Bob Phillis Chief Executive

The year under review has been characterised by a period of some economic uncertainty in the second half of the year and a flight from high tech businesses based on stand-alone internet operations. As the Chairman has noted, one of the great strengths of the unique ownership structure of GMG is the ability to take a long term strategic view of the development of our existing operations and the investment in new businesses necessary to safeguard the continuing financial strength of the Group.

In our strategic review eighteen months ago, we identified the need to enhance our flagship publications, to extend the reach of our digital publishing capacity and to broaden the base of our diverse portfolio of media activities. Considerable progress has been made in meeting these objectives and in restructuring the Group during the year. This has involved an increasing amount of revenue expenditure in product development, new media and the building of our radio operations. All of this has been achieved while adding £18 million to our net cash resources, which stood at nearly £200 million at the year-end. This puts the Group in a strong position to capitalise on further opportunities for growth that are likely to arise during the current financial year.

The Newspapers
During the year, the Guardian, our flagship title, has been able to build on the firm foundations established during the past five years. Sales at 399,696 have remained stable in a continuously decreasing market, enabling its share to grow to 17.01% of the quality broadsheet market. Advertisement revenues for the Guardian grew by £12 million on the previous year.

Editorially, the Guardian has been responsible for a number of high profile agenda-setting campaigns, including the debate on the future of the Monarchy, the state of the prison service, Britain's public services, and an examination of the patenting of human genes. In September, Guardian North was launched, offering its readers a national newspaper with more local news, sport and art reviews.

During the year, we commissioned extensive research into consumer reading habits on weekdays and at weekends. This has led to a sharper focus during the week on news, sport and industry-related supplements (such as Media, Education and Society Guardian) and the launch on 21st April 2001 of a significantly enhanced new-look Saturday newspaper, with lifestyle and leisure supplements.

The Guardian's editorial excellence has been recognised by a wide range of industry awards: Newspaper of the Year at the 2001 Newspaper Awards for clear evidence of profit, market share, outstanding design and strong circulation performance; Best Daily Newspaper on the world-wide web at the same awards; Young Journalist of the Year (Emma Brockes) at the British Press Awards 2001; National Newspaper Journalist of the Year (Vikram Dodd) at the Commission for Racial Equality's Race in the Media Awards 2001. At the What The Papers Say Awards, Tom Jenkins was named Sports Photographer of the Year for his work on both the Guardian and the Observer.

The Observer has enjoyed a remarkably successful year. The March 2001 ABC figure of 451,834 was up 10.8% year on year. The six-month October to March figure was up 8.12% at 445,119, demonstrating sustained growth against the trend in the Sunday quality newspaper market.

Advertising revenue performance was also strong, with year-on-year growth exceeding £2 million. This performance has been driven by a clear strategy of investment in product development, designed to give the Observer a true point of difference against its competitors in the quality Sunday market. The major publishing event was the launch of the Observer Sports Monthly (OSM) in May 2000. It has been applauded throughout the industry, winning the award of Supplement of the Year at the British Press Awards and Magazine Launch of the Year, given by Campaign Magazine. This process of product innovation and investment continued with the launch of Observer Food Monthly in April.

In March, the Observer published the Britain Uncovered Supplement, a probing poll into the more nefarious side of British life. Coupled with strong features on the more surprising aspects of our society, it made for compelling reading, strong advertising and the second highest sale of the financial year.

The Observer also won a number of other notable awards in the last year. Roger Alton was named Editor of the Year and Andrew Rawnsley was judged Columnist of the Year at the What the Papers Say Awards; Murdo Macleod, News Photographer of the Year at the same event; Faisal Islam, Wincott Award for Financial Journalism; Kevin Mitchell, Sports Feature Writer and Sports Journalist of the Year at the Sports Writers Association and Sport England Awards, while the Observer won Newspaper of the Year at the Picture Editor Awards 2000.

The Manchester Evening News (MEN) faced a tough year in a fragmenting market affecting all metropolitan daily newspapers as well as commercial television. A strong editorial team produced a string of exclusives demonstrating its leading role in investigative journalism amongst Britain's regional evening newspapers. These included the former prostitute at the centre of the Jeffrey Archer libel trial being killed in a car crash with an armed robber; a three-part expose which "named and shamed" the men behind the city's vice trade; and how a Manchester social worker was a leading figure in a group linked to the Real IRA terror group which planted the Omagh bomb. In addition, our journalists launched and sustained the Manchester Metro ahead of Associated Newspapers' launch of their national title. After our successful court action over the Metro title, Associated and MEN now jointly produce the free morning paper in the city. The fact that commercially 2000-01 was the Evening News' most successful year is due to its reputation, its ability to deliver a quality readership, a highly professional advertisement department and its pre-eminence in the jobs market. It is also a result of using technology to reduce costs and deliver efficiency.

Within the Greater Manchester area, the regional newspapers' total circulation of paid for, evening and weekly papers and free newspapers exceeded 2.6 million copies per week. The particular feature of the MEN's battleground was the intense competition from free newspapers of all descriptions.

Paid-for weeklies across the UK are enjoying stable circulation and an increased advertisement market share, but it is the free sector of the industry which is showing the strongest growth in readership and advertising. In Cheshire & Lancashire the Stockport Express, Wilmslow Express, Macclesfield Express, Rossendale Free Press and Middleton Guardian all achieved circulation increases. Our strength in the Greater Manchester weeklies lies with our large free newspapers: the Manchester Metro; Stockport Times; the Tameside, Oldham, and West Manchester Advertisers. Here the strategy has been to increase editorial pagination and improve design and colour content. The result has been increased advertisement revenue. The purchase of the South Manchester Reporter allowed us to merge this title with the South Manchester Express and the new paper's coverage of a string of important suburbs has expanded significantly, leading to increased revenue and a subsequent contribution to profit.

Surrey & Berkshire had an outstanding year. In Reading, a re-designed Evening Post significantly increased its full-price sale to a new unaudited level of just below 17,000 copies a day.

The Reading Standard was redesigned and renamed Reading Central, with delivery extended from homes to buses and street distribution, whilst in Surrey, The Rush was produced for the county's commuters and represented another benefit to flow from the new Stoke Mill operation. The Surrey Advertiser remains one of the country's dominant weekly papers, with a weekly sale of over 43,000, and the Surrey Advertiser series has a total weekly sale of over 117,000.

During the year Guardian Media Group expressed an interest in acquiring all, or part of, the assets of the RIM (Regional Independent Media) group of Regional Newspapers. Following a thorough and searching investigation by the Competition Commission, GMG was granted permission to proceed separately and/or jointly with Johnston Press and Newsquest. The objective was to strengthen the Greater Manchester hub of our regional newspaper operations. Regrettably little progress was made in the year under review.

New Media
GMG continues to make significant investments in internet and interactive services. Despite the severe downturn in the high technology marketplace, we are continuing our strategy of investment in websites that build on our strengths in editorial and classified advertising and our presence in particular communities. We have developed a number of strong and well regarded on-line brands that support and enhance our print businesses. Revenue from the sites is steadily increasing, but the scale of the investment is such that our investment strategy is regularly reviewed. To date, we have achieved or exceeded our goals for these investments.

Guardian Unlimited has continued to achieve national and international recognition. During the year, new specialist channels, including media, society and politics, together with a website for the Observer, have been launched and Guardian Unlimited is now available on interactive television, mobile phones and hand-held devices. As an endorsement of its progress, it was judged Best Daily Newspaper on the world-wide web at the 2000-01 Newspaper Awards; Best Consumer Media Site by New Media Age 2000; Online Media Owner of the Year by Media Week 2000; and won Revolution's award for the Best Use of New Media by a media owner. Traffic and user figures have been similarly impressive. In March, audited page impressions exceeded 30 million with 2.4 million unique users, confirming it as the largest and most popular UK newspaper website.

Following the completion of a joint venture between GNL and a South African education web content business - Education Interactive Solutions - we launched learn.co.uk. The site aims to provide learning resources for school students aged four to nineteen, covering every aspect of the national curriculum, as well as lessons based on the Guardian archive. Content is now building at a rapid rate, covering the whole secondary spectrum and there are plans to move into primary resources. Learn.co.uk has been chosen as the lead content provider for the first of the Government's education broadband networks and reached close to 3 million page impressions a month during this year's revision season. Learn.co.uk appeals to three key audiences: pupils, teachers and parents with one clear and simple proposition.

GMG also launched Workthing, a recruitment site providing a wide range of services to job seekers, recruiters and employers. It is now fully operational, employing eighty people in its own separate office accommodation. Its role within GMG is to focus on digital recruitment outside of those areas where Guardian Unlimited is strongly established. Workthing addresses sectors such as IT, Finance, FMCG and Retail, New Media, Travel and Engineering. Job vacancies from the Guardian in Public Sector, Education and Media are given additional distribution through the Workthing site and in return Workthing is currently completing the use of its technology to drive the job search functionality within the Guardian Unlimited sites.

Workthing operates in a highly competitive marketplace, but has established itself as one of the leading on-line recruitment sites by paying close attention to the needs of its users and of HR managers in the sectors that it serves. A superior job search capability, meaningful career advice and development, and an emphasis on high service levels has resulted in 3.5 million page views, three hundred thousand unique users and monthly figures of over three quarters of a million job searches. Workthing is attracting blue chip corporate clients and new customers and revenue streams into the Group.

Our regional newspaper websites have been reorganised under a holding company, GMG Regional Digital, with the objective of developing site content, services and revenue. Manchesteronline, was relaunched as a regional portal in the Autumn with a new range of services and its quality and range of services has been recognised in the Newspaper Society's New Media Awards as the Best Daily Newspaper Internet Site. Within Manchesteronline, Sportloco, a specialist site for amateur sports was launched during the year, and at the same awards was named Best Internet Site of the Year, Best Niche Internet Site and Best Online Community Site. The judges described sportloco.com as "having massive future potential, using the internet to its best to satisfy the needs of amateur sports". The Group's weekly newspapers in the Greater Manchester area have sites within the portal, providing news and services specific to their areas. Get Reading has been relaunched as a portal for the Reading area, while the established Surrey Advertiser site has continued to carry significant traffic. Sites for other towns in Surrey and Berkshire are planned.

Through GMG Regional Digital, we are also one of the largest shareholders, along with other regional newspaper owners, in Fish4, the national classified site. Fish4 Jobs is now the biggest jobs site in the UK, with Fish4 Cars and Fish4 Homes also seeing significant traffic.

Through the Group's investment in Trader Media, we also have a significant stake in the Auto Trader and Ad Trader websites. Auto Trader is the largest car classified site in the UK, currently running at an average of 28 million page impressions per month providing an essential service to car dealers and other private advertisers. This site, also available via cable television and mobile telephone, is expected to be trading profitably by the end of the current financial year.

Radio
The diversification of our media portfolio away from its heavy concentration on the printed word had been identified as a key strategic objective almost three years ago. At that time GMG held small stakes - 15.1% in Jazz FM and 8.1% in Radio Investments Limited (RIL). Considerable progress has been made since that time. Our stake in Jazz FM is now 18.7% and GMG has Board representation. RIL has been restructured and expanded. GMG and Caledonia Investments each hold 39.2% of the equity with GWR converting its minority stakes in a number of the operating stations to a 20% holding in RIL. Ralph Bernard, Chairman of GWR plc, has joined the RIL Board. Together, we aim to make RIL the largest local radio group in the UK. With the acquisition of Mix 96 and Sun FM during the year, RIL now controls 24 local radio stations.

The greatest success story during the year was the launch of Real Radio in South Wales at the beginning of October. It has been regarded as the most successful launch of a commercial regional radio station in the UK, with the first official audience figures showing a reach of 19%, average listening of 12 hours a week and an audience share of 11.5%. The operation is performing 12 months ahead of its original business plans. GMG also believes that digital radio is the future of the medium and has invested significant sums in the development of our radio brands in preparation for a successful take-up of digital radio. We are one of the founders of Oneword Radio, which broadcasts on the national digital network and which won the Sony Award for the Digital Radio Station of the Year in April and we have entered into an agreement with EMAP to transmit our Real Radio brand across the UK on seven of their northern local digital services.

Since the year-end, we added further to the strength of our regional radio operations with the acquisition of Scot FM from The Wireless Group for £25.5 million; and the award by the Radio Authority of the regional licence for South and West Yorkshire. Both of these stations provide the opportunity to extend the Real Radio brand. An application for the East Midlands' regional licence will be submitted later in the year.

Partnerships
Perhaps the most significant event of the financial year ended 1st April 2001 was the merger of GMG's Auto Trader interests with those of Hurst Publishing Group Limited owned by European venture capitalists, BC Partners. The new company, Trader Media Group Limited (TMG) is jointly owned by GMG plc and BC Partners.

In its first year of trading as an integrated company, TMG produced revenues in excess of £220 million, an 11% increase year on year. There have been significant increases in circulation numbers and revenues across all titles and advertising yields have been increased with the introduction of full colour printing in all our publications. Under a single board and management structure the benefits of integration from the merger have exceeded both plans and expectations. The brand awareness across the UK of Auto Trader has been enhanced by the Perfect Partners campaign and the Supermart and Diamond FreeAds titles have been rebranded AdTrader. The objective is to be the single brand that people choose for buying or selling used vehicles, whichever channel they choose, print or media. In addition to the 28 million page impressions per month on autotrader.co.uk, there are an additional 8 million page impressions made through our digital television service offered by NTL, Telewest and ITV Digital and our on-line services have been enhanced and extended through our partnerships with Microsoft Car View, Pendragon and British Car Auctions.

The merger has already resulted in stronger systems, improved productivity and customer services, a rationalisation of printing capacity and a centralisation of our main database services at a new complex in Newton Le Willows.

The year under review also saw the acquisition of the TNT and Southern Cross titles for £34 million and their successful integration into TMG. Over 100,000 copies of these free magazines are distributed in London each week and there has already been a significant uplift in profitability year on year.

Prospects for TMG in the coming year are good with further growth in revenues and profit based on clear market leadership in all of its operations.

Television
As part of the realignment of our interests, we sold our 50% share in GMG Endemol Entertainment plc, created as a joint venture between Broadcast Communications and Endemol Entertainment in 1998, realising a profit of £23.3 million. We have, however, maintained our interest in television via a 27.5% stake in Artsworld, a subscription-based arts channel, chaired by Sir Jeremy Isaacs which was launched in December 2000.

In Manchester, we have launched a local television service, Channel M, on a Restricted Service Licence from the ITC, targeted at the youth population in Greater Manchester. This early exploratory entry into local television services is part of our strategy to provide a multi-platform media service to the conurbation.

Group outlook
After a third successive year of pre-tax profits of close to £70 million, the prospects for the current financial year look more challenging. The uncertainty in the economy, associated with a slowdown in the United States, the timing of the general election, the bursting of the dot.com bubble and the sharp decline in telecoms and technology stocks has led to a perceptible weakening in levels of national advertising demand in a number of key categories. Fortunately for the Group, recruitment advertising in the public sector remains strong, the regional newspapers are still performing strongly and Trader Media Group has made an encouraging start to the year. Nevertheless, given our commitment to maintain investment in new media, operating profit will not be maintained at the level of recent years.

In these circumstances, the importance of exercising financial rigour across all of our operations, which I highlighted last year, becomes even more important. However, it is one of the great benefits of our unique ownership structure that these proper managerial disciplines can be exercised within a framework where long-term strategic objectives need not be sacrificed in pursuit of short-term financial performance. It is for this reason that the continuous monitoring of all our internet operations across the Group has allowed us to refine and adjust our plans in light of progress and performance against agreed objectives. This process continues, but contrasts starkly with the swings from hasty investment and dramatic cutbacks that we have witnessed in other parts of the media sector.

The changing economic environment also creates opportunities for further acquisitions, if opportunities that fit within our strategic objectives become available at the right price. The strength of our balance sheet, and in particular our cash reserves, place GMG in a strong position to take advantage of such opportunities.

Once again, the progress that has been made during the year, and our creative and editorial successes, which I have reflected in this review, are entirely due to the skill and dedication of our staff. I would like to record my thanks and appreciation for the way in which everyone has contributed to another successful year for GMG.