RM's ability to develop long-term partnerships with its customers, combined with its policy of continuously improving its products and services, has positioned the Group well to take advantage of growth in its markets.

Markets
The Government's enthusiasm for IT in education was backed up during the year by the commitment of new funding for the National Grid for Learning (NGfL). This funding became available in the second half of RM's financial year and has had a significant impact on the Group's full year performance. The NGfL funding was allocated on an LEA-by-LEA basis, with individual LEAs bidding on behalf of their schools. Bids had to be supported by four-year IT plans showing how the LEA intended to strategically develop IT in their schools.

The focus for the first year of NGfL funding was to equip primary schools to access the Internet and this has had a dramatic effect on the size of the primary school market. To help primary schools prepare for the NGfL, RM ran a series of high profile IT seminars for head teachers followed by regional twilight events reaching teachers after normal school hours. The combination of these two series of events reached 5,000 teachers from over 3,300 primary schools. Against this background, RM has strengthened its market position and primary school revenues increased by approximately 60%.

In the secondary school market the NGfL has had only a small impact, although a more marked effect is expected in future years. The Group's annual seminar programme was successful and, over the last three years, more than 50% of all secondary schools have attended. This year the programme took the theme "Improving Schools" and RM was pleased to welcome a number of influential keynote speakers including Lord Puttnam and Sir Dennis Stevenson (Government Advisors with a strong interest in educational IT) and Professor Michael Barber (the Head of the DfEE's Standards and Effectiveness Unit). During the year, RM has strengthened its position in the secondary school market with an increase in revenues of approximately 7%.

RM's Higher Education business increased by 17% and the Group improved its market position. In the FE College sector, RM continued to develop its services-led approach with a number of managed services contracts including the first PFI IT outsourcing deal at Tynemouth College.

Sales and Marketing
Increasingly, RM’s future success will be driven by providing innovative products and services underpinned by long-term customer partnerships. The development and implementation of this strategy will be driven by the Group’s marketing function, which was strengthened during the year including the appointment of a new Marketing Director to the Board of Research Machines plc - the Group's operating company.

To help the development of long-term mutually beneficial relationships with its customers, the Group is investing in further developing the skills of its field-based staff. At the heart of the Group’s partnership with the education community will be the ability to advise on how educational establishments can use IT in pursuit of their learning goals. The staff development programme is intended to ensure that RM personnel can offer educational value as well as technical consultancy to senior managers within the Group’s customer base.

Products
RM's product range has developed rapidly during 1998. The newer areas such as learning software and Internet connections and content have become core parts of RM’s activities, whilst RM's established business of school-wide IT infrastructure continues to lead the market in sales and innovation.

As a result of demand stimulated by the NGfL, RM's Internet connection service - Internet for Learning - has grown spectacularly. In the six month period from April 1998 to year-end, RM connected more than 2,000 more schools to the Internet. This is in addition to the 4,000 schools the Group was already working with and makes RM the biggest supplier of internet connections to schools. More significantly, the Group now provides whole-network connections to over 1,800 schools. Whole-network connections are required to bring the Internet to every PC and pupil in a school and typically require a high level of complex integration work. As such they are a good fit for RM’s strengths.

As well as supplying Internet connection services, the Group is also increasing the range of Internet services it provides. This includes providing Internet e-mail services to a large number of pupils in schools. The RM EasyMail product is now used by 50,000 pupils in primary schools and provides an easy way of offering an email service that can be accessed at any computer. RM EasyMail has been designed to address the particular requirements of the school environment, for example allowing teachers to control and filter pupils’ email messages. RM has also provided email feeds to 900 secondary schools allowing all of these schools’ teachers and pupils access to email.

Living Library, the Group's premium Internet content product, was selected by the DfEE as part of the Multimedia Portables for Teachers scheme. All of the 9,583 notebook computers were supplied with licences for Living Library. This product has also achieved significant sales into LEAs with licences being purchased centrally for authority-wide access. Living Library was awarded Millennium Product status in November 1998.

In January 1998, RM launched RM Primary Maths Learning System, which is the Group’s first in-house developed learning software products. The introduction of RM Primary Maths Learning System means that the Group's learning software business now offers a portfolio of complementary products. Recent independent tests confirmed that RM Primary Maths Learning System delivered significant and repeatable learning gains. Coupled with the continuing good results being achieved with SuccessMaker ®^*, this research demonstrates the future potential of learning software. RM Primary Maths Learning System was awarded Millennium Product status in November 1998.

From its inception, RM Primary Maths Learning System was developed with international requirements in mind. In October 1998, RM announced a partnership with Ernst Klett, the leading educational publisher in Germany, to market a German version of the product.

Developments in RM’s business supplying school-wide education IT infrastructure systems were driven by the Government’s NGfL priorities. In order to connect to the Internet many primary schools are networking their existing computers as well as purchasing new systems and software. RM has introduced new products in this area – SchoolShare and the RM Primary Network – during the year and these have proved very successful. In secondary schools, the RM Connect product range has been developed to be Internet and intranet ready. Many schools are now developing in-school intranets using RM Connect and this capability is also being used to create LEA-wide intranets.

RM’s PC business performed well during the year with revenues and gross margin ahead of last year despite the expected decline in average selling prices. RM welcomes the decline in hardware prices as it allows educational establishments to spend more of their budget on software and services.

Services
RM Services is now the Group's single largest division by headcount and employs more than 300 people. During the year the management of this business area has been significantly developed including the appointment of a new RM Services Managing Director to the Group's Operating Board.

The activities of RM Services address all stages of a customer’s buying cycle. The Group is able to offer advice and consultancy before the sale, training and implementation at the point of installation and continuing support after the sale. This unrivalled range of services is important in building long term and mutually beneficial relationships with customers. During the year the Group laid more than 1,000 miles of UTP cable on 1,100 sites, took over 160,000 telephone support calls, made 17,500 site visits and installed 17,000 systems.

In Connecting the Learning Society, the green paper outlining the development of the NGfL, the Government called upon industry to develop "managed services" that delivered the majority of a school's IT requirements. This was reinforced in the Government’s Challenge Paper published in November 1998. The aim is to make investment decision making easier for schools and ensure suppliers underwrite their customers’ long-term success with technology.

RM welcomes this as, to a large extent, it matches the Group’s traditional approach. During the year the Group has moved even further forward and, in conjunction with schools, colleges and LEAs, has developed a range of managed service products including complete outsourcing packages which transfer all IT responsibility to RM. For some customers, particularly LEAs procuring centrally and large education establishments such as FE colleges, this outsourcing approach is very attractive.

During the year RM achieved managed services successes with the first complete IT outsourcing deal in an FE College at Tynemouth College and the award of preferred bidder status for the £43 million Dudley Grid for Learning project.

Operations
The design, implementation and maintenance of commercial information systems (IS) for its own use is a core competence of RM. The Group's SAMS customer database and contact management system continues to develop and positions RM well to further improve its customer relationships. The Group has increased its investment in a range of IS developments across the business. These activities provide current competitive advantage and a platform for future growth and development.

To a very large extent, it is RM's staff at all levels, who have delivered the Group’s success. The Group's Personnel division has been highly successful in recruiting, retaining and developing the high quality people who will drive RM's growth. 276 full time employees were recruited during the year and 267 existing employees were promoted or had significant changes to their role. The Group's labour turnover decreased during the year.

Looking ahead
1998 has been the first full year that I have been responsible for RM. I am pleased with the progress made across all areas of the Group's business. During the year RM has demonstrated an ability to recognise and exploit opportunity and to build these opportunities into sustainable businesses. At the same time the Group has improved and expanded its already strong operational competences. I am confident RM is well positioned for future innovation and success.

Richard Girling
Chief Executive

^*The SuccessMaker trademark is owned, and is licensed to RM, by Computer Curriculum Corporation.

A printed copy of this Annual Report and Accounts will be sent directly to shareholders after the posting date. Copies may be obtained after the posting date from the registered office of the Company at:

New Mill House, 183 Milton Park
Abingdon, Oxfordshire, OX14 4SE