In this Annual Report on Form 20-F (the “Annual Report”) references to “Pearson”, the “Company” or the “Group” are references to Pearson plc, its predecessors and its consolidated subsidiaries, except as the context otherwise requires. “Ordinary Shares” refer to the ordinary share capital of Pearson of par value 25p each. “ADSs” refer to American Depositary Shares which are Ordinary Shares deposited pursuant to the Deposit Agreement dated March 21, 1995, amended and restated as of August 8, 2000 among Pearson, The Bank of New York as depositary (the “Depositary”) and owners and holders of ADSs (the “Deposit Agreement”). ADSs are represented by American Depositary Receipts (“ADRs”) delivered by the Depositary under the terms of the Deposit Agreement.

      We have prepared the financial information contained in this Annual Report in accordance with 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 3436 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 sterling figures into US dollars at the rate of £1.00 = $1.92,$1.96, 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, 2004.29, 2006, the last business day of 2006. We do not make any representation that the amounts of sterling have been, could have been or could be converted into dollars at the rates indicated. On March 30, 2007 the noon buying rate for sterling was £1.00 = $1.97.

      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 tabletables below showsshow selected consolidated financial data under IFRS and US GAAP. Under US GAAP, the consolidated financial data has been presented for each of the years in the five-year period ended December 31, 2004.2006. The Company adopted IFRS on January 1, 2003. As a result, in accordance with the instructions of Form 20-F, selected consolidated financial data under IFRS is only presented for each of the years in the four-year period ended December 31, 2006. The selected consolidated profit and loss account data for the years ended December 31, 2004, 20032006, 2005 and 20022004 and the selected consolidated balance sheet data as at December 31, 20042006 and 20032005 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 have been prepared in accordance with UK GAAP,IFRS, which differs from US GAAP in certain significant respects. See “Item 5. Operating and Financial Review and Prospects — Accounting Principles” and note 3436 to ourthe consolidated financial statements. The consolidated financial statements contain a reconciliation to US GAAP of profit/lossprofit 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 20042006 amounts into US dollars at the rate of £1.00 = $1.92,$1.96, the noon buying rate in The City of New York on December 31, 2004.

      We payThe Group pays dividends to holders of ordinary shares on dates that are fixed in accordance with the guidelines of the London Stock Exchange. OurThe board of directors normally declares an interim dividend in July or August of each year to be paid in September or October. OurThe 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 ourthe 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 20042006 fiscal year waswill be paid inon May 2005.11, 2007.

      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, 2004,29, 2006, the noon buying rate for sterling was £1.00 = $1.92.$1.96. On March 30, 2007 the noon buying rate for sterling was £1.00 = $1.97.

     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.

      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 StatesUS and the United Kingdom, which are theUK, jurisdictions withcovering the largest proportionsproportion of

      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 authors. This lawsuit seeks to demarcate the extent to which search engines, other internet operators and libraries may rely on the fair-use doctrine to copy content without authorization from the copyright proprietors, and may give publishers and authors more control over online users of their intellectual property. If the lawsuit is unsuccessful, publishers and authors may be unable to control copying of their content for purposes of online searching, which could have an adverse impact on our business and financial performance.

      In recent years we have begun, throughThe results and growth of our Professional division,US educational textbook and testing business is dependent on the level of US and state educational funding, which in turn is dependent on the robustness of state finances and the level of funding allocated to offer services ranging from call center operations to complete outsourcing of administrative functions. Customers are government agencies and professional organizations, mainlyeducational programs. Federal and/or state legislative changes can also affect the funding available for educational expenditure, e.g. the No Child Left Behind Act.

      Similarly changes in the United Statesstate procurement process for textbooks, learning material and student tests, particularly in the United Kingdom, and commercial businesses. These services are provided under contracts with values that vary significantly, from a few million to several hundred million pounds overadoptions market can also affect our markets. For example, changes in curricula, delays in the termtiming of the contract, whichadoptions and changes in the student testing process can run from one to ten years in length. The resultsall affect these programs and therefore the size of our Professional division can be significantlymarket in any given year.

      Our newspaper businesses are highly geared and remain dependent on advertising revenue; relatively small changes in revenue, positive or negative, have a small number of large contracts.

      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/or in the case of our UK testing business, the suspension or withdrawal of our accreditation to conduct tests. 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 (particularlyThese businesses are characterized by multi-million pound contracts spread over several years. As in mass market books), higher than average historical return rates, the weak US dollar and distribution problems in the United Kingdomany contracting business, there are inherent risks associated with a new automated warehouse facility allthe bidding process, start-up, operational performance and contract compliance (including penalty clauses) which could adversely affected Penguin’saffect our financial performance in 2004. Our abilityand/or reputation.

      Several of these businesses are dependent on either single or a small number of large contracts. Failure to restore Penguin to historical profit levels will be constrained ifretain these contracts at the US mass market does not recover. Penguin’s financial performance will 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, services and services.people. 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 to our customers 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 upgradesupgrades. The failure to recruit and retain staff with relevant skills may constrain our ability to grow as we combine traditional publishing products with online and service offerings.

      We have developed business continuity arrangements, including IT disaster recovery plans, to minimize any business disruption in the event of a major disaster. However, despite regular updates and testing of these plans there is no guarantee that our financial performance will not be adversely affected in the event of a major disaster at a key data center.and/or external threat to our business. Insurance coverage may minimize any losses in certain circumstances.

      We operate a number of pension schemesplans throughout the world, the principal ones being in the UK and US. The major schemesplans are self-administered with the schemes’plans’ 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 schemeplan is adequately funded, over time, to meet its ongoing and future liabilities. Our earnings and cash flows may be adversely affected by lowerthe need to provide additional funding to eliminate pension fund deficits in our defined benefit plans. Our greatest exposure relates to our UK defined benefit pension plan. Pension fund deficits have/may arise because of inadequate investment returns, due to a general deteriorationincreased member life expectancy, changes in equity or bond markets, requiring increased company funding of these schemes to eliminate any deficits over time. Similarly,actuarial assumptions and changes in pension regulations, including accounting rules may affectand minimum funding requirements.

      The latest valuation of our UK defined benefit pension costsplan has been completed and future funding status.arrangements have been agreed between the Company and the pension fund Trustee. Additional payments

      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 20032005 average rates had prevailed in 2004,2006, sales for 20042006 would have been £306 million£44m or 8%1% higher. 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. Pearson generates about two-thirds of its sales in the US and each five cent change in the average £:$ exchange rate for the full year (which in 2006 was £1:$1.84 and in 2005 was £1:$1.81) would have an impact of 1p on earnings per share. We estimate that a five cent change in the averageclosing exchange rate between the US dollar and sterling in any year could affect our reported earnings per shareshareholders’ funds by approximately 1 penny.£85m.

      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,

      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 Educationis a global leader in educational publishing and services.the world’s leading education company. We are a leading international publisher of textbooks, supplementary materials and electronic education programs for elementaryteachers and secondary school, higher educationstudents of all ages, and business and professional markets worldwide. We alsowe play a major role in the testing and certification of school students and professionals, mainly inprofessionals. Pearson Education consists of the US but increasingly in the UK.following three operating segments:

     The FT Group consistsis a leading provider of our international newspaper,business and financial news, data, comment and analysis, in print and online financial information, business magazine and professional publishing interests. Our flagship product isonline. The FT Group comprises theFinancial Times,published internationally and known for its premium editorial content and international scope both in newspaper and internet formats. following operating segments:

     The Penguin Groupis one of the premierworld’s foremost English language publishers in the world, with brand imprints such as Penguin, Putnam, Berkley, Viking and Dorling Kindersley (“DK”).publishers. We publish the works of many authors in an extensive portfolio of fiction, non-fiction, reference and illustrated works.works under imprints including Penguin, Hamish Hamilton, Putnam, Berkley, Viking and Dorling Kindersley.

      Since 1997,Over the past decade we have reshapedtransformed Pearson by divestingfocusing on companies which provide ‘education’ in the broadest sense of the word; companies that educate, inform and entertain. Through a rangecombination of non-core interestsorganic investment and investing over $7 billion in education, consumer publishing and business information companies. Eachacquisitions, we have built each one of our businesses aimsinto a leader in its market, and we have integrated our operations where appropriate so that our businesses can share assets, brands, processes, facilities, technology and central services.

      Our goal is to benefit from educating, informingproduce sustainable growth on our three key financial measures — adjusted earnings per share, cash flow and entertaining peoplereturn on invested capital — which we believe are, together, good indicators that we are building the long-term value of Pearson.

      We do this by investing consistently in an increasingly knowledge-based economy. Our strategy is:four areas, which are common to all our businesses:

      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 Educationmaterials. It serves the growing demands of teachers, students, parents and professionals throughout the world for stimulating and effective education programs. With federalprograms in print and state governments under pressure to measure academic progress against clear objective standards, the market for educational testing services in the United States has grown significantly. Pearson Assessments & Testing enables us to combine testing and assessment with 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.online.

      We report Pearson Education’s performance along the lines ofby the three marketsmarket segments it serves: School, Higher Education and Professional. In 2004,2006, Pearson Education had sales of £2,356 million£2,591m or 60%63% of Pearson’s total sales (61% in 2003).(2005: 62%) and contributed 68% (2005: 63%) to Pearson’s total operating profit.

      In the United States, ourOur School business includescontains a unique mix of publishing, testing and software operations.technology products, which are increasingly integrated. It generates around two-thirds of its sales in the US.

      Outside of the United States,US, we have a growing English Language Teaching business and we also publish school and

      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 chooseTypically, professors or other instructors select or ‘adopt’ the textbooks and online resources to be purchasedthey recommend for their students, which students then purchase either in a bookstore or online. Today the majority of our textbooks are accompanied by their students. In 2004, over one million college students registered for our online offerings,services which include homework and assessment products, onlinetools, 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. We have also introduced new

      WeOur Professional education businesses publish text, reference,educational materials and interactive productsprovide testing and qualifications services 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. Publishingadults. Our publishing imprints in this area include Addison Wesley Professional, Prentice Hall PTR, and Cisco Press (our three high end imprints)(for IT professionals), Peachpit Press and New Riders Press (our graphics(graphics and design imprints)professionals), Que/ Sams (consumer and professional imprint), and Prentice Hall Financial Times (professional(for the business imprint) and BradyGames (software game guides imprint)education market). We also generate revenues through our own website — InformIt. We also provide services to

      The FT Group one of the world’s leading business information companies, aims to provideprovides a broad range of business information,data, analysis and services to an audience of internationally-minded business people.people and financial institutions. In 2004,2006, the FT Group had sales of £777 million,£698m, or 20%17% of Pearson’s total sales (19% in 2003)(2005: 17%), and contributed 21% of Pearson’s operating profit (2005: 25%). The

      It has two major parts: FT Group’sPublishing, our network of international and national business is global, producing a combination of news, data, comment, analysisnewspapers and context. In addition to professionalonline services; and business consumers, individuals worldwide are demanding such strategic business information. We believe that the FT Group is well positioned to supplyInteractive Data Corporation, our 62%-owned financial information and benefit from these trends.company.

      TheFinancial Timesis athe world’s leading international daily business newspaper. Its average daily circulation of 427,800430,469 copies in December 2004,2006, 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 2004 from advertising and approximately 33% from circulation. The geographic distribution of theFinancial Timesaverage daily circulation in 2004 was:is split as follows:

      TheFinancial Timesis printed on contract in 24 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 deliveryIn 2006, approximately 70% of the various editions of the newspaper to the appropriate geographic markets. TheFinancial Timesis distributedFT’s revenues were generated through independent newsagents and direct delivery to homes and institutions.

      FT Publishing also includes: FT Business, produceswhich publishes specialist information on the retail, personal and institutional finance industries and publishes the UK’s premier personal finance magazine,through titles includingInvestors Chronicle together with,Money Management,Financial AdvisorAdviserandThe Bankerfor professional advisers; Les Echos, France’s leading business newspaper, and financial sector professionals.a number of joint ventures and associates in business publishing.

      Through our 61% interest in Interactive Data Corporation (“Interactive Data”), we are one of the world’sis a leading global providersprovider of financial market data, analytics and business informationrelated services to financial institutions, active traders and retailindividual investors. Interactive Data suppliesThe company’s businesses supply time-sensitive pricing, dividend, corporate action,evaluations and descriptive informationreference data for more than 3.5 million securities traded around the world, including hard-to-value instruments. Customers subscribeinstruments such as illiquid bonds. We own 62% of Interactive Data Corporation; the remaining 38% is publicly traded.

      On April 8, 2005, the Group completed the sale to Interactive Data’s services and use the company’s analytical toolsRetos Catera S.A. of our 79% stake in supportRecoletos, a publicly quoted Spanish media Group, for gross proceeds of their trading, analysis, portfolio management, and valuation activities.€743m. Net cash proceeds of £371m were received resulting in a profit on disposal of £306m.

      As at 2004 year end,2006 year-end, the FT Group also had a number of other associates and joint ventures, including:

      Penguin is one of the world’s premier English language publishers in the world.book publishers. We publish an extensive backlist and frontlist of titles, including some of the very best new fiction and non-fiction, literary prize winners, commercial bestsellers, classics 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.titles. We rank in the top three consumer publishers, based upon sales, in all major English speaking and related markets — the United States,US, the United Kingdom,UK, 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, Penguin’s US imprints placed 132 titles onThe New York Timesbestseller list. In the United Kingdom,

      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 operating cycles in respect of the Professional and Penguin Group’s gateway internet site, Penguin.com, provides accesssegments are more specialized in nature as they relate to its focused websiteseducational or heavy reference products released into smaller markets (e.g. the financial training, IT and travel sectors). Nevertheless, in these markets, there is still a regular cycle of product renewal, in line with demand which management monitor. Typically the United States, Canada, United Kingdomlife cycle is 5 years for Professional content and Australia. Websites have also been developed to target certain niche audiences. For example, Penguinclassics.com has an entire online service4 years 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 asMcGraw-Hill, Reed Elsevier, Houghton Mifflin Riverdeep Group and Thomson.Thomson alongside smaller niche players that specialize in a particular academic discipline or focus on a learning technology. Competition is based on the ability to deliver quality products and services that address the specified curriculum needs and appeal to the school boards, educators and government officials making purchasing decisions.

      The FT Group’s newspapers, magazines and magazineswebsites compete with newspapers and other information sources, such asThe Wall Street Journal, by offering timely and expert journalism.analysis and insight. 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 efficiencyIDC competes with Reuters, Bloomberg and Thomson Financial on a global basis for the provision of its cost basefinancial data to the back office. In Europe Telekurs is also a competitive factor.direct competitor for these services.

      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.

      In January 2005, we announcedOn February 15, 2007 the sale of our 22.4% stake in MarketWatch to Dow Jones for $101 million.

      On September 30, 2006, the Group acquired 100% of £372 million.the voting rights of Mergermarket, a financial information company providing information to financial institutions, corporations and their advisers. In addition, several other businesses were acquired in 2006 including Promissor, Paravia Bruno Mondadori (PBM), National Evaluation Systems (NES), PowerSchool and Chancery in the Education business and Quote.com in IDC.

      In JuneOn July 22, 2005, we announcedPearson acquired 100% of the acquisitionvoting rights of AGS Publishing, from WRC Media for $270 million. AGS Publishing specialises in testingan educational assessments and publishing for students with special educational needscurriculum materials publisher.

      In addition, several other businesses were acquired in the United States school market.current and prior years, none of which were individually material to the Group.

      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, 2004,2006, including name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held.

      Our headquarters isare 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. These properties consist mainly of offices, distribution centers and computer centers.

      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 3436 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.

      Sales declined from £4,048 millioncontinuing operations increased from £3,808m in 20032005 to £3,919 million£4,137m in 2004, a decrease2006, an increase of 3%9%. This declineThe increase reflected growth across all the businesses together with additional contributions from acquisitions made in both 2005 and 2006. The year on year growth was attributable to the impact ofimpacted by exchange principally the weakness ofrates, in particular the US dollar. The average US dollar exchange rate weakened in 2006, which had the affecteffect of reducing reported sales

      A £171 million profitProfit before taxation in 20042006 of £466m compares to a profit before taxation of £152 million£446m in 2003.2005. The increase of £19 million or 13% mainly£20m reflects the reduced charge for goodwill amortization andimproved operating performance offset by a reductionsmall increase in net finance costs. Net finance costs which together offset the impact of exchange.increased from £70m in 2005 to £74m in 2006. The goodwill amortization charge fellGroup’s net interest payable increased by £40 million£17m in 20042006 due to the weakerstrong rise in US dollar floating interest rates and goodwillan increase in respect of Family Education Network and Marketwatch having been fully amortized in 2003. Finance costs benefited from the reduction inGroup’s average

      In December 2004,2006 the Group announced the sale of its Government contracting business, Pearson announced its intention to disposeGovernment Solutions. The sale was completed in February 2007 and the results of this business have been shown in discontinued operations in the consolidated income statement for 2006, 2005 and 2004. In 2005 the Group sold 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 by the Spanish regulatory authorities in February 2005, and the sale closed in April 2005, realizing net cash proceeds of £372 million. 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 and loss account for 2004, 2003 and 2002.2004.

      Net cash inflowgenerated from operating activities increaseddecreased to £530 million£456m in 20042006 from £359 million£487m in 2003.2005. Cash flowgeneration in 2004 benefited from collection of2006 would have shown an improvement on 2005 but for the $151 million receivable in respect of the TSA contract, together with continued underlying improvements in Pearson Education and IDC. Therelative weakness of the US Dollardollar which reduced the value of our cash flows in Sterling. Capital expenditure was in excess of depreciation in 2004 due to up-front expenditure on professional testing contracts but, onsterling. On an average basis, the use of working capital continued to improve. CashCapital expenditure in 2006 was in line with 2005 levels at constant exchange rates. The net cash outflow on acquisitions netin respect of disposalbusinesses acquired increased from £246m in 2005 to £363m in 2006. There were no significant disposals in 2006 to match the proceeds was £20 millionreceived from the sale of Recoletos and afterMarketwatch in 2005 resulting in a decrease in cash proceeds from disposals of £420m. Dividends from joint ventures and associates increased by £31m largely due to special dividends received from the Economist. Dividends paid of £195 million and£235m in 2006 (including £15m paid to minority interests) compares to £222m in 2005. After a favorable currency movement of £75 million,£126m, overall net borrowings (excluding finance leases) fell 11%increased by 6% from £1,361 million£996m at the end of 20032005 to £1,206 million£1,059m at the end of 2004.2006.

      Pearson reported record results in 2006 and our strong trading has continued in the early part of 2007. We have made a good start in the major school textbook adoptions; continued to roll out our groundbreaking online learning and assessment platforms in Higher Education; published a string of bestsellers in Penguin; and achieved steady growth in both advertising and circulation at FT Publishing.

      We are trading in line with expectations for 2007 and expect Pearson to growachieve good underlying earnings stronglygrowth, cash conversion ahead of our 80% threshold, and a further increase in 2005 and beyond, with further progress on cash and return on invested capital. As always, our sales and profits will be concentrated in the second half of the year.

Our outlook is:expectations for the full year remain:

      We expect our worldwide School business to deliver significantachieve underlying sales and profit growth in 2005. With a stronger adoption calendar, healthier state budgets, federal funds for reading and testing and our investment in new programs, we expect our US School publishing and testing operations to achieve double-digit sales growth. We also expect to achieve steady margin improvement in our US school publishing business over the next three years, as we benefit from the adoption calendar in both 2006 and 2007, in which we expect a significant increase in our new adoption participation rate compared4-6% range with 2005.

      We expect further profit progress at the FT Group. Advertising revenues at the Financial Times were up 3%Group profit to grow strongly with our cost measures, integration actions and revenue diversification pushing margins into double digits at FT Publishing. IDC revenues to grow 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. IDC expects to grow its reported revenues and6-9% range with net income growth in the high single-digitsingle-digits to low double-digit range.

      2005 will be a year of transition for Penguin. We expect profitsPenguin margins to improve in the UK, in spite of dual-running costs at our distribution centers. In the US we are planning on the basis that the weak market conditions experienced in the second half of 2004 continue. We are taking actionfurther, as its publishing investment and efficiency programs continue to adjust our publishing program and reduce costs, and we will expense approximately £5 million as a result of those actions in 2005.

      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: