AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON April 25, 2008March 26, 2009
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 20-F
 
   
(Mark One)  
o
 REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
OF 1934
or
þ
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 20072008
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 inRule 12-b2 of the Exchange Act).  Yeso     Noo
 
Commission file number 1-16055
PEARSON PLC
(Exact name of Registrant as specified in its charter)
 
England and Wales
(Jurisdiction of incorporation or organization)
 
80 Strand
London, England WC2R 0RL
(Address of principal executive offices)
 
Stephen Jones
Telephone: +44 20 7010 22572000
Fax: +44 20 7010 66336060
80 Strand
London, England WC2R 0RL
(Name, Telephone,E-mail and/or Facsimile Number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
   
Title of Class
 
Name of Each Exchange on Which Registered
 
*Ordinary Shares, 25p par value
American Depositary Shares, each Representing One Ordinary Share, 25p per Ordinary Share		 New York Stock Exchange
New York Stock Exchange
 
 
* Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the SEC.
 
 
 
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
 
 
 
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
 
 
 
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock at the close of the period covered by the annual report:
 
     
Ordinary Shares, 25p par value  808,028,141809,276,583 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yesþ      Noo
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yeso      Noþ
 
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yesþ      Noo
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer”, inRule 12b-2 of the Exchange Act. (Check one):
þLarge accelerated fileroAccelerated fileroNon-accelerated filer
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing
 
     
oUS GAAP
 þInternational financial Reporting Standards as Issued by the
International Accounting Standards Board		 oOther
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the Registrant has elected to follow:
 
   
Item 17o
 Item 18o
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act):
 
   
Yeso
 Noþ
 

 
TABLE OF CONTENTS
 
       
    Page
 
  Introduction  4 
  Forward-Looking Statements  4 
       
  PART I    
Item 1.
 Identity of Directors, Senior Management and Advisers  6 
Item 2.
 Offer Statistics and Expected Timetable  6 
Item 3.
 Key Information  6 
  Selected Consolidated Financial Data  6 
  Dividend Information  7 
  Exchange Rate Information  78 
  Risk Factors  8 
Item 4.
 Information on the Company  1213 
  Pearson  1213 
  Overview of Operating Divisions  1213 
  Our Strategy  13 
  Operating Divisions  1314 
  Operating Cycles  1617 
  Competition  1718 
  Intellectual Property  1718 
  Raw Materials  1718 
  Government Regulation  1718 
  Licenses, Patents and Contracts  1719
Legal Proceedings19 
  Recent Developments  1819 
  Organizational Structure  1819 
  Property, Plant and Equipment  1820 
  Capital Expenditures  1921 
Item 4A.
 Unresolved Staff Comments  1921 
Item 5.
 Operating and Financial Review and Prospects  2021 
  General Overview  2021 
  Results of Operations  2324 
  Liquidity and Capital Resources  3741 
  Accounting Principles  4043 
Item 6.
 Directors, Senior Management and Employees  4043 
  Directors and Senior Management  40
New Appointments4143 
  Compensation of Senior Management  4145 
  Share Options of Senior Management  4852 
  Share Ownership of Senior Management  5054 
  Employee Share Ownership Plans  5154 
  Board Practices  5154 
  Employees  5255 
Item 7.
 Major Shareholders and Related Party Transactions  5256
Item 8.
Financial Information56
Item 9.
The Offer and Listing56 


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    Page
Item 8.
Financial Information52
Legal Proceedings53
Item 9.
The Offer and Listing53 
Item 10.
 Additional Information  5457 
  Memorandum and articles of association  5457 
  Material Contracts  5862 
  Exchange Controls  5963 
  Tax considerations  5963 
  Documents on Display  6165 
Item 11.
 Quantitative and Qualitative Disclosures Aboutabout Market Risk  6165 
  Introduction  6165 
  Interest Rates  6165 
  Currency Exchange Rates  6266 
  Forward Foreign Exchange Contracts  6367 
  Derivatives  6367 
  Quantitative Information about market risk  6367 
Item 12.
 Description of Securities Other Than Equity Securities  6367 
 
PART II
Item 13.
 Defaults, Dividend Arrearages and Delinquencies  6368 
Item 14.
 Material Modifications to the Rights of Security Holders and Use of Proceeds  6368 
Item 15.
 Controls and Procedures  6468 
  Disclosure Controls and Procedures  6468 
  Management’s Annual Report on Internal Control over Financial Reporting  6468 
  Change in Internal Control over Financial Reporting  6468 
Item 16A.
 Audit Committee Financial Expert  6468 
Item 16B.
 Code of Ethics  6469 
Item 16C.
 Principal Accountant Fees and Services  6569 
Item 16D.
 Exemptions from the Listing Standards for Audit Committees  6569 
Item 16E.
 Purchases of Equity Securities by the Issuer and Affiliated Purchases  6569
Item 16F.
Changes in Registrant’s Certifying Accountant69
Item 16G.
Corporate Governance70 
 
PART III
Item 17.
 Financial Statements  6670 
Item 18.
 Financial Statements  6670 
Item 19.
 Exhibits  6670 
 Exhibit 1.1
 Exhibit 8.1
 Exhibit 12.1
 Exhibit 12.2
 Exhibit 13.1
 Exhibit 13.2
 Exhibit 15


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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 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 from IFRS as adopted by the 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 = $1.98,$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 31, 2007,2008, the last business day of 2007.2008. 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 31, 2008February 28, 2009 the noon buying rate for sterling was £1.00 = $1.99.$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


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• 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.


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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 shows selected consolidated financial data under IFRS as issued by the IASB. The selected consolidated profit and loss account data for the years ended December 31, 2008, 2007 2006 and 20052006 and the selected consolidated balance sheet data as at December 31, 20072008 and 20062007 have been derived from our audited consolidated financial statements included in “Item 18. Financial Statements” in this Annual Report.
 
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 20072008 amounts into US dollars at the rate of £1.00 = $1.98,$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 31, 2007.2008.
 
                                                
 Year Ended December 31  Year Ended December 31 
 2007 2007 2006 2005 2004 2003  2008 2008 2007 2006 2005 2004 
 $ £ £ £ £ £  $ £ £ £ £ £ 
 (In millions, except for per share amounts)  (In millions, except for per share amounts) 
IFRS information:
                                                
Consolidated Income Statement data
                                                
Total sales  8,241   4,162   3,990   3,662   3,340   3,510   7,024   4,811   4,162   3,990   3,662   3,340 
Total operating profit  1,137   574   522   497   359   386   987   676   574   522   497   359 
Profit after taxation from continuing operations  667   337   444   319   232   239   603   413   337   444   319   232 
Profit for the financial year  614   310   469   644   284   275   472   323   310   469   644   284 
Consolidated Earnings data per share
                                                
Basic earnings per equity share(1) $0.70   35.6p   55.9p   78.2p   32.9p   31.7p  $0.53   36.6p   35.6p   55.9p   78.2p   32.9p 
Diluted earnings per equity share(2) $0.70   35.6p   55.8p   78.1p   32.9p   31.7p  $0.53   36.6p   35.6p   55.8p   78.1p   32.9p 
Basic earnings from continuing operations per equity share(1) $0.77   39.0p   52.7p   37.5p   26.4p   27.2p  $0.70   47.9p   39.0p   52.7p   37.5p   26.4p 
Diluted earnings from continuing operations per equity shares $0.77   39.0p   52.6p   37.4p   26.3p   27.2p 
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 $0.63   31.6p   29.3p   27.0p   25.4p   24.2p  $0.49   33.8p   31.6p   29.3p   27.0p   25.4p 
Consolidated Balance Sheet data at period end
                        
Consolidated Balance Sheet data at
                        
period end
                        
Total assets (non-current assets plus current assets)  14,438   7,292   7,213   7,600   6,578   6,736   14,448   9,896   7,292   7,213   7,600   6,578 
Net assets  7,671   3,874   3,644   3,733   3,014   3,161   7,335   5,024   3,874   3,644   3,733   3,014 
Long-term obligations(3)  (3,328)  (1,681)  (1,853)  (2,500)  (2,403)  (1,982)  (4,237)  (2,902)  (1,681)  (1,853)  (2,500)  (2,403)
Capital stock  400   202   202   201   201   201   295   202   202   202   201   201 
Number of equity shares outstanding (millions of ordinary shares)  808   808   806   804   803   802   809   809   808   806   804   803 


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Notes:
 
(1)Basic earnings per equity share is based on profit for the financial period and the weighted average number of ordinary shares in issue during the period.
 
(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.
 
(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.
 
(4)The results of Government Solutions (disposed in February 2007), Les Echos (disposed in December 2007) andthe Data Management business (disposed in February 2008) have been included in discontinued operations for all years presented. The results of Government Solutions (disposed in February 2007) and Les Echos (disposed in December 2007) have been included in discontinued operations for all the years to 2007.
 
Dividend information
 
We pay dividends to holders of ordinary shares on dates that are fixed in accordance with the guidelines of the London Stock Exchange. Our board of directors normally declares an interim dividend in July or August of each year to be paid in September or October. 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 our annual general meeting on April 25, 2008May 1, 2009 our shareholders will be asked to approve a final dividend of 20.5p22.0p per ordinary share for the year ended December 31, 2007.2008.
 
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 20072008 fiscal year will be paid on May 9, 2008.8, 2009.
 
                                                
Fiscal year
 Interim Final Total Interim Final Total  Interim Final Total Interim Final Total 
 (Pence per ordinary share) (Cents per ordinary share)  (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   40.6*  63.0   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   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   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   9.7   15.7   25.4   17.4   26.4   43.8 
2003  9.4   14.8   24.2   15.6   25.5   41.1 
 
 
*As the 20072008 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, 2007.2008.
**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.


7

 
Exchange rate information
 
The following table sets forth, for the periods indicated, information concerning the noon buying rate for sterling, expressed in dollars per pound sterling. The average rate is calculated by using the average of the noon buying rates in the 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 31, 2007,2008 the noon buying rate for cable transfers and foreign currencies as certified


7

by the Federal Reserve Bank of New York for customs purposes for sterling was £1.00 = $1.98.$1.46. On March 31, 2008February 28, 2009 the noon buying rate for sterling was £1.00 = $1.99.$1.43.
 
         
Month
 High  Low 
 
March 2008 $2.03  $1.98 
February 2008 $1.99  $1.94 
January 2008 $1.99  $1.95 
December 2007 $2.07  $1.98 
November 2007 $2.11  $2.05 
October 2007 $2.08  $2.03 
         
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  Average rate
2008 $1.84 
2007 $2.01  $2.01 
2006 $1.84  $1.84 
2005 $1.81  $1.81 
2004 $1.83  $1.83 
2003 $1.63 
 
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.
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.


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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


9

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 suitcompanion lawsuit brought under the auspices of the Association of American Publishers, to challengewhich 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 usersowners, 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 unableclass action settlement, now scheduled for June 2009, the settlement would allow copyright owners of books covered by it to control copyingthe online display of their content for purposesthose books by Google, with a sharing of online searching, which could have an adverse impact on our business and financial performance.revenues derived from that display.


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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, which are constantly changing in response to competition, technological innovations and other factors. A common trend facing all our businesses is the digitization of content and proliferation of distribution channels, either over the internet, or via other electronic means, replacing traditional print formats. If we do not adapt rapidly to these changes we may lose business to ‘faster’ more ‘agile’ competitors, who increasingly are nontraditionalnon-traditional competitors, making their identification all the more difficult.
 
Illustrations of the competitive threats we face at present include:
 
 — Students seeking cheaper sources of content, e.g. 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 assessment businesses.
 
 — Penguin: authors’ advances in consumer publishing. We compete with other publishing businesses to purchase the rights to author manuscripts. Our competitors may bid to a level at which we could not generate a sufficient return on our investment, and so, typically, we would not purchase these rights.
 
 — 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.
 
Our US educational textbook and assessment 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 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 finances could be adversely affected by a US recessionand/or fallout from the sub-prime mortgage crisis reducing property values and hence state property tax receipts.
Federaland/or state legislative changes can also affect the funding available for educational expenditure, e.g. the No Child Left Behind Act.
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.
Failure to generate anticipated revenue growth, synergies and/or costs savings from recent acquisitions could lead to goodwill and intangible asset impairments.
We continually acquire and dispose of businesses to achieve our strategic objectives. We recently completed two relatively large acquisitions, i.e. the Harcourt Assessment and Harcourt Education International business for $950m and the acquisition of eCollege for $491m. If we are unable to generate the anticipated revenue growth, synergiesand/or cost savings associated with these acquisitions there is a risk the goodwill and intangible assets acquired (estimated at £430m) could be impaired in future years.


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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 to alternative sourcesand/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 habits change and readers migrate online, although we see further opportunities for growth in our less mature markets outside Europe. If the migration of readers to new digital formats occurs more quickly than we expect, this is likely to affect print advertising spend by our customers, adversely affecting our profitability.
Our newspaper businesses are operationally highly geared and still rely significantly on print advertising revenue despite moves to other business models; relatively small changes in revenue, positive or negative, have a disproportionate effect on profitability; therefore any downturn in corporate and financial advertising spend would negatively impact our results.
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 USA and the UK. A service failure caused by a breakdown in our testing and assessment products and processes could lead to a mis-grading of student testsand/or late delivery of test results to students and their schools. In either event we may be subject to legal claims, penalty charges under our contracts, non-renewal of contractsand/or the suspension or withdrawal of our accreditation to conduct tests. It is also possible that such events would result in adverse publicity, which may affect our ability to retain existing contractsand/or obtain new customers.


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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 results, growth prospects and/or reputation may be adversely affected if these contracts and relationships are notpoorly managed.
 
These businesses are characterized by multi-million pound sterling contracts spread over several years. As in any contracting business, there are inherent risks associated with the bidding process,start-up, operational performance and contract compliance (including penalty clauses) which could adversely affect our 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 significant impact on our present business model.
 
At Penguin, changes in product distribution channels, increased book returns and/or customer bankruptcy may restrict our ability to grow and affect our profitability.
New distribution channels, e.g. digital format, the internet, used books, combined with the concentration of retailer power pose multiple threats (and opportunities) to our traditional consumer publishing models, potentially impacting both sales volumes and pricing.
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.


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We operate in markets which are dependent on Information Technology (IT) 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 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 threats could restrict our ability to supply products and services to our customers.
 
Across all our businesses, we manage complex operational and logistical arrangements including distribution centers, data centers and large office facilities as well as relationships with third party print sites. We have also outsourced some support functions, including 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 vendor or partner (e.g. due to bankruptcy) could restrict our ability to service our customers. Similarly external threats, such as a flu pandemic, terrorist attacks, strikes, weather etc, could all affect our business and employees, disrupting our daily business activities.
 
A major data privacy breach may cause reputational damage to our brands and financial loss.
 
Across our businesses we hold increasingly 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.


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Investment returns outside our traditional core US and UK markets may be lower than anticipated.
 
To minimize dependencetake 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 theseincreasing our investments in a number of emerging markets, building on our existing substantial international presence. Certain markets we may target for growthsome of which are inherently more risky than our traditional markets. Political, economic, currency, reputational and corporate governance risks (including fraud) as well as unmanaged expansion are all factors which could limit our returns on investments made in these markets.
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 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 latestA full valuation of our UK defined benefit pension plan has been completedwill be carried out during 2009. Any additional funding requirements will be evaluated on completion of this actuarial review and future funding arrangements have been agreed between the Company and the pension fund trustee. Additional payments amountingany additional contributions required are unlikely to £100m werebe made by the Company in 2007. We review these arrangements every three years.until 2010.


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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 60% of our revenue is generated in US dollars. Sales for 2007,2008, translated at 20062007 average rates, would have been £223m£4,491m or 6% higher.7% lower.
 
This is predominantlyprimarily 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 aboutapproximately 60% of its sales in the US and each 5¢ change in the average £:$ exchange rate for the full year (which in 20072008 was £1:$2.00)1.85) would have an impact of approximately 1p on adjusted earnings per share and affect shareholders’ funds by approximately £55m.£100m.
 
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.


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ITEM 4.  INFORMATION ON THE COMPANY
 
Pearson
 
Pearson is an international media and education company with its principal operations in the education, business information and consumer publishing markets. 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 online services. We increasingly offer services as well as content, from test creation, administration and processing to 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 (26%(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
 
Pearson consists of three major worldwide businesses:
 
Pearson Educationis the world’s leading education company. We are a leading publisher of textbooks, supplementary learningcompany, providing educational materials, technologies, assessments and electronic education programs forrelated services to teachers and students of all ages,ages. It is also a leading provider of electronic learning programmes and we play a major role inof test development, processing and scoring services to educational institutions, corporations and professional bodies around the testing and certification of school students and professionals.world. In 2007,2008, Pearson Education operated through three worldwide segments, which we refer to as “ School”“North American Education”, “Higher“International Education” and “Professional”:
 
The FT Groupis a leading provider of internationalprovides business and financial news, data, comment and analysis, in print and online.online, to the international business community. It has two major parts:
 
 • FT Publishing includes the globally focusedFinancial Times newspaper and FT.com onewebsite, a range of the world’s premier sources of business information, alongside a portfolio ofspecialist financial magazines. It also includes anmagazines and online financial information businessservices, and Mergermarket, which provides early stageproprietary forward-looking insights and intelligence to businesses and financial institutions and corporates, as well as several joint ventures and associates including 50% of both The Economist Group and the FTSE index business.institutions.


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 • Interactive Data provides specialist financial 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 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 ’education’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, informtheir 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 so that our businesses can share assets, brands, processes, facilities, technology and central services.learn’.
 
Our goal is to produce sustainableconsistent 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 long-term value of Pearson.
 
We doTo achieve this by investing consistently ingoal, our strategy has four areas, which areparts, common to all our businesses:
 
 • Content: We invest steadily in unique valuable publishing contentof stories, lessons and information and keep replenishing it. Over the past five years, for example, we have invested $1.7bn in new content in our education business alone.
 
 • Technology and services: We invested earlyContent alone is not enough, and consistently in technology, believing that, in the digital world,to make our content alone would not be enough.more useful and enticing, we often add technology. We now generate more than $1bn inreceive about a third of our annual sales from technologytechnology-based products and services, and our testing and assessment businesses, serving school students and professionals, make more than $1.2bn of sales, up from around $200m eight years ago.


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 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 approximately 60% of our sales in the US, our brands, content and technology — plus-services models work around the world.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: We’veThe 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 centralizedcentralised 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 threefive years, we have increased our operating profit margins from 10.8%10.6% to 15.0%15.8% and reduced average working capital as a percentage of sales in Pearson Education and Penguin from 29.4% to 25.6%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 in the value of the Company.
 
Operating divisions
 
Pearson Education
 
Pearson Education is one of the largest publishers of textbooks and online teaching materials. It serves the growing demands of teachers, students, parents and professionals throughout the world for stimulating and effective education programs in print and online.
 
We report Pearson Education’s performance byin the three market segments it serves: School, Highersegments: North American Education, International Education, and Professional. In 2007,2008, Pearson Education had sales of £2,628m£3,112m or 63%65% (63% in 2007) of Pearson’s total. Of these, £1.9bn (70%)approximately 60% were generated in North America and £0.8bn (30%)approximately 40% in the rest of the world. Pearson Education generated 63%60% of Pearson’s operating profit.


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SchoolNorth 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 of its sales in the US. The major customers of our Schoolthis business are state education boards and local school districts.
In the US, we publish The business publishes high quality curriculum programsprogrammes for school students, covering subjects such as reading, literature, math, scienceat both elementary and social studies. We publishsecondary level, under a rangenumber of well-known imprints that includeincluding Scott Foresman in the elementary school market and Prentice Hall in secondary.Hall.
 
Our school testing business is the leading provider of test development, processing and scoring services to US states and the federal government, processing approximately 40 million tests each year.government. Its capabilities will behave been further enhanced through the integration of the recently acquired Harcourt Assessment business. We are also a leading provider of electronic learning programs for schools, and of ’Student‘Student Information Systems’ technology which enables elementary and secondary schools and school districts to record and manage information about student attendance and performance.
 
Outside the US, we publish elementary and secondary school materials in local languages in a number of countries. We are one of the world’s leading provider of English Language Teaching materials for children and adults, published under the well-known Longman imprint. We bolstered our position further in international markets through the recent acquisition of HarcourtOur North American Higher Education International business. We are also a leading provider of testing, assessment and qualification services. Our key markets outside the US include Canada, the UK, Australia, New Zealand, Italy, Spain, South Africa, Hong Kong and the Middle East.
Higher Education
Pearsonbusiness is the largest publisher of textbooks and related course materials for colleges and universities in the US. We publish across all of the main fields of study with imprints such as Prentice Hall, Addison Wesley, Allyn & Bacon and Benjamin Cummings. Typically, professors or other


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instructors select or ’adopt’‘adopt’ the 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
See “Item 5 Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2008 compared to year ended December 31, 2007 our Higher— Sales and operating profit by division — North American Education” for a discussion of developments during 2008 with respect to this division.
International Education
Our International Education business generated approximately 77%covers all educational publishing and related services outside North America.
Our International schools business publishes educational materials in local languages in a number of its salescountries. We are one of the world’s leading providers of English Language Teaching (ELT) materials for children and adults, published under the well-known Longman imprint. We bolstered our position further in international markets through the US. recent acquisition of the Harcourt Education International business.
Outside the US, we adaptNorth America, our International higher education business adapts our textbooks and technology services for individual markets, and we have a growing local publishing program. Ourprogram, with our key markets outside the US include Canada,including the UK, Benelux, Mexico, Germany, Hong Kong, Korea, Taiwan, Singapore, Japan and Malaysia.
We are also a leading provider of testing, assessment and qualification services in a number of key markets including, the UK under the brand name Edexcel, Australia, New Zealand, South Africa, Hong Kong and the Middle East.
See “Item 5 Operating and Financial Review and Prospects — Results of Operations — Year ended December 31, 2008 compared to year ended December 31, 2007 — Sales and operating profit by division — International Education” for a discussion of developments during 2008 with respect to this division.
 
Professional
 
Following the disposal of Government Solutions in 2007 and Data Management in 2008, our Professional education business is focused on publishing and other learning programmes for professionals in business and technology, and on testing and certifying adults to become professionals. Over the past five years we have significantly re-orientated our professional publishing business towards long-term growth markets and built professional testing into a profitable industry leader.
Our Professional education business publishes educational materials and provides testing and qualifications services for adults. Our publishing imprints includeunder 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
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 Financial Industry Regulatory Authority and the UK’s Driving Standards Agency. With the sale
See “Item 5 Operating and Financial Review and Prospects — Results of Government Solutions inOperations — Year ended December 31, 2008 compared to year ended December 31, 2007 — Sales and Data Management inoperating profit by division — Professional” for a discussion of developments during 2008 our Professional business is focused on publishing for professionals in businesses and technology, and on testing and certifying professionals.with respect to this division.


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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 2007,2008, the FT Group had sales of £688m,£796m, or 16% of Pearson’s total sales (15%(16% in 2006)2007), and contributed 24%26% of Pearson’s operating profit.
 
It has two major parts: FT Publishing, a combination of theFinancial Times, FT.com website, and a portfolio of financial magazines and online financial information companies; and Interactive Data, our 62%-owned financial information company. In recent years the FT Group has significantly shifted its business towards digital and subscription revenues.
 
FT Publishing
 
TheFinancial Timesis one of the world’s leading international daily business newspapers. Its six month average circulation of approximately 440,000 copies at December 2007, as reported bynewspapers, with five editions in the Audit Bureau of Circulation, is split as follows:
United Kingdom31%
Europe, Middle East and Africa29%
US30%
Asia10%
UK, Europe, Middle East and Africa, the US and Asia.
 
Its main sources of revenue are from sales of the newspaper, advertising and conferences. The FT alsoFinancial Timesis complemented by FT.com which sells content and advertising online, through 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.and
Mergermarket, our online financial data and intelligence provider.
Mergermarketprovider, provides early stage proprietary intelligence to financial institutions and corporates. Its key products includeMergermarket,Debtwire,dealReporter,WealthmonitorandPharmawire (which(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 Publishing” for a discussion of developments during 2008 with respect to this division.
 
Interactive Data
 
Interactive Data is a leading provider of financial market data, analytics and related services to financial institutions, active traders and individual investors. The company’s customers use its offerings to support their portfolio management and valuation, research and analysis, trading, sales and marketing, and client service activities. We own 62% of Interactive Data; the remaining 38% is publicly traded on the NYSE.NYSE (for more information see NYSE:IDC).
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 — Interactive Data” for a discussion of developments during 2008 with respect to this division.
 
Les Echos
 
The sale of Les Echos to LVMH for €240m (£174m) was completed in December 2007.
 
Joint Ventures and Associates
 
The FT Group also 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 magazines.
 
 • 50% interest in FTSE International, a joint venture with the London Stock Exchange, which publishes a wide range of global indices, including the FTSE index.


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 • 50% interest inBusiness DayandFinancial Mail, publishers of one of South Africa’s leading financial newspapers and magazines.
 
 • 33% interest inVedomosti,a leading Russian business newspaper.


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• 14% interest inBusiness Standard, one of India’s leading business newspapers.
 
On March 27, 2008, Financial Times International Publishing Ltd sold its 50% partnership interest in Financial Times Deutschland GmbH & Co KG to Gruner & Jahr AG & Co KG.
 
The Penguin Group
 
Penguin is one of the world’s premier English languagemost famous brands in book publishers.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. ItPenguin ranks in the top three consumer publishers, based uponon sales in all major English speaking and related markets, —including the US, the UK, Australia, New Zealand, Canada, IndiaSouth 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, Dorling Kindersley, (DK), Dutton, Hamish Hamilton, Michael Joseph, Plume, Putnam, RiverheadPuffin, and Viking. Its leading children’s imprints include Puffin, Ladybird, Warne and Grosset & Dunlap.Ladybird. In 2007,2008, Penguin had sales of £846m,£903m, representing 21%19% of Pearson’s total sales (22%(21% in 2006)2007) and contributed 12%13% of Pearson’s operating profit. Its largest market is the US, which generated around 55%57% of Penguin’s sales in 2007.2008. 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 ande-books.
 
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. It also sells through online retailers such as Amazon.com, as well as Penguin’s own website.
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 — The Penguin Group” for a discussion of developments during 2008 with respect to this division.
 
Operating cycles
 
Pearson determines a normal operating cycle separately for each entity/cash generating unit within the Group with distinct economic characteristics. The “normal operating cycle” for each of the Group’s education businesses is primarily based on the expected period over which the educational programs and titles will generate cash flows, and also takes account of the time it takes to produce the educational programs.
 
Particularly for the US School and HigherNorth American Education businesses, which represent more than 50% (by sales) of our education publishing businesses, there are well established cycles operating in the market:
 
 • The School market is primarily driven by an adoption cycle in which major state education boards ‘adopt’ programs and provide funding to schools for the purchase of these programs. There is an established and published adoption cycle with new adoptions taking place on average every 5 years for a particular subject. Once adopted, a program will typically sell over the course of the subsequent 5 years. The Company renews its pre-publication assets to meet the market adoption cycles. Therefore the operating cycle naturally follows the market cycle.
 
 • 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


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The International Education markets operate in a similar way although often with less formal ‘adoption’ processes.
 
The operating cycles in respect of Professional and the Penguin 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.


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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 as McGraw-Hill and Houghton Mifflin 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.
 
FT Publishing competes with newspapers and other information sources, such as The Wall Street Journal, by offering timely and expert journalism.journalism and 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. Interactive Data competes with Bloomberg Reuters and Thomson FinancialReuters on a global basis for the provision of financial data to the back 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 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 for 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 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


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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.


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Legal Proceedings
We and our subsidiaries are defendants in a number of legal proceedings including, from time to time, government and arbitration proceedings, which are incidental to our and their operations. We do not expect that the outcome of pending proceedings, either individually or in the aggregate, will have a significant effect on our financial position or profitability nor have any such proceedings had any such effect in the recent past. To our knowledge, there are no material proceedings in which any member of senior management or any of 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
 
On January 2,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 Group completed its acquisitionterms of Money-Media,the Maskew Miller Longman agreement, Pearson intends to create a US-based company offering online newsnew Southern Africa business and commentaryin return for the money management industry, for $64m.
On January 30, 2008, the Group completed its $647m acquisition of Harcourt Assessment from Reed Elsevier, after receiving clearance from the US Department of Justice. On March 27, 2008, the Group disposed of its 50% interestincreased stake in Financial Times Deutschland to itsMaskew Miller Longman our current joint venture partner Gruner + Jahr.will receive £46m in cash and a 15% interest in Pearson’s Heinemann and Edexcel businesses in that region.
 
OnIn addition Pearson’s International Education business also announced the acquisition of Fronter, a European online learning company based in Oslo, for £16m. The Longman Nigeria acquisition completed in early January 2009 and the Fronter acquisition in February 22, 2008,2009. The Maskew Miller Longman transaction is expected to complete in the Group completed the salesecond quarter of its Data Management (Scanners) business to M & F Worldwide Corp. for $225m.2009 following regulatory approval.
 
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, 2007,2008, 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. United States (Delaware)  100%
Pearson Education Ltd. England and Wales  100%
Edexcel Ltd.  England and Wales  100%
NCS Pearson Inc.  United States (Minnesota)  100%
FT Group
      
The Financial Times Limited England and Wales  100%
Mergermarket Ltd.  England and Wales  100%
Interactive Data Corporation United States (Delaware)  62%
The Penguin Group
      
Penguin Group (USA) Inc.  United States (Delaware)  100%
The Penguin Publishing Co Ltd.  England and Wales  100%
Dorling Kindersley Holdings Ltd England and Wales  100%


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Property, plant and equipment
 
Our headquarters are located at leasehold premises in London, England. We own or lease approximately 650900 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 & Testing 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.


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We own the following principal properties at December 31, 2007:2008:
 
       
General use of property
 Location Area in square feet 
 
Warehouse/Office Kirkwood, New York, USA  524,000 
Warehouse/Office Pittston, Pennsylvania, USA  406,000 
Office Iowa City, Iowa, USA  310,000 
Warehouse/Office Old Tappan, New Jersey, USA  210,112 
Warehouse/Office Cedar Rapids, Iowa, USA  205,000 
Office Southwark, London, UK  155,000 
Office Hadley, Massachusetts, USA  136,570 
Printing Owatonna, Minnesota, USA  128,000 
PrintingColumbia, Pennsylvania, USA121,370*
OfficeEagan, Minnesota, USA109,500
 * Sold subsequently to year-end.
 
We lease the following principal properties at December 31, 2007:2008:
 
       
General use of property
 Location Area in square feet 
 
Warehouse/Office Lebanon, Indiana, USA  1,091,435 
Warehouse/Office Cranbury, New Jersey, USA  886,747 
Warehouse/Office Indianapolis, Indiana, USA  737,850 
Warehouse/Office San Antonio, Texas, USA559,258
Warehouse/OfficeNewmarket, Ontario, Canada  518,128 
Office Upper Saddle River, New Jersey, USA  474,801 
Warehouse/Office Rugby, UK  446,077 
Office New York City, New York, USA  430,738 
Office London, UK  282,917 
OfficeHarlow, UK231,850
Warehouse/Office Austin, Texas, USA  226,076 
Office Boston, Massachusetts, USA  225,299 
Warehouse Scoresby, Victoria, Australia  215,820197,255 
Office Boston, Massachusetts, USA  191,360*
Office Glenview, Illinois, USA  187,500
Warehouse/OfficeBedfordshire, UK187,248 
Office Bloomington, Minnesota, USA  153,240 
Office Parsippany, New Jersey, USA  143,777 
Office Harlow, UK137,857
OfficeChandler, Arizona, USA  135,460
OfficeNew York City, New York, USA116,039 
Warehouse San Antonio Zomeyucan, Mexico  113,638 
Office London, UK  112,000 
OfficeWarehouse New York City, New York, USACape Town, South Africa  107,939111,259 
Call Center Lawrence, Kansas, Kansas, USA  105,000 
 * Reduced to 53,248 square feet subsequent to year end


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Capital Expenditures
 
See Item 5. “Operating and Financial Review and Prospects — Liquidity and Capital Resources” for description of the Company’s capital expenditure.
 
ITEM 4A.UNRESOLVED STAFF COMMENTS
ITEM 4A.  UNRESOLVED STAFF COMMENTS
 
The Company has not received, 180 days or more before the end of the 20072008 fiscal year, any written comments from the Securities and Exchange Commission staff regarding its periodic reports under the Exchange Act which remain unresolved.


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ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS
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 as issued by the IASB.
 
General overview
 
Introduction
 
Sales from continuing operations increased from £3,990m in 2006 to £4,162m in 2007 to £4,811m in 2008, an increase of 4%16%. The bulkmajority of the increase was in the School businessNorth American and at FT Publishing due toInternational Education businesses which benefited from acquisitions made in both 20062007 and 2007.2008. The year on year growth was also significantly impacted by exchange rates, in particular the US dollar. The average US dollar exchange rate weakenedstrengthened in 2007,comparison to sterling in 2008, which had the effect of reducingincreasing reported sales in 20072008 by £223m£320m when compared to the equivalent figure at constant 20062007 rates. When measured at constant 20062007 exchange rates, all of Pearson’s businesses reported year on year growth.
 
Reported operating profit increased by 10%18% from £522m in 2006 to £574m in 2007. Reported2007 to £676m in 2008. Acquisitions and the relative strength of the US dollar contributed to this increase and operating profit in 2007 was £34mwould have been £71m lower than the equivalent figure reportedif translated at constant 20062007 exchange rates. When measured at constant rates, all parts of the Group contributedmain contributors to the operating profit increase through a combination of good sales growthwere the International Education and improved marginsInteractive Data businesses which together with an increased contribution from acquisitions more than offset an increased charge for intangible amortization.
 
Profit before taxation in 20072008 of £468m£585m compares to a profit before taxation of £448m£468m in 2006.2007. The increase of £20m£117m reflects the improved operating performance offset by an increase inand reduced net finance costs. Net finance costs increaseddecreased from £74m in 2006 to £106m in 2007.2007 to £91m in 2008. The Group’s net interest payable increaseddecreased by only £1m£6m in 2007 but exchange2008 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 £17m£11m in 20072008 compare to a net exchange gainloss of £19m£17m in 2006.2007. The losses in 2008 mainly relate to the retranslation of foreign currency bank accounts together with other net losses on inter-company items. The losses in 2007 principally relate to exchange losses on legacy euro denominated debt held to hedge euro denominated proceeds from the sale of Les Echos. In 2006, euro borrowings and cross currency swaps that were not designated as net investment hedges contributed to overall net exchange gains. Partially offsetting this effect wasinterest payable and exchange is finance income relating to post retirement plans of £10m£8m in 20072008 compared to an income of £4m£10m in 2006.2007.
 
On February 22, 2008 the Group completed the sale of its Data Management (Scanners) business and this business has been included in discontinued operations for the period to February 22 in 2008, and the full yearyears in 2007 2006 and 2005.2006.
 
On December 24,In 2007, the Group completed the sale of its French newspaper business, Les Echos. Pearson’sEchos and its Government contracting business, Government Solutions, was disposed of on February 15, 2007.Solutions. The results of Les Echos and Government Solutions have been included in discontinued operations for 2007, 2006 and 2005 and have been consolidated up to the date of sale.
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 and have been shown as discontinued operations in the consolidated income statement for 2005.2007 and 2006.
 
Net cash generated from operating activitiesoperations increased to £894m in 2008 from £659m in 2007 from £621m in 2006.2007. The improved cash generation in 20072008 was in spitepartly due to exchange but also represents strong cash conversion of a special contributionoperating profits from all of £100m to the UK Group pension plan.Pearson businesses. On an average basis, the useratio of working capital continued to improve.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,


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debtors and creditors. Net interest paid increased by £8m to £90mat £76m in 2007 compared to £82m2008 was £14m below the previous year as the net interest charge in 2006.the income statement fell and the timing of payments was more favorable. Tax paid in 2007 was £87m2008 remained consistent with the previous year at £89m compared to £59m£87m in 2006, the bulk of the increase was due to payments relating to the sale of Government Solutions.2007. Net capital expenditure on property, plant and equipment after proceeds from sales increased from £63m£72m in 20062007 to £74m£73m in 2007.2008. The net cash outflow in respect of businesses acquired increaseddecreased from £363m in 2006 to £472m in 2007 to £395m in 2008 whilst net proceeds from the disposal of businesses increaseddecreased from £10m in 2006 to £469m in 2007.2007 to £111m in 2008. Dividends from joint ventures and associates decreased by £13m£9m largely due to smaller special dividends received from the Economist in 20072008 compared to 2006.2007. Dividends paid of £248m£285m in 20072008 (including £10m£28m paid to minority interests) compares to £235m£248m in 2006.2007. After a favorablean unfavorable currency movement of £11m,£410m, overall net borrowings decreasedincreased by 8%50% from £1,059m at the end of 2006 to £973m at the end of 2007.2007 to £1,460m at the end of 2008.


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Outlook
 
Pearson achieved a strong performance in 2008 against the backdrop of a sharp deterioration in the global economy. Though the company performed well, market conditions became more difficult for some of our businesses as the year went on.
In recent years we have significantly changed the shape of Pearson, building and diversifyingfourth quarter, trading momentum remained strong for our education company, shiftingbusiness. The Financial Times Group continued to achieve good growth — 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 financial information businesses towards recurring revenue streams and becoming more efficient through a centralized operations organization. These moves have made Pearson a more profitable, more cash generative and more resilient company, and wethe end of 2008 are likely to persist throughout 2009. We expect to make further progress on our financial goals in 2008.
At this stage, our outlook for 2008 is:benefit from a range of early actions to revise products and supply lines, reduce costs and sustain investment.
 
Pearson Education
 
We expect another year of good profit growth, benefiting once again from the unique breadth of our education business — from pre-school to adult learning; across publishing, testing and technology; andIn Education, we are planning for weak conditions in the US School publishing market but expect continued growth in our Testing, Higher Education and aroundInternational Education businesses. We expect the world.
In our School business, integration of our recently-acquired Harcourt businesses is progressing well. In 2008, we expect School marginsnew US administration’s emphasis on education, reflected in both the economic stimulus package and the focus on reform, to be similarprovide a significant boost to 2007, after expensing integration costs relating to the acquisition. In 2009, we expect School margins to rise to around 15% as the majorityeducation institutions. The extent and timing of the integration costs fall away and asimpact on our business is unclear at this stage, so we realize the financial benefits of the acquisition. Including the Harcourt contribution, we expecthave not included these factors in our School business to grow sales well into double digits in 2008 at constant currency. Excluding Harcourt, we expect underlying sales growth in the low single digits, as US market growth of 3-4% is partly offset by our lower participation rate in new US adoptions and the conclusion of our UK key stage testing contract.
In Higher Education, we expect our underlying sales to grow in the mid single digits, a little ahead of the industry. We expect margins to be stable, as we continue to invest in expanding our adaptive learning technologies and in taking our recently-acquired eCollege platform into new segments and geographic markets.
In Professional, we expect sales to increase in the low single digits in underlying terms with underlying margins improving once again.guidance.
 
FT Group
 
TheAt the FT Group, is expected to continue its profit growth. We have substantially increasedwe anticipate continued strong demand for high-quality analysis of global business, finance, politics and economics; a tough year for advertising; strong renewal rates in our digitalsubscription businesses; and subscription revenues and reduced our exposure to print advertising in recent years. At FT Publishing, advertising revenues have continued to grow in the early part of the year, but future advertising trends remain difficult to predict. However, as a result of our revenue diversification and cost actions we expect further profit improvementgrowth at FT Publishing this year, even without any growth in advertising revenues. We expect Interactive Data to achieve its forecast revenue growth in the 7-9% range and operating profit growth in the 9-11% range (headline growth under US GAAP).Data.
 
The Penguin Group
 
TheAt Penguin, Group is expected to improve margins furtherwe expect another good competitive performance in challenging trading conditions for book publishers and into double digits. Penguin’s good publishing and trading performance has continued into the early part of 2008.booksellers.


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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  Year Ended December 31 
 2007 2006 2005  2008 2007 2006 
 £m £m £m  £m £m £m 
Education:                        
School  1,537   1,455   1,295 
Higher Education  793   795   779 
North American  2,002   1,667   1,679 
International  866   735   640 
Professional  298   280   238   244   226   211 
FT Group:                        
FT Publishing  344   280   249   390   344   280 
Interactive Data  344   332   297   406   344   332 
Penguin  846   848   804   903   846   848 
              
Total  4,162   3,990   3,662   4,811   4,162   3,990 
              
 
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  Year Ended December 31 
 2007 2006 2005  2008 2007 2006 
 £m £m £m  £m £m £m 
European countries  1,102   1,003   868   1,217   1,102   1,003 
North America  2,591   2,585   2,388   3,028   2,591   2,585 
Asia Pacific  351   295   300   415   351   295 
Other countries  118   107   106   151   118   107 
              
Total  4,162   3,990   3,662   4,811   4,162   3,990 
              
 
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 and $1.81 in 2005.2006. Fluctuations in exchange rates can have a significant impact on our reported sales and profits. In 2007,2008, Pearson generated 59% of its sales in the US (2006:(2007: 59%; 2006: 61%; 2005: 62%). 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 £55m.£100m. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for more information. The year-end US dollar rate for 20072008 was £1:$1.991.44 compared to £1:$1.961.99 for 2006.2007. In terms of the year end rate, the weakening of sterling in comparison to the US dollar in 20072008 was not asmuch more significant asthan in previous years and although the weakerrelatively strong US dollar had the effect of decreasingincreasing shareholders’ funds this was outweighed by strength in other currencies, principally the Canadian dollar and the Euro.funds. The net effect of movement in all currencies in 20072008 was an increase in our shareholders’ funds of £25m£1,050m (see also note 29 of “Item 18. Financial Statements”). The year-end rate for the US dollar in 20062007 was £1:$1.961.99 compared to £1:$1.721.96 for 20052006. 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 was the main reason for a decreasecontributed to an overall increase in shareholders’ funds due to exchange movements of £417m£25m in 2006.2007.
 
Critical accounting policies
 
Our consolidated financial statements, included in “Item 18. Financial Statements”, are prepared based on the accounting policies described in note 1 to the consolidated financial statements.


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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


22

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
Year ended December 31, 2008 compared to year ended December 31, 2007
Consolidated results of operations
Sales
Our total sales from continuing operations increased by £649m, or 16%, to £4,811m in 2008, from £4,162m in 2007. The increase reflected growth, on a constant exchange rate basis, across all the businesses together with additional contributions from acquisitions made in both 2007 and 2008. The year on year growth was impacted by movements in exchange rates, particularly in the US dollar. 2008 sales, translated at 2007 average exchange rates, would have been £4,491m.
Pearson Education increased sales by £484m or 18% from £2,628m to £3,112m. The North American business was the major contributor to the increase and although much of the increase was due to 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 2007 and 2008 and the effect of exchange. FT Publishing’s sales growth was driven by a shift toward subscription and service based revenues. The newspaper maintained circulation but advertising revenues fell by 3% as the advertising market weakened in the fourth quarter of 2008. Interactive Data sales were up by 18% (9% at constant last year exchange rates and before the contribution from acquisitions) driven by strong sales to both existing and new institutional customers and the maintenance of renewal rates at approximately 95% within the institutional services sector.
Penguin’s sales were up 7% in 2008 (3% at constant last year exchange rates and before the effect of portfolio changes) as a result of a strong publishing performance in all its markets in a year where the business continued to publish bestsellers and win awards.
Pearson Education, our largest business sector, accounted for 65% of our continuing business sales in 2008 compared to 63% in 2007. North America continued to be the most significant source of our sales and as a proportion of total continuing sales contributed 63% in 2008 and 62% in 2007.


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Cost of goods sold and operating expenses
The following table summarizes our cost of sales and net operating expenses:
         
  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 of pre-publication costs and royalty charges. Our cost of sales increased by £264m, or 14%, to £2,174m in 2008, from £1,910m in 2007. The increase corresponds to the increase in sales with cost of sales at 45.2% of sales in 2008 compared to 45.9% in 2007.
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 £290m, or 18%, to £1,890m in 2008, from £1,600m in 2007. As a percentage of sales they increased slightly to 39% in 2008 from 38% in 2007.
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 remained fairly consistent at £102m in 2008 compared to £101m in 2007.
Share of results of joint ventures and associates
The contribution from our joint ventures and associates increased slightly from £23m in 2007 to £25m in 2008. The majority of the profit comes from our 50% interest in the Economist.
Operating profit
The total operating profit increased by £102m, or 18%, to £676m in 2008 from £574m in 2007. 2008 operating profit, translated at 2007 average exchange rates, would have been £71m lower.
Operating profit attributable to Pearson Education increased by £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


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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.


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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

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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.


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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


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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 £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.


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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


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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 SchoolInternational Education business was the biggest contributor to this growth with an increase of 6%15%. Some of the SchoolPearson Education increase was due to a full year contribution from acquisitions made in 2006 and to additional contribution from the Harcourt acquisition in 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. Schoolpublishing and international testing sales, increasedprincipally in the UK, where sales were up in double digits both in the US and UKafter benefiting from further contract wins, market share gains and strength in on-line assessment. Higher Education sales were flat year on year on a headline basis, but would have been 5% ahead of the previous year at constant last year exchange rates and after taking account of portfolio changes. Pearson’s US Higher Education business grew faster than the industry for the ninth successive year with growth of 6% in US dollar terms.
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 last year2006 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 last year2006 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.


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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.


23

Cost of goods sold and operating expenses
 
The following table summarizes our cost of sales and net operating expenses:
 
                
 Year Ended December 31  Year Ended December 31 
 2007 2006  2007
 2006
 
 £m £m  £m £m 
��
Cost of goods sold  1,910   1,841   1,910   1,841 
Distribution costs  264   288   202   232 
Administration and other expenses  1,538   1,462   1,600   1,518 
Other operating income  (101)  (99)  (101)  (99)
          
Total  1,701   1,651   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 arehave typically a fairly constant percentagedeclined as the business moves more to online delivery of sales.products.
 
Administration and other expenses.  Our administration and other expenses increased by £76m,£82m, or 5%, to £1,538m£1,600m in 2007, from £1,462m£1,518m in 2006. As a percentage of sales they remained at 37%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, but was offset by an increase in intangible amortization from £18m in 2006 to £31m in 2007. Operating profit attributable to the FT Group increased by £28m, or 25%, to £140m in 2007, from £112m in 2006. The increase reflects the increase in revenues from both established businesses and an increased contribution from new acquisitions but also reflects improvements in margins particularly at FT Publishing. Operating profit attributable to the Penguin Group increased by £15m, or 26%, to £73m in 2007, from £58m in 2006 although the 2006 result included a one off goodwill charge of £7m relating to the recognition of pre-acquisition tax losses at Dorling Kindersley.
 
Net finance costs
 
Net finance costs increased from £74m in 2006 to £106m in 2007. Net interest payable in 2007 was £95m, up from £94m in 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 0.5% to 5.4%, reflecting a rise in interest rates and a change in the currency mix of year end debt. These two factors, partly offset by a decrease in the Group’s average net debt of £90m, increased the Group’s average net interest rate payable by 0.3% to 7.3%. In 2007 the net


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finance income relating to post-retirement plans was an income of £10m compared to an income of £4m in the previous year.
 
Other net finance income relating to foreign exchange and short-term fluctuations in the market value of financial instruments included a net foreign exchange loss of £17m in 2007 compared to a gain of £19m in 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
 
The total tax charge in 2007 of £131m represents 28% of pre-tax profits compared to a charge of just £4m or less than 1% of pre-tax profits in 2006. The low tax rate in 2006 was mainly accounted for by two factors. First, in anticipation of the disposal of Government Solutions, we 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 re-evaluated the likely utilization of operating losses both in the US and the UK; this 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 a non-recurring credit of £127m in 2006 which was not repeated in 2007.
 
Minority interests
 
This comprises mainly the minority share in Interactive Data. Our share of Interactive Data remained at 62% throughout 2007, 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 (Scanners) business (in February 2008). The results of Government Solutions and Les Echos have been included in discontinued operations for 2007 and 2006 and have been consolidated up to the date of sale. Operating profit for Government Solutions in 2007 was £2m compared to £22m in 2006 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 compared to £5m in 2006 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 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 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 has recognized a goodwill impairment charge of £97m in 2007 in anticipation of the loss on disposal.
 
Profit for the year
 
The total profit for the financial year in 2007 was £310m compared to a profit in 2006 of £469m. The overall decrease of £159m was mainly due to the absence of the non-recurring tax credit of £127m recorded in 2006, the decrease in contribution from discontinued businesses of £52m and the increase in net finance costs of £32m, largely due to exchange losses. These items more than offset the increase in operating profit in 2007.


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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 based on a weighted average number of shares in issue of 796.8m in 2007 and 798.4m in 2006. The decrease in earnings per share was


25

due to the decrease in profit for 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 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 weakening of the US dollar against sterling on an average basis had a negative impact on reported sales and profits in 2007 compared to 2006. 2007 sales, translated at 2006 average exchange rates, would have been higher by £223m and operating profit, translated at 2006 average exchange rates, would have been higher by £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
 
The following tables summarize our sales and operating profit for each of Pearson’s divisions. Adjusted operating profit is a non-statutorynon-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, other gains and losses and other net finance costs of associates. 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. Other gains and losses represent profits and losses on the sale of subsidiaries, joint ventures, associates and investments that are included within continuing operations but which distort the performance for the year.
 
Adjusted operating profit enables management to more easily track the underlying operational performance of the Group. A reconciliation of operating profit to adjusted operating profit for continuing operations is included in the tables below:
 
                            
                             Year Ended December 31, 2007 
 Year Ended December 31, 2007  North
             
   Higher
   FT
 Interactive
      American
 International
   FT
 Interactive
     
£m
 School Education Professional Publishing Data Penguin Total  Education Education Professional Publishing Data Penguin Total 
Sales  1,537   793   298   344   344   846   4,162   1,667   735   226   344   344   846   4,162 
  37%   19%   7%   8%   8%   21%   100%   40%   18%   5%   8%   8%   21%   100% 
Total operating profit  175   159   27   50   90   73   574   253   82   26   50   90   73   574 
  30%   28%   4%   9%   16%   13%   100%   44%   14%   4%   9%   16%   13%   100% 
Add back:                                                        
Amortization and adjustment of acquired intangibles  28   2   1   6   7   1   45   20   10   1   6   7   1   45 
                              
Adjusted operating profit: continuing operations  203   161   28   56   97   74   619   273   92   27   56   97   74   619 
Adjusted operating profit: discontinued operations  —   —   14   1   —   —   15   —   —   14   1   —   —   15 
                              
Total adjusted operating profit  203   161   42   57   97   74   634   273   92   41   57   97   74   634 
                              
  32%   25%   7%   9%   15%   12%   100%   43%   15%   6%   9%   15%   12%   100% 
 


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                             Year Ended December 31, 2006 
 Year Ended December 31, 2006  North
             
   Higher
   FT
 Interactive
      American
 International
   FT
 Interactive
     
£m
 School Education Professional Publishing Data Penguin Total  Education Education Professional Publishing Data Penguin Total 
Sales  1,455   795   280   280   332   848   3,990   1,679   640   211   280   332   848   3,990 
  36%   20%   7%   7%   8%   22%   100%   42%   16%   5%   7%   8%   22%   100% 
Total operating profit  167   161   24   30   82   58   522   266   70   16   30   82   58   522 
  32%   31%   4%   6%   16%   11%   100%   51%   13%   3%   6%   16%   11%   100% 
Add back:                                                        
Amortization and adjustment of acquired intangibles  17   —   1   2   7   8   35   14   3   1   2   7   8   35 
Other net gains and losses including associates  —   —   —   (4)  —   —   (4)  —   —   —   (4)   —   —   (4) 
Other net finance costs of associates  —   —   —   (1)  —   —   (1)  —   —   —   (1)   —   —   (1) 
                              
Adjusted operating profit: continuing operations  184   161   25   27   89   66   552   280   73   17   27   89   66   552 
Adjusted operating profit: discontinued operations  —   —   35   5   —   —   40 
Adjusted operating profit: discontinued Operations  —   —   35   5   —   —   40 
                              
Total adjusted operating profit  184   161   60   32   89   66   592   280   73   52   32   89   66   592 
                              
  31%   27%   10%   6%   15%   11%   100%   47%   12%   9%   6%   15%   11%   100% 
 
SchoolNorth American Education
 
School businessNorth American Education sales increaseddecreased by £82m,£12m, or 6%1%, to £1,537m£1,667m in 2007, from £1,455m£1,679m in 2006 and adjusted operating profit increaseddecreased by £19m,£7m, or 10%2%, to £203m£273m in 2007 from £184m£280m in 2006. In additionThe results were significantly affected by the weakening of the US dollar, which we estimate reduced sales by £135m and adjusted operating profit by £22m when compared to the equivalent figures at constant 2006 exchange rates. At constant exchange there was strong underlying growth in sales and profits, the School results in 20062007 benefited from a full year contribution from the acquisitions of National Evaluation Systems (NES), Paravia Bruno Mondadori (PBM), Chancery and PowerSchool made in 2006 together with a contribution in 2007 from the acquisition of Harcourt International. Offsetting these factors was the effect of the weakening of the US dollar, which we estimate reduced sales by £91m when compared to the equivalent figures at constant 2006 exchange rates.2006.
 
In the US school market, Pearson’s school publishing revenues grew 3.5% against the Association of American Publishers’ estimate of an increase for the industry of 2.7%. New adoption market share was 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 double digits after high single digit growth in 2006 and growth in excess of 20% in 2005. School testing benefited from further contract wins, market share gains and strength in online assessment.
The international School business, outside the US continued to grow with strong performances from the publishing businesses in South Africa and Australia. In Italy, the integration of PBM was completed and produced integration savings, margin improvement and market share gains in 2007. In School publishing, the acquisition of Harcourt International increased scale in our international education businesses bringing leading content for school and vocational customers in many markets including the UK, South Africa, Australia and New Zealand. The international testing business was again able to benefit from technology leadership. In the UK, we marked 9.6 million GCSE, AS and A-Level scripts, 4.6 million of which were on screen. Successful global English Language Teaching franchises in all major market franchises (primary, secondary, adult, business and exam preparation) drove strong growth.English Adventure, developed with Disney, grew successfully and has sold more than six million units in less than three years since launch.
School margins improved again in 2007 increasingwith savings from 12.6% to 13.2% due to improved gross margins, savings fromthe integration of acquired businesses and efficiency gains from the use of software platforms.

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Higher Education
Sales in Higher Education decreased slightly by £2m to £793m in 2007, from £795m in 2006. Adjusted operating profit remained flat at £161m. Both sales and adjusted operating profit were affected by the weakening of the US dollar which we estimate reduced sales by £57m and profits by £12m when compared to the equivalent figures at constant 2006 exchange rates.
 
In the US the 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’‘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

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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 increasesincreased from 4% to 11% in the US and from 39% to 48% in the UK.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 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 Harcourt International.
The International School business continued to grow with strong performances from the publishing businesses in South Africa and Australia. In Italy, the integration of PBM was completed and produced integration savings, margin improvement and market share gains in 2007. In School publishing, the acquisition of Harcourt International increased scale in our international education businesses bringing leading content for school and vocational customers in many markets including the UK, South Africa, Australia and New Zealand. The international testing business was again able to benefit from technology leadership. In the UK, we marked 9.6 million GCSE, AS and A-Level scripts, 4.6 million of which were on screen. Successful global English Language Teaching franchises in all major market franchises (primary, secondary, adult, business and exam preparation) drove strong growth.English Adventure, developed with Disney, grew successfully and has sold more than six million units in less than three years since launch.
International Higher Education publishing sales grew by 2%, benefiting from organic and acquisition investment. Particular areas of strength included local language editions of our major authors and custom publishing including the successful launch of “local language” science publishing in Germany. The “MyLab” and “Mastering” technology platforms are being successfully adapted for international markets and the MyLab 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.
 
HigherInternational Education margins remained constant year on year at 20.3% with a slight reductioncontinued to improve and the increase in US margins being compensated by improvementthe overall margin from 11.4% in international2006 to 12.5% in 2007 reflected increases in both publishing and testing margins.
 
Professional
 
After excluding sales and adjusted operating profit from Government Solutions and the Data Management businesses (reported as discontinued), Professional sales increased by £18m,£15m, or 6%7%, to £298m£226m in 2007 from £280m£211m in 2006. Adjusted operating profit increased by £3m£10m or 12%59% to £28m£27m in 2007, from £25m£17m in 2006. Sales were affected by the weakening US dollar, which reduced sales by £16m£14m when compared to the equivalent figures at constant 2006 exchange rates.
 
Professional Testing sales were up by 10% in 2007. Approximately 5.8 million secure online tests were delivered in more than 5,000 test centers across the world in 2007. There was strong margin improvement as test volumes rose, driven by higher demand from existing customers such as GMAC (for business school applicants), NCLEX (for nurses) and the DSA/DVTA driving theory test. Additional contributions from new contracts included


38

the American Board of Internal Medicine and the 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 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 PhotographersPhotographers.. Good growth in Europe


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was helped by publishing for the new Windows Vista launch, a new partnership with Microsoft Press in the Netherlands and a successful move into digital publishing and training in Germany. Our business imprints Wharton School Publishing and 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: HowWorld-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 higher at 9.4%11.9% in 2007 compared to 8.9%8.1% in 2006 as margins continued to improve in both the testing and professional publishing businesses.
 
FT Publishing
 
Sales at FT Publishing increased by £64m or 23%, from £280m in 2006 to £344m in 2007. Adjusted operating profit from continuing operations increased by £29m, from £27m in 2006 to £56m in 2007. The sales and profit increase 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 Publishing sales were up by 12% with advertising revenues up by 10%. FT newspaper circulation was up 2% to almost 440,000 (for the July-December 2007 Audit Bureau of Circulation, or ABC, measuring period), with a 19% increase in subscriptions. Digital subscribers to the FT were up 13% to 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 launch of its innovative new access model in October 2007. There was a strong trading performance at FT Business as integration with the FT Newspaper helped to generate additional revenue and reduce costs. Mergermarket experienced rapid revenue growth with 90%+ subscription renewal rates and a series of new product launches around the world includingPharmawire,Debtwire in Asia Pacific anddealReporterin emerging markets in Europe, Middle East and 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 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 approximately 200,000 registered executive users.
 
Overall margins at FT Publishing continued to increase as the newspaper becomes more profitable and in 2007 were 16.3% compared to 9.6% in 2006.
 
Interactive Data
 
Interactive Data, grew its sales by 4% from £332m in 2006 to £344m in 2007. Adjusted operating profit grew by 9% from £89m in 2006 to £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.


39

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


29

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 £37m and adjusted operating profit by £4m when compared to the equivalent figures at constant 2006 exchange rates.
 
Penguin maintained its competitive performance in major markets with a successful global publishing performance led by Alan Greenspan’sThe Age of TurbulenceNew York Times, with almost 1 million hard cover copies shipped worldwide, and Kim Edwards’ first novel,The Memory Keeper’s Daughter, a global #1 bestseller for Penguin in49 weeks of the US, UK, Australia and Canada. It was an outstanding year, for bestsellers in the US with titles including Elizabeth Gilbert’sPatricia Cornwell’sEat, Pray, LoveScarpetta (4.4 million copies shipped); Khaled Hosseini’s, Eckhart Tolle’sA Thousand Splendid SunsNew Earth(2.2 million); and Ken Follett’sGreg Mortenson’sWorld Without EndThree Cups of Tea.(almost 1 million). UK bestsellers included Marian Keyes’ Penguin authors won the major industry awards. Junot Díaz won The Pulitzer Prize for Fiction and the National Book Critics Circle Award for Fiction forAnybody Out There?The Brief Wondrous Life of Oscar Wao, Jamie Oliver’sand 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 bestsellerJamie at HomeDevil May Care, Jeremy Clarkson’sDon’t Stop Me Nowthe new James Bond novel by Sebastian Faulks, was the fastest-selling hardback fiction title in Penguin UK’s history and Charlie Higson’sDouble or Die. Alsothird-bestselling in the UK it was a strong year forin 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 Brands & Licensing division driven byThe Dr Who AnnualNorth.(the second bestselling children’s book of 2007) and bestsellingIn the 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, 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 growth was generatedahead of its markets with bestsellers including titles from a publishing schedule includingAustralian authors Bryce Courtenay withThe Persimmon Treeand Dr. Manny Noakes withCSIRO Total Wellbeing Diet Book 2.Tim Winton alongside international authors Marian Keyes and Eckhart Tolle. In India, Penguin India celebrated its 20th anniversary in 2007is the largest trade publisher and continued to grow rapidly with continued rapid growth. Penguin authors such as Shobhaa


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De, Amitav Ghosh and Nandan Nilekani. It also won all the major English language prizes in India’s national book awards: Vikram Chandra in fiction forSacred Games, Vikram Seth in non-fiction forTwo Livesawards.
Penguin’s eBook publishing and 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 Penguinsales 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 South Africa, another strong year was led by John van de Ruit’sSpud:the top 10 on the Amazon Kindle bestseller list. The Madness Continues.
Penguin continuedseries is now sold via online stores on both Amazon.com and Penguin.com. Traffic for all Penguin’s web sites increased 37% to focus on efficiency and improvement in operating margins 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. These efficiencies together with improved gross margins principally from innovation in formats such as the US premium paperback have helped to improve margins from 7.8% in 2006 to 8.7% in 2007.17 million unique users.
 
Year ended December 31, 20062007 compared to year ended December 31, 20052006
 
Consolidated results of operations
 
Sales
 
Our total sales from continuing operations increased by £328m,£172m, or 9%4%, to £4,162m in 2007, from £3,990m in 2006, from £3,662m in 2005.2006. The increase reflected growth, on a constant exchange rate basis, across all the businesses together with additional contributions from acquisitions made in both 20052006 and 2006.2007. The year on year growth was impacted by movements in exchange rates, particularly in the US dollar. 20062007 sales, translated at 20052006 average exchange rates, would have been £4,033m.£4,385m.
 
Pearson Education had another strong year of growth with an increase in sales of 9%4%. The SchoolInternational Education business was the biggest contributor to this growth with an increase of 12%15%. Some of the SchoolPearson Education increase was due to thea full year contribution from acquisitions made in 2006 and 2005 but weto additional contribution from the Harcourt acquisition in 2007. We estimate that after excluding these acquisitions and restating at


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constant exchange rates that the growth would have been 6%. at constant last year exchange rates.
In North America, US School publishing sales were up 3%3.5% compared to an industry declineincrease of 6%2.7% (source: Association of American Publishers) andas the business tookbenefited 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 leading shareheadline basis, they would have been 6% ahead of the new US adoption market. School testing sales continued to improve evenprevious year at constant 2006 exchange rates and after growth in US school testing revenuestaking account of more than 20% in 2005. Higher Education growth was more modest at 2% in total but was up 4% inportfolio changes. This increase meant that the US. Pearson’s US Higher Education business has growngrew faster than the industry for eight straight years. 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 30% in 2006 following the successful start up of new contracts and a contribution from the newly acquired Promissor business.5,000 testing centers worldwide. Professional publishing sales declined againincreased in 2006 due to2007 by 7%, after a number of years of decline in the continued industry-wide weakness in technology-related publishing.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 2005.2006 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 highera 10% increase in advertising revenues, at theFinancial Timesparticularly in the online, luxury goodscirculation up 2% and corporate finance categories.a strong contribution from FT.com. Interactive Data sales were up by 12% with consistent organic growth4% (8% at constant 2006 exchange rates and aidedbefore the contribution from acquisitions) driven by contributions fromstrong sales to both existing and new institutional customers and a renewal rate of approximately 95% within the acquisition of IS.Teledata (re-branded Interactive Data Managed Solutions) and Quote.com.institutional services sector.
 
Penguin’s sales grewwere flat year on year but would have increased by 5% with3% translated at 2006 average exchange rates as a record numberresult of best sellersits successful global publishing performance and another outstanding year for bestsellers in the US and UK, an increase in market share in the UK and continued success with the premium paperback format in the US.UK.


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Pearson Education, our largest business sector, accounted for 63% of our continuing business sales in 2006both 2007 and 2005.2006. 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 both 2006 and 2005.2006.
 
Cost of goods sold and operating expenses
 
The following table summarizes our cost of sales and net operating expenses:
 
                
 Year Ended December 31  Year Ended December 31 
 2006
 2005
  2007
 2006
 
 £m £m  £m £m 
Cost of goods sold  1,841   1,713   1,910   1,841 
     
Distribution costs  288   281   202   232 
Administration and other expenses  1,462   1,309   1,600   1,518 
Other operating income  (99)   (84)   (101)  (99)
          
Total  1,651   1,506   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 £128m,£69m, or 7%4%, to £1,910m in 2007, from £1,841m in 2006, from £1,713m in 2005.2006. The increase mainly reflectedcorresponds to the increase in sales over the period although the overall gross margin also increased slightly from 53%with cost of sales at 45.9% of sales in 20052007 compared to 54%46.1% in 2006.
 
Distribution costs.  Distribution costs consistedconsist primarily of shipping costs, postage and packing and arehave typically a fairly constant percentagedeclined as the business moves more to online delivery of sales.products.
 
Administration and other expenses.  Our administration and other expenses increased by £153m,£82m, or 12%5%, to £1,462m£1,600m in 2006,2007, from £1,309m£1,518m in 2005.2006. As a percentage of sales they increased to 37%remained at 38% in 2006, from 36% in 2005. The increase in administrationboth 2007 and other costs came principally from additional employee benefit expense, additional property costs and increased intangible amortization.2006.
 
Other operating income.  Other operating income mainly consistedconsists of freight recharges, sub-rights and licensing income and distribution commissions.commissions together with income from sale of assets. Other operating income increased 18%marginally by 2% to £101m in 2007 from £99m in 2006 from £84m in 2005, with the increase mainly due to increased freight recharges.2006.
 
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.


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Share of results of joint ventures and associates
 
The contribution from our joint ventures and associates increaseddecreased slightly from £14m in 2005 to £24m in 2006. The increase was mainly due2006 to an increase£23m in circulation and revenue at The2007. Our share of profit from the Economist Group, who also recordedin 2006 included a one-off gain onof £4m from the sale of its investmentinterest in Commonwealth Business Media Inc.Inc which was not repeated in 2007.
 
Operating profit
 
The total operating profit increased by £25m,£52m, or 5%10%, to £574m in 2007 from £522m in 2006 from £497m in 2005. This increase was due to increases across all the businesses, after taking account of the one-off gain from the sale of MarketWatch at FT Publishing of £40m in 2005 and a charge of £7m in 2006 at Penguin relating to an adjustment to goodwill following recognition of pre-acquisition tax losses. Operating2006. 2007 operating profit, in 2006, translated at 20052006 average exchange rates, would have been £7m£34m higher.
 
Operating profit attributable to Pearson Education increased by £44m,£9m, or 14%3%, to £361m in 2007, from £352m in 2006, from £308m in 2005.2006. The increase was due to continued improvement in School and Professional margins, the profit impact of strong sales and cost reductionsbut was offset by an increase in technology publishingintangible amortization from £18m in Professional testing.2006 to £31m in 2007. Operating profit attributable to the FT Group decreasedincreased by £17m,£28m, or 13%25%, to £140m in 2007, from £112m in 2006,2006. The increase reflects the increase in revenues from £129mboth established businesses and an increased contribution from new acquisitions but also reflects improvements in 2005. This decrease was attributable to the absence in 2006 of the £40m profit from the sale of MarketWatch that was recorded in 2005. After excluding this item profits increased by £23m, £7m at Interactive Data and £16mmargins particularly at FT Publishing. The FT Publishing increase reflected thepick-up in advertising revenues. Operating profit attributable to the Penguin Group decreasedincreased 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 toalthough the 2006 result included a one off goodwill charge of £7m caused byrelating to the recognition of previously unrecognizedpre-acquisition tax losses relating to the acquisition ofat Dorling Kindersley in 2000.Kindersley.
 
Net finance costs
 
Net finance costs increased from £70m in 2005 to £74m in 2006.2006 to £106m in 2007. Net interest payable in 20062007 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


34

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%. Combining5.4%, reflecting a rise in interest rates and a change in the rate rise with an increasecurrency 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 20062007 the net finance income relating to post-retirement plans was an income of £4m£10m compared to a costan income of £7m£4m in the previous year.
Other net finance income relating to foreign exchange and short-term fluctuations in the market value of financial instruments remained fairly constant year on year withincluded a £16m gainnet foreign exchange loss of £17m in 20062007 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
 
The total tax charge in 20062007 of £4m represented just under 1%£131m represents 28% of pre-tax profits compared to a charge of £108mjust £4m or 25%less than 1% of pre-tax profits in 2005.2006. The low tax rate in 2006 was mainly accounted for by two factors. First, in the light of the announcementanticipation of the disposal of Government Solutions, we were required to recognizerecognized 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 a non-recurring credit of £127m.£127m in 2006 which was not repeated in 2007.
 
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 comprisedThis comprises mainly the minority share in Interactive Data. In January 2006, we increased our stake inOur share of Interactive Data reducingremained at 62% throughout 2007, leaving the minority interest from 39% tounchanged at 38%.


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Discontinued operations
 
On 22Discontinued operations relate to the disposal of Government Solutions (in February 20082007), Les Echos (in December 2007), Datamark (in July 2007) and the Group completed the sale of its Data Management (Scanners) business and this business has been included in discontinued operations for the full year in 2006 and 2005. Operating profit for the Scanners business in 2006 was £13m compared to £15m in 2005.
In December 2007 the Group completed the sale(in February 2008). The results of GroupeGovernment Solutions and Les Echos and the results have been included in discontinued operations for 2007 and 2006 and 2005. Operating profit for Les Echos in 2006 was £5m compared to £4m in 2005.
In December 2006 the Group announced the sale of its Government contracting business, Pearson Government Solutions. The sale was completed in February 2007 and the results of this business have been shown in discontinued operations inconsolidated up to the consolidated income statement in both 2006 and 2005.date of sale. Operating profit for Government solutionsSolutions 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. Following2006 and the disposal of Recoletos in 2005 its results were consolidated 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. The pre-tax profit on disposalsale 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 reportedthe Group’s Other Assessment and Testing cash-generating unit (CGU) and was carved out of this CGU in 2005 was £306m.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 year
 
The total profit for the financial year in 20062007 was £469m£310m compared to a profit in 20052006 of £644m.£469m. The overall decrease of £175m£159m was mainly due to the absence of the profits on disposalnon-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 anthe 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.


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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 additionaldecrease in profit for 20052007 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
 
The weakening of the US dollar against sterling on an average basis had a negative impact on reported sales and profits in 20062007 compared to 2005. Sales in 2006,2006. 2007 sales, translated at 20052006 average exchange rates, would have been higher by £43m£223m and 2006 operating profit, translated at 20052006 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
 
The following tables summarize our sales and operating profit for each of Pearson’s divisions. Adjusted operating profit is a non-statutorynon-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, other gains and losses and other net finance costs of associates. 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. 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.


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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, 2007 
 Year Ended December 31, 2006  North
             
   Higher
   FT
 Interactive
      American
 International
   FT
 Interactive
     
£m
 School Education Professional Publishing Data Penguin Total  Education Education Professional Publishing Data Penguin Total 
Sales  1,455   795   280   280   332   848   3,990   1,667   735   226   344   344   846   4,162 
  36%   20%   7%   7%   8%   22%   100%   40%   18%   5%   8%   8%   21%   100% 
Total operating profit  167   161   24   30   82   58   522   253   82   26   50   90   73   574 
  32%   31%   4%   6%   16%   11%   100%   44%   14%   4%   9%   16%   13%   100% 
Add back:                                                        
Amortization and adjustment of acquired intangibles  17   —   1   2   7   8   35   20   10   1   6   7   1   45 
Other net gains and losses including associates  —   —   —   (4)   —   —   (4) 
Other net finance costs of associates  —   —   —   (1)   —   —   (1) 
                              
Adjusted operating profit: continuing operations  184   161   25   27   89   66   552   273   92   27   56   97   74   619 
Adjusted operating profit: discontinued operations  —   —   35   5   —   —   40   —   —   14   1   —   —   15 
                              
Total adjusted operating profit  184   161   60   32   89   66   592   273   92   41   57   97   74   634 
                              
  31%   27%   10%   6%   15%   11%   100%   43%   15%   6%   9%   15%   12%   100% 
 
                             
  Year Ended December 31, 2005 
     Higher
     FT
  Interactive
       
£m
 School  Education  Professional  Publishing  Data  Penguin  Total 
 
Sales  1,295   779   238   249   297   804   3,662 
   36%   21%   6%   7%   8%   22%   100% 
Total operating profit  142   156   10   54   75   60   497 
   29%   31%   2%   11%   15%   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   10   17   80   60   470 
Adjusted operating profit: discontinued operations  —   —   35   1   —   —   36 
                             
Total adjusted operating profit  147   156   45   18   80   60   506 
                             
   29%   31%   9%   3%   16%   12%   100% 
School
School business sales increased by £160m, or 12%, to £1,455m in 2006, from £1,295m in 2005 and adjusted operating profit increased by £37m, or 25%, to £184m in 2006 from £147m in 2005. In addition to strong underlying growth in sales and profits, the School results in 2006 benefited from the inclusion of National Evaluation Systems (NES), Paravia Bruno Mondadori (PBM), Chancery and PowerSchool together with a number of smaller


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  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% 
acquisitions all made
North American Education
North American Education sales decreased by £12m, or 1%, to £1,667m in the first half of2007, from £1,679m in 2006 and adjusted operating profit decreased by £7m, or 2%, to £273m in 2007 from a full year contribution from AGS Publishing, acquired£280m in July 2005. Offsetting these factors was the effect of2006. The results were 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 20052006 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 revenues grew 3%3.5% against the Association of American Publishers’ estimate of a decline inan 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 thedouble digits after high single digits even afterdigit growth in 2006 and growth in excess of 20% in 2005. School testing benefited from further contract wins, market share gains and leadershipstrength 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

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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 investingwith strong performances from the publishing businesses in a new generationSouth Africa and Australia. In Italy, the integration of digital products to meetPBM was completed and produced integration savings, margin improvement and market share gains in 2007. In School publishing, the demandsacquisition of Harcourt International increased scale in our international education businesses bringing leading content for school districts for personalized classroom learning.
The international School business, outsideand 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 99.6 million GCSE, AS and A-Level scripts, 4.6 million of which were marked on screen. In School publishing, the launchSuccessful global English Language Teaching franchises in the UK of ActiveTeach technology providing multimedia teaching resources has brought increasedall 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 Italianfranchises (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 (with Disney), wasdeveloped with Disney, grew successfully launchedand has sold more than six million units in Asia and Latin America.
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 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 eightless than three 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’sPsychologytogether with MyPsychLab and Hubbard’sEconomicstogether with MyEconLab. Cicarrelli’sPsychology increased Pearson’s market share in the subject by 3% to 25% and was 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.since launch.
 
International Higher Education publishing sales grew by 3%2%, benefiting from good growth inorganic and acquisition investment. Particular areas of strength included local language publishing programseditions 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 withplatforms 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.
 
HigherInternational Education margins remained constant year on year with only a smallcontinued to improve and the increase of 0.3% pointsin the overall margin from 11.4% in 2006 to 20.3%12.5% in 2006.2007 reflected increases in both publishing and testing margins.


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Professional
 
After excluding sales and adjusted operating profit from Government Solutions and the Data Management businesses which were reported(reported as discontinued,discontinued), Professional sales increased by £42m,£15m, or 18%7%, to £280m£226m in 20062007 from £238m£211m in 2005.2006. Adjusted operating profit from continuing operations increased by £15m£10m or 59% to £25m£27m in 2006,2007, from £10m£17m in 2005.2006. Sales were only slightly affected by the weakening US dollar, which we estimate reduced sales by £1m£14m when compared to the equivalent figures at constant 20052006 exchange rates.
 
Professional testingTesting 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 particular2007. There was strong margin improvement as test volumes rose, driven by higher demand from the acquisition of Promissorexisting customers such as GMAC (for business school applicants), NCLEX (for nurses) and the successfulstart-upDSA/DVTA driving theory test. Additional contributions from new contracts included


38

the American Board of Internal Medicine and the Graduate Management Admissions TestNational 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 deliveredO’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 ofEurope was helped by publishing for the new contract. Professional Testing has movedWindows Vista launch, a new partnership with Microsoft Press in the Netherlands and a successful move into profitabilitydigital 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 FTPress, imprints.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 8.9%11.9% in 2007 compared to 8.1% in 2006 comparedas margins continued to 4.2%improve in 2005 asboth the testing business moved into profitability and the technologyprofessional publishing business took specific cost actions.businesses.
 
FT Publishing
 
After excluding sales and adjusted operating profit from Les Echos which was reported as discontinued, salesSales at FT Publishing increased by £31m£64m or 12%23%, from £249m in 2005 to £280m in 2006.2006 to £344m in 2007. Adjusted operating profit from continuing operations increased by £10m,£29m, from £17m in 2005 to £27m in 2006. Much of the2006 to £56m in 2007. The sales and profit increase was again atbenefits 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 wherePublishing sales were up 8%by 12% with advertising revenues up by 10%. FT newspaper circulation was up 2% to almost 440,000 (for the July-December 2007 Audit Bureau of Circulation, or ABC, measuring period), with a 19% increase in subscriptions. Digital subscribers to the FT were up 13% to 101,000 and profit increased by £9mmonthly unique users were up 30% to £11m.5.7 million. Monthly page views were up 33% to 48.2 million. FT.com attracted 150,000 new registered users since the launch of its innovative new access model in October 2007. There was a strong trading performance at FT Business as integration with the FT Newspaper helped to generate additional revenue and reduce costs. Mergermarket experienced rapid revenue growth with 90%+ subscription renewal rates and a series of new product launches around the world includingPharmawire,Debtwire in Asia Pacific anddealReporterin emerging markets in Europe, Middle East and Africa.
 
The FT newspaper advertising revenues were up 9% for the year with rapid growth in online, luxury goods and corporate finance categories, all up more than 30% on 2005. FT worldwide circulation was up 1% to 430,469 copies per day (Source: ABC, average for six months to December 2006). FT.com’s paying subscribers were up 7% to 90,000 while the December audience was up 29% to 4.2 million. The FT continued to benefit from international expansion 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 Mergermarket, an online financial data and intelligence provider that contributed additional sales and profit in the last three months of 2006. FT Business showed good growth and improved margins driven by strong performances in events, UK retail financial titles (Investment AdviserandFinancial Adviser) and internationally withThe Banker. 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 profitresults 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 becamebecomes more profitable and in 2007 were 9.6%16.3% compared to 6.8%9.6% in 2005.2006.
 
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 20052006 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.


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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 20052006 exchange rates.
 
Interactive Data Pricing and Reference Data (formerly FT Interactive Data), Interactive Data’s largest business (approximately two-thirds of Interactive Data revenues) generated strong growthPenguin maintained its competitive performance in North America and Europe. Growth was drivenmajor markets with a successful global publishing performance led 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


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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.
Interactive Data 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 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 for Penguin in terms of literary success and bestseller performance. In the US, Penguin placed 139 books on theAlan Greenspan’sNew York Timesbestseller list, 10 more than in 2005, for 49 weeks of the year, including Patricia Cornwell’sScarpetta, Eckhart Tolle’sA New Earthand 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.
Greg Mortenson’sThree Cups of Tea.Penguin authors won a large number of prestigious awards during 2006: athe major industry awards. Junot Díaz won The Pulitzer Prize for Fiction (Marchby Geraldine Brooks); aand the National Book Critics Circle Award (for Fiction forTHEM: A MemoirThe Brief Wondrous Life of ParentsOscar Waoby Francine du Plessix Gray);, and Barton Gellman won the Michael L. Printz award (Looking for Alaskaby John Green); the OrangePulitzer Prize for Fiction (National Reporting.
In the UK, Penguin had 67 top ten bestsellers versus 52 in 2007, according to BookScan. The number one bestsellerOn BeautyDevil 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 Zadie Smith);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


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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 the Harcourt acquisition in 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.


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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, but was offset by an increase in intangible amortization from £18m in 2006 to £31m in 2007. Operating profit attributable to the FT Group increased by £28m, or 25%, to £140m in 2007, from £112m in 2006. The increase reflects the increase in revenues from both established businesses and an increased contribution from new acquisitions but also reflects improvements in margins particularly at FT Publishing. Operating profit attributable to the Penguin Group increased by £15m, or 26%, to £73m in 2007, from £58m in 2006 although the 2006 result included a one off goodwill charge of £7m relating to the recognition of pre-acquisition tax losses at Dorling Kindersley.
Net finance costs
Net finance costs increased from £74m in 2006 to £106m in 2007. Net interest payable in 2007 was £95m, up from £94m in 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 0.5% to 5.4%, reflecting a rise in interest rates and a change in the currency mix of year end debt. These two factors, partly offset by a decrease in the Group’s average net debt of £90m, increased the Group’s average net interest rate payable by 0.3% to 7.3%. In 2007 the net finance income relating to post-retirement plans was an income of £10m compared to an income of £4m in the previous year.
Other net finance income relating to foreign exchange and short-term fluctuations in the market value of financial instruments included a net foreign exchange loss of £17m in 2007 compared to a gain of £19m in 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
The total tax charge in 2007 of £131m represents 28% of pre-tax profits compared to a charge of just £4m or less than 1% of pre-tax profits in 2006. The low tax rate in 2006 was mainly accounted for by two factors. First, in anticipation of the disposal of Government Solutions, we 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 re-evaluated the likely utilization of operating losses both in the US and the Man Booker Prize UK; this 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 a non-recurring credit of £127m in 2006 which was not repeated in 2007.
Minority interests
This comprises mainly the minority share in Interactive Data. Our share of Interactive Data remained at 62% throughout 2007, 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 2006 and have been consolidated up to the date of sale. Operating profit for Government Solutions in 2007 was £2m compared to £22m in 2006 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 compared to £5m in 2006 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 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 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 has recognized a goodwill impairment charge of £97m in 2007 in anticipation of the loss on disposal.
Profit for the year
The total profit for the financial year in 2007 was £310m compared to a profit in 2006 of £469m. The overall decrease of £159m was mainly due to the absence of the non-recurring tax credit of £127m recorded in 2006, the decrease in contribution from discontinued businesses of £52m and the increase in net finance costs of £32m, largely due to exchange losses. These items more than offset the increase in operating profit in 2007.


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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 based on a weighted average number of shares in issue of 796.8m in 2007 and 798.4m in 2006. The decrease in earnings per share was due to the decrease in profit for 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 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 weakening of the US dollar against sterling on an average basis had a negative impact on reported sales and profits in 2007 compared to 2006. 2007 sales, translated at 2006 average exchange rates, would have been higher by £223m and operating profit, translated at 2006 average exchange rates, would have been higher by £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
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, other gains and losses and other net finance costs of associates. 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. Other gains and losses represent profits and losses on the sale of subsidiaries, joint ventures, associates and investments that are included within continuing operations but which distort the performance for the year.
Adjusted operating profit enables management to more easily track the underlying operational performance of the Group. A reconciliation of operating profit to adjusted operating profit for continuing operations is included in the tables below:
                             
  Year Ended December 31, 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% 


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  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% 
North American Education
North American Education sales decreased by £12m, or 1%, to £1,667m in 2007, from £1,679m in 2006 and adjusted operating profit decreased by £7m, or 2%, to £273m in 2007 from £280m in 2006. The results were significantly affected by the weakening of the US dollar, which we estimate reduced sales by £135m and adjusted operating profit by £22m when compared to the equivalent figures at constant 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 revenues grew 3.5% against the Association of American Publishers’ estimate of an increase for the industry of 2.7%. New adoption market share was 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 double digits after high single digit growth in 2006 and growth in excess of 20% in 2005. School testing benefited from further contract wins, market share gains and strength in 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

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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 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 Harcourt International.
The International School business continued to grow with strong performances from the publishing businesses in South Africa and Australia. In Italy, the integration of PBM was completed and produced integration savings, margin improvement and market share gains in 2007. In School publishing, the acquisition of Harcourt International increased scale in our international education businesses bringing leading content for school and vocational customers in many markets including the UK, South Africa, Australia and New Zealand. The international testing business was again able to benefit from technology leadership. In the UK, we marked 9.6 million GCSE, AS and A-Level scripts, 4.6 million of which were on screen. Successful global English Language Teaching franchises in all major market franchises (primary, secondary, adult, business and exam preparation) drove strong growth.English Adventure, developed with Disney, grew successfully and has sold more than six million units in less than three years since launch.
International Higher Education publishing sales grew by 2%, benefiting from organic and acquisition investment. Particular areas of strength included local language editions of our major authors and custom publishing including the successful launch of “local language” science publishing in Germany. The “MyLab” and “Mastering” technology platforms are being successfully adapted for international markets and the MyLab 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.
International Education margins continued to improve and the increase in the overall margin from 11.4% in 2006 to 12.5% in 2007 reflected increases in both publishing and testing margins.
Professional
After excluding sales and adjusted operating profit from Government Solutions and the Data Management businesses (reported as discontinued), Professional sales increased by £15m, or 7%, to £226m in 2007 from £211m in 2006. Adjusted operating profit increased by £10m or 59% to £27m in 2007, from £17m in 2006. Sales were affected by the weakening US dollar, which reduced sales by £14m when compared to the equivalent figures at constant 2006 exchange rates.
Professional Testing sales were up by 10% in 2007. Approximately 5.8 million secure online tests were delivered in more than 5,000 test centers across the world in 2007. There was strong margin improvement as test volumes rose, driven by higher demand from existing customers such as GMAC (for business school applicants), NCLEX (for nurses) and the DSA/DVTA driving theory test. Additional contributions from new contracts included


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the American Board of Internal Medicine and the 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 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 Europe was helped by publishing for the new Windows Vista launch, a new partnership with Microsoft Press in the Netherlands and a successful move into digital publishing and training in Germany. Our business imprints Wharton School Publishing and 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 higher at 11.9% in 2007 compared to 8.1% in 2006 as margins continued to improve in both the testing and professional publishing businesses.
FT Publishing
Sales at FT Publishing increased by £64m or 23%, from £280m in 2006 to £344m in 2007. Adjusted operating profit from continuing operations increased by £29m, from £27m in 2006 to £56m in 2007. The sales and profit increase 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 Publishing sales were up by 12% with advertising revenues up by 10%. FT newspaper circulation was up 2% to almost 440,000 (for the July-December 2007 Audit Bureau of Circulation, or ABC, measuring period), with a 19% increase in subscriptions. Digital subscribers to the FT were up 13% to 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 launch of its innovative new access model in October 2007. There was a strong trading performance at FT Business as integration with the FT Newspaper helped to generate additional revenue and reduce costs. Mergermarket experienced rapid revenue growth with 90%+ subscription renewal rates and a series of new product launches around the world includingPharmawire,Debtwire in Asia Pacific anddealReporterin emerging markets in Europe, Middle East and 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 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 approximately 200,000 registered executive users.
Overall margins at FT Publishing continued to increase as the newspaper becomes more profitable and in 2007 were 16.3% compared to 9.6% in 2006.
Interactive Data
Interactive Data, grew its sales by 4% from £332m in 2006 to £344m in 2007. Adjusted operating profit grew by 9% from £89m in 2006 to £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.


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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 £37m and adjusted operating profit by £4m when compared to the equivalent figures at constant 2006 exchange rates.
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 Kim Edwards’ first novel,The Memory Keeper’s Daughter, a global number one bestseller for Penguin in 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 2007) and bestsellingIn the 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 India celebrated its 20th anniversary in 2007 with continued rapid growth. Penguin authors won all the major English language prizes in India’s national book awards: Vikram Chandra in fiction forSacred Games, Vikram Seth in non-fiction forTwo Livesand 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 20062008, and in South Africa, another strong year was rewarded with a substantial increase in market share, led by Marina Lewycka’sJohn van de Ruit’sA 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 benefitedcontinues 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 investingZealand. These efficiencies together with improved gross margins principally from innovation in Indiaformats such as a pre-production and design center for reference titles.the US premium paperback have helped to improve margins from 7.8% in 2006 to 8.7% in 2007.


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Liquidity and capital resources
 
Cash flows and financing
 
Net cash generated from operations increased by £235m (or 36%), to £894m in 2008 from £659m in 2007. This increase reflected strong cash contributions from all businesses, together with the significant strengthening of the US dollar against sterling. The exchange rate for translation of dollar cash flows was $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, 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 working capital management. In 2007, the average working capital to sales ratio for our book publishing businesses improved to 25.6% from 26.3% in 2006. Average working capital is the average month end balance
Net interest paid decreased to £76m in the year of inventory (includingpre-publication), receivables and payables. In 2006, the net cash generated2008 from operations decreased by £32m, or 5%, to £621m, from £653m£90m in 2005. This reduction2007. The decrease was entirely due to the weakeningreduction 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 comparedrelative 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 rate for translation of dollar cash flows was $1.99 in 2007, $1.96 in 2006 ($1.72 in 2005). Underlying working capital efficiency continued to improve. On an average basis, the working capital to sales ratio for our book publishing businesses improved from 27.4% in 2005 to 26.3% in 2006.
Net interest paid was £90m in 2007 compared to £82m in 2006 and £72m in 2005.2006. The 10% increase in 2007 over 2006 was primarily due to higher average interest rates in the UK and US. The 14% increase in 2006 over 2005


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reflected the higher average debt resulting from the acquisitions made in the year and higher interest rates (particularly in the US).
 
Capital expenditure on property, plant and equipment was £75m in 2008, £86m in 2007 and £68m in 2006. The reduction in spend in 2008 reflects reduced infrastructure spend compared to £68m2007, although the Group continued to invest in 2006 and £76m in 2005.digital technology. The increase in 2007 over 2006 reflects investment to update infrastructure, particularly at Penguin and FT Group. The reduction in 2006 compared to 2005 was due to the movement in US dollar exchange rates.
 
The acquisition of subsidiaries, joint ventures and associates accounted for a cash outflow of £400m in 2008 against £476m in 2007 againstand £367m in 20062006. The principal acquisitions in 2008 were of Harcourt Assessments for £321m and £253m in 2005.Money Media for £33m. The principal acquisitions in 2007 were Harcourt Education International for £155m and eCollege for £266m. In 2006, the principal acquisition was of Mergermarket for £109m. The balance 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 sale of subsidiaries and associates produced a cash inflow of £111m in 2008 against £469m in 2007 againstand £10m in 2006 and £430m2006. 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 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 in 2005 were of Recoletos for net cash proceeds of £371m and MarketWatch for net cash proceeds of ��54m.
 
The cash outflow from financing of £149m in 2008 reflects the repayment of 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 outflow from financing activities of £444m in 2007 represented the higher Group dividend (as the Group sought to match dividend growth more closely with earnings growth) and the repayment of one €591m bond, offset in part by drawings on the 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.
 
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, 2007,2008, our net debt was £973m£1,460m compared to net debt of £1,059m£973m at December 31, 2006.2007. 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. 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 other marketable instruments which are readily realizable and held on a short-term basis. Short-term, medium-term and long-term borrowing amounted to £2,363m at December 31, 2008, compared to £1,608m at December 31, 2007 comparedreflecting the impact of the strengthening of the US dollar relative to £1,743m at December 31, 2006.sterling and the additional US dollar bonds issued in the year. At December 31, 2007,2008, cash and liquid resources were £560m,£685m, compared to £592m£560m at December 31, 2006.2007.


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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, 2007  At December 31, 2008 
   Less than
 One to
 Two to
 After five
    Less than
 One to
 Two to
 After five
 
 Total one year two years five years years  Total one year two years five years years 
 £m £m £m £m £m  £m £m £m £m £m 
Gross borrowings:                                        
Bank loans, overdrafts and commercial paper  444   444   —   —   —   228   —   —   228   — 
Variable rate loan notes  —   —   —   —   —   —   —   —   —   — 
Bonds  1,150   105   176   264   605   2,128   244   —   626   1,258 
Lease obligations  1,353   123   116   280   834 
Finance lease obligations  7   4   2   1   — 
Operating lease obligations  1,612   149   138   355   970 
                      
Total
  2,947   672   292   544   1,439   3,975   397   140   1,210   2,228 
                      
 
At December 31, 20072008 the Group had capital commitments for fixed assets, including finance leases already under contract, of £3m (2006: £nil)£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 0.125% on the unused amount of the Group’s bank facility.
 
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
 
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 have in place twoa committed revolving credit facilities. The first is afacility of $1.75bn, revolving credit facility, of which $92m matures in May 2011 and the balance of $1.658bn matures in May 2012. The second facility is a $975m revolving credit facility, which has been amended since the balance sheet date and, assuming the company exercises its extension option, matures in December 2008. The company has a further option to extend $300m of the $975m facility to September 2009. At December 31, 2007,2008, approximately $1.31bn and $695m were$1.56bn was available under these facilities respectively.


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this facility. This included allocations to refinance short-term borrowings not directly drawn under the facility. Both credit facilities contain the samefacility contains two key covenants measured for each 12 month period ending June 30 and December 31:
 
We must maintain the ratio of our profit before interest, tax and amortization to our net interest payable at 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.


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Treasury policy
 
Our treasury policy is described in note 1519 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
 
There were no significant or unusual related party transactions in 2008, 2007 2006 or 2005.2006. Refer to note 36 in “Item 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 2008.March 2009.
 
       
Name
 
Age
 
Position
 
Glen Moreno  6465  Chairman
Marjorie Scardino  6162  Chief Executive
David Arculus  6162  Non-executive Director
David Bell  6162  Director for People
Terry Burns  6465  Non-executive Director
Patrick Cescau  5960  Non-executive Director
Will Ethridge57Chief Executive, Pearson Education North America
Rona Fairhead  4647  Chairman and Chief Executive, The FT Group
Robin Freestone  4950  Chief Financial Officer
Susan Fuhrman  64  Non-executive Director
Ken Hydon  6364  Non-executive Director
John Makinson  5354  Chairman and Chief Executive, Penguin Group
CK Prahalad67Non-executive Director
 
Glen Morenowas appointed chairman of Pearson on October 1, 2005. He is the senior independent director of Man Group plc and a director of Fidelity International Limited. He was recently made acting chairman of UK Financial Investments Limited, 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 a non-executive directorvice chairman of Nokia Corporation and a director of several charitable organizations.
 
David Arculusbecame a non-executive director in February 2006 and currently serves on the audit and nomination committees and as chairman of the personnel committee. He is a non-executive director of Telefonica SA, and was previously chairman of O2 plc from 2004 until it was acquired by Telefonica at the beginning of 2006. His previous roles include chairman of Severn Trent plc and IPC Group, chief operating officer of United Business Media plc and group managing director of EMAP plc.
 
David Bellbecame a director in March 1996.  He was appointed Pearson’s director for people with responsibility for finding, keeping, rewarding and inspiring our employees across the Pearson Group. He is chairman of theFinancial Timesand Sadler’s Wells Theatre. He is also chairman of Crisis, a charity for the homeless, andRoehampton University, The Institute for War and Peace Reporting.Reporting and the London Transport Museum.


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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 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 beenwas 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 is currentlywas 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 and was appointed chief financial officer of Pearson in June 2002, having previously servedoriginally as deputy finance director from October 2001.chief financial officer. She was appointed chairman and chief executive of the FT Group onin June 12, 2006 and chairman of Interactive Databecame responsible for Pearson VUE in September 2007.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 memberstrategy. She is also chairman of the executive committee from 1998. Prior to that, she worked for Bombardier Inc. in finance, strategy and operational roles. She isInteractive Data, a non-executive director of HSBC Holdings plc and chairs the HSBC audit committee.
 
Robin Freestonebecame a director of Pearson and was appointed chief financial officer onin June 12, 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.a chartered accountant with 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 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 committeecommittees 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 served as Pearson’s finance director from March 1996 until June 2002. He is also chairman of the Institute of Public Policy Research and a director of The National Theatre and The International Rescue Committee (UK).


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New Appointments
Effective May 1, 2008, Pearson is making the following appointments to the board:
Coimbatore Krishnarao Prahaladbecame a non-executive director in May 2008 and is the Paula distinguished university professor of corporate strategy and Ruth McCracken distinguished University Professor of Corporate Strategyinternational business at the University of Michigan Ross SchoolBusiness School. He is a director of business. He will serve as anon-executive director.
Will EthridgeisNCR, Hindustan Unilever Corporation, World Resources Institute and the chief executive of Pearson’s North American education business, spanning School, Higher Education and Professional publishing, assessment, technology and services. He will serve as an executive director.Indus Entrepreneurs.
 
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 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.


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Remuneration policy
 
Pearson seeks to generateWe want a performance culture by operatingthat supports our strategy and goals and incentive programs that support its business goals and reward their achievement. It is the company’s policy that total remuneration (base compensation plus short and long-term incentives) should reward both short and long-term results, delivering competitive rewards for target performance, but outstanding rewards for exceptional company performance. Performance conditions for the company’s various performance-related annual or long-term incentive plans are linked to the company’s strategic objectives and aligned with the interests of shareholders. Share ownership is encouraged throughout the company.shareholders
Our starting point continues to be that total remuneration (base compensation plus annual and long-term incentives) should reward both short and long-term results, delivering competitive rewards for target performance, but outstanding rewards for exceptional company 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’ 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 places considerable emphasis on the performance-linked elements i.e. annual incentives, bonus share matching and long-term incentives.
The 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 theWe want our executive directors’ remuneration of the executive directors shouldto be competitive with those of directors and executives in similar positions in comparable companies. We 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 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
 
Our normal policy is to review salaries annually consistent with the way we benchmark pay and taking into account the remuneration of directors and executives in similar positions in comparable companies, individual performance and levels ofapproach to pay and pay increases throughoutacross the company.company as a whole.
 
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.
 
Annual incentives
 
The 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.
The financial performance measures relate to These plans then become the company’s main drivers of business performance at both the corporate and operating company level. Performance is measured separately for each item. For each performance measure, the Committee establishes thresholds, target and maximum levels of different levels of payout.
With the exceptionbasis of the chief executive, 10%annual incentive plans below the level 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 agreedprincipal operating companies, particularly with the chief executive.
For 2008, the financial performance measures for Pearson plc are sales, growth in underlying adjusted earnings per share for continuing operations at constant exchange rates, average working capital as a ratio to sales and operating cash flow. For subsequent years, the measures will be set at the time.regard


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For 2008,to the Committee has reviewed the structure for annual incentives for executive directors other than the chief executive. Previously, this has expressed individual annual incentive opportunities by reference to base salary. In future, starting in 2008, these incentive opportunities will be expressed as absolute cash amounts. The Committee with the advice of the chief executive will determine 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,performance measures used and the performance required to achieve the maximum payout. In aggregate, the target individual incentive opportunities for the chief executive will be up to 0.4% of operating profit in the company’s operating plan each year.
For 2008, there is no change torelationship between the incentive opportunity for the chief executive which remains at 100% of base salary and 150% of salary at maximum. The average target individual incentive opportunity for the other executive directors is £381,000 (compared to £345,000 in 2007)plan targets and the maximum is twice target (as in 2007).
The annual incentive plans are discretionary and the Committee reserves the right to make adjustments to payouts up or down taking into account exceptional factors in line with the Committee’s existing policy.relevant business unit operating plans.
 
The Committee will continue to review the annual incentive plans each year and to revise the performance measures, targets and individual incentive opportunities in light of current conditions.
 
Annual incentive payments do not form part of pensionable earnings.
 
For 2007, annual incentives for Marjorie Scardino, David Bell and Robin Freestone were based on theThe financial performance measures relate to the company’s main drivers of Pearson plc. Inbusiness performance at both the casecorporate, operating company and business unit level. Performance is measured separately for each item. For each performance measure, the Committee establishes thresholds, target and maximum levels of John Makinson, 60%performance for different levels of hispayout.
With the exception of the chief executive, normally 10% of the total annual incentive was based onopportunity for the performanceexecutive directors and other members of Penguin Group and 30% on the financial performance of Pearson plc. In the case of Rona Fairhead, 60% of her annual incentive was based on the financial performance of FT Group and 30% 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 wasManagement Committee is based on performance against personal objectives.objectives as agreed with the chief executive. These may includeinter alia objectives relating to corporate social responsibility.
For 2009, the financial performance measures for Pearson plc are sales, operating profit (for the operating companies) and growth in underlying 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. The selection and weighting of the performance measures takes into account the 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 2009, there is no change to the incentive opportunity for the chief executive which remains at 100% of base salary at target and 150% at maximum.
There is also no change to the average target individual incentive opportunity for the other executive directors 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 (as in 2008).
The annual incentive plans are discretionary and the Committee reserves the right to make adjustments to payouts up or down if it believes exceptional factors warrant doing so. The committee may also award individual discretionary incentive payments and did so in 2008 for Will Ethridge 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.
             
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 adjusted sales, earnings per share growth, average working capital to sales ratio and operating cash flow. Adjusted salesSales and underlying growth in adjusted earnings per share at £4,218mconstant exchange rates 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 performance 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 £684m and underlying growth in adjusted earnings per share at constant exchange rates consistent with reported adjusted earnings per share of 46.7p were all above maximum. Sales were above target but below maximum.
 
For FT Group,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 was above maximum.
For Pearson VUE, the performance measures were sales, operating profit, average working capital as a ratio to sales and operating cash flow. Sales were above target but below maximum. Operating profit and operating cash flow werePerformance across all other measures was above maximum.
 
For Penguin Group, the performance measures were sales, operating margin, average working capital as a ratio to sales and operating cash flow. Performance across all measuresSales 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.
None of the executive directors was directly covered by the plans for the education businesses where the same performance measures applied.
 
Bonus share matching
 
We are askingIn 2008, shareholders by separate resolution to approveapproved the renewal of the annual bonus share matching plan, first approved by shareholders in 1998. The Committee has reviewed the operation of this plan since its introduction. Taking into account how plans of this type have evolved, we are seeking to renew the plan on broadly similar terms. We are proposing certain changes that we think are consistent with market practice, will simplify the plan and enhancetake-up, particularly in our key market.
Subject to shareholders’ approval, the renewed annual bonus share matching plan will operate in 2008 in respect of annual incentives for 2007. The plan will continue to permitwhich permits executive directors and senior executives around the company to invest up to 50% of any after-tax annual bonus in Pearson shares.
 
If the participant’s invested shares are held, they will be matched subject to earnings per share growth over the three-year performance period on a gross basis up to a maximum of one matching share for every one held i.e. the number of matching shares will 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.


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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 3% per annum compound over the 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 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 years to measure the company’s financial progress over the period to which the entitlement to matching shares relates.
 
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.
 
The long-term incentive planLong-term incentives
 
At the annual general meeting in April 2006, shareholders approved the renewal of the long-term incentive plan first introduced in 2001.
 
Executive directors, senior executives and other managers are eligible tocan participate in the plan which can deliver restricted stockand/or stock options. Approximately 5% of the company’s employees currently hold awards under the plan. The aim is to give the 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 intention to grant stock options in 2008.2009.
 
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 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 since 2006 and that will apply for 20082009 and subsequent awards 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.
 
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.
 
The Committee establishes each yearThere are limits on the expected valueamount 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. In establishing the expected value of individual awards, the Committee also has regard to the face value of the awards and their potential value should the performance targets be met in full.
new-issue equity we can use. In any rolling10-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.


44

Shareholding policy
 
As previously noted, in line with the policy of encouraging widespread employee ownership, the company encouragesWe encourage executive directors to build up a substantial shareholding in the company.
Givencompany 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, weownership. We do not think it is appropriatenecessary 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.
 
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 specifylieu, 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 andcause 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 andtreated in lineaccordance with the market. The compensation payable in these circumstances is typically 100%terms of annual salary, 100% of other benefits and a proportion of potential bonus.the relevant plan.


48

Retirement benefits
 
Executive directors participate in the pension arrangements set up for Pearson employees. Marjorie Scardino, Will Ethridge, John Makinson, Rona Fairhead and Robin Freestone will also have other retirement arrangements because of the cap on the amount of benefits that can be provided from the 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 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 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 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. The50 (age 55 from April 2010). In the Final Pay section, the accrued pension is reduced on retirement prior to age 60. Pensions in payment are guaranteed to increase each year at 5% or the increase in the Index of Retail Prices, if lower. Pensions for a member’s spouse, dependant childrenand/or nominated financial dependant are payable in the event of death. In the Money Purchase 2003 section the account balances are used to provide benefits at retirement. In the event of death before retirement pensions for a member’s spouse, dependant childrenand/or nominated financial dependant are payable.
 
Members of the Pearson Group Pension Plan who joined after May 1989 are subject to an upper limit of earnings that can be used for pension purposes, known as the earnings cap. This limit, £108,600 as at 6 April 6, 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 £112,800£117,600 as at 6 April 6, 2007.2008.
 
In response toAs a result of the UK Government’s plans for pensions simplification and so-called‘A-Day’A-Day changes effective from April 2006, UK executive directors and other members of the Pearson Group Pension Plan who are, or become, affected by the lifetime allowance were offeredare provided with a cash supplement as an alternative to further accrual of pension benefits on a basis that is broadly cost neutral to the company.


45

Marjorie Scardino
 
Marjorie Scardino participates in the Pearson Inc. Pension Plan and the approved 401(k) plan.
 
Additional pension benefits will beare provided through an unfunded unapproved defined contribution plan and a funded defined contribution plan approved by HM Revenue and Customs as a corresponding plan to 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 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 beforeservice.


49

Will Ethridge
Will Ethridge is a 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 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. Since April 2006, she has received a taxable and non-pensionable cash supplement in replacement of the FURBS.
 
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. Since April 2006, he has received a taxable and non-pensionable cash supplement in replacement of the FURBS.
 
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
 
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).


46

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 reviewedThere were no changes in the chairman’s remuneration in 2007. In the light of this review, including a market assessment by Towers Perrin, the board approved the Committee’s recommendation that the chairman’s2008. With effect from 1 January 2007, his remuneration be increased towas £450,000 per year with effect from January 1, 2007.year.
 
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 Pearson’s articles of association. Non-executive directors receive no other pay or


50

benefits (other than reimbursement for expenses incurred in connection with their directorship of Pearson) and do not participate in the Pearson’s equity-based incentive plans.
 
In 2007,There were no changes in the board reviewed thestructure and level and structure of non-executive directors’ fees which had last been reviewed within 2008. With effect from January 1 2005. In the light of this review, which included a market assessment by Towers Perrin, the board agreed an increase in the basic fee, an increase in the fees for Committee chairmanship, audit committee membership, and the senior independent director and the removal of the previous separate fee for overseas meetings.
The level and structure of non-executive directors’ fee effective from July 1, 2007, isthese were as follows:
 
     
  Fees payable from
 
  July 1, 2007 (£) 
 
Non-executive director fee  60,000 
Chairmanship of audit committee  20,000 
Chairmanship of personnel committee  15,000 
Membership of audit committee  10,000 
Membership of personnel committee  5,000 
Senior independent director  15,000 
 
A minimum of 25% of the basic fee is paid in Pearson shares that the non-executive directors have committed to retain for the period of their directorships.
 
Terry Burns also receives a fee in respect of his non-executive directorship at Edexcel.
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.


47

Remuneration of senior management
 
Excluding contributions to pension funds and related benefits, senior management remuneration for 20072008 was as follows:
 
                                        
 Salaries/
 Annual
        Salaries/
 Annual
       
 Fees incentive Allowances(1) Benefits(2) Total(3)  Fees(1) Incentive(2) Allowances(3) Benefits(4) Total(5) 
 £000 £000 £000 £000 £000  £000 £000 £000 £000 £000 
Chairman
                    
Non-executive Chairman
                    
Glen Moreno  450   —   —   —   450   450   —   —   —   450 
Executive directors
                                        
Marjorie Scardino  900   1,341   52   39   2,332   950   1,017   55   35   2,057 
David Bell  442   650   —   19   1,111   469   493   —   21   983 
Will Ethridge (appointed 1 May 2008)  361   810   —   —   1,171 
Rona Fairhead  487   693   —   27   1,207   506   494   —   36   1,036 
Robin Freestone  405   597   —   15   1,017   450   491   —   16   957 
John Makinson  507   743   169   29   1,448   525   500   183   32   1,240 
                      
Senior management as a group
  3,191   4,024   221   129   7,565   3,711   3,805   238   140   7,894 
                      
 
Notes:
 
(1)Notes:
(1)  There will be no increase in base salary for the 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 £41,760£43,560 in respect of housing costs and a US payroll supplement of £10,446.£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 £168,545£182,824 for 2007.2008.
 
(2)(4)  Benefits include company car, car allowance and UK health care premiums. US health and welfare benefits for Marjorie Scardino and Will Ethridge are self-insured and the company cost, after employee contributions, is


51

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.
(3)(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, 20072008 as well as the exercise price, rounded to the nearest whole 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        
           


4852

           
  Number of
   Exercise
 Earliest
  
Director
 Options (1) Price Exercise Date Expiry Date
 
Marjorie Scardino(2)Robin Freestone 176,5561,757 b a*534.8p 973.3p08/01/11 09/14/0109/14/0802/01/12
5,660a*1090.0p09/14/0109/14/08
37,583c*1372.4p06/08/0206/08/09
37,583c*1647.5p06/08/0206/08/09
41,550d*1421.0p05/09/0205/09/11
41,550d*1421.0p05/09/0305/09/11
41,550d*1421.0p05/09/0405/09/11
41,550d*1421.0p05/09/0505/09/11
           
Total
 423,582—1,757        
           
John Makinson 
David Bell20,496a*973.3p09/14/0109/14/08
3734,178 b 507.6p08/01/0802/01/09
297b629.6p08/01/0902/01/10
821b690.4p424.8p 08/01/10 02/01/11
  18,70521,477 c*c* 1372.4p 06/08/02 06/08/09
  18,70521,477 c*c* 1647.5p 06/08/02 06/08/09
  16,35019,785 d*d* 1421.0p 05/09/02 05/09/11
  16,35019,785 d*d* 1421.0p 05/09/03 05/09/11
  16,35019,785 d*d* 1421.0p 05/09/04 05/09/11
  16,35019,785 d*d* 1421.0p 05/09/05 05/09/11
           
Total
 124,797—126,272        
           
Rona Fairhead1,904b*494.8p08/01/0702/01/08
2,371b690.4p08/01/1202/01/13
20,000d*822.0p11/01/0211/01/11
20,000d*822.0p11/01/0311/01/11
20,000d*822.0p11/01/0411/01/11
Total
64,275—
Robin Freestone1,866b507.6p08/01/0802/01/09
Total
1,866—
John Makinson30,576a*973.3p09/14/0109/14/08
4,178b424.8p08/01/1002/01/11
21,477c*1372.4p06/08/0206/08/09
21,477c*1647.5p06/08/0206/08/09
19,785d*1421.0p05/09/0205/09/11
19,785d*1421.0p05/09/0305/09/11
19,785d*1421.0p05/09/0405/09/11
19,785d*1421.0p05/09/0505/09/11
Total
156,848—
 
 
Notes:
Notes:
 
(1)  Shares under option are designated as:aexecutive;bworldwide save for shares;cpremium priced; anddlong-term incentive; and*where options are exercisable.

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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 conditionshave now lapsed, having already been met prior to 2007) and lapse if they remain 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.
 
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 2007.2008. The share price target for the seven-year tranche of PPOs granted in 2000 was not met in 20072008 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 2007.2008. 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.
 
(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, 2008.February 28, 2009. Additional information with respect to share options held by, and bonus 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, 2008February 28, 2009 was 1,246,0831,916,299 representing less than 1% of the issued share capital on March 31, 2008.February 28, 2009.
 
                
 Ordinary
 Restricted
  Ordinary
 Restricted
 
As at March 31, 2008
 shares(1) shares(2) 
As at March 31, 2009
 shares(1) shares(2) 
Glen Moreno  180,000   —   210,000   — 
Marjorie Scardino  400,886   1,825,384   632,755   1,957,861 
David Arculus  10,545   —   11,740   — 
David Bell  172,896   631,408   250,348   593,970 
Terry Burns  8,792   —   10,290   — 
Patrick Cescau  3,079   —   4,144   — 
Will Ethridge  128,758   490,192 
Rona Fairhead  123,460   742,896   209,259   699,460 
Robin Freestone  7,930   278,143   44,379   400,216 
Susan Fuhrman  5,726   —   7,365   — 
Ken Hydon  7,494   —   8,559   — 
John Makinson  306,592   696,012   397,733   668,469 
Rana Talwar (resigned April 27, 2007)  18,683   — 
CK Prahalad  969   — 
 
Notes:
 
(1)Notes:
(1)  Amounts include shares acquired by individuals under the annual bonus share matching plan and amounts purchased in the market by individuals.


50

(2)Restricted shares comprise awards made under the annual bonus share matching and long-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 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 PracticesLegal Proceedings
 
Our board currently comprisesWe 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 chairman, whooutcome 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 our affiliates is a part-time non-executive director, five executive directors and five non-executive directors. Our articles of association provide that at every annual general meeting, one-third of the board of directors,party adverse to us or the number nearest to one-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 for re-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 been re-elected, unless at or prior to such meeting it is expressly resolved not to fill the vacated office, or unless a resolution for the re-election of that director has been put to the meeting and lost. Our articles of association also provide that every director be subject to re-appointment by shareholders at the next annual general meeting following their appointment.
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, allsubsidiaries or in respect of which have written termsany of reference setting out their authority and duties:those persons has a material interest adverse to us or any of our subsidiaries.
 
Audit committeeRecent developments
 
This committee providesDuring 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 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 meaningterms of the applicable rulesMaskew Miller Longman agreement, Pearson intends to create a new Southern Africa business and regulations ofin return for the US Securitiesincreased stake in Maskew Miller Longman our current joint venture partner will receive £46m in cash and Exchange Commission. Our internala 15% interest in Pearson’s Heinemann 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 committee reports to the full board of directors.Edexcel businesses in that region.
 
In addition Pearson’s International Education business also announced the acquisition of Fronter, a European online learning company based in Oslo, for £16m. The Longman Nigeria acquisition completed in early January 2009 and the Fronter acquisition in February 2009. The Maskew Miller Longman transaction is expected to complete in the second quarter of 2009 following regulatory approval.
Personnel committeeOrganizational structure
 
This committee meets regularly to decidePearson plc is a holding company which conducts its business primarily through subsidiaries and other affiliates throughout the remuneration and benefits of the executive directors and the chief executivesworld. Below is a list of our three operating divisions. The committee also recommends the chairman’s remuneration to the boardsignificant subsidiaries as at December 31, 2008, including name, country of directors for its decisionincorporation or residence, proportion of ownership interest and, reviews management development and succession plans. David Arculus chairs this committee and its other members are Terry Burns and Glen Moreno.if different, proportion of voting power held.
Percentage
interest/voting
Name
Country of incorporation/residencepower
Pearson Education
Pearson Education Inc.United States (Delaware)100%
Pearson Education Ltd.England and Wales100%
Edexcel Ltd. England and Wales100%
NCS Pearson Inc. United States (Minnesota)100%
FT Group
The Financial Times LimitedEngland and Wales100%
Mergermarket Ltd. England and Wales100%
Interactive Data CorporationUnited States (Delaware)62%
The Penguin Group
Penguin Group (USA) Inc. United States (Delaware)100%
The Penguin Publishing Co Ltd. England and Wales100%
Dorling Kindersley Holdings LtdEngland and Wales100%


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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 the non-executive directors.
 
EmployeesProperty, plant and equipment
 
The average numberOur headquarters are located at leasehold premises in London, England. We own or lease approximately 900 properties, including approximately 300 testing centers in more than 50 countries worldwide, the majority of persons employedwhich are located in the United Kingdom and the United States.
All of the properties owned and leased by us during eachare 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 & Testing businesses, one of which was sold as part of the three fiscal years ended 2007 were as follows:February 2008 Data Management sale. These operations provide short-run andprint-on-demand products, typically custom client applications.
We own the following principal properties at December 31, 2008:
General use of property
LocationArea in square feet
Warehouse/OfficeKirkwood, New York, USA524,000
Warehouse/OfficePittston, Pennsylvania, USA406,000
OfficeIowa City, Iowa, USA310,000
Warehouse/OfficeOld Tappan, New Jersey, USA210,112
Warehouse/OfficeCedar Rapids, Iowa, USA205,000
OfficeSouthwark, London, UK155,000
OfficeHadley, Massachusetts, USA136,570
PrintingOwatonna, Minnesota, USA128,000
We lease the following principal properties at December 31, 2008:
General use of property
LocationArea in square feet
Warehouse/OfficeLebanon, Indiana, USA1,091,435
Warehouse/OfficeCranbury, New Jersey, USA886,747
Warehouse/OfficeIndianapolis, Indiana, USA737,850
Warehouse/OfficeSan Antonio, Texas, USA559,258
Warehouse/OfficeNewmarket, Ontario, Canada518,128
OfficeUpper Saddle River, New Jersey, USA474,801
Warehouse/OfficeRugby, UK446,077
OfficeNew York City, New York, USA430,738
OfficeLondon, UK282,917
OfficeHarlow, UK231,850
Warehouse/OfficeAustin, Texas, USA226,076
OfficeBoston, Massachusetts, USA225,299
WarehouseScoresby, Victoria, Australia197,255
OfficeBoston, Massachusetts, USA191,360*
OfficeGlenview, Illinois, USA187,500
Warehouse/OfficeBedfordshire, UK187,248
OfficeBloomington, Minnesota, USA153,240
OfficeParsippany, New Jersey, USA143,777
OfficeChandler, Arizona, USA135,460
OfficeNew York City, New York, USA116,039
WarehouseSan Antonio Zomeyucan, Mexico113,638
OfficeLondon, UK112,000
WarehouseCape Town, South Africa111,259
Call CenterLawrence, Kansas, USA105,000
 
 • * 32,692 in fiscal 2007,
• 34,341 in fiscal 2006, and
• 32,203 in fiscal 2005.Reduced to 53,248 square feet subsequent to year end


20

 
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 toCapital Expenditures
See Item 5. “Operating and Financial Review and Prospects — Liquidity and Capital Resources” for description of the business in the context of their particular job roles and believe that the relations with our employees are generally good.Company’s capital expenditure.
ITEM 4A.  UNRESOLVED STAFF COMMENTS
 
The table set forth below showsCompany 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 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 as issued by the IASB.
General overview
Introduction
Sales from continuing operations increased from £4,162m in 2007 to £4,811m in 2008, an increase of 16%. The majority of the increase was in the North American and International Education businesses which benefited from acquisitions made in 2007 and 2008. The year on year growth was also significantly impacted by exchange rates, in particular the US dollar. The average US dollar exchange rate strengthened in comparison to sterling in 2008, which had the effect of increasing reported sales in 2008 by £320m when compared to the equivalent figure at constant 2007 rates. When measured at constant 2007 exchange rates, all of Pearson’s businesses reported year on year growth.
Reported operating profit increased by 18% from £574m in 2007 to £676m in 2008. Acquisitions and the relative strength of the US dollar contributed to 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 were the International Education and Interactive Data businesses which together with an increased contribution from acquisitions more than offset an increased charge for intangible amortization.
Profit before taxation in 2008 of £585m compares to a profit before taxation of £468m in 2007. The increase of £117m reflects the improved operating performance and reduced net finance costs. Net finance costs decreased from £106m in 2007 to £91m in 2008. The Group’s net interest payable 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 2007. The losses in 2008 mainly relate to the retranslation of foreign currency bank accounts together with other net losses on inter-company items. The losses in 2007 principally relate to exchange losses on legacy euro denominated debt held to hedge euro denominated proceeds from the sale of Les Echos. Partially offsetting interest payable and exchange is finance income relating to post retirement plans of £8m in 2008 compared to an income of £10m in 2007.
On February 22, 2008 the Group completed the sale of its Data Management business and this business has been included in discontinued operations for the period to February 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 2007 2006 and 20052006.
Net cash generated from operations increased to £894m in 2008 from £659m in 2007. The improved cash generation in 2008 was partly due to exchange but also represents strong cash conversion of operating profits from all of the Pearson businesses. On an average basis, the ratio of working capital to sales deteriorated slightly in the year largely as a result of higher working capital balances at new acquisitions. Average working capital comprises the average number of persons employedthe monthly carrying values over the relevant 12 month period for inventory, pre-publication costs,


21

debtors and creditors. Net interest paid at £76m in each of our operating divisions.
             
Average number employed
 2007  2006  2005 
 
School  12,906   11,064   10,133 
Higher Education  5,098   4,368   4,196 
Professional  3,458   3,204   3,259 
Penguin  4,163   3,943   4,051 
FT Publishing  2,083   1,766   1,434 
Interactive Data  2,300   2,200   1,956 
Other  1,614   1,669   1,573 
             
Continuing operations  31,622   28,214   26,602 
             
Discontinued operations  1,070   6,127   5,601 
             
Total  32,692   34,341   32,203 
             
ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
To our knowledge,2008 was £14m below the previous year as of March 31, 2008, the only beneficial owners of 3% or more of our issued and outstanding ordinary share capital were Templeton Global Advisors Ltd which owned 56,508,060 ordinary shares representing 6.99% of our outstanding ordinary shares, Aviva plc which owned 41,301,715 ordinary shares representing 5.11% of our outstanding ordinary shares and Legal & General Group plc which owned 33,336,528 ordinary shares representing 4.12% of our outstanding ordinary shares. On March 31, 2008, record holders with registered addressesnet interest charge in the United States held 30,237,762 ADRs, which represented 3.74%income statement fell and the timing of our outstanding ordinary shares. Somepayments 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 2007 to £73m in 2008. The net cash outflow in respect of these ADRs are held by nominees and so these numbers may not accurately representbusinesses acquired decreased from £472m in 2007 to £395m in 2008 whilst net proceeds from the numberdisposal of beneficial ownersbusinesses decreased from £469m in the United States.
Loans and equity advanced2007 to joint ventures and associates during the year and as at December 31, 2007 are shown£111m in note 13 in “Item 18. Financial Statements.” Amounts due2008. Dividends from joint ventures and associates are set outdecreased by £9m largely due to smaller special dividends received from the Economist in note 20 and dividends receivable from joint ventures and associates are set out2008 compared to 2007. Dividends paid of £285m in note 13 in “Item 18. Financial Statements”. There were no other related party transactions2008 (including £28m paid to minority interests) compares to £248m in 2007. After an unfavorable currency movement of £410m, overall net borrowings increased by 50% from £973m at the end of 2007 to £1,460m at the end of 2008.
 
ITEM 8.FINANCIAL INFORMATION
Outlook
 
Pearson achieved a strong performance in 2008 against the backdrop of a sharp deterioration in the global economy. Though the company performed well, market conditions became more difficult for some of our businesses as the year went on.
In the fourth quarter, trading momentum remained strong for our education business. The financial statements filed as partFinancial Times Group continued to achieve good growth — 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 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 supply lines, reduce costs and sustain investment.
Pearson Education
In Education, we are planning for weak conditions in the 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 impact on our business is unclear at this Annual Report arestage, so we have not included on pages F-1 through F-70 hereof.these factors in our guidance.
FT Group
At the FT Group, we anticipate continued strong demand for high-quality analysis of global business, finance, politics and economics; a tough year for advertising; strong renewal rates in our subscription businesses; and continued growth at Interactive Data.
The Penguin Group
At Penguin, we expect another good competitive performance in challenging trading conditions for book publishers and booksellers.


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OtherSales information by operating division
The following table shows sales information for each of the past three years by operating division:
             
  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
The following table shows sales information for each of the past three years by geographic region:
             
  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
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. Fluctuations in exchange rates can have a significant impact on our reported sales and profits. In 2008, Pearson generated 59% of its sales in the 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 £100m. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for more information. The year-end US dollar rate for 2008 was £1:$1.44 compared to £1:$1.99 for 2007. In terms of the year end rate, the weakening of sterling in comparison to the US dollar in 2008 was much more significant than those events described 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 of £1,050m (see also note 3729 of “Item 18. Financial Statements”). The year-end rate for the US dollar in 2007 was £1:$1.99 compared to £1:$1.96 for 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 £25m in 2007.
Critical accounting policies
Our consolidated financial statements, included in “Item 18. Financial Statements”, are prepared based on the accounting policies described in note 1 to the consolidated financial statements.


23

Certain of thisForm 20-Four 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 seasonalother assumptions that it believes are reasonable. These policies are described in note 1a(3) in “Item 18. Financial Statements”.
Results of operations
Year ended December 31, 2008 compared to year ended December 31, 2007
Consolidated results of operations
Sales
Our total sales from continuing operations increased by £649m, or 16%, to £4,811m in 2008, from £4,162m in 2007. The increase reflected growth, on a constant exchange rate basis, across all the businesses together with additional contributions from acquisitions made in both 2007 and 2008. The year on year growth was impacted by movements in exchange rates, particularly in the US dollar. 2008 sales, translated at 2007 average exchange rates, would have been £4,491m.
Pearson Education increased sales by £484m or 18% from £2,628m to £3,112m. The North American business was the major contributor to the increase and although much of the increase was due to 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 2007 and 2008 and the effect of exchange. FT Publishing’s sales growth was driven by a shift toward subscription and service based revenues. The newspaper maintained circulation but advertising revenues fell by 3% as the advertising market weakened in the fourth quarter of 2008. Interactive Data sales were up by 18% (9% at constant last year exchange rates and before the contribution from acquisitions) driven by strong sales to both existing and new institutional customers and the maintenance of renewal rates at approximately 95% within the institutional services sector.
Penguin’s sales were up 7% in 2008 (3% at constant last year exchange rates and before the effect of portfolio changes) as a result of a strong publishing performance in all its markets in a year where the business continued to publish bestsellers and win awards.
Pearson Education, our largest business sector, accounted for 65% of our continuing business sales in 2008 compared to 63% in 2007. North America continued to be the most significant source of our sales and as a proportion of total continuing sales contributed 63% in 2008 and 62% in 2007.


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Cost of goods sold and operating expenses
The following table summarizes our cost of sales and net operating expenses:
         
  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 of pre-publication costs and royalty charges. Our cost of sales increased by £264m, or 14%, to £2,174m in 2008, from £1,910m in 2007. The increase corresponds to the increase in sales with cost of sales at 45.2% of sales in 2008 compared to 45.9% in 2007.
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 £290m, or 18%, to £1,890m in 2008, from £1,600m in 2007. As a percentage of sales they increased slightly to 39% in 2008 from 38% in 2007.
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 remained fairly consistent at £102m in 2008 compared to £101m in 2007.
Share of results of joint ventures and associates
The contribution from our joint ventures and associates increased slightly from £23m in 2007 to £25m in 2008. The majority of the profit comes from our 50% interest in the Economist.
Operating profit
The total operating profit increased by £102m, or 18%, to £676m in 2008 from £574m in 2007. 2008 operating profit, translated at 2007 average exchange rates, would have been £71m lower.
Operating profit attributable to Pearson Education increased by £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.


26

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

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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.


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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


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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 £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.


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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


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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 the Harcourt acquisition in 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.


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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, but was offset by an increase in intangible amortization from £18m in 2006 to £31m in 2007. Operating profit attributable to the FT Group increased by £28m, or 25%, to £140m in 2007, from £112m in 2006. The increase reflects the increase in revenues from both established businesses and an increased contribution from new acquisitions but also reflects improvements in margins particularly at FT Publishing. Operating profit attributable to the Penguin Group increased by £15m, or 26%, to £73m in 2007, from £58m in 2006 although the 2006 result included a one off goodwill charge of £7m relating to the recognition of pre-acquisition tax losses at Dorling Kindersley.
Net finance costs
Net finance costs increased from £74m in 2006 to £106m in 2007. Net interest payable in 2007 was £95m, up from £94m in 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 0.5% to 5.4%, reflecting a rise in interest rates and a change in the currency mix of year end debt. These two factors, partly offset by a decrease in the Group’s average net debt of £90m, increased the Group’s average net interest rate payable by 0.3% to 7.3%. In 2007 the net finance income relating to post-retirement plans was an income of £10m compared to an income of £4m in the previous year.
Other net finance income relating to foreign exchange and short-term fluctuations in the market value of financial instruments included a net foreign exchange loss of £17m in 2007 compared to a gain of £19m in 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
The total tax charge in 2007 of £131m represents 28% of pre-tax profits compared to a charge of just £4m or less than 1% of pre-tax profits in 2006. The low tax rate in 2006 was mainly accounted for by two factors. First, in anticipation of the disposal of Government Solutions, we 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 re-evaluated the likely utilization of operating losses both in the US and the UK; this 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 a non-recurring credit of £127m in 2006 which was not repeated in 2007.
Minority interests
This comprises mainly the minority share in Interactive Data. Our share of Interactive Data remained at 62% throughout 2007, 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 2006 and have been consolidated up to the date of sale. Operating profit for Government Solutions in 2007 was £2m compared to £22m in 2006 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 compared to £5m in 2006 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 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 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 has recognized a goodwill impairment charge of £97m in 2007 in anticipation of the loss on disposal.
Profit for the year
The total profit for the financial year in 2007 was £310m compared to a profit in 2006 of £469m. The overall decrease of £159m was mainly due to the absence of the non-recurring tax credit of £127m recorded in 2006, the decrease in contribution from discontinued businesses of £52m and the increase in net finance costs of £32m, largely due to exchange losses. These items more than offset the increase in operating profit in 2007.


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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 based on a weighted average number of shares in issue of 796.8m in 2007 and 798.4m in 2006. The decrease in earnings per share was due to the decrease in profit for 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 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 weakening of the US dollar against sterling on an average basis had a negative impact on reported sales and profits in 2007 compared to 2006. 2007 sales, translated at 2006 average exchange rates, would have been higher by £223m and operating profit, translated at 2006 average exchange rates, would have been higher by £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
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, other gains and losses and other net finance costs of associates. 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. Other gains and losses represent profits and losses on the sale of subsidiaries, joint ventures, associates and investments that are included within continuing operations but which distort the performance for the year.
Adjusted operating profit enables management to more easily track the underlying operational performance of the Group. A reconciliation of operating profit to adjusted operating profit for continuing operations is included in the tables below:
                             
  Year Ended December 31, 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% 


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  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% 
North American Education
North American Education sales decreased by £12m, or 1%, to £1,667m in 2007, from £1,679m in 2006 and adjusted operating profit decreased by £7m, or 2%, to £273m in 2007 from £280m in 2006. The results were significantly affected by the weakening of the US dollar, which we estimate reduced sales by £135m and adjusted operating profit by £22m when compared to the equivalent figures at constant 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 revenues grew 3.5% against the Association of American Publishers’ estimate of an increase for the industry of 2.7%. New adoption market share was 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 double digits after high single digit growth in 2006 and growth in excess of 20% in 2005. School testing benefited from further contract wins, market share gains and strength in 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

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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 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 Harcourt International.
The International School business continued to grow with strong performances from the publishing businesses in South Africa and Australia. In Italy, the integration of PBM was completed and produced integration savings, margin improvement and market share gains in 2007. In School publishing, the acquisition of Harcourt International increased scale in our international education businesses bringing leading content for school and vocational customers in many markets including the UK, South Africa, Australia and New Zealand. The international testing business was again able to benefit from technology leadership. In the UK, we marked 9.6 million GCSE, AS and A-Level scripts, 4.6 million of which were on screen. Successful global English Language Teaching franchises in all major market franchises (primary, secondary, adult, business and exam preparation) drove strong growth.English Adventure, developed with Disney, grew successfully and has sold more than six million units in less than three years since launch.
International Higher Education publishing sales grew by 2%, benefiting from organic and acquisition investment. Particular areas of strength included local language editions of our major authors and custom publishing including the successful launch of “local language” science publishing in Germany. The “MyLab” and “Mastering” technology platforms are being successfully adapted for international markets and the MyLab 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.
International Education margins continued to improve and the increase in the overall margin from 11.4% in 2006 to 12.5% in 2007 reflected increases in both publishing and testing margins.
Professional
After excluding sales and adjusted operating profit from Government Solutions and the Data Management businesses (reported as discontinued), Professional sales increased by £15m, or 7%, to £226m in 2007 from £211m in 2006. Adjusted operating profit increased by £10m or 59% to £27m in 2007, from £17m in 2006. Sales were affected by the weakening US dollar, which reduced sales by £14m when compared to the equivalent figures at constant 2006 exchange rates.
Professional Testing sales were up by 10% in 2007. Approximately 5.8 million secure online tests were delivered in more than 5,000 test centers across the world in 2007. There was strong margin improvement as test volumes rose, driven by higher demand from existing customers such as GMAC (for business school applicants), NCLEX (for nurses) and the DSA/DVTA driving theory test. Additional contributions from new contracts included


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the American Board of Internal Medicine and the 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 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 Europe was helped by publishing for the new Windows Vista launch, a new partnership with Microsoft Press in the Netherlands and a successful move into digital publishing and training in Germany. Our business imprints Wharton School Publishing and 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 higher at 11.9% in 2007 compared to 8.1% in 2006 as margins continued to improve in both the testing and professional publishing businesses.
FT Publishing
Sales at FT Publishing increased by £64m or 23%, from £280m in 2006 to £344m in 2007. Adjusted operating profit from continuing operations increased by £29m, from £27m in 2006 to £56m in 2007. The sales and profit increase 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 Publishing sales were up by 12% with advertising revenues up by 10%. FT newspaper circulation was up 2% to almost 440,000 (for the July-December 2007 Audit Bureau of Circulation, or ABC, measuring period), with a 19% increase in subscriptions. Digital subscribers to the FT were up 13% to 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 launch of its innovative new access model in October 2007. There was a strong trading performance at FT Business as integration with the FT Newspaper helped to generate additional revenue and reduce costs. Mergermarket experienced rapid revenue growth with 90%+ subscription renewal rates and a series of new product launches around the world includingPharmawire,Debtwire in Asia Pacific anddealReporterin emerging markets in Europe, Middle East and 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 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 approximately 200,000 registered executive users.
Overall margins at FT Publishing continued to increase as the newspaper becomes more profitable and in 2007 were 16.3% compared to 9.6% in 2006.
Interactive Data
Interactive Data, grew its sales by 4% from £332m in 2006 to £344m in 2007. Adjusted operating profit grew by 9% from £89m in 2006 to £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.


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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 £37m and adjusted operating profit by £4m when compared to the equivalent figures at constant 2006 exchange rates.
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 Kim Edwards’ first novel,The Memory Keeper’s Daughter, a global number one bestseller for Penguin in 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 2007) and bestsellingIn the 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 India celebrated its 20th anniversary in 2007 with continued rapid growth. Penguin authors won all the major English language prizes in India’s national book awards: Vikram Chandra in fiction forSacred Games, Vikram Seth in non-fiction forTwo Livesand 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 Penguin in 2008, and in South Africa, another strong year was led by John van de Ruit’sSpud:The Madness Continues.
Penguin continued to focus on efficiency and improvement in operating margins 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. These efficiencies together with improved gross margins principally from innovation in formats such as the US premium paperback have helped to improve margins from 7.8% in 2006 to 8.7% in 2007.


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Liquidity and capital resources
Cash flows and financing
Net cash generated from operations increased by £235m (or 36%), to £894m in 2008 from £659m in 2007. This increase reflected strong cash contributions from all businesses, together with the significant changestrengthening of the US dollar against sterling. The exchange rate for translation of dollar cash flows was $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, even after a one-off special contribution of £100m to our financial condition or resultsUK pension fund (over and beyond the normal funding requirement). This increase reflected stronger cash contributions from all businesses, together with further improvements in working capital management. In 2007, the average working capital to sales ratio for our book publishing businesses improved to 25.6% from 26.3% in 2006.
Net interest paid decreased to £76m in 2008 from £90m in 2007. The decrease was due to the reduction in US and UK interest rates, with some offset from the higher level of operations since December 31, 2007. debt following the acquisition of Harcourt Assessments and the strength of the US dollar relative to sterling. Net interest paid was £90m in 2007 compared to £82m in 2006. The 10% increase in 2007 over 2006 was primarily due to higher average interest rates in the UK and US.
Capital expenditure on property, plant and equipment was £75m in 2008, £86m in 2007 and £68m in 2006. The reduction in spend in 2008 reflects reduced infrastructure spend compared to 2007, although the Group continued to invest in digital technology. The increase in 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. The principal acquisitions in 2008 were of Harcourt Assessments for £321m and Money Media for £33m. The principal acquisitions in 2007 were Harcourt Education International for £155m and eCollege for £266m. In 2006, the principal acquisition was of Mergermarket for £109m. The balance related to various smaller bolt-on acquisitions (primarily in the school segment) including those of National Evaluation Systems and Paravia Bruno Mondadori.
The sale of subsidiaries and associates produced a cash inflow of £111m in 2008 against £469m in 2007 and £10m in 2006. All the proceeds in 2008 relate to the sale of the Data Management business. The principal disposals in 2007 were of Government Solutions for £278m and Les Echos for £156m. The disposal in 2006 relates entirely to the proceeds from thetake-up of share options issued to minority shareholders.
The cash outflow from financing of £149m in 2008 reflects the repayment of 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 outflow from financing activities of £444m in 2007 represented the higher Group dividend (as the Group sought to match dividend growth more closely with earnings growth) and the repayment of one €591m bond, offset in part by drawings on the 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.
Capital resources
Our borrowings fluctuate by season due to the effect of the school year on the working capital requirements ofin the educational bookmaterials 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, 2008, our net debt was £1,460m compared to net debt of £973m at December 31, 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. 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 other marketable instruments which are readily realizable and held on a short-term basis. Short-term, medium-term and long-term borrowing amounted to £2,363m at December 31, 2008, compared to £1,608m at December 31, 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, 2008, cash and liquid resources were £685m, compared to £560m at December 31, 2007.
Contractual obligations
The following table summarizes the maturity of our borrowings and our obligations under non-cancelable operating leases, exclusive of anticipated interest payments.
                     
  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, 2008 the Group had capital commitments for fixed assets, including finance leases already under contract, of £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 0.125% on the unused amount of the Group’s bank facility.
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
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 have in place a committed revolving credit facility of $1.75bn, of which $92m matures in May 2011 and the balance of $1.658bn matures in May 2012. At December 31, 2008, approximately $1.56bn was available under


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this facility. This credit facility contains two key covenants measured for each 12 month period ending June 30 and December 31:
We must maintain the ratio of our profit before interest, tax and amortization to our net interest payable at 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
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
There were no significant or unusual related party transactions in 2008, 2007 or 2006. Refer to note 36 in “Item 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 March 2009.
Name
Age
Position
Glen Moreno65Chairman
Marjorie Scardino62Chief Executive
David Arculus62Non-executive Director
David Bell62Director for People
Terry Burns65Non-executive Director
Patrick Cescau60Non-executive Director
Will Ethridge57Chief Executive, Pearson Education North America
Rona Fairhead47Chairman and Chief Executive, The FT Group
Robin Freestone50Chief Financial Officer
Susan Fuhrman64Non-executive Director
Ken Hydon64Non-executive Director
John Makinson54Chairman and Chief Executive, Penguin Group
CK Prahalad67Non-executive Director
Glen Morenowas appointed chairman of Pearson on October 1, 2005. He is the senior independent director of Man Group plc and a director of Fidelity International Limited. He was recently made acting chairman of UK Financial Investments Limited, 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 director of several charitable organizations.
David Arculusbecame a non-executive director in February 2006 and currently serves on the audit and nomination committees and as chairman of the personnel committee. He is a non-executive director of Telefonica SA, and was previously chairman of O2 plc from 2004 until it was acquired by Telefonica at the beginning of 2006. His previous roles include chairman of Severn Trent plc and IPC Group, chief operating officer of United Business Media plc and group managing director of EMAP plc.
David Bellbecame a director in March 1996.  He was appointed Pearson’s director for people with responsibility for finding, keeping, rewarding and inspiring our employees across the Pearson Group. He is chairman of theFinancial Timesand Sadler’s Wells Theatre. He is also chairman of Crisis, a charity for the 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 chairman of Alliance & Leicester plc, Abbey National plc and Glas Cymru Limited and is a non-executive director of Banco Santander Central Hispano. He was previously chairman of Marks and Spencer Group 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 was previously group chief executive of 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, originally as chief financial officer. She was appointed chairman and chief executive of the FT Group in June 2006 and became responsible for Pearson VUE in March 2008. From 1996 until 2001, she worked at ICI plc, where she served as executive vice president, group control and strategy. She is also chairman of Interactive Data, a non-executive director of HSBC Holdings plc and chairs the HSBC audit committee.
Robin Freestonebecame a director of Pearson 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). He qualified as a chartered accountant with 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 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 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 served as Pearson’s finance director from March 1996 until June 2002. He is also chairman of the Institute of Public Policy Research and a director of The National Theatre and The International Rescue Committee (UK).


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Coimbatore Krishnarao Prahaladbecame a non-executive director in May 2008 and is a distinguished university professor of corporate strategy and international business at the University of Michigan Business School. He is a director of NCR, Hindustan Unilever Corporation, World Resources Institute and the Indus Entrepreneurs.
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 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
We want a performance culture that supports our strategy and goals and incentive programs that reward their achievement. Performance conditions for the company’s 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 annual and long-term incentives) should reward both short and long-term results, delivering competitive rewards for target performance, but outstanding rewards for exceptional company 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’ 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 places considerable emphasis on the performance-linked elements i.e. annual incentives, bonus share matching and long-term incentives. The Committee will continue to review the mix of fixed and performance-linked remuneration on an annual basis, consistent with its overall philosophy.
We want our executive directors’ remuneration 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 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
Our normal policy is to review salaries annually consistent with the way we benchmark pay and taking into account the approach to pay across the company as a whole.
Allowances and benefits
It is the company’s policy is that 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.
Annual incentives
The 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 will continue to review the annual incentive plans each year and to revise the performance measures, targets and individual incentive opportunities in light of current conditions.
Annual incentive payments do not form part of pensionable earnings.
The financial performance measures relate to the company’s main drivers of business performance at both the corporate, operating company and business unit level. Performance is measured separately for each item. For each performance measure, the Committee establishes thresholds, target and maximum levels of performance for different levels of payout.
With the exception of the 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 chief executive. These may includeinter alia objectives relating to corporate social responsibility.
For 2009, the financial performance measures for Pearson plc are sales, operating profit (for the operating companies) and growth in underlying 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. The selection and weighting of the performance measures takes into account the 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 2009, there is no change to the incentive opportunity for the chief executive which remains at 100% of base salary at target and 150% at maximum.
There is also no change to the average target individual incentive opportunity for the other executive directors 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 (as in 2008).
The annual incentive plans are discretionary and the Committee reserves the right to make adjustments to payouts up or down if it believes exceptional factors warrant doing so. The committee may also award individual discretionary incentive payments and did so in 2008 for Will Ethridge 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.
             
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, average working capital to sales ratio and operating cash flow. Sales and underlying growth in adjusted earnings per share at constant exchange rates 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 performance 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 were all above maximum. Sales were above target but below maximum.
For 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 was above maximum.
For Pearson VUE, the performance measures were sales, operating profit, average working capital as a ratio to sales and operating cash flow. Sales were above target but below maximum. Performance across all other measures was above maximum.
For Penguin Group, the performance measures 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
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.
If the participant’s invested shares are held, they will be matched subject to earnings per share growth over the three-year performance period on a gross basis up to a maximum of one matching share for every one held i.e. the number of matching shares will 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 3% per annum compound over the 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 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 years to measure the company’s financial progress over the period to which the entitlement to matching shares relates.
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 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 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 intention to grant stock options in 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 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 since 2006 and that will apply for 2009 and subsequent awards 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.
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 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
We encourage executive directors to build up a substantial shareholding in the company in line with the policy of encouraging widespread employee share ownership. We do not think it is necessary to specify a particular relationship of shareholding to 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.
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.
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 lieu, subject to mitigation. In the case of the longer serving directors with legacy employment agreements, the compensation payable in circumstances where the company terminates the agreements without notice or 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 treated in accordance with the terms of the relevant plan.


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Retirement benefits
Executive directors participate in the pension arrangements set up for Pearson employees. Marjorie Scardino, Will Ethridge, John Makinson, Rona Fairhead and Robin Freestone will also have other retirement arrangements because of the cap on the amount of benefits that can be provided from the 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 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 2001 when further benefit accruals ceased. Normal retirement age is 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 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 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 (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 2006, was abolished by the Finance Act 2004. However the Pearson Group Pension Plan has retained its own ’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.
As a result of the UK Government’sA-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 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 participates in the Pearson Inc. Pension Plan and the approved 401(k) plan.
Additional pension benefits 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 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 is a member of the Pearson Group Pension Plan. He was eligible for a pension of two-thirds of his final base salary at age 62 due to his long service.


49

Will Ethridge
Will Ethridge is a 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 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 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. Since April 2006, she has received a taxable and non-pensionable cash supplement in replacement of the FURBS.
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. Since April 2006, he has received a taxable and non-pensionable cash supplement in replacement of the FURBS.
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 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 2002, increased at 1 January 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
 
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); Rona Fairhead (HSBC Holdings plc) and Robin Freestone (eChem).
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.
There were no changes in the chairman’s remuneration in 2008. With effect from 1 January 2007, his remuneration was £450,000 per year.
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 Pearson’s articles of association. Non-executive directors receive no other pay or


50

benefits (other than reimbursement for expenses incurred in connection with their directorship of Pearson) and do not participate in the Pearson’s equity-based incentive plans.
There were no changes in the structure and level of non-executive directors’ fees in 2008. With effect from 1 July 2007, these were as follows:
Fees payable from
July 1, 2007 (£)
Non-executive director fee60,000
Chairmanship of audit committee20,000
Chairmanship of personnel committee15,000
Membership of audit committee10,000
Membership of personnel committee5,000
Senior independent director15,000
A minimum of 25% of the basic fee is paid in Pearson shares that the non-executive directors have committed to retain for the period of their directorships.
Terry Burns also receives a fee in respect of his non-executive directorship at Edexcel.
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
Excluding contributions to pension funds and related benefits, senior management remuneration for 2008 was as follows:
                     
  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)  There will be no increase in base salary for the 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 £43,560 in respect of housing costs and a US payroll supplement of £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 £182,824 for 2008.
(4)  Benefits include company car, car allowance and UK health care premiums. US health and welfare benefits for Marjorie Scardino and Will Ethridge are self-insured and the company cost, after employee contributions, is


51

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.
(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, 2008 as well as the exercise price, rounded to the nearest whole 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)PriceExercise DateExpiry Date
Robin Freestone1,757b534.8p08/01/1102/01/12
Total
1,757
John Makinson4,178b424.8p08/01/1002/01/11
21,477c*1372.4p06/08/0206/08/09
21,477c*1647.5p06/08/0206/08/09
19,785d*1421.0p05/09/0205/09/11
19,785d*1421.0p05/09/0305/09/11
19,785d*1421.0p05/09/0405/09/11
19,785d*1421.0p05/09/0505/09/11
Total
126,272
Notes:
(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 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.
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 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.
(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 February 28, 2009. Additional information with respect to dividend distributionsshare options held by, and bonus awards for, these persons is describedset out above in response“Remuneration of Senior Management” and “Share Options for Senior Management”. The total number of ordinary shares held by senior management as of February 28, 2009 was 1,916,299 representing less than 1% of the issued share capital on February 28, 2009.
         
  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 and long-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 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 “Item 3. Key Information” above.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.
 
Legal Proceedings
 
We and our subsidiaries are defendants in a number of legal proceedings including, from time to time, government and arbitration proceedings, which are incidental to our and their operations. We do not expect that the outcome of pending proceedings, either individually or in the aggregate, will have a significant effect on our financial position or profitability nor have any such proceedings had any such effect in the recent past. To our knowledge, there are no material proceedings in which any member of senior management or any of 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 intends to create a new Southern Africa business and in return for the increased stake in Maskew Miller Longman our current joint venture partner will receive £46m in cash and a 15% interest in Pearson’s Heinemann and Edexcel businesses in that region.
In addition Pearson’s International Education business also announced the acquisition of Fronter, a European online learning company based in Oslo, for £16m. The Longman Nigeria acquisition completed in early January 2009 and the Fronter acquisition in February 2009. The Maskew Miller Longman transaction is expected to complete in the second quarter of 2009 following regulatory approval.
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, 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/residencepower
Pearson Education
Pearson Education Inc.United States (Delaware)100%
Pearson Education Ltd.England and Wales100%
Edexcel Ltd. England and Wales100%
NCS Pearson Inc. United States (Minnesota)100%
FT Group
The Financial Times LimitedEngland and Wales100%
Mergermarket Ltd. England and Wales100%
Interactive Data CorporationUnited States (Delaware)62%
The Penguin Group
Penguin Group (USA) Inc. United States (Delaware)100%
The Penguin Publishing Co Ltd. England and Wales100%
Dorling Kindersley Holdings LtdEngland and Wales100%


19

Property, plant and equipment
Our headquarters are located at leasehold premises in London, England. We own or lease approximately 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 & Testing 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 at December 31, 2008:
General use of property
LocationArea in square feet
Warehouse/OfficeKirkwood, New York, USA524,000
Warehouse/OfficePittston, Pennsylvania, USA406,000
OfficeIowa City, Iowa, USA310,000
Warehouse/OfficeOld Tappan, New Jersey, USA210,112
Warehouse/OfficeCedar Rapids, Iowa, USA205,000
OfficeSouthwark, London, UK155,000
OfficeHadley, Massachusetts, USA136,570
PrintingOwatonna, Minnesota, USA128,000
We lease the following principal properties at December 31, 2008:
General use of property
LocationArea in square feet
Warehouse/OfficeLebanon, Indiana, USA1,091,435
Warehouse/OfficeCranbury, New Jersey, USA886,747
Warehouse/OfficeIndianapolis, Indiana, USA737,850
Warehouse/OfficeSan Antonio, Texas, USA559,258
Warehouse/OfficeNewmarket, Ontario, Canada518,128
OfficeUpper Saddle River, New Jersey, USA474,801
Warehouse/OfficeRugby, UK446,077
OfficeNew York City, New York, USA430,738
OfficeLondon, UK282,917
OfficeHarlow, UK231,850
Warehouse/OfficeAustin, Texas, USA226,076
OfficeBoston, Massachusetts, USA225,299
WarehouseScoresby, Victoria, Australia197,255
OfficeBoston, Massachusetts, USA191,360*
OfficeGlenview, Illinois, USA187,500
Warehouse/OfficeBedfordshire, UK187,248
OfficeBloomington, Minnesota, USA153,240
OfficeParsippany, New Jersey, USA143,777
OfficeChandler, Arizona, USA135,460
OfficeNew York City, New York, USA116,039
WarehouseSan Antonio Zomeyucan, Mexico113,638
OfficeLondon, UK112,000
WarehouseCape Town, South Africa111,259
Call CenterLawrence, Kansas, USA105,000
 * Reduced to 53,248 square feet subsequent to year end


20

Capital Expenditures
See Item 5. “Operating and Financial Review and Prospects — Liquidity and Capital Resources” for description of the Company’s capital expenditure.
ITEM 4A.  UNRESOLVED STAFF COMMENTS
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 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 as issued by the IASB.
General overview
Introduction
Sales from continuing operations increased from £4,162m in 2007 to £4,811m in 2008, an increase of 16%. The majority of the increase was in the North American and International Education businesses which benefited from acquisitions made in 2007 and 2008. The year on year growth was also significantly impacted by exchange rates, in particular the US dollar. The average US dollar exchange rate strengthened in comparison to sterling in 2008, which had the effect of increasing reported sales in 2008 by £320m when compared to the equivalent figure at constant 2007 rates. When measured at constant 2007 exchange rates, all of Pearson’s businesses reported year on year growth.
Reported operating profit increased by 18% from £574m in 2007 to £676m in 2008. Acquisitions and the relative strength of the US dollar contributed to 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 were the International Education and Interactive Data businesses which together with an increased contribution from acquisitions more than offset an increased charge for intangible amortization.
Profit before taxation in 2008 of £585m compares to a profit before taxation of £468m in 2007. The increase of £117m reflects the improved operating performance and reduced net finance costs. Net finance costs decreased from £106m in 2007 to £91m in 2008. The Group’s net interest payable 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 2007. The losses in 2008 mainly relate to the retranslation of foreign currency bank accounts together with other net losses on inter-company items. The losses in 2007 principally relate to exchange losses on legacy euro denominated debt held to hedge euro denominated proceeds from the sale of Les Echos. Partially offsetting interest payable and exchange is finance income relating to post retirement plans of £8m in 2008 compared to an income of £10m in 2007.
On February 22, 2008 the Group completed the sale of its Data Management business and this business has been included in discontinued operations for the period to February 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 2007 and 2006.
Net cash generated from operations increased to £894m in 2008 from £659m in 2007. The improved cash generation in 2008 was partly due to exchange but also represents strong cash conversion of operating profits from all of the Pearson businesses. On an average basis, the ratio of working capital to 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,


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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 2007 to £73m in 2008. The net cash outflow in respect of businesses acquired decreased from £472m in 2007 to £395m in 2008 whilst net proceeds from the disposal of businesses decreased from £469m in 2007 to £111m in 2008. Dividends from joint ventures and associates decreased by £9m largely due to smaller special dividends received from the Economist in 2008 compared to 2007. Dividends paid of £285m in 2008 (including £28m paid to minority interests) compares to £248m in 2007. After an unfavorable currency movement of £410m, overall net borrowings increased by 50% from £973m at the end of 2007 to £1,460m at the end of 2008.
Outlook
Pearson achieved a strong performance in 2008 against the backdrop of a sharp deterioration in the global economy. Though the company performed well, market conditions became more difficult for some of our businesses as the year went on.
In the fourth quarter, trading momentum remained strong for our education business. The Financial Times Group continued to achieve good growth — 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 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 supply lines, reduce costs and sustain investment.
Pearson Education
In Education, we are planning for weak conditions in the 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 impact on our business is unclear at this stage, so we have not included these factors in our guidance.
FT Group
At the FT Group, we anticipate continued strong demand for high-quality analysis of global business, finance, politics and economics; a tough year for advertising; strong renewal rates in our subscription businesses; and continued growth at Interactive Data.
The Penguin Group
At Penguin, we expect another good competitive performance in challenging trading conditions for book publishers and booksellers.


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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 
  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
The following table shows sales information for each of the past three years by geographic region:
             
  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
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. Fluctuations in exchange rates can have a significant impact on our reported sales and profits. In 2008, Pearson generated 59% of its sales in the 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 £100m. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for more information. The year-end US dollar rate for 2008 was £1:$1.44 compared to £1:$1.99 for 2007. In terms of the year end rate, the weakening of sterling in comparison to the US dollar 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 of £1,050m (see also note 29 of “Item 18. Financial Statements”). The year-end rate for the US dollar in 2007 was £1:$1.99 compared to £1:$1.96 for 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 £25m in 2007.
Critical accounting policies
Our consolidated financial statements, included in “Item 18. Financial Statements”, are prepared based on the accounting policies described in note 1 to the consolidated financial statements.


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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
Year ended December 31, 2008 compared to year ended December 31, 2007
Consolidated results of operations
Sales
Our total sales from continuing operations increased by £649m, or 16%, to £4,811m in 2008, from £4,162m in 2007. The increase reflected growth, on a constant exchange rate basis, across all the businesses together with additional contributions from acquisitions made in both 2007 and 2008. The year on year growth was impacted by movements in exchange rates, particularly in the US dollar. 2008 sales, translated at 2007 average exchange rates, would have been £4,491m.
Pearson Education increased sales by £484m or 18% from £2,628m to £3,112m. The North American business was the major contributor to the increase and although much of the increase was due to 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 2007 and 2008 and the effect of exchange. FT Publishing’s sales growth was driven by a shift toward subscription and service based revenues. The newspaper maintained circulation but advertising revenues fell by 3% as the advertising market weakened in the fourth quarter of 2008. Interactive Data sales were up by 18% (9% at constant last year exchange rates and before the contribution from acquisitions) driven by strong sales to both existing and new institutional customers and the maintenance of renewal rates at approximately 95% within the institutional services sector.
Penguin’s sales were up 7% in 2008 (3% at constant last year exchange rates and before the effect of portfolio changes) as a result of a strong publishing performance in all its markets in a year where the business continued to publish bestsellers and win awards.
Pearson Education, our largest business sector, accounted for 65% of our continuing business sales in 2008 compared to 63% in 2007. North America continued to be the most significant source of our sales and as a proportion of total continuing sales contributed 63% in 2008 and 62% in 2007.


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Cost of goods sold and operating expenses
The following table summarizes our cost of sales and net operating expenses:
         
  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 of pre-publication costs and royalty charges. Our cost of sales increased by £264m, or 14%, to £2,174m in 2008, from £1,910m in 2007. The increase corresponds to the increase in sales with cost of sales at 45.2% of sales in 2008 compared to 45.9% in 2007.
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 £290m, or 18%, to £1,890m in 2008, from £1,600m in 2007. As a percentage of sales they increased slightly to 39% in 2008 from 38% in 2007.
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 remained fairly consistent at £102m in 2008 compared to £101m in 2007.
Share of results of joint ventures and associates
The contribution from our joint ventures and associates increased slightly from £23m in 2007 to £25m in 2008. The majority of the profit comes from our 50% interest in the Economist.
Operating profit
The total operating profit increased by £102m, or 18%, to £676m in 2008 from £574m in 2007. 2008 operating profit, translated at 2007 average exchange rates, would have been £71m lower.
Operating profit attributable to Pearson Education increased by £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


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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.


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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

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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.


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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


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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 £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.


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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


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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 the Harcourt acquisition in 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.


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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, but was offset by an increase in intangible amortization from £18m in 2006 to £31m in 2007. Operating profit attributable to the FT Group increased by £28m, or 25%, to £140m in 2007, from £112m in 2006. The increase reflects the increase in revenues from both established businesses and an increased contribution from new acquisitions but also reflects improvements in margins particularly at FT Publishing. Operating profit attributable to the Penguin Group increased by £15m, or 26%, to £73m in 2007, from £58m in 2006 although the 2006 result included a one off goodwill charge of £7m relating to the recognition of pre-acquisition tax losses at Dorling Kindersley.
Net finance costs
Net finance costs increased from £74m in 2006 to £106m in 2007. Net interest payable in 2007 was £95m, up from £94m in 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 0.5% to 5.4%, reflecting a rise in interest rates and a change in the currency mix of year end debt. These two factors, partly offset by a decrease in the Group’s average net debt of £90m, increased the Group’s average net interest rate payable by 0.3% to 7.3%. In 2007 the net finance income relating to post-retirement plans was an income of £10m compared to an income of £4m in the previous year.
Other net finance income relating to foreign exchange and short-term fluctuations in the market value of financial instruments included a net foreign exchange loss of £17m in 2007 compared to a gain of £19m in 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
The total tax charge in 2007 of £131m represents 28% of pre-tax profits compared to a charge of just £4m or less than 1% of pre-tax profits in 2006. The low tax rate in 2006 was mainly accounted for by two factors. First, in anticipation of the disposal of Government Solutions, we 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 re-evaluated the likely utilization of operating losses both in the US and the UK; this 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 a non-recurring credit of £127m in 2006 which was not repeated in 2007.
Minority interests
This comprises mainly the minority share in Interactive Data. Our share of Interactive Data remained at 62% throughout 2007, 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 2006 and have been consolidated up to the date of sale. Operating profit for Government Solutions in 2007 was £2m compared to £22m in 2006 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 compared to £5m in 2006 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 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 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 has recognized a goodwill impairment charge of £97m in 2007 in anticipation of the loss on disposal.
Profit for the year
The total profit for the financial year in 2007 was £310m compared to a profit in 2006 of £469m. The overall decrease of £159m was mainly due to the absence of the non-recurring tax credit of £127m recorded in 2006, the decrease in contribution from discontinued businesses of £52m and the increase in net finance costs of £32m, largely due to exchange losses. These items more than offset the increase in operating profit in 2007.


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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 based on a weighted average number of shares in issue of 796.8m in 2007 and 798.4m in 2006. The decrease in earnings per share was due to the decrease in profit for 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 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 weakening of the US dollar against sterling on an average basis had a negative impact on reported sales and profits in 2007 compared to 2006. 2007 sales, translated at 2006 average exchange rates, would have been higher by £223m and operating profit, translated at 2006 average exchange rates, would have been higher by £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
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, other gains and losses and other net finance costs of associates. 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. Other gains and losses represent profits and losses on the sale of subsidiaries, joint ventures, associates and investments that are included within continuing operations but which distort the performance for the year.
Adjusted operating profit enables management to more easily track the underlying operational performance of the Group. A reconciliation of operating profit to adjusted operating profit for continuing operations is included in the tables below:
                             
  Year Ended December 31, 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% 


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  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% 
North American Education
North American Education sales decreased by £12m, or 1%, to £1,667m in 2007, from £1,679m in 2006 and adjusted operating profit decreased by £7m, or 2%, to £273m in 2007 from £280m in 2006. The results were significantly affected by the weakening of the US dollar, which we estimate reduced sales by £135m and adjusted operating profit by £22m when compared to the equivalent figures at constant 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 revenues grew 3.5% against the Association of American Publishers’ estimate of an increase for the industry of 2.7%. New adoption market share was 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 double digits after high single digit growth in 2006 and growth in excess of 20% in 2005. School testing benefited from further contract wins, market share gains and strength in 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

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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 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 Harcourt International.
The International School business continued to grow with strong performances from the publishing businesses in South Africa and Australia. In Italy, the integration of PBM was completed and produced integration savings, margin improvement and market share gains in 2007. In School publishing, the acquisition of Harcourt International increased scale in our international education businesses bringing leading content for school and vocational customers in many markets including the UK, South Africa, Australia and New Zealand. The international testing business was again able to benefit from technology leadership. In the UK, we marked 9.6 million GCSE, AS and A-Level scripts, 4.6 million of which were on screen. Successful global English Language Teaching franchises in all major market franchises (primary, secondary, adult, business and exam preparation) drove strong growth.English Adventure, developed with Disney, grew successfully and has sold more than six million units in less than three years since launch.
International Higher Education publishing sales grew by 2%, benefiting from organic and acquisition investment. Particular areas of strength included local language editions of our major authors and custom publishing including the successful launch of “local language” science publishing in Germany. The “MyLab” and “Mastering” technology platforms are being successfully adapted for international markets and the MyLab 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.
International Education margins continued to improve and the increase in the overall margin from 11.4% in 2006 to 12.5% in 2007 reflected increases in both publishing and testing margins.
Professional
After excluding sales and adjusted operating profit from Government Solutions and the Data Management businesses (reported as discontinued), Professional sales increased by £15m, or 7%, to £226m in 2007 from £211m in 2006. Adjusted operating profit increased by £10m or 59% to £27m in 2007, from £17m in 2006. Sales were affected by the weakening US dollar, which reduced sales by £14m when compared to the equivalent figures at constant 2006 exchange rates.
Professional Testing sales were up by 10% in 2007. Approximately 5.8 million secure online tests were delivered in more than 5,000 test centers across the world in 2007. There was strong margin improvement as test volumes rose, driven by higher demand from existing customers such as GMAC (for business school applicants), NCLEX (for nurses) and the DSA/DVTA driving theory test. Additional contributions from new contracts included


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the American Board of Internal Medicine and the 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 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 Europe was helped by publishing for the new Windows Vista launch, a new partnership with Microsoft Press in the Netherlands and a successful move into digital publishing and training in Germany. Our business imprints Wharton School Publishing and 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 higher at 11.9% in 2007 compared to 8.1% in 2006 as margins continued to improve in both the testing and professional publishing businesses.
FT Publishing
Sales at FT Publishing increased by £64m or 23%, from £280m in 2006 to £344m in 2007. Adjusted operating profit from continuing operations increased by £29m, from £27m in 2006 to £56m in 2007. The sales and profit increase 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 Publishing sales were up by 12% with advertising revenues up by 10%. FT newspaper circulation was up 2% to almost 440,000 (for the July-December 2007 Audit Bureau of Circulation, or ABC, measuring period), with a 19% increase in subscriptions. Digital subscribers to the FT were up 13% to 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 launch of its innovative new access model in October 2007. There was a strong trading performance at FT Business as integration with the FT Newspaper helped to generate additional revenue and reduce costs. Mergermarket experienced rapid revenue growth with 90%+ subscription renewal rates and a series of new product launches around the world includingPharmawire,Debtwire in Asia Pacific anddealReporterin emerging markets in Europe, Middle East and 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 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 approximately 200,000 registered executive users.
Overall margins at FT Publishing continued to increase as the newspaper becomes more profitable and in 2007 were 16.3% compared to 9.6% in 2006.
Interactive Data
Interactive Data, grew its sales by 4% from £332m in 2006 to £344m in 2007. Adjusted operating profit grew by 9% from £89m in 2006 to £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.


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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 £37m and adjusted operating profit by £4m when compared to the equivalent figures at constant 2006 exchange rates.
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 Kim Edwards’ first novel,The Memory Keeper’s Daughter, a global number one bestseller for Penguin in 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 2007) and bestsellingIn the 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 India celebrated its 20th anniversary in 2007 with continued rapid growth. Penguin authors won all the major English language prizes in India’s national book awards: Vikram Chandra in fiction forSacred Games, Vikram Seth in non-fiction forTwo Livesand 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 Penguin in 2008, and in South Africa, another strong year was led by John van de Ruit’sSpud:The Madness Continues.
Penguin continued to focus on efficiency and improvement in operating margins 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. These efficiencies together with improved gross margins principally from innovation in formats such as the US premium paperback have helped to improve margins from 7.8% in 2006 to 8.7% in 2007.


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Liquidity and capital resources
Cash flows and financing
Net cash generated from operations increased by £235m (or 36%), to £894m in 2008 from £659m in 2007. This increase reflected strong cash contributions from all businesses, together with the significant strengthening of the US dollar against sterling. The exchange rate for translation of dollar cash flows was $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, 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 working capital management. In 2007, the average working capital to sales ratio for our book publishing businesses improved to 25.6% from 26.3% in 2006.
Net interest paid decreased to £76m in 2008 from £90m in 2007. The decrease was due to the 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 relative to sterling. Net interest paid was £90m in 2007 compared to £82m in 2006. The 10% increase in 2007 over 2006 was primarily due to higher average interest rates in the UK and US.
Capital expenditure on property, plant and equipment was £75m in 2008, £86m in 2007 and £68m in 2006. The reduction in spend in 2008 reflects reduced infrastructure spend compared to 2007, although the Group continued to invest in digital technology. The increase in 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. The principal acquisitions in 2008 were of Harcourt Assessments for £321m and Money Media for £33m. The principal acquisitions in 2007 were Harcourt Education International for £155m and eCollege for £266m. In 2006, the principal acquisition was of Mergermarket for £109m. The balance related to various smaller bolt-on acquisitions (primarily in the school segment) including those of National Evaluation Systems and Paravia Bruno Mondadori.
The sale of subsidiaries and associates produced a cash inflow of £111m in 2008 against £469m in 2007 and £10m in 2006. All the proceeds in 2008 relate to the sale of the Data Management business. The principal disposals in 2007 were of Government Solutions for £278m and Les Echos for £156m. The disposal in 2006 relates entirely to the proceeds from thetake-up of share options issued to minority shareholders.
The cash outflow from financing of £149m in 2008 reflects the repayment of 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 outflow from financing activities of £444m in 2007 represented the higher Group dividend (as the Group sought to match dividend growth more closely with earnings growth) and the repayment of one €591m bond, offset in part by drawings on the 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.
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, 2008, our net debt was £1,460m compared to net debt of £973m at December 31, 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. 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 other marketable instruments which are readily realizable and held on a short-term basis. Short-term, medium-term and long-term borrowing amounted to £2,363m at December 31, 2008, compared to £1,608m at December 31, 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, 2008, cash and liquid resources were £685m, compared to £560m at December 31, 2007.
Contractual obligations
The following table summarizes the maturity of our borrowings and our obligations under non-cancelable operating leases, exclusive of anticipated interest payments.
                     
  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, 2008 the Group had capital commitments for fixed assets, including finance leases already under contract, of £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 0.125% on the unused amount of the Group’s bank facility.
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
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 have in place a committed revolving credit facility of $1.75bn, of which $92m matures in May 2011 and the balance of $1.658bn matures in May 2012. At December 31, 2008, approximately $1.56bn was available under


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this facility. This credit facility contains two key covenants measured for each 12 month period ending June 30 and December 31:
We must maintain the ratio of our profit before interest, tax and amortization to our net interest payable at 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
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
There were no significant or unusual related party transactions in 2008, 2007 or 2006. Refer to note 36 in “Item 18. Financial Statements”.
Accounting principles
For a description of our principal accounting policies used refer to note 1 in “Item 18. Financial Statements”.
 
ITEM 9.6.  THE OFFERDIRECTORS, SENIOR MANAGEMENT AND LISTINGEMPLOYEES
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 March 2009.
Name
Age
Position
Glen Moreno65Chairman
Marjorie Scardino62Chief Executive
David Arculus62Non-executive Director
David Bell62Director for People
Terry Burns65Non-executive Director
Patrick Cescau60Non-executive Director
Will Ethridge57Chief Executive, Pearson Education North America
Rona Fairhead47Chairman and Chief Executive, The FT Group
Robin Freestone50Chief Financial Officer
Susan Fuhrman64Non-executive Director
Ken Hydon64Non-executive Director
John Makinson54Chairman and Chief Executive, Penguin Group
CK Prahalad67Non-executive Director
Glen Morenowas appointed chairman of Pearson on October 1, 2005. He is the senior independent director of Man Group plc and a director of Fidelity International Limited. He was recently made acting chairman of UK Financial Investments Limited, 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 director of several charitable organizations.
David Arculusbecame a non-executive director in February 2006 and currently serves on the audit and nomination committees and as chairman of the personnel committee. He is a non-executive director of Telefonica SA, and was previously chairman of O2 plc from 2004 until it was acquired by Telefonica at the beginning of 2006. His previous roles include chairman of Severn Trent plc and IPC Group, chief operating officer of United Business Media plc and group managing director of EMAP plc.
David Bellbecame a director in March 1996.  He was appointed Pearson’s director for people with responsibility for finding, keeping, rewarding and inspiring our employees across the Pearson Group. He is chairman of theFinancial Timesand Sadler’s Wells Theatre. He is also chairman of Crisis, a charity for the 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 chairman of Alliance & Leicester plc, Abbey National plc and Glas Cymru Limited and is a non-executive director of Banco Santander Central Hispano. He was previously chairman of Marks and Spencer Group 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 was previously group chief executive of 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, originally as chief financial officer. She was appointed chairman and chief executive of the FT Group in June 2006 and became responsible for Pearson VUE in March 2008. From 1996 until 2001, she worked at ICI plc, where she served as executive vice president, group control and strategy. She is also chairman of Interactive Data, a non-executive director of HSBC Holdings plc and chairs the HSBC audit committee.
Robin Freestonebecame a director of Pearson 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). He qualified as a chartered accountant with 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 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 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 served as Pearson’s finance director from March 1996 until June 2002. He is also chairman of the Institute of Public Policy Research and a director of The National Theatre and The International Rescue Committee (UK).


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Coimbatore Krishnarao Prahaladbecame a non-executive director in May 2008 and is a distinguished university professor of corporate strategy and international business at the University of Michigan Business School. He is a director of NCR, Hindustan Unilever Corporation, World Resources Institute and the Indus Entrepreneurs.
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 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
We want a performance culture that supports our strategy and goals and incentive programs that reward their achievement. Performance conditions for the company’s 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 annual and long-term incentives) should reward both short and long-term results, delivering competitive rewards for target performance, but outstanding rewards for exceptional company 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’ 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 places considerable emphasis on the performance-linked elements i.e. annual incentives, bonus share matching and long-term incentives. The Committee will continue to review the mix of fixed and performance-linked remuneration on an annual basis, consistent with its overall philosophy.
We want our executive directors’ remuneration 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 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
Our normal policy is to review salaries annually consistent with the way we benchmark pay and taking into account the approach to pay across the company as a whole.
Allowances and benefits
It is the company’s policy is that 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.
Annual incentives
The 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 will continue to review the annual incentive plans each year and to revise the performance measures, targets and individual incentive opportunities in light of current conditions.
Annual incentive payments do not form part of pensionable earnings.
The financial performance measures relate to the company’s main drivers of business performance at both the corporate, operating company and business unit level. Performance is measured separately for each item. For each performance measure, the Committee establishes thresholds, target and maximum levels of performance for different levels of payout.
With the exception of the 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 chief executive. These may includeinter alia objectives relating to corporate social responsibility.
For 2009, the financial performance measures for Pearson plc are sales, operating profit (for the operating companies) and growth in underlying 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. The selection and weighting of the performance measures takes into account the 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 2009, there is no change to the incentive opportunity for the chief executive which remains at 100% of base salary at target and 150% at maximum.
There is also no change to the average target individual incentive opportunity for the other executive directors 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 (as in 2008).
The annual incentive plans are discretionary and the Committee reserves the right to make adjustments to payouts up or down if it believes exceptional factors warrant doing so. The committee may also award individual discretionary incentive payments and did so in 2008 for Will Ethridge 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.
             
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, average working capital to sales ratio and operating cash flow. Sales and underlying growth in adjusted earnings per share at constant exchange rates 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 performance 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 were all above maximum. Sales were above target but below maximum.
For 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 was above maximum.
For Pearson VUE, the performance measures were sales, operating profit, average working capital as a ratio to sales and operating cash flow. Sales were above target but below maximum. Performance across all other measures was above maximum.
For Penguin Group, the performance measures 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
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.
If the participant’s invested shares are held, they will be matched subject to earnings per share growth over the three-year performance period on a gross basis up to a maximum of one matching share for every one held i.e. the number of matching shares will 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 3% per annum compound over the 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 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 years to measure the company’s financial progress over the period to which the entitlement to matching shares relates.
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 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 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 intention to grant stock options in 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 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 since 2006 and that will apply for 2009 and subsequent awards 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.
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 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
We encourage executive directors to build up a substantial shareholding in the company in line with the policy of encouraging widespread employee share ownership. We do not think it is necessary to specify a particular relationship of shareholding to 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.
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.
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 lieu, subject to mitigation. In the case of the longer serving directors with legacy employment agreements, the compensation payable in circumstances where the company terminates the agreements without notice or 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 treated in accordance with the terms of the relevant plan.


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Retirement benefits
Executive directors participate in the pension arrangements set up for Pearson employees. Marjorie Scardino, Will Ethridge, John Makinson, Rona Fairhead and Robin Freestone will also have other retirement arrangements because of the cap on the amount of benefits that can be provided from the 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 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 2001 when further benefit accruals ceased. Normal retirement age is 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 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 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 (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 2006, was abolished by the Finance Act 2004. However the Pearson Group Pension Plan has retained its own ’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.
As a result of the UK Government’sA-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 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 participates in the Pearson Inc. Pension Plan and the approved 401(k) plan.
Additional pension benefits 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 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 is a member of the Pearson Group Pension Plan. He was eligible for a pension of two-thirds of his final base salary at age 62 due to his long service.


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Will Ethridge
Will Ethridge is a 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 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 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. Since April 2006, she has received a taxable and non-pensionable cash supplement in replacement of the FURBS.
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. Since April 2006, he has received a taxable and non-pensionable cash supplement in replacement of the FURBS.
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 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 2002, increased at 1 January 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
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); Rona Fairhead (HSBC Holdings plc) and Robin Freestone (eChem).
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.
There were no changes in the chairman’s remuneration in 2008. With effect from 1 January 2007, his remuneration was £450,000 per year.
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 Pearson’s articles of association. Non-executive directors receive no other pay or


50

benefits (other than reimbursement for expenses incurred in connection with their directorship of Pearson) and do not participate in the Pearson’s equity-based incentive plans.
There were no changes in the structure and level of non-executive directors’ fees in 2008. With effect from 1 July 2007, these were as follows:
Fees payable from
July 1, 2007 (£)
Non-executive director fee60,000
Chairmanship of audit committee20,000
Chairmanship of personnel committee15,000
Membership of audit committee10,000
Membership of personnel committee5,000
Senior independent director15,000
A minimum of 25% of the basic fee is paid in Pearson shares that the non-executive directors have committed to retain for the period of their directorships.
Terry Burns also receives a fee in respect of his non-executive directorship at Edexcel.
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
Excluding contributions to pension funds and related benefits, senior management remuneration for 2008 was as follows:
                     
  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)  There will be no increase in base salary for the 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 £43,560 in respect of housing costs and a US payroll supplement of £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 £182,824 for 2008.
(4)  Benefits include company car, car allowance and UK health 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.
(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, 2008 as well as the exercise price, rounded to the nearest whole 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)PriceExercise DateExpiry Date
Robin Freestone1,757b534.8p08/01/1102/01/12
Total
1,757
John Makinson4,178b424.8p08/01/1002/01/11
21,477c*1372.4p06/08/0206/08/09
21,477c*1647.5p06/08/0206/08/09
19,785d*1421.0p05/09/0205/09/11
19,785d*1421.0p05/09/0305/09/11
19,785d*1421.0p05/09/0405/09/11
19,785d*1421.0p05/09/0505/09/11
Total
126,272
Notes:
(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 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.
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 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.
(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 February 28, 2009. Additional information with respect to share options held by, and bonus 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 February 28, 2009 was 1,916,299 representing less than 1% of the issued share capital on February 28, 2009.
         
  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 and long-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 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-time non-executive director, six executive directors and six 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 to one-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 for re-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 been re-elected, unless at or prior to such meeting it is expressly resolved not


54

to fill the vacated office, or unless a resolution for the re-election of that director has been put to the meeting and lost. Our articles of association also provide that every director be subject to re-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 report to the board. Each committee has its own written terms of reference setting out their authority and duties. These can be found on our website (www.pearson.com/investor/governance)
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.
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, Glen Moreno and Ken Hydon.
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 the non-executive directors.
Employees
The average number of persons employed by us during each of the three fiscal years ended 2008 were as follows:
• 33,680 in fiscal 2008,
• 32,692 in fiscal 2007, and
• 34,341 in fiscal 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 2008, 2007 and 2006 the average number of persons employed in each of our operating divisions.
             
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, 2009, the only beneficial owners of 3% or more of our issued and outstanding ordinary share capital were Legal & General Group plc which owned 33,336,528 ordinary shares representing 4.12% of our outstanding ordinary shares. On February 28, 2009, record holders with registered addresses in the United States held 33,008,366 ADRs, which represented 4.08% of our outstanding ordinary shares. 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, 2008 are shown in note 12 in “Item 18. Financial Statements.” Amounts due from joint ventures and associates are set out in note 22 and dividends receivable from joint ventures and associates are set out in note 12 in “Item 18. Financial Statements”. There were no other related party transactions in 2008.
ITEM 8.  FINANCIAL INFORMATION
The financial statements filed as part of this Annual Report are included on pages F-1 through F-70 hereof.
Other than those events described in note 37 in “Item 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, 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.
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.
 


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 Ordinary shares Average daily
  Ordinary shares Average daily
 
Reference period
 High Low trading volume  High Low trading volume 
 (In pence) (Ordinary shares)  (In pence)   
     (Ordinary shares) 
Five most recent fiscal years
                        
2008  733   519   4,758,300 
2007  915   695   6,405,600   915   695   6,405,600 
2006  811   671   5,004,500   811   671   5,004,500 
2005  695   608   5,296,700   695   608   5,296,700 
2004  682   579   6,219,200   682   579   6,219,200 
2003  680   430   6,631,800 
Most recent quarter and two most recent fiscal years
                        
2008 First quarter  733   682   5,083,300 
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   798   695   5,156,300 
Third quarter  843   729   6,481,400   843   729   6,481,400 
Second quarter  915   825   7,390,600   915   825   7,390,600 
First quarter  872   762   6,632,100   872   762   6,632,100 
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 
Most recent six months
                        
March 2008  700   648   5,124,400 
February 2008  696   636   3,831,400 
January 2008  733   621   6,110,700 
December 2007  755   695   3,917,200 
November 2007  792   712   3,714,700 
October 2007  798   742   7,540,100 
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.
ITEM 10.  ADDITIONAL INFORMATION
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, 2007.2008. 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
 
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
 
A director shall not be disqualified from contracting with us by virtueFor the purposes 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 behalfsection 175 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. Provided2006 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 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 orsection, including, without

54
57

beinglimitation, 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:
(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 be liable to account to us for any profit realized by him from the contract or arrangementnot, by reason of the director holding his office, be accountable to the Company for any remuneration or the fiduciary relationship thereby established. A director may not vote onother benefit which he derives from any contractoffice 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 proposal inbenefit 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 she has togetherobtained 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 anythat other person gives rise to a conflict of interest of any person connected with him or her, anpossible conflict of interest, which is,has been approved by the board: the director shall not be in breach of the general duties he owes to his or her knowledge, a material interest, otherwise thanthe Company by virtue of sections 171 to 177 of the 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 relationship with that person gives rise to a conflict of interest or her interestspossible conflict of interest, the Director shall not be in shares, debentures or other securitiesbreach of or otherwise in or through us. If a question arises asthe general duties he owes to the materialityCompany by virtue of a director’ssections 171 to 177 of the Act because he:
(a) absents himself from meetings of the board at which any matter relating to the conflict of interest or possible conflict of interest will or may be discussed or from the discussion of any such matter at a meeting or otherwise; and/or
(b) makes arrangements not to receive documents and information relating to any matter which gives rise to the conflict of interest or possible conflict of interest sent or supplied by the Companyand/or for such documents and information to be received and read by a professional adviser,
for so long as he reasonably believes such conflict of interest or his or her entitlement to vote and the director does not voluntarily agree to abstain from voting, that question will be referred to the chairmanpossible 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 ourits subsidiaries;
 
 • the giving of any guarantee, security or indemnity to a third party in respect of a debt or obligation of oursthe Company or any of ourits subsidiaries for which he or shehimself has assumed responsibility in whole or in part and whether alone or jointly with others under a guarantee or indemnity or by the giving of security;
 
 • any proposal relating to usthe Company or any of our subsidiariesits subsidiary undertakings where we areit is offering securities in which offer a directorDirector is or may be entitled to participate as a holder of securities or in the underwriting or sub-underwriting of which a directorDirector is to participate;
• any proposal relating to another company in which he and any persons connected with him do not to his knowledge hold an interest in shares (as that term is used in sections 820 to 825 of the Companies Act 2006) representing one per cent. or more of either any class of the equity share capital, or the voting rights, in such company;
 
 • any proposal relating to an arrangement for the benefit of ourthe employees of the Company or any of our subsidiaries thatits subsidiary undertakings which does not award him or her any privilege or benefit not generally awarded to the employees to whom such arrangement relates; and
 
 • any proposal concerning insurance that we propose to maintain or purchase for the benefit of directors or for the benefit of persons, including directors.
 
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
 
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 any intra-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
 
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 of non-executive directors, up to an aggregate of £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.


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Annual general meetings
 
Shareholders’ meetings 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 usually transacted at an annual general meeting:
 
 • approving dividends;


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 • 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 of one-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.
 
We hold 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 a general meeting whenever it thinks fit. If at any time there are not within the United Kingdom sufficient directors capable of acting to form a quorum, any director or any two members may convene a general meeting 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 business. Three members present in person and entitled to vote shall be a quorum for 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 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
 
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 registrars, Equiniti, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6TH, United Kingdom, telephone number +44-845-607-6838.
 
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 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.
 
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.


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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
 
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 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
 
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 than one-tenth of the total voting rights of all shareholders having the right to vote at the meeting; or
 
 • 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 than one-tenth of the total sum paid up on all shares conferring that right.
 
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
 
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.


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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 of three-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 820 of the Companies Act 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 least one-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 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%,
 
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
 
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
 
Pearson has not entered into any contracts outside the ordinary course of business during the two year period immediately preceding the date of this annual report.
 
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’ 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 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 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
 
The UK does not impose dividend withholding tax on dividends paid to US holders.
 
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 a non-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 US federal income tax principles.
 
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 UK for UK tax purposes and who (in the case of an individual) does not carry on a trade, profession or vocation in the 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
 
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 be long-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%. This long-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 as US-source gain or loss for US foreign tax credit purposes.
 
Estate and gift tax
 
The current Estate and Gift Tax Convention, or the Convention, between the US and the 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 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 UK or pertain to the fixed base in the 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 UK to be


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credited against tax payable in the US or for tax paid in the US to be credited against tax payable in the UK based on priority rules set forth in the Convention.
 
Stamp duty
 
No stamp duty or stamp duty reserve tax (SDRT) will be payable in the 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 UK and that the instrument or written agreement of transfer is not executed in the 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 shouldwill not from March 13, 2008, be subject to stamp duty or SDRT under legislation announced and to be enacted in the Finance Act 2008.SDRT.
 
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 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/o the Company Secretary), or, in the 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
 
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, 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.
 
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 IFRS requirements on hedge accounting, during 20072008 and 20062007 we qualified for hedge accounting under 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


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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 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 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 is denominated in a different currency to the Group’s desired borrowing risk profile and the Group 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 between hedge-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 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 before depreciation and amortization. This policy aims to dampen the impact of 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 are the US dollar and sterling. However, the Group still borrows small amounts in other currencies, typically for seasonal working capital needs. In addition, the Group’s policy does not require existing currency debt to be terminated to match declines in that currency’s share of 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, 20072008 the Group’s net borrowings in our main currencies (taking into account the effect of cross currency rate swaps) were: US dollar £1,119m,£1,777m, and sterling £45m.£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.
 
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 using short-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 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 IFRS, 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 other comprehensive incomereserves or 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 20072008 and 20062007 the Group met the prescribed designation requirements and hedge effectiveness tests under 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 incomereserves respectively by the corresponding movement in the fair value of the underlying hedged item.
 
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
 
The sensitivity of the Group’s derivative portfolio to changes in interest rates is found in note 1519 of “Item 18. Financial Statements”.
 
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.


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ITEM 15.  CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 20072008 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 officerChief Executive Officer and principal financial officer,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 on 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 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, 2007,2008, and has concluded that such internal control over financial reporting was effective.
 
PricewaterhouseCoopers LLP, which has audited the consolidated financial statements of the Company for the year ended December 31, 2007,2008, has also audited the effectiveness of the Company’s internal control over financial reporting under Auditing Standard No. 5 of the Public Company Accounting Oversight Board (United States). Their audit report may be found onpage F-2.
 
Change in 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 controlcontrols over financial reporting that have materially affected or are reasonably likely to materially affect Pearson’s internal control over financial reporting.
 
ITEM 16A.  AUDIT COMMITTEE FINANCIAL EXPERT
 
The members of the Board of Directors of Pearson plc have determined that Ken Hydon is an audit committee financial expert 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
 
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.


64

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
 2007 2006  2008 2007 
 £m £m  £m £m 
Audit fees  3   5   5   4 
Audit-related fees  1   4 
Tax fees  2   1   2   2 
All other fees  1   1   1   1 
 
Audit fees include £35,000 (2006:(2007: £35,000) of audit fees relating to the audit of the parent company.
 
Audit-related fees represent 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 feesFees for attestation under section 404 of the Sarbanes-Oxley Act.Act are allocated to audit fees paid.
 
Tax services include services related to tax planning and various other tax advisory services.
 
All other feesOther services include fees fordue diligence on acquisitions and services relatingrelated to the disposal of the Data Management business, due diligence on acquisitions and advisory services in relation to information technology and section 404.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
 
           number
 
        Total number of
  of shares that
 
        units purchased
  may yet be
 
        as part of publicly
  purchased under
 
  Total number of
  Average price
  announced plans
  the plans or
 
Period
 shares purchased  paid per share  or programs  programs 
 
February 1, 2007 - February 28, 2007  1,000,000   £8.19   N/A   N/A 
June 1, 2007 - June 30, 2007  2,500,000   £8.39   N/A   N/A 
December 1, 2007 - December 31, 2007  1,400,000   £7.31   N/A   N/A 
June 1, 2008 - June 30, 20082,000,000£6.14N/AN/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.


6569

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
 
Not applicable.
 
ITEM 18.  FINANCIAL STATEMENTS
 
The financial statements filed as part of this Annual Report are included on pages F-1 through F-70 hereof.
 
ITEM 19.  EXHIBITS
 
   
1.1 Memorandum and Articles of Association of Pearson plc.
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.


6670

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
     
  Page
 
Report of Independent Registered Public Accounting Firm
  F-2 
Consolidated Income Statement for the year ended December 31, 2008, 2007 2006 and 20052006
  F-4F-3 
Statement of Recognized Income and Expense for the year ended December 31, 2008, 2007 2006 and 20052006
  F-5F-4 
Consolidated Balance Sheet as at December 31, 20072008 and 20062007
  F-5F-4 
Consolidated Cash Flow Statement for the year ended December 31, 2008, 2007 2006 and 20052006
  F-7F-6 
Notes to the Consolidated Financial Statements
  F-8F-7 


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, 2007 and December 31, 2006 consolidated financial statements and of its internal control over financial reporting as of December 31, 2007 and an audit of its December 31, 2005 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.
 
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows and of recognized income and expense present fairly, in all material respects, the financial position of Pearson plc and its subsidiaries (the “Group”) at December 31, 20072008 and December 31, 20062007 and the results of their operations and cash flows for each of the three years in the period ended December 31, 2007,2008, in conformity with International Financial Reporting Standards (IFRSs) as issued by the 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, 20072008 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, for maintaining effective internal control over financial reporting and for its assessment of the 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 opinions on these financial statements and on the Group’s internal control over financial reporting based on our audits which were integrated in 2007 and 2006.audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements 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 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 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 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 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.


F-2

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 25, 2008March 26, 2009


F-3F-2

 
Consolidated Income Statement
Year ended 31 December 20072008
All figures in £ millions
 
                                
 Notes 2007 2006 2005  Notes 2008 2007 2006 
Continuing operations
                                
Sales  2   4,162   3,990   3,662   2   4,811   4,162   3,990 
Cost of goods sold  4   (1,910)  (1,841)  (1,713)  4   (2,174)  (1,910)  (1,841)
              
Gross profit
      2,252   2,149   1,949       2,637   2,252   2,149 
Operating expenses  4   (1,701)  (1,651)  (1,506)  4   (1,986)  (1,701)  (1,651)
Other net gains and losses  5   —   —   40 
Share of results of joint ventures and associates  13   23   24   14   12   25   23   24 
              
Operating profit
  2   574   522   497   2   676   574   522 
Finance costs  7   (150)  (133)  (132)  6   (136)  (150)  (133)
Finance income  7   44   59   62   6   45   44   59 
              
Profit before tax
      468   448   427       585   468   448 
Income tax  8   (131)  (4)  (108)  7   (172)  (131)  (4)
              
Profit for the year from continuing operations
      337   444   319       413   337   444 
(Loss)/profit for the year from discontinued operations  3   (27)  25   325 
(Loss)/gain for the year from discontinued operations  3   (90)  (27)  25 
              
Profit for the year
      310   469   644       323   310   469 
              
Attributable to:
                                
Equity holders of the Company      284   446   624 
Equity holders of the company      292   284   446 
Minority interest      26   23   20       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)
                
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   35.6p   55.9p   78.2p   8   36.6p   35.6p   55.9p 
— diluted  9   35.6p   55.8p   78.1p   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)
                
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   39.0p   52.7p   37.5p   8   47.9p   39.0p   52.7p 
— diluted  9   39.0p   52.6p   37.4p   8   47.9p   39.0p   52.6p 
              


F-4F-3

 
Consolidated Statement of Recognised Income and Expense
Year ended 31 December 20072008
All figures in £ millions
 
                            
 Notes 2007 2006 2005  Notes 2008 2007 2006 
Net exchange differences on translation of foreign operations  29   25   (417)  327   29   1,050   25   (417)
Actuarial gains on retirement benefit obligations  25   80   107   26 
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  8   29   12   12   7   2   29   12 
              
Net income/(expense) recognised directly in equity
      134   (298)  365 
Net income recognised directly in equity
      978   134   (298)
Profit for the year      310   469   644       323   310   469 
              
Total recognised income and expense for the year
      444   171   1,009       1,301   444   171 
              
Attributable to:
                                
Equity holders of the Company      418   148   989 
Equity holders of the company      1,270   418   148 
Minority interest      26   23   20       31   26   23 
              
Effect of transition adjustment on adoption of IAS 39
                
Attributable to:
                
Equity holders of the Company      —   —   (12)
 
Consolidated Balance Sheet
As atAt 31 December 20072008
All figures in £ millions
 
                        
 Notes 2007 2006  Notes 2008 2007 
Assets
                        
Non-current assets
                        
Property, plant and equipment  11   355   348   10   423   355 
Intangible assets  12   3,814   3,581   11   5,353   3,814 
Investments in joint ventures and associates  13   20   20   12   23   20 
Deferred income tax assets  14   328   417   13   372   328 
Financial assets — Derivative financial instruments  17   23   36   16   181   23 
Retirement benefit assets  25   62   —   25   49   62 
Other financial assets  16   52   17   15   63   52 
Other receivables  20   129   124   22   152   129 
          
      4,783   4,543       6,616   4,783 
Current assets
                        
Intangible assets — Pre-publication  18   450   402   20   695   450 
Inventories  19   368   354   21   501   368 
Trade and other receivables  20   946   953   22   1,342   946 
Financial assets — Derivative financial instruments  17   28   50   16   3   28 
Financial assets — Marketable securities      40   25   14   54   40 
Cash and cash equivalents (excluding overdrafts)  21   560   592   17   685   560 
          
      2,392   2,376       3,280   2,392 
Non-current assets classified as held for sale  31   117   294   31   —   117 
          
      2,509   2,670       3,280   2,509 
          
Total assets
      7,292   7,213       9,896   7,292 
          


F-5F-4

Consolidated Balance Sheet (Continued)
As atAt 31 December 20072008
All figures in £ millions
 
                        
 Notes 2007 2006  Notes 2008 2007 
Liabilities
                        
Non-current liabilities
                        
Financial liabilities — Borrowings  22   (1,049)  (1,148)  18   (2,019)  (1,049)
Financial liabilities — Derivative financial instruments  17   (16)  (19)  16   (15)  (16)
Deferred income tax liabilities  14   (287)  (245)  13   (447)  (287)
Retirement benefit obligations  25   (95)  (250)  25   (167)  (95)
Provisions for other liabilities and charges  23   (44)  (29)  23   (33)  (44)
Other liabilities  24   (190)  (162)  24   (221)  (190)
          
      (1,681)  (1,853)      (2,902)  (1,681)
Current liabilities
                        
Trade and other liabilities  24   (1,050)  (998)  24   (1,429)  (1,050)
Financial liabilities — Borrowings  22   (559)  (595)  18   (344)  (559)
Financial liabilities — Derivative financial instruments  16   (5)  — 
Current income tax liabilities      (96)  (74)      (136)  (96)
Provisions for other liabilities and charges  23   (23)  (23)  23   (56)  (23)
          
      (1,728)  (1,690)      (1,970)  (1,728)
Liabilities directly associated with non-current assets classified as held for sale  31   (9)  (26)  31   —   (9)
          
Total liabilities
      (3,418)  (3,569)      (4,872)  (3,418)
          
Net assets
      3,874   3,644       5,024   3,874 
          
Equity
                        
Share capital  27   202   202   27   202   202 
Share premium  27   2,499   2,487   27   2,505   2,499 
Treasury shares  28   (216)  (189)  28   (222)  (216)
Other reserves  29   (514)  (592)  29   586   (514)
Retained earnings  29   1,724   1,568   29   1,679   1,724 
          
Total equity attributable to equity holders of the Company
      3,695   3,476 
Total equity attributable to equity holders of the company
      4,750   3,695 
Minority interest      179   168       274   179 
          
Total equity
      3,874   3,644       5,024   3,874 
          
 
These financial statements have been approved for issue by the board of directors on 136 March 20082009 and signed on its behalf by
 
Robin FreestoneChief financial officer

F-6
F-5

 
Consolidated Cash Flow Statement
Year ended 31 December 20072008
All figures in £ millions
 
                          
 Notes 2007 2006 2005  Notes 2008 2007 2006 
Cash flows from operating activities
                                
Net cash generated from operations  33   659   621   653   33   894   659   621 
Interest paid      (109)  (106)  (101)      (87)  (109)  (106)
Tax paid      (87)  (59)  (65)      (89)  (87)  (59)
              
Net cash generated from operating activities
      463   456   487       718   463   456 
              
Cash flows from investing activities
                                
Acquisition of subsidiaries, net of cash acquired  30   (472)  (363)  (246)  30   (395)  (472)  (363)
Acquisition of joint ventures and associates      (4)  (4)  (7)      (5)  (4)  (4)
Purchase of investments      (1)  —   — 
Purchase of property, plant and equipment (PPE)      (86)  (68)  (76)      (75)  (86)  (68)
Proceeds from sale of investments      5   —   — 
Proceeds from sale of PPE  33   14   8   3   33   2   14   8 
Purchase of intangible assets      (33)  (29)  (24)      (45)  (33)  (29)
Purchase of other financial assets      —   —   (2)
Disposal of subsidiaries, net of cash disposed  32   469   10   376   32   111   469   10 
Disposal of joint ventures and associates      —   —   54 
Interest received      19   24   29       11   19   24 
Dividends received from joint ventures and associates      32   45   14       23   32   45 
              
Net cash used in investing activities
      (61)  (377)  121       (369)  (61)  (377)
              
Cash flows from financing activities
                                
Proceeds from issue of ordinary shares  27   12   11   4   27   6   12   11 
Purchase of treasury shares      (72)  (36)  (21)      (47)  (72)  (36)
Proceeds from borrowings      272   84   —       455   272   84 
Liquid resources acquired      (15)  (24)  —       —   (15)  (24)
Repayment of borrowings      (391)  (145)  (79)      (275)  (391)  (145)
Finance lease principal payments      (2)  (3)  (3)      (3)  (2)  (3)
Dividends paid to Company’s shareholders  10   (238)  (220)  (205)
Dividends paid to minority interests      (10)  (15)  (17)
Dividends paid to company’s shareholders  9   (257)  (238)  (220)
Dividends paid to minority interest      (28)  (10)  (15)
              
Net cash used in financing activities
      (444)  (348)  (321)      (149)  (444)  (348)
Effects of exchange rate changes on cash and cash equivalents      3   (44)  13       (103)  3   (44)
              
Net decrease in cash and cash equivalents
      (39)  (313)  300 
Net increase/(decrease) in cash and cash equivalents
      97   (39)  (313)
              
Cash and cash equivalents at beginning of year      531   844   544       492   531   844 
              
Cash and cash equivalents at end of year
  21   492   531   844   17   589   492   531 
              


F-7F-6

Notes to the Consolidated Financial Statements
 
General information
 
Pearson plc (the Company)company) and its subsidiaries (together the Group) are involved in the provision ofinternational media businesses covering education, business information for the educational sector,and consumer publishing and business information.publishing.
 
The Companycompany is a limited liability company incorporated and domiciled in England. The address of its registered office is 80 Strand, London WC2R 0RL.
 
The Companycompany has its primary listing on the London Stock Exchange but is also listed on the New York Stock Exchange.
 
These consolidated financial statements were approved for issue by the board of directors on 136 March 2008.2009.
 
1.  Accounting policies
 
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below.
 
a.  Basis of preparation
 
These consolidated financial statements have been prepared in accordance with 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 20072008— The Group has adopted IFRS 7 ‘Financial Instruments: Disclosures’ from 1 January 2007. The impact of the standard has been to expand the disclosures provided in these financial statements regarding the Group’s financial instruments (see notes 15, 17, 20 and 22). The Group has also adopted Amendments to IAS 1 ‘Presentation of Financial Statements — Capital Disclosures’ which resulted in the presentation of its objectives, policies and processes for managing capital as set out in note 27.
 
In addition, IFRIC 10 ‘Interim Financial Reporting and Impairment’ is mandatory for the Group’s accounting periods beginning on or after 1 January 2007. Management assessed the relevance of this interpretation with respect to the Group’s operations and concluded that it is not relevant to the Group.
(2) Standards, interpretations and amendments to published standards that are not yet effective— The Group has decided to adoptadopted IFRIC 14 ‘IAS 19 — The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’ before its, effective date (1for annual reporting periods beginning on or after 1 January 2008).2008, in the prior accounting period. IFRIC 14 resulted in no change to the full recognition of the pension asset as disclosed in note 25.
 
The Group has adopted Reclassification Amendments to IAS 39 ‘Financial Instruments: Recognition and 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 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 — The Group has decided to early adopt IFRS 8 ‘Operating Segments’ which is effective for annual reporting periods


F-7

Notes to the Consolidated Financial Statements (Continued)
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 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 2009). The amendment clarifies that only service and performance conditions are vesting conditions, and that all cancellations whether Group or counterparty, should be accounted for the same way.
 • IFRS 8 ‘Operating Segments’ (effective for annual reporting periods beginning on or afterIAS 1 January 2009). IFRS 8 requires an entity to adopt the ‘management approach’ to reporting on the financial performance(Revised) ‘Presentation of its operating segments, revise explanations of the basis on which the segment information is prepared and provide reconciliations to the amounts recognised in the income statement and balance sheet;
• Amendment to IAS 23 ‘Borrowing Costs’Financial Statements’ (effective for annual reporting periods beginning on or after 1 January 2009). The amendmentamendments provide a number of presentational changes to IAS 23 requires capitalisationthe financial statements including prohibiting the presentation of borrowing costs that relateitems of income and expense in the statement of changes in equity and requiring them to assets


F-8

Notes to the Consolidated Financial Statements (Continued)
be shown in a performance statement, the option to present the performance statement as a single statement of comprehensive income and the requirement to include a balance sheet as at the beginning of the earliest comparative period when an entity applies a retrospective change in accounting policy or makes a retrospective restatement.
 that take a substantial period of time to get ready for use or sale, with the exception of assets measured at fair value or inventories manufactured or produced in large quantities on a repetitive basis;
 • IFRIC 11 ‘GroupIFRS 3 (Revised) ‘Business Combinations’ and Treasury Share Transactions’amendments to IAS 27 ‘Consolidated and Separate Financial Statements’, (effective for annual reporting periods beginning on or after 1 March 2007)July 2009). The amendments affect the accounting for business combinations including the requirement to remeasure the fair value of previously held interests in step acquisitions with any gain or loss arising being recognised in the income statement, the requirement to expense acquisition costs and to recognise adjustments to contingent consideration in the income statement.
• 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 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 11 addresses how to apply IFRS 2 Share-based Payment to share-based payment arrangements involving an entity’s own equity16 provides guidance on net investment hedging including which foreign currency risks within the Group qualify for hedging, and where the hedging instruments or equity instruments of another entity incan be held within the same group.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:
 
• Amendments to IAS 23 ‘Borrowing Costs’ (effective for annual reporting periods beginning on or after 1 January 2009). The amendment requires capitalisation of borrowing costs that relate to qualifying assets (ones that take a substantial amount of time to get ready for use or sale, with the exception of assets measured at fair value or inventories manufactured in large quantities or on a repetitive basis). Management assessed the relevance of this amendment with respect to Group operations and concluded that it is not currently applicable to 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 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 13 ‘Customer Loyalty Programmes’ (effective for annual reporting periods beginning on or after 1 July 2008). IFRIC 13 explains how entities that grant loyalty award credits to customers should account for their obligations to provide free or discounted goods or services to customers who redeem award credits. As none of theno Group entities operate a customer loyalty programme IFRIC 13 is not relevant to the Group’s operations;Group.
 
 • IFRIC 12 ‘Service Concession Arrangements’15 ‘Agreements for the Construction of Real Estate’ (effective for annual reporting periods beginning on or after 1 January 2008)2009). IFRIC 1215 addresses the accounting by private-sector entities that by contractundertake the construction of real estate, with a government, participate in developing, financing, operating, and maintaining infrastructure assets relating to public services traditionally provided by governments.guidance on determining whether an agreement for the construction of real estate falls within the scope of IAS 11 ‘Construction Contracts’ or IAS 18 ‘Revenue’. As none of theno Group entities participate in these activities,undertake the construction of real estate IFRIC 1215 is not relevant to the Group.
• IFRIC 17 ‘Distributions of Non-cash Assets to Owners’ (effective for annual reporting periods beginning on or after 1 July 2009). IFRIC 17 provides guidance on the appropriate accounting treatment when an entity distributes assets other than cash as dividends, including recognition upon authorisation and measurement at fair value of assets distributed, with any difference between fair value and carrying value of these assets being recognised in the 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 Group financial statements as the Group does not 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 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: Pension obligations
•   Revenue 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.


F-9

Notes to the Consolidated Financial Statements (Continued)
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 is recorded as goodwill. See note 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 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’scompany’s functional and presentation currency.
 
(2) Transactions and balances— Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of 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.
 
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 in respect of foreign operations have been deemed to be zero.
 
Any gains and losses on disposals of foreign operations will exclude translation differences 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 $2.00 (2006: $1.84; 2005: $1.81)$1.85 (2007: $2.00; 2006: $1.84) and the year end rate was $1.99 (2006: $1.96; 2005: $1.72)$1.44 (2007: $1.99; 2006: $1.96).
 
d.  Property, plant and equipment
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: 3-203-10 years
 
The 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
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 and joint ventures.
 
Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. An impairment loss is recognised to the extent that the carrying value of goodwill exceeds the recoverable amount. The recoverable amountsamount is the higher of cash-generating units have been determined based onfair value less costs to sell and value in use calculations.use. These calculations require the use of estimates (seeand significant management judgement. A description of the key assumptions and sensitivities is included in note 12).11. Goodwill is allocated to cash-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 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 basis over its estimated useful life of between three and fiveeight years.
 
(3) Internally developed software— Internal and external costs incurred during the preliminary stage of developing computer software for internal use are expensed as incurred. Internal and external costs incurred to develop computer software for internal use during the application development stage are capitalised if the Group expects economic benefits from the development. Capitalisation in the application development stage begins once the Group can reliably measure the expenditure attributable to the software development and has demonstrated its


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 fiveeight years.


F-11

Notes to the Consolidated Financial Statements (Continued)
 
(4) Acquired intangible assets— Acquired intangible assets comprise publishing rights,include customer lists and relationships, technology, trade namestrademarks and trademarks.brands, publishing rights, content and technology. These assets are capitalised on acquisition at cost and included in intangible assets. Intangible assets acquired in material business combinations are capitalised at their fair value as determined by an independent valuer. Intangible assets are amortised over their estimated useful lives of between two and 20 years, using a depreciation method that reflects the pattern of their consumption.
 
(5) Pre-publication assets— Pre-publication 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 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 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 cash generated from operations in the cash flow statement (see note 33).
 
The assessment of the recoverability of pre-publication 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 18.20.
 
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 throughto 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 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
h.  Royalty advances
 
Advances of royalties to authors are included within trade and other receivables when the advance is paid less any provision required to adjust the advance to its net realisable value. The realisable value of royalty advances relies on a degree of management judgement in determining the profitability of individual author contracts. If the estimated realisable value of author contracts is overstated then this will have an adverse effect on operating profits as these excess amounts will be written off.
 
The recoverability of royalty advances is based upon an annual detailed management review of the age of the advance, the future sales projections for new authors and prior sales history of repeat authors. The royalty advance is expensed at the contracted or effective royalty rate as the related revenues are earned. Royalty advances which will be consumed within one year are held in current assets. Royalty advances which will be consumed after one year are held in non-current assets.
 
i.  Newspaper development costs
i.  Newspaper development costs
 
Investment in the development of newspaper titles consists of measures to increase the volume and geographical spread of circulation. The measures include additional and enhanced editorial content, extended


F-12

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


F-12

 
Notes to the Consolidated Financial Statements (Continued)j.  Cash and cash equivalents
j.  Cash and cash equivalents
 
Cash and cash equivalents in the cash flow statement include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are included in borrowings in current liabilities in the balance sheet.
 
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
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’scompany’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’scompany’s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable transaction costs and the related income tax effects, is included in equity attributable to the Company’scompany’s equity holders.
 
l.  Borrowings
l.  Borrowings
 
Borrowings are recognised initially at fair value, which is proceeds received net of transaction costs incurred. Borrowings are subsequently stated at amortised cost with any difference between the proceeds (net of transaction costs) and the redemption value being recognised in the income statement over the period of the borrowings using the effective interest method. Accrued interest is included as part of borrowings. Where a debt instrument is in a fair value hedging relationship, an adjustment is made to its carrying value to reflect the hedged risk. Interest on borrowings is expensed as incurred.
 
m.  Derivative financial instruments
m.  Derivative financial instruments
 
Derivatives are recognised at fair value and remeasured at each balance sheet date. The fair value of derivatives 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 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.


F-13

Notes to the Consolidated Financial Statements (Continued)
 
n.  Taxation
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.
 
o.  Employee benefits
o.  Employee benefits
 
(1) Pension obligations— The retirement benefit asset/asset and obligation recognised in the balance sheet represents the net of the present value of the defined benefit obligation lessand the fair value of plan 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.
 
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 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 expected costs of post-retirement healthcare and life assurance benefits are accrued over the period of employment, using a similar accounting methodology as for defined benefit


F-14

Notes to the Consolidated Financial Statements (Continued)
pension obligations. The liabilities and costs relating to material other post-retirement obligations are assessed annually by independent qualified actuaries.
 
(3) Share-based payments —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 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
p.  Provisions
 
Provisions are recognised 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 in the period in whichwhen the payment of the deferred consideration is probable.
 
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 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
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 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, such as the provision of supplementary materials with textbooks, revenue is recognised for each 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 partythird-party costs incurred on behalf of the principal that are rechargeable under the contractual arrangement are not included in revenue.


F-15

Notes to the Consolidated Financial Statements (Continued)
 
Income from recharges of freight and other activities which are incidental to the normal revenue generating activities is included in other income.
 
r.  Leases
r.  Leases
 
Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the commencement of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in financial liabilities — borrowings. The interest element of the finance cost is charged to the income statement over the lease period to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases 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.
 
s.  Dividends
s.  Dividends
 
Dividends are recorded in the Group’s financial statements in the period in which they are approved by the Company’scompany’s shareholders. Interim dividends are recorded in the period in which they are approved and paid.
 
t.  Non-current assets held for sale and discontinued operations
t.  Non-current assets and liabilities held for sale
 
Non-current assetsAssets 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 where appropriate.
 
u.  Trade receivables
u.  Trade receivables
 
Trade receivables are stated at fair value lessafter provision for bad and doubtful debts and anticipated future sales returns (see also note 1q).
 
2.  Segment information
2.  Segment information
 
Due toFollowing the differing risksadoption of IFRS 8 ‘Operating Segments’ and rewards associated with eachchanges in the organisational structure of the Education business, segment and the different customer focus of each segment, the Group’s primary segmentGroup has revised its reporting format is by business.segments. The Group is now organised into the following five businesssix segments:
 
SchoolNorth American Education — publisher of textbooksEducational publishing and web-based learning tools, provider of testing for the school and software services for primaryhigher education market within the USA and secondary schools;Canada;
 
HigherInternational Education— publisherEducational publishing and testing for the school and higher education market outside of textbooksNorth America;
Professional — Business and related course materialstechnology publishing and testing and certification for collegesprofessional bodies;
FT Publishing — Publisher of theFinancial Times, business magazines and universities;specialist information;


F-16

Notes to the Consolidated Financial Statements (Continued)
Interactive Data — Provider of financial and business information to financial institutions and retail investors;
 
Penguin— publisherPublisher with brand imprints such as Penguin, Putnam, Berkley, Viking, Dorling Kindersley;Kindersley.
 
FT Publishing— publisher of theFinancial Times,other business newspapers, magazines and specialist information;
Interactive Data— 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


F-16

Notes to the Consolidated Financial Statements (Continued)
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 Item 4 of thisForm20-F.
 
Primary reporting format — business segments
                                                                        
   2007    2008 
     Higher
   FT
 Interactive
          North
               
 Notes School Education Professional Publishing Data Penguin Corporate Group    American
 International
   FT
 Interactive
       
   All figures in £ millions  Notes Education Education Professional Publishing Data Penguin Corporate Group 
   All figures in £ millions 
Continuing operations
                                                                      
Sales (external)      1,537   793   298   344   344   846   —   4,162     2,002   866   244   390   406   903   —   4,811 
Sales (inter-segment)      1   —   —   —   —   19   —   20     —   —   4   —   —   22   —   26 
                                    
Operating profit before joint ventures and associates      169   159   26   34   90   73   —   551 
Share of results of joint ventures and associates      6   —   1   16   —   —   —   23 
Adjusted operating profit    303   135   36   74   121   93   —   762 
Amortisation of acquired intangibles    (45)  (22)  (1)  (7)  (9)  (2)  —   (86)
                                    
Operating profit
      175   159   27   50   90   73   —   574     258   113   35   67   112   91   —   676 
        
Finance costs  7                               (150) 6                              (136)
Finance income  7                               44  6                              45 
        
Profit before tax
                                  468                                 585 
        
Income tax  8                               (131) 7                              (172)
        
Profit for the year from continuing operations
                                  337                                 413 
                                    
Reconciliation to adjusted operating profit
                                    
Operating profit      175   159   27   50   90   73   —   574 
Amortisation of acquired intangibles      28   2   1   6   7   1   —   45 
                 
Adjusted operating profit — continuing operations      203   161   28   56   97   74   —   619 
                 
Segment assets      2,780   1,742   318   397   330   937   651   7,155     4,952   1,358   423   482   524   1,211   923   9,873 
Joint ventures  13   5   —   —   4   —   2   —   11  12  —   8   —   2   —   3   —   13 
Associates  13   3   1   —   5   —   —   —   9  12  —   4   —   6   —   —   —   10 
                                    
Assets — continuing operations      2,788   1,743   318   406   330   939   651   7,175     4,952   1,370   423   490   524   1,214   923   9,896 
Assets — discontinued operations      —   —   117   —   —   —   —   117     —   —   —   —   —   —   —   — 
                                    
Total assets
      2,788   1,743   435   406   330   939   651   7,292     4,952   1,370   423   490   524   1,214   923   9,896 
                                    
Total liabilities
      (798)  (266)  (130)  (251)  (129)  (220)  (1,624)  (3,418)
                 
Other segment items
                                                                      
Share of results of joint ventures and associates 12  —   5   —   19   —   1   —   25 
Capital expenditure  11, 12, 18   147   98   20   28   19   44   —   356  10, 11, 20  224   82   22   17   25   51   —   421 
Depreciation  11   22   11   9   9   10   7   —   68  10  25   12   8   13   13   9   —   80 
Amortisation  12, 18   124   80   11   9   8   30   —   262  11, 20  219   69   12   12   12   36   —   360 
                                    
 


F-17

Notes to the Consolidated Financial Statements (Continued)
 
                                    
                                       2007 
   2006    North
               
     Higher
   FT
 Interactive
          American
 International
   FT
 Interactive
       
 Notes School Education Professional Publishing Data Penguin Corporate Group  Notes Education Education Professional Publishing Data Penguin Corporate Group 
   All figures in £ millions    All figures in £ millions 
Continuing operations
                                                                        
Sales (external)      1,455   795   280   280   332   848   —   3,990       1,667   735   226   344   344   846   —   4,162 
Sales (inter-segment)      1   —   —   —   —   18   —   19       1   —   —   —   —   19   —   20 
                                  
Operating profit before joint ventures and associates      161   161   23   13   82   58   —   498 
Share of results of joint ventures and associates      6   —   1   17   —   —   —   24 
Adjusted operating profit      273   92   27   56   97   74   —   619 
Amortisation of acquired intangibles      (20)  (10)  (1)  (6)  (7)  (1)  —   (45)
                                  
Operating profit
      167   161   24   30   82   58   —   522       253   82   26   50   90   73   —   574 
      
Finance costs  7                               (133)  6                               (150)
Finance income  7                               59   6                               44 
      
Profit before tax
                                  448                                   468 
      
Income tax  8                               (4)  7                               (131)
      
Profit for the year from continuing operations
                                  444                                   337 
                                  
Reconciliation to adjusted operating profit
                                    
Operating profit      167   161   24   30   82   58   —   522 
Adjustment to goodwill on recognition of pre-acquisition deferred tax      —   —   —   —   —   7   —   7 
Amortisation of acquired intangibles      17   —   1   2   7   1   —   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   25   27   89   66   —   552 
                 
Segment assets      2,684   1,347   580   317   314   954   703   6,899       3,536   1,013   291   397   330   937   651   7,155 
Joint ventures  13   5   —   —   4   —   3   —   12   12   —   5   —   4   —   2   —   11 
Associates  13   4   —   —   4   —   —   —   8   12   1   3   —   5   —   —   —   9 
                                  
Assets — continuing operations      2,693   1,347   580   325   314   957   703   6,919       3,537   1,021   291   406   330   939   651   7,175 
Assets — discontinued operations      —   —   294   —   —   —   —   294       —   —   117   —   —   —   —   117 
                                  
Total assets
      2,693   1,347   874   325   314   957   703   7,213       3,537   1,021   408   406   330   939   651   7,292 
                                  
Total liabilities
      (662)  (268)  (177)  (300)  (131)  (269)  (1,762)  (3,569)
                 
Other segment items
                                                                        
Share of results of joint ventures and associates  12   —   6   1   16   —   —   —   23 
Capital expenditure  11, 12, 18   124   88   30   19   20   38   —   319   10, 11, 20   136   109   20   28   19   44   —   356 
Depreciation  11   21   8   19   9   13   7   —   77   10   26   7   9   9   10   7   —   68 
Amortisation  12, 18   117   78   21   4   7   34   —   261   11, 20   159   45   11   9   8   30   —   262 
                                  
 

F-18

Notes to the Consolidated Financial Statements (Continued)
 
                                   
                                      2006 
   2005    North
               
     Higher
   FT
 Interactive
          American
 International
   FT
 Interactive
       
 Notes School Education Professional Publishing Data Penguin Corporate Group  Notes Education Education Professional Publishing Data Penguin Corporate Group 
   All figures in £ millions    All figures in £ millions 
Continuing operations
                                                                        
Sales (external)      1,295   779   238   249   297   804   —   3,662       1,679   640   211   280   332   848   —   3,990 
Sales (inter-segment)      —   —   —   —   —   16   —   16       —   —   1   —   —   18   —   19 
                                  
Operating profit before joint ventures and associates      138   156   9   45   75   60   —   483 
Share of results of joint ventures and associates      4   —   1   9   —   —   —   14 
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
      142   156   10   54   75   60   —   497       266   70   16   30   82   58   —   522 
      
Finance costs  7                               (132)  6                               (133)
Finance income  7                               62   6                               59 
      
Profit before tax
                                  427                                   448 
      
Income tax  8                               (108)  7                               (4)
      
Profit for the year from continuing operations
                                  319                                   444 
                                  
Reconciliation to adjusted operating profit
                                    
Operating profit      142   156   10   54   75   60   —   497 
Amortisation of acquired intangibles      5   —   —   1   5   —   —   11 
Other net gains and losses  5   —   —   —   (40)  —   —   —   (40)
Other net finance costs of associates      —   —   —   2   —   —   —   2 
                 
Adjusted operating profit — continuing operations      147   156   10   17   80   60   —   470 
                 
Segment assets      2,347   1,648   1,179   154   291   960   985   7,564       3,401   795   415   317   314   954   703   6,899 
Joint ventures      6   —   —   4   —   2   —   12       —   5   —   4   —   3   —   12 
Associates      6   —   —   18   —   —   —   24       —   4   —   4   —   —   —   8 
                                  
Assets — continuing operations      3,401   804   415   325   314   957   703   6,919 
Assets — discontinued operations      —   —   294   —   —   —   —   294 
                 
Total assets
      2,359   1,648   1,179   176   291   962   985   7,600       3,401   804   709   325   314   957   703   7,213 
                                  
Total liabilities
      (557)  (341)  (263)  (336)  (109)  (280)  (1,981)  (3,867)
                 
Other segment items
                                                                        
Share of results of joint ventures and associates      —   6   1   17   —   —   —   24 
Capital expenditure      114   96   43   14   19   34   —   320       141   71   30   19   20   38   —   319 
Depreciation      26   8   17   11   11   7   —   80       15   14   19   9   13   7   —   77 
Amortisation      91   78   20   3   5   24   —   221       136   59   21   4   7   34   —   261 
                                  
 
In 2007,2008, sales from the provision of goods were £3,086m (2006: £3,031m; 2005: £2,873m)£3,411m (2007: £3,053m; 2006: £2,996m) and sales from the provision of services were £1,076m (2006: £959m; 2005: £789m)£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, 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 lengtharm’s-length basis. Segment assets consist 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 retirement benefit obligations and exclude borrowings and derivative liabilities. Corporate assets and liabilities comprise cash and cash equivalents, marketable securities

F-19

Notes to the Consolidated Financial Statements (Continued)
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 18)20).
 
Property, plant and equipment and intangible assets acquired through business combination were £226m (2006: £173m)£253m (2007: £226m) (see note 30). Capital expenditure, depreciation and amortisation include amounts relating to discontinued operations. Discontinued operations relate to Recoletos, Government Solutions, Datamark, Les Echos, and the Data Management business in 2008 and to the Data Management business, Government Solutions, Datamark and Les Echos in 2007 (see note 3).

F-19

Notes to the Consolidated Financial Statements (Continued)
 
The Group’s business segments are managed on a worldwide basis and operateGroup operates in the following main geographic areas:
 
                                                         
 Sales Total assets Capital expenditure  Sales Non-current assets 
 2007 2006 2005 2007 2006 2005 2007 2006 2005  2008 2007 2006 2008 2007 2006 
 All figures in £ millions  All figures in £ millions 
Continuing operations
                                                            
European countries  1,102   1,003   868   1,827   1,608   1,711   90   70   63 
North America  2,591   2,585   2,388   4,867   4,908   5,476   248   231   242 
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  351   295   300   365   327   325   14   12   13   415   351   295   179   114   97 
Other countries  118   107   106   96   56   52   2   2   2   151   118   107   14   11   11 
                                
Total
  4,162   3,990   3,662   7,155   6,899   7,564   354   315   320 
Total continuing
  4,811   4,162   3,990   5,951   4,318   4,073 
                                
Discontinued operations
                                                            
European countries  83   103   122   —   9   —   1   1   — 
North America  78   314   329   117   281   —   1   2   — 
UK  —   1   17   —   —   — 
Other European countries  —   82   86   —   —   — 
USA  8   78   314   —   117   294 
Canada  —   —   —   —   —   — 
Other countries  6   16   10   —   4   —   —   1   —   —   6   16   —   —   — 
                                
Total
  167 �� 433   461   117   294   —   2   4   — 
Joint ventures and associates  —   —   —   20   20   36   —   —   — 
Total discontinued
  8   167   433   —   117   294 
                                
Total
  4,329   4,423   4,123   7,292   7,213   7,600   356   319   320   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. 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.
 
3.  Discontinued operations
 
Discontinued operations relate to the following disposals madeGroup’s interest in Government Solutions (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 year (see note 32):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 the Data Management business were reported as held for sale in the 31 December 2007 balance sheet.
• Government Solutions (sold 15 February 2007)
• Datamark (acquired with eCollege and subsequently sold on 31 July 2007)
• Les Echos (sold 24 December 2007)
 
The results of Government Solutions (previously included in the Professional segment) and Les Echos (previously included in the FT Publishing segment) have beenwere included in discontinued operations for both 2006 and 2007 and have beenwere consolidated up to the date of sale.
Datamark was sold immediately following its acquisition as part of the eCollege transaction and consequently none of the results for this business have beenwere consolidated.
On 22 February 2008 the Group completed the sale of its Data Management business (previously included in the Professional segment) and this business has been included in discontinued operations for the full year in both 2006 and 2007. In anticipation of the loss on sale, an impairment to held for sale goodwill has been charged to the income statement in 2007.


F-20

Notes to the Consolidated Financial Statements (Continued)
The assets and liabilities of the Data Management business have been reported as held for sale in the 31 December 2007 balance sheet. At 31 December 2006 held for sale assets and liabilities relate to Government Solutions (see note 31).
Discontinued operations in 2005 also relate ot the sale of Pearson’s 79% interest in Recoletos Grupo de Communicacíon S. A..
 
An analysis of the results and cash flows of discontinued operations are as follows:
 
                     
  2007 
  Government
  Data
          
  Solutions  Management  Les Echos  Datamark  Total 
  All figures in £ millions 
 
Sales  29   56   82   —   167 
                     
Operating profit  2   12   1   —   15 
Goodwill impairment  —   (97)  —   —   (97)
                     
(Loss)/profit before tax
  2   (85)  1   —   (82)
                     
Attributable tax expense  (1)  (4)  —   —   (5)
                     
(Loss)/profit after tax
  1   (89)  1   —   (87)
Profit/(loss) on disposal of discontinued operations before tax  (19)  —   165   —   146 
Attributable tax (expense)/benefit  (93)  —   —   7   (86)
                     
(Loss)/profit for the year from discontinued operations
  (111)  (89)  166   7   (27)
                     
Operating cash flows  (8)  11   4   —   7 
Investing cash flows  —   (1)  4   —   3 
Financing cash flows  (4)  (10)  (7)  —   (21)
                     
Total cash flows
  (12)  —   1   —   (11)
                     
2008
Data
Management
All figures
in £ millions
Sales8
Operating profit—
Profit before tax
—
Attributable tax expense—
Profit after tax
—
Loss on disposal of discontinued operations before tax(53)
Attributable tax expense(37)
Loss for the year from discontinued operations
(90)
Operating cash flows—
Investing cash flows—
Financing cash flows—
Total cash flows
—
                     
  2007 
  Data
        Government
    
  Management  Les Echos  Datamark  Solutions  Total 
  All figures in £ millions 
 
Sales  56   82   —   29   167 
                     
Operating profit  12   1   —   2   15 
                     
Goodwill impairment  (97)  —   —   —   (97)
                     
(Loss)/profit before tax
  (85)  1   —   2   (82)
                     
Attributable tax expense  (4)  —   —   (1)  (5)
                     
(Loss)/profit after tax
  (89)  1   —   1   (87)
Profit/(loss) on disposal of discontinued operations before tax  —   165   —   (19)  146 
Attributable tax (expense)/benefit  —   —   7   (93)  (86)
                     
(Loss)/profit for the year from discontinued operations
  (89)  166   7   (111)  (27)
                     
Operating cash flows  11   4   —   (8)  7 
Investing cash flows  (1)  4   —   —   3 
Financing cash flows  (10)  (7)  —   (4)  (21)
                     
Total cash flows
  —   1   —   (12)  (11)
                     
 


F-21

Notes to the Consolidated Financial Statements (Continued)
 
                              
 2006  2006 
 Government
 Data
      Government
 Data
     
 Solutions Management Les Echos Total  Solutions Management Les Echos Total 
 All figures in £ millions  All figures in £ millions 
Sales  286   61   86   433   286   61   86   433 
                  
Operating profit  22   13   5   40   22   13   5   40 
                  
Profit before tax
  22   13   5   40   22   13   5   40 
                  
Attributable tax expense  (8)  (5)  (2)  (15)  (8)  (5)  (2)  (15)
                  
Profit after tax
  14   8   3   25   14   8   3   25 
Profit/(loss) on disposal of discontinued operations before tax  —   —   —   — 
Attributable tax expense  —   —   —   — 
Profit on disposal of discontinued operations before tax  —   —   —   — 
Attributable tax (expense)/benefit  —   —   —   — 
                  
Profit for the year from discontinued operations
  14   8   3   25   14   8   3   25 
                  
Operating cash flows  20   9   4   33   20   9   4   33 
Investing cash flows  (8)  (2)  —   (10)  (8)  (2)  —   (10)
Financing cash flows  (1)  (7)  (7)  (15)  (1)  (7)  (7)  (15)
                  
Total cash flows
  11   —   (3)  8   11   —   (3)  8 
                  
                     
  2005 
  Government
  Data
          
  Solutions  Management  Les Echos  Recoletos  Total 
  All figures in £ millions 
 
Sales  288   63   83   27   461 
                     
Operating profit  20   15   4   (3)  36 
                     
Profit before tax
  20   15   4   (3)  36 
                     
Attributable tax expense  (8)  (6)  (2)  1   (15)
                     
Profit after tax
  12   9   2   (2)  21 
Profit/(loss) on disposal of discontinued operations before tax  —   —   —   306   306 
Attributable tax expense  —   —   —   (2)  (2)
                     
Profit for the year from discontinued operations
  12   9   2   302   325 
                     
Operating cash flows  22   9   1   (6)  26 
Investing cash flows  (13)  (2)  1   —   (14)
Financing cash flows  (1)  (7)  (21)  —   (29)
                     
Total cash flows
  8   —   (19)  (6)  (17)
                     

F-22

Notes to the Consolidated Financial Statements (Continued)
 
4.  Operating expenses
 
                        
 2007 2006 2005  2008 2007 2006 
 All figures in £ millions  All figures in £ millions 
By function:
                        
Cost of goods sold  1,910   1,841   1,713   2,174   1,910   1,841 
              
Operating expenses
                        
Distribution costs  264   288   281   198   202   232 
Administrative and other expenses  1,538   1,462   1,309   1,890   1,600   1,518 
Other income  (101)  (99)  (84)  (102)  (101)  (99)
              
Total operating expenses
  1,701   1,651   1,506   1,986   1,701   1,651 
              
Total
  3,611   3,492   3,219   4,160   3,611   3,492 
              
 
                 
  Notes  2007  2006  2005 
     All figures in £ millions 
 
By nature:
                
Utilisation of inventory  19   732   702   754 
Depreciation of property, plant and equipment  11   65   68   73 
Amortisation of intangible assets — Pre-publication  18   192   210   192 
Amortisation of intangible assets — Other  12   70   48   26 
Employee benefit expense  6   1,288   1,225   1,128 
Operating lease rentals      129   122   108 
Other property costs      122   121   84 
Royalties expensed      365   360   362 
Advertising, promotion and marketing      195   190   186 
Information technology costs      70   71   81 
Other costs      484   474   309 
Other income      (101)  (99)  (84)
                 
Total
      3,611   3,492   3,219 
                 

F-22

Notes to the Consolidated Financial Statements (Continued)
                 
  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:
 
                  
 2007 2006 2005  2008 2007 2006 
 All figures in £ millions  All figures in £ millions 
Fees payable to the Company’s auditor for the audit of parent company and consolidated accounts  1   1   1 
The audit of the Company’s subsidiaries pursuant to legislation  2   4   3 
Other services pursuant to legislation  1   4   — 
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   1   1   2   2   1 
Other services  1   1   2   1   1   1 
              
Total
   7   11   7   8   7   11 
              


F-23

Notes to the Consolidated Financial Statements (Continued)
 
Reconciliation between audit and non-audit service fees is shown below:
 
                  
 2007 2006 2005  2008 2007 2006 
 All figures in £ millions  All figures in £ millions 
Group audit fees including fees for attestation under section 404 of the Sarbanes-Oxley Act  4   9   4   5   4   9 
Non-audit fees  3   2   3   3   3   2 
              
Total audit fees
  7   11   7 
Total
  8   7   11 
              
 
Other services pursuant to legislation represent 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 feesFees for attestation under section 404 of the Sarbanes-Oxley Act.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 services.matters.
 
Other services include due diligence on acquisitions and services related to the disposal of the Data Management business, due diligence on acquisitions and advisory services in relationbusiness.

F-23

Notes to information technology and section 404.the Consolidated Financial Statements (Continued)
 
5.  Other net gains and losses
             
  2007  2006  2005 
  All figures in £ millions 
 
Profit on sale of interest in MarketWatch  —   —   40 
             
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.
6.  Employee information
 
                                
 Notes 2007 2006 2005  Notes 2008 2007 2006 
   All figures in £ millions    All figures in £ millions 
Employee benefit expense
                                
Wages and salaries (including termination benefits and restructuring costs)      1,087   1,035   954       1,317   1,087   1,035 
Social security costs      100   101   91       119   100   101 
Share-based payment costs  26   30   25   23   26   33   30   25 
Pension costs — defined contribution plans  25   39   36   34   25   41   39   36 
Pension costs — defined benefit plans  25   31   29   25   25   37   31   29 
Other post-retirement benefits  25   1   (1)  1   25   6   1   (1)
              
      1,288   1,225   1,128       1,553   1,288   1,225 
              


F-24

Notes to the Consolidated Financial Statements (Continued)
 
The details of the emoluments of the directors of Pearson plc are shown in Item 6 of this Form20-F.the report on directors’ remuneration.
 
            
             2008 2007 2006 
 2007 2006 2005  Average number employed 
 Average number employed 
Employee numbers
                        
School  12,906   11,064   10,133 
Higher Education  5,098   4,368   4,196 
North American Education  15,412   14,327   12,710 
International Education  5,718   5,291   4,472 
Professional  3,458   3,204   3,259   2,641   2,540   2,223 
Penguin  4,163   3,943   4,051 
FT Publishing  2,083   1,766   1,434   2,379   2,083   1,766 
Interactive Data  2,300   2,200   1,956   2,413   2,300   2,200 
Penguin  4,112   4,163   3,943 
Other  1,614   1,669   1,573   909   918   900 
              
Continuing operations
  31,622   28,214   26,602   33,584   31,622   28,214 
              
Discontinued operations
  1,070   6,127   5,601   96   1,070   6,127 
              
  32,692   34,341   32,203   33,680   32,692   34,341 
              


F-24

Notes to the Consolidated Financial Statements (Continued)
 
7.6.  Net finance costs
 
                          
 Notes 2007 2006 2005  Notes 2008 2007 2006 
   All figures in £ millions    All figures in £ millions 
Interest payable      (114)  (117)  (98)      (106)  (114)  (117)
Net foreign exchange losses      (25)  (2)  (9)      (11)  (25)  (2)
Finance cost in respect of employee benefits  25   —   —   (7)
Other losses on financial instruments in a hedging relationship:                                
— fair value hedges      (1)  —   (1)      (7)  (1)  — 
— net investment hedges      (1)  (2)  —       —   (1)  (2)
Other losses on financial instruments not in a hedging relationship:                                
— derivatives      (9)  (12)  (17)      (12)  (9)  (12)
              
Finance costs
      (150)  (133)  (132)      (136)  (150)  (133)
              
Interest receivable      19   23   21       17   19   23 
Finance income in respect of employee benefits  25   10   4   —   25   8   10   4 
Net foreign exchange gains      8   21   21       —   8   21 
Other gains on financial instruments in a hedging relationship:                                
— fair value hedges      —   —   1       2   —   — 
— net investment hedges      —   —   3       1   —   — 
Other gains on financial instruments not in a hedging relationship:                                
— amortisation of transitional adjustment on bonds      1   8   7       1   1   8 
— derivatives      6   3   9       16   6   3 
              
Finance income
      44   59   62       45   44   59 
              
Net finance costs
      (106)  (74)  (70)      (91)  (106)  (74)
              
Analysed as:
                
Net interest payable      (95)  (94)  (77)
Finance income/(costs) in respect of employee benefits  25   10   4   (7)
       
Net finance costs reflected in adjusted earnings      (85)  (90)  (84)
Other net finance (costs)/income      (21)  16   14 
       
Total net finance costs
      (106)  (74)  (70)
       


F-25

Notes to the Consolidated Financial Statements (Continued)
 
The £1m£5m (2007: £1m) net loss on fair value hedges comprises a £20m£156m (2007: £20m) loss on the underlying bonds offset by a £19m£151m (2007: £19m) gain on the related derivative financial instruments.
 
8.7.  Income tax
 
             
              Notes 2008 2007 2006 
 Notes 2007 2006 2005    All figures in £ millions 
   All figures in £ millions 
Current tax
                                
Charge in respect of current year      (71)  (81)  (60)      (89)  (71)  (81)
Recognition of previously unrecognised trading losses      —   23   —       —   —   23 
Other adjustments in respect of prior years      27   35   (1)      10   27   35 
              
Total current tax charge
      (44)  (23)  (61)      (79)  (44)  (23)
              
Deferred tax
                                
In respect of timing differences      (96)  (73)  (66)      (97)  (96)  (73)
Recognition of previously unrecognised capital losses      —   76   —       —   —   76 
Recognition of previously unrecognised trading losses      —   37   —       —   —   37 
Other adjustments in respect of prior years      9   (21)  19       4   9   (21)
              
Total deferred tax (charge)/benefit
  14   (87)  19   (47)
Total deferred tax charge
  13   (93)  (87)  19 
              
Total tax charge
      (131)  (4)  (108)      (172)  (131)  (4)
              


F-25

Notes to the 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:
 
                  
 2007 2006 2005  2008 2007 2006 
 All figures in £ millions  All figures in £ millions 
Profit before tax  468   448   427   585   468   448 
Tax calculated at UK rate  (141)  (135)  (128)
Tax calculated at UK rate (2008: 28.5%, 2007: 30%)  (167)  (141)  (135)
Effect of overseas tax rates  (25)  (17)  (18)  (29)  (25)  (17)
Joint venture and associate income reported net of tax  7   7   5   7   7   7 
Income not subject to tax  3   5   16 
Expenses not deductible for tax purposes  (12)  (18)  (9)
Net expense not deductible for tax purposes  (1)  (9)  (13)
Utilisation of previously unrecognised tax losses  3   7   11   4   3   7 
Recognition of previously unrecognised tax losses  —   136   —   —   —   136 
Unutilised tax losses  (2)  (3)  (3)  —   (2)  (3)
Prior year adjustments  36   14   18   14   36   14 
              
Total tax charge
  (131)  (4)  (108)  (172)  (131)  (4)
              
UK  (42)  (15)  (26)  (53)  (42)  (15)
Overseas  (89)  11   (82)  (119)  (89)  11 
              
Total tax charge
  (131)  (4)  (108)  (172)  (131)  (4)
              
 
The tax benefit on items charged to equity is as follows:
 
                  
 2007 2006 2005  2008 2007 2006 
 All figures in £ millions  All figures in £ millions 
Share-based payments  7   2   3   (7)  7   2 
Pension contributions and actuarial gains and losses  28   9   —   10   28   9 
Net investment hedges and other foreign exchange gains and losses  (6)  1   9   (1)  (6)  1 
          ��    
  29   12   12   2   29   12 
              


F-26

Notes to the Consolidated Financial Statements (Continued)
 
9.8.  Earnings per share
 
Basic
 
Basic earnings per share is calculated by dividing the profit attributable to equity shareholders of the Companycompany by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the Companycompany and held as treasury shares.


F-26

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  2007  2006  2005 
     All figures in £ millions 
 
Profit for the year from continuing operations      337   444   319 
Minority interest      (26)  (23)  (20)
                 
Earnings from continuing operations
      311   421   299 
                 
(Loss)/profit for the year from discontinued operations  3   (27)  25   325 
                 
Earnings
      284   446   624 
                 
Weighted average number of shares (millions)      796.8   798.4   797.9 
Effect of dilutive share options (millions)      1.3   1.5   1.1 
Weighted average number of shares (millions) for diluted earnings      798.1   799.9   799.0 
                 
                
 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   2007 2006 2005                 
Basic      35.6p   55.9p   78.2p       36.6p   35.6p   55.9p 
Diluted      35.6p   55.8p   78.1p       36.6p   35.6p   55.8p 
              
Earnings per share from continuing operations
                
Earnings per share from continuing operations
                
Basic      39.0p   52.7p   37.5p       47.9p   39.0p   52.7p 
Diluted      39.0p   52.6p   37.4p       47.9p   39.0p   52.6p 
              
Earnings per share from discontinued operations
                
Earnings per share from discontinued operations
                
Basic      (3.4p)  3.2p   40.7p       (11.3p)  (3.4p)  3.2p 
              
 
10.9.  Dividends
 
             
  2007  2006  2005 
  All figures in £ millions 
 
Final paid in respect of prior year 18.8p (2006: 17p; 2005: 15.7p)  150   136   125 
Interim paid in respect of current year 11.1p (2006: 10.5p; 2005: 10p)  88   84   80 
             
   238   220   205 
             
             
  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 ended 31 December 20072008 of 20.5p22p per share which will absorb an estimated £164m£176m of shareholders’ funds. It will be paid on 98 May 20082009 to shareholders who are on the register of members on 1114 April 2008.2009. These financial statements do not reflect this dividend.


F-27

Notes to the Consolidated Financial Statements (Continued)
 
11.10.  Property, plant and equipment
 
                                
     Assets in
        Assets in
   
 Land and
 Plant and
 course of
    Land and
 Plant and
 course of
   
 buildings equipment construction Total  buildings equipment construction Total 
 All figures in £ millions  All figures in £ millions 
Cost
                                
At 1 January 2006  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 
         
At 1 January 2007  313   631   11   955 
Exchange differences  (2)  —   —   (2)  (2)  —   —   (2)
Additions  20   62   11   93   20   62   11   93 
Disposals  (24)  (65)  —   (89)  (24)  (65)  —   (89)
Acquisition through business combination  —   27   —   27   —   27   —   27 
Disposal through business disposal  (1)  (25)  —   (26)  (1)  (25)  —   (26)
Reclassifications  —   6   (6)  —   —   6   (6)  — 
Transfer to non-current assets held for sale  (8)  (14)  —   (22)  (8)  (14)  —   (22)
                  
At 31 December 2007
  298   622   16   936   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

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 2006  (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)
                 
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)
                 
Carrying amounts
                
At 1 January 2006  198   179   7   384 
At 31 December 2006  185   152   11   348 
At 31 December 2007
  172   167   16   355 
                 
 
Depreciation expense of £13m (2006: £18m)£12m (2007: £13m) has been included in the income statement in cost of goods sold, £5m (2006: £6m)£6m (2007: £5m) in distribution expenses and £50m (2006: £53m)£61m (2007: £50m) in administrative and other expenses. In 2007 £3m (2006: £9m) relatesThere 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 £6m (2006: £4m)£7m (2007: £6m).

F-29

Notes to the Consolidated Financial Statements (Continued)
 
12.11.  Intangible assets
 
                            
                             Acquired
         
     Acquired
 Other
 Total
        customer
 Acquired
 Acquired
 Other
   
     publishing
 intangibles
 intangibles
        lists &
 trademarks
 publishing
 intangibles
   
 Goodwill Software rights acquired acquired Total  Goodwill Software relationships & brands rights acquired Total 
 All figures in £ millions  All figures in £ millions 
Cost
                                                    
At 1 January 2006  3,654   197   68   83   151   4,002 
At 1 January 2007  3,271   201   113   26   96   53   3,760 
Exchange differences  (396)  (17)  (8)  (8)  (16)  (429)  (4)  (2)  —   1   3   —   (2)
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 
             
Exchange differences  (4)  (2)  3   1   4   (2)
Additions  —   33   —   —   —   33 
Additions — internal development  —   20   —   —   —   —   20 
Additions — purchased  —   13   —   —   —   —   13 
Disposals  (34)  (19)  (3)  —   (3)  (56)  (34)  (19)  (2)  —   (3)  2   (56)
Acquisition through business combination  304   4   40   155   195   503   304   4   76   35   40   44   503 
Transfer to non-current assets held for sale  (194)  —   —   —   —   (194)  (194)  —   —   —   —   —   (194)
                            
At 31 December 2007
  3,343   217   136   348   484   4,044   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-30F-29

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
 
                         
        Acquired
  Other
  Total
    
        publishing
  intangibles
  intangibles
    
  Goodwill  Software  rights  acquired  acquired  Total 
  All figures in £ millions 
 
Amortisation
                        
At 1 January 2006  —   (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)
                         
Exchange differences  —   1   —   1   1   2 
Charge for the year  —   (25)  (17)  (28)  (45)  (70)
Disposals  —   19   —   —   —   19 
Acquisition through business combination  —   (2)  —   —   —   (2)
Transfer to non-current assets held for sale  —   —   —   —   —   — 
                         
At 31 December 2007
  —   (142)  (32)  (56)  (88)  (230)
                         
Carrying amounts
                        
At 1 January 2006  3,654   68   63   69   132   3,854 
At 31 December 2006  3,271   66   81   163   244   3,581 
At 31 December 2007
  3,343   75   104   292   396   3,814 
                         
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 listscontent, technology and relationships, software rights, technology, trade names and trademarks.rights. Amortisation of £3m (2006: £4m)£5m (2007: £3m) is included in the income statement in cost of goods sold and £67m (2006: £47m)£111m (2007: £67m) in administrative and other expenses. In 2007 £nil (2006: £3m) of software amortisation 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.

F-31

Notes to the Consolidated Financial Statements (Continued)
 
Goodwill is allocated to the Group’s14 cash-generating units identified according to(CGUs) within the business segment. Goodwill has been allocatedsegments as follows:
 
                        
 Notes 2007 2006  Notes 2008 2007 
   All figures in £ millions    All figures in £ millions 
Higher Education      1,031   780 
School Curriculum (2006: School Book)      867   683 
School Assessment and Information (2006: School Assessment and Testing)      540   342 
School Technology      —   356 
Other Assessment and Testing      247   490 
Technology and Business Publishing (2006: Other Book)      55   56 
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
      2,740   2,707       3,821   2,740 
          
Financial Times      46   12 
Mergermarket      130   126 
Interactive Data      208   147 
FT Group total      384   285 
Penguin US      155   156       216   155 
Penguin UK      111   114       95   111 
Pearson Australia      52   44       54   52 
          
Penguin total
      318   314       365   318 
     
Financial Times      12   4 
Mergermarket      126   97 
Interactive Data      147   149 
     
FT Group total
      285   250 
          
Total goodwill — continuing operations
      3,343   3,271       4,570   3,343 
          
Goodwill held for sale  30   96   221   31   —   96 
          
Total goodwill
      3,439   3,492       4,570   3,439 
          
 
Goodwill has been allocated for impairment purposesDuring 2008, after the change in organisational structure the CGUs were reorganised and goodwill reallocated to 11 cash-generatingthe units (CGUs). During 2007, three CGUs, School Book, School Assessment and Testing and Other Book were renamed following the reorganisation of the School segment. The reorganisation resulted in the School Technology CGU being allocated between School Assessment and Information (formerly School Assessment and Testing) and School Curriculum (formerly School Book).affected. The recoverable amount of each CGU is based on value in use calculations. Goodwill is tested for impairment annually. 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 is not materially sensitive to exchange rate fluctuations.
 
Key assumptions
 
The value in use calculations use cash flow projections based on financial budgets approved by management covering a five yearfive-year period. The key assumptions used by management in the value in use calculations were:
 
Discount rate — The discount rate is based on the risk-free rate for government bonds, adjusted for a risk premium to reflect the increased risk in investing in equities. The risk premium adjustment is assessed for each specific cash-generating unit.CGU. The average pre-tax discount rates used are in the range of 10.5% to 12.0% for the Pearson Education businesses, 8.9%10.2% to 11.7% for the PenguinPearson


F-31

Notes to the Consolidated Financial Statements (Continued)
Education businesses and 10.4%(2007: 10.5% to 17.2%12.0%), 10.8% to 20.5% for the FT Group businesses.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. TheA perpetuity growth ratesrate of 2.0% was used vary betweenfor all CGUs in 2008 (a range from 2.5% andto 3.5% in 2007). The perpetuity growth rates are consistent with appropriate external sources for the relevant markets.


F-32

Notes to the Consolidated Financial Statements (Continued)
 
Cash flow growth rates — The cash flow growth rates are derived from management’s latest estimates of forecast sales growth taking into consideration past experience of operating margins achieved in the cash-generating unit.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, and the perpetuity rates.growth rates and expected future cash flows. Based on the Group’s sensitivity analysis, a reasonablereasonably possible change in a single factor will notthe discount rate or perpetuity growth rate could cause an impairment in any ofeither the Group’sUS School Curriculum or Penguin UK CGUs.
 
However,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 significant adverse changereduction of 0.6 percentage points in our key assumptions could resultthe perpetuity growth rate would cause the value in an impairment in our School Curriculumand/oruse to fall below the carrying value.
The fair value of Penguin UK CGUs as their fair value currently exceeds theiris 24% or approximately £44m above its carrying value, only by between 10% and 20%.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.
 
13.12.  Investments in joint ventures and associates
 
Joint ventures
 
      
 2007 2006       
 All figures in
  2008 2007 
 £ millions  All figures in £ millions 
At beginning of year  12   12   11   12 
Exchange differences  —   (3)  (4)  — 
Share of profit after tax  4   3   6   4 
Dividends  (8)  (4)  (5)  (8)
Additions and further investment  3   4   5   3 
          
At end of year
  11   12   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:
 
      
 2007 2006       
 All figures in
  2008 2007 
 £ millions  All figures in £ millions 
Assets
                
Non-current assets  3   3   6   3 
Current assets  23   24   21   23 
          
Liabilities
                
Current liabilities  (15)  (15)  (14)  (15)
          
Net assets
  11   12   13   11 
          
Income  61   52   36   61 
Expenses  (57)  (49)  (30)  (57)
          
Profit after income tax
  4   3   6   4 
          


F-33

Notes to the Consolidated Financial Statements (Continued)
 
Associates
 
      
 2007 2006       
 All figures in
  2008 2007 
 £ millions  All figures in £ millions 
At beginning of year  8   24   9   8 
Exchange differences  (1)  (1)  (5)  (1)
Share of profit after tax  19   21   19   19 
Dividends  (24)  (41)  (16)  (24)
Additions  1   —   —   1 
Distribution from associate in excess of carrying value  6   5   6   6 
Actuarial losses on retirement benefit obligations  (3)  — 
          
At end of year
  9   8   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, wereare as follows:
 
                                            
   %
            %
         
2007
 Country of incorporation Interest held Assets Liabilities Revenues Profit 
2008
 Country of incorporation Interest held Assets Liabilities Revenues Profit 
 All figures in £ millions  All figures in £ millions 
The Economist Newspaper Ltd  England   50   63   (63)  131   15   England   50   86   (86)  149   16 
Other          30   (21)  56   4           35   (25)  42   3 
                  
Total
          93   (84)  187   19           121   (111)  191   19 
                  
 
                                            
   %
            %
         
2006
 Country of incorporation Interest held Assets Liabilities Revenues Profit 
2007
 Country of incorporation Interest held Assets Liabilities Revenues Profit 
 All figures in £ millions  All figures in £ millions 
The Economist Newspaper Ltd  England   50   64   (64)  122   18   England   50   63   (63)  131   15 
Other          28   (20)  48   3           30   (21)  56   4 
                  
Total
          92   (84)  170   21           93   (84)  187   19 
                  
 
The interest held in associates is equivalent to voting rights.


F-33

Notes to the Consolidated Financial Statements (Continued)
 
14.13.  Deferred income tax
 
      
 2007 2006       
 All figures in
  2008 2007 
 £ millions  All figures in £ millions 
Deferred income tax assets
                
Deferred income tax assets to be recovered after more than 12 months  262   288   341   262 
Deferred income tax assets to be recovered within 12 months  66   129   31   66 
          
  328   417   372   328 
          
Deferred income tax liabilities
                
Deferred income tax liabilities to be settled after more than 12 months  (287)  (245)  (447)  (287)
Deferred income tax liabilities to be settled within 12 months  —   —   —   — 
          
  (287)  (245)  (447)  (287)
          
Net deferred income tax
  41   172   (75)  41 
          
 
Deferred income tax assets to be recovered within 12 months relate to the utilisation of losses in the US.


F-34

Notes to the Consolidated Financial Statements (Continued)
 
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 20072008 in respect of UK losses of £34m (2006: £35m)£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 2007 2006           
   All figures in
  Notes 2008 2007 
   £ millions    All figures in £ millions 
At beginning of year      172   181       41   172 
Exchange differences      (4)  (16)      (12)  (4)
Income statement (charge)/benefit  8   (87)  19 
Income statement charge  7   (93)  (87)
Acquisition through business combination  30   (45)  (26)  30   (4)  (45)
Disposal through business disposal  32   2   —   32   —   2 
Tax benefit to equity      3   14 
Tax (charge)/benefit to equity      (7)  3 
          
At end of year
      41   172       (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:
 
                                             
 Capital
 Trading
 Goodwill and
 Returns
      Capital
 Trading
 Goodwill and
 Returns
     
 losses losses intangibles provisions Other Total  losses losses intangibles provisions Other Total 
 All figures in £ millions  All figures in £ millions 
Deferred income tax asset
                        
At 1 January 2006  —   134   35   83   133   385 
Exchange differences  —   (17)  (4)  (10)  (11)  (42)
Income statement benefit/(charge)  76   12   (6)  (7)  (12)  63 
Tax benefit to equity  —   —   —   —   11   11 
At 31 December 2006  76   129   25   66   121   417 
Deferred income tax assets
                        
At 1 January 2007  76   129   25   66   121   417 
Exchange differences  —   (5)  —   (1)  (2)  (8)  —   (5)  —   (1)  (2)  (8)
Acquisition through business combination  —   10   —   —   1   11   —   10   —   —   1   11 
Income statement (charge)/benefit  (76)  (47)  (5)  14   19   (95)  (76)  (47)  (5)  14   19   (95)
Tax benefit to equity  —   —   —   —   3   3   —   —   —   —   3   3 
                          
At 31 December 2007
  —   87   20   79   142   328   —   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, retirement benefit obligations and other provisions.
 


F-35

Notes to the Consolidated Financial Statements (Continued)
                      
 Goodwill and
      Goodwill and
     
 intangibles Other Total  intangibles Other Total 
 All figures in £ millions  All figures in £ millions 
Deferred income tax liabilities
                        
At 1 January 2006  (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)
       
At 1 January 2007  (149)  (96)  (245)
Exchange differences  3   1   4   3   1   4 
Acquisition through business combination  (56)  —   (56)  (56)  —   (56)
Disposal through business disposal  —   2   2   —   2   2 
Income statement (charge)/benefit  (12)  20   8   (12)  20   8 
Tax benefit to equity  —   —   —   —   —   — 
              
At 31 December 2007
  (214)  (73)  (287)  (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)
14.  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
         
  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.
16.  Derivative financial instruments
The Group’s approach to the management of financial risks is set out in note 19. The Group’s outstanding derivative financial instruments are as follows:
                         
  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 2008, the currency split of themark-to-market values of rate derivatives, including the exchange of principal on cross currency rate derivatives, was US dollar £161m and sterling £3m (2007: US dollar £(119)m and sterling £154m).
The fixed interest rates on outstanding rate derivative contracts at the end of 2008 range from 4.45% to 7.0% (2007: 4.45% to 7.00%) and the floating rates are based on LIBOR in US dollar and sterling.


F-38

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.
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.
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.
17.  Cash and cash equivalents (excluding overdrafts)
         
  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 2008 the currency split of cash and cash equivalents was US dollars 36% (2007: 37%), sterling 22% (2007: 29%), euros 20% (2007: 16%) and other 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:
         
  2008  2007 
  All figures in £ millions 
 
Cash and cash equivalents  685   560 
Bank overdrafts  (96)  (68)
         
   589   492 
         


F-39

Notes to the Consolidated Financial Statements (Continued)
18.  Financial instrumentsliabilities — Borrowings
The Group’s current and non-current borrowings are as follows:
         
  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 (2007: £6m). Included in the current borrowings above is £1m of accrued interest (2007: £7m).
The maturity of the Group’s non-current borrowing is as follows:
         
  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

Notes to the Consolidated Financial Statements (Continued)
The carrying amounts and market values of borrowings are as follows:
                     
     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:
         
  2008  2007 
  All figures in £ millions 
 
US dollar  2,081   1,251 
Sterling  277   357 
Euro  5   — 
         
   2,363   1,608 
         
The Group has the following undrawn capacity on its committed borrowing facilities as at 31 December:
         
  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)
18.  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 Chiefchief financial officer under policies approved by the board, which are summarised below. All the treasury policies remained unchanged throughout 2007. 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 anycertain adjustments for IFRS)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 20072008 the hedging ratio, on the above basis, was approximately 58%49%. A simultaneous 1% change on 1 January in the Group’s variable interest rates in each of US dollar euro and sterling, taking into account forecast seasonal debt, would have a £6m£10m effect on profit before tax.

F-36

Notes to the Consolidated Financial Statements (Continued)
 
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.
Interest rate derivative sensitivity analysis
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.
             
  2007 
  Net carrying
       
  amount  +1% change  −1% change 
  £ millions 
 
Interest rate derivatives — in a fair value hedge relationship  10   (24)  26 
Interest rate derivatives — not in hedge relationship  (1)  1   (1)
Cross currency rate derivatives — in a net investment hedge relationship  17   —   — 
Cross currency rate derivatives — not in hedge relationship  9   —   — 
             
Total  35   (23)  25 
             
             
  2006 
  Net carrying
       
  amount  +1% change  −1% change 
  £ millions 
 
Interest rate derivatives — in a fair value hedge relationship  3   (28)  31 
Interest rate derivatives — not in hedge relationship  7   1   (1)
Cross currency rate derivatives — in a net investment hedge relationship  40   —   — 
Cross currency rate derivatives — not in hedge relationship  17   (1)  1 
             
Total  67   (28)  31 
             
 
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 20072008 the average maturity of gross borrowings was 4.65.0 years of which bonds represented 72%90% of these borrowings (up from 4.54.6 years and downup from 90%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


F-37

Notes to the Consolidated Financial Statements (Continued)
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. During the year the Group extended the maturity date of its main revolving credit facility by one year and entered into a short-term bridge financing facility. At the end of 20072008 the committed facilities amounted to £1,369m£1,217m and their weighted average maturity was 3.23.4 years.


F-43

Notes to the Consolidated Financial Statements (Continued)
 
Analysis of groupGroup 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. Net borrowings
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:derivatives, is as follows:
 
         
  2007  2006 
  £ millions 
 
Fixed rate  567   514 
Floating rate  406   545 
         
Total  973   1,059 
         
Gross borrowings:
         
  2007  2006 
  £ millions 
 
Bank debt  458   177 
Bonds  1,150   1,566 
         
Total  1,608   1,743 
         
         
  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:currency are as follows:
 
                
 2007   
   Currency
   2006         
 As reported derivatives Combined Combined  2008 2007 
 £ millions  All figures in £ millions 
US dollar  1,251   150   1,401   1,253   2,081   1,401 
Sterling  357   (150)  207   206   277   207 
Euro  —   —   —   284   5   — 
              
Total  1,608   —   1,608   1,743   2,363   1,608 
              
 
Financial counterparty risk managementAs at 31 December 2008 there were no outstanding cross-currency rate derivatives.
 
The Group’s risk of loss on deposits or derivative contracts with individual banks is managed in part throughAs at 31 December 2008 the use of counterparty limits. These limits, which take published credit limits (among other things) into account, are approved by the Chief financial officer within guidelines approved by the board. In addition, prior to their maturity in February 2007, for a currency rate swap that transformed a major partexposure of the 6.125% Euro Bonds due 2007 into a US dollar liability,borrowings of the Group entered into a mark-to-market agreement which significantly reducedto interest rate changes when the counterparty risk of that rate swap transaction.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 
                 
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


F-38F-44

Notes to the Consolidated Financial Statements (Continued)
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 our 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 is only the US dollar. However, the Group still borrows small amounts in other currencies, typically for seasonal working capital needs. In addition, the Group currently expects to hold legacy borrowings in sterling to their maturity dates: 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. Included within year end net debt, the net borrowings in the two principal currencies above (taking into account the effect of cross currency swaps) were: US dollar £1,119m and sterling £45m.
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
The sensitivity of the Group’s financial instruments to fluctuations in interest rates and exchange rates is as follows:
                     
  2007 
     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 amounts in £ millions 
 
Investments in unlisted securities  52   —   —   (4)  5 
Cash and cash equivalents  560   —   —   (36)  44 
Marketable securities  40   —   —   (3)  4 
Derivative financial instruments  35   (23)  25   11   (13)
Bonds  (1,150)  24   (26)  71   (87)
Other borrowings  (458)  —   —   42   (51)
Other net financial assets  408   —   —   (29)  35 
                     
Total financial instruments  (513)  1   (1)  52   (63)
                     


F-39

Notes to the Consolidated Financial Statements (Continued)
                     
  2006 
     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 amounts in £ millions 
 
Investments in unlisted securities  17   —   —   (1)  1 
Cash and cash equivalents  592   —   —   (38)  46 
Marketable securities  25   —   —   (2)  2 
Derivative financial instruments  67   (28)  31   8   (10)
Bonds  (1,566)  28   (31)  108   (132)
Other borrowings  (177)  —   —   16   (19)
Other net financial assets  425   —   —   (31)  38 
                     
Total financial instruments  (617)  —   —   60   (74)
                     
The table shows the sensitivities of the fair values of each class of financial instruments to an isolated change in either interest rates or foreign exchange rates. The class ‘Other net financial assets’ comprises trade assets less trade liabilities.
The sensitivities of derivative instruments are calculated using established estimation techniques such as discounted cash flow and option valuation models.
A large proportion of the movements shown above would impact equity rather than the income statement, depending on the location and functional currency of the entity in which they arise and the availability of net investment hedge treatment.
The changes in valuations are estimates of the impact of changes in market variables and are not a prediction of future events or anticipated gains or losses.

F-40

Notes to the Consolidated Financial Statements (Continued)
The accounting classification of each class of the Group’s financial assets and financial liabilities, together with their fair values, is as follows:
                                 
     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  16   52   —   —   —   —   52   52 
Marketable securities      40   —   —   —   —   40   40 
Derivative financial instruments  17   —   16   35   —   —   51   51 
Trade receivables  20   —   —   —   750   —   750   750 
Cash and cash equivalents  21   —   —   —   560   —   560   560 
                                 
Total financial assets
      92   16   35   1,310   —   1,453   1,453 
                                 
Derivative financial instruments  17   —   (8)  (8)  —   —   (16)  (16)
Trade payables  24   —   —   —   —   (342)  (342)  (342)
Bank loans and overdrafts  22   —   —   —   —   (444)  (444)  (444)
Borrowings due within one year  22   —   —   —   —   (115)  (115)  (112)
Borrowings due after more than one year  22   —   —   —   —   (1,049)  (1,049)  (1,046)
                                 
Total financial liabilities
      —   (8)  (8)  —   (1,950)  (1,966)  (1,960)
                                 


F-41

Notes to the Consolidated Financial Statements (Continued)
                                 
     2006 
     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  16   17   —   —   —   —   17   17 
Marketable securities      25   —   —   —   —   25   25 
Derivative financial instruments  17   —   25   61   —   —   86   86 
Trade receivables  20   —   —   —   768   —   768   768 
Cash and cash equivalents  21   —   —   —   592   —   592   592 
                                 
Total financial assets
      42   25   61   1,360   —   1,488   1,488 
                                 
Derivative financial instruments  17   —   (2)  (17)  —   —   (19)  (19)
Trade payables  24   —   —   —   —   (343)  (343)  (343)
Bank loans and overdrafts  22   —   —   —   —   (173)  (173)  (173)
Borrowings due within one year  22   —   —   —   —   (422)  (422)  (400)
Borrowings due after more than one year  22   —   —   —   —   (1,148)  (1,148)  (1,157)
                                 
Total financial liabilities
      —   (2)  (17)  —   (2,086)  (2,105)  (2,092)
                                 
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 outlined above. 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 profit & loss account upon initial recognition.
More detail on the Group’s accounting for financial instruments is included in the Group’s accounting policies in note 1.

F-42

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:
                 
  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 
                 
                 
  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 
                 
 
                            
 2006  2007 
 USD GBP EUR Total  USD GBP EUR Total 
 All figures in £ millions  All figures in £ millions 
Not later than one year  166   18   265   449   153   (30)  —   123 
Later than one year and not later than five years  758   60   —   818   966   70   —   1,036 
Later than five years  478   242   —   720   420   285   —   705 
                  
Total
  1,402   320   265   1,987   1,539   325   —   1,864 
                  
Analysed as:                                
Revolving credit facilities and commercial paper  99   —   —   99   429   —   —   429 
Bonds  1,045   511   423   1,979   1,017   483   —   1,500 
Rate derivatives — inflows  (318)  (329)  (192)  (839)  (268)  (160)  —   (428)
Rate derivatives — outflows  576   138   34   748   361   2   —   363 
                  
Total
  1,402   320   265   1,987   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.
 
16.  
Financial counterparty risk management
Other financial assets
             
  Notes  2007  2006 
  All figures in £ millions 
 
At beginning of year      17   18 
Exchange differences      —   (1)
Equity interest received on sale of Government Solutions  32   35   — 
             
At end of year
      52   17 
             
 
OtherCounterparty credit limits, which take published credit rating and other factors into account, are set to cover our total aggregate exposure to a single financial assets comprise non-current unlisted securities.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-43F-45

Notes to the Consolidated Financial Statements (Continued)
 
17.  Derivative financial instruments
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’s approachGroup uses both currency denominated debt and derivative instruments to implement the managementabove 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 financial riskshedging instruments is set outmonitored against the assets in note 15. Thethe 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 outstanding derivative financial instruments areto fluctuations in interest rates and exchange rates is as follows:
 
                         
  2007  2006 
  Gross notional
        Gross notional
       
  amounts  Assets  Liabilities  amounts  Assets  Liabilities 
 
Interest rate derivatives — in a fair value hedge relationship  522   18   (8)  953   20   (17)
Interest rate derivatives — not in a hedge relationship  796   7   (8)  1,026   9   (2)
Cross currency rate derivatives — in a net investment hedge relationship  100   17   —   230   40   — 
Cross currency rate derivatives — not in a hedge relationship  50   9   —   180   17   — 
                         
Total
  1,468   51   (16)  2,389   86   (19)
                         
Analysed as expiring:
                        
In less than one year  320   28   —   976   50   — 
Later than one year and not later than five years  796   13   (8)  1,005   26   (4)
Later than five years  352   10   (8)  408   10   (15)
                         
Total
  1,468   51   (16)  2,389   86   (19)
                         
                     
     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 carrying valuetable shows the sensitivities of the above derivativefair values of each class of financial instruments equals their fair value. Fair valuesto 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 determined bycalculated using market data and the use of established estimation techniques such as discounted cash flow and option valuation models.
At Where modelling an interest rate decrease of 1% led to negative interest rates, these points on the end of 2007, the currency splityield curve were adjusted to 0%. A large proportion of the mark-to-market valuesmovements shown above would impact equity rather than the income statement, depending on the location and functional currency of rate derivatives, including the exchange of principal on cross currency rate derivatives, was US dollar £(119)m, and sterling £154m (2006: US dollar £(247)m, euro £157m and sterling £157m).
The fixed interest rates on outstanding rate derivative contracts at the end of 2007 range from 4.45% to 7.00% (2006: 3.02% to 7.00%)entity in which they arise and the floating ratesavailability of net investment hedge treatment. The changes in valuations are based on LIBOR in US dollar and sterling.
The Group’s portfolio of rate derivatives is diversified by maturity, counterparty and type. Natural offsets between transactions within the portfolio and the designation of certain derivatives as hedges significantly reduce the risk of income statement volatility.
Counterparty exposure from all derivatives is managed, together with that from deposits and bank account balances, within credit limits that reflect published credit ratings 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%estimates of the Group’s consolidated total equity.
At the endimpact of 2006, the Group held an amountchanges in market variables and are not a prediction of £29m as collateral under a mark-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. The amount was settled at the beginning of February 2007, along with repayment of the €591m bond.
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-44

Notes to the Consolidated Financial Statements (Continued)future events or anticipated gains or losses.
 
18.20.  Intangible assets — Pre-publication
 
                
 2007 2006  2008 2007 
 All figures in £ millions  All figures in £ millions 
Cost
                
At beginning of year  1,152   1,357   1,264   1,152 
Exchange differences  (7)  (148)  494   (7)
Transfers  —   6 
Additions  230   213   297   230 
Disposals  (125)  (280)  (345)  (125)
Acquisition through business combination  19   4   78   19 
Transfer from software  12   — 
Transfer to non-current assets held for sale  (5)  —   —   (5)
          
At end of year
  1,264   1,152   1,800   1,264 
          
Amortisation
                
At beginning of year  (750)  (931)  (814)  (750)
Exchange differences  1   111   (337)  1 
Charge for the year  (192)  (210)  (244)  (192)
Disposals  125   280   345   125 
Acquisition through business combination  (1)  —   (51)  (1)
Transfer from software  (4)  — 
Transfer to non-current assets held for sale  3   —   —   3 
          
At end of year
  (814)  (750)  (1,105)  (814)
          
Carrying amounts                
     
At end of year
  450   402   695   450 
          
 
Included in the above are pre-publication assets amounting to £292m (2006: £243m)£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 20072008 and 2006.2007.


F-47

Notes to the Consolidated Financial Statements (Continued)
 
19.21.  Inventories
 
            
 2007 2006  2008 2007 
 All figures in £ millions  All figures in £ millions 
Raw materials  24   26   31   24 
Work in progress  30   28   29   30 
Finished goods  314   300   441   314 
          
  368   354   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 £732m (2006: £702m; 2005: £754m)£832m (2007: £732m). In 2007 £47m (2006: £46m; 2005: £42m)2008 £56m (2007: £47m) of inventory provisions was charged in the income statement. None of the inventory is pledged as security.


F-45

Notes to the Consolidated Financial Statements (Continued)
 
20.22.  Trade and other receivables
 
             
 2007 2006  2008 2007 
 All figures in £ millions  All figures in £ millions 
Current
                
Trade receivables  750   768   1,030   750 
Royalty advances  84   91   111   84 
Prepayments and accrued income  48   34   62   48 
Other receivables  59   58   135   59 
Receivables from related parties  5   2   4   5 
          
  946   953   1,342   946 
          
Non-current
                
Royalty advances  68   80   102   68 
Prepayments and accrued income  4   4   3   4 
Other receivables  57   40   47   57 
          
  129   124   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:
 
            
 2007 2006  2008 2007 
 All figures in £ millions  All figures in £ millions 
At beginning of year  (46)  (45)  (52)  (46)
Exchange differences  (1)  3   (18)  (1)
Income statement movements  (19)  (23)  (27)  (19)
Utilised  15   21   27   15 
Acquisition through business combination  (3)  (2)  (2)  (3)
Disposal through business disposal  2   —   —   2 
          
At end of year
  (52)  (46)  (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-46F-48

Notes to the Consolidated Financial Statements (Continued)
 
The ageing of the Group’s trade receivables is as follows:
 
                
 2007 2006  2008 2007 
 All figures in £ millions  All figures in £ millions 
Within due date  811   810   1,110   819 
Up to three months past due date  161   177   248   171 
Three to six months past due date  43   62   60   51 
Six to nine months past due date  7   6   21   12 
Nine to 12 months past due date  13   8   15   19 
More that 12 months past due date  4   1 
More than 12 months past due date  20   19 
          
Total trade receivables
  1,039   1,064   1,474   1,091 
          
Less: provision for bad and doubtful debts  (72)  (52)
Less: provision for sales returns  (281)  (243)  (372)  (281)
Transfer to non-current assets held for sale  (8)  (53)  —   (8)
          
Net trade receivables
  750   768   1,030   750 
          
 
The Group’s provision for bad and doubtful debts is specific to individual debts identified during the bad debt review process. Consequently the ageing analysis above is presented after deducting the associated specific bad debt provision. 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.
 
21.  Cash and cash equivalents (excluding overdrafts)
         
  2007  2006 
  All figures in £ millions 
 
Cash at bank and in hand  439   421 
Short-term bank deposits  121   171 
         
   560   592 
         
Short-term bank deposits are invested with banks and earn interest at the prevailing short-term deposit rates.
At the end of 2007 the currency split of cash and cash equivalents is US dollars 37% (2006: 31%), sterling 29% (2006: 35%), euros 16% (2006: 21%) and other 18% (2006: 13%).
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:
         
  2007  2006 
  All figures in £ millions 
 
Cash and cash equivalents  560   592 
Bank overdrafts  (68)  (61)
         
   492   531 
         


F-47

Notes to the Consolidated Financial Statements (Continued)
22.  Financial liabilities — Borrowings
The Group’s current and non-current borrowings are as follows:
         
  2007  2006 
  All figures in £ millions 
 
Non-current
        
10.5% Sterling Bonds 2008 (nominal amount £100m)  —   105 
4.7% US Dollar Bonds 2009 (nominal amount $350m)  176   178 
7% Global Dollar Bonds 2011 (nominal amount $500m)  264   266 
7% Sterling Bonds 2014 (nominal amount £250m)  251   251 
5.7% US Dollar Bonds 2014 (nominal amount $400m)  211   206 
4.625% US Dollar notes 2018 (nominal amount $300m)  143   139 
Finance lease liabilities  4   3 
         
   1,049   1,148 
         
Current
        
Due within one year or on demand:
        
Bank loans and overdrafts  444   173 
6.125% Euro Bonds 2007 (nominal amount €591m)  —   421 
10.5% Sterling Bonds 2008 (nominal amount £100m)  105   — 
Loan notes  8   — 
Finance lease liabilities  2   1 
         
   559   595 
         
Total borrowings
  1,608   1,743 
         
Included in the non-current borrowings above is £6m of accrued interest (2006: £12m). Included in the current borrowings above is £7m of accrued interest (2006: £22m).
The maturity of the Group’s non-current borrowing is as follows:
         
  2007  2006 
  All figures in £ millions 
 
Between one and two years  178   107 
Between two and five years  266   445 
Over five years  605   596 
         
   1,049   1,148 
         
As at 31 December 2007 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 
 
Carrying value of borrowings  559   444   605   1,608 
Effect of rate derivatives  359   (7)  (352)  — 
                 
   918   437   253   1,608 
                 


F-48

Notes to the Consolidated Financial Statements (Continued)
The carrying amounts and market values of non-current borrowings are as follows:
                     
     Carrying
     Carrying
    
  Effective
  amount
  Market value
  amount
  Market value
 
  interest rate  2007  2007  2006  2006 
  All figures in £ millions 
 
10.5% Sterling Bonds 2008  10.53%  —   —   105   106 
4.7% US Dollar Bonds 2009  4.86%  176   176   178   176 
7% Global Dollar Bonds 2011  7.16%  264   267   266   269 
7% Sterling Bonds 2014  7.20%  251   261   251   265 
5.7% US Dollar Bonds 2014  5.88%  211   203   206   203 
4.625% US Dollar notes 2018  4.69%  143   135   139   135 
Finance lease liabilities  n/a   4   4   3   3 
                     
       1,049   1,046   1,148   1,157 
                     
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:
         
  2007  2006 
  All figures in £ millions 
 
US dollar  1,251   966 
Sterling  357   356 
Euro  —   421 
         
   1,608   1,743 
         
The Group has the following undrawn committed borrowing facilities as at 31 December:
         
  2007  2006 
  All figures in £ millions 
 
Floating rate
        
— expiring within one year  —   — 
— expiring beyond one year  1,007   894 
         
   1,007   894 
         
During the year, the Group extended the maturity date of its main revolving credit facility by one year, and also entered into a short-term bridge financing facility.
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-49

Notes to the Consolidated Financial Statements (Continued)
The maturity of the Group’s finance lease obligations is as follows:
         
  2007  2006 
  All figures in £ millions 
 
Finance lease liabilities — minimum lease payments
        
Not later than one year  2   1 
Later than one year and not later than two years  2   3 
Later than two years and not later than three years  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  6   4 
         
The present value of finance lease liabilities is as follows:
         
  2007  2006 
  All figures in £ millions 
 
Not later than one year  2   1 
Later than one year and not later than five years  4   3 
Later than five years  —   — 
         
   6   4 
         
The carrying amounts of the Group’s lease obligations approximate their fair value.
23.  Provisions for other liabilities and charges
 
                 
  Deferred
          
  consideration  Leases  Other  Total 
  All figures in £ millions 
 
At 1 January 2007  25   12   15   52 
Exchange differences  (1)  —   (1)  (2)
Charged to consolidated income statement
                
— Additional provisions: interest  2   —   —   2 
— Additional provisions: prior year adjustments  3   —   —   3 
— Additional provisions: other  —   —   12   12 
— Unused amounts reversed  —   (1)  (1)  (2)
Acquisition through business combination  12   —   2   14 
Disposal through business disposal  —   —   (1)  (1)
Utilised  (4)  (2)  (5)  (11)
                 
At 31 December 2007  37   9   21   67 
                 
                 
  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 
                 
 


F-50

Notes to the Consolidated Financial Statements (Continued)
            
 2007 2006  2008 2007 
 All figures in £ millions  All figures in £ millions 
Analysis of provisions                
Non-current  44   29   33   44 
Current  23   23   56   23 
          
  67   52   89   67 
          
 
Deferred consideration including interest and prior year adjustments, primarily relates to the acquisition of Mergermarket in 2006. These amounts are payable in March 2009. Additional amounts incurred relate to the Group’s smaller acquisitions during the year (see note 30).
 
Lease commitments relate primarily to onerous lease contracts, acquired through business combinations, which have various expiry dates up to 2017. The provision is based on current occupancy estimates.


F-49

Notes to the Consolidated Financial Statements (Continued)
 
24.  Trade and other liabilities
 
                
 2007 2006  2008 2007 
 All figures in £ millions  All figures in £ millions 
Trade payables  342   343   450   342 
Social security and other taxes  23   18   35   23 
Accruals  402   345   501   402 
Deferred income  290   276   444   290 
Dividends payable to minority  12   — 
Interest payable  10   — 
Dividends payable to minority interest  5   12 
Other liabilities  171   178   205   171 
          
  1,240   1,160   1,650   1,240 
          
Less: non-current portion
                
Accruals  30   24   42   30 
Deferred income  58   47   87   58 
Interest payable  1   — 
Other liabilities  102   91   91   102 
     
  190   162   221   190 
          
Current portion
  1,050   998   1,429   1,050 
          
 
The carrying value of the Group’s trade and other liabilitiespayables approximates its fair value.
 
The deferred income balances comprise:
 
 • multi-year obligations to deliver workbooks to adoption customers in school businesses;
 
 • advance payments in contractingassessment 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.

F-51

Notes to the Consolidated Financial Statements (Continued)
 
25.  Retirement benefit and other post-retirement obligations
 
Background
 
The Group operates a number of defined benefit and defined contribution retirement plans throughout the world. For the 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 investment returns earned and the amount of pension this money will buy when a member retires.
 
The largest plan is the Pearson Group Pension Plan (‘UK Group plan’) with both defined benefit and defined contribution sections. From 1 November 2006, all sections of the UK Group plan were closed to new members with the exception of a defined contribution section that was 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

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.
 
                                                                        
 2007 2006 2005  2008 2007 2006 
 UK Group
 Other
   UK Group
 Other
   UK Group
 Other
    UK Group
 Other
   UK Group
 Other
   UK Group
 Other
   
 plan plans PRMB plan plans PRMB plan plans PRMB  plan plans PRMB plan plans PRMB plan plans PRMB 
%
                                                                        
Inflation  3.30   2.93   3.00   3.00   2.91   3.00   2.80   2.95   3.00   2.80   2.80   2.80   3.30   2.93   3.00   3.00   2.91   3.00 
Rate used to discount plan liabilities  5.80   6.01   6.05   5.20   5.70   5.85   4.85   5.54   5.60   6.40   6.25   6.25   5.80   6.01   6.05   5.20   5.70   5.85 
Expected return on assets  6.50   7.27   —   6.40   7.18   —   6.40   7.31   —   6.33   7.60   —   6.50   7.27   —   6.40   7.18   — 
Expected rate of increase in salaries  5.00   4.36   —   4.70   4.37   —   4.50   4.43   —   4.30   4.50   —   5.00   4.36   —   4.70   4.37   — 
Expected rate of increase for pensions in payment and deferred pensions  2.50 to 4.30   —   —   2.10 to 4.60   —   —   2.50 to 4.00   —   —   2.30 to 4.20   —   —   2.50 to 4.30   —   —   2.10 to 4.60   —   — 
Initial rate of increase in healthcare rate  —   —   9.50   —   —   10.00   —   —   10.00   —   —   9.00   —   —   9.50   —   —   10.00 
Ultimate rate of increase in healthcare rate  —   —   5.00   —   —   5.00   —   —   5.00   —   —   5.00   —   —   5.00   —   —   5.00 
                                      
 
The UK discount rate is based on the annualised yield on the iBoxx over15-year AA-rated corporate bond index.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 defined portfolio at the end of the year.
 
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 (GAM94).


F-52

Notestables. In 2007 GAM94 was used, and in 2008 this was updated to RP2000 to reflect the Consolidated Financial Statements (Continued)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  UK US 
 2007 2006 2007 2006  2008 2007 2008 2007 
Male  21.3   20.9   17.9   17.9   21.5   21.3   17.6   17.9 
Female  21.6   21.3   21.3   21.3   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  UK US 
 2007 2006 2007 2006  2008 2007 2008 2007 
Male  23.1   22.2   17.9   17.9   23.3   23.1   17.6   17.9 
Female  23.6   22.5   21.3   21.3   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:
 
                                              
 2007  2008 
   Defined
            Defined
         
 UK Group
 benefit
   Defined
      UK Group
 benefit
   Defined
     
 plan other Sub total contribution PRMB Total  plan other Sub-total contribution PRMB Total 
 All figures in £ millions  All figures in £ millions 
Current service cost  29   2   31   39   1   71   33   3   36   41   1   78 
Past service cost  —   1   1   —   5   6 
                          
Total operating expense
  29   2   31   39   1   71   33   4   37   41   6   84 
                          
Expected return on plan assets  (96)  (7)  (103)  —   —   (103)  (104)  (7)  (111)  —   —   (111)
Interest on plan liabilities  84   7   91   —   2   93   93   7   100   —   3   103 
Net finance (income)/expense
  (12)  —   (12)  —   2   (10)  (11)  —   (11)  —   3   (8)
                          
Net income statement charge
  17   2   19   39   3   61   22   4   26   41   9   76 
                          
Actual return on plan assets
  128   4   132   —   —   132 
Actual (loss)/return on plan assets
  (130)  (27)  (157)  —   —   (157)
                          
 
                                              
 2006  2007 
   Defined
            Defined
         
 UK Group
 benefit
   Defined
      UK Group
 benefit
   Defined
     
 plan other Sub total contribution PRMB Total  plan other Sub-total contribution PRMB Total 
 All figures in £ millions  All figures in £ millions 
Current service cost  27   2   29   36   1   66   29   2   31   39   1   71 
Past service cost  —   —   —   —   (2)  (2)
                          
Total operating expense/(income)
  27   2   29   36   (1)  64 
Total operating expense
  29   2   31   39   1   71 
                          
Expected return on plan assets  (85)  (7)  (92)  —   —   (92)  (96)  (7)  (103)  —   —   (103)
Interest on plan liabilities  78   7   85   —   3   88   84   7   91   —   2   93 
Net finance (income)/expense
  (7)  —   (7)  —   3   (4)  (12)  —   (12)  —   2   (10)
                          
Net income statement charge
  20   2   22   36   2   60   17   2   19   39   3   61 
                          
Actual return on plan assets
  153   13   166   —   —   166 
Actual (loss)/return on plan assets
  128   4   132   —   —   132 
                          
 


F-53

Notes to the Consolidated Financial Statements (Continued)
                                              
 2005  2006 
   Defined
            Defined
         
 UK Group
 benefit
   Defined
      UK Group
 benefit
   Defined
     
 plan other Sub total contribution PRMB Total  plan other Sub-total contribution PRMB Total 
 All figures in £ millions  All figures in £ millions 
Current service cost  25   2   27   34   1   62   27   2   29   36   1   66 
Curtailments  —   (2)  (2)  —   —   (2)
Past service cost  —   —   —   —   (2)  (2)
                          
Total operating expense/(income)
  25   —   25   34   1   60 
Total operating expense
  27   2   29   36   (1)  64 
                          
Expected return on plan assets  (75)  (6)  (81)  —   —   (81)  (85)  (7)  (92)  —   —   (92)
Interest on plan liabilities  79   6   85   —   3   88   78   7   85   —   3   88 
             
Net finance (income)/expense
  4   —   4   —   3   7   (7)  —   (7)  —   3   (4)
                          
Net income statement charge
  29   —   29   34   4   67   20   2   22   36   2   60 
                          
Actual return on plan assets
  214   7   221   —   —   221 
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:
 
                                                                
 2007 2006  2008 2007 
   Other
 Other
     Other
 Other
      Other
 Other
     Other
 Other
   
 UK Group
 funded
 unfunded
   UK Group
 funded
 unfunded
    UK Group
 funded
 unfunded
   UK Group
 funded
 unfunded
   
 plan plans plans Total plan plans plans Total  plan plans plans Total plan plans plans Total 
 All figures in £ millions  All figures in £ millions 
Fair value of plan assets  1,744   109   —   1,853   1,528   105   —   1,633   1,478   100   —   1,578   1,744   109   —   1,853 
Present value of defined benefit obligation  (1,682)  (117)  (12)  (1,811)  (1,683)  (115)  (12)  (1,810)  (1,429)  (149)  (16)  (1,594)  (1,682)  (117)  (12)  (1,811)
                                  
Net pension asset/(liability)
  62   (8)  (12)  42   (155)  (10)  (12)  (177)
Net pension (liability)/asset
  49   (49)  (16)  (16)  62   (8)  (12)  42 
                                  
Other post-retirement medical benefit obligation              (47)              (48)              (68)              (47)
Other pension accruals              (28)              (25)              (34)              (28)
     
Net retirement benefit obligations
              (33)              (250)              (118)              (33)
                      
Analysed as:
                                                                
Retirement benefit asset
              62               — 
Retirement benefit assets
              49               62 
                      
Retirement benefit obligations
              (95)              (250)              (167)              (95)
                      
 
The following (losses)/gains have been recognised in the statement of recognised income and expense:
 
                  
 2007 2006 2005  2008 2007 2006 
 All figures in £ millions  All figures in £ millions 
Amounts recognised for defined benefit plans  79   102   21   (74)  79   102 
Amounts recognised for post-retirement medical benefit plans  1   5   5   3   1   5 
              
Total recognised in year
  80   107   26   (71)  80   107 
              
Cumulative amounts recognised
  124   44   (63)  53   124   44 
              

F-54

Notes to the Consolidated Financial Statements (Continued)
 
The fair value of plan assets comprises the following:
 
                                            
 2007 2006  2008 2007 
   Other
     Other
      Other
     Other
   
 UK Group
 funded
   UK Group
 funded
    UK Group
 funded
   UK Group
 funded
   
 plan plans Total plan plans Total  plan plans Total plan plans Total 
 %  % 
Equities�� 34.3   3.4   37.7   46.6   3.9   50.5   28.0   3.1   31.1   34.3   3.4   37.7 
Bonds  34.9   2.0   36.9   23.8   2.1   25.9   40.8   2.2   43.0   34.9   2.0   36.9 
Properties  7.7   —   7.7   9.2   —   9.2   7.4   0.1   7.5   7.7   —   7.7 
Other  17.2   0.5   17.7   14.0   0.4   14.4   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:
 
                                              
 2007 2006  2008 2007 
 UK Group
 Other
   UK Group
 Other
    UK Group
 Other
   UK Group
 Other
   
 plan plans Total plan plans Total  plan plans Total plan plans Total 
 All figures in £ millions  All figures in £ millions 
Fair value of plan assets
                                                
Opening fair value of plan assets  1,528   105   1,633   1,390   110   1,500   1,744   109   1,853   1,528   105   1,633 
Exchange differences  —   1   1   —   (12)  (12)  —   23   23   —   1   1 
Expected return on plan assets  96   7   103   85   7   92   104   7   111   96   7   103 
Actuarial gains and losses  32   (3)  29   68   6   74 
Actuarial gains and (losses)  (234)  (34)  (268)  32   (3)  29 
Contributions by employer  152   5   157   43   2   45   54   3   57   152   5   157 
Contributions by employee  8   —   8   7   —   7   9   —   9   8   —   8 
Benefits paid  (72)  (6)  (78)  (65)  (8)  (73)  (72)  (8)  (80)  (72)  (6)  (78)
Other movements  (127)  —   (127)  —   —   — 
                          
Closing fair value of plan assets
  1,744   109   1,853   1,528   105   1,633   1,478   100   1,578   1,744   109   1,853 
                          
Present value of defined benefit obligation
                                                
Opening defined benefit obligation  (1,683)  (127)  (1,810)  (1,661)  (142)  (1,803)  (1,682)  (129)  (1,811)  (1,683)  (127)  (1,810)
Exchange differences  —   1   1   —   15   15   —   (38)  (38)  —   1   1 
Current service cost  (29)  (2)  (31)  (27)  (2)  (29)  (33)  (3)  (36)  (29)  (2)  (31)
Past service cost  —   (1)  (1)  —   —   — 
Interest cost  (84)  (7)  (91)  (78)  (7)  (85)  (93)  (7)  (100)  (84)  (7)  (91)
Actuarial gains and losses  50   —   50   25   3   28 
Actuarial gains and (losses)  189   5   194   50   —   50 
Contributions by employee  (8)  —   (8)  (7)  —   (7)  (9)  —   (9)  (8)  —   (8)
Benefits paid  72   6   78   65   8   73   72   8   80   72   6   78 
Acquisition through business combination  —   —   —   —   (2)  (2)
Other movements  127   —   127   —   —   — 
                          
Closing defined benefit obligation
  (1,682)  (129)  (1,811)  (1,683)  (127)  (1,810)  (1,429)  (165)  (1,594)  (1,682)  (129)  (1,811)
                          


F-55

 
NotesDuring 2008 changes made to the Consolidated Financial Statements (Continued)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:
 
            
 2007 2006  2008 2007 
 All figures in £ millions  All figures in £ millions 
Opening defined benefit obligation  (48)  (60)  (47)  (48)
Exchange differences  —   8   (19)  — 
Current service cost  (1)  (1)  (1)  (1)
Past service cost  —   2   (5)  — 
Interest cost  (2)  (3)  (3)  (2)
Actuarial gains and losses  1   5 
Actuarial gains and (losses)  3   1 
Benefits paid  3   4   4   3 
Reclassifications  —   (3)
          
Closing defined benefit obligation
  (47)  (48)  (68)  (47)
          


F-54

Notes to the Consolidated Financial Statements (Continued)
 
The history of the defined benefit plans is as follows:
 
                                        
 2007 2006 2005 2004 2003  2008 2007 2006 2005 2004 
 All figures in £ millions  All figures in £ millions 
Fair value of plan assets  1,853   1,633   1,500   1,280   1,164   1,578   1,853   1,633   1,500   1,280 
Present value of defined benefit obligation  (1,811)  (1,810)  (1,803)  (1,615)  (1,454)  (1,594)  (1,811)  (1,810)  (1,803)  (1,615)
                      
Net pension asset/(liability)
  42   (177)  (303)  (335)  (290)  (16)  42   (177)  (303)  (335)
                      
Experience adjustments on plan assets  29   74   140   67   88   (268)  29   74   140   67 
Experience adjustments on plan liabilities  50   28   (119)  (127)  (113)  194   50   28   (119)  (127)
 
Funding
 
The UK Group plan is self-administered with the plans’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 20072008 the Group contributed £21m (2007: £121m (includingincluding a special contribution of £100m) and has agreed to contribute £21m in 2008 and £21.9m per annum thereafter in excess of an estimated £30m of regular contributions.
 
The Group expects to contribute $70m$92m in 20082009 and $73m$86m in 20092010 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 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:
 
                
 2007  2008 
 1% increase 1% decrease  1% increase 1% decrease 
 All figures in £ millions  All figures in £ millions 
Effect on:
                
(Decrease)/increase in defined benefit obligation — UK Group plan  (222)  275   (180.1)  209.6 
(Decrease)/increase of aggregate of service cost and interest cost — UK Group plan  (4.6)  5.8   (2.2)  1.1 
(Decrease)/increase in defined benefit obligation — US plan  (6.7)  7.3   (12.2)  14.5 


F-56

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:
 
                
 2007  2008 
 1% increase 1% decrease  1% increase 1% decrease 
 All figures in £ millions  All figures in £ millions 
Effect on:
                
(Decrease)/increase in post-retirement medical benefit obligation  (3.7)  4.1 
Increase/(decrease) in post-retirement medical benefit obligation  3.3   (2.9)
Increase/(decrease) of aggregate of service cost and interest cost  0.1   (0.1)  0.2   (0.1)


F-55

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:
 
                  
 2007 2006 2005  2008 2007 2006 
 All figures in £ millions  All figures in £ millions 
Pearson plans  23   18   13   25   23   18 
Interactive Data plans  7   7   10   8   7   7 
              
Total share-based payment costs
  30   25   23   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 grantend 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 serviceand/or over a three to five-year period, and in the case of senior management upon the satisfaction of corporate performance targets over a three-yearthree year period. These targets may be based on marketand/or non-market performance criteria. Restricted shares awarded to senior management in October 2006July 2007, March 2008 and July 20072008, 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 20062007 and 20072008 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 Companycompany will match them on a gross basis of up to one share for every one held.


F-57

Notes to the Consolidated Financial Statements (Continued)
 
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

Notes to the Consolidated Financial Statements (Continued)
 
The number and weighted average exercise prices of share options granted under the Group’s plans are as follows:
 
                                
 2007 2006  2008 2007 
   Weighted
   Weighted
    Weighted
   Weighted
 
 Number of
 average
 Number of
 average
  Number of
 average
 Number of
 average
 
 share
 exercise
 share
 exercise
  share
 exercise
 share
 exercise
 
 options
 price
 options
 price
  options
 price
 options
 price
 
 000s £ 000s £  000s £ 000s £ 
Outstanding at beginning of year  18,861   13.36   21,677   13.15   16,781   13.15   18,861   13.36 
Granted during the year  773   6.90   837   6.30   1,437   5.35   773   6.90 
Exercised during the year  (1,326)  5.80   (1,396)  5.36   (683)  4.85   (1,326)  5.80 
Forfeited during the year  (1,434)  19.63   (1,828)  15.39   (3,082)  11.56   (1,434)  19.63 
Expired during the year  (93)  7.68   (429)  6.72   (74)  6.06   (93)  7.68 
                  
Outstanding at end of year
  16,781   13.15   18,861   13.36   14,379   13.14   16,781   13.15 
                  
Options exercisable at end of year
  13,999   14.63   15,595   14.14   11,527   14.97   13,999   14.63 
                  
 
Options were exercised regularly throughout the year. The weighted average share price during the year was £8.02 (2006: £7.45)£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:
 
                                
 2007 2006  2008 2007 
   Weighted
   Weighted
    Weighted
   Weighted
 
 Number of
 average
 Number of
 average
  Number of
 average
 Number of
 average
 
 share
 contractual
 share
 contractual
  share
 contractual
 share
 contractual
 
Range of exercise prices
 options
 life
 options
 life
  options
 life
 options
 life
 
£
 000s Years 000s Years  000s Years 000s Years 
0 — 5  930   1.56   1,649   1.94   453   1.23   930   1.56 
5 — 10  4,909   3.22   5,254   3.85   5,113   2.84   4,909   3.22 
10 — 15  7,257   2.62   7,638   3.63   5,481   1.97   7,257   2.62 
15 — 20  980   1.85   1,050   2.88   908   0.84   980   1.85 
20 — 25  400   2.19   424   3.19   350   1.19   400   2.19 
>25  2,305   2.19   2,846   3.22   2,074   1.19   2,305   2.19 
                  
  16,781   2.62   18,861   3.42   14,379   2.05   16,781   2.62 
                  
 
In 20072008 and 20062007 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-58F-57

Notes to the Consolidated Financial Statements (Continued)
 
The weighted average estimated fair values and the inputs into the Black-Scholes model are as follows:
 
                
 2007
 2006
  2008
 2007
 
 Weighted
 Weighted
  Weighted
 Weighted
 
 average average  average average 
Fair value  £2.53   £1.92   £1.67   £2.53 
Weighted average share price  £8.91   £7.66   £6.96   £8.91 
Weighted average exercise price  £6.90   £6.30   £5.35   £6.90 
Expected volatility  19.72%  23.12%  21.41%  19.72%
Expected life  4.0 years   4.0 years   4.1 years   4.0 years 
Risk free rate  5.34%  4.42%  4.28%  5.34%
Expected dividend yield  3.29%  3.52%  4.54%  3.29%
Forfeiture rate  3.5%  5.0%  3.6%  3.5%
 
The expected volatility is based on the historic volatility of the Company’scompany’s share price over the previous three to seven years depending on the vesting term of the options.
 
The following shares were granted under restricted share arrangements:
 
                                
 2007 2006  2008 2007 
   Weighted
   Weighted
    Weighted
   Weighted
 
 Number
 average
 Number
 average
  Number of
 average
 Number of
 average
 
 of shares
 fair value
 of shares
 fair value
  shares
 fair value
 shares
 fair value
 
 000s £ 000s £  000s £ 000s £ 
Annual Bonus Share Matching Plan  143   7.67   90   6.27   253   6.73   143   7.67 
Long-Term Incentive Plan  3,377   7.12   3,585   6.96   4,152   5.78   3,377   7.12 
 
Restricted shares granted under the Annual Bonus Share Matching Plan are valued using the share price at the date of grantgrant. Until 31 December 2007, they were discounted by the dividend yield (2007: 3.26%; 2006: 3.66%) 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 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 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
 
Interactive Data, a 62% subsidiary of the Group, operates the following share-based payment plans:
 
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

Notes to the Consolidated Financial Statements (Continued)
grant. Options expire ten years from the date of grant and generally vest over a three to four yearfour-year period without any performance criteria attached.


F-59

Notes to the Consolidated Financial Statements (Continued)
 
In addition, grants of restricted stock can be made to certain executives and members of the Board of Directors of 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 186,343183,318 shares (2006: 206,324)(2007: 186,343) under the 2001 Employee Stock Purchase Plan at an average share price of $17.77 (£8.93) (2006: $15.58; £7.96)$22.95(£15.96) (2007: $17.77; £8.93). The weighted average fair value at the date of grant was $4.76$6.59 (£2.39) (2006: $3.98; £2.03)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:
 
                                                
 2007 2006  2008 2007 
   Weighted
 Weighted
   Weighted
 Weighted
    Weighted
 Weighted
   Weighted
 Weighted
 
 Number
 average
 average
 Number
 average
 average
  Number
 average
 average
 Number
 average
 average
 
 of share
 exercise
 exercise
 of share
 exercise
 exercise
  of share
 exercise
 exercise
 of share
 exercise
 exercise
 
 options
 price
 price
 options
 price
 price
  options
 price
 price
 options
 price
 price
 
 000s $ £ 000s $ £  000s $ £ 000s $ £ 
Outstanding at beginning of year  10,506   16.33   8.34   10,068   15.16   8.37   9,827   18.21   9.15   10,506   16.33   8.34 
Granted during the year  1,560   27.17   13.65   1,835   20.58   10.52   1,449   24.95   17.35   1,560   27.17   13.65 
Exercised during the year  (1,935)  14.88   7.48   (1,252)  12.88   6.58   (895)  15.37   10.69   (1,935)  14.88   7.48 
Forfeited during the year  (293)  20.38   10.24   (139)  19.02   9.72   (99)  22.05   15.34   (293)  20.38   10.24 
Expired during the year  (11)  18.12   9.10   (6)  11.46   5.86   (18)  12.17   8.46   (11)  18.12   9.10 
                          
Outstanding at end of year
  9,827   18.21   9.15   10,506   16.33   8.34   10,264   19.38   13.48   9,827   18.21   9.15 
                          
Options exercisable at end of year
  6,199   15.27   7.67   6,547   14.11   7.21   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:
 
                                
 2007 2006  2008 2007 
   Weighted
   Weighted
    Weighted
   Weighted
 
 Number
 average
 Number
 average
  Number
 average
 Number
 average
 
 of share
 contractual
 of share
 contractual
  of share
 contractual
 of share
 contractual
 
Range of exercise prices
 options
 life
 options
 life
  options
 life
 options
 life
 
$
 000s Years 000s Years  000s Years 000s Years 
0 — 4.4  —   —   30   3.1   —   —   —   — 
4.4 — 7.5  72   2.1   157   2.3   47   1.3   72   2.1 
7.5 — 12  1,745   3.4   2,164   4.4   1,502   2.4   1,745   3.4 
12 — 20  3,464   5.6   4,640   6.4   2,987   4.6   3,464   5.6 
> 20  4,546   8.5   3,515   9.0   5,728   8.0   4,546   8.5 
                  
  9,827   6.6   10,506   6.8   10,264   6.2   9,827   6.6 
                  


F-60F-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  Long-Term Incentive Plan Employee Stock Purchase Plan 
 2007
 2006
 2007
 2006
  2008
 2007
 2008
 2007
 
 Weighted
 Weighted
 Weighted
 Weighted
  Weighted
 Weighted
 Weighted
 Weighted
 
 average average average average  average average average average 
Fair value  $ 6.60   $ 6.57   $ 4.76   $ 3.98   $ 5.58   $ 6.60   $ 6.59   $ 4.76 
Weighted average share price  $27.17   $20.58   $17.77   $15.58   $24.95   $27.17   $22.95   $17.77 
Weighted average exercise price  $27.17   $20.58   $17.77   $15.58   $24.95   $27.17   $22.95   $17.77 
Expected volatility  23.40%  25.90%  20.50%  18.32%  24.20%  23.40%  33.70%  20.50%
Expected life  5.0 years   4.7 years   0.5 years   0.5 years   5.7 years   5.0 years   0.5 years   0.5 years 
Risk free rate  4.2% to 4.9%   4.6% to 5.1%   4.3% to 5.1%   3.7% to 5.2%   1.5% to 3.5%   4.2% to 4.9%   2.0% to 2.4%   4.3% to 5.1% 
Expected dividend yield  1.9%  0.0%  2.0%  0.0%  2.2%  1.9%  2.1%  2.0%
Forfeiture rate  0.0%  0.0%  0.0%  0.0%  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 Interactive Data granted the following shares under restricted share arrangements:
 
                         
  2007  2006 
     Weighted
  Weighted
     Weighted
  Weighted
 
  Number
  average
  average
  Number
  average
  average
 
  of shares
  fair value
  fair value
  of shares
  fair value
  fair value
 
  000s  $  £  000s  $  £ 
 
2000 Long-Term Incentive Plan  185   27.07   13.60   196   20.82   10.64 
                         
  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.
 
27.  Share capital and share premium
 
                        
 Number
 Ordinary
 Share
  Number
 Ordinary
 Share
 
 of shares
 shares
 premium
  of shares
 shares
 premium
 
 000s £m £m  000s £m £m 
At 1 January 2006  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 
       
At 1 January 2007  806,109   202   2,487 
Issue of ordinary shares — share option schemes  1,919   —   12   1,919   —   12 
              
At 31 December 2007
  808,028   202   2,499   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 1,194m1,198m shares (2006: 1,190m(2007: 1,194m shares) with a par value of 25p per share (2006:(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 22)18), cash and cash equivalents (see note 21)17) and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings (see notes 27, 28 and 29).


F-61F-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 15.19.
 
28.  Treasury shares
 
                                  
 Pearson plc Interactive Data Total  Pearson plc Interactive Data Total 
 Number
   Number
      Number
   Number
     
 of shares
   of shares
      of shares
   of shares
     
 000s £m 000s £m £m  000s £m 000s £m £m 
At 1 January 2006  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 
           
At 1 January 2007  8,761   130   6,052   59   189 
Purchase of treasury shares  4,900   40   1,177   16   56   4,900   40   1,177   16   56 
Release of treasury shares  (1,900)  (29)  —   —   (29)  (1,900)  (29)  —   —   (29)
                      
At 31 December 2007
  11,761   141   7,229   75   216   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 Pearson plc shares in trust to satisfy its obligations under its restricted share plans (see note 26). These shares, representing 1.3% (2007: 1.5% (2006: 1.1%) ofcalled-up share capital, are heldtreated as treasury shares for accounting purposes and have a par value of 25p per share.
 
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.
 
The nominal value of Pearson plc treasury shares amounts to £2.9m (2006: £2.2m)£2.6m (2007: £2.9m). The nominal value of Interactive Data treasury shares amounts to £0.04m (2006: £0.03m)£0.06m (2007: £0.04m).
 
At 31 December 20072008 the market value of Pearson plc treasury shares was £86.1m (2006: £67.6m)£67.0m (2007: £86.1m) and the market value of Interactive Data treasury shares was £119.9m (2006: £74.3m)£157.9m (2007: £119.9m).


F-62F-61

Notes to the Consolidated Financial Statements (Continued)
 
29.  Other reserves and retained earnings
 
                                        
       Total
          Total
   
   Translation
 Fair value
 other
 Retained
    Translation
 Fair value
 other
 Retained
 
 Notes reserve reserve reserves earnings  Notes reserve reserve reserves earnings 
 All figures in £ millions  All figures in £ millions 
At 1 January 2006      (175)  —   (175)  1,214 
At 1 January 2007      (592)  —   (592)  1,568 
Net exchange differences on translation of foreign operations      (417)  —   (417)  —       25   —   25   — 
Profit for the year attributable to equity holders of the Company      —   —   —   446 
Dividends paid to equity holders of the Company  10   —   —   —   (220)
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   —   —   —   25   26   —   —   —   30 
Actuarial gains on retirement benefit obligations  25   —   —   —   107 
Treasury shares released under employee share plans  28   —   —   —   (16)
Taxation on items charged to equity  8   —   —   —   12 
         
At 31 December 2006
      (592)  —   (592)  1,568 
         
Net exchange differences on translation of foreign operations      25   —   25   — 
Cumulative translation adjustment disposed  32   53   —   53   — 
Profit for the year attributable to equity holders of the Company      —   —   —   284 
Dividends paid to equity holders of the Company  10   —   —   —   (238)
Equity settled transactions  26   —   —   —   30 
Actuarial gains on retirement benefit obligations  25   —   —   —   80 
Actuarial gains on retirement benefit obligations — Group  25   —   —   —   80 
Treasury shares released under employee share plans  28   —   —   —   (29)  28   —   —   —   (29)
Taxation on items charged to equity  8   —   —   —   29   7   —   —   —   29 
                  
At 31 December 2007
      (514)  —   (514)  1,724       (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 isin 2007 was a £49m loss (2006: £53m loss) relating to net assets classified as held for sale.
 
30.  Business combinations
 
On 4 May 2007,2 January 2008 the Group announced that it had agreed to acquire Harcourt Assessment,acquired 100% of Money-Media, a leading test provider,US based company offering online news and Harcourt Education International, publishercommentary for the money management industry. On 30 January 2008 the Group completed its acquisition of textbooks and online materials. The Harcourt Education International acquisition has closed in several stages, following regulatory reviews of the relevant authorities where required. The acquisition100% of Harcourt Assessment completed on 30 January 2008 and is therefore excludedafter receiving clearance from the numbers below (see note 37).
On 31 July 2007, the Group acquired eCollege, a leader in the US online distance learning market. In addition, several other businesses were acquired in the current year, mainly within the FT Group. NoneDepartment of these other acquisitions were individually material to the Group. The largest single acquisition in 2006 was Mergermarket.Justice.


F-63F-62

Notes to the Consolidated Financial Statements (Continued)
 
The provisional assets and liabilities arising from acquisitions are as follows:
 
                        
                           2008 2007 
   2007 2006    Harcourt
         
   Harcourt
 eCollege
 Other
 Total
 Total
    Assessment
 Money-Media
 Other
 Total
 Total
 
 Notes Fair value Fair value Fair value Fair value Fair value  Notes Fair value Fair value Fair value Fair value Fair value 
 All figures in £ millions  All figures in £ millions 
Property, plant and equipment  11   6   5   —   11   13   10   6   —   —   6   11 
Intangible assets  12   81   100   16   197   156   11   174   10   36   220   197 
Intangible assets — Pre-publication  18   16   2   —   18   4   20   27   —   —   27   18 
Inventories      15   —   —   15   14       7   —   —   7   15 
Trade and other receivables      12   13   3   28   24       48   2   4   54   28 
Cash and cash equivalents      —   —   —   —   28       5   —   11   16   — 
Trade and other liabilities      (23)  (12)  (3)  (38)  (52)      (40)  (4)  (8)  (52)  (38)
Financial liabilities — Borrowings      —   (1)      (1)  (3)      —   —   —   —   (1)
Current income tax      2   2   —   4   — 
Current income tax liabilities      —   —   (3)  (3)  4 
Net deferred income tax liabilities  14   (21)  (24)  —   (45)  (26)  13   —   —   (4)  (4)  (45)
Retirement benefit obligations  25   —   —   —   —   (2)
Provisions for other liabilities and charges  23   (1)  —   (1)  (2)  (3)  23   (19)  —   (7)  (26)  (2)
Equity minority interest      —   —   —   —   (9)
Minority interest      —   —   (2)  (2)  — 
Assets held for sale      3   —   —   3   — 
                      
Net assets acquired at fair value
      87   85   15   187   144       211   8   27   246   187 
                      
Goodwill
  12   68   181   55   304   246   11   113   25   15   153   304 
                      
Total
      155   266   70   491   390       324   33   42   399   491 
                      
Satisfied by:                                                
Cash      (155)  (266)  (47)  (468)  (382)      (321)  (33)  (40)  (394)  (468)
Deferred consideration      —   —   (12)  (12)  (17)      —   —   —   —   (12)
Net prior year adjustments      —   —   (11)  (11)  9       (3)  —   (2)  (5)  (11)
                      
Total consideration
      (155)  (266)  (70)  (491)  (390)      (324)  (33)  (42)  (399)  (491)
                      
Carrying value of net assets acquired      25   15   1   41   48 
Carrying value of net assets/(liabilities) acquired      81   (2)  (1)  78   41 
Fair value adjustments      62   70   14   146   96       130   10   28   168   146 
                      
Fair value to the Group
      87   85   15   187   144 
Fair value
      211   8   27   246   187 
                      
 
The goodwill arising on the acquisition of Harcourt Assessment and eCollegeMoney-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 the acquisition of Harcourt and eCollege are provisional and will bethese acquisitions were finalised during 2008. They include the valuation of intangible assets and the related deferred tax effect. Prior year adjustments relate to the finalisation of fair value adjustments and increases in deferred consideration relating to Mergermarket.
 


F-64F-63

Notes to the Consolidated Financial Statements (Continued)
 
                        
 Harcourt  Harcourt Assessment 
 Carrying
 Fair
 Provisional
  Carrying
 Fair
   
 value value adjs fair value  value value adjs Fair value 
 All figures in £ millions  All figures in £ millions 
Property, plant and equipment  6   —   6   7   (1)  6 
Intangible assets  —   81   81   10   164   174 
Intangible assets — Pre-publication  14   2   16   35   (8)  27 
Inventories  15   —   15   8   (1)  7 
Trade and other receivables  12   —   12   50   (2)  48 
Cash and cash equivalents  5   —   5 
Trade and other liabilities  (23)  —   (23)  (39)  (1)  (40)
Current income tax  2   —   2 
Net deferred income tax liabilities  —   (21)  (21)
Provisions for other liabilities and charges  (1)  —   (1)  (3)  (16)  (19)
Assets held for sale  8   (5)  3 
              
Net assets acquired at fair value
  25   62   87   81   130   211 
              
Goodwill
          68           113 
      
Total
          155           324 
      
 
                        
 eCollege  Money-Media 
 Carrying
 Fair
 Provisional
  Carrying
 Fair
   
 value value adjs fair value  value value adjs Fair value 
 All figures in £ millions  All figures in £ millions 
Property, plant and equipment  5   —   5 
Intangible assets  2   98   100   —   10   10 
Intangible assets — Pre-publication  2   —   2 
Trade and other receivables  13   —   13   2   —   2 
Trade and other liabilities  (10)  (2)  (12)  (4)  —   (4)
Financial liabilities — Borrowings  (1)  —   (1)
Current income tax  2   —   2 
Net deferred income tax assets/(liabilities)  2   (26)  (24)
              
Net assets acquired at fair value
  15   70   85   (2)  10   8 
              
Goodwill
          181           25 
      
Total
          266           33 
      
 
Net cash outflow on acquisition:
 
                  
 2007 2006 2005  2008 2007 2006 
 All figures in £ millions  All figures in £ millions 
Cash — Current year acquisitions  (468)  (382)  (249)  (394)  (468)  (382)
Cash — Acquisitions yet to complete  (12)  —   — 
Deferred payments for prior year acquisitions and other items  (4)  (9)  —   (5)  (4)  (9)
Cash and cash equivalents acquired  —   28   3   16   —   28 
              
Cash outflow on acquisition
  (472)  (363)  (246)  (395)  (472)  (363)
              
 
Harcourt Assessment contributed £71m£150m of sales and £7m£25m to the Group’s profit before tax between the date of acquisition and the balance sheet date. eCollegeMoney-Media contributed £15m£9m of sales and £4m to the Group’s profit before tax between the date of acquisition and the balance sheet date. Other businesses acquired contributed £4m£2m to the Group’s sales and £2m£1m to the Group’s profit before tax between the date of acquisition and the balance sheet date.

F-65

Notes to the Consolidated Financial Statements (Continued)
 
If the acquisitions had been completed on 1 January 2007,2008, the Group estimates that sales for the period would have been £4,307m£4,826m and profit before tax would have been £479m.£587m.

F-64

Notes to the Consolidated Financial Statements (Continued)
 
31.  Non-current assets classified as held for sale
 
The Group disposed of its Data Management business on 22 February 2008 and this business isIn 2007, assets classified as held for sale in 2007.related to Data Management. 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 has recognised an impairment on the goodwill allocated to the Data Management business in anticipation of the loss on disposal (see note 3). In 2006,There are no assets classified as held for sale related to Government Solutions. The major classes of assets andor liabilities comprising the operations classified as held for sale at the 2008 balance sheet date are as follows:date.
 
                    
 Notes 2007 2006  Notes 2008 2007 
Property, plant and equipment  11   7   9   10   —   7 
Intangible assets — Goodwill      96   221       —   96 
Intangible assets — Other  12   —   7 
Intangible assets — Pre-publication      2   —   20   —   2 
Inventories      4   1       —   4 
Trade and other receivables      8   56       —   8 
          
Non-current assets classified as held for sale
      117   294       —   117 
          
Other liabilities      (9)  (26)      —   (9)
          
Liabilities directly associated with non-current assets classified as held for sale
      (9)  (26)      —   (9)
          
Net assets classified as held for sale
      108   268       —   108 
          


F-66

Notes to the Consolidated Financial Statements (Continued)
 
32.  Disposals
 
                                          
 2007      2008 2007 2006 
 Government
         2006 2005  Data
         
 Solutions Les Echos Datamark Other Total Total Total  Management Other Total Total Total 
 All figures in £ millions  All figures in £ millions 
Disposal of subsidiaries
                                                
Property, plant and equipment  (10)  (3)  (3)  —   (16)  —   (48)  (7)  —   (7)  (16)  — 
Intangible assets  (6)  —   —   —   (6)  —   —   (1)  —   (1)  (6)  — 
Investments in associates and other financial assets  —   —   —   —   —   —   (5)
Intangible assets — Pre-publication  (2)  —   (2)  —   — 
Inventories  —   —   (1)  —   (1)  —   (4)  (4)  (3)  (7)  (1)  — 
Trade and other receivables  (63)  (26)  (5)  (1)  (95)  —   (59)  (8)  —   (8)  (95)  — 
Cash and cash equivalents  —   (14)  —   —   (14)  —   (134)  —   —   —   (14)  — 
Deferred income tax liabilities  —   2   —   —   2   —   8 
Net deferred income tax liabilities  —   —   —   2   — 
Trade and other liabilities  23   42   6   2   73   (1)  71   9   —   9   73   (1)
Retirement benefit obligations  —   3   —   —   3   —   —   —   —   —   3   — 
Provisions for other liabilities and charges  —   1   —   —   1   —   3   —   —   —   1   — 
Equity minority interests  —   —   —   (8)  (8)  (4)  54 
Minority interest  —   (5)  (5)  (8)  (4)
Attributable goodwill  (221)  (4)  (17)  (8)  (250)  (5)  (104)  (98)  (8)  (106)  (250)  (5)
Cumulative translation adjustment  (53)  —   —   —   (53)  —   14   (49)  —   (49)  (53)  — 
                          
Net (assets)/liabilities disposed
  (330)  1   (20)  (15)  (364)  (10)  (204)
Net assets disposed
  (160)  (16)  (176)  (364)  (10)
                          
Cash received  286   174   20   15   495   10   513   111   15   126   495   10 
Deferred receipts  —   2   2   —   — 
Other proceeds received  35   —   —   —   35   —   —   —   —   —   35   — 
Costs  (10)  (10)  —   —   (20)  —   (3)  (4)  (1)  (5)  (20)  — 
                          
(Loss)/profit on sale
  (19)  165   —   —   146   —   306   (53)  —   (53)  146   — 
                          
 
             
  2007  2006  2005 
 
Cash flow from disposals
            
Cash — Current year disposals  495   10   513 
Costs paid  (12)  —   (3)
Cash and cash equivalents disposed  (14)  —   (134)
             
Net cash inflow
  469   10   376 
             
Details of the businesses disposed are shown in note 3.
The proceeds received for the sale of Government Solutions include £286m in cash, £20m in Loan Stock and a 10% interest in the acquiring company valued at £15m.
Other includes share options exercised in Interactive Data.


F-67F-65

Notes to the Consolidated Financial Statements (Continued)
             
  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 
             
Further details of the Data Management business disposal are shown in note 3.
 
33.  Cash generated from operations
 
                          
 Notes 2007 2006 2005  Notes 2008 2007 2006 
   All figures in £ millions    All figures in £ millions 
Net profit      310   469   644       323   310   469 
Adjustments for:
                                
Income tax      222   19   125       209   222   19 
Depreciation  11   68   77   80   10   80   68   77 
Amortisation of purchased intangible assets  12   45   28   11   11   86   45   28 
Adjustment on recognition of pre-acquisition deferred tax  12   —   7   —       —   —   7 
Amortisation of other intangible assets  12   25   23   18   11   30   25   23 
Investment in pre-publication assets  18   (230)  (213)  (222)
Amortisation of pre-publication assets  18   192   210   192 
Loss on sale of property, plant and equipment      1   2   —       1   1   2 
Net finance costs  7   106   74   70   6   91   106   74 
Share of results of joint ventures and associates  13   (23)  (24)  (14)  12   (25)  (23)  (24)
Profit on sale of discontinued operations  3   (146)  —   (346)
Loss/(profit) on sale of discontinued operations  3   53   (146)  — 
Goodwill impairment of discontinued operation  3   97   —   —   3   —   97   — 
Net foreign exchange gains/(losses) from transactions      11   (37)  39 
Net foreign exchange adjustment from transactions      105   11   (37)
Share-based payment costs  26   30   25   23   26   33   30   25 
Pre-publication      (58)  (38)  (3)
Inventories      (1)  (16)  (17)      (12)  (1)  (16)
Trade and other receivables      (5)  (60)  (4)      (81)  (5)  (60)
Trade and other liabilities      80   54   71       82   80   54 
Retirement benefit obligations      (126)  (17)  (17)      (14)  (126)  (17)
Provisions      3   —   — 
Provisions for other liabilities and charges      (9)  3   — 
              
Net cash generated from operations
      659   621   653       894   659   621 
              
Net cash generated from operations 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 large currency adjustment in the reconciliation between net profit and net cash generated from operations. This adjustment reflects the timing difference between recognition of profit and the related cash receipts or payments.
 
Included in net cash generated from operations is an amount of £7m (2006: £33m; 2005: £26m)£nil (2007: £7m; 2006: £33m) relating to discontinued operations.

F-66

Notes to the Consolidated Financial Statements (Continued)
 
In the cash flow statement, proceeds from sale of property, plant and equipment comprise:
 
                  
 2007 2006 2005  2008 2007 2006 
 All figures in £ millions  All figures in £ millions 
Net book amount  15   10   3   3   15   10 
Loss on sale of property, plant and equipment  (1)  (2)  —   (1)  (1)  (2)
              
Proceeds from sale of property, plant and equipment
  14   8   3   2   14   8 
              
 
The principal other non-cash transactions are movements in finance lease obligations of £4m (2006:£2m (2007: £4m; 2005: £nil)2006: £4m).
 
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 are expected to result in a material gain or loss to the Group.


F-68

Notes to the Consolidated Financial Statements (Continued)
 
35.  Commitments
 
Capital commitments
 
Capital expenditure contracted for at the balance sheet date but not yet incurred is as follows:
 
         
  2007  2006 
  All figures in £ millions 
 
Property, plant and equipment  3   — 
         
         
  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 4.
 
The future aggregate minimum lease payments in respect of operating leases are as follows:
 
                
 2007 2006  2008 2007 
 All figures in £ millions  All figures in £ millions 
Not later than one year  123   123   149   123 
Later than one year and not later than two years  116   113   138   116 
Later than two years and not later than three years  102   103   129   102 
Later than three years and not later than four years  93   90   118   93 
Later than four years and not later than five years  85   83   108   85 
Later than five years  834   857   970   834 
          
  1,353   1,369   1,612   1,353 
          
 
36.  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 20.22.


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.
 
37.  Events after the balance sheet date
 
On 2 JanuaryDuring 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 (MML), its South African publishing business, from 50% to 85%.
Under the Group completed its acquisitionterms of Money-Media,the MML agreement, Pearson intends to create a US-based company offering online newsnew Southern Africa business and commentaryin return for the money management industry, for $64m.
On 30 January 2008, the Group completed its $647m acquisition of Harcourt Assessment from Reed Elsevier, after receiving clearance from the US Department of Justice.
On 27 March 2008, the Group disposed of its 50% interestincreased stake in Financial Times Deutschland (FTD) to itsMML our current joint venture partner Gruner + Jahr. The Group’s share of FTD assets at 31 December 2007 was €8mwill receive £46m in cash and a small profit on sale is expected.15% interest in Pearson’s Heinemann and Edexcel businesses in that region.
 
On 22In addition Pearson’s International Education business also announced the acquisition of Fronter, a European online learning company based in Oslo, for £16m.
The Longman Nigeria acquisition completed in early January 2009 and the Fronter acquisition in February 2008,2009. The MML transaction is expected to complete in the Group completed the salesecond quarter of its Data Management business to M & F Worldwide Corp. for $225m. The Group expects to report a loss on this transaction in 2008 after taking into account the cumulative translation adjustment and tax.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
/s/   Robin Freestone
Robin Freestone
Chief Financial Officer
 
Date: April 25, 2008March 26, 2009


F-70F-68