20-F

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON March 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, 2008
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from               to
or
o	SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	Date of event requiring this shell company report

Commission file number 1-16055

PEARSON PLC

(Exact name of Registrant as specified in its charter)

England and Wales

(Jurisdiction of incorporation or organization)

80 Strand

London, England WC2R 0RL

(Address of principal executive offices)

Stephen Jones

Telephone: +44 20 7010 2000

Fax: +44 20 7010 6060

80 Strand

London, England WC2R 0RL

(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of Class	Name of Each Exchange on Which Registered
*Ordinary Shares, 25p par 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 809,276,583

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ      No o

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.  Yes o      No þ

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.  Yes þ      No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer”, in Rule 12b-2 of the Exchange Act. (Check one):

þ Large accelerated filer o Accelerated filer o Non-accelerated filer

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing

o US GAAP þ International financial Reporting Standards as Issued by the
International Accounting Standards Board o Other

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 17 o Item 18 o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes o No þ

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		8
	Risk Factors		8
Item 4.	Information on the Company		13
	Pearson		13
	Overview of Operating Divisions		13
	Our Strategy		13
	Operating Divisions		14
	Operating Cycles		17
	Competition		18
	Intellectual Property		18
	Raw Materials		18
	Government Regulation		18
	Licenses, Patents and Contracts		19
	Legal Proceedings		19
	Recent Developments		19
	Organizational Structure		19
	Property, Plant and Equipment		20
	Capital Expenditures		21
Item 4A.	Unresolved Staff Comments		21
Item 5.	Operating and Financial Review and Prospects		21
	General Overview		21
	Results of Operations		24
	Liquidity and Capital Resources		41
	Accounting Principles		43
Item 6.	Directors, Senior Management and Employees		43
	Directors and Senior Management		43
	Compensation of Senior Management		45
	Share Options of Senior Management		52
	Share Ownership of Senior Management		54
	Employee Share Ownership Plans		54
	Board Practices		54
	Employees		55
Item 7.	Major Shareholders and Related Party Transactions		56
Item 8.	Financial Information		56
Item 9.	The Offer and Listing		56

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		Page
Item 10.	Additional Information		57
	Memorandum and articles of association		57
	Material Contracts		62
	Exchange Controls		63
	Tax considerations		63
	Documents on Display		65
Item 11.	Quantitative and Qualitative Disclosures about Market Risk		65
	Introduction		65
	Interest Rates		65
	Currency Exchange Rates		66
	Forward Foreign Exchange Contracts		67
	Derivatives		67
	Quantitative Information about market risk		67
Item 12.	Description of Securities Other Than Equity Securities		67
PART II
Item 13.	Defaults, Dividend Arrearages and Delinquencies		68
Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds		68
Item 15.	Controls and Procedures		68
	Disclosure Controls and Procedures		68
	Management’s Annual Report on Internal Control over Financial Reporting		68
	Change in Internal Control over Financial Reporting		68
Item 16A.	Audit Committee Financial Expert		68
Item 16B.	Code of Ethics		69
Item 16C.	Principal Accountant Fees and Services		69
Item 16D.	Exemptions from the Listing Standards for Audit Committees		69
Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchases		69
Item 16F.	Changes in Registrant’s Certifying Accountant		69
Item 16G.	Corporate Governance		70
PART III
Item 17.	Financial Statements		70
Item 18.	Financial Statements		70
Item 19.	Exhibits		70
Exhibit 1.1
Exhibit 8.1
Exhibit 12.1
Exhibit 12.2
Exhibit 13.1
Exhibit 13.2
Exhibit 15

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INTRODUCTION

In this Annual Report on Form 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 = $1.46, 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, 2008, the last business day of 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 February 28, 2009 the noon buying rate for sterling was £1.00 = $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,

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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 No 33-8879 “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 and 2006 and the selected consolidated balance sheet data as at December 31, 2008 and 2007 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 2008 amounts into US dollars at the rate of £1.00 = $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, 2008.

	Year Ended December 31
	2008			2008			2007			2006			2005			2004
	$			£			£			£			£			£
	(In millions, except for per share amounts)
IFRS information:
Consolidated Income Statement data
Total sales		7,024			4,811			4,162			3,990			3,662			3,340
Total operating profit		987			676			574			522			497			359
Profit after taxation from continuing operations		603			413			337			444			319			232
Profit for the financial year		472			323			310			469			644			284
Consolidated Earnings data per share
Basic earnings per equity share(1)	$	0.53			36.6p			35.6p			55.9p			78.2p			32.9p
Diluted earnings per equity share(2)	$	0.53			36.6p			35.6p			55.8p			78.1p			32.9p
Basic earnings from continuing operations per equity share(1)	$	0.70			47.9p			39.0p			52.7p			37.5p			26.4p
Diluted earnings from continuing operations per equity share(2)	$	0.70			47.9p			39.0p			52.6p			37.4p			26.3p
Dividends per ordinary share	$	0.49			33.8p			31.6p			29.3p			27.0p			25.4p
Consolidated Balance Sheet data at
period end
Total assets (non-current assets plus current assets)		14,448			9,896			7,292			7,213			7,600			6,578
Net assets		7,335			5,024			3,874			3,644			3,733			3,014
Long-term obligations(3)		(4,237	)		(2,902	)		(1,681	)		(1,853	)		(2,500	)		(2,403	)
Capital stock		295			202			202			202			201			201
Number of equity shares outstanding (millions of ordinary shares)		809			809			808			806			804			803

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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 the 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 May 1, 2009 our shareholders will be asked to approve a final dividend of 22.0p per ordinary share for the year ended December 31, 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 2008 fiscal year will be paid on May 8, 2009.

Fiscal year	Interim		Final		Total		Interim		Final			Total
	(Pence per ordinary share)						(Cents per ordinary share)
2008		11.8		22.0		33.8		21.6		32.1	*		53.7	**
2007		11.1		20.5		31.6		22.4		39.9			62.3
2006		10.5		18.8		29.3		20.0		31.4			51.4
2005		10.0		17.0		27.0		17.8		29.8			47.6
2004		9.7		15.7		25.4		17.4		26.4			43.8

*	As the 2008 final dividend had not been paid by the filing date, the dividend was translated into cents using the noon buying rate for sterling at December 31, 2008.
**	The US dollar values for dividends paid are translated at actual rates on the date paid. In the prior table of selected consolidated financial data, the US dollar dividends per ordinary share are translated at the noon rate on December 31, 2008. The difference between the two amounts is due to the differing exchange rates on the date of payment of the interim dividend and December 31, 2008.

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

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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, 2008 the noon buying rate for cable transfers and foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes for sterling was £1.00 = $1.46. On February 28, 2009 the noon buying rate for sterling was £1.00 = $1.43.

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

Year Ended December 31	Average rate
2008	$	1.84
2007	$	2.01
2006	$	1.84
2005	$	1.81
2004	$	1.83

Risk factors

You should carefully consider the risk factors described below, as well as the other information included in this Annual Report. Our business, financial condition or results from operations could be materially adversely affected by any or all of these risks, or by other risks that we presently cannot identify.

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 quantities and/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.

Federal and/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 the Financial Times newspaper.

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

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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, preliminary settlements of a class action lawsuit brought against Google by the Authors Guild, and a companion lawsuit brought under the auspices of the Association of American Publishers, which challenged Google’s plans to copy the full text of all books ever published without permission of the copyright owners, were reached in October 2008. Subject to a final court approval of the class action settlement, now scheduled for June 2009, the settlement would allow copyright owners of books covered by it to control the online display of those books by Google, with a sharing of revenues derived from that display.

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 non-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, 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.

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 processes could lead to a mis-grading of student tests and/or late delivery of test results to students and their schools. In either event we may be subject to legal claims, penalty charges under our contracts, non-renewal of contracts and/or the suspension or withdrawal of our accreditation to conduct tests. It is also possible that such events would result in adverse publicity, which may affect our ability to retain existing contracts and/or obtain new customers.

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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 poorly managed.

These businesses are characterized by multi-million pound sterling contracts spread over several years. As in any contracting business, there are inherent risks associated with the bidding process, start-up, operational performance and contract compliance (including penalty clauses) which could adversely affect our financial performance and/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.

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 software and/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. fire, flood etc) at a key facility or the disruption of supply from a key third party vendor or partner (e.g. due to bankruptcy) could restrict our ability to service our customers. Similarly external threats, such as a flu pandemic, terrorist attacks, strikes, weather etc, could all affect our business and employees, disrupting our daily business activities.

A major data privacy breach may cause reputational damage to our brands and financial loss.

Across our businesses we hold large volumes of personal data including that of employees, customers and, in our assessment businesses, students and citizens. Failure to adequately protect personal data could lead to penalties, significant remediation costs, reputational damage, potential cancellation of some existing contracts and inability to compete for future business.

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

To take advantage of international growth opportunities and to reduce our reliance on our core US and UK markets we are increasing our investments in a number of emerging markets, some of which are inherently more risky than our traditional markets. Political, economic, currency, reputational and corporate governance risks (including fraud) as well as unmanaged expansion are all factors which could limit our returns on investments made in these markets.

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, synergies and/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, 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.

A full valuation of our UK defined benefit pension plan will be carried out during 2009. Any additional funding requirements will be evaluated on completion of this actuarial review and any additional contributions required are unlikely to be made until 2010.

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 2008, translated at 2007 average rates, would have been £4,491m or 7% lower.

This is primarily a currency translation risk (i.e. non-cash flow item), and not a trading risk (i.e. cash flow item) as our currency trading flows are relatively limited.

Pearson generates approximately 60% of its sales in the US and each 5¢ change in the average £:$ exchange rate for the full year (which in 2008 was £1:$1.85) would have an impact of approximately 1p on adjusted earnings per share and affect shareholders’ funds by approximately £100m.

Changes in our tax position can significantly affect our reported earnings and cash flows.

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

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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 (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 Education is the world’s leading education company, providing educational materials, technologies, assessments and related services to teachers and students of all ages. It is also a leading provider of electronic learning programmes and of test development, processing and scoring services to educational institutions, corporations and professional bodies around the world. In 2008, Pearson Education operated through three worldwide segments, which we refer to as “North American Education”, “International Education” and “Professional”:

The FT Group provides business and financial news, data, comment and analysis, in print and online, to the international business community. It has two major parts:

•  FT Publishing includes the globally focused Financial Times newspaper and FT.com website, a range of specialist financial magazines and online services, and Mergermarket, which provides proprietary forward-looking insights and intelligence to businesses and financial institutions.

•  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 Group is one of the 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, and Dorling Kindersley.

Our strategy

Over the past decade, we have set out to become the world’s leading ‘education’ company. Our objective is to help people make progress in their lives through more knowledge — to help them ‘live and learn’.

Our goal is to produce consistent growth on 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.

To achieve this goal, our strategy has four parts, common to all our businesses:

•  Content: We invest steadily in unique publishing of stories, lessons and information and keep replenishing it.

•  Technology and services: Content alone is not enough, and to make our content more useful and enticing, we often add technology. We now receive about a third of our annual sales from technology-based products and

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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 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: The 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 for efficiency through savings in our individual businesses and through a strong centralised operations structure. We are integrated in many areas where our businesses share the same needs — purchasing, warehousing, distribution, facilities and real estate, project management, people resources, finance and accounting, and transactions. Over the past five years, we have increased our operating profit margins from 10.6% to 15.8% and reduced average working capital as a percentage of sales from 29.4% to 26.1%, freeing up cash for further investment.

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 in the three segments: North American Education, International Education, and Professional. In 2008, Pearson Education had sales of £3,112m or 65% (63% in 2007) of Pearson’s total. Of these, approximately 60% were generated in North America and approximately 40% in the rest of the world. Pearson Education generated 60% of Pearson’s operating profit.

North American Education

Our North American business serves educators and students in the USA and Canada from early education through elementary, middle and high schools and into higher education with a wide range of products and services: curriculum textbooks and other learning materials; student assessments and testing services; and education technologies. Pearson has a leading position in each of these areas and a distinctive strategy of connecting those parts to support institutions and personalize learning. In 2008 we began to integrate our North American School and Higher Education companies, which we believe will bring significant opportunities to develop growth businesses, to share investments and technologies and to gain further efficiencies.

Our North American School business contains a unique mix of publishing, testing and technology products for the elementary and secondary school markets, which are increasingly integrated. The major customers of this business are state education boards and local school districts. The business publishes high quality curriculum programmes for school students, at both elementary and secondary level, under a number of imprints including Scott Foresman and Prentice Hall.

Our school testing business is the leading provider of test development, processing and scoring services to US states and the federal government. Its capabilities have 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 Information Systems’ technology which enables elementary and secondary schools and school districts to record and manage information about student attendance and performance.

Our North American Higher Education business 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’ 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.

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 — North American Education” for a discussion of developments during 2008 with respect to this division.

International Education

Our International Education business covers all educational publishing and related services outside North America.

Our International schools business publishes educational materials in local languages in a number of countries. We are one of the world’s leading providers of English Language Teaching (ELT) materials for children and adults, published under the well-known Longman imprint. We bolstered our position further in international markets through the recent acquisition of the Harcourt Education International business.

Outside North America, our International higher education business adapts our textbooks and technology services for individual markets, and we have a growing local publishing program, with our key markets 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 under the following imprints: Addison Wesley Professional, Prentice Hall PTR and Cisco Press (for IT professionals); Peachpit Press and New Riders Press (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).

Our professional testing business, Pearson VUE, 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.

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 — Professional” for a discussion of developments during 2008 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 2008, the FT Group had sales of £796m, or 16% of Pearson’s total sales (16% in 2007), and contributed 26% of Pearson’s operating profit.

It has two major parts: FT Publishing, a combination of the Financial 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

The Financial Times is one of the world’s leading international daily business newspapers, with five editions in the 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 Financial Times is complemented by FT.com which sells content and advertising online, 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 Business publishes specialist information on the retail, personal and institutional finance industries through titles including Investors Chronicle, Money Management, Financial Adviser and The Banker.

Mergermarket, our online financial data and intelligence provider, provides early stage proprietary intelligence to financial institutions and corporates. Its key products include Mergermarket, Debtwire, dealReporter, Wealthmonitor and Pharmawire (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 (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 in Business Day and Financial Mail, publishers of one of South Africa’s leading financial newspapers and magazines.

•  33% interest in Vedomosti, a leading Russian business newspaper.

On March 27, 2008, Financial Times International Publishing Ltd sold its 50% partnership interest in Financial Times Deutschland GmbH & Co KG to Gruner & Jahr AG & Co KG.

The Penguin Group

Penguin is one of the most famous brands in book 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 titles including top literary prize winners, classics, reference volumes and children’s titles. Penguin ranks in the top three consumer publishers, based on sales in all major English speaking and related markets, including the US, the UK, Australia, Canada, South Africa and India.

Penguin is well known for its iconic Penguin brand, but it also publishes under many other imprints including, Hamish Hamilton, Putnam, Berkley, Dorling Kindersley, Puffin, and Ladybird. In 2008, Penguin had sales of £903m, representing 19% of Pearson’s total sales (21% in 2007) and contributed 13% of Pearson’s operating profit. Its largest market is the US, which generated around 57% of Penguin’s sales in 2008. The Penguin Group earns around 98% of its revenues from the sale of hard cover and paperback books. The balance comes from audio books and e-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 North American Education 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.

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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.

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 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 and Thomson Reuters 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 the Financial Times and 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.

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/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 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 and print-on-demand products, typically custom client applications.

We own the following principal properties at December 31, 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

We lease the following principal properties at December 31, 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, USA		559,258
Warehouse/Office	Newmarket, 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
Office	Harlow, UK		231,850
Warehouse/Office	Austin, Texas, USA		226,076
Office	Boston, Massachusetts, USA		225,299
Warehouse	Scoresby, Victoria, Australia		197,255
Office	Boston, Massachusetts, USA		191,360	*
Office	Glenview, Illinois, USA		187,500
Warehouse/Office	Bedfordshire, UK		187,248
Office	Bloomington, Minnesota, USA		153,240
Office	Parsippany, New Jersey, USA		143,777
Office	Chandler, Arizona, USA		135,460
Office	New York City, New York, USA		116,039
Warehouse	San Antonio Zomeyucan, Mexico		113,638
Office	London, UK		112,000
Warehouse	Cape Town, South Africa		111,259
Call Center	Lawrence, 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

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 integrated print-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’s Biology, Tro’s Chemistry, Lilienfeld, Lynn, Namy and Woolf’s Psychology and Wysocki and Lynch’s DK 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 for 14-19 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 including Macroeconomics by 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 included Simplified 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, from paper-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, The iPhone Developer’s Cookbook by 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 as The iPhone Book, Mac OS X Leopard Book and The 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’s SEO 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 including CCNA Exam Certification Library by Wendell Odom, Presentation Zen by Garr Reynolds and Effective Java 2E by Josh Bloch. Titles by Pearson’s business imprints, including FTPress and Wharton School Publishing, included Financial Shock by 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 Times maintained 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 Times circulation 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, and Rui, 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 one New York Times bestseller for 49 weeks of the year, including Patricia Cornwell’s Scarpetta, Eckhart Tolle’s A New Earth and Greg Mortenson’s Three 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 for The 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 bestseller Devil 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 included This Charming Man by Marian Keyes, The Beach House by Jane Green and Jamie’s Ministry of Food by Jamie Oliver. Penguin UK also published many more paperback originals, including Judith O’Reilly’s A 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’s Pride 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’s Biology, Kotler’s Marketing Management, Hubbard’s Economics and Cicarrelli’s Psychology, 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’s Corporate 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’s The World: A History with 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 for e-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 including The iPod Book; The Digital Photography Book; and The 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 with We Are Smarter Than Me: How to Unleash the Power of Crowds in Your Business, by Barry Libert and Jon Spector, and Firms 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 including Pharmawire, Debtwire in Asia Pacific and dealReporter in 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’s The 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’s Eat, Pray, Love, Khaled Hosseini’s A Thousand Splendid Suns and Ken Follett’s World Without End. UK bestsellers included Marian Keyes’ Anybody Out There?, Jamie Oliver’s Jamie at Home, Jeremy Clarkson’s Don’t Stop Me Now and Charlie Higson’s Double or Die. Also in the UK, it was a strong year for the Brands & Licensing division driven by The Dr Who Annual (the second bestselling children’s book of 2007) and bestselling In the Night Garden titles. DK delivered a strong global performance in traditional, custom and digital publishing, benefiting from innovative formats including The 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 with The Persimmon Tree and Dr. Manny Noakes with CSIRO 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 for Sacred Games, Vikram Seth in non-fiction for Two Lives and Kiran Desai in readers’ choice for The Inheritance of Loss. In China, Jiang Rong and Howard Goldblatt won the inaugural Man Asian Literary prize for Wolf 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’s Spud: 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 the take-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 this 12-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 Moreno		65	Chairman
Marjorie Scardino		62	Chief Executive
David Arculus		62	Non-executive Director
David Bell		62	Director for People
Terry Burns		65	Non-executive Director
Patrick Cescau		60	Non-executive Director
Will Ethridge		57	Chief Executive, Pearson Education North America
Rona Fairhead		47	Chairman and Chief Executive, The FT Group
Robin Freestone		50	Chief Financial Officer
Susan Fuhrman		64	Non-executive Director
Ken Hydon		64	Non-executive Director
John Makinson		54	Chairman and Chief Executive, Penguin Group
CK Prahalad		67	Non-executive Director

Glen Moreno was 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 Scardino joined 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 Arculus became 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 Bell became 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 the Financial Times and 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 Burns became 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 Cescau became 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 Ethridge became 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 Fairhead became 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 Freestone became 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 Fuhrman became 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 Hydon became 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 Makinson became 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 Prahalad became 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 include inter 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 stock and/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 spouse and/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 children and/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 children and/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’s 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 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

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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 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.

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)	Price	Exercise Date	Expiry Date
Robin Freestone	1,757	b	534.8p	08/01/11	02/01/12
Total	1,757
John Makinson	4,178	b	424.8p	08/01/10	02/01/11
	21,477	c*	1372.4p	06/08/02	06/08/09
	21,477	c*	1647.5p	06/08/02	06/08/09
	19,785	d*	1421.0p	05/09/02	05/09/11
	19,785	d*	1421.0p	05/09/03	05/09/11
	19,785	d*	1421.0p	05/09/04	05/09/11
	19,785	d*	1421.0p	05/09/05	05/09/11
Total	126,272

Notes:

(1)   Shares under option are designated as: a executive; b worldwide save for shares; c premium priced; and d long-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

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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 this Form 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.

	Ordinary shares				Average daily
Reference period	High		Low		trading volume
	(In pence)
					(Ordinary shares)
Five most recent fiscal years
2008		733		519		4,758,300
2007		915		695		6,405,600
2006		811		671		5,004,500
2005		695		608		5,296,700
2004		682		579		6,219,200
Most recent quarter and two most recent fiscal years
2008 Fourth quarter		651		520		5,603,400
Third quarter		705		570		4,748,000
Second quarter		710		611		3,590,800
First quarter		733		682		5,083,300
2007 Fourth quarter		798		695		5,156,300
Third quarter		843		729		6,481,400
Second quarter		915		825		7,390,600
First quarter		872		762		6,632,100
Most recent six months
February 2009		677		627		4,575,200
January 2009		674		584		6,426,800
December 2008		651		593		4,387,800
November 2008		622		567		4,736,800
October 2008		633		520		7,449,400
September 2008		705		580		5,560,800

ITEM 10.  ADDITIONAL INFORMATION

Memorandum and articles of association

We summarize below the material provisions of our memorandum and articles of association, as amended, which have been filed as an exhibit to our annual report on Form 20-F for the year ended December 31, 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

For the purposes of section 175 of the Companies Act 2006 the board may authorise any matter proposed to it which would, if not so authorised, involve a breach of duty by a Director under that section, including, without

57

limitation, any matter which relates to a situation in which a Director has, or can have, an interest which conflicts, or possibly may conflict, with the interests of the Company. Any such authorisation will be effective only if:

(a)  any requirement as to quorum at the meeting at which the matter is considered is met without counting the Director in question or any other interested Director; and

(b)  the matter was agreed to without their voting or would have been agreed to if their votes had not been counted.

The board may (whether at the time of the giving of the authorisation or subsequently) make any such authorisation subject to any limits or conditions it expressly imposes but such authorisation is otherwise given to the fullest extent permitted. The board may vary or terminate any such authorisation at any time.

Provided that he has disclosed to the board the nature and extent of his interest, a Director notwithstanding his office:

(a)  may be a party to, or otherwise interested in, any transaction or arrangement with the Company or in which the Company is otherwise (directly or indirectly) interested;

(b)  may act by himself or his firm in a professional capacity for the Company (otherwise than as auditor) and he or his firm shall be entitled to remuneration for professional services as if he were not a Director;

(c)  may be a director or other officer of, or employed by, or a party to a transaction or arrangement with, or otherwise interested in, any body corporate in which the Company is otherwise (directly or indirectly) interested.

A Director shall not, by reason of his office, be accountable to the Company for any remuneration or other benefit which he derives from any office or employment or from any transaction or arrangement or from any interest in any body corporate:

(a)  the acceptance, entry into or existence of which has been approved by the board (subject, in any such case, to any limits or conditions to which such approval was subject); or

(b)  which he is permitted to hold or enter into by virtue of paragraph (a), (b) or (c) above;

nor shall the receipt of any such remuneration or other benefit constitute a breach of his duty under section 176 of the Act.

A Director shall be under no duty to the Company with respect to any information which he obtains or has obtained otherwise than as a director of the Company and in respect of which he owes a duty of confidentiality to another person. However, to the extent that his relationship with that other person gives rise to a conflict of interest or possible conflict of interest, which has been approved by the board: the director shall not be in breach of the general duties he owes to the 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 possible conflict of interest, the Director shall not be in breach of the general duties he owes to the Company by virtue of sections 171 to 177 of the Act because he:

(a)  absents himself from meetings of the board at which any matter relating to the conflict of interest or possible conflict of interest will or may be discussed or from the discussion of any such matter at a meeting or otherwise; and/or

(b)  makes arrangements not to receive documents and information relating to any matter which gives rise to the conflict of interest or possible conflict of interest sent or supplied by the Company and/or for such documents and information to be received and read by a professional adviser,

for so long as he reasonably believes such conflict of interest or possible conflict of interest subsists.

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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 by any other person at the request of or for the benefit of the Company or any of its subsidiaries;

•  the giving of any guarantee, security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which he himself has assumed responsibility in whole or in part and whether alone or jointly with others under a guarantee or indemnity or by the giving of security;

•  any proposal relating to the Company or any of its subsidiary undertakings where it is offering securities in which offer a Director is or may be entitled to participate as a holder of securities or in the underwriting or sub-underwriting of which a Director is to participate;

•  any proposal relating to another company in which he and any persons connected with him do not to his knowledge hold an interest in shares (as that term is used in sections 820 to 825 of the Companies Act 2006) representing one per cent. or more of either any class of the equity share capital, or the voting rights, in such company;

•  any proposal relating to an arrangement for the benefit of the employees of the Company or any of its subsidiary undertakings which does not award him 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.

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.

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.

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

61

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

64

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 will not be subject to stamp duty or 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 2008 and 2007 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 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 the mark-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, 2008 the Group’s net borrowings in our main currencies (taking into account the effect of cross currency rate swaps) were: US dollar £1,777m, and sterling £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.

66

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 reserves 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 2008 and 2007 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 reserves 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 19 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.

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, 2008 was carried out by us under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation the Chief Executive Officer and Chief Financial Officer concluded that Pearson’s disclosure controls and procedures have been designed to provide, and are effective in providing, reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and 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 to 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, 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, 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 on page F-2.

Change in Internal Control Over Financial Reporting

During the period covered by this Annual Report on Form 20-F, Pearson has made no significant changes to its internal controls over financial reporting that have materially affected or are reasonably likely to materially affect Pearson’s internal control over financial reporting.

ITEM 16A.   AUDIT COMMITTEE FINANCIAL EXPERT

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.

ITEM 16C.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

In 2003, the audit committee adopted a revised policy for external auditor 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	2008		2007
	£m		£m
Audit fees		5		4
Tax fees		2		2
All other fees		1		1

Audit fees include £35,000 (2007: £35,000) of audit fees relating to the audit of the parent company.

Fees for attestation under section 404 of the Sarbanes-Oxley Act are allocated to audit fees paid.

Tax services include services related to tax planning and various other tax advisory services.

Other services include due diligence on acquisitions and services related to the disposal of the Data Management business.

ITEM 16D.   EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

ITEM 16E.   PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES

							Maximum
							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, 2008		2,000,000		£6.14		N/A		N/A

Purchases of shares were made to satisfy obligations under Pearson employee share award programs. All purchases were made in open-market transactions. None of the foregoing share purchases was made as part of a publicly announced plan or program.

ITEM 16F.   CHANGE IN REGISTRANT’S CERTIFYING AUDITOR

Not applicable.

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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.

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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 and 2006		F-3
Statement of Recognized Income and Expense for the year ended December 31, 2008, 2007 and 2006		F-4
Consolidated Balance Sheet as at December 31, 2008 and 2007		F-4
Consolidated Cash Flow Statement for the year ended December 31, 2008, 2007 and 2006		F-6
Notes to the Consolidated Financial Statements		F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Pearson plc

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, 2008 and December 31, 2007 and the results of their operations and cash flows for each of the three years in the period ended December 31, 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, 2008 based on criteria established in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

The Group’s management are responsible for these financial statements, 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 this Form 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 integrated 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.

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

March 26, 2009

F-2

Consolidated Income Statement
Year ended 31 December 2008
All figures in £ millions

	Notes		2008			2007			2006
Continuing operations
Sales		2		4,811			4,162			3,990
Cost of goods sold		4		(2,174	)		(1,910	)		(1,841	)
Gross profit				2,637			2,252			2,149
Operating expenses		4		(1,986	)		(1,701	)		(1,651	)
Share of results of joint ventures and associates		12		25			23			24
Operating profit		2		676			574			522
Finance costs		6		(136	)		(150	)		(133	)
Finance income		6		45			44			59
Profit before tax				585			468			448
Income tax		7		(172	)		(131	)		(4	)
Profit for the year from continuing operations				413			337			444
(Loss)/gain for the year from discontinued operations		3		(90	)		(27	)		25
Profit for the year				323			310			469
Attributable to:
Equity holders of the company				292			284			446
Minority interest				31			26			23
Earnings per share for profit from continuing and discontinued operations attributable to the equity holders of the company during the year (expressed in pence per share)
— basic		8		36.6p			35.6p			55.9p
— diluted		8		36.6p			35.6p			55.8p
Earnings per share for profit from continuing operations attributable to the equity holders of the company during the year (expressed in pence per share)
— basic		8		47.9p			39.0p			52.7p
— diluted		8		47.9p			39.0p			52.6p

F-3

Consolidated Statement of Recognised Income and Expense
Year ended 31 December 2008
All figures in £ millions

	Notes		2008			2007		2006
Net exchange differences on translation of foreign operations		29		1,050			25		(417	)
Actuarial (losses)/gains on retirement benefit obligations — Group		25		(71	)		80		107
Actuarial losses on retirement benefit obligations — associate		12		(3	)		—		—
Taxation on items charged to equity		7		2			29		12
Net income recognised directly in equity				978			134		(298	)
Profit for the year				323			310		469
Total recognised income and expense for the year				1,301			444		171
Attributable to:
Equity holders of the company				1,270			418		148
Minority interest				31			26		23

Consolidated Balance Sheet
At 31 December 2008
All figures in £ millions

	Notes		2008		2007
Assets
Non-current assets
Property, plant and equipment		10		423		355
Intangible assets		11		5,353		3,814
Investments in joint ventures and associates		12		23		20
Deferred income tax assets		13		372		328
Financial assets — Derivative financial instruments		16		181		23
Retirement benefit assets		25		49		62
Other financial assets		15		63		52
Other receivables		22		152		129
				6,616		4,783
Current assets
Intangible assets — Pre-publication		20		695		450
Inventories		21		501		368
Trade and other receivables		22		1,342		946
Financial assets — Derivative financial instruments		16		3		28
Financial assets — Marketable securities		14		54		40
Cash and cash equivalents (excluding overdrafts)		17		685		560
				3,280		2,392
Non-current assets classified as held for sale		31		—		117
				3,280		2,509
Total assets				9,896		7,292

F-4

Consolidated Balance Sheet (Continued)
At 31 December 2008
All figures in £ millions

	Notes		2008			2007
Liabilities
Non-current liabilities
Financial liabilities — Borrowings		18		(2,019	)		(1,049	)
Financial liabilities — Derivative financial instruments		16		(15	)		(16	)
Deferred income tax liabilities		13		(447	)		(287	)
Retirement benefit obligations		25		(167	)		(95	)
Provisions for other liabilities and charges		23		(33	)		(44	)
Other liabilities		24		(221	)		(190	)
				(2,902	)		(1,681	)
Current liabilities
Trade and other liabilities		24		(1,429	)		(1,050	)
Financial liabilities — Borrowings		18		(344	)		(559	)
Financial liabilities — Derivative financial instruments		16		(5	)		—
Current income tax liabilities				(136	)		(96	)
Provisions for other liabilities and charges		23		(56	)		(23	)
				(1,970	)		(1,728	)
Liabilities directly associated with non-current assets classified as held for sale		31		—			(9	)
Total liabilities				(4,872	)		(3,418	)
Net assets				5,024			3,874
Equity
Share capital		27		202			202
Share premium		27		2,505			2,499
Treasury shares		28		(222	)		(216	)
Other reserves		29		586			(514	)
Retained earnings		29		1,679			1,724
Total equity attributable to equity holders of the company				4,750			3,695
Minority interest				274			179
Total equity				5,024			3,874

These financial statements have been approved for issue by the board of directors on 6 March 2009 and signed on its behalf by

Robin Freestone Chief financial officer

F-5

Consolidated Cash Flow Statement
Year ended 31 December 2008
All figures in £ millions

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

F-6

Notes to the Consolidated Financial Statements

General information

Pearson plc (the company) and its subsidiaries (together the Group) are international media businesses covering education, business information and consumer publishing.

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

The company 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 6 March 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 1985 and/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 2008

The Group adopted IFRIC 14 ‘IAS 19 — The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’, effective for annual reporting periods beginning on or after 1 January 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.

•  IAS 1 (Revised) ‘Presentation of Financial Statements’ (effective for annual reporting periods beginning on or after 1 January 2009). The amendments provide a number of presentational changes to the financial statements including prohibiting the presentation of items of income and expense in the statement of changes in equity and requiring them to be shown in a performance statement, the option to present the performance statement as a single statement of comprehensive income and the 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.

•  IFRS 3 (Revised) ‘Business Combinations’ and amendments to IAS 27 ‘Consolidated and Separate Financial Statements’, (effective for annual reporting periods beginning on or after 1 July 2009). The 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 16 provides guidance on net investment hedging including which foreign currency risks within the Group qualify for hedging, and where the hedging instruments can be held within the Group.

Management is currently assessing the impact of these new standards and interpretations on the Group’s financial statements.

In addition, management has assessed the relevance of the following amendments and interpretations with respect to the Group’s operations:

•  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 no Group entities operate a customer loyalty programme IFRIC 13 is not relevant to the Group.

•  IFRIC 15 ‘Agreements for the Construction of Real Estate’ (effective for annual reporting periods beginning on or after 1 January 2009). IFRIC 15 addresses the accounting by entities that undertake the construction of real estate, with guidance on determining whether an agreement for the construction of real estate falls within the scope of IAS 11 ‘Construction Contracts’ or IAS 18 ‘Revenue’. As no Group entities undertake the construction of real estate IFRIC 15 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

(1) Business combinations — The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition.

Where the settlement of consideration payable is deferred, or contingent on future events, the fair value of the deferred component is determined by discounting the amount payable or probable to be paid to its present value using an appropriate discount rate.

Identifiable assets and contingent assets acquired and identifiable liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. For material acquisitions, the fair value of the acquired intangible assets is determined by an external, independent valuer. The excess of the

F-9

Notes to the Consolidated Financial Statements (Continued)

cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired 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

(1) Functional and presentation currency — Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The consolidated financial statements are presented in sterling, which is the company’s 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 $1.85 (2007: $2.00; 2006: $1.84) and the year end rate was $1.44 (2007: $1.99; 2006: $1.96).

d.  Property, plant and equipment

Property, plant and equipment is stated at historical cost less depreciation. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives as follows:

Buildings (freehold): 20-50 years

Buildings (leasehold): over the period of the lease

Plant and equipment: 3-10 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

(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 amount is the higher of fair value less costs to sell and value in use. These calculations require the use of estimates and significant management judgement. A description of the key assumptions and sensitivities is included in note 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 eight years.

(3) Internally developed software — Internal and external costs incurred during the preliminary stage of developing computer software for internal use are expensed as incurred. Internal and external costs incurred to develop computer software for internal use during the application development stage are capitalised if the Group expects economic benefits from the development. Capitalisation in the application development stage begins once the Group can reliably measure the expenditure attributable to the software development and has demonstrated its

F-11

Notes to the Consolidated Financial Statements (Continued)

intention to complete and use the software. Internally developed software is amortised on a straight-line basis over its estimated useful life of between three and eight years.

(4) Acquired intangible assets — Acquired intangible assets include customer lists and relationships, trademarks and 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 20.

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 to the income statement.

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

Advances of royalties to authors are included within trade and other receivables when the advance is paid less any provision required to adjust the advance to its net realisable value. The realisable value of royalty advances relies on a degree of management judgement in determining the profitability of individual author contracts. If the estimated realisable value of author contracts is overstated then this will have an adverse effect on operating profits as these excess amounts will be written off.

The recoverability of royalty advances is based upon an annual detailed management review of the age of the advance, the future sales projections for new authors and prior sales history of repeat authors. The royalty advance is expensed at the contracted or effective royalty rate as the related revenues are earned. Royalty advances which will be consumed within one year are held in current assets. Royalty advances which will be consumed after one year are held in non-current assets.

i.  Newspaper development costs

Investment in the development of newspaper titles consists of measures to increase the volume and geographical spread of circulation. The measures include additional and enhanced editorial content, extended

F-12

Notes to the Consolidated Financial Statements (Continued)

distribution and remote printing. These costs are expensed as incurred as they do not meet the criteria under IAS 38 to be capitalised as intangible assets.

j.  Cash and cash equivalents

Cash and cash equivalents in the cash flow statement include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are included in borrowings in current liabilities in the balance sheet.

Short-term deposits and marketable securities with maturities of greater than three months do not qualify as cash and cash equivalents. Movements on these financial instruments are classified as cash flows from financing activities in the cash flow statement as these amounts are used to offset the borrowings of the Group.

k.  Share capital

Ordinary shares are classified as equity.

Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

Where any Group company purchases the company’s equity share capital (Treasury shares) the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the company’s 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’s equity holders.

l.  Borrowings

Borrowings are recognised initially at fair value, which is proceeds received net of transaction costs incurred. Borrowings are subsequently stated at amortised cost with any difference between the proceeds (net of transaction costs) and the redemption value being recognised in the income statement over the period of the borrowings using the effective interest method. Accrued interest is included as part of borrowings. Where a debt instrument is in a fair value hedging relationship, an adjustment is made to its carrying value to reflect the hedged risk. Interest on borrowings is expensed as incurred.

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

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

(1) Pension obligations — The retirement benefit asset and obligation recognised in the balance sheet represents the net of the present value of the defined benefit obligation and 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 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

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 when 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 estimated sub-leasing revenue.

q.  Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services net of value-added tax and other sales taxes, rebates and discounts, and after eliminating sales within the Group.

Revenue 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-party costs incurred on behalf of the principal that are rechargeable under the contractual arrangement are not included in revenue.

Income from recharges of freight and other activities which are incidental to the normal revenue generating activities is included in other income.

r.  Leases

Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the commencement of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in financial liabilities — borrowings. The interest element of the finance cost is charged to the income statement over the lease period to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases is depreciated over the shorter of the useful life of the asset or the lease term.

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

s.  Dividends

Dividends are recorded in the Group’s financial statements in the period in which they are approved by the company’s shareholders. Interim dividends are recorded in the period in which they are approved and paid.

t.  Non-current assets and liabilities held for sale

Assets and liabilities are classified as 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

Trade receivables are stated at fair value after provision for bad and doubtful debts and anticipated future sales returns (see also note 1q).

2.  Segment information

Following the adoption of IFRS 8 ‘Operating Segments’ and changes in the organisational structure of the Education business, the Group has revised its reporting segments. The Group is now organised into six segments:

North American Education — Educational publishing and testing for the school and higher education market within the USA and Canada;

International Education — Educational publishing and testing for the school and higher education market outside of North America;

Professional — Business and technology publishing and testing and certification for professional bodies;

FT Publishing — Publisher of the Financial Times, business magazines and 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 — Publisher with brand imprints such as Penguin, Putnam, Berkley, Viking, Dorling Kindersley.

For more detail on the services and products included in each business segment refer to Item 4 of this Form 20-F.

			2008
			North
			American			International						FT			Interactive
	Notes		Education			Education			Professional			Publishing			Data			Penguin			Corporate		Group
			All figures in £ millions
Continuing operations
Sales (external)				2,002			866			244			390			406			903			—		4,811
Sales (inter-segment)				—			—			4			—			—			22			—		26
Adjusted operating profit				303			135			36			74			121			93			—		762
Amortisation of acquired intangibles				(45	)		(22	)		(1	)		(7	)		(9	)		(2	)		—		(86	)
Operating profit				258			113			35			67			112			91			—		676
Finance costs		6																						(136	)
Finance income		6																						45
Profit before tax																								585
Income tax		7																						(172	)
Profit for the year from continuing operations																								413
Segment assets				4,952			1,358			423			482			524			1,211			923		9,873
Joint ventures		12		—			8			—			2			—			3			—		13
Associates		12		—			4			—			6			—			—			—		10
Assets — continuing operations				4,952			1,370			423			490			524			1,214			923		9,896
Assets — discontinued operations				—			—			—			—			—			—			—		—
Total assets				4,952			1,370			423			490			524			1,214			923		9,896
Other segment items
Share of results of joint ventures and associates		12		—			5			—			19			—			1			—		25
Capital expenditure		10, 11, 20		224			82			22			17			25			51			—		421
Depreciation		10		25			12			8			13			13			9			—		80
Amortisation		11, 20		219			69			12			12			12			36			—		360

F-17

Notes to the Consolidated Financial Statements (Continued)

			2007
			North
			American			International						FT			Interactive
	Notes		Education			Education			Professional			Publishing			Data			Penguin			Corporate		Group
			All figures in £ millions
Continuing operations
Sales (external)				1,667			735			226			344			344			846			—		4,162
Sales (inter-segment)				1			—			—			—			—			19			—		20
Adjusted operating profit				273			92			27			56			97			74			—		619
Amortisation of acquired intangibles				(20	)		(10	)		(1	)		(6	)		(7	)		(1	)		—		(45	)
Operating profit				253			82			26			50			90			73			—		574
Finance costs		6																						(150	)
Finance income		6																						44
Profit before tax																								468
Income tax		7																						(131	)
Profit for the year from continuing operations																								337
Segment assets				3,536			1,013			291			397			330			937			651		7,155
Joint ventures		12		—			5			—			4			—			2			—		11
Associates		12		1			3			—			5			—			—			—		9
Assets — continuing operations				3,537			1,021			291			406			330			939			651		7,175
Assets — discontinued operations				—			—			117			—			—			—			—		117
Total assets				3,537			1,021			408			406			330			939			651		7,292
Other segment items
Share of results of joint ventures and associates		12		—			6			1			16			—			—			—		23
Capital expenditure		10, 11, 20		136			109			20			28			19			44			—		356
Depreciation		10		26			7			9			9			10			7			—		68
Amortisation		11, 20		159			45			11			9			8			30			—		262

F-18

Notes to the Consolidated Financial Statements (Continued)

			2006
			North
			American			International						FT			Interactive
	Notes		Education			Education			Professional			Publishing			Data			Penguin			Corporate		Group
			All figures in £ millions
Continuing operations
Sales (external)				1,679			640			211			280			332			848			—		3,990
Sales (inter-segment)				—			—			1			—			—			18			—		19
Adjusted operating profit				280			73			17			27			89			66			—		552
Amortisation of acquired intangibles				(14	)		(3	)		(1	)		(2	)		(7	)		(8	)		—		(35	)
Other net gains and losses of associates				—			—			—			4			—			—			—		4
Other net finance costs of associates				—			—			—			1			—			—			—		1
Operating profit				266			70			16			30			82			58			—		522
Finance costs		6																						(133	)
Finance income		6																						59
Profit before tax																								448
Income tax		7																						(4	)
Profit for the year from continuing operations																								444
Segment assets				3,401			795			415			317			314			954			703		6,899
Joint ventures				—			5			—			4			—			3			—		12
Associates				—			4			—			4			—			—			—		8
Assets — continuing operations				3,401			804			415			325			314			957			703		6,919
Assets — discontinued operations				—			—			294			—			—			—			—		294
Total assets				3,401			804			709			325			314			957			703		7,213
Other segment items
Share of results of joint ventures and associates				—			6			1			17			—			—			—		24
Capital expenditure				141			71			30			19			20			38			—		319
Depreciation				15			14			19			9			13			7			—		77
Amortisation				136			59			21			4			7			34			—		261

In 2008, sales from the provision of goods were £3,411m (2007: £3,053m; 2006: £2,996m) and sales from the provision of services were £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-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. Corporate assets comprise cash and cash equivalents, marketable securities 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 and 20).

Property, plant and equipment and intangible assets acquired through business combination were £253m (2007: £226m) (see note 30). Capital expenditure, depreciation and amortisation include amounts relating to discontinued operations. Discontinued operations relate to 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 operates in the following main geographic areas:

	Sales						Non-current assets
	2008		2007		2006		2008		2007		2006
	All figures in £ millions
Continuing operations
UK		754		721		659		701		724		545
Other European countries		463		381		344		224		140		142
USA		2,861		2,448		2,443		4,624		3,146		3,115
Canada		167		143		142		209		183		163
Asia Pacific		415		351		295		179		114		97
Other countries		151		118		107		14		11		11
Total continuing		4,811		4,162		3,990		5,951		4,318		4,073
Discontinued operations
UK		—		1		17		—		—		—
Other European countries		—		82		86		—		—		—
USA		8		78		314		—		117		294
Canada		—		—		—		—		—		—
Other countries		—		6		16		—		—		—
Total discontinued		8		167		433		—		117		294
Total		4,819		4,329		4,423		5,951		4,435		4,367

Sales are allocated based on the country in which the customer is located. This does not differ materially from the location where the order is received. 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 Group’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 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.

The results of Government Solutions (previously included in the Professional segment) and Les Echos (previously included in the FT Publishing segment) were included in discontinued operations for 2006 and 2007 and were consolidated up to the date of sale.

Datamark was sold immediately following its acquisition as part of the eCollege transaction and consequently none of the results for this business were consolidated.

F-20

Notes to the Consolidated Financial Statements (Continued)

An analysis of the results and cash flows of discontinued operations are as follows:

	2008
	Data
	Management
	All figures
	in £ millions
Sales		8
Operating profit		—
Profit before tax		—
Attributable tax expense		—
Profit after tax		—
Loss on disposal of discontinued operations before tax		(53	)
Attributable tax expense		(37	)
Loss for the year from discontinued operations		(90	)
Operating cash flows		—
Investing cash flows		—
Financing cash flows		—
Total cash flows		—

	2007
	Data								Government
	Management			Les Echos			Datamark		Solutions			Total
	All figures in £ millions
Sales		56			82			—		29			167
Operating profit		12			1			—		2			15
Goodwill impairment		(97	)		—			—		—			(97	)
(Loss)/profit before tax		(85	)		1			—		2			(82	)
Attributable tax expense		(4	)		—			—		(1	)		(5	)
(Loss)/profit after tax		(89	)		1			—		1			(87	)
Profit/(loss) on disposal of discontinued operations before tax		—			165			—		(19	)		146
Attributable tax (expense)/benefit		—			—			7		(93	)		(86	)
(Loss)/profit for the year from discontinued operations		(89	)		166			7		(111	)		(27	)
Operating cash flows		11			4			—		(8	)		7
Investing cash flows		(1	)		4			—		—			3
Financing cash flows		(10	)		(7	)		—		(4	)		(21	)
Total cash flows		—			1			—		(12	)		(11	)

F-21

Notes to the Consolidated Financial Statements (Continued)

	2006
	Government			Data
	Solutions			Management			Les Echos			Total
	All figures in £ millions
Sales		286			61			86			433
Operating profit		22			13			5			40
Profit before tax		22			13			5			40
Attributable tax expense		(8	)		(5	)		(2	)		(15	)
Profit after tax		14			8			3			25
Profit on disposal of discontinued operations before tax		—			—			—			—
Attributable tax (expense)/benefit		—			—			—			—
Profit for the year from discontinued operations		14			8			3			25
Operating cash flows		20			9			4			33
Investing cash flows		(8	)		(2	)		—			(10	)
Financing cash flows		(1	)		(7	)		(7	)		(15	)
Total cash flows		11			—			(3	)		8

4.   Operating expenses

	2008			2007			2006
	All figures in £ millions
By function:
Cost of goods sold		2,174			1,910			1,841
Operating expenses
Distribution costs		198			202			232
Administrative and other expenses		1,890			1,600			1,518
Other income		(102	)		(101	)		(99	)
Total operating expenses		1,986			1,701			1,651
Total		4,160			3,611			3,492

F-22

Notes to the Consolidated Financial Statements (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:

	2008		2007		2006
	All figures in £ millions
Fees payable to the company’s auditor for the audit of parent company and consolidated financial statements		3		3		5
The audit of the company’s subsidiaries pursuant to legislation		2		1		4
Tax services		2		2		1
Other services		1		1		1
Total		8		7		11

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

	2008		2007		2006
	All figures in £ millions
Group audit fees including fees for attestation under section 404 of the Sarbanes-Oxley Act		5		4		9
Non-audit fees		3		3		2
Total		8		7		11

Fees for attestation under section 404 of the Sarbanes-Oxley Act are allocated between fees payable for the audits of consolidated and subsidiary accounts.

Tax services include services related to tax planning and various other tax advisory matters.

Other services include due diligence on acquisitions and services related to the disposal of the Data Management business.

F-23

Notes to the Consolidated Financial Statements (Continued)

5.   Employee information

	Notes		2008		2007		2006
			All figures in £ millions
Employee benefit expense
Wages and salaries (including termination benefits and restructuring costs)				1,317		1,087		1,035
Social security costs				119		100		101
Share-based payment costs		26		33		30		25
Pension costs — defined contribution plans		25		41		39		36
Pension costs — defined benefit plans		25		37		31		29
Other post-retirement benefits		25		6		1		(1	)
				1,553		1,288		1,225

The details of the emoluments of the directors of Pearson plc are shown in the report on directors’ remuneration.

	2008		2007		2006
	Average number employed
Employee numbers
North American Education		15,412		14,327		12,710
International Education		5,718		5,291		4,472
Professional		2,641		2,540		2,223
FT Publishing		2,379		2,083		1,766
Interactive Data		2,413		2,300		2,200
Penguin		4,112		4,163		3,943
Other		909		918		900
Continuing operations		33,584		31,622		28,214
Discontinued operations		96		1,070		6,127
		33,680		32,692		34,341

F-24

Notes to the Consolidated Financial Statements (Continued)

6.   Net finance costs

	Notes		2008			2007			2006
			All figures in £ millions
Interest payable				(106	)		(114	)		(117	)
Net foreign exchange losses				(11	)		(25	)		(2	)
Other losses on financial instruments in a hedging relationship:
— fair value hedges				(7	)		(1	)		—
— net investment hedges				—			(1	)		(2	)
Other losses on financial instruments not in a hedging relationship:
— derivatives				(12	)		(9	)		(12	)
Finance costs				(136	)		(150	)		(133	)
Interest receivable				17			19			23
Finance income in respect of employee benefits		25		8			10			4
Net foreign exchange gains				—			8			21
Other gains on financial instruments in a hedging relationship:
— fair value hedges				2			—			—
— net investment hedges				1			—			—
Other gains on financial instruments not in a hedging relationship:
— amortisation of transitional adjustment on bonds				1			1			8
— derivatives				16			6			3
Finance income				45			44			59
Net finance costs				(91	)		(106	)		(74	)

The £5m (2007: £1m) net loss on fair value hedges comprises a £156m (2007: £20m) loss on the underlying bonds offset by a £151m (2007: £19m) gain on the related derivative financial instruments.

7.   Income tax

	Notes		2008			2007			2006
			All figures in £ millions
Current tax
Charge in respect of current year				(89	)		(71	)		(81	)
Recognition of previously unrecognised trading losses				—			—			23
Other adjustments in respect of prior years				10			27			35
Total current tax charge				(79	)		(44	)		(23	)
Deferred tax
In respect of timing differences				(97	)		(96	)		(73	)
Recognition of previously unrecognised capital losses				—			—			76
Recognition of previously unrecognised trading losses				—			—			37
Other adjustments in respect of prior years				4			9			(21	)
Total deferred tax charge		13		(93	)		(87	)		19
Total tax charge				(172	)		(131	)		(4	)

F-25

Notes to the 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:

	2008			2007			2006
	All figures in £ millions
Profit before tax		585			468			448
Tax calculated at UK rate (2008: 28.5%, 2007: 30%)		(167	)		(141	)		(135	)
Effect of overseas tax rates		(29	)		(25	)		(17	)
Joint venture and associate income reported net of tax		7			7			7
Net expense not deductible for tax purposes		(1	)		(9	)		(13	)
Utilisation of previously unrecognised tax losses		4			3			7
Recognition of previously unrecognised tax losses		—			—			136
Unutilised tax losses		—			(2	)		(3	)
Prior year adjustments		14			36			14
Total tax charge		(172	)		(131	)		(4	)
UK		(53	)		(42	)		(15	)
Overseas		(119	)		(89	)		11
Total tax charge		(172	)		(131	)		(4	)

The tax benefit on items charged to equity is as follows:

	2008			2007			2006
	All figures in £ millions
Share-based payments		(7	)		7			2
Pension contributions and actuarial gains and losses		10			28			9
Net investment hedges and other foreign exchange gains and losses		(1	)		(6	)		1
		2			29			12

8.   Earnings per share

Basic

Basic earnings per share is calculated by dividing the profit attributable to equity shareholders of the company by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the company 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		2008			2007			2006
			All figures in £ millions
Profit for the year from continuing operations				413			337			444
Minority interest				(31	)		(26	)		(23	)
Earnings from continuing operations				382			311			421
(Loss)/profit for the year from discontinued operations		3		(90	)		(27	)		25
Earnings				292			284			446
Weighted average number of shares (millions)				797.0			796.8			798.4
Effect of dilutive share options (millions)				0.5			1.3			1.5
Weighted average number of shares (millions) for diluted earnings				797.5			798.1			799.9
Earnings per share from continuing and discontinued operations
Basic				36.6p			35.6p			55.9p
Diluted				36.6p			35.6p			55.8p
Earnings per share from continuing operations
Basic				47.9p			39.0p			52.7p
Diluted				47.9p			39.0p			52.6p
Earnings per share from discontinued operations
Basic				(11.3p	)		(3.4p	)		3.2p

9.   Dividends

	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 2008 of 22p per share which will absorb an estimated £176m of shareholders’ funds. It will be paid on 8 May 2009 to shareholders who are on the register of members on 14 April 2009. These financial statements do not reflect this dividend.

F-27

Notes to the Consolidated Financial Statements (Continued)

10.   Property, plant and equipment

							Assets in
	Land and			Plant and			course of
	buildings			equipment			construction			Total
	All figures in £ millions
Cost
At 1 January 2007		313			631			11			955
Exchange differences		(2	)		—			—			(2	)
Additions		20			62			11			93
Disposals		(24	)		(65	)		—			(89	)
Acquisition through business combination		—			27			—			27
Disposal through business disposal		(1	)		(25	)		—			(26	)
Reclassifications		—			6			(6	)		—
Transfer to non-current assets held for sale		(8	)		(14	)		—			(22	)
At 31 December 2007		298			622			16			936
Exchange differences		54			138			6			198
Additions		6			67			6			79
Disposals		(7	)		(38	)		—			(45	)
Acquisition through business combination		2			29			2			33
Reclassifications		2			21			(23	)		—
At 31 December 2008		355			839			7			1,201

							Assets in
	Land and			Plant and			course of
	buildings			equipment			construction		Total
	All figures in £ millions
Depreciation
At 1 January 2007		(128	)		(479	)		—		(607	)
Exchange differences		—			1			—		1
Charge for the year		(14	)		(54	)		—		(68	)
Disposals		11			63			—		74
Acquisition through business combination		—			(16	)		—		(16	)
Disposal through business disposal		—			20			—		20
Transfer to non-current assets held for sale		5			10			—		15
At 31 December 2007		(126	)		(455	)		—		(581	)
Exchange differences		(30	)		(102	)		—		(132	)
Charge for the year		(19	)		(61	)		—		(80	)
Disposals		6			36			—		42
Acquisition through business combination		(1	)		(26	)		—		(27	)
At 31 December 2008		(170	)		(608	)		—		(778	)
Carrying amounts
At 1 January 2007		185			152			11		348
At 31 December 2007		172			167			16		355
At 31 December 2008		185			231			7		423

F-28

Notes to the Consolidated Financial Statements (Continued)

Depreciation expense of £12m (2007: £13m) has been included in the income statement in cost of goods sold, £6m (2007: £5m) in distribution expenses and £61m (2007: £50m) in administrative and other expenses. There was no depreciation expense relating to discontinued 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 £7m (2007: £6m).

11.   Intangible assets

							Acquired
							customer			Acquired		Acquired			Other
							lists &			trademarks		publishing			intangibles
	Goodwill			Software			relationships			& brands		rights			acquired		Total
	All figures in £ millions
Cost
At 1 January 2007		3,271			201			113			26		96			53		3,760
Exchange differences		(4	)		(2	)		—			1		3			—		(2	)
Additions — internal development		—			20			—			—		—			—		20
Additions — purchased		—			13			—			—		—			—		13
Disposals		(34	)		(19	)		(2	)		—		(3	)		2		(56	)
Acquisition through business combination		304			4			76			35		40			44		503
Transfer to non-current assets held for sale		(194	)		—			—			—		—			—		(194	)
At 31 December 2007		3,343			217			187			62		136			99		4,044
Exchange differences		1,082			71			77			24		31			62		1,347
Additions — internal development		—			29			—			—		—			—		29
Additions — purchased		—			16			—			—		—			—		16
Disposals		(8	)		(27	)		—			—		—			—		(35	)
Acquisition through business combination		153			17			77			42		—			97		386
Disposal through business disposal		—			(1	)		—			—		(2	)		—		(3	)
Transfer to Pre-publication		—			(12	)		—			—		—			—		(12	)
At 31 December 2008		4,570			310			341			128		165			258		5,772

F-29

Notes to the Consolidated Financial Statements (Continued)

						Acquired
						customer			Acquired			Acquired			Other
						lists &			trademarks			publishing			intangibles
	Goodwill		Software			relationships			& brands			rights			acquired			Total
	All figures in £ millions
Amortisation
At 1 January 2007		—		(135	)		(15	)		(1	)		(15	)		(13	)		(179	)
Exchange differences		—		1			—			—			—			1			2
Charge for the year		—		(25	)		(13	)		(3	)		(17	)		(12	)		(70	)
Disposals		—		19			—			—			—			—			19
Acquisition through business combination		—		(2	)		—			—			—			—			(2	)
Transfer to non-current assets held for sale		—		—			—			—			—			—			—
At 31 December 2007		—		(142	)		(28	)		(4	)		(32	)		(24	)		(230	)
Exchange differences		—		(50	)		(15	)		(3	)		(13	)		(12	)		(93	)
Charge for the year		—		(30	)		(24	)		(10	)		(25	)		(27	)		(116	)
Disposals		—		27			—			—			—			—			27
Acquisition through business combination		—		(13	)		—			—			—			—			(13	)
Disposal through business disposal		—		1			—			—			1			—			2
Transfer to Pre-publication		—		4			—			—			—			—			4
At 31 December 2008		—		(203	)		(67	)		(17	)		(69	)		(63	)		(419	)
Carrying amounts
At 1 January 2007		3,271		66			98			25			81			40			3,581
At 31 December 2007		3,343		75			159			58			104			75			3,814
At 31 December 2008		4,570		107			274			111			96			195			5,353

Goodwill

The goodwill carrying value of £4,570m relates to acquisitions completed after 1 January 1998. Prior to 1 January 1998 all goodwill was written off to reserves on the date of acquisition. £3,309m of the carrying value relates to acquisitions completed between 1 January 1998 and 31 December 2002 and £1,261m relates to acquisitions completed after 1 January 2003 (the date of transition to IFRS).

For acquisitions completed between 1 January 1998 and 31 December 2002 no value was ascribed to intangibles other than goodwill and the goodwill on each acquisition was amortised over a period of up to 20 years. On adoption of IFRS on 1 January 2003, the Group chose not to restate the goodwill balance and at that date the balance was frozen (i.e. amortisation ceased). If goodwill had been restated then a significant value would have been ascribed to other intangible assets, which would be subject to amortisation, and the carrying value of goodwill would be significantly lower.

For acquisitions completed after 1 January 2003 value has been ascribed to other intangible assets, which are amortised, with only the remaining difference between the purchase price and the fair value of net assets acquired being allocated to goodwill.

F-30

Notes to the Consolidated Financial Statements (Continued)

Other intangible assets

Other intangibles acquired include content, technology and software rights. Amortisation of £5m (2007: £3m) is included in the income statement in cost of goods sold and £111m (2007: £67m) in administrative and other expenses.

Impairment tests for cash-generating units containing goodwill Impairment tests have been carried out where appropriate as described below. The recoverable amount for each unit tested exceeds its carrying value.

Goodwill is allocated to 14 cash-generating units (CGUs) within the business segments as follows:

	Notes		2008		2007
			All figures in £ millions
US School Curriculum				937		677
US School Assessment and Information				722		414
US Higher Education				1,164		839
Canada				173		155
International Education Publishing				315		270
International Education Assessment and Testing				241		194
Professional Publishing				15		10
Professional Assessment and Testing				254		181
Pearson Education total				3,821		2,740
Financial Times				46		12
Mergermarket				130		126
Interactive Data				208		147
FT Group total				384		285
Penguin US				216		155
Penguin UK				95		111
Pearson Australia				54		52
Penguin total				365		318
Total goodwill — continuing operations				4,570		3,343
Goodwill held for sale		31		—		96
Total goodwill				4,570		3,439

During 2008, after the change in organisational structure the CGUs were reorganised and goodwill reallocated to the units 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-year period. The key assumptions used by management in the value in use calculations were:

Discount rate — The discount rate is based on the risk-free rate for government bonds, adjusted for a risk premium to reflect the increased risk in investing in equities. The risk premium adjustment is assessed for each specific CGU. The average pre-tax discount rates used are in the range of 10.2% to 11.7% for the Pearson

F-31

Notes to the Consolidated Financial Statements (Continued)

Education businesses (2007: 10.5% to 12.0%), 10.8% to 20.5% for the FT Group businesses (2007: 10.4% to 17.2%) and 8.8% to 10.4% for the Penguin businesses (2007: 8.9% to 11.7%).

Perpetuity growth rates — The cash flows subsequent to the approved budget period are based upon the long-term historic growth rates of the underlying territories in which the CGU operates and reflect the long-term growth prospects of the sectors in which the CGU operates. A perpetuity growth rate of 2.0% was used for all CGUs in 2008 (a range from 2.5% to 3.5% in 2007). The perpetuity growth rates are consistent with appropriate external sources for the relevant markets.

Cash flow growth rates — The cash flow growth rates are derived from management’s latest estimates of forecast sales taking into consideration past experience of operating margins achieved in the CGU. Historically, such forecasts have been reasonably accurate.

Sensitivities

The Group’s impairment review is sensitive to a change in the key assumptions used, most notably the discount rates, the perpetuity growth rates and expected future cash flows. Based on the Group’s sensitivity analysis, a reasonably possible change in the discount rate or perpetuity growth rate could cause an impairment in either the US School Curriculum or Penguin UK CGUs.

The fair value of US School Curriculum is 8% or approximately £77m above its carrying value, but an increase of 0.5 percentage points in the discount rate or a reduction of 0.6 percentage points in the perpetuity growth rate would cause the value in use to fall below the carrying value.

The fair value of Penguin UK is 24% or approximately £44m above its carrying value, but an increase of 1.4 percentage points in the discount rate or a reduction of 1.7 percentage points in the perpetuity growth rate would cause the value in use to fall below the carrying value.

12.   Investments in joint ventures and associates

Joint ventures

	2008			2007
	All figures in £ millions
At beginning of year		11			12
Exchange differences		(4	)		—
Share of profit after tax		6			4
Dividends		(5	)		(8	)
Additions and further investment		5			3
At end of year		13			11

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

F-32

Notes to the Consolidated Financial Statements (Continued)

The aggregate of the Group’s share in its joint ventures, none of which are individually significant, are as follows:

	2008			2007
	All figures in £ millions
Assets
Non-current assets		6			3
Current assets		21			23
Liabilities
Current liabilities		(14	)		(15	)
Net assets		13			11
Income		36			61
Expenses		(30	)		(57	)
Profit after income tax		6			4

Associates

	2008			2007
	All figures in £ millions
At beginning of year		9			8
Exchange differences		(5	)		(1	)
Share of profit after tax		19			19
Dividends		(16	)		(24	)
Additions		—			1
Distribution from associate in excess of carrying value		6			6
Actuarial losses on retirement benefit obligations		(3	)		—
At end of year		10			9

Investments in associates are accounted for using the equity method of accounting. There is no acquisition goodwill relating to the Group’s investments in associates.

The Group’s interests in its principal associates, all of which are unlisted, are as follows:

			%
2008	Country of incorporation		Interest held		Assets		Liabilities			Revenues		Profit
	All figures in £ millions
The Economist Newspaper Ltd		England		50		86		(86	)		149		16
Other						35		(25	)		42		3
Total						121		(111	)		191		19

			%
2007	Country of incorporation		Interest held		Assets		Liabilities			Revenues		Profit
	All figures in £ millions
The Economist Newspaper Ltd		England		50		63		(63	)		131		15
Other						30		(21	)		56		4
Total						93		(84	)		187		19

The interest held in associates is equivalent to voting rights.

F-33

Notes to the Consolidated Financial Statements (Continued)

13.   Deferred income tax

	2008			2007
	All figures in £ millions
Deferred income tax assets
Deferred income tax assets to be recovered after more than 12 months		341			262
Deferred income tax assets to be recovered within 12 months		31			66
		372			328
Deferred income tax liabilities
Deferred income tax liabilities to be settled after more than 12 months		(447	)		(287	)
Deferred income tax liabilities to be settled within 12 months		—			—
		(447	)		(287	)
Net deferred income tax		(75	)		41

Deferred income tax assets to be recovered within 12 months relate to the utilisation of losses in the US.

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 2008 in respect of UK losses of £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		2008			2007
			All figures in £ millions
At beginning of year				41			172
Exchange differences				(12	)		(4	)
Income statement charge		7		(93	)		(87	)
Acquisition through business combination		30		(4	)		(45	)
Disposal through business disposal		32		—			2
Tax (charge)/benefit to equity				(7	)		3
At end of year				(75	)		41

F-34

Notes to the Consolidated Financial Statements (Continued)

The movement in deferred income tax assets and liabilities during the year is as follows:

	Capital			Trading			Goodwill and			Returns
	losses			losses			intangibles			provisions			Other			Total
	All figures in £ millions
Deferred income tax assets
At 1 January 2007		76			129			25			66			121			417
Exchange differences		—			(5	)		—			(1	)		(2	)		(8	)
Acquisition through business combination		—			10			—			—			1			11
Income statement (charge)/benefit		(76	)		(47	)		(5	)		14			19			(95	)
Tax benefit to equity		—			—			—			—			3			3
At 31 December 2007		—			87			20			79			142			328
Exchange differences		—			19			6			28			40			93
Acquisition through business combination		—			2			—			—			—			2
Income statement charge		—			(35	)		(6	)		(1	)		(3	)		(45	)
Tax charge to equity		—			—			—			—			(6	)		(6	)
At 31 December 2008		—			73			20			106			173			372

Other deferred income tax assets include temporary differences on share-based payments, inventory, retirement benefit obligations and other provisions.

	Goodwill and
	intangibles			Other			Total
	All figures in £ millions
Deferred income tax liabilities
At 1 January 2007		(149	)		(96	)		(245	)
Exchange differences		3			1			4
Acquisition through business combination		(56	)		—			(56	)
Disposal through business disposal		—			2			2
Income statement (charge)/benefit		(12	)		20			8
Tax benefit to equity		—			—			—
At 31 December 2007		(214	)		(73	)		(287	)
Exchange differences		(73	)		(32	)		(105	)
Acquisition through business combination		(5	)		(1	)		(6	)
Income statement charge		(26	)		(22	)		(48	)
Tax charge to equity		—			(1	)		(1	)
At 31 December 2008		(318	)		(129	)		(447	)

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

F-35

Notes to the Consolidated Financial Statements (Continued)

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 the mark-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 liabilities — 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 chief financial officer under policies approved by the board, which are summarised below. All the treasury policies remained unchanged throughout 2008, with the exception of a change to the foreign exchange hedging policy made with effect from October 2008, which is explained later in this note. Some minor updates will also be made to treasury policies for 2009, largely to reflect current financial market conditions.

The audit committee and a group of external treasury advisers receives reports on the Group’s treasury activities, policies and procedures. The treasury department is not a profit centre and its activities are subject to regular internal audit.

F-42

Notes to the Consolidated Financial Statements (Continued)

Interest rate risk management

The Group’s exposure to interest rate fluctuations on its borrowings is managed by borrowing on a fixed rate basis and by entering into rate swaps, rate caps and forward rate agreements. The Group’s policy objective has continued to be to set a target proportion of its forecast borrowings (taken at the year end, with cash netted against floating rate debt and before certain adjustments for IAS 39) to be hedged (i.e. fixed or capped at the year end) over the next four years, subject to a maximum of 65% and a minimum that starts at 40% and falls by 10% at each year end. At the end of 2008 the hedging ratio, on the above basis, was approximately 49%. A simultaneous 1% change on 1 January in the Group’s variable interest rates in US dollar and sterling, taking into account forecast seasonal debt, would have a £10m effect on profit before tax.

Use of interest rate derivatives

The policy described in the section above creates a group of derivatives, under which the Group is a payer of fixed rates and a receiver of floating rates. The Group also aims to avoid undue exposure to a single interest rate setting. Reflecting this objective, the Group has swapped its fixed rate bond issues to floating rate at their launch. This creates a second group of derivatives, under which the Group is a receiver of fixed rates and a payer of floating rates. The Group’s accounting objective in its use of interest rate derivatives is to minimise the impact on the income statement of changes in the mark-to-market value of its derivative portfolio as a whole. It uses duration calculations to estimate the sensitivity of the derivatives to movements in market rates. The Group also identifies which derivatives are eligible for fair value hedge accounting (which reduces sharply the income statement impact of changes in the market value of a derivative). The Group then balances the total portfolio between hedge-accounted and pooled segments, so that the expected movement on the pooled segment is minimal.

Liquidity and refinancing risk management

The Group’s objective is to secure continuity of funding at a reasonable cost. To do this it seeks to arrange committed funding for a variety of maturities from a diversity of sources. The Group’s policy objective has been that the weighted average maturity of its core gross borrowings (treating short-term advances as having the final maturity of the facilities available to refinance them) should be between three and ten years. At the end of 2008 the average maturity of gross borrowings was 5.0 years of which bonds represented 90% of these borrowings (up from 4.6 years and up from 72% respectively at the beginning of the year).

The Group believes that ready access to different funding markets also helps to reduce its liquidity risk, and that published credit ratings and published financial policies improve such access. All of the Group’s credit ratings remained unchanged during the year. The long-term ratings are Baa1 from Moody’s and BBB+ from Standard & Poor’s, and the short-term ratings are P2 and A2 respectively. The Group’s policy is to strive to maintain a rating of Baa1/BBB+ over the long term. The Group will also continue to use internally a range of ratios to monitor and manage its finances. These include interest cover, net debt to operating profit and cash flow to debt measures. The Group also maintains undrawn committed borrowing facilities. At the end of 2008 the committed facilities amounted to £1,217m and their weighted average maturity was 3.4 years.

F-43

Notes to the Consolidated Financial Statements (Continued)

Analysis of Group debt, including the impact of derivatives

The following tables analyse the Group’s sources of funding and the impact of derivatives on the Group’s debt instruments.

The Group’s net debt position is set out below:

	2008			2007
	All figures in £ millions
Cash and cash equivalents		685			560
Marketable securities		54			40
Derivative financial instruments		164			35
Bank loans, overdrafts and loan notes		(228	)		(452	)
Bonds		(2,128	)		(1,150	)
Finance lease liabilities		(7	)		(6	)
Net debt		(1,460	)		(973	)

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

	2008		2007
	All figures in £ millions
Fixed rate		781		567
Floating rate		679		406
Total		1,460		973

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

	2008		2007
	All figures in £ millions
US dollar		2,081		1,401
Sterling		277		207
Euro		5		—
Total		2,363		1,608

As at 31 December 2008 there were no outstanding cross-currency rate derivatives.

As at 31 December 2008 the exposure of the borrowings of the Group to interest rate changes when the borrowings re-price is as follows:

	Less than		One to			More than
	one year		five years			five years			Total
	All figures in £ millions
Re-pricing profile of borrowings		476		629			1,258			2,363
Effect of rate derivatives		1,173		(254	)		(919	)		—
Total		1,649		375			339			2,363

F-44

Notes to the Consolidated Financial Statements (Continued)

The maturity of contracted cash flows on the Group’s borrowings and all of its derivative financial instruments are as follows:

	2008
	USD			GBP			EUR		Total
	All figures in £ millions
Not later than one year		311			17			—		328
Later than one year and not later than five years		884			65			—		949
Later than five years		954			266			—		1,220
Total		2,149			348			—		2,497
Analysed as:
Revolving credit facilities and commercial paper		141			—			—		141
Bonds		2,237			355			—		2,592
Rate derivatives — inflows		(392	)		(21	)		—		(413	)
Rate derivatives — outflows		163			14			—		177
Total		2,149			348			—		2,497

	2007
	USD			GBP			EUR		Total
	All figures in £ millions
Not later than one year		153			(30	)		—		123
Later than one year and not later than five years		966			70			—		1,036
Later than five years		420			285			—		705
Total		1,539			325			—		1,864
Analysed as:
Revolving credit facilities and commercial paper		429			—			—		429
Bonds		1,017			483			—		1,500
Rate derivatives — inflows		(268	)		(160	)		—		(428	)
Rate derivatives — outflows		361			2			—		363
Total		1,539			325			—		1,864

All cash flow projections shown above are on an undiscounted basis. Any cash flows based on a floating rate are calculated using interest rates as set at the date of the last rate reset. Where this is not possible, floating rates are based on interest rates prevailing at 31 December in the relevant year. All derivative amounts are shown gross, although the company net settles these amounts wherever possible.

Amounts drawn under revolving credit facilities and commercial paper are assumed to mature at the maturity date of the relevant facility, with interest calculated as payable in each calendar year up to and including the date of maturity of the facility.

Financial counterparty risk management

Counterparty credit limits, which take published credit rating and other factors into account, are set to cover our total aggregate exposure to a single financial institution. The limits applicable to published credit ratings bands are approved by the chief financial officer within guidelines approved by the board. Exposures and limits applicable to each financial institution are reviewed on a regular basis.

F-45

Notes to the Consolidated Financial Statements (Continued)

Foreign currency risk management

Although the Group is based in the UK, it has its most significant investment in overseas operations. The most significant currency for the Group is the US dollar. The Group’s policy on routine transactional conversions between currencies (for example, the collection of receivables, and the settlement of payables or interest) remains that these should be transacted at the relevant spot exchange rate. The majority of the Group’s operations are domestic within their country of operation. No unremitted profits are hedged with foreign exchange contracts, as the company judges it inappropriate to hedge non-cash flow translational exposure with cash flow instruments. However, the Group does seek to create a natural hedge of this exposure through its policy of aligning approximately the currency composition of its core net borrowings with its forecast operating profit before depreciation and amortisation. This policy aims to dampen the impact of changes in foreign exchange rates on consolidated interest cover and earnings. The policy above applies only to currencies that account for more than 15% of Group operating profit before depreciation and amortisation, which currently are only the US dollar and sterling. However, the Group still borrows small amounts in other currencies, typically for seasonal working capital needs. In addition, our policy does not require existing currency debt to be terminated to match declines in that currency’s share of Group operating profit before depreciation and amortisation. Following the board’s approval of a policy change in October 2008, currencies that account for less than 15% of Group operating profit before depreciation and amortisation may now be included in the above hedging process at the request of the chief financial officer. At the balance sheet date, no hedging transactions had been undertaken under that authority.

Included within year end net debt, the net borrowings/(cash) in the two principal currencies above (taking into account the effect of cross currency swaps) were: US dollar £1,777m and sterling £127m.

Use of currency debt and currency derivatives

The Group uses both currency denominated debt and derivative instruments to implement the above policy. Its intention is that gains/losses on the derivatives and debt offset the losses/gains on the foreign currency assets and income. Each quarter the value of hedging instruments is monitored against the assets in the relevant currency and, where practical, a decision is made whether to treat the debt or derivative as a net investment hedge (permitting foreign exchange movements on it to be taken to reserves) for the purposes of IAS 39.

Financial instruments — sensitivity analysis

As at 31 December 2008 the sensitivity of the Group’s financial instruments to fluctuations in interest rates and exchange rates is as follows:

				Impact of 1%			Impact of 1%			Impact of 10%			Impact of 10%
	Carrying			increase in			decrease in			strengthening in			weakening in
	value			interest rates			interest rates			sterling			sterling
	All figures in £ millions
Investments in unlisted securities		63			—			—			(2	)		3
Cash and cash equivalents		685			—			—			(41	)		50
Marketable securities		54			—			—			(5	)		6
Derivative financial instruments		164			(80	)		88			(15	)		18
Bonds		(2,128	)		77			(84	)		155			(189	)
Other borrowings		(235	)		—			—			19			(24	)
Other net financial assets		580			—			—			(46	)		57
Total financial instruments		(817	)		(3	)		4			65			(79	)

The table shows the sensitivities of the fair values of each class of financial instruments to an isolated change in either interest rates or foreign exchange rates. The class ‘Other net financial assets’ comprises trade assets less trade liabilities.

F-46

Notes to the Consolidated Financial Statements (Continued)

The sensitivities of derivative instruments are calculated using established estimation techniques such as discounted cash flow and option valuation models. Where modelling an interest rate decrease of 1% led to negative interest rates, these points on the yield curve were adjusted to 0%. A large proportion of the movements shown above would impact equity rather than the income statement, depending on the location and functional currency of the entity in which they arise and the availability of net investment hedge treatment. The changes in valuations are estimates of the impact of changes in market variables and are not a prediction of future events or anticipated gains or losses.

20.   Intangible assets — Pre-publication

	2008			2007
	All figures in £ millions
Cost
At beginning of year		1,264			1,152
Exchange differences		494			(7	)
Additions		297			230
Disposals		(345	)		(125	)
Acquisition through business combination		78			19
Transfer from software		12			—
Transfer to non-current assets held for sale		—			(5	)
At end of year		1,800			1,264
Amortisation
At beginning of year		(814	)		(750	)
Exchange differences		(337	)		1
Charge for the year		(244	)		(192	)
Disposals		345			125
Acquisition through business combination		(51	)		(1	)
Transfer from software		(4	)		—
Transfer to non-current assets held for sale		—			3
At end of year		(1,105	)		(814	)
Carrying amounts
At end of year		695			450

Included in the above are pre-publication assets amounting to £462m (2007: £292m) which will be realised in more than 12 months.

Amortisation is included in the income statement in cost of goods sold. There was no amortisation relating to discontinued operations in 2008 and 2007.

F-47

Notes to the Consolidated Financial Statements (Continued)

21.   Inventories

	2008		2007
	All figures in £ millions
Raw materials		31		24
Work in progress		29		30
Finished goods		441		314
		501		368

The cost of inventories relating to continuing operations recognised as an expense and included in the income statement in cost of goods sold amounted to £832m (2007: £732m). In 2008 £56m (2007: £47m) of inventory provisions was charged in the income statement. None of the inventory is pledged as security.

22.   Trade and other receivables

	2008		2007
	All figures in £ millions
Current
Trade receivables		1,030		750
Royalty advances		111		84
Prepayments and accrued income		62		48
Other receivables		135		59
Receivables from related parties		4		5
		1,342		946
Non-current
Royalty advances		102		68
Prepayments and accrued income		3		4
Other receivables		47		57
		152		129

Trade receivables are stated at fair value, net of provisions for bad and doubtful debts and anticipated future sales returns.

The movements on the provision for bad and doubtful debts are as follows:

	2008			2007
	All figures in £ millions
At beginning of year		(52	)		(46	)
Exchange differences		(18	)		(1	)
Income statement movements		(27	)		(19	)
Utilised		27			15
Acquisition through business combination		(2	)		(3	)
Disposal through business disposal		—			2
At end of year		(72	)		(52	)

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

F-48

Notes to the Consolidated Financial Statements (Continued)

The ageing of the Group’s trade receivables is as follows:

	2008			2007
	All figures in £ millions
Within due date		1,110			819
Up to three months past due date		248			171
Three to six months past due date		60			51
Six to nine months past due date		21			12
Nine to 12 months past due date		15			19
More than 12 months past due date		20			19
Total trade receivables		1,474			1,091
Less: provision for bad and doubtful debts		(72	)		(52	)
Less: provision for sales returns		(372	)		(281	)
Transfer to non-current assets held for sale		—			(8	)
Net trade receivables		1,030			750

The Group reviews its bad debt provision at least twice a year following a detailed review of receivable balances and historic payment profiles. Management believe all the remaining receivable balances are fully recoverable.

23.   Provisions for other liabilities and charges

	Deferred
	consideration			Leases			Other			Total
	All figures in £ millions
At 1 January 2008		37			9			21			67
Exchange differences		5			2			9			16
Charged to income statement		2			—			7			9
Released to income statement		—			(1	)		(5	)		(6	)
Acquisition through business combination — current year		3			—			16			19
Acquisition through business combination — prior year adjustments		(4	)		—			7			3
Utilised		—			(2	)		(17	)		(19	)
At 31 December 2008		43			8			38			89

	2008		2007
	All figures in £ millions
Analysis of provisions
Non-current		33		44
Current		56		23
		89		67

Deferred consideration primarily relates to the acquisition of Mergermarket in 2006. These amounts are payable in 2009.

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

	2008		2007
	All figures in £ millions
Trade payables		450		342
Social security and other taxes		35		23
Accruals		501		402
Deferred income		444		290
Interest payable		10		—
Dividends payable to minority interest		5		12
Other liabilities		205		171
		1,650		1,240
Less: non-current portion
Accruals		42		30
Deferred income		87		58
Interest payable		1		—
Other liabilities		91		102
		221		190
Current portion		1,429		1,050

The carrying value of the Group’s payables approximates its fair value.

The deferred income balances comprise:

•  multi-year obligations to deliver workbooks to adoption customers in school businesses;

•  advance payments in assessment and testing businesses;

•  subscription income in school, newspaper and market pricing businesses;

•  advertising income relating to future publishing days in newspaper businesses; and

•  obligations to deliver digital content in future periods.

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.

	2008						2007						2006
	UK Group		Other				UK Group		Other				UK Group		Other
	plan		plans		PRMB		plan		plans		PRMB		plan		plans		PRMB
%
Inflation		2.80		2.80		2.80		3.30		2.93		3.00		3.00		2.91		3.00
Rate used to discount plan liabilities		6.40		6.25		6.25		5.80		6.01		6.05		5.20		5.70		5.85
Expected return on assets		6.33		7.60		—		6.50		7.27		—		6.40		7.18		—
Expected rate of increase in salaries		4.30		4.50		—		5.00		4.36		—		4.70		4.37		—
Expected rate of increase for pensions in payment and deferred pensions		2.30 to 4.20		—		—		2.50 to 4.30		—		—		2.10 to 4.60		—		—
Initial rate of increase in healthcare rate		—		—		9.00		—		—		9.50		—		—		10.00
Ultimate rate of increase in healthcare rate		—		—		5.00		—		—		5.00		—		—		5.00

The UK discount rate is based on the annualised yield on the iBoxx over 15-year AA-rated corporate bond index, adjusted to reflect the duration of our liabilities. The US discount rate is set by reference to a US bond portfolio matching model. The expected return on assets is based on market expectations of long-term asset returns for the 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. In 2007 GAM94 was used, and in 2008 this was updated to RP2000 to reflect the mortality assumption now more prevalent in the US.

Using the above tables, the remaining average life expectancy in years of a pensioner retiring at age 65 on the balance sheet date for the UK and US Group plans is as follows:

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

The remaining average life expectancy in years of a pensioner retiring at age 65, 20 years after the balance sheet date, for the UK and US Group plans is as follows:

	UK				US
	2008		2007		2008		2007
Male		23.3		23.1		17.6		17.9
Female		23.8		23.6		20.2		21.3

F-51

Notes to the Consolidated Financial Statements (Continued)

Financial statement information

The amounts recognised in the income statement are as follows:

	2008
				Defined
	UK Group			benefit						Defined
	plan			other			Sub-total			contribution		PRMB		Total
	All figures in £ millions
Current service cost		33			3			36			41		1		78
Past service cost		—			1			1			—		5		6
Total operating expense		33			4			37			41		6		84
Expected return on plan assets		(104	)		(7	)		(111	)		—		—		(111	)
Interest on plan liabilities		93			7			100			—		3		103
Net finance (income)/expense		(11	)		—			(11	)		—		3		(8	)
Net income statement charge		22			4			26			41		9		76
Actual (loss)/return on plan assets		(130	)		(27	)		(157	)		—		—		(157	)

	2007
				Defined
	UK Group			benefit						Defined
	plan			other			Sub-total			contribution		PRMB		Total
	All figures in £ millions
Current service cost		29			2			31			39		1		71
Total operating expense		29			2			31			39		1		71
Expected return on plan assets		(96	)		(7	)		(103	)		—		—		(103	)
Interest on plan liabilities		84			7			91			—		2		93
Net finance (income)/expense		(12	)		—			(12	)		—		2		(10	)
Net income statement charge		17			2			19			39		3		61
Actual (loss)/return on plan assets		128			4			132			—		—		132

	2006
				Defined
	UK Group			benefit						Defined
	plan			other			Sub-total			contribution		PRMB			Total
	All figures in £ millions
Current service cost		27			2			29			36		1			66
Past service cost		—			—			—			—		(2	)		(2	)
Total operating expense		27			2			29			36		(1	)		64
Expected return on plan assets		(85	)		(7	)		(92	)		—		—			(92	)
Interest on plan liabilities		78			7			85			—		3			88
Net finance (income)/expense		(7	)		—			(7	)		—		3			(4	)
Net income statement charge		20			2			22			36		2			60
Actual (loss)/return on plan assets		153			13			166			—		—			166

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

F-52

Notes to the Consolidated Financial Statements (Continued)

The amounts recognised in the balance sheet are as follows:

	2008												2007
				Other			Other									Other			Other
	UK Group			funded			unfunded						UK Group			funded			unfunded
	plan			plans			plans			Total			plan			plans			plans			Total
	All figures in £ millions
Fair value of plan assets		1,478			100			—			1,578			1,744			109			—			1,853
Present value of defined benefit obligation		(1,429	)		(149	)		(16	)		(1,594	)		(1,682	)		(117	)		(12	)		(1,811	)
Net pension (liability)/asset		49			(49	)		(16	)		(16	)		62			(8	)		(12	)		42
Other post-retirement medical benefit obligation											(68	)											(47	)
Other pension accruals											(34	)											(28	)
Net retirement benefit obligations											(118	)											(33	)
Analysed as:
Retirement benefit assets											49												62
Retirement benefit obligations											(167	)											(95	)

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

	2008			2007		2006
	All figures in £ millions
Amounts recognised for defined benefit plans		(74	)		79		102
Amounts recognised for post-retirement medical benefit plans		3			1		5
Total recognised in year		(71	)		80		107
Cumulative amounts recognised		53			124		44

The fair value of plan assets comprises the following:

	2008						2007
			Other						Other
	UK Group		funded				UK Group		funded
	plan		plans		Total		plan		plans		Total
	%
Equities		28.0		3.1		31.1		34.3		3.4		37.7
Bonds		40.8		2.2		43.0		34.9		2.0		36.9
Properties		7.4		0.1		7.5		7.7		—		7.7
Other		17.5		0.9		18.4		17.2		0.5		17.7

The plan assets do not include any of the Group’s own financial instruments, or any property occupied by the Group.

F-53

Notes to the Consolidated Financial Statements (Continued)

Changes in the values of plan assets and liabilities of the retirement benefit plans are as follows:

	2008									2007
	UK Group			Other						UK Group			Other
	plan			plans			Total			plan			plans			Total
	All figures in £ millions
Fair value of plan assets
Opening fair value of plan assets		1,744			109			1,853			1,528			105			1,633
Exchange differences		—			23			23			—			1			1
Expected return on plan assets		104			7			111			96			7			103
Actuarial gains and (losses)		(234	)		(34	)		(268	)		32			(3	)		29
Contributions by employer		54			3			57			152			5			157
Contributions by employee		9			—			9			8			—			8
Benefits paid		(72	)		(8	)		(80	)		(72	)		(6	)		(78	)
Other movements		(127	)		—			(127	)		—			—			—
Closing fair value of plan assets		1,478			100			1,578			1,744			109			1,853
Present value of defined benefit obligation
Opening defined benefit obligation		(1,682	)		(129	)		(1,811	)		(1,683	)		(127	)		(1,810	)
Exchange differences		—			(38	)		(38	)		—			1			1
Current service cost		(33	)		(3	)		(36	)		(29	)		(2	)		(31	)
Past service cost		—			(1	)		(1	)		—			—			—
Interest cost		(93	)		(7	)		(100	)		(84	)		(7	)		(91	)
Actuarial gains and (losses)		189			5			194			50			—			50
Contributions by employee		(9	)		—			(9	)		(8	)		—			(8	)
Benefits paid		72			8			80			72			6			78
Other movements		127			—			127			—			—			—
Closing defined benefit obligation		(1,429	)		(165	)		(1,594	)		(1,682	)		(129	)		(1,811	)

During 2008 changes made to the administration of the plan assets has enabled assets relating to the defined contribution sections of the UK Group plan to be identified separately from those of the defined benefit section, for accounting purposes. Defined contribution assets will no longer be disclosed as part of the UK Group plan assets. The other movements in both the change in value of plan assets and liabilities over the year represent the separation out of these defined contribution assets.

Changes in the value of the US PRMB are as follows:

	2008			2007
	All figures in £ millions
Opening defined benefit obligation		(47	)		(48	)
Exchange differences		(19	)		—
Current service cost		(1	)		(1	)
Past service cost		(5	)		—
Interest cost		(3	)		(2	)
Actuarial gains and (losses)		3			1
Benefits paid		4			3
Closing defined benefit obligation		(68	)		(47	)

F-54

Notes to the Consolidated Financial Statements (Continued)

The history of the defined benefit plans is as follows:

	2008			2007			2006			2005			2004
	All figures in £ millions
Fair value of plan assets		1,578			1,853			1,633			1,500			1,280
Present value of defined benefit obligation		(1,594	)		(1,811	)		(1,810	)		(1,803	)		(1,615	)
Net pension asset/(liability)		(16	)		42			(177	)		(303	)		(335	)
Experience adjustments on plan assets		(268	)		29			74			140			67
Experience adjustments on plan liabilities		194			50			28			(119	)		(127	)

Funding

The UK Group plan is self-administered with the plan’s assets being held independently of the Group. The trustees of the plan are required to act in the best interest of the plan’s beneficiaries. The most recently completed triennial actuarial valuation for funding purposes was completed as at 1 January 2006 and revealed a funding shortfall. The Group has agreed that the funding shortfall will be eliminated by 31 December 2014. In 2008 the Group contributed £21m (2007: £121m including a special contribution of £100m) and has agreed to contribute £21.9m per annum thereafter in excess of an estimated £30m of regular contributions.

The Group expects to contribute $92m in 2009 and $86m in 2010 to its US pension plans.

Sensitivities

The net retirement benefit obligations are calculated using a number of assumptions, the most significant being the discount rate used to calculate the defined benefit 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:

	2008
	1% increase			1% decrease
	All figures in £ millions
Effect on:
(Decrease)/increase in defined benefit obligation — UK Group plan		(180.1	)		209.6
(Decrease)/increase of aggregate of service cost and interest cost — UK Group plan		(2.2	)		1.1
(Decrease)/increase in defined benefit obligation — US plan		(12.2	)		14.5

The effect of a one percentage point increase and decrease in the assumed medical cost trend rates is as follows:

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

F-55

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:

	2008		2007		2006
	All figures in £ millions
Pearson plans		25		23		18
Interactive Data plans		8		7		7
Total share-based payment costs		33		30		25

The Group operates the following equity-settled employee option and share plans:

Worldwide Save for Shares Plan — Since 1994, the Group has operated a Save-As-You-Earn plan for UK employees. In 1998, the Group introduced a Worldwide Save for Shares Plan. Under these plans, employees can save a portion of their monthly salary over periods of three, five or seven years. At the end of this period, the employee has the option to purchase ordinary shares with the accumulated funds at a purchase price equal to 80% of the market price prevailing at the time of the commencement of the employee’s participation in the plan. Options that are not exercised within six months of the end of the savings period lapse unconditionally.

Employee Stock Purchase Plan — In 2000, the Group established an Employee Stock Purchase Plan which allows all employees in the US to save a portion of their monthly salary over six month periods. At the end of the period, the employee has the option to purchase ADRs with their accumulated funds at a purchase price equal to 85% of the lower of the market price prevailing at the beginning or end of the period.

Long-Term Incentive Plan — This plan was introduced in 2001 and renewed in 2006 and consists of two parts: share options and/or restricted shares.

Options were granted under this plan in 2001 based on a pre-grant earnings per share growth test and are not subject to further performance conditions on exercise. The options became exercisable in tranches and lapse if they remain unexercised at the tenth anniversary of the date of grant.

The vesting of restricted shares is normally dependent on continuing service over a three to five-year period, and in the case of senior management upon the satisfaction of corporate performance targets over a three year period. These targets may be based on market and/or non-market performance criteria. Restricted shares awarded to senior management in July 2007, March 2008 and July 2008, vest dependent on relative shareholder return, return on invested capital and earnings per share growth. The award was split equally across all three measures. Other restricted shares awarded in 2007 and 2008 vest depending on continuing service over a three-year period.

Annual Bonus Share Matching Plan — This plan permits executive directors and senior executives around the Group to invest up to 50% of any after tax annual bonus in Pearson shares. If these shares are held and the Group meets an earnings per share growth target, the company will match them on a gross basis of up to one share for every one held.

In addition to the above, share options remain outstanding under Executive Share Option, Reward and Special Share Option Plans. These are legacy plans which were replaced with the introduction of the Long-Term Incentive Plan in 2001.

F-56

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:

	2008					2007
				Weighted					Weighted
	Number of			average		Number of			average
	share			exercise		share			exercise
	options			price		options			price
	000s			£		000s			£
Outstanding at beginning of year		16,781			13.15		18,861			13.36
Granted during the year		1,437			5.35		773			6.90
Exercised during the year		(683	)		4.85		(1,326	)		5.80
Forfeited during the year		(3,082	)		11.56		(1,434	)		19.63
Expired during the year		(74	)		6.06		(93	)		7.68
Outstanding at end of year		14,379			13.14		16,781			13.15
Options exercisable at end of year		11,527			14.97		13,999			14.63

Options were exercised regularly throughout the year. The weighted average share price during the year was £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:

	2008				2007
			Weighted				Weighted
	Number of		average		Number of		average
	share		contractual		share		contractual
Range of exercise prices	options		life		options		life
£	000s		Years		000s		Years
0 — 5		453		1.23		930		1.56
5 — 10		5,113		2.84		4,909		3.22
10 — 15		5,481		1.97		7,257		2.62
15 — 20		908		0.84		980		1.85
20 — 25		350		1.19		400		2.19
>25		2,074		1.19		2,305		2.19
		14,379		2.05		16,781		2.62

In 2008 and 2007 options were granted under the Worldwide Save for Shares Plan. The weighted average estimated fair value for the options granted was calculated using a Black-Scholes option pricing model.

F-57

Notes to the Consolidated Financial Statements (Continued)

The weighted average estimated fair values and the inputs into the Black-Scholes model are as follows:

	2008			2007
	Weighted			Weighted
	average			average
Fair value		£1.67			£2.53
Weighted average share price		£6.96			£8.91
Weighted average exercise price		£5.35			£6.90
Expected volatility		21.41	%		19.72	%
Expected life		4.1 years			4.0 years
Risk free rate		4.28	%		5.34	%
Expected dividend yield		4.54	%		3.29	%
Forfeiture rate		3.6	%		3.5	%

The expected volatility is based on the historic volatility of the company’s 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:

	2008				2007
			Weighted				Weighted
	Number of		average		Number of		average
	shares		fair value		shares		fair value
	000s		£		000s		£
Annual Bonus Share Matching Plan		253		6.73		143		7.67
Long-Term Incentive Plan		4,152		5.78		3,377		7.12

Restricted shares granted under the Annual Bonus Share Matching Plan are valued using the share price at the date of grant. Until 31 December 2007, they were discounted by the dividend yield (2007: 3.26%) to take into account any dividends foregone. From 2008, shares granted include the entitlement to dividends during the vesting period and therefore the share price is not discounted. The fair value of shares granted under the Long-Term Incentive Plan that vest unconditionally 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-year period without any performance criteria attached.

In addition, grants of restricted stock can be made to certain executives and members of the Board of Directors of Interactive Data. The awarded shares are available for distribution, at no cost, at the end of a three-year vesting period. No performance criteria are attached to shares granted under this plan.

Interactive Data employees purchased 183,318 shares (2007: 186,343) under the 2001 Employee Stock Purchase Plan at an average share price of $22.95(£15.96) (2007: $17.77; £8.93). The weighted average fair value at the date of grant was $6.59 (£4.58) (2007: $4.76; £2.39).

The number and weighted average exercise prices of share options granted under the 2000 Long-Term Incentive Plan are as follows:

	2008							2007
				Weighted		Weighted					Weighted		Weighted
	Number			average		average		Number			average		average
	of share			exercise		exercise		of share			exercise		exercise
	options			price		price		options			price		price
	000s			$		£		000s			$		£
Outstanding at beginning of year		9,827			18.21		9.15		10,506			16.33		8.34
Granted during the year		1,449			24.95		17.35		1,560			27.17		13.65
Exercised during the year		(895	)		15.37		10.69		(1,935	)		14.88		7.48
Forfeited during the year		(99	)		22.05		15.34		(293	)		20.38		10.24
Expired during the year		(18	)		12.17		8.46		(11	)		18.12		9.10
Outstanding at end of year		10,264			19.38		13.48		9,827			18.21		9.15
Options exercisable at end of year		6,865			16.89		11.75		6,199			15.27		7.67

The options outstanding at the end of the year have a weighted average remaining contractual life and exercise price as follows:

	2008				2007
			Weighted				Weighted
	Number		average		Number		average
	of share		contractual		of share		contractual
Range of exercise prices	options		life		options		life
$	000s		Years		000s		Years
0 — 4.4		—		—		—		—
4.4 — 7.5		47		1.3		72		2.1
7.5 — 12		1,502		2.4		1,745		3.4
12 — 20		2,987		4.6		3,464		5.6
> 20		5,728		8.0		4,546		8.5
		10,264		6.2		9,827		6.6

F-59

Notes to the Consolidated Financial Statements (Continued)

The fair value of the options granted under the Long-Term Incentive Plan and of the shares awarded under the 2001 Employee Stock Purchase Plan was estimated using a Black-Scholes option pricing model. The weighted average estimated fair values and the inputs into the Black-Scholes model are as follows:

	Long-Term Incentive Plan						Employee Stock Purchase Plan
	2008			2007			2008			2007
	Weighted			Weighted			Weighted			Weighted
	average			average			average			average
Fair value		$ 5.58			$ 6.60			$ 6.59			$ 4.76
Weighted average share price		$24.95			$27.17			$22.95			$17.77
Weighted average exercise price		$24.95			$27.17			$22.95			$17.77
Expected volatility		24.20	%		23.40	%		33.70	%		20.50	%
Expected life		5.7 years			5.0 years			0.5 years			0.5 years
Risk free rate		1.5% to 3.5%			4.2% to 4.9%			2.0% to 2.4%			4.3% to 5.1%
Expected dividend yield		2.2	%		1.9	%		2.1	%		2.0	%
Forfeiture rate		0.0	%		0.0	%		0.0	%		0.0	%

The expected volatility is based on the historic volatility of Interactive Data’s share price over the vesting term of the options.

During the year Interactive Data granted the following shares under restricted share arrangements:

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
	of shares		shares		premium
	000s		£m		£m
At 1 January 2007		806,109		202		2,487
Issue of ordinary shares — share option schemes		1,919		—		12
At 31 December 2007		808,028		202		2,499
Issue of ordinary shares — share option schemes		1,248		—		6
At 31 December 2008		809,276		202		2,505

The total authorised number of ordinary shares is 1,198m shares (2007: 1,194m shares) with a par value of 25p per share (2007: 25p per share). All issued shares are fully paid. All shares have the same rights.

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance.

The capital structure of the Group consists of debt (see note 18), cash and cash equivalents (see note 17) and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings (see notes 27, 28 and 29).

F-60

Notes to the Consolidated Financial Statements (Continued)

The Group reviews its capital structure on a regular basis and will balance its overall capital structure through payments of dividends, new share issues as well as the issue of new debt or the redemption of existing debt in line with the financial risk policies outlined in note 19.

28.   Treasury shares

	Pearson plc						Interactive Data				Total
	Number						Number
	of shares						of shares
	000s			£m			000s		£m		£m
At 1 January 2007		8,761			130			6,052		59		189
Purchase of treasury shares		4,900			40			1,177		16		56
Release of treasury shares		(1,900	)		(29	)		—		—		(29	)
At 31 December 2007		11,761			141			7,229		75		216
Purchase of treasury shares		2,028			12			1,976		35		47
Release of treasury shares		(3,341	)		(41	)		—		—		(41	)
At 31 December 2008		10,448			112			9,205		110		222

The Group holds 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%) of called-up share capital, are treated 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 £2.6m (2007: £2.9m). The nominal value of Interactive Data treasury shares amounts to £0.06m (2007: £0.04m).

At 31 December 2008 the market value of Pearson plc treasury shares was £67.0m (2007: £86.1m) and the market value of Interactive Data treasury shares was £157.9m (2007: £119.9m).

F-61

Notes to the Consolidated Financial Statements (Continued)

29.   Other reserves and retained earnings

								Total
			Translation			Fair value		other			Retained
	Notes		reserve			reserve		reserves			earnings
	All figures in £ millions
At 1 January 2007				(592	)		—		(592	)		1,568
Net exchange differences on translation of foreign operations				25			—		25			—
Cumulative translation adjustment disposed — subsidiaries		32		53			—		53			—
Profit for the year attributable to equity holders of the company				—			—		—			284
Dividends paid to equity holders of the company		9		—			—		—			(238	)
Equity settled transactions		26		—			—		—			30
Actuarial gains on retirement benefit obligations — Group		25		—			—		—			80
Treasury shares released under employee share plans		28		—			—		—			(29	)
Taxation on items charged to equity		7		—			—		—			29
At 31 December 2007				(514	)		—		(514	)		1,724
Net exchange differences on translation of foreign operations				1,050			—		1,050			—
Cumulative translation adjustment disposed — subsidiaries		32		49			—		49			—
Cumulative translation adjustment disposed — joint venture				1			—		1			—
Profit for the year attributable to equity holders of the company				—			—		—			292
Dividends paid to equity holders of the company		9		—			—		—			(257	)
Equity settled transactions		26		—			—		—			33
Actuarial losses on retirement benefit obligations — Group		25		—			—		—			(71	)
Actuarial losses on retirement benefit obligations — associate				—			—		—			(3	)
Treasury shares released under employee share plans		28		—			—		—			(41	)
Taxation on items charged to equity		7		—			—		—			2
At 31 December 2008				586			—		586			1,679

The translation reserve includes exchange differences arising from the translation of the net investment in foreign operations and of borrowings and other currency instruments designated as hedges of such investments. Included in the translation reserve in 2007 was a £49m loss relating to net assets classified as held for sale.

30.   Business combinations

On 2 January 2008 the Group acquired 100% of Money-Media, a US based company offering online news and commentary for the money management industry. On 30 January 2008 the Group completed its acquisition of 100% of Harcourt Assessment after receiving clearance from the US Department of Justice.

F-62

Notes to the Consolidated Financial Statements (Continued)

The provisional assets and liabilities arising from acquisitions are as follows:

			2008												2007
			Harcourt
			Assessment			Money-Media			Other			Total			Total
	Notes		Fair value			Fair value			Fair value			Fair value			Fair value
	All figures in £ millions
Property, plant and equipment		10		6			—			—			6			11
Intangible assets		11		174			10			36			220			197
Intangible assets — Pre-publication		20		27			—			—			27			18
Inventories				7			—			—			7			15
Trade and other receivables				48			2			4			54			28
Cash and cash equivalents				5			—			11			16			—
Trade and other liabilities				(40	)		(4	)		(8	)		(52	)		(38	)
Financial liabilities — Borrowings				—			—			—			—			(1	)
Current income tax liabilities				—			—			(3	)		(3	)		4
Net deferred income tax liabilities		13		—			—			(4	)		(4	)		(45	)
Provisions for other liabilities and charges		23		(19	)		—			(7	)		(26	)		(2	)
Minority interest				—			—			(2	)		(2	)		—
Assets held for sale				3			—			—			3			—
Net assets acquired at fair value				211			8			27			246			187
Goodwill		11		113			25			15			153			304
Total				324			33			42			399			491
Satisfied by:
Cash				(321	)		(33	)		(40	)		(394	)		(468	)
Deferred consideration				—			—			—			—			(12	)
Net prior year adjustments				(3	)		—			(2	)		(5	)		(11	)
Total consideration				(324	)		(33	)		(42	)		(399	)		(491	)
Carrying value of net assets/(liabilities) acquired				81			(2	)		(1	)		78			41
Fair value adjustments				130			10			28			168			146
Fair value				211			8			27			246			187

The goodwill arising on the acquisition of Harcourt Assessment and Money-Media results from substantial cost and revenue synergies and from benefits that cannot be separately recognised, such as the assembled workforce.

The fair value adjustments relating to these acquisitions were finalised during 2008.

F-63

Notes to the Consolidated Financial Statements (Continued)

	Harcourt Assessment
	Carrying			Fair
	value			value adjs			Fair value
	All figures in £ millions
Property, plant and equipment		7			(1	)		6
Intangible assets		10			164			174
Intangible assets — Pre-publication		35			(8	)		27
Inventories		8			(1	)		7
Trade and other receivables		50			(2	)		48
Cash and cash equivalents		5			—			5
Trade and other liabilities		(39	)		(1	)		(40	)
Provisions for other liabilities and charges		(3	)		(16	)		(19	)
Assets held for sale		8			(5	)		3
Net assets acquired at fair value		81			130			211
Goodwill								113
Total								324

	Money-Media
	Carrying			Fair
	value			value adjs		Fair value
	All figures in £ millions
Intangible assets		—			10		10
Trade and other receivables		2			—		2
Trade and other liabilities		(4	)		—		(4	)
Net assets acquired at fair value		(2	)		10		8
Goodwill							25
Total							33

Net cash outflow on acquisition:

	2008			2007			2006
	All figures in £ millions
Cash — Current year acquisitions		(394	)		(468	)		(382	)
Cash — Acquisitions yet to complete		(12	)		—			—
Deferred payments for prior year acquisitions and other items		(5	)		(4	)		(9	)
Cash and cash equivalents acquired		16			—			28
Cash outflow on acquisition		(395	)		(472	)		(363	)

Harcourt Assessment contributed £150m of sales and £25m to the Group’s profit before tax between the date of acquisition and the balance sheet date. Money-Media contributed £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 £2m to the Group’s sales and £1m to the Group’s profit before tax between the date of acquisition and the balance sheet date.

If the acquisitions had been completed on 1 January 2008, the Group estimates that sales for the period would have been £4,826m and profit before tax would have been £587m.

F-64

Notes to the Consolidated Financial Statements (Continued)

31.   Non-current assets classified as held for sale

In 2007, assets classified as held for sale related to Data Management. The Group recognised an impairment on the goodwill allocated to the Data Management business in anticipation of the loss on disposal (see note 3). There are no assets or liabilities classified as held for sale at the 2008 balance sheet date.

	Notes		2008		2007
Property, plant and equipment		10		—		7
Intangible assets — Goodwill				—		96
Intangible assets — Pre-publication		20		—		2
Inventories				—		4
Trade and other receivables				—		8
Non-current assets classified as held for sale				—		117
Other liabilities				—		(9	)
Liabilities directly associated with non-current assets classified as held for sale				—		(9	)
Net assets classified as held for sale				—		108

32.   Disposals

	2008									2007			2006
	Data
	Management			Other			Total			Total			Total
	All figures in £ millions
Disposal of subsidiaries
Property, plant and equipment		(7	)		—			(7	)		(16	)		—
Intangible assets		(1	)		—			(1	)		(6	)		—
Intangible assets — Pre-publication		(2	)		—			(2	)		—			—
Inventories		(4	)		(3	)		(7	)		(1	)		—
Trade and other receivables		(8	)		—			(8	)		(95	)		—
Cash and cash equivalents		—			—			—			(14	)		—
Net deferred income tax liabilities		—			—			—			2			—
Trade and other liabilities		9			—			9			73			(1	)
Retirement benefit obligations		—			—			—			3			—
Provisions for other liabilities and charges		—			—			—			1			—
Minority interest		—			(5	)		(5	)		(8	)		(4	)
Attributable goodwill		(98	)		(8	)		(106	)		(250	)		(5	)
Cumulative translation adjustment		(49	)		—			(49	)		(53	)		—
Net assets disposed		(160	)		(16	)		(176	)		(364	)		(10	)
Cash received		111			15			126			495			10
Deferred receipts		—			2			2			—			—
Other proceeds received		—			—			—			35			—
Costs		(4	)		(1	)		(5	)		(20	)		—
(Loss)/profit on sale		(53	)		—			(53	)		146			—

F-65

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		2008			2007			2006
			All figures in £ millions
Net profit				323			310			469
Adjustments for:
Income tax				209			222			19
Depreciation		10		80			68			77
Amortisation of purchased intangible assets		11		86			45			28
Adjustment on recognition of pre-acquisition deferred tax				—			—			7
Amortisation of other intangible assets		11		30			25			23
Loss on sale of property, plant and equipment				1			1			2
Net finance costs		6		91			106			74
Share of results of joint ventures and associates		12		(25	)		(23	)		(24	)
Loss/(profit) on sale of discontinued operations		3		53			(146	)		—
Goodwill impairment of discontinued operation		3		—			97			—
Net foreign exchange adjustment from transactions				105			11			(37	)
Share-based payment costs		26		33			30			25
Pre-publication				(58	)		(38	)		(3	)
Inventories				(12	)		(1	)		(16	)
Trade and other receivables				(81	)		(5	)		(60	)
Trade and other liabilities				82			80			54
Retirement benefit obligations				(14	)		(126	)		(17	)
Provisions for other liabilities and charges				(9	)		3			—
Net cash generated from operations				894			659			621

Net cash generated from operations 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 £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:

	2008			2007			2006
	All figures in £ millions
Net book amount		3			15			10
Loss on sale of property, plant and equipment		(1	)		(1	)		(2	)
Proceeds from sale of property, plant and equipment		2			14			8

The principal other non-cash transactions are movements in finance lease obligations of £2m (2007: £4m; 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.

35.   Commitments

Capital commitments

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

	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:

	2008		2007
	All figures in £ millions
Not later than one year		149		123
Later than one year and not later than two years		138		116
Later than two years and not later than three years		129		102
Later than three years and not later than four years		118		93
Later than four years and not later than five years		108		85
Later than five years		970		834
		1,612		1,353

36.   Related party transactions

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 12. Amounts falling due from joint ventures and associates are set out in note 22.

F-67

Key management personnel are deemed to be the members of the board of directors of Pearson plc. It is this board which has responsibility for planning, directing and controlling the activities of the Group. Key management personnel compensation is disclosed in the directors’ remuneration report.

There were no other material related party transactions.

No guarantees have been provided to related parties.

37.   Events after the balance sheet date

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 (MML), its South African publishing business, from 50% to 85%.

Under the terms of the MML agreement, Pearson intends to create a new Southern Africa business and in return for the increased stake in MML our current joint venture partner will receive £46m in cash and a 15% interest in Pearson’s Heinemann and Edexcel businesses in that 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 MML transaction is expected to complete in the second quarter of 2009 following regulatory approval.

SIGNATURES

The registrant hereby certifies that it meets the requirements for filing on Form 20-F and that it has caused and authorized the undersigned to sign this annual report on its behalf.

Pearson plc

/s/   Robin Freestone

Robin Freestone

Chief Financial Officer

Date: March 26, 2009

F-68

EX-1.1

Exhibit 1.1

1.	The name of the Company is ‘S. Pearson & Son plc’.1
2.	The Company is to be a public company.
3.	The registered office of the Company will be situate in England.
4.	The objects for which the Company is established are:
(a)	To carry on the business of a holding, management and investment holding company in all its branches, and to acquire by purchase, lease, concession, grant, licence or otherwise such businesses, options, rights, privileges, lands, buildings, leases, underleases, stocks, shares, debentures, debenture stock, bonds, obligations, securities, reversionary interests, annuities, policies of assurance and other property and rights and interests in property (including the whole or part of the business, property or liabilities of any other person or company) as the Board shall deem fit and generally to construct, hold, manage, develop, lease, sell, dispose of, maintain, alter, exchange or otherwise deal with the same; and to vary any of the investments of the Company, to act as trustees of any deeds constituting or securing any debentures, debenture stock or other securities or obligations; to enter into, assist, or participate in financial, commercial, mercantile, industrial and other transactions, undertakings and businesses of every description, and to establish, carry on, develop and extend the same, or sell, dispose of or otherwise turn the same to account, and to co-ordinate, finance and manage all or any part of the operations of any company of which this Company is a member or which is in any manner controlled by, or connected with, the Company, and to enter into any agreement or arrangement with, or relating to, any such company or other company as may seem desirable in the opinion of the Board, and to carry on all or any of the businesses of industrialists, trustees, financiers, financial agents, company promoters, bill discounters, insurance brokers and agents, mortgage brokers, rent and debt collectors, capitalists, stock and share brokers and dealers and commission and general agents, merchants and traders; and to carry out such operations and to manufacture, buy, sell, maintain, repair and deal in or with plant, machinery, tools, articles and things of all kinds capable of being used for the purposes of the above-mentioned businesses or any of them, or likely to be required by customers of or persons having dealings with the Company or as may seem to the Board directly or indirectly to be in the interests of the Company.
(b)	To carry on any other trade or business whatever which, in the opinion of the Board, can be advantageously carried on in connection with or ancillary to any of the above-mentioned businesses or is calculated directly or indirectly to enhance the value of or render profitable any of the property or rights of the Company.

¹ Name changed to Pearson plc on 1 June 1984

(c)	To co-ordinate, finance, manage, control, subsidise or otherwise assist any company or companies in which the Company has a direct or indirect interest, to provide financial, secretarial, administrative, technical, commercial and other services and facilities of all kinds for any such company or companies and to make payments in any manner and any arrangements with respect to any business or operations of or generally with respect to any such company or companies.
(d)	To sell, lease, dispose of, grant rights over or otherwise deal with the undertaking, property or assets of the Company or any part thereof or right or interest therein on such terms and for such consideration as the Board may decide and to distribute any property or assets of the Company of whatever kind in specie among the members of the Company.
(e)	To pay for any rights or property acquired by the Company and to remunerate any person or company, whether by cash payment or by the allotment of shares, debentures or other securities of the Company credited as paid up in full or in part, or by any combination of such methods or by any other method or combination of methods the Board may think fit.
(f)	To invest and deal with the moneys of the Company not immediately required and in any manner and hold and deal with any investment so made.
(g)	To work, develop, exercise, and promote the discovery or use of any invention or appliance, and to make or promote the making of any experiments, in which, or in or by the working, development, exercise, discovery, use or making of which, the Company is or may be in any way interested or benefited.
(h)	To apply for, purchase or otherwise acquire, develop, protect, maintain and renew any patents, patent rights, trade marks, designs, licences and other intellectual property rights of all kinds or any secret or other information, whether relating to any invention or otherwise, and to use, exercise, develop, experiment with, or grant licences in respect of, or otherwise deal with the property, rights or information so acquired or any property, rights or information which the Company may propose to acquire.
(i)	To apply for, support, promote and obtain any Act of Parliament, charter, privilege, concession, licence, authorisation or right of any government, state or municipality, or any other department or authority, or enter into any arrangements with any such body, for enabling the Company to carry any of its objects into effect or for extending any of the powers of the Company or for effecting any modification of the constitution of the Company or for any other purpose which may seem to the Board to be expedient, and to oppose any proceedings or applications which may seem to the Board to be calculated or likely directly or indirectly to prejudice the interests of the Company.
(j)	To form, promote, subsidise and assist companies and syndicates of all kinds and to place or guarantee the placing of, underwrite, subscribe for or

Page 2

otherwise acquire, hold, dispose of and deal with, and guarantee the payment of interest, dividends and capital on, all or any of the shares, debentures, debenture stock or other securities or obligations of any company, association, government or authority and to pay or provide for brokerage, commission and underwriting in respect of any such issue upon such terms as the Board may decide, and in particular to promote any other company for the purpose of acquiring all or any of the property and liabilities of this Company, or for any other purpose which may in the opinion of the Board seem directly or indirectly calculated or likely to benefit the Company.

(k)	To carry on through any subsidiary or associated company any activities which the Company is authorised to carry on and to make any arrangements whatsoever with such company (including any arrangements for taking the profits or bearing the losses of any such activities) as the Board may think fit.
(l)	To raise or borrow money in such manner as the Board may think fit and to receive deposits and to mortgage, charge, pledge or give liens or other security over the whole or any part of the Company’s undertaking, property and assets (whether present or futures, including its uncalled capital, for such purposes and in such circumstances and upon such terms and conditions as the Board may think fit.
(m)	To lend or advance money and to give credit and to enter (whether gratuitously or otherwise) into guarantees or indemnities of all kinds, and whether secured or unsecured, whether in respect of its own obligations or chose of some other person or company in such circumstances and upon such terms and conditions as the Board may think fit.
(n)	To draw, make, accept, endorse, discount, negotiate, execute and issue cheques, promissory notes, bills of exchange, bills of lading, warrants, debentures and other negotiable and transferable instruments.
(o)	To pay or to provide or to make such arrangements for providing such gratuities, pensions, allowances, benefits, share option, incentive and acquisition schemes, loans, insurances and other matters and to establish, support, subsidise and subscribe to any institutions, associations, clubs, buildings, schemes, funds or trusts (whether to or for the benefit of present or past directors or employees of, or any person who provides or has provided services at any time to, the Company or its predecessors in business or of any company which is a subsidiary of the Company or is allied to or associated with the Company or with any such predecessor or subsidiary or to or for the benefit of persons who are or were related to or connected with or dependents of any such persons, or otherwise to be in the interests of the Company or any such other company as aforesaid or of its members) as may seem to the Board directly or indirectly to be in the interests of the Company or to lend money to such persons as aforesaid (so far as the same is lawful) to enable them to participate in any such share option, incentive or acquisition scheme or otherwise to purchase or subscribe for fully-paid shares of the Company or any holding company to be held by themselves by way of beneficial

Page 3

ownership or to the trustees of an employees’ share scheme as defined in Section 743 of the Companies Act 1985 (including any statutory modification or re-enactment for the time being in force).

(p)	To act as agents, brokers or trustees, and to enter into such arrangements (whether by way of amalgamation, partnership, profit sharing union of interests, co-operation, joint venture or otherwise) with other persons or companies as may seem to the Board to be in the interests of the Company and to vest any property of the Company in any person or company on behalf of the Company and with or without any declaration of trust in favour of the Company.
(q)	To procure the Company to be registered or recognised in any part of the world.
(r)	To contribute to or support (including by way of giving any guarantee) any public, national, general, political, charitable, benevolent or useful object, which it may seem to the Board to be in the interests of the Company or its members to contribute to or support.
(s)	To do all or any of the above things in any part of the world whether as principals or agents or trustees or otherwise and either alone or jointly with others and either by or through agents, subcontractors, trustees or otherwise.
(t)	To do all such other things as may be considered by the Board to further the interests of the Company or to be incidental or conducive to the attainment of the above objects or any of them.

And it is hereby declared that (a) the objects set forth in each sub-clause of this clause shall not be restrictively construed but the widest interpretation shall be given thereto, and (b) the word ‘company’ in this clause, except where used in reference to the Company, shall be deemed to include any partnership or other body of persons, whether corporate or unincorporated and whether domiciled in the United Kingdom or elsewhere, and (c) the word ‘Board’ in this clause shall mean the directors for the time being of the Company or any of them acting as the Board of Directors of the Company, and (d) except where the context expressly so requires, none of the several paragraphs of this clause, or the objects therein specified, or the powers thereby conferred shall be limited by, or be deemed merely subsidiary or auxiliary to, any other paragraph of this clause, or the objects specified in such other paragraph, or the powers thereby conferred but may be carried out in as full and ample a manner and shall be construed in as wide a sense as if each of the said paragraphs defined the objects of a separate, distinct and independent company.

5. The liability of the Members is limited.

*6. The capital of the Company is £299,500,000 divided into 1,198,000,000 Ordinary Shares of 25p each, to which there shall be assigned the respective rights and privileges specified in the Company’s Articles of Association, with power to divide any new shares in the capital for the time being into several classes, and to attach

Page 4

thereto respectively such preferential, deferred or special rights or conditions as may be determined by or in accordance with the regulations of the Company.

* Notes on Capital

1. The capital of the Company on incorporation was £1,501,000 divided into 150,100 shares of £10 each, of which 50,000 were Preference Shares and 100,000 were Ordinary Shares, and 100 were Management Shares

2. On 19 December 1939 the Management Shares were converted by special resolution into Second Preference Shares.

3. On 18 May 1960 each of the Preference Shares, Second Preference Shares and Ordinary Shares of £10 each was subdivided by ordinary resolution into 10 Preference Shares, 10 Second Preference Shares or 10 Ordinary Shares all of £1 each respectively.

4. On 30 December 1968 the capital of the Company was increased by ordinary resolution to £1,521,000 by the creation of 20,000 Ordinary Shares of £1 each.

5. On 8 August 1969:

(a)	the rights of the Preference Shares were modified by special resolution and they became known as 5 per cent Cumulative Preference Shares;
(b)	the Second Preference Shares were converted by special resolution into 5 per cent Cumulative Preference Shares;
(c)	each of the Ordinary Shares of £1 each was subdivided by ordinary resolution into 4 Ordinary Shares of 5s. each;
(d)	the capital of the Company was increased by ordinary resolution to £16,001,000 by the creation of 57,920,000 Ordinary Shares of 5s. each.

6. On 25 August 1971 the capital of the Company was increased by ordinary resolution to £18,501,000 by the creation of 10,000,000 Ordinary Shares of 25p each.

7. On 28 August 1980 the capital of the Company was increased by special resolution to £21,000,000 by the creation of 9,996,000 Ordinary Shares of 25p each.

8. On 28 May 1982 the capital of the Company was increased by special resolution to £33,500,000 by the creation of 50,000,000 Ordinary Shares of 25p each.

9. On 27 May 1983 the rights of the Preference Shares were modified by special resolution and they became known as 3.5 per cent Cumulative Preference Shares.

10. On 3 May 1985 the capital of the Company was increased by ordinary resolution to £67,250,000 by the creation of 135,000,000 Ordinary Shares of 25p each.

Page 5

11. On 1 May 1987 the capital of the Company was increased by ordinary resolution to £75,375,000 by the creation of 32,500,000 Ordinary Shares of 25p each.

12. On 6 May 1988 the capital of the Company was increased by ordinary resolution to £79,000,000 by the creation of 14,500,000 Ordinary Shares of 25p each.

13. On 12 May 1989 the capital of the Company was increased by ordinary resolution to £94,885,000 by the creation of 63,540,000 Ordinary Shares of 25p each.

14. On 11 May 1990 the capital of the Company was increased by ordinary resolution to £199,695,000 by the creation of 19,240,000 Ordinary Shares of 25p each and 100,000,000 Preference Shares of £1 each, and US$5,000,000 by the creation of 50,000 Preference Shares of US$100 each.

15. On 21 June 1990 the capital of the Company was reduced by virtue of a special resolution, passed 11 May 1990, and with the sanction of an Order of the High Court of Justice, dated 18 June 1990, registered on 21 June 1990, by the cancellation of the 501,000 3.5 per cent Cumulative Preference Shares of £1 each, to £199,194,000 divided into 396,776,000 Ordinary Shares of 25p each and 100,000,000 Preference Shares of £1 each and US$5,000,000 divided into 50,000 Preference Shares of US$100 each.

16. On 10 May 1991 the capital of the Company was increased by ordinary resolution to £199,500,000 and US$5,000,000 by the creation of 1,224,000 Ordinary Shares of 25p each.

17. On 15 May 1992 the capital of the Company was increased by ordinary resolution to £299,750,000 and US$5,000,000 by the creation of 402,224,000 Ordinary Shares of 25p each.

18. On 13 May 1994 the capital of the Company was increased by ordinary resolution to £302,000,000 and US$5,000,000 by the creation of 9,000,000 Ordinary Shares of 25p each.

19. On 12 May 1995 the capital of the Company was increased by ordinary resolution to £302,750,000 and US$5,000,000 by the creation of 3,000,000 Ordinary Shares of 25p each.

20. On 3 May 1996 the capital of the Company was reduced by ordinary resolution by the cancellation of the 100,000,000 Preference Shares of £1 each and the 50,000 Preference Shares of US$100 each and then the capital of the Company was increased by ordinary resolution to £204,000,000 by the creation of 5,000,000 Ordinary Shares of 25p each.

21. On 2 May 1997 the capital of the Company was increased by ordinary resolution to £209,500,000 by the creation of 22,000,000 Ordinary Shares of 25p each.

22. On 1 May 1998 the capital of the Company was increased by ordinary resolution to £211,500,000 by the creation of 8,000,000 Ordinary Shares of 25p each.

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23. On 30 April 1999 the capital of the Company was increased by ordinary resolution to £223,500,000 by the creation of 48,000,000 Ordinary Shares of 25p each.

24. On 12 May 2000 the capital of the Company was increased by ordinary resolution to £229,000,000 by the creation of 22,000,000 Ordinary Shares of 25p each.

25. On 27 April 2001 the capital of the Company was increased by ordinary resolution to £292,500,000 by the creation of 254,000,000 Ordinary Shares of 25p each.

26. On 26 April 2002 the capital of the Company was increased by ordinary resolution to £293,500,000 by the creation of 4,000,000 Ordinary Shares of 25p each.

27. On 25 April 2003 the capital of the Company was increased by ordinary resolution to £294,500,000 by the creation of 4,000,000 Ordinary Shares of 25p each.

28. On 30 April 2004 the capital of the Company was increased by ordinary resolution to £295,500,000 by the creation of 4,000,000 Ordinary Shares of 25p each.

29. On 29 April 2005 the capital of the Company was increased by ordinary resolution to £296,500,000 by the creation of 4,000,000 Ordinary Shares of 25p each.

30. On 21 April 2006 the capital of the Company was increased by ordinary resolution to £297,500,000 by the creation of 4,000,000 Ordinary Shares of 25p each.

31. On 27 April 2007 the capital of the Company was increased by ordinary resolution to £298,500,000 by the creation of 4,000,000 Ordinary Shares of 25p each.

32. On 25 April 2008 the capital of the Company was increased by ordinary resolution to £299,500,000 by the creation of 4,000,000 Ordinary Shares of 25p each.

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We, the several persons whose names and addresses are subscribed, are desirous of being formed into a company in pursuance of this Memorandum of Association, and we respectively agree to take the number of shares in the capital of the Company set opposite our respective names.

	Number of Preference Shares
Names, addresses and descriptions of subscribers	taken by each Subscriber
Weetman Dickinson Pearson, Baronet, MP 10 Victoria Street, Westminster, SW, and	One
Paddockhurst, Worth, Sussex
Annie Pearson, Paddockhurst, Worth, Sussex	One
Wife of Sir Weetman D. Pearson, Bart., MP
George Pearson Esq, Brickendonbury, Hertford	One
Sam Wright, 10 Piccadilly, Bradford	One
Solicitor
Bernard Croft Cass, Maylands, Bradford	One
Civil Engineer
Ernest William Moir, 23 Shooters Hill Road, Blackheath	One
Civil Engineer

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	Number of Preference Shares
Names, addresses and descriptions of subscribers	taken by each Subscriber
Samuel Robinson, 46 Ryde Vale Road, Balham, SW	One
Accountant

Dated the 11th day of August 1897

Witness to the above signature of George Pearson,

F.G.W. Pearson,
Brickendonbury,
Hertford.

Gentleman.

Witness to the above signatures of Sir Weetman Dickinson Pearson, Lady Annie Pearson, Samuel Wright, Bernard Croft Cass, Ernest William Moir and Samuel Robinson,

William Edward Sayer, 10
Victoria Street,
SW.

Clerk.

Page 9

PEARSON plc

MEMORANDUM OF ASSOCIATION

Incorporating amendments made up to and
including 25 April 2008

THE COMPANIES ACTS	PUBLIC COMPANY LIMITED BY SHARES
1985 TO 2006

ARTICLES OF ASSOCIATION

OF

PEARSON PLC

Adopted by special resolution passed on 2 May 1986 and amended by special resolutions passed on 11 May 1990, 10 May 1991, 3 May 1996 and 25 April 2008.

Preliminary

1. The regulations in Table A in the First Schedule to the Companies Act 1862 shall not apply to the Company.

2. In these Articles, if not inconsistent with the context, the words standing in the first column of the table next hereinafter contained shall bear the meanings set opposite to them respectively in the second column thereof.

Meanings

Address:	Includes a number or address used for the purposes of sending or receiving documents by electronic means.
certificated share:	A share in the capital of the Company that is not an uncertificated share and references in these Articles to a share being held in certificated form shall be construed accordingly.
Chairman:	The Chairman of the Board.
clear days:	In relation to the sending of a notice, means the period excluding the day on which a notice is given or deemed to be given and the day for which it is given or on which it is to take effect.
CREST:	The relevant system, as defined in the Regulations, in respect of which CRESTCo is the Operator.
Deputy Chairman:	The Deputy Chairman of the Board.
Dividend:	Includes bonus.
electronic copy, electronic form or electronic means	Have the meanings given to them by section 1168 of the Companies Act 2006.

hard copy or hard copy form	Have the meanings given to them by section 1168 of the Companies Act 2006.
holder(s) or shareholder(s):	In relation to a share in the capital of the Company means the member whose name is entered in the Register as the holder of that share.
member:	Means a member of the Company.
month:	Calendar month.
Operator:	Has the meaning given by the Regulations.
Ordinary Share(s):	Has the meaning given by Article 3.
paid up:	Includes credited as paid up.
participating security:	Has the meaning given by the Regulations.
Regulations:	The Uncertificated Securities Regulations 2001 including any modification or re-enactment of them for the time being in force.
resolution:	Means a resolution of the members of the Company at a general meeting, unless the context otherwise requires.
satellite meeting place:	Subject to the provisions of Article 54.2, any one or more places where a person may attend a general meeting of the Company, other than the place set out in the notice referred to in Article 53.
share(s):	Means the Ordinary Share(s), unless the context otherwise requires.
share warrant:	A warrant to bearer in respect of shares of the Company issued by the Company.
Securities Seal:	An official seal kept by the Company by virtue of Section 40 of the Companies Act 1985.
The Auditors:	The auditors for the time being of the Company.
The Board:	The Directors or any of them acting as the Board of Directors of the Company.
The Directors:	The directors for the time being of the Company.
The Office:	The Registered Office of the Company.

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The Register:	As appropriate, either or both the register of members of the Company and the Operator register of members of the Company.
The Seal:	The Common Seal of the Company.
The Statutes:	The Companies Acts (as defined in Section 2 of the Companies Act 2006).
The United Kingdom:	Great Britain and Northern Ireland.
These Articles:	These Articles of Association, as originally adopted, as from time to time altered by special resolution.
Transfer Office:	The place where the register of members is situated for the time being.
treasury shares:	Has the meaning given by the Companies Act 1985, as amended by The Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003 and The Companies (Acquisition of Own Shares) (Treasury Shares) No 2 Regulations 2003, as if those Regulations were in force at the date of adoption of these Articles.
uncertificated share:	Means (subject to Regulation 42(11)(a) of the Regulations) a share in the capital of the Company, title to which is recorded on the Operator register of members of the Company and which may, by virtue of the Regulations, be transferred by means of a relevant system and references in these Articles to a share being held in uncertificated form shall be construed accordingly.
Year:	Year from 1 January to 31 December inclusive.

The expressions “debenture” and “debenture holder” shall respectively include “debenture stock” and “debenture stockholder” and the words “shareholder” and “holder” shall, subject as provided in these Articles, and unless the context otherwise requires, include the bearer of any share warrant. The expression “Secretary” shall include a temporary, deputy or assistant Secretary and any person appointed by the Board to perform any of the duties of the Secretary as set out in Articles 121-123.

Where, in relation to a share, these Articles refer to a relevant system, the reference is to the relevant system in which that share is a participating security at the relevant time.

References to a document or information being sent, supplied or given to or by a person mean such document or information, or a copy of such document or information, being sent, supplied, given, delivered, issued or made available to or by,

Page 3

or served on or by, or deposited with or by that person by any method authorised by these Articles, and sending, supplying and giving shall be construed accordingly.

References to writing mean the representation or reproduction of words, symbols or other information in a visible form by any method or combination of methods, whether in electronic form or otherwise, and written shall be construed accordingly.

Words denoting the singular number only shall include the plural number and vice versa.

Words denoting the masculine gender only shall include the feminine gender.

Words denoting persons only shall include corporations.

Save as aforesaid any words or expressions defined in the Statutes shall, if not inconsistent with the subject or context, bear the same meaning in these Articles.

Share Capital

Capital

3. The share capital of the Company is £298,500,000^* divided into 1,194,000,000 Ordinary Shares of 25p each. The liability of the members is limited to the amount, if any, unpaid on the shares respectively held by them.

*	The share capital of the Company on incorporation was £1,501,000.
*	Increased to £1,521,000 by an ordinary resolution passed on 30 December 1968.
*	Increased to £16,001,000 by an ordinary resolution passed on 8 August 1969.
*	Increased to £18,501,000 by an ordinary resolution passed on 25 August 1971.
*	Increased to £21,000,000 by a special resolution passed on 28 August 1980.
*	Increased to £33,500,000 by a special resolution passed on 28 May 1982.
*	Increased to £67,250,000 by an ordinary resolution passed on 3 May 1985.
*	Increased to £75,375,000 by an ordinary resolution passed on 1 May 1987.
*	Increased to £79,000,000 by an ordinary resolution passed on 6 May 1988.
*	Increased to £94,885,000 by an ordinary resolution passed on 12 May 1989.
*	Increased to £199,695,000, and US$5,000,000 by an ordinary resolution passed on 11 May 1990.
*	Reduced to £199,194,000 and US$5,000,000 by a special resolution passed on 21 June 1990.
*	Increased to £199,500,000 and US$5,000,000 by an ordinary resolution passed on 10 May 1991.
*	Increased to £299,750,000 and US$5,000,000 by an ordinary resolution passed on 15 May 1992.
*	Increased to £302,000,000 and US$5,000,000 by an ordinary resolution passed on 13 May 1994.
*	Increased to £302,750,000 and US$5,000,000 by an ordinary resolution passed on 12 May 1995.
*	Reduced to £204,000,000 by ordinary resolutions passed on 3 May 1996.
*	Increased to £209,500,000 by an ordinary resolution passed on 2 May 1997.
*	Increased to £211,500,000 by an ordinary resolution passed on 1 May 1998.
*	Increased to £223,500,000 by an ordinary resolution passed on 30 April 1999.
*	Increased to £229,000,000 by an ordinary resolution passed on 12 May 2000.
*	Increased to £292,500,000 by an ordinary resolution passed on 27 April 2001.
*	Increased to £293,500,000 by an ordinary resolution passed on 26 April 2002.
*	Increased to £294,500,000 by an ordinary resolution passed on 25 April 2003.
*	Increased to £295,500,000 by an ordinary resolution passed on 30 April 2004.
*	Increased to £296,500,000 by an ordinary resolution passed on 29 April 2005.
*	Increased to £297,500,000 by an ordinary resolution passed on 21 April 2006.

Page 4

Variation of Rights

4. Subject to the provisions of the Statutes, whenever the capital of the Company is divided into different classes of shares the special rights attached to any class may (unless otherwise provided by the terms of issue of the shares of that class), either:

(a)

with the written consent of the holders of three-fourths of the issued shares of the class (excluding any shares of that class held as treasury shares) which consent shall be in hard copy form or in electronic form sent to such address (if any) for the time being specified by or on behalf of the Company for that purpose, or in default of such specification to the Office, and may consist of several documents each executed or authenticated in such manner as the board may approve by or on behalf of one or more holders, or a combination of both; or

(b)

with the sanction of a special resolution passed at a separate meeting of such holders,

(but not otherwise) be varied or abrogated, and may be so varied or abrogated either whilst the Company is a going concern or during or in contemplation of a winding up.

5. The special rights conferred upon the holders of any shares or class of shares issued with preferred or other special rights shall not, unless otherwise expressly provided by these Articles or the conditions of issue of such shares, be deemed to be modified by:

(a) the creation or issue of further shares ranking pari passu therewith; or

(b) the Company permitting, in accordance with the Regulations, the holding of and transfer of title to shares of that or any other class in uncertificated form by means of a relevant system.

Shares

6. Without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares, any share may be issued with such preferred, deferred, or other special rights or such restrictions, whether in regard to dividend, voting, return of capital or otherwise as the Company may from time to time by ordinary resolution determine.

7.1 The Board has general and unconditional authority to exercise all the powers of the Company to allot relevant securities up to an aggregate nominal amount equal to the section 80 amount, for each prescribed period.

7.2 The Board is empowered for each prescribed period to allot equity securities for cash pursuant to the authority conferred by Article 7.1 as if section 89(1) of the

*	Increased to £298,500,000 by an ordinary resolution passed on 27 April 2007.
*	Increased to £299,500,000 by an ordinary resolution passed on 25 April 2008.

Page 5

Companies Act 1985 did not apply to any such allotment, provided that its power shall be limited to:

(a)	the allotment of equity securities in connection with a pre-emptive issue; and
(b)	the allotment (otherwise than pursuant to Article 7.2(a)) of equity securities up to an aggregate nominal amount equal to the section 89 amount.

In this Article and Article 7.3, a reference to the allotment of equity securities also includes the sale of any relevant shares in the Company if, immediately before the sale, the shares were held by the Company as treasury shares. This Article applies in relation to a sale of shares which is an allotment of equity securities by virtue of this paragraph as if in this Article the words “pursuant to the authority conferred by Article 7.1” were omitted.

7.3 Before the expiry of a prescribed period the Company may make an offer or agreement which would or might require equity securities or other relevant securities to be allotted after such expiry. The Board may allot equity securities or other relevant securities in pursuance of that offer or agreement as if the prescribed period during which that offer or agreement was made had not expired.

7.4 In this Article and Articles 7.1, 7.2 and 7.3:

prescribed period means any period for which the authority conferred by Article 7.1 is given by ordinary or special resolution stating the section 80 amount and/or the power conferred by Article 7.2 is given by special resolution stating the section 89 amount;

pre-emptive issue means an offer of equity securities to holders of Ordinary Shares or an invitation to holders of Ordinary Shares to apply to subscribe for equity securities and, if in accordance with their rights the Board so determines, holders of other equity securities of any class (whether by way of rights issue, open offer or otherwise) where the equity securities respectively attributable to the interests of holders of Ordinary Shares or holders of other equity securities, if applicable are proportionate (as nearly as practicable) to the respective numbers of ordinary shares or other equity securities, as the case may be held by them, but subject to such exclusions or other arrangements as the Board may deem necessary or expedient in relation to fractional entitlements or any legal, regulatory or practical problems under the laws or regulations of any territory or the requirements of any regulatory body or stock exchange;

section 80 amount means, for any prescribed period, the amount stated in the relevant ordinary or special resolution; and

section 89 amount means, for any prescribed period, the amount stated in the relevant special resolution.

8. In addition to all other powers of paying commissions, the Company may exercise the powers of paying commissions conferred by the Statutes. Subject to the provisions of the Statutes, such commissions may be satisfied by the payment of cash or the allotment of fully or partly paid shares or partly in one way and partly in

Page 6

another. The Company may also on any issue of shares pay such brokerage as may be lawful.

9. Subject to and in accordance with the provisions of the Statutes and without prejudice to any relevant special rights attached to any class of shares, the Company may purchase any of its own shares of any class (including without limitation redeemable shares) in any way and at any price (whether at par or above or below par) and may hold such shares as treasury shares.

10. Except as required by law no person shall be recognised by the Company as holding any share upon any trust, and the Company shall not be bound by or be compelled in any way to recognise any equitable, contingent, future or partial interest in any share, or any interest in any fractional part of a share, or (except only as by these Articles or by law otherwise provided) any other right in respect of any share, except an absolute right to the entirety thereof in the registered holder.

11.1 If at any time the Board is satisfied that any member or other person appearing to be interested in any shares in the capital of the Company has failed within fourteen days to comply with a notice given to that person by the Company pursuant to section 793 of the Companies Act 2006 (or under any other statutory provisions for the time being in force enabling the Company by notice in writing to require any person to give any information regarding those shares) whether or not required to comply by law or has, in purported compliance with such a notice, made a statement which is false in a material particular, then the Board may serve notice in writing on any member holding shares in relation to which the Board has determined or become aware that such a default has occurred. Any such notice (hereinafter referred to as a “Default Notice”) shall specify the nature of the default, the number of shares concerned and the steps to be taken to remedy such default. For the purposes of this Article, a person shall be treated as appearing to be interested in any shares if the member holding such shares has given to the Company a notification under section 793 of the Companies Act 2006 which fails to the satisfaction of the Board to establish the identities of those interested in the shares and if (after taking account of the said notification under the said section 793 and any other relevant information in the possession of the Company) the Company knows or has reasonable cause to believe that the person in question is or may be interested in the shares.

11.2 After the service of a Default Notice or, if later, the time specified therein, until such time as the member or other person on whom the Default Notice was served has complied in full with the notice given pursuant to section 793 of the Companies Act 2006 or any other statutory provision as aforesaid (when the Board shall serve a further notice on the member or other person concerned stating that the default has been remedied), that member shall not be entitled to attend or vote at any general meeting, either personally or by proxy, or at a separate meeting of the holders of a class of shares or on a poll in respect of any share specified in the Default Notice.

11.2A Where the shares represented in the Default Notice represent at least ¹/4 of one per cent. in nominal value of the issued shares of their class, then the Default Notice may additionally direct that in respect of such shares: (i) no payment shall be made by way of dividend (including shares issued in lieu of dividend); and (ii) no transfer shall

Page 7

be registered unless: the member is not himself in default as regards supplying the information requested and the transfer when presented for registration is accompanied by a certificate by the member in such form as the Board may in its absolute discretion require to the effect that after due and careful enquiry the member is satisfied that no person in default as regards supplying such information is interested in any of the shares the subject of the transfer or the transfer is an approved transfer.

11.2B A transfer of shares is an approved transfer if:

(a)	it is a transfer of shares pursuant to acceptance of a takeover offer (within the meaning of section 974 of the Companies Act 2006);
(b)	the Board is satisfied that the transfer is made pursuant to a sale of the whole of the beneficial ownership of the shares the subject of the transfer to a party unconnected with the member and with any other person appearing to be interested in the shares; or
(c)	the transfer results from a sale made through a recognised investment exchange as defined in the Financial Services and Markets Act 2000 or any other stock exchange outside the United Kingdom on which the Company’s shares are normally traded.

11.3 The Board shall cause to be noted in the Register against the member upon whom a Default Notice has been served, details of the Default Notice and the number of shares specified therein and shall cause a further note to be entered in the Register recording that the default complained of has been remedied upon service of any further notice under Article 11.2.

11.4 Any notice served by the Board pursuant to this Article shall be conclusive against the member concerned and its validity shall not be questioned by any person.

Uncertificated Shares

11.5 Subject to the provisions of the Regulations, the Board may permit the holding of shares in any class of shares in uncertificated form and the transfer of title to shares in that class by means of a relevant system and may determine that any class of shares shall cease to be a participating security.

11.6 Shares in the capital of the Company that fall within a certain class shall not form a separate class of shares from other shares in that class because any share in that class:

(a)	is held in uncertificated form; or
(b)	is permitted in accordance with the Regulations to become a participating security.

11.7 Where any class of shares is a participating security and the Company is entitled under any provision of the Statutes, the Regulations or these Articles to sell, transfer or otherwise dispose of, forfeit, re-allot, accept the surrender of or otherwise

Page 8

enforce a lien over a share held in uncertificated form, the Company shall be entitled, subject to the provisions of the Statutes, the Regulations, these Articles and the facilities and requirements of the relevant system:

(a)	to require the holder of that uncertificated share by notice to change that share into certificated form within the period specified in the notice and to hold that share in certificated form so long as required by the Company;
(b)	to require the holder of that uncertificated share by notice to give any instructions necessary to transfer title to that share by means of the relevant system within the period specified in the notice;
(c)	to require the holder of that uncertificated share by notice to appoint any person to take any step, including without limitation the giving of any instructions by means of the relevant system, necessary to transfer that share within the period specified in the notice;
(d)	to require the Operator to convert that uncertificated share into certificated form in accordance with Regulation 32(2)(c) of the Regulations; and
(e)	to take any action that the Board considers appropriate to achieve the sale, transfer, disposal, forfeiture, re-allotment or surrender of that share or otherwise to enforce a lien in respect of that share.

Certificates

12.1 Every person whose name is entered as a member in the Register (except a stock exchange nominee in respect of whom the Company is not by law required to complete and have ready for delivery a certificate) shall be entitled without payment to one certificate in respect of each class of shares held by him, or, with the consent of the Board and upon payment of such sum (if any) for every certificate after the first as the Board shall determine, to several certificates, each for one or more of his shares except that shares of different classes may not be included in the same certificate. Where a member has transferred a part of the shares comprised in his holding he shall be entitled to a certificate for the balance without charge.

12.2 Every certificate shall be under the Seal or under the official seal kept by the Company by virtue of the Statutes and shall specify the shares to which it relates and the amount paid up thereon. In the case of a share held jointly by several persons, the Company shall not be bound to issue more than one certificate for each class of shares so held, and delivery of a certificate for a share to one of several joint holders shall be deemed sufficient delivery to all.

13. If a share certificate is worn out, defaced, lost or destroyed it may be renewed without charge on such terms (if any) as to evidence and indemnity as the Board thinks fit, and in the case of defacement or wearing-out, on delivery up to the Company of the old certificate. The person availing himself of the provisions of this Article shall pay to the Company all exceptional out of pocket expenses incident to the investigation of evidence and the preparation of the requisite form of indemnity as aforesaid.

Page 9

Calls on Shares

14. The Board may from time to time (subject to any terms upon which any shares may have been issued) make calls upon the members in respect of any monies unpaid on their shares (whether on account of the nominal value of the shares or by way of premium), provided that (subject as otherwise fixed by the terms of issue) no call on any share shall be payable at less than fourteen clear days from the last call; and each member shall (subject to receiving at least fourteen clear days notice specifying the time or times and place of payment) pay to the Company at the time or times and place so specified the amount called on his shares. A call may be revoked in whole or in part and payment of a call may be postponed in whole or in part by the Board.

15. A call shall be deemed to have been made at the time when the resolution of the Board authorising the call was passed, and may be made payable by instalments.

16. The joint holders of a share shall be jointly and severally liable to pay all calls in respect thereof.

17. If a sum called in respect of a share is not paid before or on the day appointed for payment thereof, the person from whom the sum is due shall pay interest on the sum from the day appointed for payment thereof to the time of actual payment at such rate as may be fixed by the terms of allotment of the share or, if no rate is so fixed, at the appropriate rate (as defined by the Statutes); but the Board shall be at liberty to waive payment of such interest wholly or in part.

18. Any sum which by the terms of issue of a share becomes payable on allotment or at any fixed date, whether on account of the nominal value of the share or by way of premium, shall for all the purposes of these Articles be deemed to be a call duly made and payable on the date on which, by the terms of issue, the same becomes payable, and in case of non-payment all the relevant provisions of these Articles as to payment of interest and expenses, forfeiture and otherwise shall apply as if such sum had become payable by virtue of a call duly made and notified.

19. The Board may differentiate between the holders as to the amount of calls to be paid and the times of payment.

20. The Board may, if it thinks fit, receive from any member willing to advance the same, all or any part of the monies uncalled and unpaid upon any shares held by him, and upon all or any of the monies so advanced may (until the same would but for such advance become presently payable) pay interest at such rate (if any) not exceeding (unless the Company in general meeting shall otherwise direct) the appropriate rate (as defined by the Statutes) as may be agreed upon between the Board and such member.

Lien

21. The Company shall have a first and paramount lien on every share (not being a fully paid share) for all monies whether presently payable or not, called or payable at a fixed time in respect of that share; but the Board may at any time declare any share to be wholly or in part exempt from the provisions of this Article. The

Page 10

Company’s lien (if any) on a share shall extend to all dividends and other monies payable thereon.

22. The Company may sell, in such manner as the Board thinks fit, any shares on which the Company has a lien, but no sale shall be made unless some sum in respect of which the lien exists is presently payable, nor until the expiration of fourteen clear days after a notice in writing, stating and demanding payment of the sum presently payable, and stating the intention to sell in default, shall have been given to the registered holder for the time being of the share, or the person entitled by reason of death or bankruptcy to the share.

23. For giving effect to any such sale, the Board may, if the share is a certificated share, authorise some person to transfer the shares sold to, or in accordance with the directions of, the purchaser thereof. If the share is an uncertificated share, the Board may exercise any of the Company’s powers under Article 11.7 to effect the sale of the share to, or in accordance with the directions of, the purchaser thereof. The transferee shall be registered as the holder of the shares comprised in any such transfer, and he shall not be bound to see to the application of the purchase money, nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings in reference to the sale.

24. The net proceeds of sale, after payment of the costs thereof, shall be applied in or towards payment or satisfaction of the debt or liability in respect whereof the lien exists, so far as the same is presently payable, and any residue shall (subject to a like lien for debts or liabilities not presently payable as existed upon the shares prior to sale) be paid to the person entitled to the shares at the time of the sale.

Forfeiture of Shares

25. If a member fails to pay the whole or any part of any call or instalment of a call on the day fixed for payment thereof, the Board may, at any time thereafter during such time as any part of such call or instalment remains unpaid, serve a notice on him requiring payment of so much of the call or instalment as is unpaid, together with any accrued interest and any costs, charges and expenses incurred by the Company by reason of such non-payment.

26. The notice shall name a further day (not being less than fourteen clear days from the date of the notice) on or before which, and the place where, the payment required by the notice is to be made, and shall state that, in the event of non-payment at or before the time and at the place appointed, the shares on which the call was made will be liable to be forfeited.

27. If the requirements of any such notice are not complied with, any share in respect of which such notice has been given may, at any time thereafter, before payment of all calls, interest, costs, charges and expenses due in respect thereof has been made, be forfeited by a resolution of the Board to that effect. Such forfeiture shall include all dividends declared in respect of the forfeited share and not actually paid before the forfeiture.

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28. A forfeited share may be sold, re-allotted or otherwise disposed of either to the person who was before forfeiture the holder thereof or entitled thereto, or to any other person, upon such terms and in such manner as the Board thinks fit, and at any time before sale, re-allotment or disposal, the forfeiture may be cancelled on such terms as the Board thinks fit. The Board may authorise some person to transfer a forfeited share to any person as aforesaid. Where for the purposes of its disposal a forfeited share held in certificated form is to be transferred to any person, the Board may authorise any person to execute an instrument of transfer of the share to that person. Where for the purposes of its disposal a forfeited share held in uncertificated form is to be transferred to any person, the Board may exercise any of the Company’s powers under Article 11.7.

29. A member any of whose shares have been forfeited shall cease to be a member in respect of the forfeited shares and shall surrender to the Company for cancellation the certificate for the shares forfeited, but shall, notwithstanding the forfeiture, remain liable to pay to the Company all monies which at the date of forfeiture were presently payable by him to the Company in respect of the shares, with interest thereon at such rate as the Board shall think fit (or, if no rate is determined, at the appropriate rate as defined by the Statutes) from the date of forfeiture until payment, but the Board shall be at liberty to waive payment of such interest wholly or in part or enforce payment without any allowance for the value of the shares at the time of forfeiture or of any consideration received on their disposal and his liability shall cease if and when the Company shall have received payment in full of all monies in respect of the shares.

30. The Board may accept the surrender of any share which it is in a position to forfeit upon such terms and conditions as may be agreed and, subject to any such terms and conditions, any share so surrendered shall be treated as if it had been forfeited.

31. A statutory declaration in writing that the declarant is a Director or the Secretary, and that a share has been duly forfeited or surrendered on a date stated in the declaration shall be conclusive evidence of such facts as against all persons claiming to be entitled to the share, and such declaration and the receipt of the Company for the consideration (if any) given for the share on the sale, re-allotment or disposal thereof shall constitute a good title to the share, and the person to whom the share is sold, re-allotted or disposed of shall be registered as the holder thereof, and his title to the share shall not be affected by any irregularity or invalidity in the proceedings in reference to the forfeiture, surrender, sale, re-allotment or disposal of the share.

Transfer of Shares

32. Without prejudice to any power of the Company to register as a shareholder a person to whom the right to any share has been transmitted by operation of law, all transfers of certificated shares shall be effected by transfer in writing in the usual common form or in such other form as the Board may approve.

33. The instrument of transfer of a certificated share shall be executed by or on behalf of the transferor, and the transferor shall be deemed to remain the holder of the share until the name of the transferee is entered in the Register in respect thereof.

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Registration of any instrument of transfer or other document relating to or affecting the title to any certificated share in the Company does not require the payment of any fee, provided that in the case of a partly paid share the instrument of transfer shall also be executed by or on behalf of the transferee.

34. The Board may, in its absolute discretion, and without assigning any reason therefor, refuse to register any transfer of certificated shares which are not fully paid, provided the exercise of such discretion does not prevent dealings in the shares from taking place on an open and proper basis.

35. The Board may also refuse to register any instrument of transfer of a certificated share, if:

(a)	the instrument of transfer is not lodged, duly stamped, at the Office or at such other place as the Board may appoint or is not accompanied by the certificate of the shares to which it relates and such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer; or
(b)	the instrument of transfer is in respect of more than one class of share; or
(c)	in the case of a transfer to joint holders, they exceed four in number.

36. If the Board refuses to register a transfer of a share in certificated form, it shall within two months after the date on which the transfer was lodged with the Company, send to the transferee notice of the refusal.

37. The Register may be closed at such times and for such period as the Board may from time to time determine, provided that it shall not be closed for more than thirty days in any year.

Transmission Of Shares

38. In the case of the death of a member, the survivor where the deceased was a joint holder, and the executors or administrators of the deceased where he was a sole holder, shall be the only persons recognised by the Company as having any title to a share held by him, but nothing herein contained shall release the estate of a deceased joint holder from any liability in respect of any share held by him jointly.

39. Any person becoming entitled to a share in consequence of the death or bankruptcy of a member may, upon such evidence as to his title being produced as may from time to time be properly required by the Board, and subject as hereinafter provided, either be registered himself as the holder of the share or elect to have some person nominated by him registered as the transferee thereof.

40. A person becoming entitled by transmission to a share may, on production of any evidence as to his entitlement properly required by the Board, elect either to become the holder of the share or to have another person nominated by him registered as the transferee. If he elects to become the holder he shall send notice to the Company to that effect. If he elects to have another person registered and the share is a certificated share, he shall execute an instrument of transfer of the share to that

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person. If he elects to have himself or another person registered and the share is an uncertificated share, he shall take any action the Board may require (including without limitation the execution of any document and the giving of any instruction by means of a relevant system) to enable himself or that person to be registered as the holder of the share. All the provisions of these Articles relating to the transfer of shares apply to that notice or instrument of transfer as if it were an instrument of transfer executed by the member and the death or bankruptcy of the member or other event giving rise to the transmission had not occurred.

41. A person becoming entitled to a share in consequence of the death or bankruptcy of a member shall, subject to the requirements of Article 141, be entitled to receive and may give a discharge for all dividends and other monies payable in respect of the share, but he shall not be entitled to receive notices of or to attend or vote at meetings of the Company or to any of the rights or privileges of a member until he shall have become a member in respect of the share. The Board may at any time give notice requiring any such person to elect either to be registered himself or to transfer the share and if the notice is not complied with within sixty days the Board may thereafter withhold payment of all dividends or other monies payable in respect of the share until the requirements of the notice have been complied with.

41.(A) The following provisions shall apply to share warrants:

(a)	The Company with respect to fully-paid shares may issue share warrants stating that the bearer is entitled to the shares therein specified, and may provide by coupons or otherwise for the payment of future dividends or other monies on or in respect of the shares included in such share warrants.
(b)	A share warrant shall entitle the bearer thereof to the shares included in it, and the shares may be transferred by the delivery of the share warrant, and the provisions of these Articles with respect to transfer and transmission of shares shall not apply thereto. Each share warrant shall be issued under the Seal or under the Securities Seal or, in the case of shares on a branch register, an official seal for use in the relevant territory.
(c)	The Directors shall be at liberty to accept a certificate (in such form and from such person as the Directors may approve) to the effect that a specified person is shown in the records of the person issuing such certificate as being entitled to all or some of the shares comprised in a specified share warrant as sufficient evidence of the facts stated in such certificate, and may treat the deposit of such certificate at the Transfer Office (or at any other place specified from time to time by the Directors) as equivalent to the deposit there of the share warrant, and may inter alia allot to the person named in such certificate any shares to which the bearer of the share warrant referred to in such certificate may be entitled and the right of the allottee to the allotment shall not, after allotment, be questioned by any person.
(d)	The Directors may determine and from time to time vary the conditions upon which share warrants shall be issued, and in particular (but without limitation) upon which a new share warrant or coupon will be issued in the place of one worn out, defaced, lost or destroyed provided that no new share warrant may

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be issued to replace one that has been lost unless the Directors are satisfied beyond reasonable doubt that the original share warrant has been destroyed, upon which (subject as hereinafter provided) the bearer of a share warrant shall be entitled to attend and vote at general meetings, and upon which a share warrant may be surrendered and the name of the holder entered in the Register in respect of the shares therein specified. Subject to such conditions and to these Articles, the bearer of a share warrant shall be subject to the conditions for the time being in force relating to share warrants, whether made before or after the issue of such share warrant.

(e)

Subject to any conditions for the time being in force relating to share warrants and as otherwise expressly provided in these Articles, the bearer of a share warrant may at any time deposit the share warrant at the Transfer Office (or at such other place as the Directors may from time to time appoint) and so long as the share warrant remains so deposited, the depositor shall have the same right of signing a requisition for calling a meeting and of attending and voting, appointing a proxy and exercising the other privileges of a member at any meeting held after the expiration of forty-eight hours from the time of deposit and be entitled to be given any notices by the Company which are to be given, after the expiration of forty-eight hours from the time of such deposit, to holders of shares of that class, as if his name were inserted in the Register as the holder of the shares included in the deposited share warrant, provided that in the case of a share warrant deposited elsewhere than at the Transfer Office (or such other place as aforesaid), the depositor shall have obtained from the person with whom the same is deposited a certificate of such deposit in such form as the Directors may require specifying inter alia the share warrant and the number of shares included therein, and shall have lodged the same at the Transfer Office (or such other place as aforesaid) not less than forty-eight hours before the time of the meeting at which the depositor desires to attend or to be represented. Not more than one person shall be recognised as a depositor of any share warrant. Every share warrant which shall have been so deposited as aforesaid shall remain so deposited until after the closing of the meeting at which the depositor desires to attend or to be represented.

(f)

Subject as otherwise expressly provided in these Articles or by the terms of issue of any shares or in any conditions for the time being in force relating to share warrants, no person shall, as bearer of a share warrant, be entitled to sign a requisition for calling a meeting of the Company or give notice of intention to submit a resolution to a meeting or attend or vote or give a proxy or exercise any other privilege of a member at a meeting of the Company, or be entitled to receive any notices from the Company, but the bearer of a share warrant shall be entitled in all other respects to the same privileges and advantages as if he were named in the Register as the holder of the shares included in the share warrant, and he shall be deemed to be a member of the Company.

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Stock

42. The Company may from time to time by ordinary resolution convert any paid up shares into stock, and reconvert any stock into paid up shares of any denomination.

43. The holders of stock may transfer the same, or any part thereof, in the same manner and subject to the same regulations as and subject to which the shares from which the stock arose might previously to conversion have been transferred, or as near thereto as circumstances admit. The Board may from time to time fix the minimum amount of stock transferable and restrict or forbid the transfer of fractions of such minimum but the minimum shall not exceed the nominal amount of the shares from which the stock arose.

44. The holders of stock shall, according to the total amount of the stock held by them, have the same rights, privileges and advantages as regards dividends, participation in assets on a winding up, voting at meetings and other matters, as if they held the shares from which the stock arose, but no such privilege or advantage (except participation in dividends and in assets on a winding up) shall be conferred by any such amount of stock as would not, if existing in shares, have conferred such privilege or advantage.

45. All the provisions of these Articles applicable to paid up shares shall apply to stock, and the words “share” and “member” shall be construed accordingly.

Consolidation, Sub-division And Cancellation Of Shares

46. The Company may from time to time by ordinary resolution:

(a)

consolidate and divide all or any of its share capital into shares of larger amount than its existing shares. Whenever any fractions arise as a result of a consolidation or sub-division of shares, the Board may on behalf of the members deal with the fractions as it thinks fit. In particular, without limitation, the Board may sell shares representing fractions to which any members would otherwise become entitled to any person (including, subject to the provisions of the Statutes, the Company) and distribute the net proceeds of sale in due proportion among those members. Where the shares to be sold are held in certificated form the Board may authorise some person to execute an instrument of transfer of the shares to, or in accordance with the directions of, the buyer. Where the shares to be sold are held in uncertificated form, the Board may do all acts and things it considers necessary or expedient to effect the transfer of the shares to, or in accordance with the directions of, the buyer. The buyer shall not be bound to see to the application of the purchase monies and his title to the shares shall not be affected by any irregularity in, or invalidity of, the proceedings in relation to the sale.

(b)

sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum of association of the Company, subject nevertheless to the provisions of the Statutes and so that the resolution whereby any share is sub-divided may determine that as between the holders of the resulting shares, one or more of such shares shall have any preference or special

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advantage as regards dividend, capital, voting or otherwise, over, or may have any defined rights or be subject to any restrictions as compared with, the other or others but so that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each share resulting from the sub-division shall be the same as it was in the case of the share from which such shares were derived; and

(c) cancel any shares which, at the date of the passing of the resolution, have not been taken, or agreed to be taken, by any person, and diminish the amount of its share capital by the amount of the shares so cancelled.

Increase And Reduction Of Capital

47. The Company may from time to time by ordinary resolution increase its share capital by such sum, to be divided into shares of such amounts, as the resolution shall prescribe.

48.1 Subject to the consents and incidents required by the Statutes, the Company may by special resolution reduce its share capital, its capital redemption reserve fund and any share premium account in any way.

48.2 All shares created by ordinary resolution pursuant to Articles 46-47 shall be:

(a)	subject to all the provisions of these Articles, including without limitation provisions relating to payment of calls, lien, forfeiture, transfer and transmission; and
(b)	unclassified, unless otherwise provided by these Articles, by the resolution creating the shares or by the terms of allotment of the shares.

Redeemable Shares

49. Subject to the provisions of the Statutes, any shares may be issued on terms that they are, or at the option of the Company or the shareholder are liable, to be redeemed on such terms and in such manner as the Company before the issue of the shares may by special resolution determine.

Meetings Of Members

General And Class Meetings

50. In every year the Company shall in addition to any other meetings in that year hold a general meeting as its annual general meeting, at such time (within a period of not more than fifteen months after the holding of the last preceding annual general meeting) and place as may be determined by the Board.

51.1 The Board may call a general meeting whenever it thinks fit, and, on the requisition of members in accordance with the Statutes, it shall forthwith convene a general meeting. 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

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convene a general meeting in the same manner as nearly as possible as that in which meetings may be convened by the Board.

51.2 All provisions of these Articles relating to general meetings of the Company or the proceedings thereat shall, mutatis mutandis, apply to every separate general meeting of the holders of any class of shares in the capital of the Company, except that:

(a)	the necessary quorum shall be two persons holding or representing by proxy at least one-third in nominal value of the issued shares of the class (excluding any shares of that class held as treasury shares) or, at any adjourned meeting of such holders, one holder present in person or by proxy, whatever the amount of his holding, who shall be deemed to constitute a meeting;
(b)	any holder of shares of the class present in person or by proxy may demand a poll; and
(c)	each holder of shares of the class shall, on a poll, have one vote in respect of every share of the class held by him.

For the purposes of this article, where a person is present by proxy or proxies, he is treated as holding only the shares in respect of which the proxy or proxies are authorised to exercise voting rights.

Notice of General Meetings

52. Fourteen clear days’ notice at the least, or, in the case of an annual general meeting, twenty-one clear days’ notice at the least shall be given in the manner hereinafter mentioned to such members as are, under the provisions herein contained, entitled to receive notices from the Company and also to each of the Directors and to the Auditors.

53. Every notice of meeting shall specify the place, the day and the hour of meeting, and, in the case of special business, the general nature of such business. Every notice convening an annual general meeting shall specify the meeting as such and every notice convening a meeting to pass a special resolution shall also specify the intention to propose the resolution as a special resolution, as the case may be. Every notice of meeting shall state with reasonable prominence that a member entitled to attend and vote is entitled to appoint a proxy and that such proxy need not be a member.

54.1 The accidental omission to give notice of any meeting or resolution, or to send any notification where required by the Statutes or these Articles in relation to the publication of a notice of meeting on a website, or to send a form of proxy with a notice where required by these Articles, to any person entitled to receive the same, or the non-receipt of a notice of meeting, resolution or form of proxy by such a person, whether or not the Company is aware of such omission or non-receipt, shall not invalidate the proceedings at the meeting.

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54.2 The Board may resolve to enable persons entitled to attend a general meeting to do so by simultaneous attendance and participation at a satellite meeting place anywhere in the world. The members present in person or by proxy at a satellite meeting place shall be counted in the quorum for, and entitled to vote at, the general meeting in question, and that meeting shall be duly constituted and its proceedings valid if the chairman of the general meeting is satisfied that adequate facilities are available throughout the general meeting to ensure that members attending at all the meeting places are able to:

(a)	participate in the business for which the meeting has been convened;
(b)	hear and see all persons who speak (whether by the use of microphones, loudspeakers, audio-visual communications equipment or otherwise) in the principal meeting place and any satellite meeting place; and
(c)	be heard and seen by all other persons so present in the same way.

The chairman of the general meeting shall be present at, and the meeting shall be deemed to take place at, the principal meeting place.

54.3 If it appears to the chairman of the general meeting that the facilities at the principal meeting place or any satellite meeting place have become inadequate for the purposes referred to in Article 54.2, then the chairman of the general meeting may, without the consent of the meeting, interrupt or adjourn the general meeting. All business conducted at that general meeting up to the time of that adjournment shall be valid.

54.4 The Board may make arrangements for persons entitled to attend a general meeting or an adjourned general meeting to be able to view and hear the proceedings of the general meeting or adjourned general meeting and to speak at the meeting (whether by the use of microphones, loudspeakers, audio-visual communications equipment or otherwise) by attending at a venue anywhere in the world not being a satellite meeting place. Those attending at any such venue shall not be regarded as present at the general meeting or adjourned general meeting and shall not be entitled to vote at the meeting at or from that venue. The inability for any reason of any member present in person or by proxy at such a venue to view or hear all or any of the proceedings of the meeting or to speak at the meeting shall not in any way affect the validity of the proceedings of the meeting.

54.5 The Board may from time to time make any arrangements for controlling the level of attendance at any venue for which arrangements have been made pursuant to Article 54.4 (including without limitation the issue of tickets or the imposition of some other means of selection) if it considers it appropriate, and may from time to time change those arrangements. If a member, pursuant to those arrangements, is not entitled to attend in person or by proxy at a particular venue, he shall be entitled to attend in person or by proxy at any other venue for which arrangements have been made pursuant to Article 54.4. The entitlement of any member to be present at such venue in person or by proxy shall be subject to any such arrangement then in force and stated by the notice of meeting or adjourned meeting to apply to the meeting.

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54.6 If, after the sending of notice of a general meeting but before the meeting is held, or after the adjournment of a general meeting but before the adjourned meeting is held (whether or not notice of the adjourned meeting is required), the Board decides that it is impracticable or unreasonable, for a reason beyond its control, to hold the meeting at the declared place (or any of the declared places, in the case of a meeting to which Article 54.2 applies); and/or time, it may as appropriate: (i) change the place (or any of the places, in the case of a meeting to which Article 54.2 applies); and/or (ii) postpone the time at which the meeting is to be held. If such a decision is made, the Board may then change the place (or any of the places, in the case of a meeting to which Article 54.2 applies) and/or postpone the time again if it decides that it is reasonable to do so. In either case:

(a)

no new notice of the meeting need be sent, but the Board shall, if practicable, advertise the date, time and place of the meeting in at least two newspapers having a national circulation and shall make arrangements for notices of the change of place and/or postponement to appear at the original place and/or at the original time; and

(b)

a proxy appointment in relation to the meeting may, if by means of a document in hard copy form, be delivered to the Office or to such other place within the United Kingdom as may be specified by or on behalf of the Company in accordance with Article 74(a) or, if in electronic form, be received at the address (if any) specified by or on behalf of the Company in accordance with Article 74(b) (or such address as the Company may be deemed by The Statutes to have agreed), at any time not less than forty-eight hours before any postponed time appointed for holding the meeting.

54.7 For the purposes of Articles 54.2-54.5, the right of a member to participate in the business of any general meeting shall include without limitation the right to speak, vote on a show of hands, vote on a poll, be represented by a proxy and have access to all documents which are required by the Statutes or these Articles to be made available at the meeting.

Proceedings at General Meetings

55. All business shall be deemed special that is dealt with at a general meeting, and also all business that is dealt with at an annual general meeting, with the exception of sanctioning or declaring dividends, the consideration of the accounts and balance sheet, the ordinary reports of the Board and Auditors and any other documents required to be annexed to the balance sheet, the appointment or election of Directors in the place of those retiring by rotation or otherwise and the appointment or re-appointment of and the fixing 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 Statutes, to allot securities.

56. 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 representative duly authorised in accordance with Article 67.

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57. If within fifteen minutes from the time appointed for the meeting a quorum is not present, the meeting, if convened on the requisition of members, shall be dissolved. In any other case it shall stand adjourned to the same day in the next week, at the same time and place, or to such time and place as may be fixed by the chairman of the meeting, and if at such adjourned meeting a quorum is not present within fifteen minutes from the time appointed for holding the meeting the members present in person or by proxy shall be a quorum.

58. The Chairman (if any) of the Board or in his absence the Deputy Chairman of the Board or some other Director nominated by the Board shall preside as chairman at every general meeting of the Company. If there be no such Chairman or Deputy Chairman, or if at any meeting neither the Chairman, the Deputy Chairman nor such other Director (if any) be present within ten minutes after the time fixed for holding the meeting or be willing to act as chairman of the meeting, the Directors present shall choose one of their number to be chairman of the meeting, or if no Director is present, or if all the Directors present decline to take the chair, the members present shall choose one of their number to be chairman of the meeting.

59. The chairman of the meeting may, with the consent of any meeting at which a quorum is present (and shall if so directed by the meeting), adjourn the meeting from time to time and from place to place, but no business shall be dealt with at an adjourned meeting except business which might lawfully have been dealt with at the meeting from which the adjournment took place. When a meeting is adjourned for thirty days or more or for an indefinite period, notice of the adjourned meeting shall be given in like manner as in the case of the original meeting. Save as aforesaid, it shall not be necessary to give any notice of an adjournment or of the business to be dealt with at an adjourned meeting.

60. At any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands, unless a poll is (before or on the declaration of the result of the show of hands) demanded:

(a)	by the chairman of the meeting; or
(b)	(except on the election of the chairman of the meeting or on a question of adjournment) by at least three members present in person or by proxy and entitled to vote on the resolution; or
(c)	by any member or members present in person or by proxy and representing not less than 10% of the total voting rights of all the members having the right to vote on the resolution; or
(d)	by a member or members present in person or by proxy holding shares in the Company conferring a right to vote on the resolution being shares on which an aggregate sum has been paid up equal to not less than 10% of the total sum paid up on all the shares conferring that right;

The appointment of a proxy to vote on a matter at a meeting authorises the proxy to demand, or join in demanding, a poll on that matter. In applying the provisions of this Article, a demand by a proxy counts (i) for the purposes of paragraph (b) of this

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Article, as a demand by the member, (ii) for the purposes of paragraph (c) of this Article, as a demand by a member representing the voting rights that the proxy is authorised to exercise, and (iii) for the purposes of paragraph (d) of this Article, as a demand by a member holding the shares to which those rights are attached.

61. Unless a poll is so demanded, a declaration by the chairman of the meeting that a resolution has been carried, or carried unanimously, or by a particular majority, or lost, or not carried by a particular majority, and an entry to that effect in the minute books, shall be conclusive evidence of the fact, without proof of the number or proportion of the votes recorded in favour of or against such resolution.

62. If a poll is duly demanded, it shall be taken in such manner as the chairman of the meeting may direct, and the result of a poll shall be deemed to be the resolution of the meeting at which the poll was demanded. The chairman of the meeting may appoint scrutineers (who need not be members) and fix a time and place for declaring the result of a poll.

63. A poll demanded on the election of the chairman of the meeting or on a question of adjournment shall be taken forthwith. A poll demanded on any other question shall be taken at such time and place as the chairman of the meeting directs, but in any case not more than twenty-eight days after the meeting at which the poll was demanded. No notice need be given of a poll not taken forthwith if the time and place at which it is to be taken are announced at the meeting at which it is demanded. In any other case at least seven clear days’ notice shall be given specifying the time and place at which the poll is to be taken.

64. The demand for a poll shall not prevent the continuance of a meeting for dealing with any business other than the question on which the poll has been demanded, and it may be withdrawn at any time before the conclusion of the meeting or the date fixed for the taking of the poll. If a demand is withdrawn before the conclusion of the meeting the chairman of the meeting or other members entitled, may himself or themselves demand a poll. A demand for a poll which is withdrawn shall not be taken to have invalidated the result of a show of hands declared before the demand was made.

Votes of Members

65. Subject to any terms upon which any shares may be issued or may from time to time be held, on a show of hands every member (whether an individual or a corporation) present in person shall have one vote, and every proxy present who has been duly appointed by a member entitled to vote shall have one vote, and on a poll, every member (whether an individual or a corporation) present in person or by proxy shall have one vote for every 25 pence of nominal share capital of which he is the holder.

66. In the case of joint holders of a share the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the Register.

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67. Any corporation which is a member of the Company may, by resolution of its directors or other governing body, authorise such person as it thinks fit to act as its representative at any general meeting, and the person so authorised shall be entitled to exercise the same powers on behalf of the corporation which he represents as the corporation could exercise if it were an individual member of the Company. Any person so authorised may be required at any general meeting which such person attends to produce evidence of such authority in a form reasonably satisfactory to the Board.

68. A member in respect of whom an order has been made by any court having jurisdiction (whether in the United Kingdom or elsewhere) in matters concerning mental disorder may vote, whether on a show of hands or on a poll, by his receiver, curator bonis or other person authorised in that behalf appointed by that court, and any such receiver, curator bonis or other person may, on a show of hands or on a poll, vote by proxy provided that such evidence as the Board may require of the authority of such person shall have been deposited at the Office, or at such other place as is specified in accordance with these Articles for the deposit of proxies, not less than forty-eight hours before the time appointed for holding the meeting or adjourned meeting or for the taking of the poll at which the right to vote is to be exercised and in default the right to vote shall not be exercisable.

69. No member shall be entitled to vote at any general meeting or at any separate meeting of the holders of any class of shares in the Company, either in person or by proxy, in respect of any share held by him unless all calls or other sums presently payable by him in respect of shares in the Company have been paid.

70. No objection shall be raised to the qualification of any vote except at the meeting or adjourned meeting or poll at which the vote objected to is given or tendered, and every vote not disallowed at such meeting shall be valid for all purposes. Any such objection made in due time shall be referred to the chairman of the meeting, whose decision shall be final and conclusive.

71. On a poll, a person entitled to more than one vote need not use all his votes or cast all the votes he uses in the same way.

Proxies

72.1 The appointment of a proxy shall be made in writing and shall be in any usual form or in any other form which the board may approve. Subject thereto, the appointment of a proxy may be (a) in hard copy form, or (b) in electronic form, if the Company agrees (or is deemed by the Statutes 2006 to have agreed).

72.2 The appointment of a proxy, whether made in hard copy form or in electronic form, shall be executed in such manner as may be approved by or on behalf of the Company from time to time. Subject thereto, the appointment of a proxy shall be executed by the appointor or any person duly authorised by the appointor or, if the appointor is a corporation, executed by a duly authorised person or under its common seal or in any other manner authorised by its constitution.

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73. The Board may, if it thinks fit, but subject to the provisions of the Statutes, at the Company’s expense send hard copy forms of proxy for use at a general meeting and issue invitations in electronic form to appoint a proxy in relation to the meeting in such form as may be approved by the Board. The appointment of a proxy shall not preclude a member from attending and voting in person at the meeting or poll concerned. A member may appoint more than one proxy to attend on the same occasion provided that each such proxy is appointed to exercise the rights attached to a different share or shares held by that member.

74. The appointment of a proxy shall:

(a) if in hard copy form, be delivered by hand or by post to the Office or such other place within the United Kingdom as may be specified by or on behalf of the Company for that purpose:

(i)	in the notice convening the general meeting; or
(ii)	in any form of proxy sent by or on behalf of the Company in relation to the meeting,

not less than forty-eight hours before the time appointed for holding the meeting or adjourned meeting at which the person named in the appointment proposes to vote; or

(b) if in electronic form, be received at any address to which the appointment of a proxy may be sent by electronic means pursuant to a provision of The Statutes or to any other address specified by or on behalf of the Company for the purpose of receiving the appointment of a proxy in electronic form in:

(i)	any form of proxy sent by or on behalf of the Company in relation to the meeting; or
(ii)	any invitation to appoint a proxy issued by the Company in relation to the meeting,

not less than forty-eight hours before the time appointed for holding the meeting or adjourned meeting at which the person named in the appointment proposes to vote; or

(c)	in either case, where a poll is taken more than forty-eight hours after it is demanded, be delivered or received as aforesaid after the poll has been demanded and not less than twenty-four hours before the time appointed for the taking of the poll; or
(d)	if in hard copy form, where a poll is not taken forthwith but is taken not more than forty-eight hours after it was demanded, be delivered at the meeting at which the poll was demanded to the chairman of the meeting or to the Secretary or to any Director.

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75.1 Where the appointment of a proxy is expressed to have been or purports to have been made, sent or supplied by a person on behalf of the holder of a share:

(a)	the Company may treat the appointment as sufficient evidence of the authority of that person to make, send or supply the appointment on behalf of that holder;
(b)	that holder shall, if requested by or on behalf of the Company at any time, send or procure the sending of any written authority under which the appointment has been made, sent or supplied, or a copy of such authority certified notarially or in some other way approved by the Board, to such address and by such time as may be specified in the request (or such address as the Company may be deemed by The Statutes to have agreed) and, if the request is not complied with in any respect, the appointment may be treated as invalid; and
(c)	whether or not a request under Article 75.1(b) has been made or complied with, the Company may determine that it has insufficient evidence of the authority of that person to make, send or supply the appointment on behalf of that holder and may treat the appointment as invalid.

75.2 A proxy appointment which is not delivered or received in accordance with Article 74 shall be invalid. When two or more valid proxy appointments are delivered or received in respect of the same share for use at the same general meeting, the one which was last delivered or received shall be treated as replacing and revoking the others as regards that share, provided that, if the Company determines that it has insufficient evidence to decide whether or not a proxy appointment is in respect of the same share, it shall be entitled to determine which proxy appointment shall be entitled to determine which proxy appointment (if any) is to be treated as valid. Subject to The Statutes, the Company may determine at its discretion when a proxy appointment shall be treated as delivered or received for the purposes of these Articles.

75.3 A proxy appointment shall be deemed to entitle the proxy to exercise all or any of the appointing member’s rights to attend and to speak and vote at a meeting of the Company. The proxy appointment shall, unless it provides to the contrary, be valid for any adjournment of the meeting as well as for the meeting to which it relates.

75.4 Any corporation which is a member of the Company may, by resolution of its directors or other governing body, authorise such person or persons as it thinks fit to act as its representative or representatives at any meeting of the Company or at any separate meeting of the holders of any class of shares. A director, the secretary or other person authorised for the purpose by the secretary may require all or any of such persons to produce a certified copy of the resolution of authorisation before permitting him to exercise his powers.

75.5 The termination of the authority of a person to act as a proxy or duly authorised representative of a corporation does not affect:

(a) whether he counts in deciding whether there is a quorum at a meeting;

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(b)	the validity of anything he does as chairman of a meeting;
(c)	the validity of a poll demanded by him at a meeting; or
(d)	the validity of a vote given by that person,

unless notice of the termination was either delivered or received as mentioned in the following sentence at least three hours before the start of the relevant meeting or adjourned meeting or (in the case of a poll taken otherwise than on the same day as the meeting or adjourned meeting) the time appointed for taking the poll. Such notice of termination shall be either by means of a document in hard copy form delivered to the office or to such other place within the United Kingdom as may be specified by or on behalf of the Company in accordance with Article 74(a) or in electronic form received at the address (if any) specified by or on behalf of the Company in accordance with Article 74(b) (or such address as the Company may be deemed by The Statutes to have agreed), regardless of whether any relevant proxy appointment was effected in hard copy form or in electronic form.

Directors

Number and Appointment of Directors

76. Unless and until otherwise from time to time determined by an ordinary resolution of the Company, the Directors (other than alternate Directors) shall be not less than two in number.

77. The Board shall have power at any time, and from time to time, to appoint any other person who is willing to act to be a Director, either to fill a casual vacancy or as an addition to the existing Board, but so that the total number of Directors shall not at any time exceed the maximum number (if any) fixed by or in accordance with these Articles. Any Director so appointed shall hold office only until the next following annual general meeting, and shall then be eligible for re-appointment but shall not be taken into account in determining the Directors to retire by rotation at such meeting under the provisions contained in these Articles.

78. The continuing Directors, or a sole continuing Director, may act notwithstanding any vacancies in the Board, but, if and so long as the number of Directors is reduced below the minimum number fixed by or in accordance with these Articles, the continuing Directors or Director may act for the purpose of filling up vacancies in the Board or of summoning general meetings of the Company, but not for any other purpose. If there be no Directors or Director able or willing to act, then any two members may summon a general meeting for the purpose of appointing Directors.

79. Except as otherwise authorised by the Statutes, a motion for the appointment of two or more persons as Directors by a single resolution shall not be made unless a resolution that it should be so made has first been agreed to by the meeting without any vote being given against it.

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80. No person other than a Director retiring at the meeting shall, unless recommended by the Board for election, be eligible for the office of a Director at any general meeting, unless not less than seven and not more than forty-two days before the day appointed for the meeting there shall have been given to the Secretary notice by a member duly qualified to be present and vote at the meeting for which such notice is given of his intention to propose such person for election, and also notice by the person to be proposed of his willingness to be appointed.

Qualification of Directors

81. Unless and until otherwise determined by the Company in a general meeting, the Directors shall not be required to hold any share qualification.

Powers of Directors

84. The business of the Company shall be managed by the Board, and the Board may exercise all such powers of the Company as are not by the Statutes or by these Articles or by any directions given by the Company from time to time by special resolution required to be exercised by the Company in a general meeting. The general powers given by this Article shall not be limited or restricted by any special authority or power given to the Board by any other Article.

85. The Board may establish any local or special boards or agencies for managing any of the affairs of the Company either in the United Kingdom or elsewhere, and may appoint any persons to be members of such local or special boards or to be managers or agents, and may fix their remuneration, and may delegate to any local or special board, manager or agent any of the powers, authorities and discretions vested in the Board (other than the powers to borrow and make calls) with power to sub-delegate, and may authorise the members of any local or special board, or any of them, to fill any vacancies therein, and to act notwithstanding vacancies, and any such appointment or delegation may be made upon such terms and subject to such conditions as the Board may think fit, and the Board may remove any person so appointed, and may annul or vary any such delegation, but no person dealing in good faith and without notice of any such annulment or variation shall be affected thereby.

86.1 The Board may establish and maintain or procure the establishment and maintenance of any non-contributory or contributory pension, provident or superannuation funds for the benefit of and give or procure the giving of pensions, allowances, gratuities or bonuses to any persons who are or were at any time in the employment, or service of the Company, or of any company which is a subsidiary of the Company or is allied to or associated in business with the Company or with any such subsidiary company, or of any business acquired by the Company or who are or were at any time Directors or officers of the Company or of any such other company as aforesaid, and the spouses, civil partners, former spouses or former civil partners, families and dependants of any such persons. Any Director shall be entitled to participate in and retain for his own benefit any such pension, allowance, gratuity or bonus and may vote in favour of the exercise of any of the powers aforesaid notwithstanding that he is or may become interested therein.

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86.2 Pursuant to section 719 of the Companies Act 1985, the Board is hereby authorised to make such provision as may seem appropriate for the benefit of persons employed or formerly employed by the Company or any of its subsidiaries in connection with the cessation or transfer of the whole or part of the undertaking of the Company or any subsidiary. Any such provision shall be made by a resolution of the Board in all respects in accordance with the said section.

87. The Board may from time to time by power of attorney under the Seal appoint any company, firm or person, or any fluctuating body of persons, whether nominated directly or indirectly by the Board, to be the attorney or attorneys of the Company for such purposes and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the Board under these Articles) and for such period and subject to such conditions as it may think fit, and any such power of attorney may contain such provisions for the protection or convenience of persons dealing with any such attorney as the Board may think fit and may also authorise any such attorney to sub-delegate all or any of the powers, authorities and discretions vested in him. The Board may, by power of attorney or otherwise, appoint any person to be the agent of the Company for such purposes and on such conditions as it determines, including authority for the agent to delegate all or any of his powers.

88. The Board may from time to time make and vary such regulations as it thinks fit respecting the keeping of dominion registers of members pursuant to the Statutes.

89. All cheques, promissory notes, drafts, bills of exchange and other negotiable or transferable instruments, and all receipts for monies paid to the Company shall be signed, drawn, accepted, endorsed or otherwise executed, as the case may be, in such manner as the Board shall from time to time by resolution determine.

Borrowing

90.1 Subject as hereinafter provided, the Board may exercise all the powers of the Company to borrow money, and to mortgage or charge its undertaking, property and uncalled capital, and to issue debentures and other securities, whether outright or as collateral security, for any debt, liability or obligation of the Company or of any third party.

90.2 The Board shall restrict the borrowings of the Company and exercise all voting and other rights or powers of control exercisable by the Company in relation to its subsidiaries so as to secure (as regards subsidiaries so far as by such exercise they can secure) that the aggregate amount for the time being remaining undischarged of all monies borrowed by the Company and/or any of its relevant subsidiaries (exclusive of monies borrowed by the Company from and for the time being owing to any such relevant subsidiary, or by any such relevant subsidiary from and for the time being owing to the Company or another such relevant subsidiary) shall not at any time without the previous sanction of an ordinary resolution of the Company exceed a sum equal to twice the aggregate of the adjusted capital and reserves.

90.3 For the purposes of this Article the expression “the adjusted capital and reserves” means at any relevant time the amount of the issued and paid up share capital of the Company (and so that capital allotted and capital the issue of which has

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been underwritten shall be treated as issued and any capital already called up or payable at any fixed future date within six months shall be treated as already paid up) plus or minus the aggregate amount standing to the credit or debit of the consolidated reserves (including for the purposes of this definition profit and loss account and any share premium account), plus the amount of minority interests in any subsidiaries, all as included in the latest published audited consolidated balance sheet of the Company plus an amount equal to the goodwill (including intangible assets) which has arisen on acquisitions of interests in companies and businesses made since 1 January 1981 in which the Company or any of its relevant subsidiaries continues to have an interest as at the relevant date of calculation and which has, as at such date, been written off against the consolidated reserves referred to above in accordance with United Kingdom accounting practices, less an amount equal to the amortisation of such goodwill up to the relevant date of calculation, over twenty years on a straight line basis but:

(a)	adjusted so as to exclude an amount equal to the net tangible assets of any subsidiary which is not a relevant subsidiary as included in the consolidated balance sheet of the Company;
(b)	adjusted as may be appropriate to take account of:

(i)	any increase in or reduction of the issued and paid up share capital or share premium account of the Company since the date to which the consolidated balance sheet incorporated in such accounts shall have been made up;
(ii)	any distributions in cash or specie made (otherwise than to the Company or to a relevant subsidiary) from such reserves since such date and not provided for therein;
(iii)	any relevant subsidiary not consolidated in such accounts, any companies which since the date of such accounts have ceased to be or have become relevant subsidiaries, and any companies which will become or will cease to be relevant subsidiaries as a result of the transaction in relation to which the calculation falls to be made;

(c)	after excluding any sums provided for taxation (including deferred tax);
(d)	after deducting therefrom (insofar as not otherwise deducted) a sum equivalent to the book value of any goodwill and any other intangible assets in the said consolidated balance sheet;
(e)	after making such other adjustments (if any) as the Auditors may consider appropriate.
90.4	For the purpose of this Article “borrowings” shall include the following:
(a)	the principal amount for the time being outstanding of any debentures within the meaning of section 744 of the Companies Act 1985, issued (whether for cash or otherwise) by the Company or any relevant subsidiary;

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(b)	the principal amount for the time being outstanding in respect of acceptances raised by the Company or any relevant subsidiary under any acceptance credit opened on its behalf (not being acceptances in relation to the purchase of goods in the normal course of trading which have been outstanding for one hundred and eighty days or less);
(c)	the nominal amount of any issued share capital and the principal amount of any borrowings the repayment whereof is guaranteed by or is the subject of an indemnity from the Company or any relevant subsidiary; and
(d)	the nominal amount of any issued share capital (not being equity share capital) of a relevant subsidiary, which is not beneficially owned by the Company or by another relevant subsidiary,

together with (in any case) any fixed or minimum premium payable on final redemption or final repayment, but shall not include:

(i)	amounts borrowed and otherwise falling to be taken into account pursuant to this Article and intended to be applied within six months of being so borrowed in the repayment of borrowings then outstanding which fall to be taken into account pursuant to this Article pending their application for such purpose or the expiration of such period whichever shall be the earlier;
(ii)	borrowings from bankers or others for the purpose of financing any contract in respect of which any part of the price receivable is guaranteed or insured by the Export Credits Guarantee Department of the Department of Trade, to an amount not exceeding that part of the price receivable thereunder which is so guaranteed or insured;
(iii)	unsecured borrowings from bankers to the extent that there are amounts standing to the credit of the account(s) of the relevant subsidiary making the borrowing and/or any other relevant subsidiary which, in accordance with the arrangements made between the bankers and the relevant subsidiary making the borrowing or any other relevant subsidiary, are available for set-off by the bankers against the amount of such borrowings; and
(iv)	borrowings by a company, which on becoming a subsidiary after 27 May 1983 is also a relevant subsidiary, which are outstanding at the date when it becomes a subsidiary for a period of twelve months from the date of such event to the extent that a sum equal to the amount of such borrowings exceeds any increase in the relevant limit arising out of the adjustments to be made to the adjusted capital and reserves on account of the transaction whereby such company becomes a relevant subsidiary,

and shall be reduced by the amounts owed, as at the relevant date of calculation, to the Company or any of its relevant subsidiaries provided that the basis of calculation of such amounts owed shall be the same basis as that used for the calculation of the amounts of cash and liquid funds of the Company and its relevant subsidiaries for the purposes of the most recent published audited consolidated accounts of the Company.

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90.5 For the purpose of determining whether the limit imposed by this Article has been exceeded, the principal amount of any borrowings expressed in a currency other than sterling shall be translated into sterling on the basis adopted for the translation of borrowings in the latest published audited consolidated accounts of the Company and no account shall be taken of subsequent fluctuations in the rates between sterling and the currency or currencies of the borrowing.

90.6 Notwithstanding any provision contained in this Article no account shall be taken of any amount more than once in the determination of the amount of borrowings in relation to the limits set out in this Article. If, in the determination of any such amount, the provisions of this Article may be applied to produce more than one amount, that provision which produces the higher amount shall apply to the exclusion of the other or others.

90.7 For the purpose of this Article the expression “relevant subsidiary” means any subsidiary of the Company for the time being.

90.8 No person dealing with the Company or any of its subsidiaries shall by reason of the foregoing provisions of this Article be concerned to see or inquire whether this limit is observed, and no debt incurred or security given in excess of such limit shall be invalid or ineffectual unless the lender or the recipient of the security had at the time when the debt was incurred or security given express notice that the limit hereby imposed had been or would thereby be exceeded.

Proceedings of the Board

91.1 The Board may meet together for the despatch of business, adjourn and otherwise regulate its meetings as it thinks fit. Questions arising at any meeting of the Board shall be determined by a majority of votes. In case of an equality of votes the Chairman shall not have a second or casting vote.

91.2 A Director may, and the Secretary on the requisition of a Director shall, at any time call a meeting of the Board by giving notice of the meeting to each Director. It shall not be necessary to give notice of a meeting of the Board to any Director for the time being absent from the United Kingdom.

91.3 Notice of the date, time and place of each meeting of the Board shall, so far as practicable, be given to each Director at least twenty-four hours prior to such meeting and may be given in hard copy form or in electronic form to such address (if any) for the time being notified by the Director or on his behalf to the Company for that purpose. The accidental omission to give notice of any meeting of the Board to any Director entitled to receive the same, or the non-receipt of a notice of any such meeting by such a Director, shall not invalidate the proceedings at the meeting.

92. The quorum necessary for dealing with the business of the Board shall be fixed by the Board, and unless so fixed at any other number, shall be two. For the purpose of determining whether the quorum for dealing with the business of the Board exists:

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(a)	in the case of a resolution agreed by Directors in telephonic communications, all such Directors shall be counted in the quorum;
(b)	in the case of a meeting of Directors, in addition to the Directors present at the meeting, any Director in telephonic communication with such meeting shall be counted in the quorum.

93. The Board may elect a Chairman and, if it thinks fit, a Deputy Chairman of its meetings, determine the period for which they respectively are to hold office and may at any time remove the Chairman and/or the Deputy Chairman from their respective office. If no such Chairman or Deputy Chairman is elected, or if at any meeting of the Board neither is present within five minutes after the time appointed for holding the same, or if the Chairman or Deputy Chairman is unwilling to act, the Directors present may choose one of their number to be Chairman of the meeting.

94. A resolution in writing, agreed to by all the Directors entitled to receive notice of and vote at a meeting of the Board or of a committee of the Board shall, provided they constitute a quorum, be as effective as a resolution passed at a meeting of the Board or (as the case may be) a committee of the Board duly convened and held. For the purpose of this Article:

(a)	a Director signifies his agreement to a proposed written resolution when the Company receives from him a document indicating his agreement to the resolution authenticated in the manner permitted by the Companies Act 2006 for a document in the relevant form;
(b)	the Director may send the document in hard copy form or in electronic form to such address (if any) for the time being specified by the Company for that purpose, and in default of such specification to the Office;
(c)	if any alternate Director signifies his agreement to the proposed written resolution, his appointor need not also signify his agreement; and
(d)	if a Director signifies his agreement to the proposed written resolution an alternate director appointed by him need not also signify his agreement.

95. A meeting of the Board at which a quorum is present shall be competent to exercise all powers and discretions for the time being exercisable by the Board or by the Directors generally.

96. The Board may delegate any of its powers (other than the powers to make calls) to committees consisting of such member or members of its body as it thinks fit. Any committee so formed shall, in the exercise of the powers so delegated, conform to any regulations that may be imposed on it by the Board.

97. The meetings and proceedings of any such committee consisting of two or more members shall be governed by the provisions of these Articles regulating the meetings and proceedings of the Board, so far as the same are applicable and are not superseded by any regulations made by the Board under the last preceding Article.

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98. All acts done by any meeting of the Board, or of a committee of the Board, or by any person acting as a Director or by an alternate Director, shall, notwithstanding it be afterwards discovered that there was some defect in the appointment or continuance in office of any such Director, alternate Director or person acting as aforesaid, or that they or any of them were disqualified, or had vacated office or were not entitled to vote, be as valid as if every such person had been duly appointed and was qualified and had continued to be a Director or, as the case may be, an alternate Director and had been entitled to vote.

98.A Without prejudice to the first sentence of Article 91.1, a person entitled to be present at a meeting of the board or of a committee of the board shall be deemed to be present for all purposes if he is able (directly or by electronic communication) to speak to and be heard by all those present or deemed to be present simultaneously. A director so deemed to be present shall be entitled to vote and be counted in a quorum accordingly. Such a meeting shall be deemed to take place where it is convened to be held or (if no Director is present in that place) where the largest group of those participating is assembled, or, if there is no such group, where the chairman of the meeting is. The word meeting in these Articles shall be construed accordingly.

Minutes

99. The Board shall cause minutes to be recorded for the purpose:

(a)	of all appointments of officers made by the Board;
(b)	of the names of the Directors present at each meeting of the Board and of any committee of the Board; and
(c)	of all resolutions and proceedings at all meetings of the Company and of the holders of any class of shares in the Company and of the Board and of committees of the Board.

Any such minutes, if purporting to be signed by the chairman of the meeting to which they relate or of next meeting, shall be received as prima facie evidence of the facts therein stated.

Disqualification of Directors

100. A person ceases to be a director as soon as:

(a)	that person ceases to be a Director by virtue of any provision of The Statutes or is prohibited from being a Director by law;
(b)	a bankruptcy order is made against that person;
(c)	a composition is made with that person’s creditors generally in satisfaction of that person’s debts;
(d)	a registered medical practitioner who is treating that person gives a written opinion to the company stating that that person has become physically or

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	mentally incapable of acting as a director and may remain so for more than three months;
(e)	by reason of that person’s mental health, a court makes an order which wholly or partly prevents that person from personally exercising any powers or rights which that person would otherwise have;
(f)	notification is received by the Company from the Director that the Director is resigning or retiring from office, and such resignation or retirement has taken effect in accordance with its terms; or

that person receives notice signed by not less than three quarters of the other directors stating that that person should cease to be a director. In calculating the number of directors who are required to give such notice to the Director, (i) an alternate director appointed by him acting in his capacity as such shall be excluded; and (ii) a Director and any alternate director appointed by him and acting in his capacity as such shall constitute a single director for this purpose, so that notice by either shall be sufficient.

101.1 No Director shall be disqualified by his office from contracting with the Company either as vendor, purchaser or otherwise, or from being interested whether directly or indirectly in any contract or arrangement entered into by or on behalf of the Company. No such contract or arrangement in which any Director shall be so interested shall be avoided, nor shall any Director so contracting, or being so interested, be liable to account to the Company for any profit realised by him from such contract or arrangement by reason of such Director holding that office or the fiduciary relationship thereby established. A Director so interested in any contract or arrangement shall declare the nature of his interest in accordance with the provisions of the Statutes. For the purpose of this Article 101.1 an interest of which a Director has no knowledge and of which it is unreasonable to expect him to have knowledge shall not be treated as an interest of his.

101.2 Save as herein provided, a Director shall not vote in respect of any contract or arrangement or any other proposal whatsoever in which he has an interest which is, to his knowledge, a material interest, otherwise than by virtue of his interests in shares or debentures or other securities of or otherwise in or through the Company. A Director shall not be counted in the quorum at a meeting of the Board in relation to any resolution on which he is debarred from voting.

101.3 A Director shall (in the absence of some other material interest than is indicated below) be entitled to vote (and be counted in the quorum) in respect of any resolution concerning any of the following matters, namely:

(a)	the giving of any guarantee, security or indemnity in respect of money lent or obligations incurred by him or by any other person at the request of or for the benefit of the Company or any of its subsidiaries;
(b)	the giving of any guarantee, security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which he

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	himself has assumed responsibility in whole or in part and whether alone or jointly with others under a guarantee or indemnity or by the giving of security;
(c)	any proposal relating to the Company or any of its subsidiary undertakings where it is offering securities in which offer a Director is or may be entitled to participate as a holder of securities or in the underwriting or sub-underwriting of which a Director is to participate;
(d)	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;
(e)	any proposal relating to an arrangement for the benefit of the employees of the Company or any of its subsidiary undertakings which does not award him any privilege or benefit not generally awarded to the employees to whom such arrangement relates; or
(f)	any proposal concerning insurance which the Company proposes to maintain or purchase for the benefit of Directors or for the benefit of persons including Directors.

101.4 Where proposals are under consideration concerning the appointment (including fixing or varying the terms of appointment) of two or more Directors to offices or employments with the Company or any company in which the Company is interested, such proposals may be divided and considered in relation to each Director separately and in such cases each of the Directors concerned (if not debarred from voting under Article 101.2 above) shall be entitled to vote (and be counted in the quorum) in respect of each resolution except that concerning his own appointment.

101.5 If any question shall arise at any meeting of the Board as to the materiality of a Director’s interest or as to the entitlement of any Director to vote and such question is not resolved by his voluntarily agreeing to abstain from voting, such question shall be referred to the Chairman or, if the Chairman is also interested in the contract or arrangement in question, to a person appointed by the other Directors present at that meeting for such purpose who is not so interested, and the ruling of the Chairman or, if appropriate, such other person in relation to any other Director shall be final and conclusive except in a case where the nature or extent of the interests of the Director concerned have not been fairly disclosed.

102.1 Until such time as section 175 of the Companies Act 2006 comes into force, (whereafter Articles 120.A to 120.G shall apply), a Director may be or become a director or other officer of any company promoted by the Company or in which the Company may be interested as vendor, member or otherwise, and no such Director shall (unless otherwise agreed) be accountable for any benefits received as Director or other officer of such company.

102.2 The Board may exercise the voting power conferred by the shares in any company held or owned by the Company in such manner in all respects as it thinks fit

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(including the exercise thereof in favour of any resolution appointing its members or any of them directors of such company, or voting or providing for the payment of remuneration to the directors of such company).

102.3 Until such time as section 175 of the Companies Act 2006 comes into force, (whereafter Articles 120.A to 120.G shall apply), any Director 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.

Retirement and Removal of Directors

103. At every annual general meeting one-third of the Directors or, if their number is not a multiple of three, the number nearest to one-third of them shall retire from office but if any Director has at the start of the annual general meeting been in office for three years or more since his last appointment or re-appointment, he shall retire at that annual general meeting.

104. A Director retiring at a meeting shall retain office until the close or adjournment of the meeting.

105. The Directors to retire by rotation in every year shall be, first, those who wish to retire and not be re-appointed to office and, second, those who have been longest in office since their last election or appointment but, as between persons who became or were last re-elected Directors on the same day, those to retire shall (unless they otherwise agree among themselves) be determined by lot. A retiring Director shall be eligible for re-election.

106. The Company at a general meeting at which a Director retires in manner aforesaid may (subject to Article 80) fill the vacated office by electing a person thereto, and in default, the retiring Director shall be deemed to have been re-elected, unless at or prior to such meeting he intimates that he does not wish to be re-elected or it is expressly resolved not to fill such vacated office or a resolution for the re-election of such Director shall have been put to the meeting and lost. In the event of the vacancy not being filled at such meeting it may be filled by the Board as a casual vacancy.

107. Without prejudice to the provisions of Article 114.1, the Company may, pursuant and subject to the provisions of section 303 of the Companies Act 1985, by ordinary resolution remove any Director before the expiration of his period of office and may by an ordinary resolution appoint another person in his stead. The person so appointed shall be subject to retirement at the same time as if he had become a Director on the day on which the Director in whose place he is appointed was last elected a Director.

Managing Director and Executive Directors

108. The Board may from time to time appoint one or more of its body to the office of Managing Director, or to any other office (except that of Auditor) or employment under the Company, for such period and on such terms as it thinks fit and may revoke

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such appointment (but so that such revocation shall be without prejudice to any rights or claims which the person whose appointment is revoked may have against the Company by reason of such revocation) and may also authorise the continuation by any person appointed to be a Director in any other office or employment held by him before he was so appointed. A Director (other than a Managing Director) holding any such other office or employment is herein referred to as “an Executive Director”.

109. A Director appointed to the office of Managing Director shall, while holding that office, (subject to the provisions of any contract between himself and the Company) be subject to the same provisions as to resignation and removal as the other Directors of the Company, and if he ceases from any cause to be a Director he shall ipso facto cease to be a Managing Director (but without prejudice to any rights or claims which he may have against the Company by reason of such cesser).

110. An Executive Director shall, while holding any office or employment under the Company, (subject to the provisions of any contract between him and the Company) be subject to the same provisions as to resignation and removal as the other Directors of the Company, and if he ceases from any cause to be a Director he shall ipso facto cease to be an Executive Director (but without prejudice to any rights or claims which he may have against the Company by reason of such cesser).

111. The emoluments of any Managing Director or Executive Director for his services as such shall be determined by the Board, and may be of any description.

112. The Board may entrust to and confer upon a Managing Director or Executive Director any of the powers exercisable by it upon such terms and conditions and with such restrictions as it thinks fit, and either collaterally with or to the exclusion of its own powers, and may from time to time revoke, withdraw, alter or vary all or any of such powers.

President

113.1 The Board may from time to time appoint any person to be President of the Company and may also from time to time remove him from office and may appoint another person in his place. The appointment to the office of President shall be honorary. The President of the Company shall not be a Director and shall not by reason of his holding the office of President be deemed to be a Director.

113.2 The President shall be entitled to be repaid all such reasonable travelling (including hotel and incidental) expenses as he may incur in or about the business of the Company.

Non-executive Directors

114.1 Subject to the provisions of the Statutes, the Board may enter into, vary and terminate an agreement or arrangement with any Director who is not an Executive Director for the provision of his services to the Company. Subject to Article 114.2 and 114.3, any such agreement or arrangement may be made on such terms as the Board determines.

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114.2 The ordinary remuneration of the Directors who are not Executive Directors for their services (excluding amounts payable under any other provision of these Articles) shall not, subject to Article 114.3, exceed in aggregate £750,000 per annum^* or such higher amount as the Company may from time to time by ordinary resolution determine. Subject thereto, each such Director shall be paid a fee for his services (which shall be deemed to accrue from day to day) at such rate as may from time to time be determined by the Board.

114.3 Any Director who is not an Executive Director and who performs special services which in the opinion of the Board are outside the scope of the ordinary duties of a Director, may be paid such extra remuneration by way of additional fee, salary, commission or otherwise as the Board may determine.

Directors’ Expenses

114.4 The Directors may be paid all travelling, hotel, and other expenses properly incurred by them in connection with their attendance at meetings of the Board or committees of the Board, general meetings or separate meetings of the holders of any class of shares or of debentures of the Company or otherwise in connection with the discharge of their duties.

Alternate Directors

115. Any Director (other than an alternate Director) may without the consent of the Board appoint any other Director and may at any time appoint any person approved by the Board (such approval not to be unreasonably withheld) to be an alternate Director of the Company, and may at any time remove any alternate Director so appointed by him from office. An alternate Director so appointed shall not be entitled to receive any remuneration from the Company, nor be required to hold any share qualification. An alternate Director may be repaid by the Company such expenses as might properly have been repaid to him if he had been a Director, and he shall be entitled to be indemnified by the Company to the same extent as if he were a Director. Every person acting as an alternate Director shall be an officer of the Company and he shall not be deemed to be the agent of the Director whom he represents.

116. An alternate Director shall (subject to his giving to the Company an address within the United Kingdom at which notices may be served upon him) be entitled to receive notices of all meetings of the Board and of any committee of the Board of which the Director appointing him is a member, and to attend and vote and be counted for the purposes of a quorum as a Director at any such meeting at which the Director appointing him is not personally present, and generally perform all the functions of his appointor as a Director in his absence.

*	Increased to £250,000 by an ordinary resolution passed on 11 May 1990.
*	Increased to £300,000 by an ordinary resolution passed on 3 May 1996.
*	Increased to £500,000 by an ordinary resolution passed on 30 April 2004.
*	Increased to £750,000 by a special resolution passed on 25 April 2008.

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117. An alternate Director shall ipso facto cease to be an alternate Director if his appointor ceases for any reason to be a Director otherwise than by retiring and being re-elected at the same meeting or on the happening of any event which, if he were a Director, would cause him to vacate the office of Director.

118. An alternate Director may by notice to the Company resign such appointment.

119. All appointments and removals of alternate Directors shall be effected by notice of the Director making or revoking such appointment and shall take effect in accordance with the terms of the notice on receipt of such notice by the Company which shall, be in hard copy form or in electronic form sent to such address (if any) for the time being specified by or on behalf of the Company for that purpose, or in default of such specification, to the Office.

120. A Director or any other person may act as alternate Director to represent more than one Director, and an alternate Director shall be entitled at meetings of the Board and at any meeting of a committee of the Board to one vote for every Director whom he represents in addition to his own vote as Director.

Directors’ Interests

120.A For the purposes of section 175 of the Companies Act 2006, and from the date on which such statutory provision comes into force (whereafter Articles 120.A to 120.G shall apply), the board may authorise any matter proposed to it in accordance with these articles which would, if not so authorised, involve a breach of duty by a Director under that section, including, without limitation, any matter which relates to a situation in which a Director has, or can have, an interest which conflicts, or possibly may conflict, with the interests of the Company. Any such authorisation will be effective only if:

(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.

For the purposes of Articles 120.A to 120.G, a conflict of interest includes a conflict of interest and duty and a conflict of duties, and interest includes both direct and indirect interests.

120.B Subject to section 177(5) and section 177(6) of the Companies Act 2006, provided that he has disclosed to the board the nature and extent of his interest, a Director notwithstanding his office:

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(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.

120.C A Director shall not, by reason of his office, be accountable to the Company for any remuneration or other benefit which he derives from any office or employment or from any transaction or arrangement or from any interest in any body corporate:

(a)	the acceptance, entry into or existence of which has been approved by the board pursuant to Article 120.A (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) of Article 120.B;

nor shall the receipt of any such remuneration or other benefit constitute a breach of his duty under section 176 of the Act.

120.D Any disclosure required by Article 120.B may be made at a meeting of the board, by notice in writing or by general notice or otherwise in accordance with section 177 of the Act.

120.E A Director shall be under no duty to the Company with respect to any information which he obtains or has obtained otherwise than as a director of the Company and in respect of which he owes a duty of confidentiality to another person. However, to the extent that his relationship with that other person gives rise to a conflict of interest or possible conflict of interest, this article applies only if the existence of that relationship has been approved by the board pursuant to Article 120.B. In particular, the director shall not be in breach of the general duties he owes to the Company by virtue of sections 171 to 177 of the Act because he 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.

120.F Where the existence of a Director’s relationship with another person has been approved by the board pursuant to Article 120.B and his relationship with that person gives rise to a conflict of interest or possible conflict of interest, the Director shall not

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be in breach of the general duties he owes to the Company by virtue of sections 171 to 177 of the Act because he:

(a)	absents himself from meetings of the board at which any matter relating to the conflict of interest or possible conflict of interest will or may be discussed or from the discussion of any such matter at a meeting or otherwise; and/or
(b)	makes arrangements not to receive documents and information relating to any matter which gives rise to the conflict of interest or possible conflict of interest sent or supplied by the Company and/or for such documents and information to be received and read by a professional adviser,

for so long as he reasonably believes such conflict of interest or possible conflict of interest subsists.

120.G The provisions of articles 120.E and 120.F are without prejudice to any equitable principle or rule of law which may excuse the director from:

(a)	disclosing information, in circumstances where disclosure would otherwise be required under these articles; or
(b)	attending meetings or discussions or receiving documents and information as referred to in article 120.F, in circumstances where such attendance or receiving such documents and information would otherwise be required under these articles.

Secretary

121. The Secretary shall be appointed by the Board for such term, at such remuneration and upon such conditions as it may think fit; and any Secretary so appointed may be removed by the Board.

122. The Board may also appoint one or more persons as deputy secretary (“Deputy Secretary”) for such term, at such remuneration and upon such conditions as it may think fit; and any Deputy Secretary so appointed may be removed by the Board. Any Deputy Secretary may, in the absence of the Secretary, do anything which may be required or authorised to be done by or to the Secretary.

123. A provision of the Statutes or these Articles requiring or authorising a thing to be done by or to a Director and the Secretary shall not be satisfied by its being done by or to the same person acting both as Director and as, or in place of, the Secretary or Deputy Secretary.

The Seal

124.1 The Board shall provide for the safe custody of the Seal, which shall only be used by the authority of the Board or of a committee of the Board authorised by the Board in that behalf and, subject to the provisions of this Article, every document to which the Seal shall be affixed shall be signed by a Director and shall be

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countersigned by the Secretary or by a second Director or by some other person appointed by the Board for the purpose.

124.2 All forms of certificates for shares, stock or debentures or representing any other form of security (other than letters of allotment or scrip certificates or other like documents) shall be issued under the Seal in manner above provided or under the official seal kept by the Company by virtue of the Statutes; but the Board may by resolution determine either generally or in any particular case that any signatures may be affixed to such certificates by some mechanical means, electronic means, or printed on it or that such certificates need not be signed by any person.

124.3 The Company may exercise the powers conferred by the Statutes with regard to having an official seal for use abroad, and such powers shall be vested in the Board.

Registers

125.1 Subject to the provisions of the Statutes and the Regulations, the Company may keep an overseas or local or other register in any place, and the Board may make, amend and revoke any regulations it thinks fit about the keeping of that register.

125.2 Any Director or the Secretary or any other person appointed by the Board for the purpose shall have power to authenticate and certify as true copies of and extracts from:

(a)	any document comprising or affecting the constitution of the Company, whether in hard copy form or electronic form;
(b)	any resolution passed by the Company, the holders of any class of shares in the capital of the Company, the Board or any committee of the Board, whether in hard copy form or electronic form; and
(c)	any book, record and document relating to the business of the Company, whether in hard copy form or electronic form (including without limitation the accounts).

If certified in this way, a document purporting to be a copy of a resolution, or the minutes or an extract from the minutes of a meeting of the Company, the holders of any class of shares in the capital of the Company, the Board or a committee of the Board, whether in hard copy form or electronic form, shall be conclusive evidence in favour of all persons dealing with the Company in reliance on it or them that the resolution was duly passed or that the minutes are, or the extract from the minutes is, a true and accurate record of proceedings at a duly constituted meeting.

Accounts and Dividends

126. The Board shall cause accounting records to be kept and such other books and registers as are necessary to comply with the provisions of the Statutes.

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127. The accounting records shall be kept at the Office or (subject to the provisions of the Statutes) at such other place as the Board thinks fit, and shall at all times be open to inspection by the Directors. No member (other than a Director) shall have any right of inspecting any account or book or document of the Company, except as conferred by the Statutes or authorised by the Board or by the Company in general meeting.

128. The Board shall from time to time in accordance with the Statutes cause to be prepared and to be laid before the Company in general meeting such profit and loss accounts, balance sheets, group accounts (if any) and reports as are required by the Statutes.

129. A printed copy of every balance sheet (including every document required by law to be annexed thereto) which is to be laid before the Company in general meeting and of the Board’s and Auditor’s reports shall, at least twenty-one days before the meeting, be delivered or sent to every member and debenture holder of the Company of whose address the Company is aware, or, in the case of joint holders of any share or debenture, to one of the joint holders provided that the requirements of this Article 129 shall be deemed satisfied in relation to any member by sending to each such member, where permitted by the Statutes and instead of the said copies, a summary financial statement derived from the Company’s annual accounts and the report of the Directors and prepared in the form and containing the information prescribed by the Statutes and any regulations made thereunder.

Audit

130. Auditors of the Company shall be appointed and their duties regulated in accordance with the Statutes.

131. The Auditors’ report to the members made pursuant to the statutory provisions as to audit shall be read before the Company in general meeting and shall be open to inspection by any member who shall be entitled to be furnished with a copy of the balance sheet (including every document required by law to be annexed thereto) and Auditors’ report in accordance with the Statutes.

Dividends and Reserves

132. The profits of the Company available for dividend and resolved to be distributed shall be applied in the payment of dividends to the members in accordance with their respective rights and priorities. Subject to the next following Article, the Company in general meeting may declare dividends but not in excess of the amount recommended by the Board.

133. No dividend shall be paid otherwise than out of profits available for distribution under the provisions of the Statutes.

134.1 All dividends shall be declared and paid according to the amounts paid up on the shares in respect whereof the dividend is paid, but no amount paid up on a share in advance of calls shall be treated for the purposes of this Article as paid on the share. All dividends shall be apportioned and paid pro rata according to the amounts paid up

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on the shares during any portion or portions of the period in respect of which the dividend is paid; but if any share is issued on terms providing that it shall rank for dividend as from a particular date, or be entitled to dividends declared after a particular date such share shall rank for or be entitled to such dividend accordingly.

134.2 The Directors may at their discretion make provisions to enable such member and/or other person as they shall from time to time determine to receive dividends duly declared and all redemption monies in respect of redeemable shares in a currency or currencies other than sterling. For the purposes of the calculation of the amount receivable in respect of any dividend or payment of redemption monies, the rate of exchange to be used to determine the foreign currency equivalent of any sum payable as a dividend or payment of redemption monies shall be such market rate selected by the Directors as they shall consider appropriate ruling at any time between the close of business in London on the date which is the business day last preceding the date on which the Directors publicly announce their intention to recommend or pay (as the case may be) that specific dividend or (as the case may be) the redemption date in respect of such redeemable shares and the close of business on the date on which that specific dividend or redemption monies are paid.

135.1 Any general meeting declaring a dividend may upon the recommendation of the Board, direct payment or satisfaction of such dividend wholly or partly by the distribution of specific assets and in particular of fully paid up shares or debentures of any other company, and the Board shall give effect to such direction, and where any difficulty arises in regard to such distribution, the Board may settle it as it thinks expedient, and in particular may issue fractional certificates and fix the value for distribution of such specific assets or any part thereof and may determine that cash payment shall be made to any members upon the footing of the value so fixed in order to adjust the rights of those entitled to participate in the dividend, and may vest any such specific assets in trustees upon trust for the members entitled to the dividend as may seem expedient to the Board.

135.2 The Directors may, with the sanction of an ordinary resolution of the Company, offer any holders of the 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 or dividends (or some part to be determined by the Directors) as may be specified by the resolution. The following provisions shall apply:

(a)

the said resolution may specify a particular dividend, or may specify all or any dividends declared or to be declared or paid in respect of a specified period or periods, or for payment not later than the beginning of the annual general meeting next following the passing of such resolution or such later annual general meeting as may be specified by the resolution;

(b)

save where the Directors otherwise determine, the basis of allotment of Ordinary Shares shall be that the relevant value for each holder shall be as nearly as possible equal to (but not more than) the cash amount (exclusive of any imputed tax credit) that such holder would have received by way of the dividend forgone. For the purpose of this clause “relevant value” shall (save where the Directors otherwise determine) be calculated by reference to the

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average of the middle market quotations for the Company’s Ordinary Shares on The International Stock Exchange as derived from the Daily Official List for the day when the Ordinary Shares are first quoted “ex” the relevant dividend and the four immediately following business days;

(c)	the Board may notify the holders in writing of any right of election offered to them, and may send to holders at any time forms of election applicable to such right of election and/or to more than one such right of election, such forms specifying the procedure to be followed and the place at which, and the latest time or date by which, duly completed forms of election, or notices from holders amending or terminating existing elections, must be lodged in order to be effective;
(d)	subject to sub-paragraph (f) of this Article, the dividend (or that part of the dividend for which a right of election has been given) shall never become payable in cash on Ordinary Shares to the extent that the election has been duly effected (“elected shares”) and additional Ordinary Shares shall instead be allotted to the holders of the elected shares on the basis of allotment determined as aforesaid. For such purpose the Board shall appropriate, as it sees fit, out of such of the sums standing to the credit of any reserve or fund (including the profit and loss account), whether or not the same is available for distribution, as the Board may determine, a sum equal to the aggregate nominal amount of the additional Ordinary Shares to be allotted on such basis and apply the same in paying up in full the appropriate number of unissued Ordinary Shares for allotment and distribution to and amongst the holders of the elected shares on such basis;
(e)	the additional Ordinary Shares so allotted shall rank pari passu in all respects with the fully paid Ordinary Shares of the same class then in issue save only as regards participation in the dividend in place of which they were allotted;
(f)	no fraction of an Ordinary Share shall be allotted. The Board may make such provisions as it thinks fit for any fractional entitlements including provisions whereby, in whole or in part, the benefit thereof accrues to the Company and/or under which fractional entitlements are accrued and/or retained and in each case accumulated on behalf of any holder and such accruals or retentions are applied to the allotment by way of bonus to or cash subscription on behalf of such holder of fully paid Ordinary Shares and/or provisions whereby cash payments may be made to holders in respect of their fractional entitlements;
(g)	the Board may do all acts and things considered necessary or expedient to give effect to the allotment and issue of any Ordinary Shares in accordance with the provisions of this Article or otherwise in connection with any offer made pursuant to this Article and may authorise any person to enter, on behalf of all the holders concerned, into an agreement with the Company providing for such allotment and incidental matters and any agreement so made under such authority shall be binding on all such holders;
(h)	the Board may on any occasion decide that rights of election shall not be made available to any category of shareholders or to any shareholders in any

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territory where, in the absence of a registration statement or other special formalities or for any other reason, the circulation of an offer of rights of election to such shareholders or in such territory would or might be unlawful or where, in the opinion of the Board, compliance with local laws and/or regulations would be unduly onerous and in such case the provisions of this Article shall be subject to such decision;

(i)	the Board may in its discretion amend, suspend or terminate any offer which is in operation;
(j)	the power conferred under this Article and by any authority given by the holders shall not be exercised unless the Board shall then have:

(i)	sufficient authority to allot Ordinary Shares in the capital of the Company;
(ii)	sufficient reserves or funds that may be capitalised after the basis of allotment is determined,

in each case to give effect to the terms of any such scheme; and

(k) every duly elected election shall be binding on every successor in title to the elected shares (or any of them) of the holder(s) who has/have effected the same.

136. Subject to the provisions of the Statutes and to Article 133, the Directors:

(a)	may declare and pay the fixed dividends on any class of shares carrying a fixed dividend expressed to be payable on fixed dates on the half-yearly or other dates prescribed for the payment thereof;
(b)	may provide, in such manner and on, such terms as they may think fit, for the payment of any dividends (whether fixed or calculated by reference to or in accordance with a specified procedure or mechanism) on any class of shares carrying such a dividend on such dates as may be prescribed for the payment thereof (whether such dates are fixed or are determined or to be determined in accordance with a specified procedure or mechanism); and
(c)	may also from time to time declare and pay interim dividends on the shares of any class of such amount and on such dates and in respect of such periods as they think fit.

Provided the Directors act in good faith they shall not incur any liability to the holders of shares conferring preferred rights for any loss they may suffer by the lawful payment of an interim dividend on any shares having deferred or non-preferred rights.

137. The Board may set aside out of profits of the Company available for dividend and carry to reserve or reserves such sums as it may think proper, which shall, at the discretion of the Board be applicable for meeting contingencies, or for the gradual liquidation of any debt or liability of the Company, or in providing for depreciation or

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contingencies or for writing down the value of the assets or for equalising dividends, or for any other purpose to which the profits of the Company may properly be applied, and pending such application may, at the like discretion, either be employed in the business of the Company, or be invested in such investments as the Board may from time to time think fit. The Board may also without placing the same to reserve carry forward any profits which it may think prudent not to distribute.

138. The Board shall transfer to share premium account as required by the Statutes sums equal to the amount or value of any premiums at which any shares of the Company shall be issued. Subject to the provisions of the Statutes the provisions of these Articles relating to sums carried or standing to reserve shall be applicable to sums carried and standing to share premium account.

139. The Board may deduct from any dividend payable to any member all sums of money (if any) presently payable by him to the Company on account of calls or otherwise in relation to shares in the Company.

140. Subject to the rights attaching to, or the terms of issue of, any shares, any dividend on shares of any class or distribution, allotment or issue to the holders of any shares of any class (whether to be paid or made pursuant to a resolution of the Company in general meeting or a resolution of the Directors or otherwise) may be paid or made to the person registered as the holder of such shares or the persons otherwise entitled thereto at the close of business on a particular date notwithstanding that it may be a date prior to that on which the dividend, distribution, allotment or issue is to be paid or made or on which any resolution relating thereto is passed and any such dividend, distribution, allotment or issue shall be paid or made to them in accordance with their respective entitlements thereto but without prejudice to the rights inter se, in respect of such dividend, distribution, allotment or issue, of any holder or former holder of any such shares.

141. The Board may pay the dividends or interest payable on shares in respect of which any person is by transmission entitled to be registered as holder to such person upon production of such certificate and evidence as would be required if such person desired to be registered as a member in respect of such shares.

142. No dividend or other monies payable in respect of a share shall bear interest against the Company unless otherwise provided by the rights attached to or the terms of issue of the share.

143. All dividends unclaimed for six months after having been declared may be invested or otherwise made use of by the Board for the benefit of the Company until claimed and so that the Company shall not thereby be constituted as a trustee in respect thereof. All dividends unclaimed for a period of twelve years after having been declared shall be forfeited and shall revert to the Company.

144. Any dividend or other monies payable in respect of a share, may be paid: (i) in cash; or (ii) by cheque or warrant sent through the post to the registered address of the member or person entitled thereto (or, if two or more persons are registered as joint holders of the share or entitled thereto in consequence of the death or bankruptcy of the holder, to any one of such persons) or to such person and such address as such

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member or person or persons may by writing direct; or (iii) may be paid by inter-bank transfer to the account of the person entitled to such payment; or (iv) by such other means as the Directors may determine or think fit including without limitation in respect of an uncertificated share by means of the relevant system (subject to the facilities and requirements of the relevant system). Where such dividend or other monies are or are to be paid by cheque or warrant, every such cheque or warrant shall be made payable to the order of the person to whom it is sent or to such person as the holder or joint holders or person or persons entitled to the shares in consequence of the death or bankruptcy of the holder may direct and payment of the cheque or warrant by the bank on which it is drawn; or, in respect of an uncertificated share, the making of payment in accordance with the facilities and requirements of the relevant system (which, if the relevant system is CREST, may include the sending by the Company or by any person on its behalf of an instruction to the Operator of the relevant system to credit the cash memorandum account of the holder or joint holders or, if permitted by the Company, of such person as the holder or joint holders may in writing direct) shall be good discharge to the Company. Every such cheque or warrant shall be sent at the risk of the person entitled to the monies represented thereby. Subject to the provisions of these Articles and to the rights attaching to, or the terms of issue of, any shares, any dividend or other monies payable on or in respect of a share may be paid in such currency as the Directors may think fit or otherwise determine. If any such cheque or warrant is returned undelivered or is left uncashed on two consecutive occasions or, following one such occasion, reasonable enquiries have failed to establish any new address of the registered holder, the Company may cease sending any further cheques or warrants in respect of any dividend to such member until such time, if ever, as such member shall notify the Company of an address to which any cheque or warrant may be sent in future.

145. If several persons are registered as joint holders of any share, any one of them may give effectual receipts for any dividend or other monies payable in respect of the share.

Capitalisation of Profits

146.1 The Company may, upon the recommendation of the Board, resolve that it is desirable to capitalise any of the profits of the Company to which this Article applies and accordingly that the Board be authorised and directed to appropriate the profits so resolved to be capitalised to the members on the record date specified in the relevant resolution who would have been entitled thereto if distributed by way of dividend and in the same proportions.

146.2 Subject to any direction given by the Company, the Board shall make all appropriations and applications of the profits resolved to be capitalised by any such resolution and such profits shall be applied by the Board on behalf of the members entitled thereto, either:

(a)	in or towards paying up the amounts (if any) for the time being unpaid on any shares held by such members respectively; or
(b)	in paying up in full unissued shares, debentures or obligations of the Company of a nominal amount equal to such profits, for allotment and distribution

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credited as fully paid up, to and amongst such members in the proportion aforesaid; or

(c) partly in one way and partly in the other,

provided that the only purpose to which sums standing to capital redemption reserve or share premium account shall be applied pursuant to this Article shall be the payment up in full of unissued shares to be allotted and distributed as aforesaid.

146.3 The Board shall have power after the passing of any such resolution:

(a)	to make such provisions (by the issue of fractional certificates or by payment in cash or otherwise) as it thinks fit in the case of shares, debentures or obligations becoming distributable in fractions; and
(b)	to authorise any person to enter, on behalf of all the members entitled thereto, into an agreement with the Company providing (as the case may require) either:

(i)	for the payment up by the Company on behalf of such members (by the application thereto of their respective proportions of the profits resolved to be capitalised) of the amounts, or any part of the amounts, remaining unpaid on their existing shares; or
(ii)	for the allotment to such members respectively, credited as fully paid up, of any further shares, debentures or obligations to which they may be entitled upon such capitalisation,

and any agreement made under such authority shall be effective and binding on all such members.

146.4 The profits of the Company to which this Article applies shall be any undivided profits of the Company not required for paying the fixed dividends on any preference shares or other shares issued on special conditions and shall include:

(a)	any profits arising from appreciation in capital assets (whether realised by sale or ascertained by valuation); and
(b)	any amounts for the time being standing to any reserve or reserves or to the capital redemption reserve or to share premium or other special account.

Communications

147. Any notice to be sent to or by any person pursuant to these Articles (other than a notice calling a meeting of the Board or any committee of the Board) shall be in writing.

148. Subject to Article 147 and unless otherwise provided by these Articles, the Company shall send or supply a document or information that is required or authorised to be sent or supplied to a member or any other persons by the Company by a provision of the Statutes or pursuant to these Articles or to any other rules or

Page 49

regulations to which the Company may be subject in such form and by such means as it may in its absolute discretion determine provided that the provisions of The Statutes which apply to sending or supplying a document or information required or authorised to be sent or supplied by the Statutes shall, the necessary changes having been made, also apply to sending or supplying any document or information required or authorised to be sent by these Articles or any other rules or regulations to which the Company may be subject.

149. Subject to Article 147 and unless otherwise provided by these Articles, a member or a person entitled by transmission to a share shall send a document or information pursuant to these Articles to the Company in such form and by such means as it may in its absolute discretion determine provided that:

(a)	the determined form and means are permitted by the Statutes for the purposes of sending and supplying a document or information of that type to a company pursuant to the provisions of the Statutes; and
(b)	unless the board otherwise permits, any applicable condition or limitation specified in the Statutes, including without limitation as to the address to which the document or information may be sent, is satisfied.

Unless otherwise provided by these Articles, or required by the board, such document or information shall be authenticated in the manner specified in the Statutes for authentication of a document or information sent in the relevant form.

150. Intentionally blank

151. Intentionally blank

152.1 In the case of joint holders of a share, any document or information shall be sent to the joint holder whose name stands first in the Register in respect of the joint holding and any document or information so sent shall be deemed for all purposes sent to all the joint holders.

152.2 A member whose registered address is not within an EEA State and who sends to the Company an address within an EEA State at which a document or information may be sent to him shall be entitled to have the document or information sent to him at that address (provided that, in the case of a document or information sent by electronic means, including without limitation, any notification required by The Statutes that the document is available on a website, the Company so agrees, which agreement the Company shall be entitled to withhold in its absolute discretion including, without limitation, in circumstances in which the Company considers that the sending of the document or information to such address using electronic means would or might infringe the laws of any other jurisdiction) but otherwise:

(a)	no such member shall be entitled to receive any document or information from the Company; and
(b)	without prejudice to the generality of the foregoing, any notice of a general meeting of the Company which is in fact sent or purports to be sent to such

Page 50

member shall be ignored for the purpose of determining the validity of the proceedings at such general meeting.

152.3 A member present, either in person or by proxy, at any meeting of the Company or of the holders of any class of shares in the capital of the Company shall be deemed to have been sent notice of the meeting and, where requisite, of the purposes for which it was called.

152.4 The Board may from time to time issue, endorse or adopt terms and conditions relating to the use of electronic means for the sending of notices, other documents and proxy appointments by the Company to members or persons entitled by transmission and by members or persons entitled by transmission to the Company.

152.5 A document or information may be sent or supplied by the Company to the person or persons entitled by transmission to a share by sending it in any manner the Company may choose authorised by these Articles for the sending of a document or information to a member, addressed to them by name, or by the title of representative of the deceased, or trustee of the bankrupt or by any similar description at the address (if any) in the United Kingdom as may be supplied for that purpose by or on behalf of the person or persons claiming to be so entitled. Until such an address has been supplied, a document or information may be sent in any manner in which it might have been sent if the death or bankruptcy or other event giving rise to the transmission had not occurred.

152.6 Every person who becomes entitled to a share shall be bound by any notice in respect of that share which, before his name is entered in the Register, has been sent to a person from whom he derives his title, provided that no person who becomes entitled by transmission to a share shall be bound by any Default Notice sent under Article 11.1 to a person from whom he derives his title.

152.7 Proof that a document or information was properly addressed, prepaid and posted shall be conclusive evidence that the document or information was sent. Proof that a document or information sent or supplied by electronic means was properly addressed, shall be conclusive evidence that the document or information was sent. A document or information sent by the Company to a member by post shall be deemed to have been received:

(a)	if sent by first class post or special delivery post from an address in the United Kingdom to another address in the United Kingdom, or by a postal service similar to first class post or special delivery post from an address in another country to another address in that other country, on the day following that on which the document or information was posted;
(b)	if sent by airmail from an address in the United Kingdom to an address outside the United Kingdom, or from an address in another country to an address outside that country (including without limitation an address in the United Kingdom), on the third day following that on which the envelope containing the document or information was posted; and

Page 51

(c) in any other case, on the second day following that on which the document or information was posted.

152.8 A document or information sent or supplied by the Company to a member in electronic form shall be deemed to have been received by the member on the day following that on which the document or information was sent to the member. Such a document or information shall be deemed to have been received by the member on that day notwithstanding that the Company becomes aware that the member has failed to receive the relevant document or information for any reason and notwithstanding that the Company subsequently sends a hard copy of such document or information by post to the member.

152.9 A document or information sent or supplied by the Company to a member by means of a website shall be deemed to have been received by the member:

(a)

when the document or information was first made available on the website; or

(b)

if later, when the member is deemed by Article 152.7 or 152.8 to have received notice of the fact that the document or information was available on the website. Such a document or information shall be deemed received by the member on that day notwithstanding that the Company becomes aware that the member has failed to receive the relevant document or information for any reason and notwithstanding that the Company subsequently sends a hard copy of such document or information by post to the member.

152.10 Subject to the Statutes, if at any time the Company is unable effectively to convene a general meeting by notices sent through the post in the United Kingdom as a result of the suspension or curtailment of postal services, notice of general meeting may be sufficiently given by advertisement in the United Kingdom. Any notice given by advertisement for the purpose of this Article shall be advertised in at least one newspaper having a national circulation. If advertised in more than one newspaper, the advertisements shall appear on the same date. Such notice shall be deemed to have been sent to all persons who are entitled to have notice of meetings sent to them on the day when the advertisement appears. In any such case, the Company shall send confirmatory copies of the notice by post, if at least seven days before the meeting the posting of notices to addresses throughout the United Kingdom again becomes practicable.

Winding Up

153. If the Company shall be wound up, the liquidator may, with the sanction of a special resolution of the contributories, divide amongst the contributories in specie the whole or any part of the assets of the Company and may, for that purpose value any assets and determine how the division shall be carried out as between the contributories or different classes of contributories. The liquidator may, with the like sanction, vest the whole or any part of such assets in trustees upon such trusts for the benefit of the contributories as the liquidator with the like sanction shall think fit.

154. The power of sale of a liquidator shall include a power to sell wholly or partially for shares or stock or for the debentures, debenture stock or other obligations

Page 52

of another company, either then already constituted, or about to be constituted, for the purpose of carrying out the sale.

Indemnity

155.1 Subject to the provisions of the Statutes, but without prejudice to any indemnity to which the person concerned may otherwise be entitled, every director or other officer of the Company (other than any person (whether an officer or not) engaged by the Company as auditor) shall be indemnified out of the assets of the Company against any liability incurred by him for negligence, default, breach of duty or breach of trust in relation to the affairs of the Company, provided that this Article shall be deemed not to provide for, or entitle any such person to, indemnification to the extent that it would cause this Article, or any element of it, to be treated as void under the Act or otherwise under the Statutes.

155.2 Without prejudice to the provision of Article 155(1), the Directors shall have the power to purchase and maintain insurance for or for the benefit of any persons who are or were at any time Directors, officers or employees of the Company, or any company in which the Company has an interest whether direct or indirect or which is in any way allied to or associated with the Company, or of any subsidiary undertaking of the Company or any such other company, or who are or were at any time trustees of any retirement benefits scheme or employee benefits trust in which employees of the Company or any such other company or subsidiary undertaking are interested, including (without prejudice to the generality of the foregoing) insurance against any liability incurred by such persons in respect of any act or omission in the actual or purported execution or discharge of their duties or in the exercise or purported exercise of their powers or otherwise in relation to their duties, powers or offices in relation to the Company or any such other company, subsidiary undertaking or retirement benefits scheme or employee benefits trust.

Discovery

156. No member or meeting of members shall be entitled to discovery of or any information respecting any detail of the Company’s operations or trading or any matter which may be or is in the nature of a trade secret, or which may relate to the conduct of the business of the Company, which in the opinion of the Board it would not be expedient in the interests of the members to communicate.

Destruction of Documents

157. The Company shall be entitled to destroy all instruments of transfer of shares which have been registered at any time after the expiration of six years from the date of registration thereof and all dividend mandates and notifications of change of address at any time after the expiration of two years from the date of recording thereof and all share certificates which have been cancelled at any time after the expiration of one year from the date of the cancellation thereof and it shall conclusively be presumed in favour of the Company that every entry in the Register purporting to have been made on the basis of an instrument of transfer or other document so destroyed was duly and properly made and every instrument of transfer so destroyed was a valid and effective instrument duly and properly registered and every share

Page 53

certificate so destroyed was a valid and effective certificate duly and properly cancelled and every other document herein before mentioned so destroyed was a valid and effective document in accordance with the recorded particulars thereof in the books or records of the Company. Provided always that:

(a)	the provisions aforesaid shall apply only to the destruction of a document in good faith and without notice of any claim (regardless of the parties thereto) to which the document might be relevant;
(b)	nothing herein contained shall be construed as imposing upon the Company any liability in respect of the destruction of any such document earlier than as aforesaid or in any other circumstances which would not attach to the Company in the absence of this Article;
(c)	references herein to the destruction of any document include references to the disposal thereof in any manner.

Untraced Shareholders

158.1 If in the period of twelve years prior to the date of publication of the advertisements referred to below (or, if published on different dates, the first thereof) at least three dividends have become payable in respect of any class of shares of the Company and all warrants and cheques in respect of the shares in question have remained uncashed during that period, the Company may sell for the best price reasonably obtainable the shares of that member or of a person entitled to such shares by virtue of transmission on death, bankruptcy, mental disorder, operation of law or any other event in such manner as the Board thinks fit provided that:

(a)	the Company shall, as soon as practicable after expiry of the said period of twelve years, have given notice by advertisement in a national daily newspaper and a newspaper circulating in the area of the address at which service of notices upon such member or person entitled to such shares may be effected in accordance with these Articles of its intention to sell such shares; and
(b)	the Company has not, during the further period of three months after the date of the advertisements (or, if published on different dates the later thereof) and prior to the exercise of the power of sale, received any communication from the member or a person entitled to such shares by virtue of transmission on death or bankruptcy or otherwise.

158.2 To give effect to any such sale the Board may:

(a) where the shares are held in certificated form, authorise any person to execute as transferor an instrument of transfer of the shares to be sold to, or in accordance with the directions of, the purchaser and such instrument of transfer shall be as effective as if it had been executed by the registered holder of, or person entitled by transmission to, such shares; or

Page 54

(b) where the shares are held in uncertificated form, do all acts and things it considers necessary or expedient to effect the transfer of the shares to, or in accordance with the directions of, the buyer.

The transferee shall be entered in the Register as the holder of the shares comprised in any such transfer (notwithstanding that no certificate representing the shares shall be produced), and he shall not be bound to see to the application of the purchase money, nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings in reference to the sale.

158.3 The net proceeds of sale, after payment of the costs thereof, shall belong to the Company which shall be obliged to account to the former member or other person previously entitled as aforesaid for an amount equal to such proceeds and shall enter the name of such former member or other person in the books of the Company as a creditor for such amount. No trust shall be created in respect of the debt, no interest shall be payable in respect of the same and the Company shall not be required to account for any money earned on the net proceeds, which may be employed in the business of the Company or invested in such investments as the Board may from time to time think fit.

Page 55

Index To Articles of Association

	Article			Page
Accounts, records of		126			42
records of, where kept		127			43
copies of, to be sent to members		129			43
inspection of		127			43
to be submitted in accordance with the Statutes		128			43
Administrators of deceased Members		39			13
Allotment of shares		7.1-7.4			5
Alternate Directors		98, 115-120, 155.1			33, 38, 53
Appointment of Directors		77-80			26
Auditors, appointment		130			43
Report		131			43
Bankruptcy, rights of person entitled to shares in consequence of		39-40			13
Borrowing, Board’s powers		90.1-90.8			28
definitions related to		90.3-90.4			28
Brokerage on shares		8			6
Calls on shares, Board may make from time to time		14			10
date of call		15			10
differentiation on		19			10
forfeiture of shares, for non-payment of		25-27			11
in arrears		69			23
interest on unpaid calls		17			10
joint holders jointly and severally liable		16			10
made when resolution passed		15			10
monies may be paid up in advance and interest paid thereon		20			10
notice to be given		14			10
procedure to recover money due on calls		25			11
sums deemed to be		18			10
Capital of Company		3			4
Capital of Company, alterations to		46-48			16
cancellation of shares		46	(c)		17
conversion of shares into stock and vice versa		42			16
consolidation of shares		46	(a)		16
fractions of shares on consolidation		46	(a)		16
increase of		47			17
redeemable shares, power to issue		49			17
reduction of by special resolution		48.1			17
rights may be varied		4-5			5
shares created pursuant to alteration to capital		48.2			17
sub-division of shares		46	(b)		16
Capitalisation of profits		146.1-146.4			48
Certificates		12-13			9

Page 56

	Article			Page
charges for		12.1			9
lost or destroyed, new may be issued		13			9
may be delivered to any one of joint holders		12.2			9
one to every member		12.1			9
to be sealed, but need not be signed		124.2			42
Chairman of a meeting		57-64			21
acting as		58			21
adjourn meetings, right to		59			21
adjourned meetings, fixing of		57			21
Declaration of result of vote on a show of hands		60			21
poll, consequence of demand		64			22
poll, on election of chairman		63			22
poll, procedure and effect of		61			22
poll, right to demand		60			21
qualification of vote, decision as to		70			23
Closing of Register		37			13
Commission on shares		8			6
Communications, accidental omission of, not to invalidate resolution		54.1			18
deemed receipt of notice		152.3			51
during disruption of services		152.10			52
includes website notification		152.9			52
methods of Company sending notice		148			49
methods of member etc. sending notice		149			50
proof of sending/when notices etc. deemed sent by post		152.7			51
registered address outside UK		152.2			50
terms and conditions for electronic communications		152.4			51
to joint holders		152.1			50
to persons entitled by transmission		152.5			51
transferees etc. bound by prior notice		152.6			51
website publication by Company		152.2			50
when notice required to be in writing; use of electronic communications		152.2			50
when notices etc. deemed sent by electronic communication		152.8			52
Consolidation of shares		46	(a)		16
Conversion of shares into stock and vice versa		42			16
Debentures, etc may be issued		90.1			28
Default notices		11.1-11.4			7
Definitions		2			1
Directors, acting in a professional capacity		102.3			36
acts valid notwithstanding defect in appointment		98			33
Alternate		115-120			38
appointment of		77, 79			26
appointment of, by separate resolution		79			26
Chairman and Deputy Chairman of		93			32

Page 57

	Article		Page
Chairman entitled to take chair at general meetings		58		21
Chairman to have no casting vote		91.1		31
Committees, powers may be delegated to		96		32
Company may fill vacancies at general meeting		78		26
continuing Directors may act in case of Vacancy		78		26
contracts, interest in to be disclosed		101.1		34
contracts, not disqualified from entering into with Company		101.1		34
contracts, power to vote on		101.2		34
defect in appointment of		98		33
delegation of powers		96		32
disqualification of		100		33
election by general meeting		106		36
Executive		108, 110-112		36, 37
Expenses		114.4		38
indemnified against losses, indemnity insurance etc		155.1-155.2		53
interests		120.A-120.G		39
Managing		108-109, 111-112		36, 37
may appoint attorneys		87		28
may appoint local Boards and delegate powers		85		27
may become Director of any subsidiary or other company		102.1		35
may provide for local management		85		27
meetings, a Director may at any time convene		91.2		31
meetings, Board may fix a quorum		92		31
meetings, competency to exercise powers		95		32
meetings, Directors may meet as they think fit		91.1		31
meetings, notice of		91.3		31
meetings, proceedings at		91-98		31
meetings, quorum		92		31
no person other than retiring Director eligible for election without notice or Directors’ recommendation		80		27
non-executive		114.1-114.3		37
number of		76		26
office, when vacated		104		36
pensions and other benefits determined by the Board		86.1-86.2		27
power to determine manner of endorsement of cheques		89		28
power to make additional appointments		77		26
powers of		84-89		27
powers, general powers of Company vested in Directors		84		27
proceedings		91-98		31
qualification of		81		27
removal of		107		36
remuneration of non executive Directors		114.2		38

Page 58

	Article		Page
remuneration for special services by non executive Directors		114.3		38
report to be submitted in accordance with the Statutes		128-129		43
Resolutions of		94		32
Retirement of		103-106		36
vacancy may be filled by Directors		77		26
voting by, with regard to interest in contracts		101.2		34
voting by		101.2-101.5		34
voting powers conferred by shares of a subsidiary		102.2		35
Discovery		156		53
Dividends, interim, Board may pay		136		46
in currency other than sterling		134.2		44
from profits		132		43
joint holders		145		48
may be paid in specie or satisfied by allotment or ordinary shares if authorised by general meeting		135.1-135.2		44
may cease to be sent		144		47
method of payment		144		47
no dividends shall bear interest against Company		142		47
no larger than Board recommends		132		43
on shares in proportion to amount paid up		134.1		43
paid to registered holder or entitled to be registered as a holder		140-141		47
Production of evidence of entitlement		141		47
Reserves		137		46
subject to Statutes		133		43
Unclaimed		143		47
when may be retained		21, 41, 139		10, 14, 47
Documents, discovery		156		53
power of Company to destroy		157		53
Executive and Managing Directors		108-112		36
Forfeiture, Board may accept surrender of shares liable to		30		12
day and place, etc, to be named in notice		26		11
forfeited shares		28		12
forfeiture may be cancelled		28		12
if notice not complied with shares may be forfeited		27		11
member liable to pay call notwithstanding		29		12
notice, form of		26		11
notice requiring payment of money due		25		11
statutory declaration conclusive evidence		31		12
General and class meetings		50-64		17
Accidental omission of notice of		54.1		18
adjournment of		57, 59		21
Annual		50		17

Page 59

	Article		Page
business of annual		55		20
chairman of		58		21
change of time/place of		54.6		20
may be convened by Board or by requisition		51.1		17
notice of		52-54.7		18
other than annual		50		17
period of notice		52		18
proceedings at		55-64		20
Provisions relating to class meetings		51.2		18
Quorum		56		20
satellite meeting place		54.2-54.3		19
time and place		53		18
venue not being a satellite meeting place		54.4-54.5		19
voting at		60-64		21
Increase of capital		47		17
Indemnity		155.1-155.2		53
Instalments of a call, failure to pay		25		11
Interpretation of provisions relating to stock		45		16
Lien, application of proceeds of sale		24		11
Board may exempt any share from these provisions		21		10
Company has first lien on shares not fully paid up, and on dividends		21		10
Company may sell shares to enforce lien		22		11
effect of sale		23		11
name of purchaser shall be entered in Register		23		11
Liquidation		153-154		52
Local management		85		27
Managing Director and Executive Directors		108-112		36
appointment of		108		36
power such as Board thinks fit		112		37
remuneration to be fixed by Board		111		37
resignation and removal of		109-110		37
Minutes of Board meetings		99		33
Pensions, establishment by Board		86.1		27
Poll, demand of not to prevent dealing with other business		64		22
how to be demanded		60		21
on adjournment or election of chairman		63		22
result of		62		22
to be taken as Chairman directs		62		22
Powers of attorney		74,87		24,28
Powers of Board		84-89		27
President		113.1, 113.2		37
Proceedings, at general meetings		55-64		20
of Board		91-98		31

Page 60

	Article			Page
Proxies		65-66, 68, 69, 71-75.4			22, 23
Purchase of Company’s shares		9			7
Quorum, at Board meetings		92			31
at general meetings		56			20
at meetings of classes of shares		51.2			18
Redeemable shares		49			17
Reduction of capital		48			17
Registers		125.1-125.2			42
Retirement and removal of Directors		103-107			36
Reserves		137			46
Rights of Members, variation of		4-5			5
Seal, affixing of		124.1-124.2			41
in foreign countries		124.3			42
Secretary		121,123			41
Deputy		122			41
if a Director		123			41
Securities Seal, shares warrants, issued under		41	(A)		14
Share certificates		12-13			9
Share premium account		138			47
Share warrant, provisions applying to		41	(A)		14
Shares, allotment by Board		7.1-7.4			5
cancellation of		46	(c)		17
commissions		8			6
Company may purchase its own		9			7
consolidation		46	(a)		16
conversion into stock and vice versa		42			16
different clauses of		4			5
new issues of, not a variation of rights attaching to existing shares		6			5
power to deal with fractions on consolidation		46	(a)		16
redeemable		49			17
sub-division of		46	(b)		16
transfer and transmission of		32-41			12
trusts not recognised		10			7
Uncertificated		11.5-11.7			8
Stock, conversion into		42			16
manner of transfer		43			16
provisions of these Articles applicable to,		45			16
Stockholders, same privileges as shareholders		44			16
‘Table A’ shall not apply		1			1
Transfer and Transmission		32-41			12
absolute discretion of Board		34			13
to refuse to register

Page 61

	Article			Page
Board may refuse to register in certain other cases		35			13
form of transfer		32			12
instrument of transfer of shares to be executed by or on behalf of transferor and (in the case of partly paid shares) transferee		33			12
legal personal representatives of deceased, survivors of joint holders only persons recognised by Company		38			13
notice of refusal to register transfer		36			13
of shares of deceased or bankrupt Member		38			13
registration of transfers may be suspended		37			13
transferor holder until transferee on Register		33			12
Transfer Office		2			1
share warrants, deposited at		41	(A)		14
Transmission of shares		38-41A			13
Trusts not to be recognised		10			7
Untraced shareholders		158.1-158.3			54
Variation of rights		4-5			5
Votes of Members		65-75.4			22
by a corporation		67			23
appointment of a proxy		72-75.3			23
chairman’s declaration as to result of votes is final		50			17
evidence of passing resolutions		60			21
members under incapacity		68			23
no member entitled to vote whilst call due, etc.		69			23
no right to vote in case of a Default Notice		11.2			7
objection to qualification		70			23
one vote for each share, at a poll		65			22
personally or by proxy		65			22
right to vote on show of hands and on a poll		65, 71			22, 23
vote by proxy		75.4			25
where joint holders		66			22
Winding up		153-154			52

Page 62

PEARSON plc

A PUBLIC COMPANY LIMITED BY SHARES

ARTICLES OF ASSOCIATION

Incorporating amendments made up to and
including 25 April 2008

CONTENTS

	Page
Preliminary		1
Share Capital		4
Capital		4
Variation of Rights		5
Shares		5
Uncertificated Shares		8
Certificates		9
Calls on Shares		10
Lien		10
Forfeiture of Shares		11
Transfer of Shares		12
Transmission of Shares		13
Stock		16
Consolidation, Sub-Division and Cancellation of Shares		16
Increase and Reduction of Capital		17
Redeemable Shares		17
Meetings of Members		17
General and Class Meetings		17
Notice of General Meetings		18
Proceedings at General Meetings		20
Votes of Members		22
Proxies		23
Directors		26
Number and Appointment of Directors		26
Qualification of Directors		27
Powers of Directors		27
Borrowing		28
Proceedings of the Board		31
Minutes		33

Page I

	Page
Disqualification of Directors		33
Retirement and Removal of Directors		36
Managing Director and Executive Directors		36
President		37
Non-executive Directors		37
Directors’ Expenses		38
Alternate Directors		38
Directors’ Interests		39
Secretary		41
The Seal		41
Registers		42
Accounts and Dividends		42
Audit		43
Dividends and Reserves		43
Capitalisation of Profits		48
Communications		49
Winding Up		52
Indemnity		53
Discovery		53
Destruction of Documents		53
Untraced Shareholders		54
Index to Articles of Association		56

Page II

EX-8.1

Exhibit 8.1

List of Subsidiaries

	Country of
Company	Incorporation
Addison Wesley Longman Australia Pty Ltd	Australia
Adelphi Finance Unlimited	Jersey
African Business Channel (Pty) Ltd	South Africa
AGS Inc	USA
AW Iberoamericana SA de CV	Mexico
Axis Finance Inc	USA
Bath Road Corporation	USA
BDFM Publishers (Pty) Ltd	South Africa
Beijing Rongjin Advertising Company Ltd	China
Berkhout Nijmegen BV	Netherlands
Blue Print Technologies Inc	USA
Blue Wharf Ltd	England and Wales
BS ZAO	Russia
Burmedia Investments Ltd	England and Wales
Camshaw USA Inc	USA
Chancery Software Inc	USA
Chatelain Properties Ltd	England and Wales
Children’s Character Books Ltd	England and Wales
Chronicle Australasia pty Ltd	Australia
Data Broadcasting Corp. BVI	Virgin Islands
Detective Nominees Inc	USA
Dominie Press Inc	USA
Dorling Kindersley — Civilizacao, Editores, Lda	Portugal
Dorling Kindersley Australia Pty Ltd	Australia
Dorling Kindersley Holdings Ltd	England and Wales
Dorling Kindersley Inc	USA
Dorling Kindersley India Private Limited	India
Dorling Kindersley Ltd	England and Wales
Dorling Kindersley Publishers (South Africa) Pty Ltd	South Africa
Dorling Kindersley Publishing Inc	USA
Dorling Kindersley Publishing Pty Ltd	Australia
Dorling Kindersley Verlag GmbH	Germany
eCollege inc	USA
E-College Lanka (Private) Ltd	Sri Lanka
Edexcel China Ltd	Hong Kong
Edexcel Ltd	England and Wales
Edexcel South Africa Pty Ltd	South Africa
Editions Du Renouveau Pedagogique Inc	Canada
Education by Association (Pty) Ltd	South Africa
Educational Publishers LLP	USA
Embankment Finance Ltd	England and Wales
English Language Learning and Instruction System Inc	USA
eSignal (Europe) Ltd	England and Wales
eSignal .com Inc	USA
eSignal Inc	USA
Exec-Appointments Ltd	England and Wales
Exshare Financial (US) Ltd	England and Wales
Exshare Financial Inc	USA
Exshare Statistical Services Ltd	England and Wales
Family Books at Home Inc	USA

	Country of
Company	Incorporation
FDI Intelligence Limited	England and Wales
FEN (Delaware) Inc	USA
Financial Times (Europe) GmbH	Germany
Financial Times Business Ltd	England and Wales
Financial Times Electronic Publishing (HK) Ltd	Hong Kong
Financial Times Group Ltd	England and Wales
Financial Times Information Ltd	England and Wales
Financial Times Investor Ltd	England and Wales
Forum Deutschland Consulting GmbH	Germany
Frederick Warne & Co Ltd	England and Wales
Frederick Warne & Co Inc	USA
FT CareerPoint Ltd	England and Wales
FT Electronic Publishing (Philippines) Inc	Philippines
FT Group Inc	USA
FT Information Philippines Inc	Philippines
FT Knowledge (Holdings) Inc	USA
FT Knowledge Ltd	England and Wales
FT Personal Finance Ltd	England and Wales
FT Publications Inc	USA
FT Search Inc	USA
GTIS Corporation	USA
Guangzhou Crescent Software Co Ltd	China
Hallminster Ltd	England and Wales
Harcourt Assessment BVBA	Belgian
Headland Digital Media Inc	USA
Heinemann Education Botswana Publishers (Pty) Ltd	Botswana
Heinemann Publishers (Pty) Ltd	South Africa
IDCO Overseas Capital Management Ltd	England and Wales
IDCO Overseas Holdings Ltd	England and Wales
IDCO Worldwide Holdings Ltd	England and Wales
Infinata Inc	USA
Infotec Capital Management Corporation	USA
Infotec Holdings Corp	USA
Interactive Data (Australia) Ltd	Australia
Interactive Data (Europe) Ltd	England and Wales
Interactive Data (France) SAS	France
Interactive Data (Hong Kong) Ltd	Hong Kong
Interactive Data (Ireland) Ltd	Ireland
Interactive Data (Jersey) Ltd	Jersey
Interactive Data (Singapore) PTE Ltd	Singapore
Interactive Data Canada Inc	USA
Interactive Data Corporation	USA
Interactive Data Corporation France SAS	France
Interactive Data Managed Solutions AG	Switzerland
Interactive Data Managed Solutions AG	Germany
Interactive Data Managed Solutions LLC	USA
Interactive Data Managed Solutions Ltd	England and Wales
Interactive Data Managed Solutions Nordic Oy	Finland
Interactive Data Managed Solutions S.r.l	Italy
Interactive Data Managed Solutions SAS	France
Interactive Data Managed Solutions SL	Spain
Interactive Data Management & Services GmbH & Co KG	Germany
Interactive Data Management and Services Verwaltungs GmbH	Germany
Interactive Data Pricing and Reference Data Inc	USA
Interactive Data Real-Time Services, Inc.	USA

	Country of
Company	Incorporation
IS Teledata MD Solutions France SAS	France
Kirihara Logitec Co	Japan
Kirihara Shoten Co	Japan
L Green Ltd	England and Wales
Ladybird Books Ltd	England and Wales
Lakeside Trading Estate Ltd	England and Wales
Leading Edge Economics Pty Ltd	Australia
Learning Network Direct Inc	USA
Les Editions du Centre de Psychologie Appliquee SA	France
Lesson Lab Inc	USA
Longman Australasia Pty Ltd	Australia
Longman Botswana (Proprietary) Ltd	Botswana
Longman Communications Ltd	England and Wales
Longman Group (Overseas) Holdings Ltd	England and Wales
Longman House Ltd	England and Wales
Longman Indochina Acquisition LLC	USA
Longman Kenya Ltd	Kenya
Longman Lesotho (Proprietary) Ltd	Lesotho
Longman Malawi Ltd	Malawi
Longman Mocambique Ltda	Mozambique
Longman Namibia (Pty) Ltd	Namibia
Longman Nigeria plc	Nigeria
Longman Publishing Company SA (Pty) Ltd	South Africa
Longman Swaziland (Proprietary) Ltd	Swaziland
Longman Tanzania Ltd	Tanzania
Longman Uganda Ltd	Uganda
Longman Zambia Ltd	Zambia
Longman Zimbabwe (Private) Ltd	Zimbabwe
Macro Educational Systems Inc	USA
Marblemirror Ltd	England and Wales
Mergermarket (U.S.) Ltd	USA
Mergermarket Consulting (Australia) Pty Ltd	Australia
Mergermarket Consulting (Singapore) Pte Ltd	Singapore
Mergermarket Consulting Ltd	Hong Kong
Mergermarket Inc	USA
Mergermarket Ltd	England and Wales
MetaMetrics Inc	USA
Misty City Software Inc	USA
Money Media Inc	USA
National Evaluation Systems Inc	USA
NCS Information Services Technology (Beijing) Co Ltd	China
NCS Japan K.K.	Japan
NCS Pearson (India) private Ltd	India
NCS Pearson Inc	USA
NCS Pearson Pty Ltd	Australia
NCS Services (England and Wales) Ltd	England and Wales
NCSP Holdings Inc	USA
New York Institute of Finance Inc	USA
NYIF Holdings Inc	USA
O & B Ltd	England and Wales
P. Ed. Aust Pty Ltd	Australia
Pearson Canada Holdings Inc	Canada
Pearson Amsterdam BV	Netherlands
Pearson Amsterdam Finance Limited	England and Wales

	Country of
Company	Incorporation
Pearson Assessment & Information BV	Netherlands
Pearson Assessment & Information Sweden AB	Sweden
Pearson Assessment & Information GmbH	Germany
Pearson Assessments Canada Inc	Canada
Pearson Australia Finance Unlimited	England and Wales
Pearson Australia Group Pty Ltd	Australia
Pearson Australia Holdings Pty Ltd	Australia
Pearson Australia Pty Ltd	Australia
Pearson Broadband (US) Group	USA
Pearson Broadband School Group Inc	USA
Pearson Business Services Inc	USA
Pearson Canada Finance Unlimited	England and Wales
Pearson Canada Inc	Canada
Pearson Capital Company LLC	USA
Pearson Charitable Foundation	USA
Pearson DBC Holdings Inc	USA
Pearson Digital Learning Puerto Rico Inc	Puerto Rico
Pearson Dollar Finance plc	England and Wales
Pearson Dollar Finance Two plc	England and Wales
Pearson Driving Assessments Ltd	England and Wales
Pearson Educacion de Chile Ltda	Chile
Pearson Educacion de Colombia Ltda	Colombia
Pearson Educacion de Mexico SA de CV	Mexico
Pearson Educacion de Peru SA	Peru
Pearson Educacion Do Brasil Limitada	Brazil
Pearson Educacion S.A	Spain
Pearson Education (South Africa) Pty Ltd	South Africa
Pearson Education Asia Ltd	Hong Kong
Pearson Education Australia Superannuation Fund Pty Ltd	Australia
Pearson Education Benelux BV	Belgium
Pearson Education de Chile Ltda	Chile
Pearson Education de Mexico SA de CV (1 Share)	Mexico
Pearson Education Deutschland GmbH	Germany
Pearson Education France SAS	France
Pearson Education Hellas SA	Greece
Pearson Education Holdings Inc	USA
Pearson Education Inc	USA
Pearson Education Indochina Ltd	Thailand
Pearson Education Italia Srl	Italy
Pearson Education Japan KK	Japan
Pearson Education Korea Ltd	Korea
Pearson Education Ltd	England and Wales
Pearson Education Malaysia Sdn Bhd	Malaysia
Pearson Education Nordic AB	Sweden
Pearson Education Polska Spzoo	Poland
Pearson Education S.A	Uruguay
Pearson Education S.A.	Argentina
Pearson Education Schweiz AG	Switzerland
Pearson Education South Asia Pte Ltd	Singapore
Pearson Education Taiwan Ltd	Taiwan
Pearson Education Yayincilik Sirketi	Turkey
Pearson Educational Measurement Canada Inc	Canada
Pearson Educational Publishers LLC	USA
Pearson Finance Partnership	Bermuda

	Country of
Company	Incorporation
Pearson Heinemann Ltd	England and Wales
Pearson Holdings Italy	Italy
Pearson Holdings Inc	USA
Pearson Inc	USA
Pearson International Finance Ltd	England and Wales
Pearson Investment Holdings Inc	USA
Pearson Investment Services Ltd	England and Wales
Pearson Knowledge Technologies LLC	USA
Pearson Learning (Hong Kong) Limited	Hong Kong
Pearson Loan Finance No.2 Unlimited	England and Wales
Pearson Loan Finance Unlimited	England and Wales
Pearson Longman Inc	USA
Pearson Luxembourg Holdings Ltd	England and Wales
Pearson Luxembourg Holdings No.2 Ltd	England and Wales
Pearson Luxembourg Holdings Sarl	Luxembourg
Pearson Luxembourg Holdings SeNC	Luxembourg
Pearson Luxembourg No. 1 Sarl	Luxembourg
Pearson Luxembourg No. 2 Sarl	Luxembourg
Pearson Malaysia Sdn Bhd	Malaysia
Pearson Management Services Ltd	England and Wales
Pearson Netherlands BV	Netherlands
Pearson Netherlands Holdings BV	Netherlands
Pearson New Entertainment Holdings Ltd	England and Wales
Pearson New Zealand Ltd	New Zealand
Pearson Overseas Holdings Ltd	England and Wales
Pearson PEM P.R. Inc	Puerto Rico
Pearson Professional Holdings Ltd	England and Wales
Pearson Property Investments Ltd	England and Wales
Pearson Real Estate Holdings Inc	USA
Pearson Services Ltd	England and Wales
Pearson (Shanghai) Corporate Management Consulting Co., Ltd	China
Pearson Shared Services Ltd	England and Wales
Pearson Sterling Two plc	England and Wales
Pearson Technology Centre LLC	USA
Penguin — Highbridge Audio LLC	USA
Penguin Books (SA) Pty	South Africa
Penguin Books Benelux BV	Netherlands
Penguin Books Deutschland GmbH	Germany
Penguin Books India Pte Ltd	India
Penguin Books Ltd	England and Wales
Penguin Books S A	Spain
Penguin Capital LLC	USA
Penguin Group (USA) Inc	USA
Penguin Italia SRL	Italy
Penguin Television Ltd	England and Wales
Phumelela Publishers (Pty) Ltd	South Africa
PN Holdings Inc	USA
Poundwatch Ltd	England and Wales
Prentice Hall (South Africa) Pty Ltd	South Africa
Prentice Hall Holdings BV	Netherlands
Promissor Inc	USA
Promissor Ltd	England and Wales
Rebus Planning Associates Inc	USA
Raupo Publishing (NZ) Ltd	New Zealand
Rough Guides Inc	USA

	Country of
Company	Incorporation
Rycade Capital Corporation	USA
Salspot Ltd	England and Wales
Savoy Finance Unlimited	Jersey
Servicios Administrationes Pearson Educacion SA de CV	Mexico
Shanghai AWL Education Software Ltd	Shanghai
Sound Holdings Inc	USA
Southwark Administracao e Participacoes Ltda	Brazil
Spear Insurance Ltd	Bermuda
St Clements Press Ltd	England and Wales
Strand Finance Ltd	England and Wales
Testchange Ltd	England and Wales
The Financial Times (Benelux) Ltd	England and Wales
The Financial Times (France) Ltd	England and Wales
The Financial Times (Hong Kong) Ltd	Hong Kong
The Financial Times (Japan) Ltd	England and Wales
The Financial Times (Singapore) Pte Ltd	Singapore
The Financial Times (Spain) Ltd	England and Wales
The Financial Times (Sweden) AB	Sweden
The Financial Times International Publishing Ltd	England and Wales
The Financial Times Ltd (Newspaper)	England and Wales
The Penguin Publishing Co Ltd	England and Wales
The Rough Guides Ltd	England and Wales
The SIOP Institute LLC	USA
Themescene Ltd	England and Wales
Tussauds Espana SA	Spain
Unibook Publishers (Bophuthatswana) (Pty) Ltd	South Africa
Unibook Publishers (Pty) Ltd	South Africa
Ventura Publishing Ltd	England and Wales
Virtual University Enterprises Inc	USA
VUE Testing Services Israel Ltd	Israel
W & W Ltd	England and Wales
Walker Holdings Inc	USA
West Ferry Printers Ltd	England and Wales
West Thurrock Estate Ltd	England and Wales
ZAO Business News Media	Russia

EX-12.1

Exhibit 12.1

CERTIFICATIONS

I, Marjorie Scardino, certify that:

1.	I have reviewed this annual report on Form 20-F of Pearson plc;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of Pearson plc as of, and for, the periods presented in this annual report;
4.	Pearson plc’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Pearson plc and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Pearson plc, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)	evaluated the effectiveness of Pearson plc’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this annual report any change in Pearson plc’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, Pearson plc’s internal control over financial reporting; and

5. Pearson plc’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Pearson plc’s auditors and the audit committee of Pearson plc’s board of directors (or persons performing the equivalent function):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Pearson plc’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in Pearson plc’s internal control over financial reporting.

Date: March 26, 2009

/s/ Marjorie Scardino  

Marjorie Scardino

Chief Executive Officer

EX-12.2

Exhibit 12.2

CERTIFICATIONS

I, Robin Freestone, certify that:

1.	I have reviewed this annual report on Form 20-F of Pearson plc;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of Pearson plc as of, and for, the periods presented in this annual report;
4.	Pearson plc’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Pearson plc and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Pearson plc, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)	evaluated the effectiveness of Pearson plc’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this annual report any change in Pearson plc’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, Pearson plc’s internal control over financial reporting; and

5. Pearson plc’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Pearson plc’s auditors and the audit committee of Pearson plc’s board of directors (or persons performing the equivalent function):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Pearson plc’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in Pearson plc’s internal control over financial reporting.

Date: March 26, 2009

/s/ Robin Freestone  

Robin Freestone

Chief Financial Officer

EX-13.1

Exhibit 13.1

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Annual Report on Form 20-F of Pearson plc (the “Company”) for the fiscal year ending December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Marjorie Scardino, Chief Executive Officer of the Company, certify to my knowledge, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that:

1.	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 26, 2009

/s/ Marjorie Scardino  

Marjorie Scardino

Chief Executive Officer

EX-13.2

Exhibit 13.2

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Annual Report on Form 20-F of Pearson plc (the “Company”) for the fiscal year ending December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robin Freestone, Chief Financial Officer of the Company, certify to my knowledge, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that:

1.	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 26, 2009

/s/ Robin Freestone  

Robin Freestone 

Chief Financial Officer 

EX-15

Exhibit 15

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (Nos. 333-66444, 333-45070 and 333-445990) of Pearson plc of our report dated March 26, 2009 relating to the financial statements and effectiveness of internal control over financial reporting which appear in this Form 20-F for the year ended December 31, 2008.

PricewaterhouseCoopers LLP
London, England
March 26, 2009