The Group uses a umber of alterative (o-geerally Accepted Accoutig Practice ( o-gaap )) fiacial measures which are ot defied withi IFRS. The Directors use these measures i order to assess the uderlyig operatioal performace of the Group ad as such, these measures are importat ad should be cosidered alogside the IFRS measures. The followig o-gaap measures are referred to i this Aual Report. 2.1 Adjusted profit before tax O the face of the cosolidated icome statemet, adjusted profit before tax is separately disclosed, beig defied as profit before tax ad before the costs of restructurig or ratioalisatio of operatios, the profit or loss relatig to the sale of property, fair value remeasuremets uder IAS 32 ad IAS 39 i respect of future purchases of miority iterests ad the amortisatio ad impairmet of acquisitio itagible assets. The Directors believe that adjusted profit before tax is a importat measure of the uderlyig performace of the Group. 2.2 Adjusted earigs per share Adjusted earigs per share is calculated as the total of adjusted profit, less icome tax costs, but excludig the tax impact o the items icluded i the calculatio of adjusted profit ad the tax effects of goodwill i overseas jurisdictios, less profit attributable to miority iterests, divided by the weighted average umber of ordiary shares i issue durig the year. The Directors believe that adjusted earigs per share provides a importat measure of the uderlyig earig capacity of the Group. 2.3 Free cash flow O the face of the cosolidated cash flow statemet, free cash flow is reported, beig defied as et cash flow from operatig activities, after et capital expediture o fixed assets, but before expediture o busiess combiatios ad divideds paid to both miority shareholders ad the Compay s shareholders. The Directors believe that free cash flow gives a importat measure of the cash flow of the Group, available for future ivestmet. 2.4 Tradig capital employed I the segmet aalysis i ote 3, tradig capital employed is reported, beig defied as et assets less cash ad cash equivalets ad after addig back retiremet beefit obligatios, deferred tax, amouts i respect of future purchases of miority iterests ad adjustig goodwill i respect of the recogitio of deferred tax o acquisitio itagible assets. Retur o tradig capital employed is defied as beig adjusted profit before fiace icome ad tax, divided by tradig capital employed plus all historic goodwill ad as adjusted for the timig effect of major acquisitios ad disposals. Retur o tradig capital employed at the sector level does ot iclude historic goodwill. The Directors believe that retur o tradig capital employed is a importat measure of the uderlyig performace of the Group. 3. Busiess Segmet Aalysis For maagemet reportig purposes, the Group is orgaised ito three mai busiess segmets, Life Scieces, Seals ad Cotrols. These segmets form the basis of the primary reportig format disclosures below. The pricipal activities of each of these segmets is described i the Busiess Review o pages 21 to 35. Segmet reveue represets reveue from exteral customers; there is o iter-segmet reveue. Segmet results, assets ad liabilities iclude items directly attributable to a segmet, as well as those that ca be allocated o a reasoable basis. Life Scieces Seals Cotrols Total m m m m m m m m Reveue cotiuig operatios acquisitios Reveue Segmet operatig profit cotiuig operatios acquisitios Segmet operatig profit Amortisatio of acquisitio itagible assets (1.5) (0.6) (0.8) (0.3) (0.4) (0.1) (2.7) (1.0) Operatig profit

55 53 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets 3. Busiess Segmet Aalysis (cotiued) Segmet assets exclude cash ad cash equivalets, deferred tax assets ad corporate assets that caot be allocated o a reasoable basis to a busiess segmet. Segmet liabilities exclude retiremet beefit obligatios, deferred tax liabilities ad corporate liabilities that caot be allocated o a reasoable basis to a busiess segmet. These items are show collectively i the followig aalysis as uallocated assets ad uallocated liabilities, respectively. Life Scieces Seals Cotrols Total m m m m m m m m Operatig assets Goodwill Acquisitio itagible assets Uallocated assets: Deferred tax assets Cash ad cash equivalets Corporate assets Total assets Operatig liabilities (12.4) (11.3) (4.9) (4.1) (10.5) (11.1) (27.8) (26.5) Uallocated liabilities: Deferred tax liabilities (4.6) (5.1) Retiremet beefit obligatios (1.7) (1.6) Future purchases of miority iterests (11.2) (11.8) Corporate liabilities (2.9) (5.3) Total liabilities (48.2) (50.3) Net assets Other segmet iformatio Capital expediture Depreciatio (icludig software) Alterative Performace Measures (ote 2) Life Scieces Seals Cotrols Total m m m m m m m m Net assets Add/(less): Deferred tax, et Retiremet beefit obligatios Future purchases of miority iterests Cash ad cash equivalets (15.7) (12.4) Adjustmet to goodwill (4.1) (3.9) (1.2) (1.1) (0.7) (0.6) (6.0) (5.6) Group tradig capital employed Corporate (assets)/liabilities, et (0.1) 2.2 Segmet tradig capital employed

56 54 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Notes to the Cosolidated Fiacial Statemets For the year eded 30 September Geographic Segmet Aalysis by Origi Reveue Operatig profit* Gross assets Tradig capital employed Capital expediture m m m m m m m m m m Uited Kigdom Rest of Europe North America *before amortisatio of acquisitio itagible assets Group Employee Costs The key maagemet of the Group are the Executive Directors who have authority ad resposibility for plaig ad cotrollig all sigificat activities of the Group. The Directors emolumets ad iterests i shares of the Compay are give i the Remueratio Report o pages 41 to 45. The charge for share-based paymets of 0.5m relate to the Group s share schemes, described i the Remueratio Report. The fair value of services provided as cosideratio for part of the grat of the LTIP awards has bee based o a predicted future value model ad was 0.2m (2007: 0.2m). Group staff costs, icludig Directors emolumets, are as follows: m m Wages ad salaries Social security costs Pesio costs defied cotributio Share-based paymets The average umber of employees, icludig Executive Directors, durig the year were: Number Number Life Scieces Seals Cotrols Corporate 9 9 Number of employees average Number of employees year ed Fiace (Expese)/Icome, et m m Fiace icome iterest receivable o short term deposits et fiace icome from defied beefit pesio scheme (ote 23) Fiace expese iterest payable o bak borrowigs (0.3) fair value remeasuremet of put optios (ote 19) (3.0) (3.3) Net fiace (expese)/icome (2.8) 1.2 The fair value remeasuremet of 3.0m icludes 0.7m which relates to the uwidig of the discout o the liability for future purchases of miority iterests.

57 55 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets 7. Taxatio m m Curret tax The tax charge is based o the profit for the year ad comprises: UK corporatio tax Overseas tax Adjustmets i respect of prior year: UK corporatio tax (0.4) Overseas tax 0.2 (0.2) Total curret tax Deferred tax The deferred tax (credit)/charge based o the origiatio ad reversal of timig differeces comprises: Uited Kigdom Overseas Total deferred tax (0.3) 0.2 (0.5) 0.5 (0.8) 0.7 Total tax o profit for the year Factors affectig the tax charge for the year: The differece betwee the total tax charge show above ad the amout calculated by applyig the stadard rate of UK corporatio tax to the profit before tax is as follows: m m Profit before tax Tax o profit at UK effective corporatio tax rate of 29% (2007: 30%) Effects of: Higher tax rates o overseas earigs Adjustmets to tax charge i respect of previous periods (0.2) Fair value remeasuremets 0.9 Other permaet differeces (0.3) Total tax o profit for the year The Group ears its profits i the UK ad overseas. The stadard rate for UK corporatio tax is curretly 28%; however the effective tax rate for UK corporatio tax i respect of the year eded 30 September 2008 was 29% ad this rate has bee used for tax o profit i the above recociliatio. The Group s overseas tax rates are higher tha those i the UK, primarily because the profits eared i North America are taxed at stadard rates varyig from 32% to 38%.

58 56 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Notes to the Cosolidated Fiacial Statemets For the year eded 30 September Divideds pece pece per share per share m m Iterim divided, paid i Jue Fial divided of the prior year, paid i Jauary The Directors have proposed a fial divided i respect of the curret year of 5.0p (2007: 3.6p) which will be paid i Jauary 2009, subject to approval of shareholders at the Aual Geeral Meetig o 14 Jauary The total divided for the curret year, subject to approval of the fial divided, will be 7.5p (2007: 5.4p). Shares held by the Diploma Employee Beefit Trust are ot eligible for divideds. A recociliatio of the movemet i share capital is set out i ote (d), of the Paret Compay fiacial statemets o page Earigs Per Share Basic ad diluted earigs per share Basic ad diluted earigs per ordiary 5p share are calculated o the basis of the weighted average umber of ordiary shares i issue durig the year of 112,237,586 (2007: 112,473,930) ad the profit for the year attributable to shareholders of 13.3m (2007: 14.3m). There were o potetially dilutive shares. The comparative umber of shares i issue has bee restated to reflect the bous issue of shares o 21 Jauary Adjusted earigs per share Adjusted earigs per share, which is defied i ote 2, is calculated as follows: pece pece per share per share m m Profit before tax Tax expese (7.4) (7.5) Miority iterests (1.1) (0.5) Earigs for the year attributable to shareholders of the Compay Amortisatio of acquisitio itagible assets Fair value remeasuremets Tax effects o goodwill, acquisitio itagible assets ad fair value remeasuremets (0.5) 0.4 (0.6) 0.4 Adjusted earigs Goodwill Life Scieces Seals Cotrols Total m m m m At 1 October Acquisitios Exchage adjustmets 0.6 (0.2) At 30 September Acquisitios (ote 21) Adjustmets to prior year goodwill (0.2) (0.2) (0.4) Exchage adjustmets At 30 September

59 57 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets 10. Goodwill (cotiued) Goodwill of 6.6m, which arose o acquisitios completed durig the year, is described further i the Busiess Review o page 30. The Directors have carried out a impairmet review of goodwill held at 30 September 2008 ad are satisfied that goodwill has ot bee impaired. The key assumptios used for the value i use calculatios are those regardig the discout rates ad growth rates. The discout rates used were ca. 16% (2007: ca. 14%), which are pre-tax rates that reflect the curret market assessmets of the time value of moey ad the risks specific to the asset. A icrease i the discout rates of up to 3% would be ulikely to lead to a impairmet i the carryig value of goodwill. The growth rates are broadly based o a prudet estimate of idustry forecasts. Chages i sellig prices ad direct costs are based o past practices ad expectatios of future chages i the market ad iflatio. The cash flow forecasts are derived from the most recet budgets approved by maagemet for the ext fiacial year ad are extrapolated thereafter usig a growth rate of betwee 0% ad 3%, depedig o the relevat market i which the busiess operates. 11. Acquisitio ad Other Itagible Assets Other Acquisitio itagible itagible assets assets Total m m m Cost At 1 October Additios Acquisitios Exchage adjustmets At 30 September Additios Disposals (0.2) (0.2) Exchage adjustmets At 30 September Amortisatio At 1 October Charge for the year At 30 September Charge for the year Disposals (0.1) (0.1) Exchage adjustmets At 30 September Net book value At 30 September At 30 September Acquisitio itagible assets, which are aalysed below, relate to items acquired through busiess combiatios which are amortised over their useful ecoomic life. Net book value Ecoomic m life Customer relatioships years Supplier relatioships years Databases years The amout i respect of customer relatioships was valued usig a discouted cash flow model; the databases were valued usig a replacemet cost model; the amout i respect of supplier relatioships was valued o a relief from royalty method. Other itagible assets comprise computer software that is separately idetifiable from plat ad equipmet ad icludes software liceces. 18.6

60 58 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Notes to the Cosolidated Fiacial Statemets For the year eded 30 September Property, Plat ad Equipmet Freehold Leasehold Plat & properties properties equipmet Total m m m m Cost At 1 October Additios Acquisitios Disposals (0.1) (1.2) (1.3) Exchage adjustmets (0.3) (0.3) At 30 September Additios Acquisitios (ote 20) Disposals (0.1) (0.9) (1.0) Exchage adjustmets At 30 September Depreciatio At 1 October Charge for the year Disposals (0.1) (1.0) (1.1) Exchage adjustmets (0.1) (0.1) At 30 September Charge for the year Disposals (0.1) (0.6) (0.7) Exchage adjustmets At 30 September Net book value At 30 September At 30 September Lad icluded above, but ot depreciated, is 2.0m (2007: 2.0m). Capital commitmets cotracted, but ot provided, were Nil (2007: Nil). Freehold properties icludes ca.150 acres of lad at Stamford ( the Stamford lad ) which comprises mostly farm lad ad former quarry lad. I the Directors opiio the curret value of this lad is 0.5m (et book value: Nil).

61 59 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets 13. Deferred Tax The movemet o deferred tax is as follows: m m At 1 October (3.6) 3.4 Credit/(charge) for the year 0.8 (0.7) Acquisitios (ote 21) 0.1 (5.6) Accouted for i equity (0.3) (0.6) Exchage adjustmets (0.3) (0.1) At 30 September (3.3) (3.6) Deferred tax assets ad liabilities are oly offset where there is a legally eforceable right of offset ad there is a itetio to settle the balaces et. Assets Liabilities Net m m m m m m Property, plat ad equipmet (0.5) (0.6) (0.3) (0.4) Goodwill ad itagible assets (5.1) (5.6) (4.8) (5.2) Retiremet beefit obligatios Ivetories Share-based paymets Other temporary differeces (5.6) (6.2) (3.3) (3.6) Set off of deferred tax (1.0) (1.1) (4.6) (5.1) (3.3) (3.6) No deferred tax has bee provided for uremitted earigs of overseas Group compaies as the Group cotrols the divided policies of its subsidiaries. Uremitted earigs may be liable to overseas ad/or UK taxatio (after allowig for double taxatio relief) if they were to be distributed as divideds. The aggregate amout for which deferred tax liabilities have ot bee recogised i respect of uremitted earigs was 1.0m (2007: 0.5m). 14. Ivetories m m Fiished goods ad goods held for resale Ivetories are stated et of impairmet provisios of 3.5m (2007: 3.1m). 15. Trade ad Other Receivables m m Trade receivables Less: Impairmet provisio (0.6) (0.6) Other receivables Prepaymets ad accrued icome

62 60 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Notes to the Cosolidated Fiacial Statemets For the year eded 30 September Trade ad Other Receivables (cotiued) The maximum exposure to credit risk for trade receivables at the reportig date by currecies was: m m Sterlig US Dollars Caadia Dollars Euro Other Trade receivables, before impairmet provisios, are aalysed as follows: m m Not past due Past due, but ot impaired Past due, but impaired The ageig of trade receivables classed as past due, but ot impaired is as follows: m m Up to oe moth past due Betwee oe ad two moths past due Betwee two ad four moths past due Over four moths past due The movemet i the provisio for impairmet of trade receivables is as follows: m m At 1 October Charged agaist profit, et Utilised by write off (0.1) Acquired busiess Trade ad Other Payables m m Trade payables Other payables Other taxes ad social security Accruals ad deferred icome

63 61 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets 16. Trade ad Other Payables (cotiued) The maximum exposure to foreig currecy risk for trade payables at the reportig date by currecies was: m m Sterlig US Dollars Caadia Dollars Euro Other Cash ad Cash Equivalets Sterlig US$ Ca$ Euro Total Sterlig US$ Ca$ Euro Total m m m m m m m m m m Cash at bak Short term deposits The short term deposits ad cash at bak are both iterest bearig at rates liked to the UK Base Rate, or equivalet rate. 18. Fiacial Istrumets The Group s pricipal fiacial istrumets, other tha a limited umber of forward foreig cotracts, comprise cash ad short term deposits, trade ad other receivables ad trade ad other payables ad other liabilities. Trade ad other receivables ad trade ad other payables arise directly from the Group s day to day operatios. The pricipal fiacial risks to which the Group is exposed are those of credit, liquidity, foreig currecy ad iterest rate. A explaatio of each of these risks, how the Group maages these risks ad a aalysis of sesitivities is set out o page 33 withi Risks ad Ucertaities. Further aalyses of these risks are icluded i the cosolidated fiacial statemets as follows: a) Credit risk The Group s maximum exposure to credit risk was as follows: Carryig amout m m Trade receivables Other receivables Cash ad cash equivalets There is o material differece betwee the carryig amout of the fiacial assets ad their fair value at each reportig date. A aalysis of the ageig ad currecy of trade receivables ad the associated provisio for impairmet is set out i ote 15. A aalysis of cash ad cash equivalets is set out i ote 17.

64 62 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Notes to the Cosolidated Fiacial Statemets For the year eded 30 September Fiacial Istrumets (cotiued) b) Liquidity risk The Group has o cash loas or overdrafts at each reportig date. Carryig amout m m Trade payables Other payables Other liabilities The maturities of the udiscouted fiacial liabilities are as follows: Less tha oe year Oe-two years Two-five years Less: Discout (3.1) (2.9) There is o material differece betwee the carryig amout of these fiacial liabilities ad their fair value at each reportig date c) Currecy risk The Group holds forward foreig exchage cotracts to hedge forecast trasactioal exposure of certai of the Group s busiesses to movemets i the US dollar ad euro. These forward foreig exchage cotracts are classified as cash flow hedges ad are stated at fair value. The et fair value of forward foreig exchage cotracts used as hedges at 30 September 2008 was a 0.2m asset (2007: 1.1m liability). d) Iterest rate risk The Group does ot udertake ay hedgig of iterest rates. All cash deposits, held i the UK ad overseas, are held o a short term basis at floatig rates or overight rates, based o the relevat UK Base Rate, or equivalet rate. I February 2008, the Group drew dow 2.4m from its revolvig bak facility of 20.0m to fiace a small acquisitio. The loa was repaid i full i September The weighted average of the iterest paid o the loa, which was by referece to LIBOR, was 6.3%. A aalysis of cash ad cash equivalets at the reportig dates is set out i ote 17. e) Fair values There are o material differeces betwee the carryig value of fiacial assets ad liabilities ad their fair value. The basis for determiig fair values are as follows: Derivatives Forward exchage cotracts are valued at year ed spot rates adjusted for the forward poits to the cotract s value date, ad gais ad losses take to equity. No cotract s value date is greater tha 18 moths from the year ed. Trade ad other receivables/payables As the majority of receivables/payables have a remaiig life of less tha oe year, the otioal amout is deemed to reflect the fair value. Other liabilities The carryig amout represets a discouted value of the expected liability which is deemed to reflect the fair value.

65 63 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets 19. Other Liabilities m m Future purchases of miority iterests Deferred cosideratio At 30 September Aalysed as: Due withi oe year Due after oe year The movemet i the liability for future purchases of miority iterests is as follows: m m At 1 October 11.8 (Released)/charged to retaied earigs (3.6) 11.8 Uwidig of discout 0.7 Fair value remeasuremets 2.3 At 30 September The Group retais put/call optios to acquire the outstadig miority shareholdigs i Somage, AMT ad M Seals, which are exercisable betwee 1 October 2009 ad 31 December Followig the acquisitio o 3 March 2008 of 11.8% of the ordiary share capital of Somage Diagostics Ic. from the miority shareholders, the liability of 3.6m recogised i the cosolidated fiacial statemets at 30 September 2007 has bee released to retaied earigs. At 30 September 2008, the estimate of the fiacial liability to acquire the outstadig miority shareholdigs was reassessed by the Directors, based o their curret estimate of the future performace of the busiesses ad to reflect foreig exchage rates at 30 September This led to a remeasuremet of the fair value of these put optios ad the liability was icreased by 2.3m by a charge to the cosolidated Icome Statemet. Deferred cosideratio of 1.1m is payable to the vedors of AMT, based o the performace of the AMT busiess i the year eded 30 September Deferred cosideratio of 0.3m was paid o 10 April 2008 to the vedors of Cabletec Itercoect Compoets Systems Limited ( Cabletec ) i fial settlemet of their performace paymet; ueared deferred cosideratio of 0.2m was released agaist goodwill. 20. Miority Iterests m At 1 October Acquisitios 0.1 Share of profit for the year 0.5 Accouted for i equity (0.1) Divideds paid (0.3) At 30 September Acquisitio of miority iterest (ote 21) (0.3) Share of profit for the year 1.1 Accouted for i equity 0.1 Divideds paid (0.9) Exchage adjustmets 0.1 At 30 September

66 64 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Notes to the Cosolidated Fiacial Statemets For the year eded 30 September Acquisitios O 5 February 2008, the Group acquired 100% of Hitek Group Limited ( Hitek ), a supplier of calibratio services i the Uited Kigdom. The cosideratio, et of cash acquired ad acquisitio expeses, was 2.5m. O 17 Jue 2008, the Group acquired 100% of Sijders Egieerig BV ( Sijders ), a supplier of hydraulic seals i the Netherlads. The cosideratio, et of cash acquired ad acquisitio expeses, was 1.4m ( 1.8m). O 3 March 2008, the Group acquired 11.8% of the ordiary share capital of Somage Diagostics Ic ( Somage ) for 3.7m (C$7.3m) from the miority shareholders of Somage, pursuat to put/call optio agreemets etered ito at the time of the origial acquisitio i July The Group ow ows 91.8% of the issued share capital of Somage. The cosideratio for all of the acquisitios set out above was paid i cash ad met from the Group s existig cash resources. Set out below is a aalysis of the et book value ad fair value of the et assets acquired ad the cosideratio payable i respect of the acquisitios completed durig the year. Book value Fair value m m Property, plat ad equipmet Deferred tax 0.1 Ivetories Trade ad other receivables Trade ad other payables (0.1) (0.2) Miority s share of et assets 0.3 Net assets acquired by Group 1.0 Goodwill arisig o acquisitios completed durig the year 6.6 Satisfied by: Cash paid 7.4 Cash acquired (0.1) Expeses of acquisitio 0.3 Total cosideratio From the date of acquisitio to 30 September 2008, these acquired busiesses cotributed 0.9m to reveue ad 0.3m to operatig profit. If the acquisitio of the acquired busiesses had bee made at the begiig of the fiacial year, the acquired busiesses would have cotributed 1.8m to reveue ad 0.4m to profit after tax. Profit after tax should ot be viewed as idicative of the results of these acquired operatios that would have occurred, if these acquisitios had bee made at the begiig of the year. 22. Recociliatio of Cash Flow from Operatios m m Profit for the year Depreciatio/amortisatio of tagible ad other itagible assets Amortisatio of acquisitio itagible assets Share-based paymets expese Fiace expese/(icome) 2.8 (1.2) Tax expese Operatig cash flow before chages i workig capital Icrease i ivetories (1.5) (0.2) Decrease/(icrease) i trade ad other receivables 0.9 (1.2) (Decrease)/icrease i trade ad other payables (0.7) 0.3 Cash paid ito defied beefit schemes (0.2) (0.3) Cash flow from operatios

67 65 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets 23. Retiremet Beefit Obligatios The Group maitais several defied beefit schemes, all of which are closed to future accrual ad the assets of the schemes are held i separate trustee admiistered fuds. The schemes are fuded i accordace with rates recommeded by idepedet qualified actuaries o the basis of trieial or shorter period reviews usig the projected uit method. The two pricipal defied beefit schemes ( the schemes ) are the Diploma Holdigs PLC Permaet Staff Pesio ad Assurace Scheme ( the PLC Scheme ) ad the Aachem Limited Retiremet Beefits Scheme ( the Aachem Scheme ). Pesio deficit icluded i the balace sheet: m m Market value of schemes assets Equities Bods Cash Preset value of schemes liabilities At 30 September (14.2) (16.4) (1.7) (1.6) Amouts credited to the icome statemet i respect of defied beefit schemes: m m Charged to operatig profit Iterest cost (0.9) (0.9) Expected retur o schemes assets Credited to fiace icome (ote 6) Amouts recogised i the cosolidated statemet of recogised icome ad expese ( SORIE ): m m Experiece adjustmets o schemes assets (3.4) 0.3 Chages i assumptios o schemes liabilities Experiece adjustmets o schemes liabilities (0.1) 0.1 (0.5) 2.7 Aalysis of movemet i the pesio deficit: m m At 1 October Amouts credited to profit ad loss accout (0.2) (0.1) Cotributios paid by employer (0.2) (0.3) Actuarial loss/(gai) 0.5 (2.7) At 30 September

68 66 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Notes to the Cosolidated Fiacial Statemets For the year eded 30 September Retiremet Beefit Obligatios (cotiued) Aalysis of the movemets i the preset value of the schemes liabilities: m m At 1 October Iterest cost Actuarial loss/(gai) 0.1 (0.1) Gai o chages i assumptios (3.0) (2.3) Beefits paid (0.2) (0.1) At 30 September Aalysis of the movemets i the preset value of the schemes assets: m m At 1 October Expected retur o assets Actuarial (loss)/gai (3.4) 0.3 Cotributios paid by employer Beefits paid (0.2) (0.1) At 30 September Pricipal actuarial assumptios for the schemes at balace sheet dates: Iflatio rate 3.8% 3.4% 3.0% Expected rate of pesio icreases 3.8% 3.4% 3.0% Discout rate 7.0% 5.8% 5.0% Number of years a curret pesioer is expected to live beyod age 65 Me Wome Expected retur o schemes assets Aalysed as: Equities 8.0% 8.0% 8.0% Bods 5.5% 5.5% 4.6% Cash 4.5% 5.0% 4.0%

69 67 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets 23. Retiremet Beefit Obligatios (cotiued) Demographic assumptios: Basic mortality table used: 100% of PMA92/PFA92 Year the mortality table was published: 1999 Allowace for future improvemets i logevity: Year of birth projectios, with medium cohort improvemets with adjustmets to reflect expected scheme experiece Allowace made for members to take a cash lump sum o retiremet Members are assumed to take 100% (i PLC) ad 50% (i Aachem) of their maximum cash sum (based o curret commutatio factors) Sesitivities: Sesitivity of 2008 pesio liabilities to chages i assumptios are as follows: Impact o pesio liabilities Assumptio Assumptio Estimated Estimated icrease icrease % m Discout rate Decrease by 0.5% Expected rate of pesio icrease Icrease by 0.5% Life expectacy Icrease by 1 year Cash fudig: Accoutig costs do ot impact o the icidece or amout of cash cotributios for defied beefit plas. Future cash cotributios are determied based upo trieial actuarial valuatios. PLC Aachem Date of last formal fudig valuatio 6 April April 2007 Deficit 317, ,000 Fudig level 96% 91% Fudig approach Assumes that schemes assets will Assumes that schemes assets will outperform Govermet bods by 2.34% pa outperform Govermet bods by 2.35% pa pre-retiremet ad 0.24% pa post-retiremet pre-retiremet ad NIL% pa post-retiremet Lump sum cotributios per aum to remove the deficit 42, ,000 Period over which the deficit is expected to be removed 6 April April October September 2017 Expected cotributios durig FY , ,000 Curret ivestmet strategy 80% Equities/20% Bods 85% Equities/15% Bods Number of deferred members at date of actuarial valuatio

70 68 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Notes to the Cosolidated Fiacial Statemets For the year eded 30 September Retiremet Beefit Obligatios (cotiued) History of experiece gais ad losses All experiece adjustmets are recogised directly i equity, et of related tax Experiece adjustmets arisig o schemes assets: Amout ( m) (3.4) % of schemes assets 27% 2% 5% 9% 3% Chages i assumptios arisig o preset value of schemes liabilities: Amout ( m) (0.6) 0.3 % of preset value of schemes liabilities 21% 14% 3% 2% Experiece adjustmets arisig o preset value of schemes liabilities: Amout ( m) (0.1) 0.1 (0.6) (1.7) 0.3 % of preset value of schemes liabilities 1% 1% 3% 11% 2% Preset value of schemes liabilities (14.2) (16.4) (18.0) (16.1) (13.9) Market value of schemes assets Deficit (1.7) (1.6) (4.7) (4.4) (4.1) 24. Commitmets At 30 September 2008 the Group has total lease paymets uder o-cacellable operatig leases as follows: Lad ad Buildigs m m Lease paymets due: Withi oe year Withi two to five years After five years Total payable at 30 September Operatig lease paymets made i respect of lad ad buildigs durig the year were 1.1m (2007: 0.8m). 25. Audit Fees Durig the year the Group received the followig services from the auditors: m m Fees payable to the auditors for the audit of: the Compay s aual report the Compay s subsidiaries, pursuat to legislatio Total audit fees There were o other fees paid to the Group s auditors. 26. Exchage Rates The followig exchage rates have bee used to traslate the results of the overseas busiess: Average Closig US Dollar Caadia Dollar Euro Subsequet Evet O 5 November 2008, the Group acquired a small medical diagostic compay i Caada, Meditech Istisharat Caada Ic. ( Meditech ) for maximum cosideratio of 1.5m (C$2.9m), icludig expeses.

71 69 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Group Accoutig Policies The cosolidated fiacial statemets have bee prepared i accordace with Iteratioal Fiacial Reportig Stadards ( IFRS ) as edorsed by the Europea Uio, ad i accordace with the Compaies Act 1985, as applicable to compaies reportig uder IFRS. The accoutig policies set out below have bee cosistetly applied i 2008 ad the comparative period. There has bee o material impact o the Group s cosolidated fiacial statemets i 2008 from the issue of IFRS, or iterpretatios to existig Stadards, durig the year. The Group has adopted IFRS 7, Fiacial Istrumets: Disclosures at 30 September 2008, however this relates oly to additioal disclosures i respect of fiacial istrumets, which are icluded i this Aual Report. 1.1 Basis of preparatio The cosolidated fiacial statemets have bee prepared uder the historical cost covetio, except for derivative fiacial istrumets which are held at fair value. 1.2 Basis of cosolidatio The cosolidated fiacial statemets icorporate the fiacial statemets of the Compay ad etities cotrolled by the Compay (its subsidiaries). Cotrol exists whe the Compay has the power to gover the fiacial ad operatig policies of a etity so as to obtai beefits from its activities. The results of subsidiaries acquired or disposed of durig the year are icluded i the cosolidated icome statemet from the effective date of acquisitio or up to the effective date of disposal, as appropriate. Where ecessary, adjustmets are made to the fiacial statemets of subsidiaries to brig their accoutig policies ito lie with those detailed herei to esure that the Group fiacial statemets are prepared o a cosistet basis. All itra-group trasactios, balaces, icome ad expeses are elimiated i preparig the cosolidated fiacial statemets. Miority iterests i the et assets of cosolidated subsidiaries are idetified separately from the Group s equity therei. Miority iterests cosist of the amout of those iterests at the date of the origial busiess combiatio ad the miority s share of chages i equity sice the date of the combiatio. 1.3 Reveue recogitio Reveue is measured as the fair value of the cosideratio received or receivable for goods supplied ad services redered to customers, after deductig sales allowaces ad value added taxes. Reveue is recogised whe the risk ad rewards of owership trasfers to the customer, which depedig o idividual customer terms, is at the time of despatch, delivery or upo formal customer acceptace. Provisio is made for returs where appropriate. Service reveue received i advace is deferred ad recogised over the period of the cotract. 1.4 Employee beefits The Group operates a umber of pesio plas, both of the defied cotributio ad defied beefit type. The defied beefit schemes are closed to the accrual of future beefits. (a) Defied cotributio pesio plas Cotributios to the Group s defied cotributio schemes are recogised as a employee beefit expese whe they fall due. (b) Defied beefit pesio plas The deficit recogised i the balace sheet for the Group s defied beefit pesio schemes is the preset value of the defied beefit obligatio at the balace sheet date less the fair value of the scheme assets. The defied beefit obligatio is calculated by idepedet actuaries usig the projected uit cost method ad by discoutig the estimated future cash flows usig iterest rates o high quality corporate bods. The pesio expese for the Group s defied beefit plas is recogised as follows: (i) Withi profit before tax: l Gais ad losses arisig o settlemets ad curtailmets where the item that gave rise to the settlemet or curtailmet is recogised i operatig profit; l Iterest cost o the liabilities of the schemes calculated by referece to the scheme liabilities ad major assumptios, icludig the discout rate, at the begiig of the year; ad l Expected retur o the assets of the schemes calculated by referece to the scheme assets ad log-term expected rate of retur at the begiig of the year. (ii) Withi the statemet of recogised icome ad expese: l Actuarial gais ad losses arisig o the assets ad liabilities of the schemes arisig from actual experiece ad ay chages i assumptios at the ed of the year. The Group has adopted a policy of recogisig all actuarial gais ad losses for all of its defied beefit schemes i the period i which they occur, outside the icome statemet, i the SORIE. (c) Share-based paymets The Executive Directors of the Group receive part of their remueratio i the form of share-based paymet trasactios, whereby the Directors reder services i exchage for shares i the Compay, or rights over shares ( equity-settled trasactios). Equity-settled trasactios are measured at fair value at the date of grat. The fair value determied at the grat date takes accout of the effect of market based measures, such as the Total Shareholder Retur ( TSR ) targets upo which vestig of part of the award is coditioal, ad is expesed to the profit ad loss accout o a straight lie basis over the vestig period, with a correspodig credit to equity. The cumulative expese recogised is adjusted to take accout of shares forfeited by Executives who leave durig the performace or vestig period ad, i the case of o-market related performace coditios, where it becomes ulikely that shares will vest. For the market based measure, the Directors have used a predicted future value model to determie fair value of the shares at the date of grat. The Group operates a Employee Beefit Trust for the gratig of shares to Executives. The cost of shares i the Compay purchased by the Employee Beefit Trust are show as a deductio from equity.

72 70 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Group Accoutig Policies cotiued 1.5 Foreig currecies The idividual fiacial statemets of each Group etity are prepared i their fuctioal currecy, which is the currecy of the primary ecoomic eviromet i which that etity operates. For the purpose of the cosolidated fiacial statemets, the results ad fiacial positio of each etity are traslated ito UK sterlig, which is the presetatioal currecy of the Group. (a) Reportig foreig currecy trasactios i fuctioal currecy: Trasactios i currecies other tha the etity s fuctioal currecy (foreig currecies) are iitially recorded at the rates of exchage prevailig o the dates of the trasactios. At each subsequet balace sheet date: (i) Foreig currecy moetary items are retraslated at the rates prevailig at the balace sheet date. Exchage differeces arisig o the settlemet or retraslatio of moetary items are recogised i the icome statemet; (ii) No-moetary items measured at historical cost i a foreig currecy are ot retraslated; ad (iii) No-moetary items measured at fair value i a foreig currecy are retraslated usig the exchage rates at the date the fair value was determied. Where a gai or loss o o-moetary items is recogised directly i equity, ay exchage compoet of that gai or loss is also recogised directly i equity ad coversely, where a gai or loss o a o-moetary item is recogised i the icome statemet, ay exchage compoet of that gai or loss is also recogised i the icome statemet. (b) Traslatio from fuctioal currecy to presetatioal currecy: Whe the fuctioal currecy of a Group etity is differet from the Group s presetatioal currecy, its results ad fiacial positio are traslated ito the presetatioal currecy as follows: (i) Assets ad liabilities are traslated usig exchage rates prevailig at the balace sheet date; (ii) Icome ad expese items are traslated at average exchage rates for the year, except where the use of such a average rate does ot approximate the exchage rate at the date of the trasactio, i which case the trasactio rate is used; ad (iii) All resultig exchage differeces are recogised i traslatio reserves as a separate compoet of equity; these cumulative exchage differeces are recogised i the icome statemet i the period i which the foreig operatio is disposed of. (c) Net ivestmet i foreig operatios: Exchage differeces arisig o a moetary item that forms part of a reportig etity s et ivestmet i a foreig operatio are recogised i the icome statemet i the separate fiacial statemets of the reportig etity or the foreig operatio as appropriate. I the cosolidated Group accouts such exchage differeces are iitially recogised i traslatio reserves as a separate compoet of equity ad subsequetly recogised i the icome statemet o disposal of the et ivestmet. 1.6 Taxatio The tax expese relates to the sum of curret tax ad deferred tax. Curret tax is based o taxable profit for the year, which differs from profit before taxatio as reported i the icome statemet. Taxable profit excludes items of icome ad expese that are taxable (or deductible) i other years ad also excludes items that are ever taxable or deductible. The Group s liability for curret tax, icludig UK corporatio tax ad overseas tax, is calculated usig rates that have bee eacted or substatively eacted at the balace sheet date. Deferred tax is accouted for usig the balace sheet liability method. Deferred tax is recogised o differeces betwee the carryig amouts of assets ad liabilities i the fiacial statemets ad the correspodig tax bases used i the computatio of taxable profit. Deferred tax liabilities are geerally recogised for all taxable temporary differeces ad deferred tax assets are recogised to the extet that it is probable that taxable profits will be available agaist which deductible temporary differeces ca be utilised. Temporary differeces arise primarily from the recogitio of the deficit o the Group s defied beefit pesio schemes, the differece betwee accelerated capital allowaces ad depreciatio ad for short term timig differeces where a provisio held agaist receivables or stock is ot deductible for taxatio purposes. However, deferred tax assets ad liabilities are ot recogised if the temporary differece arises from goodwill or from the iitial recogitio (other that i a busiess combiatio) of other assets ad liabilities i a trasactio that affects either the tax profit, or the accoutig profit. Deferred tax liabilities are also recogised for taxable temporary differeces arisig o ivestmets i subsidiaries, except where the Group is able to cotrol the reversal of the temporary differece ad it is possible that the temporary differece will ot reverse i the foreseeable future. No deferred tax is recogised o the uremitted earigs of overseas subsidiaries. If these earigs were remitted, it is ulikely there would be ay sigificat impact o the tax charge or liability. Deferred tax is calculated at the tax rates that are expected to apply to the period whe the asset is realised or the liability is settled. Deferred tax is charged or credited to the icome statemet, except whe the item o which the tax or charged is credited or charged directly to equity, i which case the deferred tax is also dealt with i equity. The carryig amout of deferred tax assets is reviewed at each balace sheet date ad reduced to the extet that it is o loger probable that sufficiet taxable profits will be available to allow all or part of the assets to be recovered. Tax assets ad liabilities are offset whe there is a legally eforceable right to eforce curret tax assets agaist curret tax liabilities ad whe the deferred icome tax relates to the same fiscal authority. 1.7 Property, plat ad equipmet Freehold lad is carried at cost less accumulated impairmet losses. Other items of property, plat ad equipmet are carried at cost less accumulated depreciatio ad accumulated impairmet losses. Cost comprises the purchase price plus costs directly icurred i brigig the asset ito use, but excludig iterest. All other repairs ad maiteace expediture is charged to the icome statemet i the period i which it is icurred.

73 71 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Freehold lad is ot depreciated as it has a ifiite life. Depreciatio o other items of property, plat ad equipmet begis whe the asset is available for use ad is charged to the icome statemet o a straight-lie basis so as to write off the cost, less residual value of the asset, over its estimated useful life as follows: Freehold property betwee 20 ad 50 years Leasehold property the term of the lease Plat ad equipmet plat ad machiery betwee 3 ad 7 years iformatio techology ( IT ) ad hardware betwee 3 ad 5 years fixtures ad fittigs betwee 5 ad 15 years The depreciatio method used, residual values ad estimated useful lives are reviewed ad chaged, if appropriate, at least at each fiacial year ed. Assets held uder fiace leases are depreciated over their expected useful lives o the same basis as owed assets or, where shorter, over the term of the relevat lease. A asset s carryig amout is writte dow immediately to its recoverable amout if the asset s carryig amout is greater tha its estimated recoverable amout. Gais ad losses arisig o disposals are determied by comparig sales proceeds with carryig amout ad are recogised i the icome statemet. 1.8 Itagible assets All itagible assets, excludig goodwill arisig o a busiess combiatio, are stated at their amortised cost or fair value less ay provisio for impairmet. (a) Research ad developmet costs Research expediture is writte off as icurred. Developmet costs are writte off as icurred util it ca be demostrated that the coditios for capitalisatio as described i IAS 38 (Itagible Assets) are met. At which poit further costs are capitalised as itagible assets up util the itagible asset is readily available for productio ad amortised o a straight-lie basis over the asset s estimated useful life. Costs are capitalised as itagible assets uless physical assets, such as toolig, exist whe they are classified as property, plat ad equipmet. (b) Computer software costs Where computer software is ot itegral to a item of property, plat or equipmet its costs are capitalised as other itagible assets. Amortisatio is provided o a straight lie basis over its useful ecoomic life which is three years. (c) Acquired itagible assets busiess combiatios Itagible assets that are acquired as a result of a busiess combiatio, icludig, but ot limited to, customer lists, supplier lists, databases, techology ad software ad patets ad that ca be separately measured at fair value, o a reliable basis, are separately recogised o acquisitio at the fair value, together with the associated deferred tax liability. Amortisatio is charged o a straight lie basis to the icome statemet over the expected useful ecoomic lives. (d) Goodwill busiess combiatios Goodwill arisig o the acquisitio of a subsidiary represets the excess of the aggregate of the fair value of the cosideratio over the aggregate fair value of the idetifiable itagible ad tagible assets, et of the aggregate fair value of the liabilities (icludig cotigecies of busiesses acquired at the date of acquisitio), ad et of ay costs directly attributable to the busiess combiatio. Goodwill is iitially recogised as a asset at cost ad is subsequetly measured at cost less ay accumulated impairmet losses. Impairmet testig is carried out aually or more frequetly if evets or chages i circumstaces idicate that the carryig value may be impaired. Goodwill o acquisitios after 30 September 2004 is ot amortised ad goodwill arisig o acquisitios before the date of trasitio to IFRS (which is 1 October 2004), is ot amortised after that date. Goodwill existig at the date of trasitio to IFRS has bee retaied at the previous UK GAAP amouts, as the Group has elected ot to restate busiess combiatios that occurred before the date of trasitio to IFRS. 1.9 Impairmet of tagible ad itagible assets A impairmet loss is recogised to the extet that the carryig amout of a asset or cash geeratig uit exceeds its recoverable amout. The recoverable amout of a asset or cash-geeratig uit is the higher of (i) its fair value less costs to sell ad (ii) its value i use; its value i use is the preset value of the future cash flows expected to be derived from the asset or cash-geeratig uit, discouted usig a pre-tax discout rate that reflects curret market assessmets of the time value of moey ad the risks specific to the asset or cash-geeratig uit. Impairmet losses are recogised immediately i the icome statemet. (a) Impairmet of goodwill Goodwill acquired i a busiess combiatio is allocated to a cash-geeratig uit; cash-geeratig uits for this purpose are the busiess etities which represet the lowest level withi the Group at which the goodwill is moitored by the Group s Board of Directors for iteral ad maagemet purposes. Cash-geeratig uits to which goodwill has bee allocated are tested for impairmet aually, or more frequetly whe there is a idicatio that the uit may be impaired. If the recoverable amout of the cash-geeratig uit is less tha the carryig amout of the uit, the impairmet loss is allocated first to reduce the goodwill attributable to the cash-geeratig uit. A impairmet loss recogised for goodwill is ot reversed i a subsequet period. (b) Impairmet of other tagible ad itagible assets At each balace sheet date, the Group reviews the carryig amout of its tagible ad itagible assets to determie whether there is

74 72 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Group Accoutig Policies cotiued ay idicatio that those assets have suffered a impairmet loss. If ay such idicatio exists, the recoverable amout of the asset is estimated i order to determie the extet, if ay, of the impairmet loss. For the purposes of assessig impairmet, assets are grouped at the lowest levels for which there are separately idetifiable cash iflows. Where it is ot possible to estimate the recoverable amout of a idividual asset, the Group estimates the recoverable amout of the cash-geeratig uit to which the asset belogs. Where a impairmet loss subsequetly reverses, the carryig amout of the asset or cash-geeratig uit is icreased to the revised estimate of its recoverable amout, but so that the icreased carryig amout does ot exceed the carryig amout that would have bee determied had o impairmet loss bee recogised for the asset or cash-geeratig uit i prior years. A reversal of a impairmet loss for tagible ad itagible assets other tha goodwill is recogised immediately i the icome statemet Ivetories Ivetories are stated at the lower of cost, (geerally calculated o a weighted average cost basis) ad et realisable value, after makig due allowace for ay obsolete or slow movig ivetory. Cost comprises direct materials, duty ad freight-i costs. Net realisable value represets the estimated sellig price less all estimated costs of completio ad the estimated costs ecessary to make the sale Fiacial istrumets Fiacial assets ad liabilities are recogised i the Group balace sheet whe the Group becomes a party to the cotractual provisios of the istrumet. (a) Trade receivables Trade receivables are iitially measured at fair value, do ot carry ay iterest ad are reduced by a charge for impairmet for estimated irrecoverable amouts. Such impairmet charges are recogised i the icome statemet. (b) Trade payables Trade payables are o iterest-bearig ad are iitially measured at their fair value. (c) Cash ad cash equivalets Cash ad cash equivalets comprise cash i had, iterest bearig deposits, bak overdrafts ad short-term highly liquid ivestmets with origial maturities of three moths or less that are readily covertible to a kow amout of cash ad are subject to a isigificat risk of chages i value. Bak overdrafts are repayable o demad ad form a itegral part of the Group s cash maagemet system. (d) Put optios held by miority iterests O exercise of put optios held by miority shareholders i the Group s subsidiaries, the purchase price of the shares is calculated by referece to the profitability of the relevat subsidiary at the time of exercise, usig a multiple based formula. The et preset value of the estimated future paymets uder these put optios is show as a fiacial liability. The correspodig etry is recogised i equity as a deductio agaist retaied earigs. At the ed of each year, the estimate of the fiacial liability is reassessed ad ay chage i value is recogised i the icome statemet, as part of fiace icome or expese. Where the liability is i a foreig currecy, ay chage i the value of the liability resultig from chages i exchage rates is recogised i the icome statemet. (e) Derivative fiacial istrumets ad hedge accoutig The Group uses derivative fiacial istrumets i the form of forward foreig exchage cotracts to maage the effects of its exposures to fluctuatios i foreig exchage arisig from operatioal ad fiacial activities. I accordace with its treasury policy, the Group does ot hold or issue derivative fiacial istrumets for tradig purposes. The fair value of forward foreig exchage cotracts is their quoted market price at the balace sheet date. Uder IAS39, hedgig relatioships are categorised by type ad must meet strict criteria to qualify for hedge accoutig. At the iceptio of the trasactio the Group documets the relatioship betwee the hedgig istrumet ad the hedged item. The Group also documets its assessmet, both at hedge iceptio ad o a ogoig basis, of whether the fiacial istrumets that are used i hedgig trasactios are highly effective i offsettig chages i fair values or cash flows of hedged items. The Group uses cash flow hedges (eg forward foreig exchage currecy cotracts) to hedge exposure to variability i cash flows of a highly probable forecast trasactio. I relatio to cash flow hedges, to hedge firm commitmets which meet the coditios for hedge accoutig, the portio of the gai or loss o the hedgig istrumet that is determied to be a effective hedge is recogised directly to equity ad the ieffective portio is recogised i et profit or loss. For cash flow hedges that do ot result i the recogitio of a asset or a liability, the gais or losses that are recogised i equity are trasferred to the icome statemet i the same year i which the hedged firm commitmet affects the et profit ad loss, for example whe the future sale actually occurs. Hedge accoutig is discotiued whe the hedgig istrumet expires or is sold, termiated or exercised, or o loger qualifies for hedge accoutig. At that poit i time, ay cumulative gai or loss o the hedgig istrumet recogised i equity is kept i equity util the hedged trasactio occurs. If a hedged trasactio is o loger expected to occur, the et cumulative gai or loss recogised i equity is trasferred to et profit or loss for the year. The Group does ot use fiacial istrumets to hedge the exposure to chages i the fair value of recogised assets or liabilities that are attributable to a particular risk ad could affect profit or loss (fair value hedges). No fiacial istrumets are used to hedge et ivestmets i a foreig operatio (et ivestmet hedges).

75 73 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets 1.12 Leases Leases are classified as fiace leases wheever the terms of the lease trasfer substatially all the risk ad rewards of owership to the lessee. Leases iclude hire purchase cotracts which have characteristics similar to fiace or operatig leases. All other leases are classified as operatig leases. (a) Fiace leases Assets held uder fiace leases are recogised as assets of the Group at their fair value at the iceptio of the lease or, if lower, at the preset value of the miimum lease paymets. The correspodig liability to the lessor is icluded i the balace sheet as a fiace lease obligatio. Lease paymets are apportioed betwee fiace charges ad reductio of the lease obligatio so as to achieve a costat rate of iterest o the remaiig balace of the liability. Fiace charges are charged to the icome statemet. (b) Operatig leases Retals payable uder operatig leases are charged to the icome statemet o a straight-lie basis over the term of the relevat lease. Beefits received ad receivable as a icetive to eter ito a operatig lease are also spread o a straight-lie basis over the expected lease term Other liabilities Other liabilities are recogised whe the Group has legal or costructive obligatio as a result of a past evet ad it is possible that the Group will be required to settle that obligatio. Other liabilities are measured at the Director s best estimate of the expediture required to settle the obligatio at the balace sheet date Divideds The aual fial divided is ot provided for util approved at the Aual Geeral Meetig; iterim divideds are charged i the period they are paid Share capital Ordiary shares are classified as equity. Icremetal costs directly attributable to the issue of ew shares are show i equity as a deductio, et of tax, from the proceeds. Where ay Group compay purchases the Compay s equity share capital ad holds that share either directly as treasury shares or idirectly withi a ESOP trust, the cosideratio paid, icludig ay directly attributable icremetal costs (et of icome taxes), is deducted from equity attributable to the Compay s equity holders util the shares are cacelled, reissued or disposed of. Where such shares are subsequetly sold or reissued, ay cosideratio received, et of ay directly attributable icremetal trasactio costs ad the related icome tax effects, is icluded i equity attributable to the Compay s equity holders. These shares are used to satisfy share awards grated to Directors uder the Group s share schemes. The trustee purchases the Compay s shares o the ope market usig loas made by the Compay or a subsidiary of the Compay Accoutig stadards, iterpretatios ad amedmets to published stadards ot yet effective Certai ew stadards, amedmets ad iterpretatios to existig stadards have bee published that are madatory for the Group s accoutig periods begiig o or after 1 October 2008 or later periods, but which the Group has ot early adopted. The ew stadards which are expected to be relevat to the Group s operatios are as follows: IFRS 8 Operatig Segmets (effective from 1 October 2009) This IFRS specifies how a etity should report iformatio about its operatig segmets i its fiacial statemets. IFRS 3 Busiess Combiatios (Revised) (effective from 1 October 2009) This revised stadard relates to accoutig for acquisitios. Amedmet to IAS 1 Presetatio of Fiacial Statemets (effective from 1 October 2009) This amedmet requires iformatio i fiacial statemets to be aggregated o the basis of shared characteristics ad itroduces a statemet of comprehesive icome. IFRIC 13 Customer Loyalty Programmes (effective from 1 October 2008) IFRIC 13 addresses accoutig by etities that grat loyalty award credits to customers who buy other goods or services. IFRIC 14 The Limit o a Defied Beefit Asset, Miimum Fudig Requiremets ad their Iteractio (effective from 1 October 2009) IFRIC 14 addresses the accoutig by etities where the preset value of cash cotributios to a defied pesio scheme exceed the IAS 19 deficit. Maagemet is curretly assessig the impact of these IFRS, iterpretatios ad amedmets o the Group s cosolidated fiacial statemets. 2 Critical Accoutig Estimates ad Judgemets I order to prepare these cosolidated fiacial statemets i accordace with the accoutig policies set out i ote 1 above, maagemet has used estimates ad judgemets to establish the amouts at which certai items are recorded. Critical accoutig estimates ad judgemets are those which have the greatest impact o the fiacial statemets ad require the most difficult ad subjective judgemets about matters that are iheretly ucertai. Estimates are based o factors icludig historical experiece ad expectatios of future evets that maagemet believe to be reasoable. However give the judgemetal ature of such estimates, actual results could be differet from the assumptios used. The critical accoutig estimates ad judgemets are set out below: 2.1 Goodwill impairmet The Directors use their judgemet to determie the extet to which goodwill has a value that will beefit the performace of the Group over future periods. To assist i makig this judgemet, the Directors udertake a assessmet, at least aually, of the carryig value of the Group s capitalised goodwill, usig discouted cash flow forecasts to derive the value i use to the Group of the capitalised goodwill.

76 74 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Group Accoutig Policies cotiued This calculatio is usually based o projectig future cash flows over a five year period ad usig a termial value to icorporate expectatios of growth thereafter. A discout factor is applied to obtai a curret value ( value i use ). The fair value less costs to sell of a asset is used if this results i a amout i excess of value i use. Estimated future cash flows for impairmet calculatios are based o maagemet s expectatios of future volumes ad margis based o plas ad best estimates of the productivity of the assets i their curret coditio. Future cash flows therefore exclude beefits from major expasio projects requirig future capital expediture where that expediture has ot bee approved at the balace sheet date. Future cash flows are discouted usig discout rates based o the Group s weighted average cost of capital, adjusted if appropriate for circumstaces specific to the asset beig tested. The weighted average cost of capital is impacted by estimates of iterest rates, equity returs ad market ad coutry related risks. The Group s weighted average cost of capital is reviewed o a aual basis. The projectio period is, i the opiio of the Directors, a appropriate period over which to view the future results of the Group s busiesses for this purpose. Chages to the assumptios ad discout rates used i makig these forecasts could sigificatly alter the Director s assessmet of the carryig value of goodwill. 2.2 Retiremet beefits The Group s fiacial statemets iclude the costs ad obligatios associated with the provisio of pesio retiremet beefits to curret ad former employees. It is the Directors resposibility to set the assumptios used i determiig the key elemets of the costs of meetig such future obligatios. These assumptios are set after cosultatio with the Group s actuaries ad are cosistet with those assumptios used to determie the fiacig elemets related to the Schemes assets ad liabilities. Whilst the Directors believe that the assumptios used are appropriate, a chage i the assumptios used would affect the Group profit ad fiacial positio. Details of these assumptios, which are based o advice from the Group s actuaries, are set out i ote Taxatio The Group operates i a umber of tax jurisdictios aroud the world. Tax regulatios geerally are complex ad i some jurisdictios agreeig tax liabilities with local tax authorities ca take several years. Cosequetly, at the balace sheet date tax liabilities ad assets are based o maagemet s best estimate of the future amouts that will be settled. While the Group aims to esure that the estimates recorded are accurate, the actual amouts could be differet from those expected. Deferred tax assets maily represet timig differeces that the Group expects to recover at some time i the future ad by their ature, the amouts recorded are therefore depedet o maagemet s judgemet about future evets. Accout has also bee take of future forecasts of taxable profit i arrivig at the values at which these deferred tax assets are recogised. If these forecast profits do ot materialise or chage, or there are chages i tax rates or to the period over which the timig differece might be recogised, the the value of the deferred tax asset will eed to be revised i a future period. 2.4 Curret assets I the course of ormal tradig activities, judgemet is used to establish the et realisable value of various elemets of workig capital, pricipally ivetory ad trade receivables. Impairmet charges are made agaist obsolete or slow-movig ivetories, bad or doubtful debts. The decisio to make a impairmet charge is based o the facts available at the time the fiacial statemets are approved ad are also determied by usig profiles, based o past practice, applied to certai aged ivetory ad trade receivables categories. I estimatig the collectability of trade receivables, judgemet is required i assessig their likely realisatio, icludig the curret creditworthiess of each customer ad related ageig of the past due balaces. Specific accouts are assessed i situatios where a customer may ot be able to meet its fiacial obligatios due to deterioratio of its fiacial coditio, credit ratigs or bakruptcy. 2.5 Property, plat ad equipmet It is Group policy to depreciate its property, plat ad equipmet assets, except freehold lad, o a straight-lie basis over their estimated useful lives. This applies a appropriate matchig of the reveue eared with the delivery of goods ad services. A key elemet of this policy is the estimate of the useful life applied to each category of property, plat ad equipmet which, i tur, determies the aual depreciatio charge. Variatios i asset lives could impact Group profit through a icrease or decrease i the depreciatio charge. 2.6 Future purchases of miority iterests The Group s fiacial statemets iclude a fiacial liability for the et preset value of the expected amout that it will pay i future years to acquire the outstadig shares held by miority shareholders i the Group s subsidiaries. This amout is based o the Directors estimate of the future profitability of the relevat subsidiary ad o a assumptio of the exchage rates prevailig at the time the paymet is made. Ay chages to the estimated profitability of the relevat busiess ad/or chages to the assumptio of the relevat exchage rate, will chage the estimate of this fiacial liability.

77 75 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Paret Compay Balace Sheet As at 30 September Note m m Fixed assets Ivestmets c Creditors: amouts fallig due withi oe year Amouts owed to subsidiary udertakigs (43.0) (44.8) Total assets less curret liabilities Capital ad reserves Called up equity share capital d Capital redemptio reserve 0.2 Profit ad loss accout The fiacial statemets were approved by the Board of Directors o 17 November 2008 ad siged o its behalf by: BM Thompso Chief Executive Officer NP Ligwood Group Fiace Director The otes o page 76 form part of these fiacial statemets. Recociliatio of Movemets i Shareholders Fuds for the year eded 30 September 2008 Capital Profit ad Share redemptio loss capital reserve accout Total m m m m At 1 October Retaied profit for the year Bous issue of shares 4.6 (0.2) (4.4) Purchase of ow shares, et (0.4) (0.4) At 30 September

78 76 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Notes to the Paret Compay Fiacial Statemets a) Accoutig Policies a.1 Basis of accoutig These fiacial statemets have bee prepared uder the historical cost covetio i accordace with the Compaies Act 1985 ad applicable UK accoutig stadards. A summary of the accoutig policies of the Paret compay ( the Compay ) is set out below. As permitted by sectio 230 of the Compaies Act 1985, o separate profit ad loss accout is preseted for the Compay. a.2 Ivestmets ad divideds Ivestmets are stated at cost less provisio for impairmet. Divided icome is recogised whe received. Divided distributios are recogised i the Compay s fiacial statemets i the year i which the divideds are approved by the Compay s shareholders. Iterim divideds are recogised whe paid. a.3 Employmet Beefit Trust ad Employee Share Schemes Shares held by the Diploma Employee Beefit Trust ( the Trust ) are stated at cost ad accouted for as a deductio from shareholders fuds i accordace with UITF 38. Shares that are held by the Trust are ot eligible for divideds util such time as they vest ucoditioally to the employees. b) Directors Remueratio No emolumets are paid directly by the Compay; iformatio o the Directors remueratio ad iterests i the share capital of the Compay are set out i the Remueratio Report o pages 41 to 45. c) Ivestmets m Shares i Group udertakigs At 30 September 2008 ad 1 October Details of the pricipal subsidiaries are set out o page 79. d) Share Capital Number Number m m Authorised ordiary shares of 5p each At 1 October 35,000,000 35,000, Icrease i authorised ordiary shares 100,000, At 30 September 135,000,000 35,000, Allotted, issued ad fully paid ordiary shares of 5p each At 1 October 22,647,911 22,647, Bous issue 90,591, At 30 September 113,239,555 22,647, O 21 Jauary 2008 the Compay udertook a bous issue of four ew ordiary shares of 5 pece for each ordiary share held by shareholders of the Compay. The bous issue resulted i the issue of 90,591,644 ew ordiary shares, represetig the capitalisatio of 4.4m of the Compay s retaied earigs, together with the 0.2m which was held i the capital redemptio reserve. As a cosequece of this bous issue, the comparative earigs ad divideds per share icluded i this Aual Report have bee restated. Durig the year, the Diploma Employee Beefit Trust purchased a further 528,760 ordiary shares i the Compay for a aggregate amout of 0.9m. These shares were acquired i coectio with potetial awards uder the Group s share icetive plas. Pursuat to these plas, durig the year 259,875 shares were trasferred from the Trust to participats i coectio with vestig of awards uder the Log Term Icetive Pla. I accordace with UITF 38, the purchase cost of ow shares has bee deducted from shareholders fuds. At 30 September 2008 the Trust held 1,281,820 (2007: 1,012,935) ordiary shares i the Compay represetig 1.1% of the called up share capital. The market value of the shares at 30 September 2008 was 2.0m (2007: 2.2m).

79 77 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Idepedet Auditors Reports Idepedet Auditors Report o the Group fiacial statemets to the Members of Diploma PLC We have audited the Group fiacial statemets of Diploma PLC for the year eded 30 September 2008 which comprise the cosolidated icome statemet, the cosolidated balace sheet, the cosolidated cash flow statemet, the cosolidated statemet of recogised icome ad expese, the Group Accoutig Policies ad the related otes 1 to 27. These Group fiacial statemets have bee prepared uder the accoutig policies set out therei. We have also audited the iformatio i the Directors Remueratio Report that is described as havig bee audited. We have reported separately o the Paret compay fiacial statemets of Diploma PLC for the year eded 30 September This report is made solely to the Compay s members, as a body, i accordace with sectio 235 of the Compaies Act Our audit work has bee udertake so that we might state to the Compay s members those matters we are required to state to them i a auditors report ad for o other purpose. To the fullest extet permitted by law, we do ot accept or assume resposibility to ayoe other tha the Compay ad the Compay s members as a body, for our audit work, for this report, or for the opiios we have formed. Respective resposibilities of directors ad auditors The Directors resposibilities for preparig the Aual Report, the Directors Remueratio Report ad the Group fiacial statemets i accordace with applicable law ad Iteratioal Fiacial Reportig Stadards (IFRSs) as adopted by the Europea Uio are set out i the Statemet of Directors Resposibilities. Our resposibility is to audit the Group fiacial statemets ad the part of the Directors Remueratio Report to be audited i accordace with relevat legal ad regulatory requiremets ad Iteratioal Stadards o Auditig (UK ad Irelad). We report to you our opiio as to whether the Group fiacial statemets give a true ad fair view ad whether the Group fiacial statemets have bee properly prepared i accordace with the Compaies Act 1985 ad Article 4 of the IAS Regulatio ad whether the part of the Directors Remueratio Report described as beig audited has bee properly prepared i accordace with the Compaies Act We also report to you whether i our opiio the iformatio give i the Directors Report is cosistet with the Group fiacial statemets. The iformatio give i the Directors Report icludes that specific iformatio preseted i the Busiess Review that is cross referred from the Pricipal Activities sectio of the Directors Report. I additio we report to you if, i our opiio, we have ot received all the iformatio ad explaatios we require for our audit, or if iformatio specified by law regardig Director s remueratio ad other trasactios is ot disclosed. We review whether the Corporate Goverace Statemet reflects the Compay s compliace with the ie provisios of the 2006 Combied Code specified for our review by the Listig Rules of the Fiacial Services Authority, ad we report if it does ot. We are ot required to cosider whether the Board s statemets o iteral cotrol cover all risks ad cotrols, or form a opiio o the effectiveess of the Group s corporate goverace procedures or its risk ad cotrol procedures. We read other iformatio cotaied i the Aual Report ad cosider whether it is cosistet with the audited Group fiacial statemets. The other iformatio comprises oly the Directors Report, the Fiacial Highlights, the Chairma s Statemet, the Busiess Review ad the Corporate Goverace Statemet. We cosider the implicatios for our report if we become aware of ay apparet misstatemets or material icosistecies with the Group fiacial statemets. Our resposibilities do ot exted to ay further iformatio outside of the Aual Report. Basis of audit opiio We coducted our audit i accordace with Iteratioal Stadards o Auditig (UK ad Irelad) issued by the Auditig Practices Board. A audit icludes examiatio, o a test basis, of evidece relevat to the amouts ad disclosures i the Group fiacial statemets. It also icludes a assessmet of the sigificat estimates ad judgemets made by the Directors i the preparatio of the Group fiacial statemets, ad of whether the accoutig policies are appropriate to the Group s circumstaces, cosistetly applied ad adequately disclosed. We plaed ad performed our audit so as to obtai all the iformatio ad explaatios which we cosidered ecessary i order to provide us with sufficiet evidece to give reasoable assurace that the Group fiacial statemets are free from material misstatemet, whether caused by fraud or other irregularity or error. I formig our opiio we also evaluated the overall adequacy of the presetatio of iformatio i the Group fiacial statemets. Opiio I our opiio: the Group fiacial statemets give a true ad fair view, i accordace with IFRSs as adopted by the Europea Uio, of the state of the Group s affairs as at 30 September 2008 ad of its profit for the year the eded; the Group fiacial statemets have bee properly prepared i accordace with the Compaies Act 1985 ad Article 4 of the IAS Regulatio; the part of the Directors Remueratio Report described as havig bee audited has bee properly prepared i accordace with the Compaies Act 1985; ad the iformatio give i the Directors Report is cosistet with the Group fiacial statemets. Deloitte & Touche LLP Chartered Accoutats ad Registered Auditors Lodo 17 November 2008

80 78 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Idepedet Auditors Reports cotiued Idepedet Auditors Report o the Paret Compay fiacial statemets to the Members of Diploma PLC We have audited the Paret compay fiacial statemets of Diploma PLC for the year eded 30 September 2008 which comprise the Paret compay balace sheet, the recociliatio of movemet i shareholders fuds ad the related otes. These Paret compay fiacial statemets have bee prepared uder the accoutig policies set out therei. We have also audited the iformatio i the Directors Remueratio Report that is described as havig bee audited. We have reported separately o the Group fiacial statemets of Diploma PLC for the year eded 30 September This report is made solely to the Compay s members, as a body, i accordace with sectio 235 of the Compaies Act Our audit work has bee udertake so that we might state to the Compay s members those matters we are required to state to them i a auditors report ad for o other purpose. To the fullest extet permitted by law, we do ot accept or assume resposibility to ayoe other tha the Compay ad the Compay s members as a body, for our audit work, for this report, or for the opiios we have formed. Respective resposibilities of directors ad auditors The Directors resposibilities for preparig the Aual Report, the Directors Remueratio Report ad the Paret compay fiacial statemets i accordace with applicable law ad Uited Kigdom Accoutig Stadards (Uited Kigdom Geerally Accepted Accoutig Practice) are set out i the Statemet of Directors Resposibilities. Our resposibility is to audit the Paret compay fiacial statemets ad the part of the Directors Remueratio Report to be audited i accordace with relevat legal ad regulatory requiremets ad Iteratioal Stadards o Auditig (UK ad Irelad). We report to you our opiio as to whether the Paret compay fiacial statemets give a true ad fair view ad whether the Paret compay fiacial statemets have bee properly prepared i accordace with the Compaies Act We also report to you whether i our opiio the iformatio give i the Directors Report is cosistet with the Paret compay fiacial statemets. The iformatio give i the Directors Report icludes that specific iformatio preseted i the Busiess Review that is cross referred from the Pricipal Activities sectio of the Directors Report. I additio we report to you if, i our opiio, the Compay has ot kept proper accoutig records, if we have ot received all the iformatio ad explaatios we require for our audit, or if iformatio specified by law regardig Directors remueratio ad other trasactios is ot disclosed. We read other iformatio cotaied i the Aual Report ad cosider whether it is cosistet with the audited Paret compay fiacial statemets. The other iformatio comprises oly the Directors Report, the Fiacial Highlights, the uaudited part of the Directors Remueratio Report, the Chairma s Statemet ad the Busiess Review. We cosider the implicatios for our report if we become aware of ay apparet misstatemets or material icosistecies with the Paret compay fiacial statemets. Our resposibilities do ot exted to ay further iformatio outside of the Aual Report. Basis of audit opiio We coducted our audit i accordace with Iteratioal Stadards o Auditig (UK ad Irelad) issued by the Auditig Practices Board. A audit icludes examiatio, o a test basis, of evidece relevat to the amouts ad disclosures i the Paret compay fiacial statemets ad the part of the Directors Remueratio Report to be audited. It also icludes a assessmet of the sigificat estimates ad judgemets made by the Directors i the preparatio of the Paret compay fiacial statemets, ad of whether the accoutig policies are appropriate to the Compay s circumstaces, cosistetly applied ad adequately disclosed. We plaed ad performed our audit so as to obtai all the iformatio ad explaatios which we cosidered ecessary i order to provide us with sufficiet evidece to give reasoable assurace that the Paret compay fiacial statemets ad the part of the Directors Remueratio Report to be audited are free from material misstatemet, whether caused by fraud or other irregularity or error. I formig our opiio we also evaluated the overall adequacy of the presetatio of iformatio i the Paret compay fiacial statemets ad the part of the Directors Remueratio Report to be audited. Opiio I our opiio: the Paret compay fiacial statemets give a true ad fair view, i accordace with Uited Kigdom Geerally Accepted Accoutig Practice, of the state of the Compay s affairs as at 30 September 2008 ad its profit for the year the eded; the Paret compay fiacial statemets have bee properly prepared i accordace with the Compaies Act 1985; ad the iformatio give i the Directors Report is cosistet with the Paret compay fiacial statemets. Deloitte & Touche LLP Chartered Accoutats ad Registered Auditors Lodo 17 November 2008

81 79 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Pricipal Subsidiaries Group percetage of equity capital Coutry of icorporatio or registratio Life Scieces Aachem Limited 100% Eglad Hitek Limited 100% Eglad a1-eviroscieces Limited 100% Eglad a1-techologies GmbH 100% Germay a1-safetech AG 100% Switzerlad Somage Diagostics Ic 91.8% Caada AMT Vatage Holdigs Ic 75% Caada Seals Hercules Sealig Products Ic 100% USA HKX Ic 100% USA Hercules Europe BV (formerly Sijders Egieerig BV) 100% Netherlads M Seals A/S 90% Demark FPE Limited 100% Eglad Cotrols IS Rayfast Limited 100% Eglad IS Motorport Ic 100% USA Claredo Egieerig Supplies Limited 100% Eglad Cabletec Itercoect Compoets Systems Limited 100% Eglad Sommer GmbH 100% Germay Filco GmbH 100% Germay HA Waiwright (Group) Limited 100% Eglad Other Compaies Diploma Holdigs PLC 100% Eglad Diploma Holdigs Ic 100% USA A full list of subsidiaries will be aexed to the ext Aual Retur of Diploma PLC filed with the Registrar of Compaies. Fiacial Caledar ad Shareholder Iformatio Aoucemets (provisioal dates) Iterim Maagemet Statemet released 14 Jauary 2009 Iterim results aouced 11 May 2009 Iterim Maagemet statemet released 4 August 2009 Prelimiary results aouced 16 November 2009 Aual Report posted to shareholders 27 November 2009 Aual Geeral Meetig 13 Jauary 2010 Divideds (provisioal dates) Iterim aouced 11 May 2009 Paid 17 Jue 2009 Fial aouced 16 November 2009 Paid (if approved) 20 Jauary 2010 Aual Report: Copies ca be obtaied from the Compay Secretary at the address show below. Share Registrar Computershare Ivestor Services PLC: The Compay s Registrar is Computershare Ivestor Services PLC, PO Box 82, The Pavilios, Bridgwater Road, Bristol BS99 7NH. Telephoe: Shareholders equiries: If you have ay equiry about the Compay s busiess or about somethig affectig you as a shareholder (other tha questios dealt with by Computershare Ivestor Services PLC) you are ivited to cotact the Compay Secretary at the address show below. Secretary ad Registered Office: N P Ligwood ACA, 12 Charterhouse Square, Lodo EC1M 6AX. Telephoe: Fax: Registered i Eglad ad Wales, umber Web site: Diploma s web site is

82 80 Diploma PLC Aual Report ad Accouts 2008 Fiacial Statemets Five Year Record IFRS IFRS IFRS IFRS UKGAAP m m m m m Reveue Operatig profit Fiace icome Adjusted profit before tax Amortisatio of acquisitio itagibles ad goodwill (2.7) (1.0) (0.3) (0.8) Property profits ad restructurig costs, et Fair value remeasuremets (3.0) Profit before tax Taxatio (7.4) (7.5) (7.0) (5.0) (3.3) Profit after tax Capital structure Equity shareholders fuds Miority iterest Add/(less): cash ad cash equivalets (15.7) (12.4) (36.7) (25.7) (17.9) Add/(less): retiremet beefit obligatios Add/(less): future purchases of miority iterests Add/(less): deferred tax, et (3.4) (3.1) Add/(less): adjustmet to goodwill i respect of deferred tax (6.0) (5.6) Tradig capital employed Net icrease/(decrease) i cash 2.3 (24.1) (11.3) Add: divideds paid acquisitio of busiesses Free cash flow Per ordiary share (pece) Basic earigs Adjusted earigs Divideds Equity shareholders fuds Divided cover Ratios % % % % % Retur o tradig capital employed Operatig margi Notes 1 The cosolidated fiacial statemets have bee prepared i accordace with IFRS except for 2004, which has ot bee restated i accordace with IFRS. 2 Equity shareholders fuds represet share capital ad reserves. 3 Cash ad cash equivalets icludes cash at bak ad short term deposits less bak overdrafts. 4 Retur o tradig capital employed represets operatig profit, before amortisatio of acquisitio itagible assets, as a percetage of tradig capital employed (as adjusted for the effect of the timig of major acquisitios ad disposals). Tradig capital employed is calculated as defied i ote 2 to the cosolidated fiacial statemets. 5 Adjusted earigs per share is calculated i accordace with ote 9 to the cosolidated fiacial statemets. 6 Equity shareholders fuds per share have bee calculated by dividig equity shareholders fuds by the umber of ordiary shares i issue at the year ed. 7 Divided cover is calculated o adjusted earigs as defied i ote 2 to the fiacial statemets. 8 O 21 Jauary 2008 the Compay udertook a bous issue of four ew ordiary shares of 5 pece each for each ordiary share held by shareholders of the Compay. The comparative amouts stated above have bee restated to reflect this bous issue.

83 Desig Productio Imprima De Bussy Limited