SHOOTING UP

Profits are at an all-time high, supplies are plentiful and the customers
are not only satisfied, they're hooked.

The illegal drugs industry has never had it so good. As this chilling
'company report', leaked to The Independent from the headquarters of Drugs
(UK) plc, reveals

AS chairman of the board of Drugs (UK) plc I am pleased to report to our
directors and shareholders record sales last year. Our core business
remains the importation, distribution and retail of illegal drugs. The
overall value of our industry is, by its nature, hard to gauge.

But for the first time our own estimates have been confirmed by official
figures suggesting that we now have a turnover worth up to #10bn a year.
The Office of National Statistics report issued last week said that this
reflects up to 2.5 per cent of all consumer spending. Our turnover, which I
think you will agree is impressive, is almost comparable with the British
wine and spirit industry's #12bn per year. As you can see from our profit
and loss account, we have provided exceptional return on your venture
capital. Market penetration of all our products has increased over the last
year in all demographic and geographic areas.

About 48 per cent of 16-24-year-olds now say that they have used illegal
drugs, an increase of 3 per cent on 1994. There remains a great of scope
for expansion.

Only one-fifth of those who have used our products are regular purchasers.
We have made strenuous efforts to break away from our traditional inner
city urban image and are breaking into new regions, especially in rural
areas. Confirmation of our success came from the independent commentator on
the drugs market, "drugs tsar" Keith Hellawell, last week: "Traditionally
addicts came from broken homes, or deprived backgrounds. We are now getting
a new group, people from the more affluent rural areas.

They are often high achievers from stable homes, and they are becoming
addicted to drugs." In a year of notable successes, first I must
congratulate our employees in the heroin subsidiary for their strenuous
efforts to expand the downstream business. As our long-term investors will
know, this sector has mainly supplied a small but dedicated group of
high-spending consumers.

Official estimates suggest 40,000 registered users and a maximum of 160,000
regular purchasers. As a result of innovative marketing strategies, we have
increased our consumer base at the rate of some 20 per cent per annum.

We have been able to improve supply of this drug and to continue a 10-year
trend of price-cutting to expand our customer base. We are currently
watching with interest new, localised schemes building on this success. Our
sales team are encouraging inhalation of heroin, as this has shown to have
a better image than mainline methods.

Our new strategy of packaging in special cheap #2 "one hit wonders" appears
to be highly effective in attracting the youth market.

In some areas we supplied heroin to the school age market at below retail
cost. This "loss leader" scheme is designed to give early exposure to our
products to potential long-term consumers. Although the price of heroin has
dropped in recent years from #90 a gram to #45 a gram, the profit margin
remains high. We have also been able to increase the purity of our products
at street level.

As in previous years, heroin produces a high and sustained return on
investment. Our cocaine subsidiary has had a buoyant year. Growth has been
gradual and times have changed from the late Eighties where our City
business experienced a boom period.

Our white powder is primarily an upmarket product, and we hope to hold
sales steady through the anticipated recession. Purchases of crack cocaine,
our product targeted at a lower socio-economic target group, have
outstripped those of the classic powder product.

Market research shows that our 173,000 regular cocaine consumers spend an
average of #780 per annum on this drug. However, dedicated users spend up
to #20,000 per year, far greater expenditure than on any of our other
products.

We also have a large "impulse buy" market for this product. Cannabis
remains our biggest-selling brand.

Our core group is some 1.73 million regular customers and each is estimated
to spend some #600 a year on our cannabis range.

Market research shows that one in three 14-15-year-olds have sampled at
least one product from this range, and that 70 per cent of this age group
know one of our sales representatives. We have maintained prices at around
#3.50 a gram. Cannabis presents a difficult import challenge due to its
bulk compared with class A drugs.

It takes around 70 tonnes a year to supply our current client base. Our
cannabis and synthetic drug division has kept up its close contacts with
Holland, which leads the world in state-of-the art exportation techniques.
Our Dutch colleagues have expanded operations and continue to develop the
manufacturing base for our synthetic products. The most important of these
synthetic brands, ecstasy, continues to sell well, although it has never
quite lived up to the promise of late Eighties. We believe the problem with
this product is user tolerance which, while temporarily increasing sales,
deters long-term use. Our chemists are working with our Dutch colleagues in
the research and development division and are looking for a new product
range that overcomes this problem. I welcome the extension of the European
Community. Reducing border controls has expedited shipments and reduced
bureaucracy. Recent experience has shown that the Channel Tunnel is an
efficient route for importation if not overused. The upheaval in eastern
Europe has opened a variety of new trade routes.

In addition we have an extensive recruiting strategy in the former
Communist countries. I would like to take this opportunity to welcome our
new Romanian and Czech colleagues. One note of caution.

The biggest current threat to our business is the mounting number of health
scares associated with our brands.

We have for many years been able to present cannabis as totally harmless.

Recent research has caused worries and has deterred some casual consumers.
Ours is always a high-risk industry.

Seizures by Customs and police have increased, but we feel this reflects
the continuing expansion of our import arm. According to the latest figures
released yesterday, Customs last year seized our products to the value of
#3.3bn between 1997 and 1998, including 1.7 tonnes of heroin. In January,
Scotland Yard claimed that they had "seriously disrupted" supplies of
heroin by knocking out a distribution centre in North London. The
continuing drop in the price of this product I think speaks for itself.
Customs claimed to have eliminated 130 of our import and distribution
franchises. Sadly, this is an occupational hazard of our business.

Drugs (UK) plc's Liverpool area manager, Curtis Warren, 34, noted for his
aggressive leadership style, has moved to new pastures.

While overseeing a shipment from Holland, the Dutch police recognised his
innate organising talents and the Netherlands prison service made him an
offer he could not decline for a 12-year contract.

David Santini, 31, who had made a similar impact as our main heroin
distributor in Scotland, has received a 13-year contract from the British
Prisons Service. In the UK, heroin deaths rose from 52 to 186 in three
years.

We regret the loss of such regular customers.

I also deprecate the increase in the use of firearms that has,
unfortunately become synonymous with our business.

This damages our corporate image and attracts excessive interest from the
police. Some 95,000 of our workers and customers were arrested in 1996, up
from 86,000 in 1994. Drugs (UK) plc business has also contributed to our
allied industries, theft and prostitution. One recent report suggested that
just 664 of our regular heroin purchasers had been involved in some 70,000
theft offences in a three-month period. On the broader front it has been an
eventful year. Regarding legalisation, we were troubled by the campaign run
by a national newspaper and the increasing number of police officers and
other prominent figures who favour the legalisation of cannabis. As I have
pointed out in the past, legalisation presents a threat to our control over
the industry.

We believe we provide an exemplary 24-hour "drugs direct" service with no
expensive headquarters or showrooms, no advertising, no tax - just personal
contact with our extensive network of salesmen. We were initially concerned
at the arrival of a new government, especially one that included some
members who had personal past knowledge of our product range.

Worries that it might precipitate a radical change of policy proved
groundless. We lobbied to encourage the Government to maintain the
traditional "war on drugs" position.

I am glad to say that both the Prime Minister, Tony Blair and Home
Secretary have continued to support this hard-line stance. I emphasised to
the Government our commitment to the one truly free market. I also feel we
have entered into the spirit of Labour's "New Deal" by providing employment
for many considered unemployable in mainstream business. On the negative
side the Government appointed a "drug tsar" in October. This was followed
in March by a considered "White Paper" policy document that moved away from
the political hyperbole we have seen in the past. However, despite a number
of well considered suggestions I do not envisage any substantive impact on
our business. I would also like to express my gratitude to the Chancellor
for increasing the taxation on alcohol and tobacco.

This has meant our products can provide more "bang for the buck", compared
to the cost of a pint of bitter or a glass of wine. This has been a major
incentive for our customers among the young and unemployed. For politicians
who take a high moral tone on our trade I would draw attention to the
report by a leading expert, Rowan Bosworth-Davis, who says that the flow of
drugs money from the indebted Third World countries is helping to keep the
Western banking system afloat.

He estimates that by 2004 the value of the drugs fund world-wide will be
#1,500 bn (#937bn) - equal to the value of the world's stock of gold.
Prospects for the next five-year period look promising.

We should continue to trade on our image as a leisure industry service provider.

While we cannot afford to be complacent in a fast changing market, we see
nothing on the horizon that poses a serious threat to maintaining and
developing our trade for the foreseeable future.

Checked-by: (Joel W. Johnson)