The directors present their annual report to shareholders on the affairs of the group together with the audited consolidated financial statements of the group for the 52 weeks ended 22 February 1997.

Principal activity and business review
The principal activity of the group is the operation of food stores and associated activities in the United Kingdom, France, Czech Republic, Slovakia, Hungary and Poland. A review of the business is contained in the Annual Review which is published separately and, together with this document, comprises the full Tesco PLC Annual Report and Accounts.

Group results
Group turnover excluding VAT rose by 1,793m to 13,887m, representing an increase of 14.8%. Group profit on ordinary activities before taxation for the year was 750m compared with 675m for the previous year. The amount allocated to the employee profit sharing scheme this year was 32m as against 29m for last year. After provision for tax of 230m and dividends, paid and proposed, of 225m, profit retained for the financial year amounted to 295m.

Dividends
The directors recommend the payment of a final dividend of 7.10p per ordinary share to be paid on 1 July 1997 to members on the Register at the close of business on 18 April 1997. Together with the interim dividend of 3.25p per ordinary share paid in December 1996 the total for the year comes to 10.35p compared with 9.60p for the previous year, an increase of 7.8%.

Tangible fixed assets
Capital expenditure amounted to 731m compared with 649m during the previous year. Changes in fixed assets are summarised in note 11 to the financial statements. In the directors' opinion, the properties of the group have a market value in excess of the book value of 5,088m included in these financial statements.

Acquisitions
During the year the group acquired, for a total consideration of 112m, two retailing businesses in the Czech Republic and Slovakia, additional shares in the Hungarian food retailer Global, and a number of small businesses in France through Catteau. Details of acquisitions are set out in note 31 to the financial statements. During the year the company invested 17m for 50% of the shares of a joint venture BLT Properties Limited with British Land Company PLC. Details of this investment are set out in note 12 to the financial statements.

Post balance sheet events
On 13 February 1997 the Board announced that it had agreed with the Royal Bank of Scotland to establish a joint venture in financial services. The Royal Bank Group and Tesco will have broadly equal shares in the joint venture.

On 21 March 1997 the Board announced that it will acquire the food retailing and related businesses in Northern Ireland and the Republic of Ireland of Associated British Foods plc for 630m in cash. The acquisition will be completed after merger approval from the European Commission is obtained.

On 10 March 1997 Tesco acquired a controlling interest in 23 stores in Poland for a total consideration of 4m.

Share capital
The authorised and issued share capital of the company, together with details of the shares issued during the period, are shown in note 22 to the financial statements.

Company's shareholders
So far as the company is aware, at the date of this report Prudential Corporation holds 67,158,418 ordinary shares (3.1% of the total) on behalf of itself and others. The company is not aware of any other ordinary shareholders with interests of 3% or more.

Directors and their interests
The names and biographical details of the present directors are set out in the separately published Annual Review.

Mr J A Gardiner, Mr D E Reid, Mr J M Wemms and Baroness O'Cathain retire from the Board by rotation according to the company's Articles of Association. Being eligible, they offer themselves for re-election.

Mr V W Benjamin and Mr A D Malpas retired from the Board of Directors on 7 June 1996 and 21 February 1997 respectively.

The service contracts of Mr D E Reid and Mr J M Wemms are terminable on two years' notice from the company. Mr J A Gardiner and Baroness O'Cathain do not have a service contract.

The interests of directors and their immediate families in the shares of Tesco PLC, along with details of directors' share options, are set out in note 6 to the financial statements. At no time during the year did any of the directors have a material interest in any significant contract with the company or any of its subsidiaries.

Employment policies
The group depends on the skills and commitment of its employees in order to achieve its objectives. Company staff at every level are encouraged to make their fullest possible contribution to Tesco success.

A key business priority is to provide First Class Service to the customer. Ongoing training programmes seek to ensure that employees understand the company's customer service objectives and strive to achieve them.

The group's selection, training, development and promotion policies ensure equal opportunities for all employees regardless of gender, marital status, race, age or disability. All decisions are based on merit.

Internal communications are designed to ensure that employees are well informed about the business of the group. These include a staff magazine, videos and staff briefing sessions. Staff attitudes are frequently researched through surveys and store visits and management seeks to respond positively to the needs of employees.

Employees are encouraged to become involved in the financial performance of the group through a variety of schemes, principally the Tesco employee profit sharing scheme and the savings-related share option scheme.

Political and charitable donations
Contributions to community projects and to charity via the Tesco Charity Trust amounted to 972,000 (1996 727,000). There were no political donations.

Income and Corporation Taxes Act 1988
The company is not a close company for the purposes of this Act. This status has not changed from 22 February 1997 to the date of this report.

Supplier Payment Policy
Tesco PLC is a signatory to the CBI Code of Prompt Payment. Copies of the Code may be obtained from the CBI, Centre Point, 103 New Oxford Street, London WC1A 1DU.

Auditors
Price Waterhouse have expressed their willingness to continue in office. In accordance with section 384 of the Companies Act 1985, a resolution proposing the re-appointment of Price Waterhouse as auditors of the company will be put to the Annual General Meeting.

Annual General Meeting
A separate circular accompanying the Annual Accounts explains the special business to be considered at the Annual General Meeting on 6 June 1997.

This report was approved by the Board on 7 April 1997.

By Order of the Board
Rowley Ager Secretary Tesco PLC
7 April 1997 Registered Number: 445790