: directors’ report :

The directors are pleased to present their report to shareholders, together with the financial statements for the year ended 31 December 2000 on pages 56 to 60 and 62 to 97. Details of the businesses, the development of the Group and its subsidiaries and likely future developments are given on pages 11 to 30 of this annual report. Sales and profits of the different sectors and geographical markets are given on pages 64 and 65.

Results and dividend: The profit for the financial year ended 31 December 2000 was £179m (1999: £294m). The profit retained for the year was £15m (1999: £156m) and has been transferred to reserves. A final dividend of 13.2p per share is recommended for the year ended 31 December 2000. This, together with the interim dividend already paid, makes a total for the year of 21.4p (1999: 20.1p). The final dividend will be paid on 1 June 2001 to shareholders on the register at the close of business on 16 March 2001, the record date.

Significant acquisitions and disposals: Details of these transactions can be found in notes 27 and 28 to the accounts on pages 86 to 91.

Transactions with related parties: Details of transactions with related parties, which are reportable under FRS 8, are given in note 32 to the accounts on page 94.

Capital expenditure: The analysis of capital expenditure and details of capital commitments are shown in note 13 to the accounts on page 72.

Directors: The present members of the board, together with their biographical details, are shown on page 39. Michel David-Weill and David Verey resigned as directors on 3 March 2000. Rana Talwar was appointed a non-executive director on 20 March 2000. Details of directors’ remuneration and interests in ordinary shares and options of the company are contained in the personnel committee report on pages 47 to 54. Three directors, David Bell, John Makinson and Vernon Sankey, will retire by rotation at the forthcoming Annual General Meeting (AGM) on 27 April 2001. All three, being eligible, will offer themselves for re-election. Details of directors’ service contracts can be found on page 49. No director was materially interested in any contract of significance to the company’s business.

Corporate governance: The board supports the principles of good governance and code of best practice expressed in the Combined Code (the Code) published in June 1998. This directors’ report, including the personnel committee report which has been considered and adopted by the board, describes how the company has applied such principles and, apart from the two following exceptions, has complied with the provisions set out in section 1 of the Code. Given the small size of the board and the calibre and experience of the non-executive directors, the board does not believe the identification of a senior independent director is appropriate. Also, the board does not have a nomination committee for directors as it considers that the most formal and transparent procedure for the appointment of a new director is for this to be a matter for the whole board.

The board: The board currently comprises four executive directors, including the chairman, who is part-time, and five non-executive directors. All of the non-executive directors are independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement.

The board schedules six meetings each year and arranges to meet at other times as appropriate. There is a formal schedule of matters specifically reserved to the board for decision and approval, and the board is supplied in a timely manner with the necessary information to discharge its duties. A procedure exists for directors to seek independent professional advice in the furtherance of their duties, and all directors have access to the advice and services of the company secretary.

Board committees: The board of directors has established the following committees all of which have written terms of reference setting out their authority and duties:

i Audit committee: This committee is chaired by Vernon Sankey and its other members are Terry Burns and Reuben Mark. All are non-executive directors. The committee provides the board with the means to appraise Pearson’s financial management and reporting, and to assess the integrity of the Group’s accounting procedures and financial controls. The Group’s internal and external auditors have direct access to the committee to raise any matter of concern and to report the results of work directed by the committee. The committee reports to the full board of Pearson.

ii Personnel committee: This committee is chaired by Gill Lewis and its other members are Terry Burns and Reuben Mark. All are non-executive directors. The committee meets regularly to decide the remuneration and benefits packages of the executive directors and the chief executives of the main operating companies, as well as recommending the chairman’s remuneration to the board for its decision. It also reviews the Group’s management development and succession plans. The committee reports to the full board and its report, which has been considered and adopted by the board, is set out on pages 47 to 54.

iii Treasury committee: This committee comprises Dennis Stevenson, John Makinson, Vernon Sankey and Rana Talwar. The committee sets the policies for the company’s treasury department and reviews its procedures on a regular basis.

Internal control: Following the publication of guidance from the Turnbull Committee and its incorporation into the Listing Rules of the UK Listing Authority, the directors reviewed the effectiveness of the company’s internal control processes in the light of the provisions of the Combined Code. There is now an ongoing process which has been in place during 2000 and up to the date of the approval of this annual report that is embedded into the company’s integrated system of internal control, together with a formal reporting process to the board. The process accords with provision D.2.1 of the Combined Code.

The directors require the operating companies to undertake at least annual reviews to identify new or potentially under-managed risks. The results from these reviews are monitored within the existing quarterly reporting and annual budgeting processes. Annually, the Group control department provides a report to executive management and to the board. This system allows the board to report on the internal controls in accordance with the Financial Services Authority requirements.

The directors consider that the Group’s system of internal control is appropriately designed to provide reasonable but not absolute assurance against material misstatement or loss. The main elements of this risk identification and internal control process are as follows:

i Board: The board of directors has overall responsibility for the Group’s system of internal control and for reviewing its effectiveness, which it exercises through an organisational structure with clearly defined levels of responsibility and authority and appropriate reporting procedures. The board meets regularly and has a regular schedule of matters that are brought to it or its duly authorised committees for decision, aimed at maintaining effective control over strategic, financial, operational and compliance issues. This structure includes the audit committee which, with the finance director, reviews the effectiveness of the internal financial and operating control environment of the Group. The audit committee meets regularly and considers, inter alia, reports from internal and external auditors covering such matters.

ii Operating company controls: The identification and mitigation of major business risks is the responsibility of operating management. Each operating company maintains controls and procedures appropriate to its own business environment while conforming to Group standards and guidelines. These include procedures to identify and then mitigate all types of risks. The risks and mitigating actions are reported to the board through the quarterly reporting process.

iii Financial reporting: There is a comprehensive budgeting system with an annual budget approved by the board of directors. Monthly financial information, including balance sheets, cash flow statements, trading results and indebtedness, are reported against the corresponding figures for the budget and the previous year, with corrective action being taken by the directors as appropriate. In addition, these reports contain summary information of the major risks facing the operating companies, as well as the actions needed or taken either to mitigate or to take advantage of them.

iv Treasury management: The treasury department operates within policies approved by the board, and its procedures are reviewed regularly by the treasury committee. Major transactions are authorised outside the department at the requisite level and there is an appropriate segregation of duties. Frequent reports are made to the finance director and regular reports are prepared for the treasury committee.

v Group control: The Group control department has the central responsibility for risk control and internal audit which it exercises through teams located both in the UK and the US. The department reviews risks, processes and procedures in all main operating companies, agrees with operating companies their plans to eliminate or mitigate risks where possible, and to improve controls and processes. It monitors operating companies’ progress and reports regularly to executive management and the audit committee and annually to the board.

vi Insurance: Insurance cover is provided either through Pearson’s captive insurance subsidiary or externally, depending on the scale of the risk in question and the availability of cover in the external market.

Going concern: Having reviewed the Group’s liquid resources and borrowing facilities, and the 2001 and 2002 cash flow forecasts contained in the Group budget for 2001, the directors believe that the Group and the company have adequate resources to continue as a going concern for the foreseeable future. For this reason, the financial statements have, as usual, been prepared on a going concern basis.

Shareholder communication: Management continues to develop, increase and improve communication with shareholders, large and small, institutional and private. This year’s AGM will again include information about the Group’s businesses, as well as the 2000 results and general AGM business. The company’s website (www.pearson.com) includes a section focusing specifically on investor relations. We post all company announcements on the website as soon as they are made, and, where possible, we webcast all major investor presentations. In addition, Pearson has developed comprehensive programmes for communicating with institutional investors and with employee shareholders.

People: We have made good progress in the past year towards our goal of being the best employer in the world, though there is still a lot more to do.

On average there were 24,688 people in the company last year working in more than 60 countries. Almost all of them now own shares in Pearson; and many are saving to acquire more. We have expanded our training programmes at all levels and in all our companies, launched a new Pearson MBA in partnership with Duke University in North Carolina and introduced a new programme which makes it much easier for people to move between countries and between our companies.

This progress has been reflected in several surveys on both sides of the Atlantic in the past year. We were very pleased, for example, to be placed in the Top 100 Best Places to Work by the US magazine Working Mother. And earlier this year the British Sunday Times selected Pearson as the best place to work among the UK’s top 100 companies. Partly for these reasons we have also had a steadily increasing number of high quality job applicants at all our businesses.

i Employment: The employment policies of the Group embody the principles of equal opportunity and are designed to meet the needs of operating companies and comply with local regulations in their areas of operation. The sole criterion for selection, training, development and promotion is the individual’s suitability for the position of employment offered and his or her aptitudes and abilities. The company takes seriously its statutory obligations relating to disabled persons and seeks not to discriminate against current or prospective employees with disabilities because of a reason relating to their disability. Consideration is given to making reasonable adjustments to premises, or employment arrangements, if these substantially disadvantage a disabled employee, or prospective employee, compared to an able-bodied person.

ii Training and development: Pearson’s commitment to training and development has further strengthened during 2000 with increased activities involving more people across the company and greater involvement from the individual businesses. With a core curriculum established in 1999, the portfolio has been extended to reflect Pearson’s growing international population and now includes programmes in Europe, the US, Asia and Australia with further plans to focus on South America in 2001.

Pearson’s Senior Management Programme has now taken place at INSEAD in France and Singapore as well as Harvard Business School. It has created a powerful team of top management better equipped to meet the challenge of change in their businesses. Regular skill updates for management cover leadership, finance, personal performance and project management with coaching and mentoring programmes in place at all levels.

In February 2000 Pearson brought together for the first time over 100 high potential people to work with top management on innovation and strategy, resulting in a CEO-led initiative offering the opportunity for individuals to participate in developing their own new business models. This initial event, FORUM 2000, has had a significant impact on the motivation and retention of key talent and, with FORUM 2001 bringing together a further 140 people, this will become a regular and critical key personal and organisational development event for Pearson.

In partnership with a leading US business school Pearson has sponsored ten managers on a new international MBA that minimises time away from work and maximises on-line study and tutoring. The well established Pearson graduate training scheme has been extended and further internationalised to enable newly qualified individuals from Pearson operating companies across the world to come to Europe to work on specific projects and to participate in management training before taking up positions in their home country.

The sharing of skills and expertise in the company is greatly enhanced through the adoption of a systematic and company wide process for moving individuals across businesses. Linked to personal development this offers the opportunity for people at all stages of their career to experience new and challenging environments. A central training facility at the new corporate centre will offer advice on career management and provide inter-cultural programmes as well as core skills and management development.

iii Employee participation: Share ownership lies at the heart of Pearson’s remuneration philosophy and the directors believe that the very best way for our people to profit from Pearson’s success is for them to become shareholders. Pearson operates both worldwide profit sharing and share acquisition plans in over 60 countries. For 2000, eligible employees, who make up the majority of all employees, will receive an award of 15 Pearson shares under a Group profit sharing plan. With more than half our people in the US, we have taken special care to make it easier for them to acquire shares in Pearson. The listing of our shares on the New York Stock Exchange in 2000 allowed us to launch a new US Employee Stock Purchase Plan which makes owning shares in Pearson more accessible to the majority of our employees.

iv Employee communication: Employee communication continues to be developed through regular Group-wide communication from the chief executive, Marjorie Scardino; wide-ranging presentations to staff around the world in connection with the publication of Pearson’s results or other important events; the distribution of PearsonNow, the employee magazine; Pearsonville, the Group-wide intranet; and reports to participants in the various benefit plans. The various operating companies also have their own channels of communication such as briefing groups, videos, magazines and newsletters.

v European employee forum: Pearson has established a European Employee Forum with elected representatives from each of the Group’s main operating companies and from countries in Europe where the Group’s operations are of significant scale. The forum is intended to provide an arena for the exchange of relevant and appropriate information and to establish a constructive dialogue between management and employees on transnational issues which affect them. Two meetings of the forum were held in 2000.

Labour standards and human rights: During 2000, Pearson, along with other companies, signed a ‘global compact’ at the United Nations which sets out a series of principles on labour standards, human rights and the environment. Over the course of 2001 we are putting in place the ways to monitor our performance against these principles, and we will report on our progress in future years.

Some of the UN principles concern the environment and are covered by our environmental policy. Others refer to labour standards and human rights. They are:

Labour standards

• Freedom of association and the right to collective bargaining.
• The elimination of all forms of compulsory labour.
• The abolition of child labour.
• The elimination of discrimination in employment and occupation.

Human rights

• To support and respect international human rights within our sphere of influence.
• To ensure that we are not complicit in human rights abuses.

The following guidelines reflect the UN principles and show our key commitments:

 i Labour standards:

We try to offer equal employment opportunities to all. The people we recruit and promote are selected on merit and suitability, and will not be discriminated against because of gender, race, origin, background, religion, marital status, sexual orientation, age or political affiliation.

We aim to comply with the relevant laws relating to employment and employment conditions in each country where we operate. Where such laws are lacking, we will introduce our own guidelines. Subject to any laws, we fully support the right of our people to freedom of association, collective bargaining and representation either through trades unions, works councils, or any other appropriate forum.

We recognise that labour standards and conditions may vary from country to country. Pearson companies conduct business in many of the poorer countries of the world where living standards are low. Different attitudes to both adult and child labour prevail. Where Pearson companies directly control their activities in a country, we will ensure that our people have satisfactory wages and working conditions, and that there is no exploitation of labour. Working terms will take account of local economies.

In addition we will expect those who provide us with goods and services to assure, and if necessary demonstrate to us, that their businesses at least comply with the UN standards set out above. We also expect third party suppliers to provide satisfactory working conditions for their employees.

We will advise third party suppliers that we will positively support their efforts to comply with our guidelines to enable them broadly to adhere to the UN ‘global compact’, and we will expect them to do so within an agreed time frame.

Operating in low cost environments has a financial benefit. It also carries a social responsibility. Any improvement in working conditions or pay agreed with a local supplier has to be pursued with care. There may be occasions when to insist on instant change could lead to instant and damaging unemployment; or it could create ‘underground’ employment which would be infinitely more dangerous and totally unregulated. In such instances, Pearson will agree a timetable for steady and sustained improvement.

We recognise that there are great social, educational, health or safety problems in areas of the world where we do business and which affect our people. We will help, wherever possible, to educate our people in the workplace about such risks.

We aim to prohibit physical and verbal abuse, or the threat of it, and any other form of intimidation within our workforce.

In each country, our local subsidiary will be responsible for monitoring activity annually. These reports will be submitted to the director for people at Pearson by 31 January each year.

ii Human rights:

Pearson companies and people operate globally. Our products are produced and manufactured across the world and sold in many countries, often by companies we do not own which are operating on our behalf. We will, in the course of conducting business in ‘high risk areas’, ensure that we are not complicit in human rights abuses. This assurance can only come with regular monitoring. If we were to find ourselves inadvertently implicated in abuses of human rights, we would take immediate steps to rectify such a situation.

iii Board responsibility:

David Bell, as director for people, is the board director with overall responsibility for these issues.

Environmental policy: Pearson has had an environmental policy since 1992. In an ever-changing world, environmental issues concern the company and its shareholders, customers, staff and the general public alike. During 2000, we reviewed our policy and concluded that, although most of the original principles were still valid, we needed to enhance our efforts and measure them better.

Pearson does not directly operate in industries where there is a potential for serious industrial pollution. Our main products are based on intellectual property. However, in our normal operations we do things that have an impact on the environment in many ways.

The following policy guidelines show the principal commitments we have set for ourselves:

We seek to comply with the relevant environmental laws and regulations applicable in each country in which we operate.

We work with regulatory agencies and advisers as necessary in the implementation of effective environmental policies, and, where no regulations exist, we set our own guidelines.

We take account of environmental issues when placing contracts with suppliers of goods and services.

We will continue to introduce energy efficient systems into our buildings and to manage sensibly our energy requirements wherever we operate.

We will introduce measures to monitor our progress and report on this annually.

A senior executive has the responsibility for ensuring that our environmental principles are followed and we progress towards the targets we set ourselves. The board will take an active interest in our progress, and each of our operating companies will nominate a senior person to take responsibility for implementing our policy in those businesses. An annual report on our progress will be reviewed by the board.

We will ensure that this environmental policy and our annual environmental report are available to everyone in Pearson through our website, and actively encourage people to participate and contribute to the development of environmental initiatives as they affect our business.

Supplier payment policy: Operating companies are responsible for agreeing the terms and conditions, including terms of payment, under which business transactions with their suppliers are conducted. It is Group policy that suppliers are made aware of such terms of payment and that payments to suppliers are made in accordance with these terms, provided that the supplier is also complying with all relevant terms and conditions. Group trade creditors at 31 December 2000 were equivalent to 34 days of purchases during the year ended on that date. The company does not have any significant trade creditors enabling it to produce creditor information for this purpose.

External giving: In 2000, Pearson’s external giving totalled £1.79m (1999: £1.53m). This was split between the UK (£847,000; £967,000 in 1999) and the rest of the world (£938,000; £559,000 in 1999). About half of this went to education, arts, literacy and youth projects, including Children’s Promise and Literacy Partners. The other half was given to Pearson’s operating companies which take active roles in supporting their local communities. All of the operating companies match the funds raised by their employees for charities. The Financial Times Group continues to support schools and charities in its local London borough of Southwark including a programme where FT employees visit schools to help with reading programmes. Pearson does not make party political donations but it does support a number of independent research institutes across the political spectrum.

Share capital: Details of share issues are given in note 25 to the accounts on page 84. On 26 January 2000 Pearson announced the placing for cash of 11.5 million new ordinary shares representing approximately 2% of its then existing issued ordinary share capital. The shares were subscribed for by institutional investors at a price of £22 per share. The purpose of the placing was to fund its existing and new internet related businesses.

At the AGM held on 12 May 2000, the company was authorised, subject to certain conditions, to acquire up to 62 million of its ordinary shares by market purchase. This authority expires on the date of the forthcoming AGM. Although circumstances have not merited using this authority and there are no plans at present to do so, shareholders will be asked to renew this authority at the AGM on 27 April 2001.

In September 2000 Pearson completed a 3 for 11 rights issue of 170,528,278 new Pearson shares at a price of £10 per ordinary share. The purpose of the rights issue was to finance the acquisition of National Computer Systems, Inc.

At 5 March 2001, beneficial interests amounting to 3% or more of the issued ordinary share capital of the company notified to the company comprised:

Annual general meeting: The notice convening the AGM to be held at 12 noon on Friday, 27 April 2001 at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE, is contained in a circular to shareholders to be dated 27 March 2001.

Registered auditors: In accordance with section 384 of the Companies Act 1985 (the Act) resolutions proposing the reappointment of PricewaterhouseCoopers as auditors to the company, at a level of remuneration to be agreed by the directors, will be put to the shareholders at the AGM.

Statement of directors’ responsibilities: Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the company and Group as at the end of the year and of the profit or loss of the Group for that period. The directors are also responsible for the maintenance of adequate accounting records in compliance with the Act, for safeguarding the assets of the Group, and for preventing and detecting fraud and other irregularities. In preparing the financial statements on pages 56 to 60 and 62 to 97 inclusive, the directors consider that appropriate accounting policies have been used and applied in a consistent manner, supported by reasonable and prudent judgements and estimates, and that all relevant accounting standards have been followed.

Julia Casson : secretary : 5 March 2001