: chief executives review :

Pearson is beginning to make sense. For the last four years we’ve been honing its strategy and simplifying its parts into a club of complementary businesses. Individually, those businesses lead their markets, and with each other they share assets and values and a consistent way of doing things. There’s now a ‘Pearson-ness’ about us that was more theoretical than real before.

This approach has helped us to another record year. More importantly, it underscores the fact that we now have a business and a strategy which we’re confident will deliver a series of record years into the future.

That doesn’t mean we’ve arrived, or even that we’re at a rest stop. It just means we know where we’re going. We are about education and enlightenment. About helping children succeed at school or adults succeed in their work. About helping politicians consider different points of view or business people divine markets. About inspiring people to take a fresh look – or enjoy a wry smile – at the world.

That may sound a little grandiose. We certainly recognise the challenges and our limitations. Take interpreting markets, for instance. Sometimes that work is a little close to home. Toward the end of 2000 and the beginning of 2001, it dawned on the world that there aren’t two economies after all. Many people had suspected that all along, and suspected that what had been happening was just that markets – and human beings – were tending toward excess, as we always do.

So the trick was to stick with a set of basic principles, whatever your strategy. And we have. We believe there’s only one economy, and it demands to be fed sales and profits, and it thrives on growth. Keeping that in mind we focused our internet development on businesses that were integral to our main pursuits in education and in business information. We looked for ways to relate new ventures rather than spin them off into separate companies.

We weren’t carried away by the internet euphoria, and we aren’t carried away by the doom and gloom now either. Good businesses are still built on good ideas, well executed, and we believe technology can make both the ideas and the execution more powerful.

THE YEAR 2000

In fact, we’ve been using the internet for several years to ignite and power our businesses, and last year it played a larger part than ever both in our success in the existing businesses and in the size of our investment in the new ones. But it was only a part.

We had another record operating performance at the same time as we were building our growth potential around the group. The results are discussed in detail on pages 11 to 38. The headlines are that our results were made up of strong operating contributions from all parts of Pearson, and that we’ve invested to make sure our results of the future will be just as reliable and strong.

The Financial Times Group : In a changeable economy, the Financial Times Group had a whopping year, spurred on by its newspapers’ continuing growth in popularity and profitability, as well as their versatility and innovativeness.

Five years ago this group made about £100m in profit and was heavily dependent on one newspaper that sold 300,000 copies, most of them in its home market. In 2000, the FT Group logged a profit of more than £200m. That UK newspaper now exerts influence around the world, with two-thirds of its readers outside the UK. FT.com, its flagship web service, has begun to take on a life of its own, with impressive traffic and growing revenue, and the confidence to integrate itself into a more seamless relationship with the newspaper’s editorial and advertising staff.

This kind of transformation was repeated in our other business information operations, too. Les Echos continued to be France’s most profitable newspaper, with both advertising and circulation well up. At the same time, its business web service was the most popular one in the .fr space.

In Spain, Expansión made similar strides, adding to its roster of readers and of advertisers and developing Expansiondirecto.com into Spain’s leading online business service. Likewise, our partnership paper and online service in Germany (FT Deutschland, the first non-English language publication that carries the FT name), as well as those in South Africa, Russia and Portugal, continued to gain ground in their markets. So did the world’s best weekly news magazine, The Economist.

International, non-English-speaking markets form an increasingly important part of Pearson’s strategy. Recoletos, our Spanish media company which, among other things, publishes Marca, the largest sports newspaper in Europe, offered part of its ownership to the public market on the Madrid stock exchange in 2000. This allows Recoletos to have a freely traded currency to fund other ventures in Spain and Latin America, as well as to gauge its progress against its competitors by the market’s response. With Recoletos’ help, we will try to increase our complement of Spanish businesses in a world where Spanish is one of the three most spoken languages.

Pearson Education : Our largest business, institutional education, also took another giant step forward this year, in spite of the fact that it was already the world leader. Sales and profits increased in all businesses. At the same time, we invested in innovation, continuing to develop new online and print services and to build scale across the world in what may be the most important industry of our age.

One in three American children now use one of our math programmes. It is mathematically impossible to graduate from college in the US without being assigned one of our textbooks or online services. In 2000, we continued to improve these odds. With our most successful reading programme for a decade, our US schools business held on to the market gains it made in 1999. Our US higher education business outperformed the market in its college business, though it was held back a bit by the flat consumer computer book market, in spite of having half the bestsellers in the category. Our share in international education markets, mean-while, grew in double digits, based both on our business teaching the English language and on our local language programmes.

The September acquisition of NCS has already begun to revolutionise our education business. After seven months of ownership we are more confident than ever that it will make not only outstanding shareholder returns, but also a valuable contribution to the whole process of learning. NCS Pearson, as it’s now called, is the leader in school software services, testing and data management. With Pearson Education’s course content and NCS’s ability to provide assessment and student data and connections between schools and homes, we can create edu-cational programmes made to order for each student. Education can be customised. This is the revolution we hope to lead.

We also hope to serve learning needs broader than institutions alone. So in 2000 we launched a consumer learning business. Learning Network, an online network carried on the internet and on AOL, is designed for schools, parents, children, professionals and adults who want to keep on educating themselves. This network of sources, from inside and outside Pearson, provides a range of products and services to help each person assess his needs and fulfill them from something that can be used or bought online.

Penguin : Penguin published wonderful books while continuing to deliver the best margins and overall financial performance in the industry. We have been investing in its stock of would-be bestsellers, as well as in its classics and star authors, and this year both groups turned in award-winning performances. Its list of hits has never been longer, nor has its list of awards for literary excellence.

To add to the glitter, in 2000 we acquired Dorling Kindersley, an entirely different kind of publishing company with a unique formula for exciting imag-inations. DK has a store of largely home-grown or purpose-built content made of the artful marriage of beautiful pictures and quality text. Out of that marriage has come an imposing library of digitised images. So we’ll be able not only to bring Penguin efficiency to bear on the DK business, we’ll also be able to apply its content and images like magic around Pearson.

...AND BEYOND

In re-shaping our company, we’ve tried to take account of where the world is going, as well as our own aims and assets. Over the last two years, that world appeared to be twisted out of recognition by the invisible wire that connects us called the internet. We know that wire hasn’t changed the rules of business, but something has changed. There has been something of a revolution in the world in which we’re doing business. We see it in several trends:

The customer is in charge – really : This is no longer just a reminder that the customer is always right. It’s a fundamental shift in the balance of power from producer to consumer. People can tailor their lives to their personal needs and tastes; create products from off-the-shelf components and block ads from their tv screens. They can have things their way.

Business is now about services : To sell printers, you need to sell printing services – theatre tickets, newspapers. The value is in what the product can do. We can’t sell just textbooks; we have to sell applications that help teachers use the books to make lessons more engaging and more personal.

Intellectual property isn’t what it used to be : The shift toward services also means that content is sometimes more valuable when it’s paired with applications, or when it’s shared in some way. We live in an age of alliances – with suppliers, customers, colleagues, even competitors. Information or assets shared with them may become richer and make our ways of working more efficient.

These trends have led us to begin to change a lot about what we’re creating and how we’re selling and distributing it, as you can see in the illustrations on these pages. Our emphasis is now on personalising our services; on connecting with our customers and connecting them with each other; and on looking for flexible ways to share our assets to widen our markets and accelerate our growth.

Nowhere are these trends more applicable than in education. We all learn at different paces, in different ways, with different motivations. Technology allows us to make the most of those differences. We can create personalised learning – dynamic courses with materials not bound by two-dimensional textbooks from only one source or teachers not bound by assumptions about what the class is learning. It allows us to assess each student’s – or an entire class’ – progress, add relevant data on the student, connect those who have an interest in the process (teachers, parents) and help everyone succeed in education. What’s more, we can do this in a prog-ramme prescribed by an institution or chosen by a consumer in his own home.

These trends may change. There’s certainly no time or room for complacency. We can still remember saying blithely that we were a ‘content’ company and thinking our rich stories and insights and ideas were enough. Our world-class brands could do the rest. Now we need more. Now we have to provide the utility and connectivity that make our content special and give our brands personality. We have to help our customers use our content in a way that makes life easier for them. And whatever we do has to make a return for our shareholders. We’ve achieved record results this year and for each of the four years before that. That’s a trend we plan to follow well into the future.

To succeed in all this requires imagination. And that can come from only one place in Pearson — from the thousands of people here who every day do their jobs with self-confidence and creativity and respect for each other and those they do business with. In 2000, the people who work in Pearson once again went all out and produced wonderful products, exemplary marketing and delivery, unstinting support services and long-term value for shareholders. Thanks to all of you. Since most of you are already shareholders, you’ll reap the value you’ve created and have the satisfaction of having done some very worthwhile things in the process.