A FORMER Hampshire head teacher recruited his pupils to help run a business he was directing, an investigation has revealed.

Frank Callaghan, former principal at Applemore College in Dibden, took pupils out of lessons to help pack promotional leaflets for a firm their head teacher was involved in.

Two years after Mr Callaghan retired, an audit report by Hampshire County Council has revealed "serious breaches" in the way school funds, resources and even pupils were used while under his rule.

Mr Callaghan also instructed staff to buy petrol for college transport from a garage near his East Boldre home 12 miles away, rather than from the Tesco garage next door.

The troubled school built up a debt of more than £300,000 under his leadership. Now, it is on course to clear that deficit by next year - two years early.

Mr Callaghan and three others - vice principal Martyn Ashmead, assistant head Christine Stanway and teacher and governor Lesley Athersuch - were directors of Solent Educational Ltd, which was paid £10,117 in 2004 to 2005 from college funds.

The report states the business interests of staff were known but not regularly declared and that governors' requests to sign-off payments were ignored.

The auditors stated: "It is possible that this was a deliberate move to conceal the fact that the decisions taken could result in a potential gain to the principal and college employees listed above."

The county council also paid nearly £29,000 to the company, including about £26,000 directly linked to Applemore College. The college was supposed to run courses for gifted pupils, but none took place.

Mr Callaghan also had connections to Digital Media Interactive Ltd, which was paid £35,928 from college funds in 2004 to 2005.

Auditors also found invoices from Solent Educational Ltd for nearly £17,000, the majority of which was for electrical and computer work. But they found no time or job sheets for the payments.

The company was also paid £2,800 for adult education, but only £850 of this was actually spent on adult education.

The college also paid for leaflets to advertise the company and auditors found more than 30 occasions when the college had to pay for cover for a member of staff who was busy promoting the company.

The auditors said this was a "misuse of the college's resources".

A deficit of £303,000 was racked up from the college's £2.6m budget, which it is still working to clear.

Current head teacher Matthew Longden and chair of governors Sylvia Barnes issued a joint statement. They said: "The report raises a number of issues relating to the college's finances and we were given until 2010 to clear the deficit. We can confirm that due to continued effort and close working with the local authority that deficit will be clear two years earlier in April 2008.

"In addition the college has achieved the national standard for financial management and has plans to continue to build on the improvements and achievements already being made at Applemore.

"This report was written in 2005 and refers to relations at the college before that time. By no means is it a reflection of the current situation at the college, or indeed the exciting direction in which we are now heading."