All of business seems to be getting more complicated, and the story of our company is more complicated than it once was. We think that 1998 was a fine year, although there were some reverses along with the good news. Innumerable one-time events made it difficult to decipher our reported earnings, and we will undertake in this annual report to disentangle them and give you a clear picture of how we fared.

Of course, our own evaluation of how we performed depends in part on our aims. We've talked about those over the years, but hope this reiteration is helpful:

1. We are a highly decentralized company. Operating heads like Bill Ryan at Post-Newsweek Stations, Tom Might at Cable One, Rick Smith at Newsweek, Jonathan Grayer at Kaplan, Bev Keil at Post-Newsweek Business Information, and Marc Teren at Washingtonpost.Newsweek Interactive truly run the businesses. Our aim is top business performance in each field.

2. In most years, we make more money than we are obligated to spend on dividends and capital expenditures. Deciding how to allocate that capital is our key job. The company has never been interested in revenue growth for its own sake. Our unwavering aim, imperfectly realized, is the best use of every dollar for your benefit to increase profit and strengthen business franchises on the way to growth in value.

3. We are not at all interested in quarterly results (and we can guarantee they won't present a smooth or predictable pattern of any kind). As we grow the value of our company (and your share of it), we are willing to lose money this year if we believe we'll profit in the future from the investment. When we say this, we expect you to hold us accountable for the increase.

Our summary view of 1998 is that while earnings net of one-time events didn't grow as much as we might have hoped, the year saw us build the intrinsic value of the company meaningfully. We did this through changes Tom Might has been gradually making in our cable division and by a significant expansion of Kaplan Educational Centers. We also cautiously saw signs of progress in our Internet activities, which are now significant enough in scale that their success or failure will be quite important for the company's future.

To begin the disentangling: total reported earnings were $41.10 per share (on a diluted basis), an increase of 57 percent over 1998. This is an all-but-meaningless figure, distorted by the huge gain on the disposition of our interest in Cowles Media Company. The profit, substantial and as welcome as it was, cannot be repeated and is consequently irrelevant to future events. (Messrs. Spoon and Graham would like to note once again that 100 percent of the credit for this large gain goes to Kay Graham, who made our initial investment in 1985.)

Unfortunately for simple financial reporting, this year we also disposed of 14 small cable systems; Moffet, Larson & Johnson (MLJ), our PCS consulting firm; and our investment interest in Junglee, a facilitator of Internet commerce. On these transactions we booked an after-tax profit of $31.0 million. (With impeccable timing, we sold most of the Amazon.com stock we received for our Junglee interest just days before Amazon tripled.)

We acquired cable systems serving 72,000 subscribers in Mississippi, Louisiana, Oklahoma, and Texas from Marcus Cable. We acquired other systems in Anniston, Alabama, and Grenada, Mississippi. Kaplan made eight acquisitions during the year, and we bought New Homes Guide, an established publication in the Washington real estate market. All of these acquisitions contributed to earnings in 1998.

Our unaudited attempt at a pro forma comparison with 1997--removing acquisitions and dispositions from both years--suggests that revenues were up 4 percent, expenses were up 4 percent, and operating income grew by 3 percent. Lower profits at The Post, big increases in Internet-related expenditures, and investments in Score! Educational Centers offset profit growth at Cable One, Post-Newsweek Stations, Newsweek, and Kaplan.

Although The Post's profits fell, the newspaper had a satisfactory year in most key respects. When 1998 dawned The Post was nervously awaiting a year in which eight new presses were to be brought on line, replacing 14 old presses, some of which had been printing papers since 1949. Press transitions can be notoriously difficult, but production vice president Mike Clurman and his team brought this one in on time and under budget. In fact, the new press project, including a new plant in Maryland and a completely modernized and expanded plant in Virginia, ended up costing $230 million, $20 million below what was authorized by our Board of Directors.

These words and figures are inadequate to convey the admiration felt by Post management for the job Mike and his team carried out, and particularly the relief of the circulation department. Daily and Sunday circulation service (measured by complaints per 1,000 subscribers) actually improved and set an all-time record during the year of press transition.

There is no rest for the weary, however. As 1999 dawned the paper faced an entirely new production schedule with color debuting in January, along with our first modest efforts at zoning the daily paper. This was soon to be followed by the computer pagination of all the pages of the newspaper, a software task of daunting complexity; a new advertising computer system; a new circulation computer system; and the year 2000 computer bug awaiting us at year end. Wish us luck.

Steve Coll, a Pulitzer Prize winner and gifted Style and financial reporter and foreign correspondent, became managing editor in July. Steve will be a huge contributor to the future of the paper.

Editorially, it was a gratifying year. The Post was the first to print the Monica Lewinsky story in early January, and executive editor Len Downie and the staff spent a year of patient days and nights deciding what stories we would print as the Starr investigation progressed. Through a year of challenging decisions, the paper managed to be both aggressive and accurate in its reporting.

At year end, investigative reporters Sari Horwitz, Jeff Leen, Jo Craven, and David Jackson wrote an astounding series that told a simple story: D.C. police officers had shot more citizens than any other police department in the country by a significant amount. A new District police chief immediately set in motion a series of reforms that will almost certainly lead to a reduction in deaths in the future.

Daily and Sunday circulation each fell 1.3 percent, a result that was disappointing. While Post market penetration remains higher than that of other big-city papers in the U.S., we need to continue to focus our efforts on the circulation of printed copies of the paper. Total readership, including the Internet, boomed, of course, but we want more readers of the printed as well as of the electronic version of the paper.

Newsweek reported all-time record profits despite the absolutely impossible difficulties endured by the international edition. The national sales force under Harold Shain and new publisher Carolyn Wall brought in an exceptional revenue performance, and expenses were as tight as ever.

One Friday in early January 1998, Newsweek reporter Michael Isikoff had the first exclusive news of the Monica Lewinsky investigation and had most of the important facts. As publication deadline approached, however, the staff had been unable to talk to key participants, including Lewinsky herself, Vernon Jordan, and President Clinton. Knowing his decision would likely be criticized, Rick Smith concluded Newsweek would not print an incomplete story and decided not to publish it. At one year's remove, we couldn't be prouder of that decision and of Rick Smith, who continues to lead Newsweek as no one else could.

Late in the year the staff was shocked by the death of Maynard Parker, Newsweek's brilliant long-time editor. A tribute to Maynard appears elsewhere in this report, but the three of us would like to add that all of you should know how uniquely, critically important Maynard was to Newsweek and its success. In Rick Smith and Maynard Parker, Newsweek has had two absolutely great editors back to back. Mark Whitaker, Maynard's trusted assistant and confidant, succeeds him with the admiration of everyone on the staff for the judgment with which he led the magazine through the last difficult year.

Post-Newsweek Stations remained the largest contributor to the company's profits and continued to outperform the industry. Bill Ryan's choice to lead our new station in Orlando, Kathleen Keefe, strengthened the station's ratings and profits in its first year under Post-Newsweek management. Chris Rohrs, formerly station manager of WFSB in Hartford, rejoined Post-Newsweek Stations as vice president/sales and marketing. Thanks to the work of station managers Alan Frank (Detroit), Steve Wasserman (Houston), John Garwood (Miami), Jim Joslyn (San Antonio), and Sherry Burns (Jacksonville), the division's profits showed an increase in a year when not all station groups did so.

Looking ahead, digital broadcasting and the highly public attempts by the major networks to redefine relationships with affiliates signaled changes in what has been a very stable industry over the years. We welcome the chance afforded by both developments to improve the quality and extent of our broadcasting and to strengthen and improve network relations when the networks are open to it.

Changes engineered by Tom Might and his team, including Tom Basinger and Jerry McKenna, have made the cable division a far larger and more important component of The Washington Post Company in 1998 and for the future. The acquisitions completed last year gave us the largest increase in basic subscribers since we bought Cap Cities Cable in 1986.

What has made Cable One unique is Tom Might's focus on customer service. Every Cable One associate, from vice president to installer, understands that our goal is to have the best customer service of any cable company in the country. To facilitate this, we continued to spend heavily on improving our systems, consistent with the size of our markets. We also continued to prepare for new technologies, including the chance to deliver Internet service through cable modems and new digital channels through advanced set-top boxes. These remain future developments, however, in markets of our size. Nonetheless, we eagerly await these and other technology-based opportunities, and we are prepared to exploit them as technical standards stabilize and capital costs move down the volume curve. If we are able to deliver on Cable One's fanatical commitment to high-quality service--and offer attractive new services when appropriate--we will find no better way to fend off satellite and other competitors.

Tom renegotiated programming contracts to reduce the number of satellite suppliers providing partial coverage of our systems in favor of more networks supplying programming on a company-wide basis. This will help reduce future increases in programming costs, one of the major challenges for all cable companies.

Kaplan, a small business when we bought it in 1984, has now grown to meaningful size in the company. Beginning with 1999 numbers, we will break out its results in our segment reporting. We don't know how big Kaplan can become, but Jonathan Grayer has proven himself an expert evaluator of acquisition opportunities and an able manager of a range of education-related businesses.

Kaplan Professional became the number-one operator of career fairs in North America with the acquisition in 1997 of The Lendman Group in the U.S.; last year it acquired CEO Group in Canada. We also expanded into the software education business with the acquisition of Perfect Access, a unique New York City-based business. Kaplan began to provide training services for the securities, insurance, and real estate industries with the acquisition of Dearborn Publishing.

These new businesses came together as a coordinated thrust into providing professional, career, and training services that extend beyond the college and graduate school markets we traditionally served. Kaplan also is taking its brand, content, and field-execution skills into schools--public and private, secondary and collegiate--where it is providing basic skills training under the banner of Kaplan Learning Services.

But the best news was that Kaplan's core test preparation business continued to grow in revenues and profits, number of students, and general excellence.

While we strongly believe in Kaplan's growth prospects, its future ultimately depends on customers' perception that a Kaplan course, career fair, or professional training program is worth the money they spend on it. We are focusing on making Kaplan's financial results grow for you, our shareholders, but Jonathan, Andy Rosen, and the rest of the management team continue to focus just as much on delivering excellent results for every student. Success in that is what will make long-term profit growth possible.

We also continued to invest in Score! This has been a highly gratifying launch, under Rob Waldron's leadership. In 1998 he and his team opened 32 new Score! centers, most of which quickly filled to capacity. Score! now operates 70 centers. Parents learned that their kindergarten-through-eighth-grade children gained worthwhile academic skills from Score's combination of computer-based instruction and energetic, enthusiastic coaches.

Our Internet investments grew dramatically. They now include Washingtonpost.Newsweek Interactive (suggestions for a new name are welcome), as well as interests in Classified Ventures and CareerPath.com, two Internet companies seeking to capitalize on the massive classified advertising resources of newspapers across the country.

Thanks in part to an unusual amount of breaking news in Washington, the viewership of washingtonpost.com boomed as the year went on. By October the site was recording 67 million page views a month and was rated among the top five general news sites in the country. We are amazed by the size of washingtonpost.com's audience, though it hasn't yet generated any profits and won't any time soon. But independent audience measurement surveys suggest that our site's penetration of its market is far greater than most newspaper-based Web sites, giving us an important role in the future electronic marketplace in Washington if we are smart enough to manage it well. In addition, the site's national and international audience brought Post reporting to readers across the country and the world for the first time.

While newspaper classified advertising revenues increased at The Post, we redoubled our efforts to see to it that the classified sites in which we participate on the Web are long-term winners in what will be a vigorous competition. Shareholders should be under no illusion: the future of classified advertising on the Internet is crucial to the future economics of the company, and we continue to spare no expense to try to build our place in that world.

We are pleased with the mix of businesses in The Post Company, especially at this time of accelerating Internet impact. The mix evolved not out of a grand vision, but rational forecasts of long-term business prospects and their valuations made in recent years when we had opportunities to invest. That we spent more heavily on broadcasting, cable, and education is not a random result of sellers' decisions to divest (indeed there were sellers in every one of our industries), but rather a logical outgrowth of our investment judgments about risk and return. Not surprisingly, the net effect of the Internet on our cable and education businesses is probably more favorable than on our print publishing activities.

The Internet challenge we face is not limited to designing business plans to exploit Internet opportunities or build defenses against Internet incursions. The toughest challenge, perhaps, for all our senior managers--including those mentioned here--is to sustain our operational excellence while swiftly exploring and agilely embracing new Internet business models--friend or foe. Our managers must be willing to seize new technologies for increased advantages whenever our existing business models allow (e.g., Internet enrollment and distance learning at Kaplan). They must also be willing to create or support competing, even destabilizing, business models when such models are inevitably going to be advanced by others outside our traditional marketplaces (e.g., electronic classifieds). We doubt we can control the passage from one business equilibrium to another shaped by Internet technology. But we are confident our managers can be equally aggressive in profitably operating what works in today's market while securing a solid business footing in tomorrow's technology-enabled marketplace.

Our shareholders should know that our highly profitable traditional businesses will bear the burden of the investments we're making in attractive new business positions in the technology-infused world ahead. As we noted above, had we not been engaged in such forward-looking commitments, our operating income would have been substantially higher--more so in 1999.

We ask a lot from our shareholders in this transition period. We ask a lot from our managers and Post people generally, as they wrestle with the successful present and less certain, but certainly different, future. Their willingness and skill in operating in both worlds are exceptional.

Once again we would like to call shareholders' attention vigorously to a welcome piece of financial news that's important to understand. Because of brilliant management of our pension funds, provided in great part by Bill Ruane over the past 20-plus years, The Washington Post Company's operating income now includes more than $60 million of pension credits. These earnings are real in that we will avoid spending that much of the company's money in the future on retirement benefits. But these earnings are not cash and therefore should be viewed as being of somewhat lesser quality than other earnings. We report financial results in the format required by generally accepted accounting principles, but we wish to focus your attention on the scale of the non-cash element of our profits, and we will continue to point it out to you in the future.

Shareholders also should know that late last year we invested $165 million in the stock of Berkshire Hathaway Inc. This was a late-breaking revelation. Had Messrs. Graham and Spoon made the same investment when they assumed their present jobs in 1991, the investment would today be worth almost $1.5 billion. Berkshire's management needs no endorsement from us. Berkshire's purchase of General Re and the increasing strength of Berkshire's position in several industries attracted our interest. (Warren Buffett, our director, played no role whatever in our analysis or our decision to invest.) We hope to be long-time participants in the continued rise of this unique company.

Marty Cohen is retiring from the Board in May after 12 years as a director. As we noted last year when Marty retired from active service in the company, he has been a legend for his wise counsel, high ethical standards, and absolute frankness. We look forward to having the benefit of his judgment in an unofficial capacity in the future.

Today's Washington Post Company is not a simple one. Investors trying to understand the value of the business have to know something about newspapers, magazines, television stations, cable systems, education, and the Internet. We are willing to invest in good properties in any of these industries. Our decentralized management style means that division heads operating these businesses enjoy unusual freedom to run them, and we've been repaid with outstanding results. Our traditional businesses continue to be solid performers. Kaplan and Cable One are much more valuable today than a couple of years ago, and the future of both is very good.

Ultimately, we won't know how successful a year we had in 1998 until we know whether our Internet investments build valuable businesses for the company and new services and functionality for our customers. All three of us and everyone in Post Company management will keep focused on opportunities for wise investments to make the value of our businesses grow.

In the pages that follow, we've asked several key people in the company to talk about changes in their own jobs and businesses.

Sincerely,