AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON April 30, 2007March 31, 2010
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 
Form 20-F
   
(Mark One)  
o
 REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
OF 1934
or
þ
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the fiscal year ended December 31, 20062009
or
o
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from               to
or
o
 SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 Date of event requiring this shell company report
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of the Exchange Act).  Yes o     No o
Commission file number 1-16055
PEARSON PLC
(Exact name of Registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organization)
80 Strand
London, England WC2R 0RL
(Address of principal executive offices)
Stephen Jones
Telephone: +44 20 7010 2000
Fax: +44 20 7010 6060
80 Strand
London, England WC2R 0RL
(Name, Telephone,E-mail and/or Facsimile Number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
   
Title of Class
 
Name of Each Exchange on Which Registered
 
*Ordinary Shares, 25p par valueNew York Stock Exchange

American Depositary Shares, each Representing One Ordinary Share, 25p per Ordinary Share		 New York Stock Exchange
* Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the SEC.
New York Stock Exchange
 
* Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the SEC.
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 issuer’s classes of capital or common stock at the close of the period covered by the annual report:
     
Ordinary Shares, 25p par value  806,108,760810,799,351 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yesþ      Noo
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yeso      Noþ
 
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
 
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.  YesþNoo
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer”file” and “large accelerated filer”, in Rule 12b-2 of the Exchange Act. (Check one):
     
þLarge accelerated filer
 oAccelerated filer oNon-accelerated filer
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing
oUS GAAP
þInternational financial Reporting Standards as Issued by the
International Accounting Standards Board		oOther
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the Registrant has elected to follow:
   
Item 17þo
 Item 18o
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act):
Yes o                           No þ
Yeso
Noþ
 

TABLE OF CONTENTS
       
    Page
  
Introduction  4 
  Forward-Looking Statements  4 
PART I
Item 1.
 Identity of Directors, Senior Management and Advisers  6 
Item 2.
 Offer Statistics and Expected Timetable  6 
Item 3.
 Key Information  6 
  Selected Consolidated Financial Data  6 
  Dividend Information7
Exchange Rate Information  8 
  Exchange Rate Information9
Risk Factors  98 
Item 4.
 Information on the Company  13 
  Pearson  13 
  Overview of Operating Divisions13
Our Strategy13
Operating Divisions  14 
  Our Strategy14
Operating Divisions15
Pearson Education15
The FT Group16
The Penguin GroupCycles  17 
  Operating Cycles18
Competition  18 
  Intellectual Property  1918 
  Raw Materials  1918 
  Government Regulation  19 
  Licenses, Patents and Contracts  19 
  Legal Proceedings19
Recent Developments  19 
  Organizational Structure  20 
  Property, Plant and Equipment  20 
Item 4A.
 Unresolved Staff CommentsCapital Expenditures  21 
Item 5.4A.
 Unresolved Staff Comments21
Item 5.
Operating and Financial Review and Prospects  21 
  General Overview  21 
  Results of Operations  2724 
  Liquidity and Capital Resources  4042 
  Accounting Principles  4344 
Item 6.
 Directors, Senior Management and Employees  4344 
  Directors and Senior Management  4344 
  Compensation of Senior Management  4546 
  Share Options of Senior Management51
Share Ownership of Senior Management52
Employee Share Ownership Plans  53 
  Board PracticesShare Ownership of Senior Management53
Employees54
Item 7.
Major Shareholders and Related Party Transactions55
Item 8.
Financial Information  55 
  Legal ProceedingsEmployee Share Ownership Plans  55 
Item 9.
 The Offer and ListingBoard Practices56
Employees  56 
Item 10.7.
 Additional Information57
MemorandumMajor Shareholders and Articles of AssociationRelated Party Transactions  57 
Item 8.
 Material ContractsFinancial Information  6158 
Item 9.
 Exchange ControlsThe Offer and Listing  62
Tax Considerations62
Documents on Display64
Item 11.
Quantitative and Qualitative Disclosures About Market Risk64
Introduction6458 


2

2

       
    Page
Item 10.
Additional Information59
  Articles of association  59
  Material Contracts64
Exchange Controls64
Tax considerations64
Documents on Display67
Item 11.
Quantitative and Qualitative Disclosures about Market Risk67
Introduction67
Interest Rates  6567 
  Currency Exchange Rates  6568 
  Forward Foreign Exchange Contracts  6668 
  Derivatives  6669
Quantitative Information about market risk69 
Item 12.
 Description of Securities Other Than Equity Securities  6769 
PART II
Item 13.12D.
 American Depositary Shares69
Fees paid by ADR holders69
Fees incurred in past annual period and fees to be paid in the future70
PART II
Item 13.
Defaults, Dividend Arrearages and Delinquencies  6771 
Item 14.
 Material Modifications to the Rights of Security Holders and Use of Proceeds  6771 
Item 15.
 Controls and Procedures  6771 
  Disclosure Controls and Procedures  6771 
  Management’s Annual Report on Internal Control Overover Financial Reporting  6771 
  Change in Internal Control Overover Financial Reporting  6871 
Item 16A.
 Audit Committee Financial Expert  6871 
Item 16B.
 Code of Ethics  6872 
Item 16C.
 Principal Accountant Fees and Services  6872 
Item 16D.
 Exemptions from the Listing Standards for Audit Committees  6972 
Item 16E.
 Purchases of Equity Securities by the Issuer and Affiliated Purchases  6973 
PART III
Item 17.16F.
 Financial StatementsChanges in Registrant’s Certifying Accountant  6973 
Item 18.16G.
 Financial StatementsCorporate Governance  6973
PART III
Item 17.
Financial Statements73 
Item 19.18.
 ExhibitsFinancial Statements  6973 
Item 19.
Exhibits73
Exhibit 1.1
Exhibit 2.4
Exhibit 2.5
Exhibit 2.6
 Exhibit 8.1
 Exhibit 12.1
 Exhibit 12.2
 Exhibit 13.1
 Exhibit 13.2
 Exhibit 15

3

INTRODUCTION
 
In this Annual Report onForm 20-F (the “Annual Report”) references to “Pearson”, the “Company” or the “Group” are references to Pearson plc, its predecessors and its consolidated subsidiaries, except as the context otherwise requires. “Ordinary Shares” refer to the ordinary share capital of Pearson of par value 25p each. “ADSs” refer to American Depositary Shares which are Ordinary Shares deposited pursuant to the Deposit Agreement dated March 21, 1995, amended and restated as of August 8, 2000 among Pearson, The Bank of New York as depositary (the “Depositary”) and owners and holders of ADSs (the “Deposit Agreement”). ADSs are represented by American Depositary Receipts (“ADRs”) delivered by the Depositary under the terms of the Deposit Agreement.
 
We have prepared the financial information contained in this Annual Report in accordance with European Union (“EU”)-adopted International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”) which in respect of the accounting standards applicable to the Group do not differ in certain significant respects from generally accepted accounting principles inIFRS as adopted by the United States, or US GAAP. We describe these differences in “Item 5. Operating and Financial Review and Prospects — Accounting Principles”, and in note 36 to our consolidated financial statements included in “Item 17. Financial Statements” of this Annual Report.European Union (“EU”). Unless we indicate otherwise, any reference in this Annual Report to our consolidated financial statements is to the consolidated financial statements and the related notes, included elsewhere in this Annual Report.
 
We publish our consolidated financial statements in sterling. We have included, however, references to other currencies. In this Annual Report:
 • references to “sterling”, “pounds”, “pence” or “£” are to the lawful currency of the United Kingdom,
 
 • references to “euro” or “€“€” are to the euro, the lawful currency of the participating Member States in the Third Stage of the European Economic and Monetary Union of the Treaty Establishing the European Commission, and
 
 • references to “US dollars”, “dollars”, “cents” or “$” are to the lawful currency of the United States.
 
For convenience and except where we specify otherwise, we have translated some sterling figures into US dollars at the rate of £1.00 = $1.96,$1.62, the noon buying rate in The City of New York for cable transfers and foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes on December 29, 2006,31, 2009, the last business day of 2006.2009. We do not make any representation that the amounts of sterling have been, could have been or could be converted into dollars at the rates indicated. On March 30, 2007February 28, 2010 the noon buying rate for sterling was £1.00 = $1.97.$1.52.
The Group consists of three major world wide businesses, Pearson Education, The FT Group (“FT”) and the Penguin Group (“Penguin”). See “Item 4. Information on the Company — Overview of operating divisions”.
FORWARD-LOOKING STATEMENTS
 
You should not rely unduly on forward-looking statements in this Annual Report. This Annual Report, including the sections entitled “Item 3. Key Information — Risk Factors”, “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects”, contains forward-looking statements that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terms such as “may”, “will”, “should”, “expect”, “intend”, “plan”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue” or the negative of these terms or other comparable terminology. Examples of these forward-looking statements include, but are not limited to, statements regarding the following:
 • operations and prospects,
 
 • growth strategy,
 
 • funding needs and financing resources,
 
 • expected financial position,
 
 • market risk,

4

 • currency risk,


4

 • US federal and state spending patterns,
 
 • debt levels, and
 
 • general market and economic conditions.
 
These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. In evaluating them, you should consider various factors, including the risks outlined under “Item 3. Key Information — Risk Factors”, which may cause actual events or our industry’s results to differ materially from those expressed or implied by any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.


5

5

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 consolidated financial data
 
Following the publication of SEC Release No33-8879 “Acceptance From Foreign Private Issuers of Financial Statements Prepared in Accordance With International Financial Reporting Standards Without Reconciliation to U.S. GAAP”, the Group no longer provides a reconciliation between IFRS and U.S. GAAP.
The tablestable below showshows selected consolidated financial data under IFRS and US GAAP. Under US GAAP,as issued by the consolidated financial data has been presented for each of the years in the five-year period ended December 31, 2006. The Company adopted IFRS on January 1, 2003. As a result, in accordance with the instructions of Form 20-F, selected consolidated financial data under IFRS is only presented for each of the years in the four-year period ended December 31, 2006.IASB. The selected consolidated profit and loss account data for the years ended December 31, 2006, 20052009, 2008 and 20042007 and the selected consolidated balance sheet data as at December 31, 20062009 and 20052008 have been derived from our audited consolidated financial statements included in “Item 17.18. Financial Statements” in this Annual Report.
 Our consolidated financial statements have been prepared in accordance with IFRS, which differs from US GAAP in certain significant respects. See “Item 5. Operating and Financial Review and Prospects — Accounting Principles” and note 36 to the consolidated financial statements. The consolidated financial statements contain a reconciliation to US GAAP of profit for the year, shareholders’ funds and certain other financial data.
The selected consolidated financial information should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements and the related notes appearing elsewhere in this Annual Report. The information provided below is not necessarily indicative of the results that may be expected from future operations.
 
For convenience, we have translated the 20062009 amounts into US dollars at the rate of £1.00 = $1.96,$1.62, the noon buying rate in The City of New York for cable transfers and foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes on December 29, 2006.31, 2009.
                         
  Year Ended December 31
  2009 2009 2008 2007 2006 2005
  $ £ £ £ £ £
  (In millions, except for per share amounts)
 
IFRS information:
                        
Consolidated Income Statement data
                        
Total sales  9,111   5,624   4,811   4,162   3,990   3,662 
Total operating profit  1,223   755   676   574   522   497 
Profit after taxation from continuing operations  748   462   413   337   444   319 
Profit for the financial year  748   462   323   310   469   644 
Consolidated Earnings data per share
                        
Basic earnings per equity share(1) $0.86   53.2p   36.6p   35.6p   55.9p   78.2p 
Diluted earnings per equity share(2) $0.86   53.1p   36.6p   35.6p   55.8p   78.1p 
Basic earnings from continuing operations per equity share(1) $0.86   53.2p   47.9p   39.0p   52.7p   37.5p 
Diluted earnings from continuing operations per equity share(2) $0.86   53.1p   47.9p   39.0p   52.6p   37.4p 
Dividends per ordinary share $0.58   35.5p   33.8p   31.6p   29.3p   27.0p 
Consolidated Balance Sheet data at
period end
                        
Total assets (non-current assets plus current assets)  15,247   9,412   9,896   7,292   7,213   7,600 
Net assets  7,510   4,636   5,024   3,874   3,644   3,733 
Long-term obligations(3)  (4,943)  (3,051)  (2,902)  (1,681)  (1,853)  (2,500)
Capital stock  329   203   202   202   202   201 
Number of equity shares outstanding (millions of ordinary shares)  810   810   809   808   806   804 


6

6

                     
  Year ended December 31
   
  2006 2006 2005 2004 2003
           
    IFRS IFRS IFRS IFRS
  IFRS £ £ £ £
  $
  (In millions, except for per share amounts)
IFRS information:
                    
Consolidated Income Statement data
                    
Total sales  8,109   4,137   3,808   3,479   3,651 
Total operating profit  1,058   540   516   382   401 
Profit after taxation from continuing operations  892   455   330   248   249 
Profit for the financial year  919   469   644   284   275 
Basic earnings per equity share(4)  $1.10   55.9p  78.2p  32.9p  31.7p
Diluted earnings per equity share(5)  $1.09   55.8p  78.1p  32.9p  31.7p
Dividends per ordinary share  $0.57   29.3p  27.0p  25.4p  24.2p
Consolidated Balance Sheet data at period end
                    
Total assets (Fixed assets plus Current assets)  14,137   7,213   7,600   6,578   6,736 
Shareholders funds  6,813   3,476   3,564   2,800   2,969 
Long-term obligations(6)  (3,632)  (1,853)  (2,500)  (2,403)  (1,982)
Capital stock(1)  396   202   201   201   201 
Number of equity shares outstanding
(millions of ordinary shares)		  806   806   804   803   802 
                          
  Year ended December 31
   
  2006 2006 2005 2004 2003 2002
             
    £ £ £ £ £
  $  
  (I n millions, except for per share amounts)
US GAAP information(7):
                        
Consolidated Income Statement data
                        
Total sales(8)  8,292   4,231   3,892   3,562   3,774   3,896 
Total operating profit(2)  902   460   364   269   361   408 
Profit after taxation from continuing operations  823   420   182   170   197   185 
Net income for the year  668   341   411   182   173   189 
Profit from continuing operations for the year(3)  780   398   164   153   159   187 
(Loss)/profit from discontinued operations(3)  (112)  (57)  8   29   17   24 
Profit/(loss) on disposal of discontinued operations(3)  —   —   239   —   (3)  (1)
Basic earnings per equity share(4) $0.84   42.7p  51.5p  22.8p  21.8p  23.7p
Diluted earnings per equity share(5) $0.83   42.6p  51.4p  22.8p  21.8p  23.7p
Basic earnings from continuing operations per equity                        
 Share(1)(4) $0.98   49.9p  20.5p  19.2p  20.0p  23.5p
Diluted earnings from continuing operations per equity Shares(3)(5) $0.97   49.8p  20.5p  19.2p  20.0p  23.5p
Basic (loss)/earnings per share from discontinued operations(3)(4) $(0.14)  (7.2)p  31.0p  3.6p  1.8p  2.9p
Diluted (loss)/earnings per share from discontinued operations(3)(5) $(0.14)  (7.2)p  30.9p  3.6p  1.8p  2.9p
Dividends per ordinary share $0.57   29.3p  27.0p  25.4p  24.2p  22.7p

7

                         
  Year ended December 31
   
  2006 2006 2005 2004 2003 2002
             
    £ £ £ £ £
  $  
  (I n millions, except for per share amounts)
Consolidated Balance Sheet data at period end
                        
Total assets  14,351   7,322   7,800   7,040   7,101   6,767 
Shareholders’ funds  7,019   3,581   3,838   3,218   3,333   4,155 
Long-term obligations(6)  (3,622)  (1,848)  (2,397)  (2,392)  (1,951)  (2,026)
 
Notes:
(1)Capital stock and the number of equity shares outstanding are the same under both IFRS and US GAAP.
(2) Total operating profit under US GAAP includes a loss of £2m in 2006 (2005: £nil; 2004: profit of £14m) on the sale of fixed assets and investments. Additionally, the US GAAP operating profit includes the operating profit impact of the GAAP adjustments discussed in note 36 in “Item 17. Financial Statements”.
(3) Discontinued operations under both IFRS and US GAAP comprise the results of Pearson Government Solutions for all years presented, Recoletos Grupo de Comunicacion SA for 2005, 2004, 2003 and 2002 and the results of RTL Group for 2002. Discontinued operations under US GAAP also include the results of the Forum Corporation for 2003 and 2002.
(4) Basic earnings per equity share is based on profit/lossprofit for the financial period and the weighted average number of ordinary shares in issue during the period.
 
(5) (2)Diluted earnings per equity share is based on diluted earnings for the financial period and the diluted weighted average number of ordinary shares in issue during the period. Diluted earnings comprise earnings adjusted for the tax benefit on the conversion of share options by employees and the weighted average number of ordinary shares adjusted for the dilutive effect of share options.
 
(6) (3)Long-term obligations comprise any liabilities with a maturity of more than one year, including medium and long-term borrowings, derivative financial instruments, pension obligations and deferred income tax liabilities.
 
(7) (4)See note 36 toThe results of the consolidated financial statementsData Management business (disposed in February 2008) have been included in this Annual Report entitled “Summary of principal differences between International Financial Reporting Standards and United States of America generally accepted accounting principles”.
(8) Commencing in 2006, the Company has included within Sales, shipping and handling fees and costs, distribution income and subrights income, which were previously reflected on a net basis within operating expenses. Sales figuresdiscontinued operations for all prior years presentedto 2008. The results of Government Solutions (disposed in February 2007) and Les Echos (disposed in December 2007) have been revisedincluded in discontinued operations for comparative purposes (2006: £94m; 2005: £84m; 2004: £83m; 2003: £94m; and 2002: £109m).all the years to 2007.
Dividend information
 The Group pays
We pay dividends to holders of ordinary shares on dates that are fixed in accordance with the guidelines of the London Stock Exchange. TheOur board of directors normally declares an interim dividend in July or August of each year to be paid in September or October. TheOur board of directors normally recommends a final dividend following the end of the fiscal year to which it relates, to be paid in the following May or June, subject to shareholders’ approval at our annual general meeting. At theour annual general meeting on April 27, 200730, 2010 our shareholders approvedwill be asked to approve a final dividend of 18.8p23.3p per ordinary share for the year ended December 31, 2006.2009.

8

 
The table below sets forth the amounts of interim, final and total dividends paid in respect of each fiscal year indicated, and is translated into cents per ordinary share at the noon buying rate in the cityThe City of New York on each of the respective payment dates for interim and final dividends. The final dividend for the 20062009 fiscal year will be paid on May 11, 2007.7, 2010.
                         
Fiscal year Interim Final Total Interim Final Total
             
  (Pence per ordinary share) (Cents per ordinary share)
2006
  10.5   18.8   29.3   20.6   36.8   57.4 
2005  10.0   17.0   27.0   17.2   29.2   46.4 
2004  9.7   15.7   25.4   18.6   30.2   48.8 
2003  9.4   14.8   24.2   16.7   26.4   43.1 
2002  9.1   14.3   23.4   14.7   23.0   37.7 
 
                      ��  
Fiscal year
 Interim  Final  Total  Interim  Final  Total 
  (Pence per ordinary share)  (Cents per ordinary share) 
 
2009
  12.2   23.3   35.5   19.8   37.7*  57.5 
2008  11.8   22.0   33.8   21.6   33.2   54.8 
2007  11.1   20.5   31.6   22.4   39.9   62.3 
2006  10.5   18.8   29.3   20.0   31.4   51.4 
2005  10.0   17.0   27.0   17.8   29.8   47.6 
*As the 2009 final dividend had not been paid by the filing date, the dividend has been translated into cents using the noon buying rate for sterling at December 31, 2009.
Future dividends will be dependent on our future earnings, financial condition and cash flow, as well as other factors affecting the Group.


7

Exchange rate information
 
The following table sets forth, for the periods indicated, information concerning the noon buying rate for sterling, expressed in dollars per pound sterling. The average rate is calculated by using the average of the noon buying rates in the cityThe City of New York on each day during a monthly period and on the last day of each month during an annual period. On December 29, 2006,31, 2009 the noon buying rate for cable transfers and foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes for sterling was £1.00 = $1.62. On February 28, 2010 the noon buying rate for sterling was £1.00 = $1.96. On March 30, 2007 the noon buying rate for sterling was £1.00 = $1.97.$1.52.
         
Month High Low
     
March 2007 $1.97  $1.92 
February 2007 $1.97  $1.94 
January 2007 $1.98  $1.93 
December 2006 $1.98  $1.95 
November 2006 $1.97  $1.89 
October 2006 $1.91  $1.85 
     
Year ended December 31 Average rate
   
2006 $1.84 
2005 $1.81 
2004 $1.83 
2003 $1.63 
2002 $1.51 
         
Month
 High  Low 
 
February 2010 $1.60  $1.52 
January 2010 $1.64  $1.59 
December 2009 $1.66  $1.59 
November 2009 $1.68  $1.64 
October 2009 $1.66  $1.59 
September 2009 $1.67  $1.59 
     
Year Ended December 31
 Average rate
 
2009 $1.57 
2008 $1.84 
2007 $2.01 
2006 $1.84 
2005 $1.81 
Risk factors
 
You should carefully consider the risk factors described below, as well as the other information included in this Annual Report. Our business, financial condition or results from operations could be materially adversely affected by any or all of these risks, or by other risks that we presently cannot identify.
Our intellectual property and proprietary rights may not be adequately protected under current laws in some jurisdictions and that may adversely affect our results and our ability to grow.
Global economic conditions may adversely impact our financial performance.
      Our products largely comprise intellectual property delivered through a variety of media, including newspapers, books and the internet. We rely on trademark, copyright and other intellectual property laws to establish and protect our proprietary rights in these products.
 We cannot
As the current economic environment remains dynamic and challenging, the risk of weak trading conditions continues in 2010 which could adversely impact our financial performance. The effect of a continued deterioration in the global economy will vary across our different businesses and will depend on the depth, length and severity of any economic downturn. Specific economic risks by business are described more fully in the other risk factors below.
A significant deterioration in Group profitability and/or cash flow caused by a severe economic depression could reduce our liquidity and/or impair our financial ratios, and trigger a need to raise additional funds from the capital markets and/or renegotiate our banking covenants.
A prolonged and severe economic depression could significantly reduce the Group’s revenues, profitability and cash flows as customers would be sureunable to purchase products and services in the expected quantitiesand/or pay for them within normal agreed terms. A liquidity shortfall may delay certain development initiatives or may expose the Group to a need to negotiate further funding. If there was a steep decline in operating profit the Group might breach its banking covenants, creating (or exacerbating) a need for further funding (or a renegotiation of the terms of the bank credit agreement) to maintain operations. The current fragile state of the credit markets could expose the Group to a risk that our proprietary rights willit could neither re-negotiate its existing banking facilities, nor raise enough new funding, at a cost level that was sustainable for the business. Were this to occur, the inability to raise funding would likely lead to a curtailment in investment and growth plans, potential asset disposals (if possible), reduction or elimination in the dividend and in an extreme case a need to restructure the Group’s debt, business model and terms of trade. In such event, the value of the Group’s equity could not be challenged, invalidated or circumvented. Our intellectual property rights in countries such as the US and UK, jurisdictions covering the largest proportion ofassured.


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our operations, are well established. However, we also conduct business in other countries where the extent of effective legal protection for intellectual property rights is uncertain,
Our US educational solutions and this uncertainty could affect our future growth. Moreover, despite trademark and copyright protection, third parties may copy, infringe or otherwise profit from our proprietary rights without our authorization.
      These unauthorized activitiesassessment businesses may be more easily facilitatedadversely affected by changes in state and local educational funding resulting from either general economic conditions, changes in government educational funding, programs and legislation (both at the internet. The lack of internet-specific legislation relating to trademarkfederal and copyright protection creates an additional challenge for usstate level), and/or changes in protecting our proprietary rights relating to our online business processes and other digital technology rights. The loss or diminution in value of these proprietary rights or our intellectual property could have a material adverse effect on our business and financial performance. In that regard, Penguin Group (USA) Inc. and Pearson Education have joined three other major US publishers in a suit brought under the auspices of the Association of American Publishers to challenge Google’s plans to copy the full text of all books ever published without permission from the publishers or authors. This lawsuit seeks to demarcate the extent to which search engines, other internet operators and libraries may rely on the fair-use doctrine to copy content without authorization from the copyright proprietors, and may give publishers and authors more control over online users of their intellectual property. If the lawsuit is unsuccessful, publishers and authors may be unable to control copying of their content for purposes of online searching, which could have an adverse impact on our business and financial performance.state procurement process.
Our US educational textbook and testing businesses may be adversely affected by changes in state educational funding resulting from either general economic conditions, changes in government educational funding, programs and legislation (both at the federal and state level), and/or changes in the state procurement process.
The results and growth of our US educational textbooksolutions and testing businessassessment businesses is dependent on the level of USfederal and state educational funding, which in turn is dependent on the robustness of state finances and the level of funding allocated to educational programs. State, local and municipal finances have been adversely affected by the US recession. In response to budget shortfalls, states and districts may reduce educational spending as they seek cost savings to mitigate budget deficits. The American Recovery and Reinvestment Act provided additional federal funding for education; the potential impact of this new money on our markets remains uncertain.
Federaland/or state legislative changes can also affect the funding available for educational expenditure, e.g.which include changes in assessment policy, the No Child Left Behind Act.
reauthorization of the Elementary and Secondary Education Act, along with the movement to a common core of skills and knowledge. Similarly changes in the state procurement process for textbooks, learning material and student tests, particularly in the adoptions market can also affect our markets. For example, changes in curricula, delays in the timing of the adoptions and changes in the student testing process can all affect these programs and therefore the size of our market in any given year.
 
There are multiple competing demands for educational funds and there is no guarantee that states will fund new textbooks or testing programs, or that we will win this business.
Our newspaper businesses may be adversely affected by reductions in advertising revenues and/or circulation either because of competing news information distribution channels, particularly online and digital formats, or due to weak general economic conditions.
We generate a substantial proportion of our revenue in foreign currencies particularly the US dollar, and foreign exchange rate fluctuations could adversely affect our earnings and the strength of our balance sheet.
 Changes
As with any international business our earnings can be materially affected by exchange rate movements. We are particularly exposed to movements in consumer purchasing habits,the US dollar to sterling exchange rate as readers lookapproximately 60% of our revenue is generated in US dollars. Sales for 2009, translated at 2008 average rates, would have been £4,984m or 11% lower.
This is primarily a currency translation risk that only arises on consolidation and is the result of translating entities into sterling for reporting purposes (i.e. non-cash flow item), and not a trading risk (i.e. cash flow item) as our foreign currency trading cash flows in individual operating companies are relatively limited. See “Item 5. Operating and Financial Review and Prospects — General Overview, Exchange rate fluctuations”.
Pearson currently generates approximately 60% of its sales in US dollars and each 5¢ change in the average £:$ exchange rate for the full year (which in 2009 was £1:$1.57) has a translation impact of approximately 1.3p on reported earnings per share and affect shareholders’ funds by approximately £120m.
Our intellectual property and proprietary rights may not be adequately protected under current laws in some jurisdictions and that may adversely affect our results and our ability to alternative sources and/or providersgrow.
Our products and services largely comprise intellectual property delivered through a variety of information, such asmedia, including newspapers, books, the internet and other digital formats, may change the way we distributegrowing delivery platforms. We rely on trademark, copyright and other intellectual property laws to establish and protect our content. We might see a declineproprietary rights in print circulation in our more mature markets as readership habits changethese products and readers migrate online, although we see further opportunities for growth in our less mature markets outside Europe. If the migration of readers to new digital formats occurs more quickly than we expect, this is likely to affect print advertising spend by our customers, adversely affecting our profitability.services.
 
We cannot be sure that our proprietary rights will not be challenged, invalidated or circumvented. Our newspaper businessesintellectual property rights in countries such as the US and UK, jurisdictions covering the largest proportion of our operations, are highly gearedwell established. However, we also conduct business in other countries where the extent of effective legal protection for intellectual property rights is uncertain, and remain dependent on advertising revenue; relatively small changesthis uncertainty could affect our future growth. Moreover, despite trademark and copyright protection, third parties may copy, infringe or otherwise profit from our proprietary rights without our authorization.
These unauthorized activities may be more easily facilitated by the internet. The lack of internet-specific legislation relating to trademark and copyright protection creates an additional challenge for us in revenue, positiveprotecting our proprietary rights relating to our online business processes and other digital technology rights. The loss or negative, have a disproportionate effect on profitability. We are beginning to see an increase in advertising revenues compared to prior years, however any downturn in corporate and financial advertising spend would negatively impact our results.


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A control breakdown in our school testing businesses could result in financial loss and reputational damage.
      There are inherent risks associated with our school testing businesses, bothdiminution in the USA and the UK. A breakdown in our testing and assessment products and processes could lead to a mis-grading of student tests and/or late delivery of test results to students and their schools. In either event we may be subject to legal claims, penalty charges under our contracts, non-renewal of contracts and/or in the case of our UK testing business, the suspension or withdrawal of our accreditation to conduct tests. It is also possible that such events would result in adverse publicity, which may affect our ability to retain existing contracts and/or obtain new customers.
Our professional services and school testing businesses involve complex contractual relationships with both government agencies and commercial customers for the provision of various testing services. Our financial results, growth prospects and/or reputation may be adversely affected if these contracts and relationships are not managed.
      These businesses are characterized by multi-million pound contracts spread over several years. As in any contracting business, there are inherent risks associated with the bidding process, start-up, operational performance and contract compliance (including penalty clauses) which could adversely affect our financial performance and/or reputation.
      Severalvalue of these businesses are dependent on either singleproprietary rights or a small number of large contracts. Failure to retain these contracts at the end of the contract term would adversely impact our future revenue growth. At Edexcel, our UK Examination board and testing business, any change in UK Government policy to exam marking and student testingintellectual property could have a significant impactmaterial adverse effect on our present business model.
We operate in a highly competitive environment that is subject to rapid change and we must continue to invest and adapt to remain competitive.
      Our education, business information and book publishing businesses operate in highly competitive markets. These markets constantly change in response to competition, technological innovations and other factors. To remain competitive we continue to invest in our authors, products, services and people. There is no guarantee that these investments will generate the anticipated returns or protect us from being placed at a competitive disadvantage with respect to scale, resources and our ability to develop and exploit opportunities.
      Specific competitive threats we face at present include:
• Students seeking cheaper sources of content, e.g. on-line, used books or re-imported textbooks.
• Competition from major publishers and other educational material and service providers in our US educational textbook and testing businesses.
• Penguin — Authors’ advances in consumer publishing. We compete with other publishing businesses to purchase the rights to author manuscripts. Our competitors may bid to a level at which we could not generate a sufficient return on our investment, and so, typically, we would not purchase these rights.
• People — the investments we make in our employees, combined with our employment policies and practices, we believe are critical factors enabling us to recruit and retain the very best people in our business sectors. However, some of our markets are presently undergoing radical restructuring with several of our competitors up for sale, particularly in the Education sector. New owners, particularly private equity, may try to recruit our key talent as part of this industry restructuring.
At Penguin, changes in product distribution channels, increased book returns and/or customer bankruptcy may restrict our ability to grow and affect our profitability.
      New distribution channels, e.g. digital format, the internet, used books, combined with the concentration of retailer power pose multiple threats (and opportunities) to our traditional consumer publishing models, potentially impacting both sales volumes and pricing.

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      Penguin’s financial performance can also be negatively affected if book return rates increase above historical average levels. Similarly, the bankruptcy of a major retail customer would disrupt short-term product supply to the market as well as result in a large debt write off.
We operate in markets which are dependent on Information Technology systems and technological change.
      All our businesses, to a greater or lesser extent, are dependent on technology. We either provide software and/or internet services to our customers or we use complex information technology systems and products to support our business activities, particularly in business information publishing, back-office processing and infrastructure.
      We face several technological risks associated with software product development and service delivery in our educational businesses, information technology security (including virus and hacker attacks), e-commerce, enterprise resource planning system implementations and upgrades. The failure to recruit and retain staff with relevant skills may constrain our ability to grow as we combine traditional publishing products with online and service offerings.
Operational disruption to our business caused by a major disaster and/or external threat such as Avian Flu, restricting our ability to supply products and services to our customers.
      Across all our businesses we manage complex operational and logistical arrangements including distribution centers, third-party print sites, data centers and large office facilities. Failure to recover from a major disaster, e.g. fire, flood etc, at a key facility or the disruption of supply from a key third-party vendor could restrict our ability to service our customers. Similarly external threats, such as Avian Flu, terrorist attacks, strikes etc, could all affect our business and employees, disrupting our daily business activities.financial performance.
 We have developed business continuity arrangements, including IT disaster recovery
In that regard, Google reached a tentative settlement in 2008 with the Author’s Guild and the Association of American Publishers over Google’s plans to minimize any business disruptioncopy the full text of all books ever published without permission of the copyright owners, including Pearson. The agreement was revised in 2009 to narrow the eventdefinition of books covered under the settlement agreement to those registered with the US Copyright Office by January 2009 or published in Australia, UK, Canada or US. Subject to final court approvals, the settlement would allow copyright owners of books covered by it to control the online display of those books by Google, with a major disaster. However, despite regular updatessharing of revenues derived from that display.
Our reported earnings and testing of these plans there is no guarantee that our financial performance will notcash flows may be adversely affected by changes in the event of a major disaster and/or external threat to our business. Insurance coverage may minimize any losses in certain circumstances.pension costs and funding requirements.
Investment returns outside our traditional core US and UK markets may be lower than anticipated.
      To minimize dependence on our core markets, particularly the US, we are seeking growth opportunities outside these markets, building on our existing substantial international presence. Certain markets we may target for growth are inherently more risky than our traditional markets. Political, economic, currency and corporate governance risks (including fraud) as well as unmanaged expansion are all factors which could limit our returns on investments made in these non-traditional markets.
Our reported earnings and cash flows may be adversely affected by changes in our pension costs and funding requirements.
We operate a number of pension plans throughout the world, the principal ones being in the UK and US. The major plans are self-administered with the plans’ assets held independently of the Group. Regular valuations, conducted by independent qualified actuaries, are used to determine pension costs and funding requirements. As these assets are invested in the capital markets, which are often volatile, the plans may require additional funding from us, which could have an adverse impact on our results.
 
It is our policy to ensure that each pension plan is adequately funded, over time, to meet its ongoing and future liabilities. Our earnings and cash flows may be adversely affected by the need to provide additional funding to eliminate pension fund deficits in our defined benefit plans. Our greatest exposure relates to our UK defined benefit pension plan.plan, which is valued once every three years. Pension fund deficits have/may arise because of inadequate investment returns, increased member life expectancy, changes in actuarial assumptions and changes in pension regulations, including accounting rules and minimum funding requirements.
 
The latest valuation of our UK defined benefit pension plan has been completed and future funding arrangements have been agreed between the Companytrustees and the pension fund Trustee. Additional paymentscompany finalised the latest triennial valuation for funding purposes (as at January 1, 2009) on March 22, 2010.

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amounting
We operate in a highly competitive environment that is subject to £100m willrapid change and we must continue to invest and adapt to remain competitive.
Our education, business information and book publishing businesses all operate in highly competitive markets, which are constantly changing in response to competition, technological innovations and other factors. We may be made byrequired to invest significant resources to further adapt to the Company in 2007. We reviewchanging competitive environment. A common trend facing all our businesses is the digitization of content and proliferation of distribution channels, either over the internet, or via other electronic means, replacing traditional print formats. If we do not adapt rapidly to these arrangements every three years andchanges we may lose business to ‘faster’ more “agile’ competitors, who increasingly are confident thatnon-traditional competitors, i.e. technology companies, making their identification all the pension funding plans are sufficient to meet future liabilities without unduly affecting the developmentmore difficult.
Illustrations of the Company.
Social, environmental and ethical riskcompetitive threats we face at present include:
 We consider social, environmental and ethical (SEE) risks no differently to the way we manage any other business risk. Our 2006 risk assessments did not identify any significant under-managed SEE risks, nor have any of our most important SEE risks, many concerned with reputational risk, changed year on year. These are:
 •— Journalistic/author integrity;Students seeking cheaper sources of content, e.g. online discounters, file sharing, use of pirated copies, used books or re-imported textbooks, along with the open source initiative are causing us to lose sales and putting downward pressure on textbook prices in our major markets.
 
 •— Ethical business behavior;Competition from major publishers, technology companies and other educational material and service providers, including not for profit organizations, in our US educational solutions and assessment businesses.
 
 •— Compliance with UN Global Compact principles on labor standards, human rights, environmentPenguin: the digital migration brings the need for change in product distribution, consumers’ perception of value and anti-corruption;the publisher’s position between retailers and authors, which affects managing stock levels.
 
 •— Environmental impact;
• People;
• Data privacy.FT: we face competitive threats both from large media players and from smaller businesses, online and mobile portals and news redistributors operating in the digital arena and providing alternative sources of news and information.


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Changes in our tax position can significantly affect our reported earnings and cash flows.
 There are several factors which may affect our reported tax rate and/or level of tax payments in the future. The most important are as follows:
 •— ChangesPeople: the investments we make in corporate tax rates and/or other relevant tax lawsour employees, combined with our employment policies and practices, we believe are critical factors enabling us to recruit and retain the very best people in the UK and/or the US could have a material impact on our future reported tax rate and/or our future tax payments.business sectors.
 
 •— A material shortfallFinancial Systems and Processes: we are embarking on a substantial transformation programme based around shared and common processes and services, which is expected to result in profits ofsignificant cost savings in future years. The programme may take longer than planned, cost more than planned, and may cause disruption to our US businesses belowbusiness. We cannot be certain that we will realise the level projectedanticipated savings in our strategic plans would require us to reconsider the amount of the deferred tax asset relating to US new operating losses in our balance sheet (£126m at December 31, 2006). This could lead to a material increase in the reported tax rate.full.
We generateA major data privacy breach may cause reputational damage to our brands and financial loss.
Across our businesses we hold large volumes of personal data including that of employees, customers and, in our assessment businesses, students and citizens. Failure to adequately protect personal data could lead to penalties, significant remediation costs, reputational damage, potential cancellation of some existing contracts and inability to compete for future business.
At Penguin, changes in product distribution channel and/or customer bankruptcy may restrict our ability to grow and affect our profitability.
New distribution channels, e.g. digital format, the internet, online retailers, growing delivery platforms(e.g. e-readers), combined with the concentration of retailer power pose both threats and opportunities to our traditional consumer publishing models, potentially impacting both sales volumes and pricing.
Penguin’s financial performance could also be negatively affected by the bankruptcy of a substantial proportionmajor retail customer which disrupts short-term product supply to the market as well as results in a large debt write off. The economic slowdown has increased this risk in the short term.
Reductions in advertising revenues and/or circulation will adversely affect the profitability of our newspaper business.
Our newspaper business has diversified its revenue streams but remains dependent on advertising income. The business has high operational gearing; relatively small changes in foreign currencies, particularlyrevenue, positive or negative, have a disproportionate effect on profitability. Any downturn in corporate and financial advertising spend due to the economic slowdown will negatively impact the results of theFinancial Timesnewspaper. The outlook for advertising markets, which remain subject to macroeconomic conditions, is not clear and visibility is low.
Our customers can increasingly access their information through different channels and from alternative suppliers. This allows our newspaper businesses to distribute and monetize their content in new ways. Our ability to offer a range of content channels provides some protection against the risk of decline of any one format. For example, we might see a decline in print circulation in our more mature markets as readers migrate online or via mobile platforms, although we see further opportunities for growth in our less mature markets. However, if the migration of readers to new digital formats occurs more quickly than we expect, this is likely to adversely affect print advertising and our newspaper’s profitability.
Operational disruption to our business caused by a major disaster and/or external threats could restrict our ability to supply products and services to our customers.
Across all our businesses, we manage complex operational and logistical arrangements including distribution centers, data centers and large office facilities as well as relationships with third party print sites. We have also outsourced some support functions, including information technology, to third party providers. Failure to recover from a major disaster, (e.g. fire, flood etc) at a key facility or the disruption of supply from a key third party vendor or partner (e.g. due to bankruptcy) could restrict our ability to service our customers. Similarly external threats, such as a flu pandemic, terrorist attacks, strikes, weather etc, could all affect our business and employees, disrupting our daily business activities.


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A control breakdown or service failure in our school assessment businesses could result in financial loss and reputational damage.
There are inherent risks associated with our school assessment businesses, both in the US dollar, and foreign exchangethe UK. A service failure caused by a breakdown in our testing and assessment processes could lead to a mis-grading of student testsand/or late delivery of test results to students and their schools. In either event we may be subject to legal claims, penalty charges under our contracts, non-renewal of contractsand/or the suspension or withdrawal of our accreditation to conduct tests. It is also possible that such events would result in adverse publicity, which may affect our ability to retain existing contractsand/or obtain new customers.
Failure to generate anticipated revenue growth, synergies and/or cost savings from acquisitions could lead to goodwill and intangible asset impairments.
We continually acquire and dispose of businesses to achieve our strategic objectives. In 2009 we acquired Wall Street English, China’s leading provider of premium English language training to adults, for £101m. In South Africa, the company received regulatory approval for the acquisition of the majority stake in Maskew Miller Longman (MML) which we intend to integrate with Heinemann South Africa.
Acquired goodwill and intangible assets could be impaired if we are unable to generate the anticipated revenue growth, synergiesand/or cost savings associated with these or other acquisitions.
Changes in our tax position can significantly affect our reported earnings and cash flows.
Changes in corporate tax ratesand/or other relevant tax laws in the UKand/or the US could have a material impact on our future reported tax rate fluctuationsand/or our future tax payments.
Our professional services and school assessment businesses involve complex contractual relationships with both government agencies and commercial customers for the provision of various testing services. Our financial results, growth prospects and/or reputation may be adversely affected if these contracts and relationships are poorly managed.
These businesses are characterized by multi-million pound sterling contracts spread over several years. As in any contracting business, there are inherent risks associated with the bidding process,start-up, operational performance and contract compliance (including penalty clauses) which could adversely affect our earningsfinancial performanceand/or reputation. Failure to retain these contracts at the end of the contract term could adversely impact our future revenue growth.
At Edexcel, our UK Examination board and the strength oftesting business, any change in UK Government policy to examination marking (e.g., price capping) could have a significant impact on our balance sheet.present business model.
We operate in markets which are dependent on Information Technology (IT) systems and technological change.
 As
All our businesses, to a greater or lesser extent, are dependent on information technology. We either provide softwareand/or internet services to our customers or we use complex IT systems and products to support our business activities, particularly in Interactive Data and business information publishing, back-office processing and infrastructure.
We face several technological risks associated with any international business,software product development and service delivery in our earnings can be materially affected by exchange rate movements. We are particularly exposededucational businesses, information technology security (including virus and hacker attacks),e-commerce, enterprise resource planning system implementations and upgrades. The failure to movements in the US dollarrecruit and retain staff with relevant skills may constrain our ability to sterling exchange rategrow as approximately 65% ofwe combine traditional publishing products with online and service offerings.


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Investment returns outside our revenue is generated in US dollars. We estimate that if 2005 average rates had prevailed in 2006, sales for 2006 would have been £44m or 1% higher. This is predominantly a currency translation risk (i.e. non-cash flow item), and not a trading risk (i.e. cash flow item), as our currency trading flows are relatively limited. Pearson generates about two-thirds of its sales in thetraditional core US and each five cent change in the average £:$ exchange rate for the full year (which in 2006 was £1:$1.84 and in 2005 was £1:$1.81) would have an impact of 1p on earnings per share. We estimate that a five cent change in the closing exchange rate between the US dollar and sterling in any year could affect our shareholders’ funds by approximately £85m.
ITEM 4.     INFORMATION ON THE COMPANYUK markets may be lower than anticipated.
To take advantage of international growth opportunities and to reduce our reliance on our core US and UK markets we are increasing our investments in a number of emerging markets, some of which are inherently more risky than our traditional markets. Political, economic, currency, reputational and corporate governance risks (including fraud) as well as unmanaged expansion are all factors which could limit our returns on investments made in these markets.
ITEM 4.INFORMATION ON THE COMPANY
Pearson
 
Pearson is a global publishingan international media and education company with its principal operations in the education, business information and consumer publishing markets. We have significant operations in the United States, where we generate over 65% of our revenues, and in the United Kingdom and continental Europe. We create and manage intellectual property, which we promote and sell to our customers under well-known brand names, to inform, educate and entertain. We deliver our content in a variety of forms and through a variety of channels,

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including books, newspapers and internetonline services. We increasingly offer services as well as content, from test creation, administration and processing to training.teacher development and school software. Though we operate in more than 60 countries around the world, today our largest markets are the US (62% of sales) and Europe (22% of sales) on a continuing basis.
 
Pearson was incorporated and registered in 1897 under the laws of England and Wales as a limited company and re-registered under the UK Companies Act as a public limited company in 1981. We conduct our operations primarily through our subsidiaries and other affiliates. Our principal executive offices are located at 80 Strand, London WC2R 0RL, United Kingdom (telephone: +44 (0) 20 7010 2000).
Overview of operating divisions
 Although our businesses increasingly share markets, brands, processes and facilities, they consist
Pearson consists of three core operations:major worldwide businesses:
 
Pearson Educationis the world’s leading education company. We are a leading international publisher of textbooks, supplementarycompany, providing educational materials, technologies, assessments and electronic education programs forservices to teachers and students of all ages, and we play a major role in the testing and certification of school students and professionals. Pearson Education consists of the following three operating segments:
• School — publisher, provider of testing and software services for primary and secondary schools;
• Higher Education — publisher of textbooks and related course materials for colleges and universities;
• Professional — publisher of texts, reference and interactive products for industry professionals. Provider of various testing and service arrangements for government departments and professional bodies.
The FT Groupages. It is also a leading provider of internationalelectronic learning programmes and of test development, processing and scoring services to educational institutions, corporations and professional bodies around the world. In 2009, Pearson Education operated through three worldwide segments, which we refer to as “North American Education”, “International Education” and “Professional”:
The FT Groupprovides business and financial news, data, comment and analysis, in print and online. The FT Group comprisesonline, to the following operating segments:international business community. It has two major parts:
 • FT Publishing — publisher ofincludes the globally focusedFinancial Times, other business newspapers,newspaper and FT.com website, a range of specialist financial magazines and online services, and Mergermarket, which provides proprietary forward-looking insights and intelligence to businesses and financial information and intelligence;institutions.
 
 • Interactive Data (“IDC”) — provider ofprovides specialist financial and business informationdata to financial institutions and retail investors. Pearson owns a 61% interest in Interactive Data, which is publicly listed on the New York Stock Exchange (NYSE:IDC).
 
The FT Group also has a 50% ownership stake in both The Economist Group and FTSE International.
The Penguin Groupis one of the world’s foremost English language publishers.leading consumer publishing businesses and an iconic global brand. We publish the works of many authors in an extensive portfolio of fiction, non-fiction and reference and illustrated workstitles under imprints including Penguin, Hamish Hamilton, Putnam, Berkley, Viking and Dorling Kindersley.
Our strategy
 Over the past decade we have transformed Pearson by focusing on companies which provide ‘education’ in the broadest sense of the word; companies that educate, inform and entertain. Through a combination of organic investment and acquisitions, we have built each one of our businesses into a leader in its market, and we have integrated our operations where appropriate so that our businesses can share assets, brands, processes, facilities, technology and central services.
Our goal is to be the world’s leading ‘education’ company, and to help people make progress in their lives through learning, wherever and whenever they are learning — young or old; at home, school or at work; and through whatever medium and style of learning is most effective.


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We aim to produce sustainableconsistent growth on our three key financial measures — adjusted earnings per share, cash flow and return on invested capital — which we believe are, together, good indicators that we are building the long-term value of Pearson.
 We do
To achieve this by investing consistently ingoal, our strategy has four areas, which areparts, common to all our businesses:
 • Content:Long-term organic investment in content: We invest steadily in unique, valuable publishing content such as new education programmes, new and keep replenishing it. Overestablished authors for Penguin and the past five years, for example, we have invested $1.6bn in new content inFT’s journalism. We believe that this constant investment is critical to the quality and effectiveness of our education business alone.products and services.
 
 • TechnologyDigital and services:services businesses: Our strategy centers on adding services to our content, usually enabled by technology, to make the content more useful, personal and valuable. These digital and services businesses give us access to new sources of revenues to sustain growth. We invested early and consistently in technology, believing that, in the digital world, content alone would not be enough. In 2006, we generated more than $1bn innow receive close to one-third of our annual sales from technologydigital products and services and our testing and assessment businesses, serving school students and professionals, madewhich is more than $1bn of sales, up from around $200m sevendouble the total five years ago.

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 • International markets: Though we currently generate two-thirds of our salesPearson has market leading positions in major developed economies, particularly the US, our brands, contentUK and technology-plus-services models work around the world. All parts of PearsonWestern Europe. We are already present in more than 60 countries and we are investing in selectedto become a much larger global education company, with particular emphasis on emerging markets, wheresuch as China, India, Africa and Latin America. Over the demand for information andpast 5 years our ‘international’ (meaning ‘outside North America’) education is growing particularly fast.business has grown sales at an average annual rate of 17%.
 
 • Efficiency: WeThe businesses of Pearson have a lot in common, in costs, assets, and activities. Pooling those makes the company stronger and more efficient. It also allows our businesses to learn from each other and to collaborate to save money. On that basis we have invested to become a leaner, more efficient company,for efficiency through savings in our individual businesses and through a strong centralized operations structure. We are integrated in many areas where our businesses share the same needs — purchasing, warehousing, distribution, facilities and real estate, project management, people resources, finance and accounting, and transactions. Over the past five years, we have increased our adjusted operating profit margins from 9.9%12.8% to 13.4%15.3% and reduced average working capital as a percentage of sales in Pearson Educationfrom 27.4% to 25.1%. Adjusted operating profit is a key financial measure used by management to evaluate performance and Penguin from 30.7%allocate resources to 26.3%, freeing up cash for further investment.our business segments. See “Item 5. Operating and Financial Review”.
 We believe this strategy can create a virtuous circle — efficiency, investment, market share gains and scale — which in turn can produce sustainable growth on our financial goals and the value of the Company.
Operating divisions
Pearson Education
Pearson Education
 
Pearson Education is one of the world’s largest publishers of textbooks and online teaching materials. It serves the growing demands of teachers, students, parents and professionals throughout the world for stimulating and effective education programs in print and online.
 
We report Pearson Education’s performance byin the three market segments it serves: School, Highersegments: North American Education, International Education, and Professional. In 2006,2009, Pearson Education had sales of £2,591m£3,780m or 63%67% (65% in 2008) of Pearson’s total sales (2005: 62%) and contributed 68% (2005: 63%) tototal. Pearson Education generated 67% of Pearson’s total operating profit.
School
North American Education
 
Our North American business serves educators and students in the USA and Canada from early education through elementary, middle and high schools and into higher education with a wide range of products and services: curriculum textbooks and other learning materials; student assessments and testing services; and education technologies. Pearson has a leading position in each of these areas and a distinctive strategy of connecting those parts to support institutions and personalize learning. In 2008 we began to integrate our North American School and Higher Education companies, which we believe will bring significant opportunities to develop growth businesses, to share investments and technologies and to gain further efficiencies.
Our North American School business contains a unique mix of publishing, testing and technology products for the elementary and secondary school markets, which are increasingly integrated. It generates around two-thirdsThe major customers of its sales in the US.
      In the US, we publishthis business are state education boards and local school districts. The business publishes high quality curriculum programsprogrammes for school students, covering subjects such as reading, literature, maths, scienceat both elementary and social studies. We publishsecondary level, under a rangenumber of well-known imprints that includeincluding Scott Foresman in the elementary school market and Prentice Hall in secondary. Hall.


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Our school testing business is the leading provider of test development, processing and scoring services to US states and the federal government, processing some 40 million tests each year.government. Its capabilities have been further enhanced through the integration of the Harcourt Assessment business. We are also thea leading provider of electronic learning programs for schools, and of ‘Student Information Systems’ technology which enables elementary and secondary schools and school districts to record and manage information about student attendance and performance.
 In the US, more than 90% of government funds for schools comes from state or local government, with the remainder coming from federal sources.
Our School company’s major customers are state education boards and local school districts.
      Outside the US, we publish school materials in local languages in a number of countries. We are the world’s leading provider of English Language Teaching materials for children and adults, published under the well-known Longman imprint. We are also a leading provider of testing, assessment and qualification services. Our key markets outside the US include Canada, the UK, Australia, Italy, Spain, South Africa, Hong Kong and the Middle East.
North American Higher Education
      Pearson Education business is the United States’ largest publisher by sales, of textbooks and related course materials for colleges and universities.universities in the US. We publish across all of the main fields of study with imprints such as Pearson Prentice Hall, Pearson Addison Wesley, Pearson Allyn & Bacon and Pearson Benjamin Cummings. Typically, professors or other instructors select or ‘adopt’ the textbooks and online resources they recommend for their students, which students then purchase either in a bookstore or online. Today the majority of our textbooks are accompanied by online services which include homework and assessment tools, study guides and course management systems that enable professors to create online courses. We have also introduced new

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formats such as downloadable audio study guides and electronic textbooks which are sold on subscription. In addition, we have a fast-growing custom publishing business which works with professors to produce textbooks and online resources specifically adapted for their particular course. In 2006, our Higher
See “Item 5 Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2009 compared to year ended December 31, 2008 — Sales and operating profit by division — North American Education” for a discussion of developments during 2009 with respect to this division.
International Education
Our International Education business generated approximately 80%covers all educational publishing and related services outside North America.
Our International schools business publishes educational materials in local languages in a number of its salescountries. We are one of the world’s leading providers of English Language Teaching (ELT) materials for children and adults, published under the well-known Longman imprint. In 2008 we strengthened our position further in international markets through the US. acquisition of the Harcourt Education International business, and in 2009 through the acquisition of Wall Street English, a chain of premium English language schools in China, and investment in vocational training and online learning in India.
Outside the US, we adaptNorth America, our International higher education business adapts our textbooks and technology services for individual markets, and we have a growing local publishing program. Ourprogram, with our key markets outside the US include Canada,including the UK, Benelux, Mexico, Germany, Hong Kong, Korea, Taiwan, Singapore, Japan and Malaysia.
Professional
We are also a leading provider of testing, assessment and qualification services in a number of key markets including, the UK under the brand name Edexcel, Australia, New Zealand, South Africa, Hong Kong and the Middle East.
 
See “Item 5 Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2009 compared to year ended December 31, 2008 — Sales and operating profit by division — International Education” for a discussion of developments during 2009 with respect to this division.
Professional
Following the disposal of Government Solutions in 2007 and Data Management in 2008, our Professional education business is focused on publishing and other learning programmes for professionals in business and technology, and on testing and certifying adults to become professionals. Over the past five years we have significantly re-orientated our professional publishing business towards long-term growth markets and built professional testing into a profitable industry leader.
Our Professional education businesses publish educational materials and provide testing and qualifications services for adults. Our publishing imprints includebusiness publishes under the following imprints: Addison Wesley Professional, Prentice Hall PTR and Cisco Press (for IT professionals),; Peachpit Press and New Riders Press (graphics(for graphics and design professionals),; Que/Sams (consumer and professional imprint); and Prentice Hall FinancialHall-Financial Times and Wharton School Publishing (for the business education market). We have a fast-growing Professional Testing


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Our professional testing business, Pearson VUE, which manages major long-term contracts to provide qualification and assessment services through its network of test centers around the world. Key customers include major technology companies, the Graduate Management Admissions Council, NCLEX, the National Association of Securities DealersFinancial Industry Regulatory Authority and the UK’s Driving Standards Agency. We also provide a range
See “Item 5 Operating and Financial Review and Prospects — Results of data collection and management services, including scanners, to a wide range of customers. In December 2006, the Group announced that it had agreed to sell Pearson Government Solutions to Veritas Capital, a private equity firm. This operation is disclosed as discontinued in the yearsOperations — Year ended December 31, 2006, 2005 and 2004. The assets and liabilities of Pearson Government Solutions have been reclassified2009 compared to non-current assets held for sale in the Group’s Consolidated Balance Sheet as atyear ended December 31, 2006.2008 — Sales and operating profit by division — Professional” for a discussion of developments during 2009 with respect to this division.
The FT Group
The FT Group
 
The FT Group provides a broad range of data, analysis and services to an audience of internationally-minded business people and financial institutions. In 2006,2009, the FT Group had sales of £698m,£842m, or 17%15% of Pearson’s total sales (2005: 17%)(16% in 2008), and contributed 21%22% of Pearson’s operating profit (2005: 25%).profit.
 
It has two major parts: FT Publishing, our networka combination of internationaltheFinancial Times, FT.com website, and national business newspapersa portfolio of financial magazines and online services;financial information companies; and Interactive Data, Corporation, our 62%61%-owned financial information company. In recent years the FT Group has significantly shifted its business towards digital and subscription revenues.
FT Publishing
FT Publishing
 
TheFinancial Timesis one of the world’s leading international daily business newspaper. newspapers, with five editions in the UK, Europe, Middle East and Africa, the US and Asia.
Its average daily circulationmain sources of 430,469 copies in December 2006, as reported by the Audit Bureau of Circulation, is split as follows:
United Kingdom/ Republic of Ireland31%
Continental Europe27%
Americas31%
Asia9%
Rest of the World2%
      In 2006, approximately 70%revenue are from sales of the FT’s revenues were generated through advertising.newspaper, advertising and conferences. The FT alsoFinancial Timesis complemented by FT.com which sells content and advertising online, through FT.com. FT.comand which charges subscribers for detailed industry news, comment and analysis, while providing general news and market data to a wider audience.
 FT Publishing also includes:
FT Business which publishes specialist information on the retail, personal and institutional finance industries through titles includingInvestors Chronicle,Money Management,Financial AdviserandThe BankerBanker.; Les Echos, France’s leading business newspaper, and a number of joint ventures and associates in business publishing.

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 In August 2006, the Financial Times acquired
Mergermarket, anour online financial data and intelligence provider. The acquisition strengthens theprovider, provides early stage proprietary intelligence to financial institutions and corporates. Its key products includeMergermarket,Debtwire,dealReporter,WealthmonitorandPharmawire.
See “Item 5 Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2009 compared to year ended December 31, 2008 — Sales and operating profit by division — FT Group, adding proprietary content,Publishing” for a premium customer base, reliable growth from new revenue sources and attractive financial characteristicsdiscussion of developments during 2009 with respect to the organization.this division.
Interactive Data
Interactive Data Corporation
      Interactive Data Corporation is a leading provider of financial market data, analytics and related services to financial institutions, active traders and individual investors. The company’s businesses supply time-sensitive pricing, evaluationscustomers use its offerings to support their portfolio management and reference data for more than 3.5 million securities traded around the world, including hard-to-value instruments such as illiquid bonds.valuation, research and analysis, trading, sales and marketing, and client service activities. We own 62%61% of Interactive Data Corporation;Data; the remaining 38%39% is publicly traded.traded on the NYSE (for more information see NYSE:IDC).
Recoletos
      On April 8, 2005,During January 2010, the Group completedannounced that Interactive Data was undertaking a preliminary review of strategic alternatives for its business. At the saledate of this report, the outcome of the review is still uncertain.
See “Item 5 Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2009 compared to Retos Catera S.A.year ended December 31, 2008 — Sales and operating profit by division — Interactive Data” for a discussion of our 79% stake in Recoletos, a publicly quoted Spanish media Group, for gross proceeds ofdevelopments during 2009 with respect to this division.


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€Joint Ventures and Associates743m. Net cash proceeds of £371m were received resulting in a profit on disposal of £306m.
Joint Ventures and Associates
      As at 2006 year-end, theThe FT Group also hadhas a number of associates and joint ventures, including:
 • 50% interest in The Economist Group, publisher of one of the world’s leading weekly business and current affairs magazine.
• 50% interest inFT Deutschland, a German language business newspaper with a fully integrated online business news, analysis and data service.magazines.
 
 • 50% interest in FTSE International, a joint venture with the London Stock Exchange, which publishes a wide range of global indices, including the important FTSE index.
• 33% interest inVedomosti, a leading Russian business newspaper.
 
 • 50% interest inBusiness DayandFinancial Mail, publishers of one of South Africa’s leading financial newspapernewspapers and magazine.magazines.
 
 • 14%33% interest inBusiness StandardVedomosti,, one of India’sa leading Russian business newspapers.
The Penguin Groupnewspaper.
 
On March 27, 2008, Financial Times International Publishing Ltd sold its 50% partnership interest in Financial Times Deutschland GmbH & Co KG to Gruner & Jahr AG & Co KG.
The Penguin Group
Penguin is one of the world’s premier English languagemost famous brands in book publishers. We publishpublishing. It publishes over 4,000 fiction and non-fiction books each year, on paper, screens and in audio formats for readers of all ages, and has an extensive range of backlist and frontlist of titles including fiction and non-fiction,top literary prize winners, commercial bestsellers, classics, reference volumes and children’s titles. We rank
Penguin operates around the world through a series of connected national publishing houses. It publishes under a number of well known imprints including Putnam, Viking, Allen Lane, Hamish Hamilton, Berkley, the Penguin Press, Puffin and Dorling Kindersley. Penguin combines a longstanding commitment to local publishing with a determination to benefit from its worldwide scale, a globally recognized brand and growing demand for books in the top three consumer publishers, based upon sales,emerging markets. Its largest businesses are in all major English speaking and related markets — the US, the UK, Australia, Canada, Ireland, India, South Africa and New Zealand, Canada, India and South Africa.Zealand.
 Penguin publishes under many imprints including, in the adult market, Allen Lane, Avery, Berkley Books, Dorling Kindersley, Dutton, Hamish Hamilton, Michael Joseph, Plume, Putnam, Riverhead and Viking. Our leading children’s imprints include Puffin, Ladybird, Warne and Grosset & Dunlap.
In 2006,2009, Penguin had sales of £848m,£1,002m, representing 20%18% of Pearson’s total sales (2005: 21%)(19% in 2008) and contributed 11% of Pearson’s operating profit (2005: 12%).profit. Its largest market is the US, which generated around 60%59% of Penguin’s sales in 2006.2009. The Penguin Group earns around 99%97% of its revenues from the sale of hard cover and paperback books. The balance comes from audio books and from the sale and licensing of intellectual property rights, such as the Beatrix Potter series of fictional characters, and acting as a book distributor for a number of smaller publishing houses.e-books.
 We sell
Penguin sells directly to bookshops and through wholesalers. Retail bookshops normally maintain relationships with both publishers and wholesalers and use the channel that best serves the specific requirements of an order. WeIt also sellsells through online through third partiesretailers such as Amazon.com.Amazon.com, as well as Penguin’s own website.

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See “Item 5 Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2009 compared to year ended December 31, 2008 — Sales and operating profit by division — The Penguin Group” for a discussion of developments during 2009 with respect to this division.
Operating cycles
 
Pearson determines a normal operating cycle separately for each entity/cash generating unit within the Group with distinct economic characteristics. The “normal operating cycle” for each of the Group’s education businesses is primarily based on the expected period over which the educational programs and titles will generate cash flows, and also takes account of the time it takes to produce the educational programs.
 
Particularly for the US School and HigherNorth American Education businesses, which represent more than 50% (by sales) of our education publishing businesses, there are well established cycles operating in the market:
 • The School market is primarily driven by an adoption cycle in which major state education boards ‘adopt’ programs and provide funding to schools for the purchase of these programs. There is an established and published adoption cycle with new adoptions taking place on average every 5 years for a particular subject. Once adopted, a program will typically sell over the course of the subsequent 5 years. The Company renews its pre-publication assets to meet the market adoption cycles. Therefore the operating cycle naturally follows the market cycle.


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 • The Higher Education market has a similar pattern, with colleges and professors typically refreshing their courses and selecting revised programs on a regular basis, often in line with the release of new editions or new technology offerings. The Company renews its pre-publication assets to meet the typical demand for new editions of, or revisions to, educational programs. Analysis of historical data shows that the average life cycle of Higher Education content is up to 5 years. Again the operating cycle mirrors the market cycle.
 
A development phase of typically 12 to 18 months for Higher Education and up to 24 months for School precedes the period during which the Company receives and delivers against orders for the products it has developed for the program.Non-US
The International Education markets operate in a similar way although often with less formal ‘adoption’ processes.
 
The operating cycles in respect of the Professional and the Penguin segmentssegment are more specialized in nature as they relate to educational or heavy reference products released into smaller markets (e.g. the financial training, IT and travel sectors). Nevertheless, in these markets, there is still a regular cycle of product renewal, in line with demand which management monitor. Typically the life cycle is 5 years for Professional content and up to 4 years for Penguin content.
Competition
 
All of Pearson’s businesses operate in highly competitive environments.
 
Pearson Education competes with other publishers and creators of educational materials and services. These companies include large international companies, such asMcGraw-Hill Reed Elsevier, and Houghton Mifflin Riverdeep Group and ThomsonHarcourt, alongside smaller niche players that specialize in a particular academic discipline or focus on a learning technology. Competition is based on the ability to deliver quality products and services that address the specified curriculum needs and appeal to the school boards, educators and government officials making purchasing decisions.
 The
FT Group’s newspapers, magazines and websites competePublishing competes with newspapers and other information sources, such asThe Wall Street Journal,, by offering timely and expert analysisjournalism and insight.market intelligence. It competes for advertisers with other forms of media based on the ability to offer an effective means for advertisers to reach their target audience. IDCInteractive Data competes with Reuters, Bloomberg and Thomson FinancialReuters on a global basis for the provision of financial data to the back office.office of financial institutions. In Europe, Telekurs is also a direct competitor for these services. Smaller, more specialized vendors also compete with Interactive Data in certain market segments and in certain geographic areas.
 
The Penguin Group competes with other publishers of fiction and non-fiction books. Principal competitors include Random House, HarperCollins, and Hachette Livre.Group. Publishers compete by developing a portfolio of books by established authors and by seeking out and promoting talented new writers.

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Intellectual property
 
Our principal intellectual property assets consist of our trademarks and other rights in our brand names, particularly theFinancial Timesand the various imprints of Penguin and Pearson Education, as well as all copyrights infor our content and our patents held in the testing business in the name of Pearson NCS. We believe we have taken all appropriate available legal steps to protect our intellectual property in all relevant jurisdictions.
Raw materials
 
Paper is the principal raw material used by each of Pearson Education, the FT Group and the Penguin Group. We purchase most of our paper through our central purchasingGlobal Sourcing department located in the United States. We have not experienced and do not anticipate difficulty in obtaining adequate supplies of paper for our operations, with sourcing available from numerous suppliers. While local prices fluctuate depending upon local market conditions, we have not experienced extensive volatility in fulfilling paper requirements. In the event of a sharp increase in paper prices, we have a number of alternatives to minimize the impact on our operating margins, including modifying the grades of paper used in production.


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Government regulation
 
The manufacture of certain of our products in various markets is subject to governmental regulation relating to the discharge of materials into the environment. Our operations are also subject to the risks and uncertainties attendant to doing business in numerous countries. Some of the countries in which we conduct these operations maintain controls on the repatriation of earnings and capital and restrict the means available to us for hedging potential currency fluctuation risks. The operations that are affected by these controls, however, are not material to us. Accordingly, these controls have not significantly affected our international operations. Regulatory authorities may have enforcement powers that could have an impact on us. We believe, however, that we have taken and continue to take measures to comply with all applicable laws and governmental regulations in light of the jurisdictions where we operate so thatnature of our business the risk of these sanctions does not represent a material threat to us.
Licenses, patents and contracts
 
We are not dependent upon any particular licenses, patents or new manufacturing processes that are material to our business or profitability. Likewise, we are not materially dependent upon any contracts with suppliers or customers, including contracts of an industrial, commercial or financial nature.
Recent developmentsLegal Proceedings
 On February 15, 2007
We and our subsidiaries are from time to time the subject of legal proceedings incidental to the nature of our and their operations. These may include private litigation or arbitrations, governmental proceedings and investigations by regulatory bodies. We do not currently expect that the outcome of pending proceedings or investigations, either individually or in aggregate, will have a significant effect on our financial position or profitability nor have any such proceedings had such effect in the recent past. To our knowledge, there are no material proceedings in which any member of senior management or any of our affiliates is a party adverse to us or any of our subsidiaries or in respect of which any of those persons has a material interest adverse to us or any of our subsidiaries.
Recent developments
During January 2010, the Group completedannounced that Interactive Data was undertaking a preliminary review of strategic alternatives for its business. At the disposaldate of Pearson Government Solutions, its Government services business, to Veritas Capital. Sale proceeds consist of $560m in cash, $40m in preferred stock and 10%this report, the outcome of the equityreview is still uncertain.
On 3 February 2010 the FT Publishing business announced the acquisition of the business. The Group expects to reportMedley Global Advisors LLC, a post tax loss on the disposal, as the capital gain for tax purposes will exceed any book gain.
      On September 30, 2006, the Group acquired 100%provider of the voting rights of Mergermarket, a financial information company providing information to financial institutions, corporations and their advisers. In addition, several other businesses were acquired in 2006 including Promissor, Paravia Bruno Mondadori (PBM), National Evaluation Systems (NES), PowerSchool and Chancery in the Education business and Quote.com in IDC.
      On July 22, 2005, Pearson acquired 100% of the voting rights of AGS Publishing, an educational assessments and curriculum materials publisher.
      In addition, several other businesses were acquired in the current and prior years, none of which were individually materialmacro policy intelligence to the Group.world’s top investment banks, hedge funds and asset managers for $15.5m.


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Organizational structure
 
Pearson plc is a holding company which conducts its business primarily through subsidiaries and other affiliates throughout the world. Below is a list of our significant subsidiaries as at December 31, 2006,2009, including name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held.
       
    Percentage
    interest/voting
Name
 Country of incorporation/residence power
 
Pearson Education
      
Pearson Education IncInc.  United States (Delaware)  100%100%
Pearson Education LtdLtd.  England and Wales  100%100%
Edexcel Ltd.  England and Wales100%
NCS Pearson IncInc.  United States (Minnesota)  100%100%
FT Group
      
The Financial Times Limited England and Wales  100%100%
Financial Times Business LtdMergermarket Ltd.  England and Wales  100%100
Mergermarket LtdEngland and Wales100%%
Interactive Data Corporation United States (Delaware)  62%61
Les Echos SAFrance100%%
The Penguin Group
      
Penguin Group (USA) IncInc.  United States (Delaware)  100%100%
The Penguin Publishing Co LtdLtd.  England and Wales  100%100%
Dorling Kindersley Holdings Ltd England and Wales  100%100%
Property, plant and equipment
 
Our headquarters are located at leasehold premises in London, England. We own or lease approximately 6501,000 properties, including approximately 500 testing/teaching centers in more than 5060 countries worldwide, the majority of which are located in the United Kingdom and the United States.
 All of the
The properties owned and leased by us are suitable for their respective purposes and are in good operating condition. These properties consist mainly of offices, distribution centers and computer testing/teaching centers.
 
The vast majority of our printing is carried out by third party suppliers. We operate two small digital print operations as part of our Pearson Assessment and& Testing businesses.businesses, one of which was sold as part of the February 2008 Data Management sale. These operations provide short-run andprint-on-demand products, typically custom client applications.
 
We own the following principal properties:properties at December 31, 2009:
       
General use of property
 Location Area in square feet
 
WarehousePittstown, Pennsylvania, USA510,000
WarehouseWarehouse/Office Kirkwood, New York, USA  409,000524,000 
OfficesWarehouse/OfficePittston, Pennsylvania, USA406,000
Office Iowa City, Iowa, USA  310,000 
OfficesWarehouse/Office Old Tappan, New Jersey, USA  210,112 
Warehouse/ OfficesOffice Cedar Rapids, Iowa, USA  205,000 
Warehouse/ OfficesOffice Reading, Massachusetts, USA177,822
OfficesSouthwark, London, UK  155,000 
Printing/ ProcessingOfficeHadley, Massachusetts, USA136,570
Printing Owatonna, Minnesota, USA  128,000 
Printing/ ProcessingColumbia, Pennsylvania, USA121,370
OfficesEagan, Minnesota, USA109,500
OfficesMesa, Arizona, USA96,000


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We lease the following principal properties:properties at December 31, 2009:
       
General use of property
 Location Area in square feet
 
Warehouses/OfficesWarehouse/Office Lebanon, Indiana, USA  1,091,435 
OfficesWarehouse/Office Cranbury, New Jersey, USA  886,747 
Warehouse/OfficesOffice Indianapolis, Indiana, USA  737,850 
Warehouse/OfficesOffice Newmarket, Ontario, CanadaSan Antonio, Texas, USA  518,128559,258 
OfficesOffice Upper Saddle River, New Jersey, USA  474,801 
Warehouse/OfficesOffice Rugby, UK  446,077 
OfficesOffice Hudson St.,New York City, New York, USA  431,278430,738 
OfficesOffice London, UK  282,917 
Warehouse/OfficesOfficeNewmarket, Ontario, Canada278,912
Warehouse/Office Austin, Texas, USA  226,076 
OfficesOffice Boston, Massachusetts, USA  225,299 
Warehouse Scoresby, Victoria, Australia  215,820197,255 
OfficesBoston, Massachusetts, USA191,360
OfficesOffice Glenview, Illinois, USA  187,500 
OfficesWarehouse/OfficeBedfordshire, UK186,570
Office Bloomington, Minnesota, USA  153,240 
OfficesOffice Parsippany, New Jersey,Boston, Massachusetts, USA  143,777138,112 
OfficesOffice Harlow, UK  137,900137,851 
OfficesOffice Chester, Virginia,Chandler, Arizona, USA  123,200135,460 
Warehouse/OfficesOffice Quarry Bay, Hong KongCedar Rapids, Iowa, USA  121,748119,682
OfficeNew York City, New York, USA116,039 
Warehouse San Antonio Zomeyucan, Mexico  113,638 
OfficesOffice London, UK  112,000 
OfficesNew York, New York, USA107,939
OfficesCall Center Lawrence, Kansas, Kansas, USA  105,000 
Capital Expenditures
 
See Item 5. “Operating and Financial Review and Prospects — Liquidity and Capital Resources” for description of the Company’s capital expenditures.
ITEM 4A.     UNRESOLVED STAFF COMMENTSexpenditure.
 There are no unresolved
ITEM 4A.UNRESOLVED STAFF COMMENTS
The Company has not received, 180 days or more before the end of the 2009 fiscal year, any written comments from the Securities and Exchange Commission staff comments.
ITEM 5.     OPERATING AND FINANCIAL REVIEW AND PROSPECTSregarding its periodic reports under the Exchange Act which remain unresolved.
 
ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis is based on and should be read in conjunction with the consolidated financial statements, including the related notes, appearing elsewhere in this Annual Report. The financial statements have been prepared in accordance with IFRS which differsas issued by the IASB.
Where this discussion refers to constant currency comparisons, these are estimated by re-calculating the current year results using the exchange rates prevailing for the prior period. The increase or reduction in certain significant respects from US GAAP. Note 36 to our consolidated financial statements, included in “Item 17. Financial Statements”,the value calculated is the estimate of impact of exchange rates. We believe this presentation provides a description of the significant differences between IFRS and US GAAPmore useful period to period comparison as they relatechanges due solely to our business and provides a reconciliation to US GAAP.changes in exchange rates are eliminated.
General overview
Introduction
Introduction
 
Sales from continuing operations increased from £3,808m£4,811m in 20052008 to £4,137m£5,624m in 2006,2009, an increase of 9%17%. The increase reflected growth across all the businesses together with additional contributions from acquisitions made in both 2005 and 2006. The year on year growth was significantly impacted by exchange rates, in particular the US dollar. The average US dollar exchange rate weakenedstrengthened in 2006,comparison to sterling in 2008, which had the effect of reducingincreasing reported sales

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in 20062009 by £44m£640m when compared to the equivalent figure at constant 20052008 rates. When measured at constant


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2008 exchange rates, the main contributors to growth were the North American and International Education businesses with the International Education business in particular, benefitting from acquisitions made in 2009.
Reported operating profit increased by 5%12% from £516m£676m in 20052008 to £540m£755m in 2006. All parts2009. The relative strength of the GroupUS dollar contributed to thethis increase and operating profit increase through good sales growth and improved margins which more than offset an increased charge for intangible amortization. Included within operating profit in 2005 was the profit on the sale of MarketWatch of £40m. There were no equivalent disposals in 2006. Reported operating profit in 2006 was £7mwould have been approximately £57m lower than the equivalent figure reportedif translated at constant 20052008 exchange rates. When measured at constant rates, the main contributors to the increase were the North American and International Education businesses which benefitted from the improved sales performance.
 
Profit before taxation in 20062009 of £466m£660m compares to a profit before taxation of £446m£585m in 2005.2008. The increase of £20m£75m reflects the improved operating performance offset by a small increase in net finance costs. Net finance costs increased from £70m£91m in 20052008 to £74m£95m in 2006.2009. The Group’s net interest payable increaseddecreased by £17m£4m in 2006 due2009 as we benefitted from a fall in average interest rates on our floating-rate US dollar debt and a decrease in our overall level of average net debt. Exchange losses of £7m in 2009 compare to a net exchange loss of £11m in 2008. The losses in 2008 mainly relate to the strong riseretranslation of foreign currency bank accounts together with other net losses on inter-company items. In 2009 the loss mainly relates to losses on cross currency swaps. The benefit from reduced interest and lower exchange losses in US dollar floating interest rates and an increase in the Group’s average net debt largely reflecting the cost of acquisitions made in 2006. Partially offsetting this effect was2009 is offset by a finance incomecharge relating to post retirement plans of £4m£12m which compares to finance income from post retirement plans of £8m in 2006 compared2008. The increase in finance charges relating to a cost of £7m in 2005. The adoption of IAS 39‘Financial Instruments: Recognition and Measurement’in our financial statements as at January 1, 2005 has the potentialpost retirement plans is largely due to introduce increased volatility into the net finance cost although the effect in 2006 was not significantly different from that in 2005. IAS 39 related items and foreign exchange gains and losses together reduced net finance costs by £16m in 2006 compared to a reduction of £14m in 2005.lower expected returns on plan assets.
 In December 2006
On February 22, 2008 the Group announcedcompleted the sale of its Government contractingData Management business Pearson Government Solutions. The sale was completed in February 2007 and the results of this business havehas been shownincluded in discontinued operations in the consolidated income statement for 2006, 2005 and 2004. In 2005 the Group sold its 79% interest in Recoletos Grupo de Comunicacion S.A. The results of Recoletos have been consolidated for the period to February 28, 200522 in 2008, and the full year in 2007. In 2007, the Group completed the sale of its French newspaper business, Les Echos and its Government contracting business, Government Solutions. The results of Les Echos and Government Solutions have been shown as discontinued operations in the consolidated income statement for 2005 and 2004.2007.
 
Net cash generated from operating activities decreasedoperations increased to £456m£1,012m in 20062009 from £487m£894m in 2005. Cash2008. The improved cash generation in 2006 would have shown an improvement on 2005 but for the relative weakness of the US dollar which reduced the value of2009 was due to strong cash collections, particularly in our cash flows in sterling.education businesses. On an average basis, the useratio of working capital continued to improve. Capitalsales improved from 26.1% to 25.1%, reflecting tight working capital management and the favourable working capital profile of 2009 acquisitions. Average working capital comprises the average of the monthly carrying values over the relevant 12 month period for inventory, pre-publication costs, debtors and creditors. Net interest paid at £87m in 2009 was £11m above the previous year, purely due to the timing of interest payments on the bond portfolio. Tax paid in 2009 increased to £103m compared to £89m in 2008. Net capital expenditure on property, plant and equipment after proceeds from sales decreased to £61m in 2006 was2009 from £73m in line with 2005 levels at constant exchange rates.2008. The net cash outflow in respect of businesses acquired increaseddecreased from £246m£395m in 20052008 to £363m£208m in 2006. There were no significant disposals in 2006 to match the2009 whilst net proceeds received from the saledisposal of Recoletos and Marketwatchbusinesses decreased from £111m in 2005 resulting2008 to £14m in a decrease in cash proceeds from disposals of £420m.2009. Dividends from joint ventures and associates increased by £31m largely due to special dividends received from the Economist.were broadly flat year on year at £22m in 2009 against £23m in 2008. Dividends paid of £235m£293m in 20062009 (including £15m£20m paid to minority interests) compares to £222m£285m in 2005.2008. After a favorable currency movement of £126m,£164m, overall net borrowings increaseddecreased by 6%25% from £996m£1,460m at the end of 20052008 to £1,059m£1,092m at the end of 2006.2009.
Outlook
Outlook
 
Pearson reported growth in sales and operating profit in 2009, in spite of the exceptionally difficult macroeconomic environment and against record results2008 results. We achieved strong profit growth in 2006education, helping us to make good financial progress even though our markets in US school publishing, financial advertising and consumer books were especially challenging.
Trading conditions in those tough markets began to ease towards the end of the year, but we are planning on the basis that some of our markets remain subdued throughout 2010. Even so, we expect Pearson to produce another year of profit growth assuming exchange rates remain constant, helped by the overall resilience of our company and good growth prospects for our businesses in digital, services and emerging markets.
Pearson Education
In Education, we believe that our sustained investment in content and our leadership position in learning services and technologies will enable us to build on our strong trading has continued in the early part of 2007.market positions. We have made a good start in the major school textbook adoptions; continued to roll out our groundbreaking online learning and assessment platforms in Higher Education; published a string of bestsellers in Penguin; and achieved steady growth in both advertising and circulation at FT Publishing.
      We are trading in line with expectations for 2007 and expect to achieve good underlying earnings growth, cash conversion ahead of our 80% threshold, and again further increaseshare in return on invested capital. As always, our sales and profits will be concentrated in the second half of the year.
      Our expectations for the full year remain:


22

Pearson Education
      School to achieve underlying sales growth in the4-6% range with margins improving; Higher Education sales to grow in the3-5% range with stable margins; Professional revenues to be broadly level with margins improving;

22

the US School market which will benefit from a stronger adoption opportunity ($850m — $900m) and new federal funds, broadly offset by continued pressure on education funding at the state level. In Higher Education and International Education, we expect to produce further underlying growth and share gains.
FT Group
 Financial Times
FT Group profit
At FT Publishing, we expect to grow strongly withsustain good renewal rates in our cost measures, integration actionssubscription businesses and revenue diversification pushing margins into double digits at FT Publishing. IDChealthy margins. Advertising revenues (which in 2009 accounted for less than 3% of total Pearson revenues) remain highly unpredictable but we expect to see some stabilisation after the sharp declines across the industry in 2009. Interactive Data Corporation expects 2010 revenues to growrange between $810m to $830m and healthy margins in the6-9% 25% to 26% range with net income growth in the high single-digits to low double-digits (headline growth(guidance under US GAAP);. As previously announced, the Board of Interactive Data Corporation is currently undertaking a preliminary review of strategic alternatives for the company.
The Penguin Group
The Penguin Group
 
We expect Penguin margins to improve further, aspost another good competitive performance in the context of a consumer books market that we expect to remain broadly level in 2010. Penguin will benefit from its publishing investmentleading position in the emerging market for eBooks and from the efficiency programs continue to bear fruit.actions taken in 2009.
Sales information by operating division
Sales information by operating division
 
The following table shows sales information for each of the past three years by operating division:
              
  Year ended December 31
   
  2006 2005 2004
       
  £m £m £m
Education:            
 School  1,455   1,295   1,087 
 Higher Education  795   779   729 
 Professional  341   301   290 
FT Group:            
 FT Publishing  366   332   318 
 IDC  332   297   269 
Penguin  848   804   786 
          
Total  4,137   3,808   3,479 
          
             
  Year Ended December 31 
  2009  2008  2007 
  £m  £m  £m 
 
Education:            
North American  2,470   2,002   1,667 
International  1,035   866   735 
Professional  275   244   226 
FT Group:            
FT Publishing  358   390   344 
Interactive Data  484   406   344 
Penguin  1,002   903   846 
             
Total  5,624   4,811   4,162 
             
Sales information by geographic market supplied
 
Sales information by geographic market supplied
The following table shows sales information for each of the past three years by geographic region:
              
  Year ended December 31
   
  2006 2005 2004
       
  £m £m £m
 European countries  1,089   951   820 
 North America  2,642   2,451   2,309 
 Asia Pacific  298   300   263 
 Other countries  108   106   87 
          
Total  4,137   3,808   3,479 
          
             
  Year Ended December 31 
  2009  2008  2007 
  £m  £m  £m 
 
European countries  1,222   1,217   1,102 
North America  3,663   3,028   2,591 
Asia Pacific  519   415   351 
Other countries  220   151   118 
             
Total  5,624   4,811   4,162 
             
Exchange rate fluctuations
 
Exchange rate fluctuations
We earn a significant proportion of our sales and profits in overseas currencies, principally the US dollar. Sales and profits are translated into sterling in the consolidated financial statements using average rates. The average rate used for the US dollar was $1.84£1:$1.57 in 2006, $1.812009, £1:$1.85 in 2005,2008 and $1.83£1:$2.00 in 2004.2007. Fluctuations in exchange rates


23

can have a significant impact on our reported sales and profits. In 2009, Pearson generates approximately 65%generated 62% of its sales in the US. WeUS (2008: 59%; 2007: 59%). In 2009 we estimate that a five cent change in the average exchange rate between the US dollar and sterling would have had an impact on our reported earnings per share of 1.3p and a five per cent change in the closing exchange rate between the US dollar and sterling in any year could affect our reported earnings per share by 1p andwould have had an impact on shareholders’ funds byof approximately £85m.£120m. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for more information. Theyear-end US dollar rate for 20062009 was £1:$1.961.61 compared to £1:$1.721.44 for 2005. The weakening2008. In terms of the year end rate, the strengthening of sterling in comparison to the US dollar reducedin 2009 was less significant than in the previous year and the relatively weak value of the US dollar had the effect of reducing shareholders’ funds. The net effect of movement in all currencies in 2009 was a reduction in our shareholders’ funds by £417m (see note 27 of “Item 17. Financial

23

Statements”) in 2006.£388m. Theyear-end rate for 2005the US dollar in 2008 was £1:$1.721.44 compared to £1:$1.921.99 for 2004 resulting2007. The comparative strength of the US dollar was more significant in 2008 and the increase in shareholders funds due to the US dollar contributed to an overall increase in shareholders’ funds due to exchange movements of £327m£1,125m in 2005.2008.
Critical accounting policies
Critical accounting policies
 
Our consolidated financial statements, included in “Item 17.18. Financial Statements”, are prepared based on the accounting policies described in note 1 to the consolidated financial statements. These financial statements are prepared in accordance with IFRS, which differs in certain significant respects from US GAAP.
 The preparation of our consolidated financial statements in accordance with IFRS, and the reconciliation of these financial statements to US GAAP as described in note 36, requires management to make estimates and assumptions that affect the carrying value of assets and liabilities at the date of the consolidated financial statements and the reported amount of sales and expenses during the periods reported in these financial statements.
Certain of our accounting policies require the application of management judgment in selecting assumptions when making significant estimates about matters that are inherently uncertain. Management bases its estimates on historical experience and other assumptions that it believes are reasonable. These policies are described in note 1a(3) in “Item 18. Financial Statements”.
Results of operations
 We believe that the following are the more critical accounting policies used in the preparation of our consolidated financial statements that could have a significant impact on our future consolidated
Year ended December 31, 2009 compared to year ended December 31, 2008
Consolidated results of operations financial position and cash flows. Actual results could differ from estimates.
Revenue recognition
      Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services net ofvalue-added tax and other sales taxes, rebates and discounts, and after eliminating sales within the Group. Revenue is recognized as follows:
 Revenue from the sale of books is recognized when title passes. A provision for anticipated returns is made based primarily on historical return rates. If these estimates do not reflect actual returns in future periods then revenues could be understated or overstated for a particular period.
Sales
 Circulation and advertising revenue is recognized when the newspaper or other publication is published. Subscription revenue is recognized on astraight-line basis over the life of the subscription.
      Where a contractual arrangement consists of two or more elements that can be provided to customers either on astand-alone basis or as an optional extra and fair value exists for each separate element, such as the provision of supplementary materials with textbooks, revenue in such multiple element arrangements is recognized when each product has been delivered and all other relevant revenue recognition criteria are achieved.
      Revenue from multi-year contractual arrangements, such as contracts to process qualifying tests for individual professions and government departments, is recognized as performance occurs. The assumptions, risks, and uncertainties inherent inlong-term contract accounting can affect the amounts and timing of revenue and related expenses reported. Certain of these arrangements, either as a result of a single service spanning more than one reporting period or where the contract requires the provision of a number of services that together constitute a single project, are treated aslong-term contracts with revenues recognized on a percentage of completion basis. Losses on contracts are recognized in the period in which the loss first becomes foreseeable. Contract losses are determined to be the amount by which estimated direct and indirect costs of the contract exceed the estimated total revenues that will be generated by the contract.
      On certain contracts, where the Group acts as agent, only commissions and fees receivable for services rendered are recognized as revenue. Any third party costs incurred on behalf of the principal that are rechargeable under the contractual arrangement are not included in revenue.

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Pre-publication assets
      Pre-publication costs represent direct costs incurred in the development of educational programs and titles prior to their publication. These costs are recognized as current intangible assets where the title will generate probable future economic benefits within their normal operating cycle and costs can be measured reliably.Pre-publication assets are amortized upon publication of the title over estimated economic lives of five years or less, being the estimated expected operating life cycle of the title, usually with a higher proportion of the amortization taken in the earlier years. The investment inpre-publication has been disclosed as part of the cash generated from operating activities in the cash flow statement. The assessment of the recoverability ofpre-publication assets and the determination of the amortization profile involve a significant degree of judgment based on historical trends and management estimation of their future potential sales. An incorrect amortization profile could result in excess amounts being carried forward as intangible assets that would otherwise have been written off to the income statement in an earlier period. Reviews are performed regularly to estimate recoverability ofpre-publication costs.
Royalty advances
      Advances of royalties to authors are included within trade and other receivables when the advance is paid less any provision required to bring the amount down to its net realizable value. The realizable value of royalty advances relies on a degree of management judgment in determining the profitability of individual author contracts. If the estimated realizable value of author contracts is overstated then this will have an adverse effect on operating profits as these excess amounts will be written off. The recoverability of royalty advances is based upon an annual detailed management review of the age of the advance, the future sales projections for new authors and prior sales history of repeat authors. The royalty advance is expensed at the contracted or effective royalty rate as the related revenues are earned. Royalty advances which will be consumed within one year are held in current assets. Royalty advances which will be consumed after one year are held innon-current assets.
Defined benefit pension obligations
      The liability in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date minus the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting estimated future cash flows using yields on high quality corporate bonds which have terms to maturity approximating the terms of the related liability.
      The determination of the pension cost and defined benefit obligation of the Group’s defined benefit pension schemes depends on the selection of certain assumptions (see note 24 in “Item 17 — Financial Statements”) which include the discount rate, inflation rate, salary growth, longevity and expected return on scheme assets. Differences arising from actual experience or future changes in assumptions will be reflected in subsequent periods (actuarial gains and losses).
      Actuarial gains and losses arising from differences between actual and expected returns on plan assets, experience adjustments on liabilities and changes in actuarial assumptions are recognized immediately in the statement of recognized income and expense.
      The service cost, representing benefits accruing over the year, is included as an operating cost and the unwinding of the discount rate on the scheme liabilities and the expected return on scheme assets as a financing charge or financing income.
      Obligations for contributions to defined contribution pension plans are recognized as an expense in the income statement as incurred.
Income taxes
      Deferred income tax is provided, using the liability method on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred

25

income tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realized or the deferred income tax liability is settled.
      Deferred tax assets are recognized to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilized.
      Deferred income tax is provided in respect of the undistributed earnings of subsidiaries, other than where it is intended that those undistributed earnings will not be remitted in the foreseeable future.
      Deferred tax is recognized in the income statement, except when the tax relates to items charged or credited directly to equity, in which case the tax is also recognized in equity.
      The Group is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the estimates in relation to the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
      Deferred tax assets and liabilities require management judgment in determining the amounts to be recognized. In particular, significant judgment is used when assessing the extent to which deferred tax assets should be recognized with consideration given to the timing and level of future taxable income together with any future tax planning strategies.
Goodwill
      Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary or associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates is included in investments in associates. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. The recoverable amounts of cash generating units have been determined based on value in use calculations. These calculations require the use of estimates. Goodwill is allocated to cash generating units for the purpose of impairment testing. The allocation is made to those cash generating units that are expected to benefit from the business combination in which the goodwill arose. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
IFRS and US GAAP
      We prepare our financial statements in accordance with IFRS, which differs in certain significant respects from US GAAP. Profit attributable to equity holders of the Company and equity shareholders’ funds under IFRS and US GAAP were as follows for the respective period:
              
  Year ended December 31
   
  2006 2005 2004
       
  £m £m £m
Profit for the year
            
 IFRS  446   624   262 
 US GAAP  341   411   182 
Equity shareholders’ funds
            
 IFRS  3,476   3,564     
 US GAAP  3,581   3,838     
      The main differences between IFRS and US GAAP relate to goodwill and intangible assets, acquisition and disposal adjustments, derivatives, pensions, stock based compensation and taxation. These differences are

26

discussed in further detail under “ — Accounting Principles” and in note 36 to the consolidated financial statements.
Results of operations
Year ended December 31, 2006 compared to year ended December 31, 2005
Consolidated results of operations
Sales
Our total sales from continuing operations increased by £329m,£813m, or 9%17%, to £4,137m£5,624m in 2006,2009, from £3,808m£4,811m in 2005.2008. The increase reflected growth, across all theon a constant exchange rate basis, at our North American Education, International Education and Interactive Data businesses together with additional contributions from acquisitions made in both 20052008 and 2006.2009. The year on year growth was impacted by movements in exchange rates, particularly in the US dollar. We estimate that had the 20052009 sales, translated at 2008 average exchange rates, prevailed in 2006, sales would have been approximately £4,181m.£4,984m.
 
Pearson Education had another strong year with an increase inincreased sales of 9%.by £668m or 21% from £3,112m to £3,780m. The SchoolNorth American business was the biggestmajor contributor to this growth with anthe increase although a high proportion of 12%. Some of the Schoolthat increase was due to the contribution from acquisitions made in 2006 and 2005 but weexchange. We estimate that after excluding these acquisitions, and restatingPearson Education saw sales growth of 4% at constant last year exchange rates thatrates. The North American Education business grew ahead of the growth would have been 6%.market in its US School publishing sales were up 3%Curriculum and Higher Education businesses which together grew at 5% compared to anthe industry decline of 6% (source:which remained flat according to the Association of American Publishers)Publishers. There was also a strong performance in the US Assessment and Information division which benefitted from the business took a leading sharesuccessful integration of the new US adoption market. School testingHarcourt Assessment business acquired at the start of 2008. In International Education sales continued to improve even after growth in US school testing revenues of more than 20% in 2005. Higher Education growth was more modest at 2% in total but was up 4% in the US. Pearson’s US Higher Education business has grown faster than the industry for eight straight years. In the Professional business, sales increased 13%, with testing sales ahead by more than 30% in 2006 following the successful start up of new contractsalso benefitted from exchange and a contribution from the newlyacquisitions of Wall Street English and Fronter (a European online learning company based in Oslo) and the increased shares of Longman Nigeria and Maskew Miller Longman (MML), our publishing businesses in South Africa and West Africa respectively, which were all acquired Promissorin 2009. After excluding the effect of acquisitions we estimate that there was growth of 4% at constant last year exchange rates in the International Education business. Professional publishing sales declined againincreased in 20062009 by 13% although all of this increase was due to the continuedindustry-wideexchange and in terms of constant last year exchange rates there was a small decline in sales of 1%. This decline was entirely due to weakness intechnology-related publishing. the professional publishing market which has offset growth in the professional testing and certification businesses.
 The
FT Group sales were 11%6% ahead of last year.year with growth at Interactive Data offsetting adverse variances at FT Publishing. FT Publishing sales were updown by 10% driven by higher advertising revenues at8% or 12% after excluding theFinancial Times particularly in the online, luxury goods effect of exchange rates. FT Publishing’s sales decline mainly reflects tough market conditions for financial and corporate finance categories. IDCadvertising. The impact of advertising revenue declines was partially mitigated by growth in content revenues, the resilience of our


24

subscription businesses and an increase in paying online subscribers at FT.com. Interactive Data sales were up by 12% with consistent organic19% (2% at constant last year exchange rates and before the contribution from acquisitions). Sales growth and aidedwas driven by contributions fromInteractive Data’s Institutional Services segment which performed well despite difficult conditions in the acquisition of IS.Teledata(re-branded Interactive Data Managed Solutions) and Quote.com.financial services industry.
 
Penguin’s sales grew by 5% withwere up 11% in 2009 but this represents a record number2% decline at constant last year exchange rates and before the effect of best sellersportfolio changes. Much of the underlying decline was due to a fall in the US and UK, an increasesales of illustrated reference books which offset good performances in market share in the UK and continued success with the premium paperback format in the US.other categories.
 
Pearson Education, our largest business sector, accounted for 63%67% of our continuing business sales in 2006,2009 compared to 62%65% in 2005.2008. North America continued to be the most significant source of our sales and as a proportion of total continuing sales contributed 64%65% in both 20062009 and 2005.63% in 2008.
Cost of goods sold and operating expenses
Cost of goods sold and operating expenses
 
The following table summarizes our cost of sales and net operating expenses:
          
  Year ended
  December 31
   
  2006 2005
     
  £m £m
Cost of goods sold  1,917   1,787 
       
 Distribution costs  299   292 
 Administration and other expenses  1,504   1,351 
 Other operating income  (99)  (84)
       
Total  1,704   1,559 
       

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  Year Ended December 31 
  2009  2008 
  £m  £m 
 
Cost of goods sold  2,539   2,174 
Distribution costs  274   235 
Administration and other expenses  2,206   1,853 
Other operating income  (120)  (102)
         
Total  2,360   1,986 
         
Cost of goods sold.  Cost of sales consists of costs for raw materials, primarily paper, printing and binding costs, amortization ofpre-publication costs and royalty charges. Our cost of sales increased by £130m,£365m, or 7%17%, to £1,917m£2,539m in 2006,2009, from £1,787m£2,174m in 2005.2008. The increase mainly reflectedcorresponds to the increase in sales over the period although the overall gross margin also increased slightly from 53%with cost of sales at 45.1% of sales in 20052009 compared to 54%45.2% in 2006.2008.
 
Distribution costs.  Distribution costs consist primarily of shipping costs, postage and packing and are typicallyremain a fairly constant percentage of sales.
 
Administration and other expenses.  Our administration and other expenses increased by £153m,£353m, or 11%19%, to £1,504m£2,206m in 2006,2009, from £1,351m£1,853m in 2005.2008. As a percentage of sales they increased to 36%remained consistent at 39% in 2006, from 35% in 2005. The increase in administration2008 and other costs comes principally from additional employee benefit expense, additional property costs and increased intangible amortization.2009.
 
Other operating income.  Other operating income mainly consists of freight recharges,sub-rights and licensing income and distribution commissions.commissions together with income from sale of assets. Other operating income increased 18% to £99m£120m in 2006 from £84m2009 compared to £102m in 2005, with the2008 although much of this increase mainly duecan be ascribed to profits made on the disposalexchange.
Share of a building. See “Item 17. Financial Statements” note 36 (ix) for the treatment under US GAAP.results of joint ventures and associates
Other net gains and losses
      Profits or losses on the sale of businesses, associates and investments that are included in our continuing operations are reported as “other net gains and losses”. In 2005 the only item in this category was the £40m profit on the sale of our associate interest in MarketWatch. In 2006, there were no similar gains or losses.
Share of results of joint ventures and associates
The contribution from our joint ventures and associates increased from £14m£25m in 20052008 to £24m£30m in 2006.2009. The increase was mainly due to an increasemajority of the profit comes from our 50% interest in circulation and revenue at The Economist Group, who also recorded a gain on sale of its investment in Commonwealth Business Media Inc. There was also further reduction in losses at FT Deutschland.the Economist.
Operating profit
Operating profit
 
The total operating profit increased by £24m,£79m, or 5%12%, to £540m£755m in 20062009 from £516m£676m in 2005. This increase was due to increases across all the businesses, after taking account of theone-off gain from the sale of MarketWatch2008. 2009 operating profit, translated at FT Publishing of £40m in 2005 and a charge of £7m in 2006 at Penguin relating to an adjustment to goodwill following recognition ofpre-acquisition tax losses. We estimate that had the 20052008 average exchange rates, prevailed in 2006, operating profit would have been £7m higher.£57m lower.
 
Operating profit attributable to Pearson Education increased by £42m,£99m, or 13%24%, to £365m£505m in 2006,2009, from £323m£406m in 2005.2008. The increase was attributable to strong performances in the US Higher Education business and both the US and International Assessments businesses and due to continued improvement in School margins, the profitpositive impact of strong sales and cost reductions in technology publishing in Professional testing.exchange. Operating profit attributable to the FT Group decreased by £16m,£12m, or 12%7%, to £117m£167m in 2006,2009, from £133m£179m in 2005. This2008. The decrease was attributable toreflects the absence


25

decline in 2006 of the £40m profit from the sale of MarketWatch that was recorded in 2005. After excluding this item profits increased by £24m, £7m at IDC and £17mprofitability at FT Publishing. The FT Publishing, increase reflectedas they faced tough conditions in thepick-up in advertising revenues.market, coupled with an increased charge for intangible amortization which offsets a positive performance from Interactive Data. Operating profit attributable to the Penguin Group decreased by £2m,£8m, or 3%9%, to £58m£83m in 2006,2009, from £60m£91m in 2005. The2008. This decrease was attributableprincipally due to an adjustment to goodwill of £7m caused by the recognition of previously unrecognized tax lossescharges relating to reorganisation of the acquisition of Dorling Kindersleybusiness in 2000.the UK.
Net finance costs
Net finance costs
 
Net finance costs increased from £70m£91m in 20052008 to £74m£95m in 2006.2009. Net interest payable in 20062009 was £94m, up£85m, down from £77m£89m in 2005. Although2008. The Group’s net interest payable decreased by £4m in 2009 as we were partly protected by our fixed rate policy, the strong risebenefitted from a fall in average interest rates on our floating US dollar floating interest rates had an adverse effect.debt and a decrease in our overall level of average net debt. Year on year, average three month LIBOR (weighted for the Group’s net borrowings in US dollars euros and sterling at theeach year end) rosefell by 1.5%2.4% to 4.9%0.7%. CombiningThis reduction in floating market interest rates was partially offset by higher fixed bond coupons prevailing at the rate rise with an increasetime of our 2009 bond issue. The overall result was a decrease in the Group’s average net debt of £40m, the Group’s average net interest rate

28

payable rose by 1.1%0.6% to 7.0%5.3%. In 20062009 the net finance income relating topost-retirement plans was a charge of £12m compared to an income of £4m compared to a cost of £7m£8m in the previous year. year reflecting lower returns on plan assets.
Other net finance incomecosts relating to foreign exchange andshort-term fluctuations in the market value of financial instruments remained fairly constant year on year withincluded a £16m gainnet foreign exchange loss of £7m in 20062009 compared to a £14m gainloss of £11m in 2005.2008. The losses in 2008 mainly relate to the retranslation of foreign currency bank accounts together with other net losses on inter-company items. In 2009 the loss mainly relates to losses on cross currency swaps. For a more detailed discussion of our borrowings and interest expenses see “ —“— Liquidity and Capital Resources — Capital Resources” and “ —“— Borrowings” below and “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.
Taxation
Taxation
 
The total tax charge in 20062009 of £11m£198m represents just over 2%30% ofpre-tax profits compared to a charge of £116m£172m or 26%29% ofpre-tax profits in 2005. The low tax rate in 2006 was2008. Our overseas profits, which arise mainly accounted for by two factors. First, in the light of the announcement of the disposal of Government Solutions, we were able to recognize a deferred tax asset in relation to capital losses in the US where previously weare largely subject to tax at higher rates than the UK corporation tax rate (28% in 2009 compared to 28.5% in 2008). Higher tax rates were not confident that the benefit of the losses would be realized prior to their expiry. Second,partly offset by releases from provisions reflecting continuing progress in light ofagreeing our trading performance in 2006 and our strategic plans, togethertax affairs with the expected utilization of US net operating losses in the Government Solutions sale, we havere-evaluated the likely utilization of operating losses both in the US and the UK; this has enabled us to increase the amount of the deferred tax asset carried forward in respect of such losses. The combined effect of these two factors was to create anon-recurring credit of £127m.authorities.
Minority interests
Minority interests
 Following the disposal of our 79% holding in Recoletos and the purchase of the remaining 25% minority stake in Edexcel in 2005, our minority interests now comprise
This comprises mainly the minority share in IDC. In January 2006 we increased our stakeInteractive Data. Our share of Interactive Data was 61% in IDC reducing the minority interest from 39%2009, compared to 38%.62% in 2008.
Discontinued operations
Discontinued operations
 In December 2006 the Group announced the sale of its Government contracting business, Pearson Government Solutions. The sale was completed in February 2007 and the results of this business have been shown in discontinued
Discontinued operations in the consolidated income statement in both 2006 and 2005. Operating profit for Government solutions in 2006 was £22m compared2008 relate to £20m in 2005. Following the disposal of Recoletos in 2005 itsthe Data Management business (in February 2008). The results were consolidated forof the period up to February 28, 2005 andData Management business were included in discontinued operations to the date of disposal in 2005.2008. The results for 2005 include an operating loss before tax on disposal in 2008 was £53m, mainly relating to the cumulative translation adjustment. There was a tax charge of £37m on the sale. There were no discontinued operations in 2009.
Profit for the two months to February 28, 2005 of £3m. Thepre-taxyear profit on disposal of Recoletos reported in 2005 was £306m.
Profit for the year
The total profit for the financial year in 20062009 was £469m£462m compared to a profit in 20052008 of £644m.£323m. The overall decreaseincrease of £175m£139m was mainly due to the absence of the profitsloss on disposal of Recoletos and MarketWatch reporteddiscontinued operations in 2005. After taking account of these disposals there was an2009 but also benefitted from the improved operating performance offset by a small increase in profit in 2006 due to improvement in operating profits and the sharp reduction in tax due to the recognition of losses in 2006.net finance costs.
Earnings per ordinary share
Earnings per ordinary share
 
The basic earnings per ordinary share, which is defined as the profit for the financial year divided by the weighted average number of shares in issue, was 55.9p53.2p in 20062009 compared to 78.2p36.6p in 20052008 based on a weighted average number of shares in issue of 798.4m799.3m in 20062009 and 797.9m797.0m in 2005.2008. The decreaseincrease in earnings per share was due to the additionalincrease in profit for 20052009 described above and was not significantly affected by the movement in the weighted average number of shares.


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The diluted earnings per ordinary share of 55.8p53.1p in 20062009 and 78.1p36.6p in 20052008 was not significantly different from the basic earnings per share in those years as the effect of dilutive share options was again not significant.

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Exchange rate fluctuations
 
Exchange rate fluctuations
The weakeningstrengthening of the US dollar and other currencies against sterling on an average basis had a negativepositive impact on reported sales and profits in 20062009 compared to 2005. We estimate that if 20052008. 2009 sales, translated at 2008 average exchange rates, had prevailed in 2006, sales would have been higherlower by £44m£640m and operating profit, translated at 2008 average exchange rates, would have been higherlower by £7m.£57m. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for a discussion regarding our management of exchange rate risks.
Sales and operating profit by division
Sales and operating profit by division
 
The following tables summarize our sales and operating profit for each of Pearson’s divisions. Adjusted operating profit is anon-GAAP financial measure and is included as it is a key financial measure used by management to evaluate performance and allocate resources to business segments, as reported under FAS 131.segments. See also note 2 of “Item 17.18. Financial Statements”.
 
In our adjusted operating profit we have excluded amortization and adjustment of acquired intangibles, other gains and losses and other net finance costs of associates.intangibles. The amortization and adjustment of acquired intangibles is the amortization or subsequent impairment of intangible assets acquired through business combinations. The charge is not considered to be fully reflective of the underlying performance of the Group. Other gains and losses represent profits and losses on the sale of subsidiaries, joint ventures, associates and investments that are included within continuing operations but which distort the performance for the year.
 
Adjusted operating profit enables management to more easily track the underlying operational performance of the Group. A reconciliation of operating profit to adjusted operating profit for continuing operations is included in the tables below:
                             
  Year Ended December 31, 2006
   
    Higher   FT  
£m School Education Professional Publishing IDC Penguin Total
               
Sales  1,455   795   341   366   332   848   4,137 
   36%   19%   8%   9%   8%   20%   100% 
Total operating profit  167   161   37   35   82   58   540 
   31%   30%   7%   6%   15%   11%   100% 
Add back:                            
Amortization and adjustment of acquired intangibles  17   —   1   2   7   8   35 
Other net gains and losses including associates  —   —   —   (4)  —   —   (4)
Other net finance costs of associates  —   —   —   (1)  —   —   (1)
                      
Adjusted operating profit:
continuing operations		  184   161   38   32   89   66   570 
Adjusted operating profit:
discontinued operations		  —   —   22   —   —   —   22 
                      
Total adjusted operating profit  184   161   60   32   89   66   592 
                      
   31%   27%   10%   6%   15%   11%   100% 
                             
  Year Ended December 31, 2009 
  North American
  International
     FT
  Interactive
       
£m
 Education  Education  Professional  Publishing  Data  Penguin  Total 
 
Sales  2,470   1,035   275   358   484   1,002   5,624 
   44%   18%   5%   6%   9%   18%   100% 
Total operating profit  354   109   42   31   136   83   755 
   47%   14%   6%   4%   18%   11%   100% 
Add back:                            
Amortization of acquired Intangibles  49   32   1   8   12   1   103 
                             
Adjusted operating profit: continuing Operations  403   141   43   39   148   84   858 
Adjusted operating profit: discontinued Operations  —   —   —   —   —   —   — 
                             
Total adjusted operating profit  403   141   43   39   148   84   858 
                             
   47%   16%   5%   5%   17%   10%   100% 


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  Year Ended December 31, 2005
   
    Higher   FT  
£m School Education Professional Publishing IDC Penguin Total
               
Sales  1,295   779   301   332   297   804   3,808 
   34%   20%   8%   9%   8%   21%   100% 
Total operating profit  142   156   25   58   75   60   516 
   28%   30%   5%   11%   14%   12%   100% 
Add back:                            
Amortization and adjustment of acquired intangibles  5   —   —   1   5   —   11 
Other net gains and losses including associates  —   —   —   (40)  —   —   (40)
Other net finance costs of associates  —   —   —   2   —   —   2 
                      
Adjusted operating profit:
continuing operations		  147   156   25   21   80   60   489 
Adjusted operating profit:
discontinued operations		  —   —   20   (3)  —   —   17 
                      
Total adjusted operating profit  147   156   45   18   80   60   506 
                      
   29%   31%   9%   3%   16%   12%   100% 
                             
  Year Ended December 31, 2008 
  North American
  International
     FT
  Interactive
       
£m
 Education  Education  Professional  Publishing  Data  Penguin  Total 
 
Sales  2,002   866   244   390   406   903   4,811 
   42%   18%   5%   8%   8%   19%   100% 
Total operating profit  258   113   35   67   112   91   676 
   38%   17%   5%   10%   17%   13%   100% 
Add back:                            
Amortization of acquired Intangibles  45   22   1   7   9   2   86 
                             
Adjusted operating profit: continuing Operations  303   135   36   74   121   93   762 
Adjusted operating profit: discontinued Operations  —   —   —   —   —   —   — 
                             
Total adjusted operating profit  303   135   36   74   121   93   762 
                             
   40%   17%   5%   10%   16%   12%   100% 
School
 School business
North American Education
North American Education sales increased by £160m,£468m, or 12%23%, to £1,455m£2,470m in 2006,2009, from £1,295m£2,002m in 20052008 and adjusted operating profit increased by £37m,£100m, or 25%33%, to £184m£403m in 20062009 from £147m£303m in 2005. In addition to strong underlying growth in sales and profits,2008. The results were significantly affected by the School results in 2006 benefit from the inclusion of National Evaluation Systems (NES), Paravia Bruno Mondadori (PBM), Chancery and PowerSchool together with a number of smaller acquisitions all made in the first half of 2006 and from a full year contribution from AGS Publishing, acquired in July 2005. Offsetting these factors was the effect of the weakeningrelative strength of the US dollar, which we estimate reducedincreased sales by £17m£365m and adjusted operating profit by £60m when compared to the equivalent figures at constant 20052008 exchange rates. At constant exchange and after taking account of the contribution from acquisitions there was underlying growth in sales of 5% and profits of 13%. Although the contribution from the US school curriculum business declined due to State budget pressures and a fall in the adoption market there were strong contributions from the US Higher Education, US Assessment and Information and Canadian businesses.
 
In the US school market, Pearson’s school publishing business grew 3% against the Association of American Publishers’ estimate of a decline inthat there was an overall decrease for the industry of 6%. New13.8% as state budget pressures and a slower new adoption year caused particular weakness in the basal publishing market. Though Pearson’s US School publishing sales declined we attained an estimated 37% of new adoptions we competed for (our highest market share was 33% in the adoptions where Pearson competed (and 30%for a decade) and 32% of the total new adoption market). market. Pearson’s enVisionMATH (www.envisionmath.com), an integratedprint-and-digital program, was the top-selling basal program in the United States in 2009. It helped the School Curriculum business to an estimated 46% share of all math adoptions and sold strongly across the open territories. Successnet, the online learning platform for teachers and students which supports all Pearson’s digital instruction, assessment and remedial programs, also grew strongly achieving more than 4 million registrations in 2009.
The SchoolUS Assessment and Information business saw significant profit improvement in 2009, benefitting from the successful integration of the Harcourt Assessment business acquired in 2008. Our National Services assessment business renewed its contract with the College Board, worth $210m over 10 years, to process and score the SAT and contracts to support the College Board’s new Readi-Step and ACCUPLACER diagnostics programs. Our State Services business won a number of significant new contracts including new programs in Florida and Arizona. We continue to gain share, winning 60% of the contracts bid for by value, and to be a leader in online testing, delivering 9 million secure online assessments in 2009, up more than 100% on 2008. Our Evaluation Systems teacher certification business secured contract extensions in California, Illinois, Arizona and Washington; won re-bids in Michigan and New York, each for five years; and added new contracts in California and Minnesota. In Clinical Assessments, our AIMSWebresponse-to-intervention data management and progress monitoring service for children who are having difficulty learning, continued to grow and now has more than 3 million students on the system. Our Edustructures business, which provides interoperable systems to support data collection and reporting between school districts and state governments, doubled the number one or number twoof students served to 8 million. Our Student Information Systems (SIS) business continued to grow strongly, benefiting from strong demand for its services that

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help teachers automate and manage student attendance records, gradebooks, timetables and the like. It supports more than 12 million students — 8 million of them through its flagship PowerSchool product which is now available in more than 50 countries. In 2009 it won contracts for new school districts including Nova Scotia Department of Education (133,000 students), Newark, NJ (45,000 students), and the Hamilton County DOE, TN (40,000 students).
The US Higher Education publishing market grew 11.5% in 2009, according to the Association of American Publishers, benefiting from strong enrolment growth and federal government action to support student funding. Our US Higher Education business grew faster than the industry and outperformed the market for the eleventh straight year, continuing to see strong demand for instructional materials enhanced by technology and customization. Our sustained investment in content and technology continues to grow existing franchises and build new ones. In Engineering Mechanics, our market leading textbook, Hibbeler’s Statistics and Dynamics 12th Edition, gained an additional four percentage points of market share with the addition of our newly launched MasteringEngineering digital learning and assessment platform. Pearson became market leader in reading, math, sciencepsychology supported by the recently launched textbook Psychology 2nd Edition by Cicarelli with MyPsychLab. The ‘MyLab’ digital learning, homework and social studies. US School testing sales were upassessment programs again grew strongly. Our MyLab products saw more than 6 million student registrations globally, 39% higher than in 2008. In North America, student registrations grew 37% to more than 5.6m. Custom Solutions grew strongly across both bespoke books and customized services including content creation, technology, curriculum, assessments and courseware. We partnered with the high single digits even after growthKentucky Virtual Learning Initiative, for example, to deliver personalized mathematics instruction mapped to state college entry standards and have begun to extend this program into transitional English and Reading. eCollege, our platform for fully-online distance learning in excess of 20% in 2005. School testinghigher education, increased online enrolments by 36% to 3.5m and benefited from furthercontinued strong renewal rates of 95% by value, new contract wins market share gains and leadership in onscreen marking, online testing and embedded (formative) assessment. The acquisition of NES providing customized assessments for teacher certification in the US has allowed us to expand in an attractive adjacent market. The School technology business grew both through the acquisitions of Chancery and PowerSchool and through organicstrong growth in the digital curriculumusage of the platform, particularly by US for-profit colleges. Thirteen Pearson higher education and school products in ten categories were nominated as America’s best educational software products in the Software & Information Industry Association’s 25th Annual CODiE Awards. They include MyMathLab, Miller & Levine Biology, PowerSchool, Prentice Hall Literature, myWorld Geography, MyWritingLab, CourseConnect and eCollege.
Overall adjusted operating margins in the North American Education business which continuedwere higher at 16.3% in 2009 compared to grow while investing15.1% in a new generation2008 with the majority of digital productsthe increase attributable to meet the demands of school districts for personalized classroom learning.Harcourt Assessment integration costs that were charged in 2008.
 
International Education
International Education sales increased by £169m, or 20%, to £1,035m in 2009, from £866m in 2008 and adjusted operating profit increased by £6m, or 4%, to £141m in 2009 from £135m in 2008. The international School business, outside the US, continued to grow. The international testing business was again able tosales results benefit from technology leadership. exchange gains and a full year contribution from acquisitions made in 2009. At the adjusted operating profit level the 2008 results benefitted from transactional exchange gains that were not repeated in 2009.
In the UK, we havereceived over 3.7 million registrations for vocational assessment and general qualifications. We marked over 94.5 million ’A’-level and GCSE ASscripts on-screen and A-Level scripts on screen. In School publishing,successfully delivered the launch2009 National Curriculum test series and were awarded the contract to administer the 2010 National Curriculum Tests at Key Stage 2. We made significant investments in supporting the UKnew Diploma qualification for14-19 year-olds; the IGCSE qualifications to meet the needs of ActiveTeach technology providing multimedia teaching resources has brought increased market share in mathInternational schools and science. The acquisition of PBM, one of Italy’s leading education publishers, has allowed us to expandcolleges; and BTEC, our existing Italian business and integrate publishing, sales and marketing, distribution and back office operations. Our market leading school companies in Hong Kong and South Africa both outperformed their respective markets in 2006 and our worldwide English Language Training programflagship vocational qualification. BTEC registrations totalled more than 1 million for elementary schools,English Adventure(with Disney), was successfully launched in Asia and Latin America.
      School margins improved again in 2006the first time and were up almost 30% on 2008. Our UK Higher Education business grew strongly, helped by 1.2% pointsthe success of new first editions, the rapid take up of MyLabs adapted to 12.6%meet local requirements, and the growing popularity of custom publishing. Sales of UK primary resources fell, on the back of minimal curriculum change and some signs of schools managing their budgets more tightly.
In Continental Europe, the launch of our digi libre (Content Plus) products helped us to gain share in the lower and upper secondary markets in Italy and positions us well for major curriculum reforms planned for 2010. In Spain, our sales were down sharply with pressures on central and regional government spending and a worsening retail environment. Our ELT sales continued efficiency gainsto grow in Poland, and across central costs, production, distribution and software development.Eastern Europe we saw good demand for our publishing and digital resources and our fledgling Language Learning Solutions activities. The


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Fronter learning management system continued to grow very strongly with more than 6 million students in more than 8,000 schools, colleges and Universities around the world.
Higher Education
 Sales
In the Middle East we successfully implemented the Abu Dhabi Education Council’s (ADEC) External Measurement of Student Achievement (EMSA) program covering English, Arabic, Math and Science in HigherApril 2009 and was also contracted by the United Arab Emirates Ministry of Education to deliver the program in the northern emirates. In South Africa, we launched Platinum, the first blended print and online course developed for the South African National Curriculum. In addition 7,000 students registered for MyMathLab+ at the University of Witwatersrand.
In China, we acquired Wall Street English, the leading provider of premium English language training to adults, for £101m. The combination of Longman Schools and Wall Street English gives Pearson a leading position in the English language teaching market in China, serving students from elementary school to professional levels. We stepped up our presence in the Indian education market with two investments totalling $30m: a 50:50 joint-venture with Educomp, called IndiaCan, to offer vocational and skills training through 120 training centres across the country; and a 17.2% stake in TutorVista, which provides online tutoring for K-12 and college students.
New editions of the proven bestsellers, BackPack and Pockets, along with the successful launch of two new courses, CornerStone and KeyStone, helped to deliver strong growth in the sales of ELT materials across Latin America. In Brazil, which has one of Latin America’s largest and fastest-growing university populations, our virtual library now supports 30 post-secondary institutions. And, in Panama, 75,000 high school students are now learning Biology and Chemistry, using Prentice Hall Virtual Labs.
On a global basis our ‘MyLab’ digital learning, homework and assessment programmes were used by more than 470,000 students, up almost 60% on 2008, and are now sold in more than 200 countries. In 2009, we launched the Pearson Test of English, our new test of Academic English which will be delivered in up to 200 Pearson VUE testing centers in 37 countries. Approximately 1,000 academic programs worldwide now recognise, or are in the process of recognising, the Pearson Test of English. Our eCollege learning management system is growing rapidly in international markets, winning new contracts in Australia, Brazil, Mexico, Colombia, Puerto Rico and Saudi Arabia. Our new Pearson Learning Solutions business won its first contracts in the UK, the Gulf and Africa. It combines a broad range of products and services from across Pearson to deliver a systematic approach to improving student performance.
International Education adjusted operating margins declined from 15.6% in 2008 to 13.6% in 2009 as the benefit from transactional exchange gains at the profit level in 2008 weren’t repeated in 2009.
Professional
Professional sales increased by £16m,£31m, or 2%13%, to £795m£275m in 2006,2009 from £779m£244m in 2005.2008. Adjusted operating profit increased by £5m,£7m or 3%19% to £43m in 2009, from £36m in 2008. The sales growth was entirely due to exchange rates which increased sales by £33m when compared to the equivalent figures at constant 2008 exchange rates.
In Professional testing and certification in the UK, we extended our contract with the Driving Standards Agency to deliver the UK drivers theory test until 2014. With the Graduate Management Admissions Test and the recent contract extension for the NCLEX nursing examination, our three largest professional testing contracts now run to 2013 or after. More than seven million secure online tests were delivered in more than 4,000 test centers worldwide in 2009, an increase of 9% over 2008. Registration volumes for the Graduate Management Admissions Council test rose 8% worldwide in 2009, including a 16% increase outside the US. In the US, Pearson VUE won a number of new contracts with organizations including Oracle, Citrix, Novell, VMWare, and Adobe, the National Registry of Food Safety Professionals and the National Institute for Certification in Engineering Technologies. Pearson VUE extended its international reach, signing an agreement with the Dubai Road and Transport Authority to deliver a new, high-tech Driver Testing System and launching the Law School Admission Test in India.
Our Professional education business experienced tough trading conditions in the retail market but benefited from the increased breadth of its publishing and range of revenue streams, from online retail through digital subscriptions. A best-selling product in 2009 was CCNA Network Simulator, which are digital networking labs designed, developed and published by Pearson, to help candidates successfully pass the Cisco CCNA certification


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exam. Pearson launched new learning solutions for IT Professionals preparing for certification accreditation. Cert Flash Card applications were launched for students studying for Cisco CCNA, CompTIA and Microsoft certification exams and are accessible through web browsers and iPhone and iPod Touch devices. FT Press launched a newe-publishing imprint, FT Press Delivers, providing essential insights from some of its leading business authors including Jim Champy, Brian Solis, Mark Zandi, Jon M. Huntsman, John Kao, Michael Abrashoff, and Seth Goldman.
Overall adjusted operating margins in the Professional business continued to improve and were higher at 15.6% in 2009 compared to 14.8% in 2008 as margins improved again in both the testing and professional publishing businesses.
FT Publishing
Sales at FT Publishing decreased by £32m or 8%, from £390m in 2008 to £161m£358m in 20062009. Adjusted operating profit decreased by £35m, from £156m£74m in 2005.2008 to £39m in 2009. The sales and profit decrease is mainly from the FT Newspaper business which faced tough market conditions for financial and corporate advertising. The impact of advertising revenue declines was partially mitigated by growth in content revenues, the resilience of our subscription businesses and early actions to manage our cost base tightly.
We continued to see good demand for high-quality analysis of global business, finance, politics and economics which resulted in a 15% increase in paying online subscribers to more than 126,000 with registered users on FT.com up 85% to 1.8 million and users up 12% to 1.4 million on FTChinese.com. Financial Times worldwide newspaper circulation was 7% lower at 402,799 (for the July-December 2009 ABC period) although subscription circulation grew modestly. We continued to invest in fast-growing digital formats. We launched a new luxury lifestyle website, to complement our existingHow To Spend Itmagazine; a new iPhone application which has received more than 200,000 downloads; and, in association with Longman, Lexicon, an online glossary of economic, financial and business terms.
Mergermarket faced challenging conditions in some of its markets with reduced Mergers and Acquisition activity impacting the merger arbitrage sector serviced by dealReporter whilst Debtwire benefited from an increased focus on distressed debt. Mergermarket continued to launch new products and expand globally. Our newest product, MergerID, launched in September 2009, provides a secure online environment for principals and professionals to post and view M&A opportunities globally and has secured over 1,500 active users in more than 450 companies across the globe.
The Economist, in which Pearson owns a 50% stake, increased global weekly circulation by 2.2% to 1.42 million (for the July — December 2009 ABC period). FTSE, our 50% owned joint-venture with the London Stock Exchange, increased revenues 17% and made a strong improvement in profits.
Overall adjusted operating margins at FT Publishing decreased from 19.0% in 2008 to 10.9% in 2009 as lost advertising revenue fell through to the bottom line.
Interactive Data
Interactive Data grew its sales by 19% from £406m in 2008 to £484m in 2009. Adjusted operating profit grew by 22% from £121m in 2008 to £148m in 2009. Interactive Data margins increased from 29.8% in 2008 to 30.6% in 2009. Both sales and adjusted operating profit were affected by the weakeningrelative strength of the US dollar, which we estimate reducedincreased sales by £8m£58m and adjusted operating profit by £19m when compared to the equivalent figures at constant 20052008 exchange rates.
 
Interactive Data’s revenue growth was driven by its Institutional Services segment, despite difficult market conditions in the financial services industry. In the US, the Higher Education salesfourth quarter we began to see continued signs of trading conditions easing in certain markets that were up by 4% (in US dollars) ahead of the Association of American Publishers’ estimate of industry growth once again. Over the past eight years, Pearson’s US Higher Education business has grown at an average annual rate of 7% compared to the industry’s average growth rate of 4%. In the US there was rapid growthdifficult earlier in the online learning businesses with approximately 4.5 million US college students using one ofyear, principally in our online programs. Of these approximately 2.3 million register for an online course on one of our ‘MyLab’ online homework and assessment programs, an increase of almost 30% on 2005. In psychology and economics, two of the three largest markets in US higher education, Pearson published successful first edition bestsellers: Cicarrelli’sPsychologytogether with MyPsychLab and Hubbard’sEconomicstogether with MyEconLab. Cicarrelli’sPsychologyincreased Pearson’s market share in the subject by 3%new sales. Interactive Data continued to 25% and is the bestselling launch of a first edition in the discipline in the past decade. Also in the US the custom publishing business, which builds customized textbooks and online servicesbenefit from growth trends including: heightened scrutiny around the coursesvaluation of individual faculties or professors, continued its strong progresssecurities; increasing regulation and related investment in compliance and risk management processes; increasing adoption of low latency data for algorithmic trading; and continuing need to cost effectively differentiate wealth management offerings with another year of double-digit growth.bespoke web-based client solutions.
      International Higher Education publishing sales grew by 3%, benefiting from good growth in local language publishing programs and an increasing focus on custom publishing and technology based assessment services with the MyLab suite of products.


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      Higher Education margins remained constant year on year with only a small increase of 0.3% points to 20.3% in 2006.
Professional
      After excluding sales and adjusted operating profit from Government Solutions which were reported as discontinued in 2006, Professional sales increased by £40m, or 13%, to £341m in 2006 from £301m in 2005. Adjusted operating profit increased by £13m, or 52%, to £38m in 2006, from £25m in 2005. Sales were only slightly affected by the weakening US dollar, which we estimate reduced sales by £2m when compared to the equivalent figures at constant 2005 exchange rates.
      Professional testing sales were up more than 30% in 2006 benefiting in particular from the acquisition of Promissor and the successful start-up of the Graduate Management Admissions Test with 220,000 examinations delivered in 400 test centers in 96 countries during the first year of the new contract. Professional Testing has moved into profitability in 2006 compared to a break-even position in 2005. Technology publishing profits were up in 2006 as cost actions offset sales weakness in a market that continues to decline. There was a strong performance in other professional publishing with particular successes in the Wharton School Publishing and FT Press imprints.
      Overall margins in the Professional business were significantly higher at 11.1% in 2006 compared to 8.3% in 2005 as the testing business moved into profitability and the technology publishing business took specific cost actions.
FT Publishing
      Sales at FT Publishing increased by £34m or 10%, from £332m in 2005 to £366m in 2006. Adjusted operating profit increased by £11m, from £21m in 2005 to £32m in 2006. Much of the sales and profit increase was again at the FT newspaper and FT.com where sales were up 8% and profit increased by £9m to £11m.
      The FT newspaper advertising revenues were up 9% for the year with rapid growth in online, luxury goods and corporate finance categories, all up more than 30% on 2005. FT worldwide circulation was up 1% to 430,469 copies per day (Source: ABC, average for six months to December 2006). FT.com’s paying subscribers were up 7% to 90,000 while the December audience was up 29% to 4.2 million. The FT continued

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Pricing and Reference Data (66% of Interactive Data revenues) continued to benefitgenerate good growth in North America and Europe. Growth was primarily organic and also benefited from international expansion with approximately three-quartersbolt-on acquisitions, most recently NDF, a leading provider of financial pricing and services in Japan, and Kler’s Financial Data Service, a leading provider of reference data to the Italian financial industry. Real-Time Services (19% of Interactive Data revenues) faced challenging market conditions as solid demand for web-based Managed Solutions was more than offset by higher cancellations of real-time market data services. In December 2009, we formed the Real-Time Market Data and Trading Solutions Group which combines the resources of our eSignal, Managed Solutions and Real-Time Services businesses into a single organization. This initiative supports plans to integrate the company’s suite of real-time market data and innovative, hosted technology services and solutions to more effectively capitalize on opportunities in the wealth management and electronic trading sectors. In addition, Interactive Data recently completed two acquisitions, 7ticks and the data and tools assets of Dow Jones’ Online Financial Solutions business, that help further strengthen its real-time capabilities in the wealth management and electronic trading sectors. Interactive Data continued to invest in expanding the breadth and depth of the FT’s advertising bookeddata covered and products offered. Pricing and Reference Data added new information resources, transparency tools, and broader coverage ofhard-to-value instruments. It also introduced new services such as the Business Entity Service and Options Volatility Service aimed at helping firms address risk management and compliance challenges. In Real-Time Services, investments were aimed at expanding market coverage to include a broader range of emerging markets, level 2 data for a variety of global exchanges, and multi-lateral trading facilities. New product launches in two or more international editionsthis business included PlusBooktm, a new consolidated order book service for the European financial industry, and almost half bookedenhancements to the PrimePortal product, which are used to create customised Web solutions for all four editions worldwide. The FT’s ‘new newsroom’wealth management and infomedia applications. eSignal introduced new services and enhanced existing offerings such as its Market-Q browser-based workstation, which has created an integrated multi-media newsroom that improves commissioning, reporting, editingbeen well received in the North American wealth management market.
Interactive Data made a number of bolt-on acquisitions in late 2009 and production efficiency and provided further cost savings in 2006.
      In September 2006,into early 2010 including: the FT Publishing business acquired Mergermarket, an online financial data and intelligencetools assets of Dow Jones and Company’s OFS business, which expands the growing web-based solutions business in North America; Dubai-based Telerate Systems Limited (completed on 14 January 2010), a long-time eSignal sales agent; and 7ticks (completed on 15 January 2010), an innovative provider of very fast electronic trading networks and managed services.
During January 2010, the Group announced that contributed additional sales and profit inInteractive Data was undertaking a preliminary review of strategic alternatives for its business. At the last three monthsdate of 2006. FT Business showed good growth and improved margins driven by strong performances in events, UK retail financial titles (Investment AdviserandFinancial Adviser) and internationally withThe Banker. Les Echosachieved modest circulation and advertising growth in a weak market aheadthis report, the outcome of the French presidential electionsreview is still uncertain.
The Penguin Group
Penguin Group sales increased to £1,002m in 2007.FT Deutschlandoutperformed the German newspaper market once again increasing circulation by 2% and reducing losses.The Economist,2009 from £903m in which Pearson owns a 50% stake, increased its contribution to FT Publishing’s2008 but adjusted operating profit with another good year that saw circulation increase by 9%was down 10% to 1.2 million (for the July-December ABC period).
      Overall margins at FT Publishing continued to increase as the newspaper becomes more profitable and are now 8.7% compared to 6.3%£84m in 2005.
Interactive Data
      Interactive Data, grew its sales by 12%2009 from £297m£93m in 2005 to £332m in 2006. Adjusted operating profit grew by 11% from £80m in 2005 to £89m in 2006.2008. Both sales and adjusted operating profit were affected by the weakeningstronger US dollar which we estimate reducedincreased sales by £4m and adjusted operating profit by £1m when compared to the equivalent figures at constant 2005 exchange rates.
      Interactive Data Pricing and Reference Data (formerly FT Interactive Data), IDC’s largest business (approximately two-thirds of IDC revenues) generated strong growth in North America and Europe. Growth was driven by sustained demand for fixed income evaluated pricing services and related reference data. Interactive Data Pricing and Reference Data continued to expand its market coverage, adding independent valuations of credit default swaps and other derivative securities. There was improved momentum at Interactive Data Real-Time Services (formerly Comstock) with new sales to institutional clients and lower cancellation rates and also at eSignal with continued growth in its base of direct subscription terminals. The acquisition of Quote.com in March 2006 has expanded eSignal’s suite of real-time market data platforms and analytics and added two financial websites which enabled eSignal to generate strong growth through online advertising in 2006. IS.Teledata, acquired at the end of 2005 and rebranded Interactive Data Managed Solutions, contributed a full year of sales and profit for the first time in 2006.
      IDC margins remained roughly constant year on year at 26.8% in 2006 compared to 26.9% in 2005.
The Penguin Group
      Penguin Group sales were up 5% to £848m in 2006 from £804m in 2005 and adjusted operating profit up 10% to £66m in 2006 from £60m in 2005. Both sales and adjusted operating profit were affected by the weakening US dollar which we estimate reduced sales by £13m£109m and adjusted operating profit by £7m when compared to the equivalent figures at constant 20052008 exchange rates. In 2009, Penguin implemented a series of organisational changes in the UK designed to strengthen its publishing, reduce costs and accelerate the transition to digital production, sales channels and formats and to lower cost markets for design and production. Penguin’s 2009 results include approximately £9m of charges relating to these organisational changes.
 2006 was a record year for Penguin in terms of literary success and bestseller performance.
In the US, Penguin placed 139 books on thehad 30 number 1 New York Times bestsellers, Penguin’s most ever, and placed 243 bestsellers on New York Times lists. Bestsellers included works from debut novels such as Kathryn Stockett’sThe Helpbestsellerand Janice Y.K. Lee’sThe Piano Teacher, along with books by established authors such as Charlaine Harris and Nora Roberts.
In the UK, top-selling titles included Marian Keyes’This Charming Man, Malcolm Gladwell’sOutliers, Ant and Dec’sOoh! What a Lovely Pairand Antony Beevor’sD-Day. Penguin Children’s list 10 more than in 2005,had a very strong year with standout performances from brands such asThe Very Hungry Caterpillar (which celebrated its 40th anniversary) and kept them there for 809 weeks overall, up 119 weeks from 2005. Penguin UK placed 59 titles inPeppa Pig. Through an iPhone app, consumers were offered a try-before-you buy model of Paul Hoffman’sThe Left Hand of God, providing free downloads of the BookScan Top Ten bestseller list, up by 5 from 2005, and kept them there for 361 weeks, up 42 weeks from 2005.first three chapters.
 
In Australia, Penguin was named Publisher of the Year for the second year running at the Australian Book Industry Awards. Number 1 bestselling authors won a large number of prestigious awards during 2006: a Pulitzer Prize for Fiction (Marchby Geraldine Brooks); a National Book Critics Circle Award (THEM: A Memoir of Parentsby Francine du Plessix Gray); the Michael L. Printz award (Looking for Alaskaby John Green); the Orange Prize for Fiction (On Beautyby Zadie Smith);included Bryce Courtenay, Tom Winton, Clive Cussler and the Man Booker Prize (The Inheritance of Lossby Kiran Desai).Richelle


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      Penguin UK’s focus on fiction in 2006
Mead. In Canada, top-selling local authors included Joseph Boyden and Alice Munro, who was rewarded with a substantial increase in market share,awarded the International Man Booker prize, and our international authors Greg Mortenson and Elizabeth Gilbert led by Marina Lewycka’sA Short History of Tractors in Ukrainian.In the US, the premium paperback format accelerated revenue growth and increased profitability in the important mass-marketnon-fiction category. In India, Penguin continued its rapid growthis the largest English language trade publisher, with bestselling authors in 2009 including Narayana Murthy and extended its market leadershipNandan Nilekani. In South Africa, top-selling Penguin authors included John van de Ruit and thereJustin Bonello.
eBook sales grew fourfold on the previous year. 14,000 eBook titles are now available. eBook sales are expected to grow rapidly in 2010, benefiting from the popularity ofe-readers such as Amazon’s Kindle, the Sony Reader and Barnes and Noble’s nook as well as new devices such as Apple’s iPad.
Penguin’s adjusted operating margins deteriorated in 2009, dropping to 8.4% from 10.3% in 2008. The main reason for the decline was also strong growth and increased market share for Penguinthe charges in South Africa. 2006 also saw strong growth in online revenues and unique visitors2009 relating to the Penguin and DK websites.reorganisation of the UK business.
 Penguin continued
Year ended December 31, 2008 compared to focus on efficiency and improvement in operating margins and has benefited from the Pearson-wide renegotiationyear ended December 31, 2007
Consolidated results of major global paper, print and binding contracts, the integration of warehouse and back office operations in Australia and New Zealand and is investing in India as a pre-production and design center for reference titles.
Results of operationsSales
Year ended December 31, 2005 compared to year ended December 31, 2004
Consolidated results of operations
Sales
Our total sales from continuing operations increased by £329m,£649m, or 9%16%, to £3,808m£4,811m in 2005,2008, from £3,479m£4,162m in 2004. Sales2007. The increase reflected growth, on a constant exchange rate basis, across all the businesses together with additional contributions from acquisitions made in both 2007 and 2008. The year on year growth was impacted by movements in exchange rates, particularly in the US dollar. 2008 sales, translated at 2007 average exchange rates, would have been £4,491m.
Pearson Education increased sales by £484m or 18% from £2,628m to £3,112m. The North American business was the major contributor to the increase and although much of the increase was due to strong performanceexchange rates and a contribution from the Harcourt Assessment acquisition in our markets, helped in part by a favorable exchange rate impact. We2008, we estimate that hadafter excluding acquisitions there was growth of 3% at constant last year exchange rates. The North American Education business saw growth ahead of the 2004 average rates prevailedmarket in 2005, sales would have been approximately £3,765m.
      Pearson Education had a strong year with an increase in sales of 13%. The School businesses were the biggest contributors to this growth with an increase of 19%. Higher Education growth was 7% in total and 6% in the US. Pearson’sits US Higher Education business has grown faster than the industry for seven straight years. The School publishing business benefited from a large share of the new adoption marketand strong performances in state testing, catalogue tests and clinical assessment in its US Assessment and Information division. These businesses offset some decline in the US School Curriculum business which faced a decline in the overall US school publishing market of 4.4% (source: Association of American Publishers). International Education sales also benefitted from exchange and a full year contribution from the Harcourt Publishing acquisition in 2007. After excluding the effect of acquisitions we estimate that there was growth of 2% at constant last year exchange rates. Although there was good growth in the International Publishing business, the loss of a key school testing contract held back growth in the International Assessment business. Professional sales increased in 2008 by 8% or 1% at constant last year exchange rates. Growth in professional testing and certification was partially offset by some decline in the professional publishing markets.
FT Group sales were up more than 20% as the business made significant market share gains and benefited from mandatory state testing in the US under No Child Left Behind. In the Professional business sales increased 4%, with testing sales16% ahead of last year following the successful start-up of major new contracts. Worldwide sales of technology-related books were again lower than the previous year although weakness in the professional markets was partly offset bywith growth in consumer technology publishing.
      Theat FT Group sales were 7% in 2005 ahead of 2004.Publishing and Interactive Data. FT Publishing sales were up by 13% or 4% after excluding the contribution from acquisitions made in 2007 and 2008 and the effect of exchange. FT Publishing’s sales growth was driven by highera shift toward subscription and service based revenues. The newspaper maintained circulation but advertising revenues atfell by 3% as theFinancial Timesand IDC advertising market weakened in the fourth quarter of 2008. Interactive Data sales were up by 10% with organic growth18% (9% at constant last year exchange rates and before the contribution from acquisitions) driven by strong sales to both existing and new institutional customers and the maintenance of renewal rates at approximately 95% within the institutional services sector.
Penguin’s sales were up 7% in 2008 (3% at constant last year exchange rates and before the effect of portfolio changes) as a result of a strong publishing performance in all its businesses aided bymarkets in a full year contribution from FutureSource, acquired in September 2004,where the business continued to publish bestsellers and the strength of the US dollar. Penguin’s sales grew by 2% with successful format innovation helping to offset the weakness in the mass-market category in the US, down a further 4% for the industry in 2005.win awards.
 
Pearson Education, our largest business sector, accounted for 62%65% of our continuing business sales in 2005,2008 compared to 61%63% in 2004.2007. North America continued to be the most significant source of our sales although sales there decreased,and as a proportion of total continuing sales to 64%contributed 63% in 2005, compared to 66%2008 and 62% in 2004.2007.


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Cost of goods sold and operating expenses
Cost of goods sold and net operating expenses
The following table summarizes our cost of sales and net operating expenses:
          
  Year ended
  December 31
   
  2005 2004
     
  £m £m
Cost of goods sold  1,787   1,631 
       
 Distribution costs  292   226 
 Administration and other expenses  1,351   1,340 
 Other operating income  (84)  (83)
       
Total  1,559   1,483 
       

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  Year Ended December 31 
  2008
  2007
 
  £m  £m 
 
Cost of goods sold  2,174   1,910 
Distribution costs  235   202 
Administration and other expenses  1,853   1,600 
Other operating income  (102)  (101)
         
Total  1,986   1,701 
         
Cost of goods sold.Cost of sales consists of costs for raw materials, primarily paper, printing and binding costs, amortization of pre-publication costs and royalty charges. Our cost of sales increased by £156m,£264m, or 10%14%, to £1,787m£2,174m in 2005,2008, from £1,631m£1,910m in 2004.2007. The increase mainly reflectedcorresponds to the increase in sales over the period so the overall gross margin stayed constantwith cost of sales at 53%.45.2% of sales in 2008 compared to 45.9% in 2007.
 
Distribution Costs.costs.Distribution costs consist primarily of shipping costs, postage and packing and are typicallyremained at a fairly constant percentage of sales.sales in 2008 compared to 2007.
 
Administration and other expenses.Our administration and other expenses increased by £11m,£253m, or 1%16%, to £1,351m£1,853m in 2005,2008, from £1,340m£1,600m in 2004, although as2007. As a percentage of sales they decreasedincreased slightly to 35% in 2005, from 39% in 2004. The increase2008 from 38% in administration and other costs comes principally from additional employee benefit expense, but cost savings and more modest increases in other administration expenses have enabled overall operating margins to improve.2007.
 
Other operating income.Other operating income mainly consists of freight recharges,sub-rights and licensing income and distribution commissions.
Other net gains and losses
      Profits or losses on thecommissions together with income from sale of businesses,assets. Other operating income remained fairly consistent at £102m in 2008 compared to £101m in 2007.
Share of results of joint ventures and associates and investments that are included in our continuing operations are reported as “other net gains and losses”. In 2005 the only item in this category was the £40m profit on the sale of our associate interest in MarketWatch. In 2004, other gains and losses amounted to £9m, with the principal items being profits on the sale of stakes in Capella and Business.com.
Share of results of joint ventures and associates
The contribution from our joint ventures and associates increased slightly from £8m£23m in 20042007 to £14m£25m in 2005.2008. The increase was due tomajority of the profit improvement at The Economist Group and a reductioncomes from our 50% interest in losses at FT Deutschland.the Economist.
Operating profit
Operating profit
 
The total operating profit increased by £134m,£102m, or 35%18%, to £516m£676m in 20052008 from £382m£574m in 2004. This £134m or 35% increase was due to increases across all the businesses, the one-off gain from the sale of MarketWatch of £40m and a beneficial impact of exchange. We estimate that had the 20042007. 2008 operating profit, translated at 2007 average exchange rates, prevailed in 2005, operating profit would have been £12m£71m lower.
 
Operating profit attributable to Pearson Education increased by £58m,£45m, or 22%12%, to £323m£406m in 2005,2008, from £265m£361m in 2004.2007. The increase was mainly due to strong salesexchange which offset the effect of increased intangible amortization and improved margins in both the School and Higher Educationcost of integrating Harcourt Assessment with the existing Assessment businesses. Operating profit attributable to the FT Group increased by £63m,£39m, or 90%28%, to £133m£179m in 2005,2008, from £70m£140m in 2004. £40m of2007. The increase reflects exchange differences and a contribution from new acquisitions but also reflects improved margins at Interactive Data which offset some reorganization costs at the increase was due to the profit from the sale of MarketWatch but there were also increases at IDC of £13m and FT Publishing of £10m.Financial Times. Operating profit attributable to the Penguin Group increased by £13m,£18m, or 28%25%, to £60m£91m in 2005,2008, from £47m£73m in 2004. The increase at2007. Although Penguin benefitted from exchange there was due in part to increased efficiencies and improved margins and also due to exchange gains and one-off items in 2004. Penguin’s operating profit in 2004 was reduced bycontinued progress on margin improvement.
Net finance costs associated with disruption in UK distribution following the move to a new warehouse and closure costs associated with Penguin TV.
Net finance costs
Net finance costs reduceddecreased from £79m£106m in 20042007 to £70m£91m in 2005.2008. Net interest payable in 20052008 was £77m, up£89m, down from £74m£95m in 2004. The Group’s net interest rate payable rose by 0.9% to 5.9%.2007. Although we were partly protected by our fixed rate policy reduces the strong riseimpact of changes in market interest rates, we were still able to benefit from a fall in average US dollar floatingand sterling interest rates had an adverse effect.during the year. Year on year, average three month LIBOR (weighted for the Group’s net borrowings in US dollars euro and sterling) rosesterling at each year end) fell by 1.9%2.3% to 3.4%3.1%. This reduction in floating market interest rates was largelypartially offset by higher fixed bond coupons prevailing at the £260m falltime of our 2008 bond issue. The overall result was a decrease in the Group’s average net debt, reflecting in particular the proceeds from the disposal of Recoletos and good cash generation. In addition, in 2005 we did not benefit from a one-off credit of £9m for interest on a repayment of tax that occurred in 2004. As at January 1, 2005 we adopted IAS 39‘Financial Instruments: Recognition and Measurement’in our financial statements. This has had the effect of introducing increased volatility into the net finance cost and in 2005 the


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adoption
interest rate payable by 1.4% to 5.9%. In 2008 the net finance income relating to post-retirement plans was an income of IAS 39 reduced£8m compared to an income of £10m in the previous year.
Other net finance costs by £14m.relating to foreign exchange and short-term fluctuations in the market value of financial instruments included a net foreign exchange loss of £11m in 2008 compared to a loss of £17m in 2007. In 2008 the loss related to the retranslation of foreign currency bank overdrafts and a variety of inter-company items. In 2007 the loss mainly related to losses on Euro denominated debt used to hedge the receipt of proceeds from the sale of Les Echos. For a more detailed discussion of our borrowings and interest expenses see “— Liquidity and Capital Resources — Capital Resources” and “— Borrowing”Borrowings” below and “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.
Taxation
Taxation
 
The total tax charge for the year was £116m, representing a 26% rate onin 2008 of £172m represents 29% of pre-tax profits compared to a charge of £446m. £131m or 28% of pre-tax profits in 2007. Our overseas profits, which arise mainly in the US are largely subject to tax at higher rates than the UK corporation tax rate (28.5% in 2008 compared to 30% in 2007). Higher tax rates were offset by releases from provisions reflecting continuing progress in agreeing our tax affairs with the authorities.
Minority interests
This compares with a 2004 rate of 18% (or £55m on a pre-tax profit of £303m). In 2004,comprises mainly the tax charge reflected credits of £48m relating to previous years, a substantial element of which was non-recurring; adjustments relating to previous years in 2005 resulted in a credit of £18m. The 2005 rate benefited from the fact that the profit of £40m on the sale of Marketwatch.com was free of tax.
Minority interests
      Following the disposal of our 79% holding in Recoletos in April 2005 and the purchase of the 25% minority stake in Edexcel in February 2005, our minority interests now mainly comprise the 39% minority share in IDC.Interactive Data. Our share of Interactive Data remained at 62% throughout 2008, leaving the minority interest unchanged at 38%.
Discontinued operations
Discontinued operations
 Following the announcement of
Discontinued operations relate to the disposal of Government Solutions in(in February 2007), Les Echos (in December 2006,2007), Datamark (in July 2007) and the results of the Pearson Government SolutionData Management business have been reclassified as discontinued in 2005 and 2004. The results for the year ended December 31, 2005 included an operating profit of £20m with a corresponding operating profit of £22m in 2004.(in February 2008). The results of RecoletosGovernment Solutions and Les Echos have been included in discontinued operations for 2007 and have been consolidated for the period up to February 28, 2005the date of sale. Operating profit for Government Solutions in 2007 was £2m and the loss on disposal after tax recorded in 2007 was £112m after a tax charge of £93m. Les Echos’ operating profit in 2007 amounted to £1m and the profit on sale recorded in 2007 was £165m. There was no tax payable on the Les Echos sale. Datamark was bought with the eCollege acquisition in 2007 and immediately sold. The only profit or loss recognized relating to Datamark was a £7m tax benefit arising from the taxable loss on sale. The Data Management business was included in discontinued operations in 20052007 and 2004.2008. In 2007 the operating profit before impairment charges was £12m compared to £nil in 2008. The resultsData Management business was formerly part of the Group’s Other Assessment and Testing cash-generating unit (CGU) and was carved out of this CGU in preparation for 2005 include an operatingdisposal. As a result, the Group recognized a goodwill impairment charge of £97m in 2007 in anticipation of the loss on disposal. The loss before tax on disposal in 2008 was £53m, mainly relating to the cumulative translation adjustment. There was a tax charge of £37m on the sale.
Profit for the two months to February 28, 2005 of £3m compared to an operating profit in the full year to December 31, 2004 of £26m. The pre-tax profit on disposal of Recoletos reported in 2005 was £306m.
Profit for the year
The total profit for the financial year in 20052008 was £644m£323m compared to a profit in 20042007 of £284m.£310m. The overall increase of £360m£13m was mainly due to the profit onimproved operating performance with a contribution from reduced net finance costs. Offsetting this was the increased tax charge and increased loss from the disposal of Recoletos and MarketWatch together with significant improvement in operating profits reported across all the Pearsondiscontinued businesses. These increases were only partially offset by the increase in the tax charge in 2005.
Earnings per ordinary share
Earnings per ordinary share
 
The basic earnings per ordinary share, which is defined as the profit for the financial year divided by the weighted average number of shares in issue, was 78.2p36.6p in 20052008 compared to 32.9p35.6p in 20042007 based on a weighted average number of shares in issue of 797.9 million797.0m in 20052008 and 795.6 million796.8m in 2004. This2007. The increase in earnings per share was due to the additionalincrease in profit for the year2008 described above and was not significantly affected by the movement in the weighted average number of shares.


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The diluted earnings per ordinary share of 78.1p36.6p in 20052008 and 32.9p35.6p in 20042007 was not significantly different from the basic earnings per share in those years as the effect of dilutive share options was again not significant.
Exchange rate fluctuations
Exchange rate fluctuations
 
The strengthening of the US dollar and other currencies against sterling on an average basis had a positive impact on reported sales and profits in 20052008 compared to 2004. We estimate that if the 20042007. 2008 sales, translated at 2007 average exchange rates, had prevailed in 2005, sales would have been lower by £43m£320m and operating profit, translated at 2007 average exchange rates, would have been lower by £12m.£71m. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for a discussion regarding our management of exchange rate risks.

36

Sales and operating profit by division
 
Sales and operating profit by division
The following tables summarize our sales and operating profit for each of Pearson’s divisions. Adjusted operating profit is a non-GAAP financial measure and is included as it is a key financial measure used by management to evaluate performance and allocate resources to business segments, as reported under FAS 131.segments. See also note 2 of “Item 17.18. Financial Statements”.
 
In our adjusted operating profit we have excluded amortization and adjustment of acquired intangibles, other gains and losses and other net finance costs of associates.intangibles. The amortization and adjustment of acquired intangibles is the amortization or subsequent impairment of intangible assets acquired through business combinations. The charge is not considered to be fully reflective of the underlying performance of the Group. Other gains and losses represent profits and losses on the sale of subsidiaries, joint ventures, associates and investments that are included within continuing operations but which distort the performance for the year.
 
Adjusted operating profit enables management to more easily track the underlying operational performance of the Group. A reconciliation of operating profit to adjusted operating profit for continuing operations is included in the tables below:
                             
  Year ended December 31, 2005
   
    Higher   FT  
£m School Education Professional Publishing IDC Penguin Total
               
Sales  1,295   779   301   332   297   804   3,808 
   34%   20%   8%   9%   8%   21%   100% 
Total operating profit  142   156   25   58   75   60   516 
   28%   30%   5%   11%   14%   12%   100% 
Add back:                            
Amortization and adjustment of acquired intangibles  5   —   —   1   5   —   11 
Other net gains and losses including associates  —   —   —   (40)  —   —   (40)
Other net finance costs of associates  —   —   —   2   —   —   2 
                      
Adjusted operating profit:                            
continuing operations  147   156   25   21   80   60   489 
Adjusted operating profit:                            
discontinued operations  —   —   20   (3)  —   —   17 
                      
Total adjusted operating profit  147   156   45   18   80   60   506 
                      
   29%   31%   9%   3%   16%   12%   100% 
                             
  Year Ended December 31, 2008 
  North
                   
  American
  International
     FT
  Interactive
       
£m
 Education  Education  Professional  Publishing  Data  Penguin  Total 
 
Sales  2,002   866   244   390   406   903   4,811 
   42%   18%   5%   8%   8%   19%   100% 
Total operating profit  258   113   35   67   112   91   676 
   38%   17%   5%   10%   17%   13%   100% 
Add back:                            
Amortization of acquired Intangibles  45   22   1   7   9   2   86 
                             
Adjusted operating profit: continuing Operations  303   135   36   74   121   93   762 
Adjusted operating profit: discontinued Operations  —   —   —   —   —   —   — 
                             
Total adjusted operating profit  303   135   36   74   121   93   762 
                             
   40%   17%   5%   10%   16%   12%   100% 


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  Year ended December 31, 2004
   
    Higher   FT  
£m School Education Professional Publishing IDC Penguin Total
               
Sales  1,087   729   290   318   269   786   3,479 
   31%   21%   8%   9%   8%   23%   100% 
Total operating profit  112   133   20   8   62   47   382 
   29%   35%   5%   2%   16%   13%   100% 
Add back:                            
Amortization and adjustment of acquired intangibles  —   —   —   —   5   —   5 
Other net gains and losses including associates  (4)  (4)  (2)  (4)  —   5   (9)
Other net finance costs of associates  —   —   —   —   —   —   — 
                      
Adjusted operating profit:                            
continuing operations  108   129   18   4   67   52   378 
Adjusted operating profit:                            
discontinued operations  —   —   22   26   —   —   48 
                      
Total adjusted operating profit  108   129   40   30   67   52   426 
                      
   25%   30%   9%   7%   16%   13%   100% 
                             
  Year Ended December 31, 2007 
  North
                   
  American
  International
     FT
  Interactive
       
£m
 Education  Education  Professional  Publishing  Data  Penguin  Total 
 
Sales  1,667   735   226   344   344   846   4,162 
   40%   18%   5%   8%   8%   21%   100% 
Total operating profit  253   82   26   50   90   73   574 
   44%   14%   4%   9%   16%   13%   100% 
Add back:                            
Amortization of acquired Intangibles  20   10   1   6   7   1   45 
                             
Adjusted operating profit: continuing Operations  273   92   27   56   97   74   619 
Adjusted operating profit: discontinued Operations  —   —   14   1   —   —   15 
                             
Total adjusted operating profit  273   92   41   57   97   74   634 
                             
   43%   15%   6%   9%   15%   12%   100% 
School
 School business
North American Education
North American Education sales increased by £208m,£335m, or 19%20%, to £1,295m£2,002m in 2005,2008, from £1,087m£1,667m in 20042007 and adjusted operating profit increased by £39m,£30m, or 36%11%, to £147m£303m in 20052008 from £108m£273m in 2004.2007. The School results in 2005 benefit fromwere significantly affected by the inclusionweakening of AGS Publishing, acquired in July 2005 and the strengthening of the US dollar,sterling, which we estimate added £12m toincreased sales by £156m and £2m to adjusted operating profit by £17m when compared to the equivalent figures at constant 20042007 exchange rates. At constant exchange and after taking account of the contribution from acquisitions there was underlying growth in sales but some decline in profits as the contribution from the US school curriculum business declined in a falling market and we expensed costs on the integration of Harcourt Assessment.
 
In the US school market, Pearson’s school publishing business grew 12% ahead of the Association of American Publishers’ estimate that there was an overall decrease for the industry of industry growth of 10.5%4.4% as state budget issues caused particular industry-wide weakness in the supplementary publishing segment and the open territories (those territories that do not have a state-wide adoption process). New adoption market share was 33%31% in the adoptions where Pearson competed (and 24%28% of the total new adoption market). The US School business launched enVisionMATH, an integratedprint-and-digital elementary mathematics program (and the next generation of the innovative and highly successful California social studies program). enVisionMATH helped to gain a market-leading 38% share of all math adoptions, including 50% in Texas. The program also sold strongly across the Open Territories. During the year the U.S. Department of Defense awarded the US school business a five-year contract to provide elementary-school reading programs, including Pearson’s Reading Street, for its schools around the world.
In the US Assessment and Information business, the integration of Harcourt Assessment progressed well with strong performances in state testing, catalogue tests and clinical assessments. The market-leading state assessments division continued to gain share and the business now hasprovides major state-wide testing services to 30 states. The business took the lead in online testing with over 3.8 million secure tests delivered across 13 states during the year, up from 2.5 million in 2007. The National Assessments division benefited from new long-term contracts including the American Diploma Project (a three-year contract to deliver Algebra II exams to a consortium of fifteen states); the College Board’s Accuplacer program (a seven-year contract to deliver computer-adaptive reading, writing and maths test to assess college readiness); and the National Board for Professional Teaching Standards (a five-year

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contract to develop, administer and score its National Board Certification program for accomplished teachers, covering 25 certificate areas). The leading positionsposition in math, science, literatureteacher certification was boosted by a three-year renewal in California, a six-year renewal in Oklahoma, a four-year renewal in New Mexico and a two-year contract to manage California’s certification testing for teachers of English as a foreign languages. School testing saleslanguage. The Clinical Assessments division benefited from the strong growth of our AimsWeb data management and progress monitoring service for the Response to Intervention (RTI) market (which monitors children who are having learning difficulty) and the publication of WAIS-IV and MMPI-RF, new editions of the leading products for assessing intelligence and personality. There were major contract wins in Student Information Systems including South Carolina (709,000 students), Dallas (165,000 students) and Baltimore (83,000 students). There were also continued gains by our new Edustructures business with State Education Agencies, and it successfully implementedproof-of-concept projects in Kansas and Alaska, and expanded projects in Virginia, South Carolina and Wyoming.
The US Higher Education publishing market was up more than 20%,3.6% in 2008, according to the Association of American Publishers, benefiting from significant market share gainshealthy enrolments, even in tougher economic conditions, and mandatory state testing under No Child Left Behind. School software also had a strong year with good sales and profit growth on curriculum and school administration services.
      Outside the US, the School publishing sales increased in high single digits.federal government action to support student funding. The worldwide English Language Teaching business benefited fromindustry continues to see strong demand for English language learninginstructional materials that are enhanced by technology and investments in new products, includingEnglish Adventure(with Disney)customization. Our US Higher Education business grew significantly faster than the industry and outperformed the market for the primary school market,tenth straight year. There was continued investment in established and new author franchises, such as Campbell and Reece’sSkyBiologyfor secondary schools,, Tro’sTotal EnglishChemistry,for adult learnersLilienfeld, Lynn, Namy and Woolf’sIntelligent BusinessPsychology (withand Wysocki and Lynch’sThe EconomistDK Handbook) for the business markets.. There was also rapid growth in ‘MyLab’ digital learning, homework and assessment programs, which now span the curriculum. MyLab products were used by more than 4.3m students globally, with student registrations 48% higher than in 2007. Evaluation studies show that the use of the MyLab programs can significantly improve student test scores and institutional productivity. We saw strong growth in the international school testing markets. Four million UK GCSE, ASCustom Solutions with our expansion beyond custom textbooks to educational solutions including on-demand authoring of original content, customized technology, and A-Level scripts were marked onscreenon-demand curriculum, assessments and 2005 saw the first year of running the UK National Curriculum tests and a new contract for a national school testing pilot in Australia.
      School margins were up by 1.5% points to 11.4% with efficiency gains in central costs, production, distribution and software development.
Higher Education
      Sales incourseware. The Higher Education business formed new strategic partnerships to provide materials and online learning services to educational institutions. These included Rio Salado College in Arizona, which has 450 online classes and 48,000 students; the Colorado Community College system, providing digital textbooks for 17 courses; and the Louisiana Community & Technical College System, providing students with a customised online learning program across 47 campuses through the combination of custom textbooks, eCollege and MyLabs. eCollege, the platform for fully-online distance learning in higher education, increased enrolments by 34% to 2.5m and benefited from continued strong renewal rates. It achieved good new business performance in both the US and internationally, most notably in Brazil.
Overall adjusted operating margins in the North American Education business were lower at 15.1% in 2008 compared to 16.4% in 2007 with the majority of the decline attributable to the Harcourt Assessment integration costs.
International Education
International Education sales increased by £50m,£131m, or 7%18%, to £779m£866m in 2005,2008, from £729m£735m in 2004. Adjusted2007 and adjusted operating profit increased by £27m,£43m, or 21%47%, to £156m£135m in 20052008 from £129m£92m in 2004. Both2007. The results benefit from exchange gains and a full year contribution in 2008 from the acquisition of Harcourt International.
In the UK, Edexcel received over 1.3 million registrations for vocational assessment which, when combined with more than 2.1 million registrations for general qualifications, made it one of the UK’s largest assessment organisations. Edexcel marked 4.3m ‘A’-level and GCSE (national secondary school examinations) scripts onscreen, representing 88% of all student work marked by their examiners. Edexcel also made a significant investment in supporting the growth of academic and vocational qualifications both in the UK and internationally including the UK’s new Diploma qualification for14-19 year-olds, the IGCSE qualifications to meet the needs of International schools and colleges and BTEC, Edexcel’s flagship vocational qualification where registrations have grown from about 70,000 to 250,000 in the last two years.
The UK school publishing business grew ahead of the market, with Harcourt International making a significant contribution. This was driven by curriculum reform and market share gains in the secondary market, helped by strong publishing, innovative technology and integrated assessment for learning. The combination of Pearson


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content, customisation capabilities and technology supported strong performances in Higher Education and ELT across the European markets including France, Benelux and Central and Eastern Europe.
The ‘MyLab’ digital learning, homework and assessment programmes were used internationally by more than 237,000 students, up 82% on 2007, and are now sold in more than 65 countries worldwide. MyLabs and Mastering Physics, two of Pearson’s online education programmes, continue to win international adoptions, increasingly with localised versions for individual markets.
In the Middle East, the business won a contract to deliver the Abu Dhabi Education Council’s external assessment program that started in 2009 and is expected to run to 2011. The tests cover English, Arabic, mathematics and science for students in grades 3 to 11. Pearson worked with Jordan’s Ministry of Education to build a test development system which has been enhanced to support the creation of test items and tests in Arabic, replacing a paper-based system.
In India, International Education saw rapid sales growth underpinned by strong local publishing of titles includingMacroeconomicsby Errol D’Sousa of IIM Ahmedabad and Upinder Singh’s book on Ancient and Medieval Indian History. Two books published by Pearson Education won the First and Third Prize in the Delhi Management Association’s DMA-NTPC Awards. In Thailand, Pearson secured its largest adoption of MyITLab outside North America at Sripatum University accompanied by the Go! Office 2007 series of textbooks.
International Education saw rapid growth in Mexico, the business’ largest market in the Latin America region, with particularly strong growth in custom publishing. In English Language Teaching, we won an integrated custom publishing, academic support and services solutions contract with CONALEP, the national vocational/technical secondary program. We developed a custom publishing program for a leading test prep academy, CONAMAT, which includedSimplified Mathematics, the best selling title of the program, selling over 20,000 units. In Panama, the Ministry of Education adopted Prentice Hall’s Virtual Labs and Lab Manuals for Chemistry and Biology for 75,000 high school students. In Brazil, which has Latin America’s largest and fastest-growing university population, Pearson provided custom publishing services to five leading universities in business, math, science, engineering and several other fields. There was growing success in Government tenders including a new local math series for middle schools in Mexico and the adoption of two levels of our primary Science program in Chile, adapted from our US Scott Foresman 5th/6th Grade program, to support local curriculum standards in Spanish. Strong growth of English Language Teaching materials across Latin America was underpinned by the performance in Mexico, Argentina, Colombia, Peru and Central America.
International Education adjusted operating profit benefitedmargins continued to improve and the increase in the overall margin from the strengthening US dollar which we estimate added £14m12.5% in 2007 to 15.6% in 2008 continued to reflect increases in both publishing and testing margins.
Professional
Professional sales and £3mincreased by £18m, or 8%, to adjusted£244m in 2008 from £226m in 2007. Adjusted operating profit from continuing operations increased by £9m or 33% to £36m in 2008, from £27m in 2007. Sales were affected by the weakness of sterling, which increased sales by £15m when compared to the equivalent figures at constant 20042007 exchange rates.
In professional testing (Pearson VUE), approximately 6m secure online tests were delivered in more than 4,000 test centers worldwide in 2008, an increase of 2% over 2007. Registration volumes for the Graduate Management Admissions Council test rose 12% worldwide in 2008, including a 22% increase outside the US. New business included contracts to provide certification exams for the Health Authority of Abu Dhabi, end of course exams for Maryland University College, certification exams for the Institute of Supply Management, the development and administration of tests for the Colorado Office of Barber and Cosmetology Licensure and an exclusive contract with Adobe. Renewals included contracts with the Georgia Insurance Licensing Board, the Virginia Board of Nursing, the Law National Admissions Consortium, Measurement Research Associates Inc., and the Kentucky Real Estate Commission. Pearson VUE also announced the transition of The Institute of Internal Auditors certification exam, the Certified Internal Auditor, frompaper-and-pencil to computer-based test delivery. The Certified Internal Auditor designation is the only globally accepted certification for internal auditors and will be delivered in English, Japanese, French, Spanish and Italian. The business also agreed a partnership with NIIT Ltd. of


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India to expand Pearson VUE’s certification network in India, extending a range of tests for students throughout the country. In a first phase, Pearson VUE and NIIT will set up testing facilities in Bangalore, Chennai, New Delhi, Hyderabad and Pune.
In Professional publishing, TheiPhone Developer’s Cookbookby Erica Sadun initially published online as a DRM-free ebook, became the US,number one computer book for Amazon Kindle and the Higher Education sales were up by 6%number one book on Safari. And, when published in print form, became the number one Computers & Internet Book on Amazon. Scott Kelby, an author at our technology imprint Peachpit, was the top-selling author of computer books in the United States for the fifth consecutive year with titles such asThe iPhone Book,Mac OS X Leopard BookandThe Adobe CS4 Book for Digital Photographers.The Professional publishing business created nearly 200 video based educational lessons (230 hours of video) including Aarron Walter’sSEO And Beyond, and Deitel & Associates’C# 2008 Fundamentals I and IIand built new distribution channels for video via our web sites, and via Safari Books Online. The business developed a new iterative publishing programme called Rough Cuts which allows authors and customers to interact ahead of publication, building awareness and capturing customer contributions. Almost 25% of the Association of American Publishers’ estimate of industry growth of 5%. 2005 isprint books published in 2008 entered the seventh consecutive year that Pearson’s US Higher Education business has grown faster than the industry. The US business benefitedRough Cuts program, benefiting from continued growth from market-leading authors in key academic disciplines including biology (Campbell & Reece), chemistry (Brown & LeMay), sociology (Macionis), marketing (Kotler & Keller), math (Tobey & Slater), developmental math (Martin-Gay) and English composition (Faigley’sPenguin Handbook).comments prior to print publication. There was also expansionstrong growth in eBooks, videos and other digital assets sold directly (via our websites and our joint venture, Safari Books Online) and through other digital retail outlets (such as the Amazon Kindle and Sony eReader). Sales of English and local language technology books saw good growth in international markets including the Middle East, South Africa, India and South America with best-sellers includingCCNA Exam Certification Libraryby Wendell Odom,Presentation Zenby Garr Reynolds andEffective Java 2E by Josh Bloch. Titles by Pearson’s business imprints, including FTPress and Wharton School Publishing, includedFinancial Shockby Mark Zandi, Chief Economist at Moody’s and an advisor to the White House, on the causes of the credit crunch with particular emphasis on thesub-prime mortgage market.
Overall adjusted operating margins in the careerProfessional business continued their rapid improvement and workforce education sector,were higher at 14.8% in 2008 compared to 11.9% in 2007 as margins improved again in both the testing and professional publishing businesses.
FT Publishing
Sales at FT Publishing increased by £46m or 13%, from £344m in 2007 to £390m in 2008. Adjusted operating profit from continuing operations increased by £18m, from £56m in 2007 to £74m in 2008. The sales and profit increase is mainly generated by Mergermarket, which continued to perform strongly.
FT Publishing benefited from the shift towards subscription and service-based revenues despite a tough advertising market, particularly in the fourth quarter.Financial Timesmaintained worldwide newspaper circulation at approximately 435,000 (434,196 average for the June-December ABC period) and won both major UK press awards: Newspaper of the Year at the 2008 British Press Awards and Newspaper Awards. In the UK National Readership Survey, readership rose more than 16% to 418,000.Financial Timescirculation revenues were up 16% as investment in content and demand for high-quality analysis of the global financial crisis supported increases in pricing and quality of circulation. FT Publishing advertising revenues were 3% lower for the full year, with major publishing initiatives gaininga significantly weaker advertising market share in allied health, criminal justice, paralegal, homeland securitythe fourth quarter as financial institutions, technology companies and hospitality.recruiters reduced their marketing investment. During 2008 we took a series of actions to reduce cost and prepare for more difficult trading conditions in 2009. The online learningFinancial Times continued to invest in international expansion and custom publishing businesses saw rapid growth. Approximately 3.6 million US college students are studying through one of our online programs, an increase of 20% on 2004;fast-growing markets. It successfully launched a new edition for the Middle East, and custom publishing, which builds customized textbooksRui, a lifestyle and online services around the courses of individual faculties or professors, had double digit sales growth.wealth-management magazine for China’s fast-growing business elite.
 International Higher Education publishing sales
FT.com benefited from the launch of an innovative new access model involving registration for access to more than three articles per month. Subscribers grew by 4%,9% to 109,609, while registered users increased more than five-fold from about 150,000 at the end of 2007 to 966,000 at the end of 2008.
There was a strong performance from Mergermarket, benefiting from its digital subscription model, with contract renewal rates of almost 85%. The Mergermarket and Debtwire products performed particularly well, emphasising that the local adaptationservices remain valuable to customers throughout the cycle. Mergermarket launched two new products, Debtwire ABS and Debtwire Restructuring Database, in response to growing levels of global authors, including Campbelldistressed asset sales and Kotler,restructuring funds. It continued to expand and the introduction of custom publishing and online learning capabilities intoacquire new markets in Asia and the Middle East.
      Higher Education margins were up by 2.3% points to 20%. Good margin improvementcustomers geographically in the US, Europe


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and Asia, launching its M&A event-driven product, dealReporter, in Russia, Poland, Turkey, the UAE and South Africa. Mergermarket also continued to build its Pharmawire product for financial institutions that support the pharmaceutical industry. Mergermarket’s conference business, Remark, had a strong year, with significant growth in the number of events, attendees and newsletter publications. It also increased its digital offering in this business through video, podcasts and live webcasts. In January 2008, FT acquired Money-Media, which provides online news and commentary for the fund-management industry. During the year, Money-Media rolled out Ignites Europe, an online news service for people working with the European cross-border fund industry.
At The Economist, in which Pearson owns a 50% stake, global weekly circulation increased by 6.4% to 1.39 m (for the July-December 2008 ABC period). FTSE, in which Pearson also owns a 50% stake, announced several new indices including expansion of the FTSE Environmental Opportunities Index and introduction, in partnership with the Athens Exchange, of the FTSE/ATHEX Liquid Mid Index. Our share of the profits of the Economist and FTSE totaled £18m in 2008 compared to £17m in 2007.
Overall adjusted operating margins at FT Publishing continued to increase driven by the online businesses and in international publishing was helped2008 were 19.0% compared to 16.3% in 2007.
Interactive Data
Interactive Data, grew its sales by shared services and savings18% from £344m in central costs, technology, production and manufacturing.
Professional
      Professional sales (excluding discontinued businesses) increased by £11m, or 4%,2007 to £301m£406m in 2005 from £290m in 2004.2008. Adjusted operating profit grew by 25% from £97m in 2007 to £121m in 2008. Interactive Data margins increased from 28.2% in 2007 to 29.8% in 2008. Both sales and adjusted operating profit were affected by £7m, or 39%, to £25m in 2005, from £18m in 2004. Sales benefited from the strengtheningrelative strength of the US dollar, which we estimate added £5m toincreased sales by £28m and adjusted operating profit by £9m when compared to the equivalent figures at constant 20042007 exchange rates.
 Professional testing
Interactive Data revenue growth was driven by strong new sales were up more than 40%and approximately 95% renewal rates within its Institutional Services segment. Pricing and Reference Data continued to generate good growth in 2005 benefitingNorth America and Europe. Growth was primarily organic, providing additional services to customers; but it also benefited from bolt-on acquisitions, most recently the successful start-uppurchase of NDF, a leading provider of securities pricing, reference data and related services to most of the major financial institutions in Japan. Real-Time Services saw strong growth in its real-time data feeds business and continued expansion of its Managed Solutions business in the United States. Real-Time Services added a number of new contracts including the Driving Standards Agency, National Association of Securities Dealersmarket sources in North America and the Graduate Management Admissions Council.
      Overall marginsMiddle East. The Managed Solutions business announced that it had doubled the number of clients in the Professional business wereUnited States during the past year to 80. There was continued investment in expanding the breadth and depth of the data covered and products offered, including a little lower in 2005 comparednew alliance to 2004 mainly due to new contract start-up costs. Marginsprovide complex derivatives and structured product valuation services; and in the Professional publishing businesses were maintained despite falling sales.capacity of its real-time infrastructure to allow for the anticipated growth in real-time market data volumes.
FT Publishing
Interactive Data continued to benefit from growth trends, including heightened scrutiny around the valuation of securities, increasing regulation, increasing adoption of low latency data for algorithmic trading and continuing need to differentiate wealth management offerings with bespoke client interface solutions.
 Sales at FT Publishing (excluding discontinued businesses)
The Penguin Group
Penguin Group sales increased by £14m or 4%,to £903m in 2008 from £318m£846m in 2004 to £332m in 2005. Adjusted operating profit increased by £17m, from £4m in 2004 to £21m in 2005. Much of the sales2007 and profit increase was at the FT newspaper; sales at the other business newspapers were broadly level with 2004 with a small increase in adjusted operating profit compared to 2004.
      FT newspaper sales were up 6% while adjusted operating profit increased £14m to register a profit of £2m in 2005 compared to a loss of £12m in 2004. FT advertising revenues were up 9% for the year with sustained growth in luxury goods and worldwide display advertising. FT.com advertising sales were up 27% as some of the FT’s biggest advertisers shifted to integrated print and online advertising. The FT’s worldwide circulation was 2% lower for the year at 426,453 average copies per day although the second half of the year showed improvement to 430,635 average copies per day. FT.com’s paying subscribers increased by 12% to 84,000 and the average unique monthly users was up 7%26% to 3.2m.
      Les Echos advertising and circulation revenues for 2005 were level with 2004 despite tough trading conditions. FT Business improved margins with growth£93m in its international finance titles. Our share of the results of the FT’s joint ventures and associates improved asFT Deutschlandreduced its losses and increased its average circulation despite a weak advertising market2008 from £74m in Germany andThe Economistincreased profits helped by an increase in circulation (10% to an average weekly circulation of 1,038,519 for the January-June ABC period).

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Interactive Data
      Interactive Data, grew its sales by 10% from £269m in 2004 to £297m in 2005. Adjusted operating profit grew by 19% from £67m in 2004 to £80m in 2005.2007. Both sales and adjusted operating profit benefited fromwere affected by the strengtheningstronger US dollar which we estimate added £2m toincreased sales by £54m and £1m to adjusted operating profit by £16m when compared to the equivalent figures at constant 20042007 exchange rates.
 FT Interactive Data, IDC’s largest business (approximately two-thirds of IDC revenues) generated strong growth in North America and returned to growth in Europe. There was more modest growth at Comstock, IDC’s business providing real-time data for global financial institutions, and at CMS BondEdge, its fixed income analytics business. Renewal rates for IDC’s institutional businesses remain at around 95%. eSignal, IDC’s active trader services business, increased sales by 27% with continued growth in the subscriber base and a full year contribution from FutureSource, acquired in September 2004.
The Penguin Group
      The Penguin Group sales were up 2% to £804m in 2005 from £786m in 2004 and adjusted operating profit up 15% to £60m in 2005 from £52m in 2004. Both sales and adjusted operating profit benefited from the strengthening US dollar which we estimate added £9m to sales and £6m to adjusted operating profit when compared to the equivalent figures at constant 2004 exchange rates. 2005 adjusted operating profit also benefited from reduced operating costs at our UK distribution center.
In the US, successful format innovation helpedPenguin had a number oneNew York Timesbestseller for 49 weeks of the year, including Patricia Cornwell’sScarpetta, Eckhart Tolle’sA New Earthand Greg Mortenson’sThree Cups of Tea.Penguin authors won the major industry awards. Junot Díaz won The Pulitzer Prize for Fiction and the National Book Critics Circle Award for Fiction forThe Brief Wondrous Life of Oscar Wao, and Barton Gellman won the Pulitzer Prize for National Reporting.
In the UK, Penguin had 67 top ten bestsellers versus 52 in 2007, according to address weaknessBookScan. The number one bestsellerDevil May Care, the new James Bond novel by Sebastian Faulks, was the fastest-selling hardback fiction title in Penguin UK’s history and third-bestselling in the mass-market category that saw a further declineUK in 2008. Other bestsellers includedThis Charming Man


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by Marian Keyes,The Beach Houseby Jane Green andJamie’s Ministry of 4% forFoodby Jamie Oliver. Penguin UK also published many more paperback originals, including Judith O’Reilly’sA Wife in the industry in 2005. The first sevenNorth.
In Australia, Penguin Premium paperbacks were published in 2005, priced at $9.99, and all became bestsellers, with authors including Nora Roberts, Clive Cussler and Catherine Coulter.
      Penguin authors received a number of awards during the year: A Pulitzer Prize (for Steve Coll’sGhost Wars), a National Book Award (William T. Vollman’sEurope Central), the Whitbread Bookwas named Publisher of the Year (Hilary Spurling’sMatisseat the Master), the Whitbread NovelAustralian Book Industry Awards (and won four of the Year (Ali Smith’sThe Accidental)seven awards for individual books) and grew sales ahead of its markets with bestsellers including titles from Australian authors Bryce Courtenay and Tim Winton alongside international authors Marian Keyes and Eckhart Tolle. In India, Penguin is the FT & Goldman Sachs Business Book oflargest trade publisher and continued to grow rapidly with authors such as Shobhaa De, Amitav Ghosh and Nandan Nilekani. It also won the Year Award (Thomas Friedman’sThe World is Flat). In 2005, there were 129 New York Times bestsellersmajor English language prizes in India’s national book awards.
Penguin’s eBook publishing and 54sales expanded significantly in 2008, with nearly five-fold growth in eBook sales in the US. Penguin worldwide now has 8,500 eBook titles available, more than double the number available in 2007 and during the year Penguin US launched an Enriched eBook Classics series with Jane Austen’sPride and Prejudice, which debuted in the top 10 bestsellers in the UK. Major bestselling authors include Patricia Cornwell, John Berendt, Sue Grafton, Jared Diamond, Jamie Oliver, Gillian McKeith, Jeremy Clarkson and Gloria Hunniford.
      In 2005, there was also a strong contribution from new imprints and first-time authors. The new imprint strategy continued to gather pace and Penguin published more than 150 new authors in the US and approximately 250 worldwide — its largest ever investment in new talent. Sue Monk Kidd’s first novel,The Secret Life of Bees, has been a New York Times bestseller for almost two years; her second,The Mermaid Chair, reached number one in 2005.The Kite Runner, Khaled Hosseini’s first book, stayed on the New York TimesAmazon Kindle bestseller listlist. The series is now sold via online stores on both Amazon.com and Penguin.com. Traffic for all of 2005, selling an additional twoPenguin’s web sites increased 37% to 17 million copies (three million in total). In the UK, there was also strong performance from new fiction authors including Jilliane Hoffman, PJ Tracy, Karen Joy Fowler and Marina Lewycka.unique users.
Liquidity and capital resources
Cash flows and financing
Cash flows and financing
 
Net cash inflowgenerated from operating activities decreasedoperations increased by £32m, or 5%£118m (or 13%), to £621m£1,012m in 2006,2009 from £653m£894m in 2005.2008. This reduction was entirely due to the weakening of the US dollar compared to sterling.increase reflected strong cash contributions, particularly from our education businesses. The majority of the Group’s cash flows arise in US dollars, so any weakening of the US dollar reduces the Group’s cash flows in sterling terms. The closingexchange rate for translation of dollar cash flows was $1.96$1.61 in 2006 ($1.722009, $1.56 in 2005). Underlying working capital efficiency continued to improve. On an2008 and $1.99 in 2007. In 2009, the average basis, the working capital to sales ratio for our book publishing businesses improved to 25.1% from 27.4%26.1% in 2005 to 26.3%2008, reflecting tight working capital management and the favourable working capital profile of 2009 acquisitions. Average working capital is the average month end balance in 2006. The netthe year of inventory (including pre-publication), receivables and payables. Net cash inflowgenerated from operating activities in 2005operations increased by £129m, or 25%£235m (or 36%), to £653m£894m in 2008 from £524m£659m in 2004, even though 2004 included receipt of a $151m receivable in respect of2007. This increase reflected strong cash contributions from all businesses, together with the TSA contract. Part of this increase was due to thesignificant strengthening of the US dollar during that period. The closing rate for translation of dollar cash flows was

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$1.72 in 2005, compared to $1.92 in 2004. The improvement in cash flow from operating activities also reflected more efficient use of working capital. On anagainst sterling. In 2008, the headline average basis, the working capital to sales ratio for our book publishing businesses deteriorated to 26.1% from 25.6% in 2007, reflecting the higher levels of working capital in Harcourt Assessments (purchased at the end of January 2008). The underlying working capital to sales ratio (excluding the effect of year on year portfolio changes) improved to 25.8% in 2008 from 29.4%25.9% in 2004 to 27.4% in 2005.2007.
 
Net interest paid was £82mincreased to £87m in 2006 compared to £72m2009 from £76m in 2005 and £85m in 2004.2008. The 14% increase in 2006 over 2005 reflected the higher average debt resulting from the acquisitions made in the year and higher interest rates (particularly in the US). The 15% reduction in 2005 over 2004 was primarilyis due to the reducedtiming of payments on bonds issued in 2008 and 2009. Net interest paid decreased to £76m in 2008 from £90m in 2007. The decrease was due to a reduction in US and UK interest rates, with some offset from the higher level of debt following receiptthe acquisition of Harcourt Assessments and the strength of the proceeds from the sale of Recoletos and MarketWatch.US dollar relative to sterling.
 
Capital expenditure on property, plant and equipment was £68m£62m in 2005 compared to £76m2009, £75m in 20052008 and £101m£86m in 2004.2007. The reduction in 2006spend in 2009 reflects a more cautious approach to capital investment, given the uncertain economic environment, particularly in the first half of the year. The reduction in spend in 2008 reflects reduced infrastructure spend compared to 2005 is due2007, notwithstanding the Group continued to the movementinvest in US dollar exchange rates. The higher expenditure in 2004 reflected up-front expenditure on Professional testing contracts.digital technology.
 
The acquisition of subsidiaries, joint ventures and associates accounted for a cash outflow of £367m£222m in 20062009 against £253m£400m in 20052008 and £51m£476m in 2004. In 2006, the principal acquisition was of Mergermarket for £109m. The balance relates to various smaller bolt-on acquisitions (primarily in the school segment) including those of National Evaluation Systems and Paravia Bruno Mondadori.2007. The principal acquisitions in 20052009 were of AGSWall Street English for £161m within the School business£101m and IS. Teledataa controlling interest in Maskew Miller Longman for £29m by Interactive Data.£54m, comprising £49m in cash and £5m in other consideration. The principal acquisitions in 20042008 were of KATHarcourt Assessments for £324m and Dominie PressMoney Media for £10m within our education businesses£33m. The principal acquisitions in 2007 were Harcourt Education International for £155m and FutureSource by Interactive DataeCollege for £9m. £266m.
The sale of subsidiaries and associates produced a cash inflow of £10m£14m in 20062009 against £430m£111m in 20052008 and £31m£469m in 2004.2007. The disposal in 20062009 relates entirely to the proceeds from thetake-up of share options issued to minority shareholders. Proceeds of £99m in 2008 relate to the sale of the Data Management business, and £12m to thetake-up of share options issued to minority shareholders. The principal disposals in 20052007 were of RecoletosGovernment Solutions for net cash proceeds of £371m£278m and MarketWatchLes Echos for net cash proceeds of £54m. The proceeds in 2004 relate primarily to the sale of Argentaria Cartera by Recoletos.£156m.


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The cash outflow from financing of £348m£380m in 2006 primarily2009 reflects the payment of the Group dividend (at a higher dividend per share than 2005) and the repayment of a $250mone $350m bond, at its maturity date. the repayment of borrowings under the Group’s committed borrowing facility and an increase of the dividend in line with earnings. Offsetting this, the Group issued £300m of sterling bonds in the year.
The cash outflow from financing of £321m£149m in 20052008 reflects the improved Group dividend (compared to 2004) andrepayment at maturity of one £100m bond, the repayment of bank borrowings followingagainst a short-term bridge financing facility and a further increase in the saledividend. Offsetting this, the Group issued $900m of Recoletos.US Dollar bonds. The cash outflow from financing activities of £261m£444m in 2004 reflects2007 represented the payment of the Grouphigher dividend and the repayment at maturity of one€550m €591m bond, offset in part by drawings on the proceeds from the issue of new $350m and $400m bonds. Bonds are issued as part of our overall financing program to support general corporate expenditure.Group’s revolving credit facility.
Capital resources
Capital resources
 
Our borrowings fluctuate by season due to the effect of the school year on the working capital requirements in the educational materials business. Assuming no acquisitions or disposals, our maximum level of net debt normally occurs in July, and our minimum level of net debt normally occurs in December. Based on a review of historical trends in working capital requirements and of forecast monthly balance sheets for the next 12 months, we believe that we have sufficient funds available for the Group’s present requirements, with an appropriate level of headroom given our portfolio of businesses and current plans. Our ability to expand and grow our business in accordance with current plans and to meet long-term capital requirements beyond this12-month period will depend on many factors, including the rate, if any, at which our cash flow increases and the availability of public and private debt and equity financing, including our ability to secure bank lines of credit. We cannot be certain that additional financing, if required, will be available on terms favorable to us, if at all.
 
At December 31, 2006,2009, our net debt was £1,059m£1,092m compared to net debt of £996m£1,460m at December 31, 2005.2008. Net debt is defined as all short-term, medium-term and long-term borrowing (including finance leases), less all cash, cash equivalents and liquid resources. LiquidCash equivalents comprise short-term deposits with a maturity of up to 90 days, while liquid resources comprise short-term deposits with maturities of more than 90 days and investments thatother marketable instruments which are readily realizable and held on a short-term basis. Short-term, medium-term and long-term borrowing amounted to £1,743m£2,008m at December 31, 2006,2009, compared to £1,959m£2,363m at December 31, 2005.2008 reflecting the impact of the strengthening of sterling relative to the US Dollar. At December 31, 2006,2009, cash and liquid resources were £592m,£750m, compared to £902m£685m at December 31, 2005. Some of the cash at December 31, 2006 was being held to fund a€591m bond repayment due on February 1, 2007.2008.

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Contractual obligations
 
Contractual obligations
The following table summarizes the maturity of our borrowings and our obligations under non-cancelable operating leases.leases, exclusive of anticipated interest payments.
                      
  At December 31, 2006
   
    Less than One to Two to After five
  Total one year two years five years years
           
  £m £m £m £m £m
Gross borrowings:                    
 Bank loans, overdrafts and commercial paper  173   173   —   —   — 
 Variable rate loan notes  —   —   —   —   — 
 Bonds  1,566   421   105   444   596 
Lease obligations  1,369   123   113   276   857 
                
Total
  3,108   717   218   720   1,453 
                
 
                     
  At December 31, 2009 
     Less than
  One to
  Two to
  After five
 
  Total  one year  two years  five years  years 
  £m  £m  £m  £m  £m 
 
Gross borrowings:                    
Bank loans, overdrafts and commercial paper  70   70   —   —   — 
Bonds  1,923   —   322   754   847 
Finance lease obligations  15   4   5   6   — 
Operating lease obligations  1,487   153   144   342   848 
                     
Total
  3,495   227   471   1,102   1,695 
                     
At December 31, 20062009 the Group had capital commitments for fixed assets, including finance leases already under contract, of £nil (2005: £1m)£15m (2008: £7m). There are contingent liabilities in respect of indemnities, warranties and guarantees in relation to former subsidiaries and in respect of guarantees in relation to subsidiaries and associates. In addition there are contingent liabilities in respect of legal claims. None of these claims or guarantees is expected to result in a material gain or loss.


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The Group is committed to aan annual fee of 0.0675% per annum, payable quarterly, in arrears on the unused amount of the Group’s bank facility.
Off-Balance sheet arrangements
Off-Balance sheet arrangements
 
The Group does not have any off-balance sheet arrangements, as defined by the SEC Final Rule 67(FR-67), “Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations”, that have or are reasonably likely to have a material current or future effect on the Group’s financial position or results of operations.
Borrowings
      We have in place a $1.75bn revolving credit facility, which matures in May 2011. At December 31, 2006, approximately $1.75bn was available under this facility. This included allocations to refinance short-term borrowings not directly drawn under the facility. The credit facility contains two key covenants measured for each 12 month period ending June 30 and December 31:
 We must maintain the ratio of our profit before interest and tax to our net interest payable at no less than 3:1; and
      We must maintain the ratio of our net debt to our EBITDA, which we explain below, at no more than 4:1.
      “EBITDA” refers to earnings before interest, taxes, depreciation and amortization. We are currently in compliance with these covenants.
Treasury policy
      We hold financial instruments for two principal purposes: to finance our operations and to manage the interest rate and currency risks arising from our operations and from our sources of financing.
      We finance ourThe Group finances its operations by a mixture of cash flows from operations, short-term borrowings from banks and commercial paper markets, and longer term loans from banks and capital markets.
We borrow principallyhave in US dollars, sterlingplace a committed revolving credit facility of $1.75bn, of which $92m matures in May 2011 and eurothe balance of $1.658bn matures in May 2012. At December 31, 2009, the full $1.75bn was available under this facility. This credit facility contains two key covenants measured for each 12 month period ending June 30 and December 31:
We must maintain the ratio of our profit before interest, tax and amortization to our net interest payable at both floatingno less than 3:1; and fixed rates
We must maintain the ratio of our net debt to our EBITDA, which we explain below, at no more than 4:1.
“EBITDA” refers to earnings before interest, using derivatives, where

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appropriate, to generate the desired effective currency profiletaxes, depreciation and interest rate basis. The derivatives used for this purposeamortization. We are principally interest rate swaps, interest rate caps and collars, currency swaps and forward foreign exchange contracts.currently in compliance with these covenants.
Treasury policy
Our treasury policy is described in note 19 of “Item 18. Financial Statements”. For a more detailed discussion of our borrowing and use of derivatives, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.
Related parties
Related parties
 
There were no significant or unusual related party transactions in 2006, 20052009, 2008 or 2004.2007. Refer to note 3435 in “Item 17.18. Financial Statements”.
Accounting principles
For a description of our principal accounting policies used refer to note 1 in “Item 18. Financial Statements”.
Accounting principles
      For a summary of the principal differences between IFRS and US GAAP in respect of our financial statements and recent US GAAP and IFRS pronouncements refer to note 36 in “Item 17. Financial Statements”.
ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and senior management
 
We are managed by a board of directors and a chief executive who reports to the board and manages through a management committee. We refer to the board of directors and the chairman of the board of directors as our “senior management”.


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The following table sets forth information concerning senior management, as of April 2007.March 2010.
       
Name
 
Age
 
Position
 
Glen Moreno  6366  Chairman
Marjorie Scardino  6063  Chief Executive
David Arculus  6063  Non-executive Director
David Bell60Director for People and Chairman of The FT Group
Terry Burns  6366  Non-executive Director
Patrick Cescau  5861  Non-executive Director
Rona FairheadWill Ethridge  4558  Chief Executive, ofPearson Education North America
Rona Fairhead48Chairman and Chief Executive, The FT Group
Robin Freestone  4851  Chief Financial Officer
Susan Fuhrman  6365  Non-executive Director
Ken Hydon  6265  Non-executive Director
John Makinson  5255  Chairman and Chief Executive, Officer, Penguin Group
Rana TalwarCK Prahalad  5968  Non-executive Director
 
Glen Morenowas appointed chairman of Pearson on October 1, 2005.2005 and is chairman of the nomination committee. He is the senior independent non-executive director of Man Group plc and also a director of Fidelity International Limited and a trusteewas previously senior independent director of The PrinceMan Group plc. From January 2009 to August 2009, he was also acting chairman of Liechtenstein Foundation.UK Financial Investments Limited, the company set up by HM Treasury to manage the government’s shareholdings in UK banks. Effective March 1, 2010, he was appointed non-executive director of Lloyds Banking Group plc and became their senior independent director.
 
Marjorie Scardinojoined the board and became chief executive in January 1997. She is a member of Pearson’s nomination committee. She trained and practiced as a lawyer and was chief executive of The Economist Group from 1993 until joining Pearson. She is also a non-executive directorvice chairman of Nokia Corporation.Corporation and on the board of several charitable organizations.
 
David Arculusbecame a non-executive director in February 2006 and currently serves on the audit and nomination committees and as chairman of the personnel committee. He is a non-executive director of Telefonica SA and was previouslyappointed chairman of O2Numis Corporation plc from 2004 until it was acquired by Telefonica in early 2006.May 2009. His previous roles include chairman of O2 plc, Severn Trent plc chairman ofand IPC Group, chief operating officer

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of United Business Media plc and group managing director of EMAP plc and non-executive director of Barclays Bank plc.
 David Bellbecame a director in March 1996. He is chairman of the FT Group, having previously been chief executive of theFinancial Timesfrom 1993 to 1998. In July 1998, he was appointed Pearson’s director for people with responsibility for the recruitment, motivation, development and reward of employees across the Pearson Group. He is also a non-executive director of VITEC Group plc and chairman of Sadlers Wells and Crisis, a charity for the homeless.
Terry Burnsbecame a non-executive director in May 1999 and the senior independent director in February 2004. He currently serves on the nomination and personnel committees. He was previously the UK government’s chief economic advisor from 1980 until 1991, and Permanent Secretary of HM Treasury from 1991 until 1998.1998 and chairman of Marks and Spencer Group plc. He is non-executive chairman of Abbey National plcSantander UK and Glas Cymru Limited and is a non-executive director of Banco Santander Central Hispano.SA. He has beenwas recently appointed chairman of Marks and Spencer Group plc since July 2006, having previously been deputy chairman from October 1, 2005.The Channel 4 Television Corporation.
 
Patrick Cescaubecame a non-executive director in April 2002. He joinedserves on the audit committee in January 2005, and is also a member of the nomination committee. He joined Unilever in 1973, latterly serving as Finance Director until January 2001, at which time he was appointed Director of Unilever’s Foods Division. He is currentlypreviously group chief executive of Unilever. He is a non-executive director of Tesco plc and joined the board of directors of INSEAD, the Business School for the World, in June 2009.
 
Will Ethridgechief executive of Pearson Education North America, joined the Pearson board in May 2008, having previously held a number of senior positions within Pearson Education. He is chairman of CourseSmart, a publishers’ consortium and of the Association of American Publishers.
Rona Fairheadjoined Pearson in October 2001 and became a directorchief financial officer in June 2002. She was appointed chairman and chief executive of the FT Group onin June 12, 2006 having previously been chief financial officer ofand became responsible for Pearson from June 2002 and was appointed to the Interactive Data Corporation board on 15 February 2007. She had served as deputy finance director of Pearson from October 2001.VUE in March 2008. From 1996 until 2001, she worked at ICI plc, where she served as executive vice president, group control and strategy, and as a member of the executive committee from 1998. Prior to that, she worked for Bombardier Inc. in finance, strategy and operational roles.strategy. She is also chairman of Interactive Data, a non-executive director of HSBC Holdings plc.plc and chairs the HSBC audit committee.


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Robin Freestonebecame a director ofjoined Pearson on June 12, 2006 and was appointed chief financial officer, having previously servedin 2004 as deputy chief financial officer since 2004.and became chief financial officer in June 2006, when he also joined the Pearson board. He was previously group financial controller of Amersham plc (now part of GE), having joined Amersham. He qualified as chief financial officer of their health business in 2000. Prior to that he held a number of senior financial positionschartered accountant with ICI, Zeneca and Henkel.Touche Ross (now Deloitte). He is also a non-executive director and founder shareholder of eChem Limited.
 
Susan Fuhrmanbecame a non-executive director in July 2004. She is a member of the audit and nomination committees. She is president of Teachers College at Columbia University, America’s oldest and largest graduate school of education havingand president of the National Academy of Education. She was previously been deanDean of the Graduate school of Education at the University of Pennsylvania. She isPennsylvania and a member of the Board of Trustees of the Carnegie Foundation for the Advancement of Teaching and an officer of the National Academy of Education.Teaching.
 
Ken Hydonbecame a non-executive director in February 2006 and currently serves on the personnel and nomination committeecommittees and as chairman of the audit committee. He is a non-executive director of TescoReckitt Benckiser Group plc, Reckitt BenckiserTesco plc and Royal Berks NHS Foundation Trust. He was previously finance director of Vodafone Group plc and of subsidiaries of Racal Electronics.
 
John Makinsonbecame chairman of the Penguin Group in May 2001 and its chief executive officer in June 2002. He was appointed chairman of Interactive Data Corporation in December 2002. He served as Pearson’s Finance Directorfinance director from March 1996 until June 2002. From 1994 to 1996 he was managing director of theFinancial Times, and prior to that he founded and managed the investor relations firm Makinson Cowell. He is also a non-executivechairman of the Institute for Public Policy Research, director of George Weston Limited in Canada.The Royal National Theatre and trustee of The International Rescue Committee (UK).
 
Rana TalwarCoimbatore Krishnarao Prahaladbecame a non-executive director in March 2000May 2008 and currently serves onis a distinguished university professor of corporate strategy and international business at the personnel and nomination committees.University of Michigan Business School. He is currently chairman of Sabre Capital Worldwide and Centurion Bank and a non-executive director of Schlumberger LimitedNCR Corporation and Fortis Bank. He served as group chief executiveHindustan Unilever Corporation and director of Standard Chartered plc from 1998 until 2001,the World Resources Institute and was at Citicorp from 1969 to 1997, where he held a number of senior international management roles. He retired from the board at the 2007 AGM.Indus Entrepreneurs.

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Compensation of senior management
 It
The committee’s principal duty is to determine and regularly review, having regard to the roleCombined Code and on the advice of the personnel committee to approvechief executive, the remuneration policy and the remuneration and benefits packages of the executive directors, the chief executives of the principal operating companies and other members of the Pearson Management Committee.Committee who report directly to the chief executive. This includes base salary, annual and long-term incentive entitlements and awards, and pension arrangements.
Remuneration policy
Pearson’s goal remains unchanged: to help people make progress in their lives and thrive in a brain-based economy through learning. The committee also takes note of the remuneration for those executives with base pay over a certain level, representing approximately the top 50 executives of the company.basic strategy to achieve that goal is pursued by all Pearson’s businesses in some shape or form and has four fundamental parts: long-term organic growth investment in content; adding services to our content; international expansion; and efficiency.
Remuneration policy
      Pearson seeksOur starting point continues to generate a performance culture by operating incentive programs that support its business goals and reward their achievement. It is the company’s policybe that total remuneration (base compensation plus short-andannual and long-term incentives) should reward both short-short and long-term results, delivering competitive rewards for target performance, but outstanding rewards for exceptional company performance.
 The company’s policy is that base compensation should provide the appropriate rate of remuneration for the job, taking into account relevant recruitment markets and business sectors and geographic regions. Benefit programs should ensure that Pearson retains a competitive recruiting advantage.
      Share ownership is encouraged throughout the company. Equity-based reward programs align the interests of directors, and employees in general, with those of shareholders by linking rewards directly to Pearson’s financial performance.
Total remuneration is made up of fixed and performance-linked elements, with each element supporting different objectives. Base salary reflects competitive market level, role and individual contribution. Annual incentives motivate the achievement of annual strategic goals. Bonus share matching encourages executive directors and other senior executives to acquire and hold Pearson shares and aligns executivesexecutives’ and shareholders’ interests. Long-term incentives drive long-term earnings and share price growth and value creation and align executives’ and shareholders’ interests.
 
Consistent with its policy, the committeeCommittee places considerable emphasis on the performance-linked elements i.e., annual incentive,incentives, bonus share matching and long-term incentives.
      The committee We will continue to review the mix of fixed and performance-linked remuneration on an annual basis, consistent with its overall philosophy.
 Our policy is that the
We want our executive directors’ remuneration of the executive directors shouldto be competitive with those of directors and executives in similar positions in comparable companies. We useIn setting remuneration, the Committee reviews remuneration at a range


46

of UK companies in different sectors including the media sector. Some are of a similar size to Pearson, while others are larger, but the method which the committee’sCommittee’s independent advisers use to make comparisons on remuneration takes this into account. All have very substantial overseas operations. WeThe Committee also usereviews remuneration at selected media companies in North America. We use these companies because they represent the wider executive talent pool from which we might expect to recruit externally and the pay market to which we might be vulnerable if our remuneration was not competitive.
Base salary
Base salary
 Our
The Committee’s normal policy is to review salaries annually taking into account the remuneration arrangements and the level of directorsincreases applicable to employees across the rest of the company as a whole.
Allowances and executives in similar positions in comparable companies, individual performance and levels of pay and pay increases throughout the company.benefits
Allowances and benefits
      ItThe Group’s policy is the company’s policy that its benefit programsprogrammes should be competitive in the context of the local laborlabour market, but as an international company we require executives to operate worldwide and recognize that recruitment also operatesis worldwide.

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Annual incentives
 
Annual incentives
The committeeCommittee establishes the annual incentive plans for the executive directors and the chief executives of the company’s principal operating companies, including performance measures and targets. These plans then become the basis of the annual incentive plans below the level of the principal operating companies, particularly with regard to the performance measures used and the relationship between the incentive plan targets and the relevant business unit operating plans.
The committee also establishesCommittee will continue to review the targetannual incentive plans each year and maximum levels ofto revise the performance measures, targets and individual incentive opportunity based on an assessment by the committee’s independent advisersopportunities in light of market practice for comparable companies and jobs.current conditions.
 
Annual incentive payments do not form part of pensionable earnings.
Performance measures
The financial performance measures relate to the company’sGroup’s main drivers of business performance at both the corporate, and operating company and business unit level. Performance is measured separately for each item. For each performance measure, the committeeCommittee establishes thresholds, targetstarget and maximamaximum levels of performance for different levels of payout. With the exception of the CEO, 10%
A proportion (which for 2010 may be up to 30%) of the total annual incentive opportunity for the executive directors and other members of the Pearson Management Committee is based on performance against personal objectives as agreed with the CEO.chief executive (or, in the case of the chief executive, the chairman). These comprise functional, operational, strategic and non-financial objectives relevant to the executives’ specific areas of responsibility and inter alia may include objectives relating to environmental, social and governance issues.
 
For 2007,2010, the financial performance measures for Pearson plc are sales, operating profit (for the operating companies) and growth in underlying adjusted earnings per share for continuing operations at constant exchange rates (for Pearson plc), average working capital as a ratio to sales and operating cash flow. For subsequent years,The selection and weighting of the performance measures will be set attakes into account the time.strategic objectives and the business priorities relevant to each operating company and to Pearson overall each year.
 For 2007, there are no
In each year’s report on directors’ remuneration, we describe any changes to target and maximum incentive opportunities for the chief executive directors’ individual incentive opportunities. and the other executive directors for the year ahead.
For the CEO,2010, there is no change to the target annual incentive opportunity isfor the chief executive which remains at 100% of base salary. We reviewed the chief executive’s maximum opportunity in light of competitive market data and practice elsewhere in the company and have increased it to 180% of base salary and the maximum is 150%. (150% in 2009)


47

For the other executive directors and other members of the Pearson Management Committee, we have reviewed individual incentive opportunities taking into account their membership of that committee and the contribution of their respective businesses or role to Pearson’s overall financial goals. In the case of the executive directors, the target individual incentive opportunity is in a range up to 75%87.5% of salary and thebase salary. The maximum isopportunity remains at twice target.target (as in 2009).
 
The annual incentive plans are discretionary and the committeeCommittee reserves the right to make adjustments to payouts up or down taking into accountif it believes exceptional factors.
factors warrant doing so. The committee will continue to review themay also award individual discretionary incentive payments although no such payments were awarded in respect of 2009.
For 2009, total annual incentive plans each year and to revise the performance measures, targets and individual incentive opportunities in light of current conditions.
      Annual incentive payments do not form part of pensionable earnings.
      For 2006, annual incentives for Marjorie Scardino, David Bell, Rona Fairhead and Robin Freestone were based on thePearson plc and operating company financial performance of Pearson plc. In the case of John Makinson, 70% of his annual incentive was based on the performance of Penguin Group and 20% on the financial performance of Pearson plc. In the case of David Bell, Rona Fairhead, Robin Freestone and John Makinson, 10% of their annual incentives was based on performance against personal objectives.objectives as follows:
 
             
Name
 Pearson plc Operating company Personal objectives
 
Marjorie Scardino  100%  —   — 
David Bell  75%  —   25%
Will Ethridge  30%  60%  10%
Rona Fairhead  30%  60%  10%
Robin Freestone  90%  —   10%
John Makinson  30%  60%  10%
For Pearson plc, the performance measures were sales, earnings per share growth, operating cash flow, sales and average working capital as ato sales ratio to sales. Underlyingand operating cash flow. Sales and growth in adjusted earnings per share at constant exchange rates consistent with reported adjusted earnings per share of 40.2p was better thanwere between target but below the level of performance required for maximum payout.and maximum. Average working capital as a ratio to sales and operating cash flow of £575m were at and above maximum respectively. Sales at £4,423m were below target but above threshold.maximum.
 
For Penguin Group,Pearson Education North America, the performance measures were sales, operating profit, operating cash flow and average working capital as a ratio to sales. Forsales and operating cash flow. Operating profit, average working capital as a ratio to sales and operating cash flow were all above maximum level. Sales were above target but below maximum.
For FT Publishing, the performance was better than thatmeasures were sales, operating profit and operating cash flow. Sales were below threshold level. FT Publishing exceeded the level of performance required for maximum payout. Salespayout on operating cash flow and operating profit. Sales were below threshold.
For our professional testing business (Pearson VUE),the performance measures were sales, operating profit, average working capital as a ratio to sales, and operating cash flow. Sales were between threshold and target. Operating profit and operating cash flow were both above target but below maximum. Average working capital as a ratio to sales was above the maximum level.
 None of
For Penguin Group,the executive directors was directly covered by the plans for the other operating companies where the same performance measures applied.were sales, operating profit, operating margin, average working capital as a ratio to sales and operating cash flow. Penguin Group exceeded the level of performance required for maximum payout on operating cash flow. Average working capital to sales ratio, sales, operating profit and operating margin were above target but below maximum.
Bonus share matching
Bonus share matching
 The
In 2008, shareholders approved the renewal of the annual bonus share matching plan, which permits executive directors and senior executives around the company to invest up to 50% of any after-tax annual bonus in Pearson shares. For awards made since 2006, if these
If the participant’s invested shares are held, and the company’s adjustedthey will be matched subject to earnings per share increase in real terms by at least 3% per annum compoundgrowth over a five-yearthe three-year performance period the company will match them on a gross basis up to a maximum of one matching share for every

46

one held. Halfheld (i.e., the number of matching shares will vestbe equal to the number of shares that could have been acquired with the amount of the pre-tax annual bonus taken in invested shares).
Fifty percent of the maximum matching award, will be released if the company’s adjusted earnings per share increase in real terms by at least 3% per annum compound over the first three years.three-year performance period. One matching share for


48

      Real growth is measured against
every one invested share held (i.e., 100% of the UK Government’s Index of Retail Prices (All Items). We choose to test ourmaximum matching award, will be released if the company’s adjusted earnings per share growth against UK inflation over three and five years to measure the company’s financial progressincrease in real terms by 5% per annum compound over the period tosame period).
For real growth in adjusted earnings per share of between 3% and 5% per annum compound, the rate at which the entitlementparticipant’s invested shares will be matched will be calculated according to a straight-line sliding scale.
Where matching shares relates.vest in accordance with the plan, a participant will also receive ‘dividend’ shares representing the gross value of dividends that would have been paid on the matching shares during the holding period and re-invested.
The long-term incentive plan
Long-term incentives
 
At the annual general meeting in April 2006, shareholders approved the renewal of the long-term incentive plan first introduced in 2001.
 
Executive directors, senior executives and other managers are eligible tocan participate in the plan which can deliver restricted stockand/or stock options. Approximately 6% of the Group’s employees currently hold awards under the plan. The aim is to give the committeeCommittee a range of tools with which to link corporate performance to management’s long-term reward in a flexible way. It is not the committee’sCommittee’s intention to grant stock options in 2007.2010.
 
Restricted stock granted to executive directors vests only when stretching corporate performance targets over a specified period have been met. Awards vest on a sliding scale based on performance over the period. There is no retesting. The committee determines the performance measures and targets governing an award of restricted stock prior to grant.
 
The performance measures that have applied forsince 2006 and that will apply for the 20072010 and subsequent awards and subsequently for the executive directors are focused on delivering and improving returns to shareholders. These are relative total shareholder return, return on invested capital and earnings per share growth.
 
Restricted stock may be granted without performance conditions to satisfy recruitment and retention objectives. Restricted stock awards that are not subject to performance conditions will not be granted to any of the current executive directors.
The Committee’s independent advisers verify each year the expected value of individual awards (i.e., their net present value after taking into account the vesting schedule, risk of forfeiture and the probability that any performance targets will be met). The level of individual awards takes into account three factors: their expected values; the assessments by the Committee’s independent advisers of market practice for comparable companies and of directors’ total remuneration relative to the market and the face value of individual awards and their potential value should the performance targets be met in full.
Pearson wishes to encourage executives and managers to build up a long-term holding of shares so as to demonstrate their commitment to the company. To achieve this, for awards of restricted stock that are subject to performance conditions over a three-year period, 75% of the award vests at the end of the three-year period. The remaining 25% of the award only vests if the participant retains the after-tax number of shares that vest at year three for a further two years.
 The committee establishes each year the expected value of individual awards taking into account assessments by the committee’s independent advisers of market practice for comparable companies, directors’ total remuneration relative to the market and the potential value of awards should the performance target be met in full.
      Restricted stock may be granted without performance conditions to satisfy recruitment and retention objectives. Restricted stock awards that are not subject to performance conditions will not be granted to any of the current executive directors.
Where shares vest, participants receive additional shares representing the gross value of dividends that would have been paid on these shares during the performance period and reinvested. The expected value of awards made on this basis take this into account.
 
There are limits on the amount of new-issue equity we can use. In any rolling 10-yearten-year period, no more than 10% of Pearson equity will be issued, or be capable of being issued, under all Pearson’s share plans, and no more than 5% of Pearson equity will be issued, or be capable of being issued, under executive or discretionary plans. In addition, for existing shares no more than 5% of Pearson equity may be held in trust at any time.
Shareholding policy
Shareholding policy
 As previously noted, in line with the policy of encouraging widespread employee ownership, the company encourages
We encourage executive directors to build up a substantial shareholding in the company.
      Givencompany in line with the policy of encouraging widespread employee share retention featuresownership. We do not think it is necessary to specify a particular


49

relationship of the annual bonus share matching and long-term incentive plans andshareholding to salary because of the volatility of the stock market we do not think it is appropriate to specify a particular relationship of shareholding to salary.and the share retention features that already exist in the annual bonus share matching plan and long-term incentive plans.

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Service agreements
 
Service agreements
In accordance with long established policy, all continuing executive directors have rolling service agreements under which, other than by termination in accordance with the terms of these agreements, employment continues until retirement. These
The committee reviewed the policy on executive employment agreements in 2008 and again in 2010. For future executive directors, service agreements should provide that the company may terminate these agreements by giving no more than 12 months’ notice. As an alternative, the company may at its discretion pay in lieu of that notice. Payment in lieu of notice may be made in instalments and may be subject to mitigation.
There are no special provisions for notice, pay in some instances they specify the compensation payable by waylieu of notice or liquidated damages in circumstances where the company terminatesevent of termination of employment in the agreements without noticeevent of a change of control of Pearson. On termination of employment, executive directors’ entitlements to any vested or cause. We feel that these notice periods and provisions for liquidated damagesunvested awards under Pearson’s discretionary share plans are adequate compensation for loss of office andtreated in lineaccordance with the market. The compensation payable in these circumstances is typically 100% of annual salary, 100% of other benefits and a proportion of potential bonus.
Retirement benefits
      Following are the retirement benefits for eachterms of the executive directors.relevant plan.
 
Retirement benefits
Executive directors participate in the approved pension arrangements set up for Pearson employees. Marjorie Scardino, Will Ethridge, John Makinson, Rona Fairhead and Robin Freestone will also receive benefits under unapprovedhave other retirement arrangements discussed below because of the cap on the amount of benefits that can be provided from the approved arrangements in the US and the UK.
The differences in the arrangements for the current executive directors reflect the different arrangements in the UK and the US and the changes in pension arrangements generally over the periods of their employment. The pension arrangements for all the executive directors include life insurance cover while in employment, and entitlement to a pension in the event of ill-health or disability. A pension for their spouseand/or dependants is also available on death.
 
In the US, the approved defined benefit arrangement is the Pearson Inc. Pension Plan. This plan provides a lump sum convertible to a pension on retirement. The lump sum accrued at 6% of capped compensation until 31 December 31, 2001 when further benefit accruals ceased. Normal retirementceased for most employees. Employees who satisfied criteria of age and service at that time continued to accrue benefits under the plan. Will Ethridge is age 65 although early retirementincluded in this group and continues to accrue benefits under this plan. Marjorie Scardino is possible subject to a reduction for early payment. No increases are guaranteed for pensions in payment. There is a spouse’s pension on death in servicenot and her benefit accruals under this plan ceased at the option to provide a death in retirement pension by reducing the member’s pension.end of 2001.
 
The approved defined contribution arrangement in the US is a 401(k) plan. At retirement, the account balances will be used to provide benefits. In the event of death before retirement, the account balances will be used to provide benefits for dependants.
 
In the UK, the approvedpension plan is the Pearson Group Pension Plan and executive directors participate in either the Final Pay or the Money Purchase 2003 section. Normal retirement age is 62, but, subject to company consent, retirement is currently possible after age 50. The50 (age 55 from April 2010). In the Final Pay section, the accrued pension is reduced on retirement prior to age 60. Pensions in payment are guaranteed to increase each year at 5% or the increase in the Index of Retail Prices, if lower. Pensions for a member’s spouse, dependant childrenand/or nominated financial dependant are payable in the event of death. In the Money Purchase 2003 section the account balances are used to provide benefits at retirement. In the event of death before retirement pensions for a member’s spouse, dependant childrenand/or nominated financial dependant are payable.
 
Members of the Pearson Group Pension Plan who joined after May 1989 are subject to an upper limit of earnings that can be used for pension purposes, known as the earnings cap. This limit, £108,600 as at 6 April 5, 2006, was abolished by the Finance Act 2004. However the Pearson Group Pension Plan has retained its own ‘cap’’cap’, which will increase annually in line with the UK Government’s Index of Retail Prices (All Items). The cap was £123,600 as at 6 April 2009.


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      In response to
As a result of the UK Government’s plans for pensions simplification and so-called‘A-Day’A-Day changes effective from April 2006, UK executive directors and other members of the Pearson Group Pension Plan who are, or become, affected by the lifetime allowance were offeredare provided with a cash supplement as an alternative to further accrual of pension benefits on a basis that is broadly cost neutral to the company. In 2009 the only member of the board to whom this was applicable was David Bell. David was offered the allowance alternative but declined and continued as an active member of the plan. With David’s retirement there are no board members who received the offer of an allowance alternative.
Marjorie Scardino
Marjorie Scardino
 
Marjorie Scardino participates in the Pearson Inc. Pension Plan and the approved 401(k) plan.
 
Additional pension benefits will beare provided through an unfunded unapproved defined contribution plan and a funded defined contribution plan approved by HM Revenue and Customs as a corresponding plan to

48

replace part of the unfunded plan. The account balance of the unfunded unapproved defined contribution plan is determined by reference to the value of a notional cash account that increases annually by a specified notional interest rate. This plan provides the opportunity to convert a proportion of this notional cash account into a notional share account reflecting the value of a number of Pearson ordinary shares. The number of shares in the notional share account is determined by reference to the market value of Pearson shares at the date of conversion.
David Bell
David Bell
David Bell is drawing his pension from the Pearson Group Pension Plan. He began to receive his pension effective 30 September 2008 on attainment of Normal Retirement Age.
Will Ethridge
Will Ethridge is a member of the Pearson GroupInc. Pension Plan.Plan and the approved 401(k) plan. He is eligible foralso participates in an unfunded, unapproved Supplemental Executive Retirement Plan (SERP) that provides an annual accrual of 2% of final average earnings, less benefits accrued in the Pearson Inc. Pension Plan and US Social Security. Additional defined contribution benefits are provided through a pension of two-thirds of his final base salary at age 62 due to his long service but early retirement with a reduced pension before that date is possible, subject to company consent.funded, unapproved 401(k) excess plan.
Rona Fairhead
Rona Fairhead
 
Rona Fairhead is a member of the Pearson Group Pension Plan. Her pension accrual rate is 1/30th of pensionable salary per annum, restricted to the plan earnings cap.
Until April 2006, the company also contributed to a Funded Unapproved Retirement Benefits Scheme (FURBS) on her behalf. In the event of death before retirement, the proceeds of the FURBS account will be used to provide benefits for her dependants. Since April 2006, she has received a taxable and non-pensionable cash supplement in replacement of the FURBS.
Robin Freestone
Robin Freestone
 
Robin Freestone is a member of the Money Purchase 2003 section of the Pearson Group Pension Plan. Company contributions are 16% of pensionable salary per annum, restricted to the plan earnings cap.
Until April 2006, the company also contributed to a Funded Unapproved Retirement Benefits Scheme (FURBS) on his behalf. In the event of death before retirement, the proceeds of the FURBS account will be used to provide benefits for his dependants. Since April 2006, he has received a taxable and non-pensionable cash supplement in replacement of the FURBS.
John Makinson
John Makinson
 
John Makinson is a member of the Pearson Group Pension Plan under which his pensionable salary is restricted to the plan earnings cap. The company ceased contributions on 31 December 31, 2001 to his FURBS arrangement. During 2002 it set up an Unfunded Unapproved Retirement Benefits Scheme (UURBS) for him. The UURBS tops up the pension payable from the Pearson Group Pension Plan and the closed FURBS to target a pension of two-thirds of a revalued base salary on retirement at age 62. The revalued base salary is defined as £450,000 effective at 1 June 1, 2002, increased at 1 January 1, each year by reference to the increase in the UK Government’s Index of Retail Prices (All Items). In the event of his death a pension from the Pearson Group Pension Plan, the FURBS and the UURBS will be paid to his spouse or nominated financial dependant. Early retirement is possible from age 50 (age 55 from April 2010), with company consent.


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The pension is reduced to reflect the shorter service, and before age 60, further reduced for early payment.
Executive directors’ non-executive directorships
Executive directors’ non-executive directorships
 
Our policy is that executive directors may, by agreement with the board, serve as non-executives of other companies and retain any fees payable for their services.
 
The following executive directors served as non-executive directors elsewhere and received fees or other benefits for the period covered by this report as follows: Marjorie Scardino (Nokia Corporation and MacArthur Foundation); David Bell (VITEC Group plc); and Rona Fairhead (HSBC Holdings plc); Robin Freestone (eChem)plc and John Makinson (George Weston Limited)Spencer Stuart). Other executive directors served as non-executive directors elsewhere but did not receive fees.

49

Chairman’s remuneration
 
Chairman’s remuneration
Our policy is that the chairman’s pay should be set at a level that is competitive with those of chairmen in similar positions in comparable companies. He is not entitled to any annual or long-term incentive, retirement or other benefits.
 In accordance with the terms of his appointment, the committee intends to review
There were no changes in the chairman’s remuneration in 2007. Any change to current2009. With effect from 1 January 2007, his remuneration is subject to the approval of the full board and will be set out in the report on directors’ remuneration for 2007.was £450,000 per year.
Non-Executive directors
Non-Executive directors
 
Fees for non-executive directors are determined by the full board having regard to market practice and within the restrictions contained in the company’sPearson’s articles of association. Non-executive directors receive no other pay or benefits (other than reimbursement for expenses incurred in connection with their directorship of the company)Pearson) and do not participate in the company’sPearson’s equity-based incentive plans. The
There were no changes in the structure and level and structure of non-executive directors’ fees effectivein 2009. With effect from January 2005 is1 July 2007, these were as follows:
     
  Fees payable from
  JanuaryJuly 1, 20052007 (£)
 (£)
Basic non-executiveNon-executive director fee  45,00060,000 
Chairmanship of audit andcommittee20,000
Chairmanship of personnel committeescommittee15,000
Membership of audit committee  10,000 
Membership of audit and personnel committeescommittee  5,000 
Senior independent director’s feedirector  10,000
Overseas meetings (per meeting)2,50015,000 
 One-third
A minimum of 25% of the basic fee or the entire fee in the case of Rana Talwar, is paid in Pearson shares that the non-executive directors have committed to retain for the period of their directorships.
 Patrick Cescau’s
Terry Burns also receives a fee is paid over toin respect of his employer.non-executive directorship at Edexcel.
 The board intends to review the level and structure of non-executive directors’ fees in 2007. Any changes to existing arrangements will be set out in the report on directors’ remuneration for 2007.
Non-executive directors serve Pearson under letters of appointment and do not have service contracts. There is no entitlement to compensation on the termination of their directorships.


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Remuneration of senior management
Remuneration of senior management
 
Excluding contributions to pension funds and related benefits, senior management remuneration for 20062009 was as follows:
                     
  Salaries/ Annual      
  Fees incentive(1) Allowances(2) Benefits Total
           
  £000 £000 £000 £000 £000
Chairman
                    
Glen Moreno  425   —   —   —   425 
Executive directors
                    
Marjorie Scardino  830   1,067   50   15   1,962 
David Bell  425   512   —   17   954 
Rona Fairhead  470   573   —   19   1,062 
Robin Freestone (appointed June 12, 2006)  209   243   —   8   460 
John Makinson  490   627   183   26   1,326 
                
Senior management as a group
  2,849   3,022   233   85   6,189 
                

50

 
                     
  Salaries/
  Annual
          
  Fees(1)  Incentive(2)  Allowances(3)  Benefits(4)  Total(5) 
  £000  £000  £000  £000  £000 
 
Non-executive Chairman
                    
Glen Moreno  450   —   —   —   450 
Executive directors
                    
Marjorie Scardino  950   1,301   56   21   2,328 
David Bell (stepped down 1 May 2009)  154   207   —   6   367 
Will Ethridge  639   874   —   —   1,513 
Rona Fairhead  506   570   —   28   1,104 
Robin Freestone  450   639   —   13   1,102 
John Makinson  525   655   216   29   1,425 
                     
Senior management as a group
  3,674   4,246   272   97   8,289 
                     
Notes:
(1)  ForThere were no increases in base salary for the full year, Robin Freestone’s remuneration was: salary/fees — £315,170; annual incentive — £329,438; benefits — £13,980; total — £658,588.executive directors for 2009
 
(2)  Allowances for Marjorie Scardino include £40,190£44,870 in respect of housing costs and a US payroll supplement of £9,646.£10,961. John Makinson is entitled to a location and market premium in relation to the management of the business of the Penguin Group in the US and received £183,125£215,594 for 2006.2009.
 
(3)  Benefits include company car, car allowance and UK health care.care premiums. US health and welfare benefits for Marjorie Scardino and Will Ethridge are self-insured and the company cost, after employee contributions, is tax free to employees. For Marjorie Scardino, benefits include £5,317 for pension planning and financial advice. Marjorie Scardino, Rona Fairhead, David Bell and John Makinson have the use of a chauffeur.
(4)No amounts as compensation for loss of office and no expense allowances chargeable to UK income tax were paid during the year.
(5)David Bell stepped down from the board on 1 May 2009. He continued to be entitled to the same base salary and other benefits in accordance with his service agreement with the company until his retirement from the company on 31 December 2009.
Share options of senior management
 
This table sets forth for each director the number of share options held as of December 31, 20062009 as well as the exercise price, rounded to the nearest whole penny/pence/cent, and the range of expiration dates of these options.
           
  Number of
   Exercise
 Earliest
  
Director
 Options (1) Price Exercise Date Expiry Date
 
Marjorie Scardino(2) 176,55641,550 c* a*1421.0p 973.3p05/09/14/0109/14/08
5,660a*1090.0p09/14/0109/14/08
37,583c*1372.4p06/08/02 06/08/0905/09/11
37,583c*1647.5p06/08/0206/08/09
36,983c3224.3p05/03/0305/03/10
  41,550 d*c* 1421.0p 05/09/0203 05/09/11
  41,550 d*c* 1421.0p 05/09/0304 05/09/11
  41,550 d*c* 1421.0p05/09/0405/09/11
41,550d*1421.0p 05/09/05 05/09/11
           
Total
 460,565—166,200        
           
David Bell20,496a*973.3p09/14/0109/14/08
1,142b494.8p08/01/0702/01/08
373b507.6p08/01/0802/01/09
297b629.6p08/01/0902/01/10
18,705c*1372.4p06/08/0206/08/09
18,705c*1647.5p06/08/0206/08/09
18,686c3224.3p05/03/0305/03/10
16,350d*1421.0p05/09/0205/09/11
16,350d*1421.0p05/09/0305/09/11
16,350d*1421.0p05/09/0405/09/11
16,350d*1421.0p05/09/0505/09/11
Total
143,804—
Rona Fairhead1,904b494.8p08/01/0702/01/08
20,000d*822.0p11/01/0211/01/11
20,000d*822.0p11/01/0311/01/11
20,000d*822.0p11/01/0411/01/11
Total
61,904—


53

51

           
  Number of
   Exercise
 Earliest
  
Director
 Options (1) Price Exercise Date Expiry Date
 
David Bell 297 b 629.6p 08/01/09 02/01/10
  821 b 690.4p 08/01/10 02/01/11
  16,350 c* 1421.0p 05/09/02 05/09/11
  16,350 c* 1421.0p 05/09/03 05/09/11
  16,350 c* 1421.0p 05/09/04 05/09/11
  16,350 c* 1421.0p 05/09/05 05/09/11
           
Total
 66,518        
           
Will Ethridge 11,010 c* $21.00 05/09/02 05/09/11
  11,010 c* $21.00 05/09/03 05/09/11
  11,010 c* $21.00 05/09/04 05/09/11
  11,010 c* $21.00 05/09/05 05/09/11
  14,680 c* $11.97 11/01/02 11/01/11
  14,680 c* $11.97 11/01/03 11/01/11
  14,680 c* $11.97 11/01/04 11/01/11
           
Total
 88,080        
           
Rona Fairhead 2,371 b 690.4p 08/01/12 02/01/13
  20,000 c* 822.0p 11/01/02 11/01/11
  20,000 c* 822.0p 11/01/03 11/01/11
  20,000 c* 822.0p 11/01/04 11/01/11
           
Total
 62,371        
           
Robin Freestone 1,757 b 534.8p 08/01/11 02/01/12
           
Total
 1,757        
           
John Makinson 4,178 b 424.8p 08/01/10 02/01/11
  19,785 c* 1421.0p 05/09/02 05/09/11
  19,785 c* 1421.0p 05/09/03 05/09/11
  19,785 c* 1421.0p 05/09/04 05/09/11
  19,785 c* 1421.0p 05/09/05 05/09/11
           
Total
 83,318        
           
Number ofExerciseEarliest
DirectorOptions(1)PriceExercise DateExpiry Date
Notes:
Robin Freestone1,866b507.6p08/01/0802/01/09
Total
1,866—
John Makinson73,920a*676.4p09/12/0009/12/07
30,576a*973.3p09/14/0109/14/08
4,178b424.8p08/01/1002/01/11
21,477c*1372.4p06/08/0206/08/09
21,477c*1647.5p06/08/0206/08/09
21,356c3224.3p05/03/0305/03/10
19,785d*1421.0p05/09/0205/09/11
19,785d*1421.0p05/09/0305/09/11
19,785d*1421.0p05/09/0405/09/11
19,785d*1421.0p05/09/0505/09/11
Total
252,124—
 
(1)  Shares under option are designated as:aexecutive;bworldwide save for shares; andcpremium priced; andd long-term incentive; and*where options are exercisable.
aExecutive
The plans under which these options were granted were replaced with the introduction of the long-term incentive plan in 2001. No executive options have been granted to the directors since 1998. All options that remain outstanding are exercisable (all performance conditions having already been met prior to 2005) and lapse if they remain unexercised at the tenth anniversary of the date of grant.
The plans under which these options were granted were replaced with the introduction of the long-term incentive plan in 2001. No executive options have been granted to the directors since 1998. All options have now lapsed, having been unexercised at the tenth anniversary of the date of grant.
bWorldwide save for shares
The acquisition of shares under the worldwide save for shares plan is not subject to the satisfaction of a performance target.
The acquisition of shares under the worldwide save for shares plan is not subject to the satisfaction of a performance target.
cPremium priced
The plan under which these options were granted was replaced with the introduction of the long-term incentive plan in 2001. No Premium Priced Options (PPOs) have been granted to the directors since 1999. The share price targets for the three-year and five-year tranches of PPOs granted in 1999 have already been met prior to 2006. The share price target for the seven-year tranche of PPOs granted in 1999 was not met in 2006 and the options lapsed. The share price target for the outstanding PPOs granted in 2000 has yet to be met. The secondary real growth in earnings per share target for any PPOs to become exercisable has already been met prior to 2006.
All PPOs that remain outstanding lapse if they remain unexercised at the tenth anniversary of the date of grant.
dLong-term incentive
All options that remain outstanding are exercisable and lapse if they remain unexercised at the tenth anniversary of the date of grant.
All options that remain outstanding are exercisable and lapse if they remain unexercised at the tenth anniversary of the date of grant.
(2)  In addition, Marjorie Scardino contributes US$1,000 per month (the maximum allowed) to the US employee stock purchase plan. The terms of this plan allow participants to make monthly contributions for one year and

54

to acquire shares at the end of that period at a price that is the lower of the market price at the beginning or the end of the period, both less 15%.
Share ownership of senior management
 
The table below sets forth the number of ordinary shares and restricted shares held by each of our directors as at March 31, 2007.February 28, 2010. Additional information with respect to share options held by, and bonus

52

awards for, these persons is set out above in “Remuneration of Senior Management” and “Share Options for Senior Management”. The total number of ordinary shares held by senior management as of March 31, 2007February 28, 2010 was 734,9132,213,434 representing less than 1% 1%of the issued share capital on March 31, 2007.February 28, 2010.
         
  Ordinary Restricted
As at March 31, 2007 shares(1) shares(2)
     
Glen Moreno  110,000   — 
Marjorie Scardino  216,777   1,668,675 
David Arculus (appointed February 28, 2006)  1,317   — 
David Bell  109,578   658,625 
Terry Burns  7,349   — 
Patrick Cescau  2,758   — 
Rona Fairhead  62,593   750,046 
Robin Freestone (appointed June 12, 2006)  2,089   153,435 
Susan Fuhrman  4,163   — 
Ken Hydon (appointed February 28, 2006)  6,317   — 
John Makinson  172,872   724,562 
Reuben Mark (resigned April 21, 2006)  16,908   — 
Vernon Sankey (resigned April 21, 2006)  5,563   — 
Rana Talwar (resigned April 27, 2007)  18,683   — 
 
         
  Ordinary
  Restricted
 
As at February 28, 2010
 shares(1)  shares(2) 
 
Glen Moreno  210,000   — 
Marjorie Scardino  824,124   1,740,911 
David Arculus  13,044   — 
David Bell  253,050(3)  358,277(3)
Terry Burns  12,008   — 
Patrick Cescau  5,356   — 
Will Ethridge  262,988   622,707 
Rona Fairhead  270,982   598,749 
Robin Freestone  118,996   482,537 
Susan Fuhrman  9,384   — 
Ken Hydon  9,774   — 
John Makinson  474,581   538,569 
CK Prahalad  2,197   — 
Notes:
(1)Amounts include shares acquired by individuals under the annual bonus share matching plan and amounts purchased in the market by individuals.
 
(2)Restricted shares comprise awards made under the annual bonus share matching andlong-term incentive plans. The number of shares shown represents the maximum number of shares which may vest, subject to the performance conditions being fulfilled.
(3)David Bell’s figures are as at May 1, 2009 when David Bell resigned as a director of Pearson plc.
Employee share ownership plans
Worldwide save for shares & US employee share purchase plans
Worldwide save for shares and US employee share purchase plans
 
In 1998, we introduced a worldwide save for shares plan. Under this plan, our employees around the world have the option to save a portion of their monthly salary over periods of three, five or seven years. At the end of this period, the employee has the option to purchase ordinary shares with the accumulated funds at a purchase price equal to 80% of the market price prevailing at the commencement of the employee’s participation in the plan.
 
In the United States, this plan operates as a stock purchase plan under Section 423 of the US Internal Revenue Code of 1986. This plan was introduced in 2000 following Pearson’s listing on the New York Stock Exchange. Under it, participants save a portion of their monthly salary over six month periods, at the end of which they have the option to purchase ADRs with their accumulated funds at a purchase price equal to 85% of the lower of the market price prevailing at the beginning or end of the period.


55

Board Practices
 
Our board currently comprises the chairman, who is apart-timenon-executive, part-time non-executive director, five executive directors and six (this will be 5 following the resignation of Rana Talwar after April 27, 2007)non-executive directors. Our articles of association provide that at every annual general meeting,one-third of the board of directors, or the number nearest toone-third, shall retire from office. The directors to retire each year are the directors who have been longest in office since their last election or appointment. A retiring director is eligible forre-election. If at any annual general meeting, the place of a retiring director is not filled, the retiring director, if willing, is deemed to have beenre-elected, unless at or prior to such meeting it is expressly resolved not to fill the vacated office, or unless a resolution for there-election of that director has been put to the meeting and

53

lost. Our articles of association also provide that every director be subject tore-appointment by shareholders at the next annual general meeting following their appointment.
 Details of our approach to
However this year, and in future years, in accordance with good corporate governance, andthe board have resolved that all directors should offer themselves for re-election on an accountannual basis at the company’s annual general meeting. Accordingly, all of howthe directors will offer themselves for re-election, (or reappointment in the case of directors who were appointed since the last meeting), at the forthcoming AGM on 30 April 2010.
Pearson is listed on the New York Stock Exchange (“NYSE”). As a listed non-US issuer, we are required to comply with NYSE requirements can be foundsome of the NYSE’s corporate governance rules, and otherwise must disclose on our website (www.pearson.com/investor/corpgov.htm).any significant ways in which our corporate governance practices differ from those followed by US companies under the NYSE listing standards. At this time, the Company believes that it is in compliance in all material respects with all the NYSE rules except that the Nomination Committee is not composed entirely of independent directors, and that it is the full board, not the Nomination Committee, that develops and recommends corporate governance principles.
 
The board of directors has established the following committees, all of which havereport to the board. Each committee has its own written terms of reference setting out their authority and duties:duties. These can be found on our website (www.pearson.com/investors/shareholder-information/governance)
Audit committee
Audit committee
 
This committee provides the board with a vehicle to appraise our financial management and reporting and to assess the integrity of our accounting procedures and financial controls. Ken Hydon chairs this committee and its other members are David Arculus, Patrick Cescau and Susan Fuhrman. Ken Hydon is also the designated audit committee financial expert within the meaning of the applicable rules and regulations of the US Securities and Exchange Commission. Our internal and external auditors have direct access to the committee to raise any matter of concern and to report the results of work directed by the committee. The
Personnel committee reports to the full board of directors.
Personnel committee
This committee meets regularly to decide the remuneration and benefits of the executive directors and the chief executives of our three operating divisions. The committee also recommends the chairman’s remuneration to the board of directors for its decision and reviews management development and succession plans. David Arculus chairs this committee and its other members are Terry Burns, Rana TalwarGlen Moreno and since 1 January 2007, Glen Moreno.Ken Hydon.
Nomination committee
Nomination committee
 
This committee meets from time to time as necessary to consider the appointment of new directors. The committee is chaired by Glen Moreno and comprises Marjorie Scardino and all of thenon-executive directors.
Treasury committee
 Following a review of the board committees by the new chairman during 2006, it was decided to disband the treasury committee, dividing its responsibilities between the board (with regard to approval of treasury policies) and the audit committee (to monitor compliance with these policies).
Employees
 
The average numbersnumber of persons employed by us during each of the three fiscal years ended 20062009 were as follows:
 • 34,34137,164 in fiscal 20062009,


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 • 32,20333,680 in fiscal 2005,2008, and
 
 • 33,08632,692 in fiscal 2004.2007.
 
We, through our subsidiaries, have entered into collective bargaining agreements with employees in various locations. Our management has no reason to believe that we would not be able to renegotiate any such agreements on satisfactory terms. We encourage employees to contribute actively to the business in the context of their particular job roles and believe that the relations with our employees are generally good.

54

 
The table set forth below shows for 2006, 20052009, 2008 and 20042007 the average number of persons employed in each of our operating divisions.
             
Average number employed 2006 2005 2004
       
School  11,064   10,133   10,403 
Higher Education  4,368   4,196   4,087 
Professional  3,754   3,809   3,368 
Penguin  3,943   4,051   4,085 
FT Publishing  2,285   1,952   1,989 
IDC  2,200   1,956   1,826 
Other  1,669   1,573   1,365 
Continuing operations  29,283   27,670   27,123 
          
Discontinued operations  5,058   4,533   5,963 
          
Total  34,341   32,203   33,086 
          
             
Average number employed
 2009  2008  2007 
 
North American Education  15,606   15,412   14,327 
International Education  8,899   5,718   5,291 
Professional  2,662   2,641   2,540 
Penguin  4,163   4,112   4,163 
FT Publishing  2,328   2,379   2,083 
Interactive Data  2,459   2,413   2,300 
Other  1,047   909   918 
             
Continuing operations  37,164   33,584   31,622 
             
Discontinued operations  —   96   1,070 
             
Total  37,164   33,680   32,692 
             
ITEM 7.     MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
To our knowledge, as of February 28, 2007,2010, the only beneficial owners of 3% or more of our issued and outstanding ordinary share capital were Franklin Resources Inc. which owned 103,908,285 ordinary shares representing 12.9% of our outstanding ordinary shares, FMR Corp. and Fidelity International Limited which owned 49,800,888 ordinary shares representing 6.2% of our outstanding ordinary shares and Legal and& General Group plc which owned 28,868,36432,300,784 ordinary shares representing 3.6%3.98% of our outstanding ordinary shares. On February 28, 2007,2010, record holders with registered addresses in the United States held 36,623,44438,440,234 ADRs, which represented 4.5%4.74% of our outstanding ordinary shares. Because someSome of these ADRs are held by nominees and so these numbers may not accurately represent the number of beneficial owners in the United States.
 
Loans and equity advanced to joint ventures and associates during the year and as at December 31, 20062009 are shown in note 1312 in “Item 17.18. Financial Statements.” Amounts due from joint ventures and associates are set out in note 1922 and dividends receivable from joint ventures and associates are set out in note 1312 in “Item 17.18. Financial Statements”. There were no other related party transactions in 2006.2009.


57

ITEM 8.FINANCIAL INFORMATION
ITEM 8.     FINANCIAL INFORMATION
The financial statements filed as part of this Annual Report are included on pages F-1 throughF-70 hereof.
 
Other than those events described in note 35 in “Item 17.18. Financial Statements” of thisForm 20-F and seasonal fluctuations in borrowings, there has been no significant change to our financial condition or results of operations since December 31, 2006.2009. Our borrowings fluctuate by season due to the effect of the school year on the working capital requirements of the educational book business. Assuming no acquisitions or disposals, our maximum level of net debt normally occurs in July, and our minimum level of net debt normally occurs in December.
 
Our policy with respect to dividend distributions is described in response to “Item 3. Key Information” above.
Legal Proceedings
      We and our subsidiaries are defendants in a number of legal proceedings including, from time to time, government and arbitration proceedings, which are incidental to our and their operations. We do not expect that the outcome of pending proceedings, either individually or in the aggregate, will have a significant effect on our financial position or profitability nor have any such proceedings had any such effect in the recent past. To our knowledge, there are no material proceedings in which any member of senior management or any of

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our affiliates is a party adverse to us or any of our subsidiaries or in respect of which any of those persons has a material interest adverse to us or any of our subsidiaries.
ITEM 9.THE OFFER AND LISTING
 
The principal trading market for our ordinary shares is the London Stock Exchange. Our ordinary shares also trade in the United States in the form of ADSs evidenced by ADRs under a sponsored ADR facility with The Bank of New York Mellon, as depositary. We established this facility in March 1995 and amended it in August 2000 in connection with our New York Stock Exchange listing. Each ADS represents one ordinary share.
 
The ADSs trade on the New York Stock Exchange under the symbol “PSO”.
 
The following table sets forth the highest and lowest middle market quotations, which represent the average of closing bid and asked prices, for the ordinary shares, as derived from the Daily Official List of the London Stock Exchange and the average daily trading volume on the London Stock Exchange:
 • on an annual basis for our five most recent fiscal years,
 
 • on a quarterly basis for our most recent quarter and two most recent fiscal years, and
 
 • on a monthly basis for the six most recent months.
              
  Ordinary  
  shares  
    Average daily
Reference period High Low trading volume
       
    (Ordinary shares)
  (In pence)  
Five most recent fiscal years
            
 2006  811   671   5,004,500 
 2005  695   608   5,296,700 
 2004  682   579   6,219,200 
 2003  680   430   6,631,800 
 2002  922   505   6,164,500 
Most recent quarter and two most recent fiscal years
            
 2007 First quarter  842   762   5,864,200 
 2006 Fourth quarter  796   742   3,979,500 
 Third quarter  767   689   3,900,700 
 Second quarter  798   688   5,728,800 
 First quarter  812   671   6,395,400 
 2005 Fourth quarter  692   616   4,947,900 
 Third quarter  695   652   4,860,700 
 Second quarter  668   628   5,823,300 
 First quarter  662   608   5,626,100 
Most recent six months
            
 March 2007  872   783   8,538,000 
 February 2007  834   790   4,812,500 
 January 2007  842   762   6,380,300 
 December 2006  781   742   4,378,900 
 November 2006  789   751   3,509,000 
 October 2006  796   761   4,099,600 
             
  Ordinary shares Average daily
Reference period
 High Low trading volume
  (In pence)  
      (Ordinary shares)
 
Five most recent fiscal years
            
2009  893   578   4,030,500 
2008  733   519   4,758,300 
2007  915   695   6,405,600 
2006  811   671   5,004,500 
2005  695   608   5,296,700 
Most recent quarter and two most recent fiscal years
            
2009 Fourth quarter  893   755   2,777,200 
Third quarter  777   578   3,158,500 
Second quarter  733   600   4,554,700 
First quarter  714   584   5,695,700 
2008 Fourth quarter  651   520   5,603,400 
Third quarter  705   570   4,748,000 
Second quarter  710   611   3,590,800 
First quarter  733   682   5,083,300 
Most recent six months
            
February 2010  912   855   2,113,800 
January 2010  909   863   2,536,000 
December 2009  893   846   1,697,900 
November 2009  854   825   2,376,400 
October 2009  859   755   4,234,400 
September 2009  777   735   2,915,000 


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ITEM 10.ADDITIONAL INFORMATION
ITEM 10.     ADDITIONAL INFORMATION
Memorandum and articlesArticles of association
 
We summarize below the material provisions of our memorandum and articles of association, as amended, which have been filed as an exhibit to our annual report onForm 20-F for the year ended December 31, 2003.2009. The summary below is qualified entirely by reference to the Memorandum and Articles of Association. We have multiple business objectives and purposes and are authorized to do such things as the board may consider fit to further our interests or incidental or conducive to the attainment of our objectives and purposes.
Directors’ powers
Directors’ powers
 
Our business shall be managed by the board of directors and the board may exercise all such of our powers as are not required by law or by the Articles of Association or by any directions given by the Company by special resolution, to be exercised by resolutionin a general meeting.
Interested directors
For the purposes of section 175 of the shareholdersCompanies Act 2006 the board may authorize any matter proposed to it which would, if not so authorized, involve a breach of duty by a Director under that section, including, without limitation, any matter which relates to a situation in general meeting.which a Director has, or can have, an interest which conflicts, or possibly may conflict, with the interests of the Company. Any such authorization will be effective only if:
Interested directors(a) any requirement as to quorum at the meeting at which the matter is considered is met without counting the Director in question or any other interested Director; and
 
(b) the matter was agreed to without their voting or would have been agreed to if their votes had not been counted.
The board may (whether at the time of the giving of the authorization or subsequently) make any such authorization subject to any limits or conditions it expressly imposes but such authorization is otherwise given to the fullest extent permitted. The board may vary or terminate any such authorization at any time.
Provided that he has disclosed to the board the nature and extent of his interest, a Director notwithstanding his office:
(a) may be a party to, or otherwise interested in, any transaction or arrangement with the Company or in which the Company is otherwise (directly or indirectly) interested;
(b) may act by himself or his firm in a professional capacity for the Company (otherwise than as auditor) and he or his firm shall be entitled to remuneration for professional services as if he were not a Director;
(c) may be a director or other officer of, or employed by, or a party to a transaction or arrangement with, or otherwise interested in, any body corporate in which the Company is otherwise (directly or indirectly) interested.
A Director shall not, by reason of his office, be accountable to the Company for any remuneration or other benefit which he derives from any office or employment or from any transaction or arrangement or from any interest in any body corporate:
(a) the acceptance, entry into or existence of which has been approved by the board (subject, in any such case, to any limits or conditions to which such approval was subject); or
(b) which he is permitted to hold or enter into by virtue of paragraph (a), (b) or (c) above;
nor shall the receipt of any such remuneration or other benefit constitute a breach of his duty under section 176 of the Act.
A Director shall be under no duty to the Company with respect to any information which he obtains or has obtained otherwise than as a director of the Company and in respect of which he owes a duty of confidentiality to another person. However, to the extent that his relationship with that other person gives rise to a conflict of interest


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or possible conflict of interest, which has been approved by the board: the director shall not be disqualified from contracting with usin breach of the general duties he owes to the Company by virtue of his or her office or from having any other interest, whether direct or indirect, in any contract or arrangement entered into by or on behalf of us. An interested director must declare the nature of his or her interest in any contract or arrangement entered into by or on behalf of us in accordance with the Companies Act 1985. Provided that the director has declared his interest and acted in accordance with law, no such contract or arrangement shall be avoided and no director so contracting or being interested shall be liablesections 171 to account to us for any profit realized by him from the contract or arrangement by reason177 of the director holdingAct because he fails:
(a) to disclose any such information to the board or to any Director or other officer or employee of the Company; and/or
(b) to use or apply any such information in performing his duties as a Director of the Company.
Where the existence of a Director’s relationship with another person has been approved by the board and his officerelationship with that person gives rise to a conflict of interest or possible conflict of interest, the fiduciary relationship thereby established. A directorDirector shall not be in breach of the general duties he owes to the Company by virtue of sections 171 to 177 of the Act because he:
(a) absents himself from meetings of the board at which any matter relating to the conflict of interest or possible conflict of interest will or may be discussed or from the discussion of any such matter at a meeting or otherwise; and/or
(b) makes arrangements not to receive documents and information relating to any matter which gives rise to the conflict of interest or possible conflict of interest sent or supplied by the Companyand/or for such documents and information to be received and read by a professional adviser,
for so long as he reasonably believes such conflict of interest or possible conflict of interest subsists.
Except as stated below, a Director shall not vote onin respect of any contract or arrangement or any other proposal whatsoever in which he or she has together with any interest of any person connected with him or her, an interest which is, to his or her knowledge, a material interest, otherwise than by virtue of his or her interests in shares or debentures or other securities of or otherwise in or through us. If a question arises as to the materiality of a director’s interest or his or her entitlement to vote and the director does not voluntarily agree to abstain from voting, that question will be referred to the chairman of the board or, if the chairman also is interested, to a person appointed by the other directors who is not interested. The ruling of the chairman or that other person, as the case may be, will be final and conclusive.Company. A director willDirector shall not be counted in the quorum at a meeting of the Board in relation to any resolution on which he or she is prohibiteddebarred from voting.
 
Notwithstanding the foregoing, a director will be entitled to vote, and be counted in the quorum, on any resolution concerning any of the following matters:
 • the giving of any guarantee, security or indemnity in respect of money lent or obligations incurred by him or her or by any other person at the request of or for the benefit of usthe Company or any of ourits subsidiaries;
 
 • the giving of any guarantee, security or indemnity to a third party in respect of a debt or obligation of oursthe Company or any of ourits subsidiaries for which he or shehimself has assumed responsibility in whole or in part and whether alone or jointly with others under a guarantee or indemnity or by the giving of security;
 
 • any proposal relating to usthe Company or any of our subsidiariesits subsidiary undertakings where we areit is offering securities in which offer a directorDirector is or may be entitled to participate as a holder of securities or in the underwriting orsub-underwriting of which a directorDirector is to participate;
• any proposal relating to another company in which he and any persons connected with him do not to his knowledge hold an interest in shares (as that term is used in sections 820 to 825 of the Companies Act 2006) representing one per cent. or more of either any class of the equity share capital, or the voting rights, in such company;
 
 • any proposal relating to an arrangement for the benefit of ourthe employees of the Company or any of our subsidiaries thatits subsidiary undertakings which does not award him or her any privilege or benefit not generally awarded to the employees to whom such arrangement relates; and
 
 • any proposal concerning insurance that we propose to maintain or purchase for the benefit of directors or for the benefit of persons, including directors.

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Where proposals are under consideration concerning the appointment of two or more directors to offices or employment with us or any company in which we are interested, these proposals may be divided and considered separately and each of these directors, if not prohibited from voting under the provisoprovisions of the fourth clause above,eighth paragraph before this one, will be entitled to vote and be counted in the quorum with respect to each resolution except that concerning his or her own appointment.


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Borrowing powers
Borrowing powers
 
The board of directors may exercise all powers to borrow money and to mortgage or charge our undertaking, property and uncalled capital and to issue debentures and other securities, whether outright or as collateral security for any of our or any third party’s debts, liabilities or obligations. The board of directors must restrict the borrowings in order to secure that the aggregate amount of undischarged monies borrowed by us (and any of our subsidiaries), but excluding anyintra-group debts, shall not at any time (without the previous sanction of the Company in the form of an ordinary resolution) exceed a sum equal to twice the aggregate of the adjusted capital and reserves, unless the shareholders in general meeting sanction an excession of this limitation.reserves.
Other provisions relating to directors
Other provisions relating to directors
 
Under the articles of association, directors are paid out of our funds for their services as we may from time to time determine by ordinary resolution and, in the case ofnon-executive directors, up to an aggregate of £500,000£750,000 or such other amounts as resolved by the shareholders at a general meeting. Directors currently are not required to be qualified by owning our shares. Changes tohold any share qualification. From April 6, 2007 under the Companies Act 2006, the maximum age limit for directors of PLCs, which came into force on April 7, 2007, now permitwas 70, has been removed.
Annual general meetings
In every year the appointment of a director age 70 or over.
Annual general meetings and extraordinary general meetings
      Shareholders’ meetings may be eitherCompany must hold an annual general meetings or extraordinary general meetings. However,meeting (‘AGM’) (within a period of not more than 15 months after the date of the preceding AGM) at a place and time determined by the board. The following matters are ordinarily transactedusually considered at an annual general meeting:
 • sanctioning or declaringapproving final dividends;
 
 • consideration of the accounts and balance sheet;
 
 • ordinary reports of the board of directors and auditors and any other documents required to be annexed to the balance sheet;
 
 • as holders of ordinary shares vote for the election ofone-third of the members of the board of directors at every annual general meeting, the appointment or election of directors in the place of those retiring by rotation or otherwise;
 
 • appointment or reappointment of, and determination of the remuneration of, the auditors; and
 
 • the renewal, limitation, extension, variation or grant of any authority of or to the board pursuantin relation to the Companies Act 1985, to allotallotment of securities.
 Business transacted at an extraordinary general meeting may also be transacted at an annual general meeting.
      We hold a general meeting as our annual general meeting within fifteen months after the date of the preceding annual general meeting, at a place and time determined by the board. The board may call an extraordinarya general meeting whenever it thinks fit. If at any time and forthere are not within the United Kingdom sufficient directors capable of acting to form a quorum, any reason. The board mustdirector or any two members may convene an extraordinarya general meeting if requestedin the same manner as nearly as possible as that in which meetings may be convened by the board.
No business shall be dealt with at any general meeting unless a quorum is present when the meeting proceeds to do so by shareholders holding not less thanone-tenth of our issued share capital.
business. Three shareholdersmembers present in person and entitled to vote will constituteshall be a quorum for any general meeting. all purposes. A corporation being a member shall be deemed to be personally present if represented by its duly authorized representative.
If a quorum for a meeting convened at the request of shareholders is not present within fifteen minutes of the appointed time, the meeting will be dissolved. In any other case, the general meeting will be adjourned to the same day in the next week, at the same time and place, or to a time and place that the chairman fixes. If at that rescheduled meeting a quorum is not present within fifteen minutes from the time

58

appointed for holding the meeting, the shareholders present in person or by proxy will be a quorum. The chairman or, in his absence, the deputy chairman or any other director nominated by the board, will preside as chairman at every general meeting. If no director is present at the general meeting or no director consents to act as chairman, the shareholders present shall elect one of their number to be chairman of the meeting.


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Share Certificates
Ordinary shares
 Certificates representing ordinary
Every person whose name is entered as a member in the Company’s Register of Members shall be entitled to one certificate in respect of each class of shares are issued in registered form and, subjectheld. (The law regarding this does not apply to stock exchange nominees). Subject to the terms of issue of thosethe shares, certificates are issued following allotment or receipt of the form of transfer bearing the appropriate stamp duty by our registrar, Lloyds Bank Registrars, The Causeway, Worthing,Equiniti, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA, United Kingdom, telephone number +44-1903-502-541.+44-871-384-2043.
Share capital
Share capital
 
Any share may be issued with such preferred, deferred or other special rights or other restrictions as we may determine by way of a shareholders’ vote in general meeting. Subject to the Companies Act 1985,2006, any shares may be issued on terms that they are, or at our or the shareholders’ option are, liable to be redeemed on such terms and in such manner as we, before the issue of the shares, may determine by special resolution of the shareholders, determine.shareholders.
 
There are no provisions in the Articles of Association which discriminate against any existing or prospective shareholder as a result of such shareholder owning a substantial number of shares.
 
Subject to the terms of the shares which have been issued, the directors may from time to time make calls upon the shareholders in respect of any moneys unpaid on their shares, provided that (subject to the terms of the shares so issued) no call on any share shall be payable at less than fourteen clear days from the last call. The directors may, if they see fit, receive from any shareholder willing to advance the same, all and any part of the moneys uncalled and unpaid upon any shares held by him.
Changes in capital
Changes in capital
 
We may from time to time, by ordinary resolution:
 • consolidate and divide our share capital into shares of a larger amount than its existing shares; or
 
 • sub-divide all of or any of our existing shares into shares of smaller amounts, than is fixed by the Memorandum of Association, subject to the Companies Act 1985;2006; or
 
 • cancel any shares which, at the date of passing of the resolution, have not been taken, or agreed to be taken, by any person and diminish the amount of our share capital by the amount of the shares so cancelled.
 
We may, from time to time, by ordinary resolution increase our share capital and, subject to the consents and incidents required by the Companies Act 2006, may by special resolution decrease our share capital, capital redemption reserve fund and any share premium account in any way.
Voting rights
Voting rights
 
Every holder of ordinary shares present in person at a meeting of shareholders has one vote on a vote taken by a show of hands. On a poll, every holder of ordinary shares who is present in person or by proxy has one vote for every ordinary share of which he or she is the holder. Voting at any meeting of shareholders is by a show of hands unless a poll is properly demanded before the declaration of the results of a show of hands. A poll may be demanded by:
 • the chairman of the meeting;
 
 • at least three shareholders present in person or by proxy and entitled to vote;
 
 • any shareholder or shareholders present in person or by proxy representing not less thanone-tenth of the total voting rights of all shareholders having the right to vote at the meeting; or

59

 • any shareholder or shareholders present in person or by proxy holding shares conferring a right to vote at the meeting being shares on which the aggregate sum paid up is equal to not less thanone-tenth of the total sum paid up on all shares conferring that right.


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Dividends
 
Dividends
Holders of ordinary shares are entitled to receive dividends out of our profits that are available by law for distribution, as we may declare by ordinary resolution, subject to the terms of issue thereof. However, no dividends may be declared in excess of an amount recommended by the board of directors. The board may pay interim dividends to the shareholders as it deems fit. We may invest or otherwise use all dividends left unclaimed for six months after having been declared for our benefit, until claimed. All dividends unclaimed for a period of twelve years after having been declared will be forfeited and revert to us.
 
The directors may, with the sanction of aan ordinary resolution of the shareholders, offer any holders of ordinary shares the right to elect to receive ordinary shares credited as fully paid, in whole or in part, instead of cash in respect of such dividend.
 
The directors may deduct from any dividend payable to any shareholder all sums of money (if any) presently payable by that shareholder to us on account of calls or otherwise in relation to our shares.
Liquidation rights
Liquidation rights
 
In the event of our liquidation, after payment of all liabilities, our remaining assets would be used to repay the holders of ordinary shares the amount they paid for their ordinary shares. Any balance would be divided among the holders of ordinary shares in proportion to the nominal amount of the ordinary shares held by them.
Other provisions of the articles of association
Other provisions of the articles of association
 
Whenever our capital is divided into different classes of shares, the special rights attached to any class may, unless otherwise provided by the terms of the issue of the shares of that class, be varied or abrogated, either with the written consent of the holders ofthree-fourths of the issued shares of the class or with the sanction of an extraordinarya special resolution passed at a separate meeting of these holders.
 
In the event that a shareholder or other person appearing to the board of directors to be interested in ordinary shares fails to comply with a notice requiring him or her to provide information with respect to their interest in voting shares pursuant to section 212820 of the Companies Act 1985,2006, we may serve that shareholder with a notice of default. After service of a default notice, that shareholder shall not be entitled to attend or vote at any general meeting or at a separate meeting of holders of a class of shares or on a poll until he or she has complied in full with our information request.
 
If the shares described in the default notice represent at leastone-fourth of 1% in nominal value of the issued ordinary shares, then the default notice may additionally direct that in respect of those shares:
 • we will not pay dividends (or issue shares in lieu of dividends); and
 
 • we will not register transfers of shares unless the shareholder is not himself in default as regards supplying the information requested and the transfer, when presented for registration, is in such form as the board of directors may require to the effect that after due and careful inquiry, the shareholder is satisfied that no person in default is interested in any of the ordinary shares which are being transferred or the transfer is an approved transfer, as defined in our articles of association.
 
No provision of our articles of association expressly governs the ordinary share ownership threshold above which shareholder ownership must be disclosed. Under the Companies Act 1985,2006, any person who acquires, either alone or, in specified circumstances, with others:
 • a material interest in our voting share capital equal to or in excess of 3%; or
 
 • a non-material interest equal to or in excess of 10%,

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comes under an obligation to disclose prescribed particulars to us in respect of those ordinary shares. A disclosure obligation also arises where a person’s notifiable interests fall below the notifiable percentage, or where, above that level, the percentage of our voting share capital in which a person has a notifiable interest increases or decreases.


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Limitations affecting holders of ordinary shares or ADSs
Limitations affecting holders of ordinary shares or ADSs
 
Under English law and our memorandum and articles of association, persons who are neither UK residents nor UK nationals may freely hold, vote and transfer ordinary shares in the same manner as UK residents or nationals.
 
With respect to the items discussed above, applicable UK law is not materially different from applicable US law.
Material contracts
 The following summaries are
Pearson has not intended to be complete and reference is made to the contracts themselves, which are included, or incorporated by reference, as exhibits to this annual report. We have entered into the followingany contracts outside the ordinary course of business during the two year period immediately preceding the date of this annual report:
Issuance of $350,000,000 4.70% Guaranteed Senior Notes due 2009 and $400,000,000 5.70% Guaranteed Senior Notes due 2014
      Our wholly-owned subsidiary, Pearson Dollar Finance plc, issued $350m principal amount of 4.70% senior notes due 2009 and $400m principal amount of 5.70% senior notes due 2014, in each case fully and unconditionally guaranteed by Pearson plc, under an indenture dated May 25, 2004 between Pearson Dollar Finance plc, Pearson plc and The Bank of New York, as trustee. The firstsemi-annual interest payment was made on December 1, 2004. Pearson Dollar Finance may redeem the notes at any time, in whole or in part, at its option.report.
 The indenture describes the circumstances that would be considered events of default. If an event of default occurs, other than an insolvency or bankruptcy of Pearson Dollar Finance plc, Pearson plc or a principal subsidiary of Pearson plc (as defined in the indenture), the holders of at least 25% of the principal amount of the then outstanding notes may declare the notes, along with accrued but unpaid interest and other amounts described in the indenture, as immediately due and payable. In the event of an insolvency or bankruptcy of Pearson Dollar Finance plc, Pearson plc or a principal subsidiary of Pearson plc (as defined in the indenture), the principal of all outstanding notes shall become due and payable immediately.
Executive employment contracts
 The indenture limits our ability to create liens to secure certain types of debt intended to be listed or traded on an exchange.
Issuance of $300,000,000 4.625% Senior Notes due 2018
      We issued $300m principal amount of 4.625% senior notes due 2018 under an indenture dated June 23, 2003 between us and The Bank of New York, as trustee. The firstsemi-annual interest payment was made on December 15, 2003. We may redeem the notes at any time, in whole or in part, at our option.
      The indenture describes the circumstances that would be considered events of default. If an event of default occurs, other than the insolvency or bankruptcy of us or a principal subsidiary (as defined in the indenture), the holders of at least 25% of the principal amount of the then outstanding notes may declare the notes, along with accrued, but unpaid, interest and other amounts described in the indenture, as immediately due and payable.
      The indenture limits our ability to create liens to secure certain types of debt intended to be listed or traded on an exchange.

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Executive employment contracts
We have entered into agreements with each of our executive directors pursuant to which such executive director is employed by us. These agreements describe the duties of such executive director and the compensation to be paid by us. See “Item 6. Directors, Senior Management &and Employees — Compensation of Senior Management”. Each agreement may be terminated by us on 12 months’ notice or by the executive director on six months’ notice. In the event we terminate any executive director without giving the full 12 months’ advance notice, the executive director is entitled to receive liquidated damages equal to 12 monthsmonths’ base salary and benefits together with a proportion of potential bonus.
Exchange controls
 
There are no UK government laws, decrees, regulations or other legislation which restrict or which may affect the import or export of capital, including the availability of cash and cash equivalents for use by us or the remittance of dividends, interest or other payments to nonresident holders of our securities, except as otherwise described under “ —“— Tax Considerations” below.
Tax considerations
 
The following is a discussion of the material US federal income tax considerations and UK tax considerations arising from the acquisition, ownership and disposition of ordinary shares and ADSs by a US holder. A US holder is:
 • an individual citizen or resident of the US, or
 
 • a corporation created or organized in or under the laws of the United StatesUS or any of its political subdivisions, or
 
 • an estate or trust the income of which is subject to US federal income taxation regardless of its source.
 
This discussion deals only with ordinary shares and ADSs that are held as capital assets by a US holder, and does not address tax considerations applicable to US holders that may be subject to special tax rules, such as:
 • dealers or traders in securities or currencies,
 
 • financial institutions or other US holders that treat income in respect of the ordinary shares or ADSs as financial services income,
 
 • insurance companies,
 
 • tax-exempt entities,
 
 • US holders that hold the ordinary shares or ADSs as a part of a straddle or conversion transaction or other arrangement involving more than one position,
 
 • US holders that own, or are deemed for US tax purposes to own, 10% or more of the total combined voting power of all classes of our voting stock,
 
 • US holders that have a principal place of business or “tax home” outside the United States, or
 
 • US holders whose “functional currency” is not the US dollar.


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For US federal income tax purposes, holders of ADSs will be treated as the owners of the ordinary shares represented by those ADSs.
 
In addition, the following discussion assumes that The Bank of New York will perform its obligations as depositary in accordance with the terms of the depositary agreement and any related agreements.
 
Because US and UK tax consequences may differ from one holder to the next, the discussion set out below does not purport to describe all of the tax considerations that may be relevant to you and your particular situation. Accordingly, you are advised to consult your own tax advisor as to the US federal, state

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and local, UK and other, including foreign, tax consequences of investing in the ordinary shares or ADSs. The statements of US and UK tax law set out below are based on the laws and interpretations in force as of the date of this Annual Report, and are subject to any changes occurring after that date.
UK income taxation of distributions
UK income taxation of distributions
 
The United KingdomUK does not impose dividend withholding tax on dividends paid to US holders.
US income taxation of distributions
US income taxation of distributions
 
Distributions that we make with respect to the ordinary shares or ADSs, other than distributions in liquidation and distributions in redemption of stock that are treated as exchanges, will be taxed to US holders as ordinary dividend income to the extent that the distributions do not exceed our current and accumulated earnings and profits. The amount of any distribution will equal the amount of the cash distribution. Distributions, if any, in excess of our current and accumulated earnings and profits will constitute anon-taxable return of capital to a US holder and will be applied against and reduce the US holder’s tax basis in its ordinary shares or ADSs. To the extent that these distributions exceed the tax basis of the US holder in its ordinary shares or ADSs, the excess generally will be treated as capital gain.
 
Dividends that we pay will not be eligible for the dividends received deduction generally allowed to US corporations under Section 243 of the Code.
 
In the case of distributions in pounds, the amount of the distributions generally will equal the US dollar value of the pounds distributed, determined by reference to the spot currency exchange rate on the date of receipt of the distribution by the US holder in the case of shares or by The Bank of New York in the case of ADSs, regardless of whether the US holder reports income on a cash basis or an accrual basis. The US holder will realize separate foreign currency gain or loss only to the extent that this gain or loss arises on the actual disposition of pounds received. For US holders claiming tax credits on a cash basis, taxes withheld from the distribution are translated into US dollars at the spot rate on the date of the distribution; for US holders claiming tax credits on an accrual basis, taxes withheld from the distribution are translated into US dollars at the average rate for the taxable year.
 
A distribution by the Company to noncorporate shareholders before 2011 will be taxed as net capital gain at a maximum rate of 15%, provided certain holding periods are met, to the extent such distribution is treated as a dividend under U.S.US federal income tax principles.
UK income taxation of capital gains
UK income taxation of capital gains
 
Under the Income Tax Treaty, each country generally may tax capital gains in accordance with the provisions of its domestic law. Under present UK law, a US holder that is not a resident, and, in the case of an individual, not ordinarily resident, in the United KingdomUK for UK tax purposes and who (in the case of an individual) does not carry on a trade, profession or vocation in the United KingdomUK through a branch or agency, or (in the case of a company) does not carry on a trade in the UK through a UK permanent establishment, to which ordinary shares or ADSs are attributable will not be liable for UK taxation on capital gains or eligible for relief for allowable losses, realized on the sale or other disposal (including redemption) of these ordinary shares or ADSs.


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US income taxation of capital gains
US income taxation of capital gains
 
Upon a sale or exchange of ordinary shares or ADSs to a person other than Pearson, a US holder will recognize gain or loss in an amount equal to the difference between the amount realized on the sale or exchange and the US holder’s adjusted tax basis in the ordinary shares or ADSs. Any gain or loss recognized will be capital gain or loss and will belong-term capital gain or loss if the US holder has held the ordinary shares or ADSs for more than one year.Long-term capital gain of a noncorporate US holder is generally taxed at a maximum rate of 15%. Thislong-term capital gain rate is scheduled to expire in 2011.
 
Gain or loss realized by a US holder on the sale or exchange of ordinary shares or ADSs generally will be treated asUS-source gain or loss for US foreign tax credit purposes.

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Estate and gift tax
 
Estate and gift tax
The current Estate and Gift Tax Convention, or the Convention, between the United StatesUS and the United KingdomUK generally relieves from UK Inheritance Tax (the equivalent of US Estate and Gift Tax) the transfer of ordinary shares or of ADSs where the transferor is domiciled in the United States,US, for the purposes of the Convention. This relief will not apply if the ordinary shares or ADSs are part of the business property of an individual’s permanent establishment in the United KingdomUK or pertain to the fixed base in the United KingdomUK of a person providing independent personal services. If no relief is given under the Convention, inheritance tax may be charged on the amount by which the value of the transferor’s estate is reduced as a result of any transfer made by way of gift or other gratuitous transfer by an individual, in general within seven years of death, or on the death of an individual. In the unusual case where ordinary shares or ADSs are subject to both UK Inheritance Tax and US Estate or Gift Tax, the Convention generally provides for tax paid in the United KingdomUK to be credited against tax payable in the United StatesUS or for tax paid in the United StatesUS to be credited against tax payable in the United KingdomUK based on priority rules set forth in the Convention.
Stamp duty
Stamp duty
 
No stamp duty or stamp duty reserve tax (SDRT) will be payable in the United KingdomUK on the purchase or transfer of an ADS, provided that the ADS, and any separate instrument or written agreement of transfer, remain at all times outside the United KingdomUK and that the instrument or written agreement of transfer is not executed in the United Kingdom. StampUK. Subject to the following paragraph, stamp duty or SDRT is, however, generally payable at the rate of 1.5% of the amount or value of the consideration or, in some circumstances, the value of the ordinary shares, where ordinary shares are issued or transferred to a person whose business is or includes issuing depositary receipts, or to a nominee or agent for such a person, or issued or transferred to a person whose business is or includes the provision of clearance services or a nominee or agent for such a person.
 
Following a decision of the European Court of Justice in 2009, HMRC has announced that it will not seek to apply the 1.5% SDRT charge when new shares are issued an EU clearance service or EU depositary receipt system. It seems that HMRC’s view is that the 1.5% SDRT charge will continue to apply to transfer of shares into a clearance service or depositary receipt system, and also in respect of issues of shares into non-EU clearance services and non-EU depositary receipt systems. Arguably the 1.5% SDRT charge in such situations is not consistent with the 2009 decision of the European Court of Justice, although HMRC is likely to impose such charges until further case law or legislation resolves the issue.
A transfer for value of the underlying ordinary shares will generally be subject to either stamp duty or SDRT, normally at the rate of 0.5% of the amount or value of the consideration. A transfer of ordinary shares from a nominee to its beneficial owner, including the transfer of underlying ordinary shares from the Depositary to an ADS holder, under which no beneficial interest passes iswill not be subject to stamp duty at the fixed rate of £5.00 per instrument of transfer.or SDRT.
Close company status
Close company status
 
We believe that the close company provisions of the UK Income and Corporation Taxes Act 1988 do not apply to us.


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Documents on display
 
Copies of our Memorandum and Articles of Association the material contracts described above and filed as exhibits to this Annual Report and certain other documents referred to in this Annual Report are available for inspection at our registered office at 80 Strand, London WC2R 0RL (c/(c/o the Company Secretary), or, in the United States,US, at the registered office of Pearson Inc. at 1330 Avenue of the Americas, 7th Floor, New York, New York, during usual business hours upon reasonable prior request.
ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 11.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction
 
Our principal market risks are changes in interest rates and currency exchange rates. Following an evaluation of these positions, we selectively enter into derivative financial instruments to manage our risk exposure. For this purpose, we primarily use interest rate swaps, interest rate caps and collars, forward rate agreements, currency swaps and forward foreign exchange contracts. Managing market risks is the responsibility of the Chief Financial Officer,chief financial officer, who acts pursuant to policies approved by the board of directors. The Audit Committee receives regular reports on our treasury activities, and we periodically meet with external advisers to review our activities.

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We have a policy of not undertaking any speculative transactions, and we do not hold our derivative and other financial instruments for trading purposes.
 
We have formulated policies for hedging exposures to interest rate and foreign exchange risk, and have used derivatives to ensure compliance with these policies. Although the majoritya large proportion of our derivative contracts were transacted without regard to existing US GAAPIFRS requirements on hedge accounting, during 20062009 and 20052008 we qualified for hedge accounting under US GAAPIFRS on a number of our key derivative contracts.
 
The following discussion addresses market risk only and does not present other risks that we face in the normal course of business, including country risk, credit risk and legal risk.
Interest rates
 
The Group’s financial exposure to interest rates arises primarily from its borrowings. The Group manages its exposure by borrowing at fixed and variable rates of interest, and by entering into derivative transactions. Objectives approved by the board concerning the proportion of debt outstanding at fixed rates govern the use of these financial instruments.
 
The Group’s objectives are applied to core net debt, which is measured at the year-end and comprises borrowings net of cash and other liquid funds. Our objective is to maintain a proportion of forecast core net debt in fixed or capped form for the next four years, subject to a maximum of 65% and a minimum that starts at 40% and falls by 10% each year.
 
The principal method of hedging interest rate risk is to enter into an agreement with a bank counterparty to pay a fixed-ratefixed rate and receive a variable rate, known as a swap. Under interest rate swaps, the Group agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and variable-rate amounts calculated by reference to an agreed notional principal amount. The majority of the company’sGroup’s swap contracts are US dollar denominated, and some of them have deferred start dates, in order to maintain the desired risk profile as other contracts mature. The variable rates received are normally based on three-month or six-month LIBOR, and the dates on which these rates are set do not necessarily exactly match those of the hedged borrowings. Management believes that our portfolio of these types of swaps is an efficient hedge of our portfolio of variable rate borrowings.
 
In addition, from time to time, the Group issues bonds or other capital market instruments to refinance existing debt. To avoid the fixed rate on a single transaction unduly influencing our overall net interest expense, our typical practice ishas been to enter into a related derivative contract effectively converting the interest rate profile of the bond transaction to a variable interest rate. In some cases, the bond issue wasis denominated in a different currency to the Group’s desired borrowing risk profile and the Group enteredenters into a related cross currency interest rate swap in order to maintain this risk profile, which is predominantly borrowings denominated in US dollars.


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The Group’s accounting objective in its use of interest rate derivatives is to minimize the impact on the income statement of changes in themark-to-market value of its derivative portfolio as a whole. It uses duration calculations to estimate the sensitivity of the derivatives to movements in market rates. The Group also identifies which derivatives are eligible for fair value hedge accounting (which reduces significantly the income statement impact of changes in the market value of a derivative). The Group then divides the total portfolio betweenhedge-accounted and pooled segments, so that the expected movement on the pooled segment is minimized.
Currency exchange rates
 
Although the Group is based in the United Kingdom,UK, it has significant investments in overseas operations. The most significant currency in which the Group trades is the US dollar.
 
The Group’s policy is to align approximately the currency composition of its core net borrowings with its forecast operating profit (from February 2007, the policy is amended slightly to align core net borrowings with forecast operating profit before depreciation and amortization).amortization. This policy aims to dampen the impact of

65

changes in foreign exchange rates on consolidated interest cover and earnings. This policy applies only to currencies that account for more than 15% of group operating profit, which currently is onlyare the US dollar.dollar and sterling. However, the Group still borrows small amounts in other currencies, typically for seasonal working capital needs. In addition, the Group currently expects to hold its legacy borrowings in euros and sterling to their maturity dates: the Group’s policy does not require existing currency debt to be terminated to match declines in that currency’s share of groupGroup operating profit. Following the board’s approval of a policy change in October 2008, currencies that account for less than 15% of Group operating profit before depreciation and amortization may now be included in the above hedging process at the request of the chief financial officer. During 2009, one hedging transaction, denominated in South African Rand, had been undertaken under that authority.
At December 31, 20062009 the Group’s net borrowings/(cash)borrowings in our main currencies (taking into account the effect of cross currency rate swaps) were: US dollar £979m, euro £158m£1,314m, sterling £168m, and sterling £30m.South African rand £9m.
 
The Group uses both currency denominated debt and derivative instruments to implement the above policy. Its intention is that gains/losses on the derivatives and debt offset the losses/gains on the foreign currency assets and income. Each quarter the value of hedging instruments is monitored against the assets in the relevant currency and, where practical, a decision is made whether to treat the debt or derivative as a net investment hedge (permitting foreign exchange movements on it to be taken to reserves) for the purposes of reporting under IFRS and US GAAP.IFRS.
 
Investments in overseas operations are consolidated for accounting purposes by translating values in one currency to another currency, in particular from US dollars to sterling. Fluctuations in currency exchange rates affect the currency values recorded in our accounts, although they do not give rise to any realized gain or loss, nor to any currency cash flows.
 
The Group is also exposed to currency exchange rates in its cash transactions and its investments in overseas operations. Cash transactions — typically for purchases, sales, interest or dividends — require cash conversions between currencies. Fluctuations in currency exchange rates affect the cash amounts that the Group pays or receives.
Forward foreign exchange contracts
 
The Group sometimes uses forward foreign exchange contracts where a specific major project or forecasted cash flow, including acquisitions and disposals, arises from a business decision that has used a specific foreign exchange rate. The Group’s policy is to effect routine transactional conversions between currencies, for example to collect receivables or settle payables, at the relevant spot exchange rate.
 
The Group seeks to offset purchases and sales in the same currency, even if they do not occur simultaneously. In addition, its debt and cash portfolios management gives rise to temporary currency shortfalls and surpluses. Both of these activities require usingshort-dated foreign exchange swaps between currencies.
 
Although the Group prepares its consolidated financial statements in sterling, significant sums have been invested in overseas assets, particularly in the United States.US. Therefore, fluctuations in currency exchange rates, particularly between the US dollar and sterling, and to a lesser extent between the euro and sterling, are likely to affect shareholders’ funds and other accounting values.


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Derivatives
 
Under both IFRS, and US GAAP, the Group is required to record all derivative instruments on the balance sheet at fair value. Derivatives not classified as hedges are adjusted to fair value through earnings. Changes in fair value of the derivatives that the Group has designated and that qualify as effective hedges are either recorded in either other comprehensive incomereserves or earnings.are offset in earnings by the corresponding movement in the fair value of the underlying hedged item. Any ineffective portion of derivatives that are classified as hedges is immediately recognized in earnings.
 
In 20062009 and 20052008 the Group met the prescribed designation requirements and hedge effectiveness tests under US GAAPIFRS for some of its derivative contracts. As a result, the movements in the fair value of the effective portion of fair value hedges and net investment hedges have been offset in earnings and other comprehensive incomereserves respectively by the corresponding movement in the fair value of the underlying hedged item.

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In line with the Group’s treasury policy, none of these instruments were considered trading instruments and each instrument was transacted solely to match an underlying financial exposure.
Quantitative information about market risk
 
Quantitative information about market risk
The sensitivity of the Group’s derivative portfolio to changes in interest rates is found in note 16 to the financial statements.
ITEM 12.     DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES19 of “Item 18. Financial Statements”.
 Not applicable.
PART II
ITEM 13.     DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
      None.
ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
ITEM 12D.AMERICAN DEPOSITARY SHARES
Fees paid by ADR holders
Our ordinary shares trade in the United States under a sponsored ADR facility with The Bank of New York Mellon as depositary.
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal, or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.


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The following table summarizes various fees currently charged by The Bank of New York Mellon:
Person depositing or withdrawing shares
must pay to the depositary:
For:
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
•   Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property

•   Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
$.02 (or less) per ADS•   Any cash distribution to ADS registered holders
A fee equivalent to the fee that would be payable if securities distributed had been shares and the shares had been deposited for issuance of ADSs•   Distribution of securities by the depositary to ADS registered holders of deposited securities
$.02 (or less) per ADS per calendar year•   Depositary services
Registration of transfer fees•   Transfer and registration of shares on the share register to or from the name of the depositary or its agent when shares are deposited or withdrawn
Expenses of the depositary
•   Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)

•   Converting foreign currency to U.S. dollars
Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes•   As necessary
Any charges incurred by the depositary or its agents for servicing the deposited securities•   As necessary
Fees incurred in past annual period and fees to be paid in the future
From January 1, 2009 to February 28, 2010 the Company received payments from the depositary of $700,000, $38,000 and a further $38,000 for continuing annual stock exchange listing fees, standardout-of-pocket maintenance costs for the ADRs (consisting of the expenses of postage and envelopes for mailing the annual and interim financial reports, printing and distributing dividend cheques, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile and telephone calls), any applicable performance indicators relating to the ADR facility, underwriting fees and legal fees.
The depositary has agreed to reimburse the Company for expenses they incur that are related to establishment and maintenance expenses of the ADS programme. The depositary has agreed to reimburse the Company for its continuing annual stock exchange listing fees. The depositary has also agreed to pay the standardout-of-pocket maintenance costs for the ADRs, which consists of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend cheques, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile and telephone calls. It has also agreed to reimburse the Company annually for certain investor relationship programmes or special investor relations promotional activities. In certain instances, the depositary has agreed to provide additional payments to the Company based on any applicable performance indicators relating to the ADR facility. There are limits on the amount of expenses for which the depositary will reimburse the Company, but the amount of reimbursement available to the Company is not necessarily tied to the amount of fees the depositary collects from investors.
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal, or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.


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PART II
ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
 
None.
ITEM 15.CONTROLS AND PROCEDURES
ITEM 15.     CONTROLS AND PROCEDURES
Disclosure controlsControls and proceduresProcedures
 
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 20062009 was carried out by us under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation the Chief Executive Officer and Chief Financial Officer concluded that Pearson’s disclosure controls and procedures have been designed to provide, and are effective in providing, reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the principal executiveChief Executive Officer and financial officers,Chief Financial Officer, as appropriate to allow such timely decision regarding required disclosures. A controls system, no matter how well designed and operated cannot provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected, and that such information is accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate, to allow such timely decisions regarding required disclosure.achieve its objectives.
Management’s annual reportAnnual Report on internal control over financial reportingInternal Control Over Financial Reporting
 
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS, including the reconciliations required under US GAAP.generally accepted accounting principles.
 
Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
Management has assessed the effectiveness of internal control over financial reporting, as at December 31, 2006,2009, and has concluded that such internal control over financial reporting was effective.

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PricewaterhouseCoopers LLP, which has audited the consolidated financial statements of the Company for the year ended December 31, 2006,2009, has also audited management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of the Company’s internal control over financial reporting under Auditing Standard No. 25 of the Public Company Accounting Oversight Board (United States). Their audit report is included under “Item 17. Financial Statements” may be found onpage F-2.
Change in internal control over financial reportingInternal Control Over Financial Reporting
 
During the period covered by this Annual Report onForm 20-F, Pearson has made no changes to its internal controlcontrols over financial reporting that have materially affected or are reasonably likely to materially affect Pearson’s internal control over financial reporting.
ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16A.     AUDIT COMMITTEE FINANCIAL EXPERT
      The members of the Board of Directors of Pearson plc have determined that Vernon Sankey was an audit committee financial expert within the meaning of the applicable rules and regulations of the US Securities and Exchange Commission for the period until April 21, 2006. The members of the Board of Directors of Pearson plc have determined that Ken Hydon is an audit committee financial expert for subsequent periods.within the meaning of the applicable rules and regulations of the US Securities and Exchange Commission.


71

ITEM 16B.CODE OF ETHICS
ITEM 16B.     CODE OF ETHICS
Pearson has adopted a code of ethics (the Pearson code of business conduct) which applies to all employees including the Chief Executive Officer and Chief Financial Officer and other senior financial management. This code of ethics is available on our website (www.pearson.com/investor/corpgov.htm). The information on our website is not incorporated by reference into this report.
ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16C.     PRINCIPAL ACCOUNTANT FEES AND SERVICESIn line with best practice, our relationship with PricewaterhouseCoopers LLP (PwC) is governed by our external auditor policy, which is reviewed and approved annually by the audit committee. The policy establishes procedures to ensure the auditors’ independence is not compromised as well as defining those non-audit services that PwC may or may not provide to Pearson. These allowable services are in accordance with relevant UK and US legislation.
 In 2003,
The audit committee approves all audit and non-audit services provided by PwC. Certain categories of allowable non-audit services have been pre-approved by the audit committee adopted a revised policy for external auditor services. The policy requiressubject to the authorities below:
• Pre-approved non-audit services can be authorized by the chief financial officer up to £100,000 per project, subject to a cumulative limit of £500,000 per annum;
• Acquisition due diligence services up to £100,000 per transaction;
• Tax compliance and related activities up to the greater of £1,000,000 per annum or 50% of the external audit fee; and
• For forward-looking tax planning services we use the most appropriate advisor, usually after a tender process. Where we decide to use our independent auditor, authority, up to £100,000 per project subject to a cumulative limit of £500,000 per annum, has been delegated by the audit committee to management.
Services provided by PwC above these limits and all audit engagements undertaken by our external auditors, PricewaterhouseCoopers LLP, toother allowable non-audit services, irrespective of value, must be approved by the audit committee. The policy permits the auditorsWhere appropriate, services will be tendered prior to be engaged for other services provided the engagement is specifically approved in advance by the committee or alternatively meets the detailed criteria of specific pre-approved services and is notifiedawarding this work to the committee.auditor.
 
The Group Chief Financial Officer can procure pre-approved services, as defined infollowing table sets forth remuneration paid to PwC for 2008 and 2009:
         
Auditors’ Remuneration
 2009 2008
  £m £m
 
Audit fees  6   5 
Tax fees  2   2 
All other fees  1   1 
Audit fees include £35,000 (2008: £35,000) of audit fees relating to the audit committee’s policyof the parent company.
Fees for auditor services, of up to an amount of £100,000 per engagement, subject to a cumulative limit of £500,000 per year. The limit of £100,000 will be subject to annual review by the audit committee. Where pre-approval has not been granted for a service or whereof the amount is above these limits, specific case by case approval must be obtained fromeffectiveness of the Group’s internal control over financial reporting are allocated to audit committee priorfees paid.
Tax services include services related to tax planning and various other tax advisory services.
Other services include due diligence on acquisitions and services related to the engagementdisposal of our auditor.
         
Auditors’ Remuneration 2006 2005
     
  £m £m
Audit fees  5   4 
Audit-related fees  4   — 
Tax fees  1   1 
All other fees  1   2 

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ITEM 16D.     EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEESthe Data Management business.
 Not applicable.
ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.


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ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES
                 
        Maximum
        number
      Total number of
 of shares that
      units purchased
 may yet be
      as part of publicly
 purchased under
  Total number of
 Average price
 announced plans
 the plans or
Period
 shares purchased paid per share or programs programs
June 1, 2008 - June 30, 2008  
March 1, 2006 - March 31, 2006900,0002,000,000   £ 7.406.14   N/A   N/A 
MayJune 1, 20062009 - May 31, 2006June 30, 2009  900,0002,200,000   £ 7.67N/AN/A
August 1, 2006 - August 31, 2006900,000£ 7.43N/AN/A
December 1, 2006 - December 31, 20062,000,000£ 7.736.14   N/A   N/A 
 
Purchases of shares were made to satisfy obligations under Pearson employee share award programs. All purchases were made in open-market transactions. None of the foregoing share purchases was made as part of a publicly announced plan or program.
ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING AUDITOR
Not applicable.
ITEM 16G.CORPORATE GOVERNANCE
Pearson is listed on the New York Stock Exchange (“NYSE”). As a listed non-US issuer, we are required to comply with some of the NYSE’s corporate governance rules, and otherwise must disclose on our website any significant ways in which our corporate governance practices differ from those followed by US companies under the NYSE listing standards. At this time, the Company believes that it is in compliance in all material respects with all the NYSE rules except that the Nomination Committee is not composed entirely of independent directors, and that it is the full board, not the Nomination Committee, that develops and recommends corporate governance principles.
PART III
ITEM 17.     FINANCIAL STATEMENTS
 
ITEM 17.FINANCIAL STATEMENTS
Not applicable.
ITEM 18.FINANCIAL STATEMENTS
The financial statements filed as part of this Annual Report are included on pages F-1 through F-79F-70 hereof.
ITEM 18.     FINANCIAL STATEMENTS
ITEM 19.EXHIBITS
 We have elected to respond to Item 17.
ITEM 19.     EXHIBITS
   
1.1 Memorandum and Articles of Association of Pearson plc.†
2.1 Indenture dated June 23, 2003 between Pearson plc and The Bank of New York, as trustee.†trustee *
2.2 Indenture dated May 25, 2004 among Pearson Dollar Finance plc, as Issuer, Pearson plc, Guarantor, and the Bank of New York, as Trustee,trustee, Paying Agent and Calculation Agent.#Agent. #
4.12.3 Letter AgreementIndenture dated January 28, 2005June 21, 2001 between Pearson plc and Peter Jovanovich.#The Bank of New York, as trustee.†
2.4Indenture dated March 26, 2009 among Pearson Funding One plc, as the Issuer, Pearson plc, Guarantor, and The Law Debenture Trust Corporation P.L.C., as trustee.
2.5Indenture dated May 6, 2008 among Pearson Dollar Finance Two plc, as the Issuer, Pearson plc, Guarantor, and The Bank of New York, as trustee, Paying Agent and Calculation Agent.
2.6Indenture dated October 27, 1999 between Pearson plc, as the Issuer and The Law Debenture Trust Corporation P.L.C., as trustee.
8.1 List of Significant Subsidiaries.
12.1 Certification of Chief Executive Officer.


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12.2 Certification of Chief Financial Officer.
13.1 Certification of Chief Executive Officer.
13.2 Certification of Chief Financial Officer.
15 Consent of PricewaterhouseCoopers LLP.
 
†  *Incorporated by reference from theForm 20-F of Pearson plc for the year ended December 31, 2003 and filed May 7, 2004.
#Incorporated by reference from theForm 20-F of Pearson plc for the year ended December 31, 2004 and filed June 27, 2005.
†Incorporated by reference from the Form 20-F of Pearson plc for the year ended December 31, 2001 and filed June 10, 2002.

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69

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
     
  Page
 
Report of Independent Registered Public Accounting Firm  F-2 
Consolidated Income Statement for the year ended December 31, 2006, 20052009, 2008 and 20042007
F-3
Consolidated Statement of Comprehensive Income for the year ended December 31, 2009, 2008 and 2007
  F-4 
Consolidated Statement of Recognized Income and ExpenseChanges in Equity for the year ended December 31, 2006, 20052009, 2008 and 20042007
  F-5 
Consolidated Balance Sheet as at December 31, 20062009 and 20052008
  F-5F-6 
Consolidated Cash Flow Statement for the year ended December 31, 2006, 20052009, 2008 and 2004
F-7
Notes to the Consolidated Financial Staetments2007  F-8 
Notes to the Consolidated Financial Statements
F-9


F-1

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Pearson plc
 We have completed an integrated audit of Pearson plc’s December 31, 2006 consolidated financial statements and of its internal control over financial reporting as of December 31, 2006 and an audit of its December 31, 2005 and December 31, 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated income statementsbalance sheets and the related consolidated balance sheets, consolidated statements of income, comprehensive income, equity and cash flows and, consolidated statements of recognised income and expense present fairly, in all material respects, the financial position of Pearson plc and its subsidiaries (the “Group”) at December 31, 20062009 and 2005December 31, 2008 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006,2009, in conformity with International Financial Reporting Standards (IFRSs) as adoptedissued by the European Union. TheseInternational Accounting Standards Board. Also in our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Group’s management is responsible for these financial statements, are the responsibilityfor maintaining effective internal control over financial reporting and for its assessment of the Group’s management.effectiveness of internal control over financial reporting, included in “Management’s Annual Report on Internal Control Over Financial Reporting” appearing under Item 15 of thisForm 20-F. Our responsibility is to express an opinionopinions on these financial statements and on the Group’s internal control over financial reporting based on our integrated audits.
We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements includesincluded examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statementsstatement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
      As discussed in Note 1, the Group adopted International Accounting Standard (IAS) 32 “Financial Instruments: Disclosure and Presentation”, and IAS 39 “Financial Instruments: Recognition and Measurement”, prospectively from 1 January 2005. As discussed in Note 31 to the consolidated financial statements, during the year ended December 31, 2006, the Group reclassified investment in pre-publication assets from cash used in investing activities to cash generated from operations.
      IFRSs as adopted by the European Union vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 36 to the consolidated financial statements.
Internal control over financial reporting
      Also, in our opinion, management’s assessment, included in Managements’ annual report on internal control over financial reporting as set out in “Item 15. Controls and Procedures”, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Group’s internal control over financial reporting based on our audit.
      We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment,

F-2

testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting standards and principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting standards and principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
London
London
United Kingdom
April 30, 2007March 31, 2010


F-2

F-3

CONSOLIDATED INCOME STATEMENT
YEAR ENDEDConsolidated Income Statement
Year ended 31 DECEMBER 2006
(December 2009
All figures in £ millions)millions
                 
  Notes 2006 2005 2004
         
Continuing operations
                
Sales  2   4,137   3,808   3,479 
Cost of goods sold  5   (1,917)  (1,787)  (1,631)
             
Gross profit
      2,220   2,021   1,848 
Operating expenses  5   (1,704)  (1,559)  (1,483)
Other net gains and losses  4   —   40   9 
Share of results of joint ventures and associates  13   24   14   8 
             
Operating profit
  2   540   516   382 
Finance costs  7   (133)  (132)  (96)
Finance income  7   59   62   17 
             
Profit before tax
      466   446   303 
Income tax  8   (11)  (116)  (55)
             
Profit for the year from continuing operations
      455   330   248 
Profit for the year from discontinued operations  3   14   314   36 
             
Profit for the year
      469   644   284 
             
Attributable to:
                
Equity holders of the Company      446   624   262 
Minority interest      23   20   22 
             
Earnings per share for profit from continuing and discontinued operations attributable to the equity holders of the Company during the year
(expressed in pence per share)
                
— basic  9   55.9p   78.2p   32.9p 
— diluted  9   55.8p   78.1p   32.9p 
             
Earnings per share for profit from continuing operations attributable to the equity holders of the Company during the year(expressed in pence per share)
                
— basic  9   54.1p   38.9p   29.0p 
— diluted  9   54.0p   38.8p   29.0p 
             
                 
  
Notes
  2009  2008  2007 
 
Continuing operations
                
Sales  2   5,624   4,811   4,162 
Cost of goods sold  4   (2,539)  (2,174)  (1,910)
                 
Gross profit
      3,085   2,637   2,252 
Operating expenses  4   (2,360)  (1,986)  (1,701)
Share of results of joint ventures and associates  12   30   25   23 
                 
Operating profit
  2   755   676   574 
Finance costs  6   (122)  (136)  (150)
Finance income  6   27   45   44 
                 
Profit before tax
      660   585   468 
Income tax  7   (198)  (172)  (131)
                 
Profit for the year from continuing operations
      462   413   337 
Loss for the year from discontinued operations  3   —   (90)  (27)
                 
Profit for the year
      462   323   310 
                 
Attributable to:
                
Equity holders of the company      425   292   284 
Minority interest      37   31   26 
                 
Earnings per share for profit from continuing and discontinued operations attributable to the equity holders of the company during the year(expressed in pence per share)
                
— basic  8   53.2p   36.6p��  35.6p 
— diluted  8   53.1p   36.6p   35.6p 
                 
Earnings per share for profit from continuing operations attributable to the equity holders of the company during the year(expressed in pence per share)
                
— basic  8   53.2p   47.9p   39.0p 
— diluted  8   53.1p   47.9p   39.0p 
                 


F-3

F-4

CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE
YEAR ENDEDConsolidated Statement of Comprehensive Income
Year ended 31 DECEMBER 2006
(December 2009
All figures in £ millions)
                 
  Notes 2006 2005 2004
         
Net exchange differences on translation of foreign operations  27   (417)  327   (203)
Actuarial gains/(losses) on defined benefit pension and post-retirement medical plans  24   107   26   (61)
Taxation on items charged to equity  8   12   12   9 
             
Net (expense)/income recognised directly in equity
      (298)  365   (255)
Profit for the year      469   644   284 
             
Total recognised income and expense for the year
      171   1,009   29 
             
Attributable to:
                
Equity holders of the Company      148   989   7 
Minority interest      23   20   22 
             
Effect of transition adjustment on adoption of IAS 39
                
Attributable to:                
Equity holders of the Company      —   (12)  — 
             
CONSOLIDATED BALANCE SHEETmillions
                 
  
Notes
  2009  2008  2007 
 
Profit for the year      462   323   310 
Net exchange differences on translation of foreign operations      (388)  1,125   24 
Currency translation adjustment disposed — subsidiaries      —   49   53 
Currency translation adjustment disposed — joint venture      —   1   — 
Actuarial (losses)/gains on retirement benefit obligations — Group  25   (299)  (71)  80 
Actuarial losses on retirement benefit obligations — associate  12   (3)  (3)  — 
Net increase in fair values of proportionate holding arising on stepped acquisition      18   —   — 
Taxation on items recognised in other comprehensive income  7   91   9   22 
                 
Other comprehensive (expense)/income for the year
      (581)  1,110   179 
                 
Total comprehensive (expense)/income for the year
      (119)  1,433   489 
                 
Attributable to:
                
Equity holders of the company      (127)  1,327   464 
Minority interest      8   106   25 
                 


F-4

AS ATConsolidated Statement of Changes in Equity
Year ended 31 DECEMBER 2006
(December 2009
All figures in £ millions)millions
             
  Notes 2006 2005
       
Assets
            
Non-current assets            
Property, plant and equipment  11   348   384 
Intangible assets  12   3,581   3,854 
Investments in joint ventures and associates  13   20   36 
Deferred income tax assets  14   417   385 
Financial assets — Derivative financial instruments  16   36   79 
Other financial assets  15   17   18 
Other receivables  19   124   108 
          
       4,543   4,864 
Current assets
            
Intangible assets — Pre-publication  17   402   426 
Inventories  18   354   373 
Trade and other receivables  19   953   1,031 
Financial assets — Derivative financial instruments  16   50   4 
Financial assets — Marketable securities      25   — 
Cash and cash equivalents (excluding overdrafts)  20   592   902 
          
       2,376   2,736 
Non-current assets classified as held for sale  29   294   — 
          
       2,670   2,736 
          
Total assets
      7,213   7,600 
          
                                 
  Equity attributable to the equity holders of the company       
  Share
  Share
  Treasury
  Translation
  Retained
     Minority
  Total
 
  capital  premium  shares  reserve  earnings  Total  interest  equity 
 
At 1 January 2009  202   2,505   (222)  586   1,679   4,750   274   5,024 
Total comprehensive (expense)/income  —   —   —   (359)  232   (127)  8   (119)
Equity-settled transactions  —   —   —   —   37   37   —   37 
Taxation on equity-settled transactions  —   —   —   —   6   6   —   6 
Issue of ordinary shares under share option schemes  1   7   —   —   —   8   —   8 
Purchase of treasury shares  —   —   (33)  —   —   (33)  —   (33)
Release of treasury shares  —   —   29   —   (29)  —   —   — 
Put option over minority interest  —   —   —   —   (23)  (23)  —   (23)
Changes in minority shareholding  —   —   —   —   —   —   24   24 
Dividends  —   —   —   —   (273)  (273)  (15)  (288)
                                 
At 31 December 2009  203   2,512   (226)  227   1,629   4,345   291   4,636 
                                 
                                 
At 1 January 2008  202   2,499   (216)  (514)  1,724   3,695   179   3,874 
Total comprehensive income  —   —   —   1,100   227   1,327   106   1,433 
Equity-settled transactions  —   —   —   —   33   33   —   33 
Taxation on equity-settled transactions  —   —   —   —   (7)  (7)  —   (7)
Issue of ordinary shares under share option schemes  —   6   —   —   —   6   —   6 
Purchase of treasury shares  —   —   (47)  —   —   (47)  —   (47)
Release of treasury shares  —   —   41   —   (41)  —   —   — 
Changes in minority shareholding  —   —   —   —   —   —   6   6 
Dividends  —   —   —   —   (257)  (257)  (17)  (274)
                                 
At 31 December 2008  202   2,505   (222)  586   1,679   4,750   274   5,024 
                                 
At 1 January, 2007  202   2,487   (189)  (592)  1,568   3,476   168   3,644 
Total comprehensive income  —   —   —   78   386   464   25   489 
Equity-settled transactions  —   —   —   —   30   30   —   30 
Taxation on equity-settled transactions  —   —   —   —   7   7   —   7 
Issue of ordinary shares under share option schemes  —   12   —   —   —   12   —   12 
Purchase of treasury shares  —   —   (56)  —   —   (56)  —   (56)
Release of treasury shares  —   —   29   —   (29)  —   —   — 
Changes in minority shareholding  —   —   —   —   —   —   8   8 
Dividends  —   —   —   —   (238)  (238)  (22)  (260)
                                 
At 31 December 2007  202   2,499   (216)  (514)  1,724   3,695   179   3,874 
                                 
The translation reserve includes exchange differences arising from the translation of the net investment in foreign operations and of borrowings and other currency instruments designated as hedges of such investments.


F-5

F-5

CONSOLIDATED BALANCE SHEET (CONTINUED)
AS ATConsolidated Balance Sheet
As at 31 DECEMBER 2006
(December 2009
All figures in £ millions)millions
             
  Notes 2006 2005
       
Liabilities
            
Non-current liabilities            
Financial liabilities—Borrowings  21   (1,148)  (1,703)
Financial liabilities—Derivative financial instruments  16   (19)  (22)
Deferred income tax liabilities  14   (245)  (204)
Retirement benefit obligations  24   (250)  (389)
Provisions for other liabilities and charges  22   (29)  (31)
Other liabilities  23   (162)  (151)
          
       (1,853)  (2,500)
Current liabilities
            
Trade and other liabilities  23   (998)  (974)
Financial liabilities—Borrowings  21   (595)  (256)
Current income tax liabilities      (74)  (104)
Provisions for other liabilities and charges  22   (23)  (33)
          
       (1,690)  (1,367)
Liabilities directly associated with non-current assets classified as held for sale  29   (26)  — 
          
Total liabilities
      (3,569)  (3,867)
          
Net assets
      3,644   3,733 
          
Equity
            
Share capital  25   202   201 
Share premium  25   2,487   2,477 
Treasury shares  26   (189)  (153)
Other reserves  27   (592)  (175)
Retained earnings  27   1,568   1,214 
          
Total equity attributable to equity holders of the Company
      3,476   3,564 
Minority interest      168   169 
Total equity
      3,644   3,733 
          
             
  Notes  2009  2008 
 
Assets
            
Non-current assets
            
Property, plant and equipment  10   388   423 
Intangible assets  11   5,129   5,353 
Investments in joint ventures and associates  12   30   23 
Deferred income tax assets  13   387   372 
Financial assets — Derivative financial instruments  16   112   181 
Retirement benefit assets  25   —   49 
Other financial assets  15   62   63 
Other receivables  22   112   152 
             
       6,220   6,616 
Current assets
            
Intangible assets — Pre-publication  20   650   695 
Inventories  21   445   501 
Trade and other receivables  22   1,284   1,342 
Financial assets — Derivative financial instruments  16   —   3 
Financial assets — Marketable securities  14   63   54 
Cash and cash equivalents (excluding overdrafts)  17   750   685 
             
       3,192   3,280 
             
Total assets
      9,412   9,896 
             


F-6

Consolidated Balance Sheet (Continued)
As at 31 December 2009
All figures in £ millions
             
  Notes  2009  2008 
 
Liabilities
            
Non-current liabilities
            
Financial liabilities — Borrowings  18   (1,934)  (2,019)
Financial liabilities — Derivative financial instruments  16   (2)  (15)
Deferred income tax liabilities  13   (473)  (447)
Retirement benefit obligations  25   (339)  (167)
Provisions for other liabilities and charges  23   (50)  (33)
Other liabilities  24   (253)  (221)
             
       (3,051)  (2,902)
Current liabilities
            
Trade and other liabilities  24   (1,467)  (1,429)
Financial liabilities — Borrowings  18   (74)  (344)
Financial liabilities — Derivative financial instruments  16   (7)  (5)
Current income tax liabilities      (159)  (136)
Provisions for other liabilities and charges  23   (18)  (56)
             
       (1,725)  (1,970)
             
Total liabilities
      (4,776)  (4,872)
             
Net assets
      4,636   5,024 
             
Equity
            
Share capital  27   203   202 
Share premium  27   2,512   2,505 
Treasury shares  28   (226)  (222)
Translation reserve      227   586 
Retained earnings      1,629   1,679 
             
Total equity attributable to equity holders of the company
      4,345   4,750 
Minority interest      291   274 
             
Total equity
      4,636   5,024 
             
These financial statements have been approved for issue by the board of directors on 910 March 20072010 and signed on its behalf by
Robin FreestoneChief financial officer


F-7

F-6

CONSOLIDATED CASH FLOW STATEMENT
YEAR ENDEDConsolidated Cash Flow Statement
Year ended 31 DECEMBER 2006
(December 2009
All figures in £ millions)millions
                 
  Notes 2006 2005 2004
         
Cash flows from operating activities
                
Cash generated from operations  31   621   653   524 
Interest paid      (106)  (101)  (98)
Tax paid      (59)  (65)  (45)
             
Net cash generated from operating activities
      456   487   381 
             
Cash flows from investing activities
                
Acquisition of subsidiaries, net of cash acquired  28   (363)  (246)  (41)
Acquisition of joint ventures and associates      (4)  (7)  (10)
Purchase of property, plant and equipment (PPE)      (68)  (76)  (101)
Proceeds from sale of PPE      8   3   4 
Purchase of intangible assets      (29)  (24)  (24)
Purchase of other financial assets      —   (2)  (1)
Disposal of subsidiaries, net of cash disposed  30   10   376   7 
Disposal of joint ventures and associates      —   54   24 
Disposal of other financial assets      —   —   17 
Interest received      24   29   13 
Dividends received from joint ventures and associates      45   14   12 
             
Net cash (used in)/generated from investing activities
      (377)  121   (100)
             
Cash flows from financing activities
                
Proceeds from issue of ordinary shares  25   11   4   4 
Purchase of treasury shares  26   (36)  (21)  (10)
Proceeds from borrowings      84   —   473 
Short-term investments required      —   —   (5)
Liquid resources acquired      (24)  —   — 
Repayments of borrowings      (145)  (79)  (524)
Finance lease principal payments      (3)  (3)  (2)
Dividends paid to Company’s shareholders  10   (220)  (205)  (195)
Dividends paid to minority interests      (15)  (17)  (2)
             
Net cash used in financing activities
      (348)  (321)  (261)
Effects of exchange rate changes on cash and cash equivalents      (44)  13   (4)
             
Net (decrease)/increase in cash and cash equivalents
      (313)  300   16 
             
Cash and cash equivalents at beginning of year      844   544   528 
             
Cash and cash equivalents at end of year
  20   531   844   544 
             
                 
  Notes  2009  2008  2007 
 
Cash flows from operating activities
                
Net cash generated from operations  31   1,012   894   659 
Interest paid      (90)  (87)  (109)
Tax paid      (103)  (89)  (87)
                 
Net cash generated from operating activities
      819   718   463 
                 
Cash flows from investing activities
                
Acquisition of subsidiaries, net of cash acquired  29   (208)  (395)  (472)
Acquisition of joint ventures and associates      (14)  (5)  (4)
Purchase of investments      (10)  (1)  — 
Purchase of property, plant and equipment (PPE)      (62)  (75)  (86)
Proceeds from sale of investments      —   5   — 
Proceeds from sale of PPE  31   1   2   14 
Purchase of intangible assets      (58)  (45)  (33)
Disposal of subsidiaries, net of cash disposed  30   14   111   469 
Interest received      3   11   19 
Dividends received from joint ventures and associates      22   23   32 
                 
Net cash used in investing activities
      (312)  (369)  (61)
                 
Cash flows from financing activities
                
Proceeds from issue of ordinary shares  27   8   6   12 
Purchase of treasury shares      (33)  (47)  (72)
Proceeds from borrowings      296   455   272 
Liquid resources acquired      (13)  —   (15)
Repayment of borrowings      (343)  (275)  (391)
Finance lease principal payments      (2)  (3)  (2)
Dividends paid to company’s shareholders  9   (273)  (257)  (238)
Dividends paid to minority interest      (20)  (28)  (10)
                 
Net cash used in financing activities
      (380)  (149)  (444)
Effects of exchange rate changes on cash and cash equivalents      (36)  (103)  3 
                 
Net increase/(decrease) in cash and cash equivalents
      91   97   (39)
                 
Cash and cash equivalents at beginning of year      589   492   531 
                 
Cash and cash equivalents at end of year
  17   680   589   492 
                 


F-8

F-7

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
General informationNotes to the Consolidated Financial Statements
 
General information
Pearson plc (the Company)company) and its subsidiaries (together the Group)are involved in the provision ofinternational media businesses covering education, business information for the educational sector,and consumer publishing and business information.publishing.
 
The Companycompany is a limited liability company incorporated and domiciled in England. The address of its registered office is 80 Strand, London WC2R 0RL.
 
The Companycompany has its primary listing on the London Stock Exchange but is also listed on the New York Stock Exchange.
 
These consolidated financial statements were approved for issue by the board of directors on 910 March 2007.2010.
11.  Accounting policies
 
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below.
a.     Basis of preparation
a.  Basis of preparation
These consolidated financial statements have been prepared in accordance with EU-adopted International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) interpretations as adopted by the European Union (EU) and with those parts of the Companies Act 1985and/or the Companies Act 2006 (as applicable) applicable to companies reporting under IFRS. These consolidated financial statements are also prepared in accordance with IFRS as issued by the International Accounting Standards Board (IASB). In respect of the accounting standards applicable to the Group there is no difference between EU-adopted and IASB-adopted IFRS. The Group transitioned from UK GAAP to IFRS on 1 January 2003.
 
These consolidated financial statements have been prepared under the historical cost convention as modified by the revaluation of financial assets and liabilities (including derivative financial instruments) atto fair value.
 
(1) Interpretations and amendments to published standards effective in 2006 — 2009The following amendments and interpretations to standards are mandatory
IAS 1 (Revised) ‘Presentation of Financial Statements’, effective for the Group’s accountingannual reporting periods beginning on or after 1 January 2006:2009. The amendments require a number of presentational changes including the requirement to present a statement of changes in equity as a primary statement and the introduction of the statement of comprehensive income, which presents all items of recognised income and expense, either in one statement or in two linked statements. Management have elected to present two statements.
• IAS 21 ‘The Effects of Changes in Foreign Currency’;
• IAS 39 (Amendment) ‘Cash Flow Hedge Accounting of Forecast Intragroup Transactions’;
• IAS 39 (Amendment) ‘The Fair Value Option’;
• IAS 39 and IFRS 4 (Amendment) ‘Financial Guarantee Contracts’;
• IFRS 6 ‘Exploration for and Evaluation of Mineral Resources’;
• IFRIC 4 ‘Determining whether an Arrangement contains a Lease’;
• IFRIC 5 ‘Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds’;
• IFRIC 6 ‘Liabilities arising from Participating in a Specific Market — Waste Electrical and Electronic Equipment’.
Amendments to IAS 23 ‘Borrowing Costs’, effective for annual reporting periods beginning on or after 1 January 2009. The amendment requires capitalisation of borrowing costs that relate to qualifying assets (ones that take a substantial amount of time to get ready for use or sale, with the exception of assets measured at fair value or inventories manufactured in large quantities or on a repetitive basis). Management have assessed that this amendment has no impact on the Group’s financial statements as there are currently no material qualifying assets.
 
Amendments to IFRS 7 ‘Financial Instruments: Disclosures’, effective for annual reporting periods beginning on or after 1 January 2009. The amendments require additional disclosures about fair value measurement and liquidity risk. For financial instruments measured at fair value in the balance sheet disclosure is required, based on observability of inputs, into a three level fair value hierarchy. In addition, a reconciliation between the opening and closing balance for level 3 fair value measurements must be presented, along with significant transfers between the levels of the hierarchy. The amendments also clarify the scope of liquidity risk disclosures. Fair value measurement and liquidity risk disclosures are detailed in note 19.
Amendments to IFRS 2 ‘Share-based Payment’, effective for annual reporting periods beginning on or after 1 January 2009. The amendment clarifies that only service and performance conditions are vesting conditions and that all cancellations, whether Group or counterparty, should be accounted for the same way. Management assessedhave determined that this does not have any impact on the relevance of these amendments and interpretations with respectfinancial statements for the Group.


F-9

Notes to the Consolidated Financial Statements (Continued)
Amendments to IAS 32 ‘Financial Instruments: Presentation’ and IAS 1 ‘Presentation of Financial Statements’ — Puttable Financial Instruments and Obligations Arising on Liquidation, effective for annual reporting periods beginning on or after 1 January 2009. The amendments require puttable financial instruments or investments that impose on the entity an obligation to another party in respect of a share of net assets only on liquidation to be classified as equity. Management have determined that this has no impact on the financial statements of the Group.
Amendments to IFRIC 9 ‘Reassessment of Embedded Derivatives’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’, effective for annual reporting periods ending on or after 30 June 2009. The amendments clarify the position on embedded derivatives following the earlier amendments to IAS 39 regarding reclassification. The amendment to IFRIC 9 requires an entity to assess whether an embedded derivative must be separated from a host contract when the entity reclassifies a hybrid financial asset out of the fair value through profit or loss category. IAS 39 now states that if an embedded derivative cannot be reliably measured, the entire hybrid instrument must remain classified as at fair value through profit and loss. Management have determined this has no impact on the financial statements of the Group.
‘Improvements to Financial Reporting Standards 2008’, mostly effective for annual reporting periods beginning on or after 1 January 2009. This is the first standard published under the IASB’s annual improvements process which is designed to deal with non-urgent minor amendments to standards. Of the 35 amendments issued, the adoption of the following amendment resulted in a change to accounting policy but did not have any significant impact on the Group’s operationsfinancial position or performance.
Amendments to IAS 38 ‘Intangible Assets’ require expenditure on advertising and concludedpromotional activities to be recognised as an expense when the Group either has the right to access the goods or has received the service, rather than when the Group uses the goods or service.
Other amendments did not have any impact on the accounting policies or financial statements of the Group.
In the 2008 accounts the Group early adopted IFRS 8 ‘Operating Segments’, effective for annual reporting periods beginning on or after 1 January 2009.
The standard requires a management approach to reporting segmental information and six reporting segments have been identified under IFRS 8 as detailed in note 2.
IFRIC 13 ‘Customer Loyalty Programmes’, effective for annual reporting periods beginning on or after 1 July 2008. IFRIC 13 explains how entities that they aregrant loyalty award credit to customers should account for their obligations to provide free or discounted goods or services to customers who redeem award credits. As no Group entities operate a customer loyalty programme management have assessed that IFRIC 13 is not relevant or material to the Group.
 
IFRIC 15 ‘Agreements for the Construction of Real Estate’, effective for annual reporting periods beginning on or after 1 January 2009. IFRIC 15 addresses the accounting by entities that undertake the construction of real estate with guidance on determining whether an agreement for the construction of real estate falls within the scope of IAS 11 ‘Construction Contracts’ or IAS 18 ‘Revenue’. As no Group entities undertake the construction of real estate management have assessed that IFRIC 15 is not relevant to the Group.
IFRIC 16 ‘Hedges of a Net Investment in Foreign Operations’, effective for annual reporting periods beginning on or after 1 October 2008. IFRIC 16 provides guidance on net investment hedging including which foreign currency risks within the Group qualify for hedging and where the hedging investments can be held within the Group. Management have assessed that this has no impact on the Group’s financial statements.
(2) Standards, interpretations and amendments to published standards that are not yet effective —Certain new standards, amendments and interpretations to existing standards have been published that are

F-8

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
mandatory for the Group’s accounting periods beginning on or after 1 January 2007 or later periods.
The Group has not early adopted any of the following new pronouncements whichthat are as follows:not yet effective:
 • IFRS 73 (Revised) ‘Business Combinations’ and amendments to IAS 27 ‘Consolidated and Separate Financial Statements’, effective for annual reporting periods beginning on or after 1 July 2009. The


F-10

Notes to the Consolidated Financial Statements (Continued)
amendments affect the accounting for business combinations, including the requirement to re-measure the fair value of previously held interests in step acquisitions with any gain or loss arising being recognised in the income statement, the requirement to expense acquisition costs and the requirement to recognise adjustments to contingent consideration in the income statement.
• Amendments to IAS 39 ‘Financial Instruments: Disclosures’ (effective fromRecognition and Measurement’, effective for annual reporting periods beginning on or after 1 January 2007). IFRS 7 introduces new disclosuresJuly 2009. These amendments clarify that inflation may only be hedged where changes in inflation are a specified portion of qualitativecash flows of a financial instrument, and quantitative information about exposure to risks arising from financial instruments, including specific minimum disclosures about credit risk, liquidity risk and market risk.also clarify hedging with options.
 
 • A complementary amendmentAmendments to IAS 1 ‘Presentation of Financial Statements — Capital Disclosures’(24 ‘Related Parties’, effective fromfor annual reporting periods beginning on or after 1 January 2007).2011. The amendments simplify disclosure for government related entities and clarify the definition of a related party.
• Amendments to IFRS 2 ‘Share-based Payment’: Group cash-settled share-based payment transactions, effective for annual reporting periods beginning on or after 1 January 2010. This amendment clarifies the scope and accounting for group cash-settled share-based payment transactions.
• Amendments to IAS 32 ‘Financial Instruments: Presentation’ — Classification of Rights, effective for annual reporting periods beginning on or after 1 February 2010. The amendment clarifies that rights, options or warrants issued to IAS 1 introduces disclosures abouta acquire a fixed number of an entity’s own non-derivative equity instruments for a fixed amount in any currency are classified as equity instruments provided the level and the managementoffer is made pro-rata to all existing owners of the capitalsame class of an entity.the entity’s own non-derivative equity instruments.
 
 • IFRS 8 ‘Operating Segments’ (effective9 ‘Financial Instruments’, effective for annual reporting periods beginning on or after 1 January 2009). IFRS 8 requires an entity to adopt2013. The new standard details the ‘management approach’ to reporting onrequirements for the classification and measurement of financial performance of its operating segments, revise explanations of the basis on which the segment information is prepared and provide reconciliations to the amounts recognised in the income statement and balance sheet.assets.
 
 • Management‘Improvements to IFRSs — 2009’ effective dates vary upon the amendment. This is currently assessing the impactsecond set of IFRS 7, IFRS 8amendments published under the IASB’s annual improvements process and incorporates minor amendments to 12 standards and interpretations.
• IFRIC 18 ‘Transfers of Assets from Customers’ effective for transfers of assets from customers received on or after 1 July 2009. IFRIC 18 states that when an item of property, plant and equipment is received from a customer and it meets the complementarydefinition of an asset from the perspective of the recipient, the recipient should recognise the asset at its fair value at the date of transfer and recognise the credit in accordance with IAS 18 ‘Revenue’.
• IFRIC 19 ‘Extinguishing Financial Liabilities with Equity Instruments’, effective for annual reporting periods beginning on or after 1 July 2010. IFRIC 19 clarifies accounting by entities issuing equity instruments to extinguish all or part of a financial liability.
• Amendments to IFRIC 14 ‘Prepayments of a Minimum Funding Requirement,’ effective for annual reporting periods beginning on or after 1 January 2011. This amendment remedies a consequence of IFRIC 14 where, in certain circumstances, an entity was not permitted to IAS 1 on the Group’s financial statements.recognise prepayments of a minimum funding requirement as an asset.
 
Management are currently assessing the impact of these new standards, interpretations and amendments on the Group’s financial statements.
In addition, management has assessed the relevance of the following amendments and interpretationsinterpretation with respect to the Group’s operations:
 • IFRIC 8 ‘Scope17 ‘Distributions of IFRS 2’ (effective for annual periods beginning on or after 1 May 2006). IFRIC 8 requires consideration of transactions involving the issuance of equity instruments — where the identifiable consideration received is less than the fair value of the equity instruments issued —Non-cash Assets to establish whether or not they fall within the scope of IFRS 2. The Group will apply IFRIC 8 from 1 January 2007, but it is not expected to have any impact on the Group’s accounts;
• IFRIC 10 ‘Interim Financial Reporting and Impairment’ (effective for annual periods beginning on or after 1 November 2006). IFRIC 10 prohibits impairment losses recognised in an interim period on goodwill, investments in equity instruments and investments in financial assets carried at cost to be reversed at a subsequent balance sheet date. The Group will apply IFRIC 10 from 1 January 2007;
• IFRIC 7 ‘Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies’(Owners’, effective for annual reporting periods beginning on or after 1 March 2006).July 2009. IFRIC 717 provides guidance on how to apply the requirements of IAS 29 in a reporting period in whichappropriate accounting treatment when an entity identifies the existencedistributes assets other than cash as dividends, including recognition upon authorisation and measurement at fair value of hyperinflationassets distributed, with any difference between fair value and carrying value of these assets being recognised in the economy of its functional currency,income statement when an entity settles the economy wasdividend payable. This does not hyperinflationary in the prior period. As none of the Group entities have a currency of a hyperinflationary economy as their functional currency, IFRIC 7 is not relevantapply to the Group’s operations; and


F-11

Notes to the Consolidated Financial Statements (Continued)
 • IFRIC 9 ‘Reassessmentdistributions of Embedded Derivatives’ (effective for annual periods beginningnon-cash assets under common control. This interpretation will have no impact on or after 1 June 2006). IFRIC 9 requires an entity to assess whether an embedded derivative is required to be separated from the host contract and accounted forGroup’s financial statements as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. The Group does not expect IFRIC 9 to have a material impact.currently distribute non-cash assets.
 
(3) Critical accounting assumptions and judgements —The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting assumptions. It also requires management to exercise
its judgement in the process of applying the Group’s accounting policies. The areas requiring a higher degree of judgement or complexity or areas where assumptions and estimates are significant to the

F-9

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
consolidated financial statements, are discussed in the relevant accounting policies under the following headings:
   

•   Intangible assets:		 Goodwill
•   Intangible assets: Pre-publication assets
•   Royalty advances  
•   Taxation  
•   Employee benefits: Retirement benefitPension obligations
•   Revenue recognition.recognition  
b.Consolidation
 
(1) Business combinations —The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition.
Where the settlement of consideration payable is deferred, or contingent on future events, the fair value of the deferred component is determined by discounting the amount payable or probable to be paid to its present value using an appropriate discount rate.
Identifiable assets and contingent assets acquired and identifiable liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. For material acquisitions, the fair value of the acquired intangible assets is determined by an external, independent valuer. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired after the identification of purchased intangible assets, is recorded as goodwill. See note 1e(1)1e(1) for the accounting policy on goodwill.
 
(2) Subsidiaries —Subsidiaries are entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are de-consolidated from the date that control ceases.
 
(3) Transactions with minority interests — Transactions with minority interests are treated as transactions with shareholders. Any surplus or deficit arising from disposals to a minority interest is recorded in equity. For purchases from a minority interest, the difference between consideration paid and the relevant share acquired of the carrying value of the subsidiary is recorded in equity.
(4) Joint ventures and associates —Joint ventures are entities in which the Group holds an interest on a long-term basis and which are jointly controlled, with one or more other venturers, under a contractual arrangement. Associates are entities over which the Group has significant influence but not the power to control the financial and operating policies, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in joint ventures and associates are accounted for by the equity method and are initially recognised at cost. The Group’s investment in associates includes related goodwill.
 
The Group’s share of its joint ventures’ and associates’ post-acquisition profits or losses is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. The Group’s share of its joint ventures’ and associates’ results is recognised as a component of operating profit as these


F-12

Notes to the Consolidated Financial Statements (Continued)
operations form part of the core publishing business of the Group and are an integral part of existing wholly ownedwholly-owned businesses. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in a joint venture or associate equals or exceeds its interest in the joint venture or associate, the Group does not recognise further losses, unless the Group has incurred obligations or made payments on behalf of the joint venture or associate.
c.Foreign currency translation
 
(1) Functional and presentation currency — Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The consolidated financial statements are presented in sterling, which is the Company’scompany’s functional and presentation currency.
 
(2) Transactions and balances — Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of

F-10

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying net investment hedges.
 Translation differences on other non-monetary items such as equities held at fair value are reported as part of the fair value gain or loss through the income statement. Fair value adjustments on non-monetary items such as equities classified as available for sale financial assets, are included in the fair value reserve in equity.
(3) Group companies — The results and financial position of all Group companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
      i) assets and liabilities are translated at the closing rate at the date of the balance sheet;
      ii) income and expenses are translated at average exchange rates;
      iii) all resulting exchange differences are recognised as a separate component of equity.
i) assets and liabilities are translated at the closing rate at the date of the balance sheet;
 
ii) income and expenses are translated at average exchange rates;
iii) all resulting exchange differences are recognised as a separate component of equity.
On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity. The Group treats specific inter-company loan balances, which are not intended to be repaid in the foreseeable future, as part of its net investment. When a foreign entityoperation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.
 
At the date of transition to IFRS the cumulative translation differences forin respect of foreign operations have been deemed to be zero.
Any gains and losses on disposals of foreign operations will exclude translation differences arisingthat arose prior to the transition date.
 
The principal overseas currency for the Group is the US dollar. The average rate for the year against sterling was $1.84 (2005: $1.81)$1.57 (2008: $1.85) and the year end rate was $1.96 (2005: $1.72)$1.61 (2008: $1.44).
d.     Property, plant and equipment
d.  Property, plant and equipment
Property, plant and equipment isare stated at historical cost less depreciation. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost toless their residual values over their estimated useful lives as follows:
      Buildings (freehold): 20-50 years
      Buildings (leasehold): 50 years (or over the period of the lease if shorter)
      Plant and equipment: 3-20 years
Buildings (freehold): 20-50 years
 
Buildings (leasehold): over the period of the lease
Plant and equipment: 3-10 years
The asset’sassets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.


F-13

 
Notes to the Consolidated Financial Statements (Continued)
The carrying value of an asset is written down to its recoverable amount if the carrying value of the asset is greater than its estimated recoverable amount.
e.     Intangible assets
e.  Intangible assets
(1) Goodwill — Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary, associate or associatejoint venture at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates and joint ventures is included in investments in associates. associates and joint ventures.
Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. An impairment loss is recognised to the extent that the carrying value of goodwill exceeds the recoverable amount. The recoverable amountsamount is the higher of cash generating units have been determined based onfair value less costs to sell and value in use calculations.use. These calculations require the use of estimates (seeand significant management judgement. A description of the key assumptions and sensitivities is included in note 12).11. Goodwill is allocated to cash generatingcash-generating units for the purpose of impairment testing. The allocation is made to those cash

F-11

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
generatingcash-generating units that are expected to benefit from the business combination in which the goodwill arose.
Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. IFRS 3 ‘Business Combinations’ has not been applied retrospectively to business combinations before the date of transition to IFRS. Subject to the transition adjustments to IFRS required by IFRS 1, the accounting for business combinations before the date of transition has been grandfathered.
 
(2) Acquired software — Software separately acquired for internal use is capitalised at cost. Software acquired in material business combinations is capitalised at its fair value as determined by an independent valuer. Acquired software is amortised on a straight linestraight-line basis over its estimated useful life of between three and fiveeight years.
 
(3) Internally developed software — Internal and external costs incurred during the preliminary stage of developing computer software for internal use are expensed as incurred. Internal and external costs incurred to develop computer software for internal use during the application development stage are capitalised if the Group expects economic benefits from the development. Capitalisation in the application development stage begins once the Group can reliably measure the expenditure attributable to the software development and has demonstrated its intention to complete and use the software. Internally developed software is amortised on a straight-line basis over its estimated useful life of between three and fiveeight years.
 
(4) Acquired intangible assets — Acquired intangible assets comprise publishing rights,include customer lists and relationships, technology, trade namestrademarks and trademarks.brands, publishing rights, content and technology. These assets are capitalised on acquisition at cost and included in intangible assets. Intangible assets acquired in material business combinations are capitalised at their fair value as determined by an independent valuer. Intangible assets are amortised over their estimated useful lives of between two and 20 years, using a depreciation method that reflects the pattern of their consumption.
 
(5) Pre-publication assets — Pre-publication costsassets represent direct costs incurred in the development of educational programmes and titles prior to their publication. These costs are recognised as current intangible assets where the title will generate probable future economic benefits within their normal operating cycle and costs can be measured reliably. Pre-publication assets are amortised upon publication of the title over estimated economic lives of five years or less, being an estimate of the estimated expected operating life cycle of the title, with a higher proportion of the amortisation taken in the earlier years.
The investment in pre-publication assets has been disclosed as part of the cash generated from operations in the cash flow statement(seestatement (see note 31).
 
The assessment of the recoverability of pre-publication assetassets and the determination of the amortisation profile involve a significant degree of judgement based on historical trends and management estimation of future potential


F-14

Notes to the Consolidated Financial Statements (Continued)
sales. An incorrect amortisation profile could result in excess amounts being carried forward as intangible assets that would otherwise have been written off to the income statement in an earlier period.
Reviews are performed regularly to estimate recoverability of pre-publication assets. The carrying amount of pre-publication assets is set out in note 17.20.
f.  f.     Other financial assets
 
Other financial assets, designated as available for sale investments, are non-derivative financial assets measured at estimated fair value. Changes in the fair value are recorded in equity in the fair value reserve. On the subsequent disposal of the asset, the net fair value gains or losses are taken throughto the income statement.
g.  g.     Inventories
 
Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first in first out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads. Net realisable value is the estimated selling price

F-12

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
in the ordinary course of business, less estimated costs necessary to make the sale. Provisions are made for slow moving and obsolete stock.
h.  Royalty advances
 
Advances of royalties to authors are included within trade and other receivables when the advance is paid less any provision required to adjust the advance to its net realisable value. The realisable value of royalty advances relies on a degree of management judgement in determining the profitability of individual author contracts. If the estimated realisable value of author contracts is overstated, then this will have an adverse effect on operating profits as these excess amounts will be written off.
The recoverability of royalty advances is based upon an annual detailed management review of the age of the advance, the future sales projections for new authors and prior sales history of repeat authors. The royalty advance is expensed at the contracted or effective royalty rate as the related revenues are earned. Royalty advances which will be consumed within one year are held in current assets. Royalty advances which will be consumed after one year are held in non-current assets.
i.     Newspaper development costs
i.  Newspaper development costs
Investment in the development of newspaper titles consists of measures to increase the volume and geographical spread of circulation. The measures include additional and enhanced editorial content, extended distribution and remote printing. These costcosts are expensed as incurred as they do not meet the criteria under IAS 38 ‘Intangible Assets’ to be capitalised as intangible assets.
j.     Cash and cash equivalents
j.  Cash and cash equivalents
Cash and cash equivalents in the cash flow statement include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are included in borrowings in current liabilities in the balance sheet.
k.     Share capital
Short-term deposits and marketable securities with maturities of greater than three months do not qualify as cash and cash equivalents. Movements on these financial instruments are classified as cash flows from financing activities in the cash flow statement as these amounts are used to offset the borrowings of the Group.
 
k.  Share capital
Ordinary shares are classified as equity.
 
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.


F-15

 
Notes to the Consolidated Financial Statements (Continued)
Where any Group company purchases the Company’scompany’s equity share capital (Treasury(treasury shares) the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company’scompany’s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’scompany’s equity holders.
l.     Borrowings
l.  Borrowings
Borrowings are recognised initially at fair value, which is proceeds received net of transaction costs incurred. Borrowings are subsequently stated at amortised cost with any difference between the proceeds (net of transaction costs) and the redemption value being recognised in the income statement over the period of the borrowings using the effective interest method. Accrued interest is included as part of borrowings. Where a debt instrument is in a fair value hedging relationship, an adjustment is made to its carrying value in the income statement to reflect the hedged risk. Interest on borrowings is expensed in the income statement as incurred.

F-13

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
m.  Derivative financial instruments
 
Derivatives are initially recognised at fair value and re-measured at the date of transition to IAS 39(1 January 2005)or, if later, on the date a derivative is entered into. Derivatives are subsequently remeasured at their fair value.each balance sheet date. The fair value of derivatives has beenis determined by using market data and the use of established estimation techniques such as discounted cash flow and option valuation models. The Group designates certain of the derivative instruments within its portfolio to be hedges of the fair value of its bonds(fairbonds (fair value hedges) or hedges of net investments in foreign operations (net investment hedges).
 
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
 
The effective portion of changes in the fair value of derivatives that are designated and qualify as net investment hedges are recognised in equity.other comprehensive income. Gains and losses accumulated in equity are included in the income statement when the corresponding foreign operation is disposed of. Gains or losses relating to the ineffective portion are recognised immediately in finance income or finance costs in the income statement.
 
Certain derivatives do not qualify or are not designated as hedging instruments. Such derivatives are classified at fair value and any movement in their fair value is recognised immediately in finance income or finance costs in the income statement immediately.
n.     Taxationstatement.
 
n.  Taxation
Current tax is recognised on the amounts expected to be paid or recovered under the tax rates and laws that have been enacted or substantively enacted at the balance sheet date.
 
Deferred income tax is provided, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts. Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred income tax liability is settled.
 
Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
 
Deferred income tax is provided in respect of the undistributed earnings of subsidiaries other than where it is intended that those undistributed earnings will not be remitted in the foreseeable future.
 
Current and deferred tax are recognised in the income statement, except when the tax relates to items charged or credited directly to equity or other comprehensive income, in which case the tax is also recognised in equity.equity or other comprehensive income.


F-16

Notes to the Consolidated Financial Statements (Continued)
 
The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the estimates in relation to the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
 
Deferred tax assets and liabilities require management judgement in determining the amounts to be recognised. In particular, significant judgement is used when assessing the extent to which deferred tax assets should be recognised with consideration given to the timing and level of future taxable income together with any future tax planning strategies.

F-14

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
o.  Employee benefits
o.     Employee benefits
(1) Retirement benefitPension obligations— The liabilityretirement benefit asset and obligation recognised in respectthe balance sheet represents the net of defined benefit pension plans is the present value of the defined benefit obligations at the balance sheet date lessobligation and the fair value of plan assets.assets at the balance sheet date. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting estimated future cash flows using yields on high quality corporate bonds which have terms to maturity approximating the terms of the related liability.
 
The determination of the pension cost and defined benefit obligation of the Group’s defined benefit pension schemes depends on the selection of certain assumptions, which include the discount rate, inflation rate, salary growth, longevity and expected return on scheme assets. Differences arising from actual experience or future changes in assumptions will be reflected in subsequent periods (actuarial gains and losses).
 
Actuarial gains and losses arising from differences between actual and expected returns on plan assets, experience adjustments on liabilities and changes in actuarial assumptions are recognised immediately in the statement of recognised income and expense.other comprehensive income.
 
The service cost, representing benefits accruing over the year, is included in the income statement as an operating cost. The unwinding of the discount rate on the scheme liabilities and the expected return on scheme assetassets are presented as finance costs or finance income.
 
Obligations for contributions to defined contribution pension plans are recognised as an operating expense in the income statement as incurred.
 
(2) Other post-retirement obligations— The Group provides certain healthcare and life assurance benefits. The principal plans are unfunded. The expected costs of thesepost-retirement healthcare and life assurance benefits are accrued over the period of employment, using ana similar accounting methodology which is the same as that for defined benefit pension plans.obligations. The liabilities and costs relating to material other post-retirement obligations are assessed annually by independent qualified actuaries.
 
(3) Share-based payments— The Group has a number of employee option and share plans. The fair value of options or shares granted under the Group’s share and option plans is recognised as an employee expense after taking into account the Group’s best estimate of the number of awards expected to vest. Fair value is measured at the date of grant and is spread over the vesting period of the option or share. The fair value of the options granted is measured using whichever of the Black-Scholes, Binomial and Monte Carloan option model that is most appropriate to the award. The fair value of shares awarded is measured using the share price at the date of grant unless another method is more appropriate. Any proceeds received are credited to share capital and share premium when the options are exercised. The Group has applied IFRS 2 ‘Share-based Payment’ retrospectively to all options granted but not fully vested at the date of transition to IFRS.
p.     Provisions
p.  Provisions
Provisions are recognised whenif the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are discounted to present value where the effect is material.


F-17

 
Notes to the Consolidated Financial Statements (Continued)
The Group recognises a provision for deferred consideration inwhen the period that an acquisitionpayment of the deferred consideration is made and the Group becomes legally committed to making the payment.probable.
 The Group recognises a provision fore integration and reorganisation costs in the period in which the Group becomes legally or constructively committed to making the payment.
The Group recognises a provision for onerous lease contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. The

F-15

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision is based on the present value of future payments for surplus leased properties under non-cancellable operating leases, net of estimatedsub-leasing revenue.
q.     Revenue recognition income.
 
q.  Revenue recognition
Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services net of value-added tax and other sales taxes, rebates and discounts, and after eliminating sales within the Group. Revenue is recognised as follows:
 
Revenue from the sale of books is recognised when title passes. A provision for anticipated returns is made based primarily on historical return rates. If these estimates do not reflect actual returns in future periods then revenues could be understated or overstated for a particular period.
 
Circulation and advertising revenue is recognised when the newspaper or other publication is published. Subscription revenue is recognised on a straight-line basis over the life of the subscription.
 
Where a contractual arrangement consists of two or more separate elements that can be provided to customers either on a stand-alone basis or as an optional extra, and fair value exists for each separate element, such as the provision of supplementary materials with textbooks, revenue in such multiple element arrangements is recognised whenfor each product has been delivered and all other relevant revenue recognition criteria are achieved.element as if it were an individual contractual arrangement.
 
Revenue from multi-year contractual arrangements, such as contracts to process qualifying tests for individual professions and government departments, is recognised as performance occurs. The assumptions, risks, and uncertainties inherent in long-term contract accounting can affect the amounts and timing of revenue and related expenses reported. Certain of these arrangements, either as a result of a single service spanning more than one reporting period or where the contract requires the provision of a number of services that together constitute a single project, are treated as long-term contracts with revenue recognised on a percentage of completion basis. Losses on contracts are recognised in the period in which the loss first becomes foreseeable. Contract losses are determined to be the amount by which estimated total costs of the contract exceed the estimated total revenues that will be generated by the contract.
 
On certain contracts, where the Group acts as agent, only commissions and fees receivable for services rendered are recognised as revenue. Any third partythird-party costs incurred on behalf of the principal that are rechargeable under the contractual arrangement are not included in revenue.
 
Income from recharges of freight and other activities which are incidental to the normal revenue generating activities is included in other income.
r.     Leases
r.  Leases
Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the commencement of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in financial liabilities — borrowings. The interest element of the finance cost is charged to the income statement over the lease period to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases isare depreciated over the shorter of the useful life of the asset or the lease term.


F-18

 
Notes to the Consolidated Financial Statements (Continued)
Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases by the lessee. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

F-16

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
s.  Dividends
s.     Dividends
Dividends are recorded in the Group’s financial statements in the period in which they are approved by the Company’scompany’s shareholders. Interim dividends are recorded in the period in which they are approved and paid.
t.  Non-current assets and liabilities held for sale
Assets and discontinued operations
      Non-current assetsliabilities are classified as assets held for sale and stated at the lower of carrying amount and fair value less costs to sell if it is intended to recover their carrying amount principally through a sale transaction rather than through continuing use. No depreciation is charged in respect of non-current assets classified as held for sale. Amounts relating to non-current assets and liabilities held for sale are classified as discontinued operations in the income statement.
u.     Trade receivablesstatement where appropriate.
 
u.  Trade receivables
Trade receivables are stated at fair value lessafter provision for bad and doubtful debts and anticipated future sales returns (see also note 1q).
2     Segment information
2.  Segment information
      Due to the differing risks and rewards associated with each business segment and the different customer focus of each segment, the Group’s primary segment reporting format is by business. The Group is organised into the following fivesix business segments:
 
SchoolNorth American Education — publisher, providerEducational publishing, assessment and testing for the school and higher education market within the USA and Canada;
International Education — Educational publishing, assessment and testing for the school and higher education market outside of North America;
Professional — Business and technology publishing and testing and software servicescertification for primary and secondary schools;professional bodies;
 Higher Education — publisher of textbooks and related course materials for colleges and universities;
Penguin — publisher with brand imprints such as Penguin, Putnam, Berkley, Viking, Dorling Kindersley;
FT Publishing— publisherPublisher of theFinancial Times other, business newspapers, magazines and specialist information;
 
Interactive Data Corporation (IDC)— providerProvider of financial and business information to financial institutions and retail investors.investors;
 The remaining business group, Professional, brings together a number of education publishing, testing
Penguin — Publisher with brand imprints such as Penguin, Putnam, Berkley, Viking and services businesses that publish texts, reference and interactive products for industry professionals and does not meetDorling Kindersley.


F-19

Notes to the criteria for classification as a ‘segment’ under IFRS. Consolidated Financial Statements (Continued)
For more detail on the services and products included in each business segment refer to the Business Review.Item 4 of thisForm 20-F.
                                     
    2009 
    North
                      
    American
  International
     FT
  Interactive
          
  Notes Education  Education  Professional  Publishing  Data  Penguin  Corporate  Group 
    All figures in £ millions 
 
Continuing operations
                                    
Sales (external)      2,470   1,035   275   358   484   1,002   —   5,624 
Sales (inter-segment)      —   —   7   —   —   24   —   31 
                                   
Adjusted operating profit      403   141   43   39   148   84   —   858 
Amortisation of acquired intangibles      (49)  (32)  (1)  (8)  (12)  (1)  —   (103)
                                   
Operating profit
      354   109   42   31   136   83   —   755 
                                   
Finance costs  6                               (122)
Finance income  6                               27 
                                   
Profit before tax
                                  660 
                                   
Income tax  7                               (198)
                                   
Profit for the year from continuing operations
                                  462 
                                   
Segment assets      4,382   1,635   377   420   471   1,173   924   9,382 
Joint ventures  12   13   —   1   1   —   3   —   18 
Associates  12   —   5   —   7   —   —   —   12 
                                   
Total assets
      4,395   1,640   378   428   471   1,176   924   9,412 
                                   
Other segment items
                                    
Share of results of joint ventures and associates  12   (2)  6   1   25   —   —   —   30 
Capital expenditure  10, 11, 20   258   80   20   15   29   46   —   448 
Depreciation  10   24   16   10   5   21   9   —   85 
Amortisation  11, 20   274   89   13   20   16   42   —   454 
                                   


F-20

F-17

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
Primary reporting format — business segments
                                     
      Higher     FT     2006
  Notes School Education Professional Penguin Publishing IDC Corporate Group
                   
  (All figures in £ millions)
Continuing operations
                                    
Sales (external)      1,455   795   341   848   366   332   —   4,137 
Sales (inter-segment)      1   —   —   18   —   —   —   19 
                            
Operating profit before joint ventures and associates      161   161   36   58   18   82   —   516 
Share of results of joint ventures and associates      6   —   1   —   17   —   —   24 
                            
Operating profit
      167   161   37   58   35   82   —   540 
                            
Finance costs  7                               (133)
Finance income  7                               59 
                            
Profit before tax
                                  466 
                            
Income tax  8                               (11)
                            
Profit for the year from continuing operations
                                  455 
                            
Reconciliation to adjusted operating profit
                                    
Operating profit      167   161   37   58   35   82   —   540 
Adjustment to goodwill on recognition of pre-acquisition deferred tax      —   —   —   7   —   —   —   7 
Amortisation of acquired intangibles      17   —   1   1   2   7   —   28 
Other net gains and losses of associates      —   —   —   —   (4)  —   —   (4)
Other net finance costs of associates      —   —   —   —   (1)  —   —   (1)
                            
Adjusted operating profit — continuing operations      184   161   38   66   32   89   —   570 
                            
Segment assets      2,684   1,347   580   954   317   314   703   6,899 
Joint ventures  13   5   —   —   3   4   —   —   12 
Associates  13   4   —   —   —   4   —   —   8 
                            
Assets — continuing operations      2,693   1,347   580   957   325   314   703   6,919 
Assets — discontinued operations      —   —   294   —   —   —   —   294 
                            
Total assets
      2,693   1,347   874   957   325   314   703   7,213 
                            
Total liabilities
      (662)  (268)  (177)  (269)  (300)  (131)  (1,762)  (3,569)
                            
Other segment items
                                    
Capital expenditure  11, 12, 17   124   88   30   38   19   20   —   319 
Depreciation  11   21   8   19   7   9   13   —   77 
Amortisation  12, 17   117   78   21   34   4   7   —   261 
                            
                                     
     2008 
     North
                      
     American
  International
     FT
  Interactive
          
  Notes  Education  Education  Professional  Publishing  Data  Penguin  Corporate  Group 
     All figures in £ millions 
 
Continuing operations
                                    
Sales (external)      2,002   866   244   390   406   903   —   4,811 
Sales (inter-segment)      —   —   4   —   —   22   —   26 
                                     
Adjusted operating profit      303   135   36   74   121   93   —   762 
Amortisation of acquired intangibles      (45)  (22)  (1)  (7)  (9)  (2)  —   (86)
                                     
Operating profit
      258   113   35   67   112   91   —   676 
                                     
Finance costs  6                               (136)
Finance income  6                               45 
                                     
Profit before tax
                                  585 
                                     
Income tax  7                               (172)
                                     
Profit for the year from continuing operations
                                  413 
                                     
Segment assets      4,952   1,358   423   482   524   1,211   923   9,873 
Joint ventures  12   —   8   —   2   —   3   —   13 
Associates  12   —   4   —   6   —   —   —   10 
                                     
Total assets
      4,952   1,370   423   490   524   1,214   923   9,896 
                                     
Other segment items
                                    
Share of results of joint ventures and associates  12   —   5   —   19   —   1   —   25 
Capital expenditure  10, 11, 20   224   82   22   17   25   51   —   421 
Depreciation  10   25   12   8   13   13   9   —   80 
Amortisation  11, 20   219   69   12   12   12   36   —   360 
                                     


F-21

F-18

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
                                     
      Higher     FT     2005
  Notes School Education Professional Penguin Publishing IDC Corporate Group
                   
  (All figures in £ millions)
Continuing operations
                                    
Sales (external)      1,295   779   301   804   332   297   —   3,808 
Sales (inter-segment)      —   —   —   16   —   —   —   16 
                            
Operating profit before joint ventures and associates      138   156   24   60   49   75   —   502 
Share of results of joint ventures and associates      4   —   1   —   9   —   —   14 
                            
Operating profit
      142   156   25   60   58   75   —   516 
                            
Finance costs  7                               (132)
Finance income  7                               62 
                            
Profit before tax
                                  446 
                            
Income tax  8                               (116)
                            
Profit for the year from continuing operations
                                  330 
                            
Reconciliation to adjusted operating profit
                                    
Operating profit      142   156   25   60   58   75   —   516 
Amortisation of acquired intangibles      5   —   —   —   1   5   —   11 
Other net gains and losses      —   —   —   —   (40)  —   —   (40)
Other net finance costs of associates      —   —   —   —   2   —   —   2 
                            
Adjusted operating profit — continuing operations      147   156   25   60   21   80   —   489 
                            
Segment assets      2,347   1,648   1,179   960   154   291   985   7,564 
Joint ventures  13   6   —   —   2   4   —   —   12 
Associates  13   6   —   —   —   18   —   —   24 
                            
Total assets
      2,359   1,648   1,179   962   176   291   985   7,600 
                            
Total liabilities
      (557)  (341)  (263)  (280)  (336)  (109)  (1,981)  (3,867)
                            
Other segment items
                                    
Capital expenditure  11, 12, 17   114   96   43   34   14   19   —   320 
Depreciation  11   26   8   17   7   11   11   —   80 
Amortisation  12, 17   91   78   20   24   3   5   —   221 
                            

F-19

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                     
      Higher     FT     2004
  Notes School Education Professional Penguin Publishing IDC Corporate Group
                   
  (All figures in £ millions)
Continuing operations
                                    
Sales (external)      1,087   729   290   786   318   269   —   3,479 
Sales (inter-segment)      —   —   —   15   —   —   —   15 
                            
Operating profit before joint ventures and associates      109   133   20   46   4   62   —   374 
Share of results of joint ventures and associates      3   —   —   1   4   —   —   8 
                            
Operating profit
      112   133   20   47   8   62   —   382 
                            
Finance costs  7                               (96)
Finance income  7                               17 
                            
Profit before tax
                                  303 
                            
Income tax  8                               (55)
                            
Profit for the year from continuing operations
                                  248 
                            
Reconciliation to adjusted operating profit
                                    
Operating profit      112   133   20   47   8   62   —   382 
Amortisation of acquired intangibles          —   —   —   —   5   —   5 
Other net gains and losses      (4)  (4)  (2)  5   (4)  —   —   (9)
                            
Other net finance costs of associates      —   —   —   —       —   —     
Adjusted operating profit — continuing operations      108   129   18   52   4   67   —   378 
                            
Segment assets      1,860   1,224   1,345   892   502   247   461   6,531 
Joint ventures  13   7   —   —   5   2   —   —   14 
Associates  13   5   —   —   —   28   —   —   33 
                            
Total assets
      1,872   1,224   1,345   897   532   247   461   6,578 
                            
Total liabilities
      (439)  (286)  (212)  (259)  (435)  (110)  (1,823)  (3,564)
                            
Other segment items
                                    
Capital expenditure  11, 12, 17   104   79   62   36   15   12   —   308 
Depreciation  11   25   9   16   9   16   9   —   84 
Amortisation  12, 17   74   65   18   29   2   5   —   193 
                            
 
                                     
     2007 
     North
                      
     American
  International
     FT
  Interactive
          
  Notes  Education  Education  Professional  Publishing  Data  Penguin  Corporate  Group 
     All figures in £ millions 
 
Continuing operations
                                    
Sales (external)      1,667   735   226   344   344   846   —   4,162 
Sales (inter-segment)      1   —   —   —   —   19   —   20 
                                     
Adjusted operating profit      273   92   27   56   97   74   —   619 
Amortisation of acquired intangibles      (20)  (10)  (1)  (6)  (7)  (1)  —   (45)
                                     
Operating profit
      253   82   26   50   90   73   —   574 
                                     
Finance costs  6                               (150)
Finance income  6                               44 
                                     
Profit before tax
                                  468 
                                     
Income tax  7                               (131)
                                     
Profit for the year from continuing
operations
                                  337 
                                     
Segment assets      3,536   1,013   291   397   330   937   651   7,155 
Joint ventures      —   5   —   4   —   2   —   11 
Associates      1   3   —   5   —   —   —   9 
                                     
Assets — continuing operations      3,537   1,021   291   406   330   939   651   7,175 
Assets — discontinued operations      —   —   117   —   —   —   —   117 
                                     
Total assets
      3,537   1,021   408   406   330   939   651   7,292 
                                     
Other segment items
                                    
Share of results of joint ventures and associates      —   6   1   16   —   —   —   23 
Capital expenditure      136   109   20   28   19   44   —   356 
Depreciation      26   7   9   9   10   7   —   68 
Amortisation      159   45   11   9   8   30   —   262 
                                     
In 2006,2009, sales from the provision of goods were £3,117m (2005: £2,956m; 2004: 2,787m)£3,947m (2008: £3,411m; 2007: £3,053m) and sales from the provision of services were £1,020m (2005: £852m; 2004: 692m)£1,677m (2008: £1,400m; 2007: £1,109m). Sales from the Group’s educational publishing, consumer publishing and newspaper business are classified as being from the provision of goods and sales from its assessment and testing, marketpricing, corporate trainingmarket pricing and managementother service businesses are classified as being from the provision of services.
 
Corporate costs are allocated to business segments on an appropriate basis depending on the nature of the cost and therefore the segment result is equal to the Group operating profit. Inter-segment pricing is determined on an arm’s lengtharm’s-length basis. Segment assets consist primarily of property, plant and equipment, intangible assets, inventories, receivables, retirement benefit assets and deferred taxation and exclude cash and cash equivalents and derivative assets. Segment liabilities comprise operating liabilities and exclude borrowings and derivative liabilities. Corporate assets and liabilities comprise cash and cash equivalents, marketable securities borrowings and derivative financial instruments. Capital expenditure comprises additions to property, plant and equipment and intangible assets, including pre-publication but excluding goodwill (see notes 10, 11 12 and 17)20).

F-20

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
Property, plant and equipment and intangible assets acquired through business combinationscombination were £173m (2005: £111m; 2004: £16m)£153m (2008: £253m) (see notes 11, 12 and 17)note 29). Capital expenditure, depreciation and amortisation include amounts relating to discontinued operations. In April 2005, Pearson sold its 79% interestDiscontinued operations relate to the Data Management business in Recoletos Grupo de Communicación S.A.. This operation is disclosed as a discontinued operation2008 and to the Data Management business, Government Solutions, Datamark and Les Echos in 20052007 (see note 3). In December 2006 Pearson announced its intention

F-22

Notes to sell Pearson Government Solutions. This operation is disclosed as a discontinued operation (see note 3) and the assets and liabilities are classified as held for sale (see note 29).
Secondary reporting format — geographic segmentsConsolidated Financial Statements (Continued)
 
The Group’s business segments are managed on a worldwide basis and operateGroup operates in the following main geographic areas:
                                     
  Sales Total assets Capital expenditure
       
  2006 2005 2004 2006 2005 2004 2006 2005 2004
                   
  (All figures in £ millions)
Continuing operations
                                    
European countries  1,089   951   820   1,608   1,711   1,112   70   63   79 
North America  2,642   2,451   2,309   4,908   5,476   4,716   231   242   208 
Asia Pacific  298   300   263   327   325   302   12   13   10 
Other countries  108   106   87   56   52   43   2   2   3 
                            
Total
  4,137   3,808   3,479   6,899   7,564   6,173   315   320   300 
                            
Discontinued operations
                                    
European countries  17   39   205   9   —   358   1   —   8 
North America  257   266   195   281   —   —   2   —   — 
Other countries  12   10   7   4   —   —   1   —   — 
                            
Total
  286   315   407   294   —   358   4   —   8 
Joint ventures and associates  —   —   —   20   36   47   —   —   — 
                            
Total
  4,423   4,123   3,886   7,213   7,600   6,578   319   320   308 
                            
 
                         
  Sales  Non-current assets 
  2009  2008  2007  2009  2008  2007 
  All figures in £ millions 
 
Continuing operations
                        
UK  748   754   721   941   701   724 
Other European countries  474   463   381   242   224   140 
USA  3,462   2,861   2,448   3,811   4,624   3,146 
Canada  201   167   143   204   209   183 
Asia Pacific  519   415   351   340   179   114 
Other countries  220   151   118   121   14   11 
                         
Total continuing
  5,624   4,811   4,162   5,659   5,951   4,318 
                         
Discontinued operations
                        
UK  —   —   1   —   —   — 
Other European countries  —   —   82   —   —   — 
USA  —   8   78   —   —   117 
Canada  —   —   —   —   —   — 
Asia Pacific  —   —   —   —   —   — 
Other countries  —   —   6   —   —   — 
                         
Total discontinued
  —   8   167   —   —   117 
                         
Total
  5,624   4,819   4,329   5,659   5,951   4,435 
                         
Sales are allocated based on the country in which the customer is located. This does not differ materially from the location where the order is received.

F-21

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) Non-current assets are based on the subsidiary’s country of domicile. This is not materially different to the location of the assets. Non-current assets comprise property, plant and equipment, intangible assets, investments in joint ventures and associates and other receivables.
33.  Discontinued operations
 On 11 December 2006, Pearson announced that it had agreed
Discontinued operations relate to sell Pearsonthe Group’s interest in Government Solutions to Veritas Capital, a private equity firm. This operation is disclosed as discontinued(sold on 15 February 2007), Datamark (sold on 31 July 2007), Les Echos (sold on 24 December 2007) and the assets and liabilitiesData Management business (sold on 22 February 2008).
The results of Pearson Government Solutionsthe Data Management business (previously included in the Professional segment) have been reclassifiedincluded in discontinued operations for 2007 and 2008. In anticipation of the loss on sale, an impairment to non-current assets held for sale (see notes 29 and 35).
      Discontinued operations in 2005 also relategoodwill was charged to the saleincome statement in 2007.
The results of Pearson’s 79% interestGovernment Solutions (previously included in Recoletos Grupo de Communicación S.A..the Professional segment) and Les Echos (previously included in the FT Publishing segment) were included in discontinued operations for 2007 and were consolidated up to the date of sale.
 
Datamark was sold immediately following its acquisition as part of the eCollege transaction and consequently none of the results for this business were consolidated.


F-23

Notes to the Consolidated Financial Statements (Continued)
An analysis of the results and cash flows of the discontinued operations areoperation is as follows:
                             
  2006 2005     2004    
  Pearson Pearson     Pearson    
  Government Government 2005 2005 Government 2004 2004
  Solutions Solutions Recoletos Total Solutions Recoletos Total
               
  (All figures in £ millions)
Sales  286   288   27   315   217   190   407 
 ��                    
Operating profit/(loss)  22   20   (3)  17   22   26   48 
Net finance income  —   —   —   —   —   3   3 
                      
Profit/(loss) before tax
  22   20   (3)  17   22   29   51 
                      
Attributable tax (expense)/benefit  (8)  (8)  1   (7)  (8)  (7)  (15)
                      
Profit/(loss) after tax
  14   12   (2)  10   14   22   36 
Profit on disposal of discontinued operations before tax  —   —   306   306   —   —   — 
Attributable tax expense  —   —   (2)  (2)  —   —   — 
                      
Profit for the year from discontinued operations
  14   12   302   314   14   22   36 
                      
Operating cash flows  20   22   (6)  16   112   12   124 
Investing cash flows  (8)  (13)  —   (13)  (5)  17   12 
Financing cash flows  (1)  (1)  —   (1)  —   —   — 
                      
Total cash flows
  11   8   (6)  2   107   29   136 
                      
2008
Data
Management
All figures
in £ millions
Sales8
Operating profit—
Profit before tax
—
Attributable tax expense—
Profit after tax
—
Loss on disposal of discontinued operations before tax(53)
Attributable tax expense(37)
Loss for the year from discontinued operations
(90)
Operating cash flows—
Investing cash flows—
Financing cash flows—
Total cash flows
—
                     
  2007 
  Data
        Government
    
  Management  Les Echos  Datamark  Solutions  Total 
  All figures in £ millions 
 
Sales  56   82   —   29   167 
                     
Operating profit  12   1   —   2   15 
                     
Goodwill impairment  (97)  —   —   —   (97)
                     
(Loss)/profit before tax
 ��(85)  1   —   2   (82)
                     
Attributable tax expense  (4)  —   —   (1)  (5)
                     
(Loss)/profit after tax
  (89)  1   —   1   (87)
Profit/(loss) on disposal of discontinued operations before tax  —   165   —   (19)  146 
Attributable tax (expense)/benefit  —   —   7   (93)  (86)
                     
(Loss)/profit for the year from discontinued operations
  (89)  166   7   (111)  (27)
                     
Operating cash flows  11   4   —   (8)  7 
Investing cash flows  (1)  4   —   —   3 
Financing cash flows  (10)  (7)  —   (4)  (21)
                     
Total cash flows
  —   1   —   (12)  (11)
                     


F-24

Notes to the Consolidated Financial Statements (Continued)
44.  Other net gains and lossesOperating expenses
             
  2006 2005 2004
       
  (All figures in £ millions)
Profit on sale of interest in MarketWatch  —   40   — 
Other items  —   —   9 
          
Total other net gains and losses  —   40   9 
          
 Other net gains and losses represent profits and losses on the sale of subsidiaries, joint ventures, associates and other financial assets that are included within continuing operations.

F-22

             
  2009  2008  2007 
  All figures in £ millions 
 
By function:
            
Cost of goods sold  2,539   2,174   1,910 
             
Operating expenses
            
Distribution costs  274   235   202 
Administrative and other expenses  2,206   1,853   1,600 
Other income  (120)  (102)  (101)
             
Total operating expenses
  2,360   1,986   1,701 
             
Total
  4,899   4,160   3,611 
             

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5Operating expenses
             
  2006 2005 2004
       
  (All figures in £ millions)
By function:
            
Cost of goods sold  1,917   1,787   1,631 
          
Operating expenses
            
Distribution costs  299   292   226 
Administrative and other expenses  1,504   1,351   1,340 
Other income  (99)  (84)  (83)
          
Total operating expenses
  1,704   1,559   1,483 
          
Total
  3,621   3,346   3,114 
          
                 
  Notes 2006 2005 2004
         
    (All figures in £ millions)
By nature:
                
Utilisation of inventory  18   820   767   699 
Depreciation of property, plant and equipment  11   71   76   74 
Amortisation of intangible assets — pre-publication  17   210   192   168 
Amortisation of intangible assets — other  12   48   26   24 
Employee benefit expense  6   1,280   1,177   1,074 
Operating lease rentals      125   111   126 
Other property costs      121   84   69 
Royalties expensed      360   363   331 
Advertising, promotion and marketing      212   198   171 
Information technology costs      90   81   73 
Other costs      383   355   351 
Other income      (99)  (84)  (46)
             
Total
      3,621   3,346   3,114 
             
                 
  Notes  2009  2008  2007 
     All figures in £ millions 
 
By nature:
                
Utilisation of inventory  21   843   832   732 
Depreciation of property, plant and equipment  10   85   80   65 
Amortisation of intangible assets — Pre-publication  20   307   244   192 
Amortisation of intangible assets — Other  11   147   116   70 
Employee benefit expense  5   1,903   1,553   1,288 
Operating lease rentals      171   168   129 
Other property costs      87   116   122 
Royalties expensed      497   415   365 
Advertising, promotion and marketing      297   244   195 
Information technology costs      96   76   70 
Other costs      586   418   484 
Other income      (120)  (102)  (101)
                 
Total
      4,899   4,160   3,611 
                 
 
During the year the Group obtained the following services from the Group’s auditor:
             
  2006 2005 2004
       
  (All figures in £ millions)
Audit services
            
Fees payable to the Company’s auditor for the audit of parent company and consolidated accounts  1   1   1 
Non-audit services
            
Fees payable to the Company’s auditor and its associates for other services:            
 — The audit of the Company’s subsidiaries pursuant to legislation  4   3   3 
 — Other services pursuant to legislation  4   —   — 
 — Tax services  1   1   2 
 — Services relating to corporate finance transactions  1   1   — 
 — All other services  —   1   — 
          
   11   7   6 
          
             
  2009  2008  2007 
  All figures in £ millions 
 
Fees payable to the company’s auditor for the audit of parent company and consolidated financial statements  4   3   3 
The audit of the company’s subsidiaries pursuant to legislation  2   2   1 
Tax services  2   2   2 
Other services  1   1   1 
             
Total
  9   8   7 
             


F-25

F-23

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
 ‘Other services pursuant to legislation’ represents
Reconciliation between audit and non-audit service fees is shown below:
             
  2009  2008  2007 
  All figures in £ millions 
 
Group audit fees including fees for attestation under section 404 of the Sarbanes-Oxley Act  6   5   4 
Non-audit fees  3   3   3 
             
Total
  9   8   7 
             
Fees for attestation under section 404 of the Sarbanes-Oxley Act are allocated between fees payable for services in relation to other statutory filings or engagements that are required to be carried out by the appointed auditor. In particular, this includes fees for reports under section 404 (S-404)audits of the US Public Company Accounting Reformconsolidated and Investor Protection Act of 2002 (Sarbanes-Oxley) which are required for the first time in 2006.subsidiary accounts.
 ‘Services relating to corporate finance transactions’ relate to a carve-out audit of Pearson Government Solutions in 2006. In 2005 this largely
Tax services include services related to tax planning and various other tax advisory matters. Other services include due diligence work at IDC.on acquisitions.
 ‘All other services’ in 2005 relate to IFRS transition work and Sarbanes-Oxley section 404 compliance services.
      Audit fees in relation to the IDC SEC filings have been entirely included in ‘The audit of the Company’s subsidiaries pursuant to legislation’. The audit fee relates to an integrated S-404 review and audit in which the audit work takes leverage from the results of S-404 testing. The fees for the S-404 review and the audit are not separate, therefore no IDC fees have been included in ‘Other services pursuant to legislation’.
65.  Employee information
                 
  Notes 2006 2005 2004
         
    (All figures in £ millions)
Employee benefit expense
                
Wages and salaries (including termination benefits and restructuring costs)      1,080   993   903 
Social security costs      111   100   89 
Share-based payment costs  24   25   23   25 
Pension costs — defined contribution plans  24   36   35   32 
Pension costs — defined benefit plans  24   29   25   24 
Other post-retirement benefits  24   (1)  1   1 
             
       1,280   1,177   1,074 
             
 
                 
  Notes  2009  2008  2007 
     All figures in £ millions 
 
Employee benefit expense
                
Wages and salaries (including termination benefits and restructuring costs)      1,632   1,317   1,087 
Social security costs      152   119   100 
Share-based payment costs  26   37   33   30 
Retirement benefits — defined contribution plans  25   62   41   39 
Retirement benefits — defined benefit plans  25   18   37   31 
Other post-retirement benefits  25   2   6   1 
                 
       1,903   1,553   1,288 
                 
The details of the emoluments of the directors of Pearson plc are shown in Item 6 of this Form 20-F.the report on directors’ remuneration.
             
  2006 2005 2004
       
  (Average number employed)
School  11,064   10,133   10,403 
Higher Education  4,368   4,196   4,087 
Professional  3,754   3,809   3,368 
Penguin  3,943   4,051   4,085 
FT Publishing  2,285   1,952   1,989 
IDC  2,200   1,956   1,826 
Other  1,669   1,573   1,365 
          
Continuing operations
  29,283   27,670   27,123 
          
Discontinued operations
  5,058   4,533   5,963 
          
   34,341   32,203   33,086 
          
             
  2009  2008  2007 
  Average number employed 
 
Employee numbers
            
North American Education  15,606   15,412   14,327 
International Education  8,899   5,718   5,291 
Professional  2,662   2,641   2,540 
FT Publishing  2,328   2,379   2,083 
Interactive Data  2,459   2,413   2,300 
Penguin  4,163   4,112   4,163 
Other  1,047   909   918 
             
Continuing operations
  37,164   33,584   31,622 
             
Discontinued operations
  —   96   1,070 
             
   37,164   33,680   32,692 
             


F-26

F-24

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
76.  Net finance costs
                 
  Notes 2006 2005 2004
         
    (All figures in £ millions)
Interest payable      (117)  (98)  (91)
Finance costs re employee benefits  24   —   (7)  (5)
Net foreign exchange losses      (2)  (9)  — 
Other losses on financial instruments in a hedging relationship:                
— fair value hedges      —   (1)  — 
— net investment hedges      (2)  —   — 
Other losses on financial instruments not in a hedging relationship:                
— derivatives      (12)  (17)  — 
             
Finance costs
      (133)  (132)  (96)
             
Interest receivable      23   21   17 
Finance income re employee benefits  24   4   —   — 
Net foreign exchange gains      21   21   — 
Other gains on financial instruments in a hedging relationship:                
— fair value hedges      —   1   — 
— net investment hedges      —   3   — 
Other gains on financial instruments not in a hedging relationship:                
— amortisation of transitional adjustment on bonds      8   7   — 
— derivatives      3   9   — 
             
Finance income
      59   62   17 
             
Net finance costs
      (74)  (70)  (79)
             
Analysed as:
                
Net interest payable      (94)  (77)  (74)
Finance income/(costs) re employee benefits  24   4   (7)  (5)
             
Net finance costs reflected in adjusted earnings      (90)  (84)  (79)
Other net finance income      16   14   — 
             
Total net finance costs
      (74)  (70)  (79)
             

F-25

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                 
  Notes  2009  2008  2007 
     All figures in £ millions 
 
Interest payable      (92)  (106)  (114)
Finance costs in respect of retirement benefits  25   (12)  —   — 
Net foreign exchange losses      (7)  (11)  (25)
Other losses on financial instruments in a hedging relationship:                
— fair value hedges      (1)  (7)  (1)
— net investment hedges      —   —   (1)
Other losses on financial instruments not in a hedging relationship:                
— derivatives      (10)  (12)  (9)
                 
Finance costs
      (122)  (136)  (150)
                 
Interest receivable      7   17   19 
Finance income in respect of retirement benefits  25   —   8   10 
Net foreign exchange gains      —   —   8 
Other gains on financial instruments in a hedging relationship:                
— fair value hedges      4   2   — 
— net investment hedges      —   1   — 
Other gains on financial instruments not in a hedging relationship:                
— amortisation of transitional adjustment on bonds      3   1   1 
— derivatives      13   16   6 
                 
Finance income
      27   45   44 
                 
Net finance costs
      (95)  (91)  (106)
                 
The £3m net gain (2008: £5m net loss; 2007: £1m net loss) on fair value hedges comprises a £96m gain (2008: £156m loss; 2007: £20m loss) on the underlying bonds offset by a £93m loss (2008: £151m gain; 2007: £19m gain) on the related derivative financial instruments.
87.  Income tax
                 
  Notes 2006 2005 2004
         
    (All figures in £ millions)
Current tax
                
Charge in respect of current year      (88)  (68)  (57)
Recognition of previously unrecognised trading losses      23   —   — 
Other adjustments in respect of prior years      35   (1)  25 
             
Total current tax charge
      (30)  (69)  (32)
             
Deferred tax
                
In respect of timing differences      (73)  (66)  (46)
Recognition of previously unrecognised capital losses      76   —   — 
Recognition of previously unrecognised trading losses      37   —   — 
Other adjustments in respect of prior years      (21)  19   23 
             
Total deferred tax benefit/(charge)
  14   19   (47)  (23)
             
Total tax charge
      (11)  (116)  (55)
             
 In 2006,
                 
  Notes  2009  2008  2007 
     All figures in £ millions 
 
Current tax
                
Charge in respect of current year      (156)  (89)  (71)
Other adjustments in respect of prior years      9   10   27 
                 
Total current tax charge
      (147)  (79)  (44)
                 
Deferred tax
                
In respect of temporary differences      (55)  (97)  (96)
Other adjustments in respect of prior years      4   4   9 
                 
Total deferred tax charge
  13   (51)  (93)  (87)
                 
Total tax charge
      (198)  (172)  (131)
                 


F-27

Notes to the Group has recognised a deferred tax asset in relation to capital losses in the US which will be utilised on the sale of Pearson Government Solutions. Previously it had not been possible to foresee the utilisation of these losses prior to their expiry. In addition, due to improved trading performance and revised strategic plans together with the expected utilisation of US net operating losses in the Pearson Government Solutions sale, the Group has re-evaluated the likely utilisation of operating losses both in the US and UK and as a consequence has increased the amount of the deferred tax asset carried forward in respect of such losses. The combined effect of these two factors was to create a non-recurring tax benefit of £127m.Consolidated Financial Statements (Continued)
 
The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the UK tax rate as follows:
             
  2006 2005 2004
       
  (All figures in £ millions)
Profit before tax  466   446   303 
Tax calculated at UK rate  (140)  (134)  (91)
Effect of overseas tax rates  (19)  (20)  (6)
Joint venture and associate income reported net of tax  7   5   2 
Income not subject to tax  5   16   6 
Expenses not deductible for tax purposes  (18)  (9)  (5)
Utilisation of previously unrecognised tax losses  7   11   5 
Recognition of previously unrecognised tax losses  136   —   — 
Unutilised tax losses  (3)  (3)  (14)
Prior year adjustments  14   18   48 
          
Total tax charge
  (11)  (116)  (55)
          
UK  (15)  (26)  5 
Overseas  4   (90)  (60)
          
Total tax charge
  (11)  (116)  (55)
          

F-26

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
             
  2009  2008  2007 
  All figures in £ millions 
 
Profit before tax  660   585   468 
Tax calculated at UK rate (2009: 28%, 2008: 28.5%, 2007: 30%)  (185)  (167)  (141)
Effect of overseas tax rates  (40)  (23)  (25)
Joint venture and associate income reported net of tax  8   7   7 
Net income/(expense) not subject to tax  5   (7)  (9)
Utilisation of previously unrecognised tax losses  2   4   3 
Unutilised tax losses  (1)  —   (2)
Prior year adjustments  13   14   36 
             
Total tax charge
  (198)  (172)  (131)
             
UK  (43)  (53)  (42)
Overseas  (155)  (119)  (89)
             
Total tax charge
  (198)  (172)  (131)
             
 
The tax benefit/(charge) on items charged to equityrecognised in other comprehensive income is as follows:
             
  2006 2005 2004
       
  (All figures in £ millions)
Deferred tax on share based payments  2   3   4 
Deferred tax on net investment hedges  3   —   — 
Deferred tax on actuarial gains and losses  9   —   — 
Current tax on foreign exchange gains and losses  (2)  9   5 
          
   12   12   9 
          
             
  2009  2008  2007 
  All figures in £ millions 
 
Pension contributions and actuarial gains and losses  79   10   28 
Net investment hedges and other foreign exchange gains and losses  12   (1)  (6)
             
   91   9   22 
             
A tax benefit of £6m (2008: tax charge £7m; 2007: tax benefit £7m) relating to share-based payments has been recognised directly in equity.
98.  Earnings per share
Basic
 
Basic earnings per share is calculated by dividing the profit attributable to equity shareholders of the Companycompany by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the Companycompany and held as treasury shares.


F-28

DilutedNotes to the Consolidated Financial Statements (Continued)
 
Diluted
Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares to take account of all dilutive potential ordinary shares and adjusting the profit attributable, if applicable, to account for any tax consequences that might arise from conversion of those shares.
                 
  Notes 2006 2005 2004
         
    (All figures in £ millions)
Earnings      446   624   262 
Adjustments to exclude profit for the year from discontinued operations:                
Profit for the year from discontinued operations  3   (14)  (314)  (36)
Majority interest share of above      —   —   5 
             
Earnings — continuing operations
      432   310   231 
             
Earnings      446   624   262 
             
Weighted average number of shares (millions)      798.4   797.9   795.6 
Effect of dilutive share options (millions)      1.5   1.1   1.1 
Weighted average number of shares (millions) for diluted earnings      799.9   799.0   796.7 
             
             
  2006 2005 2004
       
Earnings per share from continuing and discontinued operations
            
Basic  55.9p  78.2p  32.9p
Diluted  55.8p  78.1p  32.9p
          
Earnings per share from continuing operations
            
Basic  54.1p  38.9p  29.0p
Diluted  54.0p  38.8p  29.0p
          
Earnings per share from discontinued operations
            
Basic  1.8p  39.3p  3.9p
Diluted  1.8p  39.3p  3.9p
          

F-27

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                 
  Notes  2009  2008  2007 
     All figures in £ millions 
 
Profit for the year from continuing operations      462   413   337 
Minority interest      (37)  (31)  (26)
                 
Earnings from continuing operations
      425   382   311 
                 
Loss for the year from discontinued operations  3   —   (90)  (27)
                 
Earnings
      425   292   284 
                 
Weighted average number of shares (millions)      799.3   797.0   796.8 
Effect of dilutive share options (millions)      0.8   0.5   1.3 
Weighted average number of shares (millions) for diluted earnings      800.1   797.5   798.1 
                 
Earnings per share from continuing and discontinued operations
                
Basic      53.2p   36.6p   35.6p 
Diluted      53.1p   36.6p   35.6p 
                 
Earnings per share from continuing operations
                
Basic      53.2p   47.9p   39.0p 
Diluted      53.1p   47.9p   39.0p 
                 
Earnings per share from discontinued operations
                
Basic      —   (11.3p)  (3.4p)
                 
109.  Dividends
             
  2006 2005 2004
       
  (All figures in £ millions)
Final paid in respect of prior year 17p (2005: 15.7p; 2004: 14.8p)  136   125   119 
Interim paid in respect of current year 10.5p (2005: 10p; 2004: 9.7p)  84   80   76 
          
   220   205   195 
          
 A
             
  2009  2008  2007 
  All figures in £ millions 
 
Final paid in respect of prior year 22.0p (2008: 20.5p; 2007: 18.8p)  176   163   150 
Interim paid in respect of current year 12.2p (2008: 11.8p; 2007: 11.1p)  97   94   88 
             
   273   257   238 
             
The directors are proposing a final dividend in respect of the financial year endingended 31 December 20062009 of 18.8p23.3p per share has been approved andwhich will absorb an estimated £151m£187m of shareholders’ funds. It will be paid on 117 May 20072010 to shareholders who are on the register of members on 109 April 2007.2010. These financial statements do not reflect this dividend.


F-29

Notes to the Consolidated Financial Statements (Continued)
1110.  Property, plant and equipment
                 
      Assets in  
  Land and Plant and course of  
  buildings equipment construction Total
         
  (All figures in £ millions)
Cost
                
At 1 January 2005
  280   604   13   897 
Exchange differences  18   40   —   58 
Transfers  —   13   —   13 
Additions  32   41   1   74 
Disposals  (5)  (28)  —   (33)
Acquisition through business combination  3   6   —   9 
Reclassifications  —   7   (7)  — 
             
At 31 December 2005
  328   683   7   1,018 
             
Exchange differences  (20)  (54)  —   (74)
Transfers  —   (11)  (1)  (12)
Additions  12   52   13   77 
Disposals  (9)  (32)  —   (41)
Acquisition through business combination  9   12   —   21 
Reclassifications  —   8   (8)  — 
Transfer to non-current assets held for sale  (7)  (27)  —   (34)
             
At 31 December 2006
  313   631   11   955 
             

F-28

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                 
      Assets in  
  Land and Plant and course of  
  buildings equipment construction Total
         
  (All figures in £ millions)
Depreciation
                
At 1 January 2005  (106)  (436)  —   (542)
Exchange differences  (7)  (33)  —   (40)
Charge for the year  (17)  (63)  —   (80)
Disposals  —   30   —   30 
Acquisition through business combination  —   (2)  —   (2)
             
At 31 December 2005
  (130)  (504)  —   (634)
             
Exchange differences  10   41   —   51 
Transfers  —   5   —   5 
Charge for the year  (17)  (60)  —   (77)
Disposals  4   27   —   31 
Acquisition through business combination  —   (8)  —   (8)
Transfer to non-current assets held for sale  5   20   —   25 
             
At 31 December 2006
  (128)  (479)  —   (607)
             
Carrying amounts
                
At 1 January 2005  174   168   13   355 
At 31 December 2005  198   179   7   384 
At 31 December 2006
  185   152   11   348 
             
 
                 
        Assets in
    
  Land and
  Plant and
  course of
    
  buildings  equipment  construction  Total 
  All figures in £ millions 
 
Cost
                
At 1 January 2008  298   622   16   936 
Exchange differences  54   138   6   198 
Additions  6   67   6   79 
Disposals  (7)  (38)  —   (45)
Acquisition through business combination  2   29   2   33 
Reclassifications  2   21   (23)  — 
                 
At 31 December 2008  355   839   7   1,201 
                 
Exchange differences  (21)  (55)  (1)  (77)
Additions  14   46   7   67 
Disposals  (2)  (41)  —   (43)
Acquisition through business combination  1   17   —   18 
Reclassifications  1   5   (6)  — 
                 
At 31 December 2009
  348   811   7   1,166 
                 
                 
        Assets in
    
  Land and
  Plant and
  course of
    
  buildings  equipment  construction  Total 
  All figures in £ millions 
 
Depreciation
                
At 1 January 2008  (126)  (455)  —   (581)
Exchange differences  (30)  (102)  —   (132)
Charge for the year  (19)  (61)  —   (80)
Disposals  6   36   —   42 
Acquisition through business combination  (1)  (26)  —   (27)
                 
At 31 December 2008  (170)  (608)  —   (778)
                 
Exchange differences  11   42   —   53 
Charge for the year  (17)  (68)  —   (85)
Disposals  2   39   —   41 
Acquisition through business combination  —   (9)  —   (9)
                 
At 31 December 2009
  (174)  (604)  —   (778)
                 
Carrying amounts
                
At 1 January 2008  172   167   16   355 
At 31 December 2008  185   231   7   423 
At 31 December 2009
  174   207   7   388 
                 
Depreciation expense of £18m (2005: £19m)£12m (2008: £12m) has been included in the income statement in cost of goods sold, £6m (2005: £7m)£7m (2008: £6m) in distribution expenses and £53m (2005: £54m)£66m (2008: £61m) in administrative and other expenses. In 2006 £6m (2005: £4m) relates to discontinued operations.
The Group leases certain equipment under a number of finance lease agreements. The net carrying amount of leased plant and equipment included within property, plant and equipment was £4m (2005: £3m)£15m (2008: £7m).


F-30

F-29

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
1211.  Intangible assets
                         
      Acquired Other Total  
      publishing intangibles intangibles  
  Goodwill Software rights acquired acquired Total
             
  (All figures in £ millions)
Cost
                        
At 1 January 2005  3,160   181   10   46   56   3,397 
Exchange differences  345   15   2   4   6   366 
Transfers  —   (13)  —   —   —   (13)
Additions  —   24   —   —   —   24 
Disposals  (6)  (10)  —   —   —   (16)
Acquisition through business combination  155   —   56   33   89   244 
                   
At 31 December 2005
  3,654   197   68   83   151   4,002 
                   
Exchange differences  (396)  (17)  (8)  (8)  (16)  (429)
Transfers  —   6   —   —   —   6 
Additions  —   29   —   —   —   29 
Disposals  (5)  (2)  —   —   —   (7)
Acquisition through business combination  246   4   36   117   153   403 
Adjustment on recognition of pre-acquisition deferred tax  (7)  —   —   —   —   (7)
Transfer to non-current assets held for sale  (221)  (16)  —   —   —   (237)
                   
At 31 December 2006
  3,271   201   96   192   288   3,760 
                   
                         
      Acquired Other Total  
      publishing intangibles intangibles  
  Goodwill Software rights acquired acquired Total
             
  (All figures in £ millions)
Amortisation
                        
At 1 January 2005  —   (111)  —   (8)  (8)  (119)
Exchange differences  —   (10)  —   —   —   (10)
Charge for the year  —   (18)  (5)  (6)  (11)  (29)
Disposals  —   10   —   —   —   10 
                   
At 31 December 2005
  —   (129)  (5)  (14)  (19)  (148)
                   
Exchange differences  —   13   1   2   3   16 
Transfers  —   (5)  —   —   —   (5)
Charge for the year  —   (23)  (11)  (17)  (28)  (51)
Disposals  —   1   —   —   —   1 
Acquisition through business combination  —   (1)  —   —   —   (1)
Transfer to non-current assets held for sale  —   9   —   —   —   9 
                   
At 31 December 2006
  —   (135)  (15)  (29)  (44)  (179)
                   
Carrying amounts
                        
At 1 January 2005  3,160   70   10   38   48   3,278 
At 31 December 2005  3,654   68   63   69   132   3,854 
At 31 December 2006
  3,271   66   81   163   244   3,581 
                   
                             
        Acquired
             
        customer
  Acquired
  Acquired
  Other
    
        lists and
  trademarks
  publishing
  intangibles
    
  Goodwill  Software  relationships  and brands  rights  acquired  Total 
  All figures in £ millions 
 
Cost
                            
At 1 January 2008  3,343   217   187   62   136   99   4,044 
Exchange differences  1,082   71   77   24   31   62   1,347 
Additions — internal development  —   29   —   —   —   —   29 
Additions — purchased  —   16   —   —   —   —   16 
Disposals  (8)  (27)  —   —   —   —   (35)
Acquisition through business combination  153   17   77   42   —   97   386 
Disposal through business disposal  —   (1)  —   —   (2)  —   (3)
Transfer to Pre-publication  —   (12)  —   —   —   —   (12)
                             
At 31 December 2008  4,570   310   341   128   165   258   5,772 
                             
Exchange differences  (420)  (25)  (32)  (9)  (5)  (22)  (513)
Additions — internal development  —   35   —   —   —   —   35 
Additions — purchased  —   24   —   —   —   —   24 
Disposals  (9)  (5)  —   —   —   —   (14)
Acquisition through business combination  205   —   38   24   55   25   347 
                             
At 31 December 2009
  4,346   339   347   143   215   261   5,651 
                             


F-31

F-30

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
 
                             
        Acquired
             
        customer
  Acquired
  Acquired
  Other
    
        lists and
  trademarks
  publishing
  intangibles
    
  Goodwill  Software  relationships  and brands  rights  acquired  Total 
  All figures in £ millions 
 
Amortisation
                            
At 1 January 2008  —   (142)  (28)  (4)  (32)  (24)  (230)
Exchange differences  —   (50)  (15)  (3)  (13)  (12)  (93)
Charge for the year  —   (30)  (24)  (10)  (25)  (27)  (116)
Disposals  —   27   —   —   —   —   27 
Acquisition through business combination  —   (13)  —   —   —   —   (13)
Disposal through business disposal  —   1   —   —   1   —   2 
Transfer to Pre-publication  —   4   —   —   —   —   4 
                             
At 31 December 2008  —   (203)  (67)  (17)  (69)  (63)  (419)
                             
Exchange differences  —   19   6   1   6   8   40 
Charge for the year  —   (44)  (35)  (11)  (22)  (35)  (147)
Disposals  —   4   —   —   —   —   4 
                             
At 31 December 2009
  —   (224)  (96)  (27)  (85)  (90)  (522)
                             
Carrying amounts
                            
At 1 January 2008  3,343   75   159   58   104   75   3,814 
At 31 December 2008  4,570   107   274   111   96   195   5,353 
At 31 December 2009
  4,346   115   251   116   130   171   5,129 
                             
Goodwill
The goodwill carrying value of £4,346m relates to acquisitions completed after 1 January 1998. Prior to 1 January 1998 all goodwill was written off to reserves on the date of acquisition. £3,127m of the carrying value relates to acquisitions completed between 1 January 1998 and 31 December 2002 and £1,219m relates to acquisitions completed after 1 January 2003 (the date of transition to IFRS).
For acquisitions completed between 1 January 1998 and 31 December 2002 no value was ascribed to intangibles other than goodwill and the goodwill on each acquisition was amortised over a period of up to 20 years. On adoption of IFRS on 1 January 2003, the Group chose not to restate the goodwill balance and at that date the balance was frozen (i.e. amortisation ceased). If goodwill had been restated then a significant value would have been ascribed to other intangible assets, which would be subject to amortisation, and the carrying value of goodwill would be significantly lower.
For acquisitions completed after 1 January 2003 value has been ascribed to other intangible assets, which are amortised, with only the remaining difference between the purchase price and the fair value of net assets acquired being allocated to goodwill.
Other intangible assets
Other intangibles acquired include customer listscontent, technology and relationships, software rights, technology, trade names and trademarks.rights. Amortisation of £4m (2005: £4m)£5m (2008: £5m) is included in the income statement in cost of goods sold and £47m (2005: £25m)£142m (2008: £111m) in administrative and other expenses. In 2006 £3m of software amortisation (2005: £3m) relates

F-32

Notes to discontinued operations.the Consolidated Financial Statements (Continued)
Impairment tests for cash-generating units containing goodwill
Impairment tests have been carried out where appropriate as described below. The recoverable amount for each unit tested exceeds its carrying value.
 
Goodwill is allocated to the Group’s14 cash-generating units identified according to(CGUs) within the business segment. Goodwill has been allocatedsegments as follows:
             
  Notes    
       
    2006 2005
       
    )
    (All figures
    in £ millions
Higher Education      780   903 
School Book      683   714 
School Assessment and Testing      342   310 
School Technology      356   408 
Other Assessment and Testing      490   531 
Other Government Solutions      —   249 
Other Book      56   57 
          
Pearson Education total
      2,707   3,172 
          
Penguin US      156   179 
Penguin UK      114   114 
Pearson Australia      44   47 
          
Penguin total
      314   340 
          
IDC
      149   138 
          
Mergermarket  28   97   — 
Other FT Publishing      4   4 
FT Publishing total
      101   4 
          
Total goodwill — continuing operations
      3,271   3,654 
          
Goodwill held for sale  29   221   — 
          
Total goodwill
      3,492   3,654 
          
 Goodwill
         
  2009  2008 
  All figures in £ millions 
 
US School Curriculum  812   937 
US School Assessment and Information  652   722 
US Higher Education  1,064   1,164 
Canada  181   173 
International Education Publishing  468   315 
International Education Assessment and Testing  222   241 
Professional Publishing  13   15 
Professional Assessment and Testing  226   254 
         
Pearson Education total
  3,638   3,821 
         
Financial Times  43   46 
Mergermarket  125   130 
Interactive Data  184   208 
         
FT Group total
  352   384 
         
Penguin US  190   216 
Penguin UK  103   95 
Pearson Australia  63   54 
         
Penguin total
  356   365 
         
Total goodwill
  4,346   4,570 
         
As highlighted in the 2008 business review, integration of the US School and Higher Education businesses began in 2008. This integration continued throughout 2009 and has been allocatednow advanced to a point where, from 1 January 2010, these companies will be combined into one CGU for impairment purposes to 13 cash-generating units. review purposes.
The recoverable amount of each cash-generating unitCGU is based on value in use calculations, with the exception of IDC which is assessed on a market value basis.calculations. Goodwill is tested for impairment annually. Following aOther than goodwill there are no intangible assets with indefinite lives. The goodwill is generally denominated in the currency of the relevant cash flows and therefore the impairment review in 2006, the allocation of corporate items has been revised. The 2005 comparative has been revised accordingly.is not materially sensitive to exchange rate fluctuations.
 
Key assumptions
The value in use calculations use cash flow projections based on financial budgets approved by management covering a five yearfive-year period. The key assumptions used by management in the value in use calculations were:
Discount rate — The discount rate is based on the risk-free rate for government bonds, adjusted for a risk premium to reflect the increased risk in investing in equities. The risk premium adjustment is assessed for each specific CGU. The average pre-tax discount rates used are in the range of 10.9% to 11.8% for the Pearson Education businesses (2008: 10.2% to 11.7%), 12.7% to 18.1% for the FT Group businesses (2008: 10.8% to 20.5%) and 9.5% to 11.4% for the Penguin businesses (2008: 8.8% to 10.4%).
Perpetuity growth rates — The cash flows subsequent to the approved budget period are based upon the long-term historic growth rates of the underlying territories in which the CGU operates and reflect the long-term growth prospects of the sectors in which the CGU operates. A perpetuity growth rate of 2.0% was used for


F-33

Notes to the Consolidated Financial Statements (Continued)
all CGUs in 2009 (2008: 2.0%). The perpetuity growth rates are consistent with appropriate external sources for the relevant markets.
Cash flow growth rates — The cash flow growth rates are derived from management’s latest forecast of sales taking into consideration past experience of operating margins achieved in the CGU. Historically, such forecasts have been reasonably accurate.
Sensitivities
The Group’s impairment review is sensitive to a change in assumptions used, most notably the discount rates, the perpetuity growth rates and expected future cash flows. Based on the Group’s sensitivity analysis, a reasonably possible change in the discount rate or perpetuity growth rate could cause an impairment in the US School Curriculum CGU. Following a restructuring during 2009, the Penguin UK CGU is no longer considered sensitive to impairment.
The fair value of US School Curriculum is 6%, or approximately £59m, above its carrying value, but an increase of 0.4 percentage points in the discount rate or a reduction of 0.5 percentage points in the perpetuity growth rate would have caused the value in use to fall below the carrying value.
12.  Discount rate — The discount rate is based on the risk-free rate for government bonds, adjusted for a risk premium to reflect the increased risk in investing in equities. The risk premium adjustment is assessed for each specific cash-generating unit. The average pre-tax discount rates used are in the range

F-31

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of 10.3% to 11.9% for the Pearson Education businesses, 7.8% to 10.3% for the Penguin businesses and 10.5% to 11.0% for the FT Publishing businesses.
Perpetuity growth rates — The cash flows subsequent to the approved budget period are based upon the long-term historic growth rates of the underlying territories in which the cash-generating unit operates and reflect the long-term growth prospects of the sectors in which the cash-generating unit operates. The perpetuity growth rates used vary between 2.5% and 3.5%. The perpetuity growth rates are consistent with appropriate external sources for the relevant markets.
Cash flow growth rates — The cash flow growth rates are derived from forecast sales growth taking into consideration past experience of operating margins achieved in the cash-generating unit. Historically, such forecasts have been reasonably accurate.
      The valuation of IDC is determined using an observable market price for each share. Other than goodwill there are no intangible assets with indefinite lives.
13Investments in joint ventures and associates
Joint ventures
         
  2006 2005
     
  (All figures in
  £ millions)
At beginning of year  12   14 
Exchange differences  (3)  (3)
Share of profit/(loss) after tax  3   (1)
Dividends  (4)  (4)
Additions and further investment  4   6 
       
At end of year
  12   12 
       
 
         
  2009  2008 
  All figures in £ millions 
 
At beginning of year  13   11 
Exchange differences  —   (4)
Share of profit after tax  4   6 
Dividends  (3)  (5)
Loan repayment  (3)  — 
Additions and further investment  13   5 
Transfer to subsidiary  (6)  — 
         
At end of year
  18   13 
         
Investments in joint ventures are accounted for using the equity method of accounting and are initially recognised at cost. Investments at 31 December 2009 include goodwill of £11m (2008: £nil).


F-34

Notes to the Consolidated Financial Statements (Continued)
 
The aggregate of the Group’s share inof its joint ventures,ventures’ assets (including goodwill) and liabilities, none of which are individually significant, are as follows:
         
  2006 2005
     
  (All figures in
  £ millions)
Assets
        
Non-current assets  3   3 
Current assets  24   26 
       
Liabilities
        
Current liabilities  (15)  (17)
       
Net assets
  12   12 
       
Income  52   46 
Expenses  (49)  (47)
       
Profit/(loss)after income tax
  3   (1)
       

F-32

         
  2009  2008 
  All figures in £ millions 
 
Assets
        
Non-current assets  15   6 
Current assets  11   21 
         
Liabilities
        
Current liabilities  (8)  (14)
         
Net assets
  18   13 
         
Income  12   36 
Expenses  (8)  (30)
         
Profit after income tax
  4   6 
         
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)Associates
Associates
         
  2006 2005
     
  (All figures in
  £ millions)
At beginning of year  24   33 
Exchange differences  (1)  — 
Share of profit after tax  21   15 
Dividends  (41)  (10)
Disposals  —   (14)
Distribution from associate in excess of carrying value  5   — 
       
At end of year
  8   24 
       
         
  2009  2008 
  All figures in £ millions 
 
At beginning of year  10   9 
Exchange differences  4   (5)
Share of profit after tax  26   19 
Dividends  (19)  (16)
Additions  1   — 
(Reversal of distribution)/Distribution from associate in excess of carrying value  (7)  6 
Actuarial losses on retirement benefit obligations  (3)  (3)
         
At end of year
  12   10 
         
Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. There is no acquisition goodwill relating to the Group’s investments in associates.
 
The Group’s interests in its principal associates, all of which are unlisted, wereare as follows:
                         
    %        
2006 Country of incorporation Interest held Assets Liabilities Revenues Profit
             
    (All figures in £ millions )    
The Economist Newspaper Ltd  England   50   64   (64)  122   18 
Other          28   (20)  48   3 
                   
Total
          92   (84)  170   21 
                   
                         
    %        
2005 Country of incorporation Interest held Assets Liabilities Revenues Profit
             
    (All figures in £ millions )    
The Economist Newspaper Ltd  England   50   79   (67)  105   12 
Other          42   (30)  49   3 
                   
Total
          121   (97)  154   15 
                   
 
                         
     %
             
2009
 Country of incorporation  interest held  Assets  Liabilities  Revenues  Profit 
  All figures in £ millions 
 
The Economist Newspaper Ltd  England   50   116   (116)  161   22 
Other          42   (30)  50   4 
                         
Total
          158   (146)  211   26 
                         
                         
     %
             
2008
 Country of incorporation  interest held  Assets  Liabilities  Revenues  Profit 
  All figures in £ millions 
 
The Economist Newspaper Ltd  England   50   86   (86)  149   16 
Other          35   (25)  42   3 
                         
Total
          121   (111)  191   19 
                         
The interestinterests held in associates isare equivalent to voting rights.


F-35

Notes to the Consolidated Financial Statements (Continued)
1413.  Deferred income tax
         
  2006 2005
     
  (All figures in £
  millions)
Deferred tax assets
        
Deferred tax assets to be recovered after more than 12 months  288   343 
Deferred tax assets to be recovered within 12 months  129   42 
       
   417   385 
       
Deferred tax liabilities
        
Deferred tax liabilities to be settled after more than 12 months  (245)  (204)
Deferred tax liabilities to be settled within 12 months  —   — 
       
   (245)  (204)
       
Net deferred tax
  172   181 
       

F-33

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
         
  2009  2008 
  All figures in £ millions 
 
Deferred income tax assets
        
Deferred income tax assets to be recovered after more than 12 months  374   341 
Deferred income tax assets to be recovered within 12 months  13   31 
         
   387   372 
         
Deferred income tax liabilities
        
Deferred income tax liabilities to be settled after more than 12 months  (473)  (447)
Deferred income tax liabilities to be settled within 12 months  —   — 
         
   (473)  (447)
         
Net deferred income tax
  (86)  (75)
         
 
Deferred income tax assets to be recovered within 12 months relate to the utilisation of losses in the US. Included within the losses to be utilised in 2007 are capital and operating losses of £93m which it is anticipated will be utilised on the sale of Pearson Government Solutions.
 
Deferred income tax assets and liabilities may be offset when there is a legally enforceable right to offset current income tax assets against current income tax liabilities and when the deferred income taxes relate to the same fiscal authority. The Group has unrecognised deferred income tax assets at 31 December 20062009 in respect of UK losses of £35m and has not recognised a deferred tax asset amounting to £47m on the net pension deficit on UK plans on the basis that it is not sufficiently certain that suitable future profits will arise against which to offset the liability.£20m (2008: £28m). None of these unrecognised deferred income tax assets have expiry dates associated with them.
 
The recognition of the deferred income tax assets is supported by management’s forecasts of the future profitability of the relevant business units.
 
The movement on the net deferred income tax account is as follows:
             
  Notes 2006 2005
       
    (All figures in
    £ millions)
At beginning of year      181   220 
Transition adjustment on adoption of IAS 39      —   5 
Exchange differences      (16)  21 
Acquisition through business combination  28   (26)  (21)
Income statement release/(charge)  8   19   (47)
Tax benefit to equity      14   3 
          
At end of year
      172   181 
          
 
             
  Notes  2009  2008 
     All figures in £ millions 
 
At beginning of year      (75)  41 
Exchange differences      10   (12)
Income statement charge  7   (51)  (93)
Acquisition through business combination  29   (45)  (4)
Tax benefit/(charge) to other comprehensive income or equity      75   (7)
             
At end of year
      (86)  (75)
             


F-36

Notes to the Consolidated Financial Statements (Continued)
The movement in deferred income tax assets and liabilities during the year is as follows:
                     
      Goodwill    
  Capital Trading and    
  losses losses intangibles Other Total
           
  (All figures in £ millions)
Deferred income tax assets
                    
At 1 January 2005  —   150   37   172   359 
Transition adjustment on adoption of IAS 39  —   —   —   5   5 
Exchange differences  —   16   4   18   38 
Acquisition through business combination  —   —   —   1   1 
Transfer between current and deferred taxation  —   —   —   23   23 
Income statement charge  —   (32)  (6)  (6)  (44)
Tax benefit to equity  —   —   —   3   3 
                
At 31 December 2005
  —   134   35   216   385 
                
Exchange differences  —   (17)  (4)  (21)  (42)
Income statement release/(charge)  76   12   (6)  (19)  63 
Tax benefit to equity  —   —   —   11   11 
                
At 31 December 2006
  76   129   25   187   417 
                

F-34

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                         
           Retirement
       
  Trading
  Goodwill and
  Returns
  benefit
       
  losses  intangibles  provisions  obligations  Other  Total 
  All figures in £ millions 
 
Deferred income tax assets
                        
At 1 January 2008  87   20   79   10   132   328 
Exchange differences  19   6   28   2   38   93 
Acquisition through business combination  2   —   —   —   —   2 
Income statement (charge)/benefit  (35)  (6)  (1)  (8)  5   (45)
Tax benefit/(charge) to other comprehensive income or equity  —   —   —   3   (9)  (6)
                         
At 31 December 2008  73   20   106   7   166   372 
                         
Exchange differences  (5)  (2)  (10)  (1)  (17)  (35)
Acquisition through business combination  —   —   —   —   —   — 
Income statement (charge)/benefit  (46)  (7)  (4)  (6)  42   (21)
Tax benefit to other comprehensive income or equity  —   —   —   68   3   71 
                         
At 31 December 2009
  22   11   92   68   194   387 
                         
 
Other deferred income tax assets include temporary differences on share-based payments, inventory sales returns and other provisions.
             
  Goodwill and    
  intangibles Other Total
       
  (All figures in £ millions)
Deferred income tax liabilities
            
At 1 January 2005  (59)  (80)  (139)
Exchange differences  (8)  (9)  (17)
Acquisition through business combination  (24)  2   (22)
Transfer between current and deferred taxation  —   (23)  (23)
Income statement (charge)/release  (26)  23   (3)
          
At 31 December 2005
  (117)  (87)  (204)
          
Exchange differences  15   11   26 
Acquisition through business combination  (20)  (6)  (26)
Income statement charge  (27)  (17)  (44)
Tax benefit to equity  —   3   3 
          
At 31 December 2006
  (149)  (96)  (245)
          
 
             
  Goodwill and
       
  intangibles  Other  Total 
  All figures in £ millions 
 
Deferred income tax liabilities
            
At 1 January 2008  (214)  (73)  (287)
Exchange differences  (73)  (32)  (105)
Acquisition through business combination  (5)  (1)  (6)
Income statement charge  (26)  (22)  (48)
Tax charge to other comprehensive income or equity  —   (1)  (1)
             
At 31 December 2008  (318)  (129)  (447)
             
Exchange differences  30   15   45 
Acquisition through business combination  (41)  (4)  (45)
Income statement (charge)/benefit  10   (40)  (30)
Tax benefit to other comprehensive income or equity  —   4   4 
             
At 31 December 2009
  (319)  (154)  (473)
             
Other deferred income tax liabilities include temporary differences in respect of depreciation and royalty advances.


F-37

Notes to the Consolidated Financial Statements (Continued)
1514.  Classification of financial instruments
The accounting classification of each class of the Group’s financial assets and financial liabilities, together with their fair values, is as follows:
                                     
     2009 
     Fair value             
        Derivatives
  Derivatives
     Amortised cost  Total
  Total
 
     Available
  deemed held
  in hedging
  Other
  Loans and
  Other
  carrying
  market
 
  
Notes
  for sale  for trading  relationships  liabilities  receivables  liabilities  value  value 
     All figures in £ millions 
 
Investments in unlisted securities  15   62   —   —   —   —   —   62   62 
Cash and cash equivalents  17   —   —   —   —   750   —   750   750 
Marketable securities      63   —   —   —   —   —   63   63 
Derivative financial instruments  16   —   42   70   —   —   —   112   112 
Trade receivables  22   —   —   —   —   989   —   989   989 
                                     
Total financial assets
      125   42   70   —   1,739   —   1,976   1,976 
                                     
Derivative financial instruments  16   —   (9)  —   —   —   —   (9)  (9)
Trade payables  24   —   —   —   —   —   (461)  (461)  (461)
Other financial liabilities — put option over minority interest  24   —   —   —   (23)  —   —   (23)  (23)
Bank loans and overdrafts  18   —   —   —   —   —   (70)  (70)  (70)
Borrowings due within one year  18   —   —   —   —   —   (4)  (4)  (4)
Borrowings due after more than one year  18   —   —   —   —   —   (1,934)  (1,934)  (1,969)
                                     
Total financial liabilities
      —   (9)  —   (23)  —   (2,469)  (2,501)  (2,536)
                                     


F-38

Notes to the Consolidated Financial Statements (Continued)
                                 
     2008 
     Fair value             
        Derivatives
  Derivatives
  Amortised cost  Total
  Total
 
     Available
  deemed held
  in hedging
  Loans and
  Other
  carrying
  market
 
  Notes  for sale  for trading  relationships  receivables  liabilities  value  value 
     All figures in £ millions 
 
Investments in unlisted securities  15   63   —   —   —   —   63   63 
Cash and cash equivalents  17   —   —   —   685   —   685   685 
Marketable securities      54   —   —   —       54   54 
Derivative financial instruments  16   —   23   161   —   —   184   184 
Trade receivables  22   —   —   —   1,030   —   1,030   1,030 
                                 
Total financial assets
      117   23   161   1,715   —   2,016   2,016 
                                 
Derivative financial instruments  16   —   (20)  —   —   —   (20)  (20)
Trade payables  24   —   —   —   —   (450)  (450)  (450)
Bank loans and overdrafts  18   —   —   —   —   (228)  (228)  (228)
Borrowings due within one year  18   —   —   —   —   (248)  (248)  (247)
Borrowings due after more than one year  18   —   —   —   —   (1,887)  (1,887)  (1,620)
                                 
Total financial liabilities
      —   (20)  —   —   (2,813)  (2,833)  (2,565)
                                 
Certain of the Group’s derivative financial instruments are deemed to be held for trading either as they do not meet the hedge accounting criteria specified in IAS 39 ’Financial Instruments: Recognition and Measurement’ or the Group has chosen not to seek hedge accounting for these instruments. None of these derivatives are held for speculative trading purposes. Transactions in derivative financial instruments are only undertaken to manage risks arising from underlying business activity, in accordance with the Group’s treasury policy as described in note 19.
The Group designates certain qualifying derivative financial instruments as hedges of the fair value of its bonds (fair value hedges). Changes in the fair value of these derivative financial instruments are recorded in the income statement, together with any change in the fair value of the hedged liability attributable to the hedged risk.
The Group also designates certain of its borrowings and derivative financial instruments as hedges of its investments in foreign operations (net investment hedges). Movements in the fair value of these financial instruments (to the extent they are effective) are recognised in other comprehensive income.
None of the Group’s financial assets or liabilities are designated at fair value through the income statement upon initial recognition.
More detail on the Group’s accounting for financial instruments is included in the Group’s accounting policies. The Group’s approach to managing risks in relation to financial instruments is described in note 19.

F-39

Notes to the Consolidated Financial Statements (Continued)
15.  Other financial assets
         
  2006 2005
     
  (All figures in
  £ millions)
At beginning of year  18   15 
Exchange differences  (1)  1 
Additions  —   4 
Disposals  —   (2)
       
At end of year
  17   18 
       
 
         
  2009  2008 
  All figures in £ millions 
 
At beginning of year  63   52 
Exchange differences  (6)  18 
Acquisition of investments  10   1 
Disposal of investments  (5)  (8)
         
At end of year
  62   63 
         
Other financial assets comprise non-current unlisted securities.

F-35

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1616.  Derivative financial instruments
 
The Group’s approach to the management of financial risks is set out in Item 11 of this Form 20-F.note 19. The Group’s outstanding derivative financial instruments are as follows:
             
  2006
   
  Gross  
  notional  
  amounts Assets Liabilities
       
  (All figures in £ millions)
Interest rate derivatives — in a fair value hedge relationship  953   20   (17)
Interest rate derivatives — not in a hedge relationship  1,026   9   (2)
Cross currency rate derivatives — in a net investment hedge relationship  230   40   — 
Cross currency rate derivatives — not in a hedge relationship  180   17   — 
          
Total
  2,389   86   (19)
          
Analysed as expiring:
            
In less than one year  976   50   — 
Later than one year and not later than five years  1,005   26   (4)
Later than five years  408   10   (15)
          
Total
  2,389   86   (19)
          
             
  2005
   
  Gross  
  notional  
  amounts Assets Liabilities
       
  (All figures in £ millions)
Interest rate derivatives — in a fair value hedge relationship  1,109   31   (16)
Interest rate derivatives — not in a hedge relationship  1,330   18   (6)
Cross currency rate derivatives — in a net investment hedge relationship  230   13   — 
Cross currency rate derivatives — not in a hedge relationship  180   21   — 
          
Total
  2,849   83   (22)
          
Analysed as expiring:
            
In less than one year  250   4   — 
Later than one year and not later than five years  1,823   57   (8)
Later than five years  776   22   (14)
          
Total
  2,849   83   (22)
          
 
                         
  2009  2008 
  Gross notional
        Gross notional
       
  amounts  Assets  Liabilities  amounts  Assets  Liabilities 
  All figures in £ millions 
 
Interest rate derivatives — in a fair value hedge relationship  1,103   70   —   1,232   161   — 
Interest rate derivatives — not in a hedge relationship  486   13   (7)  1,033   23   (20)
Cross currency rate derivatives — in a net investment hedge relationship  220   29   (2)  —   —   — 
                         
Total
  1,809   112   (9)  2,265   184   (20)
                         
Analysed as expiring:
                        
In less than one year  238   —   (7)  487   3   (5)
Later than one year and not later than five years  844   60   (2)  859   47   (15)
Later than five years  727   52   —   919   134   — 
                         
Total
  1,809   112   (9)  2,265   184   (20)
                         
The carrying value of the above derivative financial instruments equals their fair value. Fair values are determined by using market data and the use of established estimation techniques such as discounted cash flow and option valuation models.
 
At the end of 2006,2009, the currency split of themark-tomark-to-market-market values of rate derivatives, including the exchange of principal on cross currency rate derivatives, was US dollar £(247)£(127)m, euro £157msterling £252m and sterling £157m (2005:South African rand £(22)m (2008: US dollar £(269)m, euro £166m£161m, sterling £3m and sterling £164m)South African rand £nil).
 
The fixed interest rates on outstanding rate derivative contracts at the end of 20062009 range from 3.02%3.65% to 7.00% (2005: 3.02%9.28% (2008: 4.45% to 7.23%7.00%) and the floating rates are based on LIBOR in US dollar sterling and euro(EURIBOR).

F-36

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)sterling.
 
The Group’s portfolio of rate derivatives is diversified by maturity, counterparty and type. Natural offsets between transactions within the portfolio and the designation of certain derivatives as hedges significantly reduce the risk of income statement volatility. The sensitivity of the portfolio to changes in market rates is set out in note 19.
 The following sensitivity analysis of derivative financial instruments to interest rate movements is based on the assumption of a 1% change in interest rates for all currencies and maturities, with all other variables held constant.
             
  2006
   
  Net carrying 1% rate 1% rate
  amount increase decrease
       
  (All figures in £ millions)
Interest rate derivatives — in a fair value hedge relationship  3   (28)  31 
Interest rate derivatives — not in a hedge relationship  7   1   (1)
Cross currency rate derivatives — in a net investment hedge relationship  40   —   — 
Cross currency rate derivatives — not in a hedge relationship  17   (1)  1 
          
Total
  67   (28)  31 
          
Effect of fair value hedge accounting  —   28   (31)
Sensitivity after the application of hedge accounting  67   —   — 
          
Counterparty exposure from all derivatives is managed, together with that from deposits and bank account balances, within credit limits that reflect published credit ratings and by reference to other market measures (e.g.


F-40

Notes to the Consolidated Financial Statements (Continued)
market prices for credit default swaps) to ensure that there is no significant risk to any one counterparty. No single derivative transaction had a market value (positive or negative) at the balance sheet date that exceeded 3% of the Group’s consolidated total equity.
 At the year end the Group held an amount of £29m equivalent as collateral under amark-to-market agreement. This reflected the amount, at market rates prevailing at the end of October 2006, owed to the Group by a counterparty for a set of three related rate derivatives. Under these derivatives the Group is due to exchange $209m for€204m at the beginning of February 2007,with the repayment of the€591m bond. There are no restrictions on the Group’s use of these funds, which have been recorded in borrowings as a current bank loan.
In accordance with IAS 39 ‘Financial’Financial Instruments: Recognition and Measurement’, the Group has reviewed all of its material contracts for embedded derivatives that are required to be separately accounted for if they do not meet certain requirements, and has concluded that there are no material embedded derivatives.

F-37

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1717.  Intangible assets — pre-publication
         
  2006 2005
     
  (All figures in
  £ millions)
Cost
        
At beginning of year  1,357   1,109 
Exchange differences  (148)  112 
Transfers  6   — 
Additions  213   222 
Disposals  (280)  (113)
Acquisition through business combination  4   27 
       
At end of year
  1,152   1,357 
       
Amortisation
        
At beginning of year  (931)  (753)
Exchange differences  111   (87)
Charge for the year  (210)  (192)
Disposals  280   113 
Acquisition through business combination  —   (12)
       
At end of year
  (750)  (931)
       
Carrying amounts
        
At end of year
  402   426 
       
      Included in the above are pre-publication assets amounting to £243m (2005: £261m)which will be realised in more than 12 months.
      Amortisation is included in the income statement in cost of goods sold. There was no amortisation relating to discontinued operations in 2006 and 2005.
18Inventories
         
  2006 2005
     
  (All figures in
  £ millions)
Raw materials  26   23 
Work in progress  28   43 
Finished goods  300   307 
       
   354   373 
       
      The cost of inventories, all relating to continuing operations, recognized as an expense and included in the income statement in cost of goods sold amounted to £820m (2005: £767m). In 2006 £46m (2005: £42m) of inventory provisions were charged in the income statement. None of the inventory is pledged as security.

F-38

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19Trade and other receivables
         
  2006 2005
     
  (All figures in £
  millions)
Current
        
Trade receivables  768   825 
Royalty advances  91   124 
Prepayments and accrued income  34   38 
Other receivables  58   42 
Receivables from related parties  2   2 
       
   953   1,031 
       
Non-current
        
Royalty advances  80   67 
Prepayments and accrued income  4   4 
Other receivables  40   37 
       
   124   108 
       
      Trade receivables are stated net of provisions for bad and doubtful debts and anticipated future sales returns of £284m (2005: £313m). The carrying amounts are stated at their fair value. Concentrations of credit risk with respect to trade receivables are limited due to the Group’s large number of customers, who are internationally dispersed.
20Cash and cash equivalents (excluding overdrafts)
         
  2006 2005
     
  (All figures in
  £ millions)
Cash at bank and in hand  421   393 
Short-term bank deposits  171   509 
       
   592   902 
       
 
         
  2009  2008 
  All figures in
 
  £ millions 
 
Cash at bank and in hand  580   528 
Short-term bank deposits  170   157 
         
   750   685 
         
Short-term bank deposits are invested with banks and earn interest at the prevailing short-term deposit rates.
 
At the end of 20062009 the currency split of cash and cash equivalents iswas US dollars 31% (2005: 31%dollar 35% (2008: 36%), sterling 35% (2005: 38%22% (2008: 22%), euros 21% (2005: 24%euro 18% (2008: 20%) and other 13% (2005: 7%25% (2008: 22%).
 
Cash and cash equivalents have fair values that approximate to their carrying amountsvalue due to their short-term nature.
 
Cash and cash equivalents include the following for the purpose of the cash flow statement:
         
  2006 2005
     
  (All figures in
  £ millions)
Cash and cash equivalents  592   902 
Bank overdrafts  (61)  (58)
       
   531   844 
       
         
  2009  2008 
  All figures in
 
  £ millions 
 
Cash and cash equivalents  750   685 
Bank overdrafts  (70)  (96)
         
   680   589 
         


F-41

F-39

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
2118.  Financial liabilities — Borrowings
 
The Group’s current and non-current borrowings are as follows:
         
  2006 2005
     
  (All figures in
  £ millions)
Non-current
        
6.125% Euro Bonds 2007 (nominal amount€591m)
  —   436 
10.5% Sterling Bonds 2008 (nominal amount £100m)  105   107 
4.7% US Dollar Bonds 2009 (nominal amount $350m)  178   203 
7% Global Dollar Bonds 2011 (nominal amount $500m)  266   307 
7% Sterling Bonds 2014 (nominal amount £250m)  251   250 
5.7% US Dollar Bonds 2014 (nominal amount $400m)  206   238 
4.625% US Dollar notes 2018 (nominal amount $300m)  139   161 
Finance lease liabilities  3   1 
       
   1,148   1,703 
       
Current
        
Due within one year or on demand:
        
Bank loans and overdrafts  173   102 
7.375% US Dollar notes 2006  —   152 
6.125% Euro Bonds 2007 (nominal amount€591m)
  421   — 
Finance lease liabilities  1   2 
       
   595   256 
       
Total borrowings
  1,743   1,959 
       
         
  2009  2008 
  All figures in
 
  £ millions 
 
Non-current
        
Bank loans and overdrafts  —   132 
7.0% Global Dollar Bonds 2011 (nominal amount $500m)  322   368 
5.5% Global Dollar Bonds 2013 (nominal amount $350m)  226   258 
5.7% US Dollar Bonds 2014 (nominal amount $400m)  274   322 
7.0% Sterling Bonds 2014 (nominal amount £250m)  254   254 
6.0% Sterling Bonds 2015 (nominal amount £300m)  297   — 
6.25% Global Dollar Bonds 2018 (nominal amount $550m)  359   445 
4.625% US Dollar notes 2018 (nominal amount $300m)  191   237 
Finance lease liabilities  11   3 
         
   1,934   2,019 
         
Current
        
Due within one year or on demand:
        
Bank loans and overdrafts  70   96 
4.7% US Dollar Bonds 2009 (nominal amount $350m)  —   244 
Finance lease liabilities  4   4 
         
   74   344 
         
Total borrowings
  2,008   2,363 
         
Included in the non-current borrowings above is £12m of accrued interest (2005: £35m)(2008: £12m).
Included in the current borrowings above is £22m£nil of accrued interest (2005: £3m)(2008: £1m).
All of the Group’s borrowings are unsecured. In respect of finance lease obligations (2006: £4m; 2005: £3m) the rights to the leased asset revert to the lessor in the event of default.
The maturity of the Group’s non-current borrowing is as follows:
         
  2006 2005
     
  (All figures in
  £ millions)
Between one and two years  107   437 
Between two and five years  445   310 
Over five years  596   956 
       
   1,148   1,703 
       
         
  2009  2008 
  All figures in
 
  £ millions 
 
Between one and two years  327   2 
Between two and five years  760   759 
Over five years  847   1,258 
         
   1,934   2,019 
         


F-42

F-40

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
 As at 31 December 2006 the exposure of the borrowings of the Group to interest rate changes when the borrowings re-price is as follows:
                 
      One to More than
  Total One year five years five years
         
  (All figures in £ millions)
Carrying value of borrowings  1,743   595   552   596 
Effect of rate derivatives  —   629   (221)  (408)
             
   1,743   1,224   331   188 
             
The carrying amounts and market values of non-current borrowings are as follows:
                     
    Carrying Market Carrying Market
  Effective amount value amount value
  interest Rate 2006 2006 2005 2005
           
    (All figures in £ millions)
6.125% Euro Bonds 2007  6.18%  —   —   436   419 
10.5% Sterling Bonds 2008  10.53%  105   106   107   113 
4.7% US Dollar Bonds 2009  4.86%  178   176   203   200 
7% Global Dollar Bonds 2011  7.16%  266   269   307   310 
7% Sterling Bonds 2014  7.20%  251   265   250   282 
5.7% US Dollar Bonds 2014  5.88%  206   203   238   234 
4.625% US Dollar notes 2018  4.69%  139   135   161   155 
Finance lease liabilities  n/a   3   3   1   1 
                
       1,148   1,157   1,703   1,714 
                
 
                     
     2009  2008 
  Effective
  Carrying
     Carrying
    
  interest rate  value  Market value  value  Market value 
  All figures in £ millions 
 
Bank loans and overdrafts  n/a   70   70   228   228 
4.7% US Dollar Bonds 2009  4.86%  —   —   244   243 
7.0% Global Dollar Bonds 2011  7.16%  322   331   368   349 
5.5% Global Dollar Bonds 2013  5.76%  226   232   258   227 
5.7% US Dollar Bonds 2014  5.88%  274   266   322   262 
7.0% Sterling Bonds 2014  7.20%  254   276   254   258 
6.0% Sterling Bonds 2015  6.27%  297   317   —   — 
6.25% Global Dollar Bonds 2018  6.46%  359   360   445   352 
4.625% US Dollar notes 2018  4.69%  191   176   237   169 
Finance lease liabilities  n/a   15   15   7   7 
                     
       2,008   2,043   2,363   2,095 
                     
The market values are based on clean market prices at the year end or, where these are not available, on the quoted market prices of comparable debt issued by other companies. The effective interest rates above relate to the underlying debt instruments.
 
The carrying amounts of the Group’s borrowings are denominated in the following currencies:
         
  2006 2005
     
  (All figures in
  £ millions)
US dollar  966   1,165 
Sterling  356   357 
Euro  421   437 
       
   1,743   1,959 
       
 The maturity of the Group’s finance lease obligations is as follows:
         
  2006 2005
     
  (All figures in
  £ millions)
Finance lease liabilities — minimum lease payments
        
Not later than one year  1   2 
Later than one year and not later than five years  3   1 
Later than five years  —   — 
Future finance charges on finance leases  —   — 
Present value of finance lease liabilities  4   3 
       

F-41

         
  2009  2008 
  All figures in
 
  £ millions 
 
US dollar  1,457   2,081 
Sterling  551   277 
Euro  —   5 
         
   2,008   2,363 
         

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 The present value of finance lease liabilities is as follows:
         
  2006 2005
     
  (All figures in
  £ millions)
Not later than one year  1   2 
Later than one year and not later than five years  3   1 
Later than five years  —   — 
       
   4   3 
       
      The carrying amount of the Group’s lease obligations approximates their fair value.
The Group has the following undrawn capacity on its committed borrowing facilities as at 31 December:
         
  2006 2005
     
  (All figures in
  £ millions)
Floating rate
        
— expiring within one year  —   — 
— expiring beyond one year  894   786 
       
   894   786 
       
 During the year, the Group renegotiated its revolving credit facility which increased the amount and extended the maturity date.
         
  2009  2008 
  All figures in
 
  £ millions 
 
Floating rate
        
— expiring within one year  —   — 
— expiring beyond one year  1,084   1,085 
         
   1,084   1,085 
         
 
In addition to the above facilities, there are a number of short-term facilities that are utilised in the normal course of business.
All of the Group’s borrowings are unsecured. In respect of finance lease obligations, the rights to the leased asset revert to the lessor in the event of default.


F-43

Notes to the Consolidated Financial Statements (Continued)
The maturity of the Group’s finance lease obligations is as follows:
         
  2009  2008 
  All figures in
 
  £ millions 
 
Finance lease liabilities — minimum lease payments
        
Not later than one year  4   4 
Later than one year and not later than two years  5   2 
Later than two years and not later than three years  3   1 
Later than three years and not later than four years  3   — 
Later than four years and not later than five years  —   — 
Later than five years  —   — 
Future finance charges on finance leases  —   — 
         
Present value of finance lease liabilities  15   7 
         
The present value of finance lease liabilities is as follows:
         
  2009  2008 
  All figures in
 
  £ millions 
 
Not later than one year  4   4 
Later than one year and not later than five years  11   3 
Later than five years  —   — 
         
   15   7 
         
The carrying amounts of the Group’s lease obligations approximate their fair value.
2219.  Financial risk management
The Group’s approach to the management of financial risks together with sensitivity analyses is set out below.
Treasury policy
The Group holds financial instruments for two principal purposes: to finance its operations and to manage the interest rate and currency risks arising from its operations and its sources of finance. The Group finances its operations by a mixture of cash flows from operations, short-term borrowings from banks and commercial paper markets, and longer term loans from banks and capital markets. The Group borrows principally in US dollars and sterling, at both floating and fixed rates of interest, using derivative financial instruments (’derivatives), where appropriate, to generate the desired effective currency profile and interest rate basis. The derivatives used for this purpose are principally rate swaps, rate caps and collars, currency rate swaps and forward foreign exchange contracts. The main risks arising from the Group’s financial instruments are interest rate risk, liquidity and refinancing risk, counterparty risk and foreign currency risk. These risks are managed by the chief financial officer under policies approved by the board, which are summarised below. All the treasury policies remained unchanged throughout 2009, apart from a revision to the Group’s bank counterparty limits policy and a minor change applicable to the authorisation of treasury policy waivers.
The audit committee receives reports on the Group’s treasury activities, policies and procedures. The treasury department is not a profit centre and its activities are subject to regular internal audit.
Interest rate risk management
The Group’s exposure to interest rate fluctuations on its borrowings is managed by borrowing on a fixed rate basis and by entering into rate swaps, rate caps and forward rate agreements. The Group’s policy objective has


F-44

Notes to the Consolidated Financial Statements (Continued)
continued to be to set a target proportion of its forecast borrowings (taken at the year end, with cash netted against floating rate debt and before certain adjustments for IAS 39 ’Financial Instruments: Recognition and Measurement’) to be hedged (i.e. fixed or capped at the year end) over the next four years, subject to a maximum of 65% and a minimum that starts at 40% and falls by 10% at each year end. At the end of 2009 the fixed to floating hedging ratio, on the above basis, was approximately 71%. This above-policy level was a result of better than forecast cash collections in December 2009, resulting in lower than expected net debt. A simultaneous 1% change on 1 January in the Group’s variable interest rates in US dollar and sterling, taking into account forecast seasonal debt, would have a £6m effect on profit before tax.
Use of interest rate derivatives
The policy described in the section above creates a group of derivatives, under which the Group is a payer of fixed rates and a receiver of floating rates. The Group also aims to avoid undue exposure to a single interest rate setting. Reflecting this objective, the Group has predominantly swapped its fixed rate bond issues to floating rate at their launch. This creates a second group of derivatives, under which the Group is a receiver of fixed rates and a payer of floating rates. The Group’s accounting objective in its use of interest rate derivatives is to minimise the impact on the income statement of changes in themark-to-market value of its derivative portfolio as a whole. It uses duration calculations to estimate the sensitivity of the derivatives to movements in market rates. The Group also identifies which derivatives are eligible for fair value hedge accounting (which reduces sharply the income statement impact of changes in the market value of a derivative). The Group then balances the total portfolio between hedge-accounted and pooled segments, so that the expected movement on the pooled segment is minimal.
Liquidity and refinancing risk management
The Group’s objective is to secure continuity of funding at a reasonable cost. To do this it seeks to arrange committed funding for a variety of maturities from a diversity of sources. The Group’s policy objective has been that the weighted average maturity of its core gross borrowings (treating short-term advances as having the final maturity of the facilities available to refinance them) should be between three and ten years. At the end of 2009 the average maturity of gross borrowings was 5.1 years of which bonds represented 96% of these borrowings (up from 5.0 years and up from 90% respectively at the beginning of the year).
The Group believes that ready access to different funding markets also helps to reduce its liquidity risk, and that published credit ratings and published financial policies improve such access. All of the Group’s credit ratings remained unchanged during the year. The long-term ratings are Baa1 from Moody’s and BBB+ from Standard & Poor’s, and the short-term ratings are P2 and A2 respectively. The Group’s policy is to strive to maintain a rating of Baa1/BBB+ over the long term. The Group will also continue to use internally a range of ratios to monitor and manage its finances. These include interest cover, net debt to operating profit and cash flow to debt measures. The Group also maintains undrawn committed borrowing facilities. At the end of 2009 the committed facilities amounted to £1,084m and their weighted average maturity was 2.4 years.


F-45

Notes to the Consolidated Financial Statements (Continued)
Analysis of Group debt, including the impact of derivatives
The following tables analyse the Group’s sources of funding and the impact of derivatives on the Group’s debt instruments.
The Group’s net debt position is set out below:
         
  2009  2008 
  All figures in £
 
  millions 
 
Cash and cash equivalents  750   685 
Marketable securities  63   54 
Derivative financial instruments  103   164 
Bank loans, overdrafts and loan notes  (70)  (228)
Bonds  (1,923)  (2,128)
Finance lease liabilities  (15)  (7)
         
Net debt  (1,092)  (1,460)
         
The split of net debt between fixed and floating rate, stated after the impact of rate derivatives, is as follows:
         
  2009  2008 
  All figures in £
 
  millions 
 
Fixed rate  772   781 
Floating rate  320   679 
         
Total  1,092   1,460 
         
Gross borrowings, after the impact of cross-currency rate derivatives, analysed by currency are as follows:
         
  2009  2008 
  All figures in £ millions 
 
US dollar  1,656   2,081 
Sterling  330   277 
Other  22   5 
         
Total  2,008   2,363 
         
As at 31 December 2009 the exposure of the borrowings of the Group to interest rate changes when the borrowings re-price is as follows:
                 
  Less than
  One to
  More than
    
  one year  five years  five years  Total 
  All figures in £ millions 
 
Re-pricing profile of borrowings  74   1,087   847   2,008 
Effect of rate derivatives  1,289   (762)  (527)  — 
                 
Total  1,363   325   320   2,008 
                 


F-46

Notes to the Consolidated Financial Statements (Continued)
The maturity of contracted cash flows on the Group’s borrowings and all of its derivative financial instruments are as follows:
                 
  2009 
  USD  GBP  Other  Total 
  All figures in £ millions 
 
Not later than one year  42   21   2   65 
Later than one year and not later than five years  878   313   30   1,221 
Later than five years  739   106   —   845 
                 
Total
  1,659   440   32   2,131 
                 
Analysed as:                
Revolving credit facilities and commercial paper  —   —   —   — 
Bonds  1,692   745   —   2,437 
Rate derivatives — inflows  (386)  (313)  —   (699)
Rate derivatives — outflows  353   8   32   393 
                 
Total
  1,659   440   32   2,131 
                 
                 
  2008 
  USD  GBP  Other  Total 
  All figures in £ millions 
 
Not later than one year  311   17   —   328 
Later than one year and not later than five years  884   65   —   949 
Later than five years  954   266   —   1,220 
                 
Total
  2,149   348   —   2,497 
                 
Analysed as:                
Revolving credit facilities and commercial paper  141   —   —   141 
Bonds  2,237   355   —   2,592 
Rate derivatives — inflows  (392)  (21)  —   (413)
Rate derivatives — outflows  163   14   —   177 
                 
Total
  2,149   348   —   2,497 
                 
All cash flow projections shown above are on an undiscounted basis. Any cash flows based on a floating rate are calculated using interest rates as set at the date of the last rate reset. Where this is not possible, floating rates are based on interest rates prevailing at 31 December in the relevant year. All derivative amounts are shown gross, although the Group net settles these amounts wherever possible.
Amounts drawn under revolving credit facilities and commercial paper are assumed to mature at the maturity date of the relevant facility, with interest calculated as payable in each calendar year up to and including the date of maturity of the facility.
Financial counterparty risk management
Counterparty credit limits, which take published credit rating and other factors into account, are set to cover our total aggregate exposure to a single financial institution. The limits applicable to published credit ratings bands are approved by the chief financial officer within guidelines approved by the board. Exposures and limits applicable to each financial institution are reviewed on a regular basis.


F-47

Notes to the Consolidated Financial Statements (Continued)
Foreign currency risk management
Although the Group is based in the UK, it has its most significant investment in overseas operations. The most significant currency for the Group is the US dollar. The Group’s policy on routine transactional conversions between currencies (for example, the collection of receivables, and the settlement of payables or interest) remains that these should be transacted at the relevant spot exchange rate. The majority of the Group’s operations are domestic within their country of operation. No unremitted profits are hedged with foreign exchange contracts, as the company judges it inappropriate to hedge non-cash flow translational exposure with cash flow instruments. However, the Group does seek to create a natural hedge of this exposure through its policy of aligning approximately the currency composition of its core net borrowings (after the impact of cross currency rate derivatives) with its forecast operating profit before depreciation and amortisation. This policy aims to dampen the impact of changes in foreign exchange rates on consolidated interest cover and earnings. The policy above applies only to currencies that account for more than 15% of Group operating profit before depreciation and amortisation, which currently is only the US dollar. The Group still borrows small amounts in other currencies, typically for seasonal working capital needs. Our policy does not require existing currency debt to be terminated to match declines in that currency’s share of Group operating profit before depreciation and amortisation. In addition, currencies that account for less than 15% of Group operating profit before depreciation and amortisation can be included in the above hedging process at the request of the chief financial officer.
Included within year end net debt, the net borrowings/(cash) in the hedging currencies above (taking into account the effect of cross currency swaps) were: US dollar £1,314m, sterling £168m and South African rand £9m.
Use of currency debt and currency derivatives
The Group uses both currency denominated debt and derivative instruments to implement the above policy. Its intention is that gains/losses on the derivatives and debt offset the losses/gains on the foreign currency assets and income. Each quarter the value of hedging instruments is monitored against the assets in the relevant currency and, where practical, a decision is made whether to treat the debt or derivative as a net investment hedge (permitting foreign exchange movements on it to be taken to reserves) for the purposes of IAS 39.
Financial instruments — fair value measurement
The following table provides an analysis of those financial instruments that are measured subsequent to initial recognition at fair value, grouped into levels 1 to 3, based on the degree to which the fair value is observable:
Level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 fair value measurements are those derived from inputs, other than quoted prices included within level 1, that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices); and
Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
                 
  2009 
  Level 1  Level 2  Level 3  Total 
  All figures in £ millions 
 
Financial assets at fair value
                
Derivative financial assets  —   112   —   112 
Marketable securities  —   63   —   63 
Available for sale financial assets
                
Investments in unlisted securities  —   —   62   62 
Financial liabilities at fair value
                
Derivative financial liabilities  —   (9)  —   (9)
Other financial liabilities — put option over minority interest  —   —   (23)  (23)
                 
Total
  —   166   39   205 
                 


F-48

Notes to the Consolidated Financial Statements (Continued)
The following table analyses the movements in level 3 fair value measurements:
         
  2009 
  Investments in
  Other financial
 
  unlisted securities  liabilities 
  All figures in £ millions 
 
At beginning of year  63   — 
Exchange differences  (6)  — 
Additions  10   (23)
Disposals  (5)  — 
         
At end of year  62   (23)
         
The fair value of the investments in unlisted securities is determined by reference to the financial performance of the underlying asset and amounts realised on the sale of similar assets. The fair value of other financial liabilities represents the present value of the estimated future liability.
Financial instruments — sensitivity analysis
As at 31 December 2009 the sensitivity of the Group’s financial instruments to fluctuations in interest rates and exchange rates is as follows:
                     
     Impact of 1%
  Impact of 1%
  Impact of 10%
  Impact of 10%
 
  Carrying
  increase in
  decrease in
  strengthening in
  weakening in
 
  value  interest rates  interest rates  sterling  sterling 
  All figures in £ millions 
 
Investments in unlisted securities  62   —   —   (2)  3 
Cash and cash equivalents  750   —   —   (47)  58 
Marketable securities  63   —   —   (5)  7 
Derivative financial instruments  103   (59)  66   14   (17)
Bonds  (1,923)  54   (61)  118   (144)
Other borrowings  (85)  —   —   8   (9)
Put option over minority interest  (23)  —   —   3   (3)
Other net financial assets  528   —   —   (42)  52 
                     
Total financial instruments  (525)  (5)  5   47   (53)
                     
The table shows the sensitivities of the fair values of each class of financial instruments to an isolated change in either interest rates or foreign exchange rates. The class ‘Other net financial assets’ comprises trade assets less trade liabilities.
The sensitivities of derivative instruments are calculated using established estimation techniques such as discounted cash flow and option valuation models. Where modelling an interest rate decrease of 1% led to negative interest rates, these points on the yield curve were adjusted to 0%. A large proportion of the movements shown above would impact equity rather than the income statement, depending on the location and functional currency of the entity in which they arise and the availability of net investment hedge treatment. The changes in valuations are estimates of the impact of changes in market variables and are not a prediction of future events or anticipated gains or losses.


F-49

Notes to the Consolidated Financial Statements (Continued)
20.  Intangible assets — Pre-publication
         
  2009  2008 
  All figures in £ millions 
 
Cost
        
At beginning of year  1,800   1,264 
Exchange differences  (160)  494 
Additions  322   297 
Disposals  (230)  (345)
Acquisition through business combination  (1)  78 
Transfer from software  —   12 
Transfer to inventories  (4)  — 
         
At end of year
  1,727   1,800 
         
Amortisation
        
At beginning of year  (1,105)  (814)
Exchange differences  102   (337)
Charge for the year  (307)  (244)
Disposals  230   345 
Acquisition through business combination  3   (51)
Transfer from software  —   (4)
         
At end of year
  (1,077)  (1,105)
         
Carrying amounts        
At end of year
  650   695 
         
Included in the above are pre-publication assets amounting to £398m (2008: £462m) which will be realised in more than 12 months.
Amortisation is included in the income statement in cost of goods sold.
21.  Inventories
         
  2009  2008 
  All figures in £ millions 
 
Raw materials  32   31 
Work in progress  23   29 
Finished goods  390   441 
         
   445   501 
         
The cost of inventories relating to continuing operations recognised as an expense and included in the income statement in cost of goods sold amounted to £843m (2008: £832m). In 2009 £75m (2008: £56m) of inventory provisions was charged in the income statement. None of the inventory is pledged as security.


F-50

Notes to the Consolidated Financial Statements (Continued)
22.  Trade and other receivables
         
  2009  2008 
  All figures in £ millions 
 
Current
        
Trade receivables  989   1,030 
Royalty advances  99   111 
Prepayments and accrued income  75   62 
Other receivables  121   135 
Receivables from related parties  —   4 
         
   1,284   1,342 
         
Non-current
        
Royalty advances  86   102 
Prepayments and accrued income  24   3 
Other receivables  2   47 
         
   112   152 
         
Trade receivables are stated at fair value, net of provisions for bad and doubtful debts and anticipated future sales returns. The movements on the provision for bad and doubtful debts are as follows:
         
  2009  2008 
  All figures in £ millions 
 
At beginning of year  (72)  (52)
Exchange differences  5   (18)
Income statement movements  (26)  (27)
Utilised  20   27 
Acquisition through business combination  (3)  (2)
         
At end of year
  (76)  (72)
         
Concentrations of credit risk with respect to trade receivables are limited due to the Group’s large number of customers, who are internationally dispersed.
The ageing of the Group’s trade receivables is as follows:
         
  2009  2008 
  All figures in £ millions 
 
Within due date  1,096   1,110 
Up to three months past due date  228   248 
Three to six months past due date  51   60 
Six to nine months past due date  20   21 
Nine to 12 months past due date  4   15 
More than 12 months past due date  20   20 
         
Total trade receivables
  1,419   1,474 
         
Less: provision for bad and doubtful debts  (76)  (72)
Less: provision for sales returns  (354)  (372)
         
Net trade receivables
  989   1,030 
         


F-51

Notes to the Consolidated Financial Statements (Continued)
The Group reviews its bad debt provision at least twice a year following a detailed review of receivable balances and historic payment profiles. Management believe all the remaining receivable balances are fully recoverable.
23.  Provisions for other liabilities and charges
                         
  Deferred   Re-      
  consideration Integration organizations Leases Other Total
             
  (All figures in £ millions)
At 1 January 2006  26   3   5   12   18   64 
Exchange differences  —   —   —   (2)  (2)  (4)
Charged to consolidated income statement
                        
— Additional provisions  —   —   1   4   7   12 
— Unused amounts reversed  (9)  —   (2)  —   (4)  (15)
On acquisition  17   —   —   —   3   20 
Utilised during year  (9)  (1)  (3)  (2)  (10)  (25)
                   
At 31 December 2006
  25   2   1   12   12   52 
                   
         
  2006 2005
     
  (All figures in
  £ millions)
Analysis of provisions
        
Non-current  29   31 
Current  23   33 
       
   52   64 
       

F-42

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                 
  Deferred
          
  consideration  Leases  Other  Total 
  All figures in £ millions 
 
At 1 January 2009  43   8   38   89 
Exchange differences  (2)  —   (3)  (5)
Charged to income statement  3   3   2   8 
Released to income statement  —   —   (3)  (3)
Acquisition through business combination — current year  27   —   —   27 
Acquisition through business combination — prior year adjustments  (4)  —   —   (4)
Utilised  (29)  (2)  (13)  (44)
                 
At 31 December 2009  38   9   21   68 
                 
 
         
  2009  2008 
  All figures in £ millions 
 
Analysis of provisions        
Non-current  50   33 
Current  18   56 
         
   68   89 
         
Deferred consideration — Additional deferred consideration of £17m was incurred during the year relating primarily relates to the acquisition of Mergermarket.Fronter in 2009.
 Lease commitments — These relate primarily to onerous lease contracts, acquired through business combinations, which have various expiry dates up to 2010. The provision is based on current occupancy estimates.
2324.  Trade and other liabilities
         
  2006 2005
     
  (All figures in
  £ millions)
Trade payables  343   348 
Social security and other taxes  18   21 
Accruals  345   363 
Deferred income  276   237 
Other liabilities  178   156 
       
   1,160   1,125 
       
Less: non-current portion
        
Accruals  24   15 
Deferred income  47   51 
Other liabilities  91   85 
       
   162   151 
       
Current portion
  998   974 
       
 
         
  2009  2008 
  All figures in £ millions 
 
Trade payables  461   450 
Social security and other taxes  30   35 
Accruals  504   501 
Deferred income  487   444 
Interest payable  10   10 
Dividends payable to minority interest  —   5 
Put option over minority interest  23   — 
Other liabilities  205   205 
         
   1,720   1,650 
         
Less: non-current portion
        
Accruals  23   42 
Deferred income  116   87 
Interest payable  —   1 
Put option over minority interest  23   — 
Other liabilities  91   91 
   253   221 
         
Current portion
  1,467   1,429 
         


F-52

Notes to the Consolidated Financial Statements (Continued)
The carrying value of the Group’s trade and other liabilitiespayables approximates theirits fair value.
 
The deferred income balances comprise:
 
• multi-year obligations to deliver workbooks to adoption customers in school businesses;
• advance payments in assessment and testing businesses;
• subscription income in school, newspaper and market pricing businesses;
• advertising income relating to future publishing days in newspaper businesses; and
• obligations to deliver digital content in future periods.
The put option over minority interest is the fair value of an option held by the minority interest in our Pearson South Africa business. The option enables the minority interest to deliver workbookssell their 15% share of Pearson South Africa to adoption customers in school businesses;Pearson from 1 January 2012 at a price determined by the future performance of that business.
 • advance payments in contracting businesses;
      • subscription income in school, newspaper and market pricing businesses; and
      • advertising income relating to future publishing days in newspaper businesses.
2425.  Employee benefitsRetirement benefit and other post-retirement obligations
Retirement benefit obligationsBackground
 
The Group operates a number of defined benefit and defined contribution retirement benefit plans throughout the world,world. For the principal ones beingdefined benefit plans, benefits are based on employees’ length of service and final pensionable pay. Defined contribution benefits are based on the amount of contributions paid in respect of an individual member, the UKinvestment returns earned and US. the amount of pension this money will buy when a member retires.
The major plans are self-administered withlargest plan is the plans’ assets being held independently of the Group. Retirement benefit costs are assessed in accordance with the advice of independent qualified actuaries. The Pearson Group Pension Plan (‘UK Group plan is a hybrid planplan’) with both defined benefit and defined contribution sections. From 1 November 2006, all sections but, predominantly, consisting of defined benefit liabilities. There are a number of defined contribution plans, principally overseas.
      The most recent actuarial valuation of the UK Group plan were closed to new members with the exception of a defined contribution section that was completed as at 1 January 2006.opened in 2003. This section is available to all new employees of participating companies. The other major defined benefit plans are based in the US.

F-43

Other defined contribution plans are operated principally overseas with the largest plan being in the US. The specific features of these plans vary in accordance with the regulations of the country in which employees are located.
Pearson also has several post-retirement medical benefit plans (PRMBs), principally in the US. PRMBs are unfunded but are accounted for and valued similarly to defined benefit pension plans.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)Assumptions
 
The principal assumptions used for the UK Group plan and the US PRMB are shown below. Weighted average assumptions have been shown for the other plans.
                         
  2006 2006 2005 2005 2004 2004
  UK Group Other UK Group Other UK Group Other
% plan plans plan plans plan plans
             
Inflation  3.00   2.91   2.80   2.95   2.80   2.98 
Expected rate of increase in salaries  4.70   4.37   4.50   4.43   4.80   4.44 
Expected rate of increase for pensions in payment and deferred pensions  2.10 to 4.60   —   2.50 to 4.00   —   2.80 to 4.00   — 
Rate used to discount plan liabilities  5.20   5.70   4.85   5.54   5.40   5.84 
Expected return on assets  6.40   7.18   6.40   7.31   6.60   7.23 
                   
      Assumptions regarding future mortality experience are set based on advice, published statistics and experience in each territory. In 2006, the Group used the PMFA92 (medium-cohort) series mortality tables for the UK Group plan modified for age-rating adjustmentsplans, which primarily relate to recalibrate the tables against observed experience of the plan, and allowing for the future improvement effect from the medium cohort approach.US pension plans.
 The remaining average life expectancy in years of a pensioner retiring at age 65 on the balance sheet date is as follows for the UK Group plan:
         
  2006 2005
     
Male  20.9   19.5 
Female  21.3   21.5 
       
                                     
  2009  2008  2007 
  UK Group
  Other
     UK Group
  Other
     UK Group
  Other
    
  plan  plans  PRMB  plan  plans  PRMB  plan  plans  PRMB 
 
%                                    
Inflation  3.50   2.50   2.50   2.80   2.80   2.80   3.30   2.93   3.00 
Rate used to discount plan liabilities  5.70   5.25   5.50   6.40   6.25   6.25   5.80   6.01   6.05 
Expected return on assets  6.03   6.75   —   6.33   7.60   —   6.50   7.27   — 
Expected rate of increase in salaries  5.00   4.00   —   4.30   4.50   —   5.00   4.36   — 
Expected rate of increase for pensions in payment and deferred pensions  2.60 to 4.40   —   —   2.30 to 4.20   —   —   2.50 to 4.30   —   — 
Initial rate of increase in healthcare rate  —   —   8.50   —   —   9.00   —   —   9.50 
Ultimate rate of increase in healthcare rate  —   —   5.00   —   —   5.00   —   —   5.00 
                                     
      The remaining average life expectancy in years of a pensioner retiring at age 65, 20 years after the balance sheet date, is as follows for the UK Group plan:
         
  2006 2005
     
Male  22.2   20.2 
Female  22.5   22.1 
       
      The amounts recognised in the income statement are as follows:


F-53

                     
    Defined      
  UK Group benefit   Defined 2006
  plan other Sub Total contribution Total
           
  (All figures in £ millions)
Current service cost  27   2   29   36   65 
                
Total operating costs
  27   2   29   36   65 
                
Expected return on plan assets  (85)  (7)  (92)  —   (92)
Interest on pension scheme liabilities  78   7   85   —   85 
                
Net finance income
  (7)  —   (7)  —   (7)
                
Net income statement charge
  20   2   22   36   58 
                
Actual return on plan assets
  153   13   166   —   166 
                

F-44

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
                     
    Defined      
  UK Group benefit Sub Defined 2005
  plan other Total contribution Total
           
  (All figures in £ millions)
Current service cost  25   2   27   35   62 
Curtailments  —   (2)  (2)  —   (2)
                
Total operating costs
  25   —   25   35   60 
                
Expected return on plan assets  (75)  (6)  (81)  —   (81)
Interest on pension scheme liabilities  79   6   85   —   85 
                
Net finance costs
  4   —   4   —   4 
                
Net income statement charge
  29   —   29   35   64 
                
Actual return on plan assets
  214   7   221   —   221 
                
                     
    Defined      
  UK Group benefit Sub Defined 2004
  plan other Total contribution Total
           
  (All figures in £ millions)
Current service cost  22   2   24   32   56 
                
Total operating costs
  22   2   24   32   56 
                
Expected return on plan assets  (71)  (6)  (77)  —   (77)
Interest on pension scheme liabilities  72   6   78   —   78 
                
Net finance costs
  1   —   1   —   1 
                
Net income statement charge
  23   2   25   32   57 
                
Actual return on plan assets
  135   9   144   —   144 
                
The total operating charge is included in administrative and other expenses.
The amounts recognised inUK discount rate is based on the balance sheet are as follows:
                                 
  2006 2006 2006   2005 2005 2005  
  UK Other Other   UK Other Other  
  Group funded unfunded 2006 Group funded unfunded 2005
  plan plans plans Total plan plans plans Total
                 
  (All figures in £ millions)
Fair value of plan assets  1,528   105   —   1,633   1,390   110   —   1,500 
Present value of defined benefit obligation  (1,683)  (115)  (12)  (1,810)  (1,661)  (131)  (11)  (1,803)
                         
Net pension liability
  (155)  (10)  (12)  (177)  (271)  (21)  (11)  (303)
                         
Other post-retirement medical benefit obligation              (48)              (60)
Other pension accruals              (25)              (26)
                         
Total retirement benefit obligations
              (250)              (389)
                         

F-45

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
annualised yield on the iBoxx over15-year AA-rated corporate bond index, adjusted to reflect the duration of our liabilities. The following gains/(losses) have been recognised inUS discount rate is set by reference to a US bond portfolio matching model. The expected return on assets is based on market expectations of long-term asset returns for the statement of recognised income and expense:
             
  2006 2005 2004
       
  (All figures in £ millions)
Amounts recognised for defined benefit plans  102   21   (60)
Amounts recognised for post-retirement medical benefit plans  5   5   (1)
          
Total recognised in year
  107   26   (61)
          
Cumulative amounts recognised
  44   (63)  (89)
          
      The fair value of plan assets comprisesdefined portfolio at the following:
                         
  2006 2006   2005 2005  
  UK Other   UK Other  
  Group funded 2006 Group funded 2005
% plan plans Total plan plans Total
             
Equities  46.6   3.9   50.5   47.4   4.3   51.7 
Bonds  23.8   2.1   25.9   24.7   2.0   26.7 
Properties  9.2   —   9.2   8.9   —   8.9 
Other  14.0   0.4   14.4   11.7   1.0   12.7 
      The plan assets do not include anyend of the Group’s own financial instruments, nor any property occupied by the Group.

F-46

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)year.
 Changes in the values of plan assets and liabilities are as follows:
                         
  2006 UK     2005 UK    
  Group 2006 2006 Group 2005 2005
  plan Other Total plan Other Total
             
  (All figures in £ millions)
Fair value of plan assets
                        
Opening fair value of plan assets  1,390   110   1,500   1,198   82   1,280 
Exchange differences  —   (12)  (12)  —   9   9 
Expected return on plan assets  85   7   92   75   6   81 
Actuarial gains and losses  68   6   74   139   1   140 
Contributions by employer  43   2   45   35   10   45 
Contributions by employee  7   —   7   6   —   6 
Benefits paid  (65)  (8)  (73)  (63)  (6)  (69)
Acquisition through business combination  —   —   —   —   8   8 
                   
Closing fair value of plan assets
  1,528   105   1,633   1,390   110   1,500 
                   
Present value of defined benefit obligation
                        
Opening defined benefit obligation  (1,661)  (142)  (1,803)  (1,502)  (113)  (1,615)
Exchange differences  —   15   15   —   (12)  (12)
Current service cost  (27)  (2)  (29)  (25)  (2)  (27)
Curtailment  —   —   —   —   2   2 
Interest cost  (78)  (7)  (85)  (79)  (6)  (85)
Actuarial gains and losses  25   3   28   (112)  (7)  (119)
Contributions by employee  (7)  —   (7)  (6)  —   (6)
Benefits paid  65   8   73   63   6   69 
Acquisition through business combination  —   (2)  (2)  —   (10)  (10)
                   
Closing defined benefit obligation
  (1,683)  (127)  (1,810)  (1,661)  (142)  (1,803)
                   
      The history of the defined benefit plans is as follows:
                 
  2006 2005 2004 2003
         
  (All figures in £ millions)
Fair value of plan assets  1,633   1,500   1,280   1,164 
Present value of defined benefit obligation  (1,810)  (1,803)  (1,615)  (1,454)
             
Net pension liability
  (177)  (303)  (335)  (290)
             
Experience adjustments on plan assets  74   140   67   88 
Experience adjustments on plan liabilities  28   (119)  (127)  (113)
             
The expected rates of return on categories of plan assets are determined by reference to relevant indices. The overall expected rate of return is calculated by weighting the individual rates in accordance with the anticipated balance in the plan’s investment portfolio.
 
The expected rate of increase in salaries has been set at 5.0% for 2009 with a short-term assumption of 3.0% for three years.
In 2008 the UK mortality assumptions were derived by adjusting standard mortality tables (PMFA 92 tables projected forward with medium cohort improvement factors). In 2009 the Group changed its mortality assumptions in the UK. The mortality base table assumptions have been derived from the SAPS ‘all pensioners’ tables for males and the SAPS ‘normal health pensioners’ tables for females, adjusted to reflect the observed experience of the plan, with medium cohort improvement factors. In 2008 a 1% improvement floor on the medium cohort was applied. In 2009 this was changed to 1.5% for males and 1.25% for females, with tapering.
For the US plans, the assumptions used were based on standard US mortality tables. In 2008 a switch from GAM94 to RP2000 was made, to reflect the mortality assumption now more prevalent in the US.
Using the above tables, the remaining average life expectancy in years of a pensioner retiring at age 65 on the balance sheet date for the UK and US Group plans is as follows:
                 
  UK  US 
  2009  2008  2009  2008 
 
Male  22.7   21.5   17.6   17.6 
Female  23.5   21.8   20.2   20.2 
The remaining average life expectancy in years of a pensioner retiring at age 65, 20 years after the balance sheet date, for the UK and US Group plans is as follows:
                 
  UK  US 
  2009  2008  2009  2008 
 
Male  25.3   23.3   17.6   17.6 
Female  25.6   23.8   20.2   20.2 


F-54

Notes to the Consolidated Financial Statements (Continued)
Financial statement information
The amounts recognised in the income statement are as follows:
                         
  2009 
     Defined
             
  UK Group
  benefit
     Defined
       
  plan  other  Sub-total  contribution  PRMB  Total 
  All figures in £ millions 
 
Current service cost  14   3   17   62   2   81 
Past service cost  —   1   1   —   —   1 
                         
Total operating expense
  14   4   18   62   2   82 
                         
Expected return on plan assets  (83)  (5)  (88)  —   —   (88)
Interest on plan liabilities  89   8   97   —   3   100 
Net finance expense
  6   3   9   —   3   12 
                         
Net income statement charge
  20   7   27   62   5   94 
                         
Actual return on plan assets
  136   8   144   —   —   144 
                         
                         
  2008 
     Defined
             
  UK Group
  benefit
     Defined
       
  plan  other  Sub-total  contribution  PRMB  Total 
  All figures in £ millions 
 
Current service cost  33   3   36   41   1   78 
Past service cost  —   1   1   —   5   6 
                         
Total operating expense
  33   4   37   41   6   84 
                         
Expected return on plan assets  (104)  (7)  (111)  —   —   (111)
Interest on plan liabilities  93   7   100   —   3   103 
Net finance (income)/expense
  (11)  —   (11)  —   3   (8)
                         
Net income statement charge
  22   4   26   41   9   76 
                         
Actual loss on plan assets
  (130)  (27)  (157)  —   —   (157)
                         
                         
  2007 
     Defined
             
  UK Group
  benefit
     Defined
       
  plan  other  Sub-total  contribution  PRMB  Total 
  All figures in £ millions 
 
Current service cost  29   2   31   39   1   71 
                         
Total operating expense
  29   2   31   39   1   71 
                         
Expected return on plan assets  (96)  (7)  (103)  —   —   (103)
Interest on plan liabilities  84   7   91   —   2   93 
Net finance (income)/expense
  (12)  —   (12)  —   2   (10)
                         
Net income statement charge
  17   2   19   39   3   61 
                         
Actual (loss)/return on plan assets
  128   4   132   —   —   132 
                         


F-55

Notes to the Consolidated Financial Statements (Continued)
The total operating charge is included in administrative and other expenses. In 2008 the UK Group plan current service cost included £14m (2007: £10m) relating to defined contribution sections. In 2009 the defined contribution section of the UK Group plan is recorded within the defined contribution expense.
The amounts recognised in the balance sheet are as follows:
                                 
  2009  2008 
     Other
  Other
        Other
  Other
    
  UK Group
  funded
  unfunded
     UK Group
  funded
  unfunded
    
  plan  plans  plans  Total  plan  plans  plans  Total 
  All figures in £ millions 
 
Fair value of plan assets  1,609   118   —   1,727   1,478   100   —   1,578 
Present value of defined benefit obligation  (1,798)  (151)  (18)  (1,967)  (1,429)  (149)  (16)  (1,594)
                                 
Net pension (liability)/asset
  (189)  (33)  (18)  (240)  49   (49)  (16)  (16)
                                 
Other post-retirement medical benefit obligation              (65)              (68)
Other pension accruals              (34)              (34)
Net retirement benefit obligations
              (339)              (118)
                                 
Analysed as:
                                
Retirement benefit assets
              —               49 
                                 
Retirement benefit obligations
              (339)              (167)
                                 
The following (losses)/gains have been recognised in other comprehensive income:
             
  2009  2008  2007 
  All figures in £ millions 
 
Amounts recognised for defined benefit plans  (295)  (74)  79 
Amounts recognised for post-retirement medical benefit plans  (4)  3   1 
             
Total recognised in year
  (299)  (71)  80 
             
Cumulative amounts recognised
  (246)  53   124 
             
The fair value of plan assets comprises the following:
                         
  2009  2008 
     Other
        Other
    
  UK Group
  funded
     UK Group
  funded
    
  plan  plans  Total  plan  plans  Total 
  % 
 
Equities  27.4   2.4   29.8   28.0   3.1   31.1 
Bonds  47.2   2.1   49.3   40.8   2.2   43.0 
Properties  9.4   0.0   9.4   7.4   0.1   7.5 
Other  10.4   1.1   11.5   17.5   0.9   18.4 
The plan assets do not include any of the Group’s own financial instruments, or any property occupied by the Group.


F-56

Notes to the Consolidated Financial Statements (Continued)
Changes in the values of plan assets and liabilities of the retirement benefit plans are as follows:
                         
  2009  2008 
  UK Group
  Other
     UK Group
  Other
    
  plan  plans  Total  plan  plans  Total 
  All figures in £ millions 
 
Fair value of plan assets
                        
Opening fair value of plan assets  1,478   100   1,578   1,744   109   1,853 
Exchange differences  —   (6)  (6)  —   23   23 
Expected return on plan assets  83   5   88   104   7   111 
Actuarial gains and (losses)  53   3   56   (234)  (34)  (268)
Contributions by employer  64   26   90   54   3   57 
Contributions by employee  3   —   3   9   —   9 
Benefits paid  (72)  (10)  (82)  (72)  (8)  (80)
Other movements  —   —   —   (127)  —   (127)
                         
Closing fair value of plan assets
  1,609   118   1,727   1,478   100   1,578 
                         
Present value of defined benefit obligation
                        
Opening defined benefit obligation  (1,429)  (165)  (1,594)  (1,682)  (129)  (1,811)
Exchange differences  —   14   14   —   (38)  (38)
Current service cost  (14)  (3)  (17)  (33)  (3)  (36)
Past service cost  —   (1)  (1)  —   (1)  (1)
Interest cost  (89)  (8)  (97)  (93)  (7)  (100)
Actuarial gains and (losses)  (335)  (16)  (351)  189   5   194 
Contributions by employee  (3)  —   (3)  (9)  —   (9)
Benefits paid  72   10   82   72   8   80 
Other movements  —   —   —   127   —   127 
                         
Closing defined benefit obligation
  (1,798)  (169)  (1,967)  (1,429)  (165)  (1,594)
                         
During 2008 changes made to the administration of the plan assets enabled assets relating to the defined contribution sections of the UK Group plan to be identified separately from those of the defined benefit section, for accounting purposes. Defined contribution assets are no longer disclosed as part of the UK Group plan assets. The other movements in both the change in value of plan assets and liabilities in 2008 represent the separation out of these defined contribution assets.
Changes in the value of the US PRMB are as follows:
         
  2009  2008 
  All figures in £ millions 
 
Opening defined benefit obligation  (68)  (47)
Exchange differences  8   (19)
Current service cost  (2)  (1)
Past service cost  —   (5)
Interest cost  (3)  (3)
Actuarial gains and (losses)  (4)  3 
Benefits paid  4   4 
         
Closing defined benefit obligation
  (65)  (68)
         


F-57

Notes to the Consolidated Financial Statements (Continued)
The history of the defined benefit plans is as follows:
                     
  2009  2008  2007  2006  2005 
  All figures in £ millions 
 
Fair value of plan assets  1,727   1,578   1,853   1,633   1,500 
Present value of defined benefit obligation  (1,967)  (1,594)  (1,811)  (1,810)  (1,803)
                     
Net pension (liability)/asset
  (240)  (16)  42   (177)  (303)
                     
Experience adjustments on plan assets  56   (268)  29   74   140 
Experience adjustments on plan liabilities  (351)  194   50   28   (119)
Funding
The UK Group plan is self-administered with the plan’s assets being held independently of the Group. The trustees of the plan are required to act in the best interest of the plan’s beneficiaries. The plan trustees and the company are currently finalising the latest triennial valuation for funding purposes as at 1 January 2009. At this point, the Group has contributed an additional £20m to the plan in 2009. In total the Group contributed £42m (2008: £21m) towards the funding shortfall and expects to contribute a similar amount in 2010. Regular contributions to the plan are estimated to be £23m for 2010.
The Group expects to contribute approximately £150m$83m in 2010 and $126m in 2011 to its US pension plans.
Sensitivities
The net retirement benefit obligations are calculated using a number of assumptions, the most significant being the discount rate used to calculate the defined benefit plans in 2007, which includes an additional contribution of £100m to the UK Group plan.

F-47

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
obligation. The effect of a one percentage point increase and decrease in the discount rate on the defined benefit obligation and the total pension expense is as follows:
         
  2006 2006
  1% increase 1% decrease
     
  (All figures in £ millions)
Effect on:
        
(Decrease)/increase in defined benefit obligation  (242)  297 
Other post-retirement obligations
         
  2009 
  1% increase  1% decrease 
  All figures in £ millions 
 
Effect on:
        
(Decrease)/increase in defined benefit obligation — UK Group plan  (260.2)  325.4 
(Decrease)/increase of aggregate of service cost and interest cost — UK Group plan  (4.5)  3.9 
(Decrease)/increase in defined benefit obligation — US plan  (12.4)  14.7 
 
The Group operates a numbereffect of post-retirement medicalmembers living one year more or one year less on the defined benefit plans, principally in the US. These plans are unfunded. The method of accountingobligation and the frequency of valuations are similar to those used for defined benefittotal pension plans.
      The principal assumptions used are shown below:
             
% 2006 2005 2004
       
Inflation  3.00   3.00   3.00 
Initial rate of increase in healthcare rates  10.00   10.00   12.00 
Ultimate rate of increase in healthcare rates  5.00   5.00   5.00 
Rate used to discount scheme liabilities  5.85   5.60   5.60 
      The amounts recognised in the income statement areexpense is as follows:
             
  2006 2005 2004
       
  (All figures in £ millions)
Current service cost  1   1   1 
          
Past service cost  (2)  —   — 
          
Total operating (income)/costs
  (1)  1   1 
          
Interest cost  3   3   4 
          
Net income statement charge
  2   4   5 
          
 The current and past service costs have been included in administrative and other expenses.
         
  2006 2005
     
  (All figures in
  £ millions)
Opening defined benefit obligation  (60)  (58)
Exchange differences  8   (7)
Reclassifications  (3)  — 
Current service cost  (1)  (1)
Past service cost  2   — 
Interest cost  (3)  (3)
Benefits paid  4   4 
Actuarial gains and losses  5   5 
       
Closing defined benefit obligation
  (48)  (60)
       

F-48

         
  2009 
  1 year increase  1 year decrease 
  All figures in £ millions 
 
Effect on:
        
Increase/(decrease) in defined benefit obligation — UK Group plan  50.7   (49.3)
Increase/(decrease) in defined benefit obligation — US plan  1.3   (1.7)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
The effect of a one percentage point increase and decrease in the assumed medical cost trend rates is as follows:
                         
  2006 2006 2005 2005 2004 2004
  1% increase 1% decrease 1% increase 1% decrease 1% increase 1% decrease
             
  (All figures in £ millions)
Effect on:
                        
Increase/(decrease) of aggregate of service cost and interest cost  0.1   (0.1)  0.2   (0.2)  0.2   (0.2)
(Decrease)/increase in defined benefit obligation  (4.7)  5.1   (4.7)  4.1   (4.1)  3.7 
         
  2009 
  1% increase  1% decrease 
  All figures in £ millions 
 
Effect on:
        
Increase/(decrease) in post-retirement medical benefit obligation  3.1   (2.7)
Increase/(decrease) of aggregate of service cost and interest cost  0.2   (0.2)


F-58

Share-based paymentsNotes to the Consolidated Financial Statements (Continued)
 
26.  Share-based payments
The Group recognised the following charges in the income statement in respect of its equity-settled share-based payment plans:
             
  2006 2005 2004
       
  (All figures in £ millions)
Pearson plans  18   13   15 
IDC plans  7   10   10 
          
Total share-based payment costs
  25   23   25 
          
 
             
  2009  2008  2007 
  All figures in £ millions 
 
Pearson plans  27   25   23 
Interactive Data plans  10   8   7 
             
Total share-based payment costs
  37   33   30 
             
The Group operates the following equity-settled employee option and share plans:
Worldwide Save for Shares Plan — Since 1994, the Group has operated a Save-As-You-Earn plan for UK employees. In 1998, the Group introduced a Worldwide Save for Shares Plan. Under these plans, employees can save a portion of their monthly salary over periods of three, five or seven years. At the end of this period, the employee has the option to purchase ordinary shares with the accumulated funds at a purchase price equal to 80% of the market price prevailing at the time of the commencement of the employee’s participation in the plan. Options that are not exercised within six months of the third, fifth or seventh anniversary after grant lapse unconditionally.
Employee Stock Purchase Plan — In 2000, the Group established an Employee Stock Purchase Plan which allows all employees in the US to save a portion of their monthly salary over six month periods. At the end of the period, the employee has the option to purchase ADRs with their accumulated funds at a purchase price equal to 85% of the lower of the market price prevailing at the beginning or end of the period.
Long-Term Incentive Plan — This plan was introduced in 2001 and renewed in 2006 and consists of two parts: share options and/or restricted shares.
      Options were granted under this plan in 2001 based on a pre-grant earnings per share growth test and are not subject to further performance conditions on exercise. The options became exercisable in tranches and lapse if they remain unexercised at the tenth anniversary of the date of grant.
      The vesting of restricted shares is normally dependent on continuing service and/or upon the satisfaction of corporate performance targets over a three-year period. These targets may be based on market and/or non-market performance criteria. Restricted shares awarded to senior management in October 2006 vest dependent on relative shareholder return, return on invested capital and a combination of earnings per share growth. The award was split equally across all three measures. Other restricted shares awarded in 2006 vest depending on continuing service over a three-year period.
Worldwide Save for Shares Plan — Since 1994, the Group has operated a Save-As-You-Earn plan for UK employees. In 1998, the Group introduced a Worldwide Save for Shares Plan. Under these plans, employees can save a portion of their monthly salary over periods of three, five or seven years. At the end of this period, the employee has the option to purchase ordinary shares with the accumulated funds at a purchase price equal to 80% of the market price prevailing at the time of the commencement of the employee’s participation in the plan. Options that are not exercised within six months of the end of the savings period lapse unconditionally.
Employee Stock Purchase Plan — In 2000, the Group established an Employee Stock Purchase Plan which allows all employees in the US to save a portion of their monthly salary over six month periods. At the end of the period, the employee has the option to purchase ADRs with their accumulated funds at a purchase price equal to 85% of the lower of the market price prevailing at the beginning or end of the period.
Long-Term Incentive Plan — This plan was introduced in 2001 and renewed in 2006 and consists of two parts: share optionsand/or restricted shares.
Options were last granted under this plan in 2001 based on a pre-grant earnings per share growth test and are not subject to further performance conditions on exercise. The options became exercisable in tranches and lapse if they remain unexercised at the tenth anniversary of the date of grant.
The vesting of restricted shares is normally dependent on continuing service over a three to five-year period, and in the case of senior management upon the satisfaction of corporate performance targets over a three-year period. These targets may be based on marketand/or non-market performance criteria. Restricted shares awarded to senior management in March 2008 and March 2009 vest dependent on relative shareholder return, return on invested capital and earnings per share growth. The award was split equally across all three measures. Other restricted shares awarded in 2008 and 2009 vest depending on continuing service over a three-year period.
Annual Bonus Share Matching Plan — This plan permits executive directors and senior executives around the Group to invest up to 50% of any after tax annual bonus in Pearson shares. If these shares are held and the Group meets an earnings per share growth target, the company will match them on a gross basis i.e. the maximum number of matching shares is equal to the number of shares that could have been acquired with the amount of the pre-tax annual bonus taken in invested shares.
In addition to the above, share options remain outstanding under Executive Share Option, Reward and Special Share Option Plans. These are legacy plans which were replaced with the introduction of the Long-Term Incentive Plan in 2001.


F-59

F-49

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
Annual Bonus Share Matching Plan — This plan permits executive directors and senior executives around the Group to invest up to 50% of any after tax annual bonus in Pearson shares. If these shares are held more than three years and the Group meets an earnings per share growth target, the Company will match them on a gross basis of up to one share for every one held after five years.
      In addition to the above, share options remain outstanding under Executive Share Option, Reward and Special Share Option Plans. These are legacy plans which were replaced with the introduction of the Long-Term Incentive Plan in 2001.
The number and weighted average exercise prices of share options granted under the Group’s plans are as follows:
                 
  2006 2006 2005 2005
  Number of Weighted Number of Weighted
  share average share average
  options exercise options exercise
  000s price £ 000s price £
         
Outstanding at beginning of year  21,677   13.15   26,179   13.62 
Granted during the year  837   6.30   606   4.92 
Exercised during the year  (1,396)  5.36   (324)  6.01 
Forfeited during the year  (1,828)  15.39   (4,352)  15.75 
Expired during the year  (429)  6.72   (432)  9.17 
             
Outstanding at end of year
  18,861   13.36   21,677   13.15 
             
Options exercisable at end of year
  15,595   14.14   17,420   13.90 
             
 
                 
  2009  2008 
     Weighted
     Weighted
 
  Number of
  average
  Number of
  average
 
  share
  exercise
  share
  exercise
 
  options
  price
  options
  price
 
  000s  £  000s  £ 
 
Outstanding at beginning of year  14,379   13.14   16,781   13.15 
Granted during the year  1,320   5.47   1,437   5.35 
Exercised during the year  (656)  5.91   (683)  4.85 
Forfeited during the year  (2,488)  13.02   (3,082)  11.56 
Expired during the year  (68)  5.20   (74)  6.06 
                 
Outstanding at end of year
  12,487   12.78   14,379   13.14 
                 
Options exercisable at end of year
  9,264   15.28   11,527   14.97 
                 
Options were exercised regularly throughout the year. The weighted average share price during the year was £7.45 (2005: £6.52)£7.15 (2008: £6.44). Early exercises arising from redundancy, retirement or death are treated as an acceleration of vesting and the Group therefore recognises in the income statement the amount that otherwise would have been recognised for services received over the remainder of the original vesting period.
 
The options outstanding at the end of the year have weighted average remaining contractual lives and exercise prices as follows:
                 
  2006 2006 2005 2005
  Number of Weighted Number of Weighted
  share average share average
Range of exercise prices options contractual options contractual
£ 000s life years 000s life years
         
0 — 5  1,649   1.94   2,773   2.32 
5 — 10  5,254   3.85   5,555   4.57 
10 — 15  7,638   3.63   8,237   4.64 
15 — 20  1,050   2.88   1,168   3.81 
20 — 25  424   3.19   930   3.80 
>25  2,846   3.22   3,014   4.22 
             
   18,861   3.42   21,677   4.19 
             
 
                 
  2009  2008 
     Weighted
     Weighted
 
  Number of
  average
  Number of
  average
 
  share
  contractual
  share
  contractual
 
Range of exercise prices
 options
  life
  options
  life
 
£
 000s  Years  000s  Years 
 
0 — 5  172   1.07   453   1.23 
5 — 10  5,523   2.37   5,113   2.84 
10 — 15  4,225   1.36   5,481   1.97 
15 — 20  270   0.75   908   0.84 
20 — 25  344   0.19   350   1.19 
>25  1,953   0.19   2,074   1.19 
                 
   12,487   1.57   14,379   2.05 
                 
In 20062009 and 20052008 options were granted under the Worldwide Save for Shares Plan. The weighted average estimated fair value for the options granted was calculated using a Black-Scholes option pricing model.


F-60

F-50

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
 
The weighted average estimated fair values and the inputs into the Black-Scholes model are as follows:
         
  2006 2005
  Weighted Weighted
  average average
     
Fair value  £1.92   £2.41 
Weighted average share price  £7.66   £6.54 
Weighted average exercise price  £6.30   £5.08 
Expected volatility  23.12%  35.47%
Expected life  4.0 years   4.1 years 
Risk free rate  4.42%  4.48%
Expected dividend yield  3.52%  3.93%
Forfeiture rate  5.0%  6.3%
       
 
         
  2009
  2008
 
  Weighted
  Weighted
 
  average  average 
 
Fair value  £1.69   £1.67 
Weighted average share price  £7.13   £6.96 
Weighted average exercise price  £5.47   £5.35 
Expected volatility  27.32%  21.41%
Expected life  4.0 years   4.1 years 
Risk free rate  2.45%  4.28%
Expected dividend yield  4.74%  4.54%
Forfeiture rate  3.5%  3.6%
The expected volatility is based on the historic volatility of the Company’scompany’s share price over the previous three to seven years depending on the vesting term of the options.
 
The following shares were granted under restricted share arrangements:
                 
  2006 2006   2005
  Number Weighted 2005 Weighted
  of shares average Number average
  000s fair value of shares fair value
    £ 000s £
         
Annual Bonus Share Matching Plan  90   6.27   71   5.57 
Long-Term Incentive Plan  3,585   6.96   3,987   5.05 
 In 2005, the
                 
  2009 2008
    Weighted
   Weighted
  Number of
 average
 Number of
 average
  shares
 fair value
 shares
 fair value
  000s £ 000s £
 
Long-Term Incentive Plan  4,519   5.77   4,152   5.78 
Annual Bonus Share Matching Plan  271   6.70   253   6.73 
The fair value of restricted shares awardedgranted under the Annual Bonus Share Matching Plan and the Long-Term Incentive Plan wasthat vest unconditionally is determined using a Black-Scholes model to reflect dividends foregone using a dividend yieldthe share price at the date of 3.85%. From 2006 onwards, participantsgrant. Participants of the Long-Term Incentive Plan are entitled to dividends during the vesting period. Following a reviewThe number of the accounting policiesshares to vest has been adjusted, based on historical experience, to account for share-based payments in 2006, the restrictedany potential forfeitures. Restricted shares granted in 2006 under the Annual Bonus Share Matching Plan are valued using the share price at the date of grant discounted bygrant. Shares granted include the dividend yield (3.66%)entitlement to take into account any dividends foregone. The fair value of shares granted underduring the Long-Term Incentive Plan that vest unconditionally was determined usingvesting period and therefore the share price at the date of grant. The number of shares to vest was adjusted based on historical experience to account for any potential forfeitures. is not discounted.
Restricted shares with a market performance condition were valued by an independent actuary using a Monte Carlo model. Restricted shares with a non-market performance condition were fair valued based on the share price at the date of grant. Non-market performance conditions were considered by adjusting the number of shares expected to vest based on the most likely outcome of the relevant performance criteria.
Subsidiary share option plans
 IDC,
Interactive Data, a 62%61% subsidiary of the Group, operates the following share-based payment plans:
2001 Employee Stock Purchase Plan In 2001, IDC adopted the 2001 Employee Stock Purchase Plan for all eligible employees worldwide. The 2001 Employee Stock Purchase Plan allows employees to purchase stock at a discounted price at specific times.
2000 Long-Term Incentive Plan Under this plan, the Compensation Committee of the Board of Directors can grant share-based awards representing up to 20% of the total number of shares of common stock outstanding at the date of grant. The plan provides for the discretionary issuance of share-based awards to directors, officers and employees of IDC, as well as persons who provide consulting or other services to IDC. The exercise price for all options granted to date has been equal to the market price of
2001 Employee Stock Purchase Plan
The 2001 Employee Stock Purchase Plan allows all eligible employees worldwide to purchase stock at a discounted price at specific times.
2000 Long-Term Incentive Plan
Under this plan, the Compensation Committee of the Board of Directors can grant share-based awards representing up to 20% of the total number of shares of common stock outstanding at the date of grant. The plan provides for the discretionary issuance of share-based awards to directors, officers and employees of Interactive Data, as well as persons who provide consulting or other services to Interactive Data. The exercise price for all options granted to date has been equal to the market price of the underlying shares at the date of


F-61

F-51

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
the underlying shares at the date of grant. Options expire ten years from the date of grant and generally vest over a three to four year period without any performance criteria attached.
grant. Options expire ten years from the date of grant and generally vest over a three to four-year period without any performance criteria attached.
 
In addition, grants of restricted stock can be made to certain executives and members of the Board of Directors of IDC.Interactive Data. The awarded shares are available for distribution, at no cost, at the end of a three-year vesting period. No performance criteria are attached to shares granted under this plan.
 
Interactive Data employees purchased 234,956 shares (2008: 183,318) under the 2001 Employee Stock Purchase Plan at an average share price of $19.47 (£12.06) (2008: $22.95; £15.96). The weighted average fair value at the date of grant was $5.82 (£3.60) (2008: $6.59; £4.58).
The number and weighted average exercise prices of share options granted under the 2000 Long-Term Incentive Plan are as follows:
                         
    2006     2005  
  2006 Weighted 2006 2005 Weighted 2005
  Number average Weighted Number average Weighted
  of share exercise average of share exercise average
  options price exercise options price exercise
  000s $ price £ 000s $ price £
             
Outstanding at beginning of year  10,068   15.16   8.37   9,832   13.46   7.36 
Granted during the year  1,835   20.58   10.52   1,940   21.38   11.80 
Exercised during the year  (1,252)  12.88   6.58   (1,412)  11.57   6.39 
Forfeited during the year  (139)  19.02   9.72   (292)  16.86   9.31 
Expired during the year  (6)  11.46   5.86   —   —   — 
                   
Outstanding at end of year
  10,506   16.33   8.34   10,068   15.16   8.37 
                   
Options exercisable at end of year
  6,547   14.11   7.21   6,052   12.58   6.94 
                   
 
                         
  2009  2008 
     Weighted
  Weighted
     Weighted
  Weighted
 
  Number
  average
  average
  Number
  average
  average
 
  of share
  exercise
  exercise
  of share
  exercise
  exercise
 
  options
  price
  price
  options
  price
  price
 
  000s  $  £  000s  $  £ 
 
Outstanding at beginning of year  10,264   19.38   13.48   9,827   18.21   9.15 
Granted during the year  1,224   23.25   14.40   1,449   24.95   17.35 
Exercised during the year  (1,493)  14.20   8.79   (895)  15.37   10.69 
Forfeited during the year  (159)  24.44   15.13   (99)  22.05   15.34 
Expired during the year  (64)  25.93   16.06   (18)  12.17   8.46 
                         
Outstanding at end of year
  9,772   20.53   12.71   10,264   19.38   13.48 
                         
Options exercisable at end of year
  6,839   18.92   11.72   6,865   16.89   11.75 
                         
The options outstanding at the end of the year have a weighted average remaining contractual life and exercise price as follows:
                 
  2006 2006 2005 2005
  Number Weighted Number Weighted
  of share average of share average
Range of exercise prices options contractual options contractual
$ 000s life years 000s life years
         
0 — 4.4  30   3.1   33   4.2 
4.4 — 7.5  157   2.3   206   3.6 
7.5 — 12  2,164   4.4   2,685   5.3 
12 — 20  4,640   6.4   5,243   7.4 
>20  3,515   9.0   1,901   9.5 
             
   10,506   6.8   10,068   5.4 
             
 
                 
  2009  2008 
     Weighted
     Weighted
 
  Number
  average
  Number
  average
 
  of share
  contractual
  of share
  contractual
 
Range of exercise prices
 options
  life
  options
  life
 
$
 000s  Years  000s  Years 
 
0 — 4.4  —   —   —   — 
4.4 — 7.5  20   0.3   47   1.3 
7.5 — 12  909   1.5   1,502   2.4 
12 — 20  2,339   3.6   2,987   4.6 
> 20  6,504   7.5   5,728   8.0 
                 
   9,772   6.0   10,264   6.2 
                 


F-62

Notes to the Consolidated Financial Statements (Continued)
The fair value of the options granted under the 2000 Long-Term Incentive Plan and of the shares awarded under the 2001 Employee Stock Purchase Plan was estimated using a Black-Scholes option pricing model. The weighted average estimated fair values and the inputs into the Black-Scholes model are as follows:
                 
  Long-Term Incentive Plan  Employee Stock Purchase Plan 
  2009
  2008
  2009
  2008
 
  Weighted
  Weighted
  Weighted
  Weighted
 
  average  average  average  average 
 
Fair value  $4.92   $5.58   $5.82   $6.59 
Weighted average share price  $23.25   $24.95   $19.47   $22.95 
Weighted average exercise price  $23.25   $24.95   $19.47   $22.95 
Expected volatility  29.70%  24.20%  48.40%  33.70%
Expected life  5.9 years   5.7 years   0.5 years   0.5 years 
Risk free rate  2.4% to 2.6%   1.5% to 3.5%   0.3% to 0.4%   2.0% to 2.4% 
Expected dividend yield  3.6%  2.2%  3.6%  2.1%
Forfeiture rate  0.0%  0.0%  0.0%  0.0%
The expected volatility is based on the historic volatility of Interactive Data’s share price over the vesting term of the options.
During the year IDCInteractive Data granted the following shares under restricted share arrangements:
                         
    2006        
  2006 Weighted 2006   2005 2005
  Number average Weighted 2005 Weighted Weighted
  of shares fair value average Number average average
  000s $ fair value of shares fair value fair value
      £ 000s $ £
             
2000 Long-Term Incentive Plan  196   20.82   10.64   148   20.57   11.35 
2001 Employee Stock Purchase Plan  206   3.98   2.03   178   3.68   2.03 
 
                         
  2009  2008 
     Weighted
  Weighted
     Weighted
  Weighted
 
  Number of
  average
  average
  Number of
  average
  average
 
  shares
  fair value
  fair value
  shares
  fair value
  fair value
 
  000s  $  £  000s  $  £ 
 
2000 Long-Term Incentive Plan  415   22.92   14.19   194   25.43   17.69 
Shares awarded under the 2000 Long-Term Incentive Plan were valued based on the share price prevailing at the date of grant. The fair value of the options granted under the Long-Term Incentive Plan and

F-52

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of the shares awarded under the 2001 Employee Stock Purchase Plan was estimated using a Black-Scholes model. The weighted average estimated fair values and the inputs into the Black-Scholes model are as follows:
                 
  Long-Term Incentive Plan Employee Stock Purchase Plan
     
  2006 2005 2006 2005
  Weighted Weighted Weighted Weighted
  average average average average
         
Fair value  $ 6.57   $ 5.56   $ 3.98   $ 3.68 
Weighted average share price  $20.58   $21.38   $15.58   $15.46 
Weighted average exercise price  $20.58   $21.38   $15.58   $15.46 
Expected volatility  25.90%  24.50%  18.32%  20.00%
Expected life  4.7 years   4.0 years   0.5 years   0.5 years 
Risk free rate  4.56% to 5.11%  3.86%  3.66% to 5.22%  2.33%
Expected dividend yield  0.0%  0.0%  0.0%  0.0%
Forfeiture rate  0.0%  0.0%  0.0%  0.0%
             
      The expected volatility is based on the historic volatility of IDC’s share price over the vesting term of the options.
2527.  Share capital and share premium
             
  Number Ordinary Share
  of shares shares premium
  000s £m £m
       
At 1 January 2005  803,250   201   2,473 
Issue of ordinary shares — share option schemes  770   —   4 
          
At 31 December 2005
  804,020   201   2,477 
          
Issue of ordinary shares — share option schemes  2,089   1   10 
          
At 31 December 2006
  806,109   202   2,487 
          
 
             
  Number
  Ordinary
  Share
 
  of shares
  shares
  premium
 
  000s  £m  £m 
 
At 1 January 2008  808,028   202   2,499 
Issue of ordinary shares — share option schemes  1,248   —   6 
             
At 31 December 2008  809,276   202   2,505 
             
Issue of ordinary shares — share option schemes  1,523   1   7 
             
At 31 December 2009
  810,799   203   2,512 
             
The total authorised number of ordinary shares is 1,190m shares (2005: 1,186m shares) withhave a par value of 25p per share (2005:(2008: 25p per share). All issued shares are fully paid. All shares have the same rights.
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance.
The capital structure of the Group consists of debt (see note 18), cash and cash equivalents (see note 17) and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings.
The Group reviews its capital structure on a regular basis and will balance its overall capital structure through payments of dividends, new share issues as well as the issue of new debt or the redemption of existing debt in line with the financial risk policies outlined in note 19.


F-63

Notes to the Consolidated Financial Statements (Continued)
2628.  Treasury shares
                     
  Pearson plc IDC Total
       
  Number   Number    
  of shares   of shares    
  000s £m 000s £m £m
           
At 1 January 2005  4,623   105   3,145   27   132 
Purchase of treasury shares  626   5   1,407   16   21 
                
At 31 December 2005
  5,249   110   4,552   43   153 
                
Purchase of treasury shares  4,700   36   1,500   16   52 
Release of treasury shares  (1,188)  (16)  —   —   (16)
                
At 31 December 2006
  8,761   130   6,052   59   189 
                
 
                     
  Pearson plc  Interactive Data  Total 
  Number
     Number
       
  of shares
     of shares
       
  000s  £m  000s  £m  £m 
 
At 1 January 2008  11,761   141   7,229   75   216 
Purchase of treasury shares  2,028   12   1,976   35   47 
Release of treasury shares  (3,341)  (41)  —   —   (41)
                     
At 31 December 2008  10,448   112   9,205   110   222 
                     
Purchase of treasury shares  2,200   13   1,280   20   33 
Release of treasury shares  (2,983)  (29)  —   —   (29)
                     
At 31 December 2009
  9,665   96   10,485   130   226 
                     
The Group holds its ownPearson plc shares in trust to satisfy its obligations under its restricted share plans (see note 24)26). These shares, representing 1.2% (2008: 1.3%) ofcalled-up share capital, are heldtreated as treasury shares for accounting purposes and have a par value of 25p per share.
 IDC
Interactive Data hold their own shares in respect of share buy-back programmes. These shares are held as treasury shares and have a par value of $0.01.

F-53

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The nominal value of Pearson plc treasury shares amounts to £2.2m (2005: £2.1m)£2.4m (2008: £2.6m). The nominal value of IDCInteractive Data treasury shares amounts to £0.3m (2005: £0.3m)£0.07m (2008: £0.06m).
 
At 31 December 20062009 the market value of Pearson plc treasury shares was £67.6m (2005: £36.2m)£86.1m (2008: £67.0m) and the market value of IDCInteractive Data treasury shares was £74.3m (2005: £60.2m)£164.3m (2008: £157.9m).


F-64

Notes to the Consolidated Financial Statements (Continued)
2729.  Other reserves and retained earnings
                     
        Total  
    Translation Fair value other Retained
  Notes reserve reserve reserves earnings
           
  (All figures in £ millions)
At 1 January 2005      (491)  —   (491)  749 
Net exchange differences on translation of foreign operations      327   —   327   — 
Cumulative translation adjustment disposed      (14)  —   (14)  — 
Profit for the year attributable to equity holders of the Company      —   —   —   624 
Dividends paid to equity holders of the Company  10   —   —   —   (205)
Equity settled transactions  24   —   —   —   23 
Actuarial gains on post-retirement plans  24   —   —   —   26 
Taxation on items charged to equity  8   —   —   —   12 
Transition adjustment on adoption of IAS 39      3   —   3   (15)
                
At 31 December 2005
      (175)  —   (175)  1,214 
                
Net exchange differences on translation of foreign operations      (417)  —   (417)  — 
Profit for the year attributable to equity holders of the Company      —   —   —   446 
Dividends paid to equity holders of the Company  10   —   —   —   (220)
Equity settled transactions  24   —   —   —   25 
Actuarial gains on post-retirement plans  24   —   —   —   107 
Treasury shares released under employee share plans  26   —   —   —   (16)
Taxation on items charged to equity  8   —   —   —   12 
                
At 31 December 2006
      (592)  —   (592)  1,568 
                
      The translation reserve includes exchange differences arising from the translation of the net investment in foreign operations and of borrowings and other currency instruments designated as hedges of such investments.
28Business combinations
 
On 30 September 2006,15 April 2009 the Group acquired 100%Wall Street English (WSE), China’s leading provider of premium English language training to adults. On 15 July 2009 the voting rightsGroup completed the purchase of Mergermarket, a financial information company providing information to financial institutions, corporations and their advisers. In addition, several other businesses were acquiredan additional stake in the current year including Promissor, Paravia Bruno Mondadori (PBM)Maskew Miller Longman (MML), National Evaluation Systems (NES), PowerSchool and Chancery inits South African publishing business. Provisional values for the Education business and Quote.com in IDC. None of these other acquisitions were individually material to the Group. In 2005, the amounts shown below mainly relate to the acquisition of AGS Publishing.

F-54

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
      The assets and liabilities arising from these and other acquisitions completed in the year together with adjustments to prior year acquisitions are as follows:
                             
    2006 2005
       
    Mergermarket Mergermarket   Other Total Total
    Carrying Fair value Mergermarket Fair Fair Fair
  Notes amount adjs Fair value value value value
               
  (All figures in £ millions)
Property, plant and equipment  11   1   —   1   12   13   7 
Intangible assets  12   —   34   34   122   156   89 
Intangible assets — Pre-publication  17   —   —   —   4   4   15 
Inventories      —   —   —   14   14   10 
Trade and other receivables      11   —   11   13   24   32 
Cash and cash equivalents      14   —   14   14   28   3 
Trade and other liabilities      (21)  —   (21)  (31)  (52)  (42)
Financial liabilities — Borrowings      —   —   —   (3)  (3)  — 
Deferred income tax liabilities  14   —   (10)  (10)  (16)  (26)  (21)
Retirement benefit obligations  24   —   —   —   (2)  (2)  (2)
Provisions for other liabilities and charges  22   —   —   —   (3)  (3)  (1)
Equity minority interest      —   —   —   (9)  (9)  8 
                      
Net assets acquired at fair value
      5   24   29   115   144   98 
                      
Goodwill
              97   149   246   155 
                      
Total
              126   264   390   253 
                      
Satisfied by:
                            
Cash              (109)  (273)  (382)  (249)
Deferred consideration              (17)  —   (17)  (5)
Net prior year adjustments              —   9   9   1 
Total consideration
              (126)  (264)  (390)  (253)
                      
Book value of net assets acquired              5   43   48   58 
Fair value adjustments              24   72   96   40 
                      
Fair value to the Group
              29   115   144   98 
                      
 The fair value adjustments relating
                         
     2009  2008 
     Wall Street
             
     English
  MML
  Other
  Total
  Total
 
  Notes  Fair value  Fair value  Fair value  Fair value  Fair value 
  All figures in £ millions 
 
Property, plant and equipment  10   6   1   2   9   6 
Intangible assets  11   40   47   55   142   220 
Intangible assets — Pre-publication  20   —   —   2   2   27 
Inventories      1   12   1   14   7 
Trade and other receivables      8   7   8   23   54 
Cash and cash equivalents      3   9   17   29   16 
Trade and other liabilities      (56)  (16)  (19)  (91)  (52)
Current income tax liabilities      —   (2)  (2)  (4)  (3)
Net deferred income tax liabilities  13   (9)  (12)  (24)  (45)  (4)
Provisions for other liabilities and charges      —   —   —   —   (26)
Retirement benefit obligations      —   —   (1)  (1)  — 
Minority interest      —   (7)  (9)  (16)  (2)
Assets held for sale      —   —   —   —   3 
                         
Net assets/(liabilities) acquired at fair value
      (7)  39   30   62   246 
                         
Goodwill
  11   108   38   59   205   153 
                         
Increase in fair values of proportionate holding arising on stepped acquisition
      —   (23)  —   (23)  — 
                         
Total
      101   54   89   244   399 
                         
Satisfied by:                        
Cash      (101)  (49)  (51)  (201)  (394)
Other consideration      —   (5)  —   (5)  — 
Deferred consideration      —   —   (27)  (27)  — 
Net prior year adjustments      —   —   (11)  (11)  (5)
                         
Total consideration
      (101)  (54)  (89)  (244)  (399)
                         
Carrying value of net (liabilities)/assets acquired      (22)  5   2   (15)  78 
Fair value adjustments      15   34   28   77   168 
                         
Fair value
      (7)  39   30   62   246 
                         


F-65

Notes to the acquisition of Mergermarket are provisionalConsolidated Financial Statements (Continued)
The goodwill arising on these acquisitions results from substantial cost and willrevenue synergies and from benefits that cannot be finalised during 2007. They includeseparately recognised, such as the valuation of intangible assets and the related deferred tax effect. Adjustments to 2005 provisional fair values largely relateassembled workforce.
             
  Wall Street English 
  Carrying
  Fair value
    
  value  adjustments  Fair value 
  All figures in £ millions 
 
Property, plant and equipment  6   —   6 
Intangible assets  16   24   40 
Inventories  1   —   1 
Trade and other receivables  8   —   8 
Cash and cash equivalents  3   —   3 
Trade and other liabilities  (56)  —   (56)
Net deferred income tax liabilities  —   (9)  (9)
             
Net liabilities acquired
  (22)  15   (7)
             
Goodwill
          108 
             
Total
          101 
             
             
  MML 
  Carrying
  Fair value
    
  value  adjustments  Fair value 
  All figures in £ millions 
 
Property, plant and equipment  1   —   1 
Intangible assets  —   47   47 
Inventories  12   —   12 
Trade and other receivables  7   —   7 
Cash and cash equivalents  9   —   9 
Trade and other liabilities  (16)  —   (16)
Current income tax liabilities  (2)  —   (2)
Net deferred income tax liabilities  1   (13)  (12)
Minority interest  (7)  —   (7)
             
Net assets acquired  5   34   39 
             
Goodwill
          38 
             
Increase in fair values of proportionate holding arising on stepped acquisition
          (23)
             
Total
          54 
             


F-66

Notes to the acquisition of AGS Publishing.Consolidated Financial Statements (Continued)
 
Net cash outflow on acquisition:
             
  2006 2005 2004
       
  (All figures in £ millions)
Cash — Current year acquisitions  (382)  (249)  (39)
Deferred payments for prior year acquisitions and other items  (9)  —   (2)
Cash and cash equivalents acquired  28   3   — 
          
Cash outflow on acquisition
  (363)  (246)  (41)
          
      The goodwill arising on the acquisition of Mergermarket is attributable to the profitability of the acquired business and the significant synergies expected to arise.
 Mergermarket
             
  2009  2008  2007 
  All figures in £ millions 
 
Cash — Current year acquisitions  (201)  (394)  (468)
Cash — Acquisitions yet to complete  (4)  (12)  — 
Deferred payments for prior year acquisitions and other items  (32)  (5)  (4)
Cash and cash equivalents acquired  29   16   — 
             
Cash outflow on acquisition
  (208)  (395)  (472)
             
Wall Street English contributed £9m£29m of sales and £2m£nil to the Group’s profit before tax between the date of acquisition and the balance sheet date. MML contributed £22m of sales and £4m to the Group’s profit before tax between the date of acquisition and the balance sheet date. Other businesses acquired contributed £15m£37m to the Group’s sales and £6m to the Group’s profit before tax between the date of acquisition and the balance sheet date.

F-55

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
If the acquisitions had been completed on 1 January 2006,2009, the Group estimates that sales for the period would have been £4,199m£5,658m and profit before tax would have been £478m.
29  Non-current assets classified as held for sale£662m.
 As described in note 3, on 11 December 2006 the Group announced the disposal of Pearson Government Solutions. This disposal was completed on 15 February 2007 (see note 35). The major classes of assets and liabilities comprising the operations classified as held for sale at the balance sheet date are as follows:
         
  Notes 2006
     
    (All figures in
    £ millions)
Property, plant and equipment  11   9 
Intangible assets — Goodwill  12   221 
Intangible assets — Other  12   7 
Inventories      1��
Trade and other receivables      56 
       
Non-current assets classified as held for sale
      294 
       
Other liabilities      (26)
       
Liabilities directly associated with non-current assets classified as held for sale
      (26)
       
Net assets classified as held for sale
      268 
       
3030.  Disposals
             
  2006 2005 2004
       
  (All figures in £ millions)
Disposal of subsidiaries
            
Property, plant and equipment  —   (48)  — 
Investments in associates  —   (3)  — 
Deferred income tax assets  —   8   — 
Other financial assets  —   (2)  — 
Inventories  —   (4)  — 
Trade and other receivables  —   (59)  (4)
Trade and other liabilities  (1)  71   2 
Provisions for other liabilities and charges  —   3   — 
Cash and cash equivalents  —   (134)  1 
Equity minority interests  (4)  54   (4)
Attributable goodwill  (5)  (104)  (4)
Currency translation adjustment  —   14     
          
Net assets disposed of
  (10)  (204)  (9)
          
Proceeds received  10   513   8 
Costs  —   (3)  (2)
          
Profit on sale
  —   306   (3)
          
             
  2009  2008  2007 
  Total  Total  Total 
  All figures in £ millions 
 
Disposal of subsidiaries
            
Property, plant and equipment  —   (7)  (16)
Intangible assets  —   (1)  (6)
Intangible assets — Pre-publication  —   (2)  — 
Inventories  —   (7)  (1)
Trade and other receivables  —   (8)  (95)
Cash and cash equivalents  —   —   (14)
Net deferred income tax liabilities  —   —   2 
Trade and other liabilities  —   9   71 
Retirement benefit obligations  —   —   3 
Provisions for other liabilities and charges  —   —   1 
Minority interest  —   —   — 
Attributable goodwill  —   (99)  (242)
Cumulative translation adjustment  —   (49)  (53)
             
Net assets disposed
  —   (164)  (350)
             
Cash received  —   114   481 
Deferred receipts  —   2   — 
Other proceeds received  —   —   35 
Costs  —   (5)  (20)
             
(Loss)/profit on sale
  —   (53)  146 
             
             


F-67

F-56

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
             
  2006 2005 2004
       
Cash flow from disposals
            
Cash — Current year disposals  10   513   8 
Costs paid  —   (3)  (2)
Cash and cash equivalents/net debt disposed of  —   (134)  1 
          
Net cash inflow
  10   376   7 
          
 The 2006 disposal relates to share options exercised in IDC.
      2005 disposals relate mainlyNotes to the disposalConsolidated Financial Statements (Continued)
             
  2009  2008  2007 
 
Cash flow from disposals
            
Cash — Current year disposals  —   114   481 
Cash — Transactions with minorities  14   12   14 
Cash and Cash equivalents disposed  —   —   (14)
Costs paid  —   (15)  (12)
             
Net cash inflow
  14   111   469 
             
Further details of the Group’s 79% interestData Management business disposal in Recoletos Grupo de Communicación S.A..2008 are shown in note 3.
31  
31.  Cash generated from operations
                 
  Notes  2009  2008  2007 
     All figures in £ millions 
 
Net profit      462   323   310 
Adjustments for:
                
Income tax      198   209   222 
Depreciation  10   85   80   68 
Amortisation of purchased intangible assets  11   103   86   45 
Amortisation of other intangible assets  11   44   30   25 
Loss on sale of property, plant and equipment      2   1   1 
Net finance costs  6   95   91   106 
Share of results of joint ventures and associates  12   (30)  (25)  (23)
Loss/(profit) on sale of discontinued operations  3   —   53   (146)
Goodwill impairment of discontinued operation      —   —   97 
Net foreign exchange adjustment from transactions      (14)  105   11 
Share-based payment costs  26   37   33   30 
Pre-publication      (16)  (58)  (38)
Inventories      32   (12)  (1)
Trade and other receivables      (14)  (81)  (5)
Trade and other liabilities      103   82   80 
Retirement benefit obligations      (72)  (14)  (126)
Provisions for other liabilities and charges      (3)  (9)  3 
                 
Net cash generated from operations
      1,012   894   659 
                 
Net cash generated from operations
                 
  Notes 2006 2005 2004
         
    (All figures in £ millions)
Net profit      469   644   284 
Adjustments for:
                
Tax      19   125   70 
Depreciation  11   77   80   84 
Amortisation of purchased intangible assets  12   28   11   5 
Adjustment on recognition of pre-acquisition deferred tax  12   7    —   — 
Amortisation of other intangible assets  12   23   18   20 
Investment in pre-publication assets  17   (213)  (222)  (181)
Amortisation of pre-publication assets  17   210   192   168 
Loss on sale of property, plant and equipment      2    —   4 
Profit on sale of investments      —   —   (16)
Net finance costs      74   70   76 
Share of results of joint ventures and associates  13   (24)  (14)  (10)
(Profit)/loss on sale of subsidiaries and associates      —   (346)  3 
Net foreign exchange(losses)/gains from transactions      (37)  39   (15)
Share-based payment costs  24   25   23   25 
Inventories      (16)  (17)  (12)
Trade and other receivables      (60)  (4)  (18)
Trade and other liabilities      54   71   61 
Provisions      (17)  (17)  (24)
          
Cash generated from operations
      621   653   524 
          
      Following is translated at an exchange rate approximating to the rate at the date of cash flow. The difference between this rate and the average rate used to translate profit gives rise to a review of accounting presentationcurrency adjustment in 2006, the Group has chosen to reclassify investment in pre-publication assets asreconciliation between net profit and net cash generated from operations. This alignsadjustment reflects the classificationtiming difference between recognition of profit and the related cash receipts or payments.
Included in the cash flow with the treatment of comparable items in other industries and provides more relevant information on the Group cash flow. The impact of this change is to reducenet cash generated from operations by £222m in 2005 (£181m in 2004) and increase net cash (used in)/generated from investing activities by £222m in 2005 (£181m in 2004).is an amount of £nil (2008: £nil; 2007; £7m) relating to discontinued operations.

F-68

F-57

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
 
In the cash flow statement, proceeds from sale of property, plant and equipment comprise:
         
  2006 2005
     
  (All figures in
  £ millions)
Net book amount  10   3 
Loss on sale of property, plant and equipment  (2)  — 
       
Proceeds from sale of property, plant and equipment
  8   3 
       
 
             
  2009  2008  2007 
  All figures in £ millions 
 
Net book amount  3   3   15 
Loss on sale of property, plant and equipment  (2)  (1)  (1)
             
Proceeds from sale of property, plant and equipment
  1   2   14 
             
The principal other non-cash transactions are movements in finance lease obligations of £4m (2005: £nil)£8m (2008: £2m; 2007 £4m).
32  Contingencies
32.  Contingencies
There are contingent Group liabilities that arise in the normal course of business in respect of indemnities, warranties and guarantees in relation to former subsidiaries and in respect of guarantees in relation to subsidiaries and associates. In addition there are contingent liabilities of the Group in respect of legal claims. None of these claims isare expected to result in a material gain or loss to the Group.
33  Commitments
33.  Commitments
CapitalThere were no commitments
      Capital for capital expenditure contracted for at the balance sheet date but not yet incurred is as follows:incurred.
         
  2006 2005
     
  (All figures in
  £ millions)
Property, plant and equipment  —   1 
       
 
The Group leases various offices and warehouses under non-cancellable operating lease agreements. The leases have varying terms and renewal rights. The Group also leases various plant and equipment under operating lease agreements, also with varying terms. The lease expenditure charged to the income statement during the year is disclosed in note 5.4.
 
The future aggregate minimum lease payments in respect of operating leases are as follows:
         
  2006 2005
     
  (All figures in
  £ millions)
Not later than one year  123   132 
Later than one year and not later than two years  113   117 
Later than two years and not later than three years  103   108 
Later than three years and not later than four years  90   97 
Later than four years and not later than five years  83   81 
Later than five years  857   915 
       
   1,369   1,450 
       

F-58

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
         
  2009  2008 
  All figures in £ millions 
 
Not later than one year  153   149 
Later than one year and not later than two years  144   138 
Later than two years and not later than three years  129   129 
Later than three years and not later than four years  114   118 
Later than four years and not later than five years  99   108 
Later than five years  848   970 
         
   1,487   1,612 
         
34.  Related party transactions
34  Related party transactions
Joint ventures and associates — Amounts advanced to joint ventures and associates during the year and at the balance sheet date are set out in note 13.12. Amounts falling due from joint ventures and associates are set out in note 19.22.
 
Key management personnel — Key management personnel are deemed to be the members of the board of directors of Pearson plc. It is this board which has responsibility for planning, directing and controlling the activities of the Group. Key management personnel compensation is disclosed in the directors’ remuneration report.
 
There were no other material related party transactions.
 
No guarantees have been provided to related parties.
35  Events after the balance sheet date


F-69

      On 15 February 2007 the Group completed the disposal of Pearson Government Solutions, its Government services business, to Veritas Capital. Sale proceeds consist of $560m in cash, $40m in preferred stock and 10% of the equity of the business. The Group expects to make a post-tax loss on the disposal as the capital gain for tax purposes will exceed any book gain.

F-59

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3635.  Summary of principal differences between International Financial Reporting Standards and United States of America generally accepted accounting principlesEvents after the balance sheet date
 The accompanying consolidated financial statements have been prepared in accordance with EU-adopted International Financial Reporting Standards (“IFRS”), which differ in certain significant respects from generally accepted accounting principles in the United States of America (“US GAAP”). Such differences involve methods for measuring the amounts shown in the financial statements.
      The following is a summary of the adjustments to consolidated profit for the financial year and consolidated shareholders’ funds that would have been required in applying the significant differences between IFRS and US GAAP.
Reconciliation of consolidated profit for the financial year
                  
    Year ended December 31
     
  Note 2006 2005 2004
         
    £m £m £m
Profit for the financial year under IFRS
      446   624   262 
US GAAP adjustments:                
 Intangible amortization  (i)   (50)  (60)  (74)
 Discontinued operations  (iii)   (71)  —   (2)
 Leases  (v)   (5)  —   3 
 Disposal adjustments  (iv)   —   (119)  — 
 Pensions and other post-retirement benefits  (vi)   (19)  (26)  (23)
 Share-based payments  (vii)   —   (4)  (13)
 Derivative financial instruments  (viii)   (11)  (12)  (23)
 Acquisition adjustments  (xii)   (3)  1   — 
 Partnerships and associates  (x)   (1)  (2)  — 
 Minority interests  (xi)   1   2   — 
 Other      (2)  (9)  (1)
 Taxation effect of US GAAP adjustments  (xiv)   56   16   53 
             
Total US GAAP adjustments      (105)  (213)  (80)
             
Net income under US GAAP
      341   411   182 
             
Profit from continuing operations (less (benefit from)/charge for applicable taxes 2006: £(45)m, 2005: £100m, 2004: £2m)      398   164   153 
(Loss)/profit from discontinued operations (less charge for applicable taxes 2006: £8m; 2005: £8m, 2004: £15m)      (57)  8   29 
Profit on disposal of discontinued operations (less charge for applicable taxes 2006: £nil; 2005: £1m, 2004: £nil)      —   239   — 
             
Net income under US GAAP
      341   411   182 
             

F-60

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                 
    Year ended December 31
     
  Note 2006 2005 2004
         
Presentation of earnings per equity share under US GAAP
  (xiii)             
Earnings/(loss) per equity share      (p)  (p)  (p)
Basic:                
Continuing operations      49.9   20.5   19.2 
Discontinued operations      (7.2)  31.0   3.6 
             
Total      42.7   51.5   22.8 
             
Diluted:                
Continuing operations      49.8   20.5   19.2 
Discontinued operations      (7.2)  30.9   3.6 
             
Total      42.6   51.4   22.8 
             
Average shares outstanding (millions)      798.4   797.9   795.6 
Dilutive effect of stock options (millions)      1.5   1.1   1.1 
             
Average number of shares outstanding assuming dilution (millions)      799.9   799.0   796.7 
             
Reconciliation of consolidated shareholders’ funds
              
    Year ended
    December 31
     
  Note 2006 2005
       
    £m £m
Shareholders’ funds under IFRS
      3,476   3,564 
US GAAP adjustments:            
 Goodwill  (i)   76   81 
 Intangibles  (i),(ii)   158   231 
 Discontinued operations  (iii)   (64)  7 
 Leases  (v)   (5)  — 
 Pensions and other post-retirement benefits  (vi)   —   61 
 Derivative financial instruments  (viii)   5   15 
 Share-based payments  (vii)   (3)  — 
 Acquisition adjustments  (xii)   24   26 
 Partnerships and associates  (x)   9   15 
 Minority interests  (xi)   (26)  (30)
 Other      (8)  (6)
 Taxation effect of US GAAP adjustments  (xiv)   (61)  (126)
          
Total US GAAP adjustments      105   274 
          
Shareholders’ funds under US GAAP
      3,581   3,838 
          

F-61

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
      A summary of the principal differences and additional disclosures applicable toDuring January 2010, the Group are set out below:
(i) Goodwill and other intangibles
      Both IFRS and US GAAP require purchase consideration to be allocated to the net assets acquired at their fair value onannounced that Interactive Data was undertaking a preliminary review of strategic alternatives for its business. At the date of acquisition, withthis report, the difference between the consideration and the fair valueoutcome of the identifiable net assets recorded as goodwill.review is still uncertain.
 Goodwill is tested for impairment on an annual basis in accordance with IFRS
On 3‘Business Combinations’.
      For February 2010 the purposes of US GAAP, all goodwill written off against reserves before the transition to IFRS has been reinstated as an asset on the balance sheet. Prior to July 1, 2001, goodwill was amortized over its estimated useful life. In July 2001, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard (“FAS”) 142,“Goodwill and Other Intangible Assets”which required that goodwill no longer be amortized. SFAS 142 was effective for the Group on January 1, 2002. As a result, goodwill is no longer subject to amortization subsequent to the date of adoption, but is subject to the annual impairment testing provisions of FAS 142. Impairment reviews were performed and, consistent with IFRS, no reporting units were impaired.
      Under UK GAAP, before the transition to IFRS on January 1, 2003, intangible assets (other than goodwill) could only be recognized where they could be disposed of separately from the businesses to which they related. Consequently the Group did not recognize any acquired intangible assets other than goodwill prior to January 1, 2003. In accordance with IFRS 3, acquired intangible assets (such as publishing rights, customer relationships, technology and trademarks) in respect of acquisitions after January 1, 2003 have been capitalized and amortized over a range of estimated useful lives between 2 and 30 years. Under US GAAP, acquired intangible assets on all acquisitions have been capitalized and amortized. The identified intangibles have been valued based on independent appraisals and management evaluation and analysis.
      GAAP differences between IFRS and US GAAP arise from the following factors. In respect of acquisitions prior to January 1, 1998, goodwill has remained as a deduction to reserves under IFRS in accordance with the transition rules of IFRS 1 but has been capitalized under US GAAP. In respect of acquisitions between January 1, 1998 and December 31, 2002, no acquired intangible assets other than goodwill have been recognized under IFRS while they have been fully recognized under US GAAP. Amortization of goodwill ceased on December 31, 2001 under US GAAP but ceased a year later under IFRS. Also, contingent consideration is recognized as a cost of acquisition under IFRS, if it is probable that the contingent consideration will be paid and can be measured reliably. Under US GAAP, contingent consideration is only recognized when paid (see acquisition adjustments (xii) below).

F-62

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
      The movement of the US GAAP adjustments to goodwill and intangibles in the years ended December 31, 2006 and 2005 is as follows:
         
  Goodwill Intangible assets
     
  £m £m
Year ended December 31, 2004  129   267 
Foreign exchange differences  (9)  28 
Amortization  —   (60)
Net movement in deferred consideration  (39)  — 
Acquisitions  —   (4)
       
Year ended December 31, 2005  81   231 
       
Foreign exchange differences  1   (25)
Amortization  —   (50)
Net movement in deferred consideration  (4)  — 
Acquisitions  (2)  2 
       
Year ended December 31, 2006  76   158 
       
(ii) Pre-publication assets
      In accordance with IAS 1 ‘Presentation of Financial Statements’ the Group classifies its pre-publication assets as current intangibles under IFRS, as they are expected to be consumed within their normal identifiable operating cycle. Under IFRS an asset shall be disclosed as current when it is expected to be realized in, or is intended for sale or consumption in, the entity’s normal operating cycle, provided that the operating cycle is clearly identifiable. Where the operating cycle is not clearly identifiable its duration is assumed to be twelve months. Under US GAAP, these assets are classified as long-term assets, as the benefit will accrue to several future annual periods, in accordance with ARB 43 ‘Restatement & Revision of Accounting Research Bulletin (Working Capital)’. As a result of this difference in classification, non-current intangible assets are £402m higher under US GAAP in 2006 than under IFRS (2005: £426m higher) and current intangible assets under US GAAP are £nil for all periods presented.
      The Company determines a normal operating cycle under IFRS separately for each entity/ cash generating unit within the group with distinct economic characteristics. Each of its education businesses has an operating cycle which is clearly identifiable. The duration of the cycle is primarily based on the expected period over which the educational programs and titles will generate cash flows, and also takes account of the time it takes to produce the educational programs. The pre-publication assets are amortized from the date of first delivery of the program. The normal operating cycle commences when pre-publication activity starts and typically ends 5 years after the date of first delivery for the School, Higher Education and Professional segments, and 4 years after the date of first delivery for the Penguin segment.
      Under US GAAP, the Company’s investment in pre-publication assets has been classified as an investing activity, whereas under IFRS, investment in pre-publication assets has been classified as an operating activity. Consequently under US GAAP, net cash generated from operations, in respect of this item, is £213m higher in 2006 than under IFRS (£222m higher in 2005 and £181m higher in 2004) while the cash flow from investing activities in 2006 is £213m lower than under IFRS (£222m lower in 2005 and £181m lower in 2004).
(iii) Discontinued operations
      Discontinued operations comprise the differences between IFRS and US GAAP in respect of Pearson Government solutions for 2006, 2005 and 2004 and Recoletos for 2005 and 2004.

F-63

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
      The (loss)/profit before tax, assets and liabilities in respect of discontinued operations under US GAAP are as follows:
             
  2006 2005 2004
       
  £m £m £m
Total (loss)/profit before tax in respect of discontinued operations  (49)  17   49 
Assets in respect of discontinued operations  240   388   729 
Liabilities in respect of discontinued operations  (27)  (51)  (183)
      Under US GAAP, the Company has included the Cumulative Translation Adjustment (CTA) relating to the assets held for sale in relation to Government Solutions in its impairment analysis as required by EITF 01-05. As the resulting carrying value exceeds the fair value less cost to sell, the Group has recognized an impairment loss of £70m in its US GAAP income statement for the year ended December 31, 2006. The CTA will be released to net income upon the completion of the disposal of Government Solutions in 2007.
      Under IFRS, the Group has measured its assets and liabilities that have been classified as held for sale at the lower of its carrying amount and fair value less costs to sell. IFRS does not require the CTA to be included in the carrying value when assessing an asset held for disposal for impairment. As a result, there is no impairment loss recognized in the Group’s financial statements under IFRS in 2006.
(iv) Disposal adjustments
      In 2005 and 2004 gains and losses were recognized under IFRS on the disposal of a number of the Group’s businesses and assets. Adjustments made to reconcile US GAAP and IFRS have an effect on the net assets of these businesses and, accordingly, a corresponding impact on the gain or loss on disposal. There were no corresponding disposal adjustments in 2006.
      Under IFRS, goodwill previously written off to reserves, which has been grandfathered under the first time adoption provisions of IFRS 1, is not treated as part of the calculation of profit or loss on disposal when theFT Publishing business to which it relates is sold. This usually results in higher profits on disposal than under US GAAP, where the goodwill was capitalized and forms part of the calculation of profit or loss on disposal.
      Under both IFRS and US GAAP, it is necessary to factor into the disposal calculation any cumulative translation adjustment associated with the business. However, a GAAP difference arises on disposals of entities acquired before the adoption of IFRS as the translation reserve was reset to zero at the date of the adoption of IFRS in accordance with the transitional provisions in IFRS 1. Under US GAAP, the translation reserve runs from the date of acquisition.
      The reconciling items between IFRS and US GAAP in respect of disposals are summarized as follows:
             
  2006 2005 2004
       
  £m £m £m
Difference in carrying value on disposal  —   (86)  — 
Cumulative translation adjustment  —   (33)  — 
          
Total US GAAP differences in respect of disposals
  —   (119)  — 
          
(v) Leases
      During the year, the Group disposed of one of its properties in a sale and lease back transaction. The resulting lease qualifies under both IFRS and US GAAP as an operating lease. A GAAP difference arises as under US GAAP any gain that arises on the sale is deferred and spread over the remaining life of the lease. In accordance with IAS 17, the gain on disposal was recognized immediately in the income statement as the transaction was established at fair value.

F-64

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
     (vi) Pensions and other post-retirement benefits
      The Group operates defined benefit pension plans for its employees and former employees throughout the world. The largest defined benefit plan is a funded plan operated in the UK.
      In 2006, the Group adopted FAS 158 ‘Employers’ accounting for defined benefit pension and other post retirement plans’, this applies in conjunction with FAS 87 ‘Employers’ Accounting for Pensions’. FAS 87 has been applied during 2004 and 2005.
      Under IFRS, the expense of defined benefit pension plan and other post-retirement benefits is charged to the income statement as an operating expense over the periods benefiting from the employee’s services. The charge is based on actuarial assumptions reflecting market conditions at the beginning of the financial year.
      Under IAS 19, the Group has recognized a pension obligation representing the excess of the defined benefit obligation over the fair value of assets as at December 31, 2005 and December 31, 2006. Actuarial gains and losses, i.e. the difference between the expected development of the assets and liabilities and the actual development, are recognized immediately through the statement of recognized income and expenses.
      Under both FAS 158 and FAS 87, in addition to the pension expense items recognized under IFRS, actuarial gains and losses in excess of the corridor are recognized over the average remaining service life of employees. However, the unrecognized amount attributable to actuarial gains and losses falling within a 10% corridor (i.e. 10% of the greater of the market value of the plan assets or plan liabilities) is deferred and not spread. Under US GAAP this results in an £19m increase in the pension charge in 2006 (2005: £26m; 2004: £23m).
      Under FAS 87, the accrual or prepayment recognized in the balance sheet in respect of pensions represents the cumulative income statement charges net of contributions to the scheme since transition to the standard. In addition to this amount, FAS 87 requires that an additional minimum liability is recorded for any plan where the accumulated benefit obligation exceeds the fair value of the plan assets by an amount greater than the liability recognized in the balance sheet.
      Under FAS 158, the provision or surplus recognized on the balance sheet represents the difference between the fair value of plan assets and the projected benefit obligation.
      The adoption of FAS 158 resulted in the recognition of a pension obligation representing the excess of the defined benefit obligation over the fair value of assets. The effect was an increase in the pension liability under US GAAP of £44m. At December 31, 2006 there is no difference between the pension liabilities under IFRS and US GAAP. For the year ended December 31, 2005 the Group had recognized prepaid pension costs amounting to £57m and a minimum pension liability of £298m in respect of pensions and accrued pension costs amounting to £49m in respect of post-retirement benefit plans in line with FAS 87.
     (vii) Share-based payments
      Under both IFRS and US GAAP, the share-based payment charge is determined based on the fair value of the award at the grant date and is spread over the vesting period.
      Under both IFRS and US GAAP, the fair value of awards is determined at the date of grant using whichever of the Black-Scholes, Binomial and Monte Carlo model is most appropriate to the award. These models require assumptions to be made regarding share price volatility, dividend yield, risk-free rate of return and expected option lives.
      The Group adopted FAS 123(R) as at January 1, 2006 using the ‘Modified Prospective Application’ transition method. In 2006, differences between US GAAP and IFRS relate to the treatment of dual-indexed awards which are considered equity-settled under IFRS. Under US GAAP these awards are classified as liabilities and revalued to their fair value at each balance sheet date. On adoption the Group reclassified £1.2m relating to dual-indexed awards from equity to liabilities and revalued them. The revaluation of these awards

F-65

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
on adoption and at year-end resulted in an increase of the share-based payment charge by £1m. This increase was offset by differences in the IFRS and US GAAP charge due to the different treatment of forfeitures in prior years.
      In 2005, differences between the US GAAP and IFRS charge were mainly due to the different treatment of options with graded vesting features. Under IFRS the charge is recognized as the options gradually vest, whereas under US GAAP the charge is recognized on a straight-line basis over the vesting period resulting in an additional cost of £5m (2004: £13m). The remainder of the adjustment in 2005 relates to the treatment of forfeitures.
      Differences also arise between US GAAP and IFRS on the calculation of deferred tax on share-based payments. Whereas under IFRS the deferred tax benefit is calculated based on the intrinsic value of the option/share at the balance sheet date, FAS 123(R) requires the tax benefit to be calculated based on the compensation expense recognized during the year.
     (viii) Derivative financial instruments
      Prior to the adoption of IAS 39‘Financial Instruments: Recognition and Measurement’ on January 1, 2005, the Group’s derivatives were recorded as hedging instruments. Amounts payable or receivable in respect of interest rate swaps were accrued with net interest payable over the period of the contract. Unrealized gains and losses on currency swaps and forward currency contracts were deferred and recognized when paid. Following the adoption of IAS 39, derivatives are required to be recognized at fair value using market prices or established estimation techniques such as discounted cash flow or option valuation models.
      For both IFRS and US GAAP, the Group designates certain of the derivative financial instruments in its portfolio to be hedges of the fair value of its bonds (fair value hedges) or hedges of net investment in foreign operations (net investment hedges). Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with the change in fair value of the hedged assets or liability attributable to the hedged risk. The effective portion of changes in the fair value of derivatives that are designated and qualify as net investment hedges are recognized in equity. Gains and losses accumulated in equity are included in the income statement when the corresponding foreign operation is disposed of. Gains or losses relating to the ineffective portion are recognized immediately in the income statement. Changes in the fair value of derivatives not in hedging relationships are recognized in the income statement.
      Under US GAAP, certain of the Group’s financial instruments met the designation and testing requirements for hedge accounting from January 1, 2004. Under IFRS, hedge accounting has only been available from the date of adoption of IAS 39, on January 1, 2005. This additional year of hedge accounting under US GAAP gives rise to a difference between IFRS and US GAAP in respect of shareholders’ funds.
      On adoption of IAS 39 on January 1, 2005, certain of the Group’s derivative financial instruments were deemed to be in fair value hedging relationships for the purposes of calculating the transition adjustment. The Group has elected not to designate all of these derivatives as hedges on an ongoing basis. In this circumstance, the transitional adjustment to the carrying value of those bonds deemed to be in fair value hedging relationships is being amortized over the life of the corresponding derivative financial instrument. This gives rise to a difference between IFRS and US GAAP, as this amortization is included in the income statement under IFRS with no corresponding entry under US GAAP.
     (ix) Revenue recognition
      The Group recharges some of its freight revenue to its customers. As this income is incidental to the Group’s main revenue generating business, this income is classified as other income under IFRS as disclosed in note 5 to these financial statements. Under US GAAP freight recharges should be recognized as revenue in accordance with EITF 00-10 ‘Accounting for Shipping and Handling Fees and Costs’. The Group has also

F-66

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
reclassified distribution and subrights income to revenue for all years presented. This resulted in an increase in sales under US GAAP of £94m in 2006 (2005: £84m; 2004: £83m).
     (x) Partnerships and associates
      There is no difference between IFRS and US GAAP in the accounting for partnerships and associates. However, the accounts of partnerships and associates must be adjusted from IFRS to US GAAP, which has an impact on the results of the partnerships and associates, as well as the carrying value of the investment in these entities. Principal differences identified with respect to the Group’s investments in partnerships and associates include: historic goodwill, pensions and derivatives.
(xi) Minority interests
      Under IFRS, when less than 100% of a subsidiary has been acquired, minority interest in a business combination is stated at the minority’s proportion of the net fair value of acquired assets, liabilities and contingent liabilities assumed. Under US GAAP, the minority interest is valued at historical book value. In the years ended December 31, 2006, 2005 and 2004, there was no difference between IFRS and US GAAP in the recognition of minority interest. In all years, minority interests represent the minority share of US GAAP adjustments.
      Under IFRS, minority interest is classified as a component of shareholders’ equity. Under US GAAP, minority interest is classified outside of equity.
(xii) Acquisition adjustments
      Under US GAAP, consideration related toannounced the acquisition of businesses contingent onMedley Global Advisors LLC, a future event such as achieving specific earnings levels in future periods, that is treated as additional purchase price is recorded only when the specified conditions are met and the consideration determinable, in accordance withSFAS 141 “Business Combinations.”Consideration relatedpremier provider of macro policy intelligence to the acquisition of a business contingent on a future event that is treated as compensation expense is recorded over the period in which the compensation is earned. Under IFRS, contingent consideration is treated as part of the purchase price on the date of acquisition, if it is probable that the contingent consideration will be paidworld’s top investment banks, hedge funds and can be measured reliably.asset managers for $15.5m.
(xiii) Presentation of earnings per equity share
      Under US GAAP an entity must present basic and diluted EPS for discontinued operations or the cumulative effect of an accounting change. Accordingly, the Group has presented EPS for income from continuing operations, discontinued operations and net income.
(xiv) Deferred taxation
      Under IFRS, IAS 12“Income Taxes”, deferred tax is recognized if it is probable that sufficient taxable profit is available against which the temporary difference can be utilized. Under US GAAP, deferred tax is recognized in full but then reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized.

F-67

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)SIGNATURES
 The reconciling items in 2006, 2005 and 2004 reflect the impact of recording the full provision and deferred tax assets, net of valuation allowance, and are summarized below:
                     
  Income Equity Income Equity Income
  2006 2006 2005 2005 2004
           
  £m £m £m £m £m
Tax effect of GAAP adjustments on:
                    
Goodwill and intangible amortization  20   (94)  18   (121)  17 
Derivative financial instruments  3   (1)  3   (5)  38 
Options, pensions, disposals and other adjustments  33   34   (6)  —   (2)
                
Total taxation effect of US GAAP adjustments
  56   (61)  15   (126)  53 
                
      Income tax adjustments on the GAAP differences on goodwill and intangible amortization are calculated by reference to each specific acquisition. These adjustments arise on tax deductible goodwill and intangibles primarily on acquisitions prior to January 1, 2003 where intangibles have been recognized under US GAAP which have not been recognized under IFRS. The net effect of the adjustments is to recognize a smaller deferred tax liability under US GAAP.
      Adjustments to the deferred tax on derivatives are provided on the gross adjustment to the value of the derivatives at the balance sheet date with the movement on the tax adjustment shown as a reconciling item in the profit and loss account.
      Valuation allowances have previously been recognized in respect of the tax losses carried forward. Following a review of the tax position in the US and the likely utilization of operating losses, the Group has released its valuation allowance in respect of the deferred tax asset relating to its US share-based payment plans amounting to £38m in 2006. These plans are not in the money and, consequently, a deferred tax asset has not been recognized in line with IAS 12. FAS 123(R) only permits a valuation allowance where there are insufficient future taxable profits to utilize the reversal of the temporary difference.
Other disclosures required by US GAAP
     Consolidation
      The consolidated financial statements include the accounts of the Group and majority-owned and controlled subsidiaries. Under IFRS, the investments in companies in which the Group is unable to exercise control but has the ability to exercise significant influence over operating and financial policies are accounted for by the equity method, which is consistent with the equity method under US GAAP. Accordingly, the Group’s share of the net earnings of these companies is included in the consolidated profit and loss. The investments in other companies are carried at cost. Inter-company accounts and transactions are eliminated upon consolidation.
      The Group consolidates variable interest entities where we are deemed to be the primary beneficiary of the entity. Operating results for variable interest entities in which we are deemed the primary beneficiary are included in the profit and loss account from the date such determination is made.
     Use of estimates
      Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Accounting estimates have been used in these financial statements to determine reported amounts, including realizability, useful lives of tangible and intangible assets, income taxes and other items. Actual results could differ from those estimates.

F-68

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
     U.S. Accounting Pronouncements
      In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an Interpretation of FASB Statement No. 109. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006 with the cumulative effect of a change in accounting principle recorded as an adjustment to opening retained earnings. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this standard. FIN 48 requires that the Group recognizes in the financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognizing, classification, interest and penalties, accounting in interim periods, disclosure, and transition attributable to the tax position. Management is currently assessing the impact of FIN 48 on the Group.
International Accounting Pronouncements
      IFRS 7 ‘Financial Instruments: Disclosures’ (effective from January 1, 2007). IFRS 7 introduces new disclosures of qualitative and quantitative information about exposure to risks arising from financial instruments, including specific minimum disclosures about credit risk, liquidity risk and market risk. Management is currently assessing the impact of IFRS 7 on the Group’s financial statements.
      A complementary amendment to IAS 1 ‘Presentation of Financial Statements — Capital Disclosures’ (effective from 1 January 2007). The amendment to IAS 1 introduces disclosures about the level and the management of the capital of an entity. Management is currently assessing the impact of the complementary amendment to IAS 1 on the Group’s financial statements
      IFRS 8 ‘Operating Segments’ (effective January 1, 2009). IFRS 8 requires an entity to adopt the ‘management approach’ to reporting on the financial performance of its operating segments, revise explanations of the basis on which the segment information is prepared and provide reconciliations to the amounts recognized in the income statement and balance sheet. Management is currently assessing the impact of IFRS 8 on the Group’s financial statements.
      IFRIC 8 ‘Scope of IFRS 2’ (effective for annual periods beginning on or after May 1, 2006). IFRIC 8 requires consideration of transactions involving the issuance of equity instruments — where the identifiable consideration received is less than the fair value of the equity instruments issued — to establish whether or not they fall within the scope of IFRS 2. The Group will apply IFRIC 8 from January 1, 2007, but it is not expected to have any impact on the Group’s accounts.
      IFRIC 10 ‘Interim Financial Reporting and Impairment’ (effective for annual periods beginning on or after November 1, 2006). IFRIC 10 prohibits impairment losses recognized in an interim period on goodwill, investments in equity instruments and investments in financial assets carried at cost to be reversed at a subsequent balance sheet date. The Group will apply IFRIC 10 from January 1, 2007 but it is not expected to have a significant impact on the Group’s accounts.
      IFRIC 7 ‘Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies’ (effective for annual reporting periods beginning on or after March 1, 2006). IFRIC 7 provides guidance on how to apply the requirements of IAS 29 in a reporting period in which an entity identifies the existence of hyperinflation in the economy of its functional currency, when the economy was not hyperinflationary in the prior period. As none of the Group entities have a currency of a hyperinflationary economy as their functional currency, IFRIC 7 is not relevant to the Group’s operations.
      IFRIC 9 ‘Reassessment of Embedded Derivatives’ (effective for annual periods beginning on or after June 1, 2006). IFRIC 9 requires an entity to assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. The Group does not expect IFRIC 9 to have a material impact.

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SIGNATURES
The registrant hereby certifies that it meets the requirements for filing onForm 20-F and that it has caused and authorized the undersigned to sign this annual report on its behalf.
Pearson plc
/s/ Robin Freestone
Robin Freestone
Chief Financial Officer
Pearson plc
/s/   Robin Freestone
Robin Freestone
Chief Financial Officer
Date: April 30, 2007March 31, 2009


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