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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 20-FANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: 30 June 2001

Commission file number: 1-10691

DIAGEO plc(Exact name of Registrant as specified in its charter)

England(Jurisdiction of incorporation or organisation)

8 Henrietta Place, London, W1G 0NB, England(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered

American Depositary Shares New York Stock Exchange

Ordinary shares of 28101/108 pence each New York Stock Exchange*

9.42% Cumulative guaranteed preferred securities, series A** New York Stock Exchange

* Not for trading, but only in connection with the registration of American Depositary Shares representing such

ordinary shares, pursuant to the requirements of the Securities and Exchange Commission.

** Issued by Grand Metropolitan Delaware, LP, of which the Registrant is the sole general partner, and

guaranteed as to certain payments by the Registrant.

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the

close of the period covered by the Annual Report: 3,410,747,468 ordinary shares of 28 101/108 pence each

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d)

of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the

Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past

90 days. Yes No n

Indicate by check mark which financial statement item the Registrant has elected to follow.

Item 17 n Item 18

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TABLE OF CONTENTSPage

Introduction***************************************************************** 4

PART I

Item 1. Identity of Directors, Senior Management and Advisers ***************************** n/a

Item 2. Offer Statistics and Expected Timetable ****************************************** n/a

Item 3. Key Information ************************************************************* 5

Selected financial data ****************************************************** 5

Capitalisation and indebtedness *********************************************** n/a

Reasons for offer and use of proceeds ***************************************** n/a

Risk factors*************************************************************** 10

Item 4. Information on the Company*************************************************** 13

History and development of the company*************************************** 13

Business overview ********************************************************* 16

Organisational structure ***************************************************** 29

Properties, plants and equipment********************************************** 29

Environmental issues ******************************************************* 29Item 5. Operating and Financial Review and Prospects ************************************ 30

Operating results*********************************************************** 30

New accounting standards *************************************************** 49

Reconciliation to US generally accepted accounting principles********************** 50

Liquidity and capital resources *********************************************** 52

Research and development, patents and licences, etc****************************** 55

Trend information********************************************************** 55

Item 6. Directors, Senior Management and Employees ************************************ 56

Directors and senior management ********************************************* 56

Compensation and shareholdings********************************************** 59

Board practices ************************************************************ 64

Employees**************************************************************** 66

Share ownership *********************************************************** 66

Item 7. Major Shareholders and Related Party Transactions ******************************** 69

Major shareholders ********************************************************* 69

Related party transactions *************************************************** 70

Interests of experts and counsel*********************************************** n/a

Item 8. Financial Information ********************************************************* 70

Consolidated statements and other financial information *************************** 70

Legal proceedings********************************************************** 70

Dividends **************************************************************** 71

Item 9. The Offer and Listing********************************************************* 72

Trading market for shares *************************************************** 72Item 10. Additional Information******************************************************** 74

Memorandum and articles of association *************************************** 74

Material contracts ********************************************************** 78

Exchange controls********************************************************** 80

Taxation****************************************************************** 80

Documents on display ****************************************************** 83

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Page

Item 11. Quantitative and Qualitative Disclosures about Market Risk************************** 84

Item 12. Description of Securities Other than Equity Securities ****************************** n/a

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies ********************************** n/a

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds ********** n/aItem 15. Reserved ******************************************************************* n/a

Item 16. Reserved ******************************************************************* n/a

PART III

Item 17. Financial Statements********************************************************** n/a

Item 18. Financial Statements********************************************************** 87

Item 19. Exhibits ******************************************************************** 88

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INTRODUCTION

Diageo plc is a public limited company incorporated under the laws of England and Wales. As used herein,

except as the context otherwise requires, the term company refers to Diageo plc and the terms group and

Diageo refer to the company and its consolidated subsidiaries. Diageo was formed by a merger (the Merger)

of Guinness PLC and Grand Metropolitan Public Limited Company, which became effective on 17 December

1997. As used herein, except as the context otherwise requires, the term the Guinness Group refers to the

former Guinness PLC and its consolidated subsidiaries, the term GrandMet PLC refers to Grand Metropolitan

Public Limited Company, the term GrandMet refers to GrandMet PLC and its consolidated subsidiaries, and the

terms Guinness UDV or Premium Drinks refer to Guinness United Distillers & Vintners. References used

herein to ordinary shares are, except where otherwise specified, to Diageo plcs ordinary shares.

Presentation offinancial information

Diageo plcs fiscal year ends on 30 June. GrandMet PLCs fiscal year ended on 30 September of any particular

year up until 1997. The company publishes its consolidated financial statements in pounds sterling. In this Annual

Report, references to pounds sterling, sterling, , pence or p are to UK currency and references to

US dollars, US$ or $ are to US currency. For the convenience of the reader, this Annual Report contains

translations of certain pounds sterling amounts into US dollars at specified rates, or, if not so specified, the noon

buying rate in New York City for cable transfers in pounds sterling as certified for customs purposes by the

Federal Reserve Bank of New York (the noon buying rate) on 29 June 2001 of 1.00 = $1.41. No representation

is made that the pounds sterling amounts have been, could have been or could be converted into US dollars at the

rates indicated or at any other rates. See Item 3. Key Information Selected Financial Data Exchange rates

for information regarding the noon buying rates from 1 October 1996 to the present.

Diageos consolidated financial statements included in this Annual Report have been prepared in accordance with

accounting principles generally accepted in the United Kingdom (UK GAAP), which is the groups primary

reporting framework. Unless otherwise indicated all other financial information contained in this document has

been prepared in accordance with UK GAAP. Under UK GAAP, the Merger has been accounted for using merger

accounting principles and the results of operations and financial position of Diageo reflect the historical

UK GAAP results and financial position of the Guinness Group and GrandMet on a combined basis as though the

group had always been one. Under accounting principles generally accepted in the United States (US GAAP), the

Merger has been accounted for as an acquisition of the Guinness Group by GrandMet in a purchase transaction

on 17 December 1997. Details of the principal differences are also included in this Annual Report underItem 5. Operating and Financial Review and Prospects Reconciliation to US generally accepted accounting

principles and note 33 to the consolidated financial statements of Diageo.

The principal executive office of the company is located at 8 Henrietta Place, London, W1G 0NB, England and

its telephone number is 011 44 (0) 20 7927 5200.

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PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

SELECTED FINANCIAL DATA

The selected consolidated financial data set forth below should be read in conjunction with, and are qualified in

their entirety by reference to, the consolidated financial statements and notes thereto prepared included elsewhere

in this Annual Report.

UK GAAP

The following table presents selected consolidated financial data for Diageo in accordance with UK GAAP for

each of the five years ended 30 June 2001 and as at the appropriate year ends. The selected consolidated financial

data for the three years ended 30 June 2001 and as at the appropriate year ends has been derived from Diageos

consolidated financial statements, which have been audited by Diageos independent auditors. The selected

consolidated financial data presented in accordance with UK GAAP for the years ended 30 June 1998 and

30 June 1997 and as at 30 June 1997 is derived from unaudited information contained in the consolidated

financial statements of Diageo. This unaudited consolidated financial information, in the opinion of Diageo

management, includes all adjustments, consisting solely of normal, recurring adjustments, necessary to present

fairly the information contained therein.

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Year ended 30 June

2001(1) 2001 2000 1999 1998 1997

(unaudited) (unaudited)$ Profit and loss account data under

UK GAAP (in millions, except dividend and per ordinary share data)

Turnover

Premium Drinks *************** 10,688 7,580 7,117 7,163 7,503 7,951

Quick Service Restaurants ******* 1,469 1,042 941 875 869 879Packaged Food **************** 5,921 4,199 3,812 3,757 3,654 3,755

Continuing operations*********** 18,078 12,821 11,870 11,795 12,026 12,585

Discontinued operations(2)******* 3 400

Total turnover ******************* 18,078 12,821 11,870 11,795 12,029 12,985

Operating profit before goodwill

amortisation and exceptional items

Premium Drinks *************** 2,019 1,432 1,286 1,240 1,317 1,399

Quick Service Restaurants ******* 250 177 202 185 179 160

Packaged Food **************** 730 518 492 478 447 423

Continuing operations*********** 2,999 2,127 1,980 1,903 1,943 1,982

Discontinued operations(2)******* (1) 21Total operating profit before goodwill

amortisation and exceptional items 2,999 2,127 1,980 1,903 1,942 2,003

Share of profit of associates before

exceptional items and taxation **** 286 203 198 188 210 196

Exceptional items before taxation(3) (327) (232) (347) (296) (167) (642)

Profit for the year **************** 1,729 1,226 976 942 879 674

Dividend per share (4) ************ $0.31 22.3p 21.0p 19.5p 23.3p n/a

Earnings per share

basic ********************** $0.51 36.3p 28.8p 26.7p 23.0p 16.8p

diluted ******************** $0.51 36.3p 28.7p 26.5p 22.8p 16.9p

Earnings before goodwill amortisation

and exceptional items per ordinary share basic ********************** $0.60 42.8p 37.3p 34.5p 33.0p 33.0p

diluted ******************** $0.60 42.8p 37.2p 34.3p 32.7p 32.5p

As at 30 June

2001(1) 2001 2000 1999 1998 1997

(unaudited)$ Balance sheet data under

UK GAAP (in millions)

Net current assets/(liabilities)(5) **** 302 214 (68) (879) 29 2,540

Net assets(7) ******************** 8,168 5,793 5,285 4,593 5,164 7,301

Total assets ********************* 24,861 17,632 16,136 16,278 17,254 17,388

Net borrowings(6)(7) ************* 7,725 5,479 5,545 6,056 4,508 3,770

Shareholders equity(7)************ 7,314 5,187 4,711 4,026 4,629 6,771Called up share capital(4) ********* 1,392 987 990 992 1,139 n/a

No. No. No. No. No. No.

(in millions)

Number of shares(4)************** 3,411 3,411 3,422 3,428 3,594 n/a

This information should be read in conjunction with the notes on pages 7 and 8.

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US GAAP

The following table presents selected consolidated financial data for Diageo in accordance with US GAAP for the

three years ended 30 June 2001, the 9 months ended 30 June 1998 and the appropriate period ends. The table also

presents selected consolidated financial data for GrandMets final fiscal year ended on 30 September 1997. The

selected consolidated financial data for the year ended 30 June 2001 has been based on information contained in

Diageos UK GAAP consolidated financial statements. The selected consolidated financial data for the years

ended 30 June 2000 and 30 June 1999 and for the 9 months ended 30 June 1998 has been extracted fromDiageos US GAAP audited consolidated financial statements. The selected consolidated financial data for the

year ended 30 September 1997 has been based on information contained in GrandMets UK GAAP audited

consolidated financial statements.

9 monthsended Year ended

Year ended 30 June 30 June 30 September2001(1) 2001 2000 1999 1998 1997

$ Income statement data underUS GAAP(10) (in millions, except per ordinary share and ADS data)

Sales from continuing operations ********** 17,722 12,569 11,614 11,579 7,399 8,157

Operating income from continuing

operations(8) ************************ 1,882 1,335 1,221 898 355 842

(Losses)/gains on disposals of businesses *** (11) (8) 75 (35) 559 (75)Net income**************************** 1,069 758 798 392 430 383

Basic earnings from continuing operations

per ordinary share ******************** $0.32 22.4p 23.5p 11.1p 14.0p 20.9p

Diluted earnings from continuing operations

per ordinary share ******************** $0.32 22.4p 23.5p 11.0p 13.9p 20.8p

Basic earnings from continuing operations

per ADS**************************** $1.28 89.6p 94.0p 44.4p 56.0p 83.6p

As atAs at 30 June 30 September

2001 2001 2000 1999 1998 1997

$

Balance sheet data under US GAAP(10) (in millions)Total assets**************************** 36,597 25,955 24,868 25,586 27,726 13,295

Net assets***************************** 17,604 12,485 12,375 12,257 13,619 5,427

Long term obligations(9)***************** 5,681 4,029 3,753 3,431 2,931 2,905

Shareholders equity(7) ****************** 16,751 11,880 11,802 11,690 13,084 5,003

This information should be read in conjunction with the notes on pages 7 and 8.

Notes

(1) For the convenience of the reader, pounds sterling amounts for the year ended 30 June 2001 have been

translated into US dollars at the noon buying rate on 29 June 2001 of 1 = $1.41.

(2) Included within discontinued operations, under UK GAAP, are Pearle (an eyewear and eyecare retailer) and

the national food businesses in Europe. The national food businesses in Europe have been accounted for as

continuing under US GAAP. Under UK GAAP, Packaged Food will be accounted for as a discontinued operation

in the year ending 30 June 2002.

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(3) An analysis of exceptional items before taxation under UK GAAP is as follows:

Year ended 30 June

2001 2000 1999 1998 1997

(unaudited) (unaudited)

(in millions)

Charged to operating profit

Guinness/UDV merger integration costs ****** (74) GrandMet/Guinness merger integration costs ** (83) (262) (302)

Other restructuring and reorganisation costs *** (89) (43) (77)

Quick Services Restaurants **************** (65) (55)

Share option funding costs***************** (43)

Agreement with LVMH and employee

incentive schemes ********************** (270)

(228) (181) (382) (572)

Charged to associates *********************** (3) (8) (15) (24)

Charged to interest ************************* (58)

Gains/(losses) on disposal of tangible

fixed assets ***************************** 19 5 (10) 5 (19)

(Losses)/gains on disposal and terminationof businesses **************************** (23) (168) 104 558 (599)

Merger transaction costs********************* (85)

(232) (347) (296) (167) (642)

(4) Diageo plc was formed from the merger of GrandMet PLC and Guinness PLC on 17 December 1997. The

dividend per share figure for the year ended 30 June 1998 represents the amount per share paid to shareholders in

the nine months to June 1998. All amounts for the year ended 30 June 1998 were paid subsequent to

17 December 1997. For the year ended 30 June 1997 dividend per share information, the called up share capital

and number of shares in issue at 30 June 1997 are not applicable as Diageo plc had not been formed at that date.

(5) Net current assets /(liabilities) is defined as current assets less current liabilities.

(6) Net borrowings is defined as total borrowings (i.e. short term borrowings plus long term borrowings plus

finance lease obligations) less cash at bank and in hand, interest rate and foreign currency swaps and current

asset investments.

(7) Under UK GAAP, net assets represents shareholders equity aggregated with minority interests. In March

1999, the group repurchased for cancellation 161.5 million of its ordinary shares at a cost of 1,137 million. In

January 1998, shareholders approved a capital repayment of 2,880 million of which 2,775 million had been

paid to shareholders by 30 June 1998. In addition, shareholders equity and net borrowings at 30 June 1998

reflect the conversion during the year of the $710 million 6.5% convertible notes.

(8) Operating income from continuing operations, under US GAAP, is after charging 169 million of unusual

items (2000 115 million; 1999 346 million; 9 months ended 30 June 1998 276 million; year ended

30 September 1997 21 million) and amortisation of brands and goodwill of 435 million (2000

392 million; 1999 392 million; 9 months ended 30 June 1998 247 million; year ended 30 September

1997 206 million).(9) Long term obligations is defined as long term borrowings and capital lease obligations which fall due after

more than one year.

(10) The results of the Guinness Group have been included in the US GAAP consolidated financial statements

from 31 December 1997, the deemed acquisition date.

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Exchange rates

A substantial portion of the groups assets, liabilities, revenues and expenses is denominated in currencies other

than pounds sterling, principally US dollars. For a discussion of the impact of exchange rate fluctuations on the

companys financial condition and results of operations, see Item 11. Quantitative and Qualitative Disclosures

about Market Risk.

Fluctuations in the exchange rate between the pound sterling and the US dollar will also affect the US dollarequivalent of the pound sterling price of the ordinary shares on the London Stock Exchange and, as a result, will

affect the market price of the ADSs on the NYSE. In addition, such fluctuations will affect the US dollar amounts

received by holders of ADSs on conversion of cash dividends paid in pounds sterling on the underlying

ordinary shares.

The following table shows, for the periods indicated, information regarding the US dollar/pound sterling

exchange rate, based on the noon buying rate, expressed in US dollars per 1.

Period Averageend rate(1)

Year ended 30 September1996******************************************************************** 1.57 1.54

1997******************************************************************** 1.61 1.649 months ended 30 June 1998********************************************** 1.67 1.66

Year ended 30 June1999******************************************************************** 1.58 1.64

2000******************************************************************** 1.51 1.59

2001******************************************************************** 1.41 1.45

Note

(1) The average of the noon buying rates on each day during the period.

The following table shows high and low US dollar/pound sterling exchange rates by month, for the period to

9 November 2001, expressed in US dollars per 1.Period Period

high low

Month endedMay 2001 *************************************************************** 1.44 1.41

June 2001 *************************************************************** 1.42 1.37

July 2001**************************************************************** 1.43 1.40

August 2001 ************************************************************* 1.46 1.41

September 2001 ********************************************************** 1.47 1.44

October 2001************************************************************* 1.48 1.42

November (through 9 November 2001)**************************************** 1.47 1.45

The noon buying rate was $1.46 per 1 on 9 November 2001.

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RISK FACTORS

Diageo faces competition which may reduce its market share and margins.

Diageo faces competition from several international companies as well as local and regional companies in the

countries in which it operates. Diageo competes with premium drink companies across a wide range of consumer

drinking occasions. Within a number of categories consolidation or realignment is taking place. Increased

competition and unanticipated actions by competitors could lead to downward pressure on prices and/or decline

in Diageos market share in any of these categories, which would adversely affect Diageos results and hinder itsgrowth potential.

Diageo may not be able to derive the expected benefits from its restructuring strategy.

On 17 July 2000, Diageo announced the integration of its spirits, wine and beer business to create Guinness UDV

as part of an integrated strategy to be a focused premium drinks company. In line with this strategy, Diageo has

also entered into an agreement to acquire, subject to appropriate regulatory approvals, certain of the Seagram

spirits and wine businesses, as described more fully in Item 4. Information on the Company Premium

Drinks. However, there can be no assurance that Diageo will be able to derive all anticipated operating synergies

and cost savings from the integration of Diageos beverage alcohol businesses. There also can be no assurance

that Diageo will be able to complete the acquisition of the Seagram businesses in light of the objections from the

US competition authorities or, if the acquisition is completed, to derive the anticipated synergies and cost savings.

In addition, Diageo may experience problems or delays in integrating the Seagram businesses, including

disruption of its ongoing operations or diversion of managements attention. Failure to complete successfully the

integration process would have a material adverse effect on Diageos operating results. Furthermore, Diageo may

not be able to dispose of non-core assets acquired in connection with the Seagram transaction within the time

schedule originally anticipated or to receive the anticipated proceeds due to market conditions or other factors.

There can also be no assurance that Diageos strategic focus on premium drinks will result in better opportunities

for growth and improved margins.

Diageo remains exposed to factors affecting the US food industry.

While Diageos strategy is to focus on premium drinks, it remains exposed to factors affecting the US food

industry through Burger King and its equity interest in General Mills. Following the disposal of Pillsbury to

General Mills and the exercise of its option to sell back to General Mills 55 million General Mills shares, Diageoholds approximately 21.7% of General Mills outstanding share capital. The market valuation of this interest may

be affected adversely by a variety of factors, including the performance of General Mills and the extent to which

that performance meets investors expectations, economic conditions in the United States, including the

US financial markets, and factors affecting the food industry generally, including increased competition, changes

in consumer preferences and other factors. Any of these factors could also affect Diageos ability over time to

reduce its equity interest in, or affect the price it receives for, General Mills shares. In addition, Diageos ability

to effect a separation of Burger King at a suitable price is dependent on, among other things, the successful

operation of both owned and franchise restaurants in a highly competitive market place. Any significant failure of

such restaurants to operate successfully due to economic conditions, increased competition, financial problems or

other factors impacting on the fast food industry could adversely affect Diageos ability to separate the Burger

King business on favourable terms.

Regulatory decisions and changes in the legal and regulatory environment could increase Diageos costsand liabilities or limit its business activities.

Diageos operations are subject to extensive regulatory requirements regarding production, product liability,

distribution, marketing, labelling, advertising and labour and environmental issues. Changes in laws, regulations

or governmental policy, could cause Diageo to incur material costs or liabilities and could adversely affect its

business. In particular, governmental bodies in countries where Diageo operates may impose new labelling or

production requirements, limitations on the advertising activities used to market alcohol beverages, restrictions on

retail outlets, and other restrictions on marketing and distribution. Regulatory authorities under whose laws

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Diageo operates may also have enforcement power that can subject the group to actions such as product recall,

seizure of products or other sanctions, which can have an adverse effect on its sales or damage its image.

In addition, spirits, wine and beer are the subject of national import and excise duties in many markets around the

world. An increase in import or excise duties could have a significant adverse effect on Diageos sales revenue,

both through reducing overall consumption and by encouraging consumers to switch to lower-taxed categories

of alcohol.

Companies in the alcohol industry may also be exposed to class action or other litigation relating to alcohol abuse

problems, including drink driving or health consequences from the misuse of alcohol. If the industry were to be

involved in such litigation, Diageos business could be materially adversely affected.

Demand for Diageos products may be adversely affected by changes in consumer preferencesand tastes.

Diageos portfolio includes certain of the worlds leading beverage alcohol brands as well as brands of local

prominence. Maintaining Diageos competitive position depends on its continued ability to offer products that

have a strong appeal to consumers. Consumer preferences may shift due to a variety of factors, including changes

in demographic and social trends, changes in travel, vacation or leisure activity patterns, downturn in economic

conditions, which may reduce consumers willingness to purchase premium branded products, or concerns about

health effects due to negative publicity regarding alcohol consumption, regulatory action or any litigation orcustomer complaints against companies in the industry. Any significant changes in consumer preferences and

failure to anticipate and react to such changes could result in reduced demand for Diageos products and erosion

of its competitive and financial position.

Diageos operating results may be adversely affected by increased costs or shortages of raw materialsor labour.

The raw materials Diageo uses for the production of its food and beverage products are largely commodities that

are subject to price volatility caused by changes in global supply and demand, weather conditions or

governmental controls. If commodity price changes result in unexpected increases in raw materials cost or the

cost of packaging materials, Diageo may not be able to increase its prices to offset these increased costs without

suffering reduced volume, revenue and operating income. Diageo may also be adversely affected by shortages ofsuch raw materials. For instance, as described under Item 5. Operating and Financial Review and Prospects

volume for Cuervo tequila was recently affected by the shortage of agave, a key ingredient in the production

of tequila.

Similarly, Diageos operating results could be adversely affected by labour shortages or increased labour costs

due to increased competition for employees, higher employee turnover or increased employee benefit costs.

Diageos business may be adversely impacted by unfavourable economic conditions or otherdevelopments and risks in the countries in which it operates.

Diageos business is dependent on general economic conditions in the United States, Great Britain and other key

markets. A significant deterioration in these conditions, including a reduction in consumer spending levels, could

have a material adverse effect on Diageos business and results of operations. In particular, Diageos results ofoperations may be adversely affected by the impact on the US economy of the 11 September 2001 terrorist

attacks, including any changes in consumer behaviour, and any economic impact on other of Diageos key

markets. In addition, Diageo may be adversely affected by political and economic developments in any of the

countries where Diageo has distribution networks, production facilities or marketing companies. Diageos

operations are also subject to a variety of other risks and uncertainties related to doing business in numerous

foreign countries, including fluctuations in currency values, political or economic upheaval and the imposition of

any import or investment restrictions, including tariffs and import quotas or any restrictions on the repatriation of

earnings and capital.

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Diageos premium drinks operations may be adversely affected by failure to renegotiate distributionrights on favourable terms.

Guinness UDV has a number of distribution agreements for brands owned by it or by other companies. These

agreements vary depending on the particular brand, but tend to be for a fixed number of years. There can be no

assurance that Guinness UDV will be able to renegotiate distribution rights on favourable terms when they expire.

Failure to renew distribution agreements on favourable terms can have an adverse impact on its revenues and

operating income. See Item 8. Financial Information Legal Proceedings for further information about adispute in respect of the distribution rights of the Jose Cuervo tequila brands. In addition, Diageos sales may be

adversely affected by any disputes with distributors or Burger King franchisees.

Diageo may not be able to protect its intellectual property rights.

Given the importance of brand recognition to its business, Diageo has invested considerable effort in protecting

its intellectual property rights, including trademark registration and domain names. Diageos patents cover some

of its process technology, including some aspects of its bottle marking technology. Diageo also uses security

measures and agreements to protect its confidential information. However, Diageo cannot be certain that the steps

it has taken will be sufficient or that third parties will not infringe or misappropriate its intellectual property

rights. Moreover, some of the countries in which Diageo operates offer less intellectual property protection than

Europe or North America. If Diageo is unable to protect its intellectual property rights against infringement or

misappropriation, this could materially harm its future financial results and ability to develop its business.

Forward-looking statements

This report contains statements with respect to the financial condition, results of operations and business of

Diageo and certain of the plans and objectives of Diageo with respect to these items. These forward-looking

statements are made pursuant to the Safe Harbour provisions of the US Private Securities Litigation Reform Act

of 1995. In particular, all statements that express forecasts, expectations and projections with respect to future

matters, including trends in results of operations, margins, growth rates, market standing and volume of products,

overall market trends, the impact of interest or exchange rates, or the introduction of the euro, and anticipated

cost savings or synergies and the completion of expected acquisitions and any payments in connection with such

acquisitions are forward-looking statements. In addition, certain statements with regard to the completion of

strategic transactions, the outcome of certain litigation and risk management are also forward-looking in nature.By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend

on circumstances that will occur in the future. There are a number of factors that could cause actual results and

developments to differ materially from those expressed or implied by these forward-looking statements,

including:

) Competitive product and pricing pressures and unanticipated actions by competitors, including changes in

marketing expenditures and strategies, that could impact Diageos market share, increase expenses and

hinder growth potential;

) The effects of business combinations, acquisitions or disposals and the ability to realise expected synergies

and/or costs savings;

)Legal and regulatory developments, including changes in regulations regarding consumption of oradvertising for beverage alcohol, changes in accounting standards, taxation requirements, such as the impact

of excise tax increases with respect to the premium drinks business, environmental laws, regulatory approval

of pending or future acquisitions or disposals and development of litigation directed at the drinks and spirits

industry;

) Changes in consumer preferences and tastes, demographic trends or perception about health-related issues,

which may affect all business segments;

) Changes in the cost and availability of raw materials and labour costs;

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) Changes in economic conditions in countries in which Diageo operates, including changes in levels of

consumer spending or any adverse impact on the US or global economy of the 11 September 2001

terrorist attacks;

) Renewal of distribution rights on favourable terms when they expire;

) Diageos ability to protect its intellectual property rights; and

) Changes in financial and equity markets, including significant interest rate and foreign currency ratefluctuations.

ITEM 4. INFORMATION ON THE COMPANY

HISTORY AND DEVELOPMENT OF THE COMPANY

Diageo is one of the worlds leading drinks businesses with a portfolio of international brands. Diageo was the

twelfth largest publicly quoted company in the United Kingdom in terms of market capitalisation on 3 November

2001, with a market capitalisation of approximately 23.9 billion.

Diageo was formed by the Merger of GrandMet PLC and Guinness PLC that became effective on 17 December

1997. As a result of the Merger, GrandMet PLC became a wholly owned subsidiary of Guinness PLC, and

Guinness PLC was renamed Diageo plc.Diageo is incorporated as a public limited company in England and Wales.

Diageo is a major force in branded drinks and operates on an international scale. It brings together world-class

drinks brands and a management team committed to the maximisation of shareholder value. The management

team expects to invest in global brands, expand internationally and launch innovative new products and brands.

Diageos principal business activities are as follows:

Premium Drinks. Premium Drinks comprises Guinness UDV, which is the worlds leading branded premiumspirits and wine business by volume, sales revenue and operating profit, and which brews and markets beer.

Guinness UDV produces and distributes a wide range of premium brands, including Johnnie Walker Scotch

whiskies, Guinness stout, Smirnoff vodka, J&B Scotch whisky, Baileys Original Irish Cream liqueur, Tanqueray

gin and Malibu speciality spirit.Diageo owns 45% of Jose Cuervo SA, a leading producer and exporter of tequila, based in Mexico. The group

and Jose Cuervo SA have established distribution arrangements in a number of markets. Diageo also owns 34%

of Moet Hennessy SA (Moet Hennessy). Moet Hennessy is based in France and is a leading producer and

exporter of champagne and cognac. Diageo and Moet Hennessy have established a number of joint distribution

arrangements.

On 17 July 2000, Diageo announced the integration of its spirits, wine and beer businesses to create Premium

Drinks. It is anticipated that the integration will cost approximately 170 million of which 74 million was

charged as an exceptional operating cost in the year ended 30 June 2001.

On 20 December 2000, Diageo and Pernod Ricard S.A. (Pernod Ricard) announced that they had signed an

agreement with Vivendi Universal S.A. (Vivendi) to acquire the spirits and wine business of The Seagram

Company Ltd. (Seagram), for $8.15 billion (5.8 billion) in cash, subject to certain debt and working capitaladjustments. Diageo is expected to fund approximately $5.03 billion of the purchase and Pernod Ricard is

expected to fund approximately $3.12 billion, but this proportion may be changed by Diageo and Pernod Ricard.

See Item 10. Additional Information Material contracts for additional information on the agreement. The

proposed acquisition has received anti-trust pre-clearances in every jurisdiction where Diageo believes it is

required, except in the United States where on 23 October 2001 the Federal Trade Commission (FTC) voted to

challenge the acquisition. Diageo, Pernod Ricard and Vivendi are in discussion with the FTC in an attempt to

resolve this matter. If a resolution can be reached, and the transaction can be completed, Diageo expects to fund

the acquisition from existing cash resources, including proceeds from the sale of Pillsbury. No assurance can be

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given that the FTC will approve the transaction or that any conditions to such approval will not be materially

burdensome.

Major Seagram brands that will become part of the Diageo portfolio of brands, if the acquisition is completed,

include Captain Morgan rum, Crown Royal Canadian whisky, Seagrams 7 Crown American whisky, Seagrams

VO Canadian whisky and Barton & Guestier wines. In the year ended 30 June 2001, the Seagram brands to be

added to the Diageo portfolio achieved volumes of over 15 million nine litre cases. Diageo will also directly and

indirectly acquire production facilities and warehouses containing Seagram inventory. These facilities are locatedin a number of countries, including the United States, Canada, France, Korea and Venezuela.

Seagrams spirits and wine subsidiary, Joseph E Seagram & Sons, Inc., owns the Captain Morgan spiced rum

brands. Destiler a Serralles (Serralles) has commenced litigation against Seagram and Joseph E Seagram & Sons,

Inc. claiming that its right of first refusal regarding the Captain Morgan trademarks is triggered by the agreement

to sell the shares of Joseph E Seagram & Sons, Inc. to Diageo. Seagram has filed a motion for summary

judgement with the US District Court in San Juan, Puerto Rico, which is hearing the case. If Serralles is

successful, Joseph E Seagram & Sons, Inc., as acquired by Diageo, will no longer own the Captain Morgan

trademark or will be required to transfer it. As described more fully in Item 10. Additional Information

Material contracts Agreement for the acquisition of the Seagram spirits and wine business, Diageo would be

entitled to an indemnity from Vivendi or an adjustment of the purchase price if a court requires it to transfer the

Captain Morgan trademarks to Serralles or otherwise prevents it from acquiring the Captain Morgan business.

There are also a number of businesses, that may be acquired in connection with the Seagram transaction, that

Diageo and Pernod Ricard intend jointly to dispose of promptly after the closing of the transaction. Proceeds

from the dispositions are to be shared in the proportion of 61.8% and 38.2% between Diageo and Pernod Ricard

respectively, unless those percentages are changed by Diageo and Pernod Ricard. Principal businesses which are

expected to be disposed of include Mumm Sparkling Wines, Seagram mixers and Ricks lemonade, Sandeman

ports and sherries, Four Roses bourbon and Oddbins (a chain of off-licence retail outlets in the United Kingdom).

Quick Service Restaurants. The Burger King Corporation (Burger King) is a leading fast food hamburgerrestaurant chain with over 11,300 outlets worldwide, of which over 8,300 are in the United States. Of the total

number of outlets, 91% are franchised and 9% are company-operated.

The group has announced that it intends to dispose or separate its Quick Service Restaurants business. During the

year ended 30 June 2001, the new management team at Burger King has been strengthened by a number of keyappointments of executives with wide experience in the relevant areas of hospitality, fast food and marketing.

They are working on a strategy to restore market share and improve operating performance, as well as to facilitate

the separation of Burger King from Diageo.

Packaged Food. On 31 October 2001, Diageo completed the disposal to General Mills, Inc. (General Mills) ofits worldwide Packaged Food operations, in a transaction valued at $10.4 billion (7.4 billion). Diageo and

General Mills have amended the original terms of the transaction to reflect changes which have occurred since the

transaction was originally announced on 17 July 2000.

Under the revised terms of the transaction, Diageo received 134 million newly issued General Mills shares,

constituting approximately 32% of General Mills share capital and valued at $5,896 million (4,182 million),

based on a share price of $44, the average General Mills closing share price on the New York Stock Exchange

over the month preceding the completion. Diageo also received $3,830 million (2,716 million) of cash less

Pillsburys outstanding net borrowings of $234 million (166 million).

Under the amended agreement, Diageo also had an option to sell 55 million of its General Mills shares back to

General Mills within six days of completion at a price of $42.14 per share. Diageo exercised this option on

1 November 2001 and, as a result, received proceeds of $2,318 million (1,644 million) on 5 November 2001.

Following the sale of these shares back to General Mills, Diageos stake in General Mills is approximately

21.7%, based on the share capital of General Mills as of 29 October 2001. Based on this stake in General Mills,

Diageo will also receive up to $395 million (280 million) at the eighteen-month anniversary of the completion

depending on the General Mills share price shortly prior to that anniversary and the number of General Mills

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shares Diageo continues to hold. Diageo is committed to return capital to shareholders when circumstances are

appropriate and the sale of shares to General Mills has increased Diageos capacity to do so.

Diageo expects to be able to participate in the enhanced growth, cost synergies and shareholder value benefits

which are expected to accrue to the new General Mills. In the longer term, consistent with its focus on premium

drinks, Diageo will consider further reductions in its holding in General Mills. However, such reductions will

only be made when they are also in line with Diageos shareholder value principles and in full collaboration with

General Mills.

Unaudited condensed pro forma consolidated financial information is included on pages A1-A5 of the Annual

Report on Form 20-F reflecting the disposal of Pillsbury and the acquisition of 21.7% of General Mills. The

transaction gives rise to a pro forma exceptional gain of approximately 400 million before transaction costs and

tax and after charging goodwill previously written off of 1.5 billion, based on current US dollar exchange rates.

Diageos estimated tax liability for the disposal of Pillsbury is expected to be reduced to approximately

$300 million, which is significantly lower than originally estimated.

Under UK GAAP, Packaged Food will be accounted for as a discontinued operation in the year ending 30 June

2002. This will mean that the turnover and operating profit of the Packaged Food segment will be disclosed

separately from the continuing business of Diageo for future reported periods in Diageos consolidated financial

statements.

The merger agreement relating to the combination, and the amendments to the agreement, have been filed with

the Securities and Exchange Commission and the descriptions contained above and in Item 10. Additional

Information Material contracts of this Report is qualified in its entirety by the merger agreement, as amended.

Acquisitions and disposals. Diageo has completed a number of other acquisitions and dispositions consistentwith its strategy of focusing on its major products. Between the Merger in December 1997 and 30 June 2001, the

group has received approximately 2.5 billion from disposals and spent approximately 0.7 billion on

acquisitions. In the year ended 30 June 2001, Diageo disposed of UDV Industria e Comercio Ltda in Brazil. In

the year ended 30 June 2000, disposals included Grupo Cruzcampo SA for 450 million and four European

spirits brands for 250 million. In the year ended 30 June 2001, Diageo acquired the 50% outstanding share

capital in Bundaberg Distilling Investments Pty Limited in Australia. Other acquisitions made since the Merger

include DCA Bakery in February 2000, Hazelwood Farms Bakeries in May 1999 and the Heinz bakery products

unit in October 1998, all in the Bakeries and Foodservice division of the Packaged Food business for an aggregate

consideration of 385 million. In order to gain regulatory approval for the Merger, the group disposed of its

worldwide interests in the Dewars Scotch whisky brand and the Bombay gin brands in 1998 for 1,150 million

and its 49.6% equity stake in Cantrell & Cochrane Group Limited, an associate of Guinness Brewing.

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BUSINESS OVERVIEW

The following table shows UK GAAP turnover and operating profit before goodwill amortisation and exceptional

items by activity and geographic area and the percentage contributions of each activity and geographic area to

Diageos turnover and operating profit before goodwill amortisation and exceptional items for the three years

ended 30 June 2001.

Year ended Year ended Year ended

30 June 2001 30 June 2000 30 June 1999

million % million % million %

Segmental analysisTurnoverPremium Drinks**************************** 7,580 59 7,117 60 7,163 61

Quick Service Restaurants******************** 1,042 8 941 8 875 7

Packaged Food ***************************** 4,199 33 3,812 32 3,757 32

12,821 100 11,870 100 11,795 100

Operating profit(1)Premium Drinks**************************** 1,432 68 1,286 65 1,240 65

Quick Service Restaurants******************** 177 8 202 10 185 10

Packaged Food*****************************

518 24 492 25 478 252,127 100 1,980 100 1,903 100

Geographical analysis(2)TurnoverEurope *********************************** 4,073 32 4,181 35 4,230 36

North America ***************************** 6,401 50 5,639 48 5,656 48

Asia Pacific ******************************* 990 8 886 7 777 7

Latin America ***************************** 776 6 697 6 716 6

Rest of World****************************** 581 4 467 4 416 3

12,821 100 11,870 100 11,795 100

Operating profit(1)

Europe***********************************

614 29 585 30 594 31North America ***************************** 1,001 47 956 48 936 49

Asia Pacific ******************************* 206 10 170 9 131 7

Latin America ***************************** 188 9 165 8 155 8

Rest of World****************************** 118 5 104 5 87 5

2,127 100 1,980 100 1,903 100

Notes

(1) The operating profit for the year ended 30 June 2001 is before goodwill amortisation of 26 million

(2000 17 million; 1999 4 million), exceptional merger related costs of 74 million (2000 83 million;

1999 262 million), other integration and restructuring costs of 89 million (2000 43 million; 1999

77 million) and net charges in respect of Quick Service Restaurants of 65 million (2000 55 million;

1999 0). In addition, in the year ended 30 June 1999 there was a 43 million exceptional charge in respect ofordinary shares purchased to satisfy options granted to employees.

(2) The geographical analysis is based on the location of the third party customers.

Premium Drinks

Premium Drinks has a portfolio of widely recognised alcoholic beverages including a number of the worlds

leading spirits and beer brands. The information below, when comparing volume information with competitors,

has been sourced from data published during 2001 by Impact International, a publication which compiles volume

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statistics for the international drinks industry. Thirteen of Guinness UDVs owned brands were among the top

100 premium distilled spirits brands worldwide in calendar year 2000. Impact International defines premium as

brands generally with a retail price of greater than US$10 per 750ml bottle (in the United States US$12 per

750ml bottle). Guinness UDV is engaged in a broad range of activities within the premium drinks business. Its

operations include producing, distilling, brewing, bottling, packaging, distributing, developing and marketing a

range of brands in approximately 200 countries around the world.

In the year ended 30 June 2001, Guinness UDV sold 87 million equivalent cases of spirits (including ready todrink), 2 million equivalent cases of wine and 20 million equivalent cases of beer. In the year ended 30 June

2001, ready to drink products contributed 3.3 million equivalent cases of total Guinness UDV volume (nearly

1 billion bottles) of which Smirnoff Ice accounted for 2.4 million equivalent cases. Volume is measured on an

equivalent servings basis to nine litre cases of spirits. Equivalent cases are measured as follows wine in nine

litre cases is divided by 5, ready to drink products in nine litre cases are divided by 10, beer in hectolitres is

divided by 0.9. An equivalent case represents 272 servings. A serving comprises 35ml of spirits; 165ml of wine;

or 330ml of ready to drink or beer.

Turnover for Guinness UDV for the year ended 30 June 2001 was 7,580 million and total operating profit before

goodwill amortisation and exceptional items was 1,432 million.

Guinness UDVs portfolio comprises brands owned by the company as a principal and brands the company holds

under agency agreements. The portfolio includes:Global priority brands

Johnnie Walker Scotch whiskies

Guinness stout

Smirnoff vodka

J&B Scotch whisky

Baileys Cream liqueur

Cuervo tequila (agency brand in North America, the European Union and most international markets)

Tanqueray gin

Malibu speciality spirit

Other spirits brands include: Wine brands include:

Gordons gin and vodka Beaulieu Vineyard wine

Buchanans De Luxe whisky Blossom Hill wine

Bells Extra Special whisky Glen Ellen wine

Dimple/Pinch whiskyOther beer brands include:

Old Parr whiskySmithwicks bitter

The Classic Malt whiskiesHarp Irish lager

White Horse whiskyRed Stripe lager

Bundaberg rumKilkenny Irish beer

Archers speciality spirit

Guinness UDVs agency agreements vary depending on the particular brand, but tend to be for a fixed number of

years. There can be no assurances that Guinness UDV will be able to renegotiate distribution rights on favourable

terms when they expire. Guinness UDVs principal agency brands are Cuervo in North America, the European

Union and most international markets, Jack Daniels Tennessee whisky and Southern Comfort speciality spirit inGreat Britain and Grand Marnier liqueur in the United States.

Guinness UDV also brews and sells other companies beer brands under licence, including principally Budweiser

and Carlsberg in Ireland, Bass in the United States, Tiger beer in Malaysia and Heineken lager in Jamaica.

Global priority brands. Guinness UDV has eight global priority brands that it markets worldwide. GuinnessUDV considers these brands to have the greatest current and future earnings potential. Each global priority brand

is marketed consistently around the world, and therefore can achieve scale benefits such as global media

campaigns. Guinness UDV manages and invests in these brands on a global basis. In the year ended 30 June

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2001, global priority brands contributed over 55% of Guinness UDVs total volume and achieved turnover of

4,375 million.

All figures for global priority brands include ready to drink products.

Johnnie Walker Scotch whiskies comprises Johnnie Walker Red and Johnnie Walker Black and Deluxe. During

the year ended 30 June 2001, Johnnie Walker Red sold 6.9 million equivalent cases and was ranked, by volume,

as the number one Scotch whisky and the number four premium spirits brand in the world. Johnnie Walker Black

and Deluxe ranked, by volume, as the number six Scotch whisky brand in the world sold 3.7 million equivalent

cases in the year ended 30 June 2001.

Guinness is the companys only global priority beer brand, and for the year ended 30 June 2001 achieved volume

of 11.1 million equivalent cases. Guinness stout was ranked, by volume, as the number one stout and the

eighteenth largest beer brand in the world.

Smirnoff is Guinness UDVs highest volume brand and achieved sales of 18.4 million equivalent cases in the year

ended 30 June 2001. Smirnoff is ranked, by volume, as the number one premium vodka and the number two

premium spirits brand in the world.

Other global priority brands were also ranked, by volume, among the leading premium distilled spirits brands by

Impact International. These include J&B Scotch whisky (comprising J&B Rare, J&B Select, J&B Reserve and

J&B Jet), ranked the number two Scotch whisky in the world, Cuervo, ranked the number one tequila in theworld, Baileys, ranked the number one liqueur in the world, Tanqueray, ranked the number six premium gin

brand in the world and Malibu, ranked the number four liqueur in the world. During the year ended 30 June 2001,

J&B, Cuervo, Baileys, Tanqueray and Malibu sold 6.2 million, 4.3 million, 5.1 million, 1.9 million and

2.3 million equivalent cases, respectively.

Guinness UDV places great emphasis on innovative long term brand development. Some of its leading brands,

including Baileys and Malibu, are the result of this creativity. Guinness UDV continues to develop and introduce

new brands. It has also introduced extensions of existing successful brands, such as Guinness Extra Cold,

Tanqueray No. TEN, and ready to drink formats such as Smirnoff Ice, J&B Mack and Archers Aqua.

Other brands. Guinness UDV manages its other brands by category, analysing them between local prioritybrands and other wines, beers and spirits brands.

Local priority brands represent the brands, apart from the global priority brands, that make the greatest

contribution to operating profit in an individual country, rather than worldwide. Guinness UDV has identified

30 local priority brands. Guinness UDV manages and invests in these brands on a market by market basis and,

unlike the global priority brands, may not have a common marketing strategy around the world for such brands.

For the year ended 30 June 2001, local priority brands contributed 14% of Guinness UDVs total volume (in nine

litre equivalent cases) and turnover of 1,165 million. Examples of local priority brands include Bells Extra

Special in Great Britain, Dimple/Pinch in Korea, Beaulieu Vineyard wines in the United States, Smithwicks in

Ireland, Budweiser in Ireland, Carlsberg in Ireland, and Gordons gin in Great Britain and the United States.

The remaining spirit brands are grouped under other spirits. Other spirits achieved volume of 27.2 million

equivalent cases and contributed 1,241 million to Guinness UDVs turnover in the year ended 30 June 2001.

Examples of other spirit brands are Gordons gin and vodka (all markets except Great Britain and North America

which are reported as local priority brands), The Classic Malt whiskies, White Horse whisky and Bundaberg rum.

In the year ended 30 June 2001, Guinness UDV sold 4.8 million equivalent cases of other beers, achieving

turnover of 536 million. Approximately 39% of other beer volume were attributable to owned brands, such as

Red Stripe lager, Smithwicks bitter, Kilkenny Irish beer and Harp Irish lager. The remainder was attributable to

beers brewed or sold under licence, including Bass in the United States, Tiger beer in Malaysia and Heineken

in Jamaica.

In addition, Guinness UDV produces and markets a wide selection of US and European wines, classified as other

wines. These include well known labels such as Blossom Hill, Glen Ellen, M.G. Vallejo and Piat dOr. For the

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year ended 30 June 2001, other wine volume was 1.9 million equivalent cases, contributing turnover of 263

million.

Production. Guinness UDV owns over 65 production facilities including distilleries, breweries, packagingplants, bottling plants, cooperages and vineyards. 47 of these facilities are located in the United Kingdom and

Europe, 9 in Africa, 5 in North America and the remaining elsewhere. Production also occurs at over 80 plants

owned and operated by third parties at a number of locations internationally.

Spirits are produced in distilleries located worldwide. Guinness UDV owns whisky distilleries in Scotland and the

United States and gin distilleries in England, the United States, Canada, Africa and the Philippines. Guinness

UDV produces Smirnoff vodka internationally, Popov vodka and Gordons vodka in the United States and

Baileys in the Republic of Ireland. Rum is blended and bottled in Barbados and is distilled, blended and bottled

in Australia.

Guinness UDVs principal wineries are in the United States and Argentina. Wines are sold both in their local

markets and overseas.

Guinness UDV produces a range of ready to drink products in Italy, the United States, South Africa and

Australia. These products are produced based on alcohol sourced from both within and outside the Group.

Guinness UDV has brewing facilities at the St Jamess Gate brewery in Dublin and in Kilkenny, Waterford andDundalk in the Republic of Ireland, Park Royal in London, England and in Nigeria, Ghana, Cameroon, the

Seychelles, Malaysia and Jamaica (through its 58% owned subsidiary, Desnoes & Geddes Limited). Over 40% of

total Guinness output in the Republic of Ireland is exported, and Ireland is the main export centre for the

Guinness brand. In other countries, Guinness is brewed under licensed arrangements. Guinness Draught in cans,

which uses an in-can system to replicate the taste of Guinness Draught, is packaged at Runcorn in the

United Kingdom.

Marketing and distribution. Guinness UDV is committed to investing in its brands, and spent 995 millionworldwide on marketing investment in the year ended 30 June 2001. Marketing investment was focused on the

eight global priority brands, which represented approximately 71% of total marketing expenditure on premium

drinks products.

Guinness UDV focuses on four major strategic markets North America, Great Britain, Ireland and Spain. In

the year ended 30 June 2001, these markets contributed over 54% of Guinness UDVs operating profit before

exceptional items. In addition, there are 15 key markets, which contributed 31% of Guinness UDVs operating

profit before exceptional items which are considered to be individually important. The remaining geographic

markets are reported as venture markets which accounted for 15% of Guinness UDVs operating profit before

exceptional items in the year ended 30 June 2001.

North America. The United States is the largest market for Guinness UDV, and the largest premium drinks

market in the world. In certain US states, and in the majority of the provinces and territories in Canada,

distribution is controlled by local government-owned liquor monopolies as required by the law. Guinness UDV

markets the majority of its spirits and wine brands through five wholly owned in-market companies split

geographically across the United States, which sell through independent distributors and brokers in each state.

Ready to drink products such as Smirnoff Ice, and the groups beer portfolio (Guinness stout, Harp lager, Bassale, Caffreys Irish ale, Kaliber non-alcoholic lager and Red Stripe lager) are distributed nationally through the

Guinness Bass Import Company subsidiary. In addition, through its distribution joint venture with Moet

Hennessy, Schieffelin & Somerset, Guinness UDV markets its Scotch whisky brands and Tanqueray gin and

vodka. In Canada, all Guinness UDV products are sold through a single in-market company. Guinness UDV has

spirits and wine manufacturing operations in both the US and Canada. Shared services for all US operating

companies are provided from the companys North American head office in Stamford, Connecticut. Guinness

UDV is the leading distributor of spirits in North America, significantly ahead, in terms of volume, of its nearest

competitor.

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During the year ended 30 June 2001, the distribution rights for Stolichnaya vodka in the United States ended.

This termination did not impact operating profit in the year ended 30 June 2001, but is expected to reduce

operating profit by approximately 30 million in the year ended 30 June 2002.

Great Britain. Guinness UDV Great Britain has the largest brand, by volume, in a number of spirit categories

including vodka with Smirnoff, whisky with Bells and gin with Gordons. Smirnoff and Bells are also the top

two distilled spirit brands, by volume, in the United Kingdom. Products are distributed via wholesalers and

directly to the major grocers, convenience and specialist stores. In the on trade (for example, licenced bars andrestaurants), products are sold through the major brewers, multiple retail groups and smaller regional independent

brewers and wholesalers.

Ireland. The Republic of Ireland and Northern Ireland are important markets for Guinness UDV. Guinness

UDV is the market leader having almost 50% market share of the total alcoholic drinks market. The Guinness and

Smirnoff brands are market leaders in their respective categories of long alcoholic drinks and vodka. Budweiser

and Carlsberg, also major players in the Guinness UDV portfolio, are brewed and sold under licence in addition

to other local priority brands of Smithwicks and Harp. In both countries, Guinness UDV distributes directly to

both the on trade and the off trade (for example, retail shops and wholesalers). Guinness UDV also brews and

packages a range of beers in Ireland for export to the United Kingdom, the United States and other international

markets.

Spain. Spain is the largest Scotch whisky market in the world, and Guinness UDV has two of the top fiveScotch whisky brands by volume in Spain, with J&B at number one and Johnnie Walker Red at number five. This

is a particularly important J&B market, with Spain contributing 45% of Guinness UDVs J&B total volume.

Distribution in Spain is primarily through Guinness UDVs own distribution company.

Key markets. Key markets are markets which contribute significantly to Guinness UDVs operating profit and

have the potential of becoming major markets. Key markets comprise Africa (excluding North Africa), Greece/

Turkey, Global Duty Free, Venezuela, the Free Trade Zone (certain countries in Latin America), Australia, Japan,

France, Korea, Brazil/Paraguay/Uruguay, Thailand, Taiwan, Portugal, Mexico and Columbia.

The distribution network across Latin America is a mixture between Guinness UDV companies and third party

distributors.

Africa (excluding North Africa) is one of the longest established and largest markets for the Guinness brand, with

the brewing of Guinness Foreign Extra Stout in over 20 African countries through subsidiaries or under licence.

Guinness UDV has a wholly owned subsidiary in Cameroon and majority owned subsidiaries in Nigeria, Ghana,

Kenya, Uganda and the Seychelles.

Global Duty Free is Guinness UDVs sales and marketing organisation which targets the international duty free

consumer in duty free outlets such as airport shops, airlines and ferries around the world. The global nature of

this organisation allows a co-ordinated approach to brand building initiatives and builds on consumer insights in

this trade channel where consumer behaviour tends to be different from domestic markets.

In European key markets, Guinness UDV distributes its spirits brands primarily through its own distribution

companies, except in France, where it sells its spirits and wine products through a joint venture with

Moet Hennessy.

In Thailand, Guinness UDV distributes its spirits and wine brands through joint ventures with Moet Hennessy,and in Japan and Taiwan it distributes through a joint venture with Jardine Matheson Ltd and Moet Hennessy. In

Australia, Guinness UDV has its own distribution company and also has licensed brewing arrangements with

Carlton-United Breweries, while in New Zealand it operates through third party distributors and has licensed

brewing arrangements with Lion Nathan.

Generally the remaining markets are served by third party distribution networks controlled by regional offices.

Venture markets. This grouping comprises all other markets, with the largest being North Africa and the Middle

East, Jamaica and the rest of Caribbean, the Canary Islands, Malaysia, Italy, Germany, Belgium, Netherlands and

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the Nordics. In these markets there is a focus on fewer brands and each business can decide what organisation

structure is most appropriate for its purpose.

In the European venture markets, Guinness UDV distributes its brands primarily through its own distribution

companies. In Asia Pacific, Guinness UDV works with a number of joint venture partners. For Guinness UDVs

spirits and wine brands, the most significant of these is Moet Hennessy with operations in Malaysia, Singapore,

China and Hong Kong. In Malaysia, Singapore and Indonesia, Guinness UDV also brews and distributes its own

and third party beers through controlling interests held in local companies. In addition, Guinness UDV owns acontrolling interest in Desnoes & Geddes Limited, the Jamaican local brewer of Red Stripe lager. In general, the

remaining markets are served by third party distribution networks controlled by regional offices.

Raw materials. Cream is the principal raw material used in the production of Baileys and is sourced fromIreland. Grapes are used in the production of wine and are sourced from suppliers in the United States, France

and Argentina. Other raw materials purchased in significant quantities for the production of spirits and beer are

neutral spirits, cereals, sugar and a number of flavours (such as juniper berries, agave, coconut, chocolate and

herbs). These are sourced from suppliers around the world.

The majority of products are supplied to customers in glass bottles. Glass is produced around the world and is

sourced principally from the Owens Illinois group.

The group has generally not experienced and does not anticipate difficulty in obtaining adequate supplies of its

raw materials for its operations with sourcing available from numerous producers. There has, recently, been aworldwide shortage of agave, a key ingredient required for the production of tequila. The group has a number of

contracts for the forward purchasing of its raw material requirements in order to minimise the effect of raw

material price fluctuation. Long term contracts are in place for the purchase of significant raw materials including

glass, neutral spirits, cream and grapes. In addition, contracts for a number of months are in place for the

purchase of other raw materials including sugar and cereals to minimise the effects of short term price

fluctuations.

Seasonal impacts. Christmas provides the peak period for Guinness UDVs sales. Historically, approximately30% of Guinness UDVs sales volume occurs in the last three months of each calendar year.

Competition. Guinness UDV competes on the basis of consumer loyalty, quality and price. The neworganisation has brought Guinness and UDV together with an integrated strategy in beverage alcohol. Its goal is

to increase its share of high value adult drinking occasions.

In spirits and wine, Guinness UDVs major global competitors are Allied Domecq, Bacardi, Seagram and Pernod

Ricard, each of which has several brands that compete directly with Guinness UDV. Diageo believes, based on its

analysis of data compiled by Impact International, that Guinness UDV and these four other major international

companies account for 58% of the volume of the top 100 premium distilled spirits in the worldwide market. In

addition, Guinness UDV faces competition from local and regional companies in the countries in which

it operates.

In beer, the Guinness brand competes in the overall beer market with its key competitors varying by market.

These include Heineken in Ireland, Carling in the United Kingdom and Carlsberg in Malaysia.

Guinness UDV aims to maintain and improve its market position by enhancing the consumer appeal of its brands

through consistent high investment in marketing support focused around the eight global priority brands.

Guinness UDV makes extensive use of magazine, newspaper, point of sale and poster and billboard advertising,and uses radio, cinema and television advertising where appropriate and permitted by law.

E-commerce. Guinness UDV continues to explore opportunities to apply new technologies that will delivernew revenue streams while at the same time building on the assets and capabilities of its core business. In the year

ended 30 June 2001, 30 million has been expended by Guinness UDV on new business ventures compared with

8 million in the prior year. In e-marketing, Guinness UDV has invested in the development of two businesses:

Translucis which has developed a market leading product to provide media advertising on plasma screens to the

on trade, and Nightfly which is a mobile phone marketing service business that offers venues and lifestyle brands

the opportunity to communicate through a highly profiled consumer database.

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In addition, Guinness UDV invested in ways to apply existing technologies to enhance its business. These include

e-marketing initiatives with core brands to develop interactive web sites with consumers and collaboration

initiatives which develop communication internally and also with customers and suppliers.

Associates. Guinness UDV has two principal associates Moet Hennessy and Jose Cuervo SA. It also ownsshare in a number of other associates mainly in the Far East. In the year ended 30 June 2001, Guinness UDVs

share of profit of associates before interest and exceptional items was 178 million, of which Moet Hennessy

accounted for 155 million.

Moet Hennessy. Diageo owns 34% of Moet Hennessy, the spirits and wine subsidiary of LVMH Moet

Hennessy Louis Vuitton SA (LVMH). LVMH is based in France and listed on the Paris and New York Stock

Exchanges. Moet Hennessy is also based in France and is a producer and exporter of a number of brands in its

main business areas of champagne and cognac. Its principal brands include four champagne brands, Mo et &

Chandon (including Dom Perignon), Veuve Clicquot, Pommery and Mercier, all of which are included in the top

ten champagne brands worldwide by volume and two brands of cognac, Hennessy and Hine. Hennessy is the top

cognac brand worldwide by volume.

Since 1987, a number of joint distribution arrangements have been established with LVMH, principally covering

distribution of Guinness UDVs premium brands of Scotch whisky and gin and Moet Hennessys premium

champagne and cognac brands in the Asia Pacific region, the United States, and France. Schieffelin & Somerset

was established as a joint venture in the United States and distributes Johnnie Walker Red and Black, J&B,Tanqueray, Moet & Chandon and Hennessy brands. Diageo and LVMH have each undertaken not to engage in

any champagne or cognac activities competing with those of Moet Hennessy. The arrangements also contain

certain provisions for the protection of Diageo as a minority shareholder in Moet Hennessy.

On 11 October 1997, the Guinness Group and LVMH entered into an agreement to strengthen their worldwide

co-operation in order to enable Diageo and LVMH to work together to develop their brands.

Jose Cuervo SA. The group indirectly owns 45% of Jose Cuervo SA. Jose Cuervo SA is a leading producer and

exporter of tequila, including Jose Cuervo Especial and Jose Cuervo 1800. Guinness UDV and Jose Cuervo SA

have established distribution agreements in a number of markets. Guinness UDV and Jose Cuervo SA are

renegotiating their existing arrangements, certain aspects of which are the subject of ongoing litigation in the

US and Mexican courts between the two parties as described under Item 8. Financial Information

Legal proceedings.

Other associates. These include Lothian Distillery in the United Kingdom (50% owned) and a number of joint

ventures in the Far East.

Acquisitions and disposals. Guinness UDV has made a number of strategic acquisitions and disposals ofbrands and equity interests in non-core premium drinks businesses.

In January 2001, Guinness UDV acquired additional shares in East African Breweries Limited which as a result

became a subsidiary. In October 2000, Guinness UDV acquired the remaining 50% share of Bundaberg Rum,

Australias second largest spirit brand. The annualised turnover of these two acquisitions is approximately

320 million and their annualised contribution to operating profit is approximately 40 million.

In September 2001, Guinness UDV announced the sale of its Croft and Delaforce port and sherry businesses to a

consortium of Gonzalez Byass S.A. and Taylor Fonseca S.A. for a consideration of482 million (50 million). InJuly 2001, Guinness UDV disposed of its Guinness World Records business to Gullane Entertainment plc for

46 million.

In January 2001, Guinness UDV disposed of UDV Industria E Comercio Ltda, the Brazilian business that

produces and markets local brands Dreher, Old Eight and Drurys.

In January 2000, Guinness UDV disposed of its 88% equity interest in Grupo Cruzcampo SA beer business in

Spain to Heineken NV for a consideration of 450 million. This resulted in an exceptional gain of 82 million,

after charging 224 million in respect of goodwill previously written off.

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In December 1999, Guinness UDV disposed of its Jamaican soft drinks business (owned by Desnoes & Geddes

Limited, a 58% owned subsidiary of Diageo) to PepsiCo, Inc.

In October and November 1999, Guinness UDV disposed of four European spirits and wine brands (Cinzano,

Metaxa, Asbach and Vecchia Romagna) for a total consideration of 250 million. The disposals resulted in an

exceptional charge of 247 million, of which 214 million was in respect of goodwill previously written off.

In March and April 1999, Guinness UDV sold eight Canadian whisky brands, including Black Velvet to

Canandaigua Brands Inc, and six US brands, including Christian Brothers to a number of purchasers. Ouzobrands were sold to Campari in June 1999. In July 1998, Guinness UDV disposed of its investment in

Champagne Laurent-Perrier and Guinness Brewing disposed of its 49.6% equity interest in Cantrell & Cochrane.

In March 1999, Guinness Brewing acquired the remaining 69% of United Beverages Holdings Limited, a

distributor of drinks located in Ireland.

Sale of the worldwide interests in the Dewars Scotch whisky and the Bombay gin brands was a condition of the

US Federal Trade Commissions clearance of the Merger. Guinness UDV sold these interests to Bacardi on

16 June 1998.

Quick Service Restaurants

Burger King is a leading company in the worldwide quick service restaurant industry. In the year ended 30 June

2001, Burger King had turnover of 1,042 million and operating profit before goodwill amortisation andexceptional items of 177 million. Dollar system sales were $11.2 billion in the year ended 30 June 2001. The

division has over 11,300 outlets, of which over 8,300 are in the United States. Of these 11,300 outlets, 91% are

franchised and 9% are company operated.

Franchise agreements between Burger King and franchisees govern restaurant format, building location, building

standards and operating procedures. A monthly royalty fee and advertising contribution, based on a percentage of

sales, are required from franchisees. Operating profit is also generated from outlets directly operated by Burger

King. These outlets may have been internally developed or have been previously purchased from franchisees. In

approximately 13% of franchised outlets, Burger King either owns or holds the lease on the restaurant property

from which the franchisee operates and may realise net rental income from the leased properties.

Burger King sells a range of hamburgers, chicken and associated products. Its hamburgers are flame-broiled,

which differentiates it from the majority of its competitors, who fry their hamburgers. Burger Kings marketing

strategy is to position its products as having the best taste and quality combined with quick and friendly service at

an attractive value to the consumer at superior locations. The strategy is executed by providing customers bigger

and tastier flame broiled burgers than the competition and a wide variety of value meals, which consist of a

sandwich, french fries or onion rings, and a soft drink. Additionally, Burger King continues to develop innovative

new burgers, sandwiches, and other menu items on both a permanent and promotional basis. During the year

ended 30 June 2001, Burger King introduced: the BK Broiler Club sandwich, a new promotional product for a

limited time; the 99 BK Cravers Menu, a new permanent Value menu which included Mozzarella Sticks with

Marinara Sauce, Jalapeno Poppers with Ranch Dip, the Bulls-Eye BBQ Deluxe burger, and the Chicken Tenders

sandwich; the Triple Cheeseburger, a new promotional product for a limited time; the Size It Your Way

Three-Tier Value Meal menu, a permanent menu addition which included new sizes for french fries, onion rings

and soft drinks; new and improved french fries, and Green Frozen Minute Maid Cherry, a new promotional

product for a limited time.

Burger King specifically markets to 18-49 year olds, as well as to children and families with children to

encourage early allegiance to the brand. Burger King regularly enters into agreements with global promotional

partners. To support its market position, Burger King advertises on a local and national basis in the United States.

During the year ended 30 June 2001, over 250 million was spent on marketing activities promoting the Burger

King brand in the United States.

A new management team was put in place at Burger King in the second half of the year ended 30 June 2001. The

new team has a wide level of experience in hospitality, fast food, and marketing. The management team has

focused on the following four strategic assets: the brands owned by Burger King, which include Burger King

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and the Whopper sandwich; the customer preferred larger burger as determined by market studies; Burger

Kings investment in the flame broiling process; and the franchise distribution system.

Burger King continues to implement various restaurant upgrade initiatives, previously bundled together as a

restaurant transformation plan consisting of new logo and signage, enhanced drive-through equipment, and new

restaurant image, as well as, a new kitchen design. Burger King has prioritised the various upgrade initiatives

making the new kitchen design the top priority. The new kitchen design is focused on improving the taste and

consistency of all products. All United States restaurants must install the Phase 1 kitchen that consists of a newhigh-speed toaster and holding cabinets by 30 June 2002. The Phase 2 kitchen, which consists of a new Flexible

Broiler that has multiple cooking chambers so restaurants can cook a variety of products simultaneously, even if

they require different cooking temperatures, will be required to be installed in the United States at a later date.

The enhanced drive-thru 2000 equipment that consists of a new preview menu board, a drive-through main

menu board, an order confirmation unit and a full duplex sound system remains a top priority. Implementation of

the drive-thru 2000 equipment bundle and new interior menu board must be completed by 31 December 2002 in

the United States and new logo signage must be installed by June 2003. The drive-thru 2000 equipment, new logo

signage, Phase 1 kitchen and new restaurant image are now mandatory elements for all new restaurants.

Implementation of the new restaurant image will take place over a longer period of time in the United States. The

logo and signage elements are also being rolled out internationally. Burger King offered eligible franchisees a

new successor franchise agreement and financial incentives if they agreed to remodel their restaurants within a

given timeframe. The financial incentives included a reduced royalty rate for a period of three to five years

dependent on the year of enrolment in the programme.

Burger King continues its growth strategy in the United States and overseas both by restaurant development and

acquisition. Approximately 3,700 restaurants have been added over the last five years, with 2,000 of these

opening in the United States. In recent years, Burger King continued its international growth, opening

340 restaurants outside the United States in the year ended 30 June 2001. Burger Kings international

development is primarily focused on five markets United Kingdom, Germany, Spain, Mexico and Canada.

Additionally, in March 2001 all Burger King restaurants operating in the Netherlands were acquired from the

former Dutch franchisee to a