DIRECTORS' REPORT

The directors present their annual report together with the financial statements and independent auditors' report for the year ended 28 May 2006. A review of the business is given in the business review and the financial review.

Principal activities
The principal activities of the Group are the design and manufacture of miniature figures and games and the retail and wholesale distribution of these products.

Dividend
The directors recommend a final dividend of 14.025 pence per share to be paid on 27 October 2006 to ordinary shareholders on the register at close of business on 6 October 2006.

Substantial shareholdings
The following interests in 3% or more of the issued share capital of the Company as at 11 July 2006 have been disclosed to the Company:

No. of ordinary shares Percentage
A thin, black line.
Schroder Investment Management Limited 3,410,541 11.0
Fidelity International Limited 3,121,229 10.0
Phoenix Asset Management Partners Limited 2,890,294 9.3
Legal & General Group plc 1,722,583 5.5
Marathon Asset Management LLP 1,406,414 4.5
UBS Global Asset Management Limited 1,076,410 3.5
Aberforth Smaller Companies Trust plc
 946,100 3.0

The Company has not been notified of any other substantial shareholdings other than those of the directors, which are disclosed in the remuneration report.

Directors
The present directors of the Company are listed here. All of the directors were members of the board throughout the year. Under the Company’s articles of association one third of the directors are required to retire by rotation at each annual general meeting. Those who retire are the longest in office since their election or last re-election. Under this formula, one director is required to retire at this year's annual general meeting and is seeking re-election, namely T H F Kirby. In addition, as a result of their long service, independent directors C J Myatt and A J H Stewart are required to retire and are seeking re-election. In relation to the independent directors, the chairman has confirmed that following formal performance evaluation, the performance of C J Myatt and A J H Stewart continues to be effective and they continue to demonstrate commitment to their role as independent directors, including commitment of the necessary time to board and committee meetings and other duties. C J Myatt and A J H Stewart are considered by the board to be independent of the Group as set out in the corporate governance report.

Directors' interests
The interests of the directors in the shares of the Company are disclosed in the remuneration report, together with details of share options granted to the directors. None of the directors had a material interest in any contract of significance to which the Company, or any of its subsidiaries, was a party during the year.

Information on executive directors
T H F Kirby (age 56), Chairman and Chief Executive. Tom Kirby joined Games Workshop in April 1986 as general manager and led the management buy-out in December 1991, becoming chief executive at that time. Between 1998 and 2000 he took on the role of non-executive chairman, returning to the role of chief executive in September 2000. Prior to joining Games Workshop, he worked for six years for a distributor of fantasy games in the UK and was previously an Inspector of Taxes.

M Sherwin (age 47), Finance Director. Prior to joining Games Workshop in June 1999, Michael Sherwin was group financial controller of Courtaulds Textiles plc where he had worked for six years. He was previously with Price Waterhouse for 12 years where he qualified as a chartered accountant in 1984. In July 2004, he was appointed an independent director of PlusNet plc. He is also Visiting Fellow in Durham Business School and a member of the Advisory Board of Durham Business School.

Information on independent directors
C J Myatt (age 62). Chris Myatt is the senior independent director, joining the board on 18 April 1996. He is chairman of Palgrave Brown Holdings Limited and an independent director of SRS Holdings Limited and Ying Tai (UK) Limited. He is the Honorary Treasurer of Keele University and a member of its council. He was formerly a divisional managing director within Tarmac PLC.

A J H Stewart (age 46). Alan Stewart joined the board as an independent director on 12 September 1996. Alan is group finance director of WHSmith PLC. He was previously an executive director of Thomas Cook AG and chief executive of Thomas Cook UK Limited. Prior to that he was an investment banker for 10 years with HSBC Investment Bank and is a qualified chartered accountant.

N J Donaldson (age 52). Nick Donaldson was appointed to the board on 18 April 2002. A barrister by profession, Nick is a partner and co-founder of The Capital Markets Group Limited. Nick was, until 2003, head of corporate finance at Arbuthnot Securities Limited and previously held senior investment banking positions at Robert W Baird Limited and at Credit Lyonnais Securities. He is an independent director of The Clapham House Group PLC and chairman of F4G Software plc.

Employees
The Group's policy is to consult and discuss with employees, at meetings, matters likely to affect employees' interests. Information on matters of concern to employees is given through information bulletins and reports which seek to achieve a common awareness on the part of all employees of the financial and economic factors affecting the Group's performance.

The Group operates an employee sharesave scheme as a means of further encouraging the involvement of employees in the Group's performance.

The Group's policy is to consider, for recruitment, disabled workers for those vacancies that they are able to fill. All necessary assistance with training courses is given. Once employed, a career plan is developed so as to ensure suitable opportunities for each disabled person. Arrangements are made, wherever possible, for retraining employees who become disabled, to enable them to perform work identified as appropriate to their aptitudes and abilities.

Creditor payment policy
The Company's current policy concerning the payment of the majority of its trade creditors is to follow the DTI's Better Payment Practice Code. For other suppliers, the Company's policy is to:

a. settle the terms of payment with those suppliers when agreeing the terms of each transaction
b. ensure that those suppliers are made aware of the terms of payment by inclusion of the relevant terms in contracts
c. pay in accordance with its contractual and other legal obligations.

This payment policy applies to all payments to creditors for revenue and capital supplies of goods and services without exception. Wherever possible UK subsidiaries follow the same policy and overseas subsidiaries are encouraged to adopt similar policies, by applying local best practices.

The number of days credit taken by the Group from its suppliers at the year end was 39 days (2005: 35 days).

Environment and community
This is the first time that we have gathered together those items we have chosen to refer to loosely as 'environment and community' in one section. Games Workshop is full of people wanting to do 'the right thing'; it is an important part of who we are. People are important, the Hobby is important, but so is the way in which we do things.

This is where we talk about what that actually means to us.

We know it is important to understand and manage the relationship between our business and the economy, the environment and the community. We have already found that recycling and energy saving bring us cost benefits and that changing the materials we use improves staff health and the working environment. One of the benefits of our open and inclusive culture is that our people are constantly coming up with new and innovative ideas to benefit our business in ways which are sympathetic to the environment and community.

Community support and donations
The Group does not make significant cash donations to charities. However, the Group encourages all employees to engage with their community in whatever way each individual believes to be most appropriate. In many instances this is in the field of education, and the Group provides time and resources for staff members who work with local libraries, who take on leadership roles (such as school governors) or occasional teaching roles.

The Group encourages staff to raise money for children's charities by providing time and resources. During this financial year, staff in several of our businesses raised money for good causes through sponsored events. The Group helped them to realise their fundraising targets by matching the sponsorship monies raised. This matching cost for the Group was £4,500 during the year. In addition to staff fundraising, gifts in kind have been donated to a number of charities. The Group made no contributions for political purposes.

Health and safety
The Group's policy is to achieve and maintain high standards of health and safety. The Group believes this to be a key part of good business management.

The chairman and chief executive has overall responsibility for health and safety (H&S) matters across the Group, however the day-to-day execution of this responsibility is embedded into the roles of the general managers and line managers in each business area. H&S developments, initiatives and best practices are co-ordinated by the corporate social responsibility (CSR) group, which is chaired by the finance director and includes the general managers of each of the operating divisions.

The number of reportable accidents is tracked by business area. In our manufacturing activities, which have been assessed as the areas of highest risk in our operations, there were four reportable accidents during the year (2005: 9). This is a result of our focus on continuing improvements in all areas of H&S.

Internally the reporting documentation has improved, making accident reporting, investigation and root cause analysis more efficient, thus allowing relevant controls to be put in place more effectively.

Risk assessments are still under regular review and several new assessments have been carried out for our new injection moulding equipment and resins business.

A goal for 2006/7 is the formalisation of our H&S management system in line with OSHAS 18001. Although not an internationally recognised standard as yet, OSHAS 18001 is modelled on the environmental management system ISO 14001. Our plan for 2007/8 is to merge our environmental and H&S management systems into one integrated management system. A detailed gap analysis has been carried out and we will continue to improve in our areas of opportunity.

To enhance further H&S at all sites, extensive training programmes are undertaken ranging from induction improvements through cell leader training to senior management responsibilities training.

Environmental performance
The Group aims to manage its operations in ways which are environmentally sustainable and economically feasible, and to minimise the negative impact of its activities on the environment.

The chairman and chief executive has overall responsibility for environmental matters across the Group, however the day-to-day execution of this responsibility is embedded in the supply chain. Environmental developments, initiatives and best practices are co-ordinated by the CSR group.

In 2003 we reported we had embarked upon a three year strategic environmental management system which focused upon:

Year 1 - 2003 waste management
Year 2 - 2004 pollution assessment and control
Year 3 - 2005 energy management

In 2005/6 we benchmarked the Group’s energy management policy. We will address the issue of energy management in substance next year.

The progress that has been made is reported below:

Waste management
Our greatest improvement has been the significant reduction in waste materials from our operations going to landfill. This is an area which we have improved on consistently. The charts below show a detailed breakdown of our waste streams. In 2001/2, 51% of our waste went to landfill, a total of 266 tonnes compared with 121 tonnes (21%) for 2005/6.

Waste recycled by category - 2005/6
Waste recycled by category - 2001/2

Using the principles of continuous improvement, the Group continues to explore ways of reducing the amount of waste which our products generate for end consumers by minimising the plastic content of sprues, re-using trays and ensuring full boxes are despatched from our warehousing facilities, with investigations continuing into new packaging and product development.

We are trialling a customer recycle initiative which allows customers to return their sprues for regrinding. This will be carried out in the Warhammer World Hobby store initially with plans to provide recycle facilities at this year's UK Games Day. If this proves to be successful, we may introduce it more widely.

Pollution assessment and control
Our environmental management system includes a biodiversity action plan developed to cover pollution present in the air, water and on land. A key element is a pollution control barrier erected around our main UK manufacturing and distribution site to eliminate the possibility of wind blown litter leaving the site. Games Workshop is also involved in biodiversity conservation and protection through our association with Nottinghamshire Wildlife Trust. We are proud to have become one of their Wildlife Guardians and encourage staff to take part in conservation activities such as litter picks along the riverbank at our Lenton site. This year we are implementing an employee suggestion to create natural meadow areas within the grounds of our Lenton warehousing facility to encourage local flora and fauna.

There have been no notifiable pollution incidents in the year under review.

Energy management
As our strategic focus has broadened to include energy management, Games Workshop has engaged with the Government funded organisation Action Energy (now The Carbon Trust). We have collated the base data for the energy consumption for the Group's UK manufacturing facilities and the central Nottingham site. To facilitate accurate measurement and tracking, we have installed electricity monitoring meters to identify periods of maximum usage.

We have recently created a new position of building maintenance manager. The H&S manager and building maintenance manager have set specific targets for the reduction in energy use. This team will drive continuous improvement projects looking at the most cost effective solutions first and assessing those projects that require capital expenditure.

In our manufacturing and supply activities, compliance audits of the Group's policies and practices have been carried out annually or more frequently if a new process has been introduced. These audits have been performed following the ISO 14001 standard.

The Group has continued to work in co-operation with environmental lobby groups and non-governmental organisations, including Friends of the Earth and EIRIS, to assist in data compilation and transparent public environmental reporting with a view to incorporating ethical values into our manufacturing principles.

Additional activities
During the year, the Group was involved in the following additional activities:

  • Assisting Action Aid to raise £1,060 through the collection of our used printer cartridges and mobile phones.
  • Host to the Environmental Institute of Stockholm in their study of ecological footprinting in Nottinghamshire (every two months).
  • Host to the Create Sustainability Committee to assist in their organisation for the Nottinghamshire county and city councils yearly environmental initiative (every two months).
  • Eco-week initiative held on the Lenton site for five days which included a presentation to other local businesses covering effective waste management, a litter pick of the river Leen, cycle and public transport encouragements, free environmental information for the home and the office, and reduced membership fees for joining the Nottinghamshire Wildlife Trust.

For further fuller information on our commitment to the environment and community, including our ethical and environmental policies, please see our Environment and Community section.

Constructive use of the annual general meeting
The chairmen of the audit and the remuneration and nomination committees will be available to answer questions at the annual general meeting. Separate resolutions are proposed for substantially separate issues at the meeting and the chairman of the Company will declare the number of proxy votes received both for and against each resolution.

Special business at the annual general meeting

Resolutions 8 and 9
The directors are currently authorised to allot relevant securities under section 80 of the Companies Act 1985 and to allot equity securities under section 95 of the Companies Act 1985. Those authorities expire at the conclusion of the annual general meeting. Resolutions are therefore being put to the annual general meeting to renew those authorities, resolution 8, to give the directors authority to allot relevant securities up to an aggregate nominal amount of £518,809 (representing one third of the Company's current issued share capital). The directors have no present intention of exercising this authority. Resolution 9 authorises the directors to allot equity securities for cash otherwise than on a pre-emptive basis in certain limited circumstances and otherwise up to an aggregate nominal amount of £77,821 (representing 5% of the Company's current issued share capital).

Resolution 10
The directors are also currently authorised to make market purchases of the Company's shares pursuant to section 166 of the Companies Act 1985. This authority expires at the conclusion of the next annual general meeting of the Company. Resolution 10 renews this authority for up to a maximum of 4,638,153 ordinary shares (representing 14.9% of the Company's current issued share capital). The directors' intentions regarding exercising this authority are set out in the financial review.

Under the Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003, the Company is allowed to hold its own shares in treasury following a buy-back as an alternative to cancelling them. Shares held in treasury may be subsequently sold for cash, but all rights attaching to them, including voting rights and the right to receive dividends, are suspended while they are held in treasury.

Auditors
Resolution 6, to re-appoint PricewaterhouseCoopers LLP as auditors of the Company, will be proposed at the annual general meeting.

Going concern
After making appropriate enquiries, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the Group's financial statements.

By order of the board

M Sherwin
Secretary
24 July 2006

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