Indicate by check mark which financial statement item the Registrant has elected to follow:

      In this Annual Report on Form 20-F (the “Annual Report”) references to “Pearson” 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 generally accepted accounting principles in the United Kingdom, or UK GAAP,European Union(“EU”)-adopted International Financial Reporting Standards (“IFRS”), which differsdiffer in certain significant respects from generally accepted accounting principles in the United States, or US GAAP. We describe these differences in “Item 5. Operating and Financial Review and Prospects — Accounting Principles”, and in note 3435 to our consolidated financial statements included in “Item 17. Financial Statements” of this Annual Report. 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:

      For convenience and except where we specify otherwise, we have translated some sterlingSterling figures into US dollars at the rate of £1.00 = $1.92,$1.72, 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, 2004.30, 2005, the last business day of 2005. 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 April 28, 2006 the noon buying rate for sterling was £1.00 = $1.82.

      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

      These forward-looking statements are only predictions. They 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.

      Not applicable.

      Not applicable.

      The table below shows selected consolidated financial data for each of the years in the five-year period ended December 31, 2004.2005. The selected consolidated profit and loss account data for the years ended December 31, 2005, 2004 2003 and 20022003 and the selected consolidated balance sheet data as at December 31, 2005, 2004 and 2003 have been derived from our audited consolidated financial statements included in “Item 17. Financial Statements” in this Annual Report which have been audited by PricewaterhouseCoopers LLP, independent auditors. The selected consolidated profit and loss account data for the years ended December 31, 2001 and 2000, and the selected consolidated balance sheet data as at December 31, 2002, 2001 and 2000 have been derived from our audited consolidated financial statements for those periods and as of those dates, which are not included in this Annual Report.

      Our consolidated financial statements for the year ended December 31, 2005 have been prepared in accordance with IFRS, which differs from US GAAP in certain significant respects. See “Item 5. Operating and Financial Review and Prospects — Accounting Principles” and note 3435 to ourthe consolidated financial statements. The consolidated financial statements contain a reconciliation to US GAAP of profit/loss for the financial year, shareholders’ funds and certain other financial data.

      The selected consolidated financial information should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements and the related notes appearing elsewhere in this Annual Report. The information provided below is not necessarily indicative of the results that may be expected from future operations.

      For convenience, we have translated the 20042005 amounts into US dollars at the rate of £1.00 = $1.92,$1.72, the noon buying rate in The City of New York on December 31, 2004.30, 2005.

      TheIn accordance with EU regulations, the Company has restated its UK GAAP shareholders’ funds forprepared the financial years ended December 31, 2003 and 2002 for adoption of UITF Abstract 38 “Accounting for ESOP trusts’. This has reduced shareholders’ fundsstatements as at December 31, 20032005 in accordance with EU-adopted International Financial Reporting Standards (IFRS) and 2002 by £59 million and £62 million respectively (see note 24 in “Item 17.International Financial Statements”)Reporting Interpretations Committee interpretations (IFRIC).

      We pay dividends to holders of ordinary shares on dates that are fixed in accordance with the guidelines of the London Stock Exchange. Our board of directors normally declares an interim dividend in July or August of each year to be paid in September or October. Our board of directors normally recommends a final dividend following the end of the fiscal year to which it relates, to be paid in the following May or June, subject to shareholders’ approval at our annual general meeting. At our annual general meeting on April 29,

      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 20042005 fiscal year waswill be paid inon 5 May 2005.2006.

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

      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, 2004,30, 2005, the noon buying rate for sterling was £1.00 = $1.92.$1.72. On April 28, 2006 the noon buying rate for sterling was £1.00 = $1.82.

     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.

      The results of our US educational textbook and testing business Pearson Education, which accounted for 60% of our total 2004 revenue, dependdepends on the level of US and state educational funding. The economic slowdownfunding and this funding is a significant influence on our ability to grow.

      With the improvement in 2002 and 2003, coupled with decliningthe US economy state educational expenditure has increased as state tax revenues, resulted in some US states deferring

      Our newspaper business resultsbusinesses are highly geared and remain dependent on advertising revenue; relatively small changes in revenue, positive or negative, have been adversely affected by the reductiona disproportionate affect on profitability. We are beginning to see an increase in advertising particularlyrevenues compared to prior years, however any downturn in corporate and financial advertising since 2001. Also some ofspend would negatively impact our newspapers’ circulation is declining or static due to general economic conditions and changesresults.

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

      Our products are largely comprised ofcomprise 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. However, we

      We cannot be sure that our proprietary rights will not be challenged, invalidated or circumvented. Our intellectual property rights in countries such as the United States and the United Kingdom, which are the jurisdictions with the largest proportions of our operations, are well established. However, we also conduct business in other countries where the extent of effective legal protection for intellectual property rights is uncertain, and this uncertainty could affect our future growth. Moreover, despite trademark and copyright protection, third parties may be able to copy, infringe or otherwise profit from our proprietary rights without our authorization.

      These unauthorized activities may be more easily facilitated by the internet. The lack of internet-specific legislation relating to trademark and copyright protection creates an additional challenge for us in protecting our proprietary rights relating to our online business processes and other digital technology rights. The loss or diminution in value of these proprietary rights or our intellectual property could have a material adverse effect on our business and financial performance. In that regard, Penguin Group (USA) Inc. and Pearson Education have joined three other major US publishers in a suit brought under the auspices of the Association of American Publishers to challenge Google’s plans to copy the full text of all books ever published without permission from the publishers or the authors. This lawsuit seeks to demarcate the extent to which search engines and other internet operators may rely on the fair-use doctrine to copy content without authorization from the copyright proprietors, and may give publishers more control overon-line users of their intellectual property. If the lawsuit is unsuccessful, publishers and authors may not be able to control copying of their content for purposes of on-line searching, which could have an adverse impact on our business and financial performance.

      In recent years we have begun, through ourOur Professional division to offerprovides services ranging from call center operations to complete outsourcing of administrative functions. Customers are government agencies and professional organizations, mainly in the United StatesUSA and the United Kingdom,UK, and commercial businesses. These services are provided under contracts with values that vary significantly, from a few million to several hundred million pounds over the term of the contract, which can run from one to ten years in length. The results of our Professional division can be significantly dependent on a small number of large contracts.

      As in any long-term contracting business, there are inherent risks associated with the bidding process, operational performance, contract compliance (including penalty clauses), indemnification (if available) and contract re-bidding, which could adversely affect our financial performance and/or reputation. In addition, US government contracts are subject to audit and investigation by the applicable contracting government entity and may otherwise be investigated by the government, and this can result in payment delays and, in certain circumstances, reductions in the amounts received, penalties or other sanctions.

      There are inherent risks particularly associated with our school testing businesses, both in the United StatesUSA and the United Kingdom.UK. A breakdown in our testing and assessment products and processes could lead to either a mis-grading of student test scorestests and/or late delivery of test scoresresults to students and their schools. In either event we may be subject to legal claims, penalty charges under our contracts, and non-renewal of contracts.contracts and in the case of our UK testing business, the suspension or withdrawal of our accreditation. It is also likelypossible that such events would result in adverse publicity, which may affect our school testing business’s ability to retain existing clientscontracts and/or obtain new clients.customers.

      Weak US market conditions (particularly in mass market books), higher than average historical return rates,New distribution channels, e.g. digital format, the weak US dollar and distribution problems ininternet, used books, combined with the United Kingdom associated with a new automated warehouse facility all adversely affectedconcentration of retailer power pose multiple threats to our traditional consumer publishing models. Penguin’s financial performance in 2004. Our ability to restore Penguin to historical profit levels will be constrained if the US mass market does not recover. Penguin’s financial performance willcan also be negatively affected if book return rates remain above their historical average or increase further.

      Our education, business information and book publishing businesses operate in highly competitive markets. These markets constantly change in response to competition, technological innovations and other factors. To remain competitive we continue to invest in our authors, products and services. There is no guarantee that these investments will generate the anticipated returns or protect us from being placed at a competitive disadvantage with respect to scale, resources and our ability to develop and exploit opportunities. Specific competitive threats we face at present include:

      All our businesses, to a greater or lesser extent, are dependent on technology. We either provide software and/or internet services or we use complex information technology systems and products to support our business activities, particularly in 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 and business continuity in the event of a disaster at a key data center.

      We operate a number of pension schemes throughout the world, the principal ones being in the UK and US. The major schemes are self-administered with the schemes’ assets held independently of the Group. Regular valuations, conducted by independent qualified actuaries, are used to determine pension costs and funding requirements.

      It is our policy to ensure that each pension scheme is adequately funded to meet its ongoing and future liabilities. Our earnings may be adversely affected by lower investment returns due to a general deterioration in equity or bond markets, requiring increased company funding of these schemes to eliminate any deficits over time. Similarly, changes in pension regulations, including accounting rules, may affect our pension costs and funding status.

      As with any international business our earnings can be materially affected by exchange rate movements. We are particularly exposed to movements in the US dollar to sterling exchange rate as approximately 65% of our revenue is generated in US dollars. We estimate that if 20032004 average rates had prevailed in 2004,2005, sales for 20042005 would have been £306£46 million or 8% higher.1% lower. This is predominantly 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. We estimate that a five cent change in the average exchange rate between the US dollar and sterling in any year could affect our reported earnings per share by approximately 1 penny.pence.

      Pearson is a global publishing company with its principal operations in the education, business information and consumer publishing markets. We have significant operations in the United States, where we generate over 65% of our revenues, and in the United Kingdom and continental Europe. We create and manage intellectual property, which we promote and sell to our customers under well-known brand names, to inform, educate and entertain. We deliver our content in a variety of forms and through a variety of channels, including books, newspapers and internet services. We increasingly offer services as well as content, from test processing to training.

      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).

      Although our businesses increasingly share markets, brands, processes and facilities, they consist of three core operations:

     Pearson Education is a global leader in educational publishing and services. We are a leading international publisher of textbooks, supplementary materials and electronic education programs for elementary and secondary school, higher education and business and professional markets worldwide. We also play a major role in the testing and certification of school students and professionals, mainly in the US but increasingly in the UK. Pearson Education consists of the following three operating segments:

     The FT Group consists of our international newspaper, print and online financial information, business magazine and professional publishing interests. Our flagship product is theFinancial Times,published internationally and known for its premium editorial content and international scope both in newspaper and internet formats. The FT Group comprises the following operating segments:

     The Penguin Group is one of the premier English language publishers in the world, with brand imprints such as Penguin, Putnam, Berkley, Viking and Dorling Kindersley (“DK”). We publish the works of many authors in an extensive portfolio of fiction, non-fiction, reference and illustrated works.

      Since 1997, we have reshaped Pearson by divesting a range of non-core interests and investing over $7 billion in education, consumer publishing and business information companies. Each one of our businesses

aims to benefit from educating, informing and entertaining people in an increasingly knowledge-based economy. Our strategy is:

      Pearson Education is one of the world’s largest publishers of textbooks and online teaching materials based on published sales figures and independent estimates of sales. Pearson Education serves the growing demands of teachers, students, parents and professionals throughout the world for stimulating and effective education programs. With federal and state governments under pressureincreasingly required to measure academic progress against clear objective standards, the market for educational testing services in the United States has grown significantly. Pearson Assessments & Testing enablessignificantly, as have markets around the world. Our integrated approach to education has helped us to combine testing and assessment withgrow faster because of our traditional educational curriculum services and products to form one of the world’s leading integrated education companies. Pearson Assessments & Testing provides the entire spectrum of educational services — from educational curriculum to testing and assessment to data management and reporting.breadth.

      We report Pearson Education’s performance along the lines ofby the three marketsmarket segments it serves: School, Higher Education and Professional. In 2004,2005, Pearson Education had sales of £2,356£2,663 million or 60%65% of Pearson’s total sales (61%(63% in 2003)2004).

      In the United States, our School business includes publishing, testing and software operations. Outside of the United States, we have a growing English Language Teaching business and we also publish school and

      In the US, Pearson’s Assessmentsassessments & Testingtesting operations make us aare leading service providerproviders in the markets for test development, processing and scoring and the provision of enterprise software solutions to schools. We score and process some 40 million student tests across the United States each year.

      Pearson School Systems provideprovides district-wide solutions that combine the power of assessment, student information, financial systems and actionable reporting to improve student performance. We are the market leader in student information with our solutions used by over 16,00020% of schools nationwide and we are the provider of the newest technologies for benchmark testing and student progress analysis.

      Over 90% of education spending for kindergarten through 12th grade in the United States is financed at the state or local level, with the remainder coming from Federalfederal funds. The School division’s major customers are state education boards and local school districts. In the United States, 21 states, which account for over 50% of the total kindergarten through 12th grade US school population of some 53 million students, buy educational programs by means of periodic statewide “adoptions”. These adoptions cover programs in the core subject areas. Typically, a state committee selects a short-list of education programs from which the school districts then make individual choices. We actively seek to keep as many of our offerings as possible on the approved list in each state, and we marketsell directly to the school districts. In the states without adoptions, orcalled “open territories”, local school districts choose education programs from the extensiveentire range available. We actively marketsell to school districts in open territories as well.

      In 2004, Edexcel won a five year contract for the administration and marking of “Key Stage” testing for 11 and 14 year old students in the UK. Edexcel also began electronic scanning and marking of GCSE and A-level exams in 2004. 3.54 million scripts are expected to bewere marked electronically in 2005.

      Pearson Education is the United States’ largest publisher, by sales, of textbooks and related course materials for colleges and universities based on sales.universities. We publish across all of the main fields of study with imprints such as Pearson Prentice Hall, Pearson Addison Wesley, Pearson Allyn & Bacon and Pearson Benjamin Cummings. Our sales forces call on college educators, who choose the textbooks and online resources to be purchased by their students. In 2004, over one2005, 1.8 million college students registered for our online offerings, which include homework and assessment products, online study guides and textbook companion websites. Many of our online offerings are integrated with course management systems that provide easy-to-use tools that enable professors to create online courses. In addition, our custom publishing business, Pearson Custom, works with professors to produce textbooks specifically adapted for their particular course.

      We publish text, reference, and interactive products for IT industry professionals, graphics and design users of all types, and consumers interested in software applications and certification, professional business books, and strategy guides for those who use PC and console games. Publishing imprints in this area include Addison Wesley Professional, Prentice Hall PTR, and Cisco Press (our three high end(IT professional imprints), Peachpit Press and New Riders Press (our graphics(graphics and design imprints), Que/Sams (consumer and professional imprint), and Prentice Hall Financial Times (professional business imprint) and BradyGames (software game guides(business imprint). We also generate revenues through our own website — InformIt.InformIT, and through Safari Books Online (a joint venture with O’Reilly Media). We also provide services to

      Our Government Solutions group manages and processes student loan applications on behalf of the US Department of Education and hasEducation. It also provides a number of education, testing-relatednon-education and other testing and service-related contracts with various government departments.agencies both within and outside the US.

      We also provide a range of data collection and management services, including the sale of scanners, to a wide range of customers. We also provide corporate training courses to professionals.

      In 2004, our Assessment & Testing business won a number of contracts, the most significant beingContracts include a seven year contract to develop and deliver the Graduate Management Admissions Test (GMAT) worldwide. We will begin receiving revenues from this contractworldwide, beginning in 2006. Another successful tender was for theJanuary 2006 and a nine year,non-exclusive contract to deliver the National Association of Security Dealers exams over nine years on a non-exclusive basis.exams.

      The FT Group, one of the world’s leading business information companies,sources, aims to provide a broad range of business information,data, analysis and services to an audience of internationally-minded business people. In 2004,2005, the FT Group had sales of £777£629 million, or 20%15% of Pearson’s total sales (19%(16% in 2003)2004). The FT Group’s business is global,

producing a combination of news, data, comment, analysis and context. In addition to professional and business consumers, individuals worldwide are demanding such strategic business information. We believe that the FT Group is well positioned to supply information and benefit from these trends.

      TheFinancial Timesis a leading international daily business newspaper. Its average daily circulation of 427,800439,563 copies in December 2004,2005, as reported by the Audit Bureau of Circulation, gives theFinancial Timesthe second largest circulation of any English language business daily in the world. TheFinancial Timesderived approximately 67% of its revenue in 20042005 from advertising and approximately 33% from circulation.print and online content sales. The geographic distribution of theFinancial Timesaverage daily circulation in 20042005 was:

      TheFinancial Timesis printed on contract in 2423 cities around the world and our sales mix is increasingly international. The newspaper draws upon an extensive local network of correspondents to produce unique, informative and timely business information. For production and distribution, theFinancial Timesuses computer-driven communications and printing technology for timely delivery of the various editions of the newspaper to the appropriate geographic markets. TheFinancial Timesis distributed through independent newsagents and direct delivery to homes and institutions.

      The FT seeks to make its content available both in print and online, through FT.com, its internet service, and sales of electronic content to third parties. FT.com charges subscribers for detailed industry news, comment and analysis, while providing general news and market data to a wider audience. The business earns revenues by selling content directly, selling advertising and selling subscriptions. At the end of JanuaryDecember 2005, FT.com had 76,00084,000 paying subscribers. According to figures independently audited by ABC, the site has 3.7subscribers and an average of 3.2 million unique monthly users and 58.3 million page views.users.

      Our other business publishing interests include France’s leading business newspaper,Les Echoswith an average daily 2005 circulation of 119,800119,000 and lesechos.fr, its internet service.

      FT Business produces specialist information on the retail, personal and institutional finance industries and publishes the UK’s premier personal finance magazine,Investors Chronicle, together withMoney Management, Financial AdvisorandThe Bankerfor professional advisers and financial sector professionals.

      Through our 61%62% interest in Interactive Data Corporation (“Interactive Data”), we are one of the world’s leading global providers of financial market data, analytics and business informationrelated services to financial institutions, active traders and retailindividual investors. Interactive Data supplies time-sensitive pricing, dividend, corporate action, and descriptive information for more than 3.5 million securities traded around the world, including hard-to-value instruments. Customers subscribe to Interactive Data’s services and use the company’s analytical tools in support of their trading, analysis, portfolio management, and valuation activities.

      As at 20042005 year end, the FT Group also had a number of other associates and joint ventures, including:

      A 50% interest inFT Deutschland,launched in February 2000, in partnership with Gruner + Jahr,Jahr.FT Deutschland is oura German language newspaper with a fully integrated online business news, analysis and data service. Its circulation grew by 5.4%6% in 20042005 to 96,900102,000 copies.

      A 50% interest in The Economist Group, which publishes the world’s leading weekly business and current affairs magazine. Its circulation increased by 10% to 1,038,519 for the January to June 2005 period.

      A 50% interest in FTSE International, a joint venture with the London Stock Exchange, which among other things, publishes a wide range of global indices, including the important FTSE index.

      A 33% interest inVedomosti, a leading Russian business newspaper and a partnership venture with Dow Jones and IMH Media Ltd.

      A 50% interest inBusiness Day andFinancial Mail, publishers of South Africa’s leading financial newspaper and magazine.

      A 14% interest inBusiness Standard, India’s secondthird largest daily financial newspaper.

      Penguin is one of the premier English language book publishers in the world. We publish an extensive backlist and frontlist of titles, including some of the very best new fiction and non-fiction, literary prize winners and commercial bestsellers. Our titles range from history and science to essential reference. We are also one of the pre-eminent classics publishers and publish some of the most highly prized and enduring brands in children’s publishing, featuring popular characters such as Spot, Peter Rabbit and Madeline, as well as the books of Roald Dahl. We rank in the top three consumer publishers, based upon sales, in all major English speaking and related markets — the United States, the United Kingdom, Australia, New Zealand, Canada, India and South Africa.

      Penguin publishes under many imprints including, in the adult market, Allen Lane, Avery, Berkley Books, Dorling Kindersley, Dutton, Hamish Hamilton, Michael Joseph, Plume, Putnam, Riverhead and Viking. Our leading children’s imprints include Puffin, Ladybird, Warne and Grosset & Dunlap. In 2004,2005, Penguin’s US imprints placed 132129 titles onThe New York Timesbestseller list. In the United Kingdom,

      In 2004,2005, Penguin had sales of £786£804 million, representing 20% of Pearson’s total sales (21% in 2003)2004). Revenues are balanced between frontlist and backlist titles. The Penguin Group earns over 95% of its revenues from the sale of hard cover and paperback books. The balance comes from audio books and from the sale and licensing of intellectual property rights, such as the Beatrix Potter series of fictional characters, and acting as a book distributor for a number of smaller publishing houses.

      We sell 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. We also sell online through third parties such as Amazon.com.

      The Penguin Group’s gateway internet site, Penguin.com, provides access to its focused websites in the United States, Canada, United Kingdom and Australia. Websites have also been developed to target certain niche audiences. For example, Penguinclassics.com has an entire online service for the classics, with anthologies, original essays, interviews and discussions and links to other classics sites.

      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 some small niche players and some large international companies, such as McGraw-Hill, Reed Elsevier, Houghton Mifflin and Thomson. Competition is based on the ability to deliver quality products and services that address the specified curriculum needs and appeal to the school boards, educators and government officials making purchasing decisions.

      The FT Group’s newspapers and magazines compete with newspapers and other information sources, such asThe Wall Street Journal,by offering timely and expert journalism. 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. The efficiency of its cost base is also a competitive factor.

      The Penguin Group competes with other publishers of fiction and non-fiction books. Principal competitors include Random House, HarperCollins, and HarperCollins.Hachette Livre. Publishers compete by developing a portfolio of books by established authors and by seeking out and promoting talented new writers.

      Our principal intellectual property assets consist of our trademarks and other rights in our brand names, particularly theFinancial Timesand the various imprints of Penguin and Pearson Education, as well as all copyrights in 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.

      Paper is the principal raw material used by each of Pearson Education, the FT Group and the Penguin Group. We purchase most of our paper through our central purchasing department located in the United States. We have not experienced and do not anticipate difficulty in obtaining adequate supplies of paper for

      The manufacture of certain of our products in various markets is subject to governmental regulation relating to the discharge of materials into the environment. Our operations are also subject to the risks and uncertainties attendant to doing business in numerous countries. Some of the countries in which we conduct these operations maintain controls on the repatriation of earnings and capital and restrict the means available to us for hedging potential currency fluctuation risks. The operations that are affected by these controls, however, are not material to us. Accordingly, these controls have not significantly affected our international operations. Regulatory authorities may have enforcement powers that could have an impact on us. We believe, however, that we have taken and continue to take measures to comply with all applicable laws and governmental regulations in the jurisdictions where we operate so that the risk of these sanctions does not represent a material threat to us.

      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.

      InOn January 2005, we9, 2006 Pearson announced the salepurchase of our 22.4% stake1,130,739 shares in MarketWatchInteractive Data from an individual shareholder for $21.67 per share in cash. This purchase brings Pearson’s total holding in Interactive Data to Dow Jones for $101 million.almost 62%.

      In February 2005, we acquired the remaining 25% of Edexcel Limited that we did not already own for £30 million.

      On April 25, 2006 Pearson announced the acquisition of National Evaluation Systems, Inc, a leading teacher certification testing and publishing for students with special educational needscompany in the United States school market.US.

      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, 2004,2005, including name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held.

      Our headquarters is located at leasehold premises in London, England. We own or lease over approximately 650 properties 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.

      We own the following principal properties:

      We lease the following principal properties:

      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 UK GAAP,IFRS, which differs in certain significant respects from US GAAP. Note 3435 to our consolidated financial statements, included in “Item 17. Financial Statements”, provides a description of the significant differences between UK GAAPIFRS and US GAAP as they relate to our business and provides a reconciliation to US GAAP. These consolidated financial statements are the Group’s first financial statements to be prepared in accordance with IFRS, as adopted by the EU. Consolidated financial statements of Pearson up to and including December 31, 2004 had been prepared in accordance with UK GAAP. UK GAAP differs in certain respects from IFRS. When preparing the Group’s 2005 consolidated financial statements, management has amended certain accounting, valuation and consolidation methods applied in the UK GAAP financial statements to comply with IFRS. The comparative figures in respect of 2004 and 2003 were restated to reflect these adjustments. Note 34 included in “Item 17. Financial Statements”, describes how, in preparing the consolidated financial statements, the Group has applied accounting standards as adopted for use in the EU under the first-time adoption provisions as set out in IFRS 1.

      Sales declinedincreased from £4,048 million in 2003 to £3,919£3,696 million in 2004 to £4,096 million in 2005, an increase of 11%. The increase reflected growth across all the businesses with a decrease of 3%. This declineparticularly strong performance at Pearson Education. The year on year growth was attributable to the impact ofimpacted by exchange principally the weakness of therates but less so than in previous years. The average US dollar exchange rate strengthened slightly in 2005, which had the affecteffect of reducingincreasing reported sales in 20042005 by £306£46 million when compared to the equivalent figure at constant 20032004 rates. After taking out the effect of currency there were increases in sales at Pearson Education and IDC. Reported operating profit increased by 2%33% from £226 million in 2003 to £231£404 million in 2004 despiteto £536 million in 2005. Pearson Education benefited from strong sales growth and improved margins in the adverse impactSchool and Higher Education businesses. FT Group benefited from improved profits largely as a result of increases in advertising revenues at FT Publishing and IDC’s continued strong organic growth and synergies from the integration of recent acquisitions. Penguin profits benefited from

the effect of exchange rates. Thererates but still improved from the prior year, with margins increasing despite only a small increase in sales. Included within operating profit in 2005 was good progressthe profit on the sale of MarketWatch of £40 million. Equivalent sales of businesses and investments in 2004 saw a profit of £9 million. Reported operating profit in 2005 was £12m higher than the equivalent figure reported at Pearson Education and a significant improvement at the Financial Times, but Penguin’s results were disappointing.constant 2004 exchange rates.

      A £171 million profitProfit before taxation in 20042005 of £466 million compares to a profit before taxation of £152£325 million in 2003.2004. The increase of £19£141 million or 13% mainly reflects the reduced charge for goodwill amortizationimproved operating performance and a reduction in net finance costs. Net finance costs which together offset the impact of exchange. The goodwill amortization charge fell by £40reduced from £79 million in 2004 due to the weaker US dollar and goodwill£70 million in respect of Family Education Network and Marketwatch having been fully amortized in 2003. Finance costs2005. Net interest payable benefited from the reduction in average

      In December 2004,April 2005, Pearson announced its intention to dispose ofsold its 79% interest in Recoletos Grupo de Comunicacion S.A. to Retos Cartera, a consortium of investors, as part of a tender offer for all of Recoletos. The transaction was approved bybecame unconditional on approval from the Spanish regulatory authorities in February 2005, and the sale closed in April 2005, realizing net cash proceeds of £372 million.2005. The results of Recoletos have been consolidated for the period to February 28, 2005 and have been shown as discontinued operations in the consolidated profitincome statement for 2005, 2004 and loss account for 2004, 2003 and 2002.2003.

      Net cash inflowgenerated from operating activities increased to £530£709 million in 2005 from £562 million in 2004 from £359 million in 2003.with very strong cash generation across all the businesses. Cash flow in 2004 benefited from collection of the $151 million receivable in respect of the TSATransportation Security Administration (“TSA”) contract, together with continued underlying improvementsa contract to create a qualification, assessment, staffing and placement system for security screeners at airports in Pearson Education and IDC.the US. The weaknessrelative strength of the US Dollar reduceddollar also increased the value of our cash flows in Sterling. Capital expenditure was in excess of depreciation indown from 2004 due tofollowing the up-front expenditure on professional testing contracts in that year but oninvestment in pre-publication increased. On an average basis, the use of working capital continued to improve. Cash outflow on acquisitionsThe net cash inflow from disposals net of disposal proceedsacquisitions was £20£175 million in 2005 compared to a net cash outflow of £4 million in 2004. Dividends paid of £222 million in 2005 (including £17 million paid to minority interests) compares to £197 million in 2004 and, after dividends paid of £195 million and a favorablean adverse currency movement of £75£121 million, overall net borrowings (excluding finance leases) fell 11%18% from £1,361£1,221 million at the end of 20032004 to £1,206£996 million at the end of 2004.2005.

      We expect 2006 to be another good year for Pearson as we anticipate increasing margins and growth ahead of our markets. We expect to growachieve strong earnings stronglygrowth, good cash generation and a further significant improvement in 2005 and beyond, with further progress on cash and return on invested capital. Our outlook is:

      We expect our worldwide School businessPearson Education to deliver significant underlyingachieve sales and profit growth in 2005. Withthe 3-5% range, with similar rates of growth in each of its three worldwide businesses (School, Higher Education and Professional). We expect margins to improve in School and Professional and remain stable in the Higher Education business. School testing is strengthened by 2005 contract wins with a stronger adoption calendar, healthier state budgets, federal funds for readinglifetime value of $700 million (including Texas, Virginia, Michigan and testingMinnesota) and our investment in new programs, we expect ourthe US School publishing and testing operationsnew adoption market is expected to achieve double-digit sales growth. We also expect to achieve steady margin improvement in our US school publishing businessgrow strongly over the next three years, as we benefit from the adoption calendar in both 2006 andperiod 2007 in which weto 2009.

      We expect a significant increase in our new adoption participation rate compared with 2005.

      We expect our Professional business to grow sales in the mid-single digits in 2005, helped by continued growth in our contract businesses and a stabilization in technology publishing. We expect this division to deliver sustained growth on the basis of our long-term contracts in Government Solutions and Professional Testing.Testing and to improve margins after the successful start-up of major new contracts in 2004 and 2005. We also expect to maintain our leading market share in professional

      We expect further profit progressimprovement at the FT Group. AdvertisingTheFinancial Times continues to show good momentum with circulation up 4% and advertising revenues at the Financial Times were up 3%continue to show double digit growth in the early part of 2005 and, assuming similar advertising revenue growth for the full year, we would expect the Financial Times to be around breakeven for the year as a whole.2006. IDC expects another good year, benefiting from similar business conditions to grow its reported revenues2005, strong organic growth and net income in the high single-digit to low double-digit range.

      Penguin is expected to grow at a similar rate in 2006 to 2005 will bewith continued investment in new markets and international talent and with a yearstrong list of transition for Penguin. We expect profitsnew titles from best selling authors. Margins are expected to improve in the UK, in spite of dual-running costs at our distribution centers. In the USsteadily as we are planning on the basis that the weak market conditions experienced in the second half of 2004 continue. We are taking action to adjust our publishing program and reduce costs, and we will expense approximately £5 million as a result of those actions in 2005.benefit from efficiency gains.

      We generate around two-thirds of total revenuessales in the US and a five cent change in the average exchange rate for the full year (which in 20042005 was £1: $1.83)$1.81) will have an impact of approximately 1p on adjusted earnings per share.

      The following table shows sales information for each of the past three years by operating division:

      The following table shows sales information for each of the past three years by geographic region:

      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 $1.81 in 2005, $1.83 in 2004 and $1.63 in 2003 and $1.51 in 2002.2003. Fluctuations in exchange rates can have a significant impact on our reported sales and profits. The Group generates approximately 65% of its sales in US dollars and a five cent change in the average exchange rate for the full year has an impact of approximately 1 pence on earnings per share. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for more information.

      Our consolidated financial statements, included in Item 17. “Financial Statements”, are prepared based on the accounting policies described in note 1 to the consolidated financial statements which are in conformityaccordance with UK GAAP,IFRS, which differs in certain significant respects from US GAAP.

      The preparation of our consolidated financial statements in conformityaccordance with UK GAAP,IFRS, and the reconciliation of these financial statements to US GAAP as described in note 34,35, requires management to make estimates and assumptions that affect the carrying value of assets and liabilities at the date of the consolidated financial statements and the reported amount of sales and expenses during the periods reported in these financial statements. Certain of our accounting policies require the application of management judgment in selecting assumptions when making significant estimates about matters that are inherently uncertain. Management bases its estimates on historical experience and other assumptions that it believes are reasonable.

      We believe that the following are ourthe more critical accounting policies used in the preparation of our consolidated financial statements that could have a significant impact on our future consolidated results of operations, financial position and cash flows. Actual results could differ from estimates.

      Sales representRevenue comprises the amountfair value of the consideration received or receivable for the sale of goods orand services net of value addedvalue-added tax and other sales taxes, rebates and excluding any trade discounts, and anticipated returns, provided to external customers and associates.after eliminating sales within the Group. Revenue is recognized as follows:

      Revenue from the sale of books is recognized when title passes. AnticipatedA provision for anticipated returns areis made based primarily on historical return rates. If these estimates do not reflect actual return rates experiencedreturns in recent years.future periods then revenues could be understated or overstated for a particular period.

      Circulation and advertising revenue is recognized when the newspaper or other publication is published. Subscription revenue is recognized 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 recognized 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 recognized as performance occurs. Certain of these arrangements, either as a result of a single service spanning more than one reporting period or where the contract requires the provision of a number of services that together constitute a single project, are treated as long-term contracts with revenues recognized on a percentage of completion basis. Losses on contracts are recognized in the period in which the loss first becomes foreseeable. Contract losses are determined to be the amount by which estimated direct and indirect costs of the contract exceed the estimated total revenues that will be generated by the contract. The assumptions, risks and uncertainties inherent in long-term contract accounting can affect the amounts and timing of revenue and related expenses reported.

      On certain contracts, where the Group acts as agent, only commissions and fees receivable for services rendered are recognized as revenue. Any third party costs incurred on behalf of the principal that are rechargeable under the contractual arrangement are not included in revenue.

      Pre-publication costs represent direct costs incurred in the development of educational programs and titles prior to their publication. These costs are carried forward in stockcurrent intangible assets where the title to which they relate has a useful life in excess of one year.will generate probable future economic benefits and costs can be measured reliably. These costs are amortized upon publication of the title over estimated economic lives of five years or less, being an estimate of the expected life cycle of the title, usually with a higher proportion of the amortization taken in the earlier years. The investment in pre-publication has been disclosed as part of the investing activities in the cash flow statement. The assessment of useful life and the calculation of amortization involve a significant amount of estimation and management judgment asbased on historical trends and management must estimate the sales cycle and lifeestimation of a particular title.their future potential sales. The overstatement of useful lives could result in excess amounts being carried forward in stock

intangible assets that would otherwise have been written off to the profit and loss account in an earlier period. Reviews are performed regularly to estimate recoverability of pre-publication costs.

      Advances of royalties to authors are included within debtorstrade and other receivables when the advance is paid less any provision required to bring the amount down to its net realizable value. The royalty advance is expensed at the contracted royalty rate as the related revenues are earned. Royalty advances which will be consumed within one year are held in current assets. This represents the operating cycle of consumer publishing titles. Royalty advances which will be consumed after one year are held in non-current assets. The realizable value of royalty advances held within debtors is regularly reviewed by reference to anticipated future sales of books or subsidiary publishing rights but still relies on a degree of management judgmentjudgement in determining the profitability of individual author contracts. If the estimated net realizable value of author contracts is overstated then this will have an adverse effect on operating profits as these excess amounts will be written-off.written off.

      The liability in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date minus the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting estimated future cash flows using yields on high quality corporate bonds which have terms to maturity approximating the terms of the related liability.

      The determination of the pension cost and defined benefit obligation of the Group’s defined benefit pension schemes principally the UK-based scheme, is charged to the profit and loss account in order to apportion the cost of pensions over the service lives of the employees in the schemes, in accordance with Statement of Standard Accounting Practice 24. The determination of the pension costs, as well as the pension obligation, dependdepends on the selection of certain assumptions (see note 24 in “Item 17 — Financial Statements”) which include the expected long-termdiscount rate, ofinflation rate, salary growth, longevity and expected return on scheme assets, salary inflation rates and discount rates used by the actuaries to calculate such amounts. These assumptions are described in further detail in note 10 to the consolidated financial statements. Although we believe the assumptions are appropriate, differencesassets. Differences arising from actual experience or future changes in assumptions may materially affect the pensions costs recordedwill be reflected in the profit and loss accounts in future years. In particular, a reduction in the realized long-term rate of return on scheme assets and or a reduction to the discount rates would result in higher pension costs in futuresubsequent periods.

      Deferred tax assets and liabilities require management judgment in determining the amounts to beare recognized and in particular, the extent to which deferred tax assets can be recognized. Under Financial Reporting Standard 19Deferred Tax, the UK generally accepted accounting principle which we adopted in 2002, we recognize a deferred tax asset in respect of tax losses and other timing differences. We recognize deferred tax assets to the extent that they are recoverable, based on the probabilityit is probable that therefuture taxable profit will be future taxable incomeavailable against which thesethe temporary differences can be utilized.

      Deferred income tax losses andis provided in respect of the undistributed earnings of subsidiaries, other timing differences maythan where it is intended that those undistributed earnings will not be utilized. We regularly review our deferredremitted in the foreseeable future.

      Deferred tax assetsis recognized in the income statement, except when the tax relates to ensure that they are recoverable and have exercised significant judgments when consideringitems charged or credited directly to equity, in which case the timing and level of future taxable income. Our business plans and any future tax planning strategies are considerationsis also recognized in our assessment of recoverability. If a deferred tax asset is not considered recoverable, a valuation allowance is recorded to the extent that recoverability is not deemed probable.equity.

      In accordance with UK GAAP, capitalized goodwill is amortized over its estimated useful life, not exceeding 20 years. The estimated useful life is determined after taking into account such factors asGoodwill represents the nature and ageexcess of the business andcost of an acquisition over the stabilityfair value of the industry in whichGroup’s share of the acquired business operates as well as typical life spansnet identifiable assets of the acquired products to whichsubsidiary or associate at the goodwill attaches. The estimated useful lives ascribed to goodwill range from 3 to 20 years.date of acquisition. Goodwill relating toon acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates is included in investments in associates. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the more established book publishing businesses is typically written off over 20 years whiledisposal of an entity include the carrying amount of goodwill relating to less established businesses, for example internet-related businesses, where there is no consistent record of profitability, are being written off over 3 to 5 years.

      We prepare our financial statements in accordance with UK GAAP,IFRS, which differs in certain significant respects from US GAAP. Our profitProfit attributable to equity holders of the Company and equity shareholders’ funds under IFRS and US GAAP were as follows for the financial year ended December 31, 2004 under UK GAAP was £88 million compared with a profit of £182 million under US GAAP for the same year. The profit for the financial year ended December 31, 2003 under UK GAAP was £55 million, compared with a profit of £173 million under US GAAP for the same year. The loss for the financial year ended December 31, 2002 under UK GAAP was £111 million compared with a profit of £210 million under US GAAP for the same year.respective period:

      The main differences between UK GAAPIFRS and US GAAP relate to goodwill and intangible assets, acquisition and disposal adjustments, derivatives, pensions, and stock based compensation.compensation and taxation. These differences are discussed in further detail under “— Accounting Principles” and in note 3435 to the consolidated financial statements.