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 in~~IFRS 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,~~$1.46, 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, 2008, the last business day of ~~2006.~~2008. 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, 2007~~February 28, 2009 the noon buying rate for sterling was £1.00 = ~~$1.97.~~$1.43.

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,


	•	currency risk,

	•	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.

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 tables below ~~show~~shows 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, 2005~~2008, 2007 and ~~2004~~2006 and the selected consolidated balance sheet data as at December 31, ~~2006~~2008 and ~~2005~~2007 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 ~~2006~~2008 amounts into US dollars at the rate of £1.00 = ~~$1.96,~~$1.46, 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, 2008.


	Year Ended December 31
	2008			2008			2007			2006			2005			2004
	$			£			£			£			£			£
	(In millions, except for per share amounts)

IFRS information:
Consolidated Income Statement data
Total sales		7,024			4,811			4,162			3,990			3,662			3,340
Total operating profit		987			676			574			522			497			359
Profit after taxation from continuing operations		603			413			337			444			319			232
Profit for the financial year		472			323			310			469			644			284
Consolidated Earnings data per share
Basic earnings per equity share(1)	$	0.53			36.6p			35.6p			55.9p			78.2p			32.9p
Diluted earnings per equity share(2)	$	0.53			36.6p			35.6p			55.8p			78.1p			32.9p
Basic earnings from continuing operations per equity share(1)	$	0.70			47.9p			39.0p			52.7p			37.5p			26.4p
Diluted earnings from continuing operations per equity share(2)	$	0.70			47.9p			39.0p			52.6p			37.4p			26.3p
Dividends per ordinary share	$	0.49			33.8p			31.6p			29.3p			27.0p			25.4p
Consolidated Balance Sheet data at
period end
Total assets (non-current assets plus current assets)		14,448			9,896			7,292			7,213			7,600			6,578
Net assets		7,335			5,024			3,874			3,644			3,733			3,014
Long-term obligations(3)		(4,237	)		(2,902	)		(1,681	)		(1,853	)		(2,500	)		(2,403	)
Capital stock		295			202			202			202			201			201
Number of equity shares outstanding (millions of ordinary shares)		809			809			808			806			804			803

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 55.9 p 78.2 p 32.9 p 31.7 p
Diluted earnings per equity share(5) $1.09 55.8 p 78.1 p 32.9 p 31.7 p
Dividends per ordinary share $0.57 29.3 p 27.0 p 25.4 p 24.2 p
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 42.7 p 51.5 p 22.8 p 21.8 p 23.7 p
Diluted earnings per equity share(5) $ 0.83 42.6 p 51.4 p 22.8 p 21.8 p 23.7 p
Basic earnings from continuing operations per equity
Share(1)(4) $ 0.98 49.9 p 20.5 p 19.2 p 20.0 p 23.5 p
Diluted earnings from continuing operations per equity Shares(3)(5) $ 0.97 49.8 p 20.5 p 19.2 p 20.0 p 23.5 p
Basic (loss)/earnings per share from discontinued operations(3)(4) $ (0.14 ) (7.2 )p 31.0 p 3.6 p 1.8 p 2.9 p
Diluted (loss)/earnings per share from discontinued operations(3)(5) $ (0.14 ) (7.2 )p 30.9 p 3.6 p 1.8 p 2.9 p
Dividends per ordinary share $ 0.57 29.3 p 27.0 p 25.4 p 24.2 p 22.7 p

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/loss~~profit 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 to~~	The results of the ~~consolidated financial statements~~Data 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 ~~presented~~presented. The results of Government Solutions (disposed in February 2007) and Les Echos (disposed in December 2007) have been ~~revised~~included 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. ~~The~~Our board of directors normally declares an interim dividend in July or August of each year to be paid in September or October. ~~The~~Our 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 ~~the~~our annual general meeting on ~~April 27, 2007~~May 1, 2009 our shareholders ~~approved~~will be asked to approve a final dividend of ~~18.8p~~22.0p per ordinary share for the year ended December 31, ~~2006.~~2008.

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 city of New York on each of the respective payment dates for interim and final dividends. The final dividend for the ~~2006~~2008 fiscal year will be paid on May ~~11, 2007.~~8, 2009.

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)

2008		11.8		22.0		33.8		21.6		32.1	*		53.7	**
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
2004		9.7		15.7		25.4		17.4		26.4			43.8


*		As the 2008 final dividend had not been paid by the filing date, the dividend was translated into cents using the noon buying rate for sterling at December 31, 2008.

**		The US dollar values for dividends paid are translated at actual rates on the date paid. In the prior table of selected consolidated financial data, the US dollar dividends per ordinary share are translated at the noon rate on December 31, 2008. The difference between the two amounts is due to the differing exchange rates on the date of payment of the interim dividend and December 31, 2008.

Future dividends will be dependent on our future earnings, financial condition and cash flow, as well as other factors affecting the Group.

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 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, 2008 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 = $1.46. On February 28, 2009 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.~~$1.43.

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 2009	$	1.49	$	1.42
January 2009	$	1.53	$	1.37
December 2008	$	1.55	$	1.44
November 2008	$	1.62	$	1.48
October 2008	$	1.78	$	1.55
September 2008	$	1.86	$	1.75


Year Ended December 31	Average rate

2008	$	1.84
2007	$	2.01
2006	$	1.84
2005	$	1.81
2004	$	1.83

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.

With the rapid deterioration in the global economic environment during 2008, there is an increased risk of a further weakening in trading conditions in 2009 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 unable 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 it 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 assured.

Our US educational textbook and assessment businesses may be adversely 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 federal and state level), and/or changes in the state procurement process.

The results and growth of our US educational textbook and assessment business is dependent on the level of federal 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. Federal economic stimulus packages may provide additional educational funding to compensate for budget shortfalls at the state level.

Federaland/or state legislative changes can also affect the funding available for educational expenditure. 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.

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 revenue, 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.

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, 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.

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, online retailers, 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 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. The economic slowdown has increased these risks in the short term.

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.

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 be sure that our proprietary rights will not be challenged, invalidated or circumvented. Our intellectual property rights in countries such as the US and UK, jurisdictions covering the largest proportion of our

~~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, 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 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 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.~~preliminary settlements of a class action lawsuit brought against Google by the Authors Guild, and ~~Pearson Education have joined three other major US publishers in~~ a ~~suit~~companion lawsuit brought under the auspices of the Association of American Publishers, ~~to challenge~~which challenged 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 fromof the copyright ~~proprietors, and may give publishers and authors more control over online users~~owners, were reached in October 2008. Subject to a final court approval of ~~their intellectual property. If~~ the ~~lawsuit is unsuccessful, publishers and authors may be unable~~class action settlement, now scheduled for June 2009, the settlement would allow copyright owners of books covered by it to control ~~copying~~the online display of ~~their content for purposes~~those books by Google, with a sharing of ~~online searching, which could have an adverse impact on our business and financial performance.~~


	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 textbook and testing business is dependent on the level of US and state educational funding, which in turn is dependent on the robustness of state finances and the level of funding allocated to educational programs. Federal and/or state legislative changes can also affect the funding available for educational expenditure, e.g. the No Child Left Behind Act.revenues derived from that display.

~~Similarly changes~~

We operate 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~~a highly competitive environment that 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.

~~Changes in consumer purchasing habits, as readers look~~subject to alternative sources and/or providers of information, such as the internet and other digital formats, may change the way we distribute our content. We might see a decline in print circulation in our more mature markets as readership habitsrapid change and ~~readers migrate online, although~~ we ~~see further opportunities for growth in our less mature markets outside Europe. If the migration of readers~~must continue to ~~new digital formats occurs more quickly than we expect, this is likely~~invest and adapt to ~~affect print advertising spend by our customers, adversely affecting our profitability.~~remain competitive.

Our newspaper businesses are highly geared and remain dependent on advertising revenue; relatively small changes in revenue, positive 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.


	*~~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, both 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.

Several of these businesses are dependent on either single 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 testing could have a significant impact 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 all operate in highly competitive ~~markets. These~~ markets, which are constantly ~~change~~changing in response to competition, technological innovations and other factors. ~~To remain competitive~~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 ~~continue~~do not adapt rapidly to ~~invest in our authors, products, services and people. There is no guarantee that~~ these ~~investments will generate~~changes we may lose business to ‘faster’ more ‘agile’ competitors, who increasingly are non-traditional competitors, making their identification all 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.~~more difficult.

~~Specific~~

Illustrations of the competitive threats we face at present include:


	•—	Students seeking cheaper sources of content, e.g. ~~on-line,~~online discounters, file sharing, use of pirated copies, used books or re-imported ~~textbooks.~~textbooks, causing us to lose sales and putting downward pressure on textbook prices in our major markets.

	•—	Competition from major publishers and other educational material and service providers, including not for profit organizations, in our US educational textbook and ~~testing~~assessment businesses.

	•—	~~Penguin — Authors’~~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~~ FT: we face competitive threats both from large media players and from smaller businesses, online portals and news redistributors operating in the digital arena and providing alternative sources of news and information.

	—	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,~~

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 ~~internet, used books, combined with~~USA and the ~~concentration~~UK. A service failure caused by a breakdown in our testing and assessment processes could lead to a mis-grading of ~~retailer power pose multiple threats (and opportunities)~~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 ~~traditional consumer publishing models, potentially impacting both sales volumes and pricing.~~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.

~~Penguin’s~~

In December 2008, the Qualifications and Curriculum Authority awarded Edexcel the 2009 National Curriculum Test (NCT) contract following the termination of the previous contractor who underperformed in delivering the 2008 NCT exams. This is a one year contract for marking Key Stage 2 tests for 2009 only. There is significant reputational risk to Pearson, should Edexcel fail to deliver on this contract. Given the 2008 problems, there will be intense government and media scrutiny of Edexcel’s performance. Furthermore, as the contract was only awarded in late 2008, there is limited time to set up and deliver the required marking services.

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 ~~performance can also~~results, growth prospects and/or reputation may be ~~negatively~~adversely affected if ~~book return rates increase above historical average levels. Similarly,~~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 ~~bankruptcy~~bidding process,start-up, operational performance and contract compliance (including penalty clauses) which could adversely affect our financial 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 testing business, any change in UK Government policy to examination marking — for example, introduction of new qualifications — could have a ~~major retail customer would disrupt short-term product supply to the market as well as result~~significant impact on our present business model.

We operate in ~~a large debt write off.~~markets which are dependent on Information Technology (IT) systems and technological change.


	*~~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 information technology. We either provide softwareand/or internet services to our customers or we use complex ~~information technology~~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 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.~~*

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, ~~third-party print sites,~~ data centers and large office ~~facilities.~~facilities as well as relationships with third party print sites. We have also outsourced some support functions, including IT, to third party providers. Failure to recover from a major disaster, ~~e.g.~~(e.g. fire, flood ~~etc,~~etc) at a key facility or the disruption of supply from a key ~~third-party~~third party vendor or partner (e.g. due to bankruptcy) could restrict our ability to service our customers. Similarly external threats, such as ~~Avian Flu,~~a flu pandemic, terrorist attacks, strikes, weather etc, could all affect our business and employees, disrupting our daily business activities.

~~We have developed business continuity arrangements, including IT disaster recovery plans, to minimize any business disruption in the event of a~~

A major disaster. However, despite regular updates and testing of these plans there is no guarantee that our financial performance will not be adversely affected in the event of a major disaster and/or external threatdata 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. ~~Insurance coverage~~

Investment returns outside our traditional core US and UK markets may ~~minimize any losses in certain circumstances.~~be lower than anticipated.


	*~~Investment returns outside our traditional core US and UK markets may be lower than anticipated.~~*

To ~~minimize dependence~~take advantage of international growth opportunities and to reduce our reliance on our core US and UK markets ~~particularly the US,~~ we are ~~seeking growth opportunities outside these~~increasing our investments in a number of emerging markets, ~~building on our existing substantial international presence. Certain markets we may target for growth~~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 ~~non-traditional~~ markets.


	*~~Our reported earnings and cash flows may be adversely affected by changes in our pension costs and funding requirements.~~*

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 2007/08 we made two relatively large acquisitions, i.e. Harcourt Assessment and Harcourt Education International for $950m and eCollege for $491m.

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.

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 volatile capital markets, 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~~

A full valuation of our UK defined benefit pension plan ~~has been completed and future funding arrangements have been agreed between the Company and the pension fund Trustee. Additional payments~~

~~amounting to £100m~~ will be carried out during 2009. Any additional funding requirements will be evaluated on completion of this actuarial review and any additional contributions required are unlikely to be made by the Company in 2007. We review these arrangements every three years and are confident that the pension funding plans are sufficient to meet future liabilities without unduly affecting the development of the Company.until 2010.

~~Social, environmental and ethical risk~~

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;~~

	•	~~Ethical business behavior;~~

	•	~~Compliance with UN Global Compact principles on labor standards, human rights, environment and anti-corruption;~~

	•	~~Environmental impact;~~

	•	~~People;~~

	•	~~Data privacy.~~


	*~~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:~~


	•	~~Changes in corporate tax rates and/or other relevant tax laws in the UK and/or the US could have a material impact on our future reported tax rate and/or our future tax payments.~~

	•	A material shortfall in profits of our US businesses below the level projected 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.

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.

As with any international business our earnings can be materially affected by exchange rate movements. We are particularly exposed to movements in the US dollar to sterling exchange rate as approximately ~~65%~~60% of our revenue is generated in US dollars. ~~We estimate that if 2005~~Sales for 2008, translated at 2007 average rates, ~~had prevailed in 2006, sales for 2006~~ would have been ~~£44m~~£4,491m or ~~1% higher.~~ 7% lower.

This is ~~predominantly~~primarily 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~~approximately 60% of its sales in the US and each ~~five cent~~5¢ change in the average £:$ exchange rate for the full year (which in ~~2006~~2008 was £1:$~~1.84 and in 2005 was £1:$1.81)~~1.85) would have an impact of approximately 1p on adjusted earnings per ~~share. We estimate that a five cent change in the closing exchange rate between the US dollar~~share and ~~sterling in any year could~~ affect ~~our~~ shareholders’ funds by approximately ~~£85m.~~£100m.

~~ITEM 4.~~ ~~INFORMATION ON THE COMPANY~~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 rateand/or our future tax payments.


ITEM 4.	*INFORMATION ON THE COMPANY*

Pearson

Pearson is ~~a global publishing~~an 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,

including books, newspapers and ~~internet~~online 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 (59% of sales) and Europe (25% 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, supplementary~~company, providing educational materials, technologies, assessments and ~~electronic education programs for~~related services 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 Group~~ages. It is also a leading provider of ~~international~~electronic learning programmes and of test development, processing and scoring services to educational institutions, corporations and professional bodies around the world. In 2008, 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 comprises~~online, to the ~~following operating segments:~~international business community. It has two major parts:


	•	FT Publishing ~~— publisher of~~includes 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 of~~provides specialist financial ~~and business information~~data to financial institutions and retail investors. Pearson owns a 62% 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.~~most famous brands in book publishing. We publish the works of many authors in an extensive portfolio of fiction, non-fiction and reference ~~and illustrated works~~titles 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~~set out to become the world’s leading ‘education’ company. Our objective is to help people make progress in ~~the broadest sense of the word; companies that educate, inform~~their lives through more knowledge — to help them ‘live 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.learn’.

Our goal is to produce ~~sustainable~~consistent growth on ~~our~~ three key financial measures — adjusted earnings per share, cash flow and return on invested capital — which we believe those are, together, good indicators that we are building ~~the~~ long-term value of Pearson.

~~We do~~

To achieve this ~~by investing consistently in~~goal, our strategy has four ~~areas, which are~~parts, common to all our businesses:


	•	Content: We invest steadily in unique ~~valuable~~ publishing ~~content~~of stories, lessons and information and keep replenishing it. ~~Over the past five years, for example, we have invested $1.6bn in new content in our education business alone.~~

	•	Technology and services: Content alone is not enough, and to make our content more useful and enticing, we often add technology. 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 in~~now receive about a third of our annual sales from ~~technology~~technology-based products and ~~services, and our testing and assessment businesses, serving school students and professionals, made more than $1bn of sales, up from around $200m seven years ago.~~


		services, and these are many of our fastest-growing businesses. Digital services of one kind or another are fundamental to every part of Pearson today.


	•	International markets: Though we currently generate ~~two-thirds~~approximately 60% of our sales in the US, our brands, content and ~~technology-plus-services models work around the world.~~technology travel well. All parts of Pearson operate in most developed markets and we are also investing in selected emerging markets, where the demand for information and education is growing particularly fast. Our ‘international’ (meaning ‘outside North America’) education business, for example, has almost doubled its sales over the past five years. Five years ago, it accounted for 8% of Pearson’s profits; today it is approaching 20%.

	•	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~~centralised 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 operating profit margins from ~~9.9%~~10.6% to ~~13.4%~~15.8% and reduced average working capital as a percentage of sales ~~in Pearson Education and Penguin~~ from ~~30.7%~~29.4% to ~~26.3%~~26.1%, freeing up cash for further investment.

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, Higher~~segments: North American Education, International Education, and Professional. In ~~2006,~~2008, Pearson Education had sales of ~~£2,591m~~£3,112m or ~~63%~~65% (63% in 2007) of Pearson’s ~~total sales (2005: 62%)~~total. Of these, approximately 60% were generated in North America and ~~contributed 68% (2005: 63%) to~~approximately 40% in the rest of the world. Pearson Education generated 60% 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-thirds~~The major customers of ~~its sales in the US.~~

~~In the US, we publish~~this business are state education boards and local school districts. The business publishes high quality curriculum ~~programs~~programmes for school students, ~~covering subjects such as reading, literature, maths, science~~at both elementary and ~~social studies. We publish~~secondary level, under a ~~range~~number of ~~well-known~~ imprints ~~that include~~including Scott Foresman ~~in the elementary school market~~ and Prentice ~~Hall in secondary.~~ Hall.

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 recently acquired Harcourt Assessment business. We are also ~~the~~a 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~~text books 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

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~~

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 sales~~countries. 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. We bolstered our position further in international markets through the ~~US.~~ recent acquisition of the Harcourt Education International business.

Outside ~~the US, we adapt~~North America, our International higher education business adapts our textbooks and technology services for individual markets, and we have a growing local publishing ~~program. Our~~program, 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.

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 include~~business 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 Financial Times and Wharton School Publishing (for the business education market). ~~We have a fast-growing Professional Testing~~

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 Dealers~~Financial 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 reclassified~~2008 compared to ~~non-current assets held for sale in the Group’s Consolidated Balance Sheet as at~~year ended December 31, ~~2006.~~2007 — Sales and operating profit by division — Professional” for a discussion of developments during 2008 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,~~2008, the FT Group had sales of ~~£698m,~~£796m, or ~~17%~~16% of Pearson’s total sales ~~(2005: 17%)~~(16% in 2007), and contributed ~~21%~~26% of Pearson’s operating ~~profit (2005: 25%).~~profit.

It has two major parts: FT Publishing, ~~our network~~a combination of ~~international~~theFinancial Times, FT.com website, and ~~national business newspapers~~a portfolio of financial magazines and online ~~services;~~financial information companies; and Interactive Data, ~~Corporation,~~ our 62%-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 circulation~~main sources of ~~430,469 copies in December 2006, as reported by the Audit Bureau of Circulation, is split as follows:~~


~~United Kingdom/ Republic of Ireland~~	31	%
~~Continental Europe~~	27	%
~~Americas~~	31	%
~~Asia~~	9	%
~~Rest of the World~~	2	%

~~In 2006, approximately 70%~~revenue are from sales of the ~~FT’s revenues were generated through advertising.~~newspaper, advertising and conferences. The ~~FT also~~Financial Timesis complemented by FT.com which sells content and advertising online, ~~through FT.com. FT.com~~and which charges subscribers for detailed industry news, comment and analysis, while providing general news and market data to a wider audience. The new FT.com access model was successfully introduced in 2007 and is based on frequency of use and is intended to drive usage and accelerate advertising growth, while providing greater value and services to its premium paying customers.

~~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 ~~Banker~~Banker.; ~~Les Echos~~~~, France’s leading business newspaper, and a number of joint ventures and associates in business publishing.~~

~~In August 2006, the Financial Times acquired~~

Mergermarket, anour online financial data and intelligence ~~provider. The acquisition strengthens the~~provider, provides early stage proprietary intelligence to financial institutions and corporates. Its key products includeMergermarket,Debtwire,dealReporter,WealthmonitorandPharmawire(which was launched in 2007).

See “Item 5 Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2008 compared to year ended December 31, 2007 — 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 characteristics~~discussion of developments during 2008 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, evaluations~~customers 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% of Interactive ~~Data Corporation;~~Data; the remaining 38% is publicly ~~traded.~~traded on the NYSE (for more information see NYSE:IDC).


	~~Recoletos~~

~~On April 8, 2005, the Group~~

Les Echos

The sale of Les Echos to LVMH for €240m (£174m) was completed ~~the sale to Retos Catera S.A. of our 79% stake~~ in ~~Recoletos, a publicly quoted Spanish media Group, for gross proceeds of~~€~~743m. Net cash proceeds of £371m were received resulting in a profit on disposal of £306m.~~December 2007.


	~~Joint Ventures and Associates~~

Joint Ventures and Associates

~~As at 2006 year-end, the~~

The FT Group also ~~had~~has 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 in~~~~FT 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 in~~~~Vedomosti~~~~, a leading Russian business newspaper.~~

	•	50% interest inBusiness DayandFinancial Mail, publishers of one of South Africa’s leading financial ~~newspaper~~newspapers and ~~magazine.~~magazines.

	•	~~14%~~33% interest in~~Business Standard~~Vedomosti,~~, one of India’s~~a leading Russian business ~~newspapers.~~


	*~~The Penguin Group~~*newspaper.

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 language~~most famous brands in book ~~publishers. We publish~~publishing. It publishes over 4,000 fiction and non-fiction books each year 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 ranks in the top three consumer publishers, based ~~upon~~on sales in all major English speaking and related markets, —including the US, the UK, Australia, ~~New Zealand,~~ Canada, ~~India~~South Africa and ~~South Africa.~~India.

Penguin is well known for its iconic Penguin brand, but it also publishes under many other imprints including, ~~in the adult market, Allen Lane, Avery,~~Hamish Hamilton, Putnam, Berkley, ~~Books,~~ Dorling Kindersley, ~~Dutton, Hamish Hamilton, Michael Joseph, Plume, Putnam, Riverhead~~Puffin, and ~~Viking. Our leading children’s imprints include Puffin, Ladybird, Warne and Grosset & Dunlap.~~Ladybird. In ~~2006,~~2008, Penguin had sales of ~~£848m,~~£903m, representing ~~20%~~19% of Pearson’s total sales ~~(2005: 21%)~~(21% in 2007) and contributed ~~11%~~13% of Pearson’s operating ~~profit (2005: 12%).~~profit. Its largest market is the US, which generated around ~~60%~~57% of Penguin’s sales in ~~2006.~~2008. The Penguin Group earns around ~~99%~~98% 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 ~~sell~~sells through online ~~through third parties~~retailers such as ~~Amazon.com.~~Amazon.com, as well as Penguin’s own website.

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 Higher~~North 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.

	•	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 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 ~~segments~~segment 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 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 Thomson~~Harcourt, 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 compete~~Publishing competes with newspapers and other information sources, such asThe Wall Street Journal,, by offering timely and expert ~~analysis~~journalism 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. ~~IDC~~Interactive Data competes with ~~Reuters,~~ Bloomberg and Thomson ~~Financial~~Reuters 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.

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 purchasing~~Global 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.

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 the jurisdictions where we operate so that 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 developments~~Legal Proceedings

~~On February 15, 2007~~

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 ~~Group completed~~outcome of pending proceedings, either individually or in the ~~disposal~~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 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 2008 Pearson’s International Education business announced its intention to increase its stakes in Longman Nigeria from 29% to 51% for £9m and Maskew Miller Longman (its South African publishing business) from 50% to 85%. Under the terms of the Maskew Miller Longman agreement, Pearson ~~Government Solutions, its Government services~~intends to create a new Southern Africa business ~~to Veritas Capital. Sale proceeds consist of $560m~~and in return for the increased stake in Maskew Miller Longman our current joint venture partner will receive £46m in cash ~~$40m~~and a 15% interest in ~~preferred stock~~Pearson’s Heinemann and ~~10% of the equity of the business. The Group expects to report a post tax loss on the disposal, as the capital gain for tax purposes will exceed any book gain.~~Edexcel businesses in that region.

~~On September 30, 2006, the Group acquired 100% 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~~Pearson’s International Education business also announced the acquisition of Fronter, a European online learning company based in ~~2006 including Promissor, Paravia Bruno Mondadori (PBM), National Evaluation Systems (NES), PowerSchool~~Oslo, for £16m. The Longman Nigeria acquisition completed in early January 2009 and ~~Chancery~~the Fronter acquisition in February 2009. The Maskew Miller Longman transaction is expected to complete in the ~~Education business and Quote.com in IDC.~~second quarter of 2009 following regulatory approval.

~~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 material to the Group.~~

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,~~2008, 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 ~~Inc~~Inc.	United States (Delaware)		~~100%~~100	%
Pearson Education ~~Ltd~~Ltd.	England and Wales		~~100%~~100	%
Edexcel Ltd.	England and Wales		100	%
NCS Pearson ~~Inc~~Inc.	United States (Minnesota)		~~100%~~100	%
FT Group
The Financial Times Limited	England and Wales		~~100%~~100	%
~~Financial Times Business Ltd~~Mergermarket Ltd.	England and Wales		~~100%~~100
~~Mergermarket Ltd~~	~~England and Wales~~		~~100%~~	%
Interactive Data Corporation	United States (Delaware)		~~62%~~62
~~Les Echos SA~~	~~France~~		~~100%~~	%
The Penguin Group
Penguin Group (USA) ~~Inc~~Inc.	United States (Delaware)		~~100%~~100	%
The Penguin Publishing Co ~~Ltd~~Ltd.	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 ~~650~~900 properties, including approximately 300 testing centers in more than 50 countries worldwide, the majority of which are located in the United Kingdom and the United States.

All of 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 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, 2008:


General use of property	Location	Area in square feet

~~Warehouse~~	~~Pittstown, Pennsylvania, USA~~		~~510,000~~
~~Warehouse~~Warehouse/Office	Kirkwood, New York, USA		~~409,000~~524,000
~~Offices~~Warehouse/Office	Pittston, Pennsylvania, USA		406,000
Office	Iowa City, Iowa, USA		310,000
~~Offices~~Warehouse/Office	Old Tappan, New Jersey, USA		210,112
Warehouse/ ~~Offices~~Office	Cedar Rapids, Iowa, USA		205,000
~~Warehouse/ Offices~~Office	~~Reading, Massachusetts, USA~~		~~177,822~~
~~Offices~~	Southwark, London, UK		155,000
~~Printing/ Processing~~Office	Hadley, Massachusetts, USA		136,570
Printing	Owatonna, Minnesota, USA		128,000
~~Printing/ Processing~~	~~Columbia, Pennsylvania, USA~~		~~121,370~~
~~Offices~~	~~Eagan, Minnesota, USA~~		~~109,500~~
~~Offices~~	~~Mesa, Arizona, USA~~		~~96,000~~

We lease the following principal ~~properties:~~properties at December 31, 2008:


General use of property	Location	Area in square feet

~~Warehouses/Offices~~Warehouse/Office	Lebanon, Indiana, USA		1,091,435
~~Offices~~Warehouse/Office	Cranbury, New Jersey, USA		886,747
Warehouse/~~Offices~~Office	Indianapolis, Indiana, USA		737,850
Warehouse/~~Offices~~Office	San Antonio, Texas, USA		559,258
Warehouse/Office	Newmarket, Ontario, Canada		518,128
~~Offices~~Office	Upper Saddle River, New Jersey, USA		474,801
Warehouse/~~Offices~~Office	Rugby, UK		446,077
~~Offices~~Office	~~Hudson St.,~~New York City, New York, USA		~~431,278~~430,738
~~Offices~~Office	London, UK		282,917
Office	Harlow, UK		231,850
Warehouse/~~Offices~~Office	Austin, Texas, USA		226,076
~~Offices~~Office	Boston, Massachusetts, USA		225,299
Warehouse	Scoresby, Victoria, Australia		~~215,820~~197,255
~~Offices~~Office	Boston, Massachusetts, USA		191,360	*
~~Offices~~Office	Glenview, Illinois, USA		187,500
~~Offices~~Warehouse/Office	Bedfordshire, UK		187,248
Office	Bloomington, Minnesota, USA		153,240
~~Offices~~Office	Parsippany, New Jersey, USA		143,777
~~Offices~~Office	~~Harlow, UK~~		~~137,900~~
~~Offices~~	~~Chester, Virginia,~~Chandler, Arizona, USA		~~123,200~~135,460
~~Warehouse/Offices~~Office	~~Quarry Bay, Hong Kong~~New York City, New York, USA		~~121,748~~116,039
Warehouse	San Antonio Zomeyucan, Mexico		113,638
~~Offices~~Office	London, UK		112,000
~~Offices~~Warehouse	~~New York, New York, USA~~Cape Town, South Africa		~~107,939~~111,259
~~Offices~~Call Center	Lawrence, ~~Kansas,~~ Kansas, USA		105,000


	*	Reduced to 53,248 square feet subsequent to year end

Capital Expenditures

See Item 5. “Operating and Financial Review and Prospects — Liquidity and Capital Resources” for description of the Company’s capital ~~expenditures.~~expenditure.

ITEM 4A. UNRESOLVED STAFF COMMENTS

~~There are no unresolved~~

The Company has not received, 180 days or more before the end of the 2008 fiscal year, any written comments from the Securities and Exchange Commission staff ~~comments.~~regarding 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 differs in certain significant respects from US GAAP. Note 36 to our consolidated financial statements, included in “Item 17. Financial Statements”, provides a description of~~as issued by the ~~significant differences between IFRS and US GAAP as they relate to our business and provides a reconciliation to US GAAP.~~IASB.

General overview


	*~~Introduction~~*

Introduction

Sales from continuing operations increased from ~~£3,808m~~£4,162m in ~~2005~~2007 to ~~£4,137m~~£4,811m in ~~2006,~~2008, an increase of 9%16%. The majority of the increase ~~reflected growth across all~~was in the North American and International Education businesses ~~together with additional contributions~~which benefited from acquisitions made in ~~both 2005~~2007 and ~~2006.~~2008. The year on year growth was also significantly impacted by exchange rates, in particular the US dollar. The average US dollar exchange rate ~~weakened~~strengthened in ~~2006,~~comparison to sterling in 2008, which had the effect of ~~reducing~~increasing reported sales

in ~~2006~~2008 by ~~£44m~~£320m when compared to the equivalent figure at constant ~~2005~~2007 rates. When measured at constant 2007 exchange rates, all of Pearson’s businesses reported year on year growth.

Reported operating profit increased by 5%18% from ~~£516m~~£574m in ~~2005~~2007 to ~~£540m~~£676m in ~~2006. All parts~~2008. Acquisitions and the relative strength of the ~~Group~~US dollar contributed to ~~the~~this increase and operating profit would have been £71m lower if translated at constant 2007 exchange rates. When measured at constant rates, the main contributors to the increase ~~through good sales growth~~were the International Education and ~~improved margins~~Interactive Data businesses which together with an increased contribution from acquisitions 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 £7m lower than the equivalent figure reported at constant 2005 exchange rates.

Profit before taxation in ~~2006~~2008 of ~~£466m~~£585m compares to a profit before taxation of ~~£446m~~£468m in ~~2005.~~2007. The increase of ~~£20m~~£117m reflects the improved operating performance ~~offset by a small increase in~~and reduced net finance costs. Net finance costs ~~increased~~decreased from ~~£70m~~£106m in ~~2005~~2007 to ~~£74m~~£91m in ~~2006.~~2008. The Group’s net interest payable ~~increased~~decreased by £6m in 2008 as although our fixed rate policy reduces the impact of changes in market interest rates, we were still able to benefit from a fall in average US dollar and sterling interest rates during the year. Exchange losses of £11m in 2008 compare to a net exchange loss of £17m in ~~2006 due~~2007. The losses in 2008 mainly relate to the ~~strong rise~~retranslation of foreign currency bank accounts together with other net losses on inter-company items. The losses in ~~US dollar floating interest rates and an increase in~~2007 principally relate to exchange losses on legacy euro denominated debt held to hedge euro denominated proceeds from the ~~Group’s average net debt largely reflecting the cost~~sale of ~~acquisitions made in 2006.~~Les Echos. Partially offsetting ~~this effect was~~interest payable and exchange is finance income relating to post retirement plans of ~~£4m~~£8m in ~~2006~~2008 compared to ~~a cost~~an income of ~~£7m~~£10m in ~~2005. The adoption of IAS 39~~~~‘Financial Instruments: Recognition and Measurement’~~in our financial statements as at January 1, 2005 has the potential 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 2005.2007.

~~In December 2006~~

On February 22, 2008 the Group ~~announced~~completed the sale of its ~~Government contracting~~Data Management business ~~Pearson Government Solutions. The sale was completed in February 2007~~ and ~~the results of~~ this business ~~have~~has been ~~shown~~included 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, 2005~~22 in 2008, and the full years in 2007 and 2006.

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~~2007 and ~~2004.~~2006.

Net cash generated from ~~operating activities decreased~~operations increased to ~~£456m~~£894m in ~~2006~~2008 from ~~£487m~~£659m in ~~2005. Cash~~2007. The improved cash generation in ~~2006 would have shown an improvement on 2005~~2008 was partly due to exchange but ~~for the relative weakness~~also represents strong cash conversion of operating profits from all of the ~~US dollar which reduced the value of our cash flows in sterling.~~Pearson businesses. On an average basis, the ~~use~~ratio of working capital ~~continued~~ to ~~improve. Capital~~sales deteriorated slightly in the year largely as a result of higher working capital balances at new 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 £76m in 2008 was £14m below the previous year as the net interest charge in the income statement fell and the timing of payments was more favorable. Tax paid in 2008 remained consistent with the previous year at £89m compared to £87m in 2007. Net capital expenditure on property, plant and equipment after proceeds from sales increased from £72m in ~~2006 was~~2007 to £73m in ~~line with 2005 levels at constant exchange rates.~~2008. The net cash outflow in respect of businesses acquired ~~increased~~decreased from ~~£246m~~£472m in ~~2005~~2007 to ~~£363m~~£395m in ~~2006. There were no significant disposals in 2006 to match the~~2008 whilst net proceeds ~~received~~ from the ~~sale~~disposal of ~~Recoletos and Marketwatch~~businesses decreased from £469m in ~~2005 resulting~~2007 to £111m in ~~a decrease in cash proceeds from disposals of £420m.~~2008. Dividends from joint ventures and associates ~~increased~~decreased by ~~£31m~~£9m largely due to smaller special dividends received from the ~~Economist.~~Economist in 2008 compared to 2007. Dividends paid of ~~£235m~~£285m in ~~2006~~2008 (including ~~£15m~~£28m paid to minority interests) compares to ~~£222m~~£248m in ~~2005.~~2007. After ~~a favorable~~an unfavorable currency movement of ~~£126m,~~£410m, overall net borrowings increased by 6%50% from ~~£996m~~£973m at the end of ~~2005~~2007 to ~~£1,059m~~£1,460m at the end of ~~2006.~~2008.


	*~~Outlook~~*

Outlook

Pearson ~~reported record results~~achieved a strong performance in ~~2006 and our strong trading has continued~~2008 against the backdrop of a sharp deterioration in the ~~early part~~global economy. Though the company performed well, market conditions became more difficult for some of ~~2007. We have made a good start in~~our businesses as 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.year went on.

~~We are~~

In the fourth quarter, trading ~~in line with expectations~~momentum remained strong for ~~2007 and expect~~our education business. The Financial Times Group continued to achieve good ~~underlying earnings~~ growth ~~cash conversion ahead~~— in particular at Interactive Data and Mergermarket — but FT Publishing saw a decline in advertising revenues (which now account for 4% of Pearson’s sales). Consumer publishing markets in the US and the UK were challenging, but Penguin performed well in the key holiday selling season.

We are planning on the basis that the tough market conditions we saw for some of our ~~80% threshold,~~businesses towards the end of 2008 are likely to persist throughout 2009. We expect to benefit from a range of early actions to revise products and ~~a further increase in return on invested capital. As always, our sales~~supply lines, reduce costs and ~~profits will be concentrated~~sustain investment.

Pearson Education

In Education, we are planning for weak conditions in the ~~second half~~US School publishing market but expect continued growth in our Testing, Higher Education and International Education businesses. We expect the new US administration’s emphasis on education, reflected in both the economic stimulus package and the focus on reform, to provide a significant boost to education institutions. The extent and timing of the ~~year.~~impact on our business is unclear at this stage, so we have not included these factors in our guidance.

~~Our expectations~~

FT Group

At the FT Group, we anticipate continued strong demand for ~~the full~~high-quality analysis of global business, finance, politics and economics; a tough year ~~remain:~~for advertising; strong renewal rates in our subscription businesses; and continued growth at Interactive Data.


	~~Pearson Education~~

The Penguin Group

~~School to achieve underlying sales growth~~

At Penguin, we expect another good competitive performance 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;~~challenging trading conditions for book publishers and booksellers.

Sales information by operating division


	~~FT Group~~

~~Financial Times Group profit to grow strongly with our cost measures, integration actions and revenue diversification pushing margins into double digits at FT Publishing. IDC revenues to grow in the6-9%~~ ~~range with net income growth in the high single-digits to low double-digits (headline growth under US GAAP);~~


	~~The Penguin Group~~

~~Penguin margins to improve further, as its publishing investment and efficiency programs continue to bear fruit.~~


	*~~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
	2008		2007		2006
	£m		£m		£m

Education:
North American		2,002		1,667		1,679
International		866		735		640
Professional		244		226		211
FT Group:
FT Publishing		390		344		280
Interactive Data		406		344		332
Penguin		903		846		848

Total		4,811		4,162		3,990


	*~~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
	2008		2007		2006
	£m		£m		£m

European countries		1,217		1,102		1,003
North America		3,028		2,591		2,585
Asia Pacific		415		351		295
Other countries		151		118		107

Total		4,811		4,162		3,990


	*~~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 $1.85 in 2008, $2.00 in 2007 and $1.84 in ~~2006, $1.81 in 2005, and $1.83 in 2004.~~2006. Fluctuations in exchange rates can have a significant impact on our reported sales and profits. In 2008, Pearson ~~generates approximately 65%~~generated 59% of its sales in the ~~US.~~US (2007: 59%; 2006: 61%). We estimate that a five cent change in the closing exchange rate between the US dollar and sterling in any year could affect our reported earnings per share by 1p and shareholders’ funds by approximately ~~£85m.~~£100m. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for more information. Theyear-end US dollar rate for ~~2006~~2008 was £1:$~~1.96~~1.44 compared to £1:$~~1.72~~1.99 for ~~2005. The~~2007. In terms of the year end rate, the weakening of sterling in comparison to the US dollar ~~reduced~~in 2008 was much more significant than in previous years and the relatively strong US dollar had the effect of increasing shareholders’ funds. The net effect of movement in all currencies in 2008 was an increase in our shareholders’ funds ~~by £417m~~of £1,050m (see also note 2729 of “Item ~~17.~~18. Financial

Statements”) ~~in 2006.~~. Theyear-end rate for ~~2005~~the US dollar in 2007 was £1:$~~1.72~~1.99 compared to £1:$~~1.92~~1.96 for ~~2004 resulting~~2006. The comparative weakness of the US dollar was less significant in 2007 and the decrease in shareholders funds due to the US dollar was outweighed by the strength of other currencies principally the Canadian dollar and the Euro which contributed to an overall increase in shareholders’ funds due to exchange movements of ~~£327m~~£25m in ~~2005.~~2007.


	*~~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, 2008 compared to year ended December 31, 2007

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 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 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.


	*~~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 in~~pre-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 of~~pre-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 in~~non-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

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

~~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,~~£649m, or 9%16%, to ~~£4,137m~~£4,811m in ~~2006,~~2008, from ~~£3,808m~~£4,162m in ~~2005.~~2007. The increase reflected growth, on a constant exchange rate basis, across all the businesses together with additional contributions from acquisitions made in both ~~2005~~2007 and ~~2006.~~2008. The year on year growth was impacted by movements in exchange rates, particularly in the US dollar. ~~We estimate that had the 2005~~2008 sales, translated at 2007 average exchange rates, ~~prevailed in 2006, sales~~ would have been ~~approximately £4,181m.~~£4,491m.

Pearson Education ~~had another strong year with an increase in~~increased sales ~~of 9%.~~by £484m or 18% from £2,628m to £3,112m. The ~~School~~North American business was the ~~biggest~~major contributor to ~~this growth with an~~the increase ~~of 12%. Some~~and although much of the ~~School~~ increase was due to exchange and a contribution from the Harcourt Assessment acquisition in 2008, we estimate that after excluding acquisitions there was growth of 3% at constant last year exchange rates. The North American Education business saw growth ahead of the market in its US Higher Education business and 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 16% ahead of last year with growth at FT Publishing and Interactive Data. FT Publishing sales were up by 13% or 4% after excluding the contribution from acquisitions made in ~~2006~~2007 and 2005 but we estimate that after excluding these acquisitions and restating at constant exchange rates that the growth would have been 6%. US School publishing sales were up 3% compared to an industry decline of 6% (source: Association of American Publishers)2008 and the ~~business took a leading share~~effect of ~~the new US adoption market. School testing~~exchange. FT Publishing’s 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~~driven by a shift toward subscription and service based revenues. The newspaper maintained circulation but ~~was up 4%~~advertising revenues fell by 3% as the advertising market weakened 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 upfourth quarter of ~~new contracts and a contribution from the newly acquired Promissor business. Professional publishing sales declined again in 2006 due to the continuedindustry-wide~~ ~~weakness intechnology-related~~ ~~publishing.~~

~~The FT Group sales were 11% ahead of last year. FT Publishing~~2008. Interactive Data sales were up by ~~10%~~18% (9% at constant last year exchange rates and before the contribution from acquisitions) driven by ~~higher advertising revenues~~strong sales to both existing and new institutional customers and the maintenance of renewal rates at ~~the~~~~Financial Times~~ ~~particularly in~~approximately 95% within the ~~online, luxury goods and corporate finance categories. IDC~~institutional services sector.

Penguin’s sales were up ~~by 12% with consistent organic growth~~7% in 2008 (3% at constant last year exchange rates and ~~aided by contributions from~~before the ~~acquisition~~effect of ~~IS.Teledata(re-branded~~ ~~Interactive Data Managed Solutions)~~portfolio changes) as a result of a strong publishing performance in all its markets in a year where the business continued to publish bestsellers and ~~Quote.com.~~win awards.

~~Penguin’s sales grew by 5% with a record number of best sellers in the US and UK, an increase in market share in the UK and continued success with the premium paperback format in the US.~~

Pearson Education, our largest business sector, accounted for ~~63%~~65% of our continuing business sales in ~~2006,~~2008 compared to ~~62%~~63% in ~~2005.~~2007. North America continued to be the most significant source of our sales and as a proportion of total continuing sales contributed ~~64%~~63% in ~~both 2006~~2008 and ~~2005.~~62% in 2007.

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

Year Ended December 31
2008 2007
£m £m

Cost of goods sold 2,174 1,910
Distribution costs 198 202
Administration and other expenses 1,890 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 ofpre-publication costs and royalty charges. Our cost of sales increased by ~~£130m,~~£264m, or 7%14%, to ~~£1,917m~~£2,174m in ~~2006,~~2008, from ~~£1,787m~~£1,910m in ~~2005.~~2007. The increase ~~mainly reflected~~corresponds to the increase in sales ~~over the period although the overall gross margin also increased slightly from 53%~~with cost of sales at 45.2% of sales in ~~2005~~2008 compared to ~~54%~~45.9% in ~~2006.~~2007.

Distribution costs.  Distribution costs consist primarily of shipping costs, postage and packing and ~~are~~have typically ~~a fairly constant percentage~~declined as the business moves more to online delivery of ~~sales.~~products.

Administration and other expenses.  Our administration and other expenses increased by ~~£153m,~~£290m, or ~~11%~~18%, to ~~£1,504m~~£1,890m in ~~2006,~~2008, from ~~£1,351m~~£1,600m in ~~2005.~~2007. As a percentage of sales they increased slightly to ~~36%~~39% in ~~2006,~~2008 from ~~35%~~38% in ~~2005. The increase in administration and other costs comes principally from additional employee benefit expense, additional property costs and increased intangible amortization.~~2007.

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%~~remained fairly consistent at £102m in 2008 compared to ~~£99m~~£101m in ~~2006 from £84m in 2005, with the increase mainly due to profits made on the disposal~~2007.
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 slightly from ~~£14m~~£23m in ~~2005~~2007 to ~~£24m~~£25m in ~~2006.~~2008. The ~~increase was mainly due to an increase~~majority 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,~~£102m, or 5%18%, to ~~£540m~~£676m in ~~2006~~2008 from ~~£516m~~£574m in ~~2005. This increase was due to increases across all the businesses, after taking account of theone-off~~ ~~gain from the sale of MarketWatch~~2007. 2008 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 2005~~2007 average exchange rates, ~~prevailed in 2006, operating profit~~ would have been ~~£7m higher.~~£71m lower.

Operating profit attributable to Pearson Education increased by ~~£42m,~~£45m, or 12%, to £406m in 2008, from £361m in 2007. The increase was mainly due to exchange which offset the effect of increased intangible amortization and the cost of integrating Harcourt Assessment with the existing Assessment businesses. Operating profit attributable to the FT Group increased by £39m, or 28%, to £179m in 2008, from £140m in 2007. 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 Financial Times. Operating profit attributable to the Penguin Group increased by £18m, or 25%, to £91m in 2008, from £73m in 2007. Although Penguin benefitted from exchange there was also continued progress on margin improvement.
Net finance costs
Net finance costs decreased from £106m in 2007 to £91m in 2008. Net interest payable in 2008 was £89m, down from £95m in 2007. Although our fixed rate policy reduces the impact of changes in market interest rates, we were still able to benefit from a fall in average US dollar and sterling interest rates during the year. Year on year, average three month LIBOR (weighted for the Group’s net borrowings in US dollars and sterling at each year end) fell by 2.3% to 3.1%. This reduction in floating market interest rates was partially offset by higher fixed bond coupons prevailing at the time of our 2008 bond issue. The overall result was a decrease in the Group’s average net

25

interest rate payable by 1.4% to 5.9%. In 2008 the net finance income relating to post-retirement plans was an income of £8m compared to an income of £10m in the previous year.

Other net finance costs 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 “— Borrowings” below and “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.

Taxation

The total tax charge in 2008 of £172m represents 29% of pre-tax profits compared to a charge of £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 comprises mainly the minority share in Interactive Data. Our share of Interactive Data remained at 62% throughout 2008, leaving the minority interest unchanged at 38%.

Discontinued operations

Discontinued operations relate to the disposal of Government Solutions (in February 2007), Les Echos (in December 2007), Datamark (in July 2007) and the Data Management business (in February 2008). The results of Government Solutions and Les Echos have been included in discontinued operations for 2007 and have been consolidated up to the 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 2007 and 2008. In 2007 the operating profit before impairment charges was £12m compared to £nil in 2008. The Data 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 disposal. 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 year

The profit for the financial year in 2008 was £323m compared to a profit in 2007 of £310m. The overall increase of £13m was mainly due to the improved operating performance with a contribution from reduced net finance costs. Offsetting this was the increased tax charge and increased loss from the disposal of discontinued businesses.

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 36.6p in 2008 compared to 35.6p in 2007 based on a weighted average number of shares in issue of 797.0m in 2008 and 796.8m in 2007. The increase in earnings per share was due to the increase in profit for 2008 described above and was not significantly affected by the movement in the weighted average number of shares.

The diluted earnings per ordinary share of 36.6p in 2008 and 35.6p in 2007 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

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 2008 compared to 2007. 2008 sales, translated at 2007 average exchange rates, would have been lower by £320m and operating profit, translated at 2007 average exchange rates, would have been lower by £71m. 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

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. See also note 2 of “Item 18. Financial Statements”.

In our adjusted operating profit we have excluded amortization and adjustment of acquired intangibles. The amortization and adjustment of acquired intangibles is the amortization or subsequent adjustment of intangible assets acquired through business combinations. The charge is not considered to be fully reflective of the underlying performance of the Group.

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, 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 and adjustment 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, 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 and adjustment 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%
North American Education
North American Education sales increased by £335m, or 20%, to £2,002m in 2008, from £1,667m in 2007 and adjusted operating profit increased by £30m, or 11%, to £303m in 2008 from £273m in 2007. The results were significantly affected by the weakening of sterling, which we estimate increased sales by £156m and adjusted operating profit by £17m when compared to the equivalent figures at constant 2007 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, the Association of American Publishers’ estimate that there was an overall decrease for the industry of 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 31% in the adoptions where Pearson competed (and 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, winning almost half of the contracts competed for by value and the business now provides 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 contract to develop, administer and score its National Board Certification program for accomplished teachers, covering 25 certificate areas). The leading position in teacher 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 language. 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
28

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 implemented proof-of-concept projects in Kansas and Alaska, and expanded projects in Virginia, South Carolina and Wyoming.

The US Higher Education publishing market was up 3.6% in 2008, according to the Association of American Publishers, benefiting from healthy enrolments, even in tougher economic conditions, and federal government action to support student funding. The industry continues to see strong demand for instructional materials that are enhanced by technology and customization. Our US Higher Education business grew significantly faster than the industry and outperformed the market for the tenth straight year. There was continued investment in established and new author franchises, such as Campbell and Reece’sBiology, Tro’sChemistry,Lilienfeld, Lynn, Namy and Woolf’sPsychologyand Wysocki and Lynch’sDK Handbook. There was also rapid growth in ‘MyLab’ digital learning, homework and assessment programs, which now span the curriculum. MyLab products are now 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 Custom Solutions with our expansion beyond custom textbooks to educational solutions including on-demand authoring of original content, customized technology, and on-demand curriculum, assessments and courseware. 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 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 £131m, or 18%, to £866m in 2008, from £735m in 2007 and adjusted operating profit increased by £43m, or 47%, to £135m in 2008 from £92m in 2007. 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 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 over three years starting in 2009. 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 margins continued to improve and the increase in the overall margin from 12.5% in 2007 to 15.6% in 2008 continued to reflect increases in both publishing and testing margins.

Professional

Professional sales increased by £18m, or 8%, to £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 2007 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 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 number one computer book for Amazon Kindle and the 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 II and 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 print books published in 2008 entered the Rough Cuts program, benefiting from comments prior to print publication. There was also strong 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 2Eby 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 the sub-prime mortgage market.

Overall margins in the Professional business continued their rapid improvement and were higher at 14.8% in 2008 compared to 11.9% in 2006 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 ~~£365m~~£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 a significantly weaker advertising market in the fourth quarter as financial institutions, technology companies and 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 Financial Times continued to invest in international expansion and fast-growing markets. It successfully launched a new edition for the Middle East, andRui, a lifestyle and wealth-management magazine for China’s fast-growing business elite.

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 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 services remain valuable to customers throughout the cycle. Mergermarket launched two new products, Debtwire ABS and Debtwire Restructuring Database, in response to growing levels of distressed asset sales and restructuring funds. It continued to expand and acquire new customers geographically in the US, Europe 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 margins at FT Publishing continued to increase driven by the online businesses and in 2008 were 19.0% compared to 16.3% in 2007.

Interactive Data

Interactive Data, grew its sales by 18% from £344m in 2007 to £406m in 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 the relative strength of the US dollar, which we estimate increased sales by £28m and adjusted operating profit by £9m when compared to the equivalent figures at constant 2007 exchange rates.

Interactive Data revenue growth was driven by strong new sales and approximately 95% renewal rates within its Institutional Services segment. Pricing and Reference Data continued to generate good growth in North America and Europe. Growth was primarily organic, providing additional services to customers; but it also benefited from bolt-on acquisitions, most recently the purchase 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 market sources in North America and the Middle East. The Managed Solutions business announced that it had doubled the number of clients in the United 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 new alliance to provide complex derivatives and structured product valuation services; and in the capacity of its real-time infrastructure to allow for the anticipated growth in real-time market data volumes.

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.

The Penguin Group

Penguin Group sales increased to £903m in 2008 from £846m in 2007 and adjusted operating profit was up 26% to £93m in 2008 from £74m in 2007. Both sales and adjusted operating profit were affected by the stronger US dollar which we estimate increased sales by £54m and adjusted operating profit by £16m when compared to the equivalent figures at constant 2007 exchange rates.

In the US, Penguin 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 BookScan. 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 UK in 2008. Other bestsellers includedThis Charming Manby Marian Keyes,The Beach Houseby Jane Green andJamie’s Ministry of Foodby Jamie Oliver. Penguin UK also published many more paperback originals, including Judith O’Reilly’sA Wife in the North.

In Australia, Penguin was named Publisher of the Year at the Australian Book Industry Awards (and won four of the 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 largest trade publisher and continued to grow rapidly with authors such as Shobhaa

De, Amitav Ghosh and Nandan Nilekani. It also won the major English language prizes in India’s national book awards.

Penguin’s eBook publishing and sales 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 on the Amazon Kindle bestseller list. The series is now sold via online stores on both Amazon.com and Penguin.com. Traffic for all Penguin’s web sites increased 37% to 17 million unique users.

Year ended December 31, 2007 compared to year ended December 31, 2006

Consolidated results of operations

Sales

Our total sales from continuing operations increased by £172m, or 4%, to £4,162m in 2007, from £3,990m in 2006. The increase reflected growth, on a constant exchange rate basis, across all the businesses together with additional contributions from acquisitions made in both 2006 and 2007. The year on year growth was impacted by movements in exchange rates, particularly in the US dollar. 2007 sales, translated at 2006 average exchange rates, would have been £4,385m.

Pearson Education had another year of growth with an increase in sales of 4%. The International Education business was the biggest contributor to this growth with an increase of 15%. Some of the Pearson Education increase was due to a full year contribution from acquisitions made in 2006 and to additional contribution from ~~£323m~~the Harcourt acquisition in ~~2005.~~2007. We estimate that after excluding these acquisitions the growth would have been 6% at constant last year exchange rates.

In North America, US School publishing sales were up 3.5% compared to an industry increase of 2.7% (source: Association of American Publishers) as the business benefited from sustained investment in new basal programs and innovative digital services. US School testing grew in double digits and although US Higher Education sales were 1% behind the previous year on a headline basis, they would have been 6% ahead of the previous year at constant 2006 exchange rates and after taking account of portfolio changes. This increase meant that the US Higher Education business grew faster than the industry for the ninth successive year.

There was also faster growth in international school publishing and international testing sales, principally in the UK, where sales were up in double digits after benefiting from further contract wins, market share gains and strength in on-line assessment.

In the Professional business, Professional testing sales were up by 10% in 2007 as approximately 5.8m secure online tests were delivered in more than 5,000 testing centers worldwide. Professional publishing sales increased in 2007 by 7%, after a number of years of decline in the professional publishing markets, as it benefited from a focused and refreshed front list, a favorable software release schedule and sales from Safari Books Online, our electronic publishing platform (a joint venture with O’Reilly Media).

The FT Group sales were 12% ahead of 2006 with a full year contribution from Mergermarket acquired in the second half of 2006. FT Publishing sales were up by 23% or 12% after excluding the contribution from acquisitions made in 2006 and 2007. FT Publishing growth was driven by a 10% increase in advertising revenues, circulation up 2% and a strong contribution from FT.com. Interactive Data sales were up by 4% (8% at constant 2006 exchange rates and before the contribution from acquisitions) driven by strong sales to both existing and new institutional customers and a renewal rate of approximately 95% within the institutional services sector.

Penguin’s sales were flat year on year but would have increased by 3% translated at 2006 average exchange rates as a result of its successful global publishing performance and another outstanding year for bestsellers in the US and UK.

Pearson Education, our largest business sector, accounted for 63% of our continuing business sales in both 2007 and 2006. North America continued to be the most significant source of our sales and as a proportion of total continuing sales contributed 62% in 2007 and 65% in 2006.

Cost of goods sold and operating expenses

The following table summarizes our cost of sales and net operating expenses:

Year Ended December 31
2007
2006

£m £m

Cost of goods sold 1,910 1,841
Distribution costs 202 232
Administration and other expenses 1,600 1,518
Other operating income (101 ) (99 )

Total 1,701 1,651

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 £69m, or 4%, to £1,910m in 2007, from £1,841m in 2006. The increase corresponds to the increase in sales with cost of sales at 45.9% of sales in 2007 compared to 46.1% in 2006.
Distribution costs.  Distribution costs consist primarily of shipping costs, postage and packing and have typically declined as the business moves more to online delivery of products.
Administration and other expenses.  Our administration and other expenses increased by £82m, or 5%, to £1,600m in 2007, from £1,518m in 2006. As a percentage of sales they remained at 38% in both 2007 and 2006.
Other operating income.  Other operating income mainly consists of freight recharges, sub-rights and licensing income and distribution commissions together with income from sale of assets. Other operating income increased marginally by 2% to £101m in 2007 from £99m in 2006.
Share of results of joint ventures and associates
The contribution from our joint ventures and associates decreased slightly from £24m in 2006 to £23m in 2007. Our share of profit from the Economist in 2006 included a one-off gain of £4m from the sale of its interest in Commonwealth Business Media Inc which was not repeated in 2007.
Operating profit
The total operating profit increased by £52m, or 10%, to £574m in 2007 from £522m in 2006. 2007 operating profit, translated at 2006 average exchange rates, would have been £34m higher.
Operating profit attributable to Pearson Education increased by £9m, or 3%, to £361m in 2007, from £352m in 2006. The increase was due to continued improvement in School and Professional margins, ~~the profit impact of strong sales and cost reductions~~but was offset by an increase in ~~technology publishing~~intangible amortization from £18m in ~~Professional testing.~~2006 to £31m in 2007. Operating profit attributable to the FT Group ~~decreased~~increased by ~~£16m,~~£28m, or ~~12%~~25%, to ~~£117m~~£140m in ~~2006,~~2007, from ~~£133m~~£112m in ~~2005. This decrease was attributable to~~2006. The increase reflects the ~~absence~~increase in ~~2006 of the £40m profit~~revenues from ~~the sale of MarketWatch that was recorded~~both established businesses and an increased contribution from new acquisitions but also reflects improvements in ~~2005. After excluding this item profits increased by £24m, £7m at IDC and £17m~~margins particularly at FT Publishing. ~~The FT Publishing increase reflected thepick-up~~ ~~in advertising revenues.~~ Operating profit attributable to the Penguin Group ~~decreased~~increased by ~~£2m,~~£15m, or 3%26%, to £73m in 2007, from £58m in 2006 ~~from £60m in 2005. The decrease was attributable to an adjustment to~~although the 2006 result included a one off goodwill charge of £7m ~~caused by~~relating to the recognition of ~~previously unrecognized~~pre-acquisition tax losses ~~relating to the acquisition of~~at Dorling ~~Kindersley in 2000.~~Kindersley.
~~Net finance costs~~
Net finance costs

Net finance costs increased from ~~£70m in 2005 to~~ £74m in ~~2006.~~2006 to £106m in 2007. Net interest payable in ~~2006~~2007 was ~~£94m,~~£95m, up from ~~£77m~~£94m in ~~2005.~~2006. Although we were partly protected by our fixed rate policy, the strong rise in average US dollar

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floating interest rates had an adverse effect. Year on year, average three month LIBOR (weighted for the Group’s borrowings in US dollars, euros and sterling at the year end) rose by ~~1.5%~~0.5% to ~~4.9%. Combining~~5.4%, reflecting a rise in interest rates and a change in the ~~rate rise with an increase~~currency mix of year end debt. These two factors, partly offset by a decrease in the Group’s average net debt of ~~£40m,~~£90m, increased the Group’s average net interest rate

payable ~~rose~~ by ~~1.1%~~0.3% to ~~7.0%~~7.3%. In ~~2006~~2007 the net finance income relating topost-retirement plans was an income of ~~£4m~~£10m compared to ~~a cost~~an income of ~~£7m~~£4m in the previous year.

Other net finance income relating to foreign exchange andshort-term fluctuations in the market value of financial instruments ~~remained fairly constant year on year with~~included a ~~£16m gain~~net foreign exchange loss of £17m in ~~2006~~2007 compared to a ~~£14m~~ gain of £19m in ~~2005.~~2006. 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. In 2006 the exchange gains mainly relate to the unhedged exposure on Euro borrowings and swaps that could not be designated as a net investment under IAS 39. 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 ~~2006~~2007 of ~~£11m~~£131m represents ~~just over 2%~~28% ofpre-tax profits compared to a charge of ~~£116m~~just £4m or ~~26%~~less than 1% ofpre-tax profits in ~~2005.~~2006. The low tax rate in 2006 was mainly accounted for by two factors. First, in ~~the light of the announcement~~anticipation of the disposal of Government Solutions, we ~~were able to recognize~~recognized a deferred tax asset in relation to capital losses in the US where previously we were not confident that the benefit of the losses would be realized prior to their expiry. Second, in the light of our trading performance in 2006 and our strategic plans, together with the expected utilization of US net operating losses in the Government Solutions sale, we ~~have~~re-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.~~£127m in 2006 which was not repeated in 2007.


	*~~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 stake in IDC reducing~~Interactive Data. Our share of Interactive Data remained at 62% throughout 2007, leaving the minority interest ~~from 39% to~~unchanged at 38%.


	*~~Discontinued operations~~*

Discontinued operations

Discontinued operations relate to the disposal of Government Solutions (in February 2007), Les Echos (in December ~~2006 the Group announced the sale of its Government contracting business, Pearson Government Solutions. The sale was completed in February 2007~~2007), Datamark (in July 2007) and the Data Management business (in February 2008). The results of ~~this business~~Government Solutions and Les Echos have been ~~shown~~included in discontinued operations ~~in the consolidated income statement in both~~for 2007 and 2006 and ~~2005.~~have been consolidated up to the date of sale. Operating profit for Government ~~solutions~~Solutions in 2007 was £2m compared to £22m in 2006 and the loss on disposal after tax recorded in 2007 was ~~£22m~~£112m after a tax charge of £93m. Les Echos’ operating profit in 2007 amounted to £1m compared to ~~£20m~~£5m in ~~2005. Following~~2006 and the ~~disposal~~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 and immediately sold. The only profit or loss recognized relating to Datamark was a £7m tax benefit arising from the loss on sale. The Data Management business was held throughout 2006 and 2007 and the operating profit before impairment charges in 2007 was £12m compared to £13m in 2006. The Data Management business was formerly part of ~~Recoletos~~the Group’s Other Assessment and Testing cash-generating unit (CGU) and was carved out of this CGU in ~~2005 its results were consolidated~~preparation for disposal. As a result, the Group has recognized a goodwill impairment charge of £97m in 2007 in anticipation of the loss on disposal.

Profit for the ~~period up to February 28, 2005 and included in discontinued operations in 2005. The results for 2005 include an operating loss for the two months to February 28, 2005 of £3m. Thepre-tax~~year ~~profit on disposal of Recoletos reported in 2005 was £306m.~~


	*~~Profit for the year~~*

The total profit for the financial year in ~~2006~~2007 was ~~£469m~~£310m compared to a profit in ~~2005~~2006 of ~~£644m.~~£469m. The overall decrease of ~~£175m~~£159m was mainly due to the absence of the ~~profits on disposal~~non-recurring tax credit of ~~Recoletos~~£127m recorded in 2006, the decrease in contribution from discontinued businesses of £52m and ~~MarketWatch reported in 2005. After taking account of these disposals there was an~~the increase in net finance costs of £32m, largely due to exchange losses. These items more than offset the increase in operating profit in ~~2006 due to improvement in operating profits and the sharp reduction in tax due to the recognition of losses in 2006.~~2007.

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 35.6p in 2007 compared to 55.9p in 2006 ~~compared to 78.2p in 2005~~ based on a weighted average number of shares in issue of 796.8m in 2007 and 798.4m in ~~2006 and 797.9m in 2005.~~2006. The decrease in earnings per share was due to the ~~additional~~decrease in profit for ~~2005~~2007 described above and was not significantly affected by the movement in the weighted average number of shares.

The diluted earnings per ordinary share of 35.6p in 2007 and 55.8p in 2006 ~~and 78.1p in 2005~~ 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 weakening of the US dollar against sterling on an average basis had a negative impact on reported sales and profits in ~~2006~~2007 compared to ~~2005. We estimate that if 2005~~2006. 2007 sales, translated at 2006 average exchange rates, ~~had prevailed in 2006, sales~~ would have been higher by ~~£44m~~£223m and operating profit, translated at 2006 average exchange rates, would have been higher by ~~£7m.~~£34m. 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. The amortization and adjustment of acquired intangibles is the amortization or subsequent ~~impairment~~adjustment 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.

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, 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 and adjustment 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%

36
30

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, 2006
North

American
International
FT
Interactive

£m
Education Education Professional Publishing Data Penguin Total

Sales 1,679 640 211 280 332 848 3,990
42% 16% 5% 7% 8% 22% 100%
Total operating profit 266 70 16 30 82 58 522
51% 13% 3% 6% 16% 11% 100%
Add back:
Amortization and adjustment of acquired intangibles 14 3 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 280 73 17 27 89 66 552
Adjusted operating profit: discontinued Operations — — 35 5 — — 40

Total adjusted operating profit 280 73 52 32 89 66 592

47% 12% 9% 6% 15% 11% 100%
~~School~~
~~School business~~
North American Education
North American Education sales ~~increased~~decreased by ~~£160m,~~£12m, or ~~12%~~1%, to ~~£1,455m~~£1,667m in ~~2006,~~2007, from ~~£1,295m~~£1,679m in ~~2005~~2006 and adjusted operating profit ~~increased~~decreased by ~~£37m,~~£7m, or ~~25%~~2%, to ~~£184m~~£273m in ~~2006~~2007 from ~~£147m~~£280m in ~~2005. In addition to strong underlying growth in sales and profits, the School~~2006. The 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 ofwere significantly affected by the weakening of the US dollar, which we estimate reduced sales by ~~£17m~~£135m and adjusted operating profit by £22m when compared to the equivalent figures at constant ~~2005~~2006 exchange rates. At constant exchange there was strong underlying growth in sales and profits, the School results in 2007 benefited from a full year contribution from the acquisitions of National Evaluation Systems (NES), Chancery and PowerSchool made in 2006.

In the US school market, Pearson’s school publishing ~~business~~revenues grew 3%3.5% against the Association of American Publishers’ estimate of ~~a decline in~~an increase for the industry of 6%2.7%. New adoption market share was ~~33%~~31% in the adoptions where Pearson competed (and 30% of the total new adoption market). The School business now has the number one or number two market share in reading, math, science and social studies. US School testing sales were up in ~~the~~double digits after high single ~~digits even after~~digit growth in 2006 and growth in excess of 20% in 2005. School testing benefited from further contract wins, market share gains and ~~leadership~~strength in ~~onscreen marking,~~ online assessment. US School margins improved again in 2007 with savings from the integration of acquired businesses and efficiency gains from the use of software platforms.
In US Higher Education sales were up by 6% (in US dollars) ahead of the Association of American Publishers’ estimate of industry growth for the ninth year in succession with rapid growth in online learning and custom publishing. In the US, investment in established and new author franchises, such as Campbell’sBiology, Kotler’sMarketing Management, Hubbard’sEconomicsand Cicarrelli’sPsychology, continued to underpin the strong performance. The ‘MyLab’ digital homework and assessment programs were launched in 22 new subject disciplines in 2007, increasing the total number of disciplines covered to 38. These programs support over 2,000 textbooks and were used globally by 2.9 million students in 2007 (up more than 30% on 2006). In corporate
37

finance, one of the largest global markets in business education, Pearson published the successful first edition bestseller, Berk/DeMarzo’sCorporate Finance, together with MyFinanceLab and Pearson’s share of this market increased from 4% to 11% in the US. It is the most successful launch of a first edition in this discipline in more than a decade and one of Pearson’s most successful global launches ever, winning university adoptions in 22 countries. In World History, the first edition of Fernandez-Armesto’sThe World: A Historywith MyHistoryLab increased Pearson’s market share from 25% to 35%. In July 2007, we acquired eCollege which builds on Pearson’s position as an education services provider. eCollege works with partner educational institutions to design, build and support online degree, certificate, diploma and professional development programs. Student enrollments increased by 44% in 2007 to 1.9 million. There was continued strong double digit growth in our custom solutions business which builds customized textbooks and online services and has become a leader in the creation of courseware and curricula fore-learning institutions.

Overall margins in the North American Education business were slightly lower at 16.4% in 2007 compared to 16.7% in 2006 as small declines in US publishing margins offset the improvement in US assessment and testing and ~~embedded (formative) assessment.~~Canadian margins.

International Education

International Education sales increased by £95m, or 15%, to £735m in 2007, from £640m in 2006 and adjusted operating profit increased by £19m, or 26%, to £92m in 2007 from £73m in 2006. The results benefit from the first contribution in 2007 from the acquisition of ~~NES providing customized assessments for teacher certification in the US has allowed us to expand in an attractive adjacent market.~~ Harcourt International.

The International School ~~technology~~ business ~~grew both through the acquisitions of Chancery and PowerSchool and through organic growth in the digital curriculum business which~~ continued to grow ~~while investing~~with strong performances from the publishing businesses in ~~a new generation~~South Africa and Australia. In Italy, the integration of ~~digital products to meet~~PBM was completed and produced integration savings, margin improvement and market share gains in 2007. In School publishing, the ~~demands~~acquisition of Harcourt International increased scale in our international education businesses bringing leading content for school ~~districts for personalized classroom learning.~~

~~The international School business, outside~~and vocational customers in many markets including the ~~US, continued to grow.~~UK, South Africa, Australia and New Zealand. The international testing business was again able to benefit from technology leadership. In the UK, we ~~have~~ marked ~~over 9~~9.6 million GCSE, AS and A-Level scripts, 4.6 million of which were on screen. ~~In School publishing, the launch~~Successful global English Language Teaching franchises in ~~the UK of ActiveTeach technology providing multimedia teaching resources has brought increased~~all major market ~~share in math and science. The acquisition of PBM, one of Italy’s leading education publishers, has allowed us to expand our existing Italian~~franchises (primary, secondary, adult, 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 program for elementary schools,exam preparation) drove strong growth.English Adventure(, developed with ~~Disney), was~~Disney, grew successfully ~~launched~~and has sold more than six million units in ~~Asia and Latin America.~~less than three years since launch.

~~School margins improved again in 2006 and were up by 1.2% points to 12.6% with continued efficiency gains in central costs, production, distribution and software development.~~


	~~Higher Education~~

Sales in Higher Education increased by £16m, or 2%, to £795m in 2006, from £779m in 2005. Adjusted operating profit increased by £5m, or 3%, to £161m in 2006 from £156m in 2005. Both sales and adjusted operating profit were affected by the weakening of the US dollar which we estimate reduced sales by £8m when compared to the equivalent figures at constant 2005 exchange rates.

In the US, the Higher Education sales 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 growth in the online learning businesses with approximately 4.5 million US college students using one of 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’s~~Psychologytogether with MyPsychLab and Hubbard’s~~~~Economics~~~~together with MyEconLab. Cicarrelli’s~~~~Psychology~~increased Pearson’s market share in the subject by 3% 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 services around the courses of individual faculties or professors, continued its strong progress with another year of double-digit growth.

International Higher Education publishing sales grew by 3%2%, benefiting from ~~good growth in~~organic and acquisition investment. Particular areas of strength included local language ~~publishing programs~~editions of our major authors and ~~an increasing focus on~~ custom publishing including the successful launch of “local language” science publishing in Germany. The “MyLab” and “Mastering” technology ~~based assessment services with~~platforms are being successfully adapted for international markets and the MyLab ~~suite of products.~~programs are now being used in almost 50 countries with almost 160,000 student registrations for online courses in Europe, the Middle East and Africa.

~~Higher~~

International Education margins ~~remained constant year on year with only a small~~continued to improve and the increase ~~of 0.3% points~~in the overall margin from 11.4% in 2006 to ~~20.3%~~12.5% in ~~2006.~~2007 reflected increases in both publishing and testing margins.


	~~Professional~~

Professional

After excluding sales and adjusted operating profit from Government Solutions ~~which were reported~~and the Data Management businesses (reported as ~~discontinued in 2006,~~discontinued), Professional sales increased by ~~£40m,~~£15m, or ~~13%~~7%, to ~~£341m~~£226m in ~~2006~~2007 from ~~£301m~~£211m in ~~2005.~~2006. Adjusted operating profit increased by ~~£13m,~~£10m or ~~52%,~~59% to ~~£38m~~£27m in ~~2006,~~2007, from ~~£25m~~£17m in ~~2005.~~2006. Sales were ~~only slightly~~ affected by the weakening US dollar, which ~~we estimate~~ reduced sales by ~~£2m~~£14m when compared to the equivalent figures at constant ~~2005~~2006 exchange rates.

Professional ~~testing~~Testing sales were up by 10% in 2007. Approximately 5.8 million secure online tests were delivered in more than ~~30%~~5,000 test centers across the world in ~~2006 benefiting in particular~~2007. There was strong margin improvement as test volumes rose, driven by higher demand from ~~the acquisition of Promissor~~existing customers such as GMAC (for business school applicants), NCLEX (for nurses) and the ~~successful start-up~~DSA/DVTA driving theory test. Additional contributions from new contracts included

the American Board of Internal Medicine and the ~~Graduate Management Admissions Test~~National Association Boards of Pharmacy. There were also strong renewals, including the Institute of Financial Services and the American Registry of Radiological Technologists.

Technology Publishing achieved good sales growth and significantly improved profitability, benefiting from a focused and refreshed front list, a favorable software release schedule and Safari Books Online, our electronic publishing platform (a joint venture with ~~220,000 examinations delivered~~O’Reilly Media). Scott Kelby, a Peachpit author, is the top-selling US computer book author for the fourth consecutive year with titles includingThe iPod Book; The Digital Photography Book;andThe Adobe Photoshop Lightroom Book for Digital Photographers. Good growth in ~~400 test centers in 96 countries during the first year of~~Europe was helped by publishing for the new ~~contract. Professional Testing has moved~~Windows Vista launch, a new partnership with Microsoft Press in the Netherlands and a successful move into ~~profitability~~digital publishing and training 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 theGermany. Our business imprints Wharton School Publishing and ~~FT Press imprints.~~FTPress, aided by Pearson’s global distribution and strong retail relationships, had a successful year. Wharton School Publishing was recognized by the Amazon.com Best Business Books of 2007 withWe Are Smarter Than Me: How to Unleash the Power of Crowds in Your Business, by Barry Libert and Jon Spector, andFirms of Endearment: How World-Class Companies Profit from Passion and Purpose, by Rajendra S. Sisodia, David B. Wolfe and Jaqdish N. Sheth.

Overall margins in the Professional business were ~~significantly~~ higher at ~~11.1%~~11.9% in 2007 compared to 8.1% in 2006 ~~compared~~as margins continued to ~~8.3%~~improve in ~~2005 as~~both the testing ~~business moved into profitability~~ and ~~the technology~~professional publishing ~~business took specific cost actions.~~businesses.


	~~FT Publishing~~

FT Publishing

Sales at FT Publishing increased by ~~£34m~~£64m or ~~10%~~23%, from ~~£332m~~£280m in ~~2005~~2006 to ~~£366m~~£344m in ~~2006.~~2007. Adjusted operating profit from continuing operations increased by ~~£11m,~~£29m, from ~~£21m~~£27m in ~~2005~~2006 to ~~£32m~~£56m in ~~2006. Much of the~~2007. The sales and profit increase ~~was again at~~benefits from a full year contribution from Mergermarket, acquired in the second half of 2006.

After excluding additional sales from a full year of ownership of Mergermarket, FT ~~newspaper and FT.com where~~Publishing sales were up ~~8% and profit increased~~ by ~~£9m to £11m.~~

~~The~~12% with advertising revenues up by 10%. 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%2% to ~~430,469 copies per day (Source:~~almost 440,000 (for the July-December 2007 Audit Bureau of Circulation, or ABC, ~~average for six months~~measuring period), with a 19% increase in subscriptions. Digital subscribers to ~~December 2006). FT.com’s paying subscribers~~the FT were up 7%13% to ~~90,000 while~~101,000 and monthly unique users were up 30% to 5.7 million. Monthly page views were up 33% to 48.2 million. FT.com attracted 150,000 new registered users since the ~~December audience~~launch of its innovative new access model in October 2007. There was ~~up 29% to 4.2 million. The~~a strong trading performance at FT ~~continued~~

~~to benefit from international expansion~~Business as integration with approximately three-quarters of the FT’s advertising booked in two or more international editions and almost half booked for all four editions worldwide. The FT’s ‘new newsroom’ has created an integrated multi-media newsroom that improves commissioning, reporting, editing and production efficiency and provided further cost savings in 2006.

~~In September 2006,~~ the FT ~~Publishing business acquired~~Newspaper helped to generate additional revenue and reduce costs. Mergermarket ~~an online financial data~~experienced rapid revenue growth with 90%+ subscription renewal rates and ~~intelligence provider that contributed additional sales~~a series of new product launches around the world includingPharmawire,Debtwire in Asia Pacific and ~~profit~~ dealReporterin ~~the last three months of 2006. FT Business showed good growth~~emerging markets in Europe, Middle East and ~~improved margins driven by strong performances in events, UK retail financial titles (~~~~Investment Adviser~~~~and~~~~Financial Adviser~~~~) and internationally with~~~~The Banker. Les Echos~~~~achieved modest circulation and advertising growth in a weak market ahead of the French presidential elections in 2007.~~~~FT Deutschland~~~~outperformed the German newspaper market once again increasing circulation by 2% and reducing losses.~~Africa.

The Economist, in which Pearson owns a 50% stake, increased its circulation by 9% to 1.3 million (for the July-December 2007 ABC period). FTSE, in which Pearson also owns a 50% stake, achieved double digit sales growth, benefiting from a strong new business performance, a joint venture with Xinhua Finance in China and strong growth in Exchange Traded Fund (ETF) licenses.

Small acquisitions of complementary subscription-based and digital businesses made their first contribution to FT Publishing’s ~~adjusted operating profit~~results including: Infinata, a provider of research and business information to life science and financial services companies; and Exec-Appointments, a well-established global job site that focuses on the high-earning executive sector with ~~another good year that saw circulation increase by 9% to 1.2 million (for the July-December ABC period).~~approximately 200,000 registered executive users.

Overall margins at FT Publishing continued to increase as the newspaper becomes more profitable and ~~are now 8.7%~~in 2007 were 16.3% compared to ~~6.3%~~9.6% in ~~2005.~~2006.


	~~Interactive Data~~

Interactive Data

Interactive Data, grew its sales by ~~12%~~4% from ~~£297m in 2005 to~~ £332m in ~~2006.~~2006 to £344m in 2007. Adjusted operating profit grew by ~~11%~~9% from ~~£80m~~£89m in ~~2005~~2006 to ~~£89m~~£97m in 2007. Interactive Data margins increased from 26.8% in 2006 to 28.2% in 2007. Both sales and adjusted operating profit were affected by the weakening US dollar, which we estimate reduced sales by £20m and adjusted operating profit by £6m when compared to the equivalent figures at constant 2006 exchange rates.

Sales growth at Interactive Data was driven primarily by strong sales to both existing and new institutional customers and a renewal rate of approximately 95% within the Institutional Services business. The business continued to focus on high value services and the Pricing and Reference Data business continued to generate good growth in North America and Europe. The business continues to broaden its coverage of complex securities by expanding its universe of European asset-backed and mortgage-backed securities. The business also launched a new web-based offering, the Basket Calculation Service, designed to provide clients with the indicative optimized portfolio value for equity and fixed income exchange traded funds. The Real-Time Services business achieved strong growth with new institutional sales in its two core product areas of real-time data feeds and managed solutions. There was growing adoption of the PlusFeed data service for algorithmic trading applications, a successful introduction of DirectPlus, a new ultra low latency direct exchange data service and excellent sales momentum for managed solutions in North America with new customers including media companies, online brokerages, stock exchanges and financial institutions. Fixed Income Analytics completed 30 new BondEdge^® installations during the year and made good progress in the development of its next-generation BondEdge^® platform. In the Active Trader Services business, eSignal experienced modest expansion of its direct subscriber base, delivered numerous innovations across its suite of Active Trader Services, and added new content and capabilities on its financial websites.

The Penguin Group

Penguin Group sales decreased slightly to £846m in 2007 from £848m in 2006 and adjusted operating profit up 12% to £74m in 2007 from £66m in 2006. Both sales and adjusted operating profit were affected by the weakening US dollar which we estimate reduced sales by ~~£4m~~£37m and adjusted operating profit by ~~£1m~~£4m when compared to the equivalent figures at constant ~~2005~~2006 exchange rates.

~~Interactive Data Pricing~~

Penguin maintained its competitive performance in major markets with a successful global publishing performance led by Alan Greenspan’sThe Age of Turbulence, with almost 1 million hard cover copies shipped worldwide, and ~~Reference Data (formerly FT Interactive Data)~~Kim Edwards’ first novel,The Memory Keeper’s Daughter, 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 and adjusted operating profit by £7m when compared to the equivalent figures at constant 2005 exchange rates.

~~2006 was a record year~~global number one bestseller for Penguin in ~~terms~~the US, UK, Australia and Canada. It was an outstanding year for bestsellers in the US with titles including Elizabeth Gilbert’sEat, Pray, Love, Khaled Hosseini’sA Thousand Splendid Sunsand Ken Follett’sWorld Without End. UK bestsellers included Marian Keyes’Anybody Out There?, Jamie Oliver’sJamie at Home, Jeremy Clarkson’sDon’t Stop Me Nowand Charlie Higson’sDouble or Die. Also in the UK, it was a strong year for the Brands & Licensing division driven byThe Dr Who Annual(the second bestselling children’s book of ~~literary success~~2007) and ~~bestseller performance.~~ bestsellingIn the ~~US,~~Night Gardentitles. DK delivered a strong global performance in traditional, custom and digital publishing, benefiting from innovative formats includingThe Human Body Book, personalized travel guides via traveldk.com and the first DK textbooks for higher education markets.

In Australia, sales growth was generated from a publishing schedule including Bryce Courtenay withThe Persimmon Treeand Dr. Manny Noakes withCSIRO Total Wellbeing Diet Book 2. In India, Penguin ~~placed 139 books on the~~~~New York Times~~~~bestseller list, 10 more than~~India celebrated its 20th anniversary in 2005, and kept them there for 809 weeks overall, up 119 weeks from 2005. Penguin UK placed 59 titles in the BookScan Top Ten bestseller list, up by 5 from 2005, and kept them there for 361 weeks, up 42 weeks from 2005.

2007 with continued rapid growth. Penguin authors won ~~a large number of prestigious awards during 2006: a Pulitzer Prize~~all the major English language prizes in India’s national book awards: Vikram Chandra in fiction for ~~Fiction (~~~~March~~Sacred Games~~by Geraldine Brooks); a National Book Critics Circle Award (~~, Vikram Seth in non-fiction for~~THEM: A Memoir of Parents~~Two Lives~~by Francine du Plessix Gray); the Michael L. Printz award (~~~~Looking for Alaska~~~~by John Green); the Orange Prize for Fiction (~~~~On Beauty~~~~by Zadie Smith);~~ and ~~the Man Booker Prize (~~Kiran Desai in readers’ choice forThe Inheritance of Loss. In China, Jiang Rong and Howard Goldblatt won the inaugural Man Asian Literary prize forWolf Totem, to be published in English around the world by ~~Kiran Desai).~~

Penguin ~~UK’s focus on fiction~~ in ~~2006~~2008, and in South Africa, another strong year was ~~rewarded with a substantial increase in market share,~~ led by ~~Marina Lewycka’s~~John van de Ruit’s~~A Short History of Tractors in Ukrainian.~~SpudIn the US, the premium paperback format accelerated revenue growth and increased profitability in the important mass-market category. In India, Penguin continued its rapid growth and extended its market leadership and there was also strong growth and increased market share for Penguin in South Africa. 2006 also saw strong growth in online revenues and unique visitors to the Penguin and DK websites.:The Madness Continues.

Penguin continued to focus on efficiency and improvement in operating margins ~~and has benefited~~continues to benefit from the Pearson-wide renegotiation of major global paper, print and binding contracts and the integration of warehouse and back office operations in Australia and New ~~Zealand and is investing~~Zealand. These efficiencies together with improved gross margins principally from innovation in ~~India~~formats such as ~~a pre-production and design center for reference titles.~~

~~Results of operations~~


	*~~Year ended December 31, 2005 compared to year ended December 31, 2004~~*


	~~Consolidated results of operations~~


	*~~Sales~~*

Our total sales increased by £329m, or 9%, to £3,808m in 2005, from £3,479m in 2004. Sales growth was due to strong performance in our markets, helped in part by a favorable exchange rate impact. We estimate that had the 2004 average rates prevailed 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’s 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 market in the US ~~and testing sales were up more than 20% as the business made significant market share gains and benefited~~premium paperback have helped to improve margins from ~~mandatory state testing~~7.8% in the US under No Child Left Behind. In the Professional business sales increased 4%, with testing sales 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 weakness2006 to 8.7% in ~~the professional markets was partly offset by growth in consumer technology publishing.~~2007.

~~The FT Group sales were 7% in 2005 ahead of 2004. FT Publishing sales were up by 4% driven by higher advertising revenues at the~~~~Financial Times~~and IDC sales were up by 10% with organic growth at all its businesses aided by a full year contribution from FutureSource, acquired in September 2004, 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.

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Pearson Education, our largest business sector, accounted for 62% of our sales in 2005, compared to 61% in 2004. North America continued to be the most significant source of our sales although sales there decreased, as a proportion of total sales, to 64% in 2005, compared to 66% in 2004.


	*~~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

~~Cost of goods sold.~~~~Cost of sales consists of costs for raw materials, primarily paper, printing costs, amortization of pre-publication costs~~
Liquidity and ~~royalty charges. Our cost of sales~~capital resources
Cash flows and financing
Net cash generated from operations increased by ~~£156m, or 10%~~£235m (or 36%), to ~~£1,787m~~£894m in ~~2005,~~2008 from ~~£1,631m~~£659m in ~~2004. The~~2007. This increase ~~mainly~~ reflected ~~the increase in sales over the period so the overall gross margin stayed constant at 53%.~~
~~Distribution Costs.~~~~Distribution costs consist primarily of shipping costs, postage and packing and are typically a fairly constant percentage of sales.~~
~~Administration and other expenses.~~~~Our administration and other expenses increased by £11m, or 1%, to £1,351m in 2005,~~strong cash contributions from £1,340m in 2004, although as a percentage of sales they decreased to 35% in 2005, from 39% in 2004. The increase 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.
~~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 the sale of~~all 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 2004, other gains and losses amounted to £9m,together 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 from £8m in 2004 to £14m in 2005. The increase was due to profit improvement at The Economist Group and a reduction in losses at FT Deutschland.
~~Operating profit~~
      The total operating profit increased by £134m, or 35%, to £516m in 2005 from £382m 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 2004 average rates prevailed in 2005, operating profit would have been £12m lower.
      Operating profit attributable to Pearson Education increased by £58m, or 22%, to £323m in 2005, from £265m in 2004. The increase was due to strong sales and improved margins in both the School and Higher Education businesses. Operating profit attributable to the FT Group increased by £63m, or 90%, to £133m in 2005, from £70m in 2004. £40m of 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. Operating profit attributable to the Penguin Group increased by £13m, or 28%, to £60m in 2005, from £47m in 2004. The increase at Penguin 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 by 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 reduced from £79m in 2004 to £70m in 2005. Net interest payable in 2005 was £77m, up from £74m in 2004. The Group’s net interest rate payable rose by 0.9% to 5.9%. Although we were partly protected by our fixed rate policy, the strong rise in US dollar floating interest rates had an adverse effect. Year on year, average three month LIBOR (weighted for the Group’s borrowings in US dollars, euro and sterling) rose by 1.9% to 3.4%. This was largely offset by the £260m fall in 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~~
35
adoption of IAS 39 reduced net finance costs by £14m. For a more detailed discussion of our borrowings and interest expenses see “— Liquidity and Capital Resources — Capital Resources” and “— Borrowing” below and “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.
~~Taxation~~
      The total tax charge for the year was £116m, representing a 26% rate on pre-tax profits of £446m. This compares with a 2004 rate of 18% (or £55m on a pre-tax profit of £303m). In 2004, 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.
~~Discontinued operations~~
      Following the announcement of the disposal of Government Solutions in December 2006, the results of the Pearson Government Solution 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. The results of Recoletos have been consolidated for the period up to February 28, 2005 and included in discontinued operations in 2005 and 2004. The results for 2005 include an operating loss 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 year in 2005 was £644m compared to a profit in 2004 of £284m. The overall increase of £360m was mainly due to the profit on disposal of Recoletos and MarketWatch together with significant ~~improvement in operating profits reported across all the Pearson businesses. These increases were only partially offset by the increase in the tax charge in 2005.~~
~~Earnings per ordinary share~~
      The basic earnings per ordinary share, which is defined as the profit for the year divided by the weighted average number of shares in issue, was 78.2p in 2005 compared to 32.9p in 2004 based on a weighted average number of shares in issue of 797.9 million in 2005 and 795.6 million in 2004. This increase in earnings per share was due to the additional profit for the year described above and was not significantly affected by the movement in the weighted average number of shares.
      The diluted earnings per ordinary share of 78.1p in 2005 and 32.9p in 2004 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~~
      ~~The~~ strengthening of the US dollar against sterling on an average basis had a positive impact on reported sales and profits in 2005 compared to 2004. We estimate that if the 2004 average rates had prevailed in 2005, sales would have been lower by £43m and operating profit would have been lower by £12m. 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~~
      The following tables summarize our sales and operating profit for each of Pearson’s divisions. Adjusted operating profit is a non-GAAP 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. See also note 2 of “Item 17. 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. 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 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%
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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%
~~School~~
      School business sales increased by £208m, or 19%, to £1,295m in 2005, from £1,087m in 2004 and adjusted operating profit increased by £39m, or 36%, to £147m in 2005 from £108m in 2004. The School results in 2005 benefit from the inclusion of AGS Publishing, acquired in July 2005 and the strengthening of the US dollar, which we estimate added £12m to sales and £2m to adjusted operating profit when compared to the equivalent figures at constant 2004 exchange rates.
      In the US school market, Pearson’s school publishing business grew 12% ahead of the Association of American Publishers’ estimate of industry growth of 10.5%. New adoption market share was 33% in the adoptions where Pearson competed (and 24% of the total new adoption market). The School business now has leading positions in math, science, literature and foreign languages. School testing sales were up more than 20%, benefiting from significant market share gains 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. The worldwide English Language Teaching business benefited from strong demand for English language learning and investments in new products, including~~English Adventure(with Disney) for the primary school market,~~~~Sky~~~~for secondary schools,~~~~Total English~~~~for adult learners and~~~~Intelligent Business~~ ~~(with~~~~The Economist~~) for the business markets. There was also strong growth in the international school testing markets. Four million UK GCSE, AS and A-Level scripts were marked onscreen 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 in Higher Education increased by £50m, or 7%, to £779m in 2005, from £729m in 2004. Adjusted operating profit increased by £27m, or 21%, to £156m in 2005 from £129m in 2004. Both sales and adjusted operating profit benefited from the strengthening US dollar which we estimate added £14m to sales and £3m to adjusted operating profit when compared to the equivalent figures at constant 2004 exchange rates.
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      In the US, the Higher Education sales were up by 6% ahead of the Association of American Publishers’ estimate of industry growth of 5%. 2005 is the seventh consecutive year that Pearson’s US Higher Education business has grown faster than the industry. The US business benefited 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’s~~Penguin Handbook~~). There was also expansion in the career and workforce education sector, with major publishing initiatives gaining market share in allied health, criminal justice, paralegal, homeland security and hospitality. The online learning 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; and custom publishing, which builds customized textbooks and online services around the courses of individual faculties or professors, had double digit sales growth.
      International Higher Education publishing sales grew by 4%, benefiting from the local adaptation of global authors, including Campbell and Kotler, and the introduction of custom publishing and online learning capabilities into new markets in Asia and the Middle East.
      Higher Education margins were up by 2.3% points to 20%. Good margin improvement in the US and in international publishing was helped by shared services and savings in central costs, technology, production and manufacturing.
~~Professional~~
      Professional sales (excluding discontinued businesses) increased by £11m, or 4%, to £301m in 2005 from £290m in 2004. Adjusted operating profit increased by £7m, or 39%, to £25m in 2005, from £18m in 2004. Sales benefited from the strengthening US dollar, which we estimate added £5m to sales when compared to the equivalent figures at constant 2004 exchange rates.
      Professional testing sales were up more than 40% in 2005 benefiting from the successful start-up of major new contracts including the Driving Standards Agency, National Association of Securities Dealers and the Graduate Management Admissions Council.
      Overall margins in the Professional business were a little lower in 2005 compared to 2004 mainly due to new contract start-up costs. Margins in the Professional publishing businesses were maintained despite falling sales.
~~FT Publishing~~
      Sales at FT Publishing (excluding discontinued businesses) increased by £14m or 4%, from £318m in 2004 to £332m in 2005. Adjusted operating profit increased by £17m, from £4m in 2004 to £21m in 2005. Much of the sales 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% 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 in its international finance titles. Our share of the results of the FT’s joint ventures and associates improved as~~FT Deutschlandreduced its losses and increased its average circulation despite a weak advertising market in Germany and~~~~The Economist~~~~increased 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. Both sales and adjusted operating profit benefited from the strengthening US dollar, which we estimate added £2m to sales and £1m to adjusted operating profit when compared to the equivalent figures at constant 2004 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 helped to address weakness in the mass-market category that saw a further decline of 4% for the industry in 2005. The first seven 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’s~~~~Ghost Wars~~~~), a National Book Award (William T. Vollman’s~~~~Europe Central~~~~), the Whitbread Book of the Year (Hilary Spurling’s~~~~Matisse the Master~~~~), the Whitbread Novel of the Year (Ali Smith’s~~~~The Accidental~~~~) and the FT & Goldman Sachs Business Book of the Year Award (Thomas Friedman’s~~~~The World is Flat~~). In 2005, there were 129 New York Times bestsellers and 54 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 Times bestseller list for all of 2005, selling an additional two 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.
~~Liquidity and capital resources~~
~~Cash flows and financing~~
      ~~Net cash inflow from operating activities decreased by £32m, or 5%, to £621m in 2006, from £653m in 2005. This reduction was entirely due to the weakening of the US dollar compared to~~ sterling. 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 closing~~exchange rate for translation of dollar cash flows was ~~$1.96~~$1.56 in 2008 and $1.99 in 2007. In 2008, the headline average 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 25.9% in 2007. Average working capital is the average month end balance in the year of inventory (including pre-publication), receivables and payables. Net cash generated from operations increased by £38m (or 6%), to £659m in 2007 from £621m in 2006, ~~($1.72~~even after a one-off special contribution of £100m to our UK pension fund (over and beyond the normal funding requirement). This increase reflected stronger cash contributions from all businesses, together with further improvements in ~~2005). Underlying~~ working capital ~~efficiency continued to improve. On an~~management. In 2007, the average ~~basis, the~~ working capital to sales ratio for our book publishing businesses improved to 25.6% from ~~27.4% in 2005 to~~ 26.3% in 2006.
Net interest paid decreased to £76m in 2008 from £90m in 2007. The net cash inflow from operating activities in 2005 increased by £129m, or 25%, to £653m from £524m in 2004, even though 2004 included receipt of a $151m receivable in respect of the TSA contract. Part of this increasedecrease was due to the ~~strengthening~~reduction in US and UK interest rates, with some offset from the higher level of debt following the acquisition of Harcourt Assessments and the strength 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~~relative to $1.92 in 2004. The improvement in cash flow from operating activities also reflected more efficient use of working capital. On an average basis, the working capital to sales ratio for our book publishing businesses improved from 29.4% in 2004 to 27.4% in 2005.
sterling. Net interest paid was £90m in 2007 compared to £82m in ~~2006 compared to £72m in 2005 and £85m in 2004.~~2006. The ~~14%~~10% increase in ~~2006~~2007 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~~2006 was primarily due to higher average interest rates in the ~~reduced debt following receipt of the proceeds from the sale of Recoletos~~UK and ~~MarketWatch.~~US.

Capital expenditure on property, plant and equipment was £75m in 2008, £86m in 2007 and £68m in ~~2005 compared to £76m in 2005 and £101m in 2004.~~2006. The reduction in ~~2006~~spend in 2008 reflects reduced infrastructure spend compared to ~~2005 is due~~2007, although the Group continued to ~~the movement~~invest in ~~US dollar exchange rates.~~digital technology. The ~~higher expenditure~~increase in ~~2004 reflected up-front expenditure on Professional testing contracts.~~2007 over 2006 reflects investment to update infrastructure, particularly at Penguin and FT Group.

The acquisition of subsidiaries, joint ventures and associates accounted for a cash outflow of £400m in 2008 against £476m in 2007 and £367m in ~~2006 against £253m~~2006. The principal acquisitions in ~~2005~~2008 were of Harcourt Assessments for £321m and ~~£51m~~Money Media for £33m. The principal acquisitions in ~~2004.~~2007 were Harcourt Education International for £155m and eCollege for £266m. In 2006, the principal acquisition was of Mergermarket for £109m. The balance ~~relates~~related to various smaller bolt-on acquisitions (primarily in the school segment) including those of National Evaluation Systems and Paravia Bruno Mondadori. The principal acquisitions in 2005 were of AGS for £161m within the School business and IS. Teledata for £29m by Interactive Data. The principal acquisitions in 2004 were of KAT and Dominie Press for £10m within our education businesses and FutureSource by Interactive Data for £9m.
The sale of subsidiaries and associates produced a cash inflow of £111m in 2008 against £469m in 2007 and £10m in ~~2006 against £430m~~2006. All the proceeds in ~~2005~~2008 relate to the sale of the Data Management business. The principal disposals in 2007 were of Government Solutions for £278m and ~~£31m in 2004.~~Les Echos for £156m. The disposal in 2006 relates entirely to the proceeds from thetake-up of share options issued to minority shareholders.
The ~~principal disposals~~cash outflow from financing of £149m in ~~2005 were~~2008 reflects the repayment of ~~Recoletos for net~~one £100m bond, the repayment of borrowings against a short-term bridge financing facility and a further increase in the group dividend. Offsetting this, the Group successfully issued $900m of US Dollar bonds in the year in spite of the challenging credit markets. The cash ~~proceeds~~outflow from financing activities of ~~£371m~~£444m in 2007 represented the higher Group dividend (as the Group sought to match dividend growth more closely with earnings growth) and ~~MarketWatch for net cash proceeds~~the repayment of ~~£54m. The proceeds~~one €591m bond, offset in ~~2004 relate primarily to~~part by drawings on the ~~sale of Argentaria Cartera by Recoletos.~~
Group’s revolving credit facility. The cash outflow from financing of £348m in 2006 primarily reflects the payment of the Group dividend (at a higher dividend per share than 2005) and the repayment of a $250m bond at its maturity date. The cash outflow from financing of £321m in 2005 reflects the improved Group dividend (compared to 2004) and the repayment of bank borrowings following the sale of Recoletos. The cash outflow from financing of £261m in 2004 reflects the payment of the Group dividend and the repayment of one€~~550m bond offset by 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.~~
~~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

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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,~~2008, our net debt was ~~£1,059m~~£1,460m compared to net debt of ~~£996m~~£973m at December 31, ~~2005.~~2007. 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. ~~Liquid~~Cash 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 that~~other 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~~£2,363m at December 31, ~~2006,~~2008, compared to ~~£1,959m~~£1,608m at December 31, ~~2005.~~2007 reflecting the impact of the strengthening of the US dollar relative to sterling and the additional US dollar bonds issued in the year. At December 31, ~~2006,~~2008, cash and liquid resources were ~~£592m,~~£685m, compared to ~~£902m~~£560m 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.


	*~~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, 2008
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 228 — — 228 —
Variable rate loan notes — — — — —
Bonds 2,128 244 — 626 1,258
Finance lease obligations 7 4 2 1 —
Operating lease obligations 1,612 149 138 355 970

Total
3,975 397 140 1,210 2,228

At December 31, ~~2006~~2008 the Group had capital commitments for fixed assets, including finance leases already under contract, of ~~£nil (2005: £1m)~~£7m (2007: £9m). 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.

The Group is committed to a quarterly fee of ~~0.0675% per annum, payable quarterly in arrears~~0.125% 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 our~~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.
We ~~borrow principally~~have in ~~US dollars, sterling~~place a committed revolving credit facility of $1.75bn, of which $92m matures in May 2011 and ~~euro at both floating and fixed rates~~the balance of ~~interest, using derivatives, where~~$1.658bn matures in May 2012. At December 31, 2008, approximately $1.56bn was available under

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~~appropriate,~~
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 ~~generate~~our net interest payable at no less than 3:1; and
We must maintain the ~~desired effective currency profile~~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 ~~interest rate basis. The derivatives used for this purpose~~amortization. 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, 2005~~2008, 2007 or ~~2004.~~2006. Refer ~~to note 34 in “Item 17. 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.~~18. Financial Statements”.
Accounting principles
For a description of our principal accounting policies used refer to note 1 in “Item 18. 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”.

The following table sets forth information concerning senior management, as of ~~April 2007.~~March 2009.

Name

Age

Position

Glen Moreno 6365 Chairman
Marjorie Scardino 6062 Chief Executive
David Arculus 6062 Non-executive Director
David Bell 6062 Director for People ~~and Chairman of The FT Group~~
Terry Burns 6365 Non-executive Director
Patrick Cescau 5860 Non-executive Director
~~Rona Fairhead~~Will Ethridge 4557 Chief Executive, ofPearson Education North America
Rona Fairhead 47 Chairman and Chief Executive, The FT Group
Robin Freestone 4850 Chief Financial Officer
Susan Fuhrman 6364 Non-executive Director
Ken Hydon 6264 Non-executive Director
John Makinson 5254 Chairman and Chief Executive, ~~Officer,~~ Penguin Group
~~Rana Talwar~~CK Prahalad 5967 Non-executive Director

Glen Morenowas appointed chairman of Pearson on October 1, 2005. He is the senior independent ~~non-executive~~ director of Man Group plc and ~~also~~ a director of Fidelity International Limited. He was recently made acting chairman of UK Financial Investments Limited, ~~and a trustee of The Prince of Liechtenstein Foundation.~~the company set up by HM Treasury to manage the government’s shareholdings in UK banks.

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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 vice chairman of Nokia Corporation and a ~~non-executive~~ director of ~~Nokia Corporation.~~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 previously chairman of O2 plc from 2004 until it was acquired by Telefonica ~~in early~~at the beginning of 2006. His previous roles include chairman of Severn Trent plc ~~chairman of~~and 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 the~~~~Financial Times~~~~from 1993 to 1998. In July 1998, he~~ was appointed Pearson’s director for people with responsibility for ~~the recruitment, motivation, development~~finding, keeping, rewarding and ~~reward of~~inspiring our employees across the Pearson Group. He is ~~also a non-executive director of VITEC Group plc and~~ chairman of ~~Sadlers~~theFinancial Timesand Sadler’s Wells ~~and~~Theatre. He is also chairman of Crisis, a charity for the ~~homeless.~~homeless, Roehampton University, The Institute for War and Peace Reporting and the London Transport Museum.

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 the UK government’s chief economic advisor from 1980 until 1991 and Permanent Secretary of HM Treasury from 1991 until 1998. He is ~~non-executive~~ chairman of Alliance & Leicester plc, Abbey National plc and Glas Cymru Limited and is a non-executive director of Banco Santander Central Hispano. He ~~has been~~was previously chairman of Marks and Spencer Group ~~plc since July 2006, having previously been deputy chairman from October 1, 2005.~~plc.

Patrick Cescaubecame a non-executive director in April 2002. He joined 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 currently~~previously group chief executive of ~~Unilever.~~Unilever and currently serves as a non-executive director of Tesco plc.

Will Ethridgebecame a director in May 2008 and was appointed chief executive of Pearson’s North American education business, spanning School, Higher Education and Professional publishing, assessment, technology and services. He previously held a number of senior positions within Pearson Education. He is chairman of CourseSmart, a publishers’ consortium, vice chairman of the Association of American Publishers and a director of Interactive Data.
Rona Fairheadbecame a director in June ~~2002.~~2002, originally as chief financial officer. She was appointed chairman and chief executive of the FT Group onin June ~~12,~~ 2006 ~~having previously been chief financial officer of~~and 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.

Robin Freestonebecame a director of Pearson ~~on June 12, 2006~~ and was appointed chief financial officer in June 2006, having previously served as deputy chief financial officer since 2004. 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 positions~~chartered 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 having previously been ~~dean~~Dean of the Graduate school of Education at the University of Pennsylvania. She is 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.

Ken Hydonbecame a non-executive director in February 2006 and currently serves on the personnel and nomination ~~committee~~committees and as chairman of the audit committee. He is a non-executive director of Tesco plc, Reckitt Benckiser Group 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 Director~~finance director from March 1996 until June 2002. ~~From 1994 to 1996 he was managing director of the~~~~Financial Times~~~~, and prior to that he founded and managed the investor relations firm Makinson Cowell.~~ He is also chairman of the Institute of Public Policy Research and a ~~non-executive~~ director of ~~George Weston Limited in Canada.~~The National Theatre and The International Rescue Committee (UK).

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~~Rana Talwar~~Coimbatore Krishnarao Prahaladbecame a non-executive director in ~~March 2000~~May 2008 and ~~currently serves on~~is 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 Limited~~NCR, Hindustan Unilever Corporation, World Resources Institute and Fortis Bank. He served as group chief executive of Standard Chartered plc from 1998 until 2001, 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 is the role of the personnel committee (the Committee) to approve 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. The ~~committee~~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.
~~Remuneration policy~~
Remuneration policy
~~Pearson seeks to generate~~
We want a performance culture ~~by operating~~that supports our strategy and goals and incentive programs that ~~support its business goals and~~ reward their achievement. ~~It is~~Performance conditions for the company’s ~~policy~~various performance-related annual or long-term incentive plans are linked to the company’s strategic objectives and aligned with the interests of shareholders
Our starting point continues to be that total remuneration (base compensation plus ~~short-and~~annual 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 ~~executives~~executives’ 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 ~~committee~~Committee places considerable emphasis on the performance-linked elements i.e. annual ~~incentive,~~incentives, bonus share matching and long-term incentives.
The ~~committee~~Committee 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 should~~to be competitive with those of directors and executives in similar positions in comparable companies. We use a range 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’s~~Committee’s independent advisers use to make comparisons on remuneration takes this into account. All have very substantial overseas operations. We also use 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 normal policy is to review salaries annually consistent with the way we benchmark pay and taking into account the ~~remuneration of directors~~approach to pay across 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~~
It is the company’s policy is that ~~its~~ benefit programs should be competitive in the context of the local labor market, but as an international company we require executives to operate worldwide and recognize that recruitment also operates worldwide.
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~~Annual incentives~~

Annual incentives
The ~~committee~~Committee 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

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to the performance measures used and the relationship between the incentive plan targets and the relevant business unit operating plans.
The ~~committee also establishes~~Committee will continue to review the ~~target~~annual incentive plans each year and ~~maximum levels of~~to revise the performance measures, targets and individual incentive ~~opportunity based on an assessment by the committee’s independent advisers~~opportunities in light of ~~market practice for comparable companies and jobs.~~current conditions.

Annual incentive payments do not form part of pensionable earnings.
The financial performance measures relate to the company’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 ~~committee~~Committee establishes thresholds, ~~targets~~target and ~~maxima~~maximum levels of performance for different levels of payout.
With the exception of the ~~CEO,~~chief executive, normally 10% 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. These may includeinter alia objectives relating to corporate social responsibility.

For ~~2007,~~2009, 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 at~~takes into account the ~~time.~~strategic objectives and the business priorities relevant to each operating company and to Pearson overall each year.

Since 2008, the individual annual incentive opportunities for the executive directors other than the chief executive have been expressed as absolute cash amounts. The Committee with the advice of the chief executive determines the aggregate level of annual incentives and individual incentive opportunities taking into account all relevant factors. These factors may include the profitability of the company, individual roles and responsibilities, market annual incentive levels, and the level of stretch in the performance targets.
For ~~2007,~~2009, there ~~are~~is no ~~changes~~change to the ~~executive directors’ individual incentive opportunities. For the CEO, the target annual~~ incentive opportunity isfor the chief executive which remains at 100% of base salary at target and 150% at maximum.
There is also no change to the ~~maximum is 150%. For~~average target individual incentive opportunity for the other executive directors ~~and other members of the Pearson Management Committee, the~~which is £396,000 (the same as in 2008 on a like-for-like basis at constant exchange rates). The maximum opportunity remains at twice target ~~is up to 75% of salary and the maximum is twice target.~~(as in 2008).

The annual incentive plans are discretionary and the ~~committee~~Committee reserves the right to make adjustments to payouts up or down ~~taking into account~~if it believes exceptional ~~factors.~~
factors warrant doing so. The committee ~~will continue to review the annual incentive plans each year and to revise the performance measures, targets and~~may also award individual ~~incentive opportunities in light of current conditions.~~
      ~~Annual~~discretionary incentive payments ~~do not form part~~and did so in 2008 for Will Ethridge in recognition of ~~pensionable earnings.~~
      ~~For 2006, annual incentives for Marjorie Scardino, David Bell, Rona Fairhead and Robin Freestone were based~~his contributions in such areas as his leadership efforts on the ~~financial performance~~Google settlement and his oversight 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.Pearson’s global content management programme.

Name
Pearson plc Operating company Personal objectives

Marjorie Scardino 100 % — —
David Bell 90 % — 10 %
Will Ethridge 45 % 35 % 20 %
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 a~~to sales ratio ~~to sales. Underlying~~and operating cash flow. Sales and underlying growth in adjusted earnings per share at constant exchange rates ~~consistent with reported adjusted earnings per share of 40.2p was better than~~were above target but below maximum. Average working capital as a ratio to sales was above threshold but below target. Operating cash flow was above maximum.

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For Higher Education and Professional, the ~~level of~~ performance ~~required for maximum payout. Average~~measures were sales, operating profit, average working capital as a ratio to sales and operating cash flow. Operating profit, average working capital as a ratio to sales and operating cash flow ~~of £575m~~ were ~~at and~~all above ~~maximum respectively.~~maximum. Sales ~~at £4,423m~~ were ~~below~~above target but ~~above threshold.~~below maximum.

For ~~Penguin Group,~~FT Publishing, the performance measures were sales, operating profit and operating cash flow. Sales were below threshold. Operating profit was above threshold but below target. Operating cash flow ~~and~~was above maximum.
For Pearson VUE, the performance measures were sales, operating profit, average ~~working capital as a ratio to sales. For~~ working capital as a ratio to sales and operating cash ~~flow, performance was better than that required for maximum payout.~~flow. Sales ~~and operating profit~~ were ~~both~~ above target but below maximum. Performance across all other measures was above maximum.
~~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 margin, average working capital as a ratio to sales and operating cash flow. Sales were above target but below maximum. Operating margin was above threshold but below target. Average working capital as a ration to sales and operating cash flow were above 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 adjusted~~they will be matched subject to earnings per share ~~increase in real terms by at least 3% per annum compound~~growth over ~~a five-year~~the three-year performance period ~~the company will match them~~ on a gross basis up to a maximum of one matching share for every
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one ~~held. Half~~held i.e. the number of matching shares will ~~vest~~be equal to the number of shares that could have been acquired with the amount of the pre-tax annual bonus taken in invested shares.
One matching share for every two invested shares held i.e. 50% 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 every one invested share held i.e. 100% of the maximum matching award, will be released if the company’s adjusted earnings per share increase in real terms by 5% per annum compound over the same period.

For real growth in adjusted earnings per share of between 3% and 5% per annum compound, the rate at which the participant’s invested shares will be matched will be calculated according to a straight-line sliding scale.
Real growth is ~~measured against~~calculated by reference to the UK Government’s Index of Retail Prices (All Items). We choose to test our earnings per share growth against UK inflation over three ~~and five~~ years to measure the company’s financial progress over the period to which the entitlement to matching shares relates.
~~The long-term incentive plan~~
Where matching shares 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.

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 to~~can participate in the plan which can deliver restricted stockand/or stock options. Approximately 5% of the company’s employees currently hold awards under the plan. The aim is to give the ~~committee~~Committee 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’s~~Committee’s intention to grant stock options in ~~2007.~~2009.

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~~Committee determines the performance measures and targets governing an award of restricted stock prior to grant.

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The performance measures that have applied ~~for~~since 2006 and that will apply for ~~the 2007~~2009 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-year~~ten-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.~~
      ~~Given~~company in line with the policy of encouraging widespread employee share ~~retention features of the annual bonus share matching and long-term incentive plans and the volatility of the stock market, we~~ownership. We do not think it is ~~appropriate~~necessary to specify a particular relationship of shareholding to ~~salary.~~salary because of the volatility of the stock market 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. 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 to giving notice, the company may pay salary, target annual incentive and the cost of pension and other benefits in ~~some instances they specify~~lieu, subject to mitigation. In the case of the longer serving directors with legacy employment agreements, the compensation payable ~~by way of liquidated damages~~ in circumstances where the company terminates the agreements without notice or ~~cause. We feel that these notice periods and~~cause takes the form of liquidated damages.
There are no special provisions for notice, pay in lieu of notice or liquidated damages in the event of termination of employment in the event of a change of control of Pearson. On termination of employment, executive directors’ entitlements to any vested or unvested awards under Pearson’s discretionary share plans are ~~adequate compensation for loss of office and~~treated in ~~line~~accordance 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 each~~terms of the ~~executive directors.~~relevant plan.

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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 unapproved~~have other retirement arrangements 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 retirement age is ~~age~~ 65 although early retirement 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 service and the option to provide a death in retirement pension by reducing the member’s pension.

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 ~~approved~~pension 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. The~~50 (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 £117,600 as at 6 April 2008.
~~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 offered~~are 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.
~~Marjorie Scardino~~
Marjorie Scardino

Marjorie Scardino participates in the Pearson Inc. Pension Plan and the approved 401(k) plan.

Additional pension benefits ~~will be~~are 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
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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 a member of the Pearson Group Pension Plan. He iswas eligible for a pension of two-thirds of his final base salary at age 62 due to his long ~~service but early retirement with~~service.

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Will Ethridge
Will Ethridge is a ~~reduced pension before~~member of the Pearson Inc. Pension Plan and the approved 401(k) plan. He also participates in an unfunded, unapproved Supplemental Executive Retirement Plan (SERP) that ~~date is possible, subject to company consent.~~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 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.
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);~~ Rona Fairhead (HSBC Holdings plc); and Robin Freestone (eChem) ~~and John Makinson (George Weston Limited)~~.
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~~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 current~~2008. 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’s~~Pearson’s articles of association. Non-executive directors receive no other pay or

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benefits (other than reimbursement for expenses incurred in connection with their directorship of ~~the company)~~Pearson) and do not participate in the ~~company’s~~Pearson’s equity-based incentive plans. ~~The~~
There were no changes in the structure and level ~~and structure~~ of non-executive directors’ fees ~~effective~~in 2008. With effect from ~~January 2005 is~~1 July 2007, these were as follows:

Fees payable from
~~January~~July 1, ~~2005~~2007 (£)
~~(£)~~
~~Basic non-executive~~Non-executive director fee ~~45,000~~60,000
Chairmanship of audit ~~and~~committee 20,000
Chairmanship of personnel ~~committees~~committee 15,000
Membership of audit committee 10,000
Membership of ~~audit and~~ personnel ~~committees~~committee 5,000
Senior independent ~~director’s fee~~director ~~10,000~~
~~Overseas meetings (per meeting)~~ ~~2,500~~15,000
~~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 to~~in 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.
~~Remuneration of senior management~~
Remuneration of senior management

Excluding contributions to pension funds and related benefits, senior management remuneration for ~~2006~~2008 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

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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 1,017 55 35 2,057
David Bell 469 493 — 21 983
Will Ethridge (appointed 1 May 2008) 361 810 — — 1,171
Rona Fairhead 506 494 — 36 1,036
Robin Freestone 450 491 — 16 957
John Makinson 525 500 183 32 1,240

Senior management as a group
3,711 3,805 238 140 7,894

Notes:
(1)   ~~For~~There will be no increase 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)   Will Ethridge’s annual incentive includes a special award of Pearson shares in recognition of his contributions in such areas as his leadership efforts on the Google settlement and his oversight of Pearson’s global content management programme. The after-tax amount will be invested in Pearson shares, which will be acquired and held under the annual bonus share matching plan in 2009.
(3)   Allowances for Marjorie Scardino include ~~£40,190~~£43,560 in respect of housing costs and a US payroll supplement of ~~£9,646.~~£11,804. 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~~£182,824 for ~~2006.~~2008.

~~(3)~~(4)   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

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tax free to employees. For Marjorie Scardino, benefits include £20,233 pension planning and financial advice. Marjorie Scardino, Rona Fairhead, David Bell and John Makinson have the use of a chauffeur.
~~(4)~~(5)   No amounts as compensation for loss of office and no expense allowances chargeable to UK income tax were paid during the year.
Share options of senior management

This table sets forth for each director the number of share options held as of December 31, ~~2006~~2008 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) 37,583 c* 1372.4p 06/08/02 06/08/09
37,583 c* 1647.5p 06/08/02 06/08/09
41,550 d* 1421.0p 05/09/02 05/09/11
41,550 d* 1421.0p 05/09/03 05/09/11
41,550 d* 1421.0p 05/09/04 05/09/11
41,550 d* 1421.0p 05/09/05 05/09/11

Total
241,366

David Bell 297 b 629.6p 08/01/09 02/01/10
821 b 690.4p 08/01/10 02/01/11
18,705 c* 1372.4p 06/08/02 06/08/09
18,705 c* 1647.5p 06/08/02 06/08/09
16,350 d* 1421.0p 05/09/02 05/09/11
16,350 d* 1421.0p 05/09/03 05/09/11
16,350 d* 1421.0p 05/09/04 05/09/11
16,350 d* 1421.0p 05/09/05 05/09/11

Total
103,928

Will Ethridge 10,802 c* 1372.4p 06/08/02 08/06/09
10,802 c* 1647.5p 06/08/02 08/06/09
11,010 d* $21.00 05/09/02 09/05/11
11,010 d* $21.00 05/09/03 09/05/11
11,010 d* $21.00 05/09/04 09/05/11
11,010 d* $21.00 05/09/05 09/05/11
14,680 d* $11.97 11/01/02 11/01/11
14,680 d* $11.97 11/01/03 11/01/11
14,680 d* $11.97 11/01/04 11/01/11

Total
109,684

Rona Fairhead 2,371 b 690.4p 08/01/12 02/01/13
20,000 d* 822.0p 11/01/02 11/01/11
20,000 d* 822.0p 11/01/03 11/01/11
20,000 d* 822.0p 11/01/04 11/01/11

Total
62,371

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Number of
Exercise
Earliest

Director
Options (1) Price Exercise Date Expiry Date
~~Marjorie Scardino(2)~~ ~~176,556~~ a * ~~973.3p~~ ~~09/14/01~~ ~~09/14/08~~
Robin Freestone ~~5,660~~1,757 b a *534.8p ~~1090.0p~~08/01/11 ~~09/14/01~~ ~~09/14/08~~ 02/01/12
~~37,583~~ c * ~~1372.4p~~ ~~06/08/02~~ ~~06/08/09~~
~~37,583~~ c * ~~1647.5p~~ ~~06/08/02~~ ~~06/08/09~~
~~36,983~~ c ~~3224.3p~~ ~~05/03/03~~ ~~05/03/10~~
~~41,550~~ d * ~~1421.0p~~ ~~05/09/02~~ ~~05/09/11~~
~~41,550~~ d * ~~1421.0p~~ ~~05/09/03~~ ~~05/09/11~~
~~41,550~~ d * ~~1421.0p~~ ~~05/09/04~~ ~~05/09/11~~
~~41,550~~ d * ~~1421.0p~~ ~~05/09/05~~ ~~05/09/11~~

Total
~~460,565~~ — 1,757

John Makinson
~~David Bell~~ ~~20,496~~ a * ~~973.3p~~ ~~09/14/01~~ ~~09/14/08~~
~~1,142~~ 4,178 b ~~494.8p~~ 424.8p 08/01/07 10 02/01/08 11
~~373~~21,477 b ~~507.6p~~ ~~08/01/08~~ ~~02/01/09~~
~~297~~ b ~~629.6p~~ ~~08/01/09~~ ~~02/01/10~~
~~18,705~~ c * c* 1372.4p 06/08/02 06/08/09
~~18,705~~21,477 c * c* 1647.5p 06/08/02 06/08/09
~~18,686~~19,785 c ~~3224.3p~~ ~~05/03/03~~ ~~05/03/10~~
~~16,350~~ d * d* 1421.0p 05/09/02 05/09/11
~~16,350~~19,785 d * d* 1421.0p 05/09/03 05/09/11
~~16,350~~19,785 d * d* 1421.0p 05/09/04 05/09/11
~~16,350~~19,785 d * d* 1421.0p 05/09/05 05/09/11

Total
~~143,804~~ — 126,272

~~Rona Fairhead~~ ~~1,904~~ b ~~494.8p~~ ~~08/01/07~~ ~~02/01/08~~
~~20,000~~ d * ~~822.0p~~ ~~11/01/02~~ ~~11/01/11~~
~~20,000~~ d * ~~822.0p~~ ~~11/01/03~~ ~~11/01/11~~
~~20,000~~ d * ~~822.0p~~ ~~11/01/04~~ ~~11/01/11~~
~~Total~~
~~61,904~~ —
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~~Number of~~ ~~Exercise~~ ~~Earliest~~
~~Director~~ ~~Options~~ ~~(1)~~ ~~Price~~ ~~Exercise Date~~ ~~Expiry Date~~
Notes:
~~Robin Freestone~~ ~~1,866~~ b ~~507.6p~~ ~~08/01/08~~ ~~02/01/09~~
~~Total~~
~~1,866~~ —
~~John Makinson~~ ~~73,920~~ a * ~~676.4p~~ ~~09/12/00~~ ~~09/12/07~~
~~30,576~~ a * ~~973.3p~~ ~~09/14/01~~ ~~09/14/08~~
~~4,178~~ b ~~424.8p~~ ~~08/01/10~~ ~~02/01/11~~
~~21,477~~ c * ~~1372.4p~~ ~~06/08/02~~ ~~06/08/09~~
~~21,477~~ c * ~~1647.5p~~ ~~06/08/02~~ ~~06/08/09~~
~~21,356~~ c ~~3224.3p~~ ~~05/03/03~~ ~~05/03/10~~
~~19,785~~ d * ~~1421.0p~~ ~~05/09/02~~ ~~05/09/11~~
~~19,785~~ d * ~~1421.0p~~ ~~05/09/03~~ ~~05/09/11~~
~~19,785~~ d * ~~1421.0p~~ ~~05/09/04~~ ~~05/09/11~~
~~19,785~~ d * ~~1421.0p~~ ~~05/09/05~~ ~~05/09/11~~
~~Total~~
~~252,124~~ —

(1)   Shares under option are designated as:aexecutive;bworldwide save for shares;cpremium priced; anddlong-term incentive; and*where options are exercisable.
a Executive
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.
b Worldwide 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.
c Premium 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.~~
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 2008. The share price target for the seven-year tranche of PPOs granted in 2000 was not met in 2008 and the options lapsed. The secondary real growth in earnings per share target for any PPOs to become exercisable has already been met prior to 2008. All PPOs that remain outstanding lapse if they remain unexercised at the tenth anniversary of the date of grant.
d Long-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 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%.
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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, 2009. Additional information with respect to share options held by, and bonus
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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, 2007~~February 28, 2009 was ~~734,913~~1,916,299 representing less than 1% of the issued share capital on ~~March 31, 2007.~~February 28, 2009.

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 March 31, 2009
shares(1) shares(2)

Glen Moreno 210,000 —
Marjorie Scardino 632,755 1,957,861
David Arculus 11,740 —
David Bell 250,348 593,970
Terry Burns 10,290 —
Patrick Cescau 4,144 —
Will Ethridge 128,758 490,192
Rona Fairhead 209,259 699,460
Robin Freestone 44,379 400,216
Susan Fuhrman 7,365 —
Ken Hydon 8,559 —
John Makinson 397,733 668,469
CK Prahalad 969 —
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.
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.
Board Practices

Our board currently comprises the chairman, who is a~~part-timenon-executive,~~ ~~five~~ part-time non-executive director, six 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

54
to fill the vacated office, or unless a resolution for there-election of that director has been put to the meeting and
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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.

However this year, and in future years, in accordance with good corporate governance, the board have resolved that all directors should offer themselves for re-election on an annual basis at the company’s annual general meeting. Accordingly, all of the 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 1 May 2009.
Details of our approach to corporate governance and an account of how we comply with NYSE requirements can be found on our website (www.pearson.com/investor/corpgov.htm).

The board of directors has established the following committees, all of which ~~have~~report 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/investor/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 Talwar~~Glen 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 ~~numbers~~number of persons employed by us during each of the three fiscal years ended ~~2006~~2008 were as follows:
• ~~34,341~~33,680 in fiscal ~~2006~~2008,

• ~~32,203~~32,692 in fiscal ~~2005,~~2007, and

• ~~33,086~~34,341 in fiscal ~~2004.~~2006.

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.

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The table set forth below shows for ~~2006, 2005~~2008, 2007 and ~~2004~~2006 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
2008 2007 2006

North American Education 15,412 14,327 12,710
International Education 5,718 5,291 4,472
Professional 2,641 2,540 2,223
Penguin 4,112 4,163 3,943
FT Publishing 2,379 2,083 1,766
Interactive Data 2,413 2,300 2,200
Other 909 918 900

Continuing operations 33,584 31,622 28,214

Discontinued operations 96 1,070 6,127

Total 33,680 32,692 34,341

ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

To our knowledge, as of February 28, ~~2007,~~2009, 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 ~~28,868,364~~33,336,528 ordinary shares representing ~~3.6%~~4.12% of our outstanding ordinary shares. On February 28, ~~2007,~~2009, record holders with registered addresses in the United States held ~~36,623,444~~33,008,366 ADRs, which represented ~~4.5%~~4.08% of our outstanding ordinary shares. ~~Because some~~Some 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, ~~2006~~2008 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.~~2008.
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 3537 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.~~2008. 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~~ITEM 9.  THE OFFER AND LISTING
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 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,

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• 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
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Ordinary shares Average daily

Reference period
High Low trading volume
(In pence)
(Ordinary shares)

Five most recent fiscal years

2008 733 519 4,758,300
2007 915 695 6,405,600
2006 811 671 5,004,500
2005 695 608 5,296,700
2004 682 579 6,219,200
Most recent quarter and two most recent fiscal years

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
2007 Fourth quarter 798 695 5,156,300
Third quarter 843 729 6,481,400
Second quarter 915 825 7,390,600
First quarter 872 762 6,632,100
Most recent six months

February 2009 677 627 4,575,200
January 2009 674 584 6,426,800
December 2008 651 593 4,387,800
November 2008 622 567 4,736,800
October 2008 633 520 7,449,400
September 2008 705 580 5,560,800
ITEM 10.  ADDITIONAL INFORMATION
Memorandum and articles 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.~~2008. 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 to be exercised by resolution of the shareholders in general meeting.
Interested directors
For the purposes of section 175 of the Companies Act 2006 the board may authorise any matter proposed to it which would, if not so authorised, involve a breach of duty by a Director under that section, including, without

57
limitation, any matter which relates to a situation in which a Director has, or can have, an interest which conflicts, or possibly may conflict, with the interests of the Company. Any such authorisation 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 authorisation or subsequently) make any such authorisation subject to any limits or conditions it expressly imposes but such authorisation is otherwise given to the fullest extent permitted. The board may vary or terminate any such authorisation 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 or possible conflict of interest, which has been approved by the board: the director shall not be ~~disqualified from contracting with us~~in 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 reason~~177 of the ~~director holding~~Act 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 ~~office~~relationship with that person gives rise to a conflict of interest or possible conflict of interest, the ~~fiduciary relationship thereby established. A director may~~Director shall not ~~vote on any contract or arrangement or any other proposal~~be in ~~which~~breach of the general duties he ~~or she has, together with any interest of any person connected with him or her, an interest which is,~~owes to ~~his or her knowledge, a material interest, otherwise than~~the Company by virtue of ~~his or her interests in shares, debentures or other securities~~sections 171 to 177 of ~~or otherwise in or through us. If a question arises~~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 ~~to the materiality~~he reasonably believes such conflict 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~~possible conflict 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. A director will not be counted in the quorum at a meeting in relation to any resolution on which he or she is prohibited from voting.interest subsists.

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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 ~~our~~its subsidiaries;

• the giving of any guarantee, security or indemnity to a third party in respect of a debt or obligation of ~~ours~~the Company or any of ~~our~~its subsidiaries for which he ~~or she~~himself 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 subsidiaries~~its subsidiary undertakings where ~~we are~~it is offering securities in which offer a ~~director~~Director is or may be entitled to participate as a holder of securities or in the underwriting orsub-underwriting of which a ~~director~~Director 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 ~~our~~the employees of the Company or any of ~~our subsidiaries that~~its 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 proviso of the fourth clause above, will be entitled to vote and be counted in the quorum with respect to each resolution except that concerning his or her own appointment.
~~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 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.
~~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 to the Companies Act, which came into force on April 7, 2007, now permit the appointment of a director age 70 or over.
~~Annual general meetings and extraordinary general meetings~~
Annual general meetings

Shareholders’ meetings ~~may~~could previously be either annual general meetings or extraordinary general meetings. However the concept of an extraordinary meeting has not been retained by the Companies Act 2006 and shareholder meetings can now only be annual general meetings.
The following matters are ~~ordinarily~~usually transacted at an annual general meeting:
• ~~sanctioning or declaring~~approving dividends;

59
• 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, pursuant to the Companies Act 1985, to allot 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 extraordinary~~a general meeting whenever it thinks fit. If at any time ~~and for~~there are not within the United Kingdom sufficient directors capable of acting to form a quorum, any ~~reason. The board must~~director or any two members may convene ~~an extraordinary~~a general meeting ~~if requested~~in 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 ~~shareholders~~members present in person and entitled to vote ~~will constitute~~shall 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
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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.
~~Ordinary shares~~
Ordinary shares

Certificates representing ordinary shares are issued in registered form and, subject to the terms of issue of those shares, 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,~~registrars, Equiniti, Aspect House, Spencer Road, Lancing, West Sussex, BN99 ~~6DA,~~6TH, United Kingdom, telephone number ~~+44-1903-502-541.~~+44-845-607-6838.
~~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.

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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, 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
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• 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.
~~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 a 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

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written consent of the holders ofthree-fourths of the issued shares of the class or with the sanction of an extraordinary 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 ~~212~~820 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.
~~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 following~~any 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 first~~semi-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 ~~months~~months’ base salary and benefits together with a proportion of potential bonus.

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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 States~~US 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.

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 Kingdom~~UK 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.

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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 Kingdom~~UK for UK tax purposes and who (in the case of an individual) does not carry on a trade, profession or vocation in the ~~United Kingdom~~UK 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.
~~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 States~~US and the ~~United Kingdom~~UK 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 Kingdom~~UK or pertain to the fixed base in the ~~United Kingdom~~UK 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 Kingdom~~UK to be

64
credited against tax payable in the US or for tax paid in the US to be credited against tax payable in the ~~United States or for tax paid in the United States to be credited against tax payable in the United Kingdom~~UK 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 Kingdom~~UK 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 Kingdom~~UK and that the instrument or written agreement of transfer is not executed in the ~~United Kingdom.~~UK. 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.

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 is~~will 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.
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 majority of our derivative contracts were transacted without regard to existing ~~US GAAP~~IFRS requirements on hedge accounting, during ~~2006~~2008 and ~~2005~~2007 we qualified for hedge accounting under ~~US GAAP~~IFRS 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.

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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-rate~~fixed 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’s~~Group’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 is 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 ~~was~~is denominated in a different currency to the Group’s desired borrowing risk profile and the Group ~~entered~~enters into a related cross currency interest rate swap in order to maintain this risk profile, which is predominantly borrowings denominated in US dollars.

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
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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 only~~are 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 ~~group~~Group 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 amortisation may now be included in the above hedging process at the request of the chief financial officer. At the balance sheet date, no hedging transactions had been undertaken under that authority.
At December 31, ~~2006~~2008 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~~£1,777m, and sterling ~~£30m.~~£127m.

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.

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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.
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 income~~reserves 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 ~~2006~~2008 and ~~2005~~2007 the Group met the prescribed designation requirements and hedge effectiveness tests under ~~US GAAP~~IFRS 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 income~~reserves 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 SECURITIES~~19 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
Not applicable.

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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 ~~controls~~Controls and ~~procedures~~Procedures

An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, ~~2006~~2008 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 executive~~Chief 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 report~~Annual Report on ~~internal control over financial reporting~~Internal 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,~~2008, 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,~~2008, 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 reporting~~Internal Control Over Financial Reporting

During the period covered by this Annual Report onForm 20-F, Pearson has made no significant changes to its internal ~~control~~controls 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.

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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 SERVICES~~
In 2003, the audit committee adopted a revised policy for external auditor ~~services.~~services, which is re-approved annually. The policy requires all audit engagements undertaken by our external auditors, PricewaterhouseCoopers LLP, to be approved by the audit committee. The policy permits the auditors 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 notified to the committee.

The Group Chief Financial Officer can procure pre-approved services, as defined in the audit committee’s policy 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 where the amount is above these limits, specific case by case approval must be obtained from the audit committee prior to the engagement 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
68

Auditors’ Remuneration
2008 2007
£m £m

Audit fees 5 4
Tax fees 2 2
All other fees 1 1
~~ITEM 16D.~~     ~~EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES~~
~~Not applicable.~~
Audit fees include £35,000 (2007: £35,000) of audit fees relating to the audit of the parent company.
Fees for attestation under section 404 of the Sarbanes-Oxley Act are allocated to audit fees 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 disposal of the Data Management business.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES

~~Maximum~~ Maximum
~~number~~ number
Total number of
of shares that
~~units purchased~~ 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

February 1, 2007 - February 28, 2007
~~March 1, 2006 - March 31, 2006~~ ~~900,000~~1,000,000 £ ~~7.40~~8.19 N/A N/A
~~May~~June 1, ~~2006~~2007 - ~~May 31, 2006~~June 30, 2007 ~~900,000~~2,500,000 £ ~~7.67~~ ~~N/A~~ ~~N/A~~
~~August 1, 2006 - August 31, 2006~~ ~~900,000~~ ~~£ 7.43~~8.39 N/A N/A
December 1, ~~2006~~2007 - December 31, ~~2006~~2007 1,400,000 £7.31 N/A N/A
June 1, 2008 - June 30, 2008 2,000,000 £ ~~7.73~~6.14 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.

69
ITEM 16G. CORPORATE GOVERNANCE
In November 2003, the US Securities and Exchange Commission approved changes to the New York Stock Exchange’s listing standards related to the corporate governance practices of listed companies. As a listed non-US issuer, Pearson is required to comply with some of the rules, and otherwise must disclose 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-79~~F-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.†~~
~~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, Paying Agent and Calculation Agent.#~~
~~4.1~~ ~~Letter Agreement dated January 28, 2005 between Pearson plc and Peter Jovanovich.#~~
8.1 List of Significant Subsidiaries.
12.1 Certification of Chief Executive Officer.
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 the Form~~ ~~20-F~~ ~~of Pearson plc for the year ended December 31, 2003 and filed May 7, 2004.~~

70
# ~~Incorporated by reference from the Form~~ ~~20-F~~ ~~of Pearson plc for the year ended December 31, 2004 and filed June 27, 2005.~~
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, 2005~~2008, 2007 and ~~2004~~2006
~~F-4~~F-3
Statement of Recognized Income and Expense for the year ended December 31, ~~2006, 2005~~2008, 2007 and ~~2004~~2006
~~F-5~~F-4
Consolidated Balance Sheet as at December 31, ~~2006~~2008 and ~~2005~~2007
~~F-5~~F-4
Consolidated Cash Flow Statement for the year ended December 31, ~~2006, 2005~~2008, 2007 and ~~2004~~2006
F-6
Notes to the Consolidated Financial Statements
F-7
~~Notes to the Consolidated Financial Staetments~~ ~~F-8~~

F-1
~~F-1~~
REPORT 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 statements~~balance sheets and the related consolidated ~~balance sheets, consolidated~~ statements of income, of cash flows and ~~consolidated statements~~ of ~~recognised~~recognized income and expense present fairly, in all material respects, the financial position of Pearson plc and its subsidiaries (the “Group”) at December 31, ~~2006~~2008 and ~~2005~~December 31, 2007 and the results of their operations and cash flows for each of the three years in the period ended December 31, ~~2006,~~2008, in conformity with International Financial Reporting Standards (IFRSs) as ~~adopted~~issued by the ~~European Union. These~~International Accounting Standards Board. Also, in our opinion the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008 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 are responsible for these financial statements, ~~are the responsibility~~for 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 opinion~~opinions 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 ~~audit~~audits to obtain reasonable assurance about whether the financial statements are free of material ~~misstatement. An audit~~misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements ~~includes~~included 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 ~~statements~~statement 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
United Kingdom
~~April 30, 2007~~March 26, 2009

F-2
~~F-3~~
~~CONSOLIDATED INCOME STATEMENT~~
~~YEAR ENDED~~Consolidated Income Statement
Year ended 31 ~~DECEMBER 2006~~
(December 2008
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 2008 2007 2006

Continuing operations

Sales 2 4,811 4,162 3,990
Cost of goods sold 4 (2,174 ) (1,910 ) (1,841 )

Gross profit
2,637 2,252 2,149
Operating expenses 4 (1,986 ) (1,701 ) (1,651 )
Share of results of joint ventures and associates 12 25 23 24

Operating profit
2 676 574 522
Finance costs 6 (136 ) (150 ) (133 )
Finance income 6 45 44 59

Profit before tax
585 468 448
Income tax 7 (172 ) (131 ) (4 )

Profit for the year from continuing operations
413 337 444
(Loss)/gain for the year from discontinued operations 3 (90 ) (27 ) 25

Profit for the year
323 310 469

Attributable to:

Equity holders of the company 292 284 446
Minority interest 31 26 23

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 36.6p 35.6p 55.9p
— diluted 8 36.6p 35.6p 55.8p

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 47.9p 39.0p 52.7p
— diluted 8 47.9p 39.0p 52.6p

F-3
~~F-4~~
~~CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE~~
~~YEAR ENDED~~Consolidated Statement of Recognised Income and Expense
Year ended 31 ~~DECEMBER 2006~~
(December 2008
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 SHEET~~millions

Notes 2008 2007 2006

Net exchange differences on translation of foreign operations 29 1,050 25 (417 )
Actuarial (losses)/gains on retirement benefit obligations — Group 25 (71 ) 80 107
Actuarial losses on retirement benefit obligations — associate 12 (3 ) — —
Taxation on items charged to equity 7 2 29 12

Net income recognised directly in equity
978 134 (298 )
Profit for the year 323 310 469

Total recognised income and expense for the year
1,301 444 171

Attributable to:

Equity holders of the company 1,270 418 148
Minority interest 31 26 23

~~AS AT~~Consolidated Balance Sheet
At 31 ~~DECEMBER 2006~~
(December 2008
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

Notes 2008 2007

Assets

Non-current assets

Property, plant and equipment 10 423 355
Intangible assets 11 5,353 3,814
Investments in joint ventures and associates 12 23 20
Deferred income tax assets 13 372 328
Financial assets — Derivative financial instruments 16 181 23
Retirement benefit assets 25 49 62
Other financial assets 15 63 52
Other receivables 22 152 129

6,616 4,783
Current assets

Intangible assets — Pre-publication 20 695 450
Inventories 21 501 368
Trade and other receivables 22 1,342 946
Financial assets — Derivative financial instruments 16 3 28
Financial assets — Marketable securities 14 54 40
Cash and cash equivalents (excluding overdrafts) 17 685 560

3,280 2,392
Non-current assets classified as held for sale 31 — 117

3,280 2,509

Total assets
9,896 7,292

F-4
~~F-5~~
~~CONSOLIDATED BALANCE SHEET (CONTINUED)~~
~~AS AT~~Consolidated Balance Sheet (Continued)
At 31 ~~DECEMBER 2006~~
(December 2008
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 2008 2007

Liabilities

Non-current liabilities

Financial liabilities — Borrowings 18 (2,019 ) (1,049 )
Financial liabilities — Derivative financial instruments 16 (15 ) (16 )
Deferred income tax liabilities 13 (447 ) (287 )
Retirement benefit obligations 25 (167 ) (95 )
Provisions for other liabilities and charges 23 (33 ) (44 )
Other liabilities 24 (221 ) (190 )

(2,902 ) (1,681 )
Current liabilities

Trade and other liabilities 24 (1,429 ) (1,050 )
Financial liabilities — Borrowings 18 (344 ) (559 )
Financial liabilities — Derivative financial instruments 16 (5 ) —
Current income tax liabilities (136 ) (96 )
Provisions for other liabilities and charges 23 (56 ) (23 )

(1,970 ) (1,728 )
Liabilities directly associated with non-current assets classified as held for sale 31 — (9 )

Total liabilities
(4,872 ) (3,418 )

Net assets
5,024 3,874

Equity

Share capital 27 202 202
Share premium 27 2,505 2,499
Treasury shares 28 (222 ) (216 )
Other reserves 29 586 (514 )
Retained earnings 29 1,679 1,724

Total equity attributable to equity holders of the company
4,750 3,695
Minority interest 274 179

Total equity
5,024 3,874

These financial statements have been approved for issue by the board of directors on 96 March ~~2007~~2009 and signed on its behalf by
Robin Freestone Chief financial officer

F-5
~~F-6~~
~~CONSOLIDATED CASH FLOW STATEMENT~~
~~YEAR ENDED~~Consolidated Cash Flow Statement
Year ended 31 ~~DECEMBER 2006~~
(December 2008
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 2008 2007 2006

Cash flows from operating activities

Net cash generated from operations 33 894 659 621
Interest paid (87 ) (109 ) (106 )
Tax paid (89 ) (87 ) (59 )

Net cash generated from operating activities
718 463 456

Cash flows from investing activities

Acquisition of subsidiaries, net of cash acquired 30 (395 ) (472 ) (363 )
Acquisition of joint ventures and associates (5 ) (4 ) (4 )
Purchase of investments (1 ) — —
Purchase of property, plant and equipment (PPE) (75 ) (86 ) (68 )
Proceeds from sale of investments 5 — —
Proceeds from sale of PPE 33 2 14 8
Purchase of intangible assets (45 ) (33 ) (29 )
Disposal of subsidiaries, net of cash disposed 32 111 469 10
Interest received 11 19 24
Dividends received from joint ventures and associates 23 32 45

Net cash used in investing activities
(369 ) (61 ) (377 )

Cash flows from financing activities

Proceeds from issue of ordinary shares 27 6 12 11
Purchase of treasury shares (47 ) (72 ) (36 )
Proceeds from borrowings 455 272 84
Liquid resources acquired — (15 ) (24 )
Repayment of borrowings (275 ) (391 ) (145 )
Finance lease principal payments (3 ) (2 ) (3 )
Dividends paid to company’s shareholders 9 (257 ) (238 ) (220 )
Dividends paid to minority interest (28 ) (10 ) (15 )

Net cash used in financing activities
(149 ) (444 ) (348 )
Effects of exchange rate changes on cash and cash equivalents (103 ) 3 (44 )

Net increase/(decrease) in cash and cash equivalents
97 (39 ) (313 )

Cash and cash equivalents at beginning of year 492 531 844

Cash and cash equivalents at end of year
17 589 492 531

F-6
~~F-7~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~
~~General information~~Notes to the Consolidated Financial Statements

General information
Pearson plc (the ~~Company)~~company) and its subsidiaries (together the Group)are ~~involved in the provision of~~international media businesses covering education, business information ~~for the educational sector,~~and consumer ~~publishing and business information.~~publishing.

The ~~Company~~company is a limited liability company incorporated and domiciled in England. The address of its registered office is 80 Strand, London WC2R 0RL.

The ~~Company~~company 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 96 March ~~2007.~~2009.
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) at fair value.

(1) Interpretations and amendments to published standards effective in ~~2006~~2008
The Group adopted IFRIC 14 ‘IAS 19 — The ~~following amendments~~Limit on a Defined Benefit Asset, Minimum Funding Requirements and ~~interpretations to standards are mandatory~~their Interaction’, effective for ~~the Group’s accounting~~annual reporting periods beginning on or after 1 January ~~2006:~~
• ~~IAS 21 ‘The Effects of Changes~~2008, 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’.~~
      ~~Management assessed~~ the ~~relevance of these amendments and interpretations with respect~~prior accounting period. IFRIC 14 resulted in no change to the ~~Group’s operations~~full recognition of the pension asset as disclosed in note 25.
The Group has adopted Reclassification Amendments to IAS 39 ‘Financial Instruments: Recognition and ~~concluded that they are~~Measurement’ and IFRS 7 ‘Financial Instruments: Disclosures,’ issued in October 2008 but effective from 1 July 2008. The amendments allow additional reclassifications of certain classifications of financial instruments in rare circumstances, and management determined this was not relevant ~~or material~~ to the Group.

IFRIC 11 ‘Group and Treasury Share Transactions’ is effective for annual reporting periods beginning on or after 1 March 2007. This addresses how to apply IFRS 2 ‘Share-based Payment’ to arrangements involving an entity’s own equity instruments, or equity instruments of another entity in the same group, in the stand alone accounts of the parent and group companies. Management have assessed that this interpretation has no impact on the Group’s financial statements.
IFRIC 12 ‘Service Concession Arrangements’ is effective for annual reporting periods beginning on or after 1 January 2008. This addresses the accounting by private sector entities that, by contract with a government, participate in developing, financing, operating and maintaining infrastructure assets relating to public services traditionally provided by governments. As none of the Group entities participate in these activities, IFRIC 12 is not relevant to the Group.
(2) Standards, interpretations and amendments to published standards that are not yet effective —~~Certain new standards, amendments and interpretations~~ The Group has decided to ~~existing standards have been published that are~~early adopt IFRS 8 ‘Operating Segments’ which is effective for annual reporting periods

F-7
~~F-8~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~Notes to the Consolidated Financial Statements (Continued)
~~mandatory~~
beginning on or after 1 January 2009. The new standard requires a management approach to reporting segmental information. After changes in the organisational structure within the Education business, six revised reporting segments were identified under IFRS 8 as detailed in note 2. The impact of the standard has been to revise the disclosure for the ~~Group’s accounting~~reported segments. Comparatives for 2007 have been restated.
The Group has not early adopted the following new pronouncements that are not yet effective:
Amendments to IFRS 2 ‘Share-based Payment’ (effective for annual reporting periods beginning on or after 1 January ~~2007~~2009). The amendment clarifies that only service and performance conditions are vesting conditions, and that all cancellations whether Group or ~~later periods. The Group has not early adopted any of~~counterparty, should be accounted for the ~~new pronouncements which are as follows:~~same way.
• ~~IFRS 7 ‘Financial Instruments: Disclosures’ (effective from~~IAS 1 January 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.
• ~~A complementary amendment to IAS 1~~(Revised) ‘Presentation of Financial ~~Statements — Capital Disclosures’(effective from~~Statements’ (effective for annual reporting periods beginning on or after 1 January ~~2007)~~2009). The ~~amendment~~amendments provide a number of presentational changes to ~~IAS 1 introduces disclosures about~~ the ~~level~~financial statements including prohibiting the presentation of items of income and expense in the statement of changes in equity and requiring them to be shown in a performance statement, the option to present the performance statement as a single statement of comprehensive income and the ~~management~~requirement to include a balance sheet as at the beginning of the ~~capital of~~earliest comparative period when an ~~entity.~~entity applies a retrospective change in accounting policy or makes a retrospective restatement.

• IFRS ~~8 ‘Operating Segments’~~3 (Revised) ‘Business Combinations’ and amendments to IAS 27 ‘Consolidated and Separate Financial Statements’, (effective for annual reporting periods beginning on or after 1 ~~January~~July 2009). ~~IFRS 8 requires an entity~~The amendments affect the accounting for business combinations including the requirement to ~~adopt~~remeasure the ~~‘management approach’ to reporting on the financial performance~~fair value of ~~its operating segments, revise explanations of the basis on which the segment information is prepared and provide reconciliations to the amounts~~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 ~~balance sheet.~~to recognise adjustments to contingent consideration in the income statement.

• ~~Management is currently assessing the impact of IFRS 7, IFRS 8 and the complementary amendment~~Amendments to IAS 39 ‘Financial Instruments: Recognition and Measurement’ (effective for annual reporting periods beginning on or after 1 July 2009). The amendments clarify that inflation may only be hedged where changes in inflation are a specified portion of cash flows of a financial instrument, and also clarify hedging with options.
• ‘Improvements to Financial Reporting Standards 2008’ (mostly effective for annual reporting periods beginning on or after 1 January 2009). This is the ~~Group’s financial statements.~~first standard published under the IASB’s annual improvements process which is designed to deal with non-urgent minor amendments to standards. Thirty five amendments were issued, 24 resulting in changes in presentation, recognition or measurement, and 11 are expected to have no or minimal effect on accounting.
• 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 instruments can be held within the Group.

Management is currently assessing the impact of these new standards and interpretations on the Group’s financial statements.
In addition, management has assessed the relevance of the following amendments and interpretations with respect to the Group’s operations:
• ~~IFRIC 8 ‘Scope of IFRS 2’~~Amendments to IAS 23 ‘Borrowing Costs’ (effective for annual reporting periods beginning on or after 1 ~~May 2006)~~January 2009). ~~IFRIC 8~~The amendment requires ~~consideration~~capitalisation of ~~transactions involving~~borrowing costs that relate to qualifying assets (ones that take a substantial amount of time to get ready for use or sale, with the ~~issuance~~exception of ~~equity instruments — where the identifiable consideration received is less than the~~assets measured at fair value or inventories manufactured in large quantities or on a repetitive basis). Management assessed the relevance of ~~the equity instruments issued —~~this amendment with respect to ~~establish whether or not they fall within the scope of IFRS 2. The~~ Group ~~will apply IFRIC 8 from 1 January 2007, but~~operations and concluded that it is not ~~expected~~currently applicable to ~~have any impact~~the Group as there are no material qualifying assets.

F-8
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 amendment requires puttable financial instruments, or instruments that impose on the ~~Group’s accounts;~~entity an obligation to another party in respect of a share of net assets only on liquidation, to be classified as equity. Management assessed the relevance of this amendment with respect to the Group and concluded it is not relevant.

• IFRIC ~~10 ‘Interim Financial Reporting and Impairment’~~13 ‘Customer Loyalty Programmes’ (effective for annual reporting periods beginning on or after 1 ~~November 2006)~~July 2008). IFRIC ~~10 prohibits impairment losses recognised in an interim period on goodwill, investments in equity instruments and investments in financial assets carried at cost~~13 explains how entities that grant loyalty award credits to ~~be reversed at~~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 ~~subsequent balance sheet date. The Group will apply~~customer loyalty programme IFRIC ~~10 from 1 January 2007;~~13 is not relevant to the Group.

• IFRIC ~~7 ‘Applying~~15 ‘Agreements for the ~~Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies’(effective~~Construction of Real Estate’ (effective for annual reporting periods beginning on or after 1 ~~March 2006)~~January 2009). IFRIC ~~7 provides~~15 addresses the accounting by entities that undertake the construction of real estate, with guidance on ~~how to apply~~determining whether an agreement for the ~~requirements~~construction of real estate falls within the scope 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.~~11 ‘Construction Contracts’ or IAS 18 ‘Revenue’. As ~~none of the~~no Group entities ~~have a currency~~undertake the construction of ~~a hyperinflationary economy as their functional currency,~~real estate IFRIC 715 is not relevant to the ~~Group’s operations; and~~Group.

• IFRIC ~~9 ‘Reassessment~~17 ‘Distributions of ~~Embedded Derivatives’~~Non-cash Assets to Owners’ (effective for annual reporting periods beginning on or after 1 ~~June 2006)~~July 2009). IFRIC ~~9 requires~~17 provides guidance on the appropriate accounting treatment when an entity ~~to assess whether an embedded derivative is required to be separated from the host contract~~distributes assets other than cash as dividends, including recognition upon authorisation 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~~measurement at fair value of assets distributed, with any difference between fair value and carrying value of these assets being recognised in the ~~terms~~income statement when an entity settles the dividend payable. This does not apply to distributions of non-cash assets under common control. This interpretation will have no impact on the ~~contract that significantly modifies~~Group financial statements as 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 benefit~~Pension obligations
•   Revenue ~~recognition.~~recognition
b. ~~Consolidation~~

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

F-9
Notes to the Consolidated Financial Statements (Continued)
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) 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 operations form part of the core publishing business of the Group and an integral part of existing wholly 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~~
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’s~~company’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 entity is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.

F-10
Notes to the Consolidated Financial Statements (Continued)

At the date of transition to IFRS the cumulative translation differences ~~for~~in respect of foreign operations have been deemed to be zero.
Any gains and losses on disposals of foreign operations will exclude translation differences ~~arising~~that 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)~~$1.85 (2007: $2.00; 2006: $1.84) and the year end rate was ~~$1.96 (2005: $1.72)~~$1.44 (2007: $1.99; 2006: $1.96).
d.  Property, plant and equipment

Property, plant and equipment is 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 to 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’s~~assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

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

(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 or associate 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 ~~amounts~~amount is the higher of ~~cash generating units have been determined based on~~fair value less costs to sell and value in ~~use calculations.~~use. These calculations require the use of estimates ~~(see~~and significant management judgement. A description of the key assumptions and sensitivities is included in note ~~12).~~11. Goodwill is allocated to ~~cash generating~~cash-generating units for the purpose of impairment testing. The allocation is made to those ~~cash~~
~~F-11~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
~~generating~~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 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 line~~straight-line basis over its estimated useful life of between three and ~~five~~eight 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

F-11
Notes to the Consolidated Financial Statements (Continued)
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 ~~five~~eight years.

(4) Acquired intangible assets — Acquired intangible assets ~~comprise publishing rights,~~include customer lists and relationships, ~~technology, trade names~~trademarks 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 costs 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(see~~statement (see note ~~31)~~33).

The assessment of the recoverability of pre-publication ~~asset~~assets and the determination of the amortisation profile involve a significant degree of judgement based on historical trends and management estimation of future potential 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.     Other financial assets~~
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 ~~through~~to the income statement.
~~g.     Inventories~~
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

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

F-12
Notes to the Consolidated Financial Statements (Continued)
distribution and remote printing. These ~~cost~~costs are expensed as incurred as they do not meet the criteria under IAS 38 to be capitalised as intangible assets.
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.
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.

Where any Group company purchases the ~~Company’s~~company’s equity share capital (Treasury shares) the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the ~~Company’s~~company’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’s~~company’s equity holders.
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 to reflect the hedged risk. Interest on borrowings is expensed as incurred.
~~F-13~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
m.  Derivative financial instruments

Derivatives are ~~initially~~ recognised at fair value ~~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~~and remeasured at ~~their fair value.~~each balance sheet date. The fair value of derivatives ~~has been~~is 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(fair~~bonds (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. 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.~~statement.

F-13
~~n.     Taxation~~Notes to the Consolidated Financial Statements (Continued)

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, in which case the tax is also recognised in equity.

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

(1) ~~Retirement benefit~~Pension obligations — The ~~liability~~retirement benefit asset and obligation recognised in ~~respect~~the balance sheet represents the net of ~~defined benefit pension plans is~~ the present value of the defined benefit ~~obligations at the balance sheet date less~~obligation 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.

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 ~~asset~~assets 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.

F-14
Notes to the Consolidated Financial Statements (Continued)

(2) Other post-retirement obligations — ~~The Group provides certain healthcare and life assurance benefits. The principal plans are unfunded.~~ The expected costs of ~~these~~post-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 Carlo~~an 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

Provisions are recognised ~~when~~if 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.

The Group recognises a provision for deferred consideration inwhen the ~~period that an acquisition~~payment 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)~~
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

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 ~~when~~for 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.

F-15
Notes to the Consolidated Financial Statements (Continued)

On certain contracts, where the Group acts as agent, only commissions and fees receivable for services rendered are recognised as revenue. Any ~~third party~~third-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

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 is depreciated over the shorter of the useful life of the asset or the lease term.

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

Dividends are recorded in the Group’s financial statements in the period in which they are approved by the ~~Company’s~~company’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 ~~and discontinued operations~~
~~Non-current assets~~
Assets and liabilities 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.~~statement where appropriate.
u.  Trade receivables

Trade receivables are stated at fair value ~~less~~after provision for bad and doubtful debts and anticipated future sales returns (see also note 1q).
22.  Segment information
~~Due to~~
Following the ~~differing risks~~adoption of IFRS 8 ‘Operating Segments’ and ~~rewards associated with each~~changes in the organisational structure of the Education business, ~~segment and~~ the ~~different customer focus of each segment, the Group’s primary segment~~Group has revised its reporting ~~format is by business.~~segments. The Group is now organised into ~~the following five business~~six segments:

~~School~~North American Education — ~~publisher, provider~~Educational publishing and testing for the school and higher education market within the USA and Canada;
International Education — Educational publishing and testing for the school and higher education market outside of North America;
Professional — Business and technology publishing and testing and ~~software services~~certification for ~~primary~~professional bodies;
FT Publishing — Publisher of theFinancial Times, business magazines and ~~secondary schools;~~specialist information;

F-16
Notes to the Consolidated Financial Statements (Continued)

~~Higher Education~~Interactive Data — ~~publisher~~Provider of ~~textbooks~~financial and ~~related course materials for colleges~~business information to financial institutions and ~~universities;~~retail investors;

Penguin— ~~publisher~~Publisher with brand imprints such as Penguin, Putnam, Berkley, Viking, Dorling ~~Kindersley;~~Kindersley.
~~FT Publishing~~ ~~— publisher of the~~~~Financial Times,~~ ~~other business newspapers, magazines and specialist information;~~
~~Interactive Data Corporation (IDC)~~ ~~— provider of financial and business information to financial institutions and retail investors.~~
      The remaining business group, Professional, brings together a number of education publishing, testing and services businesses that publish texts, reference and interactive products for industry professionals and does not meet the criteria for classification as a ‘segment’ under IFRS. For more detail on the services and products included in each business segment refer to ~~the Business Review.~~Item 4 of thisForm 20-F.

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

Assets — continuing operations 4,952 1,370 423 490 524 1,214 923 9,896
Assets — discontinued operations — — — — — — — —

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-17
~~F-17~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~Notes 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

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 12 — 5 — 4 — 2 — 11
Associates 12 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 12 — 6 1 16 — — — 23
Capital expenditure 10, 11, 20 136 109 20 28 19 44 — 356
Depreciation 10 26 7 9 9 10 7 — 68
Amortisation 11, 20 159 45 11 9 8 30 — 262

F-18
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~Notes 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

2006
North

American
International
FT
Interactive

Notes Education Education Professional Publishing Data Penguin Corporate Group
All figures in £ millions

Continuing operations

Sales (external) 1,679 640 211 280 332 848 — 3,990
Sales (inter-segment) — — 1 — — 18 — 19

Adjusted operating profit 280 73 17 27 89 66 — 552
Amortisation of acquired intangibles (14 ) (3 ) (1 ) (2 ) (7 ) (8 ) — (35 )
Other net gains and losses of associates — — — 4 — — — 4
Other net finance costs of associates — — — 1 — — — 1

Operating profit
266 70 16 30 82 58 — 522

Finance costs 6 (133 )
Finance income 6 59

Profit before tax
448

Income tax 7 (4 )

Profit for the year from continuing operations
444

Segment assets 3,401 795 415 317 314 954 703 6,899
Joint ventures — 5 — 4 — 3 — 12
Associates — 4 — 4 — — — 8

Assets — continuing operations 3,401 804 415 325 314 957 703 6,919
Assets — discontinued operations — — 294 — — — — 294

Total assets
3,401 804 709 325 314 957 703 7,213

Other segment items

Share of results of joint ventures and associates — 6 1 17 — — — 24
Capital expenditure 141 71 30 19 20 38 — 319
Depreciation 15 14 19 9 13 7 — 77
Amortisation 136 59 21 4 7 34 — 261

In ~~2006,~~2008, sales from the provision of goods were ~~£3,117m (2005: £2,956m; 2004: 2,787m)~~£3,411m (2007: £3,053m; 2006: £2,996m) and sales from the provision of services were ~~£1,020m (2005: £852m; 2004: 692m)~~£1,400m (2007: £1,109m; 2006: £994m). 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,~~market pricing, corporate training and management 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 length~~arm’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 ~~combinations~~combination were ~~£173m (2005: £111m; 2004: £16m)~~£253m (2007: £226m) (see ~~notes 11, 12 and 17)~~note 30). Capital expenditure, depreciation and amortisation include amounts relating to discontinued operations. ~~In April 2005, Pearson sold its 79% interest~~Discontinued operations relate to the Data Management business in ~~Recoletos Grupo de Communicación S.A.. This operation is disclosed as a discontinued operation~~2008 and to the Data Management business, Government Solutions, Datamark and Les Echos in ~~2005~~2007 (see note 3). ~~In December 2006 Pearson announced its intention~~
F-19
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 segments~~Consolidated Financial Statements (Continued)

The ~~Group’s business segments are managed on a worldwide basis and operate~~Group 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
2008 2007 2006 2008 2007 2006
All figures in £ millions

Continuing operations

UK 754 721 659 701 724 545
Other European countries 463 381 344 224 140 142
USA 2,861 2,448 2,443 4,624 3,146 3,115
Canada 167 143 142 209 183 163
Asia Pacific 415 351 295 179 114 97
Other countries 151 118 107 14 11 11

Total continuing
4,811 4,162 3,990 5,951 4,318 4,073

Discontinued operations

UK — 1 17 — — —
Other European countries — 82 86 — — —
USA 8 78 314 — 117 294
Canada — — — — — —
Other countries — 6 16 — — —

Total discontinued
8 167 433 — 117 294

Total
4,819 4,329 4,423 5,951 4,435 4,367

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 subsidiaries 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, other receivables and non-current assets classified as held for sale.
33.   Discontinued operations
~~On 11 December 2006, Pearson announced that it had agreed~~
Discontinued operations relate to ~~sell Pearson~~the 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 Data Management business (sold on 22 February 2008).
The results of the Data Management business (previously included in the Professional segment) have been included in discontinued operations for 2006, 2007 and 2008. In anticipation of the loss on sale, an impairment to held for sale goodwill was charged to the income statement in 2007. The assets and liabilities of ~~Pearson Government Solutions have been reclassified to non-current assets~~the Data Management business were reported as held for sale ~~(see notes 29~~in the 31 December 2007 balance sheet.
The results of Government Solutions (previously included in the Professional segment) and ~~35).~~
      ~~Discontinued~~Les Echos (previously included in the FT Publishing segment) were included in discontinued operations ~~in 2005 also relate~~for 2006 and 2007 and were consolidated up to the ~~sale~~date of ~~Pearson’s 79% interest in Recoletos Grupo de Communicación S.A..~~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-20
Notes to the Consolidated Financial Statements (Continued)
An analysis of the results and cash flows of discontinued operations are 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
Sales 8
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-21
Notes to the Consolidated Financial Statements (Continued)

2006
Government
Data

Solutions Management Les Echos Total
All figures in £ millions

Sales 286 61 86 433

Operating profit 22 13 5 40

Profit before tax
22 13 5 40

Attributable tax expense (8 ) (5 ) (2 ) (15 )

Profit after tax
14 8 3 25
Profit on disposal of discontinued operations before tax — — — —
Attributable tax (expense)/benefit — — — —

Profit for the year from discontinued operations
14 8 3 25

Operating cash flows 20 9 4 33
Investing cash flows (8 ) (2 ) — (10 )
Financing cash flows (1 ) (7 ) (7 ) (15 )

Total cash flows
11 — (3 ) 8

44.   ~~Other net gains and losses~~Operating 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.~~

2008 2007 2006
All figures in £ millions

By function:

Cost of goods sold 2,174 1,910 1,841

Operating expenses

Distribution costs 198 202 232
Administrative and other expenses 1,890 1,600 1,518
Other income (102 ) (101 ) (99 )

Total operating expenses
1,986 1,701 1,651

Total
4,160 3,611 3,492

F-22
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~Notes to the Consolidated Financial Statements (Continued)
5 ~~Operating 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 2008 2007 2006
All figures in £ millions

By nature:

Utilisation of inventory 21 832 732 702
Depreciation of property, plant and equipment 10 80 65 68
Amortisation of intangible assets — Pre-publication 20 244 192 210
Amortisation of intangible assets — Other 11 116 70 48
Employee benefit expense 5 1,553 1,288 1,225
Operating lease rentals 134 129 122
Other property costs 116 122 121
Royalties expensed 415 365 360
Advertising, promotion and marketing 244 195 190
Information technology costs 76 70 71
Other costs 452 484 474
Other income (102 ) (101 ) (99 )

Total
4,160 3,611 3,492

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

2008 2007 2006
All figures in £ millions

Fees payable to the company’s auditor for the audit of parent company and consolidated financial statements 3 3 5
The audit of the company’s subsidiaries pursuant to legislation 2 1 4
Tax services 2 2 1
Other services 1 1 1

Total
8 7 11

Reconciliation between audit and non-audit service fees is shown below:

2008 2007 2006
All figures in £ millions

Group audit fees including fees for attestation under section 404 of the Sarbanes-Oxley Act 5 4 9
Non-audit fees 3 3 2

Total
8 7 11

Fees for attestation under section 404 of the Sarbanes-Oxley Act are allocated between fees payable for the audits of consolidated and subsidiary accounts.
Tax services include services related to tax planning and various other tax advisory matters.
Other services include due diligence on acquisitions and services related to the disposal of the Data Management business.
F-23
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~Notes to the Consolidated Financial Statements (Continued)
‘Other services pursuant to legislation’ represents 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) of the US Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley) which are required for the first time in 2006.
      ~~‘Services relating to corporate finance transactions’ relate to a carve-out audit of Pearson Government Solutions in 2006. In 2005 this largely related to due diligence work at IDC.~~
      ~~‘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 2008 2007 2006
All figures in £ millions

Employee benefit expense

Wages and salaries (including termination benefits and restructuring costs) 1,317 1,087 1,035
Social security costs 119 100 101
Share-based payment costs 26 33 30 25
Pension costs — defined contribution plans 25 41 39 36
Pension costs — defined benefit plans 25 37 31 29
Other post-retirement benefits 25 6 1 (1 )

1,553 1,288 1,225

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

2008 2007 2006
Average number employed

Employee numbers

North American Education 15,412 14,327 12,710
International Education 5,718 5,291 4,472
Professional 2,641 2,540 2,223
FT Publishing 2,379 2,083 1,766
Interactive Data 2,413 2,300 2,200
Penguin 4,112 4,163 3,943
Other 909 918 900

Continuing operations
33,584 31,622 28,214

Discontinued operations
96 1,070 6,127

33,680 32,692 34,341

F-24
~~F-24~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~Notes 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 2008 2007 2006
All figures in £ millions

Interest payable (106 ) (114 ) (117 )
Net foreign exchange losses (11 ) (25 ) (2 )
Other losses on financial instruments in a hedging relationship:
— fair value hedges (7 ) (1 ) —
— net investment hedges — (1 ) (2 )
Other losses on financial instruments not in a hedging relationship:
— derivatives (12 ) (9 ) (12 )

Finance costs
(136 ) (150 ) (133 )

Interest receivable 17 19 23
Finance income in respect of employee benefits 25 8 10 4
Net foreign exchange gains — 8 21
Other gains on financial instruments in a hedging relationship:
— fair value hedges 2 — —
— net investment hedges 1 — —
Other gains on financial instruments not in a hedging relationship:
— amortisation of transitional adjustment on bonds 1 1 8
— derivatives 16 6 3

Finance income
45 44 59

Net finance costs
(91 ) (106 ) (74 )

The £5m (2007: £1m) net loss on fair value hedges comprises a £156m (2007: £20m) loss on the underlying bonds offset by a £151m (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 2008 2007 2006
All figures in £ millions

Current tax

Charge in respect of current year (89 ) (71 ) (81 )
Recognition of previously unrecognised trading losses — — 23
Other adjustments in respect of prior years 10 27 35

Total current tax charge
(79 ) (44 ) (23 )

Deferred tax

In respect of timing differences (97 ) (96 ) (73 )
Recognition of previously unrecognised capital losses — — 76
Recognition of previously unrecognised trading losses — — 37
Other adjustments in respect of prior years 4 9 (21 )

Total deferred tax charge
13 (93 ) (87 ) 19

Total tax charge
(172 ) (131 ) (4 )

F-25
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)~~

2008 2007 2006
All figures in £ millions

Profit before tax 585 468 448
Tax calculated at UK rate (2008: 28.5%, 2007: 30%) (167 ) (141 ) (135 )
Effect of overseas tax rates (29 ) (25 ) (17 )
Joint venture and associate income reported net of tax 7 7 7
Net expense not deductible for tax purposes (1 ) (9 ) (13 )
Utilisation of previously unrecognised tax losses 4 3 7
Recognition of previously unrecognised tax losses — — 136
Unutilised tax losses — (2 ) (3 )
Prior year adjustments 14 36 14

Total tax charge
(172 ) (131 ) (4 )

UK (53 ) (42 ) (15 )
Overseas (119 ) (89 ) 11

Total tax charge
(172 ) (131 ) (4 )

The tax ~~benefit/(charge)~~benefit on items charged to equity 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

2008 2007 2006
All figures in £ millions

Share-based payments (7 ) 7 2
Pension contributions and actuarial gains and losses 10 28 9
Net investment hedges and other foreign exchange gains and losses (1 ) (6 ) 1
��
2 29 12

98.   Earnings per share
Basic

Basic earnings per share is calculated by dividing the profit attributable to equity shareholders of the ~~Company~~company by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the ~~Company~~company and held as treasury shares.

F-26
~~Diluted~~Notes 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 55.9 p 78.2 p 32.9 p
Diluted 55.8 p 78.1 p 32.9 p

Earnings per share from continuing operations

Basic 54.1 p 38.9 p 29.0 p
Diluted 54.0 p 38.8 p 29.0 p

Earnings per share from discontinued operations

Basic 1.8 p 39.3 p 3.9 p
Diluted 1.8 p 39.3 p 3.9 p

~~F-27~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

Notes 2008 2007 2006
All figures in £ millions

Profit for the year from continuing operations 413 337 444
Minority interest (31 ) (26 ) (23 )

Earnings from continuing operations
382 311 421

(Loss)/profit for the year from discontinued operations 3 (90 ) (27 ) 25

Earnings
292 284 446

Weighted average number of shares (millions) 797.0 796.8 798.4
Effect of dilutive share options (millions) 0.5 1.3 1.5
Weighted average number of shares (millions) for diluted earnings 797.5 798.1 799.9

Earnings per share from continuing and discontinued operations

Basic 36.6p 35.6p 55.9p
Diluted 36.6p 35.6p 55.8p

Earnings per share from continuing operations

Basic 47.9p 39.0p 52.7p
Diluted 47.9p 39.0p 52.6p

Earnings per share from discontinued operations

Basic (11.3p ) (3.4p ) 3.2p

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

2008 2007 2006
All figures in £ millions

Final paid in respect of prior year 20.5p (2007: 18.8p; 2006: 17p) 163 150 136
Interim paid in respect of current year 11.8p (2007: 11.1p; 2006: 10.5p) 94 88 84

257 238 220

The directors are proposing a final dividend in respect of the financial year ~~ending~~ended 31 December ~~2006~~2008 of ~~18.8p~~22p per share ~~has been approved and~~which will absorb an estimated ~~£151m~~£176m of shareholders’ funds. It will be paid on 118 May ~~2007~~2009 to shareholders who are on the register of members on 1014 April ~~2007.~~2009. These financial statements do not reflect this dividend.

F-27
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

Assets in

Land and
Plant and
course of

buildings equipment construction Total
All figures in £ millions

Cost

At 1 January 2007 313 631 11 955
Exchange differences (2 ) — — (2 )
Additions 20 62 11 93
Disposals (24 ) (65 ) — (89 )
Acquisition through business combination — 27 — 27
Disposal through business disposal (1 ) (25 ) — (26 )
Reclassifications — 6 (6 ) —
Transfer to non-current assets held for sale (8 ) (14 ) — (22 )

At 31 December 2007 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

Assets in

Land and
Plant and
course of

buildings equipment construction Total
All figures in £ millions

Depreciation

At 1 January 2007 (128 ) (479 ) — (607 )
Exchange differences — 1 — 1
Charge for the year (14 ) (54 ) — (68 )
Disposals 11 63 — 74
Acquisition through business combination — (16 ) — (16 )
Disposal through business disposal — 20 — 20
Transfer to non-current assets held for sale 5 10 — 15

At 31 December 2007 (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 )

Carrying amounts

At 1 January 2007 185 152 11 348
At 31 December 2007 172 167 16 355
At 31 December 2008
185 231 7 423

F-28
~~F-28~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~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

Depreciation expense of ~~£18m (2005: £19m)~~£12m (2007: £13m) has been included in the income statement in cost of goods sold, £6m ~~(2005: £7m)~~(2007: £5m) in distribution expenses and ~~£53m (2005: £54m)~~£61m (2007: £50m) in administrative and other expenses. ~~In 2006 £6m (2005: £4m) relates~~There was no depreciation expense relating to discontinued ~~operations.~~operations in 2008 (2007: £3m).

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)~~£7m (2007: £6m).
~~F-29~~
~~NOTES 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 &
trademarks
publishing
intangibles

Goodwill Software relationships & brands rights acquired Total
All figures in £ millions

Cost

At 1 January 2007 3,271 201 113 26 96 53 3,760
Exchange differences (4 ) (2 ) — 1 3 — (2 )
Additions — internal development — 20 — — — — 20
Additions — purchased — 13 — — — — 13
Disposals (34 ) (19 ) (2 ) — (3 ) 2 (56 )
Acquisition through business combination 304 4 76 35 40 44 503
Transfer to non-current assets held for sale (194 ) — — — — — (194 )

At 31 December 2007 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

F-29
~~F-30~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~Notes to the Consolidated Financial Statements (Continued)

Acquired

customer
Acquired
Acquired
Other

lists &
trademarks
publishing
intangibles

Goodwill Software relationships & brands rights acquired Total
All figures in £ millions

Amortisation

At 1 January 2007 — (135 ) (15 ) (1 ) (15 ) (13 ) (179 )
Exchange differences — 1 — — — 1 2
Charge for the year — (25 ) (13 ) (3 ) (17 ) (12 ) (70 )
Disposals — 19 — — — — 19
Acquisition through business combination — (2 ) — — — — (2 )
Transfer to non-current assets held for sale — — — — — — —

At 31 December 2007 — (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 )

Carrying amounts

At 1 January 2007 3,271 66 98 25 81 40 3,581
At 31 December 2007 3,343 75 159 58 104 75 3,814
At 31 December 2008
4,570 107 274 111 96 195 5,353

Goodwill
The goodwill carrying value of £4,570m 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. £3,309m of the carrying value relates to acquisitions completed between 1 January 1998 and 31 December 2002 and £1,261m 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.
F-30
Notes to the Consolidated Financial Statements (Continued)
Other intangible assets
Other intangibles acquired include ~~customer lists~~content, technology and ~~relationships,~~ software ~~rights, technology, trade names and trademarks.~~rights. Amortisation of ~~£4m (2005: £4m)~~£5m (2007: £3m) is included in the income statement in cost of goods sold and ~~£47m (2005: £25m)~~£111m (2007: £67m) in administrative and other expenses. ~~In 2006 £3m of software amortisation (2005: £3m) relates to discontinued operations.~~
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’s~~14 cash-generating units ~~identified according~~(CGUs) within the business segments as follows:

Notes 2008 2007
All figures in £ millions

US School Curriculum 937 677
US School Assessment and Information 722 414
US Higher Education 1,164 839
Canada 173 155
International Education Publishing 315 270
International Education Assessment and Testing 241 194
Professional Publishing 15 10
Professional Assessment and Testing 254 181

Pearson Education total
3,821 2,740

Financial Times 46 12
Mergermarket 130 126
Interactive Data 208 147
FT Group total 384 285
Penguin US 216 155
Penguin UK 95 111
Pearson Australia 54 52

Penguin total
365 318

Total goodwill — continuing operations
4,570 3,343

Goodwill held for sale 31 — 96

Total goodwill
4,570 3,439

During 2008, after the change in organisational structure the CGUs were reorganised and goodwill reallocated to the ~~business segment. Goodwill has been allocated 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 has been allocated for impairment purposes to 13 cash-generating units.~~units affected. The recoverable amount of each ~~cash-generating unit~~CGU 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 a~~Other 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 year~~five-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 10.2% to 11.7% for the Pearson

F-31
Notes to the Consolidated Financial Statements (Continued)
Education businesses (2007: 10.5% to 12.0%), 10.8% to 20.5% for the FT Group businesses (2007: 10.4% to 17.2%) and 8.8% to 10.4% for the Penguin businesses (2007: 8.9% to 11.7%).
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 all CGUs in 2008 (a range from 2.5% to 3.5% in 2007). 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 estimates of forecast 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 the key 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 either the US School Curriculum or Penguin UK CGUs.
The fair value of US School Curriculum is 8% or approximately £77m above its carrying value, but an increase of 0.5 percentage points in the discount rate or a reduction of 0.6 percentage points in the perpetuity growth rate would cause the value in use to fall below the carrying value.
The fair value of Penguin UK is 24% or approximately £44m above its carrying value, but an increase of 1.4 percentage points in the discount rate or a reduction of 1.7 percentage points in the perpetuity growth rate would cause 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.~~
13 Investments 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

2008 2007
All figures in £ millions

At beginning of year 11 12
Exchange differences (4 ) —
Share of profit after tax 6 4
Dividends (5 ) (8 )
Additions and further investment 5 3

At end of year
13 11

Investments in joint ventures are accounted for using the equity method of accounting and are initially recognised at cost.

F-32
Notes to the Consolidated Financial Statements (Continued)

The aggregate of the Group’s share in its joint ventures, 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~~

2008 2007
All figures in £ millions

Assets

Non-current assets 6 3
Current assets 21 23

Liabilities

Current liabilities (14 ) (15 )

Net assets
13 11

Income 36 61
Expenses (30 ) (57 )

Profit after income tax
6 4

~~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

2008 2007
All figures in £ millions

At beginning of year 9 8
Exchange differences (5 ) (1 )
Share of profit after tax 19 19
Dividends (16 ) (24 )
Additions — 1
Distribution from associate in excess of carrying value 6 6
Actuarial losses on retirement benefit obligations (3 ) —

At end of year
10 9

Investments in associates are accounted for using the equity method of accounting. 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, ~~were~~are 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

%

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

%

2007
Country of incorporation Interest held Assets Liabilities Revenues Profit
All figures in £ millions

The Economist Newspaper Ltd England 50 63 (63 ) 131 15
Other 30 (21 ) 56 4

Total
93 (84 ) 187 19

The interest held in associates is equivalent to voting rights.

F-33
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)~~

2008 2007
All figures in £ millions

Deferred income tax assets

Deferred income tax assets to be recovered after more than 12 months 341 262
Deferred income tax assets to be recovered within 12 months 31 66

372 328

Deferred income tax liabilities

Deferred income tax liabilities to be settled after more than 12 months (447 ) (287 )
Deferred income tax liabilities to be settled within 12 months — —

(447 ) (287 )

Net deferred income tax
(75 ) 41

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 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 ~~2006~~2008 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.£28m (2007: £34m). 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 2008 2007
All figures in £ millions

At beginning of year 41 172
Exchange differences (12 ) (4 )
Income statement charge 7 (93 ) (87 )
Acquisition through business combination 30 (4 ) (45 )
Disposal through business disposal 32 — 2
Tax (charge)/benefit to equity (7 ) 3

At end of year
(75 ) 41

F-34
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)~~

Capital
Trading
Goodwill and
Returns

losses losses intangibles provisions Other Total
All figures in £ millions

Deferred income tax assets

At 1 January 2007 76 129 25 66 121 417
Exchange differences — (5 ) — (1 ) (2 ) (8 )
Acquisition through business combination — 10 — — 1 11
Income statement (charge)/benefit (76 ) (47 ) (5 ) 14 19 (95 )
Tax benefit to equity — — — — 3 3

At 31 December 2007 — 87 20 79 142 328

Exchange differences — 19 6 28 40 93
Acquisition through business combination — 2 — — — 2
Income statement charge — (35 ) (6 ) (1 ) (3 ) (45 )
Tax charge to equity — — — — (6 ) (6 )

At 31 December 2008
— 73 20 106 173 372

Other deferred income tax assets include temporary differences on share-based payments, inventory, ~~sales returns~~retirement benefit obligations 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 2007 (149 ) (96 ) (245 )
Exchange differences 3 1 4
Acquisition through business combination (56 ) — (56 )
Disposal through business disposal — 2 2
Income statement (charge)/benefit (12 ) 20 8
Tax benefit to equity — — —

At 31 December 2007 (214 ) (73 ) (287 )

Exchange differences (73 ) (32 ) (105 )
Acquisition through business combination (5 ) (1 ) (6 )
Income statement charge (26 ) (22 ) (48 )
Tax charge to equity — (1 ) (1 )

At 31 December 2008
(318 ) (129 ) (447 )

Other deferred income tax liabilities include temporary differences in respect of depreciation and royalty advances.

F-35
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:

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 )

F-36
Notes to the Consolidated Financial Statements (Continued)

2007
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 52 — — — — 52 52
Cash and cash equivalents 17 — — — 560 — 560 560
Marketable securities 40 — — — — 40 40
Derivative financial instruments 16 — 16 35 — — 51 51
Trade receivables 22 — — — 750 — 750 750

Total financial assets
92 16 35 1,310 — 1,453 1,453

Derivative financial instruments 16 — (8 ) (8 ) — — (16 ) (16 )
Trade payables 24 — — — — (342 ) (342 ) (342 )
Bank loans and overdrafts 18 — — — — (444 ) (444 ) (444 )
Borrowings due within one year 18 — — — — �� (115 ) (115 ) (112 )
Borrowings due after more than one year 18 — — — — (1,049 ) (1,049 ) (1,046 )

Total financial liabilities
— (8 ) (8 ) — (1,950 ) (1,966 ) (1,960 )

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 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 equity.
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 included in note 19: Financial instruments and risk management.
F-37
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

2008 2007
All figures in £ millions

At beginning of year 52 17
Exchange differences 18 —
Acquisition of investments 1 —
Disposal of investments (8 ) —
Equity interest received on sale of Government Solutions — 35

At end of year
63 52

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 )

2008 2007
Gross notional
Gross notional

amounts Assets Liabilities amounts Assets Liabilities
All figures in £ millions

Interest rate derivatives — in a fair value hedge relationship 1,232 161 — 522 18 (8 )
Interest rate derivatives — not in a hedge relationship 1,033 23 (20 ) 796 7 (8 )
Cross currency rate derivatives — in a net investment hedge relationship — — — 100 17 —
Cross currency rate derivatives — not in a hedge relationship — — — 50 9 —

Total
2,265 184 (20 ) 1,468 51 (16 )

Analysed as expiring:

In less than one year 487 3 (5 ) 320 28 —
Later than one year and not later than five years 859 47 (15 ) 796 13 (8 )
Later than five years 919 134 — 352 10 (8 )

Total
2,265 184 (20 ) 1,468 51 (16 )

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,~~2008, the currency split of the~~mark-to~~mark-to-market~~-market~~ values of rate derivatives, including the exchange of principal on cross currency rate derivatives, was US dollar ~~£(247)m, euro £157m~~£161m and sterling ~~£157m (2005:~~£3m (2007: US dollar ~~£(269)~~£(119)m ~~euro £166m~~ and sterling ~~£164m)~~£154m).

The fixed interest rates on outstanding rate derivative contracts at the end of ~~2006~~2008 range from ~~3.02%~~4.45% to ~~7.00% (2005: 3.02%~~7.0% (2007: 4.45% to ~~7.23%~~7.00%) and the floating rates are based on LIBOR in US dollar ~~sterling~~ and ~~euro(EURIBOR).~~sterling.

F-38
~~F-36~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~Notes to the Consolidated Financial Statements (Continued)

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. 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 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.~~
18 ~~Inventories~~

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)~~
19 ~~Trade 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.
20 Cash 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

2008 2007
All figures in £ millions

Cash at bank and in hand 528 439
Short-term bank deposits 157 121

685 560

Short-term bank deposits are invested with banks and earn interest at the prevailing short-term deposit rates.

At the end of ~~2006~~2008 the currency split of cash and cash equivalents iswas US dollars ~~31% (2005: 31%~~36% (2007: 37%), sterling ~~35% (2005: 38%~~22% (2007: 29%), euros ~~21% (2005: 24%~~20% (2007: 16%) and other ~~13% (2005: 7%~~22% (2007: 18%).

Cash and cash equivalents have fair values that approximate to their carrying amounts 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

2008 2007
All figures in £ millions

Cash and cash equivalents 685 560
Bank overdrafts (96 ) (68 )

589 492

F-39
~~F-39~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~Notes 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

2008 2007
All figures in £ millions

Non-current

Bank loans and overdrafts 132 —
4.7% US Dollar Bonds 2009 (nominal amount $350m) — 176
7% Global Dollar Bonds 2011 (nominal amount $500m) 368 264
5.5% Global Dollar Bonds 2013 (nominal amount $350m) 258 —
5.7% US Dollar Bonds 2014 (nominal amount $400m) 322 211
7% Sterling Bonds 2014 (nominal amount £250m) 254 251
6.25% Global Dollar Bonds 2018 (nominal amount $550m) 445 —
4.625% US Dollar notes 2018 (nominal amount $300m) 237 143
Finance lease liabilities 3 4

2,019 1,049

Current

Due within one year or on demand:

Bank loans and overdrafts 96 444
10.5% Sterling Bonds 2008 (nominal amount £100m) — 105
4.7% US Dollar Bonds 2009 (nominal amount $350m) 244 —
Loan notes — 8
Finance lease liabilities 4 2

344 559

Total borrowings
2,363 1,608

Included in the non-current borrowings above is £12m of accrued interest ~~(2005: £35m)~~(2007: £6m).
Included in the current borrowings above is ~~£22m~~£1m of accrued interest ~~(2005: £3m)~~(2007: £7m).
~~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

2008 2007
All figures in £ millions

Between one and two years 2 178
Between two and five years 759 266
Over five years 1,258 605

2,019 1,049

F-40
~~F-40~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~Notes 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

2008 2007
Effective
Carrying
Carrying

interest rate value Market value value Market value

Bank loans and overdrafts n/a 228 228 444 444
Loan notes n/a — — 8 8
10.5% Sterling Bonds 2008 10.53 % — — 105 102
4.7% US Dollar Bonds 2009 4.86 % 244 243 176 176
7% Global Dollar Bonds 2011 7.16 % 368 349 264 267
5.5% Global Dollar Bonds 2013 5.76 % 258 227 — —
5.7% US Dollar Bonds 2014 5.88 % 322 262 211 203
7% Sterling Bonds 2014 7.20 % 254 258 251 261
6.25% Global Dollar Bonds 2018 6.46 % 445 352 — —
4.625% US Dollar notes 2018 4.69 % 237 169 143 135
Finance lease liabilities n/a 7 7 6 6

2,363 2,095 1,608 1,602

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~~

2008 2007
All figures in £ millions

US dollar 2,081 1,251
Sterling 277 357
Euro 5 —

2,363 1,608

~~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.~~

2008 2007
All figures in £ millions

Floating rate

— expiring within one year — —
— expiring beyond one year 1,085 1,007

1,085 1,007

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-41
Notes to the Consolidated Financial Statements (Continued)
2218.   Financial liabilities — Borrowings continued
The maturity of the Group’s finance lease obligations is as follows:

2008 2007
All figures in £ millions

Finance lease liabilities — minimum lease payments

Not later than one year 4 2
Later than one year and not later than two years 2 2
Later than two years and not later than three years 1 1
Later than three years and not later than four years — 1
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 7 6

The present value of finance lease liabilities is as follows:

2008 2007
All figures in £ millions

Not later than one year 4 2
Later than one year and not later than five years 3 4
Later than five years — —

7 6

The carrying amounts of the Group’s lease obligations approximate their fair value.
19.   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 2008, with the exception of a change to the foreign exchange hedging policy made with effect from October 2008, which is explained later in this note. Some minor updates will also be made to treasury policies for 2009, largely to reflect current financial market conditions.
The audit committee and a group of external treasury advisers 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.

F-42
Notes to the Consolidated Financial Statements (Continued)
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 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) 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 2008 the hedging ratio, on the above basis, was approximately 49%. 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 £10m 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 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 2008 the average maturity of gross borrowings was 5.0 years of which bonds represented 90% of these borrowings (up from 4.6 years and up from 72% 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 2008 the committed facilities amounted to £1,217m and their weighted average maturity was 3.4 years.

F-43
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:

2008 2007
All figures in £ millions

Cash and cash equivalents 685 560
Marketable securities 54 40
Derivative financial instruments 164 35
Bank loans, overdrafts and loan notes (228 ) (452 )
Bonds (2,128 ) (1,150 )
Finance lease liabilities (7 ) (6 )

Net debt (1,460 ) (973 )

The split of net debt between fixed and floating rate, stated after the impact of rate derivatives, is as follows:

2008 2007
All figures in £ millions

Fixed rate 781 567
Floating rate 679 406

Total 1,460 973

Gross borrowings, after the impact of cross-currency rate derivatives, analysed by currency are as follows:

2008 2007
All figures in £ millions

US dollar 2,081 1,401
Sterling 277 207
Euro 5 —

Total 2,363 1,608

As at 31 December 2008 there were no outstanding cross-currency rate derivatives.
As at 31 December 2008 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 476 629 1,258 2,363
Effect of rate derivatives 1,173 (254 ) (919 ) —

Total 1,649 375 339 2,363

F-44
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:

2008
USD GBP EUR 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

2007
USD GBP EUR Total
All figures in £ millions

Not later than one year 153 (30 ) — 123
Later than one year and not later than five years 966 70 — 1,036
Later than five years 420 285 — 705

Total
1,539 325 — 1,864

Analysed as:
Revolving credit facilities and commercial paper 429 — — 429
Bonds 1,017 483 — 1,500
Rate derivatives — inflows (268 ) (160 ) — (428 )
Rate derivatives — outflows 361 2 — 363

Total
1,539 325 — 1,864

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 company 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-45
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 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 are only the US dollar and sterling. However, the Group still borrows small amounts in other currencies, typically for seasonal working capital needs. In addition, 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. 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 amortisation may now be included in the above hedging process at the request of the chief financial officer. At the balance sheet date, no hedging transactions had been undertaken under that authority.
Included within year end net debt, the net borrowings/(cash) in the two principal currencies above (taking into account the effect of cross currency swaps) were: US dollar £1,777m and sterling £127m.
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 — sensitivity analysis
As at 31 December 2008 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 63 — — (2 ) 3
Cash and cash equivalents 685 — — (41 ) 50
Marketable securities 54 — — (5 ) 6
Derivative financial instruments 164 (80 ) 88 (15 ) 18
Bonds (2,128 ) 77 (84 ) 155 (189 )
Other borrowings (235 ) — — 19 (24 )
Other net financial assets 580 — — (46 ) 57

Total financial instruments (817 ) (3 ) 4 65 (79 )

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.

F-46
Notes to the Consolidated Financial Statements (Continued)
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.
20.   Intangible assets — Pre-publication

2008 2007
All figures in £ millions

Cost

At beginning of year 1,264 1,152
Exchange differences 494 (7 )
Additions 297 230
Disposals (345 ) (125 )
Acquisition through business combination 78 19
Transfer from software 12 —
Transfer to non-current assets held for sale — (5 )

At end of year
1,800 1,264

Amortisation

At beginning of year (814 ) (750 )
Exchange differences (337 ) 1
Charge for the year (244 ) (192 )
Disposals 345 125
Acquisition through business combination (51 ) (1 )
Transfer from software (4 ) —
Transfer to non-current assets held for sale — 3

At end of year
(1,105 ) (814 )

Carrying amounts
At end of year
695 450

Included in the above are pre-publication assets amounting to £462m (2007: £292m) 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 2008 and 2007.

F-47
Notes to the Consolidated Financial Statements (Continued)
21.   Inventories

2008 2007
All figures in £ millions

Raw materials 31 24
Work in progress 29 30
Finished goods 441 314

501 368

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 £832m (2007: £732m). In 2008 £56m (2007: £47m) of inventory provisions was charged in the income statement. None of the inventory is pledged as security.
22.   Trade and other receivables

2008 2007
All figures in £ millions

Current

Trade receivables 1,030 750
Royalty advances 111 84
Prepayments and accrued income 62 48
Other receivables 135 59
Receivables from related parties 4 5

1,342 946

Non-current

Royalty advances 102 68
Prepayments and accrued income 3 4
Other receivables 47 57

152 129

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:

2008 2007
All figures in £ millions

At beginning of year (52 ) (46 )
Exchange differences (18 ) (1 )
Income statement movements (27 ) (19 )
Utilised 27 15
Acquisition through business combination (2 ) (3 )
Disposal through business disposal — 2

At end of year
(72 ) (52 )

Concentrations of credit risk with respect to trade receivables are limited due to the Group’s large number of customers, who are internationally dispersed.

F-48
Notes to the Consolidated Financial Statements (Continued)
The ageing of the Group’s trade receivables is as follows:

2008 2007
All figures in £ millions

Within due date 1,110 819
Up to three months past due date 248 171
Three to six months past due date 60 51
Six to nine months past due date 21 12
Nine to 12 months past due date 15 19
More than 12 months past due date 20 19

Total trade receivables
1,474 1,091

Less: provision for bad and doubtful debts (72 ) (52 )
Less: provision for sales returns (372 ) (281 )
Transfer to non-current assets held for sale — (8 )

Net trade receivables
1,030 750

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 2008 37 9 21 67
Exchange differences 5 2 9 16
Charged to income statement 2 — 7 9
Released to income statement — (1 ) (5 ) (6 )
Acquisition through business combination — current year 3 — 16 19
Acquisition through business combination — prior year adjustments (4 ) — 7 3
Utilised — (2 ) (17 ) (19 )

At 31 December 2008 43 8 38 89

2008 2007
All figures in £ millions

Analysis of provisions
Non-current 33 44
Current 56 23

89 67

Deferred consideration ~~— Additional deferred consideration of £17m was incurred during the year relating~~ primarily relates to the acquisition of ~~Mergermarket.~~Mergermarket in 2006. These amounts are payable in 2009.

Lease commitments ~~— These~~ relate primarily to onerous lease contracts, acquired through business combinations, which have various expiry dates up to ~~2010.~~2017. The provision is based on current occupancy estimates.

F-49
Notes to the Consolidated Financial Statements (Continued)
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

2008 2007
All figures in £ millions

Trade payables 450 342
Social security and other taxes 35 23
Accruals 501 402
Deferred income 444 290
Interest payable 10 —
Dividends payable to minority interest 5 12
Other liabilities 205 171

1,650 1,240

Less: non-current portion

Accruals 42 30
Deferred income 87 58
Interest payable 1 —
Other liabilities 91 102
221 190

Current portion
1,429 1,050

The carrying value of the Group’s ~~trade and other liabilities~~payables approximates ~~their~~its fair value.

The deferred income balances comprise:
~~• multi-year obligations to deliver workbooks to adoption customers in school businesses;~~
• 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.
~~• 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 benefits~~Retirement benefit and other post-retirement obligations
~~Retirement benefit obligations~~Background

The Group operates a number of defined benefit and defined contribution retirement ~~benefit~~ plans throughout the ~~world,~~world. For the ~~principal ones being~~defined 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 with~~largest 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 plan~~plan’) 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.
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.

F-50
~~F-43~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~Notes to the Consolidated Financial Statements (Continued)

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.
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, which primarily relate to US pension 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~~

2008 2007 2006
UK Group
Other
UK Group
Other
UK Group
Other

plan plans PRMB plan plans PRMB plan plans PRMB

%
Inflation 2.80 2.80 2.80 3.30 2.93 3.00 3.00 2.91 3.00
Rate used to discount plan liabilities 6.40 6.25 6.25 5.80 6.01 6.05 5.20 5.70 5.85
Expected return on assets 6.33 7.60 — 6.50 7.27 — 6.40 7.18 —
Expected rate of increase in salaries 4.30 4.50 — 5.00 4.36 — 4.70 4.37 —
Expected rate of increase for pensions in payment and deferred pensions 2.30 to 4.20 — — 2.50 to 4.30 — — 2.10 to 4.60 — —
Initial rate of increase in healthcare rate — — 9.00 — — 9.50 — — 10.00
Ultimate rate of increase in healthcare rate — — 5.00 — — 5.00 — — 5.00

The UK discount rate is based on ~~advice, published statistics and experience in each territory. In 2006,~~ the ~~Group used~~annualised yield on the ~~PMFA92 (medium-cohort) series mortality tables~~iBoxx over15-year AA-rated corporate bond index, adjusted to reflect the duration of our liabilities. The US 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 ~~UK Group plan modified for age-rating adjustments to recalibrate~~defined portfolio at the ~~tables against observed experience~~end of the ~~plan, and allowing for the future improvement effect from the medium cohort approach.~~year.
~~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

      ~~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:~~

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 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 in 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)~~
      ~~The following gains/(losses) have been recognised in 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 comprises 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 any of the Group’s own financial instruments, nor any property occupied by the Group.~~
~~F-46~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~
      ~~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 UK mortality assumptions have been derived by adjusting standard mortality tables (PMFA 92 tables projected forward with medium cohort improvement factors). The Group changed its mortality assumptions in the UK in 2007 to reflect an assumed increased life expectancy of pensioners by adding a 1% floor to the medium cohort projections.
For the US plans, the assumptions used were based on standard US mortality tables. In 2007 GAM94 was used, and in 2008 this was updated to RP2000 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
2008 2007 2008 2007

Male 21.5 21.3 17.6 17.9
Female 21.8 21.6 20.2 21.3
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
2008 2007 2008 2007

Male 23.3 23.1 17.6 17.9
Female 23.8 23.6 20.2 21.3

F-51
Notes to the Consolidated Financial Statements (Continued)
Financial statement information
The amounts recognised in the income statement are as follows:

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)/return 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

2006
Defined

UK Group
benefit
Defined

plan other Sub-total contribution PRMB Total
All figures in £ millions

Current service cost 27 2 29 36 1 66
Past service cost — — — — (2 ) (2 )

Total operating expense
27 2 29 36 (1 ) 64

Expected return on plan assets (85 ) (7 ) (92 ) — — (92 )
Interest on plan liabilities 78 7 85 — 3 88
Net finance (income)/expense
(7 ) — (7 ) — 3 (4 )

Net income statement charge
20 2 22 36 2 60

Actual (loss)/return on plan assets
153 13 166 — — 166

The total operating charge is included in administrative and other expenses. The UK Group plan current service cost includes £14m (2007: £10m) relating to defined contribution sections.

F-52
Notes to the Consolidated Financial Statements (Continued)
The amounts recognised in the balance sheet are as follows:

2008 2007
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 1,478 100 — 1,578 1,744 109 — 1,853
Present value of defined benefit obligation (1,429 ) (149 ) (16 ) (1,594 ) (1,682 ) (117 ) (12 ) (1,811 )

Net pension (liability)/asset
49 (49 ) (16 ) (16 ) 62 (8 ) (12 ) 42

Other post-retirement medical benefit obligation (68 ) (47 )
Other pension accruals (34 ) (28 )
Net retirement benefit obligations
(118 ) (33 )

Analysed as:

Retirement benefit assets
49 62

Retirement benefit obligations
(167 ) (95 )

The following (losses)/gains have been recognised in the statement of recognised income and expense:

2008 2007 2006
All figures in £ millions

Amounts recognised for defined benefit plans (74 ) 79 102
Amounts recognised for post-retirement medical benefit plans 3 1 5

Total recognised in year
(71 ) 80 107

Cumulative amounts recognised
53 124 44

The fair value of plan assets comprises the following:

2008 2007
Other
Other

UK Group
funded
UK Group
funded

plan plans Total plan plans Total
%

Equities 28.0 3.1 31.1 34.3 3.4 37.7
Bonds 40.8 2.2 43.0 34.9 2.0 36.9
Properties 7.4 0.1 7.5 7.7 — 7.7
Other 17.5 0.9 18.4 17.2 0.5 17.7
The plan assets do not include any of the Group’s own financial instruments, or any property occupied by the Group.

F-53
Notes to the Consolidated Financial Statements (Continued)
Changes in the values of plan assets and liabilities of the retirement benefit plans are as follows:

2008 2007
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 1,744 109 1,853 1,528 105 1,633
Exchange differences — 23 23 — 1 1
Expected return on plan assets 104 7 111 96 7 103
Actuarial gains and (losses) (234 ) (34 ) (268 ) 32 (3 ) 29
Contributions by employer 54 3 57 152 5 157
Contributions by employee 9 — 9 8 — 8
Benefits paid (72 ) (8 ) (80 ) (72 ) (6 ) (78 )
Other movements (127 ) — (127 ) — — —

Closing fair value of plan assets
1,478 100 1,578 1,744 109 1,853

Present value of defined benefit obligation

Opening defined benefit obligation (1,682 ) (129 ) (1,811 ) (1,683 ) (127 ) (1,810 )
Exchange differences — (38 ) (38 ) — 1 1
Current service cost (33 ) (3 ) (36 ) (29 ) (2 ) (31 )
Past service cost — (1 ) (1 ) — — —
Interest cost (93 ) (7 ) (100 ) (84 ) (7 ) (91 )
Actuarial gains and (losses) 189 5 194 50 — 50
Contributions by employee (9 ) — (9 ) (8 ) — (8 )
Benefits paid 72 8 80 72 6 78
Other movements 127 — 127 — — —

Closing defined benefit obligation
(1,429 ) (165 ) (1,594 ) (1,682 ) (129 ) (1,811 )

During 2008 changes made to the administration of the plan assets has 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 will no longer be disclosed as part of the UK Group plan assets. The other movements in both the change in value of plan assets and liabilities over the year represent the separation out of these defined contribution assets.
Changes in the value of the US PRMB are as follows:

2008 2007
All figures in £ millions

Opening defined benefit obligation (47 ) (48 )
Exchange differences (19 ) —
Current service cost (1 ) (1 )
Past service cost (5 ) —
Interest cost (3 ) (2 )
Actuarial gains and (losses) 3 1
Benefits paid 4 3

Closing defined benefit obligation
(68 ) (47 )

F-54
Notes to the Consolidated Financial Statements (Continued)
The history of the defined benefit plans is as follows:

2008 2007 2006 2005 2004
All figures in £ millions

Fair value of plan assets 1,578 1,853 1,633 1,500 1,280
Present value of defined benefit obligation (1,594 ) (1,811 ) (1,810 ) (1,803 ) (1,615 )

Net pension asset/(liability)
(16 ) 42 (177 ) (303 ) (335 )

Experience adjustments on plan assets (268 ) 29 74 140 67
Experience adjustments on plan liabilities 194 50 28 (119 ) (127 )
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 most recently completed triennial actuarial valuation for funding purposes was completed as at 1 January 2006 and revealed a funding shortfall. The Group has agreed that the funding shortfall will be eliminated by 31 December 2014. In 2008 the Group contributed £21m (2007: £121m including a special contribution of £100m) and has agreed to contribute £21.9m per annum thereafter in excess of an estimated £30m of regular contributions.
The Group expects to contribute ~~approximately £150m~~$92m in 2009 and $86m in 2010 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~~

2008
1% increase 1% decrease
All figures in £ millions

Effect on:

(Decrease)/increase in defined benefit obligation — UK Group plan (180.1 ) 209.6
(Decrease)/increase of aggregate of service cost and interest cost — UK Group plan (2.2 ) 1.1
(Decrease)/increase in defined benefit obligation — US plan (12.2 ) 14.5
The Group operates a number of post-retirement medical benefit plans, principally in the US. These plans are unfunded. The method of accounting and the frequency of valuations are similar to those used for defined benefit 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 are 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~~
~~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

2008
1% increase 1% decrease
All figures in £ millions

Effect on:

Increase/(decrease) in post-retirement medical benefit obligation 3.3 (2.9 )
Increase/(decrease) of aggregate of service cost and interest cost 0.2 (0.1 )

F-55
~~Share-based payments~~Notes 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

2008 2007 2006
All figures in £ millions

Pearson plans 25 23 18
Interactive Data plans 8 7 7

Total share-based payment costs
33 30 25

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 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 July 2007, March 2008 and July 2008, 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 2007 and 2008 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 of up to one share for every one held.
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-56
~~F-49~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~Notes 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

2008 2007
Weighted
Weighted

Number of
average
Number of
average

share
exercise
share
exercise

options
price
options
price

000s £ 000s £

Outstanding at beginning of year 16,781 13.15 18,861 13.36
Granted during the year 1,437 5.35 773 6.90
Exercised during the year (683 ) 4.85 (1,326 ) 5.80
Forfeited during the year (3,082 ) 11.56 (1,434 ) 19.63
Expired during the year (74 ) 6.06 (93 ) 7.68

Outstanding at end of year
14,379 13.14 16,781 13.15

Options exercisable at end of year
11,527 14.97 13,999 14.63

Options were exercised regularly throughout the year. The weighted average share price during the year was ~~£7.45 (2005: £6.52)~~£6.44 (2007: £8.02). 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

2008 2007
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 — 5 453 1.23 930 1.56
5 — 10 5,113 2.84 4,909 3.22
10 — 15 5,481 1.97 7,257 2.62
15 — 20 908 0.84 980 1.85
20 — 25 350 1.19 400 2.19
>25 2,074 1.19 2,305 2.19

14,379 2.05 16,781 2.62

In ~~2006~~2008 and ~~2005~~2007 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-57
~~F-50~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~Notes 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 %

2008
2007

Weighted
Weighted

average average

Fair value £1.67 £2.53
Weighted average share price £6.96 £8.91
Weighted average exercise price £5.35 £6.90
Expected volatility 21.41 % 19.72 %
Expected life 4.1 years 4.0 years
Risk free rate 4.28 % 5.34 %
Expected dividend yield 4.54 % 3.29 %
Forfeiture rate 3.6 % 3.5 %
The expected volatility is based on the historic volatility of the ~~Company’s~~company’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 fair value of restricted shares awarded under the Annual Bonus Share Matching Plan and the Long-Term Incentive Plan was determined using a Black-Scholes model to reflect dividends foregone using a dividend yield of 3.85%. From 2006 onwards, participants of the Long-Term Incentive Plan are entitled to dividends during the vesting period. Following a review of the accounting policies for share-based payments in 2006, the restricted

2008 2007
Weighted
Weighted

Number of
average
Number of
average

shares
fair value
shares
fair value

000s £ 000s £

Annual Bonus Share Matching Plan 253 6.73 143 7.67
Long-Term Incentive Plan 4,152 5.78 3,377 7.12
Restricted shares granted ~~in 2006~~ under the Annual Bonus Share Matching Plan are valued using the share price at the date of ~~grant~~grant. Until 31 December 2007, they were discounted by the dividend yield ~~(3.66%~~(2007: 3.26%) to take into account any dividends foregone. From 2008, shares granted include the entitlement to dividends during the vesting period and therefore the share price is not discounted. The fair value of shares granted under the Long-Term Incentive Plan that vest unconditionally ~~was~~is determined using the share price at the date of grant. Participants of the Long-Term Incentive Plan are entitled to dividends during the vesting period. The number of shares to vest ~~was~~has been adjusted, based on historical experience, to account for any potential forfeitures.
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% 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-58
~~F-51~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~Notes 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 183,318 shares (2007: 186,343) under the 2001 Employee Stock Purchase Plan at an average share price of $22.95(£15.96) (2007: $17.77; £8.93). The weighted average fair value at the date of grant was $6.59 (£4.58) (2007: $4.76; £2.39).
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

2008 2007
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 9,827 18.21 9.15 10,506 16.33 8.34
Granted during the year 1,449 24.95 17.35 1,560 27.17 13.65
Exercised during the year (895 ) 15.37 10.69 (1,935 ) 14.88 7.48
Forfeited during the year (99 ) 22.05 15.34 (293 ) 20.38 10.24
Expired during the year (18 ) 12.17 8.46 (11 ) 18.12 9.10

Outstanding at end of year
10,264 19.38 13.48 9,827 18.21 9.15

Options exercisable at end of year
6,865 16.89 11.75 6,199 15.27 7.67

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

2008 2007
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 47 1.3 72 2.1
7.5 — 12 1,502 2.4 1,745 3.4
12 — 20 2,987 4.6 3,464 5.6
> 20 5,728 8.0 4,546 8.5

10,264 6.2 9,827 6.6

F-59
Notes to the Consolidated Financial Statements (Continued)
The fair value of the options granted under the 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
2008
2007
2008
2007

Weighted
Weighted
Weighted
Weighted

average average average average

Fair value $ 5.58 $ 6.60 $ 6.59 $ 4.76
Weighted average share price $24.95 $27.17 $22.95 $17.77
Weighted average exercise price $24.95 $27.17 $22.95 $17.77
Expected volatility 24.20 % 23.40 % 33.70 % 20.50 %
Expected life 5.7 years 5.0 years 0.5 years 0.5 years
Risk free rate 1.5% to 3.5% 4.2% to 4.9% 2.0% to 2.4% 4.3% to 5.1%
Expected dividend yield 2.2 % 1.9 % 2.1 % 2.0 %
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 ~~IDC~~Interactive 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

2008 2007
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 194 25.43 17.69 185 27.07 13.60
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 2007 806,109 202 2,487
Issue of ordinary shares — share option schemes 1,919 — 12

At 31 December 2007 808,028 202 2,499

Issue of ordinary shares — share option schemes 1,248 — 6

At 31 December 2008
809,276 202 2,505

The total authorised number of ordinary shares is ~~1,190m~~1,198m shares ~~(2005: 1,186m~~(2007: 1,194m shares) with a par value of 25p per share ~~(2005:~~(2007: 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 (see notes 27, 28 and 29).

F-60
Notes to the Consolidated Financial Statements (Continued)
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.
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 2007 8,761 130 6,052 59 189
Purchase of treasury shares 4,900 40 1,177 16 56
Release of treasury shares (1,900 ) (29 ) — — (29 )

At 31 December 2007 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

The Group holds ~~its own~~Pearson plc shares in trust to satisfy its obligations under its restricted share plans (see note ~~24)~~26). These shares, representing 1.3% (2007: 1.5%) ofcalled-up share capital, are ~~held~~treated 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)~~£2.6m (2007: £2.9m). The nominal value of ~~IDC~~Interactive Data treasury shares amounts to ~~£0.3m (2005: £0.3m)~~£0.06m (2007: £0.04m).

At 31 December ~~2006~~2008 the market value of Pearson plc treasury shares was ~~£67.6m (2005: £36.2m)~~£67.0m (2007: £86.1m) and the market value of ~~IDC~~Interactive Data treasury shares was ~~£74.3m (2005: £60.2m)~~£157.9m (2007: £119.9m).

F-61
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

Total

Translation
Fair value
other
Retained

Notes reserve reserve reserves earnings
All figures in £ millions

At 1 January 2007 (592 ) — (592 ) 1,568
Net exchange differences on translation of foreign operations 25 — 25 —
Cumulative translation adjustment disposed — subsidiaries 32 53 — 53 —
Profit for the year attributable to equity holders of the company — — — 284
Dividends paid to equity holders of the company 9 — — — (238 )
Equity settled transactions 26 — — — 30
Actuarial gains on retirement benefit obligations — Group 25 — — — 80
Treasury shares released under employee share plans 28 — — — (29 )
Taxation on items charged to equity 7 — — — 29

At 31 December 2007
(514 ) — (514 ) 1,724

Net exchange differences on translation of foreign operations 1,050 — 1,050 —
Cumulative translation adjustment disposed — subsidiaries 32 49 — 49 —
Cumulative translation adjustment disposed — joint venture 1 — 1 —
Profit for the year attributable to equity holders of the company — — — 292
Dividends paid to equity holders of the company 9 — — — (257 )
Equity settled transactions 26 — — — 33
Actuarial losses on retirement benefit obligations — Group 25 — — — (71 )
Actuarial losses on retirement benefit obligations — associate — — — (3 )
Treasury shares released under employee share plans 28 — — — (41 )
Taxation on items charged to equity 7 — — — 2

At 31 December 2008
586 — 586 1,679

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. Included in the translation reserve in 2007 was a £49m loss relating to net assets classified as held for sale.
2830.   Business combinations

On ~~30 September 2006,~~2 January 2008 the Group acquired 100% of Money-Media, a US based company offering online news and commentary for 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~~money management industry. On 30 January 2008 the current year including Promissor, Paravia Bruno Mondadori (PBM), National Evaluation Systems (NES), PowerSchool and Chancery in 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 theGroup completed its acquisition of ~~AGS Publishing.~~100% of Harcourt Assessment after receiving clearance from the US Department of Justice.

F-62
~~F-54~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~Notes to the Consolidated Financial Statements (Continued)

The provisional assets and liabilities arising from 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 to the acquisition of Mergermarket are provisional and will be finalised during 2007. They include the valuation of intangible assets and the related deferred tax effect. Adjustments to 2005 provisional fair values largely relate to the acquisition of AGS Publishing.

2008 2007
Harcourt

Assessment
Money-Media
Other
Total
Total

Notes Fair value Fair value Fair value Fair value Fair value
All figures in £ millions

Property, plant and equipment 10 6 — — 6 11
Intangible assets 11 174 10 36 220 197
Intangible assets — Pre-publication 20 27 — — 27 18
Inventories 7 — — 7 15
Trade and other receivables 48 2 4 54 28
Cash and cash equivalents 5 — 11 16 —
Trade and other liabilities (40 ) (4 ) (8 ) (52 ) (38 )
Financial liabilities — Borrowings — — — — (1 )
Current income tax liabilities — — (3 ) (3 ) 4
Net deferred income tax liabilities 13 — — (4 ) (4 ) (45 )
Provisions for other liabilities and charges 23 (19 ) — (7 ) (26 ) (2 )
Minority interest — — (2 ) (2 ) —
Assets held for sale 3 — — 3 —

Net assets acquired at fair value
211 8 27 246 187

Goodwill
11 113 25 15 153 304

Total
324 33 42 399 491

Satisfied by:
Cash (321 ) (33 ) (40 ) (394 ) (468 )
Deferred consideration — — — — (12 )
Net prior year adjustments (3 ) — (2 ) (5 ) (11 )

Total consideration
(324 ) (33 ) (42 ) (399 ) (491 )

Carrying value of net assets/(liabilities) acquired 81 (2 ) (1 ) 78 41
Fair value adjustments 130 10 28 168 146

Fair value
211 8 27 246 187

~~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~~Harcourt Assessment and Money-Media results from substantial cost and revenue synergies and from benefits that cannot be separately recognised, such as the assembled workforce.
The fair value adjustments relating to these acquisitions were finalised during 2008.

F-63
Notes to the ~~profitability~~Consolidated Financial Statements (Continued)

Harcourt Assessment
Carrying
Fair

value value adjs Fair value
All figures in £ millions

Property, plant and equipment 7 (1 ) 6
Intangible assets 10 164 174
Intangible assets — Pre-publication 35 (8 ) 27
Inventories 8 (1 ) 7
Trade and other receivables 50 (2 ) 48
Cash and cash equivalents 5 — 5
Trade and other liabilities (39 ) (1 ) (40 )
Provisions for other liabilities and charges (3 ) (16 ) (19 )
Assets held for sale 8 (5 ) 3

Net assets acquired at fair value
81 130 211

Goodwill
113

Total
324

Money-Media
Carrying
Fair

value value adjs Fair value
All figures in £ millions

Intangible assets — 10 10
Trade and other receivables 2 — 2
Trade and other liabilities (4 ) — (4 )

Net assets acquired at fair value
(2 ) 10 8

Goodwill
25

Total
33

Net cash outflow on acquisition:

2008 2007 2006
All figures in £ millions

Cash — Current year acquisitions (394 ) (468 ) (382 )
Cash — Acquisitions yet to complete (12 ) — —
Deferred payments for prior year acquisitions and other items (5 ) (4 ) (9 )
Cash and cash equivalents acquired 16 — 28

Cash outflow on acquisition
(395 ) (472 ) (363 )

Harcourt Assessment contributed £150m of sales and £25m to the ~~acquired business~~Group’s profit before tax between the date of acquisition and the ~~significant synergies expected to arise.~~
      ~~Mergermarket~~balance sheet date. Money-Media contributed £9m of sales and ~~£2m~~£4m to the Group’s profit before tax between the date of acquisition and the balance sheet date. Other businesses acquired contributed ~~£15m~~£2m to the Group’s sales and £1m 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,~~2008, the Group estimates that sales for the period would have been ~~£4,199m~~£4,826m and profit before tax would have been ~~£478m.~~£587m.
F-64
Notes to the Consolidated Financial Statements (Continued)
29
31.   Non-current assets classified as held for sale
In 2007, assets classified as held for sale
      ~~As described~~ related to Data Management. The Group recognised an impairment on the goodwill allocated to the Data Management business in ~~note 3,~~anticipation of the loss on ~~11 December 2006 the Group announced the~~ disposal ~~of Pearson Government Solutions. This disposal was completed on 15 February 2007~~ (see note ~~35)~~3). ~~The major classes of~~There are no assets ~~and~~or liabilities ~~comprising the operations~~ classified as held for sale at the 2008 balance sheet ~~date are as follows:~~date.

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

Notes 2008 2007

Property, plant and equipment 10 — 7
Intangible assets — Goodwill — 96
Intangible assets — Pre-publication 20 — 2
Inventories — 4
Trade and other receivables — 8

Non-current assets classified as held for sale
— 117

Other liabilities — (9 )

Liabilities directly associated with non-current assets classified as held for sale
— (9 )

Net assets classified as held for sale
— 108

3032.   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 )

2008 2007 2006
Data

Management Other Total Total Total
All figures in £ millions

Disposal of subsidiaries

Property, plant and equipment (7 ) — (7 ) (16 ) —
Intangible assets (1 ) — (1 ) (6 ) —
Intangible assets — Pre-publication (2 ) — (2 ) — —
Inventories (4 ) (3 ) (7 ) (1 ) —
Trade and other receivables (8 ) — (8 ) (95 ) —
Cash and cash equivalents — — — (14 ) —
Net deferred income tax liabilities — — — 2 —
Trade and other liabilities 9 — 9 73 (1 )
Retirement benefit obligations — — — 3 —
Provisions for other liabilities and charges — — — 1 —
Minority interest — (5 ) (5 ) (8 ) (4 )
Attributable goodwill (98 ) (8 ) (106 ) (250 ) (5 )
Cumulative translation adjustment (49 ) — (49 ) (53 ) —

Net assets disposed
(160 ) (16 ) (176 ) (364 ) (10 )

Cash received 111 15 126 495 10
Deferred receipts — 2 2 — —
Other proceeds received — — — 35 —
Costs (4 ) (1 ) (5 ) (20 ) —

(Loss)/profit on sale
(53 ) — (53 ) 146 —

F-65
~~F-56~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~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.~~

2008 2007 2006

Cash flow from disposals

Cash — Current year disposals 126 495 10
Costs paid (15 ) (12 ) —
Cash and cash equivalents disposed — (14 ) —

Net cash inflow
111 469 10

~~2005 disposals relate mainly to the disposal~~
Further details of the ~~Group’s 79% interest~~Data Management business disposal are shown in ~~Recoletos Grupo de Communicación S.A..~~note 3.
31
33.   Cash generated from operations

Notes 2008 2007 2006
All figures in £ millions

Net profit 323 310 469
Adjustments for:

Income tax 209 222 19
Depreciation 10 80 68 77
Amortisation of purchased intangible assets 11 86 45 28
Adjustment on recognition of pre-acquisition deferred tax — — 7
Amortisation of other intangible assets 11 30 25 23
Loss on sale of property, plant and equipment 1 1 2
Net finance costs 6 91 106 74
Share of results of joint ventures and associates 12 (25 ) (23 ) (24 )
Loss/(profit) on sale of discontinued operations 3 53 (146 ) —
Goodwill impairment of discontinued operation 3 — 97 —
Net foreign exchange adjustment from transactions 105 11 (37 )
Share-based payment costs 26 33 30 25
Pre-publication (58 ) (38 ) (3 )
Inventories (12 ) (1 ) (16 )
Trade and other receivables (81 ) (5 ) (60 )
Trade and other liabilities 82 80 54
Retirement benefit obligations (14 ) (126 ) (17 )
Provisions for other liabilities and charges (9 ) 3 —

Net cash generated from operations
894 659 621

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. In 2008 the difference between this rate and the average rate used to translate profit gives rise to a ~~review of accounting presentation~~large currency adjustment in ~~2006,~~ the ~~Group has chosen to reclassify investment in pre-publication assets as~~reconciliation between net profit and net cash generated from operations. This ~~aligns~~adjustment reflects the ~~classification~~timing 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 reduce~~net 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 (2007: £7m; 2006: £33m) relating to discontinued operations.
F-66
~~F-57~~
~~NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS~~Notes 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

2008 2007 2006
All figures in £ millions

Net book amount 3 15 10
Loss on sale of property, plant and equipment (1 ) (1 ) (2 )

Proceeds from sale of property, plant and equipment
2 14 8

The principal other non-cash transactions are movements in finance lease obligations of ~~£4m (2005: £nil)~~£2m (2007: £4m; 2006: £4m).
~~32  Contingencies~~
34.   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~~
35.   Commitments
Capital commitments

Capital expenditure contracted for at the balance sheet date but not yet incurred is as follows:

2006 2005

(All figures in
£ millions)
Property, plant and equipment — 1

2008 2007
All figures in £ millions
Property, plant and equipment — 3

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)~~

2008 2007
All figures in £ millions

Not later than one year 149 123
Later than one year and not later than two years 138 116
Later than two years and not later than three years 129 102
Later than three years and not later than four years 118 93
Later than four years and not later than five years 108 85
Later than five years 970 834

1,612 1,353

36.   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.

F-67
Key management personnelare 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~~
      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)~~
36 ~~Summary of principal differences between International Financial Reporting Standards and United States of America generally accepted accounting principles~~
      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~~37.

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 to 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 on the date of acquisition, with the difference between the consideration and the fair value of the identifiable net assets recorded as goodwill.
      ~~Goodwill is tested for impairment on an annual basis in accordance with IFRS 3~~~~‘Business Combinations’~~.
      For 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 the 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 to the acquisition of businesses contingent on 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 with~~SFAS 141 “Business Combinations.”~~Consideration related 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 paid and can be measured reliably.
~~(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)~~
      ~~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~~Events after the balance sheet date
~~IFRS 7 ‘Financial Instruments: Disclosures’ (effective~~
During 2008 Pearson’s International Education business announced its intention to increase its stakes in Longman Nigeria from ~~January 1, 2007). IFRS 7 introduces new disclosures of qualitative~~29% to 51% for £9m and ~~quantitative information about exposure~~Maskew Miller Longman (MML), its South African publishing business, from 50% 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.85%.
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 inUnder the terms of the ~~contract~~MML agreement, Pearson intends to create a new Southern Africa business and in return for the increased stake in MML our current joint venture partner will receive £46m in cash and a 15% interest in Pearson’s Heinemann and Edexcel businesses in that ~~significantly modifies~~region.
In addition Pearson’s International Education business also announced the ~~cash flows that otherwise would be required under~~acquisition of Fronter, a European online learning company based in Oslo, for £16m.
The Longman Nigeria acquisition completed in early January 2009 and the ~~contract,~~Fronter acquisition in ~~which case reassessment~~February 2009. The MML transaction is ~~required. The Group does not expect IFRIC 9~~expected to ~~have a material impact.~~complete in the second quarter of 2009 following regulatory approval.
~~F-69~~
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, 2007~~March 26, 2009

F-68
~~F-70~~


(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, ~~2006~~2008
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


Title of Class		Name of Each Exchange on Which Registered

*Ordinary Shares, 25p par value		~~New York Stock Exchange~~
American Depositary Shares, each Representing One Ordinary Share, 25p per Ordinary Share		New York Stock Exchange


		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 Information		7
	Exchange Rate Information		8
	~~Exchange Rate Information~~		9
	Risk Factors		98
Item 4.	Information on the Company		13
	Pearson		13
	Overview of Operating Divisions		13
	Our Strategy		13
	Operating Divisions		14
	~~Our Strategy~~		14
	Operating ~~Divisions~~		15
	~~Pearson Education~~		15
	~~The FT Group~~		16
	~~The Penguin Group~~Cycles		17
	~~Operating Cycles~~		18
	Competition		18
	Intellectual Property		1918
	Raw Materials		1918
	Government Regulation		1918
	Licenses, Patents and Contracts		19
	Legal Proceedings		19
	Recent Developments		19
	Organizational Structure		2019
	Property, Plant and Equipment		20
~~Item 4A.~~	~~Unresolved Staff Comments~~Capital Expenditures		21
Item 5.4A.	Unresolved Staff Comments		21
Item 5.	Operating and Financial Review and Prospects		21
	General Overview		21
	Results of Operations		2724
	Liquidity and Capital Resources		4041
	Accounting Principles		43
Item 6.	Directors, Senior Management and Employees		43
	Directors and Senior Management		43
	Compensation of Senior Management		45
	Share Options ~~of Senior Management~~		51
	~~Share Ownership~~ of Senior Management		52
	Share Ownership of Senior Management		54
	Employee Share Ownership Plans		5354
	Board Practices		53
	~~Employees~~		54
~~Item 7.~~	~~Major Shareholders and Related Party Transactions~~		55
~~Item 8.~~	~~Financial Information~~		55
	~~Legal Proceedings~~Employees		55
Item 9.7.	~~The Offer~~Major Shareholders and ~~Listing~~Related Party Transactions		56
Item ~~10.~~8.	~~Additional~~Financial Information		57
	~~Memorandum and Articles of Association~~		5756
Item 9.	~~Material Contracts~~The Offer and Listing		61
	~~Exchange Controls~~		62
	~~Tax Considerations~~		62
	~~Documents on Display~~		64
~~Item 11.~~	~~Quantitative and Qualitative Disclosures About Market Risk~~		64
	~~Introduction~~		6456


		Page

Item 10.	Additional Information		57
	Memorandum and articles of association		57
	Material Contracts		62
	Exchange Controls		63
	Tax considerations		63
	Documents on Display		65
Item 11.	Quantitative and Qualitative Disclosures about Market Risk		65
	Introduction		65
	Interest Rates		65
	Currency Exchange Rates		65
	~~Forward Foreign Exchange Contracts~~		66
	~~Derivatives~~Forward Foreign Exchange Contracts		66
~~Item 12.~~	~~Description of Securities Other Than Equity Securities~~		67
~~PART II~~
~~Item 13.~~	~~Defaults, Dividend Arrearages and Delinquencies~~Derivatives		67
	Quantitative Information about market risk		67
Item ~~14.~~12.	Description of Securities Other Than Equity Securities		67

PART II
Item 13.	Defaults, Dividend Arrearages and Delinquencies		68
Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds		67
~~Item 15.~~	~~Controls and Procedures~~		67
	~~Disclosure Controls and Procedures~~		67
	~~Management’s Annual Report on Internal Control Over Financial Reporting~~		67
	~~Change in Internal Control Over Financial Reporting~~		68
Item ~~16A.~~15.	Controls and Procedures		68
	~~Audit Committee~~Disclosure Controls and Procedures		68
	Management’s Annual Report on Internal Control over Financial ~~Expert~~Reporting		68
	Change in Internal Control over Financial Reporting		68
Item ~~16B.~~16A.	~~Code of Ethics~~Audit Committee Financial Expert		68
Item ~~16C.~~16B.	~~Principal Accountant Fees and Services~~Code of Ethics		68
~~Item 16D.~~	~~Exemptions from the Listing Standards for Audit Committees~~		69
Item ~~16E.~~16C.	Principal Accountant Fees and Services		69
Item 16D.	Exemptions from the Listing Standards for Audit Committees		69
Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchases		69
~~PART III~~
~~Item 17.~~	~~Financial Statements~~		69
Item ~~18.~~16F.	~~Financial Statements~~Changes in Registrant’s Certifying Accountant		69
Item ~~19.~~16G.	~~Exhibits~~Corporate Governance		6970

PART III
Item 17.	Financial Statements		70
Item 18.	Financial Statements		70
Item 19.	Exhibits		70
Exhibit 1.1
Exhibit 8.1
Exhibit 12.1
Exhibit 12.2
Exhibit 13.1
Exhibit 13.2
Exhibit 15


*	~~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


þLarge accelerated filer	oAccelerated filer	oNon-accelerated filer


þo~~Large accelerated filer~~US GAAP		oþ~~Accelerated filer~~International financial Reporting Standards as Issued by the International Accounting Standards Board		o~~Non-accelerated filer~~Other


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


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

		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


	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 and adjustment 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%


	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 and adjustment 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%


	Year Ended December 31
	2007			2006
	£m			£m

Cost of goods sold		1,910			1,841
Distribution costs		202			232
Administration and other expenses		1,600			1,518
Other operating income		(101	)		(99	)

Total		1,701			1,651


	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%


Item 17þo		Item 18o


Yeso		Noþ


	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 and adjustment 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%


	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, 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%


		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, 2008
			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		228		—		—		228		—
Variable rate loan notes		—		—		—		—		—
Bonds		2,128		244		—		626		1,258
Finance lease obligations		7		4		2		1		—
Operating lease obligations		1,612		149		138		355		970

Total		3,975		397		140		1,210		2,228


Name	Age			Position

Glen Moreno		6365	Chairman
Marjorie Scardino		6062	Chief Executive
David Arculus		6062	Non-executive Director
David Bell		6062	Director for People ~~and Chairman of The FT Group~~
Terry Burns		6365	Non-executive Director
Patrick Cescau		5860	Non-executive Director
~~Rona Fairhead~~Will Ethridge		4557	Chief Executive, ofPearson Education North America
Rona Fairhead		47	Chairman and Chief Executive, The FT Group
Robin Freestone		4850	Chief Financial Officer
Susan Fuhrman		6364	Non-executive Director
Ken Hydon		6264	Non-executive Director
John Makinson		5254	Chairman and Chief Executive, ~~Officer,~~ Penguin Group
~~Rana Talwar~~CK Prahalad		5967	Non-executive Director


Name	Pearson plc			Operating company			Personal objectives

Marjorie Scardino		100	%		—			—
David Bell		90	%		—			10	%
Will Ethridge		45	%		35	%		20	%
Rona Fairhead		30	%		60	%		10	%
Robin Freestone		90	%		—			10	%
John Makinson		30	%		60	%		10	%


	*~~Executive directors’ non-executive directorships~~*


	Fees payable from
	~~January~~July 1, ~~2005~~2007 (£)
	~~(£)~~

~~Basic non-executive~~Non-executive director fee		~~45,000~~60,000
Chairmanship of audit ~~and~~committee		20,000
Chairmanship of personnel ~~committees~~committee		15,000
Membership of audit committee		10,000
Membership of ~~audit and~~ personnel ~~committees~~committee		5,000
Senior independent ~~director’s fee~~director		~~10,000~~
~~Overseas meetings (per meeting)~~		~~2,500~~15,000


	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


	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		1,017		55		35		2,057
David Bell		469		493		—		21		983
Will Ethridge (appointed 1 May 2008)		361		810		—		—		1,171
Rona Fairhead		506		494		—		36		1,036
Robin Freestone		450		491		—		16		957
John Makinson		525		500		183		32		1,240

Senior management as a group		3,711		3,805		238		140		7,894


(1)	~~For~~There will be no increase 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)	Will Ethridge’s annual incentive includes a special award of Pearson shares in recognition of his contributions in such areas as his leadership efforts on the Google settlement and his oversight of Pearson’s global content management programme. The after-tax amount will be invested in Pearson shares, which will be acquired and held under the annual bonus share matching plan in 2009.

(3)	Allowances for Marjorie Scardino include ~~£40,190~~£43,560 in respect of housing costs and a US payroll supplement of ~~£9,646.~~£11,804. 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~~£182,824 for ~~2006.~~2008.

~~(3)~~(4)	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 £20,233 pension planning and financial advice. Marjorie Scardino, Rona Fairhead, David Bell and John Makinson have the use of a chauffeur.


~~(4)~~(5)	No amounts as compensation for loss of office and no expense allowances chargeable to UK income tax were paid during the year.


	Number of		Exercise	Earliest
Director	Options	(1)	Price	Exercise Date	Expiry Date

Marjorie Scardino(2)	37,583	c*	1372.4p	06/08/02	06/08/09
	37,583	c*	1647.5p	06/08/02	06/08/09
	41,550	d*	1421.0p	05/09/02	05/09/11
	41,550	d*	1421.0p	05/09/03	05/09/11
	41,550	d*	1421.0p	05/09/04	05/09/11
	41,550	d*	1421.0p	05/09/05	05/09/11

Total	241,366

David Bell	297	b	629.6p	08/01/09	02/01/10
	821	b	690.4p	08/01/10	02/01/11
	18,705	c*	1372.4p	06/08/02	06/08/09
	18,705	c*	1647.5p	06/08/02	06/08/09
	16,350	d*	1421.0p	05/09/02	05/09/11
	16,350	d*	1421.0p	05/09/03	05/09/11
	16,350	d*	1421.0p	05/09/04	05/09/11
	16,350	d*	1421.0p	05/09/05	05/09/11

Total	103,928

Will Ethridge	10,802	c*	1372.4p	06/08/02	08/06/09
	10,802	c*	1647.5p	06/08/02	08/06/09
	11,010	d*	$21.00	05/09/02	09/05/11
	11,010	d*	$21.00	05/09/03	09/05/11
	11,010	d*	$21.00	05/09/04	09/05/11
	11,010	d*	$21.00	05/09/05	09/05/11
	14,680	d*	$11.97	11/01/02	11/01/11
	14,680	d*	$11.97	11/01/03	11/01/11
	14,680	d*	$11.97	11/01/04	11/01/11

Total	109,684

Rona Fairhead	2,371	b	690.4p	08/01/12	02/01/13
	20,000	d*	822.0p	11/01/02	11/01/11
	20,000	d*	822.0p	11/01/03	11/01/11
	20,000	d*	822.0p	11/01/04	11/01/11

Total	62,371


(1)	Shares under option are designated as:aexecutive;bworldwide save for shares;cpremium priced; anddlong-term incentive; and*where options are exercisable.


	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 acquisition of shares under the worldwide save for shares plan is not subject to the satisfaction of a performance target.~~


	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.~~


	~~All options that remain outstanding are exercisable and lapse if they remain unexercised at the tenth anniversary of the date of grant.~~