One Year On: Princess Inc In a country called Diana Plc, pilgrims happily exchange hard-earned cash for memorabilia of their icon. Last year alone an estimated pounds 266m was spent on Diana collectibles.

Paula Mattison is a pilgrim in a bit of a panic. It has been a full day since she left her village in Kent to travel to Princess Diana's grave at Althorp, a journey that involves a bike ride, two train trips, one Underground journey, a bus and, finally, a two-mile hike. She walked because she wants to save her money. After all, she only makes pounds 50 a week at her job caring for a woman with Parkinson's disease and, while her rent is free, she still has to buy food and everything else out of that. And she can't very well go to Althorp and not go to the gift shop, can she?

She is hot and bothered, as she walks down the lane leaving Althorp, gripping a plastic bag full of Diana memorabilia. All in all, she has spent pounds 41 in the shop and, for that, she has got three packs of postcards (pounds 3 each set), a key ring wrapped in purple tissue paper (pounds 6.50), three programmes (pounds 3.50 each) and a silver-plated frame containing a quote from Earl Spencer's funeral address (pounds 15). It is all in the best possible taste but Paula wishes that there had been at least one item for sale with Diana's face on it. "I really thought she was the perfect Princess," she says.

So how much has she spent in total? "A fortune," she says. "I had to get someone at Althorp to cash a cheque so I could get more money!" We add it up. The tour cost pounds 9.50, the journey pounds 23, the bed and breakfast was pounds 25, plus pounds 7 for a bouquet of flowers made by the local church, and five more postcards at 50p each - plus all the money spent in the Althorp shop. All in all, the trip, so far, has cost pounds 108. That is a fortune for 29-year-old Paula - and she isn't done yet.

Paula doesn't know it but we are in the centre of something here, though it is well concealed. Perhaps this is because the fields around Althorp and the adjacent village of Great Brington seem to absorb any noise made by the 2,300 who come here each day - and the not-unrelated noise of cash registers opening and closing in the gift shop. In the car park, women with flowery bosoms talk in murmurs to their men in socks and sandals as they set up card tables for a spot of tea. Walking down the lane towards the village, you only hear the buzz of insects. Yet this is a modern-day Lourdes of a sort and the capital of a country called Diana Plc.

This is a virtual kind of country, a busy and rich place populated by millions around the world, a theocracy steeped in the ways of merchandising. Diana is both saint and product here, and the glue that holds the whole thing together is money. People talk about good taste and good causes - and sometimes they actually do more than talk - but the rules that govern such things here are even more open to interpretation than those that used to govern MPs at the House of Commons. The economy here, though, is strictly cash-for-icon, with the emphasis on the cash.

The only survey done so far, by a consultancy called The Bis in Glasgow, estimates that a minimum of pounds 266m was spent on collectibles alone in Diana Plc in the past year. That includes figurines, dolls, pictures, toys and plates. This is not the half of it really. Don't forget the autographs, the stamps, the dresses, the letters - or the 1981 Ford Escort Ghia that Charles gave her as an engagement present.

There are many ways to make a mint in Diana Plc and one of them is to have bought that car back in 1995 for pounds 4,600. That's what Norfolk businessman Keith Lawson has done. Now, its real market value (sans Diana) should be about pounds 600. With the Diana connection, he was offered pounds 1.5m. Bidders included disgraced boxing champion Mike Tyson and Las Vegas casinos wanting to offer it as a prize. "I have had staggering offers but my main concern is to get it into a museum. I did not want it going to a casino or to one man who would lock it away where people couldn't see it," he says. In the end, he will only say that the selling price to the American museum was between half a million and pounds 1.5m and that, in any country, is a lot of cold, hard cash.

They know about such things at Autograph Collector magazine in Los Angeles, too. Here, over the past year, Bill Miller has been tracking the price of a Diana signature. "Shortly after her death, I estimated that a signed 8in by 10in photograph would be worth between $5,000 and $10,000 and that immediately became true. A Christmas card of her and Charles and signed by her went for between $6,000 and $7,000. It was literally a frenzy. A hand-written note was worth about $10,000," he says. Things have calmed down now, he says, with a signed Christmas card going for $2,500 to $3,000.

One cannot be so sure about her letters: "They go for anything from $10,000 to $50,000. Good content would be anything that mentions Charles and anything that mentions divorce," he says. If dirt sells, then so does love. One of Diana's letters to "Love Rat" Major James Hewitt could go for between $50,000 to $100,000 if they were to ever escape on to the market.

Death always adds value to an autograph, he says, but nothing can compare to Diana. He points out that an autograph from Lucille Ball (of I Love Lucy fame) went up in value 20 per cent when she died, while the price of one of Diana's tripled and quadrupled. "Americans had a real romance with Diana and due to that she took on mythical proportions," says Miller. "She became larger than icons like Marilyn Monroe. Again, that's tragedy for you. Tragedy adds a lot of value."

Melvyn Ingleson is a director of The Bis and says that the number-one market for Diana is the States. "You cannot have a Princess in the States but every middle-class mother there wants her daughter to be one. So this is one way of getting a Princess into the home," he says. "Japan is also a very powerful market. Western Europe is clearly a market but our view is that there is some reticence. I think because we are much closer to it."

That we are. In America Diana is viewed as part of the "mass-media celebrities" market which also includes stars from the world of movies, television and rock'n'roll. In Britain, it is a bit more complicated than that. At one end are the souvenir shops where you cannot move for thimbles, ashtrays and the like. But one person's tat is another's thimble. "Some people want T-shirts and rock," says one shop-owner in the village, "but we like to think we do tasteful merchandise." I turned over a saucer-cum-ashtray covered in a late-1980s photograph of Diana. It was inscribed: "In Tribute To The Tragically Short Life Of DIANA Princess of Wales". This is tacky but perhaps, when compared to a stick of Princess Di rock, it is tastefully so.

None of this even compares to some of the proposals received by the Princess of Wales Memorial Fund. These are contained in large red binders along one wall of the Fund's Millbank Tower offices and, taken together, they form a sort of Bad Taste Guide to the Tragically Short Life of Diana. Here are plans to market the icon as compost, air freshener, even as a razor-blade sharpener. Then there is always the idea for the English Rose Commemorative Lager. So far the Fund has only approved seven products: a crystal candle-holder, commemorative stamps, a purple Beanie Baby toy called Princess, a scented candle, enamel boxes, a tribute CD and a photographic print.

It's all very safe - unlike Diana who sometimes had fantastically unsafe (and bad) taste - and likely to stay that way. The Fund has become hyper- sensitive to the idea of commercialising her memory. Perhaps this is because of the Flora factor - the appearance of Diana's signature on tubs of margarine, albeit in the name of charity, brought the wrath of Earl Spencer himself down on the Fund. (He has only promised 10 per cent of the pounds 9.50 tour fee to the Fund for now.) The charity now finds itself acting as a taste police of sorts, which should be interesting. So far it has launched only one court case, against the Franklin Mint over its "vinyl portrait doll" that comes complete with landmine outfit and accessories.

Diana Plc is divided over the doll. Many people in Britain feel it is an accessory too far, despite the Franklin Mint promising to donate some proceeds to charity - it has already given pounds 2.7m. Others just do not see taste as a factor. "Most of the direct-mail companies are making contributions to charity. So collectors are getting closer to their idol and also contributing to her charities. That is not perceived as being crass commercialisation. It is seen as a noble effort here. I guess that is the difference between the countries," says Pam Danzinger of Unity Marketing, near Philadelphia, which specialises in the collecting and gifts markets.

Of course, there are collectors and collectors. Robin Gray Adams may have been brought up in "cow-pie country" (that's in Chino, California, by the way) but she has one of the largest Di collections in the world. Among her 500 pieces are a doll wearing an exact replica of Diana's wedding gown with half-point diamonds in the tiara (originally sold as a limited edition for $130 in 1981, it is valued at $2,000 now). Other royal wedding items include cups, mugs, decanters, bells, serving trays, tea sets, etched crystal goblets and plates, all the official publications, video cassettes and audio recordings. She even has two bottles of "royal wedding" beer. She also has hundreds of magazines with Diana's picture on the cover and every book written about the Princess except for Kitty Kelly's on the royals which she believes is pure fiction. She also, it must be said, wears an exact replica of Diana's engagement ring.

If all this makes you feel slightly queasy, then try and avoid the most recent copy of Majesty magazine (itself a collectible for Diana-philes). Its readers' offer includes an entire cabinet stuffed with Diana plates, trinket boxes and vases. These are called "Diana Commemoratives". Steven Jackson of the Commemorative Collectors Society might take issue with that. "The serious commemorative collector accepts that with the death, the subject is finished. These anniversary commemoratives mean nothing and it becomes sycophantic," he says. Diana, he adds, is in danger of joining the likes of Elvis Presley or, say, Robin Hood in becoming a character.

Perhaps, however, she already has become our modern-day Robin Hood. Certainly many claim to be inspired. The tiny firm of Sheltonian China in Stoke- on-Trent tells me that it is donating a bit from every Diana item it sells (that's 2p from each thimble, for instance). "I couldn't justify doing it without that," says Mel Davis of the firm that employs just five people.

Across the Atlantic, in deepest Florida, Tampa retail executive Maureen Rorech has been bitten by the same bug. She was the mystery buyer of 14 gowns at the Christie's dress auction last spring. The idea was merely to add to her costumes collection. Then Diana died. "Maureen is a visionary," says her colleague Kathleen Anders, "and when the Princess died her vision about this became totally different. She envisioned these dresses as having a job to do." The result is the "Dresses for Humanity" travelling exhibition. In the end, Maureen plans to give all of them away except one - the "John Travolta" gown that Diana wore for that dance at the White House. (Others are not so charitable, however. One scarlet silk-lace Catherine Walker number that was bought at auction for pounds 15,700 was sold on, post-death, for pounds 157,000.)

All of these people belong to Diana Plc and, back in the capital of Great Brington, I run into Paula again. Now there are only three places to go in this village - the church, the pub and the post office - and I find Paula in the latter which is thatched and has rather a lot of thimbles for sale. Paula has purchased a drawing of Diana by a local artist and several more postcards. The result is that she is down a further pounds 9.85 and is carrying another bag. "I can't fit any more into my backpack," she says. "I won't be able to ride my bike home because I have too much to carry." She doesn't sound too surprised: it's the kind of thing a pilgrim expects to happen in the land called Diana Plc

The never-ending story

June: Princess Margaret's clear-out

Royal sources reveal that personal letters between the Queen Mother and Diana may have been destroyed by Princess Margaret. The letters include sensitive and personal notes, with observations on events of recent years. Diana corresponded with the Queen Mother regularly while she was married to Prince Charles, and her grandmother Ruth, Lady Fermoy, was the Queen Mother's closest friend until the former died in 1993. Critics suggest that Margaret was too persuasive in getting her mother's agreement to the clear-out. Constitutional historian Kenneth Morgan, of Queen's College, Oxford, says: "It's regrettable, and a shame they have been destroyed. The Queen Mother has had an extraordinary and long life and we need all the public material we can get." But Sir Ralph Anstruther, treasurer of the Queen Mother's household, insists: "The Queen Mother has quite a sense of history and would not have thrown out anything of historical value."

July: Diana pilgrims get lost

Dozens of Diana fans on pilgrimage to her final resting place trek in the wrong direction - ending up on the outskirts of Scunthorpe. Villagers in Althorpe, North Lincolnshire, are becoming used to the query: "Where is Diana buried?" Some of them are now practised in the reply: "More than 100 miles down the road, me duck." Yvonne Sleight, who runs a hotel near Scunthorpe, says: "They are usually quite intelligent, but I don't think they have researched their trips very well. They are a bit gobsmacked when they realise they are in the wrong place." The landlord of the local pub, the Dolphin Inn, adds: "We have been averaging about a group a week, from America, Norway, Germany and Holland. We're thinking of digging a pond in the back garden and charging a pound a visit."

August: Di and Dodi in a fountain

A bronze and granite statue commissioned by Mohamed Al Fayed of Diana with her lover Dodi Fayed is to be installed in Mr Fayed's store Harrods. The heads of the couple, in bronze bas-relief, will stare out from a fountain with three pools into which shoppers can throw coins for charity. The sculpture, designed by in-house artist Bill Mitchell, will be at the bottom of the store's Egyptian escalator, where there is already a "shrine" with two large photographs. Harrods' windows will display additional bowls of water, a bronze candelabra and photographs of Diana and Dodi. All will be unveiled in a midnight ceremony on August 31, set to a song composed for the occasion. Afterwards, Mr Fayed plans to unveil a large square plaque alongside a book of condolence. Compiled by Rachelle Thackray